Competition issues with distribution and agency agreements in India

Chadha & Co

Regulation of the distribution relationship

Competing products

Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?

Indian courts have drawn a clear distinction between non-compete covenants after the term of the agreement and non-compete covenants post the term of an agreement. To determine enforceability of such covenants, the courts consider the question whether the covenant is or is not in restraint of trade.

It is well established that the non-compete covenants operative during the period of a contract are generally enforceable if the restriction is reasonable in the context of the particular trade and business, and where the restriction is required to enhance the level of service to the customers and efficiently manage the sale of products.

In a recent judgment of the Delhi High Court, where there is a reference to franchise agreements for distribution of goods and services, it has been observed that certain agreements often incorporate terms restricting the rights of the franchisee to deal with competing goods for facilitating the distribution of the goods of the franchiser, and this cannot be regarded as a restraint of trade.

Non-compete covenants, after the expiry or termination of the contract, are generally difficult to enforce as they are considered as a restraint in exercising a lawful profession, trade or business. An exception to this restriction is an agreement not to carry on a business of which the goodwill is sold.

Prices

May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?

Control of the resale price by a supplier is generally considered as an anticompetitive agreement, if the same causes, or is likely to cause, an appreciable adverse effect on competition in India. In terms of the (Indian) Competition Act 2002 (Competition Act), agreements between parties to sell goods at different stages or levels of the production chain in different markets on the condition that the prices to be charged on the resale by the distributor or purchaser shall be the prices prescribed by the supplier or seller, are anticompetitive agreements and shall be void if they cause, or are likely to cause, an ‘appreciable adverse effect on competition’ (AAEC) in India. Such a provision is referred to as ‘resale price maintenance’ (RPM). However, the exception to this restriction is if the agreement clearly states that prices lower than those stipulated by the seller may be charged.

The AAEC needs to be determined on the basis of the factors provided under the Competition Act. In cases relating to RPM issues, the CCI has used the market share of the product in question as the centrepiece in its analysis and has found that where the market in question was generally competitive, the RPM was less likely to cause an AAEC in India.

Therefore, a supplier can control the prices at which its distribution partner resells its products in India, provided the terms of the agreement and price control mechanism are in compliance with the provisions of the Competition Act.

May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?

A supplier can influence resale prices by suggesting resale prices, establishing a minimum advertised price policy both for physical or online sale, or by announcing that it will not deal with customers who do not follow its pricing policy or such like, if such agreement includes the exception provided in the Competition Act in the case of RPM, and if the terms of pricing do not cause, or are not likely to cause, AAEC under the Competition Act for the given market or products.

Care should also be taken that the provision related to refusal to deal should not amount to abuse of dominant position by the seller under the Competition Act.

May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?

Yes, such a provision can be incorporated in the distribution contract, provided that such restriction does not amount to creating an AAEC in the relevant market in India.

Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?

Generally, a seller can charge different prices to different customers based on location, type of customer, quantities purchased or otherwise. There is no legal restriction for the same. However, in the event that the seller is a foreign company and the distributors are based in India, and if different distributors import the goods at different prices, the issue relating to evasion of customs duty by the distributor importing at a lower price may arise. The issue would not be relevant where the Indian entity of the foreign seller imports into India and thereafter distributes its products to different distributors in India at different prices based on location, type of customer, quantities purchased, or otherwise.

Geographic and customer restrictions

May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? May a supplier reserve certain customers to itself? If not, how are the limitations on such conduct enforced? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?

Generally, an exclusive distribution agreement, including an agreement that limits, restricts or withholds the output or supply of any goods or allocates any area or market for the sale of the goods, is considered as an anticompetitive agreement, if such agreement causes, or is likely to cause, an AAEC in India. However, the Competition Act provides for an exception where such restriction is necessary for restraining any infringement of, or to protect, intellectual property rights.

Matters related to anticompetitive agreements are decided on a case-to-case basis on the basis of the rule of reason, which involves enquiry into the purpose and effects of an agreement, whether the restraint imposed is such that it merely regulates and perhaps promotes competition, or whether it is such that it may suppress or even destroy competition.

Therefore, a supplier can restrict the geographical area or categories of customers if the agreement is in compliance with the above provisions of competition law.

The concept of active sales efforts and passive sales are not recognised under Indian law. Restrictions, whether express or implied, are tested on the touchstone of the above legal principles.

Online sales

May a supplier restrict or prohibit e-commerce sales by its distribution partners?

