ADIR v. Apotex Inc.

ADIR v. Apotex Inc.
Court (s) Database
Federal Court Decisions
Date
2015-06-18
Neutral citation
2015 FC 721
File numbers
T-1548-06
Notes
A correction was made on March 3, 2016
Decision Content
Date: 20150618
Docket: T-1548-06
Citation: 2015 FC 721
Ottawa, Ontario, June 18, 2015
PRESENT: The Honourable Madam Justice Gagné
BETWEEN:
ADIR
and
SERVIER CANADA INC.
Plaintiffs
and
APOTEX INC.
and
APOTEX PHARMACHEM INC.
Defendants
PUBLIC JUDGMENT AND REASONS
(Confidential Judgment and Reasons issued June 8, 2015)
I. Overview [1] On July 2, 2008, as the liability phase of the trial before this Court came to a close, my colleague Snider J granted the plaintiffs’ claim against the defendants; she found that the defendants had infringed claims 1, 2, 3 and 5 of ADIR’s Canadian Letters Patent No 1,341,196 [196 Patent] by manufacturing, selling, offering for sale and otherwise dealing in perindopril containing products in Canada. She further found that the plaintiffs were entitled to elect between an accounting of the defendants’ profits and their damages sustained by reason of the infringing activities (Laboratoires Servier v Apotex Inc, 2008 FC 825 [Liability judgment]). The Liability judgment was upheld by the Federal Court of Appeal (aff’d 2009 FCA 222) and leave to appeal to the Supreme Court of Canada was denied.
[2] The plaintiffs elected an accounting of the defendants’ profits; as a result, an additional 17 day hearing was held before me, during which I heard 16 regular witnesses and 6 expert witnesses. These reasons for judgment address the evidence adduced and the parties’ arguments that pertain to the remedy phase of the trial.
[3] In searching for the portion of the infringers’ profit which is causally attributable to the invention (Monsanto Canada Inc v Schmeiser, 2004 SCC 34 [Schmeiser], at para 101), the plaintiffs bear the burden of establishing the defendants’ revenues attributable to the sale of the infringing products, while the defendants are required to establish the costs incurred to produce and sell the infringing products and any apportionment necessary under the circumstances. The profits to be disgorged will consist of the difference between the defendants’ gross revenues and its current and capital expenses directly attributable to the infringement (Monsanto Canada Inc v Rivett, 2009 FC 317 [Rivett FC], aff’d 2010 FCA 207 [Rivett FCA].
[4] These reasons will discuss in detail the notion of causation since it underscores two of the arguments advanced by the defendants. They argue that: i) a portion of their revenues should be disaggregated as part of the sale price was paid on account of non-infringing indemnity and legal services offered to affiliates in the United Kingdom [UK] and Australia ; and that ii) there were non-infringing alternatives [NIA or NIAs] available to them, thereby warranting the “differential profit” approach found to be the preferred mean of accounting profits by the Supreme Court in Schmeiser—as a result, the defendants are of the view that the profits to be disgorged are substantially reduced, even to zero.
[5] As the parties disagree as to the reading and application of Schmeiser in this case, a review of the pre and post-Schmeiser case law is called for.
II. Facts and proceedings General remarks [6] For a presentation of the parties and a complete factual background to angiotensin-converting enzyme (ACE), ACE Inhibitors in general and perindopril in particular, I refer the reader to section III of Snider J’s Liability judgment.
[7] It has also been found in the Liability judgment and discussed at length before me that Apotex Pharmachem Inc. [Pharmachem] manufactured a large quantity of bulk perindopril active pharmaceutical ingredient [API] that it sold to Apotex Inc. [Apotex] as early as April 2004 and to Apotex Netherland B.V. around June 27, 2008. As a formulator, Apotex used the perindopril API to manufacture and sell 8 mg strength perindopril erbumine tablets for the Canadian market and, for export sales to its affiliates in the UK, Australia and the Netherlands, it manufactured 2mg, 4mg and 8mg strength perindopril erbumine tablets as well as tablets containing a combination of perindopril erbumine and indapamide [Combination product].
