Patents — Compulsory licence — Diazepam — Medicinal patent — Patent Act, s. 41(4) — First appeal from decision of Commissioner under new legislation — Royalty rate — Wrong principle to be shown or that Commissioner manifestly wrong — Royalty based on dosage sale price of appellant — Per kilo royalty rejected — Maintenance of research incentive — Cost of maintaining acceptance of the drug — Maintenance of research incentive — Return on capital — Absence of evidence of problems facing inventors in search for drug — No evidence whether other valuable drugs found in research — No evidence of importance of drug nor processes producing it — Value of use of invention — Willing licensor and willing licencee — Commissioner entitled to use his general knowledge and experience — Term as to exports — Licensee not restricted to source disclosed in application — Requirement as to price structure — Retention by Commissioner of power to amend — Requirement to sell under generic name rejected — Contrast with corresponding U.K. legislation.

The appellant appealed to the Exchequer Court the decision of the Commissioner of Patents made pursuant to s. 41(4) of the Patent Act, R.S.C. 1952, c. 203, amended 1968-69 (Can.), c. 55, relating to an application for compulsory licence by the respondent in respect of the medicine diazepam. A licence to import the medicine from Italy was granted by the Commissioner. It was made applicable to four patents owned by the appellant. The royalty payable by the licencee was fixed at 4% of the new selling price of the medicine in its final dosage form.

The appellant objected to the royalty as fixed by the Commissioner on the ground that it was manifestly too low because it was below the 11% which the Roche companies spend on research and was, therefore, inadequate to maintain research incentive alone besides affording no compensation for the expense of obtaining and maintaining medical acceptance of the drug and no return on the capital invested in research.

The appellant also objected to certain terms included in the licence by the Commissioner.

Held, per Thurlow, J.:

Finding as to royalty

The objection of the appellant as to royalty is rejected.

Entitlement of patentee under medical patent

The submission of the appellant as to royalty springs from a misunderstanding of what a patentee is entitled to by way of remuneration on the grant of a licence under s. 41(4) of the Act. A patentee, of a patent subject to licence under the section, does not have an unassailable complete monopoly right. Being subject to a licence in favour of anyone who can comply with the section is not a monopoly upon which a massive commercial enterprise may be built and afforded protection. [page94]

The area of protection available for an invention falling under the section is considerably less than is obtainable for other inventions.

The compensation to be paid to a patentee under the section is a reasonable sum for the value of the use of an invention having some intrinsic value. It is the advantage that the medicine being licensed has over known medicines and a known way of making them, that more than anything else, is the basis for assessing an amount to be paid as royalty. The compensation upon the privilege of competing with the patentee and diversion to the licencee business of which the patentee might otherwise have had a monopoly. The compensation is not equivalent to damages for infringement nor the profits which the licencee may make through the use of the invention. It is not compensation for the interference with the business of the patentee if left with the market to himself.

In fixing compensation, the Commissioner must ensure that the royalty will be consistent with the maintenance of research incentive and the importance of both the substance and the process. These are considerations to be borne in mind by the Commissioner when weighing the other facts before him as to the value of the use to be made by the licensee of the invention. The matter cannot be looked upon or calculated arithmetically.

General knowledge and experience of Commissioner

In the hypothetical situation of estimating royalty, it is open to the Commissioner to call in aid, as well as such material as appears in the record before him, his general knowledge and experience in such matters.

Lump sum royalty

It was not an error in principle to select as the base for calculation of royalty the net selling price of the licensee in dosage form and to reject a lump sum per kilo basis.

Basis of calculation in the United Kingdom

The principles applicable to the calculation of a royalty under the corresponding U.K. legislation differ from those applicable under s. 41(4) of the Canadian Act. The U.K. provision more closely approximates the measure of damages that might be recoverable in an infringement proceeding.

Terms of licence applicable to royalty

It is not possible in the drafting of a licence to foresee all problems that can possibly arise between a licensee and an unwilling patentee, and in the absence of suggestions from the patentee as to suitable amendments of the licence, it cannot be said that the Commissioner was manifestly wrong or that he acted on a wrong principle in failing to resolve in advance problems that can be resolved by the parties or by litigation.

The terms of the licence will be amended relating to bulk sales by the licensee restricting such sales to persons who manufacture and sell the medicine. It should also be amended to make clear the intention of the Commissioner in the use of the expression "calculates as having been made at arm's length." [page95]

Failure of applicant for licence to disclose

its price structure

The rules under the Patent Act call for the applicant for licence to describe concisely the price structure that the applicant proposes to establish for the sale of such medicine including a description of the forms in which it will be sold, classes of proposed customers, and prices at which each form will be sold to each class of customer. The rule does not require that a calculation of costs and of the profit involved in such prices be included.

(a)  Discretion of Commissioner on adequacy of application

The application does not say at what prices the applicant proposes to sell the drug to doctors or to hospitals nor about the upper limit of its proposed prices to those classes of customers. Although in the opinion of the Court, information contemplated by the rule has not been given, it is for the Commissioner to determine if, in his opinion, the information given is sufficient. The Commissioner found that the information given in the application was sufficient.

(b)  Oral hearing and opportunity to lead evidence

Moreover, in the present case, there was an oral hearing where the appellant had an opportunity to lead detailed evidence on the question and the appellant has no basis for complaint.

Request by patentee that applicant be required

to sell drug under generic name

Although the Commissioner has jurisdiction to impose a term requiring the applicant to sell the drug under its generic name, he exercised his discretion against the imposition of such a term and the Court should not interfere with the exercise of such discretion.

