Wednesday, March 15, 2023

Nova v Dow: The Legal Background

Nova Chemicals Corp v Dow Chemical Co 2022 SCC 43 Rowe J: Wagner CJ, Moldaver, Karakatsanis, Brown, Martin, Kasirer and Jamal JJ concurring; Côté J dissenting affg Nova Chemicals Corporation v Dow Chemical Company 2020 FCA 141 Stratas JA: Near, Woods JJA affg Dow Chemical Co v Nova Chemicals Corp 2017 FC 350, 2017 FC 637 Fothergill J

2,160,705 / film-grade polymers / ELITE SURPASS

My previous post on Nova v Dow provided an overview of the problem and tried to identify the central intuition behind both Rowe J’s reasons for the majority, and Côté J dissent. This post reviews the legal background to the case.

Prior to 2004, the usual view was that an accounting required the infringer to disgorge the difference between its revenue and its costs, which is to say the accounting profits, or what Rowe J referred to as the “actual profits”[102]. Then, in Schmeiser 2004 SCC 34, Supreme Court held that the preferred method for calculating an accounting of profits is the “differential profit” approach, in which “[a] comparison is to be made between the defendant’s profit attributable to the invention and his profit had he used the best non-infringing option” [102], citing my article on “The Innocent-User Problem” (2004) 20 CIPR 79 and Collette v Lasnier (1886), 13 SCR 563, 576. The defendant, Schmeiser, had grown patented herbicide resistant canola, but, so far as the evidence showed, he had not taken advantage of the herbicide resistance, but rather had treated it in the same way as conventional canola, so that his profits “were precisely what they would have been had [he] planted and harvested ordinary canola” [104]. On this evidence, Schmeiser “earned no profit from the invention and Monsanto [the patentee] is entitled to nothing on their claim of account” [105].

The differential profit approach was then elaborated by the Federal Court of Appeal in a series of decisions. The first, Rivett 2010 FCA 207, confirmed that the differential profit approach was indeed generally applicable in the context of an accounting, dismissing an argument that it was confined to the particular facts of Schmeiser. Next, in Lovastatin Damages 2015 FCA 171, the Court of Appeal held that the differential profit approach was also applicable in the context of damages: “if a court may consider a defendant’s resort to a non-infringing alternative when calculating the infringer’s profit, there is no reason in principle to ignore such conduct when calculating the patentee’s lost sales” [60]. To apply the differential profit test, it was therefore necessary to reconstruct the hypothetical or “but for” world in which the infringer had pursued a non-infringing course of action [45], [48]. The Court of Appeal in Lovastatin Damages endorsed a “could and would” test for determining what non-infringing alternative the infringer would have pursued had it not infringed: [49]–[55]. The construction of the “but for” world and the nature of the “could and would” test was further elaborated and refined in a series of decisions involving both damages and accounting of profits: see Venlafaxine 2016 FCA 161 (s 8 damages); Perindopril Accounting #1 2017 FCA 23; Cefaclor Damages 2018 FCA 217; Perindopril Accounting #2 2020 FCA 60.

The effect of these decisions was that the basic approach to either damages or an accounting was the same: both involved the construction of a “but for” world in which the infringer pursued the alternative course of action established by the “could and would” test. Once the “but for” world was constructed, the quantum of damages was the difference between the patentee’s profit in the actual world and its profit in the “but for” world; the quantum of an accounting was the difference between the infringer’s profit in the actual world and its profit in the “but for” world.

In my “Innocent-User” article that was cited by the SCC in Schmeiser, my basic argument was that the differential profit approach should be adopted because it was “simply the application of ‘but for’ causation to an accounting of profits”: 91–93. When the SCC in Schmeiser cited my article as support for the differential profit, I had assumed that it was persuaded by the reasoning, and I understood the subsequent cases through that lens. The general tenor of the Court of Appeal jurisprudence, with its fact-intensive inquiry into what the infringer could and would have done in the hypothetical world “but for” the infringement, appeared to directly reflect the principle of “but for” causation. So, Lovastatin Damages 2015 FCA 171 explicitly stated that its approach was based on “but for” causation: see [45], [52], and throughout, referring to the “but for” world. Cefaclor Damages 2018 FCA 217 [23], [94] was similarly explicit. Perindopril Accounting #1 2017 FCA 23 [61] and Perindopril Accounting #2 2020 FCA 60 [50] both relied on Cadbury Schweppes [1999] 1 SCR 142 [73], which, in the next paragraph, [74], explicitly endorsed “but for” causation as the guiding principle in as the correct approach to the remedy of equitable compensation (the equitable equivalent of damages).

However, on the facts, the non-infringing alternatives endorsed by the Court were arguably market substitutes for the infringing product. In Rivett, like Schmeiser, the alternative to patented seed was conventional seed. In both Lovastatin Damages and Cefaclor Damages, the patents related to a process for producing a drug, and the infringer argued it would have been able to make the same drug using a non-infringing process: see here and here. In the Perindopril Accounting cases, a substantial amount of infringing perindopril had been manufactured by the infringer in Canada and exported to markets such as the UK and Australia, and the alternative at issue was to source perindopril for those markets from other jurisdictions where it was not patent protected: see here. (Venlafaxine was a s 8 case, so the product was venlafaxine itself, and the nature of the non-infringing alternative was not at issue: see here.)

