Should a PAE Be Entitled to Elect an Accounting?

T-Rex Property AB v Pattison Outdoor Advertising Limited Partnership 2019 FC 1004 Manson J
            2,252,973 / Digital Information System

In comparison to the US, we have not seen a lot of litigation by patent assertion entities (PAEs) in Canada, but some actions are now starting to work their way through the system. This decision of Manson J upholding a bifurcation order and affirming the scope of a protective order granted by Steele J, while routine in many ways, raises some interesting points as to how the Canadian litigation system will deal with PAEs.

A first point is that Manson J explicitly referred to the plaintiff, T-Rex Property, as a “non-practicing entity” [27] (NPE). It appears that T-Rex is not just an NPE, but more specifically a patent assertion entity (PAE). The distinction is that an NPE is any entity that does not practice the patent, while a PAE is an entity whose only business is enforcing patents. While PAEs are all NPEs, the converse is not true. Small research based firms and universities that develop new technologies and licence it to others for commercialization are NPEs but are generally not considered PAEs.

A second point is that Manson J noted that “the question of whether a non-practicing entity is entitled to elect between damages or profits appears to be a novel legal issue” [27]. This is interesting simply because Manson J explicitly framed the question as turning on the nature of the plaintiff as a PAE. I think this is the first time I have seen it suggested that a PAE should be treated differently in law, at least in Canada. In US practice “district courts appear to have adopted a de facto rule against injunctive relief for PAEs and other patent owners who do not directly compete in a product market against an infringer” (Seaman, “Permanent Injunctions in Patent Litigation After eBay: An Empirical Study,” 101 Iowa L Rev 1949 at 1953); but doctrinally, at least, this is not a distinction based on status, but is rather because it is more difficult for a PAE to prove irreparable harm in the eBay test.

Apart from the framing, the question of whether an NPE, and particularly a PAE, should be allowed to elect an accounting is very interesting. A successful patentee is entitled to damages as of right, but an accounting is discretionary. Patentees are typically permitted to elect an accounting more or less routinely, but it is not unheard of for an election to be refused. The principles governing whether an accounting should be permitted are quite underdeveloped: it is not even clear whether a successful patentee is presumptively entitled to elect an accounting (see here and here), nor is it clear what factors should be taken into account in the exercise of the court’s discretion. The question of whether a PAE, or an NPE, should be entitled to elect an accounting would not merely be a question of applying established principles, but rather one of developing those principles. Without expressing any view on this difficult issue, I would say that this is an issue where the distinction between a PAE and an NPE is potentially important one.

The procedural points at issue in the motion may also be significant in shaping PAE litigation. The defendant Pattison sought an order bifurcating the damages portion of the action, and T-Rex resisted. Bifurcation orders are commonly granted in patent cases to avoid wasting money and court resources on an issue that will be moot if the patentee loses on the merits. No new points were raised by Manson J in affirming Steele J’s decision to grant the motion. The more interesting question is why T-Rex opposed the bifurcation. Different PAEs have different litigation strategies (see this FTC Study), but one strategy that is used by some PAEs, especially when the case is weak on the merits, is to offer to settle for less than the defendant would need to spend to defend the case. In aid of this approach, some PAEs will try to impose substantial discovery costs on the defendant in order to gain settlement leverage; this strategy can work because discovery costs tend to be asymmetrical, especially when the patentee is a PAE, and so does not have information as to how the invention was developed. A PAE which uses this strategy might want to resist bifurcation in order to increase settlement pressure with discovery related to the damages issue. Perhaps that is what is going on here — though that’s pure speculation, as I don’t know anything about T-Rex apart from what I’ve read in this decision.

Costs are also an important aspect of PAE litigation, and I’ve heard it suggested that we have seen less PAE litigation in Canada because we follow the English rule of costs-in-the-cause. When the PAE’s case is weak on the merits and the PAE is aiming to settle on a litigation cost basis, costs on motions are even more important than any ultimate costs order. In this decision, Steele J required T-Rex to pay costs for the motion immediately, despite T-Rex having posted security for costs [41]. Manson J upheld this “quintessentially discretionary” decision [42], though remarking that “I may not myself have awarded costs payable forthwith in these circumstances” [44]. To the extent that T-Rex might be employing a litigation cost settlement strategy, the order to pay costs on the motion forthwith might help tilt the settlement leverage back in Pattison’s favour (or at least less against Pattison). While Manson J made no reference to T-Rex’s status as a PAE in this part of his decision, it strikes me that costs on motions might be an issue where the PAE status of the patentee is relevant, and Steele J’s order might be justified on that basis, even aside from its discretionary nature.

With all that said, I’m not sure if tailoring procedural rules to PAEs is desirable (though to be clear, I’m not sure it’s undesirable either). PAE litigation strategy highlights aspects of the patent system that arise to some degree in all types of patent litigation, so in principle, sound general rules should suffice. But PAE litigation may also highlight areas where the general rules need to be developed, as with the principles applicable to an election of an accounting.