Supreme Court decides cross undertaking in damages enforceable where UK patent held invalid: no illegality defence where manufacture of product infringed Canadian patent

30 October 2014

Les Laboratoires Servier v Apotex [2014] UKSC 55

In 2006 Servier was granted an interlocutory injunction against Apotex for infringement of a UK patent for a crystalline form of the perindopril erbumine compound, an ACE inhibitor used for treating hypertension and cardiac insufficiency. The injunction was obtained on Servier giving the usual undertaking to comply with any order the court might make if it should later find the injunction had been wrongly granted to compensate Apotex for loss it had suffered (commonly termed a 'cross-undertaking in damages').  At full trial the patent was held to be infringed but invalid, and the injunction was discharged.

Meanwhile in separate proceedings in Canada for infringement of the Canadian patent for the compound itself, the patent was held valid and infringed, and Servier was granted a final injunction. In the UK the patent on the compound itself expired in 2004, but the corresponding Canadian patent expires in 2018.

Apotex claimed compensation for the loss it suffered by the wrongful grant of the injunction in the UK (where the patent was invalid).  It was agreed that the damages under the cross-undertaking fell to be assessed on the basis that but for the injunction Apotex would have sold an additional 3.6 million packs of tablets. Notably the active ingredient would have been manufactured by Apotex in Canada for sale in the UK.

In the proceedings to assess Apotex's damages, two points were raised:

  • An 'illegality defence' – Servier argued it was against public policy for Apotex to recover damages for being prevented from selling a product whose manufacture in Canada would have been illegal as an infringement of the Canadian patent.  In other words Apotex's claim was founded on an immoral or illegal act.
  • The 'cost of manufacture' point – the damages for infringement to which Servier would be entitled in the Canadian proceedings should be deducted from Apotex's loss of profits so as to reduce or eliminate any loss under the cross-undertaking in the UK.  Apotex conceded this point.

At first instance Arnold J held that Apotex's claim was barred because it could not make good its claim for damages without affirming that it would have manufactured the product in Canada where it was illegal to do so. The Court of Appeal disagreed on the basis that the infringement of a foreign patent was not 'turpitude' for the purpose of the illegality defence. The five important factors in its decision were (1) Apotex honestly and reasonably believed the Canadian patent was invalid; (2) Servier should, as a matter of principle, have to pay when it was found not to be entitled to a monopoly; (3) the sale of tablets in the UK was not an infringement of the Canadian patent; (4) the Canadian court had refused an interlocutory injunction restraining manufacture of the active ingredient or tablets in Canada; (5) any public policy arising from the illegality of the manufacture and formulation of the product in Canada was sufficiently addressed by Apotex's concession that credit had to be given for the damages payable in the Canadian proceedings for infringements committed there.

The Supreme Court dismissed the appeal but noted that only the first of these factors (Apotex's honest belief in the invalidity of the Canadian patent) was an assessment of the moral culpability of Apotex's infringement. The others were subjective fact-based evaluations of the effect of applying them to an individual case. This approach was wrong because the illegality defence was a general rule of law based on public policy, not a discretionary process depending on balancing the merits between the parties to a particular dispute.

Lord Sumption held that 'turpitude' meant criminal acts or 'quasi-criminal acts' because only acts in these categories engage the public interest which underlies the illegality defence. Patent infringement, being a tort or civil wrong, offended against private interests rather than the public interest.

It followed that in this case the illegality defence did not apply. Although a patent is a public grant of the state, it did not follow that the public interest is engaged by infringement of a patentee's rights. The only relevant interest affected was that of the patentee and that was sufficiently vindicated by the availability for damages for the infringement in Canada which would be deducted from any recovery under Servier's undertaking in the UK. There was no public policy which could justify in addition the forfeiture of Apotex's right to be compensated.

Lord Toulson who agreed the appeal should be dismissed, noted that cross-undertakings are a standard and valuable feature of commercial litigation and there is a public interest in their enforceability in bona fide disputes.

Comment: The illegality defence would never have arisen if there had been no patent in Canada, where Servier successfully brought its infringement action. Nor would it have arisen if the manufacture had taken place in any other country where there was no patent. Interestingly Servier's brave attempt to avoid payment under the cross-undertaking in the UK succeeded at first instance but ultimately failed when the illegality defence was struck down by both the Court of Appeal and the Supreme Court.

The Supreme Court noted that there might at some later stage need to be a detailed re-analysis of the conflicting case law and in the light of the Law Commission's 2009 Consultative Report on the Illegality Defence. This had proposed a 'public conscience' test under which the illegality defence would call for a value judgment about the significance of the illegality and the injustice of barring the claim on account of it. In the present case, however, the outcome would have been the same, as the Court of Appeal using a more discretionary approach reached the same conclusion as the Supreme Court.

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