Thursday, February 24, 2011

Separation of NOC Proceedings from Infringement Action Results in Unfairness in Section 8 Damages

Apotex v Janssen-Ortho Inc / levofloxacin (NOC) 2011 FCA 57 (Stratas JA: Sexton, Layden-Stevenson JJA) varying 2010 FC 711 (Hughes J)

In the levoflaxin dispute, Janssen-Ortho faces the possibility of liability for section 8 damages in respect of a patent that has been found valid in both an infringement action and in the course of the NOC proceedings in which the liability may arise. While the particular facts of the levoflaxin dispute are unusual, the root cause of this paradox is the separation of the stay under the PM(NOC) Regulations and the infringement action itself.

A prohibition order consequent on PM(NOC) proceeding is analogous to an interlocutory injunction, and section 8 is analogous to the undertaking required of the party who obtains such an injunction: 2008 FC 1185 [54]. One important difference is that in contrast to a motion for an interlocutory injunction, the PM(NOC) proceedings are entirely separate from any subsequent infringement action. This means that entitlement to section 8 damages turns on success in the NOC proceedings, not on the success in the infringement action which typically follows. Compared with a true interlocutory injunction, this is unsatisfactory in two ways. On the one hand, if the patentee obtains the prohibition order but the patent is ultimately held to be invalid, the generic will not be able to recover its lost profits from being wrongly excluded from the market (Apotex v Syntex / naproxen (NOC) 2010 FCA 155 affm’g 2009 FC 494), though it would have been able to recover such losses on the undertaking if the PM(NOC) system did not exist, and an interlocutory injunction had been granted to patentee.1 Conversely, if the patentee loses in the NOC proceedings, but prevails in the infringement action, the patentee will nonetheless be liable to the generic under section 8, though it would not have been liable on the undertaking on an interlocutory injunction. This follows both from the general principle that the NOC proceedings and the infringement action are separate, and also on the face of section 8 itself (see esp. subsection 8(3)).

This second scenario has not yet arisen directly, but the levoflaxin litigation raises the same problem in an exaggerated form. In 2004 FC 1631 the patent in issue was found to be invalid for obviousness in NOC proceedings against Novopharm. In the subsequent infringement action against Novopharm, 2006 FC 1234 affm’d 2007 FCA 217, Hughes J found the patent to be valid and infringed. Apotex then applied for an NOC and in 2008 FC 744 Shore J held the patent to be valid and granted a prohibition order. Here is where things took an unusual twist. In the course his decision, Shore J referred repeatedly to the decision of Hughes J in the Novopharm litigation. In 2009 FCA 212 the FCA decided that Shore J had relied excessively on the decision of Hughes J and remitted the matter back to him with instructions to assess the evidence independently. Shore J, evidently piqued at the FCA’s holding, recused himself: 2010 FCA 643 affm’d 2011 FCA 58. The matter was then heard by Hughes J. However, the day after the FCA decision remitting the matter to Shore J, the patent expired, and the day after that the NOC was granted. In 2010 FC 711 Hughes J held the prohibition proceeding to be moot as the NOC had been granted. However, Hughes J did not “dismiss” the action; instead, he “terminated” it for mootness. In 2011 FCA 57 the FCA varied this by holding that the matter was instead “dismissed.” The significance of the terminological distinction is that section 8 provides that the generic is entitled to damages if the application is “dismissed by the court hearing the application.” It was expressly in order to make it clear that Apotex was not entitled to section 8 damages that Hughes J held that the proceeding was “terminated” [34].

Monday, February 21, 2011

Maintenance Fees Must be Paid by the Authorized Correspondent: Why?

Unicrop Ltd. v. Canada (Attorney General) 2011 FCA 55 Noël JA: Pelletier, Trudel JJA affm’g 2010 FC 61 Boivin J

In Unicrop the FCA affirmed that maintenance fees must be paid by the authorized correspondent, and that the Commissioner is entitled, and indeed apparently required, to refuse payment from anyone else. It is difficult to argue with this conclusion, given the text of the Patent Rules; the question is why the Rules impose such a stringent requirement.

Unicrop’s representatives on filing were Bereskin & Parr LLP, who also paid the first two annual maintenance fees. The third annual fee was not paid in time and the application was deemed abandoned. Just prior to the one year grace period for reinstatement, the applicant attempted to reinstate the application through their new agent, Furman & Kallio. However, the notice of appointment of agent had not been submitted to CIPO prior to the grace period deadline [FC 27]. CIPO therefore refused to accept the fee payment, on the basis that it had not been submitted by the authorized correspondent. The Appointment of Agent form was submitted to CIPO after the deadline, but CIPO was of the view that the application could not be reinstated, as the grace period had elapsed.

