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.

Perfect Balance

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.

Perfect Compensation

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 damage.”