Rovi Guides Inc v Videotron Ltd 2022 FC 874 Lafrenière J
2,337,061 / 2,339,629 / 2,730,344 / 2,336,870
In this decision Lafrenière J held all the asserted claims of Rovi’s patents to be invalid as
being anticipated and/or obvious [7] for reasons that turned entirely on the facts. Some
of the claims would have been infringed had they been valid. The most interesting
aspects of the decision related to remedies, and in particular the question of whether
Rovi was entitled to an accounting and his assessment of a reasonable royalty.
Lafrenière J’s analysis of these issues strikes me as being entirely sound and a very
helpful development of the law.
The patented inventions relate generally to “interactive television program guides”
[IPG]—the familiar interactive menus used to select current and upcoming programs.
Television listings were originally provided in paper, then in a non-interactive linear
scrolling on screen guide [9]–[16]. Interactive guides, as the name suggests, allow the
user to scroll through the menu in the way that is familiar to all of us today. Rovi’s
patents, which date from the late 1990s, were directed to high-level concepts. For
example the 061 claims “focus on a user using a device located outside the home, such as
a laptop or smartphone, with a limited IPG to schedule a recording on a device inside
the user’s home” [303]. “According to Rovi, there is no pay-TV provider ‘anywhere in the
world’ with an IPG who does not need a license from Rovi to operate” [552].
The defendant Videotron is a cable TV service provided operating primarily in Quebec
[25]. Videotron initially took a licence from Rovi, effective April 2010 [564], primarily to
avoid litigation risk [369], but declined to renew the licence, which expired in 2016,
considering that there was little value in the increasingly obsolete portfolio [577], [579].
Most of this long decision is devoted to the details of the prior art and the asserted
technology, but in broad terms, it was perfectly clear to everyone in the field that
interactive program guides were the future, and development was limited primarily by
limitations on bandwidth and hardware [154]. The 1990s were “a period of great
innovation in the field of interactive digital audio-visual applications and services” [316]
and the kind of conceptual innovations reflected in Rovi’s patents were natural
developments as the field responded to consumer demand and improvements in
bandwidth and other hardware; consequently, the claimed invention had already been
proposed by others, or were obvious extensions of existing technologies. That’s all I’ll
say about anticipation and obviousness, which were the main substantive issues.
Overbreadth
Before turning to remedies, I’ll note that Videotron tried yet another variant of the
overbreadth argument which was really an (unsuccessful) added matter argument.
Videotron produced the file history of the 870 patent which showed that hundreds of
claims had been added. Videotron argued that “the inventors were not consulted about
the amendments and that the 870C Claims are not described in the disclosure,” and
“[a]ccording to Videotron, this raises an issue whether the claims are broader than the
invention made or disclosed” [364]. Lafrenière J held that even if the inventors had
nothing to do with the application after it was filed “a claim is not invalid simply because
it was added without the involvement of the inventor after a patent application is filed”
[369]. Even though s 38.2 was not mentioned in the decision, this was really an added
matter argument, and Lafrenière J’s conclusion is consistent with O'Reilly J’s holding in
Western Oilfield 2019 FC 1606 [236] that “the factual circumstances surrounding the
amendments were not relevant to this issue. It is a matter of logic, not fact, whether the
amendments are reasonably inferable.” Perhaps Videotron characterized the issue as
being one of overbreadth rather than added matter in an attempt to avoid this rule. In
any event, this represents another failed attempt at giving independent effect to
overbreadth as a ground of invalidity.
Remedies
The most interesting part of the case is Lafrenière J’s discussion of remedies; while the
issue was moot, given his holding on the merits, he discussed it for the sake of
completeness [544]. The first issue was whether Rovi should be permitted to elect an
accounting, or should rather be restricted to damages, in this case a reasonable royalty.
