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Anti-Poaching Agreements: Study of Jurisprudence in USA, Singapore and India
Prachi Gupta*

There goes a saying, If you dont take care of your people, someone else will. It holds true in the highly competitive world where the job market is full of experienced professionals, constantly in search of better work profiles and career opportunities and equally enterprising employers who want the best of the hands for their organisations. It is then when the anti-poaching or cold calling agreements or understandings come into play. Many jurisdictions like USA, Singapore and India have held such anti-poaching or cold calling agreements to be anti-competitive or restrictive of trade. This article attempts to discuss the law relating to such antipoaching agreements in light of the recent investigations initiated by Department of justice, USA against Adobe, Apple, Pixar, Google, Intel etc. India has yet to witness an action against anti-poaching understandings under the Competition Act, but the stand of the Indian Courts is already well pronounced, rendering such agreements as void ab initio under provisions of Indian Contract, 1872.
Introduction Employee poaching or employee raiding takes place when a company hires an employee from a competitor company. Employee poaching often happens in the IT industry because of high-demand technical skills but there is hardly any
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industry which has not witnessed employee poaching between competitors. When an employee leaves an organisation, he takes away with him his own competence and experience, which a part of investment made to human capital by his employer, acquired through training

Advocate & Legal Expert at Competition Commission of India. She may be reached at gupta.prachi@hotmail.com. JUNE, 2013 111

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A non poaching agreements is different from non-compete agreements, where unlike the non-compete agreements, which is between an employer and an employee, non poaching agreement is between two employers
programs, formal or informal. At times, some employers also suspect their employees of taking business relations and confidential informations to their new employers, irrespective of the non-compete agreements between employer and employee. Often non poaching agreements have been confused with non-compete agreements. A non poaching agreements is different from non-compete agreements, where unlike the non-compete agreements, which is between an employer and an employee, non poaching agreement is between two employers. A non-compete agreements restricts the employee from seeking employment with a rival or other company, whereas, on the other hand, non poaching agreements refrains other companies from poaching into each others talent pools. A non poaching agreement confers fair protection upon the parties to the agreement by setting out guidelines to be followed in case of lateral hiring. Furthermore, it does not restrain an individual from exercising a lawful profession, nor does it restrict an individual from joining another company, or carrying out the same profession. It simply requires a company to first take permission of the company from which it wants to recruit. This is in conformity with

law, as (a) it is not in restraint of trade and (b) it also protects the interest of the company from which the employee is being recruited as it gives time to a company to find replacement, which would be difficult in case of poaching.1 The question arises Can employers agree amongst themselves to not hire the employees of their competitors? The Answer is No. In 2009, the Department of Justice in USA initiated investigations against allegations of such anti-competitive agreements amongst a number of big companies, including Apple, Intel, Walt Disney, Adobe, Google etc. In high technology sector, there is a strong demand for employees with advanced or specialized skills. One of the principal means by which high tech companies recruit these types of employees is to solicit them directly from other companies in a process referred to as, cold calling. This form of competition, when unrestrained, results in better career opportunities. According to the complaint by the Anti-Trust Division of Department of Justice, the companies engaged in a practice of agreeing not to cold call any employee at the other company, by way of entering into agreements which were actively managed by senior executives of these companies. The complaint alleges that the companies actions reduced their ability to compete for high tech workers and interfered with the proper functioning of the price-setting mechanism that otherwise would have prevailed in competition for employees. None of the agreements was limited by geography, job function, product group or time period and were broader than reasonably necessary for any collaboration between the companies.

Validity of Non-Poaching Agreements, Divij Kumar, available at http://psalegal.com/ upload/publication/assocFile/LaborBulletin-IssueXI10062010111939AM_1288787650.pdf COMPETITION LAW REPORTS JUNE, 2013

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Civil complaints were filed against these companies2 followed by civil complaints and settlement agreements 3 . The agreements between Apple and Google, Apple and Adobe, Apple and Pixar and Google and Intel prevented the companies from directly soliciting each others employees. An agreement between Google and Intuit prevented Google from directly soliciting Intuit employees. The Department of Justice said that the agreements eliminated a significant form of competition to attract highly skilled employees, and overall diminished competition to the detriment of affected employees who were likely deprived of competitively important information and access to better job opportunities. The agreements have the effect of restraining competition without any procompetitive justification and distorted the competitive process. Traditionally employers have used both incentives and disincentives to keep their employees from leaving. Incentives include compensation (salary, bonuses, benefits packages, and employee-specific perks) and working conditions. Disincentives include postemployment conditions in an employment agreement that make leaving relatively less attractive. For example, an employment agreement might include a non-compete covenant (employee agrees not to pursue a similar profession or trade in competition against the employer within a stated geography for a specified time), a customer nonsolicitation covenant (employee agrees not to solicit employers customers, but is otherwise free to compete, and is free to make unsolicited sales to employers
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customers), a co-employee nonsolicitation covenant (employee agrees not to solicit former co-employees to leave the company), and confidentiality agreements (employee agrees not to take, use, or disclose employers confidential information).4 The disincentives are an agreement between employer and employee, more like a deterrent or hindrance to employees from leaving the employer.

