Large retailers have been sued for patent infringement in recent years in relation to distributing a supplier’s products that allegedly infringe a third party’s intellectual property. Though suppliers can sometimes be properly named as defendants in such actions, more often patentees have named only retailers. More generally, any Canadian business selling products made in whole or in part outside of Canada could itself be subject to a claim for patent infringement.
In these situations it is important for such businesses to have strong indemnities in place to ensure that they will be properly compensated for losses arising as a result of their defence of the lawsuit. However, even the strongest indemnity provides only a contractual basis to sue the supplier of a product that is the subject of a patent infringement case against the retailer selling the product, in the event that the supplier of the infringing product refuses to compensate covered losses. In addition, in a subsequent action for breach of contract the supplier of the infringing product may attempt to relitigate the underlying issues relating to the validity of the patent and its infringement, complicating matters and making enforcement of the indemnity more expensive.
This blog post discusses an infrequently used provision of the Federal Courts Rules that may provide additional protection to a retailer in this situation. Similarly, the options described in this blog may be used by suppliers who are sued directly to ensure that any indemnity to their benefit is respected.
Rule 194(b): Additional Protection
A defendant may commence a third party claim in the Federal Court “against a person who is not a party to the action, who the defendant claims is or may be liable to the defendant for all or part of the plaintiff’s claim.” Despite this, third party claims against suppliers are uncommon because the Federal Court has only statutory jurisdiction and matters of contract law are typically within the jurisdiction of the Superior Court. Similarly, third party claims by suppliers against indemnifiers are rare.
Interestingly, a decision of the Federal Court of Appeal earlier this year held that the Federal Court had jurisdiction to determine whether a patent infringement action had been settled by contract, and if so to enforce the settlement. The Federal Court of Appeal explained that “the Federal Court has jurisdiction when the contract law issue before the Court is part and parcel of a matter over which the Federal Court has statutory jurisdiction, there is federal law essential to the determination of the matter, and that federal law is valid under the constitutional division of powers.”  There is no recent judicial consideration of this issue that would confirm extending the application of this decision to allow a third party claim to recover losses from a supplier in an ordinary situation. Older cases suggest that the Federal Court does not have jurisdiction to grant that relief.
All of which brings us to Rule 194(b) which gives the Federal Court the power to add another person to the action, who the defendant claims “should be bound by the determination of an issue between the plaintiff and the defendant.” Retailers may be able to rely on Rule 194(b) to add a supplier as a party, not to seek monetary relief – but rather for the purpose of making an order binding the supplier to the result of the action. Suppliers may similarly benefit when sued directly by patentees.
From the retailer’s perspective, the potential benefits of such an order are threefold:
- The supplier could not later challenge the Federal Court’s order relating to validity or infringement of the patent, which would greatly simply any future proceedings.
- Bringing the supplier into the action removes the retailer as the only face of the litigation. Where public relations are potentially significant, naming the supplier potentially directs attention in a more appropriate direction.
- The threat of such a motion could provide leverage necessary to bring the supplier to the table to negotiate more favorable indemnification terms.
From the supplier’s perspective, the potential benefits of such an order are the same but would apply further down the supply-chain to any company that has indemnified the supplier for the alleged infringing activity.
Rule 194(b) is meant to avoid a multiplicity of proceedings and inconsistent findings. The threshold for granting leave under Rule 194(b) is arguably low. The defendant must simply demonstrate that adding the third party would “not be superfluous or without useful purpose”. Further, A third party’s presence does not have to be “necessary” in order for it to be added under Rule 194(b). There must simply be a “good reason” for adding the third party.
An indemnity agreement provides standard protection for retailers or potentially suppliers when defending against a patent infringement action. Rule 194(b) of the Federal Courts Rules can serve as a useful tool for strengthening that protection.