[8] Apotex and Pharmachem are privately owned companies and members of the Apotex group of companies. They are held by Apotex Pharmachem Holdings Inc. [APHI], which is held by Apotex Holdings Inc. [AHI]. AHI also holds Apotex International Inc.—the parent company of the foreign selling entities in the group. Srini Pharmaceuticals Ltd [Srini], Apotex Pharmachem India Pvt. Ltd. [APIPL] and Apotex Research Pvt Ltd (India) [ARPL], which are manufacturing entities, are held, in whole or in part, by APHI. AHI is in turn held by Sherfam Inc., which also holds Signa S.A. de C.V. [Signa]. [Redacted]. Except for Srini, in which APHI only has a [redacted] interest, Dr. Sherman controls, directly or indirectly, all entities of the group.
Apotex group of companies [9] The Apotex group of companies has experienced substantial growth starting in the early 2000s. Here is a list of the additions relevant to these reasons:
• In 2002, APHI entered into a joint-venture ([redacted] with Dr. T.C. Reddy) which holds Srini, an Indian company mainly involved in the production, quality control, packaging and distribution of API and intermediate molecules (exhibit P-24);
• ARPL and APIPL were incorporated by APHI in June 2003. They are both Indian companies. ARPL mainly formulates, distributes and sells finished drug products. Its facilities were built in 2004 and were operational in December 2004. APIPL manufactures and sells API for export markets. Its facilities were built from 2003 to 2005, and were operational in March 2005;
• In 2004, Apotex International Inc. acquired Katwijk Farma B.V., a Netherlands based company engaged in the formulation, distribution and sale of finished drug products in Europe. It changed its name to Apotex Nederland B.V. [Katwijk] in 2008;
• Also in 2004, Apotex International Inc. acquired GenRx Pty Ltd., an Australian company engaged in the distribution and sale of drug products on the Australian market. It subsequently changed its name to Apotex Pty. Ltd. [GenRx];
• In 2006, Apotex International Inc. incorporated Apotex U.K. Ltd. [Apotex UK] for the distribution and sale of drug products on the UK market;
• Apotex Europe B.V. is also indirectly held by Apotex International Inc. and it acts as a regulatory center for the activities of the Apotex group of companies in Europe. It holds European marketing approvals for the marketing and distribution of Apotex’s products in the European Union;
• Finally, in September 2011, APHI acquired Signa, a Mexican company which since 1965, has engaged in the production, quality control, packaging and distribution of API and intermediate molecules.
Apotex and Pharmachem’s production and sale of perindopril [10] Dr. Sherman testified that his business development strategy is based on the identification of new products that have a high potential of profitability and on being the first generic manufacturer on the market for these products. He identified perindopril as a profitable target in the late 1990s, and from 1999 to December 2003, chemists at Pharmachem underwent a complete R&D and synthesis of perindopril API. Pharmachem’s first commercial batch of perindopril was ready in March 2004; it was sold to Apotex in April 2004 and delivered in June 2004.
[11] From 2004 to 2008, Pharmachem produced 16.9 kilograms of perindopril arginine, which was sold in August 2009 to ARPL. Also in the period of 2004 to 2008, Pharmachem produced 1,877.1 kilograms of perindopril erbumine API, of which:
(a) 1,007.4 kilograms were sold and shipped to Apotex;
(b) 869.4 kilograms were sold to Katwijk and shipped to the Netherlands on June 27, 2008 and July 7, 2008;
(c) 0.1 kilogram was sold to third parties;
[12] With the perindopril API purchased from Pharmachem, Apotex first conducted its trials and studies and manufactured its submission batch of perindopril finished dosage or tablets (later known as Apo-perindopril), for regulatory purposes, during the month of June 2004. It started its stability studies on June 18, 2004 and conducted bioequivalence studies for the UK market from July to November 2004, and for the Australian market from April to July 2005.
[13] On February 1, 2007, Apotex obtained a Notice of Compliance from Health Canada for its 8 mg perindopril tablets and started selling them on the Canadian market on March 6, 2007. Before Snider J issued her permanent injunction as part of the Liability judgment in July 2008, Apotex had sold 10.1 million perindopril tablets in Canada.
[14] In addition, Apotex made the following export sales:
(a) From July 2006 to July 2007, 125.5 million of 2, 4 and 8 mg strength perindopril tablets were sold to Apotex UK (as discussed below, an injunction issued by the UK High Court of Justice was in force from August 2006 to July 2007, prohibiting the sales of perindopril on the UK market, by Apotex and Apotex UK);
(b) From March 2007 to July 2008, 40.7 million tablets of 2, 4 and 8 mg strength perindopril and Combination Product were sold to GenRx;
(c) From February 26, 2008 to July 2008, 19.7 million perindopril tablets were sold to Katwijk;
(d) Small quantities of perindopril tablets were sold to Apotex’s affiliate in the Czech Republic and to a third party in Denmark known as Orifarm Supply A/S.
