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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 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:

  1. Was there any inequitable conduct on the part of the plaintiffs?
  2. Is the calculation relatively straightforward?
  3. Is the patented technology the key driver of sales of the infringing product, or merely a side feature?
  4. Was the copying of the plaintiff’s technology deliberate, and was the defendant aware of the plaintiff’s patent?
  5. 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.

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