CITATION: GlaxoSmithKline Inc. v. Apotex Inc., 2016 ONSC 6768

COURT FILE NO.: CV-16-543789

DATE: 20161028

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

GLAXOSMITHKLINE INC., GLAXO GROUP LIMITED and GLAXOSMITHKLINE INTELLECTUAL PROPERTY (NO. 2) LIMITED

Plaintiffs

– and –

APOTEX INC.

Defendant

Steve Tenai for the Plaintiffs

Sandon Shogilev for the Defendant

HEARD: October 18, 2016

PERELL, J.

REASONS FOR DECISION

[1] The essence of this action is whether the Defendant, Apotex Inc., was clever and used a loophole in a Settlement Agreement of an intellectual property dispute or whether it was too-clever by half and breached the contract or a duty of good faith in contract performance.

[2] The Plaintiffs, GlaxoSmithKline Inc. (“GSK Canada”), Glaxo Group Limited (“GGL”), and GlaxoSmithKline Intellectual Property (No. 2) Limited (“GIP2”), have the patent in a drug, valacyclovir hydrochloride, branded as Valtrex, and they were competing with Apotex Inc., which was marketing a rival drug. The rival drug may or may not have infringed the Plaintiffs’ patent and litigation ensued in the Federal Court. The parties eventually settled, and they signed a Settlement Agreement under which Apotex agreed to withdraw its drug from the marketplace over a six-month period. GSK Canada, GGL, and GIP2 say that the staged withdrawal was designed so that the market’s need and demand for the drug would be satisfied while GSK Canada, GGL, and GIP2 ramped up production. They allege, however, that Apotex breached the Settlement Agreement and breached a duty of good faith in contract performance when, during the six-month withdrawal from the marketplace, it sold several years’s worth of valacyclovir hydrochloride to wholesalers and thereby destroyed the value and purpose of the Settlement Agreement for GSK Canada, GGL, and GIP2.

[3] During the six-month period, Apotex sold over 21 times its usual monthly sales volume. GSK Canada, GGL, and GIP2 say this eviscerated the purpose of the Settlement Agreement.

[4] Apotex, which has not delivered its Statement of Defence, moves for an order: (a) dismissing the action by GIP2 by striking paragraphs 16 through 18 from the Statement of Claim; (b) striking the phrase "and duty of good faith" in paragraph 22 of the Statement of Claim; and (c) and striking the word "include" in paragraph 10 of the Plaintiffs' Response to Demand for Particulars dated March 4, 2016.

[5] The gist of Apotex’s argument is that: (a) GIP2 is an improper party because it was not a party to the Settlement Agreement; (b) it is plain and obvious that there was no breach of the duty of good faith in contract performance; and (c) Apotex is unable to plead a defence because the Plaintiffs listed the provisions of the Settlement Agreement alleged to have been breached by prefixing the list with the word “include.”

[6] For the reasons that follow, I dismiss Apotex’s motion with costs as already agreed by the parties.

[7] The Statement of Claim is relatively short, and for the purposes of this pleadings motion, rather than paraphrase it, I shall set out the pertinent parts in full. The Statement of Claim states:

1. The plaintiffs claim:

(a) Damages equal to the lost revenue suffered by the plaintiffs due to lost sales caused by the defendant, particulars to be provided prior to trial;

(b) An additional liquidated sum of $4,000,000;

(c) …

The Parties:

2. The plaintiff GlaxoSmithKline Inc. ("GSK Canada") is a manufacturer, vendor and distributor of pharmaceutical products in Canada, including valacyclovir hydrochloride 500 mg and 1000 mg tablets. Its head office is located in Mississauga, Ontario.

3. The plaintiff Glaxo Group Limited ("GGL") is a company existing under the laws of the United Kingdom with its principal place of business in England.

4. The plaintiff, GlaxoSmithKline Intellectual Property (No. 2) Limited ("GIP2"), is a company existing under the laws of the United Kingdom with its principal place of business in England.

5. The defendant, Apotex Inc. ("Apotex"), is a corporation with offices in Toronto, Ontario. Apotex produces generic pharmaceuticals that are sold in Canada.

Valacyclovir Hydrochloride Medicines

6. GSK Canada and Apotex each produce, market and sell valacyclovir hydrochloride products in Canada which are prescribed as antiviral medicines.

