COMPETITION LAW

PROJECT TOPIC:
HORIZONTAL AND VERTICAL AGREEMENTS

Submitted to: Submitted by:-

Mr. Saket Sharma Pradip Kr. Mahanty (24)
SoL, UPES Akash Parmar (03)
Rameezul Hoda (26)
 TABLE OF CONTENTS

1. ABSTRACT

2. INTRODUCTION

3. DEFINITION OF HORIZONTAL AGREEMENT

4. ANTI-COMPETITIVE AGREEMENTS

5. COMPETITION LAW IN VARIOUS COUNTRIES WITH RESPECT TO HORIZONTAL

AGREEMENTS

6. PRESUMPTION UNDER SECTION 3(3) COMPETITION ACT: REBUTTABLE OR

IRREBUTTABLE

7. VERTICAL RESTRAINT AGREEMENT

8. HOW ARE VERTICALAGREEMENTS REGULATED?

9. AGREEMTNS REGULATING IPR

 ABSTRACT

Any agreement with respect to production, supply, distribution, storage, acquisition or control
of goods/provision of services which is anticompetitive is prohibited and void. Such
agreements must cause or be likely to cause appreciable adverse effect on competition
(AAEC) in a relevant market in India. The relevant market may be a geographical or a
products market. The Act distinguishes between horizontal and vertical agreements.
Agreements between enterprises or persons engaged in trade of identical or similar goods or
services are presumed to have AAEC if they: • Directly or indirectly determine purchase or
sale prices • Limit or control output, technical development, services etc. • Share or divide
markets • Indulge in rigging or collusive bidding.

Agreements between enterprises or persons at different stages/levels of production chain in

different markets are prohibited if such agreements cause or are likely to cause AAEC.
Vertical agreements include: • Tie-in arrangement (e.g. requiring a purchaser of goods to
purchase some other goods as condition of such purchase) • Exclusive supply arrangement
(e.g. restricting a purchaser in course of his trade from dealing in any goods other than those
of the seller) • Exclusive distribution arrangement (e.g. limiting/restricting supply of goods or
allocate any area or market for sale of goods) • Refusal to deal (e.g. restricting by any method
any person/classes of persons to whom goods are sold) • Resale price maintenance (e.g.
selling goods with condition on resale at stipulated prices )

Horizontal agreements are presumed to have AAEC whereas in vertical agreements, the onus
of proving AAEC lies on the CCI. Joint venture agreements are an exception to horizontal
agreements, provided such agreements increases efficiency in production, supply,
distribution, storage acquisition or control of goods or provisions of services. Export
agreements and agreements to protect intellectual property are allowed to have protective
clauses. A dominant position is a position of strength enjoyed by an enterprise in the relevant
market in India, which enables it to: • Operate independently of competitive forces • Impact
its competitors, consumers, relevant market in its favour Factors for determining dominant
position include market share, size and resources of the enterprise/competitors, economic
power of enterprise, vertical integration, dependence of consumers etc.

KEYWORDS: Horizontal agreements, Vertical agreements, dominant position, competition,

CCI.
I.INTRODUCTION

The new competition law of India , namely, the Competition Act, 2002 (Act, for brief
amended in 2007) in its preamble highlights its major objectives so as ―to prevent practices
having adverse effect on competition, to promote and sustain competition in markets, to
protect the interests of consumers and to ensure freedom of trade carried on by other
participants in markets in India‖. The Preamble also mandates that the economic development
of the country needs to be kept in view in implementing the Act’s objectives. Jaivir Singh,
Professor at Jawaharlal Nehru University New Delhi, argues that competition policy in
developing economies should support their overall development path. A survey of the
literature shows that there is no agreed list of the elements of competition law but the
following figure prominently in the laws of most countries (UNCTAD, 2002): 1. Measures
relating to agreements between firms in the same market to restrain competition. These
measures can include provisions banning cartels as well as provisions allowing cartels under
certain circumstances. 2. Measures relating to attempts by a large incumbent firm to
independently exercise market power (sometimes referred to as abuse of dominant position).
3. Measures relating to firms that, acting collectively but in the absence of an explicit
agreement between them, attempt to exercise market power. These measures are sometimes
referred to as measures against collective dominance. 4. Measures relating to attempts by a
firm or firms to drive one or more of their rivals out of a market. Laws prohibiting predatory
pricing are an example of such measures. 5. Measures relating to collaboration between firms
for the purposes of research, development, testing, marketing, and distribution of products. 6.
Measures for control of mergers, amalgamations and acquisitions. The above list of six
measures which occur in most competition laws, is not exhaustive nor does it suggest that
each measure is given the same weight or described in the same terminology in each country
with a functioning competition law.
 PART I

