Competition Act, 2002: An Incomplete Act
The various forms of mergers, amalgamations and combinations in India are done as per the provisions of Competition Act, 2002. Prior to competition Act, 2002 there was MRTP ACT, 1969 Act, 1969(monopolies and restrictive trade practices act) then in 2002 this act was repealed and Competition Act 2002 was enacted. Basically MRTP ACT, 1969 Act, 1969 was not competent to deal with the contemporary mergers, dealings etc. therefore there was a need to develop a new act. Most of the part of competition Act is similar to that of MRTP ACT, 1969 but there are certain changes which were introduced in the MRTP ACT, 1969 Act, 1969 and some new things are added and Competition Act, 2002 was enacted after the recommendations of S V S Raghavan Committee.
Competition Act, 2002 and MRTP ACT, 1969
Following are the additions in the MRTP ACT, 1969 which are there in Competition Act, 2002
• Section 2 of the Competition Act deals with definitions of various terms, certain terms like ‘ acquisition’ , ‘ cartel’ , regulations’ , ‘ statutory authority’ are included which were not there in MRTP ACT, 1969.
• Though MRTP ACT, 1969 has included ‘regulation of combination’ under sec-66 but the term combination as such was not explained but in Competition Act, 2002 sec-5 has defined combination as ‘the acquisition of one or more enterprises by one or more persons or mergers or amalgamation of enterprises shall be a combination of such enterprises and persons.’ Moreover this section also explains who are competent for combination i.e. a specified limit of turnover of parties has been set.
• Both competition Act and MRTP ACT, 1969 forms commissions under sec-7 and sec-5 of respectively. MRTP ACT, 1969 has no provision for procedure for deciding a case where members of a bench differ in opinion whereas sec-24 of Competition Act, 2002 says that such cases shall be decided according to opinion of majority. Competition Act also mentions the jurisdiction of the bench (sec-25) : A complaint can be instituted (i) where the respondent resides or carries on business (ii) the cause of action arises.
• Also the powers conferred to the commission of Competition Act are much wider than that of MRTP ACT, 1969. Such powers include power to grant interim relief where it deems it necessary (sec-33); power to review (sec-37) and rectify (sec-38) its own orders; Sec-39 of Competition Act points out that orders of commission shall be executed in the same manner as that of the High Court or Principal civil court.; sec-61 says that no civil court shall have jurisdiction in cases which the commission is empowered to determine.
• There are certain combinations which are likely to have an appreciable adverse effect on competition but the same adverse effects can be eliminated after suitable modifications. MRTP ACT, 1969 hasn’t given space to such combinations whereas sec-31 of Competition Act has included these combinations and has prescribed procedure for them.
• MRTP ACT, 1969 was enacted in 1969, so legislature could not foresee about those acts taking place outside India but having an effect on competition in India, thus sec-32 of Competition Act, 2002 has included this provision.
• MRTP ACT, 1969 is silent about the sums realized by the way of penalties but Competition Act sec-47 points out that this sum will be credited to the Consolidated Fund of India.
• A new chapter (Ch-vii) has been inculcated in CA which deals with advisory jurisdiction of competition commission. Sec-49 i.e. competition advocacy says that the central government while formulating a policy on competition can seek opinion of Competition commission but such opinion is not binding.
• In order to avoid corruption or misappropriation of money of competition fund sec-52 and sec-53 are included which directs the commission to maintain paper accounts, other relevant records and to prepare an annual report giving a true and full account of its activities during the previous year and copies of the same will be forwarded to central government.
• Though there has not been any change regarding the particulars of offence but MRTP ACT, 1969 has laid stress on imprisonment as punishment rather than fine on the other hand Competition Act, 2002 had introduced huge fine as penalty and had avoided imprisonment. E.g. Competition Act gives one year imprisonment when there is contravention of orders of commission and failure to pay the penalty (sec-42) and in all other offences accused has to pay fine.