Retention by Commissioner of power to amend licence

The rejection of the request of the patentee that the Commissioner impose a term retaining the power to amend has not been shown to have been made on the application of any wrong principle or to be manifestly wrong.

Authority to grant a licence to sell products

in Canada and elsewhere

The Commissioner expressed his intention to impose no restriction on the sale by the respondent of its product. The licence does not extend beyond what is comprised in the unqualified word "sell" as used in the Act. The Commissioner did not exceed his jurisdiction in respect of this term of the licence.

Scope of the licence in relation to the application

Neither s. 41(4) of the Patent Act nor Rule 116B(1) of the rules under it requires the applicant to limit the scope of the licence applied for to the particulars of the information required by the rules.

The licence need not be restricted to importations from the sources disclosed in the application.

[Hoffmann-La Roche Ltd. v. L. D. Craig Ltd., Bell-Craig Pharmaceuticals Division, 48 C.P.R. 137, 56 D.L.R. (2d) 97, [1966] S.C.R. 313, 32 Fox Pat. C. 106; vard. 46 C.P.R. 32, [1965] 2 Ex. C.R. 266, 29 Fox Pat. C. 123; Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., 30 C.P.R. 59, 17 D.L.R. (2d)1 53, [1959] S.C.R. 219, 18 Fox [page96] Pat. C. 125; Hoffmann-La Roche Ltd. v. Delmar Chemicals Ltd., 51 C.P.R. 24, [1968] 1 Ex. C.R. 209, 36 Fox Pat. C. 115, apld; The King v. Irving Air Chute Co. Inc., 10 C.P.R. 1, [1949] S.C.R. 613, 9 Fox Pat. C. 10, consd; Aktiebolaget Astra Apotekarnes Kemiska Fabriker v. Novocol Chemical Mfg. Co. of Canada Ltd., 44 C.P.R. 15, 45 D.L.R. (2d) 662, [1964] Ex. C.R. 955; Rhone-Poulenc S. A. v. Micro Chemicals Ltd., 44 C.P.R. 193, [1964] Ex. C.R. 819, 25 Fox Pat. C. 134; affd 53 C.P.R. 140, [1965] S.C.R. 284, 29 Fox Pat. C. 27, refd to]

EDITORIAL NOTE: Since this decision is the first decision on an appeal from an award of compensation by the Commissioner of Patents under the new legislation relating to drug patents, it has added significance.

Guidance is given as to the kind of evidence that is required to be considered by the Commissioner of Patents in fixing compensation under s. 41(4) of the Act.

It would appear that the evidence to be adduced should include evidence relating to the problems faced by the inventor in his search for the discovery of the substance or the processes for its production. At the same time, on the opposite side of the coin, consideration should be given as to what other valuable discoveries were made in the course of the research.

Evidence should be led as to the importance of the drug from the point of view of the physician.

Evidence should be offered of the advantages or importance of the processes involved in the patented invention.

More specifically, it is indicated that the advantage obtained by the licensee for the use of the invention is of weight in the consideration of the Commissioner. In this respect, it would appear that the price structure of the applicant including his profit would give some measure to the importance of that use. But, the position of the patentee on this point is rendered more difficult by the holding that it is not an error of principle for the Commissioner not to require a detailed disclosure of such proposed price structure.

Moreover, the licence when issued does not include a term imposing a price structure on the licensee. Since no condition is imposed upon the licensee, he is not committed to the price structure disclosed. The applicant can, in any event, disregard the price structure disclosed in the application. In these circumstances, the requirement of a disclosure of price structure seems hardly to be material. As one of the purposes of the legislation is to achieve lower drug prices, it might be considered that promises of lower prices by an applicant should become a commitment.

Subsequent cases decided by the Commissioner show that he fixes a royalty of 4% of dosage sales price of the licensee whatever the evidence. It will be of interest to see if evidence such as outlined in this case will result in a different rate.

The Court held that the Commissioner is entitled to use his experience and knowledge in matters of licensing in fixing the compensation. It is of interest to observe that in this case (the first under the new legislation) it is not shown what rate that experience and knowledge would dictate. [page97]

It is also noteworthy that the applicant is not confined to import from the source disclosed in the application. As a practical matter, this could impose a difficult problem for the Food and Drug Directorate in checking the source of material to be sold in Canada.

During the Parliamentary hearings, the Food and Drug Directorate indicated that it would be able to monitor importations if given the source of the material to be imported into Canada. In the absence of a term requiring the licensee to maintain that source, the monitoring ephemeral.

APPEAL from a decision of the Commissioner of Patents 61 C.P.R. 243, granting a licence to the respondent under s. 41(4) of the Patent Act.

   R. Graham McClenahan and David E. Clarke, for appellant.

   D. S. Johnson, Q.C., for respondent.

   George Ainslie, Q.C., and Derek Aylen, Q.C., for intervenant.

THURLOW, J.:— This was the first to be heard of a group of six appeals from decisions of the Commissioner of Patents rendered following the coming into force in June, 1969, of amendments to s. 41 of the Patent Act. Section 41(4) as enacted by 1968-69 (Can.), c. 49, s. I reads as follows:

By the decision here in question the Commissioner granted to the respondent, Frank W. Horner Limited, [61 C.P.R. 243] a licence under patents numbered 647,701, 647,702, 671,044 and 725,187, all of which are held by the appellant, to import and sell a tranquillizing drug known as diazepam. The appellant markets this drug in dosage forms under the trade mark VALIUM. The patents cover processes for the production of diazepam and intermediate substances used in its production. By his decision the Commissioner also fixed the amount of the royalty payable by Horner at 4% of the not selling price of the drug in its final dosage forms.

