The Limits of Anticipation by Speculation

Teva Canada Innovation v Pharmascience Inc 2020 FC 1158 Kane J

2,702,437 / 2,760,802 / glatiramer acetate / Copaxone / Glatect / NOC

The patents at issue in this case relate to the use of glatiramer acetate for the treatment of multiple sclerosis [MS]. Glatiramer acetate was known to be effective in treating MS, with a standard dose of 20mg daily, administered by subcutaneous injection. The 437 patent claims the early use of glatiramer acetate for the purpose of delaying the development of MS, while the 802 patent claims a dosing regime of 40mg three times a week. The decision turned largely on the facts (to the tune of 936 paragraphs!), but a few points of interest were raised, particularly in the discussion of the 437 patent, which Kane J held to be novel, but invalid for obviousness. Kane J's holding that the 802 patent was not invalid for obviousness or lack of utility, and that it would be infringed by Pharmascience's 40mg product, turned on the facts.

MS is a disease of the central nervous system in which the patient’s own immune system attacks the myelin of the CNS. The early course of the disease is characterized by intermittent attacks, which include episodes of numbness, muscle weakness and spasticity, etc [73]. The disease also gives rise to lesions on the CNS resulting from destruction of the myelin sheath [71]. Patients who present with a single clinical attack having features typical of MS were considered to have a “clinically isolated syndrome” (CIS) [77]. CIS patients are at elevated risk for MS itself (also referred to as “clinically definite MS” or CDMS), but not all CIS is caused by MS, so CIS patients are not considered to actually have MS.

The inventive concept of the 437 patent is that glatiramer acetate could be used to delay the onset of clinically definite MS in CIS patents at risk of developing MS [569]. Accordingly, Claim 1 was to glatiramer acetate “for use in delaying the onset of clinically definite multiple sclerosis,” in a patient who presents with at least one lesion “suggestive of multiple sclerosis” and who is “at risk of developing” clinically definite MS, and “prior to development of clinically definite multiple sclerosis” [251].

The claim construction debate turned on the fact that around the time of filing, in 2007, the criteria for diagnosing MS were changing. The older Poser criteria relied on clinical signs, ie two clinical attacks. The new McDonald criteria were developed to take advantage of the use of MRI for diagnosis using direct detection of lesions characteristic of MS with less reliance on clinical signs. The result is that some patients who would not have been diagnosed as actually having MS using the Poser criteria, would be diagnosed as having it using the McDonald criteria. The 437 patent was apparently developed with the Poser criteria in mind and there was a long and involved argument as to whether the patients with MS according to the McDonald criteria would be included in the claim; if so, the claim would not be novel, as the use of glatiramer acetate for treating MS was known [305].

I must admit that I was having trouble following the argument and its significance, and I was relieved when Kane J stated that “In my view, far too much time and effort was devoted to debating the meaning of the terms, the evolving diagnostic criteria and the scope of the patients covered by the claims” [306] . All the experts construed the claims in accordance with their plain language, which did not specifically refer to either set of criteria by name, and “the claims mean what they say” [307]. Kane J held that on a plain reading of the claims they were directed to a patient who did not already have a confirmed diagnosis of MS, and so did not include patients who already met the McDonald criteria [329]. This reading seems eminently sensible to me. The result of this claim construction holding was to negate both anticipation based on the Pinchasi 2007 prior art [454] as well as the Gillette defence [396], [403].

In light of this conclusion on claim construction, the more interesting anticipation argument was based on the Karussis 2006 prior art. This was a report of an International Working Group for Treatment Optimization in MS [458]. The report suggested the use of therapies approved for treatment of MS itself, which prominently includes glatiramer acetate, as a possible treatment for patients at risk of developing MS (ie, those with CIS), but acknowledged that this was an inference and was not based on evidence [464], [465]. So, the Working Group concluded that “as [other therapies] and glatiramer acetate have been shown to be effective in [the most common form of diagnosed MS], and a patient with a CIS is highly likely to progress to MS, it is reasonable to propose early treatment with [therapies approved for treatment of MS] at the doses approved for MS, even though there is not yet evidence to support this approach” [465]. The question is whether this and similar statements anticipated the claims of the 437 patent.

This raises the issue of what I have called “anticipation by speculation,” as raised in Hospira 2020 FCA 30 and Biogen v Taro 2020 FC 621, which held that similarly speculative statements were anticipatory. As discussed here and here, my view is that Hospira and Biogen v Taro stretched anticipation to the very limit, and perhaps beyond. In this case, Kane J held that Karussis 2006 was not anticipatory. This is not to say that Kane J’s holding is necessarily inconsistent with Hospira and Biogen v Taro, which Kane J considered and distinguished on the facts: [479]–[482]. I won’t go through all the particular grounds, though I will say that the distinctions she draw struck me as generally reasonable; as always in borderline cases, some of the distinctions to be drawn will necessarily be fine and turn on the particular facts. The broader point is that Kane J’s holding illustrates that anticipation by speculation can only be pushed so far and the line is somewhere in this general vicinity.

One general observation made by Kane J is worth pointing out (my emphasis):

[484] In my view, if Karussis 2006 is anticipatory art, what would prevent a group of experts in any field from having discussions and speculating on the positive outcome of a clinical trial in progress, developed and implemented by others, in order to later argue that their speculation that the trial in progress would be successful anticipated the claims of a patent that are based on such clinical trials. This approach seems to be inconsistent with the objectives of the experimental use exemption established in the common law.

[485] As noted by Teva, the law recognizes that there is no disclosure for the purposes of anticipation where a prior use is experimental. If a patent cannot be anticipated by its own clinical study, in my view, it cannot be anticipated by the speculative recommendations of a group of experts who discuss the state of MS treatment, note the lack of evidence, and note that trials are underway.

Kane J then went on to hold that Karussis 2006 did not in any event satisfy the enablement branch of anticipation: [486]–[493].

All that was for nought, so far as Allergan is concerned, as Kane J then went on to find the 437 patent invalid for obviousness on an obvious-to-try analysis. This is likely to be common in cases where a clear suggestion to try the invention can be found in the prior art, especially since the holding in Hospira 2020 FCA 30 that the state of the art for purposes of an obviousness attack includes all prior art. Exactly where we draw the line on anticipation is now less important, because if an obscure piece of prior art does not quite reach the level of anticipation, it can still be used as the basis for an obviousness attack. With that said, it does not appear that the Hospira rule made any difference in this case; while Karussis 2006 was not common general knowledge, it reflected several studies that were [573].

I’ll finish with two quick points on obviousness.

First, Kane J clearly stated that the mere fact that it is not self-evident that the invention will work, before any experiments are undertaken, does not mean that it is not obvious.

[593] Dr. Selchen’s opinion that the invention was not self-evident appears to conflate the obvious to try test with the factor or consideration that informs the test, i.e., whether it was self-evident that it would work, in the sense of being effective for CIS patients to delay the onset of MS and achieve the other claimed benefits.

I entirely agreed with Kane J on this, but it is a point that continues to pop up and cause confusion, as it did for Dr Selchen in this case.

Second, Kane J recognized and applied the “golden bonus” rule, usually traced back to Hallen v Brabantia [1991] RPC 195, 216 (CA), which says that if an invention is obvious for one reason, it does not become non-obvious merely because it has some non-obvious benefits (the "golden bonus"):

[594] Teva’s submission – that the therapeutic benefits or outcomes of the ‘437 Patent were not obvious or expected – does not diminish that the invention was obvious to try. In Janssen [2015 FC 184] at para 100 [see here], the Court explained, that “if a patentee obtains a workable formulation, the later discovery of one of its inherent characteristics does not add anything inventive to what had already been discovered: see Alcon Canada Inc. v Apotex Inc., 2012 FC 410 at para 45, [2012] FCJ No 1707 (QL).” In the present circumstances, once the POSITA pursued the use of glatiramer acetate for CIS patients, the claimed benefits would follow.

