Yesterday’s post provided an overview of the facts and issues in Lovastatin damages, and discussed the issue of whether the availability of a non-infringing alternative is relevant to the assessment of damages.* This post describes the remaining issues.
Pre-Expiry Replacement Sales – Deductibility of Royalties Paid to MACI
A subsidiary issue in respect of pre-expiry sales was whether Merck Canada’s lost profit damages should include the 8.5% royalty normally payable by Merck Canada to MACI [122-142]. (Again, quantum was agreed.) If Merck Canada had made the lost sales, it would have been required to pay that royalty to MACI, thus reducing its profit. Apotex argued that it should be therefore be deducted, to put Merck Canada in the same position it would have been in but for the sales . Merck argued that it would be required to pay the royalty to MACI on the damages award, so if the royalty was deducted from its lost profit damages, it would not be made whole; it would in effect pay the royalty twice, once through the deduction in damages, and then again to MACI.
Snider J held for Apotex on this point . The crux of her reasoning was that
 In my view, the MACI Royalty Agreement is clear and unambiguous, creating no obligation to pay upon receipt of lump sum damages. Since there is no obligation to pay any royalty on the an award of legal damages, the MACI Royalty is properly characterized as an expense that would have been incurred in the hypothetical scenario but saved because of the infringement. As such, it should be deducted in the calculation of Merck Canada’s lost profits.
This implies that if the contract does specify that a royalty is to be paid on an award of legal damages, then it will be added to the damages. The lesson here is straightforward: if the licensee intends to pay royalties on damages to the licensor, the contract should say so expressly.
On this point Merck also argued that the royalty was payable as a matter of law, on the basis of the surrogatum principle, applied by courts in the tax context, that lump sum damages take on the character of the interest settled. Snider J rejected this argument on the basis that this was a principle specific to tax law, which could not create obligations between the parties to the contract . Put another way, if the contract had expressly specified that the royalty was not payable on a damages award, then even if the damages award were nonetheless treated as a receipt on sales for tax purposes, this would not create an obligation on the licensee to pay the royalty to the licensor.
Apotex argued that Merck was entitled only to a reasonable royalty on the pre-expiry replacement sales . Given her conclusion that Merck was entitled to its lost profits on those sales, Snider J did not have to, and chose not to, calculate the reasonable royalty that would be owing in the event she was wrong that Apotex could not raise the non-infringing alternative defence . However, she did describe two “conceptual elements” of the approach that she would apply in making that calculation, in the event that it was referred back to her on appeal.
The first element was that the reasonable royalty should be calculated on the basis of a one-time negotiation on the eve of the first infringement , [156 - 62]. The reason the date of the hypothetical negotiation matters is that the bargaining position of the parties might change in the interim: see eg Applied Medical Resources Corp. v US Surgical Corp 435 F.3d 1356 (Fed Cir, 2006). In this case that means that the reasonable royalty on the Phase 3 shipments from Blue Treasure, which commenced in March of 1998, would be assessed at the time of production of the first batch, CR0157, in 1996, notwithstanding that Merck was awarded lost profits for this batch, and not a reasonable royalty.
The second element is “the use of a framework taking into account the hypothetical licensee's maximum willingness to pay (MWP) and hypothetical licensor's willingness to accept (MWA) methodology” , with the assumption that the parties with equal bargaining power would then split the difference equally . This is essentially the Nash Bargaining Solution to a negotiation. (Compare Suffolk Tech. LLC v. AOL Inc., No. 1:12cv625 (E.D. Va. April 12, 2013 (Dkt. No. 518), rejecting the use of the Nash Bargaining solution under Daubert, as not sufficiently tied to the facts of the case; and VirnetX Inc. v. Cisco Systems, Inc., Case No. 6:10-cv-00417-LED (Doc. No. 745), accepting the use of the Nash Solution.) The assessment of MWP and MWA is the central question when using this method. Snider J held that the patentee’s MWA sets a floor on the reasonable royalty; so, if the patentee’s MWA is greater than the infringer’s MWP, the royalty would be set equal to the MWA, notwithstanding that that is more than the infringer would have been willing to pay .
Reasonable Royalty – Pre-Expiry Export Sales
Merck acknowledged that it would not have made the post-expiry sales made by Apotex, and Merck claimed only a reasonable royalty. The quantity of sales was not disputed, and the parties agreed that the reasonable royalty would split the difference between Apotex’s profits costs using the infringing and non-infringing processes; that is, the parties would split equally the additional profits made available by the use of the patented invention as compared with the best available alternative . Snider J used the same methodology to award a reasonable royalty in respect of post-expiry sales of infringing product.
Lost Profits – Post-Expiry Ramp-Up
This head of damages is often referred to as “springboard” damages. A generic cannot normally make sales instantaneously on expiry of the patent, as some time is required to physically ship product to pharmacies and so on. It is established in UK and US law that springboard damages are recoverable, and Snider J acknowledged that they are likely recoverable in Canadian law as well : and see Siebrasse et al “Damages Calculations in Intellectual Property Cases in Canada”, (2008) 24 CIPR 153, §2.4. She nonetheless denied Merck’s claim for two reasons.
The first was that Merck did not provide adequate notice that springboard damages would be claimed. Snider J concluded that the issue had been raised for the first time in Merck’s opening argument , so that Apotex did not have adequate notice, and she would have denied the claim for that reason alone .
Snider J also held that Merck’s evidence establishing springboard damages was not adequate. One key problem is that Apotex did make substantial non-infringing sales prior to patent expiry, and so it would have had distribution networks in place . Consequently, Merck's assumption that Apotex’s ramp-up in the hypothetical post-expiry world in 2001 would have been the same as it’s actual ramp-up in 1997 was not sound .
Merck US was the patent owner, but it was not the licensor, as it had granted the exclusive right to grant licenses to MACI. However, Merck US did make a profit by supplying Merck Canada with lovastatin, and consequently it’s profits were reduced by Apotex’s infringement. The quantum of Merck US’s lost profits was agreed, but Apotex argued that it should be restricted to nominal damages because of the exclusive licence granted to MACI. Snider J rejected this argument, noting that in the liability portion she had held that Merck US had standing as the patentee to bring an action . She noted that notwithstanding the licence to MACI, Merck US remained the patentee, and there was nothing in the agreement that could be read to exclude Merck US from claiming damages due to infringement .
*As noted in yesterday’s post, I consulted for Apotex on the damages portion of this action.