Friday, April 17, 2020

The “Would Have” Branch of the Non-Infringing Alternative Analysis

Apotex Inc v ADIR 2020 FCA 60 Mactavish JA: Webb, Near JJA aff’g 2018 FC 346 Gagné J
            1,341,196 / perindopril / COVERSYL

In this decision the FCA affirmed Gagné J’s holding that Apotex had not established a non-infringing alternative defence in respect of an accounting of profits. I was very critical of Gagné J’s holding in my post on her decision, on the view that what I called “Dr Sherman’s idiosyncratic non-economic motivations,” should not have been taken into account, as doing so meant that the amount awarded as an accounting would not reflect the true economic value of the invention. On reading the FCA decision, I now see that my criticism was not entirely well-founded. On the one hand, the FCA decision reinforces the view that the “would have” branch of the NIA test is and should be focused on economic considerations; but on the other hand, I now see that the motivations taken into account by Gagné J actually were economic in nature.

The perindopril litigation started with 2008 FC 825 aff’d 2009 FCA 222, holding that ADIR’s 196 patent was valid and infringed by Apotex. ADIR elected an accounting, and the profits portion of the action has gone back and forth between the FC and FCA a couple of times. Gagné J’s initial decision refusing to consider the availability of a non-infringing alternative was decided just before the NIA defence was accepted by the FCA in Lovastatin Damages 2015 FCA 171 and Effexor / Venlafaxine 2016 FCA 161: see Perindopril Profits #1 2015 FC 721 rev’d in part and remanded by Perindopril Profits #1 Appeal 2017 FCA 23, discussed here. The remand gave rise to the decision under appeal, which we might as well call Perindopril Profits #2, making this FCA decision Perindopril Profits #2 Appeal.

The differential profits approach to an accounting is now well-established, and the FCA reaffirmed that the function of the differential profits is to ensure that the award of profits reflects “the value that was contributed to the defendant’s goods by the patented invention” [41]. This requires a comparison between those profits that are attributable to the invention, and the profits that the defendant would have made using the best non-infringing alternative (NIA) [42]. In Lovastatin Damages 2015 FCA 171 set out a general framework for assessing the impact of competition from a defendant marketing an NIA. While I’ve come to think of this as a “could and would” test, the FCA at [Lovastatin FCA 73] actually set out four questions to be considered (original emphasis):

i) Is the alleged non-infringing alternative a true substitute and thus a real alternative?

ii) Is the alleged non-infringing alternative a true alternative in the sense of being economically viable?

iii) At the time of infringement, does the infringer have a sufficient supply of the non-infringing alternative to replace the non-infringing sales? Another way of framing this inquiry is could the infringer have sold the non-infringing alternative?

iv) Would the infringer actually have sold the non-infringing alternative?

In this decision, the FCA has helpfully indicated that these questions overlap, and they actually can probably be subsumed into a two part “could and would” test, with the first Lovastatin question going to the ‘could’ branch and the second going to the ‘would’ branch [97-99].

More generally, it would seem that the ‘could’ branch goes to technical considerations: is the alternative a true substitute in the technical sense [98]? Could it have been produced in sufficient quantities and marketing authorization obtained [FC 19]? The ‘would’ branch looks to business considerations and the “economic viability” of the invention: an alternative that is very expensive might be technically available, and yet unprofitable [99].

The key issue on remand related to the ‘would’ branch of the test, focusing in particular on infringing material manufactured by Apotex in Canada for export to markets such as UK and Australia. Apotex argued in the “but for” world, rather than manufacturing this product in Canada, it would have obtained the product from independent manufacturers located abroad (in Mexico and India), for sale to Apotex’s affiliates in the UK and Australia. In the decision under appeal, Gagné J applied the “could and would” test set out by the FCA in Lovastatin Damages [49]-[50]. She concluded that the first branch of the test was satisfied: Apotex could have obtained non-infringing perindopril from those alternative sources, in the sense that they were capable of producing perindopril and would have been willing to enter into a supply contract with Apotex [22].

However, Gagné J held that Apotex had not established that the Apotex would have acquired the non-infringing product from an alternative source, essentially because Dr Sherman preferred to develop its technology in Canada for transfer to its wholly-owned affiliates, and it would have chosen not to enter those markets at all rather than doing so by contracting with a foreign third party [24], [FC 89], [FC 91]. In this case, the FCA reaffirmed that the infringer’s “intentions and preferences” are relevant under the ‘would’ branch [106], including its “subjective preferences” [109], and so affirmed Gagné J’s holding.

The tricky point is that the evidence at trial, accepted by Gagné J, was that the NIA proposed by Apotex, namely sourcing from independent manufacturers for supply to the UK and Australia, would have been “economically viable” [FC 83]. My error in my post on Gagné J’s decision was to suppose that this was sufficient to establish that it would be profitable to do so. It is, however, well understood that what can be proven at trial is not a full reflection of business reality. This information asymmetry between the courts and the parties is the basic justification for granting injunctive relief as a remedy: this is the key insight in the famous article by Calabresi & Melamed, “Property Rules, Liability Rules, and Inalienability” (1972) 85 Harv L Rev 1089. The preferences and practices of any business person, and particularly a very successful business person such as Dr Sherman, reflect a range of business considerations which we must presume are important to profitability, even though it may be very difficult to prove their impact on the evidence in a particular case. That is why business decisions are not made by litigators and forensic accountants. It is reasonable to describe these preferences as “subjective,” or even idiosyncratic, as they reflect the particular business strategy adopted by Dr Sherman; but that does not mean they are non-economic; different firms may adopt different strategies in pursuit of profit. On the facts, I was wrong to say Dr Sherman’s motivations were “non-economic,” implying his preferences might have been driven by values such as patriotism. The actual preferences and motivations relied on by Gagné J were not non-economic; rather, they were overarching business considerations. Dr Sherman was an extremely successful business person. It is only reasonable to presume that his preferences in running his business were based on sound considerations of profitability; were it otherwise, Apotex would not have become the company that it is today.

