The Federal Court of Appeal Rules on Whether Licenses Demonstrate That Competition is not Lessened Under the Competition Act

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THEFEDERALCOURTOFAPPEALRULESONWHETHERLICENSESDEMONSTRATE
THATCOMPETITIONISNOTLESSENEDUNDERTHECOMPETITIONACT

NadiaPerri*
LEGERROBICRICHARD
,L.L.P.
Lawyers,PatentandTrademarkAgents
CentreCDPCapital
1001Square-Victoria–BlocE–8
thFloor
Montreal,Quebec,CanadaH2Z2B7
Tel.(514)9876242–Fax(514)8457874
info@robic.com-www.robic.ca

INTRODUCTION

OnappealfromadecisionrenderedbytheFederalCourtofCanada(the“Federal
Court”)grantingmotionsforsummaryjudgementbroughtforthbyEliLillyand
Company(“EliLilly&Co.”),EliLillyCanadaInc.(“EliLilly”)andShionogi&Co.Ltd.
(“Shionigi”)(EliLilly&Co.,ElliLillyandShionogicollectivelythe“Respondents”),with
regardtothestrikingoutofcertainparagraphscontainedinApotexInc.’s
(“Apotex”)statementofdefenseandcounterclaimandthedismissalofApotex’s
counterclaimagainstShionogi,theFederalCourtofAppeal(“CourtofAppeal”)
dismissedtheaforesaidmotionsforsummaryjudgementandreinstatedthe
paragraphsstrickenfromApotex’sstatementofdefenceandcounterclaimand
restoredApotex’scounterclaimagainstShionogi.

THEFACTS

OnJune18,1997,EliLily&Co.andEliLilly(collectively“Lilly”)institutedlegal
proceedingsagainstApotexwherebyLillyclaimedthatApotexhadinfringedseven
ofitsprocesspatentsrelatingtointermediatecompoundsandprocessesfor
preparingintermediatesusefulinthepreparationoftheantibioticcefaclor.Lily
amendeditsinitialstatementofclaimonJanuary11,2001toincludeaneigthpatent
whichLillyclaimedhadalsobeeninfringedbyApotex.

FouroftheeightpatentsallegedlyinfringedbyApotexhadbeenassignedtoLillyin
1995byShionogi,whereasLillyownedtheotherfourpriortotheassignment.

©CIPS,2006
*NadiaPerri,Lawyer,isamemberofLEGERROBICRICHARD,L.L.P.,amultidisciplinaryfirmof
lawyers,andpatentandtrade-markagents.Publishedat(2006),20-1WIPR25-27underthetitle
CourtConsidersWhetherLicenseUnlawfullyLessensCompetition.Publication142.185.

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InresponsetoLilly’sstatementofclaim,Apotexalledged,intheamendmenttoits
statementofdefenseandcounterclaimfiledonMarch9,2001thattheaforesaid
assignmentviolatedsection45oftheCompetitionAct(CompetitionAct,R.S.C.1985,
c.C-34;the“Act”)therebyentitlingApotextoseekdamagesagainstthe
Respondentsundersection36oftheAct.Essentially,Apotexclaimedthatthe
Respondentsconspired,agreed,orarrangedtohinder,restrictorminimizethe
manufactureofcefaclor.

InDecember2002,ApotexelectedtoseeklegalrecourseagainstShionigiaswell
andamendeditsstatementofdefenseandcounterclaimtoaddShionogiasa
defendanttothecounterclaimproceedingsinstitutedbyApotex.

ThreemotionswerebroughtbeforetheFederalCourteachofwhichweregranted.
Inthefirst,Lillysoughtsummaryjudgementstrikingtheparagraphscontainedin
Apotex’sstatementofdefenseandcounterclaimwhichmadereferencetoanti-
competitivebehaviouronthepartofbothLillyandShionogianddismissingApotex’s
counterclaimagainstShionogi.Inthesecondmotion,Shionogisoughtasummary
judgementstrikingApotex’scounterclaimagainsttheformer.Finally,inthethird
motion,ShionogiappealedtherulingofProthonotaryArnovitchrefusingtostrike
Apotex’scounterclaimagainstShionogi.

AccordingtotheFederalCourt,Apotexhadfailedtodemonstrate,tothe
satisfactionoftheCourtthatithadaviablecauseofactionagainstthe
Respondents,andassuchconcludedthatApotex’samendmentstoitsstatementof
defenceandcounterclaimshouldneverhavebeenpermitted,andthatits
counterclaimagainstShionogishouldhavebeendismissedonthelatter’smotion.

DiscontentedwiththeFederalCourt’sruling,Apotexfiledamotionforleaveto
appealbeforetheCourtofAppeal,amotionwhichsaidCourtlatergranted.

