Apotex Inc. v. Eli Lilly and Company

Apotex Inc. v. Eli Lilly and Company
Court (s) Database
Federal Court of Appeal Decisions
Date
2018-11-23
Neutral citation
2018 FCA 217
File numbers
A-64-15
Notes
Digest
Decision Content
Date: 20181123
Docket: A-64-15
Citation: 2018 FCA 217
CORAM:
GAUTHIER J.A.
GLEASON J.A.
LASKIN J.A.
BETWEEN:
APOTEX INC.
Appellant
and
ELI LILLY AND COMPANY AND ELI LILLY CANADA INC.
Respondents
Heard at Toronto, Ontario, on September 17-18, 2018.
Judgment delivered at Ottawa, Ontario, on November 23, 2018.
REASONS FOR JUDGMENT BY:
GAUTHIER J.A.
CONCURRED IN BY:
GLEASON J.A.
LASKIN J.A.
Date: 20181123
Docket: A-64-15
Citation: 2018 FCA 217
CORAM:
GAUTHIER J.A.
GLEASON J.A.
LASKIN J.A.
BETWEEN:
APOTEX INC.
Appellant
and
ELI LILLY AND COMPANY AND ELI LILLY CANADA INC.
Respondents
REASONS FOR JUDGMENT
GAUTHIER J.A.
I. INTRODUCTION
[1] This is the latest in a long saga of proceedings opposing generic drug producer Apotex Inc. and global pharmaceutical giant Eli Lilly and Company and its Canadian subsidiary, Eli Lilly Canada Inc. [together, Lilly]. Here, Apotex appeals the judgment of Zinn J. of the Federal Court (2014 FC 1254) [Damages Decision]. In that decision, the Federal Court was tasked with assessing the damages suffered by Lilly as a result of the infringement of eight Canadian patents for the processes relating to the making of a key intermediate compound (referred to as “7-ACCA”) required to make cefaclor, a cephalosporin antibiotic used to treat certain bacterial infections.
[2] Liability for the infringement was attributed to Apotex in 2009 following a trial spanning 67 days between April and December 2008 (2009 FC 991) [Liability Decision]. The Federal Court found that the patents at issue were valid and that they had been infringed by Apotex as a result of its importation and use of cefaclor produced by South Korean drug maker Kyong Bo Chemical Ltd. [Kyong Bo] and Lupin Laboratories Ltd. of India [Lupin] before June 1998. That decision was later confirmed by this Court in 2010 (2010 FCA 240), and leave to appeal to the Supreme Court of Canada was refused in May 2011.
[3] In the decision under appeal before us, the Federal Court ordered Apotex to pay Lilly $31,234,000.00 in damages pursuant to subsection 55(1) of the Patent Act, R.S.C. 1985, c. P-4 [Patent Act]. Lilly was also awarded $75,040,649.00 in prejudgment interest as damages for the time value of the money lost in the 17 years before the reference trial on damages took place, bringing the total award to $106,274,649.00.
[4] Though the parties raised many issues given the amounts involved, I do not agree with Apotex that new questions of law requiring the consideration of new policy concerns are at play. The facts of this case are so unusual that it would be unwise to use them as a backdrop for stating general principles of law. As the adage goes, “hard facts” often make “bad law”.
[5] I realize that much time has been spent and resources deployed, including those of the judiciary, in these proceedings. Still, for the reasons that follow, I propose that the appeal be allowed, but solely on the question of interest granted as damages.
II. OVERVIEW AND BACKGROUND FACTS
A. General facts
[6] Four of the cefaclor process patents at issue during the liability phase of the proceedings were filed in 1979. They were subsequently issued to Lilly between October 1982 and July 1983. The first patent issued expired in October 1999, and the last in July 2000. The other four relevant patents were issued to Shionogi & Co. Ltd. [Shionogi], a Japanese pharmaceutical company, between February 1981 and April 1983. The first of these expired in February 1998, while the last expired in April 2000. Lilly became the owner of the Shionogi patents by way of assignment in 1995 (see Liability Decision at paras. 3-4).
[7] Litigation between Apotex and Lilly over the process patents began in 1993, when Apotex filed a Notice of Compliance [NOC] submission for its own generic version of cefaclor (known as “Apo-Cefaclor”) with Health Canada. Lilly subsequently commenced an application under the then recently enacted Patented Medicines (Notice of Compliance) Regulations, SOR/93-133 [PMNOC Regulations], seeking an order prohibiting Apotex from selling its cefaclor product in Canada.
