A PROJECT ON:
Anti-Competitive Agreements in India under Competition Act, 2002
Submitted to: Mr. Mohd. Atif Khan
(Asst. Lecturer, HNLU)
Submitted by: Trivikram Nayak
Roll No: 167, Sem. IX
Vth Year, B.A. LL.B.(Hons.)
Hidayatullah National Law University, Raipur
Acknowledgement
I feel highly elated to work on the topic “Anti-Competitive Agreements in India under Competition Act, 2002.” The practical realization of this project has obligated the assistance of many persons. I express my deepest regard and gratitude to my guide, mentor and lecturer Mr. Mohd. Atif Khan for his unstinted support. His consistent supervision, inspiration and invaluable guidance have been of immense help in understanding and carrying out the nuances of the project report. I take this opportunity to also thank the university for providing extensive database resources in the Library and through Internet.
Table of Contents
1) Introduction…………………………………………………………….………….3
2) Objectives & Research Methodology……………………………….…………4
3) Chapter 1: Anti-Competitive Agreements: A Brief…….……………………5-16
Overview
4) Conclusion………………………………………………………………………..17
5) Bibliography………………………………………………..………………..18-19
Introduction
As we all know, there have been two different schools – The Harvard School & The Chicago School Approach. One talks about the self-regulatory mechanism of the market and the other talks about the interventionist approach. In the present time, we see a combination of these two approaches, i.e. markets are considerably free but when any anti-competitive agreement tries to distort the competition, then the government vide the Competition Commission intervenes.
The need for regulating competition has been aptly described in the Preamble of the Competition Act, 2002. It also helps in promoting the interest of the consumers and international trade. The question arises as to what are these anti-competitive agreements? In my opinion it includes a variety of agreements between enterprises, persons, etc. the ultimate aim of which is to control the market by one way or another, it may be through forming cartels or through some tie in arrangement or refusal to deal situation. Hence for the ultimate welfare of the society, there is a need to control and regulate the market.
Chapter II, Section 3 of the Competition Act, 2002 specifically deals with prohibition of certain agreements, which have appreciable adverse effect on the market. The provisions of the Competition Act relating to anti-competitive agreements were notified on 20th May, 2009. The endeavor of the researcher is to make a careful and elaborate study of provisions relating to anticompetitive agreement under the Act.
Objectives of Study
➢ To study and understand the meaning of anti-competitive agreements;
➢ To analyse section 3 of Indian Competition Act, 2002.
Research Methodology
Research methodology of this project consists of following procedures:
Research Design: The project is descriptive in nature, it goes through theoretical aspect of powers of an arbitral tribunal and analyses it with the help of cases and statutes.
Source of Data: This study is mainly based on secondary data. Data has mostly been gathered from various journals, magazines, committee reports, case laws and websites.
Chapter 1: Anti-Competitive Agreements- A Brief Overview
Comparative Study within USA, EU and UK Regimes:-
Before going in detail analysis of anti-competitive Agreements as under section 3 of the Act a study of laws as existing in other countries on anti-competitive Agreements namely EU, UK, and USA law would be useful because competition law in these countries are much older than India’s. The history of competition law reaches back to the Roman Empire. The business practices of market traders, guilds and governments have always been subject to scrutiny, and sometimes-severe sanctions. Since the 20th century, competition law has become global. The two largest and most influential systems of competition regulation are United States antitrust law and European Union competition law. National and regional competition authorities across the world are framed on the model of these two regimes. Not going into much detail, we have the Sherman Act, Clayton Act, Federal Trade Commission Act & the Robinson Patman Act in the US dealing with Anti-trust and other anti-competitive issues. In EU we have the EC Treaty (Treaty of Rome)- Article 81 & 82 of which deal with the issue.
Indian Scenario
The present Act is quite contemporary to the laws presently in force in the United States of America as well as in the United Kingdom. In other words, the provisions of the present Act and Clayton Act, 1914 of the United States of America, The Competition Act, 1988 and Enterprise Act, 2002 of the United Kingdom have somewhat similar legislative intent and scheme of enforcement. However, the provisions of these Acts are not quite pari materia to the Indian legislation.
