Know Your Role: Federal Court Considers its Jurisdiction

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January 29, 2021

In the recent case of McCain Foods Limited v. J.R. Simplot Company, 2021 FCA 4 (“McCain Foods”), the Federal Court of Appeal took up the issue of the jurisdiction of the Federal Court of Canada.  In particular, the Court considered the circumstances under which it had jurisdiction to hear claims that require, in part, the interpretation of a contract.  The Court of Appeal’s holdings in McCain Foods regarding the Federal Court’s jurisdiction to determine a third-party claim for indemnity in the context of a patent infringement action appear to be at odds with obiter comments from 2020 in a case heard by a different panel of the Court.

The Jurisdiction of the Federal Court of Canada

The Federal Court and the Federal Court of Appeal are said to be creatures of statute in that they possess only the jurisdiction that has been conferred upon them by statute.    In ITO-Int’l Terminal Operators v. Miida Electronics, [1986] 1 S.C.R. 752, the Supreme Court of Canada set out a three-part test to determine if a matter falls within the Court’s jurisdiction, namely:

1. there must be a statutory grant of jurisdiction by the federal Parliament;
2. there must be an existing body of federal law which is essential to the disposition of the case and which nourishes the statutory grant of jurisdiction; and
3. the law on which the case is based must be a “law of Canada” as the phrase is used in section 101 of the Constitution Act, 1867 (U.K.).

In analyzing whether a claim meets these requirements, it is necessary to characterize the claim to determine its essential nature or “pith and substance”.  When applying this analysis to a third-party claim, the third-party claim must be characterized separately from the main claim. A third-party claim must stand on its own as an independent and separate claim. However, the prior case law has confirmed that a claim not otherwise based on federal law is not brought within the jurisdiction of the Court merely because it arises from essentially the same facts as a related claim which is within the Court’s jurisdiction.  Notwithstanding that limitation, regard may nonetheless be given to the main claim to assist in ascertaining the essential nature of the third-party claim.

The Court’s Decision in McCain Foods

McCain Foods Limited (“McCain”) brought an action against J.R. Simplot Company and Simplot Canada (II) Limited (collectively, “Simplot”) alleging that Simplot was infringing McCain’s patent related to a process for treating frozen fruits and vegetables using a pulsed electric field (“PEF”) to reduce resistance to cutting after they are cooked.

Simplot had purchased its PEF system from a German company, Elea Vertriebs-und-Vermarktungsgesellschaft, mbH (“Elea”).  After being sued by McCain, Simplot sought to have Elea agree to indemnify it for any damages awarded to McCain as a result of the action on the basis of its purchase agreement for the PEF system.  Elea refused to indemnify Simplot. Simplot therefore brought a motion to commence a third-party claim against Elea for warranty and indemnity, based on the purchase agreement.

McCain resisted the motion on the basis that the third-party claim was essentially a contract dispute that was therefore outside the scope of the Federal Court’s jurisdiction.  Simplot was successful on its motion and McCain appealed to the Federal Court of Appeal.  The Federal Court of Appeal’s decision dealt with a variety of issues but ultimately concluded with a rejection of Simplot’s attempt to commence the third-party claim against Elea.

Specifically, the Court decided that it did not have jurisdiction to adjudicate Simplot’s third-party claim.  It could only do so if the claim was based on a specific statutory grant of jurisdiction.

The Court concluded that the third-party claim was essentially a contract claim.  The Court affirmed that it had the jurisdiction to determine the main claim for patent infringement.  However, it could find no support in the Patent Act for the third-party claim.  Simplot argued that the third-party claim was incidental to the patent infringement claim but, given the Court’s conclusion that the third-party claim was a contract claim and not based on any statutory grant of jurisdiction to the Federal Court, it rejected those arguments as well.

The decision in McCain Foods raises an interesting contrast to the Federal Court of Appeal’s decision, and specifically its obiter comments, in a 2020 decision.

The Court’s Decision in Salt

In Salt Canada Inc. v. Baker, 2020 FCA 127, (“Salt”) the Federal Court of Appeal clarified that the Federal Court does have jurisdiction to interpret contracts between private citizens if it is done under a sphere of valid federal jurisdiction vested in the Federal Court.  The case concerned an application under section 52 of the Patent Act to vary an entry in the records of the Patent Office.  The question of ownership of the patent in that case required the Court to review and interpret a series of assignment agreements between the parties. The Court held that the Federal Court has a wide power to determine issues of title to a patent, even if contractual instruments need to be interpreted as part of that exercise.

The Federal Court of Appeal concluded that requiring litigants to seek judgment in a provincial court on a contractual dispute before applying to the Federal Court for other remedies is unnecessarily burdensome and offends the principle of access to justice. 

