Can the Election Between Damages and an Accounting Be Made after Discovery?

Angelcare Canada Inc v Munchkin Inc 2023 FC 1111 Roy J

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

In Angelcare v Munchkin 2022 FC 507, Roy J held that various claims of Angelcare’s six patents were valid and infringed by Munchkin in the liability phase of a bifurcated trial: see here. This motion concerned a variety of remedial matters preliminary to the remedies phase, specifically entitlement to injunctive relief, entitlement to an accounting of profits; entitlement to punitive damages; and which of the three plaintiffs is entitled to a pecuniary remedy.

Election between damages and an accounting

With respect to entitlement to an accounting, Angelcare did not merely seek an accounting: it sought the entitlement to decide between damages and an accounting after discovery was completed, in order to have the financial information necessary to make the most advantageous choice [15]. Roy J granted this right to elect after discovery, after a review of the authorities which focused exclusively on the issue of entitlement to an accounting, not the narrower issue of whether there is an entitlement to elect after discovery: see [15]–[41] and the Order entitling the Plaintiffs “to claim a monetary remedy, be it damages or an accounting profits.”

This holding is contrary to AlliedSignal (1995), 61 CPR (3d) 417 (FCA) 444 which addressed the same issue: “[t]he appellant is asking for damages or an accounting of profits made by the respondents by reason of their unlawful acts, ‘whichever shall, upon inquiry, prove to be the larger amount’.” This request was denied: entitlement to an accounting “certainly cannot depend on whichever amount would turn out, on inquiry, to be more profitable.” The reason is that “[a]n accounting of profits is an equitable remedy which ought to be allowed by the Court in the exercise of its equitable jurisdiction when the circumstances so warrant.” There must a basis in equity for granting an accounting and “putting as much money as possible into the pocket of the patentee” is not an equitable principle. Roy J did not consider AlliedSignal, presumably because it was not cited to him, and consequently his holding on this point cannot be considered to have any precedential value.

I would also point out that while Roy J also held that Angelcare was entitled to an accounting if it so elected, he relied entirely on caselaw that preceded the SCC decision in Nova v Dow 2022 SCC 43. In a two part article forthcoming in the IPJ and summarized in a series of blog posts, I have argued that Nova v Dow wrought such a major change in the principles on which the quantum of an accounting is assessed that the courts should revisit the principles on which an accounting is granted. I argued that Nova v Dow turned an accounting into a randomized quasi-punitive remedy, and consequently an accounting should only be awarded in cases in which the infringer tried to game the system by knowingly declining to take a licence to a patent which it knew to be valid, in the hopes of escaping detection.

Punitive damages

Roy J declined to award punitive damages [61], rightly, in my view. He noted that there is a very high threshold for awarding punitive damages, which are granted only in “exceptional cases for ‘malicious, oppressive and high-handed’ misconduct that ‘offends the court’s sense of decency’”: [46], quoting Whiten 2002 SCC 18 [36]. He further noted that “[a]llegations of willful and knowing infringement are alone insufficient to support a claim to punitive damages” [45], quoting Bauer 2014 FCA 158 [25]. This is because wilful infringement of a patent which the defendant reasonably believes to be invalid is not malicious at all; on the contrary, it does a public service by enabling a challenge to patents which were obtained without the quid pro quo of a truly new, useful and non-obvious invention. US law does allow for treble damages for wilful infringement, while carving out an exception for cases in which the infringer reasonably believed the patent to be invalid or not infringed, but the US experience, in my view, illustrates the futility of trying to assess the intent of the infringer for such purposes. The Canadian approach, in which wilful infringement alone is not grounds for punitive damages, is clearly preferable.

Bell Helicopter 2013 FCA 219 was the only case brought to his attention by the parties (and the only Canadian case known to me) in which punitive damages were awarded outside the context of litigation misconduct [44]. Roy J distinguished Bell Helicopter on the basis that in that case “Bell Helicopter used the invention as its own to promote its helicopter” [50]: see also [58]. More specifically, in passages quoted by Roy J at [50], the FCA in Bell Helicopter stated “Bell Helicopter promoted the infringing Legacy landing gear as its own invention,” knowing this to be untrue [191], and the FCA went on to say that “Where a person infringes a patent which it knows to be valid, appropriates the invention as its own, and markets it as its own knowing this to be untrue, punitive damages may be awarded” [192]. As Roy J stressed, this was the key fact which took the infringement in Bell Helicopter beyond wilful and knowing infringement to a case in which punitive damages could properly be awarded [58]. Consequently, in my view, Roy J was quite right to distinguish Bell Helicopter on this basis.

