RESEARCH PAPER
ON
“HORIZONTAL AGREEMENTS”
BY
SHOBHIT SACHAN
LL.M. CORPORATE LAW
NATIONAL LAW UNIVERSITY, JODHPUR
TABLE OF CONTENTS
S.NO. CONTENTS PAGE NUMBER
1. Introduction 1
2. Definition of Horizontal
Agreement 2
3. Anti-Competitive Agreements 3-4
4. Law relating to Horizontal
Agreements in various countries 5-9
5. Presumption under Section 3(3)
Competition Act:Rebuttable or 10-11
irrebuttable
6. Conclusion 12
I.INTRODUCTION
The new competition law of India1, namely, the Competition Act, 2002 (Act, for brief amended in
2007) in its preamble highlights its major objectives so as ―to prevent practices having adverse effect
on competition, to promote and sustain competition in markets, to protect the interests of consumers and
to ensure freedom of trade carried on by other participants in markets in India‖.
The Preamble also mandates that the economic development of the country needs to be kept in view in
implementing the Act’s objectives. Jaivir Singh, Professor at Jawaharlal Nehru University New Delhi,
argues that competition policy in developing economies should support their overall development path.
A survey of the literature shows that there is no agreed list of the elements of competition law but
the following figure prominently in the laws of most countries (UNCTAD, 2002):
1. Measures relating to agreements between firms in the same market to restrain competition.
These measures can include provisions banning cartels as well as provisions allowing cartels
under certain circumstances.
2. Measures relating to attempts by a large incumbent firm to independently exercise market
power (sometimes referred to as abuse of dominant position).
3. Measures relating to firms that, acting collectively but in the absence of an explicit agreement
between them, attempt to exercise market power. These measures are sometimes referred to
as measures against collective dominance.
4. Measures relating to attempts by a firm or firms to drive one or more of their rivals out of a
market. Laws prohibiting predatory pricing are an example of such measures.
5. Measures relating to collaboration between firms for the purposes of research,
development, testing, marketing, and distribution of products.
6. Measures for control of mergers, amalgamations and acquisitions.
The above list of six measures which occur in most competition laws, is not exhaustive nor does it
suggest that each measure is given the same weight or described in the same terminology in each
country with a functioning competition law.
_____________________________________________________________________________________
1
Ramappa,T.,Competition Law in India Policy Issues and Developments,1,(New Delhi:Oxford University Press,2006)
1
II.DEFINITION OF HORIZONTAL AGREEMENT
A Horizontal Agreement2 is an agreement between competing firms in the same industry, which
may result in reduced competition. Subjects of such agreements may include2:
Common pricing policies
Common production quotas
Information sharing
In many countries, anti-competitive behaviour and unfair business practices are regulated by
antitrust laws.
In other words, Horizontal Agreement is an agreement for co-operation3 between two or more
competing businesses operating at the same level in the market. This is generally to develop a healthy
relationship between competitors. The substantial clauses of the agreement may include policies
regarding pricing, production and distribution. The agreement may also discuss sharing of information
regarding the products and the market.3 Horizontal Agreements can prompt violations of antitrust laws
because these agreements may include clauses which restrict competition.
Horizontal Agreements may cause negative market effects with respect to prices and quality of products.
On the other hand, horizontal cooperation can lead to substantial economic benefits such as sharing risk,
cost savings, sharing know-how and making innovations faster.
Price fixing is a term associated with horizontal agreements. It is an arrangement in which several
competing businesses make a secret agreement to set prices for their products to prevent real
competition. Price fixing is a criminal violation of federal antitrust statutes. Price fixing also includes
secret setting of favourable prices between suppliers and favoured manufacturers or distributors to
beat the competition.
_____________________________________________________________________________________
2
Inc., Web Finance, Horizontal Agreement, (Visited on January 24,2014)
<http://www.businessdictionary.com/definition/horizontal-agreement.html>
3
Inc., USLEGAL, Horizontal Agreement Law And Legal Definition, (Visited on January
25,2014) < http://definitions.uslegal.com/h/horizontal-agreement/>
2
III. ANTI-COMPETITIVE AGREEMENTS4
Firms enter into agreements, which may have the potential of restricting competition. Agreements
could be formal written documents or oral understandings, whether or not enforceable by legal
proceedings. Horizontal agreements are those among competitors. A particularly pernicious type of
horizontal agreements is the cartel. Horizontal agreements are more likely to reduce competition than
agreements between firms in a purchase-seller relationship.
