Micro Chemicals Limited et al. v. Smith Kline & French Inter-American Corporation, [1972] SCR 506

Supreme Court of Canada

Micro Chemicals Limited et al. v. Smith Kline & French Inter-American Corporation, [1972] S.C.R. 506

Date: 1971-10-05

Micro Chemicals Limited Appellant;

and

Smith Kline & French Inter-American Corporation Respondent.

Micro Chemicals Limited, Paul Maney Laboratories Canada Ltd. and Gryphon Laboratories Ltd. Appellants;

and

Smith Kline & French Inter-American Corporation Respondent.

1971: February 18, 19; 1971: October 5.

Present: Judson, Hall, Spence, Pigeon and Laskin JJ.

ON APPEAL FROM THE EXCHEQUER COURT OF CANADA

Patents—Compulsory licence—Effective date-Royalty—Terms—Fixing of royalty postponed until decision to grant licence—Patent Act, R.S.C. 1952, c. 203, s. 41(3).

Patents—Infringement—Experimental use of patented article.

The appellant applied to the Commissioner of Patents under s. 41(3) of the Patent Act for a compulsory licence to make and sell trifluoperazine under a Canadian patent owned by the respondent. The latter persuaded the Commissioner that the royalty issue should be postponed and not dealt with until a decision had been made as to whether a licence was or was not to be granted. On June 21, 1966, the Commissioner granted a non-exclusive licence, effective as of that day. On February 3, 1967, he fixed the royalty payable and other terms as of June 21, 1966. The respondent appealed to the Exchequer Court from both decisions. Jackett P. concluded that the granting of a licence and the fixing of the royalty and other terms under s. 41(3) was one act which could not be separated into two stages, and declared that the licence only became effective as of February 3, 1967. Pursuant to leave granted by the Exchequer Court, the appellant appealed to this Court solely on the question as to the effective date of the licence. The respondent cross-appealed

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for a higher royalty and for a change in the terms of the licence.

Meanwhile, the respondent had brought an action in the Exchequer Court for infringement of its patent. Walsh J. held that the patent had been infringed before the effective date of the licence. The defendants in that action appealed to this Court. The two appeals were heard together.

Held: The appeal as to the effective date of the licence should be allowed.

There are two elements in s. 41(3): (1) the decision to grant or refuse a licence; and (2) if a licence is granted, the amount of the royalty and other terms. There is no reason why the Commissioner cannot deal with these two elements successively and in some instances actually postpone consideration of royalty and other terms until the essential question of licence or no licence is determined. It follows that the appellant had a licence as of June 21, 1966, which was the date fixed by the Commissioner.

Held further: There was no infringement in respect of the periods prior to January 22, 1966.

An experimental user without a licence in the course of bona fide experiments with a patented article is not in law an infringer. The use the appellant was making of the patented substance was not for profit but to establish the fact that it could manufacture a quality product in accordance with the specifications disclosed in the application for patent. This sort of experimentation and preparation is not an infringement. It is the logical result of the right to apply for a compulsory licence. While it may not be necessary in each case to be in position to show capacity to manufacture, it is a reasonably prudent thing for an applicant to be able to do.

The finding at trial that there was an infringement in the period between January 25, 1966 and June 21, 1966 was amply supported by the evidence.

The appeal in respect of the royalty should be dismissed, as there was no error on the part of the trial judge in confirming the Commissioner.

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APPEALS from a judgment of Jackett P. of the Exchequer Court of Canada[1], and from a judgment of Walsh J. of the Exchequer Court of Canada[2], in a patent matter.

J.T. Thorson, Q.C., for the appellants.

Gordon F. Henderson, Q.C., and R.G. McClenahan, for the respondent.

The judgment of the Court was delivered by

HALL J.—These two appeals were heard together pursuant to an Order made by the Registrar of the Court on January 12, 1971. The first appeal which in these reasons will be referred to as the “effective date appeal” is from a decision delivered on the 20th day of September, 1967 by The Honourable, The President of the Exchequer Court[3]. The second is from a decision of Walsh J. in the same Court[4] dated July 31, 1969, which will be referred to as the “infringement appeal”.

