Rovi Guides, Inc v BCE Inc 2022 FC 1388 Lafrenière J
2,336,870 / 2,339,629 / 2,425,482 / 2,514,585 / Interactive Television Program Guide / Internet Protocol Television
In this decision Lafrenière J held that all of the asserted claims of Rovi’s patents were invalid for anticipation and / or obviousness in an analysis that turned entirely on the facts. Infringement was largely conceded [142]. The most import aspect of the decision was Lafrenière J’s discussion of remedies, though it was strictly obiter given his holding on validity [578]. Lafrenière J held that even if the patents had been valid and infringed, he would have denied both an accounting of profits and injunctive relief, expressly on the basis that “the present case exemplifies the patent holdup problem” [652]. In my view, Lafrenière J was right in both his analysis and his conclusions.
The trial in this case took place shortly after completion of the trial of the infringement action brought earlier by Rovi against Videotron, also before Lafrenière J, resulting in Rovi v Videotron 2022 FC 874* [36]. Rovi v Videotron involved two of the same patents, namely the 629 and 870 patents, as well as two additional patents, 2,337,061 and 2,730,344. (I’ve counted a total of 12 different Rovi patents that have popped up in various motions and other litigation, and no doubt this is only a selection from a large portfolio.) As discussed here, the result in Rovi v Videotron was much the same as in this case: Lafrenière J held all of Rovi’s asserted claims to be invalid, and he would have denied an accounting. Lafrenière J’s remedial analysis was also very similar in Videotron, though this decision is somewhat more explicit in discussing the holdup problem.
It is fortunate for the development of the law that this was a particularly clear case of holdup on the facts; it sets out the principle that an accounting and injunctive relief can be denied to address holdup, while leaving it to future cases to address more difficult borderline cases. I can’t say that the principle is now established, given that the remedial holdings in BCE and Videotron were obiter decisions at the trial level. But I hope they will be influential nonetheless, as Lafrenière J’s decisions strike me as a sound basis for further development of the law of patent remedies in the context of patent holdup and patent assertion entities.
A couple of preliminary points. This post is much too long, but to paraphrase Pascal, I didn’t have time to write a shorter one. I am going to blame Covid brain fog for the length and delay. Second, this is a very long decision, dealing with multiple patents and issues, and it would be very helpful if Lafrenière had asked his clerk to create a hyperlinked table of contents to go at the start of the decision. The decision is well-structured with headers (like most FC decisions), so all that would be required is to generate the ToC. I’ve seen this done in a number of decisions, and I’d like to see it become routine, at least for long decisions.
Holdup and PAEs
In the landmark decision of the US Supreme Court in eBay Inc (2006) 547 US 388, 396-97 Kennedy J noted that “An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest” (citations omitted). These firms are known as patent assertion entities (PAEs), or, pejoratively, patent trolls.
The “undue leverage” arises because of the problem of “holdup.” The holdup problem began attracting attention by that name about 20 years ago. An early description was provided by Professor Carl Shapiro in his article Navigating the Patent Thicket (2001) 1 Innovation Policy and the Economy 119, 125–26. He illustrated the problem using an example of a manufacturer who
could, with ease, invent around a given patent, if that manufacturer were aware of the patent and afforded sufficient lead time. Clearly, in this case the patented technology contributes little if anything to the final product, and any reasonable royalty would be modest at best. But, oh, how the situation changes if the manufacturer has already designed its product and placed it into large scale production before the patent issues . . . . The patentee can credibly seek far greater royalties, very likely backed up with the threat of shutting down the manufacturer if the Court indeed finds the patent valid and infringed and grants injunctive relief. The manufacturer could go back and redesign its product, but to do so (a) could well require a major redesign effort and / or cause a significant disruption to production, (b) would still leave potential liability for any products sold after the patent issued before the redesigned products are available for sale, and (c) could present compatibility problems with other products or between different versions of this product. In other words, for all of these reasons, the manufacturer is highly susceptible to holdup by the patentee.
The problem is also discussed by Lemley & Shapiro in their classic article, “Patent Holdup and Royalty Stacking” (2007) 85 Tex L Rev 1991, as well as in a series of US FTC Reports, namely “To Promote Innovation” (October 2003), “Antitrust Enforcement and Intellectual Property Rights” (April 2007) and "The Evolving IP Marketplace” (March 2011).
While the term “patent holdup” and “patent trolls” are relatively new, the problem is much older. Prior to the implementation of the Uruguay Round Agreements in 1994, patent term in the US ran from issuance, not from filing, and US applications were kept secret until grant until 2000. The gave rise to the problem of “submarine patents,” as described in the Statement of Intellectual Property Owners in the Uruguay Round Hearings (US) (1994) 378–80:
The current term of 17 years measured from patent grant is interfering with the patent system’s objective of stimulating progress in technology. A term measured from grant encourages applicants to file too many successive continuing applications on the same invention. The result is “submarine” patents, kept alive through continuing applications, that remain submerged in the Patent and Trademark Office in secrecy year after year and cause a great deal of mischief. Large and small companies and independent inventors have sometimes abused the patent system by obtaining submarine patents.
