In a Judgment released July 23, 2015, the Federal Court of Appeal upheld the Federal Court’s award of more than C$180 million in damages and interest for Apotex’s infringement of Merck’s Canadian lovastatin patent. In this decision, the Federal Court of Appeal reversed the Trial Judge and held that the availability of a non-infringing alternative (“NIA”) is relevant under Canadian law but held that Apotex could not have and would not have deployed it.

Background

This litigation between Merck and Apotex dates back to 1997 when Merck sued Apotex for infringing its patent covering a process for making the first-approved cholesterol lowering statin, called lovastatin, which was marketed in Canada and around the world as MEVACOR®.

In 2010, Merck prevailed at trial (2010 FC 1265). The Trial Judge found that Apotex had infringed Merck’s patent on a massive scale by selling generic Apo-lovastatin between 1997 and 2001 despite its undertaking to Merck and Health Canada that it would manufacture lovastatin using a non-infringing process. Apotex’s appeal from this ruling was dismissed in 2011 (2011 FCA 363). Apotex’s application for leave to appeal to the Supreme Court of Canada was also dismissed.

The parties then proceeded to a trial on the issue of damages. Apotex contended that Merck should be limited to a reasonable royalty because it had a non-infringing process that it had previously used and could have used to replace the infringing sales. The Trial Judge rejected this argument and held that such an argument is irrelevant under Canadian law. The Trial Judge awarded Merck more than C$180 million, the largest award of damages for patent infringement in Canadian history.

The Appeal

On appeal, the key dispute was whether a non-infringing alternative is a relevant factor to be considered in assessing patent infringement damages. The issue had never been considered by a Canadian appellate court and had only twice been considered by Trial Courts. The Court of Appeal did not agree with the trial Judge that a NIA could not be considered in the assessment of damages. However, the Court of Appeal held that Apotex had failed to establish the defence, with the result that Apotex’s appeal was dismissed, albeit for different reasons than set out by the trial Judge.

The Court of Appeal approved the US approach to damages articulated by the Federal Circuit and by some US academic commentators in applying basic propositions of causation law in holding that the availability of an NIA can establish that the plaintiff’s lost sales were not causally related to the infringement. In so holding, the Court of Appeal disapproved of the only two Canadian cases directly on point and declined to follow UK law, under which an NIA is irrelevant to patent damages.

Importantly, the Court of Appeal held that an NIA can only be invoked if the defendant proves not only that it could have used an NIA, but also that it would have used an NIA in order to replace infringing sales. Citing with approval a decision of the Australian Federal Court, the Court of Appeal held that an NIA must be available to replace infringing sales at the exact moment they were made, “instantaneously”.

Applying this standard, the Court held that because Apotex would have had to move its manufacturing back to Canada from China and restart the process there, it would have taken several weeks to produce non-infringing lovastatin such that it would not have been able to replace any of the infringing sales at the time each sale was made.

The Court of Appeal also held that Apotex failed to prove that it would have used the NIA because:

  1. Apotex was likely aware that the Chinese-made bulk lovastatin was infringing and chose to sell it anyway.
  2. Apotex believed that Merck’s patent was invalid.
  3. Apotex called no witness from its Canadian manufacturer (the manufacturer of the alleged NIA) to support its contention.
  4. Apotex’s only fact witness was its CEO, Barry Sherman, whose evidence (albeit not on this point) was found to be unsubstantiated and self-serving.
  5. Apotex did not prove that it would have profited by selling an NIA in light of the value it would have lost by taking the steps necessary to use the NIA.

Ultimately, the Court of Appeal concluded that since Apotex did not meet its burden to show it could have and would have replaced the infringing sales with its NIA, the trial judge correctly awarded Merck damages for those lost sales. Accordingly, Apotex’s appeal was dismissed.