FRANK W. HORNER LTD. v. HOFFMANN-LA ROCHE LTD.
61 C.P.R. 243
Commissioner of Patents
January 20, 1970
Patents Compulsory licence Medicinal claims to a composition of matter Patent Act s. 41(4) as amended in 1969 Application for licence to import Principle to be followed by the Commissioner of Patents Absence of good reasons to the contrary Policy of statute to create effective competition Applicant not obliged to make all of the invention Terms of licence. [page244]
Patents Royalty in compulsory licence cases Amendment effecting no basic change in the law Royalty rate based on sale price of medicine in dosage form Royalty to be such as to maintain research incentive and reflect importance of medicine Royalty commensurate with sale of medicine at lowest possible price Capital for research not an element.
The respondent owned four patents in Canada applicable to the medicinal substance known generically as Diazepam. Two of the patents related to production of Diazepam and two of the patents related to an intermediate used in its preparation. The patents contained claims to processes as well as to certain compositions of matter.
The applicant sought a compulsory licence under s. 41(4) of the Patent Act, R.S.C. 1952, c. 203. In respect of the processes, the request was to import medicine in the preparation of which the inventions had been used. In respect of the compositions of matter the request was to import such inventions for the preparation of medicine.
Held, the application for a non-exclusive licence is granted as requested.
Food & Drug Directorate
There is no indication that the Food & Drug Directorate of the Department of National Health and Welfare objects to the granting of the licence.
Section 41(4) of the Patent Act enables the Commissioner of Patents to grant a licence to import medicines. The basic issue for the Commissioner under the section is whether or not the grant of a licence will result in the provision of effective competition by the applicant with the patentee.
Licences under s. 41(4) amount almost to licences of right. The grant of a licence is mandatory, unless the Commissioner sees good reason not to grant the licence.
The patentee has failed to show good reason for the refusal of the licence. It is not necessary for an applicant to intend to sell all applicable physical forms of the medicine. It is not a condition to the grant of a licence that the applicant submit its cost structure or indicate to the Commissioner its profit.
The changes in the legislation relating to royalty have not been changes in substance.
The law in Canada differs from that applicable in England under the corresponding section of the Patent Act. The Canadian law does not give the patentee any guarantee that it shall derive a reasonable advantage from its patent rights.
In Canada the Commissioner must have regard to the desirability of making medicine available to the public at the lowest possible price consistent with giving the patentee due reward for the research leading to the invention. The Commissioner is not required to take into consideration such elements as the cost of obtaining and maintaining medical acceptance of the drug or a return on the capital employed in research and promotion.
The royalty should take into account that it should be commensurate with an amount that will maintain research incentive and will reflect the importance of the medicine. [page245]
The duty of the Commissioner is to fix a royalty in accordance with the provisions of the section. Voluntary licences in respect of the same subject-matter are irrelevant.
The royalty is fixed at 4% of the net selling price of the medicine by the applicant in its final dosage form as sold to purchasers at arm's length.
The request of the patentee that the licence contain a restriction to require the applicant to sell Diazepam under its generic name is rejected.
The licence should include a term whereby the Commissioner will retain jurisdiction to deal with the matter of royalty pursuant to any such other factors as may be prescribed following the report of the Economic Council of Canada in respect of its study on patents.
Deferment of the Grant
Since the jurisdiction of the Commissioner of Patents is being challenged in another proceeding in Court, the issuance of a licence shall be deferred until such jurisdiction is no longer in dispute.
[Parke, Davis & Co. v. Fine Chemicals Ltd., 30 C.P.R. 59, 17  S.C.R. 219, 18 Fox Pat. C. 125, apld; Aktiebolaget Astra, Apotekarnes Kemiska Fabriker v. Novocol Chemical Mfg. Co. of Canada Ltd., 44 C.P.R. 15, 45 D.L.R. (2d) 662,v  Ex. C.R. 955, 27 Fox Pat. C. 156; Hoffmann-La Roche Limited v. L. D. Craig Ltd., Bell-Craig Pharmaceuticals Division, 46 C.P.R. 32,  2 Ex.C.R. 266, 29 Fox Pat. C. 123; vard 48 C.P.R. 137, 56 D.L.R. (2d) 97,  S.C.R. 313, 32 Fox Pat. C. 106; Hoffmann-La Roche Ltd. v. Delmar Chemicals Ltd., 43 C.P.R. 93,46 D.L.R. (2d) 140,  1 Ex. C.R. 611, 27 Fox Pat. C. 178, consd; J. R. Geigy S.A.'s Patent,  R.P.C. 391; D.D.S.A. Pharmaceuticals Limited v. F. Hoffmann-La Roche Company Limited -- A.G. (1969), R.P.C. 504; Sherman & Ulster Limited v. Merck & Co. Inc. (1970), 61 C.P.R. 264; The King v. Irving Air Chute Co. Inc., 10 C.P.R. 1,  S.C.R. 613, 9 Fox Pat. C. 10, refd to]
EDITORIAL NOTE: The present decision is one that will give precious little comfort to the owners of pharmaceutical patents in Canada. The amendment to s. 41(3) of the Patent Act, R.S.C. 1952, c. 203, has not worked any benefit to patentees, but has opened up the patent to licences to import.
