Canada: Canada’s Federal Court of Appeal Rules on Competition Law/Patent Law Interface

In November 2005, Canada’s Federal Court of Appeal ruled on the important question of whether the assignment of a patent pursuant to section 50 of Canada’s Patent Act may constitute an agreement or arrangement to lessen competition unduly, or, in other words, a conspiracy under section 45 of Canada’s Competition Act. The Court’s decision in Apotex Inc. v. Eli Lilly and Company reversed the previous summary judgment decision of the lower court, and restored the Competition Act counter-claims of Apotex.

The recent decision is part of a complex litigation that was last reported on in the January 2005 IP Update. It began in 1997 when Eli Lilly brought an action against Apotex for infringement of eight patents related to intermediate compounds and processes for manufacture of the antibiotic "cefaclor." Four of the eight patents had been assigned to Lilly in 1995 by Japanese-based Shionogi & Co. Ltd., giving Lilly a monopoly in Canada on known processes for producing the drug. By way of counterclaim, Apotex alleged that these assignments constituted an agreement that unduly lessened competition, contrary to section 45 of the Competition Act, thereby entitling Apotex to damages under section 36 of the Competition Act.

Motions by Lilly and Shionogi for summary judgment were granted by the Federal Court in October 2003, on the grounds that the assignment of the patents did not disclose a cause of action under the Competition Act. In so finding, the judge relied on the Federal Court of Appeal’s 1991 decision in Molinlycke AB v. Kimberly-Clark of Canada Ltd., which held that "the impairment of competition inherent in the exercise of rights provided by [the Patent] Act" could never be "undue" for purposes of section 45 of the Competition Act.

On appeal by Apotex, the Federal Court of Appeal held, in June of 2004, that Molinlycke does not preclude application of the Competition Act in all cases in which the impugned conduct comprises the exercise of patent rights. In this respect, the Court pointed to section 32 of the Competition Act, which specifically authorizes the imposition of various special remedies, including compulsory licensing and revocation of patents, where the use of (or refusal to use) an intellectual property right lessens competition unduly. Accordingly, the Court of Appeal found that the judge on the motion erred in law by failing to consider Apotex’s argument that the Shionogi assignment, which reduced from two to one the number of companies possessing Canadian patent rights to cefaclor manufacturing processes, was "something more than the mere exercise of patent rights," and thus constituted conduct to which the Competition Act’s conspiracy provisions could in fact apply.

Pursuant to instructions from the Federal Court of Appeal, the trial judge reconsidered the motions for summary judgment and concluded that, while restrictions on competition that are not specifically authorized by the Patent Act are subject to section 45 of the Competition Act, agreements that are authorized by the Patent Act fall within the "mere exercise" of patent rights and, as such, are exempt from section 45. As a result, the trial judge decided that while the existing Lilly patents combined with the assigned Shionogi patents may have worked to confer greater market power than was inherent in the assigned patents alone, because there was no agreement or term in addition to the assignment of patents that could comprise "something more" than mere assignment, section 45 of the Competition Act did not apply. Accordingly, the trial judge again granted the motions to dismiss Apotex’s Competition Act claims.

With its November 2005 ruling, the Federal Court of Appeal has now reversed this decision and restored Apotex’s Competition Act claims. At the heart of the Court’s decision is the conclusion that there is no true conflict between section 50 of the Patent Act and section 45 of the Competition Act, because section 50 of the Patent Act does not compel or expressly authorize what section 45 of the Competition Act forbids, and vice versa. As a result, it is open to litigants in Canada to argue that, even absent any additional agreement between the assignor and assignee, the circumstances surrounding a patent assignment including, in particular, the nature of the existing patent portfolio of the assignee, may support a Competition Act conspiracy claim, notwithstanding the right to assign provided under section 50 of the Patent Act.

The Federal Court of Appeal’s decision is of interest to business and legal practitioners in the fields of intellectual property and competition/antitrust, because the Federal Court’s summary judgement decision represented a significant departure from the Competition Bureau’s stated approach to the interface between competition policy and intellectual property rights. The Competition Bureau’s Intellectual Property Enforcement Guidelines (IPEGs) define the "mere exercise of an IP right" as either the owner’s unilateral exclusion of others from using the intellectual property or the non-use of the intellectual property by the owner. In contrast, non-unilateral conduct, including "[a] transfer of IP rights," is clearly stated by the Competition Bureau as being, in its view, "something more than the mere exercise of the IP right." The Competition Bureau’s IPEGs state that the mere exercise of intellectual property rights does not violate the Competition Act’s general provisions (which include the section 45 conspiracy provision), regardless of the degree to which competition is affected.

The Commissioner of Competition was an intervener before the Federal Court of Appeal in this appeal, and argued strenuously (and apparently convincingly) that the trial judge had erred in construing the scope of the Competition Act too narrowly. The Federal Court of Appeal’s reversal of the trial judge’s decision squares well with the views of the Competition Bureau on the Competition Act / Patent Act interface, as expressed in the IPEGs.

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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