Module 2 Competition Law

 Key Definition- Agreement, Enterprises, Persons, Relevant Market, Consumer, Goods, Services, Trade.
 Anti-Competitive Agreements, Horizontal and Vertical Agreement,
 Rule of Per se and Reason,
 Factors causing Adverse effect on competition (AAEC) in India,
 Prohibition of Anti-Competitive Agreement/ Cartel/ Bid Rigging Price Fixing etc.,
 Introduction to various IP assets, interface between competition and IPR,
 Inquiry process in Anti-Competitive Agreements, Exemptions, Penalties

Key Definition
Agreement- Section 2(b) of the Act defines agreement. The Act defines the term ‘Agreement’ in a wide and inclusive
manner and states the following-

a. Any arrangement between parties, or

b. Any understanding between the parties, or

c. Any action taken in concert by the parties.

d. Such an arrangement, understanding or action may or may not be formal, or

e. May or may not be in writing, or

f. It may or may not be intended to be enforced by legal proceedings.

This definition of the term brings a wide variety of acts by the parties into the ambit of agreement. It is often said
that in Competition Law, even a ‘nod or a wink’ can constitute an agreement in the market. Hence, the Competition
Commission of India is very liberal in its interpretation of the term agreement.

Enterprises- Enterprise means a person or a department of the Government, who or which is, or has been, engaged
in any activity, Relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or
the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or
dealing with shares, debentures or other securities of any other body corporate, either directly or through one or
more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place
where the enterprise is located or at a different place or at different places But does not include any activity of the
Government relatable to the sovereign functions of the Government including all activities carried on by the
departments of the Central Government dealing with atomic energy, currency, defense and space.

Person, it includes An individual, HUF, company body corporate, firm whether incorporated or not ,in india or outside
india or Any co operative society or A local authority or very Artificial juristic person

Relevant Market- The concept of relevant markets is very important under the Competition Act. The Competition
Commission of India gives due preference to the relevant market while determining anti-competitive agreements
between players and their impact.

Section 2(r) of the Act defines the term “Relevant Market.” Any market that is determined by the Competition
Commission to be of relevance is a relevant market. It can either be the relevant product market or the relevant
geographic market.

Relevant geographic market

Section 2(s) of the Act, defines “Relevant Geographic Market.” It is defined as the geographic area in which the
competition between players in the market for the supply of goods and services is homogenous and different from
the conditions in the neighbouring geographic areas.

Relevant product market

“Relevant Product Market” has been defined under Section 2(t) of the Act. It is defined as the market where goods
that can be substituted are sold. These goods are substitutes for each other either through their characteristics, their
prices, or their means of use.

Consumer-

Goods- The Act defines “Goods” under Section 2(i). It states that goods under the Act would have the same meaning
as defined in the Sale of Goods Act, 1930. Hence, goods means and include the following-

a. All kinds of moveable property, except actionable claims and money,

b. This includes growing crops, grass, and things that are attached to the land or form part of the land, and the
same can be severed before sale or under the contract of sale.

c. It also includes products that are manufactured, processed or mined.

d. Stocks, shares and debentures after allotment,.

e. Goods that are imported into India, when they are distributed, supplied, or controlled in India.

Services - Section 2(u) of the Act defines “Services” and includes any kind or description of service that is provided to
the users. It may include a variety of services that may be in connection with business of any industrial or commercial
nature. A few kinds of services under the Competition Act are banking, education, financing, communication,
insurance, chit funds, material treatment, storage, transport, processing, supply of electrical or other energy,
boarding, lodging, entertainment, amusement, construction, repair, conveying of news or any information and
advertisement.

Trade-

Anti-Competitive Agreements, Horizontal and Vertical Agreement

Any agreement for goods or services which has appreciable adverse effect on competition in India is prohibited.
These kinds of agreements are known as anti-competitive agreements. Anti competitive agreement of entered into
shall be void. Section 3 of the Act states that no enterprise shall enter into:

1. Any agreement With respect to production, supply distribution, storage, acquisition or control of goods/provision
of services which is anti-competitive is prohibited and void.

