On November 2, 2005, a unanimous Federal Court of Appeal (the "FCA") rendered an important decision in Apotex Inc. v. Eli Lilly and Co. concerning the interplay between the Competition Act and intellectual property rights.  The principal issue addressed by the FCA was whether the assignment of a patent can constitute an agreement or arrangement to lessen competition unduly, contrary to section 45 of the Competition Act.  The FCA held that the assignment of a patent may, as a matter of law, constitute an arrangement or agreement which results in an undue lessening of competition.  The FCA allowed Apotex's appeal and dismissed the motions for summary judgment on this issue. 

The FCA's decision has its roots in a long-standing patent infringement dispute between Eli Lilly and Apotex concerning the manufacture of the antibiotic cefaclor.  In 1997, Eli Lilly commenced an action against Apotex alleging that it had infringed eight of its manufacturing process patents, four of which had been assigned to Eli Lilly by Shionogi in 1995.  In 2001, Apotex amended its statement of defence and counterclaim to argue that the assignment of these patents constituted an unlawful agreement contrary to section 45 of the Competition Act and thereby entitled Apotex to damages under section 36 of the Competition Act.  Interestingly, the process patents in question had expired in 2000 and the patent for cefaclor had expired in 1995.   

Once Apotex initiated its counterclaim, a series of motions for summary judgment were brought by Eli Lilly and Shionogi regarding the potential application of section 45.  These motions wound their way through the Federal Court and then the FCA through various appeals.  Initially, Justice Hugessen, a Judge of the Federal Court Trial Division held (on an appeal from a Prothonotary of the Federal Court) that Apotex's  conspiracy counterclaim should be dismissed.  Apotex's appeal of this decision was allowed by the FCA and the matter was remanded back to Justice Hugessen for further consideration.  Justice Hugessen refused to depart from his original reasoning, however, and struck the counterclaim in a second decision.  Apotex appealed once more to the FCA which, in its November 2nd  judgment, held that Justice Hugessen had erred in law and that Apotex's counterclaim should proceed. 

Of special note is the fact that the Competition Bureau applied for and was granted leave to intervene in these proceedings.  In its application for leave, the Bureau argued that Justice Hugessen's decision would cause "great mischief" if upheld and lacked support in legal precedent and public policy as well.  In its decision to grant the Bureau's application for leave, the FCA held that the Bureau had standing because its ability to administer the Competition Act in respect of patent rights could be affected by the outcome of the case.  In particular, the Bureau would be able to provide the FCA with its input regarding Justice Hugessen's assertion that his decision was consistent with the Bureau's Intellectual Property Enforcement Guidelines.  In its materials, the Bureau disagreed with this view. 

Throughout the proceedings, Eli Lilly and Shionogi had argued that section 45 could not apply as a matter of law to an assignment of patent rights because the Canadian Patent Act specifically authorizes holders of patents to assign such rights.  The argument was that an assignment of rights made lawful by the Patent Act is incapable, by definition, of being unlawful under the Competition Act, even if it lessens competition. Eli Lilly and Shionogi relied on a 1991 decision of the FCA in Molnlycke AB v. Novopharm Kimberly-Clarke of Canada Ltd. as authority for this proposition, which was accepted by Justice Hugessen in his decision dismissing Apotex's counterclaim. 

The FCA disagreed with Justice Hugessen and held that Molnlycke applies only when the market power created by the assignment is inherent in the patent assigned, i.e., where the assignment of the patent in and of itself increases or creates market power in a relevant market.  However, when there are other factors which contribute to the creation or increase of market power, then Molnlycke will not preclude the application of section 45.  The FCA distinguished Molnlycke from the case at bar on the basis that it was the combination of the 1995 assignment from Shionogi, together with Eli Lilly's already existing ownership of patents for the other commercially viable methods of production for cefaclor, which led to a lessening of competition and potentially invoked the application of section 45.  

In reaching its decision, the FCA also noted that section 45 of the Competition Act does not contain any express exception for the exercise of patent rights, in contrast to other provisions of the Competition Act which contain such an exemption.  In addition, the FCA held that "an interpretation of [the Patent Act] which does not immunize the assignment of patents from section 45 when it lessens competition is consistent with the purpose of the Competition Act" which, as stated in section 1.1, is to "maintain and encourage" competition.  Furthermore, the FCA found that this interpretation of the Patent Act was more consistent with the enforcement approach set out in the Competition Bureau's IPEGs. 

The alternative argument offered by Eli Lilly and Shionogi was that, even if section 45 could apply in theory, it did not apply in practice because the assignment did not lessen competition unduly on the facts of the case.  The FCA dismissed this argument on the basis that even Justice Hugessen had found that, on the facts, there had at least been a lessening of competition in the relevant market.  The FCA stated that the question of whether this lessening of competition was "undue" should be decided at trial.   

The FCA also left to trial the particular issues of whether (i) Apotex's claims were in fact statute-barred because they were beyond the limitation period set out in section 36 of the Competition Act and (ii) Apotex had sustained any actual damages, another pre-condition for a claim under section 36.  With respect to the relevant limitation period, it is notable that even though the assignment took place in 1995, the FCA characterized the conduct as ongoing "as long as the assignment had competition-lessening effect".  Although the FCA's comments on this point are obiter, this approach differs from the judicial treatment of limitation periods in respect of mergers or other analogous events which are typically viewed as complete once implemented. 

Overall, the FCA's decision that the Patent Act cannot in all circumstances preclude the application of the Competition Act is hardly a new or surprising position.  This general proposition is consistent with the Bureau's IPEGs and with other international jurisprudence regarding the interplay between antitrust regulation and intellectual property rights.  That said, the FCA's decision is notable in that it underscores the careful consideration which must be afforded to competition law issues when licenses or patents are assigned.  As demonstrated in this case, the assignment of a patent right could land the parties in the middle of an alleged criminal conspiracy, raising the prospect of prosecution and follow-on civil actions.   

It remains to be seen whether Eli Lilly or Shionogi will appeal this decision once again.  However, this is certain not to be the last time that the interplay of competition law and intellectual property rights is considered in Canada. 

The FCA's decision is available from the Federal Court of Appeal's website at:  http://decisions.fca-caf.gc.ca/fca/2005/2005fca361.shtml.

The foregoing is a summary of a recent development in competition law.  If you would like additional information about this topic or any aspect of Canadian competition law, please contact George Addy, Anita Banicevic, Laurent Debrun, Mark Katz, Hillel Rosen or any other member of the Competition and International Trade Practice Group at Davies Ward Phillips & Vineberg LLP at (416) 863-0900 (Toronto) or (514) 841-6400 (Montréal).

Davies Ward Phillips & Vineberg LLP, with over 225 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments contained herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances.  For particular applications of the law to specific situations, the reader should seek professional advice.