FEDERAL COURT OF AUSTRALIA

Otsuka Pharmaceutical Co., Ltd v Generic Health Pty Ltd [2015] FCA 848

THE COURT NOTES THAT:

1.    The appellants, by their solicitor, Philip John Kerr, undertake to the Court:

(a)    to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, adversely affected by the operation of interlocutory orders 1 or 2 below or any continuation (with or without variation) thereof:

(b)    to pay the compensation referred to in (a) to the person there referred to;

(c)    not apply to list any generic aripiprazole product on the Schedule of Pharmaceutical Benefits, or launch any such product, until the determination of this appeal or further order; and

(d)    not to authorise any other person to list any generic aripiprazole product on the Schedule of Pharmaceutical Benefits, or launch any such product, until the determination of this appeal or further order.

THE COURT ORDERS THAT:

1.    The operation of orders 1, 2, 4 and 7 made by Justice Yates on 16 July 2015 in Federal Court Proceeding No. NSD 121 of 2012 be stayed until the determination of these appeal proceedings or further order.

2.    By no later than 5pm on 16 September 2015, the respondent withdraw any application it has made to obtain listing under the Pharmaceutical Benefits Scheme maintained by the Commonwealth of Australia (“Commonwealth”) under the National Health Act 1953 (Cth) of any of the GH products (as that term is defined in the reasons for judgment delivered by Justice Yates on 29 June 2015 in Federal Court Proceeding No NSD 121 of 2012).

3.    The first appellant provide additional security in favour of the respondent for:

(a)    the appellants’ undertaking as to damages provided to Justice Yates on 22 March 2012;

(b)    the undertakings set out in paragraph 1(a) and 1(b) above; and

(c)    the respondent’s costs of the proceeding before Yates J and the appeal

in the amount of $8.7 million by no later than 14 September 2015, such security to be provided in the form of an unconditional and irrevocable bank guarantee issued by an Australian trading bank in favour of the respondent and served on the respondent no later than 14 September 2015.

4.    The first appellant provide security in favour of the Commonwealth for the undertakings set out in paragraph 1(a) and 1(b) above in the amount of $6.0 million by no later than 14 September 2015, such security to be provided in the form of an unconditional and irrevocable bank guarantee issued by an Australian trading bank in favour of the Commonwealth and served on the Commonwealth no later than 14 September 2015.

5.    Until further order, publication or disclosure of Confidential Annexures “MK-3”, “MK-4”, “MK-6” and “MK-8” to the affidavit of Masamitsu Kitada, affirmed on 17 July 2015 and filed in these appeal proceedings, is prohibited (the Court being satisfied that such order is necessary to prevent prejudice to the proper administration of justice).

6.    Until further order, publication or disclosure of Confidential Annexures “MRM-3”, “MRM-4”, “MRM-5” and “MRM-9” to the affidavit of Mohammed Raza Merchant, sworn on 30 July 2015 and filed in these appeal proceedings, is prohibited (the Court being satisfied that such order is necessary to prevent prejudice to the proper administration of justice).

7.    Each of the parties (which for this purpose includes the Commonwealth) has liberty to apply on 3 days’ notice in relation to these orders.

8.    Costs of the interlocutory applications be reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    In early 2012 the first appellant (“Otsuka”) and the second appellant (“BMS”) commenced a proceeding against the respondent (“Generic Health”) for threatened infringement of Patent No 2005201772 (“the 772 patent”). The 772 patent includes claims for a method of treatment and “Swiss-style” claims involving the use of a carbostyril compound having a defined standard formula or a pharmaceutically acceptable salt or solvent of such compound. Generic Health filed a cross-claim seeking to have the relevant claims of the 772 patent revoked. There was a trial of the proceeding in 2014 before Yates J. On 29 June 2015 his Honour published detailed reasons for judgment in which he held each of the relevant claims invalid for lack of novelty and lack of inventive step.

2    On 16 July 2015 his Honour made orders (inter alia) revoking the relevant claims and dismissing the appellant’s infringement claims. His Honour also made an order vacating an interlocutory injunction he granted on 22 March 2012 in favour of the appellants against Generic Health.

3    His Honour also granted a stay of the order revoking the relevant claims of the 772 patent and the order vacating the interlocutory injunction. However, the stay granted by his Honour was expressed to operate until such time as an application for a stay pending the determination of any appeal was determined.