On March 25, 1965, the appellant (hereinafter referred to as “Micro”) applied to the Commissioner of Patents under s. 41(3) of the Patent Act for a compulsory licence to make and sell trifluoperazine under Canadian Patent No. 612204 owned by the respondent. Ordinarily on an application for a licence under s. 41(3) the Commissioner deals with the application and either refuses to grant a licence or grants a licence and fixes the royalty payable and the other terms of the licence.

That procedure was not followed in this instance because the respondent persuaded the Commissioner that the royalty issue should be postponed and not dealt with until a decision had been made as to whether a licence was or was not to be granted. The reason given for departing from the usual procedure was stated by the respondent in a letter dated May 3, 1965, to the Commissioner as follows:

It would, therefore, be appreciated if you would confirm that in preparing our counterstatement, we need not present our position as to royalty until a decision has been made upon the merits of the ap-

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plication. Many of the matters on which we shall be obliged to rely on the matter of royalty are private and confidential and we would not wish to have them made of record if it should not be necessary so to do. (Emphasis added)

Following an exchange of correspondence, the respondent repeated its request in a letter dated May 14, 1965, in part as follows:

With this in mind, would you please consider our request that the royalty submission be withheld pending your decision on the merits of a licence, leaving the period for the filing of the counterstatement as now fixed at sixty days.

On May 26, 1965, the Commissioner replied:

As this is the first case which is prosecuted under a slightly different system, I will allow your client the ordinary sixty days to file the counterstatement as in the past.

Also as indicated in the last paragraph of my May 5, 1965 letter, I agree to the postponement of the submission on royalty pending the decision on the merits of the application for a licence.

Micro’s application was dealt with on this basis. The Commissioner proceeded to receive submissions from the parties and on June 21, 1966, handed down his decision, the material parts of which read:

I have carefully reviewed the application, the counterstatement, the reply and other material on the file. I have come to the conclusion that no valid reasons to refuse the application have been advanced. The objections of the patentee do not contain anything new over the reasons advanced by the patentees over the years in similar applications.

I do hereby grant a non-exclusive licence, effective as of this day, to the applicant Micro Chemicals Limited to carry out the patented process in Canada in its own establishment and to sell the resulting product for the sole purpose of the preparation or production of medicine but not otherwise. (Emphasis added)

[Page 510]

On the question of royalty and other terms of the licence, I order that the patentee file his submission with me, and a copy to the applicant, within thirty days and the applicant will have also thirty days thereafter to file his own submissions and comments. Upon consideration of the submissions I shall finalize the licence with effect as of the date of this decision.

Having thus disposed of Micro’s right to a licence, the Commissioner proceeded to hear representations from the parties as to the royalty payable to the respondent. On February 3, 1967, he handed down his decision, fixing the royalty payable and other terms of the licence, including a provision as follows:

The said royalty shall be paid on all sales of the product made by MICRO CHEMICALS LIMITED subsequently to June 21, 1966.

On May 2, 1967, the respondent appealed to the Exchequer Court from the decision of the Commissioner dated June 21, 1966, and from his Order of February 3, 1967. The appeal was heard by Jackett P. who held on September 20, 1967, that the decision of June 21, 1966, in so far as it purported to fix the effective date of the licence as June 21, 1966, was a nullity to be ignored, and he proceeded to deal with the appeal as one from the Order of February 3, 1967.

The learned President: (1) sustained the granting of the licence and dismissed the appeal in this respect; (2) dismissed the appeal in respect of the quantum of the royalty payable; and (3) struck out the provision in the Commissioner’s decision of February 3, 1967, that Micro should pay royalty on sales of the product subsequent to June 21, 1966, and declared that the licence only became effective as of February 3, 1967. He concluded that the granting of a licence and the fixing of the royalty and other terms under s. 41(3) was one act which could not be separated into two stages as the Commissioner had purported to do.

Micro did not appeal from that Order within the time limited for so doing, but after the time

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for appealing had passed it applied to Jackett P. to extend the time. The learned President did so by an Order dated December 21, 1970, the Order reading in part as follows:

IT IS ORDERED that, on condition that

(a) if the proposed appeal is successful, and

(b) if, as a result of that success, the defendants in the infringement action in this Court (No. B-2435) are successful in respect of that part of the appeal from the judgment of Walsh J. in that action that relates to the period from June 21, 1966, to February 3, 1967,

the Respondent will compensate the Appellant in respect of the solicitor and client costs incurred in that action that would not have been incurred if the proposed appeal had been prosecuted within the normal delays by

(c) foregoing any costs of the appeal from the judgment of Walsh J. that may be allowed to the defendants, any costs in this Court of the infringement action that may be allowed to the defendants by the judgment on appeal and any right to recover the amount paid by the defendants to the Appellant in respect of the party and party costs in the infringement action, and

(d) paying to the Appellant the sum of $5,000, the time for Appeal herein is extended to January 14, 1971.