• Also the amount of fine in Competition Act is much more than in MRTP ACT, 1969. E.g. For the offences in relation to furnishing of information Competition Act imposes fine of Rs. 10 lakhs (sec-45) whereas for the same offence MRTP ACT, 1969 imposes a fine of Rs. 500.
Though Competition Act has been enacted with a view to eradicate the shortcomings of MRTP ACT, 1969 but still Competition Act, 2002 is an incomplete act. Basically Competition Act, 2002 haven’t explained the basics of competition. Chapter 1 (Preliminary) deals with definitions and explanation of terms, now many basic terms has not been defined. Similarly in Chapter 2 (Prohibition of certain agreements, Abuse of dominant position and regulation of combinations) only headings have been given but the particular cases under those headings has not been included.
According to researcher more work is required in the second chapter as other chapters are almost complete simply because this chapter deals with such issues which are not uniform and varies from country to country. Such as Chapter 3- Competition Commission of India; Ch 4-Duties, power and functions of commission; Ch 5- Duties of Director General etc. As per the Indian conditions these chapters have rightly been framed.
Almost whole of the Competition Act, 2002 is borrowed from Sherman Act, 1890; Federal Antitrust Act: Clayton Act and European Community Treaty thus these are the basic sources of Competition Act, 2002. So for further modifications in the act the above said sources can be consulted.
Sherman Act, 1890
Sherman Act declared illegal all contracts, combinations or conspiracies in restraint of trade or commerce among the states or territories or with foreign nations. The basic requirement is that there should be an agreement or mutual commitment to engage in a common course of anticompetitive conduct.
Monopolize and Conspiracy to monopolize:
Section 2 of the Sherman Act outlawed (a) Monopolization (b) attempt to monopolize (c) conspiracies to monopolize
This section has two basic elements 1.) Possession of monopoly power in relevant market 2.) The willful acquitsion or maintenance of the power. A person is not guilty of monopolization unless he has monopoly power i.e. power to control prices and exclude competition. Therefore offence of monopolization requires monopoly power and intention to monopolize, but there is no monopolization if the defendant’s monopoly power grows as a consequence of superior product, business acumen or historical accident.
The competition act has included monopolization but it has not included conspiracy to monopolize. Now Sherman Act proscribes even attempt to monopolize. The difference between actual monopolization and attempt to monopolization is that in actual monopolization general intent to do act is required but in attempt to monopolize specific intent, which can be established by evidence of unfair tactics on part of defendant, is required. To establish conspiracy to monopolize three basic things are to be proved
(a) proof of conspiracy
(b) specific intent to monopolize
(c) an overt act in furtherance of conspiracy and there is no need to establish the market power.
A conspiracy in restraint of trade differs from a contract in restraint of trade as a conspiracy is the result of contract rather than contract itself. The plaintiff must submit that there was a conscious commitment to a common scheme. An association can only be held liable for concerted action if it acted as an entity. When a group of competitors enters into a series of separate but similar agreements with competitors a strong inference can be drawn that such agreements are the results of the concerted action.
Competition Act has included the term association of price i.e. price fixing but it hasn’t elaborated the vertical and the horizontal price fixing. If a manufacturer, by using his dominant position, fixes the price with retailer then it is vertical price fixing but if manufacturer fixes price with other manufacturer then it is horizontal price fixing. Vertical price fixing is also knows as price maintenance e.g. Agreement between a film distributor and exhibitor is illegal. A patentee cannot control its resale price through price maintenance agreements. Generally prices are fixed when they are agreed upon.
Section 1 of Sherman Act also mentions that dissemination or exchange of price information does not itself establish a violation of section 1 rather price information coupled with criminal intent to fix the price violates section 1 of Sherman act. However a combination or conspiracy within section 1 is established where an agreement exists between competitors to furnish price information upon request.
Price parallelism is not outlawed by Sherman Act. An agreement among competitors to fix the resale price of their products violates Sherman Act. Open announcements of prices and terms does not violate Sherman Act but after the announcement if opportunities for variation of prices and terms is cut off in the course of competition then it is illegal.
