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Why COMPAT order is at best partially convincing in KDCA case

Sumit Jain

On 7th December 2016, Competition Appellate Tribunal (COMPAT) - chaired by Mr. G.S. Singhvi, set aside the order by CCI where it decided to levy a penalty of 10 per cent on Karnataka Druggist and Chemist Association (KDCA), as well as M/s Lupin Limited. The penalty was in violation of section 3(1) and section 3(3)(b) of the Competition Act 2002 (“Act”). The COMPAT, among other things, said that M/s Maruti and Company (the “Informant”) deliberately hide information from Competition Commission of India (CCI) and it is a justified ground for the order to be set aside. While the order is 198 page long, there are serious gaps in the reasoning used by COMPAT for justifying non-violation of section 3(1) and CCI’s reasoning for contravention sounds more cogent.

The bulk of the COMPAT decision lies on the fact that the Informant “deliberately” omitted to mention that it was receiving insulin products from Eli Lilly for more than 10 years without obtaining NOC from KDCA. Appellate tribunal however failed to understand that the word “deliberately” intrinsically requires presence of an intent. At nowhere in the order COMPAT has been able to identify this intention on the part of person (association/company) committing the act. The order is problematic in more than one sense as it tries to equate the products of “Eli Lilly” with “Diabetics Care Division”. A basic understanding of pharmaceutical market and brands can tell us that commission (margin) is based on the brand of medicine or product, even though the said products are used for the same purpose. A nearest example to the case in hand could be of Hansaplast and Johnson and Johnson’s Band-aid.

COMPAT order relies a lot on cross-examination of Mr. Sardar Mal Surana (Managing Director of Informant) where it found a lot of inconsistencies. Undoubtedly it creates a doubt in the reader’s mind about culpability of KDCA and M/s Lupin Limited, but violation of the Act is a civil wrong. Therefore the burden of proof has to only suffice the standard “preponderance of probabilities rather than “beyond reasonable doubt”. Inability of M/s Lupin Limited to assail the veracity of the postal receipt produced by the Informant (as dealt in CCI order) confirming the delivery of order at Lupin’s address proves fatal to its case. Even at the place where COMPAT raises question on departure from trend and says it finds it boggling how come Informant placed an order through speed post (when it had made around 100 orders through email), it is difficult to be convinced as electronic mails are inherently less rely worthy than postal communications. While latter result in physical beings signing the receiving of the letter, former does not have any such process. In fact this is the reason most of the government and court procedures, including the RTI, rely on latter rather than former. If not encouraged, Informant should not have been at least questioned on why it is switching to more authentic means for placing order. COMPAT also erred in saying that instead of contacting officials of Lupin for delivering medicines informant started preparing his case to file before CCI. It sounds unreasonable in the sense that Informant is operating in a market where the sole purpose is to earn profits. It cannot be expected out of him to keep incurring losses on account of non-delivery of medicines and keep on approaching officials of Lupin. It had a better option of approaching CCI and therefore it availed the same.

Appellate tribunal at another place says that Lupin started supplying orders placed by Informant in January 2014, this time again through email, even when no official communication was received by it for filing of information by the Informant to the CCI for contravention of the law. This is again problematic in the sense that markets operate in a certain way and therefore Lupin must have benefitted from the informal communications happening around, thereby getting access to the information (i.e. the informant is planning to approach CCI). In fact as far as violation of section 3(1) is also concerned, the ambit of the sub-section is quite huge and as per Ramakant Kini case, section 3(3) and section 3(4) “are not exhaustive of the scope of s.3(1)”. The language of the given sub-section is clear that “any agreement….likely to cause an appreciable adverse effect on competition” shall not be entered into. If a consortium like KDCA is allowed to issue No Objection Certificate (NOC) to dealers, it would result in “appreciable adverse effect on competition” as firms would then not be free to compete with each other, thereby resulting in increase in prices for the end-consumer. This results in violation of section 3(1).

However COMPAT reasoning is convincing as far as non-contravention of section 3(3)(b) is concerned. S. 3(3) talks about “horizontal restraints” where entities are “engaged in identical or similar trades of goods”. In this case KDCA is a consortium of the pharmaceutical companies which does not engage in any production while Lupin is a firm operating in market continuously engaged in buying and selling of products. No identical or similar trades can be established whatsoever. Therefore the question of violation of section 3(3)(b) does not arise.

The crux of the order can be said to have COMPAT again establishing inconsistency in application of provisions of the Act. While firms know they have to keep on competing with each other in order to pass on the benefits to end-consumer, this order again makes it difficult for them to know when they are violating the Act, and when are they not.