Adding the Manufacturer to a Suit Against End-users

Seismotech IP Holdings Inc v John Does 2023 FC 1335 Grammond J

2552603 / 2364081 / 2551854 / 2621287 / 2551847*

This procedural decision, adding the manufacturer to an action brought by the patentee against end-users, will be of interest in actions relating to patent assertion entities (PAEs). Patent assertion entities are businesses whose primary business is asserting patents against alleged infringers which typically independently developed the technology. The PAE’s patents are normally acquired from third parties, though in some cases the PAE may be the final business model for a previously successful operating company. The PAE may also be the inventor of ‘paper’ patents that were never commercialized: see generally Patent Assertion Entity Activity: an FTC Study (2016).

Some PAEs assert strong patents or large portfolios against large companies, seeking a licence for large sums, often in the millions of dollars. Other PAEs assert a small number of patents, which are often weak, against smaller entities, seeking much smaller settlements in a pattern that is consistent with nuisance litigation: FTC Study 41. The nuisance actions may be brought against end-users because the interest of the end-user extends only to the disruption and expense of switching to another product if a settlement is not reached. An end-user will often be willing to settle for a small amount to make the litigation go away, even if the patent is weak and the infringement claim is doubtful. A similar issue arises in the context of demand letters, as illustrated by Fluid Energy Group v Exaltexx 2020 FC 81, discussed here.

The interest of the patentee or licensed manufacturer, on the other hand, extends to the product itself. The interest of the patentee will be much greater than the interest of any individual end-user, and indeed, will generally be much greater than even the cumulative interests of all the current end-users, because the patentee hopes to also sell its product to future end-users. Consequently, the patentee will be willing to spend money to defend the validity of the patent that covers its product. The manufacturer is therefore a far more formidable foe for the PAE, which will accordingly wish to avoid prodding the bear.

This appears to be the situation here. Judging from its name, it’s recent incorporation in BC on 3 November 2022, and the lack of an online footprint, the plaintiff, Seismotech IP Holdings Inc, appears to be a PAE, perhaps with ‘paper’ patents. Even if it is not, its tactics are typical of the nuisance action PAEs. The patents at issue relate to smart thermostats, which help save money by reducing energy use. In the underlying litigation, Seismotech is suing as of yet unidentified end-users who purchased allegedly infringing smart thermostats, as well as the retail distributors—but not the manufacturer. In this decision, Seismotech was resisting a motion by Ecobee, the manufacturer of the allegedly infringing product, seeking to have Ecobee added as a party to the action [6].

Grammond J ordered that Ecobee be added as a party under Rule 104(b). That Rule is to be interpreted in light of the principle of party autonomy, according to which “parties are free to choose the manner in which they will assert or defend a claim, including the plaintiff’s choice of the defendants against whom to bring an action” [9]. Thus there is a fairly high hurdle if a party is to be added against the objections of the plaintiff [11].

In Ferguson v Arctic Transportation Ltd [1996] 1 FC 771 Prothonotary Hargrave provided a very helpful review of the cases to that point, including International Minerals v Potash Company of America [1965] SCR 3 in which the SCC addressed the issue in the patent context. More recently, in Servier v Apotex 2007 FC 1210, Snider J updated Hargrave P’s discussion and provided a helpful summary of the relevant principles at [17]. The current leading case from the FCA is Canada (Fisheries and Oceans) v Shubenacadie Indian Band 2002 FCA 509, though the discussion is fairly brief.

The case most directly relevant is Havana House (1998) 80 CPR (3d) 443 (FCTD) in which “[t]he owner of a trademark sued sellers of allegedly infringing cigars, but not their distributor. The Court added the distributor as a defendant in spite of the plaintiff’s objections” [16]. Rothstein J, as he then was, stated that:

Kozy Korner’s and Nigro are retail sellers, and Copa-Habana is the distributor to them. It may well be that Kozy Korner’s and Nigro will defend, but there is no reason that Copa-Habana should have to accept that its interest and its ability to market its merchandise as the original distributor to them should have to be defended vicariously. Its rights and its pocket-book would be directly affected by any order made against Kozy Korner’s and Nigro and it therefore has a direct interest to protect.

