Federal Court Decisions

Decision Information

Decision Content

Date: 19980826

Docket: T-80-83





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[1]      These Reasons concern a judgment in a reference determining the extent of infringement by the defendant of certain patent rights of the plaintiffs and the results of an accounting of profits derived by the defendant from its activities found at trial to constitute infringement of the plaintiffs' Canadian Patent No. 907,014.1

[2]      The Order now issued includes certain conclusions and directions for the parties, as set out in the Conclusion of these Reasons, upon which detailed calculations of the account of profits can be completed. The amount of accountable profits which Apotex will be ordered to pay to the plaintiffs will be that agreed upon by counsel in accord with the directions now issued, or absent that agreement will be as may be determined by the Court. That amount will be dealt with by a Judgment, to which these Reasons relate, to be issued after consultation between, and if necessary with, counsel.


[3]      The reference is conducted pursuant to a pre-trial Order of Mr. Justice Addy dated April 17, 1983, and in accord with the terms of Judgment following trial of the issue of infringement, with the plaintiffs' election of an accounting of profits dated January 5, 1996, and with the Order of the Associate Chief Justice dated November 1, 1996.

[4]      The plaintiffs at trial of the infringement action were The Wellcome Foundation Limited ("Wellcome"), a United Kingdom corporation, owner of the patents then in issue, and Burroughs Wellcome Inc., a Canadian corporate subsidiary of Wellcome, the licensee for marketing pharmaceutical products produced by the processes protected by Wellcome's patents. Corporate changes since that trial are reflected in the replacement of the Canadian corporate plaintiff by its successor Glaxo Wellcome Inc.

[5]      The chemical compound protected by the plaintiffs' '014 patent in the action is TAA when produced by the patented process. Here Trimethoprim ("TMP"), acquired from abroad by Apotex, was found to contain TAA which, under the Patent Act as it then provided, was deemed to have been produced by the plaintiffs' patented process. Certain claims of the patent were upheld by judgment following trial, a decision amended in part by the Court of Appeal. Valid claims were declared to have been infringed by the defendant's manufacture and sale of its Apo-Sulfatrim products in which TMP, then found to contain TAA, and Sulfamethoxazole ("SMX") are combined in a ratio of 1:5 by weight as active ingredients. That combination was earlier found by Wellcome to constitute an effective anti-bacterial agent, which it marketed under its own trade name. The final combination drug, and its two active components, TMP and SMX, were not new and were not themselves patented substances at the time Apotex entered the market in about 1980.

[6]      The plaintiffs also claimed at trial that the defendant's Apo-Sulfatrim infringed Wellcome's patent interests under Canadian Patent No. 741,825 which related to a different intermediate chemical compound, MTBP, produced by a different process, known as the methoxy process, and used for the synthesis of TMP. That claim was dismissed following trial and certain claims included in that patent were declared invalid. In the result, TMP produced using MTBP as an intermediate is not a product that infringed the plaintiffs' Canadian patent interests.

[7]      Judgment following trial, in accord with Reasons filed November 14, 1991, was rendered January 21, 1992 after hearing counsel for the parties in relation to its terms. In addition to the declarations of validity and infringement of certain claims of the '014 patent, and dismissal of the plaintiffs' claims concerning the '825 patent, the Judgment included certain terms relevant for this reference. Paragraph 7 sets out directions concerning procedures and time limits for various steps in preparation for hearing the reference. In addition, paragraphs 4, 5, 6 and 9 of the Judgment provided:

         4.      The defendant is restrained and enjoined from infringing, by itself, its officers, directors, agents and employees, any of claims 14, 27, 28, 29, 31, 39, 56, 96 and 97 of Canadian Patent No. 907,014, by in any way dealing with TMP manufactured by using TAA as an intermediate and acquired by it prior to the expiration of the said Patent on August 7, 1989 (hereinafter referred to as the "Infringing TMP") and from offering for sale, selling, distributing or otherwise dealing with any tablets containing Infringing TMP. [The reference to claim 14 was subsequently struck out by the Court of Appeal.]         
         5.      The defendant shall forthwith destroy upon oath, or deliver to the plaintiffs' solicitors for destruction, all Infringing TMP and all tablets containing Infringing TMP in its possession or under its control.         
         6.      The plaintiffs shall be entitled to be paid the damages suffered by them, or the profits made by the defendant, by reason of such infringement as aforesaid as the plaintiffs may elect. Pursuant to the Order of the Honourable Mr. Justice Addy dated April 17, 1983, there shall be a reference to determine:         
              (a)      the extent of the infringement by the defendant; and         
              (b)      (i)      the amount of damages flowing from such infringement, or         
                  (ii)      the amount of the profits arising from such infringement, as the plaintiff may elect following discovery of the defendant as provided by this Order.         
         9.      The plaintiffs shall be entitled to pre-judgment and post-judgment interest on such damages or profits, such interest to be determined by the referee to be appointed following submissions of the parties.         

The issues

[8]      The reference raises a number of issues. Among them are the primary issues of the extent of infringement and the accounting of profits earned by the defendant as a result of its infringing activities. In the circumstances of this case, determination of the extent of infringement and of the revenues earned by the defendant from its use of infringing TMP, requires resolution of competing views about whether some portions of the defendant's product, found to contain TAA, should be treated, in full, as containing infringing product, i.e., TMP produced by use of TAA. Once revenues are determined there is no agreement on the measure of expenses, if any, that are appropriately deducted in this case to determine profits earned by the defendant from its infringing activities, and there is no agreement about whether apportionment of profits is appropriate particularly in light of the relative portions of the active ingredients, i.e. TMP and SMX, both contained in the defendant's Apo-Sulfatrim. Once profits are determined, the parties differ on how interest is to be calculated pursuant to the Court's Order of January 21, 1993. Finally, the plaintiffs seek costs of the reference on a solicitor-client basis, or, in the alternative, an opportunity to request special directions, for an assessment officer, respecting items in subparagraphs (a), (b) and (c) of Rule 344(6), now replaced by Rule 403, of the Court's Rules, 1998. That request for costs the defendant opposes.

[9]      I deal with each of the major issues in turn, after setting out the matters agreed by the parties.

