By: Keya Dasgupta

In a recent decision, Merck Frosst Canada Ltd. et al. v. Apotex Inc., 2009 FCA 187, the Federal Court of Appeal narrowed the scope of damages recoverable by a generic company that successfully opposes an application pursuant to the Patented Medicines (Notice of Compliance) Regulations (the "Regulations") ("NOC proceeding").

A generic company requires a Notice of Compliance (NOC) before it can bring a generic drug to market. When a brand name company commences a NOC proceeding against a generic company, the Minister puts the generic company's application for an NOC on hold pending the resolution of the NOC proceeding. If the NOC proceeding is withdrawn, discontinued, or ultimately unsuccessful, the generic company can pursue a claim for damages caused as a result of being kept off the market pursuant to section 8 of the Regulations.

In this case, Merck Frosst Canada Ltd. ("Merck") was unsuccessful in its application against Apotex Inc. ("Apotex") regarding the drug alendronate. Following the dismissal of the application, Apotex brought a claim for damages against Merck, claiming entitlement to: (i) disgorgement of Merck's profits; and (ii) future losses resulting from having been kept off the market.

In the Spring 2009 edition of the IP Advocate we reported on the outcome of this proceeding at the Federal Court level. In short, Justice Hughes held that Apotex was not entitled to disgorgement of Merck's profits but that Apotex was entitled to its future losses.

With respect to the issue of disgorgement of profits, Justice Hughes held that a reasonable interpretation of the words "damages or profits" as they appear in subsection 8(4) of the Regulations was required. Justice Hughes held that the Regulations make no mention of a remedy aimed at the profit made by a brand name company. He also reviewed the Regulatory Impact Analysis Statement (RIAS) which accompanied the 1998 amendment of section 8 for insight into the purpose of the amendments. The RIAS stated that the section 8 amendments were brought in to provide "a clear indication . as to the circumstances in which damages could be awarded to a generic manufacturer to compensate for loss suffered by reason of delayed market entry of its drug." Based on this analysis, Justice Hughes held that reading subsection 8(4) to allow for "damages or lost profits" (i.e., profits suffered by the generic and not the brand name company) was proper. Justice Hughes concluded, in respect of disgorgement of profits, that this was a legitimate reading down of the statute.

The Federal Court of Appeal upheld Justice Hughes' decision, noting that the words of section 8 must be read in their entire context and in their grammatical and ordinary sense, harmoniously with the scheme of the Regulations, their object, and the intention of Parliament.

The Federal Court of Appeal found that there was no error in Justice Hughes' reasoning and reiterated that a contextual reading of section 8 indicates that "'compensation' for the loss resulting from the operation of the automatic stay is to be computed by reference to the loss suffered by the second person [Apotex] by reason of the stay or the profits that would have been made during the period when it was prevented from going to the market."

With respect to future losses, Apotex argued that during the period from February 2004 to May 2006, the market for alendronate became distorted because two other generics entered the market in that period. Apotex claimed that were it not for the NOC proceeding, it could have been the first generic in the marketplace (or at least have entered the market at about the same time as the other generic companies). Apotex argued that its market share would thereby have been larger than it now was and that this loss of market share was permanent. In finding for Apotex on this issue, Justice Hughes held that the claim for lost sales and lost permanent market share beyond May 2005, was proper. He analogized the permanent loss suffered by Apotex to that of a person who suffers a leg injury by the tortious act of another and leaves the injured party with a permanent leg disability for which she/he should be compensated.

The Federal Court of Appeal reversed Justice Hughes' finding regarding future losses. The Federal Court of Appeal held that the issue was whether the claim as construed by Justice Hughes comes within the words of subsection 8(1). Merck argued that subsection 8(1) only makes a first person liable for any loss "suffered" during the period (i.e., past tense). The Federal Court of Appeal again looked to the RIAS for context. The RIAS provides that:

"[T]he first person 'is liable to the second person for any loss suffered during the period.

(a) beginning on the date, as certified by the Minister, on which a notice of compliance would have been issued in the absence of these Regulations, unless the Court is satisfied on the evidence that another date is more appropriate; and
(b) ending on the date of the withdrawal, the discontinuance, the dismissal of the reversal." [Court's emphasis]

Based on this analysis, the Federal Court of Appeal concluded that the losses that could be legitimately claimed by Apotex were those caused during the period when Apotex was prevented from occupying the market. The RIAS indicated that the government intended to limit the measure of losses which can be compensated to those "suffered" during the period, a time limitation was put on this award.