Friday, April 1, 2011

International Ex Turpi Causa as a Defence to an Undertaking in Damages

Les Laboratoires Servier & Anor v Apotex Inc & Ors [2011] EWHC 730 (Pat) Arnold J

In the latest decision in the perindopril litigation, Arnold J applied the maxim ex turpi causa non oritur actio in exercising his discretion to decline enforcement of an undertaking in damages given by a patentee who had obtained an interlocutory injunction.1 The issue arose because the product in question was patented in the jurisdiction of manufacture (Canada), but not in the jurisdiction of sale (the UK). It is thus one aspect of the larger problem of territorial limits to patent protection, and ultimately Arnold J’s decision turned on principles of international comity.

Servier obtained a compound patent for perindopril in both Canada and Europe. The European compound patent expired in 2001. The corresponding Canadian patent, which was governed by the old Act, was delayed in conflict proceedings. It was not granted until 2001, and will not expire until 2018. Servier was granted a further European patent for a crystalline form of perindopril in 2004. In 2006 Servier commenced an infringement action against Apotex based on the European crystalline form patent. Servier obtained an interlocutory injunction from Mann J [2006] EWHC 2137 (Pat), subject to the usual undertaking in damages. Servier’s European patent action ultimately failed as the crystalline form patent was declared invalid: [2008] EWCACiv 445 aff’g [2007] EWHC 1538 (Pat).

Apotex sought damages on the undertaking for the loss of UK sales. This was heard in June of 2008 and Norris J held that Servier was liable for £17.5 million: [2008] EWHC 2347 (Ch). Apotex’s loss was calculated on the basis that the perindopril would be manufactured at its facility in Canada and exported to the UK. However, at the same time Servier and Apotex were litigating the compound patent in Canada. On July 2, 2008 Snider J held that the Canadian patent was valid and on June 30, 2009 the FCA affirmed: Laboratoires Servier v. Apotex Inc./ perindopril, 2009 FCA 222 affm'g 2008 FC 825. Thus it became clear that manufacture in Canada of the product which Apotex would have sold in the UK but for the injunction, would have infringed the Canadian patent. Consequently Servier sought and ultimately obtained permission to amend its pleading to raise the defence that Apotex could not claim damages on the undertaking for lost sales when the manufacture of the product would have been illegal: [2010] EWCA 279 (Civ).

This was the point that Arnold J had to decide. Because of the way the case unfolded, Servier had already paid Apotex, and the question was whether the money should be returned, but the question was treated as if it was purely a question of whether Arnold J should exercise his discretion to enforce the undertaking. The procedural quirks were significant, however, because the argument in the inquiry before Norris J established that Apotex would have manufactured in Canada, so this counter-factual, which might otherwise have been difficult to prove, was not contested.

Much of the argument turned on the precise degree of turpitude necessary to support a defence of ex turpi causa. Servier argued that the unlawfulness of infringement was enough, while Apotex argued that the principle required criminal acts or civil wrongs involving moral turpitude, and more precisely dishonesty. After a lengthy review of the cases Arnold J declined to establish any criteria based solely on the degree or type of illegality. While these are significant factors, other factors are also important, particularly “the claimant’s state of knowledge.” The requisite degree of illegality will therefore turn on the circumstances of the case: [93]-[94], [95].2

While this is, in my view, a fair assessment of the cases, it may appear to be a wishy-washy and unhelpful “all the circumstances” test. However, this is the type of case the common law delights in, as the underlying principle was helpful in deciding the case, and at the same time the case serves to illuminate that principle. The primary modern case relied on [44] by Arnold J in explaining the public policy underlying the ex turpi causa rule was the decision of the Supreme Court of Canada in Hall v. Hebert [1993] 2 SCR 159, [17]. McLachlin J explained that to allow recovery for losses based on illegal acts would “introduce an inconsistency in the law,” and “put the courts in the position of saying that the same conduct is both legal, in the sense of being capable of rectification by the court, and illegal.” “We thus see that the concern, put at its most fundamental, is with the integrity of the legal system.”

Reference to integrity and inconsistency in the law may seem very abstract, but the facts of this case provide an excellent illustration of what is meant. When he granted the interlocutory injunction Mann J apparently did not know that Apotex would manufacture in Canada and that this might infringe a Canadian patent [16]. If this had been raised, and Servier had offered an undertaking that excluded any liability for lost sales of infringing product, would Mann J have accepted that undertaking and granted the injunction? Arnold J answered in the affirmative: “In my judgment that would have had no effect on the exercise of his discretion to grant the injunctions. . . .The same policy considerations which underlie the ex turpi causa rule would lead to the conclusion that such losses should not weigh in the balance when deciding whether or not to grant an interim injunction” [115].

