2013 FC 751, 2013 FC 751

T-1272-97 2013 FC 751 Merck & Co., Inc. and Merck Canada Inc. Plaintiffs (Defendants by Counterclaim ) v. Apotex Inc. and Apotex Fermentation Inc. Defendants (Plaintiffs by Counterclaim ) Indexed as: Merck & Co., Inc. v. Apotex Inc. Federal Court, Snider J.—Toronto, April 8, 9, 10, 11, 15, 16, May 1, 2, 3; Ottawa, July 16, 2013.

Patents — Infringement — Damages — Damages phase of action in which plaintiffs seeking declaration that Canadian Patent No. 1161380 (‘380 patent) valid, having been infringed by defendants — Action bifurcated — In liability phase, ‘380 patent found valid, infringed by defendants, plaintiffs entitled to damages rather than accounting of profits — Present judgment dealing with quantum of damages to be paid to plaintiffs — Merck U.S. named patentee of ‘380 patent — ‘380 patent product-by-process patent for anti- cholesterol drug lovastatin when made with specific micro-organism — Merck Canada, other plaintiff, selling lovastatin in Canada under licence from Merck U.S. — Merck Canada purchasing bulk lovastatin (API) from Merck U.S. — Apotex Inc. selling own brand of lovastatin tablets in Canada (Apo-lovastatin) — While Apotex Fermentation Inc. capable of manufacturing lovastatin API using non- infringing process, some lovastatin API made using process infringing ‘380 patent — Plaintiffs claiming, in particular, award for lost profits for certain categories of sales; royalty payable to Merck and Company, Incorporated (MACI) per royalty agreement — Defendants claiming, inter alia, that plaintiffs only entitled to reasonable royalty since unable to show damages sustained by reason of defendants’ infringement; that non-infringing alternative (NIA) defence applicable herein — Whether defendants could raise NIA defence in present case; whether, assuming NIA defence could not be raised, plaintiffs entitled to lost profits; whether Merck Canada’s lost profits should be reduced to account for royalty payable to MACI; whether Merck U.S. entitled to recover lost profits — Merck Canada’s lost profits for pre-expiry replacement sales caused by defendants’ infringement — Under current state of Canadian law, non- infringing alternative (NIA) irrelevant to assessment of damages; NIA defence thus rejected herein — In calculating Merck Canada’s award of pre-patent expiry lost profits, MACI royalty properly characterized as expense incurred but for infringement; royalty thus deducted from award — Plaintiffs also awarded reasonable royalty as damages for sale of infringing tablets in export market, post- expiry replacement tablets but claim for lost profits in respect of post-expiry ramp-up tablets disallowed — Merck U.S. having right to claim damages sustained by infringement of ‘380 patent; not excluded from claiming damages despite conveying certain rights to MACI in licence agreement — However, Merck U.S.’ lost profits reduced — Total damages of $119 054 327 awarded to plaintiffs.

This was the damages phase of an action in which the plaintiffs sought a declaration that Canadian Patent No. 1161380 (‘380 patent) was valid and had been infringed by the defendants. The action was bifurcated. In the liability phase, it was found that the ‘380 patent was valid, had been infringed by the defendants and that the plaintiffs were entitled to their damages rather than to an accounting of profits. This judgment dealt with the quantum of damages to be paid to the plaintiffs.

Merck U.S., one of the plaintiffs in the action, is the named patentee of the ‘380 patent, which patent was issued in January 1984 and expired in January 2001. The ‘380 patent is a product-by-process patent for the anti-cholesterol drug lovastatin when made with a specific micro-organism. Merck Canada and the other plaintiff in this action sold lovastatin under the trade name MEVACOR in Canada beginning in 1988 under licence from Merck U.S. Merck Canada purchased bulk lovastatin (API) from Merck U.S.

In 1997, Apotex Inc., one of the defendants in this action, began selling its brand of lovastatin tablets in Canada (Apo-lovastatin). The API for Apo-lovastatin was made either by Apotex Fermentation Inc. (AFI), the other defendant herein, or by another company overseas. AFI could manufacture lovastatin API using a non-infringing process. In the liability phase of this action, it was found that some but not all lovastatin API was made using a process which infringed the ‘380 patent. Thus, specific lots of lovastatin were found to have infringed the '380 patent. The defendant’s infringement was significant.

Approximately 60 percent of its sales made between March 1997 and the expiry of the '380 patent were sales of infringing lovastatin.

The plaintiffs claimed, in particular, an award for lost profits for certain categories of sales including: MEVACOR tablets that would have been sold domestically by Merck Canada to replace each infringing Apo-lovastatin tablet sold domestically before the patent’s expiry (pre-expiry replacement tablets) and those sold after the expiry of the patent during the hypothetical ramp-up period (post-expiry ramp-up tablets); lost profits from the sale of lovastatin API that would have been sold by Merck U.S. to Merck Canada.

They also claimed a royalty regarding infringing sales that they would not have made and a royalty payable to Merck and Company, Incorporated (MACI) to be included in the award of profits pursuant to the terms of an agreement between the predecessor in interest of Merck Canada and MACI (MACI Royalty Agreement).

The defendants’ main position was that, except for those tablets that formed part of the infringing batch, Merck Canada was only entitled to a reasonable royalty because it could not show that its damage was sustained “by reason of the infringement”; that Merck U.S. was entitled to a nominal damages award only since it had assigned all of its rights to damages to MACI, and that the plaintiffs were not entitled to an additional recovery in respect of the MACI royalty.

The main issues were whether the defendants could raise the defence that they had a non-infringing alternative (NIA defence) (i.e. they could have used an alternate process to manufacture sufficient quantities of lovastatin to supply the Canadian market) and thus Merck Canada was only entitled to a reasonable royalty with respect to the pre-expiry replacement tablets; whether (assuming the NIA defence could not be raised and the plaintiffs were entitled to an award of lost profits), the plaintiffs were entitled to lost profits for the post- expiry ramp-up sales; whether Merck Canada’s lost profits should be reduced to account for the MACI royalty and; whether Merck U.S. was entitled to recover its lost profits and how they should be determined.

Held , the plaintiffs are entitled to a total award of $119 054 327 in damages. The damages the plaintiffs were entitled to were limited under subsection 55(1) of the Patent Act . An award of damages differs

fundamentally from an accounting of profits. A claim for damages focuses on the plaintiff’s loss whereas an accounting of profits looks at the benefit or advantage that a defendant derived from the use of the invention. Merck Canada’s lost profits for the pre-expiry replacement sales were caused by the defendants’ infringement.

Based on the record, the plaintiffs would have sold every one of the pre- expiry replacement sales if the defendants had not infringed the ‘380 patent, a conclusion reached based on a common sense view of causation, the current state of Canadian law and a rejection of the defendants’ NIA defence. The current state of Canadian law is that the existence of a non-infringing alternative is not relevant to an assessment of damages and results in a rejection of the NIA defence.

In other words, under current Canadian law of damages, the fact that the defendants had available to them but did not use a non-infringing alternative was irrelevant to a calculation of damages. The defendants argued that the Supreme Court of Canada case Monsanto Canada Inc. v. Schmeiser effectively and completely changed the law of damages not only respecting the law of an accounting of profits but for a claim in damages as well to permit the NIA defence. But this argument was rejected.

Monsanto did not change the law but merely affirmed an approach to the calculation of an infringer’s profits that already existed in Canadian law. Thus, the defendants’ argument that the non-infringing alternative was a relevant factor or defence in the assessment of damages under

section 55 of the Act was rejected. Merck Canada was entitled to an award of $62 925 126 as its lost profits with respect to the pre-expiry replacement tablets. As to the MACI royalty, the MACI Royalty Agreement was clear and unambiguous, creating no obligation to pay upon receipt of lump sum damages. Since there was no obligation to pay any royalty on an award of damages, the MACI Royalty was properly characterized as an expense that would have been incurred in the hypothetical scenario but saved because of the infringement.

As such, this expense should be deducted in the calculation of Merck Canada’s award of pre-patent expiry lost profits. However, if the NIA defence were to be allowed, a reasonable royalty should be fixed for all lost domestic sales where the defendants could have competed with Merck Canada without infringing the '380 Patent (pre-expiry replacement tablets). Regarding the infringing export sales the defendants made, the plaintiffs were entitled to a reasonable royalty as damages for the sale of infringing Apo-lovastatin tablets in the export market.

With respect to damages for post-expiry sales, the plaintiffs claimed, in particular, a reasonable royalty regarding infringing Apo- lovastatin tablets sold domestically after the '380 patent expiry (post-expiry replacement tablets) and lost profits for MEVACOR tablets that would have been sold domestically to replace each and every Apo-lovastatin tablet sold after the '380patent expiry during the hypothetical ramp-up period (post-expiry ramp-up tablets). The plaintiffs were awarded an amount (reasonable royalty) as damages relating to the post-expiry replacement tablets.

However, the plaintiffs’ claim for lost profits in respect of post-expiry ramp-up tablets was disallowed since the defendants were not fully and fairly put on notice of this issue earlier and because the plaintiffs did not meet their burden to demonstrate on a balance of probabilities the lost profits they claimed they had suffered. As to the damages Merck U.S. was claiming for the breach of the '380patent, it was submitted that the injury to Merck U.S. arose because of the supply chain that requires Merck Canada to purchase its lovastatin API from Merck U.S.

