Full Court of the Federal Court of Australia dismisses Commonwealth appeal for compensation for delayed generic entry

What you need to know

• The Commonwealth has failed in its appeal against a first instance decision which rejected the Commonwealth's application for compensation from two originator pharmaceutical companies, Sanofi and Bristol-Myers Squibb (BMS).
• The Commonwealth was seeking compensation for higher prices paid under the Pharmaceutical Benefits Scheme (PBS) following the grant of a preliminary injunction which delayed generic entry for around two years, based on a patent that was later wholly revoked.
• The Full Court upheld the trial judge's finding that the evidence did not clearly establish that the generic would have launched and obtained PBS listing, had it not been restrained.
• The Commonwealth's position was made more difficult by the fact that the generic, Apotex, settled its claim against the originators on terms preventing waiver of privilege.
• The Full Court overturned the finding that, even if it were shown that the generic would have launched, the Commonwealth's losses were not directly caused by the injunction.  This removes what had been considered a significant barrier to the Commonwealth recovering its losses in similar cases.

What you need to do 

• This decision should be closely reviewed by pharmaceutical companies considering the Australian market.
• Originators / patentees should continue to actively monitor the market and new regulatory listings and seek injunctions early. Originators should also be mindful that their submissions made in support of the need for a preliminary injunction, may be used against them when a party seeks to claim under the usual undertaking (although in this case Sanofi was largely able to resile from its earlier submissions that a preliminary injunction was required to prevent Apotex's launch and PBS listing).
• Generics should be careful to document their decision making and launch activities to ensure they can demonstrate what would have happened, but for any subsequent preliminary injunction (including years later, or when decision makers are no longer available in person). 
• Generics should also be aware that, even after settling their own claims for damages under the usual undertaking, they may still be required (under subpoena or other documentary processes) to participate in any Commonwealth claim.  This should be factored in to relevant settlement agreements.

Background

In 2007, the Federal Court of Australia granted Sanofi and BMS' application for a preliminary injunction restraining the launch of Apotex's generic clopidogrel products in Australia on the basis that the sale of such products would have infringed Sanofi's (then granted) patent for the drug.  In this article, we will refer to the originators together as Sanofi.

At the time, Sanofi alleged that permitting such a launch would cause significant and possibly irreparable harm.  Among other things, Sanofi relied upon the fact that Apotex's launch would trigger an automatic reduction in the price paid by the Commonwealth for prescriptions under the Pharmaceutical Benefits Scheme (PBS).

As the price for the injunction, Sanofi provided the "usual undertaking as to damages" to the Court, undertaking to compensate "any person … adversely affected by" the grant of the injunction in the event that Sanofi was ultimately unsuccessful in defending the patent.  Relevantly, the injunction prohibited acts of exploitation of the patent (eg, making or selling products), but did not expressly prohibit applying for PBS listing (which is not an act of exploitation).  In the same orders, the Court noted that Apotex undertook not to seek PBS listing.

Ashurst represented Apotex.  Apotex ultimately succeeded in its revocation proceedings (Apotex Pty Ltd v Sanofi-Aventis [2009] FCAFC 134; (2009) 82 IPR 416) and Sanofi's patent was wholly revoked in October 2009.  The High Court refused Sanofi's application for special leave to appeal that decision in March 2010.

Apotex made a claim for compensation to recover the losses it suffered as a result of being kept off the market for over two years.  At the time, Plavix was one of the most valuable drugs prescribed in Australia with sales in the hundreds of millions of dollars per annum.  Apotex claimed substantial losses, but ultimately settled its claim with Sanofi.

In April 2013, the Commonwealth applied to recover its losses associated with the higher prices resulting from delayed generic entry.

This is the first such case to proceed to judgment.  The Commonwealth has made at least three other claims under undertakings in relation to PBS prices resulting from delayed generic entry.  The Commonwealth's claims against Wyeth (venlafaxine / Efexor XR) and AstraZeneca (rosuvastatin / Crestor) were settled.  The Commonwealth's claim against Otsuka and BMS (aripiprazole / Abilify) is ongoing and the Federal Court records (NSD121/2012) indicate the Commonwealth is currently seeking evidence via subpoena, including from the relevant generics.

First instance decision

Sanofi's position

Sanofi argued that Apotex would not have launched had the injunction not been granted.  In the alternative, Sanofi argued that, even if Apotex would have launched, among other things, the Commonwealth's losses (1) were not foreseeable, and/or (2) were caused by the Commonwealth itself, and/or (3) did not flow directly from the preliminary injunction.

