Instantaneous Availability of Non-Infringing Alternative

Apotex Inc. v. ADIR 2017 FCA 23 Dawson JA: Boivin, Woods JJA rev’g in part 2015 FC 721 Gagné J
            1,341,196 / perindopril / COVERSYL

In its Perindopril Accounting decision, the FCA has once again affirmed the centrality of the differential profits approach to causation, and in particular the need to consider any non-infringing alternatives (NIA) that would have been used by the infringer but for the infringement. This decision builds on the foundational authority of Monsanto v Schmeiser, 2004 SCC 34, and the FCA’s subsequent decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161. The FCA decisions since Schmeiser have consistently affirmed the basic principle that it is necessary, not optional, to consider any non-infringing alternative in the causation analysis (as discussed here, here and here). There have, however, been some refinements in the details. In Venlafaxine, as discussed here, the FCA developed the principles relating to the burden of proof. And now, in Perindopril, the FCA has apparently retrenched from its earlier position that an NIA could be considered only if it was “instantaneously” available.

This case is the accounting of profits portion of a bifurcated trial. In the liability decision, Laboratoires Servier v Apotex Inc, 2008 FC 825 aff’d 2009 FCA 222, Snider J held that the defendants had infringed the plaintiff’s ‘196 patent and she allowed the plaintiff to elect an accounting of profits. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. Apotex had argued that there were a number of viable, non-infringing alternative sources of both bulk perindopril API and perindopril tablets (in particular manufactured in jurisdictions other than Canada) [18] [FC 79]-[80]. Apotex argued that the profits it would have made by manufacturing abroad (the non-infringing alternative), should be deducted from the profits actually made by the infringing manufacture in Canada, to arrive at the profits to be disgorged [18], [FC 121]. As I explained here, Gagné J rejected consideration of potential the non-infringing alternatives as a matter of law [25], [FC 126] and Apotex appealed this point [8.i].

The FCA has now held that “the Federal Court erred in law by rejecting the relevance at law of any available non-infringing perindopril” [9]. This is not very surprising. Gagné J’s decision was released prior to the FCA decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161, in which the FCA affirmed the need to consider any non-infringing alternative in the causation analysis (as discussed here, here and here), in light of Schmeiser, 2004 SCC 34. This Perindopril Accounting decision reaffirms the same point.

Perindopril Accounting is nonetheless significant in a few respects. First, Lovastatin Damages and Venlafaxine s8 were both damages cases, while Perindopril is an accounting case. The damages cases were in some ways more debatable, as Schmeiser, which established the NIA analysis, was an accounting of profits decision, and it was argued that the reasoning did not apply in the damages context. Lovastatin Damages [60] held that the basic causation analysis is the same in both contexts, and this point has now been reaffirmed in Perindopril: “While Lovastatin considered a claim for compensatory damages for patent infringement, the comments have equal application to an accounting for profits” [34] (and to the same effect, [40]). Thus it is now perfectly clear that NIA analysis is equally applicable in both the damages and accounting contexts. This is undoubtedly correct, as the causation inquiry is fundamentally the same in either context. As the SCC explained in the accounting context, “A comparison is to be made between the defendant’s profit attributable to the invention and his profit had he used the best non-infringing option” Schmeiser [102]. The only change in the damages context is to substitute the words “plaintiff’s profits” in place of “defendant’s profits.”

While Gagné J recognized that Schmeiser had endorsed the NIA analysis, she noted that the SCC has stated only that the differential profits approach is the “preferred” method, and consequently Gagné J felt that the SCC had left it open to the courts to apply a different approach on the facts of a particular case [FC 118-19]. The FCA acknowledged that [28, my emphasis]:

in Schmeiser the Supreme Court referred to the differential profit approach as the ‘preferred means’ of calculating an accounting of profits – not the only means. However, at bottom is the need to ensure that a patentee only receives that portion of the infringer’s profit that is causally attributable to the invention

In my view, this is entirely correct. It is necessary, as a matter of law, that the profits (whether those of the infringer or the patentee) are only those which are causally attributable to the infringement. The differential profit analysis, including consideration of the NIA, is the best way of implementing this fundamental causation requirement. Other ways of implementing the same causation analysis may be permitted, but it is not open to the courts to use an approach which ignores the causation requirement.

The FCA did state that “in this circumstance” it was an error for the Federal Court not to take into account the NIA (the availability of non-infringing perindopril for export), [28], [30]. This leaves open the question of exactly when it might be appropriate not to use the differential profits analysis. In my view, it is understandable that the SCC and the FCA would not want to set down a strict rule that must be applied regardless of the vagaries of the case at hand. I would suggest that the main, and perhaps only, circumstances in which it need not be used is when it is clear that not all of the profits at issue are attributable to the infringement, and yet the evidence does not allow a differential profit analysis. Lubrizol [1997] 2 FC 3 (FCA), might be an example. But what is essential, as per the above underlined statement by the FCA, is that the causation requirement be respected. Given that the differential profits approach, including the NIA, is the best method for implementing the causation requirement, I would suggest that it must be used whenever the evidence allows it.

So far, this is all to clarify or reinforce the law as set out in Schmeiser, Lovastatin Damages and Venlafaxine s8. There is one important new development. In Lovastatin the FCA held that an in order to be considered in the differential profit analysis, the NIA had to be available “instantaneously”:

[79] Dealing first with whether Apotex could have sold non-infringing lovastatin, Merck argues that the alleged alternative must have been actually available to replace Apotex’ infringing sales as they were made. Otherwise, Merck, not Apotex, would have replaced those sales. I believe this submission to be correct both in fact and in law. In Advanced Building Systems Pty Ltd et al. v. Ramset Fasteners (Aust) Pty Ltd, [2001] FCA 1098, (2001) 52 I.P.R. 305 the Federal Court of Australia rejected the relevance of a non-infringing alternative, but held that if it was legally relevant, it could only apply “if at the moment of infringement […] there is available on the market instantaneously the appropriate substitute” in the reconstituted market. I agree.

This is in sharp contrast with Perindopril Accounting. In the result, the FCA held that the issue of whether Apotex “would have and could have” obtained quantities of non-infringing perindopril from other sources for sale abroad, should be remitted to the Federal Court for determination on the facts [65]. The FCA further directed the Federal Court as follows (my emphasis):

[67] [I]t may be that the Federal Court could conclude in the hypothetical world that one or more suppliers would not or could not supply perindopril in time to replace the initial infringing sales. However, this would not end the inquiry as the Federal Court would still have to consider whether at some later point in time a supplier would and could have provided replacement non-infringing tablets.

I don’t see how the two statements can be reconciled, but both decisions were written by Dawson JA, so I can’t see this as a disagreement between different panels of the court. Instead, it appears to be a significant retrenchment from the “instantaneous availability” test for an NIA set out in Lovastatin. This is a welcome development, because, in my view, as explained here, the “instantaneous availability” test is inconsistent with the fundamental principle of “but for” causation.

Overall, then, Canadian law on causation and non-infringing alternatives is shaping up very well. Lovastatin took a large step in the right direction, and Venlafaxine and Perindopril have made modest course corrections to bring the law onto the right path. This is how the common law is supposed to work.

I do see one issue which may require further consideration (though it was wasn't raised at all in this case.) That is the question of whether the but for world should be approached as one world, established on the balance of probabilities, or multiple worlds considered in terms of weighted possibilities. In both Lovastatin and Venlafaxine the FCA held that the burden lies on the defendant to establish the factual relevance of a non-infringing alternative “on the balance of probabilities. Mere possibilities short of probabilities do not suffice” Venlafaxine [56] (and to the same effect Lovastatin [74]). On its face this is a sensible position, and the FCA cited as authority Rainbow Caterers [1991] 3 SCR 3, 14, which does indeed say that the but for world must be established “on a balance of probabilities.” The problem is that this is difficult to reconcile with Athey v Leonati [1996] 3 SCR 458 (citations omitted):

[27] Hypothetical events (such as how the plaintiff’s life would have proceeded without the tortious injury) or future events need not be proven on a balance of probabilities. Instead, they are simply given weight according to their relative likelihood. For example, if there is a 30 percent chance that the plaintiff’s injuries will worsen, then the damage award may be increased by 30 percent of the anticipated extra damages to reflect that risk. A future or hypothetical possibility will be taken into consideration as long as it is a real and substantial possibility and not mere speculation.

