The Competition Bureau (the “Bureau”) is an independent law enforcement agency, that ensures Canadian businesses and consumers operate in a competitive and innovative market place. On March 13, 2019 the Bureau introduced its new Intellectual Property Enforcement Guidelines (“IPEGs”). The IPEGs seek to increase transparency regarding the Bureau’s application of the Competition Act as it relates to the assertion of IP rights.
Section 7.3 of the IPEGs addresses competition concerns from settlements between brand and generic parties in relation to litigation under Patented Medicines (Notice of Compliance) Regulations (the “PM(NOC) Regulations”). In particular, section 7.3 addresses the application of sections 90.1, 79 and 45 of the Competition Act to such settlements.
The Bureau’s primary focus is on whether settlements between brand and generic parties involve payments that could serve as compensation to the generic party in exchange for delaying market entry (otherwise known as “pay for delay”) resulting in harm to competition.
Unique aspects of pharmaceutical litigation under the PM(NOC) Regulations
The IPEGs recognize advantages to settling litigation under the PM(NOC) Regulations. Settlements avoid the risk of receiving an adverse outcome at trial, provide parties certainty and as well alleviates burdens on the Courts. Further, the IPEGs highlight unique elements posed by pharmaceutical litigation which may be considered when evaluating these settlements. These include the potential exposure a brand faces for damages under section 8 of the PM(NOC) Regulations, legal costs associated with complex litigation and the pricing regimes for both brand and generic products.
Types of Settlements of Proceedings under the PM(NOC) Regulations
The IPEGs identify three types of settlements which may arise from proceedings under the PM(NOC) Regulations, two of which may warrant an investigation by the Bureau:
1. Entry-Split Settlement are settlements permitting generic market entry prior to patent expiry. These agreements are considered to reflect a compromise of each party’s expectation of success at trial. As long as there is no consideration provided by the brand other than the entry date prior to patent expiry, the Bureau would not review these settlements under the Competition Act;
2. Settlement with Payment involves the brand party providing compensation in addition to allowing generic market entry prior to patent expiry. The Bureau may review such a settlement under the Competition Act to determine whether it amounts to pay for delay; and
3. Sham Settlements or Settlements Extending beyond an Exclusionary Period. Settlements, which are shams (i.e. the parties know the patent is not infringed) or settlements which extend beyond the life of a patent, may trigger a criminal investigation.
Sections 90.1, 79 and 45 of the Competition Act
If a settlement gives rise to an investigation, it will most likely be in relation to section 90.1 and occasionally section 79 of the Competition Act. In some instances, a criminal investigation under section 45 may be triggered.
Application of Sections 90.1 and 79 of the Competition Act
Section 90.1 of the Competition Act prohibits agreements that substantially prevent or lessen competition. Meanwhile, section 79 prohibits abuse of a dominant position. The Bureau may apply to the Competition Tribunal (the “Tribunal”) under either provision in which the Tribunal may make an order prohibiting certain action or requiring parties to take a positive action. Section 79 further permits the Tribunal to order an administrative monetary penalty.
Section 90.1 applies to agreements between competitors or potential competitors. The Competition Act defines these actors broadly as “a person who it is reasonable to believe would be likely to compete” with respect to the relevant product “in the absence of the agreement or arrangement”. Accordingly, parties to litigation under the PM(NOC) Regulations would likely fall within this definition.
Under section 90.1, the Bureau will investigate whether a settlement has the effect of likely causing a substantial prevention or lessening of competition. The Bureau will apply a “but-for” test to determine what would have occurred but-for the settlement. This includes considering whether the brand firm and generic firm would have been likely to compete earlier than the generic entry date specified in the settlement and whether entry would have resulted in the discipline of the firm’s market power through the introduction of a lower cost alternative for drug buyers. In particular, the Bureau will examine whether any payment by the brand likely had the effect of delaying generic entry.
In determining whether payment likely had the effect of delaying a generic firm’s entry, the Bureau would consider factors such as (i) the fair market value of any goods or services provided by the generic firm; (ii) the magnitude of the brand firm’s section 8 exposure under the PM(NOC) Regulations; and (iii) the brand firm’s expected remaining litigation costs absent settlement.
With respect to (iii), expected remaining litigation costs absent settlement may include the expected costs of a subsequent appeal, and potential adverse cost awards at the initial action and in an appeal proceeding. If the payment is within a reasonable estimate of these factors based on information known at the time the settlement was reached, the Bureau would conclude that the settlement does not raise issues under the Competition Act.
Under section 90.1(4), the Bureau may also consider possible efficiencies that could be realized through the settlement, as an exception to what would otherwise be an offence under 90.1. When assessing potential efficiencies, the Bureau would consider the credibility of such claims, their link to settlement and whether these efficiencies would or could not have been achieved by settlement.
If reviewing the settlement under section 79 of the Competition Act, the Bureau would consider possible business justifications in its determination of whether the settlement was or was part of a practice of anti-competitive acts. The Bureau indicates it will take into account a number of considerations, including the credibility of the justifications and the link to the settlement.
Application of Section 45 of the Competition Act
Section 45 of the Competition Act addresses conspiracies and sham agreements between parties. Settlements that clearly restrict competition beyond a patent’s exclusionary potential, restrict competition of products not at issue or are made in relation to a patent parties know is not infringed may contravene section 45 of the Competition Act.
Offences under section 45 may give rise to the Bureau referring the matter to the Department of Public Prosecution (the “DPP”) for prosecution. This can result in a fine of $25 million and up to 14 years in prison. The IPEGs recognize it will be rare for settlements in relation to the PM(NOC) Regulations to offend section 45.
However, even if the Bureau does not proceed with referring the matter to the DPP, it may seek a remedy in respect of the agreement under section 90.1 of the Competition Act if it is of the view that the settlement is likely to prevent or lessen competition substantially.
In the rare circumstances where the elements of a section 45 offence are made out, the Bureau will consider whether the ancillary restraints defence under subsection 45(4) or any other defence under section 45 is made out. In such instances, it will not refer the matter to the DPP but may seek a remedy in respect of section 90.1.
Generally, parties may approach the Bureau at any time to resolve a matter prior to referral to the DPP for prosecution.
The new IPEGs provide additional clarity regarding how the Bureau will review pharmaceutical settlement agreements and what terms the Bureau considers to be anti-competitive. It will be important for all parties to any patent litigation settlement, in particular with respect to proceedings under the PM(NOC) Regulations, to keep the IPEGs in mind when preparing settlement terms and conditions.