2. Such agreements must cause or be likely to cause appreciable adverse effect on competition (AAEC) in a relevant
market in India. The relevant market may be a geographical or a products market.

There are Two kinds of agreements 1. Horizontal agreements ( ) 2. Vertical agreements. ( | )

Horizontal agreements

They are Agreements Between Parties in the same line of production. Example - Agreement between Manufactures,
Agreement between Distributors. Horizontal agreements are presumed to have AAEC if they

Directly or indirectly 1. determine purchase or sale prices 2. Limit or control output, technical development, services
etc. 3. Share or divide markets 4. Indulge in rigging or collusive bidding.

It include- Price Fixing Agreement, Group Boycotts, trade association,

Vertical agreements

Section 3(4) of the Act deals with Vertical Agreements. These agreements are made between persons or enterprises
who are at different stages of the supply chain in different markets. It affects the intra-brand competition in the
market.
For example- an agreement between a manufacturer of a good and its retailer to only deal with each other in the
market is a vertical agreement between players who are at different stages of production in different markets.

Vertical agreements are not per se anti-competitive, and the view of the Competition Commission towards these
agreements is quite lenient; however, when these agreements cause an appreciable adverse effect on the
competition in the market, they are a cause of a problem.

Specific vertical agreements

The Competition Act, 2002, deals with some specific types of vertical agreements between players in the market.
They have been discussed briefly here:

 Tying/tie-in arrangement

Section 3(4)(a) of the Act deals with tie-in arrangements between players in the market. A tie-in arrangement is a
type of vertical agreement that requires the purchaser of a good to purchase some other goods as a condition to
such a purchase; otherwise, they will not be able to buy the first product or the guarantee for the product will be
withheld. The main product is known as the tying product and the secondary product is known as the tied product.

For example- while buying a shaving foam named A, the customers have to compulsorily take the shaving brush
named C. It is a compulsory condition, while the second tied product may or may not be free.

In India, while determining tie-in arrangements, the CCI looks into the market power of the main tying product and
applies the rule of reason.

 Exclusive supply and distribution agreement

Section 3(4)(b) and (c) of the Act deal with this kind of vertical agreement. Here, players who are at different levels in
the supply chain come into an agreement where one player restricts the other from dealing in goods with any other
producer except them, or there might be a restriction or limitation on supplying goods in any particular area of the
market. This is the exclusive supply or distribution agreement.

For example- One wholesaler of a fruit, such as an apple, might come into an agreement with one of the retailers in
the market and make an agreement, thereby restricting the retailer from dealing in tomatoes with any other
wholesaler. This will restrict other wholesalers from entering the market and will foreclose the market.

DGIR v. Bayer India Ltd. (1988)

In this case, it was held that while entering into an agreement between the manufacturer and the distributor, the
distributor will not supply the products to any chemist, doctor or any private or government institute, which is an
anti-competitive practice. It is a form of exclusive distribution agreement.

 Refusal to deal

Section (3)(4)(d) of the Act states the arrangement of refusal of deal. In this type of vertical agreement, one powerful
and dominant firm in the market refuses to deal with other players except one, and only sells at one price, which may
be expensive. This refusal to deal can take different forms, such as:

 Refusal to supply to non-competitors,

 Refusal to supply to competitors,

 Refusal to supply to third parties,

 Deny to supply product which are not accessible in the market,

 Deny granting licences of intellectual property rights, etc.

 Resale price maintenance

Another type of vertical agreement is dealt with in Section 3(4)(e) of the Act, which is resale price maintenance.
Here, one dominant firm sells goods on conditions such as that the prices charged on resale shall be stipulated by the
seller, unless it has been stated that it can be sold at lower prices as well.

For example- The manufacturer tells the distributor to sell a product at a stipulated price only, and if the seller does
not comply with the stipulations, then the manufacturer may cut down on all business with the seller. This is also
known as vertical price fixing.