4    The appellants have filed their appeal against the primary judge’s judgment including, in particular, his Honour’s decision to revoke the relevant claims of the 772 patent for lack of novelty and lack of inventive step. The appeal is expected to be listed for hearing in November this year.

5    The appellants now seek orders staying until the determination of their appeal the order revoking the relevant claims of the 772 patent and the order vacating the interlocutory injunction. Generic Health does not oppose a stay of the first of these proposed orders. However, it does oppose the making of any order staying his Honour’s order vacating the interlocutory injunction.

6    The Commonwealth of Australia was given leave to intervene for the limited purpose of being heard on the appellants’ application for a stay. The Commonwealth says that there should be no stay of the order vacating the interlocutory injunction unless the appellant provides to the Court an undertaking in a form that expressly permits recovery of compensation for any financial loss suffered by the Commonwealth in the event the appeal is unsuccessful subject to what it refers to as “just and equitable discretionary considerations”. It also says that the appellants should be required to provide security in favour of the Commonwealth for the amount of its estimated loss.

7    The interlocutory relief obtained by the appellants against Generic Health on 22 March 2012 included an interlocutory injunction restraining it, until further order, from selling, offering to sell, importing or keeping for such purposes certain pharmaceutical products (“the GH products”). The appellants provided to the Court an undertaking in the form usually given in such cases (“the usual undertaking”) whereby they undertook:

(a)    to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, adversely affected by the operation of the interlocutory order or undertaking or any continuation (with or without variation) thereof; and

(b)    to pay the compensation referred to in (a) to the person there referred to.

A number of consent orders were also made. One of these required the appellants to provide security for their usual undertaking in an initial amount of $6.5 million, with such security to be provided in the form of an unconditional and irrevocable bank guarantee issued by an Australian trading bank in favour of Generic Health.

8    There is affidavit evidence before me from Mr Masamitsu Kitada, the Managing Director of Otsuka Australia Pty Ltd (“Otsuka Australia”) and affidavit evidence from Mr Mohammed Merchant, the Chief Financial Officer of Generic Health. There is also affidavit evidence before me from the solicitor for the appellants and the solicitor for the Commonwealth.

9    Otsuka is the manufacturer of aripiprazole which is contained in pharmaceutical products sold by reference to the brand name Abilify. These products are sold in tablet form or injectable form. It was not in dispute at the trial that aripiprazole is a form of the carbostyril compound of the relevant claims.

10    Otsuka has an agreement with Lundbeck which commenced on 11 November 2011, pursuant to which Otsuka supplies to Lundbeck aripiprazole in the form of 400 mg/vial and 300 mg/vial of lyophilized powder for supply in Australia.

11    Under a worldwide agreement which commenced on 20 September 1999 and which was in place at the time Otsuka commenced its proceeding against Generic Health, Otsuka also granted to BMS a licence to sell pharmaceutical products containing aripiprazole in Australia. This licence terminated on 20 April 2015. Accordingly, since 21 April 2015, Otsuka Australia has been the sole supplier in Australia of Abilify in tablet form.

12    On 29 June 2015 Generic Health applied to list the GH products under the Pharmaceutical Benefits Scheme (“PBS”) as a medicament for the treatment of schizophrenia. Generic Health says that it expects that the GH products will be listed on the Schedule of Pharmaceutical Benefits (“PBS Schedule”) from 1 October 2015 unless the stay sought by Otsuka is granted.

13    Upon listing of the GH products on the PBS Schedule, there would be an immediate reduction in the approved price to pharmacists for the Abilify tablets of 16% and Abilify tablets would immediately be removed from the F1 to the F2 formulatory. It would also be open to other generic suppliers who have obtained ARTG registration of their own generic aripiprazole products to obtain a listing of such products on the PBS Schedule. This could in turn precipitate heavy price discounting as generic suppliers fight for a share of the market for aripiprazole products.

14    It is clear that the 16% reduction in the approved price to pharmacists would lead to a significant reduction in the prices that Otsuka Australia can sell the Abilify tablets and, consequently, the profits which Otsuka can make from the sale of Abilify tablets by Otsuka in Australia. Confidential profit calculations in evidence indicate that Otsuka’s loss of profit is likely to be very substantial. These calculations do not take account of the impact on Otsuka Australia’s pricing of other generic suppliers also entering the market.

