Tuesday, February 3, 2015

"That Mode Is Adopted Which Is . . . the Least Burthensome to the Defendant"

Eli Lilly and Co v Apotex Inc / cefaclor, 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,0071,146,5361,133,4681,150,725 [“Lilly Patents”]
            1,095,0261,132,5471,136,1321,144,924 [“Shionogi Patents”]

In the liability phase of this bifurcated action, Cefaclor Liability 2009 FC 991 aff’d 2010 FCA 240, Gauthier J held that at least one valid claim of each of the eight patents was infringed by Apotex. Lilly elected damages, which were assessed by Zinn J in the decision at hand. Sunday’s post concerned the misnamed “NIA defence,” which turned entirely on a question of law. Today’s post looks at what I will call “reverse springboard” damages, though that is probably also a misnomer. The question is whether Lilly should be able to claim lost profit damages for sales it would have made in the but for world, even though in the relevant period in the actual world Apotex was selling non-infringing product.

At issue were two set of four patents relating to processes for producing cefaclor. (The so-called “Shionogi patents” had been assigned to Lilly by Shionogi. The different sets of patents related to somewhat different processes.) There were essentially three processes used to make the cefaclor imported and sold by Aptoex: Kyong Bo, Lupin 1 and Lupin 2. The first two processes were infringing, but Lupin 2 was non-infringing. (More precisely, Lilly failed to prove that Lupin 2 infringed and Zinn J took this as tantamount to a finding of non-infringement for the purposes of the damages phase [61].) In the liability phase it was established that the last shipment of infringing cefaclor was received by Apotex on June 3, 1998 [Liability 228-29], [58]. Presumably there was some subsequent period during which Apotex sold infringing product that it had imported prior to that time, but unfortunately, it is not clear from either the liability decision or the damages decision exactly when the last infringing product was sold by Apotex in Canada.

On the question of when Apotex would have entered the market with non-infringing product in the “but for” world, Apotex argued that

proof of what it would have done in the but-for world is established by what it did in the real world. In the real world, when it determined that the process being used infringed the patents, it sought out a non-infringing process and continued selling in the marketplace. [63]

Zinn J rejected this, and held that in the but for world, Apotex would not have been in the cefaclor market under April 19, 2000, when the last of the Shionogi patents expired [70]. It is implicit in this exchange that in the real world, the last infringing product was sold by Apotex prior to that time. My understanding is that Apotex stopped selling infringing product by the summer of 1999 at the latest, so that all product sold in the real world in the period from (at least) the late summer of 1999 to April of 2000 was non-infringing.

So, my analysis of this point proceeds on the basis that Lilly was awarded lost profit damages on sales it would have made in the but for world for a period during which Apotex was selling non-infringing product in the real world.

On its face, Zinn J’s reasoning is based simply on the construction of the but for world on the facts. The main evidence relied on by Apotex to establish that in the but for world it would have used a non-infringing process, at least as of the summer of 1999, is that it did so in the actual world. Specifically, in the real world, Apotex “sought out” a non-infringing process “when it determined that the process being used infringed the patents” [63]. Zinn J accepted this as true [63], but he was not persuaded that that what Apotex would have done in the but for world. His reasoning is quite brief, but if I understand it correctly, he is saying that Apotex developed an NIA only because it was in the market and wanted to stay in the market. If it had not entered the market in the first place, it would not have had any incentive to develop the NIA [63]-[64]. That, while it would have been technically feasible for Apotex to have marketed non-infringing product, it would not have been motivated to do so. Instead, it would have stayed out of the market entirely and Lilly would have had the market to itself until the expiry of the last Shionogi patent, which would have allowed Apotex to produce non-infringing product using the Kyong Bo process [69].

This reasoning calls to mind Open Window Bakery 2004 SCC 9, in which the plaintiff had been wrongly dismissed without cause and without notice. The trial judge held that but for the breach of contract, the plaintiff would not have been dismissed, but would have been retained for the entire remainder of the contract term. The defendant argued that on the contrary, but for the wrongful dismissal, the plaintiff would have been dismissed without cause but with notice. (The putative cause for dismissal involved dishonesty, and while the plaintiff had acted inappropriately [2000] OJ 5004 [70], the trial judge held that dishonesty was not established [112]. The trial judge also held that the employees who had made honest mistakes were generously treated by defendant’s CEO [115].)

So, in Open Window Bakery there were two ways in which the defendant might have avoiding wrongdoing: (1) it might have retained the plaintiff for the duration of the contract; or (2) it might have terminated the plaintiff without cause but with notice. The trial judge found that in fact the defendant would have chosen option (1), though option (2) would have been less burdensome. This case presents much the same scenario. Apotex might have avoided infringement by (1) staying out of the market for until the expiry of the patents at issue; or (2) by developing a non-infringing alternative. Zinn J found that in fact Apotex would have chosen option (1), though option (2) would have been less burdensome.

The SCC in Open Window Bakery reversed the trial judge, without disputing his finding of fact, on the basis that as a matter of law, “where there are several ways in which the contract might be performed, that mode is adopted which is . . . the least burthensome to the defendant” [11] (and see similarly [20], [21]). Now, in Open Window Bakery the SCC emphasized this is a principle of contract law, and distinguished it from “a tort-like inquiry as to what would have happened if [the plaintiff] had not breached its contractual obligations to [the defendant]” [19]. But I am not sure that the trial judge’s approach really reflected a tort-like analysis. The tort analogy would be more exact if there were two ways of avoiding liability, and one would have resulted in harm to the defendant. I’m not sure how tort law would handle such a case, but it is not clear to me that it would necessarily be strictly by an inquiry as to what most likely would have happened. I suggest that rather than considering the principle of “least burdensome performance” as being a unique aspect of contract law, it can be explained as a presumption of law regarding the most likely course of action in fact, which simply happens to arise more commonly in contract.

In any event, while patent infringement is often described as a kind of “statutory tort” [10], it is not a tort as such, and the principles of patent damages must be interpreted in a manner that is consistent with the purposes of the Patent Act. The relevant principle is that the patentee should be rewarded commensurately with the social value of its invention, and that is the difference between the value of the invention and the value of the best non-infringing alternative. To posit that Apotex would not have entered with a non-infringing method means that Lilly would be rewarded as if it process were more valuable than it is really is. Consequently, it seems to me that the principle of least burdensome performance should apply, at least presumptively, under the Patent Act as much as in contract.

1 comment:

  1. It seems perverse that what an infringer could or would have done but for infringement that is different than its real world conduct cannot be considered to reduce damages (i.e. sell non-infringing product instead of infringing product) but what an infringer could or would have done but for infringement that is different than its real world conduct can be considered to increase damages (i.e. sell nothing instead of non-infringing product).