Re Prime Mag. Subscription Services Pvt. Ltd

In this case, the CCI observed that even though the publisher in the instant case imposed the maximum discount rate
on the distributor, it does not imply that it was an abuse of the dominant position because the impact of this resale
price maintenance is very negligible in the market.

Horizontal agreements vs. vertical agreements

The Competition Act treats horizontal agreements differently from vertical agreements. The difference between
horizontal and vertical agreements in the market can be tabulated as follows:

Horizontal Agreements Vertical Agreements

1. Horizontal Agreements are entered 1. Vertical Agreements are entered into

into between those enterprises that between enterprises which are at
are involved in the trade of similar or different levels of the supply chain, such
identical goods and services. as production, distribution, storage, etc.

2. Here, the enterprises are competitors 2. Here, the enterprises are at different levels of
in the market and operate at the same the supply chain, such as one producer and the
level of supply chain, such as two other- a retailer.
producers of cement.

3. Kinds of Horizontal Agreements 3. Kinds of Vertical Agreements include-

include-
 Tie-in arrangement,
 Price Fixing,
 Exclusive Supply agreement,
 Limiting the supply,
 Exclusive distribution agreement,
 Sharing the markets among the
 Refusal to deal,
competitors,
 Resale price maintenance.
 Rigging the bid.

4. The rule of presumption is applied in 4. The rule of reason is applied in cases of vertical
cases of horizontal agreements, such agreements in the market.
as cartels. This is a rebuttable
presumption.

5. Example- Two sellers of cement enter 5. Example- The producer of sofas makes an
into an agreement and decide to agreement with the distributor to only distribute
increase the price in the market his products in the market.
together.

Rule of Reason and Per se Rule.

The Competition Law around the World refers to different kinds of rules for determining and punishing anti-
competitive practices by enterprises. The major approaches taken by Competition Laws around the world are Rule of
Reason and Per se Rule.

The Per se Rule under the Competition Law implies that certain kinds of agreements are presumed to be
violative of the antitrust laws as soon as they are formed, without any regard to other factors in the market.
The parties to the agreement are deemed to be in contravention and the onus to prove that the agreement
is not anti-competitive is on the members of the agreement.
The Rule of Reason under the Competition Law implies that an agreement is not violative of competition or
antitrust laws per se, the courts look into various factors in the market before determining the violation.
The onus to prove the violation of the law is on the informant or the plaintiff.
Various competition and antitrust systems around the world have their own preferences between these
two approaches. Let us take a look at the position in different countries.
Position in India
The Competition Law of India has followed the rule of reason in determining the anti-competitive
agreements in the market. Section 3 of the Competition Act deals with both horizontal and vertical
agreements, as discussed earlier in this blog.
In Section 3(3)(d) of the Act, the phrase “shall be presumed” has been used, which states that all the anti-
competitive horizontal agreements shall be presumed to have an appreciable adverse effect on
competition. This presumption rule can be said to be similar to the per se rule in the USA because it is
believed that horizontal agreements are presumed to have such an adverse effect on competition.
However, it has been held that even though the per se rule can be read through Section 3(3) of the Act, it
has been diluted through Section 19(3), which provides for exceptions to this rule.
Sodhi Transport v. State of U.P (1986)
In this case, it was held that the presumption under Section 3(3) of the Act is a rebuttable presumption and
that it is not conclusive proof. So, any horizontal agreement or cartel will be presumed to have an adverse
effect on the competition; however, the burden of proof will shift to the defendant and the defendant can
make its representation.
In the case of vertical agreements under Section 3(4) of the Act, the Commission follows the rule of reason
itself. The pro-competitive effects and anti-competitive effects are evaluated against each other to find out
if there has been a contravention of the law or not. The Commission evaluates if these agreements are
“likely to cause” appreciable adverse effects.
Neeraj Malhotra v. Deutsche Post Bank (2011)
The CCI held that even though the wording of Section 3(3) reflects the per se rule in India, it is simply a
presumption that shifts the burden of proof. The defendant is free to take the shelter of Section 19(3) to
disprove the presumption. Indian law has been more inclined towards the use of Rule of Reason and not
the Per se Rule.

