Armstrong Cork Canada v. Domco Industries Ltd., [1982] 1 SCR 907

Supreme Court of Canada

Armstrong Cork Canada v. Domco Industries Ltd., [1982] 1 S.C.R. 907

Date: 1982-06-23

Armstrong Cork Canada Limited, Armstrong Cork Company, Armstrong Cork Industries Limited and Armstrong Cork Inter-Americas Inc. (Defendants) (Appellants) Appellants;

and

Domco Industries Limited (Plaintiff) (Respondent) Respondent;

and

Congoleum-Nairn Inc., Congoleum Industries, Inc. and Congoleum Corporation (Defendants) (Respondents) Respondents.

File No.: 16437.

1981: December 15, 16; 1982: June 23.

Present: Laskin C.J. and Martland, Ritchie, Dickson and Beetz JJ.

ON APPEAL FROM THE FEDERAL COURT OF APPEAL

Patents—Infringement—Settlement by patentee—Action of non-exclusive licensee against an infringer for damages—Interpretation and application of s. 57 of the Patent Act—No distinction between exclusive and non-exclusive licensee—Patent Act, R.S.C. 1970, c. P-4, s. 57.

Congoleum, the holder of a Canadian patent, granted to Domco a restricted non-exclusive right and licence to make, use and sell the products covered by its patent. Both companies brought an action against the appellants for damages for infringement of patent. Appellants settled with Congoleum but not with Domco. The Federal Court Trial Division allowed Domco’s action and the Court of Appeal upheld that decision. This appeal is to determine whether a licensee can claim damages for patent infringement.

Held: The appeals should be dismissed.

A person who is a licensee under a patent is a person claiming under the patentee within the meaning of s. 57(1) of the Patent Act. There is no valid basis under the wording of that subsection to exclude its application to a non-exclusive licensee. Section 57(1) gave the licensee a statutory right of action and an entitlement to damages sustained in consequence of the patent’s infringement. The patentee could not independently

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extinguish that right by virtue of a settlement with the infringer.

Electric Chain Company of Canada Ltd. v. Art Metal Works Inc., [1933] S.C.R. 581; Heap v. Hartley (1889), 42 Ch.D. 461; American Cyanamid Co. v. Novopharm Ltd., [1972] F.C. 739; Flake Board Co. v. Ciba-Geigy Corp. (1974), 15 C.P.R. (2d) 33; Spun Rock Wools Ltd. v. Fiberglas Canada Ltd., [1943] S.C.R. 547; [1947] A.C. 313, considered.

APPEALS from judgments of the Federal Court of Appeal (1980), 35 N.R. 181, 54 C.P.R. (2d) 155, 118 D.L.R. (3d) 48, [1981] 2 F.C. 510, affirming judgments of the Trial Division (1980), 47 C.P.R. (2d) 1, [1980] 2 F.C. 801. Appeals dismissed.

Gordon F. Henderson, Q.C., and David Watson, Q.C., for the appellants.

Donald F. Sim, Q.C., and C.E.R. Spring, for the respondent Domco Industries Limited.

Donald J. Wright, Q.C., and Donald H. MacOdrum, for the respondents Congoleum-Nairn Inc. et al.

The judgment of the Court was delivered by

MARTLAND J.—The appellants (hereinafter jointly referred to as “Armstrong”) appeal from two judgments of the Federal Court of Appeal which dismissed appeals by Armstrong from the judgments of Mahoney J. at trial. Two actions were originally commenced against Armstrong by the respondent Domco Industries Limited (hereinafter referred to as “Domco”) and by the other respondents (hereinafter jointly referred to as “Congoleum”). The duplication was because of a title dispute, which is no longer material. The issues at trial were identical and the cases were heard together. The appeals to the Federal Court of Appeal were also heard together. The judgments in that Court differ only in relation to the disposition of costs. Similarly, the appeals to this Court were argued as one appeal.

