Shoppers Drug Mart Inc. et al. v. Minister of Health and Long-Term Care et al.

Katz Group Canada Inc. et al. v. Minister of Health and Long-Term Care et al.

[Indexed as: Shoppers Drug Mart Inc. v. Ontario (Minister of Health and Long-Term Care)]

109 O.R. (3d) 279

2011 ONCA 830

Court of Appeal for Ontario,

MacPherson, Epstein and Karakatsanis JJ.A.

December 23, 2011

Statutes -- Interpretation -- Regulations -- Judicial restraint required in reviewing statutes and regulations in complex area of intersection of health and economics -- Provincial regulations which purported to ban pharmacies from selling private label generic drugs being intra vires -- Regulations regulating private label products rather than prohibiting them -- Regulations consistent with purposes of their home statutes -- Regulations not constituting unauthorized interference with property and commercial rights of generic drug companies and not discriminating against generic drug companies.

The applicants brought an application for judicial review of regulations under the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 ("DIDFA") and the Ontario Drug Benefits Act, R.S.O. 1990, c. O.10 ("ODBA"), which purported to ban pharmacies from selling private label generic drugs. They argued that the regulations were ultra vires and of no force or effect. The application was granted. The respondents appealed.

Held, the appeal should be allowed.

Per MacPherson and Karakatsanis JJ.A.: As a general principle, subordinate legislation should be construed in a manner that renders it intra vires. Moreover, the ODBA and the DIDFA, taken together, constitute a specialized legislative scheme in a highly important and complex domain of public policy, namely, health and economics. Courts must be careful in evaluating government decisions in that domain.

The regulations did not fall outside the regulation-making authority of their home statutes because they purported to prohibit rather than regulate private label products. The applicants were still entitled to participate in most, but not all, components of the fabricator/manufacturer/wholesaler/ pharmacy/patient continuum of the Ontario drug supply chain. The regulations involved regulation, not prohibition. The regulations were consistent with the purposes of their home statutes. The purpose of the legislation was to control the cost of prescription drugs in Ontario without compromising safety. Ontario could reasonably conclude that private label generics would reduce the competitiveness of the generic drug market, making future price reductions more difficult. The regulations did not constitute an unauthorized interference with the applicants' property and commercial rights. They did not completely ban generic drug companies from conducting business in Ontario. They were not an improper restraint on trade, but rather a regulation of the business model behind the manufacture and sale of generic drug products to pharmacies as part of a scheme that was meant to control the types and amounts of payments to participants in the drug supply chain to ensure the lowest possible drug prices for the public. In any event, any interference with property or [page280] commercial rights was necessarily implied in the authority to set conditions for the listing of drugs as a benefit under the ODBA or as interchangeable under the DIDFA. The regulations did not constitute unauthorized discrimination against private label drug manufacturers. The regulations were intra vires.

Per Epstein J.A. (dissenting): The complexity, importance and cost of the regulatory regime did not provide the government with a carte blanche. The regulations were ultra vires. Restricting the profits that pharmacies may realize through common ownership was not consistent with the purpose of the legislation. The compensation that the legislative scheme restricted was only that which arose out of the resale of drugs. There was no demonstrable nexus between prices and inter-corporate investment. Moreover, the regulations were prohibitive, and therefore beyond the scope of the legislation; they interfered with property and commercial rights; and they discriminated in an unauthorized manner between different classes of corporation based on common ownership.

APPEAL from the orders of the Divisional Court (Molloy, Whalen and Swinton JJ.), [2011] O.J. No. 480, 2011 ONSC 615 (Div. Ct.) declaring certain regulations to be ultra vires.

Cases referred to Adult Entertainment Assn. of Canada v. Ottawa (City), [2007] O.J. No. 2021, 2007 ONCA 389, 283 D.L.R. (4th) 704, 224 O.A.C. 267, 156 C.R.R. (2d) 61, 33 M.P.L.R. (4th) 1, 158 A.C.W.S. (3d) 221; Apotex Inc. v. Ontario (Lieutenant Governor in Council), [2007] O.J. No. 3121, 2007 ONCA 570, 229 O.A.C. 11, 159 A.C.W.S. (3d) 775; Apotex Inc. v. Ontario (Minister of Health) (2004), 2004 CanLII 34622 (ON CA), 73 O.R. (3d) 1, [2004] O.J. No. 4360, 246 D.L.R. (4th) 577, 191 O.A.C. 135, 36 C.P.R. (4th) 97, 134 A.C.W.S. (3d) 889 (C.A.); Bomberry v. Ontario (Minister of Revenue) (1989), 1989 CanLII 4300 (ON SC), 70 O.R. (2d) 662, [1989] O.J. No. 989, 63 D.L.R. (4th) 526, 34 O.A.C. 17, [1989] 3 C.N.L.R. 27, 2 T.C.T. 4234, 18 A.C.W.S. (3d) 115 (Div. Ct.); Montreal (City) v. Arcade Amusements Inc., 1985 CanLII 97 (SCC), [1985] 1 S.C.R. 368, [1985] S.C.J. No. 16, 18 D.L.R. (4th) 161, 58 N.R. 339, J.E. 85-414, 29 M.P.L.R. 220, 30 A.C.W.S. (2d) 481; R. v. Sharma, 1993 CanLII 165 (SCC), [1993] 1 S.C.R. 650, [1993] S.C.J. No. 18, 100 D.L.R. (4th) 167, 149 N.R. 161, J.E. 93-462, 61 O.A.C. 161, 10 Admin. L.R. (2d) 196, 79 C.C.C. (3d) 142, 19 C.R. (4th) 329, 14 M.P.L.R. (2d) 35, 18 W.C.B. (2d) 524

Statutes referred to Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 [as am.], s. 14 [as am.], (1) [as am.], (a), (d) [as am.] Food and Drugs Act, R.S.C. 1985, c. F-27 [as am.] Ontario Drug Benefit Act, R.S.O. 1990, c. O.10, ss. 0.1, 18 [as am.], (1) [as am.], (0.a), (b) [as am.], (m) Tobacco Tax Act, R.S.O. 1980, c. 502

Rules and regulations referred to Food and Drug Regulations, C.R.C., c. 870 [as am.] O. Reg. 201/96 (Ontario Drug Benefit Act), ss. 1(6) [as am.], 11 [as am.], 12.0.2, (1), (2), 12.1 [as am.] R.R.O. 1990, Reg. 935, (Drug Interchangeability and Dispensing Fee Act), ss. 6-8 [as am.], 6(1)(a), 9, (1), (2)

Authorities referred to Brown, Donald J.M., and John M. Evans, Judicial Review of Administrative Action in Canada, looseleaf (Toronto: Canvasback Publishing, 1998) Brown, Donald J.M., and John M. Evans, Judicial Review of Administrative Action in Canada, 2nd ed., looseleaf (Toronto: Canvasback Publishing, 2011) Keyes, John Mark, Executive Legislation, 2nd ed. (Markham, Ont.: LexisNexis Canada, 2010) Mullan, David J., Administrative Law, 3rd ed. (Toronto: Carswell, 1996) [page281]

Kim Twohig, Lise G. Favreau and Kristin Smith, for appellants. Mahmud Jamal, Craig Lockwood and Eric Morgan, for Shoppers respondents. Terrence O'Sullivan and Paul Michell, for Katz respondents.

