Indian courts have drawn a clear distinction between non-compete covenants during the term of the agreement and non-compete covenants after the term of an agreement. To determine their enforceability, the courts consider whether or not the covenant is in restraint of trade.
It is well established that 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.
According to a judgment of the Delhi High Court in 2017, where there is a reference to franchise agreements for the distribution of goods and services, certain agreements often incorporate terms restricting the rights of the franchisee to deal with competing goods to facilitate the distribution of the goods of the franchiser. This cannot be regarded as a restraint of trade.
Non-compete covenants following the expiry or termination of the contract are generally difficult to enforce as they are considered 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.
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 it causes, or is likely to cause, an appreciable adverse effect on competition in India. In terms of the (Indian) Competition Act 2002 (the 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. This 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 must be determined on the basis of the factors provided under the Competition Act. In cases relating to RPM issues, the Competition Commission of India (CCI) has used the market share of the product 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 that 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 prices, establishing a minimum advertised price policy, both for physical or online sales, or by announcing that it will not deal with customers that do not follow its pricing policy, among other things, if the 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 does 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, this provision can be incorporated in the distribution contract provided that the 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 on it. However, if the seller is a foreign company and the distributors are based in India, and if different distributors import the goods at different prices, an 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? 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 an anticompetitive agreement if it causes, or is likely to cause, an AAEC in India. However, the Competition Act provides for an exception where the restriction is necessary for restraining any infringement of, or protecting, intellectual property rights.
Matters related to anticompetitive agreements are decided case by case on the basis of the rule of reason, which involves an inquiry into the purpose and effects of an agreement, and whether the restraint imposed merely regulates and perhaps promotes competition, or suppresses or even destroys competition.
Therefore, a supplier can restrict the geographical area or categories of customers if the agreement is in compliance with the provisions of the Competition Act.
The concepts of active sales efforts and passive sales are not recognised under Indian law. Restrictions, whether express or implied, are tested on the touchstone of whether they cause an AAEC in India.
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 different markets, they are only different channels of distribution. E-commerce entities need to maintain a level playing field. Therefore, the legal position relating to the suppliers’ restriction on e-commerce sales by its distributors would be the same as that relating to restrictions on geographic areas and categories of customers, and would be considered under the category of exclusive distribution agreement. Accordingly, they may amount to being anticompetitive if the agreement causes, or is likely to cause, an AAEC in India.
These cases are decided on their own specific facts on the basis of the rule of reason, which involves an inquiry into the purpose and effects of an agreement, whether the restraint imposed reduces competition in India in any manner, or merely regulates and promotes competition. If it is the latter, the 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 to be 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 these sales by territory. A provision for claiming ‘invasion fees’ or a similar amount by the distribution partner may be incorporated in the distribution agreement if the 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?
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.
Under what 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?
In accordance with the Competition Act, no distribution or agency agreement is required to be reported under merger control regulations or requires clearance by the CCI. However, the CCI may, on the basis of a complaint made before it or on its own motion, initiate an inquiry if it becomes aware that any agreement is an anticompetitive agreement and the transaction is likely to cause an AAEC in the relevant market in India.
To evaluate whether there is an AAEC, the CCI, among others, considers the:
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. The competition laws prohibit the following agreements, among others:
However, the above restrictions are not applicable to any agreement entered into by way of a joint venture if it increases 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, places restrictions on prices, limits or restricts the market, results in denial of market access or makes the conclusion of contracts subject to the 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, in accordance with the procedure provided under the Competition Act, to determine anticompetitive agreements and abuse of a dominant position as provided in the 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 to:
The CCI may also 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 an order of the CCI, it may appeal to the Competition Appellate Authority Tribunal and subsequently, if necessary, appeal to the Supreme Court of India against any order or decision of the Competition Appellate Authority Tribunal.
Law stated date
Give the date on which the information above is accurate.
