Apotex Inc v ADIR2017 FCA 23

Another judgment affirms that the non-infringing alternative (“NIA”) defence is relevant in the reduction of accounting of profits awards.

In this Federal Court of Appeal (“FCA”) decision, on appeal from ADIR v Apotex Inc, 2015 FC 721 [ADIR v Apotex], Apotex Inc. (“Apotex”) asserted that the Federal Court (“FC”) erred in the judgment previously rendered on two grounds: by failing to take into account the availability of NIAs so as to reduce the profits Apotex received from infringement of ADIR’s patent for perindopril, [8] and by failing to apportion the profit Apotex earned on the sales of infringing perindopril from the profit it earned from the provision of the indemnity and related legal services Apotex agreed to provide its foreign affiliates. [8]

The FCA concluded that the FC erred in law by rejecting the relevance at law of any available NIA to perindopril and failed to adequately consider the evidence presented as to the ability and willingness of three suppliers to provide a NIA of perindopril. [9] The FCA further concluded that while the FC committed an extricable error of law in its interpretation of contracts between Apotex and its affiliates, it did not err in its ultimate conclusion to not apportion Apotex’s profit. [9]

The single issue of the presence of the NIA was remitted to the FC. In all other respects, the appeal was dismissed. [9]

The ‘196 Patent: Background and Judicial History

ADIR is the owner of Canadian Patent No. 1,341,196 (“the ‘196 Patent”), entitled “Process for the Preparation of Substituted Imino Diacids,” which claims the drug perindopril that is distributed in Canada by Servier Canada Inc. [1] In 2006, Apotex began manufacturing its own generic version of perindopril. [2]

In 2008, the FC found the ‘196 Patent valid and infringed by Apotex in a liability judgment (Laboratoires Servier, Adir, Oril Industries, Servier Canada Inc v Apotex Inc, 2008 FC 825), which was later affirmed by the FCA (Apotex Inc v ADIR, 2009 FCA 222). [3] When provided with the option to claim either damages or an accounting of Apotex’s profits, ADIR elected the latter. [4]

In determining the amount of Apotex’s profits which were attributable to the infringing activity, the FC considered the manufacture and sale of perindopril tablets in Canada as well as their sale abroad. [5] At trial, Apotex acknowledged that there was no alternative to infringing the ‘196 Patent for domestic sales, rendering those profits not of issue on this appeal. [5] What were at issue in this appeal were Apotex’s profits from the sales of perindopril abroad, particularly sales made to affiliates of Apotex located in Australia and the United Kingdom. [5]

Non-Infringing Alternatives: Relevant to the discussion

Apotex submitted that a defendant need only disgorge profits that are causally linked to the patentee’s invention. [24] Citing the case of Monsanto Canada Inc v Schmeiser, 2004 SCC 34 [Schmeiser], Apotex argued that if all the profits claimed by ADIR could have been earned without infringement of the ‘196 Patent, then there would be no profits to disgorge. Apotex further submitted that there were numerous sources of NIAs to perindopril available for Apotex to sell abroad. [24] The FCA structured its analysis of these submissions by first considering whether the FC erred by rejecting the relevance at law of perindopril NIAs for export sales, and then considering the FC’s assessment of the evidence before it. [25]

After an analysis of Schmeiser, the FCA concluded that the FC had erred in law by rejecting Apotex’s argument to take the availability of the perindopril NIAs for export, and for failing to apply the differential profit approach. [30] However, an analysis of the FC’s assessment of the evidence yielded that the FC had erred by ignoring whether Apotex would and could have obtained quantities of perindopril NIAs from three foreign manufacturers and, if so, whether Apotex would and could have used perindopril NIAs for sales to its affiliates in Australia and the United Kingdom. [64] This single, determinative issue was remitted back to the FC for review. [65]

No Case for Apportionment

The FCA rejected Apotex’s argument of apportionment by analyzing the causation requirement and the transfer pricing agreements. [71] The causation requirement revealed that “but for” Apotex’s infringing activities, Apotex would have earned nothing on its sales. [79] Applying the necessary principles of the standard of review and contractual interpretation, [82-92] the FCA concluded that the FC’s interpretation of the transfer pricing agreements was based on an extricable error of law. [93] Finally, after applying their interpretation, [93-105] the FCA concluded that Apotex had failed to demonstrate the transfer pricing agreements apportion it was asserting. [106]

Commentary

The NIA defence in Canada has seen a great deal of evolution in recent times. Canadian courts originally followed the British precedent as set out in United Horse-Shoe and Nail Co v Stewart (1888), which held that only actual actions matter, not what could or would have been possible to do. Modern decisions, however, have shown that courts are now taking the existence of NIAs into account. The decision of Apotex Inc v Merck & Co, Inc, 2015 FCA 171 confirmed that this principle now applies to damages as well as accountings of profits. Having slowly crept North from the US, cases like these show that the NIA defence is steadily taking root in Canada.