MACPHERSON and KARAKATSANIS JJ.A.: -- A. Introduction

[1] The Government of Ontario ("Ontario") appeals from two orders of the Divisional Court dated February 3, 2011 declaring that two sections of provincial regulations purporting to ban pharmacies from selling so-called "private label" generic drugs are ultra vires and of no force and effect.

[2] In its decision, the Divisional Court held that the regulations were ultra vires for three reasons:

[3] They fell outside the regulation-making authority of the parent statutes, in particular because they purport to prohibit rather than regulate private label products;

[4] They were extraneous to the purposes of the parent statutes; and

[5] They constituted an interference with property and commercial rights that was not expressly authorized by the parent statutes.

[6] The appeal raises issues relating to the interpretation of the relevant provincial statutes and regulations. However, it does so in the context of, or under the umbrella of, a careful consideration of the roles of the legislative, executive and judicial branches of government in a major area of health and finance policy posing highly important, complex and difficult issues.

B. Facts

(1) The parties and events

[7] Shoppers Drug Mart Inc., Shoppers Drug Mart (London) Limited and Sanis Health Inc. are three subsidiaries of Shoppers Drug Mart, a Canadian public company. Shoppers Drug Mart Inc. and Shoppers Drug Mart (London) Limited together license the 622 Shoppers Drug Mart retail pharmacies in Ontario. Sanis Health Inc. is a "manufacturer" of generic prescription drugs. In [page282] the generic industry, a "manufacturer" is not necessarily a fabricator of drugs. Sanis, like many other generic drug manufacturers, outsources the fabrication of generic drugs. Sanis apparently sells its generic drugs primarily to Shoppers Drug Mart.

[8] Katz Group Canada Inc., Pharma Plus Drug Marts Ltd. and Pharmx Rexall Drug Stores Ltd. are related companies that own, operate and franchise retail pharmacies in Canada. Katz Group reports that they have, since 2009, been planning to manufacture, distribute and market private label generic drugs, and have taken extensive steps to do so.

[9] The Canadian drug industry is comprehensively regulated by federal and provincial statutes. The federal Food and Drugs Act, R.S.C. 1985, c. F-27 (the "FDA") governs the approval of drugs with respect to their safety. Prescription drugs fall into two main categories: "brand" drugs, also known as "original products"; and "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.

[10] A brand drug is a product that has, or once had, patent protection. A manufacturer with a patent can command a higher price for the drug as it is likely the only one of its kind on the market. The price of a patented brand drug is regulated by federal legislation.

[11] A generic drug is a copy of a patented 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. The price of a generic drug is regulated by provincial legislation.

[12] In Ontario, two different but interconnected regimes govern pharmacy sales and reimbursements for generic prescription drugs that have been approved for marketing in Canada under the FDA.

[13] The Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 (the "DIDFA") applies generally to the dispensing of generic prescription drugs in Ontario. The DIDFA permits, and often requires, pharmacists to dispense generic drugs that have been designated as interchangeable with a brand drug. The DIDFA sets out rules respecting drug interchangeability, the pricing of interchangeable drug products and the fees that may be charged by pharmacists for dispensing these products to patients.

[14] The Ontario Drug Benefit Act, R.S.O. 1990, c. O.10 (the "ODBA") applies to the submission and reimbursement of claims for drug products dispensed to eligible patients (such as seniors) covered by the Ontario Drug Benefit ("ODB") plan. The ODBA [page283] sets out rules concerning the listing of drug products as benefits to eligible persons, the amounts that Ontario will pay to pharmacy operators for dispensing drug products to ODB patients and requirements respecting the manner in which claims must be submitted for reimbursement under the ODB program.

[15] Under the ODB program, Ontario provides coverage for most of the cost of over 3,300 prescription drug products for Ontario residents eligible to receive benefits under the ODBA. In the 2009-2010 fiscal year, the ODB program provided drug coverage to approximately 2.5 million people in Ontario and reimbursed over 114.8 million claims at a cost of $3.7 billion.

[16] The reimbursement of drugs by Ontario under the ODB program is commonly referred to as the "public market". In contrast, in the "private market" drugs are paid for by individuals or reimbursed through third parties, such as insurance companies.

[17] The price paid for a drug in the "public market" is set out in the Formulary, which is a list of generic drug products and prices. The Formulary is maintained and published by the executive officer of Ontario Public Drug Programs. The executive officer 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.

[18] The price paid for a generic drug listed in the Formulary but sold on the "private market" is capped by the DIDFA regulation.

(2) The 2006 amendments

[19] The participants in the drug supply chain include fabricators, manufacturers, wholesalers, pharmacies and patients. Legislative and regulatory changes to the ODBA and the DIDFA since 2006 have moved Ontario from a system in which pharmacies earned profits buying drugs at lower prices and selling them at higher prices toward a system that compensates pharmacies for a combination of products and services, including dispensing fees and professional services delivered to patients.

[20] There have been two rounds of significant amendments to the ODBA and the DIDFA and their regulations, in 2006 and 2010.

[21] Prior to the 2006 amendments to the ODBA and DIDFA statutes and their regulations, drug manufacturers attempted to gain competitive advantages over each other by providing rebates to pharmacies that purchased their products. The resulting savings to the pharmacies were not passed on to the patients. Studies indicated that generic drugs were more expensive in Canada [page284] compared to other countries, partly because of this rebate problem. As a result, legislative amendments in 2006 essentially prohibited rebates, subject to an exception that permitted pharmacies to receive "professional allowances" from drug manufacturers to be used for patient care purposes.

[22] The situation between 2006 and 2010 is well-described in the Divisional Court's reasons [at para. 16]:

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. In November 2008, the Competition Bureau of Canada published a report in which it found that the rebates paid to pharmacies accounted for at least 40% of the generic drug costs borne by public and private payers. The report noted that the use of rebates as a competitive practice was viewed as artificially driving up the cost of generic drugs for payers. The study found that if rebates were not paid to pharmacies, the price of drugs that is reimbursed to pharmacies and paid by patients, government, and private insurers could be lower. It recommended that provincial drug plans should, inter alia, reimburse pharmacy services such as dispensing and patient services separately from drug costs.

(3) The 2010 amendments

[23] In March and April of 2010, Ontario introduced new proposals to amend the ODBA and DIDFA statutes and regulations. The proposed amendments aimed at reducing generic drug costs and continuing the move to the new pharmacy reimbursement model. The amendments phased out professional allowances from manufacturers and increased the amount of government-paid compensation for pharmacist services.

[24] As part of the 2010 reforms, the conditions for listing a drug product under the ODBA and DIDFA regulations were amended to prohibit the listing of private label generic drugs. This change was made in two regulations.