The '380 patent was granted to Merck U.S. and Merck U.S., through the MACI Licence Agreement, granted MACI certain rights of intellectual property, which included the ‘380 patent. The MACI Licence Agreement was clear on its face that not all rights were conveyed to MACI. The MACI Licence Agreement could not be read to exclude Merck U.S. from claiming damages that arose by reason of an infringement of the '380 patent.

The conduct of the parties to the agreement was also considered and the evidence showed that the parties believed that the right to standing in the present action and the right to damages remained with Merck U.S. Thus, Merck U.S. had standing to bring the action herein and had the right to claim damages sustained by reason of the infringement. However, while Merck U.S. was entitled to its lost profits based on its sale of lovastatin API to Merck Canada, its lost profits were reduced by 1.3 percent to $51 290 364. Finally, the plaintiffs were entitled to both pre- and post-judgment interest and their costs.

STATUTES AND REGULATIONS CITED Federal Courts Act , R.S.C., 1985, c. F-7, s. 36(2), (4) , (5) . Federal Courts Rules , SOR/98-106, rr. 400(3), 405, Tariff B, Columns III, IV. Interest Act , R.S.C., 1985, c. I-15, s. 4. Patent Act , R.S.C., 1985, c. P-4, ss. 2 “patentee”, 55, 57(1)( b ). Patented Medicines (Notice of Compliance) Regulations , SOR/93-133, s. 8. Patents, 35 U.S.C. § 284. CASES CITED followed: The United Horse Shoe and Nail Company, Limited v. Stewart & Company (1888), 5 R.P.C. 260 (H.L.). applied: Jay-Lor International Inc. v.

Penta Farm Systems Ltd. , 2007 FC 358 , 59 C.P.R. (4th) 228; Catnic Components Ltd. v. Hill & Smith Ltd. , [1983] F.S.R. 512 (Pat. Ct.); Gerber Garment Technology Inc. v. Lectra Systems Ltd. , [1995] R.P.C. 383 (Pat. C.), revd [1997] R.P.C. 443 (C.A.); Domco Industries Ltd. v. Armstrong Cork Canada Ltd. et al. (1983), 76 C.P.R. (2d) 70 (F.C.T.D.) , revd (1986), 10 C.P.R. (3d) 53 (F.C.T.D.) ; Apotex Inc. v. Bristol-Myers Squibb Company , 2011 FCA 34 , 91 C.P.R. (4th) 307.

distinguished: General Store Publishing House Inc. v. B.D. Waite Co., [1988] O.J. No. 2050 (H.C.J.) (QL). considered: Merck & Co. Inc. v. Apotex Inc., 2010 FC 1265, 91 C.P.R. (4th) 1, affd 2011 FCA 363, 102 C.P.R. (4th) 321; Monsanto Canada Inc. v.Schmeiser, 2004 SCC 34, [2004] 1 S.C.R. 902; Hoffmann-La Roche Ltd. v. Canada (Minister of National Health and Welfare) (1996),70 C.P.R. (3d) 206, 205 N.R. 331 (F.C.A.); Mowry v. Whitney, 81 U.S. 620 (1871); Laboratoires Servier v. Apotex Inc., 2008 FC 825, 67C.P.R. (4th) 443, affd 2009 FCA 222, 75 C.P.R. (4th) 443; Cadbury Schweppes Inc. v.

FBI Foods Ltd., (SCC), [1999] 1S.C.R. 142, (1999), 167 D.L.R. (4th) 577; Coflexip S.A. & Anor v. Stolt Offshore M.S. Ltd. & Ors, [2003] EWCA Civ 296; Panduit Corp.v. Stahlin Bros. Fibre Works, Inc. 575 F.2d 1152 (6th Cir. 1978); Monsanto Canada Inc. v. Schmeiser, 2001 FCT 256, 12 C.P.R. (4th)204, affd 2002 FCA 309, [2003] 2 F.C. 165; Collette v. Lasnier (1886), 1886 CanLII 54 (SCC), 13 S.C.R. 563; Monsanto Canada Inc. v.Rivett, 2010 FCA 207, [2012] 1 F.C.R. 473 affg 2009 FC 317, [2010] 2 F.C.R. 93; Sanofi-Aventis Canada Inc. v. Teva Canada Ltd.,2012 FC 552, 410 F.T.R. 1; Apotex Inc. v.

Canada (Minister of National Health and Welfare), , 181 D.L.R. (4th) 404(F.C.A.); Leslee Sports Importing (Brockville) Ltd. v. Reebok Canada Inc., [1991] O.J. No. 1536 (Gen. Div.) (QL); AlliedSignal Inc. v.du Pont Canada Inc., , 78 C.P.R. (3d) 129 (F.C.T.D.), affd , 86 C.P.R. (3d) 324 (F.C.A.); GrainProcessing Corp. v. American Maize-Products Co., 185 F.3d 1341 (Fed. Cir. 1999); Yacyshyn v. Canada, , 99 DTC5133 (F.C.A.); Forget v. Specialty Tools of Canada Inc., (BC CA), [1996] 1 W.W.R. 12, (1995), 62 C.P.R. (3d) 537(B.C.C.A.); Armstrong Cork Canada v.

Domco Industries Ltd., (SCC), [1982] 1 S.C.R. 907, (1982), 136 D.L.R. (3d)595; Merck & Co., Inc. v. Apotex Inc., 2006 FC 524, 53 C.P.R. (4th) 1, affd 2006 FCA 323, [2007] 3 F.C.R. 588; Apotex Inc. v. WellcomeFoundation Ltd., (FCA), [2001] 1 F.C. 495, (2000), 10 C.P.R. (4th) 65 (C.A.); Hertzog v. Highwire Information Inc., (F.C.); Universal Sales, Limited v. Edinburgh Assurance Co. Ltd., 2012 FC 1192, 420 F.T.R. 29. referred to: Canson Enterprises Ltd. v. Boughton & Co., (SCC), [1991] 3 S.C.R. 534, (1991), 85 D.L.R. (4th) 129; Athey v. Leonati, (SCC), [1996] 3 S.C.R. 458, (1996), 140 D.L.R. (4th) 435; Clements v.

Clements, 2012 SCC 32, [2012] 2 S.C.R. 181;Ultraframe (U.K.) Limited v. Eurocell Building Plastics Limited & Anor, [2006] EWHC 1344 (Pat.); Colonial Fastener Co. Ltd. v.Lightning Fastener Co. Ltd., (SCC), [1937] S.C.R. 36, [1937] 1 D.L.R. 21; Apotex Inc. v. Sanofi-Aventis, 2012 FC 553,410 F.T.R. 78; Apex Construction v. Ceco Developments Ltd., 2008 ABCA 125, 88 Alta. L.R. (4th) 126; General Motors of Canada Ltd.v. Canada, 2008 FCA 142, 292 D.L.R. (4th) 331; Eli Lilly & Co. v. Novopharm Ltd., (SCC), [1998] 2 S.C.R. 129,(1998), 161 D.L.R. (4th) 1; Transocean Offshore Ltd. v.

Canada, 2005 FCA 104, 332 N.R. 21; Bourgault Industries Ltd. v. Canada,2006 TCC 449, 55 C.P.R. (4th) 369; Electric Chain Co. of Canada Ltd. v. Art Metal Works et al., (SCC), [1933] S.C.R.581, [1933] 4 D.L.R. 240; Janssen-Ortho Inc. v. Novopharm Ltd., 2006 FC 1234, 57 C.P.R. (4th) 6; Merck & Co. v. Apotex Inc., 2002FCT 842, affd 2002 FCT 1037, 22 C.P.R. (4th) 377. AUTHORS CITED Fox, Harold G. Canadian Law and Practice Relating to Letters Patent for Inventions, 4th ed. Toronto: Carswell, 1969. Pincus, Laura B. “The Computation of Damages in Patent Infringement Actions” (1991), 5 Harv. J.L. & Tech. 95.

Siebrasse, Norman. “ A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms” (2004),20 C.I.P.R. 79. Siebrasse, Norman et al. “Damages Calculations in Intellectual Property Cases in Canada” (2008), 24 C.I.P.R. 153. DAMAGES phase of an action in which the plaintiffs sought a declaration that Canadian Patent No. 1161380 was valid and had beeninfringed by the defendants. Total damages of $119 054 327 awarded to plaintiffs. APPEARANCES Andrew J. Reddon, Steven G. Mason, David Tait and Natacha Engel for plaintiffs. Harry B.

Radomski, John Keefe, Andrew Brodkin, David Scrimger, Mark Dunn and Jordon D. Scopa for defendant Apotex Inc. John A. Myers and Patrick Riley for defendant Apotex Fermentation Inc. SOLICITORS OF RECORD McCarthy Tétrault LLP, Toronto, for plaintiffs. Taylor McCaffrey LLP, Winnipeg, for defendant Apotex Fermentation Inc. Goodmans LLP, Toronto, for defendant Apotex Inc. The following are the public reasons for judgment[1] rendered in English by Snider J.: I. Introduction [1] In an action commenced on June 12, 1997, the plaintiffs sought a declaration that Canadian Patent No. 1161380 ('380 patent) was

valid and infringed by the defendants. On November 14, 2003, the action was bifurcated, meaning that the appropriate damages or accounting of profits would only be determined after the liability phase (order of Prothonotary Aronovitch dated November 14, 2003, as amended on November 20, 2003). The liability trial commenced on February 1, 2010 before me and concluded on May 21, 2010. In Merck & Co. Inc. v.

