Two recent legal challenges have been launched attacking the federal government's system of price regulation of patented medicines. The stakes could not be higher.  Recent amendments to the regulations have fundamentally changed the system in ways that we believe will be damaging to manufacturers, Canada's health care system, and to Canadians. In our view, however, the applications currently before the courts are unlikely to succeed.

Background

Canada has had a price review mechanism for medicines that is unique among the world's developed nations since the late 1980s. The Patented Medicine Prices Review Board (PMPRB) obtains its jurisdiction from the Patent Act and Patented Medicines Regulations. The PMPRB only has power over "patentees"-to review the price of a medicine. Patentees are those who derive rights from patents that pertain to the medicine sold.[1] 

Canada's Constitution explains the singularity of this system. The federal government lacks the power to regulate the prices of any consumer good-including medicines-absent extraordinary circumstances. The power to regulate prices is assigned to the provinces alone.[2] On the other hand, the federal government does have the power to issue patents. Over time, therefore, a system of price regulation has developed, as an outgrowth of the federal government's jurisdiction over patents. In introducing legislation creating this system, the federal government has always denied that what it was doing was controlling prices-although this is indisputably what the system was intended to accomplish.

Purporting to regulate the abuse of patents however, is a sleight of hand. The system developed in stages-first, one empowering the PMPRB to impose compulsory licencing of medicines deemed "excessively" priced,[3]  to a system eliminating the compulsory licencing regime and in turn granting the PMPRB the power to directly recoup "excessive revenues" to the government's benefit (not those who actually paid for the "excessively" priced medicines),[4]  and finally to the recent regulatory amendments.[5]  The recent amendments, as explained below, make the purposes of the federal government crystal clear, stripped bare of any lingering notion that the price controls have anything to do with patents. 

Previous Challenges

At each stage of this progression, there have been questions as to the constitutionality of this regime. Questions were raised in Parliament before both the 1987 and the 1992 changes to the Patent Act. Notably, before the passage of the 1992 Act, a respected scholar wrote an opinion, which was tabled in Parliament concluding that the system was of dubious constitutional validity.[6] 

The constitutionality of the legislation has also been challenged in the courts, but so far to no avail. In the leading case, the 1987 Act was found to be "in pith and substance" about patent regulation, and only "incidentally" related to property and civil rights-and therefore was not outside Parliament's jurisdiction.[7] It should be noted that the legislation changed after this case was decided; however, despite the change, subsequent court challenges have fared no better.[8] The courts' reasoning in these decisions has been thin. Essentially, they have held that if a price control regime concerned patented medicines, falling within the 'control of patents' and not 'control of prices', and that the introduction of changes to the system in the 1992 Act did nothing to change this conclusion.[9] 

The New System

As noted above, the regime is set to change once again with introduction of the Amended Regulations, this time, in a fundamental way.

In the current system, the maximum "non-excessive" price of patented medicines is established by means of set comparisons: the price of the same medicine in a set of reference countries, and, where appropriate, the prices of other medicines in the same "therapeutic class" in Canada and in those other countries.[10] Ostensibly, by comparing the price of a medicine in Canada with these prices in other jurisdictions, the level of 'abuse' of the monopoly right conferred by the Canadian patent is relative to the level of 'abuse' elsewhere.

As such, this comparative exercise does nothing to curb prices if they are high overall, particularly for medicines which lack comparators: in these cases, the price of the medicine can only be "excessive" if it is higher in Canada than in the 'reference' countries. If it is expensive elsewhere, then it is equally expensive in Canada.

The new system will be quite different. The new regulations specify three new factors, with the express purpose as stated in the published Regulatory Impact Statement, of forcing the overall prices of medicines in Canada down:

(a) the pharmacoeconomic value in Canada of the medicine and that of other medicines in the same therapeutic class;

(b) the size of the market for the medicine in Canada and in countries other than Canada; and

(c) the gross domestic product in Canada and the gross domestic product per capita in Canada. 

In addition, the list of countries used for comparison purposes will be amended, removing the US and Switzerland in which prices tend to be higher, and adding countries in which prices are lower, often because of price controls.

