Nova Chemicals Corporation v. Dow Chemical Company

Nova Chemicals Corporation v. Dow Chemical Company
Court (s) Database
Federal Court of Appeal Decisions
Date
2020-09-15
Neutral citation
2020 FCA 141
File numbers
A-150-17, A-227-17
Notes
Reported Decision A correction was made on March 2, 2022
Decision Content
Date: 20200915
Dockets: A-150-17
A-227-17
Citation: 2020 FCA 141
CORAM:
STRATAS J.A.
NEAR J.A.
WOODS J.A.
BETWEEN:
NOVA CHEMICALS CORPORATION
Appellant
and
THE DOW CHEMICAL COMPANY, DOW GLOBAL TECHNOLOGIES INC. and DOW CHEMICAL CANADA ULC
Respondents
Heard at Ottawa, Ontario, on June 19, 2018.
Judgment delivered at Ottawa, Ontario, on September 15, 2020.
PUBLIC REASONS FOR JUDGMENT BY:
STRATAS J.A.
CONCURRED IN BY:
NEAR J.A.
PUBLIC DISSENTING REASONS BY:
WOODS J.A.
Date: 20200915
Dockets: A-150-17
A-227-17
Citation: 2020 FCA 141
CORAM:
STRATAS J.A.
NEAR J.A.
WOODS J.A.
BETWEEN:
NOVA CHEMICALS CORPORATION
Appellant
and
THE DOW CHEMICAL COMPANY, DOW GLOBAL TECHNOLOGIES INC. and DOW CHEMICAL CANADA ULC
Respondents
PUBLIC REASONS FOR JUDGMENT
This is a public version of confidential reasons for judgment issued to the parties.
There are no redactions from the confidential reasons for judgment.
STRATAS J.A.
[1] Before the Court is an appeal and a cross-appeal from the judgment of the Federal Court in file T-2051-10 (per Fothergill J.): 2017 FC 350, supplementary reasons 2017 FC 637, reasons on costs 2017 FC 759.
[2] After argument in this Court, the appeal and the cross-appeal were held in abeyance for a considerable time to allow for settlement discussions. Unfortunately, those settlement discussions were unsuccessful.
[3] For simplicity, in these reasons I will refer to the appellant as “NOVA” and the respondents as “Dow”.
[4] Broadly speaking, the appeal and the cross-appeal in this Court concern the principles that should govern the calculation of a plaintiff’s recovery under an accounting of profits. This issue arises from an earlier judgment of the Federal Court, later affirmed on appeal: 2014 FC 844, aff’d 2016 FCA 216.
[5] In that earlier judgment, the Federal Court found that NOVA was liable for infringing Dow’s patent over metallocene linear low-density polyethylene by manufacturing its product, SURPASS and selling it in competition to Dow’s product, ELITE.
[6] The question of remedy arose. The Federal Court permitted Dow to elect between an accounting of profits earned as a result of the patent infringement or compensatory damages caused by the patent infringement. Dow elected an accounting of profits.
[7] Neither the decision to allow Dow to elect nor the election itself is under appeal. The appeal and the cross-appeal exclusively concern the remedy of an accounting of profits and, specifically, the calculation of the amount Dow is entitled to receive.
[8] For the reasons that follow, I would dismiss both the appeal and the cross-appeal.
A. An accounting of profits as a remedy for patent infringement
(1) General principles
[9] In this area of law, judges tend not to write much about the principles they are applying and, rather, offer narrow rationales for their decisions. Sometimes in later cases, judges take these rationales as ironclad rules and apply them according to their terms. Over time, there is a risk that, through later application and refinement, the rules evolve in a way that deviates from the governing principles. Worse, as the rules get more complicated, some lawyers and even some judges, start invoking “equity” as a reason to award whatever seems, to them, appropriate and fair. Such an approach is antithetical to a legal system governed by the rule of law that prizes consistent and predictable rulings.
[10] To prevent this from happening, it is useful every once and a while to identify and explain the principles that underlie an area of law. This case presents us with an opportunity to do this in the area of an accounting of profits as a remedy for patent infringement. When we do this and when we apply the principles to the facts here, it becomes evident that the Federal Court did not commit reviewable error in deciding in the way it did. Indeed, as will be seen, except for one small area, I substantially agree with the analysis of the Federal Court.
