James Lawrence, Partner

The authors have previously published on the issue of damages calculated pursuant to the “user principle” and the Winnebago decision in the March 2016 edition of Intellectual Property Forum.

Background

Bayer AG and Bayer Australia Ltd (together, Bayer) are the patentee and exclusive licensee respectively of Australian Patent No 780330 (Patent) pursuant to which they have manufactured and sold in Australia for over 15 years an oral contraceptive (OC) product known as “Yasmin”. Yasmin contains a combination of ethinylestradiol (EE) and drospirenone (DRSP) as the active pharmaceutical ingredients.

On 23 January 2012, the respondents (together, Generic Health) commenced selling an EE and DRSP combination OC called “Isabelle”, which was registered in the Australian Register of Therapeutic Goods (ARTG) on the basis of bioequivalence with (ie as a generic of)[1] Yasmin, in Australia.

Within weeks of the launch of Isabelle, Bayer commenced infringement proceedings against Generic Health and applied to the Court to amend a number of claims of the Patent under section 105 of the Patents Act 1990 (Cth) (Act).

Yates J allowed the amendments to the Patent on 14 December 2012 and, on 8 May 2013, Jagot J handed down the primary judgment in the substantive proceeding, finding that Generic Health’s manufacture and sale of Isabelle in Australia infringed the Patent. A subsequent appeal was dismissed by the Full Federal Court and, following a refusal of its special leave application by the High Court on 19 June 2014, Generic Health was permanently restrained from supplying Isabelle in Australia.

Bayer elected to receive damages, rather than an account of profits, with the matter being returned to Jagot J to determine the quantum of the award to which Bayer was entitled as compensation for its lost sales of Yasmin.

Claim amendment & damages – good faith

The preliminary question, which the parties referred to as the “good faith issue”, was whether Bayer was entitled to recover damages for infringements occurring prior to the amendment of the Patent and, in particular, whether it had satisfactorily established that the original specification was framed “in good faith and with reasonable skill and knowledge” as mandated by paragraph 115(1)(a) of the Act.

Rejecting Bayer’s submission that compliance with this requirement should be assumed in the absence of any positive evidence to the contrary, Jagot J nevertheless accepted that such an inference could be drawn from the circumstances of a particular case having regard to the following principles:

1. Patent drafting is a collaborative process between inventors/clients and patent attorneys which involves balancing the commercial, legal and technical position of the patent applicant; and
2. Patent attorneys are entitled to (i) rely on information provided by inventors/clients with respect to technical matters (eg in relation to pharmaceutical patents, the range of dosage of the active pharmaceutical ingredient which may validly be claimed) and (ii) assume that the inventor/client has an honest belief, based on experimental evidence or a plausible expectation that the invention would work throughout the defined range, that a claim is justified.

With these principles in mind, Jagot J was satisfied on the basis of the evidence adduced by Bayer as to the reasoning and process which led to the unamended claims being included in the original specification – comprising documents and that of the Bayer employee ultimately responsible for filing the Patent – that those claims had been prepared with the requisite level of good faith, skill and knowledge so as to entitle Bayer to recover damages in respect of infringing conduct occurring prior to the amendment.

Assessment of damages

There was general agreement between the parties that damages are, by their nature, compensatory and the calculation of which often involves a level of unavoidable imprecision. The parties also accepted that was it appropriate for her Honour to have regard to the sales figures for Isabelle and Petibelle, a generic version of Yasmin released by Bayer shortly after the withdrawal of Isabelle, and Bayer’s standard costings for Yasmin in attempting to quantify the appropriate award. However, the parties were at issue as to whether a discount ought to be applied:

1. to account for the fact that not every Isabelle and Petibelle sale represented a lost sale of Yasmin in respect of which Bayer was entitled to compensation (the “one for one issue”); and/or
2. to Bayer’s standard costings to take into account the risk that its costs of producing Yasmin would have been greater than estimated (the “costings issue”).

Noting that the Australian OC market can be distinguished from markets for highly substitutable products which involve a significant degree of consumer choice, such as clothing and industrial goods, Jagot J rejected Generic Health’s submission that such discounting was justified purely on the basis of the approach adopted in previous cases to the assessment of damages and instead held that these issues were best resolved in the relevant factual context summarised below.

Factual context

Australian OC market

The Australian OC market comprises a number of prescription medicines containing EE in combination with one form or another of progesterone. In order to purchase an OC, a consumer must hold a prescription for the particular combination of EE and progesterone in the product, although this is usually specified by the doctor in the prescription by reference to the brand name of the innovator product rather than the actual active ingredients. As long as the prescription does not indicate that brand substitution is not permitted, a pharmacist may supply any brand of OC containing that precise combination of EE and progesterone (but no other) in response to the prescription.

