Canada: Agreement To Assign Patents Subject To Act

The Federal Court of Appeal unanimously held that an assignment of a patent may constitute an agreement or arrangement which results in an undue lessening of competition contrary to s. 45 of the Competition Act.

In June, 1997, Eli Lilly and Company and Eli Lilly Canada Inc. (collectively, "Lilly") filed a statement of claim alleging that Apotex Inc. ("Apotex") had infringed several of its patents, including four patents that had previously been assigned to it by Shionogi & Co. Ltd. ("Shionogi") (the "Shionogi Patents"). Each of the Shionogi Patents described and claimed processes suitable for making intermediates which could be converted to the antibiotic, cefaclor, using other non-infringing processes.

Section 45

In 2001, Apotex amended its statement of defence and counterclaim to argue that the assignment of the Shionogi Patents to Lilly violated s. 45 of the Competition Act (the "Act"), which prohibits agreements that prevent or lessen competition unduly. Apotex requested a declaration that the Shionogi Patents were "invalid, void, unenforceable and of no force or effect." It sought damages under subs. 36(1) of the Act. Interestingly, the last of the Shionogi Patents had expired in 2000, and the patent for cefaclor had expired in 1994.

Once Apotex initiated its counterclaim, Lilly and Shionogi brought a series of motions for summary judgment which wound their way through the Federal Court and then the Federal Court of Appeal (the "FCA") through various appeals. Throughout these proceedings, Lilly and Shionogi argued that s. 45 of the Act could not apply as a matter of law to an assignment of patent rights because the Patent Act specifically authorizes holders of patents to assign such rights.

Lilly and Shionogi relied on the FCA's decision in Molnlycke AB v. Kimberly-Clark of Canada Ltd. ("Molnlycke") in which the FCA struck out allegations of anti-competitive activity on the basis that the assignment of a patent involves nothing more than the legitimate exercise of the patentee's monopoly.

Intervenor Status

The Commissioner of Competition (the "Commissioner") applied for and was granted leave to intervene in these proceedings. Her ability to administer the Act in respect of patent rights could be affected by the outcome of the case. In her materials, the Commissioner disagreed with Justice Hugessen's assertion that his decision was consistent with the Competition Bureau's Intellectual Property Enforcement Guidelines (the "IPEGs").

Prior Decisions

Summary Judgment

Initially, a Prothonotary concluded that Molnlycke was distinguishable from the present case in that it involved a different "factual paradigm." It allowed Apotex's claim to proceed. Justice Hugessen disagreed. Following Molnlycke, he concluded that

[the] allegation that Shionogi and Lilly entered into the agreement to assign the Shionogi Patents . . . for the purpose and with the effect of allowing Lilly to continue to have a monopoly of the Canadian market for cefaclor is simply not . .. an allegation of illegal conduct. Everyone who obtains a patent, whether by issue or by assignment, does so for the purpose of obtaining a monopoly which, by definition, is a lessening of competition. That monopoly is one that is legally sanctioned and simply cannot, as a matter of law, result in the lessening of competition being 'undue' during the life of the patent.

Accordingly, Justice Hugessen held that Apotex's counterclaim did not state a cause of action. He granted summary judgment in favour of Lilly and Shionogi.

Reversal On Appeal

On November 2, 2005 the FCA reversed Justice Hugessen's decision, finding the earlier decision in Molnlycke distinguishable from the present case:

[i]n the case of Molnlycke, there was a single supplier lawfully .entitled to sell. the subject of the patent prior to the patent being ssigned. The assignment merely transferred the patent to another company. The only effect of the assignment was that a different company could sue the defendant for infringement. There was no change in the number of patent-holders before and after the assignment.

By contrast, before the assignment of the Shionogi Patents, there were two companies with commercially viable processes for making cefaclor- namely, Shionogi and Lilly. After the assignment, there was only one such company.

Application Of Act

The FCA also pointed out that, in Molnlycke, it had found

that, in order to provide scope for the statutory monopolies - granted by the Patent Act to operate, Parliament must have intended that 'undue impairment of competition cannot be inferred from evidence of the exercise of [patent] rights alone.' Where, however, there is evidence of something more than the mere exercise of patent rights that may affect competition in the relevant market, Molnlyck does not purport to completely preclude application of the [Act].

No Violation

The FCA remanded the matter to Justice Hugessen, who found that the assignment in question did not involve something more than the mere exercise of intellectual property rights; once again, he struck out Apotex's counterclaim.

Federal Court Of Appeal

On Apotex's further appeal, the FCA concluded that Justice Hugessen had erred in law and that Apotex's counterclaim should proceed. The FCA held that the Patent Act does not immunize an agreement to assign a patent from s. 45 of the Act when the assignment increases the assignee's market power in excess of that inherent in the patent rights assigned.

It distinguished Molnlycke, finding that the combination of the assignment of the Shionogi Patents, together with Lilly's already existing ownership of patents for the other commercially viable methods of production for cefaclor, led to a lessening of competition and potentially invoked the application of s. 45.

The FCA noted that: this interpretation of . . . the Patent Act enables it and section 45 of the [Act] to operate harmoniously in accordance with the ordinary meaning of the statutory language of the provisions.

Exemptions And Purpose

The court noted that s. 45 of the Act does not contain any express exception for the exercise of patent rights, in contrast with other provisions of the Act which contain such an exemption. The FCA also noted that

an interpretation of [the Patent Act] which does not immunize the assignment of patents from section 45 when it lessens competition is consistent with the purpose of the [Act].

That purpose, as stated in section 1.1, is to "maintain and encourage" competition. The FCA also noted that this interpretation of the Patent Act is consistent with the enforcement approach set out in the IPEGs.

Meaning Of "Undue"

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

Limitations And Damages

The FCA also left for resolution at trial the particular issues of whether (i) Apotex's claims were in fact statute-barred because they were beyond the limitation period set out in s. 36 of the Act; and (ii) Apotex had sustained any actual damages, which is another pre-condition for a claim under s. 36.

Even though the assignment took place in 1995, the FCA characterized the conduct as going on "as long as the assignment had competition-lessening effect." This approach, while offered as obiter, differs from the judicial treatment of limitation periods for mergers or other analogous events which typically are viewed as complete once implemented.

Significance

The FCA's decision that the Patent Act cannot, in all circumstances, preclude the application of the Competition Act is consistent with the IPEGs and with other international jurisprudence regarding the interplay between antitrust regulation and intellectual property rights.

That said, the decision underscores the careful consideration which must be afforded to competition law issues when licenses or patents are assigned. 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.

References: Apotex Inc. v. Eli Lilly and Co., (November 2, 2005) Doc. A-579-04 (F.C .A.); Molnlycke AB v. Kimberly-Clark of Canada Ltd. (1991), 36 C.P.R. (3d) 493

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