There Is No Such Thing as Licensee Estoppel

Loops LLC v Maxill Inc 2020 ONSC 5438 Lederer J: Swinton, Penny, JJ revg 2020 ONSC 971 Templeton J

            2,577,109 / Toothbrush

In Lear Inc v Adkins 395 US 653 (1969) the US Supreme Court abolished the doctrine of “licensee estoppel,” which (more or less) prevents a licensee from challenging the validity of the licensed patent. Monday’s post summarized the decision of Lederer J for the Ontario Divisional Court holding that a “no-challenge” clause in a settlement agreement is enforceable, Lear v Adkins notwithstanding. In this post I will argue that there is really no such thing as licensee estoppel in Canadian law. More precisely, the rule at issue is simply based on contract law and it is not helpful to characterize it as based on an estoppel.

First, what exactly is the rule? The precise nature of the licensee estoppel rule was not at issue in this case, as the question was only whether the express no-challenge clause was enforceable. Lederer J at [61] did quote from Asturiana (1979) 55 CPR(2d) 131 (Ont HCJ) referring to the consistent Anglo-Canadian authority “that a licensee is not permitted to dispute the validity of the patents.” This is not exactly right because there are many circumstances in which a licensee is permitted to dispute validity. It is more accurate to say that a licensee cannot raise invalidity of the patent as a defence to an action for payment of royalties owing under a licence agreement, except in the case of fraud, unless the agreement contains an express covenant as to validity of the patent. (Asturiana was an action for payment of royalties, so the quoted statement is correct in that context.)

Now, in some respects the rule is very strict. In particular, the licensee cannot raise invalidity as a defence to an action for payment of royalties even when the patent has actually been held invalid in other proceedings: Mills v Carson (1893) 10 RPC 9 (CA); African Gold Recovery Co Ltd (1897) 14 RPC 660 cited with approval in Anderson v EJ Shepard Ltd (1930), 66 OLR 105 (CA) [20]; Duryea v Kaufman (1910), 21 OLR 165 (OHCJ) [23] (in obiter).

On the other hand, it is subject to a major exception. While a licensee cannot raise invalidity as a defence to an action for payment of royalties under the licence, a licensee, even a current licensee, may always raise invalidity as a defence to an action for infringement: this was in fact the holding in Duryea v Kaufman, the leading case that firmly established licensee estoppel in Canadian law with a thorough review of the English cases; see also Bayer AG v Apotex Inc (1995) 60 CPR(3d) 58 (OGD) 73 (“a licensee will not be estopped from alleging that the patent is invalid if the action brought against it is for infringement of the patent”) aff’d (1998) 82 CPR (3d) 526 (Ont CA) 532-33; Fuel Economy v Murray (1930) 47 RPC 346 (Ch) at 353 (“an estoppel cannot arise in an action for infringement”) aff’d 358 (CA). So, for example, a current licensee may argue invalidity if the patentee alleges the licensee has infringed by carrying out activities outside the scope of the licence, whether by falling outside of the permitted uses (Apotex v Tanabe (1994) 59 CPR(3d) 38 (OGD) 49; Bayer AG v Apotex Inc) or outside the geographic scope of the licence (Fuel Economy v Murray). A defendant claiming a right by licence may plead invalidity in the alternative: Duryea [35], [41]-[42]. A former licensee whose licence has come to an end by revocation, lapse of time, or any other method, may raise invalidity as a defence to an action for infringement in the same manner as if it had never had a licence: Duryea [35]; Crossley v Dixon (1863), 10 HLC 293, 308. Conversely, a former licensee may not raise invalidity as a defence in an action for unpaid royalties owing under the agreement that was formerly in effect: Crossley v Dixon (1863), 10 HLC 293, 308; Philco Products Ltd v Thermionics Ltd [1943] SCR 396, 419.

Now, while this rule is commonly referred to as an estoppel, it is not based on any recognized form of estoppel. Indeed, in every case I have found in which a recognized estoppel has been argued, it has been rejected: see Curtiss-Wright Corporation v Canada [1968] 1 ExCR 519 (rejecting estoppel in pais and promissory estoppel); Cropper v Smith (1884), 1 RPC 81 (CA) (rejecting arguments based on estoppel of record, estoppel by deed and estoppel in pais) aff’d on this point (1885) 10 AC 249 (HL) at 259. In Clark v Adie (No 2) (1877), 2 AC 423, 435-36 (HL) Lord Blackburn drew a loose analogy with the position of a tenant of lands who is his estopped from denying his lessor’s title so long as the lease remains in force, and the tenant has not been evicted from the land, he is estopped from denying that his lessor had a title to that land. However, Lord Kenyon in Hayne v Maltby (1789) 100 ER 665 at 666, rejected the analogy.

This should perhaps not be very surprising. Generally speaking, an estoppel is an equitable doctrine that supplements contract law by giving effect to some representation that is not supported by consideration, such as in promissory estoppel when a representation by one party to an agreement leads the other party to suppose that the agreement will not be strictly enforced, even though no consideration may have been given for the forebearance: John Burrows Ltd [1968] SCR 607 at 614-16; Curtiss-Wright Corporation v Canada [1968] 1 ExCR 519 at 530; and see generally John D McCamus, The Law of Contracts, (2005), Ch 8. It is sometimes said that the licensee estoppel arises “from the fact of the relationship itself,” (Fox on Patents 3^rd ed Vol I, 618; Fox 4^th at 320) but this is clearly not true; a licensee may raise invalidity as a defence if there is an express guarantee that the patent is valid, notwithstanding that the nature of the relationship is otherwise the same. In any event, it is very difficult to see how the act of entering into an agreement could in itself give rise to an estoppel making it inequitable to insist on the terms of the agreement.

In Lear the US Supreme Court at 656 explained that

The theory underlying this doctrine is that a licensee should not be permitted to enjoy the benefit afforded by the agreement while simultaneously urging that the patent which forms the basis of the agreement is void.

Perhaps this was the theory in US law, but it cannot be the explanation for the Anglo-Canadian rule; it is perfectly clear, as discussed above, that when sued for infringement a current licensee may indeed enjoy the benefit of the licence agreement while simultaneously urging that the patent is void.

So, we have a bit of a puzzle. Licensee estoppel is an estoppel that is not related to any other estoppel, that does not prevent either party from relying on the strict terms of the contract, and that operates only in respect of a claim brought on the contract. In short, it looks a great deal like a contract doctrine.

And indeed it is. The basis for the “estoppel” doctrine is really very simple. A licensee cannot raise invalidity as a defence to an action for unpaid royalties under a licence because the validity of the patent is normally immaterial to the obligation to pay under the contract. This has nothing to do with estoppel; it is purely a matter of contract. The licensee is contractually obliged to pay and unless otherwise provided in the contract, that obligation is not contingent on the validity of the contract. The “estoppel” such as it is, does not arise from the relationship between the parties, it arises from the terms of the contract. See Aidan Robertson, “Is the Licensee Estoppel Rule Still Good Law? Was It Ever?” 10 EIPR 373 (1991) making much the same point.

This explains what might otherwise be counter-intuitive aspects of the doctrine. It is why the actual invalidity of the patent, established in different proceedings, has not afforded a defence. It is not because the courts have buried their heads in the sand, like ostriches, resolutely ignoring the fact of invalidity; rather, the courts have in effect said, “Yes, we know the patent is invalid, but that doesn’t affect your obligations under the contract.” That is why fraud is an exception; contracts induced by fraud are not enforceable as a matter of general contract law doctrine. That is why an express provision is an exception; it is no exception at all, as the question is simply a matter of interpreting the contract, and an express term will always trump an implied term. That is why a licensee in good standing can always raise invalidity as a defence to an infringement action; invalidity is always material to the licensee’s obligation to pay damages for infringement, even when it is not material to the licensee’s obligation to pay royalties. That is why licensee estoppel is not related to any other established form of estoppel: it is not an estoppel, but purely a matter of contract. When an allegation of invalidity by the licensee is struck, it is simply on the basis of the procedural rule that allegations that can have no effect on the outcome of the case should be struck as a waste of judicial resources.

