Monday, July 22, 2013

Non-Infringing Alternative Not Considered in Assessing Damages

Merck & Co Inc v Apotex Inc / lovastatin damages 2013 FC 751 Snider J
            1,161,380 MEVACOR

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 decision.)

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 [9]. 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 [8]. 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 [11].

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) [12].

Merck Canada also requested that its lost profits award include an amount to reflect the 8.5% royalty payable to MACI [13]. 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 [127].

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 [33]. Merck’s lost profits were therefore not caused by the infringement. (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 [145].) (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 [34]. 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” [40].

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: [63]-[69]. US law, on the other hand, is equally clearly to the contrary: an available non-infringing alternative must be considered [92]. 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 [71], [73]. As Snider J noted, this “may not constitute the highest authority” [74].

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” [102] (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 [90]. Snider J acknowledged that the Schmeiser principle was also implicitly applied by the SCC in Cadbury Schweppes [1999] 1 SCR 142 [55], and by Snider J herself in [107] 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 [55], [108]. 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: [188]-[119].

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 [98]-[106], but concluded that on this point I am “‘the lone voice in the wilderness’ supporting the adoption of the [non-infringing alternative] defence” [106]. 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.

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