Publication

Table of Contents

I. Introduction
II. Compulsory Licensing for Manufacture
III. Compulsory Licensing for Manufacture & Importation (1969 Amendments)
(a) Discretion to Refuse Licence
(b) Royalty Due to the Patentee
(c) Eastman Report
IV. Bill C-22 (1987 Amendments)
(a) Deferred Compulsory Licences
(b) Price Control / Patented Medicine Prices Review Board
V. Bill C-91 (1993 Amendments)
(a) Compulsory Licences Abolished
(b) Early Working and Stockpiling Exceptions to Infringement
(c) PMPRB
(d) Patented Medicines (Notice of Compliance) Regulations
VI. International Treaty Obligations
(a) General Agreement on Tariffs and Trade (GATT) 
World Trade Organization (WTO) 
Trade-Related Aspects of Intellectual Property Rights (TRIPS)
(b) North American Free Trade Agreement (NAFTA)
(c) Minimum Intellectual Property Protections in TRIPS & NAFTA
VII. Conclusion

Since the early 1920's, the federal government has struggled with the appropriate level of legislative protection to extend to drug patents.  This struggle has historically been influenced by the need to balance two competing objectives:  (i) the need to provide low cost medication to the public; and (ii) the need to ensure that foreign and Canadian innovators are appropriately compensated so that new drugs are developed and marketed in Canada.
This paper provides a brief survey of the evolution of the legislative protection extended to drug patents in Canada.  This evolution does not result from the development of a reasoned body of jurisprudence, but rather from political decisions that reflect a changing view of the appropriate balance to be struck between the above objectives.

II. Compulsory Licensing for Manufacture

In 1923, the federal government introduced into its patent legislation provisions pertaining to "inventions relating to substances prepared or produced by chemical processes and intended for food or medicine" .  These provisions allowed patentees to obtain protection for a process to produce a drug, but not for the drug itself unless produced by the claimed process.
These provisions also established a compulsory licensing regime for "use of the invention for the purposes of preparation or production of food or medicine but not otherwise".  While a licensee could obtain a compulsory licence to manufacture a drug product (i.e. the active ingredient) in Canada, that licence did not permit the importation of that drug into Canada.  Despite the availability of such licences in Canada, the absence of drugs with large sales potential, combined with the relatively small size of the market, made it uneconomical to manufacture generic drugs in Canada.   As such, in the period between 1923 and 1969, only 22 compulsory licences were issued in Canada.
Compulsory licensing limited to the manufacture of drugs continued until 1969, when the Patent Act was amended to expand the scope of such licences to include a right to import patented drugs.

III. Compulsory Licensing for Manufacture & Importation (1969 Amendments)

During the 1960's, the federal government commissioned a number of studies to examine the health care system and cost of drugs in Canada.   Such studies concluded that the price of drugs was high compared to other industrialized nations, and cited the existence of drug patents as the primary reason.   As a result, a number of study reports (see footnote 4 below) recommended a reduction in the term of patent protection for drugs.  The Restrictive Trade Practices Commission even went so far as to recommend the outright abolition of patent protection for drugs in Canada.
In the mid-1960's, universal health care was introduced in Canada.  In 1969, the federal government amended the Patent Act to allow third parties to obtain compulsory licences for the importation of patented drugs into Canada.   These amendments are commonly referred to as the 1969 Amendments.  In particular, subsection 41(4) provided third parties with the ability to apply for a licence to:
(i) Import the patented invention;
(ii) Make the patented invention;
(iii) Use the patented invention to produce medicine;  or
(iv) Sell the patented invention in Canada and abroad, in bulk or dosage form.
Such a licence would be granted on application to the Commissioner of Patents and subsection 41(4) stipulated that the Commissioner:
"shall grant to the applicant a licence to do the things specified in the application except such, if any, of those things in respect of which he sees good reason not to grant such a licence".
 