The more interesting question is why, as a matter of contract law, the obligation to pay royalties does not turn on the validity of the patent (unless of course, the agreement itself so provides). The answer is most clearly articulated in the early cases, decided before the matter was settled simply by reference to authority. It follows from two principles. First, a warranty or guarantee of validity will not normally be implied into a licence agreement; absent express language or special circumstances, either a licence or assignment is presumed to be transferring only such rights as the letters patent conferred upon the patentee: Electric Fireproofing Co of Canada v Electric Fireproofing Co (1910) 43 SCR 182 at 184-85 (Davies J), 189-90 (per Duff J), 195 (Anglin J) (assignment); Vermilyea v Canniff (1886), 12 OR 164 (OntHCJ), 169 (licence); Duryea (1910), 21 OLR 165 [10]-[14] (reviewing the cases); Anderson v EJ Shepard Ltd (1930), 66 OLR 105 (Ont CA) [19] (licence); Rymland v Regal Bedding Co Ltd (1966), 51 CPR 137 (Man CA) 141 (licence). This is because the validity of the patent turns on objective considerations—the early cases dealt primarily with anticipation by a third party publication—and not on information peculiarly within the knowledge of the patentee, and therefore the licensee is generally as well placed as the patentee to assess the validity of the patent: Hall v Conder (1857) 140 ER 318, 327; Taylor v Hare (1805) 127 ER 461, 462; Lawes v Purser (1856) 119 ER 1110, 1112; Vermilyea v Canniff (1886), 12 OR 164 (OntHCJ), 169; Rymland v Regal Bedding Co Ltd (1966), 51 CPR 137 (Man CA) 141. As the exception that proves the rule, if the patentee had actual knowledge of invalidity, this would likely constitute fraud that would enable the licensee to raise invalidity even in an action for payment under the contract: see Lawes v Purser (1856) 119 ER 1110, 1112. Moreover, this is not a strict rule as such; it is simply the usual outcome of interpreting the contract in light of the fact that the licensee is normally in as good a position to assess validity as the licensor. Thus the most accurate statement of the law is that “Courts are not prepared to readily extend the meaning of doubtful words so as to convert them into an express warranty of the validity of a patent”: Rymland 141.

Second, invalidity of the patent does not normally constitute complete failure of consideration, as even an invalid patent may effectively confer the benefit of exclusivity until such time as it is challenged: Vermilyea v Canniff at 169; Lawes v Purser (1856) 119 ER 1110, 1112; Taylor v Hare (1805) 127 ER 461, 462. So, in the early English case of Taylor v Hare, the licensee had practised the invention for 6 years before discovering prior art said to anticipate, and sought on that basis to recover all the royalties that had been paid to date. The court rejected the action, with Heath J stating at 462 “It might as well be said, that if a man lease land, and the lessee pay rent, and afterwards be evicted, that he shall recover back the rent, though he has taken the fruits of the land.” A licence agreement may also involve a transfer of know-how or confidential information, or more than one patent, so that it would be unwarranted to read in a provision absolving the licensee of the obligation to pay on the basis of the invalidity of one patent. Consequently, even when there is language in the agreement relating to the validity of the patent, the courts will not interpret it as absolving the licensee of the obligation to pay royalties (unless it is expressly to that effect); it is more likely to be interpreted as a warranty, breach of which might be the basis for a counter-claim in damages: see eg Hall v Conder (1857) 140 ER 318, 323; Gillard v Watson (1924) 26 OWN 77 (OCA).

In summary, there is no rule of licensee estoppel, because there is no rule and it is not an estoppel. While a licensee cannot normally raise invalidity as a defence to an action for payment of royalties, this is simply because the obligation to pay royalties under the licence is not normally conditional on validity.

No-Challenge Clause in Settlement is Enforceable

Loops LLC v Maxill Inc 2020 ONSC 5438 Lederer J: Swinton, Penny, JJ revg 2020 ONSC 971 Templeton J

            2,577,109 / Toothbrush

This interlocutory motion concerns the enforceability of a “no-challenge” clause in a settlement agreement. It also indirectly raises the question of whether Canadian law should follow the decision of the US Supreme Court in Lear Inc v Adkins 395 US 653 (1969) and abolish the doctrine of “licensee estoppel,” which (more or less) prevents a licensee from challenging the validity of the licensed patent. At first instance Templeton J held that the no-challenge clause at issue was not enforceable (see here). In this appeal, Lederer J, for a unanimous panel of the Ontario Divisional Court, reversed, holding that a no-challenge clause in a settlement agreement is indeed enforceable according to its terms. At the same time, he left the door open to the possibility that Lear might be followed in a different context as part of the incremental evolution of the law; my sense is that he did not particularly favour such a development, but was simply concerned not to decide any more than was necessary to dispose of this motion.

In this post, I will summarize Lederer J’s decision. I agree entirely with his reasons, both in the substantive analysis and in his balanced approach to legal change. In two subsequent posts I will address issues that are raised by the decision, but which go beyond what was required by this appeal. My next post will review the Anglo-Canadian law and argue that there is no such thing as licensee estoppel; more precisely, “estoppel” is a very unhelpful label for a doctrine grounded entirely in contract law and not on any kind of equitable principle. In my third post I will argue that Lear is not sound as a matter of policy and should not be followed in any context, even as a part of a more incremental development of the law.

Facts

Loops and Maxill are in the toothbrush business. In 2012 Loops sued Maxill in Canada for infringement of Loops’ 109 patent. Two years later they reached a global settlement, which contained a “no-challenge” clause stating that Maxill would not “directly or indirectly assist any person attacking the validity” of either the Canadian 109 patent or the corresponding US Patent 8,448,285 [3]–[5], [ONSC 971/15]. Maxill then created another toothbrush to try to design around the 109 patent. In 2015 Loops sued Maxill in Canada over the new toothbrush, this time for breach of the Agreement [7], [ONSC 971/20]. In 2017 Loops also sued Maxill in the US, alleging the same new toothbrush infringed the US 285 patent [9]. Shortly thereafter, a US subsidiary of Maxill, Maxill (Ohio), brought an action seeking a declaratory order that the 285 patent was invalid [10]. The US actions were consolidated in Washington [11]. The result of the US consolidation is that Maxill itself was attacking the validity of the US patent, notwithstanding the no-challenge clause in the settlement agreement; under Lear, as interpreted in the US 9^th Circuit (which includes Washington), the no-challenge clause is unenforceable [ONSC 971/62]. Loops then brought this Canadian motion for an interlocutory injunction prohibiting Maxill from challenging the validity of the US 285 patent in the US litigation, on the basis that this was a breach of the no-challenge clause in the Agreement [ONSC 971/1]. In effect, Maxill is seeking a partial anti-suit injunction to enforce the no-challenge clause in the settlement agreement.

Because the injunction sought involved the enforcement of a restrictive covenant, this required Loops to make out a “strong prima facie case” on the merits [15]. In the decision under appeal, Templeton J held that Loops had failed to make out a strong prima facie case, for three reasons, the first two of which are largely peculiar to the case. The Divisional Court reversed on all points.

Does the Discoverability Rule Apply to the Patent Act Limitations Provision?

Paid Search Engine Tools, LLC v Google Canada Corp 2020 FC 992 McVeigh J

            2,415,167

In this motion McVeigh J declined to direct the proposed determination of a question of law relating to the limitations period in s 55.01 the Patent Act pursuant to Rule 220(1)(a), but in so doing she decided an equally important question of law—just not the one that was asked. This issue is also very interesting, and I’m afraid I went down the rabbit hole—this blog post is longer than the decision.

