Thursday, July 13, 2017

Record Quantum

The Dow Chemical Co v NOVA Chemicals Corp 2017 FC 637 Fothergill J
            2,160,705 / film-grade polymers / ELITE, SURPASS

In the liability phase of this action, Dow v NOVA (No 1) 2014 FC 844 aff’d 2016 FCA 216, O'Keefe J held Dow’s 705 patent related to advanced film-grade “mLLDPE” polymers, to be valid and infringed by Nova. He also held that Dow was entitled to damages under s 55(2) of the Patent Act for pre-grant ‘infringement’, and that Dow was entitled to elect between damages and an accounting for post-grant infringement. Dow subsequently elected an accounting [107]. Fothergill J’s subsequent decision in the remedies phase, Dow v Nova (No 2) 2017 FC 350, addressed various issues to allow the parties’ accountants to calculate the actual sums owed by Nova to Dow [6]. (See my posts on reasonable compensation, springboard profits, fixed costs, and interest.) The parties were then able to largely agree on the quantum, but they returned to the court for further direction on three issues, which were addressed in this decision.

The first issue was whether Nova was entitled to deduct capital depreciation expenses for the division used to make the infringing product [5]. Fothergill J held it was not so entitled, as a matter of interpreting his own prior decision, without adding any substantive analysis [8].

Second, in Dow v Nova (No 2) [165], Fothergill J had allowed Nova to deduct a “proportional amount” of fixed costs, which he considered properly attributed to the production and sale of the infringing products. But what is “proportional”? Dow proposed an allocation based on relative production volumes [10], which Forthergill J accepted, noting that while Nova’s alternative proposals relied on “potentially valid distinctions,” Nova had not adduced evidence to support them [13]. As I suggested in my previous post on fixed costs, the theoretically ideal method is probably to allow full deduction of opportunity costs. Allowing a deduction of a portion of fixed costs is a half measure between that and refusing deduction entirely. Even though not ideal, that approach may be justified on the basis of practical administrability as compared with a full opportunity cost approach. If it is correct to say that deduction of proportional fixed costs is justified on that pragmatic basis, it is not surprising that there is no single theoretically appropriate basis for the apportionment.

The third issue is the timing of the conversion of certain capital expenditures from Canadian dollars to U.S. dollars for the purpose of calculating annual capital depreciation [15]. Nova sold most of its infringing product in the US and retained its profits in US dollars (Dow v Nova (No 2), [189]), and Fothergill J held the profits to be disgorged should be calculated in US dollars and converted to Canadian dollars as of the date of judgement (Dow v Nova (No 2), [176]). Nova was entitled to deduct some part of the depreciation on the plant that made the infringing product, but that plant was built in Canada and paid for in Canadian dollars. The question was how the depreciated amount should be converted to US dollars to be deducted from the annual profit, which was calculated in US dollars. Dow’s position was that the appropriate date for conversion was when the expenditure was incurred, so that the full capital amount would be converted into US dollars at the exchange rate for that year, then annual depreciation would be calculated in US dollars [16]. Nova’s position was that the annual depreciation should be calculated in Canadian dollars, and then converted to US dollars on an annual basis, using the exchange rate for the year of the deduction, on the view that the point of depreciation is to recognize that capital-related expenses are multi-year expenses [16], [18]. The issue was important because the exchange rate had fluctuated substantially over the relevant period, and “Dow complains that [Nova’s] approach results in a greater deduction for depreciation in USD than the costs Nova actually incurred in USD,” [17] I’m not sure I’m entirely persuaded by Nova’s point, since no one was taking issue with the depreciation itself, and even if it is true that capital-expenses are multi-year expenses, it does seem strange that the amount of the depreciation should be greater than the actual cost incurred. On the other hand, the conversion rate when the plant was built was unusually low [20], and Forthergill J was concerned that using it as the single point of conversion “would be punitive,” and he therefore adopted Nova’s approach, which was reasonable and supported by the evidence.

In the result, Fothergill J awarded Dow just under $645 million including pre-judgment interest to April 7, 2017, the date of judgment in Dow v Nova (No 2), plus pre-judgment interest to the date of this judgment. This seems to be a record award in reported Canadian patent cases.

No comments:

Post a Comment