The Supreme Court of Canada has granted leave to appeal in a case that pits retail pharmacy chains in Ontario against the provincial government in a battle over generic drug reform. At the heart of this appeal is whether Ontario can lawfully prohibit pharmacies from selling private–label generic drugs by regulation, rather than by statute. Put another way, must the provincial government obtain the approval of the Legislature in order to prohibit the sale of certain drugs in Ontario? Engaging diverse issues at the intersection of health care policy and public finance, the outcome of this appeal could affect the legislative scheme governing prescription drugs in Ontario – and the bottom line for pharmacies.
Shoppers Drug Mart and its business rival, Katz Group Canada Inc., own, operate and franchise pharmacies across Canada (Katz runs the Rexall Pharma Plus drugstores). Sanis Health Inc. is a subsidiary of Shoppers. Sanis manufactures generic prescription drugs and sells primarily to Shoppers, but outsources the actual fabrication of the drugs. In a number of provinces other than Ontario, Shoppers sells its Sanis private – label generic drugs on store shelves. Katz stated that it has considered adopting a similar business model.
In Ontario, two statutes work together to regulate prescription drugs: the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 (“DIDFA”) permits and requires pharmacists to dispense generic drugs that are interchangeable with a brand name drug, and the Ontario Drug Benefits Act, R.S.O. 1990, c. O.10 (“ODBA”) sets out, among other things, the amount the province will pay to pharmacies for dispensing drugs.
Before continuing, a quick refresher on the difference between a “brand name” and a “generic” product: simply put, a brand name product is a product that has – or at some point had – patent protection. A product that is under patent is likely unique and can command a higher price. Federal legislation regulates the price of brand name drugs.
Once a product’s patent protection expires, generic copies tend to quickly flood the market. Generic products are typically less expensive than brand names, for the most part because generics do not have any market exclusivity. The price of generic drugs is set by provincial legislation.
Up until 2006, in this province, generic pharmaceutical manufacturers would try to gain an advantage over their competitors by offering “rebates” to pharmacies that stocked and sold their products. This practice was prohibited by amendments to both Acts in 2006. As a result, some pharmacies, like Shoppers, began purchasing generic drugs from non-arm’s length manufacturers in attempt to replace revenues previously realized from rebates (these generic drugs, purchased from a related manufacturer, are called “private–label” drugs). In 2010, however, further amendments to the DIDFA and the ODBA prohibited the listing of private–label generic drugs as interchangeable with brand name drugs. Unless a generic drug is approved as interchangeable with a brand name equivalent, it cannot be legally sold in Ontario.
Shoppers and Katz challenged the validity of the regulations that made private–label listing illegal.
The Divisional Court sided with the retailers for three reasons. First, the regulations were ultra vires their parent statutes – the parent statutes grant a power to regulate, not prohibit. Second, the regulations were attempting to control the profitability of pharmacies, a purpose inconsistent with the governing Acts. Finally, the regulations were an unwarranted interference with Shoppers’ and Katz’s property and commercial rights. Having made these findings, the Divisional Court did not need to consider Shoppers’ fourth submission, that the regulations constituted unauthorized discrimination against private – label generic drug manufactures – it struck down the impugned regulations. The province appealed.
The majority of the Court of Appeal for Ontario allowed the appeal. The majority first concluded that because the regulations “impose conditions on generic drugs, they necessarily authorize the exclusion of drugs that do not meet the conditions” (para 51). The regulations are therefore not ultra vires. Second, the majority found that the regulations were consistent with the purpose of the DIDFA and the ODBA, which is to make “generic drugs available to eligible persons and the rest of the public at low prices” (para 54). Having so concluded, the majority commented but briefly on the third issue: “the regulations are not an improper restraint on trade, but rather a regulation of the business model…” (para 67). The court thus held that the regulations were valid.
In dissent, Epstein J.A. agreed with the findings of the Divisional Court, and would have also found the regulations discriminatory. At the core of her reasons is the distinction between a regulation aimed at restricting the profits earned by pharmacies, and a regulation restricting those profits “insofar as it is a vehicle for reducing drug costs” (para 116). Only the latter is consistent with the purpose of the Acts. She explains that while rebates from manufacturers were “a perversion in the sense that their sole purpose was to circumvent the compensation scheme and increase profits earned by pharmacies” (para 107), the same cannot be said of the business decision to vertically integrate. Curbing profits is not the proper subject of regulations under the parent statute (para 116).
Potential Significance of the Appeal
There are a number of players who have a significant interest in the outcome of this appeal. Pharmacy operators in Ontario – and across the country – will be tuned in, as the result may dictate how they structure their business and how they earn profits. Provincial regulators will also be paying attention. Ontario’s Health Minister, Deb Matthews, was cited in a Globe and Mail article, stating that “private labelling does not benefit Ontarians.” If this is the province’s opinion, then should the appeal be allowed, Ontario will have to decide whether to seek permission from the Legislature to prohibit private- labelling, or whether to abandon this profit-curbing legislation altogether.
In terms of legal issues, the Supreme Court will have to address a number of novel questions that cut across multiple industries: What are the guidelines for determining whether a regulation is intra vires its parent statute? How does a court distinguish between a prohibition and a condition? When can a regulation interfere with the property and commercial rights of a company? And, depending on whether this issue is fully argued before the Court, what is the test for administrative law discrimination and does this principle apply to regulations? The time is ripe for these questions to be answered: regulations do the “heavy lifting” in a number of areas, be it food and drugs, healthcare, or alcohol and gaming. Guidance on how regulations should be written, interpreted and applied will be welcome. Whatever the outcome, this decision will impact a wide variety of regulatory regimes across Ontario and the country.
A final note: the Court will likely not be sitting 9 judges, as Madam Justice Karakatsanis was part of the majority decision at the OCA.
SCC Court File No. 34649
Date Granted: August 30, 2012