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Damages - Disgorgement
MORE CASES
Part 2
. 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. . Bhatnagar v. Cresco Labs Inc.
In Bhatnagar v. Cresco Labs Inc. (Ont CA, 2023) the Court of Appeal considered the calculation of damages in an 'honest performance' contract case. In this quote the court considers when 'disgorgement' damages may be awarded in contract cases:[83] Disgorgement for breach of contract may be appropriate in exceptional circumstances but, at a minimum, only where other remedies are inadequate and the circumstances warrant such an award: Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19, [2020] 2 S.C.R. 420, at paras. 52-53. Circumstances of inadequacy arise when the nature of the claimant’s interest is such that it cannot be vindicated by other forms of relief as, for example, where the plaintiff’s loss is “impossible to calculate” or where the plaintiff’s interest in performance is not reflected by a purely economic measure: Atlantic Lottery, at para. 59. . Interhealth Canada Limited v. O’Keefe
In Interhealth Canada Limited v. O’Keefe (Ont CA, 2023) the Court of Appeal considers the causal requirements of a disgorgement damage claim:[113] While, in my view, in all the circumstances, Mr. O’Keefe’s pre-resignation involvement with HIH did not breach his fiduciary duty, even if it did, the appellant has not satisfied me of the requisite causal link between the breach and the gain which the appellant seeks disgorgement of.
[114] In the event the court found that Mr. O’Keefe did not divert the Cromwell Opportunity to CHNI, the appellant sought disgorgement of the profits earned by Mr. O’Keefe from the HIH Opportunity as a result of the breaches of his fiduciary duty to the appellant.[4] The appellant’s submission properly acknowledged that the fiduciary’s breach must be the cause-in-fact of the wrongdoer’s gain in respect of which disgorgement is sought: see Southwind v. Canada, 2021 SCC 28, 459 D.L.R. (4th) 1, at para. 70. Thus, the appellant must establish both that Mr. O’Keefe’s involvement with HIH prior to his resignation breached his fiduciary duty to the appellant, and that it was the cause-in-fact of CHNI securing the HIH Opportunity. . Extreme Venture Partners Fund I LP v. Varma
In Extreme Venture Partners Fund I LP v. Varma (Ont CA, 2021) the Court of Appeal considered disgorgement damages:[111] The leading case on disgorgement of profits is Strother v. 3464920 Canada Inc., 2007 SCC 24, [2007] 2 S.C.R. 177, where the Supreme Court stated:74. This Court has repeatedly stated that "[e]quitable remedies are always subject to the discretion of the court". (internal citations omitted) In Neil, the Court stated emphatically: "It is one thing to demonstrate a breach of loyalty. It is quite another to arrive at an appropriate remedy" (para. 36).
75. Monarch seeks "disgorgement" of profit earned by Strother and Davis. Such a remedy may be directed to either or both of two equitable purposes. Firstly, is a prophylactic purpose, aptly described as appropriating for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest.
(Chan v. Zacharia (1984), 154 C.L.R. 178, per Deane J., at p. 198)
76. The second potential purpose is restitutionary, i.e. to restore to the beneficiary profit which properly belongs to the beneficiary, but which has been wrongly appropriated by the fiduciary in breach of its duty. …
77. The concept of the prophylactic purpose is well summarized in the Davis factum as follows:[W]here a conflict or significant possibility of conflict existed between the fiduciary's duty and his or her personal interest in the pursuit or receipt of such profits . . . equity requires disgorgement of any profits received even where the beneficiary has suffered no loss because of the need to deter fiduciary faithlessness and preserve the integrity of the fiduciary relationship. [Emphasis omitted; para. 152.] Where, as here, disgorgement is imposed to serve a prophylactic purpose, the relevant causation is the breach of a fiduciary duty and the defendant's gain (not the plaintiff's loss). Denying Strother profit generated by the financial interest that constituted his conflict teaches faithless fiduciaries that conflicts of interest do not pay. The prophylactic purpose thereby advances the policy of equity, even at the expense of a windfall to the wronged beneficiary. . Atlantic Lottery Corp. Inc. v. Babstock
In Atlantic Lottery Corp. Inc. v. Babstock (SCC, 2020) the Supreme Court of Canada clarifies disgorgement as a remedy of limited application (not as an independent cause of action) that it equates with "wrongdoing without proof of damage (for example, breach of fiduciary duty)" [para 32]:[31] Recognizing that disgorgement is simply a remedy for certain forms of wrongful conduct places the central issue in this case in context. By pleading disgorgement as an independent cause of action, the plaintiffs seek to establish an entirely new category of wrongful conduct — one that is akin to negligence but does not require proof of damage. Supporters of this type of claim assert that “there is simply no reason in principle why the rules for compensatory damages need to be identical to the rules for disgorgement” (McCamus, at p. 359) and that, given that the purpose of granting disgorgement is to deter wrongful conduct rather than to provide compensation, there is no reason to require proof of damage (p. 354).