The decision is of considerable interest as the Commissioner has clearly defined the considerations and principles that will guide him under the new legislation and applicable regulations in respect of the grant of a licence and the determination of royalty.
It will be noted that the absence of a reply from the Food & Drug Directorate to a request for information on the applicant is treated as an approval of the applicant. A licence is regarded as almost a licence of right. The royalty will be such that the patentee has no guarantee that he will receive a reasonable advantage from his Canadian patent.
Since the absence of a communication from the Food & Drug Directorate is considered as an approval of the applicant, there is a danger that the public interest in the safety of the drug will go by default in any consideration as to whether a licence should be [page246] granted. The Commissioner of Patents has made it known during hearings on applications of this kind that it is not the responsibility of the Commissioner to ensure that drugs are safe. This function is the province of the Food & Drug Directorate. The absence of a reply to the Commissioner by that Directorate is consistent with the fact that the facilities and processes of the foreign supplier of the drug have not yet been inspected.
The existence of good reason to the contrary is still a ground for the refusal of a licence. The onus is still upon the patentee to establish its existence. It is for the Commissioner to see whether such ground subsists. To see predicates that one must look. On the multitude of decisions on the point patentees may be pardoned if they indicate some difficulty in finding a difficulty in attempting to guide the Commissioner in the direction in which he should look.
The decision is also of interest in respect of royalty. The price and profit of an applicant is not considered to be a relevant factor in determining whether the applicant will provide effective competition. The cost of capital employed in research is not considered a relevant factor in the maintenance of research incentive and voluntary licences are not relevant to a determination of the royalty under the provisions of the section. The research ratio as defined in the decision was cut back from that shown in the evidence. In this circumstance, the award of the Commissioner is somewhat in the nature of a jury award made on a consideration of factors that will inevitably make it less than that which would likely be negotiated between the parties.
That it is not necessary for an applicant to supply all dosage forms, see also Hoffmann-La Roche & Co. A.G.'s Patent,  R.P.C. 504 at p. 519.
APPLICATION for a compulsory licence under s. 41(4) of the Patent Act.
D. S. Johnson, Q.C., for applicant.
R. Graham McClenahan, and David E. Clarke, for opponent.
A. M. LAIDLAW, COM'R PAT.:-- This is an application for a compulsory licence under s. 41(4) of the Patent Act, R.S.C. 1952, c. 203, brought by Frank W. Horner Limited of Montreal, Province of Quebec, to use the inventions for which the following Canadian patents were issued to Hoffmann-La Roche Limited of Montreal, Province of Quebec:
Canadian Patent No. 647,701 'Process for the Manufacture of 1, 4-Benzo-Diazepine Derivatives' issued August 28, 1962; Canadian Patent No. 647,702 'Process for the Manufacture of 1, 4-Benzo-Diazepine Derivatives' issued August 28, 1962; Canadian Patent No. 671,044 'Process for the Manufacture of Quinazoline 3-Oxides' issued September 24, 1963; and Canadian Patent No. 725,187 'Process for the Manufacture of 1, 4-Benzo-Diazepine Derivatives' issued January 4, 1966. [page247]
With respect to those patents that are for an invention that is a process, the applicant has applied for a licence to import medicine in the preparation or production of which the invention has been used and to sell such medicine; and with respect to any of those patents that are for an invention other than a process, in particular patent 647,702, the applicant has applied for a licence to import such invention for the preparation or production of medicine.
Substances produced by patents 647,701 and 647,702 are known generically as Diazepam and substances produced by patents 671,044 and 725,187 are intermediates used in the production of Diazepam.
This is the first application under s. 41(4) of the Patent Act with which I have had to deal and which comes within the Regulations enacted by Order in Council P.C. 1969-1318, SOR/ 69-331, dated June 27, 1969. Both Frank W. Horner Ltd. (hereinafter referred to as the applicant) and Hoffmann-La Roche Ltd. (hereinafter referred to as the opponent) have complied with the regulations. Also in accordance with the regulations the Department of National Health and Welfare was notified immediately regarding the application filed by the applicant, the counterstatement filed by the opponent and the subsequent reply thereto filed by the applicant. There is no indication that the Food and Drug Directorate of the Department of National Health and Welfare objects to the granting of a licence to the applicant.
In view of the fact that this is the first application to be dealt with out of a substantial number filed as a result of the new legislation, I find it convenient to set out the law as it existed prior to the amendment of June 27, 1969 (1968-69 (Can.), c. 49) and the changes made by the new legislation; and also to set out the basic principles by which I consider myself bound through various Court decisions.
Section 41(3) (prior to the amendment of June 27, 1969) reads as follows:
41(3) In the case of any patent for an invention intended for or capable of being used for the preparation or production of food or medicine, the Commissioner shall, unless he sees good reason to the contrary, grant to any person applying for the same, a licence limited to the use of the invention for the purposes of the preparation or production of food or medicine but not otherwise; and, in settling the terms of such licence and fixing the amount of royalty or other con- [page248] sideration payable the Commissioner shall have regard to the desirability of making the food or medicine available to the public at the lowest possible price consistent with giving to the inventor due reward for the research loading to the invention.
