1,341,196 / perindopril / COVERSYL
As discussed in Friday’s post, Perindopril Accounting is the accounting portion of a bifurcated action. In the liability decision, 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. Friday’s post dealt with the issue of whether Apotex might have made the same profits by manufacturing in some other jurisdiction for export to those markets.
The subject of today’s post is a second question raised on appeal, relating to the provision of litigation insurance by Apotex as part of the transfer price agreements [8.ii]. Apotex Inc sold the infringing product to affiliated companies, Apotex UK and GenRX, for sale in the UK and Australia respectively. The transfer price agreements had two different prices defined, with a higher price payable by the purchaser when the product was considered a “Patent Challenge Product,” which meant that there were good reasons for expecting the affiliate to be subject to patent litigation in the export market (ie the UK or Australia). The same transfer price agreement also provided that Apotex would pay all legal expenses and indemnify the foreign purchaser against any such claims that might be brought . (See here for more detail.)
Apotex argued that it was really selling two things in a single contract, namely infringing perindopril and litigation insurance, and the profits due to the infringing perindopril should be disgorged, but not those derived from litigation insurance. At trial, Gagné J accepted Apotex’s argument in principle on the basis that “that the provision of foreign litigation services and of an indemnity for liability under foreign patents does not constitute an infringement of the 196 Patent” . While she held that it was not established on the facts that the increased payments for a Patent Challenge Product really were in the nature of insurance payments , this implies that this the same basic argument might succeed if the transfer pricing agreement were drafted differently.
Apotex appealed this point, and the FCA affirmed, but on entirely different grounds:
 What drove Apotex’ sales of perindopril were the new and useful characteristics of the drug. Had perindopril not been protected by the 196 Patent, there would have been no need for Apotex to provide an indemnity to protect the fragility of its affiliates. “But for” the infringing qualities of perindopril, Apotex would have earned nothing on its sale, whether attributable to the drug itself or to the indemnity required to protect the affiliates. Thus, the profit resulting from the sale of perindopril was entirely causally attributable to the invention. It follows that no apportionment is warranted.
That is, in the ‘but for’ world, Apotex would have sold non-infringing perindopril, and if it had sold non-infringing perindopril, it would not have had to provide litigation insurance, as there would have been no risk of litigation. On this approach, it would not matter how the agreement is drafted, because no matter how the agreement is drafted, Apotex would never be in a position to sell litigation insurance where there is no risk of litigation.
On its face, this logic is a compelling and straightforward application of ‘but for’ causation.The answer to Gagné J’s point is that the profits to be disgorged are those caused by the infringement, not the profits associated with infringing products; so the question is not whether provision of litigation insurance is an infringement, but whether Apotex would have made those profits but for the infringement. There is a parallel with convoyed goods, where a patentee may recover lost profits on the lost sale of unpatented goods, if it would have made those sales but for the infringement: see eg Jay-Lor 2007 FC 358, .
I have just a couple of questions. First, suppose that the litigation insurance would not be required in the ‘but for’ world, and suppose also that in the real world the litigation insurance had been provided by an entirely independent firm, rather than by Apotex. Would the patentee be able to get an accounting of the insurer’s profits on the basis that those profits were caused by the infringement, even though the insurer itself had not infringed? If so, on what basis? If not, why should Apotex be treated differently in respect of its insurance business? I have no good answer to these questions, one way or the other.
Second, the FCA indicated that litigation insurance was required because perindopril was protected by the Canadian 196 patent . But my understanding from the trial decision is that litigation insurance was required because of the possibility of litigation based on a patent that was effective in the export country, ie a UK or Australian patent: see [FC 38]. So, according to Apotex’s version of the but for world, as I understand it, if Apotex had not manufactured perindopril in Canada that infringed the 196 patent, it would have manufactured in some other jurisdiction in which perindopril was not patented, but it would still have exported to the UK and Australia, where there was a risk of litigation based on the UK and Australian patents. If that’s right, then it seems to me that Apotex would have provided the same litigation insurance, even though it would not have infringed the 196 patent. The FCA’s discussion of this point was quite brief, and it may be that I’ve misunderstood either the reasoning or the factual underpinnings. In any event, this point was not essential to the disposition of the case, as the FCA nonetheless went on to consider the specific contracts and the facts of the case, and held that Apotex had not demonstrated that the transfer price agreements had intended to apportion the revenue between the product and the litigation insurance [106-7]. However, if that conclusion turns on the particular contract rather than on a general principle of causation, then the possibility remains open that the revenues might be apportioned if the contract were differently drafted.