Competition Bureau completes update of Intellectual Property Enforcement Guidelines

Jeff Brown and Margaret Kim - 

On March 31, 2016, the Competition Bureau (the Bureau) released the anticipated final version of its updated Intellectual Property Enforcement  Guidelines (2016 IPEGs), seven months after the public consultation of the Phase II draft revision (Draft Phase II IPEGs) concluded in August 2015. The 2016 IPEGs further clarify, and provide practical guidance on, the Bureau’s enforcement approach to several important issues at the interface between competition and intellectual property (IP) laws, namely (1) patent litigation settlements between brand and generic pharmaceutical companies, (2) product switching (also known as product hopping), (3) patent assertion entities (PAEs) and (4) collaborative standard setting and standard essential patents (SEPs). 

 Overview

The IPEGs set out the general approach of the Commissioner of Competition (the Commissioner) and the Bureau to the administration and enforcement of the Competition Act (the Act) with respect to potentially anti-competitive practices involving IP.  Changes in the 2016 IPEGs reflect past Bureau enforcement experience, Canadian case law, and guidance documents released in other jurisdictions. In producing the 2016 IPEGs, which were preceded most recently by the Draft Phase II IPEGs, the Bureau addressed concerns expressed by domestic and international stakeholders, including the Competition Law Section of the Canadian Bar Association, the Antitrust Law Section of the American Bar Association, industry associations, major technology firms and competition law scholars.

The 2016 IPEGs conclude a more than two-year process of updating the Bureau’s IPEGs, which were first published in 2000 (the 2000 IPEGs). The update process was undertaken in two phases, beginning in April 2014 with publication of a revised “phase I” consultation draft (the Draft Phase I IPEGs), followed by a final phase I IPEGs in September 2014 (the Revised Phase I IPEGs). Also in September 2014, the Bureau published a white paper entitled Patent Litigation Settlement Agreements: A Canadian Perspective (White Paper), which set out the Bureau’s proposed approach to patent litigation settlements between brand and generic pharmaceutical companies. The Bureau’s “phase II” consultation draft IPEGs followed in June 2016 (the Draft Phase II IPEGs), followed finally with publication of the 2016 IPEGs on March 31, 2016. 

For more information of how the IPEGs have evolved over time, see our previous post

Summary of Major Changes in the 2016 IPEGs

As noted previously, the 2016 IPEGs clarify, and provide practical guidance on, the Bureau’s enforcement approach with respect to patent litigation settlements between brand and generic pharmaceutical companies, product switching, PAEs and standard setting.  The following briefly discusses the Bureau’s enforcement approach in each of these areas, as set out in the 2016 IPEGs.

(a)   Pharmaceutical Patent Litigation Settlements

The 2016 IPEGs update the Bureau’s enforcement approach in respect of settlements of proceedings between brand and generic pharmaceutical companies under the Patented Medicines Notice of Compliance (PMNOC) Regulations. The Bureau’s approach to such settlements was first proposed in the White Paper, as a precursor to its inclusion (in revised form) in the Draft Phase II IPEGs. The 2016 IPEGs further refine the Bureau’s analytical framework for reviewing pharmaceutical patent settlements in a number of ways. 

The 2016 IPEGs confirm that, other than in certain defined circumstances, the Bureau will review pharmaceutical patent settlements under the Act’s civil reviewable practice provisions (section 90.1, for competitor collaborations, or section 79, for abuse of dominance). The circumstances in which the Bureau will review settlements under the Act’s criminal cartel provision (section 45) are limited to settlements in which the settlement:

  • extends beyond the exclusionary potential of the patent by delaying generic entry past the patent expiry date;
  • extends beyond the exclusionary potential of the patent by restricting competition for products unrelated to the patent subject to the PMNOC proceeding; or
  • is a “sham”.

The Bureau recognizes that certain features of Canada’s PMNOC Regulations that govern generic entry prior to patent expiry differ from the features of counterpart regimes in other jurisdictions, including in particular the United States. The Bureau acknowledges that these differences may affect the relative incentives of parties to reach settlements, as well as the potential terms of settlements in Canada, as compared to under regimes in the United States. These differences, and their potential impacts, include:

  • First generic filer exclusivity: In Canada, there is no exclusivity period following patent expiration for the first generic challenger, which, relative to the United States (which has such exclusivity), reduces the incentives for the first generic filer to enter into settlements with the brand.  
  • Section 8 damages: The prospect of a brand firm’s liability under section 8 of the PMNOC Regulations, which has no counterpart in the United States, is a relevant consideration when evaluating the magnitude of a brand firm’s payment to the generic firm in a settlement agreement.
  • Dual litigation / double jeopardy: The PMNOC Regulations create a system of legal double jeopardy, insofar as a generic firm can face an infringement action even if it successfully defends a PMNOC proceeding, and a brand firm can face patent impeachment proceedings even though its prohibition application was successful.  The potential follow-on litigation, which again has no counterpart in the United States, is a relevant consideration when assessing the magnitude of how much a brand firm paid the generic firm in a settlement agreement.

