Docket: A-242-13
Citation:
2015 FCA 171
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CORAM:
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DAWSON J.A.
STRATAS J.A.
BOIVIN J.A.
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BETWEEN:
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APOTEX INC. and
APOTEX FERMENTATION
INC.
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Appellants
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and
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MERCK &
CO., INC. and
MERCK CANADA INC.
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Respondents
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REASONS
FOR JUDGMENT
DAWSON J.A.
[1]
The principal issue raised on this appeal is
whether, when calculating damages for patent infringement, it is relevant to
consider the availability of non-infringing alternative products available to
the infringer. For the reasons that follow I have concluded that, as a matter
of law, the availability of a non-infringing alternative is a relevant
consideration. The issue arises in the following context: Apotex has been found
liable for patent infringement. On the issue of remedy, Apotex submits that the
damages it is liable for should be reduced because it had available a
non-infringing product that it could and would have used. On the evidentiary
record before us, I disagree. Therefore, I would dismiss the appeal with
costs.
I.
Factual Background
[2]
Merck & Co. Inc. (Merck & Co.) is the
named patentee of Canadian Patent No. 1,161,380. The patent is a
product-by-process patent for the anti-cholesterol drug lovastatin (AFI-1
process). The patent issued to Merck & Co. in 1984 and expired on January 31,
2001. Merck Canada Inc. (Merck Canada) or its corporate predecessor has sold
lovastatin in Canada under the trade name MEVACOR since 1988 under licence from
Merck & Co.
[3]
Merck & Co. and Merck Canada are
collectively referred to as Merck or the respondents in these reasons.
[4]
In 1993, Apotex Inc. applied to the Minister of
Health for a notice of compliance that would enable it to market a generic
version of lovastatin in Canada. Apotex alleged it would not infringe the patent
because it would use a process to produce lovastatin that would not fall within
the scope of the patent (AFI-4 process).
[5]
A notice of compliance was issued to Apotex on
March 27, 1997.
[6]
In 1997, Merck commenced an action against
Apotex Inc. and Apotex Fermentation Inc. (AFI) (together the appellants or
Apotex) alleging infringement of the patent. After a lengthy trial, a judge of
the Federal Court found that the patent was valid and had been infringed (2010
FC 1265).
[7]
Specifically, the Judge found the patent to have
been infringed in two respects. First, the Judge found that one batch of
lovastatin manufactured in or around November 1996 by AFI in Winnipeg (batch CR0157)
was prepared using the patented process. Second, in 1997 Apotex transferred
production of lovastatin from AFI in Winnipeg to Qingyuan Blue Treasure
Pharmaceutical Co. Ltd. (Blue Treasure), a Chinese joint venture company in
which AFI held a 42.5% share. The transfer of the AFI-4 process and technology
to Blue Treasure was made on the basis that the lovastatin purchased from it by
Apotex would be produced exclusively with the AFI-4 process. Notwithstanding, the
Judge found that after March 1998 and continuing until around March 2000, 294
batches of lovastatin were produced by Blue Treasure using the patented
process.
[8]
The Judge characterized this infringement to be
significant. Approximately 60% of Apotex’ sales made between March 1997 and the
expiry of the patent were sales of infringing lovastatin. On a volume basis,
approximate 71% of the total amount of bulk lovastatin supplied to Apotex Inc.
by AFI (either directly or through Blue Treasure) was infringing material.
[9]
The Judge also found that the respondents were entitled
to compensatory damages rather than an accounting of profits.
[10]
Following the exhaustion of all rights of appeal
relating to the liability phase, the Judge embarked on a lengthy inquiry into
the quantification of Merck’s damages.
[11]
Briefly stated, for reasons cited as 2013 FC 751,
the Judge found that Merck was entitled to a total damages award of $119,054,327,
plus pre-judgment and post-judgment interest. The damages were comprised of:
i)
$62,925,126 as lost profits of Merck Canada in
respect of pre-expiry replacement sales (as defined in the reasons of the Federal
Court);
ii)
$51,290,364 as lost profits of Merck & Co.
in respect of pre-expiry replacement sales;
iii) $2,696,963 based on a reasonable royalty calculation, for post-expiry
infringing domestic sales; and
iv) $2,141,874 based on a reasonable royalty calculation, for infringing
export sales.
[12]
These damages were calculated on the basis that
the Judge rejected the argument advanced by Apotex and AFI that the
availability of non-infringing lovastatin should be taken into account in
assessing damages.
II.
The Issues
[13]
In their memorandum of fact and law the
appellants asserted that the Judge committed a number of reviewable legal
errors, including awarding pre-judgment interest at a rate greater than the
Bank Rate. At the hearing of the appeal the appellants advised that they would
not pursue the argument that the Judge erred by awarding pre-judgment interest
based on an augmented Bank Rate. The remaining issues continue to be live.
[14]
As set out above, I have concluded that the
Judge erred by rejecting the legal relevance of the non-infringing alternative
when computing the compensatory patent infringement damages. However, recognizing
the legal relevance of the non-infringing alternative process by itself does
not assist the appellants. An additional issue must be determined on the
evidence: has Apotex made out its case as a matter of fact?