New Court Challenges

Pharmaceutical manufacturers have responded with new legal challenges.

In Quebec, a group of six manufacturers commenced an application for judicial review in the Quebec Superior Court on August 22, 2019-the day after the final Amended Regulations were published. They challenge the constitutionality of sections 73 to 103 of the Patent Act as well as the Amended Regulations-in short, the entire legislative authority for the PMPRB. The basis of the challenge is the same as in previous attempts, with a few minor differences: that the federal government lacks the constitutional authority to create a system of price regulation for medicines.[11]  This is a broad challenge to the entire price regulation regime.

In contrast, Innovative Medicines Canada (IMC) together with its member companies, launched a judicial review application in the Federal Court on September 6, 2019. This is a much more narrowly focused application. Rather than attacking the entire legislative scheme underpinning the system of patented medicine price regulation, IMC challenges certain elements of the new regulations.[12] 

Significantly, the IMC application is not a constitutional challenge. Rather, the application states that the impugned sections of the regulations are contrary to the Patent Act in that they exceed the regulation-making authority granted by the statute.

In our view, the chances of success of each of these applications is low.

The Quebec application is a broad attack on the constitutionality of the entire system. While the Quebec application attacks the constitutionality of the Amended Regulations, this is not its focus. Instead, it is a broad-based attack on the system as a whole and is unlikely to succeed. Even with the new aspects, the application is similar to prior constitutional attacks on the system-none of which have been successful. The courts will likely dismiss it, unless the court in Quebec is more sympathetic to constitutional challenges than the Federal Court has been.

The thinking may be that Quebec's Superior Court may more jealously protect the sovereignty of the province within the various fields of provincial jurisdiction laid down in the Constitution Act, 1867 than the Federal Court. If successful, this would mean conflicting decisions between the Federal Court and the superior court of a province-setting the stage for ultimate resolution by the Supreme Court of Canada.

The IMC application is more narrowly focused on the Amended Regulations, but makes no attack on the constitutionality of the price control regime.[13] Without an express constitutional challenge, it is difficult to see how the addition of new factors, much less changes to the list of comparator countries, could be found outside the scope of the Patent Act. The Act contains express statutory authority to add new factors to the existing list.[14] Absent a constitutional limitation, it is difficult to conceive that the government may not establish these new benchmarks. 

The Preferred Strategy

In our view, the more persuasive strategy is to advance a more narrowly focused constitutional challenge, along the following lines:

  1. Past courts have found that the price control scheme is, in fact, constitutional, because in "pith and substance" it is a system intended to control the abuse of the patent monopoly, and so falls within the federal government's power to regulate patents. The courts found that price controls, while present, were merely "incidental" or "ancillary" to that patent abuse prevention purpose.
  2. The court must now revisit this conclusion. With the addition of the new factors, (and the changes to the list of comparator countries), it is now clear that the purpose of the system is to engage in naked price control, untethered to the regulation of patents, and therefore not to prevent abuse of the monopoly granted by a patent to a patentee. 
  3.  As such, the federal government lacks the constitutional authority to enact the new regulations.    

This argument seems to us to be correct and difficult for the government to offer an effective response. However, it was not made in either of these two applications.

The argument is that, from an economic perspective, price control systems that have been instituted in other countries (and Canada) have used 'factors' such as domestic GDP, per capita GDP, etc.  Indeed, such factors are the very hallmark of a price regulation scheme-as measures of a country's overall 'wealth' or an individual's 'ability to pay'.  A country's GDP or a purchaser's wealth or ability to pay has absolutely nothing whatever to do with the ability of a patentee to set a price for his invention.  The obvious point is that such factors are entirely independent of the monopoly power conferred by the Canadian patent. 

While many countries regulate the prices of medicines, no country in the world (other than Canada) purports to regulate such prices as incidental to a patent power. 'Price regulation' is not an element of patent law either in the common law world or in continental legal systems.  Compulsory licensing is completely distinguishable from the current system of price regulation in Canada.  Even if one were to accept that the current system of price regulation is properly connected to the federal patent power, from an intellectual property perspective, price regulation based on factors entirely unrelated to (or distinct from) patents (a country's GDP as a measure of its overall wealth and the like) cannot be said to constitute an element of the legal power to regulate "patents of invention and discovery" (the language used in the Constitution Act, 1867).

