AIPPI 2017 - Study Question - Quantification of Monetary Relief

AIPPI 2017 - Study Question - Quantification of monetary relief

Study Question

Submission date: May 15, 2017

Sarah MATHESON, Reporter General

Jonathan P. OSHA and Anne Marie VERSCHUUR, Deputy Reporters General

Yusuke INUI, Ari LAAKKONEN and Ralph NACK, Assistants to the Reporter General

Quantification of monetary relief

Responsible Reporter: Ari LAAKKONEN

National/Regional Group / Canada
Contributors name(s) / Jason Markwell (Chair of Canadian National Group Litigation Committee); Anthony Prenol; Bradley White; Brian Gray; Bruno Barette; Christopher Van Barr; Douglas Deeth; , Steven Garland; Hadi El-Duweini; Jonathan Auerbach; Jonathan Mesiano-Crookston; Jordana Sanft; Katie Wang; Keri Johnston; Kristin Wall; Michael Crinson; Warren Sprigings; Heather Watts, Alfred Macchione (National Group Liaison); Stephanie Anderson
e-Mail contact /

I. Current law and practice

Please answer all questions in Part I on the basis of your Group's current law.

1. What rules and methods are applied when quantifying actual loss?

In particular, please describe:

a) the method used to determine the diversion of sales, i.e the part of the infringing sales that the rightholder would have made but for infringement;

b) what level of profit margin is taken into account.

1a) Rules and principles in quantifying actual loss

The objective of an award of damages is to compensate the plaintiff for losses that are caused by the defendant’s infringement (Laboratoires Servier v. Apotex Inc., 2008 FC 825 at para 504; Merck & Co. v. Apotex Inc., 2013 FC 751 at para 49). An award of damages focuses on the loss suffered by the plaintiff as a result of the infringement (the quantum of profits earned by the infringing party is irrelevant) (Merck & Co. v. Apotex Inc, 2013 FC 751 at para 46; MacOdrum at 14-9; Jay-Lor International Inc. v. Penta Farm Systems Ltd., 2007 FC 358 at para 123).

Generally, the measure of damages is the sum of money that will put the injured party in the same position as it would have been in if it had not sustained the wrong (Jay-Lor International Inc. v. Penta Farm Systems Ltd., 2007 FC 358 at para 222). For example, since the patent system is designed to advance research and development and to encourage broader economic activity, the court must find the balance between under-compensation and over-compensation of an inventor (Free World Trust c. Électro Santé Inc., 2000 SCC 66 at para 42; Airbus Helicopters, S.A.S. v. Bell Helicopter Texteron Canada Ltée, 2017 FC 170 at para 110).

1b) Methods to quantify actual loss

The plaintiff is generally entitled to an award of damages. This is calculated as the lost profits on sales that that would have been made, but for the presence of the infringing product in the market (Jay-Lor International Inc. v. Penta Farm Systems Ltd., 2007 FC 358 at para 123). The plaintiff bears the burden of establishing its loss (Jay-Lor International Inc. v. Penta Farm Systems Ltd., 2007 FC 358 at para 118). If the plaintiff cannot show that it would have made particular sales, then it is entitled to an award of damages calculated as a reasonable royalty (Airbus Helicopters, S.A.S. v. Bell Helicopter Texteron Canada Ltée, 2017 FC 170 at para 112).

In order to quantify lost profits on lost sales, the differential method of accounting is preferred, although the appropriate methodology will depend on the particular facts and circumstances of a case (Domco Industries Ltd. v. Armstrong Cork Canada Ltd., 1986 CarswellNat 629 at para 68-69. The differential method is performed by deducting the following costs from sales revenues: (1) variable costs attributable to the relevant product(s); and (2) any increase in fixed costs attributable to the relevant product(s) (Teledyne Industries Inc. v. Lido Industrial Products Ltd., 1982 CarswellNat 676 at paras 17-18).

A party may adduce expert evidence with respect to diversion of sales (Wise, “Quantification of Economic Damages”, 1999 J. Bus. Valuation 361 at 408).

