Wednesday, January 29, 2020

Does a Direct Infringer Have a Cause of Action Against its Inducer?

McCain Foods Limited v JR Simplot Company 2019 FC 1635 McVeigh J
2,412,841 / Process for Treating Vegetables and Fruit Before Cooking

This appeal of Aylen J’s decision granting Simplot leave to file a third party claim and file related amendments to its statement of defence raises a couple of novel legal issues. One of the amendments to the statement of defence seems to be premised on a novel extension of the law of implied licence: see the discussion below under Amendments: Licence (2). And McVeigh J also held that it is arguable that in an inducement scenario, the direct infringer has a cause of action against the indirect infringer that induced it to infringe. This implies that in an inducement scenario, the direct infringer can effectively force the patentee into an action against the indirect infringer: see the discussion below under Third Party Claim: Induced infringement. However, McVeigh J upheld Aylen J’s decision on these points on the deferential basis that there was no palpable and overriding error, so this decision does not establish any point of law. If this litigation proceeds to trial, these will be issues to watch.

The basic facts are that McCain sued Simplot, one of its competitors, for infringement of McCain’s 841 patent which covers a process for treating frozen fruits and vegetables using a pulsed electric field (“PEF”) to reduce resistance to cutting after they are cooked [3,[4]. Simplot implemented the allegedly infringing process using a PEF system manufactured by Elea, a German company, which sells such systems worldwide [3]-[5]. Simplot’s contract with Elea specified that Elea would “defend, save harmless, and indemnify Simplot” for patent infringement cases arising from “any and all… services, materials, goods, consumables, equipment…” supplied by Elea to Simplot [74]. When Simplot was served with McCain’s statement of claim, Simplot requested an indemnity from Elea under this provision [8]. Elea refused [9].

Simplot might simply have brought an action against Elea on the contract. Instead, in the motions under appeal, Simplot sought to add Elea to the litigation as a third party under Rules 193 and 194, and to make related amendments to its statement of defence. Elea and McCain both resisted: [11], [14]. While McCain would have an arguable case against Elea for inducing infringement (assuming the PEF system is infringing), it appears that McCain has no interest in bringing an action against Elea. Note that similar litigation is ongoing in the US [7].

The motions raised a number of legal issues, some of which strike me as being fairly difficult. McVeigh J held that almost all the issues raised mixed questions of fact and law, and so the appropriate standard of review was that of palpable and overriding error, not correctness [18], [19]. Because of that, and the sheer number and difficulty of the issues raised, I will not try to provide a substantive analysis of all the arguments. Instead, I’ll simply summarize the key points.

One broad set of issues related to the amendments to Simplot’s statement of defence, and another set of issues related to the third party claim against Elea. For convenience I’ll refer simply to “facts” rather than alleged or pleaded facts.

The amendments arose from the fact that Elea supplies PEF systems around the world, with McCain’s knowledge, and indeed Elea has sold PEF systems to McCain itself [28]. Simplot argued that this supported four defences [24]:

1) Elea was explicitly licenced by McCain to make and sell PEF systems
2) Elea was implicitly licenced by McCain to make and sell PEF systems
3) Simplot was explicitly licenced by McCain to use the PEF systems in Canada
4) Simplot was implicitly licenced by McCain to use the PEF systems in Canada

The allegations related to an explicit licence are straightforward, but those related to an implicit licence are more difficult. Defence (3) was struck and the others were allowed to stand.

Defence (3) was struck on the basis that if Simplot was explicitly licenced Simplot would have the knowledge to plead it specifically [32]. The thrust of (1) is that McCain has explicitly licenced Elea to sell to anyone under terms such that purchasers, like Simplot, are also licenced. This doesn’t raise any new legal issue. If that is established, then McCain would be trying to push an authorized user out of the market and is resisting adding the claim against Elea so that the licence does not come to light.

(2) is more problematic. “Simplot’s argument is that when McCain bought an Elea machine (a) McCain implicitly licensed Elea to sell its machines to other parties like Simplot, and/or (b) McCain implicitly licensed third parties like Simplot to use the impugned PEF systems in Canada” [28]. McVeigh J held this was arguably supported by these facts:

i) Elea advertises that it has developed and installed over 100 Elea PEF systems and McCain is aware of these sales to others;
ii) Elea warranted to Simplot in the contract that the systems do not infringe any patent; and
iii) Elea sold the same PEF systems to McCain.

This strikes me as a substantial departure from the traditional role of an implied licence. As explained by Lord Hoffmann in United Wire [2000] UKHL 42, [2001] RPC 24:

The concept of an implied licence to do various acts in relation to a patented product is well established in the authorities. Its proper function is to explain why, notwithstanding the apparent breadth of the patentee's rights, a person who has acquired the product with the consent of the patentee may use or dispose of it in any way he pleases.

