Docket: A-315-15
Citation:
2017 FCA 23
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CORAM:
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DAWSON J.A.
BOIVIN J.A.
WOODS J.A.
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BETWEEN:
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APOTEX INC. and
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APOTEX
PHARMACHEM INC.
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Appellants
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and
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ADIR and
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SERVIER CANADA
INC.
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Respondents
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REASONS
FOR JUDGMENT
DAWSON J.A.
[1]
ADIR is the owner of Canadian Patent No.
1,341,196 (196 Patent) which claims the drug perindopril. Perindopril is
distributed and sold under the trademark COVERSYL and is used primarily in the
treatment of hypertension and cardiac insufficiency. Servier Canada Inc., a
corporate affiliate of ADIR, exploits the 196 Patent in Canada. Together, ADIR
and Servier are referred to as Servier in these reasons.
[2]
Apotex Pharmachem Inc. (Pharmachem) manufactures
and supplies drugs in Canada. Commencing around 2006, it began to manufacture a
generic version of perindopril in tablet form in Canada. The generic
perindopril tablets were then sold to Apotex Inc. which sold the tablets in
Canada and abroad. Pharmachem also made some export sales of perindopril. In
these reasons Pharmachem and Apotex Inc. are collectively referred to as Apotex
or the defendants.
[3]
In 2008, the Federal Court held that the 196
Patent was valid and was infringed by the defendants through the manufacture in
Canada and sale of perindopril tablets: 2008 FC 825 (liability judgment). The
liability judgment was affirmed by this Court on appeal: 2009 FCA 222.
[4]
The liability judgment permitted Servier to
elect to claim either an accounting of the defendants’ profits or all of the
damages sustained by Servier as a result of the defendants’ activities which
infringed the 196 Patent. Servier elected to recover the profits the defendants
earned by reason of their infringing activities.
[5]
Thereafter, following a lengthy trial, the Federal
Court determined the amount of Apotex’ profits which were attributable to the
infringing activity. This required the Federal Court to consider the
manufacture and sale of perindopril tablets in Canada as well as their sale
abroad. Apotex’ profits from the sale in Canada of perindopril tablets in
Canada are not in issue on this appeal because at trial Apotex acknowledged
that there was no alternative to infringing the 196 Patent for domestic sales
of perindopril. It followed that Apotex was required to completely disgorge its
Canadian profits. At issue in this appeal are Apotex’ profits from the sale of
perindopril tablets abroad, particularly sales made to affiliates of Apotex
located in Australia (Apotex Australia) and the United Kingdom (Apotex UK).
[6]
To determine the profits earned by the
defendants on export sales, the Federal Court was obliged to determine a number
of issues, only two of which are at issue in this appeal:
i.
With respect to export sales, were there
non-infringing alternatives to the infringing perindopril Apotex sold, and if
so, what were Apotex’ profits attributable to its use of the patented
invention?
ii.
With respect to the export sales made to Apotex’
affiliates in Australia and the United Kingdom, was any part of the profit
realized attributable to non-infringing services, namely the provision of an
indemnity and related legal services Apotex agreed to provide to its foreign
affiliates? If so, this profit was not attributable to the sale of infringing
perindopril tablets.
[7]
The Federal Court, in reasons cited as 2015 FC
721:
i.
rejected the argument that Apotex’ profits
should be reduced by taking into account the availability of non-infringing
alternatives; and,
ii.
rejected the argument that Apotex’ profits
should be reduced on the basis that a portion thereof was attributable to
non-infringing services it provided.
[8]
This is an appeal from the judgment of the
Federal Court. On this appeal Apotex asserts that the Federal Court erred in
two respects by:
i.
failing to reduce the profits Apotex received from
infringement by taking into account the availability of non-infringing
alternatives; and,
ii.
failing to apportion or segregate the profit
Apotex earned on the sale of infringing perindopril from the profit it earned
from the provision of the indemnity and related legal services Apotex agreed to
provide to its foreign affiliates.
[9]
For the reasons that follow, I have concluded
that the Federal Court erred in law by rejecting the relevance at law of any
available non-infringing perindopril and failed to adequately consider the
evidence adduced as to the ability and willingness of three suppliers to
provide non-infringing perindopril. In light of the factually complex
evidentiary record before the Federal Court and the need to assess the
credibility of the evidence, I would remit this issue to the Federal Court as
described in more detail below. I have further concluded that while the Federal
Court committed an extricable error of law in its interpretation of contracts
between Apotex and its affiliates, it did not err in its ultimate conclusion
that this is not a proper case to apportion Apotex’ profit. It follows that except
for the single issue I would remit to the Federal Court, I would in all other
respects dismiss the appeal.
[10]
I begin my analysis by briefly reviewing the
decision of the Federal Court as it relates to the two issues on appeal. I then
move to consider the standard of review to be applied to the decision of the
Federal Court. Each issue is then addressed.
I.
The Decision of the Federal Court
[11]
After setting out the issues raised on the
accounting, the Federal Court moved to consider whether the profit Apotex
earned on certain export sales should be apportioned so as to segregate profit
earned from the provision of an indemnity and related legal services from the
profit earned on the sale of infringing perindopril.
[12]
The Federal Court began by setting out the
procedural history of this issue: the issue was not raised until shortly before
trial when Apotex presented a motion to allow it to file two addenda to the
report in chief of its expert witness, Howard Rosen. Mr. Rosen is a chartered
accountant with expertise in the quantification of loss and the accounting of
profits in intellectual property disputes. The motion to allow the addenda was
granted less than a month prior to the commencement of the hearing (reasons,
paragraphs 19 and 20).
[13]
The Federal Court then expressed its agreement with
the general principle that “the provision of foreign
litigation services and of an indemnity for liability under foreign patents
does not constitute an infringement of the 196 Patent.” It followed that
the question to be determined was whether the defendants had provided
sufficient evidence to prove that a portion of the price paid in respect of the
sale of perindopril tablets was on account of the indemnity and non-infringing
services (reasons, paragraph 30).
