Abstract
Competition law and policy is central to managing healthcare markets in many nations. This essay addresses, from the perspective of competition law and policy, issues concerning anticompetitive practices prevailing in the pharmaceutical industry in India and its competitiveness as a provider of safe and affordable drugs.
Introduction
The pharmaceutical sector is among the highly regulated sectors across the globe. Yet, it is often noted that the required degree of competition is often missing from these markets. The pharmaceutical sector is increasingly under mounting amount of scrutiny in developed country jurisdictions –viz., Europe and United States– as there are indications that competition in pharmaceuticals markets may not be working well. For instance, though, fewer new medicines are being brought to market, and the entry of generic medicines is at times restricted through anticompetitive practices. India being one of the biggest emerging markets of the pharmaceutical sector, there has not been any comprehensive study on the pharmaceutical industry from the perspective of competition law and policy. Moreover there are apprehensions that some of the anti-competitive practices go unscrutinised in India due variety of reasons. Hence there are good reasons to look into current state of competition prevailing in the pharmaceutical sector in India.
In 1978, the Declaration of Alma Ata emphasized upon the need for urgent action by all governments, all health and development workers and the world community to protect and promote health of all the people in the world. Many WHO Resolutions have timely emphasized the need for universal access to healthcare. In India, although the fundamental right to health is not explicit, it is recognized as a derived fundamental right under Article 21 of the Constitution of India- which is life and blood of any Democracy. In N D Jayal v. Union of India [2004 (9) SCC 362] this right came to be specifically recognized as part of right to life under the Constitution of India. Right to access to quality and affordable medicines is an important component of right to health. At times, the right to access to medicines gets violated in the midst of many anti- competitive practices. The pharmaceutical industry is an important source of health care for billions of population globally and in India. Hence it is a highly regulated sector. The pharmaceutical industry is influenced by a host of practices which may primarily relate to price regulations, insurance and reimbursements, drug procurement by government agencies, patent laws, innovation polices, biotechnology and safety policies, drug regulation, data protection, trademarks and use of international non- proprietary names, drug promotion regulation, drug advertising regulation etc… Hence competition law has to work in tandem with all such diverse set of laws, polices and regulation governing the pharmaceutical sector.
The essay has examined issues concerning working of pharmaceutical sector both from a horizontal and vertical point of view. One should not lose sight of the fact that the pharmaceutical sector in India has grown out of policy patronage adopted since 1970. The most important policy decisions were to limit the grant of patent only to process and not to products and the drug policy of 1970. Subsequent to this pharmaceutical prices came to be regulated through the Drug Price Control Orders (DPCOs) which have been amended from time to time. According to the Department of Pharmaceuticals, India is the 3rd largest manufacturer of pharmaceutical products (in terms of volume) and it ranks 14 th in terms of value. Data also shows that Indian generic export have shown a steady increase since 1990’s and is a major supplier of generic drugs to both developed and developing countries. The generic price competition offered by Indian companies has been globally recognised. The pharmaceutical industry is currently divided into three tier structure. Large MNCs operate as originator drug companies and generic companies along with large Indian generic companies. Medium and small scale industries are also engaged in production of branded generics and contract manufacturing related activities. Much of the small scale is engaged in production of generic-generic medicines. Though, there are public sector undertakings in the pharmaceutical sector, their presence has become marginal. The pharmaceutical markets in India are growing at an exponential rate. However, price competition among retailers can be hardly witnessed. The Indian pharmaceutical market has three types of substitutable drugs being sold. The first category includes originator drugs (patented or newly innovated) – they have a brand name. The second category includes brand name generic or branded generic drugs. The third category is generic-generic drugs- which are sold without a brand name.
It is a well-documented fact that Pharmaceutical companies spend vast sums of money on drug promotion. They use various tools and methods such as sales representatives, samples, advertisements in broadcast and print media and sponsorship for promoting drugs. It is also known fact that drug promotion closely linked to unfair trade practices. An analysis of the drug promotion matrix in India reveals that there are various unfair trade practices prevailing in the industry. Considerable amount is spent in such activities. In fact, authoritative studies, including those by the EU Competition Commission have noted that pharmaceutical companies spend more on promotion and advertising and less on research and development. Such practices are also recorded through existing reports and experiences in the pharmaceutical sector. Studies have reported that there is some anecdotal evidence, and there have been news reports in popular media, including medical and other journals highlighting the nexus between different actors in the supply chain emphasizes the need for a further comprehensive study examining various issues.
