





CITATION:
Shoppers Drug Mart Inc. v. Ontario (Health and
          Long-Term Care), 2011 ONCA 830



DATE: 20111223



DOCKET: C53663 and C53664



COURT OF APPEAL FOR ONTARIO



MacPherson, Epstein and Karakatsanis JJ.A.



BETWEEN



Shoppers Drug Mart Inc., Shoppers Drug Mart (London)
          Limited and Sanis Health Inc.



Applicants (Respondents on Appeal)



and



Minister of Health and Long-Term Care, Lieutenant
          Governor-in-Council of Ontario and Attorney General of Ontario



Respondents (Appellants on Appeal)



AND BETWEEN



Katz Group Canada Inc., Pharma Plus Drug Marts Ltd. and
                                                  Pharmx Rexall Drug Stores Ltd.



Applicants (Respondents on Appeal)



and



Minister of Health and Long-Term Care, Lieutenant
          Governor-in-Council of Ontario and Attorney General of Ontario



Respondents (Appellants on Appeal)



Kim Twohig, Lise G. Favreau and Kristin Smith, for the
          appellants



Mahmud Jamal, Craig Lockwood and Eric Morgan, for the Shoppers
          respondents



Terrence OSullivan and Paul Michell, for the Katz respondents



Heard: June 27, 2011



On appeal from the orders of the Superior Court of Justice
          Divisional Court (Justice Anne M. Molloy, Justice W. Larry Whalen and Justice
          Katherine E. Swinton) dated February 3, 2011, reported at 2011 ONSC 615.



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 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 Benefits 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
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 3300 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 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
    Courts reasons:

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.

[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) and
DIDFA

Regulation
, s. 9(2)):

(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 arms-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 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
    Courts 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
statutes:

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:

It is apparent from the materials filed, and from
    the legislation itself, that the governments 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 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
    governments 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:

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?

[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), 73 O.R. (3d) 1
    (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 governments 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
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
s. 6(1)(a).

[52]

Neither Shoppers not 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.

[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 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 that the
    two impugned regulations were outside this purpose of the
ODBA
and
DIDFA
statutes, and reflected that the governments 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:

[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 Courts analysis is both
    misplaced and too narrow.  The Divisional Courts 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
    Courts 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 through the use of
    non-arms 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 Ontarios 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
reg 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
    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 (Office of
    the Lieutenant Governor)
, 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.

[72]

A similar argument was disposed of in brisk fashion in
Apotex Inc. v.
    Ontario
, 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.

J.C. MacPherson J.A.

Karakatsanis J.A.


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, 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 operators 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.

·

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 products
    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 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:


The governments 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 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 governments efforts to keep drug prices low on the
    basis that due to market forces over the long term, inter-corporate control and
    associated re-direction 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
    Legislations 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 the return on investment that one corporation
    expects to achieve by investing in another.

[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 $1.00, a pharmacy
    operator would purchase that drug for $1.00, 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 example, $0.20, as an incentive to stock
    their product. The technical sale price from the manufacturer to the pharmacy
    remains $1.00, 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 pharmacys
    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 re-direction 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 governments amendments to Ontarios 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.
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 Ontarios 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. 57
    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 center  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 Ministrys June 8, 2010 letter refusing to
    list Sanis PLP drugs on the 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 Legislations 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
, 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: LexisNexis Canada
    Inc.), at pp. 310-312.

[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 the 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 ONCA 389, 283 D.L.R.
    (4th) 704, at para. 22;
Montreal v. Arcade Amusements Inc.
, [1985] 1
    S.C.R. 368
.

[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 Courts 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. The authority for such action must be
    conferred by express statutory language.

[130]

This
    principle is expressed in the Divisional Courts decision in
Bomberry v.
    Minister of Revenue for Ontario
(1989)
,
63 D.L.R. (4th) 526, [1989]
    3 C.N.L.R. 27 (Ont.).   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, 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 that [i]t
    would take express language to confer such powers on the Minister or
    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, 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.

[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] 1 S.C.R. 650, at pp. 667-68. 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 Legislations proper functioning.

[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.

RELEASED: December 23, 2011 (J.C.M.)

G.J. Epstein
    J.A.


