Monday, November 14, 2022

Canadian Court Denies Accounting of Profits, Injunction, Citing Holdup

The decision is Rovi Guides, Inc. v Bell Canada, 2022 FC 1388, which Professor Siebrasse recently called to my attention.  I understand that he will be blogging about the case in depth after he recovers from a bout of COVID.  In the meantime, I'll just mention the remedies issues flagged by the trial court.


Rovi is the owner of a portfolio of patents relating to interactive television program guide and internet protocol television technology.  In the present case, it asserted four patents against defendants Bell Canada and others, all of which the district court found to be invalid on anticipation and/or obviousness grounds, and some of which it found, in the alternative, to be not infringed.  In addition, the court addressed the remedies to which Rovi would be entitled if the court's conclusions on validity and noninfringement are in error.  Specifically, the court focused on whether Rovi would be entitled to an injunction (for the infringement of the one non-expired patentsin suit) and to an accounting of profits (as opposed to settling for a reasonable royalty).


On the issue of accounting, the court cited Canadian precedent for the proposition that accounting is not available as of right, but rather as a matter of discretion, with four nonexhaustive factors guiding the court's analysis:  (1) "the complexity and the practical difficulties of an accounting of profits"; (2) "the conduct of the patentee"; (3) "the good faith of the defendant"; and (4) "whether the patentee does not compete with the Defendants" (para. 587).  Proceeding with the analysis, the court first considers "the complexity of calculating an accounting of profits," citing Philip Morris Products SA v. Marlboro Canada Ltd., [2015] FCJ No. 1564, aff'd Philip Morris FCA at paras. 25-26, for the proposition that "the focus is on the proportionality of the accounting remedy" (para. 589).  (To my mind, complexity and proportionality seem analytically distinct, though I firmly agree that both should be relevant in this context.)  The court further rejects Rovi's argument that in the present case an accounting of profits would not be "inordinately complex" (emphasis in original), stating that "this places the bar too high" (para. 596).  Reviewing the evidence, the court then concludes that "isolating the impact of the individual features at issue in this case, while not impossible, would prove extremely challenging" given the number of necessary steps ("Calculation of Contribution Margins, Valuation of the Features, Market Modelling, Assessing Non-Infringing Alternatives, Calculation of IPTV Profits, and Calculation of Profits from Bundled Services") and the fact that "if there were problems with any of the steps in the analysis the result would be unreliable" (paras. 598-99).  Further, the court states:


[600] There is another wrinkle in this case. A consequence of Rovi’s delay in issuing the Patents, as discussed in the section below, is that Rovi is seeking remedies for periods where the Patents were not actually issued. During these periods, Rovi is not entitled to an accounting of profits, and Rovi’s remedy is limited to “reasonable compensation” pursuant to s 55(2) of the Patent Act. The method to calculate reasonable compensation is not settled but it has been calculated as a reasonable royalty in Jay-Lor at para 122. The Defendants submit that it is certainly not their profits. Thus, if Rovi is entitled to elect an accounting of profits, it will be necessary to perform at least two remedies analyses: a determination of profits during the period after the Patents were issued and a determination of reasonable compensation before the Patents were issued.


[601] Because the Patents were issued at different times, if more than one of the Patents were found to be valid and infringed, this may also necessitate differentiating profits and compensation from each Patent — adding further complexity and unreliability to the already overwhelming process.


[602] For the above reasons, I find that this factor does not militate in favour of granting the equitable remedy of an accounting of profits.


Moving on to the second factor, the court finds that Rovi’s delay in prosecuting its patents weighs against an accounting, and likes this conduct to a form of holdup:


[624] A similar strategy is employed by patent assertion entities (PAEs), businesses that acquire patents from third parties and seek to extract more than the inherent value of the supposed invention. That is because, in an ex-ante negotiation, a potential licensor will pay only the value of the patented technology. However, in an ex-post negotiation, once the technology has been integrated, the licensor can extract not only the value of the invention, but all of the additional costs that stem from redesigning a system to remove the technology.


