Friday, December 30, 2016

No New Cases Last Week

Not very surprisingly, no new patent / NOC / data protection cases were released over the past week. I hope everyone at the Federal Courts had a good break, and will return ready to deal with all the interesting and difficult issues that patent law throws at us. Here's to 2017!

Tuesday, December 20, 2016

Sublingual Dosage Form Patent Valid but Not Infringed on the Facts

Meda AB v Pharmascience Inc 2016 FC 1362 Manson J
            2,629,988 / zolpidem / SUBLINOX / NOC

In this NOC proceeding, Meda’s ‘988 patent was held to be substantially valid, but not infringed by Pharmascience’s PMS-Zolpidem product. This result turned entirely on the facts, and no significant points of law were raised. The overbreadth discussion does provide an interesting example of the role of claim differentiation.

The ‘988 patent is a formulation patent, claiming zolpidem for the treatment of insomnia in a sublingual dosage form comprising an ordered mixture, in which the API is adhered to larger carrier particles, and a bio/mucoadhesive promoting agent [76]. (As I understand it, an “ordered mixture” means a homogeneous mixture, as opposed to a random mixture in which some degree of segregation may occur.

Validity was attacked on the basis of anticipation, obviousness, lack of utility and overbreadth [18]. The anticipation argument failed because the prior art relied on did not teach an ordered mixture or sublingual administration [134]. The patent is a combination patent, in the sense that all the elements were known in the prior art [77], and the question was whether it would have been obvious to combine them. On the facts, Manson J held that the combination was not obvious [154]. Pharmascience’s argument to the contrary was not helped by the fact that in a review article its own expert had described the ‘988 patent as “an unusual approach” and “very different from all the formulations that [he’d] read” [151]. The utility attack was based on the promise of bio/mucoadhesion. Manson J held that “[a]ll that is required is sufficient bio/mucoadhesion to achieve the promised rapid release and absorption” [176] and this promise was demonstrated by examples in the patent [178].

Pharmascience also attacked the patent on the basis of overbreadth. Specifically, Pharmascience argued that the claims were overbroad because it was necessary that the formulation (1) have the bio/mucoadhesive agent on the surface of carrier particles; and (2) be essentially free from water [157], and Claim 1 was invalid because it did not have the first limitation, and all the claims were invalid because none of them had the second limitation. Both limitations were, however, disclosed in the specification, and Meda responded that a POSITA reading the claims in light of the specification would understand those limitations to be implicit [162]. Manson J agreed that a skilled person reading the claim “in light of the specification as a whole, with a mind willing to understand, would know that the formulation would have to be essentially free from water to work” [168]. The attack based on the absence of that limitation therefore failed. However, Manson J held that it was not permissible to read limitation (1) as being implicit in Claim 1, because it was explicit in Claim 2 and following claims, and “the presumption against redundancy precludes this limitation from being implied into claim 1" [168]. Consequently, Claim 1 was invalid for overbreadth [168]. However, this did not substantially affect the strength of the patent as a whole, because Claim 2 was exactly the same as Claim 1 except that it did include this limitation. The interesting point is what would have happened if Claim 2 had omitted this limitation; it seems not unlikely that Manson J would have been willing to find it to implicit, as he did with the requirement of being free from water.

While the patent was held to be substantially valid, Manson J held that Pharmascience’s allegation of non-infringement was justified [195]. The reasoning on this point is not entirely clear, as the discussion was substantially redacted. It is nonetheless clear enough that the result turned on the facts.

Friday, December 16, 2016

No New Cases for the Last Two Weeks

No new patent / NOC / data protection cases have been released in the last couple of weeks.

Note that I generally only blog on substantive patent / pharma cases. If you want to keep abreast of all new Canadian decisions, including procedural decisions and copyright and trade-mark cases, I recommend subscribing to the Daily Intellectual Property News service from Alan Macek's IPPractice.

Thursday, December 1, 2016

Are Damages an Element of a Claim under Section 7 of the Trade-marks Act?

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

E Mishan & Sons, Inc v Supertek Canada Inc 2016 FC 986 Hughes J
            2,779,882 / Industrial Design 146,676 / expandable garden hose

Tuesday’s post provided the background to the threats claim brought under s 7(a) of the Trade-marks Act, and yesterday’s post discussed the safe harbour for purely informative communications. Today’s post discusses the proposition, agreed to by counsel in Supertek 2016 FC 986 [7] and affirmed by Hughes J [28], that “Damages are . . . an essential element in a claim under section 7(a) of the Trade-marks Act.” Manson J put it somewhat differently, and more accurately, in Excalibre: “It is settled law that evidence of actual or potential damage is a necessary element for finding liability under section 7" [286, my emphasis]. The difficulty with this proposition, particularly in Hughes J’s formulation, is that if resulting loss is an element of the tort, then the plaintiff is not entitled to an injunction to restrain false statements discrediting its wares, and perhaps not even its costs in the action, unless loss has already been suffered. This is a very strange proposition. Certainly, a plaintiff is not entitled to a monetary award unless it has proven its loss, but why should a plaintiff be helpless to prevent false statements from discrediting its wares simply because it had the good sense to act promptly? Surely it is better to prevent the loss from happening in the first place than to provide relief after the fact.

Wednesday, November 30, 2016

Informative v Threatening Letters

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

E Mishan & Sons, Inc v Supertek Canada Inc 2016 FC 986 Hughes J
            2,779,882 / Industrial Design 146,676 / expandable garden hose

Yesterday’s post described the unjustified threats action under s 7(a) of the Trade-marks Act, and discussed its rationale, which is to prevent a patentee from interfering with the business of a competitor by persuading end-users, who are not interested in being caught up in litigation, to abandon the competitor’s wares. In light of that rationale, I must doubt the validity of the distinction between cease and desist letters that are threatening and those that merely informative. On the authority of Cullen J’s decision in M&I Door Systems Ltd v Indoro Industrial Door Co Ltd (1989), 25 CPR (3d) 477 (FCTD), it is said that the latter may engage s 7(a), while the former do not. As Mason J explained in Excalibre v API:

[282] Informative letters set out a patentee’s rights and provide information that will enable the recipient to understand what may constitute infringement. Threatening letters contain explicit or veiled threats that the recipient will be sued if they do not change a particular course of conduct.

Manson J accepted this distinction [282], as did Hughes J in Supertek [10]-[11], but neither actually applied it to defeat the action. Both held on the facts that the communications in question were threatening, in Excalibre J because the letters contained explicit threats of litigation [284], and in Supertek because the defendants had “deliberately and skilfully conducted themselves so as to leave [the recipient] with the impression,” that it would be sued for patent infringement [27]. The only case I have found in which the court dismissed the claim for a remedy under s 7(a) because the communication, while false, was “more informative than threatening” is M&I Door Systems itself (523).

