Monday, February 27, 2017
Blogging Pause
Regular readers may have noticed the lack of activity on my blog in the past couple of weeks. I've fallen behind because what had started as a brief post on a couple of recent interlocutory injunction decisions, has ballooned into a minor research project, at the same time as other new decisions have come out. The interlocutory injunction post (or posts) are still not ready, and between that and my other teaching and research obligations, it will be a few more days before my next post. I hope to have my first post on interlocutory injunctions out early next week, and then I'll catch up on the other recent decisions and get back to my regular blogging schedule.
Friday, February 17, 2017
The Value of the Standard
My article, co-authored with Professor Tom Cotter, on “The Value of the Standard,” has just
been published in Volume 101(3) of the Minnesota Law Review. Here is the abstract:
Standard-setting organizations (SSOs) often require member firms to license their
standard-essential patents (SEPs) on undefined “fair, reasonable, and nondiscriminatory”
(FRAND) terms. Courts and commentators in turn have proposed various principles for
calculating FRAND royalties, among them that the royalty should not reflect “the value of
the standard.” As we show, however, this principle could be understood to mean any or
all of three distinct concepts, namely that the royalty should not reflect the implementer’s
sunk costs; that the patentee should not be able to extract any of the value resulting from
network effects; or that the royalty should be proportionate to the patent’s contribution to
the standard.
This Article proposes, as an alternative benchmark, that a FRAND royalty should reflect
the incremental contribution of the patent to the value of the standard to the user. This
principle combines two related ideas: first, that royalties should reflect the hypothetical
bargain the parties would have struck ex ante (prior to incurring sunk costs) in view of the
incremental value of the technology over unpatented alternatives as revealed ex post; and
second, that multiple patents reading on a standard should be valued in proportion to their
marginal contribution (“ex post Shapley pricing”). Our proposal would prevent patentees
from extracting sunk costs or a disproportionate share of standard value, but (contrary to
some approaches) it would enable them to draw some of the increased value resulting
from network effects. We show that our approach is more consistent with sound
innovation policy, and suggest some practical applications.
Tuesday, February 14, 2017
Specific v General Motivation in the Obviousness Analysis
AstraZeneca Canada Inc. v. Mylan Pharmaceuticals ULC 2017 FC 142 Diner J
2,449,098 / naproxen-esomeprazole dosage form / VIMOVO / NOC
In this decision Diner J held AstraZeneca’s 098 patent to be invalid for obviousness, relying in part on the obvious-to-try analysis set out in Sanofi 2008 SCC 61. The decision turned essentially entirely on the facts. There were a few legal points of some interest, the most notable being the discussion of the distinction between specific and general motivation in the obviousness analysis. More broadly, I must admit that I did not find the obvious-to-try analysis as set out in Sanofi itself to be pellucid, but the Federal Courts have nonetheless consistently applied it in a robust and principled manner to invalidate patents for invention which were the result of routine testing of alternatives that was more or less guaranteed to arrive at a solution to the problem at hand, even if the precise solution could not have been predicted in advance.
Before turning to obviousness, there are a couple of other issues worth mentioning. As discussed here, there has been an ongoing debate as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous on their face. While claim construction was not particularly controversial in this case [28], and Diner J did not address the debate directly, he provided the following summary of the law (citations omitted):
This strikes me as both sensible and an accurate summary of the law.
The issue of blinding the experts also arose. Mylan argued its experts should be preferred because they were blinded to the NOA, and AstraZeneca responded that Mylan’s experts should be ignored because they failed to address the NOA [74], [76]. Diner J stated that “Blinding experts does not necessarily produce a more reliable outcome” [77]:
While the debate over blinding is not over yet, and no doubt is will continue to be a helpful practice in some situations, Diner J’s remarks seem to me to reflect and reinforce a trend towards not putting too much weight on the question of blinding.
The key substantive issue was obviousness. Naproxen was a known NSAID, and like other NSAIDs it can cause gastrointestinal [GI] injuries if taken alone [5]. Various mitigating strategies were known, including co-administration with a PPI [6], but co-therapy was known to have patient compliance problems [7]. The asserted claims of the 098 patent solved this problem with a sequential release tablet comprising esomeprazole, a PPI, in immediate release form (not surrounded by an enteric coating), with a delayed release of naproxen, an NSAID [107]. The parties largely agreed that the difference between that inventive concept and the state of the art was the sequential release profile, which was achieved by the decision not to fully enteric coat the PPI [113]. This was arguably inventive, because PPIs were sensitive to acid, so that it was common practice to enteric coat PPIs [46]. After a review of the facts, including consideration of the obvious-to-try factors, Diner J found the difference between the invention and the state of the art to be obvious [130], [171]. This holding turned largely on the facts, but one statement of law is worth quoting, as it reflects a common thread through the Federal Court’s obvious-to-try decision:
Finally, Diner J’s discussion included a fairly extensive discussion of the significance of general vs specific motivation in the obviousness analysis [148ff]. AstraZeneca seems to have argued that the invention would not be obvious unless the POSITA would have had a specific motivation to come up with the particular inventive concept of the 098 patent [140], while Mylan argued that specific motivation is not required [150]. Diner J agreed with Mylan [150].
Diner J suggests that a “general” versus “specific” motivation distinction “may be a false dichotomy” [152]. He made two suggestions. First, “the measure to be taken is one of difference or degree, not kind. Like with many subjective measures, the notional skilled person’s motivation would at best be identified as somewhere along a spectrum” [153]. This means it would be confusing rather than helpful to require a binary determination[154].
Diner J also had a second suggestion:
Similarly, in Janssen-Ortho 2007 FCA 217 [25.5], the FCA suggests that general motivation is important because if there has been a long-standing general motivation to solve a problem, and no one has been able to do so, this is evidence that the solution someone finally does come up with was not obvious. On the other hand, if there wasn’t any general motivation to solve a problem, then the answer to Beloit’s classic question may be “no one bothered to try.” This suggests that even if motivation were a binary question, “[i]ts relative importance will depend on the context and factual backdrop of each case” [151]. Again, this leads to the conclusion that a distinction between general and specific motivation is a false dichotomy. That does not mean that general and specific motivations are the same, but rather than the effect of motivation on the obviousness analysis depends on how it interacts with the other relevant facts, and not which category it falls into.
2,449,098 / naproxen-esomeprazole dosage form / VIMOVO / NOC
In this decision Diner J held AstraZeneca’s 098 patent to be invalid for obviousness, relying in part on the obvious-to-try analysis set out in Sanofi 2008 SCC 61. The decision turned essentially entirely on the facts. There were a few legal points of some interest, the most notable being the discussion of the distinction between specific and general motivation in the obviousness analysis. More broadly, I must admit that I did not find the obvious-to-try analysis as set out in Sanofi itself to be pellucid, but the Federal Courts have nonetheless consistently applied it in a robust and principled manner to invalidate patents for invention which were the result of routine testing of alternatives that was more or less guaranteed to arrive at a solution to the problem at hand, even if the precise solution could not have been predicted in advance.
