Profits vs. Damages – Non-Infringing Alternatives

Only rarely do patent cases proceed to trial and even more rarely are contested judgments on remedies issued. A recent Federal Court decision on damages considered whether non-infringing alternatives to the defendant’s infringing activities should be considered.

In most patent cases, the quantification of damages are bifurcated, or deferred until after a trial decision on validity and infringement. Only if the patent is found valid and infringed, will the remedies need to be considered. Unfortunately, for those interested in following decisions on patent remedies, in most cases the patents are found invalid, not infringed or a settlement is reached prior to a decision.

In a decision released in July, Merck & Co., Inc. v. Apotex Inc., 2013 FC 751, Justice Snider held that Apotex must pay $119 million in damages for its sale of generic lovastatin, a cholesterol drug, which infringed one of Merck’s patents.

The case has a long history, having been started in 1997 when Apotex received Health Canada approval to sell its product. In a 2010 decision, after a 35 day trial, Justice Snider determined that Merck’s patent was valid and Apotex’s lovastatin infringed the patent (see 2010 FC 1265 aff’d 2011 FCA 363). Because the quantum of damages had been bifurcated, there was no determination of how much was to be paid until now.

After the appeal to the Federal Court of Appeal, and discovery on the remedies and further expert reports, a second trial was held to determine the damages, including Merck’s lost profits as a result of Apotex’s sales.

A key argument made by the defendant was that a non-infringing alternative was available. Therefore, the argument goes, the plaintiff’s damage was the same as it would have been had the non-infringing alternative been used and therefore only nominal damages should be awarded.

This argument was based on a line of cases primarily relating to an accounting of profits. The Supreme Court of Canada, in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34 had held that the availability of the non-infringing alternative to be relevant to the quantification of the accounting of profits remedy.

In contrast, damages were at issue in the Merck case. Justice Snider distinguished (at para 46) between the accounting of the defendants’ profits from a calculation of the plaintiff’s damages:

The key difference between the two remedies is the focus or starting point of the assessment. A claim for damages focuses on the plaintiff’s loss. What loss did the plaintiff suffer from the unauthorized use of the invention by the defendant? On the other hand, an accounting of profits looks at the benefit or advantage that a defendant derived from the use of the invention.

Justice Snider rejected Apotex’s position that a non-infringing alternative is relevant to an assessment of damages on a number of grounds.

She highlighted the development of Canadian law on damages from the UK, particularly since United Horse Shoe from 1888 and concluded:

[69] In sum, the law of the United Kingdom is clear and unequivocal; the non-infringing alternative defence is wrong at law.

[70] The reasoning of United Horse Shoe has been considered and followed in Canada in at least one decision of our court and referred to in another.

Justice Snider also considered the policy for not considering non-infringing alternatives for damages and concluded that it would result in “inadequate compensation for injured plaintiffs and the infringer escaping responsibility for its infringement. The submission of the Defendants is, quite simply, that ‘I would have harmed you just as much even if I had not infringed!’” (para 113).

Interestingly, the United States takes a different position on non-infringing alternatives, which Justice Snider distinguished primarily on the basis of a different legislative basis. She accepted that the United States does consider non-infringing alternatives when calculating damages. Professor Cotter, in a case comment on this decision, highlighted a rational for considering non-infringing alternatives when calculating damages:

If, but for the infringement, the defendant would have resorted to a non-infringing alternative that would have enabled it to make all the sales it made using an infringing product, the patentee quite literally has suffered no lost profit attributable to the infringement.

According to Justice Snider’s decision, the Canadian courts consider that there is a significantly different rational for an accounting of profits than for damages leading to a different analysis. For damages, which focused on the harm suffered by the plaintiff, hypothetical scenarios where the defendant used non-infringing alternatives are not to be considered.

Apotex has filed an appeal to the Federal Court of Appeal (A-242-13) so this is likely not the last word on non-infringing alternatives.

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