IN THE SUPREME COURT OF CANADA (ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO)

Transcription

1 IN THE SUPREME COURT OF CANADA (ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO) S.C.C. File No BETWEEN: SHOPPERS DRUG MART INC., SHOPPERS DRUG MART (LONDON) LIMITED and SANIS HEALTH INC. - and - Appellants MINISTER OF HEALTH AND LONG-TERM CARE, LIEUTENANT GOVERNOR-IN- COUNCIL OF ONTARIO and ATTORNEY GENERAL OF ONTARIO Respondents IN THE SUPREME COURT OF CANADA (ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO) S.C.C. File No BETWEEN: KATZ GROUP CANADA INC., PHARMA PLUS DRUG MARTS LTD., and PHARMX REXALL DRUG STORES LTD. - and - Appellants MINISTER OF HEALTH AND LONG-TERM CARE, LIEUTENANT GOVERNOR-IN- COUNCIL OF ONTARIO and ATTORNEY GENERAL OF ONTARIO Respondents FACTUM OF THE RESPONDENTS, MINISTER OF HEALTH AND LONG-TERM CARE, LIEUTENANT GOVERNOR-IN- COUNCIL OF ONTARIO and ATTORNEY GENERAL OF ONTARIO (Pursuant to Rule 42 of the Rules of the Supreme Court of Canada)

2 MINISTRY OF THE ATTORNEY GENERAL Crown Law Office - Civil 8th Floor, 720 Bay Street Toronto, Ontario M7A 2S9 Fax: Kim Twohig (LSUC # 17986O) Tel: Kim.Twohig@ontario.ca BURKE-ROBERTSON LLP Barristers & Solicitors 441 MacLaren Street, Suite 200 Ottawa, Ontario K2P 2H3 Robert E. Houston, Q.C. Tel: Fax: or rhouston@burkerobertson.com Lise G. Favreau (LSUC # 37800S) Tel: Lise.Favreau@ontario.ca Kristin Smith (LSUC# 55678C) Tel: Kristin.Smith@ontario.ca Counsel for the Respondents, Minister of Health and Long-Term Care, Lieutenant Governor-In-Council of Ontario and Attorney General of Ontario Ottawa Agents for the Respondents, Minister of Health and Long-Term Care, Lieutenant Governor-In-Council of Ontario and Attorney General of Ontario

3 ORIGINAL TO: THE REGISTRAR COPIES TO: OSLER, HOSKIN & HARCOURT LLP P.O. Box 50, 1 First Canadian Place Toronto, Ontario M5X 1B8 Mahmud Jamal Craig T. Lockwood Eric Morgan W. David Rankin Tel: Fax: mjamal@osler.com Counsel for the Appellants, Shoppers Drug Mart Inc., Shoppers Drug Mart (London) Limited and Sanis Health Inc. OSLER, HOSKIN & HARCOURT LLP 340 Albert Street, Suite 1900 Ottawa, Ontario K1R 7Y6 Patricia J. Wilson Tel: Fax: pwilson@osler.com Ottawa Agents for the Appellants, Shoppers Drug Mart Inc., Shoppers Drug Mart (London) Limited and Sanis Health Inc. LAX O SULLIVAN SCOTT LISUS LLP Suite 2750, 145 King Street West Toronto, Ontario M5H 1J8 Terrence J. O Sullivan Paul Mitchell Tel: Fax: tosullivan@counsel-toronto.com Counsel for the Appellants, Katz Group Canada Inc., Pharma Plus Drug Marts Ltd., and Pharmx Rexall Drug Stores Ltd. BORDEN LADNER GERVAIS LLP World Exchange Plaza 100 Queen Street, Suite 1100 Ottawa, Ontario K1P 1J9 Nadia Effendi Tel: Fax: neffendi@blg.com Ottawa Agent for the Appellants, Katz Group Canada Inc., Pharma Plus Drug Marts Ltd., and Pharmx Rexall Drug Stores Ltd.

4 i INDEX PAGE PART I OVERVIEW AND STATEMENT OF FACTS... 1 A. OVERVIEW... 1 B. RESPONDENTS POSITION ON THE APPELLANTS SUMMARY OF FACTS... 3 The Ontario Public Drug Program... 3 Pricing and reimbursement of generic drugs from 2006 to (a) Pricing and Reimbursement of drugs prior to (b) 2006 amendments to pricing and reimbursement for drugs... 9 (c) July 2010 Amendments Private Label Products The Appellants Private Label Products (a) The Shoppers Drug Mart Group (b) The Katz Group Court Decisions Below (a) Decision of the Divisional Court (b) Decision of the Court of Appeal for Ontario PART II QUESTIONS IN ISSUE PART III STATEMENT OF ARGUMENT QUESTION 1: STANDARD OF REVIEW OF REGULATIONS QUESTION 2: ASSESSING THE VALIDITY OF REGULATIONS QUESTION 3: EXTRINSIC EVIDENCE IS NOT RELEVANT TO ASSESSING THE VIRES OF A REGULATION QUESTION 4: THE PRIVATE LABEL REGULATIONS ARE AUTHORIZED BY THE ODBA AND THE DIDFA REGULATION-MAKING POWERS A. Purpose of the ODBA and the DIDFA B. Purpose of Private Label Regulations C. The Efficacy of the Private Label Regulations is Not Relevant D. The Private Label Regulations are a Condition for Listing that is authorized by the ODBA and the DIDFA QUESTION 5: THE ODBA AND THE DIDFA DO NOT AFFECT PROPERTY AND CIVIL RIGHTS QUESTION 6: NO ADMINISTRATIVE DISCRIMINATION... 38

