Anti-Competitive Agreements under the Competition Act

December 01,2017

What is an Anti-competitive Agreement?

Section 3 of the Competition Act, 2002

The Act under Section 3(1) prevents any enterprise or association from entering into any agreement which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India. The Act clearly envisages that an agreement which is contravention of Section 3(1) shall be void.

How to determine AAEC?

The Act provides that any agreement including cartels, which-

  • Directly or indirectly determines purchase or sale prices;
  • Limits production, supply, technical development or provision of services in market;
  • Results in bid rigging or collusive bidding

Shall be presumed to have an appreciable adverse effect on competition in India

Proviso to Section 3 of the Act provides that the aforesaid criteria shall not apply to joint ventures entered with the aim to increase efficiency in production, supply, distribution, acquisition and control of goods or services.

Anti-competitive agreements are further classified into Horizontal agreements and Vertical agreements.

What are Horizontal Agreements?

HORIZONTAL AGREEMENTS- Horizontal agreements are arrangements between enterprises at the same stage of production. Section 3(3) of the Act provides that such agreements includes cartels, engaged in identical or similar trade of goods or provision of services, which-

  1. Directly or indirectly determines purchase or sale prices
  2. Limits or controls production, supply
  3. Shares the market or source of production
  4. Directly or indirectly results in bid rigging or collusive bidding

Under the Act horizontal agreements are placed in a special category and are subject to the adverse presumption of being anti-competitive. This is also known as ‘per se’ rule. This implies that if there exists a horizontal agreement under Section 3(3) of the Act, then it will be presumed that such an agreement is anti-competitive and has an appreciable adverse effect on competition1.

What are Vertical Agreements?

VERTICAL AGREEMENTS- Vertical agreements are those agreements which are entered into between two or more enterprises operating at different levels of production2. For instance between suppliers and dealers. Other examples of anti-competitive vertical agreements include:

  • Exclusive supply agreement & refusal to deal
  • Resale price maintenance
  • Tie-in-arrangements
  • Exclusive distribution agreement

The ‘per se’ rule as applicable for horizontal agreements does not apply for vertical agreements. Hence, a vertical agreement is not per se anti-competitive or does not have an appreciable adverse effect on competition.

The Act under Section 3 of the Act also prohibits any agreement amongst enterprises which materialize in:

  • Tie-in arrangement

    What is a tie-in arrangement?According to the Statute it includes any agreement requiring purchaser of goods, as a condition of purchase, to purchase some other goods. In the case of Sonam Sharma v. Apple & Ors., the CCI stated that in order to have a tying arrangement, the following ingredients must be present:

  1. There must be two products that the seller can tie together. Further, there must be a sale or an agreement to sell one product or service on the condition that the buyer purchases the other product or service. In other words, the requirement is that purchase of a commodity is conditioned upon the purchase of another commodity.
  2. The seller must have sufficient market power with respect to the tying product to appreciably restrain free competition in the market for the tied product. That is, the seller has to have such power in the market for the tying product that it can force the buyer to purchase the tied product; and
  3. The tying arrangement must affect a “not insubstantial” amount of commerce. Tying arrangements are generally not perceived as being anti- competitive when substantial portion of market is not affected.
  • Exclusive supply agreement- The Act defines such agreements to include any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person.
  • Exclusive distribution agreement- This includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of goods.
  • Refusal to deal- The Act states that this criteria includes agreement which restricts by any method the persons or classes of persons to whom the goods are sold or from whom goods are bought.

Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors- Important case law on Anti-competitive Agreements

In the case of Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors3, the concept of vertical agreements including exclusive supply agreements, exclusive distribution agreements and refusal to deal were deliberated by the Commission.

Facts– The informant in the case had alleged anti-competitive practices on part of the Opposite Parties (OPs) whereby the genuine spare parts of automobiles manufactured by some of the OPs were not made freely available in the open market and most of the OEMs (original equipment suppliers) and the authorized dealers had clauses in their agreements requiring the authorized dealers to source spare parts only from the OEMs and their authorized vendors only.

CCI’s decision– The Commission held that such agreements were in the nature of exclusive supply, exclusive distribution agreements and refusal to deal under Section 3(4) of the Act and hence the Commission had to determine whether such agreements would have an AAEC in India.

The Commission held the impugned agreements were in contravention of Section 3 of the Act and remarked that the network of such agreements allowed the OEMs to become monopolistic players in the aftermarkets for their model of cars, create entry barriers and foreclose competition from the independent service providers.

The Commission further stated that such a distribution structure allowed the OEMs to seek exploitative prices from their locked-in consumers, enhance revenue margin form the sale of auto component parts as compared to the automobiles themselves besides having potential long term anti-competitive structural effects on the automobile market in India.

