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.

Not Necessary to Decide Whether the Patent at Issue Is a Selection Patent

Apotex Inc v Shire LLC 2018 FC 637 Fothergill J
            2,527,646 / lisdexamfetamine [LDX] / VYVANSE / NOC

Shire’s invention at issue in this consolidated impeachment action and prohibition application [20] relates to the compound L-lysine-d-amphetamine aka lisdexamfetamine aka LDX, its pharmaceutical compositions and it use for treating ADHD [34]-[40]. Fothergill J found the 646 patent to be valid and not infringed by Apotex’s activities to date, on the basis of the defence of experimental or regulatory use, but he granted the order of prohibition on the basis that the patent would be infringed if Apotex were to obtain an NOC and market Apo-lisdexamfetamine. The decision raises some interesting issues relating to selection patents and obviousness, though they were not dispositive, and in the end the decision turned largely on the facts.

Amphetamines have long been used to treat ADHD, but they can be abused by snorting or injection [28]. There was therefore a need for a therapeutically effective abuse-resistant dosage form of amphetamine. LDX provides a solution to that problem in the form of a prodrug, namely an amphetamine covalently attached to a chemical moiety which is transformed into the active amphetamine in the body through a time-dependent process of hydrolysis, resulting in an extended release form that cannot be effectively circumvented by snorting or injection [31]. The claims as construed by Fothergill J were directly specifically to a conjugate of the amino acid L-lysine bound to d-amphetamine [74].

The main validity attack was based on AU Patent No 54168/65, which disclosed “a very large class of d-, l-, and dl-amphetamine amino acid conjugates, both protected and unprotected” [104]. None of the specific examples disclosed LDX itself [105]. The parties debated whether the 646 patent was a selection over the 168 patent [88], with Apotex arguing in particular that the 646 patent provided “insufficient description of its advantages over the purported genus patent to be classified as a selection from AU 168, citing Hoffman-La Roche Ltd v Apotex Inc, 2013 FC 718.” I am very pleased that Fothergill J cited my blog post “Time to Abandon the Doctrine of Selection Patents?” which critiqued that aspect of Hoffman-La Roche, saying that those criticisms “may be reason to approach Hoffman-La Roche with caution” [96]. (I’d point out that my post Genus Anticipates Species is perhaps even more directly relevant to the anticipation analysis in Hoffman-La Roche, as that is the post in which I argued that Hoffman-La Roche cannot be distinguished from Sanofi 2008 SCC 61.)

More importantly, in the post cited by Fothergill J, I had argued that the selection patent doctrine was arguably generating more heat than light, and it might be time to abandon the doctrine entirely. Forthergill J stated that “Professor Siebrasse’s general remarks regarding this potentially confusing area of patent law are worth bearing in mind,” and he went on to emphasize that

[97] By statute, the basis for assessing anticipation cannot depend on whether the patent is a selection patent or not. The jurisprudence does not imply that anticipation and obviousness in respect of a selection patent are to be assessed over the genus patent from which it is a selection, rather than over the prior art read as a whole. A selection patent “does not in its nature differ from any other patent” (Sanofi-Synthelabo at para 9), there is no reference to selection patents in the Patent Act, and the conditions for a valid selection patent do not constitute an independent basis upon which to attack the validity of a patent. A selection patent, like any other patent, is therefore vulnerable to any attack set out in the Patent Act, but no other.

This is a strong statement, though in the end he held that nothing turned on the point, so it was unnecessary for him to decide whether the 646 patent was a selection patent [98].

