In recent years, Canada has become an increasingly attractive jurisdiction for patentees to obtain and enforce their patent rights. In terms of monetary remedies, as compared to the United States, there is often greater flexibility in Canada in crafting compensation for infringement. Despite our smaller market, the size of damages and profits awards can, at times, end up being larger in Canada.
This article is targeted to those who have some familiarity with patent infringement remedies available in the United States. It is intended to provide our observations on the key differences we have noted in corresponding Canadian cases.
1. Damages determination – Underlying rationale is similar
When it comes to ascertaining patent damages in Canada and the United States, the basic premise is similar. The goal is to award the patentee with an amount that reflects the difference between (i) the financial position the patentee would have been in but for the infringement, and (ii) the actual financial position of the patentee reflecting the negative consequences of the infringement.
For instance, if the patentee can establish that but for the defendant’s infringement, it would have made the sales achieved by the defendant, the measure of the damages is the patentee’s lost profits. Lost profits are determined by deducting all costs, fixed or variable, that the patentee would have incurred to achieve its sales.
Where the patentee does not itself practice the patent or cannot otherwise establish that it would have achieved the defendant’s sales, then the damages take the form of a reasonable royalty. If the defendant can prove that it could and would have used a non-infringing alternative, or that unrelated factors were responsible for some or all of its sales, the damages amount may be reduced.
Additional categories of damages may be recovered in Canada such as convoyed sales (sales of complementary products tied to the patented product that were lost due to the defendant’s infringement) and price erosion or suppression (if the patentee had to lower its prices or suppress its planned price increases due to illegal competition from the defendant). These principles are common between both countries.
As well, general limitation periods for damages are the same for patent actions in Canada and the United States - six years before the commencement of the court action.
2. Apportionment of damages between infringing/non-infringing parts – Not in Canada
What happens if the infringed feature is one of multiple features contained in the product as a whole? In Canada, the concept of apportionment of damages based on infringing and non-infringing parts of the product has not been used to reduce damages payable by the defendant. This aspect of Canadian law may arise in part from the concept of patent infringement as a tort, and the fundamental premise that a plaintiff in tort may recover 100% of its loss even if the defendant’s negligence was not the sole cause of its injuries. As well, when considering the analysis of whether the patentee would have achieved the defendant’s sales – such considerations may already be taken into account at the earlier stage when the patentee proves entitlement to damages.
Canadian law could develop further on this point if a defendant presents a case having the right evidence. In the meantime, apportionment for such reasons has not formed an established part of Canadian damages law.
This is quite unlike the situation in the United States, where apportionment is the rule rather than the exception. For example, when calculating damages amounts, the base of sales that the US Court will typically use will be based on the “Smallest Saleable Patent Practising Unit” (SSPPU), which is the smallest saleable product that reads on the patent claims. Even within the SSPPU, further apportionment may be required between patented and unpatented portions. This can result in a significant reduction in the ultimate damages amount awarded in the United States.
3. Reasonable royalty calculations – Similar approaches
Reasonable royalties may be used to determine the damages payable to a successful patentee when the patentee cannot establish it would have made those sales achieved by the defendant.
In both Canada and the United States, the exercise of determining the reasonable royalty rate is similar. The rate is determined by constructing a hypothetical negotiation between the parties as of the date of first infringement, assuming that both are behaving reasonably and are willing parties to the transaction. The courts conduct a multi-factor analysis to determine what rate the parties would have likely arrived at. In the United States, these are called the “Georgia Pacific” factors, and include consideration of factors such as past royalty rates charged by the patentee, rates paid by the defendant for comparable licenses, any exclusivity or other restrictions on territory, and the commercial relationship between the parties.
In Canada, a similar multi-factor analysis is undertaken to determine what royalty rate would result from negotiations between a willing licensor and a willing licensee, with the exercise bracketed by two endpoints: the hypothetical licensor’s minimum willingness to accept and the hypothetical licensee’s maximum willingness to pay. The date of the negotiation is also assumed to be the first date of infringement in Canada.
However, there is one key difference: in the United States, the amount arrived at through a reasonable royalty analysis may still need to be apportioned in accordance with the SSPPU doctrine. This concept has not arisen in Canada in the reasonable royalty jurisprudence. Arguably, if a patented part only formed an insignificant portion of the product, this factor would already be taken into account in the course of the hypothetical negotiation to determine the royalty rate.
