Cotter, Hovenkamp, and Siebrasse on Patent Holdup

Tom Cotter, Erik Hovenkamp, and I have posted a paper on ssrn titled Demystifying Patent Holdup, 76 Washington & Lee Law Review __ (forthcoming 2019). Here is a link to the paper, and here is the abstract:

Patent holdup can arise when circumstances enable a patent owner to extract a larger royalty ex post than it could have obtained in an arm's length transaction ex ante. While the concept of patent holdup is familiar to scholars and practitioners—particularly in the context of standard-essential patent (SEP) disputes—the economic details are frequently misunderstood. For example, the popular assumption that switching costs (those required to switch from the infringing technology to an alternative) necessarily contribute to holdup is false in general, and will tend to overstate the potential for extracting excessive royalties. On the other hand, some commentaries mistakenly presume that large fixed costs are an essential ingredient of patent holdup, which understates the scope of the problem. 

In this article, we clarify and distinguish the most basic economic factors that contribute to patent holdup. This casts light on various points of confusion arising in many commentaries on the subject. Path dependence—which can act to inflate the value of a technology simply because it was adopted first—is a useful concept for understanding the problem. In particular, patent holdup can be viewed as opportunistic exploitation of path dependence effects serving to inflate the value of a patented technology (relative to the alternatives) after it is adopted. This clarifies that factors contributing to holdup are not static, but rather consist in changes in economic circumstances over time. By breaking down the problem into its most basic parts, our analysis provides a useful blueprint for applying patent holdup theory in complex cases.

Is the Test for Correcting Inventorship Errors under S 52 the Same as under S 31?

Pharma Inc. v. Canada (Commissioner of Patents) 2019 FC 208 Pentney J
            2,503,570

This decision concerned an uncontested application to add the name of a co-inventor who had been inadvertently omitted from the original application [1], [2]. The leading case on this issue is Micromass UK Ltd v Canada (Commissioner of Patents), 2006 FC 117 [10], which held that an application to the Court is required, as the Commissioner cannot make corrections related to inventorship under s 8 of the Act, which only gives the Commissioner authority to correct “clerical errors” [4]. Pentney J granted the application pursuant to s 52, which provides that:

52 The Federal Court has jurisdiction, on the application of the Commissioner or of any person interested, to order that any entry in the records of the Patent Office relating to the title to a patent be varied or expunged.

While the matter was routine, one point caught my eye. Pentney J remarked that:

[5] In prior cases involving the addition or deletion of an inventor’s (or co-inventor’s) name, the Court has considered the test set out in sub-sections 31(3) and (4) of the Act, which relate to the addition or removal of applicants to a pending patent application: Plasti-Fab v Canada (Commissioner of Patents), 2010 FC 172, at para 14; Qualcomm Inc v Canada (Commissioner of Patents), 2016 FC 1092; Gilead Sciences Inc. v Canada (Commissioner of Patents), 2019 FC 70. The pertinent part for the purposes of this application requires that the Court be satisfied: (i) that the person should be joined as a co-inventor; and (ii) “that the omission of the further applicant or applicants had been by inadvertence or mistake and was not for the purpose of delay” (sub-section 31(4)).

Note the careful language. Pentney J did not say that the test for changing inventorship under s 52 is the same as under s 31(3)(4), but rather that the Court “has considered” that test. Nonetheless, on the facts he applied the s 31 test, and there seems to be a creeping tendency to import the s 31 test into s 52.

While the point didn't make any difference on the facts, it seems to me that it would be wrong in principle to hold that the s 31(4) test applies under s 52 as well. (And I would repeat that Pentney J did not so hold.) Section 31(4), relevant to adding an inventor, provides as follows:

(4) Where an application is filed by one or more applicants and it subsequently appears that one or more further applicants should have been joined, the further applicant or applicants may be joined on satisfying the Commissioner that he or they should be so joined, and that the omission of the further applicant or applicants had been by inadvertence or mistake and was not for the purpose of delay.

