T-476-71
Domco Industries Limited (Plaintiff)
v.
Armstrong Cork Canada Limited, Armstrong
Cork Company, Armstrong Cork Industries Lim
ited, Armstrong Cork Inter-Americas Inc., Con-
goleum-Nairn Inc., Congoleum Industries, Inc.
and Congoleum Corporation (Defendants)
Trial Division, Mahoney J.—Toronto, March 11
and 12; Ottawa, March 21, 1980.
Patents — Infringement — Plaintiff is the non-exclusive
licensee of patentee, which had settled with the infringer of the
patent — Whether plaintiff has an independent right of action
against infringer — If the plaintiff has an independent right of
action, is the remedy of an accounting of profits available to
it? — Was the infringer freed of any claim for infringement by
the patentee settling its claim against it and/or by the patentee
granting a licence to a third- party? — Action allowed in part
— Plaintiff entitled to damages — Patent Act, R.S.C. 1970, c.
P-4, ss. 57, 59.
The plaintiff is the non-exclusive licensee of the patentee,
Congoleum. The defendant Armstrong admits that it infringed
the patent. This action was started with Congoleum and Domco
as plaintiffs and Armstrong as defendant. Subsequently senior
officers of Congoleum and Armstrong executed a memorandum
of understanding wherein the parties agreed to settle the dis
pute. A second memorandum was later executed, and it pro
vided for the execution of minutes of consent, which would
contain a consent to judgment. Notwithstanding••Congoleum's
undertaking to have Domco execute the minutes of consent,
Domco refused to execute them. On Congoleum's application,
judgment issued, and the three Congoleum companies were
removed as plaintiffs and added as defendants and the plead-
ings were extensively amended. Also, Congoleum granted a
non-exclusive licence to a third party to sell the product in
Canada. The following are the issues:- whether or not the
non-exclusive licensee has an independent right of action
against an infringer; if so, is the remedy of an accounting of
profits available to it? and, was the infringer freed of any claim
for infringement by the patentee settling its claim against it
and/or by the patentee granting a licence to a third party?
Held, the action is allowed in part. Domco is entitled to
recover damages from Armstrong. Whatever the quality of its
licence to manufacture and sell, Domco has a right of action in
respect of Armstrong's infringement of Congoleum's patent,
whether by manufacture or importation and sale. The existence
of a licensed third party is immaterial except, perhaps, as to
proof of its damages. If Domco can prove that it lost sales of a
product, which it would otherwise have made in Canada, as a
result of Armstrong's infringement of the patent, Domco is
entitled to damages. Armstrong is free of any claim for
infringement for the period covered by the memorandum of
understanding, which licensed Armstrong to do what would
otherwise have been infringement after the date of the memo-
randum. However, Congoleum did not purport to release Arm-
strong from its liability to Domco for the infringement commit
ted before the date of the memorandum. Quite the contrary;
the separate acquiescence of Domco was expressly contemplat
ed. The payment does not have any significance of its own; it is
part and parcel of the first agreement. Subsection 59(1) would
appear to vest the Court with discretion to give a non-exclusive
licensee the right to elect an accounting of profits as an
alternative to damages. It may be that circumstances would
support such an exercise of discretion, but in this instance
Domco should be refused the option of an accounting of profits.
American Cyanamid Co. v. Novopharm Ltd. [1972] F.C.
739 reversing [1971] F.C. 534, followed. Flake Board v.
Ciba Court No. A-191-73, referred to. Neilson v. Betts
(1871-72) L.R. 5 H.L. 1, referred to. Ciba Corp. v.
Decorite IGAV (Canada) Ltd. (1971) 2 C.P.R. (2d) 124,
referred to. Rawlings v. National Molasses Co. (1968)
158 USPQ 14 (Court of Appeals, Ninth Circuit), referred
to. The Duplan Corp. v. Deering Milliken Research Corp.
(1975) 186 USPQ 369 (Court of Appeals, Fourth Circuit),
referred to.
ACTION.
COUNSEL:
D. Sim, Q.C. and R. Hughes for plaintiff.
D. Watson, Q.C. for defendant Armstrong
Cork Canada Limited.
D. MacOdrum for defendant Congoleum-
Nairn Inc.
SOLICITORS:
D. Sim, Q.C., Toronto, for plaintiff.
Gowling & Henderson, Ottawa, for defendant
Armstrong Cork Canada Limited.
