Canadian Court of Appeal Holds That Noninfringing Alternatives Are Relevant to Lost Profits

A recurring question in the law of patent remedies is whether a patent owner's ability to recover lost profits or an accounting of the infringer's profits should be affected by the fact that, if the defendant had not infringed, it could have made comparable sales by using an available noninfringing technology.  From an economic perspective, the correct answer is yes:  if the defendant would have made the same number of sales but for the infringement, the plaintiff has not lost any sales due to the infringement, and should recover only a reasonable royalty or, in countries which permit this remedy, the disgorgement of whatever additional profit or cost saving the defendant achieved by using the patented technology as opposed to the next-best alternative.  (Perhaps the defendant would have made the same number of sales using the alternative, but at slightly higher cost.)  Courts in the U.S. and France have long followed this principle, while the U.K. still adheres to a nineteenth century precedent, United Horse-Shoe & Nail Co. v. John Stewart & Co., rejecting it.  Courts in other parts of the world have given mixed signals.  In Canada, for example, the Supreme Court concluded in Monsanto v. Schmeiser, 2004 SCC 34, that noninfringing alternatives are relevant when the plaintiff seeks an accounting of the infringer's profits.  On the other hand, in two recent cases involving requests for lost profits, Eli Lilly & Co. v. Apotex Inc., 2014 FC 1254 (Jan. 23, 2015) (see blog post here), and  Merck & Co. v. Apotex, Inc., 2013 FC 751 (July 16, 2013) (see blog post here), trial courts in Canada have followed United Horse-Shoe.   (See also Professor Siebrasse's write-up on Sufficient Description of another recent Canadian trial court decision rejecting the use of noninfringing alternatives.)

Last week, however, the Federal Court of Appeal in Apotex, Inc. v. Merck & Co. (link here) held that noninfringing alternatives are indeed relevant to the calculation of lost profits (though the court dismissed the appeal on the ground that, as a factual matter, Apotex had not proven that it would have sold lovastatin made by use of a noninfringing process during the relevant time period).  Justice Dawson's analysis of the legal relevance of noninfringing alternative can be found in paragraphs 38-72, and her analysis of the factual evidence follows.  Key quotes from the Court of Appeal's legal analysis:

[48]           . . . if damages for lost profits are calculated never having regard to an available non-infringing alternative, the patentee will sometimes be better off than it would have been in the absence of infringement. This is so for the following reason. Where a defendant can make and sell a non-infringing alternative, the patent does not confer a complete monopoly on the patent holder. Instead, the patent confers a share of market power upon the patentee. In this circumstance, where, instead of using a non-infringing alternative, a defendant infringes, it is a question of fact whether, “but for” the infringement, the defendant would not have competed with it. The defendant’s lawful competition in the “but for” world may have deprived the patentee of some sales.

[49]           Put another way, in cases where, in the “but for” world, the infringer could and would have made and sold a non-infringing alternative, these sales may well reduce the patent owner’s sales. Awarding the patentee full damages for lost profits in every case will, therefore, sometimes over-compensate the patentee.

[50]           Perfect compensation requires consideration of: (i) what, if any, non-infringing product the defendant or any other competitors could and would have sold “but for” the infringement; and, (ii) the extent lawful competition would have reduced the patentee’s sales.

In addition, paragraph 60 quotes a portion of my book arguing that there is no policy reason to admit the relevance of noninfringing alternatives in cases involving accountings of profits, but to reject it in cases involving lost profits:

[60]           The Judge correctly understood that Monsanto did not change the existing law as to how the patentee’s lost profits are to be calculated. However, the significance of Monsanto is that if a court may consider a defendant’s resort to a non-infringing alternative when calculating the infringer’s profit, there is no reason in principle to ignore such conduct when calculating the patentee’s lost sales. This is particularly so where:

The problem with computing lost profits without considering the availability of noninfringing alternatives is that […] this practice renders the patentee better off than she would have been in the absence of infringement. (Analogously, ignoring noninfringing substitutes when calculating defendant’s profits renders defendants worse off than they would have been, but for the infringement.) [Emphasis in the original]

(Thomas F. Cotter, Comparative Patent Remedies: A Legal and Economic Analysis (New York: Oxford University Press 2013) at pages 189 to 190). 

As for the factual analysis, however, the court concludes, among other things, that Apotex did not prove that resort to the noninfringing process would have been economically feasible during the relevant period of time (paras. 91, 94).  Embracing the principle that noninfringing alternatives are relevant nevertheless is an important, and in my view welcome, contribution to the law of patent remedies.