The disincentives are an agreement between employer and employee, more like a deterrent or hindrance to employees from leaving the employer.
Agreements between Competitors A number of employers have tried this approach but have miserably failed. In Nichols v. Spencer International Press, Inc.,5 two competitors in business of sale of encyclopaedias and books had a no switching agreement between them, under which they refused to permit employees to work for their competitors and similarly refused to hire employees of any competitors. The Court rejected the contention that Section 6 of the Clayton Act, immunized this agreement. The Court held that agreements among supposed competitors not to employ each others employees not only restrict freedom to enter into employment relationships, but may also, depending upon the circumstances, impair full and

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United States v. Adobe Sys., Inc., filed Sept. 24, 2010), available at http://www.justice.gov/ atr/cases/f262600/262650.htm; United States v. Lucasfilm Ltd., available at http:// www.justice.gov/atr/cases/lucasfilm.html. Available at http://www.justice.gov/opa/pr/2010/September/10-at-1076.html No Poaching Allowed: Antitrust Issues in Labor Markets, by Michael Lindsay and Katherine Santon, Available at http://www.dorsey.com/files/Upload/eU_LE_antitrust_poaching_ 072412.pdf 371 F.2d 332 (7th Cir. 1967) JUNE, 2013 113

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free competition in the supply of a service or commodity to the public. No-Switching Agreements between Competitors An employer usually dreads the prospect of his employee switching to a competitor employer i.e. joining the business of a competitor, fearing that the employees knowledge and relationships can damage the former employers business and relationships. In American Express Bank Ltd. v. Ms. Priya Puri,6 the High Court of Delhi refused to believe the contention of the Bank that defendant employee had taken confidential information and data of bank and opined that rights of an employee to seek and search for better employment are not to be curbed by an injunction even on the ground that she has confidential data as per the facts and circumstances. Such an injunction will facilitate the plaintiff to create a situation of once a customer of American Express, always a customer of American Express. In the garb of confidentiality the plaintiff cannot be allowed to perpetuate forced employment. It is well settled in many jurisdictions that employment agreements or understanding agreements between employers are not a solution to prevent employees from leaving, but on the contrary are construed by the courts to hamper and constrict the professional and intellectual freedom of the employees. Hence, purely naked non-solicitation clauses between businesses are void and run contrary to anti-trust laws, nonsolicitation clauses between businesses and their employees, and between

Singapore In Singapore, Courts have adopted a stringent approach towards restraint of trade clauses in employment agreements, including non-solicitation clauses. Essentially, Courts have held bare restraint of trade clauses as being contrary to public policy and hence illegal, and unenforceable. However, all is not lost; a non-solicitation provision contained in an employment agreement may still be upheld if it satisfies the three criteria below: The clause protects a legitimate proprietary interest of the employer; The clause is reasonable as between the parties; and The clause is reasonable in the public interest. From the above, what is clear is that businesses must take great care in drafting restraint of trade clauses to ensure that such clauses are not declared void and unenforceable. Further, a well crafted non-solicitation clause can be an effective tool and function effectively to protect the legitimate interest of the employer.7 Anti-Poaching agreements between Employers Similar to the no-tolerance approach adopted by Singapore Courts in employment agreements, a similar approach has been adopted towards non-solicitation clauses or other forms anti-poaching arrangements between employers if there is no genuine interest intended to be protected. Section 34 of

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2006 (110) FLR 1061 Anti-Poaching Agreements Prohibited Under Law? Kala Anandarajah and Dominique Lombardi, available at http://www.singaporelawwatch.com/slw/attachments/24036/ Anti-poaching%20agreements.pdf COMPETITION LAW REPORTS JUNE, 2013

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To further strengthen the law, onus to establish or justify a non-solicitation or other restrain between employers or even net economic benefit is on the employers
the Competition Act of Singapore 8 passed in 2004, prohibits an agreement between competitors not to solicit each others employees as anti-competitive. Such agreements are also considered as having an adverse effect on competition. However, there are few exemptions where an anti-competitive agreement will be deemed acceptable. Like in situations where there is net economic benefit to be derived from the restriction or the restriction is such that it is directly related and necessary to the implementation of a merger. To further strengthen the law,
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onus to establish or justify a nonsolicitation or other restrain between employers or even net economic benefit is on the employers. Class Actions and Private Actions in Singapore Class Actions against anti-poaching agreements - In Singapore, regulatory rules allow for class actions by group of persons who are affected. The Singapore Rules of Court, Order 15 Rule 12 provides for a representative action, where numerous persons have the same interest in any proceedings, the proceedings may be begun, and, unless the Court otherwise orders, continued, by or against any or more of them as representing all or as representing all except one or more of them. Private Actions against anti-poaching agreements Under Singapores Competition Law, a person who has suffered any loss or damage directly as a result of the substantive violation of the Competition