Price cutting does not violate the Sherman Act. A manufacturer has the right to respond to the lower prices of its competitors with reduced prices on its products as this is considered as part of the competition.
Profit maximizing theory
There is a Profit maximizing theory in Sherman Act according to which, the act is violated if the defendant purposely failing to maximize its profits with the intent to injure the competition, even though its prices have consistently been set above its total average costs.
Certain doctrines such as General Electric Doctrine are there in the Sherman Act. According to the General Electric Doctrine if a manufacturer of an article fix prices as he himself is selling to consumer through sales agents then it is not violative of Sherman Act.
There is something called as coercive conduct in Sherman Act. A famous case Parke Davis Decision holds that a price fixing combination may be inferred from evidence that the manufacturer in seeking compliance with its suggested resale prices imposed restraints on its dealers by coercive conduct and dealers involuntary adhere to those restraints.
In cases where price is fixed in patent license agreements Sherman Act holds that if there is no conspiracy and no effort to monopolize then patentee may lawfully license another to make and vend the patented device at prices fixed by the patentee. An arrangement between patent holders to fix prices on the patented products for themselves and their licensees violates Sherman Act.
The Competition Act, 2002 has not elaborated the various sorts of tying agreement. It has only defined tie-in agreements as "tie-in arrangement" includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods;” But in the Sherman Act it has been very well explained. Sherman Act defines Tying Agreements as an agreement by a party to sell one product but only on the condition that the buyer also purchase a different product or agree that he will not buy that product from another supplier. Tying agreements are not illegal per se. An illegal tying agreement takes place when a seller requires a buyer to purchase another, less desired or cheaper product, in addition to the desired product, so that the competition in the tied product would be lessened. Sherman act also pointed out that there should be separateness of products which are tied because if the products are identical and market is same then there is no unlawful tying agreement.
Now there are various sorts of tying agreements.
• Requiring dealer to take unwanted products
• Parts tied to sale i.e. the owner of a patent cannot expand the patent monopoly by attaching conditions to its use.
• Supplies tied to sale or license, it means that the mere possession of a patent does not authorize a patentee to condition a license to use the patent so as to tie the use of patented device or process which lie outside the patent monopoly.
• Services tied to sale. In this the Supreme Court is unwilling to accept that an unlawful tying agreement cannot have separate markets for service and parts but the other courts have observed that public’s demand for a product is closely related to, but legally separable from, its demand for installation of the product.
• Credit tied to sale. In this a credit corporation which is manufacturer’s subsidiary violates Sherman act by conditioning its grant of credit to a borrower on the borrower’s agreement to purchase the manufacturer’s product.
Now all these tying agreements are not explained in the Competition Act, 2002. Mere definition of tie-in agreement is given which would not suffice.
Moreover Sherman Act has also included Reciprocal Dealing arrangements where two parties act as both buyer and seller. It is basically of two types (a) voluntary (b) coercive. Coercive is similar to tying agreements and is violative of Sherman Act.
Sherman Act has a special category under refusal to deal called as Group Boycott. Under the Competition Act, 2002 refusal to deal is defined in section 3(4)(d) as "refusal to deal" includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought. However Sherman Act has explained various conditions of Group Boycott. Sherman Act says that Group Boycott are unlawful under section 1, there is a Supreme Court authority which holds that Group Boycott is illegal per se but recent decisions looked at the issue whether per se condemnation is necessary or not. Now in case of Horizontal restraints per se rule is applicable but in case of Vertical restraints majority court view is that per se rule is not applicable. There are many sorts of Group Boycott:
• Group Boycott of competitor i.e. joint effort by a firm with dominant market position to disadvantage competitors violates section 1 of Sherman Act.
• An agreement among competitors to stop selling to certain customers is illegal.
• Boycott by physicians, doctors, advocates of a particular customer is unlawful.
• Customer boycott of supplier may or may not, on the basis of circumstances, violate Sherman Act.