Considering the views taken by the CCI while dealing with various complaints made against e-commerce websites in India, it can be concluded that offline and online markets are not two different relevant markets, and are only different channels of distribution of the same product. E-commerce entities need to maintain a level playing field. Therefore, the legal position relating the suppliers’ restriction on e-commerce sales by its distributors would be the same as explained in question 18 and would be considered under the category of exclusive distribution agreement. Accordingly, such restrictive covenants in the agreement may amount to being anticompetitive if the agreement causes, or is likely to cause, an AAEC in India.

As explained above, these cases are decided on their own specific facts, on the basis of the rule of reason, which involves enquiry into the purpose and effects of an agreement, whether the restraint imposed is in any manner reducing competition in India, or merely regulates and promotes competition. In such a case, restriction can be provided for in the agreement.

Any provision stating that e-commerce sales by distribution partners, or by e-commerce intermediaries to which the distribution partner sells, are not resold outside the distribution partner’s assigned territory may be included, if it can be proved that the agreement does not cause, or is not likely to cause, an AAEC in India.

Further, there is no restriction on the supplier to require reports of such sales by territory. A provision for claiming ‘invasion fees’ or similar amount by the distribution partner may be incorporated in the distribution agreement, if such exclusive distribution agreement is not considered void under competition law.

Refusal to deal

Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?

Yes, a supplier can refuse to deal with particular customers; however, restricting its distributor’s ability to deal with particular customers under contract may be treated as an anticompetitive agreement if the agreement causes, or is likely to cause, an AAEC in India.

Competition concerns

Under which circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?

As per the Competition Act, no distribution or agency agreement is required to be reported under the merger control regulation or require clearance by the CCI. However, the CCI may, on the basis of any complaint made before it or on its own motion, initiate an inquiry if it comes to the knowledge of the CCI that any agreement is an anticompetitive agreement and such a transaction is likely to cause an AAEC in the relevant market in India.

To evaluate the AAEC, the CCI, among others, considers the following factors:

• creation of barriers to new entrants in the market;
• driving existing competitors out of the market;
• foreclosure of competition by hindering entry into the market;
• accrual of benefits to consumers;
• improvements in production or distribution of goods or provision of services; and
• promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?

The competition laws of India regulate the relationship between suppliers and their distributors. In addition to the restrictions and regulations stated above, the competition laws prohibit the following agreements:

• any agreement in respect of production, supply, distribution, storage, acquisition or control of goods, which causes, or is likely to cause, an AAEC in India;
• any agreement which, directly or indirectly, determines purchase or sale prices, limits or controls production, supply, markets, technical development, shares the market or source of production by way of allocation of geographical area of market or type of goods or number of customers in the market; and
• tie-in arrangement, exclusive supply agreement, exclusive distribution agreement, agreement for refusal to deal, resale price maintenance and so on, if such agreement causes, or is likely to cause, an AAEC in India.

However, the above restrictions are not applicable where any agreement entered into by way of a joint venture, if such agreements increase efficiency in production, supply, distribution, storage, acquisition or control of goods or for the purposes of protecting intellectual property rights.

Further, any agreement resulting in abuse of dominant position by a party whereby the agreement imposes unfair or discriminatory conditions in the purchase or sale of goods, or places restrictions on prices, limits or restricts the market, results in denial of market access, or makes the conclusion of contracts subject to acceptance of supplementary obligations (which, by their nature or according to commercial usage, have no connection with the subject of such contracts), is not permissible under the competition laws of India.

Competition law matters are dealt with by the CCI, as per the procedure provided under the Competition Act, to determine anticompetitive agreements and abuse of dominant position as provided in the Competition Act.

On completion of an inquiry in the manner prescribed under the Competition Act, the CCI has the power to pass any or all of the following orders:

• impose a penalty;
• direct modification of the agreements;
• pass an interim order to temporarily restrain any party from carrying on such act until the conclusion of the inquiry, or until further orders;
• discontinue and not to re-enter such agreement, or discontinue the abuse of dominant position, as the case may be; direct division of an enterprise enjoying dominant position to ensure that the enterprise does not abuse its dominant position;
• direct the enterprises concerned to abide by such other orders as the CCI may pass and comply with the directions, including payment of costs, if any; and
• pass any other order as it may deem fit.

Any person or trade association can file information before the CCI for making an inquiry under the Competition Act. The CCI may also initiate an inquiry on its own motion.

Where a party is aggrieved by the order of the CCI, the party may resort to the following remedies:

• appeal to the Competition Appellate Authority Tribunal;
• appeal to the Supreme Court of India against any order or decision of the Competition Appellate Authority Tribunal.

Ref.: https://www.lexology.com/library/detail.aspx?g=1c2bcb5a-d9e7-4ddf-bde0-dfa677623f3e