Liability of the Parent Corporation / Implied Obligation of Confidence

Angelcare Canada Inc v Munchkin Inc 2022 FC 507 Roy J

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

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

Overview

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

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

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

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

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

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

Inducement

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

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

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

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

Liability of Parent Corporation

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

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

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

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

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

Implied Obligation of Confidence

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

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

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

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

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

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

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

Overbreadth

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

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

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

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

*In my initial post, this sentence reversed the names of the parties. Corrected as of 17 Feb 2023

Elevated Costs and Refusal to Bifurcate

Paid Search Engine Tools, LLC v Google Canada Corporation 2022 FC 519 McDonald J

2,415,167 / Paid Search Engine Bid Management

This is the costs decision following on 2021 FC 1435 (blogged here and here), in which McDonald J held that that the 167 patent asserted by Paid Search (PSET) against Google was invalid and not infringed.

McDonald J awarded costs at an elevated level (the upper range of Column of IV—Google did not seek a lump sum[10]), in light of several considerations. The main point of general interest is that PSET had refused to bifurcate and Google argued the consequent increase in litigation costs weighed in favour of elevated costs [23]. In response, PSET relied on Seedlings 2020 FC 505 [25], in which Grammond J noted parties are not required to seek bifurcation, and further noting, as McDonald J put it, “that the unsuccessful party would already face the consequences of failing to bifurcate as the costs award would include the fees that the successful party spent on the damages portion of the claim.”

McDonald J was not persuaded by this argument:

[25] In my view, this is a case that should have been bifurcated. The trial on construction, infringement and validity could have been conducted in half the time with significantly fewer experts. Although I acknowledge that, as in Seedlings, PSET will be responsible for Google’s damage experts’ fees, this was, nonetheless, a case that would have benefited [] from the liability portion of the claim [] proceeding in advance of the damages portion of the claim.

[26] Here, despite there being 59 claims that required construction, there is no doubt that the damages portion of the case took the majority of time and was the focus of most of the expert evidence. Damage and remedy-related evidence focused on reasonable royalty, accounting of profits, apportionment and non-infringing alternatives.

[27] This proceeding would have been more efficient as a bifurcated matter. The failure of PSET to agree to bifurcate is a factor which weighs in favour of higher fees.

This seems to be something of a difference of principle (albeit one that is within the discretion of the judge awarding costs). PSET v Google was perhaps more complex than Seedlings — McDonald J described this case as being “above average” in complexity [19], while Grammond J said Seedlings was “[not] overly complex” [p24], but I don’t read McDonald J as relying on this to distinguish Seedlings.

Moreover, I don’t see as the complexity of the case makes any difference. The question is whether the naturally elevated costs faced by an unsuccessful party who refused to bifurcate is a sufficient disincentive, or whether some additional sanction in the form of elevated costs is appropriate. Either way, the additional costs will increase proportionately with the complexity of the case, so I don’t think the complexity affects the principle. Similarly, some cases may benefit more from bifurcation if the damages portion is particularly time consuming relative to the liability portion, but again costs will increase proportionately under either approach.

The question of how to deploy costs awards to encourage just yet efficient resolution of a dispute is always tricky—there is no academic consensus even on the basis issue of the Amercian rule v the English rule for fee shifting—and I have no opinion as to which approach is preferable. I note that this case did not raise the problem of access to justice by small or unsophisticated parties: McDonald J observed that “PSET is neither an inexperienced nor an unsophisticated litigant. Accordingly, I do not accept that the access to justice rights of smaller patent holders is a factor that needs to be considered in setting the quantum of costs in this case” [15].

Non-Standard Bifurcation in SEP Litigation

Wi-Lan Inc v Apple Canada Inc 2022 FC 276 Tabib CMJ

This decision raises an interesting procedural issue regarding SEP litigation, in particular the question of a non-standard bifurcation. (Coincidentally, last Friday’s post also dealt with a non-standard bifurcation, albeit along different lines.)