Section 41(4) (enacted 1968-69, c. 49, s. 1) which now replaces [in part] the former s. 41(3) reads as follows:
(4) Where, in the case of any patent for an invention intended or capable of being used for medicine or for the preparation or production of medicine, an application is made by any person for a licence to do one or more of the following things as specified in the application, namely:
where the invention is a process, to use the invention for the preparation or production of medicine, import any medicine in the preparation or production of which the invention has been used or sell any medicine in the preparation or production of which the invention has been used, or
where the invention is other than a process, to import, make, use or sell the invention for medicine or for the preparation or production of medicine,
the Commissioner shall grant to the applicant a licence to do the things specified in the application except such, if any, of those things in respect of which he sees good reason not to grant such a licence; and, in settling the terms of the licence and fixing the amount of royalty or other consideration payable, the Commissioner shall have regard to the desirability of making the medicine available to the public at the lowest possible price consistent with giving to the patentee due reward for the research loading to the invention and for such other factors as may be prescribed.
The basic change to s. 41 was to enable the Commissioner of Patents to issue compulsory licences for the importation of medicines produced by patented processes or substances produced by patented processes used in the preparation or production of medicines, whereas prior to the new enactment the Commissioner had authority only to issue to applicants compulsory licences to manufacture under the patent affected, although there are those who consider that the new enactment merely now makes specific what the Commissioner of Patents already had the authority to do. In any event the authority now is expressly stated. [page249]
Apart from this basic change the new wording of the statute regarding the direction to the Commissioner of Patents, i.e., in the fixing of the royalty and settling the terms of the licence, relates to three items:
The words "food or" were omitted so that the new s-s. (4) deals only with patented drugs or medicines;
The word "patentee" was substituted for the word "inventor"; and
The words "and for such other factors as may be prescribed" were added.
In my view, and in spite of the amendments, the direction to the Commissioner of Patents relating to the fixing of the royalty or other consideration and in settling the terms of the licence has not in fact fundamentally been changed; and hence the principles determined by the Courts in the interpretation of the former s. 41(3) still remain applicable. I shall deal with my reasons for this opinion and the amendments set out in (b) and (c) above later in this decision.
First, it is clear that s. 41(4) of the Patent Act is mandatory in that the Commissioner of Patents
shall grant to the applicant a licence to do the things specified in the application except such, if any, of those things in respect of which he sees good reason not to grant such a licence.
(Italics mine) In Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., 30 C.P.R. 59 at p. 67, 17 D.L.R. (2d) 153,  S.C.R. 219 speaking of the Commissioner's role in determining whether a licence under s. 41(3), now s. 41(4), should be granted, Martland, J., stated that "The decision is his to make". (Italics mine)
The policy underlining the section before the amending legislation was stated succinctly by Rand, J., in Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., supra, at p. 62, namely, that new medicines prepared from patented processes "are, in the public interest, to be free from legalized monopoly". This principle was followed by Jackett, P., in Aktiebolaget Astra, Apotekarnes Kemiska Fabriker v. Novocol Chemical Mfg. Co. of Canada Ltd., 44 C.P.R. 15, 45 D.L.R. (2d) 662,  Ex. C.R. 955, and again by Thurlow, J., in Hoffmann-La Roche Ltd. v. Delmar Chemicals Ltd., 43 C.P.R. 93, 46 D.L.R. (2d) 140,  Ex. C.R. 611. Thurlow, J., after referring to the statement by Rand, J., in Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., supra, even went further (at pp. 97-8).
I would carry the matter a stage further and say that the subsection also aims at freeing the new process from the [page250] absolute control of the patentee by denying him both the exclusive right to refuse licences and thus to prevent the use of the process by others ... and the right to dictate the terms of a licence.
It is also well settled that the principal purpose of former s. 41(3) was to bring about competition, and the change in the section only makes abundantly clear the express authority of the Commissioner of Patents to issue compulsory licences to applicants wishing to import medicinal substances manufactured under patented processes or substances produced by patented processes used in the preparation or production of medicine. Jackett, P., in Hoffmann-La Roche Ltd. v. L. D. Craig Ltd., Bell-Craig Pharmaceuticals Division, 46 C.P.R. 32,  2 Ex. C.R. 266, 29 Fox Pat. C. 123, in referring to the meaning behind s. 41(3), now 41(4) said at p. 50:
In my view, the objective of the provision is to bring about competition. On balance, in most fields, competition is regarded by Parliament as being in the public interest ... and also because competition tends to bring about greater efficiency, better service, and further research. The monopoly granted to an inventor is an exception to this general principle in our law. Section 41(3) was passed because, in the field to which it applies, 'the specific public interest in free competition' was deemed to be more important than the maintenance of the patentee's monopoly rights:
On appeal to the Supreme Court of Canada, 48 C.P.R. 137, 56 D.L.R. (2d) 97,  S.C.R. 313, the purpose of the sub-section was settled beyond dispute, where Abbott, J., at p. 144 delivered the judgment of the Court:
In my view the purpose of s. 41(3) is clear. Shortly stated it is this. No absolute monopoly can be obtained in a process for the production of food or medicine. On the contrary, Parliament intended that, in the public interest, there should be competition in the production and marketing of such products produced by a patented process, in order that as the section states, they may
be available to the public at the lowest possible price consistent with giving to the inventor due reward for the research leading to the invention.
