CONCEPT OF AGREEMENTS HAVING

ADVERSE EFFECT ON COMPETITION

AND CRITERIA FOR DETERMINING
IT:-

The Competition Act, 2002-

The Competition Act, 2002 was enacted by the Parliament of
India and governs Indian competition law. It replaced the
archaic The Monopolies and Restrictive Trade Practices Act,
1969. Under this legislation, the Competition Commission of
India was established to prevent the activities that have an
adverse effect on competition in India. This act extends to whole
of India except the State of Jammu and Kashmir.
It is a tool to implement and enforce competition policy and to
prevent and punish anti-competitive business practices by firms
and unnecessary Government interference in the market.
Competition laws is equally applicable on written as well as oral
agreement, arrangements between the enterprises or persons.
The Competition Act, 2002 was amended by the Competition
(Amendment) Act, 2007 and again by the Competition
(Amendment) Act, 2009.
The Act establishes a Commission which is duty bound to protect
the interests of the free and fair competition (including the process
of competition), and as a consequence, protect the interests of
consumers. Broadly, the Commission's duty is:-

 To prohibit the agreements or practices that have or are

likely to have an appreciable adverse effect on competition in a
market in India, (horizontal and vertical agreements / conduct);
 To prohibit the abuse of dominance in a market;
 To prohibit acquisitions, mergers, amalgamations etc.
between enterprises which have or are likely to have an
appreciable adverse effect on competition in market(s) in India.

In addition to this, the Competition Act envisages its enforcement

with the aid of mutual international support and enforcement
network across the world,
Types of agreement-
A 'horizontal agreement' is an agreement for co-operation
between two or more competing businesses operating at the
same level in the market. A vertical agreement is an agreement
between firms at different levels of the supply chain. For instance,
a manufacturer of consumer electronics might have a vertical
agreement with a retailer according to which the latter would
promote their products in return for lower prices.
Abuse of dominant position-
There shall be an abuse of dominant position if an enterprise
imposes directly or indirectly unfair or discriminatory conditions in
purchase or sale of goods or services or restricts production or
technical development or create hindrance in entry of new
operators to the prejudice of consumers. The provisions relating
to abuse of dominant position require determination of dominance
in the relevant market. Dominant position enables an enterprise to
operate independently or effect competitors by action[14]
Combinations-
The Act is designed to regulate the operation and activities of
combinations, a term, which contemplates acquisition, mergers or
amalgamations. Combination that exceeds the threshold limits
specified in the Act in terms of assets or turnover, which causes or
is likely to cause adverse impact on competition within the
relevant market in India, can be scrutinized by the Commission.

Anti-Competitive Agreements
under the Competition Act
Anti Agreements -
Enterprises, persons or associations of enterprises or persons, including cartels, shall not enter into
agreements in respect of production, supply, distribution, storage, acquisition or control of goods or
provision of services, which cause or are likely to cause an "appreciable adverse impact" on
competition in India. Such agreements would consequently be considered void. Agreements which
would be considered to have an appreciable adverse impact would be those agreements which-

 Directly or indirectly determine sale or purchase prices,

 Limit or control production, supply, markets, technical development, investment or
provision of services,

 Share the market or source of production or provision of services by allocation of

inter alia geographical area of market, nature of goods or number of customers or any
other similar way,

 Directly or indirectly result in bid rigging or collusive bidding.

What is an Anti-competitive Agreement?

Section 3 of the Competition Act, 2002

The Act under Section 3(1) prevents any enterprise or association from entering
into any agreement which causes or is likely to cause an appreciable adverse
effect on competition (AAEC) within India. The Act clearly envisages that an
agreement which is contravention of Section 3(1) shall be void.

How to determine AAEC?

The Act provides that any agreement including cartels, which-

 Directly or indirectly determines purchase or sale prices;

 Limits production, supply, technical development or provision of
services in market;

 Results in bid rigging or collusive bidding

Shall be presumed to have an appreciable adverse effect on competition in India

Proviso to Section 3 of the Act provides that the aforesaid criteria shall not apply
to joint ventures entered with the aim to increase efficiency in production, supply,
distribution, acquisition and control of goods or services.

Anti-competitive agreements are further classified into Horizontal

agreements and Vertical agreements.

What are Horizontal Agreements?

HORIZONTAL AGREEMENTS- Horizontal agreements are arrangements between

enterprises at the same stage of production. Section 3(3) of the Act provides that
such agreements includes cartels, engaged in identical or similar trade of goods
or provision of services, which-

1. Directly or indirectly determines purchase or sale prices

2. Limits or controls production, supply

3. Shares the market or source of production

4. Directly or indirectly results in bid rigging or collusive bidding

Under the Act horizontal agreements are placed in a special category and are
subject to the adverse presumption of being anti-competitive. This is also known
as ‘per se’ rule. This implies that if there exists a horizontal agreement under
Section 3(3) of the Act, then it will be presumed that such an agreement is anti-
competitive and has an appreciable adverse effect on competition 1.

