Tuesday, April 7, 2015

Federal Circuit Affirms in Part, Reverses in Part $76 Million Award Against Apotex

Last year Norman Siebrasse and I blogged about the district court's opinion in this case (here and here), and we also have written about it in our forthcoming article on reasonable royalties.  Here is our brief statement of the facts from that article:
Astrazeneca (Astra) owned a patent on the compound omeprazole, which it marketed as a gastrointestinal drug under the brand name Prilosec. This patent expired in 2001. Astra also owned two patents pertaining to a specific formulation of omeprazole. These patents expired in 2007. Between 2001 and 2007, therefore, generic drug companies could market omeprazole only if they avoided using Astra’s patented formulation. The first such company to do, KUDCo, began marketing a noninfringing omeprazole product in 2002 using its own patented formulation. The following year three other companies (Mylan, Lek, and Apotex) produced generic omeprazole “at risk,” that is, before any court had determined whether their formulations infringed. In 2007, a court ruled that Mylan’s and Lek’s formulations did not infringe but that Apotex’s did.The question before the court in 2013 was therefore the amount of damages that Apotex owed Astra, based on a hypothetical negotiation just prior to the date on which Apotex began infringing in November 2003.
This morning the Federal Circuit mostly affirmed the district court's damages award--$76 million not including prejudgment interest, based on 50% of Apotex's profits over the relevant period of time--in favor of Astra (opinion here), with the exception of damages that were awarded for a two-month period after which Astra's patents had expired but during which it enjoyed an additional six-month period of exclusivity under FDA law for having agreed to participate in pediatric studies.  (The FDA revoked Apotex's ANDA after the district court found that Apotex had infringed, but there was a two-month period before that revocation when Apotex made sales that invaded Astra's post-patent-expiration pediatric exclusivity period.  The district court included these sales in its calculation of patent damages, but the Federal Circuit held that since these sales did not infringe Astra's patents, because the patents had expired, it was error to include them as part of Astra's patent damages.  If I'm understanding this correctly, this is no remedy for these sales.  The principal portion of Judge Bryson's opinion, however, affirms the district court and is what I shall address below.)

Apotex's first challenge to the damages award was that it overcompensated Astra because it "(1) improperly discounted evidence that by November 2003 the market for omeprazole was 'well on its way to full genericization'; (2) placed undue emphasis on Astra’s ability to keep Apotex temporarily off the market by refusing to grant a license; and (3) gave 'short shrift to contemporaneous licensing agreements that Astra entered with other companies' for royalty rates lower than 50 percent" (p.12).  Not surprisingly, perhaps, given that the standard for reviewing the district court's evaluation of the evidence is clear error, the court affirms Judge Cote's evaluation of the assumptions under which a willing licensor and licensee would have bargained for a license as of November 2003.  

The theoretically interesting issue here, as Professor Siebrasse and I note in our article, is whether the value of that license should be based on the existence of noninfringing alternatives that existed as of November 2003 (KUDCo's, Mylan's, and Lek's  formulations), even though the latter two of those formulations were not yet adjudicated to be noninfringing.  As we discuss in the article, the theoretical question is whether the hypothetical ex ante bargain must be based only on evidence that itself was available ex ante, or on facts such as the existence of a noninfringing alternative that only becomes known ex post.  We argue for the latter, but Judge Bryson appears to disagree, stating that because the Lek and Mylan formulations "were not found to be non-infringing until 2007, [they] would not have been considered as non-infringing alternatives in November 2003" (p.26).  Nevertheless, Apotex also failed to convince Judge Cote that it could have used KUDCo's formulation without infringing KUDCo's patents (pp. 26-27); Judge Cote found that Apotex wouldn't have been able easily to copy the Mylan or Lek formulations (see pages 61-62 of her opinion, here); and Judge Bryson credits Judge Cote's finding that Apotex would have faced substantial technical and regulatory hurdles in trying to market a noninfringing alternative as of November 2003 (pp. 15-16). So perhaps one could argue that the statements about whether the alternative formulations could be considered, even though they were not yet recognized as noninfringing in 2003, are not dispositive.

The court also concluded that Judge Cote properly considered and "fairly weighed" certain licenses Astra had entered into, even though some were in settlement of litigation; "there is no per se rule barring settlements simply because they arise from litigation," and here the two settlement agreements in question had both been made after a finding of infringement, a setting "similar to the setting of a hypothetical negotiation" (p.18).  (Query, though, whether such a settlement also might reflect the infringer's sunk costs . . .  Nevertheless, given the deference due the district court's factfinding and the fact that this was a bench trial, the affirmance on this issue does not strike me as surprising.)

Apotex's second challenge was that "the district court improperly based its damages calculation on the value of the omeprazole product as a whole," even though the patents on the active ingredient had expired; rather, the court "should have calculated damages by apportioning the relative contribution of value between the active ingredient and the 'inventive element' of the patents" (p.20).  The court rebuffs this challenge too, however:
A threshold question arose below regarding the applicability of the entire market value rule in this case. As an initial matter, the district court noted that “there is little reason to import [the entire market value] rule for multi-component products like machines into the generic pharmaceutical context.” While we do not hold that the entire market value rule is per se inapplicable in the pharmaceutical context, we concur with the district court that the rule is inapplicable to the present case. . . .
While the entire market value rule does not apply to this case, the damages determination nonetheless requires a related inquiry. When a patent covers the infringing product as a whole, and the claims recite both conventional elements and unconventional elements, the court must determine how to account for the relative value of the patentee’s invention in comparison to the value of the conventional elements recited in the claim, standing alone. . . .
Several of the factors set forth in the Georgia-Pacific case bear directly on this issue. Georgia-Pacific factors nine and ten refer to “the utility and advantages of the patent property over any old modes or devices that had been used” and “the nature of the patented invention, its character in the commercial embodiment owned and produced by the licensor, and the benefits to those who used it,” respectively. Factor thirteen, which refers to the “portion of the realizable profit that should be credited to the invention,” embodies the same principle. Thus, the standard Georgia-Pacific reasonable royalty analysis takes account of the importance of the inventive contribution in determining the royalty rate that would have emerged from the hypothetical negotiation. However, while it is important to guard against compensation formore than the added value attributable to an invention, it is improper to assume that a conventional element cannot be rendered more valuable by its use in combination with an invention. . . .
It is not the case that the value of all conventional elements must be subtracted from the value of the patented invention as a whole when assessing damages. For a patent that combines “old elements,” removing the value of all of those elements would mean that nothing would remain. In such cases, the question is how much new value is created by the novel combination, beyond the value conferred by the conventional elements alone (pp. 21-23).
Applying that standard here:
The "district court did not clearly err in concluding that the subcoating is so important to the viability of the commercial omeprazole product that it was substantially responsible for the value of the product. . . By inventing a structure in which a subcoating separates the drug core, and thus the ARCs, from the enteric coating, and finding the right subcoating material, Astra was able to achieve both storage stability and acid resistance. That combination of features made it possible for drug manufacturers to commercialize omeprazole.
Astra’s formulation thus created a new, commercially viable omeprazole drug. That product was previously unknown in the art and was novel in its own right. Accordingly, the district court permissibly found no reason to exclude the value of the active ingredient when calculating damages in this case.

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