Thursday, March 22, 2012

The “No Reach Back” Shoe is on the Other Foot – Sort of

Apotex Inc. v. Merck Frosst Canada Ltd. / lovastatin (NOC) 2011 FCA 364 Evans JA: Gauthier, Stratas JJA rev’g 2010 FC 1264 Snider J

This decision of the FCA is an important development, though not a final answer, in the debate over whether a generic which has succeeded in an NOC proceeding can get section 8 damages even if the patent is subsequently determined to be valid and infringed in an infringement action.

An initial question in this appeal was whether Apotex’s claim for compensation governed by the 1993 NOC Regulations, or the 1998 Regulations. Under the transitional provisions, this turns on whether Merck’s application for prohibition was “pending” on the transitional date of March 11, 1998. On the transitional date the Federal Court had already dismissed Merck’s application for prohibition, and Merck had filed an appeal from this decision, but the appeal (which was ultimately dismissed for mootness) had not yet been decided. Snider J held that the 1993 Regulations applied. The FCA reversed Snider J on this point, essentially because she did not have the benefit of the FCA decision in Merck / norflaxin 2011 FCA 329 (blogged here). In an interesting point of statutory interpretation, the FCA held that an interpretation favouring the 1998 Regulations was to be preferred, as they were intended to, and did, clarify the 1993 Regulations [28]. In the result, the FCA stipulated a broad understanding of “pending.” The question is not whether the action is moot, but whether FCA still has jurisdiction to hear an appeal. The holding that the 1998 Regulations applies makes the Court’s conclusion on the substantive issue that much more important.

The question as to whether Apotex was entitled to section 8 damages arose because the stay expired without the application for the order of prohibition ever having been heard on the merits. Apotex argued that Merck had not been successful in the NOC proceedings. Merck, on the other hand, argued that it wasn’t unsuccessful, either. Snider J, interpreting the 1993 Regulations (blogged here), held that entitlement was triggered only when the Minister issued the NOC after expiry of the relevant patents; because the patent had not expired, Apotex was not entitled to damages. The FCA, interpreting the new Regulations, held that the only requirements for triggering section 8 are that the patentee’s application for prohibition is dismissed [34], and that the generic has suffered a loss by being kept out of the market as a result of the stay [35]. As both conditions were satisfied, Apotex was entitled to section 8 damages – with a major caveat.

On a broader level, the argument in favour of allowing the generic to claim damages in a case in which the patent was held invalid in the NOC proceedings, but valid in a subsequent infringement action, is the “no reach back” rule enunciated in Syntex / naproxen (NOC) 2010 FCA 155, which has since been affirmed a number of times (eg here and here). This principle says that NOC proceedings and an infringement action are independent. To be entitled to section 8 damages, the generic must succeed in the NOC proceeding itself; if it loses in the NOC proceeding, but subsequently prevails in the infringement action, the generic cannot reach back and apply the declaration of invalidity from the infringement action to gain entitlement to section 8 damages. Conversely, it would seem to follow that if the generic is successful in the NOC proceedings, but subsequently loses the infringement action, the patentee cannot reach back and apply the declaration of validity in the infringement action to deny the generic section 8 damages. While this result seemed to follow, it had not been tested, until now. Consistently with the no reach back rule, the FCA in this case held that Apotex could claim section 8 damages.

The difficulty with this logic, as Merck pointed out [33], is that the generic would be entitled to damages for having been kept out of a market which it had no right to enter. A holding in NOC proceedings that the patentee did not show the allegation of invalidity to be unjustified is not an in rem declaration of invalidity. If the patent is subsequently held to be valid in litigation, then it was always valid, including during the period when the generic entered the market after the NOC proceedings. This means that the generic had no right to enter the market, which we know with hindsight was protected by a valid patent; it is simply that the procedural mechanism of the NOC proceedings did not immediately vindicate the patentee’s right. In this case, Merck characterized this as a matter of ex turpi causa.

This leads to the major caveat on the generic’s entitlement to damages. The FCA reconciled these two conflicting principles by applying the no reach back rule in the liability question, and the ex turpi causa point in the damages phase. Apotex is entitled to section 8 damages, under the no reach back rule, but the quantum of damages might be reduced “or eliminated” [37] at the damages calculation as a result of ex turpi causa:

[38] The Court’s broad discretion under subsection 8(5) allows it, when considering arguments based on ex turpi causa, to have regard to the factual situation in its entirety, including its nuances. In the present case, one such nuance is that not all the tablets sold by Apotex were found in the infringement action to contain lovastatin made by the infringing process. A court is likely to find it easier to apply the ex turpi causa principle through an exercise of judicial discretion than through the definition of liability. Discretion enables the court to assess the appropriate amount of compensation payable (including nil) in a manner that properly takes account of all the relevant facts.

The Court did not decide whether Apotex was actually entitled to substantial damages on the facts, holding that this was a matter to be returned to the trial judge, including the crucial question of “the extent to which the ex turpi causa principle should be applied on these facts, if at all.” While the FCA is no doubt right to say that this is a matter which turns on issues of law and fact which should be determined by a trial judge, it also raises a crucial issue of principle on which the FCA has provided no guidance. The result is that this decision is an important step in the resolution of this question, but it is very far from being the final word.

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