Apotex Inc. , 2010 FC 1265 , 91 C.P.R. (4th) 1 ( Liability Reasons ), affd 2011 FCA 363 , 102 C.P.R. (4th) 321, I found that the '380 patent was valid and had been infringed by the defendants and that the plaintiffs were entitled to their damages rather than to an accounting of profits ( Liability Reasons , above, at paragraph 624). The damages phase of this matter began on April 8, 2013 and concluded on May 3, 2013. During this phase of the proceedings, I heard evidence from four fact witnesses and one expert witness, followed by three days of final argument.

These reasons for judgment deal with the quantum of damages to be paid to the plaintiffs. [ 2 ] In brief and for the reasons that follow, I have concluded that the plaintiffs are entitled to a total damages award of $119 054 327, plus pre-judgment and post-judgment interest, comprised of: • $62 925 126 as lost profits of Merck Canada Inc. (Merck Canada), in respect of pre-expiry replacement sales (defined below); • $51 290 364 as lost profits of Merck & Co.

Inc. (Merck U.S.), in respect of pre-expiry replacement sales; • [Redacted], based on a reasonable royalty calculation, for post-expiry infringing domestic sales; and • [Redacted], based on a reasonable royalty calculation, for infringing export sales. [ 3 ] In addition, I have made the following determinations: • Merck should not be awarded its lost profits (if any) or a reasonable royalty in respect of post-expiry ramp-up sales; • Merck is not entitled to “lost royalties” that would have been earned by Merck and Company, Incorporated (MACI) on additional sales of Mevacor tablets; • Apotex’s argument that its non-infringing alternative should be taken into account in assessing damages is rejected; and • Pre-judgment interest should be calculated at a rate equal to the 1997 bank rate plus 1 percent and post-judgment interest at a rate of 5 percent. [ 4 ] In these reasons, unless otherwise expressed, all monetary figures are expressed as Canadian dollars.

II. Table of Contents [ 5 ] For the convenience of the reader, I am including a Table of Contents. The references for each

section are to the beginning paragraph numbers. Table of Contents Paragraph I. Introduction 1 II. Table of Contents 5 III. Background 6 IV.

Summary of the Parties’ Positions 10 V. Issues 17 VI. Witnesses 18 A. Merck Witnesses 19 B. Apotex Witness 25 VII. Lost Profits of Merck Canada 26 A. Apotex’s Submission 32 B. Merck’s Position 34 C. General Principles of Damages 41 D. Damages vs Accounting of Profits 45 E. Causation 49 F. Canadian Law on the NIA Defence 57 G. Evolution of the Law According to Apotex 77

(1) Monsanto/Schmeiser 77

(2) Law of the United States on NIA Defence 91

(3) The Professor Siebrasse Papers 98

(4) Section 8 Damages under the PM(NOC) Regulations 107 H. Policy Reasons Supporting the Rejection of the NIA Defence 113 I. Conclusion on NIA Defence 121 VIII. MACI Royalty 122 A. The Terms of the MACI Royalty Agreement 129 B. The Surrogatum Principle 139 C. Conclusion on MACI Royalty Issue 142 IX. Calculation of a Reasonable Royalty on Blue Treasure Pre-Expiry Sales 143

A. General Principles 149 B. One-time Negotiation on the Eve of First Infringement 156 C. Framework for Hypothetical Negotiations 163 X. Export Sales 176 XI. Post-Expiry Sales 182 A. Reasonable Royalty for Post-Expiry Replacement Tablets 185 B. Post-Expiry Ramp-Up Lost Profits 200

(1) Lack of Notice 206

(2) Inadequacy of the Evidence 216

(3) Conclusion on Post-Expiry Ramp-Up Lost Profits 227 XII. Lost Profits of Merck U.S. 228 A. Merck U.S. Assignment to MACI 233 B. Quimica 247 C. Conclusion on the Lost Profits of Merck U.S. 252 XIII. Pre-Judgment Interest 253 XIV. Post-Judgment Interest 271 XV. Costs 272 A. Scale 273 B. Split or Differentiated Costs Awards 275 C. Counsel 278 D. Experts 281 E. Conclusion on Costs 286 XVI. Overall Conclusions 287 Appendix A – Estimated Lost Profits from Post-Expiry Ramp-Up Tablets III. Background [ 6 ] This litigation has a complex context and history.

I refer the reader to paragraphs 10 to 16 and 18 to 39 of the Liability Reasons , for a more detailed description of the history. By way of short background, Merck U.S., one of the plaintiffs in the action, is the named patentee of the '380 patent, which patent was issued January 31, 1984 and expired on January 31, 2001. The '380 patent is a product-by- process patent for the anti-cholesterol drug, lovastatin, when made with a micro-organism known as Aspergillus terreus .

Merck Canada, the successor in interest to Merck Frosst Canada Ltd. and the other plaintiff in this action, sold lovastatin under the trade-name MEVACOR in Canada beginning in 1988, under licence from Merck U.S. Merck Canada purchased bulk lovastatin (API) from Merck U.S. Collectively, I refer to Merck Canada and Merck U.S. as “Merck” or the “plaintiffs”. [ 7 ] In March 1997, Apotex Inc., one of the defendants in this action, began selling its brand of lovastatin tablets in Canada (Apo- lovastatin).

The API for Apo-lovastatin was made either by Apotex Fermentation Inc. (AFI), the other defendant in this action, in Winnipeg, Manitoba, or by Qingyuan Blue Treasure Pharmaceuticals Co. Ltd. (Blue Treasure), in China. In these reasons, I will refer to Apotex Inc. and AFI, collectively, as “Apotex” or the “defendants”. [ 8 ] A highly relevant twist to this action is the capability of AFI to manufacture lovastatin API using a non-infringing process (referred to as AFI-4), a process which uses the micro-organism Coniothyrium fuckelii rather than Aspergillus terreus .

In the liability phase of this action, I found that some—but not all—lovastatin API was made using a process (referred to as AFI-1) which infringed the '380 patent.

Specifically, I concluded (see Liability Reasons , above, at paragraph 638) that the following lots of lovastatin infringed the '380 patent: 1. all Apo-lovastatin product that was produced by AFI from AFI batch CR0157 (CR0157) manufactured in AFI’s facilities in Winnipeg and delivered to Apotex Inc. on December 2, 1996; and 2. all 294 batches of lovastatin produced by Blue Treasure after March 1998 and imported into Canada. [ 9 ] In the end result, Apotex’s infringement was significant.

Approximately 60 percent of Apotex’s sales made between March 1997 and the expiry of the '380 patent were sales of infringing lovastatin. Viewed on a volume basis, approximately 71 percent of the total amount of lovastatin API supplied to Apotex Inc. by AFI was infringing material. IV.

Summary of the Parties’ Positions [ 10 ] Very helpfully, on the eve of trial, the parties resolved a number of matters which, otherwise, would have required evidence during the trial. The resolved matters were memorialized in the “Streamlining Agreement Re: Certain Facts and Figures” (TX 175 or the Streamlining Agreement) dated March 27, 2013. Some of the key areas of agreement were on the subjects of: (

a) the number and timing of sales of infringing and non-infringing Apo-lovastatin; (

b) hypothetical profits of Merck U.S. and Merck Canada; (

c) the hypothetical MACI Royalty; and (

d) the profitability of the AFI-4 process. As required, the specific items of agreement will be referred to in the relevant sections of these reasons. [ 11 ] Merck claims lost profits with respect to three categories of sales: 1. MEVACOR tablets that would have been sold domestically by Merck Canada to replace each and every infringing Apo-lovastatin tablet sold domestically prior to January 31, 2001 (the pre-expiry replacement tablets or sales);

2. Lost profits from the sale of lovastatin API that would have been sold by Merck U.S. to Merck Canada to produce the pre-expiry replacement tablets; and 3. MEVACOR tablets (and related lovastatin API) that would have been sold domestically to replace each and every Apo-lovastatin tablet sold after the '380 patent expiry during the hypothetical ramp-up period (the post-expiry ramp-up tablets or sales). [ 12 ] Merck also claims a royalty in respect of infringing sales that it would not have made, specifically: 1.

Infringing Apo-lovastatin tablets sold into the export market prior to and after the '380 patent expiry (export tablets); and 2. Infringing Apo-lovastatin tablets sold domestically after the '380 patent expired (the post-expiry replacement tablets). [ 13 ] Merck Canada further requests that its award of lost profits include an amount to reflect an 8.5 percent royalty payable to MACI.

Merck also seeks pre-judgment interest at a rate of at least 5 percent per annum and its costs. [ 14 ] The total damages claimed by Merck are $156 320 737, plus interest. [ 15 ] In response, Apotex’s position can be summarized as follows: 1. In respect of the pre-expiry replacement tablets, Merck Canada is entitled to: a. its lost profits for the CR0157 infringement; and b. only a reasonable royalty for the Blue Treasure infringing batches, on the basis that Apotex had available to it a non-infringing alternative; 2.