The “but for” world is a hypothetical event; how the plaintiff’s life would have proceeded without the tortious injury is the equivalent, in the personal injury context, of how the patentee’s market would have developed without the infringement. Thus Athey directly implies that the defendant need not establish the relevance of the NIA on the balance of probabilities; if there is a 30% chance that the infringer would have been able to supply the market with an NIA, then the profits to be disgorged should be reduced by the same percentage.

The FCA in Venlafaxine [56] also cited Tervita 2015 SCC 3, [49]-[51], [66], citing F.H. v. McDougall, 2008 SCC 53, [40], [49]. I don’t think these are relevant. As Athey also stated (citations omitted)

[28] By contrast, past events must be proven, and once proven they are treated as certainties. In a negligence action, the court must declare whether the defendant was negligent, and that conclusion cannot be couched in terms of probabilities. Likewise, the negligent conduct either was or was not a cause of the injury. The court must decide, on the available evidence, whether the thing alleged has been proven; if it has, it is accepted as a certainty:

As I understand it, there is a distinction between proving the wrong and assessing damages. The wrong itself is always proven on the balance of probabilities, and, as I understand it, that was the point in Tervita and McDougall. That is not inconsistent with assessing damages using weighted probabilities.

But Rainbow Caterers is certainly directly relevant, and it is not clear to me how to reconcile that case with Athey v Leonati. To the extent that there is a conflict between the two cases, Athey is probably the stronger authority. In Rainbow Caterers the choice was between two 'but for' worlds, one proposed by the plaintiff and the other by the defendant, and it does not appear that the option of taking both possibilities into account on the basis of their relative likelihood was before the court. In Athey, in contrast, that was a central question. Moreover, probability based adjustments for hypothetical events (eg the crumbling skull doctrine) and future contingencies are routine in the tort context, particularly in personal injury cases. With that said, neither approach is obviously superior in principle, and the Rainbow Caterers approach has the practical advantage of simplicity. My only conclusion at this point is that the problem of whether the 'but for' world should be constructed on a balance of probabilities, or with weighted possibilities, is a difficult one. It may be that the two approaches can indeed be reconciled; or that one is superior in principle; or that there is some sound reason for using a different approach in patent law than in tort law.

Miscellaneous Issues in Frac Shack v AFD

Frac Shack Inc v AFD Petroleum Ltd 2017 FC 104 Manson J

2,693,567 / Fuel Delivery System and Method

In this infringement action, Manson J held Frac Shack’s 567 patent to be largely valid and infringed by AFD’s “Frac Trailer.” The decision turned on the facts and on claim construction. Manson J granted a permanent injunction, an accounting of profits, and a reasonable royalty for pre-grant / post-publication ‘infringement’ under s 55(2). While no new law was applied, there are a few points of interest as confirming some existing trends.

The invention relates to a system for refueling well site equipment while the engines are running. It was primarily intended for use on fracking sites. Fracking typically requires multiple diesel engines running in close quarters. Ideally the equipment would run 24 hours a day, but an engine will run out of fuel in 3-4 hours [13]-[14]. Shutting down the engines to refuel wastes time, and can also cause downhole problems which reduce the effectiveness of the fracking operation [13]. Refueling while the fracturing equipment is operational is therefore often required. Prior to the invention, this had involved “manual hot refueling,” which requires a worker to pull fuel-laden hoses to each piece of equipment’s fuel tank and manually discharge diesel fuel into the tank, typically working between equipment that is spaced about a meter apart, with pumping equipment that is operating at high pressures [15]. While there was some debate as to exactly how often fires occurred, there was no real dispute that manual hot refueling was as dangerous, unpleasant and environmentally dirty as it sounds [18].

Claim Construction
As discussed here, there is an ongoing debate in Canadian law as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous on their face. Manson J’s approach in this case was very much in the former camp. In his recent Mediatube 2017 FC 6 decision, Locke J was very careful to analyze the claims first, and determine there was an ambiguity, before turning to the disclosure for clarification. In contrast, in discussing the first two disputed terms, Manson J began by quoting from the disclosure [159]-[160], [171], before consideration of the claims themselves, and nowhere did he consider whether the claims were ambiguous on their face. Rather, he simply read the claims in light of the common general knowledge, in the context of the disclosure and the other claims (eg [167]-[168]), in a manner much more akin to Gauthier J’s approach in LOSEC 2017 FCA 9. I won’t repeat the discussion of the case law on this issue that can be found in my post contrasting those two earlier decisions, but I will say that the holistic and contextual approach, as applied by Manson J in this case, resulted in a claim construction that was straightforward, easy to follow, and persuasive.

Validity
AFD tried a classical sufficiency attack, arguing that the disclosure would not allow a POSITA to make the invention. Manson J had no difficulty in holding this argument failed on the facts [209], [213]. An obviousness attack also failed on the facts. The fact that AFD, in a SR&ED grant application submitted to the Canadian government, had argued that their infringing device was innovative, did not help their case [252].

Manson J did find some claims to be overbroad. Some of the claims did not include a remote fuel level sensor, which means that an operator “would have to go into the hot zone to determine the level of fuel in a tank, and would have to physically monitor the filling of the tank to ensure that there was no overflow” [216]. Since the purpose of the invention was to reduce the hazards of manual hot refueling by removing people from the hot zone, Manson J held that the claims without the fuel sensor were overly broad [218]. On the other hand, an overbreadth attack was also made on claims including a pressurized hose near the equipment end of the tank, which could be dangerous if a pin-hole leak sprayed pressurized fuel near the running engine [220]. Manson J held this did not make the claimed invention overbroad, because “having pressurized hoses anywhere in the invention is possibly not optimal from a safety perspective, whether or not an invention, or part of an invention, is optimal is not relevant to the question of whether claims are overly broad” [222]. This contrasts with the holding regarding the fuel sensor. These holdings can be reconciled on the basis that the inventive concept “is to design a system and method for efficient and safe hot fueling to multiple pieces of equipment, in remote and semi-permanent well site locations, that removes the operators from the hot zone during fracturing operations at a well site” [247, emphasis added]. It seems reasonable that the question of overbreadth should turn on the scope of the inventive concept. There was, however, other evidence suggesting that the aim of the invention was to address a number of defects in manual hot refueling, which included risk to the operator, but also environmental risks and general fire safety [29]. That suggests that perhaps the overbreadth holding turned on patentee’s failure to sufficiently emphasize the other advantages of the invention during the obviousness argument. In any event, it would be wrong to read too much into Manson J’s relatively brief overbreadth discussion. While the law respecting overbreadth is easy enough to state – the invention cannot be broader than the invention made or disclosed [202] – this decision, among others, illustrates that we do not yet have a fully coherent framework for identifying exactly what it is that makes an invention too broad.

Infringement
The holding that AFD’s Frac Trailer infringed various valid claims followed directly from the holdings on claim construction [257]-[280].

Remedy
An accounting of profit is a discretionary remedy, and there is a question as to whether a successful patentee is presumptively entitled to elect an accounting. The general practice is that a successful patent will be entitled to an accounting, absent some specific reason for denying it, though there are a few cases which have suggested to the contrary: see here for a discussion. Manson J’s holding in this case, allowing the patentee to an elect an accounting, is consistent with the general practice. His general statement of principle indicated that an patentee is presumptively entitled to an account ([282]), and he concluded that “there is no reason that [the Plaintiffs] should not be allowed to elect for accounting of profits” [290]. This is not really very remarkable, given that AFD’s arguments as to why Frac Shack should be denied an accounting were weak. But nonetheless, if the burden was on Frac Shack to show it was entitled to an accounting, the result might have been different. On the whole, Manson J’s decision on this point is by no means a major development, but it is one more case that reinforces the mainstream view that a patentee is presumptively entitled to an accounting.