Such patents delay dissemination of technological information to the public and prolong the period of uncertainty about the status of legal rights in inventions. Submarine patents can be a brutal surprise to companies who manufacture in the U.S.
One IPO member spend tens of millions of dollars to launch a new product that turned out to be very successful. Unfortunately, within a year after launch, another party obtained a U.S. patent covering the product after a pendency of 22 years in the Patent and Trademark Office. . . .
U.S. companies that invest in product development and commercialization and find they are blocked from the market by a submarine patent ultimately pass on their costs to consumers. Patents that continue 10, 15, and in some cases more than 20 years beyond the time they normally should have expired discourage new product innovation more than they encourage it.
This is another version of patent holdup.
As the IP Owner’s Submission notes, holdup can discourage innovation. Patents are a powerful tool because they provide a high-powered incentive to invest in socially beneficial innovation. The patent incentive is high-powered in the sense that the inventor must put its own time and money at risk, with no prospect of a return unless they are able to develop an invention that the public actually wants to purchase; and the greater the demand, the greater the reward. Thus a desirable feature of the patent system is that the patent reward is commensurate with the inventor’s contribution to society. The link between reward and benefit breaks down in the case of holdup, in part because of delay and secrecy, as implied by the phrase “submarine” patents.
Delay is important because invention alone typically provides no benefit to the public; an invention must be commercialized to be socially useful. The concept of enabling mobile phone users to receive e-mail over wireless networks is a good one, but the value of Blackberry’s business turned not just on that idea, but also on the investment in development, networks, marketing, production, and so on, that goes into the implementation of that idea. A patentee, like NTP, armed with an injunction can extract not just the value of the patented technology, but also the value of the sunk costs invested in the implementation of that idea. So, if you want a vacation home on a landlocked parcel, the amount you will pay for a right of way over the neighbour’s property will be much higher if you negotiate after you build the house, rather than before.
Extended delay and attendant sunk costs is not the only source of holdup. Holdup can also arise in the context of ‘complex’ products, which incorporate many different patented technologies, each of which contributes only a small part of the value of the product. In such a case, if the product is kept off the market because of an injunction based on infringement of one minor patented technology, the implementer will lose the entire value of the product for the time it takes to redesign; even a delay of a couple of months can result in a very substantial loss in an annual product cycle. This is very prominent in the context of standard essential patents (SEPs), but it is a feature of complex products more generally. While the product at issue in this case is a complex product in that sense, I won’t discuss this form of holdup further, as on the facts in this case, the source of the holdup was extended delay. For a discussion of the various sources of holdup see Cotter, Hovenkamp & Siebrasse, Demystifying Patent Holdup (2020) 76 Wash & Lee L Rev 1501.
One response to the holdup problem is for the implementer to negotiate for the right to use the patented technology before it incurs sunk costs. This works well in the context of real property—eg getting a right of way over a neighbouring property—where physicality places a finite and modest limit on the number of possible neighbours. In theory this is possible in the patent context as well. Patent applications are laid open to the public after 18 months. Publication of applications has always been a feature of the Canadian system, and is now a feature of the US system as well (since November of 2000). The idea here is that a party seeking to implement a new technology that it has developed can carry out a freedom to operate search to find out whether anyone else has previously patented that same technology, and then license ex ante, thereby avoiding the sunk costs problem. While certainly desirable, publication is at best a partial solution to the problems described above. First, 18 months is still a long time in a fast moving field—long enough for the speed of transistors to double. More importantly, doing an effective freedom to operate search is essentially impossible in some fields, such as the ‘technology’ sector. In contrast to real property, in the patent context there are no physical boundaries, but only the boundaries defined by claims. This means that there is no limit on the number of potentially ‘adjacent’ property rights. Estimates of the number of patented technologies embodied in a smartphone range from tens to hundreds of thousands: my understanding is that not even Google knows how many patented technologies are embodied in one of its Pixel phones. (I should emphasize that the extent of this problem varies a great deal with the technology area; it is generally considered not to be a major problem in the pharma sector, for example, which is one reason why the patent system is usually thought to work well in pharma and chemistry.) Of course, even in the tech sector many patents are well-known and easily licensed, but the point remains that 18 month publication only mitigates the problem of hidden patents, and does not eliminate it.
