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Module III - Regulation of Collusion in the Market:

Anti-Competitive Agreements under the Competition Act, 2002 - Appreciable Adverse Effect
on Competition in the Market - Determination of Relevant Market - Rule of Reason and Perse
Illegal Rule- Horizontal and Vertical restraints – Exemptions – Penalties - Prohibition of
AntiCompetitive Agreements in EU, UK and US Laws

Anti-Competitive Agreements under the Competition Act, 2002 [PDF]

“True economic freedom cannot exist without effective Competition and Investment Regime”.
To achieve this objective, the Government of Indian enacted the competition Act, 2002 which
prohibits anti-competitive agreements, abuse of dominant position and regulates combinations.​
The Framework of Competition Act 2002 has essentially four anchors:​
​
1. Prohibition of Anti-Competitive Agreements [Section 3]​
2. Prohibition of Abuse of Dominant Position [Section 4]​
3. Regulation of Combination- Merger & Amalgamations, Takeovers etc. [Section 5 & 6]​
4. Competition Advocacy [Section 49]​
​
The anchors can be further sub-classified under two categories:​
a) Behaviour-Oriented- Deals with the past agreements between enterprises like anti-competitive
agreements and abuse of dominant position​
b) Structure-Oriented- Deals with future agreements between enterprises such as Merger &
Amalgamation, Takeovers etc.​
​
ANTI-COMPETITIVE AGREEMENT [Section 3] (Ref. Bare Act)​
​
Any agreement for goods or services which has an appreciable adverse effect on competition in
India is prohibited. These kinds of agreements are known as anti-competitive agreements. Anti
Competitive Agreements if entered into shall be void.​
​
Anti Competitive Agreement Prohibition: Section 3 (1) of the Act states that:​

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“No enterprise shall enter into any agreement with respect of production, supply, distribution,
storage, acquisition or control of goods/provision of services, which causes or is likely to cause
appreciable adverse effect on competition within India”​
​
Thus, there are two essential requirements of Anti-Competitive Agreements:​
i. There should be an agreement.​
ii. Such agreement must cause or is likely to cause an appreciable adverse effect on competition
in a relevant market in India. The relevant market may be a geographical or the market of a
product.​
​
TYPES OF ANTI-COMPETITIVE AGREEMENTS​
​
There are two kinds of anti-competitive agreements viz.​
1. Horizontal Anti-Competitive Agreements [Section 3(3)]​
2. Vertical Anti-Competitive Agreements [Section 3(4)]​
​
HORIZONTAL ANTI-COMPETITIVE AGREEMENTS [SECTION 3(3)]​
They are agreements between parties in the same line of production. Example of horizontal anti
competitive agreements could be- An Agreement between Manufactures, Agreement between
Distributors. Horizontal agreements are presumed to have appreciable adverse effect on
competition if they:​
1. directly or indirectly determine purchase or sale prices;​
2. limit or control output, technical development, services etc.;​
3. share or divide markets​
4. indulge in bid-rigging or collusive bidding​
​
Types of Horizontal Anti-Competitive Agreements:​
1. Price-Fixing Agreements [Section 3(3)(a)]​
2. Limiting Or Controlling Production And Investment [Section 3(3)(b)]​
3. Market Allocation And Sharing [Section 3(3)(c)]​
4. Bid Rigging Or Collusive Bidding [Section 3(3)(d)]​

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VERTICAL ANTI-COMPETITIVE AGREEMENTS​

Vertical anti competitive agreements are entered between two or more companies each of which
operates, at a different level of production or distribution chain, and relating to conditions under
which the parties may purchase, sale or resell certain goods or services.​
​
Example of vertical anti competitive agreement could be ‘An agreement between manufacturer
and supplier’ or between ‘Producers and Whole-Sellers’ or between ‘Producers, Wholesalers and
Retailers’.​
​
Types of Vertical Anti Competitive Agreements:​
1. Tie-In Arrangement- Imposing a condition on the purchaser of goods, to purchase some
other goods and thus selling goods which is not of purchaser’s choice. For Example: Requiring a
person to keep FD with the Bank while offering him a locker, Requiring a stabilizer to be bought
along with the refrigerator.​
2. Exclusive Supply Arrangement- An agreement restricting the purchase in course of trade
from acquiring the goods of any other seller (e.g. restricting a purchaser in the course of his trade
from dealing in any goods other than those of the seller).​
3. Exclusive Distribution Arrangement- Agreement to limit or restrict the output or supply of
any goods to any market or area (e.g. limiting/restricting supply of goods or allocate any area or
market for the sale of goods).​
4. Refusal To Deal- Restricting by any method any person/classes of persons to whom goods are
sold.​
5. Resale Price Maintenance- Selling goods with the condition to resale at stipulated prices.​
​
HORIZONTAL VS VERTICAL ANTI-COMPETITIVE AGREEMENTS

