Key Insights into Vertical and Horizontal Agreements

The Competition Act, 2002 (“the Act”) forms the foundation of competition law in India, aiming to prevent practices that cause or are likely to cause an appreciable adverse effect on competition (AAEC) in India. The Act prohibits anti-competitive agreements, abuse of dominant positions by enterprises, and regulates combinations (mergers, amalgamations, and acquisitions) to ensure there is no adverse effect on competition in the country. An ‘agreement’ under the Act includes any arrangement, understanding, or concerted action entered into between parties, whether written or oral.

The Competition Act also empowers the CCI with extraterritorial jurisdiction to examine anti-competitive agreements outside India if such agreements cause (or are likely to cause) an appreciable adverse effect on competition in India. Anti-competitive agreements are broadly classified into two categories: horizontal and vertical agreements. This article provides a comprehensive analysis of the legal framework governing these agreements under Indian competition law.

Horizontal Agreements

Horizontal agreements are agreements between enterprises or persons at the same level of the production chain, such as agreements between competing manufacturers or competing retailers. These agreements are often the result of collusion, which can be explicit or implicit.

Section 3(3) of the Act deals with horizontal agreements and presumes that certain types of horizontal agreements have an AAEC. These include agreements to fix prices, limit production or supply, allocate markets, or rig bids. This presumption, however, is rebuttable.

Legal Provisions and Case Law

Section 3(3) of the Act defines horizontal agreements and covers any agreement entered into between enterprises, associations of enterprises, persons, associations of persons, or between any person and enterprise. It also includes practices carried on or decisions taken by any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services.

The Competition Commission of India (CCI) examines both conduct-based and economic evidence in cases related to horizontal agreements. In assessing AAEC, the CCI considers factors such as:

• The creation of barriers to new entrants in the market.
• The driving of existing competitors out of the market.
• The accrual of benefits to consumers.
• Improvements in production or promotion of technical or scientific advancements.

Joint Ventures Exception

The Act provides an exception for joint ventures if the agreement increases efficiency in production, supply, distribution, storage, acquisition, or control of goods or provision of services.

Case Law

A landmark case concerning horizontal agreements is the Cement Cartel Case, where the CCI found that cement manufacturers had engaged in cartelisation by fixing prices and limiting production. In this case, the CCI conducted a detailed investigation into the practices of major cement manufacturers in India and found evidence of coordinated price increases and production cuts. The CCI concluded that these practices had an AAEC and imposed substantial penalties on the cement companies.

Another significant case is Builders Association of India v. Cement Manufacturers’ Association & Ors, 2016 SCC Online CCI 46 where the CCI held that the cement manufacturers had abused their dominant position by entering into anti-competitive agreements. This case involved allegations of collective dominance and anti-competitive practices by cement manufacturers. The CCI found that the cement companies had engaged in price parallelism and other practices that harmed competition in the market.

Types of Horizontal Agreements

Horizontal agreements can manifest in various forms, including:

• Price Fixing Agreements: Agreements between competitors to fix, maintain, or increase the price of goods or services.
• Production and/or Supply Control Agreements: Agreements to limit or control the production, supply, markets, technical development, investment, or provision of services.
• Market Allocation Agreements: Agreements to divide the market or source of production or provision of services by way of allocation of geographical areas of market, type of goods or services, or number of customers in the market.
• Bid-Rigging or Collusive Bidding: Agreements between bidders to manipulate the outcome of a bidding process. This can involve practices such as agreeing on who will submit the winning bid, rotating bids among competitors, or submitting artificially high bids to ensure a specific competitor wins.

Penalties and Consequences

Violating the Act’s provisions on horizontal agreements can result in penalties of up to 10% of the average turnover for the last three preceding financial years. In addition, individuals involved in the infringement may face penalties of up to ₹1 crore.

Leniency Program

The Act includes a leniency program that offers reduced penalties or immunity to cartel members who cooperate with the CCI by providing information about the cartel. This program encourages cartel members to come forward and assist the CCI in its investigations, thereby facilitating the detection and prosecution of cartels.

Vertical Agreements

Vertical agreements are agreements between enterprises or persons at different stages or levels of the production chain in different markets. These agreements are prohibited under Section 3(4) of the Act if they cause or are likely to cause an AAEC in India. Unlike horizontal agreements, vertical agreements are not per se anti-competitive, and an effects-based approach is followed to assess their impact on competition.

Legal Provisions and Case Law

Section 3(4) of the Act provides a non-exhaustive list of vertical agreements that have the potential to cause an AAEC. These include:

• Tie-in arrangement: An agreement where a seller conditions the sale of one product on the buyer also purchasing another product. This can be used to leverage market power in one product to gain an advantage in another market.
• Exclusive supply/distribution arrangement: An agreement where a supplier agrees to sell its products only to a particular distributor or where a distributor agrees to buy products only from a particular supplier. This can limit competition by foreclosing access to markets for other suppliers or distributors.
• Refusal to deal: An agreement that restricts the persons or classes of persons to whom goods are sold or from whom goods are bought. This can be used to exclude competitors or to enforce certain market conditions.
• Resale price maintenance: An agreement where a supplier dictates the price at which a buyer can resell the product. This can reduce price competition among retailers.