That is, the licence is normally implied from a grant by the patentee: for example, purchase from the patentee may imply a licence to repair the purchased article. Or if a right of resale is implied, the rights of an indirect purchaser are still derived from the original sale by the patentee to the direct purchaser. In this case, a licence from the patentee is to be implied even though the purchaser does not claim under the patentee at all. I can see how these facts might support an argument of acquiescence, discussed below, but I have difficulty seeing support for an implied licence. The difficulty in raising it as an implied licence instead of acquiescence is that it evades the requirement for encouragement that is required for acquiescence.

The cases cited by McVeigh J as being roughly analogous do not strike me as being helpful. Signalisation de Montréal (1992), 46 CPR (3d) 199, 1992 CanLII 2427 (FCA) held that a purchaser from a licensed vendor has standing to sue, and de Korompay v Ontario Hydro (1989), 26 CPR (3d) 464 (FCTD) held that when the inventor sells a machine that is especially adapted for use in a patented process, the sale of the machine may imply a licence.

I have some difficulty understanding the logic of (4). If all the other purchasers from Elea have an express licence, then I don’t see how a sale to Simplot could give rise to an implied licence: that the patentee licensed A does not imply that it licenced B. So the premise must be that the other purchasers do not have an express licence. If that is the case, and they do have an implied licence then any purchaser from Elea in similar circumstances must also have an implied licence. If that is the argument, then it seems to me that, like (2), it mixed up acquiescence and implied licence. In any event, the exact reasoning behind the amendment was not set out, and all I can say is that while this appears to be a novel point of law, McVeigh J treated it as being a point of mixed law and fact, and so the holding really turns on the point that “this area of law is unsettled” [33].

The argument here is that by standing by while Elea sold to others, McCain J has acquiesced in any infringement. Ultimately the test is whether actions of the patentee, beyond mere delay, “encourage[d] the wrongdoer to believe that he does not intend to rely on his strict rights”: Remo Imports 2005 FC 870 [53]. McVeigh J noted that the encouragement requirement would likely be difficult to make out [39], but it has sufficient prospect of success to be allowed to stand.

Third Party Claim
Licence and acquiescence cannot be used as a sword
A third party claim must stand on its own as an independent and separate claim [45]. Aylen J had allowed Simplot to seek a declaration of licence and acquiescence to support the third party claim. McVeigh J reversed, on the ground that the law is clear that licence and acquiescence can only be used as a shield (a defence) and not as a sword [51], [55]. (Note that while McVeigh J stated that this was an issue of mixed fact and law where the standard of review was reasonableness, her analysis appears to have treated the point as an error of law.)

Induced infringement
Aylen J had permitted Simplot to base the third party claim on a declaration of induced infringement. The basic facts — Elea sold a machine to Simplot that was especially adapted to infringe — would clearly support an allegation of inducing infringement if McCain brought an action against Elea. It is a classic inducement scenario. But the question is not whether the patentee can bring an action against the indirect infringer, but whether the direct infringer can bring an action against the indirect infringer.

First, McVeigh J held that “it is not plain and obvious that Simplot is not a person claiming under the patentee McCain, when it argues Elea induced the breach” [61]. I can’t say I understand this, except that the issue is novel and “there is no conclusive jurisprudence on who can bring an inducement claim” [61], and “there are no authorities to the effect that induced infringement declarations cannot stand as a cause of action” [62]. (Again, this strikes me as a point of law, but McVeigh J reviewed it for palpable and overriding error as being a matter of mixed fact and law.)

This argument strikes me as particularly important, because it does not turn on the indemnification contract between Elea and Simplot, or on any kind of licence between Elea and McCain. So far as I can see, if this ground is ultimately successful, it means that in an inducement scenario, the direct infringer can effectively force the patentee into an action against the indirect infringer, whether or not the patentee wants to sue the indirect infringer.

Contractual indemnity
Simplot also sought to seek a declaration of contractual indemnity in the third party claim. Simplot could clearly have brought an independent action directly against Elea seeking indemnity under the contract, but the question is whether it is within the jurisdiction of the Federal Court to hear such an action. McVeigh J held that the Federal Court has jurisdiction because Simplot’s contractual indemnity claims are incidental to the main action [70]. I must say that I find this very difficult to reconcile with the jurisprudence holding that the FC does not have jurisdiction to determine ownership of a patent when used as a sword: see here. Simplot is clearly using the declaration of contractual indemnity as a sword, not a shield, as it must to base the third party claim. It seems to me that a declaration of patent ownership is much more closely related to the core jurisdiction of the Federal Court than is a declaration of entitlement to contractual indemnity for patent infringement. If the Federal Court does not have jurisdiction to consider the former, I find it difficult to see how it has jurisdiction to consider the latter.

Elea’s Motion
The above discussion focused on Simplot’s motion to amend and to bring a third party claim. Elea also brought a motion to strike the third party claim against it. The issues overlapped to a considerable extent with the points raised by Simplot and were decided the same way for the same reasons: [78]-[84]. Elea also raised distinct arguments of lack of jurisdiction over the subject matter of the case (as opposed to the FC jurisdiction to hear the contract claim); forum non conveniens; and that the claim against it should be stayed until the main action was decided. McVeigh J dismissed all these arguments, but I won’t go into the details as they don’t turn on issues of patent law.

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