A New Framework for Determining Reasonable Royalties

Tom Cotter and I have posted on ssrn a revised version of our paper A New Framework for Determining Reasonable Royalties in Patent Litigation, which is forthcoming in the Florida Law Review. Here is the abstract:

Conventional analysis often assumes that there are only two theoretical options for calculating a reasonable royalty in patent disputes: a “pure ex ante” approach, under which a court reconstructs the hypothetical bargain the parties would have struck prior to infringement, based on the information available to them at that time; and a “pure ex post” approach, under which the court considers the bargain the parties might have reached as of some later date such as the date of judgment. The first approach avoids patent holdup — basing the royalty partly on the infringer's sunk costs — but cannot easily explain other longstanding features of how royalties are calculated, and can lead to awards that reflect the parties’ erroneous ex ante expectations. By contrast, the pure ex post approach uses more accurate information about the invention’s actual value, but it also enables the patentee to capture some of the patent’s ex post holdup value. In this Article, we show that a “contingent ex ante” framework, under which the court reconstructs the bargain the parties would have reached ex ante, based on all relevant information that is available ex post, is superior to both of the conventional approaches. More specifically, our framework enables courts to base the royalty on the most accurate information available of patent value while avoiding the holdup risk arising from the pure ex post approach. We analyze how courts can apply our approach in various settings, including cases involving SEPs, sequential infringement, regulatory uncertainty, and unexpected exogenous events.

Invalidity of Tadalafil Formulation Patent Upheld

Eli Lilly Canada Inc v Mylan Pharmaceuticals ULC (NOC) 2015 FCA 286 Dawson JA: Near, Boivin JJA 2015 FC 178 aff’g de Montigny J
            2,379,948 – Tadalafil formulation – CIALIS

In my post on de Montigny J’s Tadalafil formulation (NOC) decision, which held Lilly’s ‘948 patent to be invalid and not infringed, I noted that “The decision turned entirely on the facts. As counsel for Lilly stated at one point, ‘a lot of it just comes down to which expert the Court is going to go with’.” It is accordingly unsurprising that the FCA, in very brief reasons, has now affirmed “substantially for the reasons given by the Judge” [5]. The main legal ground of attack was that at one point de Montigny J had incorrectly articulated the “obvious to try” test, but the FCA held that on the whole it was clear that de Montigny J understood and applied the correct test, and so the error in his initial articulation of the test was immaterial [4].

Complete Code Bars Class Action for Recovery of Profits from to Invalid Patent

Low v Pfizer Canada Inc, 2015 BCCA 506 Garson JA: Bennett, Savage JJA rev’g 2014 BCSC 1469 Smith J (blogged here).
            2,163,446 / VIAGRA / sildenafil

In Low v Pfizer, the BCCA refused to certify a class action seeking disgorgement of the excess profits earned by Pfizer on sales of Viagra during the period when Pfizer’s market position was protected by a patent which was ultimately held to be invalid. The BCCA decision was based on three points: (1) the plaintiff was essentially seeking to create a tort of breach of statute, contrary to Saskatchewan Wheat Pool [1983] 1 SCR 205; (2) the patent regulatory regime is in any event complete code; (3) and the claims in unjust enrichment and unlawful interference with economic relations would fail on their own merits independently of the complete code argument. From a policy perspective, the BCCA was concerned about “tortifying” regulatory law and upsetting the complex balance of patent incentives that have been established by the legislature.

Pre-Amalgamation Settlement Agreement Does Not Bar Action by Amalgamated Entity

Pfizer Canada Inc v Teva Canada Ltd 2015 FCA 257 Gauthier JA: Webb, Near JJA
            2,163,446 / VIAGRA / sildenafil

In this decision the FCA held that a pre-amalgamation settlement agreement entered into by one of two subsequently amalgamated entities does not bar an action by the amalgamated entity based on pre-amalgamation events affecting the other entity.

In 2006-08, Teva (then Novopharm) and ratiopharm both filed ANDS for sildenafil. Pfizer sought orders of prohibition in respect of both under s 6 of the PM(NOC) Regulations. Pfizer and ratiopharm settled, and under the terms of the Agreement ratiopharm agreed not to launch until expiry of the patent. Teva and ratiopharm then amalgamated. The s 6 action against Teva proceeded, and Teva ultimately prevailed: Viagra 2012 SCC 60. The Minister granted an NOC in respect of Teva-sildenafil and Teva then brought a s 8 action for damages for having been keep out of the market by the NOC proceeding. Teva did not claim any damages relating to ratio-sildenafil, but only in respect of Teva-sildenafil. Pfizer brought a motion for summary judgment on the basis that Agreement entered into with ratiopharm barred the action by Teva. Pfizer acknowledged that when the Agreement was entered into, the parties did not intend to cover Teva’s product, but it argued that the scope of the Agreement changed as a result of the amalgamation [21]-[22]. Not very surprisingly, the FCA, affirming O’Keefe J, held that the Agreement only bars Teva from seeking s 8 damages in respect of ratio-sildenafil, and Teva's action in respect of Teva-sildenafil can proceed: [25].

Whether HAL HCl is an ester of ALA HCl is a Matter of Fact

Photocure ASA v Canada (Health) 2015 FC 959 Kane J
            hexaminolevulinate hydrochloride / CYSVIEW [aka HEXVIX]

In this application for judicial review Kane J declined to interfere with the Minister’s decision refusing to add Photocure’s drug CYSVIEW to the Register of Innovative Drugs. The key issue was whether the Minister’s decision involved matter of law or matter of fact. The case does not really raise any questions of general legal interest, though there was some suggestion by Kane J that whether the Minister’s interpretation of the Data Protection Regulations is to be reviewed on a correctness standard turns on the particular legal issue.

Is Minerals Separation Still Good Law?

Leo Pharma Inc v Teva Canada Ltd 2015 FC 1237 Locke J
            2,370,565 / calcipotriol & betamethasone / DOVOBET

In this NOC proceeding Locke J granted an order of prohibition as infringement of multiple claims was conceded, and he held that Teva’s allegations of obviousness, lack of utility and insufficiency were not justified [193]. The holding turned on the facts of the case, but the claim construction argument raises the question of the continued vitality of Minerals Separation.

The claimed invention is a dermal cream formulation for the treatment of psoriasis. Vitamin D and vitamin D analogues, specifically calcipotriol, were previously known for treatment of psoriasis, as were corticosteroids (such as betamethasone), and these were commonly used sequentially. There was consequently a motivation to develop a combined formulation, but the two drugs could not simply be mixed because they were pH incompatible, which is to say that calcipotriol was unstable at any pH value which was favourable to the stability of a corticosteroid, and vice versa [54], [55], [108]. Leo discovered a stable formulation containing these compounds plus the solvent POP-15. Claim 1 was to a formulation comprising vitamin D or a vitamin D analogue (component A), a corticosteroid (component B) and a solvent selected from a large class, while Claim 17 specified POP-15 as the solvent. (Claim 17 was the only claim held to be useful and infringed. The utility of the other infringed claims was not addressed.)

The patent itself disclosed that a formulation using propylene glycol as a solvent was unstable [19]. Teva argued that because the wording of the claims is non-exhaustive (using "comprising") and there is nothing in the claims to suggest that they are limited to compositions that are useful in treating psoriasis, the claim should therefore be construed as encompassing formulations with an additional  component, such as propylene glycol, which would not be useful [89]. More generally, if Teva’s argument were sound, any claim using “comprising” language would be invalid unless it was expressly limited to safe or effective formulations, as a claim not so limited would encompass the formulation plus Compound X, where Compound X is a poison.