India: Vertical Restraints

In summary

This chapter sets out the legal framework governing anticompetitive vertical agreements in India. It discusses the features of vertical agreements in India and the various types of vertical restraints caught by the prohibition. It also sheds light on the recent enforcement actions of the Competition Commission of India (CCI) against anticompetitive vertical agreements.

Discussion points

  • Vertical agreements under the Indian Competition Act 2002 (the Competition Act);
  • features of an anticompetitive vertical agreement; and
  • the CCI’s increasing focus on vertical agreements in digital markets.

Referenced in this article

  • Sections 3(4) and 19(3) of the Competition Act;
  • Hyundai Motor India Ltd v. Competition Commission of India & Ors;
  • Tamil Nadu Consumer Products Distributers Association v. Fangs Technology Pvt Ltd;
  • Federation of Hotel and Restaurant Associaions of India (FHRAI) v. MakeMyTrip India Pvt Ltd & Ors;
  • Shamsher Kataria v. Honda Siel & Ors;
  • CCI Market Study on E-commerce in India;
  • Harshita Chawla v. Whatsapp Inc;
  • Jasper lnfotech Private Limited (Snapdeal) v. KAFF Appliances (India) Pvt Ltd;
  • Samir Agarwal v. ANI Technologies Pvt Ltd & Ors;
  • Delhi Vyapar Mahasangh v. Flipkart Internet Private Limited & Amazon Seller Services Private Limited; and
  • JSW Paints Private Limited v. Asian Paints Limited.

Introduction

The Indian competition law regime is governed by the provisions of the Competition Act and the CCI is the principal regulatory body that enforces the Competition Act. The CCI functions with the aid of its investigative arm, namely, the Office of the Director General (DG). Appeals against orders of the CCI are adjudicated by the National Company Law Appellate Tribunal (NCLAT) and thereafter by the Supreme Court of India.

Vertical agreements are covered under Section 3(4) of the Competition Act, which defines a vertical agreement as an ‘agreement amongst enterprises or persons at different stages or levels of the production chain in different markets’. Section 3(4) of the Competition Act sets out an inclusive list of vertical agreements that, if found to cause an appreciable adverse effect on competition (AAEC) in India, will be held to be anticompetitive and deemed void:

  • tie ins, or agreements requiring a purchaser of goods to also purchase some other goods as a condition of purchase;
  • exclusive supply agreements, or agreements that restrict a purchaser from dealing in any goods other than those of a certain supplier;
  • exclusive distribution agreements, or agreements to limit, restrict or withhold the supply of goods or allocate any market area for disposal of goods;
  • refusal to deal, or agreements that restrict or limit the categories of persons from whom goods are bought or to whom they are sold; and
  • resale price maintenance (RPM), or an agreement to sell goods at a price specified by the seller, unless the seller has the freedom to charge lower prices.

Features of a vertical agreement

The CCI, while assessing a vertical agreement, is required to identify the existence of an agreement and assess whether the agreement causes or is likely to cause an AAEC in India.

Courts in India have reiterated that the aforesaid analysis is a sine qua non for holding a violation of Section 3(4) of the Competition Act, including for arriving at a preliminary determination of infringement and directing an investigation into a vertical agreement.

Existence of agreement

An ‘agreement’ is defined very broadly under the Competition Act and includes any arrangement, understanding or action in concert. In Indian competition jurisprudence, an agreement need not be in writing and is not required to be legally enforceable in Indian courts.[1] In Re Director General (Supplies & Disposals) Directorate General of Supplies & Disposals,[2] the CCI held that such an ‘understanding may be tacit, and the definition covers situations where the parties act on the basis of a “nod or a wink”’. To establish an agreement’s existence, the CCI can also consider circumstantial evidence, behaviour or conduct of the parties. In the Snapdeal preliminary order, the CCI noted that the ‘existence of agreement may be inferred from coercive conduct when the level of coercion exerted to impose an apparent unilateral policy, in combination with the number of distributors that are actually implementing the unilateral policy of the supplier would, in practice, point to tacit acquiescence by the other party or parties’. [3]

Relevant market

A relevant market definition is often required to determine whether an agreement results in an AAEC. For instance, the CCI’s decision holding that car manufacturer Hyundai’s RPM was anticompetitive, was set aside on appeal on account of, among other things, the CCI’s failure to define the relevant market. [4]