As Kane J notes, this is not an entirely new development in Canadian law, but it is nonetheless welcome to see the point expressly recognized and affirmed. I believe that this is the first time that the phrase “golden bonus” has actually been used in a Canadian case [510].

Prosecution History May Not Be Used to Rebut Representations Made by a Licensee

Allergan Inc v Sandoz Canada Inc 2020 FC 1189 Crampton CJ

2,507,002 / silodosin / RAPAFLO / NOC

Section 53.1 of the Patent Act permits the use of prosecution history in claim construction in certain circumstances. In this decision, Crampton CJ held that s 53.1 only permits use of prosecution history to rebut a representation made in litigation by a patentee, not representations made by a licensee. This is a truck-sized loophole in s 53.1, and Crampton CJ noted the prosecution history in question “provides a glaring example of the mischief that is implicitly permitted by the current wording” [135]. Nonetheless, Crampton CJ’s analysis of the provision is entirely compelling.

As noted in Monday’s post, the key issue on infringement was whether “wet granulation” was an essential element of the claims in question. Allergan argued it was not. Sandoz wished to rely on representations made during patent prosecution to rebut this assertion. The difficulty is that s 53.1 permits prosecution history to be introduced to rebut any representation “made by the patentee in the action.” Allergan is not the patentee; it is the exclusive Canadian licensee [1] and is the “first person” under the PM(NOC) Regulations [5]. The patent owner is Kissei Pharmaceutical and the patent was prosecuted on Kissei’s behalf [1], [3]. Kissei was also a defendant to this NOC action, joined pursuant to s 6(2), but crucially, Kissei took no position on the infringement issue, though it adopted Allergan's submissions relating to validity. (Kissei did not appear during the trial [7].)

So, Allergan’s argument was that the prosecution history could not be introduced because it can only be used to rebut a representation by the “patentee” and the patentee, Kissei had not made any representations. The question facing Crampton CJ was therefore whether s 53.1 should be interpreted to allow prosecution history to be used to rebut representations made by a licensee.

As noted, I find Crampton CJ’s reasons on this point to entirely convincing. I don’t have anything to add, so I will simply reproduce the key passage (with some references omitted):

[124] In my view, none of the arguments advanced by Sandoz can overcome the plain wording of subsection 53.1(1), a contextual reading of the Act or the jurisprudence in respect of the definition of the word “patentee” in section 2 of that legislation.

[125] It is trite law that “the words of a statute must be read ‘in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament’”.

[126] The “chapeau” in subsection 53.1(1) plainly limits the scope of that provision to permitting certain written communications to be admitted into evidence to rebut any representation made by the patentee in an action or proceeding, in respect of the construction of a claim in a patent that is at issue in the action or proceeding. In the present proceeding, it is admitted that the patentee is the defendant Kissei, which has not made any representation to the Court with respect to the construction of the ‘002 Patent. Accordingly, in the absence of any clear indication elsewhere within the scheme or object of the Act that Parliament intended to word “patentee” to include a licensee of a patent, subsection 53.1(1) cannot be invoked in this proceeding.

[127] I do not agree with Sandoz’s position that a licensee falls within the meaning of the word “patentee”, as defined in section 2 of the Act, namely, “the person for the time being entitled to the benefit of a patent”. This position was specifically considered and rejected in Electric Chain Co of Canadas Ltd v Art Metal Works Inc, [1933] SCR 581 at 586-587 [Electric Chain]. The effect of that decision was that a licensee had no right to be a party to an infringement action in Canada. As a result, what is subsection 55(1) was added to the Act: American Cyanamid Co v Novopharm, [1972] FC 739 at paras 23-24 (FCA) [American Cyanamid]. That provision, which has undergone some minor amendments that are not germane for the present purposes, states:

“A person who infringes a patent is liable to the patentee and to all persons claiming under the patentee for all damage sustained by the patentee or by any such person, after the grant of the patent, by reason of the infringement.”

[128] It has since been confirmed that a person who is a licensee under a patent is a “person claiming under” the patentee within the meaning of subsection 55(1): Armstrong Cork Canada v Domco Industries Ltd, [1982] 1 SCR 907 at 914; American Cyanamid, above, at paras 31-32.

[129] What is instructive for the present purposes is that while the Act was amended to permit a licensee to sue for infringement, the definition of “patentee” was not amended following the interpretation that it was given in Electric Chain, above.

[130] Moreover, given that Parliament included the words “the applicant for a patent” in clause 53.1(1)(b)(i), but not in the “chapeau” of subsection 53.1(1), it can be inferred that (i) Parliament was aware of the distinction between a patentee and a person who is not the patentee, and (ii) Parliament decided to strictly limit the scope of the “chapeau” to a person who is a patentee.

[131] This interpretation of Parliament’s intent finds some support in the legislative history. In particular, in the submission that IPIC made to the [Senate Banking, Trade and Commerce Committee], discussed at paragraph 123 above, IPIC noted that the language of section 53.1 created a “loophole” that would permit “a patentee to circumvent the operation of this section by acting through a licensee”: IPIC Submission, above, at 12. To address this “loophole”, IPIC recommended that subsection 53.1(1) be amended to include “persons claiming under the patentee”. The specific amendment proposed by IPIC is the underlined wording in the chapeau of that provision:

53.1 (1) In any action or proceeding respecting a patent, a written communication or any part of such a communication, may be admitted into evidence to rebut any representation made by the patentee or a person claiming under the patentee in the action or proceeding as to the construction of a claim in the patent if […]

[132] Ultimately, IPIC’s recommendation was not accepted, and Bill C-86 was passed without any change to the language of subsection 53.1(1). This legislative history provides additional support for the view that, at the time Parliament added subsection 53.1(1) to the Act, it was aware of the distinction between a patentee and a person who is not a patentee, yet it chose to limit the scope of section 53.1 to representations made by patentees.

While Crampton CJ did not rely primarily on the last point, I must say that I find it particularly compelling; this very issue was before the responsible Parliamentary committee, along with a very simple fix, and it was not implemented. The inference that it was considered and rejected is strong, which implies that the “loophole” was specifically intended.

[133] In summary, the plain and ordinary meaning of the language in subsection 53.1(1), together with a contextual reading of the Act and the jurisprudence discussed above, support the view that the word “patentee” in subsection 53.1(1) does not include a licensee. The legislative history also provides some additional support for this interpretation. Sandoz has not identified any contextual consideration to support the alternative interpretation that it has advanced.

While the considerations reviewed by Crampton CJ are textual and contextual, rather than purposive, and there is evidently some kind of purposive argument to be made that this loophole frustrates the operation of the provision, Crampton CJ’s textual and contextual analysis is so entirely compelling that I cannot see that any other conclusion would be possible without an impermissible usurpation of the legislative role.

Sandoz also argued that the prosecution history was admissible entirely apart from s 53.1, relying on the FC decision in Distrimedic 2013 FC 1043 at [210]: [116]. Crampton CJ rejected this argument, in part on the basis that Distrimedic is distinguishable [117]. More importantly Crampton CJ also observed that in light of the bar on the use of prosecution history set out in of Free World 2000 SCC 66 [66], Distrimedic has been “overcome” by the enactment of section 53.1 [115], [118]. I understand Crampton CJ to be saying that the use of prosecution history is now confined to the circumstances set out in s 53.1. This strikes me as undoubtedly correct. Any use of prosecution history in Canada now turns entirely on the interpretation of s 53.1 and any subsequent legislative amendments.

