Friday, June 17, 2016

A Purposive Interpretation of the Standing Provision

Janssen Inc v Teva Canada Ltd / levofloxacin 2016 FC 593 Hughes J
            1,304,080 / levofloxacin / LEVAQUIN

This Levofloxacin Damages decision is the damages phase of 2006 FC 1234 aff’d 2007 FCA 217, in which Hughes J held Claim 4 of the ‘080 patent, a compound claim to levofloxacin, to be valid and infringed by the Novopharm (now Teva). The decision turned largely on the facts, with the most legally significant issue being the standing of Janssen US to claim damages.

The standing issue was important to the bottom line. Hughes J ultimately held that Janssen US did have standing and he awarded it over $13m, while Janssen Canada was awarded just under $5.5m. The standing issue arose in light of the structure of Janssen’s supply chain. Daiichi, the owner of the ‘080 patent, supplied levofloxacin API to Janssen Puerto Rico, which manufactured finished tablets and then routed them, financially, at least, through Janssen US to Janssen Canada for sale in Canada. It was these sales that were displaced by Teva’s infringing sales, and Janssen US was claiming for the lost profit it would have made on its sales to Janssen Canada [54]. (Daiichi, while a named plaintiff, had settled with Teva and did not participate in the damages proceeding [5].)

Standing is statutorily governed by s 55(1) of the Act which provides that infringer is liable in damages “to all persons claiming under the patentee” for losses sustained as a result of infringing acts. Hughes J thoroughly canvassed the case law, which generally interprets “claiming under” quite broadly, including an assignee, a licensee, including a non-exclusive licensee [43]. Moreover, the Canadian courts take a very pragmatic approach in determining whether a party is a licensee, as the licence need not be in writing and may be inferred from the facts [43].

However, in one case, Servier v Apotex 2008 FC 825, Snider J held that none of the companies in the Servier global family, except ADIR, the patentee, and Servier Canada, which exploited the patent in Canada, had standing to seek damages [Servier 67-95]. Hughes J characterized Servier as holding that an entity that did not operate “in Canada'” did not have standing [42], and that the claim must be one in respect of a use in Canada and not elsewhere in the corporate chain [43]. He also distinguished Servier on the basis that in that case, each of the foreign entities had its own geographical sphere of operation and those entities not operating in a Canadian sphere could not be considered to have standing, whereas in this case “the J&J group of companies are operating as a team whereby licensed tablets ultimately found their way to Canada” [67].

Stepping back from the cases, in defining who may claim damages s 55(1) has two effects, at least potentially. On the one hand, it gives standing to entities which might not otherwise have standing under a common law test. And on the other hand, it may operate to deny recovery to some entities. The exclusionary effect of s 55 only bites if the entity claiming standing actually suffered a loss as a result of the infringement of the Canadian patent. If we are to give a purposive interpretation to s 55(1), we must ask when it is right to hold that an entity should not recover, even though it has actually suffered loss caused by the infringement. There is a prima facie argument that such loss should always be recoverable, on the basis that a wrongdoer should be liable for all the harm it causes, or the wrong will not be sufficiently deterred and victims will not be adequately compensated.

This intuition is not always sound. Suppose that Company A, which is at arms length to both the patentee and the infringer, produces feedstock for the process used by the patentee to produce the API. The feedstock itself is not patented and so A does not need or take a licence. As a consequence of infringement, the patentee reduces production, and so A suffers lost profits on the consequently reduced sales of the feedstock. Should A be able to recover? Apart from any limits imposed by s 55(1), it might seem that A should be able to recover, on the basis that it has suffered a loss caused by the infringer. But now suppose that A also supplied the feedstock to the infringer, and when A’s sales to the patentee went down, its sales to the infringer went up by exactly the same amount. In that case A should clearly not recover because it would have suffered no loss. Now suppose that instead, the infringer bought the feedstock, not from A, but from arms length Company B, so that A’s loss was B’s gain. Should A recover? From a law and economics perspective, the answer is no. The shift in profit from A to B is a mere transfer; while A has lost, B has gained, and in the broader picture, no harm was done. To impose liability on the infringer for A’s loss would consequently cause over-deterrence. This is one of the main justifications for the general reluctance of tort law to provide recovery for pure economic loss: see CNR v Norsk [1992] 1 SCR 1021. Denying recovery to A in such a case also makes sense purely in terms of patent policy, because A is not operating under the patent, and so refusing to allow it to recover does not adversely affect the incentive to invent. In this scenario, in which A did not have a licence and so did not “claim under the patentee,” s 55(1) would operate to deny recovery to an entity that had suffered a loss as a result of the infringement, and this result would be sound as a matter of policy.

This analysis suggests that the role of standing, and s 55(1) of the Act, is to prevent recovery by an entity which has suffered a loss as a result of the infringement when that loss did not affect the incentive to invent. Put another way, by analogy with the requirement for an “antitrust injury” in US competition law, we might say that only an entity that has suffered a “patent injury” should be entitled to recover. This is broadly consistent with the “claiming under” requirement of s 55, on the reasoning that if the entity’s loss is linked to its rights under the patent, then the loss would adversely affect the incentive to invent. So, for example, the profits made by a licensee contribute to the incentive to invent via the royalty paid for that licence.

This theory supports Hughes J’s holding in this case that Janssen US has standing. I’m not sure whether it is consistent with Servier, because the nature of the loss that would have been claimed by the excluded entities in that case is not clear to me. This theory is at least consistent with Snider J’s rejection of the highly speculative scenario advanced by Servier in support of its claim at [88-89].

Thanks to Smart & Biggar for posting this decision before it was posted on the FC website.

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