Napp Pharmaceutical Holdings Ltd v Dr Reddy's Laboratories (UK) Ltd & Ors

This is an application based on a Request for Further Information in an enquiry as to damages on a cross-undertaking. The position is that the patentee (Napp Pharmaceutical Holdings Limited) brought a claim for patent infringement and an interim injunction against, among others, Sandoz Limited, relating to buprenorphine transdermal patches. A cross-undertaking was given and the matter was dealt with on an expedited basis. It began in early 2016 and by 1st August 2016 the first-instance trial, which Napp lost, and the appeal, which Napp also lost, had been completed. The injunction was discharged.

An enquiry on the cross-undertaking was ordered on 13th July but was stayed pending the appeal. As I said, the appeal came to an end on 1st August, although at that stage the Court of Appeal had given their decision but indicated their reasons would follow. The reasons came on 1st November. Sandoz have brought the application for damages, as they are entitled to do.

The Points of Claim plead out Sandoz's case as to why it is entitled to damages. The sum claimed is of the order of £100 million. That is a lot of money. Napp make the point that it is more than the annual value of the market but the answer from Sandoz is that the damages are not claimed simply for one year's sales or even for six months' sales. Sandoz's case is that the effect of being kept out of the market for six months has led to permanent effects on the market from Sandoz's point of view and losses which run into the future. Aggregating them all together comes to the figure of about £100 million. Sandoz’s argument is a familiar argument in these circumstances and there is nothing inherently wrong with it in principle. It will depend on the facts.

The response to the Points of Claim from Napp was to file a lengthy request for further information, which Sandoz criticised. There is some force in Sandoz's criticism in that the Request for Further Information was too long and too broad. However, in my judgment Napp were right that the Points of Claim were fundamentally lacking in critical information which Napp were entitled to, and which should have been provided in the first place. That information is the profit margin and price which the claimant on the cross-undertaking (Sandoz) contends they would have been charging for the relevant products. The damages claimed are essentially the difference in profit earned in the actual situation and what would have been earned in a counter-factual situation. The counter factual situation is one in which Sandoz would have launched when they planned to. The point is that the injunction prevented them from doing this.

The Points of Claim go into some detail to explain how the market itself would change in terms of volume over time. In that respect they are not far from being adequate, although it is fair to say that the manner in which the calculations are actually done is not explained. The market consists of a collection of different sizes of transdermal patch. Although the Points of Claim treats the growth rates of most size of patch in the same way, there is also a 15 microgram patch whose pattern of sales will be different because it was only launched in March 2017. At least for that reason it is not obvious on the face of the numbers how the overall figures for the market over time have been generated. One of the questions that Napp asked was to extract that information from Sandoz, in other words to find out what the calculations actually are.

It was explained by counsel for Sandoz in the course of her submissions that when one looks carefully at what is said in the Points of Claim you can work out how the annexed calculations have been done. I am not 100% certain that I followed the explanation completely, but I can see that it is probably close to being right. Nevertheless, the reader of the Points of Claim should not have had to work that out in that way. It is something which could and should have been explained in more detail. Napp were entitled to asked the question.

Much more significant, however, is that the Points of Claim are entirely lacking on any explanation of how the damages claimed are derived from the figures for sales volumes. There is simply a statement that profit margin will remain constant in certain circumstances, and then a statement that by applying the profit margin (unspecified) to the volume data in certain ways a result is produced.

It is said that using the calculations that have been provided one could back calculate from the total loss claimed a form of blended lost profit figure. That blended figure would not be a profit margin but an absolute sum aggregated over the period. Again, I am not certain I followed that completely but I am prepared to accept it. However such a blended profit figure is not a real profit for an actual product. It would be blended across all the different kinds of products and also, critically, it would be blended among the other group companies who are part of this claim. That is an aspect I have not mentioned yet.

