Varco Canada Ltd. et al v. Pason Systems Inc. et al – 2013 FC 750

This action relates to the infringement of Varco’s Canadian Patent No. 2,094,313 (the 313 Patent), which relates to automatic drilling systems used in well drilling rigs. Varco claims that Pason has infringed the 313 Patent, and claims damages or an accounting of profits as well as punitive damages. Pason denies infringement and attacks the validity of Varco’s Patent.

The Court held that Varco’s 313 Patent is valid and infringed, and ordered an accounting of Pason’s profits while refusing punitive damages.

Infringement – Direct

The Court concluded that Pason had directly infringed claims 1, 11 and 14 of the 313 Patent.

Infringement – Induced

The Court held that Pason is liable for inducing its customers to infringe the 313 Patent.

The Court applied the Weatherford (2011 FCA 228) test for inducement to infringe, and found that the primary means of inducement exercised by Pason was through the instructions it gave to purchasers as to the operation of the Pason AutoDriller. [253]

The Court noted that “[g]iven the sales of the Pason AutoDriller, both domestic and foreign, it is more likely than not that…customers assembled and/or used the Pason AutoDriller, that the customers were influenced by Pason’s manuals, instructions and training, and that Pason knew (indeed expected) that customers would act in accordance with what Pason supplied.” [255]

In the alternative, the Court stated that “[e]ven if the assembly of the Pason AutoDriller is not done by customers or technicians on their behalf, the operation of the Pason AutoDriller infringes Claims 11 and 14 and Pason is liable for inducing that infringement by others. The acts of inducement occur at least in part in Canada for which Pason is liable.” [256]

Infringement – by Exportation

The Court held that Pason infringed the 313 Patent by exporting parts of the AutoDriller which were assembled outside Canada.

Pason argued that since it ships to outside Canada all of the Pason AutoDriller parts but in unassembled form, there is no infringement and Pason should be permitted to retain the revenues earned from an activity which, if performed in Canada, would be infringement. [257]

The Court held that “[t]he reality is that the shipment of parts, along with the relatively simple later assembly, is the shipment from Canada of Pason AutoDrillers.” [264]

The Court stated that the method claims 11 and 14 are infringed outside of Canada and are not directly protected by the Court’s jurisdiction [265], but the product claim, claim 1, is protected because the sale of the infringing product occurs, at least for purposes of this case, in Canada where Pason is paid for the goods and shipments.” [266]

Validity – Anticipation – Prior Use

The Court found there was no anticipation by prior use.

The Court assessed the evidence and noted that the inventor had testified that the box containing the invention was locked, that he disconnected hoses, and that it was not possible to see inside the device or observe its inner workings. While he explained the operation generally to a third-party to obtain its consent to testing the invention, there is no evidence that it was anything more than a general description. An expert witness confirmed, and the Court accepted, that nothing the inventor said or did would have enabled a Skilled Person to know how the invention worked. [301]

Furthermore, the Court stated that nothing contradicts the inventor’s evidence that the agreement with the third party was to test the device and that only after it was tested did the third party agree to pay for the use during the test period. “An ex post facto payment without prior obligation to pay is not sufficient to constitute a sale before the relevant date.” [302]

Obviousness

The Court held the claims were not obvious.

The Court applied the Sanofi test, and in concluding the invention was not obvious, observed that “[g]iven the need and the commercial advantage of the invention, if it was so obvious in a field as rich and energetic as oil production with so many well-trained people, it is strange that it was not invented before.” [321]

Inutility

The Court held that the challenge of inutility had a false ring. [326]

One aspect of Pason’s inutility challenge was the confusion in claims 9 and 10 between “increase” and “decrease”. As described, claim 9 (and its dependent claim 10) will not work. [329] The problem is that the word “increased” appears where the word “decreased” should have been used and vice versa. [330]

The Court held that a Skilled Person would see the error and make the necessary corrections; and would not be confused or misled. Even a judge hearing this case could see the error and make the correction. [336]

Deemed Abandonment

Pason argued that the 313 Patent is invalid and void having been deemed permanently abandoned pursuant to s. 73(1)(a) of the Patent Act by reason of the failure to reply in good faith to the CIPO Examiner’s requisition. [341]

The Court held that “there was no absence of good faith in the response to the requisition” [377] and found “no basis to conclude that the 313 Patent is invalid by reason of abandonment.” [380]

The Examiner’s requisition of June 9, 1998 issued pursuant to Rule 29 of the Patent Rules. The requisition reads in part:

an identification of any prior art cited in respect of the corresponding United States and European patent applications and the patent numbers, if granted.