The patent at issue was published in January 2002 and granted in March 2017, and an action was brought by Paid Search against Google on January 12, 2018 [3]-[4]. The question presented for determination by Google was whether the six-year limitation period in s 55.01 of the Act applies to a claim for “reasonable compensation” pursuant to s 55(2) of Act, for acts of ‘infringement’ between the time the application was published and the time the patent was granted,“such that in the present action no remedy, including no reasonable compensation, may be awarded for any act of infringement committed prior to January 12, 2012?” [4]. Thus the answer to the question affects the claim to reasonable compensation potentially over a ten year period, depending on when any infringement began.

Rule 220(1)(a) allows the court to determine a pure question of law when that question may be answered without having to make any determination of fact [10]. McVeigh J held that the question was not a pure question of law because the discoverability rule applies to the s 55.01 limitation period [14], [23]. Under the discoverability rule, the limitation period does not begin to run until the material facts were reasonably discoverable: Pioneer Corp v Godfrey 2019 SCC 42 [31] cited at [16]; and see eg the s 5 of the Ont Limitations Act for a statutory implementation. The discoverability rule therefore turns on factual issues, including “the moment at which [Paid Search] learned of the patent infringement, the moment [Paid Search] was able to commence the action and the reasons for the delay, if any” [24]. So, if the discoverability rule applies, the question posed — as to whether reasonable compensation may be awarded for acts prior to January 2012 — is not a pure question of law [24]. While the question might nonetheless be decided under Rule 220 if the relevant facts were undisputed, that was not the case [25-26]. McVeigh J consequently dismissed the motion [29]. Her holding on this point was strictly not determinative, as she also held that determination of the question prior to trial would not be likely to save time and money, particularly given the likelihood of an appeal of the motion decision [33]-[46], but the central holding was that the discoverability rule applies to s 55.01.

Thus, while McVeigh J declined to answer the question of whether limitations period barred reasonable compensation prior to the relevant date, she did answer the even more important question of whether the discoverability rule applies to the limitation period set out in s 55.01 of the Act, which applies to any remedy:

55.01 No remedy may be awarded for an act of infringement committed more than six years before the commencement of the action for infringement.

This is a novel point of law, as McVeigh J noted: “The question of whether the discoverability principle applies to the limitation period found in section 55.01 of the Patent Act has not been yet resolved by the courts” [17].

You Can’t Have Your Non-infringing Alternative and Eat it Too

Hospira Healthcare Corporation v The Kennedy Trust for Rheumatology Research 2020 FCA 191 Gleason JA: Stratas, Laskin JJA aff’g 2019 FC 1252 & 2019 FC 1253 Phelan J

            2,261,630 / infliximab / INFLECTRA

In the liability phase of Hospira v Kennedy Trust 2018 FC 259 var’d 2020 FCA 30 Hospira and others were found to have infringed the 230 patent by making and selling INFLECTRA, an infliximab biosimilar of REMICADE [FC 16-17]. They also had a second drug, REMSIMA, also an infliximab biosimilar. During the liability phase Hospira took the position that REMSIMA was the same as INFLECTRA in material respects and the liability trial proceeded on that basis [2]. During the damages phase of the proceedings, Hospira sought to amend its Statement of Issues to assert that REMSIMA was a non-infringing alternative, which it claimed disentitled the patentee to damages [2]. Phelan J, in unreported decisions, held that the proposed amendments were abusive as being a radical departure from the position taken by Hospira in the liability phase, and undercut the basis upon which the proceeding had taken place [5]. The FCA has now affirmed. The FCA noted that “While there may well be cases where a party may set out an alternative for the first time as part of the ‘but for’ world in the damages phase of a patent infringement matter, this is not one of them” [5].

Filgrastim Patent Obviousness Upheld on the Facts

Amgen Inc v Pfizer Canada ULC 2020 FCA 188 Stratas JA: Gleason, Laskin JJA aff’g 2020 FC 522 Southcott J

1,341,537 / filgrastim / NEUPOGEN / NIVESTYM

Southcott J at first instance in this NOC decision found Amgen’s 537 patent to be obvious on an obvious-to-try analysis in a decision that turned almost entirely on the facts. The FCA has now upheld that the decision, largely on the usual basis that read holistically, there was no overriding error, and it is not the FCA’s role to re-weigh the evidence [12]. The FCA then went further and specifically approved Southcott J’s decision, saying that even if it had reviewed the evidence de novo, it would have come to the same conclusion [13]. The FCA commended Southcott J’s analysis, saying “we consider the Federal Court’s reasons worthy of recognition for their attention to detail, their careful analysis of the rival experts and the thorough analysis throughout.

Split Consent Effective under the NOC Regs

 Fresenius Kabi Canada Ltd v Canada (Health) 2020 FC 1013 Manson J

IDACIO / HUMIRA / adalimumab

AbbVie is the owner of several patents relating to adalimumab / HUMIRA. AbbVie and Fresenius Kabi entered into a confidential licensing agreement evidently allowing Fresenius Kabi to market its biosimiliar IDACIO. Fresenius Kabi then sought an NOC relying on s 7(2) of the PM(NOC) Regulations which permits the Minister to grant an NOC if the owner of the patent consents to "the making, constructing, using or selling of the drug." AbbVie wrote to the Minister consenting to "the making, constructing, and, on and after February 15, 2021, to the using and selling" in Canada by Fresenius Kabi of IDACIO [4]. Evidently the temporal split in the consent was to allow Fresenius Kabi to stockpile the drug for launch on February 15. The Minister refused to accept this as effective consent for the purposes of s 7(2), on the basis that the "or" should be read as "and" to avoid an absurd result [12]. Manson J reversed on reasonableness review [9], holding that "or" should be read as "or" [22]-[25] and that this did not result in any absurdity [31]-[33]. Manson J also noted that the Minister's interpretation failed to recognize that one purpose of the Regulations is to allow the timely market entry of generics [29]-[30]; if the temporal split in consent were not permitted, this would result in delayed launch [35].

Manson J’s analysis strikes me as being entirely compelling. The direct practical implication is that the NOC Regulations will not prevent parties from entering into an agreement that ensures launch on a specific date, but not before.

A broader point is that different judges of the Federal Court have consistently interpreted reasonableness review under Vavilov 2019 SCC 65 as endorsing a fairly robust review of Health Canada’s statutory interpretation decisions: in addition to this decision of Manson J, see also Natco 2020 FC 788 McHaffie J (here); ViiV Healthcare 2020 FC 756 Fuhrer J (here); Glaxosmithkline 2020 FC 397 Barnes J (here), all reversing Health Canada on statutory interpretation issues. (I’m not an admin law expert, so I don’t really know how different the results would have been prior to Vavilov.) Substantively, I’m pleased to see this, as Health Canada’s interpretation struck me as unreasonable in all these cases and the FC intervention has helped ensure that the law develops in the manner that would have been intended by the legislature. Of course, Health Canada isn’t always wrong in its stat interp decisions — see Janssen 2020 FC 904 (here) (though even there Health Canada was simply following an FCA decision)—but statutory interpretation just doesn’t seem to be one of Health Canada’s strengths. That is fair enough, given that their mandate is focused on “helping Canadians maintain and improve their health.”

Blogging Break

I'll be taking a break from blogging for a couple of weeks. I'll be back as usual sometime in mid-November. 

