Canada’s Intellectual Property Firm

Federal Court of Appeal affirms largest reported Canadian patent infringement award in history

Authored byDaniel Hnatchuk

In earlier decisions of the Federal Court (2017 FC 350 and 2017 FC 637), the Court ordered Nova Chemicals Corporation (Nova) to pay The Dow Chemical Company (Dow) approximately $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 the principles that should govern the calculation of a plaintiff’s recovery under an accounting of the infringer’s profits, springboard profits for post patent expiry sales, and the date of currency conversion of the award into Canadian dollars.

Steven Garland, Jeremy Want and Daniel Davies of Smart & Biggar acted as counsel for Dow.

Earlier decisions on infringement and validity

During the liability phase, which began in 2010, the Federal Court found that Nova’s SURPASS polymers infringed, and upheld the validity of Dow’s Canadian Patent No. 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 an election between damages and an accounting of profits, reasonable compensation for infringement that occurred between the publication date of the ‘705 Patent and its date of issuance, interest and costs. 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.

Federal Court Judgment on Remedies

In the quantification phase of the proceedings, the Federal Court ordered Nova to disgorge profits and other relief totaling approximately $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 September 18, 2020.

Principles relevant to an accounting of profits

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 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 the wrongdoer has made as a result of the infringement. Overall, the award of an accounting of profits has two primary purposes: (i) restitution, in having the defendant disgorge all of the profits from its infringing conduct; and (ii) deterrence, by warning potential infringers that they had best steer clear of others’ rights of exclusivity under patents and, instead, spend their time in more profitable, lawful ways.

An accounting of profits must walk a fine line between deterring infringement, i.e., extracting any economic incentive to infringe, without being punitive, i.e., extracting sums not causally connected to the infringement. An 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: (1) only actual profits, meaning actual revenues minus actual costs, are disgorged; and (2) only profits that have resulted from the patent infringement are disgorged.

Apportionment of profits not appropriate for hypothetical non-infringing ethylene sales

On the appeal, Nova had argued that a portion of the profits it gained from the infringing sales were not due solely to the patented invention but were tied the ethylene 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. This argument was rejected by the Court of Appeal as Nova did not factually demonstrate that it would have been able to sell the ethylene to third parties if it did not use 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 have done 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 Nova’s alleged “market price” for ethylene was a theoretical cost that Nova did not incur.  Allowing Nova to deduct its hypothetical ethylene sales profits from the accounting of profits would incentivize 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. This argument was also rejected by the Court of Appeal because Nova’s higher infringing profits as a result of its lower production costs for ethylene is 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 Justice Stratas noted, “[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”, contrary to the exclusive right to the patented invention under the Patent Act.

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.

Springboard profits

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 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 not available at law. The Court of Appeal rejected this argument, finding that there was no principled reason standing in the way of springboard profits, which are 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 unauthorized invasion on the statutory monopoly period, then those profits should be disgorged.

Accounting of profits and appropriate deduction of costs

There are several means of performing an accounting for profits:

  1. the incremental cost approach, under which the profits to be disgorged are the applicable revenue less any variable costs and any increased fixed or capital costs attributable to the infringing activity; or
  2. the full cost (or “absorption”) approach, under which the profits to be disgorged are the applicable revenues less in essence all applicable costs calculated on a proportionate basis to the overall costs of the defendant’s business.

Dow had cross-appealed in respect of the Federal Court’s application of the “full costs” approach. The Court of Appeal dismissed the cross-appeal, finding that the full costs approach is 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.

Currency conversion on awarded profits

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 U.S. 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 U.S. 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, please contact a member of our firm’s IP Litigation & Enforcement group.

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