OCs fall into one of three categories based on the type of progesterone they contain; namely, “first generation” (EE and norethisterone), “second generation” OCs (EE and levonorgestrel) or “third generation” OCs (EE and desogestrel, gestodene, nomegestrol, cyproterone or DRSP).

There is a significant variation in the retail price of OCs in Australia between:

1. all first and some second generation OCs which are available via the Pharmaceutical Benefits Scheme (PBS) at a greatly reduced Government-subsidised price;
2. those second generation OCs which are not available via the PBS and are priced between PBS-subsidised products and third generation OCs;
3. third generation OCs which are priced at a premium and generally marketed on the basis of non-contraceptive benefits and reduced side-effects.

Yasmin, Isabelle and Petibelle are third generation OCs containing 30 µg EE and 3 mg DRSP. Both Isabelle and Petibelle were registered in the Australian Register of Therapeutic Goods (ARTG) on the basis of bioequivalence with (ie as generic versions of) Yasmin.

During the relevant period, the approximate retail prices of different OCs in the Australian market were:

• First and second generation OCs listed on the PBS: $19 – $24 ($36 max) (four month supply)
• Second Generation OCs not listed on the PBS: $35 – $40 (three month supply)
• Third generation OCs (none listed on the PBS):
  • Generally: $71-$84 per month (three month supply)
  • Yasmin: $71 – $73 (three month supply)
  • Isabelle: $60 – $61 (three month supply)
  • Petibelle: $66 (three month supply)

Supply of Yasmin, Isabelle and Petibelle in Australia

In August 2002, Bayer launched Yasmin into a crowded Australian OC market dominated by low-priced first generation OCs and promoted it, as the first OC containing EE and DRSP to be made available in Australia, on the basis of the unique suite of non-contraceptive benefits offered by DRSP (namely, reduced risk of fluid retention, weight gain, breast tension, headache, bloating and, in some cases, increased blood pressure). In accordance with its usual strategy of registering generic brands of its innovator products which could be launched in the event of a third party generic entry to the market, Bayer registered (but did not commence supplying) Petibelle in the ARTG in October 2011.

On 23 January 2012, Generic Health launched Isabelle which it marketed to pharmacists on the basis that they could potentially derive a greater profit margin by dispensing Isabelle rather than Yasmin. A week after Isabelle was withdrawn from the market on 19 June 2014 following injunctive relief, Bayer commenced supplying Petibelle and wrote to doctors advising them of its availability.

The one for one issue

As the starting point for considering the one for one issue, Jagot J was satisfied that every sale of Isabelle and Petibelle could at least be taken as representing a prescription for Yasmin which had not resulted in a sale of Yasmin, given that:

1. each product requires (or, in the case of Isabelle, required) the purchaser to hold a prescription for a product containing 30 µg EE and 3 mg DRSP;
2. the only products available in Australia containing 30 µg EE and 3 mg DRSP throughout the relevant period were Yasmin alone (from August 2002 to 23 January 2012 and 19 to 26 June 2014), Yasmin and Isabelle (from 23 January 2012 to 19 June 2014) and Yasmin and Petibelle (from 26 June 2014 onwards);[2] and
3. the evidence established that doctors wishing to prescribe an OC with 30 µg EE and 3 mg DRSP continued to do so by reference to Yasmin following the launch of Isabelle onto the market. There was no evidence of a prescription ever being issued specifically for Isabelle or Petibelle.

However, there was no empirical data available as to the whether (and, if so, the proportion of) some these sales would never – even if Isabelle or Petibelle was unavailable – have resulted in a sale of Yasmin.

Nevertheless, Generic Health submitted that a number of Isabelle sales were likely to have been made to women holding Yasmin prescriptions who were prepared to pay the price of Isabelle or Petibelle but who would not have been willing or able to pay, or continue to pay, the high cost of Yasmin (including women who had not been using OCs, or had been using a different type of OC, prior to the launch of Isabelle who first obtained a Yasmin prescription in order to purchase Isabelle). In support of this contention, Generic Health relied on:

1. evidence from a pharmacist, Mr McCann, to the effect that (i) he had dealt with a number of women who had been prescribed Yasmin but were “shocked” at the price and could not afford to fill their prescription at all and (ii) he would only advise a patient who had been prescribed Yasmin of the availability of Isabelle if they raised concern about the price of Yasmin; and
2. the expert opinion of an economist, Mr Houston, based primarily on his conclusion that price is a significant factor influencing a woman’s decision to purchase one OC rather than another, that is Isabelle had not been available a number of Isabelle purchasers would, on learning the price of Yasmin, have been likely to discontinue using OCs altogether or returned to their doctor to obtain a prescription for an alternative OC.

