Competition law and trade associations

Written by Krishna Sarma | Updated: Dec 30 2010, 07:16am hrs
Instances of Competition Commission of India (CCI) intervening in the release of Dabangg and Raavan, which were being blocked by state-level film associations, grabbed headlines. CCI is supposedly keeping track of activities of trade associations that are issuing guidelines and passing resolutions that restrict the trade and have anti-competitive effects. As a result, it is being reported that CCI is planning to issue a code of conduct for trade bodies.

The general objective of competition law is to maintain and promote free competition in the marketplace and to protect the interests of consumers. Section 3 of the Competition Act 2002 was notified w.e.f. May 20, 2009. The provisions prohibit any agreements, understandings, decisions/recommendations of associations, information exchanges and concerted practices that restrict or are likely to restrict competition. While some horizontal agreements are presumed to have appreciable adverse effect on competition like the ones that determine prices and therefore are deemed void ab initio, many others (like vertical agreements) are subject to rule of reason. The rule of reason, a method of anti-competition analysis that distinguishes legitimate acts from illegal ones by balancing the anti-competitive effects with their potential pro-competitive benefits.

A body formed to represent the interests of its members in commercial matters may be a trade association. Trade associations, by definition, are made up of competitors. It is irrelevant how the association is organised. Trade associations provide their members and consumers with valuable benefits, such as education, outreach efforts to expand markets, enhance product compatibility or quality standards, and otherwise help businesses become more efficient. While the pro-competitive or competitively neutral aspects of trade associations are recognised, competition regulators are particularly alert to the risk of certain types of conduct like information sharing with a potential to facilitate agreements amongst competitors on price, output, or other terms of trade.

Given that the law is new and a vast majority of trade associations are unaware of the law and its implications, guidelines to explain the provisions of the law to those that are likely to be affected by them and to indicate how CCI expects them to operate is essential. A more robust advocacy effort is necessary too. In the UK, the Office of Fair Trading has issued such guidelines for trade associations, professions and self-regulating bodies.

At the level of trade associations, it is important to bear in mind that (i) regardless of good intentions of the trade association and/or its members, if the effect of conduct is to restrict competition, the activity may be illegal, and (ii) infringement does not require actual adverse effect on the market, the mere intention to impede competition is sufficient. Infringement can attract penal liability up to 10% of the worldwide turnover and in case of cartels, penalty of 10% of turnover or three times of profit, whichever is higher. Therefore, it is the responsibility of the association and its members to ensure compliance with the law.

Unlike in the US and EU, there is no provision for obtaining an advance ruling (on the lines of advisory opinions and business review letters) on matters pertaining to competition law whereby there is a possibility of ascertaining whether certain acts and decisions are anti-competitive.

To ensure compliance with the competition law, trade associations should also play a proactive role in undertaking self-assessments regarding competitive implications of their day-to-day conduct of the business of an association, resolutions and binding decisions of the management committee or full membership in general meetings, articles of association, memorandum of association, rules and regulations, nature and quantity of information exchange and so on. To be prohibited by competition law, an agreement need not be written down or binding. In conduct of trade association meetings, safeguards such as providing a clear agenda or indication of purpose; signing a competition compliance dos and donts acknowledgement circulated at the start of the meeting; having a compliance officer/ lawyer being present would mitigate risk of exposure to allegations of anti-competitive conduct.

The author is managing partner, Corporate Law Group