Paper Report
Marketing Law and Beyond “Drug Stores Collusion Scandal”

Martin Doren Ross Petty April 29th 201

Brief Background In December of 2006 the Chilean public prosecution of Santiago has imposed legal charges on the three main Drug Retailers of the country, Farmacias Ahumada (FASA), Cruz Verde and Salcobrand. These companies were charged of Collusion, it means that they decided to raise and fix the prices of their products in a similar way so they would had a bigger margin and take advantage of the competition and consumers. But the Drug Retailers where not the only ones, five Pharmaceutical Companies; Laboratorio Chile, Garden House, Medipharm, Recalcine and Grunenthal were also involved in this “agreement” and would face trial with the same charges. The consequences for this crime in terms of prison that the executives involved could have to face where 61 days to 3 years plus the determined fines.

The Allegation made by the Chilean Economic authorities got all this investigation started, so the public prosecution would not be taking this matter lightly, through this fear and pressure these companies had to start thinking what are their statements going to be towards the prosecution arguments. FASA couldn’t take the pressure and during the investigation gave a confession declaring themselves guilty of all charges and dictating that there was an arrangement to establish the prices in a way that all companies were beneficiated. This statement was rejected by the other two companies and didn’t gave much credibility to the prosecution, in fact this was believed to be an strategy to reduce charges, so they decided to leave it in standby.

Regardless of this confession the investigation kept going and during 2009 the prosecution found laptops and files that were property of several executives of Drugs Retailers and Pharmaceutical Companies involved in the case. Through the exploration of these items, the prosecution discovered key facts such as emails, files, names, etc. This new information could effectively prove that there was an arrangement among these companies in order to deliberated raise and fix prices of over the counter drugs and chronic treatments. These companies made modifications on the prices of over 222 medicines, including contraceptives and drugs for treating diabetes and epilepsy. The National Economic Prosecution (Fiscalia Economica Nacional) argued that these companies had broken the most serious law in terms of Free Competition Market (anticompetitive collusion). Basically they cheated other competitors, leaving some of them in bankruptcy as they control 80% of the market plus defrauding consumers trust and acting against public interest.

Finally the Resolutions of this case where the next ones; FASA’s statement was reopen and accepted by the prosecution thanks to their collaboration and good behavior during the investigation and the fact that all of the confession was effectively true. This company’s fine was reduce to US$ 1 million dollars per year and some of the executives made their jail time lower than expected. Salcobrand and Cruz Verde where imposed of full charges plus the obstruction of truth and bad behavior during the investigation, their fine was US$ 19 million dollars per year and all the executives involved were given serious time in prison. The masterminds involved where the following:

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Sergio Purcell FASA CEO Roberto Belloni Salcobrand CEO Ricardo Valdivia Cruz Verde Division Manager

International Laws So what we saw in this description was a case of collusion, when different parties make arrangements for their behalf and to benefit out of the situation. This is a serious crime in most places of the world because it’s interfering with the Free Competition Law. But are the punishments and consequences the same in the rest of the world?

In the US this law was enacted in 1890, it is called the Sherman Act and is one of the most important economic laws of their country. The Sherman act doesn’t allow any arrangement between competitors or companies of the same industry to fix prices, rig bids or engage in other anti-trust activity. The violation of the Sherman Act it is a crime where consequences are pretty huge such as fines up to US$ 100 million dollars for corporations and US$ 1 million dollars for individuals and prison time is up to 10 years. In addition to receiving a criminal sentence, a corporation or individual convicted of a Sherman Act violation may be ordered to make restitution to the victims for all overcharges.

United Kingdom Law dictates that any act of conspiracy or collusion against free competition or activisms of anti-competitive behavior should be fined up to 10% of their company’s worldwide turnover, plus five years in prison for any individual executive involved in the case, if the person involved is a member of the company’s directory he also would be punish with inability of being chairman of a company for 15 years.

China’s National People’s Congress creates a new Anti-Monopoly Law (“AML”) in August First, and in this law regards all the matters about price fixing and collusion. The fine for a corporation is also up to 10% of their worldwide turnover, plus any illegal profit made since the arrangement or the crime should be pay back. The jail time goes up to 10 years too.

We can see that the punishment in others parts of the world are much severe and may affect the judge of further acts of collusion. So maybe the punishment and the legal System in Chile may be too soft for this kind of violation since affects the free competition law and the consumers. Plus in many cases the executives involved are not the owners of the company. This means that the company not only has to face legal matters, also has to face all of the consumers complains as the institution they are, and if they are able to confront the trial in a positive way, they still have to gain the customers trust again and after committing this crime would really hard.

