Vertical agreements run along the supply chain rather than across a single market level: a manufacturer and its dealers, a producer and its distributors, a brand and its retailers. Unlike the cartels caught by Section 3(3), these arrangements are not presumed illegal. Section 3(4) of the Competition Act, 2002 lists five suspect vertical restraints, but each must be tested on the rule of reason — a structured weighing of pro-competitive benefits against anti-competitive harm using the Section 19(3) factors. This chapter traces that test through the bare provision, its Indian and comparative case law, and the recurring exam traps around resale price maintenance and tie-ins.
What makes an agreement "vertical"
Section 3(1) of the Competition Act, 2002 lays down the master prohibition: no enterprise or person shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India. Section 3(2) renders any such agreement void. The Act then splits the world of agreements into two analytical streams. Section 3(3) governs horizontal agreements between competitors operating at the same level of the production chain — price-fixing, output limitation, market sharing and bid-rigging — which are presumed to cause AAEC.
Section 3(4), by contrast, governs vertical agreements: those between enterprises or persons "at different stages or levels of the production chain in different markets". The classic example is a manufacturer and its dealer, or a franchisor and its franchisee. Because the parties are not competitors but complementary links in getting a product to the consumer, the law does not presume harm. As the statute itself signals by omitting any presumption, a vertical restraint contravenes Section 3 only if it actually causes or is likely to cause AAEC — a question answered through the rule of reason rather than a per se rule. This distinction between Section 3(3) and 3(4) is the single most tested point in this topic, and it flows directly from the scheme of anti-competitive agreements.
The five restraints listed in Section 3(4)
Section 3(4) provides an illustrative, non-exhaustive list of five vertical restraints, each defined in the Explanation to the sub-section. (a) Tie-in arrangement includes any agreement requiring a purchaser of goods, as a condition of purchase, to buy some other goods. (b) Exclusive supply agreement includes any agreement restricting in any manner the purchaser, in the course of his trade, from acquiring or dealing in any goods other than those of the seller or any other person. (c) Exclusive distribution agreement includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goods. (d) Refusal to deal includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought. (e) Resale price maintenance (RPM) includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.
The word "includes" matters: the list does not exhaust the species of vertical restraint that may be examined, but in practice the CCI maps complaints onto one of these five heads. The chapeau of Section 3(4) is equally important — it expressly subjects the entire sub-section to the requirement that the agreement "causes or is likely to cause an appreciable adverse effect on competition in India". That clause is the textual hook for the rule of reason.
What the rule of reason actually requires
The rule of reason is a method of inquiry, not a verdict. Rather than condemning a practice by its label, the adjudicator examines the agreement in its full market context to decide whether, on balance, it harms competition. The doctrine is borrowed from United States antitrust jurisprudence, where Standard Oil Co. of New Jersey v. United States (1911) first articulated that only "unreasonable" restraints of trade offend the Sherman Act. The modern locus classicus for vertical restraints is Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977), in which the U.S. Supreme Court overruled United States v. Arnold Schwinn & Co. and held that non-price vertical territorial restrictions must be judged under the rule of reason because departures from that standard must rest on "demonstrable economic effect rather than…formalistic line drawing".
Under Indian law the rule of reason is operationalised through Section 19(3), which lists the factors the Commission must weigh when deciding whether an agreement causes AAEC. The negative (anti-competitive) factors are: creation of barriers to new entrants; driving existing competitors out of the market; and foreclosure of competition by hindering entry. The positive (pro-competitive) factors are: accrual of benefits to consumers; improvements in production or distribution of goods or provision of services; and promotion of technical, scientific and economic development by means of production or distribution. The CCI tallies these factors and asks whether the harms substantially outweigh the gains. This statutory balancing exercise is the rule of reason in Indian competition law.
Per se rule vs rule of reason in the Act's scheme
The contrast between the two standards animates the whole of Section 3. Section 3(3) attaches a presumption: once a horizontal agreement of the listed kind is shown, AAEC is "presumed" and the burden shifts to the defendant to rebut it. This is the closest the Act comes to a per se rule. Section 3(4) attaches no presumption; the informant must affirmatively establish AAEC. The Supreme Court drew exactly this line in Competition Commission of India v. Coordination Committee of Artistes and Technicians of W.B. Film and Television, (2017) 5 SCC 17, observing that the Section 19(3) factors govern the inquiry into appreciable adverse effect and that the analysis under Section 3 is effects-based.
Indian courts had embraced rule-of-reason thinking even under the predecessor statute. In Tata Engineering and Locomotive Co. Ltd. (TELCO) v. Registrar of Restrictive Trade Agreements (1977), the Supreme Court, applying the Monopolies and Restrictive Trade Practices Act, 1969, upheld territorial allocation in TELCO's dealership agreements on the reasoning that the restriction served equitable distribution and was not unreasonable in context — an early Indian application of the rule of reason to a vertical restraint. The 1984 amendment to the MRTP Act later made territorial allocation a per se restrictive trade practice, but the Competition Act, 2002 returned vertical restraints firmly to the rule-of-reason fold under Section 3(4). For the foundational architecture see the anti-competitive agreements chapter.
