In recent years, there have been a number of important intellectual property cases that involve the quantification of damages. The method of calculating damages had a significant impact on the final amount of the award in each case.

This article summarizes the important aspects of these cases from a damages perspective, and provides a professional update.

The Wellcome Foundation Limited et al. v. Apotex Inc.

The Federal Court of Canada found that Apotex Inc. had infringed Wellcome’s Patent No. 907,014. Wellcome elected an accounting of profits. The amount of damages awarded in this case was driven directly by the method of calculation allowed by the courts. Two elements of the accounting of profits affected the amount awarded: First, the court found against calculating Apotex’s profits using a comparative method, where the comparative method consists of comparing the defendant company's actual profits with the profits the defendant company would have made, had the defendant not used the infringing product. Since the cost of a non-infringing product was about the same as the cost of the infringing product, the comparative method would have resulted in little or no difference between the two profits, and little or no money payable by Apotex to Wellcome. Instead, the court chose to use the differential or incremental cost accounting method: "The method provides for assessment of profits by calculation of the revenues derived from infringement less those variable and fixed costs which contributed to the sums received as revenues.

No part or portion of any expenditure which would have been incurred had the infringing activity not taken place is to be considered deductible. In this approach only that portion of indirect costs or fixed costs that can fairly be attributable to the infringing activity is deductible, as opposed to the absorption or full cost approach which provides for allocation of a portion of all indirect or fixed costs to be attributed to that activity." Specifically, the court allowed for the deduction of direct variable material costs, direct costs of production and direct costs of selling. Second, the court addressed apportionment. There are two active ingredients in the drug, and only one of the ingredients was infringing. The profit from the product made from a combination of both the infringing and non-infringing products had to be apportioned. The court found the proper apportionment of the combined profit to the infringing ingredient to be 60%. The ratio recognizes the infringing ingredient as the more significant of the two.

Allied Signal v. Du Pont

The Federal Court of Canada found that the defendant (Du Pont Canada Inc.) infringed the plaintiff's patent for a thin film used in the manufacture of sheet moulding. The plaintiff elected the remedy of damages. Again, the calculation of damages was based on differential accounting. The following are the important damages issues: In the determination of lost sales, the defendant relied on a market share approach, while the plaintiff's analysis was prepared on a customer by customer basis. The specialized nature of the business meant that there were only nine customers, and the court reached its conclusions based on a customer by customer analysis; In the determination of the costs that the plaintiff would have incurred to produce the extra film, the focus was on variable costs (costs that change with changing production volumes). Specifically: a) the court reached its conclusions based on the labour and electricity costs of the film produced, and not on the average labour and electricity costs of all products produced in the plant, and b) selling expenses were not included because no additional sales people would have been hired; For film that did not represent lost sales to the plaintiff, but simply represented a lost royalty, a reasonable royalty rate had to be determined. This determination was made more difficult because the plaintiff had never licensed the film. The court chose 25% of profit before tax, being the low end of the range of 25% to 33% presented by the defendant. This was then translated into 17.5% of the selling price; and The claim by the plaintiff for lost profits due to price suppression (the plaintiff would have raised prices had the defendant not been selling the infringing film) failed for lack of evidence to support the claim.

Beloit Canada Ltd. v. Valmet Oy

Valmet was found to have infringed a patent held by Beloit related to the press section of a paper-making machine. Beloit elected an accounting of profits by the defendants.

In "The Findings of Reference for an Accounting of Profits", the Federal Court of Canada addressed a number of issues, some of which were subsequently reviewed by the Federal Court of Appeal. These issues, and the findings, are summarized in the table below:

Issue	Finding of Reference for an Accounting of Profits	Finding of the Federal Court of Appeal
Differential Accounting vs. Full Cost Accounting	Differential Accounting conceded by the plaintiff
Profit on sale of paper- making machine (beyond the infringing press section)	Each of the four sales reviewed in detail. Infringing patent did not drive the sale of the rest of the machine, therefore profits restricted to the infringing press section	Upheld finding of the reference
Profit of sale of spare parts	Excluded	Upheld finding of the reference
Government Subsidies	Excluded	Included
Prejudgement Interest	5% simple interest	Finnish rate plus 1.5% compounded semi-annually
Earnings on positive working capital (customer deposits)	Finnish rate

Decisions Cited

Wellcome Foundation Ltd. v. Apotex Inc., unreported, (August 26, 1998) Doc. T-80-83

AlliedSignal Inc. v. Du Pont Canada Inc. (February 13, 1998), Doc. T-2234-89, (1998), 78 C.P.R. (3d) 129, 142 F.T.R. 241 (Fed. T.D)

Beloit Canada Lteé/Ltd. v. Valmet Oy (May 12, 1994), Doc. T-1003-76 (1994), 55 C.P.R. (3d) 433, 78 F.T.R. 86 (Fed. T.D.) reversed (May 12, 1995), Doc. A-246-94 (1995), 61 C.P.R. (3d) 271, 184 N.R. 149, 94 F.T.R. 102 (note) (Fed. C.A.)

Peter Macaulay CA (84), MBA specialises in damage quantification, loss of profit calculations, accounting investigations and litigation support in the context of commercial disputes.

Contact:

Ph: 416 642-6010

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Email: info@pmacaulay-assoc.com

Peter Macaulay

P. Macaulay & Associates Inc.
1800 - 130 King St. West
Toronto, ON
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