II. DEFINITION OF HORIZONTAL AGREEMENT

A Horizontal Agreement is an agreement between competing firms in the same industry,

which may result in reduced competition. Subjects of such agreements may include :
Common pricing policies Common production quotas Information sharing In many
countries, anti-competitive behavior and unfair business practices are regulated by antitrust
laws. In other words, Horizontal Agreement is an agreement for co-operation3 between two
or more competing businesses operating at the same level in the market. This is generally to
develop a healthy relationship between competitors. The substantial clauses of the agreement
may include policies regarding pricing, production and distribution. The agreement may also
discuss sharing of information regarding the products and the market. Horizontal Agreements
can prompt violations of antitrust laws because these agreements may include clauses which
restrict competition. Horizontal Agreements may cause negative market effects with respect
to prices and quality of products. On the other hand, horizontal cooperation can lead to
substantial economic benefits such as sharing risk, cost savings, sharing know-how and
making innovations faster. Price fixing is a term associated with horizontal agreements. It is
an arrangement in which several competing businesses make a secret agreement to set prices
for their products to prevent real competition. Price fixing is a criminal violation of federal
antitrust statutes. Price fixing also includes secret setting of favorable prices between
suppliers and favored manufacturers or distributors to beat the competition

III. ANTI-COMPETITIVE AGREEMENTS

Firms enter into agreements, which may have the potential of restricting competition.
Agreements could be formal written documents or oral understandings, whether or not
enforceable by legal proceedings. Horizontal agreements are those among competitors. A
particularly pernicious type of horizontal agreements is the cartel. Horizontal agreements are
more likely to reduce competition than agreements between firms in a purchase-seller
relationship. HORIZONTAL AGREEMENTS: Agreements between two or more enterprises
that are at the same stage of the production chain and in the same market constitute the
horizontal variety. An obvious example that comes to mind is an agreement between
enterprises dealing in the same product or products. But the market for the product(s) is
critical to the question, if the agreement trenches the law. The Act has taken care to define the
relevant market. To attract the provision of law, the products must be substitutes. If parties to
the agreement are both producers or retailers (or wholesalers), they will be deemed to be at
the same stage of the production chain. The Act seeks to prevent economic agents from
distorting the competitive process either through agreements with other companies or through
unilateral actions designed to exclude actual or potential competitors. It frowns upon
agreements among competing enterprises (horizontal agreements) on prices or other
important aspects of their competitive interaction. In general, the ―rule of reason‖ test is
required for establishing that an agreement is illegal. However, for certain kinds of
agreements, the presumption is generally that they cannot serve any useful or procompetitive
purpose. Because of their presumption, the lawmakers do not subject such agreements to the
―rule of reason‖ test. The Act presumes that the four types of agreements between
enterprises, involved in the same or similar manufacturing or trading of goods or provision of
services have an appreciable adverse effect on competition. These four types of agreements
between enterprise are as described here under

 Agreements regarding prices: These include all agreements that directly or indirectly
fix the purchase or sale price.
 Agreements regarding quantities: These include agreements aimed at limiting or
controlling production, supply, markets, technical development, investment or
provision of services.
 Agreements regarding bids (collusive bidding or bid-rigging): These include tenders
submitted as a result of any joint activity or agreement.
 Agreements regarding market sharing: These include agreements for sharing of
markets or sources 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.

