Wednesday, October 26, 2011

Amalgamation, Equitable Election, and Section 8 Claims

Teva Canada Limited v Wyeth LLC, 2011 FC 1169, Hughes J

The issue in this case is narrow and tricky, but it is also novel and interesting: what is the effect of a merger of generics when one of the generics was a licensee of the brand, and the other had a valid section 8 claim?

Wyeth entered into authorized generic agreement with Novopharm under which Wyeth licensed Novopharm to sell a generic version of a Wyeth drug. To protect Novopharm’s position as the authorized generic, Wyeth also agreed to make commercially reasonable efforts to enforce the patent against third parties. Ratiopharm then served an NOA on Wyeth. At Novopharm’s request pursuant to the agreement, Wyeth instituted NOC proceedings against ratiopharm. Wyeth lost, and ratiopharm brought a section 8 claim against Wyeth. So far there is nothing out of the ordinary. However, after Novopharm changed its name to Teva, Teva and ratiopharm amalgamated. What is the effect of Novopharm’s agreement with Wyeth on ratiopharm’s section 8 claim, in light of the amalgamation?

Teva is seeking to continue ratiopharm’s section 8 claim against Wyeth. It would normally be entitled to do so, as an existing cause of action is unaffected by amalgamation. However, Wyeth argued in this motion that Teva can’t have its cake and eat it too. Teva – in its previous guise as Novopharm – requested that Wyeth bring the action against Teva – in its previous guise as ratiopharm – and it should not be able to turn around and disclaim that request.

Hughes J accepted this argument, on the basis of the doctrine of equitable election. Hughes J relied primarily on the decision of the Ontario Court of Appeal in Charter Building Co v 1540957 Ontario, 2011 ONCA 487, in which Epstein J explained

The doctrine is based on the fact that the electing party, having obtained a particular benefit from a transaction, must accept all of the consequences that flow from that transaction, including those to his detriment.

The equitable doctrine of election does not involve choice between alternatives. To establish an election in equity, it is unnecessary to show that the electing party made a conscious choice between inconsistent rights at the time when the original decision was made. In fact, an equitable election does not involve making a choice at all - it involves accepting the consequences of a decision already made.

Hughes J stated that:

Novopharm’s actions fit within the criteria of the equitable doctrine of election. It has taken a deliberate course of action, the encouragement and expectation that Wyeth must take proceedings against ratiopharm. . .What, then, is the effect of the merger between ratiopharm, who otherwise would have a perfectly valid section 8 claim, and Novopharm, who would be precluded by the equitable doctrine of election from asserting such a claim? I find that . . . the amalgamated corporation carries with it the obligation of equitable election, so as to make the ratiopharm section 8 claim no longer enforceable. [55]-[57].

Company law is not my area of expertise, but I must say that I am not entirely convinced by this reasoning. Prior to merger Novopharm was not precluded from asserting a section 8 claim by equitable election, but rather by the simple fact that it was not a successful second party in an NOC proceeding. If Novopharm was not bound by any equitable election, then that obligation could not have been carried forward. By holding that the amalgamated Teva has made an election, it seems that Hughes J is in effect treating the merged company as if the merger had retroactive effect. I’m not saying he was wrong to have done so, but the question is more difficult when posed this way.

This is not a merely technical point. As explained in Charter Building, equitable election developed in the context of wills and trusts, where the principle is apparently that a beneficiary should not be able to receive more than the testator intended by picking benefits and rejecting burdens expressed in the will: see Granot v Hersen 1999 CanLII 1689 OCA. That is not unfair to the beneficiary, who can make the election according to his own assessment of his interests. The problem with applying this doctrine in the present context is that the benefit received by Novopharm under the agreement may be much smaller than the burden of the loss of ratiopharm’s section 8 claim. (We don’t know, as quantum was not discussed.) It might be said that the amalgamated Teva did make an implicit election to accept the benefit to Novopharm and accept the loss of the section 8 claim when the two companies made the decision to merge, but this is not as compelling as enforcing a choice made by a party with full knowledge at the time of the choice. And on the other hand, the licence between Novopharm and Wyeth expressly provided that Wyeth would bear the burden of enforcing the patent. Presumably Wyeth took into account the cost of enforcement and the possibility of being liable for section 8 damages when it entered into that agreement, so it does not seem unfair to Wyeth to hold it liable for the losses that it must have anticipated. Put another way, if equitable election operates as a complete defense, the merger of Novopharm and ratiopharm has delivered an unanticipated windfall to Wyeth. I don't have a firm view on the question, but it does seems to me more difficult than Hughes J's decision would suggest. I'd be interested in the opinion of a company law expert.

On a separate procedural point, which is likely to be of more general interest, Hughes J also held that this question was appropriate for determination by way of summary trial because the issues were well defined and there was no controversial evidence. He also stated that there is no presumption against using a summary trial: “The proper approach is to consider that there is provided a number of means or “tools” by which a just, expeditious and least expensive determination can be made in dealing with a matter on the merits with an appropriate selection to be made among them” [31].

No comments:

Post a Comment