Matters agreed to by the parties

[10]      At the commencement of the hearing of this reference, but only after the hearing commenced, the parties agreed upon the following matters.

     1.      Prior to expiry of the patent no. 907,014 on August 7, 1989, the defendant Apotex acquired 116 batches of TMP in bulk totalling 30,953 kg.
     2.      From the 116 batches of TMP acquired by Apotex samples of 115 were provided to the plaintiffs for testing, and samples of 81 batches, totalling 25,250 kg of TMP, when tested were found to contain TAA.
     3.      Of the 81 batches found to contain TAA, 27 were found to also contain MTBP.
     4.      The 27 batches of mixed TMP, including traces of both TAA and MTBP, were used to make Apo-Sulfatrim tablets.
     5.      Fourteen lots of TMP mixed by Apotex in production of tablets, were found to contain TMP that included TAA mixed with 828.4 kg of TMP that was non-infringing [i.e. contained no TAA].
     6.      Absence or presence of BTAA [a third intermediate chemical compound referred to in the course of trial of infringement issues] in the 81 batches found to contain TAA is irrelevant to this reference.
     7.      Medichem was at all material times an affiliated company of Apotex, and from June 10, 1985, had a compulsory licence under the subject patent [No. 907,014] based on an application dated November 17, 1983, but no sales were made by Medichem to Apotex under the licence.

[11]      During the course of the hearing of the reference the parties also agreed on the following matters, here assigned succeeding numbers for convenience.

     8.      The defendant's revenues resulting from infringement were as follows.
         a)      If all 81 batches found to contain TAA plus 824.4 kg of non-infringing TMP mixed by the defendant with infringing TMP:      [revenues] $18,456,294.
         b)      If the 824.4 kg of non-infringing TMP mixed by the defendant do not infringe, then deduct $600,000. leaving:      [revenues] $17,856,294.
         c)      If the 27 batches of TMP found to contain both TAA and MTBP do not infringe the '014 patent, then deduct a further $4,730,000. leaving

     [revenues] $13,126,294.

         d)      If only the 27 batches of TMP containing both TAA and MTBP do not infringe, then deduct $5,240,000. leaving:      [revenues] $13,216,294.
     9.      If traces of MTBP were detected in any of the 81 infringing batch samples, some indeterminate portion of such samples will have been made by some other process than a process for making TMP using TAA as an intermediate.
     10.      Plantex material [i.e. material obtained from Plantex] tested was not found to infringe the '014 patent.
     11.      A table, "Allocation of Agreed Revenues to Years" described as for the years 1980 to 1990 but including also 1991, was filed by agreement of counsel for the parties as Exhibit 67 at the hearing.

The extent of, and revenues derived from, infringement

[12]      The extent of infringement and the revenues derived from it by the defendant depend upon resolution of the portion of the defendant's Apo-Sulfatrim product that is to be considered as having been produced from infringing TMP.

[13]      There were 54 batches of TMP acquired by Apotex which were found, upon testing of the samples provided by the defendant, to contain TAA and these were used to produce tablets. There is no disagreement between the parties that use of the 54 batches constituted infringement. The differences between the parties concern whether 828.4 kg of non-infringing TMP mixed by Apotex with infringing TMP should be considered as infringing use, and whether the use of the 27 batches acquired by Apotex and found to contain both TAA and MTBP should be considered as infringing use, and if so on what basis.

[14]      Infringing TMP, for purposes of this reference, is defined in paragraph 6 of the Order of January 21, 1992, as TMP manufactured by using TAA as an intermediate and acquired by Apotex prior to the expiration of the '014 patent on August 7, 1989. The injunction ordered by that paragraph precluded the defendant from dealing in any way with infringing TMP, and from selling or dealing with tablets containing infringing TMP.

[15]      I turn first to the 27 batches of TMP which, upon testing, indicated the presence of TAA and MTBP. For the reference Apotex did provide a list of its suppliers, by batch, but there was no evidence, just as there was none at trial, of how the manufacturers of the product, all located abroad, actually made TMP.

[16]      At trial I held that the plaintiffs were entitled to rely on the presumption set out in the former s-s. 39(2) of the Patent Act which provided at all relevant times:2

         39. (2) In an action for infringement of a patent where the invention relates to the production of a new substance, any substance of the same chemical composition and constitution shall, in the absence of proof to the contrary, be deemed to have been produced by the patented process.         

In Reasons for Judgment following trial I concluded on this point:

         ...In the absence of evidence to the contrary, and in light of the agreed statement of facts that the Defendant has no knowledge of the process by which the imported Trimethoprim was manufactured, the intermediates here in issue, MTBP and TAA, found to be contained in the Defendant's tablets, must be deemed to have been produced by the patented processes.         

[17]      In my view that conclusion, as it relates to TAA, is as relevant for this reference as it was for the trial on infringement, of which this reference is but a second phase concerning the appropriate remedy. If I understood, in the course of the reference hearing counsel for the defendant submitted that the statutory presumption was not here applicable since the issues now concerned the use of TMP which was not a new substance at the relevant time. While that may be the case, it is the use of TMP manufactured by using TAA, admittedly a new product by process patented under the '014 patent, as an intermediate, that was found to be infringing. For purposes of the reference, TAA found in TMP acquired by Apotex prior to August 7, 1989, when the patent expired, is deemed to have been produced by the patented process, for no evidence to the contrary is provided so that, in the words of then s-s. 39(2) of the Act, there is an "absence of proof to the contrary".

[18]      In my opinion, that is an answer to the defendant's argument to disregard the 27 batches of mixed TMP, found to contain both TAA and MTBP, in considering the extent of infringement. That argument is essentially based on the plaintiffs' primary burden in this reference to establish the case the defendant must meet, and upon the absence of proof by the plaintiffs of how the mixed batches originated.

[19]      Two possibilities for the presence of the two intermediates are advanced. The plaintiffs, relying on the evidence of the presence of TAA in the samples of those batches acquired by Apotex, and upon the statutory presumption, submit that the batches must have been mixed with TMP derived from two processes, using TAA in one and MTBP in the other. The other explanation, urged by the defendant, is that the mixed batches were not made by the aniline process using TAA as an intermediate, but rather they were created by the methoxy process using MTBP as an intermediate in conditions where one of the reagents used in the reaction was contaminated with aniline and traces of TAA were not removed by purifying processes.