Onappeal,theCourtofAppealheld,withrespecttotheorderofProthonotary
ArnovitchregardingApotex’scauseofactionagainstShionogithatsuchanorder
shouldnothavebeenoverturnedasitwasnotapparentandprominentthatApotex
hadnoarguablecauseofactionagainstShionogi.Withrespecttothetwomotions
forsummaryjudgementrespectingApotex’sstatementofdefencetoLilly’saction
forinfringementandcounterclaimagainstShionogi,theCourtofAppealruledthat
Apotex’sappealshouldbeallowedandthatsuchmotionsshouldberemittedback
totheFederalCourtforfurtherconsideration.

AccordingtotheCourtofAppeal,itwasparamountthattheFederalCourt,while
examiningtheargumentsraisedbytheRespondentsandApotex,addressthe
followingthreeissues:
(i)whetheragreementsinvolvingtheexerciseofpatentrightsaresubjectto
subsection45(1)oftheAct;
(ii)whetherthefactsinthecaseatbardemonstrated,tothesatisfactionof
theFederalCourt,thatShionogi’sandLilly’sconductwasinbreachof
section45oftheAct;and

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(iii)supposingthattheFederalCourtdeterminedthatsubsection45(1)ofthe
ActappliedandthattheRespondentscontravenedsection45oftheAct,
whetherApotex’sclaimundersection36oftheActwouldnotprevailfor
thereasonthat:(a)Apotex’scauseofactionwasstatute-barred,(b)
Apotexdidnotsufferanydamages,or(c)ShionogiandLillywereexempt
inaccordancewithsubsection45(3)oftheAct.

THEFEDERALCOURTJUDGEMENT

Onreconsideration,theFederalCourtstruckyetagainApotex’sclaimundersection
45oftheActagainsttheRespondents.WhiletheFederalCourtadjudgedthatthe
assignmentagreementbyandbetweenLillyandShionogididindeedeffecta
lesseningofcompetition,itconcludedthatsuchlesseningwasnot“undue”on
accountofthefactthatsection50ofthePatentAct(PatentAct,R.S.C.1985,c.P-4;
the“PatentAct”)expresslyauthorizesthetransferofpatents.

Astothefirstissue,theFederalCourt,inrelyingontheCourtofAppealsdecisionin
MolnyckeAB.v.Kimberly-ClarkofCanadaLtd((1991),36C.P.R.(3d)(493F.C.A.);
“Molnycke”)opinedthatagreementspertainingtopatentrightsarenot,asa
generalruleoflaw,immunetotheliabilityprovisionssetforthinthePatentAct.The
FederalCourtarguedthat“whereanagreementdealsonlywithpatentrightsandis
itselfspecificallyauthorizedbythePatentAct,anylesseningofcompetitionresulting
therefrom,beingauthorizedbyParliament,isnot“undue”andisnotanoffence
undersection45”
(EliLillyandCo.v.ApotexInc.,[2004]FC1445.).

Inotherwords,theFederalCourtconcluded,withregardtothefirstissue,inapplying
theprinciplessetforthinMolnlycke,thattheenteringintoofanagreement
authorizedbyanActofParliamentsuchasthatofanassignmentunderthePatent
Act,cannotembodyconductwhichundulydiminishescompetitionforthepurposes
ofsection45oftheActandthatitisonlythoseagreementswhichinvolvethemere
excerciseofpatentrightswhichmaybeexemptfromsubsection45(1)oftheAct.

Astothesecondissue,theFederalCourtconsideredthefactthat(i)thepatents
assignedbyShionogiinfavorofLillywereforprocessesinstrumentalinthe
manufactureofcefaclor,(ii)Lillywastheproprietoroffourotherprocesspatents
usefulforthesamepurpose,and(iii)thepatentfortheproductcefaclorhaditself
expired.

WhiletheFederalCourtconcluded,withrespecttothesecondissue,thatthe
assignmentagreementbyandbetweenShionogiandLillyprecipitatedanincrease
inLilly’smarketpowerandalesseningincompetitionbyvirtueofLilly’sownershipof
alleightprocesspatentsinstrumentalinthemanufactureofcefaclor,itdetermined
thatsuchalesseningcouldnotbe“undue”onaccountofthefactthatithadbeen
authorizedbyanActofParliament.

Essentially,theCouropinedthatbytheirverynature,patentsaccordtheirownersa
monopolyinaparticularmarket.Parliamentauthorizespatentownerstoassigntheir

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rightstopersonsoftheirchoiceviawrittenagreements.Therefore,suchwritten
agreementsnecessarilyresultinthetransferringofthepatentownersmarketpower
fromtheassignortotheassignee,therebyincreasingthelatter’smarketpower.