These cases are all entirely consistent with “but for” causation; after all, if a generic had decided to enter the market for a drug, it is not very surprising that next best thing to using an infringing process would be to use an unpatented process to make the same drug. At the same time, the cases were also consistent on the facts with the view that the non-infringing alternative must be a market substitute for the infringing process. That is how Dow characterized those cases—as only allowing the use of the differential profits based on “true market substitutes for the patented invention” (Dow Reply FM050 [6]—relying on Collette v Lasnier (1886) 13 SCR 563, 576, Rivett 2009 FC 317 [56], Lovastatin Damages 2015 FCA 171 [73], Perindopril Accounting #1 2017 FCA 23 [41]–[42], Cefaclor Damages 2018 FCA 217 [54], and Perindopril Accounting #2 2020 FCA 60 [46]–[48], in addition to the FCA decision in Nova v Dow: see Dow Factum FM020 [90]–[93] and Dow Reply FM050 [8]–[11].

A key passage relied on by Dow was the statement in Lovastatin Damages [73] that when considering the effect of legitimate competition from a non-infringing alternative, the court must consider whether the alleged non-infringing alternative is “a true substitute and thus a real alternative.” Elaborating on this, in Cefaclor Damages 2018 FCA 217 the FCA stated (emphasis added by Dow FM050 [10]):

[54] Armed with these principles, I now turn to the very first issue to be considered by any court when determining whether an NIA defence is available: “Is the alleged NIA a true alternative to the inventions at issue?” In non-pharmaceutical cases, this is a very important question that usually turns on whether the product at issue would be considered a true substitute by the consumer. However, in pharmaceutical cases where generic products are bioequivalents of the original product, this aspect is not an issue.

I don’t see this as signaling a departure from “but for” causation. These were both damages cases. In damages cases the patentee is claiming for lost sales. The infringer is arguing that it would have made those sales even without infringing. The only way the infringer can take sales from the patentee without infringing is to sell a market substitute. As the FCA put it in Lovastatin Damages, “in cases where, in the ‘but for’ world, the infringer could and would have made and sold a non-infringing alternative, these sales may well reduce the patent owner’s sales” [49]. So, if Dow in this case had sued for damages on the basis of sales of food wrap plastic lost to Nova’s infringing competition, then, on a “but for” approach, it would indeed be entirely irrelevant whether Nova could have made $300m in the crate and pail market; the question is whether Nova would have been able to take food wrap sales from Dow without infringing. It follows that on a “but for” approach, in a damages case, the infringer must indeed show that its product would have been a market substitute. But this does not imply that a non-infringing substitute must be a market substitute in an accounting case; the market substitute requirement is not a basic principle, but is only a reflection of how “but for” causation plays out in the damages context.

I don’t read the accounting cases as establishing a market substitute rule either. In Perindopril Accounting #1 and #2, the FCA cited the passage from Lovastatin Damages [73], as the approach to follow “in assessing the impact of legitimate competition from a defendant marketing a non-infringing alternative product” [#2 48]. In Perindopril, the infringer argued that it would have made and sold a non-infringing market substitute, just as in Lovastatin, so it is reasonable to apply the same approach. This doesn’t imply that the infringer is restricted as a matter of principle to arguing that it would have sold a market substitute.

The remaining cases cited by Dow are, in my view, even weaker support for a “market substitute” rule. The SCC in Collette v Lasnier (1886) 13 SCR 563, 576 said it was an error for the differential profit to be assessed by using an outdated alternative, which was no longer used, instead of with “the latest precedent and best known mode.” I find it impossible to read this as mandating a comparison only with a market substitute. The “but for” alternative will often be a market substitute, and the remark was really aimed at the error of using an outdated comparator. Rivett was an accounting case, but I read [56] as addressed at a different point entirely, holding (correctly, in my view) that the non-infringing alternative cannot be that the infringer would have taken a licence from the patentee, or an accounting would reduce to a reasonable royalty.

In my view, the best reading of the cases as a whole is that they endorse “but for” causation. With that said, it is true that on the facts they are consistent with the idea that the non-infringing alternative has to be a market substitute for the infringing product, and there are a few comments that can be read as supporting that position.

It is interesting to note how Stratas JA treated these decisions in his decision for the majority in Nova v Dow. He rejected “but for” causation in the context of an accounting, but he does not seem to have accepted the market substitute test, nor does he appear to have read the prior cases in the same way as Dow. Stratas JA never referred to the “true alternative” language from Lovastatin Damages and he never cited [73]; on the contrary, he cited Lovastatin Damages for the proposition that “‘but for’, hypothetical reasoning applies when courts award compensatory damages for patent infringement” [45] and he accordingly affirmed the use of “but for” reasoning in the damages context [45], [67], [76]–[76]. He didn’t cite Cefaclor Damages or Perindopril Accounting #2 at all. He cited Perindopril Accounting #1 2017 FCA 23 extensively, as illustrating the correct approach on the facts [58]–[62], and for stating the requirement of a causal link, but he did not cite it for the specific approach, and indeed he found it necessary to doubt the decision’s apparent endorsement of “but for” causation, as being obiter: [79]. He did rely extensively on Rivett, though it is of course not binding authority.

