Friday, September 8, 2023

Nova v Dow: Summary of the Summary

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

In Nova v Dow, Rowe J, writing for an 8-1 majority, addressed the proper method of calculating an accounting of profits in the patent context. I had started a series of posts summarizing my forthcoming two-part article on Nova v Dow which will appear in the IPJ, but I got distracted over the summer. The series resumes with this post and will continue on Fridays.

My article is very long, so I will start by emphasizing my conclusion: the Nova v Dow decision is so bad, both doctrinally and in policy terms, that the accounting remedy has been fatally damaged. If an accounting continues to be granted routinely Nova v Dow will almost certainly have a chilling effect on innovation and legitimate competition. There is no way to interpret Nova v Dow that would restore the remedy to a sound basis. The best response to Nova v Dow is therefore to abolish the accounting remedy entirely. That may not be practical, as it would require legislative intervention. The next best response is to restrict the accounting remedy to cases in which the infringer was trying to game the system by avoiding ex ante licensing, ie was engaging in holdout. Restricting the availability of an accounting is consistent with the equitable nature of the accounting remedy; it is consistent with the existing caselaw on the entitlement to an accounting; it is consistent with Nova v Dow, which did not address entitlement to an accounting; and it is supported by the extra-judicial writing of Edelman J of the High Court of Australia.

My previous summary posts are also very long, so in this post I will recap the facts and provide a summary of my summaries.

The Facts

Dow had a patent on specialized plastic film, used for items such as food packaging. Nova made and sold a competing film that was found to be infringing. Dow was awarded an accounting of Nova’s profits from sales of infringing film, with a quantum of $644 million. The major input to the infringing plastic is ethylene, an unpatented bulk commodity. Nova had a very efficient process for making ethylene—the “Alberta Advantage”—and so could make ethylene for far less than it would have cost to buy on the open market. On the facts, if Nova had not infringed, it would have used its ethylene to make commodity grade “pail and crate” plastic [FC 158]. Nova argued that because of the Alberta Advantage, it would have made approximately $300 million in profit on the sale of that plastic, despite the competitive nature of that market [FCA 187]. The question was whether Nova was entitled to deduct the amount it would have made in the pail and crate market, on the view that that part of the overall profit was caused by its efficient ethylene production process and not by the infringement.

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.

On the facts, Rowe J held that Nova was not entitled to deduct the amount it would have made in the commodity plastic market, because commodity plastic was not a “non-infringing alternative” (“NIO”) under Step 2, so the entire actual profits were to be deducted.

Rowe J stated that it is a "fundamental principle" that the infringer must disgorge "all profits causally attributable to infringement of the invention" [4] and at the same time he emphasized that the profits to be disgorged in an accounting are "only the profits causally attributable to the invention" [48] (original emphasis). Rowe J repeated the need for a causal connection more than two dozen times.

The Intuition

A key question is what constitutes an appropriate non-infringing option at Step 2. One view, taken by Nova and Côté J, is that the NIO reflects the application of “but for” causation, so that the amount to be disgorged is the difference between the infringer’s actual position and the position the infringer would have been in but for the infringement. On this view, the profit to be disgorged is the profit caused by the infringement, which takes into account both the value contributed by the invention and the value contributed by the infringer. This means that profits that the infringer might have made in other unrelated markets—such as the market for commodity plastic—are deducted because if the infringer could have earned excess profits in an unrelated market this reflects the unique value contributed by the infringer in consequence of its special expertise or manufacturing advantage.

The other view, taken by Rowe J for the majority, focuses on profits caused by the invention as opposed to profits caused by the infringement. The intuition seems to be that an accounting reflects the value of the invention, as opposed to the value of the infringement, and the value of the invention cannot depend on the vagaries of unrelated markets such as the market for commodity plastic. On that view, there is something special about certain non-infringing options such that a comparison with an appropriate NIO reveals the value of the invention itself. Whether something is an appropriate NIO does not simply turn on what the infringer would have done but for the infringement; the NIO turns on the nature of the invention, not on the what the infringer might have done with it. On this view, the value of the invention cannot depend on what happens in entirely unrelated markets.