There were a couple of technical issues in actually calculating the accounting that Manson J resolved on the facts [296]-[309]. Of more interest was his holding that manual hot refueling is not an non-infringing alternative, so that AFD was required to disgorge its gross profits from the rental of its infringing Frac Trailer, not the differential profits as compared with hot refueling. He held that [312]

manual hot refueling is not a non-infringing alternative to using the ‘567 invention. Even if accidents due to manual hot refueling are rare, the fact that reducing the risk of an accident creates a significant improvement over the alternative hot fueling system, because the consequences of such an accident can be life threatening or cause millions of dollars’ worth of damage to the fracturing operation.

This holding would make sense if, after the invention was commercialized, everyone in the industry had abandoned manual hot refueling. However, even the President of the patentee Frac Shack admitted that “some fracturing companies still find manual hot refueling to be an acceptable method of refueling, regardless of whether the equipment in the hot zone is depressurized,” and that “there was no one correct way for fracturing companies to perform a risk matrix and that companies may assess risks differently” [36]. This suggests that manual hot refueling, though substantially inferior, was still a viable alternative. On the other hand, AFD only had one Frac Trailer operating. Even if the whole industry had not abandoned manual hot refueling, if the market demand for the patented system was not saturated, it is possible that all of its customers for the infringing trailer would have considered manual hot refueling to be an unacceptable alternative, and would have used the plaintiff’s system instead. In that case, attributing the AFD’s gross profit from the rental of the Frac Trailer to the infringement would be sound.

Manson J also awarded “reasonable compensation” for pre-grant / post-publication infringement under s 55(2), and the parties agreed with the standard view that a reasonable royalty would be the appropriate measure of compensation for this period [314]. This is of some interest because there are few cases to have actually awarded reasonable compensation, but there is nothing novel in the law that was applied.

Finally, Manson J also refused to award punitive damages [323], [329]. This is consistent with the general reluctance of Canadian courts to award punitive damages. With that said, Manson J’s decision is not particularly significant in reinforcing that general trend, because, as he found, the facts were very far from anything that would warrant punitive damages.

UPDATE: In 2017 FC 274 Manson J clarified that depreciation should be calculated using the "sum of digits" method. 

"One Method is Enough"

Apotex Inc v AstraZeneca Canada Inc 2017 FCA 9 Gauthier JA: Pelletier, Scott JJA var’g 2015 FC 322 as amended by 2015 FC 671 Barnes J
            1,292,693 / omeprazole formulation / LOSEC

Barnes J’s holding that the ‘693 patent valid and infringed turned primarily on the facts, as did the FCA affirmation, but the FCA decision shed interesting light on the proper approach to claim construction. That was subject of yesterday’s post. Today's post turns to the FCA's discussion of Biogen v Medeva.

The ‘693 patent pertains to pharmaceutical preparations containing omeprazole. Omeprazole was a known to be useful in treating gastric and duodenal ulcers, but it turned out to be a particularly difficult compound to formulate. It had to be enteric coated to prevent contact with acidic gastric juice, but a conventional enteric coating would react with omeprazole and cause degradation, particularly in storage. The claimed invention solved this problem with an inert subcoating between the omeprazole core and the enteric coating. The disclosure of the 693 patent contemplated that the subcoating would be applied “by conventional coating procedures in a suitable coating pan or in a fluidized bed apparatus using water and/or conventional organic solvents for the coating solution” (p6). In Apotex’s product, in contrast, the putative subcoating was the end product of an in situ chemical reaction that occurs when the enteric coat is applied by Apotex to the pellet cores. The main issue at trial was claim construction: Apotex argued that the claims did not cover a subcoat which forms in situ. Barnes J rejected this argument as a matter of claim construction. (See my post on the FC decision for details.) This holding was affirmed on appeal.

But Apotex had another arrow in its quiver. The ‘693 patent did disclose how to make the claimed invention using conventional coating procedures, but it did not disclose how to make the claimed invention using the in situ process, for the simple reason that the in situ process was developed several years after the patent was issued [80]. Apotex argued that the disclosure was therefore insufficient [80], [81], relying on Teva (VIAGRA) 2012 SCC 60, and Biogen v Medeva [1996] UKHL 18, [1997] RPC 1.

Gauthier JA easily distinguished Teva [80], but the Biogen discussion was more interesting. She distinguished Biogen as follows:

[81] [I]n [Biogen], the reason Lord Hoffman held that the disclosure was insufficient was because of the hybrid nature of the claim and the nature of the invention. In that case, the inventor could not claim a product because the DNA molecule (Dane particle) he had made was not new. He could not claim the process because the process itself was also known; thus, he had to draft the claim to describe the product he was trying to monopolize partly through the way it worked and partly through how it was made.

[82] As indicated above, the 693 Patent is a product claim describing the essential elements of the final structure of the product, thus the nature of the claims in the 693 Patent are not at all similar to the one dealt with in Biogen.

This is not entirely convincing. It is true that the nature of the claims is different, but that in itself does not provide a distinguishing principle. The claim at issue in Biogen was to “A recombinant DNA molecule characterized by a DNA sequence coding for a polypeptide or a fragment thereof displaying HBV antigen specificity. . .” There is no doubt that the disclosure did enable a skilled person to make such a DNA molecule (Biogen, 50), but Lord Hoffmann went on to say (51, my emphasis):

there is more than one way in which the breadth of a claim may exceed the technical contribution to the art embodied in the invention. The patent may claim results which it does not enable, such as making a wide class of products when it enables only one of those products and discloses no principle which would enable others to be made. Or it may claim every way of achieving a result when it enables only one way and it is possible to envisage other ways of achieving that result which make no use of the invention.

It was on this second branch, now known as “Biogen insufficiency,” that the claim failed: “Its excessive breadth is due, not to the inability of the teaching to produce all the promised results, but to the fact that the same results could be produced by different means” (51-52). The defendant Medeva’s method used a different means to produce the same result (52).

With that said, I intend no criticism of Gauthier JA in so distinguishing Biogen, because she was simply adopting Lord Hoffmann’s own subsequent explanation in Lundbeck CA aff’g [2008] EWCA Civ 311 aff’d [2009] UKHL 12, [2009] RPC 13, which she then went on to cite and discuss. In that case Lord Hoffmann said, in a passage quoted by Gauthier JA [86, Gauthier JA's emphasis]:

[27] In an ordinary product claim, the product is the invention. It is sufficiently enabled if the specification and common general knowledge enables the skilled person to make it. One method is enough.

Lord Justice Jacob agreed, in a passage also relied on by Gauthier JA [89]:

[52] I turn to sufficiency. There is a very short answer to this point. The claim is to the (+) enantiomer. That is novel and non-obvious. If one asks the straightforward question "Does the patent enable the skilled man to make it?" the answer is an equally straightforward: "Yes."

Gauthier JA is more than justified in adopting the explanation of Lord Hoffmann’s decision in Biogen provided by Lord Hoffmann himself. But I must say that I don’t find Lord Hoffmann’s distinction based on the form of the claim to be persuasive. The real point of Lord Hoffmann’s Biogen opinion, it seems to me, was to draw a distinction based on the inventive concept, or “technical contribution” as he called it. As stated in the passage quoted above, he was concerned that “the breadth of a claim may exceed the technical contribution to the art embodied in the invention,” and he focused on “the technical contribution to the art which [the inventor] made in 1978 and disclosed in [the patent application]” (51). He concluded by noting that the defendant’s methods “owe nothing” to the invention (52).

But if that is right, then “one method” of enabling the invention is not necessarily enough; it might be, or it might not be, depending on the nature of the inventive concept. Now, on the facts of this particular case, as I understand them, Apotex would have lost even on Biogen insufficiency, because the inventive contribution was not a method of depositing an inert subcoating, but the idea of using an inert subcoating, regardless of the method of deposition. But that conclusion would have required an investigation of the inventive concept, rather than merely an assessment of the nature of the claim.