On dealing with the point of mergers and aquisitions by the Indian pharmaceutical companies, the pharmaceutical industry is witnessing increasing consolidation, which is likely to continue in the following years. Like the pre – 1970 situation, it appears that the multinational drug companies are all set to repeat their success in capturing a larger pie of Indian markets.In 2009, we had seen few public offers for acquisitions. Experts believed that a crash in the stock market over the last few years ha helped the MNCs to increase their acquisition activities. In the recent past there has been an increase in number of public offers by the MNCs like Abbott India, Novartis India and Pfizer Ltd to raise their equity stakes (Mint, April 2009). For e.g. It is reported that Pfizer Inc, a US top pharma giant, has decided to raise its equity stake in its Indian arms from present 41.23 per cent to 75%. This may work to an investment of Rs 680 crore for Pfizer. Again, Novartis AG is planning to acquire an additional stake of up to 39 per cent in its majority owned Indian subsidiary Novartis India Ltd. At present it has a controlling stake of 50.9 per cent in its Indian arm. It is expected that this will increase the stake to over 90 per cent with investment of Rs 440 crore. During September 2008, Abbott India completed its buy-back offer. With this offer, the promoters increased their stake from 65.14 per cent to 68.94 per cent.
One of the major reasons that are identified by industry experts is the economic crises that plagued the world. Again, in January 2009, Merck India expressed that the company was hopeful of signing a couple of acquisition deals later in the year 2009. French multinational Sanofi-Aventi’s has also expressed that the company was looking towards consolidation opportunities in India (Mint, 2009). Mergers and acquisitions in the past show some interesting trends and incisiveness. However, only few commentators have collected exhaustive data and analyzed the trends and patterns. These patterns in fact correspond to global pattern in consolidation of generic firms through Mergers and Acquisitions (M&A).Data on M&A is very limited. However, some studies can provide anecdotal evidence of M&A activities and behavioural patterns during pre merger and post merger period. Post liberalization and until 2005, there were around 64 mergers and 63 acquisitions in the pharmaceutical industry (Beena, 2006). The study shows a domination of domestic firms over foreign firms in case of mergers. It is noted that out of the total 32 merging firms, 20 belonged to the domestic sector and in the case of merged firms; it is 38 and 20 respectively. Domestic firms are merging with the domestic firms, which constituted 64 percent of the total number of mergers and many foreign subsidiaries merged with other foreign subsidiaries, which constitute 26 percent of the total number of mergers.The study also noted that almost all the merged firms were medium sized, i.e. 27 out of the 28 firms come under medium sized category. Medium sized firms were getting merged with large sized firms. About 64 percent of the mergers came under this category (Beena, 2006).
Commentators note that the preference for medium sized firms by the large sized merging firms may be due to several reasons such as the ownership of well-known brands in some therapeutic markets, well established marketing networks and their market share-even though they are not the market leaders. The study also noted that most of the mergers in the pharmaceutical industry were horizontal type. There are high instances of cross-border acquisitions, and unlike in case of mergers they are acquisitions by foreign companies. Large number of acquisitions occurred among the foreign owned firms. It is noted that foreign firms are increasingly willing to raise their stakes in the Indian subsidiary. The reasons being a favourable investment policy of the government and a conducive patent law regime for marketing new technology products (Mint, 2009). These acquisitions have occurred where firms already had some managerial tie-ups (Beena , 2006).There were also alliances within the pharmaceutical industry during this period. Most alliances were on account of marketing motives. It is noted that 34 out of the 62 alliances, which accounts for 55 percent of the total number of alliances were exclusively for marketing purpose (Beena , 2006). They study notes that marketing and manufacturing including contract manufacturing. Marketing and others includes technology, capital utilization, market entry, Research and Development and availing raw materials etc.It may be noted that motives for joint R&D and technology for alliances constitutes only 6.45%. This has much to state about the quality of such an alliance, which at times may not be at advantage from a broader industry perspective.
According to the above given data it is the marketing activities, which constitutes the chunk of possible motives not high-end use of technology and human resource. Thus such alliance may not be useful from the point of technology spillovers that accrue through such alliances.The performance of merged firm’s pre and post merger provides some interesting trends. As a natural consequence of mergers, there is bound to be an increase in scale and scope of enterprise activities and reducing costs of the firms merged. However, it also leads to more market concentration and can be a cause for higher pricing. No such perforce-price studies have been conducted in India to the knowledge of the authors revealing the effects of mergers and acquisitions in India. Indeed, a price based evaluation would be difficult to assess mergers/acquisitions. However, using certain performance indicators, commentators have noted that overall performance has increased among the merged firm (Beena, 2006). But such data does not explain the impact of such mergers on the market and implications for consumer welfare.
