Miscellaneous Issues in Cefaclor Damages

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J
            1,133,007 – 1,146,536 – 1,133,468 – 1,150,725 [Lilly Patents]
            1,095,026 – 1,132,547 – 1,136,132 – 1,144,924 [Shionogi Patents]

There are a couple of miscellaneous points arising out of Cefaclor Damages FCA that I’d like to address.

Grain Processing
In her remarks on general principles, Gauthier JA noted that

[48] [I]t is important to understand that our Court did not simply import an American law concept in a wholesale fashion. The Court in Lovastatin may indeed have referred to American authorities in order to better ground the concept. But one must be careful not to construe references to American jurisprudence lending support for the NIA defence as a blind incorporation of, or strict adherence to, the reasoning adopted by American courts.

This is all fair enough in the abstract, but a bit obscure; the FCA seems to be implying that there is some particular aspect of American law which is not good law in Canada, but without specifying exactly what.

I wonder if the remark might have been aimed at Grain Processing 85 F3d 1341 (Fed Cir 1999), in which the Fed Cir allowed the infringer to rely on an NIA which was not in existence at the relevant time. Grain Processing was relied on by Apotex both in Lovastatin FCA and in this case. Gauthier JA pointed out that Grain Processing, can be distinguished on the facts, because in that case the NIA was a process that increased the cost by only 2.3%, while in this case the increased costs were raised by at least 40%. I agree; and there is another related distinction. In Grain Processing, the only reason the infringer did not develop the infringing process earlier was that it did not know it was infringing. The infringer knew of the patent, and was trying to design around it, and thought it had succeeded, but there was a technical dispute over exactly how the “dextrose equivalent value” specified by the claim was to be measured (using the “Schoorl test” or the “Lane-Eynon test”). The infringer guessed wrong. But the point remains that once the true construction of the claim had been determined, the infringer had no difficulty designing around the claim and developing a substantially equivalent non-infringing process. That is why the Fed Cir in Grain Processing ultimately held that the infringer would have used the non-infringing process from the outset; it was very clear on the facts that it could have developed the NIA much earlier and would have done so had it known that the process it was using was infringing. This is very far from facts in this case, in which it was difficult to design around the patent and the resulting process was not economically competitive [44e, n]. Again, I’m not sure that Gauthier JA’s general remark was actually aimed at Grain Processing, and I do agree with Gauthier JA that we cannot assume that US law on this issue is correct in every respect. But Grain Processing itself is entirely sound, given its unusual facts, and because of those unusual facts it provides a particularly striking example of the NIA defence; but it is only equally unusual facts that will generate the same kind of result.

Convoyed Sales and Remoteness
On a different issue, Apotex also argued that it is an error of law “to award damages for sales displaced by non-infringing products because such sales are beyond the scope of the Patent Act [and] are too remote” [112]. Gauthier JA re-affirmed that the well-established law that damages for lost sales of so-called convoyed goods are indeed recoverable [114], [122], and on the facts the sales at issue were not too remote [127]. But Gauthier JA did appear to acknowledge that in some circumstances convoyed sales might be too remote for damages to be recoverable, even though the lost sales were caused by infringement [123]-24]. That is, causation is not necessarily the only limitation on recovery in patent damages. Gauthier JA did warn that remoteness is not usually an issue, and it should be raised as soon as possible or it may be considered to have been waived [123].

Compound Interest May Be Awarded as Damages, but Must Be Proven, Not Presumed

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J
            1,133,007 – 1,146,536 – 1,133,468 – 1,150,725 [Lilly Patents]
            1,095,026 – 1,132,547 – 1,136,132 – 1,144,924 [Shionogi Patents]

As previous posts this week have discussed, the FCA’s reasoning differed somewhat from that of Zinn J, but in the end it varied his decision only in respect of the award of compound interest, which it returned to him for redetermination. The FCA confirmed that compound interest is available when interest is claimed as a head of damages; but the loss cannot be presumed, and must be proven [156], [158].

Gauthier JA’s discussion started with a brief and helpful discussion of the law relating to compound interest, confirming that while compound prejudgment interest is not available when interest is claimed under s 36 of the FC Act (per 36(4)(b)), it may be awarded when interest is claimed as a head of damages [145]-[152]. (Gauthier JA largely summarized the principles she had stated in Cefaclor Liability FC 2009 FC 991 [665]-[675], but it is helpful to have these principles restated by the FCA itself.)

Gauthier JA also stated that “The Liability Decision was not reversed on appeal and is final. In light of this, in my view, it was not open to Apotex to argue that subsection 55(1) of the Patent Act does not allow for the granting of compound interest” [151]. This seems to be saying that it is not open to Apotex to make that argument because that issue was res judicata in this dispute. However, given Gauthier JA’s preceding discussion of the law, it would now seem to be clearly established more generally that 55(1) does allow compound interest to be awarded.

Procedurally, subsection 36(5) confers discretion on the FC to allow interest, and in a bifurcated proceeding such as this one, that discretion must be exercised at the liability stage (unless the parties agree otherwise) [149]. However, at the liability stage, the court cannot know whether an entitlement to interest will be established as a head of damages at the reference stage, so the award of simple interest under s 36 at the liability stage was in this case (and, presumably, normally should be) expressly conditional on interest not being awarded as damages at the reference phase [150].

The problem with Zinn J’s decision is not that he awarded compound interest, but rather that he awarded it on the basis of a presumption: “in today’s world there is a presumption that a plaintiff would have generated compound interest” [FC 118], [155] (FCA emphasis), and he awarded compound interest apparently on this basis. Gauthier JA held that there is no such presumption [156] (with the possible exception of some cases in equity [157]), and “a loss of interest must be proved in the same way as any other form of loss or damage” [158]. As to what kind of evidence could be used to establish compound interest as a loss, and the appropriate rate, Gauthier JA noted that various evidence was tendered on the issue, and had the Federal Court granted compound interest as damages on the basis of that evidence, rather than on the basis of a presumption, the FCA would not have intervened unless it was persuaded that the assessment was tainted by a palpable and overriding error [153].

Legitimate NIA Must Not Infringe Any Patent

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,007 – 1,146,536 – 1,133,468 – 1,150,725 [Lilly Patents]
            1,095,026 – 1,132,547 – 1,136,132 – 1,144,924 [Shionogi Patents]

As discussed in yesterday’s post, the key issue in Cefaclor Damages was the extent to which Apotex could rely on the Lupin 2 process for making cefaclor as a non-infringing alternative (NIA) in assessing damages. A legitimate NIA must of course be non-infringing in the sense of not infringing the patents at issue; but in this case the FCA held that neither can it infringe other patents. This appears to be a novel legal point [55], which arose from the unusual facts of the case.

Apotex imported and sold cefaclor produced by by South Korean drug maker Kyong Bo and Indian company Lupin. Lilly alleged that all of it infringed the patents at issue. The Lupin product was imported in a few different batches, and Gauthier J ultimately held that the Lupin product was produced by (essentially) two different processes, Lupin 1 and Lupin 2 [FC 15]. At the liability phase, Lilly did not prove that Lupin 2 infringed; indeed, Lilly never even argued that Lupin 2 infringed, because Lilly’s position was that the Lupin 2 process was so inefficient that it could not have been used [56]. No doubt that was a reasonable position at the liability phase, but having lost on that point, in the reference phase Lilly had to accept that the last shipments of Lupin cefaclor were produced using the Lupin 2 process. At the reference phase, Lilly argued, for the first time, that the Lupin 2 process infringed an entirely separate Lilly patent, the 646 patent. Understandably, the 646 patent patent was not in issue at all in liability phase [60], given that Lilly didn’t believe the process it covered was being used [56].

