Wednesday, January 27, 2016

Inequitable Conduct by Patentee: Defence v Reduction of Damages

Alcon Canada Inc v Actavis Pharma Co 2015 FC 1323 Locke J
            2,447,924 / olopatadine solution / PATADAY

As a partial defence to Alcon’s infringement action, Actavis alleged that Alcon engaged in inequitable conduct. This pleading has survived a motion to strike, and Locke J’s decision is interesting both on the substantive issue and for his thorough analysis of the case law relating to the standard of review of the Prothonotary’s decision.

The ‘924 patent covers a formulation of 0.2% olopatadine, as found in Alcon’s PATADAY. Actavis alleged that Alcon conspired, in breach of the Competition Act, to ensure that Actavis could not sell its non-infringing 0.1% olopatadine product, and this inequitable conduct by Alcon should partially offset any damages resulting from Actavis’s (alleged) infringement [5]. (The exact nature of the conduct was not specified – perhaps product hopping?) It was this pleading that was the subject of the motion to strike.

This is an intriguing argument, which I discuss in more detail below, but Locke J first had to deal with the almost equally complex question of the standard of review to be applied to the Prothonotary’s decision.

Under Aqua-Gem [1993] 2 FC 425 discretionary orders of prothonotaries ought not to be disturbed on appeal to a judge unless [8]:

a. they are clearly wrong, in the sense that the exercise of discretion by the prothonotary was based upon a wrong principle or upon a misapprehension of the facts, or

b. they raise questions vital to the final issue of the case.

If the prothonotary refuses to strike a pleading, can this ever be vital to the final issue? After all, if the pleading stands, the result of the motion will never be determinative of the outcome; but on the other hand, a motion on a central issue might reasonably be said to be “vital”. As Locke J put it, “If one focuses on what was sought in Alcon’s motion, it is final. However, if one focuses on the result of the motion, it is interlocutory” [12, original emphasis].

Locke J reviewed the case law on this issue, noting an apparent split within the Federal Court [18], and concluded that the proper question is whether what was sought was vital [19]. This means that even a refusal to strike might in principle be “vital” to a final issue.

What, then, is meant by “vital”? Again Locke J thoroughly reviewed the case law. He concluded that the question is whether “the paragraphs that Alcon seeks to have struck in the present case are more in the nature of ‘isolated allegations’ or rather ‘important or central allegations’” [24]. On the particular pleadings at issue, Locke J held that the paragraphs Alcon sought to have struck were isolated allegations not vital to the case [26]. Consequently, a deferential standard of review should be applied; the order of the prothonotary should not be disturbed unless it is “clearly wrong” [27].

Locke J then turned to the second branch of the conjunctive Aqua-Gem test: was the refusal to strike “clearly wrong”? On the substantive point, Alcon relied on Sanofi FCA 2008 FCA 175 [16], [18], where the FCA said that “a party claiming equitable relief will not be disentitled to that relief by virtue of inappropriate conduct on its part unless that conduct relates directly to the subject matter of that party's claim and the equitable relief sought,” and in a patent case this means that the alleged conduction must “cast a shadow” over the patent rights themselves, or the question of whether infringement occurred [29]. It was not disputed that the conduct alleged in this case did not do either of these things [30], and so Alcon argued that the pleading must be struck.

Locke J rejected this, saying that the Sanofi test was only applicable to equitable relief, and the allegations in this case concerned damages [32]. On its face, this makes sense. Equitable relief is discretionary, and inequitable conduct or “unclean hands” is one factor that a court may take into account in exercising its discretion. Damages are as of right, and without any discretion to be exercised, so unclean hands are not relevant. Ex turpi causa might still be relevant, as a rule of law, but the bar is probably substantially higher than unclean hands, at least according to the UKSC in Servier v Apotex [2014] UKSC 55, though see here suggesting that simple illegality is enough. Ex tupri causa was not raised in this case, as Actavis alleged only “inequitable conduct.”

But a holding based on the distinction between law and equity tends to seem formalistic, particularly when parallel doctrines such as unclean hands and ex turpi causa are available. Actavis clearly raised an allegation of contravention of the Competition Act, and it would be unsatisfactory if the whether pleading stood turned on whether it used the words “unclean hands” or “ex turpi causa.” Similarly, Locke J’s holding on this point implies that if Alcon had sought an accounting of profits, Actavis’ defence would have been struck. It is not evident why unclean hands should bar one monetary remedy but not another, and to say one remedy is legal while the other is equitable is a formalistic answer.

