Friday, January 22, 2021

Clarification of Federal Court Jurisdiction over Patent-related Contractual Matters

McCain Foods Limited v JR Simplot Company 2021 FCA 4 Locke JA: Near, Mactavish JJA varg 2019 FC 1635 McVeigh J

2,412,841 / Process for Treating Vegetables and Fruit Before Cooking

The Federal Court’s jurisdiction over patent-related contractual matters was recently expanded in Salt v Baker 2020 FCA 127 (here). This FCA decision on a motion to add a third-party claim clarifies the limits of that jurisdiction. As discussed here, in the action underlying this motion, McCain sued Simplot, one of its competitors, for infringement of McCain’s 841 patent which relates to a system that uses a pulsed electric field (“PEF”) to facilitate cutting of frozen fruits and vegetables [1]. Simplot implemented the system using a PEF system manufactured by Elea, a German company [FC 3]-[5]. Simplot’s contract with Elea specified that Elea would “defend, save harmless, and indemnify Simplot” for patent infringement cases arising from products supplied by Elea to Simplot [FC 74]. Accordingly, when Simplot was sued by McCain, it requested an indemnity from Elea [FC 8, 74]. Elea refused [FC 9].

Rather than bringing an action against Elea on the contract, in the motion under appeal Simplot sought to bring Elea into the infringement action with a third party claim. This was allowed by Aylen J at first instance and by McVeigh J on appeal to the FC. Locke JA’s decision for the FCA, reversed on this point and refused to allow the third party claim. The bottom line is that for the Federal Court to have jurisdiction, it is not enough that the claim relates to a patent: the claim must have a basis in federal law, which as a practical matter means a basis in a federal Act.

A third party claim must stand on its own as an independent proceeding [26]. The question therefore is whether the Federal Court would have jurisdiction over Simplot’s claim against Elea if brought as an independent action. Because the Federal Court is a statutory court, its jurisdiction must be founded on some statutory grant of jurisdiction by Parliament [58].

Of course the Federal Court has jurisdiction over patent infringement [62]. Simplot therefore argued that Elea had induced Simplot to infringe the 841 patent. Locke JA disposed of this with a neat logical point:

[69] either Simplot does not infringe McCain’s patent (in which case it will have no liability to McCain that could ground a claim against Elea), or Simplot does infringe (in which case it cannot claim to be a person claiming under the patentee, and hence lacks standing to sue).

So, Elea may indeed be an infringer by inducement; if McCain had brought an action against Elea for inducing Simplot to infringe, this would be a classic inducement scenario and there would be no question that the Federal Court would have jurisdiction. But the question is not whether McCain can bring an infringement action against Elea, but whether Simplot can. Elea can only be liable for inducement (to anyone) if Simplot is an infringer [70]. But if Simplot is an infringer, it can’t be the plaintiff in a patent action; under s 55(1) only a “person claiming under the patentee” has standing to bring an infringement action, and an infringer is not a person claiming under the patentee [73]–[80]. This analysis provides a clear and logical legal foundation to support the intuition that a direct infringer can’t sue the party who induced it to infringe (at least not for infringement). This means this argument was disposed of not as a matter of Federal Court jurisdiction, but as a matter of standing. This seems right to me: the question isn’t whether Elea is inducing infringement, but whether Simplot can bring the action.

Simplot’s next argument was that the Federal Court has jurisdiction pursuant to s 20(2) of the Federal Courts Act:

20(2) The Federal Court has concurrent jurisdiction in all cases, other than those mentioned in subsection (1), in which a remedy is sought under the authority of an Act of Parliament or at law or in equity respecting any patent of invention, certificate of supplementary protection issued under the Patent Act, copyright, trademark, industrial design or topography referred to in paragraph (1)(a).

Under this provision the party has to be (1) seeking a remedy (2) under an Act of Parliament or at law or in equity (3) respecting any patent of invention. It’s not entirely clear from this portion of the decision, but I take it that the remedy sought by Simplot was indemnification under its contract with Elea [90], [91], and that Simplot argued that this was a remedy “respecting any patent of invention.” These points were not elaborated as the matter was disposed of on the basis of element (2), requiring an “Act of Parliament or at law or in equity.”

Locke JA rejected this argument on the basis that “Act of Parliament” in this provision cannot refer to the Federal Courts Act itself, as this would be impermissibly self-referential [86]. In so holding, he followed Windsor Bridge 2016 SCC 54 [52] on the interpretation of s 23, which deals with different subject matter (eg bills of exchange), but is otherwise similarly worded [85]. Section 20(2) gives jurisdiction when the party is seeking a remedy under an Act of Parliament, but the Federal Courts Act does not confer rights for which a remedy might be sought, so it cannot be the requisite “Act of Parliament.” That is, the Federal Courts Act “it is not itself a federal law under which the Company can seek relief, however ‘relief’ is defined”: Windsor Bridge [52].

This provides a good basis for distinguishing Salt v Baker, which expanded the previous understanding of the Federal Court’s jurisdiction. Locke JA noted that “Salt concerned an application under section 52 of the Patent Act to vary an entry in the records of the Patent Office. Section 52 of the Patent Act therefore constituted a specific statutory grant of jurisdiction to the Federal Court” [63]. That strikes me as an entirely sound distinction. It is not merely technical. Section 52 gives the Federal Court jurisdiction to vary records relating to title. Determining who actually has title will normally require interpretation of the relevant assignments, but also application of the Patent Act priority rules which are set out in what is now s 49 of the Act. Thus, varying the title records is almost always closely entwined with application of substantive provisions of the Act.