Before turning to obviousness, there are a couple of other issues worth mentioning. As discussed here, there has been an ongoing debate as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous on their face. While claim construction was not particularly controversial in this case [28], and Diner J did not address the debate directly, he provided the following summary of the law (citations omitted):
[26] In sum, a patent is to be construed through the eyes of the POSITA having a mind
willing to understand the invention, and the claims are to be approached in a purposive
manner and construed in light of both the disclosure and the claims. That said, while it is
permissible to read the disclosure in order to assist in understanding the terms used in the
claims, the disclosure cannot be used to construe the claims more narrowly or widely than
the text of the claims allows
This strikes me as both sensible and an accurate summary of the law.
The issue of blinding the experts also arose. Mylan argued its experts should be preferred because they were blinded to the NOA, and AstraZeneca responded that Mylan’s experts should be ignored because they failed to address the NOA [74], [76]. Diner J stated that “Blinding experts does not necessarily produce a more reliable outcome” [77]:
[78] In this case, the approach of both sides in the preparation of their witnesses was
acceptable, and as a result neither warrants exclusion or less weight. Rather, my analysis
turns on which of the experts provided the most compelling evaluations of the common
general knowledge held by the POSITA, the state of the art, and other factors in the
obviousness analysis.
While the debate over blinding is not over yet, and no doubt is will continue to be a helpful practice in some situations, Diner J’s remarks seem to me to reflect and reinforce a trend towards not putting too much weight on the question of blinding.
The key substantive issue was obviousness. Naproxen was a known NSAID, and like other NSAIDs it can cause gastrointestinal [GI] injuries if taken alone [5]. Various mitigating strategies were known, including co-administration with a PPI [6], but co-therapy was known to have patient compliance problems [7]. The asserted claims of the 098 patent solved this problem with a sequential release tablet comprising esomeprazole, a PPI, in immediate release form (not surrounded by an enteric coating), with a delayed release of naproxen, an NSAID [107]. The parties largely agreed that the difference between that inventive concept and the state of the art was the sequential release profile, which was achieved by the decision not to fully enteric coat the PPI [113]. This was arguably inventive, because PPIs were sensitive to acid, so that it was common practice to enteric coat PPIs [46]. After a review of the facts, including consideration of the obvious-to-try factors, Diner J found the difference between the invention and the state of the art to be obvious [130], [171]. This holding turned largely on the facts, but one statement of law is worth quoting, as it reflects a common thread through the Federal Court’s obvious-to-try decision:
[134] Furthermore, neither the fact that (i) no one knew whether the claimed invention
would provide any additional benefit (i.e. the non-enteric coated PPI), nor that (ii) there
were other options amongst gastroprotective agents apart from PPIs, render the claims
non-obvious. The following words of Justice Barnes in Janssen Inc v Teva Canada
Limited, 2015 FC 184 at para 113, are apposite:
…The fact that the formulator had a few choices to make and would need to test
the formulation to ensure its efficacy does not render this exercise non-obvious.
Here I adopt the point made by Justice Roger Hughes in Shire Biochem Inc. v.
Canada (Minister of Health), 2008 FC 538 (F.C.) at para 80, [2008] F.C.J. No.
690 (F.C.), that the existence of number of possible routes to solve a problem does
not mean that the route taken was not obvious. In Brugger v. Medicaid Ltd. (No.
2), [1996] R.P.C. 635 (England P.C.) at p 661, the same point was stated in the
following way:
First a route may still be an obvious one to try even if it is not possible to
be sure that taking it will produce success, or sufficient success to make it
commercially worthwhile. ... Secondly, if a particular route is an obvious
one to take or try, it is not rendered any less obvious from a technical point
of view merely because there are a number, and perhaps a large number, of
other obvious routes as well. If a number of obvious routes exist it is more
Finally, Diner J’s discussion included a fairly extensive discussion of the significance of general vs specific motivation in the obviousness analysis [148ff]. AstraZeneca seems to have argued that the invention would not be obvious unless the POSITA would have had a specific motivation to come up with the particular inventive concept of the 098 patent [140], while Mylan argued that specific motivation is not required [150]. Diner J agreed with Mylan [150].
Diner J suggests that a “general” versus “specific” motivation distinction “may be a false dichotomy” [152]. He made two suggestions. First, “the measure to be taken is one of difference or degree, not kind. Like with many subjective measures, the notional skilled person’s motivation would at best be identified as somewhere along a spectrum” [153]. This means it would be confusing rather than helpful to require a binary determination[154].
Diner J also had a second suggestion:
[159] [S]pecific motivation arguably cuts both ways. It could be said that its existence
indicates that it was likely obvious that someone would eventually get there, without
inventiveness. On the other hand, it could be said that the existence of specific motivation
before the claimed invention was patented only reinforces Beloit’s classic question (at
para 21): if it was obvious – and there was specific motivation to try it – why didn’t you?
Similarly, in Janssen-Ortho 2007 FCA 217 [25.5], the FCA suggests that general motivation is important because if there has been a long-standing general motivation to solve a problem, and no one has been able to do so, this is evidence that the solution someone finally does come up with was not obvious. On the other hand, if there wasn’t any general motivation to solve a problem, then the answer to Beloit’s classic question may be “no one bothered to try.” This suggests that even if motivation were a binary question, “[i]ts relative importance will depend on the context and factual backdrop of each case” [151]. Again, this leads to the conclusion that a distinction between general and specific motivation is a false dichotomy. That does not mean that general and specific motivations are the same, but rather than the effect of motivation on the obviousness analysis depends on how it interacts with the other relevant facts, and not which category it falls into.
Monday, February 13, 2017
Is Litigation Insurance Separable?
Apotex Inc. v. ADIR 2017 FCA 23 Dawson JA: Boivin, Woods JJA rev’g in part 2015 FC 721
Gagné J
1,341,196 / perindopril / COVERSYL
As discussed in Friday’s post, Perindopril Accounting is the accounting portion of a bifurcated action. In the liability decision, 2008 FC 825 aff’d 2009 FCA 222, Snider J held that the defendants had infringed the plaintiff’s ‘196 patent and she allowed the plaintiff to elect an accounting of profits. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. Friday’s post dealt with the issue of whether Apotex might have made the same profits by manufacturing in some other jurisdiction for export to those markets.
The subject of today’s post is a second question raised on appeal, relating to the provision of litigation insurance by Apotex as part of the transfer price agreements [8.ii]. Apotex Inc sold the infringing product to affiliated companies, Apotex UK and GenRX, for sale in the UK and Australia respectively. The transfer price agreements had two different prices defined, with a higher price payable by the purchaser when the product was considered a “Patent Challenge Product,” which meant that there were good reasons for expecting the affiliate to be subject to patent litigation in the export market (ie the UK or Australia). The same transfer price agreement also provided that Apotex would pay all legal expenses and indemnify the foreign purchaser against any such claims that might be brought [37]. (See here for more detail.)