On the facts, Fothergill J concluded that the AU 168 patent did not anticipate the 646 patent, in part because the AU 168 patent did not disclose the mechanism or relevant properties of the prodrug, or even that it was a prodrug [106]-[108]. This reasoning is consistent with and tracks the analysis in Sanofi 2008 SCC 61 [38], [40]-[41], which emphasized disclosure of the special properties of the species. I would suggest that there is another route to the same end, which is that the genus does not anticipate the species unless the genus contains an individualised description of the species. That is the European position: see Dr Reddy’s [2009] EWCA Civ 1362 [23]-[33]. In my view, that is entirely consistent with established Canadian principles: a disclosure of genus which does not individually identify a species would not allow a skilled person to arrive at the species “in every case and without possibility of error” (Beloit 8 CPR(3d) 289, 297 (FCA)), nor would practising the genus necessarily result in infringement of the species patent. A person who has disclosed a genus and “planted his flag” by disclosing some representative species, does not plant a flag at every species within the genus: to plant a flag in L'Anse aux Meadows is to plant a flag in North America, but it is not the same as planting a flag in San Diego. I’d suggest the converse is also true. If the genus patent had individually disclosed a compound, that compound could not be the subject of a new claim as such, even if it’s unique properties were not disclosed, for the same reason that a party who discovered a new use for a known compound can claim the new use, but not the compound per se. But all that is an aside, given that in this case the claimed species was not individually disclosed.

Turning to obviousness, Forthergill J noted that the FCA in Ciba v SNF 2017 FCA 225 (blogged here) had raised questions as to the role of the “inventive concept” in the obviousness analysis [115]. Apotex went so far as to argue that “following Ciba, ‘inventive concept’ should no longer be used in the obviousness analysis, pending clarification of its meaning by the Supreme Court. Rather, the question of obviousness should be determined by reference to the claims alone” [116]. Fothergill J rejected this, noting that as a matter of stare decisis, Ciba cannot be understood to have overruled the SCC decision in Sanofi [117]. Moreover, as Fothergill J noted, in this particular case, “the inventive concept may be grasped without difficulty, and there is no danger of distraction or engaging in unnecessary satellite debate” [117]. While the FCA in Ciba v SNF was certainly very critical of the role that is sometimes played by the inventive concept, Forthergill J’s approach nonetheless strikes me as being consistent with both Ciba v SNF and Sanofi. Ciba v SNF counseled particularly strongly against the uncertainty which might arise from parsing the disclosure in a search for the inventive concept [74], but the Court did not say that the “inventive concept” should never be used. 

This does not detract from the criticisms of the role of the "inventive concept" raised by the Court in Ciba; it is only to say that they did not arise in this particular case. I have thought for some time that the European problem-solution approach may be a way of resolving some of those problems, and that it is consistent with the traditional Canadian approach to obviousness. Consequently, I found it particularly interesting to see Shire suggesting a European-style “problem-solution” analysis might be “viable” and consistent with Sanofi [120]. The Court of Appeal in Ciba suggested that it will be up to the SCC to develop “a workable definition of the inventive concept” [77]. But given that the SCC in Sanofi did not provide a workable definition, perhaps it is open to the Federal Courts to fill that gap, so long as it is done in a manner that is consistent with Sanofi and prior Canadian law.

Finally, on a minor point of interest, the claim construction adopted by Fothergill J implied that some claims were redundant, describing exactly the same compound either verbally or visually. Fothergill J noted that “[a]s a general rule, claims should be construed to avoid redundancy. However, claims may be repeated, and courts may even read claims as redundant when it is reasonable to do so,” and in this case he held that the best reading was to accept the redundancy [75]. It seems likely that the reason for the redundancy was an excess of caution—the drafter was likely worried that either the verbal or visual representation might be misconstrued, and so included both.

Arctic Cat v BRP Ignition Timing Decision Affirmed

Arctic Cat Inc v Bombardier Recreational Products Inc 2018 FCA 125 Gauthier, De Montigny, Gleason JJA aff’g 2016 FC 1047 Roy J
            2,322,738

At trial in Arctic Cat v BRP Roy J held that on a proper construction of the claims, Arctic Cat’s 738 patent relating to engine ignition timing was not infringed by BRP’s snowmobile engines, but if he was wrong as to the proper claim construction, so that BRP’s engines did infringe, then the claims at issue were invalid for obviousness: see previous posts on claim construction and damages. Arctic Cat appealed, and the FCA has now affirmed on the basis of obviousness, in a brief decision delivered from the bench.