15    There is a significant risk that, in the event that Otsuka’s appeal was to succeed, Otsuka would not be able to recover from Generic Health any loss of profit it suffered as a result of the GH products being listed on the PBS Schedule. Otsuka could only recover its loss of profits from Generic Health if it could show they were suffered as a result of infringement of the 772 patent by Generic Health. It would face significant difficulties in proving such a claim especially if other generic suppliers enter the market with their own generic aripiprazole products before the appeal is determined.

16    Mr Merchant says that the launch of the GH products on 1 October 2015, coinciding with the proposed PBS listing of these products, is of critical importance to Generic Health because it will enable Generic Health to obtain a first mover advantage. He says that a first mover advantage in the field of generic medicines is especially valuable because pharmacists are often reluctant to stock more than one generic brand of any pharmaceutical product. He says that while pharmacists are often willing to switch a patient from an originator product to a generic product, they are usually unwilling to make a second switch from one generic product to another generic product as this offers no advantage to the consumer and relatively little advantage to the pharmacist. Mr Merchant also says that the first mover advantage will give Generic Health the opportunity to cross-promote its other pharmaceutical products to pharmacists who are interested in the GH products.

17    In a confidential exhibit to Mr Merchant’s affidavit he provides a forecast of the market share for aripiprazole products that he believes Generic Health can obtain if it obtains the benefit of a first mover advantage. In another confidential exhibit he provides his estimate of other sales that Generic Health might also be expected to make with a first mover advantage.

18    Mr Merchant also refers to the difficulties which he says Generic Health will encounter when seeking to prove its loss if the stay sought by Otsuka is granted and the appeal is ultimately dismissed. He also refers to the possibility that Otsuka might itself introduce its own “authorised” generic product in a bid to maintain its market share.

19    Mr Merchant also expresses concern that other generic manufacturers will seek to have their own products listed on the PBS Schedule now that there has been a finding that the relevant claims of 772 patent are invalid. He says that if the stay sought by Otsuka is granted and other generic suppliers are allowed to enter the market, then Generic Health will have lost a significant opportunity. He also refers to the complex and time consuming nature of other proceedings in which Generic Health is making claims on undertakings given in patent infringement proceedings brought by other pharmaceutical companies that obtained interlocutory injunctions based on claims later held to be invalid.

20    A single Judge has power to make an interlocutory order pending the determination of an appeal: see s 25(2B)(ab) of the Federal Court of Australia Act 1976 (Cth) (“the FCA Act”). This power extends to granting a stay of an order the subject of such an appeal. Neither the FCA Act nor the Federal Court Rules 2011 (Cth) impose any express condition or limitation upon the exercise of what is a broad discretionary power. In particular, it is not necessary for the applicant for a stay to demonstrate the existence of “special circumstances”.

21    The test that is usually applied in this Court was explained in the Full Court’s judgment in Powerflex Services Pty Ltd v Data Access Corp (1996) 67 FCR 65 (Burchett, Heerey and Whitlam JJ). In that case Burchett J (delivering the reasons of the Court) referred to O 52 r 17 of the Federal Court Rules 1979 (Cth) and said (at p 66):

The language of that rule suggests no limitation upon a broad discretion inhering in the Court. Several judges of the Court, most recently Heerey J in Henderson v Amadio Pty Ltd (No 3) (1996) 65 FCR 66 have followed the decision of the Court of Appeal of New South Wales in Alexander v Cambridge Credit Corporation Ltd (Receivers Appointed) (1985) 2 NSWLR 685, where, at 694, that Court said it was “sufficient that the applicant for the stay demonstrates a reason or an appropriate case to warrant the exercise of discretion in his favour”. The Court of Appeal also referred with approval to a statement of Mahoney JA in Re Middle Harbour Investments Ltd (In liq) (unreported, Court of Appeal, NSW, 15 December 1976) where, with the concurrence of the other members of the Court, Mahoney JA said:

“Where an application is made for a stay of proceedings, it is necessary that the applicant demonstrate an appropriate case. Prima facie, a successful party is entitled to the benefit of the judgment obtained by him and is entitled to commence with the presumption that the judgment is correct. These are not matters of rigid principle and a court asked to grant a stay will consider each case upon its merits, but where an applicant for a stay has not demonstrated an appropriate case but has left the situation in the state of speculation or of mere argument, weight must be given to the fact that the judgment below has been in favour of the other party.”

Notwithstanding that in the Supreme Court of Victoria a more stringent test has generally been applied (see Cellante v G Kallis Industries Pty Ltd [1991] 2 VR 653; Lagama Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150), we think we should follow the decision in Alexander v Cambridge Credit. “Special” circumstances do not have to be shown.

