Rarotonga, 2010

Simon's Megalomaniacal Legal Resources


ADMINISTRATIVE LAW | SPPA / Fairness (Administrative)

home / about / Democracy, Law and Duty / testimonials / Conditions of Use

Civil and Administrative
Litigation Opinions
for Self-Reppers

Simon's Favourite Charity -
Little Friends Lefkada (Greece)
Cat and Dog Rescue


Damages - Accounting of Profit

. Greenblue Urban North America Inc. v. Deeproot Green Infrastructure, LLC

In Greenblue Urban North America Inc. v. Deeproot Green Infrastructure, LLC (Fed CA, 2023) the Federal Court of Appeal considered the remedial law of accounting and disgorgement, here in a patent infringement context:
[77] In this regard, an accounting of profits is akin to the equitable remedy of restitution, and is available for patent infringement by virtue of paragraph 57(1)(b) of the Patent Act, R.S.C. 1985, c. P-4. An accounting of profits is an alternative remedy to an order for payment of damages, which is available by virtue of subsection 55(1) of the Patent Act.

[78] The damages remedy focuses on the losses incurred by the patentee and aims to compensate a plaintiff for losses incurred due to the infringement. These may include, among other things, lost profits incurred by reason of sales lost by the plaintiff due to the infringement or compensation for reasonable royalties the plaintiff would have earned had the defendant agreed to pay a royalty.

[79] An accounting of profits, on the other hand, focuses on the profits wrongfully earned by the infringer and requires that the defendant disgorge to the plaintiff the amount of profits earned by reason of the infringement. As explained at length in Nova Chemicals (F.C.A.), the accounting of profits remedy is a necessary tool to deter infringement by those who could make profits in excess of the damages they would cause to a patent holder.

[80] A court possesses discretion as to whether or not to award an accounting of profits. Therefore, a court is not necessarily required to give effect to a plaintiff’s election for an accounting of profits and may refuse the remedy where it would be inequitable to award it. This may, for example, be the case if there is excessive delay or misconduct by the patentee: Apotex Inc. v. Bayer Inc., 2018 FCA 32, [2018] 4 F.C.R. 58 at paras. 60-61, 67 [Apotex v. Bayer], citing Beloit Canada Ltd. v. Valmet-Dominion Inc. (C.A.), 1997 CanLII 6342 (FCA), [1997] FCJ No 486 (QL), [1997] 3 FC 497 at 545; Merck v. Apotex, 2006 FCA 323, [2007] 3 F.C.R. 588 at para. 127. As noted at paragraph 67 of Apotex v. Bayer:
... the election of a final accounting of profits, following a determination of infringement, necessarily belongs to a patentee, subject to the Court’s discretion. In other words, the Court can refuse to grant the remedy of accounting in which case the patentee shall be entitled to its damages. It is also clear that the Court cannot oblige the patentee to accept as a remedy an accounting of profits if it is not willing to do so.
[81] With respect to both the remedy of damages and that of disgorgement, proof of a causal connection to the infringement is required.

[82] Dealing more specifically with disgorgement, in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34, [2004] 1 S.C.R. 902, the majority noted at paragraph 101 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: Lubrizol Corp. v. Imperial Oil Ltd., 1996 CanLII 4095 (FCA), [1997] 2 F.C. 3 (C.A.); Celanese International Corp. v. BP Chemicals Ltd., [1999] R.P.C. 203 (Pat. Ct.), at para. 37. This is consistent with the general law on awarding non-punitive remedies: “[I]t is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach” (Canson Enterprises Ltd. v. Boughton & Co., 1991 CanLII 52 (SCC), [1991] 3 S.C.R. 534, at p. 556, per McLachlin J. (as she then was), quoted with approval by Binnie J. for the Court in Cadbury Schweppes Inc. v. FBI Foods Ltd., 1999 CanLII 705 (SCC), [1999] 1 S.C.R. 142, at para. 93).
[83] In a damages claim, the plaintiff bears the burden of establishing the quantum and nature of the damages it suffered on the balance of probabilities: TPG Technology Consulting Ltd. v. Canada, 2016 FCA 279 at para. 37; Janiak v. Ippolito, 1985 CanLII 62 (SCC), [1985] 1 SCR 146 at para. 32.

[84] Where disgorgement is sought, the plaintiff likewise bears the burden of establishing the infringer’s profits. However, because the information regarding details of costs incurred in making sales is largely, if not exclusively, within the knowledge of the infringer, the plaintiff is only required to establish the infringer’s sales when establishing profits. The onus then shifts to the defendant to establish the elements of costs to be deducted from those sales to establish its profit: see e.g. Monsanto Canada Inc. v. Janssens, 2009 FC 318, at para. 32; Diversified Products Corp. v. Tye-Sil Corp., [1990] F.C.J. No. 952, 32 C.P.R. (3d) 385 at 390; Teledyne Industries Inc. v. Lido Products Ltd. (1982), 17 A.C.W.S. (2d) 391 (F.C.), 68 C.P.R. (2d) 204 at 209.

