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Patents - Accounting of Profits
MORE CASES
Part 2
. Nova Chemicals Corp. v. Dow Chemical Co.
In Nova Chemicals Corp. v. Dow Chemical Co. (SCC, 2022) the Supreme Court of Canada considers the patent infringment remedy of 'springboard profits':[4] Additionally, for the first time in Canadian law, the reference judge awarded “springboard profits” to Dow. Springboard profits are profits that arise post-patent-expiry but that are causally attributable to infringement of the invention during the period of patent protection. ...
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B. Issue 2: Is Dow Entitled to Springboard Profits?
[74] An accounting of profits requires that the infringer disgorge all profits causally attributable to infringement of the invention, regardless of when the profits materialize. For example, if an infringer earns additional profits after the patent expires because of an accelerated entry into the market, the infringer should disgorge those post-patent-expiry profits. This principle is known as “springboard profits” or “springboard relief”.
[75] For the first time in Canadian law, the reference judge awarded springboard profits to Dow. The Federal Court of Appeal upheld this decision, agreeing with the reference judge that “springboard profits ‘are nothing more than a type of [gain] to be proven with evidence’” (F.C.A. reasons, at para. 126 (text in brackets in original), citing F.C. reasons, at para. 124).
[76] Nova challenges the decision to award springboard profits on three grounds. The company argues (1) that springboard profits are not legally permissible; (2) that Nova has already compensated Dow for its “ramp-up” into the market through its payment of a reasonable royalty (as described in para. 7 above); and (3) alternatively, that if springboard profits are legally permissible, the springboard profits should be reduced to account for the fact that Nova would have earned profits by selling pail and crate plastics had it not infringed.
[77] None of these arguments are persuasive. As I explain below, (1) springboard profits are legally permissible; (2) whether post-patent-expiry profits are causally attributable to patent infringement is a question of fact and Nova has not shown palpable and overriding error in the reference judge’s findings; and (3) for the reasons given above, Nova is not entitled to deduct the profits it could have earned from pail and crate plastics. There is therefore no basis to interfere with this part of the reference judge’s award to Dow.
(1) Springboard Profits are Legally Permissible
[78] Nova submits that Canadian courts have never awarded springboard profits before. That is true. But Canadian courts have recognized and awarded springboard damages (AstraZeneca Canada Inc. v. Apotex Inc., 2015 FC 671, at para. 7 (CanLII); Teva Canada Limited v. Janssen Inc., 2018 FCA 33, 420 D.L.R. (4th) 493, at paras. 107-12; Merck & Co., Inc. v. Apotex Inc., 2013 FC 751, [2015] 1 F.C.R. 405, at para. 183, aff’d 2015 FCA 171, [2016] 2 F.C.R. 202; Apotex Inc. v. Eli Lilly and Company, 2018 FCA 217, 161 C.P.R. (4th) 411, at para. 114; see also Siebrasse, Stack et al., at pp. 96-97).
[79] The purpose underlying springboard damages is sound, having regard to the scheme and purposes of the Patent Act. A patent provides a time-limited monopoly to make, use, and sell an invention during the life of the patent (Patent Act, s. 42). This monopoly gives the patentee the right to build sales capacity and market share without any market competition. The patentee can then use this market advantage against competitors after the patent expires (M. E. Charles, “Monetary Remedies in Intellectual Property Litigation”, [2007] J. Bus. Valuation 159, at pp. 160 and 167).
[80] An infringer that begins selling the patented invention before the patent expires interferes with the patentee’s right to build sales capacity and market share in the absence of competition. This can reduce the patentee’s post-patent-expiry profits. If the patentee can prove that it lost sales post-patent-expiry as a result of infringing activity occurring during the life of the patent, the patentee is entitled to springboard damages to compensate for that loss.