M&I Door Systems cited no authority for this distinction. Indeed, Cullen J did not cite any authority at all on the interpretation of s 7(a) – not even the leading case, S. & S. Industries Inc. v. Rowell [1966] SCR 419. And M&I Door Systems is very difficult to reconcile with S. & S. Industries. Cullen J gave two main reasons for tempering his response to the claim under s 7(a). One reason is that the patent is prima facie valid and “the patentee has the right to act on that basis” (523). This point was the appellant’s main contention in S. & S. Industries (426), and it was rejected. As Gill notes, Cullen J’s holding on this point is “[s]eemingly in direct contradiction to the Supreme Court’s pronouncement in S. & S. Industries”: A. Kelly Gill Balancing Necessary Monopolies and Free Competition: Threats of Patent Infringement and Trade Libel (1998) 14 CIPR 125, 132. Gill was of the view that M&I Door Systems imposed a desirable limitation on the scope of s 7(a); while I don't agree on the policy point, I do agree with his legal analysis that M&I Door Systems is inconsistent with S. & S. Industries. The other main point made by Cullen J is that if he had held the patent valid, he would have had “little or no difficulty” in holding that it was infringed (523). This seems ancillary to the point regarding the prima facie validity of the patent, as the only basis for distinguishing between a false statement relating to validity and a false statement relating to infringement is that the patent is prima facie valid, while the patentee bears the burden of proving infringement. In holding that the prima facie validity of the patent was irrelevant, the SCC in S. & S. Industries implicitly rejected this distinction. Section 7(a) itself refers only to a “false or misleading” statement, and makes no distinction as to the reason why the statement is false. A third consideration noted by Cullen J was that the president of the patentee corporation, who sent the letters in question, was honestly convinced that the defendant’s products were infringing (523). Again, this goes to the absence of malice, and is irrelevant under S. & S. Industries. On the whole, I must wonder whether S. & S. Industries was even cited to Cullen J. Section 7(a) was raised as a counterclaim in an action for infringement, and the discussion of the issue was one page in a 47 page decision, the remainder of which dealt with validity and infringement. Perhaps the litigation effort was similarly apportioned.

Nor can a safe harbour for purely informative statements be justified as balancing the rights of the patentee to enforce its patent against the rights of the competitor to be free of unjustified interference. Even without any safe harbour for purely informative statements, the patentee will only be liable for damages under s 7(a) if it makes false statements that cause damage to the competitor by wrongly discrediting its wares. Why should the patentee escape liability if it has couched its false statements in the form of information rather than threats? Such a distinction seems to reflect the mala fides basis for the action which was rejected by the SCC in S. & S. Industries. Moreover, it is a very fine distinction, which may appeal to lawyers, but is unlikely to impress the practical business people who receive these letters, and who, as the facts in Excalibre show, may well not choose not to take legal advice at all. This opens the door to a patentee with a patent it knows to be weak, to nonetheless effectively halt its competitor’s sales. 

It may be suggested that without some kind of safe habour s 7(a) would be hard on small patentees who are legitimately trying to protect their patent rights. But adding in a safe harbour of this kind will be equally hard on small rivals who are legitimately trying to market a product which is in fact non-infringing. As Spence J pointed out in S. & S. Industries [1966] SCR 419, 423, the most straightforward means for a patentee to enforce its rights is to sue the manufacturer and join end-users, in which case the patentee may be able to obtain an interlocutory injunction restraining the allegedly infringing sales, but only on giving an undertaking in damages:

The injunction having been granted only upon his undertaking to pay the damages incurred thereby should he fail, he proceeds at his own risk. There would seem to be no valid reason why rather than choosing that forthright course he should be permitted to proceed by threats against the purchasers from the alleged infringer without rendering himself liable for damages unless his mala fides could be proved.

When seeking an interlocutory injunction, a good faith and reasonable belief in its claim does not shield the patentee from giving an undertaking. The threatened action against and end-user achieves the same end as an interlocutory injunction, namely to halt the competitor's sales, and accordingly, the SCC held that a reasonable belief in the validity of the claim is not a shield against s 7(a) either. By the same token, a patentee seeking an interlocutory injunction cannot avoid giving an undertaking in damages by asking politely, and neither should that shield it from liability under s 7(a).

A stronger justification for a safe harbour of this type is that without some kind of safe harbour the patentee would adopt what the UK Law Commission, No 360, ¶ 124 has described as “a ‘sue now – talk later’ culture because once infringement proceedings are issued, the provisions no longer apply.” Whether that is an adequate justification, given that any such safe harbour is liable to be abused, is a question for another day.

Tuesday, November 29, 2016

No Malice Requirement in Unjustified Threats Claim

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

In Excalibre v API, Manson J held that the three patents asserted by Advantage Products Inc (API), were either invalid or not infringed. This holding turned on the facts, and no significant new legal issues were raised. Of more interest, Manson J also held that the Excalibre parties were entitled to damages pursuant to s 7(a) of the Trade-marks Act, because API had threatened to bring infringement actions against end-users of the allegedly infringing Excalibre product, and these threats had caused the end-users to avoid buying Excalibre’s product. While Mason J applied established law on this issue as well, his decision is nonetheless significant as there have been only a handful of cases dealing with this provision in the fifty years since the SCC in S. & S. Industries Inc. v. Rowell [1966] SCR 419, aff’g 44 CPR 260 (Ex Ct) held that mala fides is not an element of a claim under s 7(a). This issue is salient at present because of the concern that patent assertion entities may level unfounded threats against end-users: see the 2016 US FTC Study on Patent Assertion Entity Activity Ch 3. (Though in this case, API is an operating company, not a patent assertion entity.) As discussed in this post, Excalibre v API is a paradigmatic example of liability for wrongful threats under s 7(a), and as such it illustrates why the threats action, and the SCC holding that mala fides is not an element, are sound as a matter of policy. In subsequent posts I will suggest that it is not correct as a matter of law to distinguish between threats and communications which merely provide information, and that this distinction is also dubious as a matter of policy. I also doubt whether it is right to say that damages is an element of the claim under s 7(a). While both of these points were raised in Manson J’s decisions, neither was crucial to the outcome.

In oil production, when a downhole pump is used to pump oil to the surface, the pump creates a torque which can cause the tubing string above it to unscrew. A torque anchor is a cylindrical device that prevents this by anchoring the tubing string to the fixed wellbore casing. The anchor is designed to lock into place when rotated clockwise (the direction of torque produced by the pump), and to unlock for removal when rotated counter-clockwise [34]-[36]. Both Excalibre and API make and sell torque anchors. API alleged that Excalibre’s CTA Torque Anchor infringed the API patents. As noted, Manson J ultimately held fact the CTA Torque Anchor did not infringe any valid patent.

