Case Summary and Remedies Discussion Re: Schmeiser v. Monsanto - Supreme Court of Canada

The Trial Decision:

In 1998 Monsanto started an action claiming that Schmeiser (corporate and personal defendants) was growing its genetically modified (GM) Roundup Ready™ canola without a license, therefore infringing the Monsanto patent. Monsanto had been marketing Roundup Ready™ canola under the terms of a Technology Use Agreement (TUA) under which growers paid Monsanto $15 per acre for the rights to grow the genetically modified canola.

Section 42 of the Patent Act gives a patentee, or owner of a patent, "the exclusive right, privilege and liberty of making, constructing, and using the invention and selling it to others to be used."

At trial, MacKay J., defined the issues as:

• the admissibility of evidence of the tests conducted on samples of Schmeiser’s canola,
• the validity of the plaintiffs' patent,
• possible waiver of patent rights by the plaintiffs,
• infringement of the patent,
• the remedies applicable if there be infringement, and
• costs.

Considerable testimony centered around the possible source of the seed and the sampling and testing of canola growing in Schmeiser’s fields, but in the end MacKay J. found the evidence to be relevant and admissible.

With respect to validity of the patent, MacKay J. noted that the usual bases of invalidity, based on prior art or insufficiency of the disclosure, were not raised. He rejected arguments that the subject matter of the patent was a natural process, and could not be contained, and that the Plant Breeders’ Rights Act precluded patent protection for patents related to plants. He found the patent to be valid, stating "Here it is the gene and the process for its insertion which can be reproduced and controlled by the inventor, and the cell derived from that process, that is the subject of the invention."

With respect to possible waiver by Monsanto of its patent rights, MacKay found that Monsanto had taken efforts to control its use, citing the Monsanto contracts and fees for use, their monitoring efforts, and their efforts to remove plants where they were found to have spread into fields where they were not wanted. Monsanto had therefore not waived any of its rights.

MacKay J. rejected arguments that Schmeiser had not intended to infringe the patent. He stated it to be well settled that intention is immaterial, for infringement occurs when the invention is taken, regardless of the intention of the infringer. He found that the source of the seed was not significant to determining infringement, and found that in 1998 Schmeiser planted seed from the 1997 crop which either knew or ought to have known was Roundup Ready™.

Schmeiser’s principle defense was that since he had not sprayed the crop with Roundup™, he had not "used" the invention as the inventor intended, and so had not used the patented gene or cell. MacKay J. rejected that argument, stating that the patent’s utility did not define its purpose or possible uses, and that the claims were to the gene and cell, not to the use of them in any particular fashion.

In the end MacKay J. stated that:

"In my opinion, whether or not that crop was sprayed with Roundup during its growing period is not important. Growth of the seed, reproducing the patented gene and cell, and sale of the harvested crop constitutes taking the essence of the plaintiffs' invention, using it, without permission. In so doing the defendants infringed upon the patent interests of the plaintiffs."

With respect to remedies, MacKay J. made a declaration of validity, but only to the extent it was argued at trial. He also granted an injunction against the corporate defendant, Schmeiser Enterprises Ltd., and against Mr. Schmeiser personally, restraining them from growing Rounduo Ready™ canola. He granted an order that Schmeiser deliver up any Roundup™ tolerant plants or seeds from the 1997 or 1998 crop.

Monsanto had claimed general damages on behalf of the Canadian licensee, Monsanto Canada, in the amount of their lost royalties of $15/acre for a total of $15,450, and in addition claimed on behalf of the American owner of the patent, Monsanto U.S., for Schmeiser’s profits from the crop which Monsanto argued amounted to $105,000. MacKay J. denied the two separate claims, stating that a single plaintiff would not be allowed both claims, and that even if allowed the damages award would need to be subtracted from the profits to avoid unjust enrichment. The Monsanto plaintiffs elected an accounting of profits, and dropped the claim for general damages.

Schmeiser argued there were no measurable profits earned by sale of the 1998 crop. MacKay J. characterized this as an argument that Schmeiser would have earned the same profit from sale of a crop that did not include the patented genes and cells. He found that it is the profit from sale of that crop that plaintiffs may claim, not the difference between sale of that crop and sale of an alternative crop that was not grown. He declined to accept the figure of $105,000, citing further expenses that should be deducted, and ordered the parties to agree on a figure, failing which he would award general damages of $15,450 plus an amount that could be established by Monsanto U.S. The parties later settled on an award of profits in the amount of $19,832.

