Canada: Federal Court Of Appeal Acknowledges "Non-Infringing Alternative" Defence For The First Time In The Assessment Of Damages For Patent Infringement

On July 23, 2015, the Federal Court of Appeal held that the availability of a non-infringing alternative may be a relevant consideration when assessing damages for patent infringement (2015 FCA 171). Nevertheless, the extent to which this decision will actually affect the quantum of damages awards in future patent infringement cases in Canada remains unclear.

The decision appealed

The Court of Appeal's decision overturns the reasoning of the 2013 decision of Snider J. of the Federal Court, who had held that the availability to a defendant of a non-infringing alternative (i.e., a product that could have been manufactured and sold in place of the infringing product manufactured and sold by the defendant) is not and should not be a relevant factor in the assessment of damages (2013 FC 751). In this regard, Snider J.'s decision was consistent with prior Federal Court decisions on this issue.

In this particular case, Snider J. found the defendants Apotex Inc. and Apotex Fermentation Inc. (collectively, "Apotex") liable for damages following their infringement of a product-by-process patent for the anti-cholesterol drug lovastatin owned by Merck & Co Inc. and licensed to Merck Canada Inc. (collectively, "Merck"). Apotex argued that the damages owed should be reduced because it had available to it a non-infringing alternative process for producing lovastatin that Apotex could and would have used had it not infringed. Snider J. dismissed this argument in a section spanning nearly 30 pages of her reasons. The point became the central issue on appeal.

Causation principles underlying the calculation of damages

Pursuant to the Canadian Patent Act, a person who infringes a patent is liable to the patentee for all damages he has sustained by reason of the infringement. Canadian courts have long held that this phrase "by reason of the infringement" invokes the principle of causation, i.e., scrutiny of the causal relationship between the wrongful conduct of the defendant and the injury suffered by the plaintiff. As such, a plaintiff-patentee is entitled to recoup all damages that it has established would not have occurred "but for" the defendant's infringement. Typically, this principle entitles the patentee to the hypothetical profits from the sales that it can establish it would have made "but for" the presence of the defendant's infringing product in the market.

Snider J. held that the fact "that the defendant could have used a non-infringing alternative (but did not)" was irrelevant to the foregoing analysis, as its proper focus ought to be on the infringer's actual actions and not its hypothetical actions.

In this respect, the Court of Appeal held that Snider J. erred and conflated the legal relevance of the non-infringing alternative with the availability of the non-infringing alternative in fact. Indeed, the Court of Appeal held that ignoring this consideration could actually over-compensate the patentee. That is, if damages for lost profits are calculated without regard to an available non-infringing alternative, the patentee would sometimes be better off than it would have been in the absence of infringement because, in the "but for" world, the infringer could and would have made and sold a non-infringing alternative that would have legitimately reduced the patentee's sales.

As such, in the Court of Appeal's view, achieving "perfect" compensation for the patentee requires consideration of (a) what, if any, non-infringing product the defendant or any other competitors could and would have sold "but for" the defendant's infringement and (b) the extent to which such lawful competition would have reduced the patentee's sales.

Other jurisprudence as support

In support of its analysis, the Court of Appeal cited jurisprudence from the U.S. as well as the Supreme Court of Canada and distinguished certain U.K. decisions that had previously been followed by Canadian courts.

In reviewing the U.S jurisprudence, the Court of Appeal noted that U.S. courts have held that if a non-infringing alternative that a defendant could and would have used, had it not infringed, is a true substitute and a real alternative to the infringing product, and would have replaced all infringing sales, the infringement causes the patentee to suffer no compensable damages, for two reasons. First, a truly fair and accurate reconstruction of the "but for" world must also take into account relevant, alternative actions that an infringer foreseeably could and would have undertaken had it not infringed. Second, only by comparing the patented invention to non-infringing alternatives can a court discern the market value of the patent owner's exclusive right and therefore its expected profit.

The Court of Appeal also cited the Supreme Court of Canada's decision in Monsanto Canada v Schmeiser (2004 SCC 34), which affirmed that the availability of a non-infringing alternative is relevant to the assessment of an accounting of the defendant's profits, an alternative remedy to a recovery of the plaintiff's damages in Canada. The Court of Appeal took the view that the same principle of causation underlies both remedies and, as such, there is no reason in principle to ignore the availability of a non-infringing alternative when calculating the patentee's lost sales.