The second part of the test stated by Pentney J in [5], that “that the omission of the further applicant or applicants had been by inadvertence or mistake and was not for the purpose of delay,” is drawn directly from s 31(4), as Pentney J noted. Section 52 is much broader on its face. As Layden-Stevenson J noted in Micromass:

[15] The powers conferred on the Court under section 52 are very broad. In Clopay, Cameron J. described section 54 (now section 52) of the Act in the following manner:

...I think, therefore, that s. 54 was enacted so as to enable the rectification by the Court of the records in the Patent Office relating to title in order that the party or parties actually entitled to the grant or to be registered as to the assignees of the patent, might have their rights properly recorded (p. 235).

There is no suggestion in Micromass, or in s 52 itself, that s 52 is in any way restricted to cases of inadvertence or mistake.

The notion that the test from s 31 is relevant to s 52 appears to stem from Plasti-Fab 2010 FC 172 [14], where O’Keefe J, after quoting at length from Micromass, stated “Therefore this Court may, in place of the Commissioner, engage the test set out in subsection 31(4) to determine if an individual should be joined.” With respect, there is nothing whatsoever in the passage quoted by O’Keefe J, or anywhere else in Micromass, to suggest that s 52 engages the test set out in s 31(4).

Other cases have considered the relationship between the provisions. In Gilead 2019 FC 70 [2], Grammond J stated that “This Court has said, however, that the criteria found in section 31(4), which governs the addition of applicants to a patent application, are relevant to an application under section 52,” citing Micromass and Pasti-Fab. Plasti-Fab does stand for this proposition, via the questionable interpretation of Micromass, just discussed, but Micromass does not.

Qualcomm #1 2016 FC 499 (blogged here) concerned an application under s 52 to remove a co-inventor from a granted patent. Simpson J considered s 31(3), which relates to the removal of an named inventor from an application, where (i) “it . . . appears that one or more of them has had no part in the invention,” and (ii) the Commissioner is satisfied “by affidavit that the remaining applicant or applicants is or are the sole inventor or inventors.” Simpson J stated at [7] that “I am satisfied that the first part of the test in [s 31(3)] is relevant” under s 52; but this is only to say that a named inventor should not be removed unless they are in fact not an inventor. No doubt the Court would have come to that conclusion under s 52, even without consulting s 31(3). She then went on to say that the second part of s 31(3), the requirement for an affidavit, did not apply [8]-[11]. Thus, Qualcomm #1 is authority for the proposition that the test from s 31(3) is not applicable under s 52, though some of the same considerations may be relevant.

In Qualcomm #2 2016 FC 1092 (blogged here) Southcott J noted that Simpson J in Qualcomm #1 had held that affidavits were not required under s 2, but he accepted them nonetheless given that they had been sworn and introduced into evidence. He did not suggest that he disagreed with Simpson J’s holding.

It does seem entirely reasonable to say that the test from s 31 may be relevant under s 52, in that whenever the more restrictive requirements of s 31 are met, it will almost always be appropriate to order the correction under s 52. But on the face of the Act, and in light of Micromass and Qualcomm #1, it seems to me that the opposite is not true; s 52 might properly be invoked even in circumstances where the test from s 31 is not satisfied.

This is a longer post than is perhaps necessary given that the issue discussed made no difference on the facts. But I am concerned that by slow accretion of obiter statements it might become accepted that the s 31 test is required under s 52, thereby effectively reading a restriction from s 31 into s 52. I appreciate Pentney J’s careful language on this point, noting that prior decisions had considered the test from s 31, without saying that it was necessary under s 52.

Airbus v Bell Punitive Damages Award Upheld

Airbus Helicopters S.A.S. v. Bell Helicopter Textron Canada Limited 2019 FCA 29 de Montigny JA: Pelletier, Boivin JJA aff’g 2017 FC 170 Martineau J
            2,207,787 / helicopter landing gear

In Eurocopter v. Bell Helicopter Textron Canada Limitée 2012 FC 113 aff’d 2013 FCA 219 Martineau J held that one of the claims of the 787 patent, owned by Eurocopter (now the helicopter division of Airbus), to be valid and infringed. The patent covers sleigh type skid landing gear for helicopters [8]. In the subsequent Airbus Damages decision, Martineau J awarded $500,000 in compensatory damages (see here and here) and $1,000,000 in punitive damages, plus pre-judgment and post-judgment interest. (I wrote far too much on the punitive damages aspect of the trial decision, trying to analyze the relevant principles. I won’t repeat that here, but for those who are interested the posts are here, here, and here.) Airbus appealed, arguing that the award of punitive damages should have been higher, alleging a variety of errors [29]. Bell cross-appealed on the basis that the award of punitive damages was too high [71]. A few general principles arise from the FCA decision.

