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How Competition Law Intersects with Intellectual Property and What You Should Know

How Competition Law Intersects with Intellectual Property and What You Should Know

Competition law can at times conflict with the goals of intellectual property (IP) law. While competition law seeks to maintain market competition by regulating anti-competitive conduct, IP law grants exclusive rights to inventors and creators. In view of these inconsistent goals, IP rights (IPRs) do not function as a blank cheque to practice in any manner the IPR holder sees fit. For example, sections 45 and 90.1 of the Competition Act (RSC 1985, c C-34) regulate various IP issues, including licensing agreements, patent pools, assignments, distribution practices, and patent litigation settlement agreements. IPR holders should review how their actions may be affected by these provisions and competition law generally.

IP Guidelines

On 31 March 2016, the Competition Bureau released an updated version of the Intellectual Property Enforcement Guidelines (the “IPEGs”). Although non-binding, the IPEGs attempt to provide clarity on how the Bureau approaches IP-related matters under the Competition Act. Specifically, the IPEGs attempt to provide practical guidance on the Bureau’s approach to patent settlement agreements, product switching, patent assertion entities, and collaborative standard setting and standard essential patents.

“A Mere Exercise” of IPRs

The IPEGs state that the general provisions of the Competition Act will apply to anything more than a “mere exercise” of IPRs. What constitutes “a mere exercise” depends on the specific context. A relevant question is whether an IPR holder has used its statutory rights to increase the market power beyond whatever initially derived from the statutory rights. Interestingly, the IPEGs note that IPRs do not necessarily confer market power. For example, the existence of market power depends on the subject matter of a patent (or patents) owned by the entity in question, the level of concentration in the relevant market, and any horizontal effects a merger may cause on the market.

Section 32 of the Competition Act serves as an exception to the “mere exercise” rule. That is, where a mere exercise of IPRs actually “unduly” lessens competition, the Bureau may seek to preclude or reverse that conduct. The Bureau can seek a number of remedies under this section, including a declaration that a license, assignment, or other agreement is void; an order that a trademark registration be expunged or amended; an order to revoke a patent; or an order directing the grant of a license. The use of section 32 is rare, and there is no existing jurisprudence to guide how the Bureau might apply this section.  However, it is still important for IPR holders to be aware of its existence, given the potentially serious actions the Bureau is permitted to take.

Licensing Agreements

Licensing agreements are generally seen as pro-competitive, as they provide competitors with access to otherwise monopolized products. Unless the licensing agreement reduces competition substantially relative to what the situation would have been in the absence of the agreement, the Bureau will be unlikely to take any action. However, such agreements may attract scrutiny under section 45 or section 90.1 of the Competition Act if they resemble an attempt to control prices or otherwise restrict competition in a market.[1]

Patent Pools

A patent pool involves several companies assigning their patents to a third party and in return each receiving a license to use all of the “pooled” patents. Such conduct can allow companies to fix prices, increase royalties, or otherwise limit competition, thereby potentially falling within section 45 or 90.1 of the Competition Act. However, where a patent pool simply has the effect of avoiding litigation or is otherwise pro-competitive, it is unlikely that the Bureau will pursue action against such conduct.

Assignments

Where an assignment grants an assignee greater market power than the underlying IPRs would otherwise grant, section 45 or section 90.1 may come into play. It remains a fact-specific question as to whether or not the assignment amounts to a “mere exercise” of IPRs, or something more. Assignment agreements between direct competitors will likely attract more scrutiny than other assignments.

Patent Litigation Settlement Agreements

According to the IP Guidelines, patent litigation settlement agreements cannot be a “mere exercise” of IPRs because settlement agreements engage at least two parties. Therefore, patent settlement agreements attract the general provisions of the Competition Act.

The test for finding a substantial lessening or prevention of competition is the “but for” test – that is, but for the settlement, would the parties have been likely to compete in the relevant market? If so, it is open for the Bureau to find that there has been a negative effect on competition.

In the pharmaceutical realm, an innovative pharmaceutical company that allows a generic manufacturer to enter the market before the expiry of the innovator’s patent without other consideration will not likely attract attention from the Bureau. However, if the innovator provides additional consideration to the generic manufacturer in order to obtain the settlement, the Bureau may review the settlement, particularly where the additional consideration acts as compensation for delaying the generic manufacturer’s entry into the market.