Crampton CJ therefore concluded that “given that no representation has been made by the patentee (Kissei) of the ‘002 Patent in the present action, the file prosecution history is not admissible in evidence in this action. It is barred by the prohibition against extrinsic evidence: Free World, above, at para 66" [133].

Crampton CJ’s holding was driven inexorably by the legislation; he did not necessarily welcome it. On the contrary, he observed “in passing,” that the “file prosecution history in question provides a glaring example of the mischief that is implicitly permitted by the current wording of subsection 53.1(1)” [135]. For those interested in looking at the prosecution history themselves, the documents 02507002 - 2011-08-25 - PRO and 02507002 - 2011-01-19 - PRO emphasize wet granulation to overcome various objections.

Reconciling the Two Essentiality Tests in Free World

Allergan Inc v Sandoz Canada Inc 2020 FC 1189 Crampton CJ

2,507,002 / silodosin / RAPAFLO / NOC

In this NOC decision Crampton CJ held that Allergan’s 002 patent was not invalid for obviousness, but it was not infringed by Sandoz’s silodosin formulation. These holdings turned largely on the facts, though Crampton CJ’s discussion raised several interesting legal issues, the most important relating to the interpretation of s 53.1, which permits the use of prosecution history in claim construction in certain circumstances. I’ll discuss this in a subsequent post. This post will provide the background and discuss claim construction, which was determinative of infringement. In particular, I’ll consider the question of how to reconcile the two apparently different tests for essentiality set out by the SCC in paragraph 55 of Free World 2000 SCC 66. Really this is a discussion of a point that was raised more directly by Locke J in Shire v Apotex 2016 FC 382, though I didn’t discuss it when I blogged about that case.

The 002 patent relates to a solid dosage form of silodosin. Silodosin was known to be useful in treating dysuria associated with a kind of benign prostate tumour. However, it was difficult to formulate in a solid dosage form, in part because of its potent adhesive properties. The 002 patent reflects the inventors’ solution to this problem. There were two independent claims at issue. Claim 1 was to a capsule comprising a granule “prepared by wet granulation” of silodosin and various excipients, with a specified dissolution profile [63]. Claim 6 was a method claim comprising granulating silodosin, and other excipients by a “wet granualtion process” [63]. The meaning of the terms was not disputed [64], nor was it disputed that the Sandoz product included all the specified ingredients [21]. The only dispute was as to whether the wet granulation elements were essential [64].

Crampton CJ’s starting point is that all elements are presumed to be essential: [46]. He then adopted at [67] the two-pronged approach to essentiality set out by the SCC in Free World 2000 SCC 66 at the beginning of para 55:

For an element to be considered non-essential and thus substitutable, it must be shown either

(i) that on a purposive construction of the words of the claim it was clearly not intended to be essential, or

(ii) that at the date of publication of the patent, the skilled addressees would have appreciated that a particular element could be substituted without affecting the working of the invention

The difficulty is that in the same paragraph, only two sentences later, the SCC quoted with approval the three part-test set out by Hoffmann J in Improver [1989] RPC 69, which was intended to summarize Catnic:

(i) Does the variant have a material effect upon the way the invention works? If yes, the variant is outside the claim. If no: –

(ii) Would this (i.e.: that the variant had no material effect) have been obvious at the date of publication of the patent to a reader skilled in the art? If no, the variant is outside the claim. If yes: –

(iii) Would the reader skilled in the art nevertheless have understood from the language of the claim that the patentee intended that strict compliance with the primary meaning was an essential requirement of the invention? If yes, the variant is outside the claim.

As Locke J pointed out in Shire v Apotex 2016 FC 382 [135], these two tests are not entirely consistent. The first prong of the two-part test corresponds roughly to the third Improver question, and the second prong corresponds roughly to the first and second Improver questions, but the two-part test is disjunctive while the Improver questions are conjunctive [135]. The problem, then, is to try to understand what the SCC intended. Locke J suggested that the SCC probably intended the two-part test to be conjunctive, so that it would be necessary to establish both elements in order to establish that the element at issue is not essential [137].

Lear v Adkins Should Not Be Followed

Loops LLC v Maxill Inc 2020 ONSC 5438 Lederer J: Swinton, Penny, JJ revg 2020 ONSC 971 Templeton J

            2,577,109 / Toothbrush

In Monday’s post I reviewed Lederer J’s decision in this case, holding that a no-challenge clause in a settlement agreement is enforceable, notwithstanding the decision of the US Supreme Court in Lear Inc v Adkins 395 US 653 (1969) which abolished the doctrine of licensee estoppel in US law. In Tuesday’s post I explained that the doctrine of licensee estoppel is not based on estoppel at all, but is based entirely on contract law. Absent an express agreement to the contrary, the licensee’s obligation to pay royalties will not normally be contingent on the validity of the patent. This is partly because the courts will not normally imply a warranty of validity into the agreement and partly invalidity will not normally constitute complete failure of consideration, but might instead give rise to a counter-claim for damages. In this post I will step back and consider the bigger question: as a matter of policy, should Lear v Adkins be followed in Canada? Recall that while Lederer J was of the view that holding a no-challenge clause in a settlement agreement to be unenforceable was a leap too far [64], but he left open the possibility that it might be adopted in more incremental steps. That is the question I will focus on.

There Is No Such Thing as Licensee Estoppel

Loops LLC v Maxill Inc 2020 ONSC 5438 Lederer J: Swinton, Penny, JJ revg 2020 ONSC 971 Templeton J

            2,577,109 / Toothbrush

In Lear Inc v Adkins 395 US 653 (1969) the US Supreme Court abolished the doctrine of “licensee estoppel,” which (more or less) prevents a licensee from challenging the validity of the licensed patent. Monday’s post summarized the decision of Lederer J for the Ontario Divisional Court holding that a “no-challenge” clause in a settlement agreement is enforceable, Lear v Adkins notwithstanding. In this post I will argue that there is really no such thing as licensee estoppel in Canadian law. More precisely, the rule at issue is simply based on contract law and it is not helpful to characterize it as based on an estoppel.

First, what exactly is the rule? The precise nature of the licensee estoppel rule was not at issue in this case, as the question was only whether the express no-challenge clause was enforceable. Lederer J at [61] did quote from Asturiana (1979) 55 CPR(2d) 131 (Ont HCJ) referring to the consistent Anglo-Canadian authority “that a licensee is not permitted to dispute the validity of the patents.” This is not exactly right because there are many circumstances in which a licensee is permitted to dispute validity. It is more accurate to say that a licensee cannot raise invalidity of the patent as a defence to an action for payment of royalties owing under a licence agreement, except in the case of fraud, unless the agreement contains an express covenant as to validity of the patent. (Asturiana was an action for payment of royalties, so the quoted statement is correct in that context.)

Now, in some respects the rule is very strict. In particular, the licensee cannot raise invalidity as a defence to an action for payment of royalties even when the patent has actually been held invalid in other proceedings: Mills v Carson (1893) 10 RPC 9 (CA); African Gold Recovery Co Ltd (1897) 14 RPC 660 cited with approval in Anderson v EJ Shepard Ltd (1930), 66 OLR 105 (CA) [20]; Duryea v Kaufman (1910), 21 OLR 165 (OHCJ) [23] (in obiter).