Lilly raised the 646 patent, not to establish that the Lupin 2 process infringed the 646 patent, so as to give rise to damages for sale of the Lupin 2 cefaclor, but rather to preclude Apotex from raising the Lupin 2 process as an NIA in the assessment of damages for the Kyong Bo and Lupin 1 cefaclor. This argument was not addressed by Zinn J, apparently because of his view that the NIA defence was not available as a matter of law [59].

Thus the point was addressed for the first time by the FCA. The FCA held that [55, my emphasis]:

It goes without saying that to be a real alternative, an NIA must be lawful, that is to say, non-infringing. This applies to more than just the patent(s) in suit in the proceedings”

The matter must of course be put in play by the patentee—it is not for the infringer to establish that there is no patent in the world that it might have infringed [57], [61], [65]. Once the issue is in play, it is for the infringer “to explain or produce evidence explaining why, despite the reference to this unexpired patent, the NIA on which it sought to rely on was in fact lawful” [65]. It would seem that not very much is required to put the issue in play, though that may be due to the unusual facts [62].

This basic holding strikes me as sound in principle, though different facts might raise questions. In this case, Lilly owned the 646 patent, so it goes without saying that it would not have licensed the technology to Apotex. But what if the 646 patent had been owned by a third party, which was routinely willing to licence it to all comers at a set royalty? What if the 646 patent had been owned by a third party, which did not routinely licence it, but might have been willing to do so? I won’t explore those questions here, except to say that I do not think they are settled by this decision, which, as Gauthier JA noted, turned on its unusual facts [4].

There is also a separate point respecting the burden of proof, which relates to the patents that were in issue. As noted, at the liability phase, Lilly had never argued that the Lupin 2 process infringed the patents that were in issue (because its position that the Lupin 2 process was not actually being used), nor did Gauthier J make such a finding. Instead, she held only that Lilly had not established that it infringed [56]. At the reference phase, Lilly wanted to re-open this issue. If I understand correctly, the basis for the argument is that the burden is different: while it was for Lilly to prove infringement at the liability stage, at the reference stage, Apotex had the burden of proving that it had an NIA available, including that the NIA was non-infringing. Zinn J rejected this, on the basis that the matter had been decided in the liability phase [61], and the FCA has affirmed that the issue cannot be re-opened [58].

In the result, Gauthier JA concluded that the Lupin 2 process prima facie infringed the 646 patent [64], and Apotex had not countered the prima facie case, and in consequence, the Lupin 2 process could not be a legitimate NIA [69].

A Non-Infringing Alternative Must Be Objectively Economically Viable

Apotex Inc v Eli Lilly and Co 2018 FCA 217 Gauthier JA: Gleason, Laskin JJA aff’g 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,007 – 1,146,536 – 1,133,468 – 1,150,725 [Lilly Patents]
            1,095,026 – 1,132,547 – 1,136,132 – 1,144,924 [Shionogi Patents]

In the liability phase of this bifurcated action, Cefaclor Liability 2009 FC 991 aff’d 2010 FCA 240, Gauthier J held that at least one valid claim of each of the eight patents at issue was infringed by Apotex. In the damages phase, Zinn J awarded Lilly damages in the form of lost profits and a reasonable royalty, plus compound interest as a head of damages. Gauthier JA, writing for the FCA, has now affirmed Zinn J’s award, except in respect of the assessment of interest. The main issue was the role of the non-infringing alternative (NIA), in assessing damages. Gauthier JA stated that no new questions of law were raised, and she warned that “The facts of this case are so unusual that it would be unwise to use them as a backdrop for stating general principles of law” [4]. However, basic principles are sometimes brought into clearest focus by unusual facts, and this decision clarified several points of general interest relating to the so-called NIA defence. (I don’t like the term NIA “defence,” but it now seems to be established, so I will give up and start using it.) This post provides an overview of the facts, and addresses the holding that the NIA must be objectively economically viable.

There were three processes used to make the cefaclor imported and sold by Aptoex: Kyong Bo, Lupin 1 and Lupin 2. The first two processes were infringing, but the Lupin 2 process was not. (More precisely, Lilly did not prove that Lupin 2 infringed [56].) The reference was therefore to establish damages for infringement in respect of the Kyong Bo and Lupin 1 cefaclor. The last infringing product was imported in June of 1998; after that, Apotex imported Lupin 2 cefaclor.

The key question on appeal was the extent to which Apotex could rely on Lupin 2 cefaclor as an NIA. At first instance, Apotex had argued that an NIA defence was available, and that damages should be assessed on the basis it would have entered the market with Lupin 2 product even before June, 1998, when it actually began selling Lupin 2 cefaclor. (Specifically, on appeal Apotex argued that it would have legal cefaclor available as early as October 1997 [38], which is when Apotex concluded internally that its Lupin 1 and Kyong Bo cefaclor were infringing: [44i].)) Zinn J rejected this on the basis that the NIA defence was not available as a matter of law [FC 57]. In the alternative, Apotex argued that damages should be assessed on the basis that in the “but for” world, it would have entered the market with Lupin 2 product in June of 1998, as it did in the real world. Lilly, on the other hand, argued that Apotex would not have come to market with legal cefaclor prior to the expiry of the infringed patents in July of 2000 [FC 59-60]. Zinn J found in favour of Lilly on this point as well [70]. While FCA decisions subsequent to Zinn J’s decision on the reference have established that Zinn J erred in rejecting the NIA defence as a matter of law [42], [46], the FCA nonetheless upheld Zinn J’s award on that basis that the NIA defence was not available on the facts, and moreover that Zinn J had not erred in finding that in the “but for” world, Apotex would not have entered until the market until the expiry of the last patent at issue.

Economic Viability of the NIA
A key issue related to the economic viability of the Lupin 2 process. The Lupin 2 process was substantially more expensive than the infringing Kyong Bo or Lupin 1 processes, and on the evidence, it would not have been commercially viable to enter the market with Lupin 2 cefaclor [78]. This was relevant because Apotex had tendered evidence that its business decisions were not motivated by profitability, but rather by a desire to have a broad portfolio of products [FC 68], [102]. Thus, Apotex wanted to argue that it would have entered the market with the Lupin 2 process, even though it would have lost money doing so. That would of course reduce the damages, because Lilly’s profits would be much greater in a world in which it had market exclusivity than one in which it faced strong competition from Apotex, even if Apotex would have been losing money.

Gauthier JA provided a summary of general principles regarding the NIA defence at [47]-[53]. While the entire discussion is helpful, I would highlight one passage that is important both as a general principle, and in respect of this particular issue (my emphasis):

[49] With this in mind, I underscore that the objective of the NIA “defence” is to help ascertain the real value of inventions for which a patentee such as Lilly was granted a monopoly. Inasmuch as overcompensation is inappropriate in our law, so is undercompensation. Thus, the goal is not to enable an infringer to breach the bargain made on behalf of the Canadian public when a patent is issued. Nor is the defence a means by which one can infringe at the lowest possible cost.

