Tuesday, May 15, 2012

Equitable Election Does Not Preclude a Section 8 Claim after Amalgamation

Teva Canada Limited v. Wyeth LLC, 2012 FCA 141 Sharlow JA: Dawson, Stratas JJA rev’g 2011 FC 1169 Hughes J

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. Then, after Novopharm changed its name to Teva, Teva and Ratiopharm amalgamated. Teva is seeking to continue Ratiopharm’s section 8 claim against Wyeth, on the basis of the rule that an existing cause of action is unaffected by amalgamation.

In the decision under appeal, Hughes J held that in the circumstances the doctrine of equitable election precluded Teva from continuing the section 8 action. The FCA has now reversed, pointing out that Novopharm’s request that Wyeth institute proceedings against Ratiopharm, could not affect Ratiopharm’s right to section 8 damages [36]. In my view, this reasoning is sound. Neither Ratiopharm nor Novopharm ever elected between two inconsistent courses of action; any apparent inconsistency arose only subsequently, as a result of the amalgation. As I noted in my post on the decision under appeal, the result is not unfair to Wyeth, which is exposed to the same liability that it would have faced if Novopharm and Ratiopharm had not merged. There is no reason why that merger should confer a windfall on Wyeth.

A second question, not addressed by Hughes J given his decision on equitable election, was whether Wyeth was entitled to an order to the effect that Ratiopharm’s claim for section 8 damages, now continued by Teva, should be reduced to reflect gains realized by Novopharm, Teva’s other corporate predecessor, under its licence agreement with Wyeth [38]. Wyeth’s argument is that while in fact Novopharm had the generic market to itself, in the “but for” scenario which forms the basis for assessing Ratiopharm’s damages, Ratiopharm and Novopharm would have shared the market [40]-[41]. This means that Novopharm’s profits in the “but for” scenario would have been lower than they were in fact. If Ratiopharm’s damages are not adjusted to reflect this excess profit actually gained by Novopharm, then Teva will be in a better position than it would have been had the “but for” scenario actually taken place [43]. The FCA rejected this argument as well.

This conclusion is also seems to me to be correct. If Novopharm and Ratiopharm had not merged, Novopharm would have gained the same windfall, and this would not be any objection to Ratiopharm’s claim. Further, such a windall to Novopharm must have been contemplated by Wyeth, as the possibility of third party generic entry was expressly addressed in the agreement between them. Wyeth could have controlled that windfall by contract, for example by specifying that Novopharm would be bear a corresponding share of the liability for section 8 damages if Wyeth’s efforts to exclude third party entry were unsuccessful. On its face, the contract allocated the risk entirely to Wyeth; presumably as a consequence, Wyeth obtained a better royalty than if Novopharm had shared the risk. If Wyeth could now require Teva to offset the excess profits gained by Novopharm, it would in effect be doing an end-run around the contractual allocation of risk.

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