As I see it, the problem with Biogen insufficiency is that it is not really a sufficiency objection at all, but rather an objection of overbreadth (see eg see Sandvik v Kennametal [2011] EWHC 3311 (Pat) Arnold J at [106]-[124] describing three types of insufficiency in modern UK law as being classical insufficiency, ambiguity and excessive breadth, with the latter corresponding to Biogen insufficiency). As the High Court of Australia perceptively noted in Lockwood (No 1) [2004] HCA 58, [67] the House of Lords' reasoning in Biogen boils down “to the following Voltairean aphorism: ‘Since the fair basis doctrine no longer exists, it is necessary to invent it.’” In Canada, the overbreadth objection is reflected in the principle that an inventor cannot claim more than he has invented: see eg Farbwerke Hoechst AG v. Commissioner of Patents, [1966] ExCR 91, 106; Radio Corp v Raytheon (1957) [1956-60] Ex CR 98, 117; Lovell Manufacturing Co v Beatty Bros (1962), 41 CPR 18, 66 (Ex Ct). The difficulty is that this principle, while very well established, does not have a clear basis in the Act. (The nearest thing is perhaps Rule 84, requiring that the claims be supported by the disclosure, but this is not a particularly clear statement of a prohibition on overbroad claims, and it is in any event discomfiting to have such a fundamental principle found only in the regulations, rather than the Act itself). Nonetheless, in my view, it is probably best to recognize overbreadth as an independent objection, rather than trying to shoehorn it into sufficiency, with the confusing fallout that we have seen from Biogen. So, in my view, the correct approach to sufficiency is indeed that articulated by Gauthier JA, following Lord Hoffmann and Lord Justice Jacob in Lundbeck CA, but I would suggest it should apply regardless of the nature of the claim. This is not to say that Biogen is a dead letter, but rather than the problem it raised should be addressed, in Canadian law at least, as a matter of overbreadth.

Claim-First or Disclosure-First in Claim Construction?

Apotex Inc v AstraZeneca Canada Inc 2017 FCA 9 Gauthier JA: Pelletier, Scott JJA var’g 2015 FC 322 as amended by 2015 FC 671 Barnes J
            1,292,693 / omeprazole formulation / LOSEC

As discussed here, Barnes J's decision at first instance, holding that AstraZeneca’s ‘693 patent to be valid and infringed, turned primarily on the facts. Unsurprisingly, the FCA has upheld Barnes J. The FCA decision is nonetheless interesting for its approach to claim construction, particularly in contrast with Locke J’s decision in Mediatube Corp v Bell Canada 2017 FC 6 (blogged here on the costs issue). That aspect of the decision is the focus of this post.

By way over overview, while Apotex raised a number of issues on appeal, the most important related to claim construction [27]. On that issue, Apotex acknowledged that Barnes J had correctly stated the applicable principles, but argued that he had misapplied them [31]. This argument was rejected by Gauthier J, essentially on the basis that it took passages from Barnes J’s decision out of context, and when read as a whole, it was evident that Barnes J had indeed applied the claim construction principles he had articulated (see eg [43]).

The FCA did vary Barnes J’s decision on a limitations period point, which was governed by s 39 of the Federal Courts Act, as this case was decided under the old Act [8]. Section 39 provides that the provincial limitations period applies in respect of any cause of action arising entirely in one province, and a general six year period is otherwise applicable. The FCA held that on the facts, Barnes J had wrongly applied the six year period to all the infringing acts, even though some of them might have arisen entirely in one province [124]. Rather than remanding, the FCA held that the difficult issue of assessing the limitation period applicable in respect of each act could be undertaken in the damages portion of this bifurcated trial [126]. The legal error is of little significance going forward, as s 55.01 of the current Patent Act provides for a general six year limitation period, regardless of where the cause of action arose.

Claim Construction

There is an ongoing debate in Canadian law as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous on their face. The latter position seems to stem from Procter & Gamble Co v Beecham Canada Ltd (1982) 61 CPR(2d) 1 (FCA) at 11, where the FCA reviewed the cases and summarized by saying:

in construing the claims in a patent recourse to the remainder of the specification is (a) permissible only to assist in understanding terms used in the claims; (b) unnecessary where the words of the claim are plain and unambiguous; and (c) improper to vary the scope or ambit of the claims.

(See also Dableh v. Ontario Hydro [1996] 3 FC 751 (FCA), repeating this.) Now, “unnecessary” does not mean “impermissible,” but in Mylan v Eli Lilly (CIALIS) 2016 FCA 119 [39] the FCA took that next step and held that “the judge erred in referring to the specification when construing the claims of the ‘377 patent. The rules of patent construction preclude reference to the specification when the claims are clear, and improper if reference varies the scope of the claims” [sic] (my emphasis). On the other hand, in Whirlpool 2000 SCC 67 Binnie J, for the Court, said that:

"[t]erms must be read in context, and it is therefore unsafe in many instances to conclude that a term is plain and unambiguous without a careful review of the specification". In my view, it was perfectly permissible for the trial judge to look at the rest of the specification, including the drawing, to understand what was meant by the word “vane” in the claims, but not to enlarge or contract the scope of the claim as written and thus understood.

In his recent decision in Mediatube Corp v Bell Canada 2017 FC 6 Locke J had a very careful analysis of this “tension” [37] in the jurisprudence. On that point he quoted and agreed with Zinn J’s discussion in Janssen-Ortho 2010 FC 42, [115-116], [119], including this paragraph:

[115] In my view, the whole of the specification (including the disclosure and the claims) may be examined to ascertain the nature of the invention. Where the words of the claims are plain and unambiguous and capable of only one interpretation by a person skilled in the art, recourse to the disclosure is unnecessary. This is not to say that the interpreter should not examine the disclosure. In my view, one should do so, but with caution. Recourse may be had to the disclosure for the purpose of confirming the interpretation arrived at from examining the claims alone or to disclose an ambiguity in the language of the claims that was not otherwise evident. However, the patentee cannot expand the monopoly specifically expressed in the claims by borrowing phrases from the disclosure and placing them into the language of the claims.

This threads the needle between the two approaches, though rightly favouring the SCC position that reference to the disclosure is permissible even when the claims are unambiguous. Nonetheless, Locke J was very careful to first read the words of the claims alone to determine whether they were ambiguous. He did have recourse to the specification in interpreting each disputed terms, but in almost every case, this was only after expressly concluding the claim alone was ambiguous. See eg his discussion of “audio/video signals,” concluding examination of the claim alone “certainly gives rise to enough ambiguity in this term to justify recourse to the disclosure in order to assist in understanding its scope” [49]. This implies that recourse to the disclosure, if not strictly impermissible, would not be “justified” absent the ambiguity. See similarly [58], [74], [81]. (The only exception was in considering the term “server,” where he adverted to the disclosure without expressly holding the claim was ambiguous on its own [66]).

Contrast Locke J’s analysis with Gauthier J’s approach in this case:

[41] As the issue of construction of the patent is to be reviewed on the correctness standard, I have performed my own analysis of the 693 Patent. I have thus considered, as proposed by Apotex, what the invention is by reading the full specification.

The first sentence is explicit that Gauthier J is performing her own analysis, which means the approach she takes would be also appropriate for a judge at first instance. The second sentence indicates that Gauthier J very first step in construing the claims is to read the disclosure, without a word as to whether there is any ambiguity in the claims themselves. She also stated (my emphasis) that

[48] It is trite law that a court will consider the disclosure when it construes the claims. I considered the disclosure as it may help to determine if the inventor gave a particular meaning to an expression or word in the claim by adopting a special lexicon. However, the disclosure cannot be used “to enlarge or contract the scope of the claim as written and thus understood” (Whirlpool at para. 52 in fine; see also Justice Rothstein’s comment in the seminal decision of Apotex Inc. v. Sanofi-Synthelabo Canada Inc., 2008 SCC 61 at para. 77 in fine, [2008] 3 S.C.R. 265).

