Thursday, February 3, 2011

Accounting Denied

Merck & Co Inc. v. Apotex Inc. / lovastatin 2010 FC 1265, Snider J

An accounting of profits is an equitable remedy and therefore discretionary, but it has been common practice in the Federal Court to allow a successful patentee to elect between an accounting and damages. In the lovastatin decision, Snider J denied an accounting to the patentee. The question is whether this is part of general reconsideration of the practice of allowing an election, as was called for by Hughes J in 2006 FC 524 [227], or whether it simply reflects the particular facts of the case.

In refusing to award the accounting Snider J adverted to two general points of principle. The first is that “[i]t is necessary for a party seeking an equitable remedy, such as profits, to show some basis for the exercise of equity,” [617], citing Janssen-Ortho Inc. v. Novopharm Ltd., 2006 FC 1234, 57 C.P.R. (4th) 58 at para. 132, (Hughes J). In Janssen-Ortho Hughes J denied an accounting for that reason alone. With respect, the view that equitable remedies are inherently extraordinary is unsound in principle and dangerous in practice. The historical reason for restricting access to equitable remedies was to restrict forum shopping and minimizing the case-load in equity, which had limited resources compared with the courts of law. In other words, it was not equitable remedies that were extraordinary, but access to the courts of equity. There is no good reason to treat equitable remedies as extraordinary after the unification of the courts: see my article “Interlocutory Injunctions and Irreparable Harm in the Federal Courts,” 88 Can Bar Rev 517 (2009). The issue here is not simply accounting of profits; permanent injunctions are also equitable remedies. While there may well be circumstances in which a permanent injunction is inappropriate (see eBay Inc. v. MercExchange (2006) 547 US 388), it surely would be inadequate to say that injunctions should routinely be denied simply because they are equitable in nature. The same is true for an accounting. The law has moved beyond such formalism.

The second point of principle is that “[a]n accounting of profits is not an easy calculation” [615]. While this is no doubt true, the relevant question is whether it is easier than damages. I may be missing something from my academic perch, but it is not clear to me why it is more difficult to calculate the defendant’s actual profits in an accounting than it is to calculate the plaintiff’s hypothetical lost profits in a damages assessment; certainly there are many well-known judicial statements remarking on the difficulty of calculating damages.* I can understand that a profits calculation of either kind might be more difficult than reasonable royalty damages, but a patentee is entitled to lost profit damages if it can show that it has lost sales, and the greater ease of calculating a reasonably royalty has never been a ground for confining the patentee to that remedy. One practical point that may make an accounting more difficult is that the defendant is liable to resist the necessary discovery to avoid disclosing business information to a competitor (Beloit v. Valmet OY (1992), 45 CPR(3d) 116 at 118 (FCA)). But it is disquieting to respond to this by instead requiring the successful patentee to disclose its business information to an infringing competitor. Of course, on the facts of a particular case it may be easier to calculate the plaintiff’s hypothetical lost profits than the defendant’s actual profits, but that is very different from saying that an accounting is generally more difficult.

The advantages of an accounting must also be recognized. One advantage stems from the very feature that gives rise to the difficulty: that it is the infringer, rather than the successful patentee that has to disclose its business information can be seen as an advantage of the remedy. But the more compelling point is that the alternative of a reasonable royalty, which is the easiest calculation, amounts to a compulsory licence. As Zinn J has pointed out in Monsanto Canada Inc. v. Rivett 2009 FC 317 at [23], “[a]t the level of principle, there is no deterrent from infringing the patent if what the infringer is required to hand over is the sum he would otherwise have paid to Monsanto to buy the seed and the licence. In fact, this would almost be counter to the purpose of deterrence. It is much like saying, as the plaintiffs put it in their oral submission, ‘Catch me if you can’. If caught, the defendant would be required to pay the sum he would have paid to use the patent in any event. When not caught, he is left with a windfall.”

Surely an accounting is a far better response to the deterrence problem than the US approach of treble damages for wilful infringement. The problem with the US approach is that determination of wilfulness is always uncertain; used too sparingly the deterrence is inadequate, but used too vigorously its punitive nature risks chilling legitimate activity. An accounting strikes a sound middle ground; the deterrence is adequate because the defendant is worse off than if it had obtained a licence; but the remedy is not punitive, in the sense that the defendant is no worse off for having infringed that if it had pursued some other activity entirely.

Given these advantages, I would suggest that the long-standing practice of permitting a successful patentee to elect an accounting, unless there is some reason to refuse on the facts, is sound. The difficulty of an accounting can be taken into account, but ideally it would be in comparison with the difficulty of calculating lost profits. The notion that an accounting somehow needs special justification simply because it is equitable in nature is an argument that should be banished.

On the facts, Snider J pointed to two factors that weighed against allowing an accounting. One was the delay in bringing the matter to trial and the consequent exceptional difficulty of calculation of the defendant’s profits [620]. Delay is a well accepted reason for refusing an equitable remedy, both generally and with respect to an accounting in particular, and to the extent that the patentee contributed to the delay, as Snider J suggested, then it is not unreasonable that the patentee should suffer this consequence. The second factor was the complexity of the defendant’s commercial arrangements, which would again increase the complexity of the calculation. Presumably, though Snider J did not say so directly, it would make calculation of Apotex’s profits more difficult than calculation of the plaintiffs’ lost profits. With that said, the implication, that a defendant may shield itself from an accounting by carefully structuring its supply arrangements, is somewhat troubling, though perhaps it is unrealistic to suppose that this consideration would be of sufficient practical importance to affect the defendant’s business structure.

In the end, I suggest that Snider J’s decision to deny an accounting is best seen as an application of the traditional approach to the particular facts of the case. Even though it has been common, even routine, to allow the patentee to elect an accounting, an accounting has never been considered as of right. There have always been occasional cases denying that remedy on the facts, and this is one of them.

* “[T]he whole subject-matter [of the calculation of damages] is one that is not capable of being mathematically ascertained by any exact figure.” Meters Ltd. v. Metropolitan Gas Meters Ltd. (1911), 28 RPC 157 at 166 (C.A.).
"[T]he restoration by way of compensation is therefore accomplished to a large extent by the exercise of a sound imagination and the practice of the broad axe."  Watson Laidlaw Co. Ltd. v. Pott, Cassells and Williamson (1914), 31 RPC 104 at 117-118 (H.L.), cited and applied in Colonial Fastener Co. v. Lightning Fastener Co., [1937] SCR 36 at 44.
"[I]t is impossible to ascertain with arithmetical precision what in the ordinary course of business would have been the amount of the patentees' sales and profits." United Horse-Shoe & Nail Co. v. Stewart & Co. (1888), 5 RPC 260, L.R. 13 App.Cas. 401 at 413 (H.L.).

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