AMITY LAW SCHOOL

Competition Law

“Anti Competitive Agreement”

SUMITTED TO: - Mr. Brijesh SUMITTED BY: - Ankita Singh

LL.M (2 nd sem)
 1) Introduction:-
The competition act provides for avoiding certain discrepancies and irregularities which would arise out
of unfair trade practices, as a result of free and open market economy. One such discrepancy can be in
the form of ANTI COMPETITIVE AGREEMENTS. As it has been observed by National Consumer Disputes
Redressal Commission;”Even in any free economy/deregulated economy exploitation of the
borrower/debtor is prohibited and is considered to be unfair trade practice. Free economy would not
mean licence to exploit the borrowers/debtors by taking advantage of their basic needs for their
livelihood. This cannot be permitted in any civilized society - maybe a deregulated free market
economy.” Thus, it has been observed that the role of the new competition policy is to cater against all
sorts of anti competitive practices, formulated as per the report of a High Level committee, appointed by
the Government of India, named- Raghavan Committee Report, 2000.

Section 3 of the Competition Act states that any agreement which causes or is likely to cause an
appreciable adverse effect (AAE) on competition in India is deemed to be anticompetitive. Section 3 (1)
of the Competition Act prohibits any agreement with respect to “production, supply, distribution,
storage, and acquisition or control of goods or services which causes or is likely to cause an appreciable
adverse effect on competition within India.”1

2) What are anti competitive agreement:-

While doing business in India, parties are prohibited from executing anti-competitive agreements.
Generally, the agreements which cause or are likely to cause appreciable adverse effect on competition
(“AAEC”) are anti-competitive agreements. Such agreements may be horizontal or vertical. However, the
Competition Act, 2002 (“Act”) recognizes intellectual property rights and to facilitate their protection,
the Act permits reasonable restrictions imposed by their owners. Similarly, the Act exempts agreements
between exporters as exports do not impact markets in India. The Competition Commission of India
(“CCI”) has been given the authority to direct any enterprise or person to modify, discontinue and not
re-enter into anti-competitive agreement and impose penalty, which can be 10% of the average of the
turnover for the last three years. In light of such power of CCI, it becomes essential that parties doing
business in India are aware regarding the agreements which can fall within the ambit of being labeled as
“anti-competitive”. Sub Clauses (1) and (2) of Section 3, of Competition Act defines anti competitive
agreements and provides that any contravention with respect to such agreements shall be void. Under
the sub clause (3), the section mentions factors. 2

3) APPRECIABLE ADVERSE EFFFECT on COMPETITION:

1
ANTI COMPETETIVE AGREEMENTS UNDER COMPETITION ACT 2002, BY: AMAN SRIVASTAVA.
2
Anti-competitive agreements: tests and tribulation, by: Neeraj Dubey
Section 3 mentions the term “Appreciable Adverse Effect on Competition” (AAEC) under its sub clause
(1) and sub clause (3), although the term is not expressly defined under the Competition Act. AAEC is a
phenomenon which is observed when the provisions of the Act are contravened to negatively affect the
market players and healthy competition in market. It is important to note that the AAEC should only be
adjudged with reference to Indian economic market only, i.e. AAEC caused within India. Sub clause (3)
also mentions determining factors while having presumption of the fact that AAEC has been caused. This
presumption can be made if the agreement in question or a mutual or multilateral decision taken
between more than one market players, leads to any of the four mentioned factors under sub clause (3)
Apart from this, Section 19(3) of the Competition Act expressly mentions the factors which the
Competition Commission shall consider while adjudging whether an agreement or an arrangement has
caused or is likely to cause AAEC.

(i) Bar from entering anti-competitive agreements:-

Section 3(1) of the Act provides a general prohibition on the following to enter into agreements which
causes or is likely to cause an AAEC in India:

(a) Enterprise and enterprise;

(b) Enterprise and association of enterprises;

(c) Two associations of enterprises;

(d) Two persons;

(e) Person and an association of persons;

(f) Between two association of persons;

(g) Person and an enterprise;

(h) Person and an association of enterprise;

(i) Association of persons and enterprises;

(j) Association of persons and association of enterprises.

If an agreement is entered between any of the above, it would be void under the Act and while deciding
so they will be examined under the rule of reason on a case-to-case basis.

(ii) Exclusions of certain agreements from AAEC:-

However, with the inclusion of a proviso to section 3(3), the intent of the legislature is to exclude certain
agreements from the purview of being tagged as anti competitive in nature and thus causing AAEC. The
effect of this proviso is that any agreement entered into by way of joint ventures if such agreement
increases efficiency in production, supply, distribution, storage, acquisition or control of goods or
provision of services, shall not be presumed to have caused an AAEC.