HORIZONTAL ANTI-COMPETITIVE VERTICAL ANTI-COMPETITIVE

AGREEMENT AGREEMENT

1. A horizontal Anti Competitive 1. Vertical Anti-Competitive Agreement is

Agreement is entered between enterprises entered between enterprises or persons
operating at the different level of supply chain.

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or persons operating at the same level in the

supply chain.

2. Horizontal Anti Competitive Agreement 2. Vertical Anti Competitive Agreement is

is presumed to have an appreciable adverse subject to rule or reason-type approach (i.e.,
effect on competition (Per se). need to be assessed for effect on competition)
(Rule of Reason)

APPRECIABLE ADVERSE EFFECT ON COMPETITION IN INDIA

India's efforts to liberalize the economy and pursue economic globalization led to the passage of
the Competition Act of India in 2002. Although the Act aims to restrict such behaviors that
significantly negatively impact consumers, it does not intend to outlaw market competition.

Appreciable Adverse Effect Competition in India (AAEC). The legislation also encourages free
and fair competition in the marketplace, safeguards the rights of consumers, and guarantees trade
freedom in Indian marketplaces.

One of the key goals of the Competition Act is to control such actions that result in AAEC. The
following are the possible causes of AAEC:
●​ Anti-competitive agreements
●​ Combinations
●​ Dominance abuse

Any arrangement, understanding, or joint action, whether formal, in writing, or intended to be

enforced by legal action, falls under the term of "agreement" as stated in Section 2(b) of The
Competition Act, 2002. This term is broad and covers not just an agreement in the traditional
sense as defined by the Indian Contract Act of 1872, but also any arrangement, understanding, or
coordinated activity between two or more parties, whether formal or in writing, whether or not it
is enforceable by law, and any action taken alone or in concert with another.

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COMPETITION ACT: ANTICOMPETITIVE AGREEMENTS

Any agreement regarding the manufacture, distribution, storage, purchase, or control of goods or
the provision of services that has or is likely to have a materially adverse effect on competition
inside India is considered an anti-competitive arrangement under Section 3(1).
Encouraging competition in order to advance the welfare and interests of consumers is the
fundamental tenet of India's competition law, which includes a section addressing
anti-competitive agreements. In addition, Section 3(2) specifies that any agreement entered into
by a firm in violation of the Act's general prohibitions shall be regarded as null and void.

They are of two types according to the competition act (2002)

1. Horizontal Agreements - These are contracts that typically develop between two or more
businesses that compete in the same market for production, supply, etc. Examples of horizontal
anti-competitive agreements would be an agreement between producers of a particular
commodity not to offer a given product at a cheaper price or to a particular market.
2. Vertical Agreements: According to section 3(4) of the act, vertical agreements are those
that are made between businesses or individuals at various stages or levels of production in
relation to the production, supply, distribution, storage, sale, or price of goods, among other
things.

The judgement rendered by CCI on August 23, 2021, is a recent illustration of vertical
agreement. Maruti Suzuki India Ltd. was fined Rs 200 crore by CCI for preventing dealers from
providing discounts to customers. It was discovered that dealers had a "discount control policy"
in place that prohibited them from giving consumers discounts or freebies in excess of what the
Company had approved.

APPLICABILITY OF CCI,2002
When assessing whether an agreement contains an AAEC under Section 3 of the Act, the CCI
takes into account all or any of the elements listed under Section 19(3) of the Act:
i)creating obstacles for potential competitors to enter the market;
ii) preventing viable competitors from entering the market;
iii) eliminating competition by preventing entry into the market

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iv) accruing customer compensation;

v) Fostering technological, scientific, and economic development through manufacturing;
vi) advances in building, giving out, or providing services

Section 19 states that the CCI must give no consideration to any of the aforementioned criteria
(3). In numerous adjudications, the CCI has assessed the claims and evidence in light of the
elements of section 19(3) as stated above. But the CCI decided in Automobiles Dealers
Association v. Global Automobiles Limited & Another that it would be prudent to carefully
examine a course of action in the context of all the elements listed in Section 19. (3)

WHEN AAEC IS ALREADY ASSUMED

If the agreement complies with section 3(3) of the Competition Act, 2002, there is a presumption
that the arrangement will have an appreciable adverse effect on competition. It is assumed that
the agreement is having an appreciably unfavourable effect on competition under any provision
of this section, according to sub-section 3 of section 3 of the Competition Act. The onus of
proving otherwise will be placed on the businesses or parties that entered into the arrangement,
shifting the responsibility from CCI to those who did. Even if there is no tangible proof
demonstrating a significant harmful effect, it will be assumed to exist.

