Thursday, July 29, 2021

Presumption That Marginal Rate of Return Equals Average Rate of Return

Apotex Inc v Eli Lilly and Company 2021 FCA 149 Boivin JA: Webb, Near JJA affg 2019 FC 1463 Zinn J [Cefaclor Interest]

            1,133,0071,146,5361,133,4681,150,725 [the Lilly Patents]

            1,095,0261,132,5471,136,1321,144,924 [the Shionogi Patents]

Is the Cefaclor litigation finally winding to a close, 25 years after the action was commenced? In Cefaclor liability FC 2009 FC 991 affd Cefaclor liability FCA 2010 FCA 240, Gauthier J found that at least one valid claim of each of Lilly’s patents had been infringed by Apotex. After Gauthier J was appointed to the FCA, Zinn J was assigned to hear the damages reference. His lost profits damages award of $31m was affirmed by the FCA, except in respect of the interest calculation: Cefaclor Damages FC 2014 FC 1254 affd Cefaclor Damages FCA 2018 FCA 217. Zinn J had awarded compound interest on the basis of a presumption that a plaintiff would have generated compound interest [FC 118] (see here), and the FCA remitted on the basis that there is no such presumption [FCA 156] and “a loss of interest must be proved in the same way as any other form of loss or damage” [FCA 158] (as discussed here).

The decision under appeal in this case is the interest decision on remand, which I’ll call Cefaclor Interest FC. In Cefaclor Interest FC, Zinn J set the compound interest rate by assuming that Lilly would use the money it would have had in such a way as to maximize its rate of return [30], [FC 27]. That’s fine, but he also set the rate at a rate equal to Lilly’s average rate of return [72]. The problem, as discussed here, is that as a matter of financial logic, the marginal rate of return—what Lilly would have done with the extra money—is necessarily lower than the average rate of return. Now of course, this is a matter for financial evidence, not just financial logic, but Zinn J considered the evidence of the financial experts to be “unhelpful”, because they carried out their analysis on the assumption that the lost profits were “a sum separate and apart from the other Lilly profits” [12], [FC 53]. That is, he disregarded the expert evidence as to the rate of return precisely because they carried out a marginal analysis. He preferred the evidence of Lilly’s fact witness, which was to the effect that Lilly would have spread the extra money among the same investments that it had made in the real world [13], [FC 55–56]. But there is actually no conflict between the financial experts and the fact witness. That Lilly would have spread the extra money among the same projects does not imply that the rate of return on extra money spent on those projects would be the same as the average rate of return on those projects. On the contrary, as a matter of financial logic, even if it is true that in fact Lilly would have spread the money among the same uses, the marginal return from an extra investment in those uses would have been less than the average return from those uses, again as discussed here. So far as I can tell, there was no evidence on the issue of the marginal rate of return on the same projects, presumably because the experts had focused their analysis on treating the extra money as a separate sum. In effect, Zinn J applied a presumption that the marginal rate of return would be the same as the average rate of return: “Where that proposed use of the slightly larger pool of profits parallels the use Lilly made in the real-world, there must be a heavy burden on Apotex to show that there was something making it impossible for Lilly to do so again” [FC 57].

Where does this leave the law? The FCA decision establishes that a trial judge is entitled to find that the marginal rate of return is the same as the average rate of return. But the issue was treated as a matter of fact at both levels of court, so this doesn’t establish a legal rule that the marginal rate of return is equal to the average rate of return. There is a “heavy burden” on a party seeking to show that average and marginal rates of return are different, but presumably that burden can be discharged by evidence directly on point, which we now know is necessary.

Monday, July 26, 2021

Stare Decisis and Statutory Interpretation

Janssen Inc v Canada (Attorney General) Mactavish JA: Stratas, Rennie JJA 2021 FCA 137 affg 2020 FC 904 Zinn J

esketamine hydrochloride / SPRAVATO

The FCA decision in Janssen is a straightforward application of the doctrine of stare decisis, with a loose end that raises some interesting questions for the application of stare decisis in the context of statutory interpretation.

