Accounting Denied

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].

Use of ex Post Information in Assessing a Reasonable Royalty

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 yesterday’s post. Despite his holding that all the asserted claims were either invalid or not infringed, Grammond J went on to consider remedies, which had been fully argued. This post discusses a timing issue that arises in assessing a reasonable royalty. In particular, I will argue that the timing of the hypothetical negotiation construct used in assessing a reasonable royalty must reflect its purpose, which is to ensure proper compensation. This implies that there is no strict rule that the hypothetical negotiation takes place at the time of first infringement, nor is there a rule that ex post information cannot be used.

Compound Interest is Here to Stay

Grenke v. DNOW Canada ULC 2018 FC 564 Phelan J
            2,095,937

This decision is the damages portion of a bifurcated action, following Weatherford Canada Ltd v Corlac Inc 2010 FC 602,, in which Phelan J held the plaintiff Grenke’s 937 patent to be valid and infringed by the defendants. (Weatherford, a licensee of Grenke, has settled, and the names of various parties, including Corlac, have changed through acquisition and otherwise, which is why the case names are so different: [11]-[17]). The patentee elected damages rather than an accounting [2].

In oil production, a “stuffing box” is used to seal the top of an oil well and prevent leakage of the oil as it is being pumped out of the ground. The 937 patent claims a new type of environmentally-friendly seal assembly, which minimizes leakage [18]-[19]. There was substantial regulatory and environmental pressure to minimize leakage, and the patented technology was a game-changer [21], [45]. The decision is quite straightforward, and it is a good example of damages assessment in the context of a simple product, in which the patented technology contributed a major part of the value of the end-product. (This is in contrast to complex products, such as a smartphone, where any single technology contributes only a small part of the overall value.) Perhaps the most legally interesting aspects are that Phelan J allowed full recovery for convoyed sales, refused to grant punitive damages, and granted compound interest.

To begin, Phelan J emphasized the need to use a “broad axe” in assessing damages: while perfect compensation is the goal, the reality of litigation is that perfection can rarely be achieved: [71]-[73]. This point was repeated at a number of instances, though in most cases the inaccuracy in question would be small in any event: [84], [99], [101], [119], [130], [168]

The basic framework is to assess how many sales the patentee lost as a result of the infringing competition, and to calculate lost profits on those sales, and then to assess a reasonable royalty on all the remaining infringing sales. The parties did not really disagree on this framework, or indeed any major conceptual issues, but only on the application to the facts.

Phelan J accepted that market share was appropriately used by the plaintiffs in this case as a proxy for determining the plaintiff’s lost sales [91], [96], pointing out that “This is not a case with a small number of customers. . . which might require “customer-specific” evidence” [97]. Phelan J held on the facts that the appropriate market was “the ‘environmentally friendly stuffing box market’” [105]. There is something of a debate as to whether and when fixed costs can be deducted in calculating profits (see here, here, and here), but in this case the parties apparently agreed that only variable costs should be deducted [115].

Reasonable Royalty
With respect to the reasonable royalty, Phelan J remarked:

[136] In constructing the hypothetical negotiation of the royalty rate, it is important to take into account the realities on the ground. It is particularly relevant that GrenCo had market strength because of its technology and also important is that all the evidence suggests Grenke would have been an unwilling seller, difficult to deal with, and prepared to push the limits of “reasonableness” to the edge (and perhaps over). This all suggests a rate at the upper end of reasonableness. It is somewhat ironic that Grenke would be deemed, under this hypothetical negotiation, to accept any amount of royalty rate given his general intransigence to the point of “going down with his ship” rather than to settle. However, the Court must accept some of the realities in constructing the hypothetical negotiation and resolution.