The Court of Appeal also considered jurisprudence from the U.K., where, unlike the U.S., it has long been held that the availability of a non-infringing alternative is irrelevant to the assessment of damages for patent infringement. Prior Canadian decisions had followed this U.K. jurisprudence. However, the Court of Appeal found the U.K. law to be based on public policy rather than the principle of causation. In addition, the Court of Appeal found that the Canadian decisions that had followed the U.K. practice had inappropriately fixated on the defendant's actual conduct rather than its hypothetical conduct in the "but for" world and provided little by way of actual causation analysis. The Court of Appeal found that those earlier decisions "do not accord with the requirement in section 55(1) of the Patent Act that the damages be sustained 'by reason of the infringement'."

Policy rationale

Snider J. also rejected the relevance of a non-infringing alternative on the basis of several policy reasons, which generally centered on the view that considering this factor would result in inadequate compensation for the injured patentee and allow the infringer to escape responsibility for its infringement. As explained above, the Court of Appeal countered that consideration of this factor would actually result in "perfect compensation" – albeit less than the patentee might feel entitled to. Moreover, the availability of other remedies (e.g., elevated costs, injunctive relief for the remaining duration of the patent, an accounting of the infringer's profits, punitive damages) would in the Court of Appeal's view counterbalance any risk of immunity from liability or incentive to infringe.

Legal test to be applied

With these principles in mind, the Court of Appeal proposed a new legal test for determining the relevance of a non-infringing alternative based on the facts of a given case:

  1. Is the alleged non-infringing alternative a true substitute and thus a real alternative?
  2. Is the alleged non-infringing alternative a true alternative in the sense of 
  3. being economically viable?
  4. At the time of infringement, did the infringer have a sufficient supply of the non-infringing alternative to replace the non-infringing sales? Or rather, could the infringer have sold the non-infringing alternative? To satisfy this step, the alleged alternative must have been actually available to replace the infringing sales as they were made.
  5. Would the infringer actually have sold the non-infringing alternative? 

The burden lies on the defendant to establish the factual relevance of a non-infringing alternative pursuant to this framework on a balance of probabilities.

Application to the facts of the case

The Court of Appeal held that, on the one hand, Apotex had at all relevant times the capacity to manufacture and sell non-infringing lovastatin in sufficient quantities. On the other hand, Apotex failed to meet its burden of showing that, notwithstanding this capacity, it could and would have sold this non-infringing alternative in place of the infringing product.

Rather, at some point during the relevant time period, Apotex had ceased manufacturing operations of the non-infringing lovastatin, which would have taken several weeks to ramp up sufficiently again. As such, the alleged non-infringing alternative was not actually available to replace Apotex's infringing sales as they were made.

In any event, the Court of Appeal held that Apotex likely would not have replaced its infringing sales with sales of the non-infringing alternative because of, among other reasons: the scale of Apotex's infringement; its likely knowledge that its supplier was providing it with infringing lovastatin; its belief during the relevant time period that the Merck patent was invalid; its failure to adduce evidence that had it known the product was infringing it would have resurrected its manufacturing operations of the non-infringing alternative; and its failure to adduce evidence demonstrating that the profits it would have made from sales of the non-infringing alternative would have been greater than the value lost by reallocating resources to do so.

In light of these conclusions, the Court of Appeal held that the availability of a non-infringing alternative was not relevant on the facts of the case. As such, the appeal was dismissed – effectively upholding Snider J.'s decision, including the award of close to $120-million CAD in damages to Merck, plus interest, although guided by quite different reasoning.

Conclusion

As noted above, this decision is arguably a departure from past Canadian jurisprudence that had rejected the relevance of a non-infringing alternative in the assessment of damages for patent infringement. At the same time, the application of this analysis to the facts in the case highlights how difficult it may be for defendants to establish the existence and relevance of a non-infringing alternative in a particular case. Further understanding of the scope and effect of the decision will no doubt come with further decisions on patent infringement damages in Canada.

For further information, please contact a member of our firm's Litigation group.

The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions