In the realm of commercial transactions and business practices, competition law plays a pivotal role in ensuring a level playing field, fostering economic efficiency, and safeguarding consumer interests against detrimental anti-competitive practices. In Pakistan, the governance of such matters falls under the purview of the Competition Commission of Pakistan (the Commission), as vested by the Competition Act, 2010 (the Act). The Commission’s ambit encapsulates all marketplaces within the nation, transcending the technical and economic regulations imposed by sector-specific authorities like SECP, NEPRA, OGRA, PTA, and PEMRA among others.
To elucidate the scope and application of Section 4 of the Act, the Commission has disseminated the Guidelines on Prohibited Agreements (the Guidelines) pursuant to Sections 28, 29, and 61 of the Act in conjunction with Regulation 41 of the General Enforcement Regulations, 2007. These Guidelines serve as an illustrative manual, albeit not a substitute for the Act or its derivative rules and regulations, for understanding the prohibitions concerning anti-competitive agreements and decisions by associations of undertakings. The insights provided are aimed at aiding undertakings, their associations, and consumers in navigating the legal landscape, with a caveat to seek legal counsel as needed.
Section 4 of the Act proscribes undertakings and associations of undertakings from engaging in agreements or decisions concerning the production, supply, distribution, acquisition, or control of goods or the provision of services if such engagements curtail, restrict, or diminish competition within the relevant market, barring exemptions under section 5. Any transgressions of Section 4(2) that fail to meet the stipulations in Sections 5, 8, and 9 are deemed null and void as per Section 4(3).
In scrutinising a Section 4 infringement, the Commission undertakes a meticulous appraisal of the agreement(s) or concerted practice(s) involved. This entails a step-wise methodology comprising the identification of the undertaking(s) or association of undertakings, the agreement(s) and/or concerted practice(s) and/or decision(s), the relevant and/or related market(s), and an evaluation of whether an agreement or decision exists, and if it harbours the ‘object’ or ‘effect’ of impeding, restricting, or reducing competition in contravention of Section 4.
An integral aspect of this evaluation is the definition and understanding of ‘Undertaking’ and ‘Association of Undertakings’ as delineated under the Act. The term ‘Undertaking’ encompasses a wide spectrum of entities engaged in commercial or economic activities, irrespective of their legal status or financing model. Similarly, associations of undertakings, often manifesting as trade associations, fall within this ambit. While primarily serving legitimate functions, these associations could, in certain instances, become conduits for collusion and coordinated actions that infringe upon Section 4 prohibition.
The Act’s lexicon extends the meaning of ‘Agreements’ beyond formal contracts to include any arrangement, understanding, or practice, irrespective of its legal enforceability or form. This broad definition encapsulates both legally binding and non-binding agreements, oral or written, formal or informal. The prohibition under Section 4 also covers ‘decisions’ by associations of undertakings, focusing on whether such decisions or actions aim to influence or coordinate the commercial conduct of the members, even if non-binding.
The Act does not exonerate parties from liability even if their participation in the anti-competitive agreement was limited, coerced, or partially implemented. However, these factors might be considered mitigating when determining penalties. Both individual members and the association may be subjected to fines in cases of Section 4 violations.
The applicability of Section 4 extends to all agreements between undertakings operating at either horizontal or vertical levels within the market. Generally, horizontal agreements between competitors in the same market are perceived as per se violations of Section 4, whereas vertical agreements, often seen as efficiency-enhancing, are usually exempt from this prohibition. Nonetheless, exceptions may exist based on the specific circumstances.
Lastly, the delineation of the relevant market is fundamental to assessing the breach of Section 4. The Act defines a relevant market with two facets: the relevant product market and the relevant geographic market. This definition underscores the interchangeability or substitutability of products or services from a consumer’s perspective and the homogeneity of competition conditions within a geographic area, distinguishing it from adjacent areas with appreciably different competition conditions.