The two-limb test for a Section 3(4) contravention
To establish a contravention of Section 3(4) read with Section 3(1), two conditions must be satisfied. First, an agreement, arrangement or understanding of one of the listed kinds must exist between parties at different levels of the production chain. Second, that agreement must cause or be likely to cause AAEC in India. The first limb is a factual question about the existence and nature of the vertical relationship; the second is the rule-of-reason evaluation under Section 19(3).
Critically, the existence of a restraint alone proves nothing. A manufacturer may lawfully appoint exclusive distributors, allocate territories, or insist on quality conditions, provided the net competitive effect is benign or beneficial. The CCI's task is to ask whether the restraint forecloses rivals, raises entry barriers or harms consumers to a degree that the efficiency justifications cannot redeem. Where the relevant market is fiercely competitive, a vertical restraint imposed by a single non-dominant supplier rarely causes AAEC, because consumers can switch to competing brands — the inter-brand competition disciplines any intra-brand restraint. This insight, central to GTE Sylvania, recurs throughout the CCI's vertical-restraint orders.
Resale price maintenance: the Hyundai litigation
RPM under Section 3(4)(e) is the most litigated vertical restraint in India, and the leading authority is the Hyundai saga. In Fx Enterprise Solutions India Pvt. Ltd. v. Hyundai Motor India Ltd. (CCI, 2017), the Commission found that Hyundai operated a "Discount Control Mechanism" capping the maximum discount its dealers could offer, thereby effectively fixing a minimum resale price, and enforced it by penalising deviating dealers and monitoring through a "mystery shopping agency". The CCI held this to be RPM in contravention of Section 3(4)(e) and also found a tie-in in the requirement that dealers use only recommended lubricants and oils. It imposed a penalty of roughly Rs. 87 crore.
On appeal in Hyundai Motor India Ltd. v. Competition Commission of India (NCLAT, judgment dated 19 September 2018), the National Company Law Appellate Tribunal set aside the order. The Tribunal held that the CCI could not simply adopt the Director General's findings but had to undertake an independent analysis, and that there was insufficient evidence of AAEC. The NCLAT faulted the failure to define the relevant market properly under Sections 19(6) and 19(7) and identified internal contradictions in the order — for instance, treating warranty conditions on non-recommended oils as both permissible and as a tie-in. The decision is a sharp reminder that even an apparent RPM must clear the rule-of-reason threshold of demonstrated competitive harm; labelling alone is fatal to neither side.
RPM in e-commerce: Snapdeal v KAFF
The second pillar of Indian RPM law is Jasper Infotech Private Limited (Snapdeal) v. KAFF Appliances (India) Pvt. Ltd., Case No. 61 of 2014, decided by the CCI on 15 January 2019. Snapdeal, an online marketplace, alleged that KAFF (a maker of chimneys and hobs) sought to enforce a "market operating price" and threatened a caution notice when Snapdeal listed the goods at deep discounts. After a multi-year investigation the Director General found no contravention of Section 3(4)(e), reasoning that an online marketplace performs no "material function" in the vertical chain, that the buyer-seller relationship essential to RPM was absent because Snapdeal did not purchase the goods from KAFF, and that the platform did not influence the listed prices.
The CCI dismissed the information, but its reasoning matters for the doctrine: it reaffirmed that vertical restraints under Section 3(4), including RPM, are not per se anti-competitive, and that the onus lies on the informant to demonstrate AAEC. The order is also noted for accepting that vertical agreements frequently protect end-consumer interests and can be pro-competitive — for example by ensuring pre-sale services, preventing free-riding and supporting brand investment. Read with Hyundai, Snapdeal v KAFF confirms that India treats RPM through an effects-based lens, contrasting with the older common-law hostility to price restraints.
Tie-in arrangements and the Sonam Sharma test
A tie-in under Section 3(4)(a) conditions the sale of a desired "tying" product on the purchase of a separate "tied" product. The framework for assessing tie-ins was laid down by the CCI in Shri Sonam Sharma v. Apple Inc. USA & Ors. (CCI, order dated 19 March 2013), which concerned the bundling of Apple iPhones with the GSM services of Airtel and Vodafone. Drawing on U.S. jurisprudence, the Commission identified the essential conditions for an anti-competitive tie-in: (i) there must be two separate and distinct products capable of being tied together; (ii) the seller must possess sufficient market or economic power over the tying product to appreciably restrain free competition in the market for the tied product; (iii) the tie-in must affect a "not insubstantial" amount of commerce; and the arrangement must have an anti-competitive effect.
