Patent Litigation Settlement Agreements: A Canadian Perspective
A paper prepared for the Global Antitrust Institute, George Mason University School of Law Conference: Global Antitrust Challenges for the Pharmaceutical Industry, Tuesday, September 23, 2014.
September 23, 2014
Table of contents
- Competition Bureau: Recent initiatives involving pharmaceuticals
- Pharmaceutical regulatory regimes: Differences between Canada and the US
- Settlements: Entry‑date versus pay‑for‑delay
- Patent settlement agreements and the law in Canada
Health care is a very important sector within the Canadian economy. A recent report estimates total health care spending at CDN $211.2 billion in 2013.Footnote 1 This figure represents 11.2 percent of the Canadian economy or approximately CDN $5,988 per capita.Footnote 2 Pharmaceuticals comprise the second largest component of total health care spending, estimated to be 16.3 percent of such spending in 2013 (CDN $34.5 billion).Footnote 3 Historically, pharmaceuticals have been one of the fastest growing segments, although this trend has slowed in recent years.Footnote 4 A significant percentage of pharmaceutical spending is for prescription drugs (84.6 percent in 2011) and, unlike spending on hospitals and physicians, most pharmaceutical spending is from the private sector.Footnote 5 Private sector spending includes spending by both private health insurance plans, estimated at 59.6 percent in 2011, and households who pay out‑of‑pocket, estimated at 40.4 percent.Footnote 6
Among Canadian prescription drugs in 2013, generics were estimated to have a 66 percent share of retail prescriptions but only 23.5 percent of total prescription drug expenditures.Footnote 7 These figures reflect the dramatic savings that consumers who pay out‑of‑pocket and drug plan providers experience from the availability of generic prescription drugs. The increasing prevalence of generics, particularly among a number of commonly prescribed drugs (e.g., Lipitor), is one of the reasons why the growth in pharmaceutical spending has slowed in recent years.Footnote 8
Given the importance of pharmaceuticals to Canada’s health care sector and the role that generic drugs have played in limiting pharmaceutical spending, the Competition Bureau ("Bureau") has focused its advocacy and enforcement efforts in this area on continuing to ensure that competition from generic drugs is not delayed or foreclosed through anticompetitive conduct. Accordingly, the Bureau has an interest in preventing patent litigation settlement agreements ("settlements") between brand name and generic pharmaceutical manufacturers that improperly delay generic entry. Regarding this issue, some of the Bureau’s stakeholders have expressed an interest in knowing how the Bureau will apply the Competition ActFootnote 9 to settlements.Footnote 10
The goal of this paper is to provide some background on Canada’s regulatory system governing generic entry, its competition legislation, and the Bureau’s preliminary views as to how the Canadian competition law could apply to settlements. As part of its work on examining issues involving IP rights and competition policy, the Bureau is considering the appropriate enforcement approach to settlements in the Canadian context. In the process of determining this approach, the Bureau will continue to consult with interested parties, as well as other competition agencies, to benefit from their knowledge and experience.
A. Pharmaceutical regulatory regime
As in the United States ("US"), Canada has a special regulatory regime governing the entry of generic pharmaceuticals. This regime balances the benefits Canadians receive from timely access to lower cost generic medicines with the need to protect the intellectual property of brand manufacturers in order to promote the research and development of new therapeutic treatments.
If a manufacturer wishes to begin selling a generic version of a drug that has already received regulatory approval by demonstrating its safety and efficacy, Canada’s Food and Drug RegulationsFootnote 11 allow that manufacturer to get regulatory approval by showing that the generic, among other things, is bio‑equivalent to the original (i.e., brand) drug. This saves the generic manufacturer the time and money of replicating the same clinical trials that the brand was required to provide for approval. Generic manufacturers, under Canada’s Patented Medicine Notice of Compliance RegulationsFootnote 12 ("PM(NOC) Regulations"), may also seek permission to begin selling their generics before the date that a brand manufacturer’s patent expires. To be able to do this, a generic manufacturer must however submit a notice of allegation specifying that the generic drug will not infringe the brand manufacturer’s patent rights, or that the brand’s patent is invalid.Footnote 13
If, after receiving a notice of allegation, a brand manufacturer wishes to contest the allegations, it must, within 45 days, apply to a court for an order prohibiting Canada’s Minister of Health from granting the generic regulatory approval until after the expiration of the patent that is the subject of those allegations. If the brand applies for such an order, it is automatically granted a 24 month stay prohibiting the generic from being granted regulatory approval. The generic may only be granted regulatory approval after the 24 month stay expires or once the PM(NOC) prohibition proceedings commenced by the brand are resolved in its favour, whichever is earlier. Importantly, if the brand obtains a 24 month stay, but the generic is successful in the prohibition proceedings, the generic, under section 8 of the PM(NOC) Regulations, can seek damages from the brand for its losses resulting from being kept off the market.Footnote 14 These damages are often referred to as section 8 damages.Footnote 15
B. Canadian competition legislation
Canada’s legislation to prohibit anticompetitive practices is the federal Competition Act ("Act"). Its principal provisions include those governing:
- criminal conspiracies,
- civil collaborations or agreements among competitors,
- abuse of dominance,
- mergers, and
- deceptive marketing practices.
