Canada: Dow Succeeds On Major Issues In Patent Infringement Profits Case

Last Updated: April 25 2017
Article by Daniel Hnatchuk

The Federal Court has issued their Public Judgment and Reasons concerning the financial compensation to be paid as a result of earlier patent infringement and validity proceedings between Dow Chemical Company ("Dow") and NOVA Chemicals Corporation ("Nova") (2014 FC 844).

In his reasons, Justice Fothergill considered a number of significant and novel issues relating to patent infringement remedies and, in particular the accounting of profits remedy available in Canadian patent infringement litigation. The final quantum of the award is still before the courts, but is expected to be one of the largest ever awarded in a Canadian patent case.

Steven Garland, Jeremy Want, Colin Ingram, Daniel Davies and Kevin Graham of Smart & Biggar acted as co-counsel on behalf of Dow.

Background

During the liability phase, the Federal Court upheld the validity of Dow's Canadian Patent No. 2,160,705 ("'705 Patent") and found that Nova's SURPASS polymers infringed. The polymers are polyethylene compositions used in packaging applications including heavy duty bags, pallet wrapping and food packaging. The compositions comprise blends of two polymers with particular physical or mechanical characteristics. 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.

On September 6, 2016, the Federal Court of Appeal upheld the Federal Court decision on the merits (2016 FCA 216). On April 20, 2017, Nova's application for leave to appeal to the Supreme Court of Canada was dismissed (37274).

First reported award of 'springboard' profits

Of particular note, Justice Fothergill's judgment represents the first time that springboard profits have been awarded in Canada, and is potentially the first reported instance of such an award anywhere in the world.

Dow claimed that Nova's infringement of the '705 Patent provided it with a "springboard" into the market, which resulted in Nova continuing to profit from its infringing activity after the expiry of the '705 Patent. Justice Fothergill was satisfied that in a hypothetical "but for" world where Nova was unable to enter the relevant market until the expiry of the '705 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. Justice Fothergill therefore found that 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.

Accounting of profits and the deduction of costs

Justice Fothergill also considered the extent to which Nova should be allowed to deduct its costs from its revenues to arrive at its profits. Two primary issues were before the court. The first issue related to the appropriate measure of the cost of ethylene, a key component used to make the infringing SURPASS products. Nova claimed that it should be entitled to deduct an "economic value" of the ethylene as measured by Nova's average selling price of ethylene to third-parties. Dow claimed that because Nova itself produced the ethylene used to make SURPASS, it was entitled to deduct only its actual costs incurred to manufacture the ethylene. Justice Fothergill agreed with Dow's position that the actual cost to Nova of manufacturing the ethylene should be used, noting that Nova's position would result in deduction of a "theoretical cost that [Nova] did not incur."

The second issue relating to Nova's deduction of costs was whether non-incremental fixed costs and capital depreciation expenses could be applied against the relevant revenues. Justice Fothergill indicated in his judgment that there are several recognized means of accounting for profits:

  1. the differential profit approach, under which the profits to be disgorged are those earned from the infringement less those profits that would have been earned had the infringer produced a non-infringing alternative.
  2. the incremental cost approach, under which the profits to be disgorged are the applicable revenue less any variable costs attributable to the invention, and any increased fixed or capital costs attributable to the invention.
  3. the full cost approach, under which the profits to be disgorged are the applicable revenues less applicable variable, incremental fixed, and a proportion of certain non-incremental fixed and capital costs.

Nova contended that the full cost approach was the appropriate approach in this case since there were no direct non-infringing alternatives (such that the differential profits approach could not apply), and its incremental costs would be negligible, such that the incremental costs approach would result in an inequitable outcome.

Justice Fothergill ultimately concluded that Nova should be entitled to deduct a proportion of certain of its claimed fixed costs and capital depreciation expenses related to the production and sale of the infringing products.

Currency conversion on profits aligned to judgment date

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 in U.S. dollars, the Currency Act requires that the judgment of a court be expressed in Canadian Dollars. Dow argued that since Nova retained its profits in U.S. dollars, the date of currency conversion should be the date of the Judgment. Nova countered that its profits should be converted to Canadian dollars at the applicable exchange rate when they were earned, i.e. annually during the period of the infringement. Justice Fothergill found that the evidence supported that Nova's profits were primarily retained in U.S. dollars such that the date of conversion into Canadian dollars should be the date of the Judgment.

Inclusion of additional product grades in the calculation of profits

Also at issue before Justice Fothergill were four grades of Nova's SURPASS product that Dow claimed were identical or nearly identical to those that were specifically identified in Dow's original Statement of Claim, but were sold by Nova under slightly different names at various times.  Nova conceded that these grades infringed the '705 Patent, but argued defences of res judicata, abuse of process and the application of a limitation period because they had not been specifically identified in the Statement of Claim during the liability phase of the proceeding.  Justice Fothergill ultimately determined that these grades were to be included in the calculation of profits, holding that it would be inconsistent with the liability judgment to exclude them merely because they were "sold under slightly different names by the infringing party."

Other issues

For the period between the publication date of the '705 Patent and its date of issuance, Dow was awarded a reasonable royalty at 8.8%.

Finally, Justice Fothergill also found that Dow was entitled to recovery of pre-judgment interest on Nova's profits at a rate of 5%, compounded annually, citing evidence of Nova's actual cost of borrowing.

For further information, please contact a member of our firm's Litigation group.

The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.

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