No new substantive patent cases were released last week.
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Wednesday, January 30, 2019
Thursday, January 17, 2019
Ownership Can Be Raised as a Defence but Not as a Counterclaim
Farmobile, LLC v Farmers Edge Inc 2018 FC 1269 Mactavish J aff’g 2018 FC 915 Ring J
2,888,742 / Farming data collection
Farmobile, the patentee in this action, sued Farmers Edge (FE) for infringement of the 742 patent. FE asserted, by way of both defence and counterclaim, that it was the rightful owner of the patent [915-3]. The defence and counterclaim were both based on the same facts [14], [914-38], to the effect that the right in the invention had been assigned to it [8]-[12], [914-4]. Farmobile sought to strike the allegations related to ownership from both the Statement of the Defence and the Statement of Counterclaim, which were considered separately. Ring J granted the motion to strike the counterclaim, but allowed the same allegations to stand as a defence (see here). Mactavish J has now affirmed.
In affirming that the allegation of ownership may stand as a defence, Mactavish J established what appears to be a novel point, albeit a minor one, namely that ownership of the patent by the defendant is indeed a defence to a claim of patent infringement which may be asserted in Federal Court, like non-infringement, invalidity and use pursuant to a licence [31]. This was in the face of Farmobile’s argument that the Federal Court lacked jurisdiction to entertain ownership in any context; it asserted that “while ownership is indeed a defence to a claim for patent infringement, it is not one that can be asserted in this Court” (Mactavish J’s emphasis). As Mactavish J pointed out, it is well-established that a licence to use is a valid defence, notwithstanding that assessing the merits of such a defence involves a matter of contractual interpretation, and “A licence is, after all, merely one form of contract” [32]. This holding seems clearly correct, but it is nonetheless a relief.
At the same time, Mactavish J affirmed that the Court does not have jurisdiction to consider exactly the same issue, based on exactly the same facts, by way of counterclaim. Mactavish J held that the contracts relating to ownership may be used a shield, but not as a sword [26], [35], [50]. The rationale is that in the defence, the essence of the litigation is patent infringement, while in the counterclaim, the essence of the litigation is patent ownership. This distinction does have support in the cases, in particular Innotech (1997) 74 CPR (3d) 275 (FCA), relied on by Mactavish J [34],[43]-[50]. And it is also reasonable to say the that the Federal Court can determine ownership when raised as a defence to an infringement action, even if it does not have jurisdiction to do so when ownership is raised independently.
However, the shield / sword distinction does not address, or affect, the more fundamental issue as to whether the Federal Court has jurisdiction to consider patent ownership when raised indepednently. If the Federal Court does not have such jurisdiction, then the sword / shield distinction makes sense; but if it does have such jurisdiction, then it doesn’t. Mactavish J’s reasoning is sound if one accepts that the Federal Court does not have jurisdiction to determine patent ownership on its own, but nothing in her decision addresses that fundamental point, one way or the other.
In previous posts, here and here, I have argued that the Federal Court does indeed have such jurisdiction, in light of s 20(2) of the Federal Court Act which gives the Federal Court “concurrent jurisdiction in all cases. . . in which a remedy is sought under the authority of an Act of Parliament or at law or in equity respecting any patent of invention.” In Kellogg [1941] SCR 242 the SCC interpreted the predecessor provision of the Exchequer Court Act as follows:
Mactavish J interpreted Kellogg as holding that the Federal Court “may resolve contractual issues raised in an action that is in ‘pith and substance’ within the Court’s jurisdiction” [20]. I’m not sure that is exactly right: what the above passage says is that a party has jurisdiction when seeking a remedy respecting any patent of invention; which, of course, is what s 20(2) of the Act says on its face.In any event, whatever the broader principle, it seems to be to say quite explicitly that the Court does have jurisdiction in the circumstances at hand.