Wi-Lan, a non-practising entity (NPE) [1], is suing Apple for infringement of its 159 patent. (The full patent number is not given in the decision, but my guess is that it is 2,686,159.) While not stated in the decision, Wi-Lan appears to be a patent assertion entity (PAE), which is to say that its main business is monetizing patents through licensing to operating companies. Wi-Lan asserts that the 159 patent is a standard essential patent (SEP) which is essential to the 4G and 5G standards. Apple denies that is it an SEP, but argues that if it is, Wi-Lan is not entitled to an injunction, and its sole remedy is a reasonable royalty on FRAND (fair, reasonable and non-discriminatory) terms [8].

In this motion, Apple is seeking to bifurcate the proceedings. Bifurcation is common in patent actions. In the standard bifurcation, the first phase deals with validity and infringement, as well entitlement to an injunction and the election between an accounting and damage, though not quantification. The second stage is quantification of the monetary remedy. In this motion, Apple sought a bifurcation in which the entitlement to remedies, not just quantification, would be left to the second stage. More specifically, validity and infringement would be assessed in the first stage, but “Wi-Lan’s right to an injunction, right to delivery up of infringing devices, right to elect between profits and damages, and the calculation of profits or damages” would be left to the second stage” [2].

Why is Apple seeking this unusual bifurcation? It may be that Apple’s main objective was to put off the question of Wi-Lan’s entitlement to injunctive relief [2] (though that may be reading too much between the lines.) If so, why would Apple seek to defer the question of Wi-Lan’s entitlement to injunctive relief to the second stage?

Injunctive relief plays an outsized role in SEP litigation, and more broadly in litigation involving any ‘complex’ product which embodies a large number of patented technologies, each of which contributes only a small part of the overall value. This gives rise to the problem of ‘holdup’. As Shapiro explained in an early influential article, Navigating the Patent Thicket (2000) 1 Innovation Policy and the Economy 119, 125 consider a manufacturer of a complex product

who could, with ease, invent around a given patent, if that manufacturer were aware of the patent and afforded sufficient lead time. Clearly, in this case the patented technology contributes little if anything to the final product, and any reasonable royalty would be modest at best. But, oh, how the situation changes if the manufacturer has already designed its product and placed it into large scale production before the patent issues . . . . The patentee can credibly seek far greater royalties, very likely backed up with the threat of shutting down the manufacturer if the Court indeed finds the patent valid and infringed and grants injunctive relief. The manufacturer could go back and redesign its product, but to do so (a) could well require a major redesign effort and / or cause a significant disruption to production, (b) would still leave potential liability for any products sold after the patent issued before the redesigned products are available for sale, and (c) could present compatibility problems with other products or between different versions of this product. In other words, for all of these reasons, the manufacturer is highly susceptible to holdup by the patentee.

The problem of holdup, when it exists, means that a patentee armed with an injunction can extract a settlement that reflects not just the value of the patented technology, but some part of the sunk costs that have been incurred by the manufacturer. A very influential article on the problem is Lemley & Shapiro, “Patent Holdup and Royalty Stacking” (2007) 85 Tex L Rev 1991. I have also addressed it in a couple of co-authored pieces, namely Ch 4 Injunctive Relief in Patent Remedies and Complex Products: Towards a Global Consensus (2019) and Ch 7 reviewing the literature; and Cotter, Hovenkamp & Siebrasse, Demystifying Patent Holdup (2020) 76 Washington and Lee Law Review 1501-65.

It is injunctive relief which allows the patentee to extract sunk costs, thereby capturing a reward greater than the value of the patent. Consequently, an important part of the response to the holdup problem in US law has been to deny injunctive relief entirely to patent assertion entities, following eBay v MercExchange (2006) 547 US 388: see Seaman, “Permanent Injunctions in Patent Litigation After eBay: An Empirical Study” (2016) 101 Iowa L Rev 1949. (I’ll note that in Farmobile v Farmers Edge 2022 FC 22, [80] blogged last Friday, Farmers Edge argued that Farmobile should be denied injunctive relief because it was a non-practicing entity (NPE). NPEs include patent assertion entities, but the category also includes eg small R&D startups which invent new technology but then licence it to a larger entity for commercialization. Those types of NPEs do not practice the invention themselves, but they typically seek to assert their patent rights to secure market exclusivity, albeit for their licensee or future assignee, not for themselves. This is in contrast to PAEs, which exploit the patent by licensing, rather than by enforcing market exclusivity. The distinction between PAEs and NPEs more broadly is important when considering injunctive relief. PAEs are almost never granted injunctive relief in US law, but NPEs seeking market exclusivity are not disfavoured, or at least not as disfavoured.)