In the 15-year period between 1969 and 1985, some 765 applications were filed resulting in approximately 400 issued licences, mostly for the importation of drugs into Canada.   This was the beginning of the modern generic drug industry in Canada and in the period following the 1969 Amendments, this industry experienced significant growth.
(a) Discretion to Refuse Licence
The 1969 Amendments provided that the Commissioner of Patents shall issue a compulsory licence unless he "sees good reason not to grant such a licence".  This discretion to refuse to grant a licence was rarely exercised and, provided that the licensee was not bankrupt, and in the absence of evidence suggesting that an application contained false statements, such licences were granted as a matter of right.   The Courts consistently refused to interfere with discretionary decisions of the Commissioner and never set aside a decision to grant a compulsory licence.
(b) Royalty Due to the Patentee
In considering the first application for a compulsory licence under the 1969 Amendments, the Commissioner granted a licence and fixed the royalty payable to the patentee at 4% of the net selling price of the drug in final dosage form.   This 4% royalty rate was mechanically applied to virtually all subsequent applications despite the fact that subsection 41(4) provided the Commissioner with a discretion to fix the royalty rate on a case by case basis.   In addition, several provincial governments during this period passed legislation permitting pharmacists to substitute lower cost generic equivalents to prescribed innovative drugs, and structured government reimbursement plans to pay only at the level of the lowest cost equivalent drug available.
(c) Eastman Report
The resulting growth of the generic drug industry in the aftermath of the 1969 Amendments had a significant impact on the research and development undertaken by innovative drug companies in Canada, and resulted in the closure of a number of high profile research centres especially in the province of Québec.   One commentor has suggested that this phenomenon was a result of a combination of "Canada's somewhat hostile attitude towards the pharmaceutical industry coupled with the introduction of incentives for pharmaceutical research and development in the United States".
Accordingly, as a result of increasing pressure from innovative manufacturers, the federal government commissioned the Eastman Report to examine, in part, the impact of compulsory licensing in Canada.  The Eastman Report provided a number of conclusions including:
(i) Savings from compulsory licensing were significant;
(ii) Multinational pharmaceutical companies had only lost approximately
3.1% of the Canadian market to generic competition by 1983;  and
(iii) Canada was a "negligible force" with respect to basic pharmaceutical research.
Based on the above conclusions, the Eastman Report provided a number of recommendations, the most notable being that new drugs be awarded a 4-year period of exclusivity after obtaining regulatory approval, and that the compulsory licence royalty rate be increased from 4% to 14%.   In addition, the report recommended that the federal government devote resources to support clinical research, a field in which Canada was considered to have a competitive advantage, as opposed to supporting basic pharmaceutical research.  Before the Eastman proposals could be implemented, negotiations for a free trade zone between Canada, the United States and Mexico were initiated.  As discussed in greater detail below, the ratification of the resulting North American Free Trade Agreement was significant to innovators because it included provisions setting minimum standards of protection for intellectual property.
 
IV. Bill C-22 (1987 Amendments)

The federal government's stated purpose in legislating Bill C-22 was to encourage multinational drug companies to spend more money on research and development in Canada while, at the same time, maintaining control over the prices charged for new drug products.   Bill C-22 amended the Patent Act in three fundamental ways:
(i) It allowed innovators to obtain claims for drug compounds per se without a process limitation;
(ii) It implemented a system whereby drug innovators could exercise their exclusivity for a period of between 7 and 20 years before a compulsory licence could issue (deferred compulsory licences); and
(iii) It established a Patented Medicine Prices Review Board to monitor and review prices charged for new drugs, as well as monies expended on research and development by drug innovators (price control).
(a) Deferred Compulsory Licences
Under the deferred licensing regime, a generic manufacturer was prevented from exercising a compulsory licence for periods of 7, 8 or 10 years depending on certain transitional rules from the first Notice of Compliance issued to the innovator for the medicine.
(b) Price Control / Patented Medicine Prices Review Board
The mandate of the Patented Medicine Prices Review Board (the "PMPRB") was as follows:
(i) To limit the excessive pricing of new drugs in Canada;
(ii) To monitor and report on drug price trends in Canada; and
(iii) To report on research and development monies expended by individual patentees and the innovative drug industry as a whole.
The PMPRB was given the mandate to report on research and development expenditures because innovative manufacturers promised to increase such spending in Canada in exchange for the enactment of a deferred compulsory licensing regime.
 