In our view, such a conclusion would be difficult to resist: it is abundantly clear that the Amended Regulations are intended to curb the price of medicines generally and quite independently of Parliament's jurisdiction over patents of invention and discovery.

Conclusions

Unfortunately, the applications as currently framed are, in our view, less likely to succeed. This is especially unfortunate because the imposition of the Amended Regulations will result in substantial harm to the industry in Canada, the Canadian healthcare system, and the public interest.

Many medicines, and in particular so-called "orphan drugs" for rare diseases, may be forced out of the Canadian market altogether, as they could never meet the new tests.  Manufacturers may also decide not to bring new medicines to the Canadian market or significantly delay introduction to Canada of these medicines.  Given our proximity to the US, it is unlikely that Canadian patients will agree to simply go without drugs available south of the border. Rather, they will insist on obtaining them. The paradoxical effect will be that Canadians will likely pay more for such medicines, because they will be forced to purchase them through the Special Access Program-at prices completely unregulated by the PMPRB


[1] A nexus or rational connection with a patent is required, although the case law states that only the "merest slender thread" of connection is necessary to ground jurisdiction. See ICN Pharmaceuticals Inc v Canada (Staff of the Patented Medicine Prices Review Board), [1997] 1 FC 32 (Fed CA). [ Note that the phrase "merest slender thread" was recently held to be an unhelpful metaphor by the Federal Court of Appeal in Canada (Attorney General) v. Galderma Canada Inc., [2019] FCA 196 (Fed CA).

[2] Under section 92(13) of the Constitution Act, 1867. See Anti-Inflation Reference, [1976] 2 SCR 373 (SCC)

[3] Bill C-22, enacted as An Act to amend the Patent Act and to provide for certain matters in relation thereto, 1987, assented to 19th November, 1987 (the "1987 Act").

[4] Bill C-91, enacted as Patent Act Amendment Act, 1992, SC 1993, c 2 (the "1992 Act").

[5] Regulations amending the Patented Medicines Regulations, Canada Gazette Part ll, No. 17, August 21, 2019 (the "Amended Regulations"). The Amended Regulations come into force on July 1, 2010.

[6] Legal Opinion of James C. MacPherson, then Dean of Osgoode Hall Law School, September 14, 1992. 

[7] Manitoba Society of Seniors Inc v Canada (Attorney-General), [1991] 77 DLR (4th) 485 (MBQB), appeal dismissed [1992] 96 DLR (4th) 606 (MBCA).

[8] Most recently, in Canada (Attorney General) v. Sandoz Canada Inc., [2015] FCA 249 and Alexion Pharmaceuticals Inc v Canada (Attorney General), 2017 FCA 241.

[9]  The idea is expressed in Sandoz that the system is constitutional, even though it contains a price regulation mechanism, because ultimately it is intended as a corrective to the potential "excessive" price increases created by patent protection: see para. 115. The Alexion decision merely asserted that Sandoz was binding. 

[10]   See the factors in section 85(1) of the Patent Act. The legislation provides no detail as to how these comparisons are to be made—that is the function of the PMPRB's guidelines, which are not binding.

[11]   There are slight differences—for example, the Applicants cite not only price regulation as an aspect of the provincial power over property, but also the provincial power over hospital administration and purely private matters. The argument is that health care matters, including health system management, are provincial activities, as well as issues of price regulation.

[12]   Specifically, the filed judicial review application seeks a declaration that sections 3(4), 4 and 6 (and the Schedule) are invalid because they are contrary to the Patent Act. These sections deal with the imposition of the new factors. 

[13]   We can only speculate as to why: perhaps because the IMC saw the constitutional issue was historically unsuccessful, or perhaps because they wanted to avoid the necessity to issue a notice of constitutional question to all of the provinces.

[14] See paragraph 85(1)(e) and paragraph 101(1)(d).