Parliament, therefore, has deliberately provided a restriction of the rights of a patentee "in the case of any patent for an [page251] invention intended or capable of being used for medicine or for the preparation or production of medicine" and it has entrusted to the Commissioner of Patents the duty of carrying into effect the legislative policy underlying the section, namely, that of restricting the patentee's legalized monopoly and has directed him to grant a licence to any applicant to do the things specified in the application except those things, if any, in respect of which the Commissioner sees good reason not to grant such a licence.
As suggested earlier and to be explained later, these principles apply equally to the new s. 41(4).
A basic issue before the Commissioner of Patents in any application for a compulsory licence under s. 41(4) of the Patent Act is, then, as to whether or not the grant of that licence will result in the provision of effective competition by the applicant with the patentee so that the patentee's former legal monopoly is made available to the public at the "lowest possible price" within the meaning of the subsection.
One other point of principle. It is also well settled that the Commissioner's decision to grant a licence under the sub-section must not depend on whether or not the patentee's prices for its product are reasonable. Jackett, P., in Hoffmann-La Roche v. Bell-Craig, supra, stated at p. 50:
there is no duty imposed upon the Commissioner by s. 41(3) of the Patent Act, when he is considering whether there is 'good reason' to reject an application for compulsory licence, to conduct an investigation as to whether the prices at which the patentee has been selling the patented product are in fact 'reasonable'.
In short, compulsory licences applied for under s. 41 of the Patent Act leave little discretion to the Commissioner of Patents. These licences, in fact, amount almost to licences of right. What the Commissioner of Patents is required to do is mandatory unless he sees good reason not to grant the licence applied for.
So much for the basic principles which must guide the Commissioner as to whether or not a licence should be granted.
I turn now to the case before me. The application for the licence is dated July 9, 1969. The counterstatement filed by the opponent is dated September 26, 1969. The reply to the counterstatement filed by the applicant is dated October 27, 1969. All three documents with their supporting affidavits and exhibits, together with other material later filed by the opponent, have [page252] been carefully considered. In an endeavour to show good reason why the application ought to be refused the opponent presented a number of arguments which may be set out briefly as follows:
the applicant failed to comply with the rules relating to its price structure;
the cost to the applicant of obtaining Food and Drug Directorate approval is insignificant both in actual amount and in relation to its high expectations of sales at its proposed prices;
the applicant failed to comply with the rules in that it did not indicate what profit is contained in its proposed sale prices;
the applicant, having failed to comply with the price structure requirements, prevents the Commissioner from determining the "lowest possible price" to which, under the statute, the Commissioner "shall have regard";
the applicant's prices are not calculated by reference to costs;
the applicant's prices, in view of the fact that it will not have to incur the cost of maintaining medical information, when considered realistically, are not actually lower than the opponent's prices;
the applicant's failure to comply with price structure requirements might prevent an inquiry as to whether or not the applicant intended to sell below cost merely to harass the patentee;
the applicant did not furnish prices at which it would sell each form of the product to each class of customer;
the applicant should not be permitted a compulsory licence when it only intends to sell the less costly dosage forms of Diazepam leaving the less profitable part of the patentee's patent for the opponent to supply to the public.
Briefly stated I find that these arguments are irrelevant to the issue before me. For example, the fact that the applicant might not or does not intend to sell Diazepam in the parenteral form would not, in my view, be a good reason for not granting the licence for which the applicant has applied. With respect to the allegation that the applicant has failed to comply with the price structure requirements under the rules, I am satisfied that the application sets out in sufficient terms its proposed price structure, the class of customers to whom Diazepam will [page253] be sold and the prices at which the drug will be sold to such customers. It is also not a condition to the grant of a licence in my opinion that the applicant submit its cost structure or indicate its profits. With respect to other arguments raised by the opponent I see even less relevancy. As I understand the general principles underlying s. 41(4) of the Patent Act as outlined above, the basic issue before me is whether the granting of the licence applied for will result in the provision of effective competition with the opponent thereby accomplishing the desirable result of reduced prices for Diazepam in its final dosage form, thereby enabling the legislative policy expressed in this section to be carried into effect.
In the circumstances, therefore, I see no good reason why this licence should not be granted and accordingly I grant a non-exclusive licence to the applicant to use the inventions claimed in the above identified Canadian patents and to do those things specified in the application, and such licence is not confined to use of the inventions solely in Canada.
My decision to grant this licence is based solely on the material filed by the applicant and the opponent. However, as this application was the first to be dealt with under the new amendment to s. 41, and as I felt both parties should be given maximum opportunity to be heard with respect to royalty and other terms that would form the basis of such a licence, I granted a hearing which was held on December 5, 1969. That to hold a hearing is advisable, refer to Aktiebolaget Astra, Apotekarnes Kemiska Fabriker v. Novocol Chemical Mfg. Co. of Canada Ltd., supra, where Jackett, P., at p. 25 said,
the Commissioner might consider, in future cases under s-s. (3) of s. 41, after he decides that the case is one for a licence, to afford the parties an opportunity of presenting evidence on the question of 'royalty or other consideration' before deciding that question. See Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., supra, per Rand, J., at p. 63 C.P.R., p. 156 D.L.R., p. 223 S.C.R.