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The actions were tried upon an agreed statement of facts and issues and no oral evidence was given. The facts disclose that Congoleum is the holder of Canadian Patent No. 764,004 issued on July 25, 1967, relating to a type of chemically embossed floor covering. By an agreement dated July 8, 1966, Congoleum granted to Domco a restricted non-exclusive right and licence to make, use and sell the products covered by the patent in Canada. The relevant portions of this agreement are as follows:

GRANT

2. (a) LICENSOR hereby grants to LICENSEE under the PATENT RIGHTS, subject to the terms, conditions, and limitations hereof, a restricted nonexclusive right and license to make, use and sell said LICENSED PRODUCTS in Canada.

…

EXCLUSIVE PERIOD

8. LICENSOR agrees that during the first five-year period from the date of this agreement, it will not grant to any third party a license under said PATENT RIGHTS to manufacture floor, or felt-backed or paperbacked wall covering in Canada. LICENSOR also agrees that during the first three-year period of this agreement, it will not manufacture floor coverings in Canada under said PATENT RIGHTS.

Armstrong, at the time the patent issued, was already selling in Canada products manufactured in the United States. On April 26, 1968, it commenced to manufacture such products in Canada. It continued to sell in Canada products manufactured in the United States. During the period of time relevant to this action only the infringer, Armstrong, and the licensee, Domco, were manufacturing the products covered by the patent in Canada.

In consequence of Armstrong’s activities, which were carried on without any licence from Congoleum, the actions referred to above were commenced by Congoleum and Domco as plaintiffs alleging that Armstrong had infringed Congoleum’s patent.

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On March 9, 1976, Congoleum and Armstrong agreed to a settlement of the above litigation, as well as litigation between them in the United States. Armstrong paid to Congoleum the sum of $35,000,000 in full satisfaction of Congoleum’s claim. Armstrong was given a licence for the period from the date of settlement to the end of 1976 to enable it to effect an orderly termination of the manufacture and sale of the products.

The memorandum of understanding contained the following provision:

4. The parties to T-476-71 and T-1209-71 will enter into minutes of consent in the form attached. Congoleum undertakes to obtain such action by its subsidiaries and affiliates and by Domco Industries, Ltd. Armstrong undertakes to obtain such action by its subsidiaries and affiliates and represents that it is authorized to take such action on behalf of Trimont Building Supplies, Ltd.

The references to T-476-71 and T-1209-71 are to the numbers of the two actions in the Federal Court. Domco did not agree to the release, with the result that Congoleum proceeded with the settlement as far as it could. The pleadings in the actions were amended so that Congoleum ceased to be a plaintiff and was named as a defendant. As a consequence, while Congoleum appears as a respondent in the appeal to this Court, it supported the position of Armstrong. This is understandable since Congoleum, when Domco refused to be a party to the settlement, undertook to indemnify Armstrong from any claim which Domco might have in the action.

There is now no issue as to the validity of the Congoleum patent, nor as to the fact that Armstrong had infringed it. The real issue is as to whether Domco, as the holder of a licence to make, use and sell in Canada the products covered by the patent, can claim damages from Armstrong arising out of its infringement of that patent. This involves the interpretation and application of s. 57 of the Patent Act, R.S.C. 1970, c. P-4, which provides as follows:

57. (1) Any person who infringes a patent is liable to the patentee and to all persons claiming under him for

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all damages sustained by the patentee or by any such person, by reason of such infringement.

(2) Unless otherwise expressly provided, the patentee shall be or be made a party to any action for the recovery of such damages.

The position taken by Armstrong is that Domco as the holder of a non-exclusive licence was not entitled to invoke s. 57(1) because:

(a) Domco had no claim to qualify it as a person “claiming under” the patentee;

(b) Domco did not have any right which could be infringed; and

(c) Domco could not sustain “damages” by reason of the patent infringement.

Domco contends that the Federal Court of Appeal correctly construed s. 57(1) and was right in holding that a licensee is a person claiming under the patentee, who has a remedy for all damages sustained by it by reason of the infringement of the patent.

Section 57 of the Patent Act first appeared as s. 55 of the Patent Act, 1935 (Can.), c. 32. It was in the same terms as the present section. Section 55 was a part of a new statute which repealed the earlier Act and which was enacted following representations to and hearings by a Senate committee. In determining its meaning, it is helpful to consider the state of the law prior to its enactment.