To determine whether payment from an innovative drug company to a generic manufacturer under a settlement agreement likely had the effect of delaying the generic manufacturer’s entry into the market, the Bureau will consider the following factors:

  • the fair market value of any consideration provided by the generic manufacturer;
  • the extent of the innovator’s exposure to damages under section 8 of the Patented Medicines (Notice of Compliance) Regulations (SOR/93-133); and
  • the innovator’s expected remaining litigation costs in the absence of a settlement agreement.

Under the IPEGs, a settlement will only be reviewed under the section 45 criminal provisions in rare circumstances, such as where the settlement is a “sham” or where the settlement precludes marketplace entry of a generic manufacturer until well after the expiry date of the patent in consideration. Another example is where a settlement is entered into even when parties realize that the patent is invalid or otherwise not infringed.

Distribution Practices

The Competition Tribunal has held that a refusal to license an IPR does not amount to “something more” than the mere exercise of that right, and therefore does not attract the section 75 “refusal to deal” provision of the Competition Act.[2] However, acquiring a large number of IPRs in a certain area and then refusing to license them, and therefore causing a substantial lessening or prevention of competition in a particular market, could draw the Bureau’s attention to other provisions of the Competition Act, including sections 45 and 90.1. Further, a refusal to license an IPR to a downstream customer or supplier might run afoul of the price maintenance provision of the Competition Act.[3]

Conclusion

In general, the mere exercise of IPRs will not offend provisions of the Competition Act. However, a transaction or other action that has a negative effect on competition in a market may prompt review by the Competition Bureau.

IPR holders involved in one or more of the transaction types discussed above should take steps now to evaluate what impact competition law may have on their business operations.

Endnotes

[1]  Section 45 of the Competition Act prohibits individuals and companies from conspiring with one another to lessen competition unduly or to enhance prices unreasonably. A purpose of this prohibition is to ensure that businesses and their customers both benefit from competitive prices, produce choice, and quality products and services. Where the Competition Tribunal has reason to believe that an individual or company is conducting affairs in a manner contrary to section 45 (or other provisions of the Competition Act), it will conduct an investigation. Investigations under the Competition Act can lead to significant financial penalties and criminal proceedings, including fines to a maximum of $10 million per incident and jail terms of up to five years. Under section 36 of the Competition Act, victims can seek compensation for losses incurred as a result of violations of the Competition Act, including section 45.

Section 90.1 regulates existing or proposed agreements between persons, two or more of whom are “competitors,” that prevent or lessen competition substantially (or are likely to do so). The factors to be considered by the Competition Tribunal in undertaking this assessment include effective remaining competition, barriers to entry, change and innovation, etc. An efficiencies defence applies if the agreement brings about “gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition” and if the efficiency gains would not be attained if a prohibition order was issued. In contrast to section 45, available remedies under section 90.1 are purely injunctive in nature. No private actions for damages are available for breaches of section 90.1.

[2] Canada (Director of Investigation & Research) v Warner Music Canada Ltd., 78 CPR (3d) 321.

While there is no absolute obligation on any person to supply to, or buy a product from, another person, section 75 of the Competition Act may be triggered under certain circumstances where one person refuses to supply another person. For section 75 to apply, the following requirements must be met: (i) the business of the would-be-customer is shown to be substantially affected or inoperable as a result of not being able to obtain adequate supplies of a product on usual trade terms; (ii) the inability to obtain adequate supplies must result from a lack of competition among suppliers; (iii) the would-be-customer is willing and able to meet the supplier’s usual trade terms; (iv) the product is in ample supply; and (v) the refusal to supply has an adverse effect (or is likely to cause an adverse effect) on competition in a market.

[3] The price maintenance provision, section 76, of the Competition Act permits the Bureau or a person (with leave) to apply to the Competition Tribunal for an order prohibiting certain conduct that has an adverse effect on competition, including conduct that involves: (i) a person influencing upward or discouraging the reduction of a second person’s selling or advertised price; (ii) a person refusing to supply a second person or otherwise discriminating against that second person because of that second person’s low pricing policy; and (iii) a person conditioning their supply to a second person on that second person not supplying a third person because of the third person’s low pricing policy. Section 76 permits the Competition Tribunal to prohibit conduct contrary to section 76 or to require that a person supply another person. A violation of section 76 will not result in a criminal conviction, criminal sentence, financial penalty, or the exposure to private damages (unless another provision of the Competition Act is breached).

By Tyler C. Berg and Stephanie A. Melnychuk

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