Canada: Federal Court Of Appeal Confirms Ip Rights Not Categorically Immune From Competition Act Scrutiny - Apotex v. Eli Lilly and Shionogi

The Federal Court of Appeal's recent decision provides some needed judicial guidance on the interface between intellectual property and competition laws in Canada. The Court concluded that the assignment of a patent (which is expressly permitted by section 50(1) of the Patent Act¹ may, as a matter of law, constitute an agreement to unduly lessen competition contrary to section 45 of the Competition Act² where there is evidence that the assignment is something more than the mere exercise of an intellectual property right.

In 1995, Shionogi, a Japanese pharmaceutical manufacturer, assigned to Eli Lilly four process patents related to the manufacture of the drug cefaclor. At that time, Eli Lilly owned four other of its own patents also related to cefaclor. In 1997, Eli Lilly sued Apotex for infringement of the cefaclor patents. Apotex counterclaimed against Eli Lilly and added Shionogi as a party, alleging that the assignment of the patents constituted an agreement to unduly lessen competition contrary to section 45(1) of the Competition Act.³ Apotex claimed that by combining the two sets of patents through an assignment by Shionogi to Lilly, Lilly acquired a monopoly, not through its own patent protection, but by a negotiated agreement contrary to section 45. Eli Lilly and Shionogi brought motions for summary judgment to dismiss Apotex' section 45 counterclaim. The Trial Division of the Federal Court granted the summary judgment motions of Eli Lilly and Shionogi. Citing Molnlycke AB v. Kimberly-Clark of Canada Ltd. Et Al.⁴ (Molnlycke), the Court held that any lessening of competition resulted from Shionogi's assignment of patents to Eli Lilly. Since the right to assign was authorized by section 50 of the Patent Act, any lessening of competition following the exercise of the right to assign could not be undue.

Apotex appealed the decision. The appeal was allowed on the ground that Molnlycke only applied when the lessening of competition resulted from the assignment alone. The Court of Appeal noted that if there was evidence of something more than the mere exercise of patent rights, the Competition Act claim was not necessarily excluded. The matter was referred back to the Trial Division to address certain questions. The Trial Division confirmed the view that Molnlycke applied. The Court held that any lessening of competition resulted from the assignment alone since there was no agreement alleged or shown between Shionogi and Eli Lilly other than the assignment. Again, Apotex appealed. As a signal of the importance of the case to competition law and policy, the Commissioner of Competition was granted intervener status on the appeal.

The Federal Court of Appeal decided in Apotex's favour, permitting its counterclaim to proceed, and holding that the assignment could constitute an agreement to lessen competition within the meaning of section 45(1). While an assignment of patent rights on its own is not a violation of section 45(1), the assignment of the four patents to Eli Lilly resulted in a virtual monopoly for Eli Lilly in the manufacture of bulk cefaclor due to Eli Lilly's existing ownership of other patents. The Court concluded that:

[36] . the Judge erred in law by holding that the assignment of patents is exempt from section 45 when, by reason of the assignee's existing ownership of other patents, the assignment transfers more market power than that inherent in the patents assigned.

Therefore, the assignment constituted an agreement that lessened competition within the meaning of section 45(1). The Court allowed the matter to proceed to trial on all other issues, except whether there was a lessening of competition as a result of the assignment.⁵ The Court did not find that the assignment violated section 45(1). At trial, Apotex will still have to establish all of the elements of the offence, including that the lessening of competition resulting from the assignment was "undue" and the amount of any actual loss or damage suffered by Apotex as a result of the assignment.

The Federal Court of Appeal rejected the argument of Eli Lilly and Shionogi that since the right to assign is one of the rights conferred on patentees by Parliament, any lessening of competition following the exercise of the right to assign cannot be undue. Eli Lilly and Shionogi cited Molnlycke as binding authority for this proposition.

The Court distinguished Molnlycke from the present case on the basis that Molnlycke dealt with the situation in which the only market power created by the assignment was that inherent in the patent assigned. The assignment in Molnlycke resulted in a different company holding the patent, but there was no change in the total number of patent holders before and after the assignment. In this case, something more than the mere exercise of patent rights affected competition in the cefaclor market. The assignment gave Eli Lilly increased power in the market for bulk cefaclor as a result of its existing ownership of related patents. The Court pointed to the existence of section 32 of the Competition Act as evidence that there was no legislative intent to support the conclusion that the granting and assignment of intellectual property rights in accordance with the Patent Act or other intellectual property legislation necessarily immunizes the intellectual property holder from scrutiny under Canada's competition laws. Section 32 provides the Federal Court with the power to make broad remedial orders where it finds that an intellectual property holder has unilaterally used its rights to prevent or lessen competition unduly (i.e., without the need for an agreement as in section 45). The Court, in this case, accepted Apotex' argument that section 50 of the Patent Act and section 45 of the Competition Act can be read harmoniously, and that while section 50 permits patents to be assigned, neither the holding in Molnlycke nor section 50 of the Patent Act exempt the assignor and assignee from the need to comply with the Competition Act.⁶

The Federal Court of Appeal considered that Apotex' argument was consistent with the Competition Bureau's Intellectual Property Enforcement Guidelines ("IPEGs"). The IPEGs contemplate that something more than the mere exercise of an intellectual property right is necessary in order to constitute a violation of any of the general provisions of the Competition Act (which include section 45). The Bureau applies the general provisions of the Competition Act when intellectual property rights form the basis of arrangements (which may include the transfer or license of such rights) and when competitive harm results from the arrangement and not just from the exercise of the intellectual property rights.

The IPEGs state, at section 4.2, that: "If 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 arrangement creates, enhances or maintains market power, the Bureau may seek to challenge the arrangement under the appropriate section of the Competition Act."

The decision of the Federal Court of Appeal makes it clear that assignments of patents, or other intellectual property rights, are not immune from application of the Competition Act. Where such assignments result in market power beyond that which is inherent in the intellectual property right being assigned, they may raise competition concerns. In particular, assignments of patents among competing holders of related patents may be subject to scrutiny.

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