COMPETITION LAW

‘An analysis of agreements that are anti-

competitive in nature’

Submitted By
Yashvardhan Singh
19FLICDDN02134
BA.LL.B. (Hons.) 4th Year

Submitted To

SCHOOL OF LAW
FACULTY OF LAW
ICFAI UNIVERSITY, DEHRADUN
2022
INTRODUCTION

With dynamic trends in the new economic market scenario, there was an enactment of new
Competition law regime in India. One of the major objectives of this law was to change Indian
economic policies, removal of trade barriers and enforce pro-trade changes. All this would ensure fair
competition in the market which would benefit both the consumer and ensure smooth functioning of
the market at the same time not proving to be arbitrary. In furtherance of the same, it was necessary to
ensure that the agreements entered by trading entities do not acquire an anti-competitive nature.

Therefore, while engaging in a business activity in India, the parties to an agreement although have the
freedom of trade are prohibited from entering into agreements that are anti-competitive in nature. Anti-
Competitive Agreements are those agreements that have their object in furtherance of or prevent,
restrict or distort competition in India. Competition Act of 2002 defines the kind of anti-competitive
agreements that cannot be made in India. According to Section 3 of the Competition Act, any
agreements entered into are deemed to be anti-competitive if it falls into any

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:
Enterprise and enterprise;
Enterprise and association of enterprises;
Two associations of enterprises;
Two persons;
Person and an association of persons;
Between two association of persons;
Person and an enterprise;
Person and an association of enterprise;
 Association of persons and enterprises;
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 reason1 on a case-to-case basis.

Categories of Anti-Competitive Agreements

These categories broadly include the following agreements, between two entities, engaged in trade
of similar or identical goods or services:
I. That directly or indirectly leads to determination of purchase or sale prices;

II. That limits or controls production, supply, markets, technical development, investment or
provision of services;
III. That 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;
IV. That directly or indirectly results in bid rigging or collusive bidding, shall be presumed to
have an appreciable adverse effect on competition. Whether an agreement has an anti-
competitive effect on the competition in India is to be decided by the Competition
Commission of India. According to Section 19 of the Act, the parameters for judging or
determining whether the agreement can have appreciable adverse impact on the
competition include the following:
However, an exception can be created to this rule. If the nature of agreements is that of increasing
efficiency regarding production, supply, distribution, storage, acquisition or control of goods or
services. In the case where the agreement has a direct nexus between cost and quality efficiencies
and it benefits the consumers or compensates them for any actual or negative impact that the
agreement is likely to cause, then such an agreement does not fall within this category.
Also, the Competition Act, 2002 does not recognize those agreements which impose reasonable
restrictions that restrict or protect infringement of rights as guaranteed under the Intellectual
Property laws. In the case of Shri Ashok Kumar Sharma v. Agni Devices Pvt. Ltd it was held that
 a mere restriction on the use of the trademark would not be held as anti – competitive within the
meaning of Section 3 or 4 of the Act.
Section 19(3) requires that the Competition Commission of India should give due regard to the
factors as mentioned above while deciding whether it causes appreciable adverse effect or not.
However, in the case of Automobiles Dealers Association v. Global Automobiles Limited &
Another, CCI held that while examining the said matter, it shall work on the principles of prudence
in light of the factors as mentioned in Section 19 (3).

V. Agreements among enterprises or persons at different stages or levels of the production,

supply, storage, sale, price of trade of goods or services including the following:
VI. Tie-in arrangement – agreement which requires a purchaser to purchase some other goods
as a condition to purchase the goods that he wants to purchase.

VII. Exclusive supply agreement – agreement that restricts a purchaser in any manner, directly
or indirectly, from acquiring or dealing in the goods other than those of the seller or any of
the other person.

VIII. Exclusive distribution agreement – agreement which limits, restricts or withholds the
output or supply of any goods or allocates the area or market for disposal or sale of the
goods.

