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. It is 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.

"Whack the Zombies Dead Once and for All"

Apotex Inc v Abbott Laboratories, Ltd 2018 ONSC 5199 Quigley J

The now defunct rule that a patent would be invalid for lack of utility under s 2 of the Act if the invention failed to meet the promise of the patent is known as the Promise Doctrine. The Promise Doctrine was abolished by the SCC in AstraZeneca 2017 SCC 36 (see here). In a series of cases, defendants have sought to resurrect it in another guise, with almost uniform lack of success. In this decision, another attempt to revive the promise doctrine was rejected by Quigley J in the strongest possible terms.

The decision concerned a motion by Apotex to amend its pleadings in litigation in which Apotex has been seeking damages under s 8 of the NOC Regulations against Abbott and Takeda in the Ontario courts, in respect of lansoprazole [1]. (Some of the history of this very complex litigation is provided here.) Abbott and Takeda have counterclaimed against Apotex for patent infringement, and hence a central issue is the validity of Abbott and Takeda’s patents relating to lansoprazole; if the patents are valid, then damages on the counterclaim will substantially reduce or even entirely negate Apotex’s s 8 damages [4].

Apotex had defended against the counterclaim by alleging the patents were invalid for failure to meet the promise of the patent. Apotex has conceded that as a result of AstraZeneca, these allegations are not longer capable of supporting an argument for invalidity [19]. In this motion, Apotex therefore sought to amend its pleadings to allege invalidity for insufficiency, overbreadth, and material misrepresentation under s 27(3) and s 53 [23], without any changes to the underlying factual allegations [18]. Consequently:

[22] The question on this motion is clear: While abolishing the “Promise Doctrine”, did the Supreme Court nevertheless intend that promise based claims of patent invalidity could now be brought under ss. 27 and 53 of the Act? Apotex says yes. Abbott and Takeda say no.

It is, I think, uncontroversial that prior to AstraZeneca, the Promise Doctrine was not legally coextensive with insufficiency and material misrepresentation. That is, facts which would support an allegation of invalidity for failure to meet the promise of the patent would not necessarily support an allegation of insufficiency or material misrepresentation. For example, in the Olanzapine litigation an attack based on s 53(1) was rejected 2009 FC 1018, [150-53], even though the patent was ultimately held invalid, by the same judge, for failure to satisfy the promise of the patent: 2011 FC 1288, [209]-[210] aff’d 2012 FCA 232. Of course, in some cases the same facts might support multiple grounds for invalidity, just as a single piece of prior art might render a patent invalid for both anticipation and obviousness. 

Apotex therefore argued that AstraZeneca substantively changed the law of insufficiency and material misrepresentation [6]. The argument was effectively that the substance of the Promise Doctrine is still good law, and the only change wrought by AstraZeneca is that it must be pleaded as a matter of s 27(3) or s 53, rather than as a matter of s 2, which is what Apotex's proposed amendments sought to do. In contrast, Abbott and Takeda argued that “AstraZeneca had no effect on the law as it relates to any other ground of invalidity (including insufficiency, overbreadth, or fraud on the Commissioner of Patents)” [17, original emphasis]. 

In support of its position, Apotex relied on the following passage from AstraZeneca (my emphasis):

[45] Supporters of the doctrine assert that the consequences of the Promise Doctrine play a key role in ensuring patentees do not “overpromise” in their patent applications. That is, a patentee will be dissuaded from stating the invention can be used for things that are not sufficiently established at the time of filing if doing so would risk invalidating the entire patent. The utility requirement should not be interpreted, however, as the Federal Courts have done, to address such concerns. Nonetheless, overpromising is a mischief.

[46] The scheme of the Act treats the mischief of overpromising in multiple ways. There are consequences for failing to properly disclose an invention by claiming, for instance, that you have invented more than you have. A disclosure which is not correct and full, or states an unsubstantiated use or operation of the invention, may be found to fail to fulfill the requirements of s. 27(3). An overly broad claim may be declared invalid; however, under the operation of s. 58 of the Patent Act, remaining valid claims can be given effect. As well, this mischief may result in a patent being void under s. 53 of the Act, where overpromising in a specification amounts to an omission or addition that is “wilfully made for the purpose of misleading”.

The question is whether this passage was intended to change the law of sufficiency, overbreadth and material misrepresentation, as Apotex argued, so that they would now reflect the promise doctrine; or merely to acknowledge that some forms of overpromising had always been addressed by those doctrines, as Abbott and Takeda argued. My view is that the latter interpretation is correct. For example, s 53 has an intent requirement of wilful misleading that was never part of the promise doctrine. Wilfully overpromising for the purpose of misleading is undoubtedly a “mischief.” Prior to AstraZeneca it might have engaged both s 53 and the Promise Doctrine; after AstraZeneca it will still engage s 53. But that does not mean that overpromising that was neither willful nor for the purpose of misleading will now engage s 53, even though it might have engaged the defunct Promise Doctrine.

Quigely J held unequivocally in favour of Abbott and Takeda on this issue.

[27] Having specifically overruled the Promise Doctrine as bad law, it is not evident and indeed is counterintuitive that the Supreme Court intended that promise based arguments would simply be imported into claims of overbreadth or misrepresentation under those sections.

Quigley J found support in this conclusion in the consistent holdings to the same effect in the Federal Court [28] (and see here, discussing these holdings). He also cited my blog posts for the position that “we should ‘whack the zombies dead once and for all’” [28]. While I don’t believe I ever said exactly those words, I wish I had, and the statement certainly captures the gist of my comments.