Lang, Michener, Cranston, Farquharson &
Wright, Toronto, for defendant Congoleum-
Nairn Inc.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: The issues are set forth with some
particularity in the agreement as to facts and
issues, hereinafter "the agreement", filed herein
but may be stated broadly as follows:
1. Does the non-exclusive licensee of a patentee
have an independent right of action against an
infringer?
2. If so, is the remedy of an accounting of profits
available to it?
3. In the particular circumstances, was the
infringer freed of any claim for infringement by
the patentee settling its claim against it and/or
by the patentee granting a licence to a third
party?
Questions as to the extent of the infringement, the
damages flowing from it or the profits arising from
it are to be subject of a reference. The action was
tried together, on common evidence, with action
no. T-1209-71, which, as now constituted, bears an
identical style of cause. The evidence consists
entirely of agreed facts and admissions in the
pleadings. The validity of the patent and its
infringement are admitted.
The plaintiff, hereinafter "Domco", was, at all
material times, licensee of the patentee of Canadi-
an Letters Patent No. 764,004 issued July 25,
1967, and entitled "Textured Foam Products".
There is now no material distinction to be made
within the two groups of defendants. The four first
named defendants, hereinafter "Armstrong", were,
collectively, the infringer. The three last named,
hereinafter "Congoleum", were, successively, the
patentee.
A good deal of what is particularized in the
agreement is not material to the issues I must
decide. Some of those facts will be relevant to the
matters to be considered on the reference. Some
would be most material if I were able to accept the
argument that I am not bound by the majority
decision of the Federal Court of Appeal in Ameri-
can Cyanamid Co. v. Novopharm Ltd.' Those
facts are on the record for the referee and for any
court not bound by that decision and I see no
advantage in fully setting them out or summariz
ing them except to the extent necessary to put my
decision in what I hope will be comprehensible
factual frame.
The term "chemically embossed product" is
defined in the agreement as:
[1972] F.C. 739; (1973) 7 C.P.R. (2d) 61, reversing [1971]
F.C. 534; (1972) 3 C.P.R. (2d) 206.
chemically embossed floor covering which and the process for
making which fall within at least some of the claims of the
patent in issue.
I shall refer to it as the "product".
By the licensing agreement, made July 8, 1966,
Congoleum granted Domco, inter alia, "a restrict
ed non-exclusive right and license to make, use and
sell" the product in Canada. For the first five
years, Congoleum would not grant a third party a
licence to manufacture the product in Canada and
for the first three years, it would not itself manu
facture the product in Canada. In August, 1967,
Domco began manufacturing the product in
Canada, which it continues to do to this day. Most
of what it makes is sold in Canada.
Armstrong infringed the patent in the following
respects:
1. By importing and selling product made in the
United States of America from a date prior to
July 8, 1966, the date of Domco's licence, until
not later than April 5, 1974, when it was
enjoined by a United States court from export
ing the product.
2. By manufacturing and selling product in
Canada between April 26, 1968, and
September 1, 1976, when it ceased in compli
ance with the memorandum of understanding
with Congoleum hereinafter referred to.
Armstrong's product on hand as of July 25, 1967,
the date of issue of the patent, is not subject of
Domco's claim, being entitled to the benefit of
section 58 of the Patent Act. 2
This action was commenced May 3, 1968, and
action T-1209-71 was commenced August 25,
1970, with Congoleum and Domco as plaintiffs
and Armstrong as defendant. Actions involving the
corresponding United States patent were taken
there by Congoleum against Armstrong.
On March 9, 1976, a handwritten document
entitled "memorandum of understanding", was
signed by senior officers of Congoleum and Arm
2 R.S.C. 1970, c. P-4.
strong. It provided for payment of $35,000,000
(U.S.) to Congoleum and, inter alia,
2. Final settlement of the following (dismissal with prejudice)
Canada - Congoleum v. Armstrong
Permanent injunction commencing Sept. 1, 1976
- right of Armstrong to make and sell up to that date.
It is agreed that the testimony of those officers, if
called as witnesses, would have been that it was
their understanding and intention on March 9,
1976, to dispose completely of
... all claims each might have against the other in the United
States litigation and in the Canadian litigation and to permit
ARMSTRONG to make in Canada and sell CHEMICALLY
EMBOSSED PRODUCT up to September 1, 1976 (which date was
subsequently extended to the end of 1976 by the Memorandum
of Understanding of Schedule H) at which date an injunction
would become effective, so as to enable ARMSTRONG to effect
an orderly termination of the manufacture and sale of the
CHEMICALLY EMBOSSED PRODUCT which was the subject of
the action.
