Question 4 of 7: Canadian Patents and the Alternatives

Question 4: Canadian Patents and the Alternatives (15 marks)

Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.

Part A — A working definition of a Canadian patent

A Canadian patent is a right granted by the federal Crown, through the Canadian Intellectual Property Office under the Patent Act (RSC 1985, c. P-4), that gives the patentee the exclusive right to make, use and sell the claimed invention in Canada for twenty years from the filing date, in exchange for a full public disclosure of how to make and use it. Three features of that definition are worth stating explicitly because candidates routinely get them wrong. It is a negative right — it lets the patentee exclude others, and does not by itself confer the right to practise the invention, which may be blocked by someone else's patent or by regulation. It is territorial — a Canadian patent has no effect in the United States or the European Union, and international filing is managed through the Paris Convention priority year and the Patent Cooperation Treaty. And it is a bargain: the monopoly is the price the public pays for the disclosure, which is why an inadequately disclosed patent is invalid.

Part B — Basic requirements for preparing a patent

Two sets of requirements have to be met at once: the substantive tests the invention must pass, and the formal content the application must contain.

Substantively, the subject matter must fall within the statutory definition of an invention — an art, process, machine, manufacture or composition of matter, or an improvement thereof — and must be novel (not anticipated by any prior public disclosure anywhere), useful (it must work and have a practical purpose; utility must be demonstrated or soundly predicted at the filing date), and non-obvious to a person skilled in the art at the claim date.

Formally, the application must contain an abstract; a specification that describes the invention in enough detail to enable a skilled person to make and use it, including the best mode known to the inventor for a machine; drawings where the nature of the invention admits them; and, most importantly, claims that define the boundary of the monopoly in words. The claims are the legal instrument; the description merely supports them. In practice the preparation work is a prior-art search to establish what is already known, an inventorship determination and confirmation of ownership (an employer does not automatically own an employee's invention in Canada absent contract or a duty to invent), a decision on the filing route, and payment of filing fees, followed by a request for examination — which must be made within four years of filing under the current rules, because examination in Canada is not automatic — and maintenance fees thereafter.

Part C — Two people with the same idea

Canada has been a first-to-file jurisdiction since 1 October 1989. The patent is awarded to the applicant with the earliest filing date (or earliest validly claimed priority date), regardless of who conceived the invention first. The engineering consequence is blunt: laboratory notebooks establish inventorship and can defeat an allegation of derivation, but they do not win a race that was lost at the patent office counter. Where two people genuinely arrive independently, the later filer's options are to challenge the earlier patent's validity, to design around its claims, to license it, or — if they were practising the invention before the other's filing date — to rely on the limited prior-user right under section 56.

Part D — Conditions under which a patent is not available

A patent will be refused, or granted and later invalidated, in the following circumstances. Prior public disclosure. Any enabling disclosure anywhere in the world before the claim date destroys novelty — a conference paper, a trade-show exhibit, an offer for sale or an unprotected demonstration to a customer. Canada is unusual in offering a twelve-month grace period for disclosures originating from the applicant, but relying on it forfeits patentability in most other countries, which have no such grace. Obviousness. An invention that a skilled person would have reached by routine work from the prior art is unpatentable however commercially valuable it is. Lack of utility, including inoperability and overbroad promises of usefulness. Excluded subject matter: mere scientific principles and abstract theorems are excluded by section 27(8); so are methods of medical treatment, higher life forms, and, generally, a computer program considered as such, though a program that is part of a system solving a practical problem may be claimable. Insufficient disclosure, where the specification does not enable the skilled person to work the invention. And procedural loss — missing the examination request deadline or failing to pay maintenance fees.

Part E — Protecting the idea when a patent is unavailable

The principal alternative is a trade secret: keep the invention confidential and rely on the law of confidence, non-disclosure agreements, employment terms, access compartmentalisation and physical security. Unlike a patent it has no term limit, no registration cost and no disclosure requirement, but it protects nothing against independent discovery or lawful reverse engineering, and once leaked it is gone permanently. That is a commercial trade-off, and it is quantifiable.

Given. The invention protects a margin of CAD 150,000 per year. The company's cost of capital is 8 per cent. A patent runs 20 years from filing with about 3 years to grant, so roughly 17 years of enforceable exclusivity, and costs about CAD 12,000 to prepare and prosecute with a further CAD 4,500 present value of maintenance fees. Kept as a secret instead, the protection is assumed to survive with a constant annual hazard of disclosure λ.

Find. Which instrument is worth more, and at what leak hazard the two are indifferent.

1. Value the patent as a finite annuity. $$PV_{pat}=R\,\frac{1-(1+i)^{-N}}{i}=150{,}000\times\frac{1-1.08^{-17}}{0.08} =150{,}000\times 9.1216=\text{CAD }1{,}368{,}246$$ Net of preparation and maintenance, CAD 1,351,746.
2. Value the trade secret as a decaying perpetuity. If the secret survives with constant hazard $\lambda$, the expected present value of the margin is $$PV_{sec}=\frac{R}{i+\lambda}$$ because the hazard discounts the cash flow exactly as an interest rate does. At a realistic $\lambda=0.15$ per year (an expected survival of under seven years for something embodied in a product a competitor can buy and dismantle), $PV_{sec}=150{,}000/0.23=\text{CAD }652{,}174$ — the patent is worth CAD 716,072 more.
3. Find the indifference hazard. Setting $PV_{sec}=PV_{pat}$ and solving, $$\lambda^{*}=\frac{R}{PV_{pat}}-i=\frac{150{,}000}{1{,}368{,}246}-0.08 =\boxed{0.0296\ \text{per year}}$$ an expected secret life of $1/\lambda^{*}=33.8$ years. So the trade secret only wins if the process is genuinely un-inferable from the product and can be expected to hold for more than three decades. That is the Coca-Cola case, and it is rare; for anything a competitor can buy, section and measure, the patent is the better instrument.

Beyond the trade secret, three further instruments are available and are often the right answer. An industrial design registration protects the visual features of shape, configuration, pattern or ornament of a finished article for up to 15 years from filing — the correct instrument when what is distinctive is the appearance rather than the function. A trade mark protects the brand under which the product is sold and is renewable indefinitely, which is why a company whose technical advantage will lapse in twenty years invests in a name that will not. Copyright arises automatically in software source code, documentation and drawings. And where the objective is merely to stop a competitor patenting the idea, a defensive publication puts the disclosure into the prior art cheaply and permanently. In practice these are combined: patent the mechanism, register the housing as an industrial design, hold the process parameters as a secret, and build the brand.