Module 3

Anti-competitive
Agreements

September 2014

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 Table of Contents

Overview
1. Understanding Anti-competitive Practices
2. Anti-competitive Agreements
3. Horizontal Agreements
3.1. Types of Horizontal Agreements
3.1.1. Agreement regarding prices
3.1.2. Agreements regarding quantities
3.1.3. Agreements regarding market sharing
3.1.4. Agreements regarding bids
3.2. What are Cartels?
4. Vertical Agreements
4.1. Types of Vertical Agreements
4.1.1. Tying Agreements
4.1.2. Exclusive Supply and Distribution Agreements
4.1.3. Refusal to Deal
4.1.4. Resale Price Maintenance
5. Exceptions to Anticompetitive Agreements
6. Investigating Horizontal Agreements
7. Analysing Appreciable Adverse Effect on Competition
8. Remedial Measures
9. Leniency Programme
10. Summary
References
Review Questions
September 2014

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Overview:

India is reeling under the tag of a developing country. There are peculiar damages caused by
restrictive business practices or anti-competitive practices to developing countries such as
implications for the purchasing power of consumers through increased prices, etc.

During the last decade, many developing countries have adopted or are in the process of
enacting competition laws. There is a growing awareness among developing countries of the
adverse effects of anti-competitive practices on their economies as well as their populations.
However, the effects of such practices are not easily quantifiable and may therefore not be
obvious. Nevertheless, developing countries have come to recognise the potential benefits that
can be derived from competition law enforcement. The drive to establish legal and institutional
frameworks in order to fight anti-competitive practices has intensified in recent decades.

The Competition Act 2002 has been in force since past five years and the Competition
Commission has been tasked to deal with anti-competitive practices that can act as impediments
to the competition is the market. In its five years of operation, it has been able to streamline a lot
of competition issues in various sectors.

1. Understanding Anti-competitive Practices

A fundamental concern of competition law is the prevention of restrictive business practices
(RBPs) or anti-competitive practices (ACPs) which deteriorate competition in the economy.
Systems of competition law have specific provisions and mechanisms for dealing with situations
where firms tend to enter into such practices.

Anti-competitive practices, in the private or the public sector, limit access to markets or restrain
competition in the market in order to increase the relative market position and profits of the
enterprises involved in such practice. In India before the Competition Act, 2002 (CA02) came
into being RTPs were handled by the Monopolies and Restrictive Trade Practices Act (MRTPA),
1969.

Anti-competitive practices includes:

A) Anti-competitive Agreements
 Horizontal Agreements
 Agreements regarding prices
 Agreements regarding quantities
 Agreements regarding bids
 Agreements regarding market sharing
 Joint refusal to deal
 Vertical Agreements
 Resale price maintenance
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 Exclusive supply and distribution agreements

 Tie-in arrangement

B) Abuse of Dominant Position

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  Price Discrimination
 Predatory Pricing
 Refusal to Deal or Supply

In this module we will deal with the anti-competitive agreements. The part on abuse of
dominance will be covered in module 4.

2. Anti-competitive Agreements
Anti - competitive agreements are agreements in respect of
production, supply, distribution, storage, acquisition or
control of goods or services, which can cause an appreciable
adverse effect on competition. Anti-competitive agreements
can be with firms dealing at the same level in production or
marketing or can be at different level of production, e.g. in a
relationship of purchasing and selling.

Anti-competitive agreements, on one hand, is associated with

the intent to restrain competition, on the other hand there
should be joint capacity of the parties involved in such trade
practices to do so.
Section 2(b) of the Competition Act defines agreement and as
per this provision, the agreement includes any arrangement or understanding or action in
concert:
 whether or not such arrangement, understanding or action is formal or in writing; or
 whether or not such arrangement, understanding or action is intended to be enforceable
by legal proceedings.

Indian Competition Act, 2002, prohibits all anti-competitive agreements and declares them void
ab initio. It is important to note that agreements contravening Section 3(1) of the Competition
Act, 2002 are void and not merely voidable at the option of the aggrieved party. Such agreements
are, therefore, nugatory and devoid of any legal effect. The relevant extracts of Section 3 of the
Competition Act, 2002 are reproduced here:

Section 3(1) and 3(2) of the Competition Act, 2002:

3(1) 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.

3(2) Any agreement entered into in contravention of the provisions contained in

subsection (1) shall be void.
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Competition laws in all over the world usually places anti-competitive agreements in two
categories namely – horizontal agreements and vertical agreements. Competition authorities see

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horizontal agreements more seriously than the vertical agreements. Firms enter into agreements,
which may have the potential of restricting competition. The level of interaction at the market,
places firms into two distinction arrangements ― horizontal agreements and ―vertical
agreements between firms. While horizontal agreements are those among competitors and the
latter, i.e. the vertical agreements are those relating to an actual or potential relationship of
purchasing or selling to each other. A particularly pernicious type of horizontal agreements is the
cartel. Vertical agreements may become pernicious, if they are between firms in a position of
dominance.

Chart depicting types of anti -competitive agreements:

Figure: II

SUPPLIER SUPPLIER SUPPLIER

V
MANUFACTURER MANUFACTURER MANUFACTURER
E

R
DISTRIBUTOR/ DISTRIBUTOR/ DISTRIBUTOR/
T
WHOLESALER WHOLESALER WHOLESALER
I

C RETAILER RETAILER RETAILER

L
H O R I Z O N T A L A G R E E M E N T

3. Horizontal Agreements
Horizontal agreements are agreements between firms dealing at the same level in production or
marketing. These are often competitors.
Section 3(3) of the Competition Act defines the premises of horizontal anti-competitive
Agreements: 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;
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(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.

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Generally the “rule of reason” test is required to prove whether an agreement is illegal or not.
But for the agreements related to price, quantity, bids or market sharing, the CA02 presumes that
these cannot serve any useful purpose and will have an appreciable adverse effect on
competition. Therefore, such agreements are not subjected to the ‘rule of reason’ analysis.