The argument endorsed above was made in the alternative (though that does not detract from its authority, as it was "obviously intended for guidance" and so should be accepted as authoritative: R v Henry 2005 SCC 76 [57]). Mactavish J implicitly distinguished Kellogg by saying that in that case the “primary issue” was a matter of patent law, not that alternative argument, citing pages 249-250. The exact “matter of patent law” at issue in Kellogg at 249 was as follows
That is, the "matter of patent law" is the question of who is the true owner of the patent in light of the contract of employment. This is exactly the question at issue in Farmobile: see the allegations [915-4], reproduced in my post on Ring J’s decision. The argument which I have previously discussed, based on what is now s 20(2), was an argument in the alternative. The primary basis for the decision in Kellogg, which Mactavish J acknowledged was a matter of patent law, is that ownership of a patent by virtue of contractual assignment and related circumstances, is essentially a matter of patent law and so the Federal Court has jurisdiction by virtue of that fact. This is entirely apart from any authority to award a remedy under s 20(2), or vary the Register under s 20(1). This aspect of Kellogg strikes as even more fundamental and directly on point. I cannot see how it is distinguishable from the facts at hand.
I remain perplexed by the Federal Court’s unwillingness to accept jurisdiction in these situations. When SCC precedent is unsound, I can understand that the Federal Court would resist its application by looking for tenuous distinctions. Indeed, that is in part how the common law “works itself pure.” But to my mind Kellogg makes perfect sense. The Federal Court consistently recognizes that it is “inconvenient” to require a party to commence a second proceeding in a provincial superior court in such circumstances [52]; the Court does not seem to be resisting jurisdiction out of concern that it would create some practical problem, which might not be apparent to an academic such as myself. It is of course true that inconvenience in itself is not a basis to assert jurisdiction where it does not exist [52], but conversely, creating inconvenience is not a basis to refuse jurisdiction where it does exist.
More broadly, a court faced with the question of who is the present owner of the patent must address who was the inventor, in order to determine who had the right to make a valid assignment in the first place, and that is surely a matter of patent law; as well as the question of how is the first owner, which is usually said to be a matter of patent law (see Comstock 38 CPR(3e) 29, 51-54; s 49); as well as the matter of priorities under s 51. Ultimately the remedy is amendment of the Register, which is established pursuant to s 12, and which the Federal Court, but not the provincial superior courts, has the authority to order amended, pursuant to s 52. Thus, patent law and the Patent Act is implicated at every stage of an patent ownership dispute. Consequently, while contacts of assignment are also implicated, the matter of ownership of a patent seems to me to be essentially a matter of patent law, and that is what Kellogg says on its face.
2,888,742 / Farming data collection
Farmobile, the patentee in this action, sued Farmers Edge (FE) for infringement of the 742 patent. FE asserted, by way of both defence and counterclaim, that it was the rightful owner of the patent [915-3]. The defence and counterclaim were both based on the same facts [14], [914-38], to the effect that the right in the invention had been assigned to it [8]-[12], [914-4]. Farmobile sought to strike the allegations related to ownership from both the Statement of the Defence and the Statement of Counterclaim, which were considered separately. Ring J granted the motion to strike the counterclaim, but allowed the same allegations to stand as a defence (see here). Mactavish J has now affirmed.
In affirming that the allegation of ownership may stand as a defence, Mactavish J established what appears to be a novel point, albeit a minor one, namely that ownership of the patent by the defendant is indeed a defence to a claim of patent infringement which may be asserted in Federal Court, like non-infringement, invalidity and use pursuant to a licence [31]. This was in the face of Farmobile’s argument that the Federal Court lacked jurisdiction to entertain ownership in any context; it asserted that “while ownership is indeed a defence to a claim for patent infringement, it is not one that can be asserted in this Court” (Mactavish J’s emphasis). As Mactavish J pointed out, it is well-established that a licence to use is a valid defence, notwithstanding that assessing the merits of such a defence involves a matter of contractual interpretation, and “A licence is, after all, merely one form of contract” [32]. This holding seems clearly correct, but it is nonetheless a relief.
