Section 3 of Competition Act, 2002, which became effective on January 13, 2003, is part of Chapter II of the Act. This chapter focuses on stopping certain agreements, preventing the abuse of dominant market positions, and regulating business combinations like mergers. The goal of Section 3 is to block agreements that harm competition, hurt consumers, or slow down economic growth. This article explains Section 3 in detail, covering its legal definitions, prohibited practices, exceptions, how it’s enforced, and real-world examples, making it clear for lawyers, businesses, and policymakers.
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Understanding Anti-Competitive Agreements Under Section 3 of Competition Act, 2002
Section 3 of the Competition Act, 2002 is all about stopping anti-competitive agreements deals between businesses or individuals that mess up the fair workings of the market. It’s broken down into several parts, each dealing with different kinds of agreements that could harm competition.
General Prohibition of Anti-Competitive Agreements
Section 3(1): This section says that no company, group of companies, person, or group of people can make an agreement about producing, supplying, distributing, storing, acquiring, or controlling goods or services if it causes or is likely to cause a significant negative impact on competition in India. This negative impact is called an “appreciable adverse effect on competition” (AAEC).
Section 3(2): Any agreement that breaks the rule in Section 3(1) is considered void, meaning it has no legal power and cannot be enforced in court.
This rule applies to all kinds of agreements whether they’re written, spoken, formal, or informal so it covers a wide range of situations.
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Horizontal Agreements: Presumed Harm to Competition
Horizontal agreements happen between businesses or people who are at the same level in the market, like competitors selling similar products. Section 3(3) assumes that certain types of these agreements automatically cause a significant negative impact on competition. If someone is accused of making such an agreement, they have to prove it doesn’t harm competition.
The types of horizontal agreements that are assumed to harm competition include:
Price Fixing (Section 3(3)(a)): When competitors agree to set the price of their products or services, either directly (like agreeing on a specific price) or indirectly (like using tactics to control prices, such as predatory pricing to undercut competitors).
Output Restriction (Section 3(3)(b)): When competitors agree to limit how much they produce, supply, or sell, or restrict technical development, investment, or services. For example, agreeing to produce fewer products to keep prices high.
Market Allocation (Section 3(3)(c)): When competitors divide up markets, like agreeing to sell only in certain areas, to specific customers, or for certain types of goods or services.
Bid Rigging (Section 3(3)(d)): When competitors collude to manipulate bidding processes, like agreeing who will win a contract or setting bids to eliminate competition.
Exception: Joint ventures that improve efficiency in producing, supplying, distributing, storing, acquiring, or controlling goods or services are not automatically considered harmful, as long as they don’t completely eliminate competition.
For bid rigging, the Competition Commission of India (CCI) uses a strict approach. Once it’s proven that bid rigging happened, no further proof of harm is needed; the burden is on the parties to show the agreement wasn’t harmful.
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Vertical Agreements: Case-by-Case Assessment
Vertical agreements happen between businesses at different stages of the supply chain, like a manufacturer and a distributor. Section 3(4) lists specific types of vertical agreements that might be anti-competitive if they cause a significant negative impact on competition:
Tie-in Arrangements (Section 3(4)(a)): Forcing someone to buy one product to get another. For example, a company might say you can only buy their printer if you also buy their ink.
Exclusive Supply Agreements (Section 3(4)(b)): Limiting who a supplier can sell to. For example, a supplier might agree to sell only to one specific distributor.
Exclusive Distribution Agreements (Section 3(4)(c)): Restricting where or to whom a distributor can sell. For example, a manufacturer might tell a dealer they can only sell in a specific area.
Refusal to Deal (Section 3(4)(d)): When a business refuses to work with certain companies. For example, a big supplier might refuse to sell to a retailer who works with a competitor.
Resale Price Maintenance (Section 3(4)(e)): When a manufacturer sets the price at which a retailer must sell a product. For example, telling a store they can’t sell a product below a certain price.
Unlike horizontal agreements, vertical agreements aren’t automatically assumed to harm competition. The CCI has to investigate and prove they cause a significant negative impact.
Exceptions to Section 3 of Competition Act, 2002
Section 3(5) allows some agreements to be exempt from these rules if they:
Protect intellectual property rights, like those under the Copyright Act, 1957; Patents Act, 1970; Trademarks Act, 1999; Geographical Indications Act, 1999; Designs Act, 2000; or Semi-conductor Integrated Circuits Layout-Design Act, 2000.
