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Pay-for-delay: coming to a courtroom near you?

The IT Girl
|Written By Sarah Dale-Harris
Pay-for-delay: coming to a courtroom near you?

In a country of 30 million-plus people, there can only be so many big players in the market right? From telecommunications to pharmaceuticals, most Canadians have some idea as to who is providing their goods and services.

So what happens if two companies operating in the same field get embroiled in expensive litigation that results in a deal in which one of the parties agrees to cease selling, or to not sell, in that field for a specified period of time, for a price?

The cost of litigation can be prohibitive and negotiated settlements are frequently entered into, so it seems reasonable to expect the parties would have the right to settle on mutually agreeable business terms — subject to certain potential limitations of course. One of which has been the subject of significant debate and litigation in the United States, but is not likely to be limited to the U.S. or even the European Union for long.

In a nutshell, the U.S. Federal Trade Commission conducted a study last year that found barring pharmaceutical companies from paying potential competitors to delay (referred to as “pay-for-delay”) the introduction of generic products into the marketplace, could save American consumers and the government billions of dollars a year.

Since then, the FTC has been pushing hard to prevent such deals from being entered into. While the study was conducted in the U.S. and relates to the pharmaceutical industry in particular, I think there are some interesting potential implications that could be taken up in other jurisdictions (Canada specifically) and, possibly, extend into other markets.

For instance, as in the U.S., Canada grants legal monopolies to companies in the form of patents. Patents are basically business tools that, among other things, can be asserted to legally keep potential competitors at bay, for a time, and to a degree, anyway.

And if i4i Inc. is any example, with a little (or a lot of) help, a small company can be in a position to go toe to toe with a giant to enforce its patent rights, and prevail. Last week, the U.S. Patent and Trademark Office threw out a review requested by Microsoft Corp. concerning patents by Toronto-based i4i. The PTO confirmed the patentability of i4i products that Microsoft had asked to be re-examined in a last-ditch effort to challenge claims made by i4i regarding its U.S. Patent 5,787,449 (‘499).

Credit to i4i’s patent agents for assisting it in securing strong rights — strong enough it appears to withstand the scrutiny of the PTO — but the reality is that even with solid intellectual property protection, litigation is extremely expensive and not all companies have the means or the appetite to go the distance.

Settlements and compromises are made and deals are reached all the time — whether to avoid the expense of litigation, because of a pending acquisition, or simply in order to protect other aspects, or indeed the very survival, of a business.

So let’s say one telecommunications company sues another (which never happens of course . . .) and the parties ultimately reach a deal whereby the junior or startup company agrees and receives payment to hold off selling, or even completing development of, a new product for a specified period of time. Could such a deal be subject to scrutiny in Canada by the Competition Bureau?

Could it be held to be anti-competitive and void, if for instance the junior company’s product could have saved end users money? Would it matter how much money could have been saved or by whom? And if the junior company deliberately put itself in a position to be able to benefit from such a deal — could a case be made that the parties were engaged in collusive practices?

Ironically, the FTC issued a statement in 2009 that such deals have “opened a Pandora’s box of settlements” with generic firms competing to be the first to get paid off to stay out of the market instead of competing to be the first to come to market.

Back to our example though, if the parties to the litigation had not entered into a settlement agreement in order to terminate litigation proceedings, and had proceeded with the litigation and the junior company ended up going out of business as a result, is the consumer (or the government for that matter) any better off?

The result is arguably the same. The product or service will not be offered by the junior company saving the consumer money. Only in this case, the junior company is doing no business at all. So it stands to reason, admittedly possibly only in my own utopian world, that a settlement agreement in our example relating to a particular product or service would have been better than the entire demise of the company.

So on the one hand, we have the interests of consumers who pay for products and services, some of them life-saving, who should be able to benefit from having access to the best available at the lowest prices possible.

On the other hand, we have the interests of companies that have spent millions of dollars developing the products and services that consumers have access to should be able to profit from their endeavours. Not to mention that profits and other monies reinvested into research and the development of new products and services also benefit consumers.

The fact though, is that we are not a big country in terms of population and attracting the level of competition that exists in other jurisdictions like the U.S. and the EU is no easy task, and at the end of the day, I’m not sure that the Competition Bureau’s intervention in such cases in Canada would ultimately benefit anyone.

This is an article, and I’m a closet idealist at heart. Just saying.

Sarah Dale-Harris is a lawyer in the intellectual property, technology & interactive entertainment groups at Davis LLP. Her practice focuses on the creation, development, management, commercialization, and enforcement of technology and life sciences-based portfolios and related intellectual property rights. Sarah can be reached at 416-365-3522 or at sdale-harris@davis.ca.


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