Canada: IP And Competition: The Competition Act Applies To Assignment Of Patents

On 2 November 2005, a unanimous Federal Court of Appeal (the FCA) gave an important decision in Apotex Inc v Eli Lilly and Co concerning the interplay between competition law and intellectual property rights in Canada. The principal issue addressed by the FCA was whether the assignment of a patent could constitute an agreement or arrangement to lessen competition unduly, contrary to section 45 of the Competition Act. The FCA held that the assignment of a patent may, as a matter of law, result in an undue lessening of competition, notwithstanding that this assignment is otherwise authorised and lawful under Canada’s patent legislation.

As described previously in CLI 12 July 2005 (p12), the FCA’s decision has its roots in a long-standing patent infringement dispute between Eli Lilly and Apotex concerning the manufacture of the antibiotic cefaclor. In 1997, Eli Lilly commenced an action against Apotex, alleging that it had infringed eight of its manufacturing process patents, four of which had been assigned to Eli Lilly by Shionogi in 1995. In 2001, Apotex amended its statement of defence and counterclaim to argue that the assignment of these patents constituted an unlawful agreement, contrary to section 45 of the Competition Act, thereby entitling Apotex to damages under section 36 of the Act. Interestingly, the process patents in question had expired in 2000 and the patent for cefaclor had expired in 1995.

Once Apotex had initiated its counterclaim, a series of motions for summary judgment was brought by Eli Lilly and Shionogi regarding the potential application of section 45. These motions wound their way through the Federal Court and then the FCA through various appeals. Initially, Justice Hugessen, a judge of the Federal Court Trial Division, held that Apotex’s conspiracy counterclaim should be dismissed. Apotex’s appeal of this decision was allowed by the FCA and the matter was remanded back to Justice Hugessen for further consideration. Justice Hugessen refused to depart from his original reasoning, however, and struck the counterclaim in a second decision. Apotex appealed once more to the FCA which, in its 2 November judgment, held that Justice Hugessen had erred in law and that Apotex’s counterclaim should proceed.

Of special note is the fact that the Competition Bureau applied for and was granted leave to intervene in these proceedings. In its application for leave, the Bureau argued that Justice Hugessen’s decision would cause "great mischief " if upheld and lacked support in legal precedent and public policy as well. In its decision to grant the Bureau’s application for leave, the FCA held that the Bureau had standing because its ability to administer the Competition Act in respect of patent rights could be affected by the outcome of the case. In particular, the Bureau would be able to provide the FCA with its input regarding Justice Hugessen’s assertion that his decision was consistent with the Bureau’s intellectual property enforcement guidelines (IPEGs). In its materials, the Bureau disagreed with this view.

Throughout the proceedings, Eli Lilly and Shionogi had argued that section 45 could not apply as a matter of law to an assignment of patent rights because the Canadian Patent Act specifically authorises holders of patents to assign such rights. The argument was that an assignment of rights made lawful by the Patent Act is incapable, by definition, of being unlawful under the Competition Act, even if it lessens competition. Eli Lilly and Shionogi relied on a 1991 decision of the FCA in Molnlycke AB v Novopharm Kimberly-Clarke of Canada Ltd as authority for this proposition, which was accepted by Justice Hugessen in his decision dismissing Apotex’s counterclaim.

The FCA disagreed with Justice Hugessen and held that Molnlycke applies only when the market power created by the assignment is inherent in the patent assigned – ie where the assignment of the patent in and of itself increases or creates market power in a relevant market. However, when there are other factors which contribute to the creation or increase of market power, then Molnlycke will not preclude the application of section 45. The FCA distinguished Molnlycke from the case at bar on the basis that it was the combination of the 1995 assignment from Shionogi, together with Eli Lilly’s already existing ownership of patents for the other commercially viable methods of production for cefaclor, which had led to a lessening of competition and potentially invoked the application of section 45.

In reaching its decision, the FCA also noted that section 45 does not contain any express exception for the exercise of patent rights, in contrast to other provisions of the Competition Act which contain such an exemption. In addition, the FCA held that "an interpretation of [the Patent Act] which does not immunise the assignment of patents from section 45 when it lessens competition is consistent with the purpose of the Competition Act" which, as stated in section 1.1, is to "maintain and encourage" competition. Furthermore, the FCA found that this interpretation of the Patent Act was more consistent with the enforcement approach set out in the Competition Bureau’s IPEGs.

The alternative argument offered by Eli Lilly and Shionogi was that, even if section 45 could apply in theory, it did not apply in practice because on the facts of the case the assignment did not lessen competition unduly. The FCA dismissed this argument on the basis that even Justice Hugessen had found that, on the facts, there had been at least a lessening of competition in the relevant market. The FCA stated that the question of whether this lessening of competition was "undue" should be decided at trial.

The FCA also left to trial the particular issues of whether (1) Apotex’s claims were in fact statute-barred because they were beyond the limitation period set out in section 36 of the Competition Act, and (2) Apotex had sustained any actual damages, another pre-condition for a claim under section 36. With respect to the relevant limitation period, it is notable that even though the assignment took place in 1995, the FCA characterised the conduct as ongoing "as long as the assignment had competition-lessening effect". Although the FCA’s comments on this point are obiter, this approach differs from the judicial treatment of limitation periods in respect of mergers or other analogous events which are typically viewed as complete once implemented.

Overall, the FCA’s decision that the Patent Act cannot in all circumstances oust the application of the Competition Act is hardly a new or surprising position. This general proposition is consistent with the Bureau’s IPEGs and with other international jurisprudence regarding the interplay between competition law and intellectual property rights. That said, the FCA’s decision is notable in that it underscores the careful consideration which must be afforded to competition law issues when licences or patents are assigned. As demonstrated in this case, the assignment of a patent right could land the parties in the middle of an alleged criminal conspiracy, raising the prospect of prosecution and follow-on civil actions.

The FCA’s decision is available from the Federal Court of Appeal’s website at: http://decisions.fca-caf.gc.ca/fca/2005/2005fca361.shtml.

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