In early 2008 some users of Excalibre’s CTA Torque Anchors, in particular Husky Energy Inc and Bronco Energy Inc, received letters from API’s lawyer stating, inter alia, that API held patents for specific torque anchor designs [29], that the CTA Torque Anchor infringed those patents, and that Husky and Bronco would be sued for infringement unless they immediately stopped sourcing CTA Torque Anchors [52]. These letters had the desired effect. Evidence from Bronco’s COO was that Bronco stopped using the CTA Torque Anchor immediately after receiving the letter, without even getting an infringement opinion, because it was easier to switch to a competing product [83]-[85]. Husky’s lawyer testified that Husky was litigation averse, and it also decided to stop purchasing the CTA Torque Anchor, without obtaining an infringement opinion, again because it was easier to switch to a different product [87]-[88]. She also stated that “an offer of an indemnity would not have changed her mind because she did not want to enter into a situation where Husky would be vulnerable to litigation” [90].

This is a paradigmatic illustration of the problem that the threats action is intended to address. For any individual end-user, the value of the product is its incremental value over the best alternative, which may well be less than the cost and inconvenience of litigation exposure. The manufacturer’s interest in defending its product is much greater, because the value to the manufacturer reflects its sales to multiple end-users. The value to the manufacturer therefore more closely reflects the aggregates social value of the invention. This means that a threat directed to an end-user may be effective in inducing it to stop using the product, even when infringement and validity are questionable.

Paragraph 7(a) of the Trade-marks Act provides that:

No person shall make a false or misleading statement tending to discredit the business, goods or services of a competitor;

The common law action of trade libel, aka slander of title, would only lie if the statements were made with malice. It was not enough that the statements made were untrue; they also had to be made without reasonable grounds for believing they were true: S. & S. Industries Inc. v. Rowell [1966] SCR 419, 426-27. However, s 7(a) is based not on the common law, but on Article 10bis of the Paris Convention for the Protection of Industrial Property, and, as Manson J noted at [279], in S. & S. Industries the SCC held that under s 7(a) there is no requirement that the false statements be made maliciously or with knowledge of their falsity. Thus he held that

[280] In this case, because I find that that no version of the CTA Torque Anchor infringes any of the API Patents, it is clear that Goodwin’s letters to Husky and Bronco (i.e., the January 16, 2008 Husky Letter; the February 1, 2008 Husky Letter; the April 28, 2008 Husky Letter; and the May 16, 2008 Bronco Letter), sent on behalf of API, contained false and misleading statements.

For convenience I will refer to a claim made under s 7(a) as a “unjustified threats” action, as the threats must be unjustified in the sense of being false, in order to attract liability. Because s 7(a) is not based on the common law, and because malice is not an element, the common law terms referring to slander or libel are no longer appropriate. The Canadian action must be distinguished from the action under s 70 of the UK Patents Act, 1977, which is referred to as an action for “groundless threats”, or, in the recently introduced Bill, “unjustified threats,” also on the view that “Threats to sue for infringement are unjustified where they are made in respect of an invalid right or where there has been no infringement”: Unjustified Threats Bill Explanatory Notes, ¶ 1. Despite this commonality, the UK provisions, both existing and proposed, are an evolutionary reform based on the common law, and the option of a reform based on Article 10bis of the Paris Convention was specifically rejected: see the UK Law Commission, No 360, ¶ 144. The UK experience is undoubtedly helpful in understanding the issues (see generally the UK Law Commission project on unjustified threats), but UK law on this point is not helpful in interpreting the Canadian provisions.

The absence of a malice requirement is sometimes criticized on the basis that a balance must be struck between “protect[ing] competitors and their customers against unfair threats, while still giving effect to the patent holder’s right under the Patent Act to charge these customers with infringement,” and the requirement of malice strikes this balance because it “permits the patent holder to exercise and protect its patent monopoly in good faith, while society is protected against the abuses caused by false and malicious threats of infringement”: A. Kelly Gill Balancing Necessary Monopolies and Free Competition: Threats of Patent Infringement and Trade Libel (1998) 14 CIPR 125, 128, 126; and see the UK Law Commission, No 346, ¶ 1.21, saying “The law should enable rights holders to assert and defend their rights, but this must be balanced by curbs on abuse,” (though the Law Commission recommended a safe harbour, rather than a mala fides requirement, as will be discussed in tomorrow’s post).

I accept the need for this balance, but it strikes me that an appropriate balance is struck even without any requirement of mala fides. A patentee whose patent is certainly valid and infringed can tell infringers as much without fear of liability, because the truth of its assertion is an answer to any action for unjustified threats. If its case is weak, the patentee will be exposed to risk, but it is only right that a patentee with a weak case should be hesitant to disrupt the business of a rival, on grounds that may ultimately prove unfounded. While the patentee is entitled to asserts its legitimate rights, the defendant equally has the right to operate freely if it is not in fact violating the patentee’s rights. The threats action, without any malice requirement, provides a proportionate incentive: the weaker that patentee's case, the greater the its exposure. In the absence of a malice requirement, the dial of potential liability increases smoothly as the patentee’s case becomes weaker. In contrast, a requirement of malice imposes a sharp cut-off; a patentee with a 49% probability that its patent is valid and infringed will expect to be liable for half the loss it causes (it will be 100% liable in 49% of cases, and not liable at all in 51% of cases), whereas a patentee with a patent that is 51% likely to be valid and infringed, faces no liability at all, though there remains a substantial likelihood that its threats are in fact unjustified.

Put another way, threatening a rival’s customers with an infringement action has the same de facto effect as an interlocutory injunction against the rival itself, as the rival will be effectively prevented from selling the allegedly infringing goods, before validity and infringement are definitively established. A plaintiff seeking an interlocutory injunction will almost invariably be required to give an undertaking to compensate the defendant for any harm caused by the injunction. The plaintiff is not excused from giving such an undertaking simply because it has a reasonable belief that its claim is well-founded. Nor is it excused from satisfying the undertaking if it turns out, after trial, that the plaintiff’s action was reasonable, though it ultimately failed. The requirement to give an undertaking in damages does not stop plaintiffs from seeking an interlocutory injunctions; it just ensures that they are appropriately careful when doing so. In the absence of an undertaking in damages, the risk would lie entirely with the defendant, who might suffer a substantial loss even if it ultimately prevails. Patent rights are no different from any other rights in this respect, and a patentee should not be able to use threats to a customer to harm a rival without fear of repercussion, even if the patentee had reasonable grounds for believing its patent was valid and infringed.

Addendum: I should have noted that in S. & S. Industries Spence J relied expressly on the parallel with an interlocutory injunction in holding that mala fides was not required under s 7(a):

Moreover, the person seeking to defend his patent has a choice of immediately commencing an action for infringement and applying for an injunction to restrain the continuance of such prejudice to his patent rights, or of bringing action for damages against those who use, in their business, the wares manufactured by the alleged infringer. If he chooses the first alternative, he may join as parties defendants all who purchase from the alleged infringer to use in their business. The injunction having been granted only upon his undertaking to pay the damages incurred thereby should he fail, he proceeds at his own risk. There would seem to be no valid reason why rather than choosing that forthright course he should be permitted to proceed by threats against the purchasers from the alleged infringer without rendering himself liable for damages unless his mala fides could be proved.

That is, if mala fides were an element, the patentee could avoid the risk associated with an undertaking by making threats against end-users.

