Court Breaks with Apportionment
28 July, 2015
Ephraim Stulberg
Canada
The case of Varco Canada Limited v. Pason Systems Corp., 2013 FC 750 (CanLII) involved an award of over $52M based on an accounting of the defendant’s profits. Perhaps more importantly, the decision sheds light on a number of conceptual issues relating to the quantification of financial remedies in Canadian patent litigation. This article explores some of the key financial points raised by the decision.
Criteria for Awarding the Defendant’s Profits
The Varco matter involved a dispute over a patented technology employed in automatic drilling systems used for the extraction of oil by means of horizontal or directional wells. The Federal Court found that the autodriller developed by Pason had infringed Varco’s 313 Patent. In deciding to award Varco with an accounting of Pason’s profits, Justice Phelan set out (at paras. 402-410) a number of criteria that must be met in order for an equitable award of an accounting of profits pursuant to s. 57 of the Patent Act:
- Was there any inequitable conduct on the part of the plaintiffs?
- Is the calculation relatively straightforward?
- Is the patented technology the key driver of sales of the infringing product, or merely a side feature?
- Was the copying of the plaintiff’s technology deliberate, and was the defendant aware of the plaintiff’s patent?
- Is it possible that the defendant infringed in an attempt to “steamroll” a much smaller competitor?
The fourth criterion is of particular importance, as it connects directly with the idea that an accounting of profits is meant to serve as a deterrent to willful infringement. It recognizes that an accounting of profits may often contain a punitive aspect and leave the defendant in a worse financial position than if it had not infringed. At paragraph 408 Justice Phelan stated that the defendant “knew or ought to have known of the risk of infringement and if the potential disgorgement remedy. It took the calculated business risk to proceed in any event. Having taken the risk, it is only equitable that it face the full consequences.”
Apportionment versus Differential Profits
When it came to calculating the defendant’s profits, Justice Phelan took exception to the methodology adopted by the defendant’s expert in “apportioning” its profits between the infringing technology and other positive factors brought to bear by the defendants on their infringing product, such as their size and market presence, their customer service programs, and the superiority of their product’s performance. Justice Phelan noted that such factors were irrelevant to the quantification, noting that “the proper place to consider non-infringing features is in the analysis of “causal connection”, because the Supreme Court of Canada in Monsanto has stated that “the inventor is only entitled to that portion of the infringer’s profit which is causally attributable to the invention”” (para. 421). This comment bears elaboration.
Both “Apportionment” of the sort proposed by the defendants in Varco and the Differential Profits approach advocated by the Supreme Court in Monsanto seek to rectify a potential injustice, whereby sales of an item of which the infringing technology constitutes only a small portion of the overall product are nonetheless deemed to be 100% “infringing” and subject to disgorgement.
Prior to Monsanto, courts had typically resorted to “apportioning” the defendant’s profits between their infringing and non-infringing components. Apportionment had been done on the basis of cost (Beloit Canada Ltee v. Valmet OY, (1994), 55 CPR (3d) 433 (FCTD – Prothonotary), the number of steps in the production process (Celanese Industrial v. BP Chemicals (1999) RPC 203), relative importance (Wellcome Foundation Limited v. Apotex Inc., 1998 CanLII 8270 (FC)) or other metrics. Such attempts to allocate profits, while applying various mathematical formulas and thus giving the illusion of precision, were arguably at least somewhat arbitrary, attempting to assign discrete value to the various components of an integrated product.
In Monsanto, the Supreme Court was faced with a case in which the infringing properties of the patented product sold by the defendant did not contribute any value to the product being sold, as the patented canola seeds sold by the defendant were to be crushed for oil, whereas the patented properties of the seeds’ related to their resistance to herbicides once planted. Instead of simply invoking the principle of apportionment, however – by apportioning zero percent of the defendant’s profits to patent – the Supreme Court set out an altogether new line of reasoning. It ruled that in an accounting of profits, one adopts a “Differential Profits” approach, in which one compares the actual profits earned by the defendant with the profits that would have been earned had the defendant adopted the best available Non-Infringing Alternative. Monsanto requires the resolution of a much more manageable and realistic question, namely: but for the infringement, what would the defendant’s profits have been? This Differential Profits approach gets right to the crux of the very issue an accounting of profits seeks to resolve, and which proponents of apportionment had been approaching indirectly, by asking directly whether, and to what extent, the defendant has truly benefited from the plaintiff’s technology.
