Judgments

[1995] 1 F.C. 483

A-874-92

Baker Energy Resources Corporation (Appellant)

v.

Reading & Bates Construction Co. and Reading & Bates Horizontal Drilling Ltd. (Respondents)

Indexed as: Reading & Bates Construction Co. v. Baker Energy Resources Corp. (C.A.)

Court of Appeal, Hugessen, Létourneau and McDonald JJ.A.—Toronto, September 27, 28, and 29; Ottawa, October 17, 1994.

Patents — Infringement — Accounting of profits — Equitable remedy to prevent unjust enrichment — Patent infringer accountable both for profits improperly obtained and subsequent use — Burden on defendant to prove right to apportionment, absence of causal link between that portion of profits and infringement — Absent such proof, proper to assume ill-gained profits used to realize profits of ordinary, responsible businessperson — Respondents entitled to profits actually made through infringing acts — Pre-judgment interest awarded even if not claimed — As pre-judgment interest deemed earnings on profits where infringer not accounting for profits as required by law, not discretionary — Compound pre-judgment interest rule, subject to Court’s discretion if award thereof amounting to punishment — Judgment in infringement action incomplete until judgment rendered on report of accounting of profits — Delay in filing report depriving plaintiffs of money — Where failure to account for profits, reasonable to assume person who has improperly enjoyed profits making most beneficial use of them — Profits bearing interest at chartered bank rate on prime business loans — Canadian rate of interest applied as contract performed in Canada, payable in Canadian dollars, cause of action arising in Canada, proceedings instituted in Canada.

Restitution — Accounting of profits in patent infringement case — Equitable remedy to prevent unjust enrichment, not to punish infringer — Onus of proving profits and apportionment — Court considers profits made by infringing acts, not profit made if non-infringing method used — Pre-judgment interest awarded though not claimed as unjust enrichment if infringer retaining earnings on improperly made profits — Equity requiring award of compound interest to reflect reality of business life.

Practice — References — Appeal from trial judgment confirming referee’s accounting of profits from patent infringement — On appeal under R. 506, reviewing judge should not interfere unless error of law, or findings of fact made in perverse or capricious manner or resulting from palpable, overriding error — Exercise of discretionary power by prothonotary, whether sitting as prothonotary, or referee, not disturbed unless clearly wrong.

This was an appeal from a trial judgment confirming the conclusions of a referee appointed to take account of the profits made by the appellant from the infringement of the respondents’ patented method for installing pipeline.

The appellant contended that the Judge who heard the appeal from the referee’s report was free to substitute his own views of the law for those of the referee and that he was not bound by the prothonotary’s opinion in discretionary matters and had to exercise his own discretion. The appellant further submitted that the plaintiff had the burden of proving the extent of his claim whether he claimed entitlement to damages or to profits. As to the computation of profits, the appellant contended that a defendant was accountable for the difference between the actual profits earned and the profits that would have been earned through use of an alternative, non-infringing method that the appellant would most likely have used instead of the infringing method. According to the appellant there were four other methods available to install the pipeline, involving at most an additional cost of $100,000. The appellant objected to the awarding of pre-judgment interest compounded annually because interest was not requested in the statement of claim and no amendment was made to request it. Furthermore, the reviewing Judge failed to recognize that the awarding of pre-judgment interest was discretionary, and thus failed to recognize that he had a discretion and to exercise it. It also argued that the question of awarding compound interest was a matter of discretion, and that it was generally not awarded except in those cases where the defendant was in a fiduciary position and had breached its fiduciary duty. Pre-judgment interest was awarded from the date of the receipt of the profits in September 1983 to the date of the judgment confirming the referee’s report. The appellant argued that the interest should have ended with the liability judgment on March 20, 1986.

The issues were: (1) the role of the Court under Federal Court Rules, Rule 506 in reviewing a referee’s report; (2) the onus of proving the amount of profits, and their apportionment; (3) the method of calculating the amount of profits; (4) the power of the Court to allow pre-judgment interest at the prime rate compounded annually; and (5) whether the Canadian or the American interest rate should apply.

Held, the appeal should be dismissed.

On an appeal from the decision of a referee under Rule 506, a judge is in very much the same position as the Court of Appeal would be on an appeal from the Trial Division, i.e. the reviewing judge should not interfere with findings of law and of fact unless, in making the former, the referee has committed some error of law and in the latter, the findings of fact are wrong in that they are made in a perverse or capricious manner or are the result of some palpable and overriding error. The exercise of discretionary power by a prothonotary ought not to be disturbed unless it is clearly wrong, i.e. based upon a wrong principle or a misapprehension of the facts, or unless it raises questions vital to the final issue of the case. The same principle applies when the prothonotary sits as a referee pursuant to Rule 500.

