Inequitable Conduct by Patentee: Defence v Reduction of Damages

Alcon Canada Inc v Actavis Pharma Co 2015 FC 1323 Locke J
            2,447,924 / olopatadine solution / PATADAY

As a partial defence to Alcon’s infringement action, Actavis alleged that Alcon engaged in inequitable conduct. This pleading has survived a motion to strike, and Locke J’s decision is interesting both on the substantive issue and for his thorough analysis of the case law relating to the standard of review of the Prothonotary’s decision.

The ‘924 patent covers a formulation of 0.2% olopatadine, as found in Alcon’s PATADAY. Actavis alleged that Alcon conspired, in breach of the Competition Act, to ensure that Actavis could not sell its non-infringing 0.1% olopatadine product, and this inequitable conduct by Alcon should partially offset any damages resulting from Actavis’s (alleged) infringement [5]. (The exact nature of the conduct was not specified – perhaps product hopping?) It was this pleading that was the subject of the motion to strike.

This is an intriguing argument, which I discuss in more detail below, but Locke J first had to deal with the almost equally complex question of the standard of review to be applied to the Prothonotary’s decision.

Under Aqua-Gem [1993] 2 FC 425 discretionary orders of prothonotaries ought not to be disturbed on appeal to a judge unless [8]:

a. they are clearly wrong, in the sense that the exercise of discretion by the prothonotary was based upon a wrong principle or upon a misapprehension of the facts, or

b. they raise questions vital to the final issue of the case.

If the prothonotary refuses to strike a pleading, can this ever be vital to the final issue? After all, if the pleading stands, the result of the motion will never be determinative of the outcome; but on the other hand, a motion on a central issue might reasonably be said to be “vital”. As Locke J put it, “If one focuses on what was sought in Alcon’s motion, it is final. However, if one focuses on the result of the motion, it is interlocutory” [12, original emphasis].

Locke J reviewed the case law on this issue, noting an apparent split within the Federal Court [18], and concluded that the proper question is whether what was sought was vital [19]. This means that even a refusal to strike might in principle be “vital” to a final issue.

What, then, is meant by “vital”? Again Locke J thoroughly reviewed the case law. He concluded that the question is whether “the paragraphs that Alcon seeks to have struck in the present case are more in the nature of ‘isolated allegations’ or rather ‘important or central allegations’” [24]. On the particular pleadings at issue, Locke J held that the paragraphs Alcon sought to have struck were isolated allegations not vital to the case [26]. Consequently, a deferential standard of review should be applied; the order of the prothonotary should not be disturbed unless it is “clearly wrong” [27].

Locke J then turned to the second branch of the conjunctive Aqua-Gem test: was the refusal to strike “clearly wrong”? On the substantive point, Alcon relied on Sanofi FCA 2008 FCA 175 [16], [18], where the FCA said that “a party claiming equitable relief will not be disentitled to that relief by virtue of inappropriate conduct on its part unless that conduct relates directly to the subject matter of that party's claim and the equitable relief sought,” and in a patent case this means that the alleged conduction must “cast a shadow” over the patent rights themselves, or the question of whether infringement occurred [29]. It was not disputed that the conduct alleged in this case did not do either of these things [30], and so Alcon argued that the pleading must be struck.

Locke J rejected this, saying that the Sanofi test was only applicable to equitable relief, and the allegations in this case concerned damages [32]. On its face, this makes sense. Equitable relief is discretionary, and inequitable conduct or “unclean hands” is one factor that a court may take into account in exercising its discretion. Damages are as of right, and without any discretion to be exercised, so unclean hands are not relevant. Ex turpi causa might still be relevant, as a rule of law, but the bar is probably substantially higher than unclean hands, at least according to the UKSC in Servier v Apotex [2014] UKSC 55, though see here suggesting that simple illegality is enough. Ex tupri causa was not raised in this case, as Actavis alleged only “inequitable conduct.”

