A sense of déjà vu: The Québec Court of Appeal rules on constitutionality of PMPRB

On February 18, 2022, the Québec Court of Appeal released its decision on the constitutionality of the legislative framework of the Patented Medicines Prices Review Board (PMPRB): the provisions of the Patent Act that establish the PMPRB and its mandate, the Patented Medicines Regulations and the 2019 amendments to those Regulations (the 2019 Amendments). While the Court held that the overall legislative framework for the PMPRB is valid, it held that certain of the 2019 Amendments, scheduled to come into force on July 1, 2022, are constitutionally invalid, falling outside the scope of federal jurisdiction over patents.

What you need to know

• The PMPRB is a federal administrative body created under the Patent Act with the mandate of ensuring that the price of patented medicines sold in Canada is not “excessive”.
• Initially enacted in August 2019, the 2019 Amendments are set to come into force on July 1, 2022, having been delayed multiple times from an initial date of January 1, 2021¹.
• The 2019 Amendments generally fall into three categories: i) replacing the current basket of comparator countries for pricing tests, where the new basket would exclude higher-price countries United States and Switzerland, ii) introducing new mandatory economic factors for the PMPRB to use in determining whether a medicine’s price is “excessive”, and iii) requiring patentees to report rebates provided to third parties such as public or private insurers.
• In response to a challenge to the constitutionality of the regime, in a unanimous decision, the Québec Court of Appeal (QCA) upheld the constitutionality of the PMPRB regime as a whole, and the current Regulations. However, two key aspects of the 2019 Amendments were found to be outside federal jurisdiction over patents: i) the new economic factors (the pharmacoeconomic value of the drug in Canada, the market size of that drug in Canada and the gross domestic product per capita in Canada) and ii) the requirement for patentees to report rebates. The Court held that these aspects of the 2019 Amendments went beyond controlling excessive prices of patented medicines to impose significant price reductions that have nothing to do with the monopoly conferred by patents. The changes to the basket of countries were held to be constitutionally valid.
• Another proceeding relating to the 2019 Amendments is set to be heard by the Federal Court of Appeal on February 28, 2022.
• To appeal the QCA decision, leave from the Supreme Court of Canada must be sought within 60 days from the date of the judgment (i.e., by April 19, 2022).

Analysis

The PMPRB and its mandate

Sections 79 to 103 of the Patent Act establish the PMPRB and authorize it to determine whether prices of patented medicines are “excessive”. Together with the Patented Medicines Regulations, this regime is the primary tool by which the federal government regulates the price of patented pharmaceuticals in Canada. The PMPRB’s constitutional authority is grounded in the Federal government’s jurisdiction over patents set out in section 91(22) of the Constitution Act, 1867.

The PMPRB publishes a set of guidelines that implement and operationalize the Act and Regulations, (Guidelines). The Guidelines are not binding on PMPRB, however in practice they are heavily relied upon by PMPRB staff when assessing whether a medicine is priced excessively.

In August 2019, the Federal government proposed the 2019 Amendments, described by the government as being necessary to give the PMPRB “the tools to protect Canadians from excessive prices and make patented medicines more affordable”. The key portions of these amendments fall within three main categories:

1. replacing the basket of comparator countries, removing the United States and Switzerland from the current comparison, and adding several new countries with historically lower list prices than that of Canada;
2. allowing PMPRB to use new mandatory economic factors in determining whether a price is “excessive”, specifically the pharmacoeconomic value of the medicine in Canada, the size of the market for the medicine in Canada and the gross domestic product (GDP) and GDP per capita of Canada; and
3. requiring that the selling price reported to the PMPRB take into account rebates provided by the patentee (drug manufacturer), to third parties such as public and private insurers.

Court proceedings

The proceedings of the Québec Superior Court and QCA are not the first to have considered the validity of the current PMPRB regime. A Federal Court judicial review in 2020 focused on the regulatory validity of the 2019 Amendments, holding that the new basket of comparator countries and use of new economic factors were within the regulation-making authority of the Patent Act, while deciding that the requirement to report third-party rebates fell outside the regulation-making power. This decision is under appeal and is scheduled to be heard by the Federal Court of Appeal on February 28, 2022.

The proceedings in Québec challenged the constitutional validity of the entire PMPRB regime on the grounds that it exceeded Parliament’s legislative authority over patents, and was instead a matter of provincial jurisdiction over property and civil rights, over hospitals, and over matters of a merely local or private nature, including health. The QCA affirmed the constitutionality of relevant provisions of the Patent Act and the current Regulations, but found certain aspects of the 2019 Amendments exceeded Parliament’s legislative authority over patents: in particular, the requirement for third-party rebate reporting and the use of new economic factors were held to be unconstitutional. The new basket of countries was held to be constitutionally valid.

QCA decision

As is done in every constitutional analysis, the Court began by determining the impugned provisions’ true subject matter—also known as its “pith and substance”—by considering its purpose and effects. It then moved to a classification stage, determining whether, based on its true subject matter, the legislation was properly a matter of patents under section 91(22) of the Constitution.