Competition Act has used the word amalgamation many times but it hasn’t explained much about it. As per the Sherman Act an Amalgamation is unlawful in two ways firstly if the amalgamation eliminates substantial competition and secondly if it created a monopoly. Basically there are two types of amalgamation horizontal and vertical. In Horizontal amalgamation for example two companies are major competitive factors in a relevant market a merger or consolidation between them violates the Sherman Act if such action ends competition. However if a company is losing money and has decided to wind up then its horizontal amalgamation is not illegal. In vertical amalgamation it is not illegal unless its illegality turns on (a) the purpose or intent with which it was conceived (b) the power it creates in the relevant market.
Misuse of Patents
Competition Act, 2002 has not given much space to misuse of patent, only section 5 has mentioned patent whereas Sherman Act has laid down rules for the misuse of patent. It points out that a valid patent does not give any exemption to patentee from Sherman Act, but patent misuse does not necessarily violate Sherman Act. The enforcement of a patent known to be invalid is unlawful therefore attempted enforcement of a patent does not violate act unless it is done in bad faith. Sherman Act has also made provision for Cross licensing patent and pooling patents. Cross licensing patent is lawful but it is unlawful when it is used to effect monopoly, to fix prices, to impose an unreasonable restraint. Patent holders violate the act by pooling their patents and fixing prices for themselves and their licensees.
Federal Antitrust Laws: Clayton Act:
After the Sherman Act to supplement the Sherman Act there was another act enacted in 1914 named as Federal Antitrust Laws: Clayton Act. Now Competition Act is required to add some important things from this act also.
This act has defined vertical and horizontal mergers. Vertical merger is a merger of buyer and seller and Horizontal merger is a merger which is of direct competitors. A merger which is neither vertical nor horizontal is conglomerate merger. Competition Act has not mentioned about the conglomerate mergers. As per the Clayton Act a pure Conglomerate merger is one in which there is no relationship between the acquiring and the acquired firm.
Clayton Act has also defined the horizontal and vertical, amalgamations, product extension mergers and joint ventures. Amalgamations between firms performing similar functions in the production or sale of comparable goods and services are known as the Horizontal Amalgamation. Now Clayton Act has also mentioned about the burden of proof in Horizontal Amalgamation. It points out that by showing that a horizontal acquisition will lead to undue concentration in the market for a particular product in a particular market; the government establishes a presumption that the transaction will lessen the competition. The burden of producing evidence to rebut this presumption then lies with the defendants. Clayton Act does not outlaw all vertical amalgamations but it forbids those whose effect may be substantially to lessen competition or tend to create monopoly in any line of commerce in any section of the country. The acquisition of the largest producer, in product extension mergers, by a firm dominant in positioning producing other products violates the Clayton Act because it reduces the competitive structure of the industry by raising entry barriers and dissuading the smaller firms from aggressive competition and because it eliminates the potential competition of the acquiring firm. Competition Act, 2002 holds that joint ventures are legal as far as they increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. In Clayton Act it is given consideration whether the joint venture eliminated the potential competition of the corporation that might have remained at the edge of the market continually threatening to enter.
Failing Company Defence
Apart from that some other things are there in the Clayton Act which is not there in the CA, 2002 such as Failing Company Defence. Section 20(4) of the CA, 2002: For the purposes of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission shall have due regard to some factors one of the factors is possibility of a failing business. In the Clayton Act according to the Failing Company Defence a proposed acquisition may be approved despite its anticompetitive effect if the resources of the target company are so depleted and the prospect of rehabilitation so remote that it faces the grave probability of business failure.
Competition Act, 2002 has not given any place to intention or motive whereas both Sherman Act and Clayton Act has mentioned about the intention of the parties. As per Sherman Act good intentions of parties is no defence to a charge of violating the act and thus will not validate an otherwise anticompetitive practice. Similarly according to Clayton Act it is not required to show that lessening of competition or a monopoly was intended.
Domestic Competition Law: The Fair Trading Act, 1973
This act was passed in England with a view to provide an environment for free competition. This act basically focused on the restriction of monopoly.