The criminal conspiracy provision of the Act (section 45) prohibits agreements or arrangements between competitors to fix prices, allocate markets or customers, or limit production or supply.Footnote 16 Conspiracies are a criminal offence that may involve both fines and prison terms. Part VIII of the Act deals with conduct that is not anticompetitive in all circumstances, and as such, constitutes reviewable matters by the Competition Tribunal ("Tribunal") under civil law. The abuse of dominance provision (section 79) and the civil provision that prohibits agreements or arrangements between competitors (section 90.1) are both included in Part VIII. The abuse of dominance provision seeks to prevent dominant firms from engaging in anticompetitive acts that cause a substantial prevention or lessening of competition ("SPLC"). Importantly, this provision contains an exception for firms that are engaged in the "mere exercise" of an Intellectual Property ("IP") right. Section 90.1 of the Act prohibits agreements or arrangements between competitors that do not merit treatment as criminal conspiracies, but which nonetheless harm competition in a market.Footnote 17 Finally, section 92 allows the Bureau to review proposed and consummatedFootnote 18 mergers to determine whether they will likely result in an SPLC. More information on several of these provisions will be provided below in the context of discussing the potential application of the Act to settlements.
II. Competition Bureau: Recent initiatives involving pharmaceuticals
The Bureau has been active in promoting competition within the Canadian pharmaceutical sector for the past several years. As part of its advocacy initiatives, the Bureau published two studies addressing competition issues related to generic competition. The first, titled Canadian Generic Drug Sector Study, was published in October 2007.Footnote 19 This study was a detailed examination of the Canadian generic drug market and identified reasons why the prices of generic drugs were higher in Canada than in other jurisdictions. The second report, titled Benefiting from Generic Drug Competition in Canada: The Way Forward, was released in November 2008 as a follow‑up to the original report.Footnote 20 This report contained specific recommendations for private and public drug plan providers on initiatives they could adopt to decrease generic drug prices. Since these reports were published, a number of Canadian provinces have made regulatory changes in order to reduce generic drug prices for both public and private payers.
On November 13, 2013, the Bureau hosted a workshop to explore a number of developments in the industry, including international trends in pharmaceuticals and antitrust, "pay‑for‑delay"Footnote 21 settlements and life‑cycle management strategies. The purpose of the workshop was to signal the Bureau’s interest in competition issues involving the health care sector and to learn from the experiences of international antitrust authorities. On this point, all participants benefited from hearing from representatives from both the US and the EU.
On the enforcement front, in 2012 the Bureau commenced an inquiry into "product‑switching" by Alcon Canada Inc. ("Alcon"), a branded pharmaceutical firm. The matter involved allegations that Alcon had, among other acts, intentionally disrupted the supply of its prescription anti‑allergy drug Patanol as part of a conversion strategy meant to forcibly switch patients to a reformulated version of the drug and discourage or delay the entry of a generic version. The Bureau investigated the conduct under the abuse of dominance section of the Act. The investigation was ultimately discontinued as Alcon resumed the supply of Patanol and generics were able to enter and capture a significant share of the market.Footnote 22
In addition to the Alcon investigation, the Bureau has undertaken a number of merger reviews involving the pharmaceutical industry. For example, on October 14, 2009, the Bureau announced that it had approved a merger between Pfizer Inc. ("Pfizer") and Wyeth on the condition that, among other things, Pfizer amend the terms of its existing arrangement with Paladin Laboratories, a Canadian speciality drug company, governing the distribution, marketing and sale of the drug Estring to ensure continued competition in the supply of human hormone replacement therapy products.