[11] Broadly speaking, the Patent Act, R.S.C. 1985, c. P-4 enshrines and regulates a bargain made between inventors and the public: inventors disclose their inventions for the good of all, including the public and later inventors, and, in return, they are given a powerful monopoly for a period of time to exploit their invention. If the Patent Act did not do this, one would expect that many inventors would keep their inventions secret, depriving all of knowledge and know-how that can be built upon. Over time, one would expect fewer discoveries and, thus, fewer benefits for society. The Supreme Court and this Court have repeatedly explained this patent bargain in cases such as Free World Trust v. Électro Santé Inc., 2000 SCC 66, [2000] 2 S.C.R. 1024 at para. 13 and Apotex Inc. v. Merck & Co. Inc., 2015 FCA 171, [2016] 2 F.C.R. 202 at para. 42 (Apotex FCA (2015)).
[12] In the academic literature and in many university seminars, many debate whether the bargain is as beneficial for society as some contend. But in the courtroom, the debate is irrelevant. The Patent Act, with the bargain it enshrines and regulates, is law that binds us. By enacting the Patent Act, Parliament has decreed the bargain to be a social good, necessary both for the creation of wealth and the improvement of our collective welfare.
[13] Putting aside the exceptional cases where punitive damages are warranted or specific legislative provisions provide to the contrary, remedies addressing patent infringement must be consistent with the bargain. The remedies must neither overshoot nor undershoot the mark: they must neither undercut the bargain nor extend it.
[14] The Patent Act and the Federal Courts Act, R.S.C. 1985, c. F-7 specifically speak to the remedies for patent infringement. One remedy is compensatory damages: Patent Act, s. 55. Others include injunction, inspection and an accounting: Patent Act, s. 57. The Federal Courts also have the power to grant other remedies “at law or in equity” or under other Acts of Parliament: Federal Courts Act, ss. 20(2).
[15] Compensatory damages for patent infringement serve a particular purpose: to restore those whose patents have been infringed to the position they would have been in had the infringement never taken place. Compensation is the aim, no more, no less.
[16] In many cases, an award of compensatory damages is consistent with the bargain under the Patent Act. Those whose patents have been infringed are made whole for the wrongful incursion into their rights to exclusive use of the invention. In many cases, the infringer does not benefit from its wrongdoing and no incentives to infringe are created.
[17] In some cases, however, compensatory damages are inconsistent with the bargain under the Patent Act. An infringer can make a gain from the use of the patented invention and, in some cases, that gain can be more than the cost of paying compensatory damages to the holder of the benefit of the patent. On a net basis, the infringer can come out ahead.
[18] If the court’s remedial armoury were limited to an award of compensatory damages, in some cases infringers would have an incentive to infringe. For them, compensatory damages would be nothing more than a manageable fee to infringe the patent and earn benefits over and above the fee. Effectively, in such cases, inventors would no longer enjoy exclusive rights to benefit from their invention but rather merely a right to a fee for the unconsented-to use of their invention. Indeed, in some cases, infringers would have very strong economic incentives to invade the monopoly granted by the patent. The bargain under the Patent Act would be no more.
[19] Fortunately, the court’s remedial armoury is not so impoverished. It has another tool by which it can protect and vindicate the patentee’s right to exclusivity and, thus, the bargain under the Patent Act: an accounting of profits.
[20] The aim of an accounting of profits is not to compensate for injury but to remove the benefits the wrongdoer has made as a result of the infringement. By doing this, any economic incentive to infringe is removed. Potential infringers realize that they will not come out ahead if they infringe a patent and the infringement is detected—all benefits earned as a result of the infringement will be stripped from them. The availability of the remedy of an accounting of profits warns potential infringers that they had best steer clear of others’ rights of exclusivity under patents and, instead, spend their time in more profitable, lawful ways. In this way, an accounting of profits reinforces the bargain under the Patent Act. If infringers invade a patentee’s statutory monopoly with insufficient consequence, the Patent Act’s bargain crumbles, inventive spirit sputters, and a source of public wealth depletes.