[14]
The Federal Court then reviewed the evidence
adduced by Apotex, including the written agreements entered into between Apotex
and both Apotex UK and Apotex Australia relevant to sales of perindopril
(transfer price agreements) (reasons, paragraph 31 to 46). Of relevance to this
appeal is that the transfer price agreements drew a distinction between the
transfer price to be paid for a “Patent Challenge
Product” and that to be paid for a non-patent challenge product. Patent
Challenge Products were defined in the agreements. Simply put, they were
products viewed to carry a heightened litigation risk in the relevant
jurisdiction. The heightened risk was viewed to arise when Apotex’ affiliate was
the only generic in the market for perindopril, the patentee had an unexpired
patent for perindopril and the patentee sold a branded version of perindopril.
[15]
The Federal Court began its analysis of the
evidence by rejecting Servier’s contention that the transfer price agreements
explicitly define the transfer price to be solely in respect of the supply of
perindopril tablets. While the transfer pricing agreements between Apotex and its
affiliates define the “transfer price” to mean the
price to be paid by the affiliate to Apotex “for the
supply of the Product”, the Federal Court found that the transfer price
agreements “must be interpreted in the light of the
entire agreement and that the commercial logic behind the formula for two
prices does take into account the increased risk of the sale of a Patent
Challenge Product” (reasons, paragraph 51).
[16]
This said, the Federal Court then rejected the
assertion that the higher price paid by Apotex UK and Apotex Australia for
perindopril as a Patent Challenge Product “was paid
solely on account of the indemnity provision and related litigation services”.
Thus the Federal Court found the transfer price to be on account only of the
sale of the drug perindopril (reasons, paragraph 51). The Federal Court reached
this conclusion for the following reasons:
i.
The “provisions of the
transfer price agreements that deal with the Transfer Price are distinct from
those provisions that provide for an indemnity and related services and are
severable.” It could not be argued “that the
higher price is, in full or in part, a consideration for the indemnity if, in
case the Transfer Price provisions are found to be invalid or unenforceable,
the indemnity provisions will remain in full force and effect.”
Additionally, the indemnity and related services were offered even if there was
no litigation or risk of litigation and the product was sold at the lower non-patent
challenge product price (reasons, paragraph 52).
ii.
The choice of the higher Patent Challenge
Product price was likely triggered, at least in part, by Apotex’ desire to
enhance its profitability in cases where its affiliate was the only generic in
the marketplace (reasons, paragraphs 56-59). The Federal Court rejected Apotex’
contention that the only factor that triggered the higher Patent Challenge
Product price was the increased risk of litigation. Rather, the triggering
event for the change in price was the presence of one or more generic
competitors in the market – a factor which impacted the profitability of the
product (reasons, paragraph 54).
iii.
The transfer price agreements provided that any
awards or settlements received by Apotex’ affiliates in litigation were to be
shared with Apotex. This was a significant consideration for the indemnity and
legal services offered by Apotex to its foreign affiliates (reasons, paragraphs
60-63).
[17]
Additionally, the Federal Court expressed the
opinion that segregating or apportioning the revenue Apotex received would not
be equitable (reasons, paragraph 51). No additional reasons were given for this
conclusion.
[18]
The Federal Court then moved to consider Apotex’
next argument that there were a number of viable, non-infringing alternative
sources of both bulk perindopril active pharmaceutical ingredient and perindopril
tablets that, if used, would have resulted in lower profits on Apotex’ export
sales than it received as a result of manufacturing and selling perindopril
tablets from Canada.
[19]
After surveying the relevant jurisprudence, the
Federal Court concluded that in Monsanto Canada Inc. v. Schmeiser, 2004
SCC 34, [2004] 1 S.C.R. 902 the Supreme Court did not “suggest
that in an accounting of profits, courts are bound to always consider
[non-infringing alternative] products, options or scenarios, as fanciful as
they may be.” Rather, the Supreme Court “simply
reiterated that ‘the inventor is only entitled to that portion of the
infringer’s profit which is causally attributable to the invention’”
(reasons, paragraph 118). The Federal Court went on to reject Apotex’ argument
that its profits should be calculated taking into account the availability of
non-infringing perindopril for export sales. It did so for the following three reasons:
i.
As expressed by the Federal Court at paragraph
119 of its reasons:
“Tracing causation is a factual endeavour.
In some cases, it could almost be as complex as the invention, and it will
require factual or expert evidence. In other cases, as the one before me, there
is no need for a very sophisticated analysis of the causal relationship between
the infringement and the infringer’s profits as the defendants merely sold
perindopril, the compound covered by the 196 Patent.”
ii.
To accept the relevance of a non-infringing
alternative for export sale would provide infringers with “a perfect shelter against the consequences of any future
patent infringement in Canada” (reasons, paragraph 121).
iii.
Apotex’ argument was akin to the argument
advanced by it in Wellcome Foundation Ltd v. Apotex Inc., [1998] F.C.J.
No. 1205, 151 F.T.R. 250 when it argued that it could have legally manufactured
the infringing product by obtaining a compulsory license from the patentee.
This argument was rejected in that case and was not supported by the case law
(reasons, paragraph 122).
[20]
Having rejected the relevance at law of
non-infringing alternatives, it was not necessary for the Court to consider
whether, on the facts of the case, non-infringing alternatives were available.
However, the Federal Court noted that “as more than
half of the time spent at trial was devoted to the evidence pertaining to that
question” the Court would “provide a few comments”
(reasons, paragraph 128). The Federal Court then in the course of four
paragraphs, paragraphs 129 to 132, briefly reviewed the evidence for the
purpose of determining “which alternative would, all
things considered, most likely have been used” (reasons, paragraph 134).
[21]
The Federal Court then provided the following
comments:
i.
If perindopril was at the relevant time readily
available on the international market, why did Apotex choose to manufacture
perindopril in Canada where Servier held an unexpired patent (reasons,
paragraph 136)?
ii.
No explanation was given as to why a technology
transfer to a third party, Signa S.A. de C.V. (Signa), was not completed. This
technology transfer would have allowed Signa to supply Apotex with perindopril
active pharmaceutical ingredient (reasons, at paragraphs 131, 136).
iii.