[25] Under the ODBA, the relevant regulation-making authority is:

18(1) The Lieutenant Governor in Council may make regulations, (0.a) defining any word or expression used in this Act but not defined in this Act; . . . . . (b) prescribing conditions to be met for a listed 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. [page285]

[26] The impugned ODBA regulation, O. Reg. 201/96, provides:

12.0.2(1) A drug product that is a private label product shall not be designated as a listed drug product.

[27] Under the DIDFA, the relevant regulation-making authority is:

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; . . . . . (d) defining any word or expression used in this Act but not defined in this Act.

[28] The impugned DIDFA regulation, R.R.O. 1990, Reg. 935, provides:

9(1) A product that is a private label product shall not be designated as interchangeable.

[29] In effect, the term "private label product" refers to a generic prescription drug that a pharmacy retailer markets under its own trade name. In both regulations, the definition of "private label product" is identical (ODBA regulation, s. 12.0.2(2); DIDFA regulation, s. 9(2)):

9(2) In this section,

"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.

[30] The pharmacy retailer marketing the private label drug does not produce or fabricate the drug. Instead, the pharmacy [page286] retailer creates (or is related to) a separate private label company (for example, Sanis, a subsidiary of Shoppers Drug Mart) that enters into agreements with one or more existing drug fabricators that produce the same interchangeable products for sale in pharmacies. The 2010 amendments to the ODBA and DIDFA regulations prevented this.

[31] The Shoppers and Katz groups of companies challenged the validity of s. 12.0.2 of the ODBA regulation and s. 9 of the DIDFA regulation.

(4) The Divisional Court's decision

[32] In comprehensive reasons, the Divisional Court struck down the impugned regulations. It did so on three bases.

[33] First, the Divisional Court said that the regulations fell outside the regulation-making authority of the ODBA and DIDFA statute [at paras. 49-51]:

It is a basic principle of statutory construction that words used in legislation are to be given their plain and ordinary meaning. The language used in the impugned Regulations in this case, in its plain and grammatical sense, is prohibitory. Further, it is clear that the intention of the government was to prohibit certain private label generic products altogether based on the corporate relationships of the manufacturer, fabricator and customer. The government did not intend to impose conditions that, if met, would enable the generic drugs supplied by Sanis, for example, to be listed in the Formulary.

Further, I find that in pith and substance the provisions are prohibitory. They do not purport to impose conditions upon private label products, the compliance with which will result in their being listed. On the contrary, the Regulations set out to, and do, ban private label generic drugs from the public and private markets, based on the corporate ownership of the manufacturer.

The statute does not give the Lieutenant Governor in Council the power to make regulations banning classes of persons from supplying generic drugs in the public or private market. There is only a power to regulate, not a power to prohibit. Accordingly, in my opinion, the Regulations are ultra vires.

[34] Second, the Divisional Court held that the regulations were not consistent with the purposes of the ODBA and DIDFA statutes [at paras. 80-81]:

It is apparent from the materials filed, and from the legislation itself, that the government's real concern is that larger pharmacy chains (such as Shoppers Drug Mart and the Katz Group) have found a way to make a profit from the supply and sale of generic drugs at an earlier place in the supply chain than at the point of sale to consumers. They achieve this not by manipulating prices or by artificial kickbacks, but rather through corporate ownership. By owning their own manufacturer, they can keep for themselves the profit that would otherwise be made by arms-length manufacturers. However, these corporations are conducting a business and are in [page287] business to make a profit. If through business structure and economies of scale they are able to maximize their overall profit without increasing the price paid by the government or consumers for generic drugs, I do not see how the purposes or objects of the legislation are affected. Indeed, the legislation already provides for similar economies by permitting normal volume discounts and early payment incentives with respect to the prices paid by pharmacies to their suppliers.

In short, there is no concern about the safety or efficacy of the private label products. They will be sold to the public and to the government for precisely the same price as other equivalent generic drugs supplied under different labels by other manufacturers. The government's concern is directed at profits being made by corporations that both own a manufacturer and franchise pharmacies or own pharmacies. Controlling the profitability of such corporations is not a legitimate object or purpose of the ODBA or the DIDFA, provided it has no corresponding cost to the consumer, which it does not.

[35] Third, the Divisional Court stated that the regulations were an unwarranted interference with the Shoppers and Katz companies' property and commercial rights [at para. 85]:

Essentially, the regulations in issue here prohibit a corporation that owns a pharmacy from also owning a generic drug manufacturer, unless the manufacturer is also fabricating its own drugs. Further, this is done in order to restrict profits that can be earned by a corporation in the pharmacy business. This is a significant interference with the property rights and commercial freedom of the corporation, as the regulation prohibits it from engaging in an otherwise legal business activity through its subsidiary. It is also a significant interference with the freedom of the subsidiary company to engage in a trade which is its whole source of business. That is not to say that these kinds of restrictions are beyond the power of the legislature to impose. However, there must be express legislation enabling such control. It cannot be done under the authority of the regulation-making power currently in the enabling statutes.

[36] Finally, the Divisional Court noted that the Shoppers applicants (but not the Katz applicants) argued that the private label products regulations were invalid because they constituted unauthorized discrimination against private label drug manufacturers. The Divisional Court declined to consider this argument in light of its conclusion in the applicants' favour on the other three issues.

C. Issues

[37] The issues are:

[38] Did the Divisional Court err by concluding that the impugned regulations fell outside the regulation-making authority of the ODBA and the DIDFA, in particular because they purport to prohibit rather than regulate private label products?

[39] Did the Divisional Court err by concluding that the impugned regulations were extraneous to the purposes of the ODBA and the DIDFA statutes? [page288]

[40] Did the Divisional Court err by concluding that the impugned regulations constituted an interference with the Shoppers and Katz companies' property and commercial rights that was not expressly authorized by the ODBA and the DIDFA?

[41] Do the impugned regulations constitute unauthorized discrimination against private label drug manufacturers?

D. Analysis

[42] We begin with a preliminary observation. In our view, there is a good deal of overlap in the first three issues listed above and considered in detail by the Divisional Court. Ontario has dealt with the second issue first in its factum. While an understanding of the purpose of the ODBA and the DIDFA is central to a proper consideration of the impugned regulations, we will nonetheless consider the issues in the order they were addressed by the Divisional Court in its judgment, as well as both respondents in their facta.

[43] 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": see D.J.M. Brown and Hon. J.M. Evans, Judicial Review of Administrative Action in Canada, looseleaf (Toronto: Canvasback Publishing, 1998), at para. 15:3200.

[44] 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: see Apotex Inc. v. Ontario (Minister of Health) (2004), 2004 CanLII 34622 (ON CA), 73 O.R. (3d) 1, [2004] O.J. No. 4360 (C.A.), at para. 39 ("Apotex").

[45] 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.

[46] As a result, courts must be careful in evaluating government decisions in this domain. We agree with the view expressed by Feldman J.A. in Apotex, at para. 39:

[T]he responsibility for the management of public funds rests with the government and not the court, as does the correctness of the government's decisions and policies, especially in the context of a specialized legislative scheme such as this one.

