Background
Director general investigation
CCI analysis
Comment


The Competition Commission of India (CCI) recently imposed(1) a Rs80,185 fine on the Jalgaon District Medicine Dealers Association (JDMDA) for collecting product information service (PIS) charges from pharma product manufacturers, thereby restricting medicine supplies in the market. Additional fines were imposed on the president and secretary of the JDMDA.

Background

The information was filed by Mr Nadie Jauhri (the informant) against JDMDA, which is affiliated with the Maharashtra State Chemists and Druggists Association (MSCDA), alleging collection of PIS charges from pharma product manufacturers.

The informant relied on a public notice dated 31 January 2014 issued by the CCI which stated that anti-competitive practices prevalent in the pharma sector should be stopped, including:

  • the procurement of no objection certificates or letters of consent;
  • the compulsory payment of PIS charges by pharma entities to the district associations; and
  • the fixation of trade margins.

Consequently, the CCI held that there was a prima facie case of contravention of Section 3(3)(b) read with Section 3(1) of the Competition Act 2002 and thereby directed the CCI director general to investigate.

Director general investigation

The director general's report was submitted on 5 January 2017 and found that pharma companies were paying PIS charges to the MSCDA in return for details of their products published in their respective district association news bulletins or magazines. A sum of Rs500 per product per district was collected from the pharma companies that had approached the MSCDA seeking to advertise their new products in the JDMDA's news bulletin. After deducting service tax and 20% for operational costs, the MSCDA transmitted the remaining amount to the affiliated district associations, including the JDMDA. The MSCDA kept 20% (ie, Rs100) for meeting its operational costs (eg, staff, stationery, clerkage and bank charges).

Nine out of the 10 pharma companies that the director general examined held that the aim of paying PIS charges was to advertise their products in the district associations' news bulletins, including the JDMDA's. When questioned whether the PIS charge was mandatory or voluntary in nature, two companies stated that the charges related to seeking the MSCDA's approval before launching new products and avoiding any risk of a boycott. However, three companies held that it was not mandatory to have product information published by the MSCDA before launching a new product.

The director general also found that despite the pharma companies' payment of PIS charges:

  • no information about the newly launched drugs had been published in the news bulletins;
  • no timeframes or uniform publication schedules for the news bulletins had been enforced;
  • the National Pharmaceutical Pricing Authority's (DPCO's) prescribed format for the information had been ignored; and
  • the companies had failed to receive copies of the news bulletins in which their ads were published.

Consequently, the director general found that the JDMDA had demanded PIS charges not for advertising purposes, but rather for getting opposing parties' prior permission to launch new drugs on the market. Therefore, the director general concluded that payment of PIS charges violated Section 3(3)(b) read with Section 3(1) of the Competition Act, as the levy of such charges limited and controlled free supply of new products by pharma companies in the market.

CCI analysis

The CCI considered the following two issues:

  • whether the collection of PIS charges from companies was mandatory and violated Section 3 of the Competition Act; and
  • whether the contravention of Section 3 of the act would result in penalties for the office bearers as per Section 48 of the act.

Citing Santuka Associates Pvt Limited,(2) the CCI held that whether PIS charges are anti-competitive depends on whether they are voluntarily payable before the pharma company launches the drug.

Based on replies and statements filed, most pharma companies believed that publication of their products in the association's news bulletin was an effective way to raise awareness of the new products and was beneficial to the entrants; however, a few companies disagreed.

Mr Chachad, a former employee of Cerovene Healthcare Private Limited, provided an important testimonial to the CCI, stating that "if PIS charges are not paid then the product will not be sold in that particular district". On cross-examination, this statement was corroborated by an email dated 5 February 2013 between Chachad and the JDMDA, wherein the company had agreed "not [to] take any products on which PIS charges are not paid".

The opposing party responded to the email, explaining that some companies leave stockists and retailers with unsold stock. Therefore, undertakings are sought to protect retailers. Further, on being asked why Cerovene Healthcare Private Limited products were sold in most parts of Maharashtra but not by retailers or wholesalers in Jalgaon District, Chachad stated that he had not received the JDMDA's permission to launch their product. Chachad's reasoning was further corroborated by a statement from Cerovene Healthcare Private Limited Director Nita Shah.

The CCI also highlighted a letter exchanged between the JDMDA and a proprietor of M/s Unifab Pharmaceuticals, Mr Salem, who sought permission to launch products. The nature of the letter was obvious due to its use of terms like 'request for the permission to launch' as the subject line.

Further, the JDMDA secretary admitted to not listing approximately 70 to 80 drugs from the publication. The director general also found that out of the 4,000 drugs for which the JDMDA had received payment, PIS information was published only in respect of 216 drugs. This established that the purpose of PIS was not to spread information about new drugs in Jalgaon District. Had it been so, the opposing party ought to have published the information supplied by the pharma company for every drug, dosage and strength in its news bulletin. The director general also pointed out that, after making the payment, the companies had failed to check whether their 'ads' had actually been published, which is indicative of the fact that payments made by them in the name of PIS were neither for advertising purposes nor DPCO compliance.

Based on the abovementioned evidence, the CCI held that the practice of mandatory PIS charges limited and controlled the supply of drugs in the market and amounted to anti-competitive behaviour under Section 3(3)(b) read with Section 3(1) of the Competition Act, as the pharma companies were unable to rebut the presumption of the tacit understanding between themselves and the JDMDA, which had a substantial adverse effect on competition.

Accordingly, the CCI imposed a Rs80,185 fine on the JDMDA (ie, based on 10% of the average income from PIS charges for the financial years 2013 to 2014, 2014 to 2015 and 2015 to 2016). Additional fines of Rs14,340 and Rs1,27,447 were imposed on the president and secretary of the JDMDA, respectively.

Comment

This order is one of many passed by the CCI on chemist and druggist associations for continuing to seek no objection certificates and/or imposing PIS charges on pharma companies for appointing new stockists and introducing new drugs on the market. However, it is the first time that fines have been imposed only for collecting PIS charges.

As regards collecting PIS charges, this case establishes that the practice was mandatory in nature, though in the oral depositions most of the pharma companies claimed that it was voluntary. However, the director general's detailed investigation and the CCI's subsequent inquiry proved otherwise.

Further, by this order, the CCI seems to have upheld the often-repeated contention by pharma companies that they are victims and not collaborators of such anti-competitive practices by chemist and druggist associations.

For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email ([email protected]). The Vaish Associates website can be accessed at www.vaishlaw.com.

Endnotes

(1) By way of order dated 20 June 2019.

(2) Case 20/2011.