Section 3 of the Competition Act, 2002 is the substantive provision in the Competition Law dealing with anti-competitive agreements and arrangements. An anti-competitive agreement is an agreement having an appreciable adverse effect on the competition. This Section prohibits any agreement in respect of production, supply, distribution, storage, acquisition or control of goods and services which causes, or likely to cause an applicable adverse effect on the competition in India. Thus there are two essential requirements to bring into operation Section 3(1):
- There should be an agreement
- The agreement should cause an appreciable adverse effect on competition in the market in India
An agreement is anti-competitive if it causes or is likely to cause an adverse effect on the competition. The term appreciable adverse effect has not been defined in the Act. In the case of Haridas Exports v. All India Float Glass Manufacturers Association (2002), the Supreme Court observed that the words appreciable adverse effect on competition embraces acts, contracts, agreements or combinations which operate to the prejudice of the public interests by unduly restricting competition or unduly obstructing the due course of the trade.
Proviso to Section 3 provides that the aforesaid criteria shall not apply to Joint ventures entered with the aim to increase efficiency in production, supply, distribution, acquisition and control of goods or services.
Horizontal agreements are agreements between enterprises at the same stage of production. Section 3(3) provides that such agreements includes cartels, engaged in identical or similar trade of goods or provisions of services, which-
- Directly or indirectly determines purchases or sale prices.
- Limits or controls production and supply.
- Share the market or source of production
- Directly or indirectly results in bid rigging or collusive bidding.
Under the Competition Act, 2002, horizontal agreements are placed in a special category and are subject to the adverse presumption of being anti-competitive. this is known as ‘per se’ rule. This implies that if there exists a horizontal agreement under Section 3(3) of the Act, then it will be presumed that such an agreement is anti-competitive and has an appreciable adverse effect on competition.
Vertical agreements are those agreements which are entered into between two or more enterprises operating at different levels of production. For instance between suppliers and dealers. Other examples of anti-competitive vertical agreements include:
- Exclusive supply agreement and refusal to deal.
- resale price maintenance
- tie-in arrangements
- Exclusive distribution agreements
The ‘per se’ rule as applicable for horizontal agreements does not apply for vertical agreements. Hence, a vertical agreement is not per se anti-competitive or does not have an appreciable adverse effect on competition.
Section 3(5)(i) of the Act provides an exception, from the adverse effect of Section 3 to the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been conferred upon him under:-
- The Copyright Act, 1957
- The Patents Act, 1970
- The Trade and Merchandise Marks Act, 1958
- The Geographical Indications of Goods ( Registration and Protection) Act, 1999
- The Design Act, 2000
- The Semi-Conductor and Integrated Circuits Layout Design Act, 2000
The effect of Section 3(5) is that entire Section 3 dealing with prohibition of anti-competitive agreements will not apply where the owner of any intellectual property rights under the enactments provided above does not anything in the exercise of his right of restrain the infringement of any of those rights, or imposes reasonable conditions as may be necessary for the protection of any of those rights. In the case FICCI-Multiplex Association of India v. United Producers/ Distributors Forum & Ors.(2011), it was held that the extend of non obstante clause in Section 3(5) of the Act is not absolute as is clear from the language used therein and it exempts the right holder from the rigors.