into the United States market during the period was not a reflection of a dearth of drug industry interest in the manufacture and sale of cephalexin monohydrate. During that period, two small United States pharmaceutical companies sought licenses to make the drug, but Lilly denied their requests. (Whale Affidavit 2-3).
Four multi-national drug companies which manufacture the drug in foreign countries or have the capacity to manufacture it here have respected Lilly's "656 Patent and refrained from entering the United States DCM manufacturing or sales market. Bristol-Myers manufactures DCM in Lativa, Italy, and sells in Italy and other countries where Lilly has no patent. In 1975, Bristol-Myers produced some 15-20 tons of the antibiotic. (Whale Affidavit 3; Whale Affidavit of March 7, 1978 (hereinafter Whale Supplemental Affidavit) 2). Glaxo Group, Ltd. and its affiliate, Ankerfarm, manufacture DCM in England and market it in foreign countries under license from Lilly. In 1975, Glaxo and Ankerfarm manufactured about 35-50 tons of the drug which it sells under the trademark Ceporex. There is no express or implied provision in the Glaxo licenses or other Lilly-Glaxo agreements whereby Glaxo would lose its license right to manufacture, use and sell DCM in foreign countries if Glaxo were to infringe the "656 Patent. (Whale Affidavit 3; Whale Supplemental Affidavit 2-3).
E. R. Squibb and Sons and SmithKline Corporation both manufacture and sell cephradine, a product which is closely related in chemical structure to DCM. Cephradine and DCM are made from identical starting materials and by nearly identical processes. The only difference in their manufacture is that in making cephradine, one of the starting materials must be subjected to a preliminary chemical conversion to a closely related intermediate. To the extent said conversion is incomplete, the unconverted starting material becomes cephalexin in the cephradine product. (Hatfield Affidavit 2). Both SmithKline and Squibb have royalty-bearing licenses under the "656 Patent for the inclusion of up to 10% Cephalexin in their cephradine product. Cephradine is manufactured by SmithKline in Swedeland, Pennsylvania and by Squibb in Humacao, Puerto Rico. Each company produced about 15 tons of cephradine in 1975. SmithKline and Squibb have the present capacity to manufacture and sell DCM in the United States, and their entrance into the United States DCM market would not be grounds for Lilly to terminate their license rights under the terms of their respective licenses or any other agreements. (Whale Supplemental Affidavit 4-5).
Zenith's Entry Into The Cephalexin Monohydrate Market.
In late 1977, Zenith began to sell cephalexin monohydrate in the United States in capsule sizes of 250 and 500 mg. Instead of manufacturing the drug itself, Zenith purchases cephalexin in bulk from an Italian manufacturer, imports it and encapsulates it into appropriate capsule sizes in the United States. Zenith obtained the approval of the Food and Drug Administration for its 250 mg. product in April 1976 and for its 500 mg. product in May 1977. (Rooney Affidavit P 9).
Zenith markets its 250 mg. product in a green and white capsule with rounded ends. Each half of the capsule is marked with the notation "Z 463". Zenith's 500 mg. product comes in a green and light green capsule with rounded ends, each half bearing the notation "Z 464". Each capsule size is sold in bottles of 100 capsules. The bottles are labeled as Zenith's Cephalexin Monohydrate and with the amount of the dosage content of each capsule. (Rooney Affidavit PP 10, 16).
Zenith's choices of capsule colors for each dosage size are identical to the colors of Lilly's capsules for the same dosage size: Lilly markets Keflex in green and white 250 mg. capsules and in green and light green 500 mg. capsules. However, Lilly's capsules of both sizes have pointed ends, and the 250 mg. size bears the notation "Lilly H69" at both ends while the 500 mg. capsule is similarly labeled "Lilly H71". (Rooney Affidavit PP 9, 10). Zenith selected its particular color combinations out of a possible 42 colors (and clear), standard capsule colors available in the industry. (Rooney Affidavit P 11). Zenith submits data to the effect that it is standard industry practice for a generic drug to be marketed in capsules with colors the same or similar to those of the chemically equivalent brand name drug (Rooney Affidavit PP 12-14), and asserts that color equivalency provides a means for quick visual identification of particular drugs and dosage levels which is advantageous for health care administration. (Rooney Affidavit P 17).
Zenith includes in its packaging of its 250 mg. capsules descriptive literature about cephalexin which in its wording is virtually identical to the literature which Lilly encloses in the packaging of Keflex. (Whale Affidavit 4). Further, Zenith has solicited orders for its product by relating it to Lilly's Keflex. Specifically, Zenith's Director of Sales sent a letter to a potential customer in September 1977 representing that "Zenith is now marketing Keflex generically." (Whale Affidavit 3). Lilly's claims of unfair competition are grounded on Zenith's imitation of Lilly's trade dress and the use of Lilly's trademark for solicitation.