Monsanto seemingly left open the question of whether apportionment could still be applied in the event that no Non-Infringing Alternative existed: could one still argue that there were other contributors to the defendant’s profits that ought to be deducted? At paragraph 404, Justice Phelan notes that “This case involved just two competing products. The Defendants admit without these features of the Pason AutoDriller (which the Court has found to be infringing), it would not have any such sales. The weight of the evidence is that each Pason sale is one that would, in all probability, have gone to the Plaintiffs.”Justice Phelan answered emphatically under these circumstances that apportionment is not appropriate, ruling that the infringing technology was the sole causal factor in customers’ decision to purchase Pason’s autodriller, and that “but for the infringing qualities of the Pason AutoDriller, Pason would have earned nothing” (para 422).
Conclusion
While there remain a number of issues relating to accounting of profits that are still unresolved, the resounding rejection of the defendant’s “apportionment” methodology in this type of fact situation by Justice Phelan provides further guidance in the application of an accounting of profits quantification.
By Ephraim Stulberg. Published in the March 14, 2014 edition of Lawyers Weekly.
The statements or comments contained within this article are based on the author’s own knowledge and experience and do not necessarily represent those of the firm, other partners, our clients, or other business partners.
Ephraim Stulberg
B.A, M.A, M.BA, CPA, CA, CBV, CFF, Partner/Senior Vice President
- +1 416.366.4968
- estulberg@mdd.com
- Toronto, ON, Canada
Articles
Relevant Articles
Our experts are extremely knowledgeable about thier subject areas and often write educational material and commentary on topical issues they come across.
Natural Gas – The Past, Present and Future
There has been a significant push towards transitioning to cleaner and renewable energy sources, moving away from fossil fuels due to their environmental impact. By looking at the past, the present and the future, the question remains: can we realistically...
Upstream Oil and Gas Losses
In this briefing, we discuss various considerations in upstream oil and gas production losses, and in particular how rates of production depend on the type of well. We also discuss what the shift to horizontal drilling and hydraulic fracturing means...
Benefits of Hindsight when Quantifying Financial Losses
Claims for economic losses arising out of failed real estate developments can be complex to prove, requiring evidence concerning many different aspects of the proposed construction project. There can also be different approaches to quantifying losses. Both of these issues...
An Introduction to Natural Gas: Separation, LNG and GTL Plants
Our first technical briefing introduced the Oil & Gas value chain, divided into: i) upstream; ii) midstream; and iii) downstream. Here is a recap, before we explore natural gas in more detail. Upstream: this involves the exploration and extraction of...
Imbalance of Gas Supply
The sanctions imposed on Russia amid the Russia-Ukraine conflict have impacted global gas markets, particularly those in Europe. Russia is the second largest producer of natural gas globally and used to supply about 40% of Europe's natural gas. However, supplies...
The Global Energy Crisis
As the Ukrainian conflict unfolds, Europe’s energy dependence on Russia becomes an increasingly critical bargaining tool. The economic sanctions imposed by some Western nations in response to Russia’s invasion appear to be increasingly directed against Russian oil and gas supplies...
Measuring Refining Margins for a BI Loss
When it comes to Business Interruption policies for Oil & Gas risks, there are different types of coverage available in the market, including Gross Profit, Gross Earnings, Specified Standing Charges etc. Common Policy Wordings Gross Profit equates to Turnover less...
The Importance of Linear Programs (LPs) in Refinery Claims
The use of Linear Program models is common in refining, and other industries, to optimise their activities by using an algorithm subject to a set of inputs, constraints, and relationships. This article discusses the LP models in more detail and...
What Happened to Jet Fuel During Covid-19?
The main types of jet fuels used by airlines are Jet A-1, Jet A and Jet B. Jet A is mainly used in the United States, whereas Jet A-1 is commonly used outside the United States and Jet B is...
Lost Profits Measurement in the Cannabis Industry
What used to be considered an illicit drug in most countries is now a decriminalized plant with some medicinal potential. Cannabis is in the midst of a global transformation into a major industry with massive investment and growth potential. Canada...
