SUPREME
COURT OF CANADA
Between:
Katz
Group Canada Inc.,
Pharma
Plus Drug Marts Ltd. and Pharmx Rexall Drug Stores Ltd.
Appellants
and
Minister
of Health and Long-Term Care,
Lieutenant
Governor-In-Council of Ontario and Attorney General of Ontario
Respondents
And
Between:
Shoppers
Drug Mart Inc.,
Shoppers
Drug Mart (London) Limited and Sanis Health Inc.
Appellants
and
Minister
of Health and Long-Term Care,
Lieutenant
Governor-In-Council of Ontario and Attorney General of Ontario
Respondents
Coram: McLachlin C.J. and LeBel, Abella, Rothstein, Cromwell,
Moldaver and Wagner JJ.
Reasons for
Judgment:
(paras. 1 to 51)
|
Abella J. (McLachlin C.J. and LeBel, Rothstein, Cromwell,
Moldaver and Wagner JJ. concurring)
|
Katz Group
Canada Inc. v. Ontario (Health and Long‑Term Care), 2013 SCC 64,
[2013] 3 S.C.R. 810
Katz Group Canada Inc.,
Pharma Plus Drug Marts Ltd. and
Pharmx Rexall Drug Stores Ltd. Appellants
v.
Minister of Health and Long‑Term
Care,
Lieutenant Governor‑in‑Council of Ontario and
Attorney General of Ontario Respondents
‑ and ‑
Shoppers Drug Mart Inc.,
Shoppers Drug Mart (London)
Limited and Sanis Health Inc. Appellants
v.
Minister of Health and Long‑Term
Care,
Lieutenant Governor‑in‑Council of Ontario and
Attorney General of Ontario Respondents
Indexed as: Katz Group Canada Inc. v. Ontario (Health and
Long‑Term Care)
2013 SCC 64
File Nos.: 34647, 34649.
2013: May 14; 2013: November 22.
Present: McLachlin C.J. and LeBel, Abella, Rothstein,
Cromwell, Moldaver and Wagner JJ.
on appeal from the court of appeal for ontario
Food and drugs —
Regulations — Validity — Province of Ontario enacting Regulations to
effectively ban the sale of private label drugs by pharmacies — Purpose of
Regulations to reduce drug prices — Whether Regulations are ultra vires on the
ground that they are inconsistent with the statutory scheme and mandate — Drug Interchangeability and Dispensing Fee Act Regulation, R.R.O.
1990, Reg. 935, s. 9 — Ontario Drug
Benefit Act Regulation, O. Reg. 201/96, s. 12.0.2.
For
decades, Ontario has been involved in an ongoing struggle to control rising
drug costs. Generic drugs have been a key part of the strategy for dealing
with this problem. Persistent market practices, however, have kept generic
prices high. In Ontario, the result has been an episodic and totemic tug‑of‑war
between regulators and those engaged in the manufacture, distribution and sale
of generic drugs.
In
1985, two complementary and intersecting statutes were introduced together to
address the problem of rising drug prices for consumers: the Drug
Interchangeability and Dispensing Fee Act and the Ontario Drug Benefit
Act. The Drug Interchangeability and Dispensing Fee Act empowers
the Ministry to designate a cheaper generic drug as “interchangeable” with a
more expensive brand‑name drug. Pharmacists must dispense the cheaper
interchangeable generic to customers unless the prescribing physician specifies
“no substitution” or the customer agrees to pay the extra cost of the brand
name. This statute also limits the dispensing fees that pharmacies can
charge private customers.
The Ontario
Drug Benefit Act governs the Ontario Drug Benefit Program whereby the
province reimburses pharmacies when they dispense prescription drugs at no
charge to “eligible persons” — primarily seniors and persons on social
assistance. All drugs for which Ontario will provide reimbursement, along with
the price that Ontario will pay for them, are listed in the Formulary. When a
pharmacy dispenses a listed drug to an eligible person, the Ontario Drug
Benefit Act requires Ontario to reimburse the pharmacy for an amount based
on the Formulary price of the drug plus a prescribed mark‑up and
prescribed dispensing fee. This legislative scheme effectively creates two
markets in Ontario for brand name and generic drugs. The private market
consists of individuals buying drugs at their own expense or for reimbursement
by private drug insurance plans. The “public market” is the government‑funded
Ontario Drug Benefit Program. Generic drugs reach consumers in Ontario’s
private and public markets through a supply chain that involves several
participants regulated at the federal level, the provincial level, or both. They
are: fabricators, who make the generic drugs; manufacturers, who sell generic
drugs under their own name to wholesalers or directly to pharmacies;
wholesalers, who buy drugs from manufacturers to distribute to pharmacies; and
pharmacies, who buy drugs from wholesalers or manufacturers and dispense them
to their customers.
Before
2006, the price at which manufacturers could apply to list generic drugs in the
Formulary was capped by regulations under the two statutes. In order to be
competitive, manufacturers would, however, give pharmacies a substantial rebate
to induce them to buy their products. The price that manufacturers charged — and
customers paid — was thereby artificially increased to the extent of the rebates.
In 2006, in order to stop this inflationary effect on generic drug prices, the
two statutes and the Regulations under them were amended to prohibit rebates. The
expected savings did not occur and manufacturers continued to charge high
prices for generic drugs. Instead of the rebates, manufacturers were now
paying pharmacies $800 million annually in professional allowances. Amendments
were therefore introduced in 2010 eliminating the “professional allowances”
exception.