Competition laws in India were governed by the MRTP Act, 1969 which was substantially taken from U.K Legislations, particularly the Restrictive Trade Practices
Act, 1956 and Resale Prices Act, 1964. This Act established the Monopolistic and Restrictive Trade Practices. The emphasis under the MRTP Act was in respect of trade practices that adversely affected competition and were subject to the rule of reason . Under the MRTP Act till the cease and desist order was passed by the MRTP
Commission, a particular trade practice was not considered void or illegal whereas this is not the case under the Competition Act. In term of the provisions of MRTP Act, fourteen trade practices were listed which were deemed to be restrictive and the respondent has to
prove his innocence before the MPRTC. It was deeming provision and almost identical to per se illegal in public interest.
A comparison of section 33 of the MRTP Act, 1969 with the corresponding provisions of Section 3 of the Competition Act, 2002 would show that the anti-competitive agreements particularized in sub section 3 and 4 of the Competition Act, 2002 are somewhat akin to restrictive trade practices specified in clauses (a)-(d), (f)-(h), (j), (ja), (jb) of sub-section 1 of section 33 of the MRTP Act, 1969.
The Competition Act as laid down in its preamble has been framed on the philosophy of modern competition law to come in line with current policies of GOI with growing national and international trends with regard to competition both at national and international level. It aims at fostering competition and promoting Indian markets against anti-competitive practices by enterprises. Competition laws in India like in any other jurisdiction prohibits all agreements which restrict freedom of trade and cause consumer harm by way of limiting production and distribution of goods and services and fixing prices higher than normal. Principle objective of supplier of goods and services who are in a position to manipulate the market is to maintain their profits at pre-determined levels. Where competition is adversely affected to an appreciable extent, such agreements would be anti-competitive.
The law prohibiting agreements, practices, and decisions that are anti-competitive are contained in section 3 of the Act. Before going into much detail, lets deal with the following provision first, which provides as under:
Section 3- Anti Competitive Agreements:
(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an AAEC within India.
(2) Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void.
(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice
carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which–
(a) directly or indirectly determines 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, Shall be presumed to have an appreciable adverse effect on competition:
Provided that nothing contained in this sub-section shall apply to 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.
Explanation.—For the purposes of this sub-section, “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
(4) Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including:
(a) tie-in arrangement;
(b) exclusive supply agreement;
(c) exclusive distribution agreement;
(d) refusal to deal;
(e) resale price maintenance,
shall be an agreement in contravention of sub-section (1) if such agreement causes
or is likely to cause an appreciable adverse effect on competition in India.
(5) Nothing contained in this section shall restrict—
i. the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under—
(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);
(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999);
(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of 1999);
(e) the Designs Act, 2000 (16 of 2000);
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);
ii. the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.
The term anti-competitive agreements as such has not been defined by the Act, however, Section 3 prescribes certain practices which will be anti-competitive and the Act has also provided a wide definition of agreement under section 2 (b). Section 3(1) is a general prohibition of an agreement relating to the production, supply, distribution, storage, acquisition or control of goods or provision of services by enterprises, which causes or is likely to cause an ‘appreciable adverse effect’ on competition within India. Section 3(2) simply declares agreement under section 3(1) void. Section 3(3) deals with certain specific anti competitive agreements, practices and decisions of those supplying identical or similar goods or services, acting in concert for example agreement between manufacturer and manufacturer or supplier and supplier, and also includes such action by cartels. Section 3(4) deal with restraints imposed through agreements among enterprises in different stages of production or supply etc. for example agreement amongst manufacturer and supplier. Section 3 (5) provides for exceptions, it saves the rights of proprietor of any intellectual property right listed in it to restrain the infringement of any of those rights regardless of section 3.
Terms & Their Interpretation
After taking all the relevant factors into account in a given statute, there should be still some principles and terms on which one can arrive at a conclusion on the effect of the anticompetitive conduct or practice on competition. The courts all over the world including India have come to judge violations of anti-competitive agreements by the following main approaches.
Agreements
An Agreement can be said to be a mutual understanding between two or more persons. Black’s Law Dictionary defines agreement as – A mutual understanding between two or more persons about their relative rights and duties regarding past or future performances, a manifestation of mutual consent by two or more persons. According to Iyers Law Lexicon, agreement is the – Coming together of parties, in opinion or in final determination, the union of two or more minds in a thing done or to be done, a mutual assent to do a thing. It has also been defined as – The occurrence of two or more persons in affecting or altering their rights and duties.