[21] This is not unlike the role of an accounting of profits in preserving other important dynamics and relationships recognized by law. For example, an accounting of profits plays a key role in protecting and vindicating the relationship between fiduciaries and their beneficiaries and removing any incentives to dishonour the relationship. See, e.g., Strother v. 3464920 Canada Inc., 2007 SCC 24, [2007] 2 S.C.R. 177 at para. 75; Hodgkinson v. Simms, [1994] 3 S.C.R. 377, 117 D.L.R. (4th) 161 at 453-454; I.M. Jackman, “Restitution for Wrongs” (1989) 48:2 Cambridge L.J. 302 at 304; James Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Portland, OR: Hart Publishing, 2002) at 83-86.
[22] In the area of fiduciary duty, compensatory damages can fall short of vindicating the fiduciary relationship in the same way that they can fall short in the patent infringement context: James Edelman, “The Measure of Restitution and the Future of Restitutionary Damages” (2010) 18 R.L.R. 1 at 11 (“disgorgement damages…are needed…where other remedies do not provide sufficient deterrence”). For example, if persons in a fiduciary position invest $100 of trust money for their personal use and earn a profit of $1000, compensatory damages would only require them to surrender $100, allowing them to retain $900. A purely compensatory approach would incentivize faithless fiduciary behaviour and undermine a relationship the law considers worthy of protection.
[23] In the patent infringement context, suppose a multinational infringer is extremely efficient: it can produce infringing wares at much higher volumes than the patentee at similar cost. If a court is restricted to awarding only compensatory damages, the patentee’s lost sales will be a drop in the infringer’s bucket of profits. The remedial restriction would be a boon for efficient infringers. Stripping infringers of their wrongful gains through an accounting of profits is often the only way to vindicate the patentee’s rights to exclusivity over the invention.
[24] An accounting of profits ensures that faithless fiduciaries and patent infringers alike will not “profit from [their] wrong”: Hall v. Hebert, [1993] 2 S.C.R. 159, 101 D.L.R. (4th) 129 at 174; Strother, above at para. 77 (the remedy “teaches faithless fiduciaries that conflicts of interest do not pay”); Andrew Burrows, The Law of Restitution, 3rd ed. (New York: Oxford University Press, 2011) at 621-623; Jackman, above at 304. This principle is a longstanding and powerful one that animates remedial responses in many areas of law: see, e.g., Lundy v. Lundy (1895), 24 S.C.R. 650; Jamieson v. Jamieson (1921), 63 S.C.R. 188; Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87, 96 D.L.R. (4th) 609; Hall v. Hebert, above; Scott v. Wawanesa Mutual Insurance Co., [1989] 1 S.C.R. 1445, 59 D.L.R. (4th) 660. In the area of patents, stripping infringers of their wrongful gains restores confidence in the Patent Act scheme and ensures equitable treatment not only for inventors but also for market competitors who continue to play by the rules. As Professor Burrows (now Burrows L.J. of the U.K. Supreme Court) puts it, above at 662, “[w]hy should a wrongdoing defendant end up better off, for example, than a competitor who has taken care not to infringe another’s legal rights?”
[25] I.M. Jackman, a leading Commonwealth scholar on the topic of restitution, explains how restitutionary remedies, like an accounting of profits, can guard the integrity of “facilitative legal institutions”:
Just as the law protects people directly from harm, so must the law protect the integrity of … facilitative legal institutions, and the structure of civil remedies thus reflects the need to guard against not only personal harm, but also institutional harm. Institutional harm may not be a form of immediate “harm to others,” but will be in a mediate way, by depriving a community of the integrity (and thus the utility) of its facilitative institutions. Further, these two kinds of protection from harm operate independently, so that even if no one personally and immediately has suffered harm, a remedy might still be attracted to protect a particular facilitative institution.
(Jackman, above at 304, emphasis added, footnotes omitted.)
[26] In Hodgkinson, above at 453, the Supreme Court echoes these comments in the fiduciary context: “…the law is able to monitor a given relationship society views as socially useful while avoiding the necessity of formal regulation that may tend to hamper its social utility.”
[27] An accounting of profits is directed to the disgorgement of benefits obtained by infringers as a result of the infringement, no more, no less: e.g., Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34, [2004] 1 S.C.R. 902 at para. 101; Apotex Inc. v. ADIR, 2017 FCA 23, 406 D.L.R. (4th) 572 at paras. 26, 28 (ADIR FCA); Rivett v. Monsanto Canada Inc., 2010 FCA 207, 408 N.R. 143 (Rivett FCA); Dart Industries Inc. v. Décor Corporation Pty Ltd. (1993), 179 C.L.R. 101, (1993) 116 A.L.R. 385 at 111 (Aust. H.C.); Norman Siebrasse, “A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms” (2004), 20 C.I.P.R. 79 at 83 (Siebrasse 2004).
