Lost sales of Yasmin (Grounds 5-9)
145 We now turn to Grounds 5, 6, 8 and 9 of the notice of appeal concerning the Damages Judgment, Ground 7 not being pressed. Grounds 5, 6, 8 and 9 are expressed in the following terms:
5. The primary judge erred in holding that Bayer's damages were to be assessed on the basis that every sale of Isabelle was a lost sale of Yasmin (Main Judgment at [345]) (the Lost Sales of Yasmin Conclusion).
6. The primary judge erred in failing to apply the five-step approach to discounting that is used where the infringer and the intellectual property rights holder compete in the same market and the intellectual property rights holder's claim is for lost profits (Main Judgment at [227]-[229]).
…
8. The primary judge erred in finding, and relying upon the finding, that third generation oral contraceptives (OCs) other than Yasmin and Isabelle had prices "ranging from around $71 to $84 for a packet of three cycles" (Main Judgment at [206]) in circumstances where there was evidence that cyproterone acetate brands such as Brenda, Carolyn, Estelle, Juliet and Laila, being other third generation OCs, had prices ranging from $18.90 to $39.10 for a packet of three cycles.
9. Further or in the alternative to grounds 5 and 6, the primary judge erred in holding that it was unnecessary for the Court to attempt to quantify the size of any discount to be applied in respect of the Lost Sales of Yasmin Conclusion (Main Judgment at [299], [301], [302]).
146 Her Honour held that Bayer's damages were to be assessed on the basis that every sale of Isabelle was to be treated as a lost sale of Yasmin, with no discount to be made to reflect any uncertainty in the relevant hypothetical counterfactual, namely, that if a particular sale of Isabelle had not been made, then an equivalent sale of Yasmin would have been so made. But Generic Health submitted that her Honour erred in that conclusion by not making a discount for such uncertainty. It submitted that we ought to apply a discount rate in the order of 10% to 15%, which would result in a reduction in the damages award of $2.4 to $3.6 million (excluding interest), not including the portion of the award made in respect of the Petibelle sales.
147 The purpose of an award of damages for patent infringement is compensatory, rather than punitive: Bailey v Namol Pty Ltd [1994] FCA 733; 53 FCR 102 at 110-111 and the other cases collected in Seafolly Pty Ltd v Fewstone Pty Ltd [2014] FCA 321; 313 ALR 41 at [506]. The appropriate quantum of damages is that which will restore the patentee to the position it would have been in had the infringement(s) not occurred: General Tire and Rubber Company v Firestone Tyre and Rubber Company Limited (1976) 93 RPC 197 (General Tire (1976)) and the other cases cited in Pacific Enterprises (Aust) Pty Ltd v Bernen Pty Ltd [2014] FCA 1372; 321 ALR 715 at [5]. But when one comes to assessing damages based upon a hypothetical counterfactual, a question that arises is whether any discount should be made, and if so what, to reflect any uncertainty. We will return to that question later.
148 It is appropriate to begin by noting the following facts, most of which were the subject of the primary judge's findings at [197] et seq and not disputed before us unless we indicate otherwise.
149 First, women could only purchase OCs at a pharmacy, with all OCs requiring a prescription from a doctor. Doctors would prescribe originator brand names, and were not generally aware of generic versions of brands unless a patient specifically requested them.
150 Secondly, and as her Honour found at [208], whether before or after Isabelle was introduced, doctors would have prescribed Yasmin if they intended the patient to take the desired formulation of EE and DRSP.
151 Thirdly, Yasmin consisted of 3 mg DRSP and 0.03 mg EE. It offered a unique compound. When first introduced in Australia, it was the only OC with DRSP as the progestogen component. This offered non-contraceptive benefits which were not otherwise available in the one OC, including by reason of DRSP's aldosterone-antagonist effect, thereby avoiding increased plasma volume and body weight and symptoms such as breast tension, headache, bloating and increased blood pressure. From 23 January 2012, Isabelle and Yasmin were the only products on the market with 3 mg DRSP and 0.03 mg EE.
152 Fourthly, Isabelle was cheaper than Yasmin. Isabelle was sold by pharmacists to customers for around $60 to $61 for a three month supply and around $25 to $26 for a one month supply. Contrastingly, Yasmin was sold by pharmacists to customers for around $71 to $73 for a three month supply and around $28 to nearly $30 for a one month supply.
153 Fifthly, there was high compound loyalty by women to their OC, or, as the parties described it before us, "molecule" loyalty. Women did not like to 'chop and change' OCs, but loyalty was not absolute.
154 Sixthly, the OC market was crowded and split into two segments. One segment was third generation OCs, which were marketed for their side-effect profiles and benefits. These were not PBS-listed and were for the most part priced at a premium. The other segment was first and second generation OCs, which were PBS-listed (other than some second generation OCs) and which were not priced at a premium. Each of Yasmin and Isabelle was a third generation OC. Yasmin had a side-effect profile based on reduced weight gain, fluid retention and effect on mood. Other third generation OCs had different profiles, including lighter bleeding (Zoely and Qlaira) and better management of androgenisation, such as facial hair and acne. These included the cyproterone acetate combined OC brands (CPA brands). We will return to discuss the pricing of CPA brands later.
155 Generic Health submitted that the primary judge erred in various respects in not making an appropriate discount. Generally speaking, Generic Health's appeal grounds fall into two categories. The first category relates to what was said to be the price sensitivity of women concerning their purchase of OCs. Generic Health submitted that her Honour ought to have made a discount on the basis of such sensitivity to reflect the fact that a woman who had purchased Isabelle may not have necessarily purchased Yasmin if Isabelle had not been available. The second category relates to the appropriateness of the methodology that her Honour used. It is appropriate to begin with the first category of complaint.
156 Generic Health submitted that the primary judge misunderstood evidence, which showed that Bayer had engaged in conduct recognising the price sensitivity of patients to Yasmin, being:
(a) the "Win/Lose" Scenarios document (the Win/Lose document), being an internal document dated 14 March 2013 prepared by Mr Peace, Bayer Australia's former Business Unit Manager, Women's Health Care Unit; and
(b) the strategy adopted by Bayer of releasing Petibelle, the generic version of Yasmin.