An accounting of profits is an equitable remedy whose object is not to punish the infringer, but to prevent his unjust enrichment by compelling him to surrender those profits that were improperly made as a result of the infringement. When a plaintiff elects to take account of the profits made as a result of a patent infringement, it is the infringer, not the plaintiff, who is made accountable for the profits improperly obtained and who has to reveal and disgorge those profits. He has to account both for the profits and their subsequent use as the plaintiff is entitled to both. The plaintiff need only prove the amount of revenue made from the acts of patent infringement. Where a defendant claims that part of the profits accounted for did not result from the infringement, the burden is on him to prove his right to apportionment and the absence of a causal link between that portion of the profits and the infringement. The appellant failed to account for the subsequent use of the profits improperly made. It was proper for the referee and the reviewing judge to assume that the appellant had used them to realize such profits as an ordinary and responsible businessperson would be expected to realize.

The respondents were entitled to the profits that the appellant actually made through the infringing acts, not the profit that he could have made had he used a non-infringing method. It would be unjust and contrary to the equitable nature of the accounting remedy to force a sharing of profits between the appellant and the respondents for the following reasons: (1) The contract was a “No Hole, No Pay” contract. A failure to succeed meant no revenue and substantial losses. The referee properly concluded that the appellant always intended to infringe the respondents’ patent. (2) The contract required the use of the very method devised by the respondents. (3) The whole process was infringed. As a result the whole of the appellant’s profits came through the infringing act, i.e. the use of the patented method. (4) Neither the Trial Judge nor this Court made any provision for apportionment. This Court had no jurisdiction to rewrite the liability judgment. (5) The referee and the reviewing judge both concluded that of the four alternative methods of installing the pipeline, the one most likely to have been used would have infringed the patent. Assuming the alternative methods of installing pipeline could have been considered, the appellant failed to meet the burden of proving the availability, utility and workability thereof, and their costs.

Given the nature and purpose of an accounting remedy, a patent infringer, who knows that he must account both for the profits improperly made and the earnings on such profits, cannot complain of being taken by surprise simply because no request for pre-judgment interest was made in the statement of claim. Pre-judgment interest as deemed earnings on the profits can be awarded against an infringer who has to account for the profits notwithstanding that it is not mentioned in the original or an amended statement of claim. The infringer must be given the opportunity of making submissions in relation to relevant issues such as the interest rate, its annual or periodical compounding and the length of the period for which interest ought to be awarded.

The awarding of pre-judgment interest should be characterized as deemed secondary benefits, i.e. deemed earnings on the profits, where the infringer fails to account for them as required by law. Therefore it is not a discretionary matter. The awarding of interest on the contract profits is part of the assessment of the profits that the plaintiff is entitled to and would have made if they had been paid to him rather than to the infringer.

Bearing in mind the modern reality that interest paid or earned on deposits or loans is compound interest and the need to achieve equity in the accounting of profits, the awarding of compound pre-judgment interest as deemed earnings on the profits is the rule, subject to a Court’s discretion to mitigate it or to award only simple interest in appropriate circumstances. A judge may consider the good faith of the infringer, the validity of the patent claim or that compounding the interest may reach beyond equity into the realm of punishment, in the exercise of judicial discretion.

A judgment in an infringement action is not complete, where the plaintiff elects an accounting of profits, until the profits have been accounted for and the judgment rendered on the report of the person designated to take accounts. The complaint that the referee took more than two years to file his report while pre-judgment interest was accruing overlooked the fact that the respondents had been deprived of that money during that period of time while the appellant had it. Furthermore, compound interest is not a penalty, but a recognition of reality.

The burden was on the appellant to account for the earnings on the profits, failing which an estimated amount had to be established. It is sensible to assume that the person who has improperly enjoyed the profits would have made the most beneficial use of them. There was no fault with the referee’s recommendation that the profits bear interest at the chartered bank rate on prime business loans. There was nothing wrong in using the Canadian rate of interest because the contract was performed in Canada, was payable in Canadian dollars, the cause of action arose in Canada, the proceedings were instituted in Canada and the decisions of the referee and the reviewing Judge ordered the disgorgement of the appellant’s profits in Canadian dollars. It would be under-compensatory to give the plaintiff judgment in Canadian dollars and pre- judgment interest at the American rate which is lower than the Canadian rate.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Federal Court Rules, C.R.C., c. 663, RR. 500, 506.

Law Reform (Miscellaneous Provisions) Act, 1934 (U.K.), 24 & 25 Geo. 5, c. 41, s. 3.