The further memorandum of understanding was
signed in February, 1977. It is a professionally
drawn document that recites the "conclusion" of
litigation in the U.S. and Canada including this
action and action No. T-1209-71; payment of the
$35,000,000 (U.S.) and provides, inter alia:
4. The parties to T-476-71 and T-1209-71 will enter into
minutes of consent in the form attached. Congoleum under
takes 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.
It also provides that product made by Armstrong
in Canada on or before August 31, 1976,
shall be free of any claim by Congoleum for patent infringe
ment. Such floor covering used or sold in Canada by or on
behalf of Armstrong ... shall also be free of any claim by
Congoleum for patent infringement.
The minutes of consent referred to in paragraph 4
follows:
MINUTES OF CONSENT
1. Plaintiffs release the defendants from all claims for recov
ery of money because of infringement of Canadian Patent
764,004 arising out of manufacture prior to 1st September
1976 and arising out of use or sale prior to 1st January 1977.
2. The parties hereto consent to judgment in the terms of
Exhibit A hereto without prejudice to the rights of the parties
in any other jurisdiction.
3. The parties understand that this action to the extent that it
is based on Petry Canadian Patent No. 664,322 be discontinued
without costs, such discontinuance being effective immediately
in advance of the entry of judgment in this action.
Solicitors for the Plaintiffs
Congoleum-Nairn Inc.,
Congoleum Industries, Inc.
and Congoleum Corporation.
Solicitors for the Plaintiff
Domco Industries Ltd.
Solicitors for the Defendants
Domco refused to execute the minutes of con
sent. On February 20, 1978, on Congoleum's
application, judgment issued substantially in the
form annexed to the minutes of consent. The three
Congoleum companies were then removed as
plaintiffs and added as defendants and the plead-
ings extensively amended.
Effective January 1, 1970, Congoleum granted a
third party a non-exclusive licence to sell product
in Canada, Effective January 1, 1974, the third
party was licensed to manufacture it in Canada as
well. It has, in fact, sold, but has not manufac
tured, product in Canada.
In American Cyanamid Co. v. Novopharm Ltd.,
the plaintiff was the non-exclusive licensee of a
patentee which had sued the same defendant for
infringement but had not joined the licensee as a
plaintiff in its action. The defendant moved under
Rule 419 to strike out the licensee's statement of
claim on the ground that it disclosed no reasonable
cause of action because a non-exclusive licensee
has no right to sue under section 57 of the Patent
Act.
57. (1) Any person who infringes a patent is liable to the
patentee and to all persons claiming under him for 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.
Noël A.C.J. agreed and held "The plaintiff having
no status in this action, it shall be dismissed with
costs against it". That decision was appealed and,
by a majority decision, the appeal was allowed.
The dissenting judgment of Jackett C.J. is
exhaustive and, with a substitution of the particu
lar facts in this action for those then considered, is
a fair summary of the defendants' arguments on
this issue except that the defendants also say that I
am not bound by the decision of the majority,
Bastin and Sweet D.JJ. The basis for that submis
sion is that the appeal was concerned only with a
motion to strike whereas the matter is now before
the Court on its merits.
The Court of Appeal was unanimous in holding
that a non-exclusive licensee is a person claiming
under the patentee within the meaning of those
words as used in subsection 57(1). It was only
after that that Jackett C.J. parted company with
his brethren. He held [at page 758] that:
... a Statement of Claim whereby a non-exclusive licensee
claims damages for infringement of a patent does not disclose
an arguable cause of action unless facts are pleaded upon which
it can at least be argued that there was some interference with
the rights held by the plaintiff under the patentee by reason of
the defendant's alleged infringement of the patent.
Bastin D.J. said [at pages 763-764]:
It is a cardinal principle of interpretation that the ordinary and
grammatical sense of the words be adhered to unless this would
lead to manifest absurdity. Parliament could not have used
words with a more comprehensive meaning than those found in
this section:
[57(1)] ... all persons claiming under him (the patentee) for
all damages sustained ... by any such person, by reason of
such infringement.
As the Associate Chief Justice stated in his judgment, "The
right of a licensee to sue is purely statutory". It follows that the
intention of Parliament must be ascertained from the words of
the statute. The Court is not justified in reading into the plain
meaning of this section qualifications which Parliament could
have expressly provided if that was the intention.