Variation of Injunction Refused

 Bombardier Recreational Products Inc v Arctic Cat, Inc 2020 FC 946 Roy J

          2,350,264

After protracted litigation and a couple of trips to the FCA, Bombardier Recreational Products (BRP) finally prevailed in its patent litigation against Arctic Cat and was granted a permanent injunction. In this motion Arctic Cat and its dealers sought to vary that injunction using Rule 399. This is Arctic Cat’s third attempt to avoid the injunction. The final substantive decision in this litigation was the 15 June decision of Roy J in 2020 FC 691: see here. After prevailing on the merits of the 264 patent (one of several that had been asserted), BRP had requested the usual permanent injunction, which would have the effect of prohibiting Arctic Cat and all its dealers from selling Arctic Cat’s current model year snowmobiles. Arctic Cat had resisted vigorously, arguing that the injunction should not be granted at all. Roy J rejected Arctic Cat’s arguments [178-94], and granted a permanent injunction “to restrain the Defendants, their . . . distributors and dealers having knowledge of the injunction” from “selling or offering for sale, making, using or distributing in Canada any [infringing] snowmobile.” BRP notified all the dealers after the injunction was granted, [12]-[13], so there was no dispute that the inventors had knowledge of the injunction. Arctic Cat then sought a stay pending appeal, which was refused: 2020 FCA 116, discussed here and here.

In this motion Arctic Cat, as well as some of its dealers (who had not previously been directly involved in the litigation), tried again, bringing motions under Rules 399(2) and 399(1), respectively, seeking an order to vary the injunction [1]. The effect of the variation would be to allow dealers to sell infringing snowmobiles that they held in stock as well as pre-ordered snowmobiles. The motions were unsuccessful, largely because Rule 399 isn't a vehicle for varying an injunction that has been granted after full argument on the merits.

While I agree with Roy J’s holding in the context of Rule 399, I would suggest that Canadian courts should be more willing to consider staying or tailoring a permanent injunction (eg by carving out certain products) in appropriate circumstances. As I discussed in a recent post on Nova v Dow, sunk costs and the difficulty of doing full patent pre-clearance means that the patent system can hinder rather than advance innovation. In Patent Remedies and Complex Products: Towards a Global Consensus § 4.4.3, p155-56, we argue that tailoring of injunctive relief in appropriate circumstances can mitigate some of the worst effects. This case was arguably appropriate for tailoring. I must acknowledge that in my post on Roy J’s decision granting the injunction, I noted that “Roy J’s analysis was brief and I agree entirely.” However, because the analysis was brief I didn’t fully grasp the issues, and moreover, the argument was framed as denying the injunction rather than staying or otherwise tailoring it. After blogging on the more recent proceedings, I have a better handle on the issues, and while I won’t say that the injunction in this case should necessarily have been stayed or tailored, I will say that the possibility should have been taken more seriously.

I am the author of the Canada chapter in a forthcoming book on the comparative law of tailoring injunctions, Contreras & Husovec (eds) Injunctions in Patent Law: a Trans-atlantic Dialogue on Flexibility and Tailoring (Cambridge U Pr) (expected release in spring 2021). In their synthesis chapter, Professors Contreras and Husovec divide countries into four groups. In Group A injunctions are granted essentially as of right, while in Group B injunctions are in fact discretionary. There are two subgroups in each category: A1 with automatic issuance upon a finding of infringement, most prominently Germany; A2, with automatic issuance upon a finding of infringement owing to attitudes of judges, despite the fact that that the law gives them some discretion eg Poland; B1, in which injunctions generally issue, but there is an individualized assessment in some cases, most prominently the UK; and B2, with individualized assessment in all cases, comprising only the US. While injunctions are clearly discretionary in principle in Canada, the suite of decisions in the Bombardier v Arctic Cat litigation, as well as decisions such as Valence v Phostech 2011 FC 174 (see here) indicate that Canada belongs in Group B2. I would like to see Canada move closer to the UK position, where injunctions are normally granted, but there is a real possibility of tailoring after a principled analysis in appropriate cases.

This point is only tangential to the main holding in the decision at hand. The thrust of Roy J’s decision was that if the injunction was to be tailored, it should have been done at first instance or on the application for a stay pending appeal; the opportunity has now passed. That seems right to me. 

However, I raise the point because some of Roy J’s obiter remarks suggest tailoring or staying injunctive relief is almost never appropriate. I recognize that Roy J’s remarks are broadly consistent with those of Rivoalen JA in the stay application in this litigation, and also with Gauthier J’s brief analysis in Valence v Phostech. It is because precisely because this series of decisions from different judges indicates a general view in the FC/FCA that I feel the point is worth pursuing. At the same time, I should also point out that Roy J’s original decision does show the possibility of tailoring, as Roy J deliberately refused to order delivery up of infringing snowmobiles in possession of the dealers, so as to allow them to sell those machines after the expiry of the patent. It is just this kind of flexibility that I suggest should be more often considered.

With that long preface, I’ll turn to the decision itself.

The main substance of Roy J’s decision dismissing both motions was fairly straightforward. Rule 399(2), relied on by Arctic Cat itself, allows the Court to set aside or vary an order “by reason of a matter that arose or was discovered subsequent to the making of the order.” There simply wasn’t any new matter [30]. Arctic Cat tried to argue that the scope of the injunction was unclear and this was discovered after the order was made [31], but this argument failed because any lack of clarity did not arise subsequent to the making of the order, so Rule 399(2) was not applicable [30]. In any event, the order wasn’t actually unclear at all [31]. Citing Abbvie 2014 FCA 176 [43], Roy J noted that Rule 399 is applicable “[o]nly if there is specific, particularized evidence of significant, unforeseen difficulty in following the terms of an injunction” [27]. The motion sought to allow the dealers to sell infringing snowmobiles that they owned and that were in their possession, but this was clearly prohibited by the express terms of the order restraining “dealers having knowledge of the injunction” from “selling or offering for sale” any infringing snowmobile. This could hardly be clearer [41]. Moreover, the scope of the injunction was not a mistake. Roy J noted that dealers had not been ordered to deliver up infringing snowmobiles in their possession. Roy J made this order deliberately, so as to allow dealers to retain those snowmobiles and sell them after the expiry of the patent [33]. But this reinforces the point that Roy J intended that dealers be prohibited from selling during the term [41]. Arctic Cat also argued that the pre-ordered sleds were already sold to the final customers, or at least that there was ambiguity on this point. Roy J had no difficulty concluding that the title to the pre-ordered sleds—which had not yet even been manufactured—had not passed to the customers [21].

The motion made by the dealers raised essentially the same issues. It was brought under Rule 399(1), which allows the court to set aside or vary an order that was made “(a) ex parte; or (b) in the absence of a party who failed to appear by accident or mistake or by reason of insufficient notice of the proceeding.” Again, the motion did not fit within the scope of the rule as the order was not made ex parte, and the dealers were not parties who failed to appear by mistake, as they were not parties at all [53]-[54].

With that said, the motion by the dealers raises an interesting issue precisely because they were not parties and they are now bound by the injunction even though they never had a chance to argue its merits. As Roy J pointed out, non-parties may be bound by an injunction: MacMillan Bloedel [1996] 2 SCR 1048. But that being the case, it would seem all the more reason why third parties who are bound by an injunction should have the chance to challenge the injunction after it has been granted, as they will not be in a position to argue the merits before the fact. Roy J remarked that “the issues raised by the Dealers were defended by Arctic Cat with a great deal of vigour. In essence, the Dealers seek to litigate that which has already been litigated” [53]. In a practical sense there is a great deal of force to that observation. But in our legal system parties normally have a right to be heard, and I am not very comfortable by dismissing this right by saying “Don’t worry, someone else argued your case for you without telling you about it, and we think they did a pretty good job”—even if it is true that the case was well argued. Given that breach of an injunction may be sanctioned by contempt, it seems to me that there is a strong prima facie argument that any party bound by an injunction should have the opportunity to challenge it on the merits. I doubt that such an opportunity would be abused. If indeed the original party did argue the case well, then the third party seeking to re-argue the injunction would face an uphill battle; it would probably lose and then would have to bear its costs as well as some part of the plaintiff’s costs. None of this is to criticize Roy J’s holding. Even if such a mechanism is desirable, it seems clear that Rule 399 isn’t the right vehicle. I have to wonder whether there is a procedural gap in the law in this respect, though I have not researched the point thoroughly.