 Bid Rigging and Collusive Bidding: Explanation to sub clause (3) of section 3 explains the term
“bid rigging” or “collusive bidding” for the purposes of section 3 (3) d, which says that an
agreement resulting in bid rigging or collusive bidding shall be presumed to have an AAEC. Bid
rigging is an outcome of horizontal anti competitive agreements. According to the explanation-
"bid rigging" means any agreement, between enterprises or persons referred to in sub-section
(3) engaged in identical or similar production or trading of goods or provision of services, which
has the effect of eliminating or reducing competition for bids or adversely affecting or
manipulating the process for bidding.
 Cartels: The term ‘Cartel’ finds its mention under section 3(3) of the Competition Act. Cartels
are such agreements, which are explicitly and formally entered by market players. These
agreements form a part of a concerted action by the market players to join hands and get
together to a consensus to abide by certain anti competitive practices which affect the market
competition negatively. For a cartel to be in existence it need not necessarily meet every day or
do something daily to be said to exist. Even a single series of meetings or concerted action with
the clear intent to limiting output or fixing prices is sufficient condition for a cartel. As long as
the reigning prices and market conditions exist due to the actions of the cartel, the cartel itself
would be considered to be continuing.

4) Agreements:-
The term agreement finds a detailed mention under the Competition Act under section 2(b),
which provides ― “agreement includes any arrangement or understanding or action in
concert:–
(i) whether or not, such arrangement, understanding or action is formal or in writing; or
(ii) Whether or not such arrangement, understanding or action is intended to be enforceable by
legal proceedings.

In Neeraj Malhotra vs Deustche Post Bank Home Finance Ltd. & Ors 3. the competition commission
of India, construed the term ‘agreement’ with all its dimensions as: “For an agreement to exist there
has to be an act in the nature of an arrangement, understanding or action in concert including
existence of an identifiable practice or decision taken by an association of enterprises or persons. In
this case, the allegation by the informant is that the act of charging prepayment interest/penalty is
such an act. Furthermore, for an agreement, it is essential to have more than one party… An
agreement is a conscious and congruous act that has to be associated to a point in time.”

(i) Types of agreements:-

3
Case No. 5/2009 DATE OF DECISION: 2.12.2010.
The competition Act does not specifically use the terminology, but section 3(3) and 3(4) indirectly
classifies agreements into two forms, for the purpose of ascertaining the anti competitive nature.

 Horizontal agreements:

Section 3(3) discusses about a specific class of agreements including cartels which are to be
presumed to be anti competitive. Horizontal agreements are agreements between enterprises,
group of enterprises, persons or group of persons, engaged in trade of identical or similar products.
Horizontal agreements are entered between two or more competitors at same level of activity, for
example- producers, distributers, manufacturers. Usually the essence and purpose of horizontal
agreements is to generate policies regarding production, distribution and price fixation. Also such
agreements provide a channel for sharing of information which can usually be price sensitive and
may influence the market. Such practices adversely affect competition by prompting antitrust law
violations. Horizontal agreements also affect prices and quality of products in the market.

Section 3(3) broadly provides for the restriction of following as being anti competitive in nature-
Agreements, practices, and decisions. Cartels are also brought under the purview of being anti
competitive under this section. The types of horizontal agreements which are considered to be anti
competitive under section 3(3) are:

(a) Directly or indirectly determine the purchase or sale prices;

(b) Limits or controls production, supply, markets, technical development, investment or provision
of services;

(c) Shares the market or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers in the market or
any other similar way;

(d) Directly or indirectly results in bid rigging or collusive bidding (effect of eliminating or reducing
competition for bids or adversely affecting or manipulating the process for bidding).

The section provides an exception to the joint ventures entered into by the parties if they increase
the efficiency in production, supply, distribution, storage, acquisition or control of goods or
provisions of services. Section 3(1) of the Act cannot be invoked independently and is necessarily to
be used along with section 3(3) related to horizontal agreements or section 3(4) related to vertical
agreements. However, it should be clarified that section 3(1) is not merely a suggestive provision but
is essentially the “genus” of the Act. It should also be invoked independently to serve the interest of
consumers and also cover various other types of agreements which may not fall under the aegis of
section 3(3) or 3(4).

