Thursday, December 6, 2018

Miscellaneous Issues in Cefaclor Damages

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J
            1,133,0071,146,5361,133,4681,150,725 [Lilly Patents]
            1,095,0261,132,5471,136,1321,144,924 [Shionogi Patents]

There are a couple of miscellaneous points arising out of Cefaclor Damages FCA that I’d like to address.

Grain Processing
In her remarks on general principles, Gauthier JA noted that

[48] [I]t is important to understand that our Court did not simply import an American law concept in a wholesale fashion. The Court in Lovastatin may indeed have referred to American authorities in order to better ground the concept. But one must be careful not to construe references to American jurisprudence lending support for the NIA defence as a blind incorporation of, or strict adherence to, the reasoning adopted by American courts.

This is all fair enough in the abstract, but a bit obscure; the FCA seems to be implying that there is some particular aspect of American law which is not good law in Canada, but without specifying exactly what.

I wonder if the remark might have been aimed at Grain Processing 85 F3d 1341 (Fed Cir 1999), in which the Fed Cir allowed the infringer to rely on an NIA which was not in existence at the relevant time. Grain Processing was relied on by Apotex both in Lovastatin FCA and in this case. Gauthier JA pointed out that Grain Processing, can be distinguished on the facts, because in that case the NIA was a process that increased the cost by only 2.3%, while in this case the increased costs were raised by at least 40%. I agree; and there is another related distinction. In Grain Processing, the only reason the infringer did not develop the infringing process earlier was that it did not know it was infringing. The infringer knew of the patent, and was trying to design around it, and thought it had succeeded, but there was a technical dispute over exactly how the “dextrose equivalent value” specified by the claim was to be measured (using the “Schoorl test” or the “Lane-Eynon test”). The infringer guessed wrong. But the point remains that once the true construction of the claim had been determined, the infringer had no difficulty designing around the claim and developing a substantially equivalent non-infringing process. That is why the Fed Cir in Grain Processing ultimately held that the infringer would have used the non-infringing process from the outset; it was very clear on the facts that it could have developed the NIA much earlier and would have done so had it known that the process it was using was infringing. This is very far from facts in this case, in which it was difficult to design around the patent and the resulting process was not economically competitive [44e, n]. Again, I’m not sure that Gauthier JA’s general remark was actually aimed at Grain Processing, and I do agree with Gauthier JA that we cannot assume that US law on this issue is correct in every respect. But Grain Processing itself is entirely sound, given its unusual facts, and because of those unusual facts it provides a particularly striking example of the NIA defence; but it is only equally unusual facts that will generate the same kind of result.

Convoyed Sales and Remoteness
On a different issue, Apotex also argued that it is an error of law “to award damages for sales displaced by non-infringing products because such sales are beyond the scope of the Patent Act [and] are too remote” [112]. Gauthier JA re-affirmed that the well-established law that damages for lost sales of so-called convoyed goods are indeed recoverable [114], [122], and on the facts the sales at issue were not too remote [127]. But Gauthier JA did appear to acknowledge that in some circumstances convoyed sales might be too remote for damages to be recoverable, even though the lost sales were caused by infringement [123]-24]. That is, causation is not necessarily the only limitation on recovery in patent damages. Gauthier JA did warn that remoteness is not usually an issue, and it should be raised as soon as possible or it may be considered to have been waived [123].

Wednesday, December 5, 2018

Compound Interest May Be Awarded as Damages, but Must Be Proven, Not Presumed

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J
            1,133,0071,146,5361,133,4681,150,725 [Lilly Patents]
            1,095,0261,132,5471,136,1321,144,924 [Shionogi Patents]

As previous posts this week have discussed, the FCA’s reasoning differed somewhat from that of Zinn J, but in the end it varied his decision only in respect of the award of compound interest, which it returned to him for redetermination. The FCA confirmed that compound interest is available when interest is claimed as a head of damages; but the loss cannot be presumed, and must be proven [156], [158].

Gauthier JA’s discussion started with a brief and helpful discussion of the law relating to compound interest, confirming that while compound prejudgment interest is not available when interest is claimed under s 36 of the FC Act (per 36(4)(b)), it may be awarded when interest is claimed as a head of damages [145]-[152]. (Gauthier JA largely summarized the principles she had stated in Cefaclor Liability FC 2009 FC 991 [665]-[675], but it is helpful to have these principles restated by the FCA itself.)