[81] A corresponding purpose underlies an accounting of profits. By infringing during the life of the patent, the infringer can also build sales capacity and market share for their own version of the patented product. Then, after the patent expires, the infringer can use this sales capacity and market share to earn profits that it would not have earned but for the infringing activity that occurred during the life of the patent. Thus, a portion of such post-expiry profits may be causally attributable to infringement of the invention. Failing to disgorge those profits would leave gains that are causally attributable to infringement of the invention in the hands of the infringer. It would also be unfair to third parties that waited for patent expiry to compete with the patentee.
[82] I agree with the reference judge and the Federal Court of Appeal that springboard profits are “nothing more than a type of [gain] to be proven with evidence”. The Patent Act does not bar disgorgement of profits that materialize after patent expiry. To the contrary, artificially limiting an accounting of profits in the manner suggested by Nova would leave gains that are causally attributable to infringement of the invention in the hands of the infringer and thus undercut the bargain underlying the Patent Act. Judges should determine whether any profits earned post-patent-expiry are causally attributable to infringement of the invention during the period of patent protection. If they are, such profits should be disgorged.
(2) The Reasonable Royalty Award Did Not Cover Nova’s Post-expiry Profits
[83] The reference judge found no support for Nova’s argument that its springboard profits were already accounted for by its payment of pre-grant reasonable royalties (paras. 122-24). The Federal Court of Appeal agreed. It held that royalties paid to cover the post-filing, pre-grant time period were unrelated to the quantum of profits Nova earned as a result of infringement of the invention, during the period of patent protection (paras. 137-40).
[84] Before this Court, Nova again argued that it had already compensated Dow for its “ramp-up” into the market by virtue of its payment of a reasonable royalty (as described in para. 7 above; see A.F., at para. 126). I see no merit in this argument. Disgorgement of springboard profits is a means to prevent an infringer from gaining from its infringement that is different from, but (in the circumstances of this case) complementary to, compensating a patentee by way of a reasonable royalty. The need to disgorge springboard profits is a factual question: are there any profits earned post-patent-expiry that are causally attributable to infringement of the invention, during the period of patent protection? Nova has not shown any palpable and overriding error in the reference judge’s findings in this regard.
(3) Dow is Entitled to All Springboard Profits Causally Attributable to Infringement of the Invention
[85] In the alternative, Nova argues that the springboard profits should be reduced to account for the fact that, had it not infringed Dow’s patent, it would have earned profits by selling pail and crate plastics. For the reasons given above, I reject this argument. Like profits earned during the life of the patent, a patentee is entitled to all the infringer’s profits causally attributable to infringement of the invention, even if they materialize after the patent expires. Nova conceded that pail and crate plastics were not a non-infringing option, so no proper basis has been shown to reduce the reference judge’s springboard profits award in the circumstances.
. Nova Chemicals Corp. v. Dow Chemical Co.
In Nova Chemicals Corp. v. Dow Chemical Co. (SCC, 2022) the Supreme Court of Canada considered calculation methods for the patent infringment remedy of 'accounting for profits':B. Calculating an Accounting of Profits
[8] As previously stated, this appeal addresses the correct method of calculating an accounting of profits. Courts have calculated an accounting of profits in three ways: (1) differential costs, (2) full costs, and (3) differential profits. I explain each below.
Differential Costs
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The differential costs approach requires the infringer to disgorge the difference between actual revenues earned by selling the infringing product and the actual costs associated with producing the infringing product.
Infringers can deduct any expense incurred because of the infringing activity. Any category of expense, so long as it is directly attributable to the infringing activity, is deductible. These can be thought of as “direct” expenses: “. . . all expenses — variable, current, increased, fixed, or capital — that are directly attributable to the infringement, are deductible” (Andrews and de Beer, at p. 646).
Infringers cannot deduct expenses they would have incurred in the absence of infringement (Monsanto Canada Inc. v. Rivett, 2009 FC 317, [2010] 2 F.C.R. 93, at para. 30; Andrews and de Beer, at pp. 643-44).