Agreements, etc., preventing, restrict ting or distorting competition 34.(1) Subject to section 35, agreements between undertakings, decisions by associations of undertakings or concerted practices which have as their object or effect the prevention, restriction or distortion of competition within Singapore are prohibited unless they are exempt in accordance with the provisions of this Part. (2) For the purposes of subsection (1), agreements, decisions or concerted practices may, in particular, have the object or effect of preventing, restricting or distorting competition within Singapore if they (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; or (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. (3) Any provision of any agreement or any decision which is prohibited by sub-section (1) shall be void on or after 1st January 2006 to the extent that it infringes that subsection. (4) Unless the context otherwise requires, a provision of this Act which is expressed to apply to, or in relation to, an agreement shall be read as applying, with the necessary modifications, equally to, or in relation to, a decision by an association of undertakings or a concerted practice. (5) Subsection (1) shall apply to agreements, decisions and concerted practices implemented before, on or after 1st January 2006.

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Act has a right of action in civil proceedings against the undertaking which is the subject of a decision by the Competition Commission of Singapore. Hence, where the Competition Commission of Singapore finds that a non-solicitation clause between competing businesses infringes provisions of Section 34, the businesses could be the subject of a private action by its employees. As of now, there have been no private actions for infringements of the Competition Act but it is a possibility that cannot be ignored.9 In a nutshell, employers in Singapore must be cautious when entering into nonsolicitation arrangements to avoid contravention of the Section 34 Prohibition of the Competition Act. Apart from the financial penalties that may be imposed by the Competition Commission of Singapore, employers may also be subject to a private action or a possible class action by their employees which could result in negative impact on the companys business performance, public image and reputation. India Every employer prefers to hire employees who are already experienced and equipped with skills, suited to the job, rather then employ fresh recruits, and train them to make them employable. As in 2010, Indian IT industry approximately spends Rs 3,000 crores every year on training fresh graduates. The Indian IT sector is also facing serious problems of employee attrition, a situation faced by an employer when his employees leave due to job dissatisfaction, new opportunities in the market, better compensation etc. before coming into force of the Competition
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Act, 2002, the enforceability of a Non Poaching Agreement was tested under the provisions section 27 of the Indian Contract Act, 1872 which holds any agreement restraining an individual from exercising a lawful profession, trade or business of any kind to be void. Indian Contract Act considers restraint to be reasonable if it affords fair protection to the parties and does not interfere with the public interest. India has yet to witness an action against anti-poaching agreements under the purview of Competition Act, 2002 but a number of legal proceedings have already been initiated under Section 27 of the Indian Contract Act, 1872. In Gujarat Bottling v. Coca Cola Company10, the Supreme Court held that a man is entitled to exercise any lawful trade or calling as and where he wills, as long as it is not against public policy or interest. It further held that under Section 27(a), a restrictive covenant extending beyond the term of the contract is void and not enforceable, (b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment and is applied only when the contract comes to an end, and (c) this doctrine (Section 27) is not confined only to contracts of employment, but is also applicable to all other contracts. In Pepsi Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & Others 11, there was a negative covenant clause in employment contract, restraining an employee from engaging or undertaking employment for 12 months after he has left the plaintiffs service. The Delhi High court held that it is well settled that such post termination restraint, under Indian Law, is in violation of Section 27 of the Indian Contract Act. Such contracts are

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Anti-Poaching Agreements Prohibited Under Law? Kala Anandarajah and Dominique Lombardi, available at http://www.singaporelawwatch.com/ slw/attachments/24036/Anti-poaching%20agreements.pdf MANU/SC/0472/1995: AIR 1995 SC 2372: 1995 (2) UJ 698 81 (1999) DLT 122 COMPETITION LAW REPORTS JUNE, 2013

