This article is written by Tanisha Kohli who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.
Table of Contents
Introduction
The Competition Act (“the Act”) has come into existence to ensure that there is healthy competition in the market and the interests of the consumers are protected. It does this by prohibiting certain agreements which have an anti-competitive nature, prohibiting abuse of a dominant position in the market, and regulating the combining of enterprises/persons.
Section 3 of the Act deals with anti-competitive agreements. Anti-competitive agreements can be categorized into horizontal agreements and vertical agreements.
Essentially, horizontal agreements are agreements between competitors. These competitors are at the same stage in the production chain and exist in the same market.
Example 1: An agreement between Ola and Uber would be a horizontal agreement, as they provide identical/similar services.
Example 2: An agreement between two or more cement manufacturers would be a horizontal agreement, as they are at the same stage of production and engaged in identical trade of goods.
This article is intended to serve as an introduction to horizontal agreements under the Act.
Understanding horizontal agreements
From a combined reading of Sections 3(1) and 3(2) of the Act, the following equation is derived.
AGREEMENT → AAEC = VOID
Equation 1: Agreements which cause or are likely to cause an Appreciable Adverse Effect on Competition(AAEC) in India are void. The nature of these agreements is elaborated hereinafter.
Meaning of Agreement
Figure 1: An Agreement includes an arrangement, or an understanding, or an action in concert.
The term Agreement has been defined in Section 2(b) of the Act. The definition of an Agreement is very wide and capable of covering a broad range of interactions within it.
It includes:
- Formal arrangement.
- Formal understanding.
- Formal action in concert.
- Informal arrangement.
- Informal understanding.
- Informal action in concert.
- Written arrangement.
- Written understanding.
- Written action in concert.
- Unwritten arrangement.
- Unwritten understanding.
- Unwritten action in concert.
- Arrangement intended to be enforceable by law.
- Understanding intended to be enforceable by law.
- Action in concert intended to be enforceable by law.
- Arrangement NOT intended to be enforceable by law.
- Understanding NOT intended to be enforceable by law.
- Action in concert NOT intended to be enforceable by law.
Parties of the Agreement:
Such an agreement is entered into by
- An Enterprise or,
- A Person or,
- An Association of Enterprises or,
- An Association of Persons.
Enterprise has been defined in Section 2(h) of the Competition Act to mean; (i) a person or (ii) a department of the Government who or which is or has been engaged in any activity relating to—
(a) production, storage, supply, distribution or acquisition or control of goods or articles; or
(b) provision of services of any kind;
(c) investment;
(d) business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any body corporate the aforesaid activities may be carried out either directly or indirectly, e.g., through one of its units or divisions or subsidiaries, whether located at the place where enterprise located or elsewhere.
A person has been defined in 2(l) of the Act. The definition of a person is very wide. It includes an individual, a Hindu undivided family (HUF), a firm, a company and other legal entities, including local authority and any artificial juridical person.
Agreement about what?:
Figure 2: Such an Agreement may be with respect to ANY of the above represented seven aspects.
Appreciable adverse effect on competition (AAEC)
Figure 3: The Effect on Competition has to be Appreciable, Adverse, and have an impact on India.
The Appreciable adverse effect on Competition in India can be an actual effect or potential effect. In other words, it can refer to consequences that have either already happened or are happening or are likely to happen. The consequences must be appreciable i.e not merely minimal consequences.
To determine whether an agreement has an AAEC, the Competition Commission of India is required to consider the factors provided under Section 19(3) of the Act, such as whether the agreement creates entry barriers to the market, pushes out existing competing players etc.
Horizontal Agreements under the Competition Act, 2002
Section 3(3) of the Act deals with Horizontal Agreements. As explained in the introduction, horizontal agreements are essentially agreements between competitors. These competitors are at the same stage in the production chain and exist in the same market. From a reading of Section 3(3) of the Act, the following equation may be arrived at:
Agreement/Practice/Decision + Similar trade of Goods/Services + Effect of the Agreement = Presumption of AAEC
Equation 2: An Agreement, the parties to which are engaged in similar trade of goods or services, and the agreement has a particular effect, leads to a presumption that the Agreement has an appreciable adverse effect on competition in India. Each of the three elements of this equation is elaborated hereinafter.
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Parties to the Agreement
The Agreement may be entered into by and between the following parties:
- Enterprise(s) ↔ Enterprise(s)
- Person(s) ↔ Person(s)
- Association(s) of Enterprises ↔ Association(s) of Enterprises
- Association (s) of Persons ↔ Association(s) of Persons
- Person(s) ↔ Enterprise(s)
The practice relating to any trade may be carried on, or decision may be taken by:
- Association of Enterprises.