At the same time, Mactavish J affirmed that the Court does not have jurisdiction to consider exactly the same issue, based on exactly the same facts, by way of counterclaim. Mactavish J held that the contracts relating to ownership may be used a shield, but not as a sword [26], [35], [50]. The rationale is that in the defence, the essence of the litigation is patent infringement, while in the counterclaim, the essence of the litigation is patent ownership. This distinction does have support in the cases, in particular Innotech (1997) 74 CPR (3d) 275 (FCA), relied on by Mactavish J [34],[43]-[50]. And it is also reasonable to say the that the Federal Court can determine ownership when raised as a defence to an infringement action, even if it does not have jurisdiction to do so when ownership is raised independently.
However, the shield / sword distinction does not address, or affect, the more fundamental issue as to whether the Federal Court has jurisdiction to consider patent ownership when raised indepednently. If the Federal Court does not have such jurisdiction, then the sword / shield distinction makes sense; but if it does have such jurisdiction, then it doesn’t. Mactavish J’s reasoning is sound if one accepts that the Federal Court does not have jurisdiction to determine patent ownership on its own, but nothing in her decision addresses that fundamental point, one way or the other.
In previous posts, here and here, I have argued that the Federal Court does indeed have such jurisdiction, in light of s 20(2) of the Federal Court Act which gives the Federal Court “concurrent jurisdiction in all cases. . . in which a remedy is sought under the authority of an Act of Parliament or at law or in equity respecting any patent of invention.” In Kellogg [1941] SCR 242 the SCC interpreted the predecessor provision of the Exchequer Court Act as follows:
It will be noticed that subsection (c) deals with the "remedy" which is sought. And it
enacts that the Exchequer Court shall have jurisdiction between subject and subject in all
cases where a "remedy is sought" "respecting any patent of invention" "under the
authority of any Act of the Parliament of Canada or at Common Law or in Equity." The
remedy sought by the appellant, as a result of paragraph 8 of its statement of claim, is
evidently a remedy in Equity respecting a patent of invention. The appellant claims that
remedy as a consequence of the facts alleged in its paragraph 8 [that the appellant was
owner by assignment]. It claims the remedy as owner deriving its title from the same
alleged inventor of whom the respondent claims to be the assignee, through other
assignors. In such a case, the invention or the right to the patent for the invention is
primarily the subject-matter of the appellant's claim, and the remedy sought for is clearly
"respecting any patent of invention." And this is covered by subsection (c) of section 22
of the Exchequer Court Act, as it stands at present.
Mactavish J interpreted Kellogg as holding that the Federal Court “may resolve contractual issues raised in an action that is in ‘pith and substance’ within the Court’s jurisdiction” [20]. I’m not sure that is exactly right: what the above passage says is that a party has jurisdiction when seeking a remedy respecting any patent of invention; which, of course, is what s 20(2) of the Act says on its face.In any event, whatever the broader principle, it seems to be to say quite explicitly that the Court does have jurisdiction in the circumstances at hand.
The argument endorsed above was made in the alternative (though that does not detract from its authority, as it was "obviously intended for guidance" and so should be accepted as authoritative: R v Henry 2005 SCC 76 [57]). Mactavish J implicitly distinguished Kellogg by saying that in that case the “primary issue” was a matter of patent law, not that alternative argument, citing pages 249-250. The exact “matter of patent law” at issue in Kellogg at 249 was as follows
the appellant is entitled to the benefit of the invention because John L. Kellogg, Jr. [the
putative inventor], at the time when he is alleged to have made it, was in the employ of
the appellant and then carrying out work which he was instructed to do on the plaintiff's
behalf, and that, by virtue of his contract of employment and the circumstances under
which the invention was made, he became and is a trustee of the invention for the
company; if it be true further that, by reason of his being such a trustee, he was unable to
transfer any right, title, or interest in the invention to any other party, and that the plaintiff
is now the owner of any invention so made by John L. Kellogg, Jr., this would be one of
the reasons why the appellant should be declared entitled, as against the respondent, to
the issue of a patent including the claims in conflict as applied for by it.