2. What rules and methods are applied when quantifying a reasonable royalty?

In particular, please describe:

a) the royalty base;

b) how relevant comparables among licence agreements are defined;

c) how a reasonable royalty is quantified in the absence of relevant comparables;

d) the nature of the royalty, e.g. lump-sum, percentage of revenues or profit, a mix?

a) the royalty base;

The object of the Court in determining a reasonable royalty is to ascertain what the infringer would have needed to pay the IP holder for a license to use the property. The royalty base is generally the incremental profit earned by the infringer as a result of the infringing use of the intellectual property at issue. The exact nature of the incremental profit will depend upon the methodology applied to determine the royalty rate in any given case. In the first approach, the Allied Signal Approach, the royalty base is the plaintiff’s incremental profits before tax using differential cost accounting. In the second approach, the Analytical Approach, the royalty base is the difference between the infringer’s gross margin before infringing, and the infringer’s anticipated gross margin after infringement due to the infringement. In the third approach, the Anticipated Profits Approach, the royalty base is the infringer’s anticipated profits arising from the sale of the infringing product.

b) how relevant comparables among license agreements are defined;

Canadian Courts have indicated that comparables are generally of little use in determining a reasonable royalty, as they frequently lack important information such as: marketing conditions that drove those licenses; the businesses and products of the licensor and licensee; and the state of the market at the time of that comparable license. In general, Canadian Courts prefer to rely on generally accepted methodologies to determine, in an artificial construct, the royalty rate that would have been agreed between the parties. Comparables, at best, serve as a “sanity check” or to support other methodologies. In the context of copyright infringement, license agreements by the same copyright owner for a similar work may be more relevant as a comparable.

c) how a reasonable royalty is quantified in the absence of relevant comparables;

The reasonable royalty determined by the Courts is the hypothetical rate that would have resulted from negotiations between a willing licensor and a willing licensee. Three different approaches (the Allied Signal Approach, the Analytical Approach, and the Anticipated Profits Approach) have been considered by Canadian Courts to determine a reasonable royalty. The choice of methodology in a given situation is determined by the Court, based on the evidence. Once the appropriate methodology has been determined, the Court will split the royalty base between the rights holder and the infringer after considering a number of non-exhaustive factors, including: transfer of technology; the nature of the license (non-exclusive); the term of the license; competitive products; territorial limitations; competition between licensor and licensee; demand for the product; risk, novelty of the product; compensation for research and development costs; displacement of business; and capacity to meet market demand.

d) the nature of the royalty, e.g. lump-sum, percentage of revenues or profit, a mix?

The royalty may be a lump sum, but is usually calculated as a running royalty based upon a percentage of the profit related to the infringement. In exceptional circumstances when an injunction is not granted or not immediately granted, a post-judgment royalty will be a higher percentage of profits than is used to calculate the pre-judgment damages.

3. What rules and methods are applied when quantifying the infringer’s profits, as part of quantifying damages?

In particular, please describe:

a) the method to determine the profits resulting from the infringement, i.e. resulting from the use of the IP right;

b) what level of profit margin of the infringer should be taken into consideration.

Generally, an award of damages (i.e., lost profits on lost sales suffered by the rights holder) and an accounting of the infringer’s profits are alternate remedies, and the rights holder will be called upon to elect which remedy to pursue. An exception is the Copyright Act, R.S.C., 1985, c. C-42 in which the award of profits is not an alternative to damages but rather parallel (s. 35)). As an equitable remedy, the entitlement to elect an accounting of the infringer’s profits is subject to the court’s discretion (See for example, Unilever PLC v. Procter & Gamble Inc., (1993), 47 C.P.R. (3d) 479 (Fed. T. D.), affirmed (1995), 61 C.P.R. (3d) 499 (Fed.C.A.)).

Prior to 2004, Canadian courts generally applied a direct cost accounting method in calculating the infringer’s profits. In 2004, the Supreme Court of Canada applied a “value-based or “differential profit” approach to an accounting of profits Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34 [Schmeiser]. In this approach, profits are allocated according to the value contributed to the defendant’s wares by the intellectual property (in that case, the patent). The Supreme Court also directed that a comparison is to be made between the defendant’s profit attributable to the invention and its profit had it used the best non-infringing alternative.

If the activity that generates profit is only partly infringing, the Court will consider apportioning the profit between infringing and non-infringing activities. For example, see Wellcome Foundation Ltd, v. Apotex Inc. (1998), 82 C.P.R. (3d) 466 (Fed. T. D.), additional reasons (1999) 87 C.P.R. (3d) 34, 2001 FCT 174, affirmed (2001), 11 C.P.R. (4th) 218 (Fed.C.A.) [Wellcome FCA], leave to appeal refused 2001 CarswellNat 1776 (S.C.C.). The defendant bears the burden to prove apportionment (Baker Energy Resources Corp v. Reading & Bates Construction Co., (1994), 58 C.P.R. (3d) 359 (Fed. C. A.) [Baker Energy] at para. 18, leave to appeal refused 1995 CarswellNat 2829 (S.C.C.)).