[20]      The defendant's explanation is based upon two considerations. Dr. Bernard Sherman, Chairman of Apotex, who admitted he did not know the processes followed by suppliers of the TMP, though certain of them were well known for the quality of their product, testified it would be contrary to good manufacturing practice for manufacturers to mix a compound produced by two different processes. Indeed, in his view it would be virtually impossible for product from two distinct manufacturing processes to be mixed. That view was supported by Dr. McClelland, an expert witness at trial and in these reference proceedings, who had some experience in working with the chemical industry. Neither Dr. Sherman nor Dr. McClelland knew the manufacturing processes used for the product acquired by Apotex or whether some suppliers were not themselves manufacturers but merely brokers selling chemical products. Their scepticism that suppliers would have mixed product known to have been produced from different processes or sources is undermined by the mixing of TMP from different sources and batches by Apotex itself, some with infringing TMP and some with non-infringing TMP, in production of its Apo-Sulfatrim.

[21]      Dr. McClelland did offer his opinion on how the mixed batches of combined TAA and MTBP could have originated using the methoxy process with MTBP contaminated by a reagent used in the process with aniline. Indeed, he suggests three or four such possible processes, including one process described in a European patent application dated after the last acquisition of mixed product by Apotex. With respect for Dr. McClelland's theories to explain the presence of TAA found in the TMP with MTBP, I am not persuaded those explanations qualify as "proof to the contrary" within s-s. 39(2) of the Act as it was. Moreover, aside from the statutory presumption, that explanation, i.e., that there could be impurities in the ingredients used in the methoxy process, is based on theoretical mixing of compounds at an earlier stage in the process. That explanation is speculation and I am not persuaded it should be accepted to exclude, from the determination of the extent of the infringement, the batches of TMP showing the presence of TAA and MTBP.

[22]      Since TAA was found in 81 batches of TMP acquired by Apotex before expiry of the '014 patent, all of which was used to produce tablets, in my opinion the extent of infringement includes use of all 81 batches as use of infringing TMP. That includes the 27 batches also found to contain MTBP. The TAA found in those 27 batches, as in the case of the other 54 batches containing only TAA, means that the TMP is infringing TMP for it contains TAA that, in the absence of proof to the contrary in this case, is deemed to have been produced by the process upheld as valid in the '014 patent.

[23]      The defendant suggested two other bases on which the extent of infringement should be calculated in relation to the 27 batches of TMP found to contain both TAA and MTBP. Both are based on its perception that the plaintiffs failed to assess the relative quantities of TAA and MTBP contained in these 27 batches, although through its testing it might have done so. Knowing that ratio, it is urged, would permit determination of the proportion of the mixed TMP made by TAA and that made by MTBP. The defendant submits that given the plaintiffs' primary burden of adducing evidence, since those proportions were not determined, only one-half the revenues attributable to the 27 batches of mixed TMP should be included as revenues from infringement, or alternatively 61% of the revenues attributable to these batches should be included as revenues for which Apotex should account. That percentage was based on the ratio of batches containing only TAA (54) to the total of those batches and batches which contained only MTBP (34) so that the ratio to be applied is 54:88 or 61%.

[24]      I am not persuaded that either of those proposals should be accepted, for including only a portion of the use of TMP from the 27 batches containing both TAA and MTBP. Neither proposal is based on evidence related to the use of infringing TMP. Presumably the TMP mixed from two processes would be mixed homogeneously and an entire batch found to contain TAA and MBTP would have TMP from both sources distributed uniformly throughout its volume. Use of any portion of it would thus be use of infringing TMP though it would also be use of non-infringing TMP. It is the former that constitutes infringement. There is no basis in evidence before me to conclude that use of only a portion of the batches of mixed TMP should be considered in determining the extent of infringement, or for considering less than the total revenues derived from use of the 27 batches. The argument based on ratios of TAA to MTBP, within the 27 batches, or by the unmixed batches containing one or the other, that Apotex had acquired, is not persuasive. All 27 batches with both TAA and MTBP plus the 54 batches containing only TAA, in my opinion, should be considered as infringing use for which Apotex must account.

[25]      As for the tablets produced by Apotex from 14 lots of TMP mixed from batches of infringing TMP and 828.4 kg of non-infringing TMP, the plaintiffs submit the 828.4 kg of TMP should be included in determining the extent of infringement. In proper preparation for manufacture of its product Apotex would have mixed the TMP homogeneously and the plaintiffs urge that all tablets produced would constitute infringing product. The defendant urges that the 828.4 kg of non-infringing TMP mixed by it for these 14 lots of tablets ought not to be added to the quantities of infringing TMP for purposes of considering the extent of infringement or the revenues derived from it.

[26]      In my opinion, the 828.4 kg of non-infringing TMP mixed by Apotex to produce tablets from the 14 lots in question, should not be added to the quantities of infringing TMP in the 81 batches which were found to contain TAA, and should not be included in determining revenues resulting from infringing activities. It is true that manufacture and sale of tablets from TMP mixed by Apotex from different sources, using infringing and non-infringing TMP, would constitute infringement and would violate terms of the injunction ordered following trial. Nevertheless, the infringing TMP from the batches acquired by Apotex that it mixed with 828.4 kg of non-infringing TMP could only be used once and that use is already accounted for in assessing the extent of infringement by use of TMP from the 81 batches containing TAA. It is that use that is to be accounted for in assessing the extent of infringement and in calculating the revenues from that infringement. Whether the infringing TMP was mixed with non-infringing TMP or merely with SMX and excipients in manufacturing tablets, it could only be used once.

[27]      Thus, it is my conclusion that the extent of infringement in the circumstances of this case is to be measured by the defendant's use of infringing TMP in the 81 batches found to contain TAA. That does not include the 828.4 kg of non-infringing TMP mixed by Apotex with infringing TMP from the 81 batches, but it does include all 27 batches that were found to contain both TAA and MTBP.