On the other hand, it is subject to a major exception. While a licensee cannot raise invalidity as a defence to an action for payment of royalties under the licence, a licensee, even a current licensee, may always raise invalidity as a defence to an action for infringement: this was in fact the holding in Duryea v Kaufman, the leading case that firmly established licensee estoppel in Canadian law with a thorough review of the English cases; see also Bayer AG v Apotex Inc (1995) 60 CPR(3d) 58 (OGD) 73 (“a licensee will not be estopped from alleging that the patent is invalid if the action brought against it is for infringement of the patent”) aff’d (1998) 82 CPR (3d) 526 (Ont CA) 532-33; Fuel Economy v Murray (1930) 47 RPC 346 (Ch) at 353 (“an estoppel cannot arise in an action for infringement”) aff’d 358 (CA). So, for example, a current licensee may argue invalidity if the patentee alleges the licensee has infringed by carrying out activities outside the scope of the licence, whether by falling outside of the permitted uses (Apotex v Tanabe (1994) 59 CPR(3d) 38 (OGD) 49; Bayer AG v Apotex Inc) or outside the geographic scope of the licence (Fuel Economy v Murray). A defendant claiming a right by licence may plead invalidity in the alternative: Duryea [35], [41]-[42]. A former licensee whose licence has come to an end by revocation, lapse of time, or any other method, may raise invalidity as a defence to an action for infringement in the same manner as if it had never had a licence: Duryea [35]; Crossley v Dixon (1863), 10 HLC 293, 308. Conversely, a former licensee may not raise invalidity as a defence in an action for unpaid royalties owing under the agreement that was formerly in effect: Crossley v Dixon (1863), 10 HLC 293, 308; Philco Products Ltd v Thermionics Ltd [1943] SCR 396, 419.

Now, while this rule is commonly referred to as an estoppel, it is not based on any recognized form of estoppel. Indeed, in every case I have found in which a recognized estoppel has been argued, it has been rejected: see Curtiss-Wright Corporation v Canada [1968] 1 ExCR 519 (rejecting estoppel in pais and promissory estoppel); Cropper v Smith (1884), 1 RPC 81 (CA) (rejecting arguments based on estoppel of record, estoppel by deed and estoppel in pais) aff’d on this point (1885) 10 AC 249 (HL) at 259. In Clark v Adie (No 2) (1877), 2 AC 423, 435-36 (HL) Lord Blackburn drew a loose analogy with the position of a tenant of lands who is his estopped from denying his lessor’s title so long as the lease remains in force, and the tenant has not been evicted from the land, he is estopped from denying that his lessor had a title to that land. However, Lord Kenyon in Hayne v Maltby (1789) 100 ER 665 at 666, rejected the analogy.

This should perhaps not be very surprising. Generally speaking, an estoppel is an equitable doctrine that supplements contract law by giving effect to some representation that is not supported by consideration, such as in promissory estoppel when a representation by one party to an agreement leads the other party to suppose that the agreement will not be strictly enforced, even though no consideration may have been given for the forebearance: John Burrows Ltd [1968] SCR 607 at 614-16; Curtiss-Wright Corporation v Canada [1968] 1 ExCR 519 at 530; and see generally John D McCamus, The Law of Contracts, (2005), Ch 8. It is sometimes said that the licensee estoppel arises “from the fact of the relationship itself,” (Fox on Patents 3^rd ed Vol I, 618; Fox 4^th at 320) but this is clearly not true; a licensee may raise invalidity as a defence if there is an express guarantee that the patent is valid, notwithstanding that the nature of the relationship is otherwise the same. In any event, it is very difficult to see how the act of entering into an agreement could in itself give rise to an estoppel making it inequitable to insist on the terms of the agreement.

In Lear the US Supreme Court at 656 explained that

The theory underlying this doctrine is that a licensee should not be permitted to enjoy the benefit afforded by the agreement while simultaneously urging that the patent which forms the basis of the agreement is void.

Perhaps this was the theory in US law, but it cannot be the explanation for the Anglo-Canadian rule; it is perfectly clear, as discussed above, that when sued for infringement a current licensee may indeed enjoy the benefit of the licence agreement while simultaneously urging that the patent is void.

So, we have a bit of a puzzle. Licensee estoppel is an estoppel that is not related to any other estoppel, that does not prevent either party from relying on the strict terms of the contract, and that operates only in respect of a claim brought on the contract. In short, it looks a great deal like a contract doctrine.

And indeed it is. The basis for the “estoppel” doctrine is really very simple. A licensee cannot raise invalidity as a defence to an action for unpaid royalties under a licence because the validity of the patent is normally immaterial to the obligation to pay under the contract. This has nothing to do with estoppel; it is purely a matter of contract. The licensee is contractually obliged to pay and unless otherwise provided in the contract, that obligation is not contingent on the validity of the contract. The “estoppel” such as it is, does not arise from the relationship between the parties, it arises from the terms of the contract. See Aidan Robertson, “Is the Licensee Estoppel Rule Still Good Law? Was It Ever?” 10 EIPR 373 (1991) making much the same point.

This explains what might otherwise be counter-intuitive aspects of the doctrine. It is why the actual invalidity of the patent, established in different proceedings, has not afforded a defence. It is not because the courts have buried their heads in the sand, like ostriches, resolutely ignoring the fact of invalidity; rather, the courts have in effect said, “Yes, we know the patent is invalid, but that doesn’t affect your obligations under the contract.” That is why fraud is an exception; contracts induced by fraud are not enforceable as a matter of general contract law doctrine. That is why an express provision is an exception; it is no exception at all, as the question is simply a matter of interpreting the contract, and an express term will always trump an implied term. That is why a licensee in good standing can always raise invalidity as a defence to an infringement action; invalidity is always material to the licensee’s obligation to pay damages for infringement, even when it is not material to the licensee’s obligation to pay royalties. That is why licensee estoppel is not related to any other established form of estoppel: it is not an estoppel, but purely a matter of contract. When an allegation of invalidity by the licensee is struck, it is simply on the basis of the procedural rule that allegations that can have no effect on the outcome of the case should be struck as a waste of judicial resources.

The more interesting question is why, as a matter of contract law, the obligation to pay royalties does not turn on the validity of the agreement (unless of course, the agreement itself so provides). The answer is most clearly articulated in the early cases, decided before the matter was settled simply by reference to authority. It follows from two principles. First, a warranty or guarantee of validity will not normally be implied into a licence agreement; absent express language or special circumstances, either a licence or assignment is presumed to be transferring only such rights as the letters patent conferred upon the patentee: Electric Fireproofing Co of Canada v Electric Fireproofing Co (1910) 43 SCR 182 at 184-85 (Davies J), 189-90 (per Duff J), 195 (Anglin J) (assignment); Vermilyea v Canniff (1886), 12 OR 164 (OntHCJ), 169 (licence); Duryea (1910), 21 OLR 165 [10]-[14] (reviewing the cases); Anderson v EJ Shepard Ltd (1930), 66 OLR 105 (Ont CA) [19] (licence); Rymland v Regal Bedding Co Ltd (1966), 51 CPR 137 (Man CA) 141 (licence). This is because the validity of the patent turns on objective considerations—the early cases dealt primarily with anticipation by a third party publication—and not on information peculiarly within the knowledge of the patentee, and therefore the licensee is generally as well placed as the patentee to assess the validity of the patent: Hall v Conder (1857) 140 ER 318, 327; Taylor v Hare (1805) 127 ER 461, 462; Lawes v Purser (1856) 119 ER 1110, 1112; Vermilyea v Canniff (1886), 12 OR 164 (OntHCJ), 169; Rymland v Regal Bedding Co Ltd (1966), 51 CPR 137 (Man CA) 141. As the exception that proves the rule, if the patentee had actual knowledge of invalidity, this would likely constitute fraud that would enable the licensee to raise invalidity even in an action for payment under the contract: see Lawes v Purser (1856) 119 ER 1110, 1112. Moreover, this is not a strict rule as such; it is simply the usual outcome of interpreting the contract in light of the fact that the licensee is normally in as good a position to assess validity as the licensor. Thus the most accurate statement of the law is that “Courts are not prepared to readily extend the meaning of doubtful words so as to convert them into an express warranty of the validity of a patent”: Rymland 141.