Apotex argued that it was really selling two things in a single contract, namely infringing perindopril and litigation insurance, and the profits due to the infringing perindopril should be disgorged, but not those derived from litigation insurance. At trial, Gagné J accepted Apotex’s argument in principle on the basis that “that the provision of foreign litigation services and of an indemnity for liability under foreign patents does not constitute an infringement of the 196 Patent” [30]. While she held that it was not established on the facts that the increased payments for a Patent Challenge Product really were in the nature of insurance payments [67], this implies that this the same basic argument might succeed if the transfer pricing agreement were drafted differently.
Apotex appealed this point, and the FCA affirmed, but on entirely different grounds:
That is, in the ‘but for’ world, Apotex would have sold non-infringing perindopril, and if it had sold non-infringing perindopril, it would not have had to provide litigation insurance, as there would have been no risk of litigation. On this approach, it would not matter how the agreement is drafted, because no matter how the agreement is drafted, Apotex would never be in a position to sell litigation insurance where there is no risk of litigation.
On its face, this logic is a compelling and straightforward application of ‘but for’ causation.The answer to Gagné J’s point is that the profits to be disgorged are those caused by the infringement, not the profits associated with infringing products; so the question is not whether provision of litigation insurance is an infringement, but whether Apotex would have made those profits but for the infringement. There is a parallel with convoyed goods, where a patentee may recover lost profits on the lost sale of unpatented goods, if it would have made those sales but for the infringement: see eg Jay-Lor 2007 FC 358, [198].
I have just a couple of questions. First, suppose that the litigation insurance would not be required in the ‘but for’ world, and suppose also that in the real world the litigation insurance had been provided by an entirely independent firm, rather than by Apotex. Would the patentee be able to get an accounting of the insurer’s profits on the basis that those profits were caused by the infringement, even though the insurer itself had not infringed? If so, on what basis? If not, why should Apotex be treated differently in respect of its insurance business? I have no good answer to these questions, one way or the other.
Second, the FCA indicated that litigation insurance was required because perindopril was protected by the Canadian 196 patent [79]. But my understanding from the trial decision is that litigation insurance was required because of the possibility of litigation based on a patent that was effective in the export country, ie a UK or Australian patent: see [FC 38]. So, according to Apotex’s version of the but for world, as I understand it, if Apotex had not manufactured perindopril in Canada that infringed the 196 patent, it would have manufactured in some other jurisdiction in which perindopril was not patented, but it would still have exported to the UK and Australia, where there was a risk of litigation based on the UK and Australian patents. If that’s right, then it seems to me that Apotex would have provided the same litigation insurance, even though it would not have infringed the 196 patent. The FCA’s discussion of this point was quite brief, and it may be that I’ve misunderstood either the reasoning or the factual underpinnings. In any event, this point was not essential to the disposition of the case, as the FCA nonetheless went on to consider the specific contracts and the facts of the case, and held that Apotex had not demonstrated that the transfer price agreements had intended to apportion the revenue between the product and the litigation insurance [106-7]. However, if that conclusion turns on the particular contract rather than on a general principle of causation, then the possibility remains open that the revenues might be apportioned if the contract were differently drafted.
1,341,196 / perindopril / COVERSYL
As discussed in Friday’s post, Perindopril Accounting is the accounting portion of a bifurcated action. In the liability decision, 2008 FC 825 aff’d 2009 FCA 222, Snider J held that the defendants had infringed the plaintiff’s ‘196 patent and she allowed the plaintiff to elect an accounting of profits. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. Friday’s post dealt with the issue of whether Apotex might have made the same profits by manufacturing in some other jurisdiction for export to those markets.
The subject of today’s post is a second question raised on appeal, relating to the provision of litigation insurance by Apotex as part of the transfer price agreements [8.ii]. Apotex Inc sold the infringing product to affiliated companies, Apotex UK and GenRX, for sale in the UK and Australia respectively. The transfer price agreements had two different prices defined, with a higher price payable by the purchaser when the product was considered a “Patent Challenge Product,” which meant that there were good reasons for expecting the affiliate to be subject to patent litigation in the export market (ie the UK or Australia). The same transfer price agreement also provided that Apotex would pay all legal expenses and indemnify the foreign purchaser against any such claims that might be brought [37]. (See here for more detail.)
Apotex argued that it was really selling two things in a single contract, namely infringing perindopril and litigation insurance, and the profits due to the infringing perindopril should be disgorged, but not those derived from litigation insurance. At trial, Gagné J accepted Apotex’s argument in principle on the basis that “that the provision of foreign litigation services and of an indemnity for liability under foreign patents does not constitute an infringement of the 196 Patent” [30]. While she held that it was not established on the facts that the increased payments for a Patent Challenge Product really were in the nature of insurance payments [67], this implies that this the same basic argument might succeed if the transfer pricing agreement were drafted differently.
Apotex appealed this point, and the FCA affirmed, but on entirely different grounds:
[79] What drove Apotex’ sales of perindopril were the new and useful characteristics of
the drug. Had perindopril not been protected by the 196 Patent, there would have been no
need for Apotex to provide an indemnity to protect the fragility of its affiliates. “But for”
the infringing qualities of perindopril, Apotex would have earned nothing on its sale,
whether attributable to the drug itself or to the indemnity required to protect the affiliates.
Thus, the profit resulting from the sale of perindopril was entirely causally attributable to
the invention. It follows that no apportionment is warranted.
That is, in the ‘but for’ world, Apotex would have sold non-infringing perindopril, and if it had sold non-infringing perindopril, it would not have had to provide litigation insurance, as there would have been no risk of litigation. On this approach, it would not matter how the agreement is drafted, because no matter how the agreement is drafted, Apotex would never be in a position to sell litigation insurance where there is no risk of litigation.
On its face, this logic is a compelling and straightforward application of ‘but for’ causation.The answer to Gagné J’s point is that the profits to be disgorged are those caused by the infringement, not the profits associated with infringing products; so the question is not whether provision of litigation insurance is an infringement, but whether Apotex would have made those profits but for the infringement. There is a parallel with convoyed goods, where a patentee may recover lost profits on the lost sale of unpatented goods, if it would have made those sales but for the infringement: see eg Jay-Lor 2007 FC 358, [198].
I have just a couple of questions. First, suppose that the litigation insurance would not be required in the ‘but for’ world, and suppose also that in the real world the litigation insurance had been provided by an entirely independent firm, rather than by Apotex. Would the patentee be able to get an accounting of the insurer’s profits on the basis that those profits were caused by the infringement, even though the insurer itself had not infringed? If so, on what basis? If not, why should Apotex be treated differently in respect of its insurance business? I have no good answer to these questions, one way or the other.
