Federal Court Patent Decision May Undercut Competition Act on Intellectual Property Rights

January 28, 2005

An agreement dealing with patent rights that is specifically authorized by the Patent Act, including the assignment of a patent, involves the "mere exercise" of patent rights such that any resulting lessening of competition is not undue and cannot constitute the criminal offence of conspiracy under section 45 of the Competition Act (the Act). That is the recent finding of the Federal Court of Canada in Eli Lilly and Company v. Apotex Inc., which represents a significant departure from the Competition Bureau's stated approach to the interface between competition policy and intellectual property rights.

The Decision

The Court's decision relates to an action begun in 1997 by Eli Lilly against Apotex for infringement of eight patents related to intermediate compounds and processes for manufacture of the antibiotic "cefaclor." Four of the eight patents had been assigned to Lilly in 1995 by Japan-based Shionogi & Co. Ltd., giving Lilly a monopoly in Canada on known processes for producing the drug. By way of counterclaim, Apotex alleged that these assignments constituted an agreement that resulted in an undue lessening of competition, contrary to section 45 of the Act, thereby entitling it to damages under section 36.

Three motions by Lilly and Shionogi for summary judgment were granted by Hugessen J. in October 2003, on the grounds that the allegations respecting the alleged anti-competitive assignment agreement did not disclose a cause of action under the Act. In so finding, Hugessen J. relied on the Federal Court of Appeal's 1991 decision in Molinlycke AB v. Kimberly-Clark of Canada Ltd., which held that "the impairment of competition inherent in the exercise of rights provided by [the Patent] Act" could never be "undue" for the purposes of section 45 of the Act.

On appeal by Apotex, the Federal Court of Appeal held, in June of 2004, that Molinlycke does not preclude application of the Act whenever evidence exists that competition is affected by the exercise of patent rights. In this respect, the Court pointed to section 32 of the Act, which specifically authorizes the imposition of various special remedies, including compulsory licensing and revocation of patents, where the use of (or refusal to use) an intellectual property right lessens competition unduly. Accordingly, the Court of Appeal found that Hugessen J. erred in law by failing to consider Apotex's argument that the Shionogi assignment, which reduced from two to one the number of companies possessing Canadian patent rights to cefaclor manufacturing processes, constituted "something more than the mere exercise of patent rights," to which section 45 could in fact apply.

Pursuant to instructions of the Federal Court of Appeal, Hugessen J. reconsidered the motions for summary judgment. Hugessen J. held that, while restrictions on competition that are not specifically authorized by the Patent Act are subject to section 45 of the Act, agreements that are authorized by the Patent Act will fall within the "mere exercise" of patent rights and, as such, are exempt from section 45. As a result, the Court recognized that the Shionogi assignments gave Lilly a monopoly in process patents for cefaclor, but nevertheless held that they were beyond the reach of section 45 since assignments of patents are specifically provided for in section 50 of the Patent Act.

The Decision Creates Uncertainty Over the IPEGs

Notwithstanding the Court's assertion that its conclusion is "fully compatible" with the Competition Bureau's Intellectual Property Enforcement Guidelines (IPEGs), the Court's interpretation of what constitutes the "mere exercise" of patent rights is, in our view, clearly at odds with that of the Bureau in the IPEGs. The Bureau defines the "mere exercise of an IP right" as either the owner's unilateral exclusion of others from using the IP or the non-use of the IP by the owner; non-unilateral conduct, including "[a] transfer of IP rights," is clearly stated by the Bureau as being, in its view, "something more than the mere exercise of the IP right.". The Bureau does, however, state that the mere exercise of IP rights does not violate the Act's general provisions (which include the section 45 conspiracy provision), no matter to what degree competition is affected.

Applying the IPEGs to Shionogi's assignment of the cefaclor patents to Lilly, the agreement would be characterized as "something more" than the mere exercise of patent rights. Further, because the assignment reduced the number of competitors with patent rights to the cefaclor manufacturing process, which the Federal Court found increased Lilly's market power, the IPEGs suggest that Lilly and/or Shionogi could have been potentially liable to enforcement proceedings under the Act's general provisions. In the circumstances of this case, the applicable general provisions could have included the section 45 criminal offence, as well as practices that are civilly reviewable, such as abuse of dominance (section 79) and mergers (section 92) However, it should be noted that limitation periods prevent initiation of proceedings under sections 79 and 92 more than three years after the conduct has ceased.

In characterizing the Shionogi assignment as the "mere exercise" of patent rights, the Federal Court appears to have narrowed the circumstances in which the Competition Act will apply to anti-competitive effects stemming from the exercise of IP rights. If a lessening of competition from the assignment of a patent cannot be "undue" under section 45 because assignment is authorized by the Patent Act, it might be argued similarly that any anti-competitive effects arising from the assignment cannot be "substantial," as required under sections 79 and 92, among other sections. The same may equally be said with respect to IP licences, which, like assignments, are authorized by IP legislation.

Eli Lilly thus has the potential to blow open a gaping hole in Canada's competition regime, permitting anti-competitive effects to go unchecked merely because their source, whether an agreement or otherwise, was permitted under an IP statute. Such an exception would also constitute a major departure from other competition regimes, including those in the United States and the European Union, which adopt an approach to the competition/IP interface in relation to IP assignments and licensing that is broadly similar to that set out in the Bureau's IPEGs. Accordingly, the Bureau's response (or lack of response) to the Court's decision will be of great interest and consequence to business and IP and competition/antitrust practitioners.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.