Canada: Federal Court of Appeal Confirms Application of Competition Act to IP Rights

Last Updated: November 15 2005

Article by Brian Facey, Jason Gudofsky, Sheldon Burshtein and Chris Hale, ©2005 Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Competition & Intellectual Property, November 2005

On November 2, 2005, the Federal Court of Appeal released its second decision in Apotex v. Eli Lilly and Company. The decision confirms that the Competition Act applies to intellectual property rights (IPRs), under certain circumstances.

In summary:

  • The Federal Court of Appeal was asked to consider whether an assignment of a patent can constitute an unlawful agreement or arrangement to lessen competition unduly, contrary to section 45 of the Competition Act.
  • Eli Lilly argued that a patent assignment could never be contrary to the Competition Act because section 50 of the Patent Act explicitly recognizes the right of a patent holder to assign its patent.
  • Apotex, with the support of the Commissioner of Competition as intervener, argued that an assignment is subject to the Competition Act, including the prohibition on agreements that unduly lessen competition. The Federal Court of Appeal agreed.


Eli Lilly sued generic drug manufacturer Apotex, alleging infringement of eight patents related to intermediate compounds and processes for preparing intermediates useful in the production of the antibiotic cefaclor. Four of these patents had been assigned to Eli Lilly in 1995 by Shionogi & Co. Ltd. ("Shionogi"), a non-related company. Pursuant to section 36 of the Competition Act, Apotex counterclaimed against both Eli Lilly and Shionogi asserting, among other things, harm arising from the assignment, which Apotex alleged was anti-competitive contrary to section 45 of the Competition Act.

Eli Lilly and Shionogi brought motions for summary judgement alleging that Apotex’s counterclaim did not disclose a cause of action under the Competition Act. Following various appeals and a remand back to the Federal Court, Hugessen J. ultimately found that the Competition Act could apply to an agreement involving patent rights, but that it would not apply unless the agreement went beyond a mere exercise of the rights authorized in the Patent Act. Since the assignment of patents was specifically authorized by section 50 of the Patent Act, it could not be considered "undue" for the purposes of the Competition Act. Hugessen J. found this despite the fact that he had concluded that the assignment resulted in a lessening of competition because, according to Justice Hugessen, it "increase[d] [Eli Lilly’s] monopoly power".

Federal Court of Appeal Decision

The Federal Court of Appeal explained that section 50 of the Patent Act does not immunize the assignment of a patent from section 45 of the Competition Act "when the assignment increases the assignee’s market power in excess of that inherent in the patent rights assigned". The Court found that section 50 of the Patent Act and section 45 of the Competition Act do not conflict since the relevant provision of the Patent Act only authorizes, and does not compel, the assignment of a patent. Accordingly, the Court concluded that "... the assignment of a patent may, as a matter of law, unduly lessen competition" (emphasis added).

The good news for IP owners is that the Federal Court of Appeal effectively confirmed that an owner’s unilateral exclusion of others from using its IP and its right to use or not use its IP constitutes a mere exercise of an IPR that will not raise competition issues under the general provisions of the Competition Act (subject only to the potential application of a special remedies provision under section 32 of the Act). At the same time, the decision scales back the immunity that Justice Hugessen had accorded to certain conduct involving patents, and which presumably would have applied equally to all other conduct involving IPRs specifically authorized by IP legislation. Conduct that goes beyond the mere exercise of an IPR, such as an assignment of a patent right that results in the acquisition of market power can constitute "more than the mere exercise" of an IPR and is therefore subject to the Competition Act.

Of particular note is the fact that the Federal Court of Appeal referred to the Competition Bureau’s Intellectual Property Enforcement Guidelines (the IPEGs). While acknowledging that the IPEGs are neither binding nor determinative, the Court accepted them as an aid for interpreting the Competition Act. Although the Court did not explicitly endorse the IPEGs, its decision was broadly consistent with the interpretation in the IPEGs that a "mere exercise" of an IPR cannot contravene the general provisions of the Competition Act, including section 45.

The Federal Court of Appeal’s decision attempts to strike a balanced approach to the dual objectives of (i) promoting conditions for research and development and innovation, which can be encouraged through the grant of exclusivity inherent in an IPR; and (ii) promoting conditions for competitive markets, which can be encouraged through the elimination of barriers to entry deriving from the grant of exclusive rights. However, the fact that conduct going beyond the "mere exercise" of an IPR is subject to the Competition Act can have implications for a broad range of commercial arrangements between independent parties involving IPRs. Scrutiny under the Competition Act cannot be avoided merely because an IPR being developed, assigned, acquired or otherwise implicated derives from a statute. Competitive effect must be considered. This result is broadly consistent with how many other major jurisdictions deal with the intersection between IP and competition laws, such as the EU and the U.S.

Finally, while the Federal Court of Appeal’s decision has brought clarity to the intersection between IPRs and competition law, and is broadly consistent with the IPEGs, there is at least one critical issue that was never addressed by either the Federal Court or Court of Appeal and another critical issue that the Federal Court of Appeal decided should be determined at trial.

First, none of the reported decisions appear to consider what constitutes the "relevant market", despite referring to Eli Lilly as having a "monopoly". Rather, the courts appear to assume that the relevant market is the market for cefaclor. Neither potentially substitutable pharmaceutical products or Apotex’s apparent ability to obtain bulk cefaclor from another source that allegedly did not infringe the Shionogi or Eli Lilly patents were even considered as factors that might lead to a broader definition of the relevant market. The Court of Appeal found no basis to interfere with the lower Court’s finding that the assignment of the patents did lessen competition, and left for trial the question of whether the lessening of competition was undue.

This issue is critical because it is within the context of a relevant market that the anti-competitive effect of the impugned patent assignment must be considered. This is particularly true in the context of pharmaceuticals, where Canadian regulatory regimes create specific market forces between originator and generic drugs. Should the Competition Bureau, Competition Tribunal and/or Canadian courts interpret this decision as indicating that an IPR necessarily constitutes a relevant product market in antitrust terms, it would not only be inconsistent with the IPEGs, it could potentially lower the effective bar to a finding that conduct involving IPRs contravenes the Competition Act.

Second, Eli Lilly pleaded that the counterclaim by Apotex was statute barred because subsection 36(4) of the Competition Act provides that "[n]o action may be brought ... after two years from ... a day on which the conduct was engaged in". The assignment agreement had been concluded, and the underlying patents had even expired, more than two years before the counterclaim was issued. The Federal Court of Appeal nevertheless found that there were possible grounds for a court to conclude that the action was not statute barred, including that the assignment could be viewed as a "continuing" practice that may have anti-competitive effects even after the expiry of the patents. The Court concluded that this question should be determined at trial and not on a motion for summary judgement.

This issue is important because a later determination that the counterclaim is not statute barred could severely restrict the application of the limitation period. Many structural arrangements, such as mergers, joint ventures, or assignments, and even quasi-structural arrangements, such as licensing agreements, constitute "continuing" conduct that could be subject to a claim for damages under section 36 of the Competition Act notwithstanding that an impugned agreement may have crystallized more than two years before a claim is launched. Undoubtedly, the trial court’s disposition of this issue will be watched closely by the business community and the bar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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