Thursday, November 24, 2016

It Is Not Possible to Contract out of the Priority Provisions of the Patent Act

SALT Canada Inc v Baker 2016 FC 830 Boswell J

The main issue in SALT Canada v Baker was whether the FC had jurisdiction to order the patent register to be varied under s 52 to list SALT as the owner of the `058 patent, where determining SALT’s ownership turned on the interpretation of contracts assigning the patent rights to various parties. My earlier post on this case focused on the issue of the court’s jurisdiction. This post is a belated footnote, elaborating on a point I had addressed only in passing.

As part of his analysis of the Court’s jurisdiction, Boswell J emphasized that “Statutory rights in a patent are governed by the laws of the jurisdiction in which the patent exists,” no matter what court has jurisdiction over the dispute, and regardless of what law is applicable to the contract of assignment. “Therefore, no assignment or transfer can take place except in accordance with the laws of [the jurisdiction of the patent]” [30].

[31] Accordingly, nothing in the assignment agreements could have the effect of exempting them from the operation of section 51 of the Patent Act, which renders an unregistered assignment void against subsequent assignees. . . .

[32] The ultimate outcome of this case will thus need to take the Patent Act into account notwithstanding whatever provincial or foreign law may be applicable to the assignment agreements at issue. This will be so regardless of the forum that ultimately adjudicates this dispute, be it a provincial superior court in Canada or the Superior Court of the State of Georgia. . . .

I felt this point to be so clearly correct that all I said in my earlier post is that “This is certainly true.” Since then, I have seen some comments suggesting that it was a legal point of significance, so I thought I might elaborate.

The general principle is that the issue priority of rights affects third parties, and so cannot be varied by contract. A third party must know where to look to determine its rights. In particular, as Boswell J noted, s 51 renders an unregistered assignment void against subsequent assignees. This allows a party seeking to take an assignment from the current registered owner to look to the Canadian register to determine whether there are any prior rights that might impair its title. If the registration venue could be changed by contract, this would defeat the purpose of s 51. Therefore s 51 must apply regardless of the proper law of the contract, and by the same token it is not possible for the parties to an assignment of a Canadian patent to use a choice of law clause to displace the statutory priority provisions.

This is a long-established general principle of priorities. As the USSC explained in Harrison v. Sterry (1809) 5 Cranch 289, 298-99:

The law of the place where a contract is made is, generally speaking, the law of the contract; i. e. it is the law by which the contract is expounded. But the right of priority forms no part of the contract itself. It is extrinsic, and is rather a personal privilege dependent on the law of the place where the property lies, and where the court sits which is to decide the cause. . . . In this country, and in its courts, in a contest respecting property lying in this country, the United States are not deprived of that priority which the laws give them, by the circumstance that the contract was made in a foreign country, with a person resident abroad.

See similarly Gimli Auto Ltd. v. BDO Dunwoody Ltd., 1998 ABCA 154:

[9] Nor need one consider a choice-of-law clause in a lease, for the statute sets which law applies. Nor is this a suit between two parties to a contract. The whole point of the P.P.S.A. is to overrule certain contractual or property rights: Re Giffen, supra. The lessor and lessee could not, by contracting that the lease would be valid even if not registered, bind others. This is legislation on priorities: ibid.

The scholarly commentary wholly endorses this position. Cuming, Walsh & Wood, Perspnal Property Security Law (2d ed), 187-88 put is this way:

To what extent are the secured party and the debtor free to choose a different governing law than the law designated as applicable by the PPSA? Clearly, a contractual choice of law clause cannot bind third parties. It follows that contracting parties cannot displace the legal regime to which the PPSA refers issues relating to the validity, perfection and priority of security interests by selecting a different governing law in their contract. The proposition is a long-standing one, codified rather than introduced by the PPSA.”

See also the UNCITRAL Legislative Guide on Secured Transactions, Chapter 10, esp. para.13:

13. A corollary to recognizing party autonomy with respect to the personal obligations of the parties is that the conflict-of-laws rules applicable to the property aspects of secured transactions are matters that are outside the domain of freedom of contract. For example, the grantor and the secured creditor are normally not permitted to select the law applicable to priority, since this could not only affect the rights of third parties, but could also result in a priority contest between two competing security rights being subject to two different laws leading to opposite results.

Friday, November 11, 2016

What Did Whirlpool Decide?

Apotex Inc v Eli Lilly Canada Inc 2016 FCA 267 Pelletier JA: Boivin, Rennie JJA aff’g 2015 FC 875 Gleason J
            2,226,784 / tadalafil / CIALIS / NOC

This brief decision of FCA dealing with obviousness-type double patenting is important for its discussion of the FCA's view of precedent, both at the SCC level and its own. The decision first addresses the question of when the SCC should be taken to have settled a question of law. This topic is important not just for the issue at hand, but more broadly as the Federal Courts interprets and applies new Supreme Court precedent. The FCA also suggested that counsel might want to be more creative in thinking about how to approach obviousness-type double patenting. On both points, the FCA’s attitude bodes well for the future development of the law.

The 784 patent was attacked as being invalid for double patenting over patent 2,181,377 in two separate NOC proceedings, one involving Mylan and the other involving Apotex. The key issue in all the proceedings was the appropriate date for assessing obviousness-type double patenting: is it the claim date of the earlier patent, the claim date of the later patent, or the publication date of the later patent?

Mylan FC 2015 FC 17 was decided in Lilly’s favour in January 2015 (see here). The decision under appeal in this case, Apotex FC 2015 FC 875 was decided, also in Lilly’s favour, in July 2015 (see here). Mylan FC was affirmed by Mylan FCA 2016 FCA 119, which was issued in April of 2016. As discussed here, in Mylan FCA, the FCA rejected the latest date, namely the publication date of the later patent, and held that it did not need to decide between the two other possible dates, because the FC had held that on the facts, the 784 patent was not obvious over the 377 patent on either of the claim dates. Only a few days after Mylan FCA was issued, the appeal from Apotex FC was heard [8]. Pelletier JA remarked that “In the normal course, given that the double patenting issue is identical in both cases, this Court would have simply followed Mylan FCA and rejected Apotex’s double patenting argument on the basis that it had already decided this issue” [8]. But Apotex argued that Mylan FCA should not be followed because it was inconsistent with the SCC decision in Whirlpool 2000 SCC 67. The question therefore, was “What did Whirlpool Decide?” [28ff].

I won’t rehash the details of the Whirlpool decision, which was summarized by the FCA at [28]-[33]. Suffice it to say that Apotex made a plausible argument that the SCC in Whirlpool would have assessed double patenting as of the publication date of the later patent, if the issue had been before it [36-[37]. However, Whirlpool didn’t explicitly decide, or even address, the question of the appropriate date. The issue is whether the appropriate date should be considered settled by implication through exegesis of the SCC’s statements, or whether the question should be considered to have been left open.