Factors causing Adverse effect on competition (AAEC) in India

It is said that the appreciable adverse effect on competition in India (AAEC) occurs when certain practices restrict
competition. AAEC can take three forms:

 Anti-competitive agreement

 Abuse of dominance
  Combinations

Section 19(3) of the Act states that the Competition Commission of India shall take into consideration all or any of the
following factors in determining whether an agreement has an appreciable adverse effect on competition under
Section 3:

 New entrants in the market are confronted with barriers;

 Excluding existing competitors from the market;

 The elimination of competition by hindering entry to the market;

 The accrual of consumer benefits;

 Production, distribution, or service improvements;

 Promotion of technical, scientific, and economic development using production or distribution of goods or
provision of services.

Prohibition of Anti-Competitive Agreement/ Cartel/ Bid Rigging Price Fixing etc

The Competition Act of 2002 in India prohibits anti-competitive agreements, including cartels, bid rigging, and price
fixing.

CARTEL- A cartel has been defined in Section 2(c) of the Act. It is a kind of horizontal agreement and can be
understood as follows-

 It is an association;
 This association is made as a result of an agreement by producers, sellers, traders, distributors or service
providers;
 The purpose of this agreement is to limit the production, distribution, sale or price of goods or trade in goods
and services; or
 The purpose is to control the production, distribution, sale or price of goods or trade in goods and services;
 The purpose is to attempt to control the production, distribution, sale, or price of goods or trade in goods
and services.

Formation and maintenance of cartels

Cartels are very attractive to the participants in the market because of their advantages. One of the main advantages
of cartels is that the total profit of the enterprises and players who are a part of the cartel would be higher than their
individual profit in a competitive market.

For example, in a market for cement clinkers, if the players come together and form a cartel, they will collectively
create shortages and increase the price. This will ensure that each of them gets higher profits than what they would
earn in a competitive market.

Why are cartels prohibited

The most simple fact in a market is that competitors are supposed to compete with one another; they are not meant
to cooperate with each other and disturb the competition in the market. Hence, horizontal agreements are
prohibited. More so, cartels are prohibited by almost all the systems of competition law in and around the world. It is
believed that cartels have no redeeming effect at all. Once a cartel is established, it is presumed to have an adverse
effect on competition. Hence, they are subject to strict penalties.

Adam Smith wrote in “The Wealth of Nations” that people who are engaged in the same trade do not meet very
often, but when they do, it often ends up being a conspiracy against the public or some contrivance to raise the
prices in the market.

CEMENT CASE OF NCLAT

BID RIGGING Another type of horizontal agreement that firms may enter into is an agreement to rig the bids by
collaborating over their responses to invitations to tender. In case of any type of bid or tender in the market, the
players may decide not to compete with others and rotate the bid. So, players simply put up a show of bidding and
let one firm win the bid at a predetermined price between them. This way, the rotation of bids continues and each
firm can profit from the bids.

PRICE FIXING- Players in the market can enter into a horizontal agreement to fix similar prices in the market and not
compete with each other. It is the most recognised form of horizontal agreement and is inherent in cartels as well.
Section 3(3)(a) of the Act deals with this category of horizontal agreement. Any direct or indirect effect on the price
of any goods or services in the market because of any action or coordination between the competitors in terms of
prices leads to this type of agreement.

For example-A and B are sellers of umbrellas in a small market. Both decide to price the umbrellas at Rs. 250 instead
of Rs. 200 during the rainy season. So that both can earn equal profits since customers have no other choice.

