Canada: The Non-Infringing Alternative Defence When Assessing Damages Comes To Canada

Last Updated: June 3 2016
Article by Adrian J. Howard

Most Read Contributor in Canada, November 2016

Patent infringers in Canada may have a new argument in their arsenal against an assessment of damages: the non-infringing alternative.

Historically, Canada has rejected the notion that a non-infringing alternative is relevant to an assessment of damages for patent infringement. This history was described by the Federal Court in Merck & Co., Inc. v. Apotex Inc.,1 as originating from the UK House of Lords decision in The United Horse Shoe and Nail Company, Limited v Stewart and Company.2 The Court found that one did not consider whether an infringer could have sold an existing non-infringing alternative, or could have developed a new non-infringing process, or could have avoided infringement altogether by obtaining a licence, because it is completely irrelevant to the question of damages.

In considering the policy arguments that were set forth, the Judge responded with her own policy reasons for rejecting the legal relevance of non-infringing alternatives, including:

  1. a patentee would be inadequately compensated;
  2. the non-infringing alternative was already taken into account because the patentee could not claim lost profits in respect of sales lost to non-infringing products;
  3. acknowledging the relevance of non-infringing alternatives would create an incentive to infringe; and
  4. acknowledging the relevance of non-infringing alternatives would be inconsistent with Canada's repeal of the compulsory licensing regime and Canada's international obligations (specifically article 1709(10) of the North American Free Trade Agreement and article 31 of the Agreement on Trade- Related Aspects of Intellectual Property Rights).

This was reversed by the Federal Court of Appeal.3 It was stated that a non-infringing alternative is legally relevant.

The purpose of the Patent Act was described as seeking to advance research and development, and to encourage broader economic activity. This was established by balancing "the benefit conferred on the public through the disclosure of a new and useful invention, and the benefit conferred on the inventor through the grant of a monopoly. Thus, in the event of infringement, under-compensation of an inventor discourages research and development, and the disclosure of useful inventions. Equally, over-compensation of an inventor chills potential competition to the extent that a potential infringer is uncertain about the scope and validity of a patent. The balance at the heart of the Act requires perfect compensation."4

In deciding this balance, the Court found that where a defendant can make and sell a non-infringing alternative, the patent does not confer a complete monopoly on the patent holder. Instead, the patent confers a share of market power upon the patentee.

Perfect compensation was said to require consideration of:

  1. what, if any, non-infringing product the defendant or any other competitors could and would have sold "but for" the infringement; and,
  2. the extent lawful competition would have reduced the patentee's sales.

The policy arguments sustained by the Judge were dismissed on appeal, with the Panel stating that the first and second policy reasons were addressed by perfectly compensating the patentee. The third policy reason regarding creating an incentive to infringe was said to be balanced by the availability of other remedies at law, such as elevated costs, injunctive relief for the remaining duration of the patent, an accounting of the infringer's profits, and punitive damages. The fourth and final policy reason was disregarded because reasonable royalty damages are only equivalent to the granting of a compulsory licence if there is no non-infringing alternative. Thus, the Court of Appeal has held that the non-infringing alternative is legally relevant to the assessment of damages.

Moving on from the legal question, the Court of Appeal stated that at least the following questions of fact will need to be considered by the Court:

  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 being economically viable?
  3. At the time of infringement, does the infringer have a sufficient supply of the non-infringing alternative to replace the non-infringing sales? Another way of framing this inquiry is could the infringer have sold the non-infringing alternative?
  4. Would the infringer actually have sold the non-infringing alternative?

On the facts of this case, Apotex failed to meet its burden that, notwithstanding its manufacturing capacity, it could and would have sold a non-infringing product. The Panel found that the alleged alternative must have been actually available to replace the infringing sales as they were made.

Furthermore, Apotex did not point to evidence that demonstrated the profits that it would have made through the non-infringing alternative would have been greater than value lost in any of the identified scenarios.

On April 14, 2016 Canada's Supreme Court dismissed Apotex's leave to appeal on this issue.5 We cannot yet be certain as to how the non-infringing alternative will be applied in Canada, but at least one other decision rejecting the non-infringing alternative defence is currently under appeal and may perhaps provide further insight for the future.6

Footnotes

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

2 (1888), 5 RPC 260, 13 App Cas 401 (HL)

3 Apotex Inc. v. Merck & Co., Inc., 2015 FCA 171

4 Ibid at para 42.

5 Apotex Inc. v. Merck & Co. Inc., 2015 FCA 171, leave to appeal to S.C.C. refused, 36655 (April 14, 2016)

6 ADIR v. Apotex Inc., 2015 FC 721, appeal in A-315-15

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