Second, invalidity of the patent does not normally constitute complete failure of consideration, as even an invalid patent may effectively confer the benefit of exclusivity until such time as it is challenged: Vermilyea v Canniff at 169; Lawes v Purser (1856) 119 ER 1110, 1112; Taylor v Hare (1805) 127 ER 461, 462. So, in the early English case of Taylor v Hare, the licensee had practised the invention for 6 years before discovering prior art said to anticipate, and sought on that basis to recover all the royalties that had been paid to date. The court rejected the action, with Heath J stating at 462 “It might as well be said, that if a man lease land, and the lessee pay rent, and afterwards be evicted, that he shall recover back the rent, though he has taken the fruits of the land.” A licence agreement may also involve a transfer of know-how or confidential information, or more than one patent, so that it would be unwarranted to read in a provision absolving the licensee of the obligation to pay on the basis of the invalidity of one patent. Consequently, even when there is language in the agreement relating to the validity of the patent, the courts will not interpret it as absolving the licensee of the obligation to pay royalties (unless it is expressly to that effect); it is more likely to be interpreted as a warranty, breach of which might be the basis for a counter-claim in damages: see eg Hall v Conder (1857) 140 ER 318, 323; Gillard v Watson (1924) 26 OWN 77 (OCA).

In summary, there is no rule of licensee estoppel, because there is no rule and it is not an estoppel. While a licensee cannot normally raise invalidity as a defence to an action for payment of royalties, this is simply because the obligation to pay royalties under the licence is not normally conditional on validity.

No-Challenge Clause in Settlement is Enforceable

Loops LLC v Maxill Inc 2020 ONSC 5438 Lederer J: Swinton, Penny, JJ revg 2020 ONSC 971 Templeton J

            2,577,109 / Toothbrush

This interlocutory motion concerns the enforceability of a “no-challenge” clause in a settlement agreement. It also indirectly raises the question of whether Canadian law should follow the decision of the US Supreme Court in Lear Inc v Adkins 395 US 653 (1969) and abolish the doctrine of “licensee estoppel,” which (more or less) prevents a licensee from challenging the validity of the licensed patent. At first instance Templeton J held that the no-challenge clause at issue was not enforceable (see here). In this appeal, Lederer J, for a unanimous panel of the Ontario Divisional Court, reversed, holding that a no-challenge clause in a settlement agreement is indeed enforceable according to its terms. At the same time, he left the door open to the possibility that Lear might be followed in a different context as part of the incremental evolution of the law; my sense is that he did not particularly favour such a development, but was simply concerned not to decide any more than was necessary to dispose of this motion.

In this post, I will summarize Lederer J’s decision. I agree entirely with his reasons, both in the substantive analysis and in his balanced approach to legal change. In two subsequent posts I will address issues that are raised by the decision, but which go beyond what was required by this appeal. My next post will review the Anglo-Canadian law and argue that there is no such thing as licensee estoppel; more precisely, “estoppel” is a very unhelpful label for a doctrine grounded entirely in contract law and not on any kind of equitable principle. In my third post I will argue that Lear is not sound as a matter of policy and should not be followed in any context, even as a part of a more incremental development of the law.

Facts

Loops and Maxill are in the toothbrush business. In 2012 Loops sued Maxill in Canada for infringement of Loops’ 109 patent. Two years later they reached a global settlement, which contained a “no-challenge” clause stating that Maxill would not “directly or indirectly assist any person attacking the validity” of either the Canadian 109 patent or the corresponding US Patent 8,448,285 [3]–[5], [ONSC 971/15]. Maxill then created another toothbrush to try to design around the 109 patent. In 2015 Loops sued Maxill in Canada over the new toothbrush, this time for breach of the Agreement [7], [ONSC 971/20]. In 2017 Loops also sued Maxill in the US, alleging the same new toothbrush infringed the US 285 patent [9]. Shortly thereafter, a US subsidiary of Maxill, Maxill (Ohio), brought an action seeking a declaratory order that the 285 patent was invalid [10]. The US actions were consolidated in Washington [11]. The result of the US consolidation is that Maxill itself was attacking the validity of the US patent, notwithstanding the no-challenge clause in the settlement agreement; under Lear, as interpreted in the US 9^th Circuit (which includes Washington), the no-challenge clause is unenforceable [ONSC 971/62]. Loops then brought this Canadian motion for an interlocutory injunction prohibiting Maxill from challenging the validity of the US 285 patent in the US litigation, on the basis that this was a breach of the no-challenge clause in the Agreement [ONSC 971/1]. In effect, Maxill is seeking a partial anti-suit injunction to enforce the no-challenge clause in the settlement agreement.

Because the injunction sought involved the enforcement of a restrictive covenant, this required Loops to make out a “strong prima facie case” on the merits [15]. In the decision under appeal, Templeton J held that Loops had failed to make out a strong prima facie case, for three reasons, the first two of which are largely peculiar to the case. The Divisional Court reversed on all points.

Does the Discoverability Rule Apply to the Patent Act Limitations Provision?

Paid Search Engine Tools, LLC v Google Canada Corp 2020 FC 992 McVeigh J

            2,415,167

In this motion McVeigh J declined to direct the proposed determination of a question of law relating to the limitations period in s 55.01 the Patent Act pursuant to Rule 220(1)(a), but in so doing she decided an equally important question of law—just not the one that was asked. This issue is also very interesting, and I’m afraid I went down the rabbit hole—this blog post is longer than the decision.

The patent at issue was published in January 2002 and granted in March 2017, and an action was brought by Paid Search against Google on January 12, 2018 [3]-[4]. The question presented for determination by Google was whether the six-year limitation period in s 55.01 of the Act applies to a claim for “reasonable compensation” pursuant to s 55(2) of Act, for acts of ‘infringement’ between the time the application was published and the time the patent was granted,“such that in the present action no remedy, including no reasonable compensation, may be awarded for any act of infringement committed prior to January 12, 2012?” [4]. Thus the answer to the question affects the claim to reasonable compensation potentially over a ten year period, depending on when any infringement began.

Rule 220(1)(a) allows the court to determine a pure question of law when that question may be answered without having to make any determination of fact [10]. McVeigh J held that the question was not a pure question of law because the discoverability rule applies to the s 55.01 limitation period [14], [23]. Under the discoverability rule, the limitation period does not begin to run until the material facts were reasonably discoverable: Pioneer Corp v Godfrey 2019 SCC 42 [31] cited at [16]; and see eg the s 5 of the Ont Limitations Act for a statutory implementation. The discoverability rule therefore turns on factual issues, including “the moment at which [Paid Search] learned of the patent infringement, the moment [Paid Search] was able to commence the action and the reasons for the delay, if any” [24]. So, if the discoverability rule applies, the question posed — as to whether reasonable compensation may be awarded for acts prior to January 2012 — is not a pure question of law [24]. While the question might nonetheless be decided under Rule 220 if the relevant facts were undisputed, that was not the case [25-26]. McVeigh J consequently dismissed the motion [29]. Her holding on this point was strictly not determinative, as she also held that determination of the question prior to trial would not be likely to save time and money, particularly given the likelihood of an appeal of the motion decision [33]-[46], but the central holding was that the discoverability rule applies to s 55.01.

Thus, while McVeigh J declined to answer the question of whether limitations period barred reasonable compensation prior to the relevant date, she did answer the even more important question of whether the discoverability rule applies to the limitation period set out in s 55.01 of the Act, which applies to any remedy:

55.01 No remedy may be awarded for an act of infringement committed more than six years before the commencement of the action for infringement.

