Damages on a cross-undertaking -- it's payback time

Les Laboratoires Servier & Another v Apotex Inc & Others [2011] EWHC 730 (Pat) was decided today by Mr Justice Arnold in the Patents Court, England and Wales. IP Finance thanks Bristows, which acted for Servier, for the following information:

This morning, the High Court of England and Wales handed down an unprecedented judgment which will impact on the complex financial assessment that every company has to make before asking the Court to grant an interim injunction pending trial.

The judgment is the latest in an ongoing dispute which is the first case in recent times in which the Court has been asked to consider the level of damages payable under a cross undertaking given in exchange for an interim injunction in a patent case. In an unusual twist, the judgment ... found that Apotex should pay back to Servier the £17.5 million plus interest that Servier was ordered to pay to Apotex in 2008 after the hearing of the damages inquiry. Liz Cohen, Partner at Bristows comments: 

"... As a matter of public policy, a party should not be able to claim compensation for being prevented from infringing one patent on the basis that it would have infringed another patent, if the injunction had not been granted. It further reinforces the principle that there is no automatic right to compensation under a cross undertaking. This will undoubtedly impact on the complex financial assessment that every company has to undertake before launching a product at risk in the UK”

In August 2006, Servier obtained an injunction against Apotex preventing it from marketing and selling its generic perindopril in the UK pending trial. In exchange for the injunction, Servier gave Apotex a cross undertaking, agreeing to comply with any order the Court made to pay compensation to Apotex for any damage suffered as a result of the injunction. In July 2007, the patent was invalidated, the injunction was lifted and an inquiry into the level of damages suffered by Apotex was ordered. Judgment in the damages inquiry was given by the High Court in October 2008. Shortly before this judgment was handed down, Servier asked the Court for permission to amend its pleading to enable it to argue that, as matter of public policy, Apotex should not be able to recover any damages under the cross undertaking due to the fact that it would have manufactured its generic perindopril in Canada, an act which had recently been found to infringe Servier’s Canadian Patent. The judge in the High Court refused the amendment and Servier was ordered to pay Apotex £17.5 million damages plus interest.

Servier appealed this decision to the Court of Appeal. In February 2010, the Court of Appeal allowed Servier’s amendment and on 15-16 March 2011, the High Court heard the public policy issues relating to Servier’s amended pleading. The judgment handed down this morning reflects the finding of the High Court that Apotex should not be able to rely upon its own illegality to benefit from the cross undertaking given by Servier".

It's most unusual for a judge an IP proceedings of this nature to have the chance to apply the principle of ex turpi causa, and Mr Justice Arnold was swift to take the opportunity to do so.

Calculating damages on a cross-undertaking in patents

In Les Laboratoires Servier and Servier Laboratories Ltd v Apotex Inc, Apotex Pharmachem Inc, Apotex Europe Ltd and Apotex UK Ltd [2008] EWHC 2347 (Ch) (full text here, IPKat comment here) there is an interesting example of a judge's calculations, following an inquiry into damages, as to how much a pharmaceutical product patent owner must pay a competitor where an interim injunction was granted subject to a cross-undertaking on the part of the patent owner to compensate the alleged infringer in the event that the infringement action failed at trial. After summarising the basic principles he applies them to the market for the patented perindopril, which Servier sold under the Coversyl trade mark and which Apotex had been restrained from selling in generic form (the patent was subsequently held invalid):

"13. First, the "at risk" period. Where a drug patent has been registered but its validity is under challenge any company which brings onto the market a competing generic drug does so "at risk". The risk is enormous. The "protected" branded product is generally sold not simply at a "premium" price but at a hugely profitable price. Coversyl was on the market at about £11 per unit, whereas the "floor" price for the generic product (which is obviously still profitable for those who manufacture and sell it) is currently £1.50 per unit. The whole point of the generic product is to provide a cheaper alternative. A generic pharmaceutical company which launches its generic product in the "at risk" period in order to make a margin of x% on each unit sale may (if the patent is upheld and its product found to be infringing) therefore ultimately find that it is liable to pay damages in respect of every unit it sold at 2x% or 5x% or 7x% or more. Thus if a unit of generic perindopril sells for £1.50 and yields Apotex 50 pence profit, but Coversyl sells for £11 per unit, in seeking to make its profit of 50p per unit Apotex is having to run the risk of having to pay Servier damages of £10 per unit. Entering a market "at risk" thus requires (a) a high degree of confidence in the accuracy of the "judgment call" on the validity of the patent, (b) a company capitalised at a sufficient level to secure that any misjudgement on that validity question can be survived and will not lead to the destruction of the company (which may have a range of other profitable generic products not "at risk"); and (c) experience both of the market into which the competing products are being sold and the strengths and weaknesses of the brand leader with whom the fight will have to be conducted or a deal struck.

14. The second feature is the market dynamic. The market ultimately moves from one absolute state (the monopoly of the patent holder) to another (an entirely open market in an unprotected product). But the move from one such state to another is not a smooth transition properly represented by a straight line or a simple curve. There are transitional stages which themselves are characterised by periods of rapid price adjustment ("transition periods") interspersed with periods of relative price stability ("plateau periods"). The transition periods represent the market response to an actual or rumoured new entrant (whose only ability to gain market share from existing participants will be through price advantage, but who will have no interest in driving prices immediately to rock bottom whilst there remains some advantage in sharing in the profit margins established by the earlier and fewer participants). The reason for the plateau period is that if the number of participants in the market is relatively stable, then gradually market shares and unit prices emerge with which each participant is comfortable, and which yield a satisfactory return. The move from monopoly to open market will take three or four years. The number and individual length of the intervening "plateau periods" will depend on the number and timing of new entrants. The steepness of the price fall in the transition periods will depend on the degree of aggression of the new entrant and the extent to which there is scope for cutting prices to obtain market share".

The judge then interrelated these two features, added some figures, did a bit of conjecture and came up with an award of £17.5 million. This will have disappointed Apotex, which had asked for £27 million.