In US, rule of reason test is not generally applied. The agreement will be considered as unlawful
regardless of whether the fixed price is reasonable or not. However, under the rule of reason test,
agreement will be unlawful only if the anti-competitive effect outweighs the pro-competitive
effect of trade practice. In Canada, the rule is generally applied. The agreement will be illegal
under Section 45 of the Canadian Competition Act if it unduly reduces the competition. The
example of this kind of agreement is a cartel.

3.1 Horizontal Agreements Regulated Under the Competition Act, 2002

 There are four types of horizontal agreements deemed to have an appreciable adverse
effect on competition and are presumed to be anti-competitive under the Competition
Act, 2002. With respect to these agreements, it is not necessary to prove that they have
an adverse effect on competition rather the onus is on the person or enterprise
concerned to prove that the agreement does not fall under the prohibited category in the
enquiry before the CCI.

Figure: III

Anti-competitive Horizontal Agreement

Agreements Agreements regarding Agreements regarding Agreements

regarding price quantity and quality market sharing regarding bids
(collusive
bidding or bid-
rigging)
All agreements Agreements aimed at Agreements for sharing of
that directly or limiting or controlling markets or sources of Tenders
indirectly fix the production, supply, production or provision of submitted as a
purchase or markets, technical services by way of allocation result of any
sale price. development, of geographical area of joint activity or
investment or market, or type of goods or agreement.
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provision of services. services, or number of

The different kinds of agreements under the horizontal agreements are:

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 3.1.1 Agreement regarding prices
Competitors tend to fix the purchase or sale price amongst themselves for higher profits thereby
leading to unfair competition and hence inefficiency in the market. It is also defined as entering
into collusive agreement (form a cartel) on prices by the competitors, at any level in the
production-distribution chain. The CA02 prohibits such agreements under section 3(3) (a).

Cartels are considered among the most serious competition infringements. Competition
authorities around the world are increasing their efforts to pursue cartel offences, both
domestically and internationally. However, the fight against cartels is legally and practically a
demanding task. First of all, cartelists are by definition secretive about their illicit behaviour, and,
therefore, agencies have to undertake great efforts to detect concealed cartels. Secondly, agencies
need extraordinary powers and skills to collect sufficient evidence to mount a viable case against
sometimes uncooperative defendants.

The “price” according to the Section 2(o) CA02, in relation goods or services, includes every valuable
consideration, whether direct or indirect or deferred, and includes any consideration which in effect relates to the sale
of any goods or to the performance of any services, although ostensibly relating to any other matter or thing.

Box 3.1: Penalty Imposed on Bengal Chemists and Druggists Association

In Re: Bengal Chemist and Druggist Association wherein a suo moto case was initiated by the
CCI, after receiving an email on the alleged anti-competitive practices adopted by the BCDA.
This matter was clubbed with the information filed by Directorate of Drugs, West Bengal
alleging anti-competitive activities of BCDA. The BCDA was alleged of issuing circulars which
directed the retailers not to give any discount to the consumers. After finding a prima facie case
the CCI ordered for the DG’s investigation. The DG during its investigation found that the
BCDA and its District and Zonal Committees were engaged in anti-competitive practices of
directly or indirectly determining the sale prices of drugs and controlling or limiting the supply of
drugs through concerted and restrictive practices including imposing 'No Discount' notices to be
displayed at the said shops, in contravention of the provisions of Section 3(3)(a) and (b) read
with Section 3(1) of the Act. The CCI accordingly concluded that the activities of the BCDA are
in conflict with the objects of the competition law as they cause restraint of trade, stifle
competition and harm the consumers. CCI imposed a penalty of Rs 18.38 crores on BCDA and
its office bearers and also directed the BCDA and its office bearers to ‘cease and desist’ from
indulging in practices found to be anti-competitive in terms of the provisions of the Act.

Source: http://www.cci.gov.in/May2011/OrderOfCCI/27/022012.pdf

Box 3.2: In Builders’ Association of India vs. Cement Manufacturers’ Association & Ors.,
COMPAT upholds CCI’s 630cr fine on cement companies

The Competition Appellate Tribunal (COMPAT) directed 11 cement companies to pay 10% of
the penalty of Rs 6,307 crore imposed by the Competition Commission of India (CCI) for
forming a cartel and colluding to charge higher prices from consumers. The cement companies
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have to pay the 10% amounting to Rs 630 crore within a month.

The order to levy a penalty had been passed following a probe by director general (investigation)
of the CCI on a complaint filed by the Builders Association of India (BAI) against the cement

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companies for indulging in unfair trade practice. CCI found cement makers had violated the
provisions of the Competition Act, 2002, which deals with anti-competitive contracts, including
cartels.

In its 2012 order, the CCI had imposed a fine on Aditya Birla Group's Ultratech Cements (Rs
1,175 crore), Ambuja Cements (Rs 1164 crore) and ACC (Rs 1,148 crore). Other companies
found guilty were Grasim Cements (now merged with Ultratech), Lafarge India, JK Cement,
India Cements, Madras Cements, Century and Binani Cements. The fine was fixed at 50% of
their profit during 2009-10 and 2010-11. The industry body Cement Manufacturers Association
(CMA) was also fined Rs 73 lakh.

Source: Times of India, May 18, 2013

Box 3.3: COMPAT upholds CCI penalty on LPG cylinder makers

In what may be a first, the Competition Appellate Tribunal (COMPAT) has upheld the Rs 165-
crore penalty (7 per cent of turnover) imposed by the Competition Commission of India (CCI)
in February on 48 LPG cylinder makers after it found them indulging in cartelisation and
manipulation of tenders floated by Indian Oil Corporation last year. Hearing the appeal of the
LPG cylinder makers against CCI order, COMPAT refused to grant blanket stay on the CCI
penalty. Instead, it gave the cylinder makers four weeks to comply.

