FCA imposes "could and would" test to assess non-infringing alternative

The Federal Court of Appeal has released its reasons in the appeal of Justice Snider’s lovastatin damages decision. Justice Snider awarded Merck $119 million, plus interest, as damages for Apotex’s infringement of Merck’s patent covering its lovastatin product. The FCA dismissed Apotex’s appeal (copy available here).

The primary issue on appeal was whether a non-infringing alternative (NIA) can be considered in law when calculating a patentee’s damages for infringement. Taking a bold step away from established Canadian law, the FCA found that a NIA can be so considered.  However, the Court imposed a strict test requiring that the infringer both could and would have used the NIA had it not used the infringing product.

Background

In Canadian law, a patentee who successfully sues for infringement can elect to claim for its damages or for an accounting of the infringer’s profits. In this proceeding, Merck successfully argued at trial that its patent was valid and that Apotex infringed (the “liability phase”).¹ Merck then elected to make a claim for damages, which was heard by way of a second trial solely on this issue (the “damages phase”).² This is an appeal from the reasons relating to the damages phase.

Damages, as the FCA noted,³ are meant to compensate a patentee who has suffered loss as a result of patent infringement.

Damages assessments are contrasted with an accounting of the infringer’s profits in that an accounting of profits focuses on the windfall gained by the wrongdoer rather than the damages of the patentee. In other words, claims to damages focus on the patentee’s business, while an accounting of profits targets the wrongdoer’s actions.

Thus, until now, damages cases did not take into account whether the infringer would and could have avoided infringement.  It mattered not what the infringer could have or should have or would have done – but did not do. The relevant questions were: did the infringer’s actions harm the plaintiff and then, if so, what was the cost of such harm?⁴

In other words, NIA arguments were not permitted under Canadian law when calculating a patentee’s damages for patent infringement.

The trial decision

At trial, Justice Snider affirmed that NIA is not the law of Canada. In particular, she held that allowing a NIA defence would:

• Render the Patent Act’s grant of exclusivity illusory;
• Judicially sanction what amounts to a licensing system such as that repealed by Parliament as being inconsistent with Canada’s international obligations;
• Create an incentive to infringe; and
• Inadequately compensate the patentee.

The FCA decision: NIA is allowable under limited circumstances

Diverging from  established Canadian and U.K. jurisprudence, the FCA in the present decision opened the door to the NIA defence in Canada. Four minimum criteria to be assessed by future Courts were set out [emphasis in FCA’s decision]:

[73] When considering the effect of legitimate competition from a defendant marketing a non-infringing alternative, a court is required to consider at least the following questions of fact:

i) Is the alleged non-infringing alternative a true substitute and thus a real alternative?

ii) Is the alleged non-infringing alternative a true alternative in the sense of being economically viable?

iii) At the time of infringement, does the infringer have a sufficient supply of the non-infringing alternative to replace the non-infringing sales? Another way of framing this inquiry is could the infringer have sold the non-infringing alternative?

iv) Would the infringer actually have sold the non-infringing alternative?

This “could and would test” set out by the FCA is not a balancing exercise. The NIA defence is not available if an infringer fails any aspect of the test.

The FCA also made clear that there is a persuasive burden on the infringer to prove that it would have used the NIA. Further, it is required that the NIA be available to the infringer instantaneously “at the moment of infringement.”

Rationale for the decision

The FCA’s over-riding justification for introducing NIA into Canadian law was its opinion that the patentee would be over-compensated in situations where an NIA existed that an infringer could and would have used.⁵

In coming to this conclusion, the FCA relied upon its interpretation of the principle of causation, on select U.S. jurisprudence, and on the Supreme Court’s decision in Monsanto v. Schmeiser.⁶ All three of these supporting bases raise interesting questions.

Causation

As traditionally applied, causation and the assessment of damages are discrete inquiries. Only once causation is established can damages be assigned to a particular act giving rise to injury suffered from the act. However, damages can be, and are, assessed independent to causation. For example, parties may agree before trial on the quantum of damages suffered, but without any admission of causation (i.e., I agree that appropriate compensation for your injury is $5,000, but I did not cause your injury and therefore I am not liable). Further, causation requires the plaintiff to meet a burden (balance of probabilities), while the broad axe principle is applied to assessing damages. In short, quantification of damages and causation are distinct concepts.

However, in its reasons the FCA co-mingled the issue of causation with the quantification of damages, stating that “it is necessary to understand the role of causation in the quantification of compensatory damages.” The FCA went on to criticize the trial judge for “refusing to apply principles of causation to the actions of Apotex.” Applying causation-type principles, the FCA concluded that “awarding the patentee full damages for lost profits in every case will, therefore, sometimes over-compensate the patentee”.  

Yet it is not apparent why this should be so.  Previously, it was the law that if the infringer’s actions caused damages then those damages were quantified and ordered paid.  The structure of the damages analysis itself, which required causation of harm to be proved, inherently guarded against overcompensation.

The FCA asked the question, whether “damages be...restricted so that a court is required to disregard legitimate competition from an infringer.” The Court then asked whether “potential legitimate competition from the infringer [is] a legally relevant consideration.”⁷ Previously, Canadian courts addressed the issue of potential legitimate compensation by finding that it could have no impact on the actual harm suffered by the patentee which is the mischief the Act seeks to remedy. 

However, the FCA found that the trial judge’s failure to apply a causation-type analysis to the quantification issue was the primary error. The Court then relied on its causation-type analysis as its principle justification for  the introduction of the NIA defence into Canadian law.

U.S. law

The FCA also cited law from the United States, where the NIA defence is a part of the law, in support of its decision.

There are important differences in American patent law that may help explain NIA’s presence and offset its impact in the U.S.

Most notably, the governing U.S. statute differs significantly from the Canadian Patent Act. For instance, treble damages for infringement are specifically contemplated under the American statute (35 USC §284). As such, the principle of what might be called “overcompensation” is enshrined in US law perhaps giving rise to opposing considerations of NIA. Further, the U.S. statute reads differently to that in Canada; 35 USC §284 requires compensation for “damages adequate to compensate for the infringement”, while Canada’s Patent Act mandates liability for “all damage sustained by the patentee…by reason of the infringement.”⁸ [emphasis added]

Monsanto v. Schmeiser

Monsanto addressed an accounting of profits and not damages. In considering an accounting, the Court found it relevant to look at the portion of the infringer’s profit that was causally attributable to the invention. This analysis “requires a comparison between the infringer’s real world profit and what his profit would have been had he not infringed.”

The FCA in Lovastatin held that, if a NIA can be considered in assessing an accounting of profits, there is no reason that it cannot be also be relied on in a damages inquiry.

At the same time, the damages inquiry and the accounting of profits exercise are undeniably approached from opposing perspectives. An accounting of profits analysis is from the perspective of the infringer and the windfall that they gained by using the infringing product. In an accounting of profits, the infringer’s but for world includes the NIA. However, in a damages assessment, the inquiry is performed from the patentee’s perspective – “what did the infringer do to you?”. Allowing the NIA defence may permit the infringer to re-write history to argue, “now that I’ve been caught and found liable, this is how I say I would have conducted my affairs.” Such an analysis may ignore the harm to the patentee.  

Application to this case

Apotex was unsuccessful in making out a NIA defence. In particular, the FCA found that Apotex neither could nor would have sold non-infringing lovastatin.

Regarding the “could” inquiry, while Apotex was at one point in possession of a NIA, it used its entire quantity of NIA and never replenished its stock. Its plant that made the NIA was re-purposed to make a different product, and there was no evidence of any available alternative to make the NIA. Thus, once its stock ran out, Apotex did not meet its burden to show that it could have restocked with non-infringing lovastatin to make the NIA defence available.

Regarding the “would” inquiry, the FCA found that Apotex was likely aware that the infringing process was being used, that the infringement was carried out on a large scale, that Apotex believed Merck’s patent to be invalid, and that Apotex’s evidence as to what it would have done was unsatisfactory. Further, Apotex led no evidence to suggest that it would have made greater profits through using the NIA than the value that it would have lost by switching to or adopting the NIA process (i.e., by repurposing a different facility). Apotex thus failed to meet its burden on the “would” aspect of the inquiry.

Conclusion

The FCA’s decision to allow defendants to claim the NIA defence unsettles Canada’s law of damages. Procedurally, it will have an impact on pleadings and the scope of discovery. The incorporation of the NIA defence into Canadian law may also require Courts to consider claims by patentees for increased damages (either through treble damages as in the U.S. or punitive damages as in Eurocopter⁹) or increased costs (on a solicitor-client or indemnity basis), as such mechanisms may be required to provide a disincentive to intentional infringement.

Further, the use of interlocutory injunctions in patent law (none have been granted in many years) may also be revisited as a tool to dissuade intentional infringement that may occur as a result of the NIA defence, as the right to exclusivity may be more valuable than the damages claim.