[625] By failing to prosecute their Patents diligently, Rovi left the Defendants in the invidious position of not knowing which patents were allegedly infringed, while they attempted to maximize the value of their patented technology. During that period when the Patents were pending, because the letters patent were not issued, the Defendants were unable to take any action to have the Patents declared invalid pursuant to subsection 60(1) of the Patent Act. Rovi's attempt to “game the system” goes against the restitutionary purpose of an accounting of profits. The goal of the Patent system, through a grant of a temporary monopoly, is to “encourage invention and to regulate the issuance of patents in Canada” (Genecor International Inc v Canada (Commissioner of Patents), 2008 FC 608 at para 39; Pope Appliance Corp v Spanish River Pulp and Paper Mills Ltd, [1929] A.C. 269 cited in CertainTeed Corp v Canada (Attorney General), 2006 FC 436 at para 25. An unreasonable and unexplained delay in prosecuting the Patents prejudices the public and stifles the innovation envisioned by the patent system.


[626] Dr. Bazelon agreed that “patent holdup” occurs when a patent owner takes advantage of the potential infringer’s reduced flexibility after they have launched a product and opportunistically tries to extract a larger unreasonable licensing fee, especially using the threat of an injunction. This strategy has been described as engaging in “pre-litigation conduct […] designed to place the infringer in the most disadvantageous bargaining position”; and delaying “so that the infringer’s dependency on the patent is maximized, as is the proportion of profits claimed.”: Jeff Berryman, Comment on Norman Siebrasse, Business Method Patents and PatentTrolls, 54 CAN. Bus. L.J. 58 (2013) Vol. 54, 58-67, at 66.


[627] The case before me exemplifies the “patent holdup” problem. Rovi’s conduct in this case militates strongly against granting the equitable remedy of an accounting of profits as it would create an incentive for licensing entities to imitate Rovi’s conduct.


Third, the court finds that “the Defendants behaved responsibly,” stating that “[w]hen the Defendants launched their IPTV products, they had a licence from Rovi through Microsoft. Third-party transactions, outside of the Defendants’ control, meant that patent coverage was allegedly lost according to Rovi, but only after the Defendants had made huge investments and paid Microsoft/Ericsson for patent coverage. Under such circumstances, it was eminently reasonable for Bell and TELUS to tell Rovi and Ericsson to resolve the issue”; and concluding that the Defendants were not willful infringers in need of a deterrent  (paras. 635-36).  On the fourth factor, although some cases have stated that a patentee’s decision to license its patents rather than to practice them itself weighs against an accounting, the court does not believe that this factor should weigh against a nonpracticing entity like Rovi that routinely licenses its patents (paras. 641-42).  On balance, however, the court concludes that Rovi’s “conduct, by itself, is a compelling reason to deny the right to elect an accounting of profits,” and that “Rovi is not prejudiced as it can still seek damages, presumably a reasonable royalty, which is the compensatory remedy awarded in the vast majority of patent cases” (para. 643).


On the issue of injunctive relief, although the prevailing patentee is presumptively entitled to an injunction, factors including “delay, lack of clean hands, unconscionability, and triviality” can weigh against granting an injunction (para. 647).  Here, the court concludes that no injunction would be warranted:


[651] . . .  As I stated earlier, the present case exemplifies the patent holdup problem. To grant an injunction on the particular facts of this case would be signalling that this Court finds Rovi’s business practice to be acceptable and create an incentive for licensing entities to imitate Rovi’s conduct.


[652] The evidence before me is that Rovi does not compete with Bell and TELUS. Rovi admits that it cannot deliver IPTV to Canadian customers and routinely licences its patents in Canada. It is effectively a non-practising entity in Canada. In my view, it would be inequitable to prevent Bell and TELUS from providing IPTV products which do not compete with Rovi and it is not in the public interest to deny millions of their customers access to features they previously enjoyed. The imminent expiry of the 585 Patents is a further reason to not impose the costs of modifying Bell and TELUS’ systems to comply with an injunction, when such modifications would be for a short period of time.


[653] In this case, good policy and the equities are aligned. Engaging in patent holdup is a business practice this Court should not condone and the Canadian patent system should not be creating incentives for such unfair practices to occur. There was no improper conduct on the part of Bell and TELUS which requires sanction, while to grant an injunction would run a very serious risk of rewarding Rovi’s delay through overcompensation.

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