Gauthier JA also stated that “The Liability Decision was not reversed on appeal and is final. In light of this, in my view, it was not open to Apotex to argue that subsection 55(1) of the Patent Act does not allow for the granting of compound interest” [151]. This seems to be saying that it is not open to Apotex to make that argument because that issue was res judicata in this dispute. However, given Gauthier JA’s preceding discussion of the law, it would now seem to be clearly established more generally that 55(1) does allow compound interest to be awarded.

Procedurally, subsection 36(5) confers discretion on the FC to allow interest, and in a bifurcated proceeding such as this one, that discretion must be exercised at the liability stage (unless the parties agree otherwise) [149]. However, at the liability stage, the court cannot know whether an entitlement to interest will be established as a head of damages at the reference stage, so the award of simple interest under s 36 at the liability stage was in this case (and, presumably, normally should be) expressly conditional on interest not being awarded as damages at the reference phase [150].

The problem with Zinn J’s decision is not that he awarded compound interest, but rather that he awarded it on the basis of a presumption: “in today’s world there is a presumption that a plaintiff would have generated compound interest” [FC 118], [155] (FCA emphasis), and he awarded compound interest apparently on this basis. Gauthier JA held that there is no such presumption [156] (with the possible exception of some cases in equity [157]), and “a loss of interest must be proved in the same way as any other form of loss or damage” [158]. As to what kind of evidence could be used to establish compound interest as a loss, and the appropriate rate, Gauthier JA noted that various evidence was tendered on the issue, and had the Federal Court granted compound interest as damages on the basis of that evidence, rather than on the basis of a presumption, the FCA would not have intervened unless it was persuaded that the assessment was tainted by a palpable and overriding error [153].

Tuesday, December 4, 2018

Legitimate NIA Must Not Infringe Any Patent

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,0071,146,5361,133,4681,150,725 [Lilly Patents]
            1,095,0261,132,5471,136,1321,144,924 [Shionogi Patents]

As discussed in yesterday’s post, the key issue in Cefaclor Damages was the extent to which Apotex could rely on the Lupin 2 process for making cefaclor as a non-infringing alternative (NIA) in assessing damages. A legitimate NIA must of course be non-infringing in the sense of not infringing the patents at issue; but in this case the FCA held that neither can it infringe other patents. This appears to be a novel legal point [55], which arose from the unusual facts of the case.

Apotex imported and sold cefaclor produced by by South Korean drug maker Kyong Bo and Indian company Lupin. Lilly alleged that all of it infringed the patents at issue. The Lupin product was imported in a few different batches, and Gauthier J ultimately held that the Lupin product was produced by (essentially) two different processes, Lupin 1 and Lupin 2 [FC 15]. At the liability phase, Lilly did not prove that Lupin 2 infringed; indeed, Lilly never even argued that Lupin 2 infringed, because Lilly’s position was that the Lupin 2 process was so inefficient that it could not have been used [56]. No doubt that was a reasonable position at the liability phase, but having lost on that point, in the reference phase Lilly had to accept that the last shipments of Lupin cefaclor were produced using the Lupin 2 process. At the reference phase, Lilly argued, for the first time, that the Lupin 2 process infringed an entirely separate Lilly patent, the 646 patent. Understandably, the 646 patent patent was not in issue at all in liability phase [60], given that Lilly didn’t believe the process it covered was being used [56].

Lilly raised the 646 patent, not to establish that the Lupin 2 process infringed the 646 patent, so as to give rise to damages for sale of the Lupin 2 cefaclor, but rather to preclude Apotex from raising the Lupin 2 process as an NIA in the assessment of damages for the Kyong Bo and Lupin 1 cefaclor. This argument was not addressed by Zinn J, apparently because of his view that the NIA defence was not available as a matter of law [59].

Thus the point was addressed for the first time by the FCA. The FCA held that [55, my emphasis]:

It goes without saying that to be a real alternative, an NIA must be lawful, that is to say, non-infringing. This applies to more than just the patent(s) in suit in the proceedings

The matter must of course be put in play by the patentee—it is not for the infringer to establish that there is no patent in the world that it might have infringed [57], [61], [65]. Once the issue is in play, it is for the infringer “to explain or produce evidence explaining why, despite the reference to this unexpired patent, the NIA on which it sought to rely on was in fact lawful” [65]. It would seem that not very much is required to put the issue in play, though that may be due to the unusual facts [62].