The LPG cylinder makers had challenged the CCI order before COMPAT demanding a blanket
stay on the CCI order. In its appeal, the lawyers arguing on behalf of the cylinder makers said
CCI had erred while imposing 7 per cent of turnover as penalty because it treated all of them as
equals whereas all companies are different in size, capacity and status.

Source: Indian Express, October 23, 2013

The sanctions for price fixing are different in the various

jurisdictions. In US, horizontal price fixing is per se
unlawful, regardless of whether the fixed price is
reasonable. Per se illegality includes the clear probability of
anti-competitive effect of any activity and the
improbability of adequate compensating competitive
virtues. On the other hand, rule of reason analysis is the
examination of the anti-competitive effects and the pro-
competitive attributes of the relevant activity.

Although the MRTPC had dealt with Refusal to Deal price fixing cartels, due to lack of the
power of levying penalties/fines no deterrent effect could have been created. The MRTPC could
only order cease and desist. Under CA02, this weakness has been removed and the CCI has
levied fines, some very heavy as seen in Boxes 3.2 and 3.3.
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3.1.2 Agreements regarding quantities

Under this agreement, enterprises producing or supplying the same products or services agree to
limit their supplies to a lower proportion of their previous sales. The quantity restriction includes

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limiting or controlling production, supply, markets, technical development or provision of
services.

An indication can be whether the supply of certain products in the market all of a sudden had
been reduced thereby creating an artificial crisis. It is considered unlawful under the Section 3(3)
(b) of the CA02.

Box 3.4: UTV Software Communications Limited vs.

Motion Pictures Association (MPA)

The CCI found MPA guilty under Section 3(3) (b) of the CA02 for limiting and controlling the
distribution and exhibition of films in its areas of operation. The rules and other associations
formed by MPA restricting their members not to deal with non-members, making compulsory
registration of each film before release in their territories, restrictions regarding unfair holdback
period for exploitation of Satellite, Video, DTH and rules regarding penalising members who
do not follow the dictates of the association were held to be anti-competitive practices. The
rules for registration of film put restriction on producers and distributors of the film.

Source: http://www.cci.gov.in/May2011/OrderOfCommission/092011Main.pdf

3.1.3 Agreements regarding Bids

Bid rigging usually involves competitors collaborating in some way to

restrict competition in response to a tender, regardless of whether the
tender is issued by a public authority or a private entity.

Section 3 of the CA02 defines “bid-rigging” as any agreement,

between enterprises or persons engaged in identical or similar
production or trading of goods or provision of services, which has the
effect of eliminating or reducing competition for bids or adversely
affecting or manipulating the process for bidding.

The joint agreements by firms in the process of submitting tenders will be regarded as unlawful
as it prevents the most efficient firm from bagging the tender. It includes collusive bidding or
bid-rigging. Some of the indications of bid rigging are:
 whether there is an unusually high margin between the winning and unsuccessful bids.
 whether there is an obvious pattern of rotation of successful bidders.
 whether the same supplier always become the successful bidder on several successive
occasions in a particular area or for a particular form of contract, or not.

The abovementioned indications are not exhaustive and there are also other factors which need
to be considered while deciding on bid-rigging. There are also factors which can favour bid
rigging like fewer bidders in the market as it is easy to collude, products not easily substitutable,
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repetitive purchases as bidders become familiar with each other, etc.

These indications do not necessarily mean that bid rigging is in operation in a particular area, but
it can raise suspicion in the minds of the competition authority.

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Bid rigging is illegal under Section 3 (3) (d) of the CA02 but it is not a criminal offence in India.
In some countries, it is a criminal offence. In Kenya, bid rigging is a criminal offence with
imprisonment up to three years. In US, bid rigging is conclusively presumed to be illegal with
heavy penalties for both the company and responsible executives (in the latter case
imprisonment also).

Bid Rigging Conspiracy

Form of Bid Rigging Nature and Description

Bid Suppression Where one or more competitors who otherwise would be

expected to bid, or who have previously bid, agree to refrain
from bidding or withdraw a previously submitted bid so that
the designated winning competitor's bid will be accepted.

Complementary Bidding Also known as 'cover' or 'courtesy' bidding occurs when some
competitors agree to submit bids that are either too high to be
accepted or contain special terms that will not be acceptable to
the buyer. Such bids are not intended to secure the buyer's
acceptance, but are merely designed to give the appearance of
genuine competitive bidding. Complementary bidding schemes
are the most frequently occurring forms of bid rigging, and they
defraud purchasers by creating the appearance of competition
to conceal secretly inflated prices.

Bid Rotation The conspirators submit bids but take turns to be the lowest
bidder. The terms of the rotation may vary; for example,
competitors may take turns on contracts according to the size
of the contract, allocating equal amounts to each conspirator or
allocating volumes that correspond to the size of each
conspirator. A strict bid rotation pattern defies the law of
chance and suggests that collusion is taking place.
Subcontracting arrangements are often part of a bid-rigging
scheme. Competitors who agree not to bid or submit a losing
bid, frequently receive subcontracts or supply contracts in
exchange from the successful bidder. In some schemes, a low
bidder will agree to withdraw its bid in favour of the next low
bidder in exchange for a lucrative subcontract that divides the
illegally obtained higher price between them. Almost all forms
of bid-rigging schemes have one thing in common: an
agreement among some or all of the bidders, which
predetermines the winning bid and limits or eliminates
competition among the conspiring vendors.
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Box 3.5: Three Firms Fined for Bid Rigging

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The CCI fined three makers of agricultural chemicals almost US$60mn for colluding to rig
public tenders, making this the third cartel it has punished with hefty penalties in 2012.