7. GSK Canada markets and sells its valacyclovir hydrochloride products in Canada under the VALTREX brand.

8. On or about May 2008, Apotex began to sell its valacyclovir hydrochloride products in Canada. It does so under the APO-VALACYCLOVIR brand.

Prior Litigation

9. In 2009, Apotex instituted a proceeding before the Federal Court of Canada against GSK Canada pursuant to section 8 of the Patented Medicines (Notice of Compliance) Regulations. GSK Canada defended that proceeding on the basis that the sale of APOVALACYCLOVIR would have been an infringement of the Canadian patent relating to VALTREX (the "Patent"). GSK Canada, GGL and other related companies further counterclaimed against Apotex for damages for infringement of the Patent. Apotex responded by counterclaim seeking a declaration of invalidity of the Patent.

10. During the course of the above litigation, and by way of a Deed of Contribution and Licence dated December 31, 2012 (the "Deed"), GGL granted GIP2 an exclusive licence to the Patent effective January 1, 2013.

11. Apotex was provided with a copy of the Deed and was aware thereafter of the grant to GIP2 thereunder.

12. The trial of the foregoing proceedings commenced in January 2014.

Settlement Agreement

13. During the course of the trial, as of February 4, 2014, GSK Canada, GGL and Apotex entered into a settlement agreement (the "Settlement Agreement”).

14. GGL entered into the Settlement Agreement on its own behalf and as agent for GIP2.

15. The Deed provides that GGL shall do all acts and execute all documents to secure to GIP2 the full benefit of the rights licensed and conferred on GIP2 under the Deed "including, but not limited to, for the purposes of bringing or defending legal proceedings including infringement actions and validity challenges ..." In accordance with the Deed, all moneys belonging to GIP2 which are received by GGL in connection with the Patent are to be held by GGL for GIP2's benefit.

16. Apotex was subject to a duty of good faith to the plaintiffs. This duty required Apotex to not act in a manner which would defeat or eviscerate the very purpose and objective of the Settlement Agreement.

Sales of APO-VALACYCLOVIR

17. In breach of its duty of good faith, between February 6 and 13, 2014, Apotex issued multiple invoices to wholesalers for an extraordinary volume of APO-VALACYCLOVIR.

18. Apotex, directly or indirectly, took steps to precipitate, encourage and/or facilitate wholesalers to place extraordinary orders, including by breaching confidentiality obligations under the Settlement Agreement and its duty of good faith.

19. Further, Apotex continued to sell volumes of APO-VALACYCLOVIR after February 14, 2014, in breach of its obligations under subsection 15(b) of the Settlement Agreement.

20. Particulars of the nature of the breach of the Settlement Agreement have been provided to Apotex by the plaintiffs.

Damages Suffered

21. As a result of Apotex's conduct, GSK Canada lost VALTREX sales.

22. Apotex is responsible for the plaintiffs' loss in revenue due to lost sales of VALTREX caused by Apotex's breaches of the Settlement Agreement and duty of good faith.

In response to a Demand for Particulars, the Plaintiffs delivered the following response:

4. The proceedings mentioned in paragraph 12 of the Claim refer to actions that were consolidated and heard together as follows:

(a) Apotex Inc. v. GlaxoSmithKline Inc., Court File No. T-14-09;

(b) Pharmascience Inc. v. GlaxoSmithKline Inc., Court File No. T-643-10; and

(c) GlaxoSmithKline Inc., et al. v. Pharmascience Inc., et al, Court File No. 7-2101-09.

7. Particulars of the steps taken directly or indirectly by Apotex to precipitate, encourage and/or facilitate wholesalers to place extraordinary orders as described in paragraph 18 of the Claim are within the knowledge of Apotex and the applicable wholesalers. Without limiting the foregoing, based on the volume of sales between February 5 and13 (inclusive), the Plaintiffs believe that Apotex directly or indirectly communicated to wholesalers that Apotex would be withdrawing APONALACYCLOVIR from the Canadian market and sales after February 14th would be limited.

8. Particulars of the identity of the wholesalers referred to in paragraph 18 of the Claim include;

(a) McKesson Canada;

(b) McKesson Pharmaceuticals;

(c) Kohl & Frisch Limited;

(d) Kohl & Frisch Distribution Inc.; and

(e) such additional wholesalers known to Apotex and the applicable wholesaler.