Apotex failed to demonstrate that an entity referred
to as Srini could have obtained regulatory approval and manufactured the required
quantity of perindopril active pharmaceutical ingredient at the relevant time
or at the quoted price (reasons, paragraphs 137, 138).
iv.
Apotex failed to demonstrate Apotex Netherlands,
also referred to as Katwijk Farma B.V. could have manufactured the required
quantity of perindopril tablets at the relevant time (reasons, paragraphs 132,
140).
v.
Even if the defendants’ affiliates had
demonstrated that they could have manufactured the required quantity of
perindopril tablets, Apotex had not shown that this would have resulted in it
receiving any profit on the sale of the tablets. Rather, “if those profits had made their way to Canada, it would most
probably have been through dividends paid to [the affiliates’] mother companies
… not to the defendants” (reasons, paragraph 141).
II.
Standard of Review
[22]
The standard of review applicable to the issues
raised on this appeal 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.
[23]
Where required, the standard of review will be
discussed in greater detail in the context of the analysis of each issue
asserted by Apotex.
III.
The Issue of Non-infringing Perindopril
[24]
Apotex’ submissions on this issue may be
summarized as follows:
i.
A defendant need only disgorge profits which are
causally linked to the patentee’s invention. Citing Schmeiser, if all of
the profits claimed by Servier could have been earned without infringing of the
196 Patent, then the profits to be disgorged are nil.
ii.
The evidence established that there were several
sources of non-infringing perindopril available to Apotex to sell abroad.
[25]
I begin my analysis of Apotex’ submissions by
considering whether the Federal Court erred by rejecting the relevance at law
of non-infringing perindopril for export sales. I then consider the Federal
Court’s assessment of the evidentiary record before it.
A.
The legal relevance of non-infringing
perindopril when calculating the profits earned by the defendants by reason of
their infringing activities
[26]
The starting point of this analysis must be the
decision of the Supreme Court in Schmeiser, cited above at paragraph 19.
In Schmeiser, 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.R. 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 is 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, ‘where profits are allocated
according to the value contributed to the defendant’s wares by the patent’”.
Citing Professor Norman Siebrasse in “A Remedial Benefit-Based Approach to
the Innocent-User Problem in the Patenting of Higher Life Forms” (2003) 20
C.I.P.R. 79 and its earlier decision Collette v. Lasnier (1886) 13
S.C.R. 563 at page 576, the Supreme Court explained that a “comparison is to be made between the defendant’s profits attributable
to the invention and his profit had he used the best non-infringing option”.
[27]
The need for a comparison between a defendant’s
profit attributable to the invention and the defendant’s profit using the best
non-infringing alternative is explained in the Siebrasse article cited by the
Supreme Court. There, at page 92, Professor Siebrasse writes:
The differential profit approach looks to
the profits causally attributable to the infringement, while the cost-based
approach looks to the costs causally attributable to the infringement, and the
whole profits approach and physically based apportionment more generally, looks
to the physical changes causally attributable to the invention. The profits
are clearly the correct criterion, for two reasons. First, the award is an
award of profits, and the causal link must be between the award and the
infringement. Secondly, awarding profits according to the value added by the
patented invention and opposed to the proportionate cost or physical size, is
consonant with fundamental nature of patents as intellectual property.
What is valuable is the intellectual contribution which is embodied in an
invention, not the physical contribution. It may be that even though the
patented aspect is only a small part of the wares which are sold, either by
physical proportion or by cost, the entire value of the wares is due to the
patent. In such a case, which is not uncommon, the differential profit rule
will allocate the entire profits to the patentee.
[Italics in the original]
[Underlining added]
[28]
Servier argues that Schmeiser did not
definitively preclude the use by a trial judge of other valuation methods,
better suited to a different set of facts and that it was open to the Federal
Court to proceed as it did. I acknowledge that in Schmeiser the Supreme
Court referred to the differential profit approach as the “preferred means” of calculating an accounting of
profits – not the only means. However, at bottom is the need to ensure that a
patentee only receives that portion of the infringer’s profit that is causally
attributable to the invention. In this circumstance, I accept the submission of
Apotex that the value of the invention can only be quantified if non-infringing
alternatives are considered. This is so because the value of a patent lies in
the ability of the patentee to exclude competitors and competition.
[29]
Thus, Professor Thomas F. Cotter, an American
scholar whose principal research and teaching interests are in the fields of
domestic and international intellectual property law, antitrust law, and law
and economics, wrote in Comparative Patent Remedies: A Legal and Economic
Analysis (New York: Oxford University Press, 2013) at pages 189 to 190:
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]
[30]
In this circumstance I conclude that the Federal
Court erred in law by rejecting Apotex’ argument that its profits should be
calculated taking into account the availability of non-infringing perindopril
for export sales and by failing to apply the differential profit approach.
[31]
Before leaving this issue, I wish to deal with
the three reasons given by the Federal Court for rejecting the relevance of
non-infringing perindopril. Those reasons are summarized at paragraph 19 above.
[32]
As I understand the reasons of the Federal
Court, the first reason for rejecting the relevance of the non-infringing
perindopril was that a non-infringing alternative cannot be the patented
product itself. To the extent the Federal Court rejected the relevance of
non-infringing perindopril because the defendant sold perindopril, this
conclusion is inconsistent with Schmeiser where the Roundup Ready Canola
sold by the defendant Schmeiser consisted entirely of the patented genes and
the differential profit approach was nonetheless applied.
[33]
Additionally on this point, the 196 Patent has
no extraterritorial reach. Thus, perindopril may be manufactured in
jurisdictions where it was never patented. It may also be manufactured in
jurisdictions where Servier held a patent, but the patent has been invalidated
or has expired. Ignoring perindopril manufactured in such jurisdictions when
assessing Apotex’ profit would give an extraterritorial reach to the 196
Patent.