Quigley J then went on to consider whether the factual allegations made by Apotex would nonetheless support an allegation of invalidity under s 53, notwithstanding that it had not initially been pleaded as such [31]-[32]. He concluded that they did not [33], [39].

Further, he awarded costs on the motion on a substantial indemnity basis [48]:

[47] “the caselaw is plain that any party against whom such unfounded and deficient s. 53 fraud allegations are made, in this case Takeda, will be severely prejudiced if they are permitted to be advanced. . . . The allegation alone may severely damage Takeda’s reputation, as well as the reputation of its inventors. The mere publication of fraud allegations causes reputational harm. As such, I agree that the making of the allegation without foundation must entitle Takeda to heightened costs on this motion.

Preferred Embodiments do not Limit the Claims

Bombardier Recreational Products Inc v Arctic Cat, Inc 2018 FCA 172 Gauthier JA: Pelletier, de Montigny JJA var’g 2017 FC 207 Roy J
            2,293,106 / 2,485,813 / 2,411,964 / 2,350,264

As noted in my post on Roy J’s trial decision, in the late 1990s, Bombardier Recreational Products (BRP) made a “significant breakthrough” in snowmobile design [FC 415]. Its so-called radical evolution vehicle (REV), introduced in 2002, moved the rider weight forward, so that instead of sitting back as if on a couch, the rider is balanced forward, as if riding a dirt bike [FC 414]. BRP obtained four patents related to its new design. The three Rider Position Patents (106, 813 and 964), claimed a snowmobile with a rider forward position; the 264 patent, aka the Frame Construction Patent, claimed a new frame design with enhanced rigidity [FC 100]. At trial, Roy J held the 264 patent was not infringed. The FCA has now reversed on this point, and returned the matter to Roy J for determination of the outstanding issues relating to the 264 patent, namely validity and remedies [57]. The FCA affirmed Roy J’s holding that the Rider Position Patents were invalid for insufficiency.

Frame Construction Patent / 264 patent
The 264 patent claimed a pyramidal frame assembly with “a frame including a tunnel and an engine cradle forward of the tunnel” [19]. The key question was the meaning of the term “engine cradle”. Roy J held that this meant a cradle with walls, which plays a role in enhancing the rigidity of the vehicle [FC 348, 350, 372, 377, 380, 382] [50], and so excluded the defendant’s snowmobiles, in which the engine cradle was not walled [FC 378-79]. The FCA reversed on this point, essentially on the ground that Roy J had wrongly used the description of the preferred embodiment to limit the claims: the FCA noted that the Roy J’s comments “appear to ignore the basic principle that the description of the preferred embodiments is not meant to include all the possible embodiments of the invention claimed”: [54], and see generally [40]-[55]. This holding did not involve new law. As the FCA noted, it is well-established that the description of the preferred embodiments does not exhaust the invention claimed: [41] (quoting Whirlpool 2000 SCC 67 [54]), [47]. It is possible to have a definition in the disclosure which would limit the ordinary meaning of a term of art, but that was not the case here [43].

On a preliminary point, the FCA also emphasized that claim construction, including purposive construction, is objective:

[23] although purposive interpretation can be viewed as an attempt to determine the intention of the inventor, one does not seek to establish the subjective intention of the inventor. Rather, one must seek to determine the objective intention as it was expressed in the patent itself, and as would be understood by the person to whom it is addressed.

(See to the same effect, Kirin-Amgen [2004] UKHL 46, [32], noting “[t]here is no window into the mind of the patentee,” and "[c]onstruction is objective in the sense that it is concerned with what a reasonable person to whom the utterance was addressed would have understood the author to be using the words to mean.") Thus, evidence of the inventor’s subjective intent, such as whether inventor considered a particular claim element to be important, is irrelevant [22].

Further, reference to other extrinsic evidence, such as other patents or patent applications, is also “inappropriate and cannot inform the construction of the claims” [51]:

[24] Thus, apart from the specification itself, the only evidence that should be considered to inform a court’s analysis of a claim is proper evidence as to how the POSITA would understand it in light of his or her relevant common general knowledge in the context of the specification as a whole.

Rider Position Patents
As noted, at trial Roy J had held the disclosure of how to make the invention in the Rider Position Patents (which shared the same description), to be insufficient. I had interpreted Roy J’s decision as turning on the view, based on Teva v Pfizer [Viagra] 2012 SCC 60, that the specification would be insufficient if even a “minor research project” were required to put the invention into practice. I noted that this view was an error of law, albeit understandable in light of Viagra.

On appeal, the FCA reiterated that the SCC decision in Teva v Pfizer [Viagra] 2012 SCC 60, did not change the law of enablement (as opposed to disclosure of the invention) [78], a point the Court had originally made in Teva v Leo Pharma 2017 FCA 50 [58]. The Court at [78] emphasized that “Enablement (how to practice the invention) is a concept completely distinct from the disclosure of the invention itself, the latter of which was at issue in Pfizer.” The Court noted that Leo Pharma had been released only after Roy J’s decision [78].

Nonetheless, the FCA affirmed Roy J’s holding on this point, on the view that he had also applied the correct standard [79]. The Court noted that “[t]he extent of the effort required in any given case is a pure question of fact,” and despite Roy J’s error in interpreting Viagra, the FCA cannot substitute its own assessment of the evidence. After reviewing the evidence, the Court held that it was open to Roy J to conclude that a major research project would have been required to work the invention [95].

Two points mentioned by the FCA in arriving at this conclusion are worth noting.

