Tuesday, January 27, 2015

Canadian Court Rejects the Principle that Non-Infringing Alternatives Limit the Recovery of Lost Profits

One of the recurring issues in patent enforcement is the following.  Suppose that P makes and sells products embodying its patented invention X.  D makes and sells products that infringe the patent.  P sues D and requests a judgment for lost profits on the sales it lost to D.  D responds with evidence that there is a nonpatented noninfringing alternative to X--call it Y--that D could have made and sold instead of X, and that consumers would have considered Y to be a perfect substitute for X.  Is X entitled to lost profits nonetheless, on the theory that regardless of what would have happened in the "but for" world--the world in which D used the noninfringing alternative--in the real world X lost sales, and hence profits, as a result of having to compete with X's infringing products?  Or should X recover no lost profits because in that but-for world it would have lost just as many sales and just as much profit as it did in the real world?  (To think of it another way, if the economic value of a technology is its value in comparison with alternatives, and if Y is a perfect substitute for X, then X has no economic value over the nonpatented alternative, and P should recover nothing.)  As I explain in my book, different patent systems answer these questions in different ways.  The general rule in the U.S., dating all the way back to the nineteenth century, is that under the circumstances described above the patent owner should recover no lost profits (see pp. 111-12).  On the other hand, a nineteenth century decision from the U.K., United Horse-Shoe & Nail Co. v. John Stewart & Co. (1888) L.R. 13 App. Case 401 (H.L.), takes precisely the opposite view, and courts within the U.K.--as well as some in Canada and Australia--have followed United Horse Shoe ever since (see pp. 187-91).  Also lining up with the U.K. on this issue are, possibly, Germany and Japan (see pp. 263-64, 314), while the French cases appear more consistent with the U.S. rule (see p. 265).  And of course there can be numerous variations of the above hypothetical:  for example, maybe Y is an imperfect substitute that would have appealed to some but not all of D's clientele; maybe Y itself was a patented alternative, which complicates matters; maybe D would have sold just as many products using Y but would have done so at higher cost, in which case even under the U.S./French rule it seems that P should be entitled to a nonnegligible reasonable royalty; and so on.  My own view, as expressed in my book, on this blog, and elsewhere, is that from an economic standpoint the rule followed in the U.S. and France is correct, and that United Horse-Shoe was wrongly decided.

Anyway, Professor Norman Siebrasse recently called my attention to a Canadian trial court decision, Eli Lilly & Co. v. Apotex Inc., 2014 FC 1254 (Jan. 23, 2015), that lines up with United Horse-Shoe  on this issue.  (It doesn't appear to be up yet on the Federal Court's website, but here is a link to my copy of the decision.)  Professor Siebrasse will be posting a more detailed discussion of the case on his Sufficient Description Blog in the near future--a different write-up by Jennifer Wilkie and Adam Heckman has already appeared on the Gowlings firm's website here--and I needn't repeat here the arguments I've made in the past in support of my view.  I would note two things, however.  First, Apotex cited one of my blog posts in support of its position that the court should take noninfringing alternatives into account, and the court in turn cited that post in paragraphs 25 and 54-56.  So while the court rejected my view, this marks (to my knowledge) the first time the blog has been cited in a judicial decision.  (Not sure if I should be happy or sad, though!)  Second, if I'm reading the opinion correctly, after rejecting the argument that noninfringing alternatives which the defendant didn't but could have used are relevant for purposes of calculating lost profits, the court goes on to award Lilly lost profits covering a subsequent period of time in which Apotex was using a purported noninfringing alternative, on the ground that but for the initial infringement Apotex wouldn't have been in the market at that point at all.  This seems to me to be a sort of springboard damages theory, but (with respect) I'm inclined to think it only compounds the error of ignoring noninfringing alternatives to award lost profits during a period of time in which the defendant was in reality--not just hypothetically--using the noninfringing alternative.

I wonder if an appeal will be taken, and if so what the Court of Appeals' take on this issue will be?     

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