Intheirdefence,theRespondentsarguedthatApotex’sclaimfordamagespursuant
tosection36oftheActshouldbedismissedbytheCourtas(i)Apotexdidnot
institutelegalproceedingsagainsttheRespondentswithintheprescribedperiodof
time,(ii)Apotexdidnotmeetitsburdenofproofbydemonstratingthatithad
indeedsuffereddamages,and(iii)theresearchanddevelopmentexemptionset
forthatsection45(3)oftheActappliedtotheRespondents.ThoughtheFederal
Courtinitiallyaffirmedthatitwouldnotcommentonthethirdissue,itlaterdecided
toverybrieflyexplainthereasonswhyitwouldrejectthedefencesraisedbythe
Respondents.

WithregardtothefirstandthirddefenceraisedbytheRespondents,theCourt
concludedthat“thereissufficientconflictandlackofclarityintherelevant
evidenceonthequestionsofforseeabilityandthereachofthe1975researchand
developmentagreementbetweenLillyandShionogithatthosequestionsarenot
suitableforsummaryjudgementandshouldonlyberesolvedafterafulltrial”.With
respecttotheseconddefenceraisedbytheRespondents,theFederalCourtwas
unabletodefinitivelydeterminewhethersuchadefencewouldsucceedinthe
eventthatApotexwassuccessfulinitsclaimfordamagesagainsttheRespondents
undersection36oftheActdespitethefactthattheCourtconcludedthatsucha
defencewasbasedonApotex’sadmissionsthat:(i)ithadnotbeendelayedin
bringingitsversionofcefaclortothemarketand(ii)thedamagessufferedby
ApotexwererestrictedtotheamountsApotexmaybeorderedtoremittoLilly
shouldtheFederalCourtdeterminethattheformerviolatedthepatentrightsofthe
latter.

THEFEDERALCOURTOFAPPEALJUDGEMENT

Onappeal,theCourtofAppealconsideredandruledonthethreeissuesit
previouslyorderedthattheFederalCourtexamine.

Astowhetheranagreementwhichpertainsexclusivelytotheexerciseofpatent
rightscanbeactionnableundersection45oftheAct,theCourtofAppeal
adjudgedthatsection50ofthePatentActcannotimmunizeapatentassignment
agreementfromsection45oftheActintheeventthatsuchanassignmenteffects
anincreaseintheassigneesmarketpowerinexcessofthatinherentinthepatent
rightsassigned.Inreachingsuchadetermination,theCourtofAppealexamined
theFederalCourt’sinterpretationofMolnlycke,andthelatter’sconclusionthatthe
mereexerciseofpatentrightsprecludesthedeterminationthatcompetitionhas
beenundulylessened.AccordingtotheFederalCourt,Molnlyckecannothavethe
effectofhinderingtheapplicationoftheprovisionssetforthintheActinthosecases
wherethereisclearevidenceofsomethingotherthanthemereexerciseofpatent
rightswhichinfluencescompetitioninaparticularmarket.

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Apotexallegedthatthe“somethingother”wasthefactthattheassignmentin
questionresultedinLillyacquiringrightstopatentswhichpermittedittocontrolallof
thecommerciallyviableprocessesformakingcefaclorwhensuchprocesseswere
controlledbybothShionogiandLillypriortotheassignment.

InMolnlycke,theonlymarketpowercreatedbytheassignmentwasthatinherentin
thepatentassigned.Therewasnochangeinthenumberofpatent-holdersbefore
andaftertheassignment.Theassignmentmerelyeffectedthetransferofapatent
fromonecompanytoanother,asituationquiteunlikethatopposingApotexandthe
Respondents.

Essentially,theCourtofAppealarguedthatitwasonthisbasisandthisbasisalone
thatMolnlyckeneededtobedistinguishedfromthecaseatbarandthatthe
FederalCourthaderredinfailingtodoso.

Initsdefence,theRespondentsassertedthatthefactthatShionogihadbeen
grantedanon-exclusivelicensetousetheprocesspatentsdemonstratedthatthe
assignmenthadnotlessenedcompetition.AccordingtotheRespondents,there
weretwosources,namelyShionogiandLilly,fromwhichacompetitorcould
purchaseorseekalicensetomanufacturetheantibioticcefaclor,beitprioror
subsequenttotheassignment.

AstowhetherthefactsevidencedthattheRespondentswereinbreachofsection
45oftheAct,theCourtofAppealruledthatitcouldnot,intheabsenceofpalpable
error,challengetheFederalCourt’sdeterminationthatLilly’sownershipofthe
processpatentsforthemanufactureofcefaclorpriortotheassignmentcoupled
withthefactthatsubsequenttotheassignmentitheldalltheprocesspatentsforthe
manufactureofcefaclorresultedinalesseningofcompetition.Accordingtothe
CourtofAppeal,itwouldbeincumbentonthetrialjudgetodetermineifsuch
lesseningfellwithintheambitofsection45oftheAct.

