India: CCI Imposes Penalties On The Chemists' Associations In State Of Gujarat And Three Pharma Companies For Indulging In Practice Of "No Objection Certificate" Before Appointment Of Stockists

Last Updated: 8 January 2019

Article by MM Sharma, Head Competition Law & Policy Practice, Vaish Associates, Advocates, New Delhi, India

The Competition Commission of India ("CCI") by way of an order dated 12 July 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 druggist 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 druggist associations prior to the appointment of their stockists.

During the detailed investigation , the DG, did not find any evidence of the majority of pharma companies and their C&F agents indulging in the practice of obtaining NOC before appointing new stockists except (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 conversation , 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 association 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 Dahyabhai 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 druggist 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 was 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 druggist associations under the provisions of Section 27 of the Act.

Penalty on the pharmaceutical companies were imposed at the rate of 1% of the their average income based on their financial statements of the three years which amounts to 4,500 Lakhs for Glemark, 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 druggist association, and the officials of the pharmaceutical companies at the rate of 1% of their incomes, respectively. Furthermore, the chemists and druggist 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.

Comment: This case is important because, firstly,  it was for the first time 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 Informantto 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 my 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.   

Specific Questions relating to this article should be addressed directly to the author.

© 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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