Do phrases like ‘non-compete’ or ‘exclusive’ in a commercial contract have anti-competitive implications? Probably not in layman’s language, anti-competitive asks remain buried in various provisions of business agreements.
The CCI’s order, not too long ago, against Google in the In re: Kshitiz Arya and another v. Google LLC and others, Case No. 19 of 2020, was about being guilty of anti-competitive practices and abuse of dominance in the market for licensable Smart TV device operating systems in India involving Television App Distribution Agreement (TADA) and Android Compatibility Commitment (ACC). This highlights the importance of due diligence in assessing anti-competitive aspects in a commercial agreement.
Exclusivity, as a term, in horizontal commercial agreements between direct competitors or on a vertical level between different operating entities like manufacturers and dealers, is negotiated as pure non-compete restrictions. At the horizontal level, these get evaluated under the Section 3(3) and are considered per se void unless proven otherwise. At the vertical level as provided under Section 3(4), these are assessed using the Rule of Reason against, both, pro and anti-competitive elements of Section 19(3).
Vertical restraints are contained in Section 3(4) of the Act through resale price maintenance, refusal to deal, tie-in arrangements and exclusive agreements. These are terms commonly negotiated in commercial contracts and have a bearing on competition in the relevant market. In many cases, exclusionary conduct could amount to an abuse of dominant position under Section 4 of the Act (abuse of dominance).
Agreements such as Exclusive Distribution/ Supply, Agency, Franchise Agreements, restrictive covenants, etc. are commercial agreements to be considered for anti-competitive effects.
WHAT WAS GOOGLE’S SMART TV OEMS CASE?
The allegations involved two agreements: TADA and ACC. Under an open-source licence, Google makes Android Open-Source Project (AOSP) available to any third party, however, the AOSP licence does not provide Original Equipment Manufacturers (OEMs) the ability to distribute Google’s proprietary apps, such as Play Store, YouTube, and others, which are referred to as Google Applications in TADA. Google offers an option to the OEMs to sign a non-exclusive agreement, known as TADA which prevents the OEMs from distributing Google Apps and prevents the use of the Android logo and trademarks.
Additionally, TADA mandates that OEMs follow a legal and effective ACC.
ACC, formerly known as Anti-Fragmentation Agreement prevents OEMs from manufacturing/ distributing/ selling any other Smart television operating on a competing forked Android OS, barring the OEMs from developing their operating system as well as limiting research and scientific/ technical development of forked Android-based OS. This is meant to restrict fragmentation.
ACC lays down conditions vital to the transaction. For instance, for the Smart TV OEMs to be allowed to preinstall Google’s proprietary apps, device manufacturers have to follow the ACC for all Android devices they manufacture and distribute, or sell. The ACC terms essentially, requires Android compatibility to be followed by the OEMs to run in the Android execution environment and to preinstall the complete suite of Google apps to ensure pre-installation of any Google product. The compatibility test is to avoid absolute deviation from Google’s Android OS by the OEMs, it asserts.
Similarly, TADA imposed conditions that OEMs must distribute all Google Applications on each Device; Google Applications must be preloaded and placed on the default Home Screen; Google Play Store can be the only application/ service that has install packages permission rather than individual apps listed on Play Store and to pass the Compatibility Test Suite (CTS) designed by Google in case the developer does not pre-install Google apps with an intent to limit the enhanced cloning by the OEMs.
CCI’S ANALYSIS
- Installation of Google’s Play Store, being conditional on the signing of an ACC for all android devices manufactured /distributed/marketed by OEMs, implies Google has limited the device manufacturers’ ability and incentive to develop and sell devices based on alternative versions of Android, i.e., Android forks, limiting technical or scientific development relating to goods or services to the detriment of consumers.
- This tying of ‘must have’ Google apps when other alternatives are accessible, is an unfair imposition of conditions and is in contravention of section 4(2)(a)(i) of the Act.
- ACC prohibited OEMs from producing, distributing, or selling any other device that runs a forked Android OS. As a result, with Google’s market dominance and pronounced network effects, developers of such cloned Android OS are denied market access, violating Section 4(2)(c) of the Act.
Google was effectively constructing a large roadblock for OS developers to develop/license a rival and maybe better ‘forked android’ OS as a result of these agreements between Google and all major smart TV OEMs.
A similar, little older case against Google, In re: Mr. Umar Javeed and others v. Google LLC and another, Case No. 39 of 2018, in the Smart mobile devices was considered by the CCI, wherein the device manufacturers were barred from selecting apps from the Google Mobile Services (GMS) suite of apps for preinstallation under the Mobile App Distribution Agreement (MADA). The CCI held that the pre-installation of the GMS suite under MADA amounted to an unfair condition imposed on the device manufacturers, in violation of Section 4(2)(a)(i) of the Act. Google’s dominance in Play Store to safeguard its online general search market and prevention of market access to other search apps violated Section 4(2)(c) of the Act as search algorithms require voluminous data received from users using mobile search and with Google denying market access, it forecloses the entry of new search apps.
NON-COMPETE RESTRICTIONS IN CASE OF JOINT VENTURES AND ACQUISITIONS
The CCI’s guidance note suggests, reasonability as a ground for assessing exclusivity restrictions resulting in anti-competitive outcomes. In case of a transfer involving both goodwill and know-how, a non-compete of 3 years could be justified and if only goodwill is involved then up to 2 years. The restriction would be restricted to the primary business of the transferred business or the venture.
CCI’S ASSESSMENT OF ANTI-COMPETITIVE AGREEMENTS
The CCI uses the requirements of Sections 3(4) and 4 of the Act to examine the market power of the parties to determine whether they have entered into anti-competitive agreements. Market share, its structure, size, competitors, economic power, resources, consumer dependency, entrance hurdles, vertical integration, etc., are commonly used to determine market power or substantial market power. There is jurisprudence to indicate that a 30% market share in the relevant market can result in an adverse effect on competition.
If the exclusivity is not objectively justified, exclusive agreements by a dominant firm are frequently considered per se, violative of abuse of dominance under Sections 4(2)(a)(ii) (unfair or discriminatory condition in purchase or sale of goods or services) and 4(2)(c) (denial of market access). Anti-competitive agreements, on the other hand, are decided by the CCI using the considerations set forth in Section 19(3), which include both pro and anti-competitive effects such as creation of barriers to entry and accrual of benefits to consumers, respectively.
Similarly, in case of inter (entities with different business segments) and intra (entities with same business segment) brand agreements, the exclusivity restrictions limit competition, when suppliers collude over prices and quantities, which result in limiting innovation.
It cannot be argued that there are no pro-competitive grounds in exclusivity agreements. It is sometimes considered as a way to safeguard the brand image or to prevent free-riding benefits through best promotional techniques. Reasonable restrictions and the necessity to safeguard Intellectual Property rights are prime motivators of the CCI for granting exemption from the assessment of competition concerns in cases of exclusivity involving IP under Section 3(5) of the Act.
CONCLUSION
Although, there is no single formula for determining whether, exclusivity restraints imposed by dominant enterprises are objective or are the result of abuse of dominance or anti-competitive practises, the legislation is broad in its interpretation and application.
These decisions indicate CCI’s critical application in viewing exclusivity in business agreements. It also, has thrown caution to big giants and small players in different market segments to not view non-compete clauses, casually.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein.
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