Merck U.S. is entitled to a nominal damages award only, since Merck U.S. had assigned all of its rights to damages to MACI; 3. Merck is entitled to neither lost profits nor a reasonable royalty for the post-expiry ramp-up tablets; 4. Apotex agrees with the payment of a reasonable royalty on the export tablets, but proposes a lower royalty rate than Merck; 5. Merck is not entitled to an additional recovery in respect of the MACI royalty; and 6.

Pre-judgment interest should be calculated at the bank rate in the first quarter of 1997. [ 16 ] Apotex argues that the Merck’s total damages should be $9 554 288 (plus a “nominal”, unquantified amount to Merck U.S.), together with pre-judgment interest at a rate of about 3.3 percent and post-judgment interest at a rate of 5 percent. V. Issues [ 17 ] Although the parties reached agreement on some of the underlying facts and relevant evidence from the liability phase was incorporated into this phase, a number of issues have endured. 1.

In calculating Merck Canada’s damages, are the defendants able to raise the defence that they had a non-infringing alternative; that is, from March 1997, Apotex could have used the AFI-4 process to manufacture sufficient quantities of lovastatin to supply the Canadian market and, therefore, Merck Canada is only entitled to a reasonable royalty with respect to the pre-expiry replacement tablets? 2. If I agree that Apotex is able to raise its non-infringing alternative (NIA) defence and a reasonable royalty only is payable with respect to sales lost by Merck, what should that reasonable royalty be? 3.

If I find that Apotex cannot rely on its NIA defence and the plaintiffs are entitled to an award of lost profits (rather than a reasonable royalty): a. Is Merck entitled to lost profits for the post-expiry ramp-up sales, due to the fact that Apotex did not require a “ramp-up” period to reach its ultimate market share? b. Using a differential accounting method of lost profits, should Merck Canada’s lost profits be reduced to account for the MACI royalty? 4. In a calculation of Merck U.S.’s lost profits: a.

Is Merck U.S. entitled to anything other than nominal damages because of its assignment of certain rights in the '380 patent to MACI? b. If Merck U.S. is entitled to recover its lost profits for sale of API to Merck Canada, should those damages be reduced in view of sales of API that would have been made to Merck Canada by Merck Sharpe & Dohme Quimica (Quimica) and, if so, at what level? 5.

Since Merck agrees that they would not have captured export sales of lovastatin during the infringement and post-expiry sales made with infringing, stockpiled API, what “reasonable royalty” would be applicable to those infringing sales made by Apotex? 6. At what level should Merck be awarded pre-judgment interest and post-judgment interest? 7. What principles should apply to any award of costs? VI. Witnesses

[ 18 ] As mentioned above, only four fact witnesses and one expert witness testified at the trial. A. Merck’s Witnesses [ 19 ] Merck presented the following three witnesses. [ 20 ] Mr. Kirk Duguid is presently the Vice President of Finance for Merck Canada (2T112-113). In November-December of 1996, Mr. Duguid was Director of Financial Planning and Analysis, responsible for financial planning and assisting with sales forecasts (2T113-114). Mr. Duguid testified about Merck’s long-range marketing plan for MEVACOR in 1996.

He also reviewed invoices relating to purchases of API by Merck Canada from Merck U.S. and Quimica. Lastly, Mr. Duguid described the payment of royalties to MACI. [ 21 ] Mr. Barry O’Sullivan is an Executive Director with the Corporate Tax Department of Merck U.S. (2T212-213). He is responsible for worldwide physical and financial supply chain planning, inter-company licensing, funding of research and development, international inter-company transfer pricing and coordination of tax planning in Canada and Mexico. Mr.

O’Sullivan testified about the physical supply chain for MEVACOR API and discussed the MACI royalty. [ 22 ] Mr. Joseph Promo is the assistant treasurer responsible for international treasury services for non-U.S. subsidiaries of Merck U.S. (3T443-444). Mr. Promo testified about Merck’s weighted average cost of capital (WACC) and the use of WACC to decide whether a transaction is beneficial for the company. Mr. Promo also discussed Merck’s long-term debt. [ 23 ] Merck also presented one expert, Dr. Christine S. Meyer . Dr.

Meyer was qualified as an expert to opine on “economic issues related to the determination of a reasonable royalty as a result of a hypothetical royalty negotiation” (2T238-241). The Court also accepted that this expertise includes applicable bargaining theory (2T241-243). [ 24 ] Dr. Meyer explained economic principles relating to a hypothetical royalty negotiation, including potential costs and benefits to both Merck and Apotex. She set the hypothetical negotiation in November 1996, assuming that the ' 380 patent was valid and infringed and that the parties provide each other with accurate information. B.

Apotex’s Witness [ 25 ] Apotex presented only one fact witness (and no experts) to the Court. Specifically, Dr. Bernard Sherman was presented as a fact witness. Dr. Sherman is the Chairman of Apotex (5T506-507). He testified about the acquisition by Apotex of the company that later became AFI and the decision to outsource lovastatin production to Blue Treasure. Dr. Sherman also discussed his knowledge of infringement by AFI and Blue Treasure and what he would have done had he known about the infringement taking place. He also testified about the NOC [notice of compliance] proceedings and the AFI-4 process. VII.

Lost Profits of Merck Canada [ 26 ] As I determined at the liability phase of the trial, Merck is limited to a claim of damages under subsection 55(1) of the Patent Act , R.S.C., 1985, c. P-4 ( Patent Act ). Subsection 55(1) provides that: Liability for patent infringement 55.

(1) A person who infringes a patent is liable to the patentee and to all persons claiming under the patentee for all damage sustained by the patentee or by any such person, after the grant of the patent, by reason of the infringement. I will deal first with the claim of Merck Canada. [ 27 ] Merck Canada claims that the infringement by Apotex led to lost profits that Merck Canada would have earned from the sale of MEVACOR tablets in the amount of $73 303 319.

This amount consists of $62 925 126 for the lost profits that Merck Canada would have earned if it had replaced each and every infringing Apo-lovastatin tablet sold domestically prior to January 31, 2001 (the pre-expiry replacement tablets). Merck Canada also claims that its damages award should include an additional amount of $10 378 193 to reflect the MACI royalty. [ 28 ] The parties have agreed that the profits that Merck Canada would have earned if it had sold the pre-expiry replacement tablets, incorporating a deduction for the MACI royalty, are $62 925 126 (Streamlining Agreement, at paragraph 6).

Underlying this final figure is an acknowledgment by the defendants that they will not contest a host of questions with respect to the “but for” world. Settlement has been reached on the following issues: the volume of sales that would have been made by Merck Canada; the capacity of Merck Canada to manufacture the required MEVACOR tablets; and the appropriate accounting treatment of hypothetical gross sales revenues. [ 29 ] There are two points of disagreement: (

a) whether the availability of Apotex’s AFI-4 process (a non-infringing alternative or NIA) results in a finding that Merck Canada is only entitled to a reasonable royalty on the lost sales rather than its lost profits; and (

b) how or whether to account for the MACI royalty agreed to be in the amount of $10 378 193 (Streamlining Agreement, at paragraph 8). [ 30 ] In this

section of the reasons, I will consider only Merck’s claim to $62 925 126 and Apotex’s defence of a non-infringing alternative. The question of Merck’s entitlement to the MACI royalty amount is dealt with in

section VIII of these reasons. [ 31 ] In dealing with this issue, I have organized my analysis with regard to the following questions:

1. What are Apotex’s submissions with respect to the NIA defence? 2. What are Merck’s submissions with respect to the NIA defence? 3. What are the general principles of damages? 4. What are the key differences between “damages” and an “accounting of profits”? 5. What was the “causation” of Merck Canada’s losses? 6. What is the state of the law of Canada on the NIA defence? This analysis requires me to examine the law of the United Kingdom upon which, at least thus far, Canadian law appears to be based. 7. Has Canadian law on the NIA defence changed or should it change because: a.

The Supreme Court of Canada, in Monsanto Canada Inc. v. Schmeiser , 2004 SCC 34 , [2004] 1 S.C.R. 902 ( Monsanto/Schmeiser ), changed the law of damages; b. Courts in the United States have long recognized consideration of all competition the patentee would have faced but for infringement, including competition from the infringer; c. Recent legal commentary by Professor Norman Siebrasse has urged the adoption of the NIA defence; or d. The NIA defence has been accepted by the Federal Court in the context of damages assessed pursuant to

section 8 of the Patented Medicines (Notice of Compliance) Regulations , SOR/93-133 (PM (NOC) Regulations)? 8. Are there policy reasons to reject (or accept) the NIA defence in the context of Merck Canada’s claim for lost profits? A. Apotex’s Submission [ 32 ] Apotex submits that Merck Canada should not be awarded its lost profits with respect to the pre-expiry replacement tablets.