9. See response in paragraph 6 above. Between February 5 and 13, 2014 (inclusive), over 167,944 units of APOVALACYCLOVIR were sold by Apotex. In contrast, between January 1 and December 31, 2013 (inclusive), 101,955 units of APOVALACYCLOVIR were sold by Apotex. The number of units sold by Apotex in 9 days between February 5 and 13, 2014 was the equivalent of more than 21 times the Average Monthly Sales as defined in the Settlement Agreement.

10. The specific provisions of the Settlement Agreement that were breached by Apotex and referenced in paragraph 18 of the Claim include:

(a) paragraph 12;

(b) paragraphs 15(b) and 15(g); and

(c) paragraph 18.

11. See Tab 3 for a list of sales after February 14, 2014. Any sale of APOVALACYCLOVIR between February 14 and May 31, 2014 to any Canadian customer would have been a sale while Canadian customers' inventory owned or controlled exceeded 4 weeks inventory owned. See additional information in response 9 above.

[8] In addition to the above pleaded facts, it should be noted that the Settlement Agreement, which is incorporated by reference into the Statement of Claim, stipulated that all of the terms would be maintained in strict confidence except as otherwise provided in the Agreement. The Settlement Agreement did not provide for the public disclosure of Apotex’s withdrawal from the Canadian market. The Settlement Agreement provided that it was binding on the parties’ respective predecessors, successors, assigns, parents, subsidiaries, affiliates and divisions.

[9] For the purposes of this pleadings motion, it should also be noted that with respect to GIP2, the Statement of Claim discloses that during the Federal Court litigation and to Apotex’s knowledge, GIP2 was granted an exclusive licence in the drug. Under the licence agreement, GGL was to pay all monies received for the patent right for GIP2s benefit and GGL was obliged to do all acts and execute all documents to secure to GIP2 the full benefit of rights under the Patent including bringing and defending legal proceedings such as patent infringement actions. The Statement of Claim expressly pleads that GGL entered into the Settlement Agreement on its own behalf and as agent for GIP2.

[10] In my opinion, there is no merit to any of Apotex’s arguments to strike portions of the Statement of Claim or parts of the response to the Demand for Particulars.

[11] For Apotex to succeed on this motion, it must show that it is plain and obvious and beyond doubt that GIP2’s claim as the owner of a licence in the patent has no chance of success. Similarly, with respect to the Plaintiffs pleading that there has been a breach of the duty of good faith in contract performance, for Apotex to succeed, it must show at this early stage of the action, that the Plaintiffs’ claim is essentially hopeless.

[12] A claim will be struck out if it has no reasonable prospect of success, but where a reasonable prospect of success exists, the matter should be allowed to proceed: R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 at para. 17. The threshold to be met by a party moving to strike a claim is very high: Amato v. Welsh, 2013 ONCA 258 at para. 32.

[13] In assessing the cause of action, the court accepts the pleaded allegations of fact as proven, unless they are patently ridiculous or incapable of proof: Canada (Attorney General) v. Inuit Tapirisat of Canada, 1980 CanLII 21 (SCC), [1980] 2 S.C.R. 735; Canada v. Operation Dismantle Inc., 1985 CanLII 74 (SCC), [1985] 1 S.C.R. 441. The pleading is to be read generously with allowance for inadequacies due to drafting deficiencies: Nash v. Ontario (1995), 1995 CanLII 2934 (ON CA), 27 O.R. (3d) 1 (C.A.).

[14] GIP2’s claim as the principal and as the owner of the patent might not succeed and Apotex is entitled to challenge GIP2’s legal status to assert any claim given that it was not an actual signatory of the Settlement Agreement, but it is very far from plain and obvious that the claim has no reasonable prospect of success. Apotex submits that the Deed of Contribution and Licence, referred to in the Statement of Claim is just a licence agreement and not a contract of agency. That is an arguable proposition, but that circumstance just demonstrates that it is not plain and obvious that GIP2 cannot enforce the Settlement Agreement. Apotex submits that there is an insufficient pleading of the material facts of a viable claim by an undisclosed principal. This is an arguable proposition, as is the argument that GIP2 was a disclosed principal, but, once again, these circumstances demonstrate that it is not plain and obvious that GIP2 cannot enforce the Settlement Agreement.