Another response to holdup that has gained prominence since eBay, is to deny injunctive relief to a successful patentee when holdup is a threat. It is the threat of injunctive relief that allows the submarine patentee to extract some part of the infringer’s sunk costs; in theory, if injunctive relief is denied, an award of a reasonable royalty in lieu can be used to ensure that the patentee’s reward reflects the value of the patented technology, and not the infringer’s sunk costs. This approach also has its problems. It is extremely difficult for a court to set the reasonable royalty accurately: see Siebrasse & Cotter, Judicially Determined FRAND Royalties, in Contreras (ed), The Cambridge Handbook of Technical Standardization Law (2017). Too low, and the royalty undercompensates the patentee; too high, and it replicates (in part) the holdup problem. The difficulty of assessing damages is why the traditional approach has been to protect patents with injunctive relief, like other forms of property: see Calabresi & Melamed’s seminal article, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral (1972) 85 Harv L Rev 1089. A second problem is that if the implementer anticipates that injunctive relief will be denied, it may give rise to the problem of “holdout,” where an implementer which believes it will not be enjoined may force the patentee to license at an undervalue, since even if the patentee is successful in litigation, the remedy will be restricted to a reasonable royalty.
Validity
With that background, we can turn to Rovi Guides itself. As noted, Lafrenière J held the patents at issue to be invalid for anticipation and / or obviousness in an analysis which turned entirely on the facts. While the validity analysis did not raise any novel points of law, it is worth reviewing to illustrate Rovi’s overall strategy.
The claimed technology relates generally to “interactive television program guide” [IPG] and “internet protocol television” [IPTV] technology. The IPG is the now familiar user interface that allows a TV viewer to navigate through TV program listings by scrolling up and down using a remote control, and to select programs to watch or record.
There is a notable preliminary point relating to the evidence of Rovi’s expert on validity issues, Mr Wahlers. Substantial portions of Mr Wahlers’s validity reported repeated, almost word for word, passages found in the report of Rovi’s technical expert in Rovi #1, Dr Balakrishnan: [98], [92], [94], [95], [339], [346]. It was not possible that Dr Balakrishnan copied from Mr Wahlers, as Dr Balakrishnan’s report was served well before Mr Wahlers began working on his validity report: [98]. Lafrenière J rejected the possibility of coincidence as “unimaginable” given the extent of the similarities [100]. He also found that Mr Wahlers did not knowingly copy from Dr Balakrishnan’s report and that Mr Wahlers was not aware that plagiarism had taken place at all [101]. Lafrenière J concluded that the most likely scenario was that the similarities were due to “counsel’s role in wordsmithing and stylistic editing,” as Rovi put it [103]. Lafrenière J noted that collaboration between experts and counsel is permitted and should be encouraged in order to ensure that expert reports are focused and timely [104], but he held that the “plagiarism pure and simple” that occurred in this case, went beyond those limits [107]. Lafrenière J was also concerned by the fact that, when confronted with the obvious copying, Mr Wahlers continued to insist that he wrote all of the words [102]. The plagiarism was not the only problem with Mr Wahlers’ evidence. Lafrenière J described some of Mr Wahlers’ responses during cross-examination as “incoherent and contradictory,” “inconsistent and incoherent” and simply “not credible”: [415], [456], [489].
Nonetheless, Lafrenière J did not disqualify Mr Wahlers evidence entirely; his concerns went instead to the weight to be given to Mr Wahlers evidence. While Lafrenière J treated it with “great skepticism”, he noted that some aspects of Mr Wahlers evidence proved “useful and reliable” [118]. Indeed, in a few instances, Lafrenière J preferred Wahlers’ conclusions: see eg [395], [497].
With that all said, I don’t see this as a case where an expert who testified poorly affected the outcome; I’m inclined to think the expert testified poorly because the patents were so weak on the facts. The incoherent responses, in particular, were in the context of trying to defend indefensible differences between the claimed invention and the prior art: see eg [414]–[415]; [489].
It is clear that these were extremely weak patents. The point is illustrated by the first claim dealt with by Lafrenière J, Claim 346 of the 870 patent, referred to as the “870A Claim.” The inventive concept of this claim was the idea of using an interactive program guide (IPG) to record more than one program at once [242]. Using an IPG to record single programs was part of the CGK ([251], [357]), and recording two programs at once was an old idea [248]. Nor was there any technical hurdle in the implementation: [52]–[53]. So the only putatively inventive point was simply the idea of using an IPG to record two programs at once. This must immediately have occurred to any skilled person—and indeed, any unskilled person— who happened to be a fan of Sunday afternoon NFL football. And indeed, Lafrenière J found the claimed invention just as obvious as it appears on the surface: “the subject matter of the 870A Claim was immediately and intuitively obvious to the Skilled Person in 1998, if not before,” based on the CGK alone or, alternatively, based on the CGK and certain elements of the prior art [255].
