How do we value IP?

In a patent infringement case, a plaintiff (the patent holder, whose patent is infringed) can get 2 types of remedies: either damages or an accounting of profits.  If the plaintiff proves infringement, then it can elect only one of these 2 remedies. While the goal of each remedy is the same, the underlying principles are very different:

Damages seek to compensate the plaintiff for losses suffered by the plaintiff as a result of the infringement. Whether the infringing party actually earned any profits is irrelevant.

On the other hand, an accounting of profits aims to calculate the profits that the infringer made through the improper use of the patented technology. The infringer disgorges those profits on the basis that the money rightly belongs to the plaintiff. The infringer is only required to disgorge those profits earned from the infringement of the plaintiff’s patent.

It’s up to the plaintiff to prove damages. Where the patent owner actually sells its patented product (as opposed to licensing the patent), it is entitled to the profits on the sales it would have made if the infringing product had not been on the market. Otherwise, the plaintiff is entitled to a “reasonable royalty”.  Which brings us to the critical question: what is a “reasonable royalty”? Many courts in Canada have calculated a reasonable royalty according to what the infringer would have paid if it had entered into a legitimate licensing agreement with the patent holder. Put another way: what rate would result from negotiations between a willing licensor and a willing licensee. This is where the difficult task of IP valuation really gets tricky.  In the US, the “25% Rule” was often used as a guide for determining the royalty that two parties would have hypothetically negotiated. That rule has been tossed by the US Federal Court of Appeal. Is that rule used in Canada?

In Part 3, we’ll examine that question and look at one of the leading cases in Canada.

Calgary – 07:00 MST