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Entire Market Value Rule Inapplicable Where the Patent claims both Inventive and Conventional Elements and the Combination Substantially Accounts for the Value of the Invention

April 28, 2015

Federal Circuit

Entire Market Value Rule Inapplicable Where the Patent claims both Inventive and Conventional Elements and the Combination Substantially Accounts for the Value of the Invention

April 28, 2015

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AstraZeneca AB v. Apotex Corp., __ F.3d ___ (Fed. Cir. Apr. 7, 2015) (O’Malley, Clevenger, BRYSON) (S.D.N.Y.:  Cote) (2 of 5 stars)

Federal Circuit affirms 50% royalty on gross margin of infringing sales but reverses portion of the award on post-expiration sales.

AstraZeneca held patents to the formulation of Prilosec®, which included “three key elements—the drug core, the enteric coating, and the subcoating.”  Slip Op. at 22.  A prior appeal had upheld validity and infringement, so review here was limited to damages.

Royalty Rate:  The court rejected all Apotex’s challenges to the royalty rate.  Apotex’s fundamental error was to try to limit royalties to “the harm actually suffered,” when a reasonable royalty theory “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.”  Slip op. at 13.  Under the proper analysis, a 50% royalty was reasonable because Apotex “would be [still] left with a profit margin of 36 percent, which was solidly in the range . . . typically earned on its products at the time.”  Id. at 14.  Moreover, Apotex’s market entry would swiftly decrease prices and destroy the patentee’s remaining market, suggesting the patentee would demand a high royalty.

The lack of viable alternative, non-infringing designs also supported a higher royalty rate:  “if avoiding the patent would be difficult, expensive, and time-consuming, the amount the infringer would be willing to pay for a license is likely to be greater.”  Id. at 15.  Apotex could not rely on another defendant’s non-infringing formulation as an alternative because that defendant had its own patents drawn to that product, and it was therefore reasonable to infer they covered it and would have rendered it unavailable to Apotex.

AstraZeneca’s other licenses with ~20% rates in the over-the-counter market didn’t require a lower royalty because the district court found significant differences between that and the prescription market.  By contrast, AstraZeneca’s litigation settlements with other generics for 50-70% rates were instructive because they were negotiated after the district court had found infringement and validity, making them comparable to the hypothetical negotiation.

Entire Market Value Rule:  The patentee properly calculated damages based on the entire drug product.  Although the entire market value rule was not per se inapplicable to pharmaceuticals, it did not apply here.  The patent was to a product with three key elements—the drug core, coating, and subcoating—and it was the unique combination of those elements that was the invention.  “There is no unpatented or non-infringing feature in [AstraZeneca’s] product” because the “patents cover the infringing product as a whole, not a single component of a multicomponent product.”  Slip Op. at 22.  It was thus appropriate to address damages under a Georgia-Pacific analysis, in which factors 9, 10, and 13 already require assessing the importance of the inventive contribution, while bearing in mind that “it is improper to assume that a conventional element cannot be rendered more valuable by its use in combination with an invention.”  Id. at 23.  “It is not the case that the value of all conventional elements must be subtracted from the value of the patented invention as a whole when assessing damages. . . . [T]he question is how much new value is created by the novel combination, beyond the value conferred by the conventional elements alone.”  Id.  Here, the inventive subcoating permitted AstraZeneca to create a commercial viable product where it otherwise could not have, so it was appropriate to also include the value of the active ingredient when calculating damages.

No Post-Expiration Damages:  The District Court incorrectly included damages from sales made during the post-expiration pediatric exclusivity period.  “Even though a party in Apotex’s position would have agreed to a license covering both the patent term and the pediatric exclusivity period,” damages for that period cannot be included in an award for patent infringement under either sections 271(e)(4)(A) or 284.  Slip op. at 33.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes and is not intended to be and should not be taken as legal advice.

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Zachary Loney | Associate

Zachary Loney is an a​ssociate in the litigation group in Fish & Richardson’s Washington, DC office. Prior to joining the firm, Zachary served as a judicial intern for The Honorable Lynn N. Hughes of the U.S. District Court for the Southern District of Texas. Zachary...

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