Article by D. Jeffrey Brown and Jessica Rutledge
On June 16, 2015, the Competition Bureau released an updated draft version of the Intellectual Enforcement Property Guidelines (IPEGs), which set out its approach to enforcing the Competition Act against potentially anti-competitive practices involving intellectual property. The draft updates concentrate on the Bureau's enforcement approach in three areas, namely (a) patent litigation settlements, (b) standard-essential patents and (c) patent assertion entities. The most significant changes include the creation of a "safe harbour" for settlements of patent infringement litigation between branded and generic drug manufacturers that do not involve a reverse payment (i.e., a payment from the branded manufacturer to the alleged infringer). The draft IPEGs also signal a narrow scope of litigation settlements that may be subject to enforcement under the criminal cartel provisions of the Act.
Background
The IPEGs set out the Bureau's enforcement approach with respect to the Competition Act and potentially anti-competitive practices involving intellectual property.
The first IPEGs were released by the Bureau in 2000, and in 2013, the Commissioner of Competition, John Pecman, announced the Bureau's plan to undertake a two-phase update of the IPEGs. The first phase revision began with publication of a revised draft of the IPEGs in April 2014, and ended with the publication of revised IPEGs on September 18, 2014. Phase I changes to the IPEGs were primarily technical in nature, focusing on updates relating to statutory amendments since 2000. The second phase is a more substantive update, addressing the Bureau's enforcement approach to key issues that have arisen in the IP/competition interface in recent years, namely settlement of patent litigation between branded and generic pharmaceutical companies under the Patented Medicines Notice of Compliance (PMNOC) regulations, standard essential patents (SEPs) and patent assertion entities (PAEs).
Prior to Phase II, the Bureau released a white paper (the White Paper) setting out its proposed approach to enforcement of the Act to PMNOC litigation settlements (see our earlier comments on the White Paper). The White Paper's proposed enforcement approach to reviewing such settlements was controversial, with a particular concern expressed being the suggestion in the White Paper of an openness on the part of the Bureau to reviewing such settlements under the Act's per se criminal cartel provision. The potential application of these provisions to legitimate settlements of patent litigation was criticized for reasons including the risk of a potential chilling effect on the settlement of complex pharmaceutical patent litigation.
Summary of Proposed Changes
The Phase II draft IPEGs were released for public comment on June 9, 2015, with a comment period running through to August 10, 2015. As noted previously, changes in the Phase II draft focus largely on the Bureau's enforcement approach in respect of PMNOC litigation settlements, SEPs and PAEs.
(a) Pharmaceutical Patent Settlements
The Bureau expressly acknowledges that parties may wish to settle PMNOC proceedings rather than run the risk of an adverse outcome from fully litigated proceedings, and that society also benefits from the settlement of litigation. At the same time, the Phase II draft states that settlement of PMNOC proceedings may "pose competition risks if the agreement of the parties goes beyond what is reasonably necessary to reach a settlement and delays the benefits of generic competition."
For the purposes of determining the Bureau's enforcement approach to PMNOC litigation settlements, the Phase II draft divides such settlements into three categories.
- The first category of settlements is for
"entry-split" agreements, whereby a generic company
agrees to delay its entry into the market to some point prior to
the patent term expiry in exchange for not challenging the
patent's validity. If such an agreement does not include
consideration (whether monetary or otherwise) from the brand-name
company to the generic firm, the Phase II draft states that the
Bureau will not review the settlement under the Act. As the Bureau,
in the White Paper, had stated previously that both entry-split
settlements and "pay-for-delay" settlements could be
subject to review under the Act, the Phase II draft's treatment
of entry-split settlements creates a new "safe harbour"
that will help parties assess the risk of potential Bureau scrutiny
of settlements.
- Settlements that go beyond delaying generic market to some
point prior to the patent term expiry to include some form of
consideration (whether monetary or otherwise) from the brand to the
generic comprise the second category of settlements. According to
the Phase II draft, such settlements, which involve "reverse
payments" and are referred to as "pay-for-delay"
settlements, would be reviewed under the Act's competitor
collaboration provision, section 90.1 of the Act, although
"[i]n certain circumstances" the Bureau "may also
choose to review a settlement [as a potential abuse of dominance]
under section 79 of the Act." In either case, the Bureau will
seek to determine whether the settlement results, or is likely to
result, in a substantial prevention or lessening of competition, in
which case the Commissioner may seek a remedial order from the
Tribunal. In making this determination, the Bureau will consider
"whether the magnitude of the payment was so large that it was
probably for the purpose of delaying generic entry" (taking
into account, for example, the brand's exposure to damages
under section 8 of the PMNOC regulations, the brand's expected
litigation cost savings and litigation costs incurred by the
generic up to the date of settlement) and "the likely price
difference that would have prevailed between the branded version of
the pharmaceutical drug and the competing generic drug"
(taking into account, among other things, potential entry by other
generics). Even if it is expected that such reviews will normally
be conducted under section 90.1 of the Act, for which the principal
available remedy would be an order prohibiting implementation of
the settlement, the potential applicability of section 79 raises
the potential additional risk of substantial administrative
monetary penalties in an amount up to $10 million.