What is also interesting is that the Federal Court of Appeal, in obiter, made comments which appear to be inconsistent with the Court’s later decision in McCain Foods.  Specifically, the Court noted that the interpretation of agreements is frequently done in the Federal Court, in almost all of the Federal Courts’ jurisdictional pockets: tax, intellectual property, administrative law, maritime law, privacy and access to information.

The Court concluded that it is true that, absent a specific statutory grant of jurisdiction to the Federal Court, parties cannot assert a contractual claim in the Federal Court against another private party to obtain a damages remedy. However, the Court interpreted the Supreme Court of Canada decision in Kellogg Co v Kellogg, [1941] SCR 242 to stand for the proposition that, where such a grant of jurisdiction is present, parties can claim a remedy even if their entitlement turns on a matter of interpretation of an agreement or other instrument.

However, the Court went further.  The Court espoused that “[t]he bounds of the Federal Court’s jurisdiction do not rest on the nebulous exercise of assessing whether something is “primarily a case in contract” or whether contractual interpretation will “dictate” the result.  The Court suggested that, in analyzing jurisdictional issues, the Court should keep issues of access to justice and the minimization of litigation expenses front of mind.

The Court undertook a review of the history of the Federal Courts system in Canada and specifically the legislative review of the Act in 1990.  The Court reviewed the minutes of the proceedings of the legislative committee of Canadian parliament and concluded that the committee did not believe that the intersection of federal jurisdiction and contract/torts should result in dividing proceedings between the federal and provincial courts.  Where contracts arise within its jurisdiction, the Federal Courts are empowered to resolve these disputes just as any other court does, and they do so all the time.

The Court reasoned that, if the Federal Courts declined cases that “primarily” involved contracts, it would be forced to divide many of its cases across different superior court jurisdictions across the country.  The Court reasoned that the legislative changes in 1990 sought to minimize this problem by making the Courts’ jurisdiction concurrent in certain areas.

The Court concluded that this ensured that, where a counterclaim or third-party claim was brought, a dispute arising from the same facts could be adjudicated entirely within a single proceeding. The Court went on to say:

If the Federal Court does not have jurisdiction in this case - and by extension in any case where contractual interpretation is central to the disposition - the problem of divided proceedings will once again become a feature of the Federal Court system despite Parliament’s intention. If the Federal Courts always need the provincial courts as a crutch to determine a matter leaning on contractual considerations or other private rights, its very core and purpose, as encapsulated by John Turner, the architect of the first Federal Courts Act, would be eviscerated:

[N]ous avons cherché une cour nationale qui pourrait appliquer le droit fédéral - une cour nationale avec une expertise dans tous les domaines de droit fédéral. Les impôts, l'amirauté, les brevets, le droit administratif, le droit d'immigration - et j'ai cherché la cour qui pourrait adopter une certaine uniformité dans ses jugements. D'avoir une cohésion nationale dans ses jugements.

(Translation: [W]e looked for a national court that could apply federal law - a national court with expertise in all areas of federal law. Taxes, admiralty, patents, administrative law, immigration law - and I looked for the court that could adopt some uniformity in its judgments. To have national cohesion in its judgments.)

The Court did note that there will be cases where the Federal Court does not have jurisdiction because the matter is purely contractual between private parties or where, on the particular facts, it would be more appropriate for the Federal Court to stay proceedings before it to allow ongoing related litigation in the provincial superior courts to go ahead.

Analysis

On its face, and bearing in mind the existing jurisprudence, the decision in McCain Foods appears reasonable at first blush.  However, it is difficult to reconcile the Court’s decision in McCain Foods with the obiter comments in Salt. 

It is reasonable to view the Court’s obiter comments in Salt as specifically suggesting that the Federal Court should accept jurisdiction in situations like McCain Foods, considering issues of access to justice and the minimization of litigation expenses.  For example, in this case, Simplot will now (subject to a successful appeal to the Supreme Court of Canada) need to commence a separate proceeding against Elea to seek to enforce its warranty and indemnity claims.

Furthermore, the decision has potential negative consequences for prospective third parties, such as Elea.  Rule 197 of the Federal Courts Rules provides that a third party has the right to defend the plaintiff’s claim against the defendant.  It further provides that the third party, in defending the plaintiff’s claim against the defendant, has the same procedural rights and obligations in the action as the defendant, including those in respect of discovery, trial, and appeal.   Practically, that means that a third party, can assert defenses, or raise invalidity attacks, not raised by the defendant.  This provides a third party with an opportunity to ensure that the main claim is defended vigorously. 

Without that ability, a third party may be a bystander to the results of the main action and be required to accept the Federal Court’s finding.

Conclusions

There can be no doubt that the most efficient manner of handling a defendant’s claim for indemnity in an intellectual property infringement proceeding is for the Federal Court to assume jurisdiction over such claim. It is therefore to be hoped that the McCain Foods decision either is appealed and is heard by the Supreme Court of Canada or, alternatively, a future panel of the Federal Court of Appeal considers the issue and provides guidance as to the Court’s jurisdiction.

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