There is indeed considerable artificiality in constructing a hypothetical negotiation in a case in which it is clear on the facts that the patentee would never have licensed in reality. But recall that a reasonable royalty is only assessed in respect of sales which the patentee would not have made in the real world; if the patentee can prove that it would have made the sale, then it will be entitled to lost profits. Sometimes, this will be because the infringer was selling into a market that the patentee had not entered. In this case, the parties were competing in the same market, and patentee is seeking lost profits on infringing sales that would not have been captured by the patentee, but which would instead have gone to a different competitor with a non-infringing product. That is, for reasons of pre-existing relationships, distribution, etc, if the particular customer had not bought from the defendant, it would have bought from a non-infringing third party. In that case it makes sense for the patentee to accept that since it would not have made the sale in any event, it would be better to allow the infringer to make the sale as a licensee, so that the patentee gets a return in the form of a royalty, rather than losing out altogether. The artificiality arises because it is only with hindsight that we know that the patentee would lose the sale in any event. At the time, it would have made sense for the patentee to fight for the sale, rather than license the defendant, because (unlike the case in which the defendant is selling into a different market), the patentee would rather have the profits on the sale than a royalty, and it can’t license only for those sales it won’t get, because it doesn’t know at the time that it won’t get the sale.

The larger point, perhaps, is that the objective is to assess a royalty which is reasonable in the circumstances, and a hypothetical negotiation is no more than a useful heuristic, which should not be taken too literally if problems arise in applying it. With that all said, I am not suggesting that it is wrong to assess a reasonable royalty “at the upper end of reasonableness” when the patentee was competing in the same market. I don’t have an opinion on that issue. My point is that the hypothetical negotiation framework is not particularly helpful in resolving the issue.

Turning to the calculation itself, the parties both used the “anticipated profits approach,” supplementing this analysis with the “minimum willingness to accept (MWA) versus maximum willingness to pay (MWP)” [135].

The anticipated profits approach supposes that the parties to a hypothetical negotiation, which takes place at the time of first infringement, split the profits they anticipate the infringer will make from the use of the patented technology. As noted by Phelan J, this approach has previously been used in Jay-Lor 2007 FC 358, and AlliedSignal 1998 CanLII 7464, 78 CPR (3d) 129 aff`d (1999) 86 CPR (3d) (FCA). In “A New Framework for Determining Reasonable Royalties in Patent Litigation,” (2016) 68 Florida Law Review 929, Tom Cotter and I argue that instead of anticipated profits, a split of the actual profits should be used. The difference is important only when actual profits are different from the profits that would have been anticipated at the time of first infringement. Despite the name “anticipated profits” approach, I believe that using actual profits would be consistent with Canadian cases. Note that the anticipated profits already relies on actual profits to a large extent. Profits are sales multiplied by profit margin per unit, and the “anticipated” profits approach normally (always, in Canadian cases) uses the actual sales, not anticipated sales, in calculating the “anticipated” profits. We argue that there is no good reason to use actual sales combined with anticipated profit margin. Further, it appears that in AlliedSignal, the calculation did use the actual profits [213]-[214],though it is a bit difficult to tell as the detailed calculations are in a confidential Appendix. (Note that AlliedSignal never used the “anticipated profits” terminology.) Jay-Lor did refer to anticipated profits, but in calculating anticipated profit margin, it appears that actual post-infringement costs (“over the past four years”) were used to assess the profits that would have been anticipated [142]. If that is right, Jay-Lor used an actual profits approach, with an anticipated profits terminology, or, at most, there was no difference between actual and anticipated profits. In this case, the details of the calculation are not discussed, as the parties were largely in agreement, so it is not clear whether actual or anticipated per unit profits were used. In summary then, if there is a case in which anticipated and actual profits are different, it would be open to Canadian courts to use an actual profits methodology, and in my view this would be preferable in principle, for reasons explained in detail in my article with Professor Cotter.

With respect to the MWP versus MWA analysis, Phelan J noted that in Merck v Apotex 2013 FC 751, (blogged here) “the Federal Court indicated that if there were no overlap between the MWA and the MWP, then the reasonable royalty is the MWA. The “minimum” of the MWA must, logically, be the lower end of the range – therefore, the application of Merck FC to this case leads to the conclusion that 8% is a reasonable royalty rate” [143]. Here again, I would suggest that we keep in mind that a reasonable royalty is being assessed only in respect of sales which the patentee would not have captured. In such circumstances, the patentee’s MWA will be its marginal cost, normally zero, because if the negotiation breaks down, the patentee will not make the sale itself, and so will not get any return at all. If the MWA is higher than the MWP, it must be that there was a conceptual error in assessing the MWA (assuming the patented technology is actually valuable, not detrimental, as was clearly true in this case). The details of the assessment of the MWA was not described. However, the MWP / MWA analysis gave much the same result as the anticipated profits analysis.

