Blogging Break

I'll be taking a break until early in the new year, when I'll be back with a long post on the double patenting issues raised by NCS Multistage v Kobold 2023 FC 1486 and AbbVie v JAMP Pharma 2023 FC 1520. Enjoy the holidays!

Nova v Dow: Doctrinal Implications

Nova Chemicals Corp v Dow Chemical Co 2022 SCC 43 Rowe J: Wagner CJ, Moldaver, Karakatsanis, Brown, Martin, Kasirer and Jamal JJ concurring; Côté J dissenting affg Nova Chemicals Corporation v Dow Chemical Company 2020 FCA 141 Stratas JA: Near, Woods JJA affg Dow Chemical Co v Nova Chemicals Corp 2017 FC 350, 2017 FC 637 Fothergill J

2,160,705 / film-grade polymers / ELITE SURPASS

The Intuition / The Legal Background / Causation as a Matter of Fact / The Concession / What Role for “But For” Causation in Identifying the NIO? / Summary of the Summary / Causation Concept in the Absence of an NIO / What is the NIO? / The Value of the Invention / Rivett on the Facts / Three Policy Arguments / The Source of the Chilling Effect / Miscellaneous Policy Issues

In Nova v Dow, Rowe J, writing for an 8-1 majority, addressed the proper method of calculating an accounting of profits in the patent context. I have a two-part article on the decision forthcoming in the IPJ. Part I of that article analyzes Nova v Dow at a doctrinal level. What did Rowe J mean by “cause”? What did he mean by “the non-infringing option”? What did he mean by “the value of the invention”? I summarized Part I in a series of blog posts, listed above. Part II addresses the policy implications of Nova v Dow. In the first post summarizing Part II, I argued that the policy arguments advanced by Rowe J in support of his approach are either entirely misguided, or support a “but for” approach to an accounting. Further, while Rowe J asserted that his approach would not chill legitimate non-infringing competition because his approach is not intended to be punitive, the chilling effect does not depend on the label we attach to a remedy. In the next post I discussed the source of the chilling effect and showed that Rowe J’s departure from “but for” causation does indeed risk a chilling effect. That post left aside the question of the extent of that chilling effect and the appropriate policy implication, which will be discussed in the post following this one. In this, the fourth post on Part II, I will summarize my thoughts on the likely doctrinal implications of Nova v Dow. A subsequent post will consider the policy implications and the appropriate response to the decision. (The third post on Part II dismisses two minor policy arguments made by Rowe J.)

The accounting context

The most basic question is how Nova v Dow will impact the accounting of profits remedy in the patent context. This question is remarkably difficult to answer given that it was the focus of the entire decision. The problem is that Rowe J did not provide any guidance on the key issues. While he implicitly rejected “but for” causation, he did not specify any alternative. On the central issue of what constitutes an appropriate a non-infringing option, the key holding is that the NIO is “any product that helps courts isolate the profits causally attributable to the invention” [58]. In the absence of any clear causation concept, saying that the NIO is anything that is helpful is, well, unhelpful. Moreover, he held that both causation and the nature of the NIO are matters of fact. Since Rowe J did not articulate any guiding principle it is difficult to predict how the law will evolve. Ultimately, my best guess is that the courts will develop a non-exhaustive list of factors, including market substitutability, technical similarity, and “but for” causation, which are all considered and balanced in light of the facts of the case.

Many doctrines involve balancing a list of factors. This does not raise any problems in itself—so long as the factors are all relevant to some principled underlying inquiry. For example, a variety of factors may be relevant to reconstructing the hypothetical negotiation in assessing reasonable royalty damages, with more or less weight given to any particular factor on the facts of a case. That does not necessarily result in unpredictability, because the various factors all address the same principled question, namely what are the terms of the licence the parties would have entered into had they bargained ex ante. The weight to be given to each factor turns on the degree to which, on the facts, that factor is relevant to the ultimate inquiry. The difficulty in with Nova v Dow is that there is no underlying principle. This means that even if the courts develop a list of “relevant” factors, those factors will not be relevant to any underlying principle, because there is no underlying principle. This means that there will be no way to predict whether one factor rather than another will have more weight in any given case; that will likely turn on arbitrary and idiosyncratic factors such as the mannerisms and persuasiveness of the expert witnesses.

Consequently, if I suspect that Nova v Dow will result in long-term uncertainty, where there is really no way of predicting whether an NIO is appropriate other than going to trial.

In her dissent, Côté J stated that “[t]here must be some legal requirements or standards [for a non-infringing option] that guide courts and the parties to the litigation” [193]. The “must” in that sentence is aspirational rather than descriptive. There should be some legal requirements or standards to provide guidance—but, since Nova v Dow, there aren’t. No doubt the FCA would like to provide guidance, but only time will tell whether that will be possible in the face of Rowe J’s holding that it is purely a matter of fact as to whether a particular alternative is an NIO.

There will also be uncertainty as to the applicability of Rowe J’s approach to different heads of profit. Rowe J explicitly endorsed “but for” causation in the context of springboard damages, while he used a different causation concept in the context of the non-infringing option. So “but for” causation is used sometimes, but not always, when assessing the amount to be disgorged. There is an open question as to whether “but for” causation will be used in assessing products from convoyed goods (unpatented goods normally sold with the patented product), fixed costs (which were addressed in the FCA but not the SCC), and the cost of capital. The most likely scenario is that these heads of profits will be addressed on an ad hoc basis, in which “but for” causation may or may not be applied in each case. However, we can expect clarity to emerge as courts specifically address these heads of profit. 

In particular, in the Nova v Dow FCA decision Stratas JA held that "the full costs approach [to deduction of fixed costs] is principled and sound" [154]. This means that the infringer will always be able to deduct some portion of its fixed costs. This issue was not addressed by the SCC, but if the SCC had addressed some coherent causation principle, then Stratas JA's approach to fixed costs might have been subject to revision. As it is, I expect it will stand, even though it is not based either on "but for" causation or on whatever causation concept was being used by Rowe J. While we now have doctrinal clarity regarding the deductibility of fixed costs, I doubt this will lead to predictability. While Stratas J A clearly held that some proportion of fixed costs are always deductible, he did not provide any principle to determine what that proportion might be — except that whatever the principle is, it is not "but for" causation. In my view, "but for" causation is the only principled approach and consequently, Stratas JA's full costs approach is likely to also lead to long-term unpredictability and arbitrary results. I am coming around to the view that this may even more important in practice than the question of the appropriate NIO. An infringer will always be able to point to very substantial fixed costs and if any significant proportion of those costs is regularly deducted, this may significantly reduce the quantum of the accounting.

Further, in the article, I point out that there is a real puzzle in allowing for the cost of capital. It is possible that deductibility of the cost of capital will turn on whether the infringing product is funded with retained capital or external capital, even though this clearly has no bearing on whether the profits are caused by the invention.

The patent damages context

The next question is whether Rowe J’s approach to the NIO will extend to patent damages. The straightforward argument for extending it to the damages context is that prior to Nova v. Dow, patent damages and an accounting were symmetrical. As the Court of Appeal stated in Merck 2015 FCA 171 [60] in the course of holding that the Schmeiser differential profits approach extends to damages, “the significance of [Schmeiser] is that if a court may consider a defendant’s resort to a non-infringing alternative when calculating the infringer’s profit, there is no reason in principle to ignore such conduct when calculating the patentee’s lost sales.” If the Schmeiser approach applies to damages as much as an accounting, then it would seem to follow that the Nova v Dow approach does also. On the other hand, Rowe J focused throughout his decision on the accounting remedy, and there is not the slightest hint of a suggestion that the principles would extend to damages as well. Further, Stratas JA, whose judgment in the Court of Appeal was affirmed by the Supreme Court, expressly held that his approach to an accounting did not apply in the damages context: Nova v. Dow FCA 2020 FCA 141 [45], [67], [76]. Consequently, it would be entirely fair to read the SCC decision as being confined to the accounting context. I suspect that whether the Court of Appeal decides to extend Rowe J’s approach to the NIO to the damages context depends on the view it takes of the soundness of his decision. A similar question arises with respect to s 8 damages under the PM(NOC) regime. I expect that will go the same way as damages more generally.