[15] Apotex’s arguments to the contrary, GIP2 has pleaded the material facts of a claim as principal to a contract entered into by its agent. The Statement of Claim pleads the factual foundation and circumstances of the relationship between GGL and GIP2, all of which Apotex knew when it signed the Settlement Agreement.

[16] Similarly, it is very far from plain and obvious that GSK Canada, GGL, and GIP2 do not have a viable claim for breach of good faith in contract performance.

[17] The doctrine of good faith in contract performance, while not nascent or novel, is now entering into a developmental stage given the impetus of the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 77.

[18] In Bhasin v. Hrynew, Justice Cromwell stated at paras. 65-66:

65. The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While "appropriate regard" for the other party's interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.

66. This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines, but we should also recognize that this list is not closed. The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs.

[19] See also: Transamerica Life Canada Inc. v. Aegon Canada Inc., 2003 CanLII 9923 (ON CA), [2003] O.J. No. 4656 (C.A.); Nareerux Import Co. v. Canadian Imperial Bank of Commercial, 2009 ONCA 764; Kang v. Sun Life Assurance Co. of Canada, 2013 ONCA 118; Barclays Bank PLC v. Metcalfe & Mansfield Alternative Investment VII Corp., 2013 ONCA 494; 2336754 Ontario Inc. v. 1559586 Ontario Inc., 2016 ONSC 2467.

[20] In Kang v. Sun Life Assurance Co. of Canada, supra at para. 39, Justice Laskin stated:

39. Finally, it is clear from the arguments raised by both parties and the foregoing discussion that the jurisprudence on the duty of good faith and fair dealing, generally and as it applies to the insurance relationship, is not settled in this country. As O'Connor A.C.J.O. observed at para. 52 of his reasons in Transamerica, again in the context of commercial contracts, the contours of the duty of good faith and fair dealing in Canadian law have yet to be determined:

Unlike the situation in the United States where the duty of good faith in the performance of enforcement of commercial contracts has been broadly recognized, Canadian courts have not developed a comprehensive and principled approach to the implication of duties of good faith in commercial contracts. As Professor McCamus points out, many questions about the nature and scope of such duties have yet to be resolved. Indeed, it remains an open question whether implied duties of good faith add anything to the other available common law doctrines that apply to contracts.

[21] In 2336754 Ontario Inc. v. 1559586 Ontario Inc., supra Justice Morgan stated at para. 23:

23. A duty of good faith is required in contract law, but it is measured by the specific relationship between the parties: Yam Seng Pte Ltd. v. International Trade Corp. Ltd., [2013] 1 All E.R. (Comm.) 1321, [2013] EWHC 111 (Q.B.). It very much depends on “whether, in the particular context, the conduct would be regarded as commercially unacceptable by reasonable and honest people”: Mid Essex Hospital Services NHS Trust v. Compass Group UK and Ireland Ltd., [2013] EWCA Civ, 200 (C.A.).

[22] Where the scope of a legal duty has not been fully settled in the jurisprudence, an allegation that the duty has been breached should not be dismissed on a Rule 21 motion: see Folland v. Ontario (2003), 2003 CanLII 52139 (ON CA), 64 O.R. (3d) 89 (C.A.), at para. 11, leave to appeal to S.C.C. refused, [2003] S.C.C.A. No. 249.

[23] Finally, there is no merit in Apotex’s argument that it is unable to plead a defence because of the use of the word “include” in the response to the Demand for Particulars.

[24] For the above reasons, Apotex’s motion is dismissed.

Perell, J.

Released: October 28, 2016

CITATION: GlaxoSmithKline Inc. v. Apotex Inc., 2016 ONSC 6768

COURT FILE NO.: CV-16-543789

DATE: 20161028

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

GLAXOSMITHKLINE INC. GLAXO GROUP LIMITED and GLAXOSMITHKLINE INTELLECTUAL PROPERTY (NO. 2) LIMITED

Plaintiffs

– and –

APOTEX INC.

Defendant

REASONS FOR DECISION

PERELL J.

Released: October 28, 2016