As a result of the hearing certain other pertinent material and arguments were furnished, all of which I have considered.
Earlier I expressed the view that the amendment to s. 41, in so far as the Commissioner's authority relating to the fixing of the royalty or other consideration and in settling the terms of the licence was concerned, had not been changed. In an earlier decision I considered that the word "patentee" which was substituted for the word "inventor" had no effect with respect [page254] to royalty determination. See Sherman & Ulster Ltd. v. Merck Co. Inc. (1969), post p. 264.
The second change in the wording of the amending legislation added the words "and for such other factors as may be prescribed". At this date no such factors have been prescribed. At the hearing as well as in its counterstatement the opponent contended that the addition of these words clearly involved a substantial change with respect to the quantum of royalty. The mere fact that the Government had referred the question of the quantum of royalty awards under s. 41 to the Economic Council of Canada suggested, it was argued, that Parliament, by making possible the establishment of guide-lines upon which the Commissioner must act, intended the patentee to receive a "fair compensation" for the loss of its market as a result of any compulsory licence grant.
I cannot agree. I am obliged to fix the royalty in accordance with the precise terms of the statute as interpreted by the Courts. There is no obligation on the part of the Economic Council of Canada to propose guide-lines for the Commissioner to use in fixing royalty or other compensation for patentees whose patents become subject to compulsory licences. Indeed, even if the Economic Council proposed certain guide-lines for the Commissioner to follow, the Government need not prescribe those factors or any others for that matter. However, in the event that factors may later be prescribed by Order in Council which when taken into consideration would either increase or decrease the quantum of royalty which I have fixed, I intend to provide, as one of the terms of the licence, an opportunity for either party to present new arguments, after which I shall re-determine the quantum of royalty to be paid to the patentee based upon those factors prescribed.
The opponent in its counterstatement and at the hearing urged a substantial royalty if the licence was granted. It put its case on the quantum of the royalty on the method of calculation adopted by the Assistant Comptroller of Patents in the United Kingdom in comparable cases and the opponent submitted that the Commissioner would be entitled to follow the same procedure. It is important, therefore, to set out in detail what the opponent's royalty submission is always bearing in mind, of course, the law upon which the determination was based. The corresponding United Kingdom law is found (coincidentally) in s. 41(2) of the United Kingdom Patents Act, 1949 (U.K.), c. 87, which reads as follows: [page255]
41(2) In settling the terms of licences under this section the comptroller shall endeavour to secure that food, medicines, and surgical and curative devices shall be available to the public at the lowest prices consistent with the patentees' deriving a reasonable advantage from their patent rights.
The opponent's royalty submission was set out in detail by a Mr. Robert Hunter in an affidavit that accompanied the counterstatement, and Mr. Hunter elaborated thereon at the hearing. Mr. Hunter is a chartered accountant who has been closely associated since 1943, with Hoffmann-La Roche and since 1946, has been a director of its United Kingdom subsidiary. Mr. Hunter has previously appeared as a witness on behalf of Roche and/or the opponent in Canadian Courts. His testimony indicates that he is very knowledgeable with respect to accounting procedures used by international drug firms. I would interject at this point that Mr. Hunter made no claim to expertise in the legal interpretation of s. 41 of the Canadian Patent Act, but left the impression that if the Canadian law could be said to be identical or comparable to the United Kingdom law then the procedure in determining the quantum of royalty as set out in his affidavit should be followed. Leaving aside for the moment the question of whether or not the opponent's royalty submission may be applicable or adaptable to Canadian law, nevertheless I think it important to set out exactly what that royalty submission is.
Among other things Mr. Hunter stated the sale of any patented drug, such as Diazepam in the present instance, by a licencee directly diminishes the sale of that product by the patentee and that, as a large element of the patentee's costs are due to fixed overhead costs which cannot be reduced, compensation for those costs must be paid by the licencee to the patentee. Further, the patentee should similarly be compensated for the return on its capital invested in, or the profit margin on its costs which the patentee will also fail to recover through lost sales.
Mr. Hunter pointed out that a major item of the fixed overhead costs is through heavy and continuing research expenditures which on an international basis, in so far as Roche is concerned, amounted to 11% of world sales. He admits that Hoffmann-La Roche Ltd. in Canada do not conduct research, i.e., basic or applied research, although clinical trials of drugs are conducted by the opponent in Canada. In this respect I consider that the word "research" as used in s. 41 of the Ca- [page256] nadian Patent Act should be interpreted as research on an international scale. By the very nature of the drug industry research is carried out, generally speaking, where it is most economic; and as long as Canadians benefit from the research that is carried out it is of no consequence, at least from the patent point of view, whether research is carried out in Canada or elsewhere. This observation is strengthened by the fact that the opponent makes an annual contribution, recognized by the Department of National Revenue, to its parent corporation as its share of research costs. The Supreme Court of Canada has looked realistically at the interpretation to be placed on the word "research" contained in former s. 41(3) of the Patent Act. Martland, J., in Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., supra, stated that "the royalty allowed should be commensurate with the maintenance of research incentive ..." -- a broader view, certainly, than the more confining "research leading to the invention". By such an interpretation, the Court has, in my view, recognized research in the drug industry as an international effort, that research costs cannot be isolated and determined for each particular invention, that continuing research will lead to naught in the quest for "drug winners".