As a result, until opposing evidence is presented to disprove the fact, the courts are compelled to
consider it proven, making this presumption rebuttable. However, this is insufficient because
these agreements aren't regarded as conclusive evidence. If the parties to the agreement provide
sufficient evidence to refute the presumption, the Competition Commission must take these
factors into consideration and determine whether any or all of them are established. If the CCI
evidence supports any or all of the factors listed in section 19(3), the agreement is once more
assumed to have AAEC until proven otherwise.
The question before the Supreme Court of India in Excel Crop Care Limited v. Competition
Commission of India was whether the four manufacturers of Aluminium Phosphide Tablets had
formed a cartel by entering into anti-competitive agreements among themselves because these
manufacturers cited exact same prices for their products. The Apex Court relied on
circumstantial evidence given the nature of these organisations in the absence of any concrete

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evidence of the agreement. The chemical sector has a very small number of manufacturers, and
despite having various manufacturing costs, geographic locations, and profit margins, these
manufacturers have given the exact same prices. The Court found the appellants guilty in
accordance with Section 3 of the Competition Act as a result.

There is no presumption of AAEC in section 3(4), hence it is the responsibility of CCI to

demonstrate that the competition has been adversely affected on the basis of the grounds listed in
section 19(3) of the competition act.

The act intends to stop parties with AAEC in India from acting unethically.
Nevertheless, unless the parties conducting commerce uphold the act's principles, this goal will
not be realized. It is imperative for parties to avoid including any anti-competitive language in
their contracts when conducting business in India. There must be fair competition for the market
to operate well. Businesses should take the initiative to address any anti-competitive provisions
in their current agreements. Employees can be made aware of the negative effects of
anti-competitive agreements as well as how to prevent them. Experts can always lead people and
companies in the direction of a safer solution if they are needed.
****
Introduction: The Competition Act, 2002, a pivotal law in India, was initiated to repeal the
previous Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. It brought forth a new
authority, the Competition Commission of India (CCI), to administer competition compliances in
the country.
Anti-Competitive Agreements
Anti-Competitive agreements means the agreement in relation to any goods or services which
eventually has an appreciable adverse effect on competition in India.
Wherein section 3 states as follows:
“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.

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Any agreement entered into in contravention of the provisions contained in subsection (1) shall
be void.
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.”

Types of Anti-Competitive Agreements

1. Price Fixation Agreements under Section 3(3)(a)
2. Controlling or Limiting Investment and Production under section 3(3)(b)]
3. Allocation and sharing of market under section 3(3)(c)
4. Collusive Bidding or Bid Rigging under section 3(3)(d)

Factors Determining Appreciable Adverse Effect on Competition In India

According to section 19 (3) of the Competition Act, 2002, the following factors shall be kept in
mind by the CCI while determining Appreciable Adverse Effect on Competition In India:
(a) creating barriers to new entrants into the market;
(b) driving of existing competitors out of the market;
(c) foreclose competition by hindering entry into the market;
(d) accrual of benefits to consumers;

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(e) improvements in production or distribution of goods or provision of services; or

(f) promotion of scientific, technical and economic development by means of distribution or
production of goods or provision of services.

