Executive Summary: Key Legal and Evidentiary Issues

• The appeal concerned a case management order dismissing Challenger Downhole Tools Inc.’s motion to compel Impulse Downhole Solutions Ltd. and Impulse Downhole Tools Ltd. to answer a refused discovery question about the Acti-Pulse and Power-Pulse tools.

• The sole issue on appeal was whether the case management judge correctly determined that the refused discovery question was irrelevant to the issues in the civil action.

• The court interpreted subsection 55(1) of the Patent Act as permitting a patentee to recover “all damage” flowing from infringement, not limited to lost sales of products that fall within the claims of the patent.

• The reasons referred to Apotex Inc v Eli Lilly and Company, Jay-Lor International Inc v Penta Farm Systems Ltd, Nova Chemicals Corp v Dow Chemicals Co, and convoyed products jurisprudence in explaining that damages may include losses on products regardless of whether they fall within the patent claims, provided they flow from the infringement.

• The court stated that it is not for the defendant or the court to dictate the plaintiffs’ litigation strategy and that the plaintiffs may object to disclosing whether the Acti-Pulse and Power-Pulse tools fall within the patent claims.

• The court dismissed the appeal and awarded costs to the plaintiffs in accordance with Column III of Tariff B, payable forthwith and in any event of the cause, without specifying an amount.

Facts and procedural background

Impulse Downhole Solutions Ltd. and Impulse Downhole Tools Ltd. are the plaintiffs and defendants by counterclaim. Challenger Downhole Tools Inc. is the defendant and plaintiff by counterclaim. The plaintiffs are the owner and licensee of Canadian Patent 2,872,736, titled Flow Controlling Downhole Tool, and Canadian Patent 2,994,473, titled Lateral Drilling Method. The plaintiffs market the “Acti-Pulse” and “Power-Pulse” tools in competition with tools marketed by the defendant. In their amended statement of claim, the plaintiffs seek, among other things, declarations that the defendant has infringed the two patents. The plaintiffs request damages or, in the alternative, an accounting of the defendant’s profits, and they have not yet elected between damages and an accounting of profits. During examination for discovery, the plaintiffs’ representative was asked to provide drawings or other documents showing the structure of both the Acti-Pulse and Power-Pulse tools to demonstrate whether the products fall within the claims of the patents. The plaintiffs refused to answer this question. The case management judge dismissed the defendant’s motion for an order compelling the plaintiffs to answer the question. Challenger Downhole Tools Inc. appealed that order.

Issues on appeal

The appeal arose from a discretionary order made by an associate judge acting as case management judge. The court noted that such an order is reviewed using the standards set out in Housen v Nikolaisen and Hospira Healthcare Corporation v Kennedy Institute of Rheumatology, with questions of law reviewed for correctness and findings of fact or mixed fact and law reviewed for palpable and overriding error. The reasons of the case management judge were delivered orally and no transcript was provided to the court. According to the defendant’s written representations, the case management judge indicated that the law does not require a patentee to engage in the sale of the patented tool to claim damages for lost sales of that tool. The parties agreed that the reasons of the case management judge raised an extricable question of law, so the order was reviewable on a correctness standard. The sole issue identified by the court was whether the case management judge correctly determined that the refused discovery question was irrelevant to the issues raised in the civil action.

Legal reasoning on damages

The court set out subsection 55(1) of the Patent Act, which states that a person who infringes a patent is liable for “all damage” sustained by the patentee or persons claiming under the patentee by reason of the infringement. The court stated that the language of this provision makes clear that the patentee may recover all damage flowing from an infringement and that this is not limited to lost sales of products that fall within the claims of the patent. The court observed that if Parliament had intended to limit recovery in that manner, it would have done so explicitly. The court referred to Apotex Inc v Eli Lilly and Company and noted that in that decision, claims for damages arising from patent infringement required determination of the question: but for the infringing product being on the market, what would the patentee’s position have been? The court stated that this confirms that damages may be recovered for lost sales of products regardless of whether they fall within the claims of the patent. The reasons included an example from counsel for the plaintiffs: if a competitor’s sale of an infringing product has the effect of destroying the patentee’s business entirely, the patentee may sue for recovery of all consequent losses, and the court agreed with that example. The court also cited Arysta Lifescience North America, LLC v Agracity Crop & Nutrition Ltd and an excerpt from Fox on the Canadian Law of Patents concerning recovery of damages for lost sales caused by products made by an infringing process, even if the plaintiff does not use that process, on the basis that the loss flows from the wrongful act.

Use of prior case law and convoyed products

The defendant relied on Jay-Lor International Inc v Penta Farm Systems Ltd. The court noted that in that case all of the plaintiff’s products that were said to compete with the defendant’s infringing products were within the scope of the patent in issue and that the question of whether a patentee may recover damages for lost sales of products that fall outside the claims of the patent was not before the court. The court also pointed out that Jay-Lor included general principles stating that an award of damages seeks to compensate the plaintiff for any losses suffered as a result of the infringement and that the plaintiff is entitled to the profits on the sales it would have made but for the presence of the infringing product in the market. The defendant further relied on Nova Chemicals Corp v Dow Chemicals Co. The court quoted from that decision that damages may be awarded for any monetary loss suffered by the patentee as a result of patent infringement and may include lost profits on direct sales of the patented product, lost profits on sales of related goods or services, lost profits due to price depression, lost profits due to increased costs, and lost profits on royalties from licensing agreements. The court noted that there was nothing in that account of the law that limits a patentee’s recovery to lost sales of products that are themselves subject to the patent and cited a passage explaining that damages are a loss-based remedy aimed at placing the patentee in the position it would have been in but for the infringement. The court stated that jurisprudence regarding damages for sales of convoyed products does not assist the defendant and explained that convoyed products do not fall within the claims of a patent but are commonly sold together with the patented product. The reasons described the assessment of damages on convoyed sales as premised on the causal connection between the patentee’s loss and infringement of the patent and as an example of restoration of the patentee to its position in the “but for” world, citing Dnow Canada ULC v Grenke Estate and Beloit Canada Ltd v Valmet-Dominion Inc.

Discovery question and litigation strategy

The court observed that, depending on the facts of a case, it may be difficult for a patentee to prove lost sales of products that do not fall within the scope of the patent and noted that a successful plaintiff may, in most cases, elect an accounting of the defendant’s profits instead. The court stated that it is not for the defendant or the court to dictate the plaintiffs’ litigation strategy. The reasons further stated that if the plaintiffs object to disclosing whether the Acti-Pulse and Power-Pulse tools fall within the claims of the two patents, that is their prerogative. On that basis, the court concluded that the appeal should be dismissed.

Outcome and costs

The court dismissed the appeal from the case management judge’s order. By agreement of the parties, the reasons state that costs would be awarded to the successful party in accordance with Column III of Tariff B, payable forthwith and in any event of the cause. In the formal judgment, the court ordered that the appeal is dismissed and that costs are awarded to the plaintiffs in accordance with Column III of Tariff B, payable forthwith and in any event of the cause. The decision did not set out any specific monetary amount for costs and did not award or quantify any damages.