III. Issues [15] The parties have made several admissions and have provided the Court with tables of stipulated amounts, respectively for Apotex’s domestic and export sales [Table 3] and for Pharmachem’s domestic and export sales [Table 4]. Taking those stipulations into consideration, the following issues/sub-issues are raised:
(a) What are the Defendants’ revenues from the sales of perindopril products?
- Can the Defendants segregate their revenues?
- If so, have they adduced sufficient evidence of the quantum of revenues that should be so segregated?
(b) What are the costs that can be deducted from the Defendants’ revenues? (full absorption approach vs incremental costs approach)
(c) What are the Defendants’ profits from the sales of perindopril products?
- Is the Differential Profit approach applicable in this case?
- Were NIAs available to the Defendants?
(d) What are the Defendants’ returns on profits?
IV. Discussion The Defendants’ revenues from the sales of perindopril products [16] The parties have stipulated that Apotex’s revenues for domestic sales were [redacted] and its revenues from its export sales were [redacted], for a total of $68,375,000. They agree that [redacted] must be deducted from Apotex’s domestic sales to account for rebates and discounts and that [redacted] must be deducted from its export sales to account for transfer price adjustment from its sales to Apotex UK and GenRx (as per the transfer price agreements that will be discussed below). However, from the agreed amount of $43,326,000 ($59,714,000 minus $16,388,000) in total export sales, the plaintiffs dispute the defendants’ right to segregate and deduct a further amount of $22,024,374 which was allegedly paid by Apotex UK ($19,916,211) and GenRx ($2,108,163) for non-patent infringing indemnity and litigation services provided for in their respective transfer price agreement with Apotex (Exhibit D-50, Figure 1 of Addendum to the Expert Report of Howard N. Rosen dated September 12, 2014).
[17] Therefore, the plaintiffs contend that Apotex’s total net revenues from the sale of Apo-perindopril amount to $51,379,000, whereas the defendants contend that the total is $29,354,626.
[18] No such dispute arises with respect to Pharmachem’s revenues as its export sales were not governed by any transfer price agreement. Pharmachem’s revenues from domestic sales amounted to [redacted] while its export sales amounted to [redacted], for a total of $13,080,000.
(1) Segregation of Apotex’s revenues [19] This first point of dispute between the parties arose when the defendants presented a motion to file two addenda to Mr. Howard N. Rosen’s expert report delivered in-chief, which I granted less that a month prior to the opening of the hearing.
[20] Mr. Rosen was heard at trial as an expert witness. He is a chartered accountant, with particular expertise in, but not limited to, the valuation of intellectual property and quantification of loss and accounting of profits in intellectual property and commercial litigation disputes.
[21] In his report filed in-chief, Mr. Rosen, after having acknowledged the fundamental principle that only profits that can be shown to have been causally derived from the infringement must be disgorged, computes said profits from Apotex’s revenues from the sales of perindopril by “reviewing and summarizing a detailed report of Apotex’s billing documents obtained from the company’s SAP system”. He therefore assesses Apotex’s gross revenues from the sale of perindopril as totalling $68,375,205 (hence the stipulated amount of $68,375,000), from which he only deducts the transfer price adjustment and rebates and discounts to arrive at net sales revenues of $51,379,000 (exhibit D-49, Expert report of Howard N. Rosen-Perindopril, dated May 30, 2014, sections 4.2 and 4.18 and Schedule 4; exhibit P-4, Perindopril Sales Summary and pages 635 and 636 of the transcript of hearing).
[22] In a first addendum dated September 12, 2014 (exhibit D-50), Mr. Rosen explains that upon reviewing Mr. Ross Hamilton’s report dated August 15, 2014 (exhibit P-110), he came across some clauses of Apotex’s transfer price agreements with Apotex UK and GenRx, which distinguish between the price of a “Patent Challenge Product” and the price of a “Non-Patent Challenge Product”. Since his interpretation of these clauses has a significant impact on his computation of Apotex’s gross revenues used in the calculation of its profits, and as he felt that part of the gross revenues assessed in his May 30, 2014 report were on account of something other than the infringing product itself, he felt that it was his duty to so advise counsel for the defendants and to file this first addendum.