The reasons for appeal as set out in the notice of appeal to this Court are "that the Commissioner of Patents proceeded on a wrong principle or was manifestly wrong on the evidence [FN1] in that:

[FN1] Vide Hoffmann-La Roche Ltd. v. L. D. Craig Ltd., Bell-Craig Pharmaceuticals Division, 48 C.P.R. 137 at p. 140, 56 D.L.R. (2d)97, [1966] S.C.R. 313 per Abbott, J.:

              "Under s. 41(3), the decision both as to whether a licence should issue, and if so the royalty to be paid, was one for the Commissioner to make. While an appeal lies from that decision, in order to succeed it is for the appellant to show that the Commissioner acted on a wrong principle or that, on the evidence, the decision was manifestly wrong: Parke, Davis & Co. v. Fine Chemicals Ltd. and Hoffmann-La Roche Ltd. v. Delmar Chemicals Ltd., supra, and The King v. Irving Air Chute Co. Inc ..."

[page99]

      8.   he erred in fixing royalty provisions that are inadequate;

Of these 17 reasons or grounds of appeal all but that numbered 11 appear to me to raise matters which, even if sustainable, are but grounds for amendment of the licence or for referral back to the Commissioner for reconsideration and amendment as may be necessary. Ground 11 on the other hand appears to raise a matter which, if sustained, would lead to the reversal of the decision to grant the licence. I have not, however, reached the conclusion that ground 11 should be sustained and accordingly I shall deal with the grounds substantially in the order in which they are set out, turning first to those concerned with the royalty set by the Commissioner, that is to say, grounds I to 6 inclusive.

For the purpose of reaching his decision on this question the Commissioner had before him the specifications of the four patents in question, the respondent's application and supporting documents, the appellant's counterstatement and supporting documents, including an affidavit by Mr. Robert Hunter, the respondent's reply to this counterstatement, the evidence offered by both parties at an oral hearing granted at the request of the respondent on the subject of the royalty to be awarded and written submissions on the subjects of royalty and terms submitted later by both parties. While I have the impression that this mass of material is unduly preoccupied with argumentation, conjecture and theory and is remarkably reticent about pertinent facts that might have served better to assist the Commissioner in reaching a proper conclusion, it should be noted at this point that no complaint was made, either in the notice of appeal to this Court or in the course of argument, either that ample opportunity had not been given to the parties to present their case or that the material before the Commissioner was not adequate to enable him to intelligently [page101] arrive at a royalty which would give due weight to all the relevant considerations. [FN2] Indeed the position taken by counsel for the appellant during the argument was that the material was ample for the Commissioner's purpose though he appeared at one point to suggest that the Commissioner was under some obligation to make further inquiry if the material was not sufficient to lead him to the conclusion sought by the appellant.

[FN2] Vide Parke, Davis & Co. v. Fine Chemicals of Canada Ltd., 30 C.P.R. 59, 17 D.L.R. (2d) 153, [1959] S.C.R. 219 at p. 233 and p. 228 and Hoffmann-La Roche Ltd. v. Bell-Craig, supra, at pp. 316-7 S.C.R.

In brief the salient facts appearing from the material are as follows:

In its counterstatement opposing the application the appellant contended that the royalty offered was inadequate, that the royalty to be fixed should amount to full compensation for what the appellant would lose by the grant of the licence and that it should be the amount per kilo calculated by reference to the appellant's costs as set out in Mr. Hunter's affidavit. Those costs were said to consist of three main elements viz. (1) the cost of basic research conducted by Roche companies amounting alone to 11% of their world sales of drugs, (2) the costs of obtaining and maintaining medical acceptance of Roche drugs in Canada, and (3) an addition for return or profit on capital employed in research and in the provision of medical information. On this basis the appellant's claim for royalty was formulated as follows, based on an average selling price per kilo during the six years 1963 to 1968 of $10,076.

      to the ratio of that cost to the sales of it

      and all similarly patented drugs

      medical acceptance of the drug per State-

      per paragraph 16 of the Affidavit 22.5% of

                                                    2,979.25 [page103] It is not unworthy of note at this point that while this calculation was founded on principles said to have been adopted by the Assistant Comptroller in the United Kingdom no portion of the cost of basic research appears to have been deducted in respect of research in respect of formulations and improved production techniques from which a licensee of the patented inventions would not benefit. That, however, may well be of minor significance since but a minor deduction for such costs was made by the Assistant Comptroller in the case relied on. It is also of interest to observe that Roche's Canadian prices for the drug are considerably higher than its prices in some European countries.

No figures were given with respect to the actual costs of the research leading to the invention of diazepam. Mr. Hunter expressed the view that to try to determine such costs would be unrealistic and unreliable. Nor was evidence offered of what problems were in fact faced by the inventor in his search for and discovery of the substance or the processes for its production or of what other valuable discoveries were made in the course of such research. Moreover, little was said of the importance of diazepam as a drug from the point of view of a physician into whose hands it is put as a useful tool. Indeed any assessment of its importance seems to have been left to such inference as may be drawn from the fact that the public can be induced to use it at, such prices and from the eagerness of others to participate in supplying it. Whatever inference might be suggested by these facts is, however, to be weighed with the fact that the advantages are not such that use of the drug would continue even after medical acceptance had been secured but would disappear if continuous promotion were not maintained. Nor was evidence led of the advantages or importance of the processes involved in the patented inventions.