The
Regulations to the two statutes were also amended to prevent pharmacies
from controlling manufacturers who sell generic drugs under their own name but
do not fabricate them. This was done by creating a category designated as
“private label products”, which includes products sold but not fabricated by a
manufacturer which does not have an arm’s length relationship with drug
wholesalers or pharmacies. Under the Regulations, private label products
cannot be listed in the Formulary or designated as interchangeable.
Sanis
Health Inc., a subsidiary of Shoppers Drug Mart, was incorporated by Shoppers
for the purpose of buying generic drugs from third party fabricators and
selling them under the Sanis label in Shoppers Drug Mart stores. Katz Group
Canada Inc., Pharma Plus Drug Marts Ltd. and Pharmx Rexall Drug Stores Ltd.
also operate pharmacies in Ontario and, like Shoppers, have taken steps to set
up their own “private label” manufacturer. In 2010, Sanis applied to list
several generic drugs in the Formulary and have them designated as
“interchangeable”. Its application was rejected, however, because those
generic drugs were “private label products”. Shoppers and Katz challenged the
Regulations that banned the sale of private label products as being ultra vires
on the grounds that they were inconsistent with the purpose and mandate of the
statutes. The challenge succeeded in the Divisional Court. The Court of Appeal
reversed the decision.
Held:
The appeal should be dismissed.
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 has two aspects: it places the
burden on challengers to demonstrate the invalidity of regulations rather than
on regulatory bodies to justify them; and it favours an interpretative approach
that reconciles the regulation with its enabling statute so that, where
possible, the regulation is construed in a manner which renders it intra vires.
Both the challenged regulation and the enabling statute should be
interpreted using a broad and generous approach consistent with this Court’s
approach to statutory interpretation generally. This inquiry
does not involve assessing the policy merits of the Regulations to determine
whether they are necessary, wise or effective in practice. Nor is it an
inquiry into the underlying political, economic, social or partisan
considerations.
In
this case, the original legislative intent animating the two statutes was to
control the cost of prescription drugs in Ontario without compromising safety. As
the legislative history shows, attempts were made to promote transparent
pricing and eliminate price inflation along the drug supply chain, all in
pursuit of the ultimate objective of lowering drug costs. The purpose
of the 2010 Regulations banning private label products was to prevent another
possible mechanism for circumventing the ban on the rebates that had kept drug
prices inflated. If pharmacies were permitted to create their own affiliated
manufacturers whom they controlled, they would be directly involved in setting
the Formulary prices and have strong incentives to keep those prices high.
The
2010 private label Regulations contribute to the legislative pursuit of
transparent drug pricing. They fit into this strategy by ensuring that
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. The Regulations were therefore
consistent with the statutory purpose of reducing drug costs.
Cases Cited
Referred
to: Waddell v. Governor in Council (1983), 8 Admin. L.R. 266; United
Taxi Drivers’ Fellowship of Southern Alberta v. Calgary (City), 2004 SCC
19, [2004] 1 S.C.R. 485; Glykis v. Hydro‑Québec, 2004 SCC 60,
[2004] 3 S.C.R. 285; Jafari v. Canada (Minister of Employment and
Immigration), [1995] 2 F.C. 595; Ontario Federation of Anglers &
Hunters v. Ontario (Ministry of Natural Resources) (2002), 211 D.L.R. (4th)
741; Thorne’s Hardware Ltd. v. The Queen, [1983] 1 S.C.R. 106; CKOY
Ltd. v. The Queen, [1979] 1 S.C.R. 2; Alaska Trainship Corp. v. Pacific
Pilotage Authority, [1981] 1 S.C.R. 261; Re Doctors Hospital and
Minister of Health (1976), 12 O.R. (2d) 164; Shell Canada Products Ltd.
v. Vancouver (City), [1994] 1 S.C.R. 231; Municipal Corporation of City
of Toronto v. Virgo, [1896] A.C. 88; Forget v. Quebec (Attorney General),
[1988] 2 S.C.R. 90.
Statutes and Regulations Cited
Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23, ss. 12.1, 14(1), (8).
Food and Drug Regulations, C.R.C.,
c. 870.
Legislation Act, 2006, S.O. 2006,
c. 21, Sch. F, ss. 64, 82.
O. Reg. 201/96, ss. 1, 1(6) [rep. & sub. O. Reg. 220/10, s.
1(1)], 12.0.2(1), (2) “private label product” [ad. O. Reg. 220/10, s. 3].
Ontario Drug Benefit Act, R.S.O. 1990,
c. O.10, ss. 0.1, 1(1), 1.2(2)(a), 1.3, 11.5, 18(1), (6).
R.R.O. 1990, Reg. 935, ss. 2, 9(1), (2) “private label product”
[ad. O. Reg. 221/10, s. 5].
Transparent Drug System for Patients Act, 2006, S.O. 2006, c. 14.
Authors Cited
Brown, Donald J. M., and John M. Evans, with the
assistance of Christine E. Deacon. Judicial Review of Administrative
Action in Canada, vol. 3. Toronto: Canvasback, 1998 (loose‑leaf
updated August 2012).