5 ii PART IV SUBMISSIONS CONCERNING COSTS PART V ORDER SOUGHT PART VI TABLE OF AUTHORITIES PART VII TABLE OF STATUTES AND LEGISLATION Legislation Act, 2006, S.O. 2006, c. 21, Sch. F 47

6 1 PART I OVERVIEW AND STATEMENT OF FACTS A. OVERVIEW 1. This appeal involves the validity of regulations made under the Ontario Drug Benefit Act (the ODBA ) 1 and the Drug Interchangeability and Dispensing Fee Act (the DIDFA ) 2. The goal of the legislative scheme is to reduce the cost of generic drugs to the health care system and to individual members of the public. The legislative scheme accomplishes the goal, in part, by regulating the model of compensation for each of the participants in the drug supply system. The Private Label Regulations 3 that are the subject of this appeal fit within this legislative scheme by regulating a business model that would allow the appellants to circumvent the statutory ban on rebates, thereby indirectly allowing them to earn revenue on the purchase and sale of drugs beyond what the legislation has defined as falling within the permissible payments for pharmacies. Under the Private Label Regulations, generic drugs are precluded from being designated as a benefit under the ODBA or listed as interchangeable under the DIDFA if the manufacturer is in a non-arm s length relationship with a pharmacy and has not fabricated the drug product. 2. The Court of Appeal for Ontario upheld the impugned regulations (2-1) on the basis that the regulation-making powers under the statutes are very broad, and given the complex market and regulatory framework, it was reasonable for the Ontario government to conclude that the existence of private label generic drugs could reduce competition in ways that would adversely affect long-term prices for drugs. The Court held that as long as regulations remain within the scope authorized by statute and are consistent with statutory purposes, it is not the role of the court to assess and second-guess the merits of Cabinet decisions. 4 Ontario s position is that the majority decision is correct and the appeal should be dismissed. 1 Ontario Drug Benefit Act, R.S.O. 1990, c. O.10, s. 18 ( ODBA ), Appellants Joint Book of Legislation ( ABL ), Tab 6, p Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P. 23, s. 14 ( DIDFA ), ABL, Tab 4, p Ontario Drug Benefit Act, R.S.O. 1990, c. O.10, Ontario Regulation 201/96, s ( ODBA Regulation ), ABL, Tab 7, p. 10; Drug Interchangeability and Dispensing Fee Act, O. Reg. 201/96, s. 9 ( DIDFA Regulation ), ABL, Tab 5, p Court of Appeal for Ontario, Reasons for Decision dated December 23, 2011 ( Court of Appeal Reasons ) at para. 65, AR, Vol. I, Tab 11, p. 65, citing Apotex Inc. v. Ontario (Office of the Lieutenant Governor), 2007 ONCA 570, 229 O.A.C. 11.

7 2 3. The purchase and sale of drugs in Ontario is highly regulated. Ontario has developed an intricate and interrelated set of rules designed to make drugs more economically accessible to all Ontarians. Under the ODBA, the government of Ontario itself pays billions of dollars per year for drugs prescribed to eligible recipients. Under the DIDFA, Ontario designates eligible generic drugs as interchangeable with brand drugs. Under both legislative schemes, Ontario regulates the amounts that each participant is to receive in the drug distribution system and fixes the maximum price it pays and members of the public pay for generic prescription drugs, thereby making many prescription drugs available to members of the public at a lower cost. Without these two regulatory regimes, the public s access to affordable prescription drugs would be compromised. 4. This appeal concerns Ontario s ability to set the rules it views as necessary to effectively regulate the price of generic drugs paid from public funds, by individuals and by third parties such as insurers. On the basis of evidence that Ontario pays higher prices for generic drugs than other jurisdictions and that prior to 2006 a significant reason for these higher prices were rebates paid by manufacturers to pharmacists, Ontario introduced a series of legislative and regulatory changes designed to reduce the price of generic drugs. These changes included the progressive elimination of rebates paid by manufacturers to pharmacies, regulation of the types and amounts each participant in the drug distribution system is entitled to receive for the sale of drugs, and a reduction in the amount end purchasers, including Ontario, can be charged for drugs. As part of these changes, Ontario changed the compensation model for pharmacy operators whereby they receive increased dispensing fees and payment for professional services to patients rather than generating revenue from the purchase and sale of drugs. Consistent with these changes, the Private Label Regulations ensure that the pharmacy sector receives fair compensation under the new model, but does not replace rebates with some other form of benefit obtained by creating subsidiaries that fit within the definition of manufacturers. These regulations are meant to maintain the integrity of the compensation models that are part of a complex legislative system, which allows Ontario to significantly reduce the price of generic drugs. 5. The appellants primary attack on the Private Label Regulations is that they are inconsistent with the purposes of the ODBA and the DIDFA because there is no evidence that the business model created by the appellants affects the price of generic drugs. As recognized by

8 3 Ontario s Court of Appeal, the issue before the court is whether the regulations fall within the purpose of the statute; the court should not require Ontario to prove with evidence that the regulations are effective in achieving the objectives of the statutory scheme. A significant purpose of the ODBA and the DIDFA is to make drugs accessible at lower prices to Ontarians; the statutes create a complex regulatory scheme that achieves its purpose by setting the maximum price of drugs and by ensuring that those prices can be achieved through regulation of the types and amounts of compensation each participant in the drug supply chain receives. The Private Label Regulations fit within this complex regulatory scheme by ensuring that the pharmacy sector does not receive amounts beyond those contemplated by the ODBA and the DIDFA. 6. The appellants also argue that the Private Label Regulations improperly interfere with their property and commercial interests. However, this scheme does not preclude the appellants from purchasing and selling generic drugs in Ontario. In fact, the appellants are entitled to participate in this system as long as they do so in accordance with the statutes and regulations. This is a scheme that carefully regulates the conditions that participants must meet in order to purchase and sell generic drugs in Ontario, including the maximum price at which generic drugs can be sold, and the amounts participants in the system are to receive. This is, therefore, a legislative system that permits the regulation of the property and commercial interests of all entities that choose to participate in the purchase and sale of drugs in Ontario. B. RESPONDENTS POSITION ON THE APPELLANTS SUMMARY OF FACTS 7. The respondents submit that the appellants summary of the facts does not adequately describe the legislative and regulatory scheme within which the Private Label Regulations have been adopted. Set out below is a comprehensive summary of this statutory scheme which Ontario submits is necessary in order to properly assess this appeal. The Ontario Public Drug Program 8. There are two main categories of prescription drug products available for sale in Ontario:

9 4 (1) brand drugs, also known as original products ; and (2) generic drugs In order to be lawfully sold in Canada, both brand drugs and generic drugs must receive a Notice of Compliance from Health Canada A brand drug is a product that has (or had at some time in the past) patent protection. A manufacturer with a patent can command a higher price for the drug as it is the only one of its kind on the market. The price of a patented brand drug is regulated by federal legislation A generic drug is a copy of a patented brand drug that no longer has patent protection. Generic drugs are much less expensive than brand drugs, in part, because they do not have market exclusivity. In Canada, the sale and pricing of generic drugs is regulated by each province. 12. In Ontario, there are two interrelated legislative regimes, namely the ODBA and the DIDFA, that govern the sale and reimbursement of pharmaceutical drugs in the province, including generic drugs. 13. The ODBA provides for the public funding of drug products as benefits to eligible persons in Ontario. A key principle of the statute is that the public drug system aims to consistently achieve value-for-money and ensure the best use of resources at every level of the system. 8 Accordingly, the ODBA and its regulations set out, inter alia, the amounts Ontario will pay to pharmacy operators 9 and dispensing physicians for dispensing drug products to Ontario Drug Benefit ( ODB ) patients, the requirements respecting the manner in which claims must be submitted for reimbursement under the ODB Program and the conditions for the listing of a drug 5 Affidavit of Brent Fraser sworn September 10, 2010 at para. 9, Appellants Joint Record (AR), Vol. IV, Tab 28, p Food and Drugs Act, R.S.C. 1985, c. F-27, s. 12, Respondents Book of Authorities (RBA), Tab 41, p. 610; Food and Drug Regulations, C.R.C., c. 870, ss. C and C , RBA, Tab 42, pp Affidavit of Brent Fraser sworn September 10, 2010, at para. 10, AR, Vol. IV, Tab 28, p ODBA, s. 0.1(4), ABL, Tab 6, p An operator of a pharmacy is defined in the ODBA and the DIDFA as the holder of a certificate of accreditation for the operation of a pharmacy under section 139 of the Drug and Pharmacies Regulation Act : ODBA, s. 1(1), ABL, Tab 6, p. 2; DIDFA, s. 1(1), ABL, Tab 4, p. 1. In this factum, the term pharmacy operator refers to the legal definition of operator of a pharmacy.

10 5 product as a benefit under the ODBA. 10 Through the ODB Program, Ontario provides coverage for most of the cost of over 3,300 prescription drug products for Ontarians eligible to receive benefits under the ODBA. In the 2009/10 fiscal year, the ODB Program provided drug coverage to approximately 2.5 million people in Ontario and reimbursed over million claims at a cost of $3.7 billion Unlike the ODBA which applies to the submission and reimbursement of claims for drug products dispensed to ODB patients, the DIDFA applies generally to the dispensing of generic prescriptions drugs in Ontario. The DIDFA requires pharmacists to dispense the lowest cost interchangeable product unless the prescription directs no substitutions or the person presenting the prescription requests another product. The DIDFA also sets out rules respecting drug interchangeability including the conditions for listing a drug as interchangeable, the pricing of interchangeable drug products, and the fees which may be charged by pharmacy operators for dispensing these products to patients The reimbursement of drugs by Ontario under the ODB Program is commonly referred to as the public market, in contrast to the private market where drugs are paid for by individuals or reimbursed through third parties, such as insurance companies The price paid for a drug in the public market is set out on the Formulary, which is a list of generic drug products and the maximum prices for those products. The Formulary also sets out the generic drugs designated as interchangeable under the DIDFA. The Formulary is maintained and published by the Executive Officer of Ontario Public Drug Programs who also has the authority to designate generic products as interchangeable under the DIDFA, designate and remove products as listed under the ODB Program, and make payments for drug claims submitted in accordance with the requirements in the ODBA and the ODBA Regulation ODBA, ABL, Tab 6, pp. 1-20; ODBA Regulation, ss , ABL, Tab 7, pp ODBA, s. 2, ABL, Tab 6, p. 5; ODBA Regulation, s. 2(1), ABL, Tab 7, p. 3; Affidavit of Brent Fraser sworn September 10, 2010, at para. 13, AR, Vol. IV, Tab 28, pp DIDFA, ss. 4-7, ABL, Tab 4, pp ODBA, s. 4, ABL, Tab 6, pp. 5-6; Affidavit of Brent Fraser sworn September 10, 2010, at para. 19, AR, Vol. IV, Tab 28, p ODBA, ss , ABL, Tab 6, pp. 2-4; Affidavit of Brent Fraser sworn September 10, 2010, at paras , AR, Vol. IV, Tab 28, pp

