Sunday, February 5, 2012

Problematic Entitlement to Punitive Damages

Eurocopter v Bell Helicopter Textron Canada Limitée 2012 FC 113 Martineau J

In Eurocopter v Bell, Martineau J, having held one claim of Eurocopter’s patent to be valid and infringed, went on to hold that Eurocopter is entitled to punitive damages, though the quantum was left for determination pursuant to the order bifurcating damages assessment. This holding is the most legally novel aspect of Martineau J’s decision, and in my view it is also the most problematic.

The factors that Martineau J pointed to in holding that punitive damages were warranted were that Bell intentionally copied “the unique and new patented technology developed by Eurocopter” [430], without any attempt to avoid infringing the patent [431], with knowledge of the patent [432]. From this Martineau J concluded that:

[ 433] On a balance of probability, the Court finds that there is clear evidence of bad faith and egregious conduct on the part of Bell. This is not a case where the infringement is small, trivial or isolated, or where the defendant is unsophisticated or ignorant. This is a case of wilful blindness or intentional and planned misappropriation of the claimed invention. Eurocopter has proven that the infringement of the '787 Patent by the making and use of the Legacy gear was not innocent or accidental.

In short, intentional copying of a product that the defendant knows to be patented is conduct warranting punishment. This is an entirely novel concept in Canadian patent law, and it is very worrying as a matter of policy.

There is nothing at all wrong with copying a competitor’s design if it is not patented. On the contrary, copying is positively desirable from an overall social point of view, as this results in the spread of the valuable innovations. It is almost trite to say that intellectual property generally is concerned with balancing incentives to create with restrictions on dissemination. In practice, “dissemination” often means copying of a competitor’s product.

Nor is there anything wrong with copying a patented product, if the patent is invalid. On the contrary, in practice the validity of a patent is normally challenged only in infringement proceedings. A defendant who infringes a patent, refuses to settle, and ultimately proves the patent to be invalid, has done an important public service by ridding the world of an invalid patent that would otherwise impede innovation. It is the business model of many generic pharmaceutical companies to intentionally copy patented medicines and attack the validity of the patent in court. When the generic is successful in that attack, society as a whole benefits from reduced prices for a drug that should never have been protected by patent. From a policy perspective, it would be a serious error to hold that intentionally copying a patented product is in itself conduct deserving of punishment; on the contrary, in cases where the patent is ultimately determined to be invalid, the infringement is conduct deserving of reward.

The only wrong is done when a valid patent is infringed, and the only conduct that could even potentially warrant punishment is infringement of a patent which the infringer knows to be valid. But how is the infringer to know whether the patent is valid before trial? It might be said that a patent is presumed to be valid, and that is enough. But the presumption of validity is very weak in Canada, and rightfully so, as Gauthier J has explained. As a practical matter, many patents granted are ultimately determined to be invalid.

There is perhaps an argument to be made that punitive damages are appropriate in cases in which the defendant infringes a patent it believes to be valid. There are two difficulties with this as a justification for Martineau J’s decision. First, in this case Martineau J made no such express finding, and his conclusion was not based on the infringer’s subjective belief in the validity of the patent. Secondly, an inquiry into whether the defendant subjectively believed the patent to be valid would introduce complexity and risk. It would put money into the pockets of patent lawyers, who would be called on to draft opinion letters, but it would be a corresponding drain on innovation dollars. More fundamentally, I would emphasize that challenging an invalid patent is positively a good thing. Given that we can never know whether a patent is valid until it is challenged, the prospect of punitive damages for wilful infringement is likely to impede innovation by encouraging parties to settle rather than dispute validity and run the risk of punitive damages.

On the facts of this case, it turns out that this was a very strong patent; but still Martineau J held that 15 of the 16 claims were invalid. It is true that the claim covering the preferred embodiment was valid, but the point remains that few patents can be said to be unimpeachably valid before they are tested in litigation. Lubrizol Corp. v Imperial Oil Ltd. 67 CPR (3d) 1 (FCA), in which the Court of Appeal held that punitive damages were available, confirms this point, as an important aggravating factor in that case was that an interlocutory injunction had been granted prohibiting the defendant from selling the product in question pending trial, and the infringement giving rise to the punitive damages was a “deliberate, flagrant and callous disregard” of that injunction. That was a case in which the defendant could not believe its actions were justified, because whatever it thought of the validity of the patent, breach of a valid injunction is clearly wrong.

A second problematic aspect of Martineau J’s decision on this point is that he was of the view that compensatory damages would be an inadequate deterrent, as they were likely to be small [455]. However, the great advantage of compensatory damages as a deterrent is that the compensatory nature ensures that the punishment fits the crime. If the wrongdoer has done little harm, then it is normally right that it should suffer little punishment. This is particularly so when the line between right and wrong – challenging an invalid patent, and infringing a valid patent – is so difficult to draw. Punitive damages are appropriate when the wrong will often go unpunished; if the wrongdoer is unlikely to be caught, then it is necessary to impose a disproportionate penalty when they are caught. The leading Canadian case on punitive damages, Whiten v Pilot Insurance Co. 2002 SCC 18, illustrates this point. The defendant insurer was intent on extorting an unfair settlement of a claim by literally throwing the insured family out into the street in the middle of winter. A desperate family might well take an inadequate settlement in those circumstances. Because the insurer intended to avoid detection by its egregious conduct, that is exactly the circumstance where punitive damages are appropriate and necessary. Anyone who has not read Whiten should do so, for an illustration of what “egregious” and “outrageous” conduct really means. In this case, where both parties are major corporations, and Bell was publically selling the product in question, there is no problem of the infringement going undetected.

In summary, infringing good patents is wrong, but attacking bad patents is right. Punitive damages for intentional infringement of a patent that has never been tested in litigation is likely to impede innovation by allowing more bad patents to go unchallenged. Compensatory damages, or an accounting of profits, provide the right measure of deterrence in the vast majority of patent cases.

As a final note, the SCC in Whiten at [44] cited Collette v Lasnier (1886), 13 SCR 563, a patent case, as affirming in the availability of punitive damages. That is not an entirely accurate reading of that case. In Collette v Lasnier the SCC held that the assessment of damages in the courts below had proceeded on a wrong principle. Consequently, there was no evidence on which to assess damages based on the correct principle. While a modern court would almost certainly have remitted the question to the trial court for calculation of quantum on the basis of the correct principle, the SCC held that “substantial justice” would be done by an award of $100. This was a significant reduction from the damages of $600 which had been awarded at trial. The award of $100 is better seen as a rough approximation at compensatory damages, rather than a true award of punitive damages.

Update: see my more recent post for a more complete discussion of this decision.

No comments:

Post a Comment