Are only about producing, supplying, distributing, or controlling goods for export. This ensures businesses can make deals to sell abroad without being unfairly restricted.
These exceptions exist because some agreements are necessary for innovation, protecting intellectual property, or supporting international trade without hurting competition in India.
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Role of the Competition Commission of India (CCI)
The CCI is the authority responsible for enforcing Section 3. It’s outlined in Chapter IV of the Act and has the power to investigate anti-competitive agreements. Investigations can start in three ways: a complaint from someone affected, a request from the government, or the CCI deciding to act on its own (suo motu). The CCI often involves its Director General to help with investigations, as outlined in Sections 26 and 27.
If the CCI finds an agreement violates Section 3, it can:
Declare the agreement void, meaning it has no legal effect.
Fine the companies or people involved up to 10% of their average turnover from the last three years.
Order changes, like breaking up parts of a business, though this is rare and can be reviewed by courts.
Recent changes in the Competition (Amendment) Act, 2023 (published on April 11, 2023) allow businesses involved in vertical agreements to settle cases more easily. They can propose commitments or settlements after the Director General’s report but before the CCI makes a final decision.
Case Studies and Practical Application
Here are some real-world examples of how Section 3 has been used to tackle anti-competitive agreements:
Price Fixing: In the case of Express Industry Council of India v. Jet Airways, Indigo Airways, & Spice Jet Airways (2018), the CCI looked into claims that airlines were working together to set fuel surcharges. Although no solid proof of collusion was found, this case shows how closely the CCI examines price-fixing claims under Section 3(3)(a).
Output Controls: In Builders Association of India v. Cement Manufacturers and Ors. (2016), the CCI investigated whether cement companies were limiting production to control prices. While no price-fixing was proven, the case shows how Section 3(3)(b) is applied to output restrictions.
Bid Rigging: In Re: Aluminium Phosphide Tablets Manufacturers (2012), the CCI found that companies were rigging bids for government contracts, violating Section 3(3)(d) by distorting the bidding process and harming competition.
Vertical Agreements: In Shamsher Kataria v. Honda Siel Cars India Ltd. (2014), the CCI looked at car manufacturers imposing territorial restrictions and tie-in deals, showing how Section 3(4) applies to vertical agreements.
Summary
Section 3 of the Competition Act, 2002 is a strong tool for stopping agreements that harm competition, ensuring businesses play fair and consumers benefit from competitive markets. It clearly defines what kinds of agreements are prohibited, offers exceptions for certain cases, and gives the CCI the power to enforce the rules. By doing so, it supports the Act’s goal of creating a fair and competitive economy in India.
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Section 3 of Competition Act: FAQs
Q1. What kind of agreement is prohibited under Section 3 of the Competition Act, 2002?
Section 3 bans agreements between businesses, people, or groups that cause or are likely to cause a significant negative impact on competition in India, such as price fixing, market sharing, or bid rigging. These agreements are considered void and unenforceable.
Q2. What types of agreements are covered under Section 3?
It covers two types: Horizontal Agreements: Deals between competitors, like price fixing, limiting production, dividing markets, or rigging bids (Section 3(3)) and Vertical Agreements: Deals between businesses at different levels of the supply chain, like tie-ins, exclusive supply deals, or setting resale prices (Section 3(4)), but only if they harm competition.
Q3. Are there any exceptions to Section 3?
Yes, exceptions include: Joint ventures that improve efficiency without eliminating competition, agreements protecting intellectual property rights (e.g., patents, trademarks) under Section 3(5) and Agreements focused only on exports, so they don’t affect competition in India.
Q4. How does the Competition Commission of India (CCI) enforce Section 3?
The CCI investigates complaints, government requests, or starts its own probes. If it finds a violation, it can declare the agreement void, impose fines up to 10% of a company’s average turnover for three years, or order changes to stop the anti-competitive behavior.
Q5. What is the difference between horizontal and vertical agreements under Section 3?
Horizontal agreements (like cartels between competitors) are automatically assumed to harm competition under Section 3(3). Vertical agreements (like deals between suppliers and distributors) under Section 3(4) aren’t automatically harmful, the CCI must prove they cause a significant negative impact on competition.
