Understanding Prohibition of Certain Agreements under the Competition Law

Introduction

Free and fair competition is an important pillar for providing efficient business environment. The Competition Act, 2002 (“Act”) was enacted to protect and promote healthy competition in Indian markets and prevent practices, which have adverse effect on Competition. Antitrust legislation is now an integral part of economic life all the world over not only in the developed countries but also in the developing countries. The Indian Law on the subject, earlier known as the Monopolies and Restrictive Trade Practices Act (MRTP Act), was originally brought on the statute book in 1969, drawing its inspiration from the mandate given in the Directive Principles of State Policy in the Indian Constitution. In terms of competition law and consumer protection, the objective of the Act was to curb monopolistic, restrictive and unfair trade practices which curtail competition in trade and industry and which adversely affect consumer interests. A parallel legislation known as the Consumer Protection Act, 1986 had also come into being which prevails in the realm of unfair trade practices. In the context of the new economic policy paradigm, India chose to enact a new competition law called the Competition Act, 2002 (“Act”). The MRTP Act thus metamorphosed into the new law, the Act.

The principal objectives sought to be achieved through the MRTP Act were:

  • Prevention of concentration of economic power to the common detriment;
  • Control of monopolies;
  • Prohibition of Monopolistic Trade Practices (MTP);
  • Prohibition of Restrictive Trade Practices (RTP);
  • Prohibition of Unfair Trade Practices (UTP).

The MRTP Act was narrower in mandate compared to the Act of 2002 however the latter too has influence of US and UK Legal framework. The Act focuses on:

(i) Prohibition of anti-competitive agreements

(ii) Prohibition of dominance

(iii) Regulation of Combinations

(iv) Establishment of Competition Commission of India

The article focuses on anti-competitive agreements prohibited under this Act.

 A. Agreements Prohibited under the Act

In today’s global economy, enterprises association of enterprises, individuals or association of persons enter into agreements to promote the business either related to supply, production, distribution, storage or acquisition etc. in such a scenario the role of such laws regulating competition becomes more important. The Act[1], 2002 clearly states that the persons cannot enter into agreements related to the production, supply, storage, supply, acquisition or provision of services, which is likely to cause an adverse impact on competition. The Act provides broader connotation of the term agreement to include both which are formalized into writing or not or those even which were not intended to be legally enforceable[2].

B. Anti Competitive Agreements

(i) Horizontal Agreements

The anti competitive agreements include two types of agreements mainly: Horizontal and Vertical Agreements. Horizontal Agreement is an agreement for co-operation between two or more competing businesses operating at the same level in the market. This is generally to develop a healthy relationship between competitors. The substantial clauses of the agreement may include policies regarding pricing, production and distribution. The Agreement may also discuss sharing of information regarding the products and the market. Horizontal agreements can prompt violations of antitrust laws because these agreements may include clauses, which restrict competition. Price Fixing is the term usually associated with Horizontal Agreements. The Rule of reason test is applied to establish whether the agreement is illegal or not.

The Horizontal Agreements between enterprises involved in similar manufacturing of goods or services includes:

  • Agreements regarding prices
  • Agreements regarding quantities
  • Agreements regarding bids
  • Agreements regarding market sharing

(ii) The Vertical Agreements

These are the agreements between the parties generally at different stages of production. Generally Vertical Agreements are not screwed in law but the same may not be the case, if they are anti-competitive. These agreements include:

  • Tie in arrangement: Purchase of goods is tied with purchase of some other goods. Such conditions are provided in the agreement.
  • Exclusive Supply Agreements: Agreements that restricts the purchaser to supply goods other that the goods of the seller.
  • Exclusive Distribution Agreements: The agreements contain limitation in terms of supply/output/area of distribution
  • Refusal to Deal
  • Resale price maintenance: These are agreements that set the minimum price at which a reseller can sell the manufacturer’s product. This is vertical price-fixing.

The Act lists the following factors to be taken into account for adjudicatory purposes to determine whether an agreement or a practice has an appreciable adverse effect on competition, namely,

  1. Creation of barriers to new entrants in the market,
  2. Driving existing competitors out of the market,
  3. Foreclosure of competition by hindering entry into the market,
  4. Accrual of benefits to consumers,
  5. Improvements in production or distribution of goods or provision of services, and
  6. Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

Exceptions

The provisions relating to anti-competition agreements will not restrict the right of any person to restrain any infringement of intellectual property rights or to impose such reasonable conditions as may be necessary for the purposes of protecting any of his rights which have been or may be conferred upon him under the following intellectual property right statutes;

  • The Copyright Act, 1957;
  • The Patents Act, 1970;
  • The Trade and Merchandise Marks Act, 1958 or the Trade Marks Act, 1999;
  • The Geographical Indications of Goods (Registration and Protection) Act, 1999;
  • The Designs Act, 2000;
  • The Semi-conductor Integrated Circuits Layout-Design Act, 2000.

C. Judgment

In the matter of Mohit Manglani vs. M/s Flipkart India Pvt. Ltd[3] the Informant has alleged that the OP’s, which are e-commerce portals, are indulging in unfair trade practices by entering into exclusive agreements with sellers of goods and services by excluding the other portals or physical channels of sale. So, a hype of product scarcity is created. The instance of Chetan Bhagat’s Half girlfriend book is cited which was exclusively available at web portal of flipkart affecting the physical sale market. The Commission found that e-commerce accounts for 1% of the total retail market of India. Further, the online portals are meant to bring in the supplier and the end consumer. The Commission further said that only those agreements, which have Appreciable Adverse Effect on Competition (AAEC) are void. The Act identifies under section 3(3) the category of Horizontal Agreement which falls within the purview of the AAEC whereas in case of Vertical Agreements, the one that has been specified under section 3(4) of the Act and additionally those categories of agreements against which AAEC is proved. Therefore the Commission analysed the facts in light of the factors mentioned in Section 19 of the Act to find violations.

The Commission held that these principles are touchstone of assessing AAEC and further held that such exclusive agreements mentioned by the informant fails to cause a barrier to new entrant to the market or it is effecting retail market in any manner. In fact the e-commerce portals are increasing competitions. Not only this Commission found that e-commerce portals are able to enable the consumers make informed choices at the time convenient to them. No contravention of the section 3 or 4 of the Act was found and the matter was closed accordingly.

Conclusion

If any person[4], Consumer their association or trade association are aggrieved by the anti-competitive agreements they can file information before the Commission. The Central and State Government can also refer the matter to the Commission. Franchising, retailing, single branding are other kind of anti-competitive agreements too not covered under the Anti-Competitive Agreements. These laws to check the anti-competitive agreements can help to balance the trade distortions that the dominating parties intend to exercise by means of such agreements.


[1] Section 3 of the Act

[2] Section 2 (b) (i) and (ii) of the Act

[3] Case No. 80 of 2014

[4] Individual/company/firm/local authority/cooperatives/artificial juridical persons

 

Published :
September 7, 2015
Practice Area :