India: Competition News Bulletin - August 2018

Last Updated: 20 August 2018
Article by Vaish Associates Advocates

I. CARTELS AND ANTI-COMPETITIVE AGREEMENTS

INDIA

Competition Commission of India ("CCI") imposes penalty on chemists' asssociations in State of Gujarat and three pharma companies for indulging anti-competitive conduct appointment of stockists

CCI by way of an order dated July 12, 2018 has imposed penalty on the Federation of Gujarat State Chemists and Druggists Association, Amdavad Chemist Association, Surat Chemists and Druggists Association and the Chemists and Druggists Association of Baroda (collectively 'chemists and druggists associations') as well as three pharmaceutical companies namely Glenmark Pharmaceutical Limited (and its C & F agent), Hetero Healthcare Ltd and Divine Saviour (collectively 'pharmaceutical companies') for violating provisions of the Competition Act, 2002 ('Act'). Penalties were also imposed on the individual office bearers of the chemists and druggists associations and managing directors and concerned employees of the three pharma companies.

The investigation by the CCI was directed on allegations made by the Informants viz. Alis Medical Agency, M/s Stockwell pharma, M/s Apna Dawa Bazaar and Reliance Medical Agency against , not only the chemists & druggists associations but also against a large number of leading pharma companies and their Carrying & Forwarding agents (C&F Agents) alleging that the pharmaceutical companies and their C&F agents were mandating the requirement of a non-objection certificate (NOC) from the chemists and druggists associations prior to the appointment of their stockists.

During the detailed investigation, the DG did not find any evidence against the majority of pharma companies and their C&F agents for indulging in the practice of obtaining NOC before appointing new stockists except for (Glenmark Pharmaceutical Ltd ("Glenmark"), Cadilla Healthcare Ltd. ("Cadilla") (and their C&F agents) and Hetero Healthcare Ltd and Divine Saviour. The finding against the above named four companies was based on the documentary evidence found from their records and (in the case of Glenmark and its C&F agent) the transcript of tape recorded telephonic conversations, recorded by one of the Informant with the C&F agent of Glenmark. The explanation regarding the incriminating documentary evidence and the transcript of the tape recording, given by the four pharma companies and their C&F agents was not accepted by the DG .

The findings of the DG were challenged by the chemists & druggists associations and the four pharma companies and their C&F agents by detailed written objections before CCI as well as during oral arguments held before CCI. It was emphasized that multiple cases have been filed by the same set of persons, namely Shri Nayan Raval and Shri Dayabhai Patel, alleging the same facts, with ill-motives because of the political rivalry between competing factions of the chemists and druggists associations based in the State of Gujarat . It was stressed that the Informants had used the Information to settle scores with their political rivals and had fabricated evidence such as tape recording the telephonic conversations to rope in the pharma companies to put pressure on them to concede to their unjust demands and had tried to mislead the CCI .

One of the pharma companies, Cadilla, even challenged the initial prima facie order of the CCI under section 26(1) of the Act on the above grounds and also the summoning of the Managing Director of Cadilla by CCI after the DG investigation without adjudicating the role of the company under section 48(1) of the Act , before the Delhi High Court by way of a writ petition, which was dismissed by the Single Bench of the High Court but the letter patent appeal (LPA) filed by Cadilla before the Division Bench is pending before the High Court.

Following the conclusion of the oral hearings held during the inquiry, the CCI rejected the objections taken by the Opposite Parties including the pharma companies and held that the chemists and druggists associations, were indulging in the practice of NOC prior to the appointment of stockists, which has the effect of limiting and controlling of the supply of drugs in the market, in violation of Section 3(3) of the Act. Further, it was observed that instead of desisting from such activity, these associations are mandating the NOC requirement, either verbally (in order to avoid any documentary evidence/proof) or under camouflaged congratulatory/intimation letters.

The CCI also held that the three pharmaceutical companies and their C&F agents, without any resistance, cooperate with such associations to implement their anti-competitive decisions, thereby becoming equally complicit in the anti-competitive effect of such practice. Instead of approaching the CCI, these pharmaceutical companies cooperate with the NOC requirement of the associations, thus becoming perpetrators of such anti-competitive practice which is in violation of Section 3(1) of the Act. The order against Cadilla was reserved due to pendency of the LPA before the Delhi High Court.

The CCI imposed a monetary penalty of INR 9,68,651/- , INR 1,11,278/- , INR 1,09,413/- and INR 61,232/- calculated at the rate of 10 % of the average income of each of the chemists and druggists associations under the provisions of Section 27 of the Act.

