Canadian Court Rejects the Argument that Noninfringing Alternatives Are Relevant to Lost Profits

As I explain in my book (see in particular pp. 110-14, 187-89, 264-65, 314-17), courts throughout the world disagree on whether the patentee is entitled to recover lost profits in a case in which the infringer could have made the same number of sales simply by resorting to the use of an available noninfringing alternative.  In some countries, including the U.S. and France, the existence of a noninfringing alternative in such a case eliminates the patentee's ability to recover lost profits.  In other countries, most notably the U.K., noninfringing alternatives are irrelevant; the leading case there is an old one, United Horse-Shoe & Nail Co. v. John Stewart & Co. (1888) L.R. 13 App. Case 401 (H.L.), but courts in the U.K. have continued to cite it with approval.  As for Canada, the Supreme Court held in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34, that noninfringing alternatives are relevant to the calculation of the defendant's profits (see my book pp. 191, 203-05). The question remained, however, whether Canadian courts would apply that same rule to a case involving the plaintiff's lost profits, or whether they would follow United Horse-Shoe. 

Professor Siebrasse has now brought to my attention a Canadian decision, Merck & Co. v. Apotex, Inc. (Fed. Ct. July 16, 2013), that was released to the public this past Monday and that addresses this issue head-on.  As Justice Snider explains in her opinion, the patent in suit (which has now expired) was a "product-by-process patent for the anti-cholesterol drug, lovastatin, when made with a micro-organism known as Aspergillus terreus."  In an earlier proceeding, the court concluded that the patent was valid and infringed.  The principal issue in the damages trial was whether Merck was entitled to recover its lost profits or only a reasonable royalty, given that Apotex's suppliers could have made lovastatin "using a non-infringing process (referred to as AFI-4), a process which uses the micro‑organism Coniothyrium fuckelii rather than Aspergillus terreus."  (Indeed, some lovastatin was made for Apotex using the noninfringing process.)  In a lengthy opinion, Justice Snider squarely rejects "Apotex’s argument that its non-infringing alternative should be taken into account in assessing damages," and awards Merck Canada and Merck USA a grand total of $Can 119,054,327, plus pre- and post-judgment interest (which I think makes this one of the biggest damages judgment ever in Canada, though I could be mistaken).  In reaching this conclusion, Justice Snider distinguishes Schmeiser on the ground that an accounting of defendant's profits is fundamentally different from an award of plaintiff's lost profits, in that the former is an equitable remedy whereas damages are available as a matter of right (para. 45).  She also notes the U.K.'s adherence to United Horse-Shoe and the citation of that case with approval in some Canadian case law, including one of her own previous decisions.  On a policy basis, Justice Snider concludes that accepting noninfringing alternatives as relevant "would result in an inadequate compensation for injured plaintiffs and the infringer escaping responsibility for its infringement" (para. 113), and states that she "could not agree more" with the following passages from Merck's final written argument (paras. 119-20):

Where a patentee like Merck does not typically license its invention, a would-be infringer with a less efficient non-infringing alternative would simply proceed to infringe the patent with full knowledge that, at the end of the day, the infringer will only have to pay a reasonable royalty for its unauthorized use of the patent.  Adopting such a rule amounts to a judicial sanction on infringers like Apotex taking for itself a compulsory license and is flatly inconsistent with Canada’s public reasons for repealing compulsory licensing, and inconsistent with Canada’s international obligations.

Thus, if adopted, the NIA defence would render illusory the grant of the monopoly that this court has already found to be valid and infringed.  Such an approach would be inconsistent with the intent of the Patent Act.

Far from protecting valid and infringed patents, Apotex’s assertion, if accepted, would actually create an incentive to infringe.  Apotex’s position in this litigation is that it should only have to pay (at most) the cost savings associated with using the infringing AFI-1 process.  If this position is accepted, a competitor will always choose to infringe rather than use the more expensive and less efficient non-infringing alternative.

My own view, as expressed repeatedly in my book, is that United Horse-Shoe and its progeny are fundamentally wrong as a matter of economic logic.  If, but for the infringement, the defendant would have resorted to a noninfringing alternative that would have enabled it to make all the sales it made using an infringing product, the patentee quite literally has suffered no lost profit attributable to the infringement.  Put another way, the patentee's profit on sales of its patented products in the hypothetical world of no-infringement would have been no different than its profit on actual sales in the real world of infringement.  Awarding the patentee lost profits premised on its having captured all of the defendant's infringing sales thus results in overcompensation.  The correct remedy to restore the patentee to the position it would have occupied but-for the infringement is a reasonable royalty calculated on the basis of what the parties would have agreed to in arms-length negotiations prior to the infringement (e.g., some portion of the defendant's expected cost savings from using the infringing process as opposed to the next-best available noninfringing alternative).  In response to the argument that this rule "create[s] an incentive infringe," I would note that the infringing defendant is worse off than the noninfringing defendant to the extent that it incurs attorneys' fees--both its own and, in Canada and in most countries other than the U.S., some portion of the prevailing patentee's fees as well--and is potentially subject (in Canada) to punitive damages or (in the U.S.) to treble damages or (in yet other countries) to some form of enhancement to compensate for risks that the licensor bears and that the infringer forgoes. 

Anyway, whether you agree with Justice Snider or with me, her opinion is a good read.  Personally, though, I hope that the Federal Court of Appeal or the Canadian Supreme Court will see fit to lay United Horse-Shoe to rest, once and for all, in my neighbor to the north.

Update:  Professor Siebrasse informs me that, as large as the judgment is in the above case, it's not the largest in Canadian history.  The biggest is the $215 million judgment awarded to generic drug maker Apotex for having been kept out of the market by Sanofi-Aventis. See Professor Siebrasse's write-up, here.