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Scotia Plaza 40 King St. West, Suite 5800P.O. Box 1011 Toronto, ON Canada M5H 3S1 Tel. 416.595.8500 Can Assigning Your Patent Rights
Violate Canada's Competition Act?
This article is provided as an information service only and is not meant as legal advise. Readers are cautioned not to act on the information provided without seeking specific legal advise with respect to their unique circumstances. Miller Thomson LLP 1998-2005 Can Assigning Your Patent Rights Violate Canada's Competition Act?
By Michael Piaskoski and Sterling Kendall, Miller Thomson LLP
Could you be accused of criminal offence for assigning Shinogi patents could, as a matter of law, result in an or acquiring patent rights? Could you be sued for undue lessening of competition under section 45.6 damages by the victims of your “crime”? The short answer to both of these questions is “yes” following the The Treatment of Intellectual Property
recent decision (the “Apotex Decision”)1 of the
under Canadian Competition Law
Federal Court of Appeal (the “FCA”) in the patent
infringement litigation between drug manufacturers,
The Apotex Decision is part of a growing body of Apotex and Eli Lilly (“Lilly”).
jurisprudence recognizing7 the fundamental tension between the Competition Act’s purpose of maximizing Background
competition and the Patent Act’s purpose of granting a long-term monopoly to an inventor.8 Under the Patent In 1997, Lilly sued Apotex, alleging infringement of Act, patents are assignable in whole or in part, and eight of its patents for the manufacture of the patent licensees have standing to sue an infringer of antibiotic, cefaclor. Four of Lilly’s patents had been their licensed patent rights. The Canadian Competition previously assigned to it by Shionogi, a non-related Bureau has also recognized the right of patent holders Japanese company, thereby giving Lilly a monopoly in to exclude others, but has retained the power to Canada over the cefaclor manufacturing process. intervene in cases where arrangements among Apotex filed a defence and a counterclaim, alleging independent entities to use or enforce their intellectual that the assignment had violated the criminal property rights (“IPRs”) may result in competitive
conspiracy provisions of section 45 of the Competition Act.2 Under section 45, it is an offence to enter into any agreement or arrangement that will prevent or Criminalizing the Assignment of IPRs?
Has the Apotex Decision gone too far in holding that During the proceeding, Lilly was twice successful in criminal penalties could apply to an otherwise having Apotex’s counterclaim struck out as disclosing no cause of action, only to have it restored each time by the FCA.4 In doing so, the FCA distinguished its Does section 45 criminalize transactions that
earlier decision of Molnlycke5 in which it had held that might be permitted as mergers?
an assignment under the Patent Act could not be an Criminal conspiracies typically arise from deceitful or offence because any resultant lessening of competition fraudulent agreements among competitors not to could not be “undue”. The FCA stated that Molnlycke compete (e.g., with respect to prices, products, was restricted to situations where the assignment of a customers, geographic markets). However, as the patent in and of itself increased or created market assignment to Lilly had no intent to deceive or defraud power, and not where an assignment increased the assignee’s market power in excess of that inherent in the patent rights assigned. Therefore, Lilly’s market power from the combination of its own patents and the As of the date of this publication, Eli Lilly and Shionogi had not sought to appeal the Apotex Decision to the Supreme Court of Canada. 7 For example, see Astrazeneca Canada Inc. v. Minister of Health et al. (leave granted to the SCC, May 18, 2005 and Bristol-Myers Squibb Co. v. Canada, [2005] SCC No. 26 Eli Lilly and Co. v. Apotex Inc., 2005 FCA 361. (October 20, 2005) as cases where the courts have attempted to encourage competition by placing limits the rights of the In section 45. Section 36 creates a statutory cause of action (or counterclaim) for any person harmed by conduct contrary to the Harvard Professor of Law and Economics, Louis Kaplow, well explained this tension: “a practice is typically deemed to violate Conviction under section 45 can result in imprisonment for up the antitrust laws because it is anticompetitive. But the very to five years or to a fine of up to $10 million, or both. purpose of the patent grant is to reward the patentee by limiting Apotex Inc. v. Eli Lilly and Company, (2003), 