The second major item of costs found in fixed overhead and set out in Mr. Hunter's affidavit deals with "cost of obtaining and maintaining medical acceptance of ethical drugs". These deal with identifiable costs of, for example, journal advertising, literature and samples, cost of clinical trials, the cost of representatives and their supervision and training, the cost of the medical department which is made available to provide replies to doctors' problems, the cost of publication, conventions, market research, exhibits, etc.
The third element of costs described by Mr. Hunter deals with the return on the patentee's capital employed in research and its provision of medical information.
Mr. Hunter very specifically and statistically assessed what these costs would be. With regard to research, he concluded that $1,108.36 per kilo of Diazepam would be lost as a result of the compulsory licence grant. With respect to costs of obtaining and maintaining medical acceptance of ethical drugs, he said these costs, in so far as a loss of Diazepam sales are concerned, is $1,323.76 per kilo. With respect to the compensation that should be awarded the patentee as a return on the patentee's capital employed in research and the provision of medical information he set this, again against a likely loss of Diazepam sales, at $546.23 per kilo. [page257]
The total thus arrived at amounts to a loss (to the opponent) of $2,979.35 per kilo of the raw material or basic ingredient, known generically as Diazepam, as a result of the grant of a licence.
It should be noted that in this form of calculation that the opponent requests as compensation from the applicant a fixed amount in dollars per kilogram of Diazepam. By this method, no consideration need be taken of drug intermediates used in the preparation or production of the medicine in its raw or bulk state. Further, the compensation would apparently remain fixed, regardless of either an increase or decrease in the costs of the imported material, costs of manufacture, costs of providing medical information, etc. To provide for such variations would involve continual auditing procedures during the balance of the terms of the patents; the terms of such a licence would be difficult to set out and difficult for each of the parties to abide by.
As mentioned earlier Mr. Hunter followed the principle expressed in J. R. Geigy S.A.'s Patent,  R.P.C. 391 and, in particular, the decision of the British Assistant Comptroller of Patents in D.D.S.A. Pharmaceuticals Ltd. v. F. Hoffmann-La Roche Co. Ltd. -- A.G. dated October 3, 1968, which latter the opponent filed as an exhibit to its counterstatement.
In the end result, therefore, Mr. Hunter on behalf of the opponent assessed that proper compensation for the opponent would be that recognized in the United Kingdom, namely, the sum of $2,979.35 per kilo of raw material (Diazepam), although at the hearing it was made clear that Roche could make Diazepam in its raw form at $87 per kilo and in final dosage form at $487 per kilo. The selling price by the opponent of the final dosage form in Canada was $11,000 per kilo. The immense spread between the cost of the drug in its manufactured raw state (or imported raw state) and the net selling price of the final dosage form is said to be due to costs of manufacturing into dosage form, promotional costs, marketing, medical information, research and, presumably, profit etc. These figures also indicate that the opponent would receive by way of compensation (presumably recognized in the United Kingdom) if Mr. Hunter's method was followed a royalty of more than 6 times the cost of producing Diazepam in its final dosage form, or more than 33 times the cost of the basic raw material, either manufactured or imported.
Were I to accede to the view that s. 41(2) of the United Kingdom's Patents Act, 1949, was identical to s. 41(4) of the Ca- [page258] nadian Patent Act, or even similar thereto, I would have little hesitation in accepting in principle the procedure for determination of royalty in the United Kingdom upon the figures proposed by Mr. Hunter as related to the Canadian situation. The law, however, is not the same and quite different principles apply. In the United Kingdom Act the expression "medicine ... shall be available to the public at the lowest prices consistent with the patentees' deriving a reasonable advantage from their patent rights" is markedly different from the provision of establishing royalty or other compensation as set out in s. 41(4) of the Canadian Act. Prior to 1949, the United Kingdom legislation relating to the fixing of royalty and settling the terms of the licence was precisely identical to that of former s. 41(3) of the Canadian enactment. In fact, Canadian law copied the earlier United Kingdom law. Further, the Canadian Parliament chose not to change its law to conform to s. 41(2) of the United Kingdom Patents Act, 1949, but deliberately left then existing law unchanged (except for the modifications already discussed). The Canadian law does not give the patentee any guarantee that it shall derive a reasonable advantage from its patent rights. On the contrary, the patentees' rights in Canada are substantially restricted as established by the Supreme Court of Canada in Parke, Davis v. Fine Chemicals, supra. The Commissioner's responsibility in fixing the royalty or other consideration payable to the patentee is that such royalty is "consistent with giving to the patentee due reward for the research leading to the invention"; and thus the Commissioner is not required to take into consideration such further elements as the cost of obtaining and maintaining medical acceptance of the drug, return on the capital employed in research and promotion and any other elements other than "research leading to the invention", subject to other factors introduced by the Courts in their interpretation of former s. 41(3) which I shall now discuss.
The Courts have introduced factors in assessing royalty which I am required to take into consideration. The first principle, as I have mentioned, is to take into account that "the royalty allowed should be commensurate with the maintenance of research incentive and the importance of both process and substance". Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., supra. I have already discussed "research incentive". With respect to "the importance of both process and substance", I would think the present application -- indeed the majority of applications for compulsory licences -- concern significant [page259] patented processes and their resulting products and this is to be considered and weighed when assessing royalty. Abbott, J., in Hoffmann-La Roche Ltd. v. L. D. Craig Ltd., Bell-Craig Pharmaceuticals Division, supra, adopted this principle.