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unenforceable, void and against the public policy. What is prohibited by law cannot be permitted by Courts injunction. The Court further held that rights of an employee to seek and search for better employment cannot be restricted by an injunction. An injunction cannot be granted to create a situation such as Once a Pepsi employee, always a Pepsi employee. It would almost be a situation of economic terrorism or a situation creating conditions of bonded labour. Every employee is entitled to right and freedom of changing employment for improving service conditions, which cannot be restricted or curtailed by a Court injunction. Inter-changeability of service is not an accepted norm of Service Jurisprudence which cannot be curtailed by a Court injunction nor can an employees right to terminate their contracts be curtailed by injunction. Though an injunction can be granted for protecting rights of plaintiffs, it cannot be granted to limit the legal rights of defendants. The court was of the view that the purpose behind Pepsi seeking injunction in the present case was only with the extraneous motives to prevent employees from changing employers. Lastly, the Court opined that in economic matters, while granting injunction, business realities have to be taken into consideration. The employees seek betterment and advancement of their careers, while they are in service. It is impracticable and unrealistic to artificially create a situation by a Court injunction when employees would first leave the employment and then look for better service conditions and job opportunities elsewhere. The Gujarat Bottling and Pepsi case, which were the beginning of the antipoaching jurisprudence in India, clearly laid down that an employee cannot be made to work with a particular employer

against his resolve or under a threat of legal action. The only exception is where an employee might divulge the confidential information of his previous employer.12 In Jet Airways (I) Ltd. v. Mr. Jan Peter Ravi Karnik, the Bombay High Court observed that terms and conditions of service of the defendants have been unilaterally altered by the plaintiffs to the detriment of the defendant. The Court held that nongrant of injunction would not cause any irreparable loss to the plaintiffs. Earlier it was the plaintiffs who had successfully poached 16 pilots from Sahara Airlines. The conduct of the plaintiffs was such that defendants had no resort left but to seek employment elsewhere and inconvenience which had been caused by leaving of services by the defendants was merely temporary and plaintiffs were not entitled to grant of any injunction. Competition Act, 2002 The Indian Competition law is still in its nascent stages but the impact has already been witnessed in several landmark rulings of the Competition Commission of India. The Competition Act, 2002 aims to (a) prevent practices that would have an adverse effect on competition, (b) promote and sustain competition in the market, (c) protect the interest of the consumer and (d) ensure freedom of trade. Section 3 of the Competition Act, expressly prohibits agreements which are anti-competitive in nature and restricts enterprises, association of enterprises or persons from entering into agreements which cause or may cause adverse affect on competition within India. Such agreements which contravene the above are considered void ab initio, i.e. void since inception. Non Poaching enterprises do not fall under the ambit of this section,

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Shankar Golikari v. Century Spinning and Manufacturing Co. Limited, (1967) ILLJ 740 SC. JUNE, 2013 117

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as it does not ban lateral hiring, but instead sets guidelines to be followed in case of lateral hiring. Thus making the non-poaching agreements in conformity with the Competition Act as it (a) does not have an adverse effect on competition, (b) does not in any way unpromote competition, and (c) ensures freedom of trade as it does not restrict an employee from working for a competitor employer.

The law is well settled that any restrictions imposed on an employee during the employment are legally enforceable while the ones relating to post-employment period, which are meant to coerce the employee to not leave the employment or not join a competitor employer are null and void
Conclusion The law is well settled that any restrictions imposed on an employee during the employment are legally enforceable while the ones relating to post-employment period, which are meant to coerce the employee to not leave the employment or not join a competitor employer are null and void. Postemployment restrictions are rendered void by Section 27 of Contract Act. While

there exists a number of precedents under Contract Act, there is no case where the matter has been examined by a Court or authority under the Competition Act, 2002. In the Desiccant Rotors International Pvt. Ltd. v. Bappaditya Sarkar and Another., the Delhi High Court observed that it is this attempt to protect themselves from competition which clashes with the right of the employees to seek employment where so ever they choose and in a clash like this, it is clear that the right of livelihood of the latter must prevail. Competition Act, 2002 is wider in scope compared to Contract Act. While Contract Act relates to contracts only, the Competition Act relates to any agreement. Moreover, while the only action open to a Court under Contract Act is to render the contract void, it is possible under the Competition Act to impose penalties on all those who make their employees sign such documents or enter into express or implied understandings, which impose postemployment restrictions on employees. It may also be possible to initiate classaction suits or proceedings under the Competition Act on behalf of employees in sectors where such agreements are common. While the position on postemployment restrictions regarding taking up employment or other competitive activities is clear, the issue of confidentiality of information and of intellectual property rights still remains an open area. An employee has the right to engage in any gainful activity after his employment ceases but not at the cost of all confidential intellectual property of the employer.

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Distribution of Pharmaceutical Products in India: A Changing Paradigm

Vaibhav Choukse*

Why does this problem keep recurring? What is it about trade associations that lend itself to antitrust violations? For those of you who have practiced in this area for any length of time, the answer is obvious. A trade association is by definition a group of competitors who get together to share common interests and seek common solutions to common problems. The members of a trade association, singly and as a group, are sitting on an antitrust powder keg! And the job you have signed up for as their antitrust counsel is to help make sure they dont play with matches.1
May 20, 2013 marked for the fourth year of successful enforcement of the Competition Commission of India (Commission). During these years the Commission has emerged as a strong economic regulator. Though, in recent times the Commission has faced criticism for its orders lacking reasons and procedural clarity. The same was also observed by recent decision of Supreme Court of India in Ragni International Ltd. v. Nova Scotia Bank & Ors2 as, the minimum that is required of the commission is that the orders are supported by reason, even briefly. Until now, the Commission has passed orders in more than 236 cases imposing a total penalty of more than Rs. 8,013 crores (approx. US$ 1.8 bn) in 19 of these cases 3 , which include cartel fines on Cement Manufacturers, Explosive Manufacturers, LPG Cylinder Manufacturers, Aluminum Phosphate Tablets Manufacturer, Cinema Producers etc., and abuse fines on BCCI, National Stock Exchange, DLF, Schott Glass, etc.