Thus, I do agree with Roy J’s analysis and holding in respect of Rule 399. But Roy J also indicated that he would not have been inclined to vary the order in any event [36]-[37]. In part, this was because doing so would be tantamount to a compulsory licence: “The monopoly conferred by a patent is gone: moral hazard is a thing of the past, as there is an incentive to increase one’s exposure to risk by infringing on a patent because the infringer will not bear the whole cost. The infringer does not have to abide by an injunction as it can be substituted for a compulsory royalty” [38]. To repeat a point I made in an earlier post, this litigation has been ongoing since 2011, and BRP has been in effect subject to a compulsory licence for that entire period, as we now know that Arctic Cat was infringing the entire time, with the only consequence that it is liable in damages. The reason for this is that the Federal Court will never grant an injunction in patent cases, on the view that damages are an adequate remedy. If an interlocutory injunction was refused because damages are an adequate remedy, how can we then say that a permanent injunction must be granted because damages are inadequate? Certainly, there is a stronger case for a permanent injunction because we now have a substantive holding on the merits that the patent was valid and infringed; but this is a separate consideration from the adequacy of damages.

Roy J also remarked as follows (my emphasis):

[38] In the context of an infringement of the Copyright Act (RSC, 1985, c C-42), the Federal Court of Appeal found in R. v James Lorimer & Co. [1984] 1 FC 1065 [77 CPR(2d) 262] [James Lorimer], that “the copyright owner is prima facie entitled to an injunction restraining further infringement” (p. 1073). The Court goes on to “find no authority for requiring a copyright owner to acquiesce in a continuing infringement against payment of a royalty. That is tantamount to the imposition of a compulsory licence. In the absence of legislative authority, the court has no power to do that”. There is no reason to depart from the principle described in James Lorimer.

With due respect, to the extent that the emphasized statement suggests that the court has no power to refuse an injunction, it is wrong. In the first place, the provision of the Patent Act authorizing injunctive relief, s 57(1), provides that a court “may. . . make such order as the court or judge sees fit.” This expressly gives legislative authority to grant or refuse an injunction. Moreover, as a matter of general principles, injunctive relief is inherently discretionary as being an equitable remedy: “The traditional rule is that an injunction will be granted only where damages would provide an inadequate remedy” Sharpe on Injunctions and Specific Performance § 1.60. Now, it is true that “[w]here the plaintiff complains of an interference with property rights, injunctive relief is strongly favoured,” and “the conventional primacy of common law damages over equitable relief is reversed. Where property rights are concerned, it is almost that damages are presumed inadequate and an injunction to restrain continuation of the wrong is the usual remedy.” However, “as always with equity, this must be understood to be a principle rather than a rule” Sharpe § 4.10. Thus it is perfectly clear that a court has the inherent jurisdiction to refuse injunctive relief. It is true that there is only one Canadian case refusing to grant a permanent injunction to a successful patentee, namely Unilever (1993), 47 CPR(3d) 479 (FCTD)(1995), 61 CPR(3d) 499 (FCA) (though injunctive relief was moot on appeal as the patent had expired). But the fact that injunctive relief is normally granted does not mean the courts do not have the authority to refuse it. Indeed, in the UK at least, injunctive relief has been refused even in the case of trespass to land: see Jaggard v Sawyer [1995] 2 All ER 189 (EWCA).

I hope I have not been unfair in dwelling unduly on an issue that was not central to Roy J’s holding. But his views, coming on the heels of those of Rivoalen JA, suggest there may be a widespread view in the Federal Courts that a permanent injunction should always be granted. I do agree that an injunction should normally and presumptively be granted, but it is quite clear that the courts do have the authority to tailor or stay a permanent injunction, in appropriate circumstances, and I would welcome a more rounded discussion of when tailoring might be appropriate.

Camso v Soucy Affirmed from the Bench

Camso Inc c Soucy International Inc 2020 CAF 183 Nadon JA: Boivin, Leblanc JJA aff’g 2019 FC 255 Locke J

            2,372,949 / 2,388,294 / 2,822,562 / 2,825,509 / ATV Track Assemblies

At first instance, Locke J held all the claims at issue to be all the claims in issue to be invalid for anticipation and/or obviousness. As discussed here, his decision turned on claim construction and the facts. The FCA has now affirmed in a brief decision from the bench.

Summary Judgment Granted

 Flatwork Technologies, LLC (Powerblanket) v Brierley 2020 FC 997 McVeigh J

            2,383,341 / hydraulic boom heating wrap

The 341 patent relates to a heating wrap for articulated hydraulic booms, to keep them operational in very cold temperatures such as in the oilfields of northern Alberta where the invention was developed. In this decision McVeigh J granted a motion for summary judgment, holding the 341 patent invalid for obviousness, essentially on the basis that equipment heating wraps eg for a blowout preventer, were a standard part of the prior art and it was not inventive to apply such a wrap to an articulated hydraulic boom [94].

Takeda Applied: Enantiomers per se Ineligible for Data Protection

 Janssen Inc v Canada (Attorney General) 2020 FC 904 Zinn J

esketamine hydrochloride / SPRAVATO

Janssen applied for data protection for SPRAVATO, in which the medicinal ingredient is esketamine hydrochloride, an enantiomer of the ketamine hydrochloride [3]. Ketamine hydrochloride is the medicinal ingredient in the previously approved drug KETALAR [7]. A drug is only eligible for data protection if it is an “innovative drug” under section C.08.004.1(1) of the Food and Drug Regulations, which provides that a drug is not eligible if it is a variation of a previously approved drug “such as a salt, ester, enantiomer, solvate or polymorph.” In a split decision in Takeda 2013 FCA 13 the FCA interpreted this provision as providing that enantiomers are per se ineligible for data protection: see here. Relying on Takeda, the Minister refused Janssen’s application.

Janssen then sought judicial review of the Minister’s decision. In a straightforward decision, Zinn J applied Takeda to dismiss the application, on the basis that there are no factual differences which could permit him to depart from Takeda [26].

Fixed Costs and Sunk Costs

 Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE, SURPASS

Yesterday’s post discussed Stratas JA’s holding that in an accounting of profits, an infringer may always deduct some portion of its fixed costs [162]. That holding was based on Stratas JA’s rejection of “but for” causation, which does not make allowance for fixed costs unless the infringer had an outside opportunity. I am of the view that “but for” causation, and the differential profit approach from Schmeiser 2004 SCC 34 [102], which follows from it, is sound in principle. Nonetheless, I acknowledge that a real inequity may arise if a deduction for fixed costs is prohibited in cases in which the infringer did not have any outside opportunity. This is not only a moral inequity; it is a serious concern in terms of innovation policy. In this post, I will argue that the ultimate reason for this injustice is not the treatment of fixed costs, but rather the treatment of sunk costs. Consequently, the solution must look beyond an accounting to broader remedial principles, especially principles relating to injunctive relief.

This post is based on the following remark:

[160] Denying the deduction of fixed costs generates a distorted picture of the infringer’s profits. It may be the case that an infringer has minimal variable costs but very high overhead costs such that the product is not, in fact, profitable. The incremental approach. . . could force that infringer to disgorge “profits” from an unprofitable product.

This statement is somewhat obscure and I treated it cursorily in yesterday’s post, noting that there is nothing wrong to requiring the infringer to disgorge profits from an unprofitable product if it would have been even less profitable but for the infringement.

But the phrase alluding to the “distorted picture of the infringer’s profits” suggests a different point. I’m not sure whether it reflects what Stratas JA had in mind, so I didn’t want to treat it at length yesterday, but it’s interesting enough that I decided to devote a post to it. The basic idea is that sunk costs are real costs that must be incurred to make an infringing product, and if no allowance is made for sunk costs the infringer may be required to disgorge more than its actual profits.

