Date: 20010126
Docket: A-185-99
CORAM: STRAYER J.A.
NOËL J.A.
EVANS J.A.
BETWEEN:
APOTEX INC.
Appellant
(Defendant)
- and -
THE WELLCOME FOUNDATION LIMITED
and GLAXO WELLCOME INC.
Respondents
(Plaintiffs)
Heard at Toronto, Ontario, Wednesday, Thursday and Friday, January 24-25-26, 2001
Judgment delivered from the Bench at Toronto, Ontario,
on Friday, January 26, 2001
| REASONS FOR JUDGMENT OF THE COURT BY: EVANS J.A. |
Date: 20010126
Docket: A-185-99
CORAM: STRAYER J.A.
NOËL J.A.
EVANS J.A.
BETWEEN:
APOTEX INC.
Appellant
(Defendant)
- and -
THE WELLCOME FOUNDATION LIMITED
and GLAXO WELLCOME INC.
Respondents
(Plaintiffs)
REASONS FOR JUDGMENT
(Delivered from the Bench at Toronto, Ontario
on Friday, January 26, 2001)
EVANS J.A.
A. INTRODUCTION
| _. This is an appeal from a decision on a reference to the Trial Division determining the extent of the infringement by the appellant, Apotex, of a patent owned by the respondents ("Wellcome"), and ordering an account of profits. The respondents have cross-appealed portions of the order. We are not persuaded that the thorough reasons given by Mackay J. (reported at (1998), 82 C.P.R. (3d) 466 (F.C.T.D.)) contain any error that would justify intervention on appeal. |
| _. Nearly all the points argued before us had been the subject of argument before the Trial Judge and, since we agree with his conclusions, we can deal with them quite briefly. Nor is it necessary to set out at length the facts; they are fully described in the reasons given by MacKay J. |
| _. It is sufficient to say that the issues arise from Apotex' importation of 116 batches of the chemical trimethoprim ("TMP") for use as one of the two active ingredients of its antibiotic tablets, Apo-Sulfatrim. The batches were acquired some time before the expiry of the respondents' patent that is relevant to this case. |
| _. Neither TMP, nor sulfamethoxazole ("SMX"), the other active ingredient of the tablets, nor their use in combination, was the subject of a patent. However, the respondents did hold a patent (the `014 patent) on the manufacture of TMP through the anilino process, which can be identified by traces of the compound TAA that is used as an intermediate ingredient in this method of producing TMP. There is also an older and less efficient way of producing TMP, the methoxy process, which was not the subject of a valid patent. The use of this method is identified by the presence in the TMP of the compound MTBP. For present purposes, we can assume that TMP containing traces of TAA was made through the infringing process, and that TMP that contained MTBP was not. |
| _. 115 of the 116 batches of the imported TMP that were used by the appellant in the manufacture of Apo-Sulfatrim tablets were tested by the respondents. 34 were found to contain no TAA, and revenues made resulting from the tablets made from these batches were therefore excluded from the account of profits. The remaining 81 batches all contained at least some TMP. Of these 81 batches, 54 batches contained only TAA and hence the whole of the TMP that went into the tablets was infringing, while 27 batches contained traces of both MTBP and TAA. There was no quantification of the infringing and non-infringing TMP in the 27 "mixed" batches. |
| _. Finally, 14 lots of tablets were made as a result of Apotex' mixing TMP from different batches: 725.6 kilograms from batches of TMP that contained infringing material were mixed with 828.4 kilograms from the non-infringing batches. |
| _. In the statement of facts put before MacKay J., the parties agreed that Apotex' revenues from the tablets containing any infringing material was $18,456,294. This included $600,000 of revenue attributable to the tablets that contained the 828.4 kilograms of non-infringing TMP that Apotex had mixed with infringing TMP. |
| _. It should also be noted at this point that in 1985 a company related to Apotex had obtained a compulsory licence to use TMP manufactured by the patented process, subject to the payment of a very small royalty of 0.11% of the revenues of sales of a product using the patented product in combination with another. However, Apotex never made use of this licence. |
| _. We turn to the arguments advanced on behalf of the appellant, Apotex. They relate both to the Judge's determination of the revenue from the sale of Apo-Sulfatrim for which Apotex was liable to account, and to the costs that the appellant was permitted to deduct from this gross amount in accounting for the profits. |