[28]      The parties have agreed on revenues resulting from Apotex' use of the infringing TMP in all 81 batches found to contain TAA, not including the 828.4 kgs of non-infringing TMP mixed by Apotex with infringing TMP for production of tablets. As earlier noted, the figure agreed on as gross revenues earned by Apotex from infringement on that basis is $17,856,294.

Accounting of profits

[29]      The revenues derived from infringing activity by Apotex, with amounts as agreed between the parties, are a measure of the extent of infringement for which the defendant is to account for profits from that infringement.

[30]      The nature and purpose of the remedy are well settled. In the words of Mr. Justice Hugessen in Lubrizol Corp. v. Imperial Oil Ltd.:3

              The remedy of an account of profits is an equitable one. Its purpose is not to punish the defendant but simply to have him surrender the actual profits he has made at the plaintiff's expense...         

Mr. Justice Rouleau in Beloit Canada Ltée v. Valmet Oy4 contrasted the remedy with a claim for damages and said, in part:

              While both damages and accounting of profits are intended to provide compensation to a wronged plaintiff, the fundamental principles underlying the two remedies are substantially different. The primary reason for an award of damages is to make good any loss suffered by the plaintiff as a result of the defendant's misconduct. ...         
              On the other hand, an accounting of profits is based on the premise that the defendant, by reason of its wrongful conduct, has improperly received profits which belong to the plaintiff. The objective of the award is to restore those actual profits to their rightful owner, the plaintiff, thereby eliminating whatever unjust enrichment has been procured by the defendant. ...         

[31]      Alternative methods of determining profits are urged by the parties. The plaintiffs submit that the differential cost accounting method should be followed. The defendant submits the comparative method is to be preferred on one of the bases proposed, or if a cost accounting method is followed it should be the full absorption method that includes allocation of a portion of all fixed costs as part of the expenses deducted from gross revenues to provide profits.

[32]      For Apotex it is urged that in this case the most appropriate method, in light of the purpose of the remedy, i.e. to preclude unjust enrichment from use of the infringing product, is by comparing actual profits with those that would have resulted from Apotex utilizing a non-infringing product available to it. It is urged that non-infringing TMP was available at the time, at the same cost as incurred in the use of the infringing TMP acquired by Apotex. On that basis there would be little or no unjust enrichment to Apotex by its use of the infringing TMP.

[33]      The availability of non-infringing product in 1979 and the early 1980's is now clear, at least in part as a result of the determination at trial that Wellcome's patent for the methoxy process, utilizing MTBP, was invalid. Yet there is really no evidence that at the time the product was acquired there was available product then known to be non-infringing, in part because the trial on infringement dealt with infringement arising from use of a product that was not itself patented but was derived by a process using an intermediate made by a patented process. Until then it was not entirely clear that use of TMP acquired by Apotex from abroad would constitute infringement if the foreign manufacturer's product made use of a patented process for use of an intermediate. It is not established, in my view, that Apotex knew or even that it could have known that some foreign suppliers may have used the patented process of the '014 patent to produce TMP and that others did not. Correspondence from the plaintiffs in the early 1980's indicated that they knew at the time, from testing, that some TMP was produced without infringing the plaintiffs' Canadian patents, but there is not evidence Apotex knew that before it was informed by the plaintiffs, or that it knew then or since the methods of production of foreign manufacturers, or of acquisition by other foreign suppliers, from which it purchased TMP.

[34]      As another base for applying a comparative approach, it is urged that Apotex, at the time it acquired the TMP, might have applied for and obtained a compulsory licence, as others did, for production of TMP, paying a fee to the plaintiffs. The standard licence fee it could have expected would probably have been less than the norm of some 4% of sales from marketing the licensed product. Where there were a number of compulsory licenses, as there were for TMP, practice was to provide for a fee that was only a portion of the norm. Moreover, after 1978 the practice also was to apportion the normal fee in the case of a combination drug. In the case of the 1985 compulsory licence granted to Medichem, a company associated with Apotex, the fee imposed was 2/3 of 1% of sales. Another royalty basis for a comparative assessment of profits is suggested by the defendant in light of the proposal of the Canadian corporate plaintiff, before the action was initiated in 1983; then a licensing fee was proposed of 6% of sales of Apo-Sulfatrim. That is now said by plaintiffs to have been a proposal made as a basis for settlement between the parties, a basis not accepted by Apotex at the time.

[35]      Any of those bases for comparison, referred to at the hearing as "royalty bases", would equate the hypothetical cost of a royalty fee with the income to be accounted for, as a measure of the benefit derived by, or of the unjust enrichment to, Apotex. In my view none of those possible licence fee arrangements was intended to or did equate to profits. Moreover, those possible courses of action were not pursued at the time by Apotex. In my opinion the royalty Apotex might have paid to plaintiffs under a licensing arrangement is not a measure of the profits derived from infringement.

[36]      There are cases where the comparative basis for determining the profits to be accounted for is referred to with a measure of approval5, but I was not referred to any Canadian case where an account of profits was assessed on this basis. I note that it was expressly rejected, as inappropriate, by the Court of Appeal in Reading & Bates6, another patent infringement case.

[37]      I am not persuaded that any of the possible bases here suggested for the comparative approach would be appropriate in this case. All these possibilities are speculative, based on hypothetical courses of action that, even if they might have been followed by Apotex, were not followed. All ignore the issue of actual profits earned by Apotex which the remedy to account for profits is intended to capture, to compensate the plaintiffs for the unwarranted and unlawful infringement of their patent interests. Utilizing any of the comparative bases here suggested would result in no, or merely nominal, compensation to the plaintiffs and would effectively undermine the regime of monopoly for the patented invention for a term of years that Parliament by the Patent Act has established. Such a result, as it was described in Reading v. Bates, "would be unjust and contrary to the equitable nature of the accounting remedy"7 in the circumstances here, in my opinion.

[38]      If the account of profits is to be determined by assessing actual profits earned, Apotex urges that costs to be deducted from revenues should include the full costs incurred in earning the revenues, including an allocation of a portion of the defendant's full fixed costs. That method was described at the hearing as the absorption method. It is said the absorption method has been accepted by the Supreme Court of the United States as the basis for determining profits.8 It is urged that is the appropriate method in this case, if an accounting is to be undertaken, since there is no dispute that Apotex, by its research and development, its acquisition of a Notice of Compliance to permit marketing its drug, its manufacturing and its sales promotion, was responsible for significant value added to the material cost, and thus for the revenues earned from sales of Apo-Sulfatrim.