Beyond patent law

An accounting or disgorgement of the wrongdoer’s profits is a remedy that is not limited to patent law, but I very much to doubt that Nova v Dow will have any influence beyond patent law. It is difficult to identify any principle which might be extended to other cases, and Rowe J’s focus on the profits causally attributable to “the invention” is a straightforward basis for holding that Nova v Dow does not apply more broadly.

Redundancy between Overbreadth and Utility

NCS Multistage Inc v Kobold Corporation 2023 FC 1486 McVeigh J

2,693,676 / 2,820,652 / 2,738,907 / 2,766,026 / 2,820,704 (NCS) / 3,027,571 (Kobold)

My last post provided an overview of this decision and address several miscellaneous issues. This post addresses the overbreadth argument. McVeigh J held a number of claims of the 704 patent to be invalid for overbreadth. I have argued that overbreath in Canadian law is almost always redundant with some other ground of invalidity. In this case, McVeigh J held most of the overbroad claims to also be invalid for lack of utility, and I will argue that overbreadth was indeed redundant. The details are interesting to see how the two separate tests for overbreadth and utility ended up functionally converging, and to see why some claims were overbroad but nonetheless useful.

The key question on overbreadth is whether a feature of the invention is essential, not in the sense of claim construction, but “whether that feature is so key to the invention described in the disclosure that a Claim that omits it encompasses embodiments that were not contemplated in the disclosure”: Seedlings 2021 FCA 154 [54], quoted at [167]. McVeigh J summarized this as asking whether the whether the feature in question is “at the core of the invention actually invented or disclosed” [1458]. This strikes me as a good summary of Seedlings, which puts the question in a positive form. In utility, the question is whether the invention is useful, which in this case boiled down to whether it was operable, ie whether it worked. In principle, these are two distinct questions. But what does it mean to ask whether the feature lies “at the core of the invention”?

To see how McVeigh J answered this question, we need to turn to the facts. There were five features implicated in the overbreadth and utility attacks, namely three components of the fracturing valve — the wedge, plug, and seal — as well as the the alignment mechanism and the means for holding the mandrel stationary. We can ignore the wedge, as both attacks failed.

Seals

On overbreadth, McVeigh J held as follows:

[1467] The placement of the seals and the number of seals goes to the very core of the 704 Patent invention. The 704 Patent discloses a fracturing valve and both parties agree that the lower seal is essential to allow the fracturing valve to operate as disclosed. The 704 Patent does not disclose any method by which the invention could operate without the described lower seal placement. The lower seal is an essential element that goes to the very core of the invention.

The claims that did not specify a seal were therefore invalid for overbreadth [1470]. That means that those claims were overbroad because they were inoperable. The claims without seals were also invalid for lack of utility [1514] for the same reason: “There are no operable embodiments of the 704 Patent Claims that do not include a seal” [1511]. It is not just that the claims happened to be invalid on both grounds: they were invalid on both grounds for the same reason, namely inoperability. Thus overbreadth was functionally redundant in light of the utility requirement.

(Note that Claim 15 was listed as being invalid for overbreadth [1470] but not lack of utility [1514], but in light of McVeigh J’s reasoning, I think this must have been an inadvertent omission from the utility list.)

Equalization Valve or Plug

The equalization plug “goes to the very core of the invention, such that the fracturing valve cannot operate without an equalization plug” [1475]. Again, it is “core” because it is necessary for operability. Consequently, “those claims that do not explicitly claim an equalization plug are invalid for overbreadth” [1478]. Those claims were invalid for lack of utility for the same reason: “the 704 Patent Claims that do not claim an equalization plug cannot perform the claimed fracturing function; they will not operate” [1517]. Again, overbreadth and the lack of utility are functionally the same — both turn on inoperabilty — and the overbreadth attack is redundant.

Alignment Mechanism

Similarly, McVeigh J found that the alignment mechanism goes to the core of the invention because it was necessary for the tool to work [1483], and the claims at issue lacked utility for exactly the same reason [1520]. Again, overbreadth was functionally redundant.

(In the listing of invalid claims at [1486], [1521] claims 24–27 were listed as being invalid for overbreadth but not lack of utility. In light of the reasoning, this seems to have been an oversight.)

Stationary Mandrel

McVeigh J found that a component for holding the mandrel stationary was core to the invention because “there must be some kind of component that provides frictional resistance against the wellbore that allows the mandrel to remain stationary for the invention to operate” [1494]. Claims that did not specify a means for holding the mandrel stationary were therefore invalid for overbreadth [1495].

However, lack of utility was not proven:

[1525] There was insufficient evidence on this issue to demonstrate that the 704 Patent will not work where the mandrel is not held stationary. This is likely due to the fact that Kobold raised this issue in construction and it was not argued substantively by either party in closing.

[1526] Therefore, without more evidence on this specific issue, I find that Kobold has not met its burden to demonstrate inutility on this issue.

So, in discussing overbreadth, McVeigh J found that the tool would not operate if the mandrel was not held stationary, but in discussing utility she could not arrive at that conclusion on the evidence. It is not clear to me why the evidence that McVeigh J relied on in the overbreadth context did not allow her to come to the same conclusion in respect of lack of utility. Nonetheless, it is clear that the functional question was the same under both overbreadth and utility — would the invention work if the mandrel was not held stationary — and the only difference was in respect of the evidence.

In summary, notwithstanding that McVeigh applied separate analyses with separate tests for overbreadth and utility, overbreadth is functionally redundant in light of the utility requirement. I would expect similar results in contexts where there is overlap with novelty or anticipation: eg it seems very reasonable to say that a feature that is the only point of distinction between the prior art and the claimed invention would be considered “core” to the invention.

Throwing Mud at the Wall

NCS Multistage Inc v Kobold Corporation 2023 FC 1486 McVeigh J

2,693,676 / 2,820,652 / 2,738,907 / 2,766,026 / 2,820,704 (NCS) / 3,027,571 (Kobold)

This case concerns six patents relating to downhole tools used in fracking. NCS sued Kobold for infringement of five NCS patents. In response, Kobold sued NCS for infringement of Kobold’s 571 patent. It did not go well for NCS — all the claims in issue for all five patents were declared invalid, while Kobold was successful in its infringement counterclaim.

In broad brush terms, this strikes me as a case where a major new technology created new problems with obvious solutions. Horizontal fracking is relatively recent. It presents some new problems, such as clearing debris away from the tool. In a vertical well, this is accomplished largely by gravity — debris falls to the bottom of the well — but in horizontal wells, some other methods are necessary. The methods claimed by NCS were generally obvious or had already been tried: for example, if debris is getting stuck in a moving part, machine out a bit more clearance to allow free movement of the debris [1191]. Several ancillary arguments were raised along the way, of which the most important is the discussion of double patenting. I’ll deal with double patenting and overbreadth in subsequent posts. This post will provide an overview and briefly address a few of the other legal issues.