First, the patent did not contain even a single clear example of the full configuration. While an example does not serve to limit the claims, it may nonetheless be important to proper disclosure [85]. Moreover, there was “no evidence that anyone was ever able to make a configuration of the invention on the sole basis of the information contained in the disclosures without the pyramidal frame assembly claimed in the 264 Patent” [86]. This suggests that a pyramidal frame assembly, which was not disclosed in the Rider Position Patents, might have been necessary to solving the problems associated with the new rider position.

Second, in my post on this aspect of Roy J’s decision, I had noted that Roy J seemed to suggest that the specification should have explained how the new invention was different from the prior art, even though that is not required as a matter of law. The FCA reaffirmed that “an inventor does not have to describe the differences between an embodiment of the invention and those of the prior art” [84].

Sierra Club Test Governs Protective Orders

Seedlings Life Science Ventures LLC v Pfizer Canada Inc 2018 FC 956 Ahmed J rev’g 2018 FC 443 Tabib J

In the decision under appeal, Tabib J refused to issue a protective order, essentially on the basis that the implied undertaking rule, supplemented by a private agreement between the parties, would provide adequate protection: see here. In so holding, Tabib J held that the test set out in Sierra Club of Canada v Canada (Minister of Finance), 2002 SCC 41 was not applicable. In her view [15], Sierra Club was applicable only to confidentiality orders, which allow parties to file confidential information under seal with the Registry, and not to protective orders, which govern the way parties may designate as confidential, and must thereafter treat, information that they will exchange between themselves in the pre-trial phase of an action. On appeal, Ahmed J held that Tabib J erred in distinguishing Sierra Club, and that the test set out in Sierra Club is applicable to both confidentiality orders and protective orders [26]. He noted that nothing in the text of Sierra Club itself supports the distinction [26]. Further, since the rationale for a protective order, a confidentiality order, or a hybrid order, is the same — namely “the protection of sensitive information – whether from the general public or other business adversaries – from abuse or use in activities collateral to the litigation” — there was no basis for applying different tests to the different types of orders [26].

Aside from the issue of the binding nature of Sierra Club, Ahmed J noted that Tabib J had been motivated by “a desire to respond to a problem in contemporary patent litigation. In her view, routine motions for protective orders do not add substantial protection above and beyond what is already available under the implied undertaking rule or achievable through private agreements, and the judicial processing of these orders constitutes a substantial burden to the Court” [30]. Ahmed J was sympathetic to this concern: “Surely those observations are not without merit and it may well be the time for change” [30]. But in his view, it is not appropriate to implement “a fundamental shift in longstanding practice” through the jurisprudence of “this Court”: “That is the role of the legislature, or perhaps the courts above” [30]. I’m not sure I agree with that observation. The law must evolve to meet changed circumstances, and some of that evolution must come at the hands of the courts, as the legislature simply does not have the capacity to address every desirable change, no matter how minor. The same is true of the Supreme Court. Moreover, even if the Supreme Court could deal with every issue, it is arguably preferable to have some changes initiated by a lower level of court, which may, as in this case, have more practical expertise on the issue. Ahmed J stated that “in my view, it would be unjust to the litigants in the case at bar to have the so-called ‘rules of the game’ changed partway through these proceedings” [30]. That is an important point, but it is not determinative. It is the nature of the common law that the law evolves in light of decisions on the facts of particular cases, and the rules of the game are changed mid-course whenever an appeal to the SCC results in a change in the law. It is no more or less fair to have the rules changed simply because it is the SCC that changes them. To be sure, it is important to respect the settled expectations of the parties, and courts should therefore be more reluctant to change the law or practice, the more firmly it is established. But that is a matter of balancing the need for change against the importance of the settled expectations.

The test set out in Sierra Club [60] has two branches: 1) the information has been treated as confidential and that on a balance of probabilities its proprietary, commercial and scientific interests could reasonably be harmed by the disclosure of the information, and 2) it is of a confidential nature with a reasonable expectation that it be kept confidential [23]. [24]. Ahmed J held that in matter at hand, both criteria were met [28], and he therefore allowed the appeal and order the protective order be issued [29].

Patent Remedies and Complex Products: Toward a Global Consensus

For the past three (plus) years I have been involved in the International Patent Remedies for Complex Products (INPRECOMP) project, which brought together twenty patent scholars from around the world to address remedial issues related to patents for products containing multiple patented technologies, such as smartphones, robotics and the Internet of Things. The manuscript of our resulting volume, Patent Remedies and Complex Products: Toward a Global Consensus (Brad Biddle, Jorge L. Contreras, Brian J. Love & Norman V. Siebrasse eds.) is now in the hands of Cambridge University Press. It is being published under an open access model, and individual chapters are now available on SSRN (links below). As well as being an editor, I was a member of the steering committee, and I am also an author on all of the chapters except chapter 6.

The aim of the project was to arrive at a consensus and make recommendations regarding best practices, where that was possible, and to make recommendations for further research which might help resolve outstanding issues. Most of the individual chapters were written as multi-author collaborations to ensure a diversity of perspectives on the issues. The process of arriving at a final version of each chapter was challenging, thought-provoking, and sometimes contentious. I would like to thank all of the authors with whom I collaborated on the various chapters. I would also like to extend a special thank you to my co-editors, Brad Biddle, Jorge Contreras, and Brian J Love, who were always a pleasure to work with.

The INPRECOMP project was primarily funded by a gift from Intel Corporation to the Center for Law, Science and Innovation (CLSI) at Arizona State University's Sandra Day O'Connor College of Law. CLSI provided logistical and administrative support for the project.