“Ineffective Assistance of Counsel" as a Ground of Appeal

MediaTube Corp. v. Bell Canada 2018 FCA 127 Stratas JA

Stratas JA's decision on this motion provides a comprehensive review of “ineffective assistance of counsel” as a ground of appeal in civil matters. This ground of appeal is often asserted in appeals from criminal convictions. Even in criminal matters it will be “very difficult” to successfully advance this ground of appeal [36], as there is a “strong presumption” that counsel’s conduct fell within the “wide range” of “reasonable professional assistance” [30]. This presumption arises because “It is notorious that different counsel will handle situations in different ways and normally most of the ways will be the product of reasonable judgment calls.” Consequently the courts will be reluctant to use hindsight to second-guess the trial decisions of counsel [31].

It will be even more difficult to raise ineffective assistance of counsel as a ground of appeal in civil matters. The ground will succeed only in “the rarest of cases,” which is “just about the highest threshold imaginable under our law” [41]. In order to meet that threshold “an appellant must demonstrate some exceedingly special interest or truly extraordinary situation” [42]. The reason is that in civil matters, this ground of appeal enmeshes an innocent third party, the respondent, in what is really a dispute between the appellant and its former counsel [40]. The appellant will normally have an adequate remedy against the counsel directly [39]:

[62] There is a perfectly adequate forum for a litigant like MediaTube who is subject to a monetary judgment and who wishes to discover evidence of ineffective assistance: an action for negligence, breach of fiduciary duty, or both in the provincial superior court. There, full discovery can be had. If the litigant proves the cause of action, it can obtain up to full compensation—the amount of the monetary judgment in the Federal Courts system. If necessary and warranted, the litigant can come back and move for the judgment in the Federal Court to be set aside.

On the facts of this case, after losing comprehensively at trial (see 2017 FC 6 here and 2017 FC 495 here), MediaTtube launched an appeal, with new counsel. MediaTube’s subsequently brought this motion for leave to introduce “ineffective assistance of trial counsel,” as a ground of appeal, on the basis that its former counsel, Bereskin & Parr, “was in a conflict of interest, preferred the interests of another client, and did not prosecute MediaTube’s case in the Federal Court adequately” [2]. The allegation of conflict was that during much of the period that Bereskin & Parr represented MediaTube in its action against Bell Canada for patent infringement, it also represented Microsoft and filed several (unrelated) trademark applications on its behalf. Because Bell Canada’s product said to cause the infringement, Fibe TV, used certain Microsoft software known as Mediaroom, MediaTube argued that Bereskin & Parr had an interest in soft-peddling MediaTube’s case in the infringement action [65]. There was however, “no evidence that counsel was aware of the fact that Bereskin & Parr had filed trademark applications on behalf of Microsoft,” and consequently, “there is no basis to suggest that counsel had any incentive to soft-peddle MediaTube’s case or do anything other than put MediaTube’s interests first” [70]. Moreover, there was “no evidence that the Microsoft trademark filings were of such significance that counsel was in an actual conflict of interest or that the filings involved anything more than administrative work” [72]. Consequently, Stratas JA dismissed the motion on the basis that it was clear-cut that this ground of appeal was not arguable [14, [76].

As an aside, Stratas JA’s decision also has a vivid description of the pressure of litigation:

[33] In trials, turbulence and tumult often reign. Problems and questions often pop up unexpectedly, sometimes several at a time, often in need of quick answer. Some answers require knowledge of fine law and minutiae in the case, with nuances both elusive and tricky. Others draw upon something quite different, an art both mysterious and imprecise: assessing and predicting human behaviour. During trial, while events swirl about, ever present are the clients, sometimes anxious, sometimes emotional, always deeply invested in the case. Days go by to the exhaustion of all. Then the end is reached—except for the judge who is tasked to write the decision. Months can pass. During that time, memories fade while others are distorted by hope and expectation. At last, the decision arrives and with it, clarity and definitiveness. Some have won; some have lost. And some of the losers, looking for any way they can to reverse the decision, and armed with 20/20 hindsight, fuelled by disappointment, conclude that their lawyers were ineffective.