Relevant case laws for effects of Anti-Competitive Agreements

In Varca Druggist & Chemist & Others v/s Chemist & Druggists Association, Goa (“Varca
Drug”), the complaint was filed by Varca Druggist & Chemistand two other proprietors of
pharmaceutical drugs and medicines firms against the Chemist & Druggist Association, Goa
(CDAG) to the Director-General (Investigation & Registrations), Monopolies & Restrictive
Trade Practices Commission (DGIR, MRTPC) alleging that the defendant was indulged in
restrictive trade practices. The complaint was transferred to the Competition Commission of
India (CCI), wherein the CCI that the CDAG is involved in the practice of controlling and
limiting the drugs supply in Baroda, Gujarat in violation of provisions of Section3(3)(b) and
Section 3(1) of the Competition Act.
In Sunshine Pictures Private Limited & Eros International Media Limited vs Central
Circuit Cine Association, Indore & Ors.75 (“Eros International”) the plaintiff alleged that
opposite party due to the trade association had become a vehicle that uses collusive conduct for
distribution and exhibition of films for the persons and enterprises who are engaged in the
identical business, wherein the Competition Commission of India held that the trade-associations
were involved in issuing letters and circulars which were eventually used to restrict the
exhibition of films. The conduct violates the provision of Section 3(3)(b) of the Competition Act,
2002, and the penalty was subsequently imposed on the associations who were involved at a rate
of 10% of the average of three years total receipts respectively.

Power to impose lesser penalty

According to section 46 of the Act, The CCI may, if satisfied that any producer, seller, trader,
service provider or distributor is/are included in any cartel, which is alleged to be in violation of
section 3, has made true and full disclosure in respect of the alleged violations, then the CCI may
impose upon such persons a lesser penalty, than prescribed under this Act or the rules or the
regulations. Provided that CCI shall not impose lesser penalty in cases where the report of
investigation has been directed under section 26.

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Conclusion: The Competition Act, 2002, ensures that the Indian market stays competitive and is
free from undue dominance and abuse. By defining anti-competitive agreements, stipulating
penalties, and outlining the factors affecting competition, the Act provides a robust framework
for competition regulation in India. It empowers the Competition Commission of India to enforce
the provisions, promoting a healthier and more balanced marketplace for all stakeholders.

Determination of Relevant Market

Competition law is a body of laws and regulations designed to avoid imbalances in markets
caused by anti-competitive commercial practises.
The primary objective of competition law is to provide a healthy environment for both buyers
and sellers by banning illegal activities with the aim of gaining a bigger share of the market than
would've been possible through genuine competition. Anti-competitive behaviours not only
make it harder for smaller enterprises to enter or develop in a market, but they also result in
higher customer costs, inadequate services, and a lack of innovation. A few examples of
anti-competitive practices are: Predatory pricing, meaning a monopoly imposing an exorbitant
cost for an item that the customer has no alternative other than to buy; price fixing, which entails
conspiracy among would-be competitors in setting identical costs for goods; bid rigging, which
refers to colluding to determine the winner of a contract in advance; and dumping occurs when a
product is sold at such a low price that smaller businesses can't afford to compete and get forced
out of the market.
To prevent such behaviour, the Competition Act, 2002 was enacted. It created the Competition
Commission of India (CCI), the statutory national regulator whose purpose is to uphold the Act,
in order to foster competition and stop acts that have major adverse effects on competition in
India. The CCI investigates cases in which there is a detrimental effect on competition. Now for
a competition law to be effective in preventing anti-competitive measures, it is crucial that the
correct operating place or ‘market’ be identified correctly.
Relevant market is defined in Section 2(r) of the Act to mean the market determined by the CCI
with reference to the ‘relevant product market’ or the ‘relevant geographic market’ or with
reference to both the markets. These two markets help determine the market that the CCI should
consider when investigating anti-competitive practices.

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UNDERSTANDING RELEVANT MARKETS

Relevant market has been stipulated in multiple laws around the globe, such as the Act, UK
statutes, European laws, and US antitrust laws; nevertheless, it is not feasible nor fair to restrict
the scope of 'relevant market' to a few hypothetical definitions. Even courts and other forums of
dispute resolution have difficulty with limiting the extent of the concept, and every debate gives
rise to an original unique understanding. The definition of the relevant market under Section 2(r)
of the Act is not exhaustive because the term originates from the concepts of Economics and is
thus bound to be fluid based on the distinctive mix of facts for each case.
It is transparent that the responsibility of identifying the ‘relevant market’ is left to the CCI, and
terms like "relevant product market" and "relevant geographic market" call for proficiency in
legal concepts, economic concepts, and a scrutiny of large amounts of data/statistics before
reaching a decision. In common vocabulary, a relevant market is one in which competition
exists. A relevant market is further subdivided into a 'relevant product market' and a 'relevant
geography market'.
Relevant Product Market: In plain terms, a relevant product market refers to two forms of
interchangeability of the good or service - the first of which is 'demand side substitution,' which
establishes a situation where the market player receives no benefit by a small rise in cost price as
the customer has the choice of substituting the usage of such the good or service, and the second
kind is 'supply side substitution,' that says a circumstance in which other market players boost
the availability of such the good or service removing the effect of an increase in cost price.
Section 2(t) of the Act defines the 'relevant product market' as a market that includes all products
or services that consumers consider to be interchangeable or substitutable. This determination is
based on factors such as the characteristics of the products or services, their prices, and their
intended use.
Relevant Geographical Market: To determine a relevant geographic market, it is crucial to
consider the location of buyers and sellers within the market. The geographic boundaries of the
market should encompass an area where all competitive conditions for the products or services
are similar. The presence of the market can be classified as local, regional, national, or
international, depending on the locations of the buyers and sellers involved. By understanding
the geographic scope of the market, we can gain insights into the nature and extent of
competition within that specific area. Section 2(s) of the Act defines the relevant geographic

