The Supreme Court of Canada sheds light on accounting of profits analysis
On November 18, 2022, the Supreme Court of Canada ("SCC") issued its long-awaited decision on the proper calculation of the accounting of profits remedy for patent infringement. At its core, an accounting of profits requires the infringer to disgorge all profits gained that are “causally attributable to the invention”.
Writing on behalf of the eight-judge majority, Rowe J., sets out a 3-part test for an accounting of profits:
Step 1: Calculate the actual profits earned by selling the infringing product — i.e., revenue minus (full or differential) costs.
Step 2: Determine whether there is a non-infringing option (“NIO”) that can help isolate the profits causally attributable to the invention from the portion of the infringer’s profits not causally attributable to the invention — i.e., differential profits. It is at this step that judges should apply the principles of causation. Causation “need not be determined by scientific precision: it is ‘essentially a practical question of fact which can best be answered by ordinary common sense’” (Merck & Co., Inc. v. Apotex Inc., 2015 FCA 171,  2 F.C.R. 202, at para. 44, quoting Snell v. Farrell, 1990 CanLII 70 (SCC),  2 S.C.R. 311, at para. 328).
Step 3: If there is a NIO, subtract the profits the infringer could have made had it used the non-infringing option from its actual profits, to determine the amount to be disgorged.
The majority and dissenting reasons differed on the methodology used to isolate profits. While both the majority and dissenting reasons acknowledge that an accounting of profits requires an assessment of the NIO, the Court split over how to give practical effect to a NIO if one is present.
In the majority’s view, a NIO helps the Court isolate the profits causally attributable to the invention from the profits which arose at the same time the infringing product was used or sold, but which are not causally attributable to the invention. Conversely, the dissenting reasons of Côté J. place importance on what the infringer could have and would have done when assessing the accounting of profits remedy, as the Court’s objective should be to restore the infringer to the position it would have been in, but for the infringement. The majority commented specifically on Justice Côté’s methodology and explained that an NIO is not merely an infringer’s most profitable alternative sales product that it would have and could have sold had it not infringed.
The practical difference between the majority and minority approach to the NIO is evident from their assessment of an apparently novel argument raised by Nova before the SCC. Nova argued that, had it not manufactured the patented plastics, it would have used its manufacturing capacity to make and sell entirely different plastics to manufacture items like pails and crates. These are Nova’s purported NIO’s. Nova claimed that sales of these non-infringing plastics would have generated profits, which should be deductible from the profits earned by its infringement. However, the majority disagreed, holding that there was no NIA because potential buyers interested in the patented plastics would not have purchased pail-and-crate plastics as an alternative. In short, there was no overlap in the markets for the patented and crate-and-pail plastics.
The majority held that the onus is on the infringer to adduce sufficient evidence to satisfy the Court that (1) the profits from its infringing product arose by virtue of features other than the patentee’s invention; and (2) there is a NIO that can help the courts determine the value of the invention. Whether or not there is a NIO is a question of fact to be established in each case.
In ruling in favour of Dow Chemical, the majority held that the trial judge did not err when he concluded that all profits Nova earned by selling the patented plastics were causally attributable to Dow’s invention. In the majority’s view, this was supported by two facts:
- First, the reference judge found that customers only purchased Nova’s infringing plastics because they contained the features captured by Dow’s patent.
- Second, Nova did not establish that there were relevant non-infringing options that would help the Court isolate the profits causally attributable to Dow’s invention from profits attributable to non-inventive features of the infringing product.
When calculating the infringer’s profits in Step 1, the majority held that courts should only consider actual revenues and costs. This stems from the principle that a patentee must take the infringer as they find them. For example, the patentee is entitled to all the profits actually made, even if the patentee would not have attained similar profits. The majority applied this rationale and concluded that the reference judge did not err by refusing to deduct the market price of ethylene as a cost in Step 1.
The majority confirmed that springboard profits causally attributable to the infringement of the invention are in fact recoverable. These are profits that arise because of infringement that accrue after expiry of the patent. The Court held that, because pail-and-crate plastics were not a NIO, there was no basis to reduce the reference judge’s springboard profits award.
As an aside, the accounting of profits remedy is not available to successful patentees as of right. Accounting of profits is an equitable remedy that may, or may not, be available to a successful patentee based on the application of equitable principles to the facts of the each case. Before the SCC, there was no dispute that Dow was entitled to claim an accounting of profits. The only issue was how it was to be calculated.