I should add that counsel for the appellant was unable to distinguish in principle the case for royalty put forward in the present case from that which was put forward and rejected with respect to its chlordiazepoxide patent under the former s. 41(3) in the Bell-Craig, supra, and Hoffmann-La Roche Ltd. v. Delmar Chemicals Ltd., 51 C.P.R. 24, [1968] 1 Ex. C.R. 209, 36 Fox Pat. C. 115.

In his decision on the matter of royalty the Commissioner summarized the royalty claim put forward by Mr. Hunter and referred to the appellant's reliance on the method for assessing [page104] royalty adopted by the Comptroller General in the United Kingdom. He pointed out that there is a difference between the wording of the applicable United Kingdom statute and s. 41(4) of the Patent Act, and proceeded to discuss the principles established by the Courts under the former s. 41(3) of the Canadian Act. He then expressed his reasons for rejecting various bases for calculating royalty, including the per kilo basis urged by the appellant, the cost basis, and the bulk sale and bulk purchase price bases and proceeded as follows [at pp. 261-3]:

The first objection taken on the appeal was that the royalty so fixed was manifestly too low because at 4% of the sales price it was below the 11% which Roche companies spend on research and was therefore inadequate to maintain research incentive alone, besides affording no compensation for the expense of obtaining and maintaining medical acceptance of the drug and no return on the capital invested in research.

I do not wish by anything I may say to be taken as acceding to any part of this submission. For example, I do not accede to the suggestion that the cost of maintaining the level of the research programme being carried on by Roche companies provides the measure of what is required to maintain research incentive. Nor do I accede to the contention that the costs of Roche programmes to promote and maintain medical acceptance of its products must be included in the amount to be assessed for royalties. But without challenging details the submission as a whole appears to me to spring from a misunderstanding of what a patentee is entitled to by way of remuneration on the grant of a licence under s. 41(4) of the Act. His patent, as has been said in other cases, is subject to the compulsory licensing [page107] provisions. He has not the right to refuse licences or to dictate their terms as he would have if s. 41(4) were not part of the law. The Supreme Court appears to me to have expressed this position in discussing the former s. 41(2) when it said in Hoffmann-La Roche v. Bell-Craig, supra, per Abbott, J., at p. 144:

What a patentee has, therefore, from the time of issue of his patent is not an unassailable, complete monopoly right. His patent does indeed purport to give a monopoly of his invention but it is a monopoly which, because of s. 41, is subject to the right of anyone who can comply with the section to obtain the right to use the invention notwithstanding the patent. Such a monopoly is therefore nor capable of affording a foundation upon which a massive commercial enterprise, not by itself capable of being monopolized, may be built and afforded monopoly protection.

The section also contemplates that the patentee will be entitled to compensation for such use of the invention but the compensation to be paid is a reasonable sum for the value of such use and not for anything else such as the privilege of competing with the patentee and thus diverting to the licensee business of which the patentee might otherwise have had a monopoly. The compensation is not equivalent to damages for infringement nor to the profits which the licensee may make through use of the invention. Nor is it compensation for interference with business which the patentee, if left with the market to himself, might have been able to generate during the life of the patent. The invention presumably has some intrinsic value, some advantage over known medicines or known ways of making them and in my opinion it is for the use of the invention to obtain that advantage that the licensee is to be required to pay. Great or small as that advantage may be, it and it alone, [page108] as I see it, is the chose or thing for the enjoyment of which the licensee is to pay an appropriate amount and its value more than anything else is the basis for assessing an amount to be paid as royalty. Compare The King v. Irving Air Chute Co. Inc., 10 C.P.R. 1, [1949] S.C.R. 613, 9 Fox Pat. C. 10, per Rinfret, C.J.C., at p. 8:

And at p. 11:

Per Rand, J., at pp. 14-6:

Per Estey, J., at pp. 19-20:

and per Locker J., at p. 26:

Under s. 41(4), however, the royalty is to be set by the Commissioner and he is directed by the statute that in settling it, as well as in settling the terms of the licence, he is to have regard [FN3] to the desirability of making the medicine available to the public at the lowest possible price consistent with giving the patentee due reward for the research leading to the invention. The Supreme Court has also pointed out in the Parke, Davis and Bell-Craig, supra, cases that one of the matters that should be taken into account in deciding what is reasonable compensation in the particular circumstances is that the area of protection available for an invention falling within s. 41(1) is considerably less than is obtainable for other inventions and that for that reason the Commissioner should be careful to ensure that the royalty will be consistent with the maintenance of research incentive and with the importance of both the substance and the process.

[FN3] See Aktiebolaget Astra Apotekarnes Kemiska Fabriker v. Novocol Chemical Mfg. Co. of Canada Ltd., 44 C.P.R. 15 at p. 24, 45 D.L.R. 662, [1964] Ex. C.R. 955, per Jackett, P.

These (and such other matters as may one day be prescribed pursuant to ss. 41(4) and (14)) are, as I see it, all matters to be taken into account by the Commissioner -- if there is anything before him from which they can be evaluated -- but they cannot be looked upon or calculated arithmetically [FN4] and they are, in my opinion, simply considerations to be borne in mind by the Commissioner when weighing the other facts which he has before him as to the value of the use to be made by the licensee of the invention. I therefore reject the submission [page112] that the assessment of the royalty is manifestly too low for any of the reasons raised.

