Anti-Competitive Agreements under Section 3 of the Competition Act, 2002

Introduction:

Section 3 of the Competition Act, 2002 prohibits anti-competitive agreements that have an
appreciable adverse effect on competition (AAEC) within India. The goal is to maintain a fair
competitive environment that promotes efficiency and protects consumers from unfair
practices.

Section 3(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 appreciable adverse effect on competition within India.”

1. Types of Agreements under Section 3 of the Competition Act

Horizontal Agreements (Section 3(3))

Horizontal agreements are entered into between enterprises operating at the same level of
the production chain, usually between competitors. These agreements are presumed to
have an adverse effect on competition.

Types of Horizontal Agreements:

 Price Fixing: Competitors agree to fix prices, limiting price-based competition.

 Market Sharing: Competitors divide markets geographically or by customers to avoid
competition.
 Output Restriction: Firms agree to limit production to drive up prices.
 Bid Rigging: Colluding to influence the outcome of bidding processes.

Vertical Agreements (Section 3(4))

Vertical agreements are between enterprises operating at different levels of the production
chain, such as manufacturers and distributors. These are not automatically considered anti-
competitive and must be assessed for their impact on competition.

Types of Vertical Agreements:

 Tie-in Arrangements: Customers are required to buy another product or service

along with the main product.
 Exclusive Supply/Distribution Agreements: Restricting who a distributor or supplier
can deal with.
 Resale Price Maintenance: Fixing the price at which a product can be resold.
 Refusal to Deal: Refusing to sell or buy from certain parties unless certain conditions
are met.

2. Concept of Cartel
A cartel is an association of independent enterprises that agree to coordinate their actions
to control production, pricing, or market allocation, with the intention of manipulating the
market in their favour. Cartels are typically formed in secret and are illegal under
competition law.

Key Features of Cartels:

 Price Fixing: Competitors agree to sell their goods or services at a set price.
 Market Allocation: Competitors divide geographic areas or customer groups among
themselves to avoid competition.
 Production Quotas: Firms agree on limiting production to create artificial scarcity.

Example: A group of cement manufacturers agreeing to fix prices and restrict production to
control the market is an example of a cartel.

3. Concept of Appreciable Adverse Effect on Competition (AAEC)

The core test under Section 3 is whether an agreement causes or is likely to cause an
Appreciable Adverse Effect on Competition (AAEC). For an agreement to be considered
anti-competitive, it must reduce or limit competition significantly.

Factors Responsible for AAEC:

As per Section 19(3), the following factors are considered when assessing AAEC:

 Creation of barriers to new entrants.

 Driving existing competitors out of the market.
 Foreclosure of competition by hindering market access.
 Accrual of benefits to consumers.
 Improvement in production or distribution of goods or provision of services.
 Promotion of technical, scientific, and economic development.

Exceptions to AAEC:

Certain agreements are allowed despite causing AAEC if they result in benefits like improved
efficiency, consumer benefits, or technological advancements.

4. Per Se Rule vs. Rule of Reason

These are two legal standards used to evaluate whether an agreement is anti-competitive.

Per Se Rule:

Under the Per Se Rule, certain types of agreements are automatically considered anti-
competitive without needing detailed examination. Horizontal agreements like price fixing,
market allocation, and bid-rigging generally fall under this rule.
Example: Competitors agreeing to fix prices is per se illegal, as such conduct is inherently
harmful to competition.

Rule of Reason:

The Rule of Reason involves a detailed analysis of the agreement’s context, objectives, and
actual or potential effect on competition. Vertical agreements and certain horizontal
agreements are usually assessed under the rule of reason.

Example: An exclusive supply agreement may restrict some competition but could also
promote efficiency. Under the rule of reason, the overall effect on the market is evaluated.

5. Single Economic Entity Doctrine

The Single Economic Entity doctrine exempts certain agreements from the scope of Section
3. This applies to agreements between enterprises that are part of the same corporate
group or operate as a single entity.

Example: A parent company and its subsidiary coordinating their pricing strategies will not
be considered an anti-competitive agreement because they form a single economic entity.

This doctrine acknowledges that competition law is intended to regulate competition

between separate economic actors, not within the same corporate group.

RPG Enterprises Case (2012)

In this case, the CCI ruled that agreements between companies within the same corporate
group did not violate Section 3, applying the single economic entity doctrine. The CCI held
that, because these companies operated as a unified entity, their agreements were not anti-
competitive.

6. Dawn Raids

Dawn Raids are surprise inspections conducted by the Competition Commission of India
(CCI) under Section 41 to collect evidence of anti-competitive practices, such as cartelization
or abuse of dominance. These raids are usually conducted early in the morning to prevent
the destruction of incriminating evidence.