This was not merely a statement of principle; Gauthier J’s analysis of the claims at hand began with a twelve paragraph discussion of the disclosure [49]-[60], before turning to the claims themselves.

The two approaches are not strictly inconsistent in principle, in that Locke J did acknowledge that it is permissible to look to the disclosure. Nonetheless, there is a striking contrast between Locke J’s claims-first approach and Gauthier J’s disclosure-first approach.

How can this tension be resolved? First, all of the cases agree on one fundamental principle: use of the disclosure is “improper to vary the scope or ambit of the claims,” and “improper if reference varies the scope of the claims”; “the patentee cannot expand the monopoly specifically expressed in the claims by borrowing phrases from the disclosure and placing them into the language of the claims”; “the disclosure cannot be used ‘to enlarge or contract the scope of the claim as written’”; and, from Sanofi [77] “Of course, it is not permissible to read the specification in order to construe the claims more narrowly or widely than the text will allow.” I am not aware of any case holding to the contrary.

In light of this principle, it is easy enough to see why recourse to the disclosure is unnecessary when the words of the claim are plain and unambiguous; it is unlikely to change anything. Even if reading the disclosure suggests a meaning that was inconsistent with the claims, the court would say, in effect, “I see what you should have said, but you didn’t say it, and I won’t redraft the claim for you.” If that’s right, whether one starts with the claims, or starts with the disclosure, should make no difference in the end. The point made by the SCC in Whirlpool is that there may be cases where the claims appear clear when read on their own, but the disclosure clarifies the true meaning. An example might be Catnic, where the word “vertical” in the claim might be taken to mean “90 degrees”, but reading the disclosure makes it apparent that it really means “sufficiently vertical to carry out the load bearing function.”* In that case, reading the disclosure changes our understanding of the claim, but does not read limitations from the disclosure into the claim. Rather the disclosure makes it apparent that the initial reading of the claim alone was wrong, because a word that appeared clear was in fact ambiguous. In such a case, it would be wrong to avoid recourse to the disclosure on the basis that the claims were unambiguous.

The really difficult case is when the claim says “up” and the disclosure defines “up” to mean “down.” I don’t have a ready answer for that case, except to say that would be a very poorly drafted patent. It would be better to address the such a case on its facts, in light of the underlying principles that claim defines the monopoly, but the skilled person reads the patent, rather than debating whether it is permissible or not to read the disclosure.

Finally, what about  the statement in CIALIS that "[t]he rules of patent construction preclude reference to the specification when the claims are clear," and also "as there was no ambiguity in the claims here, there could be no recourse to the specification" [43]? I acknowledge that these statements of principle are inconsistent with a disclosure-first approach, but there is no inconsistency on the facts, because in CIALIS the real problem was that the trial judge had indeed read in a limitation from the disclosure into the claim: see [40]. Thus the holding would have been the same on a disclosure-first approach. 

*This oversimplifies Catnic, where the claim construction at trial was not merely “a purely literal one derived from applying to it the kind of meticulous verbal analysis,” as suggested by the HL.

Methylphenidate Dosage Form Patent Valid and Infringed on the Facts

Janssen Inc v Actavis Pharma Company 2016 FC 1361 O’Reilly J
            2,264,852 / methylphenidate dosage form / CONCERTA / NOC

In this brief decision O’Reilly J granted Janssen’s application for an order prohibiting the Minister of Health from issuing an NOC to Actavis in respect of its generic version of CONCERTA, a drug used to threat ADHD [1]. Actavis’ invalidity and non-infringement arguments failed on the facts and on claim construction.

The active ingredient in CONCERTA is methylphenidate (“MP”), but the ‘852 patent does not cover MP itself, which was long used in the treatment of ADHD, particularly in the well-known drug Ritalin [7]. Rather, it covers a formulation which provides a “sustained-ascending dose over time,” for regulation of tolerance to MP. While Ritalin was widely prescribed, the original immediate release formulation had to be taken either two or three times a day, which led to compliance problems with school age children [8]. A subsequent slow-release formulation was puzzlingly ineffective, as it too worked only for a few hours. The insight which was the basis of the ‘852 patent is that the reason for the short duration of effectiveness, even for the slow release formulation, might be “acute tolerance,” where a patient becomes tolerant to a drug within a single dosing period [14]. This would explain the failure of the slow-release formulation; while the plasma concentration was stable over the dosing period, it became less effective because the patient developed tolerance over the same period. This hypothesis turned out to be correct [18]-[19]. This discovery led to the development of the ‘852 formulation, which provides a dosage that increases over time, so as to provide a stable response once balanced against the tolerance that would develop over the same period.

Actavis’ main invalidity attack was based on obviousness. Actavis argued that all the inventors had done was to confirm the hypothesis that the problem with slow-release Ritalin was acute tolerance to MP [44]. However, on the facts, while acute tolerance was one of the conceivable reasons for the problem, is was not at all obvious that it was actually the cause; indeed, most researchers at the time doubted that acute tolerance was the reason for the problems with slow-release Ritalin [47]. In light of this, the fact that it was easy to actually make a sustained-ascending dosage form is beside the point [48]. As was said long ago, in Canadian Gypsum [1931] Ex CR 180, 187, “[T]he inventive ingenuity necessary to support a valid patent may be found in the underlying idea, or in the practical application of that idea, or in both. It may happen that the idea or conception is a meritorious one, but that once suggested, its application is very simple,” but that is no bar to obtaining a patent.

On claim construction, Actavis argued that the phrase “sustained-ascending dose over time” meant “over an entire dosing period”. This was rejected by O’Reilly J, in favour of an interpretation that the dosage would have to rise for a sufficient duration to provide effective treatment over the dosage period [33]. This is different, given that the drug continues to be effective for at least a couple of hours after it stops releasing into the plasma [34].

While Actavis lost on claim construction, it had another non-infringement argument, namely that the release profile of its product was not good enough to make it effective at compensating for acute tolerance [57]. O’Reilly J rejected this argument on the facts, including the fact that Actavis’ product monograph confirmed both that the tablets will release MP at an ascending rate for 6 to 10 hours, and that the Actavis product was essentially equivalent to CONCERTA.

A Costs Cornucopia

Mediatube Corp v Bell Canada 2017 FC 6 Locke J
            2,339,447 / Internet Protocol Television / Fibe TV, FibreOp

In his decision, Locke J held that the plaintiff NorthVu’s ‘447 patent (Mediatube is the exclusive licensee), was valid but not infringed by Bell’s products. However, the infringement action fell apart halfway through the discovery process, if not sooner, with the result that the main thrust of the decision was more about allocation of costs rather than about patent infringement [7]. While no new principles of law were applied, the decision is important on costs simply because it is unusual to see so many requests for elevated costs considered, and several actually granted. This post focuses on a few of the more interesting costs issues. These turned generally on Rule 400(3) and particularly Rules 400(3)(i), which relates to conduct which tend to “unnecessarily lengthen the duration of the proceeding,” and (k) which relates to steps which are “improper, vexatious or unnecessary,” or “taken through negligence, mistake or excessive caution.” The overall message is that there will be costs consequences against a patentee for proceeding with a claim that it should have known was without merit.

No New Cases for the Week of 2 January

No new patent / NOC / data protection cases were released for the week of 2 January 2017.

No New Cases Last Week

Not very surprisingly, no new patent / NOC / data protection cases were released over the past week. I hope everyone at the Federal Courts had a good break, and will return ready to deal with all the interesting and difficult issues that patent law throws at us. Here's to 2017!

Sublingual Dosage Form Patent Valid but Not Infringed on the Facts

Meda AB v Pharmascience Inc 2016 FC 1362 Manson J
            2,629,988 / zolpidem / SUBLINOX / NOC

In this NOC proceeding, Meda’s ‘988 patent was held to be substantially valid, but not infringed by Pharmascience’s PMS-Zolpidem product. This result turned entirely on the facts, and no significant points of law were raised. The overbreadth discussion does provide an interesting example of the role of claim differentiation.