That is, the "matter of patent law" is the question of who is the true owner of the patent in light of the contract of employment. This is exactly the question at issue in Farmobile: see the allegations [915-4], reproduced in my post on Ring J’s decision. The argument which I have previously discussed, based on what is now s 20(2), was an argument in the alternative. The primary basis for the decision in Kellogg, which Mactavish J acknowledged was a matter of patent law, is that ownership of a patent by virtue of contractual assignment and related circumstances, is essentially a matter of patent law and so the Federal Court has jurisdiction by virtue of that fact. This is entirely apart from any authority to award a remedy under s 20(2), or vary the Register under s 20(1). This aspect of Kellogg strikes as even more fundamental and directly on point. I cannot see how it is distinguishable from the facts at hand.
I remain perplexed by the Federal Court’s unwillingness to accept jurisdiction in these situations. When SCC precedent is unsound, I can understand that the Federal Court would resist its application by looking for tenuous distinctions. Indeed, that is in part how the common law “works itself pure.” But to my mind Kellogg makes perfect sense. The Federal Court consistently recognizes that it is “inconvenient” to require a party to commence a second proceeding in a provincial superior court in such circumstances [52]; the Court does not seem to be resisting jurisdiction out of concern that it would create some practical problem, which might not be apparent to an academic such as myself. It is of course true that inconvenience in itself is not a basis to assert jurisdiction where it does not exist [52], but conversely, creating inconvenience is not a basis to refuse jurisdiction where it does exist.
More broadly, a court faced with the question of who is the present owner of the patent must address who was the inventor, in order to determine who had the right to make a valid assignment in the first place, and that is surely a matter of patent law; as well as the question of how is the first owner, which is usually said to be a matter of patent law (see Comstock 38 CPR(3e) 29, 51-54; s 49); as well as the matter of priorities under s 51. Ultimately the remedy is amendment of the Register, which is established pursuant to s 12, and which the Federal Court, but not the provincial superior courts, has the authority to order amended, pursuant to s 52. Thus, patent law and the Patent Act is implicated at every stage of an patent ownership dispute. Consequently, while contacts of assignment are also implicated, the matter of ownership of a patent seems to me to be essentially a matter of patent law, and that is what Kellogg says on its face.
Friday, January 11, 2019
Legal Fees Not a Deductible Expense in an Accounting
Human Care Canada Inc v Evolution Technologies Inc 2018 FC 1302 supplementary reasons
2018 FC 1304 Elliott J
2,492,392
In Human Care v Evolution Tech, Human Care brought an action against Evolution for infringement of its 392 patent related to “rollators” – a “walker” with wheels, primarily used to assist the elderly with mobility issues. Evolution counterclaimed that the 392 patent was invalid. The case turned on the facts. One legal point of passing interest, the deductibility of legal costs as an expense in an accounting of profits, was raised.
Infringement, as usual, turned on claim construction, and Elliott J generally preferred the evidence of Human Care’s expert. For example, Elliott J agreed with counsel for Human Care that the key expert for Evolution “has looked at the claims, picked at random words, define[d] them outside of the claims, and then reinserted them into the claims” [189]. Validity attacks based on anticipation [382], obviousness [405], [410], and overbreadth [420], likewise failed on the facts.
Turning to damages, the parties agreed that the quantum for reasonable compensation for ‘infringement’ after publication but prior to grant, should be based on royalties actually charged by Human Care during that period, and the number of units was also agreed [41], so there was “nothing to discuss” on this issue [432].
Elliott J held Human Care was entitled to elect an accounting rather than damages, essentially on the basis that there was no reason, such as undue delay, for denying the election [436]. This is consistent with the general practice of presumptively allowing the patentee to elect an accounting unless there is some equitable reason to refuse it. (There are one or two cases where the Court has held that the burden was on the successful patentee to establish an entitlement to an infringement, but these are the exception.)
