Merck & Co. Inc. v. S. & U. Chemicals Ltd., [1974] SCR 839

Supreme Court of Canada

Merck & Co. v. S. & U. Chemicals Ltd., [1974] S.C.R. 839

Date: 1972-03-30

Merck & Co. Inc. Appellant;

and

S. & U. Chemicals Limited Respondent;

and

Attorney General of Canada Intervenant.

1972: March 2, 3; 1972: March 30.

Present: Abbott, Judson, Ritchie, Hall and Spence JJ.

ON APPEAL FROM THE EXCHEQUER COURT OF CANADA

Patents—Compulsory licence covering eleven patents—Single royalty for their use—Licence referred back to Commissioner for reassessment of the royalty‑Patent Act, R.S.C. 1952, c. 203, ss. 41(3) and 41(4).

The Commissioner of Patents granted a compulsory licence under s. 41(4) of the Patent Act, from appellant to respondent, covering eleven patents relating to medicines, and fixed the royalty at four per cent of the net selling price of the licensee. The Exchequer Court upheld the decision of the Commissioner to grant the licence with a single royalty for the use of all the patents, but referred the licence back to the Commissioner for reassessment of the royalty. Hence the appeal to this Court, and the cross-appeal by respondent against referral of the licence back to the Commissioner.

Held: The appeal should be dismissed, and the cross-appeal allowed.

The decision of the Commissioner to grant the licence with one royalty for the use of all the patents was upheld from the Bench.

The Commissioner’s duty is not merely to put a stamp of approval either on the agreement of the parties or on a figure in some way related to what the proposed licensee offers to pay and what the patentee asks for. His duty in fixing the amount of the royalty is to have regard to the desirability of making the medicine available to the public at the lowest possible price consistent with giving to the patentee due reward for the research leading to the invention and for such other factors as may be prescribed. There was nothing in the record to indicate that he did not perform that duty.

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APPEAL from a judgment of the Exchequer Court affirming the decision of the Commissioner of Patents, but referring the licence back to him for reassessment of the royalty. Appeal dismissed. Cross-appeal allowed.

D. Watson and D. French, for the appellant.

I. Goldsmith, Q.C., for the respondent.

D. Aylen, Q.C., for the Attorney General of Canada.

The judgment of the Court was delivered by

JUDSON J.—The subject-matter of this appeal is the grant by the Commissioner of Patents under s. 41(4) of the Patent Act of a compulsory licence from Merck & Co. to S. & U. Chemicals covering eleven patents. S. & U. Chemicals, in its application, sought liberty:

(a) to import and sell a drug known as Methyldopa in the preparation or production of which the inventions described in Canadian Patents Nos. 573568, 707354, 724687, 743125, 743128, 759063, 778412, 778413, 778414, 797869, owned by the Appellant and hereinafter referred to as the “Methyldopa patents”; and

(b) to import, use and sell the substances described in Patents Nos. 573,568, 743,125, 743,128, 759,063, and 797,869 for medicine.

Methyldopa is a drug which is useful as an anti-hypertensive agent.

The Commissioner fixed a royalty of four per cent of the net selling price of the licensee. On appeal, the Exchequer Court rejected the complaint of Merck & Co. that the Commissioner was bound to fix a separate royalty for the use of each of the inventions but referred the licence back to the Commissioner for reconsideration and reassessment of the royalty.

Merck & Co. asks this Court to set aside the decision of the Commissioner to grant the licence with one royalty for the use of all the

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patents. We dismissed from the Bench this branch of the appeal.

S. & U. Chemicals cross-appeals against the decision of the Exchequer Court to refer back the reassessment of the royalty and asks us to affirm the decision of the Commissioner in awarding four per cent of the net selling price. Merck & Co. supports the decision of the Exchequer Court. The Attorney General of Canada takes no position on this aspect of the appeal.

The basis of the decision of the Exchequer Court on the amount of the royalty is that S. & U. Chemicals in its application for a licence had offered to pay at the rate of 15 per cent on the duty paid landed cost of the drug. It was said in argument that in some circumstances this might amount to double what the Commissioner actually awarded.

