Trade Associations and Pharmaceutical Industry: A Competition Conundrum

[Yashvardhan Singh is a 2nd year student and Palash Moolchandani a 3rd year student, both at the National Law University Odisha]

Trade Associations are business platforms where players of a particular industry meet to discuss common concerns and to take collective decisions about certain practices in that industry. The role of trade associations in any industry and the economy cannot be disputed. These associations or unions facilitate collective decision making and further take up certain functions that cannot be taken up by a single firm. These associations help the industry observe uniform business practices which ultimately becomes beneficial for the consumer. Moreover, these associations help in standardization of product quality, promotion of ethical and good business practices and aid in advocating interests of the industry before government agencies.

But, more often than not, these associations overstep the competition limitation placed on them and these interactions about products, prices, market shares, territories, future business plans lead to an informal anti-competitive understanding. These associations can potentially create barriers to entry or restrict competition through discriminatory practices or boycott a particular player from the market. These associations can act as platforms for the players to collude and decide detrimental practices such as fixing the price of a commodity, giving standing diktats to its members or limiting the supply of goods in the market.

An industry which is prone to such anti-completive practices is the pharmaceutical industry. The trend of the industry is such that even after repeated cease and desist orders from the Competition Commission of India (CCI) the stakeholders in this industry often engage in anti-competitive activities.

In this post, the authors analyze two recent orders of the CCI where multiple trade associations in the pharmaceutical industry have been penalized for violating the Competition Act, 2002. The authors critically examine the current view of the CCI on the practices adopted by these associations and further identify the shortcomings of such decisions and propose a way forward.

The first judgement analyzed by the authors is that of Mr. Nadie Jauhri v. Jalagaon District Medicine Dealers Association (JDMDA). In this case, the CCI penalized a union of druggists and chemists in the Jalgaon District, Maharashtra. The basis for this decision was the mandatory charging of product information service (PIS) fee to pharmaceutical companies before they launched a product into the market.

The fee was charged on the pretext of gathering funds to publish information about the pharmaceutical product in question in the bulletins or newsletters of the Association. This newsletter would subsequently be circulated among all the dealers in the Jalgaon District. After conducting a thorough investigation, perusing the evidence and the cross-examination of witnesses, the CCI concluded that, in actuality, the PIS fee was compulsorily being charged to pharma companies as a prerequisite to selling their medicines in the Jalgaon District.

The investigation of the Director-General led him to uncover two pertinent facts: firstly, the PIS was not furthering the cause of advertisement or publicity. The PIS for an average of 4000 drugs had been collected; however, no information about the same was published in the Association’s bulletins. Secondly, the manner and format of publication of the newsletter differed from the guidelines prescribed by the Drugs Price Control Order, 2013.

It was discovered that this was a matter of practice by the Jalgaon District Medicine Dealers Association to mandatorily charge PIS fees. It was not voluntary as advertisement charges for the benefit of the pharmaceutical companies should be. The CCI placed reliance on the case of Santuka Associates (P) Ltd. v. All India Organisation of Chemists and Druggists Assn., 2013 SCC OnLine CCI 16, in which it was held that whether PIS charges are anti-competitive depends on whether these charges are voluntary or mandatorily payable before the launch of the new drug of pharmaceutical companies.

The CCI held that the practice carried out by the Association led to a distortion in competition in the market by limiting the competitive supply of goods, creating barriers to entry for new pharmaceutical companies and forecloses competition in the market. Thus, there was a violation of section 3(3)(b) read with section 3(1) of the Competition Act.

In the second case analyzed herein, i.e., Madhya Pradesh Chemists and Distributors Federation (MPCDF) v. Madhya Pradesh Chemists and Druggist Association (MPCDA) & Others, the CCI held that the Madhya Pradesh Chemists and Druggists Association and other regional associations had violated the provisions of the Act. In the same case, certain pharmaceutical companies like Himalaya Drug Company and Intas Pharmaceutical Limited were also fined for acting in contravention of the Act.

The CCI has laid down the principle that the function of these trade associations is that of a mere facilitator and is restricted to a background check of the pharma companies. On the issue of appointment of stockists, the CCI has correctly ruled that this process is the discretion of the companies and has to be done keeping in mind the competition concerns.

Letters of Consent (LOC)/ No-Objection Certificates (NOC) are a form of authorization to undertake business engagements in a particular area and are further deemed necessary for an individual to procure, to be appointed as a stockist for a pharma company. The CCI held that as these associations give preference to certain distributors such a practice leads to the limitation of consumer access to the distributor who wants to enter the market. Moreover, pharma companies accept these diktats without questioning or challenging them which makes them complicit in these activities.

The CCI found the above-mentioned parties to be in contravention of section 3(3)(b) read with section 3(1) of the Act as they sought to gain control over the supply of various pharmaceutical products by mandating the procurement of NOC/ LOC.

Limitations of the Present Regulatory Structure

The authors believe that there has been a failure on part of the CCI in identifying the vertical arrangements between the trade associations and its members. The CCI through its decisions has found that only those entities which fall under the definition of enterprises can be held liable for vertical agreements. In Santuka Associates (P) Ltd, it was held that medical associations do not fall under the purview of section 3(4) of the Act. According to the CCI, the concerned drug association did not perform any economic functions which is the sole criteria for deciding whether an entity falls under the definition of enterprise or not.

It is argued that the CCI has erred in interpreting section 3(4) of the Act. According to section 3(4), all agreements entered into by enterprises or ‘persons’ come under the scanner of the CCI if such agreements impose any vertical restraints. Since trade associations come within the definition of ‘persons’ as per the Act, there is no reason why they should be exempted from section 3(4) of the Act. Trade associations also provide services to its members which itself establishes a vertical relationship between the two. However, this has been completely overlooked by the CCI. A similar situation arose in Sandhya Drug Agency v. Assam Drug Dealers Association Co., 2014 Comp LR 0061, wherein the CCI failed to take into account Refusal to Deal and Exclusive Distribution Agreement entered into by Assam Drug Dealers Association. It merely kept itself limited to cartelization as alleged by the Informant.

Furthermore, it is also pertinent to note that trade associations enjoy a dominant position in the specific market in which they operate. These associations use their dominant strength to regulate the market. For instance, the practice of obtaining compulsory NOC and boycotting those who do not abide by it, places sufficient entry barriers in the market. There have been many other occasions where the associations have been allegedly found abusing their dominant position in the pharmaceutical market. However, the CCI has kept itself limited to regulating cartels and has never invoked its powers provided under sections 3(4) and 4 in matters relating to trade associations.

Through the above discussion, it is clear that the CCI has failed to effectively interpret the provisions of the statute. Also, there is a lack of uniformity in the decisions of the CCI concerning activities which would fall under the realm of economic functions.

Way Forward

The main objective of competition law is to prevent practices which might have an adverse effect on the market. Therefore, any activity which forecloses competition in the market should be regulated by the CCI.  Hence, it is recommended that the CCI should regulate the actions of trade associations by adopting a wider interpretation of the definition of ‘enterprise’, thereby including all those activities which restrict the supply or distribution of pharma products in a market. It is also suggested that the CCI should implement the concept of an advance ruling (followed in the US and UK), where associations can ask for advisory opinions on their future actions or decisions.

Yashvardhan Singh & Palash Moolchandani

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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