11 6 17. The regulation making powers under the ODBA are very broad, and include the following: 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; (m) respecting any matter considered necessary or advisable to carry out the intent and purposes of this Act The regulation making powers under the DIDFA are also broad, and include the power to prescribe conditions to be met by products or by manufacturers of products in order to be designated as interchangeable with other products, although the regulation making powers under the DIDFA do not include a provision equivalent to section 18(1)(m) under the ODBA. 16 Pricing and reimbursement of generic drugs from 2006 to The Court of Appeal for Ontario has recognized that one of the objectives of the ODBA and the DIDFA is to make drug products available to Ontarians at a lower cost. 17 Through a series of provisions in both the ODBA and the DIDFA and the regulations made under these statutes, this goal is achieved by fixing the maximum price that pharmacy operators can charge Ontario and members of the public for generic drugs, and by regulating the amounts and types of payments each participant in the drug supply chain is entitled to receive. 20. The Private Label Regulations introduced in July 2010 fit within an ongoing set of legislative and regulatory amendments made since 2006 aimed at reducing the price of drugs in Ontario, in part through changes to the manner in which each of the participants in the drug supply chain is compensated. 18 Unlike many other commercial activities, nearly all of the types and amounts of compensation each participant is entitled to receive are set by legislation and regulation. This tight control is essential to ensuring that the government and the public have access to lower priced drugs. 15 ODBA, ss. 18(1)(b) and (m), ABL, Tab 6, pp DIDFA, s. 14(1)(b), ABL, Tab 4, p Court of Appeal Reasons at paras , AR, Vol. I, Tab 11, pp ; Apotex Inc. v. Ontario (Minister of Health) (2004), 73 O.R. (3d) 1 (C.A.) at para. 5, Appellants Joint Book of Authorities ( ABA ), Vol. I, Tab 7, p Affidavit of Brent Fraser sworn September 10, 2010, at para. 19, AR, Vol. IV, Tab 28, p. 7; ODBA, ss. 4(5) and 6(1), ABL, Tab 6, pp. 5, 7.

12 7 21. The participants in the drug supply chain include manufacturers, wholesalers and pharmacy operators. Legislative and regulatory changes to the ODBA and the DIDFA have, since 2006, moved Ontario from a system whereby pharmacy operators were entitled to make money from buying drugs at lower prices and selling them at higher prices, toward a system that compensates pharmacy operators for providing professional services such as patient care and giving out information. 19 The compensation model is still in transition, but the 2010 amendments anticipate that by April 2013, pharmacies will be compensated for the following payments: (a) reimbursement for the cost of the drug based on maximum prices set in the Formulary; (b) a dispensing fee at a regulated rate for the public market; (c) a regulated percentage mark-up in the public market; (d) a prompt payment or volume discount to a maximum regulated rate; and (e) payments for professional services delivered to patients Similarly, wholesalers are compensated through: (a) a cost reimbursement as set out in the Formulary; and (b) a prompt payment discount, volume discount and/or distribution service fee at a maximum regulated rate In this way, the system is meant to ensure that manufacturers receive essentially the full amount of the price for the drug set out in the Formulary. 22 The legislation has achieved this goal by reducing costs for manufacturers by regulating certain transactions between manufacturers and pharmacies and moving pharmacies away from generating revenues from the purchase and sale of drugs to compensating pharmacies for providing patient services. Therefore, in accordance with the ODBA and DIDFA, while the Formulary fixes the maximum price of generic drugs, this regulatory scheme also controls the amount that each participant in the system receives in order to achieve lower prices for end payers such as the government, insurers and patients. 24. The progressive changes implemented to the ODBA and DIDFA since 2006 demonstrate 19 Court of Appeal Reasons at paras. 19 and 53, AR, Vol. I, Tab 11, pp. 50, ODBA, s. 6(1), ABL, Tab 6, p. 7; ODBA Regulation, s. 1(11), ABL, Tab 7, pp. 2-3; DIDFA Regulation, s. 2(3), ABL, Tab 5, p ODBA, s. 11.4, ABL, Tab 6, pp Under the ODBA and the ODBA Regulation, the Executive Officer has the authority to pay prices other than those set out in the Formulary. The Executive Officer may negotiate agreements with manufacturers of drug products and agree with manufacturers as to the drug benefit price of listed drug products and has the authority to enter into such agreements that have been negotiated. See ODBA, s. 1.1(2)(f), ABL, Tab 6, p. 3; ODBA Regulation, ss. 1(3) and (5), ABL, Tab 7, p. 2.

13 8 that each time Ontario reduced the maximum price of generic drugs, it also changed the amounts and types of payments that each of the different participants in the drug supply chain is entitled to receive. A detailed review of these progressive changes is set out below. (a) Pricing and Reimbursement of drugs prior to Prior to 2006, in the public market, the general pricing rule for generic drugs was set by the ODBA Regulation using a 70/90 rule. Under this rule, while there were exceptions, the first generic drug to apply for listing would be priced at 70% of the brand price, and the next product to apply for listing would be priced at 90% of the 70%. Following the listing of additional products, the manufacturer of the first generic drug to be listed would drop its price in order to remain competitive so that the effective maximum price for all generic drugs was 63% of the brand price The price of generic products in the private market, while not explicitly set by regulation, followed the price set in the public market due to the operation of section 7(2) of the DIDFA, which provides that, in respect of an interchangeable product, the pharmacy shall not charge more than the lowest amount that it would charge for interchangeable products within its inventory Prior to 2006, the ODBA and the ODBA Regulations provided that pharmacies were to receive the following amounts for drugs dispensed under the ODBA: (a) the maximum price of the drug product set in the Formulary; (b) a dispensing fee of $6.54 per drug; and (c) mark-up of 10% on the price set in the Formulary However, prior to 2006, while the maximum price of a generic drug in the Formulary was charged by a pharmacist when dispensing the product, it was typically not the actual price paid by the pharmacy to purchase the drug. A typical pharmacist s business model involved buying a generic drug from a manufacturer or wholesaler at the price set out in the Formulary (less any 23 Affidavit of Brent Fraser sworn September 10, 2010, at para. 22, AR, Vol. IV, Tab 28, p. 8; ODBA Regulation, s. 11 (historical version up to September 30, 2006), ABL, Tab 21, pp ; Apotex Inc. v. Ontario (Minister of Health), (2004), 73 O.R. (3d) 1 (C.A.) at paras , ABA, Vol. 1, Tab 7, p Affidavit of Brent Fraser sworn September 10, 2010, at para. 23, AR, Vol. IV, Tab 28, p. 8; DIDFA, s. 7(2), ABL, Tab 4, p ODBA Regulation, s. 13 (historical version up to September 30, 2006), ABL, Tab 21, p. 17.