Such horizontal agreements, which include membership of cartels, are presumed to lead to
unreasonable restrictions of competition and are therefore presumed to have an appreciable
adverse effect on competition. This would mean that there would be very limited scope for
discretion and interpretation on the part of the prosecuting and adjudicating authorities and
very little scope for the errant enterprises to rebut the presumption (the errant enterprises had
the right to agitate gateways and penalties proposed to be imposed under the repealed MRTP
Act and the Restrictive Trade Practices Act of the U.K.):
IV. COMPETITION LAW IN VARIOUS COUNTRIES WITH RESPECT TO
HORIZONTAL AGREEMENTS

The Law relating to Horizontal Agreements in various countries including India may be
discussed as follows: I. INDIA6 Legislation The oldest pillar of the Indian competition legal
system is the Monopolies and Restrictive Trade Practices Act of 1969 (MRTP Act), which
represents the first attempt to deal with competition issues. The Government appointed a
committee in 1999 to examine the soundness of the MRTP Act in order to suggest a modern
competition law system as well as to increase the possibility of dealing successfully with
cartels. Pursuant to the recommendations of this committee, the Competition Act of 2002
(amended in 2007), was enacted on 13th January 2003.However, according to the
Competition Commission of India (CCI), the CCI itself ―needs further strengthening
through functional guidelines for its activities‖, and India does not have -at this time- strong
legal tools to contrast international cartels (such as the ―Vitamins cartel‖).The old
competition law only provided for general provisions, while the new one specifically
addresses cartel concerns, but ―India must ensure that the law is duly implemented and must
also develop effective techniques for investigating international cartels.‖ (Chowdhury, 2006)
Chapter I, Section 2 of the Competition Act of 2002 (the ―Act‖) defines: (b) ―agreement‖
such 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; (c)
―cartel‖ includes 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. Chapter
II, Section 3 of the Act deals with the ―Prohibition of agreements.
 PART II

V. PRESUMPTION UNDER SECTION 3(3) COMPETITION ACT: REBUTTABLE

OR IRREBUTTABLE

Sections 3 and 4 of the Competition Act (India) relating to anti-competitive agreements and
abuse of dominant postion, were recently brought into force on May 20, 2009. Section 3 of
the Act declares that anti-competitive agreements will be void and prohibits enterprises and
persons from entering into agreements in respect of production, supply, distribution, storage,
acquisition or control of goods or provision of services that causes or is likely to cause an
appreciable adverse effect on competition in India. Generally agreements are classified into
horizontal and vertical agreements for the purpose of competition laws. However, the Indian
law doesn't use this terminology. Nevertheless it can be seen that, in substance Section 3(3)
covers horizontal agreements, whereas Section 3(4) covers vertical agreements. The
importance of this distinction is that normally horizontal agreements relating to price fixing,
market sharing etc. are considered to be "per se "anti-competitive and no defence is available.
Section 3( 3) reads - 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
VI. VERTICAL RESTRAINT AGREEMENT

Vertical restraints are competition restrictions in agreements between firms or individuals at

different levels of the production and distribution process. Vertical restraints are to be
distinguished from so-called “horizontal restraints”, which are found in agreements between
horizontal competitors. Vertical restraints can take numerous forms, ranging from a
requirement that dealers accept returns of a manufacturer’s product, to resale price
maintenance agreements setting the minimum or maximum price that dealers can charge for
the manufacturer’s product.

For any relationship to be considered vertical, each of the parties to the agreement must be at
a different level in the production or distribution level, for the purpose of their agreement.
The various levels that an enterprise can be at include the supplier level, the manufacturers,
wholesalers, distributers and retailers to name a few. As an example, an agreement between a
car manufacturer and the dealer of those cars is a vertical agreement between undertakings.
Additionally, two enterprises may also be considered to be at different levels when the
supplier’s product is absorbed into a new product that is generated by the buyer. To continue
with the same example, the supplier of vehicle paint will also be in a vertical relationship
with the car manufacturer as the manufacturer will be buying the paint from the supplier and
integrating it into a product that the buyer creates.

While horizontal agreements are between competitors and generally tend to restrain
competition, vertical agreements are typically between non-competitors and may help in
increasing the industry’s output or sales or result in other economic efficiencies. The impact
of horizontal restraints and vertical restraints on a given market can also be quite different.