IX. Refusal to deal – Any agreement that restricts or is likely to restrict any person or class of
persons, by any method, to or from whom the goods can be sold or brought.

X. Resale price maintenance – Any agreement that in which the price for resale by the
purchaser is stipulated by the seller unless it is clearly stated that the prices lower than
those prices can be charged.

XI. While determining whether the agreement falls within the category of anti-competitive one
or not, the competition Commission can employ the yardstick of the rule of reason.
According to the rule of reason as explained by the United States Supreme Court in the
case of Board of Trade of City of Chicago v. The US, [2] any restraint is of an essence until
it merely regulates and promotes competition. To determine this question, the Court must
ordinarily consider the facts peculiar to the business to which restraint is applied, its
 condition before and after the restraint was imposed, the nature of restraining and its actual
or probable effect.

Further, it is crucial to note that section 2(b) of the Act provides that "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. So, even oral
arrangement can be anti-competitive. Arrangement between parties which have not been formalized or
if written but not executed or registered can also be considered anti-competitive if they are found to
have AAEC in India.

Horizontal Agreements

Horizontal agreements are arrangements between enterprises at the same stage of the production
chain and that is generally between two rivals for either fixing prices or for limiting production or
for sharing markets. In all such agreements, there is a presumption in the Act that such agreements
cause AAEC. Cartel is also a horizontal agreement. This is generally between producers of goods
or providers of services for price-fixing or sharing of market, and is generally regarded as the most
pernicious form of anti-competitive agreement.
Directly or indirectly determine the purchase or sale prices;

Limits or controls production, supply, markets, technical development, investment or provision

of services;

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;

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 good 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 between enterprises at different stages of the production chain, like an
arrangement between the manufacturer and a distributor. The presumptive rule does not apply to
vertical agreements. The question whether the vertical agreement is causing AAEC is determined by
rule of reason. When rule of reason is employed, both positive as well as negative impact of
competition is analyzed. In order to determine whether any agreement is in contravention of section
3(4) read with section 3(1) of the Act, the following five essential ingredients of section 3(4) have to
be satisfied:
a) There must be an agreement amongst enterprises or persons;

b) The parties to such agreement must be at different stages or levels of production chain, in
respect of production, supply, distribution, storage, sale or price of, or trade in goods or
provision of services;

c) The agreeing parties must be in different markets;

d) The agreement should cause or should be likely to cause AAEC;

e) The agreement should be of one of the following natures as illustrated in section 3(4) of the
Act:

I. Tie-in arrangement (includes any agreement requiring a purchaser of goods, as a condition

of such purchase, to purchase some other goods);

II. 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);
III. 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);

Additional grounds
While determining whether an agreement has an AAEC under section 3, the CCI also gives due
regard to all or any of the following factors provided under section 19(3) of the Act –
i. Creation of barriers to new entrants in the market;

ii. Driving existing competitors out of the market;

iii. Foreclosure of competition by hindering entry into the market;

iv. Accrual of benefits to consumers;

v. Improvements in production or distribution of goods or provision of services;

vi. Promotion of technical, scientific and economic development by means of production or

distribution of goods or provision of services.

Remedies to Anti-competitive Agreements

After an inquiry if the commission finds that the agreement in question falls within the category
of Section 3, it can pass any of the following orders as the case may be:

1. Direct the person, enterprise or association involved in the agreement to discontinue

or re-enter such agreement;
2. Impose such penalties on person enterprise or association, as it deems fit. Such
penalties shall not exceed ten percent of the average turnover for the preceding three
financial years
3. In cases of cartels the penalties mentioned above shall extend to each producer, seller,
distributor, trader or service provider included in that cartel and the amount of penalty
could extend upto either three times of its profit for each year of the agreement’s
continuance or ten percent, whichever is higher.
4. Direct for modification of the agreement to the extent and in the manner as may be
specified in the order of the commission.
5. Payment of cost and issuing of directions to the enterprise to comply with the orders.
6. Pass any such order or direction as it may deem fit.
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.