This is a crucial point, which, in my view, is entirely sound. There are really two points here. First, the objective of the NIA defence is to ascertain the real value of the invention. The patent system is intended to provide an incentive to develop inventions for the benefit of the public, by providing a reward which is commensurate to the value of the invention. A process may be patentable as being new and inventive, and yet provide no economic advantage over existing processes. Such a process is not as socially valuable as one which dramatically reduces the cost of product. A process which does provide a dramatic cost saving will provide a greater reward in the marketplace; the NIA defence is a legal tool for ensuring that it provides a greater reward in terms of damages as well. The second point is that the objective of the NIA defence is to “help” ascertain the value of the invention. It is only a tool — a means to an end. The NIA defence needs to be developed in a manner which is consistent with that ultimate goal; if there is a conflict, it is the larger goal of ascertaining the real value of the invention which must prevail.

In addressing Apotex’s argument that it would have entered the market even with an unprofitable product, Gauthier JA emphasized this point (original emphasis):

[73] [T]he court’s goal is to assess the real value of the patented invention(s). Such value cannot be assessed on a purely subjective basis. Evidently, the court must be satisfied that the NIA invoked was objectively an economically viable substitute at the relevant time. To say otherwise would mean that the value of a patent could be artificially reduced by an infringer who behaves in an unorthodox manner, or whose adoption of a substitute is motivated by reasons other than economic ones.

I read this as saying that economic viability of the NIA is a prerequisite to invoking the NIA defence as a matter of law, even if on the facts the infringer would have acted in an economically irrational manner had it not infringed. In my view, this is entirely sound. As noted above, and as emphasized by Gauthier JA, the NIA defence is a tool for assessing the real value of the invention. The real social value of the invention is an objective fact, which does not depend on the idiosyncracies of the particular infringer.

Gauthier JA also noted that:

[72] In my view, economic viability is not something that is assessed solely from the subjective perspective of an infringer such as Apotex. But obviously, the subjective perspective of the infringer may be relevant to the question of whether the infringer “would” have used the NIA.

As I read it, this says that the NIA must be objectively economically viable as a threshold matter; but it may be that even an objectively economically viable alternative would not be used as an NIA, if, on the facts, it would not have been used by the infringer for subjective reasons. I’m not sure I agree with that position, as it seems to me to be at odds with the view that damages should relate to the true value of the invention, not to idiosyncracies of the infringer. This question arose in ADIR v Apotex 2018 FC 346, in which Gagné J held that Apotex could not argue that it would have manufactured abroad for sale in the UK and Australia, even though doing so was technically possible and economically viable. Gauthier JA’s remarks in [72] appear to be indirectly approving of that  holding. Nonetheless, I have significant reservations, as discussed here. With that said, this is an issue which is better explored when it arises on the facts.

UKSC decision in Warner-Lambert v Actavis – Infringement of Second Medical Use Claims

Warner-Lambert Company LLC v Generics (UK) Ltd (t/a Mylan) & Anor [2018] UKSC 56 (UKSC) Lords Mance, Sumption, Reed, Hodge, Briggs var’g [2016] EWCA Civ 1006 Floyd LJ: Patten, Kitchin LLJ var’g [2015] EWHC 2548 (Pat) Arnold J
            EP(UK) 0934061 / pregabalin / LYRICA

The decision of the UKSC in Warner-Lambert v Actavis is important in UK law both for its discussion of the concept of “plausibility” and in respect of infringement in the context of a second medical use patent. This post provides an overview and discusses the issue of infringement, which raise a truly difficult problem, of how to balance the need for an incentive to develop new indications of a known drug, against the need to allow unfettered availability of the same drug for prior indication. I will argue that Warner-Lambert v Actavis does not provide a solution; and it is unlikely to have much impact in Canadian law, except, perhaps, as a cautionary tale about how the well-intentioned restriction on patentability of methods of medical treatment has gone badly awry.

Overview
Pregabalin is indicated and marketed by Warner-Lambert for the treatment of epilepsy, general anxiety disorder ("GAD") and neuropathic pain [Pat 2]. Warner-Lambert’s patent EP0641330 claimed pregabalin as such and for use in treating epilepsy and GAD. That patent expired in 2013. The key claims of Warner-Lambert’s 061 patent were Swiss-form claims to pregabalin for the treatment of pain, inflammatory pain and neuropathic pain (Claims 1-3) [5]. Claim 3 was the most important, as neuropathic pain is the most common type of pain for which pregabalin is indicated [7], [13]. Mylan and Actavis, seeking to launch a generic pregabalin product, brought separate actions for revocation of the 061 patent, which were consolidated [Pat 3]. After both revocation actions had been started, Actavis decided to launch with a skinny label; that is, with marketing authorization and corresponding product information targeting only the non-patented uses. Warner-Lambert brought an action against Actavis in respect of that skinny label launch [4]. The market at the time was something like 1/3 for unpatented uses, and 2/3 for patented uses [Pat 399-407,425-42]. (The exact numbers are not important, except to establish that both patented and unpatented uses were significant.) Note that Warner-Lambert is a company in the Pfizer group [4], and Warner-Lambert markets pregabalin, under the brand name Lyrica, but Pfizer holds the marketing authorization [Pat 2]. Nothing turns on this, but many of the facts refer to steps taken by Pfizer rather than Warner-Lambert.

Bill C-86 and Prior User Rights

As I work my way through the patent provisions of Bill C-89, I’ll be writing some posts with my initial impressions. This post looks at the prior user rights provisions set out in ss 188, 194 of the Bill. (My last post looked at the amendments in respect of the use of prosecution history in claim construction.)

S 194 proposes a complete overhaul of prior user rights under s 56, with the existing section to be replaced entirely. The proposed amendment clarifies prior user rights in several respects, extends the right in some ways and limits it in other ways. It appears that the proposed s 56 was modeled on the UK Patents Act 1977 s 64, though with notable differences. The corresponding provision in US law is 35 USC § 273. A thorough review of Canadian law up to 2001 is provided by Gregor Binkley, Prior User Rights and the Canadian Patent Act, (2001) 18 CIPR 207, and James G Fogo, “The Imperfect Monopoly—The Application and Effect of Section 58 of the Patent Act” (1962), 38 CPR 147 provides an earlier review which is also very helpful, particularly in respect of the history of the provisions.

The current s 56 provides that a prior user has the right to use “the specific article, machine, manufacture or composition of matter” that was made or acquired prior to the claim date. The proposed new section 56(1) provides that if a person “committed an act that would otherwise constitute an infringement of the patent,” it is not an infringement of the patent (or CSP) if the person commits “the same act” after the claim date. The right also arises if the prior user made “serious and effective preparations to commit such an act.”

This reference to “an act” has two effects. First, it evidently also encompasses carrying out a process, a point which was not clear under prior law: Binkley 214-15, 220-224. More generally, there is no restriction on the kind of invention which the “act” might infringe, so it is apparently intended that prior user rights may arise in respect of any kind of invention. Second, it transforms the right from a right to use the specific article, to a right to continue to carry out the infringing act. For example, suppose the patented product is a new kind of toy. Under the current Act, if the prior user had made some infringing toys prior to the claim date, it would be entitled to subsequently sell those specific toys, but not toys manufactured after the claim date. Under the proposed provision, it would be entitled to continue to make new toys.