The Act applies a ‘rule of reason’ analysis to vertical agreements, meaning that the CCI assesses the overall impact of the agreement on competition in the market, rather than presuming it to be anti-competitive. In assessing vertical agreements, the CCI considers factors such as the impact on consumers’ interests, the degree of market power enjoyed by the entity under scrutiny, and the overall market structure.

The CCI may consider circumstantial evidence, conduct, or behavior of the parties to establish an agreement. The CCI also considers the potential for abuse of dominance by a firm imposing vertical restraints, especially when the firm holds significant market power.

Investigative Powers

The CCI and the DG have extensive powers to investigate potential violations of the Act, including summoning and enforcing the attendance of any person, requiring the discovery and production of documents, receiving evidence on affidavit, issuing requests for the examination of witnesses or documents, and requisitioning public records or documents from any office. The DG is also empowered to conduct dawn raids.

Case Law

In Shamsher Kataria v. Honda Siel Cars India Ltd, the CCI penalized several automobile manufacturers for entering into anti-competitive vertical agreements with their authorized dealers, which restricted the dealers from selling automobile spare parts to third parties. The CCI found that these agreements limited intra-brand competition and harmed consumer interests by restricting the availability of spare parts in the open market.

In Shri Ghanshyam Das Vij v. M/s Bajaj Corporation Limited and Ors, the CCI found that agreements allocating territories to certain dealers and refusing to supply products if dealers traded outside those territories did not cause AAEC due to the presence of a large number of competitors in that market. This case demonstrates the CCI’s application of the rule of reason analysis, where the CCI considered the overall market structure and the level of competition in the relevant market before reaching its decision.

Penalties and Consequences

Violating the Act’s provisions on horizontal or vertical agreements can result in penalties of up to 10% of the average turnover for the last three preceding financial years. Individuals involved in the infringement may also face penalties.

Comparing Indian Law with Other Jurisdictions

The Indian legal framework for vertical agreements is similar to that of the European Union and the United States in that it follows an effects-based approach. However, there are some key differences. For instance, the Indian Act does not have a market share threshold for vertical agreements, unlike the EU and US laws. This means that even vertical agreements involving firms with small market shares can be scrutinized if they are found to cause an AAEC.

Feature	India	European Union	United States
Market Share Threshold	No specific threshold	Vertical Block Exemption Regulation provides a safe harbor for agreements below certain market share thresholds	Rule of reason approach with a focus on market power; market share thresholds may be relevant
Approach to Vertical Agreements	Effects-based; rule of reason analysis	Generally more lenient; uses block exemptions and safe harbors	Rule of reason approach; considers impact on inter-brand and intra-brand competition
Examples of Differences	No safe harbor provisions	Vertical Block Exemption Regulation; focus on foreclosure effects	Focus on consumer welfare; consideration of efficiencies

Unlike the Indian Act, the EU and US competition laws utilize safe harbor provisions and market share thresholds to provide greater certainty to businesses. For instance, the EU Vertical Block Exemption Regulation provides a safe harbor for vertical agreements that meet certain conditions, while the US generally applies a rule of reason approach with a focus on market power4.

Expert Opinions and Analysis

Experts have noted that the CCI’s approach to vertical agreements has been evolving. While the CCI has generally adopted a rule of reason approach, there have been instances where it has taken a more interventionist stance. Some experts have also highlighted the need for greater clarity and consistency in the CCI’s approach to vertical agreements. Businesses operating in India need to stay informed about the evolving approach of the CCI towards vertical agreements and ensure their agreements comply with the latest interpretations and guidelines.

Recent Amendments and Proposed Changes

The Competition (Amendment) Bill, 2022, proposes several changes to the Act, including:

• Empowering the CCI to appoint the Director General.
• Introducing a limitation period for filing complaints.
• Introducing a ‘settlement and commitment’ framework for certain offenses, allowing for faster resolution through negotiated settlements or commitments to undertake corrective measures.

The proposed amendments, if passed, could have a significant impact on businesses operating in India. The ‘settlement and commitment’ framework, for instance, may offer a more efficient way to resolve competition law disputes, while the changes to the DG’s appointment process could potentially enhance the independence and effectiveness of the CCI.

Conclusion

Vertical and horizontal agreements are critical aspects of competition law in India. The Act provides a comprehensive framework for regulating these agreements, with the CCI playing a crucial role in its enforcement. The Act utilizes distinct approaches for horizontal and vertical agreements, with a presumption of anti-competitive behavior for certain types of horizontal agreements and a rule of reason analysis for vertical agreements. The CCI has broad investigative powers to enforce the Act and has been actively scrutinizing anti-competitive practices in various sectors of the Indian economy.

While the Indian legal framework is broadly in line with international best practices, there are some unique features, such as the absence of a market share threshold for vertical agreements. The proposed amendments to the Competition Act could bring about significant changes to the enforcement landscape, potentially offering more efficient dispute resolution mechanisms and enhancing the CCI’s effectiveness.

As the Indian economy continues to grow and evolve, businesses need to stay informed about the latest developments in competition law and ensure their practices comply with the Act to avoid penalties and foster a competitive market environment.

Get further insight into Understanding Competition Law in India: A Comprehensive Guide.