Canada. Competition Bureau. Benefiting from Generic Drug
Competition in Canada: The Way Forward. Ottawa: The Bureau, 2008
(online: http://www.competitionbureau.gc.ca/eic/site/cb‑bc.nsf/eng/03026.html).
Canadian Institute for Health Information. National Health
Expenditure Trends, 1975 to 2012. Ottawa: The Institute, 2012 (online: https://secure.cihi.ca/free_products/NHEXTrendsReport2012EN.pdf).
Keyes, John Mark. Executive Legislation, 2nd ed. Markham,
Ont.: LexisNexis, 2010.
Ontario. Legislative Assembly. Hansard — Official Report of
Debates, No. 41, 1st Sess., 33rd Parl., November 7, 1985, p. 1446.
Ontario. Legislative Assembly. Official Report of Debates
(Hansard), Nos. 13, 19 and 23, 2nd Sess., 39th Parl., April 12, 21 and
28, 2010.
Organisation for Economic Co‑operation and Development. Health
at a Glance 2009: OECD Indicators. Paris: OECD, 2009 (online: http://www.oecd-ilibrary.org/social-issues-migration-health/health-at-a-glance-2009_health_glance-2009-en).
Régimbald, Guy. Canadian Administrative Law. Markham,
Ont.: LexisNexis, 2008.
Sullivan, Ruth. Sullivan on the Construction of Statutes,
5th ed. Markham, Ont.: LexisNexis, 2008.
APPEAL
from a judgment of the Ontario Court of Appeal (MacPherson, Epstein and
Karakatsanis JJ.A.), 2011 ONCA 830, 109 O.R. (3d) 279, 286 O.A.C. 68, 345
D.L.R. (4th) 277, 37 Admin. L.R. (5th) 101, [2011] O.J. No. 5894 (QL),
2011 CarswellOnt 14816, setting aside a decision of Whalen, Molloy and
Swinton JJ., 2011 ONSC 615, [2011] O.J. No. 480 (QL), 2011
CarswellOnt 720. Appeal dismissed.
Terrence J.
O’Sullivan and M. Paul Michell, for the
appellants Katz Group Canada Inc., Pharma Plus Drug Marts Ltd. and Pharmx
Rexall Drug Stores Ltd.
Mahmud
Jamal, Craig T. Lockwood, Eric
Morgan and W. David Rankin, for the appellants Shoppers Drug
Mart Inc., Shoppers Drug Mart (London) Limited and Sanis Health Inc.
Lise G.
Favreau, Kim Twohig and Kristin Smith,
for the respondents.
The judgment of the Court was
delivered by
[1]
Abella J. — Canada spends more on prescription drugs
per capita than almost all members of the Organisation for Economic
Co-operation and Development.
Prescription drugs are the second largest area of health care spending. Drug costs accounted
for approximately 9.5% of government health care expenses in 1985. By 2010,
that number had risen to 15.9%.
[2]
A key part of the strategy for controlling drug
costs has been to replace brand-name drugs with generic drugs, in the
expectation that generic drugs would be significantly cheaper. Those
expectations were, however, challenged by persistent market practices that kept
generic prices high. In Ontario, the result has been an episodic tug-of-war
between regulators and those engaged in the manufacture, distribution and sale
of generic drugs. This appeal arises out of one of those regulatory episodes.
Background
[3]
The sale and pricing of generic drugs is
provincially regulated. In Ontario, two complementary and intersecting statutes
were introduced together in 1985 to address the problem of rising drug prices:
the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c.
P.23, and the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10 (“Acts”).
[4]
The Drug Interchangeability and Dispensing
Fee Act ensures that patients in Ontario receive generic drugs rather than
equivalent but more expensive brand-name drugs. It does so by empowering the
Executive Officer of the Ministry of Health and Long-Term Care to designate a
generic drug as “interchangeable” with a brand-name drug. Pharmacists must
dispense the cheaper interchangeable generic to customers unless the
prescribing physician specifies “no substitution” or the customer agrees to pay
the extra cost of the brand-name. The Act also limits the
dispensing fees that pharmacies can charge private customers.
[5]
The Ontario Drug Benefit Act governs the
Ontario Drug Benefit Program, whereby the province reimburses pharmacies when
they dispense prescription drugs at no charge to “eligible persons” — primarily
seniors and persons on social assistance. The list of all drugs for which
Ontario will provide reimbursement, along with the price that Ontario will pay
for them, is called the Formulary. The Executive Officer is responsible for
listing drugs in the Formulary and setting their price by agreement with the
drugs’ manufacturers. When a pharmacy dispenses a listed drug to an eligible
person, the Ontario Drug Benefit Act requires Ontario to reimburse the
pharmacy for an amount based on the Formulary price of the drug plus a
prescribed mark-up and prescribed dispensing fee.
[6]
This legislative scheme effectively creates two
markets in Ontario for brand-name and generic drugs. The “private market”
consists of individuals buying drugs at their own expense or for reimbursement
by private drug insurance plans. This market includes employer benefit plans,
which in 2010 provided drug coverage for 8.6 million Ontario employees and
their families at a cost of $4 billion to employers. Generic drugs, in order to
be in the private market, must receive Health Canada approval for safety and
effectiveness, and must be designated as “interchangeable” by Ontario’s
Executive Officer.
