Table of Contents:

Why Competition?

The New Regime Background & Introduction

The Competition Act, 2002 - Key Provisions

Impact of competition law in distributorship model.

Risk Mitigation - Critical Steps

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Competition in market is BENIGN:

Reduces prices

Improves quality

Boosts choice

Facilitates better governance

Promotes efficiency

Encourages innovation

Punishes THE LAGGARDS

Ensures AVAILABILITY OF GOODS in abundance of acceptable

quality at affordable price (AAA)

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Five Dimensions of the Act:

Anti-competitive Agreements (ACAs) [Sec. 3]

Abuse of Dominance (AOD) [Sec. 4]

Combinations, include acquisition of shares, voting rights, assets/control, mergers, amalgamations and takeovers [Secs. 5 & 6]

Advising, on a reference, to Government in respect to its policies/law

Advocacy creating awareness

(All these dimensions of law are in force)

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Powers of the CCI:

Issue directions to discontinue or not to re-enter (Cease & Desist orders) in relation to ACA/AOD);

Grant interim relief during enquiry;

Impose penalty on producers, distributors, suppliers of up to three times of average profits or up to ten percent of average turnover for each year of continuance of agreement, whichever is higher, in case of cartel like behavior;

Impose penalty which shall be not more than ten percent of the average of the turnover for the last years , for other violations.

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Contd

Impose penalty on delinquent directors and functionaries who are delegated with requisite powers;

Declare anti-competitive agreements void;

Order division of dominant enterprise or groups;

Approve/approve with modifications or block combinations;

Any other orders which the CCI may deem fit.

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Institutional Framework:

The CCI Primary body to implement the law; Office of the DG to assist the CCI in carrying out investigation

The COMPAT- For appeals against CCI Orders and to adjudicate Claims for Compensation.

Supreme Court of India For appeals against orders of COMPAT.

Central Government Vested with power to supersede the CCI; issue directions; grant exemptions from applicability of the Act.

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Powers of the DG:

Requisition of information from the parties

Requisition of information from ex-employees, distributors etc.

The DG can summon and record evidence during investigation.

DG can exercise the powers of Search and Seizure (Dawn Raids).

DG are vested with the powers of a Civil Court to aid Inquiry/Investigations

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Relevant Market includes relevant product market and relevant geographic market.

Relevant Product Market comprises all those products or services which are regarded as interchangeable or substitutable by the consumer.

United Brands v. Commission It was argued that bananas were in the same market as other fruit. The ECJ held that the banana constitutes a separate market since it has special features distinguishing it from other fruits, like it is the only fruit which can be consumed by infants and the elderly.

Relevant Market

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Contd

Relevant Geographic Market refers to market comprising the area in which the conditions of competition are distinctly homogenous.

This could be a small town, state, across the nation or even global.

For instance, relevant geographic market in the DLF case has been considered as Gurgaon on the basis that the conditions of competition between Delhi and Gurgaon and distinctly homogenous and they cannot be treated as the same (pending appeal). Further, in the cement cartel case, the relevant geographic market is considered as India since the same conditions are prevalent pan-India regarding sale of cement.

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Section 3 prohibits agreements in respect of

production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India.

The Act declares that agreements entered into in contravention of the above prohibition shall be void.

Anti-Competitive Agreements (ACAs):

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Horizontal and Vertical Agreements

Raw Material

Supplier Raw Material

Supplier Raw Material

Supplier

Manufacturer Manufacturer Manufacturer

Retailer

Wholesaler Wholesaler Wholesaler

Retailer Retailer

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Horizontal Agreements (Presumption of AAEC):

Agreements between enterprises or persons engaged in similar trade of goods or provision of services.

Agreements including cartels that:

(a) fix prices,

(b) limit or control production,

(c) allocates markets or customers, and

(d) rig bids/collusive bidding

are presumed to have an appreciable adverse effect on competition (AAEC)

The prosecutor needs to prove existence and not the harm caused.

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e.g. DISCUSS ABOUT PRICE INCREASE, TIMING OF PRICE INCREASE WITH COMPETITORS

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Retail price is too cheap. Why dont we increase the wholesale price by 5%?

I agree. Lets implement the price increase next month.

Competitors Sales Person Medtronics

Sales Person

e.g. DISCUSS ABOUT CUSTOMERS AND

TERRITORY WITH COMPETITORS

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West district of A city is our territory. Do not sell your products in our territory.

Okay. East district is our territory. Promise to us that you will not sell your products at our territory.

Medtronics Sales Person Competitors Sales Person

Contact with former boss (Fictional Case)

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What should you say? Think of a script.

Ex Medtronic Sales Person working at Competitor

Medtronic sales person

Long time no see. I did not know you were working to get this business for Medtronic. Why dont we keep in touch and exchange information?

Answer

" I agree. Give me your contact details so that we can exchange information.

" It is really nice to see you again. Why dont we go out for dinner tonight. There are lots of things that we should talk.

Leave the place after saying "It is nice meeting you again. But we are competitors now, and competing with each other for this deal. It is against our companys policy to interact with competitors. I am afraid I will have to say I have to go.

