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.

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