22    The appellants contend that the primary judge misconstrued the relevant claims of the 772 patent and that this error affected his Honour’s findings in relation to the validity of those claims. In particular, they contend that the primary judge disregarded certain words (“associated with [the] 5-HT_1A receptor subtype”) appearing in each of the relevant claims notwithstanding that they described an essential feature of the invention as claimed.

23    The main issue in the appeal seems to be whether the words the appellants say the primary judge disregarded are words that add anything of significance to what the skilled addressee would in any event understand the claim to mean. The appellants say that on his Honour’s construction of the relevant claims, language used to describe an essential integer is treated as redundant, and that this reflects an approach to claim construction that one would not usually adopt unless driven to do so.

24    On the other hand, the respondent says that his Honour was correct to treat the words he is said to have disregarded not as if they defined a separate and additional integer, but as words that merely provide additional information about an essential integer otherwise defined by the claim. There is a considerable amount of scientific evidence relevant to the interpretation of the claims including, in particular, the significance of the words which his Honour is said to have disregarded.

25    There is also an issue as to whether his Honour’s interpretation of the relevant claims affected his Honour’s conclusions in relation to validity and, in particular, inventive step. The appellants say that his Honour’s findings of obviousness based upon the two crucial publications (Serper and Saha) depend upon which interpretation of the relevant claims is adopted.

26    I accept that the appeal is arguable although I would not express my view on the strength of the appellants appeal any higher than that. This is not a case in which I think it necessary or desirable to explore the strength of the appellants’ appeal in any detail.

27    Leaving aside for the moment the considerations peculiar to the Commonwealth’s role as the funder of the PBS, the question of whether or not there should be a stay in this case is to be decided by reference to the balance of convenience and my assessment of the strength of the appeal.

28    I am mindful that Generic Health was successful at trial and that is certainly a factor that weighs in its favour on this application. On the other hand, the interlocutory injunction has been in place since early 2012. If the appeal is heard in November 2015 then a judgment can be expected sometime in the first half of 2016.

29    I would expect Generic Health to make a claim on the usual undertaking in the event that the appeal is unsuccessful even if the stay is refused. If I am right about that, the refusal of a stay is not likely to obviate the need for Generic Health to prove what sales and profits it lost as a result of being restrained from March 2012 until August 2015. I accept that it may be difficult for Generic Health to prove such loss with any precision. However, as I pointed out in a recent case in which a similar issue arose, the Court is often required to assess damages in circumstances where, through no fault on the part of the claimant, such difficulties exist: Seven Network (Operations) Limited v Endemol Australia Pty Limited [2015] FCA 800 at [40].

30    Otsuka is likely to suffer substantial losses if a stay is refused and it succeeds in its appeal. Even assuming that Generic Health would be found liable for such losses, there is a real doubt as to whether it could satisfy a judgment for such an amount.

31    I am satisfied that, as between Otsuka and Generic Health, the balance of convenience favours the grant of a stay subject to Otsuka providing further security in the agreed amount of $8.7 million and an undertaking that will ensure that the appellants do not apply for or authorise anyone else to apply for any other PBS listing for a generic aripiprazole product.

32    I have considered the possibility raised in Mr Merchant’s evidence that other suppliers of generic pharmaceutical products who are not restrained by the existing interlocutory injunction with seek to have their own aripiprazole tablets listed on the PBS Schedule.

33    Although there are a number of other suppliers which have already had aripiprazole tablets listed on the ARTG, there is no evidence to suggest that they have applied for listing of such products on the PBS Schedule. Further, it is reasonable to infer from Mr Kitada’s evidence that Otsuka would, if necessary, move for interlocutory relief against other generic suppliers if any of them attempted to do what Generic Health is itself prevented from doing.

34    Generic Health submitted that any application for an interlocutory injunction against other suppliers would most likely fail given the decision of Yates J in this case. I do not accept that submission. The merits of any such interlocutory application would need to be assessed against the background of the appeal and the stay. Having said that, it is unlikely that Otsuka could hold the stay of the order vacating the interlocutory injunction if it failed to stop any other generic supplier obtaining a listing of its aripiprazole products on the PBS Schedule.

