Merck & Co., Inc. v. Apotex Inc. – 2013 FC 751
This action involved determining the quantum of damages to be awarded to Merck for infringement of its Canadian Patent No. 1,161,380 (‘380 patent) by Apotex. In the liability phase of this action, the Court held (2010 FC 1265) that Merck’s ‘380 patent was valid and infringed by Apotex, and that Merck was entitled to an award of damages rather than an accounting of profits.
The ‘380 is a “product-by-process” patent for the anti-cholesterol drug lovastatin. Specifically, the ‘380 patent was issued on January 31, 1984 to Merck US, and expired on January 31, 2001. Following issuance of the patent, Merck Canada sold lovastatin under the brand name MEVACOR in Canada under license from Merck US, which manufactured and sold the drug to Merck Canada. Sales of MEVACOR by Merck Canada commenced in 1988. Several years later in March 1997, Apotex began selling a generic version of lovastatin in Canada called Apo-lovastatin, some of which was manufactured using a process which infringed the ‘380 patent. Overall, Apotex’s infringement was significant, as 60% of its total sales of lovastatin sold between March 1997 and the expiry of the ‘380 patent were found to be manufactured using the infringing process.
The Court held that Merck was entitled to an award of $119,054,327 in damages, consisting of amounts:
- for lost profits of Merck, in respect of pre-expiry replacement sales;
- based on a reasonable royalty calculation, for post-expiry infringing domestic sales and for infringing export sales; and
- for pre and post-judgment interest.
Pre-Expiry Replacement Sales
The Court held that Merck Canada was entitled to $62,925,126, which represented the sales of MEVACOR that it could have made to replace each and every infringing tablet of Apo-lovastatin sold domestically by Apotex prior to January 31, 2001. In addition, Merck US was awarded $51,290,364 as lost profits that it would have otherwise gained (but-for Apotex’s infringement) from the sale of lovastatin to Merck Canada, for the production of the drug under the terms of their licensing agreement. These amounts were easy for the court to award, given that many issues and facts were previously agreed to by the parties in a “Streamlining Agreement” to ease the litigation process. Agreed-upon facts and issues included: Apotex and Merck Canada were the only sellers of lovastatin in Canada during the period of infringement, Merck US and Merck Canada had the capacity to manufacture and sell the required demand for the drug, and “without Apotex’s infringement through use of the AFI-1 process, Merck Canada would have made profits from the sale of such lovastatin tablets and Merck US would have made profits off lost sales of lovastatin API to Merck Canada.” 
In this area of damages, Apotex raised the defence of a “non-infringing alternative” (NIA) to argue that Merck was merely entitled to a reasonable royalty on the pre-expiry replacement sales. Apotex argued that Merck Canada could not show that its lost profits were caused by its infringement, because in the but-for analysis required under Jay-Lor International (2007 FC 358), Merck would have suffered those losses regardless as Apotex had a way to produce and sell Apo-lovastatin in a non-infringing manner. Specifically, Apotex submitted that because it had the capacity and physical capability as of the first day of infringement in March 1997 to produce all of the infringing Apo-lovastatin tablets using a NIA Merck could not establish that it would have made those sales “but-for” the infringement ( and ).
Regarding the NIA defence, the Court reviewed the jurisprudence and ruled that the “current state of Canadian law is that the existence of a non-infringing alternative is not relevant to an assessment of damages.”  The Court when on to state that “[i]n other words, under current Canadian law of damages, the fact that Apotex had available to it (but did not use) a non-infringing alternative is irrelevant to a calculation of damages.”  Apotex had also raised to Monsanto cases (2004 SCC 34 and 2010 FCA 207 ) in support of the NIA defence. The Court ruled that these two decisions only support the principle that a non-infringing alternative can be used to calculate the quantum of profits in an accounting of profits award, and that the presence of a NIA is not applicable to an award of damages ( to ).
An important factor considered by the court in calculating the damages award for Merck Canada for its lost profits was a licensing agreement which obligated the company to pay an annual royalty to Merck US of 8.5% of “net receipt of sales.” The court ruled that this royalty payment is an expense that should be deducted from the quantum of damages awarded to Merck Canada, because “the Court must deduct expenses that have been saved because the infringement occurred” . Specifically, the licensing agreement was found not to place any obligation on Merck Canada to pay Merck US an annual royalty payment in the event that it is awarded damages in a lawsuit, but only required the payment to be made on “net receipt of sales” which implies that Merck Canada had to actually sell the drug in the marketplace in order to be obligated to pay a royalty to Merck US. Therefore, because Merck Canada was relieved of any obligation to pay this royalty expense because the infringement occurred, it should be deducted from the amount of damages awarded.
Post-Expiry Infringing Domestic Sales
The Court granted Merck an undisclosed royalty for infringing Apo-lovastatin tablets sold domestically by Apotex after the '380 patent expired. In this regard, the Court explained that “[t]here is nothing in the Patent Act that limits damages to those sustained during the life of the patent. Section 55(1) states that the infringer is liable “for all damages sustained by the patentee [or licensee] after the grant of the patent, by reason of the infringement”. Merck is entitled to its damages for infringing sales even though those sales actually would take place during the post-expiry period.” . Specifically, Merck was granted a royalty for infringing sales after the ‘380 patent expired because Apotex had manufactured Apo-lovastatin using an infringing process during the life of the patent .
Merck also requested damages for “lost profits for MEVACOR tablets (and related lovastatin API) that would have been sold domestically to replace each and every Apo-lovastatin tablet sold after the '380 Patent expiry during the hypothetical ramp-up period (the Post-Expiry Ramp-up Tablets) . Merck argued that as a result of Apotex’s infringement, it lost sales on MEVACOR tablets because Apotex already had a sufficient supply of drugs to satisfy market demand as it was using an infringing process to manufacture those drugs. Furthermore, Apotex did not experience any “ramp-up” in production to meet market demand after the ‘380 patent expired, and if it otherwise had to ramp-up production Merck would have sustained a more gradual decline in MEVACOR tablets as Apotex introduced its generic version on the market. The court explained that section 55 of the Patent Act does not prevent Merck from claiming these damages, but ruled that it introduced this claim too late in the trial and therefore “Apotex did not have adequate notice of the issue and should not have to defend against it at this late date.” .
Infringing Pre and Post-Expiry Export Sales
The Court awarded Merck an undisclosed lump sum royalty for infringing export sales of Apo-lovastatin made by Apotex before and after expiry of the ‘380 patent. The Court calculated the royalty after determining that the amount should be equal to the mid-range of the difference between Apotex’s costs to use the infringing AFI-1 process and their costs to use the non-infringing alternative in a hypothetical royalty negotiation.  In other words, Merck was awarded a royalty equal to half of the cost savings that Apotex would benefit from in a hypothetical royalty negotiation after Merck discovers that Apotex is infringing its patent.