157 Further, Generic Health pointed out that, under the heading "Outcome/behaviour", the Win/Lose document stated that, if Bayer won at trial and Isabelle was removed from the market, then "Pharmacy offer Yasmin at normal price or more likely suggest a switch to a CPA brand", thereby indicating a price sensitivity that might manifest itself by switching to a CPA brand. Contrastingly, the primary judge found that the existence of the Win/Lose document containing such a possibility was not unexpected, and gave it little weight.
158 Further, Generic Health submitted that the primary judge's conclusion of an absence of specific price sensitivity appears to have been infected by her Honour's overlooking of critical evidence, which showed that CPA brands featured many brands (for example Brenda, Carolyn, Estelle, Juliet and Laila) that had prices ranging from $18.90 to $41.45 for three cycles. It submitted that those prices were much lower than Yasmin's $71 to $73. We note that table 1.1 of Mr Houston's 8 July 2016 report relied upon by Generic Health just lists the CPA brands, not the prices; Mr Houston was an expert economist called by Generic Health. Further, in annexure FM-2 to Mr McCann's first affidavit, the position is unclear concerning Carolyn and Juliet.
159 Generic Health submitted that her Honour failed to make factual findings as to the prices of the third generation CPA brands and that they were far cheaper than Yasmin. In this respect, Generic Health submitted that the primary judge erred in respect of her findings at [206]:
Third generation OCs are priced at a premium with the prices (leaving aside Isabelle and Petibelle) ranging from around $71 to $84 for a packet of three cycles (i.e. three months).
160 Generic Health submitted that the primary judge overlooked evidence concerning the price of CPA brands and that this is confirmed by what were said to be the erroneous findings that:
(a) third generation OCs, which included CPA brands, had prices "ranging from around $71 to $84 for a packet of three cycles" at [206]; and
(b) Isabelle was priced "below the price of any non-PBS third generation OC" at [238]; in relation to the reference to "non-PBS", her Honour found that at the relevant time all third generation OCs were non-PBS.
161 We agree that her Honour erred in this respect and that, accordingly, Ground 8 is made out. But where that takes Generic Health is another matter. We will discuss the significance of making out Ground 8 to the question of whether the damages award should have been discounted later.
162 Further, Generic Health submitted that the Win/Lose document was important internal evidence of Bayer's perception of the price sensitivity of consumers, with its significance elevated by the fact that it was prepared on 14 March 2013, before the judgment on liability and, accordingly, before the quantum proceedings were on foot. It is said that unguarded, internal and contemporaneous communications often provide the best evidence of the relevant state of mind or perception. Further, Generic Health submitted that the reference to the cheaper third generation CPA brands is significant. Generic Health submitted that it confirmed Bayer's appreciation of the competition it faced from the CPA brands, including on price. Generic Health contended that Bayer's concern as to the CPA brands can only have related to price, otherwise Mr Peace would have been concerned about pharmacists suggesting a switch to other third generation OCs, including those more expensive than Yasmin. Generic Health submitted that the price concern was a very real one to Bayer. Moreover, Mr Peace considered that it was "more likely" that a pharmacist would suggest switching to a CPA brand rather than purchasing Yasmin "at normal price".
163 Further, Generic Health submitted that Bayer's strategy in relation to Petibelle was also instructive competitive conduct concerning Bayer's perception of the competitive consequences of its own pricing and, in essence, the price sensitivity of women to Yasmin.
164 Bayer started selling Petibelle on 26 June 2014, a week after Generic Health was required to cease selling Isabelle. It was sold by pharmacists for about $66 for a three-month supply and nearly $22 for a one month supply, being approximately halfway between the Yasmin and Isabelle prices. Generic Health submitted that Bayer's expert economist, Dr Williams, accepted that, if Bayer believed that consumers were indifferent to a price difference of $5, being the rough price difference between Yasmin and Petibelle, then they would not have introduced Petibelle. According to Dr Williams, Petibelle's introduction suggested that there was "potentially a class of customers of Isabelle who would not be happy paying the higher Yasmin price and might shop elsewhere in the market". Generic Health submitted that the primary judge did not refer to this evidence. Instead, according to Generic Health, her Honour found at [300] that, in introducing Petibelle, "… Bayer's concern was that Isabelle had disrupted the market possibly introducing a price sensitivity that would not have existed but for Isabelle".
165 Further, and in any event, Generic Health submitted that her Honour's finding at [300] was not open on the evidence. According to Generic Health, Dr Williams readily accepted that, if consumers buy at a high price, and then have a lower price for a period, that does not necessarily prevent them from going back to the original price. Rather, so it was said, the people who were likely to be affected by the removal of the low price were people who were new customers at the low price, i.e. people who were never prepared to pay the high price, which would include some Isabelle customers. Accordingly, so it was submitted, the introduction of Petibelle demonstrated Bayer's acceptance that some customers were price-sensitive to Yasmin and, based on its price, would have preferred other OC brands instead of Yasmin.
166 Generic Health also submitted that Dr Williams accepted that there was a price-value trade-off for consumers between different contraceptive products. As applied to Yasmin, Generic Health submitted that Dr Williams accepted in cross-examination:
(a) the possibility that some customers might desire the characteristics of Yasmin but not be willing to pay its retail price; and
(b) it was likely that there was a class of customers who might have been prepared to pay the Isabelle price, but not the Yasmin price, although Dr Williams was not asked at that point about its size.
167 Dr Williams added that "… it has always seemed to me that this issue is about quantum. That is is it de minimis or is it something that's material[?]". According to Generic Health, this was a concession that a one-for-one approach, without any discount, was inapposite. Yet, so Generic Health complains, her Honour accepted and then relied on Dr Williams' earlier suggestion that "it is appropriate to assume that every cycle sold of Isabelle was one less cycle sold of Yasmin" (see at [295], [296] and [301]).
168 Further, Generic Health submitted that the primary judge incorrectly discounted the evidence of its witness, Mr McCann, who owned a pharmacy in New South Wales. Mr McCann's evidence was the only evidence from a pharmacist, or evidence at the 'point of sale'. Generic Health submitted that Mr McCann's evidence provided examples of women purchasing Isabelle in circumstances where they would not have purchased Yasmin, contrary to the last line of [247] of her Honour's reasons.