Rather, Apotex urges the Court to conclude that, except for those tablets that formed part of the infringing batch CR0157, Merck Canada is only entitled to a reasonable royalty because Merck Canada cannot show that its damage was sustained “by reason of the infringement”. [ 33 ] The basis of this argument is that, commencing in March 1997, the “but for” analysis should take into account that Apotex had available to it a non-infringing alternative or NIA in the form of the AFI-4 process. Apotex used the NIA for about 40 percent of its sales in Canada during the period of infringement.

From March 26, 1997—the date that Apotex received its NOC—Apotex had the regulatory approval, the capacity and the physical capability to produce all of the tablets that it sold in Canada by the non-infringing AFI-4 process. It follows, submits Apotex, that Merck Canada has not demonstrated that its loss was caused by the use of the AFI-1 process by Apotex and is limited to a reasonable royalty on the pre-expiry replacement sales. This royalty should be assessed as an equal sharing of the difference in the cost of producing tablets with the infringing AFI-1 process and the non-infringing AFI-4 process.

Rather than the $62 925 126 of lost profits claimed by Merck Canada, Apotex believes that the appropriate damages award should be (

a) lost profits of $521 641 on the CR0157 tablets; and (

b) a reasonable royalty of $6 997 270 on the balance of the pre-expiry replacement tablets. B. Merck’s Position [ 34 ] Merck asserts that the NIA defence is only available to Apotex if the answers to all of the following questions are in Apotex’s favour (Merck’s final written argument, at paragraph 68): 1. Is it more likely than not that the Defendants would have made and sold non-infringing Apo-lovastatin tablets in place of the infringing tablets? 2.

Having breached its undertaking not to infringe, can the Defendants ask to have damages assessed as if they had honoured the undertaking, or is there some consequence – even a grave consequence – associated with the breach that bars the defence? 3. Even if the Defendants would have used AFI-4 in a hypothetical world, and even if grave consequences or breach of undertaking do not prevent the defence from being raised in this case, does the NIA defence exist as a matter [of] law? 4.

Even if the law is changed to permit the NIA defence, was Apotex’s non-infringing alternative “available” in fact? [Emphasis omitted.] [ 35 ] The response to question 3—the existence of the NIA as a matter of Canadian law—is determinative and, on that basis, Apotex’s argument should be rejected. I do not need to consider the other arguments of Merck. [ 36 ] However, if I had to decide those other questions, in my view, all three would be answered in the affirmative. [ 37 ] The complete response to questions 1 and 4 is that the matter has been settled by the Streamlining Agreement.

The agreement clearly states at paragraph 19 that the defendants had the capacity to manufacture and sell non-infringing lovastatin in sufficient quantities from the time Apotex received its NOC on March 26, 1997 and at all times thereafter.

Paragraph 19 of the Streamlining Agreement goes on to state that the agreement “does not affect or limit the Plaintiffs from arguing or leading evidence that uncertainty existed regarding the ability of the Defendants to meet the market demand for lovastatin with non-infringing lovastatin tablets formulated using lovastatin API made using the AFI-4 process at the AFI plant in Winnipeg” and that the defendants abandoned any argument that they would have had other suppliers.

However, in my view, these statements are relevant to the uncertainty of Apotex upon entering into a hypothetical negotiation for a reasonable royalty prior to March 26, 1997 and do not relate to Apotex’s actual capacity once it obtained

its NOC on that date. [ 38 ] With respect to question 2, I agree that Apotex breached the undertaking in its initial notice of allegation under the PM (NOC) Regulations. Apotex gave an undertaking that it would not infringe the '380 patent and, at the end of the day, approximately 60 percent of its sales of Apo-lovastatin during the life of the patent were infringing. I further agree with Merck that, in light of the breach of the undertaking, “grave consequences” may flow. This notion was discussed by the Federal Court of Appeal in Hoffmann-La Roche Ltd v.

Canada (Minister of National Health and Welfare) (1996), 70 C.P.R. (3d) 206 (F.C.A.) ( Hoffman-La Roche ), at paragraph 12 , in which the Court stated: I have no doubt, nevertheless, that such an allegation is intended to be accurate.

Once a second person's product reaches the market the first person is in a position to test the accuracy of the detailed statement; if it were shown to be inaccurate, the consequences for a second person could well be very grave indeed. [ 39 ] The question, however, is whether this concept, which was clearly intended to apply in the setting of the PM (NOC) Regulations, should be transferred from that highly specialized legislative framework to the construction of a hypothetical “but for” world in the calculation of patent infringement damages.

The facts of this case are unique, since an NOC was issued without an evaluation of the merits of an NOC proceeding. I think it dangerous and unhelpful to apply Apotex’s undertaking across the two cases. [ 40 ] The availability of the NIA defence at law is therefore the determinative question. C. General Principles of Damages [ 41 ] In Jay-Lor International Inc. v. Penta Farm Systems Ltd. , 2007 FC 358 , 59 C.P.R. (4th) 228 ( Jay-Lor ), at paragraph 123 , I set out a series of principles which, in my view, applied where an assessment of damages under subsection 55(1) of the Patent Act was to be made.

I remain of the opinion that these principles are applicable to the determination of Merck’s damages. The more significant of those guiding principles are as follows: 1. An award of damages seeks to compensate the plaintiff for any losses suffered by the plaintiff as a result of the infringement; 2. The profits made by the defendant are irrelevant; 3. Every sale of an infringing product is an illegal transaction for which the plaintiff is entitled to recover damages; 4.

In assessing the award, the plaintiff is entitled to the profits on the sales it would have made but for the presence of the infringing product in the market; 5. For those sales made by the defendant that the plaintiff patentee would not have made or cannot persuade the Court it would have made but for the presence of the infringing product, the plaintiff is entitled to a reasonable royalty; and 6. The plaintiff bears the burden of proving: (

a) the sales that it would have made but for the presence of the infringing product; and (

b) what a reasonable royalty would be. [ 42 ] Many facts of this case are either undisputed or have been addressed in the Streamlining Agreement. The parties agree that Apotex and Merck Canada were the only sources of lovastatin in Canada during the period in question (March 27, 1997 to January 31, 2001) and Merck Canada had the capacity to satisfy the lovastatin market. Thus, the infringing lovastatin tablets sold by Apotex in Canada, referred to as the pre-expiry replacement tablets, would have been sold by Merck Canada.

Without Apotex’s infringement through use of the AFI-1 process, Merck Canada would have made profits from the sale of such lovastatin tablets and Merck U.S. would have made profits off lost sales of lovastatin API to Merck Canada. [ 43 ] The evidence is clear that Merck does not, as a general practice, license the use of its inventions (2T122-123).

Accordingly, both Merck Canada and Merck U.S. would be entitled to their lost profits in respect of the pre-expiry replacement sales (see, for example, Jay-Lor , above, at paragraph 119). [ 44 ] The parties agree on the general approach described above as it applies to the pre-expiry replacement tablets, but

part company with respect to the relevance of Apotex’s non-infringing AFI-4 process. D. Damages vs Accounting of Profits [ 45 ] Notwithstanding Apotex’s efforts to argue the contrary, an award of damages differs fundamentally from an accounting of profits. Damages are a statutory right embedded in the Patent Act . A wronged patentee is entitled to damages as a matter of right. [ 46 ] The key difference between the two remedies is the focus or starting point of the assessment. A claim for damages focuses on the plaintiff’s loss.

What loss did the plaintiff suffer from the unauthorized use of the invention by the defendant? On the other hand, an accounting of profits looks at the benefit or advantage that a defendant derived from the use of the invention. As described in the United States Supreme Court in Mowry v.

Whitney , 81 U.S. 620 (1871), at page 651, a case involving a claim for an accounting of profits for the infringement of patent for an improved method of manufacturing rail-car wheels: The question to be determined in this case is what advantage did the defendant derive from using the complainant’s invention over what he had in using other processes then open to the public and adequate to enable him to obtain an equally beneficial result.

The fruits of that advantage are his profits. [ 47 ] An accounting of profits is an equitable remedy only available upon election by a plaintiff and with the discretion of the Court. In Laboratoires Servier v. Apotex Inc. , 2008 FC 825 , 67 C.P.R. (4th) 443 ( Perindopril ), at paragraphs 503–504 , affd on other grounds 2009 FCA 222 , 75 C.P.R. (4th) 443, I described the difference as follows:

While both damages and accounting of profits are intended to provide compensation to a wronged plaintiff, the fundamentalprinciples underlying the two remedies and the practical considerations are substantially different. The object of an award of damages is to make good any loss suffered by the plaintiff as a result of the defendant's infringement of thepatent. Quantification of the award is based on the losses suffered by the plaintiff; any gains realized by the defendant because of itswrongdoing are not relevant.

On the other hand, an accounting of profits is based on the premise that the defendant, by reason of itswrongful conduct, has improperly received profits which belong to the plaintiff. The objective of the award is to restore those actualprofits to their rightful owner, the plaintiff, thereby eliminating whatever unjust enrichment has been procured by the defendant.Calculation is based on the profits wrongfully gained by the defendant; any other losses suffered by the plaintiff are irrelevant. [48] An accounting of profits originated in equity, although the Patent Act now refers to this remedy.

As set out in paragraph 57(1)(b)of the Patent Act, a judge may, on application of the plaintiff, make an order “for and respecting inspection or account”. The fact that theremedy is referred to in the Patent Act does not, as suggested by Apotex, change the remedy into a statutory remedy. It is an equitableremedy and remains so. On this basis, and as explained in further detail below, the extrapolation of principles governing accounting ofprofits to the statutory remedy of patent infringement damages is often inappropriate. E.