Data protection is available for an “innovative drug” pursuant to section C.08.004.1 of the Food and Drug Regulations. “Innovative drug” is defined to mean:

a drug that contains a medicinal ingredient not previously approved in a drug by the Minister and that is not a variation of a previously approved medicinal ingredient such as a salt, ester, enantiomer, solvate or polymorph.

In a split decision in Takeda 2013 FCA 13, the FCA held that this definition should be interpreted to mean that the enumerated variations—a salt, ester, enantiomer, solvate or polymorph—were per se ineligible for data protection, regardless of the effort necessary to develop the data: see here. Stratas JA, dissenting, would have held that data protection is available for an enantiomer or other enumerated variation if regulatory approval for the drug required the submission of confidential data generated by considerable effort and the medicinal ingredient is materially different in terms of safety and efficacy: [22], Takeda [92]–[93]. I described the interpretive issue as a “hard case” where the purposive considerations relied on by Stratas JA pointed in one direction, while the textual and contextual considerations relied on by the majority pulled the other way.

In this case, Janssen applied for data protection for SPRAVATO, in which the medicinal ingredient is esketamine hydrochloride, an enantiomer of ketamine hydrochloride. Ketamine hydrochloride is the medicinal ingredient in the previously approved drug KETALAR. The Minister refused Janssen’s application. In the decision under appeal, Zinn J dismissed Janssen’s application for judicial review of that decision: see here. Zinn J accepted that there were factual differences between the cases. In particular, in Takeda both drugs were developed by the same company and used in the same manner for the same indication [FC 25], while in this case the enantiomer is indicated for an entirely different use: KETALAR is a narcotic, while SPRAVATO is an antidepressant. Thus, as a matter of policy, there is a stronger case for granting data protection in this case than in Takeda. (Note that in Takeda Stratas JA did not hold that data protection should be available for the enantiomer at issue on the facts, but only that the matter should be remitted for redetermination: Takeda [104]–[107].) However, as Zinn J pointed out, these facts were not material to the majority reasoning in Takeda, which held that the listed variations were per se ineligible, regardless of the amount of effort involved in developing the data: [41], [FC 26], Takeda [141].

In this appeal, Janssen acknowledged that the decisions below were consistent with Takeda. Its primary argument was that Takeda was wrongly decided and that Stratas JA’s interpretation of the provisions was correct [42], [71]. The FCA rejected this argument on the grounds of stare decisis, which permits departure from prior decisions only in “exceptional circumstances”: [72]–[79]. The FCA provided a useful brief summary of the relevant principles, with the most basic being that “one panel of this Court ought not to come to a different conclusion from a different panel, merely because it is of the view that the first decision was wrongly decided” [73], citing Miller 2002 FCA 370. The fact that Stratas JA was a member of both panels makes no difference: [80]–[83].

I agree with this result on the facts of this case, but I’m not comfortable with the Miller test. The law of stare decisis involves a trade-off between legal predictability and accuracy. In the easy cases, there is no conflict; if the first decision to address a point of law is clearly correct, then we get both predictability and accuracy by following it. But what if the first decision is wrong? When should we sacrifice accuracy, by following a wrong decision, for the sake of predictability? The Miller criteria set a very high bar for departing from a prior decision, giving very little weight to accuracy. The prior decision may be overruled only when it is “is manifestly wrong, in the sense that the Court overlooked a relevant statutory provision, or a case that ought to have been followed”: [75] quoting Miller [10]. “Manifestly wrong” has a “narrow” meaning, which is tantamount to saying the decision was made per incuriam: Olanzapine 2013 FCA 282 [8]. (It is a bit odd that the test for whether the FCA must follow its own precedent is much the same as the test for whether a lower court must follow a higher court.) Miller does implicitly acknowledge the trade-off between predictability and accuracy, but it adopts a threshold test for accuracy; where accuracy is unimportant outside the narrow threshold of manifestly wrong. This means that with Miller there is significant room for a lock-in effect from the first decision, where the initial decision may be generally considered to be wrongly decided, but will be reinforced by subsequent cases because it does not rise to the point of being manifestly wrong.

