In 2020 FCA 141, the Federal Court of Appeal has upheld the Federal Court's earlier judgment awarding Dow Chemical $644 million, the largest monetary award by a Canadian Court in history for patent infringement. In doing so, the Court of Appeal reviewed the law regarding the remedy of an accounting of profits, and made a number of findings that are notable for those engaged in patent disputes in Canada.
As is common in Canadian patent litigation, the discovery and trial phases for liability and compensation issues were bifurcated in this case. Following discovery and trial on compensation issues, and as we previously reported here and here, the Federal Court determined that Dow Chemical was entitled to an award of $644 million for Nova Chemicals' infringement of its patent. This compensation comprised a reasonable royalty for infringement during the pre-grant publication period of the patent, an accounting of profits for the post-grant period, and an accounting of "springboard profits" for a period of 20 months following expiry of the patent.
The current decision (2020 FCA 141) addresses Nova Chemicals' appeal and Dow Chemical's cross-appeal of the lower Court decision awarding $644 million to Dow Chemical.
Background on available remedies for patent infringement in Canada
A successful patentee in an infringement action in Canada may elect to recover either (a) its damages, or (b) the infringer's profits. Election of an accounting of an infringer's profits is subject to equitable considerations, such as the requirement that the plaintiff come to the Court with clean hands.
In addition, a patentee may recover reasonable compensation (i.e., a reasonable royalty) for all laid open (pre-grant but post-publication) period acts of infringement.
In any case, liability for damages, an accounting of profits and reasonable compensation, as the case may be, begin to accrue automatically following publication of the application and patent at issue. There is no requirement for a patentee to give actual or constructive notice.
The Court of Appeal's Decision
At the outset of its decision, the Court of Appeal made a number of comments regarding the accounting of profits remedy, and the remedy's overall role in patent law. In particular, the Court of Appeal stated that 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. By doing this, any economic incentive to infringe is removed. The Court of Appeal contrasted this purpose of the accounting of profits remedy with the purpose of the damages remedy, which it held was to restore those whose patents have been infringed to the position they would have been in had the infringement never taken place. Recognizing that there may be cases where an infringer can make a gain from the use of the patented invention that may be more than the cost of paying compensatory damages, the Court of Appeal found that the accounting of profits remedy serves the purpose of preventing an infringer from coming out ahead relative to the patentee. In other words, the accounting of profits remedy may prevent restrictions inherent with the compensatory damages remedy from being a boon for efficient infringers.
The Court of Appeal then went on to confirm that two rules apply in accounting of profits cases: (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.
Regarding (1), the Court of Appeal stated that Courts must work in the real world, not the hypothetical. Courts care only about actual revenues and actual costs. What "could have", "should have", or "would have" happened is of no moment. The only thing that matters is what did happen. In contrast, "but for" hypothetical reasoning applies when Courts award compensatory damages for patent infringement.
Regarding (2), there must be a causal connection between the profits to be disgorged and the patent infringement. Within a particular product, there may be infringing elements and non-infringing elements. That is, for a court to apportion profits, a defendant must prove that some of its profits are attributable not to the patent at issue, but rather some other non-infringing aspect of the infringing product. In addition, apportionment may be necessary even when the infringing product is the whole of the patent at issue. This is done by considering which profits are causally attributable to the patentee's monopoly and which profits were generated by some other unpatented, non-infringing element.
In addressing prior Courts' application of "non-infringing alternatives" in an accounting of profits analysis, the Court of Appeal noted that consideration of non-infringing alternatives must not rely on hypotheticals where only actual revenues and costs are to be considered. Therefore, the Court of Appeal stated that when Courts use the term "non-infringing alternative", they are really referring to a non-infringing course of action that can effectively isolate the value of the patent. In this regard, Courts really mean the non-infringing baseline as opposed to the non-infringing "alternative". Using the term "non-infringing baseline" steers Courts and litigants away from impermissible "but for" reasoning.
In the case of Nova Chemicals, it had previously admitted that it had no non-infringing alternative. Without a non-infringing baseline, the Court of Appeal found that it must be presumed that all of Nova Chemicals' profits were caused by its exploitation of the patented product.
The Court of Appeal also commented on the approach to deducting costs when calculating what profits should be disgorged from an infringer. Up until this decision, it was typically the case that infringers were only permitted to deduct their incremental costs related to production and/or sale of the infringing product; overhead or fixed costs typically could not be deducted. In contrast, the Court of Appeal has now indicated that, absent some exceptional and compelling circumstance or persuasive expert evidence in a particular case, a "full costs" approach should always be available to an infringer. The Court of Appeal explained its reasoning with the example of a factory that produces eight separate infringing product lines where each product infringes a different patent. If each of the eight patentees brings separate infringement proceedings, it should not be the case that the infringer could never deduct its overhead costs. Similarly, if only seven of the eight product lines are infringing, the one non-infringing product line should not shoulder all of the overhead, as those overhead costs were necessary to produce the infringing products. Nevertheless, an infringer would only be entitled to deduct a proportion of its fixed costs. For example, if an infringing product occupies 1% of a factory's production capacity or volume, only 1% of the fixed costs will be deducted.
Further, the Court of Appeal rejected Nova Chemicals' argument that springboard profits were not available at law. In particular, where an infringer enters the market early and enjoys post-patent expiry profits having a causal connection to pre-patent expiry infringing activities, those profits may be disgorged.
Accordingly, a majority of the Court of Appeal (Stratas J.A. and Near J.A.) dismissed the appeal and cross-appeal. A minority of the Court of Appeal (Woods J.A.) dissented and concluded that an apportionment should have been made, as the Federal Court failed to consider Nova Chemicals' argument that a portion of the infringing product's profits (i.e., profits attributable to the production of ethylene) were not causally attributable to Dow Chemical's patent.
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