Last year’s award of over $644M in Dow Chemical Company v. Nova Chemicals Corporation, 2017 FC 350 [1]
is one of the largest awards for intellectual property infringement in Canadian
history. The decision of Justice Fothergill contains many novel points of
interest, but perhaps none so significant as his treatment of the issue of
non-infringing alternatives and the deduction of fixed and capital costs in
determining Nova’s profits to be disgorged to Dow.
The case involved Dow’s patent (the “705 patent”) for the
production of a certain type of metallocene linear low density polyethylene
(mLLDPE), a type of plastic. The patent was used by Dow to produce its ELITE
mLLDPE, and the same technology was used by Nova in its SURPASS product. A
previous trial had found that Nova had infringed on the 705 patent from 2002
until it expired on April 19, 2014, and as its financial remedy Dow elected
(and was granted) an accounting of Nova’s profits from the sale of SURPASS.
Differential
Profits
Over the past decade, Canadian courts have generally adopted
what has come to be known as the “differential profits” approach. This
approach, as described by the Supreme Court in Monsanto Canada Inc. v.
Schmeiser, [2004] 1 SCR 902, 2004 SCC 34, says that in accounting
for the defendant’s profits from infringement, one makes “a comparison … between the defendant’s profit
attributable to the invention and his profit had he used the best
non-infringing option”.
The notion behind
this treatment is that the defendant should only be required to disgorge the incremental
benefit it received as a result of the infringement of the patent. If, instead
of infringing, the defendant would have devoted its efforts to some other enterprise,
then the true benefit of the infringement is only the difference between the
profit actually earned and the profit that would have earned from the
alternative.
In much of the
case law since Schmeiser, the
application of the concept of “differential profits” has generally been limited
to cases where it has been possible to identify a non-infringing alternative product
(or technology) that would have been sold to the same customers that purchased
the infringing units.
The effect of
this focus on non-infringing alternative products has been that, when the
infringing product embodies proprietary technologies that are key drivers of
sales, such that it is not plausible the same customers would have purchased an
alternative, non-infringing product from the defendant, the differential
profits approach has generally been ignored, until Nova.
“Indirect NIA”
In Nova, it was
acknowledged that there was no real non-infringing product that could have been
sold to the purchasers of SURPASS; while Nova produces many other types of
LDPE, none of these contained the unique features of ELITE or SURPASS that made
those products so appealing to their customers.
However, Nova
argued that but for its infringing activities, it would have deployed the
production capacity used to manufacture SURPASS to make other types of plastic,
which would have been sold to different customers. Nova referred to this
as an “indirect non-infringing alternative” (para. 146).
The court
accepted this argument, and allowed Nova to deduct a proportionate share of its
fixed costs and capital expenditures related to the plant that had been used to
manufacture the infringing product. The court noted that:
The “best non-infringing option” has
generally been interpreted to mean a “true substitute” or “real alternative”.
But appellate courts have frequently sought to reduce over-generous awards,
including those that neglected to take into account alternative profits. The
Federal Court of Appeal recently emphasized that “at bottom is the need to
ensure that a patentee only receives that portion of the infringer’s profit that
is causally attributable to the invention” (para 164, citations omitted).
Did the Court Apply a True “But for” Analysis?
Nova had argued
that but for the infringement, it would have manufactured other products; if
so, then it might have been appropriate for the court to analyze what the
profits from those other products would have been. The court could have looked
to the average profit per pound of other product during the relevant period and
deducted this amount against the actual profits.
Why did the court
instead simply allow for a pro-rata deduction of fixed and capital costs?
First, it is not clear from the written decision whether Nova in fact attempted
to claim as an offset, the profits it would have made from these alternate
products. In addition, there is precedent for the court’s approach from other
Commonwealth jurisdictions.
As a “shorthand”
approach, the court’s approach has much to recommend it; rather than undertake
a full analysis of the profits earned on other products, one can likely assume
that in most cases, at the very least, those profits would have covered
the fixed operating costs of the plant. But by deducting only a pro-rata
portion of fixed and capital costs, rather than projecting the profit Nova
would have made from alternate use of its fixed capacity, the court may have
overstated Nova’s true benefit from its infringing activity.
What this means
This ruling would
seem to augur the adoption of a broader, more holistic approach to the
accounting of profits. The profits to be disgorged should be equal to a) the
actual profits achieved as a result of the infringement in the real world, less
b) the level of profit that would have been achieved in the “but for” world in
which the defendant does not infringe.
This article originally appeared in The Lawyer's Daily (a LexisNexis Publication) on September 14, 2017
[1] In
that decision, Justice Fothergill set out the framework for the calculation of
damages. In 2017 FC 637, he addressed certain outstanding issues and issued the
award.
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