Anti-Competitive Contracts-Per Se Illegal Agreements

Case-Story

Robust Shoes,a giant Multinational, is world-leader in Sports-shoes,It set up its shop in India about 25 years ago and soon carved a niche for itself in premium Sports shoes market in India. However, for the past many years, Robust Shoes was not growing as expected by the company. The reason was tough competition from Indian manufacturers and cheap imports from Nepal, East Asia, Singapore etc.

In order to expand in the market, Robust Shoes decides to enter the lower-end market in India. Its business strategists recommended entry through mergers & acquisitions, instead of starting from scratch. Under this strategy, the sights of their business-managers fell on a company called Runner Shoes Ltd. Runner shoes was a private limited company controlled by a Shahni family. The family was in sports/field shoes business for the past fifty years and had an impressive market share of 45%.

Getting convinced that Runner Shoes is the best buy, Robust Shoes gave a lucrative offer to the Shahni Family which it could not refuse. However, Robust Shoes was worried that what if after some years, the Shahni Family re-enters the Sports Shoes business and become their competitor. To foreclose this possibility, Robust Shoes further sweetened their deal with the condition that the Shahni family will not re-enter Sports Shoes business for the next 25 years without the written permission of Robust Shoes. Shahni Family pondered over this condition and decided to agree. It was because ,the family was finding itself caught between a rock and a hard place. On the higher end of the market, there were several multinational companies operating, the quality of which Runner Shoes could not match. At the lower end, intense competition from cheap imports sold through the road-side was eating into their margins. The family ws afraid that this way, they could be knocked out from the business altogether in the near future.

Keeping this in view, the Shahni family decided to quit the Sports Shoes business and enter Sports-apparel business which was under nacent stage in the country. The deal with Robust Shoes was thus signed, stamped and sealed.

Ten years had passed and Shahni Family established itself in Sports apparel business. The next eneration of the family i.e. Ranjit, Vikram and Dhruv had taken-over the business. In order to expand in the market by value-addition, the trio decided to re-enter Sports Shoes business. However, their lawyers reminded them of the agreement their predessors had signed with Robust Shoes that the family will not re-enter the Sports Shoes business for the next 25 years.

Getting stuck-up in their plans, the Shahni Brothers decided to challenge the agreement in the Court of Law under Article 19 of the Constitution that the agreement infringes upon their fundamental right of profession and carrying out business and therefore is null and void. Their Lawyers,however,advised them to challenge the agreement under the Competition Act,2002.

Is it a sound legal advice?

Now,let us analyse the case from judicial point of view.

Hitherto, the judicial jurisprudence had been limited to enforcement of the contractual obligations on the contracting parties provided the contract is for a lawful activity and has not been signed under duress, coercion etc. In such a situation, the Shahni Brothers stand little or no chance in the Court of Law because their predecessors had signed the contract willingly and they were paid additional consideration for the condition that the family will not re-enter the Sports Shoes for the next twenty-five years. Though, the predecessors had infringed upon the rights of the next generation of the family, but no way the other party i.e. Robust Shoe could be made to suffer from that infringement.

In general way, the Courts would leave the matter to the Robust Shoes and the Shahni Bros to mutually decide the matter because in the original contract, the right to refuse the permission had been vested with Robust Shoes.

However, in the recent times, another dimension has been added to the judicial jurisprudence which is called "Public-interest". In many agreements, the Courts are also required to look into the "Public-interest" aspect of the contract and if the contract is contrary to the "public-interest', the contract can be termed as null and void, though it may be perfectly sound legally.

Though the "Public-interest" has not been defined clearly in the Law-books, however, the "public-interest" means "anything which is beneficial to the public at large". In the trade & commerce, anything or any act by anyone which tends to control or restrict the factors like availability, prices, choice or technological development of goods and services is contrary to the public interest. In order to empower the Courts to set-aside the agreements which tend to control or restrict the markets in any way, the Competition Acts have been enacted by various countries.

The very first Competition Act was promulgated in the USA which is called the Sherman Act. It was enacted in 1890 and states that "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal."

In India, the Competition Law has been put in place with the enactment of The Competition Act, 2002 and according to Section-3 of the Act:

(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement 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 within India.

(2) Any agreement entered into in contravention of the provisions contained in sub-section (1) shall be void.

(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which-

(a) directly or indirectly determines purchase or sale prices;

(b) limits or controls production, supply, markets, technical development, investment or provision of services;

(c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;

(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition:

The Competition Act,2002 provides for the establishment of a Competition Commission of India “CCI” to prevent practices having adverse effect on competition, to promote and sustain competition in arkets, to protect interests of consumers and to ensure freedom of trade carried on by other participants in markets. The CCI prohibits enterprises to enter into anti-competitive agreements, abusing their dominant position and forming combinations. However, Any person aggrieved by any decision or order of CCI may file an appeal to the Supreme Court within 60 days from the date of the communication of the decision or order.

Whether any contract or agreement is anti-competitive in nature is determined through the conditions as laid down in Section 3(3) of the Act as mentioned above.  However, the Courts also apply two rules to determine whether an agreement is anti-competitive in nature. These rules are referred as "Per-se Illegal Agreements" and "Rule of Reasoning". "Per-se Illegal agreements are those are agreements which anti-competitive on the face. "Rule of Reasoning" is applied to those contracts which do not appear to be anti-competitive on the face but have have an indirect bearing on the competition. For example, a Company supplying its goods to some favoured firms at a discounted price than the rest is not per se illegal agreement but by "rule of reasoning" it can be judged that such agreements with favoured firms are anti-competitive in nature.

So we can conclude that the legal advice given by the Lawyers to Runners Shoes i.e. to challenge the agreement under the Competition Act,2002 is perfectly sound. Because the agreement is 'Per Se Illegal Agreement" which is anti-competitive in nature therefore it will be termed as void and set aside by the Courts.

By Sanjay Kumar