This is a novel point of law, as McVeigh J noted: “The question of whether the discoverability principle applies to the limitation period found in section 55.01 of the Patent Act has not been yet resolved by the courts” [17].

You Can’t Have Your Non-infringing Alternative and Eat it Too

Hospira Healthcare Corporation v The Kennedy Trust for Rheumatology Research 2020 FCA 191 Gleason JA: Stratas, Laskin JJA aff’g 2019 FC 1252 & 2019 FC 1253 Phelan J

            2,261,630 / infliximab / INFLECTRA

In the liability phase of Hospira v Kennedy Trust 2018 FC 259 var’d 2020 FCA 30 Hospira and others were found to have infringed the 230 patent by making and selling INFLECTRA, an infliximab biosimilar of REMICADE [FC 16-17]. They also had a second drug, REMSIMA, also an infliximab biosimilar. During the liability phase Hospira took the position that REMSIMA was the same as INFLECTRA in material respects and the liability trial proceeded on that basis [2]. During the damages phase of the proceedings, Hospira sought to amend its Statement of Issues to assert that REMSIMA was a non-infringing alternative, which it claimed disentitled the patentee to damages [2]. Phelan J, in unreported decisions, held that the proposed amendments were abusive as being a radical departure from the position taken by Hospira in the liability phase, and undercut the basis upon which the proceeding had taken place [5]. The FCA has now affirmed. The FCA noted that “While there may well be cases where a party may set out an alternative for the first time as part of the ‘but for’ world in the damages phase of a patent infringement matter, this is not one of them” [5].

Filgrastim Patent Obviousness Upheld on the Facts

Amgen Inc v Pfizer Canada ULC 2020 FCA 188 Stratas JA: Gleason, Laskin JJA aff’g 2020 FC 522 Southcott J

1,341,537 / filgrastim / NEUPOGEN / NIVESTYM

Southcott J at first instance in this NOC decision found Amgen’s 537 patent to be obvious on an obvious-to-try analysis in a decision that turned almost entirely on the facts. The FCA has now upheld that the decision, largely on the usual basis that read holistically, there was no overriding error, and it is not the FCA’s role to re-weigh the evidence [12]. The FCA then went further and specifically approved Southcott J’s decision, saying that even if it had reviewed the evidence de novo, it would have come to the same conclusion [13]. The FCA commended Southcott J’s analysis, saying “we consider the Federal Court’s reasons worthy of recognition for their attention to detail, their careful analysis of the rival experts and the thorough analysis throughout.

Split Consent Effective under the NOC Regs

 Fresenius Kabi Canada Ltd v Canada (Health) 2020 FC 1013 Manson J

IDACIO / HUMIRA / adalimumab

AbbVie is the owner of several patents relating to adalimumab / HUMIRA. AbbVie and Fresenius Kabi entered into a confidential licensing agreement evidently allowing Fresenius Kabi to market its biosimiliar IDACIO. Fresenius Kabi then sought an NOC relying on s 7(2) of the PM(NOC) Regulations which permits the Minister to grant an NOC if the owner of the patent consents to "the making, constructing, using or selling of the drug." AbbVie wrote to the Minister consenting to "the making, constructing, and, on and after February 15, 2021, to the using and selling" in Canada by Fresenius Kabi of IDACIO [4]. Evidently the temporal split in the consent was to allow Fresenius Kabi to stockpile the drug for launch on February 15. The Minister refused to accept this as effective consent for the purposes of s 7(2), on the basis that the "or" should be read as "and" to avoid an absurd result [12]. Manson J reversed on reasonableness review [9], holding that "or" should be read as "or" [22]-[25] and that this did not result in any absurdity [31]-[33]. Manson J also noted that the Minister's interpretation failed to recognize that one purpose of the Regulations is to allow the timely market entry of generics [29]-[30]; if the temporal split in consent were not permitted, this would result in delayed launch [35].

Manson J’s analysis strikes me as being entirely compelling. The direct practical implication is that the NOC Regulations will not prevent parties from entering into an agreement that ensures launch on a specific date, but not before.

A broader point is that different judges of the Federal Court have consistently interpreted reasonableness review under Vavilov 2019 SCC 65 as endorsing a fairly robust review of Health Canada’s statutory interpretation decisions: in addition to this decision of Manson J, see also Natco 2020 FC 788 McHaffie J (here); ViiV Healthcare 2020 FC 756 Fuhrer J (here); Glaxosmithkline 2020 FC 397 Barnes J (here), all reversing Health Canada on statutory interpretation issues. (I’m not an admin law expert, so I don’t really know how different the results would have been prior to Vavilov.) Substantively, I’m pleased to see this, as Health Canada’s interpretation struck me as unreasonable in all these cases and the FC intervention has helped ensure that the law develops in the manner that would have been intended by the legislature. Of course, Health Canada isn’t always wrong in its stat interp decisions — see Janssen 2020 FC 904 (here) (though even there Health Canada was simply following an FCA decision)—but statutory interpretation just doesn’t seem to be one of Health Canada’s strengths. That is fair enough, given that their mandate is focused on “helping Canadians maintain and improve their health.”

Blogging Break

I'll be taking a break from blogging for a couple of weeks. I'll be back as usual sometime in mid-November. 

Variation of Injunction Refused

 Bombardier Recreational Products Inc v Arctic Cat, Inc 2020 FC 946 Roy J

          2,350,264

After protracted litigation and a couple of trips to the FCA, Bombardier Recreational Products (BRP) finally prevailed in its patent litigation against Arctic Cat and was granted a permanent injunction. In this motion Arctic Cat and its dealers sought to vary that injunction using Rule 399. This is Arctic Cat’s third attempt to avoid the injunction. The final substantive decision in this litigation was the 15 June decision of Roy J in 2020 FC 691: see here. After prevailing on the merits of the 264 patent (one of several that had been asserted), BRP had requested the usual permanent injunction, which would have the effect of prohibiting Arctic Cat and all its dealers from selling Arctic Cat’s current model year snowmobiles. Arctic Cat had resisted vigorously, arguing that the injunction should not be granted at all. Roy J rejected Arctic Cat’s arguments [178-94], and granted a permanent injunction “to restrain the Defendants, their . . . distributors and dealers having knowledge of the injunction” from “selling or offering for sale, making, using or distributing in Canada any [infringing] snowmobile.” BRP notified all the dealers after the injunction was granted, [12]-[13], so there was no dispute that the inventors had knowledge of the injunction. Arctic Cat then sought a stay pending appeal, which was refused: 2020 FCA 116, discussed here and here.

In this motion Arctic Cat, as well as some of its dealers (who had not previously been directly involved in the litigation), tried again, bringing motions under Rules 399(2) and 399(1), respectively, seeking an order to vary the injunction [1]. The effect of the variation would be to allow dealers to sell infringing snowmobiles that they held in stock as well as pre-ordered snowmobiles. The motions were unsuccessful, largely because Rule 399 isn't a vehicle for varying an injunction that has been granted after full argument on the merits.

While I agree with Roy J’s holding in the context of Rule 399, I would suggest that Canadian courts should be more willing to consider staying or tailoring a permanent injunction (eg by carving out certain products) in appropriate circumstances. As I discussed in a recent post on Nova v Dow, sunk costs and the difficulty of doing full patent pre-clearance means that the patent system can hinder rather than advance innovation. In Patent Remedies and Complex Products: Towards a Global Consensus § 4.4.3, p155-56, we argue that tailoring of injunctive relief in appropriate circumstances can mitigate some of the worst effects. This case was arguably appropriate for tailoring. I must acknowledge that in my post on Roy J’s decision granting the injunction, I noted that “Roy J’s analysis was brief and I agree entirely.” However, because the analysis was brief I didn’t fully grasp the issues, and moreover, the argument was framed as denying the injunction rather than staying or otherwise tailoring it. After blogging on the more recent proceedings, I have a better handle on the issues, and while I won’t say that the injunction in this case should necessarily have been stayed or tailored, I will say that the possibility should have been taken more seriously.