HORIZONTAL AGREEMENTS: Agreements between two or more enterprises that are at the same
stage of the production chain and in the same market constitute the horizontal variety. An obvious
example that comes to mind is an agreement between enterprises dealing in the same product or products.
But the market for the product(s) is critical to the question, if the agreement trenches the law. The Act
has taken care to define the relevant market. To attract the provision of law, the products must be
substitutes. If parties to the agreement are both producers or retailers (or wholesalers), they will be
deemed to be at the same stage of the production chain.
The Act seeks to prevent economic agents from distorting the competitive process either through
agreements with other companies or through unilateral actions designed to exclude actual or potential
competitors. It frowns upon agreements among competing enterprises (horizontal agreements) on
prices or other important aspects of their competitive interaction.
In general, the ―rule of reason‖ test is required for establishing that an agreement is illegal. However, for
certain kinds of agreements, the presumption is generally that they cannot serve any useful or pro-
competitive purpose. Because of their presumption, the lawmakers do not subject such agreements to the
―rule of reason‖ test. The Act presumes that the four types of agreements between enterprises, involved
in the same or similar manufacturing or trading of goods or provision of services have an appreciable
adverse effect on competition. These four types of agreements between enterprise are as described here
under:
___________________________________________________________________________________
4
L.Kelkar, Vijay, A Functional Competition Policy for India, 56, (Pradeep S. Mehta Ed., New Delhi:Academic Foundation, 2006,
(Visited on January 25,2014)<
http://books.google.co.in/books?id=YrkMLy9Z6OwC&pg=PA68&lpg=PA68&dq=author+of+a+functional+competition+po
licy+for+india&source=bl&ots=L7EL2WdXNX&sig=BVoTe_l1Tb8tw4eVWBWc6q9aHM8&hl=en&sa=X&ei=orrmUo_nJ
c_9oATH-
oL4DQ&ved=0CCgQ6AEwAA#v=onepage&q=author%20of%20a%20functional%20competition%20policy%20for%20ind
ia&f=false>
3
Agreements regarding prices: These include all agreements that directly or indirectly fix
the purchase or sale price.
Agreements regarding quantities: These include agreements aimed at limiting or controlling
production, supply, markets, technical development, investment or provision of services.
Agreements regarding bids (collusive bidding or bid-rigging): These include tenders submitted as
a result of any joint activity or agreement.
Agreements regarding market sharing: These include agreements for sharing of markets or sources
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.
Such horizontal agreements, which include membership of cartels, are presumed to lead to unreasonable
restrictions of competition and are therefore presumed to have an appreciable adverse effect on
competition. This would mean that there would be very limited scope for discretion and interpretation
on the part of the prosecuting and adjudicating authorities and very little scope for the errant enterprises
to rebut the presumption (the errant enterprises had the right to agitate gateways and penalties proposed
to be imposed under the repealed MRTP Act and the Restrictive Trade Practices Act of the U.K.)5
___________________________________________________________________________________
5
Supra note 4 at 3.
4
IV. COMPETITION LAW IN VARIOUS COUNTRIES WITH RESPECT TO
HORIZONTAL AGREEMENTS
The Law relating to Horizontal Agreements in various countries including India may be discussed
as follows:
I. INDIA6
Legislation
The oldest pillar of the Indian competition legal system is the Monopolies and Restrictive Trade
Practices Act of 1969 (MRTP Act), which represents the first attempt to deal with competition issues.
The Government appointed a committee in 1999 to examine the soundness of the MRTP Act in order to
suggest a modern competition law system as well as to increase the possibility of dealing successfully
with cartels. Pursuant to the recommendations of this committee, the Competition Act of 2002 (amended
in 2007), was enacted on 13th January 2003.However, according to the Competition Commission of
India (CCI), the CCI itself ―needs further strengthening through functional guidelines for its activities‖,
and India does not have -at this time- strong legal tools to contrast international cartels (such as the
―Vitamins cartel‖).The old competition law only provided for general provisions, while the new one
specifically addresses cartel concerns, but ―India must ensure that the law is duly implemented and must
also develop effective techniques for investigating international cartels.‖ (Chowdhury, 2006)
Chapter I, Section 2 of the Competition Act of 2002 (the ―Act‖) defines:
(b) ―agreement‖ such any arrangement or understanding or action in concert-
(i) whether or not, such arrangement, understanding or action is formal or in writing; or
(ii) whether or not such arrangement, understanding or action is intended to be enforceable by
legal proceedings;
(c) ―cartel‖ includes an association of producers, sellers, distributors, traders or service providers who,
by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale
or price of, or, trade in goods or provision of services.