[15]
Thus, I would state the issues to be:
i)
Did the Judge err in law by rejecting the legal
relevance of non-infringing lovastatin when computing damages for patent
infringement?
ii)
If the Judge so erred, has Apotex made out its
case based upon the existence of non-infringing lovastatin?
iii) Did the Judge err in assessing the royalty rate applicable to
pre-expiry infringing sales?
iv) Did the Judge err in assessing the royalty rate applicable to
post-expiry infringing sales?
v)
Did the Judge err by determining that Merck &
Co. had standing to bring a claim for damages by virtue of its exclusive
licence agreement with Merck Canada?
III.
The Standard of Review
[16]
The standard of review applicable to the issues
raised in this case are as described by the Supreme Court in Housen v.
Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. The standard of review to be
applied to questions of law is correctness. Findings of fact and inferences of
fact are to be reviewed on the basis of palpable and overriding error. Findings
of mixed fact and law are to be reviewed on the same deferential standard
unless an extricable legal error can be demonstrated, in which event such error
is reviewed on the correctness standard.
[17]
Where required, the standard of review will be
discussed in greater detail in the context of the analysis of each issue
asserted by the appellants.
IV.
The Decision of the Federal Court
A.
The relevance of non-infringing alternatives
[18]
The Judge dealt with this issue at paragraphs 26
through 121 of her reasons. She began her analysis by briefly setting out the
respective positions of the parties.
[19]
Merck Canada claimed lost profits in respect of
the MEVACOR tablets it would have sold domestically to replace every infringing
Apo-lovastatin tablet sold domestically prior to the patent’s expiry. The Judge
defined these tablets and sales to be the pre-expiry replacement tablets or
sales (reasons at paragraph 11).
[20]
The appellants countered by submitting that,
except for the tablets that formed part of infringing batch CR0157 prepared in
Winnipeg, Merck Canada should only be entitled to a reasonable royalty because
it could not show that its damage was sustained “by
reason of the infringement” as required by subsection 55(1) of the Patent
Act, R.S.C. 1985, c. P-4 (Act) (reasons at paragraph 32).
[21]
This submission was premised on the basis that,
commencing in March 1997, as a result of its AFI-4 process Apotex had available
a non-infringing alternative. Apotex submitted that the
“but for” causation test should take into account that from the day it
received its notice of compliance it had the regulatory approval, capacity and
capability to produce all pre-expiry replacement tablets sold in Canada. It
followed, in Apotex’ submission, that Merck Canada had not demonstrated that
its loss was caused by the wrongful use of its AFI-1 process by Apotex. It
further followed that Merck Canada’s loss should be limited to a reasonable
royalty on all pre-expiry replacement sales.
[22]
Merck responded that Canadian law did not
recognize the relevance of non-infringing alternatives.
[23]
Having framed the competing positions, the Judge
reviewed the general principles applicable to the assessment of damages under
subsection 55(1) of the Act (reasons at paragraph 41).
[24]
The Judge then considered the compensatory
principle of damages and the burden on Merck Canada to show that, but for the
infringement, it would have made the sales in question (reasons at paragraph
42).
[25]
She rejected the appellants’ submission that
Merck could not prove that Merck Canada would have sold the pre-expiry
replacement tablets in the “but for scenario” because
Apotex had access to a non-infringing alternative. In her view, if the appellants
had not infringed the patent, Merck Canada would have sold every pre-expiry
replacement tablet (reasons at paragraph 56).
[26]
The Judge gave four reasons for her conclusion:
i)
Causation was adequately considered when she
concluded that Merck’s lost sales were not recoverable when Apotex used the
non-infringing AFI-4 process (reasons at paragraph 52).
ii)
The appellants’ argument conflated causation
with the subsequent quantification of damages (reasons at paragraph 53).
iii) Causation in the context of tort law is directed to the original
position of the plaintiff. Therefore, Apotex’ own hypothetical action was
irrelevant (reasons at paragraph 54).
iv) The Judge distinguished Cadbury Schweppes Inc. v. FBI Foods Ltd.,
[1999] 1 S.C.R. 142, 167 D.L.R. (4th) 577 relied upon by Apotex. In her
view, the case concerned a breach of confidence and involved equitable
principles that were not applicable in the context of damages for patent
infringement (reasons at paragraph 55).
[27]
The Judge then reviewed Canadian and British
jurisprudence and concluded that the current state of Canadian law was that the
existence of a non-infringing alternative was not relevant to an assessment of
damages for patent infringement (reasons at paragraphs 57 to 76).
[28]
The Judge went on to reject four arguments
advanced by the appellants to support the submission that Canadian law
concerning the relevance of non-infringing alternatives had changed or should
change:
i)
In her view, the Supreme Court of Canada did not
alter the jurisprudence in Monsanto Canada Inc. v. Schmeiser, 2004 SCC
34, [2004] 1 S.C.R. 902. At issue there was an accounting of profits. Nothing
suggested the principles applicable to an accounting of profits could or should
be applied to the assessment of damages (reasons at paragraphs 77 to 82).
ii)
While the Judge acknowledged the legal relevance
of non-infringing alternatives in American jurisprudence, the American
statutory provisions are very different from those of Canada and the United
Kingdom (reasons at paragraphs 91 to 97).
iii) Academic writing by Professor Norman Siebrasse was not precedential.