These conditions were agreed to or complied with. Micro limited its appeal solely to the question as to the effective date of the licence.

The respondent on January 6, 1971, filed a Notice of Cross Appeal as follows:

TAKE NOTICE that the Respondent (Appellant) hereby cross appeals to this Court from the judgment of the Exchequer Court of Canada pronounced on the 20th day of September, 1967. The cross appeal is limited to the grounds that the Commissioner of Patents proceeded on a wrong principle or was manifestly wrong on the evidence in that:

1. he erred in fixing a royalty that is too low.

2. he erred in principle in clause 2(b) of the licence in not providing one rule for the case where the non-arms length purchaser resells to an arms length purchaser in bulk and another rule for the case where the non-arms length pur-

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chaser resells to an arms length purchaser in dosage or some other processed form.

Meanwhile on May 17, 1968, the respondent had brought an action in the Exchequer Court of Canada against Micro, Paul Maney Laboratories Canada Ltd. and Gryphon Laboratories Limited (hereinafter referred to respectively as “Maney” and “Gryphon”) for infringement of its patent No. 612204 from and after January 10, 1961, and claiming damages or an accounting of profits. This is the infringement action referred to in Jackett P.’s Order of December 21, 1970.

The infringement action was tried by Walsh J. on an agreed statement of facts. On July 31, 1969, he directed that judgment should be entered as follows:

1. Declaring and adjudging that Canadian Letters Patent 612204 referred to in the Statement of Claim is valid as between the parties;

2. Declaring and adjudging that the said Patent has been infringed by all three of the defendants;

3. Declaring and adjudging that the plaintiff is entitled to be paid by the defendants an amount equal to either

(a) the amount of the damages sustained by the plaintiff as a result of the infringement by the defendants of the said patent, or

(b) the amount of the profits derived by the defendants from infringing the said patent.

4. For the purpose of determining the amount that the plaintiff is so entitled to be paid by the defendants (if the parties cannot agree on it), referring to the Registrar (or a Deputy Registrar nominated by the Registrar or, if none such be available, an officer of the Court agreed upon by the parties or appointed by the Court) for inquiry and report, the following questions, viz:

(a) What acts of infringement by the defendants of the aforesaid patent have occurred as alleged by the Statement of Claim; and

(b) According to the election of the plaintiff, (which election must be made in writing and filed in the Court and served upon the defendants before the plaintiff may take any steps in

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connection with the reference) what is the amount of the aforesaid damages sustained by the plaintiff or the amount of the aforesaid profits derived by the defendants; and

5. Ordering and adjudging that the plaintiff recover from the defendants such costs herein to be taxed, except the cost of the reference, which will be left open to be dealt with upon the motion for judgment upon the report of the referee under Rule 186 of the General Rules and Orders of this Court.

In his reasons for judgment Walsh J. said in part:

The alleged infringments break down into four periods which should be considered separately as follows:

1. Actions of Micro Chemicals Ltd., prior to March 25, 1965, the date of application for the licence.

2. Actions of Micro Chemicals Ltd., between November 1, 1965 and January 22, 1966, when experimental batches were prepared.

3. Actions of all three defendants between January 25, 1966 and June 21, 1966, consisting of the transfers of the material from Micro Chemicals Ltd., to Gryphon Laboratories Ltd., the manufacture of tablets by Gryphon Laboratories Ltd., and the activities of Paul Maney Laboratories (Canada) Ltd.

4. Actions of the defendants between June 21, 1966, and February 3, 1967.

* * *

In the light of this jurisprudence and on the evidence before me I cannot conclude that defendants’ experimental use of the process during the period prior to its application for a licence on March 25, 1965, was experimental in the sense of being for the purpose of attempting to improve on the invention, but find that it was rather for the purpose of satisfying itself that it could satisfactorily produce the product on a commercial basis by use of the patented process. As the witness Diosady explained, even when following the process set out in the patent, a number of experiments were required in order to get it to work satisfactorily. The experiments made were primarily for the purpose of making trifluoperazine by the patented process.