Second, the FCA indicated that litigation insurance was required because perindopril was protected by the Canadian 196 patent [79]. But my understanding from the trial decision is that litigation insurance was required because of the possibility of litigation based on a patent that was effective in the export country, ie a UK or Australian patent: see [FC 38]. So, according to Apotex’s version of the but for world, as I understand it, if Apotex had not manufactured perindopril in Canada that infringed the 196 patent, it would have manufactured in some other jurisdiction in which perindopril was not patented, but it would still have exported to the UK and Australia, where there was a risk of litigation based on the UK and Australian patents. If that’s right, then it seems to me that Apotex would have provided the same litigation insurance, even though it would not have infringed the 196 patent. The FCA’s discussion of this point was quite brief, and it may be that I’ve misunderstood either the reasoning or the factual underpinnings. In any event, this point was not essential to the disposition of the case, as the FCA nonetheless went on to consider the specific contracts and the facts of the case, and held that Apotex had not demonstrated that the transfer price agreements had intended to apportion the revenue between the product and the litigation insurance [106-7]. However, if that conclusion turns on the particular contract rather than on a general principle of causation, then the possibility remains open that the revenues might be apportioned if the contract were differently drafted.
Friday, February 10, 2017
Instantaneous Availability of Non-Infringing Alternative
Apotex Inc. v. ADIR 2017 FCA 23 Dawson JA: Boivin, Woods JJA rev’g in part 2015 FC 721
Gagné J
1,341,196 / perindopril / COVERSYL
In its Perindopril Accounting decision, the FCA has once again affirmed the centrality of the differential profits approach to causation, and in particular the need to consider any non-infringing alternatives (NIA) that would have been used by the infringer but for the infringement. This decision builds on the foundational authority of Monsanto v Schmeiser, 2004 SCC 34, and the FCA’s subsequent decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161. The FCA decisions since Schmeiser have consistently affirmed the basic principle that it is necessary, not optional, to consider any non-infringing alternative in the causation analysis (as discussed here, here and here). There have, however, been some refinements in the details. In Venlafaxine, as discussed here, the FCA developed the principles relating to the burden of proof. And now, in Perindopril, the FCA has apparently retrenched from its earlier position that an NIA could be considered only if it was “instantaneously” available.
This case is the accounting of profits portion of a bifurcated trial. In the liability decision, Laboratoires Servier v Apotex Inc, 2008 FC 825 aff’d 2009 FCA 222, Snider J held that the defendants had infringed the plaintiff’s ‘196 patent and she allowed the plaintiff to elect an accounting of profits. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. Apotex had argued that there were a number of viable, non-infringing alternative sources of both bulk perindopril API and perindopril tablets (in particular manufactured in jurisdictions other than Canada) [18] [FC 79]-[80]. Apotex argued that the profits it would have made by manufacturing abroad (the non-infringing alternative), should be deducted from the profits actually made by the infringing manufacture in Canada, to arrive at the profits to be disgorged [18], [FC 121]. As I explained here, Gagné J rejected consideration of potential the non-infringing alternatives as a matter of law [25], [FC 126] and Apotex appealed this point [8.i].
The FCA has now held that “the Federal Court erred in law by rejecting the relevance at law of any available non-infringing perindopril” [9]. This is not very surprising. Gagné J’s decision was released prior to the FCA decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161, in which the FCA affirmed the need to consider any non-infringing alternative in the causation analysis (as discussed here, here and here), in light of Schmeiser, 2004 SCC 34. This Perindopril Accounting decision reaffirms the same point.
Perindopril Accounting is nonetheless significant in a few respects. First, Lovastatin Damages and Venlafaxine s8 were both damages cases, while Perindopril is an accounting case. The damages cases were in some ways more debatable, as Schmeiser, which established the NIA analysis, was an accounting of profits decision, and it was argued that the reasoning did not apply in the damages context. Lovastatin Damages [60] held that the basic causation analysis is the same in both contexts, and this point has now been reaffirmed in Perindopril: “While Lovastatin considered a claim for compensatory damages for patent infringement, the comments have equal application to an accounting for profits” [34] (and to the same effect, [40]). Thus it is now perfectly clear that NIA analysis is equally applicable in both the damages and accounting contexts. This is undoubtedly correct, as the causation inquiry is fundamentally the same in either context. As the SCC explained in the accounting context, “A comparison is to be made between the defendant’s profit attributable to the invention and his profit had he used the best non-infringing option” Schmeiser [102]. The only change in the damages context is to substitute the words “plaintiff’s profits” in place of “defendant’s profits.”
While Gagné J recognized that Schmeiser had endorsed the NIA analysis, she noted that the SCC has stated only that the differential profits approach is the “preferred” method, and consequently Gagné J felt that the SCC had left it open to the courts to apply a different approach on the facts of a particular case [FC 118-19]. The FCA acknowledged that [28, my emphasis]:
In my view, this is entirely correct. It is necessary, as a matter of law, that the profits (whether those of the infringer or the patentee) are only those which are causally attributable to the infringement. The differential profit analysis, including consideration of the NIA, is the best way of implementing this fundamental causation requirement. Other ways of implementing the same causation analysis may be permitted, but it is not open to the courts to use an approach which ignores the causation requirement.
The FCA did state that “in this circumstance” it was an error for the Federal Court not to take into account the NIA (the availability of non-infringing perindopril for export), [28], [30]. This leaves open the question of exactly when it might be appropriate not to use the differential profits analysis. In my view, it is understandable that the SCC and the FCA would not want to set down a strict rule that must be applied regardless of the vagaries of the case at hand. I would suggest that the main, and perhaps only, circumstances in which it need not be used is when it is clear that not all of the profits at issue are attributable to the infringement, and yet the evidence does not allow a differential profit analysis. Lubrizol [1997] 2 FC 3 (FCA), might be an example. But what is essential, as per the above underlined statement by the FCA, is that the causation requirement be respected. Given that the differential profits approach, including the NIA, is the best method for implementing the causation requirement, I would suggest that it must be used whenever the evidence allows it.
So far, this is all to clarify or reinforce the law as set out in Schmeiser, Lovastatin Damages and Venlafaxine s8. There is one important new development. In Lovastatin the FCA held that an in order to be considered in the differential profit analysis, the NIA had to be available “instantaneously”:
This is in sharp contrast with Perindopril Accounting. In the result, the FCA held that the issue of whether Apotex “would have and could have” obtained quantities of non-infringing perindopril from other sources for sale abroad, should be remitted to the Federal Court for determination on the facts [65]. The FCA further directed the Federal Court as follows (my emphasis):
I don’t see how the two statements can be reconciled, but both decisions were written by Dawson JA, so I can’t see this as a disagreement between different panels of the court. Instead, it appears to be a significant retrenchment from the “instantaneous availability” test for an NIA set out in Lovastatin. This is a welcome development, because, in my view, as explained here, the “instantaneous availability” test is inconsistent with the fundamental principle of “but for” causation.
Overall, then, Canadian law on causation and non-infringing alternatives is shaping up very well. Lovastatin took a large step in the right direction, and Venlafaxine and Perindopril have made modest course corrections to bring the law onto the right path. This is how the common law is supposed to work.
