1 January 2012CopyrightMarek Nitoslawski and David Turgeon

New course for punitive damages in Canada

Punitive damages traditionally serve a dual purpose. They deter undesirable conduct while serving as a supplementary penalty to the defendant should compensatory damages be considered inadequate. In US patent infringement cases, the award of ‘triple damages’ is often granted specifically as a sanction against wilful infringement. Canadian courts, however, have traditionally been less inclined to award punitive damages in IP cases.

This now appears to be changing. Eurocopter v Bell Helicopter Textron Canada Limited, a recent patent infringement case decided in the Federal Court of Canada, is the most recent case in a series confirming that Canadian courts are increasingly alive to the need for punitive damages to deter wilful and intentional infringement of IP rights.

Recent Canadian IP cases

The court in Eurocopter anchored the award of punitive damages on the triple criteria of wilful infringement, a finding of outrageous conduct and deterrence. In so doing, the court was tightly in step with an identifiable line of IP decisions flowing from the Supreme Court of Canada’s holding in the leading case on punitive damages, Whiten v Pilot Insurance Co.

Writing for the majority in that case, Justice Binnie identified the general objectives for punitive damages as those of punishment, denunciation and deterrence. In the decade following Whiten, Canadian courts have expanded upon these criteria and honed their application to IP cases.

A few years after Whiten, the Federal Court applied the criteria laid out by the Supreme Court to a pair of cases involving the sale of unlicensed Microsoft soft ware. In the first case, a small Québec electronics distributor centred its business model on the purchase of unbundled Microsoft products, which it then re-bundled for resale to retailers.

Microsoft successfully argued that this practice appropriated the premium Microsoft earned by explicitly prohibiting the unbundling of software packages via licensing agreements passed down through retailers to consumers. The defendant’s business model therefore relied on violations of these licensing agreements.

The court found that the company knew, or should have known, it was engaged in persistent copyright infringement. The defendants were also consistently evasive and contradictory under questioning. Suspicion that the company had profited from its infringement beyond the damages claimed by Microsoft underlined the need for punitive damages as a deterrent.

The second Microsoft case was an ex parte decision involving copyright infringement at the retail level, with unauthorised versions of software being installed on computers at the point of sale. Investigators from Microsoft were bluntly informed by the retailer’s sales staff that they knowingly loaded unlicensed soft ware on to consumers’ computers to reduce prices.

Considering the multiple cease and desist letters the retailer had received, the court concluded it had wilfully infringed Microsoft’s copyright. As in the first Microsoft case, the court discussed both the need for deterrence and how the defendant’s obstructive behaviour created difficulties in calculating loss of sales, as well as damages to Microsoft’s goodwill.

The Louis Vuitton cases

Justice Binnie’s criteria also provided the foundation for punitive damages in a pair of cases involving counterfeit Louis Vuitton products in British Columbia. The first judgment by the Federal Court involved wilful infringement of trademarks and copyrights at a fashion retail chain in Richmond. The retailer had refused to amend its practices despite court orders and seizures of merchandise.

Of particular importance in this ex parte decision was the length at which deterrence was addressed by the court, with particular reference to “the erosion of the market for which (Louis Vuitton) has worked very hard”. Finally, the court took note of the difficulty in establishing adequate damages, due largely to the uncooperative behaviour of the defendant.

Punitive damages was, therefore, a tool for ensuring that the defendant did not profit from its infringement. The facts were similar in the second Louis Vuitton case, with the court expressing its displeasure at the additional time and money required of the plaintiff to enforce its IP rights against a recalcitrant defendant.

“PUNITIVE DAMAGES WERE AWARDED, ACCORDING TO THE COURT, TO COMMUNICATE TO THE WORLD THAT ARTISTS SEEKING TO PROMOTE THEIR WORK SHOULD BE PROTECTED FROM ITS MISAPPROPRIATION.”

A recent Québec case demonstrated the emerging trends seen above while foreshadowing the subsequent decision in Eurocopter.

In Robinson v Films Cinar Inc, a production company providing consulting services was held to have appropriated central elements of the work of an author who had, allegedly, submitted storyboards for a television programme.

The principals for the defendant maintained throughout the proceedings that they had never seen the original work in question. Convinced that Cinar had been inspired by the original works, however, the court characterised the defendant’s testimony as obstructive and misleading.