This is a very long decision. That is a direct result of an “everything but the kitchen sink” approach: “[a]fter closing submissions, the parties had narrowed the scope of claims at issue down from approximately 145 claims across seven patents to approximately 123 claims at issue across six patents, still with 128 separate issues.” McVeigh J was not impressed. She quoted Locke JA’s comments in Western Oilfield 2021 FCA 24 [9] as to “the lack of wisdom of raising so many issues on appeal,” with the result that “the appellants’ approach suggests that they themselves cannot identify any issues that are particularly strong” [5]. She reiterated that “putting all these issues before the Court was an unwise litigation strategy” and warned that

[9] Lest this become a trend for this Court, or for the parties before it, I feel compelled to state that, in my view, putting these countless issues before the Court for simultaneous determination was detrimental to the aims of the parties in presenting the most clear and effective arguments. It is also contrary to the general principle of this Court to secure the just, most expeditious and least expensive outcome of every proceeding.

While McVeigh J directed her general comments at both parties, the fault lay primarily with NCS. Kobold successfully asserted one patent and four claims, which depended on three further claims [1623]. NCS asserted five patents and put over 120 claims in issue. NCS was comprehensively unsuccessful. All claims at issue — 128 in total — were declared invalid. Costs consequences followed: “There is a clear window here for an elevated lump sum costs award to incentivize efficiencies while sanctioning conduct with so many issues making it more complex.” Accordingly, McVeigh J awarded Kobold a lump sum of 45% of actual fees, up from the baseline of 37.5%, in significant part because “the multitude of claims and issues in this case unnecessarily enhanced the complexity of this case” [1671], [1674]. I must say that the 7.5% bump in the costs award strikes me as a modest sanction given the waste of judicial resources occasioned by NCS’s strategy. But maybe I am just inclined to be unsympathetic after having waded through 200 pages of claim construction.

While NCS’s strategy was certainly annoying, that doesn’t make it unwise. And while it failed in this case, that doesn’t necessarily mean it was a bad strategy; if you make a bet with good odds, it was a still a good bet to make, even if you lose. This is one of the most extreme versions of the kitchen sink strategy aka the “throw mud at the wall” strategy that I’ve seen, but that strategy is common enough in a more restrained form. This raises an interesting question about the ‘kitchen sink’ strategy: it makes the judges mad and risks an adverse costs award, but maybe that is worth it if it increases your chance of winning. I think it is pretty clear that the kitchen sink strategy sends a message to the court that you have a weak case. But given that you do have a weak case, is the kitchen sink strategy a good bet?

Of course, we can’t do a controlled study to see whether a more focused strategy is better, but I have to admit my eyes glazed over while reading hundreds of pages of claim construction, with each claim getting only a few paragraphs of analysis. And while I can’t see inside McVeigh J’s head, I have to suspect that it would have been easy for a few meritorious points to have been swamped by the routine of dismissing the unmeritorious arguments. This is particularly so because McVeigh J often found the evidence of NCS’s expert, Mr Lehr, to be wanting. He “took several positions which appeared at odds with expertise and historical facts” [92], and his arguments were regularly inconsistent with the documentary evidence: see eg [1286]. In some instances Mr. Lehr would read in new elements that were not in the claim at issue at all [1424]. I suspect NCS’s kitchen sink strategy had the effect of undermining the credibility of their own expert by inducing him to take unsupportable positions on weak claims that should never have been raised, rather than allowing him to take a stronger position on a smaller number of claims.

On the other hand, there were one or two places where the sheer volume of issues may have worked to NCS’s advantage. For example, Kobold did not carry its burden of showing that the 704 patent was obvious, because Kobold’s experts provided only conclusory statements and did not address inventiveness at the claim-by-claim level [1450]–[1452]. It is possible that these weaknesses in Kobold’s submissions were due to the sheer volume of arguments it had to deal with. (The claims were nonetheless invalid on other grounds.)

Some of the discussion was a bit difficult to follow because McVeigh J’s analysis sometimes plunged right into the weeds without making it clear why the issue mattered. Most of the hundreds of pages of claim construction were like that. While claim construction is antecedent to validity, without knowing “where the shoe pinches” it can be difficult to stay awake while reading about whether a “wedge” has to be wedge-shaped.

Priority and the use of file history

One argument that was particularly difficult to follow related to priority dates and the use of file history [1302]–[1337]. The Ravensberger patent (2,730,695), filed 11 Feb 2011 claimed an almost identical invention to the NCS 907 patent [1302], and claimed priority from US applications 12/842,099 (23 June 2010) and 12/971,932 (17 Dec 2010). The 907 patent was filed on 4 May 2011 and claimed priority to an 18 Oct 2010 US application (61/394,077). During prosecution of the 907 patent a protest was filed arguing that if the 907 patent could not claim priority from the US 077 application, then it was anticipated by the Ravensberger patent. (McVeigh J referred to the protest as being filed on 6 March 2012 [1305], but it appears she is referring to the protest filed on 26 March 2012.) The 907 patent nonetheless was granted, from which it might be inferred that the examiner had decided that it properly claimed priority from the 077 application. (Though I should say here that it is not clear to me why any of this mattered.) There was also a protest against the Ravensberger patent based on the 907 patent, apparently also raising a priority issue. NCS wanted to introduce the file history of the Ravensberger patent [1309]. (Again, I don’t understand what argument was being pursued and so I don’t know how the file history was supposed to be relevant.) McVeigh J reviewed this file history, and while she was of the view that the file history might in principle be used for purposes other than claim construction pursuant to s 53.1(1), she decided that she would not use the file history “essentially to re-argue the same protest in relation to the Ravensbergen when the Patent Office issued the patent with those priority dates” [1325]. That seems like a very reasonable conclusion, with the caveat that I don’t understand where the argument was going.

McVeigh J then stated that “[a]lthough Canadian jurisprudence does not appear to have directly addressed this question, priority can be asserted on a claim-by-claim basis” [1331]. I’m not aware of any caselaw on that point either, but nonetheless the point seems perfectly clear on the face of s 28.1(1): “The date of a claim . . . is. . . .” I expect that is why there is no jurisprudence on the point.

Then McVeigh J stated (my emphasis):

[1335] As such, it is possible for different claims to be subject to different priority dates relating to different, previously filed applications. However, I interpret this as taking place during the application process and not at the stage in an action where validity is being determined. This would amount to an ex post facto prosecution of the patent, and contrary to the role of this Court.

This is puzzling. On its face, the underlined sentence seems to to say that the Court cannot assess whether a claim can properly claim priority from a foreign filing. However, in the next paragraph McViegh J stated that “on this record with very limited argument and no expert assistance, I am not prepared to do a claim-by-claim review of priority dates” [1336]. That indicates that she would be prepared to assess priority, just not in the context of this particular patent and in particular given the (puzzling) reliance on the Ravensberger claim history. Further, in discussing Kobold’s 571 patent, McVeigh J did determine different claim dates for different claims [1586], saying “As stated earlier, I agree that it is possible to evaluate the claim date in the way NCS requests” [1580]. I take it the “earlier” is a reference to her discussion at [1302]–[1337] relating to the 907 patent. So, on the whole, it seems clear enough that McVeigh J is not suggesting that the claim date of different claims cannot be determined by the court. I would speculate that the underlined sentence was addressed to the specific argument being made by NCS — maybe to the effect that she was not prepared to review the priority date determinations made by the examiner in light of the prosecution history. That is a very reasonable position, which does not exclude the court reviewing the priority dates directly. I’ll just conclude by saying that it is perfectly clear from 28.2(1)(b) and 28.2(1), which governs anticipation generally, not just in the context of prosecution, that the claim date may be assessed by the court.

