THE COMPETITION TRIBUNAL File No. CT-2004 - 003 Registry Document No.:
BETWEEN: MRS. O'S PHARMACY INC. Applicant
- and -PFIZER CANADA INC. Respondent
REPLY TO APPLICATION PURSUANT TO SECTION 103.1 OF THE COMPETITION ACT FOR LEAVE TO MAKE APPLICATION UNDER SECTION 75 OF THE ACT
WRITTEN REPRESENTATIONS OF THE RESPONDENT
I. SUMMARY 1. Pfizer Canada Inc. ("Pfizer") terminated supply of its pharmaceutical products to Mrs. O's Pharmacy Inc. ("Mrs. O's") on March 11, 2004 for its breach of Pfizer's clearly stated terms and conditions of sale. 2. Pfizer has given Mrs. O's multiple opportunities to re-qualify for supply of Pfizer's pharmaceutical product subject to Pfizer's usual trade terms, which are reasonable terms of trade. 3. The Competition Tribunal has set a benchmark in its consideration of what will constitute a "substantial" effect. Meeting this benchmark requires evidence of impact to a business that goes beyond mere speculation.
- 2 -4. Mrs. O's has not established on credible evidence that its business has been substantially affected by Pfizer's decision to cease supply of its pharmaceutical products. 5. Pfizer submits that Mrs. O's application for leave should be dismissed. II. MATERIAL FACTS 6. Pfizer Canada Inc. ("Pfizer") is a pharmaceutical developer, manufacturer and distributor. Pfizer supplies prescription pharmaceuticals and non-prescription products to the Canadian market through a network of wholesalers, self-distributing chains and retail pharmacies. 7. Pfizer is aware that, contrary to professional and regulatory prohibitions, a number of Canadian pharmacies are operating cross-border pharmacy practices. These cross-border practices, although colloquially termed "internet pharmacies," use a variety of forums to provide Canadian pharmaceuticals to American customers. Generally, American customers submit prescriptions written by American physicians by fax or mail to Canadian pharmacies. In some cases those prescriptions are co-signed by Canadian physicians. Canadian pharmacists then fill those prescriptions and deliver the drugs to the American customers. 8. Pfizer is committed to safeguarding the integrity of the pharmaceutical product supply chain and ensuring that the distribution of its pharmaceutical products takes place in a safe and regulated manner. Cross-border pharmacy operations
- 3 jeopardize these values and greatly increase the potential for counterfeiting of drugs. 9. In order to ensure the safe and regulatory-compliant distribution of its products and to ensure the supply of pharmaceuticals for Canadians, Pfizer Canada modified its terms of sale ("Terms and Conditions") for pharmaceutical products to Canadian pharmacies and pharmacists as outlined in a letter couriered to Mrs. O's on February 20, 2004. These modified Terms and Conditions included: a. A restatement of the requirement that all Pfizer pharmaceutical products purchased were to be sold only in Canada (a condition that has existed since early 2000);
b. Limiting pharmacies' purchase of Pfizer pharmaceutical products to authorized distributors of pharmaceutical products; and
c. Reporting by distributors of pharmacies' current and historical orders of Pfizer pharmaceutical products.