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market as a market that includes an area where the competitive conditions for the supply or
demand of goods or services are clearly similar and distinguishable from the conditions
prevailing in neighbouring areas. In other words, it refers to a specific geographic region where
the market conditions for buying and selling goods or services are noticeably uniform and can be
differentiated from the conditions in nearby areas. This definition helps to determine the
boundaries and extent of the market based on the homogeneity of competitive factors in a
particular geographic area.
Determination: The Commission is always mindful when identifying the appropriate market,
because limiting the market might exclude others and competition. However, if it is overly wide
in scope, the competition might be inflated. Consequently, the market's size must be cautiously
identified, if not it will be undermined or overwhelmed. In the case of M/s Saint Gobain Glass
India Ltd. v. M/s Gujarat Gas Company Limited, the court deliberated on a more precise and
definitive test to determine the relevant market. It considered various factors for determining the
relevant market, and the CCI emphasized the significance of Section 19(7) and 19(6) in assessing
the relevant product market and relevant geographic market, respectively. As per section 19(6),
the factors enlisted for the relevant geographic market for CCI’s consideration are:
●​ Regulatory trade barriers;
●​ Local specification requirements;
●​ National procurement policies;
●​ Adequate distribution facilities;
●​ Transport costs;
●​ Language;
●​ Consumer preferences;
●​ Need for secure or regular supplies or rapid after-sales services.
Likewise, as per section 19(7), the factors enlisted for the relevant product market are:
Physical characteristics or end-use of goods;
●​ Price of goods or services;
●​ Consumer preferences;
●​ Exclusion of in-house production;
●​ Existence of specialized producers;
●​ Classification of industrial products.

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THE ROLE OF RELEVANT MARKETS IN COMPETITION LAW

Cartelization: A cartel or cartelization is an alliance of companies that work together to control
pricing, rig bids, and share customers. There can be a group of producers, sellers, distributors,
traders, or service providers who, by an agreement, restrict, control, or attempt to restrict and
control the manufacturing, distribution, sale, or price cost of goods or the supply of services. The
assumption is that it is always assumed by default is that cartels have a significant negative
impact on competition in the relevant market. Cartel are strictly banned under Section 3(1) to be
read with Section 3(3) of the act.
Abuse of Dominant Power: Chapter II of the Act's second section provides a definition and
prohibits the abuse of a dominant position. Abuse of dominant position hinders fair competition
among businesses, cheats customers, and makes it more difficult for competitors to compete on
merit with the dominating company. As per the legislation, a dominant position in the Indian
market refers to a company that possesses the power and authority to:
●​ Operate independently, unaffected by the competitive pressures within the relevant
market.
●​ Exert influence over its competitors, consumers, or the relevant market in a manner that
favours its own interests.
It is crucial to make clear that the Act's concept of dominance does not rely on a specific
quantitative threshold or market share percentage. This is due to the fact that a company with a
large market share may continue to operate legitimately provided there is strong competition
from strong rivals, whereas a firm with a small market share can abuse its position in the market
if its competitors hold the remaining market share in a fragmented manner. Setting a specific
limit may allow offenders to escape or result in unnecessary lawsuits. In the Indian context,
dominance is decided by taking into consideration the relevant market. The Competition
Commission might determine the relevant market based on the product market, the geographic
market, or both.
It must be remembered that the difference between anti-competitive agreements and abuse of
dominant position is that anti-competitive agreements need a minimum of two parties and can be
between any company or corporation, but abuse of dominant position does not. A dominant
position can be abused by just one party, but the party must be dominant in the relevant market.

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Dominance has typically been defined as the company's or firm's market share. Section 4 of the
Competition Act, 2002 provides for prohibition of abuse of dominant position.