4. Only in Canada: Availability of infringer’s profits
The Canadian Patent Act provides a patentee who has proven infringement at Court the ability to elect between its damages and the infringer’s profits. This is a key differentiator compared to the United States, whose corresponding statute provides entitlement to damages or reasonable royalties, but makes no provision for recovery of the defendant’s profits.
Profits are an equitable remedy in Canada. Courts, therefore, retain the discretion to decide that a poorly behaved patentee is not entitled to make this election, in which case the patentee will be limited to the damages it can prove. However, in the regular course, successful patentees are provided the option of choosing the defendant’s profits, which can provide significant benefits in the litigation:
- More $$$: The defendant’s profits are usually higher than the patentee’s damages. This may be in part because of the different rules on deductability of costs for a disgorgement of profits (from defendant) analysis versus a lost (patentee’s) profits analysis, as described below.
- Fewer Deductible Costs: there are limitations on what types of costs can be deducted from the defendant’s revenues in order to arrive at profits. Unlike when deducting costs for the purposes of calculating a patentee’s lost profits as a measure of the damage it suffered, in calculating the profits of an infringer, only those costs that were incurred directly to make or offer the infringing product or service are deductible (often called “variable costs”). No costs that would have been incurred otherwise (i.e. “fixed costs”) may be used to offset revenues. This is because the Court seeks to disgorge any benefit that the infringer obtained from illegal use of the patented invention. Allowing a deduction for fixed costs could mean the infringer indirectly benefits from the infringement.
- Evidentiary burden: When profits have been elected, the patentee is required to prove the defendant’s revenues, and the burden then shifts to the defendant to prove any deductions from those revenues to arrive at the portion thereof that is considered profit. Evidence-wise, from the patentee’s perspective, this can be more straightforward than proving damages and requires less financial disclosure from the patentee.
- Extraterritorial Profits on Product Made in Canada: Where there has been manufacturing in Canada which infringes the Canadian patent, even if that product is later sold outside of Canada, the associated foreign profits may be claimed in the Canadian case.
There are other complexities to profits analyses which are beyond the scope of this article, such as accounting for non-infringing alternatives. However, having the option of choosing the infringer’s profits offers a significant advantage in Canadian patent litigation.
5. Pre-grant damages: Broader entitlement in Canada
In Canada, the patentee is entitled to compensation for infringing activities that occurred between the publication of the patent application and issuance of the patent. This compensation takes the form of a reasonable royalty. There is no notice requirement and as long as the defendant’s product infringed at least one claim of the granted patent, the patentee is entitled to compensation.
In the United States, this remedy is more limited. The patent owner can recover damages prior to grant if two conditions are met: the defendant had actual notice of the published patent application, and the invention claimed in the published application is substantially identical to that in the final patent.
6. Loser pays in Canada: Recovery of legal fees
Unlike the United States, where recovery of legal fees is only provided in limited situations such as proven inequitable conduct by the patentee, Canada operates on a “loser pays” model. If successful in the action, a Canadian patentee will typically be awarded its full disbursements, such as its expert fees, plus a sizeable portion of its legal fees. In cases where the Court is satisfied that the defendant engaged in inequitable conduct or is otherwise deserving of sanction, the scope of recovery can be increased significantly.
7. No notice requirement in Canada
In Canada, the successful patentee’s entitlement to remedies starts from the time the infringer started infringing in Canada (subject to the six year limitation period), not from the time of notice.
This is not necessarily the case with patented products in the United States. Where a physical product is made under a patent, to recover damages for infringement prior to filing the lawsuit, the patented article must be marked with the patent number, or a warning letter must have been sent.
8. No treble damages framework in Canada
This is one area where the potential remedies are generally higher in the US. In cases of proven wilful infringement, US courts have the statutory authority to award three times the amount of general damages.
Canadian courts do have discretion to award aggravated or punitive damages, but the situations in which these are awarded in Canada are rare. However, recently there have been more substantial punitive damage awards in cases of wilful infringement, including a punitive damage award that was double the compensatory damage award. These cases may be the start of a trend towards higher punitive damage awards in Canada.
The distinctions between the Canadian remedies framework for patent infringement as compared to other jurisdictions like the United States provide further reasons to include Canada in a patent protection and enforcement strategy. In particular, the relative lack of apportionment of damages, availability of profits, and legal fees to the successful party can amount to significant strategic advantages when litigating in Canada.