I mentioned last month that I would be publishing a further post on this opinion authored by Judge Denise Cote of the U.S. District Court for the Southern District of New York, which issued in early December. Here is a link to the opinion; it can also be found on Westlaw at 2013 WL 6244425. As it turns out, there’s enough food for thought in the opinion to merit at least two posts. Today’s post by Professor Norman Siebrasse of the University of New Brunswick focuses on the noninfringing alternatives. Later this week, I will post my comments on the patentee’s decision to opt for reasonable royalties over lost profits.
Siebrasse: Apotex sold generic omeprazole (Prilosec) by from November 2003 until 2007, when it was held to have infringed AstraZeneca’s patent. Last December Judge Cote released her damages decision, after a bench trial: AstraZeneca AB v Apotex Corp – F.Supp.2d –, 2013 WL 6244425 (SDNY, 2013). On a purely factual level, the decision is interesting for its detailed discussion of the dynamics of brand pricing in response to generic entry. The case also raises an interesting question of principle, which is a twist on the question of whether damages should be assessed with knowledge of validity and infringement of the patent.
A reasonable royalty is determined on the basis of a hypothetical negotiation between the parties at the time of the infringement. A key question in any such negotiation is what non-infringing alternatives (NIA) the infringer would have had available to it. A potential licensee will not license a patent if the royalty is so high that it would make more money using the best non-infringing alternative, so the availability of an NIA sets a cap on the reasonable royalty.
In this case, the patent at issue is a formulation patent for omeprazole. Mylan and Lek launched at risk in August of 2003, while Apotex launched shortly afterwards, in November 2003. Because the patent at issue was a formulation patent, infringement was not a foregone conclusion. Ultimately, Mylan and Lek were found not to have infringed, while Apotex did infringe (p 5, fn 7). Apotex argued that the appropriate NIA was the non-infringing Mylan and Lek product, notwithstanding that Apotex did not know at the time of the hypothetical negotiation that the products were non-infringing. Judge Cote rejected this argument as a matter of law (21, my emphasis):
Apotex suggests that because it is assumed to have known in November 2003 that it infringed the Patents under the hypothetical negotiation framework, it should also be assumed to have known that Mylan and Lek did not infringe. Apotex has not cited any law in support of this view. The hypothetical negotiation framework does not treat the parties as having knowledge of all events between the negotiation and the finding of infringement simply because it requires them to assume that the Patents are valid and infringed.
I’m not sure I agree with Judge Cote’s conclusion, as least with respect to the specific point of whether the infringer should be assumed to know whether the alternatives are in fact infringing. The principled reason to consider the NIA is that the true value of the invention is the marginal value of NIA as compared with the patented invention. If the patent can in fact be invented around relatively easily, then it is not a valuable contribution, even though it may be difficult to know in advance which of the various easily developed alternatives actually infringe. Patents are intended to reward valuable technical innovations, not to reward the uncertainty inherent in the patent system.
The particular facts of this case illustrates the point. Because of the dynamics of the pharma market, and the unusual dynamics of this product in particular, entry by another generic might be expected to cause a significant drop in the market price. In particular, Mylan and Lex kept their prices high precisely because they were uncertain as to whether they were infringing, so as to minimize their potential liability to AstraZeneca. So the policy question is whether the effective extension of protection due to uncertainty as to infringement is part of the legitimate return to a patentee. I am inclined to think not.
But Judge Cote was making the broader point that just because the parties are assumed to bargain with knowledge of the validity and infringement of the patent at issue, this does not imply that the parties should be treated as “having knowledge of all events between the negotiation and the finding of infringement.” The assumption of knowledge regarding validity of the patent at issue is usually justified to avoid a double discounting problem (see Blair & Cotter, “Intellectual Property: Economic and Legal Dimensions of Rights and Remedies” at 230) That policy does not seem to justify a broader principle of knowledge of all intervening facts.
While it is counter-intuitive to assume knowledge of all intervening events, I’m not sure it is wrong in principle. If, at the time of the hypothetical bargain, Apotex knew that its product infringed, but it did not know whether Mylan’s process infringed, Mylan’s process would nonetheless set Apotex’s maximum willingness to pay, albeit discounted for the fact that it might infringe. On the other hand, if Apotex is assumed to know whether Mylan’s process infringed, it would also set the maximum willingness to pay – which might be higher or lower than the discounted value, depending on whether it infringed. On average, the reasonable royalty – and thus the incentive to create and deterrence to infringement – will be the same whichever rule is used. (I don’t see any selection bias problem. The defendant will invoke the alternative when it turns out to be non-infringing, but not otherwise.) But using the actual facts, rather than trying to recreate Apotex’s expectations, is both administratively simpler and more accurate. Suppose that potential infringers are systematically irrationally pessimistic about whether the alternative infringes. If that were so, using an expectations approach would inflate the return to weak patents. Conversely, the incentive to create would be undermined if it turns out that infringers are systematically over-optimistic on this issue. The reward to invention should not turn on the quirks of behavioural psychology, any more than on the uncertainty inherent in the legal system.
Finally, I should note that on the facts the Judge Cote held that Apotex would not easily have been able to easily copy Mylan’s product or develop its own similar NIA, so the holding that the bargaining should be carried out in ignorance of whether those alternatives infringed was not determinative.