[7]
The “public market” is the government-funded
Ontario Drug Benefit Program. To be in this market, generic drugs must be
approved by Health Canada, designated by Ontario as interchangeable, and
listed in the province’s Formulary. In 2010, the Ontario Drug Benefit Program
provided drug coverage for 2.5 million people for the purchase of 3,300 drugs
listed in the Formulary at a cost of $3.7 billion.
[8]
Generic drugs reach consumers in Ontario’s
private and public markets through a supply chain that involves several
participants regulated at the federal level, the provincial level, or both.
They are:
•
Fabricators, who
make the generic drugs. Fabricators are licensed federally under the Food
and Drug Regulations, C.R.C., c. 870.
•
Manufacturers,
who are licensed under the federal Food and Drug Regulations to sell
generic drugs under their own name to wholesalers or directly to pharmacies.
Manufacturers are responsible for regulatory compliance: having the drug
approved by Health Canada, and having it designated as interchangeable and
listed in the Formulary. A manufacturer can either make drugs itself, in which
case it is also regulated as a fabricator, or it can buy the drugs from a
fabricator. The price at which manufacturers sell the drugs to wholesalers or
pharmacies is regulated under the Ontario Drug Benefit Act and the Drug
Interchangeability and Dispensing Fee Act. The price at which manufacturers
buy drugs from fabricators is not regulated.
•
Wholesalers, who
are licensed under the federal Food and Drug Regulations to buy drugs
from manufacturers to distribute to pharmacies. The prices at which wholesalers
buy and sell drugs are regulated under the Ontario Acts. Their role is
not implicated in the particular issue before this Court.
•
Pharmacies, who
buy drugs from wholesalers or manufacturers and dispense them to their
customers. The term is used in these reasons to refer to pharmacy operators and
to companies that own, operate or control pharmacies. The prices at which
pharmacies buy drugs and dispense them to customers are regulated under the
Ontario Acts.
[9]
The Drug Interchangeability and Dispensing
Fee Act and the Ontario Drug Benefit Act give the Lieutenant
Governor in Council the authority to make regulations, including the authority
to prescribe the conditions drugs must meet in order to be sold in Ontario.
Ontario has used that regulatory authority to impose price controls along the
drug supply chain.
[10]
Prior to 2006, the price at which manufacturers
could apply to list generic drugs in the Formulary was capped by regulations
under the Acts at effectively 63% of the price of the brand-name drug.
Pharmacies would buy drugs from manufacturers at the Formulary price, and
dispense them to customers at the Formulary price, plus regulated mark-ups and
dispensing fees. In order to be competitive, manufacturers would, however, give
pharmacies a substantial rebate so that they would buy their products. The
price that manufacturers charged — and customers paid — was thereby
artificially increased to the extent of the rebates. The rebates were up to
$600-800 million annually, and were said to account for 40% of the price
manufacturers charged for drugs.
[11]
In order to stop this inflationary effect on
generic drug prices, in 2006, the Ontario Drug Benefit Act, the Drug
Interchangeability and Dispensing Fee Act, and the Regulations under them
were amended to prohibit rebates.
The amendments were introduced
as the Transparent Drug System for Patients Act, 2006, S.O. 2006, c. 14.
They also added a “Principles” clause to the
Ontario Drug Benefit Act,
which stated that the public drug system “aims to operate transparently
to the extent possible for all persons with an interest in the system,
including . . . consumers, manufacturers, wholesalers and pharmacies”
and “aims to consistently achieve value-for-money and ensure the best use of
resources at every level of the system”.
[12]
The legislature sought to terminate one major
source of revenue for pharmacies — payments from drug manufacturers — and
replace it with government reimbursement for providing professional health care
services. The amendments made the reimbursement of
pharmacies for professional services a function of the Executive Officer,
established a Pharmacy Council to advise the Minister primarily on this issue,
and created a new regulation-making power allowing the Lieutenant Governor in
Council to govern all aspects of professional services. Ontario also increased
the prescribed dispensing fees in the public market.
[13]
In the expectation that the elimination of
rebates would lead manufacturers to lower their prices, the Ontario government
also reduced the price cap imposed by the Regulations to 50% in the public
market and removed the cap entirely in the private market. Manufacturers could,
however, give pharmacies “professional allowances” for direct patient care
programs.
[14]
But the expected savings did not occur and
manufacturers continued to charge high prices for generic drugs. Ontario’s
Ministry of Health and Long-Term Care found in 2007 that some of the leading
generic drugs were three times more expensive in Ontario than in France,
Germany and the United Kingdom, five times more expensive than in the United
States, and twenty-two times more expensive than in New Zealand. In fact, as a
Competition Bureau Report concluded, new generic drugs were entering the
uncapped private market at a price higher than the previous cap of 63% (Benefiting
from Generic Drug Competition in Canada: The Way Forward (2008), at p. 10).
[15]
In addition, instead of the rebates, manufacturers
were now paying pharmacies $800 million annually in professional allowances. As
a result, the professional allowance exception was identified as yet another
inflationary loophole. Audits of 206 pharmacies showed that all of them were in
violation of the rules pertaining to professional allowances, and 70% of the
funds provided by manufacturers on this basis went towards higher salaries and
store profits, instead of being used for patient care. The then Minister of
Health, the Hon. Deborah Matthews, concluded that the continuing payments by
drug manufacturers to pharmacies were the major reason Ontario still had
inflated generic drug prices relative to comparable countries. In her view,
drug prices could be cut by 50% if the payments were eliminated (Legislative
Assembly of Ontario, Official Report of Debates (Hansard), Nos. 13, 19
and 23, 2nd Sess., 39th Parl., April 12, 21 and 28, 2010).
