Friday, March 16, 2018

Legal Facts in the “But For” World: Does it Matter Who Might Have Been on the SCC in Calculating Damages?

Apotex Inc v AstraZeneca Canada Inc 2018 FC 181 Locke J
            2,139,653 / esomeprazole / NEXIUM / S 8 NOC

In AstraZeneca 2017 SCC 36, an action involving the 653 patent, the SCC abolished the promise doctrine (here). In so doing, it held the 653 patent to be valid,1 reversing the decisions in the courts below which had applied the promise doctrine to invalidate it. But before that action, in 2010 FC 714, Apotex had prevailed in the NOC proceeding. This decision, by Locke J, is the s 8 damages decision following from that NOC decision. Section 8 proceedings entitle the generic to recover damages for having wrongly been kept out of the market as a result of the statutory stay triggered by the NOC proceedings in which it prevailed. But what if ultimately, in the infringement action, the patentee prevails? The key question is whether Apotex should be entitled to recover s 8 damages for having been wrongly kept out of the market, when it turns out that it never had the right to enter the market. In AstraZeneca v Apotex 2017 FC 726 Barnes J held that the answer was no: see here. Locke J has now come to the same conclusion, and he therefore dismissed Apotex’s s 8 action [112]. While Locke J’s reasoning is somewhat different from that of Barnes J, the decisions are consistent. 

The relationship between s 8 damages and damages in a subsequent infringement action will soon be of historical interest only, as the new NOC proceeding will take the form of an action. This decision does, nonetheless raise a point of more general importance regarding the nature of hypothetical legal facts in the “but for” world. For example, does it matter who is on the Supreme Court of Canada in the but for world?

The technical point is that s 8 damages, like all damages, are assessed as the difference between the plaintiff’s actual position and the position it would have been in “but for” the wrong (ie but for the statutory stay in the case of s 8 damages). The patentee’s general argument in a case in which the patent is subsequently held to be valid is that in the but for world, the generic would have infringed, and would have liable to the patentee for infringement, and that liability in the “but for” world would offset any profits the generic would have made had the statutory stay not prevented it from entering the market. In effect, the generic did not suffer any lost profits as a result of the statutory stay, because the patent, which we now know to be valid, would have prohibited it from entering the market anyway.

It is clear from prior FCA decisions, in particular Lovastatin 2011 FCA 364 (here) and Omeprazole 2013 FCA 77 (here), that liability for damages for infringement should be taken into account in assessing s 8 NOC damages. There was a preliminary dispute in this case as to whether it should be taken into account under s 8(1), which establishes liability (AstraZeneca’s position), or under s 8(5), which allows the court to consider all relevant matters in assessing quantum (Apotex’s position). Locke J, relying on Lovastatin, held that Apotex’s “but for” infringement should be taken into account using s 8(5) [62]. I think that’s right as a matter of the interpretation of Lovastatin, but I have to admit that it is not entirely clear to me what difference it makes: as Locke J pointed out, it wouldn’t have made any difference on the facts of this case: [64].

The more interesting point was how to construct the “but for” world:

[76] . . .Apotex argues that there is no evidence that any of the following would have happened in the but-for world: (i) AstraZeneca would have sued Apotex for patent infringement, (ii) the parties would not have settled the matter before a trial, (iii) the SCC would have granted leave to appeal, or (iv) the SCC would have decided such an appeal the same way. Accordingly, Apotex argues that, for the purposes of constructing the but-for world, the 653 Patent should be treated as invalid just as it was in the real world during the Delay Period.

On the details, Apotex argued, for example, that the SCC would not necessarily have decided the same way because in the “but for” world, the matter would have come to trial at a time when Rowe J, who wrote the AstraZeneca decision, was not on the Court [88].

AstraZeneca’s position was that this should all be irrelevant:

[77] It argues that we now know that the 653 Patent was valid during the Delay Period, and that it should be treated as such for the purposes of the assessment of compensation under s. 8 of the Regulations, regardless of whether it would have been found valid in the but-for world.

Locke J found it unnecessary to decide the question. Relying in large part on the principle from Ramipril s 8 2014 FCA 67 [145] that “All steps that were taken in the real world should be assumed to have been taken in the but-for world unless there is evidence upon which the trier of fact may reasonably conclude that different steps would have been taken,” he concluded that all of Apotex’s hypotheticals should be resolved against Apotex. Since AstraZeneca prevailed on the facts, it was not necessary for Locke J address the legal argument.

The point is nonetheless an important, to the extent that different facts might warrant a different conclusion. In my view, AstraZeneca was right on this point. The reason for this is emphasized in an article by David Taylor: “reasonable royalties should reflect the value of patented technology rather than patent rights” (49 Ga Law Rev 79. 89, original emphasis). Taylor made that observation in the context of reasonable royalties, by way of explaining the established rule that in determining a reasonable royalty using the hypothetical negotiation approach, the patent should be assumed to be valid, even though in the hypothetical “but for” negotiations, the parties would not have known it to be valid. The same principle applies in the context of lost profit damages. To elaborate, the purpose of assessing damages for patent infringement is to preserve the incentive to invent. In order to promote socially beneficial inventions, the incentive to invent should be commensurate with the social value of the invention. That social value is equal to the incremental value of the invention over the best non-infringing alternative: see eg The Sedona Conference, Commentary on Patent Damages and Remedies, 23-24; David O. Taylor, David, Using Reasonable Royalties to Value Patented Technology,” 49 Ga Law Rev 79. 91-97; Lee & Melamed, “Breaking the Vicious Cycle of Patent Damages,” (2016) 101 Cornell Law Rev 385, 411-12. As I said in my article “A Remedial Benefit-Based Approach to the Innocent User Problem” 920014) 20 CIPR 79, “A patent is ‘nothing very special’ when it provides only a small advantage over the next best publically available alternative. The differential profit approach, by comparing the actual profits with those which would have been made with the next best alternative, provides a precise means of identifying a patent which is ‘nothing very special.’”

The “but for” world is a construct for determining the true social value of the patent invention. The “but for” world should therefore be sensitive to factors which affect the value of the patented technology. If a drug treats a disease that has become an epidemic, it should be more valuable than one that treats a disease that was anticipated but which never emerges. This gives the inventor a strong incentive to focus its efforts on inventions that it believes will be socially valuable. The “but for” world should not be sensitive to factors which solely affect the value of the patent rights, such as whether an injunction would have been granted, or whether the patent would have been held invalid. The grant of an injunction by a court may increase the value of the patent right to the patentee, but it does not increase the social value of the patented technology.

This suggests that legal facts about the “but for” world should be treated like past events: “past events must be proven, and once proven they are treated as certainties” (Athey v Leonati [1996] 3 SCR 458, [28]). This is consistent with Locke J’s observation in response to Apotex’s argument that the SCC’s decision to change the law and reject the promise doctrine was not foreseeable (my emphasis):

[96] Even accepting all of the facts asserted in the preceding two paragraphs, the fact remains that the 653 Patent is, and always was, valid. This is the case in the real world even if I accept Apotex’s allegations that the law on the Promise Doctrine would not have evolved in the but-for world as it did in the real world. Whether or not such allegations are justified, the fact is that Apotex claims compensation for loss as a result of being prevented from infringing AstraZeneca’s valid patent.

1There was a preliminary dispute as to whether the SCC in AstraZeneca had held the 653 patent to be valid, or merely that it is not invalid for lack of utility. Locke J held that the SCC had held the 653 patent to be valid [30].

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