Deduction of Fixed Costs in Nova v Dow

 Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

As explained in my first post, Stratas JA’s decision for the majority in Nova v Dow departed from established law by rejecting “but for” causation in the context of an accounting of profits in favour of using a non-infringing “baseline” to assess the amount to be disgorged. Subsequent posts have discussed various conceptual issues: see here and here. This post turns to the specific question of deductibility of fixed costs. This question is important in practice—deduction of fixed costs can have a substantial impact on quantum—it is conceptually difficult, and the case law is unsettled. Stratas JA’s decision would always allow an infringer to deduct some portion of fixed costs, regardless of whether the infringer had another opportunity that it would otherwise have pursued [162]. This is a bold holding, which departs from prior Canadian practice and is in contrast with the UK and Australian law. Unfortunately, Stratas JA’s holding on fixed costs is based on his unorthodox approach to causation, and consequently, as I will suggest in this post, it is unsound in principle.

It’s not clear to me how trial courts and litigants will deal with this issue going forward. On the one hand, the majority in Nova v Dow held that a proportion of fixed costs are always deductible, but on the other hand this holding is based a rejection of “but for” causation in the context of an accounting and is therefore, in my view, inconsistent with the SCC authority in Schmeiser 2004 SCC 34. Now, in many cases, deduction of a portion of fixed costs is permitted by Schmeiser, so it may be some time before a case arises in which the two approaches diverge. When such a case does arise, I would guess that the FC judge will do the calculation both ways, pick one, and then let the FCA sort it out on appeal. Perhaps that day will come sooner rather than later, as the uncertainty created by Nova v Dow will make it more likely that an accounting of profits dispute will go to trial rather than settling.

Non-Infringing Baseline as an Alternative to “But For” Causation

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

In an accounting of profits the infringer is required to disgorge its profits caused by the infringement. In the standard approach causation is determined using the “but for” test, in which the amount the infringer actually earned by using the infringing technology is compared with what the infringer would have earned in the hypothetical “but for” world in which it used the best non-infringing option: Schmeiser 2004 SCC 34 [102]. As explained in last week’s post, Stratas JA’s decision for the majority in Nova v Dow rejected “but for” causation in the context of an accounting of profits. He proposed instead to assess the profit to be disgorged by comparing the infringer’s actual profit against a non-infringing “baseline,” which, in his view, better reveals the value added by the invention itself [62], which is to say the value associated with the “inventive quality” of the patented technology [78]:

[73] Non-infringing alternatives are used not to determine what the infringer could have done instead of infringing (i.e., “but for” reasoning), but instead to establish a non-infringing baseline to isolate the value of the patent.

Stratas JA did not provide an explicit definition of the non-infringing baseline, but rather illustrated its nature with one or two examples. While I appreciate the intuition underlying Stratas JA’s examples, the rule under established law is that the infringer must disgorge the profits caused by the infringement, not the profits associated with the inventive quality of the patented technology. The established “but for” test isolates the profits caused by the infringement and in my view this is sound as a matter of policy.

Stratas JA emphasized the need for a causal nexus throughout his decision, but he made the point in a couple of subtly different ways. In many places he emphasized the need for “a causal connection between the profits to be disgorged and the patent infringement” [46]; and see similarly [27], [32]. In other places he stated that the disgorgement of profit “must focus on the value added by the invention itself” [62]; and see similarly [61] (“causally attributable to the value of the patent”), [78] (quoted below). I’ll argue that there is a difference between these two ways of framing the causation requirement, and that the first is correct while the second is not.

First we need to understand what Statas JA meant by the “value added by the invention itself.” He gave a couple of examples to illustrate what he meant:

[64] What is the value of a patented pain reliever that provides eight hours and one minute of pain relief when there is a non-infringing alternative that provides eight hours of relief? The patentee did not invent pain relievers; the patentee only invented a drug that added an extra minute of relief.

In this example, the pain reliever that provides eight hours of relief is the “baseline” against which the value of the patented pain reliever is to be assessed. To the extent that the eight hour pain reliever is readily available on the market, “but for” causation and the non-infringing baseline give the same result. But for the infringement, the infringer would have used the eight hour pain reliever, and the benefit from the patent is the extra one minute of pain relief, which is also identified by Stratas JA as the value of the patent. Stratas JA’s suggestion at [73] that non-infringing alternatives have really been used to establish a non-infringing baseline seems to be saying that in many cases, such as the pain-reliever example, “but for” reasoning does end up with the correct “baseline” comparator.

Constructing the “But For” World Is Not a Purely Subjective Inquiry

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

In an accounting of profits the infringer is required to disgorge its profits caused by the infringement. In the standard approach causation is determined using the “but for” test, in which the amount the infringer actually earned by using the infringing technology is compared with what the infringer would have earned in the hypothetical world in which it used the best non-infringing option: Schmeiser 2004 SCC 34 [102]. As explained in last week’s post, Stratas JA’s decision for the majority in Nova v Dow rejected “but for” causation in the context of an accounting of profits. In so doing, he gave two thought-provoking examples which raise foundational questions regarding the nature of the “but for” world. In this post and the next, I will argue that it is not necessary to reject “but for” causation in order to address the issues raised by Stratas JA’s examples.

The first example, which is the subject of this post, raises the issue of whether the law takes a subjective or objective approach to the infringer’s behaviour in the “but for” world. As I understand Stratas JA’s analysis, he is of the view that the “but for” test for causation requires a purely subjective inquiry into what the particular infringer would have done but for the infringement. I will argue that on the contrary, “but for” causation often incorporates an objective element, both in the law generally and in the patent context. I will suggest that the prior caselaw is consistent with an approach in which the “but for” world is constructed by asking what an informed and prudent party in the position of the infringer would have done but for the infringement. Such an approach would address the concerns raised by Stratas JA’s first example.

To turn to the details, Stratas JA provides two examples to illustrate the proposition that “[t]he use of hypotheticals and the ‘but for’ test . . . has no place in an accounting of profits” [67]. In the first, the infringer, but for the infringement, would have invested in speculative stocks:

[69] For example, if an infringer could prove in evidence that, but for the infringement, it would have used its capital to invest in, say, Apple or Amazon before their market ascendance then the infringer could retain the vast majority, if not all, of its profits. But for the infringement, the infringer would have earned much more investing in Apple or Amazon than selling the infringing goods. By Professor Siebrasse’s “but for” logic, the infringer would not have to disgorge anything because using the infringing product was actually detrimental to the infringer’s overall profitability.

[70] The reality is that infringers may not always pursue the next best non-infringing alternative. It may be the case that without access to the patented product, the infringer might have pursued an entirely different course, for example, speculative investments in emerging tech companies, and would have lost everything.

I’ll call this the Apple / Amazon example. The reference is to my 2004 article, “A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms” (2004), 20 CIPR 79, that was cited with approval in Schmeiser [102].

Stratas JA emphasized throughout his decision that an accounting requires disgorgement of all profits caused by the invention, and only profits caused by the invention: [27], [32], [39], [46], [61], [ 62]. I agree. Stratas JA is evidently of the view that the value of the patented seed does not depend on whether, but for the infringement, the infringer would in fact have invested in Apple at its nadir or Yahoo at its peak. Again I agree. More broadly, I take his point to be that the value of the invention should not necessarily be assessed on solely the basis of a strictly factual inquiry as to what the particular defendant would have done but for the infringement. Here again, I agree.

However, Stratas JA offered this example to show that “[t]he use of hypotheticals and the ‘but for’ test . . . has no place in an accounting of profits” [67]. That is, Stratas JA is evidently of the view that the “but for” test for causation does not get us to the right result in the Apple / Amazon example: “By Professor Siebrasse’s ‘but for’ logic, the infringer would not have to disgorge anything because using the infringing product was actually detrimental to the infringer’s overall profitability” [691]. From this I infer that Stratas JA is of the view that the use of a hypothetical “but for” test for causation necessarily entails a subjective approach, requiring an inquiry as to what the particular infringer would have done had it not infringed; therefore, in his view, if the inquiry is not subjective, it is necessary to reject the “but for” test for causation. This is where I disagree. The law of causation permits the use of an objective approach, or at least an objective element, in assessing the defendant’s behaviour in the “but for” world, and the concern raised by the Apple / Amazon example can be addressed within the standard framework by using an approach that asks how a reasonable infringer in the position of the defendant would behave.