The FCA affirmed Boivin J, who had upheld the Commissioner’s decision: "the relevant provisions of the Rules could not be clearer. Subsection 6(1) provides that “for the purpose of prosecuting or maintaining an application the Commissioner shall only communicate with, and shall only have regard to communications from, the authorized correspondent.” The wording of section 3.1, which deals with the late payment of fees, makes it clear that this prohibition extends to communications relating to all such payments as it operates ‘subject to subsection 6(1)’” [34]. The decision of Hughes J in Sarnoff Corp. v. Canada (Attorney General), 2008 FC 712, aff'd 2009 FCA 142 was persuasively distinguished on the basis that Hughes J, faced with ambiguous evidence, had found as a fact that the notice of appointment of agent had been received by CIPO [29, FC 20].

The Court’s analysis is entirely convincing as a matter of law, but the result is not satisfactory. As Hughes J pointed out in Sarnoff “The seemingly minor fault in having maintenance fees actually paid, received and recorded by a firm which, arguably, at the time was not the patent agent or associate agent of record, results in the wholly disproportionate result of loss of all rights to receive the grant of patent monopoly rights should the application otherwise prove to be acceptable.” [32]. It is true that the facts in Unicrop were different enough to compel a different result, but the point remains that the loss of all rights is disproportionate to the fault.

Thursday, February 17, 2011

Must the Factual Basis for Sound Prediction Be Disclosed in the Patent?

Eli Lilly Canada Inc. v. Apotex Inc. / raloxifene (NOC), 2008 FC 142, 63 CPR (4th) 406, aff'd 2009 FCA 97, 78 CPR(4th) 388.

In Eli Lilly / raloxifene (NOC), 2008 FC 142 Hughes J held that the data supporting a sound prediction of utility must be disclosed in the patent itself [163-64]. This was the primary basis for holding the allegation of invalidity to be justified [183]. The holding that the disclosure must be in the patent was crucial, as Hughes J held that a good factual basis for the sound prediction did exist, and if it had been disclosed in the patent, that ground of attack would have failed [156 - 58]. Hughes J’s holding on this point was specifically affirmed by the Court of Appeal in 2009 FCA 97 [15] Noël JA: Desjardins, Trudel JJA. In this post I will argue that despite this clear holding, the doctrine that the factual basis for sound prediction must be disclosed in the patent itself is conceptually unsound and inconsistent with the leading cases, including those of the Supreme Court of Canada. Recent jurisprudence from the FCA has provided a clarification that will allow the application of the doctrine to be avoided in many, perhaps most cases, but we nonetheless are left with an unjustifiable and technical doctrine that is uniquely Canadian, and so may serve as a trap for unwary patent drafters.

Taking the conceptual difficulty first, it is well established that the data supporting utility need not be disclosed in the patent itself. Indeed, the patentee need not even explain how the invention is useful: Consolboard v. MacMillam Bloedel, [1981] 1 SCR 504 at 526; Pfizer / atorvastatin calcium (NOC), 2008 FCA 108 [57]-[62]; Pfizer / sildenafil (NOC) 2010 FCA 242 [82]. Consequently, the raloxifene rule implies a sharp distinction between a patent where utility has been established at the relevant date, and one where utility is based on sound prediction. In the former case the patent need not disclose any data supporting utility, but in the latter it must: see 2010 FC 1065 [92]. The difficulty with this distinction is that it is not consistent with a purposive interpretation of the Patent Act. On the text of the Act, there is only one utility requirement, namely that which defines an “invention” to be “new and useful.” There is therefore no textual basis for treating demonstrated utility and sound prediction differently. The purpose of that utility requirement is to ensure that a patent is not granted for “mere speculation”: Wellcome / AZT 2002 SCC 77 [69]. A line must be therefore drawn somewhere in the development of an innovation from conception to commercialization. That line is drawn at the point of sound prediction. Thus there is no purposive basis for the distinction between demonstration of actual utility and sound prediction. An innovation that has demonstrated utility is closer to practical application than one where there is only a sound prediction of utility, and an innovation that has actually been delivered to consumers is closer again; but none are based on mere speculation, and therefore all are equally “useful” under the Act. Note that the Supreme Court in Wellcome / AZT consistently treated demonstrated utility and sound prediction on the same terms: [46], [52], [56].

Tuesday, February 15, 2011

Lovastatin Background

Merck & Co Inc. v. Apotex Inc. / lovastatin 2010 FC 1265 Snider J

I have now commented on a variety of the legal issues that were raised in Snider J’s 244 page lovastatin decision, and while those issues do stand alone, a factual background might be useful. Of course, it would have been better if I had provided this background at the outset, but I was anxious to post on the legal issues.

The sole patent in issue, #1,161,380 (granted in 1984 – old Act), was a process and product-by-process patent to lovastatin when made with the micro-organism A. terreus. Lovastatin, the first commercialized “statin” sold in the Canadian market for the treatment of elevated blood cholesterol, was sold by Merck as MEVACOR. Merck was unsuccessful in obtaining an order of prohibition under the PM(NOC) Regulations because the statutory stay expired before the application was heard on the merits. (In 2010 FC 1264, released together with 2010 FC 1265, Snider J held that Apotex was not entitled to section 8 compensation: see my posts here and here.) This means that Snider J faced the infringement and validity questions on a clean slate.

In anticipation of obtaining a compulsory licence, Apotex had developed an infringing process for the production of lovastatin, AFI-1, that used A. terreus. In anticipation of the compulsory licencing regime being replaced by the PM(NOC) Regulations, Apotex subsequently developed a non-infringing process, AFI-4, which used a different organism, C. fuckelii. Apotex supplied the Canadian market primarily with product made in China by Blue Treasure, a joint venture with Chinese partners. Apotex transferred know-how related to both the AFI-1 and AFI-4 technologies to Blue Treasure. Once it became clear that Apotex would proceed under the NOC Regulations rather than by compulsory licence, Apotex insisted that Blue Treasure use the non-infringing AFI-4 technology. However, this was more expensive than the infringing AFI-1 process, and Snider J ultimately held on the facts that Blue Treasure had been boosting its profits by using the cheaper infringing process to make the lovastatin that it delivered to Apotex.

An interesting practical point is that Snider J accepted evidence that traces of DNA of the producing organism were present in the final product, so that by identifying the DNA it was possible to determine which process had been used. Snider J relied on this evidence in holding that one particular batch, that had been made in Winnipeg, had been made by the infringing process [465]. This DNA evidence was crucial for the particular batch in question, as the documentary evidence was not conclusive. (Snider J did not rely on DNA evidence for the Blue Treasure product as the provenance of the samples was not proven adequately, and documentary evidence sufficiently established infringement.) While interesting, this does not appear to raise any novel questions of evidence law. The primary debate, as to whether traces of DNA could survive the processing and whether Merck’s testing was reliable, was purely factual.

I have already commented on most of the legal issues raised by the decision. For completeness, I will mention two more. Apotex had argued that Merck was not the first inventor of the compound as claimed: recall that at the time the Act embodied a first-to-invent system. However, the Act at the time, in section 61(1), placed certain limitations on the challenge to validity based on inventorship. After a rigorous interpretation of that section Snider J held that Apotex’s challenge based on inventorship was precluded by the section, and in any event, there was no conflict in inventorship. Finally, a certain quantity of product was exempted on the basis of the regulatory working exemptions in s 55.2(1) of the current Act. On the only contentious point, Snider J held that production of product for the purpose of improving Apotex’s manufacturing process was exempt, on a straightforward application of Micro Chemicals [1972] S.C.R. 506.

Monday, February 14, 2011

Claim Construction and Inoperable Species

Merck & Co Inc. v. Apotex Inc. / lovastatin 2010 FC 1265, Snider J

As noted in my last post, claim 1 of the patent at issue in the lovastatin case related to a specified compound produced by the microorganism A. terreus. It was established [492] that not all stains of A terreus would produce the product in question. Apotex argued that the claim was therefore invalid for lack of utility [492]. Snider J rejected this argument on the basis that the claims, properly construed, included only those strains capable of producing lovastatin [494], [110]-[121].

This point of claim construction is important because of the rule that a claim lacks utility if “[t]ere is evidence of lack of utility in respect of some of the area covered” [495]. I argued in a previous post that this rule is unsound. However, it has been accepted and applied in two SCC decisions, namely Minerals Separation North American Corp. v. Noranda Mines Ltd. (1952) 69 R.P.C. 81 (J.C.P.C.) affm’g [1950] S.C.R. 36(SCC) and Société des Usines Chimiques Rhone-Poulenc v. Jules R. Gilbert Ltd [1968] S.C.R. 950. Consequently, rather than rejecting the rule itself, Canadian courts have largely avoided its application by construing the claims to exclude the inoperable species, as did Snider J. This approach was established by the SCC decision in Burton Parsons Chemicals, Inc. v. Hewlett-Packard (Canada) Ltd. [1976] 1 S.C.R. 555 which distinguished Minerals Separation and Rhone-Poulenc on the basis of claim construction.