The other patents were no better. The putative inventive step in all of them lay in the broad idea. There was no ingenuity in the actual implementation in any of the patents: “no evidence was presented of any technical step or approach that needed to be taken to implement any advance claimed in the Patents that would have been outside the CGK of the Skilled Person”; “none of the Patents identify any technical problem for which the claimed subject matter provides a solution” [52], [53]; and see [284]–[286]. Lafrenière J noted that “[t]he 585 Patent is essentially a ‘paper’ or ‘ideas’ patent,” and “like the 585 Patent, the 482 Patent is a paper or ideas patent,” with “no disclosure and no description about how to actually do what the claims require” [437],[482]. No actual prototype had been built in either case. The 870C claim was similarly “a list of desired functionality with no detail as to how to implement” [283]. The prior art that was found to anticipate the patents typically provided far more implementation detail than Rovi’s patents: [226], [283],[347], [351], [433]. The ideas themselves were certainly useful: for example, recording two programs simultaneously (870A); recording on one device and playing back on another (870C) [258]; maintaining and displaying a directory of recorded programs (629) [316]; the ability to watch a show already in progress from the beginning (585) [401]. But on the facts, these were not inventive ideas. Rovi generally acknowledged that the patents at issue claim features that now, with the benefit of hindsight, seem straightforward, but argued that they were pioneering at the time: [41], [400]. Lafrenière J found that on the facts, these features were as obvious then as they are now; they were generally identified as desirable in the leading literature (in particular the industry-wide standard published by the Digital Audio-Visual Council “DAVIC), and most were actually anticipated. (The 482 patent is the only one that did not seem blindingly obvious to me as a lay person; Lafrenière J found it was both anticipated and obvious to a skilled person.)
This is textbook obviousness. There is a known desideratum—recording two programs at once—that is impossible with existing technology, but becomes possible to implement once the technology is sufficiently developed. Sometimes the desirable feature has not been identified in advance, but becomes apparent without difficulty once the new horizons opened by the technical advances start to be explored. Either way, the clever bit is developing that related technology, but once that technology is sufficiently developed, the consequential advance is inevitable. The person who happens to be first to do it does not deserve a patent. It is precisely the role of the obviousness requirement to deny patents to new technologies that emerge inevitably from general technological advances. There is a close parallel with the automobile. Carriages were known, engines were known, and putting an engine on a carriage was a known desideratum. The hurdle was that existing engines were too heavy. Once an engine was developed that was small enough to be put on a carriage, it was inevitable that someone would do so—no cleverness was required. The real cleverness in the original horseless carriage was that of Otto, Diesel and others who made the engines small enough to mount on a carriage.
In short, these are the kinds of patents that give the patent system a bad name.
The broader point here is that Rovi was asserting a broad portfolio of very weak, paper patents to broad high-level concepts. This is a classic patent troll strategy. Patenting high level concepts maximizes the reach of potential infringement, while seeking paper patents minimizes the troll’s initial investment. The flip side is that such patents tend to be weak because, as in this case, the high-level concepts are often obvious and the difficulty, such as it is, lies in the implementation. But the broad portfolio makes it difficult and expensive to defend against all the patents, and even if most are invalid, odds are that some will be valid.
While this is classic troll strategy, it’s not clear to me whether Rovi itself is a classic patent assertion entity. Lafrenière J noted that “Rovi has invested hundreds of millions of dollars in research and development. Rovi has a long history of innovation and numerous patented features have been incorporated in its products. Rovi licenses its patent portfolios to cable television and IPTV providers worldwide, including in Canada” [24]; see similar remarks in Rovi Guides v Videotron [22]–[23]. This might suggest that Rovi has carried out some actual innovation, even though the patents at issue do not demonstrate that. But the mere fact that Rovi has a robust licensing business does not mean it is not a PAE—it may indicate only that it is a successful PAE. And it is not apparent from the decision whether Rovi’s history of “innovation” is a history of obtaining patents, or a history of actually bringing new inventions to market. And even a PAE has to invest something in R&D, though hundreds of millions of dollars is more than one might expect from a classic PAE. With that said, if Rovi has been asserting its best patents in this and the Videotron litigation, it has not been getting a very good return on its R&D investment.
In any event, it doesn’t matter whether it is fair to characterize Rovi as a patent assertion entity, or even a troll, just as it doesn’t matter whether the patents at issue are submarine patents. Trolls and PAEs often engage in holdup, but it is not only trolls that engage in holdup. Whether or not Rovi itself is a PAE in its general business strategy, the particular patents at issue here are typical of the kinds of patents asserted by trolls.
Remedies
As noted, Lafrenière J’s remedies discussion was obiter, given his holding on validity [578]. Quantification was bifurcated [19] so the only remedies issues to address were entitlement to the equitable remedies of an accounting and injunctive relief [578].
