Canada: Pharma In Brief - Non-Infringing Alternative (NIA) Defence May Be Relevant In Patent Damages Quantification: "Could" And "Would" An NIA Have Been Used?

Case: Apotex Inc et al v Merck & Co et al, 2015 FCA 171, aff'g 2013 FC 751

Drug: MEVACOR® (lovastatin)

Nature of case: Appeal from damages decision following a declaration that the patent was valid and infringed

Successful party: Merck

Date of decision: July 23, 2015

Summary

In the liability phase, the Federal Court (FC) found that Canadian Patent No. 1,161,380 (380 Patent) was valid and infringed by Apotex. In the damages phase, the FC held that the existence of a non-infringing alternative (NIA) was not relevant in law to the computation of damages. Apotex appealed to the Federal Court of Appeal (FCA), on the basis that the FC failed to consider the availability of NIA products when calculating damages. The FCA held that while the existence of a NIA is legally relevant when assessing damages, Apotex failed to establish on the evidence that it could and would have pursued the NIA. The appeal was dismissed.

Background

In the liability phase, the FC, confirmed by the FCA, found that Apotex had infringed the 380 Patent for a method for making lovastatin using a microorganism of the genus Aspergillus terreus (AFI-1).  In the damages phase, Snider J found that Merck was entitled to a total damages award of $119,054,327, plus pre-judgement and post-judgement interest.  In its reasons, the FC rejected Apotex's arguments that the NIA is a relevant factor in the assessment of damages. Snider J also stated that many policy reasons militated against acknowledgement of the legal relevance of NIAs when computing damages, including that doing so would cause the patentee to be inadequately compensated and would create an incentive to infringe.

Apotex appealed the decision on the grounds that Snider J erred: by rejecting the legal relevance of non-infringing lovastatin when computing damages; in assessing the royalty rate applicable to post-expiry infringing sales; and by determining that Merck had standing to bring a claim for damages by virtue of its exclusive licence agreement. The FCA dismissed Apotex's appeal with costs.

Apotex Appeal

Legal relevance of NIA

Justice Dawson, writing for the FCA, found that Snider J erred by concluding that the NIA was not relevant in law when calculating damages. Dawson JA held that the Canadian law on causation favours the consideration of NIA scenarios when assessing a patentee's lost profits, as failure to do so could in some circumstances over-compensate the patentee. The FCA stated that "perfect compensation" requires consideration of any non-infringing products the infringer or any competitor could and would have sold "but for" the infringement, as well as the extent to which lawful competition would have reduced the patentee's sales. Dawson JA further stated since the Supreme Court of Canada held in Monsanto Canada Inc v Schmeiser, 2004 SCC 34, that an NIA is relevant when calculating the infringer's profits, "there is no reason in principle to ignore such conduct when assessing the patentee's lost sales".

Apotex's NIA scenarios

While the FCA held that the NIA is relevant in law when calculating damages, it found that Apotex failed to establish on the evidence that it could and would have pursued its proposed NIA scenarios in the "but for" world. Dawson JA held that an infringer alleging an NIA defence must establish four elements: (i) that the alleged NIA is a true substitute and thus a real alternative; (ii) that the NIA is economically viable; (iii) that the infringer could have sold the NIA; and (iv) that the infringer would actually have sold the NIA.

While the FCA was satisfied that Apotex's alternative process for producing lovastatin (AFI-4 process) was a real and viable alternative to Merck's AFI-1 process that would not fall within the claims of the 380 Patent, Apotex failed to meet is burden on the evidence that it would have pursued this alternative in the "but for" world. In reaching this conclusion, Dawson JA pointed to the following elements of the evidentiary record: the scale of Apotex's infringement; Apotex's knowledge that its supplier was supplying it with infringing lovastatin; Apotex's belief that the 380 Patent was invalid; the lack of evidence that, had it known that its lovastatin products were infringing, Apotex would have used its non-infringing process to produce its lovastatin.

Reasonable royalties

Dawson JA did not disturb Snider J's determination of a reasonable royalty rate. This rate, based on the methodology advanced by Merck's expert, was calculated by taking the mid-point of the per kilogram cost savings to Apotex by using the infringing process, multiplied by the weight of the infringing lovastatin sold after the patent expired.

Lost profits of Merck US

Dawson JA confirmed Snider J's finding that Merck US had standing to bring the infringement action and the right to claim its damages sustained by reason of the infringement. The FCA rejected Apotex's argument that Merck US was a nominal patentee with no right to monetize the patent.

Link to decisions:

Apotex Inc et al v Merck & Co et al, 2015 FCA 171

Merck & Co., Inc. v. Apotex Inc., 2013 FC 751

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