In Burton Parsons, the claim in question, to an electrocardiograph cream, specified that a cream of specified composition that was “compatible with normal skin.” The SCC adverted to this, noting that in  Minerals Separation and Rhone-Poulenc “the object of the patent was some substances of a definite chemical composition” and “[u]nfortunately for the patentees, the claims covered at the same time” some compounds which were not useful for the specified purposes. The Court also noted that the inutility of the compounds in the earlier cases “was not known to the prior art. This is totally unlike the undesirable properties of some highly ionizable salts which Hewlett-Packard listed as objectionable. Their noxious character was well known . . .”

Thus Burton Parsons left two points open. First, what are the limits of such functional phrases: is it necessary that the inoperable embodiments were known at the time? Second, is it necessary that the claim expressly state a functional limitation, such as “compatible with normal skill,” or can this be read in on the basis that a person skilled in the art would appreciate that requirement? There was certainly many statements in Burton Parsons that would imply a generous reliance on the understanding of a person skilled in the art, but the points on which the Court distinguished the prior cases suggest a narrower approach.

The first question was addressed in Apotex Inc v Lundbeck Canada Inc / escitalopram (NOC) 2010 FCA 320 (Noël JA: Pelletier, JJA) affm'g 2009 FC 146 (Harrington J), in which claim 1 claimed “non-toxic acid addition salts” of the specified compound. The  pamoic acid salt was conceded to be toxic [105], and Apotex argued that claim 1 was therefore invalid, as there was no suggestion that pamoate salt was toxic as of the claim date. It appears to be very clear on the facts that the toxicity of the pamoate salt would not have been obvious on the claim, as the patentee has specifically claimed that salt in claim 2, which was held to be invalid for that reason. The FCA nonetheless held that claim to be valid as excluding non-toxic salts in its terms, including the pamoate acid salt [108]. It appears, therefore, that it is not essential that the functional limitation be known as of the claim date.

The second question was at issue in the lovastatin decision as “[n]either claim 1 nor the specification explicitly states that the '380 Patent excludes nonproducing strains of Aspergillus terreus” [111]. It was established on the facts that a skilled person would know that not every strain of A terreus would produce the desired results [117] and that it would be routine for a skilled person to identify and optimize the producing strains [120]. On these facts, Snider J had no difficulty finding that it was an implicit requirement that non-producing strains are excluded from the scope of the claim [121]. In support of this conclusion, she cited only the general principle from Consolboard [1981] 1 SCR 504, 520, that the patent should be read “being neither benevolent nor harsh but rather seeking a construction which is reasonable and fair to both patentee and public.” While Snider J’s decision was not unduly burdened with authorities on this point (it should be understood that this was a relatively minor part of a long and complex decision), general principles are enough to show that her holding is surely right: a patent must be approached with  “a mind willing to understand, not by a mind desirous of misunderstanding” (Whirlpool v Camco 2000 SCC 67 [49(c)]). If more authorities are needed, we may note that her holding is consistent with the dictum in Burton Parsons that “In Sandoz Patents Ltd. v. Gilcross Ltd., we had no hesitation in upholding claims for "therapeutically tolerable salts" of thioridazine to be obtained by reacting "with a therapeutically acceptable acid". I cannot think that the omission of the qualification "therapeutically acceptable" would have voided the patent and I will note that in the Rhône-Poulenc case this question was left open.”

But if Snider J is right that the operability limitation can be implied, and the FCA was right in Lundbeck / escitalopram (NOC) that inoperability need not be known as of the claim date, then it becomes increasingly difficult to distinguish Minerals Separation and Rhone-Poulenc. I argued in my last post that the principle they stand for is unsound. It now seems evident that they would not be decided the same way today. Perhaps the time has come to recognize that they are no longer good law.

Friday, February 11, 2011

Utility and Inoperable Species

Merck & Co Inc. v. Apotex Inc. / lovastatin 2010 FC 1265, Snider J

Claim 1 of the patent at issue in the lovastatin case (#1,161,380) related to a specified compound produced by the microorganism A. terreus. It was established [492] that not all stains of A terreus would produce the product in question. Apotex argued that the claim was therefore invalid for lack of utility [492]. Snider J rejected this argument on the basis that the claims, properly construed, included only those strains capable of producing lovastatin [494], [110]-[121].