The discourse surrounding restrictive agreements and anti-competitive practices is crucial for a thriving business environment. The Guidelines by the Commission furnish a coherent framework for understanding and compliance with the Competition Act, promoting a culture of fair competition, and contributing towards an economically efficacious and consumer-friendly market ecosystem in Pakistan.
In the course of adjudicating allegations of Section 4 infringements under the Act, the Commission is guided by both direct and indirect evidence pertinent to the specific case. It’s imperative to note that the definition of the market is an analytical aid rather than the focal point of the investigation. Specifically, in the investigation of alleged cartel activities, market definition serves as an auxiliary tool rather than a prerequisite for substantiating the case. The Commission may also consider other related markets, depending on the unique circumstances of each case.
The concept of a relevant market is bifurcated into a relevant product market and a relevant geographic market. The former encapsulates products or services deemed interchangeable or substitutable by the consumer based on their characteristics, prices, and intended use. The latter delineates the area where the firms in question supply products or services under fairly homogeneous competition conditions. This nuanced understanding of market definition is further expounded in the Commission’s Guidelines on Market Definition and Relevant Market.
Delving into the heart of prohibited agreements or decisions, Section 4(2) of the Act enumerates an array of such engagements which, either by their object or effect or both, are deemed prohibited. This list encompasses agreements or decisions pertaining to price fixing, market sharing, setting production or distribution quotas, limiting technical advancement or investment, collusive tendering or bidding, applying dissimilar conditions to equivalent transactions, and contractually binding supplementary obligations unrelated to the contract’s subject.
The Act specifically underlines that certain agreements or decisions by associations of undertakings engaged in cartel activities are perceived to have the ‘object’ of inhibiting, restricting or diminishing competition within the relevant markets. In absence of an anti-competitive ‘object’, the agreement or decision may still contravene the Act if an anti-competitive ‘effect’ is discernible. The Act further explicates the nuances of ‘by object’ and ‘by effect’ restrictive agreements, and how the Commission navigates the investigation of such potentially anti-competitive agreements.
Horizontal agreements, epitomized as agreements among undertakings operating at identical levels of production or supply, i.e., competitors within the same market, hold a special place in this discussion. Section 4 of the Act categorizes certain business practices as per se violations based on their ‘object’, eliminating the necessity for further exploration into the actual anti-competitive ‘effect’ of the practice on the market or the intent of the involved individuals. These per se violations, also known as hardcore cartel arrangements, encompass a range of anti-competitive practices including price fixing, market sharing, quota allocation, output restriction, limitation on technical progress and investment, or bid rigging.
Since its establishment in 2007, the Commission’s decisional practice has manifested through the imposition of substantial financial penalties on undertakings involved in cartel arrangements. There’s recognition that under certain circumstances, vertical arrangements too may infringe Section 4 of the Act and are treated as hard-core violations, including practices like resale price maintenance mechanisms, and tie-ins. In instances where an anti-competitive ‘object’ is established, the Commission is absolved from the obligation to examine the anti-competitive ‘effect’ of the agreement, underscoring a streamlined approach towards enforcing the competition law and ensuring a competitive, fair market environment conducive to economic growth and consumer welfare.
The elucidation of horizontal agreements and their manifestations in commercial practices, as outlined in the text, sheds light on the core infractions of Section 4 of the Act. Herein, an examination of various scenarios and examples illustrates the diverse mechanisms by which competition can be stifled or diluted.
Price-fixing stands out as a particularly egregious violation, with the text highlighting both direct and indirect modalities of this practice. The narrative underscores that the essence of a price-fixing agreement can be distilled from informal arrangements or verbal understandings, not necessitating a formal written accord. The hypothetical scenario depicting collusion among major home appliance suppliers, X, Y, and Z, succinctly embodies the quintessence of cartelization, which is the hallmark of price-fixing.