Professor Siebrasse merely wished Canadian law recognized the non-infringing
alternatives defence. Further, he was acknowledged by Apotex to be the “lone voice in the wilderness” (reasons at paragraphs
98 to 106).
iv) Although non-infringing alternative-type arguments were recognized
in the context of the calculation of damages under section 8 of the Patented
Medicine (Notice of Compliance) Regulations, SOR/93-133, the approach was
not applicable to the calculation of damages under subsection 55(1) of the Act
(reasons at paragraphs 107 to 112).
[29]
Finally, at paragraphs 113 to 120 of her
reasons, the Judge gave four policy reasons for rejecting the legal relevance
of non-infringing alternatives:
i)
a patentee would be inadequately compensated;
ii)
the non-infringing alternative was already taken
into account because Merck could not claim lost profits in respect of sales
lost to non-infringing Apo-lovastatin;
iii) acknowledging the relevance of non-infringing alternatives would
create an incentive to infringe; and
iv) acknowledging the relevance of non-infringing alternatives would be
inconsistent with Canada’s repeal of the compulsory licensing regime and Canada’s
international obligations (specifically article 1709(10) of the North
American Free Trade Agreement and article 31 of the Agreement on
Trade-Related Aspects of Intellectual Property Rights).
B.
The calculation of a reasonable royalty for
pre-expiry infringing sales
[30]
The Judge considered that, if she were wrong
with respect to the relevance of the non-infringing alternatives, a reasonable
royalty should be fixed for all lost domestic sales where Apotex could have competed
without infringing the patent — the pre-expiry replacement tablets or sales.
[31]
Without calculating a royalty amount, the Judge
proposed a framework for the hypothetical negotiation of a lump sum royalty.
Such royalty would be between the appellants’ maximum willingness to pay (representing
the maximum amount that would leave Apotex better off by taking a licence), and
the respondents’ minimum willingness to accept (below which Merck would not
accept an amount for entry) (reasons at paragraphs 166 to 167).
[32]
I have concluded that, while at law a
non-infringing alternative is legally relevant, the appellants failed on the
evidence to establish they could and would have pursued the non-infringing
alternative. Therefore, it is not necessary to consider in any further detail
the Judge’s reasons on this alternate finding.
C.
The calculation of a reasonable royalty for
post-expiry infringing sales
[33]
During the life of the patent, Apotex stockpiled
infringing bulk lovastatin and then sold it in tablet form after the patent
expired. The parties and the Judge agreed that the appropriate damages award
would be based upon a reasonable royalty in respect of these sales (reasons at
paragraphs 185 to 189).
[34]
The Judge assessed a reasonable royalty based on
the methodology advanced by Merck’s expert. The royalty was calculated by
taking the mid-point of the per kilogram cost savings to Apotex by using the
infringing process, multiplied by the weight of the infringing lovastatin sold
after the patent expired (reasons at paragraphs 191 and 199).
D.
Lost profits of Merck US
[35]
Merck US claimed damages for lost sales because
Merck Canada was required to acquire its bulk lovastatin from it. Apotex argued
Merck US was not entitled to any significant damages because in 1992 it entered
into an exclusive licence agreement with Merck & Co. In Apotex’ view, as a
result Merck US was a nominal patentee with no right to
“monetize” the patent.
[36]
The Judge rejected this submission. In her view,
granting an exclusive licence to use the invention did not confer any interest
or property in the patent; granting an exclusive licence does not detract from
the patentee’s ability to claim its own damages if caused by the infringement
(reasons at paragraphs 241 to 244).
[37]
Having framed the issues and summarized the
approach of the Federal Court to the issues, I turn to consideration of the
issues.
V.
Consideration of the Issues
A.
Did the Judge err in law by rejecting the legal
relevance of non-infringing lovastatin when computing damages for patent
infringement?
[38]
Patents are said to be creatures of statute (Teva
Canada Ltd. v. Pfizer Canada Inc., 2012 SCC 60, [2012] 3 S.C.R. 625, at
paragraph 45 (Sildenafil); and, Apotex Inc. v. Wellcome Foundation Ltd.,
2002 SCC 77, [2002] 4 S.C.R. 153, at paragraph 37 (AZT)). The statutory basis
for a claim to damages as a result of patent infringement is subsection 55(1)
of the Act:
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55. (1) A
person who infringes a patent is liable to the patentee and to all
persons claiming under the patentee for all damage sustained by the
patentee or by any such person, after the grant of the patent, by reason
of the infringement. [emphasis added]
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55. (1) Quiconque
contrefait un brevet est responsable envers le breveté et toute personne
se réclamant de celui-ci du dommage que cette contrefaçon leur a fait
subir après l’octroi du brevet. [Je souligne.]
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[39]
The issue to be resolved on this appeal is
whether the requirement that damages be sustained “by
reason of the infringement” is, as the Judge found, in some way
restricted so that a court is required to disregard legitimate competition from
an infringer? In the alternative, is potential legitimate competition from the
infringer a legally relevant consideration? This is a question of statutory
interpretation subject to review on the correctness standard.
[40]
To the extent that the text of subsection 55(1)
may be seen to permit either interpretation, in my view any ambiguity is
settled when the purpose and the statutory context of the provision are
considered.
