COMPETITION LAW

TOPIC:-

“Horizontal and Vertical Restraints on Competition”

SUBMITTED BY: SUBMITTED TO:

Vaibhav Patel Asst Prof – Dr Mayank Pratap

BALLB (IX SEMESTER)

ROLL NO.- 61
 ACKNOWLEDGEMENT

This project is done with the help of different journals, websites and magazines. My
supervisor teacher Dr.Mayank Pratap has also helped me a lot in pointing out my mistakes
and channelized me in a proper way. He directed me about how to proceed with the data. I
am highly obliged to him for his kind support and instructions. I am also thankful to the
companies whose secondary data has served my purpose. I hope my project on topic
Horizontal and Vertical Restraint on Competition will give an idea about and how it is
followed along with its importance.

VAIBHAV PATEL
S. No. Title Page

1 Introduction 1

2 Common Law Doctrine of Restraint 2

3 Anti- Competitive Agreements 3

4 Restraint on Competition: Vertical and Horizontal 4

5 The Differences Between Horizontal and Vertical 6

6 Position of restraints in the Indian market 7

7 Conclusion 8

8 Bibliography 9
 Introduction
When there exists an economic rivalry amongst the companies or entities for drawing the
maximum number of customers and make 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
the creation and maintenance of a conducive environment for business do that the country can
prosper.

The motto of all the competition laws operational in various parts of the world is to make
sure that there exists such an environment where all the companies can deal with fair
competition.

The Indian Competition Act has just bloomed from the bud and is still going through various
improvements. A lot of time has not lapsed since the new competition law has been adopted.
MRTP Act was used to operate the competition in market before the Competition Act,
2002came 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 a 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 create an adverse impact on the competition. It has also cast a duty upon
the Competition Commission of India to prohibit all those practices that produces an adverse
impact on the competition in the Indian market and to get all the objectives stated in the
preamble implemented.
 Common Law Doctrine of Restraint
The modern competition law owes a lot for 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 that 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) Ltd1 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 finds its branches in US jurisdiction as well.
Chief Justice White explained the relationship between the Sherman Act and the doctrine
with the help of the matter of Standard Oil Company v. US2 and held that the literalist
approach 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, there were many cases that 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.

A difference can be seen in the method of carrying out an approach under both the laws. In
the 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 the approaches is similar and both the approaches also
determine the reasonableness of the restraint caused by using public interest as a yardstick.

Anti- Competitive Agreements

The competition that exists amongst the firms taking part in the similar chain of production is
known as horizontal agreement while the competition that exists amongst the parties taking
part in the same chain of supply. Horizontal agreements are capable of creating a serious and

1
[1968] AC 269
2
221 US 1 (1911)
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 welfare and
the interests of the consumers can be promoted. 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 likely to cause an adverse
impact on the competition prevailing in the Indian market. If any company enters into an
agreement, which is against the general restriction as prescribed by the Act, is declared as
both null and void.

There are many kinds of anti-competitive agreements as described by the Competition Act,
2002. It comprises of certain decisions or actions done by an association or a group of
persons by the means of an agreement, arrangement or understanding, which is either formal
or informal in nature, and comprises of cartels and also covers a different kind of vertical
restraint on trade. The arrangements or agreements 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.
 Restraint on Competition: Vertical and Horizontal
The restraints in competition law can be broadly divided as 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 the Horizontal Agreements as
they lead to the situation where the chances of a monopoly increase. However, sometimes the
enterprises come into horizontal agreements such as harmonization of technology or
agreement on standards etc., the purpose of such agreements may not be anti-competitive in
nature.

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

Thus, the commercial life has a feature known as vertical agreements and in the matter of
Beguelin Import v. GL Import Export3, it can also be regarded as an alternative for vertical
integration. The competition law has laid down certain regulations for vertical agreements
has led to a lot of controversies. 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 be not allowed to cause any effect on competition.

The Differences Between Horizontal and Vertical Cooperation in EU Competition Law

The content below examines differences between horizontal and vertical cooperation in
European Union (EU) competition law. To better understand the approach of the Court of
Justice of the European Union (CJEU), the analysis also compares the differences that the
United States Supreme Court (US SC) makes between horizontal and vertical cooperation.
The analysis leads to the conclusion that the CJEU is substantially driven by the principles of
market integration and in most instances does not make as strong of a distinction between
compared to the distinction made by the US SC.

3
CMLR 81 [1972]
The analysis below is based on 14 leading EU competition law cases in the area of concerted
practices. The majority of the cases look into horizontal type cooperation as opposed to
vertical cooperation.

Background:

Article 101 prohibits “all agreements, decisions of associations of undertakings and concerted
practices which may affect trade between Member States…” Restraint of competition may
take place at different levels of economic activity in the Common Market; in a vertical or
horizontal type of arrangement.

