The Per Se Approach and the Rule of Reason

Every competition system must decide how much inquiry to require before condemning an agreement. At one extreme the agreement is unlawful once proved, with no examination of its effects or justification, which is the per se rule of American antitrust. At the other the agreement is judged wholly by its effects in a defined market, which is the rule of reason. Indian law adopts neither in its pure form. Section 3(3) raises a rebuttable presumption, which is a middle course, and Section 3(4) applies a full effects analysis.

1. The Two Approaches

The per se rule developed in the United States for restraints whose tendency to harm is so plain, and whose redeeming virtue so unlikely, that individual examination is not worth its cost. Horizontal price fixing, market division and bid rigging are treated in this way. Once the agreement is established, the inquiry ends: the defendant may not show that the price agreed was reasonable, that the parties lacked market power, or that the arrangement produced benefits. The justification for the rule is administrative rather than theoretical, resting on the saving of litigation cost and on the predictability that a bright line gives to business.

The rule of reason requires the whole picture. The court examines the market, the position of the parties in it, the nature and effect of the restraint, the reasons for its adoption and the alternatives available, and asks whether on balance competition is promoted or suppressed. It is applied to everything that is not per se unlawful, and in practice it decides most cases, since very little conduct falls within the per se categories.

2. The Indian Position

The Indian Act uses neither expression. What it does is divide agreements into two classes and treat them differently.

1. Section 3(3): a rebuttable presumption. Where enterprises in identical or similar trade enter into an agreement that determines prices, limits production or supply, shares the market or rigs bids, such an agreement shall be presumed to have an appreciable adverse effect on competition. The Commission need not prove the effect; the party may disprove it.
2. Section 3(4): a full effects analysis. A vertical agreement of one of the listed kinds is a contravention only if it causes or is likely to cause an appreciable adverse effect, and that must be established by reference to the factors in Section 19(3). This is a rule of reason analysis in all but name.
3. Section 3(1): the governing provision. Both sub-sections operate within Section 3(1), which prohibits only agreements having the stated effect. Section 3(3) does not create a separate offence of entering into a listed agreement; it supplies a presumption about the effect that Section 3(1) requires.

3. Why a Middle Course Was Chosen

Three reasons are given, and they are worth stating because they explain the design of the section. Cartels are secret and their effects are hard to quantify; requiring the regulator to prove the effect of a price agreement would make enforcement almost impossible, which is the case for a presumption. At the same time Indian markets include many in which parallel conduct has structural explanations, such as tenders with a single public buyer, concentrated industries with homogeneous products, and regulated prices, so a rule admitting no answer would condemn conduct that is not collusive at all. And the constitutional setting matters: an irrebuttable presumption imposing a penalty would be difficult to defend against Article 14 and Article 19(1)(g), whereas a rebuttable one leaves the party an opportunity to be heard on the merits.

4. Where the Distinction Shows Itself

5. Related Topics and Provisions