The problem of holdup also arises in the context of SEPs specifically, because standards normally embody hundreds or thousands of patented technologies, subject to a FRAND obligation to grant royalties on fair, reasonable and non-discriminatory terms. In US law, injunctive relief is rarely granted for infringement of an SEP, on the view that the patentee is contractually bound to accept a reasonable royalty.

While injunctive relief is routinely granted to a successful patentee, we have not yet had a case in Canada squarely raising the question of whether injunctive relief should be granted to a PAE in respect of an SEP [9]. This case may be the first, if it proceeds to trial, as Apple is seeking to argue that Wi-Lan should be denied injunctive relief as a matter of law if the 159 patent is determined to be an SEP [8].

With all that in mind, I can think of a two reasons Apple might have been seeking to use bifurcation to delay the question of entitlement to injunctive relief.

One reason a manufacturer of a complex product might seek bifurcation of this point is that it would operate as a kind of stay, so that the manufacturer would have time to design around the patent if it were found to infringe. The manufacturer would still be liable for reasonable royalty damages for infringement during the design around period, but this would avoid or at least mitigate the holdup problem. That is unlikely to be the motivation in this case because it is not possible to design around an SEP, unless the patented technology at issue can first be removed from the standard entirely. (I think this has happened, but it is very rare).

A more likely reason is simply to delay the date the injunction comes into force. If the patent can’t be designed around, the excess value that can be extracted by a patentee armed with an injunction depends on the value to the manufacturer of having its product on the market. The less time that the injunction holds the patent off the market, the less the excess value. If I’m right that the 159 patent is 2,686,159, it expires in 2027. If this takes a couple of years to get to the end of the first stage—say end of 2023, with four years left—and another year to the end of the second stage, the difference between the grant of the injunction at the end of the second stage instead of the first would be roughly a 25% reduction in Apple’s maximum willingness to pay.

Neither of these is a good reason in principle for bifurcation. Both of these amount to using bifurcation as a substitute for a stay of the injunctive relief. But the purpose of bifurcation is to ensure the most expeditious and least expensive determination of the outcome, and to use it as a substitute for a stay would detract from that purpose. To the extent that it is desirable to limit injunctive relief, it should be done directly, by the court refusing injunctive relief entirely on substantive grounds, or tailoring the injunction to allow a design around. And in this decision Tabib CMJ refused to bifurcate because she found that “Apple has not met its onus to show that bifurcation would result in the just, most expeditious and least expensive determination of the issues on the merits in the circumstances of this case” [20].

Another reason Apple might be seeking a stay is to avoid having to argue the law with respect to entitlement to injunctive relief. As noted above, injunctive relief is routinely granted to a successful patentee. However, we have never had a case addressing entitlement to injunctive relief in respect of an SEP, and particularly when asserted by a PAE. SEP cases are clearly distinguishable in principle because of the FRAND agreement. PAE cases are also distinguishable in principle, as the US eBay approach illustrates—it is pretty clear that Wi-Lan would be refused injunctive relief in US law. I am not* necessarily of the view that the US approach should be adopted, either broadly or in its specifics; whatever one might think of the practical outcome, the eBay court’s doctrinal analysis is very suspect: see Gergen, Golden & Smith. 2012. “The Supreme Court's Accidental Revolution” (2012) 112 Colum L Rev 203. (And see Ch 4 of Complex Products for a more detailed discussion.) Moreover, European law is more favourable to injunctive relief in SEP cases, following Huawei v ZTE (2015) Case C-170/13. But the split in approach between US and European law serves to emphasize the difficulty of the issue. In my view, this is a difficult and novel point of law. If Apple prevailed on the merits, then Wi-Lan’s entitlement to injunctive relief would not arise, and it would not be necessary to argue the point. It would be understandable for Apple to try to avoid making this novel legal argument if it didn’t have to, and in my view, that would be consistent with the purpose of bifurcation.

