Wednesday, November 1, 2023

Nova v Dow: The Source of the Chilling Effect

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 / Causation Concept in the Absence of an NIO / What is the NIO? / The Value of the Invention / Rivett on the Facts / Three Policy Arguments

In my last post on Nova v Dow, I argued that none of the policy rationales provided by Rowe J support his approach to an accounting. In this post I’ll consider whether the approach to causation adopted by Rowe J will result in overdeterrence and a consequent chilling effect.

To understand whether a remedy will have a chilling effect, we need to understand the mechanism underpinning the chilling effect. As the Court of Appeal explained in Merck 2015 FCA 171 [42], the chilling effect arises because of ex ante uncertainty as to liability:

over-compensation of an inventor chills potential competition to the extent that a potential infringer is uncertain about the scope and validity of a patent.

If the bounds of the patent monopoly could be determined precisely ex ante, in the way that a property surveyor might determine the bounds of a property prior to purchase, then we would not have to worry about punitive remedies, as any potential infringer would be able avoid punishment simply by avoiding infringement: the potential infringer would be able to either license or avoid use of the patented technology. But there is always some degree of uncertainty with respect to liability of any kind and the problem is especially acute in the patent context. The boundaries of the patent monopoly are notoriously uncertain. In contrast to real property, a patent right has no physical boundaries, so there is no limit on the number of potentially “adjacent” property rights. And even once a relevant patent is identified, it is by no means a trivial task to establish its bounds by claim construction. Determining whether the patent is valid is even more difficult. The simple fact is that any party operating in a complex product space will almost invariably be an infringer in some respect.

Consequently, the chilling effect cannot be avoided by saying that third parties should take care not to infringe. To mitigate the chilling effect arising from uncertainty, it is important to ensure that patent remedies are not excessive.

What does it mean for an accounting to be excessive, such that it gives rise to a chilling effect? When would an investor prefer to invest in a safe sector with a lower return, rather than a more dynamic project with higher returns and a greater social benefit, but a substantial risk of infringement?

On an expected value calculation, the investor will only choose the risky investment if the excess return in the scenario in which it is not sued for infringement is greater than the loss it will suffer if it is sued. This depends on how much extra profit will be made with the risky investment, the size of the penalty if it infringes, and the risk of being found to infringe. A “but for” accounting ensures that the investor will always make the socially beneficial investment because it puts the infringer in the position it would have been in had it not infringed. This makes the investor indifferent between plunging into the patent thicket rather than opting for a safer but less innovative investment.

In theory, a “but for” accounting is not the only way to avoid a chilling effect. A “but for” accounting is guaranteed to avoid the chilling effect because a potential infringer is no worse off even if they are sure to be caught. (This is a common scenario in the pharma sphere.) But if there is some chance that the activity will escape detection entirely, the infringer might expect to be better off with a “but for” accounting. A remedy that puts the infringer in a somewhat worse position if it is caught might still leave the infringer indifferent ex ante because there is some chance it won’t be caught at all. The problem is that tailoring the accounting remedy to account for this would be impossible, as it would require the court to determine the infringer’s ex ante subjective risk of getting caught and then tweaking the accounting quantum just enough to ensure the infringer is indifferent, but no more. This is an impossible task and any approach that attempts it would therefore risk a chilling effect. That is why a “but for” accounting is the only practical legal rule that ensures there will be no chilling effect. This is why the Court of Appeal in Merck [42] held that “[t]he balance at the heart of the Act requires perfect compensation” in order to encourage innovation without chilling potential competition (quoted with approval by Côté J [103]. Any greater disgorgement will result in a chilling effect.

It is clear that the approach adopted by Rowe J may put the infringer in a worse position than it would have been in but for the infringement and so his approach does indeed risk chilling innovation. As discussed in my last post, Rowe J’s assertion that the remedy is not punitive does not affect this conclusion.

My point here is only that Rowe J’s approach risks a chilling effect, as it will sometimes make the infringer worse off than if it had avoided the market entirely. However, under Rowe J’s approach, there are some circumstances in which the infringer may be left better off than it it had not infringed: in particular, where there exists an NIO that was not in fact available to the infringer at the time of the infringement, so that a disgorgement under Rowe J’s approach will be less than a “but for” disgorgement. Whether Rowe J’s approach will have a chilling effect therefore depends on whether the effect from excessive disgorgement in some cases is offset by the reduced disgorgement in other circumstances. In a subsequent post I will argue that it is essentially certain that the effect of excessive disgorgement will dominate, so that a chilling effect is inevitable.

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