169 Further, Generic Health submitted that her Honour found at [272(1)] that, if there was no material change in a patient's financial circumstances, then the desire of a patient taking Yasmin or Isabelle "would not be based on price but continued therapeutic effectiveness". Generic Health submitted that this entailed a finding that Yasmin and Isabelle were highly price inelastic. But, Generic Health contended such a proposition was not supported by any evidence. Further, the finding was contrary to the evidence of the expert economists and what had in fact occurred in the market. Generic Health argued that if Yasmin was price inelastic, customers would not have purchased Isabelle in its place.
170 It is appropriate to now turn to the other category of challenge relating to the methodological approach used by the primary judge.
171 More generally, Generic Health submitted that where, as here, the parties have competed in the same market and the claim is for lost profits, it is appropriate to apply the following "five-step approach" (see, for example, Norm Engineering Pty Ltd v Digga Australia Pty Ltd [2007] FCA 761; 162 FCR 1 at [266] to [271] per Greenwood J), being to:
(a) examine the number of the infringer's sales;
(b) assume the infringer was trying to capture sales from the patentee;
(c) assume the hypothetical counterfactual that the number of sales made by the infringer was equal to the number of sales lost by the patentee on the assumption that the patentee was the market leader;
(d) discount the number of lost sales in (c) to reflect the fact that not all sales made by the infringer could be considered sales lost by the patentee; and
(e) apply any further necessary discounts for other factors and contingencies.
172 For present purposes concerning the debate before us, the relevant integer to focus on is integer (d).
173 Generic Health submitted that the five-step approach was especially apposite in the present case because the evidence showed that Yasmin sales were declining, which made it difficult to ascertain mathematically Isabelle's impact on Yasmin's sales. We would note, however, that at [259] of her reasons, the primary judge referred to Mr Peace's evidence, which said that only a "very, very small" part of the Isabelle share of the market was new business and otherwise affirmed his evidence that an Isabelle sale was a lost sale of Yasmin. More generally, whatever the sales trends of Yasmin before and after the introduction of Isabelle, from our assessment of the evidence before her Honour, there was little, if anything, in the way of probative evidence before her that demonstrated that the introduction of Isabelle significantly grew or slowed the rate of decline of the market for the relevant compound or "molecule" from what it would have been absent the introduction of Isabelle, such that one could readily conclude that not all sales of Isabelle translated into lost sales of Yasmin.
174 Further, Generic Health contended that at [227] to [229], the primary judge appears to have held that the five-step approach was inapposite because it related to markets that "give a different context", being one of "consumer choice and substantial substitutability", which her Honour considered, at [229], was unlike the context in the OC market:
…in which the product can be obtained only on prescription, the prescription will be for a specific brand, the consumer will take advice from a doctor as to the brand which best meets the consumer's requirements, brand substitution may be permitted or prohibited, the fact that consumers do not change from one OC to another without good reason and, in the case of Isabelle, the only brand for which it could be substituted was Yasmin.
175 Generic Health submitted that her Honour's justification for the rejection of the "five-step approach" was in error.
176 On the question of the difference in markets, Generic Health submitted that integer (b) (as we have described above) assumes that it was trying to capture sales that would otherwise have been made of Yasmin. It submitted that this was consistent with her Honour's findings as to its marketing and, more generally, the purpose of a generic composition. Accordingly, Generic Health submitted that this supported the correct approach, being to consider the nature of the OC market as part of the determination of the size of the discount to be applied under integer (d) (as we have described above), rather than to reject the "five-step approach" because of the different market context.
177 More generally, Generic Health submitted that, as the burden of proof regarding damages for patent infringement lies with the patentee, the burden of proving the paucity of any discount lay with Bayer. Generic Health made reference to Gerber Garment Technology Inc v Lectra Systems Ltd [1995] RPC 383 at 393 per Jacob J, although we note that Jacob J did not refer in terms to the burden of proving the paucity of any discount. We also note that Jacob J's decision was partly set aside on appeal (Gerber Garment Technology Inc v Lectra Systems Ltd [1996] EWCA Civ 1245; [1997] RPC 443), although not in relevant respects that need trouble us for the moment.
178 Further, Generic Health submitted that the primary judge was obliged to assess the size of the discount in accordance with the principles set out earlier and to do the best her Honour could in calculating damages: Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64 at 83 per Mason CJ and Dawson J. Further, it was submitted that the inevitable degree of imprecision in quantifying a discount, or the fact that Generic Health was the "wrongdoer", did not entitle her Honour to fall back on a one-for-one assumption and to draw the conclusions that her Honour did at [301] and [302]. We set out these paragraphs of her Honour's reasons later, to which we will return.
179 Generally, Generic Health submitted that, in light of the errors contended for, we should set aside the primary judge's damages award and determine afresh the quantum of damages, applying a discount in the range of 10% to 15% to reflect the following matters:
(a) the significant price difference between Yasmin and Isabelle;
(b) Bayer's own recognition that it faced price competition in the OC market, especially from CPA brands;
(c) the crowded nature of the OC market;
(d) the evidence that at least some women were price-sensitive; and
(e) that "the hypothetical circumstances in which a woman might have come to purchase Isabelle", but would not have purchased Yasmin if Isabelle had not been available, were "capable of infinite variation" ([232]).
180 We reject most of the attacks made by Generic Health, save that (as we have recorded above) we agree that her Honour made an error concerning [206]. We also respectfully differ with her Honour in terms of the appropriate methodological approach, which in our view warrants some discount being made, even if only a very modest one.
181 We are dealing with a hypothetical situation of the past, namely, whether if a sale of Isabelle had not been made, then an equivalent sale of Yasmin would have been made. Accordingly, we must form an estimate of the likelihood that the hypothetical situation would have occurred: see Malec v J. C. Hutton Proprietary Limited [1990] HCA 20; 169 CLR 638 at 639 per Brennan and Dawson JJ. In that respect, we must assess the degree of probability that such an event would have occurred and adjust any award of damages to reflect that degree of probability: Malec at 643 per Deane, Gaudron and McHugh JJ.
182 In another sense, the question can be looked at through the lens of the value of a lost opportunity. The lost opportunity was to make a sale of Yasmin if the sale of Isabelle had not been made. In our view, it is not in doubt that it was established before the primary judge that, on the balance of probabilities, for all sales of Isabelle there was a loss of an opportunity to make a sale of Yasmin. The question then is: what is the value of the lost opportunity? On that question, the value is to be "ascertained by reference to the degree of probabilities or possibilities" involved in the hypothetical counterfactual: Sellars v Adelaide Petroleum NL [1994] HCA 4; 179 CLR 332 at 355 per the plurality.