No new cases

No new substantive patent cases were released last week.

Unclear Whether Location of Server Outside Canada Avoids Infringement

Canadian National Railway Co v BNSF Railway Co 2018 FC 614 Locke J
            2,922,551 / 2,880,372 /2,958,024

CNR’s patents at issue claim a system for conducting an online rail-shipment inquiry system, which CNR alleges are infringed by two of BNSF’s online rail-shipment tools. The claims are variously framed as being to a method, a server arrangement and a computer [15]. BNSF brought a motion to strike based in part on the fact that its server is located in Fort Worth, Texas, where it is based, and consequently many of the steps in the claims in issue would be performed outside Canada [36]. Locke J held that this argument would not sustain a motion to strike, on the basis that it is not clear as a matter of Canadian law whether such claims may be infringed even if the server is located outside Canada:

[46] I agree with CN that the debate over whether all steps of the claims in issue must be put into effect in Canada for there to be infringement is a question of law, which should not be decided on a motion to strike. In my view, the jurisprudence on this question is not sufficiently settled that CN should be prevented at this stage from advancing its position. BNSF relies on Varco Canada Limited v Pason Systems Corp, 2013 FC 750 at paras 265-266, for the principle that patents are territorial and that Canadian patents cannot be infringed outside Canada. I agree with this general principle, but there remains the more specific question of whether infringement of a claim to a method (or a sever arrangement or a computer) can be avoided by locating one component thereof (a server) outside Canada. BNSF cites a US authority (Home Gambling Network, Inc v Piche, 2013 US Dist Lexis 141595 at 5-6 (D Nev)) in support of its view that this is indeed sufficient to avoid infringement. However, CN cites a UK authority (Menashe Business Mercantile Ltd v William Hill Organisation Ltd, [2002] EWCA Civ 1702, [2003] 1 All ER 279 at para 32) for the opposite conclusion. There does not appear to be a Canadian decision directly on point. BNSF argues that the UK law concerning the territoriality of patents is different from Canada’s, and that the US authority should be preferred. Having considered the authorities cited by the parties, I am not convinced that it is plain and obvious that CN’s position is without merit.

For the Third Time, Infringement of Claim 17 was Induced

Grenke v DNOW Canada ULC 2018 FC 565 Phelan J
            2,095,937

The original liability decision in this case was Weatherford v Corlac 2010 FC 602. This was largely affirmed on appeal, 2011 FCA 228, but remanded on the sole issue of inducement as it related to Claim 17. Phelan J’s decision on remand 2012 FC 76 (discussed here),was again remanded by 2012 FCA 261, on the basis that Phelan J had not properly appreciated the scope of the issues remanded. In particular, he did not revisit a crucial factual finding, considering it to be res judicata. The FCA clarified that it had intended him to consider the factual issue as well.

This decision is therefore Phelan J’s third time addressing this issue. The question is moot, as it has no effect on the damages decision (blogged yesterday), and the parties had urged Phean J not to address the issue. While acknowledging that the issue is moot, Phelan J felt bound by the instructions of the FCA to reconsider it [3]-[4].

As I noted in my post on the remand decision, “the factual finding was implicit in Phelan J’s original decision,” and consequently, “it would be surprising if his determination were to change now that he will be required to make it explicitly.” It is entirely unsurprising, therefore, that Phelan J on reconsideration has re-affirmed his original holding that the defendants induced infringement of Claim 17.

Compound Interest is Here to Stay

Grenke v. DNOW Canada ULC 2018 FC 564 Phelan J
            2,095,937

This decision is the damages portion of a bifurcated action, following Weatherford Canada Ltd v Corlac Inc 2010 FC 602,, in which Phelan J held the plaintiff Grenke’s 937 patent to be valid and infringed by the defendants. (Weatherford, a licensee of Grenke, has settled, and the names of various parties, including Corlac, have changed through acquisition and otherwise, which is why the case names are so different: [11]-[17]). The patentee elected damages rather than an accounting [2].

