Merck & Co Inc v Apotex Inc / lovastatin damages 2013 FC 751 Snider J
Lovastatin damages raises fundamental issues as to the
nature of causation in patent damages; it is the damages equivalent of Monsanto v Schmeiser
2004 SCC 34. The specific question is whether the
availability of a non-infringing alternative should be considered in assessing damages for patent
infringement. Snider J's answer is a resounding “No.” I consulted for Apotex in this case,* and consequently my discussion of the issues will be primarily descriptive rather than analytic.
Lovastatin damages is the damages phase of a bifurcated action. In the first phase, Lovastatin
liability 2010 FC 1265, Snider J held that the ‘380 patent was valid and infringed by Apotex. (See this post for more background on the liability
The ‘380 patent is a process and product-by-process patent to lovastatin when made with the
micro-organism A. terreus [see generally liability 28-39]. In anticipation of obtaining a
compulsory licence, Apotex, through its subsidiary Apotex Fermentation Inc (AFI) developed an
infringing process for the production of lovastatin, AFI-1, that used A. terreus. Subsequently, in anticipation of
the compulsory licencing regime being replaced by the PM(NOC) Regulations, AFI developed a non-infringing process, AFI-4, which used a different organism, C. fuckelii. Some
lovastatin was produced by AFI in Canada using both processes. The infringing Canadian-made
lovastatin was used primarily for regulatory and experimental purposes, and so was exempt from
liability [liability 625ff]. Apotex then decided to shift production to China, where the lovastatin
was made by Blue Treasure, a joint venture with Chinese partners. Apotex transferred know-how
related to both the AFI-1 and AFI-4 technologies to Blue Treasure. Once it became clear that
Apotex would proceed under the NOC Regulations rather than by compulsory licence, Apotex
insisted that Blue Treasure use the non-infringing AFI-4 technology for shipments to Canada.
(The lovastatin made by the AFI-1 process was to be sold in China or other foreign markets
[liability 297]). However, this was more expensive than the infringing AFI-1 process, and Snider
J ultimately found that Blue Treasure had been boosting its profits by using the cheaper
infringing process to make the lovastatin that it delivered to Apotex. Ultimately, most of the
product sold by Apotex (71% by volume) was infringing . More specifically, the AFI-4
production took place in three phases. In Phase 1 lovastatin was produced by AFI in Winnipeg.
The first batch of AFI-4 lovastatin shipped by AFI to Apotex – “batch CR0157" – was
contaminated with AFI-1 product, and was therefore infringing, but the remaining Phase 1
production was non-infringing. In Phase 2, from mid-1997 to January 1998, Blue Treasure
produced 70 batches of lovastatin, which were entirely non-infringing. In Phase 3, from March
1998 to March 2000, Blue Treasure shipped infringing lovastatin . Thus there was a relatively
small initial infringing shipment, then a substantial period of non-infringing supply, followed by
the majority of the infringing supply. Most of the infringing supply was sold prior to the expiry of
the patent, but some was sold post-expiry.
Merck’s Supply Arrangements
The plaintiff’s supply arrangements are relevant to some of the issues. The plaintiff Merck
Canada Inc (Merck Canada) was a licensee under the patent and it supplied the Canadian market.
(Note that Merck Canada was known as Merck Frosst Canada Ltd at the time of the liability
litigation, and it is referred to as Merck Frosst in the liability decision.) The plaintiff Merck & Co Inc
(Merck US) was the owner of the patent, but Merck US had granted an exclusive licence to
Merck and Company, Incorporated (MACI), and Merck Canada paid MACI an 8.5% royalty.
MACI was not a party to the litigation. While Merck Canada paid a royalty to MACI, the supply
chain agreement required Merck Canada to purchase its lovastatin from Merck US, so Merck US
also profited from Merck Canada’s sales.
Heads of Damages
Merck Canada claimed lost profit damages on tablets that it would have sold to replace the
infringing Apo-lovastatin tablets (“Pre-Expiry Replacement Sales”).With respect to post-expiry
sales, Merck argued that Apotex would have faced a ramp-up process, and so would not have
sold as many tablets post-expiry if it had not infringed. Merck Canada claimed lost profits on the
sales it would have captured in this ramp-up period (“Post-Expiry Ramp-up Sales”). A
reasonable royalty was claimed in the alternative. Merck US claimed for its lost profits on its
supply of lovastatin API to Merck Canada in respect of the same tables, both pre- and post-expiry
Merck also claimed a reasonable royalty on sales it conceded it would not have made, namely
infringing Apo-lovastatin tablets sold into the export market pre- and post-expiry (Export
Tablets); and infringing Apo-lovastatin tablets sold domestically after the '380 Patent expired,
outside the ramp-up period (the Post-Expiry Replacement Tablets) .
Merck Canada also requested that its lost profits award include an amount to reflect the 8.5%
royalty payable to MACI . Presumably this is why MACI was not a party; on Merck’s view,
Merck Canada was required to pay the royalty on the damages collected by Merck Canada in the
event of success in litigation, so that MACI would have suffered no loss .