Full Costs
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The full costs approach also requires the infringer to disgorge the difference between actual revenues earned by selling the infringing product and the actual costs associated with producing the infringing product.
But, unlike the differential costs approach, the full costs approach allows infringers to deduct all direct costs and a portion of the indirect expenses incurred to make the infringing product.
Indirect expenses are costs which did not arise solely because the infringer manufactured the infringing goods (i.e., expenses that would have been incurred in the absence of infringement) (Rivett, at para. 32; Andrews and de Beer, at pp. 643 and 646).
Simply put, infringers can deduct more costs from their revenue (and thus reduce the profits payable to the patentee) under the full costs approach as opposed to the differential costs approach.
Differential Profits
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The differential profits approach requires an infringer to disgorge the difference between the actual profits (revenue minus costs) earned by selling the infringing product and the profits it could have earned had it sold the best “non-infringing option” (Schmeiser, at para. 102).
As I will explain, the main issue in this appeal is the appropriate scope of a non-infringing option. I will expand on this concept in the next section.
The onus is on the infringer to prove that there is a non-infringing option (see Beloit Canada Ltée v. Valmet Oy (1994), 55 C.P.R. (3d) 433 (F.C. (T.D.)), at p. 456).
C. Schmeiser
[9] Schmeiser is this Court’s leading authority on calculating an accounting of profits. The decision addressed an alleged patent infringement and the appropriate remedy flowing from that infringement. Most relevant to this decision was the Court’s acceptance of the differential profits approach and its use of a non-infringing option.
[10] By way of background, Monsanto brought a patent infringement claim against Mr. Schmeiser. Monsanto held a patent on a genetic modification to canola seeds, marketed as Roundup Ready Canola. The genetic modification to the canola “dramatically” increased the plant’s tolerance to herbicides containing glyphosate (para. 8). Farmers could spray the crop with a glyphosate herbicide after the plants had emerged from the soil without killing the crop.
[11] This Court determined that Monsanto’s patent was valid and that Mr. Schmeiser infringed that patent by planting Roundup Ready Canola without a licence. Monsanto requested and was granted an accounting of profits as a remedy. The company argued Mr. Schmeiser was required to disgorge profits he earned from selling the harvested canola seeds.
[12] This Court disagreed. It stressed it was “settled law” that, under an accounting of profits, a patentee “is only entitled to that portion of the infringer’s profit which is causally attributable to the invention” (para. 101). The preferred means of determining this was the “value-based or ‘differential profit’ approach” (para. 102). To determine which portion of Mr. Schmeiser’s profits were causally attributable to Monsanto’s invention, this Court compared the profits Mr. Schmeiser earned from the sale of Roundup Ready canola with the profits he could have earned had he used the best non-infringing option: regular, non-genetically modified canola seeds. The difference between these two values was zero: Mr. Schmeiser did not spray the crop with a glyphosate herbicide and, therefore, did not benefit from the increased yields that Monsanto’s patent offered. The entirety of Mr. Schmeiser’s profits were attributable to non-patented features of the product — the canola seed itself. None of the profits he earned were causally attributable to the invention.
[13] From Schmeiser, it can be understood that a non-infringing option is any product that helps courts isolate the profits causally attributable to the invention from the profits which arose at the same time the infringing product was used or sold, but which are not causally attributable to the invention. As stated by the Court, a patentee is only entitled to profits “causally attributable to the invention” (para. 101).
D. Simplified Method of Calculating an Accounting of Profits
[14] An accounting of profits is sometimes presented as a choice between the (1) differential costs, (2) full costs, and (3) differential profits approaches (see Rivett, at para. 28). But these approaches are not completely distinct. The starting point of analysis for all three methods is determining the infringing product’s actual revenues and costs. Even in the differential profits approach, courts must first calculate the infringer’s actual profits earned by selling the infringing product (i.e., deduct the actual cost of producing the infringing product from actual revenue). This calculation must precede the comparison between actual profits earned on the infringing product and the profits an infringer could have earned had they sold the best non-infringing option.