[8] In a decision dated September 12, 1995, Simpson J. dismissed Lilly’s application (see Eli Lilly and Co. v. Apotex Inc. (1995), 101 F.T.R. 33 (T.D.)). She held that the claims in the eight patents at issue did not relate to substances that were medicines in themselves as per the criteria set out in section 2 of the PMNOC Regulations at that time. It is in that context that Simpson J. made the following statement:
9 The uncontradicted expert evidence before me discloses that there is no commercially viable means of producing Cefaclor without using at least two of the Intermediates. Canadian Patents 1,097,611 and 1,146,536 contain the claims for those crucial intermediates. Apotex has not suggested that it has developed a non-infringing process. It is, therefore, reasonable to infer that Apotex plans to infringe the Patents by copying Lilly's production methodology if it is not prohibited from manufacturing the Intermediates by a prohibition order made in this application. In that event, it will be open to Lilly to seek remedies for infringement at common law.
[Emphasis added.]
[9] The decision was later confirmed on appeal: Eli Lilly and Co. v. Apotex Inc. (1996), 199 N.R. 4 (F.C.A.), leave to appeal to S.C.C. refused, 25477 (January 30, 1997).
[10] In light of the above, it was expected that Apotex would obtain an NOC with respect to cefaclor. As he indicated in an affidavit dated November 13, 2003, counsel for Apotex, Mr. Harry B. Radomski, advised Apotex in late 1996 to prepare to face an infringement action brought by Lilly should it enter the market with its generic version of cefaclor (Exhibit TX-641 at para. 4, Appeal Book, vol. 58, tab 256 at pp. 17191-204).
[11] On January 17, 1997, Apotex obtained its NOC for capsules of cefaclor, and another NOC was issued for the sale of cefaclor in oral suspension form on March 6, 1998. Promptly after obtaining the first NOC, Apotex began selling its various capsules of cefaclor on the Canadian market. As predicted, Lilly commenced an infringement action. Its first action was launched on January 23, 1997, but was subsequently discontinued. The action that eventually led to the liability trial in 2008 was commenced on June 18, 1997. That action specifically referred to the “Kyong Bo process” – the process used by the manufacturer Kyong Bo for the production of Apotex’s generic cefaclor. This was the only process Lilly knew Apotex was using at the time. However, Apotex had in fact two suppliers of cefaclor: Kyong Bo and Lupin.
[12] Apotex received its first commercial batch of cefaclor from Kyong Bo on November 25, 1996, ordered its last batch on June 16, 1997, and received this last batch on September 9, 1997. This portion of the total cefaclor received by Apotex is referred to as “Kyong Bo cefaclor”.
[13] Apotex received its first commercial batch of cefaclor produced by Lupin on May 23, 1997, ordered its last batch on April 3, 1997, and received this last batch on November 20, 1997. This portion is referred to as “Lupin 1 cefaclor”.
[14] Both the Kyong Bo (Shionogi patents) and Lupin 1 (Lilly patents) portions of cefaclor were found to be infringing by the Federal Court in 2009 following the liability trial.
[15] In addition to the 9,126 kg of Kyong Bo and Lupin 1 cefaclor referred to above, Apotex imported a third portion. On March 13, 1998, Apotex entered into a contract with Lupin for the supply of an additional 7,500 kg of cefaclor [1998 Agreement]. Notably, the 1998 Agreement involved cefaclor made by a new process (referred to as Process “E” in the Liability Decision). This process was developed after exchanges with Apotex (particularly its in-house counsel, Ms. Brigitte Fouillade) in order to design around the processes patented by Lilly and Shionogi. As a result, Lupin undertook to “use only the teachings” of the purportedly expired patents detailed in Appendix A of the 1998 Agreement when producing these 7,500 kg of cefaclor (Exhibit TX-1656, Appeal Book, vol. 57, tab 246 at pp. 15290-91; Liability Decision at para. 788). The process detailed in Appendix A (hereinafter the “Lupin 2 process”) was to be kept confidential, and was intended solely for the purposes of production for Apotex. This third portion is referred to as “Lupin 2 cefaclor”.
[16] Apotex imported its first batch of Lupin 2 cefaclor in June 1998, and received all 7,500 kg by October 22, 1998.
[17] The Federal Court held that Lilly had not established infringement of the Lilly and Shionogi patents in regard to the Lupin 2 process (see Liability Decision at paras. 228-29). In that sense – and only for the purposes of the proceedings before the Court in 2008 –, the Lupin 2 process was described as a legal process in the reasons dealing with Apotex’s counterclaim, which the Federal Court also dealt with in 2008. As will be discussed, it now appears that one of the patents listed in the 1998 Agreement, Canadian patent 1,218,646 [646 Patent] relating to Step VI of the Lupin 2 process, did not expire until 2004 (see Exhibit RX-207, Appeal Book, vol. 53, tab 220 at p. 15292).
[18] I also note that the initial NOC that Apotex received on January 17, 1997, was based on submissions which described Kyong Bo as its supplier and provided some detail regarding the Kyong Bo process. When Apotex decided to buy Lupin 1 cefaclor as well, it notified Health Canada through a Notifiable Change filed in April 1997 that it wanted to add Lupin as a supplier (Facts Agreed to by the Parties at p. 10, Appeal Book, vol. 2, tab I at p. 557). Health Canada requested details regarding the Lupin 1 process, which were duly provided. On June 25, 1997, Health Canada confirmed that it had no objection to the change (see Liability Decision at para. 227; see also Parra Direct Examination, Lilly’s Day Book for Re-Hearing, vol. 1, tab 30, Appeal Book, vol. 76, tab 378 at pp. 22586-87). However, Apotex did not update its file with Health Canada after the Lupin 2 process was developed for use pursuant to the 1998 Agreement. Although Lilly argued emphatically that this omission was relevant to the issues to be determined at both the liability and reference stages, I do not intend to discuss the matter further; indeed, it was held to be irrelevant in the Liability Decision at paragraph 74. Considering my other conclusions, I find it unnecessary to address it in this appeal.
B. Liability Decision (2009 FC 991)
[19] Having found Kyong Bo and Lupin 1 cefaclor to be infringing, the Federal Court granted Lilly the right to elect either an accounting of Apotex’s profits as a remedy, or an award of all damages sustained by reason of sales lost as a result of the infringement by Apotex of the eight Lilly and Shionogi patents (Liability Decision at p. 324). As per the bifurcation order dated November 29, 1999, such damages would be assessed by reference (i.e. after a separate trial).
[20] The Federal Court also awarded Lilly “pre-judgment interest on the award of damages (if elected), not compounded, at a rate to be calculated separately for each year since infringing activity began at the average annual bank rate established by the Bank of Canada” (Liability Decision at p. 325, para. 4; see also para. 674). Notably, under paragraph 36(4)(f) of the Federal Courts Act, R.S.C. 1985, c. F-7 [FC Act], this award would only apply if no interest was awarded by the reference judge as part of the damages (see para. 27 below).
C. Damages Decision (2014 FC 1254)
[21] The Damages Decision under appeal was issued on December 23, 2014, following an 18-day trial during the months of September and October 2014. What follows is meant to be a brief overview of the Federal Court’s findings. They will be developed in greater detail in the analysis.
[22] First, a word on the form and length of the Federal Court’s reasons, which span 48 pages. It appears that the structure of the Damages Decision follows that of the main issues as put forth by the parties before the Federal Court at trial. Considering the voluminous amount of evidence in the record, as well as the fact that the parties fought vigorously on almost every relevant factual issue, the reasons are comparatively brief. To my mind, the Damages Decision was drafted with only the parties as the intended audience, as it contains little reference to the many controversies regarding the evidence as a whole. Indeed, the reasons assume that the reader is particularly familiar with the evidentiary record.
[23] Second, the substance. Since Lilly elected an award of damages under subsection 55(1) of the Patent Act rather than an accounting of profits, the Federal Court applied the framework established by the Supreme Court in Clements v. Clements, 2012 SCC 32 [Clements], given that patent infringement is a statutory tort. The guiding question was thus: “But for the infringing product being on the market, what would the patentee’s position have been?” (Damages Decision at para. 20). The Federal Court noted that, in this “but-for” world, Lilly had the burden of proving the causal connection between its lost sales and infringing ones made by Apotex. Lilly also had to prove on the balance of probabilities that, but for the sales of the infringing product, it would have made additional sales. Finally, it had to prove the volume of those additional sales and the profit that it would have realized on them (Damages Decision at para. 33).
[24] However, using the authorities available to it at the time, the Federal Court concluded that the defence of a “non-infringing alternative” (or NIA) raised by Apotex was not available to an infringer in Canada (Damages Decision at para. 57).
[25] Still, given the framework adopted, the Federal Court had to determine when Apotex would have entered the market in the “but-for” world. It found that Apotex would not have been in the cefaclor market prior to April 19, 2000, when the last of the Shionogi patents expired. In other words, the Federal Court found that it is only from that date forward that Apotex would have entered the market with non-infringing cefaclor (see Damages Decision at paras. 62-63, 70-71; see also paras. 27-35 for discussion on causation). In doing so, it accepted Lilly’s position that there was a fundamental difference between the actions one takes to enter the market and those taken to remain in it. Apotex did not persuade the Federal Court that in the “but-for” world it would have had sufficient incentive to enter the market as opposed to remaining in it, as it in fact did when it ordered the Lupin 2 cefaclor (Damages Decision at para. 68).
[26] Next, the Federal Court awarded Lilly a royalty of $1,500.00 per kg for each sale made by Apotex in breach of the patents that Lilly could not have made (Damages Decision at paras. 101-03). The Federal Court thereby rejected Apotex’s expert evidence which was based on the assumption that an NIA could have been available to Apotex at the relevant time – that is, when initial infringement occurred. It is in that context that the Federal Court ruled that such a premise was not supported by the evidence; in other words, Lupin 2 cefaclor could not have been available to Apotex. This had not been proven as a fact (Damages Decision at para. 100).
[27] Finally, in regard to prejudgment interest, the Federal Court held that Lilly was not required to prove exactly what use it would have made of the profit it lost as a result of Apotex’s actions. The Federal Court also concluded that, “in today’s world”, there is a presumption that a plaintiff such as Lilly would have generated compound interest on the funds owed to it, and that Apotex also did so in the period during which it withheld the funds (Damages Decision at para. 118). The Federal Court found that Lilly would have invested in its business, and it was awarded prejudgment interest compounded annually at Lilly Canada’s historical average annual profit margin on sales for the years 1997 through 2012 (Damages Decision at paras. 122, 125; Expert Report of Stephen Foerster, Exhibit RX-115, Appeal Book, vol. 34, tab 26 at p. 9862).
III. ISSUES
[28] The standards of review applicable to the issues raised in this appeal are as described by the Supreme Court in Housen v. Nikolaisen, 2002 SCC 33. The standard of review to be applied to questions of law is correctness, while findings of fact and inferences of fact are to be reviewed on the basis of palpable and overriding error. Findings of mixed fact and law are to be reviewed on the same deferential standard unless an extricable legal error can be demonstrated, in which event the correctness standard applies.
[29] As such, I will frame the issues in the analysis as follows:
1) Did the Federal Court err in finding that no NIA defence was available to Apotex?
2) Did the Federal Court err in finding that Apotex would not have entered the market until April 2000 in the “but-for” world (causation)?
3) Did the Federal Court err in determining the reasonable royalty rate?
4) Did the Federal Court err when it held that Lilly was entitled to interest as damages?
IV. ANALYSIS
A. Preliminary Comments
[30] Before tackling the analysis, it is opportune to lay some groundwork. Two issues need to be addressed from the get-go: 1) the importance of Lupin 2 cefaclor for the majority of the issues to be addressed; and 2) the relevance of certain additional facts relating to the actual world and evidence before the Federal Court.
(1) The relevance of Lupin 2 cefaclor
[31] Except for the last issue, all the questions before us to some extent involve evaluating the availability of Lupin 2 cefaclor. It is thus useful to recall the role the notion of an NIA plays in the various hypothetical scenarios that the Federal Court, as trier of fact, had to construct in order to assess damages.
[32] First, as noted by the Federal Court, Lilly had to prove that its damages were caused by the wrongful conduct, i.e. the infringement of the patents at issue (subsection 55(2) of the Patent Act). Using the principles it properly referred to, the Federal Court had to construct a fictional, hypothetical situation on the basis of all the evidence before it. The fiction in question concerned the landscape of the cefaclor market in Canada – and Lilly’s position within it – had Apotex not infringed the patents. This exercise was necessary for assessing what sales Lilly effectively lost because of Apotex’s wrongful conduct. As noted above, this is sometimes referred to as the “but-for” world (causation).
[33] The parties agreed that, in respect of cefaclor sold by Apotex that Lilly would not have sold in the “but-for” world (such as product exported by Apotex), the damages would be limited to a royalty at a rate to be determined by the Court.