The CCI fined United Phosphorus US$48mn, Excel Crop Care US$12mn and Sandhya Organics
Chemicals US$300,000 for agreeing to coordinate their bids for the provision of aluminium
phosphide tablets, a pesticide, to the Food Corporation of India.

Another company, Agrosynth Chemicals, escaped a fine because it did not coordinate its tender
bids with its competitors after 2007. The agency is only allowed to prosecute anti-competitive
behaviour after 2009, when India’s Competition Act came into effect.

Source: Global Competition Review, April 25, 2012

Box 3.6: Policy - induced Cartel

In the mid-1980s, the policy of the Rajasthan government led to formation of a cartel under
the name of Rajasthan Barbed-wire Manufacturer’s Association, as certain quota of barbed-
wire was to be procured from the local manufacturers. The association hiked the prices and
allocated the total requirement of barbed-wire amongst its members, resulting in poor quality
barbed-wire being procured at a high price, with no quality checks at the government end.
Local manufacturers depended entirely on government’s patronage rendering them
uncompetitive. With the changed government procurement policy, local units closed down
and the association broke up.

Source: Chapter 8: State Government Policies and Competition, Dayal P and Agarwal M, in CUTS
(2006), ‘Towards a Functional Competition Policy for India’, (Pradeep S Mehta, ed) CUTS International,
Jaipur

3.1.4 Agreements regarding market sharing

The agreements on sharing of markets or sources of production or provision of services by way
of allocation of geographical area or type of goods or services or number of customers in the
market or any other similar way are also prohibited under the CA02.

Market allocating cartels can be considered as one of the most restrictive anti-competitive
practices, as they do not leave any room for competition in the relevant market and are
considered per se illegal in most jurisdictions. An indication of such type of cartel can be a
practice of preventing competitors from entering the market within a specified geographic area
or group of customers. In India, there are various examples of such types of practices.

Box 3.7: A Market Sharing Agreement

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RRTA vs. Hindustan Pilkington Glass Workers Ltd and Window Glass Ltd – The
manufacturers of wired, figured and profilite glass entered into an agreement with Surat
Cotton Spinning and Weaving Mills Private Ltd (proprietors of Navin glass products). The
latter company was prevented from making or selling certain glass products in consideration
of payment of agreed compensation of Rs 12.5 lakh by each respondent and was further

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 required to sell its products to both. Pilkington and Window Glass also arrived at a common
marketing arrangement through Associated Partners and Wired Glass, a company promoted
by them for the purpose. The Commission passed a ‘cease and desist order’ against the
respondents and declared the agreement as void.

3.2 Cartels
Cartels are arrangements between groups of firms that produce and sell the same product for the
purpose of exacting and sharing monopolistic rents. Cartel members may agree on prices,
quantity, market shares, allocation of customers, bid-rigging, division of profits or combination
of all these. Section 2(c) of the CA02 defines cartel as ‘an association of producers, sellers, distributors,
traders, or service providers who, by agreement amongst themselves, limit, control or attempt to control the
production, distribution, sale or price of, or trade in goods or provision of services’.
Cartels can be categorised as price-fixing cartel, market allocating or customer sharing cartels,
output restricting cartels and bid rigging cartels. As cartels are secretive in nature, they are not
discovered easily. Besides cartel operators, knowing that their conduct is unlawful, do not
willingly cooperate with competition officials during the course of investigations. As a result of
this, many jurisdictions have introduced leniency provisions in their competition laws.

Cartels are considered “the supreme evil of antitrust.” Fighting cartels is one of the most
important areas of activity of any competition authority and a clear priority of the CCI. A cartel
is illegal per se or by itself.

4. What are Vertical Agreements?

Vertical agreements are the agreements between the firms operating at different level of
production. These are generally contractual agreements between suppliers and distributors.

This kind of arrangement leads to vertical control within a principal-agent relationship thereby
affecting competition in the form of market foreclosure or partitioning of markets.

Box 3.10: Section 3(4): Anti-competitive Agreements

(4) Any agreement amongst 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.
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Vertical agreements are not presumed to be anti-competitive unless it is proved that the
agreement has appreciable effect on the competition. Section 3(4) deals with vertical agreements.

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Unlike horizontal agreements, the ‘rule of reason’ test is applied for vertical agreements. The test
emphasizes on whether the agreement had imposed reasonable restrictions on competition by
looking at various factors like:
 specific information about the relevant business
 its nature and condition before and after the restraint was imposed effects of the restraint.

The burden to prove that agreement has caused reasonable restriction is on the plaintiff.

Box 3.12: Eros International Media Limited vs. CCCA, MPA, NIMPA, KFCC, FDA

The CCI in this case held that actions of the mentioned associations have caused an appreciable
adverse effect on the competition in the market. It was observed that the rules and regulations,
acts and conduct of associations did not make markets perform efficiently rather restricted and
limited the supplies of the films. This is because no producer or distributor could exploit his film
and compete with other associations without being a member of the named associations. The
producers were penalised for not following the directions of the associations.

The Commission felt that the act and conduct of associations have caused restrictions on free
and fair competition in the market. Commission applied the factors mentioned under Section
19(3) of the Competition Act 2002 and held that the acts of the association have caused
appreciable adverse effect on competition. The Commission imposed penalty on the associations
and directed them to cease and desist from such anti-competitive acts.

Source: www.cci.gov.in/May2011/OrderOfCommission/CaseNo52and56of2010MainOrder.pdf

4.1 Types of Vertical Agreements

4.1.1 Tie-in Arrangement
Tied selling includes an arrangement where the sale of one good (the tying goods) to customers
is dependent on the conditions of the purchase of a second good (the tied goods). It generally
happens when there is monopolistic dominance or general scarcity in the market for some goods
or services.

There is justification of tied selling only when the tied product is of such a nature that the main
product can function in a most efficient way only if it is tied to the tied product. Tied sales can
also be encouraged if it is related to intellectual property where it involves entry of the products
in the market and bring in innovation. Tie-in arrangements are also not illegal per se.