Mr Houston’s evidence was almost entirely disregarded by Jagot J, with her Honour finding that a number of the general economic principles relied upon, and assumptions underlying, his conclusions as to the price sensitivity of Isabelle purchasers were “divorced from the factual realities” of the Australian OC market[3] and contrary to the evidence that women do not routinely change from one OC to another unless there is a good reason to do so.

Jagot J found that Mr McCann’s experience was atypical because his pharmacy was located in a lower socio-economic area and, due to his dispensing practices, he did not take advantage of the potential to increase his profit margin by switching patients from Yasmin to Isabelle. Her Honour held that the Isabelle the market would, contrary to the actual sales evidence, have been “absurdly narrow”[4] if it depended to any significant degree on sales to customers described by Mr McCann, given that only women who had never purchased Yasmin (or probably any other third generation OC) before – which, as Yasmin had been available for 10 years prior to the launch of Isabelle, was likely to represent only a small proportion of Yasmin prescriptions in the relevant period – could be “shocked” at the price.

Jagot J inferred from the above that the majority of Isabelle sales would likely have been made to women holding Yasmin prescriptions who would have been willing and able to pay, or continue to pay, the premium price for Yasmin (rather than switch to another OC) due its non-contraceptive benefits but were nevertheless happy to take a bioequivalent alternative (ie Isabelle or Petibelle) for a modest discount.

Having regard to all of these factors, her Honour accepted the opinion of Bayer’s expert economist that the “best assessment in the circumstances of [the case is to] accept one for one substitution”[5]as the basis for calculating the sales of Yasmin lost to Isabelle and Petibelle.

Further, her Honour accepted evidence from a former manager of Bayer that its sole motivation for launching Petibelle was to protect its reputation amongst the small number of Isabelle purchasers who, having become accustomed to paying the discounted price for Isabelle, would have been aggrieved at having to revert to paying the full price for Yasmin. Finding that Bayer’s attempt to respond to Isabelle’s unlawful disruption of the Yasmin market in this way was both reasonable and foreseeable by Generic Health as potentially being a direct and natural consequence of the release of Isabelle, her Honour held there was a sufficiently causal connection between Generic Health’s infringement and Bayer’s launch of Petibelle to justify an award of damages in respect of Petibelle sales for two years following its release[6].

User principle

Bayer also submitted, in the alternative, that if the proportion of overall Isabelle sales made in these circumstances was found to justify a significant discount being applied, it was nevertheless entitled to compensation for misuse of its property rights in respect of those sales pursuant to the “user principle” assessment of damages adopted by Yates J in Winnebago Industries Inc v Knott Investments Pty Ltd (No 4) [2015] FCA 1327 (Winnebago) (reported on in the March 2016 edition of the Intellectual Property Forum).

Although Jagot J was ultimately not required to decide the issue in light of the above conclusions, and expressly declined to give a concluded view on it, her Honour distinguished Winnebago on the basis that the applicant in that case was unable to point to any lost sales in respect of which damages could be assessed, expressing strong support for Generic Health’s suggestion that to allow Bayer to recover in respect of any discounted amount would, in effect, be overcompensating it for sales it would never have made.

The costings issue

Taking into account the parties’ competing expert evidence as to the appropriate discount to be applied to take into account theoretical uncertainties in Bayer’s standard costings, and noting that any doubt regarding that quantum should be decided in favour of Bayer, Jagot J allowed a discount of 2%.

Importantly however, her Honour accepted that the interest payable on that amount should not, as contended by Generic Health, be based on the post-tax profits.

Conclusion

This decision reinforces the principle that there is no “one-size-fits-all” approach to assessing damages for patent infringement; the appropriate basis for calculating the award must, regardless of whether it is intended to compensate the patentee for lost profits or otherwise, be decided in light of the relevant factual context of the case.

With this in mind, it is important to observe that her Honour’s conclusion regarding the one-for-one substitutability of Yasmin and Isabelle/Petibelle arose from a combination of factors unique to those products and would, therefore, almost certainly be an inappropriate basis upon which to calculate damages in respect of another pharmaceutical product, even perhaps another OC, which does not share Yasmin’s level of differentiation.

 

[1] While irrelevant to this decision, for completeness, a product is a generic of an originator product if it satisfies the definition of “generic product” within the meaning of Part 1 of Schedule 9 of the Therapeutic Goods Regulations 1990 (Cth).

[2] Note: In September 2008, Bayer launched its “Yaz”-branded OC product in Australia (formerly “Yaz”, now “Yaz Flex”) which also contains EE in combination with DRSP. However, the form and amount of DRSP in Yaz/Yaz Flex is different to that in Yasmin, meaning that Yaz/Yaz Flex are not bioequivalent to (ie generics of) Yasmin and making them unsuitable for some Yasmin users.

[3] Bayer at [273]

[4] Bayer at [246]

[5] Bayer at [296]

[6] Bayer contended the quantum of which was approximately AUD$25M.