Meaning Of Monopoly: there is monopoly when a person or group of persons to secure the sole exercise of any known trade throughout the country. However there are certain monopolies authorized by the statute e.g. Post office with respect to carrying of letters. If there is an agreement which gives control of trade to an individual or group of individuals then it creates a monopoly calculated to enhance prices to an unreasonable extent. It is no monopoly if the control is lawfully obtained by particular persons on particular places or kinds of articles for which a substitute is available.
Monopoly Situation: Monopoly is often created in supply of goods and services and it can be created under two sets of circumstances: (a) At least 1/4th of all the goods or services are supplied in the UK are supplied by or to any one person in such a way that their conduct prevent restrict or distort competition in connection with the production or supply of those goods and services. (b) If by an agreement the result of which is that in UK goods or services of that description are not supplied at all.
Domestic Competition Law: The Competition Act, 1998
The competition Act of 1998 repealed the Fair Trading Act, 1973. This act was divided into two parts firstly as the Chapter 1 prohibitions and secondly as the Chapter 2 prohibitions. Chapter 1 prohibitions prohibits the agreements which fix prices, control production, share market or sources of supply, apply dissimilar conditions to equivalent transactions and make the conclusion of contracts subject to acceptance by other parties of supplementary obligations which by nature of commercial usage have no connection with the subject of such contracts. All such agreements are unlawful.
Chapter 2 prohibitions: The prohibition: Any undertaking which amounts to the abuse of dominant position is prohibited if it consists in:
# Imposing unfair purchase or selling prices
# Limiting production, market or technical development
# Applying dissimilar conditions to equivalent transactions with other trading parties.
# Making the conclusion of contracts subject to acceptance by other parties of supplementary obligations have no connection with th subject of contracts.
Investigation under this act Director General of fair trading may conduct an investigation if he has reasonable grounds to believe that Chapter 1 and 2 prohibitions are infringed. However no such power is given to director of CCI.
Penalties: for the above said infringement the fine can be imposed which will not exceed 10 % of turnover of undertakings.
Immunity from penalties for small agreements and for conduct of minor significance however that immunity can be withdrawn by director general.
European Community aspect of Competition Law:
Objective (i) political objective of closer relationship between member states (ii) economic objectives of harmonious and sustainable development of economic activities and expansion. The basic approach of community policy is free competition. (free competition- assumes “laisez faire” approach i.e. letting natural market forces of supply and demand find their own levels and ensuring that the strong will prevail over the weak.)
Fair competition – implies some control of market to ensure that it develops in accordance with certain predetermined norms of business behaviour.
Restriction or distortion of competition: Agreements between undertakings which affect trade between member states by preventing, restricting or distorting competition within the common market are prohibited. This prohibition does not apply to agreements between companies which are members of the same group.
Concerted Practices: It is a form of co-ordination between undertakings which without having reached agreement have practical cooperation between them for the risks of competition. Undertakings may develop a practice of co-operating so as to eliminate competition between them or by third persons with having specifically agreed to do so. Such behaviour constitutes a concerted practice. It does not require the making of formal agreement. It is illegal under the act. Article 85(1) of the EEC treaty provides that all agreements between undertakings decisions by associations of undertakings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market are unlawful.
The compilation of statistics of the performance of particular sector of industry is unobjectionable. However where statistics relating to sales by individual undertakings are exchanged the EC Commission will infer that the purpose of such exchange was to reduce competition. The exchange of relevant information itself constitutes a concerted practice.
Article 85 of EEC treaty does not apply to agreements or concerted practices between apparent and a subsidiary company. If (i) the two form a single economic unit within which the subsidiary has no real freedom to determine its course of action on the market (ii) the agreements or practices are merely with the internal allocation of tasks as between the undertakings.
The object or effect of preventing restricting or distorting competition: Article 85(i) of EEC treaty considers those agreements as unlawful which have their object or effect the prevention, restriction or distortion of competition within the common market. An agreement may be caught by 85(i) even before it has come into effect and even if the attempts to restrict competition fail. The construction of agreement is more important than the subjective intentions of the parties.