[39]      Dr. Sherman, now Chairman of Apotex, testified in cross-examination that the costs of materials for Apo-Sulfatrim, its testing cost, and the costs of manufacturing, packaging and distribution were higher than the average cost for the company's products. He acknowledged that invoices and accounting records for costs incurred for the development and marketing of Apo-Sulfatrim were not available, but his testimony, based on his experience, was that costs related to that product were higher than the average cost of other products. Moreover, in the early years here in question, Apo-Sulfatrim was a very significant product for Apotex and the company "incurred all kinds of new expenses. We hired additional sales people because of the potential for selling Sulfatrim. We expanded our factory. Certainly there were additional automobile expenses as a result of selling Sulfatrim...". In his view, certain expenses, for research, for advertising and sales promotion were substantially increased in the early years as a result of development of Apo-Sulfatrim, and would have constituted a significant portion of Apotex' general costs for such activities in the first two years and less in later years. Dr. Sherman also testified that Apotex did not keep its financial records on a basis that allocates costs and revenues by product. Rather its records were maintained on a general basis for its operations, and invoices and other specific documents were not retained and thus were not generally available to provide a basis for determining variable or fixed costs incurred directly in relation to Apo-Sulfatrim.

[40]      Not surprisingly, the accountants called as witness by each of the parties differed in their perceptions of the appropriate basis for considering costs. Mr. Rosen, for Apotex, favoured the absorption method and developed a scenario which allocated a portion of general costs to the expenses for Apo-Sulfatrim based upon production or sales ratios. Mr. Yule, for the plaintiffs, favouring the differential cost method, indicated that the full absorption method provides no realistic assessment of costs associated with the Sulfatrim product, or with the infringement by the defendant.

[41]      In my opinion, no basis is established for using the full absorption method in this case. It is not to be accepted simply because Apotex is unable to establish from its records the costs directly associated with its development and sales of Apo-Sulfatrim. Mr. Rosen's proposals, based primarily on annual financial statements of Apotex for the years 1980 to 1991 are based on his estimates from incomplete data from Apotex. They illustrate the method he supports but the Court has no real confidence that the figures adduced are relevant, or that the proposed bases of allocation of a portion of all fixed or general costs are appropriate, for considering the costs to be deducted from Apotex' revenues to determine its profits.

[42]      The method for accounting of profits, here urged by the plaintiffs, is that followed in recent cases in this Court9, known as the differential cost accounting method, sometimes referred to as the incremental approach. It is referred to by Madam Justice Reed in Diversified Products10, thus:

         ...It is well established, since the decision of Mr. Justice Addy in Teledyne Industries11 ...that a differential or incremental approach is appropriate to determine an accounting of a defendant's profits in patent infringement cases.         

The method provides for assessment of profits by calculation of the revenues derived from infringement less those variable and fixed costs which contributed to the sums received as revenues. No part or portion of any expenditure which would have been incurred had the infringing activity not taken place is to be considered deductible. In this approach only that portion of indirect costs or fixed costs that can fairly be attributable to the infringing activity is deductible, as opposed to the absorption or full cost approach which provides for allocation of a portion of all indirect or fixed costs to be attributed to that activity.

[43]      Finally I note that in any case where profits are derived from infringement, the added profit earned by the infringer on those profits, or deemed to be so earned, is to be accounted as part of the profits earned from infringement.12 That facet of the accounting in this case I discuss in considering the plaintiffs' claim for interest.

[44]      Before considering interest, I turn first to considering the evidence of expenses here claimed by the defendant, and any appropriate reductions from revenues gained from sales of Apo-Sulfatrim. I then consider Apotex' submission that apportionment of profits, so that only a portion of the total should be accounted, is applicable in this case.

Expenses to be deducted

[45]      As earlier noted, Apotex keeps its costs and financial records on a consolidated basis, not related to production or sales of a particular product. The plaintiffs sought records of costs concerning Apo-Sulfatrim, beginning long in advance of the hearing of this reference, but none were provided then. The only records of the defendant's costs provided in advance of the hearing were the company's annual financial statements for the years 1980-1991, covering the period when it sold Apo-Sulfatrim produced from infringing TMP.

[46]      It was said by the defendant that no other cost records were available, despite the initiation of the plaintiff's action in 1983 seeking damages or an account of profits from infringement, then alleged and later found, by use of infringing TMP. After the third day of the hearing of this reference counsel for Apotex produced to the plaintiffs 17 sets of records relating to TMP purchases by Apotex in the years 1980-1984, 14 of them relating to batches found to contain TAA, which records had been discovered only after the hearing began. Subsequently, shortly before Mr. Rosen, the accountant called by Apotex, began his testimony, his report as an expert was amended, in part in light of certain production records previously sent to him by Apotex, which he had overlooked, and auditing files recently discovered in his own firm concerning annual audits of Apotex' financial operations for the years after 1985, including working papers related to calculations preparatory to establishing a reserve for "lost profits on infringing Sulfatrim sales". From these Mr. Rosen calculated costs of materials for the two active ingredients, TMP and SMX, and also, on an absorption basis he calculated other costs, allocated either by the portion of Apo-Sulfatrim production to total production in the case of labour and factory costs, or by the portion of Apo-Sulfatrim sales to total sales for other selling, general and administrative costs, or other costs.

[47]      The evidence of differential costs to Apotex as a result of its use of infringing TMP is sparse, and for Apotex no specific submissions were made about costs that should be considered in a differential cost accounting. Rather, in its view the full absorption method was the method to be followed if an accounting of profits was to be other than by the comparative method. From the opening of the reference hearing, when no cost information had been provided by Apotex except in its annual financial reports, the plaintiffs submitted that in the absence of any proof of costs, the defendant's profits must be deemed to be its revenues derived from infringement. They rely upon Reading & Bates13, where Létourneau J.A. quoted, with approval, the comment of Addy J. in Teledyne Industries14 in regard to the evidentiary burdens of the parties in an accounting of profits:

         ... The judgment obliges the defendant to account for the full amount of all revenue received from the use of the property. ...The amount so declared becomes payable to the rightful owner of the property and is subject to be reduced only by such bona fide expenses or disbursements as the infringer can by positive evidence establish as having been actually incurred...         