| _. Counsel rested much of the theory of his case on some overarching principles governing the equitable remedy of an account of profits. He argued that the purpose of the remedy was simply to require a defendant to disgorge profits that it had been able to make as a result of the breach of a plaintiff's rights, and thereby to prevent a defendant from being unjustly enriched at the plaintiff's expense. A plaintiff must therefore establish a clear causal nexus between any profit that it sought to recover and the breach. The remedy is not punitive in nature. |
| _. Applying these principles to the facts of this case, counsel submitted that it was incumbent on the respondents to demonstrate a non-remote causal connection between profits made by Apotex from the sale of Apo-Sulfatrim and the infringement of Wellcome's patent in TMP as made by the anilino process. And, for this purpose, it was also important to take fully into account all of the elements that contributed to the revenues from the sale of the tablets, including: the non-infringing TMP, the other active ingredient in the tablets, namely SMX, the non-active ingredients of the manufactured tablets, the NOC obtained by Apotex authorising the marketing of the tablets, advertising and the provincial listing of the tablets. |
| Issue 1: The 27 mixed batches |
| _. First, it was argued that the Trial Judge should have reduced the profits for which Apotex was liable to account by an amount that recognised that tablets made from the 27 mixed batches contained infringing and non-infringing TMP. The Trial Judge held (supra, at page 475, paragraph 22) that Apotex was liable to account for the revenue resulting from the sale of the tablets, regardless of whether all of the TMP that they contained was infringing, or whether only a small fraction of it was. He noted that there was no evidence establishing what proportion of the TMP in the mixed batches was infringing and what was not, although it would have been possible, if difficult, for either party to have ascertained what the proportions in fact were. |
| _. In our view, MacKay J. was correct to refuse to make any allowance for the fact that not all the TMP in the tablets made from the 27 mixed batches was made by the infringing process. The manufacture and sale of each tablet that contained any infringing TMP was itself an infringement of the respondents' patent. Once the respondents had proved how many Apo-Sulfatrim tablets containing infringing TMP had been manufactured and sold, they were entitled to an account of profits based on the revenue from the sales of those tablets, except to the extent that Apotex could prove what portion of the TMP in the tablets was not infringing. Apotex failed to discharge this burden with respect to the 27 mixed batches. |
| _. Second, it was argued that the presence of TAA did not necessarily indicate that the TMP in which it appeared had been produced by the infringing method. Based on the evidence before MacKay J. and on the submissions made to us, we find no error in the Trial Judge's findings against the appellant on this issue: supra, at page 475, paragraph 21. |
| Issue 2: The comparative method |
| _. The argument was advanced that Apotex could have made Apo-Sulfatrim tablets without infringing the respondents' patent and that such tablets would be equally marketable and profitable. Accordingly, it was said, Apotex should only be accountable for profits that it could not have made without infringing the respondents' patent. As authority for this proposition, counsel relied on the decision of the United States' Supreme Court in Tilghman v. Proctor, 125 U.S. 136 (1888). |
| _. Counsel argued that, at the relevant time, Apotex knew that non-infringing TMP was available on the market and that the 116 batches of TMP with which this litigation is concerned included 34 batches of it, and that there was no difference in quality or in the price to Apotex, between infringing and non-infringing TMP. Accordingly, since Apotex made no profit from the use of the infringing material that it would not have made if had it used only non-infringing material, it made no profits from the act of infringement for which it was liable in equity to account. |
| _. On the evidence, Apotex did not establish that there was a supply of non-infringing TMP readily available to it. While Apotex had managed to purchase some non-infringing material, it had also been assured by another supplier of TMP, which turned out to be infringing, that the product did not infringe the respondents' patent. In a word, Apotex could never be sure that any TMP that it purchased was non-infringing. |