What are Vertical Agreements?

VERTICAL AGREEMENTS- Vertical agreements are those agreements which are

entered into between two or more enterprises operating at different levels of
production2. For instance between suppliers and dealers. Other examples of anti-
competitive vertical agreements include:

 Exclusive supply agreement & refusal to deal

 Resale price maintenance

 Tie-in-arrangements

 Exclusive distribution agreement

The ‘per se’ rule as applicable for horizontal agreements does not apply for
vertical agreements. Hence, a vertical agreement is not per se anti-competitive or
does not have an appreciable adverse effect on competition.

The Act under Section 3 of the Act also prohibits any agreement amongst
enterprises which materialize in:

 Tie-in arrangement

What is a tie-in arrangement?According to the Statute it includes any

agreement requiring purchaser of goods, as a condition of purchase, to
purchase some other goods. In the case of Sonam Sharma v. Apple &
Ors., the CCI stated that in order to have a tying arrangement, the
following ingredients must be present:

1. There must be two products that the seller can tie together .
Further, there must be a sale or an agreement to sell one product
or service on the condition that the buyer purchases the other
product or service. In other words, the requirement is that
purchase of a commodity is conditioned upon the purchase of
another commodity.
2. The seller must have sufficient market power with respect to the
tying product to appreciably restrain free competition in the
market for the tied product. That is, the seller has to have such
 power in the market for the tying product that it can force the
buyer to purchase the tied product; and

3. The tying arrangement must affect a “not insubstantial” amount of

commerce . Tying arrangements are generally not perceived as
being anti- competitive when substantial portion of market is not
affected.

 Exclusive supply agreement- The Act defines such agreements to

include any agreement restricting in any manner the purchaser in
the course of his trade from acquiring or otherwise dealing in any
goods other than those of the seller or any other person.

 Exclusive distribution agreement- This includes any agreement to

limit, restrict or withhold the output or supply of any goods or
allocate any area or market for the disposal or sale of goods.

 Refusal to deal- The Act states that this criteria includes

agreement which restricts by any method the persons or classes
of persons to whom the goods are sold or from whom goods are
bought.

Anti-Competitive Agreements
An anti-competitive agreement is where two or more companies operating
as competitors in the same market agree to co-operate by, for example,
fixing prices or dividing up the market, which has the effect of reducing
competition in their market. Anti-competitive agreements can be written
down or agreed informally and can be open or secret (ie, a cartel).

Why do we need markets to be competitive?

Companies competing against each other in the same market will usually
try to gain a competitive advantage by eg, lowering their price or improving
the quality of the product. This means the consumer can buy higher quality
products at lower prices. Companies in cartels that control prices or divide
up markets so each one has a monopoly in part of the market don’t feel the
usual competitive pressure to launch new products, improve quality and
keep prices down. Consumers therefore ultimately have to pay more for
lower quality goods. Cartel agreements are particularly damaging and
therefore carry tough penalties for those who are caught.

Which agreements are seen as anti-competitive?

To establish whether an agreement is ant-competitive, the object and effect

of the agreement are examined, rather than whether the agreement was
written down or not. If the object of an agreement was to restrict
competition it means it was intended to restrict competition; if something
has the effect of restricting completion it means it has in fact restricted
competition. The following types of arrangement are generally prohibited
under Chapter 1 and Article 81: agreements which fix prices (both purchase
and selling prices); agreements which fix trading conditions, eg, discounts;
agreements which limit or control production, markets, technical
development or investment (eg, setting quotas); agreements which share
sources of supply; agreements which place other parties at a disadvantage
(eg, placing different terms on different parties for the same kind of
agreements).

What happens if a company breaches Chapter 1 or Article 81?

If a company has been found to have breached either Chapter 1 or Article

81 the punishments will be severe and can range include: a fine of up to
10% of the company’s global turnover; the provisions contained within the
agreements which are deemed anti-competitive will become void and
unenforceable

Are there any exemptions to the rule in Chapter 1 or Article 81?

Even if an agreement falls within the Chapter 1 or Article 1 definition of

anticompetitive, it can be exempt if the benefits of the agreement outweigh
the competitive disadvantages or if it is necessary to improve products or
services, develop new products or find better ways of making products
available to consumers. Research and development agreements and
technology transfer agreements are often compatible with competition law,
for example, because some new products require expensive research that
would be too costly for one company working alone. Agreements on joint
production, purchasing or sales, or on standardisation, may also be legal.