I am the author of the Canada chapter in a forthcoming book on the comparative law of tailoring injunctions, Contreras & Husovec (eds) Injunctions in Patent Law: a Trans-atlantic Dialogue on Flexibility and Tailoring (Cambridge U Pr) (expected release in spring 2021). In their synthesis chapter, Professors Contreras and Husovec divide countries into four groups. In Group A injunctions are granted essentially as of right, while in Group B injunctions are in fact discretionary. There are two subgroups in each category: A1 with automatic issuance upon a finding of infringement, most prominently Germany; A2, with automatic issuance upon a finding of infringement owing to attitudes of judges, despite the fact that that the law gives them some discretion eg Poland; B1, in which injunctions generally issue, but there is an individualized assessment in some cases, most prominently the UK; and B2, with individualized assessment in all cases, comprising only the US. While injunctions are clearly discretionary in principle in Canada, the suite of decisions in the Bombardier v Arctic Cat litigation, as well as decisions such as Valence v Phostech 2011 FC 174 (see here) indicate that Canada belongs in Group B2. I would like to see Canada move closer to the UK position, where injunctions are normally granted, but there is a real possibility of tailoring after a principled analysis in appropriate cases.

This point is only tangential to the main holding in the decision at hand. The thrust of Roy J’s decision was that if the injunction was to be tailored, it should have been done at first instance or on the application for a stay pending appeal; the opportunity has now passed. That seems right to me. 

However, I raise the point because some of Roy J’s obiter remarks suggest tailoring or staying injunctive relief is almost never appropriate. I recognize that Roy J’s remarks are broadly consistent with those of Rivoalen JA in the stay application in this litigation, and also with Gauthier J’s brief analysis in Valence v Phostech. It is because precisely because this series of decisions from different judges indicates a general view in the FC/FCA that I feel the point is worth pursuing. At the same time, I should also point out that Roy J’s original decision does show the possibility of tailoring, as Roy J deliberately refused to order delivery up of infringing snowmobiles in possession of the dealers, so as to allow them to sell those machines after the expiry of the patent. It is just this kind of flexibility that I suggest should be more often considered.

With that long preface, I’ll turn to the decision itself.

The main substance of Roy J’s decision dismissing both motions was fairly straightforward. Rule 399(2), relied on by Arctic Cat itself, allows the Court to set aside or vary an order “by reason of a matter that arose or was discovered subsequent to the making of the order.” There simply wasn’t any new matter [30]. Arctic Cat tried to argue that the scope of the injunction was unclear and this was discovered after the order was made [31], but this argument failed because any lack of clarity did not arise subsequent to the making of the order, so Rule 399(2) was not applicable [30]. In any event, the order wasn’t actually unclear at all [31]. Citing Abbvie 2014 FCA 176 [43], Roy J noted that Rule 399 is applicable “[o]nly if there is specific, particularized evidence of significant, unforeseen difficulty in following the terms of an injunction” [27]. The motion sought to allow the dealers to sell infringing snowmobiles that they owned and that were in their possession, but this was clearly prohibited by the express terms of the order restraining “dealers having knowledge of the injunction” from “selling or offering for sale” any infringing snowmobile. This could hardly be clearer [41]. Moreover, the scope of the injunction was not a mistake. Roy J noted that dealers had not been ordered to deliver up infringing snowmobiles in their possession. Roy J made this order deliberately, so as to allow dealers to retain those snowmobiles and sell them after the expiry of the patent [33]. But this reinforces the point that Roy J intended that dealers be prohibited from selling during the term [41]. Arctic Cat also argued that the pre-ordered sleds were already sold to the final customers, or at least that there was ambiguity on this point. Roy J had no difficulty concluding that the title to the pre-ordered sleds—which had not yet even been manufactured—had not passed to the customers [21].

The motion made by the dealers raised essentially the same issues. It was brought under Rule 399(1), which allows the court to set aside or vary an order that was made “(a) ex parte; or (b) in the absence of a party who failed to appear by accident or mistake or by reason of insufficient notice of the proceeding.” Again, the motion did not fit within the scope of the rule as the order was not made ex parte, and the dealers were not parties who failed to appear by mistake, as they were not parties at all [53]-[54].

With that said, the motion by the dealers raises an interesting issue precisely because they were not parties and they are now bound by the injunction even though they never had a chance to argue its merits. As Roy J pointed out, non-parties may be bound by an injunction: MacMillan Bloedel [1996] 2 SCR 1048. But that being the case, it would seem all the more reason why third parties who are bound by an injunction should have the chance to challenge the injunction after it has been granted, as they will not be in a position to argue the merits before the fact. Roy J remarked that “the issues raised by the Dealers were defended by Arctic Cat with a great deal of vigour. In essence, the Dealers seek to litigate that which has already been litigated” [53]. In a practical sense there is a great deal of force to that observation. But in our legal system parties normally have a right to be heard, and I am not very comfortable by dismissing this right by saying “Don’t worry, someone else argued your case for you without telling you about it, and we think they did a pretty good job”—even if it is true that the case was well argued. Given that breach of an injunction may be sanctioned by contempt, it seems to me that there is a strong prima facie argument that any party bound by an injunction should have the opportunity to challenge it on the merits. I doubt that such an opportunity would be abused. If indeed the original party did argue the case well, then the third party seeking to re-argue the injunction would face an uphill battle; it would probably lose and then would have to bear its costs as well as some part of the plaintiff’s costs. None of this is to criticize Roy J’s holding. Even if such a mechanism is desirable, it seems clear that Rule 399 isn’t the right vehicle. I have to wonder whether there is a procedural gap in the law in this respect, though I have not researched the point thoroughly.

Thus, I do agree with Roy J’s analysis and holding in respect of Rule 399. But Roy J also indicated that he would not have been inclined to vary the order in any event [36]-[37]. In part, this was because doing so would be tantamount to a compulsory licence: “The monopoly conferred by a patent is gone: moral hazard is a thing of the past, as there is an incentive to increase one’s exposure to risk by infringing on a patent because the infringer will not bear the whole cost. The infringer does not have to abide by an injunction as it can be substituted for a compulsory royalty” [38]. To repeat a point I made in an earlier post, this litigation has been ongoing since 2011, and BRP has been in effect subject to a compulsory licence for that entire period, as we now know that Arctic Cat was infringing the entire time, with the only consequence that it is liable in damages. The reason for this is that the Federal Court will never grant an injunction in patent cases, on the view that damages are an adequate remedy. If an interlocutory injunction was refused because damages are an adequate remedy, how can we then say that a permanent injunction must be granted because damages are inadequate? Certainly, there is a stronger case for a permanent injunction because we now have a substantive holding on the merits that the patent was valid and infringed; but this is a separate consideration from the adequacy of damages.

Roy J also remarked as follows (my emphasis):

[38] In the context of an infringement of the Copyright Act (RSC, 1985, c C-42), the Federal Court of Appeal found in R. v James Lorimer & Co. [1984] 1 FC 1065 [77 CPR(2d) 262] [James Lorimer], that “the copyright owner is prima facie entitled to an injunction restraining further infringement” (p. 1073). The Court goes on to “find no authority for requiring a copyright owner to acquiesce in a continuing infringement against payment of a royalty. That is tantamount to the imposition of a compulsory licence. In the absence of legislative authority, the court has no power to do that”. There is no reason to depart from the principle described in James Lorimer.