[16]
Amendments were therefore introduced in 2010 to
both Acts and to the Regulations, eliminating the “professional allowances”
exception. Together with the 2006 ban on rebates, this prevented manufacturers
from giving pharmacies any benefits for purchasing their drugs other
than small prescribed discounts. At the same time, Ontario reduced the price
cap imposed by the Regulations to 25% in the public market and re-introduced
the price cap in the private market. Ontario also amended the Regulations to
provide more reimbursement to pharmacies for professional services by further
increasing the prescribed dispensing fees in the public market, and by
directing the Executive Officer to pay an additional service fee on most claims
in the public market until March 31, 2013 in “recognition of the transition to
a pharmacy reimbursement model aimed at supporting professional services” (O.
Reg. 220/10, s. 1(1)). The government also allocated $100 million in funding
for the development of professional services by pharmacies.
[17]
The Regulations to the Ontario Drug Benefit
Act
and the Drug Interchangeability and Dispensing Fee Act were also amended to
prevent pharmacies from controlling manufacturers who sell generic drugs
under their own name but do not fabricate them. This was done by creating a
category designated as “private label products”, which were defined in both
sets of Regulations as follows:
“private label product”
includes a drug product in respect of which,
(a) the manufacturer applying for the designation of the product
as a listed drug product does not directly fabricate the product itself, and,
(i) is not controlled by a person that directly fabricates the
product, or
(ii) does not control the person that directly fabricates the
product, and
(b) either,
(i) the manufacturer does not have an arm’s-length relationship
with a wholesaler, an operator of a pharmacy or a company that owns, operates
or franchises pharmacies, or
(ii) the product is to be supplied under a marketing arrangement
associating the product with a wholesaler or one or more operators of
pharmacies or companies that own, operate or franchise pharmacies.
(O.
Reg. 220/10, s. 3; O. Reg. 221/10, s. 5)
[18]
Private label products cannot be listed in the
Formulary
or designated as interchangeable.
These restrictions essentially ban the sale of private label drugs in the
private and public markets in Ontario and are at the heart of this appeal.
[19]
Sanis Health Inc., a subsidiary of the Canadian
public company Shoppers Drug Mart Corp., is a manufacturer of private label
products. It was incorporated by Shoppers for the purpose of buying generic
drugs from third party fabricators and selling them under the Sanis label in
Shoppers Drug Mart stores. Sanis entered into cross-licensing and fabrication
agreements with Cobalt Pharmaceuticals Inc. and Mylan Pharmaceuticals ULC, two
manufacturers which currently fabricate generic drugs and sell them in Ontario.
Pursuant to these arrangements, Sanis would rely on Cobalt and Mylan to
fabricate generic drugs for it and would piggy-back onto their regulatory
submissions as manufacturers to obtain its own Health Canada approval.
[20]
In 2010, Sanis applied to the Executive Officer
to list several generic drugs in the Formulary and have them designated as
interchangeable. The Executive Officer rejected its application for the
following reasons:
As you may be aware, the
ministry recently posted a notice of proposed regulations on April 8, 2010 to
amend the regulations under the [Drug Interchangeability and Dispensing Fee
Act] and the [Ontario Drug Benefit Act]. These regulations propose
that it is a condition of being designated under the [Drug
Interchangeability and Dispensing Fee Act] that a product is not a private
label product, and it is a condition of a product being a listed drug product
under the [Ontario Drug Benefit Act] that it not be a private label
product. These regulations will come into effect on July 1, 2010.
It seems to me that [Sanis’
products] would be “private label products” as defined in the regulations.
Sanis does not directly fabricate the Products and it does not have an arm’s
length relationship with a company that owns, operates or franchises
pharmacies.
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.
Further, there is a concern that Shoppers Drug Mart pharmacies could have an interest
in dispensing [Sanis products] in preference to others, which raises the
potential for a conflict of interest.
As a result, I do not intend to
designate the Products as interchangeable under the [Drug Interchangeability
and Dispensing Fee Act] or as listed drug products under the [Ontario
Drug Benefit Act].
[21]
Katz Group Canada Inc., Pharma Plus Drug Marts
Ltd. and Pharmx Rexall Drug Stores Ltd. operate the Pharma Plus and Rexall
pharmacies in Ontario and, like Shoppers, have taken steps to set up their own
private label manufacturer. They have indicated that they intend
to follow the same general business model as Sanis.
[22]
Shoppers and Katz challenged the private label
regulations as being ultra vires on the grounds that they were
inconsistent with the statutory purpose and mandate. They succeeded in the
Divisional Court, where Molloy J. concluded that the private label regulations
were neither consistent with the purposes of the Ontario Drug Benefit Act
and the Drug Interchangeability and Dispensing Fee Act, nor authorised
by the regulation-making provisions. This decision was reversed in the Court of
Appeal, where a majority (MacPherson and Karakatsanis JJ.A.) found that the
private label regulations were intra vires.