Market shares

While the Competition Act does not require an AAEC analysis to include an assessment of the market shares of the parties to the agreement, the CCI, in practice, often refers to parties’ market shares for a preliminary assessment. It is for this reason that the CCI has often dismissed allegations of illegal vertical restraints by enterprises having insignificant market shares. For instance, in 2018, the CCI rejected allegations of RPM of Vivo mobile handsets in India, on account of Vivo’s low market share and high levels of competition in the Indian smartphone market. [5]

More recently, while ordering an investigation into an alleged anticompetitive vertical agreement between MakeMyTrip (an online travel agency) and OYO (a budget hotel chain),[6] the CCI noted that ‘both have considerable presence in their respective market segments and any restrictive agreement which may lead to refusal to deal with some players or exclusive arrangement with some players, may potentially have an adverse effect on competition’.

Effects analysis

Unlike horizontal agreements or agreements among competitors that are presumed to be anticompetitive (ie, cause an AAEC), there is no such presumption for vertical agreements. Instead, vertical agreements are analysed basis the rule of reason test. Thus, vertical agreements are not subject to a per se rule and are only illegal if found to cause an AAEC in India.

The Competition Act lays down certain factors that the CCI must consider while assessing whether an agreement causes an AAEC. These factors include:

  • creating entry barriers;
  • driving existing competitors out of the market;
  • foreclosing competition by hindering entry; [7]
  • accruing consumer benefits;
  • improving production or distribution of goods and services; and
  • promoting scientific, technical and economic development. [8]

While the first three factors list anticompetitive effects, the last three provide for efficiency justifications. Thus, the CCI’s AAEC analysis consists of a balancing exercise wherein the anticompetitive effects of a vertical agreement will be weighed against its potential pro-competitive benefits.

In Shamsher Kataria v. Honda Siel & Ors, the CCI rejected the argument put forward by car manufacturers that an exclusive supply agreement with original equipment manufacturers was required to ensure quality control and protection of brand goodwill. Considering the argument, the CCI held that the pro-competitive justifications put forward by the car manufacturers to defend the exclusive supply obligation could be achieved through less restrictive means. Thus, the overall effect of such exclusive supply arrangements was held to be anticompetitive based on a cumulative assessment of all the factors listed under Section 19(3) of the Competition Act. [9]

The Competition Act also provides for few defences with respect to vertical agreements. A vertical agreement can be justified if it imposes reasonable conditions to protect or restrain infringement of any IP rights.[10] The Competition Act also provides for a carve out for agreements pertaining to the export of goods or services from India. [11]

CCI’s enforcement actions

Exclusive supply agreements

Exclusive supply agreements under the Competition Act, which place restrictions on purchasers of goods or services, can fall under:

  • exclusive supply agreements, where a purchaser is restricted from acquiring or dealing with goods other than those of a particular seller; [12] and
  • refusal to deal agreements, which restrict or are likely to limit the categories of persons from whom the goods are bought or to whom they are sold. [13]

In 2020, the CCI ordered an investigation[14] into Asian Paints, a leading paints manufacturer in India, after finding that it had coerced its dealers to not associate with JSW Paints, a new entrant in the Indian paints market. The CCI prima facie found that Asian Paint’s action of barring its dealers from procuring products from JSW Paints at lower prices amounted to a vertical restraint, in the nature of an exclusive supply agreement and refusal to deal under Section 3(4) of the Competition Act. Further, given that Asian Paints was dominant in the Indian organised decorative paints market, the CCI held that its action could cause an AAEC, having the potential to create entry barriers and hamper consumer choice. The investigation by the DG Office is currently ongoing.

Exclusive distribution agreements

Exclusive distribution agreements refer to agreements aimed at restricting or withholding the supply of goods or allocating any area, market or customers for the disposal or sale of goods. The CCI’s market study on the Indian e-commerce sector[15] (Market Study) published in 2019, identified two kinds of exclusive distribution agreements between online platforms and service providers, that could raise competition concerns:

  • agreements where a product is being sold exclusively on a single online platform; and
  • agreements where only a single brand (of a particular product category) is listed on the platform.

