1,341,196 / perindopril / COVERSYL
In its Perindopril Accounting decision, the FCA has once again affirmed the centrality of the differential profits approach to causation, and in particular the need to consider any non-infringing alternatives (NIA) that would have been used by the infringer but for the infringement. This decision builds on the foundational authority of Monsanto v Schmeiser, 2004 SCC 34, and the FCA’s subsequent decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161. The FCA decisions since Schmeiser have consistently affirmed the basic principle that it is necessary, not optional, to consider any non-infringing alternative in the causation analysis (as discussed here, here and here). There have, however, been some refinements in the details. In Venlafaxine, as discussed here, the FCA developed the principles relating to the burden of proof. And now, in Perindopril, the FCA has apparently retrenched from its earlier position that an NIA could be considered only if it was “instantaneously” available.
This case is the accounting of profits portion of a bifurcated trial. In the liability decision, Laboratoires Servier v Apotex Inc, 2008 FC 825 aff’d 2009 FCA 222, Snider J held that the defendants had infringed the plaintiff’s ‘196 patent and she allowed the plaintiff to elect an accounting of profits. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. Apotex had argued that there were a number of viable, non-infringing alternative sources of both bulk perindopril API and perindopril tablets (in particular manufactured in jurisdictions other than Canada) [18] [FC 79]-[80]. Apotex argued that the profits it would have made by manufacturing abroad (the non-infringing alternative), should be deducted from the profits actually made by the infringing manufacture in Canada, to arrive at the profits to be disgorged [18], [FC 121]. As I explained here, Gagné J rejected consideration of potential the non-infringing alternatives as a matter of law [25], [FC 126] and Apotex appealed this point [8.i].
The FCA has now held that “the Federal Court erred in law by rejecting the relevance at law of any available non-infringing perindopril” [9]. This is not very surprising. Gagné J’s decision was released prior to the FCA decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161, in which the FCA affirmed the need to consider any non-infringing alternative in the causation analysis (as discussed here, here and here), in light of Schmeiser, 2004 SCC 34. This Perindopril Accounting decision reaffirms the same point.
Perindopril Accounting is nonetheless significant in a few respects. First, Lovastatin Damages and Venlafaxine s8 were both damages cases, while Perindopril is an accounting case. The damages cases were in some ways more debatable, as Schmeiser, which established the NIA analysis, was an accounting of profits decision, and it was argued that the reasoning did not apply in the damages context. Lovastatin Damages [60] held that the basic causation analysis is the same in both contexts, and this point has now been reaffirmed in Perindopril: “While Lovastatin considered a claim for compensatory damages for patent infringement, the comments have equal application to an accounting for profits” [34] (and to the same effect, [40]). Thus it is now perfectly clear that NIA analysis is equally applicable in both the damages and accounting contexts. This is undoubtedly correct, as the causation inquiry is fundamentally the same in either context. As the SCC explained in the accounting context, “A comparison is to be made between the defendant’s profit attributable to the invention and his profit had he used the best non-infringing option” Schmeiser [102]. The only change in the damages context is to substitute the words “plaintiff’s profits” in place of “defendant’s profits.”
While Gagné J recognized that Schmeiser had endorsed the NIA analysis, she noted that the SCC has stated only that the differential profits approach is the “preferred” method, and consequently Gagné J felt that the SCC had left it open to the courts to apply a different approach on the facts of a particular case [FC 118-19]. The FCA acknowledged that [28, my emphasis]:
in Schmeiser the Supreme Court referred to the differential profit approach as the
‘preferred means’ of calculating an accounting of profits – not the only means. However,
at bottom is the need to ensure that a patentee only receives that portion of the infringer’s
profit that is causally attributable to the invention
In my view, this is entirely correct. It is necessary, as a matter of law, that the profits (whether those of the infringer or the patentee) are only those which are causally attributable to the infringement. The differential profit analysis, including consideration of the NIA, is the best way of implementing this fundamental causation requirement. Other ways of implementing the same causation analysis may be permitted, but it is not open to the courts to use an approach which ignores the causation requirement.
The FCA did state that “in this circumstance” it was an error for the Federal Court not to take into account the NIA (the availability of non-infringing perindopril for export), [28], [30]. This leaves open the question of exactly when it might be appropriate not to use the differential profits analysis. In my view, it is understandable that the SCC and the FCA would not want to set down a strict rule that must be applied regardless of the vagaries of the case at hand. I would suggest that the main, and perhaps only, circumstances in which it need not be used is when it is clear that not all of the profits at issue are attributable to the infringement, and yet the evidence does not allow a differential profit analysis. Lubrizol [1997] 2 FC 3 (FCA), might be an example. But what is essential, as per the above underlined statement by the FCA, is that the causation requirement be respected. Given that the differential profits approach, including the NIA, is the best method for implementing the causation requirement, I would suggest that it must be used whenever the evidence allows it.