In this case, “the Defendants sought to create a product which would be compatible with the Plaintiffs’ pails,” [55], but as Roy J pointed out “there is nothing inherently wrong with developing compatible products. Unless there is patent infringement, that constitutes valid innovation,” which should not be discouraged [56]. “The Defendants chose to compete with the Plaintiffs in an area they believed was not covered by the Plaintiffs’ patents,” and while it turned out that they had failed in that effort, such failure is not morally blameworthy so as to justify punitive damages [56]. Patent remedies must strike a balance by protecting the incentive to invent without chilling competition, and, as Roy J pointed out repeatedly, the remedies of damages and an accounting (until Nova v Dow) strike the right balance except in the most egregious cases [56], [59].

One point which arose on the facts is worth noting, as it is likely a common scenario:

[60] The Plaintiffs seek to reproach that the Defendants’ cassettes were displayed in retail stores where the Plaintiffs’ cassettes were displayed. I cannot see anything wrong with a retailer displaying like products with like products. This is merely common sense. That is especially so with respect to large-surface retailers which represent 80% of the market. As such, there is nothing nefarious which could be held against the Defendants; it would be rather weird if the Defendants had chosen to refrain from marketing their wares in large-surface retailers where 80% of the market is.

This must be right. It is evidence that the defendants believed that their products were truly non-infringing, as they were sure to be caught if they sold their product side-by-side with the plaintiff’s product. If we are going to allow good faith competition, then we should allow vigorous good faith competition.

Injunctive Relief

The main issue relating to injunctive relief was whether an injunction should be granted in respect of early generation products which were no longer being actively marketed, and which (according to the defendants) had been removed from Canada, and which may no longer have been in existence [7]. While there is a maxim to the effect that equity does not act in vain, Roy J pointed out that “if the Defendants have no intent to commercialize in Canada their cassettes of generations 1, 2 and 3, they should not be concerned that an injunction is issued until the various patents at issue have expired” [9]. In light of the uncertainty as to whether those products were still available outside of Canada, it was not clear that the injunction would be futile [12], and Roy J consequently granted the injunction.

Standing

The standing issue concerned the entitlement of the various plaintiffs to claim damages under s 55(1) as persons “claiming under the patentee” during certain periods of time. There were three plaintiffs, Edgewell and Playtex, which were affiliated companies [65] and Angelcare, a member of a separate family of companies [66], [68]. At the risk of glossing over a very complicated set of facts, the gist of the problem is that the three plaintiffs cooperated in selling diaper pail systems in Canada over an extended period of time without always having fully formalized the licensing of the various patents which they each owned. Roy J held that this was not an insurmountable hurdle to standing. The courts have taken an expansive approach to the interpretation of s 55. It is now clear that a licence does not have to be exclusive, nor does it have to be in writing, for a person to qualify as claiming under the patentee [119]. Indeed, it is not even necessary that the person be a licensee: “[A] person ‘claiming under’ the patentee is a person who derives his rights to use the patented invention, at whatever degree, from the patentee” [80], quoting Signalisation de Montréal [1993] 1 FC 341 (FCA) 356-357. In light of this expansive definition, Roy J had little difficulty holding the plaintiffs were all persons claiming under the patentee during the relevant period, in light of the close working relationship between them in the manufacture and distribution of the patented diaper systems [122]–[125], [139]. “I find that there was ample evidence in this case that the Plaintiffs were operating together towards a common goal, thus granting each other the right to use the patents” [129].

Standing of Plaintiffs Carrying on Activity Outside of Canada

Teva Canada Ltd v Janssen Inc 2018 FCA 33 Dawson JA: Webb, Gleason JJA aff’g 2016 FC 593 Hughes J and 2016 FC 727
            1,304,080 / levofloxacin / LEVAQUIN

As discussed in Tuesday’s post, the FCA dismissed Teva’s appeal on a number of factual points that do not raise issues of general importance. But Teva v Janssen is a significant decision on standing. It raised a novel question as to whether a foreign party which has a licence from the Canadian patent owner, but which does not need the licence because it does not carry out any infringing activity in Canada, has standing as a person claiming under the patentee pursuant to s 55(1). The FCA, affirming Hughes J, held that the claimant does indeed have standing in this situation:

[126] I reject Teva’s submission that Janssen US was required to demonstrate that it engaged in conduct in Canada that would otherwise amount to infringement.

