Canada’s Commissioner of Competition has sought leave to intervene in an appeal by Apotex Inc. in Eli Lilly and Co. v. Apotex Inc., [2004] FC 1445, a decision of the Federal Court delivered last fall. Apotex holds that a mere assignment of patents does not constitute a cause of action under Section 45 of Canada’s Competition Act, R.S.C. 1985, c. C-34, even when it results in a monopoly.

Procedural Background

In 1997, Eli Lilly and Company and Eli Lilly Canada Inc. (collectively “Lilly”), the holder of eight patents for processes relating to the antibiotic drug cefaclor, brought suit against Apotex Inc. (“Apotex”) for infringement of these patents. Four of the eight allegedly infringed patents were assigned to Lilly by Shionogi & Co. Ltd. (“Shionogi”), a Japanese company.

Apotex amended its defense and counterclaimed that the assignment of the four patents to Lilly by Shionogi constitutes an agreement that resulted in an undue lessening of competition contrary to Section 45 of the Competition Act, thereby entitling Apotex to damages under Section 36 of that Act. Section 45(1) of the Act makes conspiracies that unduly restrain trade unlawful. Lilly and Shionogi sought summary judgment of Apotex’s counterclaim as to the anticompetitive agreement. The court followed Molnlycke AB v. Kimberly-Clark of Canada Ltd (1991), 36 C.P.R. (3d) 493 (“Molnlycke“) which holds that an undue impairment of competition cannot be inferred from evidence of the exercise of the patent alone. In addition, the court construed Section 50 of the Patent Act as specifically authorizing transactions including the assignment of patent rights and that with such authorization by Parliament, any lessening of competition could not be considered “undue” as required by Section 45. The court thus concluded that Apotex failed to state a claim and granted summary judgment on the counterclaim.

Apotex appealed. The Federal Court of Appeal found that the lower court erred in not considering whether the facts of Molnlycke pertained to those in the instant case and remanded the case for reconsideration of three issues:

  • Whether Section 45(1) can ever apply to an agreement involving the exercise of patent rights;
  • Whether the facts in the case at bar are sufficient to prove that Lilly and Shionogi’s conduct violated Section 45; and
  • Assuming Section 45 applies and that Lilly and Shionogi’s conduct is contrary to Section 45, whether Apotex is unable to prevail because:
  • Apotex’s cause of action is statute-barred;
  • Apotex did not suffer damages; or
  • Lilly and Shionogi are exempt under the research and development exemption in Section 45(3)(e) of the Competition Act.

Holdings

On reconsideration, the Federal Court again struck Apotex’s Section 45 claim. The court found that although there was obviously a lessening of competition, such lessening was not “undue” because it was authorized by Section 50 of the Patents Act which permits transfers of patents. The court commented that this is “fully compatible” with the Intellectual Property Enforcement Guidelines issued by the Bureau of Competition in 2000 and that it had harmoniously construed the two statutes.1

Discussion

As to the first issue, whether an agreement that merely provides for the exercise of patent rights can constitute conduct contrary to Section 45 of the Competition Act, the court noted that although the Patents Act does not insulate any and every agreement concerning patent rights from liability under the Competition Act, so long as the agreement falls within the purview of the Patents Act, any lessening of competition by virtue of the agreement will be a lessening of competition that is authorized by Parliament. In other words, the court determined that an agreement authorized by the Patents Act is an agreement authorized by Parliament and as such, cannot constitute conduct that unduly lessens competition for the purposes of Section 45 of the Competition Act. Only restrictions on competition that are not specifically authorized by Parliament, the court stated, are actionable under Section 45. The court again applied Molynycke to hold that agreements involving the mere exercise of patent rights are exempt from Section 45(1).

As to the second issue, whether the facts were sufficient to prove that Lilly and Shionogi’s conduct violated Section 45, the court took into account the fact that Lilly’s patent on cefaclor itself had already expired, but that Lilly, with Shionogi’s assignment, controlled all of the commercially viable processes for making cefaclor. The court observed that prior to the assignment, two companies, not just one, controlled the processes for cefaclor. The assignment therefore increased Lilly’s monopoly power and substantially lessened competition. However, because the only agreement that could constitute a conspiracy was the assignment agreement and because the assignment of patents is a transaction specifically authorized by Parliament under Section 50 of the Patents Act, the agreement could not be found to unduly lessen competition.

Having answered “yes” to the first issue and “no” to the second issue, the court declined to adjudicate on the third issue relating to whether Apotex would not prevail because either (a) its claim was statute-barred, (b) it did not show damages, or (c) Lilly and Shionogi were exempt under the Research and Development exemption. The court nevertheless indicated briefly why none of these defenses would succeed. As to (b), the court noted that while Apotex’s admission that it was not delayed in successfully bringing its version of cefaclor to market, the court found that it was not clear that Apotex could not succeed if it were otherwise successful and that it was inappropriate to dismiss its claim at the summary judgment stage on that basis alone. In addition, as to (a) and (c), Lilly’s and Shionogi’s arguments that the Apotex claim is either prescribed or is saved by the research and development defense, the court noted that “there is sufficient conflict and lack of clarity in the relevant evidence on the questions of foreseeability and the reach of the 1975 research and development agreement between Lilly and Shionogi that those questions are not suitable for summary judgment and should only be resolved after a full trial.” (at para. 25).

Intervention by Commissioner of Competition

The Commissioner of Competition has intervened with respect to the specific questions of whether Section 50 of the Patents Act precludes the application of Section 45 of the Competition Act, and whether such interpretation is fully compatible with the Intellectual Property Enforcement Guidelines. The Competition Bureau has not pressed the courts to decide competition matters involving intellectual property rights before. Its intervention in Apotex marks what may be the first judicial consideration of the Intellectual Property Enforcement Guidelines.

The Guidelines provide that the circumstances in which the Bureau may apply the Competition Act to conduct involving IP or IP rights fall into two broad categories: those involving something more than the mere exercise of the IP right, and those involving the mere exercise of the IP right and nothing else. The Guidelines state that the Bureau will use the general provisions of the Competition Act to address the former circumstances and Section 32 (special remedies) to address the latter. More particularly, the Bureau applies the general provisions of the Competition Act when IP rights form the basis of arrangements between independent entities, whether in the form of a transfer, licensing arrangement or agreement to use or enforce IP rights, and when the alleged competitive harm stems from such an arrangement and not just from the mere exercise of the IP right and nothing else. The Bureau’s intervention in Apotex will be highly interesting in that it will offer a chance to see how the Bureau will challenge what the Federal Court has reiterated is a mere exercise of a patent right.

  1. The Bureau’s Intellectual Property Enforcement Guidelines may be viewed online at http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/en/ct01992e.html.

Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com