Anti – Competitive Agreements Under Competition Law

Anti-Competitive Agreements

In horizontal agreement, an agreement is formed between two or more businesses which are at the same level of business, for example, manufacturing, distribution, etc. So, an agreement between the top five manufacturing plants in the nation would be a horizontal agreement that is anti – competitive, if they take part in those kinds of practices. As an example, consider a scenario where in a market, there are multiple e-commerce websites that are selling clothes over the internet. However, among the  websites like Flipkart, Myntra, Amazon, and Jabong, there is an agreement that they will not sell shirts below a price pre determined among them, let us consider that as 2000 Rs. Now, maybe Myntra is procuring the same shirts at Rs. 200, but because of this agreement that they have, they can sell them at an absurdly high profit rate, because Myntra is sure that nobody will sell shirts below this cost, so its customers can not be lost that way. Cartels, and even the infamous drug cartels, would also be part of horizontal anti – competitive agreements. Excluding the illegality of drugs, the existence of cartels makes sure that the businesses control the market in various forms, and the customers do not have the requisite amount of freedom and competition in the market to choose their preferred source of drugs1

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Vertical agreements are similar in nature, except that they are done at different levels in the process. So, a vertical anti – competitive agreement may be formed between a manufacturer and a seller, but never between two manufacturers. As an example, we can go back to one of the scenarios we considered before, the Adidas shoe and sock scenario. Consider this, that Adidas has come up with a new model of running shoes, that has many useful features, and is also priced at a reasonable level, considerably less than its competitors. However, there is a clause that to buy the shoe, the customer must also buy one pair of socks from Adidas, a purchase that most of the customers would not have made otherwise. This is an example of a vertical anti – competitive agreement between the company and the sellers of the products, and this particular example is known as a tie in arrangement. In this, as Adidas is a well known name in the shoe market, but not that popular in the socks market, it is tying the products to drive up revenue and gain a customer base for its socks.

Essential Elements

The essential elements of anti – competitive agreements, you will find that are mostly similar to the essential elements of the ordinary agreements, that you had probably read previously under the Indian Contract Act, 1872. The Competition Act, 2002, itself provides a definition of Agreements, however, it is largely similar to the definition under the Indian Contract Act, with only certain nuances being clarified better. We will now revise, in brief, what such essential elements would be:

  • Number of Parties: The number of parties who are formulating the contract should be two or more. As the Competition Act, 2002, is concerned with businesses and the effect of competition among businesses, it mentions that these parties may be natural persons, or associations of persons, businesses, enterprises, or any kind of mix among the same. However, as is the rule with any kind of agreements, an agreement can not be formed by one party in all her lonesome. So, a minimum of two parties should be needed.
  • Competency: The parties should also be eligible to contract, and should not be disqualified by the various conditions that are there under the Indian Contract Act, 1872. Thus, for example, the parties can not be underage, insane, or otherwise barred from making agreements. They would also need to have the mental capacity to understand what they are agreeing to, at the moment of making the agreement
  • . Offer and acceptance: In any kind of agreement, there needs to be an offer from the offeror’s side, and an acceptance from the offeree. There can also be cross offers and counter offers, which further complicate the process. Even though the anti – competitive agreements also require both an offer and an acceptance, due to the nature of such agreements, such actions are often done in a covert manner, which brings us to our next point of discussion.
  • Mode of Agreement: The Competition Act, 2002, specifically mention that agreements under this Act may or may not be formal or in writing, and includes various factors such as arrangement, understanding, action in concert, etc. As the businesses themselves are aware that these kinds of agreements are contrary to law, almost never will there be formal agreements or any paperwork related to the same. These agreements are, most often than not, implied – conducted by spoken words, or even other gestures such as nodding, winking, etc. For a country that is so obsessed with keeping legal documentation of paper works, the businesses engaging in anti – competitive agreements have certainly moved beyond them.
  • Appreciable Adverse Effect on Competition: The primary point which makes a difference between agreements in the normal course and anti – competitive agreements, is that these should cause or be likely to cause appreciable adverse effect on competition. We will read in detail about this appreciable adverse effect in the upcoming modules, however, essentially this means that there should be a significant amount of competition distorting effect in the concerned market, as a direct result of the agreement.

Legal Provisions

The Competition Act, 2002, defines Agreement as including “any arrangement or understanding or action in concert,— (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings”

. One could argue that after the already provided comprehensive definition of Agreement, as found under the Indian Contract Act, 1872, we did not need the Indian Competition Act, 2002, to further define the term. But, after the discussion in the last section, we certainly know better. The definition in this Act primarily highlights the differences that can be found in an agreement in the natural course, and an agreement which specifically comes within the ambit of this Act. The drafters of this legislation took into context the ill intentions of the people who would be forming such agreements, and ensured that even the most subtle of arrangements, even if made without any intention of ever legally enforcing it, would be covered by the Competition Act, 2002.

Anti – competitive agreements in particular, have been described by the Competition Act, 2002, in detail under the various provisions of Section 3. However, as we will discuss the types and subtypes of anti – competitive agreements and the legal provisions related to them in the next module, here, we will limit our discussion to only sub sections (1) and (2) of Section 3 of the Act.

Section 3(1) provides a list of entities who might get involved into anti – competitive agreements. This includes:

  • Enterprise and enterprise;
  • Enterprise and association of enterprises;
  • Two associations of enterprises;
  • Two persons;
  • Person and an association of persons;
  • Between two association of persons;
  • Person and an enterprise;
  • Person and an association of enterprise;
  • Association of persons and enterprises;
  • Association of persons and association of enterprises

These different kinds of natural and juridical personnel are prohibited from entering any kind of agreements, which would confer appreciable adverse effect on competition within India. The different areas of agreements have also been described in this section; they are as follows:

  • Production
  • Supply
  • Distribution
  • Storage
  • Acquisition
  • Control

With respect to:

  • Goods
  • Provision
  • Services.

Thus, as you can see, Section 3(1) of the Act provides a comprehensive view as to which kinds of agreements would be counted as anti – competitive. First, a list of the parties who would make such agreements is provided, then, the various areas that they might want to control by such agreements, followed by a description of the objects that they would seek to regulate by these agreements – and causing or making it likely to cause appreciable adverse effect on competition within India

Section 3(2), in simple terms, provides that “Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void.” When deciding whether an agreement exists or if it is considered as an anti – competitive agreement under Section 3(1), the CCI usually adjudicates the matter on a case to case basis.

Section 19(1) of the Act provides that under which circumstances, the CCI can put forward an enquiry regarding an alleged contravention of Section 3(1) of the Act. It allows the CCI to pursue the same “on its own motion or on –

  • [receipt of any information, in such manner and] accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association; or
  • (b) a reference made to it by the Central Government or a State Government or a statutory authority.”

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