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Vertical Restraints In Supply Chains.

Vertical Restraints in Supply Chains

1. Legal Basis

Governed by Section 3(4) of the Competition Act, 2002 (India).

It covers agreements between enterprises at different stages or levels of production, distribution, or supply that may cause Appreciable Adverse Effect on Competition (AAEC).

Unlike horizontal cartels, vertical restraints are judged under the rule of reason — CCI must assess their effect on competition.

2. What Are Vertical Restraints?

These are restrictions imposed by a firm on its trading partners in the supply chain.

Example: A manufacturer dictating how a retailer sells its products.

3. Types of Vertical Restraints (Section 3(4))

4. When Do Vertical Restraints Become Illegal?

CCI checks for AAEC using factors under Section 19(3):

Creation of entry barriers

Driving competitors out

Foreclosure of competition

Consumer harm

Impact on innovation

Vertical restraints can sometimes be justified by efficiency benefits (quality control, brand protection).

5. Supply Chain Contexts Where Issues Arise

FMCG distribution networks

Automobile dealership agreements

E-commerce platform seller restrictions

Pharmaceutical distribution

Tech product licensing and app stores

6. Key Case Laws

Case 1: Fx Enterprise Solutions v. Hyundai Motor India Ltd. (2017, CCI)

Facts: Hyundai imposed discount controls and resale price maintenance on dealers.
Held: RPM and dealer restrictions anti-competitive.
Principle: Manufacturers cannot fix resale prices indirectly.

Case 2: Shamsher Kataria v. Honda Siel Cars India Ltd. (2014, CCI)

Facts: Auto manufacturers restricted spare parts and technical info to authorized dealers.
Held: Exclusive supply + refusal to deal abused aftermarket control.
Principle: Vertical restraints foreclosing independent repairers are unlawful.

Case 3: All India Online Vendors Association v. Flipkart & Amazon (2020, CCI)

Facts: E-commerce platforms allegedly favored certain sellers via exclusive arrangements.
Held: Investigation ordered for exclusive distribution and preferential treatment.
Principle: Digital platform vertical agreements subject to scrutiny.

Case 4: Jasper Infotech (Snapdeal) Case (CCI, 2014)

Facts: Allegations of exclusive agreements with sellers.
Held: Vertical restraints assessed under rule of reason; no dominance proven.
Principle: Not all exclusivity is illegal — market power matters.

Case 5: Schott Glass India Pvt. Ltd. v. CCI (2014, COMPAT)

Facts: Refusal to supply critical glass tubing.
Held: Vertical refusal to deal may foreclose competitors.
Principle: Denial of access in supply chain can violate Section 3(4).

Case 6: ESYS Information Technologies v. Intel Corporation (CCI)

Facts: Alleged conditional rebates and exclusivity in chipset distribution.
Held: Exclusive supply and rebate structures scrutinized.
Principle: Loyalty rebates can amount to vertical foreclosure.

Case 7: Automobiles Dealers Association Case (CCI)

Facts: Car companies restricted dealer territory and pricing freedom.
Held: Exclusive distribution + RPM issues identified.
Principle: Territorial restrictions may restrict intra-brand competition.

7. Distinction: Vertical vs Horizontal

8. Pro-Competitive Justifications (Sometimes Allowed)

Quality assurance

Brand protection

Prevention of free-riding

Efficient distribution

Investment recovery

9. Penalties

Same as other anti-competitive agreements:

Up to 10% of average turnover

Modification of contracts

Cease and desist orders

10. Key Legal Principles

Conclusion

Vertical restraints in supply chains become unlawful when they:

Restrict market access + reduce consumer choice + create entry barriers

Courts and CCI balance business efficiency vs market foreclosure.

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