On this point,

[19] Apple submits that delay in the determination of Wi-Lan’s entitlement to an injunction is just, because it would not be in the public interest to grant an injunction at all. Such an argument presupposes the ultimate favourable determination of Apple’s arguments on the merits. They require the Court to assess the merits and conclude that Wi-Lan’s claim to injunctive relief is most likely to fail. These arguments are, as discussed above, not factors that the Court should consider on a motion to bifurcate.

If, as this passage indicates, Apple’s argument turns on the point that injunctive relief should not be granted at all, then I agree that this is not a point that can be decided on a motion to bifurcate, without the benefit of full argument on a difficult legal point.

But it is a different matter if the argument is that there will be a saving by not having to argue the point at all if Apple prevails at the first stage. This brings us to the arguments “discussed above,” which evidently refer to this paragraph:

[12] It is untenable at law to take into account, in considering whether a bifurcation might result in substantial savings, that the cost of determining remedies would be entirely saved if the plaintiff were to fail to establish liability. If one is to consider significant or substantial savings as a reason to bifurcate, then those savings must come from the likelihood that the determination of the first phase issues would inherently lead to a narrowing of the issues in the second phase, whatever that determination may be.

I have to say I don’t find this persuasive. Suppose that the first phase will not lead to any narrowing of the second phase issues at all. There are no doubt some additional expenses inherent in bifurcation, so that if exactly the same issues will have to be litigated whether or not the case is bifurcated, the costs will be higher. This is a thumb on the scales against bifurcation.

But on the other hand, we know as a practical matter that many litigated patents are held to be invalid. This is not happenstance—parties will settle rather than litigate if both sides are confident as to liability, one way or other. Parties only choose the expense of litigation if there is a real dispute as to validity or infringement. Only the hard cases get litigated, so we expect to see, and what we do see, is that success more or less equally divided, overall. There will be a very substantial cost savings in all of those cases that don’t have to proceed to the liability phase at all. Moreover, there are often significant cost savings even in cases in which the patentee prevails, as the parties often settle before the second phase. Thus, on average bifurcation leads to substantial cost savings even if the issues are not narrowed at all. While it is true that a motions judge can’t predict in advance whether the particular case before her will be one of those in which there are substantial cost savings, I don’t see any reason to ignore the reality that bifurcation is likely to lead to costs savings on average.

The argument against seems to be that taking into account the cost savings that would result if there is no need to go to the liability phase would require an assessment of the merits, which is inappropriate at the very early stage where bifurcation is normally ordered [19]. That would be a strong objection if the bifurcation decision rests on a mathematical balancing of the expected costs of proceeding one way or the other. But that is not done, and it is not required. As Tabib CMJ noted, the combination of Rule 3 and Rule 107 means the basic question whether “is it more likely than not that a bifurcation order would result in the just, expeditious and least expensive determination of the proceeding on its merits, so as to justify depriving the Plaintiff from its basic right to have all its issues resolved in one trial” [4]. The Prothonotaries have considerable discretion of make such orders in light of their extensive experience in managing complex litigation. I see no reason that an appreciation of the practical cost savings should be a thumb on the scales in favour of bifurcation, on the other side. Against this is the idea that the patentee has a “basic right” to a single proceeding. This was articulated in Elcano v Richmond (1986), 55 OR(2^nd) 56, 59, quoted with approval in Bristol-Myers Squibb v Apotex 2003 FCA 263 [7]; but in Bristol-Myers Squibb v Apotex the FCA went on to say that “When an experienced specialist bar like the intellectual property bar commonly consents to the making of a bifurcation order, it is open to a judge to infer that, in general, such an order may well advance the just and expeditious resolution of claims” [9]. As I read it, this statement acknowledges that bifurcation results in costs savings on average, and holds that it is permissible for the motions judge to take this into account.