MacKay J. declined to award exemplary damages or any damages against the personal defendant Schmeiser.

MacKay J. allowed the action and stated:

"I find on a balance of probabilities that the growing by the defendants in 1998 of canola on nine fields, from seed saved in 1997 which was known or ought to have been known by them to be Roundup tolerant, and the harvesting and sale of that canola crop, infringed upon the plaintiffs' exclusive rights under Canadian patent number 1,313,830 in particular claims 1, 2, 5, 6, 22, 23,  27, 28 and 45 of the patent."

A separate hearing was held with respect to costs, and counsel fees were fixed at $39,000 and disbursements at a maximum of $102,000. Monsanto’s legal bill was $726,768.

Schmeiser appealed the finding of infringement, the award of damages and the granting of the injunction.  Monsanto cross-appealed on the basis that the award of damages was too low.

Sharlow J.A. for the Court of Appeal held that the trail judge had correctly construed the patent to cover the claimed gene and cell, and upheld the trial decision that use of the properties of the gene and cell was not required to find infringement.

The Court also held that the source of the canola seed was not particularly material, and rejected Schmeiser’s arguments based on conflicting rights, the possibility that an innocent could be found to infringe, and that unconfined release constituted waiver. The court did note that Roundup Ready™ canola could spread onto a farmer’s land without his knowledge, and then the farmer could become aware of its presence but simply tolerate it and do nothing to promote it. The Court held that the present case was not such a case, and so they did not need to decide whether Monsanto could obtain a remedy against such an "innocent infringer" on the basis that intention was irrelevant.

The Appeal Court upheld the award of an injunction, and quantification of the profits. The Court confirmed the trial finding that it is the profit from sale of the crop that was 

grown that plaintiffs may claim, not the difference between sale of that crop and sale of an alternative crop that was not grown.

In a separate judgment with respect to costs, the parties were ordered to bear their own costs of the appeal.

Schmeiser appealed to the Supreme Court of Canada.

McLachlin C.J.C. and Fish J. (Major, Binnie, and Deschamps JJ. concurring) wrote for the majority, and started out by emphasizing they were not concerned here with the innocent discovery by farmers of "blow-by" patented plants on their land or in their cultivated fields, nor with the scope of the respondents' patent or the wisdom and social utility of the genetic modification of genes and cells stating: "Our sole concern is with the application of established principles of patent law to the essentially undisputed facts of this case." The Majority emphasized that they left it to Parliament to address any moral concerns about gene manipulation.

With respect to validity, the Majority noted that Monsanto’s patent for a cell and gene were somewhat analogous to claims allowed by the Commissioner of Patents, and not contested in the Supreme Court’s recent decision in Harvard Mouse. Whether or not patent protection for the gene and the cell extends to activities involving the plant is not relevant to the patent's validity, and the Majority pointed out that many patents make use of natural processes in order to work. They found the patent to be valid.

The Majority rejected the finding of the Minority (Arbour, Iacobucci, Bastarache, and Lebel JJ.) that the cell claims were only valid up the point where the cells multiplied, and became then a plant. The Minority would have limited the claims solely to genetically modified chimeric genes and cells in the laboratory prior to regeneration, and would have denied protection to the plant. In their decision, the Majority found it unnecessary to decide that the plant per se was protected by the patent.

Contrary to the view of the Trial and Appeal courts, the Majority was not inclined to the view that Schmeiser had "made" the cell within the meaning of Section 42 of the Patent Act stating: "Neither Schmeiser nor his corporation created or constructed the gene, the expression vector, a plant transformation vector, or plant cells into which the chimeric gene has been inserted." The Majority however found it unnecessary to express a decided opinion on that issue since they found, after an exhaustive analysis of the law, that he had infringed by "using" the "stand-by or insurance utility" of the properties of the patented cells and genes in his crop.

Mere possession without use is not contrary to Section 42 of the Patent Act, but it raises a presumption of "use". Where there was possession in a commercial context, "use" was more likely to be found since any economic or commercial benefit derived from an invention belonged to the patent holder. There was no doubt that Schmeiser was a commercial farmer and in possession of the patented genes and cells, and the court stated:

"Thus, a defendant in possession of a patented invention in commercial circumstances may rebut the presumption of use by bringing credible evidence that the invention was neither used, nor intended to be used, even by exploiting its stand-by utility."