A second factor in assessing royalty was introduced by Jackett, P., in Aktiebolaget Astra, Apotekarnes Kemiska Fabriker v. Novocol Chemical Mfg. Co. of Canada, supra, where he also elaborated on the subsection by stating:
The consideration spelled out in the subsection is only one consideration to which the Commissioner must 'have regard'. It must be allowed to influence the decision [i.e., the desirability of making the food or medicine available at the lowest possible price consistent with giving the inventor due reward for the research leading to the invention] but it does not displace consideration of matters that would otherwise determine the result.
At the hearing the opponent also introduced an alternative method of determining what might be considered a "fair" royalty, although this would mean considerably less compensation than that proposed by Mr. Hunter. Evidence was introduced to the effect that two agreements between Gryphon Laboratories Limited and Frank W. Horner Ltd. were executed under date of September 19, 1967, to indicate that Horner would pay to Gryphon in return for an exclusive supply of trifluoperazine (also chlordiazepoxide) in addition to the purchase price of the bulk material an amount equal to 10% of all net sales of pharmaceutical products containing trifluoperazine (also chlordiazepoxide) made by Horner and sold by it. By introducing these agreements, the opponent endeavoured to indicate that Horner, in a compulsory licensing situation affecting the opponent should pay not less than 10% royalty on its net sales under the licence. Again I do not find any relevancy here. These were voluntary agreements entered into by both parties whereas the situation before me is an application brought because both parties would not voluntarily come to a licence agreement. Again I must confine myself to the terms of s. 41(4), formerly s. 41(3), as interpreted by the Courts.
The opponent, in pursuing its argument for the highest possible royalty reward, pointed out that the applicant under a licence could well afford to pay an appropriate and maximum royalty in that it intended to sell Diazepam in its final dosage form at $9,000 per kilo, only $2,000 per kilo less than the selling price of the drug by the opponent. Much as one might deprecate the [page260] fact that the applicant, without the initial costs incurred for research carried out by itself or at the international level through associated companies or incurred for maintenance of medical information etc., intends to follow the same path as the opponent by incurring its own heavy promotional costs etc., without making massive reductions in its price structure, nevertheless competition is introduced by means of the licence and the policy underlying the section is therefore fulfilled.
Heretofore, in applications of this type -- i.e., in applications for compulsory licences to manufacture medicine under s. 41(3) royalty has been fixed at 15% of the net selling price of the bulk material made by the licensee and sold to others at arm's length with percentages varying on the expiry of the patents involved; and the Courts have held that the Commissioner was entitled to use this basis in establishing royalty and that, by so doing, he neither acted on a wrong principle nor on the evidence his decision was manifestly wrong. See Hoffmann-La Roche Ltd. v. L. D. Craig Ltd., Bell-Craig Pharmaceuticals Division, 48 C.P.R. 137 at pp. 144-5, 56 D.L.R. (2d) 97,  S.C.R. 313, where Abbott, J., stated:
there is an obvious justification, in cases where a percentage royalty is decided upon, for using as a base, the sale price of the bulk material produced by the patented process, rather than a base which reflects a variety of packaging, distribution, promotional, sales and other like expenses.
Also Abbott, J., at p. 142, in quoting a passage from Parke, Davis & Co. v. Fine Chemicals Ltd., supra, from the reasons for judgment of Martland, J., emphasized that:
the case cited by the Commissioner was merely a description of the method in fact adopted by the Commissioner for the determination of the royalty in that case. The Commissioner is however correct in stating that this Court did not disapprove of the method as constituting an improper means of the determination of royalty. Such a basis of determination is certainly a permissible basis but it was not necessarily the only one open to the Commissioner
Abbott, J., goes on to adopt the following statement of Rand, J., in The King v. Irving Air Chute Co. Inc., 10 C.P.R. 1 at p. 16,  S.C.R. 613, 9 Fox Pat. C. 10: [page261]
What the inventor is to receive is a sum of money related to the invention used; and the base value, where cost or selling price of either the whole or part of the apparatus embodying the invention, is obviously bound up with the rate or percentage to be used. Base values as in practice adopted are limited in number and can be accurately ascertained; and being fixed upon, the important question, to which the evidential matters are relevant, becomes that of the highly variable percentage.
I feel free, therefore, to adopt a different "base value" than that heretofore applied by the Commissioner to compulsory licences under s. 41. I prefer not to use a "base value" with respect to cost to produce the product of the patented process as I can foresee inevitable arguments and delay between applicant and patentee by so doing. Further, when royalty determinations are made with respect to licences directed solely to the importation of medicines in their final dosage forms, it would be next to impossible to ascertain either the cost of production of the raw material upon which a "variable percentage" might be based or, indeed, the net selling price of the raw material to the manufacturer of the final dosage forms. Nor do I see as practical, as I have stated, a royalty figure established at a fixed amount in dollars per kilogram of product, whether of raw material or the medicine in its final dosage form, in order to determine the opponent's compensation; rather I prefer to use a "variable percentage" of a readily determinable amount.