The predecessor of s. 57 was s. 32 of the Patent Act, R.S.C. 1927, c. 150. It provided as follows:

32. Every person who, without the consent in writing of the patentee, makes, constructs or puts in practice any invention for which a patent has been obtained under this Act or any previous Act, or who procures such invention from any person not authorized by the patentee or his legal representatives to make or use it, and who uses it, shall be liable to the patentee or his legal representatives in an action of damages for so doing; and the judgment shall be enforced, and the damages and costs that are adjudged shall be recoverable, in like manner as in other cases in the court in which the action is brought.

“Legal representatives” was defined in s. 2(c):

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2. (c) “legal representatives” includes heirs, executors, administrators, guardians, curators, tutors, assigns or other legal representatives;

In Electric Chain Company of Canada Ltd. v. Art Metal Works Inc., [1933] S.C.R. 581, this Court was called upon to consider the ambit of s. 32. The respondent, Dominion Art Metal Works Limited, was the Canadian subsidiary of the respondent, Art Metal Works Inc. of New Jersey, the patentee. Electric Chain Company was the infringer of the patent. Evidence disclosed that it was the Canadian company which had suffered damage by the infringement. The interest held by the Canadian company was characterized to be that of a licensee. Hughes J., who delivered the judgment of the Court, approved of the decision in Heap v. Hartley (1889), 42 Ch.D. 461, a judgment of the Court of Appeal in England, and concluded that Dominion Art Metal Works Limited had no cause of action against the infringer.

The question in issue in Heap v. Hartley was as to whether the holder of an exclusive licence had title to sue in his own name, without joining the patentee, for infringement of the patent to which his licence related. It was held that he could not. Fry L.J., at p. 470, said:

I am of the same opinion. The Plaintiff in this case sues under an exclusive license to use a certain invention for a certain time, and within a limited district. He sues a person who he says is using that patented invention within the district, and without his license. Now he puts his case in a two-fold manner. He says: “In the first place, as exclusive licensee, I am in the position of an assign of the letters patent for that district and for that term, and as an assign of letters patent, I have a right to restrain any person who is infringing within the district.” That argument appears to be based on an entire error with regard to the nature of a license. An exclusive license is only a license in one sense; that is to say, the true nature of an exclusive license is this. It is a leave to do a thing, and a contract not to give leave to anybody else to do the same thing. But it confers like any other license, no interest or property in the thing. A license may be, and often is, coupled with a grant, and that grant conveys an interest in property, but the license pure and simple, and by itself, never conveys an interest in property. It only enables a person to do lawfully what

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he could not otherwise do, except unlawfully. I think, therefore, that an exclusive licensee has no title whatever to sue.

The issue as to the right of a licensee to sue an infringer in the light of the enactment of s. 55 of the 1935 Act was considered by this Court and, on appeal, by the Privy Council in Spun Rock Wools Ltd. v. Fiberglas Canada Ltd., [1943] S.C.R. 547; [1947] A.C. 313. The action was for infringement of a patent for alleged new and useful improvements in the production of fibres or threads from glass, slag and like meltable materials. The action failed in this court, Rand J. dissenting, on the ground that there was not invention in the claim sued upon. This decision was reversed in the Privy Council.

However the claim was also opposed on the basis that the plaintiff did not have the right to maintain the action. The plaintiff had an exclusive licence to use the patent. Three of the members of the Court, Davis, Taschereau and Kerwin JJ., held that the plaintiff had a right to claim damages under s. 55. Hudson J. expressed no opinion on this issue. Rand J. did not deal with it specifically but, as he decided in favour of the plaintiff, it is clear that he held the view that a claim was available under s. 55. Kerwin J. referred to the fact that the plaintiff claimed as an exclusive licensee, but no point is made of this in the judgment of Davis J., concurred in by Taschereau J.