The Market Study noted that such agreements could be problematic when used to exclude competitors or deter new entrants. This is especially a concern in digital markets, which are characterised by a ‘winner takes all’ feature. The Market Study observed that such exclusive distribution arrangements would increase rivals’ costs, as they induce sellers to give up competing distribution contracts. Further, limiting distribution to only one brand on a major platform limits competing sellers. However, the market study also noted that exclusivity agreements have the potential to generate efficiencies and improve inter-brand competition. Accordingly, the CCI advocated a case-by-case analysis, within a rule of reason framework, for analysing exclusivity agreements in the Indian e-commerce sector.

Based on the Market Study’s findings, the CCI stated that a potentially anticompetitive vertical arrangement between platforms and sellers or service providers would be an enforcement priority. In fact, on the heels of the Market Study, in early 2020, the CCI initiated an investigation[16] into alleged exclusive agreements between leading Indian e-commerce platforms, Amazon and Flipkart, and smartphone manufacturers. The CCI prima facie found that arrangements through which a smartphone brand or model is sold exclusively on an e-commerce platform would merit investigation. The DG Office’s investigation, however, has been stayed pursuant to a jurisdictional challenge by the digital platforms before courts in India.

RPM agreements

RPM agreements refer to those arrangements where a seller dictates or restricts the price to be charged by the distributor upon resale. The CCI dealt with allegations of RPM in a recent case against cab-aggregator platforms, Ola and Uber.[17] It was alleged that the cab-aggregator platforms’ algorithms decide or fix the price that consumers pay to drivers and do not permit drivers to charge lower amounts; thus, amounting to an RPM agreement. The CCI, however, held that a resale is a mandatory criterion to establish the existence of an RPM agreement, and that sales undertaken by an agent (cab platform) of the supplier (driver) would not meet the threshold of ‘resale’ for the purposes of Section 3(4)(e) of the Competition Act.

In stark contrast, in Jasper lnfotech Private Limited (Snapdeal) v. KAFF Appliances,[18] the CCI found that transactions between a digital marketplace and consumers constitute ‘resale’ for the purposes of an RPM agreement as ‘the principles of transit/movement of products in a traditional market cannot be applied stricto senso to such digital markets’. It further held that when a distributor or a dealer uses a platform to sell products to end consumers, the platform becomes a part of the supply chain. Therefore, it could not be said that the platform is merely facilitating an interaction between the seller and the end consumer.

The CCI has assessed instances of RPMs in several cases (but no AAEC was established), and it has arrived at an RPM infringement finding and imposed a penalty in only one case in 2017. In Fx Enterprise Solutions India Pvt Ltd v. Hyundai Motors,[19] the CCI found that the seller had entered into an RPM agreement causing an AAEC by prescribing a maximum discount that car dealers could offer to end consumers, which resulted in higher prices. However, this decision was overturned by the NCLAT for an inadequate effects analysis.

Tying arrangements

A tying agreement is one where the purchaser of goods must purchase certain other goods offered by the seller as a condition of purchase. Such agreements are defined under Section 3(4)(a) of the Competition Act. The CCI first considered tie-in arrangements in 2014 in Sonam Sharma v. Apple Inc & Ors[20] and laid down the guiding elements to establish an anticompetitive tying agreement: 

  • there must be two separate products or services;
  • the purchase of one is conditioned upon the purchase of another; 
  • the seller must have sufficient economic power in the tying product, to coerce a purchase of the tied product; and
  • the tying arrangement must affect a substantial portion of the market.

This case involved ‘contractual tying’ where the handset manufacturer (Apple) and service provider (Airtel and Vodafone) had worked together to offer a packaged product to a customer. Ultimately, the CCI held that no violation had occurred, as the market shares of the parties in their respective markets made AAEC improbable and there was no consumer harm since customers had the choice to pay to unlock their phones.

The CCI also recently dealt with allegations of tying against WhatsApp.[21] The complaint alleged that Whatsapp had engaged in anticompetitive tying of its new service, WhatsApp Pay, with its leading product WhatsApp Messenger. It was alleged that WhatsApp Pay had been imposed on users of WhatsApp Messenger without their consent. However, the CCI dismissed the allegations. The CCI found that merely because WhatsApp Pay had been embedded into WhatsApp Messenger, did not necessarily amount to consumers actually using WhatsApp Pay. The CCI further noted that WhatsApp Pay was not a separate product, but in fact a value-added service to WhatsApp Messenger and that ‘incorporating the payment option in the messaging app does not seem to influence a consumer’s choice when it comes to exercising their preference in terms of app usage, particularly since there seems to be a strong likelihood of a status quo bias operating in favour of the incumbents, at present’.

