Thursday, March 27, 2014

What is the "But For" World under S 8 of the NOC Regulations?

Apotex Inc v Sanofi-Aventis Canada Inc [Apotex s 8 Liability Appeal] 2014 FCA 68 Sharlow JA, Pelletier JA concurring, Mainville JA dissenting, var’g 2012 FC 553 Snider J ( blog blog);
Teva Canada Ltd v Sanofi-Aventis Canada Inc [Teva s 8 Liability Appeal] 2014 FCA 67 Sharlow JA, Dawson JA concurring, Mainville JA dissenting, var’g 2012 FC 552 Snider J (blog blog)
            ramipril / ALTACE

In these companion cases, the FCA has split on a very difficult issue relating to calculation of damages under s 8 of the NOC Regulations.* Damages generally are assessed by a comparison of the actual world with a “but for” or hypothetical world in which the wrong had not occurred. Sharlow J for the majority in the FCA, Mainville J in dissent, and Snider J at trial, all accepted that this basic principle should apply to s 8. The question is how exactly to construct the hypothetical world in assessing damages under s 8. Should we assume that NOC Regulations were effective against all generics, so that everything would have unfolded exactly as it did, except that the claimant would have received its NOC, and entered the market, notwithstanding the statutory stay? Should we assume that the NOC Regulations did not exist at all in the compensable period, for either the claimant or other generics which might have entered the market? Should we assume that NOC Regulations were effective against all generics except the claimant? These were essentially the positions taken by Sharlow J, Mainville J, and Snider J respectively. In the end, there is no perfect answer to this question.

In this post, I will focus on the Apotex appeal, because it is in that decision that the majority elaborated its position most fully. Unless otherwise indicated, paragraph references are to that decision. 

By way of context, under the patent linkage set provided for in the PM(NOC) Regulations, a generic that would otherwise be in a position to receive an NOC as a result of an ANDS will be placed on “patent hold” until it has addressed all the patents listed against the drug in question by the innovator / patentee whose drug was the reference product for the ANDS. The generic can respond with a Notice of Allegation, alleging invalidity or non-infringement, and if the patentee responds, a statutory stay is triggered under s 7, preventing the generic from receiving its NOC until the patents have expired or the generic has prevailed on its allegations in NOC proceedings. If the generic is successful, s 8(1) makes the patentee liable to the generic for losses suffered from having been wrongly (in hindsight) held off the market by the statutory stay. The patent linkage system is analogous to an automatic interlocutory injunction, and s 8 is analogous to the undertaking in damages which is usually required for a plaintiff to obtain such an injunction. Damages are assessed by a comparison of the actual world with a “but for” or hypothetical world in which the generic had not been kept out of the market. The precise way in which the hypothetical world is constructed is very important: the more generics in the market in the hypothetical world, the better for the patentee, and the worse for the s 8 claimant. If the claimant is the only generic in the market, it will normally have a larger market share and higher prices; if multiple generics are in the market, prices will be lower and the claimant will have a smaller market share.

Turning to the details, then, Teva took a “sole generic” position at trial:

[110fcT] Teva submits that, as a matter of law and principle, it should be considered to be the only generic manufacturer of ramipril during the Relevant Period. Even if I decide that other generics could have entered the market, Teva urges me to ignore the hypothetical actions of other generics during the Relevant Period.

Snider J rejected Teva’s position, primarily because s 8 damages are intended to compensate Teva for its loss for having been kept out of the market. In any realistic hypothetical world, Teva would not have been the only generic, and to assume it was would result in over-compensation [116-17fcT].

Sanofi, in contrast, argued for a “one world” approach.