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Author is a Competition Lawyer working as Senior Associate with Vaish Associates, Advocates at New Delhi and holds LL.M in Commercial Law with focus on EU Competition Law from Kings College London. Author would like to thank Ms. Rimali Batra for her valuable inputs. The authors views expressed in the article are personal and author is solely responsible for any errors that may remain in this article. Anne K. Bingaman, Recent enforcement actions by the antitrust division against trade associations (Speech, Washington DC, 28th February, 1996). Ragni International Ltd. v. Nova Scotia Bank & Ors; Civil Appeal No. (s). 253-253A of 2012 (6th May, 2013) CCI has slapped penalties worth Rs 8,013 crore till date: Government, The Economic Times, 7th March, 2013 JUNE, 2013 119

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The premise of this article is the analysis of the order of the Commission, in the case of M/s Santuka Associates Pvt. Ltd. vs All India Organization of Chemists and Druggists and Ors4 (Order) that changed the face of distribution system for pharmaceutical products in India. Until date, in real sense, it is the one of the most distinguished win for the Commission, not in terms of the amount of penalty imposed on All India Organization of Chemists and Druggists (AIOCD) but the consequent change that followed the Commissions Order. There have been orders such as those in the case of Cement Manufacturers and National Stock Exchange (NSE), which gathered media limelight for the amount of penalty imposed but the impact of these orders is questionable. The Cement prices rose significantly before the ink on the order was dry and they continue to rise to the pity of the customers in the cement industry5. Also, the Commissions order in NSE was no relief to the consumers as the NSE started levying a transaction charge for currency derivative trade, which prior to the Commissions order was a free of cost service 6 . The complainant in the NSE case, namely MCX SX also followed the suite of levying such charges adding to the grievance of the players involved. Among the gamut of such orders that have yet to impact competition/anti-competitive practices and consumers, the order of the Commission against AIOCD paced its way to making an impact without media steering and public debates.

How the Mighty Have Fallen It all started when a clearing and forwarding agent (C&F agent) of USV Limited (a healthcare company/drug manufacturer), from Cuttack named, M/ s Santuka Associates Pvt. Ltd. (Santuka/ The Informant) decided to take on AIOCD for limiting and restricting the supply of pharmaceutical drugs. AIOCD is a national level registered association of chemists and druggists, active since 1975, representing nearly 7.5 Lakhs Chemists: both retailers and wholesalers widely across India 7 . Santuka approached the Commission and filed the Information in May 2011, alleging AIOCD of various anti-competitive practices in distribution of pharmaceutical products in India. There were four allegations raised by the Informant: i) Distribution Chained With No Objection Certificate Santukas first objection was with the requirement of obtaining a mandatory "No Objection Certificate" (NoC). All C&F agents, super- distributors, distributors or stockists in a particular state had to obtain a NoC from the state-level chemists and druggists association (State Association) as eligibility criteria to get associated with a drug manufacturer. Also, drug manufactures could not appoint any person for distribution of its drugs in the distribution chain unless the said person has a NoC from State Association. Moreover, no

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Case No. 20/2011, M/s Santuka Associates Pvt. Ltd. v. All India Organization of Chemists and Druggists and Ors. Cement prices fly weeks after CCI spinal tap, DNA India, July 18, 2012. Cement prices jump by 46% in 20 days, The Times of India, 6th June, 2013. MCX-SX follows NSE in levying charges on currency derivatives trade, The Economics Times, 19th August, 2011. AIOCD website (www.aiocd.net). COMPETITION LAW REPORTS JUNE, 2013

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The Trade Margins for controlled drugs are regulated by the Central Government through Drug Price Control Order, 1995 (DPCO
additional/new stockiest was allowed to sell the products of a drug manufacturer without NoC from the existing stockist of that drug manufacturer operating in that area. ii) Mandatory Advertisement on Launch of New Drugs The AIOCD took mandatory payments from a drug manufacturer for a service called the Product Information Service (PIS). Under the said service, AIOCD issued a PIS bulletin, which is a part of the magazine published by the respective State Associations. This bulletin contains description of new medicines to be launched in the market by drug manufacturers. Some State Associations charged Rs. 2000 per drug before it could be launched in a particular territory. Moreover, this amount of Rs. 2000 was not only charged per drug, but also, per category of that drug. Where a drug belonged to different categories, for instance 100 gm, 500 gm, 1 Kg pack, for each such category of that drug, the drug manufacture was required to pay Rs.2000. No new drug could enter the market before it got published in the PIS bulletin. iii) Playing In the Margins The Trade Margins for controlled drugs8 are regulated by the Central Government through Drug Price Control Order, 1995 (DPCO). However, the Trade Margins of uncontrolled drugs were fixed by AIOCD under a