But a holding based on the distinction between law and equity tends to seem formalistic, particularly when parallel doctrines such as unclean hands and ex turpi causa are available. Actavis clearly raised an allegation of contravention of the Competition Act, and it would be unsatisfactory if the whether pleading stood turned on whether it used the words “unclean hands” or “ex turpi causa.” Similarly, Locke J’s holding on this point implies that if Alcon had sought an accounting of profits, Actavis’ defence would have been struck. It is not evident why unclean hands should bar one monetary remedy but not another, and to say one remedy is legal while the other is equitable is a formalistic answer.

Locke J gave another reason for allowing the pleading to stand which I find more satisfactory. He noted that [37, my emphasis]:

Actavis has indicated that its allegations in issue are not intended to deny Alcon damages for infringement simply because Alcon engaged in the alleged inequitable conduct. Rather, Actavis’ allegations seek to reduce (or eliminate) those damages to reflect the effect of any improperly increased sales of Alcon’s patented product.

There is an important distinction between reducing damages and raising a complete defence. As the UKSC said in Servier, [13] “The doctrine [of ex turpi causa] necessarily operates harshly in some cases, for it is relevant only to bar claims which would otherwise have succeeded. For this reason it is in the nature of things bound to confer capricious benefits on defendants some of whom have little to be said for them in the way of merits, legal or otherwise.” Denying a claim entirely may be disproportionate to the wrong, unless the wrong is very serious, which is largely why the USKSC set a high bar for what constitutes “turpitude.” The same logic applies equally in the case of equitable remedies – in a way, even more so, since it is hardly equitable to deny a patentee’s claim entirely as a punishment for a relatively minor fault. That reasoning is consistent with the caselaw holding that inequitable conduct will only be allowed to stand as a defence if it casts a shadow on the title to the patent. That is a high bar, and it would be wrong to allow any recovery if the patentee would not have a patent at all but for its wrongful conduct.

But if the patentee has indeed committed some wrong that is related to its claim, neither is it appropriate to ignore that wrong entirely. The answer lies in the damages calculation. As I said in my post on Servier, “Instead of using the blunt hammer of ex turpi causa, the tension should be resolved with the finer sword of damages.”

In this case, Actavis’ argument can be cast in terms of “but for” causation. Actavis in effect alleged that Alcon had wrongly increased its sales of its PATADAY product at the expense of Actavis’ non-infringing product, and to the extent that Actavis’ infringing sales captured some part of the PATADAY sales that Alcon would not have obtained but for its wrongful conduct (because the sales would have been captured by Actavis’ non-infringing product), Alcon should not be able to recover damages in respect of those sales [6]. In constructing the “but for” world for the purpose of assessing damages caused by the infringement, the infringer is assumed to have acted properly, either by avoiding infringement or taking a licence. The question is whether, in constructing the but for world, we should also assume that the patentee acted properly, by not breaching the Competition Act, or avoiding whatever other wrong is alleged. When the wrong is independently actionable, as was the case in Servier (infringement in Canada, raised as defence to an undertaking in damages in respect of UK sales), or under s 45 of the Competition Act, as alleged in this case, there is a judicial economy argument for saying that all parties should be assumed to have acted properly, so as to avoid the need for a separate action. This is particularly so when the evidence relevant to the remedy in both cases is related. On the other hand, when the wrong is not independently actionable, as with the allegations in this case based on ss 75, 76 and 78 of the Competition Act, the question is more difficult, as taking into account the patentee’s wrong would effectively give the infringer a private remedy that it would not otherwise have had, but refusing to take it into account would allow the patentee to compound the harm done by its wrongful conduct.

This analysis is largely consistent with the prior cases. In Procter & Gamble (1990), 29 CPR(3d) 545 (FCA) the allegation was predatory pricing which harmed the defendant, and so might have been relevant to quantum of damages; but it was pleaded as a complete defence, and the pleading was struck. In Visx (1994), 58 CPR(3d) 51 (FCTD) the allegation was that the patentee had made unjustified allegations of infringement against third parties, so it would not even have been relevant to quantum, and it was pleaded as a complete defence. The pleading was struck. Volkswagen [2001] 3 FC 311 (FCA) is a bit different. It was a grey marketing case in which VW pursued the grey marketer for copyright infringement. The allegation was that VW’s actions in seeking to prevent grey marketing were a restraint of trade in breach of the Competition Act, and the pleading was allowed to stand as a complete defence. The FCA distinguished Visx and Procter & Gamble on the view that “it is at least arguable that in this case there is a sufficient relationship between the copyright and the unclean hands defence that the equitable remedy might not be granted.” In my view there is a more direct distinction. If the copyright owner’s rights are exhausted by the authorized foreign sale, which was the essence of the defendant’s pleading, then this would indeed serve as a complete defence, so there is nothing wrong with allowing it to stand as such.

