On March 13 2019, the Competition Bureau (the “Bureau”) released an updated version of its Intellectual Property Enforcement Guidelines ("IPEGs"). The IPEGs are intended to provide increased transparency on the Bureau's approach to assessing conduct involving intellectual property ("IP") rights and on the circumstances in which the Bureau would, under the Competition Act (the "Act"), seek to restrain anti-competitive conduct associated with the exercise of IP rights. This bulletin will outline:
- the interplay between IP law and competition law,
- the role of the Competition Bureau in monitoring the impact of certain exercises of IP rights which adversely affect innovation and fair competition, and
- the most significant updates made to the IPEGs.
Why is the Competition Bureau Concerned with IP law?
The Bureau will take issue with the exercise of IP rights if it impedes the production and diffusion of goods and technologies or the creation of new products in a way that allows the owner to create, enhance or maintain market power, which means concretely the ability to undermine a fair level of competition in the market for a given product or services for a sustained period of time.
What Will Warrant an Intervention from the Competition Bureau?
In the IPEGs, the Bureau identifies two categories of conduct related to IP rights which may warrant an enforcement action by the Bureau:
- anti-competitive conduct involving IP that is something more than the exercise of the IP right, and
- the mere exercise of an IP right and nothing else.
The IPEGs also clarify when conduct involving IP rights constitute criminal offences, and issues related to standard-setting.
Conduct That is Something More than the Mere Exercise of IP Rights
The Bureau defines "more than the mere exercise of IP rights" as situations where parties enter into agreements or arrangements, such as transfer or licensing of IP rights or agreement to use and enforce IP rights, which in turn create competitive harm. The Bureau will review such agreements on the basis of the general provisions of the Act (such as sections 45, 76, 77, 79 and 90.1). The Bureau's intervention may ultimately lead to an order from the Competition Tribunal or a court that, among other things, limits to whom and how the IP owner may license, transfer, or sell its IP.
Conduct that would be considered more than the mere exercise of IP rights which are also discussed specifically in the IPEGs include: price-fixing, exclusive licensing, exclusive contracting, patent pooling, refusal to license IP, product switching, output royalties, patent pooling, agreement to foreclose complementary products, involvement of patent asserting entities (i.e. "trolls"), etc. The IPEGs provide several hypothetical examples of general business conduct involving IP and explain the analytical framework the Bureau would apply to each.
As part of its new updates, in sections 7.2 and 7.3, the IPEGs now address more exhaustively anti-competitive issues related to the settlement of proceedings under the Patented Medicine (Notice of Compliance) Regulations ("PMNOC proceedings"). A settlement will attract Bureau scrutiny in cases where the terms of the settlement extend beyond the exclusionary potential of the patent (i.e. the term of the patent itself) or if the settlement seeks to restrict competition for products unrelated to the patent subject to the PMNOC proceeding. The Bureau mentions three types of PMNOC settlements that may warrant its intervention, as per the words of section 90.1 (anti-competitive agreements and arrangement between competitors) or section 79 (abuse of dominant position):
Entry-split settlement: An agreement pursuant to which the generic firm enters the market on or before patent expiry. This usually does not warrant enforcement action by the Bureau if the brand firm does not provide any consideration to the generic to delay its entry into the market.
Settlement with payment: An agreement pursuant to which a brand firm provides compensation or consideration to the generic firm in addition to allowing generic market entry on or before patent expiry. The Bureau adopts a flexible understanding of what "payment" actually is, which includes monetary transfer, provision of particular services by the generic firm to the brand firm, provision of inventory or backup manufacturing services, supply of raw material or finished drug products, or entering into development agreements. Agreements which provide for a delay of entry beyond the expiry date of the patent, and compensation to hold off until then, will raise even more concerns.
Settlement that may be considered a criminal conspiracy: A settlement agreement may be considered a conspiracy exposing the parties to criminal charges if
- the settlement reaches beyond the exclusionary potential of the patent, i.e. beyond its expiry date,
- it restricts competition among products not at issue in the PMNOC proceeding, or
- an agreement is entered into even though the settling parties recognize that the patent is invalid and/or not infringed (in this latter case, the agreement would be considered a "sham").
Parties involved in PMNOC proceedings should keep in mind that their agreement may be subject to review by the Bureau, and should seek the advice of IP and competition law counsel in advance of signing.
Conduct That is the Mere Exercise of IP Rights
Section 32 provides special remedies where the mere exercise of an IP right has caused competition to be unduly restrained, prevented or lessened, following one of the specific circumstances of subparagraphs (a) to (d). This section has been rarely used because the Bureau recognizes the associated risk of reducing incentives to innovate, which would be contrary to the purpose of IP laws. Nevertheless, it is possible for the Bureau to recommend the Attorney General seek an order from the Federal Court to either declare an agreement or licence void, to require the licensing of an IP right, or even to revoke an IP right to prevent any further anticompetitive effects from the assertion of an IP right. The IPEGs provide as an example of reviewable conduct the refusal to license IP in a network industry, that is refusal to license one's IP to competitors when one's own innovations have become the dominant technology within the network: use of its IP would be necessary to ensure fair market access to competitors and to allow the offering of reasonable product alternatives.
Collaborative Standard Setting
The Bureau may take issue with standard-setting for products in a particular industry. Although there are recognized benefits to such practice (lowering production costs, increasing efficiency and consumer choice, reducing barriers to entry into the market, and encouraging interoperability), they may also foreclose innovative technologies or restrict market access to certain firms by denying access to the standard or providing access on discriminatory terms. An extent of the adverse effect of standard-setting is seen in patent "hold-up" where firms need to develop their product around a specific innovation protected by patent which has become a standard, and where costs to switch to the new standard created by the patented innovation are too prohibitive and hence forces them to exit the market. The Bureau would review such conduct under the abuse of dominant position provision (section 79).
What Will Not Warrant an Intervention from the Competition Bureau?
The Bureau reiterates that its intervention will not be warranted when the owner of valid IP rights does not possess or seek to create, enhance or maintain market power in ways that limit competition. So, if the IP owner acquires market power solely by possessing a superior-quality product process, or introducing an innovative business practice, the Bureau will not consider the market power so acquired as contravening the Act.
The Bureau will typically not interfere with a licensing agreement involving IP rights where it facilitates broader use of valuable IP, unless it substantially reduces competition "relative to what would have existed in the absence of the licence's potentially anti-competitive terms". To establish such assessment, the Bureau will look at the terms of the licence.
Although it is rare for the Bureau to take enforcement action against conduct involving the mere exercise of IP rights, it would be prudent to seek IP and competition law advice when negotiating the terms of a settlement agreement in PMNOC proceedings. Parties who hold IP rights should be aware of the IPEGs. Even though they are not legally binding, they serve as a useful clarification of the approach that the Bureau will take to cases involving IP. either on the Bureau or on courts of justice, and seek advice when negotiating the terms of such settlement agreements.