[48]      The respective burdens of the parties is expressed in other words by Madam Justice Reed in Diversified Products15

         ...In establishing an infringer's profits, the plaintiff is required to prove only the defendant's sales; the burden then shifts to the defendant to prove the elements of cost to be deducted from the sales in arriving at profit. Any doubts as to the computation of costs or profits is to be resolved in favour of the plaintiff. At the same time, this does not mean that the infringer must prove expenses such as overhead and their relationship to the infringing product in minute detail. But the defendant bears the burden of explaining, at least in general terms, how claimed overhead costs actually contributed to the production of the infringing product.         

[49]      For Apotex it is urged that there is no dispute that Apotex had to incur costs to earn revenues from infringing activity, and here some evidence of costs has been adduced. The defendant urges that the Court, as in an assessment of damages, must do the best it can, on the basis of evidence adduced, to assess the profits earned by Apotex. To do as the plaintiffs urge, to ignore whatever evidence there is of costs and to consider all revenues to be profits would result in unjust enrichment of the plaintiffs, in the view of the defendant. In cross-examination, Mr. Yule, the plaintiffs' accounting expert, acknowledged that expense must have been incurred by Apotex to earn the revenues to be accounted for, but there was no direct evidence of costs incurred except the late-produced invoice records for TMP purchases in 1980 to 1984.

[50]      In my opinion, in the circumstances of this case, on the evidence adduced the following costs should be deducted as expenses from the revenues earned by Apotex from infringement.

     (1)      The direct variable material cost of the infringing TMP and SMX is to be deducted --- calculated for
         (i)      TMP on the basis of the records produced by Apotex for purchases for the years 1980 to 1984, and thereafter on the costs of TMP for 1985 to 1990 based on the figures produced by Mr. Rosen from the audit records in files of his firm, and production records of Apotex;
         (ii)      SMX on the basis that the cost per kg of SMX was half the cost per kg of TMP, and the ratio of 1 kg of TMP to 5 kg of SMX was used in the combination drug Apo-Sulfatrim.
         (iii)      No other material costs are established or allowed.
     (2)      The direct costs of production, including only a portion of the annual labour and factory overhead costs from Apotex' annual financial statements. The portion to be allocated shall be determined by calculating the proportion that total production units of infringing Sulfatrim product bears to total production units of all products of Apotex. The total production for all products is provided by Mr. Rosen's calculations, but the annual production of infringing TMP will have to be calculated. An allocation on this basis is a revision of the proposal by Mr. Rosen on behalf of Apotex, as part of his proposal for total absorption of costs. In my view, that basis provides a fair allocation of labour and factory overhead costs when related only to production of Apo-Sulfatrim containing infringing TMP as a proportion of total production units of Apotex.
     (3)      The direct costs of selling, including only an allocation of the following expenses, from Apotex' financial statements as classified within operating expenses in Mr. Rosen's report, relating to
             advertising and promotion
             bad debts
             freight out

             salesmen's salaries & commissions

             telephone, telegraph and fax


         The annual allocation of the total of these expenses of selling should be based on a refinement of Mr. Rosen's proposal for a wider range of costs; specifically it is to be based upon the proportion of infringing Apo-Sulfatrim sales (in dollars) [not total sulfatrim sales] to total sales of Apotex products, on an annual basis.

[51]      I include no allocation of Apotex' annual sales discounts, which Mr. Rosen's calculations included among other costs he would allocate. For purposes of determining profits on a differential cost basis, sales discounts, while shown as an expense in Apotex' annual financial statements, are not a cost to be deducted from revenues, unless in this case counsel are agreed that their agreed revenues were calculated on a basis that included sales discounts within revenues. Only if that is the case, shall they be considered a part of the direct cost of selling, with the other categories of operating expense specified above.

[52]      An allocation of the identified classes of Apotex' general expenses, calculated on an annual basis, I allow as deductions from revenues. There is evidence on which the annual cost of materials, i.e., of TMP and SMX, can be determined. An allocation of a share of labour and factory overhead based upon the production ratio directed, and an allocation of a share of the designated costs which appear to make a direct contribution to sales, and thus to revenues, based upon the sales ratio indicated, in my opinion are a fair indication of reasonable costs incurred by Apotex as a result of their infringing activity. Those costs would not have been incurred had the infringing activity not been undertaken and, in my opinion, they are to be considered as expenses incurred in earning the revenues from infringement. As such they are deductions from revenues in determining profits to be accounted for payment to the plaintiffs.

[53]      In my opinion there is no evidence before me that would warrant inclusion of any other direct costs or any portion of other fixed costs in the range of costs here allowed to reduce the revenues earned by Apotex from its sales of Apo-Sulfatrim produced from infringing TMP.


[54]      For Apotex it is urged that since Apo-Sulfatrim is a combination drug with two active ingredients the total of profits it is found to have made is properly to be apportioned. Neither of the active ingredients in itself constitutes the product nor is it appropriate, even if TMP is 10 or more times more active than the equivalent amount of SMX, to consider all profits are derived from use of TMP, neglecting the role of SMX in Sulfatrim. Since they are combined in the proportions of 1 kg TMP to 5 kg SMX, Apotex urges that profits should be apportioned so that 1 part of 6 is attributed to TMP. As an alternative, it is submitted that, at most apportionment should be on the basis of the cost of each to the total costs of both in Sulfatrim. Since SMX is half the cost of TMP but they are mixed in portions of 1 part TMP:5 parts SMX by weight, the cost ratio of the TMP to total cost of the two as used in Sulfatrim would be 2:7. A simple apportionment on an equal basis, based on the fact that there are two active ingredients is said to unduly attribute profits to the use of TMP.