Inquiry process in Anti-Competitive Agreements, Exemptions, Penalties

In case on any agreement mentioned under Sec3, Comes before the CCI the CCI shall conduct an enquiry and
adjudicate on whether the agreement has any adverse effect on competition based on the following facts 1. Whether
there is creation of any barrier to new entrants into market 2. Whether the agreement drives out existing
competitors in the markets 3. Whether there is any foreclosure of competition by hindering the entry into market 4.
Whether there is any accrual of benefits to the consumers 5. Whether the agreement can produce any improvement
in production, distribution or supply of goods 6. Whether the agreement promotes technical scientific or economic
development

Orders by Commission after inquiry onto agreements [Section 27 ]

If the commission finds that the agreement under sec3 is Anti competitive, it can pass following orders

1. Direct any enterprise or person to engage in such agreement to discontinue such agreement

2. Impose penalty not more than 10% of the average turnover of last 3 financial years

3. Modified the agreement to such extent and manner specified by CCI 4. Order for payment of cost 5. Any other
orders as the CCI thinks fit

Introduction to various IP assets, interface between competition and IPR

While it is the aim of the Competition Act to restrict all agreements that are anti-competitive in nature, the Act also
states a few exceptions where restrictions may be imposed by the players in the market. These exceptions are
contained in Section 3(5) of the Act.

IPR and competition law interface

The Act provides exceptions to anti-competitive agreements in the case of intellectual properties. The Competition
Act states that any restraint or reasonable conditions that are imposed to protect intellectual property rights are
exempted from the purview of this Act.

Intellectual property is the creation or a product of the mind of an individual. It is intangible and quite different from
other properties; hence, it needs a different level of protection than other kinds of goods and services, so that
intellectual inventions are not copied without consent and to promote invention and research among individuals.

The Act has exempted the following kinds of intellectual property:

  Copyright- Copyright is the exclusive right of an author or composer to exclusively publish and sell his/her
original work in a tangible form. This protection is provided to the authors as a fair reward for their creative
efforts. This exclusive right limits others from duplicating the works of others, reproducing the same and
reaping the benefits of others' labours.

 Patents- A patent is exclusively provided by the government to individuals to make, sell, and use the
inventions for a limited period of time. This is done to ensure that the inventor can use his or her invention to
reap profits and that others cannot misuse the inventor’s work.

 Trade and Merchandise Marks- A trademark is a symbol that is used to distinguish goods and services in the
market. Trademarks act as indicators for customers about the goods and the brand. The Act does not take
into account any restriction that takes place pursuant to the trademarks of any goods or services because
trademarks help brands retain their individuality and prevent imitators from copying other brands.

 Geographical indications of goods- Geographical indications of goods are done to separately identify the
goods and services that originate from a specific part of India and gain their reputation from there.

Such as Darjeeling tea and Matti banana. These indications help customers identify specific goods and also stop
others from misusing the name of the product and reaping profits. Exclusive rights are given to use these
indications.

 Designs- The Designs Act, 2000, is aimed at mandatory registration of designs to protect against any kind of
infringement. Designs include any specific shape of a product or its pattern or colours. The registration of this
design gives the proprietor the right to use the design in any way needed and restricts others from using the
same for a limited period of time.

The Competition Act does not interfere with any agreement pursuant to the Designs Act since it is aimed at
protecting the proprietor from infringing on its registered designs.

 Layout designs of integrated circuits- An integrated circuit is a product which is in its final or intermediate
form, where at least one of the elements is active and all interconnections are formed integrally to perform
some electronic function or for manufacturingpurposes.,

These layout designs are the original works of those who create them and are not commonly available or thought of
by others. Thus, these creators are given the right to produce, reproduce, and sell these layout designs for their own
profit and commercial purposes.

Export cartels

Section 3(5) of the Act also exempts the right of a person to export goods from India if such an agreement, although
hampering competition, is with regards to the production, supply, distribution, and control of goods and services only
for the purpose of export.

An export cartel can take the form of an agreement between firms to charge a specific price for export or to
efficiently divide the export market among themselves. The effect of this cartel is only felt in the country to which the
goods and services are being exported, not in the country that is exporting. These export cartels are allowed to
successfully enter foreign markets and bring income from the foreign countries to India for its own economic growth.