Grace Period

An invention must not have been obvious in light of the state of the art. Section 28.3(a) gives a one-year grace period which excludes information derived from the applicant from the state of the art. Kobold wanted to rely on a presentation referred to as “What up?” in attacking NCS’s patent. NCS objected that the presentation contained information derived from NCS and so could not be used [1258]. McVeigh J held that even if the presentation contained some information derived from NCS, 28.3(a) could not be used to exclude all information in the “What up?” presentation [1281]. That seems to be to be clearly correct. Both on the face of the Act and on a purposive analysis, it is only the information derived from the patentee that is excluded, not all information that is somehow associated with the information derived from the patentee.

Mosaicing art from different experts

NCS argued that in attacking the patent for obviousness, Kobold could only rely on references that were discussed by both of its experts, apparently on the view that where a piece of prior art is obvious, it should be obvious to both experts [1417]. McVeigh J rejected this: “I reject the proposition that references must be discussed by both (or all) experts where there is more than one expert giving their opinion for a single party. Once a piece of prior art forms part of the record, the Court is able to consider it under the obviousness analysis” [1418].

Inventive Concept

There has been a lot of controversy over the use of the inventive concept in claim construction: see here and here. My own view is that the EPO objective problem and solution approach is probably the best way: see here for my argument to that effect, and here, here and here describing the EPO approach. In this case, it seems that NCS’s expert generally wanted to characterize the inventive concept at a very abstract level, as being “active debris relief” [1097] (and see eg [1441]), but any real trouble was avoided by McVeigh J’s (clearly correct) insistence that obviousness must be addressed on a claim by claim basis: see eg [1435]–[1436]. In other instances, NCS’s expert described the inventive concept by simply paraphrasing the claims: see eg [1343]. That is a common approach, which is not necessarily a problem, but one has to ask what is gained by focusing on an ‘inventive concept’ that is just a paraphrase of the claims, as opposed to focusing on the claims themselves.

Ambiguity

It is difficult to establish ambiguity and consequently a successful attack based on ambiguity is rare, but in this case McVeigh J held two claims to be invalid as being “incapable of being meaningfully interpreted” [1530]; and see [1527]–[1532]. There is no new law here, but successful ambiguity attacks are rare enough that this one is noteworthy. (I did not review the claims myself so I do not have any independent opinion as to whether they were incapable of being meaningfully interpreted.)

Utility related to the nature of the invention

In AstraZeneca 2017 SCC 36 [53], the SCC stated that the utility of an invention must be “related to the nature of the subject-matter,” saying “a proposed invention cannot be saved by an entirely unrelated use. It is not sufficient for an inventor seeking a patent for a machine to assert it is useful as a paperweight.” We don’t see this argument used very often, but in this case NCS sought to save the 704 patent, which McVeigh J found to lack utility because it could not function without seals, by arguing that it would nonetheless be useful for cleaning the casing, presumably by pushing it through to shove debris, in the same way that a completely inoperative tool could be used. McVeigh J rejected this argument on the basis that cleaning did not relate to the nature of the invention [1512]. There is no new law, but as with ambiguity it’s noteworthy just because we don’t see this point raised very often. (NCS’s argument was a bit less absurd than the foregoing summary suggests, because an operable tool would clean the casing as part of its perforating and fracturing capabilities — but it was a desperate argument nonetheless.)

Remedy

McVeigh J allowed the successful patentee, Kobold to elect between an accounting and damages, saying “With respect to an accounting of profits, no evidence has been advanced to suggest the parties may not be entitled to this relief. With the bifurcated phase with respect to damages ahead, there is no reason to deny such relief given the Defendants came to the Court with clean hands” [1659]. The direct implication is that the successful patentee is presumptively entitled to an accounting, barring some reason for denying it, such as unclean hands. As I noted in a post on an earlier case, in a two part article forthcoming in the IPJ and summarized in a series of blog posts, I have argued that Nova v Dow 2022 SCC 43 wrought such a major change in the principles on which the quantum of an accounting is assessed that the courts should revisit the principles on which an accounting is granted.

Threshold for Sound Prediction

Sandoz Canada Inc v Janssen Inc 2023 FCA 221 Locke JA: Mactavish, Monaghan JJA affg 2022 FC 715 Pallotta J

2,659,770 / macitentan / OPSUMIT / NOC

In this brief decision, Locke JA has provided a useful summary of the law related to the threshold for a “sound” prediction of utility. The case also implicitly raises an interesting issue relating to the standard of appellate review.

Threshold for a sound prediction

At trial, Pallotta J held that Janssen’s 770 patent was valid in the face of a variety of attacks: see here. The only argument pursued on appeal related to lack of utility [2]. Pallotta J had held that while utility had not been demonstrated, it was soundly predicted. Sandoz appealed on the basis that Pallotta J has erred in law by applying too low a threshold in concluding that the prediction was “sound.” Sandoz acknowledged that Pallotta J has not explicitly misstated the law, but argued that she must have applied the wrong threshold because, according to Sandoz, the evidence could not support a finding of sound prediction based on a correct statement of the law [18]. Locke JA rejected this argument, on the basis that the threshold for sound prediction “is not high” and the facts as found by Pallotta J were sufficient to support her holding.

Locke JA’s decision provides a useful summary of the law related to the threshold for sound prediction. The leading case on sound prediction is of course Wellcome / AZT 2002 SCC 77. The leading case on the threshold is Novopharm / olanzapine 2010 FCA 197, quoted by Locke JA at [8]:

[84] [Wellcome / AZT 2002 SCC 77] does not define the threshold required for sound prediction. However, Binnie J. states that more than mere speculation is required (para. 69). He also provides the following indicia:

• the requirement is that the claims be fairly based on the patent disclosure (para. 59);

• it must be prima facie reasonable that the patentee should have a claim (para. 60);

• it cannot mean a certainty (para. 62);

• the desired result must be able to be inferred from the factual basis (para. 70).

[85] In my view, these indicia signify that a sound prediction requires a prima facie reasonable inference of utility.

The requirement of “a prima facie reasonable inference of utility” is the best known summary statement of the threshold. Pallotta J did not mention this wording explicitly, but that in itself “is not remarkable, and does not amount to an error of law” [30]. (Indeed, Sandoz itself did not explicitly refer to this wording in its written submissions before Pallotta J [31].)

Locke JA noted that Sandoz cited several additional passages from Wellcome / AZT that indicate what is not sufficient for a prediction to be sound:

1. No more than a mere belief that something might be useful (para. 25);

2. Little more than an announcement of a research project (para. 64); and

3. Only a promise that a hypothesis might later prove useful (para. 84).

Locke JA concluded:

[16] In my view, there is nothing in [Novopharm / olanzapine] that represents any kind of departure from what one would glean from a complete reading of Wellcome. While it is not necessary that the prediction be certain (see Wellcome at paragraph 62), or to a regulatory standard (see Wellcome at paragraph 63), the public is entitled to a teaching that is solid (see Wellcome at paragraph 69) and accurate and meaningful (see Wellcome at paragraph 83), and based not on speculation but exact science (see Wellcome at paragraph 84).

In affirming Pallotta J, Locke JA stated that “I am not prepared to conclude that it overlooked the guidance therein that the teaching in a patent based on a sound prediction must be solid, accurate and meaningful, and based on exact science (not speculation),” citing Wellcome / AZT [69], [83], [84]. Given his reliance on Novopharm / olanzapine, the description of the threshold for sound prediction as being as being “solid, accurate and meaningful, and based on exact science (not speculation),” is an explanation of what it means for an inference to be “a prima facie reasonable,” and is not intended as a departure from the threshold set out in Novopharm.