183 Another way to express the same point is as Brennan J described it in Sellars at 368:
Although the issue of a loss caused by the defendant's conduct must be established on the balance of probabilities, hypotheses and possibilities the fulfilment of which cannot be proved must be evaluated to determine the amount or value of the loss suffered. Proof on the balance of probabilities has no part to play in the evaluation of such hypotheses or possibilities: evaluation is a matter of informed estimation.
184 This theme of informed estimation resonates with some observations made by Hayne J in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10; 196 ALR 257 at [37] and [38]. Any estimation must be done "with as much precision as the subject matter reasonably [permits]". Mere difficulty in estimating damages does not relieve a court "from the responsibility of estimating them as best it can".
185 Interestingly, Staughton LJ in Gerber Garment Technology [1997] RPC 443 at 459 cited Sellars with approval and discussed the matter in terms of evaluating the loss of a chance. Gerber Garment Technology both at first instance ([1995] RPC 383 per Jacob J at 407 and 408) and on appeal ([1997] RPC 443 per Staughton LJ at 459 and 460) evaluated and applied a loss of a chance approach based on the possibilities and probabilities. Moreover, Jacob J at [1995] RPC 383, 395 also invoked the themes of Lord Diplock in Mallett v McMonagle [1970] AC 166; [1969] 2 WLR 767 at 176, which resonate with the themes discussed in Malec at 639 and 643 that we have referred to above.
186 Whichever way one expresses it, in assessing the possibilities or probabilities of a hypothetical counterfactual, one is engaged in the task of estimation, even if the estimation involves an assessment of the counterfactual as being close to a certainty. But being close to a certainty is not the same thing as a certainty. If one is estimating, one still needs to apply a discount, albeit a very modest one, to reflect the assessment that one is not at a certainty. If one is looking at the value of a lost opportunity which is not certain to occur, then the valuation must involve some discount, even if a very modest one.
187 Given that Generic Health is a wrongdoer, it may be accepted that damages should be liberally assessed, although not, of course, to punish it: General Tire (1976) at 212 per Lord Wilberforce. The object is to compensate Bayer. To say that damages should be liberally assessed in no way cuts across what we have just said: that, in estimating or valuing a lost opportunity or in assessing a hypothetical counterfactual for any scenario short of certainty, some discount must be made to reflect that less than certain position, even if the discount is very modest indeed.
188 Also, whilst the "five-stage approach" in Norm Engineering may be helpful in some circumstances to order analysis, it should not be seen as a definitive test for what is an evaluative assessment on all the available evidence.
189 We raise one other matter before we proceed further. In assessing the relevant hypothetical counterfactual, we are in the realm of inferential assessment. We are in as good a position as the primary judge to consider that question.
190 It is appropriate now to consider the primary judge's reasoning on this aspect of the case.
191 In our opinion, the primary judge correctly reasoned that one is "dealing with wrongdoers" and that, in one sense, her Honour was entitled to fix damages on a liberal scale (at [193]). But as will be apparent from what we have just said, one needs to be careful of statements in the authorities to the effect that estimating damages is not an exercise that requires mathematical precision, that it may need to be dealt with in the rough, or that it should be done liberally. Whilst all such statements are apposite in one sense, in another sense when one is valuing a loss of an opportunity, there still needs to be a discount if the relevant probabilities or possibilities reflect less than certainty concerning the relevant counterfactual.
192 Generic Health submitted that the primary judge ought to have applied a discount to the sum awarded to Bayer to account for the "completely speculative" ([291]) "mere possibility" ([301]) that "a very, very small" ([259] and [291]) or "immaterial" number of women who purchased Isabelle would not have purchased Yasmin if Isabelle had not been available. We agree. Although the primary judge found that there was a "very real" doubt as to whether any such customers actually existed ([301]), we respectfully reject the idea that this doubt was to be resolved in Bayer's, but not the wrongdoer's, favour (cf TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd [No 3] [2007] FCA 151; 158 FCR 444 at [207]). In our view, some very small discount should have been made to reflect the uncertainty.
193 The Win/Lose document has some importance at this point. It was a recognition by the business person at the time that there was a risk of price sensitivity or elasticity. That in part could have been brought about by the disruption to the market by Generic Health. Putting a percentage on this is not straightforward. It is more helpful to think in terms of customers. A 10% discount attempts to reflect that one in ten customers who bought Isabelle would not have bought Yasmin. Five percent is one in twenty. Two percent is one in fifty. One percent is one in a hundred.
194 We agree with Bayer's submission that there is no evidence to justify a discount of the order of 10% to 15% for which Generic Health contended. The only basis propounded for such a large discount is as to a "very small possibility" ([302]), which the primary judge found on the evidence before her was unlikely to exist. Some discount was necessary given that we are not dealing with a certainty, but not a discount of 10% to 15%. It is appropriate to elaborate further on some of the relevant facts. But we would say now that we have little difficulty with her Honour's primary and secondary factual conclusions and reasoning, save for what we have said earlier concerning the pricing of CPA brands. Rather, based on those conclusions and reasoning, and for the reasons that follow, we would put the range as between 1% and 3%. We do not think greater precision is warranted, or possible. Given that is our view of the range, and given the principle of liberality, we think that, for the reasons that follow, the choice of 2% is appropriate.
195 First, as her Honour correctly found, Genetic Health's contentions and the views of Mr Houston, its economic expert, "lack[ed] sufficient foundation in the reality of the OC market in Australia" ([270]).
196 Secondly, Dr Williams in his report (at [36]) stated that "[a]lthough it is possible that some of the sales of Isabelle were substituting Isabelle for an OC other than Yasmin, the extent (if any) of such substitution is difficult to determine". He concluded at [48] and [49]:
The detection of the magnitude of substitution between products can only be undertaken by means of empirical analysis. However, in this case, even a full-blown empirical analysis of demand is unlikely to reveal any significant substitution of Isabelle for oral contraceptives (OCs) other than Yasmin because of other effects that were operating at the same time. These other effects so dominated any possible substitution in favour of lower-priced products, that the net effect was a reduction in sales coinciding with the period in which Isabelle was in the market.