10. It was made very clear in the February 20, 2004 letter that any order for Pfizer pharmaceutical products after receipt of the notice was subject to Pfizer's Terms and Conditions set out therein. Pharmacies were invited to contact Pfizer with any questions. 11. Notwithstanding the clearly stated Terms and Conditions communicated to Mrs. O's, Pfizer became aware of a website with the url "www.canadadrugcentre.com," which was registered to Mrs. O's address and listed Mrs. O's phone number. As a result of Pfizer's subsequent investigations of www.canadadrugcentre.com and Mrs. O's, a letter was sent to Mrs. O's on March 11, 2004 advising that Mrs. O's was not in compliance with its Terms and
- 4 -Conditions and that the pharmacy was no longer approved to purchase Pfizer pharmaceutical products from Pfizer's authorized distributors. 12. Mrs. O's was given the opportunity to obtain supply of Pfizer pharmaceutical products if it brought its operations in compliance with Pfizer's Terms and Conditions as described in the February 20, 2004 letter. This option was presented to Mrs. O's on multiple occasions. Letters were sent on March 15, 2004, March 18, 2004 and April 29, 2004 providing the terms of reinstatement of supply to Mrs. O's. The opportunity for resuming product supply was also the subject of a number of telephone conversations between Mrs. O's and Pfizer. Pfizer's proposal to Mrs. O's was fair and reasonable and would have allowed Mrs. O's immediate access to supply of Pfizer pharmaceutical products. 13. In order to resume supplying pharmaceutical products to Mrs. O's, Pfizer must be confident that Mrs. O's is committed to complying with the Terms and Conditions. Accordingly, in order to have supply resumed, Pfizer reasonably requested that Mrs. O's confirm its compliance with the Terms and Conditions in writing and be subject to certain reporting and audit requirements. Such audits would, of course, be carried out by independent third parties in compliance with all applicable privacy legislation and confidentiality obligations. The audits would be carried out for the sole purpose of confirming whether Mrs. O's was in compliance with Pfizer's Terms and Conditions.
- 5 -Ill. ANALYSIS 1. Test 14. Subsection 103.1 (7) of the Competition Act, R.S. 1985, c. C-34 states that: The Tribunal may grant leave to make an application under section 75 or 77 if it has reason to believe that the applicant is directly and substantially affected in the applicant's business by any practice referred to in one of those sections that could be subject to an order under that section.
15. Pfizer submits that Mrs. O's has not provided sufficient credible evidence to establish that its business has been directly and substantially affected by Pfizer's conduct.
2. What impact has there been on Mrs. O's business? 16. Pfizer submits that the impact on Mrs. O's business described in the affidavit of Olga O'Charchin and the Statement of Grounds and Material Facts filed by Mrs. O's is overstated, unreasonable and based on insufficient and speculative information. i. Mrs. O's Actual Purchase of Pfizer Pharmaceutical Products 17. It is Pfizer's information, that Mrs. O's has purchased only approximately $10,000.00 of Pfizer pharmaceutical product since it commenced operation. This is based on data obtained from IMS Health Canada ("IMS"), an independent third party pharmaceutical data collection service. In light of this extremely small
- 6 amount of product purchased, the actual impact of Pfizer's decision to terminate supply of its pharmaceutical product has been insignificant and is not material. 18. The material submitted by Mrs. O's provides no hard data regarding actual sales lost as a result of the decision to cease supplying Mrs. O's. Indeed, the material submitted by Mrs. O's contains no sales records or documents to substantiate the claimed effect on its business. Instead Mrs. O's relies on forecasts made prior to the operation of its business. ii. Reasonableness of Mrs. O's Reliance on 20% Estimate 19. Mrs. O's bases its estimated loss of sales on a claim that eight key products that it attributes to Pfizer constitute a general "industry standard" of 20% of an Ontario pharmacist's gross annual sales. Pfizer submits that this estimate is unsubstantiated and should be given no weight. 20. This figure is not attributed to any independent third party, nor is it supported by Mrs. O's own sales figures. 21. Significantly, two of the eight products identified by Mrs. O's as accounting for 20% of an Ontario pharmacist's gross sales are not Pfizer products. As of March 2003 both Minestrin and Loestrin were divested to Galen Holdings PLC. As of April 23, 2004 all responsibility for distributing these two products has been assumed by Galen Holdings PLC. Accordingly, these products are not subject to Pfizer's decision not to supply its pharmaceutical products. Mrs. O's claim that the eight identified products represent 20% of its sales should be reduced to