[34]
The second reason given by the Federal Court was
policy based: considering a non-infringing alternative to be relevant would
provide infringers with “a perfect shelter”
against the consequences of their infringement. This argument was rejected by
this Court in Apotex Inc. v. Merck & Co. Inc., 2015 FCA 171, 387 D.L.R.
(4th) 552 (Lovastatin) at paragraph 71. While Lovastatin considered
a claim for compensatory damages for patent infringement, the comments have
equal application to an accounting for profits. In any event, policy reasons
cannot trump the requirement that an infringer’s disgorged profit must be only
the profit which is causally attributable to the invention.
[35]
The final reason given by the Federal Court,
based upon the rejection of an argument in Wellcome Foundation, cannot
stand for the reason that it is contrary to the application of the differential
profit approach applied by the Supreme Court in Schmeiser.
[36]
Having concluded that the existence of
non-infringing perindopril was legally relevant, it is necessary to consider
what the evidence established as a matter of fact.
B.
The Federal Court’s assessment of the evidence
[37]
Apotex advances two arguments in respect of the
evidence. First, it submits that the availability of non-infringing perindopril
was already determined at the liability stage of the proceeding when the trial
judge wrote at paragraph 509 of the liability judgment:
Apotex could have avoided all of the
manufacturing infringement by making perindopril - containing products outside
of Canada. This is not just speculation. As acknowledged by a number of
witnesses for Apotex, Apotex also has manufacturing facilities in India and is
in the process of obtaining authorization to produce perindopril from that
site.
[38]
Second, Apotex argues that to the extent the
Federal Court’s “comments” on the evidence are
found to constitute a finding that Apotex could not have secured non-infringing
perindopril for sale to Australia or the United Kingdom, the finding is
unsupported by the evidence and based upon palpable and overriding error.
[39]
Servier responds that the trial judge made no
binding finding of fact in the liability judgment as to the availability of
non-infringing perindopril and, in any event, the judge’s comment that Apotex
was in the process of obtaining authorization to produce perindopril in India
falls short of a finding that Apotex could have replaced all of the infringing
material. It further responds that the evidence failed to establish that Apotex
could and would have replaced all of the infringing perindopril it sold with
non-infringing perindopril. Finally, Servier argues that the Federal Court
found none of the hypothetical non-infringing alternative scenarios posited by
Apotex would have resulted in any profits flowing to Apotex.
[40]
I begin my analysis with the observation that
when considering the availability of non-infringing alternatives one enters the
world of the hypothetical – in the real world the defendant used an infringing
product. This Court considered the nature of the hypothetical world in Lovastatin.
Notwithstanding that Lovastatin concerned a claim for compensatory
damages, not an accounting of profits, again I believe that the Court’s
commentary in Lovastatin has equal application to this case. In both situations
the Court is to consider a hypothetical world where the infringing conduct did
not take place.
[41]
In Lovastatin the Court found that for a defendant
to show that in the hypothetical world it would have been able to obtain a
non-infringing product, the defendant must establish that in the hypothetical
world it would and could have obtained sufficient quantities of non-infringing
product, and that it would and could have used the non-infringing product (Lovastatin,
paragraphs 49 – 53, 70, 73 and 77-79).
[42]
As this Court later explained in Pfizer
Canada Inc. v. Teva Canada Limited, 2016 FCA 161, 483 N.R. 275, (Effexor)
at paragraph 50, both the “could have” and “would have” requirements are important. To prove “could have”, the defendant must demonstrate that it
was possible for it to secure non-infringing product. To prove “would have”, the defendant must demonstrate “that events would transpire in such a way as to put them in
that position” (Effexor, paragraph 50). The importance of the “would have” requirement is that by requiring a defendant
to show that it would have used a non-infringing alternative, the defendant
shows that the value of the patented invention is not such that reliance on
alternatives is unlikely or fanciful. Put another way, notwithstanding the
availability of a non-infringing alternative, the defendant must show that
there are no impediments to its use.
[43]
Having set out this background, I turn to
Apotex’ first argument: the availability of non-infringing perindopril was
already determined in the liability judgment. I disagree.
[44]
The passage Apotex relies upon is found in that
part of the liability judgment which considers whether Servier had shown a
basis for obtaining the equitable remedy of disgorgement of Apotex’ profits.
The trial judge’s remark was a comment on Apotex’ behaviour in choosing to make
perindopril in Canada “fully knowing that making
perindopril would constitute infringement and that it might be required to
disgorge its profits” (liability judgment, paragraph 509). This was not
a comment intended to forestall Servier from being able to argue that in the
hypothetical world Apotex could not and would not have supplied non-infringing
perindopril.
[45]
Additionally, I accept Servier’s submission that
the passage Apotex relies upon falls well short of a finding that Apotex could
and would have used non-infringing perindopril for its export sales.
[46]
I now turn to the Federal Court’s findings on
the evidentiary record before it.
[47]
Apotex adduced evidence in the Federal Court
about the availability of non-infringing perindopril from a number of sources.
The findings of the Federal Court on that evidence are summarized above at
paragraph 21.
[48]
I accept Servier’s submission that a judge need
not refer to all of the evidence adduced before the court. Reading the reasons
of the Federal Court fairly, I am satisfied that the Federal Court found as a
fact that neither Srini nor Katwijk could have manufactured the required
quantity of non-infringing perindopril at the relevant time. Apotex has not
demonstrated any palpable and overriding error in that finding.
[49]
Greater difficulty is posed however with respect
to three specific suppliers: Signa, IPCA Laboratories Ltd. (IPCA) and Intas
Pharmaceuticals Ltd. (Intas).
[50]
Evidence adduced with respect to these entities
included the following.
(1)
Signa (Transcript November 24, 2014, at pages
876 to 936)
[51]
Signa’s General Manager, Oscar Vivanco,
testified that Signa is a producer of fine chemicals located in Toluca, Mexico which
manufactures active pharmaceutical ingredients. During the years in issue, 2005
to 2008, it was one of the largest fine chemical producers in the Americas, if
not the largest. Signa began its relationship with Apotex in 1994 or 1995,
selling active pharmaceutical ingredients to it. In September 2011, Signa joined
the Apotex group of companies.