The available evidence (including the evidence of Peace, Walker and McCann) suggests that the best available assessment of Bayer's claim for damages would be by treating each sale of Generic Health's Isabelle product as a lost sale of Bayer's Yasmin product.
197 While Dr Williams' views supported her Honour's findings, we do not accept that he was expressing the matter as one of certainty.
198 Indeed, one could not exclude the possibilities adverted to by Mr Houston in the following terms:
My reasoning relies on some patients having made one of two forms of substitution, from one product to another, ie:
• the availability of Isabelle meant that some patients that would otherwise have switched from Yasmin to another COC purchased Isabelle instead of making that switch; and
• similarly, the availability of Isabelle meant that some patients with a new prescription for Yasmin purchased Isabelle instead whereas, had Isabelle not been available, they would not have proceeded to fill their Yasmin prescription, because it was too expensive.
199 His reasoning rejected the idea that each sale of Isabelle was a lost sale of Yasmin. He also concluded that "since patients were able to fulfil their prescription for Yasmin more cheaply after Isabelle was introduced, this would have led to more sales for Yasmin and Isabelle combined than would have been the case for Yasmin alone".
200 While many of Mr Houston's opinions were speculative (and his last statement was rightly rejected given its ambitious breadth), his evidence did support the notion that one could not rule out the possibility, in a very small number of cases, that a sale of Isabelle did not necessarily transpose into a lost sale of Yasmin.
201 Thirdly, as her Honour correctly observed ([226] to [229]), her estimation of damages depended upon a factual context which was quite different to the context discussed in the cases referred to by Generic Health. Whilst the principles referred to in those cases may have been appropriate in their context ([226]), including the application of the posited "five-step approach", we agree with her Honour that such authorities do not set any universal step-wise approach or rules for every damages estimation.
202 In our view, her Honour correctly distinguished other markets from the context before her. As her Honour described at [227] to [229] in pellucid terms:
The context of the present case is different. A person wishing to buy swimwear, a T-Shirt or an industrial bucket is not constrained in any relevant way. The person is free to buy whichever swimwear, T-Shirt or industrial bucket best meets their current needs and circumstances. A woman who wishes to use an OC is not in that position. Every woman who wishes to use an OC must do so under prescription from a doctor. As Yasmin was the only formulation of 3mg DRSP and 30 µg EE on the market for some 10 years before Isabelle entered the market, all sales of Yasmin represent a prescription given by a doctor to a woman for Yasmin. Having received that prescription, a woman could obtain only Yasmin from a pharmacist. If the woman did not fill that prescription (because of price or for some other reason), her choice was to not use any OC or to return to a doctor to obtain a prescription for a different OC. If she returned to her doctor, she would be informed that Yasmin was the only OC containing 3mg DRSP and 30 µg EE available and that this formulation had (or at least was said to have had, based on clinical trials) a unique suite of benefits in terms of not causing weight gain, bloating, breast tenderness and perhaps increased blood pressure. Further, given that women generally do not change their OC other than by reason of some major change in circumstances, it may be inferred that women who had been prescribed Yasmin in the past would continue to be prescribed and use Yasmin in the future unless subject to a major life event which may cause them to interrupt their use of an OC, to cease using an OC altogether, or to change their OC.
When Isabelle entered this market, it did so on the basis that it was bioequivalent to Yasmin. On the evidence, doctors would not prescribe by reference to the brand "Isabelle". Doctors would continue to prescribe Yasmin but, provided the doctor did not tick the "brand substitution not permitted" box on the prescription, a pharmacist could supply Isabelle instead of Yasmin. Accordingly, a woman could obtain Isabelle only if she held a prescription for Yasmin. A woman with a prescription for any OC other than Yasmin could not, on that prescription, obtain Isabelle. As a result, it is accurate to say that the only OC for which Isabelle could be substituted was Yasmin.
These are different circumstances from the markets for items of clothing or industrial equipment. They give a different context. The context for clothing and equipment (and many other consumables) is one of consumer choice and substantial substitutability. This is not the context for the OC market in which the product can be obtained only on prescription, the prescription will be for a specific brand, the consumer will take advice from a doctor as to the brand which best meets the consumer's requirements, brand substitution may be permitted or prohibited, the fact that consumers do not change from one OC to another without good reason and, in the case of Isabelle, the only brand for which it could be substituted was Yasmin.
203 Moreover, at [230] her Honour went on to say:
Accordingly, it is at least clear that every sale of Isabelle represents a prescription for Yasmin which resulted in Isabelle rather than Yasmin being prescribed. This is because the evidence was that doctors generally prescribe by reference to the originator brand, there was evidence of pharmacists dispensing Isabelle in respect of a prescription for Yasmin, and there was no evidence of any prescription for Isabelle. This proposition is not the same as Bayer's proposition that every sale of Isabelle (and Petibelle) must be a lost sale of Yasmin. It is, however, the necessary starting point for the consideration of the issue of Bayer's lost profits. Against this starting point, Generic Health's contentions can be assessed.
204 The primary judge did not err in not applying the "five-step approach" that we described earlier. That said, even on that approach, the application of integer (d) (as we have described above) would justify a discount of 2%. This is the discount that also ought to be applied under the Malec, Sellars or Placer approaches. Thus, any perceived methodological error in not using the "five-step approach", if there be one (which there is not), goes nowhere.
205 Fourthly, the complex and unique factual circumstances found by the primary judge were amply supported by the evidence of a pharmacist, a doctor, a pharmaceutical marketing expert, a project manager and economic evidence. Taken with other important contextual matters that we will discuss in a moment, this cumulatively led the primary judge to conclude that Bayer's loss was best assessed on the basis that every sale of Isabelle was a lost sale of Yasmin. But, as we have said, if the position was less than certainty, as it was on the evidence before her Honour, then some discount ought to have been made. The primary judge emphasised that the "one for one proposition is not a mere assumption in any event". She noted that it was "an expert opinion of Dr Williams and Mr Peace (from different perspectives) by reference to non-quantitative but detailed data about the OC market in Australia and the place of Yasmin (and Isabelle) within that market" (see at [299]). All of this is true. But no expert was certain and could not be certain that each sale of Isabelle was at the expense of Yasmin. Accordingly, some discount had to be made.