14 9 prompt payment discount provided by the manufacturer or wholesaler); however, the pharmacist would often also receive a promotional rebate (in cash or some other benefit) from a manufacturer as an incentive to encourage the pharmacies to stock and dispense the product of a particular generic manufacturer. Generic manufacturers competed with each other in respect of the amount of rebates they would provide to a pharmacy. This benefited the pharmacy sector but did not result in lower prices for end payers. This model allowed pharmacies to earn revenue from the purchase and sale of drug products since the effective price that the pharmacies paid for drug products was lower than the regulated price that was reimbursed by the payer As early as 2002, a number of studies showed that generic drug prices were higher in Canada than in other countries, including studies that indicated that the higher prices were partially attributable to the payment of rebates to pharmacies. 27 (b) 2006 amendments to pricing and reimbursement for drugs 30. In 2006, significant amendments were made to the ODBA and the DIDFA, affecting all levels of the drug supply chain. The amendments included lowering the maximum price of drugs in the public market and changing the types and amounts of payments made to pharmacies for dispensing generic drug products, including a prohibition on rebates The maximum price for generic drugs in the public market was reduced by amending the ODBA Regulation to make it a condition for listing that the price be 50% of the brand price. In the private market, pricing regulations were removed, which permitted competition In addition, the following changes were made to compensation available to pharmacies: (a) Rebates were banned in the public market and private market. The term rebate was broadly defined to include any discount on drug products, cash payment or refund made 26 Affidavit of Brent Fraser sworn September 10, 2010, at paras , AR, Vol. IV, Tab 28, p Affidavit of Brent Fraser sworn September 10, 2010, at paras , and Exhibits A and C to the Affidavit of Brent Fraser sworn September 10, 2010, AR, Vol. IV, Tab 28, pp. 9-11, and Affidavit of Brent Fraser sworn September 10, 2010, at paras AR, Vol. IV, Tab 28, pp Affidavit of Brent Fraser sworn September 10, 2010, at para. 33, AR, Vol. IV, Tab 28, p. 12; ODBA Regulation, s. 11 (historical version as of October 1, 2006), ABL, Tab 17, pp. 7-8; DIDFA Regulation, s. 1(3) (historical version as of December 14, 2006), ABL, Tab 12, p. 1.

15 10 in connection with a product, or other benefit or value provided to a pharmacist. 30 (b) As an exception to the ban on rebates, pharmacies were permitted to receive payments known as professional allowances from manufacturers in both the public and private markets. Under the ODBA Regulation, manufacturers were not allowed to make payments in excess of 20% of the value of their drugs dispensed by a pharmacy, but no such cap existed in the private market. Pharmacies were required under the regulations to use all payments of professional allowances for direct patient care purposes and were explicitly prohibited from using professional allowances for certain specified purposes, such as advertising costs and entertainment costs. 31 (c) Dispensing fees were increased from $6.54 to $7.00 per claim under the ODBA. 32 (d) Mark-up was reduced from 10% to 8% of the drug benefit price. 33 (e) The Executive Officer was authorized under the ODBA to begin paying pharmacies for professional services provided After 2006 wholesalers continued to receive prompt payment discounts at a maximum regulated rate After the 2006 amendments came into force, the prices of generic drugs continued to be higher than international averages, and the amounts pharmacies received for professional allowances were very high despite the ban on rebates Notably, in November 2008, the Competition Bureau of Canada published a report in which it found that the payments made by manufacturers to pharmacies accounted for at least 40% of the generic drug costs borne by public and private payers. The report noted that these payments artificially increased the cost of generic drugs for payers and if they were not paid to pharmacies, 30 ODBA, ss. 11.5(1)-(3) and (18) (historical version as of October 1, 2006), ABL, Tab 15, p. 10; DIDFA, s (historical version as of October 1, 2006), ABL, Tab 14, pp ODBA, ss. 11.5(15)-(18) (historical version as of October 1, 2006), ABL, Tab 15, p. 10; ODBA Regulation, ss. 1(8)-(10) and Schedule 3 (historical version as of October 1, 2006), ABL, Tab 17, pp. 2-3, 22-24; DIDFA, ss. 12.1(14)-(15) (historical version as of October 1, 2006), ABL, Tab 14, p. 6; DIDFA Regulation, s. 2 and Schedule 1 (historical version as of October 1, 2006), ABL, Tab 16, pp. 1-2, ODBA Regulation, s. 13(4) (historical version as of October 1, 2006), ABL, Tab 17, p ODBA Regulation, s. 13(2) (historical version as of October 1, 2006), ABL, Tab 17, p ODBA, s. 1.1(2)(j) (historical version as of October 1, 2006), ABL, Tab 15, pp. 2-3; ODBA Regulation, s. 1(6) (historical version as of October 1, 2006), ABL, Tab 17, p ODBA, s. 6(1), ABL, Tab 6, p. 7; ODBA Regulation, s. 1(11), ABL, Tab 7, pp. 2-3; DIDFA Regulation, s. 2(3), ABL, Tab 5, p Affidavit of Brent Fraser sworn September 10, 2010, at para. 36, AR, Vol. IV, Tab 28, p. 13.