Role of Product Monograph in Inducing Infringement

Bayer Inc. v. Pharmaceutical Partners of Canada Inc. / moxifloxacin (NOC) 2015 FC 797 Strickland J aff’d 2016 FCA 13 Stratas JA (sub nom Bayer Inc v Fresenius Kabi Canada Ltd) aff’g 2015 FC 388 Lafrenière J
            2,378,424 / moxifloxacin / AVELOX IV

In Wednesday’s post I noted that it was difficult to put FCA’s holding in this case in context, without the benefit of Strickland J’s FC decision. Today, the court has belatedly released Strickand J’s decision, which is indeed very helpful.

As outlined in my previous post, the ‘424 patent is a formulation patent claiming an aqueous formulation of moxifloxacin and from 0.4% to 0.9% (w/v) of sodium chloride [6]. The moxifloxacin for injection product for which PPC (since rebranded to Fresenius Kabi Canada) was seeking an NOC is capable of being used post-sale to make the formulation, though it can also be used for non-infringing uses. In the motion giving rise to this appeal, Lafrenière J struck the portions of Bayer’s application for an order of prohibition alleging infringement or inducing the infringement of the ‘424 patent. Only the inducement issue was appealed [4].

As discussed at length in my post on Lafrenière J’s decision, the law of inducement raises some very difficult issues in a case such as this one where the allegedly infringing product is capable of both infringing and non-infringing uses. On the one hand, the public should not be denied the benefit of competition for non-infringing uses, but on the other hand, the patentee should be able to effectively enforce its patent rights. Because of the first consideration, if a product is capable of substantial non-infringing use, the mere fact that it can also be put to an infringing use, or even that it will inevitably be put to an infringing use in some instances, is not sufficient to establish infringement. As the FCA explained in AB Hassle v Apotex / omeprazole, 2002 FCA 421:

[57] Thus Apotex cannot be prevented from obtaining a NOC solely on the basis that it will sell omeprazole. If it were otherwise, then serious policy issues would arise. If there was any likelihood that a patient would consume a generic product for a patented use, then the generic product would not be approved. This would prevent new uses from being approved for existing drugs because there is always the possibility that someone somewhere will use the drug for the prohibited, patented purpose. This would result in a real injustice: since a generic company cannot possibly control how everyone in the world uses its product, the prevention of the generic from marketing the product would further fortify and artificially extend the monopoly held by the patent holders. The patent holder would, therefore, effectively control not just the new uses for the old compound, but the compound itself, even though the compound itself is not protected by the patent in the first place. The patent holders, as a result, would obtain a benefit they were not meant to have. In the end, society would be deprived of the benefit of new methods of using existing pharmaceutical medicines at a lower cost.

For this reason, even though the generic’s sale of its product might inevitably result in direct infringement by another party, “something more” is required to establish that the generic has induced infringement [49]. Under the second branch of the test in Corlac v Weatherford 2011 FCA 228, [162], there must be some act by the accused inducer which can be said to be the cause the direct infringement. That act may consist of instructions accompanying the product which direct or instruct the purchaser to use the product in an infringing manner, as with the instruction manual included in the package of parts shipped to the purchaser in Windsurfing, which instructed the purchaser to do only one thing with the enclosed parts, namely to assemble them into an infringing windsurfer.

It is now well established in Canadian law that product instructions can constitute the necessary act of inducement, as in Windsurfing, where the sole and inevitable result of carrying out the enclosed instructions was to construct an infringing windsurfer. But in less extreme cases, where the product has substantial non-infringing uses and the directions are more equivocal, the question as to whether the instructions constitute inducement is fact specific.