| _. However, Apotex also argued that it could have exercised its rights under the compulsory licensee and thus obtained TMP without infringing the respondents' patent. Hence, since the only saving from its use of infringing TMP was the royalty fee of 0.11% of revenues that it would have had to have paid under the licence, it should not have to account for profits in excess of that fee. |
| _. In our view, however, Apotex' argument is unsound in law. Whatever may have been the law on this topic in the United States in 1886, the comparative approach is not the law in Canada today. The comparative approach has ben expressly rejected by this Court in Reading and Bates Construction Co. v. Baker Energy Resources Corp., [1995] F.C. 483, 496-97 (F.C.A.). And, even if, as counsel argued, Reading and Bates did not close the door definitively on the use of the comparative method in all cases, in the absence of Canadian authority supporting the application of this approach, it would be inappropriate in our view for this Court to take the law in the new direction urged by counsel for Apotex. |
| _. In addition to promoting certainty in an aspect of the law on which individuals may rely when making an election of remedies or attempting to settle a dispute, adopting the comparative approach would have the further disadvantage of providing no incentive to individuals to take measures to avoid infringing others' patents. It would, in effect, reintroduce the compulsory licence that Parliament abolished. As MacKay J. said (supra, at page 480, paragraph 37): |
| Utilizing any of the comparative bases here suggested would result in no, or merely nominal, compensation to the plaintiffs and would effectively undermine the regime of monopoly for the patented invention for a term of years that Parliament by the Patent Act has established. |
| _. We note also that the comparative approach urged on us by counsel was recently rejected by an English court in Celanase International Corp. v. BP Chemicals Ltd., [1999] RPC 203 (Ch. Div. (Patent Court)) in a judgment that dealt thoroughly with many of the issues about the remedy of the account of profits that are raised in the case before us. The judge, Laddie J., followed Reading and Bates, supra on this point (supra, at page 220, paragraph 39), in preference to the somewhat equivocal support that appears to have been given to the comparative approach by dicta in the much older case of Siddell v. Vickers (1892), 9 RPC 153 (Eng. C.A): supra, at pages 228-30, paragraphs 66-72. |
| Issue 3: The apportionment of the profits |
| _. Counsel submitted that, in attributing 60% of the revenues from the sale of Apo-Sulfatrim tablets to the use of the infringing TMP, MacKay J. erred in law because he took into account (supra, at page 488, paragraph 58) the fact that TMP had a greater potentiating effect than the other active ingredient, SMX. His argument was that, since TMP was not itself the subject of a patent, and that Apotex could have acquired it without infringing the respondents' patent, the Judge should have given no weight at all to the relative importance of TMP and SMX in the effectiveness of the medicine. |
| _. We do not accept this argument. In a case of this nature, apportionment calls for the exercise of judicial discretion, with which this Court should be very reluctant to interfere in the absence of some clear error of law. More particularly, it is to be noted that, having conducted the trial of the action for the infringement of the patent, as well as the reference on the account of profits, MacKay J. was well informed about all aspects of the case. |
| _. In our view, it was perfectly appropriate for the Judge to give weight to the greater potentiating qualities of TMP. Mr. Goldsmith, counsel for the respondents, succinctly pointed out that TMP does not exactly grow on trees: it has to be made. And, since the respondents' patented process was by far and away the most efficient method of so doing, MacKay J. had rightly taken into consideration the potentiating qualities of TMP. However, we also agree with counsel for Apotex' submission that, from Apotex' perspective, it did not matter that the patented method for producing TMP was more efficient. |
| _. On the other hand, we note that the relative potentiating effects of TMP was only one of the factors that MacKay J. considered and that, although TMP was said to have a potentiating effect that was between 10 and 20 times greater than that of SMX, he reduced the profits attributable to TMP by only 40%. In short, MacKay J. erred neither in taking this factor into account, nor in the weight that he attached to it. |
| Issue 4: Deductions from revenue |
