In her judgment issued March 28, 2018,[1] Justice Gagné provides the latest installment of Federal Court jurisprudence on the developing principles governing non-infringing alternatives (or NIAs) in the quantification of remedies for patent infringement. The decision follows from the Federal Court of Appeal sending back for redetermination the issue of the availability of non-infringing perindopril in proceedings for disgorgement of profits. Despite accepting that for a portion of the infringing period Apotex “could” have sourced non-infringing product for sale in the UK and Australia, Justice Gagné rejected that Apotex “would” have done so. Apotex had previously been found to infringe by making perindopril in Canada to supply those markets. Justice Gagné reaffirmed the court’s prior judgment for the plaintiffs in the order of $60 million.

Since the Court of Appeal’s formulation in Lovastatin[2] of the test for an infringer to avail itself of an NIA, the “would have” branch has proven particularly difficult to satisfy. The court’s reasons in Perindopril show it is also the least settled. By way of background, “could have” concerns whether it was in fact possible to produce an NIA and relates to issues of supply, capacity and availability. “Would have” is more subjective and looks at whether pursuing the NIA is something the infringer would have chosen to do. As stated by Justice Stratas in Venlafaxine:

Both “would have” and “could have” are key. Compensatory damages are to place plaintiffs in the position they would have been in had a wrong not been committed. Proof of that first requires demonstration that nothing made it impossible for them to be in that position—i.e., they could have been in that position. And proof that plaintiffs would have been in a particular position also requires demonstration that events would transpire in such a way as to put them in that position—i.e., they would have been in that position.[3]

Given its subjective nature, the “would have” requirement can be seen to raise a conflict between condemning the decision to infringe and accurately assessing its economic impact.[4] Support for condemnation exists in UK authority: “One is concerned with compensation for what the defendant has done by acting ‘improperly’.”[5] Consistent with this authority, at the trial level in Lovastatin, the Federal Court rejected the notion that a tortfeasor could excuse its conduct on the basis of an NIA: “Tort law is not concerned with whether the defendant could or would have acted differently in a ‘but for’ world where no wrongful conduct occurred.”[6] Likewise, in Cefaclor the court rejected the relevance of a defendant’s hypothetical actions: “[C]ausal connection must be determined based on an examination of the facts as they existed at the relevant time – not on those that could have existed.”[7]

Construction of the counterfactual world has, however, long taken into consideration the effects of legitimate non-infringing competition on sales that otherwise would have been made but for infringement.[8] Eliminating non-infringing competition, on principle, that would have come from an infringer has been criticised for creating a less than accurate economic picture of what would have happened absent infringement.

In pursuit of “perfect compensation” in Lovastatin, the Court of Appeal, therefore, held that all competition in the but-for world is relevant. Both non-infringing product the defendant or any other competitors could and would have sold, and the extent lawful competition would have reduced the patentee’s sales must be considered.[9] Justice Dawson relied heavily on the Supreme Court’s decision in Monsanto,[10] distinguishing other Canadian and UK authority and policy reasons cited by the trial judge.[11]She reasoned that economic logic ought to govern the most accurate representation of what would have happened:

The problem with computing lost profits without considering the availability of noninfringing alternatives is that […] this practice renders the patentee better off than she would have been in the absence of infringement. (Analogously, ignoring noninfringing substitutes when calculating defendant’s profits renders defendants worse off than they would have been, but for the infringement.)[12]

Similarly, in Venlafaxine the Court of Appeal later remarked:

I acknowledge that Lovastatin concerned a claim for compensatory damages for patent infringement, not a claim for damages under section 8 of the PMNOC Regulations. But in both types of claims the court’s task is the same: to assess a hypothetical world where the defendant’s impugned conduct did not take place. And in both the overriding principle is the same: a plaintiff is to be compensated, no more, no less[13]

On the evidence in Lovastatin, Justice Dawson found that Apotex neither could have nor would have sold non-infringing lovastatin. Interestingly, given the approach rooted in economic logic she had endorsed, in rejecting the argument that Apotex would have sold non-infringing compound, Justice Dawson pointed to a number of factors tied to the infringing conduct and Apotex’s knowledge, intentions and beliefs.[14] However, in a but-for world in which there was no infringement, a question arises as to whether factors related to infringement are of any relevance. One could argue that with infringement scrubbed from the hypothetical landscape, the fact infringement was brazen, knowing or on a large scale and the subjective motivations, beliefs and intentions that led to infringement have no place in constructing a world where the infringer never infringed.

