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26 October 2020
Earlier decisions on infringement and validity
Federal Court judgment on remedies
Principles relevant to accounting of profits
Apportionment of profits not appropriate for hypothetical non-infringing ethylene sales
Accounting of profits and appropriate deduction of costs
Currency conversion on awarded profits
In earlier Federal Court decisions (2017 FC 350 and 2017 FC 637), the court ordered Nova Chemicals Corporation to pay the Dow Chemical Company approximately C$650 million as a result of Nova's infringement of Dow's patent on novel polyethylene blends (2014 FC 844). As reported previously, this was the largest reported Canadian patent infringement award in history.
The Federal Court of Appeal has now issued its judgment and reasons (2020 FCA 141) on the appeal. Justice Stratas, writing for the majority, affirmed the judgment below, dismissing Nova's appeal in its entirety. Broadly speaking, the appeal concerned:
During the liability phase, which began in 2010, the Federal Court found that Nova's SURPASS polymers were infringing and upheld the validity of Dow's Canadian Patent 2,160,705. The polymers are polyethylene compositions used in packaging applications, including heavy duty bags, pallet wrapping and food packaging. Dow sells such compositions under the name ELITE.
As a result of the findings of infringement, the Federal Court awarded Dow various remedies, including:
Dow subsequently elected for an accounting of Nova's profits.
The Federal Court of Appeal upheld the Federal Court decision on infringement (2016 FCA 216). Nova was denied leave to appeal to the Supreme Court of Canada.
In the quantification phase of the proceedings, the Federal Court ordered Nova to disgorge profits and other relief totalling approximately C$650 million as a result of its infringement of Dow's patent. Nova appealed to the Federal Court of Appeal, whose decision was released on 18 September 2020.
The Federal Court of Appeal decision begins with a summary of the underlying principles relevant to an accounting of profits for patent infringement. As opposed to compensatory damages, which are intended to restore the plaintiff to the position that it would have been in had the infringement never taken place, the aim of an accounting of profits is not to compensate for injury but to remove the benefits that the wrongdoer has made as a result of the infringement. Overall, the award of an accounting of profits has two primary purposes:
An accounting of profits must walk a fine line between deterring infringement (ie, extracting any economic incentive to infringe) without being punitive (ie, extracting sums not causally connected to the infringement). Accounting must also focus on defending and vindicating – not expanding – the patentee's lawful monopoly under the patent. This has resulted in the development of two basic rules for courts in conducting an accounting of profits:
On appeal, Nova argued that a portion of the profits that it had gained from the infringing sales were not due solely to the patented invention but were tied the ethylene that it used, such that the ethylene profits component of the infringing sales should not be required to be disgorged. In this regard, Nova advanced two arguments.
The first argument was that, in a hypothetical but-for world, had Nova not infringed Dow's patent, it would have still produced the ethylene and that ethylene had a market value above the actual costs to Nova of producing the ethylene. The Court of Appeal rejected this argument as Nova did not factually demonstrate that it would have been able to sell the ethylene to third parties if it had not used it to make the infringing SURPASS product. The Court of Appeal also held that this argument was wrong in law as what a party could or would have done in a hypothetical non-infringement scenario is not part of the accounting-of-profits exercise. Only actual revenues, costs and profits are relevant. In this regard, the Court of Appeal agreed with the finding of the Federal Court that an accounting of profits should be based on actual revenues and actual costs and that Nova's alleged market price for ethylene was a theoretical cost that Nova had not incurred. Allowing Nova to deduct its hypothetical ethylene sales profits from the accounting of profits would incentivise Nova and others like it to infringe.
Nova's second argument was that a portion of its profits on the infringing sales were attributable to its ability to produce ethylene at a significant discount from the cost of having to otherwise acquire the ethylene on the open market – what it calls its 'Alberta advantage'. Nova suggested that such profits are therefore not causally attributable to the patent but are instead attributable to its advantage and the resulting efficiencies. The Court of Appeal rejected thus argument because Nova's higher infringing profits as a result of its lower production costs for ethylene were irrelevant to an accounting of profits, whereby the profits resulting from the wrongful manufacture and sale of the infringing product must be stripped from Nova. As Stratas noted, contrary to the exclusive right to the patented invention under the Patent Act:
[l]eaving an infringer with some of the profits it made from the infringement just because of the efficient nature of its operations effectively makes the infringer a joint venture partner with the patentee, able to get some benefit from its exploitation of the patentee's invention.
Justice Woods dissented solely on this issue of apportionment and would have remitted the matter to the Federal Court to recalculate the quantum of the profits award.
The trial judge concluded that Nova's infringement of its patent provided it with a springboard into the market post-patent expiry, which resulted in Nova continuing to profit from its infringing activity after the expiry of the '705 Patent. The Federal Court was satisfied that if Nova had waited to enter the market until the expiry of Dow's patent, it would have taken time for Nova to attain the same level of sales of the infringing products that Nova enjoyed in the real world at the date of patent expiry and that, therefore, a portion of Nova's post-expiry profits resulting from its pre-expiry infringing activities should be included in the accounting of profits. The springboard profits covered a period of approximately 20 months post-expiry.
Nova argued on appeal that springboard profits are unavailable at law. The Court of Appeal rejected this argument, finding that there was no principled reason standing in the way of springboard profits, which were nothing more than another type of unlawful gain from Nova's infringing activity. Overall, the Court of Appeal concluded that if an infringer's post-expiry profits can be causally linked to its unauthorised invasion on the statutory monopoly period, those profits should be disgorged.
There are several means of performing an accounting for profits:
Dow had cross-appealed in respect of the Federal Court's application of the full-cost approach. The Court of Appeal dismissed the cross-appeal, finding that the full-cost approach was principled and sound, although noting that the Federal Court's reliance on the Australian High Court decision in Dart Industries was ill-founded in that it allowed an infringer to deduct a hypothetical opportunity cost not actually incurred. Actual profits must be disgorged which means only actual costs can be deducted.
The issue of the timing of currency conversion was also before the court. While Nova's profits from the sale of infringing SURPASS products were mostly earned and retained in US dollars, the Currency Act requires that the judgment of a court be expressed in Canadian dollars. The trial judge concluded that based on the facts, including Nova retaining its profits in US dollars, the date of currency conversion should be the date of the trial judgment. Nova appealed, arguing that its profits should be converted to Canadian dollars at the applicable exchange rate when they were earned based on a proposed annual conversion during the period of the infringement. The Federal Court of Appeal affirmed, finding that performing the conversion as of the date of judgment was both properly grounded in precedent and appropriate in the context of an accounting of profits, with the purpose of extracting the infringer's profits. The Court of Appeal also commented that based on the particular facts of the case, "conversion at the date of judgment is the only correct outcome".
For further information on this topic please contact Daniel Hnatchuk at Smart & Biggar/Fetherstonhaugh by telephone (+1 613 232 2486) or email (firstname.lastname@example.org). The Smart & Biggar/Fetherstonhaugh website can be accessed at www.smart-biggar.ca.
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