Appreciable Adverse Effect on Competition:
The term appreciable adverse effect has not been defined in the Act, but section 19(3) of the Act provides for certain factors to be given due regard by the commission while determining whether an agreement has an appreciable adverse effect or not, namely: –
(a) creation of barriers to new entrants in the market;
(b) driving existing competitors out of the market;
(c) foreclosure of competition by hindering entry into the market;
(d) accrual of benefits to consumers;
(e) improvements in production or distribution of goods or provision of services;
(f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
The first three factors, relates to negative effect on competition while the remaining three factors relates to beneficial effects. Thus in assessing whether an agreements have appreciable adverse effect on competition, both the harmful and beneficial effects shall be taken into consideration while determining any case under section 3 by the commission.
Cartels
Section 3(3) provides that cartels engaged in identical or similar trade of goods or provision of services which results in anything provide in section 3(3) (a) to (d), shall be presumed to have appreciable adverse effect on competition. The Act defines Cartel under section 2(c) it says- “cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services.”
In the landmark Lombard Club case, eight Austrian Banks were fined for participating in wide ranging price cartel to the tune of 12,426 Million Euros. It is also a general principle of competition law that active participation is not the sole criteria, even having information about it is enough. Hence both active and passive membership in a cartel does not makes any difference. Although there is provision for leniency programmes. In India also we have the Cement Cartel case, Vitamin Cartel case which deal with cartelization in detail.
In dealing with this issue, through decades of practice and research, the per-se rule is adopted and hence all cartels are presumed to be anti-competitive by nature. Lets discuss the two approaches in brief.
Rule of Reason Approach
In determining whether there is an effect on the competition, the following factors are taken into consideration-
(a) facts of the case;
(b) the market;
(c) existing competition in market; &
(d) the actual or probable limiting of competition in relevant market.
The SCOTUS in Board of Trade of City of Chicago vs. US has beautifully summarized the concept. It stated that every regulation/ agreement w.r.t. trade leads to restraint, however it is to be seen, whether that restraint merely regulates and promotes completion or whether it distorts or eliminates competition. The above stated factors are to be taken into consideration while dealing with the issue.
Per-Se Rule Approach
The term ‘per se’ is a Latin phrase meaning- in itself – in legal terms it basically means that the courts will regard a certain action to always be harmful and therefore it must only be proved that the defendant has committed the action to find him guilty. Under this approach, the acts/ practices mentioned in the statute are presumed to have an appreciable adverse effect on competition like in case of cartels. This is on the basis of established experience.
In Northern Pacific Railway Company v. United States, the Court observed that there are certain agreements and practices which because of their pernicious effects on competition and lack of any redeeming virtue are confusedly presumed to be unreasonable and therefore illegal without any elaborate inquiry as to the precise harm they have caused or the business excuse for their use. This rule in section 3(3) is a presumptive one
Analysis of Section 3
For the purpose of present study Section 3 can broadly be divided into four parts namely:
i. General prohibition [section 3(1) and section 3 (2)]
ii. Horizontal agreements[section 3(3)]
iii. Vertical agreements[section 3(4)]
iiii. Exceptions[section 3(5) and (3) ]
Section 3(1)
Section 3(1) is a general prohibition of an agreement relating to the production, supply, distribution, storage, acquisition or control of goods or provision of services by enterprises, which causes or is likely to cause an appreciable adverse effect on competition within India. So the key elements for application of section 3(1) are agreement between enterprises and such agreement must cause an appreciable adverse effect on competition within India. It is to be noticed that section 3(1) prohibits agreements which causes appreciable adverse effect in India only.
Section 3(2)
Section 3(2) of the act merely declares all the agreements void, which are entered into contravention of the provisions contained in sub-section (1).
Section 3(3) Horizontal Agreements
Agreements prohibited under section 3(3) are described as horizontal agreements for they apply to similar or identical trade of goods or provision of services. A careful reading of section 3(3) prompts that it restricts three things namely agreement, practice and decision including cartels who are identical or similar trade of goods or provision of services. The Act under this sub-section presumes following activities mentioned in Section 3(3)(a)-(d) to have an appreciable adverse effect on competition.
