Friday, February 3, 2017

Miscellaneous Issues in Frac Shack v AFD

Frac Shack Inc v AFD Petroleum Ltd 2017 FC 104 Manson J
2,693,567 / Fuel Delivery System and Method

In this infringement action, Manson J held Frac Shack’s 567 patent to be largely valid and infringed by AFD’s “Frac Trailer.” The decision turned on the facts and on claim construction. Manson J granted a permanent injunction, an accounting of profits, and a reasonable royalty for pre-grant / post-publication ‘infringement’ under s 55(2). While no new law was applied, there are a few points of interest as confirming some existing trends.

The invention relates to a system for refueling well site equipment while the engines are running. It was primarily intended for use on fracking sites. Fracking typically requires multiple diesel engines running in close quarters. Ideally the equipment would run 24 hours a day, but an engine will run out of fuel in 3-4 hours [13]-[14]. Shutting down the engines to refuel wastes time, and can also cause downhole problems which reduce the effectiveness of the fracking operation [13]. Refueling while the fracturing equipment is operational is therefore often required. Prior to the invention, this had involved “manual hot refueling,” which requires a worker to pull fuel-laden hoses to each piece of equipment’s fuel tank and manually discharge diesel fuel into the tank, typically working between equipment that is spaced about a meter apart, with pumping equipment that is operating at high pressures [15]. While there was some debate as to exactly how often fires occurred, there was no real dispute that manual hot refueling was as dangerous, unpleasant and environmentally dirty as it sounds [18].

Claim Construction
As discussed here, there is an ongoing debate in Canadian law as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous on their face. Manson J’s approach in this case was very much in the former camp. In his recent Mediatube 2017 FC 6 decision, Locke J was very careful to analyze the claims first, and determine there was an ambiguity, before turning to the disclosure for clarification. In contrast, in discussing the first two disputed terms, Manson J began by quoting from the disclosure [159]-[160], [171], before consideration of the claims themselves, and nowhere did he consider whether the claims were ambiguous on their face. Rather, he simply read the claims in light of the common general knowledge, in the context of the disclosure and the other claims (eg [167]-[168]), in a manner much more akin to Gauthier J’s approach in LOSEC 2017 FCA 9. I won’t repeat the discussion of the case law on this issue that can be found in my post contrasting those two earlier decisions, but I will say that the holistic and contextual approach, as applied by Manson J in this case, resulted in a claim construction that was straightforward, easy to follow, and persuasive.

AFD tried a classical sufficiency attack, arguing that the disclosure would not allow a POSITA to make the invention. Manson J had no difficulty in holding this argument failed on the facts [209], [213]. An obviousness attack also failed on the facts. The fact that AFD, in a SR&ED grant application submitted to the Canadian government, had argued that their infringing device was innovative, did not help their case [252].

Manson J did find some claims to be overbroad. Some of the claims did not include a remote fuel level sensor, which means that an operator “would have to go into the hot zone to determine the level of fuel in a tank, and would have to physically monitor the filling of the tank to ensure that there was no overflow” [216]. Since the purpose of the invention was to reduce the hazards of manual hot refueling by removing people from the hot zone, Manson J held that the claims without the fuel sensor were overly broad [218]. On the other hand, an overbreadth attack was also made on claims including a pressurized hose near the equipment end of the tank, which could be dangerous if a pin-hole leak sprayed pressurized fuel near the running engine [220]. Manson J held this did not make the claimed invention overbroad, because “having pressurized hoses anywhere in the invention is possibly not optimal from a safety perspective, whether or not an invention, or part of an invention, is optimal is not relevant to the question of whether claims are overly broad” [222]. This contrasts with the holding regarding the fuel sensor. These holdings can be reconciled on the basis that the inventive concept “is to design a system and method for efficient and safe hot fueling to multiple pieces of equipment, in remote and semi-permanent well site locations, that removes the operators from the hot zone during fracturing operations at a well site” [247, emphasis added]. It seems reasonable that the question of overbreadth should turn on the scope of the inventive concept. There was, however, other evidence suggesting that the aim of the invention was to address a number of defects in manual hot refueling, which included risk to the operator, but also environmental risks and general fire safety [29]. That suggests that perhaps the overbreadth holding turned on patentee’s failure to sufficiently emphasize the other advantages of the invention during the obviousness argument. In any event, it would be wrong to read too much into Manson J’s relatively brief overbreadth discussion. While the law respecting overbreadth is easy enough to state – the invention cannot be broader than the invention made or disclosed [202] – this decision, among others, illustrates that we do not yet have a fully coherent framework for identifying exactly what it is that makes an invention too broad.

