Sergey Nivens /
20 August 2015AmericasMark Biernacki and Cameron Weir

From profits to damages: Canada’s NIA defence

On July 23, 2015, in Apotex v Merck & Co, Canada’s Federal Court of Appeal found for the first time that the availability to an infringer of a non-infringing alternative (NIA) is a relevant consideration when calculating damages for patent infringement. This is a significant legal development.

Historically, the availability of NIAs in Canada was only relevant in an accounting of profits—an infrequently used equitable remedy that seeks to disgorge an infringer’s unjustly earned profits. Now one can expect defendants in patent infringement disputes to raise the availability of NIAs in response to claims for damages.

However, the test set out by the appeal court requires that the infringer establishes that it had a NIA, that it both “could and would” have used it absent infringement, and that such NIA would have reduced the plaintiff’s sales. This is anticipated to be a difficult test to meet.

The NIA defence in Canada: a historical perspective

Under the Canadian Patent Act, a person who infringes a patent is liable to the patentee and all persons claiming under the patentee for all damages sustained by reason of the infringement. Damages are compensatory in nature. The object of damages is to restore the plaintiff to the financial position that it would have been in 'but for' the infringement.

An accounting of profits is an alternative monetary remedy available in Canada for patent infringement if the court in its discretion permits the patentee to so elect. An accounting of profits is equitable in nature. The object of an accounting of profits is to disgorge the unjust portion of the infringer’s profit that is causally attributable to infringement of the invention.

Canadian courts have long considered the availability of a NIA to be relevant in assessing the portion of an infringer’s profits that ought to be disgorged in an accounting of profits. Where an infringer can establish that a NIA was available to it during the period of infringement, courts have held that in some circumstances the profit to be disgorged from the infringer ought to be the difference between the infringer’s actual profit and the profit that the infringer would have made had it used the NIA instead of infringing the patent. In the 2004 decision Monsanto Canada v Schmeiser, the Supreme Court of Canada embraced this 'differential profits' approach as the preferred way of calculating the portion of the infringer’s profits that are causally attributable to infringement of the invention.

In contrast, until recently, Canadian courts have held that the availability of a NIA to an infringer is irrelevant in calculating a plaintiff’s damages.  Historically, the reason for this difference stemmed, at least in part, from the nature of the respective remedies.

The focus of an accounting of profits is on the infringer. There are different approaches to calculating an infringer’s profits. The infringer’s actual profits, ie, its revenues from infringement minus its direct costs, are always relevant. Sometimes an infringer will assert that not all of the profits earned ought to be attributed to the infringement. For instance, there may be other reasons why the infringer earned those profits, eg, effective marketing, lower price, etc … In such accounting of profits cases, what an infringer would have earned by making, using or selling a NIA was relevant.

In contrast, the focus of damages is on the plaintiff, not the defendant. In assessing damages, a key question is the position the plaintiff would have been in but for the infringement, eg, what additional sales and profits would the plaintiff have made absent the infringement. The courts have historically rejected consideration of a NIA in an assessment of damages. For example, last year the Federal Court of Canada held, in Eli Lilly and Company et al v Apotex, that "it is irrelevant whether that loss could have been avoided altogether had the infringer done otherwise—because it was not avoided”.

The new legal landscape

In July the appeals court issued a decision in a case involving the sale of a generic drug by Apotex that infringed a product-by-process patent owned by Merck for the anti-cholesterol drug Mevacor (lovastatin). Apotex argued that the damages owed to Merck should be reduced because it had available to it a NIA process for making lovastatin that it would have used had it not infringed. The appeals court, disagreeing with the federal court below, unanimously found that a NIA is relevant to an assessment of damages if the infringer established that it could and would in fact have used the NIA had it not infringed and such use of the NIA would have reduced the plaintiff’s sales.

“The recent decision of the appeals court significantly expands the availability of the NIA defence in Canada.”

While recognising the legal relevance of a NIA to an assessment of damages, the appeals court ultimately rejected Apotex’s argument on the basis that it failed to establish that it could and would have used the NIA had it not infringed. In making that assessment, the appeals court found that at least the following facts must be considered:

a) Is the alleged NIA a true substitute and therefore a real alternative?

b) Is the alleged NIA a true alternative in the sense of being economically viable?

c) At the time of infringement, did the infringer have a sufficient supply of the NIA to replace the infringing sales? Or rather, could the infringer have sold the NIA? To satisfy this step, the alleged alternative must have been actually available to replace the infringing sales as they were made.

d) Would the infringer actually have sold the NIA?

How other courts will assess these and any other relevant facts remains to be seen. However, in the context of pharmaceutical patent litigation, generics and innovators should be alert to at least the following possibilities:

a) Therapeutic equivalence, dosage equivalence and/or bio-equivalence may become relevant in establishing that a NIA is a “true substitute”.

b) Infringers will almost certainly need to establish that they could have sold the NIA at a profit. A NIA is not available in any real or practical sense unless it is at least potentially profitable such as to make it viable.

c) Infringers will likely need to establish sufficient capacity to make or obtain the NIA. In addition, infringers may also need to establish that they would not have infringed any other patents and could have obtained all necessary regulatory approvals to market and sell the NIA. The time needed to achieve sufficient capacity and obtain regulatory approval will also likely be relevant.

d) Actual conduct will be relevant in determining whether the infringer would actually have sold the NIA but for the infringement. As the appeals court observed, brazen infringement in the real world will make it very difficult to prove that the defendant would have used a NIA had it not infringed.

Even if an infringer is able to establish that a NIA was available, in the sense that it could and would have used the NIA absent infringement, the infringer will also need to establish that its use of the NIA would have reduced the plaintiff’s sales in the hypothetical 'but for' world.

For instance a NIA may be undesirable or inferior to the patented product. Even if such a NIA was available to the infringer it may not have reduced the plaintiff’s sale of the patented product. Therefore, not every available NIA will necessarily reduce the amount of damages payable by an infringer.

The recent decision of the appeals court significantly expands the availability of the NIA defence in Canada. It is no longer limited to the accounting of profits remedy; it is now also relevant to an assessment of damages. However, in order to be an effective defence to damages, the infringer will need to establish that the NIA was available, would have been used, and would have reduced the sales of the plaintiff’s patented product.

As a result of this development, defendants in patent infringement actions will likely raise the NIA defence with increasing frequency.

Another consequence is that right owners, like innovative drug companies, may decide to more aggressively patent their innovations. In doing so, such patentees may reduce or eliminate the availability of NIAs to the competition. This may make it more difficult to raise a NIA defence.

It will be interesting to see in the future whether infringers are able to successfully satisfy the factual requirements of the expanded NIA defence and whether the availability of the defence alters the behaviour of potential infringers and right owners.

Mark Biernacki is a partner at Smart & Biggar/Fetherstonhaugh. He can be contacted at:

Cameron Weir is an associate at Smart & Biggar/Fetherstonhaugh. He can be contacted at:

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