Causation [49] In the context of an award of damages, a plaintiff may only be compensated for losses which, on a common sense view ofcausation, are caused by the infringement (see, for example, Canson Enterprises Ltd. v. Boughton & Co., (SCC), [1991]3 S.C.R. 534, at page 556 (McLachlin J., as she then was, quoted with approval in Monsanto/Schmeiser, above, at paragraph 101)). Thepurpose of a compensatory remedy is to place a plaintiff in a position that he or she would have occupied but for the wrongful act.

Itwould be inappropriate to award compensatory damages that place the plaintiff in a better position (Athey v. Leonati, (SCC), [1996] 3 S.C.R. 458 (Athey), at paragraph 32). [50] Merck submits that Merck Canada’s lost profits were caused by Apotex’s infringement of the '380 patent.

Stated differently,Merck asserts that but for the infringement by Apotex, it would have sold all of the pre-expiry replacement tablets and is entitled to lostprofits in respect of each and every tablet. [51] Apotex asks me to reject this conclusion on the basis of its non-infringing alternative, drawing analogies to jurisprudence in thematters of tort and breach of confidence.

In spite of its infringement and in spite of Merck Canada’s demonstrated lost profits, Apotexargues that Merck cannot prove that Merck Canada would have made those sales in the “but for” scenario because Apotex had availableto it a different and non-infringing alternative. However, the legal principles highlighted by Apotex are irrelevant to the presentcircumstances. [52] First, causation was considered in the Liability Reasons, where I found that Merck’s lost sales were not recoverable where Apotexactually used the non-infringing AFI-4 process.

Merck’s losses during the 1996 to 2001 period exceed those claimed, since MerckCanada’s lost sales during that period were due, in part, to the sales by Apotex of non-infringing Apo-lovastatin tablets; that is, Apo-lovastatin made by the AFI-4 process. Merck Canada does not claim that it would have made those sales but for the infringement ofApotex. In other words, from a common sense view, these lost profits were not caused by Apotex’s infringement and, therefore, cannotbe recovered.

The “causation” in issue is limited to the pre-expiry replacement sales. [53] Second, principles of causation cannot support the relevance of a non-infringing alternative to an award of damages. TheSupreme Court acknowledged in Monsanto/Schmeiser, above, at paragraph 101, that all non-punitive remedies are governed by a“common sense view of causation”. However, in its discussion of accounting of profits, the Supreme Court considered the non-infringingalternative to be relevant to the quantification of the award only, after causation has already been proved.

Apotex inaccurately conflatescausation, which must be proven first, and the subsequent quantification of the remedy. [54] Third, causation in the context of tort law is directed to the original position of the plaintiff and, therefore, tort law cannotprovide support for Apotex’s argument that its own (the defendants’) hypothetical actions are relevant. Tort law focuses on the existenceof a relationship connecting the actions of the defendant to the harm the plaintiff suffered (Clements v. Clements, 2012 SCC 32, [2012] 2S.C.R. 181 (Clements), at paragraphs 6–10 and 46).

As such, tort law will not hold a defendant responsible for circumstances that changethe plaintiff’s original position in a manner that is completely unconnected to the defendant’s conduct (Athey, above, at pages 472–474;see also, Clements, above, at paragraph 40). The actions of Apotex, liable for infringement in this case, are not analogous to factorsindependent of the wrong that are inherent in Merck’s initial position.

Tort law is not concerned with whether the defendant could orwould have acted differently in a “but for” world where no wrongful conduct occurred. [55] Fourth, Cadbury Schweppes Inc. v FBI Foods Ltd., (SCC), [1999] 1 S.C.R. 142 (Cadbury), relied upon byApotex, is a case concerning breach of confidence that is inapplicable to the present circumstances. Justice Binnie recognized thatremedies for breach of confidence are sui generis, drawing on the flexibility of equitable principles as well as available remedies inmany areas of law, including contract, tort, property and trust (Cadbury, above, at paragraphs 26–28).

Further, Justice Binnie stated thatit would be inappropriate to allow the plaintiff to receive patent remedies for breach of confidence, since the requirements for a patentmay not be met, public disclosure does not occur and a trade secret can last far beyond the duration of a patent (Cadbury, above, atparagraphs 46–48). In particular, the confidential information, relating to juice formulation, was characterized as “nothing very special”,involving no inventive step whatsoever (Cadbury, above, at paragraphs 48 and 65).

Therefore, the unique nature of remedies for breachof confidence, informed by equitable principles and the particular facts of the Cadbury case, preclude application of this case to statutorypatent infringement damages. [56] In sum, I reject Apotex’s arguments regarding causation and conclude that Merck Canada’s lost profits for the pre-expiryreplacement sales were caused by Apotex’s infringement. Based on the record before me, Merck would have sold every one of thepre-expiry replacement sales if Apotex had not infringed the '380 patent.

I reach this conclusion based on a common sense view ofcausation, the current state of Canadian law and a rejection of Apotex’s NIA defence. F. Canadian Law on the NIA Defence

[ 57 ] Putting aside Apotex’s arguments, for the moment, the current state of Canadian law is that the existence of a non-infringing alternative is not relevant to an assessment of damages. This tenet of Canadian law dates back to the House of Lords decision in The United Horse Shoe and Nail Company, Limited v. Stewart & Company (1888), 5 R.P.C. 260 (H.L.) ( United Horse Shoe ), which, in my view, remains good law in Canada.

So, I begin with a review of the law of the United Kingdom, where the statutory provision for damages is similar to that of Canada. [ 58 ] United Horse Shoe involved a claim for damages by United Horse Shoe and Nail Company, Limited (referred to as the pursuers or the appellants) for infringement by Stewart and Company (referred to as the respondents or the defenders) of a number of patents for improvements in the making of nails by the use of particular machinery.

As set out by the Lord Chancellor, Lord Halsbury, in his judgment ( United Horse Shoe , above, at page 264): The actual infringement complained of consists in the sale of cases of nails produced by patent machines, which are admitted to be infringements of the Pursuers’ patents.

Every nail thus produced was an infringement of the Pursuers’ patents …. [ 59 ] The defenders asserted that the pursuers were entitled to nominal damages, because they might have produced the nails without infringing the pursuers’ patent rights. [ 60 ] All three lords — The Lord Chancellor, Lord Watson and Lord Macnaghten — rejected this argument.

Lord Halsbury described the situation in the following terms ( United Horse Shoe , above, at pages 264–265): I think it is nothing to the purpose to show, if it is shown, that the Defenders might have made nails equally good, and equally cheap, without infringing the Pursuers’ patent at all.

I will assume that to be proved, but if one assumes that the nails which were, in fact, made by the pirated machines injured the Pursuers’ sales, what does it matter if it is ever so much established that the loss which the Pursuers have sustained by the unlawful act of the Defenders might also have been sustained by them under such circumstances as would give the Pursuers no right of action?

Your Lordships have to deal with the facts as they exist, and those facts, as I say, are that the Defenders have in derogation of the Pursuers’ rights sold cases of nails which they had no right to sell, and for which to the extent to which they have interfered with the sale of the Pursuers’ patented nails, the Pursuers are entitled to damages. [Emphasis added.] [ 61 ] Lord Macnaghten summarized the issue as follows ( United Horse Shoe , above, at page 268): It appears to be beside the mark to say that the Respondents might have arrived at the same result by lawful means, and that, without infringing the Appellants’ rights, they might have produced a nail which would have proved an equally dangerous rival of the Globe nail.

The sole question is, what was the loss sustained by the Appellants by reason of the unlawful sale of the Respondents’ nails? [ 62 ] It is interesting to observe that the Lords, in their judgments, very carefully questioned various factors which affected the pursuers’ lost profits. The amount recoverable against the defenders was limited to the “amount of damages as the Pursuers can establish to have been sustained by the infringement of the patent right” ( United Horse Shoe , above, at page 264).

For example, Lord Watson referred to the fact that “all legitimate competition to which [the Appellants] would have been exposed” (emphasis added) ( United Horse Shoe , above, at page 267) must be taken into account. In addition, Lord Watson opined that the appellants had failed to establish loss after the respondents’ illegal actions ceased ( United Horse Shoe , above, at page 268). [ 63 ] United Horse Shoe was not a one-off. In Catnic Components Ltd. v. Hill & Smith Ltd. , [1983] F.S.R. 512 (Pat.

Ct.) ( Catnic ), Justice Falconer rejected the argument of the defendants that “[i]f the defendants had not made and sold infringing lintels they would have made and sold non-infringing lintels” ( Catnic , above, at page 524).

In holding that this argument was “not open to the defendants in law”, Justice Falconer stated as follows ( Catnic , above, at pages 524–525): The United Horse Shoe and Nail Company Limited case . . . is authority for the proposition that an infringer is barred from defeating a plaintiff patentee’s claim for damages for loss of profits by saying: “Yes, I infringed but I could have taken this market from you by not infringing.” Much of Mr.