(1) Scope of the regulation-making powers

[47] Against this backdrop, the first issue seems easy to resolve. The regulation-making powers in both the ODBA [page289] and the DIDFA are very broad. Section 18(1) of the ODBA states that the Lieutenant Governor in Council may make regulations, inter alia, (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.

[48] And s. 14(1) of the DIDFA provides that the Lieutenant Governor in Council may make regulations, inter alia, (a) prescribing conditions to be met by products or by manufacturers of products in order to be designated as interchangeable with other products;

[49] There can be little doubt that, at a general level, these regulation-making powers confer on the Lieutenant Governor in Council the authority to promulgate the private label product regulations under the ODBA and the DIDFA. The regulations impose a "condition" on products to be designated as a listed drug product and as interchangeable.

[50] The respondents' complaint -- accepted by the Divisional Court -- is that the condition is in fact an unauthorized prohibition on the lawful activities of drug companies in Ontario.

[51] With respect, we do not accept the stark regulation/ prohibition dichotomy articulated by the Divisional Court. The two concepts blend into each other. Because the ODBA and the DIDFA authorize regulations that impose conditions on generic drugs, they necessarily authorize the exclusion of drugs that do not meet the conditions. For instance, the condition requiring that drugs be approved by Health Canada prohibits all drugs that are not so approved: DIDFA regulation, s. 6(1)(a).

[52] Neither Shoppers nor Katz is precluded from engaging in the purchase and sale of drugs in Ontario as long as they do so in accordance with the legislative and regulatory scheme. They are entitled to continue their large-scale and province-wide pharmacy business. They are not precluded from fabricating drug products and selling them under their own labels. They are not precluded from purchasing drugs from generic drug companies for the purpose of selling them under the generic companies' labels. Moreover, companies related to Shoppers and Katz are not precluded from acting as wholesalers for the purpose of buying drugs from generic drug companies and reselling those drugs under the generic companies' labels to the pharmacies. [page290]

[53] In short, the respondents are still entitled to participate in most, but not all, components of the fabricator/ manufacturer/ wholesaler/pharmacy/patient continuum of the Ontario drug supply chain. This is regulation; it is not prohibition.

(2) Consistency with statutory purposes

[54] There is no dispute in this case about the purpose of the parent statutes, the ODBA and the DIDFA. In Apotex, Feldman J.A. described the purpose of the two statutes in this fashion, at paras. 3 and 5:

Through the two Acts, the DIDFA and the ODBA, the Ontario Ministry of Health has established a system called the Formulary, for the recognition of the interchangeability of original or brand name drugs with their generic equivalents and for the listing of drugs covered by its Drug Benefits Program. The purpose of the system is to allow pharmacists to be able to supply a prescribed drug in the cheapest form possible, both to persons who pay for the drugs themselves and to those who qualify to have the government pay for their drugs, referred to as eligible persons. . . . . .

Each Act plays a distinct role within the scheme, the ultimate goal of which is to make generic drugs available to eligible persons and the rest of the public at low prices. (Emphasis added)

[55] The Divisional Court cited Apotex and other relevant authorities and concluded [at para. 66] that "it is clear from these sources, and from the content of the two statutes, that the purpose and object of this legislation is to control the cost of prescription drugs in Ontario without compromising safety".

[56] The point of contention in this appeal concerns the consistency of the impugned regulations with this purpose. The Divisional Court concluded [at para. 80] that the two impugned regulations were outside this purpose of the ODBA and DIDFA statutes, and reflected that "the government's real concern is that larger pharmacy chains (such as Shoppers Drug Mart and the Katz Group) have found a way to make a profit from the supply and sale of generic drugs at an earlier place in the supply chain than at the point of sale to consumers". The Divisional Court continued [at para. 80]:

[T]hese corporations are conducting a business and are in business to make a profit. If through business structure and economies of scale they are able to maximize their overall profit without increasing the price paid by the government or consumers for generic drugs, I do not see how the purposes or objects of the legislation are affected.

[57] With respect, the focus of the Divisional Court's analysis is both misplaced and too narrow. The Divisional Court's [page291] approach overemphasizes the effect of the impugned regulations on manufacturers' and pharmacies' short- run profits, and pays too little heed to the potential of the regulations to affect market dynamics, incentives and drug costs in the longer-term. The Divisional Court's focus is too narrow in that it does not approach the impugned regulations in the entire context of both statutes, the design of the regulatory scheme and the problems they were designed to address.

[58] The reality is that, since Apotex dealt with the ODBA and the DIDFA in 2004, studies have shown that the price of generic drugs in Canada, and in particular in Ontario, remained higher than other jurisdictions. Payments from manufacturers to pharmacies of rebates and allowances were found to represent up to a 40 per cent discount on the price of drugs sold, which the pharmacies did not pass on to the customers. The reports documented that rebates to pharmacies led to higher prices.

[59] The 2006 and 2010 reforms have reduced the maximum permitted price of generic drugs while adjusting the compensation to the participants in the drug supply chain, focusing on pharmacies and the payments from manufacturers to pharmacies. By banning rebates, broadly defined, in 2006 and by phasing out professional allowances in 2010, the legislation and regulations have adjusted the compensation model for pharmacies to reduce the benefit from the sale of drugs and to provide increased compensation for professional services. With the reduction and elimination of professional allowances from manufacturers, Ontario introduced public funding to pay pharmacies for professional allowances. The amounts payable to pharmacies as dispensing fees, mark-up and professional allowances have been adjusted with each change in the maximum price for the generic drugs to ensure viability of the reduced prices.

[60] The private label model circumvents the legislative ban on payments from manufacturers to pharmacies from the resale of generic drugs. As the respondents emphasize, profits are not rebates. However, they both represent a benefit flowing from the resale of generic drugs rather than compensation for professional services. The private label business model permits pharmacies to generate revenues on the resale of generic drugs indirectly through related companies in a way that they are otherwise now prohibited from generating directly under the legislation. Furthermore, the private label model also results in pharmacies receiving both increased compensation for professional services, as well as (indirectly) profits from the sale of generic drugs.

[61] The regulations effectively preclude the pharmacy sector from replacing rebates on the price of drugs with profits generated [page292] through the use of non-arm's length companies that are licensed "manufacturers" but that do not fabricate drugs.

[62] The Divisional Court appears to have presumed that the purpose of lower prices is achieved primarily by fixing and regulating prices. It focused on the distinction between manufacturers and fabricators, the respondents' proposed corporate structure and on the impact of the regulations on one particular class of manufacturer. It did not focus on the impact of the private label model on the benefits received by pharmacies. Thus, it focused on the profits of a manufacturer (rather than indirect profits to a pharmacy) and found that because prices are capped for all manufacturers, such profits at an earlier stage of the supply chain could not impact on the end price to the public.

[63] However, the legislative scheme and amendments focus upon compensation to pharmacies and restricting the payments to pharmacies and wholesalers by manufacturers. By approaching the regulations from the perspective of the permissible compensation to pharmacies in the public drug system, the purpose of the regulations becomes clear.

