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High Court Puts The Brakes On Damages Recovery During Patent Term Extension

by | Mar 21, 2022

Introduction

The decision of the High Court in H. Lundbeck A/S v Sandoz Pty Ltd [2022] HCA 4 (Lundbeck) last week concerning allegations of patent infringement in respect of Sandoz’s generic version of Lundbeck’s LEXAPRO escitalopram product used to treat depression, may appear a partial victory for both parties.  

On the one hand, the Court reinstituted the finding of the primary judge that, during the period of the patent term extension (PTE) of Lundbeck’s patent, Sandoz did not have the benefit of a licence contained in a settlement agreement entered into between the parties, and so infringed the patent. 

On the other, it agreed with the Full Federal Court that Lundbeck Australia, as exclusive licensee, had no right to damages during the PTE period in circumstances where the PTE had been granted after patent expiry, and further that the misleading or deceptive conduct claim brought by CNS Pharma, a subsidiary of Lundbeck Australia which sells an authorised generic product in Australia, failed in these circumstances.

The full implications of these findings for the original $26 million damages award remain to be seen, as the case will now be remitted back to the primary judge for re-assessment of damages.  But as we discuss below, it is clear from this judgment that failing to obtain a PTE before expiry of the relevant patent may significantly compromise an originator group’s ability to recover damages for infringements occurring during the PTE period. 

Those who have followed this case since its origins in 2005 will recall that the reason why Lundbeck was granted a PTE so late in this case was that it was obtained an extension of time to do so, after the validity of the original PTE was successfully challenged on the basis that Lundbeck had not relied on the product with the earliest regulatory approval date falling within the patent scope (consequent on a finding that Lundbeck’s earlier CIPRAMIL product comprising citalopram, a racemic mixture of the (+)- and (-)- enantiomers, “contained” the (+)-enantiomer, escitalopram. 

It is pertinent therefore, that in recent months, we have reported on a developing trend of successful challenges to PTEs on various grounds (see our reports on Merck, Pharmacor and Bayer).  Where PTEs are removed from the Register, alternative PTE applications relying on extensions of time may be filed at a late stage, which could result in the grant of PTEs outside of the patent term.  The consequences of this decision as to the ability of an exclusive licensee and other originator group companies to claim damages in such circumstances may therefore prove to be of greater commercial significance than one might think.  

Limit on exclusive licensee’s right to sue for infringement

S120 of the Patents Act 1990 (Cth) (Act) confers the right on both the patentee and an exclusive licensee to bring patent infringement proceedings against a third party.   S70 allows a patentee to apply for an “extension of the term of the patent” where the relevant PTE requirements are met.  S79 of the Act makes further specific provision for the circumstance where a patent is extended after expiry, providing that in such a case “the patentee has, after the extension is granted, the same rights to start proceedings … as if the extension had been granted at the time when the act was done.”  [emphasis added].  In other words, although the PTE is not in place at the time, rights to sue for infringement are backdated to capture activity carried on in the meantime.  The question before the High Court was whether such rights could only be exercised by the patentee, given that s79 does not refer to an exclusive licensee, or whether the general right of an exclusive licensee to sue during the term of the patent is in that case extended over the PTE period. 

The High Court agreed with the Full Court that only the patentee has standing to sue for patent infringement where a PTE is granted after expiry of the relevant patent.  The Court noted that the reason for omitting exclusive licensees from s79 did not emerge from the legislative material available (and may have been an oversight), but the Court could not go behind the unambiguous words of the legislature.  In consequence, Lundbeck but not Lundbeck Australia, had standing to sue Sandoz.   

The High Court did not tackle the question of the construction of s78, which places certain limits on the rights of the patentee to enforce the patent during the PTE period.   This was a focus of the primary judge, who considered that ss78 and 79 needed to be read consistently, to encompass exclusive licensees.  The Full Court discounted the relevance of s78 on the basis that it does not confer rights. Given the High Court’s distinction between the rights given under s120 and the separate source of rights under s79, its reasoning appears to give rise to a conclusion that s78 is a limitation on the rights under s120 which are extended during the PTE period, so that the use of the wording “patentee” is not limiting in s78 in the same way as it is in s79.

This outcome is likely to be problematic for multinational originator groups, which commonly hold Australian patents offshore, while a local subsidiary makes sales of the product(s) in Australia as either a formal exclusive licensee or de facto licensee.  Where there are no formal royalty payments back to the patent holder, it will be the local entity which will likely suffer the majority of the losses due to infringing activities, and it may be difficult for the patentee to show significant loss.   In the pharmaceutical sector, the profits of an infringing generic entrant are likely to be considerably less than the damages suffered by the originator group, meaning that reliance on an account of profits is not a palatable option.  Notably, the Federal Court’s narrow reading of the term “exclusive licensee” in the Act in previous cases such as Bristol-Myers Squibb Company v Apotex Pty Ltd (No 5) [2013] FCA 1114, has caused similar difficulties.

No misleading or deceptive conduct where infringement only a remote possibility

One way of facilitating the recovery of losses sustained by other members of an originator’s group is for them to sue the alleged infringer for misleading or deceptive conduct. 

In this case, CNS Pharma alleged that Sandoz was liable for misleading or deceptive conduct because it failed to warn its customers that Sandoz’s generic products might infringe Lundbeck’s patent if a PTE was subsequently granted.  The High Court concluded that there was no evidence before the primary judge that Sandoz’s customers would have reasonably expected Sandoz to inform them that they might be exposed to an infringement action in the unlikely event that a PTE was subsequently granted.  Accordingly, a finding of misleading or deceptive conduct could not be sustained.  

Thus, in the circumstances of this case, the only member of the Lundbeck group able to recover damages as a result of Sandoz’s infringement during the PTE period is Lundbeck A/S itself.  Sandoz may therefore escape relatively lightly from what has ultimately been found to be an infringing launch. 

Implications

This judgment confirms that an exclusive licensee cannot sue for infringement where a PTE is granted after expiry and that originator group members may be unable to make a successful misleading and deceptive conduct claim in such circumstances.  In practice, this is likely to place substantial limitations on the benefits of a claim for infringement of a PTE granted post-expiry, unless sufficient internal IP arrangements have been made to transfer value from product sales back up the chain to the IP owner within the group.

For potential generic entrants, the High Court ruling reinforces that a strategy incorporating an aggressive attack on a PTE may reap benefits in obtaining early market entry, especially when action is taken close to patent expiry.   We expect that these timing considerations may feature in generic entry strategies going forwards.

Naomi Pearce

Naomi Pearce

CEO, Executive Lawyer, Patent & Trade Mark Attorney

Naomi is the founder of Pearce IP, and is one of Australia’s leading IP practitioners.  Ranked in virtually every notable legal directory, highly regarded by peers and clients, with a background in molecular biology, Naomi is market leading in the field of pharma/biopharma, biotechnology and animal health.   

Underpinning Naomi’s legal work is a deep understanding of pharma/biopharma industries, resulting from 25+ years' experience, including as VP of IP in-house at global pharma giants, and Partner of a top-tier international law firm and as the Founding Principal of Pearce IP.

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