[52]
With respect to perindopril, Mr. Vivanco
testified that in 2004 Signa received a technology transfer package from
Brantford Chemicals (now known as Pharmachem) together with the raw materials
required to produce perindopril. The program was never finished because Apotex
decided to produce perindopril at a different location. However, had Apotex
approached Signa in 2004 or 2005 and asked Signa to finish the program, Signa
could have produced 2,000 kg of perindopril in each of 2006, 2007 and 2008.
(2)
IPCA (Transcript November 26, 2014, at pages 1297
to 1372)
[53]
IPCA’s President of the Generics and Head
Mission Malaria, Murali Sarma, testified that IPCA is a medium-sized
pharmaceutical company listed on both the Bombay Stock Exchange and the
National Stock Exchange in Mumbai. To the witness’ knowledge, Apotex does not
hold shares in IPCA. IPCA manufactures active pharmaceutical ingredients and
also formulates tablets. During the relevant period, IPCA sold active
pharmaceutical ingredients to a number of researched-based pharmaceutical
companies. AstraZeneca, BASF, Bayer, GlaxoSmithKline, Merck, Pfizer, Roche and
Sanofi Aventis were all customers of IPCA. IPCA also sold active pharmaceutical
ingredients to generic pharmaceutical companies such as Apotex, Actavis and
Mylan. About 1% of its business related to Apotex.
[54]
During the period from 2005 to 2008, IPCA
manufactured small quantities of perindopril for the purpose of regulatory
filings and exported this product. While it did not formulate perindopril during
this period, IPCA had the capacity to do so. Therefore, had Apotex approached
IPCA in 2005 or 2006 and requested that IPCA manufacture between 1,000 and 2,000
kg of perindopril active pharmaceutical ingredient in each of 2006, 2007 and
2008 and then tablet that perindopril active pharmaceutical ingredient into
between 9 and 16 million tablets per month, IPCA would have taken such an order
and would have manufactured perindopril for Apotex. At that time IPCA had the
necessary regulatory approvals in place in order to send finished dosage
materials to the United Kingdom, Australia and the Netherlands.
(3)
Intas (Transcript November 26, 2014, at pages
1372 to 1410)
[55]
Intas’s Executive Vice-President of Global
Licensing and Third-Party Sales, Marc Comas, testified that Intas develops,
produces and sells generic drugs around the world. It is a privately held
company with headquarters in India. Mr. Comas referred to it as a “700 million U.S. dollar company.”
[56]
Intas produces active pharmaceutical ingredients
for internal use only; Intas only produces finished products.
[57]
Had Apotex approached Intas in mid-2005 with a
view to commercial production on a monthly basis of approximately 16 million
tablets of perindopril, Intas would have worked very hard to achieve this
production. Intas had the capacity, the necessary Good Manufacturing Practice
certificates, and a business team in place looking for this type of business.
Mr. Comas saw no reason why Intas would not be able to do so.
[58]
While Intas did not produce perindopril during
the years 2006 to 2008, in 2010 its wholly owned subsidiary, Accord Healthcare,
was granted marketing authorization in the United Kingdom for perindopril, with
a right to transfer production to Intas in India. Commencing in August 2011,
Intas supplied perindopril tablets to Accord Healthcare for sale in the United
Kingdom and it continues to do so.
[59]
The Federal Court made bare mention of these
suppliers. The sole mention to the evidence adduced on behalf of Signa was that
no explanation was provided as to why Apotex instructed Signa to stop work on
the technology transfer project for perindopril (reasons, paragraph 136). While
events in the real world inform construction of the hypothetical “but for” world (Lovastatin, paragraph 90), the
fact the project was stopped is not necessarily dispositive of Signa’s capacity
in the “but for” world.
[60]
The Federal Court’s only reference to the
evidence of IPAC and Intas was a statement that they “could
have formulated the perindopril tablets” (reasons, paragraph 135). It is
not clear, however, whether this was a finding of fact or a very short summary
of the evidence of Dr. Sherman on behalf of Apotex.
[61]
Servier characterizes the evidence summarized
above to be speculative and hypothetical. However, evidence concerning the hypothetical
world is necessarily hypothetical and the Court is free to draw inferences from
the evidence as to what would likely have happened “but
for” the breach (Cadbury Schweppes Inc. v. FBI Foods Ltd., [1999]
1 S.C.R. 142, at page 186, 167 D.L.R. (4th) 577). An inference is grounded in
evidence and so is not speculative.
[62]
Servier also objects that no palpable error has
been shown on the part of the Federal Court. IPCA never formulated perindopril
tablets, and from 2005 through 2008 it only made small quantities of the active
pharmaceutical ingredient perindopril for regulatory filings. Intas did not
hold regulatory approval to make perindopril tablets before 2010 and then it
only made and sold perindopril tablets in 2011. I reject this argument as well.
As set out above, the fact an event does not take place in the real world does
not necessarily mean that the event could not and would not have taken place in
the hypothetical world.
[63]
Signa, IPCA and Intas were at the relevant time,
manufacturers of substance in an arm’s-length relationship with Apotex. The
evidence adduced through them, if believed, could have led the Federal Court to
conclude that, in the hypothetical world, Apotex would and could have obtained
significant quantities of non-infringing perindopril. It would remain for the
Federal Court to consider whether Apotex would and could have used that
perindopril for sales to the United Kingdom and Australia.
[64]
If the Federal Court intended to conclude on all
of the evidence that Apotex could not obtain and would not use non-infringing
perindopril, it was a reviewable error for the Federal Court not to explain why
it rejected the evidence of Signa, IPCA and Intas. If, instead, in view of its
primary finding that the existence of a non-infringing alternative was not
legally relevant the Federal Court intended to provide only selective comments
on the evidence, in light of this Court’s conclusion that a non-infringing
alternative is legally relevant, it is necessary for the evidence of Signa,
IPCA and Intas to be fully considered. In either event, taking into account the
factually complex evidentiary record before the Federal Court and the need to assess
the credibility of the evidence, I am of the view that the issue should be
returned to the Federal Court for determination.
