Understanding Section 3 of Competition Act, 2002: Anti-Competitive Agreements

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Businesses cannot agree to do things that will make it harder for consumers to get the best deals on the goods and services they need.

Examples:

• Two airlines agreeing to charge the same price for flights between Delhi and Mumbai.
• Two mobile phone companies agreeing not to compete in the rural market.
• A car manufacturer and its dealers agreeing to fix the minimum price at which cars can be sold. A group of wholesalers agreeing to boycott a particular supplier.

Section 3(2) Anti-Competitive agreements are void

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

Any agreement that causes or is likely to cause an appreciable adverse effect on competition in India is void

Examples:

• Price fixing: Competitors agreeing to fix the prices of their goods or services.
• Market division: Competitors agreeing not to compete in certain markets or for certain customers.
• Output restriction: Competitors agreeing to limit the amount of goods or services they produce.
• Boycotts: Competitors agreeing to refuse to do business with a particular company or customer.
• Tying arrangements: A business requiring a customer to purchase one product or service in order to purchase another product or service.
• Exclusive dealing arrangements: A business requiring a customer to purchase all of its goods or services from that business.
• Resale price maintenance: A business setting the minimum price at which its products can be resold.

Section 3(3) Presumption of Adverse Competitive Effects in Agreements

(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.

Understanding:

• Horizontal agreements between competitors that fix prices, restrict output, or divide markets.
• Vertical agreements between businesses at different levels of the supply chain that fix resale prices or restrict distribution.
• Agreements that create or reinforce market power, such as mergers and acquisitions that reduce the number of competitors in a market.
• Agreements that exclude new entrants from a market or make it difficult for them to compete.
• Agreements that harm consumers, such as agreements that lead to higher prices, lower quality products or services, or less choice for consumers.

Examples:

• Price-Fixing Cartels: In the case of the global “LCD Price Fixing Conspiracy” involving major electronics manufacturers like LG, Samsung, and Sharp, they were found guilty of fixing prices, leading to higher costs for consumers.
• Market Allocation Agreements: Two competing construction companies might agree to operate in different geographic regions, limiting competition in each area.
• Bid Rigging: The case of the “Collusive Bidding in Road Construction Contracts” in India is an example where construction companies rigged bids for road projects.
• Production Limitation Agreements: The OPEC (Organization of the Petroleum Exporting Countries) has been accused of such practices in the oil industry.
• Inefficient Joint Ventures: Two pharmaceutical companies forming a joint venture solely to control the supply of a critical drug without any efficiency gains.

Section 3(4) Anti-Competitive Agreements Across Production Chain Levels

Any agreement among enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including—

(a) tie-in arrangement;

(b) exclusive supply agreement;

(c) exclusive distribution agreement;

(d) refusal to deal;

(e) resale price maintenance, shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.

• “tie-in arrangement” includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods;
• “exclusive supply agreement” includes 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” 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 the goods;
• “refusal to deal” includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought;
• “resale price maintenance” includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

Understanding:

The provision addresses anti-competitive agreements among enterprises or persons at different stages or levels of the production chain in different markets

Case Reference:

• Fx Enterprise Solutions India Pvt. Ltd. vs. Hyundai Motor India Limited (2015): Hyundai was found to have entered into anti-competitive agreements with its dealers, including exclusive supply and distribution arrangements, tie-in arrangements, and RPM clauses. The CCI imposed a penalty on Hyundai for these violations, which limited competition and restricted consumer choice.
• Kaff Appliances India Pvt. Ltd. vs. Hafele India Pvt. Ltd. (2020) : Hafele was accused of entering into exclusive supply and distribution agreements with builders and kitchen retailers, which restricted other competitors from supplying similar products. The CCI found these agreements to be anti-competitive, as they created barriers to entry for other suppliers and limited consumer choice. Hafele was penalized for its anti-competitive conduct.

Section 3(5) Exceptions to Restrictions in Section 3

Nothing contained in this section shall restrict—

(i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under—

(a) the Copyright Act, 1957;

(b) the Patents Act, 1970 ;

(c) the Trade and Merchandise Marks Act, 1958 or the Trade Marks Act, 1999 ;

(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 ;

(e) the Designs Act, 2000

(f)  the Semi-conductor Integrated Circuits Layout-Design Act, 2000 ;

(ii) the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.

Understanding:

The law provides exceptions to restrictions on certain agreements when they are deemed necessary to protect intellectual property rights or when they exclusively relate to the production, supply, distribution, or control of goods for export.

Case Reference:

• Bayer Corporation vs. Competition Commission of India (2013): Bayer entered into a marketing agreement with NATCO Pharma, allowing NATCO to manufacture and sell a generic version of Nexavar at a lower price. This agreement was legal under Indian competition law, as it fell under the exception provided in Section 3(5)(i) of the Competition Act, which allows for agreements that are made to protect intellectual property rights. The CCI recognized that this agreement balanced the interests of protecting intellectual property rights and ensuring access to affordable medicines.
• FICCI Multiplex Association of India vs. United Producers/ Distributors Forum (2011) : The case involved a dispute between multiplex cinema owners and film producers/distributors over revenue-sharing agreements. The multiplex owners had collectively decided to limit the number of screens allotted to films with high revenue-sharing demands. The film producers saw this as an anti-competitive practice. The CCI examined the case and concluded that the multiplex owners’ actions were not in violation of Section 3. The multiplex owners argued that their actions were necessary for protecting their rights under the Copyright Act, 1957, specifically the right to exhibit films. The CCI accepted this argument as a valid exception under Section 3(5)(i)(a) of the Competition Act.