Patent Remedies and Complex Products: Toward a Global Consensus

Ch 1 Reasonable Royalties

Ch 2 Lost Profits and Disgorgement

Ch 3 Enhanced Damages, Litigation Cost Recovery, and Interest

Ch 4 Injunctive Relief

Ch 5 The Effect of FRAND Commitments on Patent Remedies

Ch 6 The Effect of Competition Law on Patent Remedies

Ch 7 Holdup, Holdout and Royalty Stacking: A Review of the Literature

Functional Analysis in Claim Construction

Valeant Canada v Ranbaxy Pharmaceuticals Canada, 2018 FC 847 McVeigh J
            2,524,300 / bupropion XL / WELLBUTRIN XL

This decision raises an interesting point about “functional” claim construction. In this NOC proceeding Valeant sought an order of prohibition to prevent Ranbaxy from launching its generic version of extended release bupropion. The only issue was infringement [6]. The 300 patent claimed a modified-release tablet comprising (i) a core, (ii) a control-releasing coat, and (iii) an outer moisture barrier comprising an enteric polymer, a permeation enhancer and optionally a plasticizer, wherein the permeation enhancer is about 20% to about 40% of the dry weight [8]. The key element at issue was (iii). The preferred permeation enhancer disclosed was silicon dioxide. Ranbaxy’s formulation also used silicon dioxide as a permeation enhancer, but in less than the claimed range (which was ultimately construed as being 18%-44% [103]). Ranbaxy’s formulation also polyethylene glycol [PEG] and triethyl citrate [TEC], which Ranbaxy characterized as plasticizers. Valeant argued that PEG and TEC should also be considered to be permeation enhancers, in which case the Ranbaxy formulation would fall within the claimed range [10]. The key question, therefore, was whether PEG and TEC could be considered to be permeation enhancers as a matter of claim construction.

My understanding is that PEG and TEC are conventionally used as plasticizers, and Valeant did not dispute this, but Valeant argued that the “practical reality is that PEG and TEC are permeation enhancers” [50]. So, Valeant’s experts testified that PEG served as a permeation enhancer in Ranbaxy’s product and that the term “permeation enhancer” should be construed to include PEG [52]-[53], [62]. McVeigh J held that this constituted a “functional approach” to claim construction, rather than a “purposive construction,” and this functional approach was an error of law [51], [52], [56], [61], [68].

As I understand it, in McVeigh J’s view, a functional approach is one that looks to the function of the claim element in the context of the invention, while a purposive construction looks to the language of the claim and the specification: see [57], [61], [68]. That is, the proper question is not whether PEG in fact serves as a permeation enhancer, but whether the 300 patent itself says that PEG serves, or can serve, as a permeation enhancer.

In my view, McVeigh J’s apparent refusal to consider evidence of the functional characteristics of PEG and TEC, in favour of an exclusive focus on the specification, is not consistent with purposive construction. A functional analysis is part of purposive construction, not an alternative to it. In Catnic [1982] RPC 183 (HL), the question was whether “extending vertically” should be construed to encompass a support angled at 6-8°. In holding in the affirmative, Lord Diplock emphasized, at 242-43, that “From the point of view of function a reduction of this order in vertical support provided for the upper horizontal plate is negligible.” In a famous passage at 244, he said (my emphasis):

It may be that when used by a geometer addressing himself to fellow geometers, such expressions descriptive of relative position as "horizontal", "parallel", "vertical" and "vertically" are to be understood as words of precision only; but when used in a description of a manufactured product intended to perform the practical function of a weight-bearing box girder in supporting courses of brickwork over window and door spaces in buildings, it seems to me that the expression "extending vertically" as descriptive of the position of what in use will be the upright member of a trapezoid-shaped box girder, is perfectly capable of meaning positioned near enough to the exact geometrical vertical to enable it in actual use to perform satisfactorily all the functions that it could perform if it were precisely vertical...

Note that in Catnic this functional analysis actually trumped the language of the specification. The courts below had held that the phrase meant exactly vertical, not primarily because that was the literal meaning, but rather because the claim itself distinguished between a member that extended “vertically” and one which was “inclined” with the latter being described in the disclosure as being an angle of only 13° from exactly vertical: Catnic, at 212–13, 228–29. That is, a focus on the language of the specification alone led to the conclusion that the term “vertically” did not include the inclined support, and Lord Diplock came to the opposite conclusion on the basis of the functional role of the support member. Thus, it is perfectly clear from Catnic that the function must be considered in addition to the language of the specification.

To take a hypothetical loosely modeled on the present case, suppose the presence of the specified ratio of permeation enhancer was the central inventive concept enabling effective extended release. Suppose PEG was conventionally used as a plasticizer, and the specification therefore discussed it solely as being a plasticizer, in the context of the control-releasing coat. The generic discovers that PEG actually is also an acceptable permeation enhancer – perhaps not as good as silicon dioxide, which is why it is not used as such, but good enough to get the job done. The generic uses PEG in its formulation of the outer moisture-releasing cost, solely as a permeation enhancer, since a plasticizer is not necessary in the outer coating at all. In that case, I would suggested that reading “permeation enhancer” to exclude PEG would be to improperly import a limitation from the disclosure into the claims, enabling the generic to take the inventive concept.

The only authority cited by McVeigh J for rejecting functional considerations is the FCA decision in Eurocopter 2013 FCA 219, specifically [84], [96], cited by McVeigh J at [68]. Paragraph [84] simply endorses purposive construction, so the key discussion is at [96] (emphasis added, citations omitted):

Third issue: Did the Judge err by not considering the functional equivalency of the landing gear disclosed by the ‘787 Patent?