[FN4] Vide Jackett, P., in Hoffmann-La Roche Ltd. v. Bell-Craig Pharmaceuticals Div. of L. D. Craig Ltd., 46 C.P.R. 32 at p. 61, [1965] 2 Ex. C.R. 266, 29 Fox Pat. C. 123; vard. 48 C.P.R. 137, 56 D.L.R. (2d) 97, [1966] S.C.R. 313.

There is, moreover, as I see it, little reason to doubt the adequacy of the 4% royalty as fixed. There was no direct evidence of what a willing licensor of the use of the invention would have demanded or expected as a royalty -- partly because Hoffmann-La Roche does nor licence the invention -- or of the most that a willing licensee of it would be willing to pay. In either case something would turn as well on the other terms of the contemplated licence. The Gryphon licences, which are in evidence, are not concerned with diazepam and have particular terms as well which bear on the royalty agreed upon. In my view they offer nothing upon which to base an inference as to what royalty would be set by a willing licensor and willing licensee for diazepam.

Nor was there evidence, for example of the advantages, if any which diazepam has over, say phenobarbitol or over chlordiazapoxide so that an evaluation of the importance of the inventions involved in the parents might be made. [FN5] Indeed the need for a sustained program to maintain sales of diazepam in competition with other medicines known to be useful for the same purposes even after there has been an extensive program designed to introduce and gain medical acceptance of it, suggests if anything a lack of real importance in the inventions. If indeed there was or is merit in them it seems apparent that the Commissioner was simply left to glean what he could of it from the patent specifications. Nor was where evidence of the problems faced by the inventors of these inventions, of what obstacles had to be overcome to make the discoveries or of how much research was involved in them.

[FN5] A publication by Hoffmann-La Roche entitled "Valium" which bears on the subject appears to have been sent to the Commissioner (p.75) though for another purpose, by the respondent's solicitor on the same date as its written submission but the appellant's solicitor objected (p. 71) and the Commissioner decided not to use it (p. 70).

What, however, does appear from the material is that even if the use of diazepam in Canada over seventeen years amounts only to 800 kilos per year, 4% on selling prices of from $8,000 to $10,000 per kilo would total from $612,000 to $2,040,000 and this would be on a market which I would not estimate as more than 3% of the world market available to the patentee and the companies with which it is associated. In these circumstances I can see no reason or basis for treating 4% of the selling price [page113] of the drug in dosage form as being manifestly too low to be a reasonable royalty award.

It was also argued in conjunction with this submission that there was error on the part of the Commissioner in finding that if the patent were not subject to compulsory licensing it would be reasonable to assume that a willing patentee and a willing licensee bargaining on equal terms would fix a royalty at 10% of the net selling price and in proceeding from that position to make his assessment. It was said that there was either no evidence on which to reach such a finding or that the finding must have been based on the licensing agreements in evidence which for one reason or another did not support it. I see no reason to think that the finding was based on the royalty set by the licensing agreements in evidence as they are to my mind clearly inapplicable and the Commissioner does not say that he relies on them. However, it was in my opinion, open to the Commissioner in endeavouring to estimate as well as he could the royalty likely to be fixed in such a hypothetical situation [FN6] not only to use such material as there was in the record before him but to call in aid as well his general knowledge and experience in such matters. I can therefore see no basis upon which he can be said to have been manifestly wrong or that he acted on any wrong principle in making such a finding or assumption.

[FN6] Vide The King v. Irving Air Chute Co. Inc., supra, per Estey, J., at p. 18 C.P.R.

Another contention advanced while arguing this submission was that because of difficulties in defining "not selling price" for the purpose of computation of royalties the Commissioner should have fixed the royalty at a lump sum per kilo and that this would have eliminated both the difficulties and the variation of royalty per kilo that results from price changes where the royalty is set as a percentage of a price. In his reasons the Commissioner dealt with the choice of a base for calculation of royalties and in the course of so doing he rejected the suggested base, and certain other bases as well, in favour of the one adopted. It was not suggested that it was not open to the Commissioner to adopt the base which he chose and it must in any case, in my view, be borne in mind that what may, at first sight, appear most convenient as a base in a particular case may have manifest disadvantages in some other case arising under the same patent or patents. It has not been shown that any error in principle was involved in the Commissioner's [page114] selection and as under the statute the decision was his to make there is in my opinion no basis whatever for interfering with it on this appeal.

Finally it was said that the Commissioner erred in concluding that the principles applicable under s. 41(4) differed from those applicable under the corresponding United Kingdom legislation. In my opinion the principles are different, notably in that the royalty entitlement in the United Kingdom appears from the case relied on by the appellant to approximate more closely than does that under s. 41(4), the measure of damages that might be recoverable in an infringement proceeding. But whether that is so or not, having endeavoured to state above the measure of the patentee's entitlement under s. 41(4) as I understand it, it does not appear to me to be necessary for the purposes of this case to further consider its relationship to or to resolve its differences from a patentee's entitlement under the different legislation of the United Kingdom.

I therefore reject the appeal from the Commissioner's fixation of the royalty.

I turn now to grounds 7, 8, 9 and 10 all of which relate to terms of the licence which pertain to the calculation of the royalty. In putting these grounds forward the appellant's object appears to have been not to seek alteration of the terms so as to make them more to its liking but to induce the Court to think that workable provisions could not be worked out for the computation of royalty as a percentage of the selling price of the drug in dosage form and thus to persuade the Court to refer the matter back to the Commissioner for assessment of a royalty on a lump sum per kilo basis. For that reason, and because he did not want to be in the position of having suggested changes, counsel for the appellant while inviting attention to expressions in the licence and to problems that might arise on the terms if left unaltered declined (save as will later be mentioned) to be drawn into taking a position as to what changes would make the terms complained of acceptable. Accordingly what he sought as alternative relief on these grounds, in the event the Commissioner were not to be directed to fix a royalty on a per kilo basis, was that the matter be referred back to the Commissioner with a direction to settle workable royalty provisions.