Bill C-86 and the Use of Prosecution History in Claim Construction

Bill C-86 has introduced several proposed amendments to the Patent Act. The most problematic, in my view, is the proposed s 53.1 (introduced by s 191 of the Bill), which makes prosecution history relevant in claim construction. More specifically, the proposed s 53.1 provides a statutory definition of communications constituting the prosecution history, and provides that such communications “may be admitted into evidence to rebut any representation made by the patentee in the action . . . as to the construction of a claim in the patent.” (Section 187 of the Bill has an apparently related amendment to s 10(1) which would make the file history available to the public when the patent is laid open; and s 197 of the Bill introduces a new s 123.1 which provides that the same principle applies in respect of a certificate of supplementary protection.)

The proposed s 53.1 raises two questions: What is the intended effect? Is the change desirable? One might have thought that the effect of an amendment would be clear, and the difficult question is whether it is sound as a matter of policy. But s 53.1 is not entirely transparent, in part because “representation” is neither a term of art, nor even a commonly used term, in patent law. In Canadian law, at least at present, claim construction is an inquiry as to how a person of ordinary skill in the relevant art (the POSITA) would understand the claim, in light of the relevant context. The relevant context includes things such as the common general knowledge of a person skilled in the art, but not, under current law, the prosecution history. The relevant context is established on the basis of evidence, such as expert witnesses or textbooks. With the context established, the parties make submissions to the court (aka arguments) based on this evidence, as to how the POSITA would understand the claim. Does “any representation” in the proposed amendment refer to the evidence, or the arguments? And what would it mean to “rebut” a representation? Consider the parallel with the question of using legislative history in statutory interpretation – a patent is deemed to be a regulation by s 2(1) of the Interpretation Act, claim construction is like interpreting the statute (Whirlpool 2000 SCC 67 [49(e)]), and the prosecution history corresponds to the legislative history. Suppose that legislative history could not be used in statutory interpretation, and an amendment were made to the Interpretation Act saying that legislative history may be admitted into evidence to “rebut representations” made by a plaintiff in litigation as to the interpretation of the statute. What effect would that have?

Rather than trying to further parse the proposed s 53.1 directly, I will consider the various ways in which prosecution history is used in other legal systems which permit its use; whether s 53.1 might be understood as amending Canadian law analogously; and whether such a change would be desirable. (To emphasize the main points, I am overstating the distinction between these various approaches, which may run together at the margins.)

Lump Sum Costs and Experts Who Do Not Testify

Apotex Inc v. Shire LLC 2018 FC 1106 Fothergill J
            2,527,646 / lisdexamfetamine [LDX] / VYVANSE

This costs decision is consequent on 2018 FC 637 (see here), in which Fothergill J held Shire’s 646 patent to be valid and infringed. Fothergill J’s decision is interesting on two points: the award of lump sum costs, and recovery of fees for experts who provide litigation assistance without appearing as a witness.

Costs
Fothergill J awarded lump sum costs in favour of Shire, reinforcing the apparent trend to lump sum costs in complex patent cases.

While Shire requested 50% of actual fees plus all reasonable disbursements, Fothergill J remarked that this request “is a departure from the usual partial indemnity rate of one-third,” citing Philip Morris Products SA v Marlboro Canada Limited, 2015 FCA 9 [6]. This contrasts with the 50% awarded by Phelan J in Hospira v Kennedy Trust 2018 FC 1067 (discussed here). In Philip Morris, the FCA notes as follows (my emphasis):

[6] The appellants also argue that if a departure from Tariff B was appropriate, the lump sum awarded was excessive in view of prior jurisprudence of this Court on lump sum costs in intellectual property disputes. The cited case law does not set boundaries that limit the costs award the judge was entitled to make under the circumstances of this case. In fact, the judge's award is consistent with the percentage of actual costs requested by the appellants when they made representations in respect of the amount of costs that they should be awarded back in 2011. At that time, presumably, the appellants had examined the case law and were satisfied that they could request about one third of their actual cost. The judge was prepared to grant that percentage (paragraph 39 of the 2011 costs decision). The only reason he reduced it slightly was that appellants failed to explain why their legal fees were so much higher than their opponents'. As the saying goes: what is sauce for the goose is sauce for the gander.

I don’t read that as a statement that there is a usual partial indemnity rate of one-third. This decision of FCA was a review of the costs award of the trial judge. A trial judge has broad discretion regarding costs, as Fothergill J noted at [18], and the FCA in Philip Morris noted that “[t]he cited case law does not set boundaries that limit the costs award the judge was entitled to make.” The reference to an award of one-third was not based on the FCA’s own assessment of what the case law said, but only on an inference as to what the appellants might have concluded from the case law; it was really only meant to buttress the conclusion that the award of one-third was within the discretion of the judge.

Of course, that is not to say that Fothergill J was wrong to exercise his discretion to limit the award to one-third (in fact 29%, in the end), or even there isn’t a general practice of awarding a lump sum of one-third of actual costs, but only that Philip Morris itself is not strong authority for the view that one-third of actual costs is the usual rate for a lump sum.

[UPDATE: It is my policy not to substantively revise my posts, but in this case I feel compelled to add that the contrast between Fothergill J's award of 30% in this case, and Phelan J's award of 50% in Hospira v Kennedy Trust is not as sharp as my post above may suggest. One of the factors that may be taken into account in assessing costs is the conduct of the parties, and Phelan J was very critical of the conduct of Hospira / Celltrion [6], [20]-[22], while Fothergill J made no particular criticism of Apotex's conduct. With that said, Phelan J considered the matter holistically, and it is impossible to say what he would have awarded had Hospira acted more reasonably.]

Experts providing litigation assistance
Fothergill J also considered issues related to recovery of expenses for experts. In particular, Apotex relied on the decision of Hughes J in Janssen-Ortho 2006 FC 1333 [25], for the proposition that the expenses of an expert who did not appear as a witness but assisted in other capacities should be borne by the client [19]. Notwithstanding the view of Hughes J, after reviewing other relevant case-law, Fothergill J was generally not persuaded by this point [20]-[25]. Fothergill J noted that “Fees for scientific experts who assist counsel in reviewing and understanding other experts’ reports, preparing for cross-examination of opposing experts and, where applicable, assisting in preparation for discoveries, may be recoverable on an assessment of costs” [22], and his decision suggests that such expenses should normally be recoverable unless “clearly superfluous” [25].

Indemnity Principle for Costs Approved and Applied

Hospira Healthcare Corporation v. Kennedy Trust for Rheumatology Research 2018 FC 1067 Phelan J
            2,261,630 / infliximab / INFLECTRA

This is the costs decision arising from the declaratory judgment action in 2018 FC 259, in which Phelan J held Kennedy’s 630 patent to be valid and infringed: see here and here. Dissatisfaction with the outdated scale of costs set out in the Tariff had resulted in something of a trend towards awarding costs which go above the Tariff, either in the form of enhanced costs where appropriate, or a lump sum award. This decision reinforces that trend, both in the lump sum award of 50% of fees plus actual disbursements, and in Phelan J’s general comments regarding costs in complex litigation. There are two broad take-away messages. First, awarding costs on the Tariff scale of costs would have been unfair in this case, and by extension, will likely often be unfair in the context of complex litigation. Second, disruptive and unnecessary litigation tactics will have costs consequences, even if enhanced costs are not awarded on a line-by-line basis or on the motions themselves.

