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].

But for Shore J’s reliance on Hughes J’s decision, it is overwhelmingly likely that the prohibition order would have been granted and Apotex would not be entitled to section 8 damages. Shore J found the allegations of invalidity to be unjustified on the first instance, and if he had not recused himself, he would have come to the same conclusion again: 2010 FC 643 [7]. One must suspect that if Hughes J on remand had considered the matter on the merits, he would have come to the same conclusion in the Apotex NOC proceeding as he had come to in the Novopharm infringement action. Thus Janssen-Ortho is facing2 section 8 liability in respect of a patent that has been found to be valid in infringement proceedings, and would most probably have been held to be valid in the very NOC proceedings under which that liability arises. The unfairness of this result is evident.

Of course it is possible that Shore J might have come to a different conclusion if his initial determination had not been tainted by excessive reliance on the decision of Hughes J; it is possible that he would have found the proceeding moot if he had not recused himself; and it is possible that Hughes J would have come to a different conclusion on the merits had he addressed them. But these questions are not relevant to the larger point. The unfairness does not arise solely because of the procedural quirks of this particular action. It is clear on the face of the PM(NOC) Regulations that section 8 will be triggered if the application for a prohibition order is dismissed because the court hearing the application concludes that the allegation of invalidity is justified. This is so even if the patent is held to valid in a subsequent infringement action, and even if that action is between the same parties. The unfairness is palpable in the levoflaxin decision because the patent would have been held valid in the NOC proceeding itself, but being liable in damages to a generic which has been kept out of a market that it had no right to enter is equally problematic, even if the ultimate determination of validity is made in a subsequent infringement action. It must be emphasized that the problem runs both ways. To exclude the generic from entry on the basis of an invalid patent, without compensation for the impairment of its rights, as was the result in Syntex, is equally unfair; this unfairness is the reason that the practice of requiring an undertaking from the plaintiff arose in the context of interlocutory injunctions generally: American Cyanamid [1975] AC 396, 406.

This is not to say that the FCA was wrong to hold in Syntex that one cannot reach back from the infringement action to trigger section 8 liability. The FCA’s view in that decision was in effect legislatively affirmed by the 1998 amendments to the Regulations. Nor am I suggesting that the Regulations themselves should be amended to condition section 8 damages on the outcome of an infringement action which might never occur. The real problem, I suggest, is inherent in the separation of the stay under the NOC proceedings from the substantive infringement action. None of these problems would arise if the matter were dealt with by way of interlocutory injunction. Of course, doing away with the PM(NOC) Regulations and reverting to dealing with the matter entirely in terms of interlocutory injunctions would be unacceptable to the patentees, in light of the Federal Court practice of routinely refusing interlocutory injunctions, regardless of the merits, on the basis that the irreparable harm requirement has not been satisfied. In my article on Interlocutory Injunctions and Irreparable Harm in the Federal Courts, 88 Can. Bar Rev. 517 (2009), I have argued that this interpretation of the irreparable harm requirement was an error which arose initially in Cutter Ltd. v. Baxter Travenol Labs. (1980), 47 C.P.R. (2d) 53 (F.C.A.) because the FCA wished to find a legal basis on which to overrule the trial’s judge’s questionable finding on the balance of convenience. Is it possible that the problem of the levoflaxin litigation, and the larger problem resulting from separate NOC proceedings, are the vastly amplified echo of that long-ago trial decision?

1          Syntex was decided under the 1993 Regulations, but 1998 Regulations, which specify that section 8 damages are triggered only if the application is dismissed “by the court hearing the application,” confirms this result.

2          It is not clear whether Apotex is entitled to section 8 damages in consequence of the FCA decision. The FCA expressly left the question open [17] and Hughes J suggested that his disposition would not trigger section 8 on the basis that there had been no “hearing” [34].

No comments:

Post a Comment