Because market power is a precondition, a tie-in by a supplier without significant power in the tying market generally escapes condemnation — the rule of reason again doing the work. The CCI in Sonam Sharma ultimately found no contravention, partly because the alleged ties did not foreclose competition in a relevant market where rival handsets and networks were freely available. The tie-in inquiry therefore overlaps conceptually with the assessment of market power that the abuse of dominant position chapter examines, though Section 3(4) requires only sufficient power to restrain competition, not full dominance.
Exclusive supply and exclusive distribution
Exclusive supply agreements (Section 3(4)(b)) bind a purchaser to deal only in the seller's goods, while exclusive distribution agreements (Section 3(4)(c)) limit output or carve up territories and markets among distributors. Both are staples of legitimate distribution networks and are routinely upheld where inter-brand competition remains vigorous. The pro-competitive rationale is well recognised: territorial exclusivity lets a distributor invest in local marketing, after-sales service and inventory without fear of free-riding by neighbouring dealers, which can expand output and improve service.
The danger arises when such arrangements foreclose a substantial share of the market to rivals — for instance, when a supplier with a large market share locks up most efficient distributors, raising entry barriers for new manufacturers. The Section 19(3) foreclosure and barrier-to-entry factors are the analytical touchstones. The CCI consistently asks: what share of distribution outlets is tied up, for how long, and can rivals find alternative routes to market? Where the foreclosed share is modest and the supplier non-dominant, exclusivity survives the rule of reason. The TELCO reasoning — that territorial allocation served equitable distribution — remains a useful template for the efficiency defence, even though it arose under the MRTP regime.
Refusal to deal
Refusal to deal under Section 3(4)(d) covers agreements that restrict, by any method, the persons or classes of persons to whom goods are sold or from whom goods are bought. A unilateral business decision to stop dealing with a particular counterparty is not, by itself, a Section 3 violation, because Section 3 requires an "agreement". The provision bites where a coordinated or contractually structured restriction limits the universe of trading partners in a way that forecloses competition — for example, where a supplier and its dealers agree to boycott a discounter or a new entrant.
The boundary between a legitimate selective-distribution choice and an anti-competitive refusal again turns on effects. Selective distribution on objective quality criteria, applied uniformly, is generally benign; a refusal designed to discipline price-cutters or exclude rivals raises AAEC concerns. The collective-boycott logic of CCI v. Coordination Committee of Artistes and Technicians, (2017) 5 SCC 17 — though decided under Section 3(3) as a concerted refusal among competitors — illustrates how restricting the persons with whom one will deal can choke competition, and the same effects-based reasoning informs the vertical analysis under Section 3(4)(d).
The Section 3(5) safe harbours
Section 3(5) carves out two important exceptions that apply across Section 3, including vertical agreements. First, Section 3 does not restrict the right of any person to restrain infringement of, or to impose reasonable conditions necessary for protecting, intellectual property rights conferred under the listed statutes — the Patents Act, the Trade Marks Act, the Copyright Act, the Designs Act, the Geographical Indications Act and the Semiconductor Integrated Circuits Layout-Design Act. Second, the section does not restrict the right of any person to export goods from India to the extent the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.
The IPR exception is significant for vertical licensing and distribution arrangements, but it is not a blanket immunity: the conditions imposed must be "reasonable" and "necessary" to protect the IPR. An IP-holder who uses licensing terms to impose unreasonable RPM or foreclosure cannot shelter behind Section 3(5). Read with the definitions in the key definitions chapter, these exceptions delimit the outer boundary of vertical-restraint liability.
Comparative perspective: how the U.S. converged on rule of reason
India's effects-based treatment of RPM mirrors a long evolution in U.S. antitrust. For nearly a century, minimum RPM was per se illegal under Dr. Miles Medical Co. v. John D. Park & Sons Co. (1911). That position was overturned in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), where the U.S. Supreme Court, by a 5-4 majority, held that vertical minimum-price agreements must be judged under the rule of reason because economic learning shows RPM can have pro-competitive justifications — encouraging retailer services, preventing free-riding and facilitating new entry.
Together with GTE Sylvania (non-price vertical restraints), Leegin completed the American migration of all vertical restraints — price and non-price — to the rule of reason. Indian law, drafted later, embedded the rule-of-reason approach for vertical agreements from the outset in Section 3(4), so the CCI never had to make the doctrinal leap that Leegin represented. The comparative material is examiner-friendly: it lets a candidate show that India's refusal to treat RPM as per se illegal is consistent with the mainstream of modern competition economics, not an outlier.