CASES JUDICIALLY CONSIDERED

APPLIED:

Algonquin Mercantile Corp. v. Dart Industries Canada Ltd., [1988] 2 F.C. 305; (1987), 17 C.I.P.R. 68; 16 C.P.R. (3d) 193; 79 N.R. 305 (C.A.); Canada v. “Jala Godavari” (The) (1991), 40 C.P.R. (3d) 127; 135 N.R. 316 (F.C.A.); Canada v. Aqua-Gem Investments Ltd., [1993] 2 F.C. 425; (1993), 93 DTC 5080 (C.A.); Beloit Canada Ltd. v. Valmet Oy, [1994] F.C.J. No. 682 (T.D.) (QL); Wellcome Foundation Ltd. v. Apotex Inc. (1992), 40 C.P.R. (3d) 361 (F.C.T.D.); Teledyne Industries, Inc. et al. v. Lido Industrial Products Ltd. (1982), 68 C.P.R. (2d) 204 (F.C.T.D.); Beloit Canada Ltée/Ltd. v. Valmet Oy (1992), 45 C.P.R. (3d) 116 (F.C.A.).

DISTINGUISHED:

Invacare Corp. v. Everest & Jennings Cdn. Ltd. (1987), 14 C.I.P.R. 295; 15 C.P.R. (3d) 278; 3 F.T.R. 279 (F.C.T.D.); Gordon Form Lathe Co. v. Ford Motor Co. 133 F. 2d 487 (6th Cir. 1943).

CONSIDERED:

Reading & Bates Construction Co. v. Baker Energy Resources Corp. (1986), 8 C.I.P.R. 250; 13 C.P.R. (3d) 410; 2 F.T.R. 241 (F.C.T.D.); affd (1987), 18 C.P.R. (3d) 180; 79 N.R. 351 (F.C.A.); O’Sullivan v. Management Agency and Music Ltd., [1985] Q.B. 428 (C.A.).

REFERRED TO:

Diversified Products Corp. v. Tye-Sil Corp. (1991), 35 C.P.R. (3d) 350; 125 N.R. 218 (F.C.A.); My Kinda Town Limited v. Soll and Another, [1983] R.P.C. 15 (Ch. D.); Amusement Corporation of America v. Mattson, 138 F. 2d 693 (5th Cir. 1943); Ductmate Industries Inc. v. Exanno Products Ltd. (1987), 15 C.I.P.R. 115; 16 C.P.R. (3d) 15; 12 F.T.R. 37 (F.C.T.D.); Corcoran v. Ehrlick Transport Ltd. et al. (1984), 46 O.R. (2d) 225; 12 D.L.R. (4th) 134; 27 M.V.R. 197; 3 O.A.C. 148 (C.A.); Theriault v. Day & Ross Ltd. and Monnier (1977), 21 N.B.R. (2d) 120; 37 A.P.R. 120 (C.A.); Engine and Leasing Co. et al. v. Atlantic Towing Ltd. (1992), 51 F.T.R. 1 (F.C.T.D.); Dictionnaires (Les) Robert Canada SCC et al. v. Librairie du Nomade Inc. et al. (1987), 16 C.P.R. (3d) 319; 11 F.T.R. 44 (F.C.T.D.); Apple Computer Inc. v. Mackintosh Computers Ltd., [1987] 1 F.C. 173; (1986), 28 D.L.R. (4th) 178; 8 C.I.P.R. 153; 10 C.P.R. (3d) 1; 3 F.T.R. 118 (T.D.); Performing Rights Organization of Canada Ltd. v. R.F.R. Holding Corp. et al. (1987), 13 C.P.R. (3d) 115 (F.C.T.D.); Belmont Finance Corpn v Williams Furniture Ltd (No 2), [1980] 1 All ER 393 (C.A.); Westinghouse Electric and Manufacturing Company v. Wagner Electric and Manufacturing Company, 225 U.S. 604 (1912); Éditions JCL Inc. v. 91439 Canada Ltée, [1995] 1 F.C. 380 (C.A.); Wallersteiner v Moir (No. 2), [1975] 1 All ER 849 (C.A.); Siddell v. Vickers (1892), 9 R.P.C. 152 (C.A.).

AUTHORS CITED

Law Reform Commission of British Columbia. Report on the Court Order Interest Act, Vancouver: Ministry of the Attorney General, 1987.

Manitoba Law Reform Commission. Report on Prejudgment Compensation on Money Awards: Alternatives to Interest, Report No. 47, Winnipeg: Queen’s Printer, 1982.

McGregor, Harvey. McGregor on Damages, 15th ed., London: Sweet & Maxwell, 1988.

Ontario Law Reform Commission. Report on Compensation for Personal Injuries and Death, Toronto: Ministry of the Attorney General, 1987.

Saxe, Dianne. “Judicial Discretion in the Calculation of Prejudgment Interest” (1985-86), 6 Adv. Q. 433.

Waddams, S. M. The Law of Damages, 2nd ed., Toronto: Canada Law Book Inc., 1993.

APPEAL from trial judgment, Reading & Bates Construction Co. v. Baker Energy Resources Corp. (1992), 44 C.P.R. (3d) 93; 56 F.T.R. 22 (F.C.T.D), affirming the referee’s report of profits made by a patent infringer. Appeal dismissed.

COUNSEL:

B. D. Edmonds for appellant.

R. E. Dimock and B. Stratton for respondents.

SOLICITORS:

McCarthy Tétrault, Toronto, for appellant.