[34] Regarding the sales actually lost in the “but-for” world, replicating a fictionalized version of the Canadian cefaclor market, the experts agreed on many of its components relevant to the calculation of the damages according to various scenarios. Many of the differences were identified and dealt with by the Federal Court. These are not at issue. Still, there remained three main issues for the Federal Court to determine. The first and second concerned whether Lilly would have had exclusivity in this market, and if so, until when. The third related to the actual size of the market, notably in regard to the level of demand for the product.
[35] Lilly asserted that it would indeed have had exclusivity until all its patents expired. It argued that, but for the use of infringing material and subsequent initiation of its legal proceedings, Apotex (or any other generic drug manufacturer) would not have entered the market before the expiry of all the patents at issue. Particularly, Apotex would not have sold the Lupin 2 cefaclor at all because it was not commercially viable to do so. Later on, Lilly admitted that once the last Shionogi patent expired in April 2000, the Shionogi process would have provided an NIA to make cefaclor. This NIA would have been available to Apotex and any other generic drug manufacturer as of April 19, 2000. It is in that context that the Federal Court had to also determine when Apotex would have been in a position to actually sell its products in the various provinces (the formulary issue will not require any comment to determine this appeal).
[36] Apotex strenuously contested the position of Dr. Iain Cockburn, Lilly’s expert, to the effect that, in the particular circumstances of this case, it was unlikely that Apotex would have entered the cefaclor market with Lupin 2, given the nature of the product, including its economics. In Dr. Cockburn’s view (also in that of Mr. Raymond Sims, another expert for Lilly), Lupin 2 cefaclor was not a viable option in an economic sense. To explain why Apotex nevertheless ordered such a commercially non-viable product in the actual world, Dr. Cockburn explained what, in his view, was an important distinction between entering this market and remaining in it (see Exhibit RX-88, Appeal Book, vol. 28, tab 93 at pp. 8380-84; Cockburn Direct Examination at pp. 70, 93, 97, 102, Lilly’s Day-Book for Re-Hearing, vol. 1, tabs 20-22, 36, Appeal Book, vol. 54, tab 228 at pp. 15553, 15547, 15554-55; Sims Cross-Examination at pp. 78-79, Lilly Day-Book for Re-Hearing, vol. 1, tab 38, Appeal Bool, vol. 54, tab 234 at p. 15957).
[37] The availability of an NIA was also important to Apotex in relying on additional and different hypotheses in the “but-for” world. In doing so, Apotex advanced a positive defence: Apotex sought to establish that it could have entered the market with Lupin 2 cefaclor well before it actually did sell such product in 1999; it could thus have captured the sales that Lilly would have lost before Apotex’s actual use of Lupin 2 cefaclor began. While this defence would not absolve Apotex of liability for the infringement that actually took place, it would reduce the quantum of damages to a reasonable royalty for the period at issue.
[38] Apotex suggested various dates at which such an NIA could and would have been available. However, I will only discuss the dates argued before us: October 1997 and July 1998. These are described in Apotex’s relevant outline, which was filed at the beginning of the appeal hearing (Apotex’s Outline of Argument – Part III at p. 4). I understand that this outline reflects Apotex’s final position on this question.
[39] Finally, with respect to royalties, the Federal Court had to contemplate a hypothetical negotiation between the parties which would have taken place at the beginning of the infringing period. Here again, the Federal Court had to consider whether or not an NIA would have been available at the relevant time, since this would have an impact on the rate of royalty.
[40] Otherwise, the Federal Court did not find it necessary to expressly deal with some of the issues raised by the parties, such as whether a true NIA (i.e. an economically viable alternative or one that did not infringe patents other than those at issue in the Liability Decision) would have been available. Considering its finding that Apotex would not have used Lupin 2 cefaclor prior to April 2000, and that it was not established on the evidence that Lupin 2 cefaclor could have been available as of January 1997, one can understand how it was not readily apparent to the Federal Court to rule on the matter of the true NIA.
[41] While it would certainly have made our task easier had the Federal Court done so, at any rate, considering the parties’ litigious behaviour, an appeal would have been unavoidable.
[42] The fact remains for this Court that many findings of fact and mixed fact and law relating to various hypothetical scenarios were effectively made by the Federal Court in this case, and we are in large part bound by them on appeal. And indeed, these findings address important issues that are relevant to the first question before us, especially as it is now well established in our Court’s jurisprudence that an NIA defence can be raised by an infringer, provided that the infringer establishes that a true NIA could and would have been available to it (Apotex Inc. v. Merck & Co., Inc., 2015 FCA 171 [Lovastatin]; see also Pfizer Canada Inc. v. Teva Canada Limited, 2016 FCA 161; Apotex Inc. v. ADIR, 2017 FCA 23; AFD Petroleum Ltd. v. Frac Shack Inc., 2018 FCA 140).