As a preliminary point, it is perfectly clear that an accounting, like injunctive relief, is discretionary in principle—see Beloit v Valmet-Dominion [1997] 3 FC 497 (FCA) ¶ 111—but Rovi argued that an accounting of profits should “presumptively” be granted [585]. Lafrenière J noted that while it is common practice to allow a patentee to elect an accounting, this practice does not establish a right to an election: [586]: as he said in Rovi Guides v Videotron [579] “the Court should not decline to exercise its discretion to award an accounting of profits to a party in the absence of any compelling reasons of doing so.” In this case, Lafrenière J did articulate specific reasons for denying an accounting, and consequently his holding does not depart from existing practice.
Rovi’s Conduct
While Lafrenière J considered a variety of “non-exhaustive” factors that have been considered by the courts in determining whether to award an accounting [587], the main factor was Rovi’s conduct and in particular Rovi’s delay in prosecuting the patent:
[604] The Defendants submit that Rovi lay in the weeds while they spent a decade gaining market share to become leading IPTV providers. Rovi now seeks to seize profits generated through the Defendants’ efforts, while it allowed its patent applications to languish in the Patent Office. The Defendants submit that such an outcome is the reason that “equity aids the vigilant, not those who sleep on their rights.” I agree.
In other words, BCE argued that Rovi was engaging in an intentional holdup strategy: it had delayed prosecuting and bringing an action in order to wait until BCE had incurred sunk costs in building its business, so that when Rovi finally brought an infringement action, Rovi could extract some part of those sunk costs, not just the value of the technology.
Lafrenière J found on the facts that BCE had amply demonstrated that this was Rovi’s strategy. Rovi conceded that there was delay in the prosecution of the patents [605]. The time between filing and issuance was 17.5, 14, 14 and 9 years; for three of the patents Rovi waited the maximum period or nearly so before requesting examination and the applications were at one point abandoned for failure to pay fees: [606]–[609]. Lafrenière J found on the facts that this delay was part of a strategy by Rovi to delay issuance of its patents, and consequently “The Defendants established a prima facie case that Rovi failed to prosecute the Patents in a diligent manner” [614]–[619]. The only explanation for the delay provided by Rovi was the assertion that “delaying the prosecution of a patent ‘is not something that inherently makes business sense’.” Delay does not make sense for a patentee that intends to exploit its invention by gaining market share, but it makes perfect sense for a patentee intent on a strategy of holding up others to extract the fruit of their efforts.
After reviewing the facts, Lafrenière J expressly found that Rovi was intent on a holdup strategy:
[623] When considered as a whole, the clear pattern of delay and the late amendments to some of its patents leads inexorably to the conclusion that delay in prosecution of the Patents was a deliberate and integral part of Rovi’s business strategy. Notably, over the course of the licensing negotiation, Rovi did not mention the 482 Patent or the 585 Patent to Bell or TELUS. Nor did it mention the 870 Patent to Bell, and only raised claims of the 629 Patent, which are not asserted in these proceedings. Rovi’s delay in issuing the Patents and its sly conduct during negotiations allowed Bell and TELUS to fully integrate the allegedly patented technology into their IPTV systems, and gain millions of customers, before many of the asserted claims existed, let alone before the Patents were issued.
[624] A similar strategy is employed by patent assertion entities (PAEs), businesses that acquire patents from third parties and seek to extract more than the inherent value of the supposed invention. That is because, in an ex-ante negotiation, a potential licensor will pay only the value of the patented technology. However, in an ex-post negotiation, once the technology has been integrated, the licensor can extract not only the value of the invention, but all of the additional costs that stem from redesigning a system to remove the technology.
[626] Dr. Bazelon agreed that “patent holdup” occurs when a patent owner takes advantage of the potential infringer’s reduced flexibility after they have launched a product and opportunistically tries to extract a larger unreasonable licensing fee, especially using the threat of an injunction. This strategy has been described as engaging in “pre-litigation conduct […] designed to place the infringer in the most disadvantageous bargaining position”; and delaying “so that the infringer’s dependency on the patent is maximized, as is the proportion of profits claimed.”: Jeff Berryman, Comment on Norman Siebrasse, Business Method Patents and PatentTrolls, 54 CAN. Bus. L.J. 58 (2013) Vol. 54, 58-67, at 66.
[627] The case before me exemplifies the “patent holdup” problem. Rovi’s conduct in this case militates strongly against granting the equitable remedy of an accounting of profits as it would create an incentive for licensing entities to imitate Rovi’s conduct.
In other words, this is a classic case of holdup. To my mind, this establishes a strong prime facie case for denying equitable relief, for the reasons given in the extensive literature on the issue.
The only question then, is whether there is some countervailing consideration that would justify granting either an accounting or injunctive relief nonetheless.