206 It is now appropriate to discuss some of the contextual matters the primary judge found, which were amply supported by the evidence.
207 First, a woman who wished to use an OC obtained a prescription, after a consultation with a doctor regarding the benefits (including non-contraceptive benefits) and side effects of various available OCs. Further, the benefits of originator OCs such as Yasmin were primarily promoted to doctors, rather than to pharmacists, to whom generics were promoted. Moreover, doctors were not generally aware of the cost of OCs and did not generally discuss the cost of OCs with patients.
208 Secondly, when Isabelle entered the market, it did so on the basis that it was bioequivalent to, and directly substitutable with, Yasmin, which was the only such product then on the market. The Isabelle ARTG registration was based on the ARTG registration for Yasmin and the Isabelle Product Information (PI) sheet contained substantially the same information as the Yasmin PI sheet. It is not in doubt that Generic Health promoted Isabelle to pharmacists as being a substitute for Yasmin. Indeed, this could not be seriously denied. The various forms of "Exclusive introductory offer" in evidence before her Honour, marketing Isabelle to pharmacists, contained the prominent statement "Originator Brand-Yasmin" and explicitly compared the Isabelle net in-store price to the Yasmin net in-store price.
209 Thirdly, doctors were not generally aware of generic versions of OCs such as Isabelle and would prescribe the branded product Yasmin. But a pharmacist could supply only Isabelle (i.e. no other OC) instead of Yasmin if the doctor did not tick the "brand substitution not permitted" box on the prescription. A woman with a prescription for any OC other than Yasmin could not obtain Isabelle on such a prescription.
210 Fourthly, as we have touched upon earlier, the OC market included premium and standard products. The premium products generally were newer, so-called "third generation" products offering non-contraceptive benefits. The standard products generally were cheaper OCs listed on the PBS. Generally speaking, price was not a motivating factor within the private prescription segment of the OC market, as opposed to between private and PBS segments ([210]) and ([273]). Private market OCs were highly differentiated ([279] and [280]). Choices between these private market OCs were based upon side-effect profiles and non-contraceptive benefits, rather than being based on cost ([240], [243] and [273]).
211 Fifthly, the relevant CPA products were launched in 1992 as acne treatments but prescribed off-label as third generation OCs. Prior to, and after, the entry of Isabelle, they were highly genericised. Generally speaking, Mr McCann considered the CPA originator and generic OCs to be effectively within their own market. We agree with Bayer's submission that the notion that pharmacists would suggest switching to CPA brands rather than purchasing Yasmin was properly found by her Honour at [255] to be generally inconsistent with the evidence of Mr McCann as to pharmacist behaviour.
212 Sixthly, as Bayer pointed out, prior to the entry of Isabelle in January 2012, Yasmin had been on the Australian market for 10 years and was the only OC comprising 3 mg DRSP and 0.03 mg EE. Yasmin offered a unique suite of benefits over other OCs (including CPA OCs), including reduced weight gain, fluid retention and positive effect on mood. Yasmin was not, and has never been, listed on the PBS and was priced at a premium over other OCs. Further, women with a prescription for Yasmin could obtain only Yasmin from a pharmacist. If the woman did not fill that prescription, her choice was either to not use any OC or to return to her doctor to obtain a prescription for a different OC without the unique suite of benefits offered by Yasmin.
213 Seventhly, it was open to the primary judge to find that, generally speaking, women do not change their OC when they are happy in terms of side effects, other than by reason of some major change in circumstances which may cause them to interrupt or cease altogether their use of an OC or to change their OC. Such a conclusion was well-supported by the evidence, including that of Mr Peace and Mr McCann.
214 Mr McCann gave the following evidence concerning price in his first affidavit at [27] to [31]:
In my experience, price does influence whether a patient will fill a prescription. In this regard, private scripts (i.e. a script that is not covered by the PBS) can be out of reach for some patients, such as those who hold concession cards.
In my experience, patients do regularly ask whether there is a generic brand available particularly in circumstances where they hold a private script. In this regard, in my practice as a pharmacist, I am frequently asked by patients questions in words to the effect of "can you tell me how much this is?" followed by "Is there a cheaper brand?"
In my experience, the product Yasmin has produced many comments from customers as to the high price of the product. In my experience my customers are not made aware by the prescribing doctor of the price of filling such a script as Yasmin and they are surprised at the pharmacy when the script is filled or to be filled.
Upon a patient's own enquiry or upon offer of a generic by the pharmacist, my experience is that many patients will chose [sic] to take a generic product because of the cost saving. In my experience if the cost saving is $10 or more (as in the case of Isabelle and Yasmin), the consumer will usually choose the generic product. If the saving is $5 or less some will take the generic option but not as many in the case of a higher saving.
From reviewing the sales figures for Yasmin and Isabelle products in annexure FM-2, in my view the costs savings on the Isabelle script were significant enough to cause patients to opt for the generic product. In this regard, I note that I dispensed 30 3x28 boxes of Isabelle during January 2012-June 2014 versus 16 3x28 boxes of Yasmin.
215 These passages do not provide direct evidence that, if Isabelle was not available, then a woman would have gone for something other than Yasmin. Further, they do not stand as evidence of any woman switching from another brand to Isabelle, who would not have also switched to Yasmin if Isabelle had not been available.
216 Mr McCann gave evidence in cross-examination on [30] of his affidavit in terms that, when he was talking about a $10 difference, he was talking about people purchasing Isabelle instead of Yasmin. This was because their prescription was for Yasmin. He was not talking of a person purchasing Isabelle instead of another OC such as a CPA.
217 In his second affidavit, Mr McCann sought to explain at [6]:
I also refer to paragraph 29 of my First Affidavit. On numerous occasions, I received a comment from a patient to the effect that Yasmin was too expensive and they would not be able to fill their script. On these occasions (and provided the doctor has not specified no substitution), in order to assist the patient and possibly enable them to have the therapeutic benefit that their doctor had prescribed, I informed the patient about the possibility of purchasing a cheaper brand, namely Isabelle. On some of those occasions, the patient then purchased Isabelle as a cheaper alternative, either immediately or after having received information about Isabelle and subsequently returning to the pharmacy to fill their script with Isabelle rather than Yasmin.