[85] There are different approaches as to how to calculate profits, notably the full costs approach and the incremental costs approach. Under the latter, only those additional costs incurred by reason of the production of an infringing product may be deducted from sales figures to establish the defendant’s profits earned through infringement. Under the full costs approach, on the other hand, all costs, including an approximation of fixed overhead costs causally connected to the infringing sales, may be deducted from the sales figures to arrive at the profits earned by the defendant through infringement.

[86] The decision in Nova Chemicals (F.C.A.) clarifies that, at least in this Court and the Federal Court, the full costs approach is the preferred approach for calculating the quantum of profits earned through infringement for purposes of determining the availability of an order for disgorgement of profits and the quantum of such disgorgement.

[87] As noted in Nova Chemicals (F.C.A.), the full costs approach accounts for actual profits earned from and actual costs incurred in respect of infringing sales actually made by the infringer or on its behalf. Thus, hypothetical costs or lost opportunity costs incurred by reason of the infringement are to be ignored.

[88] According to Nova Chemicals (F.C.A.), the full costs that may be deducted from profits under the full costs approach include both incremental costs incurred by reason of the infringing sales (in the case at bar, the COGS), as well as the portion of the infringer’s stagnant, fixed costs that are causally attributable to the infringing product. Writing for the majority of the Court, in Nova Chemicals (F.C.A.), Stratas J.A. explained the nature of such stagnant, fixed costs that may be deducted under the full costs approach at paragraphs 158 to 161 as follows:
[158] Consider a factory that produces eight separate infringing product lines where each product infringes a different patent. If each of the eight patentees brings separate infringement proceedings, could the infringer never deduct its overhead costs? Certainly each product absorbed a portion of those necessary overhead costs: Dart Industries, at pages 116–120; Tremaine v. Hitchcock, 90 U.S. 518 (1874).

[159] What if only seven of the eight product lines are infringing? Should the one non-infringing product line shoulder all of the overhead? It is clear that those overhead costs were necessary to produce the infringing products. Indeed, if proportionate fixed costs are not deducted, the overhead that was absorbed by the infringing product will be shifted on to an infringer’s non-infringing products. This would unfairly burden a perfectly legal product line for no principled reason.

[160] Denying the deduction of fixed costs generates a distorted picture of the infringer’s profits. It may be the case that an infringer has minimal variable costs but very high overhead costs such that the product is not, in fact, profitable. The incremental approach advocated for in Teledyne could force that infringer to disgorge “profits” from an unprofitable product.

[161] The fear that allowing a deduction of fixed costs would permit an infringer to, in effect, subsidize its non-infringing products is unfounded. An infringer would only be entitled to deduct a proportion of its fixed costs. For example, if an infringing product occupies 1 percent of a factory’s production capacity or volume, only 1 percent of the fixed costs will be deducted.
[89] As the forgoing passage makes clear, fixed non-incremental overhead costs may be deducted from sales to establish an infringer’s profit, but proof of causation is still required. In other words, the defendant must establish some link between the claimed portion of the overhead and the infringing sales. However, it is not necessary for the defendant to show that these fixed costs are in addition to the fixed costs that otherwise would have been payable by the defendant.

[90] In Stratas J.A.’s example, the total amount of overhead at issue related exclusively to the costs to operate the factory where the infringing product was produced. Thus, Stratas J.A. appears to indicate that the allowable deduction for the portion of the overhead related to the infringing product could be calculated by applying, to the total overhead cost, the proportion of production the infringing sales bore to the total production made in the factory where the overhead was incurred.

[91] In Stratas J.A.’s example, the total amount of the overhead at issue relates to a single factory, where the infringing product and other products were produced. In those circumstances, an apportionment of overheard costs like that undertaken by GreenBlue in the case at bar might well be appropriate as it is clear that there is some causal connection between the overhead incurred and the production of the infringing product.

[92] However, this rough and ready approach to attributing cost requires a factual foundation to establish the requisite causal connection. One cannot always simply assume that a proportion of a corporation’s total overhead costs proportionate to the percentage of sales generated by the infringing product may be deducted under the total costs approach in every case.

[93] An example makes clear why the approach adopted by GreenBlue and accepted by the Federal Court in the case at bar cannot be universally applied.

