Rule of Reason and AAEC
Rule of reason is a principle borrowed from U.S. antitrust law but widely influential elsewhere, including India. It is a nearly ubiquitous principle that balances how one perceives certain practices as anti-competitive. Under this legal approach, the anti-competitive effects of a practice are not presumed merely because certain proscribed conduct exists. Instead, the competition authority or Courts are required to balance the pro-competitive effects against anti-competitive effects of the agreement.
In the Indian context, the rule of reason is applied to antitrust investigations where the Competition Act, 2002 warrants such an analysis. It has been interpreted by the Supreme Court of India in the case of Tata Engineering & Locomotive Co. Ltd v. Registrar of Restrictive Trade Agreement.
Section 19(3) of the Competition Act, 2002 (“the Act”) sets out factors that the Competition Commission of India (CCI) must consider in the process of determining whether an agreement has an appreciable adverse effect on competition (AAEC). The term ‘appreciable’ entails that such adverse effect must be significant and not trivial. This is also known as the ‘effects analysis’, often in the context of Section 4 investigations, and seeks to assess how much of an impact the agreement has on the market, competitors, consumer choice, etc. The CCI adopts a rule of reason approach when deciding antitrust cases, during which it considers factors listed under this sub-section. This is reflective of the legislative intent to move away from the per se approach in antitrust investigations and the evolution of the Indian competition law landscape since the MRTP era.
It is pertinent to note that the effects analysis is mandatory in case of an inquiry under Section 3(4) for vertical anti-competitive agreements but an inquiry under Section 3(3) for horizontal anti-competitive agreements presumes AAEC due to the nature of the alleged agreement. This presumption, however, is rebuttable. As far as abuse of dominant position under Section 4 is concerned, the Act does not require an effects analysis to be done, but the Director General (DG) and the CCI have generally also undertaken it during these inquiries. This has also been by the NCLAT in Google LLC v Competition Commission of India. This approach suggests that mere existence of certain practices does not necessarily indicate abuse of dominance. Instead, economic implications of the act need to be considered for it to be termed abusive. The impact of acts on the market and competition in general (like the AAEC analysis in Section 3) needs to be adopted.
Factors under Section 19(3):
The section lists 6 factors, the first three of which are negative and measure anti-competitive effects of the agreement, while the latter three factors are positive and measure pro-competitive effects of the agreement. This enables the CCI to undertake a holistic assessment and weigh the negative and positive factors against each other giving paramount importance to consumer welfare. As noted by the CCI in Automobiles Dealers Association v Global Automobiles, “it is more prudent to examine all the above factors together to arrive at a net impact on competition.”
Each factor is discussed in some detail below:
Creation of barriers to new entrants in the market
This refers to the creation or development of obstacles that impede the entry of a new firm or corporation into a particular market or industry or its ability to compete effectively. This in turn limits competition while also protecting the competitive edge of the firms already existing in the relevant industry or market. These may include market-based barriers such as control of resources, and strategic barriers that a firm can create to induce an artificial disadvantage for other players, such as exclusive contracts. A secondary implication is that a firm securing or retaining dominance in the market would be able to manipulate prices and services negatively.
Driving existing competitors out of the market:
This refers to an anti-competitive practice structured to eliminate competitors by forcing them out of business using unfair means. This tactic is often used to gain competitive advantage or a monopoly over an industry which subsequently allows these dominant competitors to raise their prices without the fear of objection or competition.
Foreclosure of competition by hindering entry into the market:
Foreclosure refers to the hindrance of competitors from accessing the market effectively and is often likened to capture of a market to the extent that other players are kept out. This may be achieved through methods such as predatory pricing, exclusive agreements and the refusal to supply parts required for production. In essence, it aims to eliminate competition and amass greater market power. It has an adverse effect on consumers as it reduces their choice, results in higher price, and stifles innovation since competitive pressure reduces.
Accrual of benefits to consumers:
Under this factor, the CCI examines if, in the relevant industry, the consumers receive any direct or indirect benefit from the agreement in question such as low prices, better quality of products or an improvement in the services. Consequent to the 2023 amendment of the Competition Act, 2002, this factor now includes a more holistic consideration of both benefits and harm caused to consumers, in an effort to analyse the effect of the agreement.
Improvements in production or distribution of goods or provision of services:
This factor takes into account any gains in efficiency in production processes, distribution networks, etc. that could result from the agreement or conduct.
Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services:
This is evaluated by the CCI to ensure agreements support innovation, research and development within the industry resulting in economic growth of the same.