Thursday, September 14, 2023

Nova v Dow: Causation Concept in the Absence of an NIO

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

The Intuition / The Legal Background / Causation as a Matter of Fact / The Concession / What Role for “But For” Causation in Identifying the NIO? / Summary of the Summary

This post continues the series summarizing the key points in my two-part article on Nova v Dow which is forthcoming in the IPJ. So far, we have considered the causation concept at play at Step 2 of Rowe J’s three-part test when there is an appropriate non-infringing option (NIO). But what if there is no appropriate NIO? In that case, the entire actual profits—revenue minus costs—must be disgorged. Rowe J insisted repeatedly that only profits caused by the invention are to be disgorged and he did not limit this to cases in which there is an NIO. So what causation concept is at play when there is no NIO?

The best reading of the decision is that when there is no NIO, Rowe J considers that the entire actual profits are caused by the infringement. In one sense, it is clearly true that the entire actual profit, which is to say the actual revenue from the sale of the infringing plastic less the actual cost of making and selling that plastic, was caused by the sale of the patented plastic. However, this causation concept—which we might dub “actual causation”—is different from “but for” causation. This is illustrated by the crumbling skull doctrine. If the defendant, driving negligently, hit the plaintiff in the knee so that the plaintiff required a knee replacement, it is true in a straightforward and intuitive sense the entire harm to the plaintiff’s knee was caused by defendant hitting it, just as Nova’s entire actual profits are caused by its infringement. But if it can be established that the plaintiff had a pre-existing degenerative knee condition and would have required a knee replacement within two years in any event, the defendant will not be liable for the entire harm, but only for the loss of the two years that the plaintiff would have enjoyed before he would have required a new knee in any event. This is simply the application of “but for” causation: see Athey v Leonati [1996] 3 SCR 458 [35].

Dow argued that the “but for” logic would apply only if Nova sold a direct market substitute for the infringing plastic on the view that “a patent does not confer a complete monopoly if a defendant could make or sell a non-infringing version of the patented invention” Dow Factum FM020 [72]–[73]. This statement is true in the damages context: a defendant will only be able to deduct sales it would have made by selling a market substitute. This is because the patentee is claiming damages for its lost sales and the infringer would only have been able to take some of those sales by selling a market substitute. But that does not reflect a principle that only profits caused by the sale of a market substitute are not caused by the infringement; rather, it reflects the way that “but for” causation plays out in the specific context of damages.

So, while actual causation is an intuitively reasonable causation concept, it is different from “but for” causation. Actual causation, which determines the amount to be disgorged when there is no NIO is obviously also different from whatever causation concept is at play when there is an NIO, simply because when there is an NIO, some amount is deducted from the actual profits.

A second issue addressed in Nova v Dow was whether the infringer is required to disgorge “springboard” profits. These are profits earned after the expiry of the patent which the infringer only earned because the pre-expiry infringement gave the infringer a head start in building sales capacity and market share. Rowe J relied on “but for” causation as a justification for holding that springboard profits must be disgorged:

[81] [A]fter the patent expires, the infringer can use this sales capacity and market share to earn profits that it would not have earned but for the infringing activity that occurred during the life of the patent. Thus, a portion of such post-expiry profits may be causally attributable to infringement of the invention.

So, the three-step test uses two different causation concepts, namely actual causation when there is no NIO, and some other causation concept when there is an NIO, and both of these are different from “but for” causation, which is used in the context of springboard profits. The use of different causation concepts in different contexts is not simply loose language or an oversight; Côté J pointed out the inconsistency explicitly and at length at [178]–[182].

Further, while Rowe J set out a three-step test to “conceptualize” an accounting [15], he did not use that three-step test in the context of springboard profits. This means that it is not clear what approach should be taken to various categories of damages that were not directly addressed in the decision, such as convoyed goods (unpatented goods normally sold with the patented product), fixed costs, and the cost of capital.

This means that there are three distinct causation concepts at play in Nova v Dow— “but for” causation in the context of springboard damages, actual causation, when there is no NIO, and whatever causation concept is at play when there is an NIO—and Rowe J gave no reason why one rather than the other is used in the different contexts. Further, there are also two different frameworks for assessing the amount to be disgorged, namely the three-step test and “but for” causation, and Rowe J gave no reason why one rather than the other is used in different contexts.

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