Process of a Dawn Raid:

 The CCI can conduct dawn raids on the premises of enterprises suspected of anti-
competitive behaviour.
  The raids are carried out with the help of the Director General and are often
accompanied by law enforcement officials.
 Companies are required to cooperate with the CCI and provide access to documents,
data, and other relevant information.

Example: If there is suspicion that a cartel exists among cement manufacturers, the CCI can
conduct a dawn raid to gather evidence of collusion.

Jindal Steel & Power Ltd. (2014)

As part of an investigation into cartelization in the steel industry, the CCI conducted a dawn
raid at the offices of Jindal Steel & Power Ltd. The raid allowed the CCI to gather documents,
emails, and other evidence that demonstrated the existence of a cartel fixing prices and
controlling the supply of steel. This case was crucial in showing how dawn raids are
effectively used to enforce Section 3 of the Act.

Table: Types of Anti-Competitive Agreements Under Section 3

Type of Agreement Section Simple Example

Horizontal Agreements Section 3(3) Three bakeries agree to

sell bread at ₹40

Price Fixing Section 3(3) Competitors agree to set

the price of milk at ₹50

Market Sharing Section 3(3) Telecom companies divide

regions to avoid
competition

Output Restriction Section 3(3) Cement producers limit

production to raise prices

Bid Rigging Section 3(3) Construction firms

coordinate bids for a
government tender

Vertical Agreements Section 3(4) A manufacturer forces

retailers to sell at ₹20,000

Tie-in Arrangements Section 3(4) A refrigerator company

requires buying a washing
 machine

Exclusive Section 3(4) A phone maker sells

Supply/Distribution exclusively through one
retailer

Resale Price Maintenance Section 3(4) A car company fixes the

retail price of its vehicles

Refusal to Deal Section 3(4) A supplier refuses to sell

unless a retailer excludes
competitors

Conclusion

The Competition Act, 2002, through Section 3, aims to regulate both horizontal and vertical
agreements that can harm competition. The concept of Appreciable Adverse Effect on
Competition (AAEC) is crucial in determining whether an agreement violates competition
law. While per se illegal agreements are automatically considered harmful, others are
evaluated under the rule of reason. The Single Economic Entity Doctrine provides relief for
intra-group agreements, and Dawn Raids are an important tool for the CCI to uncover anti-
competitive behaviour.

Landmark Cases:

1. Cement Manufacturers Association Case (2012)

Facts:
Several major cement manufacturers were found guilty of forming a cartel to control the
supply of cement and fix its prices. The manufacturers included large players in the cement
industry, such as ACC, Ambuja Cements, and others. They coordinated to limit production
and create artificial scarcity, driving up prices.

Issue:
Whether the agreement among the cement manufacturers constituted a violation of
Section 3(3) of the Competition Act, particularly regarding price-fixing and production
limitation.

Judgment:
The Competition Commission of India (CCI) held that the cement manufacturers had
engaged in price-fixing under Section 3(3)(a) and restricted output under Section 3(3)(b),
causing an appreciable adverse effect on competition (AAEC) in the cement market. The CCI
imposed a fine of ₹6,307 crore on the companies involved. This was one of the largest
penalties imposed by the CCI at the time.

Importance:
This case illustrates the strict stance taken by the CCI against cartels and price-fixing
agreements that harm competition and consumer welfare. It highlights how even the largest
industries are subject to scrutiny under the Competition Act.

2. Hindustan Lever Ltd. vs SEBI (2001)

Facts:
Although this case predates the enactment of the Competition Act, it involved vertical
agreements where Hindustan Lever Ltd. (HLL) was accused of using exclusive agreements
with its distributors to restrict competitors' access to the market. These agreements were
alleged to have a significant impact on market competition by preventing other companies
from entering or expanding their market presence.

Issue:
The case raised concerns about the anti-competitive effects of exclusive agreements
between manufacturers and distributors.

Judgment:
While this case was decided before the Competition Act came into force, it set a foundation
for how Section 3(4) of the Competition Act would later handle vertical agreements. The
case demonstrated how vertical agreements, like exclusive supply or distribution deals,
could restrict competition and harm the market.

Importance:
This case is relevant in demonstrating how exclusive agreements were evaluated under
similar laws and would later be evaluated under the Competition Act using the rule of
reason.

3. Airlines Fuel Surcharge Cartel Case (2015)

Facts:
Several airlines, including Jet Airways, IndiGo, and SpiceJet, were accused of forming a cartel
to fix the fuel surcharge rates on cargo services. This resulted in inflated costs for businesses
that relied on air cargo transportation.