[41]
The purpose of an award of damages is to
compensate a patentee (or any entity claiming under the patentee) who has
suffered loss as a result of patent infringement. The concept of compensation
rejects both under-compensation and over-compensation.
[42]
The Act as a whole is intended to advance
research and development, and to encourage broader economic activity (Free
World Trust v. Électro Santé Inc., 2000 SCC 66, [2000] 2 S.C.R. 1024,
at paragraph 42). The Act coaxes inventive solutions to practical problems into
the public domain through the promise of a limited monopoly for a limited
period of time (AZT at paragraph 37). At the heart of this bargain with the
inventor, and at the heart of the Act, is the concept of balance between the
benefit conferred on the public through the disclosure of a new and useful
invention, and the benefit conferred on the inventor through the grant of a
monopoly. Thus, in the event of infringement, under-compensation of an inventor
discourages research and development, and the disclosure of useful inventions.
Equally, over-compensation of an inventor chills potential competition to the
extent that a potential infringer is uncertain about the scope and validity of
a patent. The balance at the heart of the Act requires perfect compensation.
[43]
With this in mind, the inquiry must move to
which possible interpretation of subsection 55(1) leads to perfect
compensation? By requiring that damages for infringement must arise “by reason of the infringement”, the Act invokes the
principle of causation. Therefore, it is necessary to understand the role of
causation in the quantification of compensatory damages.
[44]
The Supreme Court has explained causation to be
the expression of the relationship that must be found to exist between the
wrongful conduct of the defendant, and the injury to the plaintiff which
justifies the payment of compensation to the plaintiff by the defendant (Snell
v. Farrell, [1990] 2 S.C.R. 311 at page 326, 72 D.L.R. (4th) 289). At page
328 of the Supreme Court Reports, the Supreme Court stated that causation need
not be determined by scientific precision: it is
“essentially a practical question of fact which can best be answered by ordinary
common sense”.
[45]
The legal test for establishing causation is the “but for” test. A plaintiff must show on a balance of
probabilities that “but for” the defendant’s
wrongful conduct, the plaintiff would not have suffered loss. This is a “factual inquiry” to be established on the evidence. The “but for” test for causation is to be applied in a “robust common sense fashion” (Clements v.
Clements, 2012 SCC 32, [2012] 2 S.C.R. 181, at paragraphs 8 and 9).
[46]
These principles are not controversial and were
accepted by the Judge (reasons at paragraph 49). In applying these principles
the Judge accepted that if the defendant could prove that a third-party
competitor would have been able to capture some sales of lovastatin, the
plaintiff would not be entitled to its lost profits, and instead would be
limited to a reasonable royalty (reasons at paragraph 115).
[47]
This said, the Judge refused to apply principles
of causation to the actions of Apotex, dismissing “a
fiction that the defendant could have used a non-infringing alternative
(but did not)” and finding it not to be
“punitive to compensate Merck for lost profits where the Defendants could have
(but did not) use the non-infringing alternative” (reasons at paragraphs 115
and 116). As developed below, in my respectful view, the Judge erred in these
passages in her application of the principles of causation. As well, in these
passages the Judge erred by conflating the relevance of the non-infringing
alternative with the availability of the non-infringing alternative in fact.
[48]
The difficulty with the Judge’s approach is that
if damages for lost profits are calculated never having regard to an available
non-infringing alternative, the patentee will sometimes be better off than it
would have been in the absence of infringement. This is so for the following
reason. Where a defendant can make and sell a non-infringing alternative, the
patent does not confer a complete monopoly on the patent holder. Instead, the
patent confers a share of market power upon the patentee. In this circumstance,
where, instead of using a non-infringing alternative, a defendant infringes, it
is a question of fact whether, “but for” the
infringement, the defendant would not have competed with it. The defendant’s
lawful competition in the “but for” world may have
deprived the patentee of some sales.
[49]
Put another way, in cases where, in the “but for” world, the infringer could and would have
made and sold a non-infringing alternative, these sales may well reduce the
patent owner’s sales. Awarding the patentee full damages for lost profits in
every case will, therefore, sometimes over-compensate the patentee.
[50]
Perfect compensation requires consideration of:
(i) what, if any, non-infringing product the defendant or any other competitors
could and would have sold “but for” the
infringement; and, (ii) the extent lawful competition would have reduced the
patentee’s sales.
[51]
I find support for this analysis in American
jurisprudence and in the decision of the Supreme Court in Monsanto.
[52]
American jurisprudence tends to apply the “but for” test in a similar way. Under the American
law for damages for patent infringement (35 U.S. Code § 284 (2011)), in order
to recover lost profits a patent owner must show causation in fact,
establishing that “but for” the infringement,
the patentee would have made additional profits (King Instruments Corp. v.
Perego, 65 F. 3d 941 at page 952 (Fed. Cir. 1995)). When a patent owner
seeks to recover alleged lost profits on lost sales, the patentee has the
initial burden to establish a reasonable probability that it would have made
the alleged sales “but for” the infringement.
Once the patentee establishes this, the burden shifts to the alleged infringer
to establish that the patent owner’s “but for”
causation claim is unreasonable for some or all of the lost sales (Rite-Hite
Corp. v. Kelley Co. Inc., 56 F. 3d 1538 at pages 1544-1545 (Fed. Cir. 1995
(en banc)).
