Monday, August 31, 2015

Non-Infringing Alternative Must be Instantaneously Available on the Market

Apotex Inc v Merck & Co, Inc / Lovastatin Damages 2015 FCA 171 Dawson JA: Stratas, Boivin JJA aff’g 2013 FC 751 Snider J
            1,161,380 / lovastatin / MEVACOR

In Lovastatin Damages the FCA has addressed the question of whether the availability of a non-infringing alternative (NIA) should be considered in assessing damages for patent infringement. As discussed here, Snider J had held that a non-infringing alternative cannot be considered. The FCA has now reversed on this point, holding that as a matter of law, the availability of a non-infringing alternative is a relevant consideration [1] if the infringer can establish that it “could and would” have sold an NIA but for the infringement [49], [50]. However, the FCA went on to hold that Apotex had not established that it either could or would have sold non-infringing product [88], [95]. Consequently the FCA affirmed Snider J’s decision that damages should be calculated on the basis that but for the infringement, Apotex would not have made any sales and Merck would have captured the entire market.

In my view, the FCA’s explanation of why the availability of a non-infringing alternative should be legally relevant to the calculation of damages is entirely correct. However, its holding that the NIA should not be considered relevant in this case is more problematic. On the “could” branch, dealt with in this post, the FCA held that as a matter of law, an NIA must be instantaneously available on the market at the time of infringement [79]. In my view, that holding is inconsistent with the general case law on causation, as well as US authority on point and the FCA’s own holdings in related areas. It is also inconsistent with the rationale given by the FCA for considering the NIA in the first place.

I consulted for Apotex at both the FC and FCA level. The views expressed in this post are my own.

The ‘380 patent is a process and product-by-process patent for lovastatin when made with a particular micro-organism. In anticipation of obtaining a compulsory licence, Apotex developed an infringing process for the production of lovastatin, AFI-1. Subsequently, in anticipation of the compulsory licencing regime being replaced by the PM(NOC) Regulations, Apotex developed a non-infringing process, AFI-4, which used a different micro-organism. After perfecting the AFI-4 method, Apotex then moved its production to China, where lovastatin was made by Blue Treasure, a joint venture with Chinese partners. The agreement with Blue Treasure provided that lovastatin destined for Canada be manufactured using the AFI-4 method and the first shipments sold in Canada were indeed non-infringing. However, Blue Treasure decided to boost 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 in Canada was infringing [9]. (See here for a more detailed description of the facts.)

Section 55(1) of the Patent Act provides that the infringer is liable to the patentee for all damage sustained “by reason of the infringement.” As the FCA explained, this invokes the same principle of causation which is generally applicable to compensatory damages [43]-[44]. The general legal test for establishing causation is the “but for” test [45]. Under this approach, the plaintiff’s loss is equal to the difference between the plaintiff’s actual position and the position it would have been in but for the wrong: Athey v Leonati [1996] 3 SCR 458, [32]. The position that the plaintiff would have been in is often referred to as the “‘but for’ world” [48].

The question in this case is whether competition by the infringer selling an NIA should be legally relevant in constructing the but for world. The answer is yes. As the FCA explained, if, but for the infringement, the plaintiff would nonetheless have faced lawful competition from the defendant, to ignore that lawful competition would place the plaintiff in a better position than it would have been in had the defendant not infringed [48]. The “crumbling skull” doctrine illustrates this point in the general tort context. If the defendant negligently injuries the plaintiff causing, for example, a disk herniation, damages will be reduced if the defendant can show that the plaintiff would in the future have suffered a herniated disk in any event due to a pre-existing condition. To do otherwise would over-compensate the plaintiff: Athey [35]. Similarly, in this case Apotex argued that if it had not sold lovastatin made using the infringing AF-1 process, it would have sold lovastatin made using the non-infringing AF-4 product at exactly the same price and so would have captured the same market share from Merck.

While the FCA accepted the relevance of the NIA in principle, it held that Apotex had not established that it could have sold non-infringing lovastatin. Citing the Federal Court of Australia in Advanced Building Systems [2001] FCA 1098, the FCA held that an NIA can only be considered “if at the moment of infringement […] there is available on the market instantaneously the appropriate substitute” [79]. While the FCA characterized the question of whether Apotex could have sold non-infringing lovastatin as a matter of fact [73(iii)], [79], the holding that to do so Apotex would have to establish instantaneous availability on the market at the moment of infringement is evidently a holding of law. Recall that prior to the infringing period Apotex had actually produced lovastatin using the non-infringing AF-4 process and the FCA accepted that at the relevant time, Apotex “had the capacity to manufacture and sell non-infringing lovastatin in sufficient quantities” [77]. The FCA acknowledged that it would have taken approximately three weeks for Apotex to ramp up production [82]. The actual infringing production took place over a period of approximately two years [7], so it clearly would have been physically possible to ramp up non-infringing production during that time. Thus the holding that Apotex “could” not have sold non-infringing lovastatin does not mean that it technically could not have done so, but rather than it is deemed not to have been able to do so because the non-infringing product was not actually available on the market during the period of infringement. The fact that Apotex had the capacity to ramp up non-infringing production within three weeks is irrelevant as a matter of law. As the FCA indirectly acknowledged [79], the holding that Apotex could not have used the non-infringing process is a mixed question of fact and law: the law set out by the FCA is that the NIA must have been instantaneously available on the market, and the fact is that Apotex did not have sufficient quantity of non-infringing product actually on hand to replace all the infringing sales [87]. The scenario in which the FCA contemplates the NIA would be relevant is one where, for example, a product that competes with the infringing product is actually on the market during the entire period of infringement, so that rather than infringing, the defendant could have purchased the non-infringing product.