[15] It is therefore more appropriate to conceptualize an accounting of profits as a three-step test:Step 1: Calculate the actual profits earned by selling the infringing product — i.e., revenue minus (full or differential) costs.
Step 2: Determine whether there is a non-infringing option that can help isolate the profits causally attributable to the invention from the portion of the infringer’s profits not causally attributable to the invention — i.e., differential profits. It is at this step that judges should apply the principles of causation. Causation “need not be determined by scientific precision: it is ‘essentially a practical question of fact which can best be answered by ordinary common sense’” (Merck & Co., Inc. v. Apotex Inc., 2015 FCA 171, [2016] 2 F.C.R. 202, at para. 44, quoting Snell v. Farrell, 1990 CanLII 70 (SCC), [1990] 2 S.C.R. 311, at para. 328).
Step 3: If there is a non-infringing option, subtract the profits the infringer could have made had it used the non-infringing option from its actual profits, to determine the amount to be disgorged. [16] Step 2 is the principal issue in this appeal. As I will set out, we are called on to clarify what is a non-infringing option. We are not called on to resolve whether differential costs or full costs is the preferred method for calculating an infringer’s costs in Step 1. While this was dealt with in the decision under appeal, we did not receive submissions on this issue (see 2020 FCA 141, [2021] 1 F.C.R. 551, at paras. 143-64). Accordingly, I do not deal further with this issue. . 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].
. Apotex Inc. v. ADIR
In Apotex Inc. v. ADIR (Fed CA, 2020) the Federal Court of Appeal considered a successful party's use of the Patent Act's remedial option [s.57(1)(b)] to claim an accounting of profits as opposed to damages, and in so doing explored the theory underlying patent law remedies:[35] The Patent Act, R.S.C. 1985, c. P-4 allows courts to award two different types of remedy for patent infringement. The first is an award of damages under subsection 55(1) of the Act. The second is an accounting of profits in accordance with paragraph 57(1)(b) of the Act, which allows a judge in a patent infringement case to make an order "“for and respecting inspection or account”". As will be discussed below, the jurisprudence makes clear that this remedy exists as an alternative to damages.
[36] Damages are based on the harm suffered by the patentee, and are intended to compensate the patentee for his or her losses. An award of damages may include compensation for the patent holder’s lost profits from sales or lost royalty payments.
[37] In contrast, an accounting of profits is an equitable remedy based on the profit made by the infringer, rather than the amount lost by the inventor: Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34, [2004] 1 S.C.R. 902 at para. 100; Rivett FCA, above at para. 23. As the Federal Court observed in Rivett, an accounting of profits serves two major equitable purposes: a "“prophylactic purpose”" deterring the infringer and others, and a "“restitutionary purpose”", restoring to the wronged party profits which have been wrongly appropriated by the infringer: Monsanto Canada Inc. v. Rivett, 2009 FC 317, [2010] 2 F.C.R. 93 (Rivett FC) at para. 19, citing Strother v. 3464920 Canada Inc., 2007 SCC 24, [2007] 2 S.C.R. 177 at para. 77.
[38] The premise underlying this remedy is that the infringer notionally acted as the agent of the patent holder, and is therefore obliged to account for the profits earned through its infringement: Beloit Canada Ltd. v. Valmet-Dominion Inc., 1997 CanLII 6342 (FCA), 73 C.P.R. (3d) 321, [1997] 3 F.C. 497 (F.C.A.) at 356; Apotex Inc. v. Bayer Inc., 2018 FCA 32, [2018] F.C.R. 58 at para. 56.
[39] An accounting of profits should be limited to profits that were actually earned by the defendant as the purpose of this remedy is not to punish the infringing party, but to prevent its unjust enrichment: Imperial Oil Ltd. v. Lubrizol Corp., 1996 CanLII 4095 (FCA), [1997] 2 F.C. 3, 206 N.R. 136 (F.C.A.) at para. 8.