Sanofi also argued that the Commonwealth did not have standing to claim under the usual undertaking.  This point was rejected separately by the Full Court in December 2015 ([2015] FCAFC 172), and special leave to appeal that decision was refused ([2016] HCASL 98).

Commonwealth position

The Commonwealth argued that, were it not for the injunction, Apotex would have listed on the PBS from 1 April 2008.  The Commonwealth argued that it suffered, as a result of the injunction, losses amounting to the difference between:

• (actual payments) the amounts the Commonwealth had paid under the PBS for clopidogrel products; and
• (counterfactual payments) the lesser amounts it would have paid, had Apotex obtained PBS listing on 1 April 2008 (triggering a statutory 12.5% price reduction and subsequent price reductions resulting from the price disclosure regime and competition in the market).

The total Commonwealth claim was for more than $325 million plus interest.

First instance judgment

The Commonwealth claim was heard in August and September 2017.  Justice Nicholas delivered the first instance judgment on 28 April 2020 (31 months later).  Justice Nicholas dismissed the Commonwealth's application and held, among other things, that:

• (directness issue) While the preliminary injunction did, in effect, stop Apotex from applying to list its products on the PBS, the preliminary injunction was not a direct cause of the Commonwealth's losses.  Instead, the Commonwealth's losses resulted from Apotex's failure to list on the PBS which was a direct result of Apotex's separate undertaking not to seek PBS listing, and therefore only an indirect result of the injunction.
• (evidentiary issues) The evidence did not establish that Apotex would have sought and obtained a PBS listing from 1 April 2008, were in not for the preliminary injunction.

Appeal

The Commonwealth appealed the first instance decision.  Sanofi filed a notice of contention seeking to uphold the first instance decision on alternate grounds.  The appeal was heard before Justices Besanko, Perram and Yates on 16-19, and 22-24 February 2021.  On 26 January 2023, the Full Court delivered a ~400 paragraph decision which, in short, found for the Commonwealth on the directness issue, but against the Commonwealth on the evidentiary issues.  As such, the Commonwealth's appeal was dismissed with costs.

Grounds of appeal

The Commonwealth's main grounds of appeal were to the directness issue and evidentiary issues.

1. Directness issue
   The Commonwealth argued that the primary judge erred in holding that the Commonwealth's losses did not flow directly from the injunction, and instead flowed from the undertaking offered by Apotex not to seek PBS listing (alongside the orders preventing acts of exploitation).
2. Evidentiary issues
   The Commonwealth argued that the primary judge:
   
   Ground 2(a) – applied the wrong standard of proof to the question of whether Apotex would have launched.
   
   Ground 2(b) – overlooked critical evidence and/or the Commonwealth's submissions about that evidence.
   
   Ground 2(c) – erred in drawing an adverse inference against the Commonwealth because it failed to call the then Apotex CEO and Chairman, Dr Barry Sherman, to give evidence.
   
   Ground 2(d) – as a result of the delay in delivering the first instance decision, had lost the usual advantage of a trial judge in assessing the evidence and credit of a witness.
   
   The parties raised a number of other arguments and grounds.  The Full Court declined to resolve those other points, given its findings on the evidentiary issues.

Key findings

Directness issue

The Full Court noted the practical and legal reality that an injunction preventing a generic from supplying a product would also prevent that generic obtaining PBS listing.  This is because an applicant for PBS listing must give an assurance of supply, and there are significant penalties for breaching the corresponding guarantee of supply which enlivens on PBS listing.

In light of this, the Full Court held that, if the Commonwealth could demonstrate that Apotex would have launched were it not for the preliminary injunction, the Commonwealth's losses would have been a direct result of the injunction and therefore compensable.

In particular, the Full Court noted that:

• (But for test) The Commonwealth's losses were caused by the preliminary injunction on a "but for" test of causation (if the Commonwealth could prove that Apotex would have launched).  The separate undertaking by Apotex not to seek PBS listing did not affect the outcome, because the Commonwealth's losses would have occurred whether or not Apotex gave that separate undertaking.
• (Causation and interposed steps) It is not necessary for the trial judge to identify a single direct cause of the harm.  The injunction may be a direct cause of the harm, even if there are interposed steps.  The requirement of directness may be one of both causation and remoteness, and it is difficult to divine a bright line between the concepts.
• The Court noted with approval Justice Jagot's findings in Sigma Pharmaceuticals (Australia) Pty Ltd v Wyeth [2018] FCA 1556; 136 IPR 8 that manufacturers or suppliers of the relevant generic medicine may be able to claim under the usual undertaking, at least for supply contracts in existence prior to the injunction.  This is notwithstanding that those losses can be described as "consequential", and that there are a number of events interposed between the injunction and the loss.
• (Scope of usual undertaking) The Court's role in assessing damages is to award compensation which is just and equitable, taking into account the justice to third parties who may be adversely affected by the arrangement in which they had no say.
• (Comments when seeking injunction) The Court noted that Sanofi had relied on harm arising from Apotex listing on the PBS system when seeking the preliminary injunction, and held that Apotex and Sanofi should have expressly raised the exclusion of PBS listing from the usual undertaking as to damages, if that was the intention behind Apotex providing a separate undertaking not to seek PBS listing.

Evidentiary issues

The Full Court upheld the trial judge's finding that the evidence did not clearly establish that Apotex would have launched, including seeking and obtaining PBS listing, were it not for the preliminary injunction.  Critically, the Full Court upheld the finding that (1) the key decision maker was the then Canadian based Apotex CEO and Chairman Dr Sherman, (2) the materials in evidence (primarily emails) did not prove that Dr Sherman had given final instructions to launch at risk, and (3) the trial judge could not infer from the materials in evidence what Dr Sherman would have decided, had the injunction not been granted and in light of changing facts at the time including the Court setting down a fast timetable for trial.

A number of key points emerge from the reasoning.

• (Standard of proof) The Full Court rejected the Commonwealth's argument that there is a standing inference that the conduct prohibited by an injunction would have occurred, unless this is disproven by the party who sought the injunction.  The Court also rejected the Commonwealth's argument that, in light of that inference, the claimant under the injunction need only establish a prima facie case of loss.  The Full Court noted that this principle is not required by any binding or persuasive authorities, and has not been applied by judges at first instance.
• Further, Sanofi had led evidence of what Apotex would have done were the injunction not granted.  The Full Court held that, even if the above principle applies, once both sides have led evidence on the question of whether the generic would launch, the onus remains with the claimant to prove that the generic would have launched were it not for the injunction.
• (Public statements) The Full Court considered Apotex's letters to customers and upheld the finding that the sentence "the decision whether to launch these products will be delayed until the outcome of [the interlocutory application]" was consistent with the fact that Apotex's decision to launch was still provisional.
• (Apotex emails) The Full Court considered in detail the Apotex evidence, including a significant number of emails, which the Commonwealth argued had not been considered by the first instance judge.  The Full Court held that these materials either had been considered, or were not material to the outcome.
• (Failure to call Dr Sherman) The Full Court upheld the first instance finding that the Commonwealth's case had an evidentiary gap that could only have been remedied by calling Dr Sherman, and the failure to do so allows a Jones v Dunkel inference to be drawn that the evidence of Dr Sherman would not assist the Commonwealth.  In particular, the Commonwealth did not offer a compelling explanation for why it did not seek to call Dr Sherman,  and the Commonwealth had been able to procure evidence from other Apotex employees.
• (Judicial delay) The Full Court accepted, in principle, the Commonwealth's arguments that the 31 month delay from first instance trial to decision meant: (1) the trial judge had no, or reduced, advantage over the appeal court in assessing the evidence and credit of witnesses, and (2) the fact the trial judge had not dealt with an item of evidence may lead to an inference that the evidence had been overlooked.  However, on the facts of this case, these matters did not change the outcome.

Key lessons

The Full Court's finding on directness improves the prospects for the Commonwealth to claim under the usual undertaking as to damages in future cases.  Ultimately, whether or not any claim under the usual undertaking will succeed will depend on the facts, and the ability of the claimant to prove the counterfactual.  In this case, the Commonwealth ultimately failed because of the incomplete evidence from the key decision maker of Apotex.

