Reasonable Royalties and Non-Infringing Alternatives

Author:Alan Macek
Date:March 16, 2017
 
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In an oil and gas patent proceeding, the court ordered a 27% royalty rate for sales made prior to the grant of the patent at issue and did not consider a manual process as being a non-infringing alternative. In a recently issued decision, Frac Shack Inc. v. AFD Petroleum Ltd., 2017 FC 104, the defendant was found to infringe several of the claims in a patent relating to a fuel delivery system used for hot refueling of equipment used for hydraulic fracturing.

If a patent is found to be infringed, the patentee, or person claiming under the patentee is entitled to ‘reasonable compensation’ for activity happening after the patent application was published that would have constituted infringement if it occurred after the patent granted – see Section 55(2) of the Patent Act. Patent applications are generally published by the Canadian Patent Office eighteen months after the patent application is filed.

There are surprisingly few cases that consider the scope of reasonable compensation available under this section but it is generally considered to be a reasonable royalty. The reasonable royalty is determined from what a willing licensor and a willing licensee would have arrived at through negotiations held at the eve of infringement.

In Frac Shack, expert evidence was introduced by both parties as to several factors that may influence a royalty rate. The factors considered, arising from previous decision of the Federal Court, are: presence of competing products in the market; advantages of the patented product over competing products; advantages of the infringing product over the patented product; market position of the patentee; market position of the infringer; market share of the patentee before and after the infringing product entered the market; size of the market before and after the infringing product entered the market; and capacity of the patentee to produce additional products.

The plaintiff’s expert, according the reported decision at paragraph 318, stated that “for patented technology, a commonly considered royalty range is 25% to 33.3%, regardless of the technology at issue.” Noting that the parties were in direct competition, and the high capital cost of the fueling system, the plaintiff’s expert estimated a royalty rate of 29%. The trial judge favoured this evidence and awarded a reasonable royalty at 29%. The defendant’s expert had estimated a 10% royalty rate, including based on the availability of a manual refueling system.

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