[40] The Supreme Court has observed that where a patentee has elected to receive an accounting of profits, the patentee will only be entitled to that portion of the infringer’s profits that is causally attributable to the invention: Schmeiser, above at para. 101. This is because a patent does not confer a complete monopoly if a defendant could make or sell a non-infringing version of the patented invention: Lovastatin, above at para. 48.
[41] Citing Professor Norman Siebrasse in "“A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms”" (2003) 20 C.I.P.R. 79, the Supreme Court went on in Schmeiser to state that the preferred method of calculating an accounting of profits is the "“differential profit approach”". In accordance with this approach, profits are allocated taking into account the value that was contributed to the defendant’s goods by the patented invention. As Professor Siebrassse has noted, awarding profits according to the value added by the patented invention is consistent with the fundamental nature of patents as intellectual property: above at page 92.
[42] A comparison thus has to be made between those profits that are attributable to the invention, and the profits that the defendant would have made using the best non-infringing alternative option: Schmeiser, above at para. 102, citing Collette v. Lasnier (1886) 1886 CanLII 54 (SCC), 13 S.C.R. 563 at page 576.
[43] In Lovastatin, this Court identified the framework to be used in constructing the hypothetical "“but-for”" world in which the infringer does not infringe the patent.
[44] The issue that faced the Court in Lovastatin was whether, in determining the damages sustained because of patent infringement in accordance with subsection 55(1) of the Patent Act, regard should be had to legitimate competition from an infringer. Subsection 55(1) states that "“[a] person who infringes a patent is liable to the patentee and to all persons claiming under the patentee for all damage sustained by the patentee or by any such person, after the grant of the patent, by reason of the infringement”".
[45] After performing a textual, contextual and purposive analysis of subsection 55(1), and after examining the law relating to causation, this Court concluded in Lovastatin that the availability of non-infringing alternatives had to be taken into account in assessing damages for patent infringement. This is because the scope of a patent holder’s monopoly may be extended if damages for lost profits were calculated without regard to the availability of a non-infringing alternative to the invention.
[46] That is, a patentee could be better off in some cases than they would otherwise have been if a defendant could have lawfully competed in the marketplace by making or selling a non-infringing product, potentially depriving the patent holder of some sales: Lovastatin, above at para. 48. Similarly, a defendant could be worse off than they would otherwise have been if the availability of non-infringing substitutes were ignored: Lovastatin, above at para. 60.
[47] As a consequence, this Court concluded in Lovastatin that "“perfect compensation”" requires a consideration of what, if any, non-infringing product or products the defendant or other competitors could and would have sold, but for the infringement. Also relevant is the extent to which lawful competition would have reduced the patent holder’s sales: above at para. 50.
[48] The Court concluded at paragraph 73 of Lovastatin, that in assessing the impact of legitimate competition from a defendant marketing a non-infringing alternative product, a court must consider at least the following questions of fact:(i) Is the alleged non-infringing alternative a true substitute and thus a real alternative?
(ii) Is the alleged non-infringing alternative a true alternative in the sense of being economically viable?
(iii) At the time of infringement, does the infringer have a sufficient supply of the non-infringing alternative to replace the non-infringing sales? Another way of framing this inquiry is could the infringer have sold the non-infringing alternative? and
(iv) Would the infringer actually have sold the non-infringing alternative? [49] Of necessity, this is a hypothetical exercise, as the Court must reconstruct the market to determine what would have happened in the hypothetical situation where, rather than infringing a plaintiff’s patent, the infringer instead chose to compete with the plaintiff using a non-infringing product.
[50] As this Court observed in the Profits Appeal, "“evidence concerning the hypothetical world is necessarily hypothetical and the Court is free to draw inferences from the evidence as to what would likely have happened ‘but for’ the breach”": above at para. 61, citing Cadbury Schweppes Inc. v. FBI Foods Ltd., 1999 CanLII 705 (SCC), [1999] 1 S.C.R. 142, 167 D.L.R. (4th) 577 at 186.
