Punitive Damages, Electing an Accounting, and Deduction of Fixed Costs

Apotex Inc. v. H. Lundbeck A/S / escitalopram 2013 FC 192 Harrington J
            CIPRALEX / escitalopram / 1,339,452

While Apotex had not launched prior to bringing its impeachment action, monetary remedies were still a live issue because it had stockpiled in the expectation of getting an NOC. When that prediction had turned out to be wrong, it sold some of the stockpiled product to affiliates in the Czech Republic and Australia [259-60], giving rise to profits and Harrington J permitted Lundbeck to elect an accounting [271]. In assessing the profit to be accounted for, Harrington J addressed one difficult remedial question, namely the deductibility of fixed costs in an accounting of profits. His approach to punitive damages and the patentee’s election of an accounting are also interesting.

Lundbeck sought punitive damages, which were refused by Harrington J [262]. He considered that neither the stockpiling itself, nor the subsequent sale of stockpiled product warranted punitive damages, particularly as Dr Sherman had stopped the sale of stockpiled product once he learned of it [263]. The refusal of punitive damages is not surprising, as they are rarely awarded in Canadian patent cases. The recent exception to this general rule is Martineau J’s Eurocopter decision 2012 FC 113. Harrington J distinguished Martineau J’s decision on the basis that in Eurocopter Martineau J “had found that Bell Helicopter had claimed Eurocopter’s invention as its own” [265]. While that was indeed one factor in Martineau J’s decision, his primary basis for his decision appears to have been simply that the infringer knowingly and intentionally infringed:

[433] On a balance of probability, the Court finds that there is clear evidence of bad faith and egregious conduct on the part of Bell. This is not a case where the infringement is small, trivial or isolated, or where the defendant is unsophisticated or ignorant. This is a case of wilful blindness or intentional and planned misappropriation of the claimed invention. Eurocopter has proven that the infringement of the '787 Patent by the making and use of the Legacy gear was not innocent or accidental.

The fact that Bell had claimed Eurocopter’s invention as it own “add[ed] to [the Court’s] outrage at the egregious conduct of Bell” [440], but it was not the central rationale. By focusing on this aspect of the Eurocopter decision, Harrington J is narrowing the effect of that decision: this suggests that Eurocopter is not the beginning of a trend favouring punitive damages. My view, as discussed in my post on the Eurocopter decision, is that Harrington J was right to return to this traditional reluctance to award punitive damages.

A second point made by Harrington J is that deficiencies in the pleadings related to remedies are more appropriately dealt with as a matter of costs, rather than by punitive damages [266].

Lundbeck also sought an accounting of Apotex’s profits, and Apotex objected [267]. There was no evidence that Lundbeck competed in the Czech and Australian markets, so if an accounting were denied, Lundbeck would have been held to reasonable royalty damages. Harrington J allowed Lundbeck to elect, saying “The election is ordinarily accepted unless there are circumstances which would warrant withholding it from the successful party. In my opinion, there are no circumstances which should deprive Lundbeck of its election” [270, citations omitted]. However, there have been a few recent cases in which an accounting was denied, including Eurocopter (here) and Merck / lovastatin 2010 FC 1265 (here). In lovastatin in particular Snider J stated that "[i]t is necessary for a party seeking an equitable remedy, such as profits, to show some basis for the exercise of equity," [617], citing Janssen-Ortho / levofloxacin 2006 FC 1234 [132] in which Hughes J had denied an accounting for that reason alone. While an accounting is discretionary, so it cannot strictly be said that there is an inconsistency in the law, there do appear to be conflicting views in the Federal Court as to whether the presumption should be in favour of, or against, allowing a free election.

The escitalopram case also raised a truly difficult question, namely how to deal with the deductibility of fixed costs in an accounting of profits. This question has long vexed the courts, both here and abroad. An accounting is an accounting of profits, so the infringer is permitted to deduct its costs from its revenues. The direct costs of producing the infringing goods are clearly deductible, but what about general overhead, such as rent, and other fixed costs which would be spent whether or not the infringing product was made? The argument against deducting fixed costs is that they would have been incurred in any event, and so are not costs caused by the infringement [293]. The view in favour of deducting a proportionate amount of the fixed costs is that a business cannot run profitably without covering its fixed costs [296]. If the business produced 20 different products, all of which infringed patents held by different patentees, and deduction of fixed costs was not permitted, the infringer would be required to account for far more profit than it actually made. This is contrary to the principle that an accounting is not punitive [272], Rivett 2009 FC 317 [25].

In this case Harrington J did not allow fixed costs to be deducted, on the basis that they were too remote [301]. As a general principle, this is arguably inconsistent with Schmeiser 2004 SCC 34. In that case the SCC held that in an accounting “[a] comparison is to be made between the defendant's profit attributable to the invention and his profit had he used the best non-infringing option” Schmeiser 2004 SCC 34 [102]. Harrington J held that this was not relevant: “This case is quite different. The only active ingredient in the Apotex product was (+)-Citalopram and so it must turn over all profit less legitimate expenses incurred” [283]. But the rule set out in Schmeiser is only an application of the general principle of causation (Schmeiser [101]), which requires a comparison between the infringer’s actual position and the position it would have been in “but for” the loss: Rivett 2009 FC 317 [21-22]. This means that it is still necessary to ask what the infringer would have done but for the infringement. As explained in my co-authored article, “Accounting of Profits in Intellectual Property Cases in Canada,” (2008) 24 CIPR 83 at 101, “A crucial question is whether or not the infringing company had excess capacity. If there was no excess capacity, then the infringing product would have displaced some alternative product, and the lost profit from that forgone alternative could be recognized as an opportunity cost or, in effect, what would have been produced becomes the most likely alternative in the economic sense. However, if there was excess capacity and no other product was displaced, then there was no opportunity lost and often no cost deduction is allowed.” See also an updated version of that paper, available from Duff and Phelps at p. 38; and Professor Tom Cotter’s excellent new book “Comparative Patent Remedies: A Legal and Economic Analysis” at 206-09. In other words, Schmeiser implies that fixed costs should be treated as an opportunity cost, and deducted when they replace a lost opportunity, but not otherwise. The details of how to implement that approach presents some difficulties which are discussed in the sources just cited.

Addendum: see also Hollister Incorporated Dansac AS v Medik Ostomy Supplies Ltd [2012] EWCA Civ 1419 [85-87] applying an opportunity cost approach to the deduction of fixed costs in an accounting of profits in a trade-mark action.