Competition Bureau Finalizes IP Enforcement Guidelines on ‘Pay-for-Delay’ Settlements, Pharmaceutical Product Switching, and ‘Patent Trolls’
On March 31, 2016, the Competition Bureau (Bureau) released revised Intellectual Property Enforcement Guidelines (IPEGs). These IPEGs reflect incremental changes to the draft version released for consultation last year. Most notably the new IPEGs provide further guidance on (i) pharmaceutical patent litigation settlements, (ii) product switching (also known as “product hopping”), (iii) collaborative standard setting and standard essential patents, and (iv) patent assertion entities.
For more information on the evolution of the IPEGs, please see our articles discussing the 2014 release for public consultation (the first update to the IPEGs since 2000) and the results of that public consultation.
Pharmaceutical Patent Litigation Settlements
The new IPEGs helpfully recognize how the unique features of Canada’s regulatory system can impact settlements, and provide further clarity on the Bureau’s approach to these settlements.
With respect to the 2015 draft IPEGs, we reported on how the Bureau divided settlements made in the context of Patented Medicines(Notice of Compliance) Regulations (PM(NOC)) proceedings into three categories. The new IPEGs provide additional guidance on the following:
- “Entry-split” settlements with no payment to the generic – no issue if the generic enters on or before patent expiry and there is no payment.
- Settlements which include a payment to the generic – possible review under sections 90.1 (civilly reviewable agreements between competitors) or 79 (abuse of dominance) of the Competition Act (Act) with the potential of an administrative monetary penalty of up to $10 million, where it is found that settlement will result in a substantial lessening of competition.
- Possibility of criminal review – no prospect of criminal review, unless the settlement: (a) extends beyond date of patent expiry, (b) restricts competition for products unrelated to the patent at issue in the litigation, or (c) is a “sham”.
In the new IPEGs, the Bureau recognizes the unique features of the Canadian PM(NOC) system, in particular with respect to settlements which include a payment:
- Exclusivity of first generic filer – Since there is no generic exclusivity available in law to the first generic challenger in Canada, the incentives for the first generic filer to enter into settlements may be impacted.
- Section 8 damages– the brand firm’s exposure to liability under section 8 of PM(NOC) is a relevant consideration when assessing the magnitude of any settlement payment.
- Dual litigation – Findings in a PM(NOC) proceeding do not prevent a generic or brand firm’s ability to bring subsequent patent impeachment/infringement actions. The consideration of such follow-on litigation is relevant when assessing the magnitude of settlement payment.
In the 2014 IPEGs, the Bureau identified product switching (also known as “product hopping”) as a practice that could constitute “something more” than the mere exercise of IP rights, and could therefore be challenged under the abuse of dominance provisions. The new IPEGs create a distinction between “hard” switching and “soft” switching. Hard switching, an example of which was included in the 2014 IPEGs, occurs where a patentee removes its original product from the market for the purpose of forcing the market to switch to its new formulation product to impede generic entry. As we previously reported, the Bureau considers such conduct reviewable under the abuse of dominance provisions. Soft switching, by contrast, occurs where the patentee does not withdraw its original product from the market, but rather ceases to promote that product to physicians in favour of its new formulation product. In a new example, the Bureau states that soft switching would not raise an issue under the Act, provided that the marketing did not involve false or misleading statements about the original product.
We previously reported on a Bureau investigation into product switching here.
Collaborative Standard Setting and Standard Essential Patents
In the 2015 draft IPEGs, we reported that the Bureau recognized the value of industry standards in setting benchmarks for performance and safety and allowing for the interoperability of devices made by different manufacturers. In the new IPEGs, the Bureau maintains this view but acknowledges that competition enforcement policy in this area is in flux, and puts the public on notice that it may revisit its guidance. Even so, the Bureau made meaningful updates:
Injunctions: The Bureau is concerned about the anti-competitive effects of patent hold-up (also known as “patent ambush”), where a patent holder purposely conceals its patent from a Standards Development Organization during the formation of an industry standard, and then later asserts the undisclosed patent when access to its technology is required to implement the standard. Accordingly, the Bureau may have concerns where a patentee seeks an injunction for the infringement of a standard essential patent it has committed to license on fair, reasonable and non-discriminatory (FRAND) terms. Nonetheless, the Bureau added two additional circumstances where it may conclude that such an injunction is appropriate. This is in addition to the existing grounds from the 2015 draft IPEGs, namely, where a prospective licensee has refused to pay a royalty that has been determined to be FRAND by an adjudicator, and where a prospective licensee refuses to negotiate licensing terms.
- Where a prospective licensee constructively refuses to negotiate (e.g., refusing to consider FRAND terms).
- Where a prospective licensee is unable to pay damages (e.g., due to bankruptcy).
- Enforcement Limitations: The Bureau has explicitly recognized the limitations of its enforcement activities. For example, the Bureau noted that it is not a price regulator and, as such, will not typically intervene in disputes about the quantum of a royalty rate. Similarly, in evaluating whether to take action in a patent hold-up case, the Bureau will consider whether private litigation is more appropriate.
Patent Assertion Entities
A patent assertion entity (PAE), also known as a non-practicing entity, acquires patents for the purpose of asserting them against potential infringers, without itself using the patented technologies it owns. In our post on the 2015 draft IPEGs, we reported the Bureau’s statement that it could take action against PAEs under the civil or criminal misleading advertising provisions of the Act. The IPEGs include a new example in which the patentee assigns its patent to a PAE specializing in patent enforcement and enters into an arrangement to split any revenues from the enforcement of that patent. In this example, the Bureau says that while the Act may prescribe limits on to whom and how a patent may be licensed or assigned, the assignment of a patent to a PAE for the simple purpose of more effective enforcement is unlikely to raise issues under the Act.
The Bureau also states that the law with respect to PAEs is a rapidly evolving area and the Bureau may revisit its guidance in this area in the future. We report on other recent US and Canadian trends with respect to PAEs here.
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Positively, the Bureau has provided more clarity in the new IPEGs, which gives market participants a measure of predictability as to how the Bureau will approach enforcement, thereby allowing them to plan more effectively. It is also helpful that the Bureau has picked up on major trends in the US, while still acknowledging that there are differences in Canada.
This post previously appeared on McCarthy Tétrault LLP's website: http://mccarthy.ca/article_detail.aspx?id=7243
 See also the Bureau’s controversial 2014 white paper, Patent Litigation Settlement Agreements: A Canadian Perspective, that outlined its preliminary views on this topic, which we analyzed.
Competition Bureau IPEGs patent patent troll product switching