Non-infringing Alternative and Non-economic Factors

ADIR v Apotex Inc 2018 FC 346 Gagné J
            1,341,196 / perindopril / COVERSYL

This decision concerns the accounting of profits portion of a bifurcated trial. In the liability decision, Apotex had been held liable for infringement and Servier elected an accounting: 2008 FC 825 aff’d 2009 FCA 222. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. In the accounting portion of the trial, Apotex argued that it had a non-infringing alternative (NIA) which would have allowed it to compete in those markets, namely by sourcing perindopril from third party manufacturers based outside Canada. Apotex argued that the profits it would have made by manufacturing abroad should be deducted from the profits actually made by the infringing manufacture in Canada, to arrive at the differential profit to be disgorged. As discussed here, Gagné J rejected consideration of the NIA as a matter of law: 2015 FC 721. Her decision was delivered prior to the FCA decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161, in which the FCA affirmed the need to consider any non-infringing alternative in the causation analysis (as discussed here, here and here). It was therefore unsurprising that the FCA allowed Apotex’s appeal in part, remanding on the NIA issue: 2017 FCA 23 Perindopril Accounting FCA rev’g in part and remanding 2015 FC 721 (here). 

The sole question in this decision on remand was “whether any of Apotex’s profits from export sales of perindopril could have and would have been realized through use of a non-infringing alternative [NIA],” with a consequent reduction in the amount to be disgorged [2]. In a striking application of the “would” branch of the test, Gagné J held that even though Apotex could have sourced non-infringing perindopril from a third party, albeit with a delay of one year, it would not have done so. Consequently, no reduction was ordered in the award of $56,000,000 plus interest.

To elaborate, in Lovastatin Damages [49]-[50] the FCA held that the NIA must be considered where the infringer “could and would” have made and sold a non-infringing alternative. The “could” branch of this analysis is reasonably straightforward: it asks whether production using the NIA could have been implemented at a technical level, including satisfying regulatory criteria. In this case, for example [19]:

Apotex has the burden of establishing that its proposed third-party manufacturers can:

(a) complete the required technology transfer(s);

(b) obtain all marketing approvals; and

(c) manufacture the required quantities of perindopril API and/or tablets – all within the relevant timeframe.

This is primarily a matter of fact. Gagné J’s decision in this case turned on questions such as how long it would have taken the third party suppliers to receive the technology, ramp up production, and obtain regulatory approval.

One legal issue arose on the “could” branch. As discussed here, in Lovastatin Damages [79] the FCA held that in order to be considered in the differential profit analysis, the NIA had to be available “instantaneously.” In Perindopril Accounting [67], the decision remanding this case to Gagné J, the FCA held that on remand “the Federal Court would still have to consider whether at some later point in time a supplier would and could have provided replacement non-infringing tablets,” implying that the alternative does not have to be available instantaneously. It is difficult to see how to reconcile these statements, and, as discussed here, in my view the Perindopril Accounting decision is undoubtedly right in principle on this point. Gagné J followed the directions given to her by the FCA in Perindopril Accounting, and accepted that the alternative did not have to be available instantaneously [9]. She also actually applied that rule on the facts, as she held that the third party source would have been available, but with a delay of one year as compared to the timeline of infringing delivery in the real world [62]. With luck, this marks the end of the “instantaneous availability” requirement.

The “would” branch is more problematic. Gagné J held on the facts that even though it was both technically possible and “economically viable” for Apotex to manufacture abroad for sale in the UK and Australia [83], it nonetheless would not have done so, essentially because Dr Sherman was committed to manufacturing in Canada, and he would have chosen not to enter those markets at all, rather than doing so by contracting with a foreign third party [89], [91]. Therefore, Gagné J held that Servier was entitled to disgorgement of Apotex’s full profits, without any offset for the amount it could have earned in the UK and Australian markets by shifting production abroad. This means that the amount to be disgorged by Apotex is greater than the economic value of the invention to Apotex. That is not merely an implication which I am drawing from the decision: Gagné J expressly held that the “would” branch required consideration of non-economic motivations [69].

This invocation of non-economic factors appears to be a departure from, or at least a novel extension of, the FCA Lovastatin Damages decision. As discussed here, in that decision the FCA characterized the “would” branch in economic terms, saying Apotex had not satisfied that branch because “Apotex did not point to evidence that demonstrated the profits that it would have made through the non-infringing alternative would have been greater than value lost in any of the identified scenarios” [94]. While the specific holding on the burden was subsequently modified, what is relevant here is that this is a purely economic point about the relative profits of the NIA. Now, the FCA did not suggest that its holding on the facts in Lovastatin Damages exhausted the potential considerations under the “would” branch, but a focus on non-economic factors is a departure in kind.