[64] In the end, we accept Ontario's submission that the statutes and regulations by their terms attempt to lower prices not only by directly regulating price but also by indirectly regulating the compensation model of some participants, with a focus on pharmacies. The regulatory regime also ensures that pharmacists are compensated as professional service providers and not from profit in the dispensing of drugs. The statutes provide detailed rules relating to compensation to pharmacies, including mark-up, dispensing fees and professional allowances. The ODBA aims to "achieve value-for-money and ensure the best use of resources at every level of the system": s. 0.1. The transition to a new "pharmacy reimbursement model" (ODBA regulation s. 1(6)) is consistent with this purpose. Both statutes eliminate rebates, and eliminate or phase out the professional allowances paid by a manufacturer to a pharmacy. As a result, the pharmacies no longer profit (through rebates) from the sale of the generic drugs and must sell the drugs to the public based upon the lowest prices available from the manufacturers of generic drugs.

[65] In our view, Ontario could reasonably conclude that private label generics would reduce the competitiveness of the generic drug market, making future price reductions more difficult. In the same way that rebates shape manufacturers' and pharmacies' incentives in ways that indirectly result in higher prices, private label generics could also influence the market in various ways. Although the actual effect of private labels on the market is hard to predict, it is reasonable to conclude that the existence of private [page293] label generics could reduce competition in ways that would adversely affect long-term prices. This is a complex market and regulatory framework. 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. The Government is accountable for such decisions only in the electoral process": Apotex Inc. v. Ontario (Lieutenant Governor in Council), [2007] O.J. No. 3121, 2007 ONCA 570, 229 O.A.C. 11, at para. 37.

(3) Interference with property and commercial rights

[66] In light of the disposition of the first two issues, the third issue falls away.

[67] The impugned regulations do not completely ban generic drug companies from conducting business in Ontario. The regulations are not an improper restraint on trade, but rather a regulation of the business model behind the manufacture and sale of generic drug products to pharmacies as part of a scheme that is meant to control the types and amounts of payments to participants in the drug supply chain to ensure the lowest possible drug prices for the public.

[68] In any event, any interference with property or commercial rights is necessarily implied in the authority to set conditions for the listing of drugs as a benefit under the ODBA or as interchangeable under the DIDFA. The conditions for listing or being designated as interchangeable are set, inter alia, to achieve low prices for generic drugs, a core purpose of the two statutes. This purpose is achieved, in part, by regulating the way pharmacies are compensated. As such, any interference with property or commercial rights through the private label regulations is within the authority conferred by the ODBA and the DIDFA.

(4) Discrimination

[69] The Divisional Court did not address this issue. The Katz respondents do not advance it on the appeal.

[70] The Shoppers respondents contend that the impugned regulations are ultra vires because they constitute unauthorized discrimination against private label drug manufacturers.

[71] The resolution of the first three issues disposes of this issue as well. The "lowest possible price" goal of the ODBA and the DIDFA permits Ontario to make choices about the compensation model relating to companies involved in the distribution of generic drugs in the province. [page294]

[72] A similar argument was disposed of in brisk fashion in Apotex Inc. v. Ontario (Minister of Health), supra, at para. 38:

The appellant also suggests that the policy is illegal because it discriminates among drug manufacturers. I reject this suggestion. The purpose and effect of the drug pricing policy is to achieve the lowest prices for drug products and to ensure that the lowest-priced interchangeable products are supplied to eligible persons and are made available to everyone else. The structure of the policy dictates different price levels for drug products depending on a variety of relevant factors, including the timing of an application for interchangeability status in the Formulary and the public interest. This structure cannot be viewed as discriminatory in an arbitrary or illegal sense.

(5) Conclusion

[73] In the last decade, on two occasions this court has strongly cautioned that in a major public policy domain involving the intersection of health care and public finance, courts must exhibit genuine restraint in reviewing statutes and regulations. With respect, the Divisional Court did not show such restraint in this case. Its premises and analysis were not faithful to the principles underlying the two Apotex cases of 2004 and 2007.

E. Disposition

[74] The appeal is allowed and the application for judicial review is dismissed. Section 12.0.2 of the ODBA regulation and s. 9 of the DIDFA regulation are intra vires their parent statutes and in full force and effect.

[75] The costs order of the Divisional Court is set aside. The appellant is entitled to its costs of the appeal and of the judicial review application fixed at $30,000 and $20,000, respectively, inclusive of disbursements and HST.

EPSTEIN J.A. (dissenting): -- I. Introduction

[76] Prescription drug products in Canada are regulated both federally by Health Canada and provincially, in Ontario, by the Minister of Health. A prescription drug cannot be sold until it has the approval of Health Canada. A new drug product, known as an innovator, must be approved for safety, efficacy and quality control. Generic drugs rely on the approval obtained by the innovator. A generic drug cannot be sold in Ontario until the executive officer of the Ministry of Health has approved it as "interchangeable". A drug manufacturer must also obtain the approval of the executive officer under the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10 [page295] before the drug is "listed" on the Formulary and thus eligible to be covered by the public drug plan. As a practical matter, it is essential that a drug be designated as interchangeable and be listed by the Formulary in order to be sold as a prescription drug in Ontario.

[77] The issue in this appeal is whether the Lieutenant Governor in Council is authorized, through regulation, to create a class of generic drugs that are, for all practical purposes, excluded from the Ontario market for the sole reason that the pharmacy operator's supply for the product is a related corporate entity that does not fabricate the drug. I will refer to the drugs in this class as private label products ("PLPs").

[78] As my colleagues note, to be valid, the impugned regulations (the "Regulations") (1) must be consistent with the purpose of their parent legislation, (2) must be within the scope of their parent legislation, (3) must not interfere with property and commercial rights in a manner not specifically authorized by their parent legislation, and (4) must not be discriminatory in a manner not authorized by their parent legislation.

[79] The Divisional Court struck down the Regulations holding that they did not meet any of the first three requirements. Given the findings of the unanimous court that the defects in the Regulations were "overwhelming", the court did not feel the need to consider the fourth.

[80] I agree with the Divisional Court and would add that, on my analysis, the Regulations are also discriminatory in that they target one singular form of corporate structure, again, without authorization that can be found in the their parent legislation.

[81] As I am of the view that the Regulations are invalid on all four grounds, I would dismiss the appeal.

II. Analysis

[82] At the outset, it may be helpful to provide a clear picture of the entities that make up the drug supply chain. Paragraph 18 of the factum of the respondent, Katz Group Canada Inc., is of assistance in this respect:

-- Fabricators make and preserve drugs for the purposes of sale.

-- Manufacturers sell drugs under their own name to wholesalers or pharmacies. They are federally licensed, and either make drugs, or buy drugs from fabricators.

-- Wholesalers buy drugs from licensed manufacturers to distribute to licensed pharmacies or pharmacy operators. They are licensed and registered provincially. [page296]

-- Pharmacies (pharmacy operators) dispense drugs to patients. They are licensed provincially to buy drugs from licensed wholesalers or licensed manufacturers.

