Thursday, October 1, 2009

Canadian courts confirm differential profits approach to Accounting of Profits cases

Just catching up on things. I wrote this for Lexology a little while ago. Thanks to Art Renaud for bringing these cases to my attention.

Two recent Federal Court of Canada cases held that when calculating an accounting of profits in patent cases the “differential profits” approach - comparing the profits actually made with those that would have been made using the best non-infringing option – must be applied. These decisions, combined with the Supreme Court of Canada’s decision in Monsanto v. Schmeiser, are important precedent for the application of the accounting of profits remedy in patent cases in Canada and the Commonwealth.

The two cases, both decided by Zinn J., are Monsanto v. Rivett, 2009 FC 317 and Monsanto v. Janssens, 2009 FC 318.

“Actual profits” vs. “differential profits”: what’s at stake?

The accounting of profits is the dominant monetary remedy for patent infringement in Canada. Unlike damages, which measures the amount of the remedy by the loss of the successful plaintiff, the accounting of profits award forces the defendant to disgorge the profits attributable to the infringement. In Commonwealth countries, successful patent plaintiffs often can choose the accounting of profits instead of a damages award, and in fact generally do so, for strategic reasons (it is easier to protect sensitive information in an accounting of profits inquiry than a damages inquiry) and/or because of an expectation that the accounting of profits award will be larger than a damages award.

There are two competing theories on how to calculate the size of an accounting of profits award:

• subtract costs from the gross revenue attributable to the infringement – the “actual profits” approach

• subtract the profits that would have been made using the best non-infringing option from the actual profits made – the “differential profits” approach

These have been much debated in the case-law since the accounting of profits remedy was revived in the early 1980s. Since the actual profits approach will usually generate a larger award on the facts in the cases where an accounting of profit has been sought, the plaintiffs typically support this approach, with the defendants proposing the differential profits approach.

Until 2004, the results in the cases were fairly one-sided, with several decisions explicitly rejecting the differential profits doctrine in favour of the actual profits doctrine, and no case clearly adopting the differential profits approach.

As a practical matter, these approaches can lead to very different sizes of award. For example, in the Schmeiser case, the application of the differential profits approach reduced the plaintiff’s monetary award to zero. In the Rivett and Janssens cases, the application of the differential profits approach decreased the plaintiff’s monetary awards by 69%.

Debate: the innocent infringer and the
Supreme Court of Canada decision in Schmeiser

The debate between the actual and differential profits approaches took a dramatic turn in 2004 in the Supreme Court of Canada case of Monsanto v. Schmeiser. In that case, the defendant Percy Schmeiser was found to have deliberately raised and sold a crop of genetically modified canola and liable for infringing a Monsanto patent. The trial judge awarded an accounting of profits, and using the actual profits approach awarded Monsanto $20,000. The Supreme Court instead applied the differential profits approach, finding that the defendant’s profits “were precisely what they would have been had they planted and harvested ordinary canola. … The appellants' profits arose solely from qualities of their crop that cannot be attributed to the invention." Hence, there was no difference between the defendant’s profits with and without the infringement, and the Supreme Court held that no profits at all were to be awarded.

Nevertheless, the Supreme Court’s treatment of the issue led to further debate. If the Supreme Court was mandating a causation based approach to the accounting of profits remedy resulting in the differential profits approach, this was the portion of the Schmeiser decision with the greatest practical impact. However, the section dealing with the accounting of profits remedy was a scant five paragraphs long, and did not discuss any of the twenty years of case law it was supposedly overruling. While many practitioners embraced the Schmeiser decision as making the differential profits approach as a new “rule of law”, others saw Schmeiser as a signal that the differential profits approach should be used when appropriate, but that courts were free to apply the actual profits or differential profits approach as appropriate based upon the facts and equities of the case before them.

Clouding the issue is the possibility that the Supreme Court was determined to issue a ruling applying the differential profits approach to accounting of profits for a reason not directly before the Court - the “innocent infringer” problem. With the patenting of genetically engineered crops arises the possibility of the “innocent infringer” – exemplified by a person who unknowingly cultivates genetically modified crops with a patented gene after seed blows onto their land. Since patent infringement does not require knowledge either of the patent or that the impugned acts might infringe a patent, the “innocent infringer” is still infringing a patent. Although the amount of damages in such a situation is likely to be small, under the actual profits approach to the accounting of profits the innocent infringer could be liable to disgorge the entire profits from the sale of the tainted crop.

Such a result seems unfair on its face, and led to calls in Canada by expert commissions for changes to patent law, including special innocent infringer exceptions and rules. In reply, legal experts (primarily Professor Norman Siebrasse of the University of New Brunswick) answered that such changes were unnecessary and counterproductive, since a proper application of well-established principles of causation in remedial awards from general tort law in the patent context would lead to the differential profits approach. Under a differential profits approach, the “innocent infringer” would not have gained any particular profits beyond the best non-infringing option (the use of unpatented seed), and any monetary award against an innocent infringer would be modest at best.

