Tuesday, September 15, 2015

Non-Infringing Alternative and Intentional Infringement

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 a comment to my post “Relevance of Infringer's Outside Option in Non-infringing Alternative Analysis,” on the FCA’s Lovastatin Damages decision, Ephraim Stulberg raises a point that deserves a full analysis:

My reading of the case is that the FCA has concluded (rightly or wrongly) that the NIA defence will typically be open only to unintentional infringers. The "but for" reconstruction cannot simply be based on the proposition that "had we only known the court would have found the patent valid"; otherwise, the actions of the defendant in the real world will be held against them (i.e. if the NIA was really such a good idea, why did you decide to roll the dice?)

I agree that the FCA did seem to be saying that an intentional infringer cannot normally raise the availability of an NIA in constructing the “but for” world. That is directly supported by the FCA’s repeated references to intentional infringement [91], [93] and it makes sense of the court’s reference to “brazen” infringement, which is otherwise puzzling [90]. It is also consistent with the court’s repeated references to Apotex’ belief that the 380 patent was invalid [92], [93], which indicates that, in the view of the FCA, Apotex intentionally infringed because it believed the patent was invalid.

The difficult question is why the FCA was of the view that intent is an important consideration. It is one thing to say that an intentional infringer cannot normally raise the availability of an NIA, but there must be some rationale for that holding, which would otherwise simply be unprincipled.

The reading I provided in my first post – that the FCA was saying that an infringer will not be able to raise the NIA in the damages assessment if it would not have been more profitable than the best outside option – is not strongly supported by the FCA’s emphasis on intent. As I explained in the footnote (*) in my first post, on that reading it doesn’t really make sense to say that an intentional infringer will not usually be able to raise the NIA analysis, because intent doesn’t say anything about whether the defendant believed it had a better outside option. On the other hand, my reading is quite strongly supported by the FCA’s only specific statement as to why as Apotex’ evidence was insufficient [94]; but if that reading is correct, the FCA’s emphasis on intent was misplaced.

While my reading of the decision does not really explain the court’s emphasis on intent, I can’t think of any other reading which does. The basic difficulty with a holding that an intentional infringer cannot raise the availability of an NIA is that, as the FCA explicitly recognized, the question at hand is one of causation [43], and intent is irrelevant to causation. If I smash a store window intentionally or accidentally, the damage I cause – the cost of replacing the window – is the same.

In some limited circumstances the intentional nature of the act might increase the harm done. The humiliation from an intentional public slap in the face might entail a real loss, even though the same physical act would be negligible if accidental. In such instances aggravated damages are appropriate to capture the intangible elements of the harm: see Cassell & Co Ltd v Broome (No 1) [1972] UKHL 3. But there is no suggestion in this case, either on the facts or in the FCA decision, that the infringement is linked to any kind of loss that would give rise to aggravated damages, and aggravated damages do not typically arise in patent litigation generally. And even if aggravated damages could somehow arise, I don’t see how there could be any link between the availability of the NIA and the quantum of the aggravated damages. So, an appeal to aggravated damages cannot justify a holding that an NIA should not be considered in assessing damages against an intentional infringer.

At first glance, punitive damages are more promising. Intent is certainly relevant to punitive damages, which are intended for punishment (or prevention), deterrence and retribution: Whiten 2002 SCC 18 [43], [53], Cinar 2013 SCC 73 [136]. Nonetheless, there are several problems with holding that an intentional infringer cannot rely on the NIA analysis in order to impose punitive damages.

First, as a general matter, punitive damages are not generally available for intentional patent infringers. Intentional infringement is common, particularly in pharmaceutical litigation, yet punitive damages are very seldom awarded. To award punitive damages routinely, but only in cases where the infringer could otherwise have competed with a non-infringing alternative, is unprincipled.