This raises two questions. The most obvious is as to whether Snider J’s construction of the claim was sound, particularly because neither claim 1 nor the specification explicitly states that the '380 Patent excludes non-producing strains of A. terreus [111]. In other words, is it permissible to read in an operability limitation?

The more fundamental question concerns the underlying rule of law respecting utility. It is now routine in Canadian law to say that a claim lacks utility if “[t]here is evidence of lack of utility in respect of some of the area covered” by the claim [495], quoting Wellcome / AZT 2002 SCC 77 [56]. This rule can operate harshly. If an inventor discovers a new class of compounds that are generally useful, for example in treating a deadly disease, this rule implies that even if a single compound within that class does not have the promised utility, the claim is invalid, even though a person skilled in the art would have no difficulty identifying the inoperative species. This consequence may be avoided if the claims are construed to exclude inoperable species, as in Snider J’s lovastatin decision, but the claim construction issue cannot be properly understood without casting a critical eye on the underlying utility doctrine.

Wednesday, February 9, 2011

Protective Order and Executive Access to Confidential Information

Novopharm Limited v. Nycomed Canada Inc. / pantoprazole (NOC) 2011 FC 109 Mandamin J

When I started this blog I told myself that I would not comment on procedure cases, but I couldn’t help but notice that this case goes to the point I made in last week’s post that difficulties in discovery may arise in the context of lost profits damages, as well as in an accounting of profits.

In the action underlying this order, Novopharm is seeking damages against Nycomed under section 8 of the NOC Regulations. Novopharm brought a motion for a protective order restricting access to certain confidential financial material that Novopharm would have to produce in order to establish its damages. In particular, Novopharm was concerned that its financial information would be indirectly disclosed to Ranbaxy, with whom Nycomed had an authorized generic agreement for the drug in question. Novopharm requested that access be restricted to Nycomed’s designee who were not involved in the Ranbaxy agreement. Prothonotary Milczynski’s order granted access to several of Nycomed’s senior executives, including Nycomed’s CEO. Novopharm appealed.

While the decision was understandably brief, the points of principle relied on by Mandamin J suggest a strong presumption against restrictive access excluding the party’s executives, on the basis that it is the corporate executives who must make the key litigation decisions on the company’s behalf, and a client must be fully informed in order to properly instruct counsel: [36]-[37]. However, the more fully reasoned decisions appear to be more nuanced than Mandamin J’s brief discussion suggests. For example, while Warner-Lambert Co. v Glaxo Laboratories Limited, [1975] RPC 354 (CA) does state that “it is the corporate decision-makers who are authorized to make decisions on the company’s behalf,” the decision as a whole reflects a concern for the legitimate interests of both parties. According to Buckley LJ:

“the court is, in my opinion, confronted with a balance or conflict of expedients. . . .How can justice be done and at the same time effect be given to the rights of each party to the greatest possible extent? . . .In such a case a controlled measure of disclosure seems best calculated to serve the interests of justice. . . . His advisers are his agents in the matter, and strong grounds must be required for excluding the principal from knowledge which his agents properly acquire on his behalf.  But this principle must be subject to some modification if trade secrets are to be protected from disclosure to possible competitors.”

In Warner-Lambert the Court of Appeal did grant access to the plaintiff’s CEO, but only after having explicitly considered whether the CEO could be properly advised without access to that information. The Court indicated that in a case, for example, where the evidence was of a technical nature such that the executive would take advice rather than form his own opinion, it would not be necessary to disclose to him the underlying facts. This principle was applied (without citing Warner-Lambert) in Automated Tabulation Inc. v. Canadian Market Images Ltd., 1995 CanLII 7073, 24 OR(3d) 292(ON SC) in which the plaintiff’s principal officers were precluded from access in part because “there were many available experts who were familiar with the relevant computer language who could be retained to assist the plaintiff” [4]. Conversely, where the technical nature of the information means that counsel cannot be properly instructed without input from the client, access is necessary: Murphy Oil Co. Ltd. v Predator Corp. Ltd., 2002 ABQB 992 [16]. Note that in Kimberly-Clark of Canada Ltd. v. Proctor & Gamble Co. et al (1989), 25 C.P.R.(3d) 12 (FCA), the Court of Appeal approved a very restrictive order that granted access to litigation counsel and “one designated representative of the receiving party . . . who is working directly on this litigation and to whom it is necessary that the material be disclosed for purposes of this litigation and who shall not be employed in research, development, or production of diaper products at the time of disclosures and for two (2) years after disclosure of such confidential information.” The Court varied this order by giving access to a patent agent who had been a member of the litigation team from the outset. However, the exclusion of executive officers was not challenged and the facts justifying the order as a whole were not given. A very helpful discussion of a range of authorities is found in the decision of the High Court of Ireland in Koger Inc v James O’Donnell [2009] IEHC 385. Kelly J concluded that a restriction that denying access to persons in the plaintiffs’ organisation “can be ordered but it is unusual. If such a restriction is to apply, there must be exceptional circumstances which would justify it.” On the facts, Kelly J held that “[t]he case is a finely balanced one,” and he consequently ordered limited disclosure of the material in question.