AstowhetherApotex’scounterclaimcouldnotprevailonaccountofthefactthatit
wasnottakenwithintheprescribedperiodoftime,andthatApotexfailedto
demonstratethatitsustaineddamagesfollowingtheassignmentbyShionogiofits
patentstoLilly,theCourtofAppealacquiescedwiththeFederalCourt’srulingthat
theseissuesberesolvedattrial.TheCourtofAppealdidnotcommentonthethird
oftheRespondents’defencesnamely,thattheresearchanddevelopment
exemptionprovidedforatsub-section45(3)oftheActappliedinthecaseatbar.

TheCourtofAppelultimatelyheldthatApotex’sappelbeallowed.TheCourtset
asidetherulingoftheFederalCourtanddismissedthemotionsforsummary
judgementandforstrikingofApotex’scounterclaimsandvariousparagraphs
containedinitsstatementofdefence.

ThustheCourtofAppealadjudgedthattheassignmentagreementbyand
betweenLillyandShionogihadindeedeffectedalesseningincompetitionand
ruledthatthetrialjudgehadtheresponsabilityof(i)determiningwhethersuch
lesseningwasinfact“undue”inaccordancewiththestipulationssetforthintheAct

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andthecriteriaestablishedintheCompetionBureau’sIntellectualProperty
EnforcementGuidelines,whichdescribeshowtheCompetitionBureaudetermines
whetherconductinvolvingintellectualpropertyraisesanissueundertheActand(ii)
furtherexploringthevalidityofthedefencesraisedbytheRespondents.

TheFederalCourthasnot,asofyet,ruledonanysuchissues.

CONCLUSION

Agreementssuchaslicensesandassignmentsarenotintrinsicallyactionnableunder
section45oftheAct.Essentially,theprovisionsoftheActandthecriteriasetforthin
theIntellectualPropertyEnforcementGuidelinesestablishcaseswhereitmaybe
necessaryfortheCompetitionBureautointerveneinabusinessarrangementin
ordertomaintaincompetitivemarkets.Eachcasemustthereforebedealtwith
separately.

Itisundisputedthatintellectualproperty,byitsverynature,lessensorprevents
competition.Ifthisweren’tso,intellectualpropertyownerswouldnotspendlarge
sumsofmoneyeachyearonthemonitoringoftheircompetitor’sactivitiesandon
theprosecutionofthosewhothreatenthepriviledgetheyaccordtheirproprietor.
Implicitinthedetentionofintellectualpropertyistherightforproprietorstodecide
where,whenandforhowmuchathirdpersonmaymakeuseofsuchintellectual
property.

Licensingisbutonewayintellectualpropertyownerspermitthirdpersonstomakeus
oftheirintellectualproperty,andisregardedinthevastmajorityofcases,asbeing
pro-competitiveonaccountofthefactthatitactuallyfacilitatestheuse,inany
givenmarket,ofintellectualpropertybypersonsotherthantheirproprietor.Further,
alicensingagreementbetweentwopotentialcompetitorsforexample,mayresultin
thedevelopmentofanewproductwhichwouldnototherwisehavebeen
developedbutforthelicense.Insuchacase,thelicensingagreementwouldeffect
anincreaseinthelevelofcompetitionintherelevantmarket.

Thoughtheenteringintooflicenseagreementsmay,insomecircumstances,
enhancecompetitionsuchagreementsmayalsolessencompetitionandenhance
themarketpowerofone,bothorallthepartiesthereof,aswasthecaseinEliLilly
andCo.v.ApotexInc.
1Priortoenteringintotheassignmentagreementwith
Shionogi,Lillycontrolledfouroftheprocesspatentsforproducingtheantibiotic
cefaclor.OncethepatentsownedbyShionogiwereassignedtoLilly,thelatter
controlledalltheprocesspatentsforproducingcefaclor.Theassignment
agreementthereforeenhancedLilly’smarketpower,afactundisputedbyboththe
FederalCourtandtheCourtofAppeal.ThefactthatLillygranted,subsequentto
theassignment,anon-exclusivelicensedidnotobliteratethefactthatcompetition
hadbeenlessenedfollowingtheintensificationofLilly’smarketpowerandthatitwas
nonethelessLillywhoultimatelycontrolledthelicensedpatents,astheaforesaid

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agreementstipulatedthatShionogicouldnotgrantsub-licenseswithoutfirst
obtainingLilly’swrittenapproval.

Inconclusion,thiscaseconfirmsthatintellectualpropertyownersshouldbewearyof
thefactthatthegrantingoflicensestothirdpersonsmaynotnecessarily
demonstrateitswillingnesstoparticipateinthemarket…

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