The arguments and jurisprudence cited in connection with the first period apply with even greater force to the second period in question from November 1, 1965, to January 22, 1966. During this pe-

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riod defendant Micro Chemicals Ltd. recommenced its experiments in the manufacture of trifluoperazine making in all some 26 batches (Exhibit 20) many of which yielded no results or were discarded. Others were unsatisfactory with respect to the quantity of the finished product obtained from a given quantity of starting material. Most of these batches were made using quantities of 25 or 27 grams of the starting material but on January 4, 1966, two batches of 675 grams each were attempted but the resulting product was discarded in both cases. By January 22 the chemists were satisfied with the tests, when they obtained 19.1 grams and 20 grams respectively of the finished product from two 27-gram batches. It was admitted that the purpose of these experiments was to explore the procedure and conditions of manufacture in order to get increased yield and to establish that Micro Chemicals Ltd. could produce the product economically. Defendants’ counsel argued that such experiments were clearly within the intention of section 41(3) of the Act which states that “In settling the terms of such licence and fixing the amount of royalty or other consideration payable the Commissioner shall have regard to the desirability of making the food or medicine available to the public at the lowest possible price consistent with giving to the inventor due reward for the research leading to the invention”. The trifluoperazine produced by these experiments was put in bottles and kept for the defendant Micro Chemicals Ltd, and never entered into commerce so that no damage was suffered by plaintiff and no profits made by the said defendant as a result of these experiments. As already indicated in dealing with the first period, these experiments, though undoubtedly expedient from the point of view of defendant, constituted a technical infringement of the patent as they were not carried out for the purpose of improving the process, but to enable the defendant Micro Chemicals Ltd to produce it commercially as soon as the licence it had applied for could be obtained.

* * *

The third period of alleged infringement dates from January 25, 1966, when a batch of 3.2 kilograms was manufactured by defendant, Micro Chemicals Ltd, this being the first manufacture in

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commercial quantity, to June 21, 1966, when the Commissioner indicated that he was granting the licence. During this period for the first time the other two defendants, Gryphon Laboratories Ltd and Paul Maney Laboratories (Canada) Ltd, entered into the picture. Defendant Micro Chemicals Ltd admits that it transferred trifluoperazine to defendant Gryphon Laboratories Ltd during this period and that ownership passed at the time of the transfer though it was only invoiced to that company on June 30, 1966, and July 15, 1966. The total quantities involved amounted to 39.5 kilograms (Paragraphs 61, 62 and 63, Statement of Facts, and Exhibits 21 and 22). Gryphon on its part during this period made tablets from the bulk material. Meanwhile defendant Paul Maney Laboratories (Canada) Ltd had a sales representative in the Province of Manitoba who called on officials of the hospitals for mental diseases at Brandon, Manitoba, and at Selkirk, Manitoba, to solicit orders for the product. On March 2, 1966, the Province of Manitoba purchasing bureau requested it to submit a quotation for a six-months’ supply of trifluoperazine tablets for use in the said hospitals and the said defendant in due course submitted the said quotation which was delivered at Winnipeg on March 9, 1966. This quotation is on a standard form of the purchasing bureau for the Province of Manitoba and the said defendant offered to make delivery on April 1, with the balance on request in connection with some of the items quoted, and in other cases uses the term “deliver on request after April 1” (Paragraphs 65, 66 and 67, Agreement as to Facts, and Exhibit 23). Subsequently between March 14 and June 3, 1966, various sample lots of 5 milligram and 10 milligram tablets were sent to the Selkirk and Brandon hospitals for experimental purposes, free of charge, on request of the Medical Superintendents of those hospitals (Paragraphs 68, 69 and 70, Agreement as to Facts, Exhibits 25, 26, 27 and 28). These tablets had been transferred to defendant Paul Maney Laboratories (Canada) Ltd by defendant Gryphon Laboratories Ltd. The total amount so furnished was less than three-quarters of a kilogram and no actual order was received for the purchase of any of the tablets until June 30.