In oil production, a “stuffing box” is used to seal the top of an oil well and prevent leakage of the oil as it is being pumped out of the ground. The 937 patent claims a new type of environmentally-friendly seal assembly, which minimizes leakage [18]-[19]. There was substantial regulatory and environmental pressure to minimize leakage, and the patented technology was a game-changer [21], [45]. The decision is quite straightforward, and it is a good example of damages assessment in the context of a simple product, in which the patented technology contributed a major part of the value of the end-product. (This is in contrast to complex products, such as a smartphone, where any single technology contributes only a small part of the overall value.) Perhaps the most legally interesting aspects are that Phelan J allowed full recovery for convoyed sales, refused to grant punitive damages, and granted compound interest.

To begin, Phelan J emphasized the need to use a “broad axe” in assessing damages: while perfect compensation is the goal, the reality of litigation is that perfection can rarely be achieved: [71]-[73]. This point was repeated at a number of instances, though in most cases the inaccuracy in question would be small in any event: [84], [99], [101], [119], [130], [168]

The basic framework is to assess how many sales the patentee lost as a result of the infringing competition, and to calculate lost profits on those sales, and then to assess a reasonable royalty on all the remaining infringing sales. The parties did not really disagree on this framework, or indeed any major conceptual issues, but only on the application to the facts.

Phelan J accepted that market share was appropriately used by the plaintiffs in this case as a proxy for determining the plaintiff’s lost sales [91], [96], pointing out that “This is not a case with a small number of customers. . . which might require “customer-specific” evidence” [97]. Phelan J held on the facts that the appropriate market was “the ‘environmentally friendly stuffing box market’” [105]. There is something of a debate as to whether and when fixed costs can be deducted in calculating profits (see here, here, and here), but in this case the parties apparently agreed that only variable costs should be deducted [115].

Reasonable Royalty
With respect to the reasonable royalty, Phelan J remarked:

[136] In constructing the hypothetical negotiation of the royalty rate, it is important to take into account the realities on the ground. It is particularly relevant that GrenCo had market strength because of its technology and also important is that all the evidence suggests Grenke would have been an unwilling seller, difficult to deal with, and prepared to push the limits of “reasonableness” to the edge (and perhaps over). This all suggests a rate at the upper end of reasonableness. It is somewhat ironic that Grenke would be deemed, under this hypothetical negotiation, to accept any amount of royalty rate given his general intransigence to the point of “going down with his ship” rather than to settle. However, the Court must accept some of the realities in constructing the hypothetical negotiation and resolution.

There is indeed considerable artificiality in constructing a hypothetical negotiation in a case in which it is clear on the facts that the patentee would never have licensed in reality. But recall that a reasonable royalty is only assessed in respect of sales which the patentee would not have made in the real world; if the patentee can prove that it would have made the sale, then it will be entitled to lost profits. Sometimes, this will be because the infringer was selling into a market that the patentee had not entered. In this case, the parties were competing in the same market, and patentee is seeking lost profits on infringing sales that would not have been captured by the patentee, but which would instead have gone to a different competitor with a non-infringing product. That is, for reasons of pre-existing relationships, distribution, etc, if the particular customer had not bought from the defendant, it would have bought from a non-infringing third party. In that case it makes sense for the patentee to accept that since it would not have made the sale in any event, it would be better to allow the infringer to make the sale as a licensee, so that the patentee gets a return in the form of a royalty, rather than losing out altogether. The artificiality arises because it is only with hindsight that we know that the patentee would lose the sale in any event. At the time, it would have made sense for the patentee to fight for the sale, rather than license the defendant, because (unlike the case in which the defendant is selling into a different market), the patentee would rather have the profits on the sale than a royalty, and it can’t license only for those sales it won’t get, because it doesn’t know at the time that it won’t get the sale.