BCE’s Conduct
As Lafrenière J noted, an accounting is often seen as a “deterrence tool,” intended to induce the infringer to license ex ante, rather than indulging in a “catch me if you can” strategy under which it refuses to license ex ante, knowing that even if it is found liable for infringement, it will only have to pay the same royalty that it would have agreed to ex ante [584]. This “catch me if you can” problem is the same as what is commonly called ‘holdout’ in the literature on holdup and injunctive relief.
The holdout problem only arises if the implementer could and should have licensed ex ante. As noted, in many cases it can be very difficult for an implementer to find the relevant patents ex ante, in which case failure to license does not reflect a holdout strategy. On the other hand, it is always possible in principle for an implementer to find the prior patents or prior published applications, and it can be difficult to tell how hard the implementer really looked.
In this case, Rovi argued that the defendants knew of Rovi’s patents and still decided to infringe—eg that they engaged in a deliberate holdout strategy [629]. Lafrenière J dismissed this argument on the facts, for reasons that are a bit difficult to follow because of redactions. From the Videotron decision [589], [591]–[592], it appears that Rovi was evasive about the patents that it intended to assert, and the same seems to have been true in this case [631]. In any event, Lafrenière J was satisfied on the facts that holdout was not a problem and that the conduct of the defendants was “beyond reproach” [635].
Complexity of calculating an accounting
Lafrenière J noted that the complexity of determining an accounting is one factor that may be taken into account in determining whether it should be granted. In this case, an accounting would be difficult to assess, because “[t]he asserted patented features are a small part of the software, which in itself is a small part of the overall product of the Defendants’ services” [597] He found on the facts that determining an accounting would be “extremely challenging” because of the difficulty in isolating the impact of the individual patented features which are implemented as part of a much larger system [598] and consequently any assessment would be unreliable [599]. He also noted that a further complication would be the need to additionally determine reasonable compensation for the period before the patent was granted [600].
While all of this is well-taken, I’ll point out that the real question in principle is not the complexity of granting an accounting, but the complexity of granting an accounting relative to the complexity of assessing damages. The successful patentee is entitled to damages as of right. If calculating an accounting is not more complex than assessing damages, then the complexity is no reason to disfavour an accounting. Both will normally require constructing a but for world in which a non-infringing alternative is used and that will often be a source of considerable complexity. If lost profit damages are claimed, then the difference is whether the court must look at the patentee’s or the infringer’s differential costs and profits; this may be of roughly equal complexity. In a case, such as this one, in which damages would be a reasonable royalty, relative complexity will depend on how the reasonable royalty is assessed. One approach is to consider that the patentee and infringer / licensor would split the licensor’s differential profit; on this approach, calculating a reasonable royalty would actually be somewhat more complex than calculating an accounting, as the initial step of determining the infringer’s differential profit is the same, and then the reasonable royalty requires an additional step of deciding how to split that different profit. If a reasonable royalty is assessed using comparable licenses, then it may well be less complex than calculating an accounting. So, damages may be easier to calculate than an accounting, but this is not necessarily true.
The view that an accounting is inherently more complex to assess than damages appears to stem back to the comment of Lindley LJ in Siddell v Vickers (1892) 9 RPC 152 (CA) 162 that “I do not know any form of account which is more difficult to work out, or may be more difficult to work out than an account of profits.” That case did not address the question of whether an accounting is more difficult to assess than damages: an account had been ordered, and even taken, and an objection had been taken as to the principle applied by the Chief Clerk in assessing the accounting. Siddell v Vickers was one of the first cases to expressly endorse a differential profits approach to an accounting, and the question was whether a comparison was to be made between profits made by the defendants with the use of the invention, and profits made by the method previously used (namely manual labour) or profits that would have been made with what the defendants would have done but for the infringement—the defendants argued that the real saving was effected by the use of steam power, which the defendants were preparing to use independently of the Plaintiff's invention (161). The Court of Appeal settled on the latter approach, which is the foundation of the approach currently used in Canadian law. But the matter had already taken up several years and various motions, and this holding would have required sending the matter back again for further assessment, to a referee who was unfamiliar with the matter, which was something that none of the parties wanted. Instead of so ordering, the Court of Appeal conducted what was in effect a settlement conference, and then simply awarded £3,000 “in satisfaction of all demands” (163). The basis for this number is not apparent from the decision. This solution was no doubt appropriate on the facts of the case, but it is not a good basis for concluding that an accounting of profits is generally more difficult to assess than damages.
It we accept that relative complexity is the relevant factor, then merely assessing this factor might in itself be complex, as it requires expert evidence as to how both an accounting and damages would be assessed, and which would be more difficult; and this is merely one factor among several in deciding whether to grant an accounting. For that reason, I’m inclined to think that complexity of granting an accounting should not be a significant factor unless it is clear that one remedy is substantially easier to assess than the other; if, for example, the product was widely licensed at a standard rate, which would readily establish the reasonable royalty.