The PMPRB was provided with wide-ranging statutory powers to ensure that it could adequately fulfill its mandate.  For instance, in circumstances where an innovator failed to provide requested information, or where the Board found that a particular medicine was being sold at an excessive price, the Board could order an innovator to lower the price of its patented medicine, revoke a compulsory licence deferral in respect of a patent, or even revoke the deferral period of any of the innovator's patents pertaining to any other medicine. The PMPRB was also given general powers of a Superior Court with respect to production of documents, inspection of documents, examination of witnesses and enforcement of orders, etc.

V. Bill C-91 (1993 Amendments)

Bill C-91 was enacted to enable Canada to meet its international obligations under NAFTA and WTO/TRIPS with respect to the protection of intellectual property.
(a) Compulsory Licences Abolished
In 1993, with the enactment of Bill C-91, the federal government abolished the compulsory licensing provisions that were originally enacted with the 1969 Amendments and later continued, in a deferred fashion, under Bill C-22.  This abolition was retroactive to December 20, 1991, thereby effectively cancelling any compulsory licence that was granted after that date.
(b) Early Working and Stockpiling Exceptions to Infringement
Under Bill C-91, the government also enacted two principal exceptions to patent infringement.  Section 55.2 of the Patent Act provided that it was not an act of infringement for a generic manufacturer to:  (i) undertake activities required by the government to obtain regulatory approval for its drug ("early working"), or (ii) stockpile a generic version of a patented medicine in the period preceding the expiry of the relevant innovator patent [Since repealed].   The accompanying Manufacturing and Storage of Patented Medicines Regulations stipulated that the "stockpiling period" was six months prior to expiry of the innovator's patent [Also Repealed].
(c) PMPRB
In addition, Bill C-91 strengthened the powers of the PMPRB to ensure that it could continue to fulfill its mandate of regulating the price of patented medicines, especially in light of the loss of its ability to revoke compulsory licences.  These amendments allowed the PMPRB to, among other things, order an innovator to reduce the price of its medicine and / or refund excess revenues.  The PMPRB was also provided with the power to order payment of up to twice the amount of the excess revenues generated.  Such a remedy could be enforced by way of a fine or imprisonment.
The PMPRB has been successful in regulating the prices charged by innovators in Canada.  In fact, in its 1999 Annual Report, the PMPRB stated that the prices charged in Canada were below those charged internationally:
". . . Canadian prices were, on average, 23% higher than the mean international price in 1987.  This ratio declined until the mid 1990's and has since remained relatively stable at 10% below the median international prices."
(d) Patented Medicines (Notice of Compliance) Regulations
At the same time that the Patent Act was amended under Bill C-91, the federal government also enacted the Patented Medicines (Notice of Compliance) Regulations (the "PM(NOC) Regulations") to prevent the granting of Notices of Compliance (regulatory approval) for generic drugs that, if marketed, would result in patent infringement.   The PM(NOC) Regulations require a generic manufacturer to address an innovator's patent before Health Canada may issue regulatory approval for a generic version of the patented medicine.
The PM(NOC) Regulations require that the Minister of National Health and Welfare (the "Minister") maintain a register of patents pertaining to medicines for which NOC's have issued.  The owner of a patent for a medicine, or a licensee of the owner, may file with the Minister a list of all of the relevant patents pertaining to an approved medicine and these patents will be entered on the register of patents.  The PM(NOC) Regulations provide a mechanism whereby the Minister may be prohibited from issuing an NOC on an abbreviated new drug submission ("ANDS") for a period of up to 24 months, during which the courts will make a determination as to whether a second-entry drug will infringe one or more patents on the register.  Failure to file a patent list with the Minister in a timely fashion may result in the granting of an NOC for a second-entry drug notwithstanding the existence of a patent for the drug.
Where a person files an ANDS referencing a drug covered by a patent on the register of patents, the applicant must advise the Minister that it will accept that the NOC will not issue until the patent expires, or file a statement alleging that the person who filed the patent list is not the patent owner (or acting with the owner's consent), or that the patent has either expired, is not valid, or is not infringed.  The statement of allegation is required to be served on the person who filed the patent list (generally the holder of the original NOC) who may, within 45 days, apply to a court for an order prohibiting the Minister from issuing an NOC for the second-entry product.  Upon being served with notice of such application to the court, the Minister is prohibited from issuing an NOC for a period of 24 months during which time the merits of the allegation may be ruled upon.   The 24-month period may be shortened or extended by the court on consent of the parties or if the court finds that one or both of the parties has failed to reasonably co-operate in expediting the application. The 24-month stay may not be extended retroactively.
The PM(NOC) Regulations also provide that if the patentee withdraws, discontinues or has its application for prohibition dismissed at trial or on appeal, the generic manufacturer, otherwise delayed in its entry to market, will have a statutory claim for compensation for any loss suffered during the delay.  The Court may make an order for relief by way of damages or profits as the circumstances require.  Also, in assessing the amount of compensation the Court shall take into account all relevant matters, including the conduct of the parties.