The standard of review is deferential

The Court noted that:

[30] It is now well established that appellate intervention with respect to an award of punitive damages will only be warranted where the trial court made an error of law or a “wholly erroneous assessment” of the quantum of damages (Richard v. Time Inc., 2012 SCC 8, [2012] 1 S.C.R. 265 at para. 190 (Time)). In Cinar Corporation v. Robinson, 2013 SCC 73, [2013] 3 S.C.R. 1168 (Cinar), the Supreme Court summarized the applicable standard of review in the following way:

In [Time], this Court held that an appellate court may only interfere with a trial judge’s assessment of punitive damages (1) if there is an error of law; or (2) if the amount is not rationally connected to the purposes for which the damages are awarded, namely prevention, deterrence (both specific and general), and denunciation …

                                    Cinar at para. 134.

Airbus argued that Martineau J had not attached sufficient importance to various factors, such as the blameworthiness of the respondent’s conduct, and the financial means of the defendant [39]. However, Martineau J “correctly identified the factors going to the proportionality of a permissible quantum of punitive damages, and properly applied them to the facts of this case” [50]. So long as that is done, the FCA will not be inclined to reweigh the relevant factors itself [39], [45]-[52], [57].

Prior awards may be used as guideposts

Airbus argued that “the judge’s determination of the quantum of punitive damages was based on his erroneous belief in the existence of a $2,000,000 ceiling” on punitive damages awards [34]. The FCA concluded that Martineau J had not in fact felt himself limited by any such ceiling [36], [38]. Rather, “he saw this scale simply as a helpful indication of the range of punitive damages previously awarded” [36]. Moreover (emphasis added):

[37] In my view, there is nothing untoward or inappropriate in using a range of previous awards, as guideposts, in assessing the quantum of punitive damages. Even the Supreme Court, in Whiten, took such a range into account, when it concluded that the award was “certainly at the upper end of a sustainable award on these facts but not beyond it” (at para. 4). It is, in fact, a very common practice, and a sound one for that matter, to consider previous awards in assessing the quantum of punitive damages in a particular case.

Lubrizol is of limited precedential value

In Lubrizol 58 CPR(3d) 167 (FCTD) rev’d 67 CPR(3d) 1 (FCA) the FC had initially awarded $15,000,000 in punitive damages. This was overturned on appeal because the quantum of the compensatory damages had not been considered in the analysis [40] and they had not yet even been assessed. As the FCA stated in Lubrizol, “the Court cannot decide whether exemplary damages are required until after it decides whether the general damages were insufficient for punishment and deterrent purposes.” Airbus argued that nonetheless the FCA in Lubrizol had “implicitly agreed” that $15,000,000 was appropriate [41]. The FCA in this case rejected that reading of Lubrizol [41], and went on to state that

[43] Lubrizol was decided almost 25 years ago and does not seem to have been given much precedential value. I have been unable to find any other case where such a large award of punitive damages has been made, and counsel has not drawn our attention to any such case. [On review of other awards] Lubrizol would therefore appear to be the outlier in terms of the significance of the award in punitive damages, and the judge was certainly entitled to distinguish that decision from the present case.

Post infringement mitigating conduct should be considered

Bell had originally used the infringing gear, known as the “Legacy” gear, but after an infringement action was brought in Canada and other jurisdictions (including the US and France), had switched to non-infringing Production gear [10]. Martineau J had taken this into account as a mitigating factor in assessing punitive damages. Airbus argued that doing so was an error of law. It argued, based on the discussion of “potential harm” in Whiten 2002 SCC 18 [117], that “the seriousness of the prejudice must be assessed at the time of the wrongful behaviour, whether or not actual prejudice ensued” [60]. This FCA rejected this, pointing out that it was clear from the SCC discussion in Whiten that “what the Court really wanted to prevent was for bare luck to be considered as a mitigating factor” [61].