Now, a purely subjective approach is not as unreasonable as it might appear at first impression, notwithstanding the intuitive appeal of the Apple / Amazon example. If a purely subjective approach were used then in some cases, as Stratas JA pointed out, the profits to be disgorged would be much less than the true value of the invention; an inventor who, but for the infringement, would have gambled and won, would be better off than one who had invested prudently [69]. On the other hand, as Stratas JA also pointed out, in some cases the award would be higher than the true value of the invention, in cases in which the infringer would have gambled and lost [70]. In theory, this should all come out in the wash. Sometimes the infringer would win, sometimes it would lose, but these random deviations from the true value of the invention would all average out. Since the patent incentive is prospective, the expected return to invention would stay the same and incentive function of the patent system would not be impaired.

However, there are two second order problems with a purely subjective approach. First, on the facts of any given case, the award might fail to reflect the value of the invention if the infringer would have behaved idiosyncratically. If a patentee received half the value of their invention, it would be cold comfort to tell them that some other patentee in some other trial would get twice what they deserved. Similarly, an infringer hit with an award much greater than the value of the invention to them would not appreciate being told, “Don’t worry, some other infringer will get off scot free.” Second, there is a selection bias problem. Patentees who anticipated that the accounting award would be unduly low as a result of idiosyncratic behaviour by the infringer would elect damages instead. This means that it would not all come out in the wash: the accounting cases would disproportionately reflect cases in which the infringer would be required to disgorge more than the value of the invention.

Thus, I agree that the Apple / Amazon example raises a real problem. But the solution is not to abandon “but for” causation. Rather, it is to use an objective approach to the infringer’s behaviour in the “but for” world.

So, in Mustapha 2008 SCC 27, the defendant owed a duty to the plaintiff and breached its duty by supplying bottled water with a dead fly in it. This in fact caused significant mental harm to the plaintiff. While the trial judge awarded damages, the SCC reversed, holding that the damages suffered were too remote to be viewed as legally caused by the defendant’s negligence, unless it could be shown that “a person of ordinary fortitude” would suffer serious injury in the same circumstances: [18]. Thus, the trial judge erred by applying a subjective standard—looking solely to the effect on the particular plaintiff—when an objective standard—looking to a person of ordinary fortitude—should have been used. Now, Mustapha was a negligence case, and foreseeability considerations are not relevant in intentional torts, and have not generally been raised in patent infringement. But the broader point is simply that “but for” causation does not inherently require a subjective inquiry into the effect of the wrong on the particular defendant.

Nor is the “but for” inquiry purely subjective in patent law generally. For example, if a patentee cannot prove damages in the form of lost profits, it is entitled to damages in the form of a reasonable royalty. The reasonable royalty is determined on the basis of a hypothetical negotiation between the infringer and the patentee at the time of the infringement. This hypothetical negotiation is not simply a reconstruction of what would have in fact happened but for the infringement; on the contrary, it is commonly applied when it is clear on the facts that the patentee would have refused to licence to the infringer on any terms. As the en banc Federal Circuit remarked in the leading case of Rite-Hite v Kelly 56 F3d 1538, 1554 n13 (Fed Cir 1995), the “willing licensor/willing licensee” characterization is “inaccurate, and even absurd, when, as here, the patentee does not wish to grant a license.” Moreover, it is well established, at least in US law, that the parties to the hypothetical negotiation are taken to bargain on the basis that the patent was valid and infringed, even though parties to an actual negotiation would not have known that the patent was valid and infringed, and so would normally be expected to allow a discount to allow for the possibility of invalidity. As another example, it would seem that a patented alternative will not be considered a legitimate alternative, even if the infringer would in fact have used it: see Cefaclor 2018 FCA 217 [55] and here.

The problem of idiosyncratic defendant behaviour specifically has also been raised in the patent infringement context. In Cefaclor 2018 FCA 217 the question was whether the putative NIA would have been economically viable. Gauthier JA for the FCA held that while the subjective perspective of the infringer may be relevant [72], it is not determinative (original emphasis):

[72] In my view, economic viability is not something that is assessed solely from the subjective perspective of an infringer such as Apotex. . . .

[73] However, as I noted earlier, the court’s goal is to assess the real value of the patented invention(s). Such value cannot be assessed on a purely subjective basis. Evidently, the court must be satisfied that the NIA invoked was objectively an economically viable substitute at the relevant time. To say otherwise would mean that the value of a patent could be artificially reduced by an infringer who behaves in an unorthodox manner, or whose adoption of a substitute is motivated by reasons other than economic ones.

This seems to me to be a direct answer to the Apple / Amazon example. Gauthier JA identified exactly the same problem raised by Stratas JA, and addressed it by holding that a purely subjective approach to the “but for” world should not be used.

With that said, I do not want to endorse a strictly objective approach to the defendant’s behaviour in the “but for” world. The main difficulty with an objective test is determining what is in fact objectively reasonable. As Gauthier JA pointed out in Cefaclor, what the particular infringer would have done helps inform what a reasonable party in the same position would have done [72]. If the actual infringer is in fact reasonable, then the two inquiries will give the same result. In the business context, at least, it is probably sound to presume that the particular infringer was reasonable: see here. That means that even if we adopt an approach to infringer behaviour in the “but for” world that is objective in principle, a subjective inquiry will almost always be necessary and will often be determinative. In most cases it will difficult to disentangle whether the inquiry is subjective or objective, and unnecessary to do so.

So, my point here is not to argue for a specific objective test. Rather, my argument is simply that it is not necessary to entirely reject “but for” causation to deal with the issue of idiosyncratic infringer behaviour. The “could have and would have” test for assessing whether a putative non-infringing alternative may be considered was originally set out in Lovastatin 2015 FCA 171. While that test continues to develop through the case law, it provides a good framework for balancing subjective and objective considerations in constructing the “but for” world. Consequently, in my view the existing legal framework of “but for” causation is entirely capable of addressing the problem raised by the Apple / Amazon example.

I’ll end with a couple of tangential notes. First, the issue of a subjective or objective approach to the “but for” world was not decided in Schmeiser. The question in Schmeiser was the whether the entire actual profits were to be disgorged or only the differential profits. It did not purport to settle all the details of the way in which the differential profit approach should be applied, in the same way that the SCC’s endorsement of “but for” causation in Athey [1996] 3 SCR 458 did not settle the precise nature of the test in the context of psychological injury that was addressed in Mustapha. Second, it is not clear to me why Stratas JA was of the view that the logic in my 2004 article would imply a subjective approach [69], given that the description I gave in the passage quoted by Stratas JA at [68], suggested that the touchstone would be an objective one, of a defendant acting in “a prudent and informed manner” while trying to maximize its profit without infringing. With that said, I have to admit that my suggestion of an objective test in my 2004 article was largely fortuitous, as the focus of my argument was that the differential profits should be disgorged, and not the entire actual profits. In any event, the issue needs to be addressed in light of the case law as it has developed since Schmeiser, in cases in which these problems arise on the facts.

 

Nova v Dow: A Radical Departure from Established Law

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE, SURPASS

The decision of Stratas JA for the majority in Nova v Dow raises a panoply of important conceptual and practical issues related to an accounting of profits, and non-punitive monetary remedies more broadly: whether the test for causation is the same in an accounting and damages; whether an accounting should provide a disincentive to infringe; the nature of the non-infringing alternative in the “but for” world; whether the hypothetical world should be constructed on subjective or objective terms; the role of opportunity costs; and the deductibility of fixed costs. And this is not to mention other less foundational but nonetheless significant issues of disgorgement of springboard profits and the date for currency conversion. Unfortunately, this decision is not likely to settle any these issues; on the contrary, it is likely to increase uncertainty in this entire area of law.