On July 30, 2010, the Bureau announced that it had reached an agreement with two generic drug manufacturers Teva Pharmaceutical Industries Ltd. ("Teva") and the Merckle Group (carrying on business as ratiopharm) relating to their proposed merger. The Bureau concluded that the merger would likely lead to a substantial lessening of competition in the supply of certain drugs commonly used for the relief of moderate to severe pain, namely acetaminophen oxycodone tablets and morphine sulphate sustained‑release tablets. Accordingly, the Bureau required the parties to divest certain assets and associated licenses relating to the sale and supply of certain dosage forms of these products in Canada.
On August 9, 2010, the Bureau approved Novartis AG’s acquisition of control of Alcon, Inc., subject to certain divestitures. The Bureau concluded that the proposed transaction was likely to result in a substantial lessening of competition in Canada for the supply of certain ophthalmic products, including contact lens cleaners and disinfectants, injectable miotics and ocular conjunctivitis drugs. The assets and associated licenses for these products were required to be divested to a third party purchaser.
Recently, the Bureau has been involved in the review of a number of transactions involving pharmaceutical firms, including the three‑part interconditional transaction between GlaxoSmithKline PLC and Novartis AG involving their consumer healthcare, vaccines and oncology businesses and Valeant Pharmaceuticals International Inc.’s proposed hostile acquisition of Allergan Inc.
Clearly the global pharmaceutical industry is continuing to undergo major consolidation with over 15 deals involving more than US $200 billion dollars announced in just the first half of the year. With companies’ desire to access viable new products, trim costs and in some cases seek out tax savings through inversion deals fueling this wave of transactional activity, the Bureau anticipates a consistent stream of divestitures, asset swaps and acquisitions necessitating careful review as the industry restructures its traditional business models.
III. Pharmaceutical regulatory regimes: Differences between Canada and the US
Some have claimed that differences between the regulatory regimes in Canada and the US call for caution in, or even abdication of, efforts to police settlements in Canada. While there are in fact differences between the two countries’ regulatory regimes, such as
- the lack of a notification system in Canada,
- the absence in Canada of a 180‑day period of exclusivity for the first generic to challenge a brand’s patent,
- particularities to the Canadian PM(NOC) Regulation prohibition proceedings, and
- the potential for generics to receive damages from brands in Canada.
The Bureau does not believe that these differences diminish the role of competition analysis in reviewing potentially anticompetitive settlements.
A. Notification system
The first difference between Canada and the US is the notification system. There is currently no system in Canada by which the Bureau is made aware of settlements between brands and generics. The absence of a formalized notification system could lead to potentially anticompetitive settlements evading review under the Act.
In the US, in contrast, all potential pay‑for‑delay settlements are reported to the antitrust agencies. The Medicare Modernization Amendments Act of 2003 ("Medicare Amendments") required agreements between brands and "Paragraph IV"Footnote 23 generics to be filed with the Assistant Attorney General of the US Department of Justice Antitrust Division and Federal Trade Commission (the "FTC").Footnote 24 Agreements that must be reported include those concerning the manufacture, marketing or sale of brand or generic products, as well as those relating to the 180‑day exclusivity period (discussed in more detail below).Footnote 25 The parties also are required to file any settlements contingent on or related to agreements that must be filed, as well as descriptions "sufficient to disclose all the terms and conditions" of agreements not reduced to text.Footnote 26 All such filings must be made "not later than 10 business days" after execution of the agreements and before the generic is first commercially marketed.Footnote 27
In explaining the need for the amendment, the Senate Judiciary Committee noted that the industry "has recently witnessed the creation of pacts between big pharmaceutical firms and makers of generic versions of brand name drugs that are intended to keep lower‑cost drugs off the market" and that "[a]greeing with smaller rivals to delay or limit competition is an abuse of the Hatch‑Waxman law that was intended to promote generic alternatives".Footnote 28 The amendment was therefore designed to "protect consumers by solving the most difficult problem faced by Federal antitrust investigators: learning about the worst of these improper deals in time to do something about them".Footnote 29
As a result of the US notification regime, the FTC has been able to track the total number of pharmaceutical settlements, as well as the subset that involve payment for delayed generic entry. It has found that pay‑for‑delay agreements have steadily increased in recent years.Footnote 30 In its latest report, covering Fiscal Year 2012, the FTC found that 40 of 140 settlements potentially involved payment for delayed entry, and that in 19 of these 40 agreements, compensation took the form of a brand’s promise not to market an authorized generic that would compete with the generic.Footnote 31
