Introduction

By way of an October 31 2017 order, the Competition Commission of India (CCI) imposed monetary penalties on the All Kerala Chemists & Druggists Association (AKCDA) and two of its district units, as well as their office bearers, for ordering pharmaceutical companies to obtain no objection notices (NOCs) before appointing new stockists. The CCI issued its first general direction and stern advisory to all pharmaceutical companies to cooperate in eradicating the practice of mandatory NOCs and report any such demand from the AKCDA to the CCI.

Although the officials of the pharmaceutical companies were deposed as third parties during the investigation in order to verify claims that they had delayed the supply of or refused to supply products to certain stockists due to non-receipt of a NOC from the AKCDA, the CCI desisted from taking suo motu action against them for their tacit consent to the impugned practice of obtaining NOCs.

Facts

Four stockists in the state of Kerala brought claims alleging that the AKCDA and two of its district-level associations in Thrissur and Kasargod had been mandating the requirement of a NOC before the appointment of any stockists, thereby violating Section 3 of the Competition Act 2002, despite cease and desist orders issued by the CCI in previous similar cases. They argued that the AKCDA's practice of requiring a NOC merely changed from submitting written approvals to issuing verbal threats and appreciation letters in order to avoid penalties under the act. The CCI ordered an investigation of the claims by the director general.

Director general investigation

The director general raised the claimants' evidence with various pharmaceutical companies, which had allegedly denied supplies to a number of stockists for want of an NOC under the threat of the AKCDA. Statements of the concerned regional sales managers of Cipla Ltd, Wallace Pharmaceuticals Pvt Ltd, Alkem Laboratories and Cadila Healthcare Ltd were recorded and the relevant documents (including emails) were examined.

The director general concluded as follows:

  • The AKCDA had been involved in the practice of requiring NOCs by various means such as issuing congratulatory letters or verbal approval before the appointment of stockists by pharmaceutical companies.
  • NOCs had been issued, at times, against cash payments to the select office bearers of the AKCDA.
  • In some instances, the AKCDA had issued lists of stockists to which another division of a pharmaceutical company could distribute.
  • Similar congratulatory, welcome or appreciation letters had been issued by the AKCDA instead of formal NOCs where stockists were appointed by:
    • Intas Pharmaceuticals;
    • Novartis India;
    • Wallace Pharma;
    • USV Pvt Ltd;
    • Unilex Lifesciences Pvt Ltd; and
    • German Remedies.
  • Evidence showed that a NOC had been issued to Cadila Healthcare and verbal approval had been issued to Alkem Laboratories.
  • In the case of Icon Life Sciences, a stockist was refused appointment due to the non-issuance of a NOC by the AKCDA.

Based on this evidence, the director general concluded that the AKCDA and its district units had violated Sections 3(3)(b) and 3(1) of the Competition Act. It also identified certain office bearers of these associations who were liable under Section 48 of the act.

The AKCDA appealed on the grounds that:

  • the claims had been made by a disgruntled former AKCDA office bearer;
  • the facts gathered by the director general during the investigation were incomplete and distorted; and
  • the facts in the case were similar to those in the previously decided case of P K Krishnan and therefore amounted to second prosecution for the same offence.

It also argued that the practice of requiring a NOC is a pro-competitive measure designed by Indian pharmaceutical associations to monitor the entry of spurious or sub-standard medicines into the market and to certify the credibility of stockists to manufacturers. For this, the AKCDA relied on the recommendations of the Mashelkar Committee report.

Finally, it argued that obtaining an NOC or any sort of permission (eg, congratulatory letters) from the AKCDA was neither mandatory nor a condition precedent for the appointment of a stockist by any manufacturer in Kerala.

CCI decision

The CCI held as follows:

  • The previous trial and imposition of a penalty was not a defence if the AKCDA had continued with anti-competitive practices, particularly when the violation related to a different and ongoing period.
  • The AKCDA's objection regarding the director general's reliance on the depositions of disgruntled office bearers was without merit as those erstwhile office bearers were key witnesses. They were part of the AKCDA and had first-hand information regarding its operation.
  • The recommendations of the Mashelkar Committee report are mainly aimed at combatting the distribution of spurious, counterfeit and questionable quality drugs. These recommendations do not suggest that the AKCDA can mandate the requirement of a NOC before the appointment of a stockist.