Dividing a market between competing enterprises through a horizontal agreement is likely to

lead to a restriction of competition as the consumer will have a reduced choice of products.
On the contrary, if a vertical agreement divides the market between dealers it may not
necessarily reduce the choices that are available to the buyer as competing brands will still be
present in that area. It is important to note that in the above example, the vertical arrangement
will reduce intra-brand competition, ie, a buyer will not have the choice of buying the same
product from different outlets as the dealers have been assigned specific territories. The
reduction of intra-brand competition is not always anti-competitive and may have some pro-
competitive effects as it may allow for a new brand to enter the market and maintain a
healthy cost-revenue ratio and provide effective competition to the incumbent. It should be
noted, however, that the presence of vertical restraints may restrict price competition between
sellers/dealers, resulting in a price increase for the buyer. Such results are considered to be
anti-competitive, harmful to the economy and can be taken very seriously by the competition
authorities.

Further, when a manufacturer places a common restraint on its dealers, it may present the
dealers with an opportunity to establish a price cartel for the product. This is because all the
relevant downstream undertakings will be selling the product on some common term. The
common term between these dealers may be the minimum selling price or a fixed resale price
for their product. In evaluating the anti-competitive nature of the agreement, the important
question that the competition authority will ask is whether the downstream entities were
aware of the agreements concluded by each other with the upstream supplier. If the
downstream undertakings were aware that each of them had entered into the same restrictive
vertical agreement or had themselves initiated the same, it is possible that a competition
authority will find that a horizontal cartel was in place. This conclusion comes from the
principle that the object of a cartel is to remove the commercial uncertainty of one’s
competitors. Therefore, if two competitors remove that certainty by using a third-party non-
competitor, it should not be treated as a purely vertical agreement. As a result, such collective
vertical agreements will not be spared and will be fully pursued under the cartel provisions.

VII. HOW ARE VERTICAL AGREEMENTS REGULATED?

The competition legislation in India, Singapore and China each has provisions on anti-

competitive agreements, albeit in different forms that either allow entirely or partially vertical

agreement. The following paragraphs describe the provisions in each country and draws

parallels with the EU (European Union) and US (United States) as useful.

Section 3(1) of the Competition Act of India (“Indian Act”) states that undertakings (or

persons) or associations of undertakings (or persons) are prohibited from entering into

agreements in respect of the production, supply, distribution, storage, acquisition, control etc

of goods or services, which cause or are likely to cause an Appreciable Adverse Effect on
Competition (“AAEC”) in India. While s 3(3) of the Act states that certain horizontal

agreements are presumed to have an AAEC, s 3(4) of the Act implies that all vertical

agreements will be evaluated on a case-by-case basis as there will be no presumption of

AAEC for them. This approach is similar to that in the EU with its Block Exemption

Regulations (“BER”). However, in contrast to the EU, which considers Resale Price

Maintenance (“RPM”) to be a hardcore restriction that is excluded from the BER, the Indian

Act makes RPM subject to the AAEC test and does not automatically condemn them. In this

regard, the Indian Act is more in-line with recent developments on handling RPM, in the US

for example, than the European model.

The Chinese Anti-Monopoly Law (“AML”) that came into force on 1 August 2008 explicitly

prohibits certain vertical agreements under art 14, such as:

1. fixing the price for resale to a third party;

2. fixing the minimum price for resale to a third party; and

3. other monopoly agreements confirmed by Anti-monopoly Enforcement Authority under

the State Council.