VI. International Treaty Obligations

In order to understand the context of the changes to the Patent Act brought about by Bill C-91, including the introduction of the PM(NOC) Regulations, it is necessary to consider Canada's role and obligations under both the Uruguay Round of the General Agreement on Tariffs and Trade, as well as the North American Free Trade Agreement.
(a) General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
Trade-Related Aspects of Intellectual Property Rights (TRIPS)
The General Agreement on Tariffs and Trade (GATT) is an international agreement directed towards reducing restrictions on trade between its member countries.   From time to time, members of GATT seek to remove restrictions on trade in rounds of negotiation.  The Uruguay Round of negotiations under GATT, which commenced September 15, 1986, focused in part on establishing minimum international standards for the protection of intellectual property.
The United States sought to include intellectual property in this round of negotiations because it was sustaining losses, estimated to be in excess of 60 billion dollars, from the infringement of U.S. intellectual property rights worldwide.  The Americans sought agreement on minimum standards of intellectual property protection and pursued the following primary objectives:
(i) Establishing minimum standards of intellectual property protection observed within each member country;
(ii) Establishing uniform enforcement procedures of intellectual property rights; and
(iii) Seeking agreement on a mechanism for resolving disputes between GATT member countries.
The conclusion of the Uruguay Round of the GATT on December 15, 1993 resulted in the formation of the World Trade Organization (WTO), as well as an agreement on Trade-Related Aspects of Intellectual Property Rights, including Trade in Counterfeit Goods (TRIPS).  The TRIPS agreement was attached as an annex to the Agreement Establishing the World Trade Organization, which was implemented in Canada by the World Trade Organization Implementation Act, proclaimed in force on January 1, 1996.
(b) North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement is a treaty between the governments of Mexico, the United States and Canada that establishes a free trade zone for goods and services in North America.  Included in Chapter 17 of this agreement are specific provisions that establish minimum standards for the recognition and protection of intellectual property rights.  Negotiations for NAFTA commenced in 1986 and were completed on August 12, 1992.  Chapter 17 articles dealing with intellectual property were implemented in Canada by the North American Free Trade Agreement Implementation Act, proclaimed in force on January 1, 1994. 
(c) Minimum Intellectual Property Protections in TRIPS & NAFTA
It is beyond the scope of this paper to discuss in any real detail the intellectual property components of both NAFTA and TRIPS.  However, provided below is a brief summary of the more significant provisions that may serve to provide the appropriate context for understanding the impetus behind the passage of Bill C-91, including the abolition of compulsory licensing, the creation of the PM(NOC) Regulations and the continuation of the PMPRB.

National Treatment
National treatment provisions are necessary to eliminate non-tariff trade barriers between member states by ensuring that intellectual property rights are respected internationally.
TRIPS - Article 3
1.  Each Member shall accord to the nationals of other Members treatment no less favourable than that it accords to its own nationals with regard to the protection of intellectual property. NAFTA - Article 1703
1.  Each Party shall accord to nationals of another Party treatment no less favourable than that it accords to its own nationals with regard to the protection and enforcement of all intellectual property rights.