Chapter II, Section 3 of the Act deals with the ―Prohibition of agreements‖.
Case study
India has been involved in an international cartel from 1990 to 1999, the so called ―Vitamins cartel‖:
leading producers of vitamins including Roche AG and BASF of Germany, Rhone-Poulenc of France,
_____________________________________________________________________________________
6
http://icl2010.wikidot.com/topic-2-horizontal-agreements
5
Takeda Chemical of Japan formed a cartel dividing up the world market and price fixing for different
types of vitamins.Overcharges impacted developing countries, and during the conspiracy period, India’s
overcharges were USD 25.71 million.According to a CCI report, ―CUTS, an India-based public interest
organization, collected some information on the vitamins cartel and passed it on to the competition
authority i.e. MRTPC for further action. However, the MRTPC came to the conclusion that no case
could be made in this regard. The ground for arriving at such a conclusion were, however, not known.―
The cartel operated for over 10 years and later prosecuted with the help of Rhone-Poulenc which
defected from cartel and cooperated with US authorities. Roche paid fines of US $ 500 million and total
fine collected exceeded US $ 1 billion in the US alone.The overcharges paid by 90 countries importing
vitamins were estimated to the tune of US $ 2700 million during the 1990s. The analysis also revealed
that jurisdictions with weak cartel enforcement regime suffered more. (Clarke and Evenett, 2003)
II. CANADA
Competition Bureau Canada
The Competition Bureau is responsible for the administration and enforcement of the Competition Act,
the Consumer Packaging and Labelling Act (non-food products), the Textile Labelling Act and the
Precious Metals Marking Act. The Competition Act is a federal law governing most business conduct
in Canada. It contains both criminal and civil provisions aimed at preventing anti-competitive practices
in the marketplace.
Its purpose is to maintain and encourage competition in Canada in order to:
• promote the efficiency and adaptability of the Canadian economy
• expand opportunities for Canadian participation in world markets while at the same time
recognizing the role of foreign competition in Canada
• ensure that small and medium-sized enterprises have an equitable opportunity to participate in the
Canadian economy
• provide consumers with competitive prices and product
choices Part VI: Offences in Relation to Competition
Section 45. Every person commits an offence who, with a competitor of that person with respect to
a product, conspires, agrees or arranges
(a) to fix, maintain, increase or control the price for the supply of the product;
(b) to allocate sales, territories, customers or markets for the production or supply of the product; or
(c) to fix, maintain, control, prevent, lessen or eliminate the production or supply of the product.
6
Case Study: Automobile Association Warns Dealers about Competition Act Conspiracy Rules August
12, 2010 The Chronicle Herald has reported that some Nova Scotia automobile dealers recently received
a reminder from their trade association regarding the conspiracy rules under the federal Competition Act.
According to the Executive Vice-president of the Nova Scotia Automobile Dealers Association, the
association wanted to ―make sure that [its] members know this legislation exists.‖
The association sent a warning to its member dealers (as well as its associate members) in response to
a letter received from the Competition Bureau, with information relating to potential conspiracy issues
raised by Sydney automobile dealers. According to the Bureau, there had been ―allegations that the
automobile dealers agreed not to purchase individual advertisements in the Yellow Pages and to co-
ordinate their hours of operation.‖
According to the association’s Executive Vice-President, the Bureau may have responded to an inquiry
received from a Sydney automobile dealer who wanted to clarify the legality of local discussions among
dealers in relation to collective advertising in the Yellow Pages and coordinating weekend hours in the
summer.While the Bureau has not commenced a formal inquiry in this case, it raised the possibility that it
may do so in the event of further complaints.As a result of recent amendments to the Act, the criminal
conspiracy provisions of the Act (section 45) have been significantly changed making it easier for the
Bureau (and private plaintiffs) to commence proceedings under section 45. In addition, three new ―hard
core‖ criminal conspiracy offences have been introduced, including agreements between competitors (and
potential competitors) to restrict output, which can take a number of forms including agreements to
eliminate or reduce production, collectively refuse to deal with certain customers or competitors, restrict
or limit advertising or standardize products or services (including collectively adopting standard terms of
sale, limiting hours of operation, etc.).