Tie-in-arrangement, under Section 3(4)(a) of the CA02, means any agreement requiring a
purchaser of goods, as a condition of such purchase, to purchase some other goods. Under the
competition law of US, (the Clayton Act) tie-in-arrangements are illegal if the seller has sufficient
economic power with respect to the tying product to restrain appreciably free competition in the
market. In India, tie-in-arrangements are not illegal per se, but whenever the arrangement causes
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adverse effect on competition, they become unlawful.

Box 3.12: Tie-up Sales of Gas Stoves with Supply of Gas Connection

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Like in any other command and control economies, some goods and services were always in
short supply, which led to political patronage and exploitation. Businesses exploited the situation
through restrictive practices like tie-up sales. One such case, which came before the MRTP
Commission in 1984, was that of Shyam Gas Company. Shyam Gas Company, the sole
distributor to Bharat Petroleum Corporation Ltd, for cooking gas cylinders at Hathras (Uttar
Pradesh), was allegedly engaging in the following restrictive practices:

• Giving gas connections to the customer only when he purchased a gas stove or a hot plate
from the company or its sister enterprise, Shyam Jyoti Enterprises; and
• Charging customers for the supply of fittings and appliances at twice the market price.

The MRTP Commission held that the company was indulging in an RTP that was prejudicial to
public interest. When charged, Shyam Gas Co. agreed to stop the RTP, and the MRTPC directed
the company to abide by the undertaking. The company was also asked to display, on its notice
board, that the consumers were free to purchase the gas stoves and hot plates from anywhere
they liked, and that the release of the gas connection would not be denied or delayed if the stove
or hot plate was not purchased from the company or its sister company. This order formed the
basis of asking all LPG dealers to put up a similar notice in their premises.

Source: Monopolies Trade Regulation & Consumer Protection, D P S Verma, 1985.

In Schott Glass case1, Schott was accused of contravening section 3(4) of the Act. According to
the information filed by Kapoor Glass, Schott was driving out competitors from the market of
clear variant by making the supply of amber tubes to ampoule manufacturers contingent on the
procurement of the clear tubes from no other source but the Appellant alone. The discount on
both amber and clear tubes should not be contingent upon sale of each other and this was found
to be anti-competitive. The CCI held that both the glass were non-substitutable distinct products
and accused Schott of contingent sale, tying of products and marketed together and a bundled
discount was given to the customer and considering its large market power leveraged its position
for sale of amber tubes contingent upon sale of clear tubes. However, COMPAT reversed this
observation of the CCI and held that the incumbent already had 90% market share in the amber
tubes and therefore, no necessity of pushing the amber tubes along with the clear tubes.

4.1.2 Exclusive Supply and Distribution Agreements

Exclusive dealing means that distributor is tied to purchase from manufacturers on the
understanding that no other distributor will receive supplies in a given particular area. These
agreements affect competition as they restrict the access of upstream rivals to distributors.

Exclusive dealing is divided in two ways under the CA02:

 Section 3(4)(b): exclusive supply agreement which 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; and

 Section 3(4)(c): exclusive distribution agreement which 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.
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1 http://circ.in/pdf/Case_Study_27.pdf

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There are efficiency effects of exclusive dealings also. Sometimes these agreements result in cost
reduction and the supplier has the incentive to provide the distributor with information.

In US, exclusive dealing was per se illegal at one time. In Continental TV, Inc. v. G.T.E. Sylvania Inc2,
it was held that exclusive dealing is not always illegal; the rule of reason approach can be
employed to see whether the practice leads to monopolisation and substantially affects
competition in the relevant market.

In a very recent decision, the CCI fined 14 carmakers for anti- competitive practices3, which
included exclusive supply and distribution agreements. This was for the first time that the CCI
had invoked the provisions of Section 3(4) of the Act. The Commission has imposed a
combined penalty of over Rs 2,500 crore on these 14 carmakers for indulging in unfair practices
in the spare parts market. The badly affected parties are; Tata Motors with a fine of Rs 1,346
crore, followed by Maruti Suzuki Rs 471 crore, Mahindra & Mahindra Rs 292 crore, General
Motors Rs 85 crore and Honda Car India Rs 78 crore. The decision was passed after
Commission found out that auto companies were indulged in anti-competitive practices as they
did not make genuine spare parts freely available in the open market, upholding the contentions
of a petition filed by a complainant in 2011.

4.1.3 Refusal to deal

The term refusal to deal covers gamut of cases wherein there is an agreement not to deal with
particular or specific group of suppliers and customers. This is also known as group boycott
wherein there is horizontal concerted refusal to deal which involves an agreement between two
or more competitors to refuse to deal with other competitors or class of competitors, or with
one or group of suppliers or customers.

It is defined under Section 3(4)(d) as "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.

Under the Indian competition law, refusal to deal is considered illegal only when it causes or is
likely to cause appreciable adverse effect on competition in India. This implies that refusal to
deal is not a per se offence and has to be governed by the rule of reason analysis. In this context,
the case of the 14 carmakers is relevant here, as apart from exclusive supply and distribution
agreement it also involved the contention of refusal to deal under section 3(4)(d) and 4 of CA02.

In many jurisdictions joint refusal to deal, is not illegal per se. Under the US competition law,
joint refusal to deal is examined by the rule of reason test. The test says that the anti-competitive
effect of the enterprise or group of enterprises has to outweigh the pro-competitive effect of the
enterprise to qualify the trade practice as illegal. In UK, boycott is considered illegal when it is
done for collective enforcement of conditions.

Box 3.13: Collective boycott/bargaining in Australia

In Australia, the competition law allows protection against legal action to parties who are
engaged in such anti-competitive conduct, like collective boycott/bargaining, when there are
public benefits that would outweigh the detriments to competition. Under their system, there
September 2014

are two ways that businesses can obtain an exemption from the competition provisions of the

2 433 US 36, 1977. http://supreme.justia.com/us/433/36/

3 http://www.cci.gov.in/May2011/OrderOfCommission/27/032011.pdf

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 Act for collective arrangements – 1) authorisation and by 2) notification.