The ‘988 patent is a formulation patent, claiming zolpidem for the treatment of insomnia in a sublingual dosage form comprising an ordered mixture, in which the API is adhered to larger carrier particles, and a bio/mucoadhesive promoting agent [76]. (As I understand it, an “ordered mixture” means a homogeneous mixture, as opposed to a random mixture in which some degree of segregation may occur.

Validity was attacked on the basis of anticipation, obviousness, lack of utility and overbreadth [18]. The anticipation argument failed because the prior art relied on did not teach an ordered mixture or sublingual administration [134]. The patent is a combination patent, in the sense that all the elements were known in the prior art [77], and the question was whether it would have been obvious to combine them. On the facts, Manson J held that the combination was not obvious [154]. Pharmascience’s argument to the contrary was not helped by the fact that in a review article its own expert had described the ‘988 patent as “an unusual approach” and “very different from all the formulations that [he’d] read” [151]. The utility attack was based on the promise of bio/mucoadhesion. Manson J held that “[a]ll that is required is sufficient bio/mucoadhesion to achieve the promised rapid release and absorption” [176] and this promise was demonstrated by examples in the patent [178].

Pharmascience also attacked the patent on the basis of overbreadth. Specifically, Pharmascience argued that the claims were overbroad because it was necessary that the formulation (1) have the bio/mucoadhesive agent on the surface of carrier particles; and (2) be essentially free from water [157], and Claim 1 was invalid because it did not have the first limitation, and all the claims were invalid because none of them had the second limitation. Both limitations were, however, disclosed in the specification, and Meda responded that a POSITA reading the claims in light of the specification would understand those limitations to be implicit [162]. Manson J agreed that a skilled person reading the claim “in light of the specification as a whole, with a mind willing to understand, would know that the formulation would have to be essentially free from water to work” [168]. The attack based on the absence of that limitation therefore failed. However, Manson J held that it was not permissible to read limitation (1) as being implicit in Claim 1, because it was explicit in Claim 2 and following claims, and “the presumption against redundancy precludes this limitation from being implied into claim 1" [168]. Consequently, Claim 1 was invalid for overbreadth [168]. However, this did not substantially affect the strength of the patent as a whole, because Claim 2 was exactly the same as Claim 1 except that it did include this limitation. The interesting point is what would have happened if Claim 2 had omitted this limitation; it seems not unlikely that Manson J would have been willing to find it to implicit, as he did with the requirement of being free from water.

While the patent was held to be substantially valid, Manson J held that Pharmascience’s allegation of non-infringement was justified [195]. The reasoning on this point is not entirely clear, as the discussion was substantially redacted. It is nonetheless clear enough that the result turned on the facts.

No New Cases for the Last Two Weeks

No new patent / NOC / data protection cases have been released in the last couple of weeks.

Note that I generally only blog on substantive patent / pharma cases. If you want to keep abreast of all new Canadian decisions, including procedural decisions and copyright and trade-mark cases, I recommend subscribing to the Daily Intellectual Property News service from Alan Macek's IPPractice.

Are Damages an Element of a Claim under Section 7 of the Trade-marks Act?

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

E Mishan & Sons, Inc v Supertek Canada Inc 2016 FC 986 Hughes J
            2,779,882 / Industrial Design 146,676 / expandable garden hose

Tuesday’s post provided the background to the threats claim brought under s 7(a) of the Trade-marks Act, and yesterday’s post discussed the safe harbour for purely informative communications. Today’s post discusses the proposition, agreed to by counsel in Supertek 2016 FC 986 [7] and affirmed by Hughes J [28], that “Damages are . . . an essential element in a claim under section 7(a) of the Trade-marks Act.” Manson J put it somewhat differently, and more accurately, in Excalibre: “It is settled law that evidence of actual or potential damage is a necessary element for finding liability under section 7" [286, my emphasis]. The difficulty with this proposition, particularly in Hughes J’s formulation, is that if resulting loss is an element of the tort, then the plaintiff is not entitled to an injunction to restrain false statements discrediting its wares, and perhaps not even its costs in the action, unless loss has already been suffered. This is a very strange proposition. Certainly, a plaintiff is not entitled to a monetary award unless it has proven its loss, but why should a plaintiff be helpless to prevent false statements from discrediting its wares simply because it had the good sense to act promptly? Surely it is better to prevent the loss from happening in the first place than to provide relief after the fact.

Informative v Threatening Letters

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

E Mishan & Sons, Inc v Supertek Canada Inc 2016 FC 986 Hughes J
            2,779,882 / Industrial Design 146,676 / expandable garden hose

Yesterday’s post described the unjustified threats action under s 7(a) of the Trade-marks Act, and discussed its rationale, which is to prevent a patentee from interfering with the business of a competitor by persuading end-users, who are not interested in being caught up in litigation, to abandon the competitor’s wares. In light of that rationale, I must doubt the validity of the distinction between cease and desist letters that are threatening and those that merely informative. On the authority of Cullen J’s decision in M&I Door Systems Ltd v Indoro Industrial Door Co Ltd (1989), 25 CPR (3d) 477 (FCTD), it is said that the latter may engage s 7(a), while the former do not. As Mason J explained in Excalibre v API:

[282] Informative letters set out a patentee’s rights and provide information that will enable the recipient to understand what may constitute infringement. Threatening letters contain explicit or veiled threats that the recipient will be sued if they do not change a particular course of conduct.

Manson J accepted this distinction [282], as did Hughes J in Supertek [10]-[11], but neither actually applied it to defeat the action. Both held on the facts that the communications in question were threatening, in Excalibre J because the letters contained explicit threats of litigation [284], and in Supertek because the defendants had “deliberately and skilfully conducted themselves so as to leave [the recipient] with the impression,” that it would be sued for patent infringement [27]. The only case I have found in which the court dismissed the claim for a remedy under s 7(a) because the communication, while false, was “more informative than threatening” is M&I Door Systems itself (523).

M&I Door Systems cited no authority for this distinction. Indeed, Cullen J did not cite any authority at all on the interpretation of s 7(a) – not even the leading case, S. & S. Industries Inc. v. Rowell [1966] SCR 419. And M&I Door Systems is very difficult to reconcile with S. & S. Industries. Cullen J gave two main reasons for tempering his response to the claim under s 7(a). One reason is that the patent is prima facie valid and “the patentee has the right to act on that basis” (523). This point was the appellant’s main contention in S. & S. Industries (426), and it was rejected. As Gill notes, Cullen J’s holding on this point is “[s]eemingly in direct contradiction to the Supreme Court’s pronouncement in S. & S. Industries”: A. Kelly Gill Balancing Necessary Monopolies and Free Competition: Threats of Patent Infringement and Trade Libel (1998) 14 CIPR 125, 132. Gill was of the view that M&I Door Systems imposed a desirable limitation on the scope of s 7(a); while I don't agree on the policy point, I do agree with his legal analysis that M&I Door Systems is inconsistent with S. & S. Industries. The other main point made by Cullen J is that if he had held the patent valid, he would have had “little or no difficulty” in holding that it was infringed (523). This seems ancillary to the point regarding the prima facie validity of the patent, as the only basis for distinguishing between a false statement relating to validity and a false statement relating to infringement is that the patent is prima facie valid, while the patentee bears the burden of proving infringement. In holding that the prima facie validity of the patent was irrelevant, the SCC in S. & S. Industries implicitly rejected this distinction. Section 7(a) itself refers only to a “false or misleading” statement, and makes no distinction as to the reason why the statement is false. A third consideration noted by Cullen J was that the president of the patentee corporation, who sent the letters in question, was honestly convinced that the defendant’s products were infringing (523). Again, this goes to the absence of malice, and is irrelevant under S. & S. Industries. On the whole, I must wonder whether S. & S. Industries was even cited to Cullen J. Section 7(a) was raised as a counterclaim in an action for infringement, and the discussion of the issue was one page in a 47 page decision, the remainder of which dealt with validity and infringement. Perhaps the litigation effort was similarly apportioned.