The order for the cross-undertaking provided that other companies in Sandoz's group would be entitled, if appropriate, to join a claim for a cross-undertaking. Three have been brought in. They are Hexal AG, Salutas Pharma GmbH and Sandoz AG. It is not explained in the pleading at all on what basis these companies have any kind of claim. When that point was raised Mr. Morgan (the solicitor for Sandoz) explained in his evidence that it is his understanding that Hexal is the manufacturer and that the supply chain from Hexal to Sandoz Limited (which is the company selling in the United Kingdom) goes through the two other companies.

There is no reason to doubt that Mr Morgan is right about that, but nothing in the Points of Claim explains how the profits are attributed between these different companies. It was suggested in the course of argument that these matters can all be dealt with on a group basis and that therefore there is no reason why Napp should have any information at this stage. I do not agree and will address this point below.

It is manifest that these Points of Claim needed from the outset to explain the claiming party’s case about what the relevant profit margins and sales prices would be or have been. It is highly likely, as Mr. Segan submitted, that in order to produce the models and figures which were provided, these calculations have all been done and included figures for these elements. The figures have simply not been provided.

It is also obvious why they have not been provided. As counsel explained, Sandoz is very concerned about providing pricing information to its close competitor Napp. I sympathise with that to this extent; such information clearly would be confidential and needs to be dealt with in a suitable confidentiality arrangement. However, the parties have already agreed that there should be a confidentiality arrangement in these proceedings, as would be naturally the case. The fact that the data would be confidential, and obviously so, is no reason at all to not provide it in the first place. It is not possible, in my judgment, to make a proper assessment of this very substantial claim without that information, and in saying that I do not mean information provided on a blended basis.

With that introduction I can turn to the particular requests in the Request for Further Information. Shortly before the hearing Napp reformulated their requests to focus down on specific issues. I will deal with it on that basis.

The first ones relate to the four companies that are now in the claim.

"Requests

1.

Please explain the relationship between each of the companies Hexal AG, Salutas Pharma GmbH and Sandoz AG and the Second Defendant/Applicant.

2.

Please explain how each of the companies in the Sandoz Group is alleged to have suffered, or to be suffering, loss caused by the Orders of Mr Justice Arnold dated 22 February, 16 March and 28 June 2016. Please identify for each Applicant / Proposed Additional Applicant the specific loss each says it has suffered.”

In my judgment, these are appropriate requests and they are things which Sandoz ought to explain in order for Napp to understand the case that it has to meet and to plead properly to it. It is not legitimate for the claim to proceed simply on a group basis. The fact that Sandoz, as a group, operates and looks at its profit on that basis does not alter the fact that if, for the sake of argument, Hexal AG is the entity in which all the profit is earned, then that needs to be explained in the pleading and Napp are entitled to know.

It may be, for example, that in the end a claim based on Hexal's lost profit fails. If that were to happen it does not follow at all that the profit could then be claimed through Sandoz Limited, Salutas Pharma or Sandoz AG. I should say that I am simply making the point as an illustration. At the moment there is no information about any of that at all.

In Gerber v Lectra, in a case concerning damages for patent infringement but in this context just as applicable when thinking about enquiries on a cross undertaking, it was accepted that in principle, in a group, it is possible for a parent company to claim damages on a one-for-one basis even if the loss was suffered by a subsidiary, however it is also explained in that case, and in many others, that while it is possible for the facts to turn out that way, one cannot simply assume that it is always the case. It has to be pleaded and proved. However it seems to have been assumed in this case. The assumption may be faulty. The basis on which the claim is made needs to be justified.

Turning to the other requests, Request 3 is not necessary. That is simply confirming something which is obvious from the pleading, so I will not require Sandoz to answer that.

Request 4:

"Under paragraph 56

Of: ‘Sandoz contends that, from March 2017, overall volumes of the Market for the 15μg/hour strength buprenorphine transdermal patches will grow at the following rate:

(1)

214% per annum growth until mid 2017;

(2)

80% per annum growth until the end of 2018;

(3)

35% per annum growth until the end of 2020;

(4)

20% per annum growth until the end of 2022; and

(5)

1% per annum thereafter.’

Requests

4.