[65]
For clarity, the issue I would remit to the
Federal Court is whether Apotex would have and could have obtained quantities
of non-infringing perindopril from any of Signa, IPCA or Intas and, if so,
whether Apotex would have and could have used non-infringing perindopril for
sales to its affiliates in the United Kingdom and Australia. I would confine
the issues to these three suppliers because Apotex has not demonstrated any
error with respect to any other supplier. The Federal Court is to decide this
issue on the record before it, with discretion to receive additional evidence
if such evidence would be of assistance and its acceptance would not prejudice
the parties opposite.
[66]
Three final comments must be made before leaving
this issue.
[67]
First, it may be that the Federal Court could
conclude in the hypothetical world that one or more suppliers would not or
could not supply perindopril in time to replace the initial infringing sales.
However, this would not end the inquiry as the Federal Court would still have
to consider whether at some later point in time a supplier would and could have
provided replacement non-infringing tablets.
[68]
Second, I am mindful that at paragraph 141 of its
reasons the Federal Court found it was not satisfied that if Apotex’ affiliates
could have manufactured perindopril, any profit would accrue to the defendants.
As none of Signa, IPCA or Intas were affiliates of Apotex at the relevant time,
this finding is of no assistance to Servier. In any event, I have difficulty understanding
the relevance of the finding. The relevant inquiry is if Apotex could have
arranged its affairs to provide perindopril tablets from non-infringing
activities. If so, the 196 Patent contributed little or no value to the profits
earned by Apotex on foreign sales. How profits were divided within the Apotex
group is not relevant.
[69]
Finally, should the Federal Court answer the
issue remitted to it in the affirmative, it follows that the Federal Court must
quantify the impact of that finding on Apotex’ profit on sales made to Apotex
Australia and Apotex UK. The Federal Court should then consider what, if any,
entitlement Apotex has to interest on monies it paid to Servier which are in
excess of its obligation as calculated taking a non-infringing alternative into
account.
IV.
The Issue of Apportionment
[70]
Apotex asserts that the Federal Court erred in
refusing to apportion the revenue Apotex received under the transfer price
agreements for the sale of perindopril to Apotex UK and Apotex Australia. It
says that the Federal Court committed a number of errors in its interpretation
of the transfer price agreements. Properly interpreted, the higher price paid
for perindopril as a Patent Challenge Product reflected the price paid for the
indemnity and related legal services Apotex agreed to provide to its foreign
affiliates.
[71]
For the reasons developed below I reject this
assertion. I begin my analysis with a discussion of the causation requirement
and conclude that apportionment is not appropriate on the facts of this case
because “but for” its infringing activities,
Apotex would have earned nothing. While this conclusion is dispositive of
Apotex’ appeal on this issue, I then consider the standard of review to be
applied to the issue of contractual interpretation and the applicable
principles of contractual interpretation. Applying those principles I conclude
that the Federal Court’s interpretation of the transfer pricing agreements was
based on an extricable error of law. This said, applying the required
interpretive principles I conclude that Apotex failed to establish that the
transfer pricing agreements apportion revenue as it asserts.
A.
The requirement of causation
[72]
It is a question of fact whether any profits
earned by Apotex under the transfer price agreements for the sale of
perindopril flowed from something other than the patented invention, and Apotex
bears the burden of establishing this fact. The question bears “on the relationship between the profits earned and the
appropriation of the patented invention” (Imperial Oil Limited v.
Lubrizol Corporation, [1997] 2 F.C.R. 3, 71 C.P.R. (3d) 26 (C.A.), at
paragraph 9.
[73]
As explained in Beloit Canada Ltée/Ltd. v.
Valmet Oy (1994), 78 F.T.R. 86, 55 C.P.R. (3d) 433 (F.C.T.D.), at page 457:
There is no question however, that the
individual circumstances of a particular case may render an apportionment of
profits the only equitable solution. The test in determining if there should be
an apportionment is based on the saleability, as a whole, of the product which
contains the patented invention. The question for the court is whether the
market demand for the defendant’s product arose because of the infringed patent
or whether it arose by virtue of the product’s additional features. In other
words, the inquiry is directed to “the value of the patented part to the
machine as a whole”, to use the words of Lord Shaw in Watson Laidlaw.
This determination is a factual one to be
made on the basis of all the evidence. The answer depends entirely on the
particular circumstances of each case. The onus is on the defendant to adduce
sufficient evidence to satisfy the court that consumer demand for its product
arose by virtue of features other than the plaintiffs’ infringed patent. If the
defendant’s evidence in this regard is inadequate, the court will not make an
apportionment.
[Underlining added]
[74]
While this decision was reversed in part on
other grounds ((1995), 184 N.R. 149, 61 C.P.R. (3d) 271 (C.A.)), the trial
court’s treatment of the apportionment issue was affirmed.
[75]
As will be explained in more detail below, the
transfer price agreements contemplated a higher price for the sale of
perindopril because it was a Patent Challenge Product. The rationale for this
was explained at trial by Jeffrey Adams, Apotex Inc.’s Vice-President of
International Sales, as follows:
Around 2006, we were starting to expand
internationally. Our expansion efforts were really driven around some of the
acquisitions, some of the start-ups that we have been discussing in terms of
the U.K., Australia, the Netherlands. In addition to the expansion, there was
also a recognition that certain products within our portfolio around that time
carried with them a very high likelihood of patent risk. We knew this, and we
needed to put a mechanism in place to address the increased risks associated
with those products. Bearing in mind that, at the time, the affiliates were
quite fragile start-ups, and these small acquisitions did not have a strong
financial base and were at risk if we were to lose the patent challenge.
(transcript December 2, 2014, starting at
line 16, page 1759)
[76]
Mr. Adams explained the steps Apotex took to
protect the frailty of its affiliates:
Generally, in these situations, we provided
– let’s call it the indemnity transfer price agreement. As the name suggests,
there was an indemnity component. The perceived value of the indemnity was
quite high in situations like this where there was a potential patent
challenge. It also accounted for the anticipated high legal costs and the
potential for fairly high damages associated with an event of a negative
litigation outcome.
