Merck Canada c. Procureur general du Canada: Under the Guise of Patents
Rebecca Rosenberg, 3L, Volume 81 Senior Editor
The recent Québec Court of Appeal (QCCA) decision in Merck Canada Inc. c. Procureur general du Canada, 2022 QCCA 240 (CanLII) (Merck Canada) held that the federal government has the constitutional power to regulate the prices of patented medicines. Not only did this case present severe implications for Canada’s pharmaceutical and healthcare industry, but it also reveals a longstanding theme of Canadian law: the erosion of federalism [1].
A Primer on the PMPRB
In 1987, Parliament enacted changes to the Patent Act (“Act”) to create the Patented Medicine Prices Review Board (“PMPRB” or “Board”), a quasi-judicial regulator mandated to ensure that patented medicines are not priced “excessively” and to oversee pricing trends in the pharmaceutical industry. Under the Act, the PMPRB is empowered to mandate caps on excessively priced patented medicines and impose financial penalties on excessively-pricing firms.
Currently, sections 79 to 103 of the Act cover the special category of patented pharmaceuticals. These provisions, along with the Patented Medicines Regulations (“Regulations”), create the regime under which the federal government and the PMPRB have been regulating the prices of patented drugs.
Many areas of law and policy intersect at patented medicines, including intellectual property law, international trade law, access to health care, and R&D investment in Canada. As a result of its wide impact, the PMPRB has drawn criticisms from various sources. Notably, policy experts Wayne Critchley and Richard Owens have criticized the PMPRB for its opaqueness in setting price limits – despite focusing solely on “excessive” pricing, the law does not actually define “excessive” – and for undermining the market in Canada for new medications.
Further, studies by the Canadian Health Policy Institute show empirically that heightened regulation of patented medicines likely leads to a reduction in new drug launches and discourages investment in R&D in Canada.
Thus, the PMPRB has been challenged on many policy grounds. However, the litigation in Merck Canada goes a step further and challenges the PMRPB’s very constitutionality.
The Constitutional Concern
Questioning the PMPRB’s constitutionality is not a new phenomenon. Challenges tend to fall into two categories: the scope of its powers under the Act, and the Board’s general jurisdiction being ultra vires the federal government.
On the first ground, many pharmaceutical companies complain that the Board’s criteria for declaring the price of a drug excessive is arbitrary. For instance, in Alexion Pharmaceuticals v Canada (Attorney General), 2021 FCA 157 (Alexion Pharmaceuticals), Alexion Pharmaceuticals sought to overturn the Board’s decision that its patented medicine, Soliris, was excessively priced. The Federal Court of Appeal (FCA) held that the Board “misunderstood the mandate Parliament has given to it,” and failed to give a well-reasoned explanation as to why the drug was excessively priced (para 48).
It is the second jurisdictional issue, however, that is central to Merck Canada. In 1992, James MacPherson, former Dean of Osgoode Hall Law School, was quoted in Parliament giving the legal opinion that if the PMPRB was challenged, the “whole compliance mechanism might be found to be unconstitutional” for being ultra vires Parliament. Here, MacPherson was referring to the Board encroaching onto provincial jurisdiction over healthcare.
The main constitutional heads of power that grant provinces the jurisdiction to regulate such issues are ss. 92(7) (governing the maintenance and establishment of hospitals), 92(13) (property and civil rights), and 92(16) (generally all local matters), of the Constitution Act, 1867 (“Constitution”). Conversely, the federal government claims jurisdiction through its s. 91(22) patent power.
The first federalism challenge against the Board occurred in ICN Pharmaceuticals Inc. v. Canada (Patented Medicine Prices Review Board), 1996 CanLII 4089 (FCA). There, the FCA held that the Board had jurisdiction to find ICN Pharmaceuticals’ medicine excessively priced, given that the company held two patents over it. Thus, the Board’s powers were initially vindicated through Parliament’s s. 91(22) jurisdiction.
The issue of jurisdiction has subsequently returned before the courts numerous times. Canada (Attorney General) v Sandoz Canada Inc., 2015 FCA 249 (Sandoz) is the leading authority for the premise that the federal government can constitutionally regulate patented medicine prices under s. 91(22). Most recently in Alexion Pharmaceuticals Inc. v. Canada (Attorney General), 2017 FCA 241 (Alexion), Justice John B. Laskin upheld Sandoz as binding authority on the matter today. However, Justice Laskin left open the possibility that the FCA may one day reconsider Sandoz or allow Alexion to develop a record for consideration by the SCC to deem Sandoz “legally problematic” (Alexion at para 45).
This leads to the case of Merck Canada.
