Canada: That's A Wrap: Springboard Profits, Full Cost Accounting, And More From The Federal Court In Dow v. Nova

Last Updated: May 18 2017
Article by James Green and Laurent Massam

Most Read Contributor in Canada, October 2018

In a recent decision (Dow Chemical Co. v. Nova Chemicals Corp, 2017 FC 350) the Federal Court has addressed an assortment of issues that can arise when calculating and quantifying financial remedies in intellectual property infringement cases.

This decision follows a 2014 decision in which a patentee, Dow, succeeded in claims of patent infringement against Nova. The patent, concerning compositions of film-grade polyethylene polymers used in consumer goods such as food wrap and garbage bags, had been found to be valid and infringed by the manufacture and sale of certain of Nova's products.

Like many complex intellectual property cases before the Federal Court in recent years, the present case was "bifurcated", meaning that the 2014 decision only addressed liability for infringement. The goal of bifurcation is to conserve the resources of the parties and the Court and advance proceedings to trial more efficiently. In a bifurcated case, any issues related to the quantification of financial remedies (whether through discovery, expert evidence, and trial) are only dealt with when, and if, the Court first finds liability for infringement.

In this case, the Court was required to address quantification issues related to two distinct categories of remedies: (1) "reasonable compensation" for the patentee's "pre-grant" damages sustained for the period between the date the patent application was first published and the date the patent was granted; and (2) damages, or alternatively, an accounting of the infringer's profits, with respect to all infringing activity occurring after the date the patent was granted.

Pre-grant "reasonable compensation"

With respect to pre-grant "reasonable compensation", the Court followed the approach adopted by the Federal Court in prior cases and found that Dow was entitled to a reasonable royalty based on a hypothetical negotiation between a willing licensor and a willing licensee for the use of the patented technology.

After considering the evidence of economic experts put forward by the parties on the issue, the Court concluded that the appropriate royalty rate would be 8.8%.

Application of the "full cost" accounting approach

With respect to the post-grant period, Dow elected to receive an accounting of profits.

In Canada, an accounting of profits is an equitable remedy which is restitutionary in nature and not intended to be punitive. In an accounting, the objective is simply to restore the infringer to the position that he would have been in had he not infringed. This is done by stripping away only those profits which he has earned which are causally attributable to the infringing use of the patented technology.

In an accounting, the patentee bears the onus to prove revenues earned from the infringement. The onus then shifts to the defendant to prove any costs to be deducted from revenues to arrive at the quantum of profits to be disgorged.

In Canada there are several recognized methods of conducting an accounting, the choice of which determines the allowable deductions from revenues. These methods are: the "differential profits" approach (where the profits disgorged are those earned from infringement less the profits that would have been earned by a non-infringing alternative); the "incremental cost" approach (where the profits disgorged are the revenues less any variable costs and any increased fixed or capital costs attributable to the invention); and the "full cost" approach (where the profits disgorged are the revenues less applicable variable, incremental fixed costs, and a proportion of certain non-incremental fixed and capital costs).

In prior decisions Courts have described the "differential profits" method as the "preferred approach". At the same time, Courts have cast doubt on the use "full cost" approach. In this case, however, the Court found that the availability of the "full cost" method was "not foreclosed" in the appropriate circumstances.

Here, the Court found that there were no direct non-infringing alternatives meaning the "differential profits" approach was unavailable. The Court also found that incremental costs were negligible, and so in the circumstances, the "incremental costs" approach would produce an inequitable and punitive result.

In deciding that the "full cost" method was most appropriate, the Court found that if Nova had not manufactured the infringing products it would have used its manufacturing capacity to make alternative products. The Court therefore determined that Nova was permitted to deduct a proportion of certain fixed and capital costs from its revenues.

Availability of "springboard profits"

Another issue for the Court was whether the patentee was entitled to recover "springboard profits" as part of the accounting.

It is well-established that "springboard damages" can be awarded in the damages context to compensate a patentee after the expiry of the patent which have been caused by the infringer's accelerated market entry and capture of market share made possible by infringement.

Until now, it was unsettled in Canada whether analogous "springboard profits" were available where a patentee had elected an accounting rather than damages.

Here the Court concluded that there was no reason why "springboard" principles should operate differently where the patentee elects to receive an accounting of profits: if it can be proven that the infringer actually received a "springboard" advantage, the profits earned from that advantage should be disgorged.

Based on the evidence in this case, the Court found that it would indeed have taken Nova "some time" to overcome the long-established presence of the patentee's products in the market, and ramp up its sales to the levels it enjoyed after the expiry of the patent. On this basis the Court determined that the accounting should include a "springboard" period of approximately 20 months following expiry of the patent.

Accounting for infringing products not explicitly addressed during liability trial

Another unusual feature of the case was the fact that the patentee sought to include in the accounting profits earned from other product variants not explicitly addressed during the liability proceeding.

Importantly, it was conceded that these other products would have been found to be infringing if they had been specifically dealt with. Nonetheless, various technical arguments were raised as to why they could not be now considered at the quantification stage.

The Court determined that even if not explicitly addressed at the liability stage, the disputed products had been encompassed by the broad language of the liability judgment. In so doing, the Court cited the risk of "never-ending litigation" if the patentee was required to bring separate claims to establish liability for other admittedly infringing product variants.

Currency conversion

A final wrinkle to the calculation of financial remedies in this case was the fact that the infringer's profits were mostly realized in US dollars. However, because Canadian courts must award monetary relief in Canadian dollars, the profits earned in U.S. currency had to be converted into Canadian currency.

The parties disputed the appropriate exchange rate to be applied. That is, whether the profits should be converted according to the exchange rate in effect when the profits were actually earned between 2004 and 2014, or instead converted based on the exchange rate in place as of the date of the Court's judgment.

The Court found that the profits had not only been earned in U.S. dollars but in fact primarily retained in U.S. currency since being earned. Accordingly, the Court determined that the exchange rate to be applied would be as of the date of the Court's judgment.

Conclusion

Subject to the outcome of any appeal, the next stage will be for the parties' accountants to actually calculate the sums owed based on this decision.

Overall, the decision provides clarification about the Federal Court's approach to a diverse range of issues which can arise in accounting of profits cases. Moreover, the decision is the latest demonstration of the Federal Court's willingness to consider flexible approaches to procedural and substantive issues to enable just and expeditious outcomes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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