Memorandum of Understandings (MoU) that existed between AIOCD and associations of pharmaceutical manufacturers such as IDMA (Indian Drugs Manufacturers Association) and OPPI (Organisation of Pharmaceutical Producers of India). MoU binds drug manufacturers to offer 10 per cent margin to whole- sellers and 20 per cent margin to retailers for sale of their drugs. In 2011, both OPPI and IDMA discontinued their Controversial MoU with AIOCD. iv) AIOCDs Way or the Highway AIOCD & State Associations boycotted the products of drug manufacturers who did not adhere to the requirements stated above, namely the NoC, the PIS and the trade margins by issuing directions to players in the distribution chain. At various occasions, on directions issued by AIOCD, the drug manufacturers often stopped supplies to the stockists who disobeyed these directions. Santuka was one such C&F agent in Cuttack. The Commission after forming a prima facie merit in the case referred the matter to Director General (DG) for detailed investigation. Interestingly, after the submission of investigation report by DG to the Commission, the Informant, presumably under the pressure of AIOCD, approached the Commission to withdraw the Information, which in turn was rejected by the Commission stating that there is no withdrawal provision under the Act. This rejection throws light on the term Information which replaced the term Complaint by an amendment of 2007 and the power of the Commission to take suo moto actions. The withdrawal application by the Informant indicates towards the strong influence of AIOCD over the Pharmaceutical industry. The

Drugs whose prices are controlled by the Central Government. JUNE, 2013 121

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same attitude of AIOCD can also be seen from the fact that AIOCD never cooperated with DG investigation by withholding information sought by DG/CCI and willful disregard to the communications of DG, despite having been made aware of its consequences and ample opportunities and time given to it. Although, the Commission penalized AIOCD for its non-cooperation by imposing a penalty of Rs. 25.75 lakhs under Section 439 of the Competition Act, 2002 (Act). The Commission post consideration of the investigation report and on hearing evidence/submissions of the parties involved along with the submissions of major drug manufacturers such as Novartis, GlaxoSmithKline, Ranbaxy, Johnson & Johnson, Cadila etc., concluded the existence of anticompetitive agreement under Section 3(3) of the Act. The Commissions Order enunciated four things; i) Firstly, that the requirement of NoC by AIOCD creates a restraint on freedom of trade and has an effect on market supply as it controls and limits the distribution of drugs widely. ii) Secondly, the PIS system appears to be an additional and stricter burden borne by drug manufactures that wish to launch new drugs in the market but are not allowed to do so without going through the PIS route. It creates a hindrance of the worst kind as it not only impacts the drug manufacturers who cannot access markets freely but widely and hardly hits consumers. iii) Thirdly, the agreement to fixed trade margins of the wholesalers and the retailers has the effect of
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directly or indirectly determining the purchase or sale prices of the drugs in the market. In absence of such fixation, the competition amongst the retailers would have forced them to reduce their trade margins resulting into sale of drugs at prices even below the Maximum Retail Price (RPM). iv) Finally, on the issue of boycotting drug manufacturers, the Commission remarked that such illegal acts have a far-reaching effect on the distribution and availability of drugs, results in Appreciable Adverse Effect on Competition (AAEC). The consequence is not only denial to market access but also rampant non-availability of the drugs to the consumers. The following words of the Commissions order need re-iteration: It cannot be doubted that had these practices not been there, the consumers at large would have been benefited in monetary terms and otherwise. In view of the above anti-competitive practices, the Commission imposed a maximum penalty of Rs. 47.40 lakhs on AIOCD (10 per cent of its turnover). Further, the Commission also directed AIOCD to: i) Cease & desist from indulging in anti-competitive practices and file an undertaking in respect of the same with the Commission. ii) Issue a letter to OPPI and IDMA informing discontinuation of the requirement of obtaining a NoC for appointment of stockists. Also stating that the drugs manufacturers, stockists, whole sellers were at liberty to give discounts to the customers. iii) Inform all its members and State Associations by sending a circular/letter that they were free to give discounts to the customers,

Section 43 of the Act deals with Penalty for failure to comply with directions of Commission and Director General. COMPETITION LAW REPORTS JUNE, 2013