[53]
The state of American jurisprudence is that if a
non-infringing alternative which a defendant could and would have
resorted, but for the infringement, is as good as the patented invention, and
would have replaced all infringing sales, the infringement causes the patentee
to suffer no damage.
[54]
In Grain Processing Corporation v. American
Maize-Products Company, 185 F.3d 1341 at pages 1350-1351 (Fed. Cir. 1999),
Judge Rader (as he then was), writing for the Court, explained the two
principal rationales for taking into account the availability of a
non-infringing alternative.
[55]
First, a patentee claiming damages is required
to reconstruct the market to project economic results that did not occur. This
is a hypothetical enterprise. To “prevent the
hypothetical from lapsing into pure speculation” courts require sound
economic proof of the nature of the market and the likely outcomes with
infringement factored out of the economic picture. Within this framework,
patentees are permitted to present market reconstruction theories showing all
of the ways in which they would have been better off in the “but for” world. A fair and accurate reconstruction
of the “but for” world must also take into
account relevant, alternative actions an infringer foreseeably could and would
have undertaken had he not infringed.
[56]
Second, only by comparing the patented invention
to non-infringing alternatives can a court discern the market value of the
patent owner’s exclusive right, and therefore his expected profit or reward.
Judge Rader quoted with approval from John W. Schlicher, Patent Law: Legal
and Economic Principles (New York: Thomson West, 1997) to the effect that “unless the law wishes to systemically overreward patented
inventions, it is necessary to inquire about the nature and value of the
product that the infringer could have made had he not infringed”.
[57]
Thus, American jurisprudence is clearly to the
effect that the “but for” causation inquiry
requires consideration of non-infringing alternatives. Otherwise, patentees may
be over-compensated.
[58]
Before considering Monsanto, by way of
context I note that the ordinary monetary remedies available for patent
infringement are damages and an accounting of profits. While the Act does not
explicitly provide for an accounting of profits, it references this remedy in
paragraph 57(1)(b) which allows a court, in an action for infringement,
to make an order “for and respecting inspection or
account”. The jurisprudence makes clear that this remedy exists as an
alternative to damages.
[59]
In Monsanto, the patentee sued the
defendant for patent infringement and sought an accounting of the defendant’s
profits. In its analysis of the remedy claim, citing Lubrizol Corp. v.
Imperial Oil Ltd., [1997] 2 F.C. 3 (C.A.), 71 C.P.R. (3d) 26, the Supreme
Court noted that it was settled law that a patentee is only entitled to that
portion of the infringer’s profit that was causally attributable to the
invention. The Court went on to explain that the preferred method of
calculating an accounting of profits is the
“differential profit” approach. This requires a comparison between the
infringer’s real world profit and what his profit would have been had he not
infringed (Monsanto at paragraphs 101 to 105).
[60]
The Judge correctly understood that Monsanto
did not change the existing law as to how the patentee’s lost profits are to be
calculated. However, the significance of Monsanto is that if a court may
consider a defendant’s resort to a non-infringing alternative when calculating
the infringer’s profit, there is no reason in principle to ignore such conduct
when calculating the patentee’s lost sales. This is particularly so where:
The problem with
computing lost profits without considering the availability of noninfringing
alternatives is that […] this practice renders the patentee better off
than she would have been in the absence of infringement. (Analogously, ignoring
noninfringing substitutes when calculating defendant’s profits renders
defendants worse off than they would have been, but for the infringement.) [Emphasis
in the original]
(Thomas F. Cotter,
Comparative Patent Remedies: A Legal and Economic Analysis (New York:
Oxford University Press 2013) at pages 189 to 190).
[61]
Before leaving this issue I wish to deal with
the Judge’s reliance upon The United Horse Shoe and Nail Company, Limited v.
Stewart and Company (1888), 5 R.P.C. 260 (H.L.), 13 App. Cas. 401, and
the policy reasons the Judge found to support rejection of non-infringing
alternatives.
[62]
In United Horse Shoe, the House of Lords held
that a non-infringing alternative is always irrelevant. This decision has been
subsequently followed by courts in the United Kingdom and some Commonwealth
jurisdictions.
[63]
It is fair to say that the House of Lords
rejected non-infringing alternatives for policy reasons. No Law Lord conducted
a causation analysis, and the reasons of each Law Lord reflect the Court’s
opprobrium of the infringer’s conduct. To illustrate, the Lord Chancellor wrote
that “[e]very sale of goods manufactured, without licence,
by patent machinery, is and must be treated as an illegal transaction in a
question with the patentee” (United Horse Shoe at page 267).
[64]
United Horse Shoe
has a narrow foothold in Canadian law. Counsel were able to refer us to only
two cases that have referred to the decision: Domco Industries Ltd. v.
Armstrong Cork Canada Ltd.et al. (1983), 76 C.P.R. (2d) 70 at page 73 (Fed.
Proth.), [1983] F.C.J. No. 1182, reversed on other grounds, (1986), 10 C.P.R.
(3d) 53 (F.C.T.D.), 3 F.T.R. 289; and, Jay-Lor International Inc. v. Penta
Farm Systems Ltd., 2007 FC 358, 59 C.P.R. (4th) 228 at
paragraph 116.
