Despite usually being deferred until after trial, cost considerations should seldom be an afterthought. Each party's litigation strategy from the start of the case will often dictate the costs ultimately awarded. Potential cost consequences should therefore be a relevant consideration of each strategic decision. This is particularly true in the context of pharmaceutical litigation where stakes can be high. A recent decision of the Chief Justice of the Federal Court of Canada emphasizes this point. In Allergan Inc. v. Sandoz Canada Inc., 2021 FC 186 (“Rapaflo”), the Court's $384,505.69 cost order against Allergan for its unsuccessful patent infringement claim, was ultimately defined by each party's chosen course of action in the underlying proceeding.
In Rapaflo, the Chief Justice was tasked with determining costs claimed in relation to a prior patent infringement action filed by the Allergan under Canada's Patented Medicines (Notice of Compliance) Regulations (“PM(NOC) Regulations”). That action related to Sandoz's generic silodosin product, used to treat benign prostatic hyperplasia. As we previously reported, Sandoz ultimately prevailed, with the Court finding no infringement of the patent at issue, despite dismissing Sandoz's counterclaim with respect to obviousness. The subsequent costs decision in Rapaflo is of particular interest to pharmaceutical litigants as it sets out a baseline for lump sum cost awards at 37.5% of fees, rejects a claim for set-off based on divided success, and illustrates the cost consequences of refusing an offer to settle.
Lump Sum Baseline: 37.5% of Fees
Lump sum cost awards have become increasingly common in IP disputes in the Federal Court. These awards are often well in excess of the amounts otherwise available under the applicable tariff. The Court in Rapaflo reaffirmed this trend, recognizing the unique attributes of IP proceedings that support these increased awards, including greater than average complexity, sophisticated litigants, and legal bills that far exceed those amounts contemplated by the tariff.
After finding a lump sum award appropriate, the Court in Rapaflo addressed recent caselaw that suggests lump sum awards should be based starting at the lower end of 25%-50% of fees. However, the Court determined that in complex proceedings under the PM(NOC) Regulations, a more appropriate starting point was the mid-point of the range (specifically 37.5%). The Court reasoned that the mid-point provides “a better incentive than the lower end for parties to conduct their litigation in manner that permits the Court to achieve its objective of shorter trials in the drug patent area” (Rapaflo, ¶35).
The Court recognized that Sandoz ultimately abandoned before trial two additional claims of invalidity it had pursued throughout the proceeding (i.e., overbreadth and insufficiency). The Court precluded Sandoz from recouping fees associated with those allegations and warned of an even further reduction had Allergan incurred greater expense in dealing with those allegations. In doing so, the Court cautioned future litigants from employing a strategy of advancing multiple invalidity allegations; a “culture” that “has to change”:
“I will pause to observe that had Allergan incurred substantially greater costs in relation to the overbreadth and insufficiency issues, I may very well have made a significant downward adjustment in the lump sum amount awarded to Sandoz. In the past, the practice of alleging many grounds of invalidity appears to have been ingrained in the drug patent bar. This has considerably increased the time and cost associated with drug patent disputes, and has consumed substantial scarce Court resources. This is an important part of the existing culture that has to change. The Court will not hesitate to use its discretion with respect to costs to support that change, when it considers it to be appropriate to do so…” (Rapaflo, ¶63)
No Divided Success, No Set-Off
While Sandoz succeeded on the issue of infringement, the Court dismissed its counterclaim for invalidity based on obviousness. Allergan sought set-off costs for having prevailed against Sandoz's invalidity attack, but the Court rejected Allergan's request. Though it recognized a split in the law, the Court found that it was bound to the line of cases that provide success is not divided where a defendant succeeds in an infringement action, despite advancing unsuccessful invalidity allegations. While the Court stated, “there should be consequences for having advanced and then failed to succeed on these issues” (Rapaflo, ¶42), it found that it was precluded from awarding Allergan its costs for those issues on which it prevailed, or to reduce Sandoz's award to reflect Allergan's success (Rapaflo, ¶43).
Double Costs: Offer to Settle
The Court in Rapaflo also awarded double costs against Allergan in relation to an unaccepted offer to settle. Rule 420(2) of the Federal Courts Rules provides that where a defendant makes a written offer to settle that the plaintiff does not accept, and the plaintiff obtains judgment less favourable than the offer's terms, the defendant is entitled to a doubling of its party-and-party costs from the date of service of the offer to the date of judgment on the merits. Sandoz made two offers to settle the dispute before trial. Neither offer was accepted.
Sandoz first offered to not seek damages under s. 8 of the PM(NOC) Regulations in exchange for a discontinuance of the action on a without costs basis and a payment that increased over time from $3,000,000 to $12,000,000. The Court found this first offer did not trigger Rule 420(2) because there had been no determination of liability under s. 8 of the PM(NOC) Regulations. Consequently, it could not be said that Allergan obtained a judgment less favourable than the offer, nor was it possible to ascertain whether the offer met the element of compromise (Rapaflo, ¶52).
Sandoz's second offer was that Allergan would discontinue the action without costs in exchange for a $50,000 payment from Sandoz. The Court was “sympathetic” with Allergan's position that the offer effectively constituted a “demand to surrender” rather than a meaningful compromise, as the Court noted how $50,000 may have been perceived to represent a nominal amount compared to what was a stake between the parties (Rapaflo, ¶55). However, Allergan failed to adduce evidence to support its position, and the Court found Allergan's bare assertion insufficient to conclude that Sandoz's offer to pay constituted a “demand to surrender” rather than a “real offer of compromise” (Rapaflo, ¶56). The Court found that in practical terms, Sandoz's offer provided Allergan with a more favourable outcome than it obtained, thereby meeting the requirements of Rule 420(2). The Court awarded double the amount of the costs that Sandoz would be entitled under the high end of Column IV of the tariff, which amounted to $47,000 (rounded), which is what Sandoz sought. However, the Court noted that the costs to be doubled are the party-and-party costs which “can either be the costs to which it would be entitled under the high end of Column IV of Tariff B, or such other costs as the Court may in its discretion allow” (Rapaflo, ¶57), potentially leaving the door open to an argument that a doubling of a lump sum award may be appropriate in some circumstances.
Altogether, the Rapaflo decision highlights the court's willingness to use costs as an incentive to make drug patent disputes more efficient, including by streamlining those claims at issue and by pressing for early resolution.
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.