In the pharmaceutical context, the product monograph corresponds to the product instructions more generally, and it may suffice to establish inducement: 2007 FCA 167, [11]. But whether a particular monograph does actually constitute inducement is a matter of fact, and there is no bright line rule. Even “subtle” references in a monograph may cumulatively establish inducement, as in Genpharm 2003 FC 1443 [155] aff'd 2004 FCA 413; and see also Abbott Laboratories 2006 FC 1411 aff’d 2007 FCA 251. But on the other hand “an inducement to infringe generally cannot be inferred from a mere reference to the new use in the product monograph, for example, in the course of explaining contraindications or drug interactions, or as part of a list of scientific references” Sanofi-Aventis v Novopharm 2007 FCA 167 [11] rev’g 2006 FC 1547; and see also Lundbeck v Ratiopharm 2009 FC 1102.

In this case, the key passage was one in which the product monograph described PPC’s moxifloxacin injection product as being “compatible” with six different intravenous solutions, one of which, sodium chloride, would have resulting in an infringing formulation:

Moxifloxacin injection is compatible with the following intravenous solutions at ratios from 1:10 to 10:1:

•→0.9% Sodium Chloride Injection, USP

•→IM Sodium Chloride Injection

•→5% Dextrose Injection, USP

•→Sterile Water for Injection, USP

•→10% Dextrose for Injection, USP

•→Lactated Ringer’s for Injection

Strickland J held that “the PPC Product Monograph does not direct nor does it instruct the co-administration of PPC-Moxifloxacin with 0.9% sodium chloride. It merely identifies that it is compatible with that solution” [61] (and see also [65]), and this therefore did not rise to inducement. Strickland J distinguished Genpharm and Abbott Laboratories on the facts.

While it is always difficult to compare different factual situations, in my view, Strickland J’s finding is consistent with the prior case law. The product monographs in Genpharm and Abbott Laboratories went further toward encouraging or instructing the infringing use, and the statement in this case was closer the passing references disparaged in statements in Sanofi-Aventis.

We now have a number of cases assessing inducement by statements in the product monograph, and it seems to me that on the whole the law is reasonably coherent and consistent, though fact-specific. Statements in a product monograph may suffice to establish inducement, but not any reference to an infringing use will suffice; the references in the product monograph must pass a threshold before they was be sufficient on their own to establish inducement. While there is no specific verbal formulation for that threshold, the cases strike me as being reasonably consistent in that statements that have been held to establish inducement have pointed more strongly to the infringing use that those where the inducement argument has failed.

On a final point, Strickland J made the following remarks almost in passing (my emphasis):

[65] Bayer has also submitted that PPC should have refrained from including 0.9% sodium chloride in the PPC Product Monograph. However, as seen from the above, Dr. Dresser’s Affidavit clearly states that the list of compatibilities with other drugs or solutions “is required to be set out in the Product Monograph” (Dresser Affidavit at para 12). Therefore, omitting this information was not an option open to PPC. Nor do I view the stating of this necessary information as encouraging or directing infringement.

If it is true that the impugned statement is required for marketing authorization, this strikes me as a very strong argument in favour of saying there is no inducement. The central problem of the law of inducement is to ensure that the public is not deprived of the product for the non-infringing uses. If the statement that is relied on as establishing inducement must be included for the product to be sold, then a finding of inducement would mean that the public would necessarily be deprived entirely of the non-infringing uses. In such a case, there is a strong argument that it is better to leave the patentee to its remedy in direct infringement, or to require it to establish inducement by other facts, such as direct marketing.