* * *

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Finally we come to the fourth period following June 21, 1966, when the Commissioner purported to grant a licence to defendant Micro Chemicals Ltd to manufacture and sell the product subject to the later fixing of the terms of the licence and of the royalty, which decision by the Commissioner was subsequently found by the Court to not constitute the granting of a licence as of that date. While defendant had not formally objected to this procedure when it was suggested to the Commissioner by solicitors for plaintiff in their letter of May 3, 1965 (Exhibit 3), it is clear that it was on the instigation of the plaintiff’s Counsel that the Commissioner adopted this procedure. Moreover, before the Commissioner reached his decision on the granting of the licence, defendants’ counsel wrote him on November 8, 1965, suggesting that it would now be appropriate to deal with the question of royalty (Exhibit 8) and this was objected to by plaintiff’s counsel in a letter to the Commissioner dated November 12, 1965 (Exhibit 9).

Defendants’ counsel claimed that his clients acted in good faith in the belief that the licence was effective as of June 21, 1966, and that therefore plaintiff is entitled only to fair and reasonable compensation. He cited the case of English and American Machinery Company v. Union Boot and Shoe Machine Company, (1896) 13 R.P.C. 64 at 67, to the effect that the amount of damages is to be ascertained by inquiring what amount of profit from licences plaintiffs have been deprived of by the action of the defendant.

and he concluded as follows:

Without going into the question of the amount of damages here I believe that a reference should be made as agreed. It is clear that the damages suffered in the first two periods in question, if any, were merely nominal though plaintiff’s rights as patentee are entitled to full protection, and as previously stated, I find that they were infringed during both of these periods. With respect to the third period when all three defendant corporations were active in preparing for the eventual sale of the product as soon as it was licensed, there was also infringement of patentee’s rights but again no sales to third parties or profits by defendants on which any calculation of damages could be based, so again

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the damages would be merely nominal during this period. With respect to the fourth period following June 21, 1966, however, and before the final licence on February 3, 1967, established the royalty payable subsequent to that date, substantial sales were made by defendants and I cannot accept the contention of defendants counsel that the only amount which could be claimed as damages resulting from these sales was the same royalty which was eventually fixed on February 3, 1967. To do so would be equivalent to saying that although it had been settled that the Commissioner was wrong in making the royalty take effect retroactively to June 21, 1966, the Court must nevertheless award damages in exactly the same amount as if this decision of the Commissioner had been correct. I do not so find and I believe therefore that the question of damages during this period remains open, and while one of the options would be to allow damages in the same amount as if the royalty had taken effect June 21, 1966, this need not necessarily be the basis for the damages to be allowed.

Micro, Maney and Gryphon appealed from the judgment of Walsh J., and as previously mentioned an Order was made that the two appeals should be heard at the same time. Separate facturas were filed by both parties in respect of each appeal.

I will deal first with the “effective date appeal”. As previously set out, the original decision of the Commissioner dated June 21, 1966, read: “I do hereby grant a non-exclusive licence effective as of this day…” and in the licence of February 3, 1967, the Commissioner said:

The said royalty shall be paid on all sales of the product made by MICRO CHEMICALS LIMITED subsequently to June 21, 1966.

It is clear beyond argument that the procedure adopted by the Commissioner in dividing Micro’s

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application for a licence into two parts was done solely for the convenience and at the insistence of the respondent.

In my view the contention of Micro is the correct one. There are two elements in s. 41(3): (1) the decision to grant or refuse a licence; and (2) if a licence is granted, the amount of the royalty and other terms. I can see no good reason why the Commissioner cannot deal with these two element successively and in some instances, as in this case, actually postpone consideration of royalty and other terms until the essential question of licence or no licence is determined. In this I am supported by the views of Rand and Martland JJ. in Parke, Davis & Co. v. Fine Chemicals of Canada Ltd.[5].

I am aware that in so holding I am taking a different view from that taken by the Divisional Court in the case of Geigys S.A.’s Patent[6]. With respect, I do not agree that the section is indivisible in that the Commissioner cannot, either at the request of one party, or on his own responsibility, divide the task imposed on him into two separate hearings, the second being dependent on the result of the first but the first being in itself a decision effective from its date or as ordered by the Commissioner. The procedure adopted here seems to me to be a very practical time- and expense-saving one of which the Court should approve. An application for compulsory licence should be dealt with as expeditiously as possible otherwise the benefit to the public which the section aims to achieve may well be nullified.

It follows that Micro had a licence as of June 21, 1966, and it is entitled to succeed in respect of the “effective date appeal”.

