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.

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