On the heels of the Supreme Court’s recent decision in Nova Chemicals Corporation v. Dow Chemical Co. 2022 SCC 43, on the accounting of profits, the Federal Court of Appeal has clarified when overhead (or “fixed”) costs may be deducted from revenue.
In Greenblue Urban North America Inc. v. Deeproot Green Infrastructure, LLC, 2023 FCA 184, the Federal Court of Appeal (FCA) confirmed a trial decision of patent validity and infringement, dismissing an appeal. In a cross-appeal, the respondent argued that certain overhead costs should not have been deducted in the accounting of profits. It argued those costs had not been proven to be causally connected to the revenue earned, but were instead simply a proportion of all overhead costs.
The FCA took the opportunity to confirm—consistent with the FCA decision in Nova—that a “full costs” approach to the accounting of profits was “at least in this Court and the Federal Court …the preferred approach.” A full costs approach involves deducing both variable costs and overhead costs.
However, the FCA agreed with the respondent that when conducting the full costs analysis, deducting overhead costs “requires a factual foundation to establish the requisite causal connection” to the revenue earned. It rejected the argument that simply attributing a proportional percentage of overhead costs based on revenue was not sufficient.
Together with Nova (SCC) and Nova (FCA), the Greenblue decision provides welcome clarity on conducting the accounting of profits.