This leads to the second point. While intent is relevant to punitive damages, it is not the only factor that is considered. “Punitive damages are awarded against a defendant in exceptional cases for ‘malicious, oppressive and high-handed’ misconduct that "offends the court's sense of decency’. The test thus limits the award to misconduct that represents a marked departure from ordinary standards of decent behaviour” Whiten [36]. Intentional infringement alone falls far short of this standard, particularly when, as in this case, the infringer believed the patent to be invalid. If, for example, a generic launches at risk in the face of an evergreening formulation patent that it believes is almost certainly invalid, surely it should not be subject to punitive damages if the 10% chance that the patent was valid is ultimately realized.

Finally, punitive damages must be reasonably proportionate to the harm caused: Whiten [94]. This means the harm caused must be determined before punitive damages can be assessed; if we don’t know what harm was caused, how can we ensure that the punitive damages are proportionate to that harm? Again, we come back to the point that the harm caused does not depend on whether the infringement was intentional. By the same token, even if punitive damages were generally appropriate for intentional infringers, there is no particular reason to believe that the appropriate quantum of punitive damages would be arrived at by excluding the NIA analysis. Recall that the NIA analysis is not a defence, but only a method of assessing damages. In this case the facts established that Apotex would have competed equally effectively with the NIA, but in general the NIA analysis might show that the infringer would have captured only a part of the market, or even none at all. So to exclude the NIA analysis as a means of levying punitive damages would mean that sometimes the punitive damages would be an enormous multiple of the harm caused – potentially hundreds or thousands of times the harm actually caused, in cases where competition with the NIA would have been very effective – to a very small fractional multiplier. Indeed, the less the harm, the greater the multiplier, which is exactly the opposite of what we would want from punitive damages that are proportionate to the harm caused.

Consequently, it would be entirely unsound to impose punitive damages by holding that an intentional infringer cannot appeal to the NIA.

Having ruled out punitive damages and aggravated damages, I can’t think of any other reason why intent would be relevant. While the reading I offered in my first post doesn’t really explain the FCA’s emphasis on intent, I can’t think of any other principled explanation for the court’s holding that gives intent a central role. So on the whole, I still think the is the best reading is the one I provided in my first post, but it is certainly possible that I have misunderstood the court’s point.

Finally, Mr. Stulberg remarked that:

The "but for" reconstruction cannot simply be based on the proposition that "had we only known the court would have found the patent valid"; otherwise, the actions of the defendant in the real world will be held against them (i.e. if the NIA was really such a good idea, why did you decide to roll the dice?)

As a general matter, I don’t see what’s wrong with basing the but-for reconstruction on the proposition that “had we only known the court would have found the patent valid,” this is what the infringer would have done. For example, a reasonable royalty is assessed on the assumption that the parties to the hypothetical negotiation knew the patent is valid, even though real licenses are presumably discounted to reflect the possibility of invalidity. More generally, my view is that damages assessment should take into account not just whether the patent is valid, but all knowledge known at the time of trial: see my article with Tom Cotter, A New Framework for Determining Reasonable Royalties in Patent Litigation (forthcoming Fla L Rev). As to why the defendant would have infringed, the answer is that it is often more profitable to infringe. In this case the infringing process was substantially cheaper than the NIA, though that differential profit would have been captured by Blue Treasure (the Chinese joint venture which manufactured most of the infringing product), rather than by Apotex. But that does not make the NIA analysis irrelevant. If the NIA indeed just as good, it is true that the infringer would normally not infringe intentionally, but in general the NIA will allow some partial degree of competition. This is there is a broad range of possibilities between an NIA that is a perfect substitute for the patented product and one that would not have captured any sales at all. It is well established that a patentee cannot recover lost profits for sales that would have been captured by third parties with non-infringing products, and typically such competitors will capture some but not all of the infringing sales: see Jay-Lor 2007 FC 358, [197], AlliedSignal (1998), 78 CPR(3d) 129, 139 (FCTD). The NIA analysis just says the same is true even if the non-infringing sales would have been made by the infringer.

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

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