In my view, limiting the relevant alternatives to those which are immediately available on the market is inconsistent with the general principles of but for causation in Canadian law. As a general matter, in assessing but for causation:

Hypothetical events (such as how the plaintiff's life would have proceeded without the tortious injury) or future events need not be proven on a balance of probabilities. Instead, they are simply given weight according to their relative likelihood. . . . A future or hypothetical possibility will be taken into consideration as long as it is a real and substantial possibility and not mere speculation
Athey v Leonati [1996] 3 SCR 458, [27]

So, under the crumbling skull doctrine, there is no requirement that the herniated disk be immediately present at the time of the tort. Indeed, it is not even necessary that the defendant prove on the balance of probabilities that the herniation would have happened but for the tort; it is enough that the defendant can prove there was a measurable risk: Athey [35].

The requirement that the NIA be instantaneously available in the market is also inconsistent with the FCA’s own decisions in related areas. The NIA analysis was established in the accounting of profits context by the SCC decision in Monsanto v Schmeiser, 2004 SCC 34, [102]-[105], and the FCA in this case accepted that NIA analysis is the same in principle in both the accounting context and damages [60]. The precise question of “whether the defendant must prove that the comparator non-infringing product was actually available for use or sale or whether it is sufficient to establish that there is such a product, even though it may not be available in reality because of market conditions” was raised in the accounting context in Monsanto v Rivett 2009 FC 317, [60]. Zinn J held that it was appropriate to use a comparator even though it is “not actually available,” because “attaching determinative weight to the vagaries of the local market for conventional soybeans would undermine the ability to isolate profits having a causal link to Monsanto's invention” [63]. The question was relevant because there was evidence that there were no non-infringing conventional soybeans locally available [60]. Zinn J held that conventional soybeans were nonetheless the appropriate comparator. The FCA in Rivett 2010 FCA 207 specifically discussed and affirmed Zinn J’s holding that “that market availability of the best non-infringing alternative was not determinative” [51]. The FCA stated even if the conventional soybeans were not available on the market, “conventional soybeans existed at that relevant time and they were suitable for planting in Mr. Rivett's fields. It is also worth noting that at paragraph 30 of Reading & Bates, cited with approval by Monsanto, the Court does not state the comparator must be shown to have been actually available to the infringer. Rather, it requires proof that such is available in similar conditions” [55]. Thus exactly the same question was addressed by the FCA in Rivett, and exactly the opposite answer was give, even though, as the FCA stated, there is no difference in principle between the two situations.

The same “but for” causation analysis also applies under s 8 of the NOC Regulations in assessing damages due to a generic for being wrongly kept out of the market: 2012 FC 552 [5]; 2011 FCA 329 [75]. In that context the FCA has held – rightly in my view – that in constructing the but-for world the entry by an authorized generic should be considered: Teva / ramipril 2014 FCA 67 [100]-[103] aff’g 2012 FC 552 [176]-]184]. In the but-for-prohibition-order world, the patentee might launch an AG to recoup some of the market that would have been lost to generics (2012 FC 553 [171]) in much the same way that in the but-for-infringement world an infringer might launch a non-infringing alternative to recoup some of the market that would have been lost to the patentee. The launch of an AG would reduce the generic’s s 8 damages in an NOC proceeding in much the same way as the launch of an NIA would reduce the patentee’s damages in an infringement action. The principled reason for considering the entry of an AG is that if the prohibition order had not been granted and the generic had launched, the generic’s profits would have been less if it faced competition from an AG than if it had not. If the patentee would have launched an AG and this is ignored in constructing the but for world, that would result in over-compensation to the generic: 2012 FC 552 [183]. The problem of over-compensating the plaintiff is exactly the same reason given by the FCA in this case for why the NIA analysis should be considered [49]. Yet in the s 8 context there is no need to show that the AG was actually on the market at the relevant time; it is enough to show on the balance of probabilities that the patentee would have launched an authorized generic: 2012 FC 552 [178], [185].

In holding that the NIA has to be instantaneously available on the market, the FCA did not appeal to any general principles or its prior case law in related areas [79]. Instead it relied only on the holding of the Federal Court of Australia in Advanced Building Systems [2001] FCA 1098 [122]. The Australian court in turn relied for this proposition on the decision of the US Federal Circuit in Grain Processing 185 F3d 1341 [54]-[57] (Fed Cir 1999). In fact, Grain Processing stands for exactly the opposite proposition.

