CCI Finds the Practice of Mandating No-Objection Certificates (‘NOC’) by Madhya Pradesh Chemists and Druggist Association Anticompetitive

Background

CCI received information from the Madhya Pradesh Chemists and Distributors Federation (‘Informant’) alleging the limiting and controlling of supplies of pharmaceutical products in Madhya Pradesh, by: (i) Madhya Pradesh Chemists and Druggist Association (‘MPCDA’) and certain associations affiliated to MPCDA (including Indore Chemist Association (‘ICA’), which was subsequently impleaded); and (iii) certain pharmaceutical companies.[1] Based on its review of the information, CCI directed the Director-General (‘DG’) to investigate the matter.

The gravamen of the Informant pertained to the practice of MPCDA, and its affiliated associations including ICA (MPCDA and ICA together referred to as the ‘Associations’), issuing NOC/Letter of Consent (‘LOC’) as a pre-requisite for appointment of stockists by the pharmaceutical companies. It was alleged that this practice of mandating NOC was stifling competition in the market by limiting access of consumers to various pharmaceutical products and controlling the supply of drugs in the market. It was also alleged that the pharmaceutical companies also adhered to these ‘directives’ of the Associations and had refused to appoint distributors till such time the Associations consented. The DG examined the conduct of different pharmaceutical companies and concluded that there was evidence to show that the market was divided into two parts with one part comprising companies which acted independently of the Associations’ directives and the other part comprising companies which conformed to the Associations’ directives.

Key Observations: CCI, inter alia, decided on the following issues:

i.       Jurisdiction: In response to the contention that the pharmaceutical sector is regulated by sectoral regulators i.e., the Drug Control Department and National Pharmaceutical Pricing Authority (‘NPPA’), CCI clarified that competition law is a special law with a mandate overarching all sectors. CCI bears the mandate to intervene when markets are adversely affected by anti-competitive conduct of the enterprises. In the present case, CCI observed that since the practices of the Associations and the pharmaceutical companies created entry barriers for stockists, CCI was competent to investigate.

ii.      Investigation v. Inquiry: The pharmaceutical companies also challenged CCI’s order under Section 26(8) of the Act, i.e., directing the DG to cause further investigation in the matter, on the ground that the said provision only allows for ‘further inquiry’ and not further investigation. Rejecting the arguments put forth by the pharmaceutical companies, CCI observed that investigation is a sub-set of inquiry and remanding the matter to the DG for further investigation is within the scope of inquiry by CCI. Further, in the present case, there was no prejudice caused to the parties as they were provided the opportunity to make their submissions both before the DG as well as CCI.

iii.     Whether Associations are  caught within the ambit of Section 3(3): It was argued that the Associations could not be proceeded against since the Associations are not engaging in similar activities as that of pharmaceutical companies. CCI rejected this argument relying on the language of Section 3(3) of the Act which includes in its scope “[a] decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services”.

iv.      The practice of requiring NOC obstructs fair competition: CCI, upon examining the email communications between the Associations as well as Himalaya Drug Company (‘Himalaya’) and Intas Pharmaceutical Limited (‘Intas’), observed that the Associations exercised influence over appointment of stockists and that the practice of requiring NOC/LOC was still persistent. The practice of mandating NOC before appointing a stockist dissuades expansion of competition in the market and leads to barriers to entry. CCI observed that every pharmaceutical company should be given the freedom to select their own distributors without any unnecessary hurdles. Accordingly, CCI observed that the category of pharmaceutical companies which abided by the directives (Himalaya and Intas) of the Associations also engaged in anti-competitive practice.

Order

CCI imposed penalties on Himalaya and Intas and the Associations for engaging in anti-competitive agreements in violation of the provisions of the Act. While the penalty on the pharmaceutical companies was levied at 1% of the average income of the preceding three financial years, the penalty on the Associations was levied at 10% of the average income of the preceding three financial years. The penalties on individuals responsible for the conduct of the pharmaceutical companies and the Associations were calculated at the same rates as those imposed on the respective enterprises.

Additionally, CCI directed the Associations to organise competition awareness and competition compliance programmes over a period of six months (five compliance programmes by MPCDA, and one compliance programme by ICA) and file a compliance report with CCI within one month of hosting the last programme.

[1] Case No. 64 of 2014

Published In:Inter Alia Special Edition- Competition Law - July 2019 [ English
Date: July 5, 2019