To understand the objections raised it is necessary to set out the terms of the licence which have been attacked. They are: [page115]

What was said in objection to these terms so far as I have understood the points raised was as follows:

Counsel for the respondent sought at first to defend the wording of cl. 3 on the basis that the respondent did not intend to sell the substance in bulk and that the intent of the term was that if the respondent should sell any of the substance in [page117] bulk the purchaser was to be one who would manufacture and sell it in final dosage form. While not considering any amendment necessary he was content, if the Court should be of the view that an amendment was required, as was also counsel for the intervenant that the clause be amended by inserting between the word "person" and the word "will" in the seventh line the words "will itself manufacture into and sell in final dosage forms to customers at arm's length and such company or person". Without abandoning his other objections counsel for the respondent conceded that this amendment would sufficiently cure the particular objection. As the licence as presently worded authorizes sales in bulk it appears to me to be necessary, in order to have terms for calculation of royalty on all sales authorized by the licence, either to add provisions to cover the situation described or to restrict the sales in bulk, as the suggested amendment will do, to sales to persons who agree to process the material themselves and to keep the necessary records. The suggested amendment is probably somewhat more restrictive or confining than other methods of dealing with the matter might be but as amendment appears to me to be necessary and the respondent and intervenant are content with that suggested the licence will be amended so as to include the suggested wording.

Here again counsel for the respondent while taking initially the position that the expressions are sufficiently clear was I think content, if the Court should regard it as necessary, to see the licence amended by striking out the impugned expressions rather than have the matter referred back to the Commissioner. Later he took the position that if the amendment to cl. 3 referred to above were made the appellant's points under grounds 9 and 10 of the notice of appeal would disappear. However, when the amendment to cl. 3 has been made all but the final provision of the last sentence of cl. 3 appears to me to be surplusage which if left in the clause is more likely than not to be a cause of confusion particularly if some meaning is to be ascribed to it. The same applies to the words "or is calculated as having been made at arm's length" in cl. 13(b). My opinion [page118] is that these expressions should be deleted in the interests of clarity and if counsel cannot agree on the wording to be deleted the matter may be spoken to when application is made for judgment herein.

There seems little reason to doubt that some, if not all, of these matters could present problems of some difficulty that could lead to disputes. Moreover, while some of the problems do not appear to be very likely to arise, others, such as for example, the problem of giving away samples are perhaps not so unlikely. I do not think, however, that they are problems which must of necessity be resolved at this point. Some are problems of the extent of the licence which can be given under the wording of the statute itself and involve the question whether a particular act can be authorized, others as I see it would simply raise questions of fact as to what had been the sale price of products the sale of which was clearly authorized by the licence. I agree with the submission of counsel for the respondent that it is not possible in the drafting of such a licence to foresee and deal comprehensively with all problems that can possibly arise between a licensee and an unwilling patentee and as no suggestions have been made as to how the problems referred to can be forestalled by amendment of the licence I am not prepared to say that the Commissioner was manifestly wrong or that he acted on any wrong principle in failing to endeavour by further provisions in the licence to [page119] resolve in advance problems which, if they ever arise, can be resolved by litigation if the parties cannot find some happier way of putting an end to the dispute.

Save for the amendments referred to in 1 and 2 above, grounds 7, 8, 9 and 10 are accordingly rejected.

This brings me to ground 11 by which it is alleged that the Commissioner erred in permitting the application to proceed to the point where a licence was granted because in its application the respondent failed to disclose its price structure as required by the Patent Act and the rules thereunder.

Under s. 116B(1)(c)(viii) [enacted P.C. 1969-1318 SOR 69/331, s. 6] of the Patent Rules, P.C. 1855, SOR Con. 1955, p. 2510, made by the Governor in Council [FN7] respecting proceedings under s. 41 of the Patent Act an application is required to be in the prescribed form and to contain inter alia the following information:

[FN7] See s. 41(4) of the Patent Act as enacted 1968-69 (Can.). c. 49, s. 1.

In para. 14 of its application to the Commissioner the respondent set out the following:

      TABLE I

A comparison of these prices with those in an alleged price list of the appellant was also included in para. 14.

By its counterstatement the appellant opposed the grant of a licence inter alia on the ground that this paragraph complied only partially with the rule in that while the precise price of the imported substance, the precise manufacturing cost and the precise amount of proposed royalty were stated only a general description was given of other items making up some $8,000 of the applicant's prices on a per kilo basis, no amounts therefor were stated and that such general description did not indicate what profit was included and thus whether or not such profit was excessive.

In its reply to the counterstatement the respondent answered this objection by contending that a price structure rather than a cost and profit structure was what the rule required and that the rule had been complied with but it went on to add several [page121] paragraphs of additional information respecting its expected costs and profits. Thereafter the appellant by letter to the Commissioner requested permission to file a further reply thereto or alternatively an opportunity to answer it at an oral hearing. The Commissioner declined the request and in doing so expressed the view that the additional information contained in the reply was not required by the rules to be included in the application and that the application met the requirements of the rules in that respect. He also indicated his intention to disregard anything in the reply which he might conclude had been improperly included therein.

