Friday, March 17, 2023

Legal or Factual Hypothetical in the S 8 “But For” World?

Apotex Inc v Sanofi-Aventis Canada Inc 2014 FCA 68 Sharlow JA, Pelletier JA concurring, Mainville JA dissenting, affd 2015 SCC 20 SCC 35886 varg 2012 FC 553 Snider J

Teva Canada Ltd v Sanofi-Aventis Canada Inc 2014 FCA 67 Sharlow JA, Dawson JA concurring, Mainville JA dissenting varg 2012 FC 552 Snider J

1,187,087 & others / ramipril / ALTACE / NOC s 8

Pfizer Canada Inc v Teva Canada Ltd 2016 FCA 161 Stratas JA: Ryer, Gleason JJA varg 2014 FC 248 Zinn J

            1,248,540/ 2,199,778 / venlafaxine / EFFEXOR XR

In a post last week I revisited the question of how to construct the “but for” world for the purposes of s 8 damages when there are multiple claimants. I pointed out Ramapril / Apotex 2014 FCA 68 (and the companion Ramipril / Teva 2014 FCA 67), raised a puzzle as to the exact nature of the hypothetical used in constructing the “but for” world. A few days later, in reviewing Venlafaxine 2016 FCA 161, it occurs to me that there is a basic question as to whether the “but for” world is premised on a legal hypothetical or a factual hypothetical. On a legal hypothetical, we are to assume that some aspects of the PMNOC Regulations don’t exist for some purposes; on a factual hypothetical we are to assume that the patentee would have behaved differently in some way.

In Ramipril the FCA rejected Sanofi’s argument that there should be only one “but for” world in which none of the potential generic entrants would have been constrained by the PMNOC Regs. Sharlow JA summarized in Ramipril / Teva [145] by saying (my emphasis):

in the hypothetical world constructed for the purposes of determining section 8 damages, the NOC Regulations should not be assumed away except to the extent required by paragraph 8(1)(a) [now 8(2)], that is, for the purpose of determining the beginning of the section 8 liability period. For all other purposes, the NOC Regulations should be assumed to exist in the hypothetical world

This posits a legal hypothetical as the basis for the “but for” world: the Regs are assumed away, though only for the specific purpose of determining the beginning of the liability period.

In last week’s post I pointed out that this is hard to reconcile with Norfloxacin 2011 FCA 329 [75], a s 8 case where the FCA stated that “the Federal Court had to assess [the generic’s s 8] damages on the basis of a hypothetical question: what would have happened had [the patentee] not brought an application for prohibition?” This is a factual hypothetical; the Regs are exactly as they are in the real world, with no modification whatsoever, and the only difference is that the patentee acts differently than it did in the real world. Venlafaxine 2016 FCA 161 also explicitly poses a factual hypothetical: to assess the impact of lost sales, the court’s task is “to assess a hypothetical world where the defendant’s impugned conduct did not take place” [46] (and similarly [45]). This says nothing about the Regs; it is the patentee’s conduct that is different in the “but for” world. More specifically, in Venlafaxine the s 8 claim was triggered because it was ultimately determined that the patent at issue was not eligible for listing on the patent register [24], and “with the benefit of hindsight, it can be said [the patentee] should not have listed [the patent at issue] on the patent register . . . and should not have brought a prohibition application” [26]. The FCA held that the trial judge had properly proceeded on the basis that “the hypothetical world . . . was one where [the patentee] did not improperly list its [] Patent,” and it is for that reason that the generic would have received its NOC on the patent hold date [71]. That is, the impugned conduct was listing a patent that we now know was not legally eligible for listing: see also [26].

There is considerable logic to positing a factual hypothetical rather than a legal hypothetical. It avoids the problem of assuming that there is a world in which some parts of the Regs exist for some generics, but not for other generics. This is a a strange assumption, as a law that applies to some parties but not to others who are similarly situated would not be possible in the real world. Moreover, the legal hypothetical used in Ramipril is not even internally coherent; as I explained in last week’s post, the decision assumed that in the “but for” world the patentee would have brought a prohibition application against the claimant, that would have unfolded as it did, even though the prohibition application would have been moot from the outset if the statutory stay did not apply to the claimant (which would have therefore received its NOC). One might say that it is just a hypothetical to allow us to calculate damages, but it is a tortured hypothetical nonetheless. In general, the damages hypothetical is realistic—the negligent driver would have driven safely, the defective house would have been built to Code, the infringer would have competed with a non-infringing alternative. Indeed, a hypothetical that is not realistic is generally not permitted: in assessing s 8 damages, the generic has to show that it could and would in fact have supplied the market, so why should we assume that the patentee would have done something that in reality would have been quite irrational?

More generally, the usual damages hypothetical is that the wrongdoer would have acted legally instead of illegally. This general approach can be applied to s 8 by using a factual hypothetical, in which the patentee acted properly instead of (with hindsight) improperly. In a case such as Venlafaxine, in which the patent was not eligible for listing, it is reasonable to suppose that the patentee would not have listed it in the first place, if the patentee knew that its patent was not in fact eligible. If the patent is ultimately held to be invalid, then it is also reasonable to suppose that the patentee would not have listed it, had it been able to foresee that outcome. If the s 8 claim arises because the patent was eligible and valid, but the generic’s product was found not to infringe, then the obvious counter-factual is to suppose that the patentee would have listed it, but would not have brought a prohibition application against that particular claimant, knowing it was bound to lose. (I’m referring to prohibition applications because that is the regime under which those cases were decided, but the same logic could be applied under the new Regs.)