In US law, the most commonly used approach to assessing a reasonable royalty is to look to comparable licences. In this case, the defendants suggested that lower rates that had been negotiated in respect of the same technology by Weatherford should be used. Phelan J rejected this, correctly in my view, noting that the deal included cross-licensing which would have depressed the rates.

Phelan J also allowed recovery of lost profits for convoyed sales, on the basis of but for causation, without any further restriction:

[163] If compensation is not provided for such add-on items, then the patentee is not being put in the position that they would have been in but-for the infringement (resulting in less than perfect compensation). If the Plaintiffs can show, on a balance of probabilities, that such sales would have been made by the Plaintiffs in the but-for world, then in my view this is a loss for which they should be compensated. This approach is consistent with the limited Canadian case law on the topic, and I would reject the requirement suggested by the Defendants that such convoyed sales must have no function independent of the patented object.

In my view, Phelan J’s conclusion is sound for the reasons he gives. If the convoyed sales are reasonably foreseeable from the sale of the patented technology, as was clearly the case here, then the patentee would face a choice between charging a higher price for the patented goods, and losing some sales and convoyed sales, or charging a lower price for the patented good, in anticipation of profits from convoyed sales. These are just different strategies for realizing the value of the patented technology, and the damages award should not turn on which marketing strategy was chosen.

Punitive Damages
The plaintiff sought punitive damages. Phelan J noted that:

[186] At the liability phase of this action, the Court found that the Defendants:

a) intentionally set out to create a product which they knew or ought to have known would infringe the Patent;

b) have used a stuffing box design which is the same as the Grenke design, and profited from the sale of the infringing articles over a 10 year span (until enjoined by this Court from further infringement);

c) were considered by this Court to have been unjustified and egregious; and

d) had denied infringement of the Patent, yet at the same time claimed ownership in the Patent and argued that the Plaintiffs had in fact infringed their patent rights.

Phelan J refused to award punitive damages, emphasizing that “patent infringement alone, even knowing infringement, is not sufficient to ground an award of punitive damages,” [185] (citing Bauer Hockey 2014 FCA 158 [29]), and similarly, “there must be something more than knowing infringement to support an award of punitive damages”[189]. The various allegations regarding infringement and validity were considered part of the “brawl” over rights in the technology. No doubt this can be distinguished on the facts from Martineau J’s Eurocopter decision (blogged here), but it does evince the traditional reluctance of the Canadian courts to award punitive damages.

Interest
The Federal Court has historically been reluctant to grant compound pre-judgment interest, in part for the very good reason that the relevant statutes relating specifically to interest did not allow compound interest: see Federal Courts Act, s 36(4)(b), as noted by Phelan J at [205] (and the discussion here). There has been a recent and welcome trend to granting compound interest nonetheless, based not on the interest provisions, but on the basis that the loss is recoverable as an element of compensation, under s 55(1). The rationale is that in reality, a party with more money in its pocket will put that money to work, and reinvest the profits, which will also go to work, and compound interest is therefore required to provide full compensation. That is the approach taken by Phelan J at [193], [209] following Zinn J in Eli Lilly / cefaclor, 2014 FC 1254 (discussed here). Phelan J stated that “I concur with Justice Zinn’s comments that in today’s world, compound interest is an accepted form of redress” [194].