- Association of Persons.
- Cartels.
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Similar trade of Goods/Services
The Parties to the Agreement or Practice or Decision are engaged in:
- Similar trade of goods or
- Identical trade of goods or
- A similar provision of services or
- Identical provision of services
-
Effect of the Agreement
Figure 4: An anti-competitive horizontal Agreement may have any of these effects.
An anti-competitive horizontal Agreement may have any of the following effects:
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The Agreement determines the prices of sale or purchase.
An agreement between two or more competitors can have the effect of determining the prices directly or indirectly. They can adopt various methods such as deciding to increase the price or decrease the price of a particular good or service or maintain the price, granting certain discounts, adopting identical cost accounting methods etc.
Such agreements are void because they adversely impact competition in the market, as the competitors are already aware of each other’s pricing policies. It kills the competition between them which harms the consumers’ interests, who benefit and can get the best goods at the lowest prices when there is price competition between the market players.
For Example, Panasonic, Everready and Nippo entered into an agreement by which they determined the prices of the zinc-carbon dry cell batteries. Panasonic would increase the price of the battery, and Everready and Nippo would also increase the battery price in the pretext of following the market leader. (Case: In Re: Cartelisation in respect of zinc-carbon dry cell batteries market in India Suo Motu Case No. 02 of 2016)
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The Agreement limits or controls production, supply, markets, technical development, investment or provision of services
An agreement that reduces or controls the production of goods or their supply in the market will increase prices due to less supply. Such behaviour harms the enterprises/persons by preventing those with the capacity to produce more from doing so, and thus lessens the competition between enterprises/persons. The reduced supply and consequent increase in prices harm the consumers.
An agreement may also prevent a competitor from engaging in technical development or further investment. For example, the Agreement may restrict the use of a particular highly efficient machinery or a particular manufacturing process.
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The Agreement shares the market or source of production or provision of services
This sharing may happen in a variety of ways such as allocating that the market in a particular geographical area shall be covered only by a particular enterprise/person, or by allocating that particular type of goods or services shall be dealt with only by a particular enterprise/person, or by allocating a certain number of customers in the market to an enterprise/person, or any other similar way.
For Example, an Agreement that prevents a retailer from selling products outside South India.
Such Agreements harm consumers as it limits their choices. For instance, they are no longer in a position to decide which retailer in their geographical area they wish to purchase from. The retailer is the sole competitor in their allocated area can also abuse their monopoly in that area by charging high prices as consumers have nowhere else to purchase from, and the retailer knows that other retailers will not compete with him because of their Agreement.
These Agreements can also harm the enterprises/persons. For instance, by preventing manufacturers from exploiting the benefits of economies of scale such as lower production costs.
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The Agreement results in bid-rigging or collusive bidding.
Bid rigging has been defined in the Explanation to S. 3(3)(d).
An Agreement that has ANY of the following effects amounts to bid-rigging:
- Eliminates Competition for bids.
- Reduces Competition for bids.
- Adversely affects the bidding process.
- Manipulates the bidding process.
Per se rule
Horizontal Agreements are per se void. This means that once the 3 ingredients in the equation presented above are satisfied, there is no need to prove that the agreement is adversely affecting competition in India. It is presumed that the agreement is harmful. In contrast, vertical agreements require that the harmful effects of the Agreement on competition have to be proved.
Exceptions
The provision governing horizontal agreements i.e. Section 3(3) of the Act does not apply to Joint venture Agreements that increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
Additionally, the rights which have been conferred by the following Acts cannot be restricted by Section 3(3) of the Act:
(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);
(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999);
(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of 1999);
(e) the Designs Act, 2000 (16 of 2000);
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);
Furthermore, the right to export goods from India cannot be restricted by Section 3(3) of the Act, when the Agreement deals only with the goods to be exported or services for the export. It may pertain to the production, supply, distribution or control of the said goods.
Conclusion
Horizontal Agreements are void and the Competition Commission of India may impose a penalty upon the parties to the Agreement under Section 27 of the Act after it has made an inquiry. This article has sought to provide an understanding of Agreements having an Appreciable Adverse Effect on Competition in India, emphasising Horizontal Agreements.
References
- The Competition Act, 2002 (12 of 2003)
- S M Dugar: Guide to Competition Law, 7th ed
- In Re: Cartelisation in respect of zinc carbon dry cell batteries market in India Suo Motu Case No. 02 of 2016.
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