A factual hypothetical is also consistent with the broad holding in Ramipril, summarized in Venlafaxine [136], that “the regulatory barriers to entry, including the PMNOC Regulations, which all generic manufacturers face in the real world, also affect all generic manufacturers in the hypothetical world. Thus, in order to assess whether and when other generic manufacturers could have and would have entered the market in the hypothetical world, the Federal Court had to assess, among other things, whether regulatory barriers stood in their way.” A factual hypothetical assumes that the Regs themselves operate exactly as they do in the real world, without any modifications whatsoever to the Regs themselves; the difference in the “but for” world lies only in the factual hypothetical as to the patentee’s behaviour, plus whatever consequences might realistically flow from that, in the context of the NOC Regs as they actually exist.

While I think using a factual hypothetical is appealing, I doubt it is consistent with Venlafaxine or Ramipril. As noted, the court in Venlafaxine stated a factual hypothetical as the basis for constructing the “but for” world, but when it came to actually assessing damages, Zinn J in Venlafaxine FC stated that

[130] The plaintiff generic need not comply with the NOC Regulations in the but-for world as they relate to the patent(s) that were the subject of the Prohibition Application for the reasons provided above. However, any competing generic manufacturer must do so because in the real world it has not addressed the patents on the Patent Register.

This is a legal hypothetical: the Regulations do not apply to the claimants, but do apply to other generics. The FCA affirmed [136]. As I understand it—and to be clear, I have not reviewed the Venlafaxine FC decision closely on this point—Novopharm’s entry was delayed by NOC proceedings related to the patent that was improperly filed. This was true in the real world and Zinn J took it to be true in the hypothetical world as well [136]. But if we actually use the factual premise that the FCA stated was the basis for constructing the “but for” world—that Pfizer had not listed the patent that was improperly listed in the real world—then Novopharm’s entry would not have been delayed. That is not because of a legal hypothetical that the Regs would not have applied to Novapharm, but rather as a consequences of the way in which the factual hypothetical plays out. So, if I am reading the cases correctly, it seems that Zinn J stated a factual hypothetical as being the correct approach, but actually applied a different, legal, hypothetical—and the FCA affirmed both. Similarly, in Ramipril, as I understand it (again, I did not review the decisions in detail on this point), the patents at issue were declared invalid, which, to my mind, implies that the appropriate factual hypothetical is that Sanofi would not have listed the patents.

I wonder if the use of a legal hypothetical in Ramipril was a consequence of the way the case was argued. Recall that Pfizer had argued for a methodology that “assumes the NOC Regulations away for the purpose of constructing the hypothetical market” 2014 FCA 68 [157]. As Mainville JA put it, dissenting on this point and agreeing with Pfizer, “those Regulations should be disregarded not only with respect to the claimant generic drug manufacturer, but also with respect to any other generic drug manufacturer that is found, on a balance of probabilities, to also be a market participant” 2014 FCA 67 [98]. That is, Pfizer argued for a sweeping legal hypothetical in which the Regs were assumed away for all purposes; Sharlow JA rejected this in favour of a minimalist legal hypothetical in which the Regs are assumed away only to the extent necessary to establish the liability period start date. Given that Sanofi’s argument was framed around a legal hypothetical, it is not surprising that Sharlow JA chose a minimalist approach. With that said, Snider J at first instance seems to have relied on a factual hypothetical, that Sanofi would not have responded to Apotex’s NOA with an application for an order of prohibition (Ramipril / Apotex FC [6], [157]), which is a reasonable counter-factual if we suppose Sanofi knew it would lose, and Sharlow JA reversed on that point, though without clearly articulating the premise of her hypothetical.

Finally, there is also the statutory point relied on by Sharlow JA in Ramipril / Teva [145], quoted above, which is that 8(1)(a) (now 8(2)) of the Regulations themselves assume away the Regs for a specific purpose, namely for the purpose of determining the beginning of the s 8 liability period. The argument is that the Regs themselves mandate a legal hypothetical. But the Regs do not explicitly say that any part of the Regs are to be disregarded for the purposes of constructing the “but for” world. Rather, as Sharlow JA noted, it says they are to be disregarded for the purposes of determining the start date for the liability period. Para 8(1)(a) (and 8(2)) states that if the patentee brings an action and is unsuccessful, the patentee is liable to the generic “for any loss suffered after . . . the day. . . on which a notice of compliance would have been issued in the absence of these Regulations.” On its face, this says nothing about how the “but for” world is to be constructed, but only addresses the start date for the liability period. It seems to me that this provision is entirely consistent with awarding s 8 damages based on a but for world based on a factual hypothetical in which, eg the patentee never listed the ineligible patent.

I don’t see how to sort this out. It strikes me that adopting a factual hypothetical is consistent with the Regs, is consistent with the general approach to damages in other areas of the law, and would avoid some of the contortions required with the legal hypothetical. But it may be that, as a matter of precedent, that ship has sailed.

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