My excuse for this error in my discussion of Gagné J’s decision is that she expressly stated that non-economic motivations must be considered: “Restricting the ‘would have’ analysis to an economic rationale would also discard cases where the infringer would not have used its proposed NIA for reasons other than economic ones and thus would not have legally competed with the patentee” [FC 69]. Even though it is now clear to me that the motivations she took into account were economic, I had initially understood them to be non-economic.

No doubt I put too much weight on that sentence, but in any event, I remain of the view that it is not sound law or policy to take into account non-economic preferences. That view is entirely consistent with the FCA’s decision in this case. The FCA did not affirm, or even mention, that particular passage. More importantly, the decision as a whole is consistent with the view that the only “subjective” motivations and preferences that are relevant to the “would” branch are those which are relevant to the economic viability of the NIA. The NIA is considered as part of the “differential profit” approach, and, as the FCA noted, the reason that approach is used is to award profits “according to the value added by the patented invention” [41]. The “value” is the social value in the hands of purchaser: as Rothstein JA explained in Harvard Mouse [2000] 4 FC 528 (FCA) [105].

Accordingly, the FCA reaffirmed that “the goal of the non-infringing alternative defence ‘is to help ascertain the real value of inventions for which a patentee […] was granted a monopoly’” [57], quoting Cefaclor 2018 FCA 217 [49]. The FCA at [109] clarified the nature of the “subjective perspective of an infringer” by reference to its decision in Cefaclor 2018 FCA 217, [72]. In Cefaclor, the Court stated that “obviously, the subjective perspective of the infringer may be relevant to the question of whether the infringer ‘would’ have used the NIA,” but Gauthier JA immediately went on to say that

[73] However . . . the court’s goal is to assess the real value of the patented invention(s). Such value cannot be assessed on a purely subjective basis. . . .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.

If subjective considerations cannot be allowed to artificially reduce the value of a patent, it follows that subjective considerations cannot be allowed to artificially inflate the value of a patent, given that the FCA has frequently emphasized that “the overriding principle” is that “a plaintiff is to be compensated, no more, and no less” [52]; Cefaclor 2018 FCA 217 [49]; Effexor / Venlafaxine 2016 FCA 161 [47]; Lovastatin Damages 2015 FCA 171 [41]; AstraZeneca v Apotex 2013 FCA 77 [7].

This shows that the ‘would’ branch of the NIA inquiry is not simply a matter of trying to reconstruct what would have happened but for the infringement, purely as a matter of fact; in Cefaclor, the FCA held that Apotex was not entitled to argue that it would have entered the market with an NIA that was not economically viable, even if that might have been its subjective preference. The ‘would’ branch like the NIA analysis as a whole, is aimed at ascertaining the true value of the patented invention, and subjective considerations are relevant only to the extent that they reflect that goal. For that reason, it strikes me that subjective preferences that are truly non-economic should not be taken into account, such as those that are motivated by religious or political beliefs. With that said, it is probably best to presume that any preferences that are part of a historical pattern are economic in nature, though such a presumption should be rebuttable.

As another example, in Cefaclor the FCA also held that to be a real alternative, an NIA cannot infringe any valid patent, not just the patent at issue in the proceedings [55], [69]. It seems likely that this would extend to alternatives that are not patented, but that are illegal for some other reason; perhaps it would even extend to unethical alternatives. Now consider a twist on this point. Suppose that the infringer had developed an alternative in-house that was technically available to it at the time of the infringement (ie, the ‘could’ branch is satisfied), but it would not actually have used because the process was covered by a patent in force at the time of the infringement. Subsequent to the infringement, the patent is invalidated, so that it becomes clear, with hindsight, that the alternative was not subject to any valid patent. (This example is based on AstraZeneca v Apotex 782 F 3d 1324 (Fed Cir 2015).) In our A New Framework for Determining Reasonable Royalties in Patent Litigation, (2016) 68 Fla L Rev 929, Tom Cotter and I argued at 991, that the alternative should be considered to have been available in such circumstances; only this way would the award of damages reflect the true value of the invention, as opposed to the fortuity of an invalid patent slipped through the Patent Office.

In summary, the historical preferences and practices of a business related to a particular course of conduct are good evidence as to the profitability of that course of conduct; better evidence, in many ways, than balance sheet calculations that might be provided by expert witnesses. There is therefore no inconsistency in saying that an accounting should reflect the true economic value of the invention, and saying that historical preferences and practices should be taken into account in determining whether an infringer would have used an NIA. For this reason, subjective preferences of an infringer may be taken into account on the ‘would’ branch of the NIA analysis. It does not follow, however, that the ‘would’ branch requires consideration of any kind of non-economic motivation; the ultimate question is always whether the evidence is helpful in assessing the true value of the invention.

*My thanks to Tom Cotter for comments on an earlier draft of this post that led me to substantially refine my views on the proper approach to subjective evidence.

No comments:

Post a Comment