The Debate in Merck Canada
In 2019, the federal government introduced the Regulations Amending the Patented Medicines Regulations (“2019 Amendments”). These amendments, not yet in force, propose three major changes:
1. replace the current basket of pricing comparator countries, removing the United States and Switzerland;
2. introduce new economic indicators, including the controversial Pharmacoeconomics, to help the PMPRB determine whether a price is excessive; and
3. require that the selling price reported by patentees include rebates provided to third parties such as public and private insurers.
These new regulations would widen the scope of the PMPRB’s powers, thereby providing renewed grounds upon which Merck Canada and other claimants are able to bring yet another constitutional challenge against the federal government. However, the federal Minister of Health Jean-Yves Duclos has since reneged on part of the proposed amendments, including the controversial economic indicators and the requirements to file information regarding the net of all price adjustments. The federal government does aim to move forward with the new basket of comparator countries. Despite this adjustment to the 2019 Amendments, the commentary below still stands.
At the Québec Superior Court (“QCCS”), Justice Sophie Picard considered whether sections 79 to 103 of the Patent Act, the Regulations, and the 2019 Amendments were ultra vires s. 91(22). Merck Canada and the intervenors, the Attorney General of Quebec, the Canadian Cystic Fibrosis Treatment Society, and the Canadian Organization for Rare Disorders, variously argued that the 2019 Amendments and the broader scheme went beyond the scope of the federal government’s patent powers and infringed on the provinces’ powers under ss. 92(7), 92(13), and 92(16). Instead, they argued that federal jurisdiction over patents should be limited to patent abuse and revoking and granting patents, rather than directly regulating the patented products.
The Attorney General of Canada, on the other hand, argued that the entirety of the existing regime and the amendments fall under its patent powers, since they deal with adverse impacts that may arise from the grant of a patent.
Justice Picard held that the Act and the Regulations are valid. However, she did strike down paragraphs 4(4)(a) and (b) of the 2019 Amendments dealing with the requirement that patentees disclose rebates given to third parties as that would allow the federal government to impede on provinces’ insurance plans, going beyond the scope of s. 91(22).
On appeal, the QCCA reversed Justice Picard’s judgment in part, holding that both the new economic indicators and the rebate disclosure provision go beyond the federal government’s patent powers. The court used the metaphor of the Trojan Horse – that the federal government is using its patent powers as a guise to regulate the sale of pharmaceuticals, traditionally a provincial matter (Merck Canada at para 239).
Nevertheless, the QCCA upheld the validity of the patented medicine prices regime as a whole under the Act and the proposed change in comparator countries.
A Note on Pith and Substance
The QCCS and QCCA agreed that the pith and substance – the doctrine used to interpret a law’s essence to determine which jurisdiction it falls under – for the pre-2019 regime is to avoid excessive prices for patented medicines (Merck Canada at para 144). In coming to this conclusion, the QCCA looked at the plain wording of the impugned provisions and Parliamentary debate surrounding amendments made to the Act that dealt with patented medicines.
While these materials were helpful in deciphering the intended purpose of the Act, they failed to capture the bigger picture.
It is true that the current regime restricts the PMPRB to deal only with excessive prices of patented medicines. And yet, the court turned a blind eye to the reality that the Board in practice often goes beyond that restriction. This was proven in Alexion Pharmaceuticals, where the FCA found that the Board’s determination of excessive pricing was “arbitrary and without regard to principles or laws” (para 67). The FCA also found that in making that order, the Board ignored the evidence provided by Alexion and instead used the lowest international list prices among the comparator countries (para 68).
The factors that the Board has available to determine what “excessive” means are so broad that virtually any drug price could seem unreasonable if viewed under a strict, bureaucratic lens. Paired with the fact that a definition of excessive is conveniently absent from the legislation, the Board seems to have almost unfettered discretion in setting price ceilings on patented medicine.
It is also true that Hansard shows Parliament’s original intent was to balance patent protection with the negative effects of a possible monopoly leading to excessive drug prices (Merck Canada at para 148 and 149). However, this is only one side of the debate. Opposing parties from all political platforms have continually criticized and questioned the PMPRB’s actual purpose. There have been a multitude of statements made in the House of Commons over the past few decades where members expressed concern that the PMPRB is distorting provincial healthcare services.
A pith and substance analysis should not take the legislature’s intent at face value. As we have seen in cases such as the Reference re Validity of Section 5 (a) Dairy Industry Act, [1949] S.C.R. 1, the federal government is no stranger to using its powers as a stepping stone to acquiring more control over areas already regulated by the provinces. Looking at a constitutional challenge too narrowly may cause a judge or court to miss the actual purpose and effects of a legislation.
