Thursday, May 21, 2015

Disgorgement of Patentee’s Profits Fails Second Branch of Unjust Enrichment Test

Apotex Inc v Eli Lilly & Co, 2015 ONCA 305 Feldman JA: Doherty, Blair JJA aff’g 2013 ONSC 5937 Grace J: Law, Sachs JJ

When a patentee brings an application for an order of prohibition pursuant to the NOC Regulations a statutory stay is automatically triggered keeping the generic off the market for 24 months or until the application is resolved in the generic's favour. If the generic prevails, it is entitled, under s 8, to damages equal to the profits it lost from having been kept off the market by the statutory stay. Since the patentee's price is normally higher than the generic's, the profits made by the patentee from sales that would have been made by the generic but for the stay are normally greater than the generic’s damages. Apotex has now failed, once again, to obtain not just its damages, but a disgorgement of the profits made by the patentee.

In its decision on this motion to strike Apotex' claim for unjust enrichment, the ONCA has provided a helpful review of the prior attempts by Apotex, both in the Federal Courts and Ontario courts, to obtain a disgorgement [22]-[31]. Apotex was previously unsuccessful on the basis that s 8 is a complete code which contemplates damages as the sole remedy [35] (and see here, discussing the previous ONCA decision, and here discussing the leading FCA decision).

In this case Apotex argued that these precedents do not govern when the patent holder obtains and lists its patent through misrepresentation: that is, it argued that even if mere invocation of the NOC Regulations cannot trigger disgorgement, knowingly triggering the Regulations by misrepretation may trigger such a remedy. This invited a debate as to the limits of the "complete code" argument, which was the basis on which Apotex' claim was struck by the Divisional Court. But the ONCA, of its own initiative [40], took a different tack. Instead of holding that the unjust enrichment claim was barred because allowing it would be inconsistent with the statutory regime, the ONCA held that Apotex' claim could not stand purely as a matter of the law of unjust enrichment [39], [41] (my emphasis):

there is a fundamental flaw in Apotex’s claim for unjust enrichment that makes this doctrine unavailable to Apotex, irrespective of the nature of Lilly’s conduct that may be proved at a trial. The flaw is in the second requirement for a claim of unjust enrichment: a corresponding deprivation.

Put simply, Apotex was never deprived of the portion of Lilly’s revenues represented by its monopolistic profits because Apotex would never have earned those profits.

It is true that the patentee, Lilly in this case, benefitted at Apotex’ expense to some degree – the profits lost by Apotex were gained by Lilly – but Apotex is already entitled to recover that loss under s 8. In the unjust enrichment claim Apotex is seeking Lilly’s excess profits above the damages which are already payable to Apotex, and “the portion of the windfall that is not compensable under s. 8 of the PMNOC regulations, the monopolistic profit, was not in any way transferred from Apotex or lost by Apotex” [53].

This brings us to Apotex’ policy argument, which is that [16]:

In the absence of a disgorgement of [the patentee’s profits], every patentee would have an incentive to use the PMNOC Regulations in all cases to unjustly delay entry of every generic product at the expense of the Generic, in the knowledge that the revenues made by it would exceed the damages for which it will be liable for the delay caused to the Generic.

There are two answers to this. One is the “complete code” argument. The appropriate incentive is a complex matter which has been addressed by the legislature in the NOC Regulations as a whole. There are a number of difficult policy decisions related to the incentives to use the regulations. For example,  under the US Hatch-Waxman Act, the first generic to successfully challenge the patent gets a 180 day exclusivity over other generics as an added incentive to file applications. This incentive feature is missing from Canadian law. Whether this is right or wrong, it is a decision that has been made by the legislature, and so should be changed, if necessary, by the same body.

The other response is made by the ONCA in this case:

Effectively, Apotex is asking the court to designate it as the de facto beneficiary of the wrongfully-obtained monopolistic profits despite recognizing in its pleadings that it was the public that suffered actual deprivation as a result of the monopolistic pricing. Unlike the plaintiffs in the “profiting from wrong” cases discussed above, Apotex is not positioned as the sole party with a legitimate right to “enforce” or “deter” the underlying wrong. The pecuniary interests of consumers, and potentially other generic companies, are also implicated.

That is, even if it is desirable to require the patentee to disgorge its profits to avoid abuse of the patent-linkage system, it does not follow that the profits should be disgorged to the generic. There is a prima facie argument that the parties actually harmed by the excessive prices, namely the consumers, should be those entitled to the disgorgement.

This argument is entirely distinct from the complete code argument. As the ONCA pointed out, in Low v Pfizer Canada Inc, 2014 BCSC 1469, Smith J allowed an allegation of unjust enrichment to stand in a class action claim on behalf of consumers [33]. Smith J’s holding required a rejection of the “complete code” argument [34], but it is consistent with the ONCA’s holding in this case. Even if it sound policy to require a patentee to disgorge is profits, Low v Pfizer illustrates that it is not necessary, either in theory or in practice, to require those profits to be disgorged to the generic that triggered the s 8 challenge.

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