Thereafter in his decision the Commissioner dealt with the point as follows [at pp. 252-3]:

The substance of the appellant's submission on this point as put forward in the course of argument of the appeal was his suggestion that had the Commissioner had before him more information respecting the costs and profit involved in the respondent's proposed prices, as in the appellant's submission was required by the rule, he might have seen in it some good reason for refusing to grant the licence or for setting a higher royalty.

While there is no definition in the rules of precisely what is meant by the expression "price structure" and while the expression in its common usage does not appear to me to be one of any well defined meaning it appears to me that the scope of the term as used in the rule can be gathered from the contest of the rule itself. There what is required is a concise description of the price structure that the applicant proposes to establish for the sale of the medicine including (1) a description of the forms to be sold, (2) the classes of customers to whom it will be sold and (2) the approximate prices at which each form will be sold to each such class of customer. Nowhere in this does [page122] there appear to me to be any requirement that a calculation of costs and of the profit involved in such prices be included. On the other hand a statement that the applicant's prices to the retail pharmacist for its diazepam would be as set out in the table which followed and that it proposed to sell the forms mentioned in the table to pharmacists, doctors and hospitals at no more than the prices recited in the tables does not appear to me to say at what prices, whether approximate or exact, it proposes to sell the drug to doctors or to hospitals nor indeed to tell anything but the proposed upper limit of its proposed prices to such classes of customers. In this respect I would not therefore conclude that the information contemplated by the rule had been given.

That, however, is not the end of the matter and does not conclude the point in the appellant's favour. Under s. 116D(1) [FN8] of the rules the Commissioner is required to exercise and deal as therein set out with any application that "in his opinion, complies satisfactorily with sections 116B and 116C". Once he had roached the preliminary opinion that the respondent's application complied satisfactorily with ss. 116B and 116C and had thereupon proceeded to his examination of it and to direct service of it upon the patentee there was, as I read the rules, no point at which the sufficiency of the information contained in the application to comply with the requirements of s. 116B could thereafter be called in question by the patentee or by anyone else and no scope or room for objection or opposition to the application or to the grant of a licence existed save on grounds directed to the merits of whether good reason existed why a compulsory licence should not be issued. It appears to me that the sufficiency of the application to comply with the rules is a matter that is left by the statute and the rules to the judgment of the Commissioner. It, is for him to determine the

[FN8] "116D(1) Upon receipt of an application that, in his opinion, complies satisfactorily with sections 116B and 116C, the Commissioner shall examine the application as soon as possible and

              (b)  in any other case, instruct the applicant to serve a copy of the application on the patentee in the manner prescribed by subsection (2) and to file with the Commissioner proof satisfactory to him of such service."

[page123]

weight to be attributed to particular matters on which he may require information in order to reach a proper determination as well as how much information on particular aspects will be necessary or useful. When in the course of carrying out the procedure prescribed by s.116D the Commissioner reaches the conclusion that the application sufficiently complies with s. 116B it must I think be taken that he has considered the information contained in the application and concluded that what is there on a particular aspect of the matter is enough for him to deal with that aspect of the matter when the application is ultimately decided. Moreover, in view of his having in the present case held an oral hearing in the course of which counsel for the appellant had the opportunity to lead detailed evidence on the question and in view also of the information put before the Commissioner that the respondent could visualize its prices to some customers going as low as $2,000 per kilo of diazepam, I do not think the appellant has any basis for complaint that more detailed information as to the respondent's proposed prices to physicians and hospitals was not put before the Commissioner in so far as it may have been of interest on the merits of the problem involved in the fixation of an appropriate royalty. I therefore reject the appellant's submission.

Grounds 19 and 12 of the appeal raise questions in respect of the refusal of the Commissioner to include in the licence a term requiring Horner to sell its diazepam products under the generic name of the drug and not in association with a trade mark used only for this product. In this connection it was submitted that by not promoting sales in association with such a trade mark -- which in effect besides distinguishing the Horner product would become the name of the product itself to the medical profession -- a massive reduction in the respondent's proposed prices could be made and that this would better serve the purpose of s. 41(4) than competition in which the respondent would be free to spend as much as it saw fit on promotion of the sale of its product. In dealing with the suggestion in the course of his decision the Commissioner said [at p. 263]:

I do not share the Commissioner's doubt as to his authority, in settling the terms of a licence, to impose a term such as that suggested or to make the term itself conditional on the patentee undertaking to abandon the promotion and use of its trade mark for its competing product if the Commissioner is of the opinion that by so doing he can promote the objects of the statute. Had his doubt been the only reason given for his conclusion I might, therefore, have been inclined to refer the matter back to him for reconsideration as to whether on the merits the suggested term or some similar term or terms dealing with the same subject-matter should be included. However, it is plain that he also considered the problem on the merits, on the assumption that he had the authority to impose such a term, and that he came to the conclusion that he should not interfere with normal competitive business practices and that the introduction of competition by granting the licence without such a restriction would sufficiently meet the ends of the section. On the facts I see no reason to think that a restriction of the use of a particular trade mark would necessarily or even probably have the effect of preventing the respondent from spending money on the promotion of the sale of its products -- which expense would then undoubtedly be reflected in their prices -- or that a restriction on such promotion itself would necessarily or probably result in the kind of competition that is likely to achieve the ends of the section. The decision, which in any view of the matter was one for the Commissioner to make, is thus, in my opinion, not shown to be manifestly wrong or to have been made on the application of any wrong principle.