A "base value" that can be accurately and readily ascertained in all instances is the net selling price of the medicine as prepared and sold in its final dosage forms.
Bearing in mind, then, the applicable factors that must govern my decision, I have decided to fix the royalty herein as a percentage of the net selling price of Diazepam in its final dosage form or forms when sold to a third party at arm's length, but I wish to emphasize that by so doing I am not awarding a royalty to the opponent or patentee for any activity that follows the production of the actual product produced by the patented process or processes, namely, Diazepam in bulk form. The use of a percentage of net sales of the finished product for public consumption is merely to establish an appropriate royalty for use of the inventions. As already mentioned, the law as stated by Abbott, J., reflecting the views of the Court, in Hoffmann-La Roche Ltd. v. L. D. Craig Ltd., Bell-Craig Pharmaceuticals [page262] Division, supra, relating to the non-applicability of a "base which reflects a variety of packaging, distribution, promotional, sales and other like expenses" sets the appropriate precedent.
The percentage chosen must, after full consideration, attempt to balance the statutory requirement of "giving to the patentee due reward for the research leading to the invention", as interpreted by the Courts, against "making the medicine available to the public at the lowest possible price". It is a decision that involves the public interest as an over-riding factor but which also recognizes that part of such interest relates to the maintenance of research incentive and the importance of process and substance.
Were the product involved not subject to compulsory licensing under the provisions of s. 41, it would be reasonable to assume that a willing patentee and a willing licensee, bargaining under equal terms, would fix a royalty at 10% of the net selling price to customers at arm's length. Indeed, this might even be considered a generous royalty. In applications for compulsory licences falling within s. 41, however, such a high figure cannot be used. The percentage figure of net sales should be substantially lower to eliminate consideration of those expenses incurred by the opponent after those that led to the invention.
Taking all these factors into account, therefore, I fix the royalty payable to the patentee at 4% of the net selling price of the drug in its final dosage form or forms to purchasers at arm's length.
This determination brings with it certain questions that should be considered. Should, for example, the royalty be apportioned between all patents licensed to the applicant? If so, which of the inventions licensed are deserving of a higher royalty award than the others? Should a patented process leading to an intermediate product (i.e., the starting material for a patented process leading to the invention i.e., the medicine) carry a royalty award greater or less than the patented process that actually leads to the invention? Will the applicant actually use all the patented processes it has licensed? Has the applicant provided alternatives in its application for licence to ensure availability of supply? Has the applicant included patents in its application for licences merely to remove the possibility of infringement? To these difficult, if not impossible determinations must be added other difficulties that arise because the terms of the patents included in the licence vary. As time passes these patents successively fall into the public domain. [page263]
Should the percentage of royalty decrease as the terms of the patents used by the applicant expire?
I find as a fact that it would not be in the public interest to attempt to answer these questions for each application. Too much uncertainty and arbitrariness would result. Not only is the importance of the various patents in the inventive process leading to the production of medicine imprecise, but also patents included in the licence may not be in fact used by the applicant in the inventive process or processes.
The royalty which I find appropriate, therefore, I have fixed as an average percentage based on the net selling price of the invention in its final dosage forms over the term of that patent within the licence document which expires last, provided that the applicant uses this, with or without others of the licensed patents, during the said term. Whether one or more patents are included in the licence is not of consequence: the royalty is based on the "package" of those patents claimed to be required to produce the invention, i.e. the medicine, and represents an average assessment over the term of that patent within the "package" which expires last.
In coming to this conclusion I foresee the possibility that applicants may apply for separate licences involving two or more different patented processes owned by different patentees but which, taken together, lead to the invention (i.e., the medicine). In this instance a modification of the procedure in the royalty determination I have decided upon would be required. A sharing of the royalty between patentees would presumably be necessary, but this need not be dealt with in this decision.
As to the terms of the licence to be granted, apart from that term I have already considered should be inserted relating to "other factors that might be subscribed", I would refer specifically to a term requested by the opponent, namely, that the licence be restricted to require the applicant to sell Diazepam under its generic name, and not under a trade mark of its own. Whether or not I have jurisdiction to provide such a term, as this seemingly falls outside my authority under s. 41(4) of the Patent Act, nevertheless this request would involve my making a decision that would interfere with normal business practices. I believe that the issuing of a licence in itself on the basis of this decision meets the policy underlying the section by introducing competition, and I should not attempt to take other means relating to restriction of monopoly that is not entrusted to me specifically by either statute or regulation. [page264]
It is important now to state that the jurisdiction of the Commissioner of Patents under s. 41(4) of the Patent Act is presently being challenged in the Courts in an application of a similar nature dated July 16, 1969, brought by Inglis Pharmaceuticals Limited (now Sterilab Corporation Limited) of Toronto, Ontario to use the inventions of American Home Products Corporation, of New York, New York, in which Canadian patents 501,583 and 552,934 are involved. In my opinion, if the Commissioner's jurisdiction is questioned with respect to one such application his jurisdiction also remains unsettled with respect to other similar applications until the Courts finally determine the matter. In consequence, therefore, I shall refrain from issuing the licence to be drafted in accordance with this decision until such time as the question of the Commissioner's jurisdiction is no longer in dispute.