This is not to say that Tabib CMJ should have granted the motion for bifurcation in this case. Her decision turned on a number of other considerations specific to the motion, which I have not touched on. But it does seem to me that the fact that bifurcation can reduce costs by eliminating the need for a second stage if the alleged infringer prevails at the first stage, or if the parties settle, is a legitimate consideration in deciding whether bifurcation should be ordered.

*The original post omitted the word "not". My policy is not to make substantive changes to my posts, but I usually correct minor typos without comment. In this case, I always intended to say "not" - I trust that was clear from the context - but I thought I should make it clear that I was not trying to surreptitiously change my mind.

Non-Standard Bifurcation Refused

Farmobile, LLC v Farmers Edge Inc 2022 FC 22 McHaffie J

            2,888,742

This decision relates to a motion by Farmobile seeking to amend its pleadings to allege that the defendant, Farmers Edge, continued to infringe the 742 patent even after a recent software update that was intended to implement a non-infringing alternative; as well as a motion by Farmers Edge seeking amendments in response, which included new invalidity defences. I don’t go into these issues, which turned on the facts. Of more general interest, Farmers Edge’s also moved for a non-standard bifurcation. Patent actions are commonly bifurcated between liability and damages [113]. The first phase normally deals with validity and infringement, as well entitlement to an injunction and the election between an accounting and damage, but does not deal with quantification. In this case Farmers Edge’s proposed a bifurcation in which the first phase would deal with pre-update infringement issues, certain validity issues and inventorship, and the second phase would deal with post-update infringement, remedies—including injunctive relief—and certain residual validity issues [115]. McHaffie J had refused to permit the amendments introducing the residual validity issues, and as a result the motion was effectively to request bifurcation between validity and pre-update infringement in the first phase, and post-update infringement and remedies in the second [134].

While McHaffie J noted a non-standard bifurcatrion is possible—“Rule 107 does not limit the Court to a particular approach to bifurcation, provided it will lead to the just, expeditious, and least expensive determination of the matter on its merits” [114]—he nonetheless refused to order the proposed bifurcation. In part this was because of factors unique to this case, such as scheduling, but in part his decision turned on more general considerations.

First, with respect to Farmers Edge’s originally proposed bifurcation, he noted that:

[133] Farmers Edge’s suggestion that it be permitted to pursue some invalidity arguments at the first trial, holding back other invalidity arguments to be made if and when it is found to infringe some of the claims, appears entirely unworkable and unfair. In addition to having to recall expert witnesses to address related issues, it would put the Court in the position of attempting to determine infringement of claims whose validity had not ultimately been determined, while Farmobile would have to face a serial approach to invalidity arguments.

As noted, McHaffie J had refused to permit amendments introducing the new validity argument, and the point was therefore moot [144], but the general observation may provide guidance in future cases.

On the pre-/post-update bifurcation, he noted

[135] I can see no efficiencies in having experts and lay witnesses reattend at a second trial to address further infringement allegations regarding related, and in some cases overlapping, patent claims and software and hardware systems that will largely be the same. The issues are clearly interwoven. Dividing the infringement issues would mean that witnesses, experts, counsel, and the Court would all have to get back up to speed on the same technologies and readdress some of the same issues, even assuming the same counsel and trial judge are involved at the second trial.

[137] It is certainly possible that one or more of the issues Farmers Edge proposes be decided at the first trial could obviate the need for a second trial entirely. If, for example, the Court concludes that Farmers Edge is the proper owner of the ’742 Patent, or that the entirety of the patent is invalid on grounds of anticipation or obviousness, no second trial would be necessary. However, while this does not alone justify a serial approach in which various arguments are raised at different stages. The opposite possibility that Farmers Edge is not successful on these issues, and the efficiencies of having to conduct a second trial in such circumstances, must also

For these reasons, in addition to various reasons turning on the facts, he refused to order bifurcation [138].