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Vertical Agreements Under the Competition Act – A Need for a Revamp in the Existing Framework?

This article has been written by Advait Ghosh.

Introduction

The increase in anti-competitive practices in the Indian market has necessitated modifications in the existing competition Law framework. This is as per the recommendations of the Competition Law Review Committee (CLRC). The draft Competition Law Bill which was tabled before the Lok Sabha in February 2020 has proposed substantial changes in the existing Law. The Bill aims to settle the difficulties in enforcing anti-competitive actions under Section 3(4) of the Act. The Bill seeks to remedy the difficulty in the enforcement of this provision vis a vis the Competition Act, 2002. 

Competition Act, 2002   

Section 3 of this Act talks about prohibition in anti-competitive agreements which causes or is likely to cause an appreciable effect of competition in India. Although the Act does not mention the words “horizontal” and “vertical”, they are prohibited under the Act. The Bill seeks to remedy this fallacy in the Act, specifically under Section 3(4). It seeks to broaden its horizons by including the words “other agreement” amongst enterprises or persons operating at different levels of the production chain. In light of this scenario the case of Ramakant Kini vs Hiranandani Hospital becomes relevant.

Ramakant Kini vs Hiranandani Hospital Case – The Commission in this case was dealing with an exclusive agreement between Hiranandani Hospital and a stem cell bank, Cryobanks Ltd. Due to the existence of this agreement the hospital did not allow Mrs Jain to avail the services of any stem cell bank, other than Cryobanks. The Informant approached the CCI alleging anti-competitive behaviour on part of the hospital. Commission said that hospital is guilty under Section 3(1) of the Act. The interpretation of Section 3(1) of the Act raises certain questions.

Lone Wolf Applicability of Section 3(1) – This case has thrown into light the lone wolf applicability of Section 3(1) as it was observed in the CCI order that horizontal and vertical agreements fall under the larger category of anti-competitive agreements & as such is not exhaustive of the Section. Thus, the agreements which do not fall under 3(3) and 3(4) will fall under Section 3(1). The lone wolf applicability of 3(1) is in contrast to the previous orders of the Commission. It is in stark contrast to the order of the Commission in the case of NK Natural Foods Pvt Ltd vs Akshaya Pvt Ltd wherein it was observed that “ “agreements under Section 3 are held anti-competitive only if they create market distortions by causing an appreciable adverse effect on competition either through concerted action of horizontally placed enterprises or through agreement between or among vertically placed enterprises”.

Statutory Interpretation Rules-  The lone wolf applicability of Section 3(1) has broadened the scope of this section, however it has nullified the existence of other clauses in the section. The rules of statutory interpretation mandate that all clauses of the section have to be construed harmoniously. The majority opinion rendered in this case, is to some extent against the settled principles of statute interpretation. 

Burden of Proof – The Commission in the case of Ghanashyam Das Vij vs Bajaj Corporation Ltd said that in the case of horizontal agreements, Section 3(3) raises a presumption as far as the appreciable adverse effect on competition is concerned. There is no such presumption in the case of agreements under 3(4), burden of proof lies on the CCI. Therefore, in case of agreements which are neither horizontal or vertical, still under the purview of Section 3(1), the Act does not clarify as to who will discharge the burden of proof. The Ramakant case has therefore highlighted a significant problem of the Competition Act, that is a failure to classify agreements which are neither horizontal or vertical. 

Anti Competitive Agreements in E-commerce

E-commerce unlike the traditional brick and mortar stores does not know any geographical limits. The competition policy problems raised in the E-commerce segment raise pertinent questions as to the competition law enforcement scenario. There have been numerous instances in the near past where the existing competition law regime failed to address the competition law infractions in the e-commerce sector. 

CCI dealt with the issue of the vertical agreements between Apple and Airtel/Vodafone wherein the Commission examined the agreement between the 2 entities. The agreement was very much similar to the one in the Ramakant case, however in this case the Commission deviated from the view and enforced 3(1) independently. These developments bring attention to the anomalies of the approach of the CCI. 

The Commission in the case of K. C. Marketing v. OPPO Mobiles MU Pvt. Ltd while scrutinizing the claim of exclusive distribution observed that online and offline are branches of the same market. In the case of All India Online Vendors Association v. Flipkart India Pvt. Ltd a separate relevant market was delineated for online platforms. These developments indicate that the Commission is evolving from its traditional point of view. The passing of the bill will therefore make it easier for the Commission to deal with vertical agreements as it will be assured of legislative support in its dealings. 

Vertical Agreements in Other Jurisdictions

As per the European Commission Guidelines on Vertical Restraints vertical agreements are less harmful than horizontal restraints. The European Commission has given broad interpretation to the term agreement. In the case of Bayer AG vs Commission, it was said that for a restriction to come under Article 101 there has to be a concurrence of wills.  Therefore, it is not necessary that there compulsorily must be a written agreement between the parties. Certain jurisdictions like the UK and Singapore do not differentiate between horizontal and vertical agreements. 

In the United States of America, the Department of Justice and the Federal Trade Commission employ the rule of reason to deal with vertical restraints, and deal with each case as per own merits. 

Conclusion

It is thus clear that a draft bill is a welcome step in the Anti-Trust enforcement scenario. It will broaden not just the mandate of Section 3, but also help the Commission scrutinize agreements which are neither vertical nor horizontal.

It will help the CCI to deal with the prevailing fit squarely approach, arising in the e-commerce sector, and help in dealing with issues of anti-trust Law in that sector. 

It will strengthen the investigative powers of the CCI to investigate a wide array of anti-competitive agreements which may or may not have AAEC. It is thus the belief of the Author that the amendment which has been made to Section 3(4) will aid the anti-trust regime in India. 

Endnotes –

  1. Ramakant Kini vs Hiranandani Hospital Case No 39 of 2012
  2. NK Natural Foods Pvt Ltd vs Akshaya Pvt Ltd Case No 74 of 2013
  3. Ghanashyam Das Vij vs Bajaj Corporation Ltd Case No. 68 of 2013
  4. K. C. Marketing v. OPPO Mobiles MU Pvt. Ltd Case No.34 of 2018
  5. All India Online Vendors Association v. Flipkart India Pvt. Ltd  Case No.20 of 2018
  6. Bayer AG vs Commission [2003] ECR I-02741

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