I do see one issue which may require further consideration (though it was wasn't raised at all in this case.) That is the question of whether the but for world should be approached as one world, established on the balance of probabilities, or multiple worlds considered in terms of weighted possibilities. In both Lovastatin and Venlafaxine the FCA held that the burden lies on the defendant to establish the factual relevance of a non-infringing alternative “on the balance of probabilities. Mere possibilities short of probabilities do not suffice” Venlafaxine [56] (and to the same effect Lovastatin [74]). On its face this is a sensible position, and the FCA cited as authority Rainbow Caterers [1991] 3 SCR 3, 14, which does indeed say that the but for world must be established “on a balance of probabilities.” The problem is that this is difficult to reconcile with Athey v Leonati [1996] 3 SCR 458 (citations omitted):
The “but for” world is a hypothetical event; how the plaintiff’s life would have proceeded without the tortious injury is the equivalent, in the personal injury context, of how the patentee’s market would have developed without the infringement. Thus Athey directly implies that the defendant need not establish the relevance of the NIA on the balance of probabilities; if there is a 30% chance that the infringer would have been able to supply the market with an NIA, then the profits to be disgorged should be reduced by the same percentage.
The FCA in Venlafaxine [56] also cited Tervita 2015 SCC 3, [49]-[51], [66], citing F.H. v. McDougall, 2008 SCC 53, [40], [49]. I don’t think these are relevant. As Athey also stated (citations omitted)
As I understand it, there is a distinction between proving the wrong and assessing damages. The wrong itself is always proven on the balance of probabilities, and, as I understand it, that was the point in Tervita and McDougall. That is not inconsistent with assessing damages using weighted probabilities.
But Rainbow Caterers is certainly directly relevant, and it is not clear to me how to reconcile that case with Athey v Leonati. To the extent that there is a conflict between the two cases, Athey is probably the stronger authority. In Rainbow Caterers the choice was between two 'but for' worlds, one proposed by the plaintiff and the other by the defendant, and it does not appear that the option of taking both possibilities into account on the basis of their relative likelihood was before the court. In Athey, in contrast, that was a central question. Moreover, probability based adjustments for hypothetical events (eg the crumbling skull doctrine) and future contingencies are routine in the tort context, particularly in personal injury cases. With that said, neither approach is obviously superior in principle, and the Rainbow Caterers approach has the practical advantage of simplicity. My only conclusion at this point is that the problem of whether the 'but for' world should be constructed on a balance of probabilities, or with weighted possibilities, is a difficult one. It may be that the two approaches can indeed be reconciled; or that one is superior in principle; or that there is some sound reason for using a different approach in patent law than in tort law.
1,341,196 / perindopril / COVERSYL
In its Perindopril Accounting decision, the FCA has once again affirmed the centrality of the differential profits approach to causation, and in particular the need to consider any non-infringing alternatives (NIA) that would have been used by the infringer but for the infringement. This decision builds on the foundational authority of Monsanto v Schmeiser, 2004 SCC 34, and the FCA’s subsequent decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161. The FCA decisions since Schmeiser have consistently affirmed the basic principle that it is necessary, not optional, to consider any non-infringing alternative in the causation analysis (as discussed here, here and here). There have, however, been some refinements in the details. In Venlafaxine, as discussed here, the FCA developed the principles relating to the burden of proof. And now, in Perindopril, the FCA has apparently retrenched from its earlier position that an NIA could be considered only if it was “instantaneously” available.
This case is the accounting of profits portion of a bifurcated trial. In the liability decision, Laboratoires Servier v Apotex Inc, 2008 FC 825 aff’d 2009 FCA 222, Snider J held that the defendants had infringed the plaintiff’s ‘196 patent and she allowed the plaintiff to elect an accounting of profits. A substantial amount of the infringing material manufactured by Apotex in Canada was destined for export to markets such as the UK and Australia. Apotex had argued that there were a number of viable, non-infringing alternative sources of both bulk perindopril API and perindopril tablets (in particular manufactured in jurisdictions other than Canada) [18] [FC 79]-[80]. Apotex argued that the profits it would have made by manufacturing abroad (the non-infringing alternative), should be deducted from the profits actually made by the infringing manufacture in Canada, to arrive at the profits to be disgorged [18], [FC 121]. As I explained here, Gagné J rejected consideration of potential the non-infringing alternatives as a matter of law [25], [FC 126] and Apotex appealed this point [8.i].
The FCA has now held that “the Federal Court erred in law by rejecting the relevance at law of any available non-infringing perindopril” [9]. This is not very surprising. Gagné J’s decision was released prior to the FCA decisions in Lovastatin Damages 2015 FCA 171 and Venlafaxine s8 2016 FCA 161, in which the FCA affirmed the need to consider any non-infringing alternative in the causation analysis (as discussed here, here and here), in light of Schmeiser, 2004 SCC 34. This Perindopril Accounting decision reaffirms the same point.
Perindopril Accounting is nonetheless significant in a few respects. First, Lovastatin Damages and Venlafaxine s8 were both damages cases, while Perindopril is an accounting case. The damages cases were in some ways more debatable, as Schmeiser, which established the NIA analysis, was an accounting of profits decision, and it was argued that the reasoning did not apply in the damages context. Lovastatin Damages [60] held that the basic causation analysis is the same in both contexts, and this point has now been reaffirmed in Perindopril: “While Lovastatin considered a claim for compensatory damages for patent infringement, the comments have equal application to an accounting for profits” [34] (and to the same effect, [40]). Thus it is now perfectly clear that NIA analysis is equally applicable in both the damages and accounting contexts. This is undoubtedly correct, as the causation inquiry is fundamentally the same in either context. As the SCC explained in the accounting context, “A comparison is to be made between the defendant’s profit attributable to the invention and his profit had he used the best non-infringing option” Schmeiser [102]. The only change in the damages context is to substitute the words “plaintiff’s profits” in place of “defendant’s profits.”
While Gagné J recognized that Schmeiser had endorsed the NIA analysis, she noted that the SCC has stated only that the differential profits approach is the “preferred” method, and consequently Gagné J felt that the SCC had left it open to the courts to apply a different approach on the facts of a particular case [FC 118-19]. The FCA acknowledged that [28, my emphasis]:
in Schmeiser the Supreme Court referred to the differential profit approach as the
‘preferred means’ of calculating an accounting of profits – not the only means. However,
at bottom is the need to ensure that a patentee only receives that portion of the infringer’s
profit that is causally attributable to the invention
In my view, this is entirely correct. It is necessary, as a matter of law, that the profits (whether those of the infringer or the patentee) are only those which are causally attributable to the infringement. The differential profit analysis, including consideration of the NIA, is the best way of implementing this fundamental causation requirement. Other ways of implementing the same causation analysis may be permitted, but it is not open to the courts to use an approach which ignores the causation requirement.
The FCA did state that “in this circumstance” it was an error for the Federal Court not to take into account the NIA (the availability of non-infringing perindopril for export), [28], [30]. This leaves open the question of exactly when it might be appropriate not to use the differential profits analysis. In my view, it is understandable that the SCC and the FCA would not want to set down a strict rule that must be applied regardless of the vagaries of the case at hand. I would suggest that the main, and perhaps only, circumstances in which it need not be used is when it is clear that not all of the profits at issue are attributable to the infringement, and yet the evidence does not allow a differential profit analysis. Lubrizol [1997] 2 FC 3 (FCA), might be an example. But what is essential, as per the above underlined statement by the FCA, is that the causation requirement be respected. Given that the differential profits approach, including the NIA, is the best method for implementing the causation requirement, I would suggest that it must be used whenever the evidence allows it.