The Recovery of Oil & Gas: A Roller Coaster Ride or Merely a Few Speed Bumps?
Covid-19 has led to major disruptions across various sectors and the petroleum industry is no exception. Demand for oil and petroleum products, in general, declined due to reduced economic activity as governments worldwide imposed lockdowns and tightened border controls. Certain...
What Triggered the UK Energy Market Crisis and What is the Impact on BI Claims?
The UK’s energy wholesale markets have reached new highs, with daily average electricity prices rising above GBP 150 per MWh since early September 2021. A record high of GBP 424 per MWh, since at least January 2019, was reached on...
Introduction to the Oil & Gas Value Chain
The Oil and Gas industry in the insurance market is usually categorised between Onshore/Offshore or Upstream/Downstream. It includes a chain of businesses relating to extraction, transportation, refining, petrochemical and chemical – essentially from the carbon in the ground to the...
Claim Considerations Related to the Beirut Port Explosion – Part 2
On 17 October 2019 large numbers of protesters began appearing in Martyrs Square, Nejmeh Square, and Hamra Street, as well as many other areas of Beirut and throughout Lebanon. The reasons for the protests are wide reaching from a social,...
Claim Considerations Related to the Beirut Port Explosion – Part 1
In this two-part series, we write about the claim considerations related to the Beirut port explosion on 4 August 2020. On 4 August 2020 at approximately 18:00 local time, an explosion measuring 3.3 on the Richter scale ripped through Beirut...
How Forensic Accountants Can Help You Manage and Effectively Resolve Litigation Cases
If you have not worked with forensic accountants before, an understanding of what they do in litigation support and how they differ from other accountants may be surprising to you. Modern television dramas’ common use of the word “forensic” may...
How to Calculate Losses Under Business Interruption Coverage
In this article we provide a brief overview of how to calculate losses under business interruption coverage. Broadly speaking, business interruption (“BI”) insurance coverage is meant to indemnify the insured for the loss of profit it suffers as a result...
Forensic Accounting Liability Exposures
The below article first appeared in THE STANDARD, New England’s Insurance Magazine. It features excerpts from a presentation given by MDD partners Paul McGowan, CPA, CVA and Jon Ducey, CPA, CVA on the topic of liability claims and other key...
Economic Damages from Personal Injury: A Forensic Accountant’s Perspective
Regrettably, individuals can experience a temporary or permanent diminishment in their ability to perform certain functions due to a tortfeasor. Forensic accountants and economists are regularly retained in matters involving the injury or death of an individual for the purpose...
Caribbean ‘vacation’ for CAT claims
As a global forensic accounting firm, we at MDD have a “boots on the ground” mentality when it comes to quantifying economic damages for catastrophe (“CAT”) claims. The busy hurricane season in 2017 meant that I, along with many of...
Mining Claim – All Is Not As It Appears
In this briefing we focus on mining claims, and share our knowledge and technical expertise on one of the loss measurement issues regularly encountered in mining claims, production bottlenecks. What you will learn from reading the article include: How the...
Identifying and Measuring Short Duration Business Interruption Losses
What have we really lost? One of the most common issues that arise from short-duration interruptions, those measured in days as opposed to weeks or months, is whether the business actually suffered a permanent loss of revenue or whether the...
Contaminated Products Insurance Claims: How to Check the Costs of a Product Recall
The number of food product recalls reported in the UK through the FSA (Food Standards Agency) rose 78% in 2015. With many UK businesses operating internationally, a product recall situation can impact many countries and cost millions of pounds in...
Staying Afloat in the Flood – The Cost of Flooding to Companies with Exposures in India
Given the number of major flood occurrences in India in the past decade, European and US companies with exposures in the country should examine their insurance coverage and disaster management planning. As the waters start to subside following India’s latest...
The Effect of Deductibles & Policy Wording – Is It What You Think?
With a typical Energy claim standing at approximately USD 4.5 million, it’s no surprise that Business Interruption (BI) is once again the #1 business risk for the fourth year in a row[i]. To help insurers mitigate their exposure when an...
