Friday, October 4, 2013

Opening the Door to Punitive Damages in Patent Law?

Eurocopter v. Bell Helicopter Textron Canada Limitée 2013 FCA 219 Mainville JA: Noël, Trudel JJA aff’g 2012 FC 113 Martineau J

Punitive damages are very rarely awarded in Canadian patent cases, yet in his trial decision in Eurocopter, Martineau J held that Eurocopter was entitled to punitive damages, essentially on the basis that Bell had intentionally copied helicopter landing gear which it knew to be patented [FC 431-33]. My post on this aspect of Martineau J’s decision argued that this holding is very problematic, as it is likely to having a chilling effect on desirable challenges to invalid patents. The FCA has now affirmed Eurocopter’s entitlement to punitive damages.

The first issue dealt with by the FCA was whether it was appropriate to decide entitlement to punitive damages before assessing compensatory damages [168-79]. The argument is that punitive damages are warranted only if compensatory damages are an inadequate deterrent, and that cannot be known until compensatory damages have been assessed: see eg Merck v Apotex / Vasotec 2003 FCA 291, in which the FCA held that “ the motions judge erred in deciding, before the other remedies are determined, that Apotex is liable for punitive damages” [34]. The FCA in Eurocopter affirmed that this remains true as a general matter, but it substantially qualified Vasotec by holding that “in appropriate circumstances and depending on the context, it may be sometimes possible to ascertain an entitlement (or a non-entitlement) to punitive damages before the exact quantum of compensatory damages has been established” [174]. My view is that the FCA was correct to state that there will be cases where “the compensatory damages, though not precisely quantified, will nevertheless be likely insufficient (or, conversely, likely sufficient) to accomplish the objectives of retribution, deterrence and denunciation” [174]. As discussed in my post on this aspect of the trial decision, an example is provided by the leading punitive damages case of Whiten v Pilot Insurance Co 2002 SCC 18, in which the defendant insurance company attempted to extort an unfair settlement of a claim by literally throwing the insured family out into the street in the middle of winter. In many cases, a desperate family whose home had been destroyed would accept the inadequate settlement. If only compensatory damages were available – which is to say, the amount which should rightfully have been paid – the insurer would come out ahead in the majority of cases in which the insured settled, and would be no worse off after litigation than if it had paid out the amount which was rightfully owing. As Zinn J pointed out in Rivett 2009 FC 317 [23], purely compensatory damages are an inadequate deterrent in the face of this kind of “catch me if you can” strategy. Whether this kind of strategy is at play is something that can be determined before assessment of the quantum of compensatory damages.

With that said, I am not persuaded by the FCA’s point in Eurocopter that, as Martineau J noted, "since the infringement of the ‘787 Patent was limited to the Legacy landing gear, which was never sold, the quantum of ordinary damages will be limited and likely minimal. Consequently, and as a logical result, he also found. . . that it is likely that compensatory damages 'will simply not be enough to achieve the goal of punishment and deterrence'” [175]. As discussed in my original post, that the quantum of compensatory damages is low in absolute terms, does not imply that it is an inadequate deterrent, because a small harm only requires a small deterrent. A large penalty for a small harm does not provide desirable deterrence, but an undesirable chilling effect. On the facts in Eurocopter, there is no reason to think that Bell was playing a game of “catch me if you can.” Bell was selling valuable helicopters in an open market, and any patent infringement was almost certain to be detected and litigated.

The next preliminary point was whether punitive damages may be awarded at all in patent cases. The FCA held that on the current state of the law, punitive damages are available in an appropriate case [180-84]. On this point I agree with the FCA, for the reasons it gave.

The main question, then, is whether punitive damages were available on the facts at hand. The FCA held they were. There were two main reasons for this. The first is simply the factual finding that Bell intentionally infringed [186]. The FCA noted that Martineau J found that Bell’s conduct “represented a marked departure from ordinary standards of decent behaviour,” and that “that there is clear evidence of bad faith and egregious conduct” [186]. As the FCA remarked, this is very strong language [187], but the factual basis for this language, as described in [186], was simply that Bell intentionally infringed. This suggests that intentional infringement alone is sufficient to warrant punitive damages. Indeed, the FCA went even further, saying “it simply defies belief that a large and sophisticated corporation such as Bell Helicopter would not verify intellectual property rights” prior to embarking on its research program. This implies that failure to conduct a freedom to operate search is itself sufficient to warrant punitive damages.

In my view, this position is very problematic, because many granted patents are invalid. Punitive damages for intentional infringement alone would therefore chill desirable attacks on potentially invalid patents. The FCA reasoning does imply that punitive damages would not be available if the infringer had had a good faith belief that the patents it knew it was infringing were invalid. But making punitive damages turn on this subjective question is not likely to deter a great deal of infringement, because there are few patents which are so rock-solid, prior to being tested in litigation, that it would be impossible for counsel to provide some reasonable basis for questioning its validity. The result will be to increase the costs of innovation, because of the need for additional, expensive, legal opinions, before conducting any research. It will also have a chilling effect on attacks on potentially invalid patents, because the uncertainty of a subjective inquiry as to intent means that there will always be some risk of facing punitive damages.

The second reason that the FCA held that punitive damages were warranted is that “The evidence also shows that Bell Helicopter promoted the infringing Legacy landing gear as its own invention through an article by one of its senior technical staff specialists” [191]. This fact does take the case out of the ordinary. For Martineau J at trial, this was apparently a secondary factor, that “add[ed]" to his outrage. [FC 440]. At the FCA level, the intentional infringement took centre stage in the discussion, with only one paragraph devoted to the fact that Bell promoted the invention as its own; but the latter point was given at least equal billing in the legal summary:

[192] Where a person infringes a patent which it knows to be valid, appropriates the invention as its own, and markets it as its own knowing this to be untrue, punitive damages may be awarded when an accounting for profits or compensatory damages would be inadequate to achieve the objectives of retribution, deterrence and denunciation of such conduct.

This provides a basis for distinguishing future cases in which the infringer intentionally infringed, but did not appropriate the invention as its own. However, the FCA decision does not expressly make that an essential factor. It is quite possible that it would have upheld the award on the basis of intentional infringement alone.

I am not persuaded that this additional factor warrants punitive damages. If Bell did commit a tort of misrepresentation, then this should be pleaded and damages assessed independently. It may be, as Martineau J said in his trial decision, that these representations are rationally connected to the infringement and “add to [the Court’s] outrage” [440] at the egregious conduct of Bell. Even so, the difficulty with adding this in as one more factor adding to the “outrage” is the general problem with punitive damages, namely the uncertain nature of the punishment. As Lord Reid said in Cassell & Co Ltd v Broome (No 1) [1972] UKHL 3

The right to give punitive damages in certain cases is so firmly embedded in our law that only Parliament can remove it. But I must say that I am surprised by the enthusiasm of Lord Devlin's critics in supporting this form of palm tree justice.

The Eurocopter decision, if broadly interpreted, will have moved punitive damages from an extremely rare award in patent law, to a remedy that will potentially be available in a large proportion of cases. The uncertainty over both the availability of the punitive damages and the quantum is likely to have a chilling effect on innovation that is contrary to the goals of patent law. I agree with the FCA that punitive remedies are available in patent cases as a matter of law, but I doubt they should be, at least when based on the uncertain common law test in which millions of dollars may turn on a judge’s subjective sense of outrage.

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

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