The Competition Bureau has released a white paper titled “Patent Litigation Settlement Agreements: A Canadian Perspective” in connection with the George Mason University School of Law Conference: Global Antitrust Challenges for the Pharmaceutical Industry held on September 23, 2014.

According to the remarks of the Commissioner of Competition, John Pecman, the white paper stems from the Competition Bureau’s keen interest in “pay-for-delay” or “reverse payment” settlements and provides the Bureau’s preliminary views on how Canadian competition laws could apply to such settlements.

As explained in the Competition Bureau’s “Highlights: Competition Bureau Workshop on Antitrust Issues in the Pharmaceutical Sector” “pay-for-delay” or “reverse payment” patent infringement/invalidity settlements involve generic manufacturers agreeing to delay the launch of a competing generic product in exchange for a value transfer (eg. direct payments) from the innovator.

Such settlements have been the subject of attention from competition authorities in the EU and the U.S.. It had been suggested that differences between the Canadian and U.S. regimes might limit consideration by the Bureau of such settlements in Canada. However, the Bureau’s view is that the following differences between Canadian and U.S. regimes do not obviate the need for Canadian oversight of settlement agreements:

  1. Lack of a notification system: Unlike the U.S., where all potential pay-for-delay settlements are reported to the antitrust agencies, Canada has no such requirement. Mr. Pecman indicated that he intends to “advocate for better information on patent settlements.”
  2. Absence in Canada of a 180-day period of exclusivity for the first generic to challenge a brand’s patent: The 180-day exclusivity applies to the first generic(s) to file an ANDA with a paragraph IV certification. Some assert that this period of exclusivity provides a greater incentive in the U.S. to settle with the first generic challenger and that this incentive does not exist in Canada. However, the white paper indicates that evidence from Canada, the U.S. and the EU — including multiple generic challengers, the presence of authorized generics, and lack of such an incentive in the EU coupled with anticompetitive settlements — undermines this assertion and supports a need for Canadian enforcement.
  3. Particularities of PM(NOC) Regulations prohibition proceedings and the potential for s. 8 damages: Peculiar to Canada are “double jeopardy” (a generic successful in a PM(NOC) proceeding could later be liable for damages in a patent infringement action which puts risk on generics) and “section 8 damages” (damages payable to the generic by the innovator if the generic is successful in the PM(NOC)proceeding which puts risk on the innovator. However, relying in part on the U.S. Supreme Court decision in Federal Trade Commission v Actavis, which concerned the legality of a settlement agreement between a generic and patentee, the Bureau does not view risk avoidance as sufficient justification for not reviewing such settlement agreements.

The Bureau is of the view that the Competition Act may apply to both entry-date settlements (limited to generic entry prior to patent expiry) and “pay-for-delay” agreements. This is in apparent contrast to the approach in the U.S. and EU, where the former are viewed as tending to reflect the odds of the parties’ success in patent litigation and are therefore typically not viewed as being anti-competitive.

Further, the Bureau considers settlement agreements as something more than a mere exercise of a patent right, and would review them under both the criminal conspiracy and civil provisions of the Competition Act. Regarding the former, circumstances that could lead to a criminal inquiry include:

  • agreements between competitors regarding products that are not the focus of the patent litigation;
  • agreements that fix generic entry beyond the term of the patent;
  • settlements in which a generic agreed to enter beyond the expected expiry date of the patent in exchange for a payment; and
  • evidence suggesting that payment was strictly to delay or prevent entry.

If the Commissioner elects to review the agreement under the civil provisions, the Bureau is most likely to consider the civil agreements provision or the abuse of dominance provision. Under either provision, the Bureau must demonstrate that the agreement would likely have the effect of causing a substantial prevention or lessening of competition (SPLC).

The Competition Tribunal has adopted a “but for” test for assessing whether there is an SPLC. According to the paper, such an analysis “may include an examination of the expected date of generic entry but for the settlement and the agreed entry date, and the difference between prices that would have been expected to prevail in each case.” Notably, the paper explains that the “but for” scenario is not necessarily the fully litigated outcome, but may rather be an alternative settlement that does not include a reverse payment.

Regarding the quantum of any payment forming part of the settlement, the white paper states that one approach may be to consider the patentee’s potential liability for section 8 damages alongside the patentee’s potential litigation costs. However, “all else being equal, the greater the value transfer from the brand to the generic, the greater the likelihood of an SPLC.” The Commissioner will consider possible business justifications or efficiencies as a rationale for the settlement.

Possible remedies for breach of the civil provisions include prohibiting the settlement or the anticompetitive terms of the settlement, a monetary penalty, and requiring any person to take any other action.

The white paper concludes that as the Bureau’s work progresses, including advocating for a settlement notification system, stakeholders and experts will be consulted in order “to develop an effective enforcement approach to settlements”.

Separately, on September 18, 2014, the Bureau released its final updated Intellectual Property Enforcement Guidelines (“IPEGs”). As explained by the Bureau in the announcement of the release, “the IPEGs outline the Bureau’s enforcement approach to a broad range of business conduct involving IP (e.g., conspiracies, licensing agreements, civil agreements) and are intended to state the Bureau’s enforcement approach for all provisions of the Competition Act where IP rights may be involved.” This final version follows a public consultation on a draft of the IPEGs, as reported in the May 2014 edition of Rx IP Update.

This version of the IPEGs completes the first stage of updates, reflecting amendments to the Competition Act, the Bureau’s recent enforcement experience and consistency with other Bureau enforcement guidelines. The second stage will involve the Bureau considering whether to update the IPEGs to reflect further competition policy and IP issues, such as reverse payment settlements and life-cycle management strategies. The Bureau plans to release a document for public consultation in the near future.