Turning back to the jurisdiction conferred by s 20(2), what about focusing on a remedy “at law”? If Simplot is seeking to enforce its contractual right to indemnity, that looks like a remedy “at law.” Locke JA rejected this argument, saying “Because both the jurisdiction of the Federal Court and patent law in general must be based on statute, Simplot must nevertheless base its argument on a federal statute” [88], and moreover, a federal statute other than the Federal Courts Act [88]. This remark doesn’t directly address the “at law” phrase, but Windsor Bridge 2016 SCC 54 and especially Quebec North Shore Paper [1977] 2 SCR 1054, 1058, 1065-66, make it clear that “at law” or “or otherwise” must refer to federal law, which is to say either a statute or federal common law (if the latter exists).

So, Locke JA’s decision is solidly based in the SCC jurisprudence he relies on. My difficulty with all this is that the SCC in Kellogg [1941] SCR 242 held that the Exchequer Court had jurisdiction to determine ownership of a patent based on the “in equity” phrase of s 22(c) of the Exchequer Court Act, which is the same as s 20(2) in relevant respects. The appellant in that case sought a declaration that it was the owner of a patent by virtue of the fact that the inventor was an employee and consequently a trustee of the invention for the company [p246]. The SCC noted that the provision gave the Exchequer Court jurisdiction “in all cases where a ‘remedy is sought’ ‘respecting any patent of invention’ ‘under the authority of any Act of the Parliament of Canada or at Common Law or in Equity.’ The remedy sought by the appellant . . . is evidently a remedy in Equity respecting a patent of invention” [p250]. Now, I can readily see how Kellogg might be distinguished on the basis that a claim respecting ownership of a patent is more closely connected to patent law than a claim under the indemnity provision at issue in this case. But that distinction would presumably turn on the phrase ““respecting any patent of invention,” and the question at hand is the interpretation of the “at law or in equity / or otherwise” phrase in s 20 and 23. On that point I’m having a hard time reconciling Kellogg with Quebec North Shore Paper and Windsor Bridge. Though I don’t want to express a firm opinion, so far as I can tell, Kellogg is probably no longer good law on this point. And after all, that provision was only a alternative basis for jurisdiction, which was founded primarily on the statutory conflict provisions of the Patent Act. This aspect of Kellogg does seem to be universally ignored. (I'm not sure I'm persuaded by the SCC interpretation of s 23 in Quebec North Shore Paper and Windsor Bridge, but that's beside the point.)

Finally, “Simplot argues that it would be put in an absurd position of having to prove infringement in a separate provincial court proceeding in order claim its indemnity” [90]. Locke JA was expressly sympathetic to Simplot’s situation “of having to commence separate legal proceedings in a different court to enforce its claims in warranty and indemnity against Elea” [91]. But as he noted, “concerns about a multiplicity of proceedings and/or inconsistent results cannot justify finding that the Federal Court has jurisdiction where no federal statute grants it jurisdiction” [90] I have to quibble a bit; while it is of course true that such concerns alone cannot be the basis for Federal Court jurisdiction, they may be relevant to a purposive interpretation of the relevant provisions. For example, the FCA in Salt v Baker [40]–[44] relied on such considerations in interpreting s 52. With that said, I have to agree that such purposive considerations cannot overcome the authorities relied on by Locke JA. So far as I can see, while there may be a real problem here, it will need some statutory fix to extend the Federal Court’s jurisdiction in order to solve it, assuming that is constitutionality possible.

I must say that it’s not clear to me that there will necessarily be duplication on the particular facts of this case, as we have been given very little of the contractual terms. To the extent that the contract requires Elea to indemnify Simplit for infringement, then once infringement is established in this action, it is not clear to me why non-infringement would need to be re-litigated in an action on the indemnity claim. To the extent that the contract requires Elea to defend the action, then I don’t see how the indemnity claim on that point would turn on whether Simplot actually infringed.

To summarize, while Simplot had a convoluted infringement argument that failed, at the end of the day, Simplot was essentially trying to bring an action against Elea in Federal Court to enforce the contractual indemnification provision. It is perfectly clear that the Federal Court does not have jurisdiction in a case “purely and simply concerning a contract between subject and subject”: Kellogg 249. The issue is whether the fact that the contractual provision at issue is in respect of an indemnity related to patent infringement is sufficient to bring it within the jurisdiction of the Federal Court. The answer is no. It is not enough that the claim relate to “any patent of invention,” the claim must have a basis in federal law.

A final point on this topic is that in Libbey-Owens-Ford Glass Co v Ford Motor Co (1968), 55 CPR165 (Ex Ct), the Exchequer Court held that there was a “good arguable case” that a claim against a third party for indemnity based on contract by a defendant in the context of a patent infringement action fell within the jurisdiction of the Exchequer Court [92]. Locke JA held it cannot be reconciled with the SCC jurisprudence he relied on and it can no longer be considered good law.

To wrap this all up, Simplot also sought to amend its statement of defence to allege a defence based on an implied licence or acquiescence, flowing ultimately from the fact (as alleged) that Elea sold its systems worldwide with McCain’s knowledge. This was permitted by Aylen J and McVeigh J. As discussed here, I found that aspect of McVeigh J’s decision a bit difficult to follow, but Locke JA has clarified that it really just turns on the facts, and while “Simplot’s implicit license defence is light on details, and it may prove difficult for it to adduce evidence sufficient to prove the existence of a license that would benefit it” [32], this is not enough to refuse it to go forward. (And see similarly [53] regarding the acquiescence defence.)

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