Under the EC regime, refusal to supply products or services constituting essential inputs a
refusal to supply will sometimes occur in a market for the supply of intermediate products or
services. When a dominant company refuses to supply an essential input to a downstream
competitor, i.e. an input without which a market participant would have difficulties of effectively
competing in that downstream market. This type of situation was encountered in Commercial
Solvents4 case, the first instance in which the European Court of Justice dealt at length with the
concept of refusal to deal. In that case, the ECJ held that it was an abuse of a dominant position
for the dominant supplier of aminobutamol, a chemical used in the production of ethambutol
and drugs based on this component, to terminate an existing supply relationship with a company
active in these downstream markets.

4.1.4 Resale Price Maintenance

Resale Price Maintenance is an arrangement where manufacturers decide the price at which
distributors could sell products of the former at certain prices, at or above a price floor
(minimum RPM) or at or below a price ceiling (maximum RPM). Branded products and
franchises are the common examples of the same. In order to maintain the image of the brand,
manufacturers do not allow sellers to put discount on their product.

When RPM is imposed, the price of goods becomes uniform at all points of resale irrespective of
the difference in location, character and quality of the services provided. Under Section 3(4)(e)
the CA02, RPM 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 the prices lower than those prices may be charged.

The CA02 prohibits RPM only when it adversely affects the competition. The RPM agreements
can be defended on the basis of economic efficiency or the grounds mentioned under Section
19(3) of the CA02.

There are also efficiency goals of RPM. Sometimes RPM helps in promoting business efficiency.
US also changed its stand on RPM in 2007, by striking down the 96 year old rule that RPMs
were automatic violation of the Sherman Antitrust Act. Now, minimum RPM in US will be
examined by ‘rule of reason’ approach, where the anti-competitive effects of RPM will be
compared with the pro-competitive effects to determine whether it is unlawful or not.

Canada has also liberalised the provision relating to price maintenance. In 2009, criminal
prohibition against ‘price maintenance’ was repealed and replaced with a civilly enforceable
provision that enables the Competition Tribunal to prohibit the practice only if it has an
“adverse effect on competition.”5

The Indian competition law considers RPMs unlawful, only when they have adverse effect on
competition in India. In India, unless ‘block exemptions’ are granted in terms of section 54 of
the CA02, franchise agreements may have to be defended only on the grounds of enhancing
economic efficiency and more particularly in terms of Section 19 (d), (e), and (f) of the CA02,
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4 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:61973CO0006&from=EN
5 Hutton, Susan, ‘Canada, U.S. Loosen Rules on Price Maintenance’, The Lawyers Weekly, November 13 2009,
available at < http://www.lawyersweekly.ca/index.php?section=article&articleid=1038 >

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which empowers the CCI to inquire into certain agreements and dominant position of enterprise,
and these agreements have to be examined by the rule of reason test.

5. Exceptions to Anticompetitive Agreements

The Competition Act, 2002 provides an exception from the applicability of per se illegal rule to
certain categories of horizontal agreements. These include agreements relating to joint ventures if
they increase efficiency in production, supply, distribution, storage, acquisition or control of
goods or provision of services. Therefore, prohibition to the anticompetitive behaviour is not
applicable in the case of any agreements or category of agreements between undertakings which
contribute to improving the production or distribution of goods or promoting technical or
economic progress, while allowing consumers a fair share of the resulting benefit.
However, there is one exception to above specified four types of horizontal agreements and it is
not presumed to have appreciable adverse effect on competition and excluded from the
provisions of Section 3(3) of the Competition Act, 2002 provided they are entered into by way of
joint ventures and increase efficiency in production, supply, distribution, storage, acquisition or
control of goods or provision of services.

Section 3(5)(i) of the Act provides that nothing contained in section 3 shall restrict ight 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 the
specified intellectual property laws under that section. An export cartel is made up of enterprises
based in one country with an agreement to cartelise markets in other countries. In the
Competition Act, 2002, cartels meant exclusively for exports have been excluded from the
provisions relating to anticompetitive agreements. Section 3(5)(ii) of the Competition Act, 2002
states that: “Nothing contained in this section shall restrict - (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.”

6. Investigating Anticompetitive Agreements

Investigation has always been a difficult task for competition regulators especially in matters of
horizontal agreements like cartels. Investigating agencies always look for existence of an
agreement either in respect of price or terms and conditions on which the goods are to be sold.
Existence of an agreement (oral or written) is an essential condition to commence investigation.
In the process, it is desirable to confirm by findings that there has been an appreciable adverse
effect on competition within India due to the given horizontal agreement. That effect is to be
judged with reference to the market share in the relevant market. In DGIR vs. UB-MEC
Batteries, it was held,

“... the fact that the respondent's market share in the replacement battery market was
just 1.45per cent in the organised sector according to the All India Automotive
Batteries Market Survey for the year 1987-88 will show that the alleged restrictive trade
practices would not have directly or indirectly restricted or discouraged competition to
any material degree in the relevant trade or industry, namely, that of the battery
market.”
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6.1 Per se Rule and Rule of Reason

Competition jurisprudence in general uses two standards for appreciating anti-competitive
practices. The first is known as rule of reason wherein the investigating/prosecuting agency
establishes existence of anti-competitive agreements. However, in the second standard, that is,
per se rule, [a presumption of negative effect on market and competition is taken if agreement

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between parties, satisfying any condition in Section 3(3) is present. In other words, Section 3(3)
of the Competition Act, 2002 embodies the per se rule of evidentiary standard. Rule of reason
covers cases falling under Section 3(4) of the Competition Act, 2002. It may be seen that
breaches under Section 3(3) by cartels or such groups, through anti-competitive agreements or
practices, that have the effects set out in Sections 3(3)(a) to (d) have been declared to be
governed by the per se rule. In case of agreements listed in Section 3(4) (a) to (e), that is, tie-in,
refusal to deal, resale price maintenance would fall under Section 3(1) it would be considered
void under Section 3(2) and hence, subject to rule of reason.
6.2 Rule of Reason
Under the rule of reason analysis, the true test of legality of an agreement is to ascertain whether
the restraint imposed is such that it merely regulates or promotes competition, or whether it
suppresses or destroys it. Most of the agreements are tested on the rule of reason basis
according to which, fact finders must decide whether the questioned practice imposes
unreasonable restraints on competition, taking into account a variety of factors, including:
 specific information about the relevant business;
 its nature and condition before and after the restraint was imposed; and
 effects of the restraint.