[55]      Apotex urges that apportionment on an equal basis or considering no apportionment at all, would ignore the contribution of SMX to the combined pharmaceutical product and the contribution of Apotex in developing a stable, safe and effective product, in acquiring a Notice of Compliance, in entering the market as the first generic producer and in generating sales of the Apo-Sulfatrim product. It is said that valuing the contribution of TMP to Apotex' profits based on the value added by Apotex to the value of TMP acquired would approximate 1/15 of the total revenue, on the basis that $50 of bulk TMP would have been sold by Apotex as finished Apo-Sulfatrim for $750.

[56]      For Wellcome it is urged that the matter of apportionment was not raised at trial and it is said to be contrary to the terms of the judgment on infringement. In my view, particularly since a reference as to any damages or accounting of profits was ordered long before trial, and since the trial judgment confirmed that reference, the fact that apportionment was not raised at trial does not preclude its being raised and considered in this reference as a factor to be considered in accounting profits which Apotex will be directed to pay to Wellcome. I am not persuaded that because TMP is significantly "more active" in its potentiating effect when combining the two active ingredients, 10 to 20 times more active than SMX according to the plaintiffs' witness Dr. Bernstein, then all profits should be attributed to use of TMP. On the other, hand the contribution of Apotex on a value added comparison of costs of bulk TMP and of revenue from finished Sulfatrim, in my view does significantly underplay the contribution of infringing TMP to Apotex' profits. It fails to fairly consider the fact that the combination product was not new when Apotex entered the market in which the plaintiffs and others were already active, and it makes no allowance for the significance of provincial health programs for sales by Apotex as the first generic producer to enter the market.

[57]      No case was referred to me concerning an accounting of profits from use of an infringing active ingredient used with another in a combination pharmaceutical product. In my opinion, apportionment is appropriate in this case, but none of the bases for apportionment proposed by Apotex is appropriate, i.e., on a value added to the cost of a unit of TMP (1/15), or on the relative weights of the two active ingredients (1/6, on a ratio of 1:5), or on the basis of relative costs of the quantities of these ingredients, TMP and SMX to their total cost in the final product (2/7, on a ratio of 1:2.5). All of those, in my view, underplay the significance of TMP as the major potentiating ingredient in the combination drug. Apotex also urged consideration of the pattern of licensing fees set by the Commissioner of Patents after 1978 for compulsory licenses for combinations of active ingredients in the drug in question, but I am not persuaded that process was related to any calculation of potential profits from each of the combined active ingredients.

[58]      In my opinion in this case, the proper apportionment is 60% of the profits earned by Apotex from use of infringing TMP with SMX, both active ingredients, in Apo-Sulfatrim. That ratio recognizes, albeit in a simplified calculation, that there are two active ingredients, that TMP is the more significant of the two in combination, and that the profit does result at least in part from Apotex' efforts to successfully develop the generic product and its market. I am satisfied that Apotex has shown that a portion of the profits may be attributed to SMX in the formulation as an active ingredient and to its successful efforts in developing and marketing Apo-Sulfatrim. Recognition of that warrants apportionment of total profits to be accounted and in my view, fair recognition of that is provided by reserving 40% of Apotex' profits and apportioning 60% to the accounting of profits to be paid to the plaintiffs.


[59]      Counsel for the parties differ in their submissions in relation to interest, related in part to their characterization of laches or default on the part of the other party at various stages in the history of this action. In my opinion, considerations of that sort are matters relevant in assessing costs; they are not relevant in considering interest.

[60]      I note that plaintiffs were declared by paragraph 9 of the Judgment of January 21, 1992, to be entitled to both pre-judgment and post-judgment interest, to be determined in this reference. Pre-judgment interest in an accounting of profits from infringement is the measure of profits earned by the infringer on the profits earned directly from infringing activities. Mr. Justice Addy, in Teledyne Industries16 wrote:

              A person who has misappropriated property is considered as having committed a species of fraud and will not be allowed to profit in any way either directly or indirectly from his actions. Interest from the profits realized is imposed in equity in order to prevent the unjust enrichment of the defendant who retains and thus is deemed to benefit from, the profits gained from his misappropriation. When one cannot...establish the extent of the additional profit earned on the original profits retained or where one cannot even establish that the defendant had actually employed the profits and thus benefited from them, he is deemed to have done so and is prevented from establishing the contrary. Interest at the current rate is then charged on the amount of profits retained.         
              The rate to be applied, in my view, should not be limited by anything except the principle of fairness having regard to the prevailing rates of interest existing from time to time. Where the defendant is carrying on a business and the illegal profits have been employed by him in his business together with revenues from his other business activities, as a general rule it would be impossible to distinguish what profits were actually realized from the moneys for which there is a liability to account...A rate of one or two percentage points above the average prime bank lending rate prevailing during any accounting period would ordinarily be quite suitable.         

[61]      In my opinion, in the circumstances of this case the accounting of profits should include, as the measure of profits earned on the profits from infringement, interest calculated at the average commercial bank prime rate plus 1%, compounded semi-annually. That pre-judgment interest runs from the date the profits on infringement were earned to the date of the final judgment to be rendered on this reference, which will order payment to the plaintiffs of an amount of the profits accounted, on the bases outlined in these Reasons, as earned by Apotex from use of infringing TMP.

[62]      Counsel were agreed that the question whether interest should be compounded, as for the question of the appropriate rate, is a matter within discretion of the Court. In my opinion, without any reference to alleged conduct of the parties in the history of the action, the rate of interest here directed and its compounding semi-annually is simply a fair measure of the profit to Apotex from profits arising from infringing activity. It reflects fairly in my opinion, reasonable costs of borrowing equivalent funds if Apotex had borrowed money in place of the profits here in issue had those not been earned. No other pre-judgment interest shall be assessed, in accord with paragraph 36(4)(f) of the Federal Court Act, R.S.C. 1985, c. F-7 as amended.

[63]      The plaintiffs raised the issue of post-judgment interest. It is not a factor to be included in the account of profits. In accord with s-s. 37(2) of the Federal Court Act I direct that interest after judgment is rendered shall be calculated, in relation to any unpaid balance of the amount determined to be paid to the plaintiffs, at the prevailing commercial bank prime rate plus 1%, compounded semi-annually.