[28] Awarding less—leaving infringers to enjoy some of the benefits from their infringement of patents—does not fully remove the incentive to infringe. It incentivizes infringement, thereby undercutting the bargain. Awarding more—stripping infringers of the benefits obtained from their infringement and taking even more away—removes the incentive to infringe. The bargain is affirmed. But by taking even more away, it punishes the infringer.
[29] An accounting of profits is not to be punitive: Schmeiser, above at para. 101; Lubrizol Corp. v. Imperial Oil Ltd. (1996), [1997] 2 F.C. 3, 71 C.P.R. (3d) 26 (C.A.) at para. 15. Instead, that is the objective of punitive damages. Punitive damages are additional awards tacked on top of another remedial response (whether compensatory or restitutionary) and a separate body of law defines and regulates their availability and quantum: e.g., Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595 at para. 36, cited in Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19 at paras. 63-66.
[30] Here, a warning must be sounded. In some cases, an accounting of profits, calculated in accordance with proper principle, can result in an enormous quantum of recovery, a sum with many digits. Some judges get spooked by this. They turn their backs on the doctrine, draw upon their own vague sense of what seems to be fair, and find some formula of words to reduce the amount awarded. This is wrong. Their response is not a judicial one, a reasoned application of settled doctrine to the evidence. Rather, their response springs from idiosyncratic feelings and impressions, something that varies from judge to judge. Were this the accepted way of performing an accounting of profits, outcomes would depend on the random chance of the particular person chosen to decide the case—essentially justice turning on the spin of a roulette wheel. Alas, some counsel—not the skilled and professional ones here—encourage these sorts of non-judicial responses by lambasting claims as “enormous”, “unfair” and “unjust” without referring to the settled doctrine.
[31] These sorts of non-judicial approaches should be seen for what they are. If a defendant wrongly takes a plaintiff’s patented machine and earns millions from the machine that it had no right to use and the remedy is an accounting of profits, every last penny caused by the wrongdoing must be stripped from the defendant, no matter how high that may be. Otherwise, the defendant is rewarded for its wrongdoing and others looking on might be encouraged to do the same.
[32] Thus, properly seen, the instruction to avoid punitive outcomes when awarding an accounting of profits is no reason to arbitrarily reduce or cap the amount to be disgorged from the infringer. It is just a prudent reminder to apply causation principles properly and rigorously, to ensure that the gain earned by the infringer as a result of the infringement is reversed, no more, no less.
[33] To reiterate, under an accounting of profits, the patentee is entitled to the benefits obtained by infringers as a result of the infringement of the patent, properly construed and understood, no more, no less. The key words are “as a result” and “infringement of the patent, properly construed and understood”. The former stresses the need for the court to analyze causation, for only those amounts causally linked to the infringement are captured by the accounting of profits; anything extra is punitive. The latter reminds us that the focus is on the protection afforded by the patent; anything extra effectively extends, improperly, the scope of protection afforded by the patent.
[34] Thus, an accounting of profits must walk a fine line between deterring infringement, i.e., extracting any economic incentive to infringe, without punishing, i.e., extracting sums not causally connected to the infringement. And it must focus on defending and vindicating—not expanding—the patentee’s lawful monopoly under the patent.
[35] To illustrate this, consider a luxury car manufacturer that uses a screw in its windshield wipers. The screw infringes a patent. The patentee’s monopoly covers that screw, not luxury cars. If the infringer would be forced to disgorge all of its profits from the luxury cars, in practical terms the remedy would place the patentee in the position of enjoying a monopoly that it simply does not possess. The patentee did not invent luxury cars, it only invented a screw. An accounting of profits defends and, thus, is constrained by a patent’s borders, nothing more.
[36] The jurisprudence has developed two rules for courts to help them implement these principles: (1) only actual profits, meaning actual revenues minus actual costs, are disgorged; (2) only profits that have resulted from the patent infringement are disgorged.
