Court of Appeal further clarifies section 8 damages framework

When a generic drug company is held off the market by an improper prohibition application, that generic is entitled to damages under s. 8 of the Patented Medicines (Notice of Compliance) Regulations. These damages are meant to compensate the generic for the sales it would have made but for the prohibition application. In determining these damages, the Court will construct a hypothetical “but-for” world.

Justice Snider established the framework for determining s. 8 damages in two companion decisions involving Sanofi-Aventis’ drug ramipril (ALTACE), against Apotex and Teva. Once the prohibition applications were dismissed, Apotex and Teva sought damages under s. 8 of the NOC Regulations.

Justice Sharlow, writing for the majority of the Court of Appeal, largely followed the framework established by Justice Snider below (see our previous post here). However, the Court of Appeal divided on two important issues:

1) The proper application of the NOC Regulations to generics in the hypothetical “but-for” world (or the so-called “open season methodology”), and

2) Whether a generic can be compensated for “double ramp-up” losses.

 Attributes of the hypothetical market during the liability period

In dissent, Justice Mainville found the trial judge erred by using a methodology that enabled each of two generic drug manufacturers to prove they were each separately entitled to 100% of their respective hypothetical generic markets. Justice Mainville found that such a result could not have been contemplated by the Governor-in-Council when adopting the NOC Regulations, and so the more appropriate construction of the “but-for” world was based on the “open season methodology”, whereby the NOC Regulations did not apply to either the claimant generic or other generics when construing the “but-for” world.

This approach differed from trial in both actions, because Justice Snider did not apply the NOC Regulations to the claimant generic but did apply them to other generics for the purpose of determining attributes of the hypothetical generic market. The majority on appeal rejected Mainville JA’s “open season methodology” but also found that the NOC Regulations should be assumed away only in respect of determining the start date of the liability period. The NOC Regulations should apply equally to all generics in the hypothetical “but-for” world, including the claimant generic. The majority’s reason for rejecting Justice Mainville’s “open season methodology” was that:

… [f]or each claimant for section 8 damages, that would result in more competitors entering the hypothetical market at an earlier date than they could have done if the NOC Regulations were assumed to be in force. That would reduce the amount of the section 8 damages in every case in which the claimant has a potential competitor, and therefore it would reduce the aggregate liability of the first person (the innovator drug manufacturer, in this case Sanofi) in all such cases involving the same generic drug. That would undoubtedly be an advantage to the first person, but it could be unfairly prejudicial to a particular claimant because it is not possible to determine whether the open season methodology necessarily would result in reasonable compensation to each claimant or to all claimants collectively.

The majority went on to state that the phrase “in the absence of these Regulations” only appears in paragraph 8(1)(a) of the NOC Regulations and relates only to the start date of the liability period. Disregarding the NOC Regulations for some other purpose “would be tantamount to judicially amending section 8.”

While seperate but-for worlds for each generic means that inconsistencies are inevitable, it is for Parliament or the Governor-in-Council to remedy any inconsistency, not the Court.

“Double ramp-up” is not compensable

“Ramp-up” is the period of time it takes a drug manufacturer to penetrate the market to its full potential. The s. 8 framework includes a “ramp-up” period in the hypothetical “but-for” world. A “Ramp-up” period would hypothetically occur but for the improper prohibition order, however such a time period does actually occur in the real world once the prohibition order is lifted. Therefore, by factoring in the hypothetical “ramp-up” period to calculate a generic’s s. 8 damages, the generic suffers diminished profits as though it experienced two ramp-up periods, when this is logically impossible.

The Court of Appeal held previously in Alendronate that s. 8 of the NOC Regulations does not contemplate profits lost outside of the liability period. On the basis of Alendronate, Justice Snider did not allow s. 8 damages for double “ramp-up”. A subsequent decision by Justice Phelan of the Federal Court in Pantoprazole did allow double “ramp-up”, as Justice Phelan did not interpret Alendronate as endorsing one “loss of revenue being double counted against the successful generic drug manufacturer”.

The dissent agreed with Justice Phelan’s reasoning in Pantoprazole on the issue of “double ramp-up”. The majority disagreed and found that it was not possible “to reach the contrary conclusion without implicitly reversing the principle in Alendronate” and was not willing to do so.

Other issues

The Federal Court of Appeal also found there was no error in dismissing Teva’s claims for lost business value, lost indirect profits, lost sales on other products and the pricing of the active pharmaceutical ingredient on the basis of the Alendronate holding. Further, there was no error in either case concerning the start date or end date of the Liability Periods. The Federal Court of Appeal also found that Authorized Generics (“AGs”) should be factored into the hypothetical “but-for” world, as AGs are mentioned in the NOC Regulations, and that off-label uses of drugs are also compensable in s. 8 damages, given these damages contemplate sales that would have been made but for the prohibition order.

Copies of the Court of Appeal’s Reasons in the Apotex and Teva matters, may be found here and here.