The larger point, perhaps, is that the objective is to assess a royalty which is reasonable in the circumstances, and a hypothetical negotiation is no more than a useful heuristic, which should not be taken too literally if problems arise in applying it. With that all said, I am not suggesting that it is wrong to assess a reasonable royalty “at the upper end of reasonableness” when the patentee was competing in the same market. I don’t have an opinion on that issue. My point is that the hypothetical negotiation framework is not particularly helpful in resolving the issue.

Turning to the calculation itself, the parties both used the “anticipated profits approach,” supplementing this analysis with the “minimum willingness to accept (MWA) versus maximum willingness to pay (MWP)” [135].

The anticipated profits approach supposes that the parties to a hypothetical negotiation, which takes place at the time of first infringement, split the profits they anticipate the infringer will make from the use of the patented technology. As noted by Phelan J, this approach has previously been used in Jay-Lor 2007 FC 358, and AlliedSignal 1998 CanLII 7464, 78 CPR (3d) 129 aff`d (1999) 86 CPR (3d) (FCA). In “A New Framework for Determining Reasonable Royalties in Patent Litigation,” (2016) 68 Florida Law Review 929, Tom Cotter and I argue that instead of anticipated profits, a split of the actual profits should be used. The difference is important only when actual profits are different from the profits that would have been anticipated at the time of first infringement. Despite the name “anticipated profits” approach, I believe that using actual profits would be consistent with Canadian cases. Note that the anticipated profits already relies on actual profits to a large extent. Profits are sales multiplied by profit margin per unit, and the “anticipated” profits approach normally (always, in Canadian cases) uses the actual sales, not anticipated sales, in calculating the “anticipated” profits. We argue that there is no good reason to use actual sales combined with anticipated profit margin. Further, it appears that in AlliedSignal, the calculation did use the actual profits [213]-[214],though it is a bit difficult to tell as the detailed calculations are in a confidential Appendix. (Note that AlliedSignal never used the “anticipated profits” terminology.) Jay-Lor did refer to anticipated profits, but in calculating anticipated profit margin, it appears that actual post-infringement costs (“over the past four years”) were used to assess the profits that would have been anticipated [142]. If that is right, Jay-Lor used an actual profits approach, with an anticipated profits terminology, or, at most, there was no difference between actual and anticipated profits. In this case, the details of the calculation are not discussed, as the parties were largely in agreement, so it is not clear whether actual or anticipated per unit profits were used. In summary then, if there is a case in which anticipated and actual profits are different, it would be open to Canadian courts to use an actual profits methodology, and in my view this would be preferable in principle, for reasons explained in detail in my article with Professor Cotter.

With respect to the MWP versus MWA analysis, Phelan J noted that in Merck v Apotex 2013 FC 751, (blogged here) “the Federal Court indicated that if there were no overlap between the MWA and the MWP, then the reasonable royalty is the MWA. The “minimum” of the MWA must, logically, be the lower end of the range – therefore, the application of Merck FC to this case leads to the conclusion that 8% is a reasonable royalty rate” [143]. Here again, I would suggest that we keep in mind that a reasonable royalty is being assessed only in respect of sales which the patentee would not have captured. In such circumstances, the patentee’s MWA will be its marginal cost, normally zero, because if the negotiation breaks down, the patentee will not make the sale itself, and so will not get any return at all. If the MWA is higher than the MWP, it must be that there was a conceptual error in assessing the MWA (assuming the patented technology is actually valuable, not detrimental, as was clearly true in this case). The details of the assessment of the MWA was not described. However, the MWP / MWA analysis gave much the same result as the anticipated profits analysis.

In US law, the most commonly used approach to assessing a reasonable royalty is to look to comparable licences. In this case, the defendants suggested that lower rates that had been negotiated in respect of the same technology by Weatherford should be used. Phelan J rejected this, correctly in my view, noting that the deal included cross-licensing which would have depressed the rates.