| _. Counsel for Apotex made two principal submissions with respect to the expenses that Mackay J. had permitted Apotex to deduct from the revenues earned from its Apo-Sulfatrim tablets. |
| _. First, he argued that the Judge had erred in law in adopting a differential or incremental accounting method for determining what proportion of Apotex' total costs could fairly be attributed to the production, marketing and sale of Apo-Sulfatrim: supra at pages 485-86, paragraphs 50-53. He submitted that it was fairer to adopt the full absorption method of cost accounting and to allow Apotex to deduct from its total costs a proportion equivalent to that borne by the revenues from Apo-Sulfatrim to the company's total revenues. |
| _. While the full absorption method may be appropriate in some circumstances, and its use has been received some support in older United States' cases (see, for example, Tremaine v. Hitchcock & Co. 90 U.S. 518 (1874)), the incremental method has been more regularly endorsed in modern Canadian jurisprudence on the accounting of profits: Teledyne Industries Inc. v. Lido Industrial Products (1982), 68 C.P.R. (2d) 204 (F.C.T.D.); Diversified Products Corp. v. Tye-Sil Corp. (1990), 32 C.P.R. (3d) 385 (F.C.T.D.). Accordingly, it cannot be said that the judge erred in law in adopting it here. |
| _. Second, counsel submitted that, even if the judge did not err in law in rejecting the full absorption method, nonetheless he made errors in applying the incremental method to the facts. For example, he failed to permit Apotex to deduct income tax paid on the revenues earned from the sale of Apo-Sulfatrim, as well as other costs that could be attributed specifically to the production and sale of the tablets. |
| _. We are not persuaded that, on the evidence before him, MacKay J. erred in the findings of fact that he made, much less that he committed a palpable and overriding error. For instance, Apotex did not argue before the Trial Judge that it was entitled to deduct taxes and, in any event, even if it were entitled as a matter of law to deduct the tax paid on the profits made from Apo-Sulfatrim tablets (see the Celanese case, supra, at pages 248-51, paragraphs 128-39, approving the deduction of tax), Apotex did not tender its income tax returns as evidence of tax paid, but only its financial statements. These contained merely projections of tax to be paid, a very different thing from a statement showing the amount of tax actually paid in particular years. |
| _. More generally, it may be noted that Apotex had not maintained financial records in a way that made it clear what expenses could be attributed to its various product lines, including Apo-Sulfatrim, even though it had known since 1983 that the respondents had the option of seeking an account of profits in respect of these tablets if liability for infringing their patent were established. Moreover, as counsel for Apotex accepted, his client had the burden of proving that it was entitled to a particular deduction. |
| _. Counsel for Apotex submitted that the Trial Judge had erred in setting the rate of pre-judgment interest at prime plus 1%: supra, at pages 489-90, paragraphs 61-63. In particular, he submitted that it was evident from the financial statements that Apotex had been able to obtain secured loans at a lower rate of interest than that. Accordingly, he argued, it was an error for the Judge to conclude that, as a result of the profits that it had made through breaching the respondents' patent, Apotex had saved the cost of borrowing at prime plus 1%. |
| _. In our view, the evidence before MacKay J. was not sufficient for us to conclude that, in fixing the interest rate as he did, he committed a reversible error on a matter that was largely within his discretion. |
| _. Nor do we agree that he erred when he considered the revenues on which the interest was computed to have been received on the date of the invoice. While there may often have been a time lag between the invoice and the actual receipt of revenue, Apotex became entitled to the invoiced amounts as of that date and introduced no evidence that would have enabled the Trial Judge to choose another date. |
Issue 1: The 828.4 kilograms
| _. Counsel for Wellcome argued that MacKay J. had erred in law when he removed from the revenues for which Apotex was liable to account, the $600,000 that it was agreed could be attributed to the sale of Apo-Sulfatrim tablets containing the 828.4 kilograms of non-infringing TMP that Apotex itself had mixed with 725.6 kilograms of infringing TMP: supra, at page 477, paragraph 26. |