-- Payors of dispensed drugs may be the patient, a private third party drug plan, or the Government under the ODBP [Ontario Drug Benefit Plan]. (Footnotes omitted)

[83] From these descriptions it may appear that there is little, if any, difference between a manufacturer and a fabricator. I note, however, that the federal Food and Drug Regulations, C.R.C., c. 870 differentiate between the two on the basis that fabricators make the drugs, and manufacturers, while they may actually make the drugs, sell the drugs and assume responsibility for their compliance with legislative requirements regarding matters such as safety and efficacy.

[84] The backdrop of the analysis of whether the Regulations are ultra vires is, of course, the purpose of the parent statutes, the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 (the "DIDFA") and the Ontario Drug Benefit Act (the "ODBA") (together, the "Legislation"). The Legislation is designed to provide access to safe drug products at the lowest possible cost to the Ontario government and the public. With this, there is no quarrel.

[85] The analysis must also proceed on the basis of a clear understanding of the import of the Regulations. The Regulations prohibit PLPs from being listed on the Formulary and from being designated as interchangeable with a brand name product. This prevents the sale of generic prescription drugs if the product's manufacturer is vertically integrated with a pharmacy operator or if the manufacturer supplies the product under marketing arrangements with one or more operators of pharmacies or companies that own, operate or franchise pharmacies.

[86] My colleagues would allow the appeal from the decision of the Divisional Court primarily on the basis that the purpose of the Legislation, to keep drug prices low, is advanced through the creation of a complex scheme that tightly controls the compensation available to the various participants in the drug supply chain. My colleagues reason that given the importance of the drug industry in terms of social policy, the public resources consumed in the provision of drug products to Ontarians and the complex nature of the scheme envisioned by the Legislation, the details of the scheme should be left to the government.

[87] With respect, I do not think my colleagues' approach, which views the Regulations as a valid addition to the compensation scheme, represents a fair reading of either the purpose of the [page297] Regulations or the Legislation. I am also of the view that while the efficacy of the Regulations is not a matter for the courts, the complexity, importance and cost of the regulatory regime do not provide the government with a carte blanche. Like all subsidiary legislation, the Regulations are bound by the scope of the authorization provided by the Legislation. Whether these Regulations meet that essential requirement is a matter for the courts.

[88] Before proceeding with my analysis, I make one more important observation. The broad issue in this appeal is not whether the government can prohibit PLPs. Rather, it is whether, as a matter of law, the government can prohibit PLPs by regulation rather than by statute.

[89] Against this background, I will examine the four issues raised in this appeal.

A. The Regulations are not consistent with the purpose of the Legislation

[90] This has been identified as the key issue in this appeal, so I will deal with it first.

[91] Assessing whether the Regulations are authorized by the Legislation necessarily engages an examination of the purpose of the Legislation, the purpose of the Regulations and the relationship between the two. With limited evidence about that relationship, it is up to the court to determine if any rational connection exists between the Regulations and the intent of the Legislation.

[92] Specifically, the focus must be on whether the record demonstrates that there is a nexus between making drugs available to the people and government of Ontario at the lowest possible prices and prohibiting certain drugs from being listed -- again, for the sole reason that the pharmacy that sells them owns the manufacturer but not the fabricator of the drug.

[93] As my colleagues note, the Divisional Court concluded that there is no such nexus. At para. 81, Molloy J. explains as follows [at para. 81]:

The government's concern is directed at profits being made by corporations that both own a manufacturer and franchise pharmacies or own pharmacies. Controlling the profitability of such corporations is not a legitimate object or purpose of the ODBA or the DIDFA, provided it has no corresponding cost to the consumer, which it does not.

[94] My colleagues agree with the Divisional Court that the Regulations are directed toward the profits that the pharmacies may potentially make by investing in manufacturers. The divide is over whether the sale of a generic drug product that has been manufactured by a company controlled by the pharmacy [page298] operator is rationally connected to the objective of keeping drug prices low.

[95] My colleagues identify a nexus between the two in the following ways.

[96] First, they write that Ontario could conclude that common ownership may have a negative impact on the government's efforts to keep drug prices low on the basis that due to market forces over the long term, inter-corporate control and associated redirection of profits could, in the future, reduce competition in a manner that would increase the prices of generic drugs to the public.

[97] I cannot accept this argument. With respect, it is not for this court to identify, without evidentiary support, a nexus between low drug prices and this particular type of vertical integration within the drug supply chain based on an unsubstantiated concern that investments such as this by pharmacy operators may affect market forces in a manner that has an adverse impact on government efforts to keep drug prices low. I say this particularly in the face of the fact that the government, through the Legislation, tightly controls the resale price of drugs at each level of the drug supply chain and ultimately to the public.

[98] Moreover, I note that there is nothing in the record that supports the conclusion that the decision to make the Regulations had anything to do with a concern about a possible future increase in drug prices resulting from market forces associated with common ownership. Rather, as I will explore below, the evidence demonstrates that the motivation behind the Regulations was a concern that through common ownership pharmacy operators had found a way to replace revenues they had been realizing from rebates before the 2006 prohibition on that practice.

[99] Second, my colleagues express concern that common ownership interferes with the complex compensation scheme that they find to be central to the Legislation's objective of maintaining low drug prices, a scheme created by the government and that should be left to the government.

[100] While I agree that the Legislation creates a complex scheme governing compensation arising out of the sale of drugs at various levels of the drug supply chain, I fail to see how, again without any evidentiary support, vertical integration of this nature might affect that scheme. The scheme is designed to control compensation generated by the sale of drugs. What corporate ownership influences is not the compensation arising out of the sale of drugs, but rather compensation arising out [of] the return on investment that one corporation expects to achieve by investing in another. [page299]

[101] The following observation demonstrates the disconnect between the purpose of the Legislation and the relationship targeted by the Regulations. If the ownership structure of the companies at the various levels of the drug supply chain is as important to the intent of the Legislation as my colleagues find it to be, it would be logical to assume that the ownership of all elements of the supply chain would be subject to regulation. But the Regulations target only one form of corporate investment: a pharmacy operator that controls a manufacturer that does not control a fabricator.

[102] It is passing strange that the Regulations restrict this type of vertical integration but permit common ownership between pharmacies and manufacturers that own or are owned by fabricators. Put another way, a pharmacy operator is not permitted to make a profit from the sale of a generic drug that it has purchased from a manufacturer it controls and from which it stands to make a profit but is permitted to earn a profit from the sale of a drug purchased from a manufacturer it controls as long as it also controls the fabricator of the drug. It would therefore appear that pharmacies could avoid the effect of the Regulations simply by purchasing a controlling interest in both the manufacturer and the fabricator of the drug -- a scenario that may generate more inter-corporate control and more profit for the pharmacy. I find it difficult to understand how two levels of common ownership and associated profit sources are not seen as a threat to the intent of the Legislation, where one is.

[103] The appellants have made much of a perceived relationship between vertical integration between pharmacies and manufacturers and the former practice of rebates. While the practice of rebates provides some historical context, with one exception, the role that rebates have come to play in this matter is not helpful to the analysis.