Definitions:

EU case law defines horizontal as “cooperation between two or more actual or potential
competitors” and vertical as “cooperation between companies operating at different levels of
the production or distribution chain.” At this point in the analysis, the US and EU courts
define horizontal and vertical cooperation very similarly. In the US, horizontal cooperation is
also generally defined, as restraints imposed by agreements between competitors and vertical
restraints imposed by agreement between firms at different levels of a distribution chain.

Some of the most common horizontal cooperation in the market includes information
exchange, joint purchasing agreements and research and development agreements.[4] In
contrast, some of the most common vertical cooperation includes exclusive distribution,
franchising and resale price restrictions.
 Position of restraints in the Indian market
The competition act of 2002 deals with the 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 welfare and
the interests of the consumers can be promoted. 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 likely to cause an adverse
impact on the competition prevailing in the Indian market. If any company enters into an
agreement, which is against the general restriction as prescribed by the Act, is declared as
both null and void.

Further, the whole concept of appreciable adverse effect 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 and
pursuant to this, the anti-competitive agreements are under strict rules and regulations.

The escalation of anti-competitive practices in the competition law regime necessitated the
competition authorities to modify the existing competition framework. To create a robust
competition structure, the Competition Commission of India (“CCI” or “Commission”),
based on the recommendations of the Competition Law Review Committee (“CLRC”),
introduced the draft Competition (Amendment) Bill, 2020 (“Bill”) in February 2020. The Bill
proposed changes, both in substantive and procedural aspects of the law. Among other things,
it aims to settle the conundrum persisting under the Competition Act, 2002 (“Act”) vis-à-vis
vertical agreements by amending Section 3(4) of the Act. The limited and strict interpretation
of Section 3(4) is standing as a roadblock in the current competition fabric. The Bill, by
delving into Section 3(4) seeks to resolve its deficient applicability in considering cases of
anti-competitive agreements.

Section 3 of the Act sets out prohibition on anti-competitive agreements which causes or is
likely to cause an appreciable adverse effect on competition (“AAEC”). Even though the Act
does not explicitly mention the terms ‘horizontal’ and ‘vertical’ agreements, it prohibits them
nature under Sections 3(3) and 3(4) of the Act respectively. The Bill purposes to decipher the
existing lacuna in Section 3(4) by expanding its horizon to include “other agreement”
amongst enterprises or persons operating at different levels of production chain in different
markets. In light of the above, the decision of CCI in the case of Ramakant Kini v. L.H.
Hiranandani Hospital4 (“Ramakant Case”) becomes crucial to analyse.

4
Appeal No. 19/2014
The authors in this blog will critically analyse the interpretation of CCI provided in the
Ramakant Case. The Competition Appellate Tribunal (“COMPAT”) though overruled the
said ruling, failed to address the obscurity in the reasoning of the CCI. The authors shall,
therefore, reflect how the CCI’s decision goes against the set precedents, scheme of the Act
and settled principles of interpretation. Moreover, the authors stress upon the need for the
draft Bill to facilitate the concerns arising in the e-commerce industry and urge on the
exigency to include “other agreement” under Section 3(4) of the Act.

Conclusion
A perusal of the above makes it clear that the draft Bill is a welcome step to the present
framework, as it will not only stretch the scope of Section 3 but will also cater to the
agreements that do not strictly fall under the set parameters of horizontal and vertical
agreements. Further, the amendment will end the confusion of standalone applicability of
Section 3(1) created by the Ramakant Case as all other agreements except horizontal
agreements will fall under Section 3(4). Likewise, it will resolve the existing or potential
ambiguity surrounding the burden of proof as the CCI will bear the burden of proof in all
cases except those falling under Section 3(3).

Furthermore, the present Bill can also be construed in light of the e-commerce industry as it
assists to remove the inadequacy and insufficiency of the CCI in assessing anti-competitive
agreements in the digital markets. It will aid CCI to disregard its current fit squarely approach
for the anti-competitive concerns arising in the e-commerce sector. Along these lines, the
agreements in the e-commerce market will no longer have to abide by the strict classification
provided under Section 3(4) to fall into the category of vertical agreements.

Moreover, the Bill will augment the investigative powers of the Commission to assess a wide
range of anti-competitive agreements that may have AAEC. Therefore, the authors are of the
view that the amendment in Section 3(4) is a desirable move to remove the vagueness in the
current realm of anti-competitive agreements.

BIBLIOGRAPHY

This project has been done with the help of different books, magazines, journals and websites
• http://hdl.handle.net/10603/272558

• https://www.cci.gov.in/sites/default/files/advocacy_booklet_document/AOD.pdf

• http://www.legalservicesindia.com/article/729/Abuse-o-Dominant-Position.html

• http://docs.manupatra.in/newsline/articles/Upload/49B54588-42DE-4173-A967-
90790B35ED50.pdf

• Dr.H.K. Saharay, Textbook on Competition Law(2ND Edition), Universal Book