Winning the battle but not the war: Federal Court clarifies how damages undertakings will be enforced when an injunction is wrongly granted

A recent Federal Court decision has clarified the nature and extent of compensation payable by a litigant who has undertaken to compensate others affected by the operation of a wrongly-granted injunction.

Background

On 19 October 2018, the Honourable Justice Jagot of the Federal Court of Australia handed down an important judgment in a long-running pharmaceutical patent case (Sigma Pharmaceuticals (Australia) Pty Ltd v Wyeth [2018] FCA 1556). The case related to the extended-release formulation of the medicine venlafaxine (perhaps best known under the name of the originator brand, Efexor-XR®).

The litigation started back in 2009 when, at the request of Wyeth (which was soon to become a subsidiary of Pfizer, Inc.) the Court granted interlocutory injunctions restraining three generic drug companies from (among other things) supplying their generic brands of venlafaxine in Australia. That left Wyeth maintaining its monopoly on the supply of venlafaxine in Australia.

In November 2010, Justice Jagot confirmed that decision, and replaced the interlocutory injunctions with a final injunction. But in November 2011 the Full Court of the Federal Court overturned Justice Jagot’s decision; the High Court subsequently refused to allow Wyeth any further appeal.

This led to the three generic companies which had been restrained, as well as two of their upstream suppliers, and the Commonwealth of Australia (which subsidised dispensing of venlafaxine under the Pharmaceutical Benefits Scheme (PBS)) each suing Wyeth pursuant to the undertakings Wyeth had given to the Court to pay damages to any person adversely affected by the 2009 interlocutory injunctions. In essence, each of the claimants said that they had suffered significant losses because the generic companies had been wrongly restrained from supplying their generic brands of venlafaxine.

The damages case was hard fought. During the course of the six years of preparation, and the six week hearing at the end of it all, some of the claimants made novel arguments in support of their cases, while Wyeth raised almost every conceivable defence to the damages claims. The final damages figures are yet to be determined, but in her judgment of 19 October 2018 Justice Jagot found that each of the claimants (other than the Commonwealth, which settled its claim after the hearing) is entitled to some compensation from Wyeth.

Justice Jagot’s judgment has particular implications for pharmaceutical patent litigation in Australia, as well as for understanding obligations in relation to the administration of the PBS by the Commonwealth. However, its relevance extends beyond those matters, to applications for interlocutory injunctions and to claims on undertakings as to damages more generally – particularly in commercial disputes.

In addition, as three of the claimants were not parties to the underlying litigation her Honour’s judgment adds to the otherwise very limited jurisprudence about third-party claims on undertakings as to damages.

Interlocutory injunctions and the usual undertaking as to damages

Interlocutory injunctions are typically sought at the beginning of a case as a means of preserving the status quo whilst the underlying legal dispute is litigated. For instance, in the venlafaxine litigation Wyeth claimed that the supply by the generic companies of their brands of venlafaxine would infringe a patent held by Wyeth. The interlocutory injunctions prevented that alleged infringement while the Court considered whether the patent was valid, and, if valid, whether it would be infringed.

But interlocutory injunctions are typically given on the basis of a limited amount of evidence, and a minimal assessment of the prospects in a case. So as a condition of a litigant being given that protection by the Court, and because at the end of the case it might be found that it should not have been protected in that way at all, the litigant is usually required to give an 'undertaking as to damages' to the Court. In summary, this is a promise to the Court that if any person is affected by the operation of a wrongly-granted interlocutory injunction then the litigant will pay compensation to that person.

The Federal Court of Australia’s Usual Undertaking as to Damages Practice Note (GPN-UNDR) provides that the usual undertaking that has to be given in that Court is:

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

(b) to pay the compensation referred to in (a) to the person affected by the operation of the order or undertaking.'

Nine interesting issues considered in this case

Given the claimants’ arguments, and the wide range of defences raised in response, the Court made a number of interesting findings in this case that will have a more general application to assessments of liability pursuant to undertakings as to damages.

1. Is an interlocutory injunction 'wrongly granted' (and therefore no loss is recoverable) where the applicant wins at first instance?

The purpose of the undertaking as to damages is to compensate a person who has been harmed by a wrongly granted injunction. In this case, because Wyeth had been successful in the substantive proceeding at first instance (and only lost on appeal), it argued that the interlocutory injunctions were not wrongly granted and, therefore, that no damages should be payable pursuant to the undertakings.