From here on wards, a review of the positions in comparative jurisdictions (primarily United States of America (US) and European Union (EU) – with timely reference to the position in other common law jurisdictions -whenever necessary) is undertaken. Positions in comparative jurisdictions are examined by referring to respective legislative provisions and through the developments in case law jurisprudence.
The Treaty Establishing the European Communities (as amended by the treaty of Amsterdam) (TEC), primarily governs the EU Competition law:
Cartels or control of collusion and other anticompetitive which has an effect on the EU. This is covered under Articles 81 of the TEC Monopolies or preventing the abuse of firms’ dominant market positions. This is governed by Article 82 TEC. This article also gives rise to the Commission’s authority under the next area;
Mergers, control of proposed mergers, acquisitions and joint ventures involving companies which have a certain, defined amount of turnover in the EU/EEA. This is governed by the Council Regulation 139/2004 EC (the Merger Regulation).
There are number of block exemptions available under the EU competition law by way of directives and regulations, which equally govern the EC space.
The US Antitrust law is governed by the Sherman Act, 1980, Clayton Act, 1914 and the FTC Act, (1914), Title 15 U.S.C. §§ 41-51 and the Robinson-Patman Act of 1936 (as amended up-to date). The Sherman and the Clayton Acts provides for regulation of trusts, combinations and abuse of dominant position.§ 1. of the Sherman Act deals with “Trusts, etc., in restraint of trade illegal; penalty”. It states: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal…”Section 2 deals with end results that are anticompetitive in nature. Sections 1 and 2 supplements each other in an effort to outlaw all types of anticompetitive conduct. US Congress designed the supplementary relationship to prevent businesses from violating the spirit of the Act, while technically remaining within the letter of the law.Because the courts found certain activities to fall outside the scope of the Sherman Act, the Congress passed the Clayton Act to further widen its scope. For example, the Clayton Act of 1914 added the following practices to the list of impermissible activities: price discrimination between different purchasers, if such discrimination tends to create a monopoly; exclusive dealing agreements; tying arrangements; and mergers and acquisitions that substantially reduce market competition. The Robinson-Patman Act of 1936 amended the Clayton Act. The amendment aimed to outlaw certain practices in which manufacturers discriminated in price between equally- situated distributors to decrease competition.
Business undertakings get into routine agreements for carrying on economic activities. While not all agreements can be termed as anticompetitive, certain agreements between competing firms or among firms in the supply chain may constitute a violation of competition law. Agreements can either be horizontal or vertical. Mergers are a form of horizontal agreement but they raise distinctive competitive concerns. The concept of restriction on competition is an economic one. Thus generally economic analysis is needed to determine whether an agreement could have an anticompetitive effect. A small class of agreements may be considered to have as their object restriction of competition. Article 81 of the EC Treaty deals with the treatment of anticompetitive Agreements. 102 The US law on anticompetitive agreements is contained in section 1 of the Sherman Act. Article 81 is applicable both to horizontal and vertical agreements. Horizontal agreements are those between undertakings at the same level of market, while vertical agreements are between undertakings at different levels of market. The policy of Article 81 is to prohibit cooperation between independent undertakings which prevents, restricts or distorts competition. More specifically, it is concerned with the eradication of cartels and ‘hardcore’ restrictions of competition. However, it is not just that legally enforceable agreements are within the scope. Article 81 also applies to cooperation achieved through the decisions of trade associations and to more informal undertakings, known concerted practices. Under Section 1 of the Sherman Act is read as a general standard that ‘Every agreement whose anticompetitive effects on trade outweigh its precompetitive effects is illegal’.
However,even though the above being the general standard the US Courts have held that there can be certain agreements which are so likely to be anticompetitive and so unlikely to have precompetitive effects that they are condemned ‘per se ’- which is to mean that no inquiry on case by case basis is conducted since the nest effect is anticompetitive [Elhauge and Geradin, 2007, p. 56]. Thus if the per se rule does not apply, then the general rule of reason will apply.Within the EU, a broad interpretation has been given to each of the terms ‘agreement’, ‘decision’ and ‘concerted practice’ [Whish, 2008, p. 97-113]. It is important to note that undertakings cannot take a defence that they were forced into anticompetitive agreements because of the conduct of the other traders. However, this may be significant in the way competition authorities may mitigate a fine, or to exempt parties from any proceedings [Whish 2008]. In the context of pharmaceuticals- where actions of trade associations in the supply chain lead to a host of anticompetitive practices- it is very important to note that actions of trade associations to enter into anticompetitive agreements are well within the scope of Article 81(1). Recommendations made by associations have been held to amount to a decision and violative of Article 81- even while the decision may not be binding upon members. 105 Decisions taken by associations formed through a statutory mode are also not immune to action under Article 81.