Phelan J began by noting that “Rule 400(1) gives the Court full discretionary power over the amount and allocation of costs” [5], and then continued:

[7] With respect to the approach to costs in complex litigation involving sophisticated large corporations, I concur with Justice Hughes in his cost decision in Air Canada v Toronto Port Authority, 2010 FC 1335, 196 ACWS (3d) 640, to favour the indemnity (whole or partial) principle and his reasoning in paragraphs 14 and 15.

Here are Justice Hughes’ remarks:

[14] Traditionally, the Federal Court of Canada has been laggard in comparison with other Canadian superior courts, such as Ontario, in escalating an appropriate scale of costs. Many cases in the Federal Court involve persons of limited means who engage the federal government in litigation of one kind or another. The scale of costs is usually modest in such circumstances or usually non-existent in cases such as immigration. Complex commercial cases are frequently those involving intellectual property such as patent infringement actions or applications made pursuant to Patented Medicines (Notice of Compliance) Regulations, SOR/93-133 as amended. Still costs in such matters are assessed largely with reference to the Tariff on one of the higher levels such as Column IV or V.

[15] Other jurisdictions, such as Ontario, have moved away from a tariff toward concepts of full indemnity or partial indemnity based upon the actual costs and disbursements incurred in the proceeding. The theory is that a successful party should not be penalized just because they become engaged in, or had to resort to, litigation. In so doing however, a Court has to be mindful that a party, while successful, may not have been entirely successful or, that the matter was a close call, or that it was one in which the assistance of a Court in its resolution was essential. Therefore an unsuccessful party should not be unduly punished by having to bear not only its own expenses but a large proportion of those of the other parties as well.

Phelan J continued:

[8] There is a public interest served by lump sum awards based on the indemnity principle, particularly in cases like these. Such awards show the real cost of initiating litigation – which Hospira/Celltrion did. Such awards also show the consequences of bringing multiple proceedings, failing to behave reasonably and efficiently in the conduct of the litigation – that there are real consequences to the various steps available in the litigation process.

[9] I intend to follow the indemnity principle, the issue remains as to what level of indemnity – 50% as proposed, 30% as a proposed alternative or some other percentage.

On the facts, Phelan J noted that Kennedy/Janssen had won on every major point [11], and had conducted the trial “with efficiency and effectiveness” [12]. 

Phelan J also noted that application of the Tariff, even the high end of Column V, would result in "an unfair discount" of less than 10% of reasonable fees. Consequently:

[13] While costs seldom are awarded on a full indemnity basis, it would be unsatisfactory to deprive Kennedy/Janssen’s clients of the fruits of their victory by a paltry cost award and would be a windfall of cost savings for the losing side. The disincentive to a losing party pursuing an unsustainable case would be eliminated where the cost award is so far removed from the reality of actual costs.

Regarding disbursements, Phelan J said there was nothing unreasonable or excessive about the disbursements, and he noted that “It is not for the losing party to tell the winning party how they could have succeeded by doing or spending less” [24].

In the result he granted Kennedy / Janssen’s motion for costs at 50% of fees plus actual disbursements [26]. In part this was due to the complexity of the litigation, but Hospira/Celltrion’s generally unreasonable conduct of the litigation was also a significant factor [20]-[22]. Phelan J warned that costs consequences should be taken into account “in terms of both the strategic and tactical decisions the clients and counsel must make and the potential consequences of their choices” [25].

Did Ciba Change the Windsurfing / Pozzoli Test?

Frac Shack Inc v AFD Petroleum Ltd 2018 FC 1047 Manson J on remand from 2018 FCA 140 Gleason JA: Webb, Laskin JJA

At trial in Frac Shack v AFD 2017 FC 104 (here) Manson J held several claims of Frac Shack's 567 patent to be valid and infringed. On appeal, the FCA reversed in part, holding that Manson J made a palpable and overriding error in his definition of the POSITA [FCA 41] (see here), and conseqeuntly returned the matter for redetermination of a number of issues related to claim construction and obviousness. Mason J was evidently somewhat miffed: he reminded us all that “an Appeal Court must read all relevant portions of the Trial Court’s reasons holistically and with an open mind” [12], and he might be taken to have suggested that the FCA itself conflated the question of who the POSITA is and what that notional person would know [13]. In the end, he clarified his initial decision by making explicit what he considered had already been implicit [24]. Unsurprisingly, then, none of his conclusions changed.

Of more general interest, Manson J dismissed arguments by the defendant that the decisions in Ciba 2017 FCA 225 (see here) and AstraZeneca 2017 SCC 36 (here), had changed the Windsurfing/Pozzoli test for obviousness.

In particular, in Ciba [77], in the course of discussing the second step of the Windsurfing/Pozzoli test for obviousness which was adopted in Sanofi 2008 SCC 61, [67], the FCA said:

There may be cases in which the inventive concept can be grasped without difficulty but it appears to me that because “inventive concept” remains undefined, the search for it has brought considerable confusion into the law of obviousness. That uncertainty can be reduced by simply avoiding the inventive concept altogether and pursuing the alternate course of construing the claim.

Manson J remarked that “the FCA’s comments are recognition of the difficulties that a court may face when attempting to identify the inventive concept of a claim. They do not suggest that the proper approach is to bypass this analysis as a matter of course and proceed directly to construing the claim” [52]. I don’t disagree with this statement, and I entirely agree with how Manson J applied it in Frac Shack itself, but I might elaborate slightly. Step 2 as set out in Sanofi is as follows:

(2) Identify the inventive concept of the claim in question or if that cannot readily be done, construe it;

There is a lot of latitude as to what “readily” means. How much effort should the court and the parties devote to identifying the inventive concept before turning to claim construction? The trend in a number of FC cases prior to Ciba had gone quite far to one extreme. The debate over the inventive concept could get very involved, to the point that the outcome of the obviousness analysis would turn on a dispute as to the “correct” inventive concept; it was almost as if step (2) had said nothing but “Identify the inventive concept.” As I see it, the FCA was strongly disapproving of this trend. The question then is how far to the other way we should go. As I read it, in Ciba the FCA was indeed suggesting that the proper approach is quite far towards the other end, on the view that the notion of the “inventive concept” is so poorly defined that it may be useful only in cases in which it can be “grasped without difficulty.” So, I agree with Manson J that Ciba did not say that identification of the inventive concept should be bypassed as “a matter of course,” but on the other hand, it did warn against devoting any substantial effort to the problem. 

It is perhaps worth repeating the key passage from Pozzoli [2007] EWCA Civ 588 [19]-[20] itself:

In some cases the parties cannot agree on what the concept is. If one is not careful such a disagreement can develop into an unnecessary satellite debate. In the end what matters is/are the difference(s) between what is claimed and the prior art. It is those differences which form the "step" to be considered at stage (4). So if a disagreement about the inventive concept of a claim starts getting too involved, the sensible way to proceed is to forget it and simply to work on the features of the claim.

