Awards of defendant's profits in Canada

Over at Sufficient Description, Professor Norman Siebrasse has an excellent write-up of a recent Canadian case, Varco Canada Ltd. v. Pason Systems Corp., 2013 FC 750, that goes through out a variety of factors that a court should consider when a patent plaintiff seeks awards of defendant's profits (see paragraphs 401-09 in particular).  In Canada, awards of defendant's profits are considered discretionary or equitable, so the prevailing plaintiff doesn't have an automatic entitlement to such an award.  Nevertheless, as I discuss in my book, awards of defendant's profits have become a very important aspect of Canadian practice over the past thirty years.  The Varco case is interesting in that the court appears to emphasize whether the defendant deliberately copied the invention and knew of the patent.  As Professor Siebrasse notes, these factors would often not be present in a case brought by a patent assertion entity.  Focusing on such factors rightly limits (or at least tends to limit; I'm not sure the court is saying these factors always must be present) an award of profits to cases in which they serve a deterrent purpose.  

In the end, the court winds up awarding $Can. 52.8 million to the plaintiff in the form of defendant's profits.   This is the second large award in a Canadian patent case this summer.  For discussion of the other, see this. 

The one theoretical point on which Professor Siebrasse and I may continue to disagree is on whether awards of defendant's profits threaten to overdeter infringement.  I've been thinking over Professor Siebrasse's argument that such awards do not overdeter ever since he raised it in his thoughtful review of my book back in April, and he makes the point again in his post on Varco ("So, the attraction of an accounting is that it provides a deterrent against infringement, because the infringer will be no better off by having infringed. But at the same time, an accounting avoids the risks of over-deterrence, because the infringer is made no worse off than if it had not infringed.")  I think our disagreement lies in our assessment of the appropriate baseline.

Professor Siebrasse's argument, if I understand it correctly, is that in the but-for world in which the defendant used the next-best available noninfringing alternative, he would have earned profit X.  The patent enabled him to earn profit Y, so if he disgorges Y - X he is no worse off than he would have been had he not infringed.  Hence, disgorgement deters but it doesn't overdeter.

I have been coming at the issue on the assumption that in the but-for world the defendant whose profit attributable to the infringement exceeds the plaintiff's own quantifiable lost profit would have used the patent with authorization, thus earning a pre-royalty profit of (Y - X), and that the royalty would be z(Y - X), where 0 < z < 1.  The post-royalty profit attributable to the use of the patent invention is therefore (1 - z) (Y -X).  (If the defendant's profit didn't exceed the plaintiff's lost profit, the plaintiff should ask for its own lost profit instead--though I realize there are practical considerations, including evidentiary hurdles and the desire not to disclose financial information, that sometimes lead plaintiffs to seek awards of profits or royalties even if their own lost profits might be higher.)  From this angle, requiring the defendant to disgorge z(Y - X) renders him no better (or worse) off for having infringed.  He still earns a profit of (1 - z) (Y - X).  Requiring him to disgorge Y - X, however, makes him worse off than he would have been but-for the infringement, and thus threatens overdeterrence (though by what amount, and whether this is likely to affect behavior, is another matter).

Plug some real numbers into the expressions above to see how the recovery could be different.  Suppose that the defendant's profit earned using the next-best available noninfringing alternative is $10.  The profit using the patent is $15.  The royalty rate the parties would have agreed to ex ante is 20% of the increase in profit earned from the use of the patent, meaning that the royalty is $1.  Should the defendant be required to pay the plaintiff $5 or $1?

I think it depends on what we view as the appropriate baseline:  in the but-for world, is the defendant's profit X (here, $10) or Y - z(Y - X)   (here, $14)?