(2) Specific principles
(a) Only actual profits are disgorged
[37] In an accounting of profits, courts must work in the real world, not the hypothetical. Courts care only about actual revenues and actual costs. What “could have”, “should have”, or “would have” happened is of no moment. The only thing that matters is what did happen. Because the aim of the remedy is to strip the gains that did happen from the infringer as a result of the actual infringement of the patent, properly construed and understood.
[38] Thus, it is a key principle in this area of law that patentees must take their infringers as they find them: Lubrizol, above at para. 15; Reading & Bates Construction Co. v. Baker Energy Resources Corp. (1994), [1995] 1 F.C. 483, 58 C.P.R. (3d) 359 at 368 (C.A.); Norman Siebrasse et al., “Accounting of Profits in Intellectual Property Cases in Canada” (2007) 24 C.I.P.R. 83 at 87 (Siebrasse, 2007); S.J. Perry and T.A. Currier, Canadian Patent Law, 3rd ed. (Markham, Ont: LexisNexis Canada, 2014) at 472, §17.46; Dart Industries, above at 111; Celanese International Corp. v. BP Chemicals Ltd., [1999] R.P.C. 203, [1998] All E.R. (D.) 594, at 220 (C.H. Eng). In its reasons, the Federal Court correctly identified this principle and was guided by it: reasons at paras. 138-140.
[39] This principle advances the purposes of the remedy. Disgorging anything less than an infringer’s actual profits would offer an economic incentive to infringe. It allows the infringer to retain some of its ill-gotten gains and chip away at the patentee’s monopoly. But disgorging more than what was actually earned is not necessary to protect that monopoly and is, therefore, punitive.
[40] In order to do this properly in an accounting of profits, courts must avoid the hypothetical, “but for” world. Questions of what the parties could, would, or should have done are irrelevant to the analysis.
[41] For example, infringers cannot deduct opportunity costs (i.e., what they would have done but for the infringement). Opportunity costs are hypothetical costs occurring in the “but for” world. Allowing any hypothetical revenues or costs to be deducted undercuts the patent bargain. When hypothetical revenues and costs are used it distorts the picture of what the infringer actually earned making it impossible to extract the actual value derived from the infringement.
[42] In its oral submissions, the respondent Dow offered a simple, apt example to illustrate this point: if bank robbers steal $50 and are liable to return it, they cannot seek to deduct $20 because they would have earned $20 in the workplace had they never robbed the bank. To allow the $20 deduction is to incentivize bank robbery: in the best case scenario, where their robbery is not detected, the bank robbers would keep all of their ill-gotten gains and, in the worst case scenario, the bank robbers would keep what they would have earned had they not robbed the bank. Given this, why wouldn’t the bank robbers decide to rob a bank every time? Likewise, why wouldn’t infringers decide to infringe every time? Under this approach, they are in effect given a free lottery ticket—there is only upside, no downside.
[43] Dow’s example can be extended further. Suppose the bank robbers were earning much more than minimum wage such that the robbers’ opportunity costs were $100. If the robbers could deduct the opportunity costs ($50 minus $100), they would have no profits to disgorge. This would allow the robbers to rob the bank free from any consequence. If actual profits are not disgorged, the robbers have an open license to rob the bank. Similarly, in the patent context, infringers with large opportunity costs—those who are powerful and well off who could make substantial lawful profits elsewhere—could infringe patents free from any consequence.
[44] Thus, allowing infringers to deduct opportunity costs violates the rule that only actual costs can be deducted. If hypothetical costs are deducted, it provides economic incentive for infringers to “rob the bank” and undermine the patent bargain.
[45] To be clear, “but for”, hypothetical reasoning applies when courts award compensatory damages for patent infringement: see, e.g., Apotex FCA (2015) at paras. 43-45; Pfizer Canada Inc. v. Teva Canada Ltd., 2016 FCA 161, 483 N.R. 275 at para. 50. There is no doubt that, in that context, “[b]oth ‘would have’ and ‘could have’ are key” to determine the proper amount of compensation: see, e.g., Pfizer at para. 50. But this is not the case in an accounting of profits. An accounting of profits is indifferent to the plaintiff’s compensation. What “would have” and “could have” happened does not matter—all that matters is what is actually in the infringer’s pockets as a result of the infringement of the patent, properly construed and understood.
(b) Only profits that have resulted from the patent infringement are disgorged
[46] There must be a causal connection between the profits to be disgorged and the patent infringement. A “common sense view of causation” is to be applied: Schmeiser, above at para. 101. For example, a pharmaceutical company does not disgorge its profits from all of its products just because one of its products is infringing.