[43] In other words, even though Apotex asks this Court to make the necessary inferences of fact to determine that an NIA could and would have been available to it as of October 1997, or at least by July 1998, we can only consider doing so if it also successfully establishes that the Federal Court’s relevant findings of fact or mixed fact and law are tainted by a palpable and overriding error.
(2) Additional background relating to the actual world
[44] As mentioned, the reasons for the Damages Decision before us are not very detailed, and, in order to better understand them in the context of the arguments and evidence, it is important to summarize pertinent previously established or undisputed facts relating to the actual world, in addition to those listed at paragraphs 6-18 above. I thus take note of the following:
a) It is not disputed that, at all relevant times, there was no publicly known and viable alternative process to make 7-ACCA, the key intermediate compound necessary for producing cefaclor, other than the ones disclosed in the Lilly and Shionogi patents (see Liability Decision at paras. 709, 798; Liability Trial Transcript, vol. 39 at pp. 75-76, Appeal Book, vol. 80, tab 398 at p. 24227);
b) At the time that Apotex sought a compulsory licence for the patents covering cefaclor itself (1986-1988), Lilly filed an objection stating that, in order to make cefaclor, Apotex would also need a licence to make 7-ACCA. Apotex refused to seek that licence at that time – more than ten years before its entry in the market (Liability Decision at paras. 773-75);
c) In its Notice of Allegation pursuant to section 5 of the PMNOC Regulations served on Lilly on May 6, 1993, Apotex addressed all the patents listed in the form IV that was filed with Health Canada for cefaclor (this included the Lilly and the Shionogi Patents) (Liability Decision at para. 776). After the filing of Lilly’s NOC application, Apotex knew that Lilly had presented expert evidence as to the importance or relevance of these patents before the Federal Court. Indeed, Simpson J.’s decision expressly references that fact (see paragraph 8 above);
d) Apotex presented expert evidence to the effect that there were no publicly known and commercially viable processes to make cefaclor other than the Lilly and Shionogi patents in the context of its own counterclaim before the Federal Court in 2008. This opinion was based on research first conducted on behalf of Apotex by Dr. Robert McClelland in 1997 or 1999 (probably 1997, considering the evidence he gave during direct examination: see Appeal Book, vol. 80, tab 401 at p. 24478, particularly the reference to the Shionogi process (Kyong-Bo cefaclor)) and again in 2003 (Liability Decision at paras. 709-10). Dr. McClelland acknowledged that anyone undertaking such research in 1985 would have come to the same conclusion;
e) Unbeknownst to the parties, Lupin had tried to design around the Lilly patents at some time in 1995, but discontinued its efforts, having concluded that the two avenues it tried would not be practically viable because of their inefficiencies and the resulting costs (see Exhibit Satpute-2, Appeal Book, vol. 69, tab 338 at pp. 20930-31);
f) In 1996, Apotex was advised by its own counsel that it would be sued for infringement if it entered the market with a cefaclor product (see para. 10 above);
g) Except for one letter in December 1996 addressed to Kyong Bo, which only dealt with the Lilly patents, Apotex did not inquire about the legality of the processes used by its suppliers before ordering and/or using the Kyong Bo and Lupin 1 cefaclor in the products it started to sell in January 1997 (see paras. 12, 13 above; Liability Decision at para. 828);
h) Before entering the market, Apotex knew that Lilly had entered into an agreement to supply Pharmascience Inc. [Pharmascience], another generic drug manufacturer and Apotex’s competitor, with cefaclor products should any other generic drug manufacturer enter the market with infringing cefaclor (Exhibit TX-1684, Appeal Book, vol. 69, tab 343 at pp. 21033-86). Pharmascience, which had an NOC since 1995, did enter the market at about the same time as Apotex did in January 1997 (see Liability Trial Transcript, vol. 39 at pp. 37-39, Appeal Book, vol. 80, tab 398 at p. 24218; Facts Agreed to by the Parties at p. 3, Appeal Book, vol. 2, tab I at p. 550);
i) Apotex did not try to design around the patents at issue until years after having been advised that there were no other commercially viable processes for making cefaclor. Sometime in July 1997, Ms. Fouillade, Apotex’s in-house counsel since 1996, was asked to look into the matter by Dr. Bernard Sherman, the then Chairman and Chief Executive Officer of Apotex. She concluded in September and October 1997 that both Lupin 1 and Kyong Bo cefaclor were made with processes which infringed the Lilly and Shionogi patents (Liability Decision at paras. 787-91, 831);
j) Despite Ms. Fouillade having concluded that Lupin 1 and Kyong Bo cefaclor were infringing, Apotex continued to forcefully deny any infringement of the patents before the Federal Court (Liability Decision at para. 710);
k) In her correspondence with Lupin and its representatives, Ms. Fouillade consistently noted that it was urgent to find a solution. Still, no order was placed for Lupin 2 cefaclor before March 1998 (see e.g. Exhibit Glopec-20 (Confidential), Appeal Book, vol. 57, tab 250 at p. 17173; Exhibit Glopec-23, Appeal Book, vol. 73, tab 353 at pp. 22171-73; Exhibit Glopec-26, Appeal Book, vol. 67, tab. 324 at pp. 20790-31; Exhibit Glopec-27, Appeal Book, vol. 67, tab 325 at pp. 20792-93).
