Tuesday, April 19, 2022

Liability of the Parent Corporation / Implied Obligation of Confidence

Angelcare Canada Inc v Munchkin Inc 2022 FC 507 Roy J

2,640,384 / 2,855,159 / 2,936,415 / 2,936,421 / 2,937,312 / 2,686,128 / Diaper pail cassette

In this decision Roy J held many claims of Angelcare’s six patents to be valid and infringed by Munchkin. The holding turned largely on the facts, but there are a few points of interest relating to inducement, liability of the parent corporation, an implied obligation of confidence and overbreadth.

Overview

The invention at issue relates to diaper pail cassettes. A cassette is an insert filled with plastic film which fits into a diaper pail, forming a diaper pail assembly, that dispense plastic bags bags to contain soiled diapers that are put into the pail. The cassettes are replaced once the film is used up, just as the cartridge in an ink jet printer is replaced one the ink is dry.











Angelcare held six patents, consisting of the 128 patent, and a family of divisional patents with 384 patent being the parent [32], [42]. The 128 patent was originally owned by Playtex, and was transferred to Angelcare in 2019 [8]. The claims at issue mostly relate to the cassette, but some relate to the assembly of the cassette and pail. Angelcare or related companies sold diaper cassettes and pails under the Diaper Genie brand. Munchkin’s cassettes were designed with the aim of being compatible with the Diaper Genie pails [14]. Until Munchkin launched its own line of pails in 2016, the Munchkin cassettes were compatible only with Diaper Genie pails: [16], [18].

Claim construction turned almost entirely on the facts. Munchkin argued non-essentiality in respect of only one element of the 128 patent [110]. After noting the presumption of essentiality [109], Roy J found that this element was essential, on the basis that a variant would have a material effect on the way the invention worked: see [38]–[39], [112]–[115]. Infringement followed on the facts in light of claim construction: see eg [163], [191].

The anticipation argument largely failed on the facts. One twist is that four claims of the 384 patent were anticipated by Angelcare’s own 138 patent” [303], [326]. While the decision is not explicit on this point, it appears that it was a matter of anticipation rather than double patenting because the 138 patent was a co-pending application owned by Playtex at the claim date of the 138 patent. These were the only infringed claims that were held invalid on any ground.

The obviousness attack failed on the facts. There was generally no difficulty in identifying the inventive concept of the patents: [394], [396], [403], [404]. The claimed invention was an improvement on the original Captiva/Diaper Genie II system that had been developed by Playtex and Angelcare, and that original system was accordingly the closest prior art [50], [407]. There was some dispute as to whether this was part of the common general knowledge, but that issue made no real difference, as it was not contested that the Captiva/Diaper Genie II system was part of the prior art, and Munchkin was consequently entitled to rely on it as the basis for the obviousness attack [382]. Roy J found on the facts that the differences between that system and the claimed inventions were not obvious.

Roy J had no difficulty in disposing of very tenuous arguments relating to insufficiency, ambiguity, utility and double patenting.

Inducement

Angelcare alleged that Munchkin’s sale of cassettes to end-users had induced infringement of certain assembly claims by those end-users [250]. The cassettes were suitable for use only in combination with patented assemblies (whether used with Angelcare or Munchkin pails) [256]. In the US, this would give rise to what is now usually called contributory infringement—sale of a component especially adapted for use in a patented invention contrary to 35 US § 271(c). However, as Roy J noted, in Canada, in MacLennan 2008 FCA 35 ¶ 33, the FCA stated that “the courts have consistently held that selling a component intended to be incorporated in a patented combination (or process) without anything further, does not constitute an inducement to infringement, even where this component cannot be used for any other purpose.” Consequently, in Canada, such situations are treated as turning on inducement, which requires some additional encouragement beyond mere sale of the part.

Now, it is true that the courts have often stated that contributory infringement in the US sense is not part of Canadian law, but as I pointed out in my article Contributory Infringement in Canadian Law (2020) 35 CIPR 10, there are very few cases which actually decline to impose liability in that scenario, with the most recent being Permacon [1988] 2 FC 179, decided over thirty years ago. Instead, whenever the part sold by the indirect party has no substantial non-infringing use, the courts have consistently found the necessary inducement, sometimes on a slender basis, such as rudimentary assembly instructions in Windsurfing (1985) 8 CPR(3d) 241 (FCA), or the equivalency table in MacLennan.

In this case, Roy J found influence sufficient to establish inducement primarily on the basis of the label affixed on the Munchkin cassettes which clearly directed the end-user to use the Munchkin cassettes with the Diaper Genie diaper pails [266]. [267]. As Roy J noted, this finding is entirely consistent with MacLennan, and the many pharma cases which have found inducement on the basis of the product monograph [268]–[270]. This confirms that, at least in the case of a product especially adapted to infringe, any indication by the indirect party that the product will be used in a patented combination will be sufficient to establish the necessary influence.

The third prong, knowing inducement, was easily established on the facts [272].