I reach the same conclusion on ground 14. The decision not to include a term under which either party could subsequently, [page125] apply for amendment of the terms of the licence in my opinion is not shown to have been made on the application of any wrong principle or to be manifestly wrong. I should, however, add that I am not persuaded that the authority to settle terms extends to including such a term and that had the Commissioner seen fit to include it consideration might have been required as to whether its inclusion was not based on a wrong principle.

Ground 15 is that the Commissioner exceeded his authority in granting a licence to sell products in Canada and elsewhere. By its terms the licence purports to authorize the sale of medicine in the preparation or production of which the invention has been used, "the sale thereof not being restricted to Canada only" and the complaint is that by the use of this expression the Commissioner purports to licence the sale in places outside Canada of medicine produced by use of the invention. This it was said goes further than what was asked for in the application, that is to say, a licence inter alia to sell medicine in the preparation or production of which the invention has been used. Under s.41(4) the Commissioner's authority to licence is restricted to licencing the doing of the things set out in the application.

In Rhone-Poulenc S.A. v. Micro Chemicals Ltd., 44 C.P.R. 193, [1964] Ex. C.R. 819 25 Fox Pat. C. 134; affd 53 C.P.R. 140, [1965] S.C.R. 284, 29 Fox Pat. C. 27, Noel, J. had occasion to consider the effect in a licence granted under the former s. 41(3) of a restriction to use of the invention for the manufacture of medicine and "to sell the medicine so prepared or produced by it, to be used in Canada." In the course of his reasons for judgment he observed at p. 207:

The problem in the Rhone-Poulenc case was, as I see it, quite different from that involved here but it seems likely that the passage cited from the judgment of Noel, J., is the reason why the Commissioner has, in my view. ex abundante cautela, expressed his intention to impose no restriction on the sale by the respondent of its product. I would therefore interpret the licence in that way, in which event, as I see it, what the licence purports to grant does not extend beyond what is comprised in the unqualified word "sell" in s. 41(1) and in the application as well.

Somewhat different language is used in the Commissioner's decision with respect to this point from that in the licence itself, and this was urged as supporting the contention that he was purporting to exceed his jurisdiction. The reasons, however, are not couched in strict technical language and in any case the wording of the licence itself, to which in my opinion there is no sound objection, governs. The point therefore fails.

The two remaining grounds of appeal, numbered 16 and 17 allege error in granting a licence that was broader than (a), was asked for, and (b), was authorized or intended by the Patent Act and rules. The point taken under these grounds was that the licence to import diazepam is not limited to importing diazepam manufactured by and purchased from a particular Italian company which was named in the application as the source from which the respondent proposed to obtain its supplies of the medicine. Reference was then made to Rule 116B(1)(c)(vii)(B) which reads:

and to s. 41(4) which provides that the Commissioner shall grant a licence only for what the applicant in its application [page127] specifies it will do. >From this it was argued that since the application specified only one source of diazepam to be imported the licence granted was broader than that applied for.

In my opinion this submission is devoid of merit. It ignores the effect of subpara. (a) of Rule 116B(1) which deals with the scope of the licence to be applied for by providing that:

The things or things referred to in s. 41(4) of the Act which the applicant must thus specify in his application and which thereupon become the definition of the extent of the licence applied for and which the Commissioner is to grant are thus simply to use, import and sell the invention as set out in s. 41(4). Nowhere does the section or the rule require the applicant to limit the scope of the licence applied for to the particulars of which information is required by subpara. (vii).

Here the application follows the prescribed form and requests a licence to import and sell medicine. The licence is expressed in the same terms and in my opinion does not go beyond what is thus applied for.

It was said, however, that even so the rule requiring the applicant to list its proposed sources of the drug must serve some purpose, that that purpose was to inform the Department of Health and Welfare of the sources of material to be imported and that the intention of the rule therefore must be that the licence is to be restricted to importation of material obtained from the listed sources as otherwise the purpose of the rule could easily be circumvented and defeated.

It is not clear to me precisely what purpose or purposes the requirement of disclosure of proposed sources was intended to serve but I do not think such purposes, whatever they may be, can override or govern what appears to me to be the plain [page128] meaning of s. 41(4), and Rule 116B(1)(b) coupled with the prescribed form to which it refers.

It appears to me moreover that to accede to the appellant's contention as to the effect of Rule 116B(1)(c)(vii)(B) would lead to a similarly restrictive effect for the other subclauses and thus to absurd or impractical results. For example, under (A) if the chemical or proper name of the drug changed, under (C) if the registration number in any named country changed, under (D) if the forms of the drug to be imported changed or new ones were added or under (E) if the nature of the preparation to be carried out or the person by whom it was to be done changed, in each situation whenever a change occurred a new application for a further licence would be required. I cannot think it likely that such a system would be helpful in achieving the object of the section to provide effective competition in the Canadian market and in my opinion no such restrictive effect on the licence is intended by the requirement of the rule. The rule itself is expressed in the present tense, it appears to me to call only for information as it exists at the time of the application and as I read it the scope of the licence obtainable is not affected by the extent of that information. These grounds of appeal as well accordingly fail.

The appeal therefore succeeds only in respect of the amendments which I have indicated will be made to cl. 3 and 13(b) of the licence. In all other respects it fails and will be dismissed. The respondent is entitled to its costs but subject to reduction by 10% in respect of the matters in respect of which the appeal has succeeded. I am inclined to think that in general no costs should be awarded to or against the intervenant in these appeals and that none should be awarded in this case. However, if counsel wishes to be heard on the matter I will hear his submissions when application is made for judgment herein. Counsel for the respondent may prepare a draft judgment in both official languages giving effect to the foregoing and may move for judgment accordingly.

Judgment accordingly.