Canada: Government Of Ontario Ban On Private Label Generics Is Upheld By Court Of Appeal

The complex market and regulatory framework for the sale of drugs in Ontario has been clarified, to some extent, by the recent decision of the Ontario Court of Appeal (Court) in an appeal by the Government of Ontario (Ontario) from two orders of the Ontario Divisional Court on applications brought by Shoppers Drug Mart and its affiliates ("Shoppers") and the Katz Group and its affiliates Pharma Plus and Rexall ("Katz"). The Court reversed the decision of the Divisional Court that had declared ultra-vires two sections of provincial regulations which effectively prohibit pharmacies from selling their "private-label" generic drugs (the "Regulations") in Ontario. A key factor in the decision was the Court's view that in a major public policy domain involving the intersection of health care and public finance, courts must exhibit "genuine restraint" in reviewing statutes and regulations and that the Divisional Court had not shown such restraint in this case.

THE ISSUES IN DISPUTE

In 2010 the conditions for listing a drug product under the Ontario Drug Benefit Act ("ODBA") and the Drug Interchangeability and Dispensing Fee Act ("DIDFA") (collectively the ODBA and the DIDFA will be referred to as the "Laws"), were amended to prohibit a drug product being designated as a "listed drug product" (i.e., eligible for reimbursement by Ontario under its public drug benefits program) if it was a "private label product". A private label product is defined in regulations made under the Laws as a drug product in respect of which the manufacturer is owned by a pharmacy but does not fabricate the product itself, is not controlled by the entity that fabricates the product or does not control the entity that fabricates the product. The existing structure established by Shoppers in other provinces (Sanis Health a subsidiary of Shoppers is a manufacturer) nor, presumably, the structure under consideration by Katz, met the limitations established in the Regulations. Shoppers and Katz argued that the Regulations:

a) fell outside the regulation-making authority granted to Ontario under the Laws because they purported to prohibit rather than regulate the listing of generic drug products and their designation as interchangeable with the brand name product; b) were inconsistent with the purpose of the Laws; and c) constituted an interference with their property and commercial rights in a manner not authorized by the Laws.

Shoppers and Katz also argued that the Regulations discriminate against private label manufacturers in a manner not authorized by the Laws.

THE DECISION OF THE COURT

The majority of the Court rejected the arguments of Shoppers and Katz. Justices MacPherson and Karakatsanis noted that legislative and regulatory changes to the Laws since 2006 have moved Ontario from a system in which pharmacies earned profits on the sale of drug products to a system that compensates pharmacies for a combination of products and services, including fees for dispensing and other professional services delivered to patients.

The majority concluded that the Regulations impose a condition for designating drug products as listed and interchangeable drug products, rather than constituting a prohibition. The Justices noted that because the Laws authorize regulations that impose conditions on generic drugs, they necessarily authorize the exclusion of drugs that do not meet the conditions. The majority noted that the Regulations do not prohibit Shoppers, Katz (or others) from participating in most of the activities in the fabricator/manufacturer/wholesaler/pharmacy/patient continuum of the Ontario drug supply chain including: continuing their large-scale and province-wide pharmacy businesses; fabricating drug products and selling them under their own labels; purchasing drugs from generic drug companies for the purpose of selling them under the generic companies' labels; and purchasing drugs from generic drug companies for resale under the generic companies' labels to other pharmacies.

As regards the issue of consistency with statutory purposes, the Justices noted that there is no dispute that the purpose of the Laws, having established a system called the Formulary for the recognition of the interchangeability of original or brand name drugs with their generic equivalents and for the listing of drugs covered by the Ontario Drug Benefits Plan is to allow pharmacists to be able to supply a prescribed drug in the cheapest form possible, both to persons who pay for the drugs themselves and to those who qualify to have the Government pay for their drugs. The majority accepted Ontario's submission that the Laws attempt to lower drug prices not only by directly regulating price, but also by indirectly regulating the compensation model of some participants in the drug supply system, with a focus on pharmacies. Unlike the Divisional Court, which focused on the impact of the Regulations on the business activities of pharmacies, the Court focused on the permissible compensation to pharmacies in the public drug system, accepting Ontario's linking of rebates (which prior to 2006 were paid to pharmacies by manufacturers as an incentive to stock their generic drug products) and the sale of private label products. The majority also accepted Ontario's position that instituting a new pharmacy reimbursement model, based on compensating pharmacies for professional services, is indispensible to achieving the purpose of the Laws and that permitting the sale of private label products would amount to the circumvention of the ban on payments from manufacturers to pharmacies from the resale of generic drugs (such as rebates). In this regard, the Laws provide detailed rules relating to compensation to pharmacies, including mark-up, dispensing fees, and professional allowances. The majority also accepted, while acknowledging that the actual effect of private labels on the market is hard to predict, that Ontario could reasonably conclude that private label products would reduce the competitiveness of the generic drug market, making future price reductions more difficult.

As regards the issue of interference with property and commercial rights, the majority noted that any interference with property or commercial rights was necessarily implied in the authority to set conditions for the listing of drugs as a benefit or as interchangeable under the Laws and as such, within the authority conferred on Ontario by the Laws.

Finally, the majority rejected the argument that the Regulations are discriminatory in an arbitrary or illegal sense, noting that under the Laws, the price of drug products depend on a variety of factors, including the timing of an application for interchangeability status and the public interest.

THE DISSENT

In a thoughtful dissent, Justice Epstein indicated that while she recognizes that Ontario could prohibit private label products by statute, she agrees with the Divisional Court that the Regulations are ultra vires.

First, Justice Epstein found that there is no rational connection between the Regulations and the purpose of the Laws. In this regard, she concluded that controlling the profitability of entities that own, operate or franchise pharmacies is not a legitimate object or purpose of the Laws, provided that it has no corresponding cost to the consumer, which she indicated was not the case in the current instance as there was no demonstrable connection between the common ownership of entities in the drug supply chain and lower drug prices. Second, Justice Epstein concluded that the intent of the Regulations was to prohibit pharmacies from earning profits through the ownership of manufacturers, and accordingly that the Regulations were designed and their effect is to prohibit rather than regulate. In this regard, Justice Epstein found that the focus on rebates and their impact on the price of drugs is not helpful to determining the issues. Third, she concluded that the Regulations interfere with commercial freedom and that the express language required to do so is not contained in the Laws. In this regard, she indicated that the authority to impose conditions for drug products to be listed and designated as interchangeable falls far short of express language authorizing interference with the right of one corporation to invest in another. Fourth, Justice Epstein found that the Regulations discriminate, in a manner not permitted by the Laws, against private label drug manufacturers and between different classes of corporations based on common ownership, when there is nothing in the Laws that specifically provides for the creation of different classes of drug manufacturers.

FINAL COMMENTS

Although they have 60 days in which to request leave to appeal to the Supreme Court of Canada (i.e., February 20, 2012), the decision of the Court has likely brought to a conclusion the debate between Shoppers and Katz and Ontario as to whether private label products, as defined in the Regulations, will be permitted. To date, only Ontario has moved to prohibit private label products. The Court's decision may encourage other provincial governments to have a closer look at this issue. While provincial jurisdiction over the sale of drugs is not in doubt, on the issue of private label products, as on other issues, one can reasonably expect a greater level of coordination among governments in the future. The increasing pressure on all governments to control the cost of drug spending means that the debate over private label products is not the last complicated and controversial drug sector issue that will create tension between governments and private sector stakeholders that the courts will be asked to consider.

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