High Court puts the brakes on damages recovery during patent term extension

H. Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd [2022] HCA 4

9 March 2022

High Court of Australia

Gaegler, Edelman, Steward and Gleeson JJ

Background

Lundbeck A/S (Lundbeck Denmark) is the owner of a patent covering the pharmaceutical substance escitalopram, used in the treatment of depression (Patent). Lundbeck Australia Pty Ltd (Lundbeck Australia) is its Australian subsidiary, which holds an exclusive licence of the patent, and sells escitalopram under the brand name, Lexapro. CNS Pharma Pty Ltd (CNS Pharma) is also an Australian subsidiary of Lundbeck Denmark, which sells an authorised generic version of Lexapro.

The background of the matter was complex. The standard term of the Patent expired on 13 June 2009.   In 2003 Lundbeck Denmark had applied for, and was granted, an extension of term (PTE) of the Patent to 13 June 2014 based on the inclusion of Lexapro in the Australian Register of Therapeutic Goods (ARTG).  However from 2006, extensive litigation took place over the validity of that PTE, and specifically whether it was required to be based on the earlier Cipramil product.  Meanwhile, separate litigation was commenced inter alia by Sandoz Pty Ltd (Sandoz), challenging the validity of the patent.  That litigation was settled in 2007, at which time Sandoz was granted a non-exclusive licence to the Patent, effective two weeks before expiry.  Since the PTE litigation was still ongoing, the true expiry date was not known at that time.  On 11 June 2009 the Full Federal Court confirmed that the PTE which had been granted was entirely invalid so that the patent would expire on 13 June 2009.  On 12 June 2009 Lundbeck Denmark filed an application for an extension of time to file a further PTE request.  On 15 June 2009 Sandoz launched its generic escitalopram product.  After extensive litigation, a PTE was granted to 9 December 2012 with retrospective effect.  On 26 June 2014, Lundbeck Denmark and Lundbeck Australia commenced proceedings against Sandoz for patent infringement.

Key Issues

The first issue was whether, during the period of the PTE of Lundbeck’s patent, Sandoz had the benefit of the licence contained in the settlement agreement, on the basis that the patent had expired on 13 June 2009 such that Sandoz’s licence had commenced 2 weeks prior to that date. 

In addition, the question arose of the ability of the exclusive licensee to sue for infringement of the patent.  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. 

A further question arose as to when a cause of action arises under s79, such that interest becomes payable on any damages awarded.

CNS Pharma also 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 availability of a misleading and deceptive conduct claim in these circumstances was also at issue.

Outcome

The Court reinstituted the finding of the primary judge that, during the period of the PTE, Sandoz did not have the benefit of a licence contained in a settlement agreement entered into between the parties, and so infringed the patent.  The intention of the parties was that Sandoz would have a licence during the final 2 weeks of the patent term and the language of the settlement clause was found not to say anything about any right that the Lundbeck parties might have under s79 of the Act to sue for infringement during the PTE period.

As to the ‘exclusive licensee’ issue, 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 further found that Lundbeck Denmark’s cause of action arose only on the grant of the PTE, such that interest accrued from that time.

The High Court also 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.

Implications

The full implications of the findings for the original $26 million damages award remain to be seen, as the case has been remitted back to the primary judge for re-assessment of damages.  

The findings in relation to the construction of the settlement agreement are likely to be largely confined to the facts at hand. However, the 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.  In practice therefore, this outcome may 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.  

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