Exceptions to Anti-Competitive Agreements under Competition Act, 2002

The Competition Act, 2002 (‘Act’) is a landmark legislation aimed at promoting and sustaining competition in Indian markets. It prohibits anti-competitive agreements, abuse of dominant positions, and regulates mergers and acquisitions that may adversely affect competition. The Act’s primary objective is to ensure a level playing field for enterprises and protect consumer interests by preventing agreements that restrict competition, such as cartelisation, price-fixing, and market allocation.

However, the Act recognises that certain agreements, although restrictive in nature, serve legitimate purposes aligned with public policy and economic growth. Therefore, the Act carves out specific exceptions to anti-competitive agreements under Section 3(5). These exceptions primarily cover agreements related to intellectual property rights (IPRs) and export-oriented cartels. 

Understanding Anti-Competitive Agreements under the Act

Before delving into exceptions, it is essential to understand what constitutes anti-competitive agreements under the Act. Section 3(1) prohibits agreements between enterprises or persons which cause or are likely to cause an appreciable adverse effect on competition (AAEC) in India. Examples include:

• Fixing prices for goods or services
• Limiting or controlling production, supply, markets, technical development, or investment
• Allocating markets or sources of production or supply
• Bid rigging or collusive tendering

Such agreements are presumed to be void and unenforceable.

Statutory Exceptions to Anti-Competitive Agreements under Section 3(5)

Section 3(5) of the Competition Act provides vital carve-outs to the prohibition on anti-competitive agreements, stating that:

• Nothing contained in Section 3 shall restrict the right of any person to prevent infringement of intellectual property rights or impose reasonable conditions necessary for their protection.
• Agreements relating to the production, supply, distribution, or control of goods or services for export purposes shall also be exempted, even if they restrict competition.

Thus, Section 3(5) recognises the need to balance the Act’s competition goals with protection of intellectual property and promotion of India’s export trade.

Intellectual Property Rights (IPR) Exemption

Rationale behind IPR Exception

Intellectual Property (IP) rights provide exclusivity to creators and innovators over their inventions, literary and artistic works, trademarks, designs, and geographical indications. Such exclusivity incentivises investment in innovation, research, creativity, and brand building.

Without the ability to protect these rights, competitors could freely copy or imitate creations, thereby eroding incentives to innovate or invest. The Act acknowledges this economic rationale and safeguards the rights of IP holders by allowing reasonable restrictions necessary to prevent infringement.

The IPR exception ensures that anti-competitive provisions of the Act do not interfere with legitimate licensing, technology transfer, and commercial exploitation agreements that are intrinsic to the IP regime.

Categories of Intellectual Property Protected

Section 3(5) specifically exempts agreements concerning the following IPRs recognised under Indian law:

• Copyrights: Exclusive rights granted to authors and composers to reproduce, publish, and distribute their original works.
• Patents: Rights conferred for inventions, allowing the patent-holder to exclude others from making, using, or selling the invention for a limited period.
• Trademarks: Symbols, names, or logos that distinguish goods or services in the marketplace.
• Designs: The visual or aesthetic features of a product protected under the Designs Act, 2000.
• Geographical Indications: Signs identifying goods as originating from a particular territory or region, such as Darjeeling tea or Alphonso mango.

These categories reflect India’s commitment to international intellectual property standards and provide clarity on which rights attract the exemption.

Reasonable Conditions for Protection of IPR

The Competition Commission of India (CCI) has emphasised that Section 3(5) applies only to reasonable conditions necessary for protection of intellectual property. This means:

• The restriction or condition imposed must be proportionate and essential to prevent infringement.
• Excessive or unnecessary restrictions that extend beyond legitimate IP protection may attract the prohibition under Section 3.

Examples of reasonable conditions include licence agreements permitting the IP holder to prevent unauthorised use, reproduction, or distribution of the IP.

When IP-Related Agreements May Violate Competition Law

Despite the statutory exemption, the CCI has identified certain IP-related practices or agreements which, if unreasonable or restrictive, may contravene Section 3. These include:

• Patent pooling where firms collectively refuse to grant licences to third parties without valid justification.
• Tying arrangements requiring licensees to purchase particular goods exclusively from the licensor.
• Payment of royalties after patent expiry, which unjustifiably extends the monopoly period.
• Restrictions on research and development (R&D) by licensees that prevent innovation or improvement.
• Clauses preventing licensees from challenging the validity of the intellectual property.
• Price-fixing where licensors dictate the resale price to licensees.
• Bundling of licences forcing licensees to accept IP rights they do not require.
• Imposition of excessive quality controls not necessary for protecting the patented product.
• Restricting the licensee’s ability to sell products to designated persons only.
• Undue restrictions on the licensee’s business activities, limiting competition.
• Limiting the extent of use of the licensed invention by licensees.
• Requiring licensees to employ staff designated by the licensor, potentially impacting operational independence.

Such conditions go beyond protecting intellectual property and can lead to anti-competitive effects.

The Shamsher Kataria Case: A Landmark Precedent

The case of Shamsher Kataria v. CCI is a crucial judicial interpretation of the IPR exemption under Section 3(5). The facts involved original equipment manufacturers (OEMs) restricting the sale of spare parts without their consent, claiming protection under the IPR exemption.

The CCI laid down a two-step test to assess such claims:

• Whether the right asserted is indeed a valid intellectual property right.
• Whether the conditions imposed are reasonable and necessary for protecting that right.

In Shamsher Kataria, the OEMs failed to produce valid registrations of IPRs in India for the spare parts in question. Further, the CCI found that the imposed restrictions were not reasonable or necessary to protect any genuine IPR. As a result, the exemption under Section 3(5) was denied, and the OEMs’ conduct was found to violate the Act.

This case underscores that mere registration of an IPR does not grant automatic immunity from competition scrutiny. The nature and impact of the conditions imposed are key considerations.

Export Cartels Exception

Section 3(5) also exempts certain agreements among producers or traders engaged in production, supply, distribution, or control of goods or services exclusively for export purposes.

Rationale for Export Exception

Export cartels are often formed to enable efficient market penetration, price stabilisation, or market allocation in foreign markets. Such cooperation may restrict competition in the export destination countries but has no appreciable adverse effect on competition in the domestic market.

India’s policy encourages exports as a driver of economic growth and foreign exchange earnings. Recognising this, the Act permits certain restrictive agreements aimed solely at export trade, so long as domestic competition remains unaffected.

Scope and Conditions

• The anti-competitive effect must be limited to foreign markets.
• The agreement must pertain strictly to the production, supply, distribution, or control of goods or services for export.
• Domestic consumers or markets should not suffer any appreciable adverse effect.

This exemption allows Indian firms to compete effectively on a global scale while maintaining a competitive domestic environment.

Conclusion

The Competition Act, through Section 3(5), thoughtfully balances the need to prevent harmful collusion with the equally important imperatives of protecting intellectual property and promoting export competitiveness. While the Act prohibits agreements that harm competition, it permits reasonable and necessary restrictions linked to IPR protection and export trade facilitation.