Canada: Pharma In Brief - Federal Court Rejects Generic’s Non-Infringing Alternative Defence And Awards Compound Interest For Patent Infringement Damages

Case: Eli Lilly and Company et al. v. Apotex Inc.
Drug: CECLOR® (cefaclor)
Nature of case: Damages reference
Successful party: Eli Lilly and Company and Eli Lilly Canada, Inc.
Date of decision: January 23, 2015

Summary

On January 23, 2015, the Federal Court released its public reasons for Judgment granting Eli Lilly and Company and Eli Lilly Canada, Inc. (collectively "Lilly") patent infringement damages in the total amount of $106,274,649.00 (inclusive of prejudgment interest).  Lilly was also awarded post-judgment interest at the rate of 5.0% from the date of judgment until payment.  This was a damages reference requisitioned by Lilly to quantify the damages owed by Apotex Inc. ("Apotex") following the liability phase of the action wherein it was held that at least one valid claim in each of eight separate patents owned by Lilly had been infringed by Apotex (Eli Lilly and Co. et al. v. Apotex Inc., 2009 FC 991; aff'd 2010 FCA 240; leave to appeal to SCC refused, [2010] SCCA No. 434).

The Court held that Lilly was entitled to its damages as described in subsection 55(1) of the Patent Act – no more and no less.  The Court firmly rejected Apotex's defence of non-infringing alternative (the "NIA Defence"), confirming that the existence of the NIA Defence is not relevant to an assessment of patent damages in Canada.  Finally, the Court accepted Lilly's argument that it should be entitled to an award of compound interest which the Court confirmed was available to patentees under subsection 55(1) of the Patent Act provided they can establish that their lost profits would have generated income on a regular basis over the period of infringement.

Damages for patent infringement

Justice Zinn held that infringement of a patent is a statutory tort created by subsection 55(1) of the Patent Act.  He rejected Apotex's argument that Lilly's damages ought to be assessed in a more limited manner.  Justice Zinn noted that where the patentee elects its damages rather than an accounting of the infringer's profits, the damages to which it is statutorily entitled are all damages sustained by reason of the infringement – nothing more, nothing less.  A judge has no jurisdiction to limit a plaintiff's recovery to any lesser sum.

Justice Zinn also awarded Lilly a reasonable royalty for each sale made by Apotex, in breach of the patents, even though Lilly itself would not have made the sale.  In arriving at a reasonable royalty rate, Justice Zinn considered the following factors: (1) Lilly does not enter into royalty agreements except with an authorized generic, which was not the situation at hand; (2) these parties are engaged in litigation on a regular and recurring basis; (3) Lilly is less likely to be willing to negotiate a deal unless it is of the view that it has "bettered" Apotex in the negotiated deal; (4) the evidence led by Apotex suggests that it would be eager to strike a deal regardless of the profit it might make on that single product; and (5) Lilly is unlikely to see any great financial advance to entering into a deal unless it does better than 50/50.  For these reasons, the Court directed that a reasonable royalty amount be included in the total damages award.

The non-infringing alternative defence (NIA Defence) is rejected

Apotex had two suppliers of cefaclor: Kyong Bo Chemical Ltd. ("Kyong Bo") and Lupin Laboratories Ltd. ("Lupin").  Apotex sold cefaclor that had been manufactured through two different Lupin processes.  During the liability phase of this action, the Court held that the first process, Lupin 1, infringed Lilly's patents.  Lilly could not prove that the second process, Lupin 2, infringed the relevant patents.  Apotex urged the Court in the damages reference to find that if there is a non-infringing alternative to the infringing process that was available to the infringer in place of the infringing process, the NIA Defence must be considered in the but-for world, even though the infringer did not employ the non-infringing alternative in the real world.

Justice Zinn rejected Apotex's NIA Defence.  He confirmed Justice Snider's decision in Lovastatin that the existence of a non-infringing alternative is not relevant to an assessment of damages in Canada (Merck & Co., Inc. v. Apotex Inc., 2013 FC 751).  While an NIA Defence is available to patentees in the United States, Justice Zinn noted that there are significant and material differences between Canadian and US legislation defining the patentee's recoverable damages.  The Court was not persuaded that the decision in Lovastatin was wrongly decided and held that the principle of comity dictates that conclusions of law of another Federal Court judge should not be departed from unless the departure is necessary and cogent reasons can be articulated for so doing.

Justice Zinn further held that there is a fundamental difference between an accounting of profits and an assessment of damages which underlies why the availability of an alternative may be considered in the former but not in the latter.  An accounting of profits requires a determination of the profits that are directly attributable to the use of the invention by the infringer.  On the other hand, an assessment of damages requires the Court to determine the profit the patentee would have made but for the infringer's actions, making it irrelevant whether the infringer could have behaved otherwise.

Finally, Justice Zinn rejected Apotex's argument that Lilly was unable to prove a causal connection between its lost sales and Apotex's infringement because Apotex could have manufactured and sold cefaclor without infringing the patents.  Justice Zinn held that causal connection must be determined in the real world based on an examination of the facts as they existed at the relevant time – not on those that could have existed in the hypothetical world.  To permit otherwise would allow a wrong-doer to escape all responsibility for its conduct by simply arguing that it would have behaved differently in the but-for-world.

Compound interest is awarded

The Court accepted Lilly's argument that it should be entitled to an award of compound interest.  Justice Zinn relied on the Supreme Court of Canada's decision in Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 where the Supreme Court recognized the "time value" of money and held that an award of compound interest is available at common law and in equity where the circumstances warrant such an award.  Justice Zinn confirmed that compound interest is available to patentees under subsection 55(1) of the Patent Act provided they can establish that their lost profits would have generated income on a regular basis over the period of infringement.

Justice Zinn further held that the patentee is not required to prove exactly what use it would have made of the profit it lost as a result of the infringer's actions since, after all, the patentee did not actually have the funds in hand.  The Court went on to state that: "[i]n today's world there is a presumption that a plaintiff would have generated compound interest on the funds otherwise owed to it and also that the defendant did so during the period in which it withheld the funds."  In determining the rate of prejudgment interest to apply, Justice Zinn was of the view that the best measure is to examine what profit it realized in its business activities during the relevant time period.

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