[111fcT] Sanofi, on the other hand, asserts that the "but for" world should include other generic manufacturers. Indeed, Sanofi's position is that there can only be one "but for" world that must apply to all potential s. 8 litigants. [and see 128fcA]

Sanofi argued that its “one world” hypothesis was necessary to avoid over-compensation. Sanofi argued that “absent a single finding as to the overall generic market in the ‘but for,’. . .’[i]f there [were] 10 generic entrants into the marketplace you could have 10 parties asserting a claim they would have been the sole generic,’” and this would be “‘inconsistent with the compensatory nature of section 8'” [124fcT]. While Snider J agreed that the possibility of multiple generic entrants must be considered, she rejected Sanofi’s “one world” position [125fcT], largely because the assessment of damages “can and should be made on the facts of each case” [126fcT]. Different evidence can lead to different hypothetical worlds, and a one world approach would the evidence in one of those cases be disregarded in favour of the evidence presented in a different case. “Such a result is unsupportable” [127fcT]. A one world approach would only be possible if the actions were joined [129fcT].

The issue was framed quite differently on appeal. Sanofi’s position was that Snider J erred by treating all the other generics, except the claimant, as being subject to the NOC Regulations [101]. Sanofi’s point is that in the real world, when one generic is successful in obtaining an NOC, others soon follow, because once one generic has succeeded, it is considered an abuse of process for the patentee to bring an application in respect of the same drug against a second generic. In the actual world, the claimant was not successful – which is why it is bringing a s 8 applications – and the other claimants had to navigate the Regulations without that benefit, and so would enter later than if the claimant had been successful. If we assume that in the hypothetical world, the NOC Regulations were effective against all the generics except the claimant, then each generic would be compensated on the basis that it was the first into the market, even though only one generic could possibly have a period of exclusivity. This means that assuming the Regulations are effective against all generics except the claimant would result in systematic overcompensation for the generics as a group. This is not simply a difference based on differing evidence; the evidence could be exactly the same in each case, and there would still be a difference because a different generic would be the claimant in case. (See generally [102-08].)

Mainville J, dissenting on this point, largely accepted Sanofi’s position. He held (my emphasis):

[114] The proper methodology is to construct a hypothetical market that most resembles a real market. In the real market, save rare exceptions, once a generic drug manufacturer has received a NOC for a generic version of an innovator drug, another generic drug manufacturer can reasonably expect to secure a NOC for its own generic version of that drug.

[117] Consequently, in the hypothetical world, once a generic drug manufacturer is deemed to have been issued a NOC under paragraph 8(1)(a) of the NOC Regulations as if these Regulations were non-existent (“in the absence of these Regulations”), then other generic drug manufacturers should be assumed to be in a position to receive a NOC subject only to the delays and timelines set out in the Food and Drug Regulations.

[118] In other words, for the purposes of constructing the hypothetical market, once a NOC is deemed to have been issued to the claimant under paragraph 8(1)(a) of the NOC Regulations, those Regulations should be disregarded not only with respect to the claimant generic drug manufacturer, but also with respect to any other generic drug manufacturer that is found, on a balance of probabilities, to also be a market participant. The regulatory hurdles of the NOC Regulations are therefore disregarded, but the other regulatory and legislative restraints flowing notably from the Food and Drug Regulations and the Patent Act are considered for each participating generic drug manufacturer individually.

Sharlow J for the majority described this as the “open season methodology” [155-56]. Mainville J’s position is not the “one world” position that was argued by Sanofi before Snider J. Mainville J stated that

[106] I agree with the Trial Judge that a single hypothetical market for all litigation involving ramipril and section 8 compensation awards may not always be a practical feasibility in light of the different relevant section 8 liability periods involved in each case, the evidence submitted at each trial, and the particular dynamics of each claim for compensation.

That is, in any given case, all generics, and not just the claimant, should be in a position to be able to obtain an NOC as if the Regulations were non-existent, there may nonetheless be differences in the evidence as to how they would have proceeded. For example, the evidence in one case might show that a particular generic lacked manufacturing capacity, while evidence in a different case might show that the same generic had capacity to spare. However, because the market is open to all generics in all of the different s 8 actions, none of them will get the first mover advantage, and so there will be no systematic over-compensation.

