Canada: Abuse Of Patents In Canada

Patents encourage ingenuity by rewarding the disclosure of an invention to the public. In exchange, a patentee acquires a limited monopoly to exclude others from exploiting the invention for a defined period of time. When the patent expires, the invention passes into the public domain to be freely used by all.

Without doubt, patents may confer considerable market power upon a patentee and/or its licensees. A handful of strategic patents can alter the competitive landscape and define the products that are made available to the public. After all, patents are exceptional, creating a lawful monopoly in circumstances where free market competition is otherwise held most dear.  

To reap its rewards, a patentee may choose to exploit the invention itself deriving profit from making, using and/or selling products and processes encompassing the invention. Alternately, it may merely hold it. It may sell the patent or grant a license permitting others to exploit the invention.

A patentee choosing to license may possess considerable bargaining power since a patent is enforceable with a variety of statutory remedies. In Canada, in addition to damages or the accounting of an infringer's profits, infringement remedies include an injunction and the delivery up or destruction of infringing goods. Disruption to business operations and the cost and inconvenience of defending an infringement suit are significant motivating factors for license negotiations.

Such power carries the concern that patents may potentially be used to extract license terms to the public's prejudice.

In the United States, the doctrine of patent misuse is a judicially created defence that can be used to render a patent unenforceable as against an alleged infringer. Typically, it is raised in connection with a patentee's licensing practices. As recently discussed by the U.S. Court of Appeals for the Federal Circuit in Princo Corp. v. International Trade Commission 616 F.3d 1318 (Fed. Cir. 2010), patent misuse concerns "patent leverage", that is, "the use of the patent power to impose over-broad conditions on the use of the patent in suit that are not within the reach of the monopoly granted by the Government". In other words, where the patentee has acted to "impermissibly broaden the 'physical or temporal' scope of the patent grant with anticompetitive effect." (Princo, 1328-1331)

The doctrine is narrowly applied. The misuse must be in respect of the use of a patent; wrongful commercial conduct, even those having anticompetitive effects and involving patented products or processes, might not amount to patent misuse (Princo, 1329). Moreover, the doctrine does not apply to a patentee's refusal to license or use any rights to the patent or to certain licensing practices that are not shown to have anticompetitive effects (35 U.S.C. § 271(d)(4) and (5)).   

Patent misconduct, or "abuse", is more expansively treated in Canada. The Canadian Patent Act contains provisions that more broadly define such misconduct and prescribes a summary, administrative procedure before the Commissioner of Patents to identify and remedy such misconduct (sections 65 to 71).

Paragraphs 65(2)(c) to (f) of the Patent Act deems four circumstances as constituting an abuse of a patent:

  1. the demand for a patented article in Canada is not being met to an adequate extent or on reasonable terms;
  2. the refusal of the patentee to license at all or on reasonable terms causes prejudice to an existing trade, industry or class or persons in trade or by blocking the establishment of any new trade or industry and it is in the public interest that a license be granted;
  3. the conditions attached to the purchase, hire, license or use of a patented article or the use or working of a patented process are such that a trade or industry, or persons therein is unfairly prejudiced; and
  4. process patents using unpatented materials or patents for substances produced by such processes, are used by the patentee so as to unfairly prejudice the manufacture, use or sale of any materials.

Unlike the United States, the circumstances constituting abuse may include a patentee's failure to work or to adequately work an invention in Canada, the patentee's refusal to license a patent at all or on reasonable terms, or improper licensing practices with certain prejudicial and not necessarily anti-competitive effects.

Any time after three years following patent grant, the Attorney General or any person interested may apply to the Commissioner of Patents alleging abuse of the patent and apply for relief. If satisfied that a case of abuse has been established, the Commissioner may order a compulsory license on terms that are expedient or may revoke the patent. Alternately, the Commissioner may make no order if it best attains the objects of the provisions.  

In Canada, unlike the United States, abuse of patents may be raised as a sword, not just as a shield. It may be raised pre-emptively, even before the applicant has engaged in infringing conduct.

In setting the terms of a compulsory license in cases of abuse, the Commissioner is also guided by certain considerations: 1) to secure the widest possible use of the invention in Canada consistent with the patentee deriving a reasonable advantage or earning a reasonable profit; 2) to secure the maximum advantage to the patentee consistent with the invention being worked by the licensee at a reasonable profit in Canada; and 3) to secure equality of advantage among several licensees, including, where due cause is shown, reducing the royalties or other payments accruing to the patentee under any license previously granted.

Such considerations may be of particular interest to licensees under Canadian patents owned by Non-Practicing Entities that do not work the patent themselves in Canada. With the Commissioner, a more favourable royalty rate and license terms may be obtained than would be possible if negotiating on a purely voluntary basis with the patentee. Moreover, such proceedings may afford a means to revisit the terms of previously negotiated but prejudicial licenses.

The process is initiated by an application setting out the nature of the applicant's interest and facts on which a case of abuse is based together with the relief sought. A statutory declaration verifying the facts and a $2,500 CAN fee is also required. A preliminary review is then made. If a prima facie bona fide interest and a case for relief has been made out, the application is then served on the patentee and other interested persons (such as exclusive licensees as registered with the Patent Office).

The patentee and any other opponents may file counterstatements within four months of receiving notice. Such counterstatements shall also be verified by statutory declaration.  

The determination of abuse may be based wholly on the written statements. However, any party may demand a hearing before the Commissioner. The Commissioner may require document production relating to matters in issue and to require the attendance of any declarant for cross-examination or for further examination on relevant matters, for example, to help establish a reasonable royalty rate.  All decisions may be appealed to the Federal Court.

Such proceedings are typically held in public subject to precautions to limit disclosure to trade rivals, with the record available from the Patent Office. Such proceedings may lead to findings providing relevant but valuable information as to a patentee's business, its conduct vis-à-vis the patent, its licensing terms and practices, including with other licensees, and may also lead to admissions as to the scope of a patent. Findings and admissions may be useful in other judicial or administrative proceedings and in future license negotiations. 

Additionally, relief is also available under the Competition Act for certain conduct involving misuse of patents (s. 32) or business arrangements involving patents with anti-competitive effects (s. 45, 77 and 79).

Maintaining the objectives of the Patent Act and the proper scope of the statutory monopoly is in the interest of the public and the free market. Canadian patents that are not worked to meet demand or refused to be licensed or are licensed subject to onerous terms including unfair tied arrangements undermines these interests. The abuse of patent provisions may be used to expeditiously obtain findings of abuse and provide relief, serving to deter against patent misconduct without the need for a full-scale infringement suit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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