Further, the FCA held that “it was open to the judge to regard the steps taken by the respondent after the infringement as a mitigating factor” [62], and indeed,“[n]ot taking into account the conduct of the respondent after being notified of the violation would be antithetical to [the holistic and balancing approach endorsed in Whiten]” [63, my emphasis]: and see [64].

Sanctions for the same infringement in other jurisdictions may be taken into account

Airbus argued that Martineau J had erred in law in considering other penalties, in particular the likelihood of damages for infringement in parallel US and French proceedings [65],[66]. (And see [FC 435], [FC 440]. The FCA held that this may be taken into account, at least so long as the proceedings related to the same infringement [66] and are actually likely to result in a sanction [67]. (Though in any event, on the facts Martineau J appears to have considered this factor to be neutral [69].)

Finally, Bell cross-appealed on the basis that the award of $1,000,000 was more than the minimum necessary to meet the purposes of punitive damages [71]. The FCA rejected this argument, holding that on the facts, it was open to Martineau J to conclude that substantial punitive damages were warranted [75].

Patent Listing Timing Turns on Date Submission is “Administratively Complete”

Eli Lilly Canada Inc. v. Canada (Attorney General) 2019 FC 5 Lafrenière J
            2,812,704 / pegbovigrastim / IMRESTOR

The PM(NOC) Regulations allow patents to be listed against a drug. The basic rule is that only patents which pre-date the NOC application are eligible for listing, on the rationale that subsequent inventions should not extend the duration of the linkage [12]. The Regulations implement this timing requirement with two provisions. Subsection 4(5) states that the patent list must be submitted at the time of filing the NDS, so that only patents that have already been granted can be listed under this provision. But it is not necessary that the patent has already been granted, so long as it has been applied for. Subsection 4(6) provides that a patent is eligible for listing if it has a Canadian filing date prior to “the date of filing of the [new drug] submission.” The question in this case is what is the date of filing of the NDS: is it the date at which the NDS is “administratively complete” or the date at which is it substantively or technically complete? Short answer: the former.

On June 21, 2011, Elanco submitted a Drug Submission Application form and some related forms, which got the ball rolling on the application process [20]. This material was received on June 24, 2011 and determined to be “administratively complete” as of that date. It was common ground that the submission was not substantively complete, in the sense that the efficacy data, animal safety data, etc required by subsection C.08.002(2) was not provided [20]. Elanco had been permitted to engage in a rolling submission process [19], and the bulk of the substantive information was provided over the year from March 2012 to March 2013. The Canadian patent filing date was September 22, 2011 [22], between these two dates. Thus, if it is enough that the NOC application is administratively complete, then the ‘704 patent was not eligible for listing as the patent filing date was after the NDS filing date. But if the NOC application has to be substantively complete, the timing requirement would be met, and ‘704 would be eligible for listing.

Health Canada’s position is that the date of filing is when the NDS is administratively complete. Accordingly, it refused to list the ‘704 patent. Elanco appealed. Lafrenière J, applying a deferential standard of review [50], upheld Health Canada’s position. (To be eligible for listing under s 4(6), it is also necessary that the patent be submitted for listing within 30 days of issuance. That requirement was met, and was not at issue [31].)

A key point is that “[n]either the Patent Act, the NOC Regulations or the FD Regulations define the term “date of filing” of a submission, nor do they establish rules for determining that date” [58]. Elanco relied on C.08.002(2) of the FD Regulations, which specify “A new drug submission shall contain sufficient information and material to enable the Minister to assess the safety and effectiveness of the new drug, including...” Elanco argued that “shall” was a mandatory provision. However, as Lafrenière J noted, “Subsection C.08.002(2) simply speaks to the contents of a NDS and not to when a NDS may be considered filed. All the provision does is to set out the information that a first person is required to provide in order for a submission to be processed” [59]. If it were mandatory in terms of timing, then the practice of allowing rolling submissions would not be permitted [60].

