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.

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