Nova v Dow: What is to be Done?

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 / The Source of the Chilling Effect / Miscellaneous Policy Issues / Doctrinal Implications / Will Nova v Dow Create a Chilling Effect?

This is the last in a series of posts summarizing my two-part article in the IPJ on Nova v Dow: 35 IPJ 249 and 36 IPJ 81. The accounting remedy as it had developed since Schmeiser 2004 SCC 34 was a useful tool that could dissuade ‘catch-me-if-you-can’ tactics, in which the infringer intentionally avoids taking a licence, knowing that if caught the only remedy will be damages equal to the royalties it would have agreed to if it had taken a licence in the first place. That tool has now been broken beyond repair: as summarized in previous posts, Nova v Dow is unprincipled and incoherent, and is likely to have a chilling effect that will impede innovation.

What is to be done?

The best response would be to abolish the accounting remedy entirely in the patent context. Any attempt to use it will almost certainly do more harm than good. An accounting remedy is not an essential part of the patent system. It was abolished in US law in 1946 and has not been missed. It is available in the UK, but is rarely used. The main difficulty with this solution is that the formal abolition of an accounting would require legislative action, which is unlikely, certainly in the short term.

An alternative response would be for the courts to restrict an accounting to cases in which the infringer is trying to game the system by avoiding taking an ex ante licence. An accounting under Nova v Dow is quasi-punitive in effect, in that it puts the infringer in a worse position — potentially very dramatically worse — than it would have been in had it never infringed. The risk of the chilling effect arises because innocent infringers may avoid an entire field rather than risk exposure to such a remedy. The chilling effect can therefore be avoided if the remedy is confined to cases in which the infringer actually knew of the patent or was willfully blind as to its existence. And the best justification for an accounting is to deter the catch-me-if-you-can problem, which only arises if the infringer actually knew of the patent or was willfully blind as to its existence. That implies that the chilling effect can be avoided by confining the accounting remedy to that specific context.

This implies that an accounting should not be granted against infringers who did not know of the patent and had no reasonable grounds for knowing of it. But it is not enough to condition the remedy on the infringer’s knowledge of the patent. A party that actually knew of the patent but chooses to infringe, knowing an action will be brought, with the intention of launching a validity action in response, is not trying to game the system. A party who challenges a patent which it reasonably believes is invalid is doing an important public service by invalidating patents that otherwise result in unjustifiably high prices and restrictions on improvements. We do not want to disincentivize socially beneficial challenges of that type.

In order to ensure that the accounting remedy does not have a chilling effect on innocent infringers or dissuade challenges to suspect patents, an accounting should not be granted unless two criteria are satisfied: (1) the infringer actually knew of the patent or was willfully blind to its existence, and (2) the infringer did not have a reasonable belief that the patent was potentially invalid. This is essentially the US requirement for awarding treble damages; the parallel makes sense, since an accounting under Nova v Dow is essentially punitive, and may result in substantially more than treble damages. The problem with this proposal is that we know from the US experience with treble damages that such an inquiry is likely to be very unsatisfactory, Establishing subjective belief in the validity of the patent is very difficult. An objective test may devolve into the formality of getting an appropriate opinion letter, and a more rigorous subjective test risks error and arbitrariness.

But we need not follow the US treble damages approach exactly. Rather than using those criteria as a test, so that the patentee would be entitled to an accounting when those two criteria are satisfied, we should use those criteria as a threshold, so that an accounting may only be granted when those criteria are satisfied, but will not necessarily be granted when those criteria are satisfied. That would leave the courts the discretion to award an accounting only when it is abundantly clear on the particular facts that the infringer was trying to game the system.

Now, this can already be done with punitive damages. Moreover, punitive damages allows the court to tailor the punitive element of the award to the degree of fault, while the punitive element under a Nova v Dow accounting is essentially random, as it depends on whether there is a non-infringing option, and on the difference between the award under ‘but for’ causation and the award under Nova v Dow causation. Because Nova v Dow causation is unprincipled, that difference is arbitrary. That is why I am of the view that it would be better to abolish the accounting remedy entirely.

As noted above, it would require legislative intervention to formally abolish the accounting remedy. But this could be done de facto if the courts were to use their discretion inherent in the award of an equitable remedy such as an accounting to restrict an accounting to cases of egregious bad faith by the infringer. That, in my view, is the best course available to the courts.