[95] However, Eurocopter’s submissions go far beyond the construction of the claims. It is also of the view that a party can be found to infringe a patent even though it omitted or changed an element that the patent itself identifies as essential. It submits that the invention should be considered and compared, for infringement purposes, from the perspective of its functional equivalence with other landing gears, such as Bell Helicopter’s Production landing gear: Eurocopter’s Memorandum at paras. 114 to 117, 123 and 129.

[96] This approach is clearly inconsistent with the teachings of Free World Trust since it fails to recognize the primacy of the language of the claims in determining the essential elements, which the Supreme Court has clearly indicated as the foundation of claims construction.

As the emphasized sentence makes clear, Eurocopter did not hold that functional characteristics are not to be considering in construing a claim, but rather than functional equivalence does not justify going beyond the claims.

While the details of Eurcopter’s submissions were not specified in the decision, they seem to have been quite extreme. The invention at issue in Eurocopter was “sleigh-type” landing gear, which the claims characterized as having an inclined transition zone “with double curvature.” The defendant Bell’s “Legacy” gear (ultimately held to infringe), did have this double curvature, but the “Production” gear (ultimately held not to infringe), did not. Eurocopter evidently wanted to argue that Bell’s Production gear should be held to infringe because it achieved the same functional landing characteristics, eg ground resonance, as Eurocopter’s patented gear. The FCA noted that

[97] As aptly noted by Binnie J. in Free World Trust at para. 32:

As stated, the ingenuity of the patent lies not in the identification of a desirable result but in teaching one particular means to achieve it. The claims cannot be stretched to allow the patentee to monopolize anything that achieves the desirable result. It is not legitimate, for example, to obtain a patent for a particular method to grow hair on bald men and thereafter claim that anything that grows hair on bald men infringes.

That is, Eurocopter had disclosed and claimed one way of achieving desirable landing characteristics. This did not justify it claiming a monopoly over a completely different way of achieving the same desirable landing characteristics.

No doubt in some cases there may be difficulties in deciding whether a functional analysis is being invoked to construe the claims, or go beyond them. But in most cases the distinction will be clear enough. Part of the problem is the level of generality at which “functionality” is defined. Eurocopter had been arguing for a functional analysis at a very high level of generality — did the Production gear perform the same function as the patented landing gear, such as effectively allowing a helicopter to land without excessive ground resonance? In Catnic, and in this case, the level of generality is much lower: is the support inclined at 6°functionally vertical within the context of the invention? Is the role of PEG in the moisture barrier functionally that of a pemeation enhancer? Ultimately, I would suggest that the correct level of generality turns on the nature of the inventive concept, and is related to the essentiality analysis, but that is more than I can discuss in this post.

This is not to say that the McVeigh J’s construction was wrong, as purposive construction also depends on the language of the claims and specification, not just on the function. Moreover, there is a separate factual issue as to whether PEG and TEC really do function as permeation enhancers [63]. My point is only that it is wrong to focus solely on the language of the specification, to the exclusion of functional considerations.

I should also say that my post on this aspect of the FCA Eurocopter decision largely missed the point being made by the FCA, particularly when the Court quoted Binnie J’s analogy to a patent for a particular method of growing hair on bald men. While I quibbled with this aspect of the FCA decision in that post, on re-reading it strikes me as straightforwardly correct.

Arbitrary Selection

Teva Canada Ltd v Janssen Inc 2018 FC 754 Locke J
            2,203,936 / 2,435,146 / 2,738,706 / bortezomib / VELCADE

Yesterday’s post focused on claim construction. Another point of considerable importance arose, almost in passing, in the obviousness discussion concerning the 936 patent. The 936 patent claims the compound bortezomib [41], and the key piece of prior art was an application disclosing a genus of compounds encompassing bortezomib. One of the points distinguishing bortezomib from that prior art was the selection of the amino acid phenylalanine (Phe) at P2 position of the peptide. It was agreed that several amino acids would work at P2, and the evidence was that a hydrophobic amino acid, such as Phe, would be preferred. The question was whether it was inventive to select Phe from the fewer than 10 hydrophobic amino acids. Crucially, there was no evidence that Phe was any better than any of the other options. Locke J held that the selection was obvious. In so holding he cited (at [198]) with apparent approval the decision of Jacob LJ in Actavis UK Ltd v Novartis AG, [2010] EWCA Civ 82 [36]-[37], discussing the “5¼ inch plate paradox.” As Jacob LJ explained:

[The paradox] runs like this. Suppose the patent claim is for a plate of diameter 5¼ inches. And suppose no-one can find a plate of that particular diameter in the prior art. Then (a) it is novel and (b) it is non-obvious for there is no particular reason to choose that diameter. The conclusion, that the plate is patentable, is so absurd that it cannot be so.

What then is the answer to the paradox? It is this: the 5¼ inch limitation is purely arbitrary and non-technical. It solves no problem and advances the art not at all. It is not inventive. And although "inventive step" is defined as being one which is not obvious, one must always remember the purpose of that definition – to define what is inventive. That which is not inventive by any criteria is not made so by the definition. Trivial limitations, such as specifying the plate diameter, or painting a known machine blue for no technical reason are treated as obvious because they are not inventive.

The principle, then, is that an arbitrary selection is not inventive. In my view, this principle is both sound and important, as it provides a principled basis for explaining why some selections which are not obvious, in the sense that a posita would not necessarily have routinely arrived at that particular selection, are nonetheless not inventive. I have previously discussed this reasoning (in the context of prior bortezomib litigation, as it happens), but I believe this is the first time it has been explicitly acknowledged in Canadian law.

When Is it Permissible to Look at the Disclosure to Interpret the Claims?