This was the situation for Justice Picard, who erred in conducting her constitutional analysis with insufficient skepticism of the federal claims for the second issue of the 2019 Amendments. She refused to include a review of the Regulatory Impact Analysis Statement published by the government describing how the new regulations fall under federal powers, or the Board’s own guidelines on how it would use the changes to impose reductions (Merck Canada at para 165).
The QCCA rightfully diverged from Justice Picard in including the Regulatory Impact Analysis Statement in its pith and substance analysis for the new regulations. On this matter, the court found that the 2019 Amendments served a dual purpose: to offset the effects of patent monopolies in drug prices, and also to impose a substantial and arbitrary reduction on a drug’s price after an initial determination (Merck Canada at paras 153 and 154). The court recognized that it “must be able to assess the anticipated effects of a regulation as shown by the evidence,” otherwise the judiciary’s ability to review constitutional questions would be in doubt (Merck Canada at para 175).
Taking a look at the broader picture allowed the QCCA to see past the federal veil and correctly identify the clear ultra vires purpose of the 2019 Amendments.
The QCCA concluded with the vague proposition that federal price control of patented medicines is constitutionally valid where the pith and substance is to avoid any negative impacts of a patent monopoly; however, such control is unconstitutional when it no longer aims to control the effect on prices of the monopoly conferred by the patent (Merck Canada at para 243).
An Erosion in Federalism
Merck Canada should have been a straightforward federalism case. The federal government, as it has in the past, created legislation that creeps too far into provincial jurisdiction. Unfortunately, the QCCA missed the mark. It missed its chance to deviate from Sandoz and deferred to Parliament.
The world has changed since Sandoz. For one thing, the pandemic has had massive repercussions on the pharmaceutical industry and highlighted the deficiencies in Canada’s life sciences sector. The initial delay in getting COVID-19 vaccinations to Canada was partly due to the fact that the Board thought the cost of these vaccines was too high. This in turn hindered the provinces’ abilities to distribute and/or invest in much-needed medication for the public. These impacts demonstrate why it is important for the courts to look at the greater landscape within which the Board is operating when assessing whether it has ventured beyond federal patent powers.
While the QCCA took a deeper look at the second issue regarding the amended regulations, there are still some difficulties with its judgment.
The QCCA did not go into an analysis under the provincial heads of power. While the issue of whether a court is required to analyze a matter under both heads of powers is uncertain (see Desgagnés Transport Inc v Wärtsilä Canada Inc, 2019 SCC 58 (CanLII)), a federalism analysis should still include arguments from both sides to properly assess the matter under the competing heads of powers. In the QCCA’s decision, provincial powers were barely mentioned, let alone taken seriously.
Rather, the court focused solely on federal patent power and decided that the Act and the Regulations present a “logical, real and direct” connection to it (Merck Canada at para 189). That thin connection is based on the fact that the medicines are patented and that holders of patents over pharmaceuticals might abuse them. Allowing Parliament to regulate patented medicines for the sake of preventing potential abuses of patent monopoly before any such abuse actually comes to fruition sends a message that jurisdictional trespasses are permissible if there is even the slightest overlap between provincial and federal powers.
This support opens the door for Parliament to continue introducing legislation that strays into provincial territory. Further, the QCCA seemingly imputed a “public interest” justification for why it believes that Parliament should be allowed to regulate patented medicines (Merck Canada at para 216). There was a lack of analysis to support this idea that leaves us asking: how far will Parliament be allowed to go under the guise of public interest? Is the fact that a product is patented sufficient to justify federal control, or is it only so in this case because patented drugs are a public interest?
Underlying Merck Canada is the greater problem that the judiciary is often too willing to let the federal government get away with legislation that impedes provincial jurisdictions. While the QCCA got it right in striking down parts of the 2019 Amendments, those provisions were patent, for lack of a better word, violations of provincial matters.
Going forward, should the 2019 Amendments continue to be challenged up to the SCC, the SCC should find an appropriate way to address both the obvious and the subtle ways that the PMPRB encroaches onto provincial territory. It would also be important for the SCC to clarify why the federal government can justify regulating patented medicines but not non-patented medicines, aside from the mere patent power argument. If Parliament is truly focused on lowering drug costs in general, it seems odd that they are drawing the line only at patented pharmaceuticals.
Finally, the SCC should look at the evolution of the PMPRB and the entire debate surrounding its function. Only then can it see whether the Board is truly limited only to Parliament’s patent powers.
The judicial branch should not be in the business of making easy decisions by stretching federal powers as far as they go. Courts must challenge the status quo and recognize that the safe outcome is not always the right legal one.
[1] Much of this discussion is a product of the fruitful research conducted by Professor Richard Owens and Haya Sardar (2L) with whom I will be publishing a paper on the legal, social, and economic impacts of the PMPRB for the Macdonald-Laurier Institute.