4.a. What rules and methods are applied, both when quantifying actual loss and quantifying a reasonable royalty in relation to convoyed goods.

The methodologies described above are applied to quantify actual losses and to quantify a reasonable royalty in all situations may have an effect on which of the above mentioned methodologies is used to quantify a reasonable royalty. In situations where the infringing product forms part of a larger assembly, the U.S. approach to the smallest saleable unit has not been adopted in Canada, but some Courts have suggested in obiter that it may be available in appropriate circumstances.

4.b. What rules and methods are applied, both when quantifying actual loss and quantifying a reasonable royalty where the infringing product forms part of a larger assembly.

See answer above for 4a.

4.c. What rules and methods are applied, both when quantifying actual loss and quantifying a reasonable royalty where the IP rights found infringed are routinely licensed together with other IP rights as a portfolio?

See answer above for 4a.

4.d. What rules and methods are applied, both when quantifying actual loss and quantifying a reasonable royalty when the damage suffered by the rightholder is related to competing goods which do not implement the infringed IP rights?

See answer above for 4a.

5. Are any of the rules and methods addressed in your answers to 1) to 4) above different when considering the damage suffered by the rightholder or by its licensee?

5a) Standing

At common law, a licensee did not have standing to sue third-party infringers of licensed intellectual property rights (Electric Chain Co. v. Art Metal Works Inc., [1933] S.C.R. 581 at para. 31). However, some statutes provide for the right of a licensee to commence proceedings for infringement of an intellectual property right (e.g., s. 55(1) of the Patent Act, s. 50(3) of the Trade-marks Act, ss. 13(6) and (7) of the Copyright Act, s. 15(1) of the Industrial Design Act and s. 8(1) of the Integrated Circuit Topography Act).

The breadth of the license may affect the licensee’s standing. For example, in Armstrong Cork Canada Ltd. v. Domco Industries Ltd., [1982] 1 S.C.R. 907 at para. 34, the Supreme Court of Canada held that a licensee (either exclusive or non-exclusive) has standing to sue for infringement under the Patent Act. However, in Milliken & Co. v. Interface Flooring Systems (Canada) Inc., (1998), 83 C.P.R. (3d) 470 at para. 50, aff’d (2000), 5 C.P.R. (4th) 209 (F.C.A.), the Federal Court held that a non-exclusive licensee of copyright has no right to sue alone in a copyright infringement action. As such, standing to sue for copyright infringement is restricted to copyright owners and exclusive licensees.

5b) Damages

The plaintiff’s entitlement to damages is explicitly provided for in the relevant statutes. If the statute gives a licensee the right to sue, then the same rules and methods for quantifying damages apply, whether the plaintiff is the owner of the intellectual property or a licensee thereof.

5c) Infringer’s Profits

Canadian courts have not determined whether a licensee may make a claim for an accounting of the infringer’s profits that is independent of the rightholder’s claim. However, in order to avoid double-recovery, the Court may hold that an infringer’s profits may only be recovered once, even if there are multiple plaintiffs.

5d) Royalties

Where the owner of intellectual property has licensed the particular right in the past, it is “almost a rule of law” to limit the quantification of damages to a reasonable royalty (AlliedSignal Inc. v. DuPont Canada Inc. (1998), 78 C.P.R. (3d) 129 at para. 22 (F.C.T.D.), aff’d (1999), 86 C.P.R. (3d) 324 (F.C.A.)).

6.a. What kinds and types of evidence are accepted for proving the quantum of actual loss.

In Canada, there is no restriction on the evidence that is acceptable to prove either loss or the quantum of reasonable royalties, subject to the regular rules of evidence in all civil court proceedings.

Generally speaking, evidence is admissible in a court proceeding when it is (1) relevant (i.e., logically probative of a material fact in issue), and (2) admissible (i.e., not excluded under a rule of evidence). Evidence that is logically probative of the plaintiff’s actual loss, or the quantum of reasonable royalties, is admissible.

Examples:

In the case of actual losses, the plaintiff is expected to adduce direct evidence of its damages or reductions in sales.