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 of 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 licence, it would have
made this clear. Since Parliament has made no such distinction,
it follows that all licensees should be treated alike.
As the law now stands, the only qualification to enable a
licensee to sue is actual loss attributable to the infringement.
Damages are the gist of the action and these can only be
determined in the trial.
Sweet D.J. concluded [at page 769]:
I am of opinion that by section 57(1) Parliament, by apt and
adequate wording, has accomplished and implemented an
intention to create a right in a non-exclusive licensee to recover
from a person who infringes a patent, in respect of any matter
relevant to his licence, damages in compensation for the licen
see's loss by reason of such infringement.
Leave to appeal to the Supreme Court of Canada
was granted; however, that appeal was not heard,
settlement having intervened.
In Flake Board v. Ciba, 3 another application to
strike, in a unanimous decision delivered by Jack-
ett C.J., the Federal Court of Appeal held itself
bound to apply American Cyanamid Co. v.
Novopharm Ltd. Leave to appeal that decision was
refused by the Supreme Court of Canada. 4
I am unable to accept the defendants' submis
sion that I am not bound by the decision in
American Cyanamid Co. v. Novopharm Ltd. It is
not a judgment, as some are, which merely says
the action ought not have been terminated sum
marily because the matter was not so clear that the
plaintiff should be deprived of an opportunity to
have it tried. Rather, it is a decision that has
3 Unreported decision rendered February 7, 1974, Court No.
A-191-73.
4 [1974] S.C.R. viii.
determined not only that the statement of claim
ought not have been struck out but, very clearly,
that it did indeed disclose a reasonable cause of
action. The Court of Appeal has considered the
issue and decided it and I am bound by that
decision.
The issue of whether or not Domco has a right
of action against Armstrong was put in the agree
ment as a series of seven questions, occupying four
and a half typed, double spaced, foolscap pages
dealing with different time periods and activities
as follows:
1. Between July 25, 1967, when the patent
issued, and April 21, 1968, when Armstrong
began manufacturing product in Canada, Arm-
strong having, during the period, imported and
sold product here.
2. Between April 21, 1968, and July 8, 1969,
when the three-year period in Domco's licence
expired.
3. Between July 8, 1969, and January 1, 1970,
when the licence to the third party to sell in
Canada came into effect.
4. Between January 1, 1970, and July 8, 1971,
when the five-year period in Domco's licence
expired.
5. Between July 8, 1971, and January 1, 1974,
when the licence to the third party to manufac
ture in Canada came into effect.
6. Between January 1, 1974, and March 9,
1976, when the memorandum of understanding
was signed by the officers of Armstrong and
Congoleum.
7. Between March 9, 1976, and September 1,
1976, when Armstrong ceased all sale and
manufacture of product in Canada.
Except as to the period in the seventh question, the
distinctions are of no significance in the result.
Whatever the quality of its licence to manufacture
and sell, Domco has a right of action in respect of
Armstrong's infringement of Congoleum's patent,
whether by manufacture or importation and sale.
The existence of a licensed third party is immateri
al except, perhaps, as to proof of its damages. If
Domco can prove that it lost sales of product,
which it would otherwise have made in Canada, as
a result of Armstrong's infringement of the patent,
Domco is entitled to damages. I conclude that
"yes" is the answer to all of the questions from
1(a) to 6(d), inclusive.
Question 7 is really an aspect of the third issue
rather than the first. The effect of the settlement
reached March 9, 1976, was to license Armstrong
to manufacture the product until September 1 and
to sell what it had on hand on March 9 or manu
factured thereafter until September 1. The dead
line was later extended to December 31, 1976, as
respects the sale and use of product manufactured
before September 1. By March 9, 1976, Domco
was, in all respects, a non-exclusive licensee and
has no right of action against any of the defend
ants in respect of what was done after that date. I
conclude that "no" is the answer to questions 7(a)
and (b).
Question 8 asks:
8. During the whole of the period July 25, 1967 to September 1,
1976, or any part thereof is ARMSTRONG free of any claim
for infringement by the agreements of Schedules G and H,
the facts stated in paragraph 2(k), and the payment made to
CONGOLEUM?
