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FCA overturns cefaclor damages decision on prejudgment interest issue, provides guidance on NIA defence

On November 23, 2018, the Federal Court of Appeal (FCA) allowed in part Apotex’s appeal of a decision awarding Eli Lilly over $100 million for Apotex’s infringement of eight process patents related to the antibiotic cefaclor: Apotex v Eli Lilly, 2018 FCA 217. The Federal Court (FC, decision reported here) had awarded Eli Lilly roughly $31 million in damages for infringement and $75 million in prejudgment interest as damages for the time value of the money lost in the 17 years that elapsed before the reference trial on damages took place. The FCA remitted the decision to the FC for reconsideration solely on the issue of interest. The Court also provided guidance regarding the application and objective of the non-infringing alternative (NIA) defence.

The NIA Defence

The NIA defence permits infringers to argue that in the hypothetical world in which damages are assessed, the infringer would have entered the market with a non-infringing alternative product and made the same sales it made with the infringing product, such that the patentee suffered no loss from the infringement and is owed no damages.

The FCA rejected Apotex’s argument that the court below should have found that an NIA would have been available to it during the relevant period: although the FC erred in concluding that the NIA defence was not available in Canada, based on the evidentiary record, the FC “could not but conclude that the defence was unavailable in this case.”

The FCA also provided guidance regarding the NIA defence.

First, the FCA explained that although a key FCA NIA decision (reported here) referenced U.S. law, the Court “did not simply import an American law concept in a wholesale fashion.” In particular, aspects unique to U.S. law “may result in a more lenient approach of the application of the NIA defence” in the U.S.

Second, the Court commented on the objective of the defence:

[49] … [T]he objective of the NIA “defence” is to help ascertain the real value of inventions for which a patentee such as Lilly was granted a monopoly. Inasmuch as overcompensation is inappropriate in our law, so is undercompensation. Thus, the goal is not to enable an infringer to breach the bargain made on behalf of the Canadian public when a patent is issued. Nor is the defence a means by which one can infringe at the lowest possible cost. This is particularly important to keep in mind when one assesses the rate of royalty that would apply when this defence is accepted. In my view, it is only when an appropriate rate is set that one can consider that accepting such a defence does not amount to a compulsory licence system in disguise.

Prejudgment interest

In the decision under appeal, the FC awarded Lilly $75 million in prejudgment interest as damages for the time value of the money lost in the time that elapsed before the reference trial on damages took place. The FCA remitted this issue to the FC for reconsideration, commenting on three aspects of the FC’s analysis.

First, the FCA found that the FC had erred in law by finding “a presumption that a plaintiff would have generated compound interest on the funds otherwise owed to it, and also that the defendant did so during the period in which it withheld the funds.” Rather, a loss of interest must be proved in the same way as any other form of loss or damage. Lilly was therefore required to prove its claimed loss in regards to the time value of the monies owed for infringement.

Second, the FCA questioned why the FC had used Lilly Canada’s annual rate of profit on its sales as the applicable rate of interest. The FCA noted that in the FC’s reconsideration, “it will be important for [the FC] to explain in more detail its finding as to the rate applicable, if any.”

Third, with respect to the FC’s failure to make a deduction to the award to account for tax, the FCA urged a fuller explanation of the burden of proof on this issue.

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