Please provide the basis upon which the per annum growth of the Market for the 15 μg/hour strength of buprenorphine transdermal patches from 2017 onwards has been predicted including the predicted sales volume figures. Please provide numerical information in Microsoft Excel readable format where appropriate.”

The point there was for Sandoz to explain the basis on which different growth rates were provided for the 15 μg/hour patches, as opposed to the growth rates which have been used for the other patches. Counsel explained this in the course of argument. The issue is that the 15 μg patch has only been launched in March 2017 and the rates for it were chosen in order to bring that product into line with the same growth rate for the others after 2022. It is not clear to me that there is any good reason why I need Sandoz to repeat what they have already explained in court and I will not require Sandoz to answer that aspect of Request 4.

The other point of request 4 is to understand how the sales volumes in the annexes are generated. That is because it is not easy to work that out given that the 15 μg patches have different growth rates from the others, the 5, 10 and 20 μg patches. As I mentioned above, Ms. Edwards-Stuart submitted that one can see exactly how the calculation was done from the way in which the pleading was drafted. She may well be right about that, but since a calculation has obviously been done and it will be a simple matter for Sandoz to provide it, they should do so. So that aspect of Request 4 needs to be answered.

Request 5 does not need to be answered. That is obvious.

Requests 6 and 7:

“Under paragraph 64

Of: ‘64. Annex 1 sets out the volumes Sandoz contends it would achieve but for the Injunctions (the Planned Launch) by applying the market shares contended for in paragraphs 59 and 60 above to the overall volumes of the INN Prescription Market and the Branded Prescription Market.’

Requests

6.

Please provide the basis, including for the avoidance of doubt the calculations and principal assumptions upon which those calculations are based, from which Annex 1 has been produced. Please provide numerical information in Microsoft Excel readable format where appropriate.

Under paragraph 65

Of: ‘65. Annex 2 sets out the volumes Sandoz contends it will actually achieve in the Delayed Launch by applying the market shares contended for in paragraphs 61 and 62 above to the overall volumes of the INN Prescription Market and the Branded Prescription Market.’

Requests

7.

Please provide the basis, including for the avoidance of doubt the calculations and principal assumptions upon which those calculations are based, from which Annex 2 has been produced. Please provide numerical information in Microsoft Excel readable format where appropriate.”

The issue here is that the figures do not provide a breakdown, by strength, for the two annexes. That is related to a point I have already made. I do not require Sandoz to deal with these requests specifically because Napp will be able to work it out from the further information I have already decided Sandoz must provide, coupled with the Points of Claim.

Turning to requests 8, 9, 10 and 11, they are:

“Under paragraph 66

Of: ‘67. Sandoz contends that its percentage profit margin on the price of a pack will remain constant from the establishment of the Stabilised Market.’

Requests

8.

Please state what Sandoz’ percentage profit margin on the price of each pack of Reletrans is for each of the 5 μg/hour, 10 μg/hour, 15 μg/hour and 20 μg/hour strengths.

9.

Please provide the basis upon which it is predicted that Sandoz’ percentage profit margin on the price of a pack of Reletrans will remain constant from the establishment of the Stabilised Market, including whether it is contended that there will be further market entrants and what their impact will be. Please provide numerical information in Microsoft Excel readable format where appropriate.

10.

Please provide the basis upon which the prices of Sandoz’ Reletrans products, for each of the 5 μg/hour, 10 μg/hour, 15 μg/hour and 20 μg/hour strengths, in the Planned Launch and Delayed Launch for 2017 onwards, have been predicted.

11.

Napp understands from this paragraph that Sandoz contends that the prices of each of the Reletrans products will not change from the establishment of the Stabilised Market. If this is correct, please explain why the prices of Reletrans products are not forecast to change. If this is incorrect, please explain the basis on which it is contended that Sandoz’ percentage profit margin on the price of a pack of Reletrans will remain constant from the establishment of the Stabilised Market, even at different price levels.”

