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Stand Alone applicability of Section 3(1) of Indian Competition Act: Panacea or Pandora’s Box?

Geo C Varghese

The CCI’s judgement on 1st December 2015 penalising Alkem Laboratories Limited to the tune of Rs. 74.6 crore reignited the question of standalone applicability of Section 3(1) of the Competition Act, 2002. The case involved Vinayaka Pharma, a distributor of medicines in Palakkad District of Kerala, alleging that M/s Alkem Laboratories Limited had rejected its appointment as a stockist due to its failure to obtain No Objection Certificate from All Kerala Chemists and Druggists Association (AKCDA). The Commission in its order opines that AKCDA’s instructions to Alkem laboratories and the latter’s obedience to same constitute an ‘understanding’ between both of them. It reasons that since the entities are not ‘engaged in identical or similar trade of goods or provision of services’ nor ‘present at different stages or levels of the production chain’, the agreement does not fall under the ambit of section 3(3) and 3(4) of the Act. It is here that the Commission invokes the standalone applicability of Section 3(1) as espoused in the Ramakant Kini Case.

In the Ramakant Kini case, the CCI was of the of the view that ‘the scope of Section 3(1) is vast and is independent of provisions of Section 3(3) and 3(4) ….that the Commission can consider the impact of any agreement which falls within the four walls of Section 3(1)’. This liberal interpretation of Section 3(1) was posited upon the claim that the aims and objectives of the Act i.e. freedom of trade, consumer welfare etc. (as seen in the preamble read with Section 18 of the Act) necessitate such a reasoning. This claim was also predicated upon the reasoning that both sections 19(1) and section 33 only talk of violation of section 3(1) and not of sections 3(3) and 3(4). But we have seen that the Commission's commitment to the standalone applicability of section 3(1) appears to be wavering considering its order on 13 January 2015 in Financial Software and Systems Private Limited case. Here the Commission had observed that the agreements between ACI and ACI banks could not be caught under section 3(4) of the Act since ACI banks are the purchasers of ACI software and hence, do not form part of the production chain as required in Section 3(4). It is in this context of inconsistency and incoherence that the CCI judgement in the Alkem Laboratories case becomes relevant.

Though the COMPAT ruling in the Alkem case questioned as to how the arrangement between parties entered into ‘under coercion’ could be termed as an ‘agreement’, it did not bother questioning the validity of enforcing section 3(1) dehors sections 3(3) and 3(4). Thus the standalone applicability of section 3(1), providing overarching powers to the Commission to take cognizance of any agreement if the same has an AAEC, seems to have been institutionalized in the Indian competition law jurisprudence. But is this in line with the spirit of Indian Competition Act?

Interpreting general prohibitions, i.e. Section 3(1), to be applicable independent of specific provisions, i.e. Sections 3(3) and 3(4) dealing with horizontal restrains and non-horizontal agreements respectively, in effect makes these specific provisions infructuous. This would even make the provisions of the Act applicable even in scenarios where parties are not tied together in any economic relationship. The Department Related Parliamentary Standing Committee on Home Affairs 93rd report on the Competition Bill, 2011 states that anti-competitive agreements amongst enterprises are of two types, i.e. horizontal and vertical. Therefore it would be antithetic to parliamentary intent if we implement Section 3 on firms that do not share vertical or horizontal economic relationships. Thus the claim of commission in Ramakant Kini that the aims and objectives of the Act necessitated a liberal interpretation does not hold much water. ML Tayal’s opinion, in his dissent order in Ramakant Kini case, is prescient at this moment,

"If the legislature intended section 3(1) to be a panacea for all anti-competitive agreements, it  would have not provided the specific prohibitions under section 3(3) and 3(4) since the former would have any way covered the prohibitions contained in the latter. The fact  that the legislature  did  not  do  so,  only  emphasize  the  fact  that  it  intended  the  prohibition  of section  3(1)  to  be  enforced  specifically  in  the  context  of  a  “horizontal contractual  relationship”  (as  under  section  3(3))  and  “vertical  contractual relationship” (as under section 3(4))".

Coming back to the Alkem case, it is evident that the said party is an enterprise involved in the manufacturing of drugs and medicines and AKDCA is an association of enterprises which was clearly not engaged in either manufacturing nor distribution of drugs and medicines in the market. Thus they are clearly not ‘engaged in identical or similar trade of goods or provision of services’, i.e. Section 3(3), nor are they ‘present at different stages or levels of the production chain’ i.e. Section 3(4). Using the precedence in Ramakant Kini case, the commission considered the ‘agreement’ between Alkem and AKDCA within 3(1) and adopted an activist position in its order,

“The Commission thinks it appropriate to issue orders against such pharmaceutical companies as well to deter their actions of facilitating the associations in indulging in anti-competitive practices in the market”.

Gladly, COMPAT struck down the CCI order in the Alkem case even though for a different reason citing inconclusive proof for the demand of NOC and the coercive nature of the agreement. Foreseeing the dangers of an omnibus Section 3(1) producing an activist CCI, not afraid to over-regulate, should make us think if the standalone applicability of 3(1) ought to remain in the present form. MT Tayal’s suggestion in Ramakant Kini case that ‘the general term ‘any agreement’ under section 3(1) needs to be embraced and should be interpreted to  the ‘type of agreements’ specifically enumerated under section 3(3) or 3(4) of the Act’ seems more persuasive at this moment.