Critical analysis of anti-competitive agreements and appreciable adverse

effect on competition in india
The importance of competition for economic growth and development is a source of growth and
technological improvement in a broad range of the development of developing countries. Many
developing countries including India undertook economic reforms which promoted a free
competitive market economy as against the control and command economy. In an increasingly
united global economy, domestic firms and industries cannot be completely covered from
external competitive pressures. The rapidity of liberalization created numerous problems for
developing countries in their approach to competition especially check over anti-competitive
practices. The primary focus of competition policy is to deter and provide remedies for various
anti-competitive practices to ensure free and fair competition in the market. The same rests on
the basis that competition law is designed to be a general charter of economic liberty proposed
at preserving free and unfettered competition as the rule of trade. The unlimited cooperation of
competitive forces will generate the best allocation of economic resources of the country, the
lowest price, the highest quality, and greatest material progress. In the research provides key
insights into the agreements which are anti-competitive in nature and what can potentially
tantamount to anti-competitive behaviour.

APPRECIABLE ADVERSE EFFECT ON COMPETITION

(AAEC)

• The philosophy guiding ‘competition analysis’ shifted from: >

Treating structure as per se bad To > Treating certain types of
conduct as bad To > Judging acts based on their ‘Effects’ •
Competition Act, 2002 frowns upon act(ion)s that have
‘appreciable adverse effects on competition’ (AAEC)

CRITERIA FOR DETERMINING “ADVERSE EFFECT

ON COMPETITON (AAEC)
• While determining whether an agreement has AAEC
under Sec 3 the Competition Commission shall have due
regard for the following factors:

- creation of barriers to new entrants in the market -

driving existing competitors out of the market

- foreclosure of competition by hindering entry into the

market

- accrual of benefits to the consumers - improvements in

production or distribution of goods or services

–promotion of technical, scientific and economic

development by means of production or distribution of
goods or provision of services

FACTORS TO BE CONSIDERED IN DETERMINING

DOMINANCE –

1 Dominant position linked to a host of factors

• Market share of enterprise

• Size and resources of enterprise

• Size and importance of competitors

• Commercial advantage of enterprise over competitors

o Vertical integration
o Dependence of consumers

o Dominant position as a result of a statue

o Entry barriers o Countervailing buying power

o Market structure and size of market

o Social obligations and costs

o Contribution to economic development

o Any other factor

ABUSE OF DOMINANCE

• Imposing unfair or discriminatory price or condition in

purchase or sale

• Limiting production or scientific development to the

prejudice of consumers

• Denial of market access in any manner

• Conclusion of contract subject to supplementary obligations

• Use of position in one relevant market to enter into or

protect other relevant market

• List of Abuses in the Act are exhaustive

• No action if an ‘act(ion)’ is not covered in ‘list’

• Abuses are of two types:

> Exploitative (predatory pricing, e.g.)

> Exclusionary (interference with competitive process)

– No concession in case of abusive use of intellectual

property

– Appreciable adverse effect on competition (AAEC) need

not be proved

REGULATION OF COMBINATIONS

• Combination is a broad term: includes merger,

amalgamation, acquisition of shares, acquiring of control
• The Act takes a liberal view

• High threshold limits – only big ticket combinations subject

to regulation

• Voluntary notification regime

• Commission to decide in 90 working days, else combination

is deemed approved

• Commission can take, upon its own knowledge or

information, action within 1 year after combination

ANTI-COMPETITIVE AGREEMENTS AND IPR EXEMPTION UNDER SECTION

3(5) OF THE ACT

Section 3(5) of the Competition Act envisages that nothing contained in Section 3
(prohibiting anti-competitive agreements) shall restrict the right of any person to
prevent infringement or imposing of reasonable conditions that may be
necessary for protecting his/her intellectual property rights i.e. copyright,
trademark, patent, designs and geographical indications.

In the aforesaid context, CCI states that any ‘reasonable condition’ imposed for
protection of IPR would not attract Section 3, however, imposition of
‘unreasonable condition’ to protect IPR would contravene Section 3 of the Act.
The CCI provides an illustrative list of practices/agreements which though
entered into for protection of IPR may contravene Section 3 of the Act 5. Such
practices/agreements are:

 Patent pooling- may be a restrictive practice if pooling firms

decide not to grant license to third parties;
 Tie-in arrangement – If under the tying arrangement, licensee is
required to acquire particular goods solely from the patentee then
it may be a restrictive practice;

 Agreement to continue payment of royalty even after the patent

has expired;

 Clause restricting competition in R & D;

 Licensee may be subjected to a condition not to challenge the

validity of IPR in question.

 Licensor fixes the price at which the licensee should sell.

 A licensee may be coerced by the licensor to take several licenses
in intellectual property even though the Licensee may not need all
of them.

 Condition imposing quality control on the licensed patented

product beyond those necessary.

 Restricting licensee’s right to sell the product of the licensed

know-how to persons other than those designated by the licensor.

 Undue restriction on licensee’s business could be anticompetitive.

 Limiting the maximum amount of use the licensee may make of the
patented invention may affect competition.

 Condition imposed on the licensee to employ or use staff

designated by the licensor.