The burden of proof is on the plaintiff to prove that the agreement violates competition
mandate. Once the plaintiff discharges the burden, the defendant can escape the liability if it
shows that the same has pro-competitive aspects, which would outweigh any harm to
competition.

The rule of reason analysis focuses on the state of competition with, as compared to without, the
relevant agreement. The issue that needs to be seen is whether the relevant agreement harms
competition by increasing the ability or incentive profitability to raise price or reduce output,
quality, service or innovation below what would likely prevail in the absence of the agreement.
Rule of reason entails a flexible enquiry and varies on focus and detail depending on the nature
of agreement and market circumstances. The CCI will have to examine the nature of the
agreement and contours of the anti-competitive harm that they may pose. As a part of the
inquiry, the business purpose of the agreement is examined to see whether the agreement, if the
same is operative, has caused any anti-competitive harm.

The assessment of whether the agreement has the object of restricting competition is based on a
number of factors. These include, content of the agreement and the objectives pursued by it. It
may also be necessary to consider the context in which it is applied and actual conduct and
behaviour of the partiers in the market. In other words, an examination of the facts underlying
the agreement and specific circumstances in which it operates may be required before it can be
concluded whether a particular restriction constitutes a restriction on competition by object. The
way in which the agreement operates may reveal restriction by object even where the formal
agreement does not contain an express provision to that effect. Evidence of subjective intent on
the part of the parties to restrict competition is a relevant factor but not a necessary condition.

The contours of the relevant market would be determined and the first step would be to
calculate market shares and concentration to assess whether the agreement may create or
September 2014

increase market power to facilitate its exercise and possess risk to competition. It is also
normally essential to assess the nature of products, market position of the parties, market
position of the competitors, market position of the buyers, existence of potential competitors
and level of entry barriers. Market share and market concentration affect the likelihood that the
relevant agreement will create or increase market power or facilitate its exercise. Negative effects

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on competition within a relevant market are likely to occur when the parties individually or
jointly have or obtain some degree of market power and the agreement contributes to the
creation, maintenance, or strengthening of market power or allows the parties to exploit such a
market power.

The nature of agreement is relevant to analyse whether it would have any anti-competitive effect.
An agreement to limit independent decision-making or to combine or control the financial
interests may reduce the ability or incentive to compete independently and therefore must be
analysed by applying the Rule of Reason, so as to conclude whether the agreement is in fact anti-
competitive.

7. Analysing AAEC
The entire concept of appreciable adverse effect on competition is made subjective and may vary
from case to case. Therefore, Section 19(3) of the Competition Act, 2002 provides that while
determining whether an agreement has adverse impact on competition, the Competition
Commission of India (CCI), has to examine the statutory and economic factors. Section 19(3) of
the Competition Act, 2002 states that the Commission shall, while determining whether an
agreement has an appreciable adverse effect on competition under Section 3, have due regard to
all or any of the following factors, namely:
(a) creation of barriers to new entrants in the market;
(b) driving existing competitors out of the market;
(c) foreclosure of competition by hindering entry into the market;
(d) accrual of benefits to consumers;
(e) improvement in production or distribution of goods or provision of services;
(f) promotion of technical, scientific and economic development by means of
production, or distribution of goods or provision of services.

The first three factors indicate anti-competitive features. Enterprises

and their acts of indulging in any one or all of these activities may
come within the ambit of anti-competitive conduct. And such
indulgence would be a strong indicator to establish causation of
‘appreciable adverse effect on competition in the market’ by such
enterprises. However, the remaining three factors indicate pro-
competitive conduct. As such, depending on facts and
circumstances of each case, the enforcers would determine the
conduct of the enterprise and ascertain whether such conducts are
pro or anti-competitive.

The modus operandi of proving that an agreement is anti-competitive under the Competition
Act is as follows6:
September 2014

6 Abir Roy and Jayant Kumar, Competition Law in India, Kolkata and New Delhi: Eastern Law House 2008

Page 18 of 24
 Figure: I

Have you entered into an

agreement with any ‘person or’
Are you an enterprise or a person as enterprise engaged in identical
defined under Section 2 of the Yes
or similar trade?
Competition Act?

Does your agreement fall under any one of

Yes the categories specifically enlisted under Yes

Section 3(4) of the Competition Act?

Does your trade practice fall under any Does this agreement cause or is likely to
of the presumptive provisions of Section Yes cause an appreciable adverse effect on
3(3) of the Competition Act? competition within India?

Yes Yes

Does your trade practice fall under proviso Anti-competitive agreement under
to Sub-Section (3) of Section 3 of the Section 3 of the Competition Act
No
Competition Act?