B. Difference between Canada’s PM(NOC) Regulations and US’s Hatch‑Waxman Act: 180‑day period
A centerpiece of the Hatch‑Waxman Act in the US is a 180‑day exclusivity period for the first generic to challenge a brand’s patent, claiming that it is invalid or not infringed. Some have claimed that the absence of such an incentive to challenge patents in Canada calls for relaxed scrutiny of settlements because generics are less likely to have an incentive to challenge brands’ patents. The 180‑day period in the US may have facilitated pay‑for‑delay settlements because brands’ payments to first‑filing settling generics delay entry not only by that generic but also by other generics, who cannot enter until 180 days after the first filer enters.Footnote 32
But even in the US, the 180‑day period does not provide the only incentive for generics to challenge patents. Since 2003, all Paragraph IV generics that file their application on the first day that a Paragraph IV application is made (typically the first day after the running of the 4‑year Food and Drug Administration ("FDA") exclusivity period for brands introducing New Chemical Entities ("NCE")) share rights to exclusivity.Footnote 33 And despite these generics’ sharing the 180‑day period, the percentage of NCEs subject to a Paragraph IV generic application increased from 6% in 2002 to 73% in 2008.Footnote 34 As the FTC concluded: "companies have been willing to undertake patent challenges despite the known likelihood of sharing 180‑day exclusivity" with other generics.Footnote 35 Just to pick one example of this phenomenon, in Vista Healthplan, Inc. v. Cephalon, Inc., four generics—Teva, Ranbaxy, Mylan and Barr—shared exclusivity, filing applications for generic versions of the sleep‑disorder drug Provigil on the first day the FDA would accept them.Footnote 36
Additional evidence of the lack of a need for an exclusive 180‑day period is provided by authorized generics, which brands have marketed as generic versions of their branded products during the first‑filing generic’s exclusivity period. Despite this development, generics have still filed patent challenges. The FTC’s authorized‑generic study found that "despite [authorized generics] and other trends that could reduce a generic’s revenues from 180‑day exclusivity", challenges have increased, which is "inconsistent with the concern that [authorized generic] competition has deterred Paragraph IV challenges".Footnote 37 Even in smaller markets, there is "no suggestion that patent challenges have diminished" because of competition from authorized generics.Footnote 38
In addition to these developments in the US, evidence that the 180‑day period is not necessary for generics to challenge patents (or enter into anticompetitive settlements with brands) comes from Europe. In 2009, the European Commission ("Commission") published a comprehensive pharmaceutical sector inquiry that found that 22 percent of settlements between 2000 and 2008 involved payments from brands to generics.Footnote 39 But attention to the issue dramatically reduced this type of settlement, with four subsequent monitoring exercises noting a decline from 22 percent to a range of 3 percent to 11 percent, with the amount of money involved falling from more than €200 million between 2000 and 2008 to less than €1 million in 2009.Footnote 40
In observing the decline in pay‑for‑delay settlements, the Commission found that companies’ assertions that they would be forced "to litigate each patent dispute until the end has proved to be unfounded".Footnote 41 In particular, the number of overall settlements significantly increased, from 24 per year between 2000 and the first half of 2008 to 183 in 2012, but 93% of the settlements "f[e]ll into categories that prima facie raise no need for competition law scrutiny".Footnote 42
In addition to these monitoring exercises, the Commission has taken action against specific companies. For example, in June 2013, it levied €146 million in fines against Lundbeck and four generics for settlements delaying generic versions of blockbuster antidepressant citalopram.Footnote 43 The Commission highlighted documents referring to a "club" being formed and "a pile of $$$" to be shared, and noted that Lundbeck "paid significant lump sums, purchased generics’ stock for the sole purpose of destroying it, and offered guaranteed profits in a distribution agreement".Footnote 44 The Commission concluded that "[t]hese agreements are very different from other settlements of patent disputes where generic companies are not simply paid off to stay out of the market".Footnote 45
The Commission also fined French company Servier and five generics €428 million for delaying generic versions of the best‑selling blood pressure medicine perindopril.Footnote 46 The Commission found that one generic admitted it was being "bought out of perindopril"; another insisted that "any settlement will have to be for significant sums" that it referred to as a "pile of cash"; and a third agreed to "sacrifice" EU markets. In each case, the Commission found that the settlements gave Servier "the certainty that the generic producers would stay out of the national markets and refrain from legal challenges for the duration of the agreements".Footnote 47
