The Supreme Court Sends a Clear Message in Katz Group v Ontario that Judges Should Defer to Government Policy
Much of what governments do in Canada is ruled by secondary legislation. These regulations fill thousands of pages, often dealing with complex technical issues. Parliament passes statutes with general principles, which authorize government bodies to write the more detailed regulations. The Supreme Court of Canada’s (“SCC”) decision in Katz Group Canada Inc v Ontario (Health and Long-Term Care), 2013 SCC 64, provides a very clear message on how courts should decide whether regulations are consistent with the primary legislation.
In the hope of lowering provincial health care costs, the Ontario government enacted regulations so that generic drugs from manufacturers owned by pharmacies would not be eligible for the provincial drug plan. The two largest retail chains, Shoppers Drug Mart and Rexall Pharma Plus (the latter operated by the Katz Group, the named plaintiff) challenged these regulations on a wide variety of grounds. In a unanimous decision delivered by Justice Abella, the SCC decisively rejected every one of their arguments.
The Courts Below
The plaintiffs won a unanimous decision at the Divisional Court, which ruled that the regulations were ultra vires. The position taken in that court was, by hindsight, misdirected. It did not distinguish between the deference due to a sovereign government, as represented by the Lieutenant Governor in Council, and the type of review that courts undertake of administrative tribunals and municipal governments.
The Divisional Court relied on the SCC’s decision in United Taxi Drivers’ Fellowship of Southern Alberta v Calgary (City), 2004 SCC 19, to suggest that the standard of review for whether regulations are intra vires is correctness. The implication of the SCC’s decision in Katz Group is that United Taxi should have been distinguished. It referred not to central government regulations, but to a municipal by-law, which is a very different creature.
The Ontario Court of Appeal reversed the Divisional Court in a 2-1 decision, Shoppers Drug Mart Inc v Ontario (Health and Long-Term Care), 2011 ONCA 830. The majority held that the proper principle was to give deference to government on policy issues, citing an earlier dictum on a related matter from Feldman J.A. in Apotex Inc v Ontario, 2007 ONCA 570:
[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 (para. 39.)
Neither of the two lower courts cited the SCC decision which was most on point, Thorne’s Hardware Ltd v The Queen,  1 SCR 106, which was cited extensively by Abella J. The ratio decidendi of that case is neatly summed up as: “The Court cannot inquire into the validity of the beliefs upon which the Governor in Council acted.” (p. 107.)
The Proper Standard of Review
Abella J.’s judgement does not once use the common phrase “standard of review,” which figured prominently in the Divisional Court’s decision in favour of the plaintiffs, and to a lesser extent in the Ontario Court of Appeal’s judgement. At the Supreme Court, the issue has been removed from the sphere of administrative law to that of statutory interpretation to verify that secondary legislation is consistent with its enabling statute.
If the standard of review concept were to be applied to what Abella J. prescribes, it would be much lower than even “rational connection” and might perhaps best be described as simple plausibility:
Regulations benefit from a presumption of validity…. This presumption has two aspects: it places the burden on challengers to demonstrate the invalidity of regulations, rather than on regulatory bodies to justify them… and it favours an interpretative approach that reconciles the regulation with its enabling statute so that, where possible, the regulation is construed in a manner which renders it intra vires. (para. 25.)
They must be “irrelevant”, “extraneous” or “completely unrelated” to the statutory purpose to be found to be ultra vires on the basis of inconsistency with statutory purpose. (para. 28.)
Much of the discussion in the lower court, and by the dissenting judge in the Court of Appeal, related to the issue of whether the government’s ban on the ownership of generic drug manufacturing would achieve its stated objective.
This was a point made strongly by Epstein J.A. dissenting at the Court of Appeal. She held that the proper standard of review was whether there was a rational connection between the regulation and the objective of the primary legislation. She felt that this could not be decided without evidence:
“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.” (para. 97.)
No doubt, if economists had been brought in as expert witnesses on the question, there would have been disagreement on whether the regulation would succeed in lowering prices. Abella J. very decisively dismissed all such questions as irrelevant. The plausibility standard implied in her decision can be decided by a judge based on common sense, without any need for evidence:
This inquiry does not involve assessing the policy merits of the regulations to determine whether they are “necessary, wise, or effective in practice”….the judicial review of regulations, as opposed to administrative decisions, is usually restricted to the grounds that they are inconsistent with the purpose of the statute or that some condition precedent in the statute has not been observed. The motives for their promulgation are irrelevant…. Nor does the vires of regulations hinge on whether, in the court’s view, they will actually succeed at achieving the statutory objectives. (para. 27-28.)
Shoppers and Katz argued, however, that the private label Regulations were inconsistent with the statutory purpose because they neither could nor would reduce drug prices. This, with respect, misconstrues the nature of the review exercise. The animating concern of the ban is that private label manufacturers’ affiliation to pharmacies could make them more resistant to Ontario’s efforts to promote lower prices. The Regulations are therefore connected to the statutory purpose of controlling – and reducing – drug prices. Whether they will ultimately prove to be successful or represent sound economic policy is not the issue. The issue is whether they accord with the purpose of the scheme. In my view, they clearly do. (para. 39.)
Judicial review of administrative actions is a valuable safeguard of rights and the rule of law. It protects citizens against arbitrary abuses of government power, as in the landmark case of Roncarelli v Duplessis,  SCR 121. How does Katz fit in that constellation?
People who favour constraining the powers of government bureaucracies will deplore this decision. It does not quite give governments carte blanche to do as they like, but it seriously curtails any chance of challenging their policies in court. However, it is reasonable to argue that cases such as the one brought by the drug companies are a misuse of the judicial process. Corporations who feel that a policy is misguided have plenty of opportunity to make their views known through lobbying and technical meetings with government officials, where they exercise considerable influence. Courts are not the appropriate venue to decide complex matters of government economic policy.
Given the structure of our political system, it is reasonable to grant a greater degree of deference to a Minister of the Crown, as part of the Governor in Council, than to an administrative tribunal or a municipal by-law. Administrative tribunals and municipalities have no power except what is in the legislation that created them, and the government relies on the courts to ensure that they do not stray outside this boundary. By contrast, if the government is not abiding by the spirit of the legislation that has replaced the royal prerogative, it is primarily the responsibility of the legislature itself to call it to account.
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