[23] His second addendum dated September 23, 2014 (exhibit D-51) also apportions this part of Apotex’s gross revenues which he attributes to non-infringing services, but in the context of the different NIA scenarios that will be discussed below. It will therefore not be specifically addressed in this section.
[24] In summary, Mr. Rosen suggests that a further $22,024,374 be deducted from Apotex’s gross revenues from its export sales to Apotex UK ($19,916,211) and GenRx ($2,108,163), as this amount was paid on account of an indemnity offered by Apotex to its affiliates, and of its undertaking to pay for and conduct the defence or claim, in the case of a patent challenge, engaged by Apotex or against its affiliates, in the affiliates’ respective jurisdictions.
[25] In response, the plaintiffs filed the report of Mr. Ross Hamilton, dated November 11, 2014 (exhibit P-112), which, in particular, bears on the segregation or apportionment suggested by Mr. Rosen. Mr. Hamilton is also a qualified chartered accountant with expertise in quantification of loss and accounting of profits in intellectual property and commercial litigation disputes, including specifically in the pharmaceutical marketplace.
[26] The defendants argue that it is a trite proposition of law that an accounting of profits from the infringement of a patent is limited in scope to those revenues generated by the sale of the infringing good. As such, they argue that a proper interpretation of the transfer price agreements should lead the Court to conclude that a substantial part of the price paid by Apotex UK and GenRx was not paid on account of the infringing perindopril. Rather, it was paid on account of the increased risk of litigation in the UK and Australia which accompanies the sale of the product. Thus, these agreements, in the defendants’ submissions, delineate the relationship between the parties with respect to more than the mere sale of perindopril. The agreements show increased consideration payable in certain circumstances to Apotex, on account of the significant risk Apotex would be called on to pay out its indemnity, and that these payouts would be significant where Apotex would be obliged to provide litigation services.
[27] Apotex believed that there was a risk the plaintiffs’ parent companies in the UK and Australia would bring an infringement suit; Apotex asked for a higher price for the sale of perindopril in these countries in exchange for agreeing to indemnify its own affiliates from the suits in addition to controlling and paying for all litigation related thereto.
[28] The plaintiffs argue that apportionment is not applicable in this instance as the whole of the perindopril sold by Apotex infringes the 196 Patent; Apotex would have received no revenue but for the infringement of the 196 Patent. Citing the following cases of this Court in Beloit Canada Ltd v Valmet Oy, [1994] FCJ 733 at para 77 [Beloit FC], rev’d on other grounds; [1995] FCJ, 733 [Beloit FCA]; Lubrizol Corp v Imperial Oil Ltd, [1994] FCJ 1441 [Lubrizol, FC]; [1996] 3 FC 40 [Lubrizol, FCA] at paras 9, 10 and 15 and Varco Canada Limited v Pason Systems Corp, 2013 FC 750 [Varco] at para 422, the plaintiffs contend that apportionment should only be ordered where a portion of the profits is attributable to non-infringing features of the product sold by the infringer.
[29] As will be discussed in detail in the section below dealing with the defendants’ alleged NIAs, the need to apportion the infringer’s revenues or profits or to apply the “differential profit” approach depends on the specific facts of each case and requires an analysis of all the evidence. The notion of apportionment is, in my view, little more than a restatement of the principle that only those profits that are causally attributable to the invention should be disgorged. As this is a question of fact, one can imagine situations where a portion of the profits is not necessarily attributable to non-infringing features of the product sold, but to non-infringing services sold with the product or rendered on the occasion of the sale of the product.
[30] In the case at bar, I agree with the defendants, as a matter of principle, that the provision of foreign litigation services and of an indemnity for liability under foreign patents does not constitute an infringement of the 196 Patent. Therefore, I am of the view that if part of the price paid by Apotex UK and GenRx is proven to have been paid on account of those services, then the revenues should be apportioned or segregated accordingly, in order to respect the simple “common sense view of causation” or “differential profit” (in this case gross revenues) approach (Schmeiser, at paras 101 and 102). The question is therefore, whether or not the defendants have provided sufficient evidence proving that part of the price paid was indeed on account of non-infringing services and indemnity.
