On November 18, 2022 the Supreme Court of Canada (the “Supreme Court”) handed down a decision that awards Dow Chemical Co. (“Dow”) $644 million for Nova Chemicals Corp.’s (“Nova”) patent infringement—the largest monetary offering in a Canadian patent lawsuit.
In an almost unanimous judgment, the Supreme Court agreed with the lower court’s calculation of damages and clarified how to correctly calculate the profit earned from infringing a patent. The decision, which cites Canadian Patent Law (Perry, Stephen J., and T. Andrew Currier, 4th ed. Toronto: LexisNexis, 2021), also confirms the availability of springboard profits.
Litigation between the parties dates back to 2010. Dow brought suit against its competitor, Nova, alleging infringement of a patent the U.S. company held for a type of polyethylene used to make plastic bags and stretch wrap. In subsequent proceedings[ii] the courts found that Nova infringed and granted Dow permission to seek an accounting of profits based on what Nova made from said infringement.
In 2017, the Federal Court of Canada awarded Dow the revenue earned by Nova from selling the infringing plastics, minus the cost to Nova for producing them.[iii] Accordingly, Nova was only permitted to subtract the cost of producing ethylene (the main component in its product) rather than its substantially higher, market cost.
A portion of the revenue was calculated using a well-established patent law principle known as “springboard” profits, which recognizes that an infringer’s liability to a patent owner does not necessarily end when the patent expires. The relief is based on the damages that accrue during the time it would have taken for an infringer to ramp up its production and sales in the “but-for” world following the expiry of the relevant patent. It compensates the successful patentee for the head-start in the market that the infringer would not otherwise have enjoyed after expiration of the patent, but for its infringing activities prior to the expiration. The 2017 decision was the first application of the principle in a Canadian court.
On appeal, the Federal Court of Appeal upheld the award to Dow.[iv] Nova was subsequently granted leave to appeal to the Supreme Court.
Before the Supreme Court, Nova maintained that the lower courts presented incorrect calculations, arguing its position from two main grounds. Firstly, Nova took the position that if it did not manufacture the infringing plastics, it would have instead manufactured and sold a non-infringing option. On this basis, Nova sought to deduct the profits from the sale of the non-infringing option from the award.[v] Secondly, Nova disputed the award of springboard profits. Nova argued that the remedy was invalid, and in the event that it was a valid remedy, it was inapplicable as Nova had already compensated Dow for its market entry through payment of a reasonable royalty.[vi]
Justice Malcom Rowe, writing for the majority, rejected both arguments, unconvinced that Nova could have made the hypothetical profits it claimed. Rowe J reasoned that the non-infringing option that Nova proposed it would have utilized did not overlap with the market of the patented product.[vii]
In its discussion, the Supreme Court took the opportunity to spell out a three-step framework for an accounting of profits analysis, summarized as follows:
- Calculate the profits earned selling the infringing product (i.e., revenue minus costs).
- Determine if there is a non-infringing option available to isolate the profits causally attributable to the invention (i.e., differential profits). Apply the principles of causation at this stage.
- If there is a non-infringing option, subtract the profits the infringer would have made had it used that option from its actual profits.
The majority also clarified the scope of a “non-infringing option” under step two of the test, explaining that this will be any product that allows the court to isolate the profits causally attributable to the invention from the profits which came about at the same time the infringing product was used or sold, but are not causally attributable to the invention. As written by Rowe J, “there are no strict rules” and “the non-infringing option need not be a strict market substitute for the patented product”. [viii]
As the sole dissenter, Justice Suzanne Côté wrote that the appeal should have been allowed, as the focus of an accounting of profits ought to be determined using the “but for” causation.[ix] Côté J took issue with the majority’s endorsement of the “but for” approach and suggested that several questions remain unanswered.
Legality of Springboard Profits
In respect of springboard profits, Rowe J held that these are an extension of the fundamental principles surrounding an accounting of profits, namely, that the infringer disgorges profits attributable to the infringement.[x] Whether the profits arise post-patent expiry vs. during the period of patent protection is irrelevant, what is important is whether they are causally connected to the infringement.
With this decision, the Supreme Court not only put the long-standing dispute between the Dow and Nova to rest, but also left the patent bar with long awaited guidance on the principles of the accounting of profits analysis. Subsequent applications by lower courts will reveal the true impact of this decision.
[i] 2022 SCC 43 [Nova Chemicals].
[ii] Dow Chemical Company v NOVA Chemicals Corporation, 2014 FC 844; Nova Chemicals Corporation v. Dow Chemical Company, 2016 FCA 216.
[iv] Nova Chemicals Corporation v. Dow Chemical Company, 2020 FCA 141.
[v] Nova Chemicals, supra note 1 at para 24.
[vi] Ibid at para 26.
[vii] Ibid at para 39.
[viii] Ibid at para 67.
[ix] Ibid at para 182.
[x] Ibid at para 4.
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