No Viable Class Action for Alleged Generic Drug Pricing Conspiracy
The Federal Court denied Kathryn Eaton’s motion to certify a national class action on behalf of Canadians who purchased generic drugs out-of-pocket or through private drug plans since January 1, 2012.
Background
The Plaintiff sought to certify a class action against numerous generic drug manufacturers based on an allegation that they conspired to fix prices and allocate markets, contrary to sections 45 and 46 of the Competition Act. The Plaintiff claims $5 billion in damages under section 36 of the Competition Act. In support of her claim, she points to U.S. investigations and deferred prosecution agreements involving parent companies of certain Defendants but none of those U.S. agreements reference conduct in Canada.
The Plaintiff claims that the Defendants fixed prices at the maximum amounts allowed by the formularies, used off-invoice discounts (“rebates”) as anti-competitive kickbacks, and agreed to limit market entry and allocate products or markets. The Plaintiff argues that the Defendants maintained the conspiracy through informal communications at industry events and asserts that the conspiracy affected all generic drugs in Canada and inflated prices nationwide.
The Plaintiff provided expert reports from Dr Michael Law and Dr Ariel Pakes. Dr Law, a health policy expert, suggests Canada’s generic market is consistent with a concentrated and potentially non-competitive market. Dr Pakes, an economist, suggests the market is conducive to collusion but acknowledges that they lack the necessary data to measure damages.
The Defendants denied the existence of an industry-wide conspiracy. Their extensive evidence included that the Canadian market is heavily regulated, list prices for most generic drugs are capped by provincial formularies, the pan-Canadian Pharmaceutical Alliance (pCPA) negotiates pricing frameworks with generic manufacturers, the industry includes many participants with varying portfolios and frequent entry and exit.
The Defendants’ experts, Dr Aidan Hollis, Dr Gregory Bell, and Dr James Levinsohn, provided evidence that the regulatory regime heavily constrains pricing behaviour, lowering list prices is commercially irrational, the off-invoice discounts reflect competitive dynamics, and that the industry’s structure and number of participants make broad collusion highly implausible. They also suggest that pharmacies and insurers play a significant role in shaping pricing, and that economic incentives do not align with the Plaintiff’s theory of conspiracy.
The Requirements to Certify as a Class Action Are Not Met
The certification of a class proceeding requires 1) a reasonable cause of action, 2) an identifiable class, 3) common issues, 4) that a class action is the preferable procedure, and 5) that there is a suitable class representative (Rule 334.16(1) of the Federal Courts Rules). The Defendants accepted that there is an identifiable class, which was also accepted by Justice Fothergill, but disputed the other requirements.
Under s. 45 of the Competition Act, a Plaintiff must plead: 1) an agreement, 2) between competitors, and 3) to fix prices, allocate markets, or control output. The Court found that the Plaintiff lacked evidence on all three points. Specifically, the Court found that the Plaintiff had failed to “plead material facts to support the assertion that the alleged conspiracy extends across North America and into Canada” and that they could not rely on US legal proceedings for her allegations as there were “no material facts to support the assertion of a conspiracy that extends to Canada”. The Court also held that the pleadings did not provide sufficient particularity as to how each Defendant participated in the alleged conspiracy.
The Court also held that the Plaintiff failed to plead the basis for which all the Defendants are alleged to be competitors. Since the Plaintiff was alleging a conspiracy encompassing the entire generic drug market in Canada and each Defendant sells a varying number of generic drugs in Canada, the Court found the pleading lacking with respect to how all the Defendants compete with each other. The Court therefore found that the Plaintiff did not have a reasonable cause of action pursuant to s. 45.
The argument under s. 46 necessarily fails with that of s. 45 as if a statement of claim does not disclose a reasonable cause of action under s. 45, it cannot disclose a reasonable cause of action under s. 46.
Justice Fothergill also considered whether the Plaintiff had established that there were common issues. He was not convinced that there was a common issue as the Plaintiff failed to “establish some basis in fact for the alleged conspiracy among the Defendants to fix prices or allocate the market for the generic drugs in Canada”. As well, although the Plaintiff was trying to rely on the US proceedings, the Plaintiff failed to provide any evidentiary basis that the “Defendants implemented a foreign directive”.
Justice Fothergill was also not convinced that the preferable procedure criterion had been met. This was due to the fact that the common issue requirement was not met, and if there are no common issues, a class action is not preferable.
And finally, the Plaintiff was found not to be a suitable class representative. Justice Fothergill found that the motion suffered from a fundamental flaw – the rudimentary nature of the litigation plan.
Justice Fothergill therefore refused to certify the class action and refused to allow the Plaintiff to amend her pleadings.
A copy of Justice Fothergill’s Reasons for Order may be found here.