The agent responsible for patent prosecution responded as follows:

In response to the requisition pursuant to Section 29 of the Patent Rules, Applicant advices that the corresponding United States case has issued as U.S. 5,474,142. We enclose a copy of the computer database printout for this patent showing the references cited. A corresponding EPO case has been filed but no action has yet been taken and no search report received.

Pason claimed that the references cited to the USPTO were not complete and did not comply with US disclosure requirements. [343] Pason argued that because the inventor intentionally violated the obligation to disclose relevant prior art to the USPTO, and because CIPO relies on these US disclosure requirements in examining the corresponding Canadian patent application, by the failure to disclose known prior art to the USPTO, there was a failure to reply in good faith to the Canadian examiner. [345]

First, the Court noted that there has been “no finding by a US court that there has been any failure to disclose which results in invalidity of the US patent. Absent such a finding, it is not for this Court to make a finding of that nature except in accordance with Canadian legal principles.” [352]

In addition, the Court rejected the reliance argument, and noted that the legislation and rules and regulations (including the Manual of Patent Office Practice) do not contemplate this extra-territorial reliance by CIPO on prior art discovered/submitted during US patent prosecution. [355]

The Court then commented on the duty of candor when prosecuting patents before CIPO, and stated that “[i]t is not accurate to say or suggest that Canada does not have a duty of candor – it is just not of the same nature as the US principle. The question is ‘good faith in respect of what?’ In Canada the good faith and duty of candor is in response to a question or inquiry. The response has to be fair and responsive, but it need not respond beyond that which is requested. [349]

The Court further refused to adopt the US doctrine of inequitable conduct into Canadian law: “[d]espite the not so veiled invitation of the Defendants to have this Court go down the US route of ‘inequitable conduct’, I will not do so. The Canadian legislation is clear, the obligation is to respond directly and honestly. The US principle is highly unsatisfactory, not supported by Canadian principles or practice, and has been described by US witnesses as a ‘mess’.” [364]

The Court also agreed that “the term ‘prior art cited’, as used in the examiner’s requisition, meant the prior art reviewed by an examiner and applied against a foreign application. It does not mean any prior art listed in a search report; nor does it mean all the prior art of which an applicant is aware.” [357]

On this basis the Court held that the inventor’s patent agent “provided the examiner with exactly what was requested – the identification of the prior art cited in respect of the corresponding US application.” [358]

Pason further argued that the phrase “no search report received” in respect of the European patent application was not correct. [344] On September 30, 1994, an international search report was generated and sent by the USPTO to the EPO for purpose of the PCT application underlying the European patent application. Moreover, Pason also alleged that the response to the Canadian examiner was inaccurate when it stated, with regards to the prosecution before the EPO, that “… no action has yet been taken and no search report is received”. [365]

The Court, however, was not convinced, “based on the context of the requisition (prior art cited) and the weight of the opinion evidence, that objectively the response to the Canadian examiner was inaccurate.” [376]

Remedies – Accounting for Profits

The Court held that the remedy of disgorgement of profits is the appropriate remedy in this case.

In ordering disgorgement of Pason’s profits, the Court stated that “[t]he deterrent effect of disgorgement over the usual remedy of damages is clearly highlighted in this case. Accepting the Plaintiffs’ figures (as I do), the Defendants would keep $30,000,000 (approximately) in profit which they would never have earned except for the infringement. There would be little or no deterrent effect if all that an infringer had to do was pay damages and pocket the remainder of profits. The risk/reward calculation would emphasize the reward.” [400]

The Court further noted that there has been no inequitable conduct by the Plaintiffs sufficient to disentitle them to equitable relief of disgorgement. [403]

The Court also observed that any customer seeking the same directional drilling capability would have bought one or other of the parties’ products. Therefore, there is no other market distractions (packaging, brand recognition, etc.) which make this relief difficult or unworkable. [404]

In selling its AudoDriller, Pason also knew that it was at patent risk. It had been warned by its Canadian patent agent that there was a significant risk of patent infringement and that only a defence of invalidity would save it. Yet Pason did not even inquire further as to infringement or invalidity nor did it attempt to negotiate some arrangement with the patent holder. [407]

Remedies – Damages

This Court rejected the US 25% Rule as a starting point for estimating a royalty rate, and noted that the Rule’s validity was not established in evidence; it does not consider the circumstances of each case and is simply an arbitrary number. [462]

Remedies – Punitive Damages

Varco sought exemplary/punitive damages. The Court stated that “[h]ad the remedy been restricted to normal damages, I would have awarded exemplary/punitive damages because of the deliberate infringement carried out in the face of advice from Leier [Pason’s patent advisor] and recklessness as to the consequences.” [469] “However, exemplary/punitive damages are equitable relief. The equitable principles have already been embodied in the disgorgement of profits remedy and further equitable relief is unwarranted.” [470]