On the whole, it appears that a restrictive order of the type sought by Novopharm is exceptional, but the judicial analysis is not generally as one-sided as Mandamin J's general statements of principle might suggest.

With that said, on the facts Mandamin J’s decision is consistent with a more balanced approach. The factor he cited as most important [40] was that Nycomed is a small company in which all executives were involved with both strategic planning and the Ranbaxy agreement. The financial information on which damages are calculated are analogous to technical information at issue in an infringement action, and this implies that some executive from Nycomed would have to have access to the information if counsel were to be properly instructed. Novopharm acknowledged as much in that its proposed order would only have excluded designees involved in the Ranbaxy agreement. But on the facts, it was essentially impossible for Nycomed to satisfy that requirement while still providing proper instruction. A second significant point relied on by Mandamin J at [33]-[35] was that the documents Novopharm designated for restricted access were defined in very general terms, such as “commercial strategic planning materials for Novopharm’s or Nycomed’s pantoprazole products.” This is both broad and imprecise, and Mandamin J no doubt envisaged an endless series of motions seeking clarification.

Similarly, Murphy Oil Co. Ltd. v Predator Corp. Ltd., 2002 ABQB 992, relied on by Mandamin J, stated at [7] that "[t]he burden of justifying the need for an order precluding inspection of records by the parties themselves lies in the party seeking the order. Such an order is rarely given and the applicant’s burden is heavy." Despite this strong wording, it too is readily justified on a more balanced approach, as the plaintiff did not seek the order protecting its information until it had almost completed discovery of the equivalent information held by the defendant [14], and, as noted above, the information was technical and required input of the client to instruct counsel.

Monday, February 7, 2011

What is a “patent”? Constitutionality of the Data Protection Regulations.

Apotex Inc. v. Canada (Health) 2010 FCA 334, Nadon JA: Sharlow, Layden-Stevenson JJA affm’g 2009 FC 725 Mandamin J

This case was a challenge to the validity of the Data Protection Regulations, on the basis, inter alia, of federalism. The heads of power advanced in support of validity were the criminal law power, trade and commerce, and POGG. Mandamin J held that the DPR is intra vires under the trade and commerce power [107], but not under the criminal law power [85]. The Court of Appeal held that it was valid under the criminal law power, and did not address whether it also fell under trade and commerce [132]. Neither addressed POGG [FC 110] [FCA 132].

I don't have the expertise to comment on the courts’ interpretation of the criminal law and trade and commerce powers. What puzzles me is that subsection 91(22) “Patents of Invention and Discovery,” was not even argued, though it seems to be the most natural head of power. Patents, after all, “are essentially about information as to what to make or do.”1 It is knowledge, not some physical thing, that provides the quid pro quo for which the patent is granted.2 A patentable invention is “the practical embodiment of the new knowledge.”3 All these descriptions of patents are equally applicable to the data at issue under the DPR, which is information as to the safety and efficacy of a particular drug. More generally, the purpose of patent law is to provide an incentive to disclose valuable new information that is costly to develop but easy to copy, by providing the patentee with a monopoly period at which its product can be priced above marginal cost, so allowing it to recoup development costs. Both the FCA at [109] and Mandamin J at [78], [83] agree that this is the purpose of the DPR. All this suggests to me that the DPR is a form of patent.