Gatwick’s address on the “loss of profits” part of the claim was devoted to, and much of the defendants’ evidence directed to, this argument, but as in my view the argument is wrong in law the evidence directed to it is irrelevant and I need not consider it further. [Emphasis added.] [ 64 ] The same conclusion was reached by Justice Jacob (as he then was) in Gerber Garment Technology Inc. v. Lectra Systems Ltd. , [1995] R.P.C. 383 (Pat. Ct.) ( Gerber ), at pages 405–406, revd on other grounds [1997] R.P.C. 443 (C.A.).

At pages 394, 405 and 406, Justice Jacob explained the issue as follows: Sometimes defendants have sought to evade substantial liability by contending that they could have avoided infringement, for instance by using some other equally efficacious but non-infringing device. They suggest that they could have inflicted the same economic “injury” by lawful competition. The courts have consistently rejected this approach. The rejection follows from the compensation principle. One is concerned with compensation for what the defendant has done by acting “improperly”. . . .

Lectra [the defendant] also argued that they should be treated as if they had acted “properly, instead of acting improperly” . . .; that they should be treated as one who “properly” undertook to take and then took a licence. But it is well settled that one does not consider what the position would be if the defendant had achieved the same effect by an alternative, non-infringing means.

That applies as mush to seeking a licence as to using an alternative, non-infringing device. “Acting properly” means no more than not having infringed; it does not mean adopting some alternative course inflicting the same economic “damage” but without infringement. [Emphasis added.] [ 65 ] Similar remarks were made by Justice Kitchin in Ultraframe (U.K.) Limited v. Eurocell Building Plastics Limited & Anor, [2006] EWHC 1344 (Pat.) ( Ultraframe ), at paragraph 93. As Lord Justice Jacob would no doubt say, further citations on this principle would be otiose (see Gerber , above, at page 394).

[ 66 ] The facts and arguments of all of these cases bear remarkable similarity to the case before me in this trial. Like the respondents in United Horse Shoe , Apotex had the possibility of producing “an equally dangerous rival” — Apo-lovastatin — by “lawful means” — the AFI-4 process. Like the respondents in that case, Apotex did not use the AFI-4 process but “pirated” Merck’s property in the '380 patent without consent or licence.

Just like the defendants in Catnic , Apotex argues, “Yes, I infringed but I could have taken this market from you by not infringing”. [ 67 ] Apotex acknowledges the state of U.K. law on this question. However, Apotex submits that the law in the United Kingdom is evolving. In support of this proposition, Apotex refers to the decision of Lord Justice Aldous in Coflexip S.A. & Anor v. Stolt Offshore M.S. Ltd. & Ors , [2003] EWCA Civ 296. This case involved a patent for a device for the laying of flexible pipe at sea.

The issue before the Supreme Court of Judicature Court on Appeal (Civil Division), on appeal from Justice Jacob (as he then was), was a matter of the pleadings. In the course of argument, counsel for the defendants raised the question of the relevance of a non-infringing alternative and the approach to this question in the United States (citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc. , 575 F.2d 1152 (6th Cir. 1978) ( Panduit ), discussed below).

Lord Justice Aldous opined, at paragraph 41, that: Despite the interesting submission on US law, it is not right at this stage of the enquiry to doubt the correctness of the United Kingdom cases. When the facts are found then perhaps guidance from [United States case law] could be of assistance. [Emphasis added.] [ 68 ] Ultimately, the case never went to trial. I decline to accept one line from a pleadings motion decision and elevate it to a conclusion that U.K. law has changed or is about to change.

Moreover, this case was decided three years before Ultraframe , above, in which the Court unequivocally followed the United Horse Shoe line of cases . [ 69 ] In sum, the law of the United Kingdom is clear and unequivocal; the non-infringing alternative defence is wrong at law. [ 70 ] The reasoning of United Horse Shoe has been considered and followed in Canada in at least one decision of our court and referred to in another. [ 71 ] The first of these cases is Domco Industries Ltd. v.

Armstrong Cork Canada Ltd. et al. (1983), 76 C.P.R. (2d) 70 (F.C.T.D.) ( Domco (Prothonotary Preston)), at page 74, revd on other grounds (1986), 10 C.P.R. (3d) 53 (F.C.T.D.) ( Domco (Collier J.)) . The relevance of non-infringing alternatives was rejected by both Prothonotary Preston and Justice Collier.

The defendants argued that damages should be reduced because, instead of infringing the plaintiff’s patents, the defendants could have sold an existing non- infringing alternative, or could have developed a new non-infringing process, or could have avoided infringement altogether by obtaining a licence ( Domco (Prothonotary Preston), above at pages 73, 81 and 82).

The Referee acknowledged these propositions but ultimately concluded that all such potential non-infringing alternatives were completely irrelevant ( Domco (Collier J.), above, at page 91): Armstrong infringed the patents and the argument that they could have taken a license [ sic ] or sold a non-patented product is irrelevant in the light of what actually happened , and tends to obfuscate the main issue of the continued infringement by the Defendant. [ 72 ] The fact that the defendant already possessed and had marketed an existing non-infringing alternative ( Domco (Prothonotary Preston), above, at page 82) did not alter the Court’s approach in rejecting the relevance of such alternatives. [ 73 ] Although the issue of a non-infringing alternative was not raised in Jay-Lor , during a discussion of general principles, I cited, with approval, the conclusions stated in Domco (Prothonotary Preston) ( Jay-Lor , above, at paragraph 115). [ 74 ] Admittedly, the Canadian cases which refer to and apply United Horse Shoe may not constitute the highest authority.

However, Domco (Collier J.) has never been overturned. This may simply be a reflection that the law is so obvious and settled that there is nothing to be said. If this Canadian case law can be described as sparse, jurisprudence to support the position of Apotex is non-existent. There is not a single Canadian case that applies a non-infringing alternative defence to an award of damages. [ 75 ] In sum, Canadian law reflects the jurisprudence of the United Kingdom and results in a rejection of the NIA defence.

In other words, under current Canadian law of damages, the fact that Apotex had available to it (but did not use) a non-infringing alternative is irrelevant to a calculation of damages. [ 76 ] I turn now to Apotex’s submissions on how that law has changed (or, alternatively, should change). G. Evolution of the Law According to Apotex

(1) Monsanto/Schmeiser [ 77 ] Apotex argues that the case of Monsanto/Schmeiser effectively and completely changed the law of damages and provides authority for its position. I do not agree. [ 78 ] In Monsanto/Schmeiser , the trial Judge found that Mr. Schmeiser had infringed the patent in issue (use of Roundup Ready canola) and awarded Monsanto an accounting of profits quantified at $19 832 ( Monsanto/Schmeiser , above, at paragraph 98; Monsanto Canada Inc. v. Schmeiser , 2001 FCT 256 , 12 C.P.R. (4th) 204, at paragraphs 133–140 ,). This award was upheld on appeal ( Monsanto Canada Inc. v.

Schmeiser , 2002 FCA 309 , [2003] 2 F.C. 165, at paragraphs 72–74 and 78–87 . The Supreme Court overturned this aspect of the lower courts’ decisions and awarded Monsanto nothing in respect of Mr. Schmeiser’s lost profits ( Monsanto/Schmeiser , above, at paragraphs 101–105). [ 79 ] The decision of the majority of the Supreme Court differentiated a claim of damages from a claim for profits ( Monsanto/Schmeiser , above at paragraph 100): The Patent Act permits two alternative types of remedy: damages and an accounting of profits.

Damages represent the inventor's loss, which may include the patent holder's lost profits from sales or lost royalty payments. An accounting of profits, by contrast, is measured by the profits made by the infringer, rather than the amount lost by the inventor. Here, damages are not available, in view of Monsanto's

election to seek an accounting of profits. [80] The Supreme Court’s analysis of the issue of calculation of damages occupied a mere five paragraphs. Because of the importancethat the defendants place on this decision, I reproduce the entire discussion from the decision, at paragraphs 101–105: It is settled law that the inventor is only entitled to that portion of the infringer's profit which is causally attributable to the invention:Lubrizol Corp. v. Imperial Oil Ltd., (FCA), [1997] 2 F.C. 3 (C.A.); Celanese International Corp. v. BP ChemicalsLtd., [1999] R.P.C. 203 (Pat. Ct.), at para. 37.

This is consistent with the general law on awarding non-punitive remedies: “[I]t isessential that the losses made good are only those which, on a common sense view of causation, were caused by the breach” (CansonEnterprises Ltd. v. Boughton & Co., (SCC), [1991] 3 S.C.R. 534, at p. 556, per McLachlin J. (as she then was), quotedwith approval by Binnie J. for the Court in Cadbury Schweppes Inc. v. FBI Foods Ltd., (SCC), [1999] 1 S.C.R. 142, atpara. 93).

The preferred means of calculating an accounting of profits is what has been termed the value-based or “differential profit” approach,where profits are allocated according to the value contributed to the defendant's wares by the patent: N. Siebrasse, “A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms” (2004), 20 C.I.P.R. 79.

A comparison is to bemade between the defendant’s profit attributable to the invention and his profit had he used the best non-infringing option: Collette v.Lasnier (1886), 1886 CanLII 54 (SCC), 13 S.C.R. 563, at p. 576, also referred to with approval in Colonial Fastener Co. v. LightningFastener Co., (SCC), [1937] S.C.R. 36. The difficulty with the trial judge’s award is that it does not identify any causal connection between the profits the appellants werefound to have earned through growing Roundup Ready Canola and the invention. On the facts found, the appellants made no profits as aresult of the invention.