(2) The evidence adduced by the Defendants [31] In order to answer that question, the transfer price agreements entered into between Apotex and both Apotex UK and GenRex respectively, need to be interpreted. Although both experts have offered their own interpretation of these agreements, this task rather belongs to the Court. Therefore, both expert reports and testimonies on this issue have been considered only to the extent that they pertain to their field of expertise.
[32] A summary of the transfer price agreements was filed as exhibit D-1. In addition, the Court heard the testimony of Mr. Jeffrey Adams, Apotex’s Director of International Finance and Corporate Development at the time the agreements were drafted. He is also signatory to the transfer price agreements with the affiliates.
[33] Mr. Adam testified that, as those export sales were made to related entities, the transfer price agreements were entered into in order to comply with the requirements of the Canadian and foreign tax authorities, with the requirements of the parties’ auditors and with those of the Organisation for Economic Co-operation and Development [OECD]’s transfer pricing guidelines. In order to satisfy the OECD guidelines, the transactions must meet an arm’s length standard.
[34] In the Brief of Transfer Price Agreements, we find the following documents:
(a) Tab A : An Agreement entered into between Apotex Inc. and Apotex UK Limited, dated May 1, 2006 [UK TPA-perindopril];
(b) Tab B : An Agreement entered into between Apotex Inc. and GenRx Pty. Limited, dated May 1, 2006 [GenRx TPA-perindopril];
(c) Tab C : An Agreement entered into between Apotex Inc and GenRx Pty Limited, dated January 1, 2007 [GenRx TPA-combination product];
(d) Tab D : An Agreement entered into between Apotex Inc and GenRx Pty Ltd., dated July 10, 2007 [GenRx TPA-general]; and
(e) Tab E : An Agreement entered into between Apotex Inc. and Katwijk Pharma B.V., dated August 22, 2007 [Katwijk TPA-general]
[35] Mr. Adams acknowledged that although some of these agreements bear earlier dates, they were all signed during the month of July 2007.
[36] The UK TPA-perindopril (exhibit D-1, Tab A) is a product specific transfer price agreement. In a recital, the parties acknowledge that perindopril is a generic version of a product developed by the plaintiffs and that, as such, it is contemplated that the plaintiffs may challenge their right to manufacture, market or sell perindopril in the UK.
[37] Section 1 of the UK TPA-perindopril is entitled Indemnity and it provides that Apotex will indemnify and hold Apotex UK harmless from and against all claims that the plaintiffs or any third party may bring, to the extent that such claim is based on the alleged infringement of the plaintiffs’ or any other third party’s patent. Section 2 is entitled Alleged Infringement and provides that Apotex and Apotex UK must promptly give each other notice of any claim commenced or threatened against it. It specifies that Apotex will pay all legal expenses and control the defence to be brought against the suit and it also provides for a split 90% Apotex -10% Apotex UK of any settlement amount or award of damages in their favour, irrespective of which of them is designated to receive such payment. Section 3 is entitled Patent Challenge and adds that Apotex has the exclusive right to bring a patent challenge in the territory and again, if successful, any award would be split 90% Apotex-10% Apotex UK. Section 4 is entitled Procedure and clarifies that if need be, Apotex UK may be permitted to comment on the proceedings, however Apotex controls the litigation and may compromise or settle without Apotex UK’s consent.
[38] Section 5 of the UK TPA-perindopril is entitled Transfer Pricing. Sub-section 5.1 enumerates several definitions to be applied to this section 5, the most relevant ones being:
(c) “Patent Challenge Product” means a generic pharmaceutical product manufactured by Apotex and supplied to Apotex UK for distribution and sale in the Territory during the same time that:
(i) a competitor markets and sells a competitive branded version of the same pharmaceutical product for which the competitor holds a recognized unexpired patent in the Territory; and
(ii) there are no other competing generic versions of the same pharmaceutical product marketed and sold in the Territory.
. . .
(e) “Transfer Price” in relation to the Product means the price to be paid by Apotex UK to Apotex for the supply of the Product.
[39] Sub-sections 5.2 and 5.3 are also worth reproducing at length:
5.2 Transfer Price—Patent Challenge Product. During any period that the Product is a Patent Challenge Product, Apotex UK shall pay to Apotex a Transfer Price for each shipment of the Product manufactured and supplied by Apotex to Apotex UK for commercial sale in the Territory equal to the Product’s Manufacturing Cost plus ninety percent (90%) of the Product Profit.