A third approach can be seen in the Singapore Competition Act (“CA”) which draws from its

UK (United Kingdom) counterpart. The relevant section on anti-competitive agreements in

the CA is s 34 and it prohibits agreements, decisions by associations of undertakings and

concerted practices that have as their object or effect the prevention, restriction or distortion

of competition within Singapore. The language of this section is wide enough to capture

vertical agreements and, therefore, there is no separate section for the same.
The application of competition law is usually done by one of two methods. The per se

method of applying competition principles dictates that an act or an agreement is prohibited

by its mere existence and does not require any further proof that it restricts competition. A

“rule of reason” approach, as is the case with vertical agreements in India and most other

jurisdictions, means that any economic benefits arising from the agreement are pitted against

any restrictions on competition that it generates. After a careful analysis, if the benefits

outweigh the detriments, the agreement is not considered to be anti-competitive and is

permitted. The primary distinction is that under the rule of reason approach an agreement will

be prohibited only if it is proven by the authority that it causes or is likely to cause an

appreciable adverse effect on competition. Therefore, in the Indian context, the Competition

Commission of India (“CCI”) bears the burden to prove that the particular agreement is anti-

competitive and should be prohibited. This approach is in a limited manner in accordance

with the recent change in the United States where the US Supreme Court overturned a 100-

year-old legal principle and declared that an agreement on resale price maintenance is no

longer a per se violation of the US Sherman Act. The benefit of the rule of reason approach is

that it does not automatically brand a particular type of agreement as being anticompetitive

and provides businesses an opportunity to present their case and explain the pro-competitive

effects of their arrangement.

Unlike the Indian Act, which allows for an evaluation on a case-by-case basis, the Chinese
AML completely prohibits vertical agreements that are listed in art 14. However,
acknowledging that sometimes efficient resource allocation is best achieved by placing some
restrictions on market competition, art 15 of the AML exempts some activities from art 14.
These exemptions are applied for:

1. improving technology, researching and developing new products;

2. upgrading product quality, reducing costs, improving efficiency, unifying product
specifications and
standards, or implementing division work based on specialisation;

3. improving the operational efficiency and enhancing the competitiveness of small and
medium-sized undertakings;

4. serving public interests such as conservation of energy, protection of the environment,

provision of disaster relief, etc;

5. mitigating a serious decrease in sales volume or excessive overstock from production

during the economic recession;

6. protecting the legitimate interests of foreign trade and foreign economic cooperation; or

7. any other circumstances as stipulated by the laws and the State Council.

It is interesting to note that the first three exemptions in the list closely follow the EU
approach under art 101(3) of its Treaty, but the next three exemptions do not seem to have
corresponding provisions. Exemption (4), for instance, allows parties to avoid the art 14
prohibition if their agreement serves a social and public interest such as energy conservation,
environmental benefits etc. While these issues are also given serious consideration in the EU,
they are more likely to be managed under other legislative enactments or policies such as
EU’s environment policy. It should be noted that the Indian Act also has an exemption for
export activities similar to that found in exemption (6) above. With a rapid increase in trade
between these two Asian giants, it is anticipated that more and more companies will be
interested in using the export exemption under their national competition regimes to capture
the cross-border market.

VIII. AGREEMENTS REGULATING IPR

Intellectual property is a niche area of law with its own set of rules and principles that are
sometimes at loggerheads with those from competition law. Competition law is about
opening the market to as many competitors as is possible and avoiding the dominance by any
one player. Intellectual property law on the other hand supports the notion that the holder of a
creation viz. copyright, patent or industrial design should be allowed to own that creation to
the exclusion of all others and economically exploit it for his sole benefit. Therefore, patent
holders and owners of industrial designs are often seen filing lawsuits pursuing injunctions
and damages against other players in the market who attempt to sell a copy of their product.
The main purpose behind these lawsuits is that IPR holders are seeking to maintain their
position as the sole supplier of their product and prohibit entry by competitors. Therefore, in
order to balance the right to exclusively exploit one’s property against the right of the
buyer/consumer to enjoy competitive rates from rival firms, competition legislation deal with
IPR agreements in a slightly different manner.

The Indian Act has placed a special exemption for IPR from its s 3 prohibition so long as the
conditions or restrictions placed through the agreement are reasonable. The Advocacy
Handbook of the CCI sets out some illustrations of the types of conditions that will be
considered as being unreasonable and, therefore, not enjoying the immunity. These include:
1. Patent pooling;

2. Market sharing among licensees;

3. Exclusive licensing;

4. Tie-in arrangement;

5. Package licensing;

6. Prohibition from using rival technology; and

7. Resale price fixing.

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