Teva Canada Ltd v Janssen Inc 2018 FC 754 Locke J
            2,203,936 / 2,435,146 / 2,738,706 / bortezomib / VELCADE

Bortezomib is the API in a pharmaceutical product used for treating certain blood cancers [7]. The 936 patent claims the compound bortezomib [41], the 146 patent claims a specific formulation, namely the lyophilized mannitol ester of bortezomib [51], and the 706 patent claims a process for “large-scale” production of bortezomib. In prior NOC proceedings, Barnes J had held the 936 and 146 patents invalid for obviousness: 2015 FC 184 (discussed here), and 2015 FC 247 (here). Teva then brought an action for s 8 compensation and Janssen defended and counter-claimed on the basis that Teva had infringed the 936, 146 and 706 patents. Locke J held that the 936 and 146 patents were invalid for obviousness [208], [287] and that the 706 patent was not infringed [337], [341-42]. The s 8 action was therefore dismissed. Locke J’s decision turned on the facts. 

One legal issue of interest is that, as discussed here, there has been something of an ongoing debate as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous when read on their own. Locke J in particular has been concerned about this problem in prior decisions. On the one hand, it has been held that recourse to the disclosure is unnecessary where the words of the claim are plain and unambiguous, and in Mylan v Eli Lilly (CIALIS) 2016 FCA 119 [39] the FCA took that next step and held that “the judge erred in referring to the specification when construing the claims of the ‘377 patent. The rules of patent construction preclude reference to the specification when the claims are clear,” (my emphasis; and see similarly [43], cited by Locke J at [72]). On the other hand, the SCC said has a number of times that the claims must be construed in light of the specification as a whole, eg in Consolboard [1981] 1 SCR 504, at 520: “We must look to the whole of the disclosure and the claims to ascertain the nature of the invention and methods of its performance” (quoted at [75]). Locke J reviewed some of the relevant jurisprudence, noting the “potential for tension,” which he resolved by agreeing, at [74], with the assessment of Zinn J in Janssen-Ortho Inc v Novopharm Ltd 2010 FC 42 [115-116], [119 ].

In my view, with respect, the statement by the FCA in Mylan v Lilly that reference to the disclosure is impermissible when the claims are clear, is simply wrong. It is inconsistent with the statement by the SCC in Metalliflex [1961] SCR 117 , 122:

The claims, of course, must be construed with reference to the entire specifications, and the latter may therefore be considered in order to assist in apprehending and construing a claim, but the patentee may not be allowed to expand his monopoly specifically expressed in the claims "by borrowing this or that gloss from other parts of the specifications".

This statement was re-affirmed in Whirlpool 2000 SCC 67 [52], and is consistent with the passage from Consolboard quoted above. Similarly, in Minerals Separation [1950] SCR 36, 56, the SCC quoted with approval from the leading UKHL decision in EMI v Lissen (1939) 56 RPC 23 at 39, in which Lord Russell said

The claims must undoubtedly be read as part of the entire document and not as a separate document; but the forbidden field must be found in the language of the claims and not elsewhere.

The SCC in Minerals Separation then confirmed that “The claims then define and limit the ambit of the invention and may be read with the disclosure in the earlier part of the specification ‘in order to understand what the former says’.” (The above passage from Metalliflex was also quoted by Zinn J in Janssen-Ortho v Novopharm 2010 FC 42 and properly emphasized by Locke J in this case [74].)

The contrary rule, expressed by the FCA in Mylan v Eli Lilly, stems from a summary of the law provided by Urie JA in Procter & Gamble v Beecham 61 CPR(2d) 1, 11 (FCA):

In summary, the principles which I derive from the above-mentioned authorities as well as from others referred to in argument, to which further reference need not be made here, are that in construing the claims in a patent, recourse to the remainder of the specification is (a) permissible only to assist in understanding terms used in the claims; (b) unnecessary where the words of the claim are plain and unambiguous; and (c) improper to vary the scope or ambit of the claims.

It is (b) that has caused the problems. In itself, (b) is not strictly inconsistent with the SCC precedent, in that when the words of the claim are plain and unambiguous, reading them in light of the disclosure is unlikely to change much. But it is a short step from there to saying that it is impermissible to consider the disclosure except when the claims are unambiguous — a step which the FCA took in Mylan v Eli Lilly. Various problems ensue, such as whether it is permissible to look at the disclosure to decide whether the words of the claims are ambiguous.

What did Urie JA mean by part (b) of his summary statement? He began the discussion which led to that summary by citing the SCC in Minerals Separation as saying that the claims may be read with the disclosure, and then went on to quote from EMI v Lissen, which, as just noted, clearly endorses reading the entire specification to understand the claims. It seems that (b) was derived from the following passages in EMI, which are the only places in Urie JA’s review referring to “unambiguous” claims:

But I know of no canon or principle which will justify one in departing from the unambiguous and grammatical meaning of a claim and narrowing or extending its scope by reading into it words which are not in it;

If the patentee has done this in a claim the language of which is plain and unambiguous, it is not open to your Lordships to restrict or expand or qualify its scope by reference to the body of the specification.

Neither of these statements says that it is impermissible to read the disclosure to understand the claims, if the claims are plain and unambiguous. Rather, they both say that it is impermissible to use the disclosure to change the meaning of the claims. That, I suggest, is the real import of part (b) of Urie JA’s summary.

This view is consistent with Dableh v Ontario Hydro [1996] 3 FC 751 (FCA), which quoted Urie JA’s summary, as in Dableh the trial judge had in effect impermissibly restricted the scope of the claims to the specific embodiment of the invention set out in the description. Even in Mylan v Eli Lilly, the putative error was “of no consequence” [43].

No new cases

No new substantive patent cases were released last week.

No new cases

No new substantive patent cases were released last week.