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specifically a circular indicating that PIS charges are not mandatory. Riveting Appeal against the Order Media reports suggest that a Chennai based registered trust namely, Pharma Care Foundation, filed an appeal before the Competition Appellate Tribunal (COMPAT) challenging the direction of the Commission. The appeal of the trust is with respect to voluntary involvement/payments by drug manufacturers for the PIS bulletin/ approval. In the words of the Appellant by giving the option of voluntary PIS services, CCI is permitting AIOCD as a seal of authority to continue PIS on voluntary basis. Further, CCI has erred in appreciating that as per the DPCO, it is a mandatory requirement that a drug manufacturer or importer should issue a price list in Form V to the retailer or dealer, who in turn is obliged to display the same in a prominent manner for the attention of the customers10. Based on the Order, it is interesting to note that the Pharma Care Foundation was neither a party to the case before Commission nor issued any notice by DG during the investigation. Although, under the scheme of the Act, any person, aggrieved by any direction, decision or order of the Commission, may file an appeal before COMPAT challenging the Order11. It is worth a mention that there is no information, if an appeal has been preferred by AIOCD. While, it is for COMPAT to access the Commissions order, there are two apparent issues with the Order that need
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introspection. First, the exoneration of IDMA an OPPI from the lash of the order and second, with respect to the lack of compliance monitoring mechanisms. Exoneration of IDMA & OPPI The Commission acknowledges that OPPI and IDMA (associations of drug manufacturers) signed a MoU with AIOCD (association of chemists and druggists) that contained various anticompetitive agreements/decisions as discussed above.12 The Commission also observed that, AIOCD, being an association of its constituent enterprises, is taking decisions relating to distribution and supply of pharmaceutical products on behalf of the members who are engaged in similar or identical trade of goods and that such practices carried on, or decisions taken by AIOCD as an association of enterprises are covered within the scope of Section 3(3) of the Act13. Following this line of observation, the final order of the Commission was amiss. The Commission inferred that the MoU between AIOCD, OPPI and IDMA couldnt be examined for violation of Section 3(3) & 3(4)14 of the Act and hence no liability bestows on either OPPI or IDMA. Under the Treaty on the Functioning of the European Union (TFEU), Article 101(1) of TFEU provides that a trade association does not have to have a commercial or economical activity of its own15; it follows that Article 101(1) of TFEU may be applicable to the decisions of the trade association, even if it does not apply to its agreements because the

Peethaambaran Kunnathoor, Appeal moved before COMPAT challenging CCI order for collecting PIS on voluntary basis The Pharmabiz.com, 14th May, 2013. Section 53(B) (1) of the Act. Para 28.7 of the Order Para 28.8 of the Order; Section 3(3) of the Act deals with Anti-competitive horizontal agreements. Section 3(4) of the Act deals with Anti-competitive vertical agreements. Article 101(1) of TFEU deals with Anti-competitive agreements. Section 3 of the Act is based largely on Article 101 of TFEU. JUNE, 2013 123

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association does not enter into the agreements as an undertaking 16. But there definitely can be an agreement between two trade associations having its members operating on a different level of production or distributor chain. The Office of Fair Trading (OFT) in its guidance paper on Trade associations, professions and self-regulating bodies17 has observed that: Decision has a wide meaning. It may include, for example, the constitution or rules of an association of undertakings or its recommendations or other activities18. In the day to day conduct of the business of an association, resolutions of the management committee or of the full membership in general meeting, binding decisions of the management or executive committee of the association, or rulings of its chief executive, the effect of which are to limit the commercial freedom of action of the members in some respect, will all be decisions of the association. The key consideration is whether the effect of the decision, whatever form it takes, is to limit the freedom of action of the members in some commercial matter. (Emphasis supplied) Beyond doubt, the tripartite agreement (MoU) between AIOCD, OPPI and IDMA will squarely fall within the definition of agreement under Section 2(b) of the Act. Furthermore, Section 3(1) of the Act states that: No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply,

distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India (Emphasis supplied) Hence, the MoU entered between AIOCD, OPPI and IDMA may seems to be in violation of Section 3(1) of the Act as the agreement/decisions entered into amongst these associations have an AAEC, effect of limiting or controlling market supply and directly or indirectly determining purchase or sale price of pharmaceutical products in India 19 . Interestingly, until date, drugs manufacturers, though considered being the victim of the AIOCD practices have been rather meek in taking any legal action against these unfair trade practices of AIOCD. The same anticompetitive MoU binds druggist & chemist on one-hand and drugs manufacturers on other, through their respective trade associations. Therefore, the exoneration of IDMA and OPPI could be seen as inappropriate. Is Compliance The Biggest Challenge? Ensuring compliance with competition and orders of the Commission would be one of the major challenges for the Commission in times to come. While in theory there are a number of compliance monitoring mechanisms available - for example, self-reporting by the parties, formal arbitration provisions, relying on third parties to monitor compliance etc; the appointment of a monitoring trustee, which is an increasingly important