[127] A party need only establish that they enjoy rights under a patent in order to be a person claiming under the patentee.

In so doing, the FCA also affirmed and distinguished Servier 2008 FC 825 (aff’d without discussion on this point, 2009 FCA 222), in which Snider J held that the foreign parties did not have standing in similar circumstances. Between the two cases, this should provide good guidance as to when a licensee which does not carry on activity in Canada does or does not have standing. However, I must say that I do not find the FCAs explanation of Servier entirely persuasive, and I am inclined to think it is better to regard Servier as having been effectively overruled.

A Purposive Interpretation of the Standing Provision

Janssen Inc v Teva Canada Ltd / levofloxacin 2016 FC 593 Hughes J
            1,304,080 / levofloxacin / LEVAQUIN

This Levofloxacin Damages decision is the damages phase of 2006 FC 1234 aff’d 2007 FCA 217, in which Hughes J held Claim 4 of the ‘080 patent, a compound claim to levofloxacin, to be valid and infringed by the Novopharm (now Teva). The decision turned largely on the facts, with the most legally significant issue being the standing of Janssen US to claim damages.

The standing issue was important to the bottom line. Hughes J ultimately held that Janssen US did have standing and he awarded it over $13m, while Janssen Canada was awarded just under $5.5m. The standing issue arose in light of the structure of Janssen’s supply chain. Daiichi, the owner of the ‘080 patent, supplied levofloxacin API to Janssen Puerto Rico, which manufactured finished tablets and then routed them, financially, at least, through Janssen US to Janssen Canada for sale in Canada. It was these sales that were displaced by Teva’s infringing sales, and Janssen US was claiming for the lost profit it would have made on its sales to Janssen Canada [54]. (Daiichi, while a named plaintiff, had settled with Teva and did not participate in the damages proceeding [5].)

Standing is statutorily governed by s 55(1) of the Act which provides that infringer is liable in damages “to all persons claiming under the patentee” for losses sustained as a result of infringing acts. Hughes J thoroughly canvassed the case law, which generally interprets “claiming under” quite broadly, including an assignee, a licensee, including a non-exclusive licensee [43]. Moreover, the Canadian courts take a very pragmatic approach in determining whether a party is a licensee, as the licence need not be in writing and may be inferred from the facts [43].

However, in one case, Servier v Apotex 2008 FC 825, Snider J held that none of the companies in the Servier global family, except ADIR, the patentee, and Servier Canada, which exploited the patent in Canada, had standing to seek damages [Servier 67-95]. Hughes J characterized Servier as holding that an entity that did not operate “in Canada'” did not have standing [42], and that the claim must be one in respect of a use in Canada and not elsewhere in the corporate chain [43]. He also distinguished Servier on the basis that in that case, each of the foreign entities had its own geographical sphere of operation and those entities not operating in a Canadian sphere could not be considered to have standing, whereas in this case “the J&J group of companies are operating as a team whereby licensed tablets ultimately found their way to Canada” [67].

Stepping back from the cases, in defining who may claim damages s 55(1) has two effects, at least potentially. On the one hand, it gives standing to entities which might not otherwise have standing under a common law test. And on the other hand, it may operate to deny recovery to some entities. The exclusionary effect of s 55 only bites if the entity claiming standing actually suffered a loss as a result of the infringement of the Canadian patent. If we are to give a purposive interpretation to s 55(1), we must ask when it is right to hold that an entity should not recover, even though it has actually suffered loss caused by the infringement. There is a prima facie argument that such loss should always be recoverable, on the basis that a wrongdoer should be liable for all the harm it causes, or the wrong will not be sufficiently deterred and victims will not be adequately compensated.