Market-sharing agreements, as exemplified by the scenario involving refined petroleum product suppliers, unveil another facet of anti-competitive practices. By demarcating distinct market segments amongst themselves, these competitors essentially immunize themselves against intra-market competition, to the detriment of consumers who are deprived of the benefits of competition, such as competitive pricing.
The discussion on output restrictions unveils yet another mechanism by which competition is undermined. By orchestrating a reduction in the supply of goods or services, competitors can artificially inflate prices to bolster their profits. The scenario provided, once again involving the suppliers X, Y, and Z, is illustrative of such collusion in action.
The present case law discussed below also delves into the realm of stifling technological innovation or investment, showcasing how concerted actions among competitors to halt or slow down technological advancements can severely impair market dynamism and consumer choice. The hypothetical scenario of automobile manufacturers X, Y, and Z engaging in a pact to curb research and development elucidates this infringement vividly.
Collusive tendering or bid-rigging, as the narrative explicates, is an artifice by which competitors manipulate the tendering process to ensure a predetermined outcome. This manipulation not only undermines the integrity of the tendering process but also escalates the costs for the entity inviting tenders.
Delving into vertical agreements, the narrative unfolds a myriad of arrangements like agency agreements, exclusive distribution or supply agreements, selective distribution, single branding, and franchise agreements. Each of these arrangements, under certain conditions, can morph into conduits for anti-competitive practices. For instance, exclusive distribution agreements, while benign on the surface, can potentially morph into instruments of market foreclosure if employed maliciously.
The discourse on franchise agreements unveils a complex interplay of production, distribution, and licensing arrangements, each with its unique dynamics and potential pitfalls in the context of competition law. The multifaceted nature of franchise agreements, underscores the necessity for meticulous scrutiny to ensure compliance with competition law.
The narrative on exemptions bifurcates the pathway into individual/template exemptions and block exemptions, each with its distinct criteria and procedural framework. Notably, the onus of demonstrating the requisite benefits, as stipulated under Sections 5 and 9 of the Act, rests upon the undertakings seeking the exemption. The individual/template exemption appears to be a more bespoke avenue catering to specific agreements, while block exemptions provide a broader, categorical shelter for a certain type of agreements within a particular industry.
Transitioning to the discourse on penalties, the text underscores the stringent financial repercussions awaiting those who transgress the prohibitions of Section 4 of the Act. The Commission’s authority, as vested by Section 38, to levy substantial fines up to PKR 75 million or an amount equivalent to 10% of the annual turnover of the infringing undertaking(s) is a testament to the gravity with which such violations are regarded. The additional penal ramifications for continued non-compliance further accentuate the rigour of the enforcement framework.
Leniency provisions, encapsulated in Section 39, furnish a mechanism for mitigating penalties for undertakings that opt for full disclosure regarding their involvement in prohibited agreements. This, along with the “Reward Payment to Informants Scheme,” forms a dual strategy to encourage disclosure and unearth anti-competitive practices. The incentivisation of whistle-blowers through potentially significant financial rewards is indicative of a proactive approach towards unearthing and dismantling cartel activities.
The segment on adjudication sketches the procedural voyage from the initiation of an inquiry to the issuance of remedial orders or financial penalties. The multiple avenues through which an inquiry can be triggered, whether suo motu by the Commission, upon a reference by the Federal Government, or through a formal complaint by an undertaking, depict a multi-pronged vigilance over market practices. The text also highlights the Commission’s powers to issue interim orders, underscoring a proactive stance to pre-empt serious damage during the adjudication process.
The provisions for appeal, first through the Competition Appellate Tribunal (CAT) and subsequently to the Supreme Court of Pakistan, enshrine the principle of legal redress and ensure a hierarchical adjudicatory framework.
A review of case law
In case, 2022 CLD 194, the Competition Commission of Pakistan (CCP) dealt with allegations against respondents who had entered into contracts restricting competition within the television audience measurement data and ratings market in Pakistan. The agreements in question were found to be restrictive as they precluded non-members of the Pakistan Broadcasters Association from accessing vital services, creating barriers to market entry. The Commission, consequently, issued prohibitory directions to the respondents under Section 31(b) of the Act, warning against engaging in such restrictive practices in the future.
