Accounting of profits offers significant benefits to patent owners

Introduction

The Canadian “accounting of profits” remedy for patent infringement, which is not available in the U.S., provides a potentially significant opportunity for companies with Canadian IP rights.

Recent court decisions have highlighted the potential advantages of the accounting of profits remedy, including Dow v Nova, in which the accounting remedy was used to obtain the highest reported Canadian patent infringement award of C$645 million.

Background

In Canada, a successful patentee in a patent infringement action is usually entitled to elect between the damages they have suffered as a result of the infringement and an accounting of the defendant’s profits. [1] Whereas damages compensate the patentee for their losses due to lost sales (or in the alternative, allow the patentee to recover a reasonable royalty on the infringing sales), an accounting of profits allows the patentee to recover the infringer’s profit earned from the infringement.

Benefits of an accounting of profits

Recent case law has shown that an accounting of profits can be a powerful remedy, especially in cases where a patentee’s losses may be difficult to establish. To obtain damages for lost profits, a patentee must prove the extent of their lost sales resulting from the infringer’s conduct. This can be difficult, especially in a complex market where there are third party competitors that could potentially have attracted the infringer’s sales instead of the patentee. If the patentee cannot prove lost sales, then damages are limited to a reasonable royalty.

However, if the patentee elects an accounting of profits, in the usual case the patentee will only have to prove the infringer’s revenues from its infringing sales in the first instance. The infringer then has the burden of proving the costs they incurred in making those sales. The infringer’s eligible costs are deducted from their revenues to arrive at the profit the infringer must disgorge.

Another benefit of the accounting remedy is that it can cover extra-territorial sales of goods made in Canada, without the patentee having to prove the extent of their lost sales in each country. For example, if an infringing good is manufactured in Canada, the act of manufacturing the good in Canada constitutes infringement of the patentee’s Canadian patent. In an accounting of profits, the infringer must account for the profits resulting from that infringement, even if the good is ultimately sold outside of Canada.

Several recent cases highlight these advantages of the accounting of profits remedy. As noted above, in Dow v Nova the accounting remedy was used to obtain an award of C$645 million. [2] The lawsuit involved polymers used to make heavy plastic bags, pallet wrap and food packaging. The Dow Chemical Company, the successful plaintiff, elected an accounting of profits in lieu of damages. The Nova polymers found to infringe Dow’s patent were made in Canada, but sold primarily in the US. Since the infringing products were made in Canada, the accounting of profits covered Nova’s worldwide sales.

Another example of the potential advantages of the accounting remedy is the 2013 decision in Varco v Pason. In this case, the Federal Court awarded the plaintiff C$53 million in profits arising from Pason’s infringement of a patent relating to automatic drilling systems used in drilling rigs. In the course of reaching his decision, the Judge also calculated the plaintiff’s damages resulting from the infringement.  If damages had been awarded instead, the award would only have been in the range of C$20 million dollars, less than 40% of the profits awarded.

Non-infringing alternative defence

One factor to consider is the potential availability of the “non-infringing alternative” (NIA) defence. If a defendant can establish that it could and would have used a NIA instead of the patented invention, then the profits to be disgorged are calculated by deducting from the infringing profits the profits that the defendant would have earned by using the NIA (referred to as the “differential profit” approach). [3] An NIA has to be a “true substitute and thus a real alternative” for the patented invention, among meeting other requirements. [4]

Recent cases show that the NIA defence is difficult to establish. As a recent example, in AstraZeneca v Apotex, 2017 FC 726, the defendant Apotex, a generic drug manufacturer, asserted that it could and would have used a variety of NIA formulations of omeprazole (sold by AstraZeneca as LOSEC) instead of AstraZeneca’s patented formulation that Apotex had been found to infringe, or in the alternative, non-infringing product from a third party. However, the court held that Apotex failed to prove that it could and would have used any of the alleged NIAs including because the alleged NIA formulations had not been shown to be approvable and commercially viable. [5] There was, therefore, no basis to reduce the profits to be disgorged.

Conclusion

The availability of an accounting of profits in Canada as a remedy for patent infringement can offer potentially huge benefits to patentees, including in cases involving infringing goods sourced from Canada, even if they are being sold elsewhere. The availability of such a remedy, and a number of other factors, including the ability to expedite proceedings and the lower cost of litigation, make Canada an attractive jurisdiction for patentees from the U.S. and elsewhere to litigate patent infringement matters.