Returning to Perindopril, at the outset Justice Gagné’s reasoning suggests the court would exclude conduct related to infringement from its analysis of what Apotex would have done in the but-for world: “In this hypothetical world analysis, I am prevented from considering what occurred in the real world as an option (i.e., infringing by manufacturing in Canada).”[15] Notably, Justice Gagné also considers the court’s reasons from the appeal of her earlier decision in the Perindopril proceedings, and provides the following interpretation of Justice Dawson’s discussion of the “would have” requirement:

By linking the “would have” branch of the NIA analysis to whether there exists any impediments to the use of an NIA, Perindopril FCA seems to remove the clutter of considering the infringer’s intentions, which was in fact an important part of the “would have” analysis in Lovastatin FCA. It also seems to limit the legal relevance of NIAs to a purely economic rationale. The logic behind that conclusion would therefore be that if an NIA is economically viable, then the infringer’s profit is not causally attributable to the invention.[16]

These remarks seem to recognize that while invoking economic logic in pursuit of perfect compensation in Lovastatin, Justice Dawson may have been less than perfect in her execution when she looked to evidence of intention, which would not be relevant to a purely economic rationale. Justice Gagné appears to interpret the Perindopril appeal as clarifying the test by excluding evidence of intention from the “would have” branch. Put another way, the court appears to be saying that, despite her earlier reasons in Lovastatin, the implication of Justice Dawson’s reasons in the Perindopril appeal is that evidence of an infringer’s intention is not relevant.

Justice Gagné, however, rejects this proposition. To do so she dispenses with the underlying premise in the reasons of the Court of Appeal that the question of impediment is linked to the “would have” branch: “However, in my humble view, the notion of impediment – as in obstacle or barrier – should be linked to the ‘could have’ analysis, not the ‘would have’ analysis.”[17]

Having interpreted the Court of Appeal’s reasons in Perindopril as foreclosing consideration of an infringer’s intention in the “would have” analysis, a question, however, arises as to whether it was open for Justice Gagné to avoid application of the principle. In fact, it seems that an impediment such as lack of economic viability falls squarely in the “would have” analysis (although an impediment such as lack of a supplier is more of a “could have” issue). Regardless, Justice Gagné’s reasons appear at odds with her interpretation of the Court of Appeal’s decision in Perindopril.

The court then quotes from Justice Dawson’s reasons for rejecting Apotex’s argument that it would have sold non-infringing lovastatin in which she relied on Apotex’s knowledge, intentions and beliefs related to infringement. Justice Gagné held: “Most of those comments apply here”.[18] Next she reviewed two recent Federal Court decisions[19] said to “confirm that the infringer’s intention is still a relevant factor to consider”.[20] She concludes: “[F]ull adherence to the NIA analytical framework still requires that the intentions, motivations and preferences of an infringing party be considered.”[21]

On the facts, Justice Gagné found that Apotex could have used offshore suppliers of non-infringing perindopril for part of the infringing period, but declined to find that it would have: “I am of the view that the evidence falls short of establishing that, despite the fact that it was economically viable for Apotex to do so, it would have used one or more of the non-affiliate manufacturers to obtain perindopril API and tablets.”[22]

The finding of economic viability would arguably satisfy Justice Gagné’s comments on the Court of Appeal’s no impediments test. Ultimately, however, evidence of Apotex’s real world choice to manufacture in Canada—the decision that led to infringement—persuaded her that Apotex would not have done otherwise in the but-for world. “Again, Apotex’s actions, motivations and preferences in the real world are instructive in drawing inferences as to what it would have done in the hypothetical world.”[23] Relying on evidence of Apotex’s preference to manufacture at its own sites in Canada, Justice Gagné concluded: “[I]t is more likely than not that Apotex would not have used one or more of those third-party suppliers to produce non-infringing perindopril”. She rejected Apotex’s claim it would have employed an NIA.[24]

On its face, Perindopril is authority for the proposition that the intentions of an infringing party are relevant to the NIA analysis. However, in light of Justice Gagné’s interpretation to the contrary of the Court of Appeal’s reasons in the Perindopril appeal, the strength of the authority is arguably an open question in an area where the law continues to evolve. On the facts, it is probable the court would have arrived at a different result if it had not taken into account the evidence of Apotex’s preference to manufacture in Canada, i.e. the intentions of the infringing party. Its finding the proposed NIAs would have been economically viable would appear to satisfy the “would have” requirement from a purely economic perspective. It seems the issue of whether this is the correct approach to assess “perfect compensation” is ripe for consideration by the Court of Appeal.