Abigail Smith January 21 2019 Federal Court of Appeal overturns cefaclor damages decision on prejudgment interest issue Smart & Biggar | Intellectual Property - Canada Abigail Smith Intellectual Property IntroductionNon-infringing alternative defencePrejudgment interestIntroductionOn 23 November 2018 the Federal Court of Appeal allowed in part Apotex's appeal of a decision awarding Eli Lilly over C$100 million for Apotex's infringement of eight process patents relating to the antibiotic cefaclor.(1) The Federal Court had awarded Eli Lilly roughly C$31 million in damages for infringement and C$75 million in prejudgment interest as damages for the time value of the money lost in the 17 years that had elapsed before the reference trial on damages took place.(2) The Federal Court of Appeal remitted the decision to the Federal Court for reconsideration solely on the issue of interest. The court also provided guidance regarding the application and objective of the 'non-infringing alternative' defence.Non-infringing alternative defenceThe non-infringing alternative defence permits infringers to argue that in the hypothetical world in which damages are assessed, the infringer would have entered the market with a non-infringing alternative product and made the same sales it made with the infringing product, such that the patentee suffered no loss from the infringement and is owed no damages.The Federal Court of Appeal rejected Apotex's argument that the lower court should have found that a non-infringing alternative would have been available to it during the relevant period. Although the Federal Court erred in concluding that the non-infringing alternative defence was unavailable in Canada, based on the evidentiary record, the Federal Court "could not but conclude that the defence was unavailable in this case".The Federal Court of Appeal also provided guidance regarding the non-infringing alternative defence.First, it explained that although a key Federal Court of Appeal non-infringing alternative decision referenced US law, the court "did not simply import an American law concept in a wholesale fashion" (for further details please see "'Non-infringing alternative' defence in assessment of damages for patent infringement"). In particular, aspects unique to US law "may result in a more lenient approach of the application of the [non-infringing alternative] defence" in the United States.Second, the court commented on the defence's objective :… [T]he objective of the [non-infringing alternative] '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.Prejudgment interestIn the decision under appeal, the Federal Court awarded Lilly C$75 million in prejudgment interest as damages for the time value of the money lost in the time that had elapsed before the reference trial on damages took place. The Federal Court of Appeal remitted this issue to the Federal Court for reconsideration, commenting on three aspects of the Federal Court's analysis.First, the Federal Court of Appeal found that the Federal Court had erred in law by finding "a presumption that a plaintiff would have generated compound interest on the funds otherwise owed to it, and also that the defendant did so during the period in which it withheld the funds". Rather, a loss of interest must be proved in the same way as any other form of loss or damage. Therefore, Lilly was required to prove its claimed loss regarding the time value of the monies owed for infringement.Second, the Federal Court of Appeal questioned why the Federal Court had used Lilly Canada's annual rate of profit on its sales as the applicable rate of interest. The Federal Court of Appeal noted that in the Federal Court's reconsideration, "it will be important for [the Federal Court] to explain in more detail its finding as to the rate applicable, if any".Finally, with respect to the Federal Court's failure to make a deduction to the award to account for tax, the Federal Court of Appeal urged a fuller explanation of the burden of proof on this issue.For further information on this topic please contact Abigail Smith at Smart & Biggar/Fetherstonhaugh by telephone (+1 416 593 5514) or email ([email protected]). The Smart & Biggar website can be accessed at www.smart-biggar.ca.Endnotes(1)Apotex v Eli Lilly (2018 FCA 217).(2) Further information is available here.