Liability of Parent Corporation

To this point I’ve omitted mention of corporation structure of the defendants, who I have referred to as Munchkin. To be more precise, there are two defendants, Munchkin, Inc, a US company, and Munchkin Baby Canada Ltd, its Canadian subsidiary [11]–[12]. The infringing cassettes were designed by Munchkin Inc [14]–[22], but it was not established that Munchkin Inc had any role in the manufacture, use or sale of the Munchkin cassettes or diaper pails in Canada [281]. (Munchkin Canada distributed and sold the products in Canada; it’s not clear to me where the products were made or by whom [282].) Roy J held Munchkin Inc liable on the basis of its role in the design of the infringing products. The entirety of his analysis on the issue is as follows (my underlining):

[282] The Plaintiffs do not address this issue directly in their closing arguments. However, the evidentiary record they mounted contained information about design decisions that came directly from Munchkin, Inc. in California, which resulted in the infringing products sold in Canada. The Court heard testimony from Mr. Johnson and Mr. Dunn, two Munchkin Inc. Officials, about how Munchkin’s cassettes were designed to be compatible with Diaper Genie’s diaper pails. Mr. Johnson testified that, to his knowledge, there have never been designers at Munchkin Canada (Johnson, TT Vol. 21, p. 2:17-21). Mr. Carvelho testified that all of the Munchkin products distributed in Canada are designed at Munchkin, Inc.’s Los Angeles headquarters (Carvelho, TT Vol. 19, p.183:10-16). He also explained that there are only seven Munchkin Canada employees and that their roles are limited to sales, marketing, and warehousing (Carvelho, TT Vol, 19, p.183:22-28). Moreover, Munchkin Canada’s products are merely a subset of what is offered in the United States; there are no unique items in Canada (Carvelho, TT Vol. 19, p.184:18-25). The Court also heard testimony from Mr. Carvelho about Munchkin’s strategy to advertise that their cassettes are compatible with Diaper Genie pails, with labelling designed to this effect. There was no distinction made between the decisions undertaken for the American market and the Canadian market to this effect. As such, the Plaintiffs advanced evidence that the American parent company made design and marketing decisions that had a direct impact on the resulting infringing activities in Canada. As such, Munchkin, Inc. is liable for any proven infringing activities in Canada.

Roy J cited no authority, and I find this passage puzzling. The gist seems to be in the penultimate sentence, which is to the effect that Munchkin Inc, caused the infringement in Canada, specifically in by (1) designing the infringing cassettes and (2) making the decision to affix labels advertising compatibility with the Diaper Genie pails.

Taking the design issue first, I have difficulty seeing how this in itself can give rise to liability. Suppose a device is patented in Canada, but not in France. If I manufacture it in France I am not infringing the Canadian patent. If I then sell and deliver it, in France, to another party who imports it into Canada, I am still not infringing the Canadian patent, even though I have caused the infringement. This point is well-established in the context of the Saccharin doctrine, which establishes that if a process that is patented in Canada is used abroad to make a product which is itself unpatented, importation and use in Canada of the product is an infringement. At the same time, it is well established that the user of the invention abroad is not an infringer under the Saccharin doctrine, even though the product is ultimately imported by another party: see Hospira v Kennedy Trust / infliximab 2020 FCA 30 ¶ 33–37 rev’g on this point Hospira v Kennedy Trust / infliximab 2018 FC 259; Cefaclor liability 2009 FC 991 ¶ 281–84; Saccharin Corporation v Reitmeyer & Co (1900) 17 RPC 606 (Ch) 612. It is for this reason that the Saccharin doctrine does not violate the principle that patent rights are territorial: Hospira v Kennedy Trust / infliximab 2020 FCA 30 ¶ 36. Accordingly, it is clear that if Munchkin Inc manufactured the cassettes in the US, that would not in itself give rise to liability for infringement of the Canadian patent, even if the cassettes are ultimately imported. It’s difficult to see how design rather than manufacture could lead to a different result.

The second point concerns the labels instructing use in an infringing combination. It may be that a party can be found liable for inducing infringement in Canada by virtue of acts abroad, but it’s not clear that this can support Roy J’s conclusion either. First, Roy J did not undertake an inducement analysis, so it does not appear that this was the basis on which he imposed liability. Third, liability based on inducement would at most support liability for the assembly claims, which were found to be infringed by inducement. Further, liability based on inducement, even for the assembly claims, gives rise to significant issues of extraterritoriality. Suppose a drug is patented in Canada but not in the US, and a generic pharma company sells the drug in the US accompanied by instructions to use it in a way that would infringe the Canadian patent. It sells the same drug in Canada with a skinny label that excises the infringing instructions. A Canadian vacationing in the US reads the PM in the US, and, as a result, uses the drug in an infringing manner on returning home to Canada. Imposing inducement for liability in such circumstances would certainly raise serious issues of extraterritoriality. Munchkin’s decision to affix the labels in the US is perhaps distinguishable, on the basis that the decision was specifically aimed at Canada. But whether that is sufficient to overcome the extraterritoriality concerns would require a full analysis. Finally, the decision to affix labels, taken abroad, is similar to the design decision, also taken abroad. If the latter does not give rise to liability, it is not clear why the former should be any different.

