Wednesday, February 26, 2014

Cinar, Monsanto and Convoyed Goods

Cinar Corp v Robinson 2013 SCC 73, var’g 2011 QCCA 1361 var’g 2009 QCCS 3793

I have finally gotten around to reading through Cinar v Robinson, 2013 SCC 73, which is of interest in the patent context primarily because of its brief discussion of Monsanto v Schmeiser, 2004 SCC 34. Monsanto set out the differential profits approach to the accounting of profits remedy in patent law, and on a quick reading Cinar could be seen as suggesting that Monsanto does not state a general principled approach to an accounting, but rather a rule which applies in specific circumstances, namely when “an infringement allows the infringer to commercialize a good in a more profitable manner than he could have without the infringement” [80]. Despite this stray phrase, taken as a whole, it is clear that Cinar simply turned on the evidence, and no limitation on the differential profit approach was intended. On the contrary, Cinar reaffirms that lost profits from so-called “convoyed” goods are prima facie recoverable.

In Cinar the SCC, affirming the courts below, held that Cinar’s television show “Robinson Sucroë” had infringed Robinson’s copyright in his work “Robinson Curiosity” which is a modern adaption of the Daniel Defoe's novel Robinson Crusoe, intended for children. Pursuant to s 35 of the Copyright Act, the trial judge awarded Robinson 50 percent of the profits made by Cinar [70]. However, the SCC noted that the trial judge refused to order an accounting of profits, and instead calculated the net profits made from Sucroë on the basis of documentary evidence produced by the parties: “As a result, this Court does not have the benefit of the type of detailed record that typically results from a taking of accounts, and must confine itself to the trial judge's findings of fact and the documentary evidence on the record before it” [74].

The plaintiff established approximately $16m in revenues associated with the infringing Sucroë show. That included about $1.5m for musical rights, derived from the TV show’s theme song: 2009 QCCS 3793 [1014]. The defendant argued that these revenues should not be included in the revenues caused by the infringement, and so should be deducted. In two very brief paragraphs the trial judge refused to do so [1016-17].

The QCCA 2011 QCCA 1361, reversed on this point. The QCCA first noted that the Sucroë music did not itself reproduce the plaintiff’s literary work and so did not itself infringe [195]. The QCCA then stated “That means that the appellants made a profit on a musical work of their own” (“Cela signifie que les appelants ont réalisé des profits sur une oeuvre musicale de leur cru.”)[195]. The court then noted that the profits had to be causally linked to the infringement, and said that the trial judge should have considered what profits would have been earned if the musical work had accompanied a non-infringing work [196]. The QCCA then quoted at length from Monsanto [197], and then again asserted that there was no causal connection between the defendant’s profits and the plaintiff’s musical [sic] work [198].

While this, particularly [196], sounds like the the QCCA applied the Monsanto “but for” test to hold there was no causal link between the infringement and the profits, that is not really the case. The QCCA evidently believed that the fact that the musical work did not infringe the plaintiff’s copyright in itself implied that the profits from the musical work were not directly attributable to the infringement [195], and there had to be a causal link between the defendant’s profits and the plaintiff’s musical work [198]. But that is not the question at all. The question is whether the defendant’s profits relating to the musical works were caused by the defendant’s infringement of the plaintiff’s copyright in the literary work. Because the QCCA asked the wrong question, it did not really address the real question at all. Consequently, there is essentially no reasoning to support its leap from the correct principle that there must be a causal link, to the conclusion that in this particular case there was no causal link.

The SCC reversed the QCCA on this point, and restored the trial judgement. The SCC stated that “The ‘differential profit’ approach on which the Court of Appeal relied is generally used in cases where an infringement allows the infringer to commercialize a good in a more profitable manner than he could have without the infringement” [80]. This statement is problematic, as it suggests that Monsanto does not state a general principle, but is simply a rule which is to be used in certain types of cases. But then the Court immediately went on to say:

However, there is no evidence that the soundtrack could have been commercialized as a separate product if Curiosity had not been infringed in the first place. The soundtrack was only commercialized as a component of the television show Sucroë, which was itself created by copying a substantial part of Robinson's work. The trial judge was entitled to conclude that the soundtrack had no stand-alone value, and that it generated profits only as an accessory to the television show. Consequently, he did not make a reviewable error in concluding that it was inappropriate to apportion profits to the soundtrack as a non-infringing component of the work.

This is all entirely consistent with the Monsanto approach. If the soundtrack could only be commercialized in conjunction with Sucroë, then, but for the infringement it would have had no value at all, and on the Monsanto approach all the profits from the soundtrack would properly be included in the differential revenues. As the SCC points out, whether this is so is a matter for evidence. The QCCA’s purported application of the Monsanto approach was really nothing more than reversing the trial judge on a matter of fact, without evidence. (And keep in mind the very limited evidence which was available with respect to the profits.)

With all that said, there is a real question as whether profits from the non-infringing musical work should be included in the accounting, but the question is not one of causation, but rather of remoteness. Non-infringing goods such as the musical works in Sucroë, the sales of which are causally linked to the sales of the infringing work are known as “convoyed” goods. In damages cases, convoyed goods are goods that are normally sold by the patentee along with the patented goods. The question is whether profits in an accounting, or losses in a damages case, due to convoyed goods are too remote to be recoverable, notwithstanding that they were in fact caused by the infringement. The general answer is that losses / profits from convoyed sales are recoverable. In damages, the leading English case is Gerber v Lectra [1997] RPC 443 (CA): and see Siebrasse et al Damages Calculations in Intellectual Property Cases in Canada, 24 CIPR 153 88 (2008) § 4.2. There is less case law on point in the accounting context, but profits from convoyed sales were included in an accounting in Beloit v. Valmet OY (1995), 61 CPR (3d) 271 (FCA) aff’g on this point (1994), 55 CPR(3d) 433 (FCTD); and see Siebrasse et al Accounting of Profits in Intellectual Property Cases in Canada, 24 CIPR 83(2008) §3.1. Perhaps the most restrictive approach was taken in the leading US case of Rite-Hite v Kelley 56 F3d 1538, 1550 (Fed Cir 1995) (en banc), which held, in a damages context, that lost profits from convoyed sales are recoverable only if the unpatented components “function together with the patented component in some manner so as to produce a desired end product or result. All the components together must be analogous to components of a single assembly or be parts of a complete machine, or they must constitute a functional unit.” On the facts, some convoyed sales were held to be too remote. For a discussion of Rite-Hite, see Cotter, Comparative Patent Remedies, 116-18 (and for a similar earlier discussion see Blair & Cotter, Rethinking Patent Damages, (2001) 10 Tex Intell Prop LJ 1, esp Pt III, Proximate Cause).

Thus, while the QCCA appears to have been simply wrong in its application of the Monsanto approach, its reluctance to include the profits from the musical works reflects a legitimate underlying concern regarding the remoteness of such sales. In reversing on this point, the SCC in Cinar has, almost inadvertently, reaffirmed, in the accounting context, that profits from convoyed sales are not too remote to be included in an accounting. This must evidently be treated with causation, due to the evidentiary nature of the holding, and the fact that remoteness as such was not addressed and presumably was not argued at any level of court. On the evidence, the profits from the musical works would likely have been included even under Rite-Hite’s restrictive approach to convoyed sales, and the exact limits of remoteness in the context of convoyed sales remains to be fully elaborated. For an interesting theoretical point related to convoyed goods, see Professor Cotter’s blog post here, discussing Xena Systems v Cantideck [2013] EWPCC 1.

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