Dow Awarded an Accounting of Profits including Springboard Profits from Infringer’s Ramped-up Sales

Dow Awarded an Accounting of Profits including Springboard Profits from Infringer’s Ramped-up Sales

Dow Chemical Company v Nova Chemicals Corporation, 2017 FC 350

Determining compensation for patent infringement is a complex and evidence-driven endeavor. The potential remuneration for a patent holder can depend on several contextual factors, including a range based on hypothetical bargaining between the parties if the parties were to enter into a license agreement, and whether the infringer could have sold a non-infringing alternative.

Following lengthy patent suits in the United States and Canada, the Federal Court (“FC”) outlined in this decision how the Dow Chemical Company (“Dow”) should be compensated by Nova Chemicals Corporation (“Nova”) for its infringement of Dow’s Canadian Patent No. 2,160,705 (“the ‘705 Patent”). Several guiding principles are set out in this decision:

  • Reasonable compensation under s. 55(2) of the Patent Act is determined as a hypothetical reasonable royalty between Dow’s minimum willingness to accept (MWTA) and Nova’s maximum willingness to pay (MWTP).
  • Where there is no mutually acceptable bargaining range between the MWTA and MWTP, the reasonable royalty will be set at the MWTP.
  • Accounting of profits covers the portion of the infringer’s profits attributable to the infringement, including “springboard” after patent expiry since post-expiry sales were ramped-up by the infringing sales
  • Costs are deducted against profits based on a “full costs” approach where there is no true non-infringing alternative, and where the infringer would have otherwise sold lower grade products
  • Profits held in U.S. dollar amounts will be converted to Canadian dollars as of the date of judgment where the infringer cannot prove that funds were converted at an earlier date

PCK reported on the infringement decision here (FC) and here (FCA).

The ‘705 Patent: Infringed

Dow is the owner of the ‘705 Patent. The ‘705 Patent relates to a kind of polyethelene known as metallocene linear low-density polyethylene (“mLLDPE”), which can be used to make films of polyethyelene which are stronger, or just as strong, as other conventional polyethylene films, while being thinner. The ‘705 Patent covers Dow’s commercial embodiment of mLLDPE, known as ELITE. [15]

Nova offered a competing product, widely considered to be a close substitute for ELITE, [77] known as SURPASS, during the lay-open period and during the term of the ‘705 Patent. During Canadian litigation at the FC and the FCA, all relevant claims of the ‘705 Patent were found to be valid and infringed by Nova for its manufacturing in Canada, and for its distributing, offering for sale, selling or otherwise making available of SURPASS, in Canada and abroad. [22]

Remedies Sought: Reasonable Compensation and Accounting of Profits

Dow commenced the Canadian proceedings on December 9, 2010, after Dow was awarded $76 million in 2009 in the United States for damages, interest, and reasonably royalties, for Nova’s sales of SURPASS in the United States. [18, 22] In Canada, Dow sought reasonable compensation under s. 55(2) of the Patent Act for infringement during the lay-open period and an accounting of profits for infringement during the term of the patent. [4] This decision only address the considerations to factor into the calculation of the Canadian remedies – the final quantification is to be calculated based on the findings of this case. [6, 190]

Reasonable Royalty set at Dow’s Minimum Willingness to Accept Where No Mutually Acceptable Bargaining Range

Dow and Nova agreed that the proper measure for reasonable compensation under s. 55(2) of the Patent Act is a hypothetical reasonable royalty rate negotiated for sales made during the relevant lay-open period. [64-67] It was agreed that this hypothetical rate would fall within Dow’s minimum willingness to accept (“MWTA”), and Nova’s maximum willingness to pay (“MWTP”). [67]

The parties agreed that Dow’s MWTA would be the profits Dow could expect to lose from some portion of sales of ELITE being diverted to SURPASS as a result of licensing the ‘705 Patent to Nova. [68] The FC determined Dow’s MWTA to be 8.8%. [81]

The parties also agreed that Nova’s MWTA would be the profit Nova could expect to earn on SURPASS, as compared to the next best non-infringing alternative. [82] If Nova could not sell SURPASS, however, there would be no true non-infringing alternative that could be a substitute for ELITE, so Nova’s best non-infringing alternative would be to run its plants as close as possible to capacity selling lower-grade, non-infringing, polyethylene. [82, 86] Interestingly, the calculation resulted in Nova’s MWTP being lower than Dow’s MWTA, meaning there would be no mutually acceptable bargaining range for the parties. [86-87] Under such circumstances, the FC followed the opinion of an expert witness who proposed that the reasonable royalty rate would be simply Dow’s MWTA, 8.8%. [87, 89]

Accounting of Profits can Include Springboard Profits for Ramped-up Sales

Dow argued that in addition to profits earned by Nova on infringing products sold during the term of the ‘705 Patent, Nova enjoyed “springboard” profits after expiry of the ‘705 Patent. The argument was that if Nova had not infringed, it would have taken it longer for Nova to “ramp up” its sales to its actual sales at the expiry of the ‘705 Patent, thus providing a springboard for future profits. [112]

Following the reasoning of Justice Barnes in AstraZeneca Canada Inc v Apotex Inc, 2015 FC 671 regarding springboard damages, the FC decided to treat springboard profits the same way – as any other type of loss which is to be proven with evidence. [124]

On one hand, in the but-for world where Nova did not infringe, Nova’s “ramp up” rate, if it had started selling post-expiry, would have been hindered by the long-established incumbency of Dow’s ELITE product. [130] On the other hand, Nova’s sales would have been accelerated by the fact the market for mLLDPE was more mature by the patent expiry date than it was during Nova’s actual ramp-up period. [126] Balancing these two factors among others, the FC ultimately decided on a “fair and balanced” approach which takes into account historical data of Nova’s actual ramp up period, but also assumes an effective ramp up rate of zero during the initial 11 months of sale. [130]

“Full Costs” Approach to Deductions where No True Substitute for the Infringing Product

Since there was no true substitute available to Nova, Nova was permitted to deduct its costs based on a “full costs” approach, which considers the actual cost that would have been incurred by Nova for making its own polyethylene in its own facilities running at capacity to sell lower-grade products (as opposed to paying a higher market rate for polyethylene [139-140]), plus a proportion of the fixed costs.

Where there is no true non-infringing alternative, and where an infringer would otherwise run one’s facilities at capacity producing other products, application of the “full costs” approach is supported by Australian and UK authorities. [161-163] Nova could therefore deduct proportional amounts of (i) capital depreciation expenses, (ii) salaries, (iii) overhead, (iv) ongoing capital costs, and (v) distribution, sales, marketing, and administration costs (but no research and development costs). [165]

Conversion of USD to CAD as of Date of Judgment

Despite the finding of infringement in Canada, Nova received its profits primarily in U.S. dollars. Nova argued that the annual exchange rate in each year of the infringement should be used to convert the amounts owed to Canadian dollars, [175] but Nova could not sufficiently prove when and in what amounts the U.S. dollars were converted to Canadian dollars. [185-189] The FC therefore converted the amounts owed as of the rate of exchange at the date of judgment, as is supported by jurisprudence, as “the only practicable” and the “most logical” date to be used. [178]