Based on the 2016 IPEGs, the Bureau differentiates its enforcement approach to patent settlements based on whether a settlement is an “entry-split” settlement (see Example 12 of the 2016 IPEGs) or a settlement with a “payment” (see Example 13 of the 2016 IPEGs). If a settlement does not involve the brand firm providing consideration to the generic firm other than allowing the generic to enter the market “on or before” patent expiry (an “entry-split” settlement), it will not raise competition issues under the Act. On the other hand, if a settlement includes the brand firm providing a payment (whether monetary or otherwise) in addition to allowing the generic firm to enter the market before patent expiry, the Bureau will likely review the settlement under the Act’s competitor collaboration provision (section 90.1) to assess whether it will have the effect of delaying generic entry and, as a result, substantially lessen or prevent competition.  In this regard, the Bureau will focus on the actual anti-competitive effects of a settlement, rather than its purpose, considering factors such as (i) the fair market value of any goods or services provided by the generic firm, (ii) the magnitude of the brand firm’s section 8 damages exposure under the PMNOC Regulations and (iii) the brand firm’s expected remaining litigation costs absent settlement.

(b)   Product Switching

The Bureau’s enforcement approach to product switching (or product hopping) was first set out in the Revised Phase I IPEGs in September 2014.  The 2016 IPEGs introduce the distinction between a “hard” switch (e.g., removal of a branded incumbent product (Product A) prior to generic entry in order to effect the switch of consumers to a follow-on product, Product B) and a “soft” switch (e.g., attempting to encourage or persuade patients and doctors to switch to a follow-on Product B by such means as offering rebates and other discounts, without removing an incumbent Product A from the market).  In Example 9A of the 2016 IPEGs, the Bureau suggests that a “hard” switch will likely be reviewed as a potential abuse of dominance under section 79 of the Act if the Bureau finds that the conduct could be for the purpose of excluding or impeding generic entry. Conversely, Example 9B of the 2016 IPEGs suggests that a “soft” switch is not likely to raise competition concerns provided that it did not anti-competitively undermine the prescription base of the incumbent product, for example through the use of false or misleading representations about the product.

Related to the Bureau’s enforcement approach to product switching is the definition of “mere exercise” of an IP right, and in particular whether the mere exercise of an IP right (which can be addressed using the special remedy in section 32 of the Act but not under the Act’s so-called “general provisions”) includes the “non-use” of an IP right. The 2000 IPEGs defined the “mere exercise” of an IP right as the “exercise of the owner’s right to unilaterally exclude others from using the IP”, as well as “the use or non-use” of IP by the owner.  In the Draft Phase I IPEGs, “non-use” was removed from the definition, presumably to allow the Bureau to enforce the Act in respect of the “non-use” of a patent right associated with product switching (which the Bureau had recently considered in the context of an inquiry involving Alcon Canada Inc.).  The Bureau’s removal of “non-use” from the definition of “mere exercise” of an IP right drew some criticism, and the Bureau responded by re-inserting “non-use” into the definition in the 2016 IPEGs.  Notwithstanding reversion to the prior definition, the Bureau has kept open the possibility of examining non-use of an IP right under the Act’s general provisions: in a footnote to Example 9A of the 2016 IPEGs, the Bureau notes that “there may be limited circumstances where non-use of an IP right may been viewed as something more than the ‘mere exercise’ and therefore could potentially raise issues under the general provisions of the Act”.    

(c)    PAEs

The Bureau first addressed conduct of PAEs in the Draft Phase II IPEGs. The Bureau’s initial guidance was limited to the use of potentially misleading representations by PAEs to support the assertion of IP rights. Absent from the Bureau’s initial guidance was how it would address the acquisition of IP rights by PAEs. The 2016 IPEGs fill this gap, addressing both types of conduct by PAEs.

The 2016 IPEGs clarify the Bureau’s position with respect to PAEs sending notice letters to firms that are allegedly infringing its patented technologies. Example 10 illustrates a scenario in which a company sending notice letters would be found to violate the misleading advertising and deceptive marketing practices provisions in sections 74.01(1)(a) (civilly reviewable practice) or 52 (criminal) of the Act. The Bureau will focus on whether “the notices included representations that were false or misleading in a material respect”, including the “general impression created by the notice, as well as its literal meaning.” If the Bureau’s examination reveals that the firm’s claims were untrue (e.g., false representations that other businesses have paid a licensing fee or that a PAE intends of commencing legal proceedings), then the representations could be found to be false or misleading. The Bureau would find that representations would be considered “material” if they “would affect the likelihood of the recipients taking some significant action in response to the claims, up to and including acceding to the demand.”