[64]      At the conclusion of the hearing, in view of the number of issues to be resolved, some of which might require calculations to be undertaken, counsel for both parties proposed that it would be appropriate to conclude these Reasons with a statement of conclusions and any necessary directions for counsel to undertake further calculations. If that is done, those calculations would not be based on new evidence or argument, rather they are related to the evidence and argument submitted to me at the hearing of the reference.

[65]      I concurred in their suggestion and now find it appropriate to set out my conclusions and directions, to apply in the calculation of profits to be accounted and paid to the defendant, as follows.

     1.      The extent of infringement by Apotex included the use of infringing TMP from 81 batches, acquired by Apotex prior to August 7, 1989, in which TAA was found.
     2.      The total revenues to Apotex from that infringement were $17,856,294, as agreed by the parties.
     3.      In accounting total profits earned by Apotex from the infringement
         i)      revenues and costs shall be calculated on an annual basis for the years 1980 to 1990 (or later if product including infringing TMP was sold after 1990);
         ii)      the following expenses shall be deducted from revenues;
             (a)      the material costs of infringing TMP and of SMX, calculated as set out in these Reasons at paragraph 50(1);
             (b)      an allocation of Apotex' annual labour and factory overhead based upon the proportion of units of infringing Sulfatrim product to the total units of Apotex production for all products (supra, paragraph 50(2)); and
             (c)      an allocation of the annual costs of selling based on the ratio of sales of infringing TMP to total sales (in dollars) of all Apotex production, for the following cost classifications in Apotex's annual financial statements:
                     advertising and promotion
                     bad debts
                     freight out
                     salesmen's salaries & commissions
                     telephone, telegraph and fax
                     (sales discounts, only if those are included in the revenues agreed by the parties)
                 ( Supra, paragraphs 50(3), 51).
     4.      The resulting annual profit shall be apportioned so that 60% is considered to arise from use of infringing TMP and to be recoverable by the plaintiffs.
     5.      Interest on the apportioned profits to be recoverable by the plaintiffs shall be added, as calculated at the rate of the commercial bank prime rate plus 1%, compounded semi-annually, from the year the income was earned until the date on which judgment in this reference is confirmed by order that Apotex pay to the plaintiffs a specified sum on account of profits earned from use of infringing TMP. That interest payment is the measure of the profit earned by Apotex on profits accounted as earned from infringing use, to be paid to the plaintiffs, in recognition that Apotex had the use of those profits through the period in question.
     6.      Interest after judgment on the amount determined that is to be paid to plaintiffs shall be calculated at the prevailing commercial bank prime rate plus 1%, compounded semi-annually, on any unpaid balance.
     7.      The parties are directed to consult and to seek to agree on the calculation of the profits for which Apotex is required to account, in accord with these conclusions and directions. If they agree, the Court would welcome that advice in writing on or before September 30, 1998 and the profits accounted, to be paid by Apotex to Wellcome, will be confirmed by Judgment. If counsel cannot agree, by the date here indicated, they shall advise the Court and a further hearing on the issues to be settled will be arranged as soon as that may conveniently be done.


[66]      As earlier noted, the plaintiffs ask for costs on a solicitor-client basis, or on the basis of special directions they would address, while the defendant opposes an award on any such basis. At the conclusion of the hearing I heard submissions by counsel on solicitor-client costs, and a substantial volume of correspondence was introduced by the plaintiffs as background for their claims to costs on that basis. No submissions were made in relation to special directions to an assessing officer if costs are to be awarded on any basis other than solicitor-client costs.

[67]      I make no order concerning costs at this time. That is a matter which in the circumstances is best left to be directed with, or after, final Judgment when payment will be ordered of an amount of profits accounted in accord with directions now issued. If plaintiffs wish to address the matter of special directions, now under Rule 403, without my decision at this stage on their application for solicitor-client costs, a hearing to include submissions on special directions will be arranged.

                             W. Andrew MacKay



OTTAWA, Ontario

August 26, 1998.


1.      The Wellcome Foundation Limited et al. v. Apotex Inc., Court file T-80-83, Reasons for Judgment, November 14, 1991, reported (1991), 47 F.T.R. 81, and Supplementary Reasons for Judgment, February 3, 1992.

2.      R.S.C. 1985, c. P-4, s-s. 39(2), (which was formerly R.S.C. 1970, c. 1, s. 41(2)), was repealed, S.C. 1993, c. 2, s. 3.

3.      (1996), 71 C.P.R. (3d) 26 at 33 (F.C.A.).

4.      (1994), 55 C.P.R. (3d) 433 at 455 (F.C.T.D.).

5.      See Collette v. Lasnier, (1886), 13 S.C.R. 563 at 574-576; Siddell v. Vickers (1892), 9 R.P.C. 152 (C.A.); Reading & Bates Construction Co. v. Baker Energy Resources Corp. (1992), 44 C.P.R. (3d) 93 at 106 (F.C.T.D.).

6.      Reading & Bates Construction Co. v. Baker Energy Resources Corp. (1994), 58 C.P.R. 359 at 369 (F.C.A.) Leave to appeal to S.C.C. refused: 60 C.P.R. (3d) vi.

7.      Idem, at p. 369.

8.      Tremaine v. Hitchcock & Co., (1874), 90 U.S. 518, 23 L.Ed. 97; 23 Wall. 518 (U.S.S.C.).

9.      See, e.g. Teledyne Industries Inc. v. Lido Industrial Products Ltd. (1982), 68 C.P.R. (2d) 204 (F.C.T.D.); Reading & Bates, supra, note 6; Diversified Products Corp. v. Tye-Sil Corp. (1990), 32 C.P.R. (3d) 385 (F.C.T.D.); Beloit Canada Ltée.v. Valmet Oy, (supra, note 4), varied on appeal (1995), 61 C.P.R. (3d) 271 (F.C.A.).

10.      Supra, note 9 at p. 387.

11.      Footnote here omitted from quotation, see supra, note 9.

12.      See the following discussion of interest; and see also Teledyne Industries, supra, note 9, at pp. 226-227.

13.      Supra, note 6 at p. 367.

14.      Supra, note 9 at p. 209.

15.      Supra, note 9 at p. 390.

16.      Supra, note 9 at pp. 226-227.

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