In Katz Group Canada Inc. v. Ontario (Health and Long-Term Care), the Supreme Court of Canada unanimously upheld the validity of regulations under the Drug Interchangeability and Dispensing Fee Act (DIDFA) and the Ontario Drug Benefit Act(ODBA). The regulations at issue were amended in 2010 to stop pharmacies from controlling manufacturers that sell generic drugs that they do not make themselves, on the rationale that if pharmacies control manufacturers, this would keep drug prices high. Under these regulations, a pharmacy cannot sell “private label” drugs – these are generic drugs that a manufacturer under the pharmacy’s control buys from a third party fabricator and then sells to the pharmacy.
The Supreme Court of Canada rejected the challenge to these private label regulations (“Regulations”) brought by pharmacy retailers, including Shoppers Drug Mart, Pharma Plus Drug Marts, and Rexall Drug Stores, relying on the principle that a successful challenge requires that the Regulations be shown to be inconsistent with the objective of their enabling statute. Justice Abella, writing for the Court, held that the Regulations were consistent with the collective goal of DIDFA and ODBA to stifle high drug prices:
The private label Regulations fit into this strategy by ensuring that pharmacies make money exclusively from providing professional health care services, instead of sharing in the revenues of drug manufacturers by setting up their own private label subsidiaries. In this way too, the Regulations correspond to the statutory purpose of reducing drug costs since disentangling the cost of pharmacy services from the cost of drugs puts Ontario in a better position to regulate both.
It is now settled that pharmaceutical companies that operate in Ontario will not be able to sell drugs purchased from manufacturers that they are not at an arm’s length from, and that do not fabricate the drugs they sell.
Background and Decisions Below
The Regulations at issue were the Ontario Drug Benefit Act Regulation, O. Reg. 201/96, s. 12.02, and the Drug Interchangeability and Dispensing Fee Act Regulations, R.R.O. 1990, Regulation 935, s. 9, which operate together to ban the sale of private label products by pharmacies in Ontario by preventing these products from being a listed drug product pursuant to ODBA, or being designated as interchangeable with a brand-name drug pursuant to DIDFA.
Private label products are drugs that a pharmacy buys from a manufacturer related to or under the control of that pharmacy, and which does not fabricate the drugs. Instead, these manufacturers buy the drugs from other sources and supply them to the pharmacies. Since these drugs cannot be designated as interchangeable or listed in Ontario’s drug Formulary pursuant to the Regulations, the “restrictions essentially ban the sale of private label drugs in the private and public markets in Ontario…”
Shoppers Drug Mart and the Katz Group (which controls Pharma Plus and Rexall pharmacies), both planned to have their own private label manufacturing subsidiaries, which would supply their pharmacies with drugs. After Shoppers Drug Mart’s manufacturing subsidiary, Sanis Health, was unable to have generic drugs listed in Ontario’s drug Formulary, the pharmacy retailers challenged these regulations as being ultra vires on the basis that they were inconsistent with the statutory purpose and mandate of ODBA and DIDFA.
At first instance, Justice Molloy of the Divisional Court allowed the challenge, striking down the regulations. However, the Court of Appeal reversed Her Honour’s decision, and today, the Supreme Court of Canada dismissed the pharmaceutical retailers’ appeal from the reversal.
In upholding the Regulations’ validity, the Supreme Court relied on several key principles, including that:
- For a successful challenge, regulations have to be shown to be inconsistent with the objective of their enabling statute or their statutory mandate. To show inconsistency, the regulation must be shown to be irrelevant, extraneous, or completely unrelated to its statutory purpose.
- Regulations benefit from a presumption of validity, which places a burden on challengers to demonstrate their invalidity, and which dictates that regulations should be construed in a manner that renders them valid and consistent with their enabling statutes where possible.
- Determining a regulation’s validity does not involve assessing policy merits, “political, economic, social or partisan considerations,” and the Court’s determination is not dependent on whether the court thinks the regulations will achieve its statutory objectives.
Bearing these principles in mind, the Court identified the objective of ODBA and DIDFA as combatting high drug prices that were caused by use of rebates. Manufacturers used to sell drugs to pharmacies at a certain price, which was then reflected in the price paid by the customer. However, manufacturers would then provide rebates to pharmacies to retain their loyalty and sales. This was seen by regulators as driving up drug prices, and their response was to amend ODBA, DIDFA, and their regulations to ban rebates.
In the Court’s view, the “purpose of the 2010 Regulations banning private label products was to prevent another possible mechanism for circumventing the ban on rebates that kept drug prices inflated.” Justice Abella wrote that if pharmacies could purchase drugs from manufacturers which they controlled, they would be directly involved in setting drug prices, providing them with “strong incentives to keep these prices high.”
Although Shoppers Drug Mart and the Katz Group argued that the Regulations would not actually reduce drug prices, the Court rejected this argument, on the basis that determining the validity of a regulation is not contingent on its likelihood of achieving its objective. The pharmaceutical retailers also argued that the Regulations are inconsistent with their statutory purpose because they were under-inclusive: there is no prohibition on a pharmacy from owning a manufacturer which does also fabricate the generic drugs it sells. The Court suggested that this issue could be a concern in the future, but that it did not render the regulations as they stand as inconsistent with their statutory purpose.
Finally, the Court took care to emphasize that this was not a “total or near-total ban on selling generic drugs in Ontario.” Instead, the Regulations were held to “restrict market access only if a particular corporate structure is used,” where private label drugs are sold by manufacturers to pharmacies that control them or are affiliated with them.
This decision effectively closes the door to pharmacies in Ontario employing a private label drug model. Consequently, even if these pharmacies use the private label structure for operations in other provinces, they will have to revise their models in Ontario. It is likely that they will purchase drugs directly from companies that fabricate generic drugs, especially if they have manufacturing subsidiaries that already purchase from the fabricators. It is yet to be seen whether the Regulations from this case will actually accomplish their desired effect of keeping generic drug prices down.
It will also be interesting to see if pharmacies set up corporate structures where they acquire manufacturing companies that do directly fabricate generic drugs, and to then have those companies supply their pharmacies with drug products. If pharmacies do institute this structure, it may prompt further amendments to Ontario’s drug laws and regulations, and some of the issues from this case may be revisited.
Katz Group Canada Inc. v. Ontario (Health and Long‑Term Care), 2013 SCC 64
SCC Docket: 34647, 34649
Date of Decision: November 22, 2013