Evidence from Canada indicates that generics have filed patent challenges, especially in markets for popular drugs. As the Bureau found in its 2007 Generic Drug Study, "molecules with large sales tend to attract a large number of generic competitors".Footnote 48 In particular, several drugs with brand sales of more than $100 million witnessed entry by nine to 12 generics.Footnote 49 And for all markets, generics have been motivated by the chance to be the first on the market, with the Generic Drug Study finding that two‑thirds of first‑entrants maintained that leader position years later.Footnote 50
Finally, any arguments that generics are not likely to challenge brands’ patents because of the absence of a 180‑day period are countered in cases in which the Bureau uncovers settlements involving payments for delayed entry. Even if theory would suggest that such settlements are less frequent because of a reduced incentive, the actual discovery of such agreements would make such arguments moot. The Bureau believes that even one such agreement that violates competition law and causes patients to pay more for prescription drugs must be addressed.Footnote 51
C. Difference between Canada’s PM(NOC) Regulations and US’s Hatch‑Waxman Act: Prohibition proceedings and section 8 damages
The nature of the prohibition proceedings and the existence of section 8 damages are two aspects of Canada’s PM(NOC) Regulations that are not present in the US and that could result in brands and generics in Canada facing different levels of risk than in the US. This section considers the current setting in Canada, recognizing that the trade agreement with Europe may lead to changes that could affect the analysis.
The prohibition proceedings initiated by a brand that contests the invalidity and/or non‑infringement allegations of the generic under the PM(NOC) Regulations do not ultimately resolve the issues of patent validity or infringement. Rather, these proceedings, which are not a full trial with witnesses examined in court, are focused solely on determining whether the generic’s allegations of non‑infringement or patent invalidity are justified. This means a patentee that is unsuccessful in the PM(NOC) proceedings may nonetheless, subsequently sue the generic, after the generic has entered the market, to recover damages in a court proceeding that will determine the actual issue of validity or infringement.Footnote 52 This possibility creates "double jeopardy" since the generic could succeed under the PM(NOC) Regulations, enter the market, and then be sued for infringement. If the brand is successful in the full trial, the generic would be responsible for paying its damages.
In short, "double jeopardy" imposes risk on generics and section 8 damages impose risk on brands. But while these particular forms of risk may result from the system in Canada, the existence of risk is commonplace in any regulatory regime around the world. Generics that enter the market before a finding of invalidity or non‑infringement always take the chance that they will be responsible for the brand’s damages. And even brands with strong patents always face the risk that a court will find that their patents are invalid or not infringed. Along these lines, one commentator in Canada has discussed brands’ "incentive to keep generics off the market" because "the market tends to be ruined after generic entry".Footnote 53
Some have argued that the setting in Canada presents unique risk because brands sell their products in a "smaller marketplace" than other jurisdictions.Footnote 54 As a result, there is "less incentive to invest in R &D and legal expenses to support a Canadian strategy".Footnote 55 But the opposite argument would seem to be at least as strong, as brands in countries with large markets, such as the US, take the risk of losing potentially billions of dollars from adverse court rulings.
Any justifications for settlements based on risk avoidance were dealt a setback in the US Supreme Court case Federal Trade Commission v. Actavis. In that case, the Court explained that "[t]he own er of a particularly valuable patent might contend . . . that even a small risk of invalidity justifies a large payment".Footnote 56 But "the payment (if otherwise unexplained) likely seeks to prevent the risk of competition", and "that consequence constitutes the relevant anticompetitive harm".Footnote 57 In short, the Court concluded that risk avoidance was not an acceptable justification for settlements. And even if settlements could be justified on the grounds of avoiding risk, the form of settlement makes a significant difference in determining its competition effects.
IV. Settlements: Entry‑date versus pay‑for‑delay
In the US and EU, settlements have been treated very differently if they involve only a date for generic entry, as compared to a payment for delayed entry. Settlements involving a compromise on the generic’s entry date tend to reflect the odds of the parties’ success in patent litigation.Footnote 58 The greater the likelihood that the patent is valid and infringed, the later in the patent term generic entry would be expected.Footnote 59 In addition, entry‑split agreements are marked by opposing incentives, with brands arguing for later entry and generics seeking earlier entry.