One of the claimants described this submission as “startling”, and Justice Jagot agreed with that description (see [234] to [237] of the judgment). Her Honour stated that the question of whether an interlocutory injunction has been wrongly granted has to be assessed by reference to the final appeal decision if there is one. In this case, the final injunctions she had granted were overturned on appeal, and it followed that the interlocutory injunctions were wrongly granted.

2. Is loss recoverable on the undertakings for the period after a (wrongly granted) final injunction?

Each of the claimants argued, on various grounds, that they should be entitled to recover loss beyond the date of the final injunctions granted by Justice Jagot in the first instance proceedings, even though Justice Jagot had made orders at that time discharging the interlocutory injunctions. The orders discharging the interlocutory injunctions were not overturned on appeal.

One of the grounds for the claimants’ submissions on this issue was that if the interlocutory injunctions had not been granted they would have been able to obtain a stay of the final injunctions, and so loss beyond the first instance decision still resulted from the interlocutory injunctions, even though they had been discharged.

Wyeth successfully contended that the discharge of the interlocutory injunctions marked the end of the relevant period for the claimant’s loss. Justice Jagot agreed with Wyeth that any loss suffered as a result of the operation of the final injunctions was not loss that flowed directly from the interlocutory injunctions (see paragraphs [238] to [272] of the judgment).

Her Honour stated that while the final injunctions were also wrongly granted the losses sustained as a result of those final injunctions must lie where they fall, despite the fact that that no doubt seemed unfair to the claimants: [1221] of the judgment.

3. Does the usual undertaking only extend to persons who were parties or were bound (as non-parties) by the interlocutory orders?

Three of the claimants were not parties to the original litigation, and Wyeth said that it should not have to pay damages to any of them, even though it had undertaken to compensate any person 'whether or not … a party' for the adverse effects of the interlocutory injunctions.

Wyeth argued that claimable losses are confined to losses suffered either by the parties against whom the interlocutory injunctions were granted, or alternately by persons who, whether or not a party, were bound by the interlocutory injunctions. It said that for anyone else the losses could not be said to flow directly from the injunctions.

Justice Jagot rejected that view as inconsistent with the plain words of the undertakings given (see [219] of the judgment). She said that interlocutory injunctions can have a foreseeable and direct adverse effect on a person who is neither a party, nor bound by the injunction.

4. Can parties affected by the injunction claim for losses that were attributable to the litigation more generally or other underlying factors (e.g. the patent)?

One clear limitation that her Honour emphasised on the loss that could be recovered from Wyeth was that it must be loss that would not have been suffered simply as a result of the litigation, or other underlying factors (such as an unrevoked patent) – to be recoverable it had to be clearly caused by the interlocutory injunction (see [128] to [140] of the judgment). For instance loss could not be recovered if the affected parties would not have acted any differently, had an injunction not been granted, because of fear of their exposure to a damages claim. Similarly, things that parties had done anticipating the possibility of an injunction being granted could not be ignored – as they were not the result of the injunction itself.

5. Does loss have to be proved on the balance of probabilities or possibilities?

The question of what burden of proof the claimants had to meet with respect to each type of loss that they claimed was a complex one, and several different alternative submissions were made and are detailed in Justice Jagot’s judgment (paragraphs [152] to [216]).

Ultimately, her Honour held that some loss needed to be proved by each claimant on the balance of probabilities (that is, with a probability of greater than 50%), and once that was established then any loss which had a possibility of more than 1% was recoverable (though the amount recovered would be the loss multiplied by the percentage possibility found by the Court).

6. Is the party which obtained the wrongly-granted interlocutory injunction precluded from arguing, on a claim on an undertaking as to damages, that the very risk it said required an injunction would not have happened?

An interlocutory injunction is usually granted where a party has argued that some other person is threatening to infringe its rights, and if the Court does not restrain that person from doing so they will infringe those rights, and the party will suffer a loss for which damages will not be an adequate remedy.

In this case, when Wyeth obtained the interlocutory injunctions in 2009 it persuaded the Court (at least in the case of two of the generic companies) that unless an injunction were granted it was likely that those companies were going to enter the market with their generic brands of venlafaxine, and cause harm to Wyeth.

When those same companies (and the other claimants) claimed damages for wrongly having been locked out of the market by the injunction Wyeth argued, in effect, that if the injunctions had not been granted the generic companies would actually not have entered the market (or at least not successfully) anyway, and so had suffered no loss.