Despite the appeal of Apotex’s argument, Pelletier JA rejected it (my emphasis):

[37] It is, in my view, improbable that Binnie J. would settle a significant point in the law of double patenting by implication and without addressing it directly. The care taken to justify the publication date of a patent as the date at which it is to be construed suggests that if Binnie J. intended to decide the issue of the comparison date of the claims of the patents in an obviousness double patenting suit, he would do so explicitly.

[38] Furthermore, the issue of the comparison date in double patenting cases had not arisen previously in the Supreme Court jurisprudence, nor in the works of the text book writers. It would be surprising, to say the least, if Binnie J. purported to deal with a novel question by implication. This is all the more so when one considers that the issue was there to be addressed if the Court chose to do so.

He therefore held that the question of the appropriate date remained open after Whirlpool [39].

In my view, Pelletier JA’s reasoning is both sound as a matter of policy and strongly supported by the SCC’s discussion in R v Henry 2005 SCC 76 [57]. In Henry the SCC reconsidered a number of its prior decisions, overruling some of them. The issue of the binding effect of SCC statements arose because R v Noël, 2002 SCC 67 was affirmed on its facts (Henry [49]) and the Attorney General of Ontario worried that some of the obiter would be seen as binding on trial courts. Binnie J, for the Court, that “ I do not think this ‘concern’ is plausible. The comment was neither part of the legal analysis nor a direction to trial courts. It was simply an observation by an experienced judge” [52]. Binnie J reviewed the law relating to the binding effect of its decisions, and summarized as follows (my emphasis):

[57] The issue in each case, to return to the Halsbury question, is what did the case decide? Beyond the ratio decidendi which, as the Earl of Halsbury L.C. pointed out, is generally rooted in the facts, the legal point decided by this Court may be as narrow as the jury instruction at issue in Sellars or as broad as the Oakes test. All obiter do not have, and are not intended to have, the same weight. The weight decreases as one moves from the dispositive ratio decidendi to a wider circle of analysis which is obviously intended for guidance and which should be accepted as authoritative. Beyond that, there will be commentary, examples or exposition that are intended to be helpful and may be found to be persuasive, but are certainly not “binding” in the sense the Sellars principle in its most exaggerated form would have it. The objective of the exercise is to promote certainty in the law, not to stifle its growth and creativity. The notion that each phrase in a judgment of this Court should be treated as if enacted in a statute is not supported by the cases and is inconsistent with the basic fundamental principle that the common law develops by experience.

This statement emphasizes that even direct statements by the SCC expressing a view on a point of law are not necessarily binding; it follows that inferences as to what the Court might have been thinking can never be binding. 

In his discussion, Binnie J acknowledged that in the 1970s the Court’s mandate shifted from error correction to development of the jurisprudence, and consequently, the Court’s work became more oriented to “the development of a general analytical framework which necessarily went beyond what was essential for the disposition of the particular case” [53]. While Binnie J noted that this is particularly true in the Charter context, there is no doubt that we have seen a similar shift in patent law as well. Binnie J acknowledged that this shift meant that some statements that are strictly dicta should nonetheless be considered to be effectively binding: “It would be a foolhardy advocate who dismissed Dickson C.J.’s classic formulation of proportionality in Oakes as mere obiter” [53]. Nonetheless, it is still true that “the common law develops by experience,” and much of that experience is gained at the trial and appellate levels. Binnie J cautioned that the lower courts should not be too ready to overly broaden what the SCC had decided, because:

the effect would be to deprive the legal system of much creative thought on the part of counsel and judges in other courts in continuing to examine the operation of legal principles in different and perhaps novel contexts, and to inhibit or skew the growth of the common law. This would be a consequence totally unforeseen and unintended by the Court that decided Sellars.[56]

The Supreme Court of Canada is the highest court in our system, and we like to think that it has some of the best judges, but very able judges are found at every level of court, and the Supreme Court justices are not omniscient oracles. A judge in the Federal Court or the Federal Court of Appeal, will have more insight into the proper disposition of a legal question that is immediately raised on the facts before her and fully argued by counsel, than can be found in the inferred intent of a Supreme Court judge. Binnie J’s assertion that it is not “plausible” that obiter statements by the SCC could be seen as effectively binding on lower courts, is, with due respect, clearly wrong, as we know well in patent law, but the remainder of his discussion is entirely compelling.

In summary, not only was the FCA in this case right to hold that the remarks in Whirlpool were not binding authority on the issue of the correct date for assessing obviousness-type double patenting, to have held otherwise would have been inconsistent with the SCC’s own guidance in R v Henry on the binding effect of SCC decisions.

Finally, on a point of considerable practical importance, Pelletier JA concluded with the following observation:

[40] I might add that the analysis in the Earlier Cases, in Mylan FCA, and in this case was driven by the fact that the parties chose to frame the issue in terms of the date for comparison of the claims of the patents in issue. Having conducted the analysis on the basis chosen by the parties, we should not be taken as having decided that this framework for analysis is the correct one. The fact that this issue has not arisen in this form in the past may be an indication that there may be other ways to approach it. Perhaps, the Court, having construed the claims of each of the patents with the assistance of the persons skilled in the art, simply compares the claims and decides whether the later claims are patentably distinct from the earlier claims on the basis of the insights which it has gained in the course of the construction of the patents. This appears to be what was done in [Comm’r of Patents v Hoechst [1964] SCR 49], and more recently in [Sanofi 2008 SCC 61]. This is not to argue that this approach is any more correct than the comparison date approach but rather that, going forward, parties should not feel that they are locked into the framework chosen by the parties in these cases.

This observation is of a piece with Pelletier JA’s discussion of Whirlpool. Adherence to precedent is important to the predictability which allows parties to plan in reliance on the law, but sound precedent cannot grow in a straightjacket imposed by the idiosyncracies of how particular cases were argued: to repeat Binnie J’s words, “The objective of the exercise is to promote certainty in the law, not to stifle its growth and creativity."

Wednesday, November 9, 2016

The Patentee, Not the Infringer, Elects an Accounting

Bayer Inc v Cobalt Pharmaceuticals Co 2016 FC 1192 Fothergill J
            2,382,426 / ethinylestradiol & drospirenone / YAZ YASMIN

After Fothergill J held in 2016 FC 1013 that Bayer’s 426 patent was valid and infringed by Apotex and Cobalt, he asked for submissions regarding Bayer’s entitlement to elect between damages and an accounting of profits [1]. Apotex made the “novel” argument that it, rather than Bayer, should be entitled to make the election, and that Bayer should be restricted to an accounting of profits [2]. The statutory basis for this argument was evidently that s 57(1) provides that in the court “may, on the application of the plaintiff or defendant, make such order as the court or judge sees fit. . .for and respecting inspection or account. . . .” The equitable argument was that Apotex had prevailed in the prior NOC proceeding [2], the implication being that its subsequent launch was justifiable, and so it should be subject to the more modest sanction of an accounting of its own profits. The insurmountable difficulty with the statutory argument, as pointed out by Fothergill J, is that pursuant to s 55(1) the successful patentee is statutorily entitled to damages, and the court has no discretion with respect to that remedy [4], [9]. The question then arises as to why s 57(1) specifies that the defendant may apply for an order. I suspect that this is targeted at the final phrase of the provision, which allows the court to make orders “generally, respecting the proceedings in the action.” Such general orders might be sought by either party.