It appears that Human Care’s rollator design swept the market, so that there was no non-infringing alternative; if Evolution had not sold infringing rollators, it would have had to leave the market, and might well have gone out of business [455]. Elliott J noted that “Where there is no non-infringing alternative, the infringer must turn over all profits made from the infringing act, less legitimate expenses incurred” [462].
One unusual point is that Evolution sought a deduction for legal fees as a business expense. Elliott J noted that:
The point was apparently a novel one in Teledyne, as the only cases cited related to deductibility for income tax purposes of legal expenses incurred for the purpose of doing business, and as such, “are not remotely applicable” (215). To say Addy J was "hesitant" to accept such a deduction, is an understatement. He said (my emphasis):
I admit the concept does seem outrageous, but outrage is always an uncertain basis for a legal holding, and to my mind Addy J’s next point was more persuasive:
That strikes me as entirely persuasive. Costs awards are dealt with separately, with distinct considerations, related to eg the incentive to litigate, and the need to sanction the conduct of the case, and so on. To allow deduction of the legal fees as an expense on the accounting would undermine the rationale for the costs award.
(Note that Addy J remarked that “[a] similar claim was also disallowed in the Dubiner v. Cheerio Toys case [[1966] Ex.C.R. 801, 837-38]” but I note that in Dubiner the legal costs were disallowed primarily “on the simple ground that the defendant failed to prove these accounts,” and it is therefore not strong authority for refusing the deduction as a matter of principle.)
In the case at hand, Elliott J, after citing Teledyne, nonetheless allowed a deduction for legal costs to a certain extent, as being the amount the defendant “spent prior to the litigation in this and a parallel dispute” [478]. This seems to suggest that the principle enunciated by Addy J is applicable only in respect of litigation expenses incurred after the statement of claim is actually filed. I’m not sure that is a principled distinction, but the issue discussed so briefly that I won't explore it further..
Overall, a number of the expense deductions were disallowed in whole or in part for lack of adequate proof. The result was a “rough justice” award of just over $12 million.
Elliott J also granted a permanent injunction on established view that ““[t]he Court should refuse to grant a permanent injunction where there is a finding of infringement, only in very rare circumstances” [485], quoting Valence v Phostech 2011 FC 174 [240]. Compound interest (“profits-on-profits”) was refused on the basis that Human Care “did not provide thorough submissions on why profits-on-profits is merited in this case” [487]. The supplementary reasons clarified the terms of the injunction and order for delivery up, as well as the details of the damages and interest assessment.
2,492,392
In Human Care v Evolution Tech, Human Care brought an action against Evolution for infringement of its 392 patent related to “rollators” – a “walker” with wheels, primarily used to assist the elderly with mobility issues. Evolution counterclaimed that the 392 patent was invalid. The case turned on the facts. One legal point of passing interest, the deductibility of legal costs as an expense in an accounting of profits, was raised.
Infringement, as usual, turned on claim construction, and Elliott J generally preferred the evidence of Human Care’s expert. For example, Elliott J agreed with counsel for Human Care that the key expert for Evolution “has looked at the claims, picked at random words, define[d] them outside of the claims, and then reinserted them into the claims” [189]. Validity attacks based on anticipation [382], obviousness [405], [410], and overbreadth [420], likewise failed on the facts.
Turning to damages, the parties agreed that the quantum for reasonable compensation for ‘infringement’ after publication but prior to grant, should be based on royalties actually charged by Human Care during that period, and the number of units was also agreed [41], so there was “nothing to discuss” on this issue [432].
Elliott J held Human Care was entitled to elect an accounting rather than damages, essentially on the basis that there was no reason, such as undue delay, for denying the election [436]. This is consistent with the general practice of presumptively allowing the patentee to elect an accounting unless there is some equitable reason to refuse it. (There are one or two cases where the Court has held that the burden was on the successful patentee to establish an entitlement to an infringement, but these are the exception.)