This intuition is not always sound. Suppose that Company A, which is at arms length to both the patentee and the infringer, produces feedstock for the process used by the patentee to produce the API. The feedstock itself is not patented and so A does not need or take a licence. As a consequence of infringement, the patentee reduces production, and so A suffers lost profits on the consequently reduced sales of the feedstock. Should A be able to recover? Apart from any limits imposed by s 55(1), it might seem that A should be able to recover, on the basis that it has suffered a loss caused by the infringer. But now suppose that A also supplied the feedstock to the infringer, and when A’s sales to the patentee went down, its sales to the infringer went up by exactly the same amount. In that case A should clearly not recover because it would have suffered no loss. Now suppose that instead, the infringer bought the feedstock, not from A, but from arms length Company B, so that A’s loss was B’s gain. Should A recover? From a law and economics perspective, the answer is no. The shift in profit from A to B is a mere transfer; while A has lost, B has gained, and in the broader picture, no harm was done. To impose liability on the infringer for A’s loss would consequently cause over-deterrence. This is one of the main justifications for the general reluctance of tort law to provide recovery for pure economic loss: see CNR v Norsk [1992] 1 SCR 1021. Denying recovery to A in such a case also makes sense purely in terms of patent policy, because A is not operating under the patent, and so refusing to allow it to recover does not adversely affect the incentive to invent. In this scenario, in which A did not have a licence and so did not “claim under the patentee,” s 55(1) would operate to deny recovery to an entity that had suffered a loss as a result of the infringement, and this result would be sound as a matter of policy.

This analysis suggests that the role of standing, and s 55(1) of the Act, is to prevent recovery by an entity which has suffered a loss as a result of the infringement when that loss did not affect the incentive to invent. Put another way, by analogy with the requirement for an “antitrust injury” in US competition law, we might say that only an entity that has suffered a “patent injury” should be entitled to recover. This is broadly consistent with the “claiming under” requirement of s 55, on the reasoning that if the entity’s loss is linked to its rights under the patent, then the loss would adversely affect the incentive to invent. So, for example, the profits made by a licensee contribute to the incentive to invent via the royalty paid for that licence.

This theory supports Hughes J’s holding in this case that Janssen US has standing. I’m not sure whether it is consistent with Servier, because the nature of the loss that would have been claimed by the excluded entities in that case is not clear to me. This theory is at least consistent with Snider J’s rejection of the highly speculative scenario advanced by Servier in support of its claim at [88-89].

Thanks to Smart & Biggar for posting this decision before it was posted on the FC website.

The CGPA Does Not Have Standing to Challenge a Listing on the Register of Innovative Drugs

Canadian Generic Pharmaceutical Association v Canada (Health) 2011 FC 465 de Montigny J aff’g 2010 FC 1211 (Lafrenière, Prothonotary)

The Canadian Generic Pharmaceutical Association (CGPA), sought to challenge the listing of a particular drug on the Register of Innovative Drugs by writing to the Minister requesting that the drug be removed from the Register. The Minister refused on substantive grounds. The CGPA sought judicial review. Lafrenière P struck the application for judicial review on the basis that the CGPA does not have standing, and de Montigny J affirmed.

de Montigny J held that the CGPA does not have standing under s 18.1 of the Federal Courts Act as a person “directly affected,” because it has never filed a new drug submission and does not intend to do so [42]; by way of analogy, under the PM(NOC) Regulations, a manufacturer does not have standing to challenge a listing on the Patent Register unless it has filed an ANDS [44].

On the question of public interest standing, de Montigny J agreed that there was a serious issue, but held that the CGPA failed on both the second and third prongs. On the second prong he held that public interest standing is intended to be used to challenge constitutional validity or general exercise of administrative authority, and not a discrete decision [60]-[61]. This distinguishes 2007 FCA 375 aff’g 2007 FC 154, which refused to strike the CGPA’s challenge to the vires of the data protection Regulations on the basis of standing. de Montigny J is an expert in this area, and his decision was thorough and well reasoned.

de Montigny J held that the CGPA also failed the third prong, which requires there is no other reasonable and effective way to bring the issue before the courts. In so holding de Montigny J usefully clarified that an individual manufacturer can challenge a listing, perhaps “merely through persuasive evidence of a genuine intention to file a drug submission” [68], or by filing an ANDS. On the latter point in particular, “it is clear from the procedure outlined above in the Guidance Document on Data Protection that it is not a criminal offence for a generic drug manufacturer to file an abbreviated new drug submission during the pendency of the data protection period” [71].