Burden of proof and the role of relevant-market analysis
In vertical cases the burden lies squarely on the informant or the DG to prove AAEC; there is no presumption to discharge it. This is the procedural mirror of the substantive rule of reason. The Hyundai NCLAT decision underscores how demanding that burden is: a finding of contravention requires the Commission's own independent, evidence-based analysis of the relevant market, the parties' market position, and the actual or likely foreclosure effect — not mere reliance on the existence of a restraint or on the DG's conclusions.
Relevant-market definition is therefore the gateway to a credible AAEC finding. Without delineating the relevant product and geographic market under Sections 19(5) to 19(7), the Commission cannot measure foreclosure or market power. The methodology is examined in the relevant market and dominance chapter; in the vertical context it answers the pivotal question whether the restraint affects a market in which competition could realistically be harmed. A precise relevant market that shows vigorous inter-brand rivalry will usually defeat a vertical-restraint complaint, because the disciplining force of competing brands neutralises any intra-brand restriction.
Exam takeaways and common traps
For judiciary and CLAT-PG candidates, the high-yield points are: (1) Section 3(4) vertical agreements carry no presumption of AAEC, unlike Section 3(3) horizontals — this single distinction answers most one-liner questions. (2) The five restraints are tie-in, exclusive supply, exclusive distribution, refusal to deal and RPM, all governed by the Explanation to Section 3(4). (3) The rule of reason is operationalised through the six factors in Section 19(3) — three anti-competitive (barriers, eliminating competitors, foreclosure) and three pro-competitive (consumer benefits, production/distribution improvements, technical/economic development). (4) RPM is not per se illegal in India: Fx Enterprise (Hyundai) found a contravention at the CCI stage but the NCLAT set it aside for want of AAEC evidence; Snapdeal v KAFF dismissed the complaint. (5) The tie-in test comes from Sonam Sharma v. Apple — two distinct products, market power over the tying product, substantial commerce affected.
Common traps: confusing the burden (informant proves AAEC in vertical cases, defendant rebuts the presumption in horizontal cases); assuming RPM is per se void (it is not in India, and no longer in the U.S. after Leegin); and overlooking the Section 3(5) IPR and export safe harbours. A model answer should always frame the analysis as a two-limb test — existence of a Section 3(4) restraint, then a Section 19(3) rule-of-reason balancing — and anchor each limb in the verified case law above. For broader context begin with the introduction to the Competition Act.
Frequently asked questions
Are vertical agreements presumed to be anti-competitive under the Competition Act, 2002?
No. Unlike horizontal agreements under Section 3(3), which carry a statutory presumption of appreciable adverse effect on competition (AAEC), vertical agreements under Section 3(4) carry no such presumption. They are judged on the rule of reason, and the informant must affirmatively prove AAEC using the Section 19(3) factors. This was reaffirmed in Jasper Infotech (Snapdeal) v. KAFF Appliances (CCI, 2019).
What are the five vertical restraints listed in Section 3(4)?
They are: (a) tie-in arrangement; (b) exclusive supply agreement; (c) exclusive distribution agreement; (d) refusal to deal; and (e) resale price maintenance (RPM). The list is illustrative ("includes"), and each is defined in the Explanation to Section 3(4). All five are actionable only if they cause or are likely to cause AAEC in India.
Is resale price maintenance (RPM) per se illegal in India?
No. RPM under Section 3(4)(e) is assessed under the rule of reason, not a per se rule. In Fx Enterprise Solutions v. Hyundai Motor India (2017) the CCI found a contravention through a discount control mechanism, but the NCLAT set the order aside in 2018 for lack of evidence of AAEC. India's approach aligns with the U.S. position after Leegin Creative Leather Products v. PSKS, 551 U.S. 877 (2007), which overruled the per se rule of Dr. Miles.
How does the rule of reason work under the Competition Act?
The rule of reason is operationalised through Section 19(3), which directs the CCI to weigh three anti-competitive factors (creation of barriers to entry, driving out existing competitors, foreclosure of competition) against three pro-competitive factors (accrual of benefits to consumers, improvements in production or distribution, and promotion of technical, scientific and economic development). An agreement contravenes Section 3 only if the harms outweigh the benefits.
What is the test for an anti-competitive tie-in arrangement in India?
The CCI laid down the test in Shri Sonam Sharma v. Apple Inc. (2013): there must be two separate and distinct products; the seller must have sufficient market power over the tying product to restrain competition in the tied-product market; the arrangement must affect a not-insubstantial amount of commerce; and it must have an anti-competitive effect. A tie-in by a supplier lacking market power generally escapes condemnation.
Do Section 3(5) exceptions protect vertical agreements?
Yes, in part. Section 3(5) preserves the right to impose reasonable conditions necessary to protect intellectual property rights under statutes such as the Patents Act and Trade Marks Act, and the right to enter export-related agreements. But the IPR exception is not absolute: the conditions must be both reasonable and necessary, so an IP-holder cannot use licensing terms to impose unreasonable RPM or foreclosure.