The second case under the same citation, 2022 CLD 194, accentuated the special status of the Competition Act, 2010, vis-à-vis the Pakistan Electronic Media Regulatory Authority Ordinance, 2002. The emphasis was on the Competition Act as a special law governing matters of competition, with a particular focus on anti-competitive practices, whereas the Pakistan Electronic Media Regulatory Authority Ordinance, 2002, was earmarked for regulation of licensed activities sans a robust enforcement mechanism against anti-competitive practices.
In 2022 CLD 670, involving Show Cause Notices issued to DEL Electronics (Pvt.) Limited and another, the discourse revolved around resale price maintenance, the definition of ‘agreement’ under Section 4, and the broad scope of prohibited agreements. The Commission found that the respondent had indeed entered into agreements as defined broadly under Section 4, extending even to circulars issued as part of ongoing business relationships. The Commission directed the respondents to deposit a penalty amount, refund penalties imposed on their dealers, and cease such conduct.
Additionally, the case delved into the definition of the relevant market, emphasizing that the focus under Section 4 was on the restrictive activity rather than the market definition. The Commission rejected the respondent’s contention of separate relevant markets for each type of home appliance, maintaining a broader relevant market definition encompassing all products across the dealer network.
Another aspect highlighted was the ‘by object’ restriction under Section 4, which did not obviate an undertaking’s obligation to seek exemption and clearance from the Commission under Sections 5 and 9 of the Act, reiterating the procedural avenue for individual or block exemptions.
Case 2022 CLD 790 expounded on the retrospective effect of Section 62 in validating actions that distort competition post-October 2, 2007, regardless of the date of execution, underscoring the overarching regulatory prowess of the Commission in ensuring competition.
In 2022 CLD 266, the emphasis was on the mandate of the Competition Commission to ensure free competition, protect consumers, and market players from anti-competitive behaviour including abuse of dominance, deceptive marketing practices, and mergers which may lessen competition substantially.
Lastly, 2022 CLD 1068 involved Pakistan Sugar Mills Association and Member Undertakings, where the discussion centered on the scope of the term ‘decision’ and the implications of membership in an association of undertakings concerning prohibited agreements under Section 4. The cases iterated that a ‘decision’ could encompass various forms like letters, rules, or recommendations, and that membership in an association could, by implication, bind the member to the association’s agreements, especially if the member didn’t expressly oppose anti-competitive agreements concluded by the Association.
These cases, collectively, underscore the vigorous enforcement landscape under Section 4 of the Competition Act, its broad scope encompassing various forms of agreements, and the proactive regulatory stance of the Competition Commission of Pakistan in curbing anti-competitive practices and fostering a competitive market environment.
Some more cases from 2022 further explore the expanse of Section 4 of the Competition Act, 2010, in Pakistan, shedding light on different dimensions of prohibited agreements and practices that could distort fair competition in the market.
In the case 2022 CLD 1068, the Competition Commission of Pakistan (CCP) dealt with a myriad of issues concerning prohibited agreements under Section 4. The Commission delineated that the mere exchange of information between competitors does not fall within the ambit of Section 4, unless there’s a clear indication that such an exchange has the “object” or “effect” of preventing, restricting, or reducing competition within the relevant market. This highlights the need for a discernible anti-competitive intent or effect to trigger the prohibitions under Section 4(1) read with Section 4(2)(a).
Moreover, the Commission clarified that lobbying the government for favourable concessions is not per se anti-competitive. This underlines the permissible bounds of advocacy and lobbying, barring any anti-competitive undertakings.
