In 2009, the Belgaum District Chemists and Druggists Association (‘hereinafter referred as BCDA’) filed a complaint alleging that Abbott India Ltd. and Geno Pharmaceuticals had stopped the supply of essential medicines. The sole ground for refusal by the Pharma Companies was that the members of the BCDA had to first obtain ‘No objection certificate’ from the All India organization of Chemists and Druggists (‘hereinafter referred as AIOCD’) or the Karnataka Chemists and Druggists Association (‘hereinafter referred as KCDA’) for being appointed as a stockist.

On 2nd March, 2017, the Competition Commission of India (hereinafter referred to as ‘CCI’) directed the KCDA to ‘Cease and Desist’ from indulging into the anti-competitive practice of mandating ‘No Objection Certificate’ as a prerequisite for appointment of stockist and also refrain from fixing ‘trade margins’ for retailers and wholesalers.[1]

Legal Scaffold-

According to Section 3 of the Competition Act, 2002 (hereinafter referred as the ‘Act’) no person shall enter into any agreement which shall have appreciable adverse effect upon competition in India and any such agreement entered into shall be held void.

Further, Section 3 (3) of the Act puts an embargo upon the practice of cartelisation that directly or indirectly affects purchase or sale prices, or limits demand, supply, production, development, etc. of any party to the agreement or any third party per se.

The CCI is empowered under Section 27 of the Act to issue any order or direction which it deems fit in cases of contravention of the provisions of Section 3. It is pertinent to note that for the purpose of determining whether an agreement is ‘anti-competitive’ the commission takes into account certain factors such as - creation of barriers to new entrants in the market; driving existing competitors out of the market; foreclosure of competition by hindering entry into the market; accrual of benefits to consumers; improvements in production or distribution of goods or provision of services; and so on.[2]

Brief facts of the case-

  • The BCDA was angered by the mandatory imposition of liability upon the stockists to have No Objection Certificates (‘hereinafter referred as NOC’) from AIOCD or KCDA due to which the supply of essential medicines was getting hampered. As a result in 2009, BCDA filed a complaint with the Director General of Investigation and Registration, Monopolies and Restrictive Trade Practices Commission (MRTP commission), which was later transferred to CCI.
  • Upon investigation by the Director General it was found that there was an understanding between AIOCD, the Indian Drug Manufactures Association and the Organisation of Pharmaceuticals Producers of India through a memorandum which laid out three things-
    1. The appointment of stockist was controlled by state association under the umbrella control of AIOCD;
    2. Trade margins of stockists and retailers was fixed; and
    3. There was a system of paid ‘Product Information Service’ which was provided to the pharmaceutical companies for the purpose of the advertisement of any new drug before introducing the product in the territory.
  • These practices were contended to have caused ‘appreciable adverse effect’ upon competition in the pharmaceutical industry in India as the practices limited and controlled the supply and prices of pharma products in the market.
  • AIOCD argued that the provision of mandatory NOC for the appointment of stockist is to protect consumers from spurious and fake drugs. Moreover, it justified the NOC norm by stating that it acted as a benchmark to ensure adequate quantity and quality of drugs in the market.
  • Furthermore, AIOCD replied that the fixation of trade margins ensure a level playing field, and to substantiate the statement it relied on the report of Dr. Kelkar Committee (1987) which recommended the fixation of trade margin with respect to wholesalers.

Findings-

  1. The CCI opined that the respondent to the present case have acted in contravention of Section 3(3)(a) and (b) of the 2002 Act by mandating NOC as a prerequisite for appointment of any new stockist of pharmaceutical products and fixing of trade margins for non-scheduled drugs.
  2. The contention of the respondents that the NOC practice was to keep a check on spurious drugs from unauthorized sources, was refused on the ground that such practice restricted the entry of new stockists and thereby limits the supply of medicines in the market. This position related to NOC was also confirmed by the Hon’ble Competition Appellate Tribunal in the case of All Kerala Chemists and Druggists vs. Competition Commission of India and Ors[3]. The Hon’ble Tribunal in the aforesaid case clarified that the requirement of NOC before the appointment of any stockist, not only limited the supply of drugs and medicines but also acted as an entry barrier, and therefore held the All Kerala Chemists and Druggists Association liable for default.
  3. The CCI concluded that the fixing of trade margins restricted price competition amongst wholesalers and amongst retailers in the market which in turn had adverse effect upon the consumers.
  4. With regard to the Product Information service charge levied upon the pharmaceutical companies for the introduction of a new drug in the market, there was no evidence to show that such a charge was mandatory. However, the CCI observed that imposition of a mandatory Product Information service charge would definitely be a restrictive trade practice.

Comments-

The Chemists and Druggists Associations have been working towards the regulation of pharmaceutical industry in India since decades. The respondents had relied on the excerpts from the report of Dr. Kelkar Committee (1987), which aimed to look into trade margin structure, that recommended that trade margins for wholesalers should be fixed after mutual discussion between trade and industry. However, the recommendations of the Dr. Kelkar Committee do not appear to be viable in view of the Competition Act coming into force. In a previous case[4], the AIOCD and All Kerala Chemists and Druggists were held liable by the Commission for acting in contravention of Section 3 of the Act on the similar lines. In the case, the Commission imposed penalty on both the parties under Section 27(b) of the Act and also directed them to file an undertaking that the practices carried on by it such as the grant of NOC for appointment of stockist, fixation of trade margins, collection of Product Information service charges and boycott of products of pharmaceutical companies have been discontinued.