Settlements of patent litigation between brand name and generic pharmaceutical companies have been the subject of significant antitrust/competition enforcement activity in the United States and Europe. In Canada, the Competition Bureau (Bureau) has long expressed interest in such settlements but, until now, has not taken any enforcement action or provided guidance on its likely approach. That changed on September 23, 2014, with the release of the Bureau's White Paper Patent Litigation Settlement Agreements: A Canadian Perspective. The White Paper provides the Bureau's preliminary views as to how Canadian competition law could apply to such settlements. The White Paper makes it clear that these are preliminary views only, and that the Bureau is still considering the appropriate enforcement approach in Canada.
The White Paper does not provide clarity on the Bureau's likely enforcement approach, but does provide hints on what that approach is likely to involve. Most regrettably, the Bureau has not (yet) ruled out the possible application of the criminal conspiracy provisions of the Competition Act to such settlements. However, the Bureau has provided limited guidance on at least some of the circumstances that could attract criminal review. On the positive side, the Bureau has hinted at the types and amounts of settlement payments that would be most likely to survive antitrust scrutiny.
The highlights of the White Paper include the following:
- As noted above, the stated goal of the paper is to provide the Bureau's preliminary views as to how Canadian competition law could apply to these settlements. The Bureau expressly states that it is still considering the appropriate enforcement approach for Canada and will engage in further public consultation.
- The Bureau explicitly acknowledges the significant differences between U.S. and Canadian pharmaceutical regulatory regimes, including the following:
- the lack of a notification system for patent settlements in Canada;
- the absence in Canada of a 180-day period of exclusivity for the first generic to challenge a brand's patent;
- "particularities" of the Canadian Patented Medicines (Notice Of Compliance) Regulations (PM (NOC) Regulations) prohibition proceedings; and
- the potential for generics to receive damages from brands in Canada under section 8 of the PM (NOC) Regulations.
- While it expressly acknowledges these important differences between the regulatory schemes in Canada and the United States, the Bureau takes the view that a patent litigation settlement can be anti-competitive under Canadian law and subject to Bureau review: "The Bureau does not believe that these differences diminish the role of competition analysis in reviewing potentially anti-competitive settlements."
- Unfortunately, the Bureau has not (yet) excluded application of the criminal provisions of the Competition Act to settlements of patent litigation. Notwithstanding the 2013 decision of the U.S. Supreme Court in Actavis1 that a "rule of reason" approach is appropriate in these cases, the Bureau has said that it may review and prosecute a patent litigation settlement under the per se criminal conspiracy provision (section 45) of the Competition Act. The White Paper states that if the settlement includes conduct that goes beyond the scope of the patent, such as fixing a generic entry date beyond the term of the patent or including products that are outside of the patent litigation, the Bureau would likely review the settlement under section 45. In addition, if the Bureau finds that a patent settlement is a "naked restraint" on competition, it may pursue the matter under section 45. Unhelpfully, the White Paper does not exclude the possibility of criminal review even outside those two parameters. In other contexts, however, the Bureau has made it clear that section 45 is reserved for "hard core" criminal conduct. One hopes that future pronouncements from the Bureau will remove this uncertainty and make it clear that, absent extraordinary circumstances, patent litigation settlements will not be subject to criminal prosecution in Canada.
- The White Paper indicates that if the Bureau examines a patent settlement under the civil provisions of the Competition Act, it is most likely to do so under section 90.1 (agreements among competitors) or section 79 (abuse of dominance). Under section 90.1, the available remedy is limited to a prohibition order going forward. Under section 79, the Competition Tribunal can make prohibition orders and may also order payment of administrative monetary penalties (AMPs) of up to $10 million. No damages or disgorgement orders are available in proceedings under section 79 or section 90.1.
- In civil proceedings under section 79 or section 90.1, the competitive effects issue is whether the settlement is likely to result in a substantial prevention or lessening of competition (SPLC). The White Paper says that the Bureau will apply a "but for" test: i.e., but for the settlement, would the parties have been likely to compete, leading to lower-cost alternatives for consumers? The Bureau notes that the alternative "but for" the settlement is not necessarily the fully litigated outcome, but could be an alternative settlement with less restrictive terms. The Bureau provides no guidance on how it would go about determining what would have happened "but for" the settlement.
- The White Paper distinguishes between settlements which involve only a date for generic entry, and those which also involve a payment or other consideration to the generic. The Bureau says the latter could amount to "pay for delay" agreements. The Bureau offers the generally unhelpful statement that "all else being equal, the greater the value transfer from the brand to the generic, the greater the likelihood of an SPLC." In assessing the "value transfer," the Bureau will consider not only cash payments, but also other forms of consideration: e.g., a promise by a brand name manufacturer not to introduce an authorized generic.
- Most helpfully, the White Paper provides some guidance on the sorts and amounts of payments to a generic which could withstand scrutiny in Canada. The Bureau makes reference (with apparent approval) to the fact that, in the U.S., a payment up to the patentee's expected litigation costs can be permissible. It goes on to suggest that in Canada, in addition to litigation costs, a payment of an amount up to the patentee's estimated liability for section 8 damages under the PM (NOC) Regulations may also be defensible.
- The White Paper ends on a controversial note with the suggestion that Canada adopt a system of mandatory notification of pharmaceutical patent settlement agreements.
While the White Paper provides only the Bureau's preliminary views, some practical tips can be gleaned from it:
- Given the Bureau's keen interest but limited guidance, and given the Bureau's unclear position on criminal enforcement, a cautious approach is warranted pending further guidance or enforcement action by the Bureau.
- Patent litigation settlements that could delay generic entry beyond the life of the patent are illegal in Canada and could lead to criminal prosecution under section 45 of the Competition Act.
- Patent litigation settlements which provide for a generic entry date, without a payment or other consideration to the generic, do not appear to raise competition issues in Canada.
- Patent litigation settlements which include a payment to the generic will be less susceptible to review if the payment does not exceed the sum of the patentee's anticipated litigation costs and its estimated section 8 damages.
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1 Federal Trade Commission v. Actavis, 133 S. Ct. 2223 (2013).
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