35    The Commonwealth also has a substantial financial interest in the outcome of this application. If the GH products are listed on the PBS Schedule with effect from 1 October 2015 then the price paid by the Commonwealth for aripiprazole products will be significantly reduced. The Commonwealth has estimated that if the GH products are listed on the PBS Schedule, its funding costs under the PBS will be reduced by approximately $6.0 million in the next 12 months and $15.0 million in the next 18 months.

36    The Commonwealth has raised two matters relevant to the present application.

37    First, it has raised a concern that, in the event that the stay is granted, and the appeal is dismissed, Otsuka might seek to argue that the Commonwealth is not entitled to recover its loss on the usual undertaking as to damages which it gave to Yates J on 22 March 2012.

38    Various arguments have been advanced in other proceedings that are yet to be determined as to why the Commonwealth might not be entitled to recover compensation on the usual undertaking in a case where a patentee has obtained an interlocutory injunction that prevented a generic supplier of pharmaceutical products obtaining a listing on the PBS Schedule on the strength of patent claims that were later held invalid.

39    A Full Court is presently reserved on a case stated pursuant to s 25(6) of the FCA Act in which it has been argued by the patentees that the Commonwealth is precluded, as a matter of law, from recovering compensation in such circumstances due to the operation of various provisions in Ch 3, Pt 3-2, Div 2 of the Therapeutic Goods Act 1989 (Cth). The point taken by the patentees in the proceedings in the Full Court is either right or wrong. If it is right, then it is difficult to see how the operation of the relevant provisions can be avoided by requiring a patentee to provide an undertaking in some more specific form in favour of the Commonwealth.

40    Another argument that has been raised by patentees in other proceedings involving claims by the Commonwealth on the usual undertaking is that the Commonwealth is not “a person” within the meaning of the usual undertaking. In my opinion, it is not seriously arguable that those words, as used in the context of the usual undertaking as to damages, do not encompass a body politic such as the Commonwealth of Australia. In this case, however, the appellants have explicitly accepted in their submissions that the Commonwealth is “a person” within the meaning of the usual undertaking as to damages.

41    In the circumstances, I do not think it appropriate to require the appellants to provide any further undertaking that refers to the Commonwealth specifically. In my view, the Commonwealth is adequately protected by the undertaking which the appellants provided to Yates J on 22 March 2012 and the further undertakings now proffered.

42    Since the appellants have offered further undertakings to the Court in connection with their application for a stay of (inter alia) Yates J’s order vacating the interlocutory injunction, I propose to accept them but in doing so I should make clear that they supplement, rather than replace, the usual undertakings provided to his Honour on 22 March 2012, which remain in full force and effect.

43    Otsuka made a number of submissions in relation to the Commonwealth’s application for security. Otsuka submitted that security should not be ordered in favour of the Commonwealth in circumstances where it is not a party to either the proceeding before Yates J or the appeal proceeding, and where the interlocutory injunction granted by his Honour does not purport to restrain the Commonwealth.

44    I was not referred to any authority in which an applicant for an interlocutory injunction (or an applicant for a stay of an order vacating an interlocutory injunction) was required to provide security on the usual undertaking to a person other than a respondent the subject of the relevant restraint.

45    The fact that the person seeking security is not a party to the relevant proceeding, or bound by the relevant restraint, may well suggest that it is not likely to be adversely affected by the order, at least not in any direct or foreseeable way. However, this could not be true of the Commonwealth in the circumstances of the present case. The loss it will suffer if a stay is granted and the appeal is later dismissed seems to me to be both direct and foreseeable.

46    It was submitted by Otsuka that it will in due course argue that any loss suffered by the Commonwealth is caused by the operation of the relevant statutory provisions creating and regulating the PBS rather than the interlocutory injunction or the stay. It is not necessary to say very much about this argument on this application except to observe that, merely because the relevant pharmaceutical products are supplied and paid for in accordance with the Commonwealth’s own statutory scheme (i.e. the PBS), it does not follow that the true cause of the Commonwealth’s loss will be anything other than the existence of the interlocutory injunction and the stay of the order vacating it.

47    Otsuka did not directly challenge the reasonableness of the Commonwealth’s estimated losses. When compared to the losses that Otsuka says it is likely to suffer in the event that a stay is refused, the Commonwealth’s estimate is not unreasonable. In the circumstances, I am satisfied that Otsuka should be required to provide security in an appropriate form in the favour of the Commonwealth in the amount of $6.0 million. If it happens that the appeal is not determined by the end of the first half of next year, the Commonwealth can make a further application to “top up” the security.

Associate:

Dated:    17 August 2015