218 But again this did not establish that, if Isabelle was not available, a woman would not have purchased Yasmin. Put another way, this was not evidence that, if Isabelle was not available, a woman would have gone to a CPA, for example.
219 Eighthly, Yasmin was targeted to women with higher disposable incomes who wanted the unique overall non-contraceptive benefits it gave them. As her Honour found, women buying Yasmin were likely to be the least price-sensitive consumers in the OC market ([270] and [273(b)]). Moreover, a woman taking Yasmin or Isabelle was paying a premium price. Contrastingly, women for whom price was a relevant factor were unlikely to afford either product: [273(a)-(b)].
220 Ninthly, the price differential between Yasmin and Isabelle was only approximately $10 over three months. Isabelle's price ($60 to $61 for three months) was well above the price of OCs on the PBS ($19 to $24 for four months), second generation OCs not on the PBS ($35 to $40 for three months) and the alleged price of the CPA OCs ($18.90 to $41.45 for three months). The retail price of CPA OCs ranged between $18.90 and $77.55 for three months (Laila-35 lowest and Diane-35 highest) according to annexure FM-2 to Mr McCann's first affidavit. According to his second affidavit, which clarified aspects of FM-2, the retail price of CPA OCs ranged between $14.90 and $59.77 for three months (NIP + retail mark-up of $6.50 to $8.00). The $10 price differential between Yasmin and Isabelle caused, as Generic Health intended, some women to purchase Isabelle instead of Yasmin, but not any other OC. This places the Win/Lose document into more context. Though the document reveals some risk of price elasticity, it is difficult to see how that price differential of $10 over three months would have been important to deter many women who did buy Isabelle from buying Yasmin on the hypothesis that Isabelle was not on the market. Put another way, for those who did buy Isabelle for its price, if it had not been on the market, it is difficult to see why $10 over three months would have been a deterrent to many women.
221 Tenthly, there was no probative evidence that the availability of Isabelle increased the sales of the DRSP and EE compound OCs, that is Yasmin + Isabelle or Yasmin + Petibelle.
222 Eleventhly, there was also no direct evidence of any woman who had purchased Isabelle who would not have purchased Yasmin. In other words, there was no evidence of a woman being supplied Isabelle as a substitute for an OC other than Yasmin. Mr McCann gave evidence that when Brenda, a CPA brand, "took all the market", he stated that all the sales came from Diane, the same compound. Mr McCann gave no evidence of any woman with a prescription for another OC returning with a prescription for Isabelle. Moreover, there was no evidence that any doctor issued a prescription for Isabelle.
223 Generally, there was no evidence that a pharmacist would encourage a woman to switch from one OC to a different OC involving a different molecule ([265]). For example, there was no evidence that a single consumer who switched from a CPA OC to Isabelle and paid, for example, an extra $7 to $14 per month, and who would not have switched to Yasmin and paid an extra $11 to $18 per month. The existence of any such consumers was "the merest possibility" ([267]).
224 Contrastingly, and as is pointed out by Bayer, switching from Yasmin to its "substitute" Isabelle was specifically promoted and intended by Generic Health, as illustrated by Generic Health's own marketing to pharmacists, as the primary judge rightly described and found on the evidence ([219], [236] to [239], [246] and [247]).
225 Generally, in terms of price sensitivity, it is also to be recalled that the primary judge made the finding that "a very price sensitive woman would have a far greater incentive to obtain a PBS prescription than to save $10 by purchasing Isabelle rather than Yasmin" [245] and also went on to say at [246] and [247]:
If Isabelle sales had been dependent on women described by Mr McCann (that is, shocked at the price of Yasmin but willing to pay for Isabelle rather than getting a PBS prescription) then the market for Isabelle, I infer, would have been absurdly narrow. Isabelle's market, it seems obvious to me, depended on women who were willing to pay the kind of price that third generation OCs commanded. This, of course, is the very market on which Generic Health's marketing to pharmacists focused - converting women on Yasmin to Isabelle.
In other words, Generic Health's marketing seems to me to have been inherently rational and to reflect the proven circumstances of the OC market in Australia. Its submissions in this case, suggesting that there was a substantial segment of the market consisting of women who would not pay the price for Yasmin but would pay the price for Isabelle (at a difference of about $10 over three months), when PBS subsidised prescriptions could result in a saving of around $40 per month compared to Isabelle, does not correspond well with the evidence. It is possible that there were some women, as Mr McCann said, who wanted the benefits of Yasmin but could not afford to pay for it but could afford to pay for Isabelle. If such women existed they were more likely than not to be in an area such as that serviced by Mr McCann's pharmacy. Yet Mr McCann's evidence did not identify any actual woman who purchased Isabelle who would not have purchased Yasmin.
226 Further, at [252] her Honour said:
In other words, while I accept there is price sensitivity for women purchasing OCs it is a sensitivity mediated through a number of other considerations. There is the doctor prescribing the product who, it seems, should consider long-term financial capacity to pay for an OC, but the evidence suggests does not in fact do so routinely. There is the fact that the market involves radically different price points - a low price point for PBS prescriptions and a high price point for private prescriptions of third generations [sic] OCs. There is the fact that women do not usually change from one OC to another OC involving a different molecule unless there is good reason to do so. There is the fact that Yasmin had been on the market for 10 years at a premium price so only newcomers to Yasmin (or private prescription OCs) could have been surprised at the price of Yasmin. There is the fact that OCs could not readily be seen as optional by women dependent on an OC, in contrast to some other prescription medicines. All of these considerations tend to support the inference that Isabelle's most likely source of sales was women who had been taking Yasmin and would have continued to do so until a good reason arose to change to another molecule.
227 No error has been demonstrated in these observations.
228 Generally, it was the primary judge's consideration of the context and nature of the OC market which led to her Honour's decision not to apply any discount. So her Honour found that Bayer's damages for each and every infringing sale of Isabelle were best assessed on the basis that each sale of Isabelle would have been a sale of Yasmin, absent Isabelle's unlawful presence in the OC market.
229 We do not deny the reasonableness of her Honour's conclusion in one sense. But given that one is involved in estimation or valuing the loss of an opportunity, if the position ultimately found is one which is less than certainty, then, as we have emphasised, some discount is required to be made, even if it is very modest. Her Honour, with respect, was in error in not doing so.