I will now deal with the appeal in the infringement action. Walsh J. in his judgment, being of the view that the alleged infringements broke

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down into four periods, dealt with the four periods accordingly. He saw the period prior to March 25, 1965, as differing from the period between November 1, 1965, and January 22, 1966, and dealt with these two periods separately. I am unable to see any difference in principle in what was done in these two periods. It is significant that Walsh J. found that the small amount of trifluoperazine produced prior to January 22, 1966, was put in bottles and kept for Micro and never entered into commerce and no damage was suffered by respondent and no profits made by Micro, but nevertheless he found there had been an infringement. In my view he was in error in holding as he did that an experimental user without a licence in the course of bona fide experiments with a patented article is in law and infringer. The reasoning of Jessel M.R. in Frearson v. Loe[7], and approved by Vice-Chancellor Bristowe in Proctor v. Bayley & Son[8], is applicable. Jessel M.R. said at pp. 66-67:

The other point raised was a curious one, and by no means free from difficulty, and what occurred with regard to that was this, that the Defendant at various times made screw blanks, as he said, not in all more than 2 lbs., by various contrivances by which no doubt crew blanks were made according to the Plaintiff’s patent of 1870, as well as that of 1875; they seem to have been an infringement of both. He said he did this merely by way of experiment, and no doubt if a man makes things merely by way of bonâ fide experiment, and not with the intention of selling and making use of the thing so made for the purpose of which a patent has been granted, but with the view of improving upon the invention the subject of the patent, or with the view of seeing whether an improvement can be made or not, that is not an invasion of the exclusive rights granted by the patent. Patent rights were never granted to prevent persons of ingenuity exercising their talents in a fair way. But if there be neither using nor vending of the invention for profit, the mere making for the purpose of experiment,

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and not for a fraudulent purpose, ought not to be considered within the meaning of the prohibition. and if it were, it is certainly not the subject for an injunction.

The use Micro was making of the patented substance here was not for profit but to establish the fact that it could manufacture a quality product in accordance with the specifications disclosed in respondent’s application for Patent No. 612204. Walsh J. found that Micro’s experiments prior to January 22, 1966, constituted a technical infringement as they were not carried out for the purpose of improving the process but to enable Micro to produce it commercially as soon as the licence it had applied for could be obtained. I cannot see that this sort of experimentation and preparation is an infringement. It appears to me to be the logical result of the right to apply for a compulsory licence.

While it may not be necessary in each case to be in a position to show capacity to manufacture, it is, I think, a reasonably prudent thing for an applicant to be able to do. It is true, as Thurlow J. said in Hoffmann-La Roche Limited v. Delmar Chemicals Limited[9], that:

…there is no statutory requirement that he prove that he is competent to produce the food or medicine or that he is possessed of the equipment, know-how and resources to do so, though the Commissioner may consider it of some importance, depending on the facts of the case, to be informed of the applicant’s qualifications and if he thinks necessary to inquire into them.

However, the fact that an applicant puts himself in a position to show that he is possessed of the equipment, skill and know-how by experimentation does not, in my opinion, make him an infringer.

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The finding of Walsh J. that there was an infringement in the period between January 25, 1966, and June 21, 1966, consisting of the transfers of the material from Micro to Gryphon and the manufacture of tablets by Gryphon and the activity of Maney in soliciting potential customers is amply supported by the evidence. The respondent is accordingly entitled to damages for infringement in this period.

I have already held that the effective date of the licence was June 21, 1966, and accordingly there was no infringement in the period between June 21, 1966, and February 3, 1967, and the appeal in this regard must be allowed as well as the appeal in respect of the periods prior to January 22, 1966.

There remains to be determined the respondent’s cross appeal as to the royalty payable as fixed by Jackett P.

The first relief sought by the respondent is the addition of two clauses to the royalty provisions as follows:

2A—For the purpose of paragraphs 1 and 2 when the bulk product has been sold by Micro Chemicals Limited to a purchaser other than an arms’ length purchaser and has been subsequently (either by that purchaser or some other person who has acquired it otherwise than as an arms’ length purchaser) resold to an arms’ length purchaser, it shall be deemed to have been sold by Micro Chemicals Limited to the arms’ length purchaser under the terms of the sale made to that purchaser and Micro Chemicals Limited shall be deemed to have received as the “net selling price” thereof all moneys paid by the arms’ length purchaser under the terms of sale.