Nor can a safe harbour for purely informative statements be justified as balancing the rights of the patentee to enforce its patent against the rights of the competitor to be free of unjustified interference. Even without any safe harbour for purely informative statements, the patentee will only be liable for damages under s 7(a) if it makes false statements that cause damage to the competitor by wrongly discrediting its wares. Why should the patentee escape liability if it has couched its false statements in the form of information rather than threats? Such a distinction seems to reflect the mala fides basis for the action which was rejected by the SCC in S. & S. Industries. Moreover, it is a very fine distinction, which may appeal to lawyers, but is unlikely to impress the practical business people who receive these letters, and who, as the facts in Excalibre show, may well not choose not to take legal advice at all. This opens the door to a patentee with a patent it knows to be weak, to nonetheless effectively halt its competitor’s sales. 

It may be suggested that without some kind of safe habour s 7(a) would be hard on small patentees who are legitimately trying to protect their patent rights. But adding in a safe harbour of this kind will be equally hard on small rivals who are legitimately trying to market a product which is in fact non-infringing. As Spence J pointed out in S. & S. Industries [1966] SCR 419, 423, the most straightforward means for a patentee to enforce its rights is to sue the manufacturer and join end-users, in which case the patentee may be able to obtain an interlocutory injunction restraining the allegedly infringing sales, but only on giving an undertaking in damages:

The injunction having been granted only upon his undertaking to pay the damages incurred thereby should he fail, he proceeds at his own risk. There would seem to be no valid reason why rather than choosing that forthright course he should be permitted to proceed by threats against the purchasers from the alleged infringer without rendering himself liable for damages unless his mala fides could be proved.

When seeking an interlocutory injunction, a good faith and reasonable belief in its claim does not shield the patentee from giving an undertaking. The threatened action against and end-user achieves the same end as an interlocutory injunction, namely to halt the competitor's sales, and accordingly, the SCC held that a reasonable belief in the validity of the claim is not a shield against s 7(a) either. By the same token, a patentee seeking an interlocutory injunction cannot avoid giving an undertaking in damages by asking politely, and neither should that shield it from liability under s 7(a).

A stronger justification for a safe harbour of this type is that without some kind of safe harbour the patentee would adopt what the UK Law Commission, No 360, ¶ 124 has described as “a ‘sue now – talk later’ culture because once infringement proceedings are issued, the provisions no longer apply.” Whether that is an adequate justification, given that any such safe harbour is liable to be abused, is a question for another day.

No Malice Requirement in Unjustified Threats Claim

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

In Excalibre v API, Manson J held that the three patents asserted by Advantage Products Inc (API), were either invalid or not infringed. This holding turned on the facts, and no significant new legal issues were raised. Of more interest, Manson J also held that the Excalibre parties were entitled to damages pursuant to s 7(a) of the Trade-marks Act, because API had threatened to bring infringement actions against end-users of the allegedly infringing Excalibre product, and these threats had caused the end-users to avoid buying Excalibre’s product. While Mason J applied established law on this issue as well, his decision is nonetheless significant as there have been only a handful of cases dealing with this provision in the fifty years since the SCC in S. & S. Industries Inc. v. Rowell [1966] SCR 419, aff’g 44 CPR 260 (Ex Ct) held that mala fides is not an element of a claim under s 7(a). This issue is salient at present because of the concern that patent assertion entities may level unfounded threats against end-users: see the 2016 US FTC Study on Patent Assertion Entity Activity Ch 3. (Though in this case, API is an operating company, not a patent assertion entity.) As discussed in this post, Excalibre v API is a paradigmatic example of liability for wrongful threats under s 7(a), and as such it illustrates why the threats action, and the SCC holding that mala fides is not an element, are sound as a matter of policy. In subsequent posts I will suggest that it is not correct as a matter of law to distinguish between threats and communications which merely provide information, and that this distinction is also dubious as a matter of policy. I also doubt whether it is right to say that damages is an element of the claim under s 7(a). While both of these points were raised in Manson J’s decisions, neither was crucial to the outcome.

In oil production, when a downhole pump is used to pump oil to the surface, the pump creates a torque which can cause the tubing string above it to unscrew. A torque anchor is a cylindrical device that prevents this by anchoring the tubing string to the fixed wellbore casing. The anchor is designed to lock into place when rotated clockwise (the direction of torque produced by the pump), and to unlock for removal when rotated counter-clockwise [34]-[36]. Both Excalibre and API make and sell torque anchors. API alleged that Excalibre’s CTA Torque Anchor infringed the API patents. As noted, Manson J ultimately held fact the CTA Torque Anchor did not infringe any valid patent.

In early 2008 some users of Excalibre’s CTA Torque Anchors, in particular Husky Energy Inc and Bronco Energy Inc, received letters from API’s lawyer stating, inter alia, that API held patents for specific torque anchor designs [29], that the CTA Torque Anchor infringed those patents, and that Husky and Bronco would be sued for infringement unless they immediately stopped sourcing CTA Torque Anchors [52]. These letters had the desired effect. Evidence from Bronco’s COO was that Bronco stopped using the CTA Torque Anchor immediately after receiving the letter, without even getting an infringement opinion, because it was easier to switch to a competing product [83]-[85]. Husky’s lawyer testified that Husky was litigation averse, and it also decided to stop purchasing the CTA Torque Anchor, without obtaining an infringement opinion, again because it was easier to switch to a different product [87]-[88]. She also stated that “an offer of an indemnity would not have changed her mind because she did not want to enter into a situation where Husky would be vulnerable to litigation” [90].

This is a paradigmatic illustration of the problem that the threats action is intended to address. For any individual end-user, the value of the product is its incremental value over the best alternative, which may well be less than the cost and inconvenience of litigation exposure. The manufacturer’s interest in defending its product is much greater, because the value to the manufacturer reflects its sales to multiple end-users. The value to the manufacturer therefore more closely reflects the aggregates social value of the invention. This means that a threat directed to an end-user may be effective in inducing it to stop using the product, even when infringement and validity are questionable.

Paragraph 7(a) of the Trade-marks Act provides that:

No person shall make a false or misleading statement tending to discredit the business, goods or services of a competitor;

The common law action of trade libel, aka slander of title, would only lie if the statements were made with malice. It was not enough that the statements made were untrue; they also had to be made without reasonable grounds for believing they were true: S. & S. Industries Inc. v. Rowell [1966] SCR 419, 426-27. However, s 7(a) is based not on the common law, but on Article 10bis of the Paris Convention for the Protection of Industrial Property, and, as Manson J noted at [279], in S. & S. Industries the SCC held that under s 7(a) there is no requirement that the false statements be made maliciously or with knowledge of their falsity. Thus he held that

[280] In this case, because I find that that no version of the CTA Torque Anchor infringes any of the API Patents, it is clear that Goodwin’s letters to Husky and Bronco (i.e., the January 16, 2008 Husky Letter; the February 1, 2008 Husky Letter; the April 28, 2008 Husky Letter; and the May 16, 2008 Bronco Letter), sent on behalf of API, contained false and misleading statements.

For convenience I will refer to a claim made under s 7(a) as a “unjustified threats” action, as the threats must be unjustified in the sense of being false, in order to attract liability. Because s 7(a) is not based on the common law, and because malice is not an element, the common law terms referring to slander or libel are no longer appropriate. The Canadian action must be distinguished from the action under s 70 of the UK Patents Act, 1977, which is referred to as an action for “groundless threats”, or, in the recently introduced Bill, “unjustified threats,” also on the view that “Threats to sue for infringement are unjustified where they are made in respect of an invalid right or where there has been no infringement”: Unjustified Threats Bill Explanatory Notes, ¶ 1. Despite this commonality, the UK provisions, both existing and proposed, are an evolutionary reform based on the common law, and the option of a reform based on Article 10bis of the Paris Convention was specifically rejected: see the UK Law Commission, No 360, ¶ 144. The UK experience is undoubtedly helpful in understanding the issues (see generally the UK Law Commission project on unjustified threats), but UK law on this point is not helpful in interpreting the Canadian provisions.