A brand is likely to gain even more exclusivity by supplementing the entry‑date agreement with a pay ment to the generic. The brand tends to make more by keeping the generic out of the market than the parties would receive by competing in the market.Footnote 60 And the generic would also benefit from a guaranteed stream of revenues, which is not subject to being lost in litigation.
The parties thus have aligned incentives, as each benefits from delaying generic entry. In fact, exclusion from payment (rather than the patent) could even resemble market division, with one company paying a second company not to enter the market. At a minimum, it represents joint conduct of potentially competing firms as opposed to "the mere exercise of an IP right".Footnote 61
In the US, the FTC has long contended that pure entry‑date agreements do not violate the antitrust laws. The FTC has explained that "[i]n light of the uncertainties facing parties at the time of settlement, it is reasonable to assume that an agreed‑on entry date, without cash payments, reflects a compromise of differing litigation expectations".Footnote 62 Similarly, the US Supreme Court in FTC v. Actavis stated that settlement allowing entry before patent expiration could "bring about competition . . . to the consumer’s benefit", in contrast to "payment in return for staying out of the market", which "simply keeps prices at patentee‑set levels" and leads to "consumer los[s]es".Footnote 63
As long as there is a gap between brand and generic prices, there is room for pay‑for‑delay settlements. In general, Canada has lower brand prices and higher generic prices than the US.Footnote 64 But while the gap might not be as large as in the US, the presence of any gap at all provides an incentive for the brand to preserve its higher profits as long as possible by paying generics to delay entry.
At times, brands have claimed that they would not be able to settle cases without paying generics. But evidence from the US and EU casts doubt on such assertions. For starters, most settlements today do not create competition concerns. For example, the FTC’s 2012 report on US settlements found that 100 of 140 settlements either did not restrict generic entry or did not involve payment.Footnote 65 Similarly, the most recent EC monitoring report found that even though "the number of overall settlements significantly increased", 93 percent did not raise competition concerns.Footnote 66
Pay‑for‑delay settlements have increased when they have not been subject to competition law scrutiny. In the period between 2000 and 2004, after the FTC announced that it would challenge pay‑for‑delay settlements and before the courts applied a deferential approach, not one of 20 settlements involved both payment to the generic and a restriction on the generic’s ability to market its product.Footnote 67 The parties settled disputes, but in ways less restrictive to competition, such as through licenses allowing early generic entry. Similarly, after the publication of the EC’s Pharmaceutical Sector Inquiry, the percentage of settlements involving payments for delay (and the amount at stake) fell dramatically.
When a brand pays more than the generic could have obtained from PM(NOC) Regulation proceedings, such payments are less likely to be justified. In contrast, more nuanced analysis is called for when the payment falls within the realm of what could be expected in PM(NOC) Regulation litigation, such as where the brand faces section 8 damages liability and makes a modest payment that is less than the expected damages the brand would owe the generic.
This does not provide free rein for brands to make whatever payments they wish. For example, the amount of section 8 damages could be low when there is generic competition, as generic prices tend to fall with more generics on the market. One commentator has explained that the presence of authorized generics "significantly reduces the size of the market available to other generic competitors" and "drastically reduces the amount of damages that are possibly recoverable under section 8".Footnote 68 In fact, the court, in Teva Canada Limited v. Sanofi‑Aventis Canada Inc.Footnote 69 made clear that authorized generics can be considered in determining the generic’s likely profits. In short, as a result of authorized generics and other entrants, the amount of section 8 damages for which the brand would be responsible could be significantly reduced, which would increase the concern with large payments to generics.Footnote 70
V. Patent settlement agreements and the law in Canada
The Bureau accepts that patents, like IP laws generally, provide incentives for innovation by establishing enforceable property rights for the creators of new and useful products, such as the developers of innovative drugs.Footnote 71 As a goal of competition law is to also foster innovation through the creation of competitive markets, IP laws and competition laws can be viewed as having complementary objectives.
As stated in the Bureau’s Intellectual Property Enforcement Guidelines, "[t]he circumstances in which the Bureau may apply the Act to conduct involving IP or IP rights fall into two broad categories: those involving something more than the mere exercise of the IP right, and those involving the mere exercise of the IP right and nothing else".Footnote 72 Since settlements involve conduct between independent entities, the Bureau views settlements as something more than the mere exercise of the patent right and would review the conduct under the general provisions of the Act (e.g., section 45 or Part VIII).
