The Ontario Court of Appeal has upheld a provincial rule forbidding big drugstore chains from launching their own private-label generic prescription drugs.

Two of the three judges on the panel concluded that the Ontario 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," put in place "to ensure the lowest possible drug prices for the public."

Judge Gloria Epstein dissented, writing that she supported the lower court which had overturned the Ontario regulations. She said  "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 (sic) parent legislation."

The two judges in the majority, James MacPherson and Andromache Karakatsanis (recently appointed to the Supreme Court of Canada), found that the Divisional Court's ruling that the regulations were beyond the power of the Ontario government was wrong.

"With respect, the focus of the Divisional Court's analysis is both misplaced and too narrow" because it failed to approach the regulations in the context of the law, the rules governing pharmacies and the problems the regulations tried to address.

'Professional allowances' at root of issue

The case began with the province's changing of regulations covering the sale of generic drugs in 2010. Then-health minister Deb Matthews later said "private labelling does not benefit Ontarians and that's why … I am continuing to stand on the side of Ontario taxpayers and patients."

The regulations attacked $800 million in "professional allowances" or rebates that generic drug makers paid Ontario pharmacies to stock their products. The allowances were aimed at giving the manufacturers an advantage over competitors, but the resulting savings to the pharmacies were not passed on to patients.

"Studies indicated that generic drugs were more expensive in Canada compared to other countries, partly because of this rebate problem," the Appeal Court ruling said.

The move has angered big pharmacy chains like Shoppers Drug Mart and Katz Group, owner of the Rexall and PharmaPlus chains, and independent operators. They argued they'll have to make drastic changes to their business models in order to survive.

Shoppers and Katz appealed the government regulations to the Divisional Court, where they won in February. Ontario appealed to the Appeal Court, resulting in Friday's judgment.

Shoppers said Friday it was disappointed in the ruling and will review the judgment.