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Vertical Agreements (Rule of Reason)

Agreements between enterprises at different stages or levels of the production chain.

What is the Rule of reason analysis?

A rule of reason analysis involves determining whether conduct can be justified on the basis that its pro-competitive gains outweigh its anti-competitive effects.

Agreements are not deemed anti-competitive unless if they cause or are likely to cause AAEC in

India.

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Examples of Competition issues in vertical relationships

Vertical agreements include:

(a)tie-in arrangements any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods.

(b)exclusive supply- any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person.

(c)exclusive distribution agreement- any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of goods.

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Contd

(d) refusal to deal- any agreement which restricts, or is likely to restrict, by any method the person or classes of persons to whom goods are sold or from whom goods are bought;

(e) resale price maintenance- any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be prices stipulated by the seller unless it clearly stated that prices lower than those prices may be charged.

The scope and ambit of above concepts is broad as the definition has been made inclusive.

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Factors for Determination of AAEC:

Creation of barriers to entry;

Driving existing competitors out of market;

Foreclosure of competition by hindering entry into market;

Accrual of benefits to consumers;

Improvements in production or distribution of goods or supply of services;

Promotion of technical, scientific and economic development;

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The Act provides for imposition of lesser penalty by the CCI in cases of violation of Section 3 where a person makes FULL, TRUE and VITAL disclosure of a cartel to the CCI; for e.g. Samsung Electronics received full immunity (100%) from fines under the Commission's leniency programme in the LCD Cartel case. LG got a 50% reduction.

The Leniency System is targeted at cartel participants and seeks to induce participants to break rank and turn approver against other cartel members.

A successful applicant can avail the benefit of a reduction in penalty in the range of up to 100% or 50% or 30% keeping in view the first mover advantage.

Risks The Leniency Provision

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Exclusions:

Section 3 does not:

- restrict right of IPR holder to prevent infringement of IPR or impose Reasonable Conditions on use of such IPR;

- restrict right of a person to export goods from India.

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The Act does not prohibit dominant position it only frowns upon the abuse thereof.

Dominant Position refers to a position of strength enjoyed by an enterprise or group in the relevant market, in India, which enables it to -

Operate independently of competitive forces prevailing in the relevant market; or

Affect its competitors or consumers or the relevant market in its favor.

Group is open ended.

Abuse of Dominant Position

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Contd

Determination of Abuse of Dominant Position involves:

Identifying the relevant market

Establishing the dominant status of the enterprise or group; and

Evaluation of the conduct to determine whether it falls within abuses listed under the Act.

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EXPLOITATIVE ABUSES i.e., conduct which results in exploitation of others in the value chain, for e.g.,

- imposition of unfair or discriminatory conditions

- imposition of unfair or discriminatory prices e.g., predatory pricing.

EXCLUSIONARY ABUSES conduct which interferes with the competitive process, for e.g.,

- Denial of market access;

- Making conclusion of contract subject to acceptance of supplementary obligations

- Limiting production of goods, provision of services; scientific development;

- Using dominance in one relevant market to enter into or protect other relevant market ;

Types of Abuses

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Market share of the enterprise Size and resources of the enterprise Size and importance of the competitors Economic power of the enterprise

Vertical integration of the enterprises

Dependence of consumers on the enterprise

Determination of Dominant Position - Factors

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Contd

Dominant position as a result of statute

Barrier to entry

Countervailing buyer power

Market structure and size of market

Social obligations and social costs

Contribution to the economic development

Any other factor (residuary factor)

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Regulation of Combinations Merger Control:

The Act regulates combinations (merger control) which involves an ex ante assessment of changes in the structure of the relevant market.

No combination can take effect unless the transaction is approved by the CCI.

Combination Regulations sets out the procedure of filing notice, fee payable and timelines.

Failure to file notice of a reportable transaction attract penalty.

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Contd

Combinations include:

- Acquisition of control, shares, voting rights, or assets

of another enterprise; or

- Acquisition of control where the acquirer already has control over a similar/identical business or

- Merger or amalgamation of enterprises

where such transactions cross the asset or turnover thresholds set out in the Act.

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Risks Impact on Companies

High penalties/liability for compensation;

Possible extra fine and/or imprisonment for breach of CCI orders;

Legal Expenses;

Loss of Reputation;

Agreements rendered null and void;

Division of dominant enterprise;

Loss of business from the harmed parties;

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A word of caution in communication?

Email, SMS, FAX, Communication in any e-mode are admissible evidence.

Skillful communication is imperative.

Do not sound guilty .

Do not use expression like destroy after reading.

Avoid the exaggerated use of power words(e.g. well destroy them, we will nail them to the wall)

Avoid giving the false impression that a customer is being given favored treatment( e.g. None of our other customers is getting this special discount).

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Contd

Do not give false impression that some action is being taken as a result of an agreement between competitors ( e.g. Everyone in the industry agrees that prices are too low).

Be carful with the use of the word market (e.g. we are dominant).

Marking a document personal and confidential or keeping it in your personal files or home office or computer does not mean that it wont be discovered.

Do not use the term market when referring to distribution channels.

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