In other cases, however, one need not get into finer points of construction – even without them the concept is fairly apparent – in Windsurfing, for instance, it was the “free sail” concept. In yet other cases it is not even practical to try to identify a concept – a chemical class claim would often be a good example of this.

On the one hand, we may look to the inventive concept if it is “fairly apparent,” but should avoid it if the task becomes “too involved.”

Both Pozzoli and Sanofi describe step (2) in terms which leave broad latitude as to how much effort is too much when trying to identify the inventive concept. I see the FCA in Ciba indicating that the lower end of that broad range is appropriate. This is not inconsistent with anything in Pozzoli and Sanofi, but neither is it merely restating exactly same test; it is a refinement of step (2) in light of experience. That is how the common law is supposed to work. And it is also a suggestion to the SCC that step (2) of the Windsurfing / Pozzoli test may need even more fundamental revision.

Security for Costs Against Foreign Patent Assertion Entity

Safe Gaming System Inc v Atlantic Lottery Corp 2018 FCA 180 Woods JA
             2,331,238

Patent assertion entities, often pejoratively referred as patent trolls, are prominent in the US patent litigation landscape, but they have been less prominent in Canada and Europe, at least in terms of cases litigated to judgment. It is often suggested that one reason for this difference is that in the US each party normally bears its own costs, while we follow the English rule for costs. This motion for costs on appeal touches on some of these issues.

Safe Gaming System Inc is “a Wyoming corporation that does not carry on any business and appears not to have assets of material value” [11]. It is therefore a non-practicing entity (NPE), and given that it appears not to have substantial assets, it would appear to be a patent assertion entity (PAE). (NPEs also include entities such as universities, which develop new technology with the intent of licensing it to another for commercialization, but such research organizations typically have substantial assets.) Safe Gaming System brought an action against the Atlantic Lottery Corporation and others alleging infringement of the 238 patent in respect of Nova Scotia's Responsible Gaming technology known as "My-Play”: 2018 FC 542 (blogged here). Safe Gaming System lost, and lump sum costs of $1,175,000 were awarded to the defendants, “payable forthwith”: 2018 FC 871.

Safe Gaming System has now appealed, and Atlantic Lottery Corporation brought this motion seeking security for costs for the trial judgment, plus security for costs on appeal, both to be provided by payment into court, with the appeal to be stayed until such security is provided [5]. The FCA granted the motion [13].

Woods JA held that payment for security for costs at trial is not premature because it has been over a month since the Federal Court fixed costs payable forthwith [9]. Nor was it premature on the basis that Safe Gaming System has appealed the costs award [10].

Safe Gaming System also argued that “the respondents are inappropriately using section 416 of the Rules as an alternative to enforcement under Part 12 of the Rules” [11]. This is the only point where Woods JA referred to Safe Gaming System’s status as an apparent PAE: “it is appropriate to use section 416 in these particular circumstances. The appellant is a Wyoming corporation that does not carry on any business and appears not to have assets of material value” [11].

Finally, Safe Gaming System suggested that it did not have the resources to pay security in the near term. Woods JA dismissed this argument: "I would comment that the appellant had the resources to prosecute lengthy and complex litigation and the Federal Court ordered that the costs be paid forthwith. In these circumstances, greater evidence is needed to demonstrate of lack of resources” [12].

Actavis Extended Protection Applied by EWCA

Icescape Ltd v Ice-World International BV & Ors [2018] EWCA Civ 2219 var’g [2017] EWHC 42 (Pat) Baldwin QC

EP (UK) 1,462,755 / “Cooling member for a mobile ice rink"

In Icescape, the EWCA applied the Actavis approach to infringement for the first time, holding that the defendant's product did not infringe as a matter of "normal" construction, but that it did infringe as a matter of extended protection. The main take-away is that it appears that the Actavis approach is here to stay: the EWCA applied it easily and without qualification. 

In Actavis [2017] UKSC 48 Lord Neuberger, writing for a unanimous UKSC, held that infringement should be approached by addressing two issues: (i) first, whether the defendant’s product falls within the scope of the claims as a matter of “normal” interpretation — that is, the words of the claim, purposively construed; and (ii) if the product nonetheless infringes as a matter of protection which extends beyond that meaning [54], [56]. This effectively reversed Kirin-Amgen [2004] UKHL 46, in which Lord Hoffmann had held that the law “shuts the door on any doctrine which extends protection outside the claims” [44], with Lord Neuberger remarking that Lord Hoffmann had “effectively conflated the two issues” [55]. Lord Neuberger held that extended protection would be limited to immaterial variations [54], and he set out a three-part test for determining when the variant should be considered immaterial [59]-[66].

In many cases, the two-stage approach will not make any difference: if the defendant’s product infringes as a matter of normal interpretation, there is no need to consider extended protection; and if it does not infringe as a matter of normal interpretation, it will often not infringe as a matter of extended protection either. But the two-stage Actavis approach has had an impact in Icescape, the first case in which the EWCA has applied the Actavis approach [91]. The EWCA held that Ice-World’s product did not infringe on normal interpretation, but that it did infringe as a matter of extended protection. (Though in the end, the infringement point was moot, as the patent was invalid as it was not entitled to priority, which was acknowledged to be crucial [3], [44].)

Ice-World’s 755 patent relates to a mobile system for cooling ice rinks, and in particular the system of pipes for delivering and recovering coolant. A typical prior art system comprised a feed manifold and a discharge manifold running parallel to one another, with a series of orthogonal cooling pipes running the length of the field [6], substantially as shown in Fig 8 (with one exception). The problem with the prior art is that the cooling pipes had to be assembled and disassembled on site, which was time-consuming, both because of assembly time and because of the need to check for leaks. The solution provided by the invention was to use flexible joint members (element 70 in Fig 8) to construct the cooling pipes, so that the pipes could be folded for transportation. This reduced assembly and disassembly time, and allowed leak-checking to be done prior to transport. Thus, the “inventive core” of the patent was the use of a flexible joint member, which allowed the system to be folded [72].

The defendant Icescape’s system was substantially the same as that described in the patent, including the flexible joint members, with one difference which was at the heart of the case on infringement. Icescape’s system used three cooling elements connected in parallel, as shown below [49], in contrast with the series connection shown in the patent specification and illustrated in Fig 8 [49]. Icescape’s system is therefore a variant of the system described in the patent, in that it uses a parallel rather than series connection. Icescape accepted that its system incorporated all of the other features of the claim [45], and the question was therefore whether infringement was avoided by the fact that the elements in its system were connected in parallel rather than in series.

Claim 1, the only claim at issue, claimed a system of course comprising a flexible joint member (integer C), to capture the inventive core of the invention [27]. The other elements of Claim 1 were common general knowledge, including integers D and E, which on a “normal” interpretation of Claim 1 specified a series connection [70]. (Note that 1 Kitchin expressly equated “normal” interpretation with “purposive” interpretation [70].) Because Icescape’s system used a parallel connection, it therefore did not infringe on a normal or purposive interpretation of the language of claim. This is a classic scenario, reminiscent of McPhar Engineering v Sharpe Instruments [1956-60] Ex CR 467, 35 CPR 105 (Ex Ct). In addition to the novel integer, the patentee also had to include other ancillary integers, which were part of the common general knowledge, in order to claim an operative system. The defendant had taken the novel integer, but implemented a variant of the conventional integers, so as to avoid coming within the language of the claims [72].