While it is very well established that an accounting is a discretionary remedy, there isn’t
a lot of jurisprudence on when an accounting should be granted in the patent context
that goes beyond the accepted general rules of equity, such as laches or bad faith. It is
usually desirable that the law develop incrementally, and it is convenient that Lafrenière
J’s holding on the merits allowed him to discuss the issue in some detail, in obiter, in the
context of a tricky case.
By way of background, the product at issue is a ‘complex product’ in the sense that the
patented technology contributes only a relatively small part of the value of the product
embodying the technology. This is opposed to a product, like pharmaceuticals, which are
not simple in a technical sense, but rather in the sense that the patented technology
accounts for a large part of the value of the product in which it is embodied. Complex
products raise some special challenges in terms of remedies, as discussed in Biddle et al
(eds), Patent Remedies and Complex Products: Towards a Global Consensus
(Cambridge University Press, 2019) (open access).
Rovi provides products, such as the supply of IPG software and program data [549], and
Rovi and its predecessors made very significant investments and contribution to the
relevant technology over the years [21], [23]. Rovi also provides licensing services,
“allowing customers to license patents that they own” [549]. This evidently includes
licensing by customers, such as Videotron, who do not use Rovi’s products. Rovi
significantly grew its patent licensing business from 2003 to 2013 [549]. Rovi’s business
model is to licence its entire portfolio at a rate that does not vary based on the number of
patents that Rovi has or the licensee practices. [550]
Rovi and Videotron initially entered into a 5 year licence agreement in 2010 [564].
Videotron’s primary motivation for entering into this agreement was reduction of
litigation risk—“Videotron did not want patent issues, including the threat of an
injunction, to distract the company from completing its important project” [567].
Videotron did not consider the market value of different features covered by the patents
in the Rovi portfolio: “freedom from suit was the primary motivating factor that led
Videotron to accept to pay the royalty rates that were ultimately negotiated, and not the
value of any particular patents in Rovi’s portfolio” [568].
When Rovi and Videotron entered into renewal negotiations prior to the expiry of the
licence agreement, Rovi wanted to nearly double the royalty rate [572]. Videotron asked
for a one-year extension to allow it to assess the value of the licensed technology [572].
Videotron repeatedly asked Rovi “to identify those patents Rovi considered to have
particular value to Videotron and that were specific to its platform,” but never received a
satisfactory answer [575]. Videotron therefore “declined to enter into another long-term
licence for what appeared to be aging patents taken from an increasingly obsolete IPG
patent portfolio” [576]. In the end, Videotron was licensed through 2016.
It was against this background that Lafrenière J addressed the question of whether Rovi
should be allowed to elect an accounting. There’s a bit of schizophrenia in the law
relating to the patentee’s election of an accounting. It is perfectly clear that a patentee
does not have a right to an accounting for profits [580] and it is true that in principle
“the patentee bears the burden of proving their entitlement to an accounting of profits”
[581]. But on the other hand, as Lafrenière J noted, “the Court should not decline to
exercise its discretion to award an accounting of profits to a party in the absence of any
compelling reasons of doing so” [580]. For this point Lafrenière J cited Philip Morris
2016 FCA 55 ¶ 8, a trademark case, which in turn cited Apotex v Bristol-Myers Squibb
2003 FCA 263, a patent case, which noted that although equitable remedies, such as an
accounting, cannot be elected as of right “a discretionary remedy is not an arbitrary
remedy. In the absence of proof of a bar to equitable relief, a claimant can expect to be
granted the remedy it seeks in accordance with the principles governing its availability.”
In practice, in a standard patent case, such as an innovator pharmaceutical company
bringing an action against a generic, the successful patentee will normally be allowed to
elect an accounting, subject to any traditional equitable bar (though even then there are
a few cases idiosyncratically denying an accounting). In non-standard cases, the
equitable analysis comes more to the fore. There is no doubt the traditional equitable
considerations of laches or bad faith are applicable, but these have traditionally had a
fairly high bar. But equity does allow for flexibility both in the application of traditional
criteria and in developing new criteria.