Penalty on the pharmaceutical companies was imposed at the rate of 1% of the their average income based on their financial statements of the last three years which amounts to 4,500 Lakhs for Glenmark, INR 0.20 lakhs on Glenmark's C & F Agent, INR 228.92 lakhs on Hetero Healthcare Ltd and INR 5.61 lakhs on Divine Savior Pvt. Ltd.

In addition, monetary penalties were imposed on the office bearers of the chemists and druggists associations, and the officials of the pharmaceutical companies at the rate of 1% of their incomes, respectively. Furthermore, the chemists and druggists associations, the pharmaceutical companies and their office bearers/officials were directed to cease and desist from indulging in the practice of mandating NOC prior to stockiest appointment.

(Source: CCI decision dated July 12, 2018; for full text see CCI website)

VA Comment: This case is important because, firstly, it was for the first time that a series of complaints were filed by some stockists against such large number of leading pharma companies pan India , secondly, the CCI has ignored the apparent ill- motive of the Informant to use the forum of the CCI to settle political scores with rival factions in the trade associations and thirdly , the CCI has arrived on its findings of violation of section 3(1) of the Act against the pharma companies , without going into the real issue whether the so called practice of NOC ( whose existence was also not conclusively proved and was rather presumed by the DG on the basis of few isolated instances found in the internal records of the four pharma companies) was causing any appreciable adverse effect on competition or not .In our view , the CCI also did not visualize that the pharma companies are actually victims and cannot be perpetrators of the practice of NOC . The decision raises many substantive legal issues which will be settled only after the decisions in the appeals to be filed by all the Opposite Parties.

CCI decides fourth case under the Leniency provisions

By way of an order dated July 11, 2018, the Competition Commission of India imposed a penalty of INR 22.36 Crore on Essel Shyam Communication (EsselSyam) for bid-rigging in tenders floated by sports broadcasters, including the Indian Premier League in 2012.

However, the quantum of fine on EsselSyam and its officials was reduced by the CCI under the lesser penalty provisions of the Act. The CCI's decision is the fourth order to be passed under the Leniency provisions.

The investigation by the CCI was initiated on the basis of disclosures by Globecast India Private Limited and Globecast Asia Private Limited (collectively referred to as 'Globecast') under Section 46 of the Competition Act, 2002 (Act) read with the Competition Commission of India (Lesser Penalty) Regulations, 2009 ('Lesser Penalty Regulations'). Subsequently, during the course of the investigation by the DG, Essel Shyam Communication Limited (ESCL), now Planetcast Media Services Limited, also approached the CCI.

It was disclosed to the CCI that there was exchange of commercial and confidential price sensitive information between ESCL and Globecast through Mr. Bharat K. Prem, an employee of Globecast India Pvt. Ltd, which resulted in bid rigging of tenders for procurement of broadcasting services of various sporting events, especially during the year 2011-12. It was alleged that Mr. Bharat K. Prem had clandestinely entered into a Consultancy Agreement with ESCL, under which Mr. Bharat, used to work for ESCL for a fixed remuneration and a share in profits from the contracts obtained through bid rigging.

From the evidence collected by the DG, the CCI found that the ESCL and Globecast operated a cartel amongst them in the various sporting events (numbering fourteen) held during the years 2011-12 including IPL-2012. While submitting bids for the tenders floated by various broadcasters during the period July 2011-May 2012 for provision of end-to-end broadcasting services, they exchanged information and quoted bid prices as per the arrangements arrived at amongst them. Accordingly, it was held that they committed an infringement of the provisions of Section 3(3)(d) read with Section 3(1) of the Act during this period.

Considering contravention of provisions of the Act by Globecast and ESCL, an amount of INR 31. 94 Crores and INR 1.33 Crores was computed as leviable penalty on ESCL and Globecast, respectively, in terms of proviso to Section 27 (b) of the Act. While computing leviable penalty, CCI took into consideration all the relevant factors including duration of cartel, mitigating factors, etc. and decided to levy penalty at the rate of 1.5 times of their profit for the period July 2011 – May 2012. Additionally, considering the totality of facts and circumstances of the case, penalty leviable on individual officials of Globecast and ESCL was computed at the rate of 10 percent of the average of their income for preceding three years.

Keeping in view the stage at which the lesser penalty application was filed, co-operation extended in conjunction with the value addition provided by the evidences furnished by the lesser penalty applicants in establishing the existence of cartel, CCI granted Globecast and its individuals 100 percent reduction in the penalty and 30 percent reduction in penalty to ESCL and its individuals. Pursuant to reduction, penalty imposed on ESCL was INR 22.36 Crores (Rupees Twenty Two Crores and Thirty Six Lakhs).