In the absence of governing statutory provisions defining the date of filing, it was open to the Minister to allocate a filing date for submissions [63]. Moreover, the rationale for using the date the filing is sound, because it promotes certainty [66]. Adopting a requirement of substantive completeness would introduce considerable uncertainty, both in light of rolling submissions and supplementary submissions.

Crystalline Form Not Obvious to Try

Apotex Inc v Pfizer Canada Inc 2019 FCA 16 Boivin JA: Webb, de Montigny JJA aff’g 2017 FC 774 Brown J
Teva Canada Ltd v Pfizer Canada Inc 2019 FCA 15 Boivin JA: Webb, de Montigny JJA aff’g 2017 FC 777 Brown J

2,436,668 / desvenlafaxine (ODV) / PRISTIQ / NOC

In ODV the FCA has affirmed Brown J’s finding that Claims 8 and 9 of the ‘668 patent, to Form I ODV succinate (a particular crystal form of a particular salt of the compound ODV), were not obvious. The decision turns on the obvious-to-try analysis: see here for a review of the facts. The FCA decision does not apply new law, but it is another helpful discussion of the obvious-to-try analysis applied to the particular facts. It is useful to contrast this case, in which the crystalline form was found not to be obvious on an obvious-to-try analysis, with Dasatinib 2017 FCA 190 aff’g 2017 FC 296, holding the claims at issue to be obvious-to-try: see here for a discussion. These are companion cases, and the reasons are largely the same. This discussion will refer primarily to the Apotex decisions, simply because it is the one I happened to read first.

As the FCA discussed in Atazanavir 2017 FCA 76 (see here), as well as in Ciba v SNF 2017 FCA 225 (see here), the role of the inventive concept in an obviousness analysis has been problematic. In this case, it was uncontested that the inventive concept of the relevant claims is Form I ODV succinate. Apotex’s main argument was that “the Federal Court Judge erred when he made reference to the properties of ODV succinate – and specifically Form I – in his reasons as they are not part of the inventive concept” [37]. This is an important point. An obvious to try analysis is likely to be appropriate “where advances are often won by experimentation” (Sanofi [68]). In such a case, the detailed properties of the invention normally cannot be predicted in advance. If the detailed properties are part of the inventive concept, then the claimed invention would never be obvious, even though it was obvious to try and succeeded without the need for inventive ingenuity, as, for example, in Dasatinib. The FCA acknowledged this concern:

[38] I am mindful that our Court cautioned in Atazanavir to not implicitly adopt a definition of the inventive concept that focuses on properties if the properties are not part of the inventive concept (Atazanavir at para. 74).

In the Teva appeal, the Court noted that there was no dispute between the parties that the inventive concept does not include properties [32]. (This is not to say that the properties can never be part of the inventive concept, as the Court indicated in [38].)

Apotex’s complaint did have some basis in Brown J's reasons; in places, he did discuss the properties of ODV in a way that could be taken to imply that it would have been necessary to be able to predict its properties from the prior art: see eg the passages quoted at [38]. However, when read as a whole:

the Federal Court Judge did not find non-obviousness on the basis that the properties were not predictable in the manner seemingly suggested by Apotex. Indeed, although the Federal Court Judge discusses properties in various parts of his reasons, his conclusion that Form I ODV succinate is not obvious does not rest solely on the unpredictability of the properties of a salt form. Rather, the Federal Court Judge relied on evidence that demonstrated that a skilled person could not have known or predicted that the Form I ODV succinate – i.e., the crystal form itself – could be made or even existed:

So, Brown J found that “the number of experiments required to move from the acceptable pharmaceutical salts to the Form I ODV succinate was extremely large, as Dr. Myerson deposes at para 102 of his affidavit, and in the nature of a research program, not routine experimentation” [FC 230] quoted at [38]. So, on the facts, actually making the crystal form required inventive ingenuity, quite aside from whether the properties are part of the inventive concept, or could have been predicted.

The FCA also affirmed that the jurisprudence “does not establish any “hard and fast rules” on obviousness when it comes to evaluating whether or not a salt screen or any other form of experimentation is obvious or not” [42]. Whether salt forms, polymorphs or crystalline forms are obvious will turn on the facts of the case.

No new cases

No new substantive patent cases were released for the week of 28 January.