The decision of this Court as to the effect of s. 55 was upheld in the Privy Council. The judgment was delivered by the Lord Simonds, who said at pp. 320-21:

Here the question is, whether a licensee is a person claiming under the patentee. On this question, even if it was argued before him, the learned trial judge can have had no doubt; for he makes no mention of it in his judgment. In the Supreme Court Davis J. (with whom

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Tachereau J. concurred) held that a licensee is for the purpose of the section a person claiming under the patentee. Kerwin J. came to the same conclusion, pointing out that in the Act of 1935 the relevant provision was recast, the words “the patentee and all persons claiming under him” taking the place of the words “the patentee or his legal representatives,” which occurred in the earlier Patent Act of 1932, and were not apt to include a licensee. On this question neither Hudson J. nor Rand J. expressed an opinion, but the latter judge, who was in favour of dismissing the appeal, can have had no doubt on the matter. In the face of this consensus of opinion on a Canadian statute their Lordships would in any case hesitate to express a contrary view. But it appears to them that the statutory amendment of 1935 following on the decision of Electric Chain Co. of Canada, Ld. v. Art Metal Works Inc. points irresistibly to the conclusion that licensees are persons claiming under the patentee within the meaning of the section. The patentee by definition means the person for the time being entitled to the benefit of a patent. Section 55, sub-s.1, contemplates an action not only by the person for the time being entitled to the benefit of a patent but also by any person claiming under that person. On the plain language of the section a licensee answers that description. The appellants as licensees were therefore entitled to sue for damages under s. 55.

No differentiation was made in these reasons as between an exclusive and a non-exclusive licence.

The Federal Court of Appeal considered the position of a non-exclusive licence in the case of American Cyanamid Co. v. Novopharm Ltd., [1972] F.C. 739. The plaintiff had a non‑exclusive licence from the patentee to manufacture, have manufactured for it, use and sell certain products manufactured by the patented processes. It sued an alleged infringer of the patent. The defendant moved to strike out the statement of claim as disclosing no cause of action because the plaintiff was not a person claiming under the patentee within the meaning of s. 57(1).

All of the three members of the Court were of the view that the judgment of the Privy Council in

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the Fiberglas (supra) case had decided that a person who is a licensee under a patent is a person claiming under the patentee within the meaning of s. 57(1). However, Chief Justice Jackett, dissenting on this point, was of the opinion that since a non-exclusive licence merely entitled the licensee to use the patented invention, and as this right of use is not affected by the infringement of the patent, the licensee suffered no damage from the infringement and therefore the statement of claim disclosed no cause of action.

The other two members of the Court did not share this view. Bastin D.J. said at p. 764:

It can hardly be questioned that the diminution in the volume of his sales due to sales by an infringer can result in a loss to a non-exclusive licensee. It might be argued that Parliament never contemplated compelling an infringer to compensate a non-exclusive licensee for such de facto damages but intended to restrict damages for which an infringer is liable to those of a person whose rights were directly infringed by the particular act of infringement. On this reasoning, a bare licensee has merely permission to make use of the patent and, unless his freedom to exercise this permission is interfered with, he cannot complain. On the other hand, an exclusive licensee has been granted a monopoly and an infringement on the patent directly affects this legal right. This may appear a logical argument but the answer is that the right of any licensee to collect damages is purely statutory and, if Parliament had intended to distinguish between an exclusive and a non-exclusive license, it would have made this clear. Since Parliament has made no such distinction, it follows that all licensees should be treated alike.

Sweet D.J. said at pp. 767-68:

It would seem logical for Parliament to decide to correct the situation wherein the licensee, under such circumstances, had no protection from and no recourse against the infringer and, in enacting section 57(1) in its present form, to create, by statute, a right in the licensee against the infringer and to provide a means of enforcing that right. Certainly the change was not necessary for the protection of the patentee or the assignee of the patent. They were already protected.

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An analysis of section 57(1) of the Patent Act reveals, I think, Parliament’s intention to create such a right and to provide the accompanying remedy and that it has implemented that intention and accomplished its purpose. In this connection, the following are noted:

1. The expressed liability of the person who infringes both to the patentee and to all persons claiming under him is set out in the same subsection and in the same terms.

2. The words “any person who infringes a patent is liable to” relate both to the patentee and to persons claiming under him.