I’ll finish with these observations of Edelman J, in his book on Gain-Based Damages (2002) 85–86, writing academically before his appointment to the High Court of Australia, who pointed out that there is an important difference between disgorgement as a remedy for breach of fiduciary responsibilities and as a remedy for infringement of property rights:

[T]he high degree of institutional protection afforded to fiduciary relationships can be justified as necessary to place the fiduciary on constant alert even to the possibility of innocent breach. Such vigil is necessary in relationships characterised by vulnerability and susceptibility to abuse. In comparison, the possibility of an innocent commission of a property wrong is not something against which a vigil can be maintained. The existence of property rights is not as obvious to a defendant as the existence of a relationship of trust and confidence or the vulnerability of the claimant. An innocent recipient of property, no matter how alert, often has no means to determine whether rights are held in the property by some unseen future claimant.

Consequently, Edelman argued that there is no justification for disgorgement damages for innocent breach of property rights. He noted also that in fact disgorgement is generally not available for innocent breach of property rights. Edelman’s comment regarding the difficulty of determining whether a property right has been infringed applies a fortiori to patent rights. Accordingly, with respect to patent rights in particular, Edelman wrote that “disgorgement damages should not be awarded for the infringement of a patent unless the infringement is shown to be wilful or cynical.”

Nova v Dow: Will Nova v Dow Create a Chilling Effect?

Nova v Dow: Will Nova v Dow Create a 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 / The Source of the Chilling Effect / Miscellaneous Policy Issues / Doctrinal Implications

In previous posts summarizing my forthcoming IPJ article, I have argued that an accounting based on “but for” causation avoids the risk of a chilling effect in which parties avoid engaging in legitimate competition and investment in innovative sectors; conversely, an accounting which results in a greater disgorgement on average than a “but for” accounting will have a chilling effect on innovation and competition. Whether Nova v. Dow will have a chilling effect on innovation therefore turns on whether it will on average result in a greater disgorgement than a “but for” accounting. The chilling effect is always prospective—the problem is that the prospective infringer does not take a socially desirable course of action out of fear of litigation—so the question is which way this balance tips in expectation, which is to say on average.

There are some cases, such as Schmeiser, where the appropriate NIO corresponds to what the infringer would in fact have done, in which case the result will be the same under either a “but for” accounting or the Nova v Dow approach. There are other cases, such as Nova v Dow itself, in which the infringer would in fact have made substantial profits but for the infringement, but there is no appropriate NIO, so that a Nova v Dow accounting will result in a greater disgorgement than a “but for” accounting. Finally, in cases in which an NIO exists that was not in fact available to the infringer and which would have been more profitable than the non-infringing option actually available to the infringer, a Nova v Dow accounting will result in a smaller disgorgement than a “but for” accounting. Whether the Nova v Dow approach will result in a chilling effect turns on whether, on average, the excessive disgorgement in the second category of cases more than outweighs the reduced disgorgement in the third category of cases.

In Part II of my forthcoming IPJ article, I argue that the expected accounting under Nova v. Dow will be excessive for two reasons. First, cases in which the infringer will be able to establish a reduced disgorgement are likely to be rare. A reduced disgorgement arises when NIO was not actually available to the infringer and the NIO was more profitable than the alternative that was actually available to the infringer. This will be rare because the market will usually supply the infringer with the most profitable alternative. If the NIO is more profitable, it will normally be available; and if it is less profitable than the alternative that the infringer would in fact have used, then using the NIO will result in excessive disgorgement. Further, the burden is on the infringer to show the profits it would have made with the NIO. It will be difficult for the infringer to establish profits that it would have made with an alternative that was not actually available to it: how can the infringer establish the cost of an alternative that it could not have purchased at any price? Rivett 2009 FC 317 is the exception which proves the rule — the profitability of the non-available alternative was, unusually, established by evidence introduced by the patentee. Second, there is a selection bias: the patentee is entitled to damages as of right and so is less likely to seek an accounting when it expects the accounting to result in a reduced disgorgement.

The article goes through the implications of these points in detail, discussing issues such as how likely it is that there will be an NIO that existed but which was not in fact available to the infringer, which the infringer will nonetheless be able to use to establish its profits in the hypothetical world. I won’t review those details here, as the argument is a bit intricate, going through a variety of scenarios, and I don’t think that I can meaningfully compress it. Suffice it to say that I am very confident that the Nova v Dow approach will result in a chilling effect. I will leave it to the reader to review my arguments in detail when the article is published, and see if you agree.