Standard of appellate review

Sandoz’s argument also raises an interesting issue as to how to distinguish a holding of law from a finding of fact in applying the standard of appellate review. Sandoz characterized Pallotta J’s putative error as an error of law in order to invoke a correctness standard of review [11]. Sandoz did not argue that Pallotta J made a palpable and overriding error of fact. While Sandoz acknowledged that Pallotta J did not explicitly misstate the law, it argued that Pallotta J must have failed to actually apply the correct law because the evidence could not support her finding that the prediction was sound [18]. Sandoz characterized this as an extricable error of law [11].

Sandoz’s argument was along the following lines. Suppose the law is that “Facts A, B and C are all relevant to establishing sound prediction.” If the trial judge says “C is not relevant and I have not considered it,” this is clearly an error of law. Now suppose the trial judge correctly states the law, and then says “I find that facts A, B and C are not proven,” yet nonetheless concludes that sound prediction has been established. The finding that sound prediction has been established is a mixed finding of law and fact, and so is to be reviewed on a deferential standard unless there is an extricable error of law. But the law itself was correctly stated. And it doesn’t seem to be an error of fact, because no one is disputing the factual findings that A, B and C were not proven. Sandoz’s argument was that this kind of error is an error of law, on the view that since the facts are undisputed and the result was clearly erroneous, we can infer that even though the trial judge stated the law correctly, the trial judge cannot actually have applied the correct law to the facts. Sansoz’s argument seems right in an extreme case such as I have described. The difficulty is that on that argument, the only way for an appellate court to decide whether the trial judge made an error of law is to delve into how the facts were applied to the law; and how the law was applied to the facts is a classic issue of a mixed finding of fact and law, which is reviewed on a deferential standard.

So, suppose a case involved a tort action in which the question was whether the defendant had been driving negligently, and the court stated “The law is that the defendant must act as a reasonable driver would in the circumstances. I find as a fact that the defendant was driving at 45kph in a 50kph zone, while sober, on dry roads, at noon, in heavy fog. I find that the defendant was not negligent.” If the factual findings are not disputed, this is a classic example of a question of mixed fact and law, to be reviewed on a deferential standard: Housen [2002] 2 SCR 235 [28]. Now suppose the court had instead stated “The law is that the defendant must act as a reasonable driver would in the circumstances. I find as a fact that the defendant was driving at 160kph in a 50kph zone, while drunk, on black ice, at dusk, in heavy fog. I find that the defendant was not negligent.” This must be an error of some kind; but the law is correctly stated and no one is disputing the specific factual findings. Is it an extricable error of law, as Sandoz argued in this case? It is true that an extricable error of law need not be explicit and can be inferred from the result on the facts, but an extricable error law is typically capable of being articulated as a specific legal rule, even if the trial court did not do so. For example, in Galaske v O’Donnell [1994] 1 SCR 670, discussed in Housen [31], the trial judge had found the driver of a car not negligent in failing to ensure that his young passenger wore a seat belt. This implies that the driver did not owe a duty of care to his underage passenger. The failure to identify this duty was an extricable error of law. Similarly, in Rhône (The) v Peter A.B. Widener (The) [1993] 1 SCR 497, discussed in Housen [34], the extricable error of law was failure to recognize that the key factor distinguishing directing minds of a corporation from normal employees “is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis.” Again, the extricable error can be separately articulated as a rule of law. In my negligent driving example, there is no separate rule that can be extracted.

Now, in this case, Sandoz did suggest that there is an extricable rule, namely the threshold for sound prediction. This argument makes sense. A threshold is a point on a continuum, so there may be cases that are so far from the threshold that we can say that the trial judge must have applied the wrong threshold, even if the trial judge articulated the threshold correctly. The same can be said about my negligent driving example. So far, so good.

The problem is that even if we accept that the threshold is a matter of law, actually extracting the threshold that was implicitly applied by the trial judge may be impossible except in the easiest cases. Put another way, in Galaske and The Rhône, there was a clear rule that could be extracted and a specific error identified. When the legal rule is a threshold that turns on a holistic consideration of the facts, it will not be possible to extract the rule from its application in any case which is anywhere close to the line. So, in the tort example I gave above with the extreme set of facts, we can say holistically that there must have been an error of law, even if we cannot specifically identify it. But as we get closer to the line (what if it was dusk, the driver was going slightly over the speed limit etc), it becomes increasingly difficult to extract any legal error, even though one may have been made. Put another way, the trial judge who found the driver was not negligent on the extreme facts clearly had an erroneous conception of reasonableness in their mind. As the facts get closer to the line of ‘true’ reasonableness, the trial judge’s decision will become more and more defensible, even though the trial judge is applying exactly the same erroneous legal concept. When the facts are anywhere close to the line, an appellate court will say “We affirm on the basis that the holding that there was no negligence is a question of mixed law and fact to be reviewed on a deferential standard.” But as the facts get further from the line, it becomes clear at some point that the trial judge must have been making an error of law all along.

Maybe this is all a long-winded way of saying what the SCC said in Housen [28], that the distinction between an error of law and an error of mixed law and fact “can be difficult in practice because matters of mixed law and fact fall along a spectrum of particularity.” But it seems to me that Housen was making a somewhat different point, namely that we call something a rule of law when it is broadly applicable to a range of facts and we call a finding a question of mixed law and fact when it is unique to the circumstances of the case: “If a court were to decide that driving at a certain speed on a certain road under certain conditions was negligent, its decision would not have any great value as a precedent” [28], quoting Southam [1997] 1 SCR 748 [37]. My point is somewhat different. Even when we can state a generalizable precedent, it may be difficult to extract that rule from its application, particularly when the rule involves a threshold (or more generally, any kind of line drawn along a continuum, such as reasonableness in tort), and the facts of the case are somewhere close to the line. In that context, it makes sense to say that a rule of law of is involved, as there are cases at either extreme that we can say are clearly correctly decided one way or the other, even without disputing the facts. But it is nonetheless problematic to apply a correctness standard to a decision involving the application of that law to the facts in a case which is close to the line.

This was arguably such a case, which tested the limits of what exactly constitutes a sound prediction. How should the courts deal with such a case? Locke JA held that the threshold for establishing sound prediction is “not high” and “[t]he terms ‘prima facie’ and ‘reasonable inference’ leave considerable space for a fact-finding body in reaching its conclusion” [24]. He further noted that “[t]he fact that more experimentation was required after the rat studies did not necessarily take the utility of the invention outside the scope of a sound prediction” [25]. This “considerable space” remark, in combination with his look at the facts, strikes me as being a kind of intermediate level of review. It seems to me that Locke JA did take a look at the facts, albeit somewhat cursorily, to satisfy himself that Pallotta J had not obviously misapplied the law to the facts. That is not exactly standard doctrine on the standard of appellate review—Locke JA doesn’t seem to have been applying either an entirely deferential standard, or a correctness standard—but it strikes me as a sound approach.

The UK Approach to Electing an Accounting

In a recent post I noted that AlliedSignal (1995), 61 CPR (3d) 417 (FCA) 444 held that an entitlement to an accounting “certainly cannot depend on whichever amount would turn out, on inquiry, to be more profitable.” I should point out that in UK law is to the contrary. In UK law, as I understand it, the successful patentee is entitled to elect between damages and an accounting as of right, unlike in Canadian law where it is clear that an accounting, as an equitable remedy, is discretionary: Beloit v Valmet-Dominion [1997] 3 FC 497 (FCA) ¶ 111. Further, in UK law, the patentee is entitled to some information from the defendant to allow it to make an informed election between the two remedies: see Lufthansa v Panasonic Avionics [2023] EWCA 1273, in which Birss LJ explained [3]:

If an IP rights holder's business is in licensing their rights then the damages would be measured by the loss of royalty on the defendant's infringing goods, which, if the infringements were highly profitable, may be a lower sum than the amount of profit the infringer earned from the infringement. The rational choice might then be to choose an account of profits. On the other hand if the infringer's business was unprofitable, perhaps trying to break into a new market, and the rights holder's business was a profitable one making direct sales to customers, which were lost due to the infringement, then a damages enquiry might be more sensible.