Dimock & Associates, Toronto, for respondents.

The following are the reasons for judgment rendered in English by

Létourneau J.A.: This appeal from a decision of the Trial Division [(1992), 44 C.P.R. (3d) 93], which confirmed the conclusions of a referee appointed to take account of the profits made by a patent infringer, raises interesting questions, some of which are brought before this Court for the first time:

a) the role of the Court under Rule 506 of the Federal Court Rules [C.R.C., c. 663] in reviewing the report of a referee made pursuant to a reference under Rule 500;

b) the onus of proving the amount of profits in case of an infringement by use of a patent and their apportionment;

c) the method of calculating the amount of profits in case of such infringement;

d) the power of the Court to allow prejudgment interest at the prime rate compounded annually; and

e) whether the rate should be the Canadian or the American interest rate.

In August 1983, the respondents commenced two actions against the appellant alleging infringement of certain specified claims of patent no. 1,037,462 which could be described as the “follow liner patent” and of all the claims of patent no. 1,140,106 which was described as the “pull back patent.”

Broadly stated, the “follow liner patent” refers to a method of drilling a pilot hole with a liner pipe along an inverted underground arcuate path beneath an obstacle. The “pull back patent” describes a method of both simultaneously and sequentially drilling that hole, lining it, and then pulling the liner back through the hole with a reamer and the production pipe attached. A summary description of that process can be found in the reasons for judgment of Strayer J. on the issue of liability rendered on March 20, 1986:

Essentially this process involves pushing and steering a small diameter non-rotating pipe, on whose end are mounted jets that emit water and mud which is pumped through the pipe from the drill rig. The erosive cutting effect of these emissions makes the hole through which the drillstring passes. The drillstring is directed from the rig positioned on one river bank, first at an angle downward into the ground, then across under the river and up the other side to reach the surface. As this work proceeds, a larger pipe variously described as a “follow liner”, “wash pipe”, or “washover pipe”, or sometimes “guide casing”, is pushed and rotated around the drillstring so as to follow it eventually to the other side of the river. The drill- string is then pulled back and by means of attaching the follow liner to a reamer (to enlarge the hole further) with a swivel connecting it to the gas pipeline or “production pipeline” which has been pre-assembled on the other shore, the latter is pulled back through the hole as the follow liner is withdrawn by the rig on the side of the river where drilling commenced. The swivel is used so that, while the follow liner is rotated in the pull back the production pipeline is not.[1]

The infringement arose out of the installation of a gas pipeline under the St. Lawrence River near Trois-Rivières, Quebec, in the summer of 1983. The appellant drilled a pilot hole from the north shore of the river to the south shore and then started the ream and pull back of the gas pipeline which lasted three days.

The Trial Judge found that claims 1 to 6 and 10 to 13 of the “follow liner patent” were invalid, but that there had been an infringement of claims 1 to 9, 14 to 28, 33 to 44, 46 and 47 of the “pull back patent” in the installation of the pipeline. The respondents elected to take account of the appellant’s profits resulting from the infringement and the matter was referred to the Associate Senior Prothonotary for determination. An appeal from the judgment of the learned Judge on liability was dismissed by the Court of Appeal on November 20, 1987.[2]

In November 1989, the Associate Senior Prothonotary held a hearing pursuant to the reference on the issue of the accounting of the profits and reserved his decision. The report of the referee was finally filed more than two years later in January 1992. The appellant unsuccessfully appealed the referee’s decision to the Trial Division. Hence the present appeal to this Court.

As one can imagine, the facts and procedural incidents in this case were substantially more intricate than my brief summary reveals. However, as I address the various grounds of appeal raised by the appellant, I will have the opportunity of being more specific and providing additional details.

A.         The Role of the Court on an Appeal Under Rule 506 against the Report of a Referee

Counsel for the appellant contends that with respect to legal issues, the learned Judge of the Trial Division (hereinafter called “the reviewing Judge”), who heard the appeal against the referee’s report, was free to substitute his own views of the law for those of the referee. He also submits that the reviewing Judge was not bound by the prothonotary’s opinion in discretionary matters and had to exercise his own discretion.

It is clear from the decisions of my colleague Hugessen J.A. in Canada v. “Jala Godavari” (The)[3] (and Algonquin Mercantile Corp. v. Dart Industries Canada Ltd.[4] that a judge who reviews findings of fact based on an assessment of credibility and made by a referee who has heard witnesses is not at liberty to reverse these findings and substitute his views for those of the referee. I believe that, on an appeal from the decision of a referee under Rule 506, the reviewing judge should not interfere with findings of law and findings of fact unless, in making the former, the referee has committed some error of law and, in the latter case, the findings of fact are wrong in that they are made in a perverse or capricious manner or are the result of some palpable and overriding error.[5] To put the matter simply, a judge who reviews a referee’s findings under Rule 506 is, as to questions of law and questions of fact, in very much the same position as this Court would be on an appeal from the Trial Division.