Fothergill J’s analysis of whether Bayer should be allowed to elect between damages and an accounting was brief. He noted that “[t]he fact that a defendant has taken a business risk and has obtained authority to market an infringing product pursuant to the NOC Regulations will not deprive a successful plaintiff of an election between damages and profits ,” citing 2008 FC 825 [509]-[510] (Snider J) and 2009 FC 991 [655], [663] (Gauthier J).

As discussed here and here, there has been something of a debate as to whether a succcessful patentee will normally be permitted to elect an accounting unless there is some reason why that remedy should be denied, or, on the other hand, an accounting will be denied unless the plaintiff can show some positive reason why it should be granted. The more recent tendency seems to be towards generally allowing an election. Fothergill J’s conclusion was consistent with this tendency: “Given that Bayer is entitled to damages pursuant to s 55(1) of the Patent Act, and all parties agree that an accounting of profits may also be an appropriate remedy, I see no reason to deny Bayer an election between damages and profits” [11]. However, given that Apotex did not oppose Bayer’s entitlement to an accounting, but rather insisted on it, not too much can be read into this.

Tuesday, October 25, 2016

TRUVADA Patent Invalidated by Conference Call With Investors Outside of Grace Period

Gilead Sciences, Inc v Apotex, Inc 2016 FC 856 Brown J
            2,512,475 / TRUVADA

In this chapter of the continuing TRUVADA saga, Brown J held Gilead’s 475 patent invalid as being anticipated, or in the alternative, obvious, on the basis of a disclosure made by Gilead executives in the course of a conference call with investors. The filing date was 13 January, 2004, and the conference call, which was public [67], took place more than one year before, on 2 December, 2002, and so outside the one year grace period for disclosure by the inventor set out in s 28.2(1)(a) and s 28.3(a). The argument for anticipation or obviousness based on the conference call was very strong, and the main tactic of Gilead’s counsel was to try to keep the conference call transcript out of evidence by instructing the Gilead witnesses not to produce the conference call transcript, in violation of Rule 94(1), and without seeking the relief of Rule 94(2) [60], [61]. Brown J held that in the circumstances hearsay evidence of the conference call transcript introduced by Apotex was admissible as being both necessary and reliable [60]. The holding on anticipation [97] and obviousness [120-21] followed directly. Apotex also argued lack of utility, but Brown J construed the promise of the patent modestly [139], and found that the promised utility was soundly predicted [143].

As a minor point, Brown J found that the conference call, which was public [67], would have been known to a person skilled in the art [103], but I don’t see a specific holding by Brown J that it was part of the state of the art, in the sense of being common general knowledge or prior art which would be discovered in a reasonably diligent search directed to the problem at hand. As noted here, there is an issue as to whether the art that can be used in an obviousness attack includes only the state of the art, so defined, or all prior art. This would potentially have been an important point had the decision rested primarily on obviousness, but given that anticipation was the primary basis for Brown J’s holding of invalidity, nothing turned on it.

Monday, October 24, 2016

When Does a Submission for an NOC Trigger S 5 of the NOC Regulations?

Teva Canada Limited v Pfizer Canada Inc 2016 FCA 248 Dawson JA: Webb, Rennie JJA rev’g 2014 FC 1243 Gleason J
            2,409,059 / exemestane / AROMASIN
            2,261,630 / infliximab / REMICADE / INFLECTRA

Section 3.4.1 of the most recent (2012) Guidance Document: Patented Medicines (Notice of Compliance) Regulations, states that when a generic manufacturer of a drug that already holds an NOC licenses a second generic to sell “the identical drug,” the second / licensee generic need only file an administrative drug submission which does not trigger s 5 of the NOC Regulations. This reversed the prior policy, under which the second generic’s submission was considered to trigger s 5. The change in policy resulted from the Minister of Health’s interpretation of the term “submission” in s 5(1) of the NOC Regulations, and not from any change in the regulations themselves. In this decision, the FCA held that the Minister’s interpretation of the Regulations was owed deference, and that the new interpretation was reasonable, reversing Gleason J on both points. This means that a patentee cannot decide whether to respond to an NOA in light of the threat it perceives from the particular generic; instead, a patentee must respond to every NOA it receives, or take the risk that the generic in question will subsequently license. With that said, according to the Guidance Document, the submission by the second generic will only be considered administrative if the drug is “identical.” In the cases under appeal, the second generic certified that its product would be manufactured in the same location with identical specifications and procedures. That is, as I understand it, the first generic, which had received the NOC, was manufacturing the drug for sale by the second generic. The FCA decision suggested that when a drug is manufactured by the second generic in circumstances that give rise to a “to a new or different basis for asserting that a particular product is infringing” [89], the submission should not be considered administrative. I would imagine that manufacturing by the second generic in a different facility might by considered sufficiently different, even if under licence by the first generic, but the Guidance Document is not explicit on this issue. And regardless of this suggestion by the FCA, the Minister’s interpretation on this point would be reviewed on a deferential standard.

Thursday, October 20, 2016

Is Recourse to the Disclosure Impermissible When the Words of the Claim Are Plain and Unambiguous?

Cascade Corporation v. Kinshofer GmbH 2016 FC 1117 Southcott J
            2,587,065 / I-LOCK and X-LOCK quick coupler

This infringement action ultimately turned entirely on claim construction. A key issue in claim construction was whether recourse to the disclosure was permissible; in the course of coming to opposite conclusions, the defendant’s expert started with the disclosure and relied extensively on it in construing the claims, while the patentee’s expert largely ignored the disclsoure. Southcott J began his discussion of claim construction by quoting the principle that recourse to the disclosure is “unnecessary where the words are plain and unambiguous”. As discussed below, Southcott J evidently took this as saying that recourse to the disclosure in claim construction is permissible only when the claims are ambiguous. In my view, that proposition is clearly wrong. Since Southcott J found the claims to be ambiguous, and hence recourse to the disclosure was permissible, the error made no difference to the result. Nonetheless, because Southcott J’s view was based on FCA authority, the point warrants some discussion.

Wednesday, October 19, 2016

Uncontested Change of Inventorship

Qualcomm Incorporated v. Canada (Commissioner of Patents) 2016 FC 1092 Southcott J

This decision concerned an uncontested application by Qualcomm pursuant to s 52 of the Act to correct the name of the inventor on the 594 patent by adding the true inventor and deleting two incorrectly named inventors. In a previous Qualcomm decision, 2016 FC 499 (blogged here), Simpson J held that the affidavits that would be required to amend the inventorship for a pending application under s 31 are not strictly required under s 52. Qualcomm nonetheless provided affidavits, out of an abundance of caution [13], [14].