Business Interruption: Complex Interdependencies
As business structures become more complex, companies often need more sophisticated insurance products to properly manage their business interruption risks. For example, narrow vertical integration makes risk management more difficult and increases the demands placed on insurers regarding correct risk...
Catastrophe Events and Business Interruption Insurance
In the event of a devastating catastrophe (“cat”) be it an earthquake, hurricane, flood, or tornado, the first and foremost priority is to ensure the safety all the people involved. Once this has been established, business owners can then begin...
A Primer To Accurately Calculating Lost Profits
What Are Lost Profits and How Are They Calculated? Lost profits are economic damages caused by a disruption in business operations. The damages can be the result of a variety of factors, some of which include patent infringement, breach of...
Gift Cards and the Illiquidity Discount – A Valuation Perspective
With the busiest season of the year for retail sales upon us, you are no doubt wondering what to buy for that special someone. If you’re reading this blog – and I have every reason to believe you are –...
I Lost My Customers and It’s Your Fault!
In Schwartz Levitsky Feldman LLP v. Werbin, 2015, an action was put forward by Schwartz Levitsky Feldman (SLF) claiming loss of profits due to the departure of Mr. Werbin. The firm contended that they purchased Werbin’s clients when they purchased...
Patent Infringement Judgment – Non Infringing Alternatives
The Federal Court of Appeal has issued a ruling that could have wide-ranging consequences for the calculation of patent infringement damages. In Apotex Inc. v. Merck & Co., Inc., 2015 FCA 171, the FCA rejected the trial judge’s ruling (Merck...
Foreign Exchange Issues in Damage Quantification: Part II – Applying the Concepts
In the previous post, we presented a basic framework for analyzing the impact of foreign exchange fluctuations on quantifying financial remedies. We argued that the treatment of foreign exchange should be consistent with the principal underlying the financial remedy being awarded;...
Foreign Exchange Issues in Damage Quantification: Part I – Basic Concepts
International trade is an increasingly important part of the Canadian economy, as this picture clearly shows: As a result, it is not uncommon for litigation to involve the quantification of financial remedies across multiple political and monetary boundaries. How does...
Adding up the Damage: Lost Profits vs. Business Value
When a business is destroyed as a result of wrongdoing, there are two commonly used methods by which the plaintiff’s damages may be measured. One method is to appraise the value of the plaintiff’s business at the date of loss;...
Court Breaks with Apportionment
The case of Varco Canada Limited v. Pason Systems Corp., 2013 FC 750 (CanLII) involved an award of over $52M based on an accounting of the defendant’s profits. Perhaps more importantly, the decision sheds light on a number of conceptual...
Calculated Risk: A $75M Award Adds Urgency to Pre-Judgment Interest Considerations
Pre-judgment interest is often the last thing litigants ponder. A recent award of $75 million in pre-judgment interest in Eli Lilly v. Apotex, 2014 FC 1254 (“Cefaclor”) may change that. Cefaclor involved the infringement of patents for an antibiotic. Damages...
Top 10 Most Common Errors in Damage Quantification – #2: “Build It and He Will Come”
I have already written, in another context, about the interaction between physical assets and lost profits. I want to explore the issue from a couple of additional angles. In the 1989 film Field of Dreams, Kevin Costner’s character hears a voice telling him...
Pre-Judgment Interest, Part III: Property Damage, Profit, and PJI
My practice involves a lot of work for property insurance companies. When damage to property occurs, the property owner may advance a claim against the third party tortfeasor for both the value of the damaged property as well as an...
Pre-Judgment Interest, Part II – Interest and Taxes
In the previous post, I discussed the large pre-judgment interest award in Cefaclor. In that case, one of the issues raised by defendant’s counsel was that to award the plaintiff compound interest would result in overpayment; since the damages award is...
Pre-Judgment Interest: Part I: Establishing a Rate – A Basic Framework
This post on pre-judgment interest deals with the basic question: what is the best method by which to calculate a pre-judgment interest rate? The Law Pre-judgment interest is interest that is added to a plaintiff’s monetary award in respect of...
Pre-Judgment Interest: Introduction
Pre-judgment interest is possibly the least sexy topic imaginable. But there is perhaps no better vehicle for a discussion of the fundamental issues involved in financial loss quantification. A short article of mine dealing with a very large PJI award (over...