A judge is given more latitude when it comes to reviewing the exercise of a discretionary power by a prothonotary. In such case, the decision of Canada v. Aqua-Gem Investments Ltd. stands for the proposition that the exercise of such power ought not to be disturbed unless it is clearly wrong, i.e., it is based upon a wrong principle or a misapprehension of the facts, or unless it raises questions vital to the final issue of the case. When the exercise of that discretion is reviewable, a judge ought to exercise his discretion de novo.[6]

Although such finding was made in the procedural context when the prothonotary sits on motions, I believe the principle to be applicable as well when he sits as a referee pursuant to Rule 500. In “Jala Godavari”, supra, my colleague Hugessen J.A., in stating the law applicable to the review of findings of fact made by a referee, acknowledged that the referee could be a prothonotary. Therefore, the scope of review of the prothonotary’s discretion ought to be the same whether he sits as a prothonotary or as a referee. (Different considerations might apply where the referee was a judge.)

B.        The Onus of Proving the Profits and their Apportionment

The remedy of an accounting of profits in case of infringement of a patent is an equitable remedy whose object is not to punish the infringer but to prevent his unjust enrichment by compelling him to surrender those profits that were improperly made as a result of the infringement.[7]

It is trite to say that the exercise of this remedy has been associated with a number of practical difficulties which have somewhat diminished its usefulness. As early as 1892, Lindley L.J., of the English Court of Appeal, wrote:

The Plaintiff therefore was perfectly within his right in electing, as he did in this case, to have an account of profits; but I do not know any form of account which is more difficult to work out, or may be more difficult to work out than an account of profits. One sees it—and I personally have seen a good deal of it—in partnership cases where the capital of a deceased or outgoing partner has been left in the trade; an account has been directed of the profits made in respect of his capital, which is something like the profits made in respect of an invention, and the difficulty of finding out how much profit is attributable to any one source is extremely great—so great that accounts in that form very seldom result in anything satisfactory to anybody. The litigation is enormous, the expense is great, and the time consumed is out of all proportion to the advantage ultimately attained; so much so that in partnership cases I confess I never knew an account in that form worked out with satisfaction to anybody. I believe in almost every case people get tired of it and get disgusted. Therefore, although the law is that a Patentee has a right to elect which course he will take, as a matter of business he would generally be inclined to take an inquiry as to damages, rather than launch upon an inquiry as to profits.[8]

The remedy often leads to a relitigation of the nature and extent of the infringement in an attempt to minimize the amount of profits made from it or to obtain apportionment. It also gives rise to litigation in the determination of the secondary benefits, i.e., the level and amount of earnings made on the profits by a defendant. Central to the debate between the litigants are the extent and the proper allocation of the burden of proof. This case is no exception to the rule.

Counsel for the appellant submits that in an action for infringement of a patent, the plaintiff has the burden of proving the extent of his damages or, if as in the present case he elects to take account of the profits made by the defendant, the amount of these profits and their apportionment. In his view, placing such burden on the plaintiff, who claims the profits, creates no hardship for that plaintiff as he can make full and extensive use of examination and discovery procedures to gain access to the information detained by the defendant. In other words, the plaintiff has the burden of proving his claim whether he claims entitlement to damages or entitlement to profits.

This submission is no doubt attractive, but it fails to recognize the special nature of the accounting remedy. When a plaintiff elects to take account of the profits made as a result of a patent infringement, it is the infringer, not the plaintiff, who is made accountable for the profits improperly obtained and who has to reveal and disgorge these profits. Indeed, he has to account both for the profits and their subsequent use as the plaintiff is entitled to both. The plaintiff need only prove the amount of revenue made from the acts of infringement to the patent. To accept the appellant’s contention and require that the plaintiff prove the profits and their proper apportionment would, in effect, reverse the roles and make the plaintiff accountable for the profits he claims entitlement to.

The findings of Addy J. that an accounting of profits pursuant to a patent infringement is like an accounting by one found guilty of misappropriation or misuse of property are applicable in the present instance:

Where the defendant, as in the present case, has been found at fault and has been ordered to account, that obligation to account rests without reservation entirely on him. There exists no onus whatsoever in this respect on the owner of the property. The judgment obliges the defendant to account for the full amount of all revenue received from the use of the property. Negligent or wilful failure to declare any such amounts might well render the infringer guilty of contempt of court. The amount so declared becomes payable to the rightful owner of the property and is subject to be reduced only by such bona fide expenses or disbursements as the infringer can by positive evidence establish as having been actually incurred in the case of a claim for damages the onus rests with the plaintiff.[9]

Having said that, it becomes obvious that in cases where a defendant claims that part of the profits accounted for did not result from the infringement, the burden is on that defendant to prove his right to apportionment and the absence of a causal link between that portion of the profits and the infringement.