l) Although Apotex had what it believed to be non-infringing cefaclor (Lupin 2 cefaclor) available to it as of June 1998, it continued to use infringing material until it had almost exhausted its stock of infringing material in 1999. No product was formulated with Lupin 2 cefaclor before December 1998;
m) Albeit in the context of Apotex’s counterclaim against Lilly and Shionogi (where it alleged to have suffered damages because Shionogi had assigned its patents to Lilly in 1995), Dr. Sherman, who took all the important decisions regarding which products Apotex would put on the market, testified that in a “but-for” world where no such assignment had taken place, the “most likely scenario” would have been that Apotex would have used cefaclor made according to the Shionogi patents (like Kyong Bo) without first obtaining a licence. This assignment was served on Apotex in January 1997 (Liability Decision at para. 750);
n) As mentioned, Lupin and Apotex entered into the 1998 Agreement for the production of 7,500 kg of Lupin 2 cefaclor. Although the Agreement does not include cefaclor’s price, it was made on the basis that Apotex was willing to pay a very high premium (at least a 40% increase on the cost of Kyong Bo and Lupin 1 cefaclor, the only active pharmaceutical ingredient (API) in its products; but see Lilly’s Day-Book for Re-Hearing, tab 15, Exhibit RX-142, Appeal Book, vol. 36, tab 155 at p. 10742). The prices paid were as follows: Kyong Bo cefaclor was $860.00 U.S.; Lupin 1 cefaclor was $1,050.00 U.S.; and Lupin 2 cefaclor was $1,500.00 U.S.;
o) In fact, the 646 Patent, whose teachings were among those which Lupin was bound to use at step VI of the process to produce 7-ACCA, did not expire until 2004. The infringement of this patent was not before the Federal Court in the liability phase, as this patent was not included in the action at the time of trial. Throughout this trial, Lilly’s position was that the Lupin 2 process could not have been used because it was too inefficient to be commercially viable (Liability Decision at paras. 245-46);
p) During the liability phase, Dr. Sherman and Apotex always maintained that they were entitled to assume that Lupin had abided by the terms of the 1998 Agreement in using the new, allegedly non-infringing Lupin 2 process for the production of cefaclor (see e.g. Liability Decision at para. 234). Indeed, Dr. Sherman expressly said that it was not his practice to enter into a contract with a supplier, but that he found it appropriate to do so here;
q) It appears that Apotex maintained this position during the reference phase because, when cross-examined, Apotex’s expert, Mr. Roy Weinstein (who was dealing with the rate of royalties), acknowledged that he was told to assume that Lupin 2 process was non-infringing (Damages Trial Transcript, vol. 82 at pp. 88-91, Appeal Book, vol. 54, tab 239 at p. 16361; Exhibit RX-207, Appeal Book, vol. 53, tab 220 at p. 15292; Damages Decision at para. 100);
r) Ultimately, for a variety of reasons (such as the higher price of Lupin 2 cefaclor, rate of exchange and amount of free goods granted by the competition, particularly Pharmascience), Apotex lost more than $5,000,000.00 on the sale of its products made using Lupin 2 cefaclor (Exhibit RX-142, Appeal Book, vol. 36, tab 155 at pp. 10739-43). There was contradictory evidence as to whether or not Apotex could have expected to incur such a loss at different points in time, including June 1998, January 1999 and April 1999. Apotex filed expert evidence to contest the calculations of Dr. Cockburn in regard to the commercial viability of products made with Lupin 2 cefaclor which were based on the actual results achieved on sales of products made with Lupin 2 cefaclor that did not start before 1999. Schedule 14 of the report of Apotex’s expert included seven different scenarios (Expert Report of Andrew Harington, Appeal Book, vol. 41, tab 170, at pp. 12401-09); and