Further, apart from ‘agreements’ and ‘decisions’, the inclusion of ‘concerted practices’ within the meaning of Article 81 means that conduct which does not fall into the two categories will also fall into the domain of Article 81(1) as amounting to a ‘concerted practice’. The EU approach to a legal test of what constitutes a concerted practice for the purpose of Article 81 is that there must be a mental consensus whereby practical cooperation is knowingly substituted for competition- however, such consensus need not be achieved verbally, an can come about by direct or indirect contact between the parties .The ECJ has held that a concerted practice is caught by article 81(1) even in the absence of anticompetitive effects on the market .It must be noted that there can be a situation where agreements are combined with unilateral conduct.
Under Article 81, the conduct must be between two or more undertakings which are consensual in nature. Thus Article 82 applies in case of unilateral action by a dominant firm. Thus unilateral conduct by a firm that is not dominant is not culpable at all [Whish, 2008, p. 107]. Thus in number of vertical agreement cases where the Commission has held that cases that first appeared to be unilateral fell within Article 81(1) as an agreement or a concerted practice. But in some other cases the findings of the commission that there were agreements between supplier and its distributors were annulled on appeal .However, as noted by commentators, it would be dangerous for suppliers wishing to suppress exports or to maintain resale prices, to suppose that this case law means that this is something that can be achieved without risk [Whish, 2008, p. 113]. Thus inasmuch as they can achieve their intended purpose on a purely unilateral basis, Bayer’s decision shows that Article 81 can be avoided. Article 81(1) prohibits agreements ‘which have as their object or effect the prevention, restriction or distortion or competition’. Thus either of the conditions is necessary for the application of article 81 (1). Thus it is important to classify agreements that have anticompetitive object vis-a-vis agreements where the effect is anticompetitive [Whish, 2008]. This is also similar to section 1 of the Sherman Act in the US where agreements are characterized based on per see rule or rule of reason analysis. It is important to note that in case of agreements where the object is anticompetitive, it is not necessary to prove that anticompetitive effects would follow. Thus under Article 81(1) the EC evaluates agreements relating to price fixing, exchange of current or future price information, sharing or allocating markets, limiting outputs, collective exclusive dealing as forming part of horizontal agreements where the object in itself is anticompetitive. Among vertical agreements, the EC evaluates fixing of minimum resale prices and imposing of export bans. In case of agreements which have possible adverse effect on competition, the evaluation of such agreements shall depend upon extensive analysis of the agreement in its market context is required to be done. There is also a need to establish the counter factual in such cases so as to show what the position would have been in the absence of the agreement, of that the agreement could have effects on competition. [Whish, 2008, p. 124]. Furthermore, not all agreements (horizontal or vertical) have actual effects on markets. This is due to their weak position in the market concerned. This is called as the deminimus doctrine. Because of their diminutive impact, they may not be prosecuted against.
The EC Commission has provided guidance on the deminimus doctrine through a series of notices, which provide a good framework for understanding agreements are within the deminimus category. 112 While the EC does not discriminate between horizontal and vertical agreements for the purpose of qualifying as deminimus, there can be a distinction made, as noted in some case, in the approach adopted for ‘hard-core’ restrictions [Whish, 2008, p. 140.]. Furthermore, in some instances, the EC commission has categorized certain agreements as deminimus even while they exceeded the thresholds established in the notice [Whish, 2008, p. 138]. A general exemption from the application of Article 81(1) is contained in the legal exception created by Article 81 (3). Article 81 (3) of the EC treaty is satisfied when an agreement contributed to improving the production or distribution of goods or to promoting technical development or economic progress; or while allowing consumers a fair share of the resulting benefits. Such agreements to qualify Article 81 (3) must not impose on the undertakings concerned restriction which are not indispensable to the attainment of these objectives, nor, afford such undertakings the possibility of eliminating competition in a substantial part of the product in question [Whish, 2008, p. 148]. Article 81(3) can also be satisfied if the agreement in question falls into one of the block exemptions issued by the EC or by the Commission. There is a worldwide consensus against hard core cartels. Horizontal agreements between undertakings to fix prices, divide markets, to restrict output and to fix the outcome of competitive bidding are the most contentious among the variety of targets of competition authorities in comparative jurisdictions. The nature and seriousness of penalty including the benefit of leniency programmes have helped competition authorities in dealing with such cartels. Even apart from developed competition law jurisdiction, new and emerging jurisdictions have also cracked down horizontal agreements which are in the nature of cartels. However, cartels are most difficult to detect, they are more so in pharmaceutical sector due to the very nature and structure of the industry and market. Cartel investigations are most difficult ones amongst the variety of practices prohibited by Competition law.