- The final category of settlements consists of settlements that are reviewable under the Act's per se criminal cartel provision, section 45. Whereas the White Paper was criticized for its overbroad approach to section 45's application to patent litigation settlements, the Phase II draft states that a PMNOC litigation settlement "may be reviewed under section 45 only where the intent of the payment was to fix prices, allocate markets or restrict output," which "[t]he Bureau anticipates ... would occur on a limited basis." Two specific examples identified by the Bureau as likely to offend section 45 of the Act are pay-for-delay agreements where the market entry is after the expiry of the patent, or settlements where there is direct evidence that the intent of the parties was to fix prices, allocate markets or restrict output.
(b) Standard Essential Patents
SEPs are patents that are required for a product or technology to comply with a technical standard. In the Phase II draft, the Bureau recognizes that the development of such standards, whether through formal Standard Development Organization (SDO) or other means, can have pro-competitive benefits, including ensuring product interoperability, lowering production costs, increasing efficiency and consumer choice, and fostering innovation. However, the Bureau also notes that standards can have anti-competitive effects, as a result of such conduct as patent ambush, reneging on licence commitments or seeking injunctions in respect of SEPs, and due to the fact that SDOs involve competitors or potential competitors in discussions regarding licensing terms and conditions and royalty rates in the context of setting an industry standard.
Patent ambush arises where a patent holder fails to disclose patents to an SDO during a standard-setting process and then, after the standard is set, uses the fact that firms are locked into the standard (for instance by high investment costs) to increase its market power beyond what was inherent in its patents. According to the Phase II draft, the Bureau will review patent ambush as a potential abuse of dominance under section 79 of the Act, to determine whether the conduct results, or is likely to result, in a substantial prevention or lessening of competition, in which case the Commissioner may seek a remedial order from the Tribunal.
The Phase II draft sets out a similar approach with respect to a patent holder reneging on commitments (e.g., with regard to licensing terms and royalties) made in the course of a standard-setting process, or seeking injunctions against firms that are "locked-in" to a standard and face prohibitive costs to switch to alternative technologies. In this latter regard, the Bureau "accepts that in certain circumstances it may be appropriate for a firm that has made a FRAND [fair, reasonable and non-discriminatory] licensing commitment to seek an injunction against an infringing party," such as where the potential licensee is unwilling to enter into negotiations or to pay a FRAND rate.
The Phase II draft also sets out the Bureau's approach to reviewing policies of SDOs with regard to disclosure of IP rights, licensing commitments and conduct of members in relation to joint negotiation or discussion of licensing terms. The Phase II draft gives the example of an SDO that adopts a disclosure policy requiring members to disclose all existing or pending patent rights relating to the possible standard, and to agree to license such rights on FRAND terms to all prospective licensees, with additional encouragement on the part of the SDO for members to specify the most restrictive licensing terms and conditions (including the maximum royalty) that they would require to license their patented technology. Recognizing that its members would include entities that compete with one another, the SDO's policy also prohibits the joint negotiation or discussion of licensing terms among members. In such a scenario, the Phase II draft states that "if the Bureau determined the SDO arrangement was only to set a standard for ... interoperability [of the subject products] and there were no joint discussions of licensing terms and conditions, it would likely conclude that the SDO was not an agreement that constituted a 'naked restraint' on competition", with the result that it would review the arrangement under section 90.1 of the Act, according to the framework outlined in the Bureau's Competitor Collaboration Guidelines.
(c) Patent Assertion Entities
The Phase II draft sets out the Bureau's approach to PAEs, albeit in the limited context of a hypothetical involving a PAE that makes false or misleading claims in the course of asserting its patent rights. In the Bureau's example, a PAE that acquires certain patents and then sends "thousands of notices to various businesses stating that it had proof that the recipient was infringing one or more of these patents, and demanding that each recipient pay a licensing fee to avoid litigation," may contravene the Act's provisions relating to false and misleading representations. Focusing on the narrow issue of whether the PAE had any basis for its alleged proof of patent violation, the Phase II draft states that the Bureau would review such conduct under paragraph 74.01(1)(a) of the Act, which prohibits representations to the public that are false or misleading in a material respect, or criminally, under subsection 52(1) of the Act, if the representations were made knowingly or recklessly.
Absent from the Phase II draft is guidance on the Bureau's approach to other types of conduct, including the acquisition of patents by PAEs.
The Bureau has invited comments on the Phase II draft by August 10, 2015.
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