16 11 the price of drugs to payers could be lower. It recommended that provincial drug plans, inter alia, reimburse pharmacies for dispensing and patient services separately from drug costs. 37 (c) July 2010 Amendments 36. On March 25, 2010, Ontario introduced the 2010 budget bill, which included proposals to amend the ODBA and the DIDFA to reduce generic drug costs and continue the move to a pharmacy reimbursement model aimed at supporting professional services by eliminating professional allowances and increasing the compensation for pharmacist services On April 8, 2010, as required by the ODBA and the DIDFA, a comprehensive set of draft regulations was published for consultation under the ODBA and the DIDFA. The proposed amendments included the Private Label Regulations. In its communications about the proposed amendments, Ontario consistently indicated that the purpose of the amendments was to end professional allowances, increase transparency, reduce drug costs in the public and private markets, and pay pharmacists for providing patient care services The 2010 budget bill received Royal Assent on May 18, The amendment to the ODBA was proclaimed in force on July 1, 2010, and the amendment to the DIDFA is to come into force as of April 1, By April 1, 2013, professional allowances in both the public and private markets will be eliminated by amending the definition of the term rebate to remove professional allowances as a permitted exception. On July 1, 2010, professional allowances were completely eliminated in the public sector. In the private sector, a cap on the amount of professional allowances was set starting on July 1, 2010 with successive reductions in the cap leading to their elimination on 37 Affidavit of Brent Fraser sworn September 10, 2010, at para. 38, AR, Vol. IV, Tab 28, p Affidavit of Brent Fraser sworn September 10, 2010, at para. 45, AR, Vol. IV, Tab 28, p ODBA, s. 18(8)-(11), ABL, Tab 6, pp ; DIDFA, ss. 14(10)-(13), ABL, Tab 4, pp. 8-9; Affidavit of Brent Fraser sworn September 10, 2010, at para. 46, AR, Vol. IV, Tab 28, pp ; Exhibit H to the Affidavit of Brent Fraser sworn September 10, 2010, AR, Vol. V, Tab H, pp Affidavit of Brent Fraser sworn September 10, 2010, at para. 50, AR, Vol. IV, Tab 28, pp

17 12 April 1, The elimination of professional allowances paid by manufacturers to pharmacies makes room for further reductions in the price of generic drugs 42, while continuing to move to compensating pharmacy operators for providing patient services. Amendments to the ODBA Regulation lowered the price of generic drugs in the public market to a maximum of 25% of the brand price, and amendments to the DIDFA Regulation initially lowered the price of drugs to a maximum 50%, with further progressive reductions such that now manufacturers cannot sell products in the private market at a price higher than the price permitted in the public market At the same time, dispensing fees were increased under the ODBA Regulation from $7 to between $8 and $12 per claim depending on the location of the pharmacy with further annual increases to be made until to April 1, The mark-up remains at 8% In recognition of the transition to a pharmacy reimbursement model aimed at supporting professional services, funding of $100 million was allocated for the development of professional services. The Executive Officer is also paying pharmacies an additional fee on most claims under the ODBA, which will end on March 31, 2013 when it is expected that a fee schedule of professional services developed in consultation with the pharmacy sector will be added to the ODBA Regulation In both the private and public sectors, pharmacies will continue to receive some payments for buying and selling drugs through ordinary commercial terms. Prompt payment discounts have been eliminated for wholesalers, who instead now receive ordinary commercial terms. The value of the payments is fixed by the ODBA Regulation and the DIDFA Regulation at a total of 10% of the value of the drugs dispensed, to be shared by pharmacies and wholesalers, as long as the payments must relate to a prompt payment discount or a volume discount provided in the 41 ODBA Regulation, s. 1(8), ABL, Tab 7, p. 2; DIDFA Regulation, ss. 2(1), (1.1) and (2), ABL, Tab 5, pp. 1-2; Affidavit of Brent Fraser sworn September 10, 2010, at para. 53, AR, Vol. IV, Tab 28, pp ODBA, s. 1.1(2)(f), ABL, Tab 6, p. 3; ODBA Regulation, ss. 1(3) and (5), ABL, Tab 7, p ODBA Regulation, ss. 11(1) 1-2, ABL, Tab 7, p. 7; DIDFA Regulation, s. 8(1) 4, ABL, Tab 5, p ODBA Regulation, ss. 13(2) and (4), ABL, Tab 7, p ODBA Regulation, s. 1(6), ABL, Tab 7, p. 2; Affidavit of Brent Fraser sworn September 10, 2010, at paras , AR, Vol. IV, Tab 28, p. 19.

18 13 ordinary course of business Accordingly, the changes implemented since 2006 demonstrate that this is a regime that tightly controls the types and amounts of payments each participant in the drug supply chain is entitled to receive. Private Label Products 45. As part of the 2010 amendments, the conditions for listing of a drug product under the DIDFA and the ODBA were amended to make it a condition of listing that the drug product not be a private label product. The term private label products refers to generic prescription drugs which a pharmacy retailer markets under its own trade name, but that the pharmacy retailer does not directly manufacture or fabricate. Instead, the pharmacy retailer creates a separate private label company (for example, Sanis, a subsidiary of Shoppers Drug Mart Corporation) which enters into an agreement with one or more existing generic drug manufacturers which is already in the business of manufacturing the same generic products for sale in pharmacies Section of the ODBA Regulation and section 9 of the DIDFA Regulation are identical provisions making it a condition of listing under the ODBA and as being interchangeable under the DIDFA that a product not be a private label product. 48 The regulations were part of a large package of regulatory amendments promulgated on July 1, 2010 after draft regulations were posted for public consultation in accordance with the DIDFA and the ODBA. 49 As set out above, all of these regulatory amendments were aimed at further lowering the cost of generic drugs and shifting to a compensation model whereby pharmacies are paid for providing patient services. 47. As found by the majority of the Court of Appeal, the Private Label Regulations are consistent with and akin to the complete ban on rebates as, similar to the ban, the regulations 46 ODBA Regulation, s. 1(11), ABL, Tab 7, pp. 2-3; DIDFA Regulation, s. 2(3), ABL, Tab 5, p Affidavit of Brent Fraser sworn September 10, 2010, at para. 56, AR, Vol. IV, Tab 28, p. 56; Exhibit G to the Affidavit of Jeff Leger sworn June 23, 2010, AR, Vol. II, Tab 25, pp ODBA Regulation, s , ABL, Tab 7, p. 10; DIDFA Regulation, s. 9, ABL, Tab 5, p ODBA, s. 18(8), ABL, Tab 6, p. 18; DIDFA, s. 14(10), ABL, Tab 4, pp. 8-9.