On the Facts, Product Monograph Does Not Induce Infringement

Bayer Inc v Fresenius Kabi Canada Ltd / moxifloxacin (NOC) 2016 FCA 13 Stratas JA, aff’g 2015 FC 797 Strickland J aff’g 2015 FC 388 Lafrenière J (here) (sub nom Bayer Inc v Pharmaceutical Partners of Canada Inc)
            2,378,424 / moxifloxacin / AVELOX

The ‘424 patent is a formulation patent claiming an aqueous formulation of moxifloxacin and from 0.4% to 0.9% (w/v) of sodium chloride. Fresenius Kabi’s moxifloxacin product is capable of being used post-sale to make the formulation, though it can also be used for non-infringing uses. In the motion giving rise to this appeal, Lafrenière J struck the portions of Bayer’s application for an order of prohibition alleging infringement or inducing the infringement of the ‘424 patent. Only the inducement issue was appealed. While Strickland J’s decision does not appear to be publicly available, we are told that “the Federal Court reached the same result as the Prothonotary for substantially the same reasons” [3]. As discussed at length in my post on Lafrenière J’s decision, the law of inducement raises some very difficult issues, particularly in a case such as this one, where the allegedly infringing product is capable of both infringing and non-infringing uses.

While the law on inducement is complex, those complexities are not necessarily raised on the facts of any particular case. In my post on Lafrenière J’s decision I pointed to the statement in the Product Monograph that “Moxifloxacin injection is compatible with the following intravenous solutions at ratios from 1:10 to 10:1: [including] 0.9% Sodium Chloride Injection, USP,” saying that “As I understand the facts, the first use would be infringing, though the following five would not.” But reading a decision is not the same thing as reading the full record, and in this case the FCA stated that the FC “found as a factual matter that the product monograph in question does not instruct or direct that Fresenius’ product is to be co-administered or co-administered with 0.9% sodium chloride (at paragraphs 59-61).” That being the case, the appeal was dismissed. This would seem to imply that a statement on a Product Monograph that a product can be used for an infringing purpose does not in itself constitute “instruction or direction” and therefore cannot constitute inducement. However, without Strickland J’s decision, it is difficult to put this holding in context.

Stratas JA also discussed the standard of review. He noted that on the authority of Housen 2002 SCC 33, the appropriate standard of review would be palpable and overriding error, but Federal Court precedent is that the standard of review is different in an appeal from a Rule 51 appeal; the FCA “may interfere with the Federal Court’s decision where the Federal Court had no grounds to interfere with the Prothonotary’s decision or, in the event such grounds existed, if the decision of the Federal Court was arrived at on a wrong basis or was plainly wrong” [6]. Stratas JA strongly suggested that the time has come to abandon this different standard of review and apply the Housen standard [7], but given that he had not received full argument on that issue, the lower standard would be applied, and in any event the standard of review made no difference in the result [8]. This is a clear invitation to argue that the Housen standard should apply in an appeal from a Rule 51 appeal.

UPDATE: Strickland J's FC decision has now been released: see here.

Siebrasse & Cotter on Judicial Determinations of FRAND Royalties

Tom Cotter and I have just posted on SSRN a draft of a paper titled Judicial Determinations of FRAND Royalties, which will be a chapter in the forthcoming Cambridge Handbook of Technical Standardization Law (Jorge L. Contreras ed., Cambridge University Press). Here is the abstract:

This chapter from the forthcoming Cambridge Handbook of Technical Standardization Law reviews the principles and methodologies courts have used for calculating royalties for the infringement of standard-essential patents (SEPs) that the owner is obligated to license on fair, reasonable and non-discriminatory (FRAND) terms. As we show, the decisions thus far -- including the U.S. decisions in Microsoft, Innovatio, Ericsson, and CSIRO, the Japanese Apple v. Samsung judgment, and Chinese Huawei v. InterDigital matter -- have tended to focus on a relatively small number of additional considerations beyond the generally applicable principles used for calculating reasonable royalties. Although reasonable minds may disagree with specific features of the relevant decisions, overall the courts (correctly, in our view) have emphasized that the owner of an SEP should receive a royalty that is proportionate to the technology’s contribution to the value of standard—a principle which, when properly applied, reduces concerns over the potential for SEPs to induce holdup and royalty stacking.

Comments welcome.

No New Cases Released over the Holidays

No new patent / NOC / data protection cases were released over the holiday break. Keep in mind that I do not normally blog on procedural cases. To keep up with all IP cases, I recommend Alan Macek's IPPractice Daily IP News service.