Phelan J also allowed recovery of lost profits for convoyed sales, on the basis of but for causation, without any further restriction:

[163] If compensation is not provided for such add-on items, then the patentee is not being put in the position that they would have been in but-for the infringement (resulting in less than perfect compensation). If the Plaintiffs can show, on a balance of probabilities, that such sales would have been made by the Plaintiffs in the but-for world, then in my view this is a loss for which they should be compensated. This approach is consistent with the limited Canadian case law on the topic, and I would reject the requirement suggested by the Defendants that such convoyed sales must have no function independent of the patented object.

In my view, Phelan J’s conclusion is sound for the reasons he gives. If the convoyed sales are reasonably foreseeable from the sale of the patented technology, as was clearly the case here, then the patentee would face a choice between charging a higher price for the patented goods, and losing some sales and convoyed sales, or charging a lower price for the patented good, in anticipation of profits from convoyed sales. These are just different strategies for realizing the value of the patented technology, and the damages award should not turn on which marketing strategy was chosen.

Punitive Damages
The plaintiff sought punitive damages. Phelan J noted that:

[186] At the liability phase of this action, the Court found that the Defendants:

a) intentionally set out to create a product which they knew or ought to have known would infringe the Patent;

b) have used a stuffing box design which is the same as the Grenke design, and profited from the sale of the infringing articles over a 10 year span (until enjoined by this Court from further infringement);

c) were considered by this Court to have been unjustified and egregious; and

d) had denied infringement of the Patent, yet at the same time claimed ownership in the Patent and argued that the Plaintiffs had in fact infringed their patent rights.

Phelan J refused to award punitive damages, emphasizing that “patent infringement alone, even knowing infringement, is not sufficient to ground an award of punitive damages,” [185] (citing Bauer Hockey 2014 FCA 158 [29]), and similarly, “there must be something more than knowing infringement to support an award of punitive damages”[189]. The various allegations regarding infringement and validity were considered part of the “brawl” over rights in the technology. No doubt this can be distinguished on the facts from Martineau J’s Eurocopter decision (blogged here), but it does evince the traditional reluctance of the Canadian courts to award punitive damages.

Interest
The Federal Court has historically been reluctant to grant compound pre-judgment interest, in part for the very good reason that the relevant statutes relating specifically to interest did not allow compound interest: see Federal Courts Act, s 36(4)(b), as noted by Phelan J at [205] (and the discussion here). There has been a recent and welcome trend to granting compound interest nonetheless, based not on the interest provisions, but on the basis that the loss is recoverable as an element of compensation, under s 55(1). The rationale is that in reality, a party with more money in its pocket will put that money to work, and reinvest the profits, which will also go to work, and compound interest is therefore required to provide full compensation. That is the approach taken by Phelan J at [193], [209] following Zinn J in Eli Lilly / cefaclor, 2014 FC 1254 (discussed here). Phelan J stated that “I concur with Justice Zinn’s comments that in today’s world, compound interest is an accepted form of redress” [194].

An interesting point arises from the approach of awarding compound interest on the basis of s 55(1). Phelan J began his discussion of interest by noting that the award of interest under s 36 of the Federal Courts Act is subject to judicial discretion to disallow interest under s 36(5), which discretion is “to assist the court in controlling the litigation process and to avoid inappropriate compensation” [191], quoting Apotex v Merck 2006 FCA 323 [140]. Phelan J also stated that compound interest was also awarded “[a]s a matter of discretion taking into account the equities and the conduct of the Defendants” [211]. But s 55(1) is normally understood as entitling the patentee to its legal damages, with only equitable remedies, such as an accounting, being subject to discretion. If compound interest is awarded as compensation under s 55(1), can it be discretionary? I’m not sure of the answer to this question, particularly in light of the argument for allowing the court to use its discretion in order to control the litigation process. The question did not arise in this case, as Phelan J did not exercise his discretion to disallow compound interest for the period for which it was claimed, but it presents something of a conundrum. No doubt the best solution would be updated interest provisions in the Federal Court Act, but there is little prospect of that happening, and I expect the issue will have to be resolved judicially.