On September 23, 2014, John Pecman, the Commissioner of Competition, delivered the keynote address at the George Mason University Pharma Conference. The Commissioner spoke about how the Competition Bureau (the Bureau) approaches the interface between competition law and intellectual property (IP), and the Bureau’s enforcement work in Canada’s pharmaceutical industry, including its treatment of reverse-payment patent settlements or pay-for-delay agreements under the Competition Act (the Act).

The Commissioner’s speech coincided with the Bureau’s release of a white paper entitled Patent Litigation Settlement Agreements: A Canadian Perspective. The white paper provides information on Canada’s pharmaceutical industry and regulatory regime, identifies the provisions of the Act that may apply to reverse-payment settlements, and explains the Bureau’s preliminary views on how the Act could apply to reverse-payment settlements. Both the Commissioner’s speech and the white paper make it clear that the Bureau will consult with stakeholders during a forthcoming second stage of public consultations for revising the Intellectual Property Enforcement Guidelines (the IPEGs) to develop appropriate enforcement guidelines.

Despite the Bureau’s assurances that its views on patent settlement agreement enforcement are preliminary and that it will continue to consult with interested parties, the Bureau’s approach to patent settlements, which departs in significant ways from the approach taken in the U.S., is certain to be controversial.

Competition Law and the Pharmaceutical Industry

Under the Act, matters involving IP or IP rights may be referred to the Attorney General under section 32 or examined under the general provisions of the Act, including the criminal conspiracy provision (section 45), the civil competitor collaboration provision (section 90.1) or the civil abuse of dominance provision (section 79). Generally speaking, the Bureau will use the Act’s general provisions for matters raising competition concerns that involve something more than the mere exercise of the IP right, and section 32 will be used where the matters involve the mere exercise of the IP right and nothing else.

Both in the Commissioner’s speech and the white paper, the Bureau reiterated its view that competition law and IP law have complementary roles in promoting a healthy and efficient economy. The Bureau also explained its recent interest in the pharmaceutical industry, which is spurred in part by the significant proportion of total healthcare spending in Canada that pharmaceuticals comprise and the role that generic drugs play in fostering the benefits of competition. According to the Canadian Institute for Health Information, the Bureau noted, health care spending accounts for 11.2 per cent of Canada’s economy and, of that, pharmaceutical spending accounts for 16.3 per cent. Of the pharmaceutical spending, almost 85 per cent is spent on prescription drugs.

In his speech, the Commissioner emphasized that generics offer attractive cost-savings to Canadian consumers and private and public drug plan providers. However, despite these cost-savings and despite representing two-thirds of retail prescriptions, less than a quarter of total prescription drug expenditures in Canada are for generics. The Bureau noted that this gap demonstrates how generics can save health care dollars, especially at a time when Canadian private and public sector organizations are struggling with how to provide first-rate, affordable services to an aging population and other citizens on fixed-incomes.

Both the Commissioner’s speech and the white paper demonstrate that balancing IP rights and competition policy can be a challenging task. They also raise the question as to whether, notwithstanding the above-noted reiteration of the complementary roles of IP and competition laws in promoting a healthy and efficient economy, the Bureau intends to resolve such conflicts in favour of competition law to the potential detriment of IP laws. Both the Commissioner’s speech and the white paper focus on how generics promote competition in the pharmaceutical industry, while paying little attention to the benefits of branded products and the role they play in the industry, including with respect to innovation leading to new pharmaceutical products.

Distinguishing the Canadian and U.S. Regulatory Regimes

The Commissioner and the Bureau’s white paper discussed several differences between the Canadian and U.S. regulatory regimes governing the entry of generic pharmaceuticals, and disputed any suggestion that these differences necessitate “caution in—or even abdication of—efforts to police reverse-payment settlements in Canada.” Differences between the regimes include:

The notification system: Unlike the U.S., where all potential reverse-payment agreements or pay-for-delay settlements must be reported, Canada does not have a notification requirement for such settlements. The Bureau would like to see a similar notification system in Canada that would give the Bureau substantive information about settlement agreements and enhance its ability to deal with any anticompetitive effects of such agreements.