Qualcomm also sought to have certain documents recorded against the 594 patent, including a copy of replacements sheets for the PCT Declarations of Entitlement [1]. Southcott J declined to grant that relief, but without actually holding that the FC does not have the jurisdiction to grant such relief under s 52. Qualcomm did not urge the point very strongly, acknowledging that it would have other means have filing the replacement documents. Accordingly, in the absence of case law holding that s 52 authorized the FC to order the recording of documents, Southcott J declined to grant the relief, without any express holding as to whether he had the necessary authority to do so [16]-[17].

Tuesday, October 18, 2016

“How Is That a Proxy for the Value Associated with the Use of the Invention?”

Arctic Cat Inc v Bombardier Recreational Products Inc 2016 FC 1047 Roy J

Complex products embody hundreds or thousands of patented components, all of which contribute a small amount to the overall value of the product. When one of those patents is infringed, how are damages to be assessed? That is problem is central to much of the high-profile litigation taking place internationally in the ICT sector concerning standard-essential patents (SEPs) subject to a commitment to license on fair, reasonable and non-discriminatory (FRAND) terms. Essentially the same problem was also raised, albeit in obiter, in Arctic Cat v BRP. As noted in Friday’s post, Roy J held that Arctic Cat’s 738 patent was not infringed. While it was therefore strictly unnecessary to consider damages, the case had not been bifurcated (“This is a case where bifurcation should have been more carefully assessed [349]), and Roy J went on to make a number of observations on the damages issue, though without arriving at any final figure. His discussion is of considerable interest as Canadian law has relatively few cases assessing damages for infringement when the invention is a minor part of a complex product.

The patentee sought damages in the form of a reasonable royalty for the use of the invention [352] and experts for both parties advanced a variety of methods for assessing those royalties. Ultimately Roy J concluded that most of the proposed methods were wholly unreliable, though one was inadequate as presented, but, with adjustment, could serve as a starting point [413]. Roy J’s criticisms of the various methodologies all turned on one fundamental point: “the Court must strive to compensate the claimed invention solely with respect to damages that can be attributed to the invention” [353]:

Where the invention is but one individual component of a multi-component product, the damages in the form of royalties must be in order to compensate the infringement of that individual component of the multi-component product that is captured by the invention. In effect, the royalty recognizes that the sales by the infringer are an illegal transaction which requires to be compensated. However, it is only the infringement that requires compensation.

The problem is that the invention is a method of tuning a two-stroke engine, in particular a snowmobile engine, for optimal performance by setting the ignition timing according to the exhaust temperature (see Friday’s post). How is the value of that invention to be separated from the value of all the other components of a snowmobile, or even of a snowmobile engine [354]? I will argue below that the method that found favour with Roy J is just as susceptible to this critique as those he rejected.

Friday, October 14, 2016

You Can’t Have the Claim Construction Cake, and Eat the Validity Cake Too

Arctic Cat Inc v Bombardier Recreational Products Inc 2016 FC 1047 Roy J

In Arctic Cat v BRP Roy J held that Arctic Cat’s 738 patent was not infringed by BRP’s snowmobile engines. This holding turned primarily on the construction of the claims. Roy J also held that 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. The analysis raised no new issues of law, but it does illustrate the interaction between claim construction, validity, and infringement. The patentee was trying to argue for a broad construction for infringement and a narrow construction for validity, which made it difficult to mount a consistent argument on either point.

Thursday, October 13, 2016

Is Trivial and Incidental Domestic Use of a Patented Intermediate Infringing?

Bayer Inc v Fresenius Kabi Canada Ltd 2016 FC 581 Brown J motion for reconsideration dismissed 2016 FC 970
            2,192,418 / moxifloxacin hydrochloride for injection / AVELOX IV / NOC

In Bayer v Fresenius Brown J granted Bayer’s application for an order of prohibition on the basis that the NOA was insufficient, even though the application would otherwise have been dismissed on the basis that Bayer had not established infringement [7]. Brown J held that the transient and insignificant use of the claimed invention in making Fresenius product which was then imported, was not an infringement. On this point he was on firm legal ground. But the implications of this legal rule, in light of the SCC decision in Monsanto 2004 SCC 34, has implications that go beyond the context of importation. It suggests that trivial and incidental use of a patented intermediate is not infringing, even if the use is entirely domestic.

[Update: On re-reading the decision, I believe I had previously misread a key passage from Brown J's decision. I am adding this note, and the explanatory footnote ** below, but it is my policy not to amend my posts to correct errors. When I'm wrong, I'm wrong.]

Friday, October 7, 2016

The Status of Intellectual Property Licences in Insolvency Proceedings

Today's post is a guest post by Professor Anthony Duggan, the Hon. Frank H. Iacobucci Chair in Capital Markets Regulation at the University of Toronto Faculty of Law.


1.      Introduction
If an intellectual property owner grants a licence and subsequently becomes insolvent, can the insolvency administrator disclaim the licence? Or, alternatively, can the insolvency administrator sell the intellectual property free and clear of the licence? Norman Siebrasse and I explored these questions in depth in a report we wrote for Industry Canada in 2013 and in an article, based on the report, which was published in the Annual Review of Insolvency Law in 2014.[1] The questions recently came up for consideration in Golden Opportunities Fund Inc. v. Phenomenome Discoveries Inc.,[2] where the court overlooked nearly all the key points.

2.      The disclaimer of intellectual property licences
Section 65.11 of the Bankruptcy and Insolvency Act[3] provides for the disclaimer of contracts in BIA proposal proceedings. Section 32 of the Companies’ Creditors Arrangement Act[4] is a parallel provision which applies in CCAA proceedings. BIA, s.65.11(7) and CCAA, s.32(6) apply to intellectual property licence agreements where the debtor is the licensor and they provide that disclaimer of the agreement does not affect the licensee’s right to use the intellectual property during the term of the agreement, provided the licensee continues to perform its obligations under the agreement. These provisions are loosely based on s.365(n) of the United States Bankruptcy Code.[5] Their immediate purpose is to protect the licensee’s reliance interest, but the larger objective is to preserve the licensing system as a means of sharing and exploiting intellectual property rights.