[47] Even within a particular product, there may be infringing elements and non-infringing elements. If a patented brake is sold inside a car, the patentee is not entitled to all of the profits generated from the sale of the car: Dart Industries at 120. Likewise, if a drug contains two active ingredients, one of which is patented and the other unpatented, then the patentee may not be entitled to all of the profits from the drug: Wellcome Foundation Ltd. v. Apotex Inc. (1998), 82 C.P.R. (3d) 466, 151 F.T.R. 250 (F.C.). The court parses through the profits and orders only those profits caused by the infringement to be disgorged, allowing the infringer to retain the rest. This is because some of the profits are generated from a non-infringing source (i.e., the car or the unpatented ingredient).
[48] The case law in this area uses the term “apportionment of profits” to describe this process of dividing profits caused by the infringement from other profits: e.g., ADIR v. Apotex Inc., 2015 FC 721, 482 F.T.R. 276 at para. 119 (ADIR FC) rev’d but not on this principle, ADIR FCA, above. This is unfortunate, as the term can be misleading. It invites some to think that the court’s task is to divide the profits into recoverable and irrecoverable amounts on the basis of fairness. Not at all. “Apportionment” is just another way of describing the process by which the court identifies and separates the profits made as a result of the infringement from those that are not. As the Supreme Court put it in Schmeiser at para. 101, “the inventor is only entitled to that portion of the infringer’s profit which is causally attributable to the invention” (emphasis added). Assessing what profit has resulted from the infringement remains the core of the court’s task.
[49] To disgorge the profits generated from an entire car because of an infringing brake or screw is not only punitive but it also overinflates the value of the patent. As explained above, the patentee has a patent over the value generated from the patented brake or the screw, not the car as a whole. Otherwise, the Patent Act would be protecting a right that the patentee simply does not have. The remedy of an accounting of profits only defends the patent’s borders; it does not expand them.
[50] In apportioning profits, the Court must look for a link between the patent and the profits. It can do this by identifying the value (i.e., profit) generated because of the patent. In other words, the court can ask what profits are attributable to the patented brake in the car. What profits are attributable to the patented ingredient in the medicine?
[51] Professor Norman Siebrasse, a leading, incisive member of Canada’s intellectual property academy, calls this the “differential profits approach” or “value-based apportionment”:
[…] awarding profits according to the value added by the patented invention and opposed to the proportionate cost or physical size, is consonant with fundamental nature of patents as intellectual property. What is valuable is the intellectual contribution that is embodied in an invention, not the physical contribution. It may be that even though the patented aspect is only a small part of the wares that are sold, either by physical proportion or by cost, the entire value of the ware is due to the patent.
(Siebrasse 2004 at 92.)
[52] In ADIR FCA at paragraph 73, this Court cited a passage in Beloit Canada v. Valmet Oy (1994), 55 C.P.R. (3d) 433, 78 F.T.R. 86 at 457 C.P.R. (F.C.), rev’d, 184 N.R. 149 (but affirmed on this point), approvingly as an illustration of this value-based approach. The passage is as follows:
There is no question however, that the individual circumstances of a particular case may render an apportionment of profits the only equitable solution. The test in determining if there should be an apportionment is based on the saleability, as a whole, of the product which contains the patented invention. The question for the court is whether the market demand for the defendant’s product arose because of the infringed patent or whether it arose by virtue of the product’s additional features. In other words, the inquiry is directed to “the value of the patented part to the machine as a whole”, to use the words of Lord Shaw in Watson Laidlaw.
This determination is a factual one to be made on the basis of all the evidence. The answer depends entirely on the particular circumstances of each case. The onus is on the defendant to adduce sufficient evidence to satisfy the court that consumer demand for its product arose by virtue of features other than the plaintiffs’ infringed patent. If the defendant’s evidence in this regard is inadequate, the court will not make an apportionment.
[53] For a court to apportion profits, the defendant must prove that some of its profits are attributable not to the patent but some other non-infringing aspect of the infringing wares: ADIR FCA at para. 72; D. MacOdrum, Fox on the Canadian Law of Patents, 5th ed (looseleaf) (Toronto: Thomson Reuters, 2019) (looseleaf update 2018-3) at §14:5(f).
