On July 16, 2013, the Federal Court released its decision granting the largest award of damages for patent infringement in Canadian history. In Merck & Co., Inc. v. Apotex Inc. (2013 FC 751) (“Merck”), Justice Snider found that Merck is entitled to over $119 million in damages, plus interest, for Apotex’s infringement of Merck’s patent for the anti-cholesterol drug lovastatin.

In Canada, virtually all patent cases are heard by the Federal Court, and it is rare for that Court to render decisions regarding damages. This is because there is a common practice in Canada for parties to bifurcate the issue of liability (i.e., patent infringement and validity) from the issue of compensation (i.e., quantum of damages or accounting of an infringer’s profits). Bifurcation is often seen as an attractive approach because it saves the parties from spending time and money on compensation-related issues in the event that the patent is found either not infringed or invalid. Even where a case is bifurcated and an accused infringer is liable for patent infringement, parties are often able to settle the compensation aspect of a case without the need for a second trial to determine quantum of damages or profits. Accordingly, decisions such as Merck do not come along very often, especially decisions where such a large quantum of damages is involved.

During the earlier liability trial, the Court decided that Merck would only be able to claim compensation in the form of damages, not an accounting of the infringer’s profits. Damages in Canada can take a number of forms, but the most common forms in patent infringement actions are (i) lost profits on sales a plaintiff patentee would have made but for the presence of the infringing product in the market, and (ii) for those sales made by the defendant that the plaintiff patentee would not have made or cannot persuade the Court it would have made but for the presence of the infringing product, the plaintiff is entitled to a reasonable royalty.

In Merck, the plaintiffs claimed lost profits with respect to lost tablet sales that Merck Canada would have made within Canada, lost tablet sales that Merck US would have made to Merck Canada, and lost tablet sales within Canada after patent expiry but during a hypothetical ramp-up period of Apotex. Merck also claimed a royalty with respect to sales it would not have made, namely, tablets sold onto the export market (pre and post-patent expiry) and tablets sold within Canada post-expiry. Based on these various claims, Merck was asking the Court to grant it over $156 million in damages, plus interest.

Apotex opposed Merck’s claims and argued for a nominal (approximately $9 million) damages quantification. One of Apotex’s key arguments for a drastically lower damages total was that it had a “non-infringing alternative”. The rationale behind the argument is that when performing a “but for” analysis to determine what position the plaintiff would have been in had the defendant not infringed the patent, the Court must take into account whether the defendant had available to it a non-infringing alternative that would have allowed it to continue competing legally. The effect of the argument, if successful, would have been to limit any damages to a reasonable royalty with respect to sales where the non-infringing alternative could have been used to prevent the plaintiff patentee from otherwise capturing the sales under the “but for” analysis.

In rejecting Apotex’s “non-infringing alternative” argument, the Court reiterated the fundamental difference between a claim for damages and a claim for an accounting of an infringer’s profits. Damages are to address a plaintiff’s loss suffered from the unauthorized use of its invention. An accounting of profits looks at the benefit or advantage that a defendant derived from the use of the invention relative to what was otherwise available but non-infringing. Notwithstanding that in the United States there was found to be some law endorsing the “non-infringing alternative” argument for damages quantification, Justice Snider concluded that there was no basis in Canadian law for such an argument. The argument, if allowed, would incentivize infringers to infringe because they would in effect be taking a compulsory license and their liability would, at most, be limited to a reasonable royalty. To allow the “non-infringing alternative” argument in a damages context would result in inadequate compensation for injured plaintiffs and the infringer escaping responsibility for its infringement. Accordingly, Merck makes it clear that the “non-infringing alternative” argument can only be made in accounting of profits cases.

With respect to determining a reasonable royalty, the Court acknowledged the “hypothetical negotiation” approach endorsed in Jay-Lor International Inc v Penta Farm Systems Ltd, 2007 FC 358 (“Jay-Lor”). In Jay-Lor, the Court found that one uses a percentage of the defendant’s anticipated profits to form the basis of a royalty. However, in Merck, only one expert (called by Merck) gave evidence on the subject of a reasonable royalty. That expert used a different methodology that focused on two end points in a bargaining range: the highest royalty that would leave the defendant better off by taking a licence (i.e., the “maximum willingness to pay” amount); and, the lowest royalty that leaves the plaintiff better off by granting a licence (i.e., the “minimum willingness to accept” amount).

A problem arises in cases where there is no overlap between the “maximum willingness to pay” and the “minimum willingness to accept” amounts. In such cases, Merck’s expert opined that the ultimate royalty from a hypothetical negotiation must adequately compensate the patentee for the infringement. Therefore, and as accepted by the Court, the royalty would be based on the patentee’s “minimum willingness to accept” amount. Significantly, the Court held that an infringer’s net profit margin does not constitute the ceiling at which a reasonable royalty is capped.

As a result of the Court’s findings with respect to the above and the evidence before it, Merck was awarded approximately $114 million in lost profits for Merck Canada’s lost sales in Canada and Merck US’s lost sales to Merck Canada, but not for lost sales post-patent expiry. With respect to lost sales post-patent expiry during the hypothetical ramp-up or “springboarding” period where the generic has yet to fully capture the market, the Patent Act does not preclude recovery of damages for such lost sales. However, in this case, as insufficient notice was provided to Apotex that Merck was claiming such damages, and there was an inadequate evidentiary record to support Merck’s claim, the Court declined to award such springboard damages. With respect to all other infringing sales, Merck was therefore compensated by way of a reasonable royalty totalling approximately $5 million.

On top of the amounts for lost profits and reasonable royalty, the Court exercised its discretion and awarded Merck prejudgment interest at 1% above the 1997 Bank of Canada rate. As a result, Merck’s total recovery will be tens of millions of dollars in excess of the base award of $119 million, as the litigation dates back to the mid-1990s.