Astrazeneca AB v. Apotex Corp. Part 2: Why Reasonable Royalties?

Earlier this week, I published Professor Siebrasse's comments on the Astrazeneca case, which centered on the issue of noninfringing alternatives.  Another aspect of the case that struck me as interesting is that the patent owner agreed to an award of a reasonable royalty rather than lost profits (see opinion p.4).  On one view, that seems odd, because  normally the brand-name drug patent owner's interest lies in exclusion, not licensing; the brand-name drug company stands to lose more in terms of lost profits than the would-be generic competitor stands to gain from competing.  See Roger D. Blair & Thomas F. Cotter, Are Settlements of Patent Disputes Illegal Per Se?, 47 Antitrust Bulletin 491, 524-25 (2002).  In this case in particular, Judge Cote concluded that Astra would not have licensed its patent to Apotex.  See opinion p.43 ("There is no evidence that Astra would have initiated or encouraged licensing discussions with Apotex."), p.115 (". . . Astra would have had no desire in November 2003, or indeed at any time, to issue a license to Apotex.").  So why not ask for lost profits instead of a reasonable royalty? There are at least three possible reasons.

One possible reason is that the defendant might have succeeded in showing that it could have turned to a noninfringing alternative.  If a noninfringing alternative were available and would have enabled Apotex to compete for Astra's clientele, Astra's lost profits caused by the infringement could be zero, in which case Astra would have been entitled only to a reasonable royalty.  (If the noninfringing alternative was not a perfect substitute in the minds of some of Astra's customers, however, Astra's lost profits caused by the infringement could be greater than zero, though whether it would be worthwhile to try to distinguish which sales Astra would have lost to Apotex even if Apotex had used the imperfect alternative, and which sales Astra would have made itself, depends on the facts.)  Perhaps Astra wasn't sure it would win on the noninfringing alternative point and decided to simplify matters by asking for only a reasonable royalty.

A second possibility is that Astra didn't want to have to disclose evidence of its own profit margins, which would be necessary to quantify its lost profits.  I don't know whether that is the case or not, but I understand that in many countries one of the reasons patent plaintiffs often opt for reasonable royalties or, where available, awards of defendant's profits is that they don't want to disclose this sort of information, particularly not to a competitor.

A third possibility is that Astra decided it would have been too difficult to try to quantify its lost profit, given the presence of multiple generic competitors, some of which were not infringing.  (Proving the amount of one's lost profits often is a problem, both in the U.S. and elsewhere.)  In that event, the reasonable royalty is really just a more-easily-proven but imperfect substitute for lost profits.  Roger D. Blair & Thomas F. Cotter, Intellectual Property:  Economic and Legal Dimensions of Rights and Remedies 231 (Cambridge Univ. Press 2005); Mark A. Lemley, Distinguishing Lost Profits from Reasonable Royalties,  51 Wm. & Mary L. Rev. 655, 662, 666-67, 671-72 (2009).  In the present case, Judge Cote set the royalty at 50% of Apotex's profits derived from the infringement over the applicable time period; and perhaps that comes close to approximating the profit that Astra lost as a result of the infringement.  (For the evidence from which she concluded that 50% was "within the range of negotiations that occurred in connection with the patents in suit," see opinion pp. 120-26.)  If, however, as suggested above, the brand-name drug company's lost profit normally exceeds the generic firm's profit attributable to the infringement, wouldn't an award of 100% of Apotex's profit come even closer to approximating the amount of Astra's lost profit?  Of course, it's not realistic to think that the infringer would have agreed to such terms ex ante, but the whole willing licensor-willing licensee framework is unrealistic on these facts, and ex ante a 100% royalty rate would come closer to approximating the amount of the plaintiff's lost profit than would a lower royalty rate multiplied by the infringer's actual sales or profits. 

Perhaps such an approach would be unduly speculative, though, and in any event an award of 100% of the infringer's profit as a reasonable royalty would be in some tension with the fact that (rightly or wrongly) the U.S. did away with awards of infringers' profits for the infringement of utility patents in 1946.  So even if it were clear that the patentee's expected lost profit exceeded the infringer's expected profit, we would need to impose an additional condition before awarding 100% of the infringer's profit as a reasonable royalty, or else we would be opening the door to allowing patent owners to recover infringers' profits even when their own lost profits are lower (that is, to awarding infringer's profits as such and not as a reasonable royalty in a case like the present one).  The additional condition would be evidence that the patentee's actual (though unquantifiable) lost profit exceeds the infringer's actual profit.  This second condition may often be present in cases involving brand-name versus generic drug companies, but of course expectations may be confounded if the infringer's product proves more popular than expected and other, perhaps unexpected, competition would have kept the patentee from achieving its expected profit even absent the infringement. 

Requiring such proof may be too complicated, however, in which case an award of something less than 100% may be the safer route, even if it does risk some degree of undercompensation.  I also tend to think that an award of 100% of the infringer’s profit as a reasonable royalty would be inappropriate in the first two scenarios above.  In the first scenario, where there is a noninfringing alternative, voluntary licensing would have been rational and a 100% royalty would not make much sense.  In the second, where the patentee chose not to seek lost profits because it wanted to keep its profit margin secret, I’m less concerned about making the patentee whole; it made its choice and has to live with it.  To the extent it’s difficult to tell whether the patentee opted for reasonable royalties over lost profits due to reasons 1, 2, or 3, though I suppose that weighs against awarding 100% of the defendant’s profit as a reasonable royalty under any of the scenarios. 

Either that, or we could amend the law to permit straightforward awards of defendant's profits (as many countries do), though I'm not sure I'm ready to go that route just yet.

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In other news, last week a federal jury in California awarded the Alfred E. Mann Foundation for Scientific Research $131 million in patent damages against Cochlear.  Judgment has yet to be entered, however.  Here is a link to a report on Bloomberg News.  I may blog about this case at some point as it develops further.