In this case, Lafrenière J applied a four-factor analysis, drawn from Apotex v
Bristol-Myers Squibb 2003 FCA 263 [15] (reformatted for clarity):
[581] These factors include:
(i) whether there has been undue delay in commencing or prosecuting the
litigation;
(ii) the patentee’s conduct;
(iii) the infringer’s conduct;
(iv) whether the patentee practiced the invention of the patent in Canada;
and
(v) complexity of calculating an accounting of profits.
The first three factors are related to the traditional grounds of laches or bad faith,
though perhaps more broadly interpreted, while the last two are more specific to patents
and the remedy of an accounting. I should note that neither the FCA in Apotex v
Bristol-Myers Squibb nor Lafrenière J in this case suggested that these considerations
are exhaustive.
(a) undue delay
There was no suggestion of undue delay by Rovi in commencing litigation [583]–[584],
though there was delay by Rovi in prosecuting its patents, which Lafrenière J discussed
under the next heading.
(b) Rovi’s conduct
Rovi’s conduct was an important factor in Lafrenière J’s decision to refuse to allow an
election of an accounting:
[587] the evidence before me establishes that Rovi has a reputation of using
hard-ball legal tactics to pressure third parties to license its patent portfolio. Rovi
was known for its business model of aggregating patent portfolios, seeking
licences, and relying on its prior licences and aggressive use of litigation to drive
risk-avoiding businesses into deals that are consistent with its schedule of royalty
fees. It would spend in the tens of millions of dollars annually on patent
litigation.
Playing “hard-ball” is not close to the kind of bad faith conduct by the plaintiff that is
more traditionally invoked in equity; this is perhaps an illustration of interpreting a
traditional equitable ground broadly in the context of an election of an accounting.
This is not a criticism. The broader point here is that if the parties negotiating this kind
of licence know that a court would grant an accounting rather than a reasonable royalty,
this gives additional leverage to the patentee in the negotiations. This makes it more
likely that the royalty will reflect the value of avoiding litigation, rather than the value of
the technology itself. This is undesirable. The point of patents is to provide an incentive
to create valuable new inventions for the benefit of society, by providing a reward
commensurate with the value of that technology. This gives the inventor high-powered
incentives to develop technology that consumers actually want—the better the invention,
the greater the reward. Giving the patentee a reward that reflects the value of avoided
litigation costs, rather than the value of the underlying technology, is therefore contrary
to the purpose of patent law. So, as Professor Taylor put it, “reasonable royalties should
reflect the value of patented technology rather than patent rights” (49 Ga Law Rev 79,
89, original emphasis); see also Ch 4 of Complex Products. The principle applies
whether the reward is reflected in a legal remedy, such as a reasonable royalty, or is
reflected in a royalty, which, after all, is negotiated ‘in the shadow of the law.’
A second factor relied on by Lafrenière J “is Rovi’s apparently deliberate strategy of
delaying the prosecution of its patents,” which were issued 13–17 years after filing. This
kind of submarine patenting is problematic because it means that potential licensees
may be locked in to the technology when negotiations start, with the result that the
patentee can leverage the threat of an injunction to extract sunk costs, a problem known
as “holdup”. In this case, “Rovi’s own expert witness confirmed that patent holdup was a
problem because once a potential infringer has launched a product it reduces flexibility
and an opportunistic patent holder can then try to extract a larger, unreasonable
licencing fee” [591]. Holdup is certainly a problem when it occurs, and the real debate is
as to whether holdup is a pervasive problem, or rare and idiosyncratic. Given the
evidence before him, it was certainly appropriate for Lafrenière J to take this into
account.