(transcript December 2, 2014, starting at
line 19, page 1760)
[77]
Mr. Adams also explained that Apotex believed
that “where the patent risk was high, that it was
reasonable for Apotex to charge a higher transfer price to account for the
value of the indemnity that they were providing but also the damages and the
potential legal costs which were quite high” (transcript December 2,
2014, starting at line 1, page 1763).
[78]
In the 2006-2007 timeframe discussed by Mr.
Adams, the principal product viewed by Apotex to be at patent risk was
perindopril.
[79]
What drove Apotex’ sales of perindopril were the
new and useful characteristics of the drug. Had perindopril not been protected
by the 196 Patent, there would have been no need for Apotex to provide an
indemnity to protect the fragility of its affiliates. “But
for” the infringing qualities of perindopril, Apotex would have earned
nothing on its sale, whether attributable to the drug itself or to the
indemnity required to protect the affiliates. Thus, the profit resulting from
the sale of perindopril was entirely causally attributable to the invention. It
follows that no apportionment is warranted.
[80]
This conclusion is consistent with Apotex’
earlier experience with paroxetine in the United Kingdom where Apotex solicited
third-party distributors to market and sell the product. Distributors would not
“take the product without an indemnity” (transcript
December 2, 2014, starting at line 11, page 1761). In consequence Apotex supplied
an indemnity. The indemnity was a condition precedent imposed by the
distributors in light of the risk of liability for infringement. There was no
evidence the purchase price for paroxetine was apportioned in light of the
indemnity.
[81]
As stated above, the finding that all profits
earned from the export of perindopril were causally attributable to the 196
Patent is fatal to Apotex’ apportionment argument. However, I reach the same
result when the transfer price agreements are properly interpreted.
B.
The transfer price agreements
(1)
The standard of review
[82]
In Sattva Capital Corp. v. Creston Moly Corp.,
2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court concluded, at paragraph 50,
that contractual interpretation “involves issues of
mixed fact and law as it is an exercise in which the principles of contractual
interpretation are applied to the words of the written contract, considered in
light of the factual matrix.” It followed that contractual
interpretation should be dealt with as a question of mixed fact and law,
attracting a deferential standard of review unless an extricable error of law
is identified. One example of such an extricable legal error identified by the
Court was the application of an incorrect principle. This said, the Supreme
Court cautioned that courts should be cautious in identifying extricable
questions of law.
(2)
Principles of contractual interpretation
[83]
Sattva also
provides useful guidance on the interpretation of contracts. The construction of
a contract is to be based on common-sense. It is not to be based on technical
rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding”
(Sattva, paragraph 47).
[84]
Contracts are to be read as a whole. Words are
to be given their ordinary and grammatical meaning. The meaning is to be
consistent with the surrounding circumstances known to the parties at the time
the contract is formed. These surrounding circumstances are often referred to
as the “factual matrix”. While the scope of the
factual matrix is broad, it is not without limits. The factual matrix is to be
assessed objectively; the factual matrix does not include evidence of
subjective intentions.
(3)
Application of the standard of review and the
principles of interpretation
[85]
As discussed above, the Federal Court rejected
the assertion that the higher Patent Challenge price “was
paid solely on account of the indemnity provision and related litigation
services” (reasons, paragraph 51). The Federal Court’s reasons for this
conclusion are summarized above at paragraph 16.
[86]
Apotex asserts that the Federal Court committed
a number of extricable errors of law in its analysis. I agree that it was an
error of principle for the Federal Court to rely upon a boilerplate
severability clause in order to interpret the intentions of the parties.
[87]
The severability provision contained in each
transfer price agreement provided:
Any provision herein which in any way
contravenes the law or which is invalid or unenforceable, in whole or in part,
shall be deemed to not be a part of this Agreement and shall be severable
therefrom and the remainder of this Agreement shall remain in full force and
effect.
[88]
This provision evidences the parties’ objective
intention to take advantage of the common law doctrine of severance. This doctrine
allows invalid parts of the contract to be separated from the valid parts.
Severance contemplates the unintended situation where a term of a contract is
found to be invalid. Accordingly, a severance provision does not inform the broader
objective intention of the parties and their understanding when they entered
into a valid contract.
[89]
Servier argues that the Federal Court’s reliance
upon the severability provision did not dominate its interpretation of the
transfer price agreements. However, the remaining reasons given by the Federal
Court are not persuasive and are not sufficient to justify its conclusion. I
reach this conclusion for the following reasons.
[90]
First, Apotex’ obligation to indemnify existed
irrespective of whether the product was a Patent Challenge Product.
Accordingly, this fact by itself does not answer the question of whether the
higher Patent Challenge price is attributable to the value provided by the
obligation to indemnify.
[91]
Next, the Federal Court rejected Apotex’
contention that the factor that triggered the higher Patent Challenge price was
the increased risk of litigation. The Court instead found that the higher price
was triggered, at least in part, by Apotex’ desire to enhance its profitability.
In rejecting Apotex’ contention that the increased risk of litigation triggered
the higher price, the Federal Court failed to deal with evidence, some of which
is quoted above, relevant to the factual matrix. Perindopril carried with it a
high likelihood of patent risk and there was a need to protect the “fragility” of the affiliates. This was well known by
the parties at the time the transfer price agreements were entered into and the
Federal Court ought to have considered this. This said, the fact a higher price
was imposed is not determinative of the question whether this was the objective
intent of the parties.
[92]
Finally, the fact Apotex would receive a share
of any awards or settlements received by its affiliates is again by itself not
an answer to whether the higher Patent Challenge price is attributable to the
value provided by the indemnification.
[93]
Having concluded that the Federal Court
committed an extricable legal error when it interpreted the transfer price
agreements, I next consider their proper interpretation.
[94]
The transfer price agreement between Apotex and
Apotex UK is product-specific to perindopril. In my view, the following
provisions shed light on the intention of the parties.