III. GERMANY
Legislation
The German legislator has laid down rules for competition in the Act against Restraints of Competition
(ARC) (Gesetz gegen Wettbewerbsbeschränkungen – GWB).Enforcing the ban on cartels within
Germany is one of many tasks of the Bundeskartellamt and the competition authorities of the Länder,
that has been an integral element of Section 1 of the ARC.Generally the Bundeskartellamt has competent
authority when competition restraint extends beyond the territory of federal Land. In other cases the
competition authorities of the Länder are responsible.In combating cartels the Bundeskartellamt mainly
focuses on so-called hardcore cartels, i.e. serious restraints of competition, in particular price and quota
agreements and market sharing agreements between competitors (horizontal agreement). But the ban on
7
cartels applies also to other types of agreement that restrict competition, e.g. agreements
between suppliers and customers (vertical agreements).
To identify the prosecution of cartels and further increase the rate of uncovered cartel agreements, the
Bundeskartellamt has recently set up two Decision Divisions which deal exclusively with cartels and
conduct fine proceedings on a cross-sector basis. The Special Unit for Combating Cartels
(Sonderkommission Kartellbekämpfung, SKK), which was founded in 2002, supports these two
Decision Divisions in particular.
Case study
On 8 June 2010 the Bundeskartellamt imposed fines totaling approx. € 30 million on eight coffee
roasters and the German Coffee Association (Deutscher Kaffeeeverband e.V., DKV), as well as ten
senior employees for price fixing (price increases and cuts) in the so-called ―out-of-house‖ market
(e.g. supply of gastronomy sector, vending machine operators). The initiative originally came from
Kraft, which also coordinated the dates with the companies involved.
The general agreement to coordinate price fixing violates European and German competition law for
the period from 1997 to July 2008. The infringement constitutes a clear-cut hardcore cartel offence.
Decisions: The Bundeskartellamt calculated the fines in application of the provisions of the 7th
Amendment to the ARC, depending on the duration of the companies’ participation in the cartel. At the
beginning of 2008 Kraft was fined for a bilateral agreement in the form of an illegal exchange of
information about a price increase.
IV. The United States of America
A cartel is defined as: a combination of independent business enterprises designed to limit competition.
In The United States (U.S.), the Sherman Act of 1989 (15 U.S.C. § 1) criminalizes domestic and
foreign agreements that restrict trade. The Act states that both corporations and individuals are subject
to criminal prosecution for“hardcore” cartel conduct including: price fixing, bid rigging, and
horizontal market allocation. The same conduct can also be separately subject to state level enforcement
actions and private actions for civil damages. The Clayton Antitrust Act of 1914 (15 U.S.C § 12-27)
adds an element to The Sherman Act that is aimed atpreventing antitrust violations. The U.S. Supreme
Court believes cartels are ―the supreme evil of antitrust‖ and violators are punishable to the full extent
of the law. The United States Department of Justice Antitrust Division is given the responsibility to
conduct investigations and prosecute corporations and individuals involved in ―hardcore‖ cartel
___________________________________________________________________________________
7
supra note 6 at 8
8
violations.
United States and the State of Colorado vs. Vail Resorts, Inc., Ralston Resorts, Inc., and
Ralston Foods, Inc. (January 3, 1997)
Case Summary
The United States and the State of Colorado filed a complaint against Vail Resorts, Inc. on the basis
that the Vail and Ralston merger had the potential to violate Section 7 of the Clayton Act. Vail and
Ralston are the two largest operators and owners of ski resorts in Colorado. On July 22, 1996 Vail
proposed to purchase voting securities of Ralston and Ralston would, in return, receive voting securities
in Vail.Vail would then assume and pay off Ralston’s debt. The merger was valued at $310 million.
The Clayton Act was the main piece of legislation used by the U.S. and the State of Colorado in
the determination that the merger would have the following consequences for Front Range Skiers:
1. Raise prices
2. Reduce discounts
3. Lessen competition
All three items are justified to be illegal through the use of economic estimates and the Herfindahl-
Hirschman Index (a measurement of market concentration). It was found that Vail had 12 percent of the
market share and Ralston its direct competitor had 26 percent of the market share. If allowed to merge,
the company would have more than 38 percent of the market share amounting to more than double the
market share of its next competitor. It was argued that a merger of this size would make raising prices
profitable based on the fact that there was no other alternative for skiers. The final U.S. judgment
allowed the ski resorts to merge. However, the Arapahoe Basin Ski Resort (the largest ski resort owned
by Ralston) had to be sold within five business days of the judge issuing his final decision. In an attempt
to be understanding, the U.S. gave the ski resorts time to partially dissolve the merger given that the
companies followed guidelines that ensured competitive pricing for consumers.
