Thursday, January 23, 2020

Can an Entity That Does Not Practise the Invention Be Entitled to an Accounting?

Seedlings Life Science Ventures, LLC v Pfizer Canada ULC 2020 FC 1 Grammond J
             2,486,935 / Auto-Injection of Medication

The facts in Seedlings are summarized here along with a discussion of claim construction. Novelty and utility are discussed in Tuesday’s post. Despite his holding that the asserted claims were either invalid or not infringed, Grammond J went on to consider remedies, which had been fully argued. Yesterday’s post discusses a timing issue in the context of the reasonable royalty determination. Today’s post considers Grammond J’s suggestion that a patentee that does not itself practice the invention cannot be entitled to an accounting of profits.

Grammond J held that he would not have allowed Seedlings to elect an accounting of profits, largely because Seedlings only intended to licence its product, and would not have competed directly in the market, and so could not have suffered damages by way of lost sales. Grammod J stated:

[252] The fact that the patentee does not practice the invention may also be taken into account in deciding whether to award an accounting of profits. In other words, where the patentee does not itself manufacture, distribute or sell the invention, it cannot be entitled to the profits made by the infringer with respect to those activities. [citations omitted]

The first sentence is well-established by the authorities cited by Grammond J, in particular Unilever v Proctor & Gamble (1993), 47 CPR (3d) 479 (FCTD), where the Muldoon J refused to allow an accounting, stating at 570-71:

The two factors which mainly predicate the Court's discretion in this regard are the plaintiff's brandishing their patent as a bargaining tool with P & G, and their never having made or practised their patent's invention in Canada.

The second sentence, which appears to say that the fact that the patentee does not practice the invention is not only a factor to be taken into account, but gives rise to a strict rule that the patentee “cannot be entitled” to an accounting, goes beyond what is established by any of the case law which he cited. So, Frac Shack 2017 FC 104 [283] and Human Care Canada 2018 FC 1302 [437], simply state that whether the patentee practiced the invention is one factor of several that can be considered. A strict rule of that nature is also difficult to reconcile with the well-established principle that an accounting, being equitable in nature, is discretionary. Grammond J recognized that an accounting is discretionary [251], and his remark at [252] should perhaps be interpreted as saying only that considerable weight will be given to this factor. Indeed, Grammond J went on to consider other factors, in particular that an accounting would have resulted in an award that would be “up to twenty times” greater than the reasonable royalty that would be assessed in damages [253], and that there was no evidence of wilful infringement [255].

It strikes me that a strict rule that a patentee that does not itself manufacture, distribute or sell the invention, cannot be entitled to an accounting, goes too far. Such an entity cannot of course get damages in the form of lost sales, so it’s remedy would be confined to a reasonable royalty, or potentially punitive damages. The difficulty with awarding only on a reasonable royalty is that it may not provide an adequate deterrent against infringement, as explained by Zinn J in Monsanto v Rivett 2009 FC 317:

[23] At the level of principle, there is no deterrent from infringing the patent if what the infringer is required to hand over is the sum he would otherwise have paid to Monsanto to buy the seed and the licence. In fact, this would almost be counter to the purpose of deterrence. It is much like saying, as the plaintiffs put it in their oral submission, “Catch me if you can”. If caught, the defendant would be required to pay the sum he would have paid to use the patent in any event. When not caught, he is left with a windfall.

In response to the deterrent argument, Grammond J pointed out that the court can award punitive damages for willful infringement [258]. The difficulty is that punitive damages are arguably an excessive deterrent, if routinely awarded, because the amount payable exceeds the benefit to the infringer from the use of the invention. Punitive damages make the infringer worse off than if it has never used the invention at all, and therefore have a chilling effect on legitimate forms of wilful infringement, such as when a party knows of the patent but believes it is probably invalid: see here. An accounting strikes a better balance, because the infringer is made worse off than if it had licenced, but not worse off than if it had never used the invention: see Rivett [22].

More broadly, a rule that a non-practising entity cannot be entitled to an accounting seems intuitively reasonable if the patentee is a patent assertion entity. But at the other end of the spectrum, consider a scenario in which a startup company with design expertise developed important new technology, and sought to licence it to a larger entity for commercialization. If the larger entity believed the patent to be valid and nonetheless copied the technology and began selling it, I don’t see why the patentee should be denied an accounting. In such a case the patentee might be entitled to punitive damages, as Grammond J pointed out, but I see no reason why it should be confined to punitive damages. Consider a similar scenario, except that the larger entity in believed, reasonably and in good faith, that the patent was invalid, but validity was ultimately upheld in close fought litigation. Why should the court have to choose between a reasonable royalty and punitive damages, rather than the middle ground of an accounting? The jurisprudence on the circumstances in which an accounting should be granted is still developing, but in my view, on the current state of the law and our understanding of the effects of the remedy, a discretionary multi-factorial approach, such as that set out by Phelan J in Varco 2013 FC 750 (see here), remain preferable to any strict rule.

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