An interesting point arises from the approach of awarding compound interest on the basis of s 55(1). Phelan J began his discussion of interest by noting that the award of interest under s 36 of the Federal Courts Act is subject to judicial discretion to disallow interest under s 36(5), which discretion is “to assist the court in controlling the litigation process and to avoid inappropriate compensation” [191], quoting Apotex v Merck 2006 FCA 323 [140]. Phelan J also stated that compound interest was also awarded “[a]s a matter of discretion taking into account the equities and the conduct of the Defendants” [211]. But s 55(1) is normally understood as entitling the patentee to its legal damages, with only equitable remedies, such as an accounting, being subject to discretion. If compound interest is awarded as compensation under s 55(1), can it be discretionary? I’m not sure of the answer to this question, particularly in light of the argument for allowing the court to use its discretion in order to control the litigation process. The question did not arise in this case, as Phelan J did not exercise his discretion to disallow compound interest for the period for which it was claimed, but it presents something of a conundrum. No doubt the best solution would be updated interest provisions in the Federal Court Act, but there is little prospect of that happening, and I expect the issue will have to be resolved judicially.

“How Is That a Proxy for the Value Associated with the Use of the Invention?”

Arctic Cat Inc v Bombardier Recreational Products Inc 2016 FC 1047 Roy J
            2,322,738

Complex products embody hundreds or thousands of patented components, all of which contribute a small amount to the overall value of the product. When one of those patents is infringed, how are damages to be assessed? That is problem is central to much of the high-profile litigation taking place internationally in the ICT sector concerning standard-essential patents (SEPs) subject to a commitment to license on fair, reasonable and non-discriminatory (FRAND) terms. Essentially the same problem was also raised, albeit in obiter, in Arctic Cat v BRP. As noted in Friday’s post, Roy J held that Arctic Cat’s 738 patent was not infringed. While it was therefore strictly unnecessary to consider damages, the case had not been bifurcated (“This is a case where bifurcation should have been more carefully assessed [349]), and Roy J went on to make a number of observations on the damages issue, though without arriving at any final figure. His discussion is of considerable interest as Canadian law has relatively few cases assessing damages for infringement when the invention is a minor part of a complex product.

The patentee sought damages in the form of a reasonable royalty for the use of the invention [352] and experts for both parties advanced a variety of methods for assessing those royalties. Ultimately Roy J concluded that most of the proposed methods were wholly unreliable, though one was inadequate as presented, but, with adjustment, could serve as a starting point [413]. Roy J’s criticisms of the various methodologies all turned on one fundamental point: “the Court must strive to compensate the claimed invention solely with respect to damages that can be attributed to the invention” [353]:

Where the invention is but one individual component of a multi-component product, the damages in the form of royalties must be in order to compensate the infringement of that individual component of the multi-component product that is captured by the invention. In effect, the royalty recognizes that the sales by the infringer are an illegal transaction which requires to be compensated. However, it is only the infringement that requires compensation.

The problem is that the invention is a method of tuning a two-stroke engine, in particular a snowmobile engine, for optimal performance by setting the ignition timing according to the exhaust temperature (see Friday’s post). How is the value of that invention to be separated from the value of all the other components of a snowmobile, or even of a snowmobile engine [354]? I will argue below that the method that found favour with Roy J is just as susceptible to this critique as those he rejected.

A New Framework for Determining Reasonable Royalty Damages in Patent Litigation

Following a jury trial in 2012, a US federal district court entered judgment in the amount of $1 billion in favor of Monsanto in a patent infringement dispute against DuPont. The strange thing about this case is that DuPont had not sold any infringing product at all; yes, you are reading correctly – $1 billion in royalties on zero sales. The $1 billion damages award reflected the jury’s best estimate of the lump-sum royalties that would have been agreed to in a hypothetical negotiation taking place just before the infringement began, in which the parties would only have had information available to the parties at that time (“ex ante information”) That DuPont ultimately did not actually sell any infringing product was ignored as being information that would not have been available to the parties at the time of the negotiation (“ex post information”).