I am not persuaded. The question is not which remedy is more rational from the perspective of the patentee, it is which remedy is more rational in light of the purpose of the patent system. The primary purpose of patent remedies is to preserve the incentive to invent. Damages serve that purpose. That is why damages are available as of right in Canada and that is why an accounting is not available at all in the US. An accounting that exceeds damages must be justified by some independent principle, such as sanctioning bad faith behaviour. So, in my article on Nova v Dow (forthcoming in the IPJ), I argue that an accounting should only be granted if the infringer was deliberately avoiding taking a licence in a game of “catch-me-if-you-can.” Simply putting more money into the pocket of the patentee is not an adequate principle. Indeed, an award that exceeds damages can be counter-productive, as it may encourage needless litigation by giving the patentee an incentive to disguise its patent rights in the hopes of trapping an unwary infringer, thereby getting a better outcome that if it had sought to make a licence easily available ex ante. This is all the more reason why the grant of an accounting must turn on the behaviour of the parties and not simply on which remedy is most favorable to the patentee.

With that said, I can understand that if the bad behaviour of the infringer warrants the grant of an accounting, it is reasonable for the patentee to want to know whether that remedy will exceed its damages. The patentee is entitled to damages to make it whole and should not have to accept a lesser amount because the infringer behaved badly. My objection is to allowing the patentee to elect an accounting simply because the quantum of the accounting would exceed the quantum of damages. The FCA in AlliedSignal did not say that a patentee is never entitled to information allowing it to judge which remedy is greater before making an election; AlliedSignal said that the grant of an accounting cannot turn on which remedy is greater. This is consistent with the view that a successful patentee must establish its entitlement to an accounting on independent substantive grounds, such as the bad behaviour of the infringer, but once it has established that it should be granted an accounting on substantive grounds, it may be granted an inquiry allowing it to make an informed choice so as to ensure that it is at least made whole.

Inducement in the Pharma Context is an Inherently Hard Problem

Apotex Inc v Janssen Inc 2023 FCA 220 Locke JA: Mactavish, Monaghan JJA affg 2022 FC 996 (reasons) 2022 FC 995 (judgment) Pallotta J

            2,659,770 / macitentan / OPSUMIT / NOC

This brief decision, affirming Pallotta J’s finding at trial that Apotex’s sale of Apo-Macitentan would induce infringement of Janssen’s 770 patent, deals with a difficult issue of inducement in the pharma context. Two main doctrinal points emerge: first, explicit instructions to infringe are not necessary to establish inducement, and second, it may sometimes be effectively impossible for a generic to avoid inducement by scrubbing its product monograph (PM) clean of references to the infringing use. More broadly, this case illustrates why indirect infringement in the pharma context is an inherently difficult problem that does not appear to have any good solution.

As discussed here, this is in many ways a typical ‘skinny label’ case, in which a generic seeks to sell a drug that is itself unpatented, but which may be used in a manner that is patented. In this case, Janssen’s 770 patent covers the use of macitentan in a combination therapy with a PDE5 inhibitor in the treatment of pulmonary arterial hypertension (PAH). Apotex sought to sell macitentan, which is itself unpatented, for monotherapy treatment of PAH. Combination therapy is about 80% of the market and monotherapy is about 20% [FC 162].

In such cases, the generic is not a direct infringer, so infringement by inducement must be established under the three-part Corlac test, 2011 FCA 228 [162]. This typically reduces to the question of whether the generic’s PM will induce infringement by prescribing physicians, who will read the PM and thereby be induced to prescribe the generic product for use in an infringing manner. A central question is therefore whether the generic’s skinny label has been sufficiently scrubbed clean of any reference to the infringing use. This turns on the details of the generic PM.

In this case, the details are a bit difficult to follow because of redactions, but the key point is that much of the information in the Apo-Macitentan PM is clinical trial data from a landmark SERAPHIN study, which established the efficacy of macitentan for both monotherapy and combination therapy [12], [FC 186]. PAH is a rare disease and macitentan can only be prescribed by about 30 specialists who work in recognized PAH centres [FC 184]. All of these specialists would be aware of the landmark SERAPHIN study and so even though the Apotex PM was scrubbed clean of explicit references to combination treatment, specialists reading the Apotex PM would recognize it referenced the SERAPHIN and so would understand that Apo-Macitentan is also suitable for combination therapy. This was the basis on which Pallotta J found that Apotex’s PM would induce infringement.

The first key doctrinal point is that explicit instructions to infringe are not necessary to establish the second prong of the Corlac inducement test:

[17] The weakness of Apotex’s position in this regard is that it assumes that an absence of explicit instruction and of intention that direct infringement should result equals an absence of influence sufficient to satisfy the second prong. That is not necessarily the case. While explicit instruction and intention may be relevant to the issue of influence, I do not accept that either is required. Even without explicit reference to combination treatment, the Federal Court was entitled to find that the Apo-Macitentan PM would influence use of macitentan in that way.

In Novopharm 2007 FCA 167 [11], the FCA remarked that “an inducement to infringe generally cannot be inferred from a mere reference to the new use in the product monograph, for example, in the course of explaining contraindications or drug interactions, or as part of a list of scientific references.” Locke JA [13]-[14] distinguished this on the basis that in Novopharm the unpatented use of the drug in question was for an entirely different use, whereas in this case, the unpatented use was for the same indication. This is consistent with the qualifier “generally” in Novopharm and this holding may be explained by the unusual expertise of the end-users in this case who would recognize the indirect allusion. Nonetheless, the point remains that in some cases a “mere reference” to an unpatented use may indeed suffice to establish inducement.

The second doctrinal point is implicit. So far as I can tell, there is nothing that Apotex could have done to avoid inducement. Certainly there was no suggestion in either the FC or FCA decision that Apotex could have done more to scrub its PM of references to the combination therapy. And in this case, there was no suggestion that there would have been any way for Apotex to have avoided such a reference. The implication is that it is simply not possible for Apotex to sell macitentan for the unpatented use.

The broader point illustrated by this case is that the problem of inducement in the pharma context is inherently very difficult. Ideally we want to allow free generic entry in the market for the unpatented use while at the same time giving the patentee exclusivity in the market for the patented use. The obvious way to do that is to sue the direct infringer, which allows the patentee to control how the product is used after it is sold. But sometimes it is not practical or desirable to sue the direct infringer, as is particularly the case with respect to pharma. That is when inducement is most important.

The law of inducement tries to target the direct infringer indirectly. The theory underpinning the Corlac test is that the product sold by the defendant will be used in accordance with the instructions, so the product will only be used to infringe if the instructions supplied by the defendant instruct infringement. This is a second-best solution, but it can work tolerably well if the end-users generally read and follow the instructions provided by the defendant. But that theory appears to be substantially wrong in the pharma context. The basic problem is that physicians are to some extent experts, with their own independent sources of information. The situation in this case, where there are only a handful of prescribing physicians who are truly expert in this area, is just an extreme version of a pervasive problem. Of course, there will be some people who are experts in almost any field, but the problem of general end-user (physican) expertise means that the standard theory is particularly weak in the pharma context.

