The Supreme Court of Canada Upholds the Ban on Private Label Generic Drugs – Katz Group Canada Inc. v Ontario (Health and Long-Term Care), 2013 SCC 64 


December 2013

Health Law Bulletin
In a unanimous ruling, the Supreme Court of Canada has upheld the validity of the private label regulations ("Regulations") made under the Ontario Drug Benefit Act ("ODBA") and the Drug Interchangeability and Dispensing Fee Act ("DIDFA"), which prevent private label generic drugs from being listed in the Formulary or designated as interchangeable.

This ruling finally disposes of the challenges made to the Regulations by certain pharmacies, and essentially bans the sale of private label generic drugs in the private and public markets in Ontario.

The challenges to the Regulations were brought by the pharmacies after Sanis Health Inc., a subsidiary of Shoppers Drug Mart Corp. and a private label manufacturer, applied to the Executive Officer of the Ontario Drug Benefit Program, in early 2010, to list several generic drugs in the Formulary and have them designated as interchangeable. The Executive Officer rejected the application on the basis of the Regulations, which were then proposed but not yet in force. In the June 2010 explanatory letter from the Executive Officer to Sanis, it was stated that:

The purpose of the regulations is to prevent a pharmacy-controlled or related entity purchasing drug products from a person that actually makes the product at lower prices than the drug benefit price on the ODB Formulary without providing any price reduction to patients, insurers, employers, the Government of Ontario, or other payors.

The government's amendments to Ontario's drug regulations seek to encourage manufacturers to provide lower prices to Ontario patients. With private label products, the price reductions that Sanis presumably enjoys would not be passed onto end-payors such as government, insurers and patients. Instead, it seems that profits would be retained within pharmacy-controlled organizations without benefiting consumers. While that would not be a "rebate" as defined in the legislation, it is a similar problem that the provisions against rebates seek to prevent.

In this letter, the Executive Officer also commented on wanting to avoid the potential for a conflict of interest where Shoppers Drug Mart pharmacies could have an interest in dispensing Sanis products in preference to others.

Katz Group Canada Inc., Pharma Plus Drug Marts Ltd. and Pharmx Rexall Drug Stores Ltd., which operate the Pharma Plus and Rexall pharmacies in Ontario, similarly intended to set up their own private label manufacturer. They joined Shoppers Drug Mart in challenging the Regulations as being ultra vires (beyond the powers) on the grounds that they were inconsistent with the statutory purpose and mandate of the ODBA and DIDFA.

The pharmacies succeeded in the Divisional Court but the decision was reversed in the Court of Appeal. The Supreme Court of Canada dismissed the pharmacies' subsequent appeal, with costs.

The Supreme Court of Canada decision sets out the background of, and rationale for, the incrementally amended regulatory framework.

The pharmacies faced an uphill battle in their challenges given the applicable common law principles (described below). The pharmacies unsuccessfully argued that the Regulations are inconsistent with the statutory purpose of the ODBA and DIDFA because:

  • they neither could nor would reduce drug prices; and

  • they are under-inclusive, in that they do not prevent a pharmacy from owning a manufacturer that is also the fabricator of the drug.

Further, the pharmacies argued that the Regulations are ultra vires because they interfere with commercial rights, prohibit an activity, and discriminate between drug manufacturers, none of which is authorised by the grants of regulation-making authority in the ODBA and DIDFA.

The Court dismissed each of these arguments in turn, relying on the following established common law principles:

  • A successful challenge to the vires of regulations requires that they be shown to be inconsistent with the objective of the enabling statute or the scope of the statutory mandate.

  • Regulations benefit from a presumption of validity. This presumption places the burden on challengers to demonstrate the invalidity of regulations rather than on regulatory bodies to justify them, and it favours an interpretive approach that reconciles the regulation with its enabling statute so that, where possible, the regulation is construed in a manner that renders it intra vires.

  • Both the challenged regulation and the enabling statute should be interpreted using a broad and purposive approach.

  • The judicial review of challenged regulations does not involve assessing their policy merits to determine if they are "necessary, wise, or effective in practice". The motives for their promulgation (whether political, economic, social or partisan) are irrelevant. The challenged regulations must be "irrelevant", "extraneous" or "completely unrelated" to the statutory purpose to be found to be ultra vires on the basis of inconsistency with statutory purpose.

In effect, although it is possible to strike down regulations as ultra vires their enabling statute, it would take an egregious case to warrant such action.

The Court held that the legislative intent behind the ODBA and DIDFA was to control – and reduce – the cost of prescription drugs in Ontario without compromising safety. Moreover, the Court outlined the consistent reasoning behind the series of amendments made to the ODBA, DIDFA and their regulations over the years. The amendments, including those to eliminate rebates and professional allowances, were made to promote transparent and fair drug pricing and to ensure pharmacies make money exclusively from providing professional health care services, instead of sharing in the revenues of drug manufacturers by setting up their own private label subsidiaries. Under this rationale, the Court held that the Regulations were consistent with the objective of the enabling statutes and scope of their mandate, and were thus intra vires and valid exercises of legislative power.

On the pharmacies' other arguments, the Court held that:

  • the ODBA and DIDFA give Cabinet the authority to set the conditions that a drug must meet to be listed in the Formulary and designated as interchangeable, and that they expressly authorise interference with a manufacturer's ability to enter and remain in the market;

  • the Regulations do not prohibit manufacturers from selling generic drugs in Ontario's markets; they restrict market access only if a particular corporate structure is used. That cannot be characterized as a total or near-total ban on selling generic drugs in Ontario;

  • Regulatory distinctions must be authorised by statute, either expressly or by necessary implication. The ODBA and DIDFA expressly authorise the making of distinctions between different drug manufacturers, and thus the "discrimination" argument is without legal foundation. Further, both Acts state that any regulations made under them "may be general or particular in [their] application" and both Acts are subject to s. 82 of the Legislation Act, 2006, which expressly provides that the power to make regulations includes the power to have them apply differently to different classes.

It is now settled law that Ontario pharmacies cannot sell private label prescription drug products.

The case also stands for the broader, and perhaps more significant, proposition that challenging regulations to a broadly purposive statute with significant public policy underpinnings is a difficult – and expensive – litigation strategy. In contexts other than Charter challenges, an appellant will face the Court's resistance to interfere with regulations enacted specifically to regulate health care services and the price of health products. This is the very essence of legislative function, an area in which the courts classically tread carefully, if at all.

While challenging regulations is a difficult endeavour, it is noteworthy that the Court deferred discussion of a pharmacy-owned manufacturer/fabricator of a generic drug. It will be interesting to see what other creative corporate structures and business models pharmacies will implement, and how legislators will respond to such entrepreneurial developments. 

by Lydia Wakulowsky and Ratika Gandhi

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013