28 C.P.R. (4th) competition, in full recognition that the monopolistic evils are 37, 2003 FC 1171; overruled by Apotex Inc. v. Eli Lilly and the price society will pay.” “The Patent-Antitrust Intersection: Company, 2004 FCA 232; Eli Lilly and Company v. Apotex A Reappraisal”, (1984) 97 Harv. L. Rev. 1813 at 1817. Inc., [2005] 2 F.C.R. 225, 2004 FC 1445. Whether such arrangements are in the form of a transfer, Molnlycke AB v. Novopharm Kimberly-Clarke of Canada Ltd. licensing arrangement or agreement See Competition Bureau, Intellectual Property Enforcement Guidelines, 2000. anyone, it is inapt to characterize it as a “conspiracy” potential responses of actual or potential competitors, when it more properly resembles a merger or the sale all within a product market capable of more than one of a business. If Shionogi had moved its patents into a legitimate definition. Similarly, before assigning a separate corporation and sold that corporation to Lilly, patent, the parties would need to retain economics that would likely have fallen under the Act’s merger consultants to conduct a detailed market analysis to provisions, which permit the Bureau to challenge and predict whether competition would be lessened unduly. ultimately prohibit a transaction, with no threat of Only then would they “know” if they were parties to a The Apotex Decision reveals a statutory inconsistency Conclusion
in that a mere patent assignment can attract criminal and civil liability whereas the sale of a business Apotex has not yet succeeded at trial on its comprising the same patent rights attracts only a counterclaim. Nevertheless, two successive panels of merger review by the Bureau. Taken to its extreme, the FCA have held that, based on the wording of any commercial agreement involving the sale of a section 45, the counterclaim should not be struck out business to a competitor could be subject to section 45. because it is not plain and obvious that it cannot succeed under that section. However, as a matter of How do the parties even know if they have
policy, Parliament could not have intended that section committed a conspiracy?
45 should be interpreted so broadly so as to stigmatize these kinds of transactions as criminal conduct. For a successful conviction under section 45, the prosecutor must establish that (1) the parties The Competition Bureau has for some time been subjectively intended to enter into the agreement (and actively considering amendments to section 45 (for intended to carry it out) and (2) objectively, a reasons unrelated to the Apotex Decision). Although reasonable person would (or should) have known that the Bureau has not yet decided on a specific legislative its effect would be to lessen competition unduly. model to recommend to the government, and any new Obviously, Lilly and Shionogi subjectively intended to legislation may be some years away, the business enter into the assignment agreement, and did carry it community can only hope that the over-inclusiveness out. Further, they must have known that moving from and vagueness of section 45 revealed in the Apotex a duopoly to a monopoly in the manufacture of Decision will be sufficient to demonstrate the need for cefaclor would likely result in a lessening of a careful circumscription of Canada’s criminal competition. But, could or should they have known that the result would be an undue lessening, whatever that might be? Section 45 provides no definition of “undue” and the conspiracy case law is not very helpful as the judicial analysis provided in the few reported cases centres around the concept of “market power” - a rather nebulous concept that is determined largely by how one chooses to define the relevant product market. Here, it is not clear whether the relevant market is “cefaclor” itself, or cefaclor plus any adequate substitutes that would permit a broader market. The difference is crucial.11 As well, in the absence of any “smoking gun” memo proving what the parties actually knew, a court would have to engage in a highly speculative assessment of what the parties should have known, considering such factors as the existence of reasonable substitutes, barriers to entry and the 10 Even if the transaction is permitted to proceed, any exercise of monopoly power by the new patent holder can be kept in check through the “abuse of dominance” review provisions of the Act. 11 The adoption of a narrower market definition may result in a finding of market power and a deemed knowledge that competition would be lessened unduly, whereas adoption of a broader market definition would not.

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