The case brought forth a contentious scenario where the Competition Commission issued a show cause notice to undertakings and an association for making collective decisions on export quantities based on shared stock information. The majority view held this collective decision-making as unjustifiable and in violation of Section 4(1), as it could lead to coordinated sales volumes and pricing strategies, thereby distorting competition. However, the minority view disagreed, highlighting a lack of specific references to the alleged collective determination of export quantities in the show cause notice and the Enquiry Report.
Further, the case delved into the notion of ‘spill-over effect’, illustrating that anti-competitive behaviour’s effect could transcend the territorial limits of respective provinces, especially concerning essential commodities due to their wide consumption and usage as inputs for other industries.
On the issue of collusive tendering, the Commission, through the majority view, frowned upon the association’s interference in the competitive tender process, which negated the essence of competitive bidding by advocating for the division of tender amongst all participating undertakings. This was seen as a move to accommodate unsuccessful bidders, thereby breaching Section 4(2)(c) concerning collusive tendering.
The Commission also elucidated on the standard of proof required in proceedings concerning contraventions of Section 4, explaining that evidence of anti-competitive practices might be fragmentary due to the clandestine nature of such activities. Nonetheless, even fragmentary evidence could suffice to establish prohibited agreements, especially where there’s a discernible anti-competitive object or effect.
Regarding the definition of the relevant market, the Commission reiterated that defining the relevant market isn’t crucial for the application of Section 4. The emphasis is rather on the restrictive activity or prohibition carried out through an ‘agreement’, underscoring the prohibited conduct over market definition.
Lastly, the wide scope of the term ‘agreement’ as used in Section 4 was emphasized, where an ‘agreement’ could refer to any arrangement, understanding, or practice, irrespective of its form, showcasing the broad net cast by Section 4 in addressing various shapes and forms of anti-competitive agreements.
In a similar vein, 2022 CLD 89 and 2022 CLD 790, further accentuate the overarching regulatory prowess of the Competition Commission to remedy anti-competitive practices and to ensure consumer protection as a core principle in all its proceedings, illustrating the broader aim of fostering fair competition and protecting consumers from the ill effects of anti-competitive behaviours.
These cases collectively offer a comprehensive insight into the expansive scope and application of Section 4 of the Competition Act, 2010, in Pakistan, shedding light on the various facets of prohibited agreements and the vigilant stance of the Competition Commission in enforcing the provisions of the Act to promote fair competition and protect consumer interests.
The Pakistani legal discourse on restrictive agreements and practices as interpreted by the Competition Commission of Pakistan (CCP) is both rich and nuanced. The elucidations provided by the CCP in various cases form a tapestry of legal reasoning that serves to better delineate the contours of Competition Law, particularly Section 4, which focuses on prohibited agreements.
In the case of 2022 CLD 1068, the CCP delineated the parameters of prohibited agreements under Section 4, particularly focusing on the mere exchange of information between competitors. It was opined that such exchanges must have a clear indication of preventing, restricting, or reducing competition within the relevant market to fall under the scope of Section 4(1) read with Section 4(2)(a). This case also highlighted that lobbying for favourable governmental concessions is not per se anti-competitive.
Moreover, the case of 2022 CLD 670 explored the dynamics of resale price maintenance under Section 4, categorizing it as a prohibited agreement that restricts competition by object, as it inhibits a retailer’s ability to independently determine resale prices.
The case 2022 CLD 266 expounded upon the Competition Commission’s mandate under the Competition Act, 2010, in enhancing economic efficiency and shielding consumers from anti-competitive behaviour. This includes prohibiting abuse of dominance, certain agreements, and deceptive marketing practices.
Furthermore, the case of 2022 CLD 1068 underscored the essence of sharing commercially sensitive information, particularly stock information, among competitors. The CCP held that such sharing constituted a violation of Section 4(1) of the Competition Act, 2010, as it could potentially coordinate future sales volumes, export, and pricing strategies, consequently distorting competition.