On the actual facts of the Schmeiser case, the defendant was not an innocent infringer. Nevertheless, the Schmeiser case did involve genetically modified plants, and the writings of Professor Siebrasse were specifically cited by the Supreme Court. It is certainly arguable that the Supreme Court only applied the differential profits test in response to concern over the innocent infringer problem, and did not intend that the differential profits approach should always be applied when calculating an accounting of profits.

The recent decisions of Zinn J. in Rivett and Janssens

This was the state of affairs until the cases of Monsanto v. Janssens and Monsanto v. Rivett, were released in March 2009. These cases, heard together before Zinn J. of the Federal Court, both were factually similar to the Schmeiser case: all of the defendants were found to have deliberately planted, harvested and sold genetically modified soybeans, thus infringing a Monsanto patent. The plaintiffs elected an accounting of profits remedy, and urged Zinn J. to apply an actual profits approach. The defendants took the position that, following Schmeiser, Zinn J. was bound to apply the differential profits approach.

Given the factual similarity between the Schmeiser, Janssens and Rivett cases, it is unsurprising that Zinn J. followed the Supreme Court’s lead and applied the differential profits approach.

What is more interesting, and a strong signal to the patent bar in general, is that Zinn J. was clearly of the view that the ruling in Schmeiser set a new legal rule, and the differential profits approach should be applied in all future accounting of profits cases.

Noting that the Supreme Court “relied heavily on and arguably adopts Professor Siebrasse’ analysis of an accounting of profits”, Zinn J. argued that the Supreme Court had established that a causal link must be found between the profits awarded and the invention that is protected. This causation requirement necessarily results in the application of the differential profits approach.

Zinn J. hastened to add that the differential profits approach could still be reconciled with much of the existing case law. In many cases, there was no “best non-infringing option”, resulting in the actual profit and differential profit approaches becoming identical. In other cases, the courts first calculated an amount using the actual profits method, but then performed an apportionment in an attempt to limit the award to the profits actually earned from the use of the invention – essentially, an attempt to reach a causation-based result without the benefit of a causation-tailored approach.

Zinn J. summarized the steps required under the differential profits approach as follows:

a) Is there a casual connection between the profits made and the infringement?’ if there is none, then there are no profits that require an accounting.

b) If there is a causal connection, then what were the profits made by the infringer as a result of the infringement? This amount I shall describe as the Gross profits of Infringement.

c) Is there a non-infringing option that the infringer could have used?

d) If there is no non-infringing option, then the Gross Profits of Infringement are to be paid over to the patentee.

e) If there is a non-infringing option, then what profit would the infringer have made, had he used that option? This amount I shall describe as the Gross Profit of Non-Infringement.

f) Where there was a non-infringing option available, the amount to be paid over to the patentee is the difference between the Gross Profits of Infringement and the Gross Profits of Non-Infringement. This sum is the profit that is directly attributable to and that results from the infringement of the invention.

Zinn J. then proceeded to apply this analysis in the cases at hand. In both cases, the application of the differential profits approach instead of the actual profits approach lowered the award by 69%. The defendants were ordered to disgorge $40,137 in the Rivett case and $11,363 in the Janssens case.

Existence of a non-infringing comparator

Zinn J. had little difficulty in finding that the appropriate non-infringing comparator was “soybean seed that has none of the plaintiff’s invention” – i.e. conventional soybean seed. He rejected the suggestion of the defendants that the comparator should be the price of buying seed from Monsanto and thus obtaining a license.

A difficulty arose as the evidence before the Court was that conventional soybean – i.e. soybean seed not containing the patented genes – was not available on the market, or at least not available at the local co-op. Arguing that the fundamental purpose of the accounting of profits remedy was to “discover the value that the invention has brought to the product”, Zinn J. held that the market availability of the best non-infringing option is not determinative. “If one uses a comparator only if it is actually physically available for use, but not when it exists but is physically unavailable, the fact that the resulting crop has a value apart from the invention will be ignored.”

The accounting of profits remedy going forward

It will be interesting to see if the clear adoption of the differential profits approach as a rule of law by Zinn J. will be followed in other courts, particularly in the United Kingdom and Australia.

In some quarters, the accounting of profits remedy has acquired a reputation as being more difficult to administer than a damages award. Since the accounting of profits award is an equitable remedy and its award is always in the discretion of the court, some courts have taken the position that the plaintiffs need to justify the choice of an accounting remedy instead of being given a free choice. While it may be appropriate for plaintiffs to provide the court with reasons why they should receive an accounting of profits award, the differential profits approach underlies the parallel nature (and difficulty) of the damages and accounting of profits awards. Damages seeks to return the plaintiff to the position they would occupy if there was no infringement; accounting of profits seeks to return the defendant to the position they would occupy if there was no infringement. There is no reason in principle why one remedy should be more difficult to apply than the other.

The adoption of the differential profits approach will often result in lower accounting of profits awards. However, plaintiffs often make their choice of remedies for reasons other than the size of the monetary award, and in some cases the differential profits approach will give a larger accounting of profits award than the actual profits approach. While we may see more damages cases coming out of patent cases in the Canadian courts, it is unlikely that the accounting of profits award will become unused. Successful plaintiffs will need to seriously consider their choice between the damages and accounting of profits remedies in light of these decisions.

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