An Exciting Time in Canadian Competition Bureau Policy – Substantive Guidance on Reverse Payment Patent Settlement Agreements May Be Imminent?

As part of the Canadian Competition Bureau’s revisions to its IP Enforcement Guidelines, some stakeholders have requested guidance on “new” issues of concern in the Competition Law area – including reverse payment patent settlement agreements. Prior to publication of the first Draft Update of the Guidelines (“Phase 1 Update”)[1], the Bureau held a Workshop to consider issues regarding competition and the pharmaceutical industry[2]. Having regard to the high cost of pharmaceuticals ($34.5 billion in 2013), and the recent decisions of the US Supreme Court and European Commission finding that reverse payments are “valid targets for antitrust scrutiny”, the Bureau sought input “from all sides relating to the enforcement and policy stance the Bureau should take on issues specific to the pharmaceutical sector”.

Recognizing that there may be “certain strategies and practices employed by pharmaceutical firms that may have the effect of diminishing competition between branded and generic pharmaceuticals”, the Bureau stated an intention to ensure “effective competition” from generics.

Of course, as is evident from the decision of the US Supreme Court in FTC v Actavis [3], many would agree that “effective competition” is desirable. The ultimate challenge for regulators, courts and parties alike is how to conduct an effective balancing to come to a reasonable/sensible solution that attains both IP and competition objectives, and provides some certainty to encourage agreements that are anti-trust compliant. This is easier said than done. Parties often propose fundamentally different approaches to attain the same apparent objective. As companies continue to craft more innovative settlements, it is expected Competition Law will continue to play “catch up”.

Recent Developments in US and Europe

In June 2013 the US Supreme Court applied the traditional “rule of reason” approach to reverse patent payments[4]. In declining to accept the FTC’s position that such agreements were presumptively anticompetitive, during oral submissions the court indicated it was worried about “creating an administrative monster”[5]. At the same time the court refused to adopt Actavis’ position that once there was patented technology involved, such agreements were within the proper exercise of patent rights, just like a patentee profiting from a licensing agreement. Actavis indicated the focus must be on the strength of the patent, and parties should be free to, and encouraged to, obtain a business result beyond merely earlier generic entry. Actavis stressed there is no requirement to litigate Hatch Waxman to completion, and that for the past 10 years the “scope of patent” rule had worked well, with many drugs going generic.

In its decision, the 5-3 majority adopted “five considerations” to be applied to reverse payment agreements that evaluate the anticompetitive harm with and without the agreement, and direct that simply because “a large, unjustified reverse payment risks anti-trust liability [this] does not prevent litigating parties from settling their lawsuits” for example by allowing generic entry in the market before patent expiry without a payment to stay out. A strong dissent by the Chief Justice clearly disagreed with the majority’s balancing of IP and competition law, and found that in fact the majority’s decision would result in a chilling effect on generic challenges:

“The majority today departs from the settled approach separating patent and antitrust law, weakens the protec­tions afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements. I would keep things as they were and not subject basic questions of patent law to an unbounded inquiry under antitrust law, with its treble damages and famously burdensome discovery…”

Shortly after FTC v Actavis, the European Commission (“EC”) concluded its 2010 competition inquiry into Lundbeck’s activities relating to restrictive business practices and abuse of dominant position. For the first time the EC imposed substantial fines against the brand name Lundbeck (over $US 100 million) and 4 generic manufacturers (totalling over $US 65 million) for entering into a reverse payment agreement regarding the “blockbuster” antidepressant citalopram.[6] The agreement terms included: millions of Euros would be paid to the generics not to enter the market, generic product was to be purchased and destroyed, and guaranteed profits were paid out to the generics in a distribution agreement. There was no guarantee of any market entry thereafter – the generics were to stay out of the market for the agreement’s duration. The EC found these agreements were unacceptable because this was more than simply paying off generics to stay out of the market – the agreement delayed entry of cheaper medicines. (In the case before it one generic had already entered the market prior to the reverse payment agreement – perhaps making this an extreme/rare example). The EC may be viewed as taking an even stricter approach than the US Supreme Court, considering the Vice-President’s widely quoted warning that:

“It is unacceptable that a company pays off its competitors to stay out of its market and delay the entry of cheaper medicines. Agreements of this type directly harm patients and national health systems, which are already under tight budgetary constraints. The Commission will not tolerate such anticompetitive practices”.