[104] Studies have shown that rebates caused an increase in the price of drugs in Ontario. Prior to the legislative ban on rebates enacted in 2006, pharmacy operators would purchase a generic drug from a manufacturer at the price set by the Formulary, but would typically also receive a promotional rebate from the manufacturer as an incentive for stocking their product. Manufacturers would compete with each other to offer the most attractive rebates.

[105] There is clear mischief in this practice. To illustrate, if the Formulary price for a drug was set at $1, a pharmacy operator would purchase that drug for $1, and would charge the payor that price plus a 10 per cent markup: $1.10. But, the manufacturer would be paying the pharmacy operator a rebate of, for [page300] example, $0.20 as an incentive to stock their product. The technical sale price from the manufacturer to the pharmacy remains $1, but, due to the rebate, the effective price to the pharmacy is $0.80. If the pharmacy operator was bound to sell to the public at the effective price plus a permissible 10 per cent markup, the payor would pay only $0.88. The public pays more for the drug than it should under the Legislation and the pharmacy increases its profit from the sale of the drug.

[106] Using this example it is easy to identify two things about rebates. They make little, if any, contribution to the supply of drugs to the public. More significantly, they can have no effect other than to interfere with the legislative intent of keeping drug prices low.

[107] Common ownership among corporate entities is, in those two respects, quite different. The purchase by one company of another within the same industry is a common business activity. In the context of this case, the profits the manufacturer presumably made as a result of its contributions as a participant in the drug supply become pharmacy profits on the basis of the return on the pharmacy's investment in the manufacturer. In contrast to the practice of rebates -- a perversion in the sense that their sole purpose was to circumvent the compensation scheme and increase profits earned by the pharmacies -- there is neither any logic nor any evidence that supports the conclusion that common ownership and associated redirection of profits is similarly motivated and would, or even might, cause an increase in the price of drugs.

[108] It is therefore puzzling that the analogy to rebates has featured so considerably in this matter.

[109] For example, in the June 8, 2010 letter from the Ministry to Sanis Health Inc., the executive officer addressed the purpose of the proposed ban on PLPs and compared the harm being addressed to the harm cause by the former rebates:

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 [sic] end-payors such as 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 in the legislation, it is a similar problem that the provisions against rebates seek to prevent. (Emphasis added)

[110] As well, in his affidavit, Brent Fraser, director of drug services at the Ministry, stated that the Regulations' treatment of PLPs is consistent with the types of payments that pharmacy operators are "permitted to receive for the sale of generic drugs. [page301] In particular, the ODBA and the DIDFA foresee that pharmacy retailers are not to make any profit from rebates or hidden mark-ups on generic drugs." This, he states, is "consistent with Ontario's ongoing efforts to reduce the price of generic drugs in Ontario, and to bring them in line with the lower prices paid in other jurisdictions" (emphasis added).

[111] The appellants, in their oral and written submissions repeatedly referred to the mischief of rebates' being re- introduced through common ownership. See, for example, the appellants' factum, at para. 48:

Contrary to the finding of the Divisional Court, the Private Label Regulations are consistent with and akin to the complete ban on rebates as, similar to the ban, the regulations control the types and amounts of payments that pharmacies receive. The Private Label Regulations are meant to ensure that pharmacies do not circumvent the ban on rebates and receive payments that are not permitted by the statutory scheme by employing a business model that allows them to make a profit on the purchase and sale of drug products. 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.

[112] The argument goes: (i) through rebates, pharmacies realized additional revenues; (ii) through common ownership, pharmacies may realize additional revenues; therefore, (iii) like rebates, common ownership had to be prevented.

[113] My colleagues also rely on their being a connection between the two. At para. 65 of their reasons, they write that "[i]n the same way that rebates shape manufacturers' and pharmacies' incentives in ways that indirectly result in higher prices, private label generics could also influence the market in various ways".

[114] While I do not agree with the perception that common ownership gives rise to the same or even close to the same mischief as that inherent in rebates, in a curious way rebates are relevant to the analysis as they provide assistance in understanding the purpose of the Regulations. It is not disputed that the Legislation aims to reduce the price of drugs in Ontario in part through changes made to the manner in which participants in the supply chain are compensated for the various roles they play in the manufacture, supply and final sale of drugs to the public and the government. However, the evidence demonstrates that the Regulations were made to prevent pharmacies from replacing one profit centre -- rebates -- with another -- common ownership. In my view, this purpose has no legitimate rational connection to the Legislation.

[115] Both the affidavit of Brent Fraser and the Ministry's June 8, 2010 letter refusing to list Sanis' PLP drugs on the [page302] Formulary confirm that the PLP ban is concerned only with stopping pharmacy operators from replacing profit that was once generated through collecting rebates from manufacturers with profit they can accrue through their investment in the business of drug manufacturers.

[116] Because the purpose of the Legislation is not to restrict the profits of pharmacy operators, a regulation restricting those profits is only valid insofar as it is a vehicle for reducing drug costs. The distinction is crucial. In and of itself, the intermediary goal of curbing profits is not the proper subject of regulations under the parent statute.

[117] I therefore conclude that restricting the profits that pharmacies may realize through common ownership is not consistent with the Legislation's purpose. First, the compensation that the legislative scheme restricts is only that which arises out of the resale of drugs. And, as I have concluded, there is no demonstrable nexus between prices and inter-corporate investment. These observations lead inexorably to the conclusion that the Regulations are ultra vires.

[118] Although this conclusion alone would be sufficient to dispose of the appeal, I will address the remaining three issues.

B. The Regulations are prohibitive, and therefore beyond the scope of the Legislation

[119] Section 14 of the DIDFA and s. 18 of the ODBA restrict regulations made under the Legislation to those that "prescribe conditions" to be met in order for a drug to be "designated as interchangeable" and "designated as a listed drug product" or, in the case of the ODBA, "respecting any matter considered necessary or advisable to carry out the intent and purposes of [the Act]".

[120] As the Divisional Court observed, at para. 39 of its reasons, it is "a settled legal principle that a delegated authority to impose conditions on an activity does not authorize a prohibition of the activity": see, also, D. Mullan, Administrative Law: 3rd ed. (Toronto: Carswell, 1996), at s. 512; and Donald J.M. Brown, Q.C., and Hon. John M. Evans, Judicial Review of Administrative Action in Canada, 2nd ed., looseleaf (Toronto: Canvasback, 2011), ss. 15.3263, at pp. 15-54 to 15-92.

[121] That there are differing views as to whether the Regulations prohibit or prescribe conditions is understandable. While the distinction between regulation and prohibition seems straightforward, it often raises practical difficulties: see J.M. Keyes, Executive Legislation, 2nd ed. (Markham, Ont.: LexisNexis Canada), at pp. 310-12. [page303]

[122] My colleagues have expressed the view that the Regulations simply exclude from the market those products that do not meet certain conditions. They reason that this conclusion, coupled with the observation that the respondents remain entitled to participate in the drug supply chain, indicate that the Regulations do not prohibit; rather, they impose conditions.

[123] The Divisional Court considered the language used in the Regulations, together with their intent and effect, and concluded that the Regulations amounted to prohibition.