Further, the CCI found that the recorded statements and documents proved beyond any doubt that the practice of obtaining NOCs existed in Kerala and was a mandatory requirement before appointing stockists. This evidence showed that the aim of the NOC was for AKCDA office bearers to make illegitimate gains by using their positions to demand money. Such practice disadvantaged consumers and created barriers to free and fair trade in the distribution of pharmaceutical products. The CCI examined the roles of each individual office bearer and found them to be liable under Section 48 of the Competition Act.

The CCI concluded that the AKCDA and its Thrissur and Kasargod district units had indulged in the practice of requiring pharmaceutical companies to obtain NOCs before appointing stockists, thereby limiting and controlling the supply of drugs in Kerala in violation of Sections 3(1) and 3(3)(b) of the Competition Act.

Monetary penalties

The CCI imposed a penalty of Rs478,545, calculated at 10% of the AKCDA's average income, under Section 27 of the Competition Act. It also imposed penalties of Rs59,434 and Rs53,889 on the Thrissur and Kasargod associations, calculated at 10% of their average income, respectively. In addition, it imposed monetary penalties on the office bearers of the AKCDA and its district units, calculated at 10% of their respective incomes, under Section 48 of the act.

Advisory

Finally, the CCI issued the following stern advisory to all pharmaceutical companies:

"Investigation in the present matter also revealed the role of some of the pharmaceutical companies, who though not actively involved in the NOC practice, were passively cooperating with the erring chemists and druggists associations. The investigation report was sent to them for their comments. Before the Commission, most of them contended, rightly so technically, that since the [director general] has not found any contravention against them, they have no submissions to make to the investigation report as such. Some of them, as pointed earlier, showed willingness to work with the Commission in eradicating anti-competitive practices prevalent in the States/Districts in which they supply their medicines.

The Commission is increasingly getting cases involving anti-competitive practices by chemists and druggists associations. The Commission has been actively taking up these cases because of the larger public interest involved. Many cases have highlighted the prevalence of practice of mandatory NOC prior to the appointment of stockists by pharmaceutical companies, in one form or the other. Earlier the NOC used to be formal, then it took the form of congratulatory letters or appreciation letters and in some cases, only verbal mandates were seen to be working well enough to ensure compliance.

The Commission is cognizant that to operate in a particular State/region, the pharmaceutical companies may find it convenient in the short run, and also mandatory, to follow the norms and practices of the existing trade associations. However, in the long run, the same will neither be in the interest of the pharmaceutical company nor in the interest of the public at large. Appointment of stockists is the right of every pharmaceutical company and the same should be based on commercial wisdom and fair market practices. Practices like the NOC not only replace the commercial business decision of pharmaceutical companies by the decisions of these trade associations, but also affect the distribution chain by bringing inefficiencies in the distribution channels. In the present case, various instances of demanding huge monies for providing NOC has also come to light. Such monies add on to the cost of doing business for the pharmaceutical companies, which these companies will ultimately pass on to the consumers, resulting in the consumer paying more for a necessity good like medicine.

The Commission has issued several cease and desist orders against these chemists and druggists associations and imposed heavy penalties on them to discipline them. Further, to ensure that pharmaceutical companies are not obligated to route their appointment of stockists through such trade associations, the Commission even started seeking cooperation from them to understand the root cause and eradicate this practice. These initiatives by the Commission show the unequivocal intention to curtail any kind of anti-competitive conduct so as to bring a positive impact on the distribution of medicines. Succumbing to the mandate of local associations to avoid consequences such as boycott etc. will not serve any good. The Commission has highlighted in an earlier order also, that instead of surrendering to the demands of such association, the pharmaceutical companies can actually approach the Commission, wherein a proper and legal recourse to such problem lies.

In view of the aforesaid discussion, the Commission hereby directs the pharmaceutical companies, not only those who were part of the investigation in this case but also all other pharmaceutical companies who are facing issues of NOC or other such practices at the hands of the local/State level chemists and druggists associations, to come forward and cooperate with the Commission in bringing fair distribution of drugs. This will not only ensure lesser cost of appointment to the pharmaceutical companies but also competition on merit amongst various stockists who wish to be associated with these pharmaceutical companies, besides ensuring regular supply of medicines at affordable prices. Until the time pharmaceutical companies do not come forward and cooperate with the Commission, this goal may not be fully achieved."

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

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.