- 7 reflect the fact that Minestrin and Loestrin are not Pfizer products and are, to the best of Pfizer's knowledge, available to Mrs. O's for purchase. 22. Pfizer's information, again based on data generated by IMS, is that in fact the six key products identified by Mrs. O's that are actually Pfizer products constitute only approximately 12% of sales to Ontario pharmacists on average and to Mrs. O's. iii. Realistic Assessment of the Fort Erie Market 23. Mrs. O's materials suggest that the loss of Pfizer's pharmaceutical product line has caused a loss of 30 prescriptions per day. This number is arrived at based on a comparison of estimated actual prescriptions (although no data is provided to substantiate this estimate) and the number of prescriptions Mrs. O's forecast it would be filling in its business development plan. 24. Given that Mrs. O's had been in operation for only approximately three months when Pfizer ceased its supply, this estimate is simply not credible, if solely for the local Fort Erie market. 25. The numbers in Mrs. O's forecast and business development plan, which documents were not provided with the affidavit material, cannot be relied upon. Mrs. O's seeks to service the downtown Fort Erie market, which has been without a pharmacy for over ten years. Clearly, the community has, during that period, come to rely on its other pharmacy options, including the well-known
- 8 brand name and discount pharmacy operations such as Shoppers Drug Mart and Walmart located on the main highway strip. 26. Given the state of the market in Fort Erie, Mrs. O's business model and forecasts are not reasonable. Because there has been no pharmacy in downtown Fort Erie for ten years and because Mrs. O's has been in business for such a short period of time, the numbers forecast are not reliable. Olga O'Charchin's own affidavit acknowledges at paragraph 4 that the downtown area of Fort Erie, in which Mrs. O's is located, has been suffering because residents are choosing to shop at the large, brand name stores. 27. In the context of these market conditions, any failure to meet business plan targets must be at least partially attributed to an unrealistic and overly optimistic forecast and not solely to Pfizer's cessation of pharmaceutical product supply. 28. In the circumstances, Pfizer submits that Mrs. O's estimate that eight key products, of which only six are Pfizer products, constituted 20% of its business is exaggerated. Pfizer also submits that Mrs. O's claim that it is losing 30 prescriptions a day is unsubstantiated and excessive. Pfizer's independently substantiated data indicates that the six Pfizer products identified by Mrs. O's as being key products represent only approximately 12% of Mrs. O's pharmaceutical products.
- 9 -3. Has Mrs. O's Been Substantially Affected? 29. Pfizer submits that Mrs. O's has not been directly and substantially affected by Pfizer's cessation of trade. Pfizer submits that to have been substantially affected, Pfizer's pharmaceutical products would have to have constituted a significant proportion of Mrs. O's actual and reasonably foreseeable sales. i. The Tribunal's Consideration of "Substantially" 30. In a number of Tribunal decisions considering the term "substantial," a benchmark has been developed of what circumstances will meet this definition. Pfizer submits that this benchmark establishes a threshold that has not been met by Mrs. O's in this application. 31. In the context of s. 75 of the Act, the Tribunal has examined the meaning of "substantially" in Canada v. Chrysler as follows: The respondent submits that "substantially" does not simply mean "some" or "to a degree" but rather "major" or "significant". The respondent takes the position that the ordinary dictionary definition should be used in the absence of strong reasons to the contrary. The Tribunal agrees that "substantial" should be given its ordinary meaning. which means more than something just beyond de minimis. While terms such as "important" are acceptable synonyms, further clarification can only be provided through evaluations of actual situations. (emphasis added)
In that case the Tribunal found that the effect had been substantial, but did so in light of a loss of 72.6% of the applicant's sales. Canada (Director of Investigation and Research) v. Chrysler Canada Ltd. (1989), 27 C.P.R. (3d) 1 at 23 (CACT). Aff'd (1991), 38 C.P.R. (3d) 25, 129 N.R. 77 (Fed. C.A.); leave to appeal ref'd.
- 10 -32. A review of the Tribunal's decisions involving analysis of the term indicate that "substantial" effects will be found only in circumstances involving much more significant impacts than those described by Mrs. O's. 33. In the context of an application, such as this, for leave under s. 103.1 (7) the Tribunal found that the test of substantially affected had been met where the applicant's business had been placed in receivership and 50% of its employees had been laid off. Barcode Systems Inc. v. Symbol Technologies Canada ULC, 2004 CACT 1 at paras. 14-16.