Their profits were precisely what they would have been had they planted and harvested ordinary canola. They sold the RoundupReady Canola they grew in 1998 for feed, and thus obtained no premium for the fact that it was Roundup Ready Canola. Nor did theygain any agricultural advantage from the herbicide resistant nature of the canola, since no finding was made that they sprayed withRoundup herbicide to reduce weeds. The appellants’ profits arose solely from qualities of their crop that cannot be attributed to theinvention.

On this evidence, the appellants earned no profit from the invention and Monsanto is entitled to nothing on their claim of account.[Emphasis in original.] [81] On the basis of this very brief analysis, Apotex argues that the law has been changed, not only with respect to the law of anaccounting of profits but for a claim in damages as well, to permit the NIA defence. [82] The Supreme Court made no comments whatsoever on whether the principles applicable to an accounting of profits could orshould be applied to a claim of damages.

Indeed, the decision very specifically begins with the statement that there are “two alternativetypes of remedies”. [83] In its decision, the Supreme Court endorsed a two-step approach to the assessment of profits. The first step is one of causation:are the infringer’s profits “causally attributable to the invention”? On the facts in the case, the Supreme Court found that the plaintiff’sclaim failed at the first step; that is, the trial Judge failed to find that Mr. Schmeiser sprayed his crops with the infringing product.

Therewas no Roundup Ready benchmark against which to apply the differential profits methodology. There was no causation. [84] Once causation is established, the second task is the quantification of profits. The Court was of the view that the differentialprofits approach, as described in a journal

article (Norman Siebrasse, “A Remedial Benefit-Based Approach to the Innocent-UserProblem in the Patenting of Higher Life Forms” (2004), 20 C.I.P.R. 79 (Siebrasse 2004)) is the “preferred method” of calculating anaccounting of profits. In addition, the Court appeared to accept that this method was already part of Canadian law, citing Collette et al. v.Lasnier (1886), 1886 CanLII 54 (SCC), 13 S.C.R. 563 (Collette), at page 576 and Colonial Fastener Co. Ltd. v.

Lightning Fastener Co.Ltd., (SCC), [1937] S.C.R. 36 (Colonial Fastener). [85] Collette is a good example of how the differential profits approach has comprised part of Canadian law for over a century.Collette involved two patents for candle-making machines. Mr. Lasnier claimed that Mr. Collette had infringed the patent and asserted aclaim for damages. This case does not assist the defendants, for the simple reason that the case did not actually involve a claim fordamages. It is obvious, from reading the judgment, that Mr. Lasnier was seeking a disgorgement of the profits made by Mr.

Collette(Collette, above, at page 575): [T]he respondent [Mr. Lasnier, the Plaintiff] alleges no actual loss, or that he suffered any damage, but simply alleges that the appellants[Mr.

Collette], by using the respondent’s patent or their fraudulent imitation of it, have realized a profit of $13,200 over and above theprofits they would have or that might have been realized in making candles without resorting to this machine .… Now, all the respondentclaims, is the profits that the appellants made…. [Emphasis added.] [86] The Supreme Court’s reference to Collette demonstrates that the Supreme Court was not changing existing law. Rather, the Courtwas relying on existing jurisprudence. [87] This view of the law of Canada is consistent with 1969 comments of Harold G.

Fox (Canadian Law and Practice Relating toLetters Patent for Inventions, 4th ed (Toronto: Carswell, 1969). At page 504, Mr. Fox described exactly what Apotex now argues is the“new” law of an accounting of profits: In arriving at the quantum of profits to be awarded regard must be had to the actual profit made by the defendant compared with theprofit that would have been derived if he had used that which he would most probably have used had he not wrongfully taken theinvention.

[ 88 ] Apotex also points to the decision of the Federal Court of Appeal in Monsanto Canada Inc. v. Rivett , 2010 FCA 207 , [2012] 1 F.C.R. 473 ( Monsanto/Rivett (F.C.A.)) as further support for the premise that the law has changed. In Monsanto/Rivett (F.C.A.), the Court of Appeal affirmed, for the most part, the decision of Justice Zinn in Monsanto Canada Inc. v. Rivett , 2009 FC 317 , [2010] 2 F.C.R. 93 ( Monsanto/Rivett (F.C.)). This case, which followed Monsanto/Schmeiser , involved infringing use of a Roundup Ready product (in this case, soybeans).

In contrast to Monsanto/Schmeiser , Justice Zinn found that there was a causal connection between the profits made and the infringement ( Monsanto/Rivett (F.C.), above, at paragraphs 94–96). Only after finding causation did Justice Zinn direct his mind to the disgorgement of profits using a differential profits approach ( Monsanto/Rivett (F.C.), above, at paragraphs 97– 102). Comparison of Monsanto/Schmeiser to Monsanto/Rivett clearly demonstrates that causation must be evaluated first.

Only where causation is established does the court employ the differential profits approach, taking into account a non-infringing alternative. Monsanto/Rivett neither shows that the differential profits methodology is neither new law, nor stands for the general proposition that the differential profits approach is transferable to an award of damages. [ 89 ] In sum, Monsanto/Schmeiser did not change the law.

Instead, it merely affirmed an approach to the calculation of an infringer’s profits that already existed in Canadian law. [ 90 ] Even if I were to conclude that the Supreme Court has changed the law, it has done so only with respect to an accounting of profits and not for a claim in damages.

(2) Law of the United States on NIA Defence [ 91 ] Apotex presented me with a comprehensive compilation of jurisprudence from the courts of the United States on the issue of the non-infringing alternative. In Apotex’s submission, the law of the United States is crystal clear; the defence of a non-infringing alternative is available and, in fact, forms part of the threshold question of entitlement to lost profits.

The point that Apotex appears to be making is that, given that the Supreme Court in Monsanto/Schmeiser has moved away from the law as stated in United Horse Shoe , the lacuna should now be filled by U.S. law on this issue. [ 92 ] I accept that an NIA defence exists in the United States. The availability of a non-infringing alternative is a threshold step in determining whether a plaintiff can claim lost profits or is limited to a reasonable royalty. In order to obtain a lost profits award in damages, a plaintiff bears the burden of demonstrating that there is no non-infringing alternative.

This “rule” is set out in the case of Panduit , above, at page 1156, frequently cited in the United States jurisprudence for its general statement of the requirements for a patentee to obtain lost profits: To obtain as damages the profits on sales he would have made absent the infringement . . . a patent owner must prove: (1) demand for the patented product, (2) absence of acceptable non-infringing substitutes , (3) his manufacturing and marketing capability to exploit the demand, and (4) the amount of profits he would have made. [Emphasis added.] [ 93 ] The first and major flaw in Apotex’s argument is that I do not accept that Monsanto/Schmeiser changed the law of damages.

The case, as I read it, changed nothing—even with respect to the law applicable to an accounting of profits. [ 94 ] The second problem with Apotex’s argument is that the statutory provisions of the United States with respect to damages are very different from that of Canada and the United Kingdom. [ 95 ] One major difference is that the relevant provision of the United States law, 35 U.S.C. §284, provides for up to triple damages, as follows: §284.

Damages Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under

section 154(

d) of this title. The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances. [Emphasis added.] [ 96 ] Further, since 1946, the remedy of an accounting of the defendant’s profits has been unavailable to American plaintiffs (Laura B. Pincus, “The Computation of Damages in Patent Infringement Actions” (1991), 5 Harv. J.L. & Tech. 95, at page 97, citing 35 U.S.C. §§ 67 and 70 (1946)). All matters relevant to remedying

an act of infringement must be considered under the heading of “damages adequate to compensate for the infringement”. While I would not wish to place too heavy a weight on the difference in the legislation, the point remains that law of the United States is different and has certainly evolved differently than that of the United Kingdom and, as a result, Canada. [ 97 ] In brief, I accept that the law of damages in the United States requires that, prior to claiming an award of lost profits, a wronged patentee must demonstrate that there is no acceptable non-infringing substitute.

If this case were before a court in the United States, Merck would be required to address whether the AFI-4 process is an “acceptable non-infringing substitute”. However, as the law stands in Canada, Merck bears no such burden.

(3) The Professor Siebrasse Papers [ 98 ] Apotex places great emphasis on two journal articles by Professor Norman Siebrasse: Sibrasse 2004, above and Norman V. Siebrasse et al. “Damages Calculations in Intellectual Property Cases in Canada” (2008), 24 C.I.P.R . 153 (Siebrasse 2008).

[99] Professor Siebrasse’s articles reflect a point of view that is different from the existing Canadian law of damages in patentinfringement cases. [100] As acknowledged by Professor Siebrasse, the primary focus of the 2004

article was the accounting of profits awarded forinfringement of patents claiming “higher life forms” since, in his view, “the law relating to this remedy is unclear in Canada” (Siebrasse2004, above, at page 80). This paper highlighted a differential profits approach to the accounting of profits to which the Supreme Courtreferred in Monsanto/Schmeiser. Although, in the course of his

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