Issue:
Whether the airlines' agreement to fix fuel surcharges violated Section 3(3)(a) of the
Competition Act, which prohibits price-fixing.
Judgment:
The CCI found that the airlines had indeed formed a cartel to fix fuel surcharges, which
violated Section 3(3)(a). The airlines were fined a total of ₹258 crore for their anti-
competitive behaviour.

Importance:
This case is a key example of how the CCI targets cartels in various industries, including the
airline sector, where pricing coordination can have wide-reaching impacts on other
industries.

4. DLF Ltd. Case (2011)

Facts:
DLF, a leading real estate developer, was accused of abusing its dominant position by
imposing unfair terms and conditions on apartment buyers. These conditions were included
in buyer agreements and were deemed one-sided and exploitative. The agreements also
created barriers for other real estate developers, limiting competition in the market.

Issue:
Whether DLF's actions constituted an abuse of dominance under Section 4 of the
Competition Act and whether the terms of the agreements led to an appreciable adverse
effect on competition (AAEC).

Judgment:
The CCI ruled that DLF had abused its dominant position and imposed unfair terms on
buyers, resulting in an adverse effect on competition. DLF was fined ₹630 crore and ordered
to amend its agreements.

Importance:
This case is crucial in understanding the application of Section 19(3), which outlines factors
for assessing AAEC. It also demonstrates how dominant firms in the real estate sector can
negatively impact both consumers and competition.

5. Hyundai Motors India Limited (2017)

Facts:
Hyundai Motors was accused of entering into resale price maintenance (RPM) agreements
with its dealers, which prevented them from offering discounts on Hyundai cars. These
agreements restricted the ability of dealers to compete on price, potentially harming
consumers by keeping car prices artificially high.

Issue:
Whether Hyundai’s resale price maintenance agreements violated Section 3(4)(e) of the
Competition Act, which deals with vertical agreements that harm competition.
Judgment:
The CCI used the rule of reason to evaluate the agreements and found that Hyundai’s
conduct restricted competition by preventing price competition among dealers. Hyundai
was fined ₹87 crore for violating the Act.

Importance:
This case illustrates how vertical agreements, such as resale price maintenance, are
evaluated under the rule of reason to assess their overall effect on competition. The
decision reinforced the need for manufacturers to avoid restrictive agreements with dealers
that could harm consumers.

6. RPG Enterprises Case (2012)

Facts:
This case involved a set of agreements between companies within the RPG Group, a large
conglomerate in India. The question was whether these intra-group agreements could be
considered anti-competitive under Section 3 of the Competition Act.

Issue:
Whether the agreements between RPG Group companies violated Section 3 or were
protected under the Single Economic Entity Doctrine.

Judgment:
The CCI held that agreements between companies within the same corporate group did not
violate Section 3 because they were part of a single economic entity. Therefore, these
agreements were exempt from being considered anti-competitive.

Importance:
This case is significant for the Single Economic Entity Doctrine, which provides an
exemption for intra-group agreements. It clarifies that agreements between companies
within the same corporate group are not subject to anti-competitive provisions, as they do
not involve competition between independent economic entities.

7. Jindal Steel & Power Ltd. (2014)

Facts:
As part of an investigation into cartelization in the steel industry, the CCI conducted a dawn
raid on Jindal Steel & Power Ltd.’s offices. The raid aimed to gather evidence of a cartel
involved in price-fixing and controlling the supply of steel in India.

Issue:
Whether Jindal Steel & Power Ltd. and other steel manufacturers were involved in cartel
activities that violated Section 3(3) of the Competition Act.
Judgment:
The CCI’s dawn raid revealed crucial evidence, including emails and documents, that
demonstrated the existence of a cartel among steel producers. The evidence led to
penalties being imposed on the companies involved.

Importance:
This case highlights the importance of dawn raids as an enforcement tool for the CCI in
uncovering cartels. It demonstrates the CCI’s ability to conduct surprise inspections to
gather evidence before companies can destroy incriminating information.

Conclusion

These cases show how Section 3 of the Competition Act is used to target anti-competitive
agreements, both horizontal and vertical. They also illustrate the importance of the rule of
reason and per se rule in evaluating agreements, the use of dawn raids in investigating
cartels, and the role of the Single Economic Entity Doctrine in exempting intra-group
agreements from scrutiny.

These cases have set important legal precedents in Indian competition law, ensuring that
markets remain competitive and consumer welfare is protected from exploitative practices.