Patentable Subject Matter
Canada is obliged to afford non-discriminatory protection to patents regardless of the field of technology.  As such, Canada abolished the deferred compulsory licensing regime that was only applicable to drug patents.

TRIPS - Article 27
1. . . . patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application. .patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced. NAFTA - Article 1709
1. . . . each Party shall make patents available for any inventions, whether products or processes, in all fields of technology, provided that such inventions are new, result from an inventive step and are capable of industrial application.
7. . . . patents shall be available and patent rights enjoyable without discrimination as to the field of technology, the territory of the Party where the invention was made and whether products are imported or locally produced.

Protection of Undisclosed Information/ Deferred Generic Drug Approval
An innovator undertakes significant risk and expense in developing data with respect to the safety and efficacy of its drug product.  Recognizing the risk involved and the value of the information developed, both TRIPS and NAFTA provide for deferred generic approval.  The deferral applies when a generic manufacturer, in its submission for regulatory approval, relies on pre-clinical and clinical data confidentially submitted by an innovative drug manufacturer to the regulatory authority.
 

TRIPS - Article 39
3. Members, when requiring, as a condition of approving the marketing of pharmaceutical or of agricultural chemical products which utilize new chemical entities, the submission of undisclosed test or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use.  In addition, Members shall protect such data against disclosure, except where necessary to protect the public, or unless steps are taken to ensure that the data are protected against unfair commercial use. NAFTA - Article 1711
5. If a party requires, as a condition for approving the marketing of pharmaceutical or agricultural chemical products that utilize new chemical entities, the submission of undisclosed test or other data necessary to determine whether the use of such products is safe and effective, the Party shall protect against disclosure of the data of persons making such submissions, where the origination of such data involves considerable effort, except where the disclosure is necessary to protect the public or unless steps are taken to ensure that the data is protected against unfair commercial use.
6. Each Party shall provide that for data subject to paragraph 5 that are submitted to the Party after the date of entry into force of this Agreement, no person other than the person that submitted them may, without the latter's permission, rely on such data in support of an application for product approval during a reasonable period of time after their submission.  For this purpose, a reasonable period shall normally mean not less than five years from the date on which the Party granted approval to the person that produced the data for approval to market its product, taking account of the nature of the data and the person's efforts and expenditures in producing them.  Subject to this provision, there shall be no limitation on any Party to implement abbreviated approval procedures for such products on the basis of bioequivalence and bioavailability studies.
In the United States generic approval is delayed for 5 years from the first approval of a new chemical entity.   In Europe the deferral period is 6 - 10 years depending on the member country.
Canada, by the enactment of section C.08.004.1 of the Food and Drug Regulations  appeared to provide for a 5-year deferral of generic drug entry by way of an Abbreviated New Drug Submission.  The Federal Court of Appeal has determined, however that the provisions of section C.08.004.1, as enacted, do not provide for generic deferral for the reason that the Minister of Health does not physically review the innovator's data when considering an ANDS.

VII. Conclusion

The globalization of the world market and Canada's continuing international obligations under both TRIPS and NAFTA will continue to influence the protection afforded to patented drugs in Canada.  In addition, as Canada moves toward building its economy through innovation, it should seek to strengthen its protection of intellectual property rights.
In the Speech from the Throne on January 30, 2001, the Governor General opened the 37th Parliament of Canada with a message of innovation.   In this speech, the government stressed that it would seek to "build a world-leading economy driven by innovation, ideas and talent" and that such an economy would be fuelled by research and development.  To ensure that these ideas and innovation were adequately protected, the government also pledged to strengthen Canada's domestic intellectual property laws in the following terms:
". . . [the Government will] ensure that Canadian laws and regulations remain among the most modern and progressive in the world, including those for intellectual property and competitiveness."
However, in that same Speech from the Throne, the government noted that it could not "lead in innovation and new ideas without healthy and secure citizens", and as such renewed its commitment to providing universal access to quality health care.  The tension between the promotion of innovation and the delivery of affordable, quality health care has influenced the degree of legislative protection extended to innovative drugs in the past, and its seems that this tension will continue to do so in the future.

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