In a series of decisions, following from the seminal decision of the SCC in Schmeiser, 2004 SCC 34, the FCA has built up what I consider to be a sound and principled approach to non-punitive remedies: see Lovastatin Damages 2015 FCA 171; Venlafaxine s8 2016 FCA 161; Perindopril Accounting #1 2017 FCA 23; Cefaclor Damages 2018 FCA 217; Perindopril Accounting #2 2020 FCA 60. While some important loose ends remain outstanding, the foundations were solid. Stratas JA’s decision for the majority in Nova v Dow has thrown a grenade into that edifice and rattled it down to those foundations. The general statements of principle set out by Stratas JA constitute, in my view, a radical and unsound departure from established principles, including those set out by the SCC in Schmeiser. Some specific holdings might be seen as refinements of prior law, but even then, because of the unorthodox reasoning, it is not clear whether even these points can now be considered settled.

Overbreadth Argument Rejected as Being Akin to the Promise Doctrine

Eli Lilly Canada Inc v Apotex Inc 2020 FC 814 St-Louis J

2,492,540 / tadalafil / CIALIS ADCIRCA

In this case, Lilly asserted that the processes used by Apotex to make tadalafil infringed Lilly’s 540 process patent. In addition to non-infringement, Apotex argued that the 540 patent was invalid for anticipation, obviousness, lack of utility and overbreadth. St-Louis J held that while the 540 patent would be infringed if it were valid, it was invalid for anticipation and obviousness, though the attacks based on lack of utility and overbreadth failed [204]. So far as I can tell, the holdings of invalidity on the basis of anticipation and obviousness turned on the facts and not on any point of law, though I have to say that the facts were quite complex and it is possible that I missed an issue.

There were a few other points of interest: (1) St-Louis J rejected an overbreadth attack as being akin to the promise doctrine; (2) there was a discussion of the presumption relating to process patents; and (3) there was a discussion of obvious errors in a claim, which related to the utility argument.

Overbreadth

Apotex argued that the 540 patent was overbroad on the basis that a particular (redacted) solvent has been tested and found not to work, but the disclosure nonetheless stated that it was useful [350].

St-Louis J rejected this argument, saying:

[356] The way that Apotex articulated the allegation of overbreadth in this case appears indeed very akin to the promise doctrine, abolished in AstraZeneca SCC. What Apotex really asks the Court to do is to parse the disclosure, conclude that [redacted solvent] promises to be useful for the PSR, import [redacted solvent] into Claim 1 in the absence of any ambiguity, and strike Claim 1 as a result.

She noted that the SCC in AstraZeneca SCC warned against this, and stated that “As such, the doctrine of overbreadth should not be applied in the manner suggested by Apotex, akin to the promise doctrine” [358].

St-Louis J’s comments strike me as entirely sound (with the caveat that her description of Apotex’s argument at [350] is very brief, so that can’t assess for myself her characterization of it at [356]). I have a paper on “Overbreadth in Canadian Patent Law” forthcoming in the IPJ, in which I argue that the approach to overbreadth adopted in Amfac (1986), 12 CPR (3d) 193 (FCA) “if widely adopted, risks invalidating patents for inventions which are new, useful and non-obvious, on the basis of an arbitrary parsing of the disclosure, in a manner reminiscent of the promise doctrine.” A draft version is available on SSRN (note that this draft was updated on 10 June from the first SSRN version). In that paper, I also show that overbreadth is almost always redundant, as merely restating a statutory ground of invalidity (most commonly lack of sound prediction of utility). In this case, if I understand Apotex’s argument correctly, it would appear that the preferable statutory basis for the attack would have been s 53(1); if St-Louis J had allowed the attack to go forward on the basis of overbreadth, this would have side-stepped the statutory requirements and related case law requiring wilfulness and materiality.

Presumption regarding a process patent

The 540 patent is a process patent, and Lilly argued that the burden should be reversed, so that Apotex would have to prove non-infringement on the basis of s 55.1, which provides that when the claim is to a process for obtaining a “new product” it should be presumed that the product was produced by the patented process. Lilly wished to argue that “new” meant that the product had not been sold on the market before, while Apotex argued it mean “new” in the sense of being previously known, whether or not it had received marketing authorization: [37], [38]. The prior caselaw at the FC level is against Lilly, which therefore did not press the point, but merely sought to preserve its rights on appeal [41].

Lilly also argued that the burden should be reversed on the basis of the common law rule that is more or less to the effect that “when the subject-matter of the allegation lies particularly within the knowledge of one of the parties, that party must prove it, whether it be an affirmative or negative character” [42]. The exact nature of the common law presumption is unsettled. In Cefaclor, 2009 FC 991, [221], Gauthier J held that the presumption would have applied “given the particular circumstances of this case,” if “Lilly had taken reasonable steps to obtain this information.” St-Louis J relied on this to hold that the presumption did not apply because the evidence did not allow her to conclude “that Apotex did not diligently seek to provide the requested process documents, nor that Lilly diligently sought further information from Apotex” [45]. This is reasonable enough as an application of Gauthier J’s holding to the facts of this case, though the caveat in Cefaclor regarding “the particular circumstances of this case,” suggests that the holding might be a fairly narrow one. It will be interesting to see how this line of reasoning develops in future cases.

Obvious Error in the Claim

Claim 12 had an obvious error. It read:

12. A method of preparing [tadalafi] comprising the steps of: . . .

(b) reacting [C] with [D] to provide [E];

            (c) reacting the product of step (b) with [F] and [G] to provide [E]; . . .

The product of step (b) is E, so reacting it with F and G would clearly not provide E. In fact, step (b) would not produce E, but rather a different compound, not otherwise mentioned in the claim [197]. The claim was otherwise correct, so that carrying out step (c) on the product of step (b) would indeed produce E.

It appears Apotex acknowledged that the error was obvious [343], and St-Louis J found on the facts that indeed a skilled person “would understand Claim 12 to bear [sic] a mistake, and would make tadalafil by following the sequence of actions” [349]. Nonetheless, Lilly did not ask the court to correct the error [197], [347]; instead “they are asking the Court to simply accept the evidence of the experts providing how a skilled person would read Claim 12c. Essentially, Lilly argue that the skilled person understands the error and accordingly understands the scope of the claim, which accords with the purposive approach construction” [197]; and see [347].

There is ample authority holding that an obvious error this type will not affect the construction of the claims: see eg Procter & Gamble (1979), 42 CPR (2d) 33, 36-37 (FCA); Cefaclor 2009 FC 991, [159]; Lovastatin 2010 FC 1265, [99]. Varco 2013 FC 750; Azithromycin 2005 FC 1421, [36]. The notion that the claim is not being “corrected” but merely read as a skilled person would read it is a technical distinction which is somewhat difficult to grasp.

In Procter & Gamble at 37 the FCA simply held that “the claims should be interpreted in the only way that makes sense”; in Cefaclor at [159] Gauthier J stated that a skilled person would “understand” the claim to apply as it should have been written; in Lovastatin at [99], Snider J held that the error “would not change the meaning ascribed to the phrase by the skilled addressee”; in Azithromycin at [36] Mosely J stated that the incorrect word in the claim is a typographical error “and is of no moment.” These statements are all a bit ambiguous as to whether the error was being “corrected” or rather that the claim was being read as a skilled person would read it. Phelan J in Varco at [336], on the other hand, expressly held that the error would be corrected: “[the plaintiff’s expert] opined that a Skilled Person would see the error and make the necessary corrections; and would not be confused or misled. [The defendant’s expert] all but admitted the same. Even a judge hearing this case could see the error and make the correction” (my emphasis).

In any event, a person untrained the law would say that an obvious error in the claim will be corrected. Even for a lawyer, that’s the easiest way to remember the rule. However one phrases it, the rule is very well established, with St-Louis J’s decision adding to the already ample authority.