So far, this is all to clarify or reinforce the law as set out in Schmeiser, Lovastatin Damages and Venlafaxine s8. There is one important new development. In Lovastatin the FCA held that an in order to be considered in the differential profit analysis, the NIA had to be available “instantaneously”:
[79] Dealing first with whether Apotex could have sold non-infringing lovastatin, Merck
argues that the alleged alternative must have been actually available to replace Apotex’
infringing sales as they were made. Otherwise, Merck, not Apotex, would have replaced
those sales. I believe this submission to be correct both in fact and in law. In Advanced
Building Systems Pty Ltd et al. v. Ramset Fasteners (Aust) Pty Ltd, [2001] FCA 1098,
(2001) 52 I.P.R. 305 the Federal Court of Australia rejected the relevance of a
non-infringing alternative, but held that if it was legally relevant, it could only apply “if at
the moment of infringement […] there is available on the market instantaneously the
appropriate substitute” in the reconstituted market. I agree.
This is in sharp contrast with Perindopril Accounting. In the result, the FCA held that the issue of whether Apotex “would have and could have” obtained quantities of non-infringing perindopril from other sources for sale abroad, should be remitted to the Federal Court for determination on the facts [65]. The FCA further directed the Federal Court as follows (my emphasis):
[67] [I]t may be that the Federal Court could conclude in the hypothetical world that one
or more suppliers would not or could not supply perindopril in time to replace the initial
infringing sales. However, this would not end the inquiry as the Federal Court would still
have to consider whether at some later point in time a supplier would and could have
provided replacement non-infringing tablets.
I don’t see how the two statements can be reconciled, but both decisions were written by Dawson JA, so I can’t see this as a disagreement between different panels of the court. Instead, it appears to be a significant retrenchment from the “instantaneous availability” test for an NIA set out in Lovastatin. This is a welcome development, because, in my view, as explained here, the “instantaneous availability” test is inconsistent with the fundamental principle of “but for” causation.
Overall, then, Canadian law on causation and non-infringing alternatives is shaping up very well. Lovastatin took a large step in the right direction, and Venlafaxine and Perindopril have made modest course corrections to bring the law onto the right path. This is how the common law is supposed to work.
I do see one issue which may require further consideration (though it was wasn't raised at all in this case.) That is the question of whether the but for world should be approached as one world, established on the balance of probabilities, or multiple worlds considered in terms of weighted possibilities. In both Lovastatin and Venlafaxine the FCA held that the burden lies on the defendant to establish the factual relevance of a non-infringing alternative “on the balance of probabilities. Mere possibilities short of probabilities do not suffice” Venlafaxine [56] (and to the same effect Lovastatin [74]). On its face this is a sensible position, and the FCA cited as authority Rainbow Caterers [1991] 3 SCR 3, 14, which does indeed say that the but for world must be established “on a balance of probabilities.” The problem is that this is difficult to reconcile with Athey v Leonati [1996] 3 SCR 458 (citations omitted):
[27] 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. For example,
if there is a 30 percent chance that the plaintiff’s injuries will worsen, then the damage
award may be increased by 30 percent of the anticipated extra damages to reflect that risk.
A future or hypothetical possibility will be taken into consideration as long as it is a real
and substantial possibility and not mere speculation.
The “but for” world is a hypothetical event; how the plaintiff’s life would have proceeded without the tortious injury is the equivalent, in the personal injury context, of how the patentee’s market would have developed without the infringement. Thus Athey directly implies that the defendant need not establish the relevance of the NIA on the balance of probabilities; if there is a 30% chance that the infringer would have been able to supply the market with an NIA, then the profits to be disgorged should be reduced by the same percentage.
The FCA in Venlafaxine [56] also cited Tervita 2015 SCC 3, [49]-[51], [66], citing F.H. v. McDougall, 2008 SCC 53, [40], [49]. I don’t think these are relevant. As Athey also stated (citations omitted)
[28] By contrast, past events must be proven, and once proven they are treated as
certainties. In a negligence action, the court must declare whether the defendant was
negligent, and that conclusion cannot be couched in terms of probabilities. Likewise, the
negligent conduct either was or was not a cause of the injury. The court must decide, on
the available evidence, whether the thing alleged has been proven; if it has, it is accepted
as a certainty:
As I understand it, there is a distinction between proving the wrong and assessing damages. The wrong itself is always proven on the balance of probabilities, and, as I understand it, that was the point in Tervita and McDougall. That is not inconsistent with assessing damages using weighted probabilities.
But Rainbow Caterers is certainly directly relevant, and it is not clear to me how to reconcile that case with Athey v Leonati. To the extent that there is a conflict between the two cases, Athey is probably the stronger authority. In Rainbow Caterers the choice was between two 'but for' worlds, one proposed by the plaintiff and the other by the defendant, and it does not appear that the option of taking both possibilities into account on the basis of their relative likelihood was before the court. In Athey, in contrast, that was a central question. Moreover, probability based adjustments for hypothetical events (eg the crumbling skull doctrine) and future contingencies are routine in the tort context, particularly in personal injury cases. With that said, neither approach is obviously superior in principle, and the Rainbow Caterers approach has the practical advantage of simplicity. My only conclusion at this point is that the problem of whether the 'but for' world should be constructed on a balance of probabilities, or with weighted possibilities, is a difficult one. It may be that the two approaches can indeed be reconciled; or that one is superior in principle; or that there is some sound reason for using a different approach in patent law than in tort law.
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