Nova v Dow: Doctrinal Implications

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 / The Source of the Chilling Effect / Miscellaneous Policy Issues

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 have a two-part article on the decision forthcoming in the IPJ. Part I of that article analyzes Nova v Dow at a doctrinal level. What did Rowe J mean by “cause”? What did he mean by “the non-infringing option”? What did he mean by “the value of the invention”? I summarized Part I in a series of blog posts, listed above. Part II addresses the policy implications of Nova v Dow. In the first post summarizing Part II, I argued that the policy arguments advanced by Rowe J in support of his approach are either entirely misguided, or support a “but for” approach to an accounting. Further, while Rowe J asserted that his approach would not chill legitimate non-infringing competition because his approach is not intended to be punitive, the chilling effect does not depend on the label we attach to a remedy. In the next post I discussed the source of the chilling effect and showed that Rowe J’s departure from “but for” causation does indeed risk a chilling effect. That post left aside the question of the extent of that chilling effect and the appropriate policy implication, which will be discussed in the post following this one. In this, the fourth post on Part II, I will summarize my thoughts on the likely doctrinal implications of Nova v Dow. A subsequent post will consider the policy implications and the appropriate response to the decision. (The third post on Part II dismisses two minor policy arguments made by Rowe J.)

The accounting context

The most basic question is how Nova v Dow will impact the accounting of profits remedy in the patent context. This question is remarkably difficult to answer given that it was the focus of the entire decision. The problem is that Rowe J did not provide any guidance on the key issues. While he implicitly rejected “but for” causation, he did not specify any alternative. On the central issue of what constitutes an appropriate a non-infringing option, the key holding is that the NIO is “any product that helps courts isolate the profits causally attributable to the invention” [58]. In the absence of any clear causation concept, saying that the NIO is anything that is helpful is, well, unhelpful. Moreover, he held that both causation and the nature of the NIO are matters of fact. Since Rowe J did not articulate any guiding principle it is difficult to predict how the law will evolve. Ultimately, my best guess is that the courts will develop a non-exhaustive list of factors, including market substitutability, technical similarity, and “but for” causation, which are all considered and balanced in light of the facts of the case.

Many doctrines involve balancing a list of factors. This does not raise any problems in itself—so long as the factors are all relevant to some principled underlying inquiry. For example, a variety of factors may be relevant to reconstructing the hypothetical negotiation in assessing reasonable royalty damages, with more or less weight given to any particular factor on the facts of a case. That does not necessarily result in unpredictability, because the various factors all address the same principled question, namely what are the terms of the licence the parties would have entered into had they bargained ex ante. The weight to be given to each factor turns on the degree to which, on the facts, that factor is relevant to the ultimate inquiry. The difficulty in with Nova v Dow is that there is no underlying principle. This means that even if the courts develop a list of “relevant” factors, those factors will not be relevant to any underlying principle, because there is no underlying principle. This means that there will be no way to predict whether one factor rather than another will have more weight in any given case; that will likely turn on arbitrary and idiosyncratic factors such as the mannerisms and persuasiveness of the expert witnesses.

Consequently, if I suspect that Nova v Dow will result in long-term uncertainty, where there is really no way of predicting whether an NIO is appropriate other than going to trial.

In her dissent, Côté J stated that “[t]here must be some legal requirements or standards [for a non-infringing option] that guide courts and the parties to the litigation” [193]. The “must” in that sentence is aspirational rather than descriptive. There should be some legal requirements or standards to provide guidance—but, since Nova v Dow, there aren’t. No doubt the FCA would like to provide guidance, but only time will tell whether that will be possible in the face of Rowe J’s holding that it is purely a matter of fact as to whether a particular alternative is an NIO.

There will also be uncertainty as to the applicability of Rowe J’s approach to different heads of profit. Rowe J explicitly endorsed “but for” causation in the context of springboard damages, while he used a different causation concept in the context of the non-infringing option. So “but for” causation is used sometimes, but not always, when assessing the amount to be disgorged. There is an open question as to whether “but for” causation will be used in assessing products from convoyed goods (unpatented goods normally sold with the patented product), fixed costs (which were addressed in the FCA but not the SCC), and the cost of capital. The most likely scenario is that these heads of profits will be addressed on an ad hoc basis, in which “but for” causation may or may not be applied in each case. However, we can expect clarity to emerge as courts specifically address these heads of profit. 

