Canada: Federal Court Of Appeal Clarifies Key Damages Concepts

Late last month, the Federal Court of Appeal released its long-awaited decision in Apotex Inc. v. Eli Lilly and Co., 2018 FCA 217. In the underlying litigation, the Federal Court awarded damages to Eli Lilly because Apotex had infringed Eli Lilly's patented process for making a cephalosporin antibiotic. The infringement action began in 1997. At trial in 2009, Apotex was held to have infringed Eli Lilly's patent.1 The Federal Court of Appeal dismissed Apotex's appeal from the bench and leave to appeal to the Supreme Court of Canada was refused.2

At the damages reference in 2014, the Federal Court awarded damages for infringement in the amount of $31 million, and prejudgment interest in the amount of $75 million.3 The appeal from the damages reference was heard in August 2016, but the decision remained under reserve in February 2018, some 18 months later. The Federal Court of Appeal convened a new hearing in September 2018. The decision was released last month. While the appeal decision affirmed the majority of the Federal Court's judgment, it set aside the $75 million prejudgment interest award, and remitted this issue back to the Federal Court for redetermination.

In the course of its decision, the Federal Court clarified a number of key patent damages concepts.

Hypothetical Sales Must be Lawful

Apotex alleged that it would have deployed a non-infringing alternative ("NIA") in defence to Eli Lilly's damages claim. Eli Lilly countered that, even if Apotex had deployed the NIA, the NIA would have infringed a different patent from the patent at issue in the litigation so far. Therefore, Eli Lilly argued that Apotex's alleged NIA was not a true alternative to the infringing process.

The Federal Court of Appeal agreed, holding that an alleged hypothetical sale had to be lawful in the sense that it did not infringe any patents, not just the patent at issue in the litigation:

Until this appeal, the lawfulness of an NIA on which a defendant was relying had never been at issue at the reference stage. That is not to say, however, that it is not an issue that may be validly raised. It goes without saying that to be a real alternative, an NIA must be lawful, that is to say, non-infringing. This applies to more than just the patent(s) in suit in the proceedings.4

Non-Infringing Alternatives Must be Objectively Economically Viable

Apotex also alleged that it would have deployed its NIA even though it would have been unprofitable because it was primarily interested in expanding its portfolio of generic drug products, rather than per-product profitability.5

The Federal Court of Appeal rejected this argument, holding that "the court's goal is to assess the real value of the patented invention(s)", and that "the court must be satisfied that the NIA invoked was objectively an economically viable substitute at the relevant time. To say otherwise would mean that the value of a patent could be artificially reduced by an infringer who behaves in an unorthodox manner, or whose adoption of a substitute is motivated by reasons other than economic ones."6

That said, the Court maintained that "the subjective perspective of the infringer may be relevant to the question of whether the infringer "would" have used the NIA."7

Damages for Non-Infringing Sales are Available

At the damages reference, the Federal Court awarded Eli Lilly damages for Apotex's sales of non-infringing cefaclor that were nonetheless caused by Apotex's infringement. On appeal, Apotex challenged those damages as "beyond the scope of the Patent Act...too remote, and...not contemplated in the Liability Decision."8

The Federal Court of Appeal rejected Apotex's argument, holding that such damages are well recognized in the Canadian patent jurisprudence and that the Federal Court had not erred.9

There is No One "Correct" Method for Determining an Appropriate Royalty

At the damages reference, the parties had agreed that a royalty should apply to Apotex's infringing sales that Eli Lilly would not have captured. On appeal, Apotex argued that the Federal Court should have attributed to it the knowledge that it had an NIA when negotiating the hypothetical royalty rate. According to Apotex's theory, armed with this knowledge, Apotex would have known that it would never have made infringing sales, which would have significantly reducing the applicable royalty rate.10

The Federal Court of Appeal disagreed, holding that "there is no single correct methodology" and that there was adequate evidence before the Court to decide as it did.11

Compound Interest Damages Must be Proved

Finally, at the damages reference, the Federal Court had awarded compound prejudgment interest on the damages award, holding that there was a presumption of compound interest.12 The Court held that, at common law, there was no such presumption and that compound interest, if claimed, must be proved.13

Footnote

1 Eli Lilly and Company v. Apotex Inc., 2009 FC 991.

2 Eli Lilly and Company v. Apotex Inc., 2010 FCA 240,  leave to appeal to SCC refused, 2010 SCCA No 434.

3 Eli Lilly and Company v. Apotex Inc., 2014 FC 1254.

4 Apotex Inc. v. Eli Lilly and Co., 2018 FCA 217 at para. 55 (emphasis added).

5 Ibid at paras. 44(s), 103.

6 Ibid at para. 73 (emphasis in original).

7 Ibid at para. 72.

8 Ibid at para. 112.

9 Ibid at paras. 114, 127.

10 Ibid at para. 136.

11 Ibid at paras. 134, 138-39.

12 Ibid at para. 155.

13 Ibid at paras. 156, 158-59.

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