Patent Infringement Judgment – Non Infringing Alternatives

The Federal Court of Appeal has issued a ruling that could have wide-ranging consequences for the calculation of patent infringement damages.  In Apotex Inc. v. Merck & Co., Inc., 2015 FCA 171, the FCA rejected the trial judge’s ruling (Merck & Co., Inc. v. Apotex Inc., 2013 FC 751)  that in quantifying a plaintiff’s damages, one does not consider whether the defendant could have made use of non-infringing alternative technologies (“NIA”s).

However, the FCA’s decision also contains some important caveats. In considering NIAs, one must consider both what the defendant could have done, but also what they would have done. It was on this latter criterion that Apotex’s appeal of its damages award ultimately foundered.

Background

The case involved Merck’s patent for producing the anti-cholesterol drug, lovastatin.  Apotex developed a second, non-infringing process for manufacturing the drug; however, this process was more costly to implement. The trial court found that ultimately, Apotex decided to use Merck’s process, and that approximately 60% of Apotex’s sales from March 1997 to the expiry of the patent in 2001 were comprised of product made with that infringing process.

During the damages phase, Apotex argued that Merck’s remedy should be limited to a reasonable royalty on the infringing sales, as Apotex could have used an NIA to produce the lovastatin it sold, and Merck could therefore not prove that Apotex’s infringement caused a loss of sales Merck would otherwise have made. Justice Snider rejected this argument. She emphasized that to establish causation in damages, it matters not what the defendant could have done, only what it did do.  She also noted that allowing the defendant to claim that it could have used a non-infringing alternative makes the threat of litigation less significant to the defendant, since any award would then be limited to a royalty that is equal to (at most) the defendant’s incremental profit from the infringement.

“Could Have”

The FCA held that any NIA should be considered in assessing damages.  It noted that NIAs have always been a consideration when there are multiple competitors in a market. Suppose Firm A holds a patent on a certain type of widget, Firm B infringes the patent, and Firm C manufactures similar widgets that do not incorporate the patented technology. Firm B has always been able to argue that, even if it had not infringed, some of its sales would have gone to Firm C rather than Firm A.  The success of this argument will depend on the nature of the patented technology, how valuable and distinctive it is. The FCA argued that there was no principled reason why this line of argument should not be extended to the defendant itself. If the defendant had the capability, through an NIA, of capturing some of the plaintiff’s sales, then the plaintiff should not be able to claim lost profits on those sales, and its award should be limited to a reasonable royalty.

The FCA also emphasized the compensatory aspect of a damages award, rather than the deterrent element, noting that: “The difficulty with the Judge’s approach is that if damages for lost profits are calculated never having regard to an available non-infringing alternative, the patentee will sometimes be better off than it would have been in the absence of infringement” (para. 48). It is only by considering NIAs that the Court can arrive at an award that properly reflects the economic value – no more, no less – of the patented technology.  

“Would Have”

Having accepted that NIAs should be considered in determining lost sales, the FCA then turned to the factual question of whether such alternatives could and would have been employed by Apotex. The burden of proving this rests with the defendant.

What does this burden look like? It appears to be a heavy one, for the simple reason that the point of departure in this analysis will always be the fact that the defendant did infringe; “conduct in the real world is ‘very important’ to what would have happened in the ‘but for’ world” (para. 90). The FCA found that there were several reasons why the defendant in this case decided to manufacture and sell infringing lovastatin:

i.        The reason for the decision to infringe was that it was not economically viable to use the NIA.

ii.        Apotex did not have sufficient additional supply of non-infringing lovastatin on hand, and it would have taken time to re-initiate production using the NIA at its Canadian facility.

iii.        Apotex’s infringement was intentional, and was done in the belief that the patent was invalid.

For these reasons, the FCA concluded that while an NIA was available, there was insufficient proof that, had it not infringed, Apotex would have made use of that NIA.

Conclusion

The decision of the FCA will no doubt be a great relief to firms worried about unintentional infringement. These firms will now be able to argue that, had they only know about the patent in question, they would have used an alternate technology, which still could have satisfied the needs of some or all of their customers.

However, the FCA’s emphasis at times on the “brazen” nature of Apotex’s infringement suggests that intentional infringers may have a difficult time arguing that they could, and would, have adopted an NIA.

The statements or comments contained within this article are based on the author’s own knowledge and experience and do not necessarily represent those of the firm, other partners, our clients, or other business partners.