So far, this is all to clarify or reinforce the law as set out in Schmeiser, Lovastatin Damages and Venlafaxine s8. There is one important new development. In Lovastatin the FCA held that an in order to be considered in the differential profit analysis, the NIA had to be available “instantaneously”:
[79] Dealing first with whether Apotex could have sold non-infringing lovastatin, Merck
argues that the alleged alternative must have been actually available to replace Apotex’
infringing sales as they were made. Otherwise, Merck, not Apotex, would have replaced
those sales. I believe this submission to be correct both in fact and in law. In Advanced
Building Systems Pty Ltd et al. v. Ramset Fasteners (Aust) Pty Ltd, [2001] FCA 1098,
(2001) 52 I.P.R. 305 the Federal Court of Australia rejected the relevance of a
non-infringing alternative, but held that if it was legally relevant, it could only apply “if at
the moment of infringement […] there is available on the market instantaneously the
appropriate substitute” in the reconstituted market. I agree.
This is in sharp contrast with Perindopril Accounting. In the result, the FCA held that the issue of whether Apotex “would have and could have” obtained quantities of non-infringing perindopril from other sources for sale abroad, should be remitted to the Federal Court for determination on the facts [65]. The FCA further directed the Federal Court as follows (my emphasis):
[67] [I]t may be that the Federal Court could conclude in the hypothetical world that one
or more suppliers would not or could not supply perindopril in time to replace the initial
infringing sales. However, this would not end the inquiry as the Federal Court would still
have to consider whether at some later point in time a supplier would and could have
provided replacement non-infringing tablets.
I don’t see how the two statements can be reconciled, but both decisions were written by Dawson JA, so I can’t see this as a disagreement between different panels of the court. Instead, it appears to be a significant retrenchment from the “instantaneous availability” test for an NIA set out in Lovastatin. This is a welcome development, because, in my view, as explained here, the “instantaneous availability” test is inconsistent with the fundamental principle of “but for” causation.
Overall, then, Canadian law on causation and non-infringing alternatives is shaping up very well. Lovastatin took a large step in the right direction, and Venlafaxine and Perindopril have made modest course corrections to bring the law onto the right path. This is how the common law is supposed to work.
I do see one issue which may require further consideration (though it was wasn't raised at all in this case.) That is the question of whether the but for world should be approached as one world, established on the balance of probabilities, or multiple worlds considered in terms of weighted possibilities. In both Lovastatin and Venlafaxine the FCA held that the burden lies on the defendant to establish the factual relevance of a non-infringing alternative “on the balance of probabilities. Mere possibilities short of probabilities do not suffice” Venlafaxine [56] (and to the same effect Lovastatin [74]). On its face this is a sensible position, and the FCA cited as authority Rainbow Caterers [1991] 3 SCR 3, 14, which does indeed say that the but for world must be established “on a balance of probabilities.” The problem is that this is difficult to reconcile with Athey v Leonati [1996] 3 SCR 458 (citations omitted):
[27] Hypothetical events (such as how the plaintiff’s life would have proceeded without
the tortious injury) or future events need not be proven on a balance of probabilities.
Instead, they are simply given weight according to their relative likelihood. For example,
if there is a 30 percent chance that the plaintiff’s injuries will worsen, then the damage
award may be increased by 30 percent of the anticipated extra damages to reflect that risk.
A future or hypothetical possibility will be taken into consideration as long as it is a real
and substantial possibility and not mere speculation.
The “but for” world is a hypothetical event; how the plaintiff’s life would have proceeded without the tortious injury is the equivalent, in the personal injury context, of how the patentee’s market would have developed without the infringement. Thus Athey directly implies that the defendant need not establish the relevance of the NIA on the balance of probabilities; if there is a 30% chance that the infringer would have been able to supply the market with an NIA, then the profits to be disgorged should be reduced by the same percentage.
The FCA in Venlafaxine [56] also cited Tervita 2015 SCC 3, [49]-[51], [66], citing F.H. v. McDougall, 2008 SCC 53, [40], [49]. I don’t think these are relevant. As Athey also stated (citations omitted)
[28] By contrast, past events must be proven, and once proven they are treated as
certainties. In a negligence action, the court must declare whether the defendant was
negligent, and that conclusion cannot be couched in terms of probabilities. Likewise, the
negligent conduct either was or was not a cause of the injury. The court must decide, on
the available evidence, whether the thing alleged has been proven; if it has, it is accepted
as a certainty:
As I understand it, there is a distinction between proving the wrong and assessing damages. The wrong itself is always proven on the balance of probabilities, and, as I understand it, that was the point in Tervita and McDougall. That is not inconsistent with assessing damages using weighted probabilities.
But Rainbow Caterers is certainly directly relevant, and it is not clear to me how to reconcile that case with Athey v Leonati. To the extent that there is a conflict between the two cases, Athey is probably the stronger authority. In Rainbow Caterers the choice was between two 'but for' worlds, one proposed by the plaintiff and the other by the defendant, and it does not appear that the option of taking both possibilities into account on the basis of their relative likelihood was before the court. In Athey, in contrast, that was a central question. Moreover, probability based adjustments for hypothetical events (eg the crumbling skull doctrine) and future contingencies are routine in the tort context, particularly in personal injury cases. With that said, neither approach is obviously superior in principle, and the Rainbow Caterers approach has the practical advantage of simplicity. My only conclusion at this point is that the problem of whether the 'but for' world should be constructed on a balance of probabilities, or with weighted possibilities, is a difficult one. It may be that the two approaches can indeed be reconciled; or that one is superior in principle; or that there is some sound reason for using a different approach in patent law than in tort law.
Friday, February 3, 2017
Miscellaneous Issues in Frac Shack v AFD
Frac Shack Inc v AFD Petroleum Ltd 2017 FC 104 Manson J
In this infringement action, Manson J held Frac Shack’s 567 patent to be largely valid and infringed by AFD’s “Frac Trailer.” The decision turned on the facts and on claim construction. Manson J granted a permanent injunction, an accounting of profits, and a reasonable royalty for pre-grant / post-publication ‘infringement’ under s 55(2). While no new law was applied, there are a few points of interest as confirming some existing trends.
The invention relates to a system for refueling well site equipment while the engines are running. It was primarily intended for use on fracking sites. Fracking typically requires multiple diesel engines running in close quarters. Ideally the equipment would run 24 hours a day, but an engine will run out of fuel in 3-4 hours [13]-[14]. Shutting down the engines to refuel wastes time, and can also cause downhole problems which reduce the effectiveness of the fracking operation [13]. Refueling while the fracturing equipment is operational is therefore often required. Prior to the invention, this had involved “manual hot refueling,” which requires a worker to pull fuel-laden hoses to each piece of equipment’s fuel tank and manually discharge diesel fuel into the tank, typically working between equipment that is spaced about a meter apart, with pumping equipment that is operating at high pressures [15]. While there was some debate as to exactly how often fires occurred, there was no real dispute that manual hot refueling was as dangerous, unpleasant and environmentally dirty as it sounds [18].