3. The words “for all damages sustained” relate both to the patentee and to persons claiming under him.

4. There is no differentiation between the liability of the infringer to the patentee and to persons claiming under him nor is there any differentiation between the nature of the rights the patentee and the persons claiming under him have against the person infringing.

It seems to me to be made manifest by the legislation that what the patentee is entitled to and what the persons claiming under him are entitled to are basically the same, namely, “all damages sustained” by them respectively by reason of the infringement. It would, of course, be inconceivable that the patentee with a valid patent would not be entitled, from the person who infringes, to damages in compensation for his loss by reason of the infringement. Having regard to the structure of section 57(1), I am of opinion that all persons claiming under the patentee, who would include nonexclusive licensees, now have the same basic right, as has the patentee, namely, to recover from the person who infringes, damages in compensation for their losses by reason of the infringement.

A similar application to strike out a statement of claim as disclosing no cause of action, because the plaintiff who was a non-exclusive licensee in respect of the use of a patent, was seeking damages as a result of the infringement of the patent, was made unsuccessfully in Flake Board Co. v. Ciba-Geigy Corp. (1974), 15 C.P.R. (2d) 33. Chief Justice Jackett, who presided, said:

Counsel for the appellant conceded that, in so far as the application to strike out Cyanamid of Canada as a plaintiff is concerned, the appeal to this Court must be dismissed having regard to the decision of this Court in

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American Cyanamid Co. v. Novopharm Ltd. (1972), 7 C.P.R. (2d) 61, [1972] F.C. 739.

The appellant, who was obviously seeking a decision on the point by this Court, then applied for leave to appeal to this Court contending that the appeal raised a question of law as to whether the plaintiff, being merely a non-exclusive licensee, had the status to be a plaintiff, i.e. whether the plaintiff was a person claiming under the patentee within the meaning of s. 57(1) of the Patent Act. Leave to appeal was refused by this Court, [1974] S.C.R. viii.

Counsel for Armstrong recognizes that both this Court and the Privy Council considered that the enactment of s. 55 (now s. 57) of the Patent Act was as a consequence of the decision of this Court in Electric Chain Co. v. Art Metal Works Inc. to which reference has already been made. The reference in the Privy Council, at p. 320, already quoted, is in these terms:

But it appears to them that the statutory amendment of 1935 following on the decision of Electric Chain Co. of Canada, Ld. v. Art Metal Works Inc. points irresistibly to the conclusion that licensees are persons claiming under the patentee within the meaning of the section.

However, he contends that s. 57(1) was only intended to change the law so as to provide a remedy to someone who by contract had been granted exclusive rights under a patent, i.e. the holder of an exclusive licence. He also contends that the judgments in Fiberglas in this Court and in the Privy Council go no further than that.

While it is true that the licensee actually under consideration in the Fiberglas case was said to be “the exclusive sub-licensee” (or “exclusive licensee”) under the patent, no information is given in any of the judgments as to the precise nature of the licence, and nothing in the reasons for judgment on this point turned on the distinction between an exclusive licensee and a non-exclusive licensee or a bare licensee. Both Mr. Justice Davis in this Court delivering his and Mr. Justice Taschereau’s judgment and Lord Simonds in the Judicial Committee used the general word “licensee”

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in delivering their judgments. It cannot be supposed that they did so intending that only an exclusive licensee was being considered, particulary when Lord Simonds defined the issue of law as being: “Here the question is whether a licensee is a person claiming under the patentee” (p. 320).

Armstrong sought to distinguish an exclusive licence from a non-exclusive licence on the basis that the former was a grant of a part of the monopoly and that such a licensee was practically an assignee of the patent for the term of the licence with all the beneficial rights of the patentee. It is difficult to reconcile this reasoning with what was said in Heap v. Hartley (supra) (applied by this Court in the Electric Chain Co. case) in the passage which I have already quoted. I repeat from that passage the following portion which is apt in relation to Armstrong’s submission:

Now he puts his case in a two-fold manner. He says: “In the first place, as exclusive licensee, I am in the position of an assign of the letters patent for that district and for that term, and as an assign of letters patent, I have a right to restrain any person who is infringing within the district.” That argument appears to be based on an entire error with regard to the nature of a license. An exclusive license is only a license in one sense; that is to say, the true nature of an exclusive license is this. It is a leave to do a thing, and a contract not to give leave to anybody else to do the same thing. But it confers like any other license, no interest or property in the thing.

