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Just Right: Non-Infringing alternative Relevant in Calculating Damages for Patent Infringement

In Apotex Inc. v. Merck & Co., 2015 FCA 171, the Federal Court of Appeal held that when calculating damages for patent infringement, it is relevant to consider the availability of non-infringing alternative product available to the infringer. The FCA ruled that this approach achieves the “perfect compensation” required by the Patent Act. The FCA’s decision now brings Canada’s approach closer in line with the U.S.

FCA Overturns Underlying Decision

The FCA’s decision overturn’s Justice Snider’s decision (2013 FC 751, previously discussed here), which held, based on prior Federal Court and U.K. jurisprudence, that the availability of a non-infringing option is not and should not be a relevant consideration in the Court’s assessment of damages pursuant to section 55(1) of the Patent Act. The FCA found that Justice Snider erred by conflating the legal relevance of the non-infringing alternative with the availability of the defence in fact. The FCA also went on to reject the prior jurisprudence and the policy rational that formed part of the basis for Justice Snider’s decision because they did not accord with the requirement in section 55(1) that damages be sustained “by reason of the infringement”

Need for Perfect Compensation

The FCA noted that the balance at the heart of the Patent Act requires perfect compensation. The Court observed that the purpose of an award of damages is to compensate the patentee who has suffered a loss as a result of the infringement. In this regard, the concept of compensation rejects both under-compensation and overcompensation. Under-compensation discourages research and disclosure; while, over-compensation could chill potential competition.

According to the FCA, perfect compensation requires consideration of: (i) what, if any, non-infringing product the defendant or any other competitors could and would have sold “but for” the infringement; and (ii) the extent lawful competition would have reduced the patentee’s sales. In the FCA’s view, this is a more balanced approach to calculating compensatory damages as it avoids over-compensating the patentee.

In coming to its decision, the FCA found support for the legal relevance of the non-infringing alternative defence in American jurisprudence and in the Supreme Court of Canada’s decision in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34, where the SCC affirmed the availability of the non-infringing alternative as a relevant consideration under an assessment of an accounting of the defendant’s profits. The FCA found that “there is no reason in principle to ignore such conduct when calculating a patentee’s lost sales.”

The FCA also considered the U.K. jurisprudence on which prior Canadian jurisprudence relied to deny the availability of the non-infringing alternative as a defence. The FCA found that the U.K.’s jurisprudence rejected non-infringing alternatives for policy reasons, mainly the Court’s contempt of the infringer’s conduct, and not on any reasoned causation analysis. Therefore, the FCA declined to follow this line of jurisprudence on the basis that these decisions do not accord with the requirement in section 55(1) that damages be sustained “by reason of the infringement”.

The Legal Test

The FCA outlined the following approach a Court must consider to determine the relevance of a non-infringing alternative based on the facts of a case

  1. Is the alleged non-infringing alternative a true substitute and thus a real alternative?
  2. Is the alleged non-infringing alternative a true alternative in the sense of being economically viable?
  3. At the time of infringement, does the infringer have a sufficient supply of the non-infringing alternative to replace the non-infringing sales? Another way of framing this inquiry is could the infringer have sold the non-infringing alternative?
  4. Would the infringer actually have sold the non-infringing alternative?

The burden lies on the defendant to establish the factual relevance of a non-infringing alternative on a balance of probabilities. 

In the Present Case

While the FCA overturned Justice Snider’s ruling with respect to the availability of a non-infringing alternative as a consideration in compensatory damages, the Court found that, on the facts of the case, Apotex failed to meet its burden that, notwithstanding its manufacturing capacity, it could and would sold non-infringing lovastatin in place of the infringing lovastatin.Therefore, the Court found no basis for interfering with Justice Snider’s decision concerning the lost profits to be awarded to Merck Canada in respect of pre-expiry tablet replacement sales.

A copy of the public Reasons for Judgment may be found here.