The plaintiff could also adduce direct evidence of its past licensing practices.

The plaintiff typically offers evidence of its actual losses as quantified by an expert forensic accountant. See the next discussion about experts.

6.b. What kinds and types of evidence are accepted for proving the quantum of reasonable royalties.

Reasonable royalties

Reasonable royalties require a slightly more complex analysis. The plaintiff may adduce direct evidence of past royalties to support a claim to reasonable royalties. Royalties charged by other companies may also be adduced. In addition, expert opinions based on admissible evidence may be admitted in some cases (e.g., general industry practices).

6. For example, is expert accounting evidence on past licensing practices accepted?

Expert opinion evidence must meet the principles enunciated by the Supreme Court of Canada in R. v. Mohan, [1994] 2 S.C.R. 9 at para. 17, [1994] F.C.J. No. 36 (QL), namely:

(a) relevance;

(b) necessity in assisting the trier of fact;

(c) the absence of any exclusionary rule; and

(d) a properly qualified expert.

The ultimate conclusion about what royalty rate is reasonable is determined by the Court.

7. What mechanisms (e.g. discovery) are available to the rightholder to assist with proving the quantum of actual loss or reasonable royalties?

The rights holder may use the following mechanisms to prove its actual loss or a reasonable royalty:

Discovery of relevant documents dealing with damages;

Oral discovery of the infringing party and of the party alleged to have suffered a loss.

Discovery of non-parties (in limited circumstances) to obtain information that cannot be obtained through other means.

In limited and specific circumstances, documents may be seized if there is a risk that the documents or evidence will be destroyed or removed in the absence of an order.

8. How, if at all, does the quantification of damages for indirect/contributory infringement differ from the quantification of damages for direct infringement?

There is no cause of action for contributory infringement under Canadian law (Nycomed Canada Inc. et al. v. Teva Canada Limited, 2011 FC 1441, aff’d 2012 FCA 195).

Under the Patent Act, a person who infringes a patent is liable for all damages sustained by the patentee. This has been interpreted in the jurisprudence to include liability for inducing infringement. The test for inducing infringement has three parts: (i) the act of infringement must have been completed by the direct infringer; (iii) the completion of the act of infringement must be influenced by the acts of the alleged inducer to the point that, without the influence, direct infringement would not take place; and (iii) the influence must knowingly be exercised by the inducer, that is, the inducer knows that this influence will result in the completion of the act of infringement (Corlac Inc. et al v. Weatherford Canada Ltd. et al¸ 2011 FCA 228). If a plaintiff is successful in making out a claim for inducing infringement, there is no difference in law in the quantification of damages.

Under the Copyright Act, secondary infringement occurs when a person deals in unauthorized copies of the copyrighted materials. Sections 27(2) – 27(5) of the Copyright Act set out prohibited activities that constitute secondary infringement. In order to establish secondary infringement, the plaintiff must establish that the defendant had actual or constructive knowledge that it was dealing in unauthorized copies of the work (except in the case of importation). If the plaintiff is successful in making out a claim for secondary infringement, there is no difference in law in the quantification of damages.

Canadian industrial design and trade-mark laws do not distinguish between direct and indirect infringement.

9. Are forward-looking damages (e.g. damage in relation to an irreversible loss of market share) available

a) if an injunction has also been granted

Please explain your answer

A successful plaintiff is entitled to damages regardless of whether an injunction has been granted. The purpose of an award of damages is to compensate a plaintiff for any losses suffered as a result of the infringement. A plaintiff is entitled to forward-looking damages, if it can establish a causal connection between the loss and the infringement.

In a patent infringement action, a plaintiff is entitled to claim damages for losses that were caused while the patent was in force but suffered at a later date.

10. Is the bad faith of the infringer taken into account in the assessment of the damage?

No

Please Explain

Bad faith of the infringer is generally not taken into account in the assessment of damages. However, punitive damages may be awarded to punish the infringer for malicious, oppressive or high-handed conduct.

Punitive or exemplary damages must be expressly pleaded and will only be considered after all other remedies have been determined. The amount to be awarded should be proportional to the gravity of the wrong. Factors to be considered may include: the harm caused; the degree of misconduct; the need for deterrence; the advantage gained by the infringer; and the vulnerability of the patentee. The relationship between the parties may also be examined to determine any imbalance in their positions. The financial worth of the infringer may also be considered.