This was the context for the SCC decision in Nova v Dow, in which Rowe J affirmed Stratas JA’s decision, though without specifically approving his reasoning. Stratas JA’s decision is not entirely moot, as the SCC did not address the question of whether the approach it took to an accounting in Nova v Dow also extends to the damages context. Dow’s argument implies that it does, while Stratas JA’s decision implies it does not.

Rowe J set out a three-step test to “conceptualize” an accounting of profits [15]:

Step 1: Calculate the actual profits earned by selling the infringing product — i.e., revenue minus (full or differential) costs.

Step 2: Determine whether there is a non-infringing option that can help isolate the profits causally attributable to the invention from the portion of the infringer’s profits not causally attributable to the invention — i.e., differential profits. It is at this step that judges should apply the principles of causation. . . .

Step 3: If there is a non-infringing option, subtract the profits the infringer could have made had it used the non-infringing option from its actual profits, to determine the amount to be disgorged.

Rowe J noted that the principal issue on appeal was Step 2 [16]. There are two key issues at Step 2: (1) the nature of the causation requirement; and (2) the nature of the non-infringing option, or “NIO.” The issues are related: if we know the causation concept, we can decide what constitutes an appropriate NIO; and if it is clear what constitutes an appropriate NIO, then we can infer the causation concept. Unfortunately, the decision provides very little guidance on either of these key points. Rowe J held that the causation requirement and the nature of the NIO are both questions of facts, with no strict rules: [3], [15], [67], [70]. Subsequent posts, and my case comment, will attempt to unpack these concepts.


  1. Thanks for this discussion. How do you reconcile your 'but for' discussion with Rivett, where it was found at trial that the defendant did not have conventional soybeans available: "he had no choice but to plant the ROUNDUP READY soybean seed as there were no conventional soybeans available at the local co-op or from the one local farmer whom he asked." Is it still appropriate to compare the actual profits with the profits using a conventional soybean when the defendant could not have used them?

    1. I read Rivett's use of conventional seed as turning on the evidence, not as being a matter of principle. Rivett was the first case on point after Schmeiser, and the “could and would” approach had not been developed. Neither party focused on how to construct the but for world. Monsanto’s main argument was that Schmeiser was restricted to an “innocent infringer” context, so the differential profit approach did not apply at all, and Rivett should therefore be required to disgorge his entire accounting profit. (Recall that the major issue in Schmeiser, even at the SCC, was whether Schmeiser as an “innocent” user had “used” the invention; the differential profit approach was only a couple of paragraphs.) Rivett’s argument was not primarily addressed to the but for hypothetical either: his main argument was as to the nature of his deductible costs. He argued that he should have been credited for his labour and expertise, and that if that was done, he had no profits to disgorge: FC [35].

      With that said, Zinn J in Rivett did apply the differential profit approach and he did hold that the market availability of conventional seed was not determinative of its use as a comparator. It is also true that Rivett failed to establish what he would actually have done but for the infringement; he seems to have essentially assumed that the appropriate comparator was conventional soybean, which he did also grow, presumably in reliance on Schmeiser. (The fact that conventional soybean was unavailable was elicited only in cross-examination.)
      Monsanto argued that since conventional soybean was unavailable, Rivett should be required to disgorge his entire accounting profit, without any deduction. It is perfectly clear that this would not properly apportion the profit; as the Federal Court [59] pointed out [59], this would be tantamount to saying that but for the infringement, Rivett would have left his fields fallow, which is clearly unreasonable. As the differential profit approach ultimately developed, it became clear that the onus lay on the infringer to establish the available of the non-infringing alternative, and no doubt Rivett would have have constructed his “but for” more carefully if he had the benefit of the “could and would” line of cases. Given that conventional soybean was unavailable, the proper “but for” comparator would probably have been corn or wheat, which Rivett also grew. But in the circumstances where the nuances of the doctrine were developing, and the major issue was whether the differential profit approach applied at all, it would have very harsh to require disgorgement of the full profits on the basis that Rivett had failed to discharge that onus. Keep in mind that this wasn’t a situation where conventional seed was unrealistic because there was no market for it: Rivett actually grew conventional seed as well, he just happened not to have it in enough quantity for his whole crop. The more structured “could and would” test, which made that onus clear, was only developed in subsequent cases, involving more sophisticated defendants. Moreover, as the Court of Appeal pointed out, it was Monsanto’s own evidence that the profit differential was 18%. In the context of an individual defendant developing a new point of law, it is not surprising that the court chose to do substantial justice on the facts rather than holding the defendant to the strict burden of proof. So the reason conventional seed was used even though not actually available is that Monsanto should not be permitted to take advantage of the fact that Rivett had not strictly carried its burden in order to extract a disgorgement that was undoubtedly excessive, when Monsanto’s own evidence established a more appropriate disgorgement.