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24 August 2015
On July 23 2015 the Federal Court of Appeal held that the availability of a non-infringing alternative may be a relevant consideration when assessing damages for patent infringement (2015 FCA 171). Nevertheless, the extent to which this decision will actually affect the quantum of damages awards in future patent infringement cases in Canada remains unclear.
The Federal Court of Appeal's decision overturns the reasoning of the 2013 ruling of Justice Snider of the Federal Court, who had held that the availability to a defendant of a non-infringing alternative (ie, a product that could have been manufactured and sold in place of the infringing product manufactured and sold by the defendant) is not and should not be a relevant factor in the assessment of damages (2013 FC 751). In this regard, the first-instance decision was consistent with prior Federal Court rulings on this issue.
In this particular case, the Federal Court had found defendants Apotex Inc and Apotex Fermentation Inc (collectively, 'Apotex') liable for damages following their infringement of a product-by-process patent for the anti-cholesterol drug lovastatin owned by Merck & Co Inc and licensed to Merck Canada Inc (collectively, 'Merck'). Apotex argued that the damages owed should be reduced because it had available to it a non-infringing alternative process for producing lovastatin that it could and would have used had it not infringed. The Federal Court dismissed this argument in a section spanning nearly 30 pages of its reasoning. The point became the central issue on appeal.
Pursuant to the Canadian Patent Act, a party that infringes a patent is liable to the patentee for all damages it has sustained by reason of the infringement. The Canadian courts have long held that the phrase "by reason of the infringement" invokes the principle of causation – that is, scrutiny of the causal relationship between the wrongful conduct of the defendant and the injury suffered by the plaintiff. As such, a plaintiff patentee is entitled to recoup all damages that it has established would not have occurred "but for" the defendant's infringement. Typically, this principle entitles the patentee to the hypothetical profits from the sales that it can establish it would have made but for the presence of the defendant's infringing product in the market.
The Federal Court held that the fact "that the defendant could have used a non-infringing alternative (but did not)" was irrelevant to the foregoing analysis, as its proper focus ought to be on the infringer's actual actions, not its hypothetical actions.
In this respect, the Federal Court of Appeal held that the Federal Court had erred and conflated the legal relevance of the non-infringing alternative with the availability of the non-infringing alternative in fact. Indeed, the Federal Court of Appeal held that ignoring this consideration could actually overcompensate the patentee - that is, if damages for lost profits are calculated without regard to an available non-infringing alternative, the patentee will sometimes be better off than it would have been in the absence of infringement because, in the 'but for' world, the infringer could and would have made and sold a non-infringing alternative that would have legitimately reduced the patentee's sales.
As such, in the Federal Court of Appeal's view, achieving "perfect" compensation for the patentee requires consideration of:
In support of its analysis, the Federal Court of Appeal cited jurisprudence from the United States as well as the Supreme Court of Canada, and distinguished certain UK decisions that had previously been followed by Canadian courts.
In reviewing the US jurisprudence, the Federal Court of Appeal noted that US courts have held that if a non-infringing alternative that a defendant could and would have used, had it not infringed, is a true substitute and a real alternative to the infringing product, and would have replaced all infringing sales, the infringement causes the patentee to suffer no compensable damages, for two reasons:
The Federal Court of Appeal also cited the Supreme Court of Canada's decision in Monsanto Canada v Schmeiser (2004 SCC 34), which affirmed that the availability of a non-infringing alternative is relevant to the assessment of an accounting of the defendant's profits, an alternative remedy to a recovery of the plaintiff's damages in Canada. It took the view that the same principle of causation underlies both remedies and, as such, there is no reason in principle to ignore the availability of a non-infringing alternative when calculating the patentee's lost sales.
The court also considered jurisprudence from the United Kingdom., where – unlike in the United States – it has long been held that the availability of a non-infringing alternative is irrelevant to the assessment of damages for patent infringement. Prior Canadian decisions had followed this UK jurisprudence. However, the Federal Court of Appeal found the UK law to be based on public policy rather than the principle of causation. In addition, it found that the Canadian decisions that had followed the UK practice had inappropriately fixated on the defendant's actual conduct rather than its hypothetical conduct in the 'but for' world, and provided little by way of actual causation analysis. The court found that those earlier decisions "do not accord with the requirement in section 55(1) of the Patent Act that the damages be sustained 'by reason of the infringement'".
The Federal Court also rejected the relevance of a non-infringing alternative on the basis of several policy reasons, which generally centred on the view that considering this factor would result in inadequate compensation for the injured patentee and allow the infringer to escape responsibility for its infringement. As explained above, the Federal Court of Appeal countered that consideration of this factor would actually result in "perfect compensation" – albeit less than the patentee might feel entitled to. Moreover, the availability of other remedies (eg, elevated costs, injunctive relief for the remaining duration of the patent, an accounting of the infringer's profits, punitive damages) would, in the court's view, counterbalance any risk of immunity from liability or incentive to infringe.
With these principles in mind, the Federal Court of Appeal proposed a new legal test for determining the relevance of a non-infringing alternative based on the facts of a given case:
The defendant has the burden of proving the factual relevance of a non-infringing alternative pursuant to this framework on a balance of probabilities.
The Federal Court of Appeal held that, on the one hand, Apotex had at all relevant times the capacity to manufacture and sell non-infringing lovastatin in sufficient quantities. On the other hand, Apotex failed to meet its burden of showing that, notwithstanding this capacity, it could and would have sold this non-infringing alternative in place of the infringing product.
Rather, at some point during the relevant period, Apotex had ceased manufacturing operations of the non-infringing lovastatin, which would have taken several weeks to ramp up sufficiently again. As such, the alleged non-infringing alternative was not actually available to replace Apotex's infringing sales as they were made.
In any event, the court held that Apotex likely would not have replaced its infringing sales with sales of the non-infringing alternative because of, among other reasons:
In light of these conclusions, the Federal Court of Appeal held that the availability of a non-infringing alternative was not relevant on the facts of the case. As such, the appeal was dismissed – effectively upholding the first-instance decision, including the award of close to C$120 million in damages to Merck, plus interest, although guided by quite different reasoning.
This decision is arguably a departure from past Canadian jurisprudence that had rejected the relevance of a non-infringing alternative in the assessment of damages for patent infringement. At the same time, the application of this analysis to the facts in the case highlights how difficult it may be for defendants to establish the existence and relevance of a non-infringing alternative in a particular case. Further understanding of the scope and effect of the decision will no doubt come with further decisions on patent infringement damages in Canada.
For further information on this topic please contact Daniel Whalen at Smart & Biggar/Fetherstonhaugh by telephone (+1 613 232 2486) or email (email@example.com). The Smart & Biggar/Fetherstonhaugh website can be accessed at www.smart-biggar.ca.
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