The Bureau has also added Example 11, in which it states that assignment by a firm of its patents to a PAE for the sole purpose of more effective enforcement is, on its own, unlikely to raise issues under the Act. Rather, it appears that such assignments will be treated in a similar manner to assignments to any other purchaser, with the focus being on the extent to which the assignment would create or enhance market power as a result of the PAE’s pre-existing portfolio including IP the competes with the assigned IP rights.  While the Bureau acknowledges concerns expressed by some about PAEs owing to the different incentives that they have with respect to enforcement of IP relative to companies that use IP to manufacture products,  the Bureau also recognizes the benefits of PAEs, such as assisting innovators in maximizing their returns from their research efforts and incentivizing further research.

(d)   Standard Setting and SEPs

In the 2016 IPEGs, the Bureau refines its view of Standards Development Organizations (SDOs), in particular with respect to what is permissible and impermissible in the context of SDO arrangements. The Bureau recognizes that the development of standards through SDOs can provide many procompetitive benefits, such as lowering production costs, increasing efficiency and consumer choice, reducing barriers to entry and fostering interoperability and innovation.

The Bureau confirms that it will review the joint conduct involving SDO participants under the Act’s civil competitor collaboration provision (section 90.1) according to the analytical framework described in the Competitor Collaboration Guidelines, provided there is no evidence that such conduct was for the purpose of facilitating an agreement prohibited under the Act’s criminal cartel provision (section 45).  

The 2016 IPEGs also state that the Bureau is likely to review patent hold-ups (also known as patent ambush) under the Act’s civil abuse of dominance provision (section 79). Patent hold-up occurs where the owner of a patent participating in the standardization process, in violation of SDO rules, fails to disclose its patent to an SDO then later asserts the patent when access to its patented technology is required to implement the standard.

The Bureau identifies a number of steps that SDOs and/or patent owners can take to reduce the potential for patent hold-up:

  • Adopt an IP policy that requires participants to disclose their patents that are essential to the standard that the SDO selects;
  • Ask participants to identify their most restrictive licensing terms and conditions, including the maximum royalty rate that they would demand if access to their patents becomes necessary to implement the standard;
  • Facilitate negotiations between participants who are potential licensees of the standard and IP owners of rival technologies; and
  • Avoid reneging on a licensing commitment by making an ex ante licensing commitments (e.g., an explicit maximum royalty rate) by encouraging its technology to be incorporated into a standard and then later, if successful, abandoning that commitment (e.g., charging a royalty higher than the maximum royalty it promised to charge).

The 2016 IPEGs also address the potential anticompetitive use of injunctions by SEP owners who have made commitments to license IP on fair, reasonable and non-discriminatory (FRAND) terms. The 2016 IPEGs expressly state that the Bureau does not view a FRAND commitment as a commitment to license on a “royalty-free basis” and that firms are “entitled to seek royalties to recover the value of their investment.” Recognizing that potential licensees may seek to take advantage of FRAND commitments by “holding out” for a particular royalty or by refusing to undertake licensing negotiations in good faith, the Bureau identifies circumstances in which a firm that has made a FRAND licencing commitment can seek an injunction against the infringing party. Previously, in the Draft Phase II IPEGs, the Bureau identified the following as appropriate circumstances for a licensor to seek an injunction:

(i) where a prospective licensee has refused to pay a royalty that has been determined to be FRAND by a court or arbitrator; and
(ii) when a prospective licensee refuses to engage in licensing negotiations.

The 2016 IPEGs identify two additional circumstances:

(iii) when a prospective licensee constructively refuses to negotiate (e.g., by insisting on terms clearly outside the FRAND terms); and
(iv) when a prospective licensee has no ability to pay damages (e.g., a firm is in bankruptcy).

Finally, while the 2016 IPEGs make it clear that there are circumstances where patent hold-up may be addressed under the Act, they also note that the Bureau will exercise enforcement discretion in determining whether the Act should be used to address conduct involving SEPs.  The 2016 IPEGs state, for example, that the Bureau is not a “price regulator”, and will therefore leave the determination of royalty rates to negotiations between parties or the courts, absent a clear breach of a licensing commitment (e.g., asking a royalty greater than a previously agreed commitment). The Bureau also notes that patent hold-up could be addressed as a matter of contract law “and will consider this possibility when exercising its enforcement discretion in a given case”.

Conclusion

The 2016 IPEGs, which complete a more than two-year exercise at updating the Bureau’s guidance in relation to its enforcement approach in relation to the competition / IP interface, offer more robust and practical guidance on the Bureau’s enforcement approach in relation to IP. In addition to providing more predictability to businesses that rely heavily (and often increasingly) on IP, the 2016 IPEGs reflect the Bureau’s openness to updating its thinking in an area that is constantly evolving. In this regard, the Bureau has indicated it will review the IPEGs annually, and  revise them as needed, based on its ongoing enforcement experience, changing circumstances and decisions of the Tribunal and the courts.  

Competition Bureau releases "Phase II" Draft Revision of the Intellectual Property Enforcement Guidelines

 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.

  1. 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.
     
  2. 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.
     
  3. 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.