Patent Settlements, Product Switching, "Patent Trolls," and Patent Owner Conduct: the Competition Bureau’s Updated IP Enforcement Guidelines

On March 31, 2016, Canada's Competition Bureau (Bureau) released an update of its Intellectual Property Enforcement Guidelines (IPEGs), after previously releasing a draft version for public comment on June 9, 2015. The main revisions include clarification on the Bureau’s approach to patent litigation settlements and product switching, but also address activities such as the conduct of patent assertion entities and conduct involving standard essential patent owners. The IPEGs provide insight and guidance on the Bureau’s enforcement mandate for the recent future. The Bureau has committed to review the IPEGs annually and revise them as needed to support innovation and ensure that guidance keeps pace with developments.

What You Need To Know

1. Patent Litigation Settlements

While the 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:

• the timing of generic entry;
• the magnitude of any settlement payment, to determine whether the payment likely had the effect of delaying entry (which involves considering the fair market value of any goods or services provided by a generic, "section 8" damages under the Patented Medicines (Notice of Compliance) Regulations, and expected litigation costs and remaining expenses); and
• the parties' beliefs with respect to patent validity

The IPEGs 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 "very limited circumstances."

The IPEGs provide further guidance that:

1. "entry-split" settlements, allowing generic entry on or before patent expiry without compensation, will not raise competition issues;
2. settlements with "payment" to the generic firm but that allow generic entry on or before patent expiry will not be reviewed under the criminal provisions of the Competition Act but may be reviewed under the civil provisions;
   • however, the IPEGs state that reflecting a reasonable estimate of section 8 damages (i.e. damages to a generic manufacturer for delaying generic entry through litigation) and expected litigation expenses (which can include the expected costs of a subsequent patent infringement action and impeachment counterclaim, and potential adverse cost awards at the prohibition application stage and in an infringement/impeachment proceeding) will likely not raise competition issues; and
3. settlements that delay entry beyond patent expiry, restrict competition among products unrelated to the patents at issue in the proceedings, or are a "sham" will almost certainly be viewed as anticompetitive and potentially pursued criminally.

With respect to (ii), the IPEGs confirm that the form of compensation will not affect the Bureau's analysis whether the settlement has the effect of delaying generic 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.

With respect to (iii), the IPEGs describe a "sham" as a situation where the parties use litigation as a means to disguise an otherwise "naked" conspiracy. That is, the parties recognized that the patent was not valid and/or not infringed and use a purported settlement to engage in anticompetitive conduct as opposed to addressing patent-protected rights. If the Bureau had reason to believe that the parties recognized the patent was not valid, it would likely pursue the settlement as a criminal matter.

In the IPEGs, the Bureau recognizes that there are significant differences between the regulatory regimes in Canada relative to other jurisdictions with respect to pharmaceuticals and that these may have implications on incentives for the terms of patent litigation settlements. The IPEGs highlight four of Canada’s unique pharmaceutical regulatory features, namely: no six-month exclusivity for the first generic filer; section 8 damages; the possibility for dual litigation under separate regimes of the Patented Medicines (Notice of Compliance) Regulations and the Patent Act; and the potential for significant regulatory restrictions on prices of drugs that are subject to government reimbursement.

These are significant changes. Prior to the 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 (at least for non "entry-split" settlements): 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 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 IPEGs.

2. Product Switching

The IPEGs make a distinction between a "hard" switch and a "soft" switch. A "hard" switch involves a brand company forcing the replacement of sales of one product with those of another (for example, a new formulation or a new dosage form) to exclude or impede generic entry and to successfully maintain its market power. In this scenario, the Bureau makes a distinction between conduct that was intended to delay or foreclose entry of a generic and conduct with a "legitimate business justification" (e.g., removing the original product from the market because it was not profitable or transitioning patients to a higher quality treatment). In making its determination, the Bureau will consult with relevant medical experts and analyze the behaviour under the civil provisions of the Competition Act.

A "soft" switch could involve discontinuing promotion of the original drug to physicians but not withdrawing it from the market. This situation will not likely raise competitive issues provided the brand company does not anti-competitively undermine the prescription base of the original product (e.g., by making false or misleading statements about the original product).

3. Patent Assertion Entities

The Bureau discusses the activities of patent assertion entities (so-called "patent trolls" or "PAE") 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. The IPEGs indicate that assigning a patent to a PAE simply for the purpose of more effective enforcement will likely not raise competition issues. The Bureau highlights that the interface between PAE conduct and competition law is a “rapidly evolving area” and that the Bureau will continue to refine its approach.

4. The Conduct of Standard Essential Patent Owners

The IPEGs highlight a concern with patent "hold-up" by the owner of a patent in the context of Standards Development Organizations (SDO). 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 later asserting them against firms requiring access to the undisclosed patented technology to implement the standard (i.e., "patent ambush"); committing to a maximum royalty and then subsequently reneging on that commitment; or seeking an injunction against "willing" licensees (i.e., those willing to enter into negotiations or pay a royalty at a fair, reasonable and non-discriminatory (FRAND) rate). As with PAEs above, conduct of standard essential patent owners was specifically highlighted as an area undergoing "rapid developments" with respect to competition enforcement policy and as such will likely be revisited in a later update.