Inexplicably, there are no corresponding provisions for bankruptcy proceedings or receiverships. The GOFI case involved a receivership and the court held that the above provisions were inapplicable.[6] The court went on to hold that, in the absence of any relevant statutory provisions and subject to any relevant provisions in the receivership order, a receiver is not bound by the debtor’s contracts and is free to disclaim them.[7] This is subject to the exception that “a receiver cannot disclaim a contract that has granted a property right”.[8] However, in  the GOFI  case the court, following Royal Bank of Canada v. Body Blue Inc.,[9] held that a licence “does not confer any interest or property in the thing being licensed” and so the licensee’s rights are purely contractual.[10] The implication is that if the receiver in the present case had sought to disclaim the licence agreement, the court would have upheld its right to do so and it would further have ruled that the disclaimer precluded the licensee from continuing to use the intellectual property.[11]

But this is wrong as a matter of both law and policy. It is a mistake to think of the issue in terms of property rights. Disclaimer of a contract in insolvency proceedings is a breach of contract, not rescission. The essence of a licence agreement is that the licensor promises not to sue the licensee for infringement, provided the licensee observes the terms of the licence. Outside insolvency, if the licensor sued the licensee for infringement even though the licensee was in compliance with all its obligations under the licence agreement, the licensor would be in breach of its primary obligation under the licence agreement and the court would disallow the action. In principle, the position should be the same in insolvency proceedings. In other words, disclaimer of a licence should not prevent the licensee from continuing to use the intellectual property; if the insolvency administrator sues the licensee for infringement, the court should disallow the action, just as it would have done outside insolvency.[12] Furthermore, as indicated above, there are strong policy reasons for not allowing disclaimer. These policy reasons apply regardless of the form the insolvency proceedings happen to take. The court in the GOFI  case overlooked these points and the case is open to criticism on this score. But more importantly, perhaps, this aspect of the decision serves to underscore the unforgivably patchwork nature of Canada’s insolvency laws. The rules governing disclaimer of contracts should be the same across the board both in the interests of consistency and to discourage forum shopping (picking and choosing between insolvency regimes to take advantage of discrepancies between the regimes).

3.      Asset sales and licensee’s rights
As it happens, the receiver in the GOFI  case did not seek to disclaim the licence agreement. Instead, it applied to the court for approval to sell the intellectual property (a patent) free and clear of the licence. BIA, s.65.13 governs asset sales in BIA commercial proposal proceedings and CCAA, s.36 is a parallel provision applicable in CCAA proceedings. There is no corresponding provision for receiverships, but the courts have developed a similar set of criteria for approving asset sales in a receivership, including a requirement that, in deciding whether to approve a sale, the court should take account of third party interests.[13] In the GOFI  case, the court held that even though the licensee had no proprietary interest in the patent, it did have a contractual right (presumably in the form of a damages claim) which it was entitled to pursue against the sale proceeds.[14] The court framed the question in terms of whether it would be unfair to permit this right to be extinguished and on the facts of the case, it concluded that this question should be answered in the negative. Specifically, the court found that the licensor and licensee companies were both, in effect, alter egos of the same human actor (Dr Goodenowe) and that Goodenowe had years previously bargained away the licensee’s rights.

This conclusion seems plausible as far as it goes, but it must be stressed that it turns on the particular facts of the case. Furthermore, even if the facts had been different and the court had found in the licensee’s  favour, on the court’s own reasoning this would have served only to keep alive the licensee’s  claim for damages and the claim, being a provable one, would be poor compensation for loss of the licence.   In this connection, the policy considerations are the same as in the context of disclaimers:  an order approving the sale free and clear of the licence would be detrimental to the licensee’s reliance interest and, if the licence is central to the licensee’s business, it might trigger the licensee’s own insolvency. Furthermore, the risk that the licence may be defeasible in the licensor’s insolvency proceedings could have a significantly chilling effect on intellectual property licensing activity at large. In this respect, too, the  GOFI  case points to the incoherence of the Canadian insolvency laws: it makes no sense to enact provisions aimed at giving effect to these policies in the disclaimer context, but to leave the licensee exposed to the very same risk in the context of asset sales.

In the GOFI  case,  the court overlooks the possible application of the registration and priority rules in the Patent Act.[15] At least until recent amendments, the Patent Act clearly required exclusive licences to be registered[16] and it further provided that that an “assignment” was void against a subsequent assignee unless registered.[17] It was unclear  (1) whether “assignment” included an exclusive licence;  (2) if so, whether the provision meant that the holder of a registered licence had priority over a subsequent purchaser of the patent; and (3) if not, what the governing priority rule might be.[18] The disputed agreement in the GOFI  case was a non-exclusive licence and, as such, it was clearly not registrable. But it is still not clear how the priorities should be determined.  Poolman v. Eiffel Productions [19] suggests that the federal intellectual property registration provisions do not establish priority regimes and that priorities between competing interests in intellectual property are subject to provincial law, not federal law. 

On the other hand, the correctness of Poolman has been doubted. For example Professor Vaver argues that the federal statutes do determine priorities, at least as between registrable interests, and that there is no room for the application of provincial laws.[20] But Vaver’s reading of the provisions leaves open the question of how to determine the priorities where one or more of the competing interests is an unregistrable interest.[21]  Perhaps the answer is that, at least in the case of a non-exclusive licence,  the licensee has no proprietary claim and so no question of priorities arises.  In any event, to the extent that federal laws apply to determine priorities between competing interests in intellectual property, they should be equally relevant inside and outside insolvency proceedings. This means that, in considering third party interests when deciding whether to approve an asset sale in insolvency proceedings, the court should not confine itself  to asking whether the asset sale is “fair” to the third party; it should also ask whether and, if so, how, the federal intellectual property laws might apply. 

In the broader scheme of things, there is a strong case for reforming the intellectual property laws to establish a modern and comprehensive system for the registration of intellectual property interests and a coherent set of priority rules, along the lines of the provincial Personal Property Security Acts.  If the government were to grasp that nettle, the new priority provisions would clearly be front and centre in any asset sale proceedings involving intellectual property.

Anthony Duggan,
Hon. Frank H. Iacobucci Chair,
Faculty of Law,
University of Toronto

[1] Anthony Duggan and Norman Siebrasse,  The Treatment of Intellectual Property Rights in Insolvency : Report to Industry Canada (September, 2013); “The Protection of Intellectual Property Licences in Insolvency: Lessons from the Nortel  Case [2014]  Annual Review of Insolvency Law  19.
[2] 2016 SKQB 306 (the “GOFI  case”).
[3] RSC 1985, c.B-3 (“BIA”).
[4] RSC 1985, c.C-36 (“CCAA”).
[6] At [21].
[7] At [23], quoting from an unreported judgment of Meschishnick J. in the same proceedings (July 19, 2016) at paras 8-10 which, in turn, cites Bennett on Receiverships  (Toronto: Carswell, 1999) at 341.
[8] Ibid.
[9] (2008) 42 CBR (5th) 125, 2008 CanLII 19227 (Ont. SCJ).
[10] At [18].
[11] As it happens, the receiver did not seek to disclaim the licence agreement, but instead applied for approval to sell the intellectual property free and clear of the licence (see further below).
[12] Duggan and Siebrasse [ARIL],  supra note 1 at 33.
[13] See Toronto-Dominion Bank v. 101142701 Saskatchewan Ltd  2012 SKQB 289, quoted in the GOFI  case at [27].
[14] At [25].
[16] Section 50(2), now replaced by s.49(3).
[17] Section 51, now replaced by s.49(4), replacing “assignment” with “transfer”.
[18] Duggan and Siebrasse [ARIL],  supra  note 1 at 38-46.
[19] (1991) 35 CPR (3d) 384 (Fed.TD).  Poolman  was a copyright case, but its reasoning seems equally applicable in the patents context.
[20] David Vaver, Copyright Law (Toronto: Irwin Law, 2000) at 248.
[21] Duggan and Siebrasse at 45.