| _. The argument was that, by mixing the non-infringing with infringing material, Apotex had increased the number of tablets that contained infringing TMP and that, since the accounting of profits was based on the number of infringing tablets that Apotex had produced, it should have to account for the revenues attributable to the tablets containing the 828.4 kilograms of non-infringing TMP. The fact that Apotex did not increase its revenues by even a cent as result of the mixing is, it was argued, irrelevant. |
| _. We agree with the Trial Judge that Apotex is not liable to account for this sum, although we would express the reasons for so concluding a little differently. In our view, Apotex is not liable to account because it is able to discharge the onus of proving how much non-infringing TMP was contained in the 14 lots of tablets made from the mixed batch: namely, 828.4 kilograms out of a total of 1554.0 kilograms of TMP. |
| _. In fact, since some of the infringing TMP that Apotex mixed with the 828.4 kilograms of non-infringing TMP came from the 27 batches that contained both infringing and non-infringing TMP, the 1554.0 kilograms must have included more than 828.4 kilograms of non-infringing TMP. However, since Apotex was unable to quantify the amount of non-infringing TMP that the 27 mixed batches contained, it was not entitled to deduct more than the revenues from the 828.4 kilograms. |
| _. Counsel for Wellcome conceded that the explanation advanced above was one possible interpretation of what the Trial Judge had meant when he said (ibid.) that the 828.4 kilograms should be excluded because their use was "already accounted for in assessing the extent the infringement by use of the 81 batches containing TAA." |
| _. Counsel submitted that MacKay J. had erred in law when he decided that it was appropriate to reduce by 40% the profits for which Apotex must account, in recognition of the presence of the other active ingredient in Apo-Sulfatrim, namely the non-infringing chemical SMX. Counsel for Wellcome relied on [1937] S.C.R. 36">Colonial Fastener Co. Ltd. v. Lightning Fastener Co. Ltd., [1937] S.C.R. 36 as authority for the proposition that apportionment is not appropriate merely because a product contained within it a part that had been manufactured by a patented process. |
| _. We were not persuaded on the strength of this decision that it was an error of law for the Judge to have apportioned in the case before us. Colonial Fastener was a damages, not an account of profits case and, despite their similarities, the principles applicable to the equitable remedy of an account of profits and to the common law remedy of damages are not necessarily identical in all respects. |
| _. Moreover, in the more recent decision in Lubrizol Corp. v. Imperial Oil Ltd., [1997] 3 F.C. 3 at page 10, paragraph 10 (F.C.A.), it was clearly assumed that, when a product contained more than one ingredient, only one of which was the subject of a patent, it was appropriate in principle to apportion the revenues between those attributable to the infringing ingredient and those that were not. However, whether apportionment was appropriate depended in large part on whether it is feasible as a matter of fact. The Lubrizol approach was approved in the Celanese case, supra, at pages 221-23, paragraphs 46 and 51. |
| _. Counsel conceded that if, contrary to his submission, apportionment was appropriate, he accepted as correct the Trial Judge's 60:40 apportionment in favour of Wellcome. |
| _. Counsel took issue with some of the deductions allowed by the Trial Judge, arguing that there was simply insufficient evidence for him to find that the production, marketing and sale of Apo-Sulfatrim had resulted in increased costs to Apotex, in respect, for example, of annual labour and factory overhead, salespersons' salaries and advertising. He emphasised that Apotex had not maintained adequate records from which the necessary calculations could reliably be made, despite its obligation so to do after it had been put on notice that Wellcome intended to seek an account of profits. |
| _. Again, we are not persuaded that the evidence was so deficient that MacKay J.'s findings of fact on these issues can be characterised as vitiated by palpable and overriding error. No doubt the evidence before the judge was much less complete than it might have been. Nonetheless, in all the circumstances of this case, we are not satisfied that his estimation of the costs can be characterised as merely a hunch. There was sufficient evidence to justify the result that he reached. |
| _. For these reasons, we would dismiss the appeal and the cross-appeal, both with costs. |
"John M. Evans"
J.A.
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