Horizontal and Vertical Restraint on Competition

The article ‘Horizontal and Vertical Restraint on Competition’ gives an insight into the restraint on competition caused when enterprises enter into horizontal and vertical agreements. The article also gives throws lights on the doctrine of restraint as followed in other jurisdictions, such as the European Commission and the US, with the help of some case laws. Then, the position of such restraints in the Indian market is also looked into by the article.

Introduction

When an economic rivalry exists amongst companies or entities to draw the maximum number of customers and make the most of the profit, such a situation is known as competition. The law drafted by the legislature to regulate such competition is known as competition law. It is also known as anti-trust law in some countries around the world. A free, fair, healthy and reasonable competition prevailing in the market is a sine qua non for creating and maintaining a conducive environment for business so that the country can prosper.

The motto of all the competition laws operational in various parts of the world is to ensure an environment where all companies can deal with fair competition.

The Indian Competition Act has just bloomed from the bud and is undergoing various improvements. Much time has not lapsed since the new competition law was adopted. MRTP Act operated the competition in the market before the Competition Act, 2002 came to the forefront. The structure of the competition law has been kept in such a way that not only promotes but also provides a fair and reasonable chance to all the enterprises in the market to have healthy competition so that the interests of the consumers can be protected.

One of the main objectives with which the Competition Act was brought is to do away with those practices that adversely impact the competition.[1] It has also cast a duty upon the Competition Commission of India to prohibit all practices that adversely impact the competition in the Indian market and to get all the objectives stated in the preamble implemented.[2]

I. Common Law Doctrine of Restraint

Modern competition law owes a lot of its evolution to the doctrine of ‘restraint of trade’ of common law. This doctrine is important because it is in contravention to the public policy that allows enterprises to get those contracts enforced that have the nature to create unreasonable restraint of trade in the market. Now the question arises of how to determine whether a contract is unreasonable in nature.

The answer to this was given by Lord Morris in the matter of Esso Petroleum Ltd. v. Harper’s Garage (Stourport) Ltd[3] and held that it is to be done by examining the restraint caused by such a contract if it is so large that causes interference with the interests of the public at large.

The common law doctrine of restraint of trade also finds its branches in US jurisdiction. Chief Justice White explained the relationship between the Sherman Act and the doctrine with the help of the matter of Standard Oil Company v. US[4] and held that the literalist approach[5] has been outdated and is not enough to deal with the competition in the market and hence, it is important to interpret the Sherman Act by following another approach known as the rule of reason.

However, in European Countries, many cases described the existence of a close relationship between the competition law followed in European Countries and the doctrine of restraint of trade propounded by the common law.[6]

A difference can be seen in the method of carrying out an approach under both laws. In common law, the focus of courts is more on the restraint that exists between the parties, while the focus of competition law is more on the result of the competition on the market. The terminology used by both approaches is similar, and both approaches also determine the reasonableness of the restraint caused by using public interest as a yardstick.[7]

Anti- Competitive Agreements

The nature of the Restrictive Trade Practices[8] under the MRTP Act, 1969, has been covered under the ambit of Anti-Competitive Agreements as mentioned under the Competition Act, 2002. The companies in the market enter into agreements that have the potential to lessen, reduce, suppress, distort and restrict the competition. When the competition across the global markets is analyzed, it comes across that the agreements entered into by the firms can be classified into two types: vertical and horizontal.

The competition amongst the firms taking part in a similar chain of production is known as a horizontal agreement. In contrast, competition exists amongst the parties taking part in the same chain of supply. Horizontal agreements are capable of creating a serious and severe impact on the competition pursuant to which these agreements are taken seriously rather than the vertical agreements by many of the competition laws in the world.

The basic premise behind the insertion of the provision concerning the anti-competitive agreements in the competition law of India is fostering competition so that the consumers' welfare and interests can be promoted.[9] The Act covered almost all the areas of business, such as promotion, sales, advertising, packaging, purchasing, investment, pricing, distribution, production, take- over or merger amalgamation with any undertaking.

Further, the Act provides a restriction on all these departments if they enter into any such agreement, which is anti-competitive in nature, that cause or is likely to cause an adverse impact on the competition prevailing in the Indian market.[10] If any company enters into an agreement, which is against the general restriction as prescribed by the Act, it is declared both null and void.[11]

There are many kinds of anti-competitive agreements as described by the Competition Act, 2002.[12] It comprises of certain decisions or actions done by an association or a group of persons by means of an agreement, arrangement or understanding, which is either formal or informal in nature, comprises cartels[13] and also covers a different kind of vertical restraint on trade.[14] The arrangements or agreements[15] that have been entered into are in the nature of controlling and dominating commerce and trade of any commodity, along with the intent and power to do away with the competitors substantially.