Sharlow J for the majority disagreed with Sanofi and Mainville J’s “open season” approach. She held that in the hypothetical world, the NOC Regulations should be treated as existing, exactly as they do in the real world, for both the claimant and other generics, except for the specific purpose set out in s 8, namely the calculation of the start date for the compensable period. For convenience I will call this the “minimalist” approach, because it assumes the smallest possible deviation from the real world. This also differs from Snider J’s approach. Snider J’s treatment of the facts assumed that the NOC Regulations did not apply at all to the claimant, but did apply to everyone else: “In the ‘but for’ world, Apotex would not have served notices of allegation on Sanofi.” [194fcA]. In Sharlow J’s hypothetical world, Apotex would have served the NOA:

[170] Paragraph 8(1)(a) does not say or suggest that the hypothetical world has no NOC Regulations, much less that the hypothetical world has no NOC Regulations that are binding on the section 8 damages claimant, in this case Apotex. It says only that the NOC Regulations are to be disregarded in determining the beginning of the section 8 liability period, as long as neither of the stated exceptions applies. For that reason, I do not accept the rationale of Apotex for confirming the Trial Judge’s conclusion as to the date on which the authorized generic would have entered the market.

[171] In my view, Apotex should be treated as having served the same notices of allegation in the hypothetical world just as it did in the real world. The NOC Regulations require that a drug manufacturer wishing to obtain a NOC for a generic version of an existing drug before the expiry of the patents listed against the existing drug must address those patents by serving a notice of allegation in which it alleges that the patent is invalid or will not be infringed by the generic product. There is no reason why that legal requirement should be ignored in the hypothetical world.

That Apotex is taken to have served its NOA significant, because if Apotex did not need to serve the NOA, its launch might have taken Sanofi by surprise, thus giving Apotex a higher early market share [195fcA] Sharlow J reversed Snider J on that point, holding that because Apotex would be required to serve its NOA in the hypothetical world, there could be no “surprise launch” by Apotex [171]. However, on the facts, she held that Sanofi would not have taken steps to launch the AG until it lost its prohibition application [172], and so she upheld Snider J in the result.

It is not just that Apotex should be treated as having served its NOAs; Sharlow J’ s minimalist approach also assumes that the prohibition application would have proceeded as it actually did. The only point on which the majority reversed Snider J on the facts related to the date of Teva’s entry into the market. Sanofi argued that once Apotex received its NOC, on the patent hold date, which was April 26, 2004, Teva would have been able leverage this into a summary decision based on abuse of process, allowing Teva to enter the market quickly [182]. Sharlow J’s response was that

in the real world, none of Sanofi’s prohibition applications responding to an invalidity allegation had been dismissed by April 26, 2004. Therefore, there is no basis for concluding that on or shortly after April 26, 2004 in the hypothetical world, Teva would have had a legal basis for a summary proceeding (such as a motion to dismiss for abuse of process) that would have led to the issuance of its NOC. I conclude that there is no merit to Sanofi’s ground of appeal on this point [183].

That is, we do not assume that in the hypothetical world Apotex would have entered the market on the patent hold date because it would have been successful in the NOC proceedings. It would simply have entered because it is assumed to have received an NOC.

Snider J had not adopted Sanofi’s position either. She had held that but for Apotex’s successful NOC challenge, which would not have occurred in the hypothetical world, Teva would have entered earlier than it did in the real world, by piggy-backing off of Riva’s NOC proceedings [159fcA]. I have to admit I do not fully understand Snider J’s reasoning on this point; I don’t see why the absence of a successful challenge by Apotex would have made things easier for Riva. Consequently, I don’t entirely understand the specific’s of Sharlow J’s response on the facts [184-85]. I would welcome clarification from anyone more familiar with the case. But Sharlow J’s statements of principle seem clear:

[186] Therefore, it appears to me that in the hypothetical world as well as in the real world, the prohibition applications against Apotex would have been dismissed just as they were in the real world.

