Author: MUSKAN KHATRI, IV year of B.B.A.,LL.B.(Hons.) from AMITY UNIVERSITY CHHATTISGARH
Co-author: ANNANYA JOHRI, IV year of B.B.A.,LL.B.(Hons.) from AMITY UNIVERSITY CHHATTISGARH
INTRODUCTION
Where there are various sellers, suppliers, manufacturers, or firms in an industry; there will be a competition. Competition is actually beneficial for consumers, industry, and the economy. This provide various alternative at a best price. Healthy competition is good; however, there are times when competition tend to become a fixed game set by a few players of the industry. There are times when sellers, suppliers, manufacturers, or firms form an alliance to gain power and control over the competition and the market; through price control, bid fixation, exclusive supply, barrier for other firms, etc. This alliance are called anti-competitive agreements. Usually these agreements are of two types: Horizontal Agreements and Vertical Agreements. As simply it is to prove that there is a horizontal agreement; it is as difficult to prove vertical agreements.
In India, we have a law that governs the competition of the market. It is called the Competition Act of 2002. Through this Act we have an adjudicating body called Competition Commission of India (CCI).
Vertical Agreements are difficult to prove anti-competitive asthere is involvement of parties that are at different levels of production chain[i], and has a principal-agent relationship[ii]. It is to be noted that not all vertical agreements are per se illegal; sometimes, people get confused between commercial decision and illegal vertical agreements.
WHAT ARE ANTI-COMPETITIVE AGREEMENTS?
The Competition Act of 2002 has specifically defined an agreement and an anti-competitive agreement. According to Sec 2 (b)[iii] of the Act, any disposition or understandingin writing or not and is legal or not; is called an agreement. It basically means union or concord between people or firms for a common interest to be fulfilled, is an agreement. Further the Act also explains what agreements are anti-competitive in nature and thus are void or prohibited. According to sec 3 (1)[iv] of the Act, if any firms or supplier or group of people unity via an agreement that has some AAEC (Appreciable Adverse Effect on the Competition) is anti-competitive agreements. Further sec 3 (2)[v] discusses that any agreement with nature mention sec 3 (1) is void. Horizontal Agreement is discussed under section 3 (3)[vi] which says that any agreement between parties of same level, dealing with similar product or rendering similar services; which has effect on the competition of the market is void.
Vertical Agreements is discussed under sec 3 (4)[vii] of the Act. It says that where there is an agreement or arrangement between parties of different levels and parties are subjected to principal-agent relationship; that has an appreciable adverse effect on the competition (AAEC), is called as vertical agreements.
ELEMENTS OF VERTICAL AGREEMENTS
There are certain elements that must be there to prove that there is a vertical agreement which is anti-competitive in nature. The elements are:
1. AGREEMENT
The primary element or criteria is to prove that there is arrangement or understanding between people or enterprise. There should be relevant proof that makes it evident that there is an existence of agreement. The agreement should be in relation with the existing competition and how they can control it. The agreement should display any sort of AAEC on the market.
2. RELEVANT MARKET
The next element is relevant market which is discussed under section 2 [r][viii] of the Act. There should be a market where the parties to the agreement tries to gain an upper hand. The relevant market proves whether the agreement was for the relevant product or geographical market or both.
3. PARTIES AT DIFFERENT LEVELS
The parties to an agreement must stand on different levels or position. There should be a principal-agent relationship. The level of the parties should be different at the supply or production chain. For example, manufacturer and retailer, or wholesaler and retailer, etc.
4. EFFECT ON THE COMPETITION
The most essential element is Appreciable Adverse Effect on the Competition. It is important to proof that there is some sort of effect on the competition or towards the consumer. The AAEC[ix] happens when there is a barrier creation for birding firms, or dispel of existing firms, or consumers are suffering, etc.
ARE ALL VERTICAL AGREEMENTS ILLEGAL?
As there are various difficulty there to prove whether the agreement is vertical agreement or not; another problems lies that is whether the vertical agreement is void or not.
Ajay Devgan Films v. Yash Raj Films Pvt Ltd & ors[x]
Facts: ADF is an actor engaged in production of films and YRF is an incorporated company engaged in film production and distribution. The Informant claimed that YRF had an arrangements with single screen theaters which is void under the Act.
ADF and YRF were going to release films, named Son of Sardaar (ADF), and Ek Tha Tiger & Jab Tak Hai Jaan (YRF). YRF tended to release Ek Tha Tiger on Eid and Jab Tak Hai Jaan on Diwali, which was when ADF was going to release Son of Sardaar on.
ADF said actors starred in the movies of YRF were having a lot of fame which will definitely make the film a big hit. Further as YRFs themselves had a market dominance in film industry which leads to a disadvantageous situation to ADF.
YRF kept a condition for all the theaters with single screen that if they want to exhibit Ek Tha Tiger in their theaters, they had to exhibit Jab Tak Hai Jaan as well; and vice versa. Few theaters agreed and few didn’t. ADF claimed this agreement to be anti-competitive in nature and contravention of section 3 (4) (a), section 3 (4) (b), section 3 (4) (d), and section 4 (2) (a) of the Act. ADF further added that for a film business to generate income they only have production of a film, distribution of a film, and exhibition of a film. Here exhibition bring the film business the maximum revenue. As YRF had agreement for exhibition it became a negative condition for other competitors.
Findings: CCI after looking at DG report and hearing the arguments, determined that:
a. There was no Tie-in Arrangement as the agreement though vertical in nature however, did not had any AAEC
b. YRF agreements did not fulfilled condition for AAEC given under section 19 (3) of the Act.
c. Single screen theaters produces revenue up to 35% only and rest 65% is generated with multiplex theater. So, ADF could display his movie with single screen theater who did not agreed with YRF conditions and multiplex theaters as well.
d. YRF did not had market dominance, rather they only had fame.
e. Agreement between YRF and single screen theaters was purely a commercial decision.
This case led down a basis that not all vertical agreement are void per se. Another instance is of case CCI v. SAIL[xi]
CONCLUSION
It is given that an agreement that has an Appreciable Adverse Effect on the Competition is void under the Competition Act of 2002. One must know that not all vertical agreements are illegal; different level of supplier or manufacturers or firms, can come into an agreement merely as a commercial decision and not with the objective of taking control over the market. CCI has led down various judgements to explain difference between commercial decision and a void vertical agreement.
[i]Manoj Hirasingh Pardeshi v Gilead Sciences Inc. USA, CCI, Case No. 41 of 2012 (5 March 2013); M/s ESYS Information [ii]EC, European Commission Guidelines on Vertical Restraints; Samir Agarwal v ANI Technologies and Ors., CCI, Case No. 37 of 2018 (6 November 2018). [iii]“agreement” includes 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; [iv]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. [v]Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void [vi]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; (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, shall be presumed to have an appreciable adverse effect on competition: Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. [vii]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. [viii]“relevant market” means the market which may be determined by the commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets [ix]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) improvements in production or distribution of goods or provision of services; or (f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services. [x] CCI no 66 of 2012 [xi] (2010) 10 SCC 744