For the violation of Section 3(3), it must be established that there exists an agreement, practice carried on or, decision taken by entities mentioned therein, including cartels, engaged in identical or similar trade of goods or provisions of services, which result in effects mentioned in clauses (a) to (d) of sub-section (3). These include acts that limit or control production, supply, markets, technical development, investment or provision of services.
Types of horizontal agreement prohibited under Section 3(3)-
a. Agreements that directly or indirectly determine purchase or sale prices like Price fixing agreements, as the name suggests are agreements to fix, directly or indirectly purchase or sale prices. The term price fixing is applied to a wide range of actions taken by competitors having a direct effect on price and includes a number of agreements such as agreements on price, agreements on credit terms, agreements to adhere to published prices etc. In Southern Motors Rate Carriers Conference Inc. et. al. vs. United States it was observed that the term price fixing generally refers to a process by which competitors agree upon prices that will prevail in the market for the goods or services they offer. The Competition Act, however refers to agreements to determine both purchase and sale prices. For instance, if a group of manufacturers of product A enter into an agreement not to sell product A below a fixed price.
b. Limits or controls production, supply, markets, technical development, investment or provision of services- Agreements that limit or control production, supply, markets, technical development investment or provision of services are also considered to be anticompetitive. An example of such an agreement is one where there is a clause that the distributor must ensure the selling of 100 cylinders a month. Agreement for limiting or controlling production are anticompetitive for two reasons; one that by controlling production. The supply is kept low as compared to the demand creating artificial scarcity; second the agreement, in effect restricts competition between the parties themselves so that the efficient ones among them also cannot go ahead with further production and dislodge the less efficient from the market.
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 the number of customers in the market or any other similar way- This category covers the agreements referred to as market sharing agreements. Market sharing agreements are considered to be anti-competitive as they reduce the choice available to customers in a competitive market. Such agreements also reduce competition between the parties to agreement. Prof. Whish observes that geographic market sharing is particularly restrictive from the customers point of view since it diminishes choice; at least where the parties fix prices, a choice of product remains and it is possible that restriction of price competition will force parties to compete in other ways. Market allocation agreements eliminate the need to police the pricing practices of the companies party to the agreement and the need for producers with different costs to agree on appropriate prices.
d. Directly or indirectly results in bid-rigging or collusive bidding- The term bid-rigging has been defined in the explanation to subsection (3) of Section 3 of the Act. According to it, bid-rigging means, any agreement between the 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. Bid rigging includes the following categories as well- bid suppression, complementary bidding, bid rotation, subcontracting, etc.
Proviso attached to this section3 (3) exempts 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. The term joint venture39 has not been defined in the Act. In general terms it means the cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise.
Section 3(4) Vertical Restraints
Vertical Agreements are agreements between persons at different levels of the production chain such as an agreement between a manufacturer and a distributor. Section 3(4) deals with certain specific vertical agreements. It includes:
i. tie-in arrangements;
ii. exclusive supply agreement;
iii. exclusive distribution agreement;
iiii. refusal to deal; &
v. resale price maintenance,
The above-mentioned terms are defined in the Explanation part of the section. The agreements mentioned under Section 3(4) are not per se anti-competitive, it depends on facts and circumstances of each case. This will be clear with the help of case laws on some of the aspects.
Tie in Arrangements- Essentials of Tie-in Arrangements is that – there should 2 distinct products, which are tied together i.e. tied product and tying product; both have different markets; condition on sale of one product is to purchase the tied product. In International Salt Co. vs. US , a company had leased its two patented products, known as lixator and saltomat. The agreement required the lessees to purchase all the raw materials i.e. unpatented salt and salt tablets, which were to be used in the machine. However, it was found by SCOTUS that the same quality of material was available in the market. Hence the condition in the agreement prevented competition by restraining other market players and creating a monopoly. Hence the agreement was found to be anti-competitive.