Top 10 Most Common Errors in Damages Calculations – #1: Failure to Consider Saved Expenses
Towards the end of the Great War (or World War I as it came to be called), the American president, Woodrow Wilson, proclaimed Fourteen Points outlining his goals for the reconstitution of Europe, and the international state system as a...
Tax Rates, Timing and Damages
In Canada, as a general rule, damages awards are subject to the same tax treatment as the monetary amounts they are meant to replace. For example, awards for lost profits are taxed as business income [1]. Litigation can often take...
Dunkin’ Donuts c. Bertico inc., Part II: Lost Profit & Loss of Business Value
Towards the end of its decision in Dunkin’ Brands Canada Ltd. c. Bertico inc.2015 QCCA 624, the Quebec Court of Appeal discussed the issue of whether an award for both a) lost profits up to 2005 and b) loss of business...
Dunkin’ Donuts c. Berticoinc, Part I: The Benchmark Approach to Lost Profits
In April 2015, the Quebec Court of Appeal released its decision in Dunkin’ Brands Canada Ltd. c. Bertico inc. 2015 QCCA 624. The Court of Appeal upheld the trial judge’s ruling (Bertico inc. c. Dunkin' Brands Canada Ltd., 2012 QCCS 2809) that...
Agricultural Loss – Quantifying Economic Damage for a Hog Farm
Damage quantification for livestock losses can be difficult as it often requires consideration of market price fluctuations, age and weight of livestock at the time of loss and the end purpose of the livestock - considering whether they are for...
Business Interruption Loss – The Interaction between Inventory Losses and Business Interruption Claims
This article explores the areas of overlap between insurance coverage for inventory loss and business interruption. In the event of physical damage to inventory, different policies provide different valuations, including: replacement cost, actual cash value, historical cost or selling price. ...
A New Take on the Accounting of Profits Remedy
The Federal Court’s decision in Merck & Co. v. Apotex Inc. [2013] F.C.J. No. 840, has shed a novel light on to how damages for patent infringement are to be calculated. Previously, in its decision in Monsanto Canada Inc. v....
Quantifying Business Loss Involving Expropriation of Newly Established Businesses
With increasing activity in public works projects in the Greater Toronto Area (e.g. the Toronto-York Spadina Subway extension) and other highway expansions across Ontario, we can expect a large number of businesses to be affected by expropriation. This article will...
Documentation and Litigation
Litigation can be a scary and intimidating process. Preparation is key and includes ensuring that the documentation you need to prove your case is ready at hand. Below are some common forms of litigation and the documentation that should be...
Forensic Accountants Make It Add Up
Corporate fraud, insider trading, 9/11, intellectual property infringement the list goes on as to instances where parties have committed acts resulting in financial losses. The legal challenge in proving financial wrongdoing is a minefield in itself, but what steps need...
Coinsurance: Can Someone Please Explain This to me Once And For All?
In the US property insurance market, coinsurance, an often-misunderstood concept, refers to the sharing of risk between the insured and the insurer and applies to property damage and business income loss coverage. Coinsurance as it applies to Property Insurance Because...
Fight the Battle on Two Fronts – Liability and Damages
Plaintiff and Defense attorneys are guilty! Guilty of waiting until the last minute to address areas of damages. MDD is very often retained in litigation engagements when the measurement of damages takes a back seat to liability and causation. Although...
Handling Large Complex Claims
Large insurance claims are almost always complex, time-consuming and in need of a forensic accountant. They are complex because of the secondary impact from the misfortune setting off the initial claim. Take, for example, a fire at a ski hill...
Projecting Sales in Business Income Losses is an Art – Not Necessarily a Science
Insurance policies generally state that in determining the Actual Loss Sustained under business income coverage, consideration must be given to actual experience of the business before and the probable experience thereafter had no loss occurred. Thus, the goal in evaluating...
The Impact of Foreign Exchange Rate Movements on Loss of Profit Claims
Foreign exchange risk has been high on the agenda of CFOs of MNCs for many years. With the expansion of the global economy and diverse influences on exchange rates - such as the current climate of economic uncertainty and fear...
