Wednesday, October 19, 2011

Hints on Validity as a Defence to a Section 8 Action

Apotex Inc v Shire Canada Inc / modafinil (NOC) 2011 FC 1159 Near J aff’g 2011 FC 436 Tabib Pr

This motion raises, albeit tangentially, the important question of whether infringement is available as a defence to an action for section 8 damages under the PM(NOC) Regulations. By way of background, Cephalon is the owner of the patent in question and Shire is a licensee. Both were parties to NOC proceedings, 2008 FC 538, in which Apotex prevailed. Cephalon has since commenced an infringement action against Apotex (T-609-09), but Shire is not a party to that action [5]. Apotex is now seeking section 8 damages from Shire, and this motion arises from those proceedings. Shire had previously tried to raise infringement as a defence, but had wanted to base the defence entirely on the outcome of the Cephalon action, without bringing any independent evidence in the section 8 damages proceeding. This amendment was not permitted (2010 FC 828 affm’d 2010 FC 1001), on the basis that the Shire had not pleaded any material facts on which the court could make any direct determination. 

Shire then sought to amend its Statement of Defence to plead infringement as a defence and counterclaim. Prothonotary Tabib refused to allow this amendment on the basis that the amendment had not been sought in a timely matter. She therefore made no comment as to whether such a defence would be permitted substantively (see my post on that decision). In this decision, Near J, reviewing the matter de novo as raising a question vital to the final issue [16], has affirmed the decision of Tabib Pr, again primarily on the basis that Shire should have brought forward the issue of infringement earlier [24]. However, Near J also hinted at the substantive point, stating “the infringement aspect is not necessarily the ‘true substance’ of section 8 proceedings directed at damages of Apotex being kept off the market. Any potential basis for infringement could be pursued by way of a separate action or by Shire joining the Cephalon proceedings already in progress without delaying a section 8 resolution” [21]. This suggests that even if Shire had pleaded infringement as a defence in a timely manner, the pleading might have been struck. However, Near J also remarked that “Shire should have brought the issue of infringement forward in its initial pleadings” [24], suggesting that this defence would have been permitted if pursued in a timely manner.

I won’t parse this decision too finely for hints as to whether a defence of infringement is available to a section 8 proceeding, as that question was clearly not central to the disposition of the motion. The argument that Shire should not be permitted to raise infringement as a defence is straightforward: as Near J pointed out, “it would insert a full infringement action into the pre-existing section 8 proceedings” [18]. While Near J noted this as a reason for putting a heavier burden on Shire to show that the amendment is justified, it is also an argument against allowing the defence at all. The validity of the patent was already argued in the NOC proceeding on which the section 8 action is based; to allow infringement to be pleaded as a defence would mean that validity would be litigated all over again in the section 8 proceeding. (The burden might not be the same, but nonetheless, the substantive questions would be.) It simply doesn’t make sense to re-litigate the same question in the subsidiary proceeding. In the current system validity of the patent is typically litigated twice, once in the NOC context and once in the infringement action; adding a third determination of validity on the merits verges on the ridiculous. Shire’s initial tactic of trying to rely directly on the outcome of the infringement action makes more sense, in that validity would not have to be re-litigated for a third time. This is not to say that I believe that Shire should have been allowed to rely on the outcome of the infringement action; as Pinard J noted in rejecting that tactic, it is not reasonable to plead as a defence “collateral contingency predicated on an unrelated proceeding. [A]ny such pleading is, by its very nature, unreasonable, as it seeks to insert into an action an allegation that cannot be resolved by the Court hearing the matter, and an allegation where the lis is not between the parties before the Court” 2010 FC 1001 at [7]. But Shire’s underlying point that it should not be liable for section 8 damages in respect of a patent that is ultimately found to be valid, is also compelling.

I see no fair and practical way out of this dilemma, which stems from the separation of the NOC proceedings and the infringement action. The NOC proceedings and section 8 damages are in some ways analogous to an interlocutory injunction and accompanied by undertaking in damages, but a fundamental differences is that the motion for an interlocutory injunction is part of the action on the merits, so entitlement to damages on the undertaking depends on success on the merits in the main action. In the NOC context the infringement action and the stay are entirely separate, so there is no evident way in which entitlement to damages for the stay can be linked to the infringement action.

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