There are some important changes to the Competition Act (the "Act") that came into effect on March 12, 2010, that are of particular interest to the biopharmaceutical sector. These changes are briefly summarized below, along with a discussion of practical consequences.

Legal Summary

In summary, effective March 12, 2010, the Act’s existing conspiracy provisions will be replaced with a per se criminal offense prohibiting agreements between competitors (and potential competitors) to fix, maintain or control prices or the production or supply of a product or to allocate sales, customers, markets or territories for the production or supply of a product. Proof that the agreement would be likely to lessen or prevent competition unduly is no longer required. The Director of Public Prosecutions will simply need to show intent to enter into the agreement and knowledge of its terms – the agreement’s effect (i.e., whether the agreement demonstrated an undue lessening of competition) will no longer be relevant.

Every person convicted of participating in the above prohibition faces a prison term of up to 14 years and a maximum fine of $25 million. In addition to these penalties, private parties can bring civil actions for loss or damage caused by the prohibited conduct. That said, liability under the Act’s conspiracy provisions can be avoided if the person establishes on a balance of probabilities that the agreement is ancillary to a broader or separate legal agreement and is reasonably necessary to give effect to the broader agreement.

In addition, as of March 12, there will be a new provision that contemplates that agreements between competitors (and potential competitors) can be reviewed by the Commissioner of Competition to determine whether they are likely to result in a substantial lessening or prevention of competition. The Commissioner has the power to refer a matter to the Competition Tribunal for adjudication. If the Tribunal is satisfied on a balance of probabilities that the agreement is likely to result in a substantial lessening of prevention of competition, the Tribunal may prohibit any person from doing anything under the agreement, or may require any person with the consent of that person and the Commissioner to take any other action.

Guidance from the Competition Bureau

The Competition Bureau ("Bureau") has issued guidelines on collaborative agreements between competitors (the "Guidelines") that outline the Bureau's approach to determining whether to assess an agreement or collaboration between competitors under the criminal conspiracy, civil agreement or other provisions of the Act.

While the Guidelines do not specifically identify biopharmaceutical license agreements as being at risk, it is clear that such agreements can contain "naked restraints" on competition (i.e., fix, maintain or control prices or the production or supply of a product or to allocate sales, customers, markets or territories for the production or supply of a product) or in other respect substantially lessen or prevent competition. This exposes a potentially vast array of agreements within the biopharmaceutical sector to a new level of scrutiny under the Act, including agreements that relate to the settlement of actual or potential intellectual property related litigation.

The Guidelines specifically refer to research and development agreements ("R&D Agreements"), another common form of biopharmaceutical industry agreement. The Guidelines note that while such agreements can result in significant benefits, they can also substantially lessen or prevent competition. The Guidelines note that in assessing R&D Agreements the Bureau generally considers where the agreement is limited to R&D or also contains provisions regarding joint exploitation of products, whether the parties hold market power in the relevant market, whether the restrictions on competition are reasonably necessary for achieving the objective of the agreement and whether any anti-competitive effects are offset and outweighed by the efficiencies generated through the agreement.

The Guidelines also acknowledge that joint production among competitors can be pro-competitive. In assessing whether such an agreement raises issues under the above noted provisions of the Act, it is noted that the Bureau considers whether the agreement contains provisions that limit output of a relevant product, fix prices or otherwise restrict competition on competitively significant matters, whether the joint production agreement otherwise reduces the incentive or ability of the parties to compete independently, whether the parties to the agreement have market power or will likely have market power and whether the anti-competitive effects are offset and outweighed by the efficiencies generated through the agreement.

Implications for Industry

Existing or future agreements with current or potential competitors must now receive a higher level of scrutiny under the Act, even if the form of agreement has been utilized previously in Canada. This is particularly the case wherein parties have a combined market share of 35% or more but even agreements where such a combined market share does not exist, if agreement could said to fix, maintain or control prices or the production or supply of a product or to allocate sales, customers, markets or territories for the production or supply of a product. Given the recent interest of the Commissioner in the generic drug sector and the continuing consolidation of market participants, among other developments, the industry should approach the new requirements of the Act with great care.