In particular, in the Nova v Dow FCA decision Stratas JA held that "the full costs approach [to deduction of fixed costs] is principled and sound" [154]. This means that the infringer will always be able to deduct some portion of its fixed costs. This issue was not addressed by the SCC, but if the SCC had addressed some coherent causation principle, then Stratas JA's approach to fixed costs might have been subject to revision. As it is, I expect it will stand, even though it is not based either on "but for" causation or on whatever causation concept was being used by Rowe J. While we now have doctrinal clarity regarding the deductibility of fixed costs, I doubt this will lead to predictability. While Stratas J A clearly held that some proportion of fixed costs are always deductible, he did not provide any principle to determine what that proportion might be — except that whatever the principle is, it is not "but for" causation. In my view, "but for" causation is the only principled approach and consequently, Stratas JA's full costs approach is likely to also lead to long-term unpredictability and arbitrary results. I am coming around to the view that this may even more important in practice than the question of the appropriate NIO. An infringer will always be able to point to very substantial fixed costs and if any significant proportion of those costs is regularly deducted, this may significantly reduce the quantum of the accounting.

Further, in the article, I point out that there is a real puzzle in allowing for the cost of capital. It is possible that deductibility of the cost of capital will turn on whether the infringing product is funded with retained capital or external capital, even though this clearly has no bearing on whether the profits are caused by the invention.

The patent damages context

The next question is whether Rowe J’s approach to the NIO will extend to patent damages. The straightforward argument for extending it to the damages context is that prior to Nova v. Dow, patent damages and an accounting were symmetrical. As the Court of Appeal stated in Merck 2015 FCA 171 [60] in the course of holding that the Schmeiser differential profits approach extends to damages, “the significance of [Schmeiser] is that 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.” If the Schmeiser approach applies to damages as much as an accounting, then it would seem to follow that the Nova v Dow approach does also. On the other hand, Rowe J focused throughout his decision on the accounting remedy, and there is not the slightest hint of a suggestion that the principles would extend to damages as well. Further, Stratas JA, whose judgment in the Court of Appeal was affirmed by the Supreme Court, expressly held that his approach to an accounting did not apply in the damages context: Nova v. Dow FCA 2020 FCA 141 [45], [67], [76]. Consequently, it would be entirely fair to read the SCC decision as being confined to the accounting context. I suspect that whether the Court of Appeal decides to extend Rowe J’s approach to the NIO to the damages context depends on the view it takes of the soundness of his decision. A similar question arises with respect to s 8 damages under the PM(NOC) regime. I expect that will go the same way as damages more generally.

Beyond patent law

An accounting or disgorgement of the wrongdoer’s profits is a remedy that is not limited to patent law, but I very much to doubt that Nova v Dow will have any influence beyond patent law. It is difficult to identify any principle which might be extended to other cases, and Rowe J’s focus on the profits causally attributable to “the invention” is a straightforward basis for holding that Nova v Dow does not apply more broadly.

The UK Approach to Electing an Accounting

In a recent post I noted that AlliedSignal (1995), 61 CPR (3d) 417 (FCA) 444 held that an entitlement to an accounting “certainly cannot depend on whichever amount would turn out, on inquiry, to be more profitable.” I should point out that in UK law is to the contrary. In UK law, as I understand it, the successful patentee is entitled to elect between damages and an accounting as of right, unlike in Canadian law where it is clear that an accounting, as an equitable remedy, is discretionary: Beloit v Valmet-Dominion [1997] 3 FC 497 (FCA) ¶ 111. Further, in UK law, the patentee is entitled to some information from the defendant to allow it to make an informed election between the two remedies: see Lufthansa v Panasonic Avionics [2023] EWCA 1273, in which Birss LJ explained [3]:

If an IP rights holder's business is in licensing their rights then the damages would be measured by the loss of royalty on the defendant's infringing goods, which, if the infringements were highly profitable, may be a lower sum than the amount of profit the infringer earned from the infringement. The rational choice might then be to choose an account of profits. On the other hand if the infringer's business was unprofitable, perhaps trying to break into a new market, and the rights holder's business was a profitable one making direct sales to customers, which were lost due to the infringement, then a damages enquiry might be more sensible.