CHALLENGES IN DEFINING RELEVANT MARKETS

The primary step in competitive analysis is defining the relevant market. It defines the limits of
the investigation and provides an outline and basis for the economic and legal examination
included within it. Both company activities and customer behaviour have been dramatically
changed by digitization. Determining the relevant market is an ongoing challenge for regulatory
bodies around the world adapting to these changes.
Previously, the CCI saw online and offline marketplaces as merely alternate channels of
distribution within the same relevant market. In recent years, it appears that the CCI has altered
its approach to defining 'relevant markets,' seeing online and offline distribution as separate
relevant markets. The reason for the CCI's reinterpretation might be to keep a close eye on any
anti-competitive practises of companies in the Indian e-commerce sector, which has grown
rapidly in recent years. Yet, by doing so, the CCI seems to have created a false dichotomy that
implies that online and offline distribution strategies do not compete with one another, pitting
solely online enterprises against one another. The CCI has also dismissed the idea that certain
internet businesses have developed new product/service categories for themselves in previously
non-existent industries, resulting in the rise of 'copycats' in the offline market. In recent years,
CCI's policy towards digital market situations has been contradictory. Unique characteristics and
diverse business models require case-by-case examination. The elements evaluated during the
investigation into misuse of dominating position play a significant effect in the conclusion of
such cases.
The emergence of data-driven digital platforms and their unique business models poses a huge
challenge to traditional market definitions used in competition rules around the world. This
problem was raised in the Harshita Chawla v WhatsApp case, where it was recognised that
consumer communication apps such as WhatsApp and Facebook have distinct characteristics
that make them appear as substitutes for certain activities but not others. As a result, determining
an app's classification within the relevant product market requires identifying its most important
qualities. Furthermore, when dealing with multiple sides of platforms that provide middlemen
services, a full market characterisation is required to determine their market dominance.

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In conclusion, understanding and defining relevant markets play a vital role in competition law.
They provide a framework for assessing market power, analysing competitive effects, and
ensuring fair competition. While the determination of relevant markets can be complex, it is
essential to consider factors such as product characteristics, pricing, and consumer
substitutability. The rise of digital platforms has added new challenges, necessitating a closer
examination of their unique features and market power. As competition regimes evolve, it is
crucial to adapt market definition methodologies to effectively address emerging market
dynamics. Continual research and analysis of relevant markets are essential to promote
competition, protect consumers, and maintain healthy and vibrant market environments.

Rule Of Reason And Per Se Illegal Rule In Competition Law

What is a Per Se Rule?
Firstly, in the class, after finishing the vertical agreements under Section 3(4) of the Competition
Act, 2002, Per Se Rule was taught. Per Se Rule is simply when one person on whom are the
offences or the allegations which pertain to a specific issue is alleged in front of any Court of
Law, such alleged person has the onus to prove that such allegation is a falsified one. In regular
cases, should there be an allegation filed against a person, the Courts would demand conclusive
evidence to prove and hold the accusation as admitted.
In these cases, the accused person need not prove anything unless some form of conclusive proof
is held against them. Wherein, in the Per Se Rule, the accused person, from the moment of
alleging, the burden to claim innocence falls on them. This rule will be employed only in the
horizontal agreements as admitted under Section 3(3) of the Competition Act, 2002. This is also
called the Rule of Presumption as the defendant party must prove that there is no such
arrangements made by them in the first place.

Rule of Reason
The rule of reason is exactly opposite to the Per Se Rule, that is, the informant holds the onus of
proving the information alleged by them or any anti-competitive agreement claimed by them.
Section 3 (1) of the act might cause or likely may cause an appreciable adverse effect.

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The reason being the application of Rule of Reason where the onus on the informant to prove the
facts, it causes an appreciable adverse effect, as there is the preponderance of probability as
applied by the Competition Commission of India. So, in Section 3 (1), Rule of Reason is applied
and not Per Se Rule. Similarly, in Section 3 (4), in the vertical agreements, as there are different
stages or levels or production chain, it may cause an appreciable adverse effect. Consequently,
the Rule of Reason is applied.