This basic holding strikes me as sound in principle, though different facts might raise questions. In this case, Lilly owned the 646 patent, so it goes without saying that it would not have licensed the technology to Apotex. But what if the 646 patent had been owned by a third party, which was routinely willing to licence it to all comers at a set royalty? What if the 646 patent had been owned by a third party, which did not routinely licence it, but might have been willing to do so? I won’t explore those questions here, except to say that I do not think they are settled by this decision, which, as Gauthier JA noted, turned on its unusual facts [4].

There is also a separate point respecting the burden of proof, which relates to the patents that were in issue. As noted, at the liability phase, Lilly had never argued that the Lupin 2 process infringed the patents that were in issue (because its position that the Lupin 2 process was not actually being used), nor did Gauthier J make such a finding. Instead, she held only that Lilly had not established that it infringed [56]. At the reference phase, Lilly wanted to re-open this issue. If I understand correctly, the basis for the argument is that the burden is different: while it was for Lilly to prove infringement at the liability stage, at the reference stage, Apotex had the burden of proving that it had an NIA available, including that the NIA was non-infringing. Zinn J rejected this, on the basis that the matter had been decided in the liability phase [61], and the FCA has affirmed that the issue cannot be re-opened [58].

In the result, Gauthier JA concluded that the Lupin 2 process prima facie infringed the 646 patent [64], and Apotex had not countered the prima facie case, and in consequence, the Lupin 2 process could not be a legitimate NIA [69].

Monday, December 3, 2018

A Non-Infringing Alternative Must Be Objectively Economically Viable

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,0071,146,5361,133,4681,150,725 [Lilly Patents]
            1,095,0261,132,5471,136,1321,144,924 [Shionogi Patents]

In the liability phase of this bifurcated action, Cefaclor Liability 2009 FC 991 aff’d 2010 FCA 240, Gauthier J held that at least one valid claim of each of the eight patents at issue was infringed by Apotex. In the damages phase, Zinn J awarded Lilly damages in the form of lost profits and a reasonable royalty, plus compound interest as a head of damages. Gauthier JA, writing for the FCA, has now affirmed Zinn J’s award, except in respect of the assessment of interest. The main issue was the role of the non-infringing alternative (NIA), in assessing damages. Gauthier JA stated that no new questions of law were raised, and she warned that “The facts of this case are so unusual that it would be unwise to use them as a backdrop for stating general principles of law” [4]. However, basic principles are sometimes brought into clearest focus by unusual facts, and this decision clarified several points of general interest relating to the so-called NIA defence. (I don’t like the term NIA “defence,” but it now seems to be established, so I will give up and start using it.) This post provides an overview of the facts, and addresses the holding that the NIA must be objectively economically viable.

There were three processes used to make the cefaclor imported and sold by Aptoex: Kyong Bo, Lupin 1 and Lupin 2. The first two processes were infringing, but the Lupin 2 process was not. (More precisely, Lilly did not prove that Lupin 2 infringed [56].) The reference was therefore to establish damages for infringement in respect of the Kyong Bo and Lupin 1 cefaclor. The last infringing product was imported in June of 1998; after that, Apotex imported Lupin 2 cefaclor.

The key question on appeal was the extent to which Apotex could rely on Lupin 2 cefaclor as an NIA. At first instance, Apotex had argued that an NIA defence was available, and that damages should be assessed on the basis it would have entered the market with Lupin 2 product even before June, 1998, when it actually began selling Lupin 2 cefaclor. (Specifically, on appeal Apotex argued that it would have legal cefaclor available as early as October 1997 [38], which is when Apotex concluded internally that its Lupin 1 and Kyong Bo cefaclor were infringing: [44i].)) Zinn J rejected this on the basis that the NIA defence was not available as a matter of law [FC 57]. In the alternative, Apotex argued that damages should be assessed on the basis that in the “but for” world, it would have entered the market with Lupin 2 product in June of 1998, as it did in the real world. Lilly, on the other hand, argued that Apotex would not have come to market with legal cefaclor prior to the expiry of the infringed patents in July of 2000 [FC 59-60]. Zinn J found in favour of Lilly on this point as well [70]. While FCA decisions subsequent to Zinn J’s decision on the reference have established that Zinn J erred in rejecting the NIA defence as a matter of law [42], [46], the FCA nonetheless upheld Zinn J’s award on that basis that the NIA defence was not available on the facts, and moreover that Zinn J had not erred in finding that in the “but for” world, Apotex would not have entered until the market until the expiry of the last patent at issue.