Effect of trade between member states: Article 85(i) does not require proof that an agreement or practice ha in fact appreciably affected interstate trade but merely requires that such agreements or practices are capable of having that effect.
De Minimus rule: it states that only those agreements are prohibited which have an appreciable impact on market conditions. Even the court of justice has held that an agreement falls outside the prohibition in article 85(i) of EEC treaty where it has only an insignificant effect on the markets, taking into account the weak position which the parties have on the product market in question.
Abuse of Dominant position: Article 86: Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it is prohibited as incompatible with the common market in so far as it may affect trade between member states if such agreements’:
# Imposing unfair purchase or selling prices
# Limiting production, market or technical development
# Applying dissimilar conditions to equivalent transactions with other trading parties.
# Making the conclusion of contracts subject to acceptance by other parties of supplementary obligations has no connection with the subject of contracts.
Structure of Article 86: three points are required (a) existence of dominant position (b) improper exploitation of that (c) the possibility that this may be prejudicial to trade between member states.
Dominant position: EEC Treaty does not define it. But court of justice has defined it as
it is the power or ability to fix and determine prices unilaterally or the ability to limit or exclude competition to a significant extent. A dominant position may be abused by one or more undertakings. Collective dominant position is simply the position of power held jointly by the members of oligopoly. Oligopolist as a group realize some form of monopolistic performance on the market.
Abuse: It covers practices relating to the behaviour of the dominant undertaking which are likely to affect the structure of the market, where competition has already weakened. In certain situations conduct which could have become an abuse if it had continued would not be abuse if it was quickly terminated. Dominant position is not necessarily for abuse regardless of the means and procedure by which it is achieved.
General nature of abuse: the existence of dominant position is not per se prohibitedby the treaty rules only such parts which offends article 82 if the firm has achieved has achieved its dominance as a result of internal growth as opposed to market behaviour. Although dominant firms are allowed to take reasonable steps to protect their interest such steps cannot be allowed where their purpose is to strengthen the firm dominant position
Extra territorial jurisdiction: Undertakings situated outside the European Community may be subject to community rules of competition. However the application of community competition law outside the member states raises procedural problems.
Conditional Clearance : According to section 31 of the CA, 2002 there are certain combinations which are likely to have an appreciable adverse effect on competition but the same adverse effects can be eliminated after suitable modifications then the commission it may propose appropriate modification to the combination. Now even if European commission finds that a merger can eliminate competition the parties may try to correct the likely effect. If the European Commission is satisfied that the commitments would maintain or restore competition in the market, thereby protecting consumer interests, it gives conditional clearance for the merger to go ahead. It then monitors whether the merging companies fulfill their commitments and may intervene if they do not.
Penalties: Under regulation 17 of EEC treaty EC commission can impose fine for infringement of article 85 and 86 of EEC treaty. The fine is imposed basically on two basis (i) the gravity of infringement (ii) the duration of infringement.
A fine between 100 to 5000 units of account is imposed for supply of wrong information, incorrect or misleading information. Fine from 1000 to 1000000 units of account and not exceeding 10% of turnover is imposed for the infringement of article 85(i) or 86 of EEC treaty and breach of any obligation in application of article 85(3) of EEC treaty.
There is also provision for periodic penalty payment. Fines from 50 to 1000 units of account per day can be imposed in order to compel them:
# To put an end to an infringement of article 85 and 86 of EEC treaty
# To refrain from any act prohibited under that regulation
# To supply correct and complete information
# To submit to an investigation which it has ordered by a decision under that regulation.
In a developing economy like ours though the legislators have tried twice to frame laws which would provide suitable conditions for a fair and perfect competition but still the present act requires some alterations. It is still incomplete and is silent on various aspects. Some changes in the present act and some new things are very much important and need to be inculcated as it would help in eliminating some serious economic problems like price fixing. Lastly much can be borrowed from the Sherman act and Clayton act and other acts of European nations as they have very perfect piece of legislations on the competition laws.
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