Exactly the same principle applies in this case.

Grammond J rejected Seismotech’s arguments that Havana House should not be applied. The most interesting argument made by Seismotech was that Havana House has been “overtaken by subsequent cases” [18]. A point emerging from the earlier cases is that “[a] mere commercial interest rather than a legal interest is not sufficient to make a person a necessary party,” as Snider J [17] put it in her summary.

Grammond J did not accept this argument. He held that the action “affects [Ecobee’s] legal interests, and consequently Ecobee should be added as a party [29]. He explained:

[18] Copa-Habana’s “ability to market its merchandise” was a legal right that would be affected by Havana House’s trademark. This is similar to Ecobee’s right to manufacture and sell its products, which would be affected by Seismotech’s allegations of patent infringement.

Further, “the reality [is] that the action cannot be allowed without determining the lawfulness of Ecobee’s products” [19].

In response, it might be said that while the lawfulness of Ecobee’s products is at stake, Ecobee’s legal rights are not at stake. Customers were never legally obliged to buy Ecobee’s products, and if in the future they refuse because Ecobee’s products are found to be infringing, that does not affect Ecobee’s legal rights as such any more than if in the future customers refuse to buy because they don’t like the colour.

The law doesn’t support such a fine distinction. International Minerals is directly on point. It concerned a conflict proceeding between International and Duval. The Potash Company of America (PCA) had for many years operated a process which it believed would infringe the patent, if granted. PCA and International had initially agreed to cooperate in either obtaining a royalty-free licence from Duval, or, failing that, in vigorously prosecuting International’s claim to be entitled to the patent. International then backed out of that agreement and told PCA it would be negotiating independently with Duval. PCA was concerned that Duval would reach an agreement with International, with the result that the patent would issue to Duval without challenge and without protection for PCA. PCA therefore sought to be added as a party. Cartwright J for the Court held that PCA should be added:

The order for which Duval is asking in the action is that it be declared that it is entitled to the issue of a patent which, if granted, will confer upon it the exclusive right of using the flotation process which PCA has been using for years and proposes to use in the development of its deposits of potash ores in Saskatchewan. The order sought would, in my opinion, affect the legal right of PCA to continue to carry on its business. It is true that if the intervention were not allowed the question of the validity of any patent to which Duval might be declared entitled would not as against PCA be res judicata and could be put in question under either s. 61 or s. 62 of the Patent Act, but until the patent was successfully impeached the right of PCA set out above would be affected. To allow the present action to proceed to judgment without the intervention of PCA, leaving it to its rights under the sections mentioned, would be to countenance the multiplicity of proceedings which it was one of the objects of the rule to avoid.

These words are equally applicable to this case. Seismotech already has its patent, but if it is successful in the underlying action, the result would confirm that Seismotech has the exclusive right of selling the product which Ecobee has been selling for some time. This in itself “would. . . affect the legal right of [Ecobee] to carry on its business.” It is true that if Ecobee were not added as a party, the outcome of the action would not be res judicata as against Ecobee, which would be entitled to bring an action under s 60 to determine whether Seismotech’s patent is valid and infringed by Ecobee’s product, but until the patent was successfully impeached, the right of Ecobee to sell its product would be affected. To allow the present action to proceed without Ecobee “would be to countenance the multiplicity of proceedings which it was one of the objects of the rule to avoid.”

In summary, in my view Grammond J’s decision was clearly right for the reasons he gave. All that I would add is to point out that this result is supported not only by Havana House, but also by the SCC decision in International Minerals.

*Grammond J did not specify the patents at issue, noting merely that there were four. The patents I have listed here are patents owned by Seismotech IP Holdings Inc which appear to broadly relate to the kind of technology at issue. Clearly, not all five patents are being asserted and it is possible that none of these patents are actually at issue in this litigation.

PS - I checked the Statement of Claim on a suggestion by a commenter. All the listed patents are being asserted except the 287 patent.