The Majority found then that intention could be relevant in rebutting the presumption of use:

"While intention is generally irrelevant to determining whether there has been "use" and hence infringement, the absence of intention to employ or gain any advantage from the invention may be relevant to rebutting the presumption of use raised by possession."

The Majority thought perhaps Schmeiser’s failure to spray with Roundup™ was an attempt to rebut the presumption, but held that Schmeiser failed to rebut it because he did not take into account the commercial benefit provided by the stand-by or insurance utility of the properties of the patented genes and cells. These properties allowed Schmeiser the 

benefit of being able to spray his crop with Roundup™ if the need arose while the crop was growing. The Majority also mentioned there was further commercial benefit, not mentioned in argument, in that there was also an opportunity to "brown-bag" the seed grown to other farmers who did not want to pay the royalty to Monsanto.

Thus the Majority held that Schmeiser had infringed by using the patented genes and cells, and so they did not have decide definitively whether he had also made them or sold them to others to be used within the meaning of Section 42.

The lower courts held that Schmeiser had infringed by planting, growing, harvesting, and selling the crop containing the patented cells and genes. Essentially by having the patented cells and genes in his field he was infringing. It was accepted at trial that the GM canola, and would be found in many field by chance, since it could drift and cross-pollinate. By their decision that simple presence of the genes and cells in a field constituted infringement, and intention was irrelevant, the lower courts had left it open for a patent holder to successfully sue an "innocent infringer".

The Majority in the Supreme Court set out how the "innocent infringer" could rebut the presumption of use saying:

"Further, the appellants did not provide sufficient evidence to rebut the presumption of use. It may well be that defendant farmers could rebut the presumption by showing that they never intended to cultivate plants containing the patented genes and cells. They might perhaps prove that the continued presence of the patented gene on their land was accidental and unwelcome, for example, by showing that they acted quickly to arrange for its removal, and that its concentration was consistent with that to be expected from unsolicited "blow-by" canola. Knowledge of infringement is never a necessary component of infringement. However, a defendant's conduct on becoming aware of the presence of the patented invention may assist in rebutting the presumption of use arising from possession."

Thus while the lower courts had left the "innocent infringer" at the mercy of the patent holder, the Majority decision in the Supreme Court allows such an innocent to rebut the presumption of use.

The "innocent infringer" is technically still not out of the woods. Since the Majority held that Schmeiser was not an innocent infringer, they never decided definitively on the issue of whether, by growing and selling the crop containing the patented cells and genes, Schmeiser had made or sold them to others to be used within the meaning of Section 42. By indicating that they were "not inclined to the view" that he had, some comfort may be had for the innocents.

While upholding the findings of validity and infringement, the Majority overturned the award of profits from the Schmeiser crop in the amount of $19,832, holding that:

"It is settled law that the inventor is only entitled to that portion of the infringer's profit which is causally attributable to the invention…………….... This is consistent with the general law on awarding non-punitive remedies. …………… A comparison is to be made between the defendant's profit attributable to the invention and his profit had he used the best non-infringing option".

This is in contrast to the presumably not so settled law found by the Appeal Court:

"The Trial Judge rejected this argument because, as he said …….. it is the profit from the sale of the infringing crop that Monsanto may claim, not the difference between that profit and the profit from the sale of an alternative crop that was not grown……… In my view the Trial Judge was correct on this point……….…..

On this accounting procedure, I believe one has to look at the profits that the appellant actually made through the infringing acts, not the profit that he could have made had he used a non-infringing method ."

The Majority found that there was no causal connection since the patented genes and cells contributed nothing to the profit from the crop. Monsanto was therefore entitled to nothing on their claim for an accounting of profits. Further, since Monsanto had elected to pursue the remedy of an accounting of profits instead of damages, damages were not now available and so Monsanto received nothing.

In view of the mixed result, the Majority ordered that each party should bear its own costs throughout.

Thus the parties seem to have battled to a draw. Monsanto saw their patent held valid and infringed. Schmeiser did not have to pay Monsanto a cent for damages, profits, or costs.

Monsanto’s stated goal in pursuing Mr. Schmeiser was to discourage farmers from seeding brown-bag seed, and thus create a level playing field for those farmers who comply with their requirements for licensed use of their GM seed. Other chemical and seed companies are faced with similar problems in finding a satisfactory method of profiting from their research. The available remedies under Canadian law might actually be inadequate to that task.