The generic companies argued, at the damages hearing, that Wyeth should not be permitted to adduce evidence, or to cross-examine, for the purpose of establishing a number of different matters which it said were contrary to the way Wyeth had put its case at the interlocutory injunction stage. The generic companies relied in that submission on legal doctrines including abuse of process, Anshun estoppel, the prohibition of approbation and reprobation, and the need for a party that seeks equity to do equity.

With one exception (a cause of action that Wyeth could have pursued but chose not to in the substantive proceedings) Justice Jagot permitted Wyeth to make the arguments that the generic companies sought to have precluded. While her Honour considered that a party such as Wyeth should not be permitted to say one thing to obtain an interlocutory injunction and then another to defend a claim for damages on the undertaking it provided in support of that injunction, she did not consider that, on balance, that was what Wyeth was doing here (see [317] to [329] of the judgment). Among other matters her Honour considered that more evidence from the generic parties was now available about what they would have done if there had been no injunction, and that it was appropriate to allow that evidence to be considered and tested.

7. What is the hypothetical world in which damages are being assessed?

In order to calculate the quantum of loss in a claim on the usual undertaking, the relevant hypothetical or counterfactual world has to be identified. It is easy to say that in that hypothetical world that there would have been no injunction granted, but harder to understand how that situation would have arisen.

For instance, was it because (in this case) Wyeth had never filed an application for an interlocutory injunction? Was it because Wyeth sought an interlocutory injunction but the Court refused it? If the Court refused to grant an interlocutory injunction, on what grounds did it do so? Or did Wyeth notify an application for an interlocutory injunction, but then choose not to proceed with it on the day it was scheduled to do so?

Justice Jagot preferred the last of those approaches. Her Honour accepted Wyeth’s submission that the only 'fact' that should be removed from what happened in the real world is the grant of the interlocutory injunction. She considered that this meant assuming that, on the relevant date, Wyeth had simply not prosecuted its application for interlocutory relief.

8. Is it helpful to have evidence of what someone says (in hindsight) they would have done if the interlocutory injunction had not been granted?

Each of the claimants and Wyeth relied on evidence (given by witnesses several years after the relevant events) about what would or would not have happened if the interlocutory injunctions had not been granted. It is fair to say that Justice Jagot was not impressed by that evidence (see [273] to [286] of the judgment). Her Honour gave it very little weight.

She noted that many of the witnesses were being asked to give hypothetical evidence in 2018 about what would have occurred between 2009 and 2011 (in a situation that never actually arose). This passage of time was reason alone, in her Honour’s eyes, to cast significant doubt on the reliability of that evidence. Further, she noted that the questions asked of the witnesses were unavoidably general and de-contextualised, creating the unpreventable risk of hindsight bias coming into play.

The evidence which her Honour found to be most persuasive was documentary evidence contemporaneous with the interlocutory injunctions, and, at least where against a party’s interest, affidavit evidence that had been relied on at the hearings where the interlocutory injunctions had been awarded.

9. Can interest be awarded on damages?

Wyeth argued that even if the claimants were entitled to damages that they were not entitled to any interest on those damages. It said that section 51A of the Federal Court of Australia Act 1967 (Cth) did not apply to the damages claims because a claim on an undertaking as to damages was not a 'cause of action' within the meaning of that provision. It also said that the claimants had not asked for interest 'as damages', but only interest 'on damages', and that the Court had no inherent equitable jurisdiction to award the latter. Given the time that had passed since the interlocutory injunctions were granted, and the start of any loss, interest had the potential to be a significant component of any damages award.

Justice Jagot rejected Wyeth’s arguments on this point. Her Honour held that section 51A did apply to claims for compensation pursuant to undertakings as to damages. She was also satisfied that interest could (and should) be awarded in the exercise of the Court’s inherent equitable jurisdiction (see [1299] and [1308] of the judgment).

Looking ahead

This decision was the first of two expected judgments in the Federal Court in the context of significant claims on undertakings as to damages in pharmaceutical patent litigation. It provides important guidance for litigants seeking interlocutory injunctions, and opposing them.

At the time of writing final orders have not yet been made arising from the judgment, and it is also unclear whether any of the parties might be inclined to extend this long-running litigation even further by pursuing an appeal.

Corrs acted for two of the claimants in this litigation. The views expressed in this article are the views of the authors and do not necessarily reflect the views of the claimants for which Corrs acted.