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Federal Court rejects non-infringing alternative defence; Apotex ordered to pay over $100 million to Eli Lilly in cefaclor damages reference

On January 23, 2015, the Federal Court released its decision on the quantum of damages in the cefaclor (Eli Lilly’s CECLOR) litigation: Eli Lilly and Company et al v Apotex Inc, 2014 FC 1254. This is only the second Federal Court decision which quantifies a damages remedy in a pharmaceutical patent infringement proceeding, the first being the lovastatin proceeding in Merck & Co Inc v Apotex Inc, 2013 FC 751, as we previously reported, the appeal of which was heard on January 15, 2015.

In the liability phase of the cefaclor action, the Federal Court, in a decision released in October 2009 and upheld on appeal as previously reported (Eli Lilly and Company et al v Apotex Inc, 2009 FC 991, aff’d 2010 FCA 240), found that at least one valid claim in each of the patents owned by Lilly was infringed by Apotex by its importation, manufacture, export, sale, and offer for sale of cefaclor. The trial Judge granted Lilly the entitlement to elect an accounting of profits or damages. Lilly chose to pursue its damages, the quantification of which was at issue before Justice Zinn.

After reviewing the law on damages, Justice Zinn found that there are two possible scenarios with respect to damages in patent cases. In the first scenario, the patentee may establish that the infringing sales would have been his and that he is entitled to be put in the position he would have been “but for” the infringer’s sales. In the second scenario, the patentee cannot prove that the infringer’s sales would have been his, but he establishes that his patent was infringed. In the latter case, a form of reasonable royalty would be appropriate.

Regarding the first scenario, Apotex raised a non-infringing alternative (“NIA”) defence. In particular, Apotex argued that if there was a NIA available to it, then, even though Apotex did not employ the NIA in the real world, the availability of the NIA must be considered in the “but for” world in calculating damages. In support of this submission Apotex argued, in part, that Lilly could not show it would have made all or any of the infringing sales made by Apotex because Apotex could have manufactured and sold cefaclor without infringing the patents (i.e., by using the NIA). In that hypothetical world, the sales would have remained sales made by Apotex, not Lilly, and therefore there would be no causal connection between the loss of sales and infringement of the patents.

Justice Zinn rejected Apotex’s NIA defence in its entirety. The Court held that a causal connection must be examined in the real world regarding conduct actually engaged in. To hold otherwise would permit an infringer to choose an infringing process over a NIA “comforted in the knowledge that the NIA defence will permit it to escape most if not all of the consequences of its wrongful act.” Justice Zinn also agreed with Justice Snider’s holding in lovastatin that a NIA defence is not relevant to an assessment of damages. The Court drew a clear distinction between a patentee's election for damages and an accounting for profits, holding that only in the latter case can the NIA defence be considered because the court must identify what profit is directly attributable to the use of the invention.

Having dismissed Apotex’s NIA defence, the Court went on to assess relevant periods (i.e., when Apotex would have entered the market with non-infringing material; provincial formulary listing dates) and relative market shares to determine Lilly’s lost profits that would have been made but for Apotex’s infringing sales.

As to the second scenario highlighted by Justice Zinn, the Court held that Lilly is entitled to a reasonable royalty for each infringing sale made by Apotex, even though Lilly itself would not have made the sale. However, the Court found that reasonable royalty calculations are not necessarily done in the hypothetical world of the equally willing licensor and licensee. Justice Zinn preferred to examine the relative bargaining position of the parties at the commencement of infringement to determine how “willing” each party would have been in assessing what the appropriate royalty rate should be. Justice Zinn also considered the availability of alternatives to the patented process, the relative bargaining strength of the parties, and the relationship between the parties.

Finally, the Court considered the issue of prejudgment compound interest, which was significant as Apotex commenced sales in 1997. Justice Zinn considered whether Lilly had established that the lost profits would have generated income on a regular basis over the period of deprivation of those profits; if so, the patentee has also sustained the damage of the lost income from those profits, which was also compensable. Justice Zinn concluded that there is a presumption “in today’s world” that a plaintiff would have generated compound interest on the money owed to it and also that the defendant did so during the period in which it held the funds. As such, Justice Zinn found that there was no need for Lilly to prove exactly what it would have done with the profit it had lost as a result of Apotex’s infringing sales and awarded prejudgment interest on the damages, compounded annually.

Lilly was awarded damages of approximately $31 million and prejudgment interest of approximately $75 million.

Apotex may appeal as of right.

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