Pre-Expiry Replacement Sales – Non-Infringing Alternative
The main issue with respect to the pre-expiry sales, and indeed the main issue in the case in respect of both the space devoted to it by Snider J, and the quantum at stake, was whether
Apotex was able to raise the defence that it had a non-infringing
alternative available to it, namely the capacity to use the AFI-4
process to supply the
market [30-120]. Apotex argued that but for the infringement, it would
have produced the same
amount of non-infringing material using the AFI-4 process, which it
would have sold for the
same price, and so Merck would have lost exactly the same market share
had Apotex not
infringed . Merck’s lost profits were therefore not caused by the
exception was with respect to the initial batch CR0157; Apotex conceded
that it would not have
been able to use its AFI-4 process to make that batch, and Merck was
therefore entitled to its lost
profits .) (Note that the quantum of Merck’s profits, had it made
the pre-expiry replacement
sales, was agreed.)
This was resolved as a pure question of law. In addition to the legal question of whether the non-infringing alternative (NIA) defence is available as a matter of law, the point turns on the factual issue of whether
Apotex could have made and sold non-infringing tablets in place of the infringing tablets. Merck also
argued that the fact that Apotex had breached its undertaking in the NOA that it would not
infringe the patent, should have consequences in the assessment of damages in the infringement
action . SniderJ resolved these issues in Apotex’s favour [37-39]. That is, Snider J held that as
a matter of fact, but for the infringement, Apotex would have made the same sales it in fact
made, but using the non-infringing process. "The availability of the NIA defence at
law is therefore the determinative question” .
The leading UK case is United Horse Shoe & Nail Co v Stewart & Co, (1888), 5 RPC 260 (HL),
which holds that the availability of a non-infringing alternative is irrelevant to the
calculation of damages. As Snider J notes, subsequent UK law affirms this position: -.
US law, on the other hand, is equally clearly to the contrary: an available non-infringing
alternative must be considered . Canadian case law on point consists only of Domco
Industries (1983), 76 CPR (2d) 70 rev’d on other grounds, (1986), 10 CPR (3d) 53, accepting
United Horse Shoe, and Snider J’s own obiter comments in and Jay-Lor 2007 FC 358 approving
the relevant passage from Domco , . As Snider J noted, this “may not constitute the highest
Given the state of Canadian authority, a key question was the impact of the SCC decision in Schmeiser
2004 SCC 34, in which the SCC stated that in calculating an accounting of profits, “[a]
comparison is to be made between the defendant's profit attributable to the invention and his
profit had he used the best non-infringing option”  (emphasis added). Does this principle apply also to
damages? In my article, “A Remedial Benefit-Based Approach to the Innocent-User Problem in
the Patenting of Higher Life Forms” (2004), 20 CIPR 79, esp at 91-95, which was cited by the SCC on this point in Schmeiser, I argued that there is one
general principle of causation which applies across all areas of law. Snider J disagreed. In her
view, the applicable principles in respect of patent damages are different from those in an
accounting . Snider J acknowledged that the Schmeiser principle was also implicitly applied
by the SCC in Cadbury Schweppes  1 SCR 142 , and by Snider J herself in  in
Teva Ramipril, 2012 FC 552 in assessing damages under s 8 of the NOC Regulations, but she
held that the principles of patent damages are different from these as well , . The
question is why patent damages should be different from these other monetary remedies. Snider
J’s answer is that it is necessary to ignore the non-infringing alternative in order to provide
adequate deterrence: -.
My view, expressed in article “A Remedial Benefit-Based Approach,” is that United Horse Shoe
ignores the generally applicable causation requirement, and it “must therefore be considered to be
clearly in error” (p95). Similarly, in my co-authored article, “Damages Calculations in
Intellectual Property Cases in Canada”, (2008) 24 CIPR 153, we noted that “United Horse-Shoe
seems to contradict the approach to causation taken by the Supreme Court of Canada in the
context of accounting of profits and equitable compensation remedies for intellectual property.”
Snider J discussed these articles at some length -, but concluded that on this point I am
“‘the lone voice in the wilderness’ supporting the adoption of the [non-infringing alternative]
defence” . This is a very complementary criticism, as the reference is to John the Baptist
saying "I am the voice of one calling in the wilderness, 'Make straight the way for the Lord.'"
While I would like to be thought of as the lone voice preaching the true gospel, that is only true if
the wilderness is confined to the backyard of Canadian patent damages. Outside of patent law, I
am in the excellent company of the Supreme Court of Canada in Schmeiser and Cabdury
Schweppes, and in the patent field, but outside of Canada, I am in the company of Chief Judges
Rader (Grain Processing 185 F.3d 1341 (Fed Cir 1999) and Easterbrook (Grain Processing VIII
979 F.Supp. 1233 (ND Ind1997)), and the leading US academic on patent remedies, Thomas F.
Cotter, Comparative Patent Remedies: A Legal and Economic Analysis (2013) at 187ff.
*I consulted only on the damages portion of this case, not the liability action. I wrote my post on the
Relevance of Non-Infringing Alternatives to Damages before being approached by Apotex.