[95]
Apotex UK agreed to pay a “Transfer Price” which is defined in the agreement to
mean “the price to be paid by Apotex UK to Apotex for
the supply of the Product” (clause 5.1(e)).
[96]
Recitals B and C of the agreement defined the
product to be “the generic pharmaceutical product Perindopril”
which is a generic version of the “product developed
and manufactured by Servier and/or its affiliates … under the brand name
Coversyl”.
[97]
To determine the Transfer Price one must first
determine whether perindopril is a Patent Challenge Product. clause 5.1(c)
defines a “Patent Challenge Product”:
“Patent Challenge Product” means a generic
pharmaceutical product manufactured by Apotex and supplied to Apotex UK for
distribution and sale in Territory during the same time that:
(i) a competitor markets and sells a
competitive branded version of the same pharmaceutical product for which the
competitor holds a recognized unexpired patent in the Territory; and
(ii) there are no other competing
generic versions of the same pharmaceutical product marketed and sold in the
Territory.
[98]
For a Patent Challenge Product clause 5.2
provides:
Transfer Price – Patent Challenge Product. During any period that the Product is a Patent Challenge Product,
Apotex UK shall pay to Apotex a Transfer Price for each shipment of the Product
manufactured and supplied by Apotex to Apotex UK for commercial sale in the
Territory equal to the Product’s Manufacturing Cost plus ninety percent (90%)
of the Product Profit.
[99]
For a non-patent challenge product the price was
to be set on the terms contained in clause 5.3.
[100] Recital F noted that it “is contemplated
that [Servier] may challenge the right of Apotex and Apotex UK to manufacture,
market and sell” perindopril for use in the United Kingdom. In that
event, the indemnification, control of the defence and entitlement to damages provisions
found in clauses 1 to 4 of the agreement applied. Briefly, clause 1 obliged
Apotex to indemnify Apotex UK against infringement claims. Clause 2 provided
that Apotex should assume control of the defence and would be entitled to a
percentage of all settlement or damage amounts resulting in infringement action.
Clause 3 allowed Apotex to receive a percentage of any settlement or damage
amounts resulting from a patent challenge brought in the United Kingdom, a
proceeding which only Apotex could initiate. Clause 4 provided that Apotex was to
control any litigation.
[101] The Apotex Australia transfer price agreement is very similar to the
Apotex UK agreement except for the following:
i.
Apotex’ entitlement to settlement or damage
amounts was set at a different percentage in Australia.
ii.
While the Apotex UK transfer price agreement
provides that the entry of other generics into the United Kingdom market would
trigger a drop in price, a somewhat different provision prevailed in Australia.
iii.
Apotex Australia was to pay a Transfer Price of
cost plus a different percentage of profit while perindopril was a Patent
Challenge Product.
iv.
A different provision applied to determine the
non-patent challenge product price.
[102] From these provisions I take the following.
[103] First, the agreements define the Transfer Price to be the price paid
“for the supply” of generic perindopril. The
Transfer Price is to be paid “for each shipment of the
Product manufactured and supplied by Apotex” for commercial sale. While
not determinative, it is significant that the transfer price agreements do not
state that the price difference between Patent Challenge perindopril and
non-patent challenge perindopril is in consideration for the indemnification
agreement.
[104] Second, and related to this, Apotex’ obligations to indemnify and
defend were the same whether perindopril was a Patent Challenge Product or not.
This makes it difficult to attribute the increased price to an obligation that
existed in any event.
[105] Turning to the factual matrix, I do accept that commercially Apotex
needed to receive a larger price where the litigation risk loomed large - as it
did with perindopril. However, by itself the need for a larger price falls
short of establishing an agreement that Apotex’ affiliates agreed to pay the
difference between the Patent Challenge price and the non-infringing patent
price solely in exchange for Apotex’ ongoing obligation to protect them. Such
an agreement would carry a number of consequences, including tax consequences.
As transfer price agreements it would have been expected that taxing officials
would scrutinize the agreements carefully to ensure the fairness of the sale
price. This would suggest that any agreement to apportion the revenue should have
precisely set out what was to be paid for what.
[106] For these reasons, I find that Apotex has not demonstrated that the
revenues received pursuant to the transfer price agreements was intended to be
apportioned between revenue received for the drug and revenue received for the
indemnity and defence costs it agreed to bear.
[107] Finally, on the facts of this case I find no air of reality to
Apotex’ apportionment argument in circumstances where:
i.
Apotex’ pleadings did not refer to
apportionment;
ii.
during the discovery process Apotex did not
suggest that the transfer prices paid by its affiliates were in respect of
anything other than the generic drug perindopril; and
iii.
in his initial report Apotex’ expert, Mr. Rosen,
computed Apotex’ profits based on its recorded revenues from its sales of
perindopril. He did so because he was of the view that the Patent Challenge price
represented the fair market value for the sale of perindopril (transcript
November 21, 2014, line 26, page 752 to line 17, page 753).
[108] It is simply not credible that Apotex objectively intended to
formally apportion the transfer price (as opposed to simply charging a higher
price) in circumstances where this notion was first floated on the eve of trial
by an expert accountant retained by Apotex to calculate its profits.
[109] For these reasons, I would dismiss this ground of appeal.
V.
Conclusion
[110] For the above reasons, I would allow the appeal in part. I would
remit to the Federal Court a single issue to determine in accordance with these
reasons. The issue I would remit is: whether Apotex would and could have
obtained quantities of non-infringing perindopril from any of Signa, IPCA or
Intas and, if so, whether Apotex would and could have used non-infringing
perindopril for sales to its affiliates in the United Kingdom and Australia.
This will require that paragraphs 3 and 4 of the judgment of the Federal Court
be set aside.
[111] In all other respects I would dismiss the appeal.
[112] As only two issues were raised on appeal and as success was divided
on these issues, I would not award any costs on the appeal.
“Eleanor R. Dawson”
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“I agree.
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Boivin J.A.”
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“I agree.
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Woods J.A.”
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