5.3 Transfer Price—Not-Patent Challenge Product. During any period that the Product is not a Patent Challenge Product, Apotex UK shall pay to Apotex a Transfer Price for each shipment of the Product manufactured and supplied by Apotex to Apotex UK for commercial sale in the Territory on terms equivalent to third party norms and standards.
[40] Finally, also significant is Section 8 which contains a standard Severability clause that provides that if any provision is found to be invalid or unenforceable, it is severable from the other provisions of the agreement that will remain in full force and effect.
[41] The GenRx TPA-perindopril (exhibit D-1, Tab B) is also a product specific agreement and is very similar to the UK TPA-perindopril. The only differences are found in its Sections 2 and 3 (the award split is [redacted] instead of 90%-10%) and in Section 5. Sub-section 5.1 contains the definition on Management Price which is not found in the UK TPA-perindopril and which should be understood as the manufacturing cost plus the actual cost to Apotex to ship the product. It, therefore, has an impact on the determination of the profit generated by the sales. Another difference is found in the definition of the Patent Challenge Product which reads as follows:
(d) “Patent Challenge Product” means a generic pharmaceutical product manufactured by Apotex and supplied to GenRx for distribution and sale in the Territory during the same time that:
(i) a competitor markets and sales a competitive branded version of the same pharmaceutical product for which the competitor holds a recognized unexpired patent in the Territory; and
(ii) there are no other competing generic versions (excluding authorized generics and swap generics that originate from Apotex/GenRx) of the same pharmaceutical product marketed and sold in the Territory;
(my emphasis)
[42] Finally, sub-section 5.3 does not provide for a specific Transfer Price- Non-Patent Challenge Product but rather cross-references, for that purpose, the GenRx TPA-general, the content of which will be discussed below.
[43] The GenRx TPA-Combination Product (exhibit D-1, Tab C) is modeled after the GenRx TPA-perindopril but specifically applies to the Combination Product.
[44] The GenRx TPA-general (exhibit D-1, Tab D) is not a product-specific agreement. For the Transfer Price-Patent Challenge Product, it refers to the Indemnity Transfer Price Agreement which, for the purpose of this case, has been proven to be either the GenRx TPA- perindopril or the GenRx TPA- Combination Product. However, it provides for a definition of the Patent Challenge Product that does not exclude “authorized generics and swap generics that originate from Apotex/GenRx”, as do the GenRx TPA- perindopril and the GenRx TPA- Combination Product. In addition, it establishes the following formula for computing the Transfer Price-Non-Patent Challenge Product:
During any period that a Product is not a Patent Challenge Product, GenRx shall pay to Apotex a Transfer Price for each Shipment of the Product manufactured and supplied by Apotex to GenRx for commercial sale in the Territory at the lesser of
Management Price + [redacted] or
Management Price + [redacted] of the Consolidated Product Profit
Further evaluation of alternative pricing strategies such as marginal costing are in effect with appropriate approvals in the instance that above (a) or (b) are not viable due to competitive local market pricing.
[45] The Katwijk TPA-general (exhibit D-1, Tab E) is modeled after the GenRx TPA-general but instead of referring to the Indemnity Transfer Price Agreement in order to identify the Transfer Price-Patent Challenge Product, it refers to the Reserved Transfer Price Agreement, which was proven not to exist.
[46] It was said during the trial that one can use interchangeably the following expressions: Patent Challenge Product, Indemnity Product or Reserved Product.
[47] Throughout the discovery process, counsel for the plaintiffs requested several times that they be provided with any documents that would allow them to understand the price paid by Katwijk for Apo-perindopril, to no avail. It was only as a result of the cross-examination of Mr. Gordon Fahner during trial that counsel for the defendants communicated a further agreement between Apotex and Katwijk, dated November 28, 2007 (D-86, Tab-5) [Katwijk-indemnity agreement] which, but for Section 5 (Transfer Price), is identical to both the GenRx TPA-perindopril and GenRx TPA-Combination Product. It is therefore solely an indemnity agreement that provides for a split [redacted] of any award or settlement payment, but does not deal with transfer price.