8. Remedial Measures
Section 27 of the Act lays down remedies for violation of section 3 and 4 of the Competition
Act. As per section 27 of CA02, the CCI has the power to pass inter alia any or all of the
following orders:

 direct the parties to discontinue and not re-enter into such agreements;
 direct the enterprise concerned to modify the agreement;
 direct the enterprises concerned to abide by such other orders as the CCI may pass
and comply with the directions, including payment of costs, if any; and pass such
other orders or issue such directions as it may deem fit.
 In addition, the CCI can impose penalty that it may deem fit. The penalty can be up
to 10 per cent of the average turnover for the last three preceding financial years
upon each of such persons or enterprises which are parties to bid-rigging or collusive
September 2014

bidding.
 In cartel cases CCI could impose a penalty that could be higher of either up to 10
percent of the turnover or three times the amount of profit derived from the cartel
agreement.

Page 19 of 24
  In case the bid-rigging or collusive bidding, agreements referred to in Section 3(3) of
the Competition Act, 2002 has been entered into by a cartel, the CCI may impose
upon each producer, seller, distributor, trader or service provider included in that
cartel, a penalty of up to three times its profit for each year of the continuance of
such agreement or 10 per cent of its total turnover for each year of the continuance
of such agreement, whichever is higher.

9. Leniency Programme
Competition Act, 2002 incorporates lesser penalty (leniency) provisions under section 46. The
Competition Act, 2002 empowers the CCI to grant leniency by levying a lesser penalty on a
member of the cartel who provides full, true, and vital information regarding the cartel. If a
member of the cartel comes forth and makes a full, true and vital disclosure regarding the cartel
and its practices, the CCI may after consideration of the information given by the member,
award a reduction in penalty of up to 100%. An applicant who applies for lesser penalty after the
first application for lesser penalty can also benefit from a reduction in penalty of up to or equal
to 50% of the full penalty leviable, upon making a disclosure of evidence that provides
significant added value to the evidence already in possession of the CCI. Similarly members or
applicants who are third may be granted reduction in penalty of up to 30%, as according to the
information provided by them and its use to the CCI in the case. The scheme is designed to
induce members to help in detection and investigation of cartels. This scheme is grounded on
the premise that successful prosecution of cartels require evidence supplied by a member of the
cartel. Similar leniency schemes have proved very helpful to competition authorities in
successfully proceeding against cartels. For instance, the elevator case in Austria where two
parties got leniency in increasing proportions, as is also possible under Competition Act, 2002.

10. Summary:
1. In this module, the implication of anti-competitive practices with reference to anti-
competitive agreements on the economy has been covered. The module covers the
provisions of law regulating the anticompetitive agreements in the Competition Act.

2. Primarily, there are two broad categories of agreements, namely; vertical agreements and
horizontal agreements. While vertical restraints, in the presence of market power, can
lead to anti -competitive and hence harmful effects, they may also produce economic
benefits. For example, vertical restraints can generate benefits through promoting
efficiencies, non-price competition, investment, and innovation. Whether a vertical
agreement actually restricts competition and, whether in that case the benefits outweigh
the anti-competitive effects will often depend on the market structure. In principle, this
requires an individual assessment on case-to-case basis.

3. The next module will deal with the anti-competitive practices from the abuse of
dominance perspective.
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References
1. Dr. Avtar Singh (2012), Competition Law, Eastern Book Company.
2. David J. Gerber (2012) Global Competition - Law, Markets and Globalization
3. Mehta S Udai & Pandey Sanjay, Cartels And Other Anticompetitive Agreements,
(14.03.2007), available at
http://www.cci.gov.in/images/workshop/14_15march07/14udai.pdf?phpMyAdmin=NMPF
RahGKYeum5F74Ppstn7Rf00
4. Richard Whish & David Bailey (7th edition 2012) Competition Law, Oxford University
Press.
5. Roy Abir, Jayant Kumar (2008), Competition Law in India. Eastern Law House.
6. CCI Advocacy booklet: Provisions Relating to Cartel;
http://www.cci.gov.in/May2011/Advocacy/cartel%20book.pdf
7. CCI Advocacy booklet: Provisions Relating to Bid Rigging; available at
http://www.cci.gov.in/May2011/Advocacy/Bid%20Rigging.pdf

September 2014

Page 21 of 24
*The images/pictures used in the module have been gathered from different sources while browsing the Internet.

Questions
1. Which of the following agreements can be termed as agreements between the firms
dealing at same level?
a) Vertical Agreements
b) Horizontal Agreements
c) Exclusive supply and distribution agreements
d) None of the above

2. Which of the provisions of the Competition Act, 2002 defines ‘cartels’?

a) Section 2(o)
b) Section 2(s)
c) Section 2(b)
d) Section 2(c)

3. Which of the following agreements are presumed to have an appreciable adverse effect
on competition?
a) Agreements regarding fixing prices
b) Exclusive supply and distribution agreements
c) Agreements regarding resale price maintenance
d) None of the above

4. In what circumstances can CCI start its inquiry?

a) On receipt of any information by a person
b) On its own (suo moto)
c) Both (a) and (b)
d) None of the above

5. Under which provision of the Competition Act, 2002 can CCI impose penalty/fines on
firms?
a) Section 32
b) Section 46
c) Section 31
d) Section 27

6. If an agreement upon enquiry is found to be anticompetitive, it is

a. voidable
b. void
c. enforceable
d. none of the above
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7. CCI has the authority to grant interim relief during the pendency of inquiry.
a) True
b) False
c) Not always

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 d) Depending on the case

8. Which of the following is an exception to anti-competitive agreements?

a) Agreements for the benefit of a particular section of the society
b) Agreements related to Intellectual Property Rights
c) Both (a) and (b)
d) None of the above

9. Which provision of the Competition Act, 2002 makes ‘joint refusal to deal’ illegal?
a) Section 3(3)(d)
b) Section 3(3)(b)
c) Section 3(4)(b)
d) Section 3(4)(d)

10. All the types horizontal agreements are considered as anti-competitive having AAEC.
a) True
b) False

Answers:
1 (b) 2 (d)

3 (a) 4 (c)

5 (d) 6 (b)

7 (a) 8 (b)

9 (d) 10 (b)

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