So for example in Chile these companies had 80% of the market share in the drug retailer sector so after the case was public all of the regular customers where furious realizing that they paid outrageous prices and not being aware that they were being deceived by this companies and the normal thing to do as a consumer would be to stop buying in this Drug Stores. But ridiculously

people continued to buy in these stores since they were the most known and the most common ones and also the competitors where individual brands that are not distributed in different parts of the country so they can’t cover place like this big companies. Summarizing the punishments should be more severe so the companies that break this law had to rethink before committing these crimes. The legal system of Chile should reconsider their laws and punishments for such actions so they won’t repeat in the future.

Fines and Fees Modifications We took a look over international matters for this kind of crimes but we should also consider the fact that when you are giving trial to big firms of drug retailers such as these companies and they manage to survive it, the fines should be really significant amounts that hurts the companies in terms of revenue and equity. I mean if we are accusing the most important companies of this industry that own 80% of the market share and the fines are just a small price to pay in exchange of the profits that they made by committing this crime, this wouldn’t stop them to make another agreement in the future. In short terms are the fines established in this case equal to revenue and incomes of the companies.

Since the year 2007 Salcobrand belongs 100% to the Group Yarur, owner of the BCI Bank (Credit Bank of Investments); Graveyard Park of the meadow; Butchery’s Ñuble and Belen Investments that owns the Morande, Vistamar and Fray Leon vineyards. This Group has equity of over US$ 2.000 million dollars, in which Salcobrand play a big roll, with 300 establishments all over the country and sales per year over US$ 400 million dollars.

On the other side Cruz Verde belongs to business Group Socofar, owned by the Harding Family. This Group is also owner of the credit card management company Solventa, Mintlab Laboratories and Rezembra Technologies. This entire holding has equity of US$ 1000 million dollars and Cruz Verde’s sales per year reach the US$ 700 million dollars. Also this chain of drug retailer has 540 establishments all over the country, plus in 2011 Socofar entered the market of Costa Rica and Colombia. Last thing I wanted to mention about these two companies, in September 2010 Cruz Verde and Salcobrand bought a chain a perfumes called Maicao owned by the Abufom Family and in 2011 registered sales up to US$ 40 million dollars.

Finally FASA or Farmacias Ahumada Anonymous Association owned by the Coder Family with 47% percent of the company and the rest distributed to 6 other associations which are; Galia Investments S.A, Tomalex Investments S.A, JCC Investments Ltda., Los Alpes Investments S.A and Falabella S.A.C.I. This Drug Store counts with 360 establishments all over the country plus the expansion of the market to Mexico and Peru. In 2006 the total revenue was of US$ 1.3 million dollars and in 2007 it went up to US$ 2.5 million dollars. I mean total profit for the owners we are talking about here.

With the analysis of this information we can be certain that fines should be reconsidered. First for the companies that had to pay US$ 19 million dollars per year it’s just a small fraction of their annual incomes. They just have to add an account in their balance sheet called crime found, raise the money and then pay it up, it’s ridiculous how these companies had to face the trial, get their punishment but they are still one of the most profitable drug retailers companies of the

country. And with FASA their fine was reduce to US$ 1 million dollars per year because of confession, good behavior and collaboration during the investigation? They still committed a crime, broke the law, I mean if the legal system is rewarding the criminals by confession and collaboration to make investigation for the police or prosecutions offices much easier and faster, maybe there is something that is not working right.

Shouldn’t the fines be defined by the gravity of the case and compared to companies incomes and revenues so they could have a great impact in the companies such as bankruptcy or breaking into smaller firms, so many corrupted or bad executives reconsider the violation of this law and mainly shouldn’t this problems be reconsider for the main protection of the consumers and the Free Competition and Anti-trust Law?

Conclusion What we head seen so far are a few points that allowed knowing different opinions and perspectives of this case globally. First we saw how where the punishments and measurements for this kind of violation, then we gave the Fines and Fees of the Legal System of Chile a second view and realized that maybe they weren’t appropriate to the gravity of this crime and that there could be a determined modification comparing actual information about the revenues and incomes of the companies involved.

In my opinion I think that the resolution of this case wasn’t severe enough, the punishment for these companies should have been of grater consequences. First, compared to other continents of world we our penalization system for this crime if too light compared to the gravity of the

situation, I mean is not only against the competitors, its acting against consumers and most of all, vulnerable consumers that need the medicine and can’t afford it. In many sectors of lower resources people had lost important percentage of their money to live in drugs and medicine because of the necessity of the product. Second, the fines and fees regarding this matter of fraud and conspiracy shouldn’t be established on some paper that dictates, the amount of money enterprises and companies should pay if they dare to break this law should be analyze and determined thought the investigation and exploration of the company’s financial statements, and then established a number that may affect the institution with great impact, even if the cause is bankruptcy or break into smaller firms.

Finally a solution to prevent events like these in the future should be Government Monitoring for future meetings. I mean, in every meeting of competitors or companies of the same industry, the government should lead an intervention, monitoring these meetings with cameras and agents that can provide all the information that was gathered in the meeting. Plus if competitors dare to meet with any government supervision there should be a fine imposed plus minimal jail time for trying avoiding monitoring in the meeting.