The question then is whether it is appropriate to take non-economic factors into account under the “would” branch. In my view it is not, on a purposive interpretation of the Patent Act. Intellectual property is intended to provide an incentive to create for the benefit of the public. It is that benefit to the public which justifies IP rights, not the natural rights of the creator. As the SCC said in Théberge 2002 SCC 34 [30], quoting Millar v Taylor (1769):

It is wise in any state, to encourage letters, and the painful researches of learned men. The easiest and most equal way of doing it, is, by securing to them the property of their own works. . . .

The proper balance among these and other public policy objectives lies not only in recognizing the creator’s rights but in giving due weight to their limited nature. In crassly economic terms it would be as inefficient to overcompensate artists and authors for the right of reproduction as it would be self-defeating to undercompensate them.

While that statement was made in the copyright context, the same instrumental justification applies to the patent system: Free World 2000 SCC 66 [13]; Whirlpool 2000 SCC 67 [42]; Consolboard [1981] 1 SCR 504, 525. The patent system is not a system of moral rights, where the reward to the inventor is based on their natural rights; it is a system intended to benefit the public, and the reward to the inventor is only a means to that end.

In the remedies context, this implies that the reward to the patentee should be commensurate with the value of the invention to the public; a valuable invention deserves a large reward, but an invention which is less valuable merits a correspondingly lesser reward. As the FCA explained in Lovastatin Damages [56], this is the rationale for considering the NIA in assessing damages: it is “only by comparing the patented invention to non-infringing alternatives can a court discern the market value of the patent owner’s exclusive right, and therefore his expected profit or reward.” On the facts in this case, the objective value of the Canadian patent was the value of the one-year head start that could be obtained by manufacturing in Canada as opposed to some other country. In holding that Apotex was not entitled to offset the profits it could have made by manufacturing abroad, Apotex has been required to disgorge more than the objective value of the invention, because of Dr Sherman’s idiosyncratic non-economic motivations. This is not consistent with the instrumental rationale for the patent system: the value of an invention to society does not turn on the identity or motivations of the infringer.

On a related point, the FCA in Lovastatin Damages emphasized the “brazen” nature of Apotex’s infringement. As discussed in a footnote to this post, it was not entirely clear to me why that should be relevant, but in AstraZeneca / Omeprazole Accounting 2017 FC 726 [31], Barnes J explained (my emphasis):

Initially I did have reservations about the idea that the availability of a NIA can be informed, in part, by the willfulness of the infringement. But as I understand the decision of the Federal Court of Appeal in Lovastatin FCA, the idea is no more than this: where an infringer brazenly infringes a valid patent, or substantially courts the risk of doing so, an inference may arise that no viable substitute was available. If it were otherwise the rational choice would always be to employ the NIA and not the infringing product.

This makes sense to me, both as an explanation of what the FCA intended, and as a matter of principle (though I would suggest the inference is a weak one, since one might also infer that the infringer believed that it would be able to successfully challenge the validity of the patent). More importantly for the present discussion, Barnes J’s explanation of the relevance of “brazen” infringement is consistent with instrumental justification for the patent system, because the infringer’s intent is not relevant in its own right, as a moral factor, but as being relevant to establishing an objective factor, namely availability of the NIA.

While Gagné J quoted Barnes J on this point [77], she interpreted the relevance of brazen infringement quite differently, saying “The “would have” branch is, on the other hand, largely based on subjective components and will require the Court to make inferences from the objective evidence tendered at trial and from what transpired in the real world to determine what would likely have motivated the infringer’s conduct in the “but for” world” [79]. This was part of her rationale for considering Dr Sherman’s non-economic motivations.

For reasons just discussed, I believe that Barnes J’s understanding of the relevance of “brazen” infringement is clearly preferable as a matter of principle. I am also inclined to think that Barnes J’s understanding is a better interpretation of the FCA’s decision in Lovastatin Damages, but that decision is not clear on this issue, and Gagné J’s interpretation is certainly at least tenable.

As one level, the “would” branch of the “could and would” test makes sense, because the ultimate question is what the infringer would have done in the hypothetical world in which it did not infringe. The “could” branch makes sense because the infringer clearly would not have done anything it could not have done. And it also seems natural to say that “could have done” is not exactly the same as “would have done,” so there must be some further consideration after the “could” question is answered. Thus “could and would” emerge naturally. But as Gagné J’s decision illustrates, the distinct “would” branch has proven to be conceptually unclear. It is now up to the FCA to clarify what is meant. In particular, the FCA will have to address whether the “would” branch invokes non-economic considerations. This ultimately turns on the fundamental justification for the patent system.