In the case at hand, the appellant failed, as required by law, to account for the subsequent use of the profits improperly made. In these circumstances, it was proper for the referee and the reviewing Judge to assume that the appellant had used them to realize such profits as an ordinary and responsible businessperson would be expected to realize. I shall come back to this assumption later when dealing with the rate of interest determined by the referee.

C.        The Method of Calculating the Amount of Profits

Counsel for the respondents claims that the respondents are entitled to all the profits made by the appellant and that the amount of such profits is obtained by deducting from the revenue received by the appellant from the infringing acts only those bona fide expenses or disbursements incurred by the appellant in the course of the operation. The revenue and the costs having on consent been established at the respective sums of $4,529,000 and $1,594,795, the total profit earned by the appellant is $2,934,205.

Counsel for the appellant proposes a different method of computing the profits. He contends that the amount of profits is determined by comparing the profits made from the infringing activity with those that could have been made from a non-infringing activity. The difference represents the profits that a defendant is accountable for and has to disgorge. To put it another way, the amount of profits is the difference between the actual profits earned and the profits that would have been earned through use of an alternative, non-infringing method that the appellant would most likely have used instead of the infringing method. The appellant submits that four other methods were available to install the pipeline and, that if any one of those methods had been used, there would have been for the appellant, at the most, an additional cost of $100,000.[10] Actually, the appellant estimates at approximately $52,500[11] the maximum savings it made by using the respondents’ invention.

On this accounting procedure, I believe one has to look at the profits that the appellant actually made through the infringing acts, not the profit that he could have made had he used a non-infringing method. As Rouleau J. noted in Beloit Canada Ltd. v. Valmet Oy,[12] “the objective of the award is to restore those actual profits to their rightful owner, the plaintiff, thereby eliminating whatever unjust enrichment has been procured by the defendant.” The respondents elected and were entitled to receive the profits that the appellant actually made. Particularly in the circumstances of this case, it would be unjust and contrary to the equitable nature of the accounting remedy to force a sharing of the profits between the appellant and the respondents. If I were to accept the appellant’s contention, the respondents, who lost the contract to the appellant in the tender process, would receive $52,500 while the appellant who infringed the patent would retain a profit of $2,881,705. Many compelling reasons militate against this unjust result.

First, the contract issued for the installation of the gas pipeline under the St. Lawrence River was a “No Hole, No Pay” contract. The appellant had an obligation of result. Therefore, it comes as no surprise that it used the method developed by the respondents as it was the best and safest method to profitably and, what is essential, successfully perform a work of this kind. It was the first time this type of installation of a pipeline was done over a distance of more than 5,200 feet in alluvial soils and silts. The appellant knew of the substantial risks involved in that undertaking. It also knew of the existence and great reliability of the respondents’ method for a project of this kind in comparison with the poor reliability of the alternative methods. It was interested in succeeding not in failing as the measure of its success was the measure of its profits. A failure to succeed meant no revenue and substantial losses. All these factors, in my view, properly led the referee to find as a fact that the appellant had at all times the intent to proceed as it did and infringe the respondents’ patent.

Second, the contract required the use of a directional drilling, ream and pull back method to install the pipeline,[13] which is the very method devised by the respondents.

Third, it is the whole process or method that has been infringed as the respondents’ invention is precisely a complete method of sequential directional drilling with simultaneous reaming and pulling back. Claims 1 and 6 of patent no. 1,140,106 describe it in the following terms:

1. A method for placing a casing along an underground inverted arcuate path provided by a preceding pilot hole comprising: drawing reaming apparatus together with said casing in a following relationship to said reaming apparatus along an underground inverted arcuate path, without any substantial rotation of said casing.

6. A method according to claim 1 comprising the steps preceding the drawing of placing a pipe having two ends along said path, until said pipe completely occupies said path; attaching said reaming apparatus to one end of said pipe; attaching one end of said casing to said reaming apparatus in following relationship to said reaming apparatus; and wherein said drawing is effected by drawing said pipe along said path without rotating said casing.

As a result, the whole of the appellant’s profits came through the infringing act, that is to say the use of the patented method.

Fourth, a sharing or an apportionment of the profits would be contrary to the decision of the Trial Judge on the infringement actions rendered in 1986 and confirmed by this Court in 1987. Both decisions concluded that the whole operation of the appellant in the installation of the pipeline infringed the respondents’ method. Strayer J. adjudged that:

“claims 1 to 9, 14 to 28, 33 to 44, 46 and 47 of Canadian Letters Patent No. 1,140,106 are valid and have been infringed by the defendant Baker Energy Resources Corporation in the installation of a pipeline under the St-Lawrence River near Trois-Rivières, Québec, in the months of July and August, 1983.”[14]

In other words, the entire performance of the contract was treated as an infringement. Neither the Trial Judge nor this Court made any provision for, or any finding as to, apportionment.

