The Federal Court of Appeal has decided that when computing
compensatory damages for patent infringement, the availability of a
non-infringing alternative is now a legally relevant consideration
that can reduce the lost profits an infringer is liable to pay a
patentee (Apotex Inc v Merck & Co,
Inc). Considering non-infringing alternatives means
taking into account the realistic effect of legitimate competition
by a defendant marketing a non-infringing alternative. This
achieves the "perfect compensation" the Patent
Act requires. The non-infringing alternative is not,
however, conceptual: the defendant must prove the existence of
a true, economically viable alternative, and the fact that it could
and would have sold that alternative in sufficient quantities to
replace infringing sales.
The Federal Court of Appeal observed that the balance at the
heart of the Patent Act demands "perfect
compensation". The Patent Act intends to
compensate a patentee who has suffered loss as a result of patent
infringement and "the concept of compensation rejects both
under-compensation and over-compensation". The Act
purports to balance the benefit to the public through disclosure of
a new and useful invention against the benefit conferred on the
inventor through the grant of a monopoly to encourage research and
development. Perfect compensation achieves the balance by avoiding
under-compensation—which would discourage research by
inventors, and over compensation—which would discourage
competition for fear of infringement.
To determine compensation, the language of the Patent
Act invokes a causation inquiry, as section 55(1)
states: an infringer is liable "for all damages
sustained... by reason of the infringement". This causation
inquiry is, in the words of the Supreme Court, best "answered
by ordinary common sense". Common sense dictates that
determining lost profits caused by patent infringement without
regard to the availability of a non-infringing alternative yields
imperfection. An award of lost profits without a realistic
consideration of market share would sometimes overcompensate the
patentee. This is because where a non-infringing alternative is
available, but disregarded in a lost profits calculation, the
patentee would be compensated for sales that would, in reality,
have been sales of the alternative product.
In the result, "[p]erfect 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."
Canada's approach to calculating compensatory patent damages
is now closer to the United States approach, which the Federal
Court of Appeal summarized as follows: "if a non-infringing
alternative [to] which a defendant could and
would have resorted, but for the infringement, is as good
as the patented invention, and would have replaced all infringing
sales, the infringement causes the patentee to suffer no
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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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