The result under the Corlac approach is that the generic will only be allowed to sell its unpatented product if it scrubs its PM clean of any references to the infringing use. The generic will also argue that even if its PM does instruct an infringing use, that doesn’t constitute infringement because the prescribers don’t pay any attention to the generic PM in any event, though I don’t believe that argument has ever prevailed on the facts. This approach has an air of unreality about it. I can’t help but imagine a scenario in which no doctor ever reads the PM for a generic product, except one scrupulous physician in a rural community where there is nothing else to do, who compulsively reads and follows the PM for any drug she prescribes. If the generic PM instructs infringement, she will be induced, so it is essential to scrub the generic PM clean in order to avoid liability. And then one day she retires, and now the generic PM can say whatever it wants.

In any event, even if there is some substantial number of physicians who pay attention to the generic PM, it seems clear enough that most do not. (And my understanding is that physicians normally prescribe generically and pharmacists do not normally know the indication, so even if the physician knows that the generic drug is not indicated for the patented use, it may be dispensed for that use nonetheless.) This means that if the generic is permitted to sell its product, we will get desirable competition in the unpatented market, but at the price of substantial infringement in the market for the patented use.

What can be done? One approach would be to favour one side or the other. In AB Hassle v Apotex 2002 FCA 421 [57], the FCA gave a strong policy statement suggesting we should favour competition in the unpatented market:

Thus [the defendant] cannot be prevented from obtaining [marketing authorization] solely on the basis that it will sell [the known compound]. If it were otherwise, then serious policy issues would arise. If there was any likelihood that a patient would consume a generic product for a patented use, then the generic product would not be approved. This would prevent new uses from being approved for existing drugs because there is always the possibility that someone somewhere will use the drug for the prohibited, patented purpose. This would result in a real injustice: since a generic company cannot possibly control how everyone in the world uses its product, the prevention of the generic from marketing the product would further fortify and artificially extend the monopoly held by the patent holders. The patent holder would, therefore, effectively control not just the new uses for the old compound, but the compound itself, even though the compound itself is not protected by the patent in the first place. The patent holders, as a result, would obtain a benefit they were not meant to have. In the end, society would be deprived of the benefit of new methods of using existing pharmaceutical medicines at a lower cost.

This logic is sound, but we have to keep in mind that we are striking a balance between the right of the patentee to exclusivity for its patented use and the need to incentivize development of new and useful treatment, and the right of the generic to sell the unpatented product for unpatented purposes and the desirability of competitive prices in the unpatented market. That balance is easy to strike if the only problem is that “someone somewhere will use the drug for the prohibited, patented purpose.” But what if the problem is that everyone everywhere will use the drug for the patented purpose?

Suppose a drug has long been generic, like aspirin, and the patentee invents a new use that represents 0.1% of sales. It seems clearly wrong as a matter of policy to prohibit the generic from selling aspirin, even if we know with certainty that it will be used for the infringing purpose. The benefit to the public of allowing generic prices for 99.9% of uses more than outweighs need for an incentive to innovate for niche uses. But conversely, if the patented use represents almost all of the market, it seems wrong to undermine that exclusivity simply because there is an unpatented niche use. The need to provide an incentive to develop major innovations that constitute the primary use for the compound outweighs the desire to allow generic prices in the niche market. So, if we can’t control direct infringement either through a direct action against the end-user or by restrictions on the product instructions, it is reasonable on policy grounds to say that the generic should be allowed to sell the product if the unpatented uses predominate but should not be permitted to sell the product if the patented uses predominate.

If we apply that reasoning to the facts of this case, in which the unpatented use is only about 20% of the market, it seems reasonable on policy grounds to prohibit the sale of the generic product. Yes, this is a bad solution and it shuts down competition in the market for the unpatented use, but all the solutions are bad—the question is which solution is the least bad. In my post on Pallotta J’s decision, I suggested that her finding may have been motivated by “the fact that combination therapy is the primary use for macitentan, with only 10–30% of patients getting monotherapy [162]. If the opposite were true, so that eg only 10% of the use was in the patented combination, then I wonder if it would have gone the other way.” This view is consistent with the two doctrinal points emerging from Locke JA’s decision on appeal. Taken on its own, the idea that a mere indirect reference to the patented use can support a finding of inducement is novel and somewhat extreme, as is the notion that it may be impossible for Apotex to sell a generic version of this drug. But both are readily understandable if the FCA was stretching existing doctrine in order to strike an appropriate balance by protecting the primary market.

I don’t really know where to go from there. I am reluctant to suggest abandoning the Corlac approach, which focuses on the instructions, even in the pharma context. The Corlac approach is logical and principled, and it works reasonably well in many contexts. The rule just doesn’t work as well in the pharma context, where most physicians do not get their information about how to use a generic drug from the manufacturer’s instructions. But it would be difficult to implement a market share approach in the pharma context, even if this could be done doctrinally. If the market shares for the patented and unpatented uses are 1%/99% or vice versa, it seems easy to say whether we should allow the generic sales. But where is that line to be drawn? Any firm line—50/50? 30/70?—seems arbitrary, but any line that turns on the facts will likely be both arbitrary and unpredictable. All I can say is that this case illustrates that the problem of inducement in the pharma context is very difficult, and I don’t see any easy solution.

TIPG on November 23rd

On November 23 I'll be discussing comparative overbreadth at a Toronto IP Group dinner.  Here is a link to the event details. I hope to see some of you there.

Nova v Dow: Miscellaneous Policy Issues

Nova Chemicals Corp v Dow Chemical Co 2022 SCC 43 Rowe J: Wagner CJ, Moldaver, Karakatsanis, Brown, Martin, Kasirer and Jamal JJ concurring; Côté J dissenting affg Nova Chemicals Corporation v Dow Chemical Company 2020 FCA 141 Stratas JA: Near, Woods JJA affg Dow Chemical Co v Nova Chemicals Corp 2017 FC 350, 2017 FC 637 Fothergill J

2,160,705 / film-grade polymers / ELITE SURPASS

The Intuition / The Legal Background / Causation as a Matter of Fact / The Concession / What Role for “But For” Causation in Identifying the NIO? / Summary of the Summary / Causation Concept in the Absence of an NIO / What is the NIO? / The Value of the Invention / Rivett on the Facts / Three Policy Arguments / The Source of the Chilling Effect

In a previous post I discussed the three main policy arguments raised by Rowe J in support of his approach to an accounting of profits, arguing that they in fact support an accounting based on “but for” causation. My last post then addressed the crucial policy issue of the chilling effect. There are two more policy arguments raised by Rowe J. While I address them at more length in Part II of my forthcoming article for completeness in canvassing the policy issues, I will mention them only briefly here as they did not seem to play a major role in Rowe J’s reasoning.

First, Rowe J said that an accounting “discourages efficient infringement: when an infringer’s profits exceed the damages suffered by the patentee” [47]. This is probably a reference to the “catch-me-if-you-can” problem, described by Zinn J at first instance in Rivett 2009 FC 317 [23]. As I explain in more detail in the article, this argument does not support Rowe J’s approach to an accounting because a “but for” accounting is entirely adequate to address the problem and does so without risking a chilling effect.

Second, Rowe J also asserted that “smaller businesses would be disproportionately disadvantaged by [“but for” causation]” [64]. With due respect, this argument is simply not serious, for reasons I discuss in detail in Part II of my the article. The only explanation for it is that Rowe J was casting about for additional arguments to bolster a decision he had already made for other reasons.

Can the Election Between Damages and an Accounting Be Made after Discovery?

Angelcare Canada Inc v Munchkin Inc 2023 FC 1111 Roy J

2,640,384 / 2,855,159 / 2,936,415 / 2,936,421 / 2,937,312 / 2,686,128 / Diaper pail cassette

In Angelcare v Munchkin 2022 FC 507, Roy J held that various claims of Angelcare’s six patents were valid and infringed by Munchkin in the liability phase of a bifurcated trial: see here. This motion concerned a variety of remedial matters preliminary to the remedies phase, specifically entitlement to injunctive relief, entitlement to an accounting of profits; entitlement to punitive damages; and which of the three plaintiffs is entitled to a pecuniary remedy.