Canadian competition law forbids tied selling, whereby a company refuses to sell a customer one product, seed for example, unless they buy another competitively available product, like the chemical to use on the crop seeded.

Contracts may include severe "liquidated damages" clauses which, for example, might say that a farmer who breaches the contract will forfeit his entire crop. Where a license fee is $20/acre, and the crop is worth $200/acre, a court would be likely to find the "liquidated damages" clause bears no relation to an honest estimate of the losses incurred and therefore is in fact a "penalty clause" and unenforceable.

Canadian law respecting remedies for infringement are similarly not particularly discouraging to infringers. In the United States, if intentional and willful infringement is found, triple damages are awarded, providing a very real disincentive to infringement. In Monsanto’s case, if that law applied in Canada, and the court had found that Schmeiser had intentionally and willfully infringed Monsanto’s patent, they would have been entitled to three times their usual royalty of $15/acre, or $45/acre.

As the trial judge found however, general damages would have amounted only to what Monsanto lost, the royalty or license fee of $15/acre. He left it open to Monsanto US to prove added damages, but these were not specified, and never were pursued. It is hard to imagine what they might have been. Damages for patent infringement in Canada, like those for breach of contract, are compensatory, ie. they are designed to either compensate the patent holder for what he lost, his damages, or deprive the infringer of his illustrated-gotten gains and turn them over to the rightful owner in an accounting of profits.

Thus, as is the case with genetically modified crops, where the patented product is readily reproducible, difficult to detect, and geographically spread over 100 million acres or so of cropland in the prairies, infringement can be very difficult to monitor. Further, farmers are not by nature particularly averse to risk, and it can be a reasonable option to seed brown-bag seed, and take a chance that the patent holder will not find out. The risk could be quite minor, especially if the fields are remote from public road allowances and the like where an investigator could readily and legally access it.

If caught, the farmer will only be required to do what he would have had to do to grow the crop legally - compensate the patent owner for what he lost, the license fee that he avoided paying in the first place. The damages situation in patent infringement involving a generally levied set license fee, such as in the Monsanto case, is much like the damages available in insurance law where an insurer refuses to pay a claim. In the end, if the insured pursues an action and wins, the insurer is ordered to do what he should have done in the first place, pay the claim. Theoretically a no-lose situation for the insurer.

A big difference is the "utmost good faith" obligation of insurers in dealing with their insured, and the availability of significant punitive damages to encourage fair dealing. No such obligation is put on a farmer dealing with a chemical or seed supplier. Monsanto sought exemplary or punitive damages, which are awarded to punish the infringer for conduct that the court feels should be condemned. Such an award was denied, and is very rarely awarded in patent cases.

Monsanto pursued an accounting of profits in an effort to get a large award against Schmeiser, and discourage infringement. A general damages award of $15/acre would not be a deterrent since it is only what the compliant farmer had to pay anyway.

The Supreme Court, however, has now settled the law so that only those profits that are shown to be earned "as a result of the infringement" will be available. Thus such an award will of course depend on the size of the crop and the price received for it, which a can vary dramatically, and in recent times it would be safe to say that there is often no profit at all. Then even if there is found to be a profit, it is only that portion of the profit that can be attributed to the infringement that would be allowed - something for a multitude of agricultural economist experts to do battle over.

Where a farmer is "caught" growing brown-bag seed, an injunction will be granted either after a trial or in a settlement agreement by consent. There are of course large disincentives to breaching an injunction. Monsanto has publicized that one of the penalties for breaching their contracts or infringing is refusal of access to the seed and the benefits that can be derived from it. The brown-bagger will have to consider that effect as well, although on the other hand Monsanto’s patent will expire in 2010.

As I recall, there is at the University of Chicago a school of thought to the effect that economic advantage is the only reason to fulfill a contract. An economic breach is justified when breaching the contract will result in greater economic reward than fulfilling the contract. The same theory can be applied to patent infringement - patents are after all is said and done, strictly about economics. When chemical and seed companies commonly print ads in farm newspapers that show hand-cuffs, and describe contract breaches and patent infringement as "crimes" they are misleading their customers in order to protect their own economic interests. Debtor’s prisons have been out of fashion for some time now.

In the end, protection for products such as Roundup Ready™ canola is perhaps most effectively provided by the fact that, while being willing to take risks, farmers for the most part are law-abiding and also reluctant to get into legal battles. A great many also recognize that the technology embodied in today’s seed and chemicals has value that they are willing to pay for.

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