With due respect, to the extent that the emphasized statement suggests that the court has no power to refuse an injunction, it is wrong. In the first place, the provision of the Patent Act authorizing injunctive relief, s 57(1), provides that a court “may. . . make such order as the court or judge sees fit.” This expressly gives legislative authority to grant or refuse an injunction. Moreover, as a matter of general principles, injunctive relief is inherently discretionary as being an equitable remedy: “The traditional rule is that an injunction will be granted only where damages would provide an inadequate remedy” Sharpe on Injunctions and Specific Performance § 1.60. Now, it is true that “[w]here the plaintiff complains of an interference with property rights, injunctive relief is strongly favoured,” and “the conventional primacy of common law damages over equitable relief is reversed. Where property rights are concerned, it is almost that damages are presumed inadequate and an injunction to restrain continuation of the wrong is the usual remedy.” However, “as always with equity, this must be understood to be a principle rather than a rule” Sharpe § 4.10. Thus it is perfectly clear that a court has the inherent jurisdiction to refuse injunctive relief. It is true that there is only one Canadian case refusing to grant a permanent injunction to a successful patentee, namely Unilever (1993), 47 CPR(3d) 479 (FCTD)(1995), 61 CPR(3d) 499 (FCA) (though injunctive relief was moot on appeal as the patent had expired). But the fact that injunctive relief is normally granted does not mean the courts do not have the authority to refuse it. Indeed, in the UK at least, injunctive relief has been refused even in the case of trespass to land: see Jaggard v Sawyer [1995] 2 All ER 189 (EWCA).

I hope I have not been unfair in dwelling unduly on an issue that was not central to Roy J’s holding. But his views, coming on the heels of those of Rivoalen JA, suggest there may be a widespread view in the Federal Courts that a permanent injunction should always be granted. I do agree that an injunction should normally and presumptively be granted, but it is quite clear that the courts do have the authority to tailor or stay a permanent injunction, in appropriate circumstances, and I would welcome a more rounded discussion of when tailoring might be appropriate.

Camso v Soucy Affirmed from the Bench

Camso Inc c Soucy International Inc 2020 CAF 183 Nadon JA: Boivin, Leblanc JJA aff’g 2019 FC 255 Locke J

            2,372,949 / 2,388,294 / 2,822,562 / 2,825,509 / ATV Track Assemblies

At first instance, Locke J held all the claims at issue to be all the claims in issue to be invalid for anticipation and/or obviousness. As discussed here, his decision turned on claim construction and the facts. The FCA has now affirmed in a brief decision from the bench.

Summary Judgment Granted

 Flatwork Technologies, LLC (Powerblanket) v Brierley 2020 FC 997 McVeigh J

            2,383,341 / hydraulic boom heating wrap

The 341 patent relates to a heating wrap for articulated hydraulic booms, to keep them operational in very cold temperatures such as in the oilfields of northern Alberta where the invention was developed. In this decision McVeigh J granted a motion for summary judgment, holding the 341 patent invalid for obviousness, essentially on the basis that equipment heating wraps eg for a blowout preventer, were a standard part of the prior art and it was not inventive to apply such a wrap to an articulated hydraulic boom [94].

Takeda Applied: Enantiomers per se Ineligible for Data Protection

 Janssen Inc v Canada (Attorney General) 2020 FC 904 Zinn J

esketamine hydrochloride / SPRAVATO

Janssen applied for data protection for SPRAVATO, in which the medicinal ingredient is esketamine hydrochloride, an enantiomer of the ketamine hydrochloride [3]. Ketamine hydrochloride is the medicinal ingredient in the previously approved drug KETALAR [7]. A drug is only eligible for data protection if it is an “innovative drug” under section C.08.004.1(1) of the Food and Drug Regulations, which provides that a drug is not eligible if it is a variation of a previously approved drug “such as a salt, ester, enantiomer, solvate or polymorph.” In a split decision in Takeda 2013 FCA 13 the FCA interpreted this provision as providing that enantiomers are per se ineligible for data protection: see here. Relying on Takeda, the Minister refused Janssen’s application.

Janssen then sought judicial review of the Minister’s decision. In a straightforward decision, Zinn J applied Takeda to dismiss the application, on the basis that there are no factual differences which could permit him to depart from Takeda [26].

Fixed Costs and Sunk Costs

 Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE, SURPASS

Yesterday’s post discussed Stratas JA’s holding that in an accounting of profits, an infringer may always deduct some portion of its fixed costs [162]. That holding was based on Stratas JA’s rejection of “but for” causation, which does not make allowance for fixed costs unless the infringer had an outside opportunity. I am of the view that “but for” causation, and the differential profit approach from Schmeiser 2004 SCC 34 [102], which follows from it, is sound in principle. Nonetheless, I acknowledge that a real inequity may arise if a deduction for fixed costs is prohibited in cases in which the infringer did not have any outside opportunity. This is not only a moral inequity; it is a serious concern in terms of innovation policy. In this post, I will argue that the ultimate reason for this injustice is not the treatment of fixed costs, but rather the treatment of sunk costs. Consequently, the solution must look beyond an accounting to broader remedial principles, especially principles relating to injunctive relief.

This post is based on the following remark:

[160] Denying the deduction of fixed costs generates a distorted picture of the infringer’s profits. It may be the case that an infringer has minimal variable costs but very high overhead costs such that the product is not, in fact, profitable. The incremental approach. . . could force that infringer to disgorge “profits” from an unprofitable product.

This statement is somewhat obscure and I treated it cursorily in yesterday’s post, noting that there is nothing wrong to requiring the infringer to disgorge profits from an unprofitable product if it would have been even less profitable but for the infringement.

But the phrase alluding to the “distorted picture of the infringer’s profits” suggests a different point. I’m not sure whether it reflects what Stratas JA had in mind, so I didn’t want to treat it at length yesterday, but it’s interesting enough that I decided to devote a post to it. The basic idea is that sunk costs are real costs that must be incurred to make an infringing product, and if no allowance is made for sunk costs the infringer may be required to disgorge more than its actual profits.

Deduction of Fixed Costs in Nova v Dow

 Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

As explained in my first post, Stratas JA’s decision for the majority in Nova v Dow departed from established law by rejecting “but for” causation in the context of an accounting of profits in favour of using a non-infringing “baseline” to assess the amount to be disgorged. Subsequent posts have discussed various conceptual issues: see here and here. This post turns to the specific question of deductibility of fixed costs. This question is important in practice—deduction of fixed costs can have a substantial impact on quantum—it is conceptually difficult, and the case law is unsettled. Stratas JA’s decision would always allow an infringer to deduct some portion of fixed costs, regardless of whether the infringer had another opportunity that it would otherwise have pursued [162]. This is a bold holding, which departs from prior Canadian practice and is in contrast with the UK and Australia law. Unfortunately, Stratas JA’s holding on fixed costs is based on his unorthodox approach to causation, and consequently, as I will suggest in this post, it is unsound in principle.

It’s not clear to me how trial courts and litigants will deal with this issue going forward. On the one hand, the majority in Nova v Dow held that a proportion of fixed costs are always deductible, but on the other hand this holding is based a rejection of “but for” causation in the context of an accounting and is therefore, in my view, inconsistent with the SCC authority in Schmeiser 2004 SCC 34. Now, in many cases, deduction of a portion of fixed costs is permitted by Schmeiser, so it may be some time before a case arises in which the two approaches diverge. When such a case does arise, I would guess that the FC judge will do the calculation both ways, pick one, and then let the FCA sort it out on appeal. Perhaps that day will come sooner rather than later, as the uncertainty created by Nova v Dow will make it more likely that an accounting of profits dispute will go to trial rather than settling.