After concluding that Icescape’s system did not infringe as a matter of normal interpretation, Lord Kitchin then went on to apply the three part test set out in Actavis. The first Actavis question asks whether the variant “achieves substantially the same result in substantially the same way as the invention,” or more briefly, whether the variant takes the “inventive core” of the invention [72]. The answer was clear: “I do not think there can be any doubt about the answer to this question,” as the “inventive core of the patent” is the flexible member (70), which was taken by Icescape [72].

The second Actavis question asks not just whether the variant took the inventive core, but further whether it would be obvious to a skilled person that the variant took to the inventive core. Again, Lord Kitchin had no hesitation answering this question in the affirmative: “it would be entirely obvious to the skilled person that, so far as the inventive core of the patent is concerned, the Icescape system achieves substantially the same result. . . in precisely the same way” [73].

The third Actavis question is whether strict compliance with the language of the claims is nonetheless required. Lord Kitchin noted that “the fact that the language of the claim does not cover the variant is certainly not enough to justify holding that Icescape does not satisfy this question” [74]. Lord Kitchin concluded that the answer to this question is “plainly ‘no’,” essentially because it was obvious that the inventive core had nothing to do with integers D and E.

Icescape is important as being the first application by the EWCA of the extended form of protection set out Actavis; and it is all the more important because the application of the test was so routine. The EWCA applied Actavis without difficulty and without hesitation. There was no attempt to find a loophole, perhaps through the third Actavis question, the precise ambit of which remains unclear. It is significant that Lord Kitchin, an experienced and eminent patent law judge, wrote the main decision. Moreover, Floyd LJ, the other experienced patent law judge on the panel, wrote a brief concurring opinion devoted largely to explaining how the Actavis approach is consistent with Art 69(1) of the EPC and the Protocol on its interpretation. The Protocol seeks a middle ground between two extremes. Floyd LJ explained that purposive construction of the language of the claims “now represents the minimum protection afforded by the patent” [96], but the Actavis approach still avoids the other extreme, where the claims are a mere guideline:

[97] It should not be thought, however, that the claims do not continue to have an important function. It is variants from the claim which have to achieve substantially the same effect in substantially same way as the invention. The claims remain the starting point for the subsequent analysis of variants. Although we may have edged closer to it, the new approach does not transgress the second of the outlawed approaches in the Protocol, which treats the claim merely as a somewhat vague guideline.

While it would be wrong to extrapolate with too much confidence from a single decision, the early signs are that the Actavis approach will be accepted and indeed embraced, by the EWCA, and, with Lord Kitchen’s appointment to the UKSC, at that level as well.

Icescape also illustrates that extended protection under Actavis does not necessarily lead to uncertainty. On the facts of this case, as Floyd LJ pointed out, the application of these new principles does not create any difficulty” [98]. Indeed, in this case the normal interpretation was “not...an easy question to answer” [70], while the analysis of extended protection under Actavis was straightforward.

Another significant point concerns the use of prosecution history. In addition to setting out a new approach to claim construction, Lord Neuberger in Actavis held that the prosecution history might be used, albeit in limited circumstances [87], though on the facts he concluded that the prosecution history did not justify departing from his initial conclusion based on the patent itself [89]. In Icescape Lord Kitchin accepted that Ice-World should be permitted to rely on the prosecution history [76], but, like Lord Neuberger in Actavis, he concluded that the prosecution history did not change his initial conclusion, as the contents of the file “do not unambiguously resolve the point with which we have to deal as to the scope of protection conferred by claim 1" [79]. He concluded that “this is a very good illustration of why it is generally so unprofitable to explore the prosecution history” [79]. In Canada, of course, prosecution history may not be used (Free World [66]), but I have written some posts suggesting that it may be time to revisit that rule: see here and generally here. I have to say that I am beginning to reconsider that position. The argument in favour of using prosecution history is that it is unfair to allow a patentee to explicitly give up subject-matter during prosecution, and then reclaim it during litigation. I remain sympathetic to the argument. However, there is also a fairness consideration on the other side, as the use of prosecution history can put the patentee between a rock and hard place, when, as happened in Actavis, the examiner is probably wrong on the merits, but the patentee needs to get its patent granted in order to effectively protect its product. And aside from fairness arguments, there is the point made by the SCC in Free World [66], and illustrated by Icescape, that use of prosecution history estoppel will often be a Pandora’s box, which adds complexity and uncertainty without improving the result. Since writing my earlier posts on prosecution history, I have read more about the mess that is the US doctrine of prosecution history estoppel, and I have come to have greater appreciation for the force of that argument.

Kellogg Co v Kellogg and Jurisdiction of the Federal Court to Interpret Contracts Related to Patent Ownership

Farmobile, LLC v Farmers Edge Inc 2018 FC 915 Ring J
            2,888,742 / Farming data collection

Farmobile brought an action against Farmers Edge for infringement of the 742 patent. Farmers Edge wants to defend on the basis that it is the rightful owner of the 742 patent. On this motion to strike, Ring J has held that the Federal Court lacks jurisdiction, because determination of ownership is essentially a matter of interpretation of the contracts of assignment. This means that in order to effectively defend against this action brought against it, Farmers Edge will have to bring a separate action in a different forum seeking a declaration that it is the true owner [55].

The jurisdiction of the Federal Courts in such matters is governed by s 52 of the Act, which (in combination with s 20) gives the Court jurisdiction “to order that any entry in the records of the Patent Office relating to the title to a patent be varied or expunged.” Ring J stated that “It is well-established that this Court lacks jurisdiction to entertain a claim under section 52 of the Patent Act where the issue to be decided is the proper owner of a particular patent, and the determination of ownership depends on the interpretation of various contract documents between the parties and the application and interpretation of contract law principles” [27].

There is indeed a well-established line of authority in the Federal Court to that effect. In my post on SALT Canada Inc v Baker 2016 FC 830, I suggested that this line of authority had overlooked the SCC decision in Kellogg Co v Kellogg, [1941] SCR 242, or interpreted it too narrowly. Kellogg also involved a motion to strike, where the underlying action was a conflict between pending applications. It is worth setting out the pleading (246) which was allowed to stand by the Supreme Court:

8. In the event that the Court should find as a fact that the said John L. Kellogg, Jr., was the first inventor of the subject-matter of the said application serial No. 450,047, then the plaintiff alleges

(a) That the late John L. Kellogg, Jr., was employed in the Experimental Department of the Kellogg Company from October 15, 1936, until December 19, 1936;

(b) If any invention was made by the said John L. Kellogg, Jr., which is not admitted but denied, it was made during and in the course of his employment by the plaintiff and when he was carrying out work which he was instructed to do on the plaintiff's behalf. By virtue of the contract of employment and the circumstances under which the invention was made the said John L. Kellogg, Jr., became and was a trustee of the invention for the company which was and is entitled to the benefit of it.

(c) The said John L. Kellogg, Jr., was by reason of his being such a trustee unable to transfer any right, title or interest in the invention to any other party and the plaintiff is now the owner of any invention covered by the application serial No. 450,047.