[54] There are numerous examples of value-based apportionment in the accounting of profits jurisprudence:
In Wellcome, above, where a drug featured one patented ingredient and one unpatented ingredient, the Federal Court declined to apportion on the basis of the relative weight of the two ingredients or the cost to make them. Instead, the Federal Court apportioned on the basis of the value generated by the patented ingredient: see paras. 54-58.
In Teledyne Industries Inc. v. Lido Industrial Products Ltd. (1982), 68 C.P.R. (2d) 204 (F.C.), the Federal Court declined to apportion the profits because “there [was] no evidence whatsoever establishing that the improvements made did, in fact, increase in any way the marketability of the shower heads or have any effect on their sales. Without a clearly proven effect on the market, there can obviously be no apportionment”: at 214.
In Lubrizol, above, the patent covered motor oil with a certain additive in it. This Court apportioned the profits because “it [was] possible that [the motor oils] have achieved their market share and attendant profits for reasons other than the presence of [the patentee’s] patented additive”: para. 10. Indeed, “the reality” was that the patentee “did not invent motor oil”: ibid.
In Dart Industries, the High Court of Australia declined to apportion profits because the infringing press button lid on an otherwise non-infringing canister was the “essential feature […] without which this particular container would never have been produced at all”: at 120.
In Manufacturing Co. v. Cowing, 105 U.S. 253 (1881), the patentee added a new device to an existing pump but the United States Supreme Court declined to apportion profits and awarded the full amount of profit from the pump because the “old pump was useless without the improvement”: at 256. None of the infringing sales would have been possible without the improvement: ibid.
[55] Value-based apportionment is accepted and applied outside of the patent infringement context and guidance can be obtained from cases in those areas: see, e.g., My Kinda Town Ltd. v. Soll (1981), [1983] R.P.C. 15, [1981] Com. L.R. 194 at 56.
[56] Apportionment is most easily understood when the patent is a component of a larger whole (i.e. when the infringing brake is sold inside the car). It is easy to grasp why the patentee is not entitled to profits from an entire car because it uses an infringing brake. But binding jurisprudence from this Court and the Supreme Court of Canada tells us that apportionment may be necessary even when the infringing product is the whole of the patent: Schmeiser; ADIR FCA, both above. In both of these cases, this Court and the Supreme Court applied value-based apportionment even though the infringing products were the patent itself.
[57] As instructed by the Supreme Court, this is accomplished by comparing “the defendant’s profit attributable to the invention and his profit had the defendant used the best non-infringing alternative”: Schmeiser, above at para. 102; Collette v. Lasnier (1886), 13 S.C.R. 563 at 576. Indeed, this is the “preferred means of calculating an accounting of profits”: Schmeiser at para. 102.
[58] Both Schmeiser, above and ADIR FCA, above are good illustrations of how to apply value-based apportionment when the product used or sold is the whole of the patent.
[59] In Schmeiser, the infringing farmers used the patentee’s herbicide-resistant canola seeds on their land. There were no non-infringing subcomponents: the patent was the whole seed. But the infringers never sprayed herbicide over their crops. The Supreme Court awarded no profit because the infringers’ “profits were precisely what they would have been had they planted and harvested ordinary canola” and, therefore, the infringers “obtained no premium” nor “gain[ed] any agricultural advantage” from the patented seeds: para. 104. When compared to the non-infringing alternative, the farmer generated no profits “as a result of the invention”: para. 103, emphasis in original.
[60] In ADIR FCA, above, the infringer manufactured the patentee’s drug in Canada and then sold it both in Canada and internationally. The infringer conceded that its Canadian sales should be disgorged but asserted, and this Court agreed, that it did not need to disgorge its international sales because the patented drugs could have been manufactured outside of Canada without infringing. The infringer gained no benefit (i.e., profit) from the patent when manufacturing in Canada because the drug could have been manufactured and sold outside of Canada without infringing.
[61] Value-based apportionment “isolates and identifies the profit that was generated because of the patented invention”: Monsanto Canada Inc. v. Rivett, 2009 FC 317, [2010] 2 F.C.R. 93 at para. 53 (Rivett FC). In Schmeiser, above the infringing farmers profited from the seeds but none of those profits were attributable to the seeds’ inventive value (i.e., herbicide resistance). In ADIR FCA, the profits earned outside of Canada were not causally attributable to the value of the patent because the patentee did not have the benefit of a monopoly in those other jurisdictions.