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Richard Whish and David Bailey, [2012], Competition Law, Oxford University Press, at p 91. See generally: Case T-25/95 etc Cimenteries CBR SA v. Commission [2000] ECR II-491, [2000] 5 CMLR 204; See the Opinion of Advocate General Slynn in Case 123/85 BNIC n. Clair [1985] ECR 391, p 396. See Office of Fair Trading, Trade Associations, Professions and Self-Regulating Bodies, Competition Law Guidelines, December 2004 National Sulphuric Acid Association Ltd, Re OJ L260, 3.10.80, p24; [1980] 3 CMLR 429. M/s Santuka Associates Pvt. Ltd. v. All India Organization of Chemists and Druggists and Ors.(Dr. Geeta Gouri, Member, Dissenting) COMPETITION LAW REPORTS JUNE, 2013

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feature not only of European Commission but also adopted by various competition authorities, would make for a hopeful compliance system in India and especially for orders passed in cases like AIOCD. Based on the media report, following the direction of the Commission, the AIOCD did issue a circular, dated April 18, 201320, to its members and office-bearers of State Associations communicating the Order of the Commission directing them to strictly adhere to the direction given by the Commission. But considering the influence and dominance of AIOCD in the Pharmaceutical community, it would be huge challenge for the Commission to monitor the compliance that would be adopted and followed by AIOCD in future. Since there are no formal provisions relating to compliance monitoring mechanisms under the Act, the Commission may thrive to take appropriate steps under Section 27 (e) & (g) of the Act21.

The Twisted Paradigm of Hope and Change Until date, the drugs manufacturers sell medicine stocks directly to approximately 5000 odd stockists and distributors who then in turn sell these products to over 10000 wholesalers who further sell them to over six lakhs retailers. This trade practice has existed in the industry for several years in India. AIOCD was directly controlling this arrangement disliked by many in the industry. The Commissions Order is all set to bring a paradigm shift in the current distribution system of the pharmaceutical products in India. With the directions ordered by the Commission, now: i) Any wholesaler with valid trade license can directly approach a drug manufacturer for his requirement of medicine supplies for selling to retailers. Wholesalers do not have to depend on stockists or distributors for their supplies any more. ii) Drug manufacturers can appoint any number of firms, at any level in its distribution chain. Drug manufacturers now have the option to negotiate the Trade Margin with the potential distributor. iii) Pharmaceutical companies can launch and distribute their new products without publishing information of their products in PIS bulletins. iv) Any stockists, distributors and retailers can offer discounts to the consumer without fear of boycott from AIODC and its affiliates. v) Pharmaceutical companies can bypass the supply chain by

The industry for several years in India. AIOCD was directly controlling this arrangement disliked by many in the industry. The Commission's Order is all set to bring a paradigm shift in the current distribution system of the pharmaceutical products in India

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Peethaambaran Kunnathoor, AIOCD issues circular to members, state assns urging strict compliance of CCI order The Pharmabiz.com, 17thMay, 2013. Section 27 of the Act deals with Orders by Commission after inquiry into agreements or abuse of dominant position. JUNE, 2013 125

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providing home service for its products to the consumers directly, which was earlier resisted by traders lobby22. Initially, the drugs manufacturers may face some difficulty in supplying drug stocks directly to wholesalers because until now they had to deal with only a few hundreds of stockists and distributors but now they have to satisfy a large number of traders with small requirements. This may cause some inconvenience and additional costs to manufacturers in its primary stages but in the long run this arrangement would lead to a healthy competition among traders resulting in lower prices to patient community23. A Way Forward Based on the media reports, the Department of Pharmaceuticals (DoP) is contemplating issuing a directive to the drugs manufacturers and chemists to clarify the situation arising out of the Order. Last month, the Commissioner of Food & Drug Administration (FDA) in its meeting with the representatives of

the pharmaceutical trade and industry advised the industry to comply strictly with the Commissions Order. The Order will change the rules of the game that have existed in pharmaceutical industry for years now, but the burden of longstanding impact would rest on the shoulders of the Commission, for a lot depends on how the Commission will monitor the compliance of its Order in the longer run. As a closing remark, it is important to realize that the success of every competition authority will never depend upon the huge amount of penalties imposed or the limelight it gathered in a particular case, but on the impact it has on the market consist of both customers and consumers. The orders passed by the Commission and COMPAT will have far reaching consequences and the Supreme Court of India has observed the same. For now, it seems the Commission has a long way to go before it reaches its full potential of being a quasi-judicial body, performing an adjudicatory role and other related operations.

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Para 28.35 of the Order. P A Francis, Taming the Pharma Trade The Pharmabiz.com, 5th June, 2013. COMPETITION LAW REPORTS JUNE, 2013