[94] Suppose a company has two factories and produces the infringing product only in one. Suppose its overhead for the plant where the infringing product was not produced is substantially higher than for the plant where the infringing product is made. Suppose also that the company earns half of its profits from goods made in each of the factories. In this fact pattern, it would be incorrect to calculate the proportion of overhead cost attributable to the infringing product as being 50% of the combined overhead for the two factories as this overestimates the costs incurred in producing the infringing product. There is, in other words, no causal connection between some of the 50% of the total overhead costs and the profits earned by reason of the infringing product.

[95] What the foregoing examples demonstrate is that the approach to quantifying overhead costs for purposes of establishing profits earned through infringement is highly fact‑dependent.

[96] Here, the Federal Court accepted GreenBlue’s calculations for overhead attributed to the infringing sales without any discussion of why they were appropriate. Indeed, the Federal Court seems to have largely ignored the requirement for any causal link between the costs claimed and the infringing sales because it wrongfully attributed elements that GreenBlue now concedes were inappropriate as they were not causally connected to the sales of infringing products. These included the costs of defending the patent infringement litigation, which cannot be deducted: see e.g. Baker Petrolite Corp. v. Canwell Enviro-Industries Ltd., 2001 FCT 889, [2002] 2 FC 3 (T.D.) at para. 157, rev’d on other grounds 2002 FCA 158, [2003] 1 FC 49.

[97] I therefore agree with DeepRoot that the Federal Court erred in accepting GreenBlue’s figures without appreciating and analyzing whether and how the overhead costs claimed were causally connected to the infringing sales.

[98] The present case is to be distinguished from the approach of the Federal Court in Dow Chemical Company v. Nova Chemicals Corporation, 2017 FC 637, 282 A.C.W.S. (3d) 845, aff’d in 2020 FCA 141. There, based on the evidence of the defendant given on discovery that fixed costs per pound were substantially the same for infringing and non-infringing products, the Federal Court allocated—on a “relative production volumes” basis—a proportional amount of certain fixed capital costs, discussing why this approach was appropriate. The Court wrote as follows at paragraphs 9-14:
[9] Subparagraph 5(b) of the Judgment in Dow v Nova states that Nova may deduct a proportional amount of certain fixed and capital costs, including costs categorized as Plant, Distribution, Sales & Marketing, Technical and Administration, from the revenues derived from the sales of the infringing products for the period August 22, 2006 to December 31, 2015. The parties disagree on the manner in which these costs should be allocated between infringing and non-infringing products.

[10] The parties' accountants have adopted different approaches to allocating fixed costs of the PE2 plant to the infringing products. Dow's accountant, Ross Hamilton, concluded that these costs should be allocated based on relative production volumes. Nova's accountant, Errol Soriano, allocated the costs on a number of different bases, based on the instructions of counsel and the opinion of Nova's economist, Randall Heeb.

[11] Dow complains that Nova's approach results in the allocation of higher fixed costs to infringing products than to non-infringing products. Dow notes that during discovery, Nova stated that "[t]he fixed costs associated with producing infringing grades do not materially differ from those for producing non-infringing products".

[12] In his expert report, Mr. Hamilton relied on Nova's discovery evidence that the fixed costs per pound were substantially the same for infringing and non-infringing products. In cross-examination, counsel for Nova suggested to Mr. Hamilton that this supported Nova's claim that the production of alternative non-infringing products would have absorbed the fixed costs associated with the manufacture of the infringing products. Counsel for Nova did not suggest to Mr. Hamilton that this assumption was incorrect.

[13] Nova's experts have proposed the use of three different allocation keys: (a) "pounds produced" or "billed volumes" for its costs relating to distribution; (b) "net revenue" for costs categorized as "Administration, Sales and Marketing"; and (3) "reactor hours" for "Plant and Technical" costs. While this approach is premised on potentially valid distinctions between different categories of costs, I agree with Dow that Nova has not adduced evidence to support it.

[14] Given the evidence provided by Nova on discovery, Mr. Hamilton's reasonable reliance on that evidence in formulating his opinion, and Nova's reinforcement of his assumption in cross-examination, I conclude that the appropriate basis for allocating fixed costs for the PE2 plant is "billed volume", as described by Mr. Hamilton.
[99] A similar analysis of the causation issue with reference to the claimed overhead is entirely absent in the case at bar, where GreenBlue called no expert evidence to support it.
. Nova Chemicals Corporation v. Dow Chemicals Company

In Nova Chemicals Corporation v. Dow Chemicals Company (Fed CA, 2020) the Federal Court of Appeal considered the damage issue of 'accounting of profits' in a patent case [paras 14-82].


The author has waived all copyright and related or neighboring rights to this Isthatlegal.ca webpage.

Last modified: 16-09-23
By: admin