2B—Where, by virtue of paragraph 2A, a higher royalty than was otherwise payable becomes payable and is paid, the amount otherwise payable and so paid shall be taken as a credit against the royalty that thereby became payable.

Because of the interlocking relationship of the three companies, Micro, Maney and Gryphon, and as they do not deal with one another at arms’ length, these clauses should be added and the

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licence will be amended accordingly effective as from June 21, 1966.

On the issue of the quantum as to royalty, Jackett P. said:

My basic difficulty in considering arguments in relation to royalty, and I assume the difficulty that faces all others involved in these matters either as counsel or otherwise, is that it seems improbable that there is a “market” to which one can turn for direct evidence as to what a willing licensee would pay to a willing licensor for a licence for the particular drug containing the particular terms. (Compare Aktiebolaget Astra, Apotekarnes Kemiska Fabriker v. Novocol Chemical Manufacturing Company of Canada, Limited, (1964) Ex. C.R. 955 at page 963.) I assume that there is no person with sufficient experience in such a specialized “market”, either as a party to such transactions or as a broker, that he is competent to assist the Court by expressing an opinion based on his experience as to what royalty would be reached by arm’s length negotiation between a willing licensor and a willing licensee for this licence for this drug. In the absence of such assistance, the tribunal, in this case the Commissioner, must form the best conclusion that he can as to what would be the result of such negotiations in the light of all the evidence of factors that would affect the bargaining parties and must then apply the statutory direction contained in the latter part of section 41(3). This is what I assume was done in the case of Hoffmann-la Roche Ltd. v. Bell-Craig Pharmaceuticals Division of L.D. Craig Ltd., (1966), S.C.R. 313, where the material available was very much the same as that available to the Commissioner in thise case and where his determination was upheld by the Supreme Court of Canada. I have given careful consideration to the differences between the two cases that have been urged on me. In the first place it was urged that the result in this case is that the licensee will pay a much smaller proportion of his proceeds of sale as royalty. I have no basis for making that a ground for interference. Then I have been pressed with a United Kingdom decision in relation to the same drug. That is a decision, as far as I know, on different evidence and with reference to a licence containing different terms. In any event, I know of no principle whereby it can be said that this Court should accept the finding of an official of another country in relation

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to a licence under the legislation of that country in preference to the judgment of the Commissioner of Patents in this country. Reference was made to the evidence of certain doctors concerning the necessity for the appellant incurring certain expenses during its distribution of the drug. I cannot see the relevance of that evidence to the question of royalty. Finally, there is evidence in this case of a licence negotiated by the patentee with a third party at a substantially higher royalty. That evidence was before the Commissioner and I assume that he gave it such weight as, in his opinion, it was worth.

The appeal in respect of royalty is therefore rejected.

I am unable to discern any error on the part of Jackett P. in confirming the Commissioner in respect of the royalty payable and I would dismiss the appeal on this branch of the case.

I do not think that the reference ordered by Walsh J. in his judgment is now required. He saw the period between June 21, 1966, and February 3, 1967, as being the time during which the respondent suffered the greatest loss because it was in this period that substantial quantities of the product were produced and held for sale. This period has now been eliminated as one in which infringement took place. In regard to the other periods, Walsh J. stated that the damages would be mainly nominal. I think that if the respondent recovers damages for the quantities of the product produced between January 25, 1966, and June 21, 1966, calculated on the basis of the royalty payable on arms’ length sales as now amended that it will have proper compensation for the infringement committed in this period.

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In the result:

1. The appeal as to the effective date of the licence will be allowed with costs in this Court and in the Exchequer Court, but subject to the terms of the Order made by Jackett P. dated December 21, 1970.

2. The licence will be amended to include the provisions respecting sales made otherwise than at arms’ length as set out on p. 14 hereof.

3. There will be a declaration that the three appellants, Micro, Maney and Gryphon, infringed the respondent’s patent in the period from January 25, 1966, to June 21, 1966, as heretofore set out, but not otherwise, and that the respondent is entitled to damages from these three parties on the quantities manufactured in the period calculated, on the basis of the royalty payable on arms’ length sales as now amended; and

4. There will be no Order as to costs to any party in this Court in respect of the infringement appeal or of the respondent’s cross appeal.

Solicitor for the appellants: J.T. Thorson, Ottawa.

Solicitors for the respondent: Gowling & Henderson, Ottawa.