The Determination of Profits in Patent Infringement Cases

1992-01-01

THEDETERMINATIONOFPROFITSINPATENTINFRINGEMENTCASES

by
BobH.Sotiriadis
*
LEGERROBICRICHARD,Lawyers
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Introduction
TheCanadianPatentActstatesthatanypersonwhoinfringesapatentis
liabletothepatenteeforalldamagessustainedbythepatenteebyreasonof
theinfringement.
Theremedyfordamages,sostipulatedintheAct,maybecategorizedasa
legalone.Whenoneinvokesthelegalremedyofdamages,theCourtwill
seektoallowthePlaintifftomakegoodonitsloss.Assuch,damagesareonly
awardedforprovenlossandtheusualburdenofprooflieswithPlaintiff.
Equitableremedieshaveadifferentbasis.Anequitablerecourseisnormally
invokedagainsttheDefendantwhohasillegallyreceivedandwithheld
propertybelongingtoPlaintiff,andhasmadeprofitsfromsame.Insuch
cases,Defendantisorderedtorestorethepropertyortheprofits.Thus,
contrarytoarecoursefordamages,inequityitisDefendant’sgainwhichis
determinedandnotPlaintiff’sprovenloss.
AdoptionofremedyforprofitsinCanadianPatentLaw
ThePatentActdoesnotprovidefortheequitableremedyforprofits.
However,theremedyhasbeengrantedonatleastthreeoccasionsbythe
FederalCourtofCanadainpatentinfringementactionsinthelasttenyears,
andwillmorethanlikelygrowinpopularitygiventhehigherawardsusually
associatedwithit.Thosecasesare:TeledyneIndustriesInc.
-vs-LidoIndustrial

*
LEGERROBICRICHARD,1992.
Lawyer,BobH.SotiriadisisaseniorpartnerinthelawfirmLEGERROBICRICHARD,g.p.andin
thepatentandtrademarkagencyfirmROBIC,g.p.Publishedat(1992),9Business&theLaw
95-96.Publication116.005.

Products,[1982]68C.P.R.(2d)204(F.C.T.D.),DuctmateIndustriesInc.-vs-
ExannoProductsLtd.
,[1986]13C.P.R.(3d)193(F.C.T.D.)andDiversified
ProductsCorporation-vs-Tye-SilCorporationLimited,[1990]32C.P.R.(3d)385
(F.C.T.D.)(onappeal).
Itisimportant,therefore,tounderstandtheworkingsoftheremedyandits
potentialwithrespecttoawardsinpatentinfringementcasesespeciallywhen
Defendantisamanufacturer.Afterall,theawardintheTeledyne
casewasin
excessof$500,000.00andtheawardintheDiversifiedProducts
casewasjust
under$2,000,000.00.
Beforeallowingtheremedyforprofitsinapatentinfringementaction,the
Courtmustdeterminewhethersucharemedyisappropriateinthe
circumstancesofthecase.IndecidingwhetheraPlaintiffisentitledtoan
accountingofprofits,theCourtmustexerciseitsdiscretionsincetheremedyis
discretionaryinnature.Assuch,thecorollarytotheaboveisthatequitable
defencesmayberaisedincontestationofademandforprofits.
Burdenofproofofpartiestoanaccounting
OncetheCourthascometotheconclusionthatitoughttoexerciseits
discretioninfavourofallowingthePlaintifftoclaimforprofits,adifferentsetof
rulesisapplicabletotheevidentiaryaspectsofthecase.
Whereanaccountingofprofitshasbeenordered,noonuswhatsoeverlieson
thePlaintifftoestablishthoseprofits.AllthePlaintiffhastodemonstratetothe
CourtarethegrosssalesoftheDefendant.Oncethegrosssalesare
demonstrated,theonuslieswiththeDefendanttoprovesuchbonafides
expensesordisbursementsashecan,bypositiveevidence,establishas
havingbeenactuallyincurred.
AccountingmethodsavailabletotheCourt
Inadditiontothisdisadvantagewithrespecttotheburdenofproof,the
Defendantmustface-uptotheaccountingpractisethathasbeenadopted
intheTeledyne
andtheDiversifiedProductscasescitedabove.Thesetwo
caseshaveadoptedthe”differential”methodofaccounting.TheDefendant
willusuallyattempttodemonstratethatthe”fullabsorptioncost”method
oughttobeapplied.ThislattermethodofaccountingallowstheDefendant
todeductsuchpartofallitsfixedcostsasmightbeattributable
proportionatelytotheinfringingoperation.