19 14 control the types and amounts of payments that pharmacies receive. 50 The Private Label Regulations are meant to ensure that pharmacies do not circumvent the ban on rebates by employing a business model that allows them to receive revenues from the purchase and sale of drug products beyond those provided for in this regulatory scheme. Without the Private Label Regulations, pharmacies can generate revenues indirectly through related companies in a way that they are otherwise prohibited from generating directly under the legislation. 51 The Appellants Private Label Products (a) The Shoppers Drug Mart Group 48. The appellants, Shoppers Drug Mart Inc. ( SDMI ), Shoppers Drug Mart (London) Limited ( SDML ) and Sanis Health Inc. ( Sanis ) (collectively the Shoppers appellants ) are all directly or indirectly wholly-owned subsidiaries of Shoppers Drug Mart. SDMI and SDML licence Shoppers Drug Mart retail pharmacies in Ontario, and buy drugs from brand and generic drug companies for the purpose of supplying them to the retail pharmacies. While Sanis is a manufacturer in accordance with federal legislation, it does not fabricate drugs. 52 Rather, it proposes to purchase drug products fabricated by generic drug manufacturers, and re-labels them under its own label to be sold through Shoppers Drug Mart and other retail stores Between February and May 2010, Sanis applied to the Executive Officer to designate a number of generic drug products as interchangeable under the DIDFA and to designate a number of those products as listed drug products under the ODBA Sanis is a subsidiary of Shoppers Drug Mart Corporation ( SDMC ) 55 which controls SDMI and SDML, the licensors and franchisors of more than 620 retail pharmacies throughout 50 Court of Appeal Reasons at paras. 61 and 65, AR, Vol. I, Tab 11, pp. 59 and Affidavit of Brent Fraser sworn September 10, 2010, at para. 57, AR, Vol. IV, Tab 28, p The terms manufacturer and fabricator are not defined in either the ODBA or the DIDFA. As the terms are not defined, a manufacturer of a generic drug will not always be a fabricator of that drug. 53 Court of Appeal Reasons at para. 7, AR, Vol. I, Tab 11, p. 47; Affidavit of Jeff Leger sworn June 23, 2010 at para. 11, and Exhibit G to the Affidavit of Jeff Leger sworn June 23, 2010 at p. 6, AR, Vol. II, Tab 25, pp. 5, Affidavit of Brent Fraser sworn September 10, 2010, at para. 58, AR, Vol. IV, Tab 28, p SDMC is not a party to this appeal.

20 15 Ontario. 56 Sanis does not fabricate generic drugs. It has entered into cross-licensing arrangements with other companies that either fabricate the drugs or are controlled by companies that fabricate the drugs. Sanis intends to rely on other companies to develop and fabricate the products it will sell SDMC stands to receive revenue from the sale of drugs by Sanis because it owns and controls Sanis. If Sanis re-labelled generic drugs are listed as drug benefits under the ODBA and/or as interchangeable under the DIDFA, the revenue on the sale of those drugs will effectively replace, in whole or in part, the compensation from rebates and professional allowances that pharmacy operators had previously received from manufacturers After receiving the initial applications and the information requested from Sanis, the Executive Officer advised Sanis that she would not be listing its products on the Formulary as doing so would not be consistent with the Private Label Regulations. In her letter, the Executive Officer also provided an explanation of the rationale behind the Private Label Regulations: Your letter indicates that Sanis is a wholly owned subsidiary of Shoppers Drug Mart Corporation which is a parent company of Shoppers Drug Mart Inc. These in turn franchise or operate Shoppers Drug Mart pharmacies in Ontario. In addition, you indicate that Sanis will or has entered into cross-licensing arrangements with manufacturers of drug products and therefore Sanis does not make drug products itself. As you may be aware, the ministry recently posted a notice of proposed regulations on April 8, 2010 to amend the regulations under the DIDFA and the ODBA. These regulations propose that it is a condition of being designated under the DIDFA that a product is not a private label product, and it is a condition of a product being a listed drug product under the ODBA that it is not a private label product. These regulations will come into effect on July 1, It seems to me that the 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. 56 Affidavit of Brent Fraser sworn September 10, 2010, at para. 61, AR, Vol. IV, Tab 28, p Affidavit of Brent Fraser sworn September 10, 2010, at paras , AR, Vol. IV, Tab 28, pp Affidavit of Brent Fraser sworn September 10, 2010, at para. 61, AR, Vol. IV, Tab 28, p. 21.