[124] As noted by the Divisional Court, the wording of the Regulations is that of prohibition. The Regulations provide that a PLP "shall not be designated". This is in stark contrast to [that] used in other regulations made under the authority of the Legislation. For example, ss. 6-8 of the DIDFA regulation and ss. 11 and 12.1 of the ODBA regulation employ the clear language of imposing conditions.

[125] That observation informs the conclusion that the Regulations prohibit. However, in my view, the more important considerations are their intent and effect: see Adult Entertainment Assn. of Canada v. Ottawa (City), [2007] O.J. No. 2021, 2007 ONCA 389, 283 D.L.R. (4th) 704, at para. 22; Montreal (City) v. Arcade Amusements Inc., 1985 CanLII 97 (SCC), [1985] 1 S.C.R. 368, [1985] S.C.J. No. 16.

[126] Here, as I have said, the intent of the Regulations is to prohibit pharmacies from earning profits through the ownership of manufacturers. Their effect is to prohibit any pharmacy operator in the business of dispensing generic prescription drugs from owning a manufacturer that enters into agreements with a fabricator to make drugs for the manufacturer. The Regulations are designed to prohibit and their effect is to prohibit.

[127] I see no error in the Divisional Court's approach or its conclusion that the Regulations prohibit rather than impose conditions. I therefore conclude on that basis that the Regulations are ultra vires.

C. The Regulations interfere with property and commercial rights

[128] It is not contested that the Regulations prevent the listing and designation of a drug product where a corporation that owns a pharmacy also owns the manufacturer, unless the manufacturer is also fabricating the product. It is also not contested that this prohibition was put in place in order to restrict the profits of pharmacies.

[129] The extreme action of prohibiting otherwise-lawful commercial activity by regulation must be carefully scrutinized. [page304] The authority for such action must be conferred by express statutory language.

[130] This principle is expressed in the Divisional Court's decision in Bomberry v. Ontario (Minister of Revenue) (1989), 1989 CanLII 4300 (ON SC), 70 O.R. (2d) 662, [1989] O.J. No. 989, 63 D.L.R. (4th) 526, [1989] 3 C.N.L.R. 27 (Div. Ct.). In that case, the court considered whether a regulation imposing a quota system was ultra vires the authority provided by the Tobacco Tax Act, R.S.O. 1980, c. 502. The court found that quotas significantly interfered with the freedom to buy and sell, an interference with commercial freedom that represented a financial burden and, at p. 540 D.L.R., listed a number of restrictions that would amount to significant infringements on rights to engage in the business of supplying tobacco products. The court concluded [at p. 676 O.R.] that "[i]t would take express language to confer such powers on the Minister or the Director . . .".

[131] Preventing corporate investment is an interference of a similar nature. It follows that the Regulations interfere with commercial freedom and express language to do so must be found in the Legislation. Here, it cannot be found. The authority to impose conditions for drug products to be listed and designated as interchangeable falls far short of express language authorizing interference with the right of one corporation to invest in another.

[132] My colleagues reason that the authority to interfere with property or commercial rights in this manner is a necessary implication of the authority to set conditions for the listing of drugs under the ODBA or as interchangeable under the DIDFA. With respect, I disagree.

[133] In Bomberry, after noting that there was nothing in the Tobacco Tax Act that expressly authorized any quota system, the court considered whether the authority was necessarily incidental to carrying out the purpose of the Act. It held, at p. 542 D.L.R., that for an impugned power to be necessarily incidental, the court must be able to clearly identify the statutory power that it supports. As the overall purpose of the Act was to collect tax from consumers, there was no provision in the Tobacco Tax Act to support a quota as a necessarily incidental power.

[134] Here, as discussed above, there is no demonstrable rational nexus between common ownership and the achievement of lower drug prices. To borrow the language of Bomberry, there is no peg in the Legislation upon which to hang this type of interference with commercial freedom. It is a very large step from keeping drug prices low to restricting profits earned from the return a corporation hopes to earn on the investment in another corporation. [page305]

[135] I conclude my analysis of this issue with the following observation: if this restriction on corporate investment can be considered necessarily incidental to the Legislation, then by the same reasoning, and without specific statutory authority, virtually any steps the pharmacies may take to increase profits -- such as mechanization, moving to less expensive locations, reducing employee wages, et cetera -- could be the proper purview of regulations under the Legislation. In my view, an approach that would give regulators such a wide berth is unsupportable.

[136] I therefore agree with the Divisional Court that the Regulations are ultra vires as they interfere with property and commercial rights in a manner not specifically or necessarily authorized by the Legislation.

D. The Regulations discriminate

[137] As noted by my colleagues, it is only the Shoppers respondents that address this issue. They submit that there is a fourth basis upon which to find that the Regulations are ultra vires: that they constitute unauthorized discrimination against private label drug manufacturers.

[138] In this administrative law context, discrimination refers to circumstances in which a regulation expressly does not apply equally to those who are subject to the enactment and who are engaged in a certain activity. As a general rule, a regulation cannot discriminate between persons or classes of persons unless it is permitted by the enabling statute, expressly or by necessary implication: see R. v. Sharma, 1993 CanLII 165 (SCC), [1993] 1 S.C.R. 650, [1993] S.C.J. No. 18, at pp. 667-68 S.C.R. To fall into the latter category, the discrimination in the regulation must be necessary to the proper functioning of the scheme in the enabling statute.

[139] It cannot reasonably be disputed that the Regulations discriminate between different classes of corporation based on common ownership. The remaining question is whether this discrimination is authorized.

[140] I see nothing in the Legislation that specifically provides for the creation of different classes of drug manufacturers. To be valid, therefore, the Regulations' singling-out of private label drug manufacturers for special treatment must be found to exist by necessary implication.

[141] In my analysis of the first issue in this appeal, I conclude that the Regulations are not consistent with the purpose of the Legislation. My reasons in respect of that inquiry apply with equal force here. If the Regulations are not consistent with the purpose of the Legislation, it cannot be said that they are necessary to the Legislation's proper functioning. [page306]

[142] Even if I am wrong in that respect, I do not think it plausible to say that restricting manufacturers that are owned by pharmacies -- and are unconnected to fabricators -- from participating fully in the market is necessary to the proper functioning of the scheme provided for in the Legislation. There is certainly no evidence that corporate ownership structure was envisioned as part of the scheme when it was designed. There is similarly no evidence that the scheme was or would be unable to function without the Regulations.

[143] On this basis, as well, I would find that the Regulations are invalid.

III. Conclusion

[144] The government, through the Regulations, responded quickly to prevent inter-corporate investment and planned inter-corporate investment between pharmacies and drug manufacturers. This quick response appears, at least in part, to be the result of a "once bitten twice shy" attitude that stems from the recent history involving the practice of rebates.

[145] I have concluded that the Regulations are ultra vires the Legislation. However, as noted at the outset of my analysis, this conclusion in no way prevents the government from prohibiting PLPs by statute.

IV. Disposition

[146] I would, for these reasons, dismiss the appeal, with costs of the appeal and the application for leave to appeal, to the respondents.

Appeal allowed.