It is plain that paragraph 8 needs to be answered. The offer made at the hearing, which was to provide a blended profit margin, blended across all packs and for all companies, is not adequate. Napp are entitled to understand what profit margin Sandoz are using in order to support their claim for which pack and which company. No doubt that information is confidential but that, as I have said already, is not a reason not to provide it.

Request 9 is not necessary and neither is 10. Request 11 is the same, so not necessary at this stage. In fact, the assumptions that have been used by Sandoz can be seen already. Napp will be able to address the case put against them without knowing what basis has been used to choose them.

“Under paragraph 68

Of: ‘68. After the application of the profit margin to the volume data, a terminal value calculation is applied to project profits into perpetuity, using the steady state growth rate for the Market described in paragraph 55 and 56 above and a discount rate of 7.5%.’

Requests

12.

Please provide the terminal value calculation including a description of each value / quantity which is involved. Please provide numerical information in Microsoft Excel readable format where appropriate.

13.

Please provide the basis upon which the discount rate of 7.5% was calculated. Please provide numerical information in Microsoft Excel readable format where appropriate.

Under paragraph 69

Of: ‘69. Interest is charged at 2.5% on past losses, and future losses are discounted at 7.5%.’

Requests

14.

Please explain the basis upon which Sandoz contends that the appropriate interest rate for past losses is 2.5% and the basis upon which Sandoz contends that the appropriate discount rate for future losses is 7.5%.

Under paragraph 70

Of: ‘70. Applied to the volumes in each Annex, the methodology above gives the total but for profits ("the Planned Launch Profits") of £154,680,806 and the total actual profits ("the Delayed Launch Profits") of £45, 730, 153.’

Requests

15.

Please provide the calculations upon which the total Planned Launch Profits and the total Delayed Launch Profits have been predicted. For the avoidance of doubt, please provide for each scenario both the price and profit margin information and their variation with time in the same manner as given for sales volumes in Annex 1 and Annex 2. Please provide numerical information in Microsoft Excel readable format where appropriate.”

The answer to request 12 needs to be provided. The pleading refers to a terminal value calculation but does not provide it. I am told on instructions that it may well be that this terminal value calculation is some kind of standard calculation in an Excel spreadsheet. If that is the answer it can be given readily, but Sandoz ought to include it. Indeed they ought to have had it in the particular Points of Claim in the first place.

As for request 13, there is no reason to provide the basis on which the discount rate of 7.5% was calculated because I am sure it was not calculated. I am sure it was chosen. That relates to request 14.

Request 14 is the next one. There is no reason why Sandoz should explain at this stage the basis for the interest rate they have chosen, but they do need to explain the basis on which they contend that a discount rate of 7.5% is appropriate. It may be there is a simple explanation, such that it is the standard discount rate used in the Sandoz group, but if that is the explanation it should be given or some other appropriate explanation.

Request 15 is also important. It is the Request which will require Sandoz to produce the pricing information which is a necessary component of the information that should be been provided in the first place. I will require Sandoz to answer question 15.

Those are all the matters to be dealt with. I should say that when I refused certain aspects of this request, it does not mean that in future these questions may not matter. What I have been focusing on and the approach I have been taking is to identify requests which Sandoz ought to answer now before Napp should be required to provide a responsive pleading to the Points of Claim.

I now need to deal with the question of cost budgeting. The Respondent (Napp) submits that although this case falls outside the letter of CPR Rule 3.12, which excludes cost budgeting for cases with a value over £10 million, nevertheless cost budgeting should be ordered in this case.

Mr. Segan submits that the judgment of Coulson J in CIP Properties v Galliford, particularly paragraphs 25 to 28, finds that there is no presumption either way; that just because a claim is outside the regime on value grounds, this does not impose an additional burden on the party to suggest that cost budgeting should be ordered to overcome. The discretion is unfettered. I accept these submissions.