Similarly in Eastman Kodak Co. vs. ImageTech. Svcs, here the Kodak company sold photocopiers and micrographic instruments. It also provided for spare parts & services. So the company tried to limit the availability of spare parts, etc. to the Independent Service Providers, so as to control the market. It was held by the court that there was sufficient evidence to prove existence of distinct products and the sale of which was tied. This was also held to be an anti-competitive practice.
Exclusive Supply Agreements- In Standard Oil Co. of California vs. United States case the company Standard Oil, had entered into agreements with its retailers to buy all their requirements of gasoline and petroleum products only from them. It was observed by SCOTUS that this agreement restricted the access of retailers to procure products from other sources, there by it limited competition in market. Hence it was also held to be anti-competitive.
Section 3(5)
The Act prohibits agreements that have appreciable adverse effect on competition, but there have been incorporated certain exceptions to this effect. Section 3(5) provides exceptions for the protection of certain IPR’s:
A. Section 3(5)(i) provides, exemption from the application of section 3, to the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under– The Copyright Act, 1957 (14 of 1957); The Patents Act, 1970 (39 of 1970); The Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999); The Geographical Indications of Goods (Registration and Protection)Act, 1999(48 of 1999); The Designs Act, 2000 (16 of 2000); The Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000).
Exception to agreements related to export- Many countries exempt anti-competitive agreements relating to exports from the operation of law; this is presumably on the ground that such anti-competitive agreements harm only overseas consumers and are therefore of no concern to the national authorities
B. Section 3(5) (ii) exempts the right of any person to export goods from India up to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.
Conclusion
Indian Competition Act has learnt from the mistakes & loopholes from its predecessors in India as well as in abroad. As we have seen through the entire project how beautifully the, Section 3 has been framed. It does not leave any stone unturned while dealing with the issue of anti-competitive agreements. However, as compared to other jurisdictions, the 2002 Act in India is a recent one, and it is to be seen in the coming years as to what is the role played by the competition commission as well as the courts in India in dealing with anti-competitive agreements. Further, it is to be noted that all agreements are not per se anti-competitive, in some cases it might be but in others, only the facts and practice will tell.
Bibliography
Books Referred: –
➢ Dorothy Livingstone & Herbert Smith, Competition Act, 1998: A practical Guide, (Sweet and Maxwell, London, Dec. 1998).
➢ Ratan Lal and Dheeraj Lal, Commentry on Law of Evidence, 173 (Lexis Nexis Butter Worths Wadhwa, Nagpur, 23rd ed. 2010).
➢ Richard Whish, Competition Law, (6th ed., Oxford University Press, 2005).
➢ T. Ramappa, Competition Law In India- Policy, Issues & Development 1-144 (3rd ed. Oxford University Press, 2014).
Legislations Referred: –
➢ The Competition Act, 2002 (Act no. 12 of 2003).
Cases Referred: –
➢ ACF Chemifarma NV v. Commission of European Communities, [1979] ECR 661.
➢ Board of Trade of City of Chicago vs. US, 246 US 231 (1918).
➢ Eastman Kodak Co. vs. ImageTech. Svcs, 504 US 451 (1992).
➢ International Salt Co. vs. US, 332 US 392 (1947).
➢ Lombard Club- Commission Decision of 11 June 2002 relating to a proceeding under Article 81 of the EC Treaty (Case COMP/36.571/D-1: Austrian banks -‘Lombard Club’), Official Journal of the European Union, Accessed on 18th September 2016, from (http://ec.europa.eu/competition/antitrust/cases/dec_docs/36571/36571_222_1.pdf.).
➢ Northern Pacific Railway Company v. United States, 356 US 1 (1958).
➢ Southern Motors Rate Carriers Conference Inc. et. al. vs. United States, 471 US 48 (1985).
➢ Standard Oil Co. of California vs. United States, 337 US 293 (1949).
Articles/ Documents/ Journals Referred: –
➢ Commission Decision of 11 June 2002 relating to a proceeding under Article 81 of the EC Treaty (Case COMP/36.571/D-1: Austrian banks -‘Lombard Club’), Official Journal of the European Union, Accessed on 18th September 2016, from (http://ec.europa.eu/competition/antitrust/cases/dec_docs/36571/36571_222_1.pdf.).
➢ World Bank/OECD (1998): A framework for the design and implementation of Competition Law and Policy World, OECD, 199