230 First, it is true that the one-for-one proposition was not a mere assumption but based upon expert opinion from Dr Williams and also the evidence of Mr Peace: [299]. But that did not require her Honour to accept it without applying a discount if the probabilities relating to evaluating the counterfactual were less than certainty.
231 Secondly, her Honour's qualified statement at [300] referring to Bayer's concern that "Isabelle had disrupted the market possibly introducing a price sensitivity that would not have existed but for Isabelle" (our emphasis), still left open the possibility of some other additional price sensitivity outside this in any event for a very small number of women.
232 Thirdly, at [301] her Honour said the following:
It is not the case that given "its onus and quantification burden, Bayer's approach is not of assistance to the Court". The onus of proof can be discharged in many ways. I am satisfied that no discount should be made in the particular circumstances of this case in order to allow for the possibility that some women bought Isabelle but would not have bought Yasmin. Apart from the fact that I agree with Mr Peace and Dr Williams that this possible class of women is likely to be very small, to the point of immateriality, it is relevant that Generic Health was the wrongdoer so that the assessment of damages ought to be liberal, not miserly. There is doubt whether such a class actually exists; it is a mere possibility. There is doubt that such a class, if it exists, in fact acted on price signals in the way Generic Health's case would have it. All of these very real doubts are to be resolved in favour of Bayer and not the wrongdoer.
(Emphasis in original.)
233 Given that these observations indicate less than certainty, some discount should have been applied, even if the possible class of relevant women was likely to be very small. Her Honour's statement of "to the point of immateriality" in context seems to equate immateriality with very small, and something to be disregarded if one "ought to be liberal, not miserly". But, as we have said, even a very small possibility (indeed, her Honour's acceptance of a "mere possibility") warranted some discount given that one is evaluating a hypothetical counterfactual.
234 The primary judge also went on to say at [302]:
This approach reflects the reality that every assessment of damages is an estimate which is imprecise in a multitude of respects. In a case such as the present, where the evidence supports the conclusion that sales of Isabelle which were not lost sales of Yasmin is likely to represent nothing more than a very small possibility, there is no reason to make an adjustment of 1% (as Bayer suggested as a possible adjustment in the alternative to its principal position). While 1% may sound trivial, it represents not only one woman in every 100 who purchased Isabelle but, as Generic Health posited, one woman in every 100 who purchased Isabelle and had the particular form of price sensitivity which meant she would not have purchased Yasmin if Isabelle had not been available. It also represents not insubstantial monetary sums given the overall sales and period of infringement. Given that Generic Health is the wrongdoer I see no reason to make such an adjustment given the evidence which I have accepted in the circumstances of this case (which, as I have said, bears no resemblance to that of other consumables) and that, on any view, Bayer is entitled to the benefit of doubt, not Generic Health.
(Emphasis in original.)
235 Again, the recognition of "a very small possibility" warranted a discount. The fact that a 1% discount reflected a substantial monetary sum did not justify not discounting, but rather the converse conclusion. Further, the fact that Generic Health was a wrongdoer did not justify not discounting. In terms of the "benefit of doubt", there was no doubt that there was a very small possibility that a woman who purchased Isabelle could have had a form of price sensitivity, which meant she would not have purchased Yasmin if Isabelle had not been available.
236 Given that her Honour erred in not applying any discount, it is necessary for us to quantify the relevant discount. While her Honour's reasons refer to a 1% discount, this was not in terms of quantifying any discount at that level; the 1% was Bayer's suggestion as a possible adjustment. Accordingly, we are free to set the discount for ourselves, but bearing in mind her Honour's factual findings. This is not a case of needing to show why her Honour was in error at the 1% level, for she did not quantify any discount. And this is not a case of needing to justify moving from a 1% level to a 2% level, for again there was no such 1% quantification of the discount by her Honour. As we have said, we are free to set the discount for ourselves. As we have earlier said, it is more helpful to deal with this in terms of numbers of women (who would not have bought the higher priced Yasmin but who did buy a lower priced Isabelle) rather than percentages. On the preponderance of the evidence before her Honour, it is apparent that there would have been only a small number of women who, if Isabelle had not been available, would have purchased another OC other than Yasmin or would not have purchased an OC at all. The Win/Lose document reveals an appreciation by Bayer of some risk of price elasticity, though with the qualification that we have already discussed. On the evidence, that number was, we think, likely within a range of one in one hundred to, at the very most, one in thirty-three (1% to 3%). Assessing damages liberally in circumstances where Generic Health was the wrongdoer, we consider that a fair percentage is 2% and we will apply 2% as the discount rate. There is no precision or science involved. The best estimation is the start and finish of the task. We think a percentage at the higher end of the previously mentioned range of 1% to 3% would risk infringement of the principle of liberality in the task. We consider 2% is appropriate in the circumstances.
237 Accordingly, we uphold appeal Grounds 5, 8 and 9, but not Ground 6.
238 First, and importantly as we have explained, it was necessary for the primary judge to quantify the discount as her Honour was engaged in the exercise of evaluating the probabilities and possibilities of the relevant hypothetical counterfactual or, in essence, valuing the loss of an opportunity. And her Honour ought to have quantified the discount, even if it were very small. Accordingly, Grounds 5 and 9 must be upheld.
239 Secondly, the primary judge erred in her finding at [206], and accordingly Ground 8 must be upheld. But, at the end of the day, that error adds little to our ultimate finding that her Honour ought to have quantified the discount at 2% as previously discussed. The error at [206] merely reinforces the point that, for a very small percentage of women who were sufficiently price-sensitive, instead of purchasing Isabelle they may not have purchased Yasmin if Isabelle had not been available. That is, they may have purchased another cheaper third generation OC instead or purchased none at all. In other words, to accept the error does not justify any additional discount over the 2% that we have already found. The 2% assessment factors in and assumes Generic Health's success on Ground 8.
240 Thirdly, we do not consider that the primary judge erred in not applying Generic Health's "five-step approach" to discounting that we have discussed earlier. While such an approach may have been justifiable in different markets involving different product substitutability questions, the task at hand is essentially one of judicial estimation unconfined by the application of rigid formulae. The primary judge was entitled to consider the "five-step approach" to be inapposite to the context before her. In any event, even if it had been appropriate to apply that approach, no different result would follow. Integer (d) would warrant, as we have said, a discount of 2%.