Federal Court of Appeal revisits patent issues in NCS Multistage v. Kobold

A recent ruling by the Federal Court of Appeal in NCS Multistage Inc. v. Kobold Corporation provides critical clarification on three key aspects of Canadian patent law: claim construction, obviousness-type double patenting, and the proper approach to awarding lump-sum costs. This decision offers important guidance on interpreting claim scope, assessing patentable distinctiveness under the first-to-file regime, and ensuring procedural fairness in cost awards.

Background and trial decision

The parties to the proceeding, NCS and Kobold, are competitors that supply services and equipment for hydraulic fracking in the oil and gas industry.

At trial, the issues included: NCS’s allegations of infringement by Kobold of six of NCS’s patents; Kobold’s counterclaim alleging the invalidity of NCS’s patents; and Kobold’s counterclaim that NCS infringed Kobold’s 571 Patent. The patents at issue involved tools and sleeves used to drill multistage horizontal oil wells for hydrocarbons.

When assessing claim construction of the 571 Patent, the Federal Court applied the principle that it is impermissible to import limitations from dependent claims into the prior claims on which they depend. Kobold’s infringement allegations were directed to the embodiments without the annual barrier seal, and NCS argued claim 12 included the seal based on limitations of dependent claim 13 of the 571 Patent. The Federal Court rejected NCS’s argument, finding it a direct violation of the principles of claim differentiation. It agreed with the parties’ experts that there are several possible embodiments encompassed by claim 12 and if claim 12 contained an annular barrier seal, claim 13 would be redundant.

On invalidity and, in particular, obviousness-type double patenting, the Federal Court stated that the question to ask is whether there is “invention” or “ingenuity” between the first patent and the second patent, not whether the patents share overlapping embodiments. The Federal Court found that although claim 13 of the 571 Patent requires a seal arrangement, claim 16 can depend on claims with an unsealed annular gap, which represents a simpler solution and a different inventive concept than its parent patent. The Federal Court ultimately found in Kobold’s favour, dismissing NCS’s actions against Kobold and declaring that Kobold’s 571 patent was valid and infringed.

On costs, Kobold requested costs at the top end of Column V of Tariff B but provided no evidence of its legal fees. Despite this, the Federal Court indicated a preference for awarding lump sum costs and held that costs should start at the midpoint between 25-50%. After assessing the factors pursuant to Rule 400(3) of the Federal Courts Rules, the Federal Court held that costs ought to be elevated due to the unnecessary complexity of the proceeding resulting from the parties’ litigation conduct. The Federal Court awarded elevated lump-sum costs at 45% in order to incentivize efficient litigation and sanction unnecessary litigation conduct.

Key findings on appeal

On appeal, the Federal Court of Appeal considered NCS’s arguments that the Federal Court erred in (1) claim construction, (2) obviousness-type double-patenting, and (3) the lump‑sum costs award. Other issues raised on the appeal, including the infringement and validity of NCS’s patents, were dropped by NCS on the eve of the hearing.

Claim differentiation

The Federal Court of Appeal held that the claim construction ground of appeal turned on whether it was an error of law for the Federal Court to find that the Asserted Claims only encompass the gap embodiment and not the seal embodiment. Regarding the relationship between independent and dependent claims, the Federal Court of Appeal affirmed that an independent claim in a patent is broader and includes the subject matter of the claims that depend on it. Although the Federal Court of Appeal agreed with the Federal Court’s reliance on CanMar Foods Ltd. v. TA Foods Ltd., 2021 FCA 7, it emphasized that the limitations of dependent claims are not limitations of independent claims and thus not an implicit element of independent claims.

In view of the wording of claim 13, the parties did not dispute that claim 12 included embodiments with a “sealed annular barrier”. Accordingly, the Federal Court of Appeal held that the Federal Court erred in concluding that claim 12 only encompassed the gap embodiment and not the seal embodiment. Properly construed, claim 12 and claim 16 include both the gap embodiment and the seal embodiment.