[65]
Domco was a
reference for the recovery of damages incurred as a result of patent
infringement. The Prothonotary rejected the relevance of a non-infringing
alternative. The Prothonotary did not provide any detailed analysis, stating
the argument “is irrelevant in the light of what
actually happened, and tends to obfuscate the main issue of the continued
infringement by the defendant” (Domco, C.P.R. at page 91).
[66]
On appeal, Justice Collier affirmed the
rejection of the relevance of a non-infringing alternative. The Judge applied United
Horse Shoe with little analysis.
[67]
In Jay-Lor at paragraph 116, the Judge
cited United Horse Shoe with approval in an obiter discussion of
general principles.
[68]
Neither of these decisions are binding on this
Court, and I decline to follow them. In my view, they do not accord with the
requirement in subsection 55(1) of the Act that the damages be sustained “by reason of the infringement”.
[69]
The Judge cited four, what she characterized to
be “compelling”, policy reasons for rejecting
the legal relevance of non-infringing alternatives (reasons at paragraphs 113
to 120). The first and second reasons were that a patentee would be
inadequately compensated and, moreover, the availability of a non-infringing
alternative was already taken into account in the liability phase of the trial,
when the Judge found that some of Apotex’ lovastatin was made using the
non-infringing process.
[70]
In my view, these concerns do not withstand
scrutiny. As explained above, taking into account a non-infringing alternative
that could and would be available perfectly compensates a patentee. Determining
which sales were non-infringing is not relevant to the assessment of the damage
that resulted from the infringement.
[71]
The third policy ground cited by the Judge for
not taking a non-infringing alternative into account was that to do so would
create an incentive to infringe. In my view, the availability of other remedies
at law, such as elevated costs, injunctive relief for the remaining duration of
the patent, an accounting of the infringer’s profits, and punitive damages (see,
for example, Eurocopter v. Bell Helicopter Textron Canada Limitée, 2013
FCA 219, 449 N.R. 111) counterbalance any incentive to infringe.
[72]
The final policy ground cited by the Judge was
that legal recognition of non-infringing alternatives would violate Canada’s
international obligation to eliminate compulsory licensing for patented
pharmaceutical inventions. However, reasonable royalty damages are only
equivalent to granting a compulsory licence if there is no non-infringing
alternative. In such a case, the infringer would obtain the full benefit of the
invention without fully compensating a patentee who would not have willingly
licenced the patent. However, where a non-infringing alternative exists,
nothing prevents the infringer from using the non-infringing alternative and
the patentee could not complain that legitimate competition from the infringer
was akin to the infringer acquiring a compulsory licence. Restoring the
patentee to this notional position is not equivalent to granting a compulsory
licence. Moreover, following a finding of infringement, there will normally be
a permanent injunction. The patentee is fully compensated for the infringement
and further infringement is punishable by contempt of court.
B.
Has Apotex established the relevance of a
non-infringing alternative based upon the existence of non-infringing
lovastatin?
[73]
When considering the effect of legitimate
competition from a defendant marketing a non-infringing alternative, a court is
required to consider at least the following questions of fact:
i)
Is the alleged non-infringing alternative a true
substitute and thus a real alternative?
ii)
Is the alleged non-infringing alternative a true
alternative in the sense of being economically viable?
iii) At the time of infringement, does the infringer have a sufficient
supply of the non-infringing alternative to replace the non-infringing sales?
Another way of framing this inquiry is could the infringer have sold the
non-infringing alternative?
iv) Would the infringer actually have sold
the non-infringing alternative?
[74]
As a matter of principle, the burden lies on the
defendant to establish the factual relevance of a non-infringing alternative on
a balance of probabilities. Indeed, Apotex acknowledged in oral argument that
it bears the persuasive burden, on a balance of probabilities, to prove that it
would have used the non-infringing alternative. This is consistent with
jurisprudence such as Rainbow Industrial Caterers Ltd. v. Canadian National
Railway Co., [1991] 3 S.C.R. 3, 84 D.L.R. (4th) 291.
[75]
Before turning to consider the state of the
evidence, it is necessary to deal with the Judge’s findings, at paragraphs 34
to 37 of her reasons, that:
- It was more
likely than not that the defendants would have made and sold
non-infringing Apo-lovastatin tablets in place of the infringing tablets.
- Apotex’ non-infringing
alternative was available in fact.
[76]
These findings were made solely on the basis of
one paragraph of an agreement in writing made between the parties prior to the
trial, which the Judge referred to as the “Streamlining
Agreement”. At paragraph 19, the parties agreed that:
19. The Defendants had the resources
and capacity to manufacture and sell non-infringing lovastatin tablets
formulated using lovastatin API made using the AFI-4 process at the AFI plant
in Winnipeg in sufficient quantities to meet market demand for lovastatin
tablets upon receipt of Apotex’s NOC on March 26, 1997 and at all times
thereafter through actual amounts of lovastatin API made at AFI’s Winnipeg
Facility and amounts delivered to AFI by Qingyuan Blue Treasure Pharmaceuticals
Co. Ltd., as found at the liability trial, and through replacing all infringing
sales of Apo-lovastatin tablets under any of the following four scenarios:
[…]
For greater
certainty, this agreement does not affect or limit the Plaintiffs from arguing
or leading evidence that uncertainty existed regarding the ability of the
Defendants to meet the market demand for lovastatin with non-infringing
lovastatin tablets formulated using lovastatin API made using the AFI-4 process
at the AFI plant in Winnipeg.
