Canada: Federal Court Grants Accounting Of Profits And Addresses NIA "Non-Infringing Alternative"

Last Updated: July 14 2015
Article by Marc Richard

The Federal Court recently released a decision accounting for an infringer's profits in a pharmaceutical matter (ADIR and Servier Canada Inc. v. Apotex Inc. and Apotex Pharmachem Inc., 2015 FC 721). The reference to quantify the defendants' profits and the decision of Justice Gagné followed a 2008 determination by Justice Snider that the defendants had infringed the plaintiffs' patent rights, with respect to the anti-hypertensive drug perindopril. The remedy of an accounting of profits is less frequently sought in pharmaceutical patent infringement matters due to the differential pricing dynamics between innovators and generics. However, in this case, Apotex had made significant export sales, which are typically subject to a royalty as damages where the plaintiff would not have made the sales in that jurisdiction.

Given the Plaintiffs' election for an accounting of profits, the Court sought to assess what portion of the infringers' profit was "causally attributable to the invention" as per the Supreme Court of Canada decision in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34. The Court's assessment looked at the difference between the Defendants' gross revenues and their current and capital expenses directly attributable to the infringement ("differential profit").

Deductions due to Indemnity/Litigation Services Provisions

The determination of gross revenues from the sale of infringing product was not controversial and was stipulated by the parties. However, a major issue arose regarding Apotex's contention that it should be permitted to deduct over 20 million dollars from such revenues for payments made to related foreign entities in respect of indemnity and litigation services under transfer pricing agreements. The Court accepted that, as a matter of principle, the provision of foreign litigation services and an indemnity for liability under the foreign patents would not constitute an infringement of the Canadian patent. Therefore, the Court accepted that if the purchase price paid by the foreign entities to the Defendant exporter was proven to be revenue paid on account of those services, the revenues generated should be apportioned or segregated under the differential profit approach.

The Court considered a number of transfer pricing agreements and the evidence of several witnesses and concluded that the proper interpretation of the agreements did not support the proposition that the price paid was attributable to the indemnity provision and related litigation services rather than on account of the sale of the product. Thus, the Court determined that segregating and apportioning such revenues would not be appropriate.

Impact of Parallel UK Proceedings

The Federal Court also considered the impact of parallel UK proceedings between an affiliate of the Plaintiffs and the Defendant Apotex which had been stayed pending the outcome of the Canadian case. The UK proceeding involved the assertion of a European patent for a crystalline form of perindopril erbumine. The Plaintiffs' UK affiliate had launched an infringement action against Apotex and obtained an interlocutory injunction restraining the sale of perindopril while giving an undertaking as to damages should the action not succeed. At first instance, the patent was held to be invalid and the injunction was not maintained pending the appeal. While the appeal was dismissed, the Plaintiffs' UK affiliate sought to amend its pleadings to rely on the Judgment of Justice Snider and the fact that the UK product would have been manufactured in Canada, thus infringing the Canadian patent. The trial court did not allow the amendment to add this ex turpi causa or "illegality" defence and awarded Apotex ₤17,500,000 in damages resulting from the injunction. The UK Court of Appeal later permitted the amendments and proceedings followed culminating in a UK Supreme Court Decision which held the illegality defence did not apply in the circumstances.

Under a transfer pricing agreement, most of the award was owed to Apotex in consideration for indemnity and legal services. Apotex conceded in the UK case that a deduction should be made to the UK damages award based on what the Canadian Court would have awarded Apotex entities to pay in Canada had the sales actually been made. The Plaintiffs in Canada, which did not include the UK affiliate, did not seek to include the Apotex share of the UK award in the Defendants' gross revenues from the sales of perindopril to Apotex UK. Thus, the UK Court will consider the Federal Court's accounting judgment to quantify the UK injunction damages. The Federal Court refused the Defendants' request to stay the judgment pending any appeal and other ongoing appeals in the UK.

Apotex's Non-Infringing Alternative Arguments

The Federal Court also considered the Defendants' argument that, while the infringing product was manufactured in Canada, the Defendants could have manufactured perindopril products in jurisdictions other than Canada without infringing the Canadian patent. The Defendants asserted that the Court should consider the potential of non-infringing alternatives (NIAs) in the accounting exercise.

The Reference Judge considered Schmeiser and found that the Court did not require that all NIA products, options or scenarios must be considered but that the accounting analysis must be premised on the notion that "the inventor is only entitled to that portion of the infringer's profit which is causally attributable to the invention". In this case, the Court found the causal relationship between the infringing products and the patent to be clear as the API compound itself was covered by the patent.

The Court rejected the Defendants' argument that the potential to have avoided infringement was a relevant consideration to causation. Moreover, after hearing extensive evidence on the matter, the Court was not convinced that any of the hypothetical scenarios put forward would have occurred.

Interest

Finally, the Court considered the appropriate rate of interest and the return on the profits to be disgorged. The Court recognized that the awarding of compound pre-judgment interest as deemed earnings on the profits is the rule. The Court found a rate of prime for the Defendant Apotex and prime plus 1% for the Defendant Apotex Pharmachem was appropriate. The total amount ordered to be paid by the Defendants was over $‎60 million not including interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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