The Bureau’s general approach to assessing competitor collaborations, including settlements that may delay generic entry, is reflected in the Bureau’s Competitor Collaborations Guidelines.Footnote 73 Where the Bureau has determined that a settlement could raise issues under either section 45 or part VIII of the Act, the Bureau will then determine whether the criminal provision in section 45, the civil competitor collaboration provision in section 90.1 or the abuse of dominance provision in section 79 is applicable. The choice of pursuing a matter under either the criminal or civil provisions of the Act will depend on the facts and evidence of each case. Accordingly, in the event an inquiry is commenced under section 10 of the Act, the Bureau may pursue a dual‑track inquiry under criminal and civil provisions (i.e., sections 45, 90.1 and 79) of the Act until a decision is made on the appropriate section of the Act to be applied.Footnote 74
If a settlement is between competitors and includes conduct with respect to markets or products that are not the focus of the patent litigation or the conduct is beyond the scope of the patent, such as fixing a generic entry date beyond the term of the patent, the Commissioner would likely pursue the settlement under section 45 if the conduct is of a type prohibited under subsection 45(1) (see below). Similarly, if the Bureau finds direct or circumstantial evidence that indicates that a settlement is a vehicle for a "naked restraint" on competition that is not implemented in furtherance of a legitimate collaboration or was motivated by factors beyond the issues associated with the litigation, the Commissioner would also likely pursue the settlement under section 45. For settlements where neither of these two conditions are met, the Commissioner will use his enforcement discretion to decide whether to pursue the matter under section 45 or Part VIII of the Act. Considerations that may inform the Commissioner in the exercise of his enforcement discretion include, in general terms: the type and value of consideration flowing from the brand to the generic for an agreed upon generic entry date; the amount of time until generic entry; and any other available evidence.
A. Section 45
Where business conduct satisfies the constituent elements of section 45 of the Act, section 45 may apply to the conduct. In the Bureau’s view, section 45 of the Act could apply to settlements that result in the delay of generic entry. Settlements that could cause delay may have terms where the generic agrees not to enter the market before a certain date and there is compensation (i.e., a "payment") from the brand to the generic.Footnote 75 This payment could take a variety of forms (e.g., cash, a promise not to launch an authorized generic, or provision of services, to name a few). Subsection 45(1) of the Act states:
45. (1) Every person commits an offence who, with a competitor of that person with respect to a product, conspires, agrees or arranges
(a) to fix, maintain, increase or control the price for the supply of the product;
(b) to allocate sales, territories, customers or markets for the production or supply of the product; or
(c) to fix, maintain, control, prevent, lessen or eliminate the production or supply of the product.
Where the constituent elements of an offence under section 45 of the Act are satisfied, the Bureau will consider whether the ancillary restraints defence under subsection 45(4) of the Act, or another defence set out in section 45 of the Act, may apply.Footnote 76
Where the Bureau determines that there is sufficient evidence to establish that an agreement satisfies the ancillary restraints defence, the Commissioner will not refer the matter to the Director of Public Prosecutions (the "DPP") with a recommendation to commence a prosecution under section 45 of the Act, but may seek a remedy in respect of the agreement under section 90.1 of the Act if the Commissioner is of the view that the settlement is likely to prevent or lessen competition substantially.
As is the case in general, parties may approach the Bureau at any time to resolve a criminal matter prior to referral to the DPP for prosecution. The Bureau’s Immunity and Leniency Programs provide a clear framework for cooperation and the provision of information by cooperating parties during investigations related to Part VI of the Act.Footnote 77 However, the DPP has the sole authority to engage in plea and sentencing discussions with counsel for an accused.
While the Bureau may, where appropriate, initially elect to evaluate a settlement under the criminal conspiracy provision of the Act, the Bureau may subsequently decide that circumstances warrant pursuing a remedy under the civil provisions of the Act at any time prior to referral of the matter to the DPP for prosecution. In cases where the matter is referred, but the DPP elects not to pursue prosecution, the Bureau may choose to re‑evaluate whether the settlement should be subject to a remedy under the civil provisions of the Act. At no time will the Bureau use the threat of criminal prosecution to induce settlement in cases proceeding by way of the civil track.