In my opinion, the reasons which led this Court and the Privy Council to the conclusion reached in the Fiberglas case are as applicable to a nonexclusive licensee as to an exclusive licensee. If an exclusive licensee is a person claiming under the patentee within s. 57(1), and the Fiberglas case so holds, there is no valid basis, under the wording of the subsection, to exclude its application to a non-exclusive licensee, and there is no valid basis for interpreting the Fiberglas case as holding otherwise.

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It was also contended on behalf of Armstrong that a non-exclusive licensee has no rights which can be infringed and therefore has no claim against the infringer of a patent. This was the view of Jackett C.J. in the American Cyanamid case. He was of the opinion that the non‑exclusive licensee had only a right to use the patent, which right was not affected by its infringement.

This was the legal position, even in respect of an exclusive licensee, prior to the enactment of s. 55 of the 1935 Act. Section 55 was enacted to meet this difficulty and, in my opinion, it has overcome the problem. Section 55(1), by its terms, imposes a liability upon the infringer of a patent to the patentee and also to all persons claiming under him for all damages sustained by the patentee or any such person by reason of such infringement. It is the infringement of the patent which gives rise to a liability. If that infringement causes damage to the patentee or to any person claiming under him, the infringer must compensate for the damage sustained by reason of the infringement of the patent. A licensee relying on this subsection is not claiming against the infringer for infringement of his rights under the licence, he is claiming for the damage he has sustained in consequence of the infringement of the patent.

On this point, I adopt the reasons of Sweet D.J. in the American Cyanamid case which have already been quoted.

Armstrong contended that the meaning of the word “damages” in s. 57(1) meant loss resulting from interference with the legal rights of the claimant. “Damages”, it was said, refers to pecuniary recompense given by process of law to a person for an actionable wrong that another has done to him.

The meaning of the word “damages” must be ascertained in respect of its use in this specific statutory provision. In section 57(1) it is provided in terms that an infringer of a patent is liable for all damages sustained by reason of his infringe-

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ment by a patentee or by any person claiming under him. This is a statutory obligation to pay damages and it applies in favour of any person who comes within the provisions of the subsection. In my opinion, Domco does come within the terms of the subsection.

Finally, Armstrong contended that the settlement made between Armstrong and Congoleum meant that there was no longer any infringement of the patent and, that, therefore, there could not be any remaining claim by the licensee, Domco, for damages for infringement.

The terms of settlement did not purport to say that there had been no infringement by Armstrong of Congoleum’s patent. The settlement provided for the payment by Armstrong to Congoleum of $35,000,000 “in full satisfaction of Congoleum’s claims”. Congoleum accepted this sum in satisfaction of its claims for damages for infringement.

Domco since the commencement of the proceedings has sought damages on the basis of its being a licensee. It was not a party to nor did it have any part in the settlement between Armstrong and Congoleum. It was a term of the settlement that Congoleum would obtain the release and consent from Domco in respect of its claim. When Domco would not sign the release and consent unless it received a portion of the settlement monies, Congoleum umdertook to indemnify Armstrong from any claim that Domco might have in the action.

Section 57(1) gave to Domco a statutory right of action and an entitlement to damages which Congoleum could not independently extinguish by virtue of its settlement with the Armstrong.

For these reasons I would dismiss the appeals with costs to the respondent, Domco, against the appellant, Armstrong, and the respondent, Congoleum. As the two appeals were identical, there should be only one set of costs.

Appeals dismissed with costs.

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Solicitors for the appellants: Gowling & Henderson, Ottawa.

Solicitor for the respondent Domco Industries Limited: Donald F. Sim, Toronto.

Solicitors for the respondents Congoleum-Nairm Inc. et al.: Hayhurst, Dale & Deeth, Toronto.