The 180-day exclusivity period: Under the U.S.’ Hatch-Waxman Act, the first generic to challenge a brand’s patent receives 180-days of market exclusivity from other generics. Since Canada does not have an equivalent market exclusivity period, some commentators have suggested that reverse-payment agreements in Canada require less scrutiny since generics do not have strong incentives to challenge patents. The Bureau disagrees with this view, and the Commissioner stated evidence in Canada shows that generics have, in large numbers, filed patent challenges.

Non-dispositive Nature of Prohibition Proceedings and Section 8 Damages: Two aspects of Canada’s regulatory regime not present in the U.S. are the non-dispositive nature of prohibition proceedings and damages under section 8 of the Patented Medicines (Notice of Compliance) Regulations (the PM(NOC) Regulations). Since prohibition proceedings brought by a brand under the PM(NOC) Regulations determine only if the generic’s allegations of patent invalidity or non-infringement are justified for the purposes of the PM(NOC) Regulations, and do not foreclose a subsequent claim for patent infringement by the brand, they are characterized as non-dispositive. Conversely, if the brand is unsuccessful in the prohibition proceeding, section 8 of the PM(NOC) Regulations allows the generic to sue the brand for any loss suffered during the period it was foreclosed from marketing its product as a result of the prohibition proceedings. Together, the non-dispositive nature of prohibition proceedings and the availability of section 8 damages create a risk of “double jeopardy.” While the Bureau acknowledges that the Canadian legislation presents a higher degree of legal risk for both branded and generic pharmaceutical manufacturers than they face in the U.S., it also says that this risk should not preclude competition law enforcement in respect of reverse-payment settlements.

Entry Date versus Pay-for-Delay: In the U.S., the Bureau notes that settlements have been treated differently if they involve only a date for generic entry, as compared to a payment for delayed entry. Before the U.S. Supreme Court’s decision in Actavis, a number of patent settlement cases litigated in the U.S. resulted in court decisions deeming these agreements legal if they were within the scope of the patent. The Actavis decision also noted that early entry dates promote competition whereas pay-for-delay agreements maintain patentee-set price levels. In contrast, the Bureau has said that it will not distinguish between entry date and pay-for-delay agreements, taking the position that the Act applies to all settlement agreements that allow generic entry before the patent expiry date, regardless of the presence of a reverse payment.

Review of Patent Settlement Agreements: The U.S. Supreme Court decided in Actavis that reverse-payment settlements are subject to a “rule of reason” analysis, which, in contrast to a per se analysis, requires an assessment of the competitive impact of the settlement. In contrast, the Bureau says it may review patent settlement agreements under the criminal or civil provisions of the Act, only the latter of which contain a competitive effects requirement analogous to the U.S. “rule of reason” analysis. By leaving the door open to application of the per se criminal conspiracy provision in section 45 of the Act, the Bureau’s approach substantially – and controversially – departs from the U.S. approach to patent settlements.

The differences between Canada and the U.S., therefore, now clearly go beyond differences in their regulatory regimes to include differences in the application of each country’s competition/antitrust laws. Of particular note in this regard is the acceptance by U.S. courts of entry-date patent settlements and a rule of reason standard for pay-for-delay settlements, in contrast to the Bureau’s stated openness to reviewing (and potentially challenging) any patent settlement including possibly under the Act’s per se criminal cartel provision. In an era where Canada and the U.S.’ competition and antitrust practices are becoming more aligned, it is surprising that the Bureau has so clearly and significantly differentiated the Canadian approach to patent agreement settlement from the U.S. Indeed, having refuted the suggestion that differences in Canada’s regulatory regime relative to the U.S. regime may justify more lenient enforcement in Canada, the Bureau appears to be signaling an even stronger approach in Canada than in the U.S.

Implications of the Bureau’s “Made in Canada” Approach to Patent Settlements

Why the Bureau considered it is necessary to signal a stronger enforcement approach in Canada is unclear, as are the merits of this divergence as a matter of competition (and broader legal) policy. The Commissioner seems to have anticipated the controversial nature of the Bureau’s approach, stating in his speech that “many of you in this room may find our approach somewhat surprising, particularly in light of the U.S. Supreme Court’s recent decision in Actavis.” As noted previously, the Actavis decision, consistent with some lower court decisions, distinguished settlement agreements providing only early generic entry from so-called pay-for-delay agreements. Whereas, according to the court, a pay-for-delay settlement “keeps prices at patentee-set levels, potentially producing the full patent-related … monopoly return [and] dividing … [it] between the challenged patentee and the patent challenger,” entry-date agreements “would … bring about competition … to the consumer’s benefit.” In effect, therefore, the court could be viewed as having considered the non-presence of a reverse payment in an entry-date settlement as a basis for forgoing antitrust scrutiny of settlements

