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Federal Court of Appeal overturns Teva’s venlafaxine section 8 award for improper reliance on hearsay evidence

On May 31, 2016, the Federal Court of Appeal set aside a decision of the Federal Court awarding Teva damages under section 8 of the Patented Medicines (Notice of Compliance) Regulations (PMNOC Regulations) in relation to its venlafaxine hydrochloride product (Pfizer’s Effexor XR) on the basis that the judge had improperly relied on hearsay evidence (2016 FCA 161). The matter was remitted to the Federal Court for redetermination, excluding the hearsay evidence. The Court also provided guidance on a number of other issues, including how to determine lost sales in the “but-for” world and the burden of proof in section 8 actions.

When a patentee is unsuccessful in a prohibition application under the PMNOC Regulations, section 8 allows the generic manufacturer to recoup its losses for being kept of the market by virtue of the statutory stay triggered by the application under section 6.

In this case, the application was dismissed on the basis that the relevant patent was not eligible for listing: Ratiopharm Inc v Wyeth, 2007 FCA 264 (Teva and Pfizer are the corporate successors to the parties of the application). In reasons dated April 3, 2014 (2014 FC 248) and further reasons dated June 30, 2014 (2014 FC 634), Zinn J. granted Teva close to $125 million in damages, including interest (previously reported here).

Determining lost sales in the but-for world

In a section 8 proceeding, the plaintiff must prove that it suffered a loss by virtue of the statutory stay that prevented it from marketing its product. This requires the Court to consider, inter alia, the sales the plaintiff would have made “but for” the stay.

Justice Stratas, writing for the Court, elaborated on the Appeal Court’s prior comments on how to calculate lost sales in a but-for world. In a decision relating to the drug lovastatin (Apotex Inc v Merck & Co, Inc, 2015 FCA 171 [lovastatin]), the Court held that in advancing an argument premised on a course of action in the but-for world, a party must show that it both could have and would have pursued that course of action. Justice Stratas noted that these comments apply whether the relevant damages flow from patent infringement or section 8 of the PMNOC Regulations, and reiterated that “could have” and “would have” are separate elements to be proven:

[50] …. Proof of that first requires demonstration that nothing made it impossible for them to be in that position—i.e., they could have been in that position. And proof that plaintiffs would have been in a particular position also requires demonstration that events would transpire in such a way as to put them in that position—i.e., they would have been in that position.

The burden of proof in the but-for world

The Court rejected Teva’s argument that Pfizer bore the burden of proof in relation to what would have and could have happened in the but-for world had Teva’s venlafaxine product not been subject to the stay. Rather, and as the Court explained in lovastatin, the plaintiff bears the burden of proving the but-for world on the balance of probabilities as part of its claim for damages. Further, the defendant bears the burden of proving any alternate theory it advances of the but-for world.

Hearsay evidence

The main factual issue in the case was whether Teva would have had access to sufficient venlafaxine to supply the market during the but-for period. Teva (then ratiopharm) relied on a separate company, Alembic Pharmaceuticals, to manufacture its venlafaxine product.

Teva adduced no direct evidence from Alembic. Rather, Teva relied on the evidence of a former ratiopharm executive, Mr. Major. By virtue of his position, Mr. Major had, for example, general knowledge of the relationship between ratiopharm and Alembic, but the Court found that Mr. Major could not supply evidence based on direct, first-hand knowledge or information on topics such as: the operating capacity of Alembic’s facility during the relevant time, Alembic’s actual ability and willingness to redirect or add equipment at the relevant time, and how long production at Alembic would have taken in the relevant period.

During his testimony, Mr. Major was presented with emails between ratiopharm employees, many of which spoke to Alembic’s manufacturing capacity. Although Mr. Major was not in a position to authenticate the emails, being neither recipient nor sender, and had no first-hand knowledge of the statements in the emails, the trial judge nonetheless relied on them to support his conclusions about the but-for world. According to the Appeal Court, the emails were “at least double hearsay on the issue of what Alembic could have or would have done” and perhaps “triple hearsay or even more”.

The Appeal Court cautioned that the recent jurisprudential trend towards flexibility in admitting evidence had limits, and noted the unfairness that admitting hearsay evidence worked in this case as those with first-hand knowledge were shielded from cross-examination.

Because the judge’s reliance on hearsay evidence may have affected the outcome of the case, the decision was set aside and remitted back to the judge for redetermination.

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