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].

Nova v Dow: The Source of the Chilling Effect

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

In my last post on Nova v Dow, I argued that none of the policy rationales provided by Rowe J support his approach to an accounting. In this post I’ll consider whether the approach to causation adopted by Rowe J will result in overdeterrence and a consequent chilling effect.

To understand whether a remedy will have a chilling effect, we need to understand the mechanism underpinning the chilling effect. As the Court of Appeal explained in Merck 2015 FCA 171 [42], the chilling effect arises because of ex ante uncertainty as to liability:

over-compensation of an inventor chills potential competition to the extent that a potential infringer is uncertain about the scope and validity of a patent.

If the bounds of the patent monopoly could be determined precisely ex ante, in the way that a property surveyor might determine the bounds of a property prior to purchase, then we would not have to worry about punitive remedies, as any potential infringer would be able avoid punishment simply by avoiding infringement: the potential infringer would be able to either license or avoid use of the patented technology. But there is always some degree of uncertainty with respect to liability of any kind and the problem is especially acute in the patent context. The boundaries of the patent monopoly are notoriously uncertain. In contrast to real property, a patent right has no physical boundaries, so there is no limit on the number of potentially “adjacent” property rights. And even once a relevant patent is identified, it is by no means a trivial task to establish its bounds by claim construction. Determining whether the patent is valid is even more difficult. The simple fact is that any party operating in a complex product space will almost invariably be an infringer in some respect.

Consequently, the chilling effect cannot be avoided by saying that third parties should take care not to infringe. To mitigate the chilling effect arising from uncertainty, it is important to ensure that patent remedies are not excessive.

What does it mean for an accounting to be excessive, such that it gives rise to a chilling effect? When would an investor prefer to invest in a safe sector with a lower return, rather than a more dynamic project with higher returns and a greater social benefit, but a substantial risk of infringement?

On an expected value calculation, the investor will only choose the risky investment if the excess return in the scenario in which it is not sued for infringement is greater than the loss it will suffer if it is sued. This depends on how much extra profit will be made with the risky investment, the size of the penalty if it infringes, and the risk of being found to infringe. A “but for” accounting ensures that the investor will always make the socially beneficial investment because it puts the infringer in the position it would have been in had it not infringed. This makes the investor indifferent between plunging into the patent thicket rather than opting for a safer but less innovative investment.

In theory, a “but for” accounting is not the only way to avoid a chilling effect. A “but for” accounting is guaranteed to avoid the chilling effect because a potential infringer is no worse off even if they are sure to be caught. (This is a common scenario in the pharma sphere.) But if there is some chance that the activity will escape detection entirely, the infringer might expect to be better off with a “but for” accounting. A remedy that puts the infringer in a somewhat worse position if it is caught might still leave the infringer indifferent ex ante because there is some chance it won’t be caught at all. The problem is that tailoring the accounting remedy to account for this would be impossible, as it would require the court to determine the infringer’s ex ante subjective risk of getting caught and then tweaking the accounting quantum just enough to ensure the infringer is indifferent, but no more. This is an impossible task and any approach that attempts it would therefore risk a chilling effect. That is why a “but for” accounting is the only practical legal rule that ensures there will be no chilling effect. This is why the Court of Appeal in Merck [42] held that “[t]he balance at the heart of the Act requires perfect compensation” in order to encourage innovation without chilling potential competition (quoted with approval by Côté J [103]. Any greater disgorgement will result in a chilling effect.

It is clear that the approach adopted by Rowe J may put the infringer in a worse position than it would have been in but for the infringement and so his approach does indeed risk chilling innovation. As discussed in my last post, Rowe J’s assertion that the remedy is not punitive does not affect this conclusion.

My point here is only that Rowe J’s approach risks a chilling effect, as it will sometimes make the infringer worse off than if it had avoided the market entirely. However, under Rowe J’s approach, there are some circumstances in which the infringer may be left better off than it it had not infringed: in particular, where there exists an NIO that was not in fact available to the infringer at the time of the infringement, so that a disgorgement under Rowe J’s approach will be less than a “but for” disgorgement. Whether Rowe J’s approach will have a chilling effect therefore depends on whether the effect from excessive disgorgement in some cases is offset by the reduced disgorgement in other circumstances. In a subsequent post I will argue that it is essentially certain that the effect of excessive disgorgement will dominate, so that a chilling effect is inevitable.