 Vertical Agreements:
Vertical agreements are the agreements at different stages or different levels of market
chain. Franchising is a form of vertical agreement, where the agreement is for leasing the
 right to use a brand’s business model and name by a retailer. Under the Competition Act
2002, section 3(4) provides for agreements which are entered by entities at different stages
of production chain under sub clauses (a) to (e). If AAEC is found to have been or is likely to
have been caused by such agreements, then it would be considered to be in contravention
to section 3(1); i.e. Such agreements shall be considered as agreements in respect of
production, supply, distribution, storage, acquisition or control of goods or provision of
services, which causes or is likely to cause an appreciable adverse effect on competition
within India.
(a) Tie-in arrangement:-includes any agreement requiring a purchaser of goods, as a
condition of such purchase, to purchase some other goods;

(b) Exclusive supply agreement:-includes any agreement restricting in any matter 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;

(c) Exclusive distribution agreement:-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
the goods;

(d) Refusal to deal:-includes any agreement which restricts, or is likely to restrict, by any
method the persons or classes of persons to whom goods are sold or from whom goods are
bought;

(e) Resale price maintenance:-includes any agreement to sell goods on condition that the
prices to be changed 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 changed.

5) DETERMINATION OF ANTI COMPETITVE NATURE OF AGREEMENTS:-

Having discussed the various anti competitive practices, the question arises regarding the determination
of true nature of an agreement whether it is actually causing any adverse effect to the market and
competition or whether it is harmless and pro-market. Various courts around the world and in India
have formulated the following rules to determine the anti competitive nature and effect of the
agreements:

 Rule of Reason

The doctrine of Rule of reason was first stated and applied by the Supreme Court of U.S.A. in its
interpretation of the Sherman Act in the case of Standard Oil Co. of New Jersey v. United States 4. Under
this judgment, the supreme court of United States observed that any restraint on the market or
competition under the then applicable Sherman Act would be anti competitive until it is for promotional
and pro competitive purposes. Also the positions before and after the agreement came into force must
be ascertained to evaluate the true nature of the agreement, whether it has actually caused any harm to
the competition or not. Apart from this, the future probabilities of a negative effect upon the
competition, is also to be considered to adjudge the agreement as anti competitive. The supreme court
of India officially paved way for the recognition of this rule when the MRTP Act was in force, under
TELCO v Registrar of RT Agreement5. This judgment Also the parameters under section 19(3) which are
to be ascertained for the purpose of analyzing the nature and effect of an agreement, justify the
applicability of rule of reason in the Indian context.

In formal terms: The Rule of reason is a legal approach by competition authorities or the courts where
an attempt is made to evaluate the pro-competitive features of a restrictive business practice against its
anticompetitive effects in order to decide whether or not the practice should be Rule of reason is
however only applicable over the class of Vertical agreements, the agreements mentioned under section
3(4) of the competition act 2002. It has been observed that some market restrictions which prima facie
seem to be anticompetitive may on further examination be found to have valid efficiency-enhancing
benefits.

 Per Se Rule Rule of reason:

The per se rule, as defined by the Merriam-Webster’s legal dictionary is- a rule that considers a
particular restraint of trade to be manifestly contrary to competition and so does not require an inquiry
into precise harm or purpose for an instance of it to be declared illegal. Agreements under section 3(3)
of the competition act 2002, or Horizontal agreements are considered to be illegal and anti competitive
ab-initio, i.e. from the very beginning. Unlike vertical agreements, which are subject to the rule of
reason and parameters under section 19(3) for ascertaining their true nature and legal validity,
horizontal agreements are outright anticompetitive and thus prohibited without considering any criteria.
Agreements leading to collective boycotting, market division, price fixation and tying in arrangements
are subjected to be adjudged as anti competitive per se. such restraints falling under the category of
horizontal agreements, cause an irredeemable harm to the market competition. The Per se rule, as a

4
221 U.S. 1 (1911).
5
1977 AIR 973, 1977 SCR (2) 685.
concept was originated by the US supreme court in 1898, the case Addyston Pipe & Steel Co. v. U.S 6.
This was also a rule formulated at the time of Sherman act being in force in the United States. The
agreement in question under this case was for the outright purpose of BID RIGGING by formation of a
CARTEL. The court opined that the agreement had a direct economic impact and was of such nature that
it could not be considered for a partial or limited restraint.

Conclusion:-
The Act aims to prevent practices by parties that have AAEC in India. This can ensure freedom of trade
and would protect the interest of all the parties, including consumers. But such an aim would not be
achieved unless the parties doing business follow the principles laid down in the Act. It is important for
the parties while doing business in India to keep a check on retaining any anti-competitive element in
the agreements between them. Enterprises should be proactive and diligent to identify the existing anti-
competitive elements from their current agreements. The employees can be trained to understand the
implications of anti-competitive agreements and how to avoid that. If need be persons and enterprises
can always consult experts who can guide them to a safer option.

6
175 U.S. 211 (1898)