Canadian Federal Court of Appeal Holds Non-Infringing Alternatives (NIAs) are Relevant to Calculating Damages for Patent Infringement

On July 23, 2015, Canada’s Federal Court of Appeal (FCA) released its decision in Apotex Inc v Merck & Co, Inc, 2015 FCA 171, dismissing the appeal of Apotex Inc and Apotex Fermentation Inc (together, Apotex) from a damages award in favour of Merck & Co, Inc and Merck Canada Inc (together, Merck) relating to Apotex’s infringement of a patent covering the Merck lovastatin drug MEVACOR® (for background, see decision on liability in 2010 FC 1265, aff’d 2011 FCA 363, and initial decision on damages by Snider J that is the subject of this appeal at 2013 FC 751).  In a significant development, the FCA disagreed with the reasoning of Snider J on the relevance of NIAs, holding that NIAs are a legally relevant consideration when calculating damages for patent infringement.  However, since Apotex had in this case failed to establish on the evidence that it could and would have pursued a NIA available to it, this appeal was ultimately dismissed.

The FCA held that Snider J erred on the legal relevance of NIAs to patent damages by conflating the issue of relevance with the availability of the NIA in fact.  The FCA noted that since the purpose of a damages award was to compensate a patentee who has suffered loss “by reason of the infringement” (i.e. requiring establishment of causation between the defendant’s wrongful conduct and the plaintiff’s injury), failure to consider the NIA could sometimes lead to over-compensation. 

In the FCA’s view, perfect compensation would require consideration of (i) any non-infringing products the infringer or any competitor could and would have sold “but for” the infringement, and (ii) the extent to which a lawful competition would have reduced the patentee’s sales.  The FCA found support for the legal relevance of the NIA defence in American jurisprudence and in the Supreme Court of Canada decision in Monsanto Canada Inc v Schmeiser, 2004 SCC 34, where NIAs were found to be relevant for calculating an infringer’s profits.  The FCA stated that “there is no reason to ignore such conduct when calculating the patentee’s lost sales”.

The FCA held that an infringer must establish “at least” the following factual elements in order to succeed with the NIA defence: (i) the alleged NIA was a true substitute and thus a real alternative; (ii) the NIA was economically viable; (iii) the infringer could have sold the NIA; and (iv) the infringer would actually have sold the NIA.

While the FCA found that Apotex had the capability to manufacture non-infringing lovastatin, it was determined that Apotex could not and would not have actually sold non-infringing lovastatin in place of infringing lovastatin at the time of infringement.  This determination was made after considering the following:

• Apotex’s supply of the NIA at the time of infringement;

• the scale of Apotex’s infringement;

• Apotex’s likely knowledge that its supplier was supplying it with infringing lovastatin;

• Apotex’s belief that the patent was invalid;

• Apotex’s failure to adduce evidence that, had it known its product was infringing, it would have resurrected manufacture of the NIA; and

• Apotex’s failure to adduce evidence that the profits it would have made through the NIA would have been greater than the value lost by pursuing the NIA.

Though this case represents significant appellate-level acceptance of the relevance of NIAs for calculating patent damages, it remains to be seen how the NIA defence can actually affect the calculation of quantum in future patent infringement cases in Canada.