[77]
I agree with the Judge that the parties agreed
that from the time Apotex received its notice of compliance, and at all
relevant times thereafter, the defendants had the capacity to manufacture and
sell non-infringing lovastatin in sufficient quantities. However, as Apotex
conceded in oral argument, the Streamlining Agreement did not address the
question of what would have happened in the “but
for” world. The Judge erred by jumping from a statement as to
manufacturing capacity to conclusions as to what Apotex could and would do in
the “but for” world.
[78]
In my view, based on the evidence adduced at
trial, Apotex failed to meet its burden to show that, notwithstanding its
manufacturing capacity, it could and would have sold non-infringing lovastatin in
place of infringing lovastatin.
[79]
Dealing first with whether Apotex could have
sold non-infringing lovastatin, Merck argues that the alleged alternative must
have been actually available to replace Apotex’ infringing sales as they were
made. Otherwise, Merck, not Apotex, would have replaced those sales. I believe
this submission to be correct both in fact and in law. In Advanced Building
Systems Pty Ltd et al. v. Ramset Fasteners (Aust) Pty Ltd, [2001] FCA 1098,
(2001) 52 I.P.R. 305 the Federal Court of Australia rejected the relevance of a
non-infringing alternative, but held that if it was legally relevant, it could
only apply “if at the moment of infringement […] there
is available on the market instantaneously the appropriate substitute”
in the reconstituted market. I agree.
[80]
Before leaving Advanced Building Systems,
I note the Judge there observed that Australia authorities do not adopt the “but for” approach to causation, instead applying a “common sense approach” (Advanced Building Systems
at paragraph 124).
[81]
Merck further argues that Apotex did not have
any non-infringing lovastatin available to replace the infringing sales. In
this regard, infringing sales of Blue Treasure lovastatin began in October,
1998 and non-infringing sales ended in February, 1999. In the Streamlining
Agreement the parties agreed that Apotex would have run out of stock of
non-infringing lovastatin on October 28, 1998.
[82]
As Merck also argues, to create replacement
tablets of non-infringing lovastatin, Apotex would have had to re-activate the
lovastatin fermentation operations at the AFI facility. This would have
required Apotex to: ferment non-infringing lovastatin; ship commercial grade
lovastatin to Toronto; and formulate it into tablets. This would have taken at
least three weeks, because at least eleven days was required for fermentation
and Dr. Sherman testified that would take between one and two weeks to make
tablets from bulk. On this basis, at the time each infringing sale was made,
Apotex could not have replaced that sale with non-infringing lovastatin.
[83]
At the hearing of the appeal, Apotex argued in
reply that its non-infringing alternative was available to it at the time it
sold infringing tablets of Blue Treasure lovastatin. It relied upon evidence at
pages 554 and 557 of the appeal book to argue that since there were 61.91 kg of
non-infringing lovastatin that Apotex sold in July 1998, this lovastatin was
available to replace its infringing sales.
[84]
This argument cannot be accepted for the
following reasons.
[85]
First, the amount of non-infringing lovastatin
sold during any period is irrelevant to the issue of Apotex’ remaining supply
of non-infringing lovastatin. The fact Apotex sold 61.91 kg of non-infringing
lovastatin in July 1998 has no bearing on whether it had any more
non-infringing lovastatin available to replace infringing sales beginning in
October 1998 or later.
[86]
Second, July 1998 is the wrong point in time for
considering whether there was any remaining non-infringing lovastatin available
to replace infringing sales. Leaving aside the agreement of the parties that
Apotex would exhaust its supply of non-infringing lovastatin on October 28,
1998, the relevant time frame is the period during which Apotex sold both
infringing and non-infringing lovastatin. Based on the data referred to by
Apotex, between October 1998, when infringing sales began, and February 1999
when non-infringing sales ended, Apotex sold 60.88 kg of non-infringing
lovastatin. In January 1999, Apotex sold 0.49 kg of non-infringing lovastatin
and after January 1999, sales of non-infringing lovastatin effectively stopped.
The inference to be drawn is that by October, 1998, Apotex had at most 60.88 kg
of non-infringing lovastatin available to displace infringing sales. By
November 1998, based on its sales, Apotex had at most 29.89 kg of
non-infringing lovastatin available. In December 1998, Apotex had at most 5.17 kg
of non-infringing lovastatin. And in January 1999, Apotex had only 0.49 kg of
non-infringing lovastatin. If Apotex had the entire 60.88 kg of non-infringing
lovastatin available in October 1998, and used all of it to replace infringing
sales as they occurred, Apotex’ entire supply of non-infringing lovastatin
would have been exhausted by mid-November 1998. Whether Apotex could have
restocked with non-infringing tablets by December 1998 is a fact that was not
proved in evidence.
[87]
Finally, all of Apotex’ non-infringing
lovastatin supply was sold in the real world. The parties agreed, in paragraph
22 of the Streamlining Agreement, that the size of the lovastatin market in both
the “but for” world and the real world was the
same. As Merck argues, had Apotex diverted any non-infringing tablets to
displace infringing sales in the “but for”
world, Merck would have captured the diverted non-infringing sales.