An alternative might be some kind of balancing test, which would more explicitly consider how likely it is that the prior decision was wrongly decided, how important the consequences are, and how much actual loss of predictability there might be. It might be said that the very use of a balancing approach to precedent would undermine predictability, because it would always be uncertain how a later panel would assess that balance. But I’m not sure that’s so different from where we are now, where problematic decisions are ignored, or gradually distinguished into oblivion. (Though that is easier when the point is factually suffused, rather than a narrow point of law.) How much worse would it be to explicitly recognize that some precedent is better than others, rather than doing it sotto voce? Another possibility would be greater use of expanded panels or en banc review, or some other approach entirely. I don’t have any answers here, but I do see a problem.

The problem of wrong precedent being locked in is particularly important in the context of statutory interpretation. As Professor Nina Varsava puts it “Does the judiciary have legitimate authority to knowingly misinterpret and misapply statutory law?”: How to Realize the Value of Stare Decisis 30 Yale J L & Human 62 (2018) 118. If the first decision interpreting a statutory provision is “manifestly wrong,” it can be revisited, but I am not sure it is sound to stick with an interpretation that is generally considered to be wrong, even if it is not “manifestly” wrong.

I should emphasize that I don’t think the main source of potential inaccuracy is poor legal reasoning on the part of the first panel to decide the issue. On that score, I do think the Miller criteria, amounting to whether the decision was made per incuriam, is appropriate. That is what makes this case an easy one. As the Court noted, the point was fully argued in Takeda and “[b]oth the majority and the minority decisions are thorough and carefully reasoned” [76]. Moreover, the case was a close call—my own view is that the majority decision was correct—with good arguments on both sides. There is much to be lost in terms of predictability if different panels flip-flop simply because they weigh close arguments slightly differently, and little to be gained in terms of accuracy of interpretation, given that either decision is about equally likely to represent the notional true intent of the legislature.

There are two other potential sources of inaccuracy that are much more important. One is that the full implications of a decision may become apparent only over time, as they are applied to different factual scenarios. A decision may be entirely well-reasoned and “right” given the information available at the time it was decided, and yet turned out to be wrong with the benefit of hindsight. That is largely what happened when, in Hospira 2016 FCA 215, the FCA departed from Aqua-Gem 1993 CanLII 2939 (FCA) on the standard of review for discretionary decisions of prothonotaries. The first reason the FCA gave for departing from Aqua-Gem was that experience had shown that the Aqua-Gem standard was difficult to apply and had generated confusion that detracted from the effective review of discretionary orders made by prothonotaries (Hospira [46]–[50]). A second reason was the persuasiveness of the reasoning on the same question in the Ontario courts (Hospira [51]–[55]). As I argued in my comment on Hospira, the FCA did not follow Miller in deciding to overrule Aqua-Gem: neither of these factors is relevant under the Miller test. Aqua-Gem was not poorly reasoned at the time it was decided (Hospira [49]) and it certainly was not manifestly wrong. This illustrates that the Miller criteria are poorly suited to a situation where the hindsight that comes with time and experience shows a prior decision to have been “wrongly” decided, even though it was entirely reasonable on the information available to the court at the time. None of these concerns are relevant to this case, as Takeda was recently decided and, so far as I can tell, nothing in our subsequent experience would cause us to weigh any of the arguments any differently.

Another source of error is when the case is poorly argued. This is perhaps particularly a problem for trial decisions, because the sheer number of factual and legal issues to be addressed can mean that a point that turns out to be important is not fully argued. My sense is that comity is not as powerful in the Federal Court for that reason. If a novel issue of law has been decided in a single prior FC decision, a subsequent FC judge will generally make their own assessment of the arguments before them, with the prior decision considered as one factor with considerable persuasive effect. (I’m afraid I can’t put my hands on particular examples right now.) This strikes me as a good approach. There is not much loss of certainty in the law, because a holding of law by the Federal Court is always liable to be overruled by the FCA in any event, and once a novel point of law has been addressed once, it is likely to be more thoroughly argued the next time. The same kind of problem can arise at the FCA level as well, particularly in cases (unlike Takeda), where there are multiple legal and factual issues being appealed.