Election between damages and an accounting

With respect to entitlement to an accounting, Angelcare did not merely seek an accounting: it sought the entitlement to decide between damages and an accounting after discovery was completed, in order to have the financial information necessary to make the most advantageous choice [15]. Roy J granted this right to elect after discovery, after a review of the authorities which focused exclusively on the issue of entitlement to an accounting, not the narrower issue of whether there is an entitlement to elect after discovery: see [15]–[41] and the Order entitling the Plaintiffs “to claim a monetary remedy, be it damages or an accounting profits.”

This holding is contrary to AlliedSignal (1995), 61 CPR (3d) 417 (FCA) 444 which addressed the same issue: “[t]he appellant is asking for damages or an accounting of profits made by the respondents by reason of their unlawful acts, ‘whichever shall, upon inquiry, prove to be the larger amount’.” This request was denied: entitlement to an accounting “certainly cannot depend on whichever amount would turn out, on inquiry, to be more profitable.” The reason is that “[a]n accounting of profits is an equitable remedy which ought to be allowed by the Court in the exercise of its equitable jurisdiction when the circumstances so warrant.” There must a basis in equity for granting an accounting and “putting as much money as possible into the pocket of the patentee” is not an equitable principle. Roy J did not consider AlliedSignal, presumably because it was not cited to him, and consequently his holding on this point cannot be considered to have any precedential value.

I would also point out that while Roy J also held that Angelcare was entitled to an accounting if it so elected, he relied entirely on caselaw that preceded the SCC decision in Nova v Dow 2022 SCC 43. In a two part article forthcoming in the IPJ and summarized in a series of blog posts, I have argued that Nova v Dow wrought such a major change in the principles on which the quantum of an accounting is assessed that the courts should revisit the principles on which an accounting is granted. I argued that Nova v Dow turned an accounting into a randomized quasi-punitive remedy, and consequently an accounting should only be awarded in cases in which the infringer tried to game the system by knowingly declining to take a licence to a patent which it knew to be valid, in the hopes of escaping detection.

Punitive damages

Roy J declined to award punitive damages [61], rightly, in my view. He noted that there is a very high threshold for awarding punitive damages, which are granted only in “exceptional cases for ‘malicious, oppressive and high-handed’ misconduct that ‘offends the court’s sense of decency’”: [46], quoting Whiten 2002 SCC 18 [36]. He further noted that “[a]llegations of willful and knowing infringement are alone insufficient to support a claim to punitive damages” [45], quoting Bauer 2014 FCA 158 [25]. This is because wilful infringement of a patent which the defendant reasonably believes to be invalid is not malicious at all; on the contrary, it does a public service by enabling a challenge to patents which were obtained without the quid pro quo of a truly new, useful and non-obvious invention. US law does allow for treble damages for wilful infringement, while carving out an exception for cases in which the infringer reasonably believed the patent to be invalid or not infringed, but the US experience, in my view, illustrates the futility of trying to assess the intent of the infringer for such purposes. The Canadian approach, in which wilful infringement alone is not grounds for punitive damages, is clearly preferable.

Bell Helicopter 2013 FCA 219 was the only case brought to his attention by the parties (and the only Canadian case known to me) in which punitive damages were awarded outside the context of litigation misconduct [44]. Roy J distinguished Bell Helicopter on the basis that in that case “Bell Helicopter used the invention as its own to promote its helicopter” [50]: see also [58]. More specifically, in passages quoted by Roy J at [50], the FCA in Bell Helicopter stated “Bell Helicopter promoted the infringing Legacy landing gear as its own invention,” knowing this to be untrue [191], and the FCA went on to say that “Where a person infringes a patent which it knows to be valid, appropriates the invention as its own, and markets it as its own knowing this to be untrue, punitive damages may be awarded” [192]. As Roy J stressed, this was the key fact which took the infringement in Bell Helicopter beyond wilful and knowing infringement to a case in which punitive damages could properly be awarded [58]. Consequently, in my view, Roy J was quite right to distinguish Bell Helicopter on this basis.

In this case, “the Defendants sought to create a product which would be compatible with the Plaintiffs’ pails,” [55], but as Roy J pointed out “there is nothing inherently wrong with developing compatible products. Unless there is patent infringement, that constitutes valid innovation,” which should not be discouraged [56]. “The Defendants chose to compete with the Plaintiffs in an area they believed was not covered by the Plaintiffs’ patents,” and while it turned out that they had failed in that effort, such failure is not morally blameworthy so as to justify punitive damages [56]. Patent remedies must strike a balance by protecting the incentive to invent without chilling competition, and, as Roy J pointed out repeatedly, the remedies of damages and an accounting (until Nova v Dow) strike the right balance except in the most egregious cases [56], [59].

One point which arose on the facts is worth noting, as it is likely a common scenario:

[60] The Plaintiffs seek to reproach that the Defendants’ cassettes were displayed in retail stores where the Plaintiffs’ cassettes were displayed. I cannot see anything wrong with a retailer displaying like products with like products. This is merely common sense. That is especially so with respect to large-surface retailers which represent 80% of the market. As such, there is nothing nefarious which could be held against the Defendants; it would be rather weird if the Defendants had chosen to refrain from marketing their wares in large-surface retailers where 80% of the market is.

This must be right. It is evidence that the defendants believed that their products were truly non-infringing, as they were sure to be caught if they sold their product side-by-side with the plaintiff’s product. If we are going to allow good faith competition, then we should allow vigorous good faith competition.

Injunctive Relief

The main issue relating to injunctive relief was whether an injunction should be granted in respect of early generation products which were no longer being actively marketed, and which (according to the defendants) had been removed from Canada, and which may no longer have been in existence [7]. While there is a maxim to the effect that equity does not act in vain, Roy J pointed out that “if the Defendants have no intent to commercialize in Canada their cassettes of generations 1, 2 and 3, they should not be concerned that an injunction is issued until the various patents at issue have expired” [9]. In light of the uncertainty as to whether those products were still available outside of Canada, it was not clear that the injunction would be futile [12], and Roy J consequently granted the injunction.

Standing

The standing issue concerned the entitlement of the various plaintiffs to claim damages under s 55(1) as persons “claiming under the patentee” during certain periods of time. There were three plaintiffs, Edgewell and Playtex, which were affiliated companies [65] and Angelcare, a member of a separate family of companies [66], [68]. At the risk of glossing over a very complicated set of facts, the gist of the problem is that the three plaintiffs cooperated in selling diaper pail systems in Canada over an extended period of time without always having fully formalized the licensing of the various patents which they each owned. Roy J held that this was not an insurmountable hurdle to standing. The courts have taken an expansive approach to the interpretation of s 55. It is now clear that a licence does not have to be exclusive, nor does it have to be in writing, for a person to qualify as claiming under the patentee [119]. Indeed, it is not even necessary that the person be a licensee: “[A] person ‘claiming under’ the patentee is a person who derives his rights to use the patented invention, at whatever degree, from the patentee” [80], quoting Signalisation de Montréal [1993] 1 FC 341 (FCA) 356-357. In light of this expansive definition, Roy J had little difficulty holding the plaintiffs were all persons claiming under the patentee during the relevant period, in light of the close working relationship between them in the manufacture and distribution of the patented diaper systems [122]–[125], [139]. “I find that there was ample evidence in this case that the Plaintiffs were operating together towards a common goal, thus granting each other the right to use the patents” [129].