Mr. Segan also points out that the judge in that case explained that cost budgeting is, generally, good idea and can be a useful case management tool. I agree. It certainly is and can be. He also submits that in this case there are particular reasons for requiring cost budgeting to apply. They are because this is a damages inquiry and so, subject to offers without prejudice save as to costs or the possibility that the claim fails utterly, the likelihood is that the claiming party (Sandoz) is litigating at the expense of the paying party (Napp) and believes it is litigating at the expense of the paying party. Therefore the usual considerations of self-interest which might constrain a party in incurring costs, since it might have to bear them itself, does not apply. Therefore there is a good reason for the stringencies of cost budgeting to be applied in these kinds of case in general.

Mr Segan also submits that this case has particular features which cause concern to his clients and suggest that Sandoz do appear to be approaching the matter as if they are litigating at Napp’s expense rather than their own. He refers to the fact that the initial letter which set out how much the claim was going to be estimated the claim value at £53 million, whereas, without any explanation when the claim was issued the value had doubled to just over £100 million. He says this is the hallmark of a party behaving in the way I have described. Mr. Segan also submits that the claimants, while they resist cost budgeting, have not given any good reason why it should not be imposed, other than by reference to the £10 million point in the rule.

Ms. Edwards-Stuart, who appears for Sandoz, submits that the court should not impose cost budgeting in this case. She submits that the detailed assessment process, which will only allow a party to recover reasonable and proportionate costs, is a sufficient safeguard. She also submits that the imposition of cost budgeting can prevent the recovery of reasonable and proportionate costs in some cases, and that cases of complexity, such as she submits this one is, are difficult to cost budget and therefore it would be inappropriate in this case to do so.

I entirely reject the submission that cost budgeting creates a problem whereby reasonable and proportionate costs may not be recovered. As Mr. Segan pointed out, budgets can and indeed often are altered during the course of proceedings, precisely in order to accommodate things that happen which were unexpected. That fundamental objection by Sandoz to cost budgeting is wrong.

Ms Edwards Stuart also submits that appropriate transparency about costs can be arranged in this case. Having read the papers overnight, I sent a message to the parties first thing this morning to ask if they could tell me what their costs to date had been and what their estimates for the future were. The costs to date are between £125,000 and £155,000 for Napp and about £250,000 for Sandoz. As regards the future costs, so far Napp are not in a position to say. Sandoz were not confident they could give an accurate estimate in the time available although they did suggest a figure but given that Napp were not in a position to give a figure at all I will not set out the Sandoz figure. Ms Edwards-Stuart submits that statements about what has been incurred and proper estimates can be provided in future and would amount to a sufficient safeguard from Napp's point of view.

As regards the complexity of the proceedings and whether that means it would be difficult to budget, Mr. Segan replies that Napp is not proposing that cost budgets be provided at this very early stage. Rather that they be provided after pleadings have closed, which will be the norm in any event. In this case, that will be some time in September. So by that time the nature of the issues in dispute will, or should, be clear.

It seems to me the real question is whether requiring the parties to produce estimates is a sufficient safeguard in these proceedings or whether I should go further and direct the matter actually be budgeted in accordance with CPR Rule 3.12.

I am not satisfied, yet, that cost budgeting in this case is required. As the matter stands, the way to deal with costs is to require the parties, after pleadings have closed, to produce and exchange statements of how much they have incurred by that stage and estimates as to what their future costs in these proceedings will be. Mr. Segan is right that estimates do not have the same stricture as cost budgets, but when the parties produce this information, at that stage it will be possible to evaluate what the likely position is. It may be, armed with that information, that Mr. Segan’s clients will be able to come back to court and submit that cost budgeting should be imposed, having regard to the information which has been provided. As the experience in the recent Unwired Planet v Huawei case shows, the estimates given before trial can operate as a practical constraint on a payment on account of costs ([2017] EWHC 1304 (Pat) paras 40, 58-59).

It is quite likely that this case will be able to carry on to trial without a significant overspend on costs without the need to impose the extra cost of budgeting. Costs budgeting can be reviewed, as I have said, in the autumn at the CMC. It may also be that even if cost budgeting is not to be imposed at that stage that the CMC should direct the parties to provide further costs information at a later stage, possibly in the early part of 2018. In any event I am not satisfied that I should impose cost budgeting now.