Lafrenière J noted “When it came time to negotiate terms of renewal of the licence,
Videotron repeatedly sought specific information about the value of the Rovi patents. Its
attempts to substantiate and validate the terms for which Rovi wanted a multi-year
contract . . . were rebuffed. It is quite apparent to me that the reason why Rovi declined
to reveal to Videotron a complete list of specific patent claims it considered infringed
was to prevent Videotron from designing around them. Rovi took the position that even
after all four patents in suit expire, Videotron would not be free to continue carrying on
its current activities as there were always other patents that Rovi would be able to assert
against Videotron” [592]–[593]. This illustrates both the holdup problem and that Rovi
wanted to avoid negotiating over the value of the technology itself.
In the end, Lafrenière J held that “Rovi’s questionable business practices cannot help
but serve to colour my view of the value of the features that it claims in the Patents. This
factor weighs heavily against Rovi.” This conclusion strikes me as entirely sound.
(c) Videotron’s conduct
Rovi argued that Videotron was a willful infringer, and this should weigh in favour of an
accounting [596], relying Monsanto v Rivett 2009 FC 317 where Zinn J gave the
following reasons for granting an accounting:
[23] 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. The accounting remedy would lack any deterrent effect
if defendants could use patented technology and retain the profits from such use
subject only to paying a license fee as compensation if and when they are caught.
This is an important point, but it is not complete. First, there are other disincentives to
infringement, even if the potential licensee knows it would be practising the invention.
An infringer will be liable for their own direct costs of litigation and some part of the
patentee’s costs, as well as the indirect costs of management distraction and business
uncertainty. In this case, for example, Videotron initially licenced simply to avoid the
business risk from litigation. Second, a reasonable royalty is intended in principle to
reflect the amount the infringer would have paid as a licensee, but, because of
information problems, the reasonable royalty is unlikely to exactly reflect the royalty
that would actually have been awarded, try as the court might. This means that the
‘catch-me-if-you-can’ strategy entails considerable risk. Further, if an injunction is a
prospect in a sunk costs scenario, the infringer may have to settle for an amount
considerably more than it would have paid for a licence. Consequently, it is not clear that
an award greater than a reasonable royalty is necessary to avoid the ‘catch-me-if-you-can’ problem: see generally Ch 3 of Complex Products.
Further, the ‘catch-me-if-you-can’ problem is not really at issue if the putative licensee
did not know of the patent, or believed in good faith that the patent was invalid or that it
did not infringe; note that in Rivett [8] it seems clear that the defendant was an
intentional infringer. An award greater than a reasonable royalty therefore risks an
unnecessary chilling effect on a party who believes in good faith that they are not
infringing.
Accordingly, in this case Lafrenière J considered that Videotron’s conduct did not weigh
in favour an accouting:
[599] I disagree that Videotron’s conduct was inappropriate, let alone that it
wilfully infringed Rovi’s patents. The evidence suggests that Videotron’s motives
to refuse to renew the licence agreement with Rovi were well-founded. Its
decision was based on a reasonable assessment of the necessity of the patents.
This strikes me as entirely sound.
(d) Whether Rovi practiced the invention of the patents in Canada
Videotron argued that “where the patentee does not practice their patents and only
licenses them, it is ‘almost a rule of law’ to assess damages in terms of a reasonable
royalty [602]. Lafrenière J considered this to be a neutral factor, as the evidence was
mixed as to the extent that Rovi actually practised the invention in Canada [603], [604].
Since this issue is tricky and it turned on the facts in this case, I won’t comment further.
(e) Complexity of Calculating an Accounting of Profits
Lafrenière J noted that there is caselaw holding that the complexity of calculating an
accounting may be a factor, because “the inventor is only entitled to that portion of the
infringers’ profit which is causally attributable to the invention, i.e. ‘perfect
compensation’” [605]. I take this to mean that complexity means uncertainty, and
uncertainty means that the patentee may be over or under-compensated. However, “the
calculation of damages can be just as complex as the accounting of profits” [605] This
suggests it is not complexity, but relative complexity, that is important. As de Montigny
J said in Philip Morris v Marlboro [2015] FCJ No 1564, cited by Lafrenière J, “the Court
is essentially concerned with the proportionality of the accounting remedy in view of the
length or extent of the infringing activity and the likely benefit of the accounting
exercise.”