Thedifferentialaccountingmethodontheotherhand,allowsonlyforthe
deductionfromtherevenuederivedfromsalesoftheinfringingproduct,the
variableexpensesattributabletotheproductinquestion,andanyincrease
in
fixedexpensesattributabletothoseinfringingproducts.TheTeledyne
andthe
DiversifiedProducts
caseshave,therefore,confirmedthatwhenthe
differentialaccountingmethodisused,theinfringerisentitledtodeductonly
thoseexpenses,bothvariableandfixed,whichactuallycontributedtothe
sumsreceivedandforwhichtheinfringerisliabletoaccount.Nopartor
proportionofanyexpenditurewhichwouldhavebeenincurredhadthe
infringingoperationnottakenplace,istobeconsideredasdeductible.
Underthismethod,”directcosts”arecoststhatcanbedirectlytiedtoa
specificunitofproductionorwithaspecificactivityrequiredsolelyforthe
manufactureandsaleoftheinfringingproduct.”Commoncosts”,otherwise
knownasindirectcosts,arecostsincurredforthebenefitoftwoormore
productsorservices.Thesecostsaregenerallynotdeductedincalculating
netprofitwhenusingadifferentialmethodofaccounting,exceptfor
particularitemsofcommoncoststhatcanbeshowntohaveincreased
specifically
fortheproductionandsaleoftheinfringingproduct.Insuch
casesanallocationofapro-ratedportionofthecommoncostsmaybe
deductedfromrevenuetocalculatenetprofit.
Itmaywellbethatincertaincases,thefullabsorptioncostmethodof
accountingismoreappropriatethanthatinvokedbytheFederalCourt,thus
far,ofdifferentialaccounting.Ineffect,thedecisiontoinvokeoneorthe
othermethodsofacountingshoulddependonthesituationoftheDefendant
atthetimethedecisiontocommencethemanufactureorsaleofthe
infringingproductwastaken.
CriteriausedbyCourtinchoosingaccountingmethod
Itwouldseemparticularlyunfairtoimposethedifferentialaccountingmethod
onaDefendantwhen,forexample,theDefendantwasoperatingatfull
capacityatthetimethedecisiontomanufacturetheinfringingarticlewas
taken,andwhentheDefendantcannotbedemonstratedtohavebeenin
badfaith.IntheDiversifiedProducts
case,theCourtstatedthatthe
differentialapproachisparticularlyappropriatewhenaprospective
Defendanthasexcessproductioncapacitysuchasunusedwarehouse
space,under-usedmachineryorunder-employedpersonel.Underthose
circumstances,suchaDefendantwouldfindthemanufactureandsaleofan
infringingproductmoreprofitablethanwouldaDefendantwhohadtoincur
additionalfixedcostsbeforesuchmanufactureandsalecouldtakeplace.In
summary,theCourtstatedthatonecouldevenspeculatethatapotential

infringerwhoisoperatingfromapositionofexcessproductivecapacityandis
inthesamebusinessasthePlaintiff,couldaffordtobemorecarelessabout
potentialinfringementthancouldamanufacturewhoisnotinthatposition.
TwoadditionalprinciplesweresetoutintheDiversifiedProducts
casetothe
effectthatiftheDefendantcanproduceaproductmoreprofitablythanthe
Plaintiff,thenthePlaintiffisentitledtothewholeofthatprofitandaPlaintiffis
notrequiredtoacceptalesseramountthanwhatitcouldhavemadeitself.
ItwouldappearfromtheDiversifiedProducts
casethattheDefendanttoan
accountingmustprovideaconvincingreasonfortheCourttorefrainfrom
usingthedifferentialaccountingapproach.Assuch,inallcaseswherean
accountingofprofitsisclaimedbythePlaintiff,proofshouldalwaysbe
adducedbyDefendantwithrespecttothestatusoftheDefendant’sbusiness
atthetimethatadecisiontomanufacturetheinfringingproductwastaken.
ThiswillenabletheCourttodecideastowhetherthedifferentialapproachis
theappropriateoneinthecircumstances.
Conclusion
Thedifferentialaccountingapproachwillalwaysbemorelucrativeforthe
Plaintiffinapatentinfringementcase,andpunitivefortheDefendant.In
practise,itisoftenalmostimpossibleforaDefendantmanufacturertofully
meetitsburdenofproofwithrespecttothedirectcostsofitssales.
Thedefinitionsofcommonanddirectcostsasestablishedintheabove-
mentionedreportedcases,oughttosufficeindemonstratingthedifficulties
facingaDefendantinapatentinfringementactionwhentheclaimisfor
profitsandthedifferentialaccountingapproachhasbeenacceptedbythe
Court.Assuch,aDefendantinsuchasituationmustbepreparedtomakeits
proofofexpensesinminutedetailthroughtheservicesofaqualifiedexpert.
Ofcourse,thistaskisrenderedlessonerouswhentheDefendanthasinplace
amodernandefficientaccountingsystem.
Finally,inallpatentinfringementcaseswhereitislikelythatPlaintiffwilloptfor
profitsoverdamages,Defendantshoulddoallitcantoavoidanaccounting
byputtingforthasearlyonintheproceedingsaspossible,allfactswhich
militateagainstanyentitlement
totheremedyforprofitsinfavourofPlaintiff.

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