Canada: Competition Bureau Releases Guidelines In Respect Of Settlements Under The PM(NOC) Regulations

On March 31, 2016, the Competition Bureau released its updated Intellectual Property Enforcement Guidelines (the "IPEGs").  The updated IPEGs replace the version dated September 18, 2014.  Only Part 7 of the IPEGs ("Application of Competition Law to IP") has been substantively changed. 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. In a separate article, we address the Bureau's views with respect to the conduct of patent assertion entities ("PAEs") and conduct concerning standard essential patents ("SEPs").

Settlements under the PM(NOC) Regulations

Section 7.3 of the IPEGs is a new section advising how the Bureau approaches settlement agreements under the PM(NOC) Regulations.  Generally speaking, the IPEGs indicate that a settlement agreement wherein the generic is permitted to launch before or upon patent expiry will not be reviewed by the Bureau.  However, where the agreement also encompasses a payment made by 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 (section 90.1)¹ and, possibly, abuse of dominance (section 79). 

Both sections 90.1 and 79 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.  Thus, the Bureau determines what would have likely occurred "but for" the settlement agreement and assesses whether the payment was so large as to significantly affect a generic's entry into the market.  In doing so, the Bureau will consider such factors as (a) the fair market value of any goods or services provided by the generic; (b) the magnitude of the innovator's exposure to section 8 damages under the PM(NOC) Regulations; and (c) the innovator's expected litigation costs (in current and future related proceedings) in the absence of the settlement agreement.

With respect to investigations under section 90.1 of the Act, if the Bureau finds 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 under section 90.1.²

With respect to investigations under section 79 of the Act, the IPEGs indicate that the Bureau would consider possible business justifications (pro-competitive rationales for the conduct) in its determination of whether the settlement was anti-competitive.

If the Bureau considers that there has been a violation of section 90.1 or 79 of the Act, it may seek remedies under one or both of these provisions, which may include 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.

In the IPEGs, the Bureau clarifies that it will typically not review agreements pursuant to the criminal provisions of the Act (section 45) unless the settlement clearly extends beyond the exclusionary potential of the patent or is a "sham". The IPEGs provide 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 PM(NOC) proceeding; or (c) where the parties recognize that the patent is invalid and/or not infringed.

Product Switches

In the 2014 version of the IPEGs, the Bureau had identified that "hard switches" of products done for the primary purpose of retaining the innovator's market strength past patent expiry could be viewed as something more than just the exercise of IP rights and might therefore attract scrutiny under section 79 (abuse of dominance) of the Act.  Specifically, the Bureau outlined a scenario where an innovator has a successful product ("Product A") which is 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.  In this hypothetical scenario, the innovator then removes Product A from the market prior to patent expiry, which causes 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. 

In the updated IPEGs, the Bureau notes that "soft" product switches would likely not raise any issue under the Act.  The IPEGs describe "soft" switches as similar to the scenario above, but instead of removing Product A from the market, the company simply stops promoting Product A to health care professionals.

A copy of the updated IPEGs are available here.

Footnotes

1.The IPEGs advise that the Bureau's approach to assessing such collaborations is reflected in the Competitor Collaboration Guidelines.

2. The Bureau's approach to the analysis of efficiencies is described in Part 12 of the Merger Enforcement Guidelines.

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