And of course, even if an accounting is relatively easy to carry out, this does not weigh in favour of granting an accounting in the face of a holdup problem. If an accounting is easy, that only means that the complexity is not in itself a reason to refuse an account, but it is not a positive reason to grant an accounting.
Lafrenière J did not, in any event, place significant weight on this factor. He held that the complexity factor “does not militate in favour of granting the equitable remedy of an accounting of profits” [602], but it did not otherwise play a significant role in his decision.
Accounting v Injunctive Relief
My discussion to this point has implicitly assumed that the reasons for denying an accounting parallel the reasons for denying injunctive relief. An accounting of profits has not received as much attention in the literature as denial of injunctive relief, for the simple reason that the literature is largely focused on the US, where an accounting is not available for patent infringement. This is not the place to go into the point in detail, but I do think that in broad terms it is appropriate to treat an accounting in the same manner as injunctive relief. An accounting is a more generous remedy than damages, at least when the patentee is a non-practising entity that would be awarded reasonable royalty damages. And as Lafrenière J pointed out, “granting the equitable remedy of an accounting of profits as it would create an incentive for licensing entities to imitate Rovi’s conduct” [627].
With that said, there are some differences. Injunctive relief allows the patentee to capture more than the value of the technology to the infringer because it allows the patentee to extract some part of the infringer’s sunk costs. An accounting is not as harsh, at least in principle. An accounting results in the patentee being awarded the full value of technology to the infringer; that is more than the patentee would have obtained in an ex ante license negotiation, which normally splits the value of the technology between the patentee and the licensor. This might suggest that denying an injunction and granting an accounting would be a middle ground, perhaps to be used in cases in which holdup is a serious problem, so injunctive relief would significantly overcompensate the patentee, while at the same time, the infringer might have made greater efforts to license ex ante. But given Rovi’s conduct, this case is clearly not a borderline case where it might be appropriate to find some middle ground. Moreover, I’m not sure how many cases there are that thread that needle and whether it would be worth the effort to try, so I won’t say more.
Whether the patentee practices the invention of the patent in Canada
A final factor considered by Lafrenière J is whether the patentee practices the invention in Canada. Rovi is not a competitor of the defendants and cannot deliver IPTV to Canadians. It derives the substantial majority of its profits from patent licensing, and presumably all of its Canadian profits [637]. The defendants argued that this is a reason to refuse an accounting.
In response, Rovi argued that the rationales for awarding an accounting of profits—not allowing a wrongdoer to benefit from infringement, as well as deterrence—apply equally to cases where a patentee is a non-practicing entity [638]. One of Rovi’s experts testified that “the decision between being a practicing entity and non-practicing entity that routinely licenses its patents is merely a difference in corporate organization, and there is no reason to distinguish between them” [648].
Lafrenière J accepted this argument, and consequently held that “The issue of entitlement of a non-practising entity to accounting of profits ought to properly be considered through the lens of its conduct, rather than on how the patentee chooses to take its invention to market as a matter of business efficiency” [649]. He also noted that in Seedlings 2021 FCA 154, Locke JA “cautioned against applying a broad principle that a patentee who makes (or intended to make) profits by selling licences to its patent should not be entitled to elect an accounting of profits,” and he “expressed concern about the potential effect of such a broadly defined principle on inventors who recognize that their specialty lies in inventing, and that production and marketing of their inventions are better left to different specialists” [640].
I agree with this, especially Lafrenière J’s point that the patentee’s conduct is the key: the real question is whether the patent assertion constitutes holdup, not the nature of the patentee. With that said, there is a reason that some commentators and courts have considered the question of whether the patentee practices the invention. An operating company that exploits its inventions by marketing a product generally does not engage in holdup. Partly this is because it exploits its patents by seeking market exclusivity and consequently is much less likely to delay in asserting the patent, so the infringer is less likely to have incurred substantial sunk costs. And even if the infringer has implemented the technology and incurred sunk costs, the operating company patentee will not use an injunction to extract those sunk costs, but rather to gain market exclusivity. An operating company that tries to extract licensing revenues from a competitor will often find itself on the receiving end of a patent infringement action.
On the other hand, as Locke JA pointed out, the mere fact that a company does not practice the invention itself does not mean it is pursuing a holdup strategy. There are some non-practicing entities (NPEs), such as specialized design firms and small startups that do not have the resources to commercialize an invention and instead license to a large company for commercialization. While such companies license their patents instead of practicing them, they are still different from patent assertion entities or trolls, in that they are using the patent to secure market exclusivity, albeit indirectly, through a licensee. Put another way, most PAEs are NPEs, but not all NPEs are PAEs.