The EC has other pending investigations into “practices that could delay entry of cheaper medicines”.

Intellectual Property Enforcement Guidelines – Phase 1 (done) and Phase 2 (to come?)

As noted in the Highlights of the 2013 Workshop, the Bureau’s amendments to its 2000 Intellectual Property Enforcement Guidelines (“IPEGs”) consist of 2 possible phases.

Phase 1 – the Phase 1 Update was to deal with any legislative changes. Stakeholders were requested to provide input on the changes made, as well as what other new issues should be addressed in the Update.

Phase 2 – “After careful consideration, the Bureau may release another draft update of the IPEGs for further public consultation as part of phase two, or it may decide to finalize the IPEGs according to the changes it made in phase one.”

Other “new issues” discussed at the Workshop included:

(1) pay for delay settlements – “when a patentee agrees to a value transfer to a generic manufacturer to settle a legal proceeding that the patentee itself initiated. If the parties had not settled, a court may have issued a legal judgment, allowing for the possibility of generic entry on the grounds that the patent was invalid or uninfringed.” The Bureau characterized diverging views as follows: are these agreements a “lawful application of the exclusionary powers granted by a patent”, OR do these agreements simply “pay potential generic competitors not to enter the marketplace, thereby lessening competition”?

(2) “life cycle management strategies” to maximize the value of pharmaceutical patents. Certain tactics like “product hopping” were of “special concern”.[7]

IPEGs Overview

The IPEGs are designed to “articulate how the Bureau approaches the interface between competition policy and IP rights”. The general provisions of the Competition Act apply to conduct involving more than the mere exercise of an IP right; only the special remedy under s. 32 applies to the mere exercise of an IP right.

An Analytical Framework is provided which (1) requires that the market be defined with reference to the IP; (2) lists a number of factors to consider in determining whether there has been an increase in market power[8]; and (3) considers if any substantial lessening of competition is offset by efficiencies or business justifications. Several “Hypothetical Examples” are given that apply the framework.

Following its June 2, 2014 deadline for Phase 1 input, the Bureau has posted submissions from (1) the Canadian Bar Association (“CBA”), (2) the American Bar Association (Antitrust Section) (“ABA”), and (3) Canada’s Research-Based Pharmaceutical Companies (“Rx&D”).

Phase 1

As the Phase 1 Update was meant to deal with administrative changes/legislative updates, the Bureau provided no specific explanation/guidance as to what changes were being made and why. However two notable amendments appear to involve substantive changes:

(1) The removal of “non-use” as a mere exercise of IP. As noted by Rx&D, there is no obligation in the Patent Act to work an invention (subject only to s. 65). The Competition Act (s. 79(5)) specifically says that exercising an IP right is not anti-competitive. If this deletion was meant to deal with patent trolls, the CBA suggested the issue be addressed in Phase 2.

(2) The removal of any analysis regarding the strength of the infringement claim in the Hypothetical Example regarding patent pooling. In this Example two competitors agree to put their patents on a medical process in a patent pool, including one competitor who has a basic patent; and thereafter set a minimal fee for each customer use. The Bureau’s analysis concludes there is conspiracy (s. 45) as the pooling is unnecessary and anticompetitive because an alternative licensing arrangement between the two competitors could have been used.

Understandably there was forceful input on this Example given that parties agreeing to pool and set a price may evoke similar principles as in the case of reverse payment agreements. The CBA stated that the discussion of the merits of the infringement claim should be added back in, and that this Example could deter pro-competitive conduct and that more guidance was required as to how s. 90.1[9] would apply, as s.45 was not applicable given this was not “naked price fixing”. In addition, the Bureau should explicitly acknowledge that this Example does NOT apply to reverse payment agreements. Rx&D argued that applying s. 45, where there is no detailed inquiry/weighing of anti-competitive and pro-competitive effects, was contrary to the rule of reason discussion in Actavis v FTC. Notably the ABA agreed with the Bureau’s analysis but sought further review given that s. 45 sanctions were normally reserved for “naked restraints” where the pool is a sham.