[23]
I agree with MacPherson and Karakatsanis JJ.A.
and would dismiss the appeal.
Analysis
[24]
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 (Guy
Régimbald, Canadian Administrative Law (2008), at p. 132). This was
succinctly explained by Lysyk J.:
In determining whether
impugned subordinate legislation has been enacted in conformity with the terms
of the parent statutory provision, it is essential to ascertain the scope of
the mandate conferred by Parliament, having regard to the purpose(s) or
objects(s) of the enactment as a whole. The test of conformity with the Act is
not satisfied merely by showing that the delegate stayed within the literal
(and often broad) terminology of the enabling provision when making subordinate
legislation. The power-conferring language must be taken to be qualified by the
overriding requirement that the subordinate legislation accord with the
purposes and objects of the parent enactment read as a whole.
(Waddell
v. Governor in Council (1983), 8 Admin. L.R. 266, at p. 292)
[25]
Regulations benefit from a presumption of validity (Ruth Sullivan, Sullivan on the Construction of Statutes (5th
ed. 2008), at p. 458). This presumption has two
aspects: it places the burden on challengers to demonstrate the invalidity of
regulations, rather than on regulatory bodies to justify them (John Mark
Keyes, Executive Legislation (2nd ed. 2010), at pp.
544-50); and it favours an interpretative approach that reconciles the
regulation with its enabling statute so that, where possible, the
regulation is construed in a manner which renders it intra vires (Donald
J. M. Brown and John M. Evans, Judicial Review of Administrative Action in
Canada, vol. 3 (loose-leaf), at 15:3200 and 15:3230).
[26]
Both the challenged regulation and the enabling statute should be
interpreted using a “broad and purposive approach . . . consistent with this
Court’s approach to statutory interpretation generally” (United Taxi
Drivers’ Fellowship of Southern Alberta v. Calgary (City), 2004 SCC 19,
[2004] 1 S.C.R. 485, at para. 8; see also Brown and Evans, at
13:1310; Keyes, at pp. 95-97; Glykis v. Hydro-Québec, 2004 SCC
60, [2004] 3 S.C.R. 285, at para. 5; Sullivan, at p.
368; Legislation Act, 2006, S.O. 2006, c. 21, Sch. F, s. 64).
[27]
This inquiry does not involve assessing the
policy merits of the regulations to determine whether they are “necessary, wise, or effective in practice”
(Jafari v. Canada (Minister of Employment and Immigration), [1995] 2
F.C. 595 (C.A.), at p. 604). As explained in Ontario Federation of Anglers
& Hunters v. Ontario (Ministry of Natural Resources) (2002), 211 D.L.R.
(4th) 741 (Ont. C.A.):
. . . the judicial review of
regulations, as opposed to administrative decisions, is usually restricted to
the grounds that they are inconsistent with the purpose of the statute or that
some condition precedent in the statute has not been observed. The motives for
their promulgation are irrelevant. [para. 41]
[28]
It is not an inquiry into the underlying
“political, economic, social or partisan considerations” (Thorne’s Hardware
Ltd. v. The Queen, [1983] 1 S.C.R. 106, at pp. 112-13). Nor does the vires
of regulations hinge on whether, in the court’s view, they will actually
succeed at achieving the statutory objectives (CKOY
Ltd. v. The Queen, [1979] 1 S.C.R. 2, at p. 12; see
also Jafari, at
p. 602; Keyes, at p. 266).
They 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 (Alaska
Trainship Corp. v. Pacific Pilotage Authority,
[1981] 1 S.C.R. 261; Re Doctors Hospital and
Minister of Health (1976), 12 O.R. (2d) 164 (Div.
Ct.); Shell Canada Products Ltd. v. Vancouver (City), [1994] 1 S.C.R.
231, at p. 280; Jafari, at p. 604; Brown and Evans, at 15:3261). In
effect, although it is possible to strike down regulations as ultra vires
on this basis, as Dickson J. observed, “it would take an egregious case to
warrant such action” (Thorne’s Hardware, at p. 111).
[29]
The grants of authority relevant to the private
label regulations are, under the Drug Interchangeability and Dispensing Fee
Act:
14.―(1) The
Lieutenant Governor in Council may make regulations,
(a) prescribing conditions to be met by products or by
manufacturers of products in order to be designated as interchangeable with
other products;
(b) prescribing conditions to be met for a product to continue
to be designated as interchangeable;
Under the Ontario Drug
Benefit Act, they are:
18.―(1) The
Lieutenant Governor in Council may make regulations,
. . .
(b) prescribing conditions to be met for a drug product to be designated
as a listed drug product;
(b.1) prescribing conditions to be met for a listed drug product
to continue to be designated as a listed drug product;
. . .
(m) respecting any matter considered necessary or advisable to
carry out the intent and purposes of this Act.
[30]
To start the analysis, we must determine the
purposes of the enabling statutes.
[31]
The original legislative intent animating the
two Acts was to combat high drug prices caused by manufacturers quoting
artificially high Formulary prices while providing hidden discounts to
pharmacies. When the statutes were first introduced in 1985, the then Minister
of Health, the Hon. Murray J. Elston, explained that they were intended to
address the problem of “unrealistic” drug pricing:
[The] formulary . . . lists
the prices at which government will reimburse pharmacies for drugs dispensed
under the program. These formulary prices are based on quotes received from
drug manufacturers. They are not set by government.