[48] Mr. Adams testified at trial that although it was not provided for in any written agreement, sales of Apo-perindopril to Katwijk were made by consignment. A commercial invoice at a price of cost plus [redacted] accompanied the product through customs and once the product was sold by Katwijk to an arms length customer, an accounting invoice was issued at the price of cost plus a [redacted] profit share.
[49] The defendants contend that the existence of two transfer prices for a single product requires the Court to answer the question as to what the higher price represents. They argue that the agreements should be interpreted in the context in which they were concluded; the entirety of the agreements and the true intent of the parties must be taken into account. On that basis, they submit that the difference between what is said to be the higher price and what is said to be the lower price relates to the indemnity and relevant litigation services.
[50] The plaintiffs argue that the agreements do not explicitly stipulate that the price is paid on account of products and services (as opined by Mr. Rosen) but rather explicitly provide for a definition of the “Transfer Price” as being the price to be paid for the supply of the Product.
[51] I agree with the defendants that the answer to this issue is not found in the single definition given to Transfer Price, that the transfer price agreements must be interpreted in the light of the entire agreement and that the commercial logic behind the formula for two prices does take into account the increased risk of the sale of a Patent Challenge Product. However, I do not agree that the proper interpretation of these agreements supports Mr. Rosen’s theory that the difference between the higher price and the lower price, in the context of the export sales of Apo-perindopril to Apotex UK and GenRx, was paid solely on account of the indemnity provision and related litigation services, and not on account of the sale of the product. In addition, I am of the opinion that segregating or apportioning those revenues would not be equitable in this case.
[52] First, the provisions of the transfer price agreements that deal with the Transfer Price are distinct from those provisions that provide for an indemnity and related services and are severable. It could hardly be argued that the higher price is, in full or in part, a consideration for the indemnity if, in case the Transfer Price provisions are found to be invalid or unenforceable, the indemnity provisions will remain in full force and effect. In addition, the indemnity and related services are offered even if there is no litigation or risk of litigation or, at least in the case of the UK TPA-perindopril, even if the lower price is applicable. There is only one agreement between Apotex and Apotex UK which covers both situations. If the product is non-patent challenged, the price, as per the UK TPA-perindopril, would be that of third party norms and standard, but the indemnity would remain available. It could also be argued that with respect to Australia, the GenRx TPA-perindopril and the GenRx TPA-Combination product, which are product-specific, would remain in force if the product becomes a non-patent challenged one, but that the price would be set by the GenRx TPA-general, which price provisions are incorporated by reference in the two previous agreements. Again, the indemnity provisions would remain binding on the parties.
[53] As indicated above, the Katwijk-indemnity agreement is, but for the Transfer Price provisions, modeled after all three product specific transfer price agreements. It could certainly not be said that sale price, be it high or low, is, in full or in part, a consideration for the indemnity and related services offered, as the agreement does not even deal with transfer pricing. Mr. Adams testified that this was probably an oversight on his part and on the part of Mr. Ben Haneveld who signed the agreement on behalf of Katwijk. However, when confronted with a similar indemnity agreement between Apotex and GenRx, for the sale of Carvedilol in Australia (P-90), he had to admit that he could provide no explanation as to why the indemnity agreements were separate from any transfer price agreement.
[54] Second, although the defendants vigorously argue that the only factor which triggers the higher price is the increased risk of litigation, Mr. Adams acknowledged that the presence of one or more generic competitors, in a given market, has an impact on the profitability of a product. As explained by Dr. Sherman, it is after all what underlines the Apotex group of companies’ business strategy: identify a profitable product and be the first generic on the market.
[55] Transfer pricing has been qualified by Mr. Hamish Salmond of Apotex UK as a “mine field”. In his email dated March 15, 2007 (P-88), he says it as it is: “you can charge an affiliate what ever price you like but this may cause a tax problem”. He further explains that the potential double taxation on the overcharge could be annihilated if Canada and the UK have a tax treaty or if a dispensation based on company size applies. Although he finishes his March 15 email in saying that he needs answers on those issues, in his March 19, 2007 email (D-86, Tab-3) he simply states that the 90-10 profit split is acceptable as long as the risk is born by Apotex. Mr. Salmond did not testify at trial and thus what was considered by Apotex UK when it accepted the price will be ignored. Mr. Adams admitted that transfer pricing is a challenging endeavour and as it could be seen from the Transfer Price Policy adopted subsequently by Apotex (D-86, Tab-6), many factors need to be considered, the affiliates’ profits being one of them.