  • Resale price maintenance

    What is resale price maintenance? It includes any agreement to sell goods on condition that the prices be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

The concept of resale price maintenance was discussed by the Commission in the case of Fx Enterprise Solutions India Pvt. Ltd. v. Hyundai Motor India Limited4. In the case, the Informant had alleged that according to the agreement with Hyundai, dealers were mandated to procure all automobile parts and accessories from Hyundai or through their vendors only. While collaborating on alleged anti-competitive practices of Hyundai, the Informant stated that Hyundai imposed a Discount Control Mechanism”, whereby dealers were only permitted to provide a maximum permissible discount and dealers were also not authorized to give discount beyond a recommended range, thereby amounting to resale price maintenance” in contravention of Section 3(4)(e) of the Act.

The CCI in the case observed that Hyundai through exclusive agreements and arrangements contravened provisions of Section 3(4)(e) read with Section 3(1) of the Act through arrangements which resulted into Resale Price Maintenance. The CCI while imposing penalty of INR 87 Crore on Hyundai noted that the infringing anti-competitive conduct of Hyundai in the case included putting in place arrangements, which resulted into Resale Price Maintenance by way of monitoring maximum permissible discount level through a Discount Control Mechanism and also a penalty mechanism for non-compliance of the discount scheme.

ANTI-COMPETITIVE AGREEMENTS AND IPR EXEMPTION UNDER SECTION 3(5) OF THE ACT

Section 3(5) of the Competition Act envisages that nothing contained in Section 3 (prohibiting anti-competitive agreements) shall restrict the right of any person to prevent infringement or imposing of reasonable conditions that may be necessary for protecting his/her intellectual property rights i.e. copyright, trademark, patent, designs and geographical indications.

In the aforesaid context, CCI states that any ‘reasonable condition’ imposed for protection of IPR would not attract Section 3, however, imposition of ‘unreasonable condition’ to protect IPR would contravene Section 3 of the Act. The CCI provides an illustrative list of practices/agreements which though entered into for protection of IPR may contravene Section 3 of the Act5. Such practices/agreements are:

  • Patent pooling- may be a restrictive practice if pooling firms decide not to grant license to third parties;
  • Tie-in arrangement– If under the tying arrangement, licensee is required to acquire particular goods solely from the patentee then it may be a restrictive practice;
  • Agreement to continue payment of royalty even after the patent has expired;
  • Clause restricting competition in R & D;
  • Licensee may be subjected to a condition not to challenge the validity of IPR in question.
  • Licensor fixes the price at which the licensee should sell.
  • A licensee may be coerced by the licensor to take several licenses in intellectual property even though the Licensee may not need all of them.
  • Condition imposing quality control on the licensed patented product beyond those necessary.
  • Restricting licensee’s right to sell the product of the licensed know-how to persons other than those designated by the licensor.
  • Undue restriction on licensee’s business could be anticompetitive.
  • Limiting the maximum amount of use the licensee may make of the patented invention may affect competition.
  • Condition imposed on the licensee to employ or use staff designated by the licensor.

Shamsher Kataria’s case elaborately dealt with provision of IPR exemption under Section 3(5) of the Act. In the case the OPs had claimed IPR exemption under Section 3(5) of the Act and stated that the restrictions imposed upon the OESs (original equipment suppliers) from undertaking sales of their proprietary parts to third parties without seeking prior consent would fall within the ambit of reasonable condition to prevent infringements of their IPRs. The Commission observed that in order to determine whether an exemption under Section 3(5) of the Act is available or not, it was necessary to consider:

a) Whether the right which is put forward is correctly characterized as protecting an intellectual property?

b) Whether the requirements of the law granting the IPRs are in fact being satisfied?

The CCI in view of the facts and circumstances prevailing in the case held that the exemption enshrined under Section 3(5) of the Act was not available to those OEMs (original equipment manufacturers) who had failed to submit the relevant documents evidencing grant of the applicable IPRs in India, with respect to the various spare parts.

The CCI also stated that the OEMs had failed to show that the impugned restrictions amounted to imposition of reasonable conditions, as may be necessary for protection any of their rights.

The CCI in the case also rendered the clarification that though registration of an IPR does not automatically entitle a company to seek exemption under Section 3(5)(i) of the Act and the essential criteria for determining whether the exemption under Section 3(5)(i) is available or not is to assess whether the condition imposed by the IPR holder can be termed as “imposition of a reasonable conditions, as may be necessary for the protection of any of his rights”.

1Neeraj Malhotra vs Deustche Post Bank Home Finance

2Fx Enterprise Solutions India v. Hyundai Motor India Limited, CCI (Case no. 36 &42 of 2014)

3Case No. 03/2011

4Case Nos. 36 & 82 of 2014

5Competition Commission of India; Advocacy Booklet on Intellectual Property Rights under the Competition Act, 2002

About the Author

Shilpi Sharan

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Shilpi Sharan is the Editor at Vakilno1.com – an Advocate with extensive knowledge in myriad fields of Law. She has a flair of writing and has legal publications in national and international law magazines to her credit. She focuses on legal research and aims at raising public awareness of laws in India.