This is part 6 of a ten part series - that was authored by AnantLaw and published by Lexology on 30 April 2020. All laws stated in this series were accurate on 24 February 2020.
Part6: Dealing with commercial partners (Suppliers & Competitors)
Vertical agreements
What types of vertical arrangements between the company and its suppliers or customers are subject to competition law enforcement?
The rule of reason applies to vertical agreements, which means that vertical agreements are not presumed to have an appreciable adverse effect on competition (AAEC), but are assessed from a legal and economic perspective to determine whether they pose any real threat to competition. Vertical agreements that result in or are likely to result in an AAEC in India fall under the scrutiny of the Competition Commission of India (CCI) under section 3(4) of the Competition Act. Section 3(4) provides an illustrative list of vertical agreements that, if proven to cause an AAEC in India, are prohibited.
Tie-in arrangements
The CCI in Fx Enterprise Solutions India Pvt Ltd and Ors v Hyundai Motor India (Case No. 36/2014) set out three terms that need to be satisfied for an arrangement to qualify as a tie-in arrangement, These are: (1) the presence of two separate products or services that are capable of being tied; (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; and (3) the tying arrangement must affect a ‘not insubstantial’ amount of commerce.
Exclusive supply agreements
In Mr Vijay Gopal v Inox Leisure Ltd & Ors (Case No. 29/2018), the parties were alleged to enter into an exclusive supply arrangement by including a clause in the agreement that ‘Hindustan Coca Cola Beverages Pvt. Ltd. will act as exclusive partner of Inox for beverage availability in the Multiplexes Cinema Theatres of Inox’. However, the clause was discontinued in successive agreements. The CCI, however, did not find that the alleged agreement was likely to cause an AAEC for various reasons, including the insignificant market power of Inox and the choice of Inox to sell competing brands of Cola. The CCI, in this regard, observed that other brands in the open retail market as well as inside other multiplexes were present, which makes the retail sale market of bottled water and cold drinks inside the multiplexes highly contestable.
Exclusive distribution agreements
In the landmark auto parts case (Shamsher Kataria v Honda Siel Cars India Ltd and others, Case No. 03/2011), the CCI imposed a penalty amounting to 25.45 billion rupees on 14 car manufacturers for entering into an exclusive distribution agreement (among other violations). Reliance was placed on the dealership agreement as well as an unwritten understanding between the original equipment manufacturers and their authorised dealers for ascertaining whether a vertical arrangement in the form of an exclusive distribution agreement results in or is likely to result in an AAEC in the market.
Refusal to deal
In the Hyundai Motors case (Fx Enterprise Solutions India Pvt Ltd and Ors v Hyundai Motor India, Case No. 36/2014), even though the CCI found a violation of resale price maintenance, the allegation of refusal to deal was not found. It was held that the mere requirement of prior consent to take a competing dealership does not amount to foreclosure. Moreover, the CCI found no evidence to demonstrate that Hyundai restricted its dealers from acquiring dealerships of competing manufacturers.
Resale price maintenance
In the Hyundai Motors case, the CCI held that by designating the maximum retail price and the maximum permissible discount that could be given by the dealers, Hyundai had effectively set a minimum resale price, thereby engaging in resale price maintenance. However, the Hyundai case has been set aside by the National Company Law Appellate Tribunal and is currently pending adjudication before the Supreme Court of India.
The scope of section 3 of the Competition Act is broad. Even if an agreement does not fall within the ambit of section 3(3) (horizontal agreements) or section 3(4) (vertical agreements) of the Act, the agreement can still be covered under section 3(1) read with section 3(2), which provides that any agreement that results in or is likely to result in an AAEC is void. In addition, an agreement with a consumer does not fall within the purview of section 3(4) since consumers are not part of the production chain.
Would the competition law regulatory authority consider the above vertical arrangements per se illegal? If not, how do they analyse and decide on these arrangements?
Vertical agreements are governed by the rule of reason. Section 3(4) of the Competition Act clarifies that the burden of proof to show that a vertical agreement results in or is likely to result in an AAEC in the market is on the person alleging the vertical agreement to be anticompetitive. The CCI, while analysing vertical agreements under the rule of reason standard, relies upon the factors prescribed under section 19(3) of the Competition Act. It provides for three negative and three positive factors. The negative factors are the creation of barriers to new entrants in the market; the driving of existing competitors out of the market; and the foreclosure of competition by hindering entry into the market. The positive factors are the accrual of benefits to consumers; improvements in the production or distribution of goods or the provision of services; and the promotion of technical, scientific and economic development by means of the production or distribution of goods or the provision of services.
Generally, only when the negative effects of the vertical arrangement overcome the positive effects can the agreement be deemed anticompetitive. However, the CCI, referring to its observations in Shamsher Kataria v Honda Siel (Case No. 03/2011), clarified that ‘where such agreements are entered into by a dominant entity, and where the restrictive clauses in such agreements are being used to create, maintain and reinforce the exclusionary abusive behaviour on part of the dominant entity, then the Commission should give more priority to factors laid down under section 19(3)(a) to (c) than the pro-competitive factors stated under section 19(3)(d) to (f) of the Act, given the special responsibility of such firms not to impair genuine competition in the applicable market’. The factors specified above by no means constitute an exhaustive list, and the competition authorities are free to look beyond them.
The CCI, while analysing vertical arrangements, also takes into consideration whether sound business justification has been provided by the parties and the commercial nature of the agreement between the parties to mutually promote their economic interests. In Shri Sonam Sharma v Apple Inc USA & Ors, while dealing with vertical arrangements, the CCI closed the matter since in the concerned market, none of the alleged parties held a position of strength (in terms of market share) that created entry barriers or drove existing competitors out of the market.
Under what circumstances can vertical arrangements be exempted from sanctions under competition law?
Exemptions, as applicable to horizontal arrangements under section 3(3) of the Competition Act, are mutatis mutandis applicable to vertical arrangements. First, if a vertical arrangement does not result in any AAEC in the market or the negative effect does not override the positive effect provided under section 19(3) of the Act, then the CCI will not act upon the arrangement.
Further, the exemption under section 3(5)(i) of the Act is applicable to all the agreements under section 3. It exempts the application of section 3 to all or any agreements restraining the infringement of or imposing reasonable conditions necessary for the protection of intellectual property rights. However, in the FICCI Multiplex case (Case No. 01/2009), the CCI observed that the intellectual property laws do not have any absolute overriding effect on competition law as the exemption is capable of providing a safety valve for the holder of the intellectual property right (IPR) only so long as it is to safeguard the relevant IPR from infringement. More importantly, in order to avail the exemption under section 3(5)(i), the CCI requires the IPR-holder claiming rights over the IPR in question to substantiate the claim by providing relevant documentary proof establishing grant of the IPR. Further, section 3(5)(ii) protects the rights of a person to export goods from India as long as the relevant agreements pertains ‘exclusively to the production, supply, distribution or control of goods or provision of services for such export’.