Obviousness-type double patenting

NCS argued that the Federal Court’s error in applying the principles of claim construction to the Asserted Claims led it to incorrectly reject NCS’s obviousness-type double patenting argument.

The Federal Court of Appeal agreed that the Federal Court had identified the correct test and stated that although the issue of evergreening is no longer a concern under the current “first to file” patent regime, obviousness-type double patenting remains a ground of invalidity in Canada.

The Federal Court of Appeal held that it is necessary to determine the inventive concept of claims 12 and 16 and whether those inventive concepts are patently distinct from the claims in the parent patent. Finding that claims 12 and 16, properly construed, include both the gap and seal embodiments, the Federal Court of Appeal remitted the issue of obviousness type double patenting back to the Federal Court for re-determination.

Lump sum award

On costs, the Federal Court of Appeal set aside Kobold’s $1,800,000 lump-sum costs award and awarded Kobold the costs they had originally requested: the upper end of Column V of Tariff B ($621,820). Because NCS succeeded in part on appeal and the double patenting issue remains to be decided, the Court of Appeal remitted the assessment of the impact of the appeal on the revised costs award to the Federal Court.

The Federal Court of Appeal held that the Federal Court’s lump sum costs award was procedurally unfair on the basis it differed materially in form and magnitude from the costs requested by Kobold. In light of the parties’ agreement that there would be no opportunity to respond to costs submissions, the Federal Court of Appeal found the cost award was procedurally unfair due to NCS’s inability to test an award that NCS had no reason to anticipate because it was not requested by Kobold.

Lump‑sum awards based on a percentage of actual fees require sufficient evidence to ensure predictability and fairness, typically including a bill of costs and evidence of fees actually incurred with descriptions sufficient to assess reasonableness. The Federal Court of Appeal found that the evidentiary record lacked detailed fee evidence or an affidavit to justify the lump sum award.

Practical implications

The Federal Court of Appeal’s decision underscores the following principles:

• Claim construction: independent claims are broader than the claims that depend on them and generally encompass the subject matter of those dependent claims; however, limitations in dependent claims are not implicit elements of the parent claim.
• Obviousness-type double-patenting: the doctrine continues to apply to divisional patents under the first-to-file patent regime, and while applying the doctrine the focus is on whether the later claims are patentably distinct from the earlier claims; an overlap in embodiments does not necessarily defeat a second patent if the later claims are patentably distinct.
• Lump sum cost: a party conservatively requesting costs pursuant to Tariff B should not expect to receive a larger lump sum award, especially if no evidence of fees incurred are provided. In such situations, it is procedurally unfair for a court to award a lump sum award when the requesting party only sought costs pursuant to Tariff B.

Next Steps on re-determination

On remand, the Federal Court must reconsider obviousness-type double patenting in view of the Federal Court of Appeal's direction that the Asserted Claims 12 and 16 include both gap and seal embodiments. The overarching question for the Federal Court is whether the inventive concept of the Asserted Claims of the divisional patent is patentably distinct from claim 17 of the parent patent. The Court of Appeal emphasized that the analysis is not confined to overlapping embodiments and that the inventive concept of the Asserted Claims must be established based on their essential elements on a claim-by-claim basis.

The Federal Court previously found that claim 13 of the 571 Patent has the same inventive concept as claim 17 of the 830 Patent and suggested that claim 13 could be invalid for double patenting. The Federal Court, considering the gap embodiment in claim 12, also previously found that the Asserted Claims offered a simpler solution and different inventive concept to address the same problem as the 830 Patent, but this finding was based on construction excluding the seal embodiment.

The Federal Court will also have to revisit the issue of costs and, based on its re-determination as to the validity of the Asserted Claims, assess the quantum of costs to which the parties are entitled to.

If you have questions or need assistance with respect to allegations of patent infringement or invalidity, please contact DLA Piper (Canada) LLP's Intellectual Property group.