By Livia Aumand, François Baril and Patrick Cashin
On March 31, 2016, the Competition Bureau released its updated Intellectual Property Enforcement Guidelines (the “IPEGs”). Of particular interest to the pharmaceutical industry are the sections of the IPEGs related to the application of competition law to settlement agreements under the Patented Medicines (Notice of Compliance) Regulations (“PM(NOC) Regulations”) and to “soft” product switches.
Settlements under the PM(NOC) Regulations
The IPEGs did not previously set out how the Bureau should approach settlement agreements under the PM(NOC) Regulations. This has been addressed by the updated IPEGs, which indicate that generally, a settlement agreement whereby the generic is permitted to launch before or upon patent expiry will not be reviewed by the Bureau. However, where the agreement also includes a payment from the innovator to the generic, the Bureau may review the agreement under the civil provisions of the Competition Act (the “Act”) dealing with anti-competitive agreements between competitors and, possibly, the abuse of dominance provision.
Both of the above-noted civil provisions of the Act require the Bureau to establish that a settlement has had, is having, or is likely to have the effect of substantially preventing or lessening competition in a market. In order to determine whether this test is met, the Bureau will consider what would have likely occurred “but for” the settlement agreement, and assess whether the payment was so large as to significantly affect (delay, cancel or limit) a generic’s entry into the market.
In circumstances where the Bureau concludes that the settlement agreement does or is likely to substantially prevent or lessen competition, the Bureau will consider whether the agreement generates any countervailing efficiencies. For example, if the restriction on competition led to long-term increases in product selection, quality, output and productivity, the Bureau may not seek a remedy.
In the updated IPEGs, the Bureau also clarifies that it will typically not review agreements pursuant to the criminal conspiracy provisions of the Act (e.g. price fixing, market allocation, suppression of supply) unless the settlement clearly extends beyond the exclusionary potential of the patent or is a “sham”. The IPEGs include some specific examples of the types of agreements that might attract such scrutiny:
(a) Where the generic is restricted from entry into the market beyond the term of the patent;
(b) Where the agreement restricts competition in respect of products not at issue in the application under the PM(NOC) Regulations; or
(c) Where the parties recognize that the patent is invalid and/or not infringed.
With respect to investigations relating to abuse of dominance, the updated IPEGs indicate that the Bureau would consider possible bone fide business justifications (pro-competitive rationales for the conduct) in its determination of whether the settlement was anti-competitive.
If the Bureau concludes that there has been a breach of the civil provisions of the Act it may seek remedies including prohibition orders and, in the case of abuse of dominance, administrative monetary penalties of up to $10 million for a first offence and up to $15 million for subsequent offences.
Product switching is a practice whereby a company stops marketing or producing one product, while concurrently beginning to market a new, similar product (e.g. a slightly different formulation or dose). While there are many reasons to do so that will not give rise to competition law issues (e.g., product improvement, refinement), the Bureau has identified situations where product switching may give rise to issues under the Act.
In the previous version of the IPEGs, the Bureau cautioned that “hard” switches might attract scrutiny under the abuse of dominance sections of the Act. An example of a “hard” switch would be where an innovator has a successful product (“Product A”), set to lose patent protection, and the innovator introduces a slightly different form of that product (“Product B”) which remains under patent protection for several more years. The innovator then removes Product A from the market prior to patent expiry, which leads health care professionals to switch to Product B. Since any generic that would have been competitive with Product A would not be interchangeable with Product B, the generic’s entry upon patent expiry of Product A may be impeded. As the innovator undertook this product switch strategy primarily to retain its market position past patent expiry, it could be viewed as something more than just the exercise of IP rights.
In the updated IPEGs, the Bureau notes that “soft” product switches would likely not raise any issue under the Act. An example of a “soft” switch would be similar to the scenario above, but instead of removing Product A from the market, an innovator simply stops promoting Product A to health care professionals. Product A would still be available for purchase; however, the innovator would actively market Product B instead. Since the generic is still interchangeable with Product A, there is less of a chance that a “soft” product switch will be viewed as having been done primarily for the purpose of illegitimately retaining market share by the innovator.
The Bureau has made no secret of its scrutiny of the pharmaceutical sector over the last several years and its concern regarding end of patent strategies which may block or delay generic access to market. In the absence of Canadian case law on the issue, the new IPEGs provide some much-needed clarity regarding the Bureau’s approach to settlements and product switching which should assist innovators in understanding the sometime complex intersection between their IP rights and their obligations under the Act.