Differentiating Between the Horizontal and Vertical Agreements

There is a fine line difference between the horizontal agreements and the vertical agreements. If
there is an exclusive agreement between two products that decide to sell together exclusively,
will this be cartel? For example, PVR Cinemas and Coca Cola enter into an agreement to sell
Coca Cola and its associated beverages in PVR premises. Would this constitute a competition
concern as the business of other similar companies are being restricted or a consumer concern as
the customer's right to choose similar companies' products is being fettered? The answer to this
would be to test the levels of the comparable market of the two products.
Cinema market is completely irrelevant to the beverage market. One's presence will not affect
the other. So, these different level market players join hands to present both of their products to
form one experience. So, this qualifies under Section 3 (4) and thus for anybody claiming against
these issues will have the onus to prove the accusation. This was the case in Shamsher Kataria v.
Honda. Thus, the Rule of Reason is applied.

Similarly, in the case of a provisional store chain like 7-Eleven cannot agree to sell Coca Cola
products alone as his market is to sell general goods as the consumers wish to purchase and there
should be no restriction felled at that end. Therefore under Section 3 (3), if such agreements
happen and someone becomes an informant, then the other person holds the onus to prove the
accusation wrong, that is, Per Se Rule is applied.

Understanding Cartel
Unlike the vertical agreements, the agreements made by the same level of players of a market, it
becomes illegal and is called as the Cartel. There is a general presumption that the horizontal
agreements are per se wrong but it is rebuttable. Not every horizontal agreement qualifies as

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cartel. Citing example to the WB Film Producers' Case, where the consortium of members of the
local TA, consult and announce that only local made serials will be telecasted but not any other
language serials which usually have higher demand. This was in cause to protect the regional
producers and promote language-based serials. This does not qualify as cartel.

If there is an agreement made by two players of the market who sit in the same chain, that is, if
the products are similar but not identical, then such agreements are horizontal agreements and
are illegal under Section 3 (3). Examples would be, if the onion wholesale dealers of one same
market discreetly agree among themselves to hold the onions for a while, so that the demand for
the onions would increase, thereby subsequently increasing their price, then this is illegal to do
so.
Sometimes similar pricing between two players to determine the market price can also be
considered under this. Such agreement need not be in writing but mere understanding of two
parties will suffice to qualify as cartel. So there need not be any reason for the informant to prove
but it falls on the other person.

Vertical restraints under Indian Competition Law [PDF]

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In India, competition law is primarily governed by the Competition Act, 2002, which addresses
both horizontal and vertical restraints to prevent anti-competitive practices.

Horizontal Agreements

Definition and Scope:

●​ Section 3(3) of the Act deals with horizontal agreements, which are agreements between
enterprises or persons at the same level of the production chain, such as competing
manufacturers or retailers.​

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●​ These agreements are often the result of collusion and can include practices like
price-fixing, limiting production or supply, market allocation, or bid rigging.

Key Features:

●​ Per Se Rule: Horizontal agreements are presumed to have an appreciable adverse effect
on competition (AAEC) and are thus considered void unless proven otherwise.
●​ Exceptions: Joint ventures that increase efficiency in production, supply, distribution,
etc., are exempted. Additionally, agreements related to intellectual property rights and
export are not restricted.
●​ Penalties: Violations can result in penalties up to 10% of the average turnover for the last
three financial years.

Vertical Agreements

Definition and Scope:

●​ Section 3(4) of the Act addresses vertical agreements, which are agreements between
enterprises at different stages of the production chain, such as between manufacturers and
distributors.
●​ These agreements are not inherently anti-competitive and are assessed based on their
effects on competition.

Key Features:

●​ Effects-Based Approach: Vertical agreements are prohibited only if they cause or are
likely to cause an AAEC in India24.
●​ Types of Vertical Restraints:
○​ Tie-in Arrangements: Require purchasing one product as a condition for buying
another.
○​ Exclusive Supply Agreements: Restrict purchasing from other suppliers.​

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○​ Resale Price Maintenance (RPM): Dictate resale prices4.​

●​ Penalties: Similar to horizontal agreements, violations can lead to penalties under

Section 27 of the Act.

Enforcement:

●​ The Competition Commission of India (CCI) is the primary authority responsible for
enforcing prohibitions on both horizontal and vertical restraints23. Decisions can be
appealed to the National Company Appellate Tribunal (NCLAT) and then to the Supreme
Court of India.

Exemptions and Penalties for Horizontal and Vertical Restraints in India

Exemptions

Horizontal Agreements

●​ Efficiency-Enhancing Joint Ventures: The Competition Act provides an exception for

joint ventures that aim to enhance efficiency in production, supply, distribution, etc.
These agreements are not presumed to have an appreciable adverse effect on competition
(AAEC) if they genuinely improve efficiency and enhance competition in the market.​

●​ Government Exemptions: The Central Government can exempt the application of the
Competition Act (or any of its provisions) to agreements/practices for a given period if it
is in the interests of national security or public interest, or if it relates to India’s
international obligations.

