In a case involving only the issue of the amount of damages to award Astra for infringement of patents directed to Astra’s Prilosec drug, the district court, in a bench trial, awarded Astra 50% of Apotex’s gross margin from sales of its generic of Prilosec between 2003 and 2007 on a reasonable royalty theory of recovery, which amounted to over $76 million.  Apotex raised five primary arguments attacking the 50% royalty rate. 

First, Apotex argued that it was the fourth generic manufacturer to enter the market, and therefore its entry caused little marginal injury to Astra.  This argument is, however, more suited to a lost profits analysis rather than a reasonable royalty theory.  The reasonable royalty theory of damages seeks to compensate the patentee not for lost sales caused by the infringement, but for its lost opportunity to obtain a reasonable royalty that the infringer would have been willing to pay if it had been barred from infringing.  The court held that the 50% rate was reasonable in view of the fact that Apotex was left with a profit margin of 36%, which was in the range of its typical margins at that time and that, if Apotex had a license, its entry into the market would have caused a decline in Prilosec prices and destroyed the remaining Prilosec market. 

Second, the evidence demonstrated that Apotex would not have been able to develop and market a non-infringing alternative product.  Apotex argued that the costs an infringer would incur to produce a non-infringing alternative product are irrelevant to the reasonable royalty.  The Federal Circuit disagreed.  The court stated that the hypothetical reasonable royalty rate would be typically low where the infringer could easily design around, but would be greater where developing a non-infringing alternative would be difficult, expensive and time consuming. 

Third, Apotex argued that the district court erred by considering other licenses that were the products of litigation settlements.  The court stated that “there is no per se rule barring reference to settlements simply because they arise from litigation.”  Here, the settlement agreement relied on by the district court was entered following the court’s finding of infringement, and thus the negotiations for that agreement would have been similar to those in a hypothetical negotiation for a reasonable royalty.  Thus, the settlement license agreement entered after the finding of infringement was “very probative” of reasonable royalty. 

Fourth, Apotex argued that the district court improperly based its damages calculation on the value of the Prilosec product as a whole, rather than on the inventive feature, apart from the non-inventive features (e.g., the active ingredient, which was not the inventive feature of the patents-in-suit), i.e., the district court improperly relied on the “entire market rule.”   Pursuant to the “entire market value” rule, a product must contain both patented features and non-patented features, and, to be applicable, the demand for the product must be based on the patented features only.  In this case, the entire market value rule was inapplicable, because the claim covers the entire Prilosec product, i.e., there is no unpatented or non-infringing feature in the product.  But, “[w]hile 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.”  In patents involving combinations of new and old elements, the question then becomes how much new value is created by the novel combination, beyond the value conferred by the conventional elements alone.  Here, the subcoating (the new element) was so important to the viability of the commercial product that it was substantially responsible for the value of that product.  Thus, the district court was correct when it found no reason to exclude the value of the active ingredient when calculating damages. 

Lastly, Apotex argues that the district court erred by awarding damages for its sales during the “pediatric exclusivity” period for the Astra patents.  The “pediatric exclusivity” period is an additional six month period of exclusivity beyond the expiration of the patent awarded to the patentee where it performs pediatric studies.  Astra obtained the additional six month exclusivity period before the district court’s liability decision.  The district court awarded damages for Apotex’s sales in the period after the patents expired but before the district court’s liability decision.  The Federal Circuit held that Astra could not recover any damages for any sales by Apotex that occurred after the expiration of its patent, but could still obtain exclusivity under the FDA rules.

Astrazeneca AB v. Apotex Corp., Case No. 2014-1221 (April 7, 2015); Opinion by: Bryson, joined by O’Malley and Clevenger; Appealed From: District Court for the Southern District of New York, Cote, J. Read the full opinion here.

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