Most favoured nation clauses.

Most favoured nation (MFN) clauses ‘are stipulations where the sellers guarantee to provide an online selling platform with terms, price and/or non-price, that are at least as favourable as those granted to any other platform thus ensuring the former a competitive advantage over its competitors’. [22]

The CCI examined MFN clauses in detail for the first time in Federation of Hotel & Restaurant Associations of India v. MakeMyTrip India Pvt Ltd.[23] In directing the DG Office to investigate online travel agent MakeMyTrip, the CCI also analysed ‘wide’ and ‘narrow’ MFN clauses. It observed that narrow parity clauses are those where ‘suppliers agree not to set lower prices or offer better terms through their own websites compared to prices/terms offered on the platform imposing the restriction’, while wide parity clauses are those that ‘restrict a supplier from charging lower prices or providing better terms on their website’ and other sales channels. Similar to other forms of vertical restraints, MFN clauses must also cause an AAEC to be anticompetitive, and it remains to be seen whether the CCI will account for its pro-competitive benefits (such as protecting the investment incentives of the platform) in its ultimate analysis of the effects of MFNs.

Conclusion

The initial few years of the CCI’s antitrust enforcement did not focus on vertical restraints; the CCI evaluated only a handful of five or six cases of vertical agreements from 2009 to 2018. However, in recent years, similar to other authorities, the CCI has seen a surge of complaints challenging vertical agreements, especially in digital markets. As such, vertical restraints, particularly in Indian e-commerce, have become an enforcement priority for the CCI. This sentiment is similarly echoed in the CCI’s Market Study. While all vertical restraints will be analysed by the CCI on a case-by-case basis, it is especially important for businesses to be wary of such arrangements having the potential to cause anticompetitive effects and the likely scrutiny that will come its way.


Notes

[1] Section 2(c) of Competition Act.

[2] Re Director General (Supplies & Disposals) Directorate General of Supplies & Disposals, Department of Commerce, Ministry of Commerce & Industry, Government of India, Reference Case No. 01 of 2012.

[3] In Re: Jasper Infotech Private Limited (Snapdeal) and Kaff Appliances Ltd, Case No. 61 of 2014.

[4] Hyundai Motor India Ltd v. Competition Commission of India & Ors, Competition Appeal (AT) No. 06 of 2017, decided on: 19 September 2018.

[5] Tamil Nadu Consumer Products Distributers Association v. Fangs Technology Pvt Ltd, CCI Case No. 15 of 2018.

[6] In Re: FHRAI v. MakeMyTrip India Pvt Ltd and others, Case No. 14 of 2019.

[7] Section 19(3)(d) to (f) of the Competition Act.

[8] Section 19(3)(a) to (c) of the Competition Act.

[9] In re: Shri Shamsher Kataria vs. Honda Siel Cars India Ltd and ors, Case No. 03 of 2011.

[10] Section 3(5)(i) of the Competition Act.

[11] Section 3(5)(ii) of the Competition Act.

[12] Section 3(4)(b) of the Competition Act.

[13] Section 3(4)(d) of the Competition Act.

[14] JSW Paints Private Limited v. Asian Paints Limited, Case No. 36 of 2019.

[15] CCI Market Study on E-Commerce, available at: http://www.cci.gov.in/node/4637.

[16] In Re: Delhi Vyapar Mahasangh v. Flipkart Internet Private Limited and Amazon Seller Services Private Limited, Case No. 40 of 2019.

[17] In re: Samir Agarwal v. ANI Technologies Pvt Ltd and Ors, Case No. 37 of 2018.

[18] Jasper lnfotech Private Limited (Snapdeal) v. KAFF Appliances (India) Pvt Ltd, Case No. 61 of 2014.

[19] Fx Enterprise Solutions India Pvt. Ltd v. Hyundai Motors, Case Nos. 36 and 82 of 2014.

[20] Sonam Sharma v. Apple Inc & Ors, Case No. 24 of 2011.

[21] Harshita Chawla v. Whatsapp Inc, Case No. 15 of 2020.

[22] In Re: FHRAI v. MakeMyTrip India Pvt Ltd And others, Case No. 14 of 2019.

[23] ibid.

Get unlimited access to all Global Competition Review content