Phase 2

Only the CBA and ABA suggested “New” issues that should be addressed in a further update:

– reverse payment settlements – including whether criminal [ie. s. 45] or civil [ie. s. 79 or 90.1 or even s. 32] challenges would be applicable, whether non cash settlements would be covered[10], and whether US principles from FTC v Actavis would be relevant

– life cycle management strategies

– patent assertion entities (trolls) – in the US there is debate whether Anti-trust laws are applicable, or whether these issues are better dealt with using consumer protection measures to ensure infringement claims are bona fide

– standard essential patents

On the same day as the Phase 1 Update was published, a Memorandum of Understanding[11] was signed between the Competition Bureau and CIPO, supporting greater interaction in theory. Whether this will translate into any substantive practical consequences to general procedures, policies/legislative changes etc remains to be seen. Interestingly, there is no reference to CIPO input in the Phase 1 Update. The three stakeholder submissions also do not refer to this Memorandum of Understanding and its potential impact on how/if the Bureau should draft guidelines on issues particularly affecting competition/IP law in the pharmaceutical sector.

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[1] http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03689.html, April 2, 2014.

[2] Highlights of “Competition Bureau Workshop on Antitrust Issues in the Pharmaceutical Sector” held November 2013, released April 29, 2014: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03728.html

[3] FTC v Actavis, 133 SCt 2223 (2013)

[4] The majority opinion introduced the issue as follows: “Company A sues Company B for patent infringement. The two companies settle under terms that require (1) Company B, the claimed infringer, not to produce the patented product until the patent’s term expires, and (2) Company A, the patentee, to pay B many millions of dollars. Because the settlement requires the patentee to pay the alleged infringer, rather than the other way around, this kind of settlement agreement is often called a “reverse payment” settlement agreement. And the basic question here is whether such an agreement can sometimes unreasonably diminish competition in violation of the antitrust laws.”

[5] Refer to http://www.oyez.org/cases/2010-2019/2012/2012_12_416#argument for a recording/transcript of the approximate hour long submissions made to the US Supreme Court.

[6] IP/13/563. Refer to press release at http://europa.eu/rapid/press-release_IP-13-563_en.htm (under appeal by Lundbeck and certain of the generics).

[7] Refer to an earlier review of a Bureau case involving Alcon: “A Rare Example Perhaps of “More than Mere Exercise of Patent Rights” – a Recent Competition Bureau Inquiry Into Pharmaceutical “Product Hopping”, dated March 14, 2013 at https://www.slaw.ca/2013/03/14/a-rare-example-perhaps-of-more-than-mere-exercise-of-patent-rights-a-recent-competition-bureau-inquiry-into-pharmaceutical-product-hopping/. This inquiry was recently discontinued after the Bureau found generic entry was not delayed given the short disruption in the brand’s first product: “competitive dynamics in the market appear to have been restored”. http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03736.html. In its May 13, 2014 Statement, the Bureau stated that “product life-cycle management strategies in the pharmaceutical sector are not inherently anti-competitive …However, life-cycle management strategies that are designed to impede competition from generic drug companies, such as product switching strategies, may cause significant harm to competition.”

[8] The IPEGs refer to market power as “…the ability to behave relatively independently of the market” per R. v. Nova Scotia Pharmaceutical Society et al., (1992) 2 S.C.R. (606).

[9] The Competition Act, s. 90.1 deals with Agreements between competitors that are likely to prevent or lessen competition substantially in a market.

[10] The ABA refers to disagreement in US courts following FTC v Actavis as to whether the US Supreme Court decision applies to non-cash “payments” in settlement agreements.

[11] http://www.cipo.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03772.html and http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03709.html