Some manufacturers
realized that by quoting artificially high prices for the formulary, prices
higher than what pharmacies were actually paying for drugs, there was an
incentive for pharmacies to purchase their products. Government reimbursements
for drugs dispensed under the ODB are, as a result, higher than the cost of
many drugs to pharmacies.
It can be easily seen
how this resulted in excess costs to the Ontario drug benefit plan. This practice of price spreading, and the fact that it was allowed
to continue for so long by the previous government, represents an unnecessary
burden on all Ontario taxpayers.
. . . since the Ontario
Drug Benefit Formulary is used as a pricing guide for prescription drug sales
in the cash market, its artificially high prices have resulted in excess costs
for cash customers and for those on other drug plans as well. [Emphasis
added.]
(Legislative
Assembly, Hansard – Official Report of Debates, No. 41, 1st Sess., 33rd
Parl., November 7, 1985, p. 1446)
[32]
In other words, the overarching purpose of the statutory
scheme is, as Molloy J. explained, “to control the cost of prescription drugs
in Ontario without compromising safety”.
[33]
The Acts and the Regulations under them
represent a series of deliberate and aspirational responses to what has
proven to be a tenacious problem over the past 25 years: manufacturers
charging exceptionally high prices for generic drugs flowing not from the
actual cost of the drugs, but from the manufacturers’ cost in providing
financial incentives to pharmacies to induce them to purchase their products.
The government has repeatedly tried to end these hidden benefits. As the
legislative history shows, attempts were made to promote transparent pricing
and eliminate price inflation along the drug supply chain, all in pursuit of the
ultimate objective of lowering drug costs. The legislature also exerted control
over the sources of pharmacy revenue, attempting to shift pharmacy revenues
away from drug sales and towards the delivery of professional services.
Of necessity, these legislative and regulatory responses have been incremental.
[34]
The purpose of the 2010 Regulations
banning private label products was to prevent another possible mechanism for
circumventing the ban on the rebates that kept drug prices inflated. As
previously noted, the problem with rebates was that they inflated the Formulary
price. In banning rebates, the expectation was that manufacturers would
lower Formulary prices, and that pharmacies would pass these savings on to
consumers. If pharmacies were permitted to create their own affiliated
manufacturers whom they controlled, they would be directly involved in setting
the Formulary prices and have strong incentives to keep these prices
high. Rather than receiving a rebate financed by inflated drug prices, the
pharmacy would share in the manufacturers’ profits from those prices. This was
expected to keep the price of drugs to consumers high.
[35]
These concerns found their way into the June
2010 explanatory letter from the Executive Officer to Sanis. The relevant portions
are repeated here for ease of reference:
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.
[Emphasis added.]
[36]
The private label Regulations also contribute to
the legislative pursuit of transparent drug pricing. The Regulations are
consistent with a recommendation in the 2008 Competition Bureau Report that
“reimbursement of pharmacy services should be provided separately from
reimbursement of drug costs”. The Bureau’s rationale was that provincial
governments have difficulty setting appropriate fees for pharmacy services as
long as pharmacies continue to receive massive payments from drug manufacturers
and can use those revenues to offset under-funding for services and inefficient
service delivery (Benefiting from Generic Drug Competition, at
pp. 20-22 and 32). Weaning pharmacies off drug manufacturer revenues
and transitioning them to a business model based on reimbursement for providing
professional services has therefore been an important strategy pursued in the
2006 and 2010 amendments to the Acts and Regulations.
[37]
The private label Regulations fit into this
strategy by ensuring that 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. In this way
too, the Regulations correspond to the statutory purpose of reducing drug costs
since disentangling the cost of pharmacy services from the cost of drugs puts
Ontario in a better position to regulate both.
[38]
The 2010 private label Regulations were
therefore part of the regulatory pursuit of lower prices for generic drugs and
are, as a result, consistent with the statutory purpose.
[39]
Shoppers and Katz argued, however, that the
private label Regulations were inconsistent with the statutory purpose because
they neither could nor would reduce drug prices. This, with respect,
misconstrues the nature of the review exercise. The animating concern of the
ban is that private label manufacturers’ affiliation to pharmacies could make
them more resistant to Ontario’s efforts to promote lower prices. The
Regulations are therefore connected to the statutory purpose of
controlling — and reducing — drug prices. Whether they will ultimately prove to
be successful or represent sound economic policy is not the issue. The issue
is whether they accord with the purpose of the scheme. In my view, they clearly
do.
[40]
Shoppers and Katz also argued that the private
label Regulations are inconsistent with the statutory purpose because they are
under-inclusive: they do not prevent a pharmacy from owning a manufacturer who
is also the fabricator of the drug. At the moment, this is pure speculation —
there are no pharmacies in Ontario which own both the manufacturer and
fabricator of a generic drug. It may well be that at some point this will
become a corporate structure of concern, but Ontario is not obliged in its
regulations to anticipate all potentially problematic scenarios. So long as
what it has actually enacted is consistent with the statutory purpose and
regulatory scope, Ontario is entitled to address the problem in stages.
The ban on private label products is not inconsistent with or extraneous to the
statutory purpose simply because it fails to include corporate models that do
not currently exist.