(Source: CCI decision dated July 11, 2018; for full text see CCI website)

NCLAT upholds highest ever penalty imposed by CCI in a cartel case

The National Company Law Appellate Tribunal (NCLAT) by way of a judgement dated July 25, 2018 has upheld the penalty imposed by the Competition Commission of India (CCI) on 11 cement companies for cartelization. The CCI in its order dated August 31, 2016 had imposed a penalty of INR 6300 crores on 11 cement companies for cartelization. The appeals were filed by Ambuja Cements Limited, ACC Limited, Jaiprakash Associates Ltd., Cement Manufactures' Association (CMA), Century Textiles & Industries Ltd., The Ramco Cements Limited, J.K. Cement Limited, The India Cements Limited, Ultra Tech Cement Limited, Nuvoco Vistas Corporation Limited and Binani Cement Limited

The NCLAT had upheld the CCI's decision on the following grounds:

Exchange of Data

The NCLAT observed that the cement companies were utilizing the platform of their trade association, the Cement Manufacturers Association (CMA) to discuss price and sensitive information relating to production, capacity, dispatch etc. The NCLAT while rejecting the parties' contention that the data was being collected at the behest of the government, held that even if the government had asked for this data, it could have been given in a sealed cover by individual companies.

It was observed that information exchange can constitute a concerted practice if it reduces strategic uncertainty in the market thereby facilitating collusion, i.e., if the data exchange is strategic. Based on the same, the NCLAT held that there was a meeting of minds between the cement companies with regard to fixation of sale price of cement and for regulating the supply and production of cement. Having held that exchange of information which has the effect of reducing strategic uncertainty in the market constitutes an agreement under the Competition Act, 2002 ('Act'), the NCLAT proceeded to examine whether such agreement attracts either Section 3(3)(a) or Section 3(3)(b) of the Act.

The NCLAT held that the provisions of Section 3(3)(a) and Section 3(3)(b) are attracted because of the following:

Price Parallelism

The NCLAT relying on price charts observed that there were several instances where the cement companies hiked the prices of cement in sharp departure to their normal trends over the previous years.

Dispatch & Production Coordination

While analysing the dispatch trends for the impugned period, the NCLAT observed that there was a simultaneous decrease in dispatches by the cement companies which was coupled with lower capacity utilization despite the absence of demand constraints.

The NCLAT held that production data, too, revealed coordinated behavior. It was noted that during the impugned period, production in absolute terms fell by 5.43 percent and 3.41 percent. Similarly, the dispatch during the same period actually fell by 6.33 percent and 4.90 percent; thus showing that in fact the dispatches fell even more than the fall in production.

It was further observed that production and dispatch of cement was reduced across all sectors in a period when the demand from the construction sector was positive.

Capacity Utilization

The NCLAT observed that capacity utilization of the cement companies fell from 83 percent to 73 percent during the impugned period.

Based on this evidence, the NCLAT upheld the INR 6,300 crore penalty imposed by CCI on the cartel members and dismissed the appeals filed by the cement companies.

(Source: NCLAT decision dated July 28, 2018; for full text see NCLAT website)

INTERNATIONAL

European Union: European Commission (EC) fines four electronics manufacturers for resale price

The EC vide recent decision dated July 24, 2018 has penalized electronic manufacturers Asus, Denon & Marantz, Philips and Pioneer for imposing fixed or minimum resale prices on their online retailers. Asus, Denon & Marantz, Philips and Pioneer engaged in so called "fixed or minimum resale price maintenance (RPM)" by restricting the ability of their online retailers to set their own retail prices for widely used consumer electronic products such as kitchen appliances, notebooks and hi-fi products.

The four manufacturers intervened particularly with online retailers, who offered their products at low prices. If those retailers did not follow the prices requested by manufacturers, they faced threats or sanctions such as blocking of supplies. Many, including the biggest online retailers, use pricing algorithms which automatically adapt retail prices to that of the competitors. In this way, the pricing restrictions imposed on low pricing online retailers typically had a broader impact on overall online prices for the respective consumer electronic products.

Moreover, the use of sophisticated monitoring tools allowed the manufacturers to effectively track resale price setting in the distribution network and to intervene swiftly in case of price decrease. The price interventions limited effective price competition between retailers and led to higher prices with an immediate effect on consumers.

Since all the four companies cooperated with the EC by providing evidence which significantly added value and expressly acknowledged the facts and the infringements of EU antitrust rules.

The EC, therefore, granted reductions to the fines depending on the extent of the cooperation ranging from 40% (for Asus, Denon & Marantz and Philips) to 50 % (for Pioneer).

(Source: European Union press release dated July 24,2018)

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© 2018, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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