Since competition law cannot prohibit all horizontal agreements outright because of efficiency gains that may follow from cooperation that are sufficient to outweigh any restriction on competition that might ensue, the Commission adopted Guidelines on Horizontal Cooperation Agreements in the year 2000. The guidelines state that horizontal cooperation agreements may lead to substantive economic benefits, in particular given the dynamic nature of markets, globalization and the speed of technological progress. In particular, of much importance to pharmaceutical sector is the treatment of R&D agreements under the Commission’s guidelines. Such agreements are evaluated on the basis of their effects, rather than objects, since the object of such agreements are not among the hard core restrictions on competition. The Commission shall evaluate agreements based on their nature. The starting point in the Commission’s approach to evaluating R&D agreements is to see whether an agreement could have the effect of restricting competition by analyzing the position of parties in the market. This would essentially require the evaluation of relevant markets as evolved by the Commission through its guidelines and practices. Thus market shares that accrue out of horizontal agreements can be classified based on the certain percentage of shares in the relevant market. [Whish, 2008, p. 580]
Regarding what ‘Abuse of dominance’ basically concerns itself with, is the unilateral acts of dominant firms as it might infringe competition laws. Article 82 of the EC Treaty prohibits abuses of a dominant position.As per the case-law developments, it is not in itself illegal for an undertaking to be in a dominant position and such a dominant undertaking is entitled to “compete” on the merits. However, the undertaking concerned has a special responsibility not to allow its conduct to “impair genuine undistorted competition” on the common market. In the US, section 2 of the Sherman Act makes it unlawful for any person to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations. ”The first step in the application of Article 82 requires the assessment of whether an undertaking is in a dominant position and of the degree of market power it holds. Developments in case-law emphasize that holding a dominant position confers a special responsibility on the firm concerned, the scope of which must be considered in the light of the specific circumstances of each case.Dominance has been defined under EC law as a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on a relevant market, by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers.The Commission may consider a combination of several factors to ascertain the dominant position derives from a combination of several factors which, taken separately, are not necessarily determinative.
On looking at India and the evolution of competition law, the reforms of 1991 brought in the necessity of a new law dealing with issues concerning competition. The Raghavan committee report noted that most countries had modern legislation’s for preserving competition. It also noted that the existing MRTP was grossly ineffective to deal with new situations. It noted that: “7.1-3 Unlike the competition laws of the countries mentioned above, which address engendering competition in the market and trade, and which address anti-competition , practices, the existing Indian competition law, namely, the MRTP Act falls considerably short of squarely addressing competition and anti-competition practices. One could argue that the restrictive trade practices listed in the MRTP Act are all anti-competitive practices and thus it constitutes the country’s competition law. But the extant MRTP Act, in comparison with competition laws of many countries is inadequate for fostering competition in the market and trade and for reducing, if not eliminating, anti-competitive practices in the country’s domestic and international trade”. The object of the new Act is also clear from the preamble which states that it’s an Act “An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto”. Certainly, consumer welfare is one of the important objectives of the Act. However, it appears from the Raghavan committee report that it would not want the Commission to over intervene in the markets for a greater degree. The amount of intervention will of course be a matter to be decided by the interpreting the law.
The Indian competition Act, 2002 is clear to the extent that it is the effect of the monopoly that is the target of regulation and prohibition. The Act prohibits or regulates three type of activities:
- Anti-competitive agreement (section 3)
- Abuse of Dominant Position (Section 4)
- Regulation of Combination (section 5 and 6)
Since the Act was to a large extent a response to economic reforms and globalisation process and hence to maintain a standard law dealing with type of practices regarded as raising competition concerns is also responsible for the new law. After a long wait, on 15 May, 2009, the Ministry of Corporate Affairs notified certain sections of the Competition Act, 2002 by powers vested in it under section 1(2). Sections 3 and 4 are operational from the 20th day of May, 2009.