9
V.PRESUMPTION UNDER SECTION 3(3) COMPETITION ACT:REBUTTABLE
OR IRREBUTTABLE
Sections 3 and 4 of the Competition Act (India) relating to anti-competitive agreements and abuse
of dominant postion, were recently brought into force on May 20, 2009.8
Section 3 of the Act declares that anti-competitive agreements will be void and prohibits enterprises and
persons from entering into agreements in respect of production, supply, distribution, storage, acquisition
or control of goods or provision of services that causes or is likely to cause an appreciable adverse effect
on competition in India.
Generally agreements are classified into horizontal and vertical agreements for the purpose of
competition laws. However, the Indian law doesn't use this terminology. Nevertheless it can be seen that,
in substance Section 3(3) covers horizontal agreements, whereas Section 3(4) covers vertical agreements.
The importance of this distinction is that normally horizontal agreements relating to price fixing, market
sharing etc. are considered to be "per se "anti-competitive and no defence is available. Section 3( 3) reads
-
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:
Provided that nothing contained in this sub-section shall apply to any agreement entered into by way
of joint ventures if such agreement increases efficiency in production, supply, distribution, storage,
acquisition or control of goods or provision of services.
____________________________________________________________________________________
8
http://perspectivesonlaw.blogspot.in/2009/11/presumption-under-section-33.html
10
Explanation.—For the purposes of this sub-section, "bid rigging" means any agreement, between
enterprises or persons referred to in sub-section (3) engaged in identical or similar production or trading
of goods or provision of services, which has the effect of eliminating or reducing competition for bids
or adversely affecting or manipulating the process for bidding
The use of the phrase " shall be presumed" in Section 3(3) raises considerable amount of doubt on
the nature of the presumption raised. Is the presumption rebuttable or irrebuttable? One opinion says
the presumption can be rebutted ( see here), while another opinion is that it cannot be rebutted (see
here). The importance of this question may be explained by this example:
A particular agreement between enterprises engaged in identical trade of goods is say alleged to be one
which shares markets by way of geographical allocation. Once this fact of market sharing is established,
the enterprises will not be allowed to show how the agreement is not anti-competitive, if the presumption
is irrebuttable. Whereas if it is rebuttable, then its only a matter of burden of proof. Once the
requirements on Section 3(3) are met, the burden will be on the enterprises to show how their agreement
does not have an appreciable adverse effect on competition.
_____________________________________________________________________________________
9
Supra note 8 at 10.
11
VI.CONCLUSION
The law recognizes intellectual property rights and in order to facilitate their protection, it permits
reasonable restrictions imposed by their owners. Since exports do not impact markets in India,
agreement between exporters, in spite of being horizontal, are exempted.
Horizontal agreements are those that are between enterprises at the same stage of the production
chain. For example, agreement between two rivals is a horizontal agreement. In cases of agreements
between rivals for fixing prices or for limiting production or for sharing markets, there is a presumption
in the Act that such agreements cause appreciable adverse effects on competition.
A typical list of Horizontal Agreements can be found in Article 81(1)(a)(c) of the
European Community Treaty and Chapter III of UNCTAD,2004
12
BIBLIOGRAPHY
1.STATUTES
Competition Act,2002(Amended in 2007)
Sherman Act,1989(15 USC § 1)
2.BOOKS
Competition Law India, Policy Issues, and Developments. 1st Edition, New Delhi, Oxford, 2006
Vinod Dhall, Competition Law today, concepts, issues, and the law in practice, 1st Edition,
Oxford University Press, India, 2007
Dr. Souvik Chatterji, Competition Law in India and Cartels in India and USA, 1st
Edition, Allahabad Law Agency, India, 2014
2.WEBSITES
http://www.mondaq.com/india/x/250048/Trade+Regulation+Practices/AntiCompetitive+Agreeme
nts+Tests+And+Tribulation
http://books.google.co.in/books?id=YrkMLy9Z6OwC&pg=PA56&lpg=PA56&dq=horizontal+agr
eements+competition+law+india&source=bl&ots=L7DU1_gRH4&sig=IaRUzT1MP9iL8KSWC
NaWMJqMmqA&hl=en&sa=X&ei=L5fWUovCIof_rAeTroGAAw&ved=0CDoQ6AEwAw#v=o
nepage&q=horizontal%20agreements%20competition%20law%20india&f=false