Economic Viability of the NIA
A key issue related to the economic viability of the Lupin 2 process. The Lupin 2 process was substantially more expensive than the infringing Kyong Bo or Lupin 1 processes, and on the evidence, it would not have been commercially viable to enter the market with Lupin 2 cefaclor [78]. This was relevant because Apotex had tendered evidence that its business decisions were not motivated by profitability, but rather by a desire to have a broad portfolio of products [FC 68], [102]. Thus, Apotex wanted to argue that it would have entered the market with the Lupin 2 process, even though it would have lost money doing so. That would of course reduce the damages, because Lilly’s profits would be much greater in a world in which it had market exclusivity than one in which it faced strong competition from Apotex, even if Apotex would have been losing money.

Gauthier JA provided a summary of general principles regarding the NIA defence at [47]-[53]. While the entire discussion is helpful, I would highlight one passage that is important both as a general principle, and in respect of this particular issue (my emphasis):

[49] With this in mind, I underscore that the objective of the NIA “defence” is to help ascertain the real value of inventions for which a patentee such as Lilly was granted a monopoly. Inasmuch as overcompensation is inappropriate in our law, so is undercompensation. Thus, the goal is not to enable an infringer to breach the bargain made on behalf of the Canadian public when a patent is issued. Nor is the defence a means by which one can infringe at the lowest possible cost.

This is a crucial point, which, in my view, is entirely sound. There are really two points here. First, the objective of the NIA defence is to ascertain the real value of the invention. The patent system is intended to provide an incentive to develop inventions for the benefit of the public, by providing a reward which is commensurate to the value of the invention. A process may be patentable as being new and inventive, and yet provide no economic advantage over existing processes. Such a process is not as socially valuable as one which dramatically reduces the cost of product. A process which does provide a dramatic cost saving will provide a greater reward in the marketplace; the NIA defence is a legal tool for ensuring that it provides a greater reward in terms of damages as well. The second point is that the objective of the NIA defence is to “help” ascertain the value of the invention. It is only a tool — a means to an end. The NIA defence needs to be developed in a manner which is consistent with that ultimate goal; if there is a conflict, it is the larger goal of ascertaining the real value of the invention which must prevail.

In addressing Apotex’s argument that it would have entered the market even with an unprofitable product, Gauthier JA emphasized this point (original emphasis):

[73] [T]he court’s goal is to assess the real value of the patented invention(s). Such value cannot be assessed on a purely subjective basis. Evidently, the court must be satisfied that the NIA invoked was objectively an economically viable substitute at the relevant time. To say otherwise would mean that the value of a patent could be artificially reduced by an infringer who behaves in an unorthodox manner, or whose adoption of a substitute is motivated by reasons other than economic ones.

I read this as saying that economic viability of the NIA is a prerequisite to invoking the NIA defence as a matter of law, even if on the facts the infringer would have acted in an economically irrational manner had it not infringed. In my view, this is entirely sound. As noted above, and as emphasized by Gauthier JA, the NIA defence is a tool for assessing the real value of the invention. The real social value of the invention is an objective fact, which does not depend on the idiosyncracies of the particular infringer.

Gauthier JA also noted that:

[72] In my view, economic viability is not something that is assessed solely from the subjective perspective of an infringer such as Apotex. But obviously, the subjective perspective of the infringer may be relevant to the question of whether the infringer “would” have used the NIA.

As I read it, this says that the NIA must be objectively economically viable as a threshold matter; but it may be that even an objectively economically viable alternative would not be used as an NIA, if, on the facts, it would not have been used by the infringer for subjective reasons. I’m not sure I agree with that position, as it seems to me to be at odds with the view that damages should relate to the true value of the invention, not to idiosyncracies of the infringer. This question arose in ADIR v Apotex 2018 FC 346, in which Gagné J held that Apotex could not argue that it would have manufactured abroad for sale in the UK and Australia, even though doing so was technically possible and economically viable. Gauthier JA’s remarks in [72] appear to be indirectly approving of that  holding. Nonetheless, I have significant reservations, as discussed here. With that said, this is an issue which is better explored when it arises on the facts.