The problem of a poorly argued case is particularly troublesome in the context of statutory interpretation. It’s disquieting to think that the law might depart from the intent of the legislature simply because a private litigant had argued its case poorly in the first decision on the issue.

This brings me to the loose end in this case. Janssen argued that the FCA should admit new evidence on appeal with respect to the effect of the repeal of NAFTA and the coming into force of CUSMA, and the impact that CUSMA should have on the interpretation of the data protection provisions [44]–[45]. In particular, “Janssen points out that under CUSMA, Canada agreed to provide protection to “new pharmaceutical products”, which are specifically defined as products that do not contain a chemical entity that has previously been approved” [46]: see CUSMA Art 20.48–20.49. Further, “Janssen notes that OSIP explicitly found that the medicinal ingredient in SPRAVATO had not been previously approved in a drug in Canada, and that this would qualify SPRAVATO for data protection under CUSMA” [46]. The FCA refused to admit the evidence on procedural grounds. First, Janssen could and should have made the argument in the Federal Court: [49]–[52]. The FCA noted that CUSMA was finalized in December 2019 and came into force on July 1, 2020, just before Janssen served and filed its application record in the Federal Court on July 17, 2020, and before its application was heard on August 31, 2020. Janssen therefore had the opportunity to make substantive submissions that CUSMA had changed the data protection regime, but failed to do so. Second, the question facing the Federal Court “was not to decide whether esketamine hydrochloride should be entitled to data protection. Its task was to determine whether OSIP’s decision to refuse data protection for SPRAVATO was reasonable, based on the record before it. OSIP [the Office of Submissions and Intellectual Property] rendered its decision on April 25, 2019, more than a year before the coming into force of CUSMA and the exchange of correspondence between the parties. Consequently, the agreement and the documents could have had no bearing on OSIP’s decision with respect to SPRAVATO, and they were not relevant to the task that the Federal Court had to perform” [54]–[55]. Both of these points strike me as compelling so far as procedural fairness to Janssen is concerned.

But what happens next time the same issue arises? Substantively, Janssen’s argument strikes me as quite reasonable. It would certainly have been taken into account if the interpretative question has been argued for the first time after CUSMA had come into force and it is at least possible that it would have tipped the balance. But the interpretive question is no longer a matter of first impression. As a matter of stare decisis, is the coming into force of CUSMA an “exceptional circumstance” that would warrant departing from Takeda, even though the legislation itself has not changed? This question raises an interesting point of principle. Suppose that the CUSMA argument was a knock-down argument that made it clear that Stratas JA’s position was correct. (I should say that this is purely for the sake of argument; I really have no opinion how the CUSMA argument would play out if it were added to the interpretive mix.) If the enactment of CUSMA was not an “exceptional circumstance” as a matter of the law of stare decisis, the result would be that a clearly wrong interpretation of the legislation would prevail simply because a private party had failed to make the argument at its first opportunity. I find this to be a troubling possibility; though perhaps it is simply a reflection of the fact that the interpretation of legislation through private litigation inevitably means that the interpretation will be shaped in part by the litigation strategy of the parties. Professor Varsava goes to far as to suggest that we should abandon stare decisis in the context of legislative interpretation, in part for that reason: see Varsava, How to Realize the Value of Stare Decisis 30 Yale J L & Human 62 (2018) 117–18. I would not go that far, but the point is an interesting one.

Because the FCA decided on procedural grounds, it was not necessary to address this question, and the Court—wisely, in my view—did not discuss the substantive point even tangentially. The door therefore remains open for this argument to be made. I expect we will find out the answer in due course, after the CUSMA argument is properly made to OSIP and it winds its way back up to the FCA on a more complete record.

