Patents And Competition

The Federal Court of Appeal is hearing a seminal case dealing with the interface between IP and competiton law.

As is the case with other competition enforcement agencies, the Canadian Competition Bureau (the Bureau) has had to consider the appropriateness of applying the strictures of competition law to the exercise of intellectual property rights. The challenge for enforcement authorities like the Bureau is to prevent anticompetitive conduct without interfering with the legitimate exercise of these IP rights.

According to its Intellectual Property Guidelines (the IP Guidelines), the Bureau will apply the general provisions of the Competition Act only to conduct that involves something more than the "mere exercise" of an IP right. However, as an ongoing case in Canada’s Federal Court demonstrates, there is often disagreement about what conduct goes beyond the "mere exercise" of an IP right and thus crosses the boundary into anticompetitive behaviour.

The case in which this issue has been raised, Eli Lilly and Co v Apotex Inc, originally began in 1997 when Eli Lilly filed a statement of claim in the Federal Court of Canada, Trial Division (the Trial Division), alleging that Apotex had infringed several of its patents, including four patents that had been assigned to Lilly by Shionogi and Company. Each of the Shionogi patents described and claimed processes suitable for making intermediates which could be converted to the antibiotic cefaclor using non-infringing processes.

In its statement of defence, Apotex claimed that the assignment of the Shionogi patents to Lilly violated section 45 of the Competition Act, which prohibits agreements that prevent or lessen competition unduly. Apotex alleged that the Shionogi patents were assigned as part of an agreement between Shionogi and Lilly to preserve Lilly’s monopoly over the manufacture and sale of cefaclor in Canada by preventing other manufacturers from entering the Canadian market with this product. Apotex also counterclaimed for damages and a declaration that the Shionogi patents were "invalid, void, unenforceable and of no force or effect".

Lilly and Shionogi brought motions to strike out certain paragraphs of Apotex’s statement of defence and counterclaim, including the paragraphs relating to section 45. In this last regard, they relied on a decision of the Federal Court of Appeal (the FCA) in which the court had struck down certain allegations of anticompetitive conduct relating to the assignment of a patent on the grounds that this involved nothing more than the legitimate exercise of the patent holder’s IP rights.

At first instance, a prothonotary (a non-judicial officer of the Federal Court appointed to consider certain preliminary motions) concluded that the FCA decision was distinguishable on its facts, and allowed Apotex’s claims under section 45 to proceed. However, on appeal, a judge of the Trial Division overruled the prothonotary and held that the FCA precedent was binding. The Trial Division judge held that a patent provides its holder with a "legally sanctioned" monopoly under Canada’s Patent Act and thus the assignment of a patent right "simply cannot, as a matter of law, result in the lessening of competition being ‘undue’ during the life of the patent".

On further appeal, the FCA reversed the Trial Division judge’s decision. The FCA agreed with the prothonotary that its earlier judgement was indeed distinguishable on its facts and did not govern in this instance. The FCA stated that, whereas in its earlier decision the patent assignment in question had not resulted in a reduction in competitors, the arrangement between Lilly and Shionogi in the instant case meant that Lilly had become the only company capable of manufacturing and selling cefaclor in Canada. The FCA held that this result could be construed as "evidence of something more than the mere exercise of patent rights" and therefore it was appropriate to allow Apotex’s claim of anticompetitive conduct to proceed. The FCA remanded the case back to the Trial Division and directed the judge to consider whether the facts of the case as pleaded could be sufficient to prove that Lilly and Shionogi had contravened section 45 of the Competition Act.

On remand, the Trial Division judge held once more that there was no evidence of an unlawful agreement under section 45. In language that seemed inconsistent with the FCA’s decision, the judge reiterated his view that the assignment of a patent is a transaction which has been specifically authorised by parliament under the Patent Act and thus is presumptively legal, regardless of the number of parties involved. The judge also asserted that his finding was entirely consistent with the Bureau’s IP Guidelines.

Not surprisingly, Apotex has appealed to the FCA yet again. This time, however, the Bureau has also sought leave to intervene in the appeal, arguing that the Trial Division judge’s decision would cause "great mischief " if upheld.

In its written submissions seeking leave to intervene, the Bureau argued that the Trial Division judge’s approach is, in fact, inconsistent with the IP Guidelines. For example, the IP Guidelines specifically state that where "an IP owner licenses, transfers or sells the IP to a firm or a group of firms that would have been actual or potential competitors without the arrangement, and if this agreement creates, enhances or maintains market power, the Bureau may seek to challenge the arrangement under the appropriate section of the Competition Act". The Bureau argued that the Trial Division judge’s decision lacks support in legal precedent and public policy as well.

The Bureau’s application to intervene was granted by the FCA on 27 May 2005. The FCA held that the Bureau had standing to intervene because its ability to administer the Competition Act in respect of patent rights may be affected by the outcome of the case. The FCA also held that the relationship between the Patent Act and the Competition Act involves a question of statutory interpretation that is justiciable and of public interest.

The appeal is expected to be heard sometime before the end of this year.

The Eli Lilly case is a paradigmatic example of a situation in which the courts – and the Bureau – must contend with defining the parameters of the legitimate use of IP rights.

The same exercise is taking place in other jurisdictions as well. In both the United States and the EU, for example, one of the issues that has generated considerable litigation (and disagreement) is when will a dominant firm’s refusal to license IP amount to unlawful monopolisation/abuse of dominance. It is clear in both jurisdictions that the refusal to grant a licence is not in itself unlawful and that "something more" (the US term) or "exceptional circumstances" (the EU term) is – or are – required to contravene the law. What remains unsettled, however, is when and in what context the conditions for illegality will be satisfied (see eg In re Independent Services Organization Antitrust Litigation in the US and the Magill and IMS Health decisions in the EU).

The same considerations lie at the heart of the Eli Lilly case. The concern with the Trial Division’s decision is that it would appear to insulate patent licensing agreements from scrutiny under the Competition Act in all circumstances. As argued by the Bureau, this absolutist approach seems to go beyond accepted principles in Canada (and elsewhere) and could provide patent holders with carte blanche to engage in abusive and anticompetitive behaviour when exercising their IP rights.

Competition Bureau, Intellectual Property Enforcement Guidelines, http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/en/ct01992e.html.

Decisions of the Trial Division in Eli Lilly and Co v Apotex Inc are available at http://www.fct-cf.gc.ca/; decisions of the FCA in Apotex Inc v Eli Lilly and Co are available at http://www.fca-caf.gc.ca/.

In re Independent Services Organization Antitrust Litigation, 2000 US App LEXIS 2303 (DC Cir).

Radio Telefis Eireann & Others v The Commission ("Magill"), Case C-241/91 1995 ECR I-743.

IMS Health Gmbh & Co. OHG v. NDC Health Gmbh & Co. KG, Case T- 184/01 - 2002 ECR II-3193.