[62] These cases illustrate how value-based apportionment must focus on the value added by the invention itself. This advances the purposes of the remedy. It ensures that the Patent Act only protects the rights actually conferred to the patentee by the Patent Act. Failing to apply value-based apportionment in Schmeiser would give the patentee a monopoly over canola seeds generally and, in ADIR FCA, “would give an extraterritorial reach” to the patent that only had a monopoly in Canada: para. 33.
[63] Even putting aside the binding jurisprudence, apportioning profits even when the patent is the whole of the infringing product makes sense on a principled level: if the purpose of an account is for the infringer to disgorge the value derived from the patent, the fact that a patent is physically part of a larger whole or not should not determine whether apportionment is available. Apportionment is simply how a court ascertains which profits are causally attributable to the patentee’s monopoly and which profits were generated by some other unpatented, non-infringing element.
[64] What is the value of a patented pain reliever that provides eight hours and one minute of pain relief when there is a non-infringing alternative that provides eight hours of relief? The patentee did not invent pain relievers; the patentee only invented a drug that added an extra minute of relief: Lubrizol, above at para. 10 (“…the reality is that Lubrizol did not invent motor oil”). Why should the defendant disgorge all of its profits if only a small fraction of its profits are attributable to the value of the invention? When comparing the patent to a non-infringing alternative, we can “isolate[] and identif[y]” the value of the patent: Rivett FC, above at para. 53. This “results in a true reflection of the profits made from the invention”: ibid at para. 56.
[65] The use of non-infringing alternatives in the accounting of profits context does not engage in impermissible hypothetical, “but for” reasoning. It is simply a means of isolating the value of the patent. While it is tempting to drift into the world of hypotheticals when using non-infringing alternatives, this temptation must be resisted.
[66] Indeed, the seminal Siebrasse (2004) article, above, advocating for value-based apportionment, cited at paragraph 51, above, briefly succumbs to this temptation. In that article, Professor Siebrasse justifies non-infringing alternatives as a “specialized statement” of the “but for” principle of causation (at 91, emphasis added):
The argument in favour of the differential-profits approach is that it is simply the application of “but for” causation to an accounting of profits.
…
It says that the defendant’s profit caused by the infringement is the difference between the profit that the defendant in fact made and the profit that the defendant would have made but for the infringement, on the supposition that but for the infringement the defendant would have used the next best non-infringing alternative.
[67] This logic violates the foundational principle that one must take the infringer as one finds them. What the defendant “would have used” is not relevant to the analysis. As explained above at paragraphs 37-45, an accounting of profits takes into account only actual revenue, actual costs and actual profits. The use of hypotheticals and the “but for” test is often used to calculate compensatory damages but has no place in an accounting of profits.
[68] Professor Siebrasse defends the proposition that but for the infringement an infringer would have used the next best non-infringing alternative as:
…a reasonable one, since it says no more than that, but for the infringement, the defendant would have acted in a prudent and informed manner in pursuing its interest in making as much money as possible. Indeed it is difficult to see what other supposition might be used…
(Siebrasse 2004 at 91-92, emphasis added)
[69] On the contrary, it is quite easy to posit another supposition. For example, if an infringer could prove in evidence that, but for the infringement, it would have used its capital to invest in, say, Apple or Amazon before their market ascendance then the infringer could retain the vast majority, if not all, of its profits. But for the infringement, the infringer would have earned much more investing in Apple or Amazon than selling the infringing goods. By Professor Siebrasse’s “but for” logic, the infringer would not have to disgorge anything because using the infringing product was actually detrimental to the infringer’s overall profitability.
[70] The reality is that infringers may not always pursue the next best non-infringing alternative. It may be the case that without access to the patented product, the infringer might have pursued an entirely different course, for example, speculative investments in emerging tech companies, and would have lost everything.
[71] Professor Siebrasse’s logic permits the deduction of opportunity costs when it comes in the form of “next best infringing alternative”. But it would be unprincipled to allow the infringer to deduct its opportunity costs where that opportunity cost is in the form of a “true” non-infringing alternative but prevent the infringer from deducting if the opportunity cost is of a different nature (i.e., investing in Apple or Amazon). If value-based apportion