Patent Settlements, Conduct of Patent Owners and "Patent Trolls": Competition Bureau Updates Draft Intellectual Property Enforcement Guidelines

On June 9, Canada’s Competition Bureau (Bureau) released a draft update of its Intellectual Property Enforcement Guidelines (Draft IPEGs) for public comment. In the Draft IPEGs, the Bureau focuses on its proposed approach to patent litigation settlements, and also discusses the conduct of patent owners and the activities of "patent trolls" in the context of misleading advertising. While the Draft IPEGs are yet to be finalized, they provide insight and guidance on the direction the Bureau’s enforcement mandate will likely take. The deadline to submit comments on the Draft IPEGs is August 10, 2015.

What You Need To Know

1. Patent Litigation Settlements

The Draft IPEGs would align Canada’s approach to reviewing patent litigation settlements more closely with international approaches by clarifying that these settlements will be primarily reviewed as civil enforcement matters under the Competition Act, and that criminal enforcement will only be pursued in "limited circumstances."

The Draft IPEGs further provide that:

• "entry-split" settlements, allowing early generic entry without compensation, will not raise competition issues;
• settlements with payments reflecting "section 8" damages (for delaying generic entry through litigation) and litigation expenses (both incurred and saved) may raise issues but likely will be reviewed as non-criminal matters; and
• settlements that delay entry beyond the patent expiry date and/or include unjustifiable payments may be reviewed as criminal matters.

While the Draft IPEGs highlight that reverse-payment settlements are potentially problematic, they also confirm that parties have legitimate interests in settling litigation and recognize the societal benefits of easing the burden on the courts and public resources.

In determining whether to challenge a settlement, the Bureau will consider a variety of factors, including: (i) the timing of generic entry; (ii) documentary evidence of the parties’ beliefs with respect to patent validity; (iii) the size of the payment, to determine whether the payment was likely for the purpose of delaying a generic drug’s entry (which involves considering "section 8" damages and litigation expenses); and (iv) the likely price difference between the brand drug and the competing generic drug were it on the market.

With respect to (i) and (ii), the Draft IPEGs confirm that a settlement with compensation, where market entry of the generic is delayed beyond patent expiry or where there exists "convincing documentary evidence" of the likely invalidity of the patent, will almost certainly be viewed as anticompetitive and potentially pursued criminally. With respect to (iii), the Draft IPEGs confirm that the form of payment will not affect the Bureau’s analysis as to whether the settlement is intended to delay generic drug entry. If the payment involves compensation for the provision of services, the Bureau will consider whether there is a history of collaboration between the brand company and the generic company. The Bureau will also consider other factors, such as whether the brand company typically enters into arrangements for such services, to determine whether the payment is legitimate for the services provided, rather than a disguised payment to the generic company for delayed entry.

These are significant changes. Prior to the Draft IPEGs, a patent was presumed to be valid and therefore any settlement that did not expand the exclusionary scope of a brand company’s patent rights was lawful. Going forward, however, the Bureau will consider whether the patent may be invalid (or whether the parties thought it invalid) in assessing whether some parties may be settling illegitimately to share in "monopoly profits."

A key question remains: what will constitute delayed entry? While entry after patent expiry will clearly be scrutinized, it is less clear how early entry will be assessed. According to the Draft IPEGs, the greater the likelihood that a patent is valid and infringed, the later in the patent term a generic drug’s entry would be expected. However, determining the strength of a patent is a challenging exercise, even for patent experts, and no further guidance is provided in the Draft IPEGs.

2. The Conduct of Standard Essential Patent Owners

The Draft IPEGs highlight a concern with patent "hold-up" by the owner of a patent. The Bureau warns that the following conduct would likely be reviewed criminally or civilly depending on whether there was a "naked restraint" on competition:

• not disclosing certain patents when standards are being developed and then asserting them against firms developing products incorporating the standard (i.e., "patent ambush");
• committing to a maximum royalty and then subsequently reneging on that commitment; or
• seeking an injunction against licensees after making a licensing commitment when the prospective licensee was willing to enter into negotiations or pay a royalty at a fair, reasonable and non-discriminatory (FRAND) rate.

3. The Activities of Patent Assertion Entities

The Bureau discusses the activities of patent assertion entities (so-called "patent trolls") in the context of false or misleading demands for licensing fees from businesses they claim are infringing one or more of their patents. Such activity may be reviewed criminally or civilly depending, for the most part, on whether a representation was made knowingly or recklessly.