On June 9, 2015, the Canadian Competition Bureau issued a draft update of its Intellectual Property Enforcement Guidelines (“IPEGs”) for public consultation (see here). The IPEGs describe the Bureau’s approach to the interface between competition law and intellectual property rights, and its enforcement approach to conduct involving the exercise of IP rights.

The draft update sets out the Bureau’s proposed enforcement approach in respect of the activities of patent assertion entities ("PAEs") (i.e., companies whose business model is asserting patents although they do not manufacture or sell products or services related to such patents), the settlement of patent litigation proceedings in the pharmaceutical industry and conduct involving standard essential patents ("SEPs") (i.e., a patent that claims an invention that must be used in order to conform to a standard adopted by a standard setting or development organization ("SDO")). 

The new draft update follows the publication by the Bureau in September 2014 of a stage 1 update of the IPEGs (which consisted primarily of administrative revisions to reflect amendments to the Canadian Competition Act, since the IPEGs were issued in September 2000) and a white paper setting out the Bureau’s preliminary views as to how Canadian competition law could apply to pharmaceutical patent litigation settlements. The white paper gave rise to significant controversy in that (among other things) it proposed a vague enforcement policy under which the Bureau would, at the Commissioner of Competition’s discretion, review pharmaceutical patent litigation settlements under the criminal conspiracy provision in section 45 of Act.

Conduct involving PAEs

The draft update addresses conduct involving PAEs only with respect to the “the sending of false and misleading claims.” The update sets out the Bureau’s position that the sending of thousands of litigation demand letters by a PAE to various businesses alleging that those businesses are infringing the PAE’s patents and demanding the payment of a license fee to avoid litigation could attract scrutiny under the misleading advertising provisions of the Act. Those provisions include a general criminal prohibition against false or misleading representations (section 52) and a general civil prohibition against deceptive marketing practices (section 74.01). These prohibitions are substantially similar, except that liability under the criminal prohibition also requires proof that the representation was made “knowingly or recklessly.” Both require a representation — made to the public — to promote a product, service, or business interest that is false or misleading in a material respect.

According to the draft update, where there is evidence that the firm sending the demand letters “was sending [those] letters to businesses indiscriminately, or was indifferent to whether the representations [as to the alleged infringement of its patents] were misleading, then the misrepresentations were made knowingly or recklessly and would raise concerns under both the reviewable matters and criminal provisions of the Act.”

Violations of the Act’s criminal misleading advertising provisions can attract serious consequences, including fines in the discretion of the court and/or up to 14 years imprisonment. The consequences of contravening the Act’s civil deceptive marketing practices provisions may also be severe. Among other things, the Act provides for the imposition of an administrative monetary penalty of up to $10 million for a first offence, and a penalty of up to $15 million for each subsequent contravention of the Act.

Pharmaceutical patent litigation settlements

The draft update summarizes the Bureau’s proposed enforcement approach to pharmaceutical patent litigation settlements as follows:

“i. An entry-split settlement ([i.e., ‘a settlement [that] does not involve the brand‑name company providing any consideration to the generic firm other than allowing the generic to enter the market before patent expiry’]) pursuant to which the generic firm enters the market prior to patent expiry will not pose an issue under the Act...;

ii. A settlement with a payment ([i.e., ‘compensation to the generic firm in addition to allowing generic market entry before patent expiry’]) to the generic firm pursuant to which the generic firm enters the market prior to patent expiry will be reviewed under section 90.1 [...] or possibly section 79, except in the circumstances specified in (iii);

iii. A settlement may be reviewed under section 45 only where there is evidence that the intent of the payment was to fix prices, allocate markets or restrict output....”

In explaining the analytical framework underlying this approach, the draft update indicates that it is the Bureau’s expectation “that in the vast majority of cases, the Bureau will review a settlement under section 90.1 of the Act because it would not be viewed as an agreement between competitors to fix prices, allocate markets or restrict output (i.e., a ‘naked restraint’ on competition).” Further, in the circumstances specified in (ii), above, the draft update states that the initial focus of the Bureau’s review under section 90.1 (or under section 79) will be on the question of whether the payment was “for the purpose of delaying generic entry” and that if the Bureau finds that the payment in issue was within a reasonable estimate of (A) the fair market value of any goods or services provided by the generic firm; (B) the magnitude of the innovator company’s section 8 damages exposure under the PMNOC regulations; and (C) the innovator company’s expected remaining litigation costs absent settlement,[1] “the Bureau would likely conclude that the settlement does not raise issues under the Act.” 

In circumstances where the Bureau concludes that the magnitude of the payment was so large that it was “probably for the purpose of delaying entry”, the draft update indicates that in assessing whether the settlement substantially prevented or lessened competition, the Bureau would then consider the competitive effects of the delayed entry, as well as possible efficiency gains from the settlement (in the case of a review under section 90.1) or possible business justifications (in the case of a review under section 79) before deciding whether to seek a remedy from the Competition Tribunal. Under section 90.1, the only available remedy is an order prohibiting the settlement. Under section 79 of the Act, the potential remedies include a prohibition order and administrative monetary penalties of up to $10 million (or of up to $15 million in the case of a second or subsequent contravention of that provision).

With respect to the possibility of criminal review, the draft update indicates that the “limited circumstances” in which a settlement may be reviewed under the criminal conspiracy provision in section 45 include where the settlement provides for generic entry after patent expiry and where there is “convincing documentary evidence that both parties recognized that the patent was not valid”.

Conduct involving SEPs

The draft update indicates that the activities of SDOs raise competition risks (including potential criminal prosecution under section 45 of the Act) insofar as discussions among competitors in the standard-setting process may lead to agreements to fix the price of goods or services or “naked agreements on licensing terms”, or may “facilitate joint discussions among members of licensing terms and conditions”.

With respect to so-called “patent hold-up” and “patent ambush”, the draft update indicates that a failure to disclose patents essential to a standard coupled with subsequent infringement litigation in respect of the previously undisclosed patents against those implementing the standard could attract antitrust liability under the abuse of dominance provision in section 79 of the Act. So too could breaches by an SEP owner of a voluntary commitment to license on fair, reasonable and non-discriminatory (“FRAND”) terms, including the transfer of the patent subject to a licensing commitment to another firm which does not abide by the commitment given by the previous patent owner.

On the question of whether competition law imposes any limits on the right of owners of FRAND-encumbered SEPs to seek injunctive relief when their patents are allegedly infringed by implementers, the draft update states the Bureau’s position that it may be appropriate for the SEP owner who has made a licensing commitment to seek injunctive relief “in certain circumstances,” including “when a prospective licensee refuses to pay a royalty that is determined to be FRAND by a court or arbitrator, or when the prospective licensee does not engage in licensing negotiations.” The draft update indicates that outside of these (and other unidentified) circumstances, the Bureau would likely review the seeking of injunctive relief by the holder of a FRAND-encumbered SEP as a potential abuse of dominance under section 79.

Conclusion

Once finalized, the draft update will define the Bureau's enforcement approach to a number of important and novel (at least in Canada) issues at the intersection of IP and competition law for many years to come. Companies that stand to be affected by the new enforcement guidelines and other stakeholders should give serious consideration to participating in the public consultation process.

The deadline for submitting comments to the Bureau is August 10, 2015.