There are a number of key lessons:

• (Submissions while seeking PI) Parties should be particularly mindful when making submissions regarding a preliminary injunction that those submissions will be relevant to any claim for damages.  Notwithstanding this, Sanofi has largely been permitted to have its cake and eat it too.  That is, when seeking a preliminary injunction, Sanofi argued that the injunction was necessary to prevent harm including PBS listing by Apotex.  Yet when defending the Commonwealth's claim under the usual undertaking, Sanofi was able to resile from that position and rely on alternative factual arguments to submit that there was no real risk that Apotex would list on the PBS.  Justice Jagot was critical of Wyeth for this same contradiction in Sigma v Wyeth [2018] FCA 1556; (2018) 136 IPR 8.
• (Delay) While accepting that this was a test case and involved significant complexity, the delay in reaching an outcome is unsatisfactory and created unnecessary uncertainty for the broader industry.  The Commonwealth commenced its claim under the usual undertaking by interlocutory application dated 11 April 2013.  It took more than 10 years to ultimately receive a decision on appeal, also coming over 15 years after the grant of the original preliminary injunction.
• (Documentation is critical) Parties defending injunctions should document all key decisions made beforehand to ensure their intentions can later (possibly many years later and/or when the persons involved are unavailable) be the subject of strong evidence of what would have occurred.  If the deliberations within the generic as documented are open to alternative interpretations, that may be an obstacle to recovery (even if key decision makers are available to explain those records).
• (The bar for relief is high) It is an onerous threshold to prove that the relevant generic would have launched, were it not for the injunction.  This is for a number of reasons, including because the deliberations of decision makers take place in the real world where the likelihood of an injunction being granted is a relevant factor.  In particular, in reaching the decision that the evidence did not clearly show that Apotex would have launched at risk, the Court relied on:

the fact that the potential downside of launching at risk, being an obligation to compensate Sanofi for its likely losses, exceeded the potential upside, being Apotex's likely profit (notwithstanding that this will almost always be true, noting that the actual originator profits are made in the context of a monopoly and its associated higher prices, whereas the counterfactual generic profits are made in the context of competition and after compulsory market price reductions); and

emails within Apotex some of which suggested that a final decision to launch might only be made after the injunction was decided (notwithstanding that some of these emails were ambiguous and/or came from employees in peripheral roles), and showing that Dr Sherman wanted to avoid incurring unnecessary costs prior to that decision (which we may say are both eminently sensible commercial positions).

• (Impact of settlement) Sanofi's settlement with Apotex (concluded several years prior to the hearing of the Commonwealth's claim) may have assisted in defeating the Commonwealth's claim, by exacerbating the forensic difficulties in proving what Apotex would have done.  This is because Apotex was no longer prosecuting its own claim for damages and was required, by the terms of its settlement agreement, not to waive privilege.  The Full Court observed that many of the emails in evidence were redacted.  The relevant term of the settlement agreement is extracted in the first instance decision at [135], and was the subject of separate challenge in Commonwealth of Australia v Sanofi (formerly Sanofi-Aventis) [2017] FCA 382.
• (Form of PI orders) In light of the Full Court's decision, the fact that a preliminary injunction does not expressly refer to the PBS will not be an obstacle to the Commonwealth's claim, provided the practical effect of the orders prevents PBS listing.
• (International law not addressed) The present litigation has not provided any guidance on whether Commonwealth claims for compensation undermine Australia's international obligations regarding the protection of IP rights.  This was not argued by Sanofi in the present case, although the argument has been made by Otsuka and BMS in relation to the Commonwealth's ongoing claim regarding aripiprazole (Abilify), and was made by AstraZeneca in the now settled claim regarding rosuvastatin (Crestor).
• (Purpose of the usual undertaking) The difficulties faced by the Commonwealth illustrate how challenging, time consuming and costly claims based on counterfactual (hypothetical but for) scenarios are to establish.  It may be the case that the usual undertaking no longer serves its intended purpose (at least in pharmaceutical patent cases) because it fails to provide a reasonable measure of protection to any person that suffers as a result of (what was clearly established here to be) a wrongly granted injunction.  This is particularly so given that in such cases the claim of any affected third party will always be dependent on establishing that the generic that was restrained was going to go to market. 

What next?

The Commonwealth has 28 days from the Full Court's decision to make any application for special leave to appeal to the High Court of Australia.

The Commonwealth's claim for compensation against Otsuka and BMS (in relation to aripiprazole / Abilify) is ongoing.  We expect the Commonwealth will seek to put forward stronger evidence from the relevant generic and, in light of the Full Court decision, will likely be able to recover its losses if it can demonstrate that the generic would have launched.

In the 2022/23 Commonwealth Budget papers, the Commonwealth published a revised statement of its ongoing intention to fund such litigation, with some minor changes from the form of wording which has appeared in similar budgetary documents since at least 2018:

The Government will continue to litigate fund legal action to seeking compensation for losses incurred by the Government as a result of pharmaceutical companies taking action to delaying the listings of generic forms of medicines on the Pharmaceutical Benefits Scheme through undue legal actions.

We will continue to closely monitor this space.