116. This point can be illustrated by imagining that on 3 August 2006 Servier had obtained an interim injunction in Canada restraining Apotex from manufacturing and exporting perindopril erbumine and that that injunction had been subsequently been continued until judgment in the Canadian proceedings. One can be confident that Apotex, as a law-abiding group of companies, would have abided by that injunction. But in those circumstances Apotex would not have been able to manufacture perindopril erbumine in Canada for sale in the United Kingdom, and would not have suffered any loss as a result of the injunctions granted by Mann J. Furthermore, given that the Canadian courts held that Apotex had infringed the Canadian Patent, Apotex would have no claim under the Canadian cross-undertaking in damages in those circumstances. Why should the facts that Servier did not apply for interlocutory injunction in Canada until 8 November 2006 and Snider J refused to grant Servier an interlocutory injunction mean that Apotex is entitled to recover damages under the cross-undertaking in this country?

The fact that Snider J refused to grant an interlocutory injunction should make no difference, because the refusal of an interlocutory injunction is not the grant of a right to do the act that would have been enjoined. Apotex had no more right to manufacture in Canada after the refusal of the injunction, than it did before, and indeed, it had no more right after the refusal than it would have had the injunction been granted. The refusal of the interlocutory injunction only affects Servier’s remedy, not its right.

In allowing Servier to amend its pleading to raise ex turpi causa the Court of Appeal made a very similar point at [2010] EWCA Civ 279 [7]:

7 One thing, however, is missing from the judge's exercise of discretion. It is what the overall effect of refusing the amendments might well be. Servier in Canada will doubtless be able to seek financial compensation for all the manufacture that did happen in Canada, including exports, but it is by no means clear that the Canadian proceedings would result in any return of money handed over to Apotex as a result of the order in this country, because that money is in respect of manufacture which did not happen because of this interlocutory injunction. Mr Watson fairly accepted that there was a very real prospect that if this amendment is not allowed, his clients will get the benefit of the sums awarded by Norris J as a total windfall. That to my mind is a very serious factor in the exercise of discretion and, although the judge mentions the argument, he does not appear to take it into account at all when exercising his discretion as to whether or not to allow the amendment. For English proceedings to give a party £17.5 million which might well be wholly unjustified is a very serious matter. I think the judge's failure to weigh that affects his exercise of discretion, wide though it is, in such a way that one can say that it is flawed.

Again, the damages on the undertaking would be unjustified because Apotex never had the right to manufacture in Canada.

Ultimately, then, the application of ex turpi causa is based on the need for consistency between Canadian patent law, which would prohibit the manufacture, and English law of contract (or equity – see [2009] EWHC 1905 (Ch) [20]) under which the undertaking is enforced. It was therefore a crucial point that infringement in Canada was understood to be an illegal act for the purpose of enforcing the undertaking in the UK that related to the European patent: “As a matter of international comity, it does not matter for this purpose whether the acts in question are unlawful under English law or under foreign law.” ([47], quoting himself in Lilly Icos LLC v 8PM Chemists Ltd [2009] EWHC 1905 (Ch) [287].)

There is a final practical point worth noting. As noted, Arnold J emphasized that the state of knowledge of the claimant is a significant factor, and on the facts, it was important that Apotex knew that it would infringe the Canadian patent by manufacturing in Canada [98]. At the same time, it is also clear that it is not necessary for the Canadian patent to have actually been held to be invalid. The damages denied were largely based on sales that would have occurred prior to Snider J’s initial decision holding the patent valid (see [2008] EWHC 2347 (Ch)). That is, even though Apotex might well have believed in good faith that the Canadian patent was invalid, this is irrelevant. So long as it knew that its product would infringe, it was at risk: “It follows that Apotex decided to take a commercial risk that its manufacture of perindopril erbumine in Canada would be held to infringe a valid patent” [99]. However, this does not mean that undertaking would not be enforced if the validity of the Canadian patent had not been affirmed by the time of inquiry on the undertaking: this point was not raised on the facts. If infringement and the validity of the patent had not been established in litigation, the ex turpi causa argument would probably be considered too speculative induce an English court to exercise its discretion and decline to enforce the undertaking. In that case the patentee’s recourse, should it ultimately prevail in Canadian litigation, would be to claim the payment made on the undertaking in the English action as damages in the Canadian action. The EWCA was right to say that whether such a claim would succeed is an open question.

1 While the primary purpose of this blog is to comment on recent Canadian patent decisions, I will occasionally refer to foreign decisions that may be of interest in Canada. Arnold J’s decision qualifies both because there is a significant Canadian connection on the facts, and because this point of law is, to my knowledge, is novel in Canada.

2 See also Still v. Canada (Minister of National Revenue - M.N.R.) [1998] 1 FC 549 (FCA) adopting a similarly flexible and purposive approach to ex turpi causa.

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