The Federal Court clears the underbrush on accounting for profits: before, during and after the patent term

May 2017

The Federal Court clears the underbrush on accounting for profits: before, during and after the patent term

Richard S. Levy
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In a very recent decision (April 19, 2017), the Federal Court of Canada cleared up much of the underbrush obscuring the accounting for profits remedy for infringement of intellectual property rights. Specifically, the Court shone a bright light on which of three methods is to be used in differing circumstances.

This decision (Dow Chemical Co. v. Nova Chemicals, 2017 FC 350), which sets out the monetary remedy, follows an earlier one attaching liability to Nova for infringing a patent owned by Dow, which claims compositions of thin polyethylene used in consumer products, such as food wrap and garbage bags. The Court found that of the three recognized accounting for profits methods:

  • The “full cost” method of calculating profits is the most suitable in these circumstances. In this method, the profits to be disgorged are the revenues minus the variable fixed costs and a percentage of non-incremental fixed and capital costs. The Court held that Nova would have used its capacity to make other products had it not made the infringing products and therefore should be permitted to deduct a portion of fixed and capital costs.
  • The “differential profits” method (where the profits awarded are those earned from infringement minus the profits which would have been earned had a non-infringing alternative been marketed) which the Court has previously described as the preferred approach, was not feasible here. There were no non-infringing alternatives available.
  • The “incremental cost” method (the profits to be disgorged are the revenues minus any variable costs and any increased fixed and capital costs attributable to the patented invention) was not appropriate because here the increased costs were negligible and the result would have unduly punished the defendant.

The flexibility shown by the Court was also evident in its other findings that:

  • Pre-grant damages incurred by Dow for the period between publication of the application and issue of the patent should consist of a reasonable royalty - which the Court set at 8.8%
  • Springboard Profits” should be awarded in accounting cases, as they have been when the patent owner chose damages. Here, the Court determined that it would take 20 months for Nova to ramp up its sales to levels it enjoyed after expiry of the patent. Therefore it ruled that the accounting should include that additional 20 month period.
  • Products not explicitly addressed during the liability trial should nevertheless be included in the remedy stage, as infringement had been conceded, and, if they were not included, there was a risk that “never-ending litigation” would ensue.

In this decision, the Federal Court struck a balance by providing the plaintiff with compensation for the defendant’s activities before and after issuance of the patent, while also not being unduly punitive to the defendant.

This bulletin provides general comments on recent developments in the law. It does not constitute and should not be viewed as legal advice. No legal action should be taken on the basis of the information contained herein.

 

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