Moreover, while operating companies are less likely to engage in holdup, it is not unheard of, especially when a company that at one time had a robust business practicing its inventions, but had gradually become less competitive and so is in the process of switching its business plan to monetizing its patents by licensing.
The upshot of all this is that whether the patentee practices the invention is a kind of proxy for whether it is engaging in holdup: most (but not all) of the patentees who pursue a holdup strategy do not practice the invention, but not all patentees who do not practice the invention are pursuing a holdup strategy. But it is an imperfect proxy; as far as I can tell, whether the patentee practices the invention is not a good enough proxy to be worth considering. Consequently, I think Lafrenière J was right to hold that the focus should be on the conduct of the patentee, rather than whether it practices the invention.
Injunctive Relief
Rovi also sought injunctive relief. Lafrenière J refused to grant injunctive relief after a brief discussion which focused largely on the holdup problem: [644]–[654]. In effect, he refused injunctive relief for essentially the same reasons that he refused to grant an accounting.
While I agree with the result in light of the holdup problem, I would quibble with one aspect of his analysis. Lafrenière J relied on eBay Inc (2006) 547 US 388, in which, as he described it, “the US Supreme Court held that the generally applicable four-factor test for permanent injunctive relief applies to disputes arising under the Patent Act” [649]. He then quoted Professor Berryman’s article “When Will a Permanent Injunction be Granted in Canada for Intellectual Property Infringement? The Influence of eBay v. Merc-Exchange” (2012) 24 IPJ 159, 175, in which Professor Berryman generally endorsed the eBay approach, arguing that:
eBay demonstrates that it is possible to have a consistent test across all spectrums of intellectual property concerning the availability of permanent injunctions.
Lafrenière J stated that “I agree with Professor Berryman’s comments and consider it appropriate to adopt the US approach here” [651].
I would question whether it is appropriate to apply the US eBay approach, for several reasons.
First, I’ll note that while the US Supreme Court described itself as applying “the traditional four-factor test” for permanent injunctive relief—which is no doubt why Lafrenière J described it the same way—in Gergen, Golden & Smith, “The Supreme Court's Accidental Revolution? The Test for Permanent Injunctions” (2012) 112 Colum L Rev 203, 205, three prominent US remedies scholars point out that the eBay test was novel—“Remedies scholars have said that, before eBay, they were unfamiliar with any traditional four-factor test for permanent injunctions”—and in fact eBay departs from the traditional approach in several important ways (207–09). The eBay approach is more akin to the approach traditionally used for interlocutory injunctions, not permanent injunctions. Now, eBay is still a decision of the US Supreme Court, and so is of considerable persuasive value for that reason alone; but it must rest on its own authority, and not as being a summary of a traditional principles.
Second, while Lafrenière J said it would be appropriate to adopt the eBay approach, he did not actually do so—and rightly so, as I doubt whether eBay is actually appropriate.
In practice, the crux of the eBay approach turns on the first factor, whether the plaintiff has suffered an “irreparable injury” (which overlaps with the second factor, whether the remedies at law are adequate). The usual view in the US courts is that a patentee who is merely seeking licencing revenues is adequately compensated by damages and therefore will not have suffered irreparable harm if the injunction is refused. So a crucial question under the eBay approach is whether the patentee practices the invention—and this consideration was rejected by Lafrenière J in his discussion of an accounting. Further, in the Federal Court jurisprudence, interlocutory injunctions are routinely refused in the patent context, on the view that any patentee, whether it practices the invention or not, is ultimately seeking money. So, if we combine the eBay approach with the Federal Court’s jurisprudence on irreparable harm, the courts would routinely deny injunctive relief, even to a patentee who practices the invention and seeks market exclusivity; that is clearly not the law in Canada.
Rather than following eBay, Lafrenière J focused on Rovi’s conduct and the problem of patent holdup:
[653] In this case, good policy and the equities are aligned. Engaging in patent holdup is a business practice this Court should not condone and the Canadian patent system should not be creating incentives for such unfair practices to occur. There was no improper conduct on the part of Bell and TELUS which requires sanction, while to grant an injunction would run a very serious risk of rewarding Rovi’s delay through overcompensation.
But eBay does not focus on holdup at all; while it may have been driving the decision, there is no reference at all to holdup in the majority decision, and even Kennedy J’s concurrence touches on holdup only obliquely. The real issue, as emphasized by Lafrenière J, is holdup, and it is preferable to focus on that issue rather than trying to shoehorn a holdup analysis into a framework based on irreparable harm.
The eBay experience is important in illustrating that the courts can deny injunctive relief in some patent cases without the patent system breaking down, but in my view Lafrenière J’s analysis of the issue is a better foundation for the further development of Canadian law.
*Cited by Lafrenière J at [36] as Rovi Guides, Inc v Videotron Ltd 2022 FC 981 [Rovi #1], but that cite is evidently a typographical error.
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