[187] Given that, it seems to me that Riva and Teva would have behaved in the hypothetical world just as they did in the real world, which was to seek summary dismissal as soon as they considered they had a fair chance of success. And in the real world, the last of the prohibition applications against Riva and Teva relating invalidity allegations was not dismissed until after December 16, 2006. I see no reason to conclude that either Riva or Teva could or would have achieved that result in the hypothetical world any earlier than they did in the real world.

The bottom line, then, seems to be that for the majority in the FCA, the only difference between the hypothetical world and the real world is that in the hypothetical world the statutory stay does not apply.

Sharlow J rested her holding in part on the text of s 8(1)(a), which provides that if an application for an order of prohibition is dismissed, the patentee is liable to the generic “for any loss suffered during the period “ beginning on the date, as certified by the Minister, on which a notice of compliance would have been issued in the absence of these Regulations.” Mainville J relied on the phrase “in the absence of these Regulations” as saying that the Regulations should be assumed to be “non-existent” for the purpose of constructing the hypothetical world [117]. But as Sharlow J pointed out, all it really says is that they should be assumed not to exist for the purpose of determining the start date of the compensable period. Sharlow J applied the principle expressio unius est exclusio alterius to argue that this implied that the Regulations should be taken to exist for all other purposes:

[161] Since the NOC Regulations say that their existence must be disregarded for one specific purpose, it seems to me that to disregard the NOC Regulations for some other purpose would be tantamount to judicially amending section 8.”

This seems to me to go too far. Even Sharlow J’s interpretation requires rewriting the Regulations in the hypothetical world to omit s 7(1)(d) and (e), which implement the statutory stay. Sharlow J is quite right to point out that the phrase “in the absence of these Regulations” applies only to determining the start of the compensable period, but nothing in the text of the Regulations really helps define the hypothetical world.

We should therefore turn to a purposive analysis. As discussed above, Mainville J adopted the open season methodology because Sharlow J’s method would result in systematic over-compensation to generics as a group. Sharlow J’s explicitly acknowledged this [164], but she countered that Mainville J’s approach

would reduce the amount of the section 8 damages in every case in which the claimant has a potential competitor, and therefore it would reduce the aggregate liability of the first person (the innovator drug manufacturer, in this case Sanofi) in all such cases involving the same generic drug. That would undoubtedly be an advantage to the first person, but it could be unfairly prejudicial to a particular claimant because it is not possible to determine whether the open season methodology necessarily would result in reasonable compensation to each claimant or to all claimants collectively [157].

I’m not sure if I fully understand this remark, but I believe Sharlow J’s point is that there is no natural baseline for constructing the hypothetical world. Mainville J is right that the minimalist approach can result in a number of different generics, in different s 8 proceedings, being held to be the sole generic in the market during the same period, which would not be possible in any single real world. But the point of s 8 is not to compensate generics as a class, but rather to compensate each for its loss.

As a final point, Mainville J indicated that Snider J had rejected the “open season” methodology [105], but it is not clear to me that the position accepted by Mainville J was ever explicitly put to Snider J. She did clearly reject the “one world” position, but, as discussed, that is not the same position. Similarly, Sharlow J said that Snider J rejected the open season methodology, “largely because it is inconsistent with the requirement that each claim for section 8 damages must be determined on its own merits based on the evidence presented [158]. In fact, that is why Snider J rejected the “one world” approach, which is different from the “open season” approach. So far as I can tell, what really happened is that Sanofi shifted its position on appeal. This is understandable, because Snider J’s criticism of the one world approach is powerful, and Sanofi’s appeal position was much more reasonable. With that said, it is correct to say that Snider J did assume that the other generics would have to deal with the NOC hurdles, though this seems to have been more by default rather than by way of a deliberate rejection of the position accepted by Mainville J. Of course, what exactly Snider J held is now largely a moot point.

*Update: Another discussion of this decision, which I hope is clearer, can be found here

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