Punitive damages were awarded, according to the court, to communicate to the world that artists seeking to promote their work should be protected from its misappropriation and the ensuing legal battles necessary to assert their rights.

However, the Quebec Court of Appeal reversed this in part, reduced the amount of punitive damages awarded at trial, and underlined the importance of distinguishing between frivolous and legitimate defences in such awards. While accepting the trial court’s general conclusions, the appeal court emphasised that Cinar’s arguments, although ultimately rejected, were not baseless.

Punitive damages in Eurocopter

The facts in Eurocopter align the case firmly with the jurisprudence flowing from Whiten in which Canadian courts have awarded punitive damages. The plaintiff Eurocopter held a Canadian patent for its design of skid-type helicopter landing gear.

Shaped like a sleigh (or, some would say, a moustache), this innovative gear absorbs energy from the craft, efficiently distributes its weight, and avoids ground resonance upon landing, a key concern for helicopter design. Bell Helicopter is Eurocopter’s long-time competitor in the civilian and parapublic helicopter industry.

For its new Bell 429 helicopter, Bell’s Canadian division developed landing gear which was strikingly similar to Eurocopter’s moustache design. Upon discovering Bell’s competing product, Eurocopter launched an infringement suit in Canada, alleging that Bell had made false and misleading claims to the effect that its landing gear design was Bell’s innovation. Bell made changes to its design after the lawsuit was launched.

The first key factor in awarding punitive damages was the court’s rejection of Bell’s claims of having been unaware of its likely infringement of Eurocopter’s patent. Bell’s developers had studied the performance of Eurocopter’s design, leased and operated a Eurocopter EC120 equipped with the moustache landing gear, performed tests and received training on it.

The result, according to the court, was “no more than a slavish copy” of Eurocopter’s patented gear. Bell’s testing of Eurocopter’s design was found to have far exceeded simple industry benchmarking practices. Furthermore, the project manager at Bell had specifically instructed engineers to “carry on” when he was informed of potential similarities with Eurocopter’s design. Bell was therefore found to have wilfully developed its product in contravention of Eurocopter’s patent.

A second aspect of the case supporting punitive damages was Bell’s conduct during the proceedings. In light of Bell’s refusal throughout to acknowledge any infringement, the court found that its quarantining of the infringing gears was best interpreted as an attempt to mitigate damages rather than a demonstration of good faith.

Forestalling an admission of infringement through multiple legal strategies was held by the court to be “vindictive” behaviour. Finally, the court drew a negative inference from the fact that Bell declined to present witnesses who would have been able to support Bell’s contention that it was unaware of Eurocopter’s patent.

The need for deterrence provided a final justification for punitive damages. Awarding an accounting of profits was difficult since the landing gear is only one component of a helicopter. The court held that Bell had nevertheless gained a significant reputational benefit in a tightly knit industry by falsely claiming to have developed an innovative product.

This deprived Eurocopter of the fruits of its investments in time and research. Protection of market recognition, a theme in the Louis Vuitton cases, therefore emerged again here.

Canadian courts are increasingly relying upon the Supreme Court’s keystone decision in Whiten for a response to the wilful infringement of IP rights. Justice Binnie’s rejection of categories and favouring of principles over stock terminology has been echoed in jurisprudence during the decade since the decision. Courts are adapting Justice Binnie’s original criteria to confront a specific behavioural cocktail.

The essential ingredients include wilful infringement of IP rights and a dismissive, or overly aggressive, approach to the legal process. Appropriation of IP can require the plaintiff to assume burdensome expenses to reclaim it; moreover, the precise determination of damages may be difficult, if not impossible.

The fruit is therefore not only seized just as it ripens, it is also immediately consumed and its prior existence insistently denied. Faced with compelling evidence of wilful infringement and obstructionist behaviour during the legal process, courts are using punitive damages to both express their concern and deter similar future behaviour.

Possible solutions for avoiding wilful infringement may reside in a practice already well established in the US: a potential infringer should obtain a freedom-to-operate opinion from counsel upon receiving notice of the patent. An opinion of non-infringement, invalidity or unenforceability may demonstrate to the court that the defendant takes the plaintiff’s patent rights seriously and that the infringement was unintentional.

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