II. Restraint on Competition: Vertical and Horizontal

The restraints in competition law can be broadly divided into horizontal and vertical. The agreement relating to the competition that operates at a similar level of the economy falls under the ambit of the Horizontal Agreement. Such agreements are between the levels that deal with the same type of products, such as producers and producers, sellers and sellers, retailers and retailers and so on and so forth.

Competition authorities always show their concern regarding Horizontal Agreements as they lead to a situation where the chances of a monopoly increase.[16] However, sometimes the enterprises come into horizontal agreements such as harmonization of technology or agreement on standards etc., and the purpose of such agreements may not be anti-competitive in nature.[17]

However, vertical restraint is between those enterprises that deal with different industries. There are agreements that have been formed by those who operate at different levels in the production chain. There always exists a production chain in case of any service or good is being processed before any product is produced for the customer. There are many stages, such as the gathering of raw materials, processing them or creating the final product and then distributing and, further, selling them to the customer.

Thus, commercial life has a feature known as vertical agreements and in the matter of Beguelin Import v. GL Import Export,[18] it can also be regarded as an alternative for vertical integration.[19] The competition law has laid down certain regulations for vertical agreements has led to a lot of controversies.[20] There is no combination of power in the market when it comes to vertical agreements.

The effect on competition in the market is produced by the vertical agreements only when the enterprises entering into the vertical agreement possess power in the market. The various theories in economics also provide that if there is a presence of competition amongst various brands, the restrictions in effect due to vertical agreement should not be allowed to cause any effect on competition.

III. Position of restraints in the Indian market

The competition act of 2002 deals with anti-competitive agreements by virtue of section 3. The basic premise behind the insertion of the provision concerning the anti-competitive agreements in the competition law of India is fostering competition so that the consumers' welfare and interests can be promoted.[21] The Act covered almost all business areas, such as promotion, sales, advertising, packaging, purchasing, investment, pricing, distribution, production, take- over or merger amalgamation with any undertaking.

Further, the Act restricts all these departments if they enter into any such agreement, which is anti-competitive in nature, that cause or is likely to cause an adverse impact on the competition prevailing in the Indian market.[22] If any company enters into an agreement, which is against the general restriction as prescribed by the Act, it is declared both null and void.[23]

Further, the whole concept of appreciable adverse effect[24] has been put under the head of subjective since it differs from person to person. Horizontal agreements are covered under Section 3 (3) of the Competition Act, 2002. There arises a presumption in the case of such agreements that there exists an appreciable adverse effect on the prevailing competition in the market. However, any such effect is not considered in the case of vertical agreements[25], and pursuant to this, the anti-competitive agreements are under strict rules and regulations.

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[1] The preamble of the Competition Act, 2002

[2] Section 18 of the Competition Act, 2002

[3] [1968] AC 269

[4] 221 US 1 (1911)

[5] US v. Trans Missouri Freight Association, 166 US 290

[6] W.W.F. v. World Wrestling Federation Entertainment Inc., EWCA Civ 196 [2002]

[7] Alexandra Kamerling & Christopher Osman, Restrictive Covenants under Common and Competition Law 1-13 (2007)

[8] Section 33 of the MRTP Act, 1969

[9] The provision relating to the anti-competitive agreements came into effect on May 20, 2009.

[10] Section 3 (1) of the Competition Act, 2002

[11] Section 3 (2) of the Competition Act, 2002

[12] Section 3 (3) and 3 (4) of the Competition Act, 2002

[13] Section 3 (3) of the Competition Act, 2002

[14] Section 3 (4) of the Competition Act, 2002

[15] Section 2 (b) of the Competition Act, 2002

[16] Mark Furse, Competition Law of the EC and UK 133-134 (2004)

[17] Article 8 (1) of EC Treaty

[18] CMLR 81 [1972]

[19] Viho v. Commission, 4 CMLR 299 [1995]

[20] Silke Neubauer & Jeremy Lever, Vertical Restraints, Their Motivation And Justification, 21(1) ECLR 7-23 (2000)

[21] The provision relating to the anti-competitive agreements came into effect on May 20, 2009.

[22] Section 3 (1) of the Competition Act, 2002

[23] Section 3 (2) of the Competition Act, 2002

[24] Section 3 (1) of the Competition Act, 2002

[25] Section 3 (4) of the Competition Act, 2002

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1. Competition Law
2. Foreign Direct Investment in NBFC Sector