The case of 2021 CLD 699 delved into an agreement between a paint manufacturer and its dealers for fixing the price of paints. The CCP condemned such agreement as it violated Section 4 of the Competition Act, 2010, restricting competition within the relevant market.
In 2020 CLD 433, the CCP highlighted that the doctrine of State Compulsion or Regulatory Conduct Defense was not available to entities fixing prices, thus violating Section 4 of the Competition Act, 2010, and imposed a hefty penalty on the Pakistan Flour Mills Association.
The case of 2019 CLD 164 examined an exclusivity agreement between a housing society and a cable service provider, which was found to contravene Section 4 of the Competition Act, 2010, as it restricted competition by granting monopoly rights to the service provider.
Lastly, 2019 CLD 326 reiterated the principle that in a market economy, businesses are free to set their prices and discount their goods and services as they see fit, independent of their competitors and trade associations, aligning with the ethos of Section 4 of the Competition Act, 2010.
This kaleidoscopic view of cases, through the lens of the CCP, provides a nuanced understanding of the legal landscape concerning restrictive agreements and practices in Pakistan, forming a substantive basis for further legal discourse and policy formulation in the realm of Competition Law.
10 Important citations on restrictive contracts and practices
These citations illustrate diverse scenarios concerning anti-competitive practices and the Competition Commission of Pakistan’s (CCP) enforcement of the Competition Act, 2010. The issues raised span various sectors including newspaper advertising, pharmaceuticals, oil, poultry, paint manufacturing, tobacco, credit rating, and engineering.
In the first and second citations (2019 CLD 326), the All Pakistan Newspapers Society (APNS) was found to have engaged in anti-competitive practices. They colluded with government departments to block advertisements in newspapers and periodicals over a payment dispute. The APNS also imposed accreditation processes on advertising agencies which the CCP considered to be anti-competitive.
The third citation (2019 CLD 1285) emphasizes the importance of a competitive process in procurement to achieve better value for money. It underscores that genuine competition is key to achieving lower prices or better quality.
In the fourth citation (2019 CLD 1152), the Pharma Bureau was accused of anti-competitive practices concerning parallel pricing of medicines. However, the CCP concluded that the price increase was due to economic challenges and not a planned strategy, hence, the Pharma Bureau was not found in violation of Section 4 of the Competition Act, 2010.
The fifth citation (2019 CLD 1285) discusses a show-cause notice issued to the Oil Companies Advisory Council (OCAC) for alleged anti-competitive conduct in awarding and managing a fuel marking contract. The CCP found the OCAC’s actions to be anti-competitive and annulled the procurement process undertaken for the Fuel Marking Program.
The sixth citation (2018 CLD 759) relates to the Pakistan Poultry Association’s appeal against a penalty imposed by the CCP for fixing selling prices of poultry products. The appeal was dismissed as the advertising of prices was found to restrict competition.
In the seventh citation (2018 CLD 873), Reliance Paints Pakistan was fined for fixing a minimum retail price for its products, a practice ongoing for almost three years until the issuance of a show-cause notice.
The eighth citation (2018 CLD 984) discusses the Pakistan Tobacco Company’s exemption from Section 4 of the Competition Act, 2010 concerning retail price fixing, following an undertaking to print only maximum retail prices on product packs.
The ninth citation (2017 CLD 1003) details a predatory pricing complaint against JCR-VIS Credit Rating Company Limited. The CCP imposed a penalty, finding the respondent engaged in predatory pricing in contravention of the Competition Act, 2010.
The tenth citation (2017 CLD 229) highlights a case where the Pakistan Engineering Council (PEC) was fined for restricting the provision of bid and performance securities to ‘AA’ rated insurance companies, which was found to be in violation of Section 4 of the Competition Act, 2010.
These cases collectively reflect the CCP’s active enforcement of the Competition Act, 2010 across different sectors to ensure market competitiveness and consumer protection. They also highlight the diverse nature of anti-competitive practices and the varying degrees of regulatory intervention required to maintain market fairness and consumer interests.