Of course, the DPR is not exactly like a modern patent granted under the Patent Act. Most obviously, there is no non-obviousness requirement. Protection under the DPR is most important precisely when the new drug is not innovative enough to be patentable under the Patent Act, and yet it is new enough to require new clinical testing prior to approval by the Department of Health. That the DPR does not require inventive ingenuity is irrelevant to whether it is a valid exercise of the patent power. Quite apart from any notion of the constitution as a “living tree,” at the time of confederation there was no requirement of non-obviousness recognized as such in patent law. The requirement for inventive ingenuity emerged gradually in the mid-to-late 19th century out of the novelty requirement. At the time of confederation the leading case was the decision of the House of Lords in Harwood v Great Northern Railway (1865) 11 E.R. 1488 holding at 1501 that “mere application of an old contrivance in the old way to an analogous subject [is] without novelty in the application.” Though this doctrine of analogous use eventually matured into the modern inventive step requirement, it was at that time still conceived of as an aspect of the novelty requirement. The exercise of inventive ingenuity as a separate requirement was not established as a distinct requirement until the 1880s.4 Even so, as late as the 5th edition in 1909, Terrell still referred to the issue as being one of novelty (at 37), and as late as 1947, in tracing the historical origins of the rquirement of inventive ingenuity, Dr. Fox argued that the whole doctrine was ill-advised and developed in error, and that the law should never have moved beyond the novelty requirements.5 Of course, Dr. Fox lost the day on this point, as he well knew, but his argument does show that inventive ingenuity cannot be considered to be a defining characteristic of patent law, either historically or normatively.

The core of the patent power, I would suggest, is to provide an incentive to the development of practical new knowledge that is difficult to develop and easy to copy, by providing a period of monopoly over the exploitation of that knowledge. Whether that definition is roughly correct, it is historically clear that non-obviousness is a relatively recent appendage, that must itself be justified by the living tree doctrine, not a central part of the concept. If anything, the protection provided by the DPR is closer to the conception of a patent that was current in 1867 than is our modern approach. Perhaps it might be said that the “living tree” metaphor works both ways, and though the DPR would have been within the patent power in 1867, it is no longer; the more obvious conclusion is simply that the DPR is valid under subsection 91(22).

1 Aerotel Ltd v Telco Ltd [2006] EWCA Civ 1371 [32] Jacob LJ.
2 Consolboard Inc v MacMillan Bloedel (Sask) Ltd, [1981] 1 SCR 504 at 517.
3 Shell Oil Co v Canada (Commissioner of Patents), [1982] 2 SCR 536 at 549.
4 See Hayward v Hamilton (1881) Griffin’s Patent Cases 115; Morgan v Windover (1887) 4 RPC 417 at 425 (Ch.D.);  Gadd & Mason v Mayor etc. of Manchester (1892) 9 RPC 516 at 425-26 (CA).
5 Harold G. Fox, Monopolies and Patents: A Study of the History and Future of the Patent Monopoly (1947 Toronto, U of T Press), generally Ch. XVII and esp 237.

Thursday, February 3, 2011

Accounting Denied

Merck & Co Inc. v. Apotex Inc. / lovastatin 2010 FC 1265, Snider J

An accounting of profits is an equitable remedy and therefore discretionary, but it has been common practice in the Federal Court to allow a successful patentee to elect between an accounting and damages. In the lovastatin decision, Snider J denied an accounting to the patentee. The question is whether this is part of general reconsideration of the practice of allowing an election, as was called for by Hughes J in 2006 FC 524 [227], or whether it simply reflects the particular facts of the case.

In refusing to award the accounting Snider J adverted to two general points of principle. The first is that “[i]t is necessary for a party seeking an equitable remedy, such as profits, to show some basis for the exercise of equity,” [617], citing Janssen-Ortho Inc. v. Novopharm Ltd., 2006 FC 1234, 57 C.P.R. (4th) 58 at para. 132, (Hughes J). In Janssen-Ortho Hughes J denied an accounting for that reason alone. With respect, the view that equitable remedies are inherently extraordinary is unsound in principle and dangerous in practice. The historical reason for restricting access to equitable remedies was to restrict forum shopping and minimizing the case-load in equity, which had limited resources compared with the courts of law. In other words, it was not equitable remedies that were extraordinary, but access to the courts of equity. There is no good reason to treat equitable remedies as extraordinary after the unification of the courts: see my article “Interlocutory Injunctions and Irreparable Harm in the Federal Courts,” 88 Can Bar Rev 517 (2009). The issue here is not simply accounting of profits; permanent injunctions are also equitable remedies. While there may well be circumstances in which a permanent injunction is inappropriate (see eBay Inc. v. MercExchange (2006) 547 US 388), it surely would be inadequate to say that injunctions should routinely be denied simply because they are equitable in nature. The same is true for an accounting. The law has moved beyond such formalism.

