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Competition Bureau Issues Draft Updated IP Enforcement Guidelines Addressing Pharma Patent Litigation Settlements, Standard Setting and Patent Trolls

Following an initial consultation process concluded last year, the Competition Bureau (Bureau) released draft revised Intellectual Property Enforcement Guidelines (IPEGs) for public consultation on June 9, 2015. These new draft IPEGs will not change the Bureau’s general enforcement policy with respect to IP rights, but do provide additional guidance on its approach to: (i) pharmaceutical patent litigation settlements, (ii) standard essential patents, and (iii) patent assertion entities.

Pharmaceutical Patent Litigation Settlements

Last year, the Bureau released a controversial white paper, Patent Litigation Settlement Agreements: A Canadian Perspective, that outlined its preliminary views, which we analyzed. In a step in the right direction, the Bureau now confirms that, absent extraordinary circumstances, it will not pursue criminal investigations in regard to such settlements. Further, the Bureau provides more guidance on how it will evaluate such settlements under the civil provisions of the Competition Act (Act).

The Bureau divides pharmaceutical patent litigation settlements into three categories:

  1. “Entry-split” settlements with no payment to the generic: The Bureau says it will not review settlements where the parties agree to generic entry on a date before the expiry of the patent, provided that there is no other consideration paid or otherwise offered by the brand-name company to the generic.

  2. Settlements which include a payment to the generic: In such settlements, also euphemistically referred to as “reverse payment” or “pay for delay” settlements, the parties agree to generic entry on a date before the expiry of the patent, and the brand-name company also provides cash or other consideration to the generic.

The Bureau says it will review such settlements under the civil provision for agreements between competitors, section 90.1, but may also investigate for joint dominance under section 79 which allows it to request an administrative monetary penalty of up to $10 million. In both cases, the Bureau will seek to determine whether the settlement will result in a substantial lessening of competition. In that regard, the Bureau says it will engage in the difficult task of assessing whether, “but-for” the settlement, the brand and generic products would have competed earlier than the generic entry date agreed upon under the settlement. This analysis will consider whether the payment from the brand-name, including in exchange for goods or services from the generic, is excessive and therefore likely for the purpose of delaying the generic’s entry. In the most helpful part of the draft IPEGs, the Bureau confirms that it will likely not take action if the payment from the brand-name company is within a reasonable estimate of:

    • the fair market value of any goods or services provided by the generic firm;
    • the magnitude of the brand company’s section 8 damages exposure under the Patented Medicines (Notice Of Compliance) Regulations; and
    • the brand company’s expected remaining litigation costs absent settlement.

    The Bureau’s analysis will also consider the likely impact on prices that would have resulted from earlier entry by the generic, and whether other potential generic suppliers were likely to enter the market.

    1. Settlements which could be subject to criminal review: The draft IPEGs indicate that the Bureau will crim inally investigate such settlements only “in limited circumstances”:
      • First, the Bureau may conduct a criminal investigation when the parties agree that the generic will only enter beyond the expiry date of the brand-name’s patent rights.
      • The Bureau says it would also conduct a criminal inquiry where it discovers evidence that the parties “nakedly” conspired to restrain trade (i.e., the settlement is a “sham”): for example, where the Bureau finds “convincing evidence” that both parties knew the patent was invalid, but nevertheless reached a settlement to allocate monopoly profits by delaying generic entry.

    We encourage the Bureau to continue along this path to recognizing that bona fide settlements of patent litigation should never be the subject of criminal investigation. Overall, the draft IPEGs do provide more guidance to assess whether a settlement could be challenged by the Bureau. Given the Bureau’s high level of interest in these settlements, it is likely to be only a matter of time before it takes some enforcement action in this area.

    Standard Essential Patents

    The Bureau recognizes the value of industry standards in setting benchmarks for performance and safety and to allow for the interoperability of devices made by different manufacturers. Once a standard is set, companies often make significant investments to comply, which can be undermined by patent holders of essential technology refusing to licence their patents. The Bureau says it will investigate the following conduct under the civil abuse of dominance provisions (section 79):

    • Patent “hold-up” or “patent ambush”: The Bureau will investigate where a patent holder purposely conceals its patent to a Standard Development Organization (SDO) during the formation process of the industry standard, and then later asserts the undisclosed patent when access to its technology is required to implement the standard.
    • Reneging on a licensing commitment: A patent holder’s decision to renege on a commitment to licence a patent under fair, reasonable and non-discriminatory (FRAND) terms could also be reviewed.
    • Seeking an injunction after making a licensing commitment: The Bureau may investigate where a patent holder makes a licensing commitment before its technology is adopted in a standard, and then seeks injunctions against firms that are “locked-in” to the standard. The IPEGs indicate that the Bureau will likely conclude that the seeking of an injunction is appropriate: (i) when a prospective licensee refuses to pay a royalty that is determined to be FRAND by a court or arbitrator; or (ii) when the prospective licensee does not engage in licensing negotiations.

    The draft IPEGs take the position that such conduct amounts to “something more” than the mere exercise of patent rights, which may be pursued for abuse of dominance. The Bureau’s reasoning is that these practices enable patent holders to enhance their market power beyond what is conferred on them by the patent by behaving dishonestly with SDOs, and then use that power to raise rivals’ costs and exclude competitors that use the standard.

    The Bureau also cautions competitors on the competition risks associated with the formation of SDOs at the “front end”. In addition to warning about criminal price-fixing, the Bureau goes on to discuss concerns that may arise from the sharing of sensitive information and the joint setting of actual licensing terms. If a standard setting organization does not have strict controls on how such information is used and kept confidential from other members, it may risk a civil investigation under section 90.1 of the Act.

    Patent Assertion Entities

    Patent assertion entities (PAEs) acquire patents from innovating companies and then demand licensing fees from companies that are allegedly infringing their patents.

    The draft revised IPEGs indicate that the Bureau may take action against PAEs under the civil or criminal misleading advertising provisions of the Act, including the new provisions introduced following the adoption of Canada’s anti-spam legislation (CASL) for representations contained in emails or other electronic messages. The included example refers to a PAE sending thousands of notices to businesses demanding licensing fees and alleging it has poof of infringement. The Bureau says it would review such conduct to determine whether the PAE has, in fact, proof of infringement or is rather sending notices indiscriminately. In addition, the Bureau would have to be able to convince the Competition Tribunal or a court that these notices are representations “made to the public” within the meaning of sections 52 or 74.01(1)(a) of the Act.

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    The public consultation period on the draft IPEGs will end on August 10, 2015.

    For more information on the evolution of the IPEGs, please see our articles discussing last year’s release for public consultation (the first update to the IPEGs since 2000) and the results of that public consultation.