Professor Tom Cotter and I have just posted a draft paper on SSRN, "A New Framework for Determining Reasonable Royalty Damages in Patent Litigation," arguing that this result is wrong. More generally, we argue that the hypothetical negotiation used for assessing a reasonable royalty should be assumed to take place at the time of first infringement (or, more precisely, first reliance), but the parties should be assumed to have available to them all the information that was available at trial. We call this the “contingent ex ante” approach; the hypothetical negotiation takes place ex ante, but it is contingent on all information available ex post. We apply our analysis to a variety of contexts, including standard essential patents; unexpected exogenous events (the market value of the invention changes because of unforeseen factors); separate and distinct infringements (when should damages be assessed on the basis of two distinct hypothetical negotiations, rather than one); regulatory uncertainty (when the patented invention received regulatory approach after the time of the first infringement); non-infringing alternatives (when a patent covering an NIA is held to be invalid after the time of the first infringement, but prior to trial), as well as in the context of lump-sum versus running royalties (which raises considerations of risk-shifting, strategic considerations in licensing and the time value of money).

While our discussion focuses entirely on US law, in my view the principles we discuss are equally applicable to Canadian law. Indeed, I suggest the argument is even stronger in Canadian law, for two reasons.

First, our basic argument is that using all available information, including ex post information, better serves the purpose of the Patent Act, which is to provide an incentive to develop inventions for the benefit of the public. Using ex post information allows more accurate determination of the true value of the invention, and so better aligns the patent incentive with the purpose of the Act. While patent damages are often analogized to a species of tort, they are ultimately statutory, and under the modern Canadian approach to statutory interpretation, the statutory provisions should be interpreted in a manner that it consistent with the purpose of the Act. (This makes our argument stronger than in the US, which has not yet fully embraced a purposive approach to statutory interpretation.)

Secondly, our argument is fully consistent with the Canadian approach to tort damages. In Athey v Leonati [1996] 3 SCR 458, the SCC said “past events must be proven, and once proven they are treated as certainties” [28]. This refers to all event prior to trial: “In this case, the disc herniation occurred prior to trial. It was a past event, which cannot be addressed in terms of probabilities” [30]. Most obviously, special damages are assessed on the basis of reasonable expenses that were actually incurred prior to trial, not what expenses the parties might have anticipated would be incurred. The fact that the plaintiff had not in fact suffered any harm as a result of a tort, perhaps because of a miraculously quick recovery, or that she had suffered unusually severe harm (the thin-skull rule), would certainly be considered in a Canadian tort case; we argue that in a case like Monsanto v DuPont, the fact that the infringer had not in fact made any sales should also be taken into account, for essentially the same reasons.

Here is the abstract:

Conventional analysis often assumes that there are only two theoretical options for calculating a reasonable royalty in patent disputes: a "pure ex ante" approach, under which a court reconstructs the hypothetical bargain the parties would have struck prior to infringement, based on the information available to them at that time; and a "pure ex post" approach, under which the court considers the bargain the parties might have reached as of some later date such as the date of judgment. The first approach avoids patent holdup - basing the royalty partly on the infringer's ex post switching costs - but cannot easily explain other longstanding features of how royalties are calculated, and can lead to awards that reflect the parties' erroneous ex ante expectations. By contrast, the pure ex post approach uses more accurate information about the invention's actual value, but it also enables the patentee to capture some of the patent's ex post holdup value. In this Article, we show that a "contingent ex ante" framework, under which the court reconstructs the bargain the parties would have reached ex ante, based on all relevant information that is available ex post, is superior to both of the conventional approaches. More specifically, our framework enables courts to base the royalty on the most accurate information available of patent value while avoiding the holdup risk arising from the pure ex post approach. We analyze how courts can apply our approach in various settings, including cases involving SEPs, sequential infringement, regulatory uncertainty, and unexpected exogenous events.

The paper is available at SSRN. It is a draft, so comments are welcome.

Reasonable Royalty in CSIRO v Cisco

Today I have a guest post on Professor Tom Cotter's Comparative Patent Remedies blog, dealing with the reasonable royalty calculation for a standard essential patent in CSIRO v. Cisco, Case No. 6:11-cv-00343-LED  (E.D. Tex. 2014).

I will be taking an end of summer vacation until August 27th, and I won't be blogging during that period. I will start back with posts on any decisions I missed, including the recently released Travoprost decision 2014 FC 699, at the end of that week.