Are territorial restrictions anti-competitive?

By Karan Chandhiok and Vishnu Suresh,Chandhiok & Mahajan
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Exclusive distribution agreements restrict or limit the supply, sale or distribution of a product or service to a defined area or to a category of customers. Broadly speaking, these arrangements can take two forms: Restricting “active sales” or sales that involve actively soliciting customers and restricting “passive sales” or sales that involve responding to unsolicited requests from customers.

Karan S. Chandhiok Partner Chandhiok & Mahajan
Karan S. Chandhiok
Partner
Chandhiok & Mahajan

An enterprise may restrict active sales to specific territories to incentivise downstream players such as dealers or distributors to invest in or promote the enterprise’s products. Restricting active sales may also prevent free-riding, where one dealer sets up an attractive store, offers amenities and provides training to its staff, and another dealer, without making such investments, simply targets customers by offering lower prices. While this may promote intra-brand competition (competition between different brands marketed by an enterprise), such benefit may only be temporary.

Restricting active sales can make inter-brand competition more vigorous. If a manufacturer, for example, restricts its dealers from pursuing active sales, competition may increase among the manufacturer and its competitors. Increased competition among competitors could potentially off-set any reduction in intra-brand competition among dealers of a particular manufacturer. Ultimately, consumers benefit from a market with vigorous inter-brand competition.

Vishnu Suresh Associate Chandhiok & Mahajan
Vishnu Suresh
Associate
Chandhiok & Mahajan

The Guide to Antitrust Laws of the US Federal Trade Commission notes that restrictions by manufacturers “can benefit consumers by increasing competition among different brands (inter-brand competition) even while reducing competition among dealers in the same brand (intra-brand competition)”. Such restrictions encourage dealers or distributors to offer services that meet manufacturers’ requirements that protect and promote consumer interests.

Under section 3(4) of the Competition Act, 2002 (act), exclusive distribution agreements are anti-competitive if they cause, or are likely to cause, appreciable adverse effect on competition (AAEC). The Competition Commission of India (CCI) is required by statute to undertake AAEC assessment by considering the six factors in section 19(3) of the act. Three are negative factors in assessing restrictions on competition, while three are pro-competitive factors.

AAEC would be likely only if the enterprise imposing the restriction has market power. The 2010 Guidelines on Vertical Restraints published by the European Commission grants block exemption to hardcore restrictions. Such an exemption applies to vertical agreements where the manufacturer’s, as well as the dealer’s or distributor’s market share, is 30% or less or where active sales by a dealer are restricted to a territory or customer group, but passive sales are permitted. However, no bright line test has been laid down by the CCI on market power threshold that warrants an investigation.

In Ghanshyam Dass Vij v Bajaj Corp Ltd, the CCI held that territorial restrictions imposed by Bajaj, an FMCG manufacturer, on its non-exclusive distributors were unlikely to have any AAEC. This was because the market for FMCG products, particularly hair oil, comprises several players including a number of domestic and international brands, and that Bajaj’s market position was not significant compared to its competitors.

In KC Marketing v OPPO Mobiles MU Pvt Ltd, the CCI dismissed a distributor’s complaint alleging that territorial restrictions imposed by OPPO were anti-competitive. The CCI found that OPPO is not dominant but did not give any specific findings on OPPO’s market power. The CCI assessed the territory restrictions imposed by OPPO and found that the restrictions did not contravene section 3(4) because they did not create entry barriers or drive competitors out of the market.

The CCI has initiated investigations against Honda Scooters and Tata Motors for imposing territorial exclusivity. The prima facie order initiating an investigation against Tata Motors records the argument made by Tata Motors that such restrictions incentivise dealers to promote manufacturers’ products and increase inter-brand competition. However, the CCI’s view was that these defences warrant an investigation. It is imperative that an effects-based approach is taken to assess these restrictions. These restrictions may be necessary to increase their reach; their investment into training staff; to create better understanding of products and to improve non-price factors of customer experience.

Karan Chandhiok is a partner and Vishnu Suresh is an associate at Chandhiok & Mahajan

competition law

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