Yet counsel for the appellant invited us to interpret narrowly the words “in the installation of the pipeline” found in the decision of the Trial Judge and subsequently approved by this Court. He argued that the Court had found that an infringement had occurred “in the course of” and not “by” the installation of the pipeline. He inferred from the use of these words that it was open to us to decide that the installation of the pipeline involved two steps: one which did not infringe the method, i.e., the drilling of the hole, the other which did, i.e., the simultaneous reaming of the hole and pull back of the pipeline. Consequently, it would be open to us to apportion the profits between the respondents and the appellant.

What the appellant, in fact, is now asking us to do is to rewrite the liability judgment. I am not willing and we have simply no jurisdiction to do that. Furthermore, and as indicated, the drilling of the hole was of absolutely no value to the appellant and its customer except as an integral part of the subsequent ream and pull back. This is what distinguishes this case from the sort of cases where a patent or process represents only a part of the ultimate production.[15] Here the patent comprised the whole of what was sold by the appellant to its customer.

Fifth, the referee and the reviewing Judge both concluded that of the four alternative methods of installing the pipeline proposed by the appellant, the one (Method A) most likely to have been used would have infringed the patent in suit.[16] The three others (Methods B, C and D)[17] were either not available at the time of the installation of the pipeline, theoretical or associated with so many contingencies as to be non profitable and not workable.

Assuming that these alternatives could have been taken into consideration in computing the profits, the burden of proving their availability, their utility and workability in conditions similar to those under which the work was performed, along with their costs, rested with the appellant. On that score, it obviously failed to persuade the referee and the reviewing Judge. There was ample written and oral evidence[18] on which the referee could have concluded as he did. In my view, the reviewing Judge was right in affirming the conclusion of the referee on this issue as his findings were properly made.

D.        The Power of the Court to Allow Pre-judgment Interest at the Prime Rate Compounded Annually

a)         The failure to request pre-judgment interest in the Statement of Claim

The appellant objects to the awarding of pre-judgment interest compounded annually. First, it complains that interest was not requested in the statement of claim. Since no motion was made to amend the statement of claim, it concludes that pre-judgment interest should not have been awarded. In support of its views, it cites the decision of the Trial Division in Invacare Corp. v. Everest & Jennings Cdn. Ltd.[19] in which pre-judgment interest was denied for that very reason.

Let me say at the outset that the Invacare Corp. case was not a case of accounting for profits. In this respect, I prefer the approach of MacKay J. in Wellcome Foundation Ltd. v. Apotex Inc. where he wrote:

At least in the case of the remedy of an accounting for profits, a remedy originating in equity, based on the principle of avoiding unjust enrichment of one who misappropriates the property of another, prejudgment interest is a traditional component of the accounting: see Addy J. in Teledyne Industries Inc. v. Lido Industrial Products Ltd. (1982), 68 C.P.R. (2d) 204 at pp. 223 and 226-7, 31 C.P.C. 285 (F.C.T.D.), and Reed J. in Ductmate Industries Ltd. v. Exanno Products Ltd. (1987), 16 C.P.R. (3d) 15 at pp. 20 and 22, 15 C.I.P.R. 115 (F.C.T.D.).[20]

It is in the nature of the accounting remedy to prevent the unjust enrichment of the infringer who knows that he may have to account both for the profits he improperly made and the earnings on such profits. He should know that these earnings can be deemed when he fails to account for them. Therefore, he cannot complain of being taken by surprise simply because no request for such relief is made in the statement of claim.

In my view, pre-judgment interest as deemed earnings on the profits can be awarded against an infringer who has to account for the profits notwithstanding that it is not mentioned in the original or an amended statement of claim. Of course, the infringer must be given the opportunity of making submissions in relation to relevant issues such as the interest rate, its annual or periodical compounding and the length of the time period for which the interest ought to be given.

b)         The entitlement to pre-judgment interest

The appellant alleges that the reviewing Judge failed to recognize that the awarding of pre-judgment interest is purely discretionary. Consequently, he failed to recognize that he had a discretion and to exercise it.

I have already made it clear that the awarding of pre-judgment interest ought to be characterized as deemed secondary benefits, that is to say deemed earnings on the profits, where the infringer fails to account for them as required by law. Therefore, it is no discretionary matter.

I agree with the reviewing Judge and with Addy J. in Teledyne Industries, Inc. et al. v. Lido Industrial Products Ltd.[21] that the awarding of interest on the contract profits is part of the assessment of the profits that the plaintiff is entitled to and would have made if they had been paid to him rather than to the infringer.

c)         Whether the interest should have been compounded

Relying upon some previous decisions of the Trial Division of this Court,[22] counsel for the appellant argued that the question of awarding compound as opposed to simple interest is a matter of discretion for the Court. He submitted that it is generally not awarded except in those cases where the defendant is in a fiduciary position and has breached his fiduciary duty.[23]

In O’Sullivan v. Management Agency and Music Ltd.,[24] the English Court of Appeal stressed the difference between the rule at common law and the rule in equity. In this latter case, compound interest can be awarded where the profits made in breach of the fiduciary duty have been used in the trade.[25] The rationale is that equity looks at the advantage gained by the wrongdoer rather than the loss to the victim.