[88]
I, therefore, conclude that Apotex has failed to
establish that it could have replaced all of its infringing sales with sales of
non-infringing lovastatin.
[89]
While this is dispositive of the appeal on this
issue, I also find that Apotex failed to establish that it would have replaced
its infringing sales. I reach this conclusion on the following basis.
[90]
First, as Apotex conceded in oral argument:
- The real world
informs our construction of the “but for”
world.
- Conduct in the
real world is “very important” to what
would have happened in the “but for” world.
- Findings of fact
from the liability decision are relevant to constructing the “but for” world.
- “Brazen” infringement in the
real world makes it very difficult to prove that the defendant would have
deployed the non-infringing alternative in the “but
for” world.
[91]
In the liability phase, the Judge found, at
paragraph 309 of her reasons (reported at 2010 FC 1265), that if Blue Treasure
had been using the non-infringing process to ferment lovastatin, it would have
lost significant amounts of money for each kilogram of product it shipped to
AFI. However, Apotex knew that once Blue Treasure began to use the allegedly
non-infringing process it became profitable. The inference to be drawn is that
Apotex knew Blue Treasure was in fact using the infringing process; yet Apotex
used that bulk product to prepare and sell its lovastatin tablets.
[92]
In this circumstance it is relevant to note that
from January 1, 1997 to January 1, 2001 Apotex believed Merck’s patent was
invalid.
[93]
Apotex’ evidence falls far short of
demonstrating that it would have sold the non-infringing product when one
considers: the scale of Apotex’ infringement; its likely knowledge that Blue
Treasure was supplying it with infringing lovastatin; its belief the Merck
patent was invalid; its failure to call a witness from AFI to support its
contention that, had it known the product was infringing, it would have
resurrected operations at AFI in Winnipeg; and the fact the Judge found that the
testimony of Apotex’ only fact witness was, albeit not on this point, unsubstantiated
and self-serving.
[94]
Even accepting that the parties agreed in the
Streamlining Agreement that Apotex had capacity to make the non-infringing
lovastatin and that Apotex would have made an accounting profit by producing the
non-infringing tablets, Apotex has not established that it would have pursued
that alternative in the “but for” world.
Specifically, Apotex did not point to evidence that demonstrated the profits
that it would have made through the non-infringing alternative would have been
greater than value lost in any of the identified scenarios (for example, the research
and development activities foregone by repurposing the Winnipeg facility). As
such, notwithstanding whether it had the capacity to produce the non-infringing
alternative, Apotex has not satisfied its persuasive burden to demonstrate on
the facts that it would have produced the non-infringing lovastatin.
[95]
To conclude on this point, while in my view, the
Judge ought to have considered the relevance of non-infringing alternatives,
Apotex has not shown it would have produced non-infringing lovastatin in the “but for” world. It follows that there is no basis
for interfering with the Judge’s decision concerning the lost profits to be
awarded to Merck Canada in respect of pre-expiry tablet replacement sales. It
further follows that it is not necessary to consider whether the Judge erred in
assessing the royalty rate that would have been applicable to the sales during
the patent term had the relevance of the non-infringing alternative been made
out.
C. Did
the Judge err in assessing the royalty rate applicable to post-expiry
infringing sales?
[96]
As noted above, during the life of the patent,
Apotex stockpiled infringing bulk lovastatin and then sold it in tablet form
after the patent expired. The parties and the Judge agreed that the appropriate
damages award in respect of those sales would be based upon a reasonable
royalty.
[97]
The Judge assessed a reasonable royalty based on
the methodology advanced by Merck’s expert. The royalty was calculated by
taking the midpoint of the per kilogram cost savings to Apotex by using the
infringing process, multiplied by the weight of the infringing lovastatin sold
after the patent expired.
[98]
At trial, Apotex proposed a de minimis
royalty rate of 1% on post-expiry sales. The Judge rejected Apotex’ proposal in
paragraphs 192 to 198 of her reasons.
[99]
On appeal, Apotex argues that the Judge
misapprehended its position, stating that she failed to appreciate that it
would simply have purchased “infringing” bulk
lovastatin in the open market after patent expiry, and not use its improperly
stockpiled lovastatin. However, the Judge rejected Apotex’ “throw-away” scenario on the basis it was unsupported
by the evidence. This finding of fact is entitled to deference, and no palpable
and overriding error has been demonstrated.
D. Did the Judge err by determining that Merck &
Co. had standing to bring a claim for damages by virtue of its exclusive licence
agreement with Merck Canada?
[100] As explained above, Merck US claimed damages for lost sales because
Merck Canada was required to acquire its bulk lovastatin from it. At trial,
Apotex argued Merck US was not entitled to any significant damages because in
1992 it entered into an exclusive licence agreement with Merck & Co. In
Apotex’ view, as a result Merck US was a nominal patentee with no right to “monetize” the patent.
[101] On appeal Apotex again argues that since Merck US had no right to
earn revenue from the patent, it also had no right to award of damages.
[102] The Judge carefully considered this argument at paragraphs 239 to
246 of her reasons. Apotex has failed to show any error in the Judge’s
analysis.
VI. Conclusion
[103] For these reasons, I would dismiss the appeal with costs.
“Eleanor R. Dawson”
“I agree.
David Stratas J.A.”
“I agree.
Richard Boivin J.A.”
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