The holding that AFD’s Frac Trailer infringed various valid claims followed directly from the holdings on claim construction [257]-[280].

An accounting of profit is a discretionary remedy, and there is a question as to whether a successful patentee is presumptively entitled to elect an accounting. The general practice is that a successful patent will be entitled to an accounting, absent some specific reason for denying it, though there are a few cases which have suggested to the contrary: see here for a discussion. Manson J’s holding in this case, allowing the patentee to an elect an accounting, is consistent with the general practice. His general statement of principle indicated that an patentee is presumptively entitled to an account ([282]), and he concluded that “there is no reason that [the Plaintiffs] should not be allowed to elect for accounting of profits” [290]. This is not really very remarkable, given that AFD’s arguments as to why Frac Shack should be denied an accounting were weak. But nonetheless, if the burden was on Frac Shack to show it was entitled to an accounting, the result might have been different. On the whole, Manson J’s decision on this point is by no means a major development, but it is one more case that reinforces the mainstream view that a patentee is presumptively entitled to an accounting.

There were a couple of technical issues in actually calculating the accounting that Manson J resolved on the facts [296]-[309]. Of more interest was his holding that manual hot refueling is not an non-infringing alternative, so that AFD was required to disgorge its gross profits from the rental of its infringing Frac Trailer, not the differential profits as compared with hot refueling. He held that [312]

manual hot refueling is not a non-infringing alternative to using the ‘567 invention. Even if accidents due to manual hot refueling are rare, the fact that reducing the risk of an accident creates a significant improvement over the alternative hot fueling system, because the consequences of such an accident can be life threatening or cause millions of dollars’ worth of damage to the fracturing operation.

This holding would make sense if, after the invention was commercialized, everyone in the industry had abandoned manual hot refueling. However, even the President of the patentee Frac Shack admitted that “some fracturing companies still find manual hot refueling to be an acceptable method of refueling, regardless of whether the equipment in the hot zone is depressurized,” and that “there was no one correct way for fracturing companies to perform a risk matrix and that companies may assess risks differently” [36]. This suggests that manual hot refueling, though substantially inferior, was still a viable alternative. On the other hand, AFD only had one Frac Trailer operating. Even if the whole industry had not abandoned manual hot refueling, if the market demand for the patented system was not saturated, it is possible that all of its customers for the infringing trailer would have considered manual hot refueling to be an unacceptable alternative, and would have used the plaintiff’s system instead. In that case, attributing the AFD’s gross profit from the rental of the Frac Trailer to the infringement would be sound.

Manson J also awarded “reasonable compensation” for pre-grant / post-publication infringement under s 55(2), and the parties agreed with the standard view that a reasonable royalty would be the appropriate measure of compensation for this period [314]. This is of some interest because there are few cases to have actually awarded reasonable compensation, but there is nothing novel in the law that was applied.

Finally, Manson J also refused to award punitive damages [323], [329]. This is consistent with the general reluctance of Canadian courts to award punitive damages. With that said, Manson J’s decision is not particularly significant in reinforcing that general trend, because, as he found, the facts were very far from anything that would warrant punitive damages.

UPDATE: In 2017 FC 274 Manson J clarified that depreciation should be calculated using the "sum of digits" method. 

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