Implied Obligation of Confidence

Roy J’s decision provides some guidance on the question of when an obligation of confidence can be implied so that a disclosure is not a disclosure to the public. While Roy J applied established law and his decision turned on the facts, it is nonethelss helpful, as there is relatively little caselaw on this point in the patent context.

The inventor, a Mr. Morand, had emailed a CAD file of a prototype of the patented cassette to Initial, a third party prototype manufacturing company located in France, more than a year before the earliest filing date [332]. Angelcare argued this disclosure was anticipatory, and Munchkin responded that it was not a disclosure to the public because it was subject to an obligation of confidentiality [336]. There was no express non-disclosure agreement, so the question was whether an obligation of confidentiality could be implied [342].

Relying on Corlac 2011 FCA 228 and Lac Minerals [1989] 2 SCR 574, Roy J held that there was an implied obligation of confidence. This was based in part on the view that “The manufacture of articles by a party for another would fall prima facie in that category carrying an obligation of confidentiality” [339], but he emphasized more specifically not just third party manufacturing, but manufacturing of prototypes:

Initial was in the business of making prototypes, which inherently suggests that an obligation of confidentiality is present” [348]

See similarly [351]. This is even though this was the first interaction between Morand and Intial, or at least very early in the relationship [340], [347].

Mr Morand also sent the same file to a different firm, Plasti-Lax, to create technical drawings for mould-making [333]. This was also found to be subject to a obligation of confidence, though the issue was easier because there was a “longstanding business relationship of trust and cooperation” between the parties.

Roy J also found that the Plaintiffs’ reliance on article 1434 of the CCQ was not helpful, because it added nothing to the test set out in Lac Minerals, and “The legal test set out in Lac Minerals, which is consistent with art. 1434 CCQ and the jurisprudence that Quebec’s courts have developed on it, should continue to guide the Court” [346].

Overbreadth

Munchkin also argued that the claims of several of the patents at issue were overbroad. [445] Roy J began by noting at [445] that “in some quarters it was argued that overbreadth does not constitute a proper ground of invalidity.” This is perhaps an oblique reference to my article Overbreadth in Canadian Patent Law 33 IPJ 21, 33 IPJ 147, in which I showed that the overbreadth argument is almost always redundant, and argued that there is no clear justification for striking down a patent which is otherwise new, useful, non-obvious and properly disclosed. As Roy J went on to point out, this argument was rejected by the FCA in Seedlings 2021 FCA 154 (blogged here), in which Locke JA expressly affirmed that “overbreadth remains a proper ground of invalidity” [50]. But as Locke JA acknowledged “[o]verbreadth often overlaps with other grounds of invalidity,” and this “makes it difficult to define circumstances in which a patent claim would be invalid for overbreadth but not also invalid on other grounds” [50], [51]. With Seedlings having given new life to overbreadth, the law will have to wrestle with new questions: What exactly constitutes overbreadth? What is the test? How it is distinct from other invalidity attacks? What justification is there for invalidating a patent to an invention which is new, useful, non-obvious and fully disclosed?

Roy J’s decision in this case does not really advance the law on those points, simply because the more difficult questions were not engaged on the facts. Roy J did begin with a general analysis, saying that “To determine whether a patent is overbroad, the Court assesses whether the claims, read fairly on what the patent discloses in the disclosure and the figures, are too wide and claim more than was invented. . . . As discussed recently by Justice Grammond, findings of overbreadth will usually occur when the patent fails to claim an essential element of the invention” [452]. This does not explain how overbreadth is different from other grounds of invalidity; in particular, if the patent fails to claim an esssential element of the invention, it will normally—dare I say inevitably?—be invalid for anticipation or obviousness.

Munchkin’s arguments on the facts were difficult to understand: so, Roy J started his analysis by saying “It is unclear how it can be said that more than this invention is claimed” given the facts acknowledged by Munchkin itself [454], and Roy J dismissed the overbreadth attack on other patents by noting that “Munchkin has not shown how these two Patents are overbroad in that the claims are broader than the invention disclosed in the specification or broader than the invention” [456]. Without going into the details reviewed by Roy J, I will say that I agree with his analysis, and his conclusion that Munchkin failed to make out any real case for overbreadth.

My sense is that what is going on is that parties seeking to attack the validity of a patent recognize that they have a new weapon in the overbreadth attack, but no one is really sure what that new weapon is, or how it should be used. I expect we will continue to see a series of futile overbreadth attacks until one day something sticks, and the law begins to develop more systematically; or nothing ever sticks, and defendants simply give up on the overbreadth attack. Time will tell, but this particular decision does not provide any signposts.

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