The answer is "yes", Armstrong is free of any
claim for infringement for the period March 9,
1976, to September 1, 1976, by the agreement of
schedule G, which is the memorandum of under
standing of March 9, 1976. Had the question been
posed to embrace the period ended December 31,
1976, I should likewise have answered "yes" and
relied, as well, on the agreement of schedule H, the
second memorandum of understanding. That is
only because those memoranda licensed Arm-
strong to do what would otherwise have been
infringement after March 9. However, Congoleum
did not purport to release Armstrong from its
liability to Domco for the infringement committed
before March 9. Quite the contrary, the separate
acquiescence of Domco was expressly contemplat
ed. I cannot see that the payment has any signifi
cance of its own in the context of the question; it is
part and parcel of the schedule G agreement. The
facts stated in paragraph 2(k) are those that estab
lish the third party licences; they are immaterial to
the answer.
The ninth and final question posed is:
Accounting of profits:
9. (a) Is an accounting of profits a remedy available to DOMCO
with respect to any period or periods in which DOMCO is
found to be entitled to maintain this action?
(b) If the answer to (a) is yes, then for which period or
periods and for which products (Canadian manufactured
and/or imported)?
Domco argues that once a licensee is held to have
a right of action under subsection 57(1), it is
entitled to the same remedies as the patentee.
Subsection 59(1) of the Act provides:
59. (1) In any action for infringement of a patent the court,
or any judge thereof, may, on the application of the plaintiff or
defendant make such order as the court or judge sees fit,
(a) restraining or enjoining the opposite party from further
use, manufacture or sale of the subject-matter of the patent,
and for his punishment in the event of disobedience of such
order, or
(b) for and respecting inspection or account,
and generally, respecting the proceedings in the action.
The defendants argue that because an accounting
of profits implies a condonation of the
infringement, 5 a non-exclusive licensee, having no
right to condone the infringement, has no right to
an accounting of profits. The defendants ask if an
infringer is to be liable to an accounting of its
profits to each of the persons entitled, under sub
section 57(1), to sue it in respect of the
infringement.
I find no help in the decided cases although it is
apparent that my brother Walsh perceived the
problem when, dealing with an application to add
a non-exclusive sublicensee of an exclusive licensee
of the patentee as plaintiff in an infringement
action, he said: 6
It must be remembered that the plaintiffs in these proceedings,
in addition to claiming damages, ask in the alternative for an
accounting of profits as they may elect, an injunction, and the
destruction of all offending products in the possession of
defendant, and it would appear that these latter two claims
would be matters which even a non-exclusive licensee would
have a valid interest in enforcing. [The emphasis is mine.]
Aside from the entitlement to damages, which
subsection 57(1) expressly provides, Walsh J. par
ticularly excluded from his conclusion as to the
5 Neilson v. Betts (1871-72) L.R. 5 H.L. 1.
6 Ciba Corp. v. Decorite IGAV (Canada) Ltd. (1971) 2
C.P.R. (2d) 124 at 127.
enforceable interest of a non-exclusive licensee the
option of an accounting of profits.
The law in the United States remains that a
licensee has no right of action against an infringer
for infringement of the patent.'
... an owner of something less than monopoly rights may not
sue for patent infringement.
Even an exclusive licensee has no status to sue
jointly with the patentee for infringement. 8 In
England, the right of a licensee to sue for infringe
ment is limited to an exclusive licensee and the
remedy of an accounting of profits is expressly
given him. 9
Subsection 59(1) would appear to vest the Court
with discretion to give a non-exclusive licensee the
right to elect an accounting of profits as an alter
native to damages. In so doing, it overrides the
logic of the defendants' argument. It may be that
circumstances would support such an exercise of
discretion. I have been unable yet to conceive just
what those circumstances might be. In this
instance, the defendants' argument convinces me
that I should refuse Domco the option of an
accounting of profits. It is entitled to recover
damages and its costs from Armstrong.
Congoleum was a necessary defendant by reason
of subsection 57(2). It supported Armstrong's
position. They had settled. Except as may have
been expressly provided in any interlocutory
orders, Congoleum shall neither pay nor recover
costs herein.
7 Rawlings v. National Molasses Co. (1968) 158 USPQ 14
at 16 (Court of Appeals, Ninth Circuit).
8 The Duplan Corp. v. Deering Milliken Research Corp.
(1975) 186 USPQ 369 (Court of Appeals, Fourth Circuit).
9 The Patents Act, 1949, 12, 13 & 14 Geo. VI, c. 87, s. 63.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.