Vertical Agreements

●​ No Specific Exemptions: There are no specific exemptions for vertical agreements under
the Competition Act. However, vertical agreements are generally permitted unless they
cause or are likely to cause an AAEC in India.

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Penalties

Horizontal Agreements

●​ Penalty Structure: Violations of horizontal agreements can result in penalties up to 10%

of the average turnover for the last three financial years.
●​ Presumption of AAEC: Horizontal agreements are presumed to have an AAEC, which
means that once such an agreement is identified, it is up to the parties involved to prove
that it does not have an adverse effect on competition.
●​ Examples of Prohibited Practices: Price-fixing, limiting production or supply, market
sharing, and bid-rigging are examples of prohibited practices under horizontal
agreements.​

Vertical Agreements

●​ Penalty Structure: Similar to horizontal agreements, violations of vertical agreements

can also lead to penalties up to 10% of the average turnover for the last three financial
years if they are found to cause or likely to cause an AAEC.
●​ Rule of Reason Approach: Vertical agreements are assessed based on their actual or
likely effect on competition. They are prohibited only if they cause or are likely to cause
an AAEC in India.
●​ Examples of Vertical Restraints: Tie-in arrangements, exclusive supply agreements,
and resale price maintenance are examples of vertical restraints that may be prohibited if
they cause an AAEC.​

Enforcement and Appeals

●​ Competition Commission of India (CCI): The CCI is the primary authority responsible
for enforcing prohibitions on both horizontal and vertical restraints. It investigates and
decides on cases involving anti-competitive agreements.

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●​ Appeals: Decisions by the CCI can be appealed to the National Company Appellate
Tribunal (NCLAT) and then to the Supreme Court of India.​

Anti-Competitive Agreements in EU, UK and US Laws

In all three jurisdictions (EU, UK, and US), anti-competitive agreements are illegal, aiming to
ensure fair competition and protect consumers. The EU's Article 101 of the TFEU, the UK's
Competition Act 1998, and the US's Sherman Act all prohibit agreements that restrict
competition, including price-fixing, market-sharing, and bid-rigging. However, there are
nuances in their application and enforcement.

EU:

●​ Article 101 of the TFEU: Prohibits anti-competitive agreements between undertakings,

including horizontal arrangements like cartels, that restrict competition within the EU.
●​ Article 102 of the TFEU: Prohibits abuse of a dominant position by undertakings in the
EU.
●​ Enforcement: The European Commission (EC) and national competition authorities
enforce these rules, according to the European Commission.
●​

UK:

​ Competition Act 1998:​

Prohibits agreements, decisions, and concerted practices that prevent, restrict, or distort
competition.
​ Abuse of Dominance:​
Chapter II addresses abuses of a dominant position in the UK.
​ Enforcement:​
The Competition and Markets Authority (CMA) and other sectoral regulators enforce
competition rules in the UK, according to the UK government.

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​ Brexit:​
Following Brexit, EU competition law ceased to apply directly in the UK, with the UK
developing its own framework based on EU principles.

US:

​ Sherman Antitrust Act:​

Prohibits agreements that unreasonably restrain trade, including price-fixing,
market-sharing, and bid-rigging, according to the US Department of Justice.
​ Enforcement:​
The Federal Trade Commission (FTC) and the Antitrust Division of the Department of
Justice enforce these rules in the US, according to the US Department of Justice.

Key Similarities:

●​ All jurisdictions prohibit agreements that restrict competition.

●​
●​ The goal is to maintain a fair and competitive market.
●​
●​ Enforcement agencies have the power to investigate and take action against
anti-competitive practices.
●​

Key Differences:

​ Scope of Application:​
EU competition law applies across the entire EU, while US and UK laws generally apply
within their respective jurisdictions, with some exceptions for conduct affecting trade within
those areas.
​ Enforcement Agencies:​
The EU has the European Commission, while the UK has the CMA and the US has the FTC
and the Antitrust Division of the Justice Department.

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​ Approach to Enforcement:​
The US tends to focus on preventing monopolies and ensuring fair competition, while the
EU also focuses on promoting the process of competition.
​ Brexit:​
The UK's departure from the EU led to the creation of a new UK competition framework,
distinct from the EU's.

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