In Grain Processing, the patentee Grain Processing Corp (GPC) held a patent for a maltodextrin food additive with specific attributes, including a “descriptive ratio” greater than 2. The defendant, American Maize, sold a maltodextrin under the name “Lo-Dex 10” which was produced by four different processes during the period at issue. After American Maize launched the product, GPC sued for infringement. The product produced by Processes I and II was found to infringe. In response, American Maize developed Process III, which it was convinced did not infringe because it had a descriptive ratio of less than 2. But American Maize used the “Lane-Eynon” method for measuring the descriptive ratio, and it was ultimately held that the “Schoorl” method was appropriate, so Process III was also held to infringe. American Maize then quickly developed the non-infringing Process IV. It was established that consumers did not care at all about the value of the descriptive ratio, so sales of the non-infringing product would have been the same as sales of the earlier infringing product.

It is crucial to recognize that Process IV did not exist at any time during the period of infringement. Process IV was not developed until after the final judicial holding that Process III infringed, and as soon as Process IV was developed, American Maize sold only product made by that process. The trial judge (Easterbrook J, sitting by designation) nonetheless refused to award lost profits on the basis that American Maize had a non-infringing alternative “available” to it because it could have developed the non-infringing process at any time during the period for which GPC was entitled to damages: 979 F.Supp. 1233, 1235 (N.D.Ind.1997).

GPC appealed on the basis that “American Maize cannot escape liability for lost profits on the basis of ‘a noninfringing substitute that did not exist during, and was not developed until after, the period of infringement.’” This was the central legal issue on appeal. The court in Grain Processing roundly rejected this proposition.

an alleged substitute not “on the market” or “for sale” during the infringement can figure prominently in determining whether a patentee would have made additional profits “but for” the infringement.

Accordingly, this court in Slimfold Manufacturing Co. v. Kinkead Industries, Inc. held that an available technology not on the market during the infringement can constitute a noninfringing alternative. . . . On the basis of this noninfringing substitute, which was not on the market at the time of infringement, this court affirmed the district court's denial of lost profits.

Thus, with proper economic proof of availability, as American Maize provided the district court in this case, an acceptable substitute not on the market during the infringement may nonetheless become part of the lost profits calculus and therefore limit or preclude those damages.

Thus the position that an non-infringing alternative is only available “if at the moment of infringement […] there is available on the market instantaneously the appropriate substitute” is directly contrary to the central holding in Grain Processing.

The confusion may have arisen because the trial judge in Grain Processing found that American Maize was able to develop a non-infringing process “within two weeks of the Federal Circuit's decision [holding Process III to infringe], which for large-scale production is practically instantaneous” (1234). This seems to have been the source of the Australian court’s statement in Advanced Building Systems that an alternative can be considered only if it is “instantaneously” available. But there is nothing in the Grain Processing decision to suggest the “practically instantaneous” nature was crucial. It is enough that the alternative is foreseeable (1350-5) and can be commercialized “readily”: Siemens v Saint-Gobain 637 F3d 1269, 1288 (Fed Cir 2011).

Moreover, even if we read Grain Processing so narrowly, it is indistinguishable from on its facts from the Lovastatin situation. In Grain Processing two weeks was considered “practically instantaneous” to begin production. In this case, it would have taken three weeks. Surely it cannot be suggested that anything turns on the distinction between two weeks and three. If anything, the non-infringing alternative was more “available” in this case, as it had actually been developed and only needed to be ramped up, while in Grain Processing the non-infringing alternative needed to be created (though this was very easy to do).

This divergence of views between Lovastatin Damages and Grain Processing is puzzling. The FCA’s main holding of law is that “Perfect compensation requires consideration of: (i) what, if any, non-infringing product the defendant or any other competitors could and would have sold ‘but for’ the infringement” [50]. The FCA also relied on Grain Processing as the primary authority for the proposition that “American jurisprudence is clearly to the effect that the ‘but for’ causation inquiry requires consideration of non-infringing alternatives. Otherwise, patentees may be over-compensated” [57]. From this, one might think that the rule set out by the FCA in this case and by the US Federal Circuit in Grain Processing are the same. But given that the FCA’s decision is directly contrary to Grain Processing on the main point at issue in that case, they clearly are not.

Grain Processing is of course not binding on the FCA. The more important question is as to the underlying principles. The policy underpinning the NIA analysis is, as explained by the FCA – relying on Grain Processing – that it is “only by comparing the patented invention to non-infringing alternatives can a court discern the market value of the patent owner’s exclusive right” [56]. In this case, Merck had a patent on a process for producing lovastatin. Its process was less expensive than the non-infringing process developed by Apotex. (The patented process was also less expensive than the NIA in Grain Processing.) The value of the invention is the reduced cost of producing lovastatin, not the value of lovastatin itself, which was not patented. The FCA would apparently accept that this would be true if the non-infringing lovastatin were actually on hand during the period of infringement. But the fact that it would have taken three weeks to ramp up non-infringing production does not mean that the value of the Merck’s process patent is equal to the full value of lovastatin itself for the entire term of the process patent. Thus, in my view, the FCA’s rule that the NIA can be taken into account only if it was instantaneously available on the market at the time of the infringement is also inconsistent with the (correct) rationale given by the FCA for accepting the relevance of the non-infringing alternative in the first place.

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