Note that I generally only blog on substantive patent cases. A new decision in the ongoing saga between Apotex and Health Canada regarding Apotex's Indian facility was released: Apotex Inc. v. Canada (Health), 2018 FCA 147. To keep abreast of new decisions like this one, as well as procedural decisions and copyright and trade-mark cases, I recommend subscribing to the Daily Intellectual Property News service from Alan Macek's IPPractice.

Is the Law of Collocation Separate from Obviousness?

Eli Lilly Canada Inc v Apotex Inc 2018 FC 736 Manson J
            2,432,644 / prasugrel / EFFIENT / NOC

The claims at issue in this NOC application were to the combination of prasugrel and aspirin for treating blood clots [5], [13], [65], [66]. Manson J held the claims to be obvious, while rejecting attacks based on patentable subject matter, sufficiency and overbreadth. The obviousness holding turned on the facts, but the “subject matter” attack is of some general interest.

Prasugrel is a member of class of compounds known as “thienopyridines” which also includes ticlopidine and clopidogrel, all of which were known to have antiplatelet aggregation activity [11], [49]. Aspirin is well-known compound, which was also known to have antiplatelet activity, though it is not a thienopyridine. Ticlopidine and clopidogrel had previously been combined with aspirin to treat blood clots: Ticlopidine with aspirin was a standard antiplatelet therapy after stent implantation, and clopidogrel with aspirin had been shown to be even better, and was widely used [108], [117]. It was also known that clopidogrel with aspirin, at least, had synergistic effects [116]. The question was whether this made it obvious to try the new member of the class, prasugrel, in combination with aspirin for the same purpose. Manson J held on the facts that it was self-evident to try the combination, and that there was a reasonable expectation of success. The claims at issue were therefore invalid for obviousness [115], [121], [122].

What was referred to as the “subject matter” argument turned on the proposition that “it is essential to the validity of a patent for a combination that the combination should lead to a unitary result, and that such result should be different from the sum of the results of the elements,” [72], citing R v American Optical Co (1950), 13 CPR 87 at 98-99 (Ex CR). On the facts, this question turned into a debate as to whether the effect of the combination was additive or synergistic. The point of more interest is whether such a requirement is sound, at least as distinct from the requirement of obviousness. Certainly, there is ample support for the proposition. American Optical held that

It is essential to the validity of a patent for a combination invention, apart from considerations of novelty and inventive ingenuity that the combination should lead to a unitary result rather than a succession of results, that such result should be different from the sum of the results of the elements and that it should be simple and not complex. The elements may interact with one another provided they combine for a unitary and simple result that is not attributable to any of the elements but flows from the combination itself and would not be possible without it.

Essentially the same proposition has been recently affirmed by the House of Lords in Sabaf SpA v MFI Furniture Centres Ltd, [2004] UKHL 45, [24], [26]. The body of law to the effect that there is a distinct requirement of this type for a combination to be patentable is sometimes referred to as the “law of collocation.”

I must say that I find the EWCA decision in Sabaf [2002] EWCA Civ 976, [43], which held that “there is no separate law of collocation,” to be more persuasive, even though it was disapproved by the House of Lords on this point. In a seminal passage on the patentability of combinations, Green LJ in Albert Wood & Amcolite Ltd v Gowshall Ltd (1936), 54 RPC 37, 40 (CA) stated that “The real and ultimate question is: Is the combination obvious or not?” This passage has often been cited with approval by the Canadian courts, including the SCC in Wandscheer v Sicard Ltd, [1948] SCR 1, 12, and many times since. If the obviousness of the combination is truly the real and ultimate question, it is difficult to see how there can be a separate rule against collocation. As the Court of Appeal pointed out in Sabaf, [43]-[44], it is well accepted that “the act of combining known concepts may itself involve an inventive step,” but if there is a separate and prior step of determining whether the claimed invention is a true combination or a mere aggregation, a court may conclude that the claim is invalid without even considering whether it is obvious, thereby bypassing the real question. To the extent that the collocation analysis is a short-cut to the obviousness inquiry, it is a dangerous short-cut. Of course, it might be that Green LJ was wrong, and the real question is not simply whether the combination was obvious. But to my mind, neither Sabaf nor American Optical provides an adequate justification for a distinct requirement that has the effect that a combination that is new, useful and non-obvious invention should nonetheless be held to be invalid. The HL in Sabaf asserted that if there is no interaction or synergy, then the separate parts of the combination are separate inventions, and the obviousness inquiry should therefore be applied to each part separately. But I cannot see how this is consistent with the principle that a combination of known parts may be an invention if it would not have been obvious to combine them. Green LJ’s statement that the real question is the obviousness of the combination, was intended precisely as a warning against the danger of a “dissection of a combination into its constituent elements and the examination of each element in order to see whether its use was obvious or not.” As he pointed out, it is “the obviousness or otherwise of each act of selection” that is at issue in a combination invention, and not the obviousness of the individual components. To my mind, Sabaf does not respond adequately to Green LJ’s point.

In any event, the point is moot in the context of this particular case, as Manson J concluded that the 644 patent did disclose an effect that is “more than the mere sum of the effects of the two agents taken alone” [90].