The Bureau has rejected such an approach. According to the Bureau, the Act applies to all settlement agreements that allow generic entry before the patent expiry date, regardless of the presence of a reverse payment. In addition to ignoring the fact that entry-date settlements remove the above-noted concern about the brand and generic sharing monopoly returns, such an approach risks undermining the broader legal principle that settlement of litigation should be encouraged. An entry-date settlement represents a compromise between the parties based on their respective assessments of the strength of the disputed patent, and potential litigation risks and costs that each faces without a settlement. In addition to suggesting the Bureau is better placed than the parties to assess such risks and benefits, the Bureau’s approach, by opening the door to competition law scrutiny of all patent settlements, will discourage settlements by introducing uncertainty into the settlement process. Setting aside the issue of whether patent settlements should be subject to competition law scrutiny at all, if Actavis is interpreted to mean only settlements with a monetary payment should be subject to antitrust scrutiny, then the U.S. approach has the merit of providing certainty that entry-date patent settlements will not be subject to antitrust scrutiny.  

Arguably the most controversial aspect of the Bureau’s approach is the Bureau’s stated willingness to review patent settlements under the Act’s per se criminal conspiracy provision, which departs from the “rule of reason” analysis used in the U.S. following Actavis. The Bureau says it will review patent settlement agreements under the criminal conspiracy provision (section 45), the civil competitor collaboration provision (section 90.1) or the civil abuse of dominance provision (section 79). In terms of when it will use section 45, the Bureau’s Competitor Collaboration Guidelines (the “CCGs”) state that it will review only agreements that create “naked restraints” on competition under the per se criminal conspiracy provision and that other agreements will be reviewed under the Act’s civil provisions, each of which requires a substantial prevention or lessening of competition. In his speech, the Commissioner further commented that inquiries under the civil provisions will likely be conducted under civil agreements provision rather than the abuse of dominance provision. He did not, however, articulate what would cause the Bureau to review a patent settlement under section 79 rather than section 90.1, notwithstanding the significance of such determination insofar as the use of section 79 (but not section 90.1) would expose the parties to potential administrative monetary penalties in an amount up to $10 million.

Given the Bureau’s previously noted position in the CCGs that section 45 should be limited to so-called “naked restraints” on competition, which the Bureau defines as “restraints that are not implemented in furtherance of a legitimate collaboration, strategic alliance of joint venture”, the suggestion that the patent settlements may be reviewed under the Act’s per se criminal conspiracy provision will raise concerns about whether the Bureau is signaling a broader approach to the enforcement of section 45, not only in the pharmaceutical sector but more generally. It is quite possible that this was not the Bureau’s intent, and that it merely intended to ensure that parties cannot escape per se condemnation for sham settlements or settlements that go beyond the scope of the patents or litigation in question. If so, however, it would have been preferable for the Bureau to follow an approach similar to that set out by the U.S. Supreme Court in Actavis by stating that it will review patent settlements under the civil competitor collaboration or abuse of dominance positions, both of which (like the U.S. Supreme Court’s rule of reason approach) require a competitive effects analysis. If it felt it necessary to do so, the Bureau could have proceeded to add the proviso that the settlements are not a sham and do not go beyond the scope of the patents or litigation in question. Instead, by placing section 45 on the same level as the civil provisions, and even arguably suggesting it will be given primacy over them, the Bureau risks creating a chilling effect in respect of competitor collaborations that could go well beyond the pharmaceutical industry.

The Commissioner was right to anticipate that many would be surprised by the Bureau’s approach to patent settlements. The Bureau did depart from the U.S. approach, and it did so in important ways that signal a potentially stronger enforcement approach in Canada rather than the “cautionary” approach the Commissioner suggests that some may have been expecting. By asserting potential competition law scrutiny over all entry-date settlements and leaving the door open to potential per se condemnation, the Bureau has indeed carved out a uniquely Canadian approach. But has it done so at the expense of sound competition and broader legal policies?