Accounting of profits

By Norman V. Siebrasse
Illustration: Mike Constable

In Canadian courts, when determining monetary remedy in patent cases, it’s crucial to determine the profit “caused” by the infringement

The Canadian Patent Act permits two types of monetary remedy, namely damages and an accounting of profit. In a recent decision of the Supreme Court of Canada in Monsanto Canada Inc. v. Schmeiser, the basis of the accounting of profit remedy was carefully considered. It provides a principled approach, more consistent with the causation and “but for” underpinnings of damages than the groundbreaking Teledyne case of 1982.

The plaintiff, Monsanto, held a patent on genetically modified canola, sold under the brand name Roundup Ready canola. The patented canola was resistant to glyphosate-based herbicides, such as the plaintiff’s own Roundup brand herbicide. The use of Roundup Ready canola permits a number of agricultural practices that can increase yield and reduce costs. For example, a farmer using the patented canola can improve weed control by spraying with a herbicide after the canola has sprouted. This practice would kill any canola other than Roundup Ready canola.

The trial established that the defendant, Percy Schmeiser, had planted his field with Roundup Ready canola without obtaining a licence from the plaintiff. (It is not clear how the canola came onto Schmeiser’s property. Schmeiser asserted it originally had blown onto his land and he had harvested it and replanted it only to prove the point that a farmer could not be found liable for growing seeds that had blown onto his land.) However, Schmeiser asserted that he had never taken advantage of the unique properties of the patented canola in that he claimed he had used exactly the same agricultural practices he would have used had he planted unpatented canola.

Schmeiser’s defence — that because he had not benefited from the invention he had not “used” it and therefore he had not infringed the patent at all — was rejected at every level of court. The trial judge, the Court of Appeal and the Supreme Court of Canada agreed that by growing the patented canola, Schmeiser had indeed infringed the patent. However, it was not proven that Schmeiser had gained any special benefit from the use of the invention.

With infringement established, Monsanto had a choice between damages (the amount of Monsanto’s loss) and anaccounting of profit (the amount of Schmeiser’s gain). Monsanto elected an accounting of the profit made by Schmeiser.

Was Monsanto entitled to the entireprofit, which was $20,000, made by Schmeiser on his canola crop? Or was Monsanto entitled only to the extra profit made by the use of the invention, over and above that which he would have made had he grown unpatented canola, which was nothing at all?

The trial judge and the Federal Court of Appeal held that Monsanto was entitled to the entire profit on Schmeiser’s canola crop. The Supreme Court of Canada disagreed. It held that Monsanto was “only entitled to that portion of the infringer’s profit that is causally attributable to the invention.”

The crucial question is how to determine the profit caused by the infringement. The Supreme Court ruled a “comparison is to be made between [i] the defendant’s profit attributable to the invention and [ii] his profit had he used the best non-infringing option.”

The court pointed out that this basis of accounting reflects the general principles that the award is not to be punitive and a comparison is to be made between [i] what actually happened and [ii] what would have happened “but for” the wrong. This is known as the value-based or differential profit.

There is no punitive element to an accounting of a profits-based award. When a value-based differential is disgorged, the defendant should not be made worse off than if it had not infringed. (Similarly, in an award of damages, the plaintiff should not be made better off than it would have been if there hadn’t been an infringement.) On the other hand, the plaintiff could have elected damages if it felt that this would provide a higher award.

Caution is needed in reading the court’s statement that the comparison is to be made between [i] the defendant’s actual profit and [ii] the profit the defendant would have made had it used “the best non-infringing option.”

Prior-case law makes it clear that the noninfringing option must be an option that was actually known and available to the defendant. For example, the defendant cannot minimize the differential profit by claiming it would have used a better option that was not invented until after its infringement, or one that had been invented by a competitor and was not yet publicly known.

It is probably more accurate to say that the comparison should be made with the noninfringing alternative that the defendant would most likely have used, in light of all the facts, including its business plan and the options actually available to it. It must be appropriate to the defendant and its operating reality, keeping in mind that the defendant is likely to have used the available option that appeared best at the time. This best noninfringing option is sometimes called the original position.

In Monsanto v. Schmeiser, the value-based differential profit was much less than the defendant’s total profit; however, this will not always be true. In Reading & Bates Construction Co. v. Baker Energy Resources Corp., for example, the defendant had used the plaintiff’s patented method in undertaking a contract for installing a gas pipeline under the St. Lawrence River. This was by no means a routine job. The evidence showed that all alternative methods were unavailable or unworkable, or at the very least unprofitable, and the defendant was only entitled to payment on successful completion. Therefore any alternative method, if it could have been made to work at all, would have resulted in a loss not a profit on the contract. The plaintiff was awarded the defendant’s entire profit on the contract. Based on the facts, this is entirely consistent with the value-based differential profit approach.

In intellectual property cases, the best noninfringing option (the original position) is not necessarily easily computed. It is not a static position. It is a function of a dynamic business environment, affected by many factors including changing markets, technology, fashion, business plans, the competitive landscape and the interaction of the defendant’s and the competitor’s operations.

It is determined with the benefit of hindsight and keeping in mind that it is the result that the defendant most likely would have achieved in light of all the facts. (Where the original position is that the defendant would have licensed the infringing IP, then the royalty rate would be that which was applicable at the date of the infringement and hindsight does not play a role in the rate selection. Of course the relevant sales to which the royalty is applied are determined with hindsight, as are all the other inputs to the computation of the original position.) It is not the position that would have been projected at the date of the infringement.

Determining the best noninfringing option but for the infringement requires a holistic assessment of how the defendant’s business strategy would have played out had the defendant made one crucial choice differently. To comprehensively synthesize all the requisite considerations, it will often, but not always, be necessary to compute the original position by preparation of annual cash-flow statements. This is a challenge that requires a combination of rigorous accounting and forecasting skills, market and operating insights and balanced business judgments.

Norman V. Siebrasse, B.Sc, LLB, LLM, clerked at the Supreme Court of Canada for the Honourable Madam Justice McLachlin during 1991-1992. He is professor of law at the University of New Brunswick. His research interests include intellectual property and commercial law. He can be reached at siebrass@unb.ca

Technical editor: Stephen Cole, FCBV, FCA, partner, Cole and Partners in Toronto