Thus the decision that the CGPA lacks standing to challenge an individual listing appears sound in law. With that said, the policy arguments advanced by the CGPA are interesting. The CGPA argued in effect that there is a collective action problem in challenging a listing. It is expensive to challenge a listing, but if the challenge is successful, all generics, not just the one that incurred the cost, will benefit. It is possible that no individual generic would find it worthwhile to challenge the listing; see generally [14]. There is a collective action problem in principle, though a similar collective action problem also arises under the PM(NOC) Regulations or indeed in a validity challenge in an infringement action. This does not prevent such challenges; presumably the generic bringing the challenge relies on a lead-time advantage to recoup its costs. (But see Pfizer Canada Inc. v Novopharm Ltd. / pregabalin (NOC), 2010 FCA 258 (Evans JA) aff’g 2010 FC 668 (Crampton J) aff’g 2010 FC 409, Milczynski Pr in which Novopharm sought to prevent free-riding off its NOA – in effect the generic was seeking data protection for the information contained in its NOA.) Nonetheless, even though the collective action problem may not preclude listing challenges, this decision, sound though it seems on current law, goes against the nascent trend of allowing collective challenges to monopoly rights, such as the Peer-to-Patent program.

On the other hand, the standing problem has another side to it. The requirement that a party must be directly affected serves to ensure that the party bringing the challenge has the motivation to present the case fully. The party who must respond should not have to endure multiple challenges from various parties with tangential interest and partial arguments. Of course the CGPA is not simply an officious inter-meddler, but on the other hand the innovator companies already face multiple attacks on their rights in a drug, first in NOC proceedings and then in infringement proceedings. The CGPA argued that denying it standing to challenge a listing would result in redundant litigation, since each manufacturer would be required to bring its own application for judicial review [66]. This would be far from the only redundant litigation in the pharmaceutical area. No doubt the process could be streamlined, but ideally this should be part of a holistic assessment.

This is not to say that there should not be a mechanism to allow some form of collective challenge to the listing, but it is just one part of a large problem of the multiplicity of actions and arises particularly in the pharmaceutical context.

Standing and Damages

Merck & Co Inc. v. Apotex Inc. / lovastatin 2010 FC 1265, Snider J

When is a patent owner no longer a “patentee” for the purpose of standing to sue for infringement under s 55? In Merck & Co Inc. v. Apotex Inc. / lovastatin, the patent owner, Merck & Co (Merck) granted a non-exclusive licence to Merck Frosst Canada Inc. (Merck Frosst), and subsequently granted to Merck and Company Inc. (MACI), a “permanent and exclusive royalty-free license,” saving the rights that had already been granted to Merck Frosst. The plaintiffs are Merck and Merck Frosst, but not MACI. Apotex challenged Merck’s standing on the basis that Merck had assigned all its interest to MACI.

Snider J held in Merck’s favour. She held at [48] that the test is whether there is “clear and persuasive evidence that [the patent owner] intended to convey all of its rights in [the patent] to [the licensee] retaining nothing to itself.” This question is answered primarily by construction of the licence agreement as a matter of contract law [47], with secondary reference to the reference to the course of conduct of the parties to the agreement [55]. The fact that Merck remained the named patentee shown as owner on the register was relevant (though not determinative), as was the simple fact that Merck was pursuing the litigation in its own name [55].

While Merck won on this point, I suspect this point will return to haunt it in the damages portion of this bifurcated proceeding. Snider J held at [624] that the plaintiffs are not entitled to an accounting of profits, and so can claim only claim damages. Merck can’t get damages in the form of lost profits since it wasn’t in the market, and I don’t see how it can get a reasonable royalty, as it didn’t have the right to grant licences. Presumably, the damage in the form of lost profits, or lost royalty revenues, was suffered by MACI, not Merck. Merck doesn't even get a cut of that because the licence to MACI was royalty free. This isn’t a technical point. MACI as an exclusive licensee has an independent right to bring an action, as established in Domco Industries Ltd., v. Armstrong Cork Canada Ltd., [1982] 1 SCR 907, 66 CPR (2d) 46.  Merck cannot be permitted to recover damages suffered by MACI, or Apotex would face double liability.

While Merck was denied an accounting in this case, it is interesting to consider the standing problem if an accounting had been granted. It would be wrong to require Apotex to account for its entire profit to two different parties, but it is not obvious on what principle the profits would be apportioned between a patentee and licensee, particularly when the party who has suffered the greatest harm is not a party to the proceeding.