A blog about patent, copyright and trademark law in the U.S. District Court
for the Southern District of New York

Court Awards Reasonable Royalty of 50% of Gross Margin in Patent Infringement Action

In a December 3, 2013 ruling, Judge Denise L. Cote entered a damages award in the last of a long-running series of patent infringement actions brought by Astrazeneca against generic drug manufacturers over the active ingredient in Astrazeneca’s brand-name drug Prilosec for heartburn.  Apotex Corporation, the largest generic drug manufacturer in Canada, was the remaining defendant.  The Court had previously found Apotex liable for infringement, and the December 3 ruling concerns only the assessment of a reasonable royalty as damages.  After a lengthy analysis, Judge Cote concluded that “the hypothetical licensing fee to which [the parties] would have agreed would have been at least 50% of the Apotex gross margin from its sales” of the infringing products, and ruled that Astrazeneca “is entitled to damages in the amount of $76,021,994.50 plus pre-judgment interest.”

In reaching that decision, the Court considered three threshold issues.  First, Judge Cote analyzed whether the royalty should be applied to the full value of the infringing product, or merely to the supposedly “minimal” value of the infringing component.  The Court noted that “[w]here a product, typically an electronic product, is composed of many different components, royalties for infringement are awarded ‘based not on the entire product, but instead on the smallest salable patent-practicing unit.’”  The Court further wrote, though, that under the “entire market value” rule, “a patentee may assess damages based on the market value of the entire product ‘where the patented feature creates the basis for customer demand or substantially creates the value of the component parts.’”  The Court rejected the notion that a rule developed for complex electronic products should be applied to generic pharmaceutical products.  The Court further ruled that even applying the entire market value rule, the patented component of the infringing generic drug did substantially create the value for the finished products.  So Judge Cote concluded that the royalty rate should be applied to the value of the generic pills sold by Apotex.

 Second, the Court determined that Apotex owed royalties for goods sold during the so-called six month “pediatric exclusivity period” that is available for drugs coming off patent where the FDA asks a “patent holder [to] perform pediatric studies of a drug.”  Apotex had argued that requiring the payment of royalties in this period would be an unlawful extension of the patent monopoly, and based its contention on Brulotte v. Thys, 379 U.S. 29 (1964).  Judge Cote held that Brulotte predates the statute establishing the “pediatric exclusivity period,” and “has been roundly criticized for years, and does not support” the “sweeping generalization” urged by Apotex.  Judge Cote concluded that it “is thus entirely proper for the damages calculation in this case to include payments made for Apotex’s right to sell” infringing product “during the pediatric exclusivity period.”

Third, the Court considered challenges to the standing of various Astrazeneca-related plaintiffs to assert patent infringement claims.  Judge Cote rejected the challenges to all but one of the plaintiffs, and more importantly concluded that in “a hypothetical negotiation, a patent owner can be expected to account for the profits its affiliates and licensees earn on its patents.”  Thus, the Court concluded that number or identity of the Astrazenca-related plaintiffs would make no difference to the amount of damages owed.
The general information and thoughts posted to this blog are provided only as an informational service to the web community and do not constitute solicitation or provision of legal advice. Nothing on this blog is intended to create an attorney-client relationship and nothing posted constitutes legal advice. You should understand that the posts by the author, who is an attorney at U.S. law firm Allegaert, Berger & Vogel, may or may not reflect the views of that firm and that the author of this blog is only authorized to practice law in the jurisdictions in which he is properly licensed to do so. For additional information, click here.