Thursday, July 8, 2021

Double Patenting over Published Prior Patent

Hoffmann-La Roche Limited v Sandoz Canada Inc 2021 FC 38 Manson J

2,667,654 / 2,709,997 / pirfenidone / ESBRIET / NOC

As I mentioned in my first post on this decision, Roche’s 997 patent was found to be invalid for obviousness-type double patenting over Roche’s 654 patent [148]–[153], even though the publication date of the 654 patent, June 26, 2008, was before the claim date of the 997 patent, November 10, 2008 [9], [11], [153], so the 654 patent was prior art over the 997 patent. In my first post, I didn’t make much of this point. I just said that I was “a bit puzzled” as to why the argument was run on a double patenting basis, given that the 654 patent was prior art over the 997 and so, under Hospira 2020 FCA 30, would have been part of the state of the art against the 997 patent. I suggested that “Perhaps Sandoz felt it was safer to use double patenting rather than to rely on the Hospira doctrine—presumably the 654 patent was not part of the common general knowledge and would not have been discoverable in a reasonably diligent search.”

On further reflection, it seems to me problematic to use double patenting in this situation. Now, it may not matter, if indeed under Hospira the 654 patent is part of the state of the art against the 997 patent. But what if there is a difference? Suppose the 654 patent could not be used in an obviousness attack against the 997 patent, but it could be used in a double patenting attack. In that case, allowing a double patenting attack would mean that the patentee is in a worse position than an unrelated third party. That is, suppose that the 654 patent can be raised against the 997 patent in a double patenting attack, but not in an obviousness attack, and suppose that the 997 patent is obvious over the 654 patent, but not otherwise. That means that the 997 patent would be considered a valid inventive improvement if granted to a third party, but would be invalid if granted to Roche. This seems to me to be contrary to the general principle that validity is objective. It also strikes me as unfair that Roche should be at a disadvantage in patenting improvements to a base technology that it invented and disclosed. 

There is also a problem of consistency with the Act. In Sanofi 2008 SCC 61 [12], the Supreme Court remarked that the law of patents is “wholly statutory.” That is a considerable overstatement: the double patenting doctrine itself, which was approved by the SCC in Whirlpool 2000 SCC 67, is a judicially created doctrine which, in the classic application, prevents an inventor from obtaining a second patent for an invention which is an obvious variant of an invention disclosed in its own unpublished prior application. The doctrine was thought to be necessary precisely because that prior application is not part of the state of the art as statutorily defined in s 28.3. There are many other instances where the courts have supplemented the sparse or ambiguous language of the statute: the non-obviousness requirement, fundamental as it is, was not codified until 1993. But there are limits. As the SCC also pointed out in Sanofi 2008 SCC 61 [12], “the general concepts which are the common currency of patent lawyers are founded on a statutory text, and cannot have any other firm foundation.” If the prior application has already been published, there is no loophole to close.

Now, as noted, none of this matters if, under Hospira the 654 patent could also be raised in an obviousness attack against the 997 patent even if granted to a third party. But that isn’t an adequate reason for holding that the double patenting doctrine applies even if the prior application is published. Hospira postdates the double patenting doctrine, and the two developed independently. If the double patenting doctrine applies now, it would also have applied prior to Hospira, when it did undoubtedly make a difference. Further, Hospira is recent and there is perhaps still some uncertainty as to its scope. Applying the double patenting doctrine in this scenario means that the 997 patent was held to be invalid without ever addressing whether the 654 patent was part of the state of the art against it.

Another problem with using double patenting in this case is that the obviousness-type double patenting was assessed as of the claim date of the 997 patent [153]. That is clearly the appropriate date for an obviousness attack, but it is not clear that it is the correct date for a double patenting attack, as it is currently unsettled whether the appropriate date is the claim date of the first (654) or second (997) patent: see here and here. Now, Manson J has previously held that the appropriate date is the second claim date, and perhaps that is why he used it, but the point is not settled at the FCA level, and it would have been preferable to have this issue discussed expressly.

Since Manson J did not have any discussion at all of whether it was appropriate to use double patenting in this situation, I would presume that Roche simply didn’t object to the use of the double patenting attack and instead chose to focus its efforts on the substantive question of obviousness. Consequently, I would suggest that this decision is not strong authority for the proposition that it is permissible to use obviousness-type double patenting when the first patent is already published.