Zenith sells one hundred 250 mg. capsules of cephalexin at $ 15.95 to $ 22.90 per bottle and one hundred 500 mg. capsules at $ 31.25 to $ 44.75 per bottle. (Rooney Affidavit P 6). Lilly's Keflex prices are $ 23.68 to $ 25.43 for one hundred 250 mg. capsules and $ 46.51 to $ 49.96 for one hundred 500 mg. capsules. (Lilly's Reply Brief 19-20).
On account of Zenith's entry into the cephalexin market, Lilly estimates that it would lose $ 3.8 to $ 6.7 million in profits from Keflex sales per year. (Step Affidavit 5). Were Lilly to prevail in this litigation, it appears at this time that Zenith would be hard pressed to respond in damages for Zenith is not in the pink of financial health. In 1976, Zenith operated at a net loss of $ 1,775,187 and on December 31, 1976 had a negative net worth. (Work Affidavit 2). Zenith's independent accountants qualified their audit report on Zenith's financial statements for 1976, stating that
because of the significant loss reported in 1976 and its effect on working capital and net worth at December 31, 1976, the ability of the Company to continue as a going concern is dependent upon the reestablishment of profitable operations and/or the Company's ability to attain adequate financing.
(Work Affidavit 3). Zenith's Report on Form 10-Q filed with the Securities and Exchange Commission for the quarter ending September 30, 1977 indicates that Zenith's net income for the first nine months of 1977 amounted to $ 27,973, and that its quarterly profits before taxes had dropped steadily during the year to a low of ($ 79,250) (negative $ 79,250) in the third quarter. (Work Supplemental Affidavit 2). On September 30, 1977, the company had a negative net worth of ($ 555,280), an increase from a negative net worth of ($ 476,030) on June 30, 1977. Further, Zenith has pledged substantially all of its accounts receivable, inventory, machinery and equipment, and the capital stock of certain subsidiaries as collateral for bank loans. (Work Affidavit 3; Work Supplemental Affidavit 2). Finally, Zenith is currently involved in a number of litigations defending against claims of patent and trademark infringement and unfair competition. According to the notes written by the company and appended to its 10-Q reports, these actions may result in the assessment of significant damages against the company. Apparently no reserves have been set aside for such an eventuality. (Work Affidavit 4). It appears that Zenith would be incapable of satisfying a judgment in this action in an amount greater than $ 500,000.
(Work Supplemental Affidavit 5).
As a prerequisite to obtaining a preliminary injunction against patent infringement pursuant to 35 U.S.C. § 283 (1954), the movant must show with the appropriate degree of proof that the patent is valid, infringed and owned by the movant, Carter-Wallace, Inc. v. Davis-Edwards Pharmacal Corp.,443 F.2d 867, 871 (2d Cir. 1971) (hereinafter Carter-Wallace ); 8 Walker on Patents § 686 (Deller 2d ed. 1973), and that irreparable harm will result if relief is not granted. Mayview Corp. v. Rodstein, 480 F.2d 714, 716 (9th Cir. 1973). Where these four factors are sufficiently demonstrated, the grant of a preliminary injunction is within the discretion of the court to be exercised in light of general equitable principles regarding injunctions. Mayview Corp. v. Rodstein, supra, at 717; Pacific Cage & Screen Co. v. Continental Cage Corp., 259 F.2d 87, 88 (9th Cir. 1958). See generally, 8 Walker on Patents § 680 (Deller 2d ed. 1973).
The standard for an injunction pendente lite of infringement is an unusually high one. While the requisite showing on the merits in other causes of action is probability of success, the party seeking to enjoin infringement ordinarily must bear the burden of demonstrating that the patent is beyond question valid and infringed. Carter-Wallace, supra, at 871; Eli Lilly and Co. v. Generix Drug Sales, Inc., 460 F.2d 1096, 1099 (5th Cir. 1972). This burden is lightened to some degree where the patent at issue has been the subject of acquiescence or previously has been adjudicated valid.
Eli Lilly and Co. v. Generix Drug Sales, Inc., supra, at 1099; Rosenberg v. Groov-Pin Corp., 81 F.2d 46 (2d Cir. 1936). Amplifying on the reluctance to enjoin infringement absent acquiescence or prior adjudication, in spite of the presumption of validity
accorded to patents, Judge L. Hand has stated:
The . . . theory is . . . practical. Examiners have neither the time nor the assistance to exhaust the prior art; nothing is more common in a suit for infringement than to find that all the important references are turned up for the first time by the industry of a defendant whose interest animates his search. It is a reasonable caution not to tie the hands of a whole art until there is at least the added assurance which comes from such an incentive.
Carter-Wallace, supra, at 871, quoting from Rosenberg v. Groov-Pin Corp., supra, at 47.
Public acquiescence in the validity of a patent is manifested by a lack of substantial challenge to the monopoly rights of the patentee under circumstances which would support an inference that the patent had been examined and deemed valid. The rationale for judicial adoption of this standard as a substitute for proof of validity beyond question is
that those whose interest would lead them to contest validity, have upon examination concluded that contest would be fruitless, and that examination is some assurance of the truth.