It appears that Human Care’s rollator design swept the market, so that there was no non-infringing alternative; if Evolution had not sold infringing rollators, it would have had to leave the market, and might well have gone out of business [455]. Elliott J noted that “Where there is no non-infringing alternative, the infringer must turn over all profits made from the infringing act, less legitimate expenses incurred” [462].
One unusual point is that Evolution sought a deduction for legal fees as a business expense. Elliott J noted that:
[477] This Court has been generally hesitant to accept deductions for legal fees. For
instance, in Teledyne [(1982), 68 CPR(2d) 204), Mr. Justice Addy at [pages] 214-216 did
not allow the defendant to deduct legal expenses because it was concluded that such an
approach would allow the infringing party to retain part of its unjust enrichment.
The point was apparently a novel one in Teledyne, as the only cases cited related to deductibility for income tax purposes of legal expenses incurred for the purpose of doing business, and as such, “are not remotely applicable” (215). To say Addy J was "hesitant" to accept such a deduction, is an understatement. He said (my emphasis):
That question must be answered most emphatically in the negative, regardless of the fact
that the expenditure might well be considered from a general accounting standpoint as
being a variable expense incurred in the course of selling the infringing product.
Allowing this deduction would amount to the Court rewarding the wrongdoer and
contravening its own finding. Such a decision would, in my mind, be likely to bring the
administration of justice into disrepute and, in addition, contribute to the unjust
enrichment of the wrongdoer. It is impossible for me to conceive how a court of equity
would even seriously consider these expenses as a legitimate deduction and indeed the
Defendant was unable to point to any case where the question was even raised.
I admit the concept does seem outrageous, but outrage is always an uncertain basis for a legal holding, and to my mind Addy J’s next point was more persuasive:
Furthermore, the Court in this action awarded-costs to the Plaintiff on a party-and-party
basis. A deduction of the Defendant's costs on a solicitor-and-silent basis would in effect
constitute a direct contradiction of its previous order. Costs in an action have always been
considered separately from the ether claims of the parties to that action, as the
considerations governing allowance or disallowance of costs, the amounts granted and the
scales on which they are to be calculated are quite different from those which govern the
Court's findings on substantive issues. It is for this same reason that a successful plaintiff,
who elects to as for an assessment of damages, is not entitled to add his legal expenses in
prosecuting the action as part of the damages incurred.
That strikes me as entirely persuasive. Costs awards are dealt with separately, with distinct considerations, related to eg the incentive to litigate, and the need to sanction the conduct of the case, and so on. To allow deduction of the legal fees as an expense on the accounting would undermine the rationale for the costs award.
(Note that Addy J remarked that “[a] similar claim was also disallowed in the Dubiner v. Cheerio Toys case [[1966] Ex.C.R. 801, 837-38]” but I note that in Dubiner the legal costs were disallowed primarily “on the simple ground that the defendant failed to prove these accounts,” and it is therefore not strong authority for refusing the deduction as a matter of principle.)
In the case at hand, Elliott J, after citing Teledyne, nonetheless allowed a deduction for legal costs to a certain extent, as being the amount the defendant “spent prior to the litigation in this and a parallel dispute” [478]. This seems to suggest that the principle enunciated by Addy J is applicable only in respect of litigation expenses incurred after the statement of claim is actually filed. I’m not sure that is a principled distinction, but the issue discussed so briefly that I won't explore it further..
Overall, a number of the expense deductions were disallowed in whole or in part for lack of adequate proof. The result was a “rough justice” award of just over $12 million.
Elliott J also granted a permanent injunction on established view that ““[t]he Court should refuse to grant a permanent injunction where there is a finding of infringement, only in very rare circumstances” [485], quoting Valence v Phostech 2011 FC 174 [240]. Compound interest (“profits-on-profits”) was refused on the basis that Human Care “did not provide thorough submissions on why profits-on-profits is merited in this case” [487]. The supplementary reasons clarified the terms of the injunction and order for delivery up, as well as the details of the damages and interest assessment.
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