The Legal Background

The prior leading case on an accounting was Schmeiser 2004 SCC 34, in which the SCC 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]. The subsequent FCA caselaw held that the same approach applies in the context of damages and elaborated a “could and would” test for identifying an appropriate NIO. In my view, these cases support the view that the differential profits approach is simply the reflection of “but for” causation. However, there were a couple of passages suggesting that an NIO must be considered “a true substitute by the consumer”: see Cefaclor Damages 2018 FCA 217 [54]. Based on this authority, Dow argued that an appropriate NIO had to be a true market substitute for the infringing product. Accordingly, Dow argued that the profits Nova would have made in the commodity plastic market could not be deducted because it was undisputed that commodity plastic is not a market substitute for the specialized patented plastic. While Rowe J held in Dow’s favour, he explicitly rejected the market substitute test for an NIO [67]. (The market substitute test was not raised in the FCA.)

Causation as a Matter of Fact

Rowe J stated more than two dozen times that there must be a causal link to the profits to be disgorged. The most prominent causation concept in law is “but for” causation and both Nova and Côté J, dissenting, took the position that “but for” causation was the appropriate causation concept. Remarkably, despite his emphasis on the importance of causation, Rowe J never identified the legal causation concept at all; instead he asserted that causation is “a practical question of fact which can best be answered by ordinary common sense” [15] and similarly, “[w]hether there is a non-infringing option that can assist courts in isolating the profits causally attributable to the invention is a question of fact” [67]. This is a remarkable novel proposition; there are many well-known SCC decisions in which the central question of law was as to the nature of the correct causation concept, including decisions which overruled the trial judge on a question of law for having applied the wrong causation concept. The cases cited by Rowe J for the proposition that causation is a matter of fact actually stand for the proposition that applying the legal causation test to the facts requires common sense.

The Concession

While Rowe J refused to articulate any causation concept, we might have expected some insight as to the principle at work from the application of his framework to the facts. Nova had argued that had it not infringed, it would have made approximately $300m in profits in the market for commodity plastic. There was no finding at trial that Nova would in fact have made such profits, as the trial judge, affirmed by the Court of Appeal, had refused to allow the deduction as a matter of law. Since Rowe J affirmed, one might normally infer that any profits from the commodity market cannot be deducted as a matter of law. However, Nova had conceded at trial that there were no non-infringing options available for the purpose of applying the differential profits approach [70]. Relying on this concession Rowe J held that there was nothing to be deducted at Step 2 and so Nova was required to disgorge its entire actual profits. Thus, while the FC and FCA had treated deductability of the commodity plastic profits as a matter of law, the SCC affirmed on the basis of a concession of fact. As a result, Rowe J did not address the nature of the causation requirement.

What Role for “But For” Causation in Identifying the NIO?

A central part of Rowe J’s three-step approach is the identification of the NIO at Step 2. The closest Rowe J came to providing a definition of the NIO is that it is “any product that helps courts isolate the profits causally attributable to the invention from the profits which arose at the same time the infringing product was used or sold, but which are not causally attributable to the invention” [58]. But Rowe J did not identify the causation concept, nor did he define or even discuss what it means for profits to be “causally attributable to the invention.” Combined with his holding that whether something is an NIO is a matter of fact, this means that an NIO is anything that the trial judge finds helpful. This implies that it remains open to a trial judge to apply “but for” causation to identify the NIO at Step 2, or as one consideration in identifying the NIO, if the trial judge is of the view that doing so would be helpful. Indeed, at one point Rowe J implied that commodity grade plastic might have been an appropriate NIO if the trial judge had made a factual finding to that effect [72]. At the same time, it is clear that the NIO is not determined solely by finding what the infringer would in fact have done but for the infringement; if that were the case, Nova would have won.

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