Compare this with the allegations which were stuck in Farmobile (reformatted for clarity)

[4] In support of its assertion that all rights to the invention claimed in the ‘742 Patent were ultimately assigned to it, Farmers Edge pleads that

(a) the three individuals who incorporated Farmobile, Heath Gerlock, Randall Nuss, and Jason Tatge, had previously been employed by Crop Ventures Inc., the corporate predecessor of Farmers Edge;

(b) Ron Osborne, who was the CEO of Crop Ventures, and Gerlock and Nuss jointly conceived and developed the invention claimed in the ‘742 Patent while they worked for Crop Ventures;

(c) Gerlock and Nuss each signed confidentiality and non-competition agreements whereby they assigned all rights and interests in the intellectual property to the inventions claimed in the ‘742 Patent to Crop Ventures; and

(d) Tatge signed an employment terms letter agreement whereby he agreed to sign Crop Venture’s standard Proprietary Information and Inventions Agreement [collectively the “Agreements”].

The allegations are substantively virtually the same: they are both to the effect that the invention was made during the course of employment and therefore belong to the employer.

Ring J distinguished Kellogg as follows (original emphasis):

[33] Further, I am of the view that the Supreme Court’s decision in Kellogg Co v Kellogg, [1941] SCR 242, is distinguishable and does not assist Farmers Edge in responding to Farmobile’s motion to strike. In Kellogg, the moving party sought an order striking out a claim, pled in the alternative, that the plaintiff was entitled to the benefit of an invention by virtue of an employment contract. In the present case, the essence of the Amended Counterclaim, namely the claim of ownership to the subject matter of the ‘742 Patent based on a series of Agreements, is sought to be struck out.

The distinction being drawn by Ring J is evidently that in Kellogg the disputed pleading was in the alternative, whereas in Farmobile it was by way of counterclaim. While that is true, I do not see it as a satisfactory distinction, for two reasons.

First, in the preceding section of her decision, Ring J had made the point that jurisdiction over the counterclaim has to be assessed separately from jurisdiction over the main action, relying on Innotech (1997) 74 CPR (3d) 275 (FCA) rev’g 72 CPR (3d) 522 (FC). In Innotech, the FCA held that “The counterclaim, when viewed by itself, would stand alone as an action for breach of contract and as such is not within the jurisdiction of this Court.” The same principle would appear to apply to the alternative claim in Kellogg, as the issue raised in the disputed pleading would have been capable of standing alone as a separate action. That is, if the pleading in Kellogg had been struck, and the plaintiff had subsequently lost and the patent issued to the defendant, nothing would have prevented the plaintiff from bringing an action to establish its ownership of the patent based on the facts alleged in the pleading at issue.

Secondly, and more importantly, there is not the least hint in Kellogg itself that the fact that the pleading was in the alternative is at all relevant; it was mentioned in the description of the facts, but never even adverted to in the Court’s reasoning.

Ring J then stated:

[34] Kellogg stands for the proposition that the Federal Court may resolve incidental contractual issues where the overall claim is, in “pith and substance”, within the Court’s jurisdiction. However, this Court has no jurisdiction to adjudicate a claim (or in this case, a counterclaim), where the claim is “purely and simply” a contractual dispute (Kellogg), or where an issue over which the Court may have jurisdiction is “secondary to and dependent upon” the resolution of a contractual issue (Salt).

[35] Since the relief sought by Farmers Edge in its Amended Counterclaim is dependent on a prior determination of the rights conferred by the Agreements described in the Amended Counterclaim, and the interpretation of these Agreements is clearly a matter of contract, rather than patent law, it is plain and obvious that the Court lacks jurisdiction to adjudicate the impugned portions of the Amended Counterclaim, and those pleadings must be struck out.

Ring J’s point is that the interpretation of the agreements is “purely and simply” a contractual dispute. One could certainly say that the dispute is over the interpretation of a contract, which just happens to involve ownership of a patent; but one could also say that the dispute is over the ownership of a patent, which just happens to turn on contractual interpretation. In my view, the SCC decision in Kellogg makes it quite clear that the second way of looking at the matter is correct. 

Here is the crux of the SCC’s reasoning in Kellogg (249-50):

It is undoubtedly true, as stated by the learned President, that the Exchequer Court has no jurisdiction to determine an issue purely and simply concerning a contract between subject and subject (His Majesty the King and Hume and Consolidated Distilleries Limited and Consolidated Exporters Corporation Limited); but here the subject-matter of the appellant's allegation only incidentally refers to the contract of employment between John L. Kellogg, Jr., and the appellant. The allegation primarily concerns the invention alleged to have been made by him and of which the appellant claims to be the owner as a result of the contract and of the other facts set forth; in the allegation. The contract and the claims based thereon are advanced for the purpose of establishing that the appellant is entitled both to the rights deriving from the invention and to the issue of a patent in its own name. That is precisely the remedy which the Exchequer Court of Canada has the power to grant under paragraph (iv) of subs. 8 of sec. 44 of the Patent Act

That is, in Kellogg the claim was allowed to stand because it was primarily about who owned the patent – even though the answer to that question turned entirely on the contract of employment. On its face, Kellogg says that a contractual dispute over ownership of an invention is primarily a dispute about the invention, not primarily about the contract. This holding was not obiter: the result in Kellogg itself is that Court had jurisdiction over a contractual dispute concerning the ownership of a patent, because of the subject matter of the dispute, ownership of the patent, meant it was more than “purely and simply” a contract between a subject and subject. An example of a dispute which is purely and simply between subject and subject is Consolidated Distilleries, in which the SCC held that the Exchequer Court did not have jurisdiction to hear a claim for indemnity for loss suffered by reason of certain bond agreements; it was a contractual dispute about a underlying issue which was itself unrelated to any head of federal power.

While I don’t find Ring J’s attempt to distinguish Kellogg to be at all persuasive, I again acknowledge that she was right to say that her decision is consistent with a well-established line of Federal Court authority. In my view, Farmobile illustrates the inconsistency between Kellogg and that line of cases. At the very least, there is a real tension. We should keep in mind that this was a motion to strike. It may be plain and obvious that the Court lacks jurisdiction based on the recent line of Federal Court cases; but the real question is whether it is plain and obvious that those cases are consistent with with Kellogg. Even if my interpretation of Kellogg is wrong, I would like to think that it is not “plain and obvious” that I am wrong. Ring J’s attempt to distinguish Kellogg implies that if the facts were such that the claim at issue in Farmobile had been pleaded in the alternative, it would have been allowed to stand. Is it plain and obvious that there is a crucial principled distinction between a counterclaim and a claim in the alternative?

Ring J, and the Court of Appeal, have said that the fact that the parties whose claim is struck will have to bring its action in a different forum is an “inconvenience,” but “such inconvenience ‘is not, of itself, a basis for this Court assuming jurisdiction.” [39], [55]. No doubt it is true that the Court cannot assume jurisdiction simply because it would make good practical sense for it to do so, but the problem should not be dismissed as a mere inconvenience. It is a defect in our patent system — indeed, a scandal worthy of Dickens — that a party seeking to defend a patent action should have to bring a separate action based on overlapping facts in a different court. If the law requires such a scandalous result, so be it, but I remain unconvinced.