21 16 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 the government, insurers and patients. Instead, it seems that profits would be retained within pharmacy-controlled organizations without benefitting consumers. While that would not be a rebate as defined by 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 the Products in preference to others, which raises the potential for a conflict of interest During the period between the Divisional Court decision striking down the Private Label Regulations and the release of the Court of Appeal decision, the Executive Officer complied with the law and approved a number of private label products submitted for listing on the formulary by Sanis. However, all listings were conditional on the outcome of the appeal and the products were delisted following the release of the Court of Appeal s decision. 60 (b) The Katz Group 54. The appellants, Katz Group Canada Inc., Pharma Plus Drug Marts Ltd. and Pharmx Drug Stores Ltd. (collectively the Katz appellants ) are all related companies that directly and indirectly operate a number of Rexall pharmacies in Ontario. The Katz Group intends to manufacture, distribute and market private label products Ontario has not received any applications from the Katz Group to designate any private label products under the DIDFA or the ODBA, nor has the Katz Group provided evidence regarding the business model it intends to use for its proposed products. 62 Court Decisions Below (a) Decision of the Divisional Court 56. The Shoppers appellants and the Katz appellants brought separate applications for judicial review challenging the vires of the Private Label Regulations. The applications were 59 Exhibit R to the Affidavit of Brent Fraser sworn September 10, 2010, AR, Vol V, Tab R, pp Affidavit of Jeff Leger sworn November 15, 2012 at para. 5, AR, Vol. VI, Tab 35, p Affidavit of Russell Cohen sworn June 30, 2010 at paras. 2 and 20-22, AR, Vol. III, Tab 26, pp. 1-2, Affidavit of Russell Cohen sworn June 30, 2010, AR, Vol. III, Tab 26, pp. 1-9; Affidavit of Russell Cohen sworn September 15, 2010, AR, Vol. V, Tab 30, pp

22 17 heard together and, in a single decision, the Divisional Court granted the applications and declared the Private Label Regulations ultra vires on the basis that: (a) The Private Label Regulations are outside the regulation-making authority of the ODBA and the DIDFA; (b) The Private Label Regulations do not fall within the purposes of the ODBA and DIDFA; and (c) The Private Label Regulations interfere with property and commercial rights in a way that is not expressly authorized by the parent statute. 63 (b) Decision of the Court of Appeal for Ontario 57. Ontario appealed the Divisional Court s decision to the Court of Appeal for Ontario. The two appeals were heard together. A majority of the Court of Appeal allowed Ontario s appeal and set aside each of the findings of the Divisional Court by concluding that: (a) The Private Label Regulations fall within the scope of the regulation-making powers in the ODBA and the DIDFA because they impose a condition on products to be designated as a listed drug product and as interchangeable and do not preclude the applicants from engaging in the purchase and sale of drugs in Ontario; (b) The Private Label Regulations are consistent with the purpose of the ODBA and the DIDFA to reduce drug costs by attempting to lower prices by directly regulating the price and by indirectly regulating the compensation model of pharmacies; and (c) The Private Label Regulations do not improperly interfere with the applicants property and commercial rights because the regulations do not completely ban generic drug companies from conducting business in Ontario Although the issue of administrative discrimination was not addressed by the Divisional Court, the majority addressed this issue and concluded that the Private Label Regulations were not discriminatory because, in order to achieve the objective of lowest possible price, the ODBA and DIDFA authorized Ontario to make choices about the compensation model relating 63 Ontario Superior Court of Justice - Divisional Court, Reasons for Decision dated February 3, 2011 ( Divisional Court Reasons ) at para. 3, AR, Vol. 1, Tab 3, p Court of Appeal Reasons at paras. 49, and 67-68, AR, Vol. I, Tab 11, pp. 59,

23 18 to companies involved in the distribution of generic drugs in the province The majority of the Court of Appeal held that the following principles applied as the starting point for assessing the vires of the Private Label Regulations: There is a crucial starting point in any assessment of delegated legislation such as the challenged regulations in this appeal. It is this: "as a general principle, subordinate legislation should be construed in a manner that renders it intra vires" A second crucial starting point is recognition that the ODBA and DIDFA, taken together, constitute "a specialized legislative scheme" in a highly important and complex domain of public policy, namely, health and economics Finally, a third starting point must be an acknowledgment that the delivery of drug products to the residents of Ontario involves the expenditure of several billion dollars of public funds each year. As a result, courts must be careful in evaluating government decisions in this domain. [citations omitted] The majority accepted the Divisional Court s finding that the purpose of the ODBA and the DIDFA is to control the cost of prescription drugs in Ontario and to ensure that safe and effective drugs are provided at the lowest price possible. However, the majority did not agree with the narrow approach taken by the Divisional Court to assessing whether the Private Label Regulations were consistent with this purpose. The majority disagreed with the Divisional Court s view that lower drug prices are achieved primarily by fixing and regulating prices. It further found that the Divisional Court erred by failing to consider the impact of Private Label Products on the benefits received by pharmacies, which the majority held has the potential to affect the price of drugs that the Ontario Government can fix through regulation Justice Epstein, dissenting, disagreed with the majority s conclusion. She agreed with the Divisional Court s finding that the purposes of the Private Label Regulations were to restrict a corporation that owns a pharmacy from also owning the manufacturer where it does not directly fabricate the drugs being sold by the pharmacy, and to restrict the profits of pharmacy operators, both of which were not consistent with the purpose of the parent statutes. 68 She further agreed with the Divisional Court s finding that the regulations interfere with the appellants property and commercial rights and discriminate between different classes of corporations based on common ownership. She found that express authority in the ODBA and the DIDFA was required 65 Court of Appeal Reasons at paras , AR, Vol. I, Tab 11, pp Court of Appeal Reasons at paras , AR, Vol. I, Tab 11, pp Court of Appeal Reasons at paras , AR, Vol. I, Tab 11, pp Court of Appeal Reasons at paras , AR, Vol. I, Tab 11, pp