Locke J gave another reason for allowing the pleading to stand which I find more satisfactory. He noted that [37, my emphasis]:

Actavis has indicated that its allegations in issue are not intended to deny Alcon damages for infringement simply because Alcon engaged in the alleged inequitable conduct. Rather, Actavis’ allegations seek to reduce (or eliminate) those damages to reflect the effect of any improperly increased sales of Alcon’s patented product.

There is an important distinction between reducing damages and raising a complete defence. As the UKSC said in Servier, [13] “The doctrine [of ex turpi causa] necessarily operates harshly in some cases, for it is relevant only to bar claims which would otherwise have succeeded. For this reason it is in the nature of things bound to confer capricious benefits on defendants some of whom have little to be said for them in the way of merits, legal or otherwise.” Denying a claim entirely may be disproportionate to the wrong, unless the wrong is very serious, which is largely why the USKSC set a high bar for what constitutes “turpitude.” The same logic applies equally in the case of equitable remedies – in a way, even more so, since it is hardly equitable to deny a patentee’s claim entirely as a punishment for a relatively minor fault. That reasoning is consistent with the caselaw holding that inequitable conduct will only be allowed to stand as a defence if it casts a shadow on the title to the patent. That is a high bar, and it would be wrong to allow any recovery if the patentee would not have a patent at all but for its wrongful conduct.

But if the patentee has indeed committed some wrong that is related to its claim, neither is it appropriate to ignore that wrong entirely. The answer lies in the damages calculation. As I said in my post on Servier, “Instead of using the blunt hammer of ex turpi causa, the tension should be resolved with the finer sword of damages.”

In this case, Actavis’ argument can be cast in terms of “but for” causation. Actavis in effect alleged that Alcon had wrongly increased its sales of its PATADAY product at the expense of Actavis’ non-infringing product, and to the extent that Actavis’ infringing sales captured some part of the PATADAY sales that Alcon would not have obtained but for its wrongful conduct (because the sales would have been captured by Actavis’ non-infringing product), Alcon should not be able to recover damages in respect of those sales [6]. In constructing the “but for” world for the purpose of assessing damages caused by the infringement, the infringer is assumed to have acted properly, either by avoiding infringement or taking a licence. The question is whether, in constructing the but for world, we should also assume that the patentee acted properly, by not breaching the Competition Act, or avoiding whatever other wrong is alleged. When the wrong is independently actionable, as was the case in Servier (infringement in Canada, raised as defence to an undertaking in damages in respect of UK sales), or under s 45 of the Competition Act, as alleged in this case, there is a judicial economy argument for saying that all parties should be assumed to have acted properly, so as to avoid the need for a separate action. This is particularly so when the evidence relevant to the remedy in both cases is related. On the other hand, when the wrong is not independently actionable, as with the allegations in this case based on ss 75, 76 and 78 of the Competition Act, the question is more difficult, as taking into account the patentee’s wrong would effectively give the infringer a private remedy that it would not otherwise have had, but refusing to take it into account would allow the patentee to compound the harm done by its wrongful conduct.

This analysis is largely consistent with the prior cases. In Procter & Gamble (1990), 29 CPR(3d) 545 (FCA) the allegation was predatory pricing which harmed the defendant, and so might have been relevant to quantum of damages; but it was pleaded as a complete defence, and the pleading was struck. In Visx (1994), 58 CPR(3d) 51 (FCTD) the allegation was that the patentee had made unjustified allegations of infringement against third parties, so it would not even have been relevant to quantum, and it was pleaded as a complete defence. The pleading was struck. Volkswagen [2001] 3 FC 311 (FCA) is a bit different. It was a grey marketing case in which VW pursued the grey marketer for copyright infringement. The allegation was that VW’s actions in seeking to prevent grey marketing were a restraint of trade in breach of the Competition Act, and the pleading was allowed to stand as a complete defence. The FCA distinguished Visx and Procter & Gamble on the view that “it is at least arguable that in this case there is a sufficient relationship between the copyright and the unclean hands defence that the equitable remedy might not be granted.” In my view there is a more direct distinction. If the copyright owner’s rights are exhausted by the authorized foreign sale, which was the essence of the defendant’s pleading, then this would indeed serve as a complete defence, so there is nothing wrong with allowing it to stand as such.

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