34. In another s.103.1 (7) leave application, the Tribunal found that the applicant's business might have been substantially affected in light of the extensive financial data filed by the applicant. The applicant in that case filed materials which identified that sales of the respondent's product had previously represented 89% of the applicants operational profit and the restrictions imposed resulted in sales decreases of 46%. Allan Morgan and Sons Ltd. v. La-Z-Boy Canada Ltd. 2004 Comp. Trib. 4 File no.: CT2003009, decided on February 5, 2004 at para. 21.
35. In analysing whether there had been a "substantial" lessening of competition under s. 77 and s. 79 of the Act, the Tribunal in Canada (Director of Investigation and Research) v. Tele-Direct (Publications) Inc., compared the value of commissionable accounts. The Tribunal determined that the total of the accounts that were tied was well in excess of 50% of the current commissionable market, the amount of revenue affected by the tie was found to be sufficient to conclude that there was a substantial lessening of competition.
- 11 -Canada (Director of Investigation and Research) v. Tele-Direct (Publications) Inc. (1997), 73 C.P.R. (3d) 1 (CACT).
36. The Tribunal in Chrysler suggests that "substantial" should be given its ordinary meaning. Although not in the context of a competition law issue, the following Shorter Oxford English Dictionary definition of "substantially," was approved by Heald J.A. of the Federal Court of Appeal in General Enterprises: ... "essential"; "that is, constitutes or involves an essential part"; and "of ample or considerable amount, quantity or dimension".
General Enterprises Construction Ltd. v. Canada (Minister of Public Works, (1987) 78 N.R. 230 at 233, 25 C.L.R. 157 (Fed. C.A.).
37. Pfizer submits that as a result of the Chrysler case, "substantial" should be given its ordinary meaning and that Mrs. O's should, therefore, be required to demonstrate a considerable or significant impact on its business. The line of cases from the Tribunal considering this issue suggests that such an impact would be at least 50%. ii. Mrs. O's Has Not Established That it Has Been Substantially Affected 38. Pfizer submits that Mrs O's has failed to credibly establish that Pfizer's refusal to supply its pharmaceutical products has had anything more than a minimal impact on its business. This is not sufficient to meet the test for "substantially affected" established by the Tribunal.
- 12 -39. Mrs. O's has provided no financial statements or sales figures to demonstrate the extent to which its sales have actually been affected to-date by the fact that it has not been receiving Pfizer pharmaceutical product. Mrs. O's relies on an unattributed industry generalization as evidence of the proportion of its business that Pfizer pharmaceutical products represent. Finally, Mrs. O's relies on its own pre-operational business plan and forecasts to estimate its alleged sales declines and losses. 40. Even using Mrs. O's own estimate of 20%, Pfizer submits that Mrs. O's has failed to establish that its business is substantially affected. In light of the ordinary meaning of "substantial" and the line of cases in which it has been applied, a 20% impact is not sufficiently significant to support an application for leave under s. 103.1 (7) of the Act. 41. In any event, Mrs. O's has been given ample opportunities to continue receiving supply of Pfizer pharmaceutical product subject to Pfizer's usual trade terms, which are reasonable terms of trade. 42. In light of Mrs. O's failure to provide sufficiently credible evidence that its business has been directly and substantially affected, Pfizer submits that this application for leave should be denied. 43. Pfizer admits the facts contained in paragraphs 1, 2, 14, 15, 16, and 17 of the Statement of Grounds and Material Facts submitted by Mrs. O's. Pfizer denies or has no information regarding the statements contained in all other paragraphs.
- 13 -44. Pfizer requests that this application proceed in English. June 10, 2004
Philip Spencer, Q.C. LSUC# 11709E Tel.: 416-860-2978 Fax: 416-640-3155
Emily Winter, LSUC #46776K Tel.: 416-860-5217 Fax: 416-642-7162 Solicitors for the Respondent