Standard of Review for Attributes of POSITA

AFD Petroleum Ltd v Frac Shack Inc 2018 FCA 140 Gleason JA: Webb, Laskin JJA rev’g 2017 FC 104, 2017 FC 274 Manson J

2,693,567 / Fuel Delivery System and Method

At trial in Frac Shack v AFD, Manson J held several claims of Frac Shack’s 567 patent to be valid and infringed. On appeal, the FCA has reversed in part, holding that Manson J made a palpable and overriding error in his definition of the POSITA [41]. The invention relates to a system for refueling fracking equipment while the engines are running (see here for a summary), and Mason J had initially described the POSITA as having experience designing fueling equipment for fracking systems, but had omitted this aspect of the POSITA’s from his explicit findings: [42] (contrasting FC [142] with FC [144], [154]). This was important to the subsequent analysis of obviousness, because a novel fuel delivery system might be obvious to a person with expertise in designing fracking fueling equipment, but not to a party without such expertise [43]. In light of the error, the FCA remanded obviousness and related questions to Manson J for redetermination [46]. I’m not sure much will change, as one of the Frac Shack’s experts, whose evidence was largely accepted by Manson J [FC 245], did have expertise in designing fueling equipment for fracking systems [FC 64], and the expert for AFD, whose evidence was less persuasive, did not [FC 247].

Of more general interest is the FCA’s summary of the standard of review. The FCA held that “the impugned findings in the instant case regarding the attributes of the POSITA and the extent of the POSITA’s common general knowledge are matters of fact or mixed fact and law from which a legal issue cannot be extricated” [38] and therefore subject to review only for palpable and overriding error (some citations omitted):

[39] In Mylan Pharmaceuticals ULC v. AstraZeneca Canada Inc., 2012 FCA 109, 432 N.R. 292, this Court noted that issues of construction are matters of law and therefore reviewable for correctness. However, the Court went on to note at paragraph 20 that:

[…] any assessment of the evidence (concerning the state of scientific knowledge at the relevant time, or how a reasonable POSITA would understand the patent, for example) made by the Judge in the course of reaching his conclusion on the construction of the patent is reviewable for palpable and overriding error.

[40] Similarly, in Wenzel Downhole Tools Ltd. v. National-Oilwell Canada Ltd., 2012 FCA 333, 443 N.R. 173, this Court stated at paragraph 44 that the “weight to be given to the expert evidence as to how particular words would be understood by the POSITA is a question where the trier of facts is entitled to deference.”

“Make, Construct and Use” in Settlement Does Not Include “Sell”

Betser-Zilevitch v Nexen Inc 2018 FC 735 Brown J
            2,584,627 /

This case is on the margins of what I normally blog about: the issue is whether a settlement agreement had been reached between the patentee Betser-Zilevitch, and the defendants, Nexen. The leading case on whether a settlement agreement has been reached is Apotex Inc v Allergan Inc 2016 FCA 155 Stratas JA; Trudel, Nadon JJA rev’g 2015 FC 367 Hughes J (which I did not blog about at the time). Here are a couple of the passages from Apotex Inc v Allergan Inc (citations omitted):

[32] The court is to view the specific facts of the case objectively in light of the practical circumstances of the case and ask whether the parties intended to be legally bound by what was already agreed or, in other words, whether an “honest, sensible business[person] when objectively considering the parties’ conduct would reasonably conclude that the parties intended to be bound or not” by the agreed-to terms. Put another way, looking not through the eyes of lawyers, but through the eyes of reasonable businesspeople stepping into the parties’ shoes, was there something essential left to be worked out? Another way of putting it is to ask how “a reasonable [person], versed in the business, would have understood the exchanges between the parties”.

[33] When courts find that there has been an agreement on essential terms, they will often imply non-essential terms into the agreement. The lack of agreement on non-essential terms will not stand in the way of a finding of an agreement. Put another way, “it is not necessary that the original contract include all the ancillary terms that are already implicit in its content”. “Even if certain terms of economic or other significance to the parties have not been finalized, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement”. For example, assuming an agreement on essential terms is otherwise in place, courts can imply terms concerning the granting of a release, the manner of payment and the timing of payment. Often these will be “mere formalities or routine language.”

In this case, Betser-Zilevitch had made a offer by letter dated January 25, 2017 [22], and Nexen replied that it “is prepared to agree in principle” to those terms  (all through counsel) [24]. Betser-Zilevitch’s counsel then wrote to the Court, with Nexen’s consent, stating that “We advise that a settlement has been reached, subject to formalization, review and execution by the parties of a formal settlement agreement” [26].

Further exchanges ensued as draft agreements were exchanged, with the parties objection to various details. Ultimately Betser-Zilevitch advised that “there was no agreement regarding settlement, that all prior settlement offers were withdrawn, and that all offers made by the Defendants were refused” [11]. The Defendants filed a motion seeking a declaration that a settlement had been reached.

Brown J granted the motion. The letter to the Court, in particular, was “convincing evidence” of the intent of the parties to create legal relations, as it was “unequivocal” in stating that a binding settlement had been reached [35]. The reference in the acceptance to an agreement “in principle” did not affect this conclusion, as that phrase must be understood contextually [31].

It was then left for Brown J to resolve the disputed terms, which he did largely by holding the parties to the terms in the offer in the letter of January 25, 2017. He found that most of the contested points were efforts by one party or the other to use the drafting process to vary the terms that had already been agreed upon.

The point of most general interest is that the offer letter specified that “Mr. Betser will agree to provide Nexen an up-front, fully paid up license to make, construct and use the invention” [22, emphasis added]. Nexen proposed that the formal agreement include the right to “sell” in addition [60]. Brown J disagreed, holding that the right to sell was not an essential term, and should not be implied:

[63] The parties were represented by counsel. They would or should have known that section 42 of the Patent Act identifies four key rights afforded to patent holders like Betser-Zilevitch. The four rights granted by section 42 may be granted or withheld as the patent holder wishes; they are property of the patent holder. Nexen accepted a settlement agreement that did not contain the Right to Sell.