Claim Construction
As discussed here, there is an ongoing debate in Canadian law as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous on their face. Manson J’s approach in this case was very much in the former camp. In his recent Mediatube 2017 FC 6 decision, Locke J was very careful to analyze the claims first, and determine there was an ambiguity, before turning to the disclosure for clarification. In contrast, in discussing the first two disputed terms, Manson J began by quoting from the disclosure [159]-[160], [171], before consideration of the claims themselves, and nowhere did he consider whether the claims were ambiguous on their face. Rather, he simply read the claims in light of the common general knowledge, in the context of the disclosure and the other claims (eg [167]-[168]), in a manner much more akin to Gauthier J’s approach in LOSEC 2017 FCA 9. I won’t repeat the discussion of the case law on this issue that can be found in my post contrasting those two earlier decisions, but I will say that the holistic and contextual approach, as applied by Manson J in this case, resulted in a claim construction that was straightforward, easy to follow, and persuasive.
Validity
AFD tried a classical sufficiency attack, arguing that the disclosure would not allow a POSITA to make the invention. Manson J had no difficulty in holding this argument failed on the facts [209], [213]. An obviousness attack also failed on the facts. The fact that AFD, in a SR&ED grant application submitted to the Canadian government, had argued that their infringing device was innovative, did not help their case [252].
Manson J did find some claims to be overbroad. Some of the claims did not include a remote fuel level sensor, which means that an operator “would have to go into the hot zone to determine the level of fuel in a tank, and would have to physically monitor the filling of the tank to ensure that there was no overflow” [216]. Since the purpose of the invention was to reduce the hazards of manual hot refueling by removing people from the hot zone, Manson J held that the claims without the fuel sensor were overly broad [218]. On the other hand, an overbreadth attack was also made on claims including a pressurized hose near the equipment end of the tank, which could be dangerous if a pin-hole leak sprayed pressurized fuel near the running engine [220]. Manson J held this did not make the claimed invention overbroad, because “having pressurized hoses anywhere in the invention is possibly not optimal from a safety perspective, whether or not an invention, or part of an invention, is optimal is not relevant to the question of whether claims are overly broad” [222]. This contrasts with the holding regarding the fuel sensor. These holdings can be reconciled on the basis that the inventive concept “is to design a system and method for efficient and safe hot fueling to multiple pieces of equipment, in remote and semi-permanent well site locations, that removes the operators from the hot zone during fracturing operations at a well site” [247, emphasis added]. It seems reasonable that the question of overbreadth should turn on the scope of the inventive concept. There was, however, other evidence suggesting that the aim of the invention was to address a number of defects in manual hot refueling, which included risk to the operator, but also environmental risks and general fire safety [29]. That suggests that perhaps the overbreadth holding turned on patentee’s failure to sufficiently emphasize the other advantages of the invention during the obviousness argument. In any event, it would be wrong to read too much into Manson J’s relatively brief overbreadth discussion. While the law respecting overbreadth is easy enough to state – the invention cannot be broader than the invention made or disclosed [202] – this decision, among others, illustrates that we do not yet have a fully coherent framework for identifying exactly what it is that makes an invention too broad.
Infringement
The holding that AFD’s Frac Trailer infringed various valid claims followed directly from the holdings on claim construction [257]-[280].
Remedy
An accounting of profit is a discretionary remedy, and there is a question as to whether a successful patentee is presumptively entitled to elect an accounting. The general practice is that a successful patent will be entitled to an accounting, absent some specific reason for denying it, though there are a few cases which have suggested to the contrary: see here for a discussion. Manson J’s holding in this case, allowing the patentee to an elect an accounting, is consistent with the general practice. His general statement of principle indicated that an patentee is presumptively entitled to an account ([282]), and he concluded that “there is no reason that [the Plaintiffs] should not be allowed to elect for accounting of profits” [290]. This is not really very remarkable, given that AFD’s arguments as to why Frac Shack should be denied an accounting were weak. But nonetheless, if the burden was on Frac Shack to show it was entitled to an accounting, the result might have been different. On the whole, Manson J’s decision on this point is by no means a major development, but it is one more case that reinforces the mainstream view that a patentee is presumptively entitled to an accounting.
There were a couple of technical issues in actually calculating the accounting that Manson J resolved on the facts [296]-[309]. Of more interest was his holding that manual hot refueling is not an non-infringing alternative, so that AFD was required to disgorge its gross profits from the rental of its infringing Frac Trailer, not the differential profits as compared with hot refueling. He held that [312]
This holding would make sense if, after the invention was commercialized, everyone in the industry had abandoned manual hot refueling. However, even the President of the patentee Frac Shack admitted that “some fracturing companies still find manual hot refueling to be an acceptable method of refueling, regardless of whether the equipment in the hot zone is depressurized,” and that “there was no one correct way for fracturing companies to perform a risk matrix and that companies may assess risks differently” [36]. This suggests that manual hot refueling, though substantially inferior, was still a viable alternative. On the other hand, AFD only had one Frac Trailer operating. Even if the whole industry had not abandoned manual hot refueling, if the market demand for the patented system was not saturated, it is possible that all of its customers for the infringing trailer would have considered manual hot refueling to be an unacceptable alternative, and would have used the plaintiff’s system instead. In that case, attributing the AFD’s gross profit from the rental of the Frac Trailer to the infringement would be sound.
Manson J also awarded “reasonable compensation” for pre-grant / post-publication infringement under s 55(2), and the parties agreed with the standard view that a reasonable royalty would be the appropriate measure of compensation for this period [314]. This is of some interest because there are few cases to have actually awarded reasonable compensation, but there is nothing novel in the law that was applied.
Finally, Manson J also refused to award punitive damages [323], [329]. This is consistent with the general reluctance of Canadian courts to award punitive damages. With that said, Manson J’s decision is not particularly significant in reinforcing that general trend, because, as he found, the facts were very far from anything that would warrant punitive damages.
UPDATE: In 2017 FC 274 Manson J clarified that depreciation should be calculated using the "sum of digits" method.
2,693,567 / Fuel Delivery System and Method
In this infringement action, Manson J held Frac Shack’s 567 patent to be largely valid and infringed by AFD’s “Frac Trailer.” The decision turned on the facts and on claim construction. Manson J granted a permanent injunction, an accounting of profits, and a reasonable royalty for pre-grant / post-publication ‘infringement’ under s 55(2). While no new law was applied, there are a few points of interest as confirming some existing trends.