[32] I acknowledge that disgorgement is available for some forms of wrongdoing without proof of damage (for example, breach of fiduciary duty). But it is a far leap to find that disgorgement without proof of damage is available as a general proposition in response to a defendant’s negligent conduct. Determining the appropriate remedy for negligence, where liability for negligence has not already been established, is futile and even nonsensical since doing so allows “the remedy tail [to] wag the liability dog” (Haida Nation v. British Columbia (Minister of Forests), 2004 SCC 73 [2004] 3 S.C.R. 511, at para. 55). This observation applies with no less force to the plaintiff who seeks disgorgement, since the availability of gain-based relief lies in “aligning the remedy with the injustice it corrects” (E. J. Weinrib, “Restitutionary Damages as Corrective Justice” (2000), 1 Theor. Inq. L. 1, at p. 23 (emphasis added)).
[33] It is therefore important to consider what it is that makes a defendant’s negligent conduct wrongful. As this Court has maintained, “[a] defendant in an action in negligence is not a wrongdoer at large: he is a wrongdoer only in respect of the damage which he actually causes to the plaintiff” (Clements v. Clements, 2012 SCC 32, [2012] 2 S.C.R. 181, at para. 16). There is no right to be free from the prospect of damage; there is only a right not to suffer damage that results from exposure to unreasonable risk (E. J. Weinrib, The Idea of Private Law (rev. ed. 2012), at pp. 153 and 157‑58; R. Stevens, Torts and Rights (2007), at pp. 44‑45 and 99). In other words, negligence “in the air” — the mere creation of risk — is not wrongful conduct. Granting disgorgement for negligence without proof of damage would result in a remedy “arising out of legal nothingness” (Weber, at p. 424). It would be a radical and uncharted development, “[giving] birth to a new tort over night” (Barton, Hines and Therien, at p. 147).
[34] The difficulty is not just normative, although it is at least that. The practical difficulty associated with recognizing an action in negligence without proof of damage becomes apparent in considering how such a claim would operate. As the Court of Appeal recognized, a claim for disgorgement available to any plaintiff placed within the ambit of risk generated by the defendant would entitle any one plaintiff to the full gain realized by the defendant. No answer is given as to why any particular plaintiff is entitled to recover the whole of the defendant’s gain. Yet, corrective justice, the basis for recovery in tort, demands just that: an explanation as to why the plaintiff is the party entitled to a remedy (Clements, at para. 7; Weinrib (2000), at pp. 1‑7). Tort law does not treat plaintiffs “merely as a convenient conduit of social consequences” but rather as “someone to whom damages are owed to correct the wrong suffered” (Weinrib (2000), at p. 6). A cause of action that promotes a race to recover by awarding a windfall to the first plaintiff who arrives at the courthouse steps undermines this foundational principle of tort law.
[35] This is not the type of incremental change that falls within the remit of courts applying the common law (Salituro, at p. 670). It follows that the novel cause of action proposed by the plaintiffs has no reasonable chance of succeeding at trial.
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