Pith and substance. In considering the “pith and substance” of the PMPRB regime, the QCA held that the real character of the current regime (i.e., the relevant provisions of the Patent Act and the current Regulations) is the control of excessive prices of patented drugs to mitigate the effect on prices due to the patent monopoly conferred by the patent. However, the Court characterized the pith and substance of the 2019 Amendments differently, explaining that they have two aspects: first, with the aim of reducing prices, to improve the existing regime for controlling excessive prices by modifying the list of foreign countries used for price comparison and taking into account the confidential discounts granted to large public insurers; and second, to impose significant and arbitrary price reductions to make patented drugs more affordable. The Court found that the clear objective of the economic factors was to control, not only the potentially “excessive” price of a patented medicine, but also the affordability of a medicine, through significant and arbitrary price reductions.

In determining the pith and substance of the legislation, the Court found the trial judge had erred in refusing to consider both the portion of the regulatory impact analysis statement dealing with the new economic factors and the PMPRB’s new Guidelines which explain in detail how these new economic factors will apply. It explained that considering the new Guidelines is critical because they operationalize the economic factors. Even though the Guidelines are not binding, they nevertheless cannot be deviated from without justification. The Court also noted that courts frequently rely on extrinsic evidence such as Hansard excerpts; there was no reason why guidelines should be ignored in determining the pith and substance of legislation just because they are not formally rules of law.

Constitutional classification. Based largely on prior jurisprudence from the Manitoba Court of Appeal and the Federal Courts (which had largely addressed the constitutional validity of the previous compulsory licensing regime), the QCA held that, as a general matter, the regime fell within the scope of the federal patent power. It explained that mitigating the effect on prices due to the pharmaceutical patent monopoly has always been recognized as falling within federal jurisdiction over patents, and there was no reason not to follow the previous case law. Moreover, the QCA agreed with the lower court that the control of excessive prices for a patented medicine resulting from the monopoly conferred by a patent has a logical, real and direct connection with federal jurisdiction over patents and does not unconstitutionally encroach on provincial jurisdictions. Thus, the overall framework of PMPRB regulation was held to be constitutionally sound.

However, it held that certain of the amendments—the new economic factors and the requirement to take rebates into account—were constitutionally problematic.

It explained that federal jurisdiction to regulate price must be bound by: i) the fact that a drug is a patented medicine; ii) the ex-factory price of the drug (i.e., the price that the patentee sells the drug at first instance); and iii) a limit on the ability to control price through regulation of the effect on prices resulting from a patent monopoly. The requirement to report third-party rebates goes beyond this scope, as PMPRB’s regulation would no longer be tied to review of the ex-factory drug price. Similarly, the new mandatory economic factors go beyond this boundary, imposing “arbitrary and significant reductions in the prices of patented drugs in Canada, regardless of the international market or any market factor. In fact, only the affordability of the price is considered for this purpose” (English translation). The QCA characterized the use of the new factors as a means to “set a state price”, which goes beyond the regulation of the monopoly conferred by a patent and instead regulates the pharmaceutical market itself.

However, the QCA held that the new basket of international comparator countries falls within federal jurisdiction over patents, as this element of amendments is considered to be aimed at controlling the effects on prices due to the patent monopoly only. Establishment of a list of comparator countries for an objective analysis of competitiveness with international prices was considered to be a reasonable exercise of federal power, with the QCA noting that “the fact that such a substitution of reasonably comparable countries could have the effect of reducing drug prices in Canada is irrelevant to the analysis of the constitutional validity of the measure, since the objective pursued remains that of ensuring price competitiveness in Canada relative to those abroad” (English translation). The QCA also remarked that in choosing the basket of countries, the federal government can take into account the impacts on research and development and change the basket according to its policies on this subject.

Interestingly, the QCA rejected the Attorney General of Canada’s submissions that the Supreme Court of Canada decision in Celgene supported the conclusion that the Federal government’s constitutional jurisdiction over the control of excessive prices of patented medicines could extend beyond the ex-factory price. It also rejected the Attorney General of Canada’s proposal that a new interpretation of the Federal government’s jurisdiction over patents should allow the Federal government to control the prices of all patented products, not just patented medicines. The QCA rejected that proposal, stating that, with few exceptions, it is the provinces that have jurisdiction to regulate the prices of products. It cited with approval the recent decision of the Federal Court of Appeal in Alexion, where Stratas J.A. stated, “Were the excessive pricing provisions of the federal Patent Act aimed at reasonable pricing, price-regulation or consumer protection at large, they would be constitutionally suspect”.

In sum, the PMPRB cannot impose price reductions through means that are not connected to the monopoly conferred by patents; it can however select the basket of countries for objective comparison even if a reasonable comparator is not included within that basket.

Implications

The determination that the new economic factors are invalid will require an overhaul to the proposed Guidelines, which apply these factors to “category 1” medicines which are deemed by the PMPRB to be of high risk of excessive pricing. The comments of the QCA strongly imply that the Guidelines cannot be used to “work around” the legislative boundaries of federal jurisdiction on pricing. We note that the innovative pharmaceutical industry association (IMC) has launched a separate proceeding in Federal Court, challenging the Guidelines which continue to include pricing tests relating to “maximum rebated price” even though the requirement to report rebates was struck down in both the federal and Québec lower court rulings. With this new ruling of the QCA, the Guidelines are inconsistent with the legal scope of PMPRB’s jurisdiction.

The fact that leave to appeal this decision of the QCA must be sought from the Supreme Court of Canada, and the continuing proceedings in the Federal Court of Appeal may result in another delay of the coming-into-force of the 2019 Amendments. We will continue to monitor the status of the court proceedings and developments relating to the implementation of the amendments to the Regulations.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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