It has been held in a number of Canadian cases that the infringer of a patent has to be treated as the plaintiff’s trustee and as a defalcating trustee who committed a species of fraud so that the awarding of compound interest is appropriate in such cases.[26] In the United States, where the accounting remedy was abolished in 1946,[27] a reference can also be found to this notion of a guilty trustee which, on established principles of equity, cannot take advantage of his own wrong.[28]

There is no doubt that the analogy between an infringer and a trustee is an imperfect one. However, it is one that the courts, in their struggle to achieve equity, devised at a time when the awarding of pre-judgment interest was not permitted at common law,[29] but was emerging in equity. It eventually led, in this latter case, to the compounding of interest because compound interest became a modern reality and the reality of business life. The modern reality is that interest paid or earned on deposits or loans is compound interest.[30]

In my view, bearing in mind this reality and the need to achieve equity in the accounting of profits, the awarding of compound pre-judgment interest as deemed earnings on the profits is the rule, subject to a Court’s discretion to mitigate it or to award only simple interest in appropriate circumstances. The good faith of the infringer is certainly a criterion that a judge can take into account in the exercise of his discretion.[31] Other factors could include the highly debatable validity of the patent claim or the fact that compounding the interest may reach beyond equity into the realm of punishment.

In the case at hand, I see no reason to intervene in the awarding of compound pre-judgment interest.

d)        The time-period over which the pre-judgment interest ought to have been calculated

The appellant complains that the reviewing Judge awarded the pre-judgment interest from the date of the receipt of the profits in September 1983 to the date of the judgment confirming the referee’s report. In its opinion, this interest should have ended with the liability judgment on March 20, 1986.

This contention is without merit. A judgment in an action for infringement is not complete until the amount of damages is established or, in a case of an account of profits, these profits have been accounted for and the judgment rendered on the report of the person designated to take accounts.

The appellant complains that it suffered some prejudice from the fact that the referee took more than two years to file his report while pre-judgment interest was accruing in the meantime. In my view, this complaint overlooks the fact that the respondents have been deprived of that money during that period of time while the appellant had it. Furthermore, it fails to understand that compound interest, in this context, is not a penalty: it simply is a recognition of reality.

e)         The rate of pre-judgment interest and whether it should be the Canadian or the American rate

The appellant submitted that there was no reasonable basis on which to presume that it would have used the contract profits in the course of its business in place of funds borrowed at prime rate. Such submission, in my view, ignores the fact that the burden is on the appellant to account for the earnings on the profits, failing which an estimated amount has to be established with the assistance of presumptions. As my colleague Hugessen J.A. said in Beloit Canada Ltée/Ltd. v. Valmet Oy,[32] there is “no reason in principle why a patentee, whose property has been wrongly appropriated through infringement, should not recover all the profits, direct and indirect, derived by the infringer from his wrongful infringement.”

In determining the amount of earnings on profits, it is sensible to assume that the person who has improperly enjoyed the profits would have made the most beneficial use of them. One such beneficial use would have been for the appellant to utilize these monies in their own trading operations or to help their subsidiaries, if any.[33] Therefore, I can find no fault with the referee’s recommendation that the profits bear interest at the chartered bank rate on prime business loans.

In this regard, the appellant submits that it is the U.S. rate of interest which should have been used to determine the amount of secondary benefits. In its view, the referee and the reviewing Judge wrongly assumed that the profits would have been employed in Canada as the respondent Reading & Bates Horizontal Drilling Ltd. is a Canadian company. In support of its submission, the appellant stresses the fact that it is an American company headquartered in Texas and would have most likely repatriated its profits in the United States. Moreover, if it had borrowed money, it would likely have done so at home.

I see, in this case, nothing wrong in using the Canadian rate of interest to compute the appellant’s earnings on its profits. The contract was performed in Canada and was payable in Canadian dollars. This is not a case where the contract was payable in American dollars. Furthermore, the cause of action arose in Canada, the proceedings were instituted in Canada and the decisions of the referee and reviewing Judge ordered the disgorgement of the appellant’s profits in Canadian dollars. As Professor Waddams rightly points out, courts should act prudently in awarding interest at a foreign rate as it could be over-compensatory for a plaintiff to recover judgment in foreign currency and pre-judgment interest at Canadian rates where these exceed the foreign currency rate.[34] The opposite is also true. It would be under-compensatory here for the plaintiff to be given judgment in Canadian dollars and pre-judgment interest at the American rate which is lower than the Canadian rate.

For these reasons, the appeal should be dismissed with costs.

Hugessen J.A.: I agree.

McDonald J.A.: I agree.

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