[51] The persuasive burden is on the defendant to establish that, in this hypothetical world, it could have and would have been able to obtain a sufficient amount of the non-infringing product, and that it could and would have used the non-infringing product to compete with the patent holder: Lovastatin, above at para. 74.
[52] The issue of a non-infringing alternative arose again in Pfizer Canada Inc. v. Teva Canada Ltd., 2016 FCA 161, 483 N.R. 275, leave to appeal to SCC refused, 37262 (19 January 2017) (Effexor). While a claim for compensatory damages for patent infringement was at issue in Lovastatin, Effexor involved a claim for damages under section 8 of the Patented Medicines (Notice of Compliance) Regulations, S.O.R./93-133. Citing Astrazeneca Canada Inc. v. Apotex Inc., 2013 FCA 77, 444 N.R. 254 at paragraph 7, this Court stated in Effexor that the overriding principle is the same in both types of cases: namely, that a plaintiff is to be compensated, no more, and no less: above at para. 47.
[53] The Court observed in Effexor that this Court held in Lovastatin that to succeed with a non-infringing alternative defence, a defendant had to establish that, in the hypothetical world, it would have and could have had access to sufficient quantities of a non-infringing product. The defendant also had to demonstrate that it would have, and could have, used the non-infringing product to compete with the plaintiff’s product: Effexor at para. 49, citing Lovastatin, at paras. 32, 53, 55, 70, 77 and 78.
[54] The Court noted at paragraph 50 of Effexor that both the "“could have”" and "“would have”" components of the non-infringing alternative defence are important in ensuring that a plaintiff is put in the position that they would have been in, had the infringement not occurred.
[55] Insofar as the "“could have”" element of the test is concerned, the defendant has to demonstrate that, in the hypothetical world, it would have been possible for it to secure non-infringing product – that is, that it "“could have”" done so. To satisfy the "“would have”" component of the test, a defendant must demonstrate "“that events would transpire in such a way as to put them in that position”": Effexor, above at para. 50. That is, that the defendant "“would have”" obtained and used the non-infringing alternative.
[56] As this Court observed in the Profits Appeal, the significance of the "“would have”" requirement is that by requiring that a defendant demonstrate that it would have used a non-infringing alternative, it shows that "“the value of the patented invention is not such that reliance on alternatives is unlikely or fanciful”". That is, even if a non-infringing alternative is available, a defendant must nevertheless show "“that there are no impediments to its use”": above at para. 42.
[57] The non-infringing alternative defence was also discussed in Apotex Inc. v. Eli Lilly and Co., 2018 FCA 217, 161 C.P.R. (4th) 411, leave to appeal to SCC refused, 38485 (23 May 2019) (Cefaclor). There, this Court reiterated that the goal of the non-infringing alternative defence "“is to help ascertain the real value of inventions for which a patentee […] was granted a monopoly”": above at para. 49.
[58] In considering the impact of legitimate competition from a defendant marketing a non-infringing alternative to the patentee’s product, the Court in Cefaclor adopted the four-part test from Lovastatin. The Court observed, however, that this test was not intended to be exhaustive, and that where the existence of a non-infringing alternative is in issue, a court will be required to consider at least the four questions of fact that were identified in Lovastatin: Cefaclor, above at para. 51 [emphasis added].
[59] The Court went on in Cefaclor to note that the following principles may also be relevant to the inquiry:1) the real world informs our construction of the “but-for” world;
2) conduct in the real world is “very important” to what would have happened in the “but-for” world;
3) findings of fact from the liability decision are relevant to constructing the “but-for” world; and
4) “brazen” infringement in the real world makes it very difficult to prove that the defendant would have deployed the non-infringing alternative in the “but-for” world. (Cefaclor at para. 52, citing Lovastatin at para. 90).
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