It is pertinent to note that the CCI may inquire into any alleged contravention of the provisions contained in subsection (1) of section 3 or sub-section (1) of section 4 either on its own motion or on-receipt of any information, in such manner and accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association; or a reference made to it by the Central Government or a State Government or a statutory authority.
Section 3 (1) 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”. Such agreements have been declared void under section 3(2). It is pertinent to note that such agreements need not be enforceable by law. As per section 19(2) the Commission shall, while determining whether an agreement has an appreciable adverse effect on competition under section 3, have due regard to all or any of the following factors, namely: (a) creation of barriers to new entrants in the market; (b) driving existing competitors out of the market; (c) foreclosure of competition by hindering entry into the market; (d) accrual of benefits to consumers; (e) improvements in production or distribution of goods or provision of services; (f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
From the above, it is pertinent to note that the Commission must follow factors specified under section 19(3) are compulsory. However, it creates a confusing situation if all agreements under section 3 must undergo this scrutiny. It is so because certain horizontal hardcore cartel agreements are per see void. In such situations it is evident that factors under section 19(3) need not be taken into consideration. More importantly, terms used in the factors specified in section 19(3) require an economic analysis, where only further regulations can clear the haze. Section 3 (3) states that “Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or 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, which— (a) directly or indirectly determines purchase or sale prices; (b) limits or controls production, supply, markets, technical development, investment or provision of services; (c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way; (d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition: Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
Explanation.—For the purposes of this sub-section, “bid rigging” means any agreement, between enterprises or persons referred to in sub-section (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.
Some agreements under section 3(3) are per se void if they are in the nature of hardcore cartels and do not require any factors to be considered under section 19(3). It is pertinent to note that section 3(3) can be used in effectively deterring collusive practices in drug procurement. While there is no direct evidence of bid rigging practices in Indian drug procurement, it must be noted that there is less effective competition prevailing in bidding of speciality drugs. They can be in the nature of market allocating agreements. Section 3(3) however, does not prohibit combinations which are in the nature of acquisitions, merger or conglomerates. They are governed by sections 5 and 6 of the Act. It is pertinent to note that joint ventures are kept out of the application of section 3 provided such joint venture agreements increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. It is pertinent to note that many market / R&D agreements in the nature of joint ventures are routinely entered in pharmaceutical will be kept out of the purview if such agreements if such agreement increases efficiency. However, there is no clear definitional understanding of what accounts to efficiency and hence one may retort to section 19(3) for guidance. Vertical restraints can be challenges under section 3(4) which states that “Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including— (a) tie-in arrangement; (b) exclusive supply agreement; (c) exclusive distribution agreement; (d) refusal to deal; (e) resale price maintenance, shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.
Regarding the question of abuse of dominance, Section 4 (1) of the Indian Competition Act states, “No Enterprise shall abuse its dominant position”. There are however certain differences in these basic provisions. While the Indian law prohibits abuse of dominant position by enterprises in general, the certain countries may have provisions in the law that prohibits the “abusive exploitation of a dominant position”. Needless to say dominance has been traditionally defined in terms of market share of the enterprise or group of enterprises concerned. However, a number of other factors play a role in determining the influence of an enterprise or a group of enterprises in the market. These include, besides market share, the size and resources of the enterprise; size and importance of competitors; economic power of the enterprise; vertical integration; dependence of consumers on the enterprise; extent of entry and exit barriers in the market; countervailing buying power; market structure and size of the market; source of dominant position viz. whether obtained due to statute etc.; social costs and obligations and contribution of enterprise enjoying dominant position to economic development. The Commission is also authorized to take into account any other factor which it may consider relevant for the determination of dominance.
There are primarily three stages in determining whether an enterprise has abused its dominant position. The first stage is defining the relevant market. As noted above, the analysis in case of pharmaceutical products in complex. The second is determining whether the concerned undertaking/enterprise/firm is in a dominant position/ has a substantial degree of market power/ has monopoly power in that relevant market. The third stage is the determination of whether the undertaking in a dominant position/ having substantial market power/monopoly power has engaged in conducts specifically prohibited by the statute or amounting to abuse of dominant position/monopoly or attempt to monopolize under the applicable law. Explanation to section 4 define dominance as “a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to-
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favour”.
It is pertinent to note that the act does not distinguish between passive or active market power. An effect based test would allow the application of this section if the enterprise has become dominant due to existence of passive market power. The Act clearly states that there shall be an abuse of dominant position if an enterprise or a group directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or service; or price in purchase or sale (including predatory price) of goods or service. Predatory pricing is also included.