The absence of a malice requirement is sometimes criticized on the basis that a balance must be struck between “protect[ing] competitors and their customers against unfair threats, while still giving effect to the patent holder’s right under the Patent Act to charge these customers with infringement,” and the requirement of malice strikes this balance because it “permits the patent holder to exercise and protect its patent monopoly in good faith, while society is protected against the abuses caused by false and malicious threats of infringement”: A. Kelly Gill Balancing Necessary Monopolies and Free Competition: Threats of Patent Infringement and Trade Libel (1998) 14 CIPR 125, 128, 126; and see the UK Law Commission, No 346, ¶ 1.21, saying “The law should enable rights holders to assert and defend their rights, but this must be balanced by curbs on abuse,” (though the Law Commission recommended a safe harbour, rather than a mala fides requirement, as will be discussed in tomorrow’s post).

I accept the need for this balance, but it strikes me that an appropriate balance is struck even without any requirement of mala fides. A patentee whose patent is certainly valid and infringed can tell infringers as much without fear of liability, because the truth of its assertion is an answer to any action for unjustified threats. If its case is weak, the patentee will be exposed to risk, but it is only right that a patentee with a weak case should be hesitant to disrupt the business of a rival, on grounds that may ultimately prove unfounded. While the patentee is entitled to asserts its legitimate rights, the defendant equally has the right to operate freely if it is not in fact violating the patentee’s rights. The threats action, without any malice requirement, provides a proportionate incentive: the weaker that patentee's case, the greater the its exposure. In the absence of a malice requirement, the dial of potential liability increases smoothly as the patentee’s case becomes weaker. In contrast, a requirement of malice imposes a sharp cut-off; a patentee with a 49% probability that its patent is valid and infringed will expect to be liable for half the loss it causes (it will be 100% liable in 49% of cases, and not liable at all in 51% of cases), whereas a patentee with a patent that is 51% likely to be valid and infringed, faces no liability at all, though there remains a substantial likelihood that its threats are in fact unjustified.

Put another way, threatening a rival’s customers with an infringement action has the same de facto effect as an interlocutory injunction against the rival itself, as the rival will be effectively prevented from selling the allegedly infringing goods, before validity and infringement are definitively established. A plaintiff seeking an interlocutory injunction will almost invariably be required to give an undertaking to compensate the defendant for any harm caused by the injunction. The plaintiff is not excused from giving such an undertaking simply because it has a reasonable belief that its claim is well-founded. Nor is it excused from satisfying the undertaking if it turns out, after trial, that the plaintiff’s action was reasonable, though it ultimately failed. The requirement to give an undertaking in damages does not stop plaintiffs from seeking an interlocutory injunctions; it just ensures that they are appropriately careful when doing so. In the absence of an undertaking in damages, the risk would lie entirely with the defendant, who might suffer a substantial loss even if it ultimately prevails. Patent rights are no different from any other rights in this respect, and a patentee should not be able to use threats to a customer to harm a rival without fear of repercussion, even if the patentee had reasonable grounds for believing its patent was valid and infringed.

Addendum: I should have noted that in S. & S. Industries Spence J relied expressly on the parallel with an interlocutory injunction in holding that mala fides was not required under s 7(a):

Moreover, the person seeking to defend his patent has a choice of immediately commencing an action for infringement and applying for an injunction to restrain the continuance of such prejudice to his patent rights, or of bringing action for damages against those who use, in their business, the wares manufactured by the alleged infringer. If he chooses the first alternative, he may join as parties defendants all who purchase from the alleged infringer to use in their business. The injunction having been granted only upon his undertaking to pay the damages incurred thereby should he fail, he proceeds at his own risk. There would seem to be no valid reason why rather than choosing that forthright course he should be permitted to proceed by threats against the purchasers from the alleged infringer without rendering himself liable for damages unless his mala fides could be proved.

That is, if mala fides were an element, the patentee could avoid the risk associated with an undertaking by making threats against end-users.

It Is Not Possible to Contract out of the Priority Provisions of the Patent Act

SALT Canada Inc v Baker 2016 FC 830 Boswell J
            2,222,058

The main issue in SALT Canada v Baker was whether the FC had jurisdiction to order the patent register to be varied under s 52 to list SALT as the owner of the `058 patent, where determining SALT’s ownership turned on the interpretation of contracts assigning the patent rights to various parties. My earlier post on this case focused on the issue of the court’s jurisdiction. This post is a belated footnote, elaborating on a point I had addressed only in passing.

As part of his analysis of the Court’s jurisdiction, Boswell J emphasized that “Statutory rights in a patent are governed by the laws of the jurisdiction in which the patent exists,” no matter what court has jurisdiction over the dispute, and regardless of what law is applicable to the contract of assignment. “Therefore, no assignment or transfer can take place except in accordance with the laws of [the jurisdiction of the patent]” [30].

[31] Accordingly, nothing in the assignment agreements could have the effect of exempting them from the operation of section 51 of the Patent Act, which renders an unregistered assignment void against subsequent assignees. . . .

[32] The ultimate outcome of this case will thus need to take the Patent Act into account notwithstanding whatever provincial or foreign law may be applicable to the assignment agreements at issue. This will be so regardless of the forum that ultimately adjudicates this dispute, be it a provincial superior court in Canada or the Superior Court of the State of Georgia. . . .

I felt this point to be so clearly correct that all I said in my earlier post is that “This is certainly true.” Since then, I have seen some comments suggesting that it was a legal point of significance, so I thought I might elaborate.

The general principle is that the issue priority of rights affects third parties, and so cannot be varied by contract. A third party must know where to look to determine its rights. In particular, as Boswell J noted, s 51 renders an unregistered assignment void against subsequent assignees. This allows a party seeking to take an assignment from the current registered owner to look to the Canadian register to determine whether there are any prior rights that might impair its title. If the registration venue could be changed by contract, this would defeat the purpose of s 51. Therefore s 51 must apply regardless of the proper law of the contract, and by the same token it is not possible for the parties to an assignment of a Canadian patent to use a choice of law clause to displace the statutory priority provisions.

This is a long-established general principle of priorities. As the USSC explained in Harrison v. Sterry (1809) 5 Cranch 289, 298-99:

The law of the place where a contract is made is, generally speaking, the law of the contract; i. e. it is the law by which the contract is expounded. But the right of priority forms no part of the contract itself. It is extrinsic, and is rather a personal privilege dependent on the law of the place where the property lies, and where the court sits which is to decide the cause. . . . In this country, and in its courts, in a contest respecting property lying in this country, the United States are not deprived of that priority which the laws give them, by the circumstance that the contract was made in a foreign country, with a person resident abroad.

See similarly Gimli Auto Ltd. v. BDO Dunwoody Ltd., 1998 ABCA 154:

[9] Nor need one consider a choice-of-law clause in a lease, for the statute sets which law applies. Nor is this a suit between two parties to a contract. The whole point of the P.P.S.A. is to overrule certain contractual or property rights: Re Giffen, supra. The lessor and lessee could not, by contracting that the lease would be valid even if not registered, bind others. This is legislation on priorities: ibid.

The scholarly commentary wholly endorses this position. Cuming, Walsh & Wood, Perspnal Property Security Law (2d ed), 187-88 put is this way:

To what extent are the secured party and the debtor free to choose a different governing law than the law designated as applicable by the PPSA? Clearly, a contractual choice of law clause cannot bind third parties. It follows that contracting parties cannot displace the legal regime to which the PPSA refers issues relating to the validity, perfection and priority of security interests by selecting a different governing law in their contract. The proposition is a long-standing one, codified rather than introduced by the PPSA.”

See also the UNCITRAL Legislative Guide on Secured Transactions, Chapter 10, esp. para.13:

13. A corollary to recognizing party autonomy with respect to the personal obligations of the parties is that the conflict-of-laws rules applicable to the property aspects of secured transactions are matters that are outside the domain of freedom of contract. For example, the grantor and the secured creditor are normally not permitted to select the law applicable to priority, since this could not only affect the rights of third parties, but could also result in a priority contest between two competing security rights being subject to two different laws leading to opposite results.