[56] There is an additional difficulty with the evidence before me: I am asked to compare a cost plus based price (lower price) with a profit share based price (higher price). The first being computed only on the basis of Apotex’s manufacturing cost increased by 30%, whereas the second is predicated on the sale price charged by the affiliates to third parties, thus on market conditions in the affiliate jurisdiction. One can easily understand that the more favourable the market conditions are, or the less competitive it is, the greater the difference will be between the higher price and the lower price and, according to the defendants, the more value would be attributed to the indemnity and related litigation services. The manufacturing costs would be the same irrespective of market conditions. Therefore, as the affiliate sale price increases, the affiliate’s profits if calculated on a cost plus 30% transfer price, would increase exponentially. However, if they are calculated with a profit share formula, they would increase in a linear way. It is likely that the choice of a higher price in that context is, at least partially, triggered by the fact that Apotex wants to benefit from those favourable market conditions.
[57] We only know the difference in price in the specific context of the sales to Apotex UK and GenRx – therefore the value allegedly attributable to the indemnity and legal services - as they were determined by Mr. Rosen who disposed of the actual revenues from the sale of perindopril to those affiliates (made at the higher price), from which he deducted the cost plus 30% figures. The difference he arrived at is substantial. As indicated above, he deducts $19,916,211 from total revenue of $49,282,144 (or approximately 40%) for UK and $2,108,163 from a $5,977,317 (approximately 35%) for Australia. This suggests that both markets were quite favourable. As we know, they were free from competition from any generic manufacturers.
[58] I agree with the plaintiffs that the evidence presented at trial indicates that Apotex’s profitability is a priority for Dr. Sherman. One example of that being the important no-interest loan between APHI and Apotex that will be discussed below in the returns on profits section of these reasons. It is only normal in that context that Apotex would want to take advantage of being the first generic on the market. As to the defendants’ argument that in the case of Australia, the high price would still apply in circumstances where an authorized generic enters the market and creates competition, I note that few comments were made at trial as to what exactly is covered by that exception. It reads “excluding authorized generics and swap generics that originate from Apotex/GenRx”. No one provided an explanation as to what should be understood by “originate from Apotex/GenRx”, or as to the likelihood such a situation occur.
[59] In my view, the difference between the higher price and the lower price is greatly predicated on Apotex’s desire to bring back home a larger part of the affiliate’s profits in cases where the latter is the only generic on the market.
[60] Third, the defendants’ suggested interpretation fails to consider that there is an important consideration to the indemnity and related services found in specific provisions; any settlement or award amounts are to be shared to the advantage of Apotex.
[61] I need here to discuss the parallel proceedings that took place and are still pending in the UK, between Servier Laboratories Limited [Servier], plaintiffs’ affiliate, and the defendant Apotex. These proceedings are presently stayed pending the outcome of this case before the Canadian courts. The key stages of these proceedings can be summarized as follows :
• The French perindopril patent, owned by Servier had expired in 2006. However in July of 2000, it had applied for a further patent covering a particular crystalline form of perindopril erbumine, which was registered by the European Patent Office (947 Patent);
• Defendant Apotex took the view that the 947 Patent was invalid, it obtained market authorization for its product in July 2006 and, as was evidenced at trial before this Court, immediately launched its Apo-perindopril in the UK, that is, the finished product dosage manufactured in Canada;
• In August 2006, Servier issued a claim for patent infringement against defendant Apotex and Apotex UK and obtained an injunction restraining them from selling perindopril in the UK until trial. As part of the injunction relief, Servier undertook to compensate the defendants, should the 947 Patent be found invalid or should they be held not to infringe it (cross-undertaking);
• On July 11, 2007, Pumfrey J, of the High Court of Justice, found the 947 Patent to be invalid and refused to maintain the injunction pending the appeal. An appeal was filed and dismissed;
• While Norris J, of the High Court of Justice, was writing his decision on the cross-undertaking damages, Servier submitted an application to amend its pleadings and to introduce the Liability judgment that had just been rendered by Justice Snider of this Court. Servier argued that the defendants’ claim should be dismissed as the perindopril Apotex UK would have sold but for the injunction, would have been manufactured in Canada and would have been an infringement of the plaintiffs’ 196 Patent. They therefore pleaded the defence of ex