I’ll note that lost profit damages and an accounting are very similar in structure – it is
the differential profit that is to be calculated, and the only difference is whether it is the
patentee’s or infringer’s differential profits. The difficulty of assessing causation, and
assessment of revenue and apportionment of costs, are likely to be equally difficult to
calculate. Reasonable royalty damages, however, are assessed instead on the basis of a
hypothetical negotiation, and so might be more or less complex that lost profit damages
or an accounting, depending on the facts.
In this case, Lafrenière J held on the facts that “While the complexity of the evidence
could be overcome, I am not satisfied that using any methods proposed by Rovi’s expert
to calculate profits, which would be fraught with insufficient, speculative, and
contradicted evidence would allow me to arrive to reliable and appropriate amount
reflecting Videotron’s profits” [607], and accordingly he held this weighed against
awarding an accounting. In other words, a patentee who wishes to elect an accounting
should propose a sound methodology. This point strikes me as compelling.
I note that in general a reasonable royalty might also be very difficult to calculate in this
type of case, where the patentee is claiming a reasonable royalty for the use of one
relatively minor feature that is part of a complex product, depending eg on whether good
comparables are available—though on the facts in this case Lafrenière J was able to
arrive at a reasonable royalty relatively easily, as discussed below. So while I agree with
Lafrenière J’s analysis in this case, in general the relevance of the complexity of
calculation is a point that needs more development.
C. Reasonable Royalty
After deciding that Rovi was not entitled to an accounting, Lafrenière J went on to
assess a reasonable royalty.
Videotron argued that should a particular Videotron system feature be found to infringe
a valid claim, the appropriate remedy “is a one-time reasonable royalty, capped at no
more than Videotron’s cost to remove or design-around the subject-matter of the
relevant asserted patent claim” [612]. Lafrenière J accepted this submission. The
evidence was that “the absence of such features would not impact the subscriber base for
Videotron” [614] and “subscribers do not make choices around staying or leaving based
on the kind of functionality at issue in this case” [615]. It is implicit that the only impact
of the patented features on Videotron’s revenue is through the subscriber base and not
on the rates that it would charge.
With one caveat, this approach is
consistent with the standard hypothetical negotiation
framework for assessing a reasonable royalty. The potential licensee’s
maximum
willingness to pay for a feature is the difference between the value of
the product with
the feature as compared with the best non-infringing alternative (NIA).
In this case the
NIA is not to include the feature at all. It is significant in this case
that the NIA is not
another unpatented technology which replicates the functionality of the
patented
invention; it is simply to remove the feature entirely. This illustrates
that the “non-infringing alternative” is simply a way of framing the
question of “what would the
licensee have done if it had not infringed”? On the facts in this case,
it would have
removed the patented feature entirely.
There is a small caveat. Though it is not entirely clear from the brief discussion, it seems
that the figure of $150,000 represents the ex post design-around cost. That is, are we
assuming that the patented feature was already incorporated in the Videotron system,
and $150,000 is the cost to remove it. If so, the $150,000 actually represents the holdup
cost, rather than the value of the feature, and so is too high; arguably the true value was
zero. With that said, Videotron’s submission, which was accepted by Lafrenière J, is not
that the design-around cost reflected the value of the patented technology, but rather
that the design-around cost “capped” the reasonable royalty. This is strictly correct. On
the facts, a reasonable royalty reflecting the value of the invention is necessarily less
than the ex post design-around cost, because the best non-infringing alternative is to
remove the feature entirely. No doubt establishing the design-around cost was the
simplest way for Videotron to establish a quantum, and safer than arguing that the
correct royalty was zero.
The uncontroverted evidence was that the approximate cost for such a design change
would have been $150,000 per feature [612], and accordingly that is the royalty that
Lafrenière J would have awarded [624].