The invention relates to a system for refueling well site equipment while the engines are running. It was primarily intended for use on fracking sites. Fracking typically requires multiple diesel engines running in close quarters. Ideally the equipment would run 24 hours a day, but an engine will run out of fuel in 3-4 hours [13]-[14]. Shutting down the engines to refuel wastes time, and can also cause downhole problems which reduce the effectiveness of the fracking operation [13]. Refueling while the fracturing equipment is operational is therefore often required. Prior to the invention, this had involved “manual hot refueling,” which requires a worker to pull fuel-laden hoses to each piece of equipment’s fuel tank and manually discharge diesel fuel into the tank, typically working between equipment that is spaced about a meter apart, with pumping equipment that is operating at high pressures [15]. While there was some debate as to exactly how often fires occurred, there was no real dispute that manual hot refueling was as dangerous, unpleasant and environmentally dirty as it sounds [18].
Claim Construction
As discussed here, there is an ongoing debate in Canadian law as to whether recourse to the disclosure as an aid to construing the claims is always permissible, or is permissible only if the claims are ambiguous on their face. Manson J’s approach in this case was very much in the former camp. In his recent Mediatube 2017 FC 6 decision, Locke J was very careful to analyze the claims first, and determine there was an ambiguity, before turning to the disclosure for clarification. In contrast, in discussing the first two disputed terms, Manson J began by quoting from the disclosure [159]-[160], [171], before consideration of the claims themselves, and nowhere did he consider whether the claims were ambiguous on their face. Rather, he simply read the claims in light of the common general knowledge, in the context of the disclosure and the other claims (eg [167]-[168]), in a manner much more akin to Gauthier J’s approach in LOSEC 2017 FCA 9. I won’t repeat the discussion of the case law on this issue that can be found in my post contrasting those two earlier decisions, but I will say that the holistic and contextual approach, as applied by Manson J in this case, resulted in a claim construction that was straightforward, easy to follow, and persuasive.
Validity
AFD tried a classical sufficiency attack, arguing that the disclosure would not allow a POSITA to make the invention. Manson J had no difficulty in holding this argument failed on the facts [209], [213]. An obviousness attack also failed on the facts. The fact that AFD, in a SR&ED grant application submitted to the Canadian government, had argued that their infringing device was innovative, did not help their case [252].
Manson J did find some claims to be overbroad. Some of the claims did not include a remote fuel level sensor, which means that an operator “would have to go into the hot zone to determine the level of fuel in a tank, and would have to physically monitor the filling of the tank to ensure that there was no overflow” [216]. Since the purpose of the invention was to reduce the hazards of manual hot refueling by removing people from the hot zone, Manson J held that the claims without the fuel sensor were overly broad [218]. On the other hand, an overbreadth attack was also made on claims including a pressurized hose near the equipment end of the tank, which could be dangerous if a pin-hole leak sprayed pressurized fuel near the running engine [220]. Manson J held this did not make the claimed invention overbroad, because “having pressurized hoses anywhere in the invention is possibly not optimal from a safety perspective, whether or not an invention, or part of an invention, is optimal is not relevant to the question of whether claims are overly broad” [222]. This contrasts with the holding regarding the fuel sensor. These holdings can be reconciled on the basis that the inventive concept “is to design a system and method for efficient and safe hot fueling to multiple pieces of equipment, in remote and semi-permanent well site locations, that removes the operators from the hot zone during fracturing operations at a well site” [247, emphasis added]. It seems reasonable that the question of overbreadth should turn on the scope of the inventive concept. There was, however, other evidence suggesting that the aim of the invention was to address a number of defects in manual hot refueling, which included risk to the operator, but also environmental risks and general fire safety [29]. That suggests that perhaps the overbreadth holding turned on patentee’s failure to sufficiently emphasize the other advantages of the invention during the obviousness argument. In any event, it would be wrong to read too much into Manson J’s relatively brief overbreadth discussion. While the law respecting overbreadth is easy enough to state – the invention cannot be broader than the invention made or disclosed [202] – this decision, among others, illustrates that we do not yet have a fully coherent framework for identifying exactly what it is that makes an invention too broad.
Infringement
The holding that AFD’s Frac Trailer infringed various valid claims followed directly from the holdings on claim construction [257]-[280].
Remedy
An accounting of profit is a discretionary remedy, and there is a question as to whether a successful patentee is presumptively entitled to elect an accounting. The general practice is that a successful patent will be entitled to an accounting, absent some specific reason for denying it, though there are a few cases which have suggested to the contrary: see here for a discussion. Manson J’s holding in this case, allowing the patentee to an elect an accounting, is consistent with the general practice. His general statement of principle indicated that an patentee is presumptively entitled to an account ([282]), and he concluded that “there is no reason that [the Plaintiffs] should not be allowed to elect for accounting of profits” [290]. This is not really very remarkable, given that AFD’s arguments as to why Frac Shack should be denied an accounting were weak. But nonetheless, if the burden was on Frac Shack to show it was entitled to an accounting, the result might have been different. On the whole, Manson J’s decision on this point is by no means a major development, but it is one more case that reinforces the mainstream view that a patentee is presumptively entitled to an accounting.
There were a couple of technical issues in actually calculating the accounting that Manson J resolved on the facts [296]-[309]. Of more interest was his holding that manual hot refueling is not an non-infringing alternative, so that AFD was required to disgorge its gross profits from the rental of its infringing Frac Trailer, not the differential profits as compared with hot refueling. He held that [312]
manual hot refueling is not a non-infringing alternative to using the ‘567 invention. Even
if accidents due to manual hot refueling are rare, the fact that reducing the risk of an
accident creates a significant improvement over the alternative hot fueling system,
because the consequences of such an accident can be life threatening or cause millions of
dollars’ worth of damage to the fracturing operation.
This holding would make sense if, after the invention was commercialized, everyone in the industry had abandoned manual hot refueling. However, even the President of the patentee Frac Shack admitted that “some fracturing companies still find manual hot refueling to be an acceptable method of refueling, regardless of whether the equipment in the hot zone is depressurized,” and that “there was no one correct way for fracturing companies to perform a risk matrix and that companies may assess risks differently” [36]. This suggests that manual hot refueling, though substantially inferior, was still a viable alternative. On the other hand, AFD only had one Frac Trailer operating. Even if the whole industry had not abandoned manual hot refueling, if the market demand for the patented system was not saturated, it is possible that all of its customers for the infringing trailer would have considered manual hot refueling to be an unacceptable alternative, and would have used the plaintiff’s system instead. In that case, attributing the AFD’s gross profit from the rental of the Frac Trailer to the infringement would be sound.
Manson J also awarded “reasonable compensation” for pre-grant / post-publication infringement under s 55(2), and the parties agreed with the standard view that a reasonable royalty would be the appropriate measure of compensation for this period [314]. This is of some interest because there are few cases to have actually awarded reasonable compensation, but there is nothing novel in the law that was applied.
Finally, Manson J also refused to award punitive damages [323], [329]. This is consistent with the general reluctance of Canadian courts to award punitive damages. With that said, Manson J’s decision is not particularly significant in reinforcing that general trend, because, as he found, the facts were very far from anything that would warrant punitive damages.
UPDATE: In 2017 FC 274 Manson J clarified that depreciation should be calculated using the "sum of digits" method.
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