Improving the Patent Law Lottery by Reforming Damages

Improving the Patent Law Lottery by Reforming Damages

A key feature of any patent system is the right of enforcement available for infringement. Of the various recourses available in Canada, damages are the default remedy. Care is therefore necessary to ensure the correct level of damages is awarded, if only because undeservedly large or small damages awards may hurt innovation by depleting the resources of those who bring inventions to market.


Especially in high tech industries, it is possible to observe awards of damages that seem disproportionate to the infringement that occurred. A team of engineers at work on a problem may find many solutions to it. Is it reasonable to expect them to scour the patent registry to ensure every solution that is implemented does not fall within a claim in some obscure patent? With so many patents with so many broad claims on the register, a solution that a team independently arrived at may randomly overlap such a claim. The scenario is like buying a lottery ticket where patents are the winning numbers. If one buys enough tickets, the winning (or rather losing) number will likely come up. Chances are less for high quality inventions that represent a real advance in the art and that may be difficult to duplicate accidentally, but may be greater for lower quality patents that represent more modest advances or variants.


The way United States courts calculate damages in this situation is instructive. In Panduit v Stahlin Brothers and subsequent cases, the court adopted a “but-for” test where the damages are the profits the patentee would have made “but for” the infringement, having due regard to acceptable non-infringing alternatives (NIAs). In essence, the court calculates what the patentee would have lost if the infringer had not infringed, but instead had used a NIA. So in our example, had the engineers unwittingly stumbled on a patented technology by independent research where NIAs were also available, they would be liable only for the incremental damages the patentee suffered had the defendant used an NIA instead of the patented invention.


Recently in Canada, this approach was summarily rejected by the Federal Court in Merck v Apotex. The court acknowledged the US NIA principle, but held that in Canada NIAs were irrelevant in calculating damages. One merit of this approach is to remove the incentive a potential infringer may have to infringe on purpose, knowing that his damages liability from lost profits will be limited to the incremental lost profits.  What some might think would be a flagrant abuse of the patent system is thus prevented.


Both the US and Canadian approaches have their merits. Can they be reconciled while maintaining their respective advantages? One way, inspired by such cases as Qualcomm v ParkerVision, is to have regard to the intention of the infringer. While Qualcomm had infringed, the court’s finding that the infringement was not wilful significantly reduced the amount of damages awarded. The divergent US and Canadian approaches on NIAs may therefore be reconciled by making the infringer’s intention a threshold test in calculating damages: if infringement is innocent, NIAs may be considered as a more accurate assessment of damages; if wilful, they should not be considered. Deterrence is a legitimate aim of compensation schemes, and deterring wilful wrongdoers more than innocent ones seems logically justifiable.


One concern with this approach is that an infringer’s intention may actually serve to change the method of calculating damages. But, from an economic viewpoint, any assessment of the actual damages suffered by a patentee must inherently consider the availability of NIAs. From this perspective, the unavailability of an “NIA defence” may simply be considered as a punitive measure that is awarded to deter abuse of the patent system, instead of a different method of calculating damages.


Even though punitive damages have rarely been awarded in patent infringement cases in Canada, in Bell Helicopter v Eurocopter the Federal Court of Appeal affirmed their availability, while noting that not every deliberate infringement case necessitates punitive damages. In cases where the court feels that the high standard of bad conduct required to award punitive damages is not present, it may still achieve a similar punitive effect by being “less generous” with the NIA deductions, as was done with the deductions in the US copyright case Sheldon v MGM involving deliberate infringement. In such cases, upon wilful infringement, the strength of the NIA deductions may be lowered, even if the defence may still be technically available.


The interesting question remains: may this result be achieved judicially or is legislative action first required?


Pasan Hapuarachchi is a JD Candidate at Osgoode Hall Law School and is enrolled in Osgoode’s Intellectual Property Law Intensive Program. As part of the program requirements, students were asked to write a blog on a topic of their choice.