[41]
It bears repeating that Ontario’s totemic
struggle to control generic drug prices has been an incremental one, due in
part to an evolving awareness of the mechanisms that can lead to high drug
prices, and in part to the dynamic nature of the problem: each time the
government has introduced new measures, market participants have changed their
business practices to obviate the restrictions and keep prices high.
[42]
The private label Regulations are part of this
incremental regulatory process, tailored to address a proposed business model
in which the private label manufacturer is a substitute for a manufacturer
which already has its drugs on the market in Ontario. Sanis, for example,
proposed to rely on Cobalt and Mylan, two manufacturers who already market generic
drugs in Ontario, to fabricate its drugs and to provide it with the groundwork
for obtaining regulatory approval. Brent Fraser, the Director of Drug Program
Services at the Ministry of Health and Long-Term Care, expressed this very
concern about Sanis’ proposal. In his view, Sanis’ intention to rely on other
companies like Cobalt or Mylan to develop the products it proposed to sell
meant that “the only role of Sanis appears to be to earn a profit for a
pharmacy operator over and above the increased dispensing fees, the newly
introduced transitional service fees, benefits associated with ordinary
commercial terms, and the planned payments for the delivery of professional
services”.
[43]
Shoppers and Katz also argued that the private
label Regulations are ultra vires because they interfere with commercial
rights, prohibit an activity, and discriminate between drug manufacturers, none
of which they say is authorised by the grants of regulation-making authority in
the Ontario Drug Benefit Act and the Drug Interchangeability and
Dispensing Fee Act. In my view, these arguments cannot succeed.
[44]
It seems to me somewhat ethereal to speak of a
commercial “right” to trade in a market as highly regulated as is the
pharmaceutical market in Ontario. Manufacturers have no right to sell
drugs in the public market in Ontario unless they are listed in the Formulary,
and no right to sell generic drugs at all unless they are designated as
interchangeable. Since the Ontario Drug Benefit Act and the Drug
Interchangeability and Dispensing Fee Act give the Lieutenant Governor in
Council the authority to set the conditions that a drug must meet in order to
be listed in the Formulary and designated as interchangeable, they expressly
authorise interference with a manufacturer’s ability to enter and remain in the
market.
[45]
Nor do the private label Regulations contravene
the principle that a statutory power to regulate an activity does not include
the power to prohibit it. This principle had its origins in Municipal
Corporation of City of Toronto v. Virgo, [1896] A.C. 88 (P.C.),
where Lord Davey held that
there is marked distinction to be drawn
between the prohibition or prevention of a trade and the regulation or
governance of it, and indeed a power to regulate and govern seems to imply the
continued existence of that which is to be regulated or governed. [p. 93]
[46]
Assessing whether a regulation has crossed the
line from being a permissible condition into being an impermissible prohibition
requires establishing the scope of the activity to be regulated and then
determining the extent to which it can continue to be carried on (Keyes, at p.
312). Here, the activity to be regulated is the sale of generic drugs in the
private and public markets in Ontario. The private label 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.
[47]
The “discrimination” or unauthorised
distinctions argument is similarly without a legal foundation. Regulatory
distinctions must be authorised by statute, either expressly or by necessary
implication (Forget v. Quebec (Attorney General), [1988] 2 S.C.R. 90, at
pp. 106-7). The applicable legislation in this case expressly authorises the
making of distinctions between different drug manufacturers. Section 14(1)(a)
of the Drug Interchangeability and Dispensing Fee Act expressly states
that the Lieutenant Governor in Council may make regulations “prescribing
conditions to be met by products or by manufacturers of products in
order to be designated as interchangeable with other products”. Prescribing
conditions to be met by drug manufacturers necessarily creates classes of manufacturers
who do or do not meet those conditions, and, consequently, to whom the
regulations apply differently.
[48]
Both Acts also state that any regulations
made under them “may be general or particular in [their] application” (Ontario
Drug Benefit Act, s. 18(6), Drug Interchangeability and
Dispensing Fee Act, s. 14(8)). Moreover, both statutes 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:
82. (1) A regulation may be general or particular in its application.
(2) The power to make a regulation includes the power to
prescribe a class.
(3) For the purposes of subsection (2), a class may be defined,
(a) in terms of any attribute or combination of
attributes; or
(b) as consisting of, including or excluding a specified
member.
[49]
The Regulations focus on the sale of drugs by
private label manufacturers because those manufacturers and their affiliated
pharmacies are the ones considered to be particularly poised to
circumvent the statutory ban on rebates that applies to all
manufacturers and pharmacies in Ontario. Far from being “discriminatory”, the
distinctions they draw flow directly from the statutory purpose and the scope
of the mandate.
[50]
Shoppers and Katz have therefore not, with
respect, demonstrated that the Regulations are ultra vires.
[51]
I would dismiss the appeal with costs.
Appeal
dismissed with costs.
Solicitors for the
appellants Katz Group Canada Inc., Pharma Plus Drug Marts Ltd. and Pharmx
Rexall Drug Stores Ltd.: Lax O’Sullivan Scott Lisus, Toronto.
Solicitors for the
appellants Shoppers Drug Mart Inc., Shoppers Drug Mart (London) Limited and
Sanis Health Inc.: Osler, Hoskin & Harcourt, Toronto.
Solicitor for the
respondents: Attorney General of Ontario, Toronto.