The principles to be applied in a matter of this kind are not in doubt. They were summarized in this Court in Hoffman-La Roche Limited v. Bell-Craig Pharmaceuticals Divisions of L.D. Craig Limited[1], at p. 316:

Under s. 41(3), the decision both as to whether a licence should issue, and if so the royalty to be paid, was one for the Commissioner to make. While an appeal lies from that decision, in order to succeed it is for the appellant to show that the Commissioner acted on a wrong principle or that, on the evidence, the decision was manifestly wrong.

Contrary to the opinion expressed in the Exchequer Court, I do not think that these requirements have been met in the present case. There are indications in the reasons of Thurlow J. that he himself was in some doubt on the problem. I quote the following extract from his reasons:

I find it impossible to draw firm conclusions from any of this evidence and I do not think it was possible for the Commissioner to draw firm conclusions from it. One thing, however, that it does suggest to me is that the percentage found by the Commissioner does not err on the high side. That, however, does not mean that I think this evidence shows that it is too low, or

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that it is manifestly too low, or even that it is lower than I might have set had I been exercising the Commissioner’s function for on the information to which I have referred I could have reached no conclusion at all other than an arbitrary one.

However, he finally decided to refer the royalty back for further consideration. His decision is in the following paragraph:

The matter was, of course, one for the Commissioner to decide and in reaching his decision he was required by the statute to have regard to the desirability of making the medicine available to the public at the lowest possible price consistent with giving the patentee due reward for the research leading to the invention. It is, I think, conceivable that that statutory requirement might in some cases justify an award somewhat lower than the royalty offered by the applicant for a licence but, to my mind, if it did the result would depend on the facts of the particular situation. In the present case there appears to me to be nothing in the material before the Court which indicates any basis for a conclusion that a royalty of but half of what the respondent offered would be adequate and in the absence of any statement in the licence as to how the Commissioner’s decision was reached I have come to the conclusion that the inference as to the value of the rights sought which is to be drawn from the respondent’s submission, either has been overlooked or has not been accorded adequate weight. Accordingly, on the material before the Court the royalty set by the Commissioner appears to me to be manifestly too low and unless the parties see fit to concur in my fixing a royalty on that material in order to avoid referring the matter back to the Commissioner, I shall refer it back to him for reconsideration and reassessment either on the basis of the material presently in the file or on it and such further material, if any, as he may in his discretion see fit to permit the parties to offer.

There appear to be three main grounds for his decision to refer the royalty back: (1) the offer by S. & U. Chemicals to pay a higher royalty than the one awarded; (2) the absence of material justifying a preference for one figure over the other; and (3) the absence of any statement in the licence of the reason for preference.

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Undoubtedly, the offer of S. & U. Chemicals made in the first document filed on its application for the compulsory licence to pay a royalty of 15 per cent of the net value for import of the drug imported in bulk and resold in bulk is and was a matter for serious consideration. Merck & Co., by its counter-statement, opposed the granting of the licence and rejected the royalty. In its reply, S. & U. Chemicals changed its proposed royalty to four per cent of the net retail price of the drug in its finished dosage form. These manoeuvres of the parties must have been considered by the Commissioner. These include the original offer and its rejection, the change in the offer, and Merck & Co.’s request at one stage for 15 per cent of the retail price in its finished dosage form.

He, however, has an independent function to perform. His duty is not to put a stamp of approval either on the agreement of the parties or on a figure in some way related to what the proposed licensee offers to pay and what the patentee asks for. His duty in fixing the amount of the royalty is to

have regard to the desirability of making the medicine available to the public at the lowest possible price consistent with giving to the patentee due reward for the research leading to the invention and for such other factors as may be prescribed.

There is nothing in the record before us to indicate that he did not perform that duty, that he acted on a wrong principle, or that the decision was manifestly wrong.

I would allow the cross-appeal with costs.

Appeal dismissed. Cross-appeal allowed with costs.

Solicitors for the appellant: Gowling & Henderson, Ottawa.

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Solicitors for the respondent: Ferguson, Goldsmith & Caswell, Toronto.

Solicitor for the Attorney General of Canada: D.H. Aylen, Ottawa.