s) In any event, Apotex’s main position was that such calculations would have been irrelevant to its decision to enter the market in January 1997, given that it never conducted a cost-profit analysis before entering. Dr. Sherman did not testify during the reference phase as to why it was important for Apotex to come to market with cefaclor. However, he had acknowledged at the liability phase in 2008 that in the mid and late 1990s the demand for cefaclor was in fact in decline and the drug was not a major product for Apotex (Damages Decision at paras. 12, 808). Apotex relied solely on the testimony of Mr. Gordon Fahner, who was Director of Finance at the relevant time and became Vice-President – Finance sometime in 2003, to establish that under the leadership of the late Dr. Sherman, Apotex as an organization did not conduct profit analysis for its individual products; rather, it made its business decisions (i.e. Dr. Sherman’s decisions) with the objective of having the largest portfolio of products possible in mind (see Damages Trial Transcript, vol. 80 at pp. 194-96, Appeal Book, vol. 54, tab 237 at p. 16251; Damages Decision at para. 68: “as many pharmaceutical products in the marketplace as possible”). Various experts debated the application of concepts such as the “first mover effect” (timing of entry and known presence of Pharmascience) in this case as well as the economic value of the portfolio approach with respect to cefaclor.
[45] It is against this backdrop that I now turn to the issue of the NIA defence.
B. Did the Federal Court err in finding that no NIA defence was available to Apotex?
[46] As mentioned, the Federal Court did not have the benefit of this Court’s most recent jurisprudence on the issue of the NIA defence before releasing its decision. Thus, as in Lovastatin, I find that the Federal Court erred when it concluded that the NIA defence was not available in Canada. However, as was also the case in Lovastatin, I conclude that this error is not determinative because, on the evidentiary record before it, the Federal Court could not but conclude that the defence was unavailable in this case.
(1) General principles regarding the NIA defence
[47] Lovastatin may well have been the first case where an NIA defence was accepted in the context of a claim for damages resulting from patent infringement (as opposed to an accounting of profit). But our Court’s acceptance of the NIA defence was based on general principles of Canadian common law (see e.g. AlliedSignal Inc. v. Du Pont Canada Inc. (1998), 78 C.P.R. (3d) 129 at pp. 140-41 (F.C.T.D.) [AlliedSignal], aff’d (1999) 86 C.P.R. (3d) 324 (F.C.A.)), as they had been applied by the Supreme Court in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34 (see also for the discussion on the burden of proof: Rainbow Industrial Caterers Ltd. v. Canadian National Railway Co., [1991] 3 S.C.R. 3).
[48] I underline the roots of our conception of the NIA defence because it is important to understand that our Court did not simply import an American law concept in a wholesale fashion. The Court in Lovastatin may indeed have referred to American authorities in order to better ground the concept. But one must be careful not to construe references to American jurisprudence lending support for the NIA defence as a blind incorporation of, or strict adherence to, the reasoning adopted by American courts. American courts view the purpose of their patent legislation differently, and emphasize the promotion of strong competition. Further, American statutes provide for “treble damages” (as a punitive award) when, among other things, infringement is committed with knowledge of the existing patent (see 35 U.S.C. § 284). These factors may result in a more lenient approach in the application of the NIA defence. In effect, the threat of a treble damages award certainly curtails potential abuses.
[49] With this in mind, I underscore that the objective of the NIA “defence” is to help ascertain the real value of inventions for which a patentee such as Lilly was granted a monopoly. Inasmuch as overcompensation is inappropriate in our law, so is undercompensation. Thus, the goal is not to enable an infringer to breach the bargain made on behalf of the Canadian public when a patent is issued. Nor is the defence a means by which one can infringe at the lowest possible cost. This is particularly important to keep in mind when one assesses the rate of royalty that would apply when this defence is accepted. In my view, it is only when an appropriate rate is set that one can consider that accepting such a defence does not amount to a compulsory licence system in disguise.
[50] The rationale of just compensation underpins why the infringer bears the burden of establishing all facts required before a court considers the effect of legitimate competition on the calculation of damages resulting from infringement.
[51] Some of the facts which the infringer must establish were identified in Lovastatin as follows:
[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-infri