The second point of principle is that “[a]n accounting of profits is not an easy calculation” [615]. While this is no doubt true, the relevant question is whether it is easier than damages. I may be missing something from my academic perch, but it is not clear to me why it is more difficult to calculate the defendant’s actual profits in an accounting than it is to calculate the plaintiff’s hypothetical lost profits in a damages assessment; certainly there are many well-known judicial statements remarking on the difficulty of calculating damages.* I can understand that a profits calculation of either kind might be more difficult than reasonable royalty damages, but a patentee is entitled to lost profit damages if it can show that it has lost sales, and the greater ease of calculating a reasonably royalty has never been a ground for confining the patentee to that remedy. One practical point that may make an accounting more difficult is that the defendant is liable to resist the necessary discovery to avoid disclosing business information to a competitor (Beloit v. Valmet OY (1992), 45 CPR(3d) 116 at 118 (FCA)). But it is disquieting to respond to this by instead requiring the successful patentee to disclose its business information to an infringing competitor. Of course, on the facts of a particular case it may be easier to calculate the plaintiff’s hypothetical lost profits than the defendant’s actual profits, but that is very different from saying that an accounting is generally more difficult.

The advantages of an accounting must also be recognized. One advantage stems from the very feature that gives rise to the difficulty: that it is the infringer, rather than the successful patentee that has to disclose its business information can be seen as an advantage of the remedy. But the more compelling point is that the alternative of a reasonable royalty, which is the easiest calculation, amounts to a compulsory licence. As Zinn J has pointed out in Monsanto Canada Inc. v. Rivett 2009 FC 317 at [23], “[a]t the level of principle, there is no deterrent from infringing the patent if what the infringer is required to hand over is the sum he would otherwise have paid to Monsanto to buy the seed and the licence. In fact, this would almost be counter to the purpose of deterrence. It is much like saying, as the plaintiffs put it in their oral submission, ‘Catch me if you can’. If caught, the defendant would be required to pay the sum he would have paid to use the patent in any event. When not caught, he is left with a windfall.”

Surely an accounting is a far better response to the deterrence problem than the US approach of treble damages for wilful infringement. The problem with the US approach is that determination of wilfulness is always uncertain; used too sparingly the deterrence is inadequate, but used too vigorously its punitive nature risks chilling legitimate activity. An accounting strikes a sound middle ground; the deterrence is adequate because the defendant is worse off than if it had obtained a licence; but the remedy is not punitive, in the sense that the defendant is no worse off for having infringed that if it had pursued some other activity entirely.

Given these advantages, I would suggest that the long-standing practice of permitting a successful patentee to elect an accounting, unless there is some reason to refuse on the facts, is sound. The difficulty of an accounting can be taken into account, but ideally it would be in comparison with the difficulty of calculating lost profits. The notion that an accounting somehow needs special justification simply because it is equitable in nature is an argument that should be banished.

On the facts, Snider J pointed to two factors that weighed against allowing an accounting. One was the delay in bringing the matter to trial and the consequent exceptional difficulty of calculation of the defendant’s profits [620]. Delay is a well accepted reason for refusing an equitable remedy, both generally and with respect to an accounting in particular, and to the extent that the patentee contributed to the delay, as Snider J suggested, then it is not unreasonable that the patentee should suffer this consequence. The second factor was the complexity of the defendant’s commercial arrangements, which would again increase the complexity of the calculation. Presumably, though Snider J did not say so directly, it would make calculation of Apotex’s profits more difficult than calculation of the plaintiffs’ lost profits. With that said, the implication, that a defendant may shield itself from an accounting by carefully structuring its supply arrangements, is somewhat troubling, though perhaps it is unrealistic to suppose that this consideration would be of sufficient practical importance to affect the defendant’s business structure.

In the end, I suggest that Snider J’s decision to deny an accounting is best seen as an application of the traditional approach to the particular facts of the case. Even though it has been common, even routine, to allow the patentee to elect an accounting, an accounting has never been considered as of right. There have always been occasional cases denying that remedy on the facts, and this is one of them.

* “[T]he whole subject-matter [of the calculation of damages] is one that is not capable of being mathematically ascertained by any exact figure.” Meters Ltd. v. Metropolitan Gas Meters Ltd. (1911), 28 RPC 157 at 166 (C.A.).
"[T]he restoration by way of compensation is therefore accomplished to a large extent by the exercise of a sound imagination and the practice of the broad axe."  Watson Laidlaw Co. Ltd. v. Pott, Cassells and Williamson (1914), 31 RPC 104 at 117-118 (H.L.), cited and applied in Colonial Fastener Co. v. Lightning Fastener Co., [1937] SCR 36 at 44.
"[I]t is impossible to ascertain with arithmetical precision what in the ordinary course of business would have been the amount of the patentees' sales and profits." United Horse-Shoe & Nail Co. v. Stewart & Co. (1888), 5 RPC 260, L.R. 13 App.Cas. 401 at 413 (H.L.).