Case: Katz Group Canada Inc. v. Ontario (Minister of Health and Long-Term Care)
Nature of case: Appeal from applications for judicial review challenging the validity of Ontario regulations made under the ODBA and DIDFA
Successful party: Ontario (Minister of Health and Long-Term Care)
Date of decision: November 22, 2013

Summary

This was an appeal from applications for judicial review brought by Shoppers Drug Mart and Katz Group Canada Inc. (“Shoppers and Katz” or collectively the “Pharmacies”), challenging the validity of Ontario regulations made under the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10 (“ODBA”) and Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 (“DIDFA”) (collectively the “Regulations”). Shoppers Drug Mart and Katz Group own and operate pharmacies across Ontario and sought to sell their own “private label” generic prescription drugs rather than source them from arms-length manufacturers. While the Divisional Court declared the impugned provisions as ultra vires, the Ontario Court of Appeal reversed this decision.

The Pharmacies were granted leave to appeal to the Supreme Court of Canada in August 2012 and sought a reversal of the Ontario Court of Appeal’s decision that the impugned provisions of the Regulations banning “private label” drugs are intra vires the governing statute and of full force and effect.

The Supreme Court of Canada (“SCC”) dismissed the Shoppers and Katz’ appeal and upheld the Regulations as intra vires.

Background

The ODBA is the governing legislation for Ontario’s public drug benefits plan. It provides for the conditions under which the government will reimburse pharmacies for prescription drugs dispensed to eligible patients under the Ontario Drug Benefit Plan (such as seniors and persons receiving social assistance); the drugs that are reimbursed are designated as listed drug products on the Formulary. The DIDFA is the governing legislation for the dispensing and sale of prescription drugs in Ontario. The DIDFA sets out the rules surrounding generic and brand name drug interchangeability, the pricing of interchangeable drugs and the dispensing fees that may be charged by pharmacists. Generally, a generic drug cannot be sold in the “private” market unless it is designated as “interchangeable” with a brand name drug product. In 2010, several amendments were made to the ODBA and DIDFA, including a provision that banned the interchangeability and reimbursement by the provincial drug plan of “private label” drugs in Ontario.

The term “private label product” is defined in the Regulations as a drug product sold under the name of a company that: (i) is not related to the party that actually fabricates the drug; and (ii) is related to a pharmacy either through a corporate or marketing arrangement. 

The Impugned Provisions

Section 12.0.2(1) of the ODBA states: A drug product that is a private label product shall not be designated as a listed drug product.

Section 9(1) of DIDFA states: A product that is a private label product shall not be designated as interchangeable.

Decisions of the Lower Courts

The Pharmacies brought an application for judicial review challenging the validity of provisions of the Regulations that prohibit the sale of “private label” generic drugs in Ontario. The practical effect of these provisions prevented the Pharmacies from selling their “private label” generics in both the public and private markets.

The Divisional Court heard two parallel applications and unanimously held that section 12.0.2 of Ontario Regulation 201/96 made under the ODBA and section 9 of Ontario Regulation 935 made under the DIDFA were ultra vires and of no force and effect. Justice Molloy declared the impugned provisions as invalid for three main reasons:

  1. the language of the provisions were prohibitory and are outside the regulation-making authority granted under the ODBA;
  2. the provisions are extraneous to the purpose of the ODBA and DIDFA, namely to reduce the cost of prescription drugs to consumers without compromising safety; and
  3. the provisions interfere with property and commercial rights, as limiting potential profits of a corporation are not authorized by the parent legislation.1

 A summary of the Divisional Court’s decision can be found here.

The Minister of Health and Long-Term Care appealed the decision of the Divisional Court. The Court of Appeal reversed the decision, holding that the regulations were intra vires and restored the impugned provisions. The Court of Appeal held that the Divisional Court erred in respect of all three reasons for invalidating the provisions. Particularly, the Divisional Court’s interpretation that the impugned provisions fell outside the regulation-making authority of the ODBA and DIDFA was not warranted. Under both Acts, the Lieutenant Governor in Council is given broad regulation-making powers. Since the Regulations did not preclude the Pharmacies from participating in all aspects of the Ontario drug supply chain, they were held to be regulatory and not prohibitory.2

In a dissenting decision, Epstein J.A. upheld the decision of the Divisional Court. She held that the regulations were prohibitive and beyond the scope of the governing legislation. Moreover, the complexity, importance and cost of the regulatory scheme did not provide the government with a carte blanche.3

The decision of the Court of Appeal can be found here.

The Regulations are intra vires

The Supreme Court of Canada held that, in order for the Pharmacies to be successful in their appeal, they must be able to show that the Regulations were inconsistent with the statutory objective of the ODBA and DIDFA. The Court provides a review of the basic principles of statutory interpretation, stating that the interpretation of an enabling statute and the challenged regulations are to be given a broad and generous approach that is consistent with the Court’s approach to statutory interpretation, generally, and that regulations benefit from a presumption of validity.

The overarching purpose of the enabling statutes was not in dispute. As stated by Molloy J. in the Divisional Court decision, the legislative purpose of the ODBA and DIDFA is “to control the price of prescription drugs in Ontario without compromising safety.”4

Shoppers and Katz were unable to demonstrate the impugned Regulations were ultra vires. They argued that the ban on “private label” generic prescription drugs was inconsistent with the statutory purpose of the ODBA and DIDFA, and would not reduce drug prices in Ontario. The SCC rejected this argument. It was irrelevant whether the effect of the ban would prove to be successful, rather the issue was whether the provisions aligned with the purpose of the enabling statutes, which in the view of the SCC, they did.

Shoppers and Katz also argued that the impugned Regulations were ultra vires because they interfered with the commercial rights of the pharmacies. The SCC rejected this argument. The pharmaceutical supply chain is a highly regulated market where in Ontario; from a practical perspective, manufacturers cannot sell generic drugs unless they are designated as interchangeable and they cannot be reimbursed by the public drug plan unless the drug is listed on the Formulary. The SCC held that these requirements represent authorized interference with the manufacturer’s ability to operate in the highly regulated market. There is no interference with the Pharmacies’ commercial right.

Conclusion

In dismissing Shoppers and Katz’ appeal, the SCC held that the provisions banning “private label drugs” fit squarely within the legislative intent of the ODBA and DIDFA. The 2010 regulatory amendments that implemented the ban on “private label” drug products were a way that the province could “prevent another possible mechanism for circumventing the ban on rebates that had kept drug prices inflated.”5 The SCC reasoned that “[i]f pharmacies were permitted to create their own affiliated manufacturers whom they controlled, they would be directly involved in setting the Formulary prices and have strong incentives to keep prices high.”6 Ultimately, the impugned provisions align with the purpose of the enabling statutes and the 2010 amendments, and contribute to the province’s goal of lowering the price of generic drugs and providing transparent drug pricing.

In the result, Shoppers and Katz’ appeal was dismissed and the impugned Regulations upheld as intra vires.

Link to decision

Katz Group Canada Inc. v. Ontario (Minister of Health and Long-Term Care), 2013 SCC 64