B. Part VIII of the Act
Where the Commissioner, in exercising his enforcement discretion, elects to pursue a matter under Part VIII of the Act, the Commissioner is most likely to examine a settlement agreement under section 90.1, but may also consider an examination under section 79 of the Act under certain circumstances. In general, agreements between competitors that may be examined under section 79 include, but are not limited to, situations where the parties are dominant, or jointly dominant, and the agreement results in or facilitates conduct that has a negative effect on a competitor that is exclusion ary, predatory or disciplinary, such that it has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market.Footnote 78, Footnote 79
Subsection 90.1(1) of the Act states:
90.1 (1) If, on application by the Commissioner, the Tribunal finds that an agreement or arrangement — whether existing or proposed — between persons two or more of whom are competitors prevents or lessens, or is likely to prevent or lessen, competition substantially in a market, the Tribunal may make an order
(a) prohibiting any person — whether or not a party to the agreement or arrangement — from doing anything under the agreement or arrangement; or
(b) requiring any person — whether or not a party to the agreement or arrangement — with the consent of that person and the Commissioner, to take any other action.
Subsection 79(1) of the Act states:
79. (1) Where, on application by the Commissioner, the Tribunal finds that
(a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business,
(b) that person or those persons have engaged in or are engaging in a practice of anti‑competitive acts, and
(c) the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal may make an order prohibiting all or any of those persons from engaging in that practice.
Both sections 79 and 90.1 requ ire the Commissioner to establish that the agreement at issue has the effect of causing an SPLC.
The Tribunal has adopted a "but for" test for assessing whether an SPLC was caused by a given anticompetitive practice.Footnote 80 If, but for the settlement, the parties would have been likely to compete, disciplining the exercise of market power and leading to lower cost alternatives for consumers, the settlement may be found to be causing an SPLC. This analysis may include an examination of the expected date of generic entry but for the settlement and the agreed entry date, and the difference between the prices that would have been expected to prevail in each case. Importantly, the alternative "but‑for" the settlement is not necessarily the fully litigated outcome. It is possible that the parties may have reached an alternative settlement with less restrictive terms such as the absence of a reverse‑payment.
An approach that has been applied in other jurisdictions is to consider whether the value transfer to the generic is in excess of the patentee’s expected litigation costs. The rationale for this is that the patentee should be willing to pay an amount up to litigation costs because it would have been required to spend this money even if it had continued the litigation. If a similar type of approach was applied in Canada, in addition to litigation costs, the patentee’s potential liability for section 8 damages under the PM(NOC) Regulations would be another factor that would have to be considered. All else being equal, the greater the value transfer from the brand to the generic, the greater the likelihood of an SPLC.
Where the constituent elements of sections 79 or 90.1 are met, the Commissioner will then consider possible business justifications (under section 79) or efficiencies (under section 90.1). When assessing business justifications or efficiencies, the Commissioner will consider a number of factors, including the credibility of the claims, the link to the settlement, the likelihood of the benefits being achieved, and whether the benefits would or could not be obtained but for the settlement.
Where the rationales provided by the parties are not valid or do not offset any negative effects on competition, the Commissioner may seek a remedy from the Tribunal to prohibit the settlement. A remedy under section 79 will consist of an order from the Tribunal prohibiting the settlement or the anticompetitive terms of the settlement. The Commissioner may also seek an administrative monetary penalty from the parties. In addition, the Tribunal is also empowered to make an order directing any or all persons against whom an order is sought to take such actions as are reasonable to overcome the effects of the practice of anticompetitive acts in that market. Under section 90.1, the Tribunal may make an order prohibiting any person from doing anything under the settlement, or requiring any person (with the consent of that person and the Commissioner) to take any other action.
Given the importance of pharmaceuticals to Canada’s health care sector and the role that generic entry plays in fostering the benefits of competition, one of the Bureau’s enforcement concerns is to prevent anticompetitive conduct in the pharmaceutical industry. In this regard, the Bureau has taken a keen interest in patent litigation settlement agreements between brand and generic drug manufacturers and the possibility that they may delay generic entry. The experience of other jurisdictions in prosecuting settlements and the resulting jurisprudence has been particularly informative for the Bureau as it continues its work on developing a Canadian approach. Although Canada’s regulatory regime governing pharmaceuticals has several unique features, the Bureau feels that these differences neither merit reduced concern over the possible impacts of these settlements nor call for a less vigorous enforcement approach than that adopted in the US or Europe. If anything, Canada’s regulatory framework needs to be strengthened to include a settlement notification system. Without such a system, Canada risks losing the full benefits that generic entry and competition can bring to consumers and plan providers. As the Bureau’s work progresses, it will continue to consult with its stakeholders and experts to develop an effective enforcement approach to settlements.
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