I am not persuaded. The question is not which remedy is more rational from the perspective of the patentee, it is which remedy is more rational in light of the purpose of the patent system. The primary purpose of patent remedies is to preserve the incentive to invent. Damages serve that purpose. That is why damages are available as of right in Canada and that is why an accounting is not available at all in the US. An accounting that exceeds damages must be justified by some independent principle, such as sanctioning bad faith behaviour. So, in my article on Nova v Dow (forthcoming in the IPJ), I argue that an accounting should only be granted if the infringer was deliberately avoiding taking a licence in a game of “catch-me-if-you-can.” Simply putting more money into the pocket of the patentee is not an adequate principle. Indeed, an award that exceeds damages can be counter-productive, as it may encourage needless litigation by giving the patentee an incentive to disguise its patent rights in the hopes of trapping an unwary infringer, thereby getting a better outcome that if it had sought to make a licence easily available ex ante. This is all the more reason why the grant of an accounting must turn on the behaviour of the parties and not simply on which remedy is most favorable to the patentee.

With that said, I can understand that if the bad behaviour of the infringer warrants the grant of an accounting, it is reasonable for the patentee to want to know whether that remedy will exceed its damages. The patentee is entitled to damages to make it whole and should not have to accept a lesser amount because the infringer behaved badly. My objection is to allowing the patentee to elect an accounting simply because the quantum of the accounting would exceed the quantum of damages. The FCA in AlliedSignal did not say that a patentee is never entitled to information allowing it to judge which remedy is greater before making an election; AlliedSignal said that the grant of an accounting cannot turn on which remedy is greater. This is consistent with the view that a successful patentee must establish its entitlement to an accounting on independent substantive grounds, such as the bad behaviour of the infringer, but once it has established that it should be granted an accounting on substantive grounds, it may be granted an inquiry allowing it to make an informed choice so as to ensure that it is at least made whole.

Nova v Dow: Miscellaneous Policy Issues

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 / The Source of the Chilling Effect

In a previous post I discussed the three main policy arguments raised by Rowe J in support of his approach to an accounting of profits, arguing that they in fact support an accounting based on “but for” causation. My last post then addressed the crucial policy issue of the chilling effect. There are two more policy arguments raised by Rowe J. While I address them at more length in Part II of my forthcoming article for completeness in canvassing the policy issues, I will mention them only briefly here as they did not seem to play a major role in Rowe J’s reasoning.

First, Rowe J said that an accounting “discourages efficient infringement: when an infringer’s profits exceed the damages suffered by the patentee” [47]. This is probably a reference to the “catch-me-if-you-can” problem, described by Zinn J at first instance in Rivett 2009 FC 317 [23]. As I explain in more detail in the article, this argument does not support Rowe J’s approach to an accounting because a “but for” accounting is entirely adequate to address the problem and does so without risking a chilling effect.

Second, Rowe J also asserted that “smaller businesses would be disproportionately disadvantaged by [“but for” causation]” [64]. With due respect, this argument is simply not serious, for reasons I discuss in detail in Part II of my the article. The only explanation for it is that Rowe J was casting about for additional arguments to bolster a decision he had already made for other reasons.

Can the Election Between Damages and an Accounting Be Made after Discovery?

Angelcare Canada Inc v Munchkin Inc 2023 FC 1111 Roy J

2,640,384 / 2,855,159 / 2,936,415 / 2,936,421 / 2,937,312 / 2,686,128 / Diaper pail cassette

In Angelcare v Munchkin 2022 FC 507, Roy J held that various claims of Angelcare’s six patents were valid and infringed by Munchkin in the liability phase of a bifurcated trial: see here. This motion concerned a variety of remedial matters preliminary to the remedies phase, specifically entitlement to injunctive relief, entitlement to an accounting of profits; entitlement to punitive damages; and which of the three plaintiffs is entitled to a pecuniary remedy.

Election between damages and an accounting

With respect to entitlement to an accounting, Angelcare did not merely seek an accounting: it sought the entitlement to decide between damages and an accounting after discovery was completed, in order to have the financial information necessary to make the most advantageous choice [15]. Roy J granted this right to elect after discovery, after a review of the authorities which focused exclusively on the issue of entitlement to an accounting, not the narrower issue of whether there is an entitlement to elect after discovery: see [15]–[41] and the Order entitling the Plaintiffs “to claim a monetary remedy, be it damages or an accounting profits.”

This holding is contrary to AlliedSignal (1995), 61 CPR (3d) 417 (FCA) 444 which addressed the same issue: “[t]he appellant is asking for damages or an accounting of profits made by the respondents by reason of their unlawful acts, ‘whichever shall, upon inquiry, prove to be the larger amount’.” This request was denied: entitlement to an accounting “certainly cannot depend on whichever amount would turn out, on inquiry, to be more profitable.” The reason is that “[a]n accounting of profits is an equitable remedy which ought to be allowed by the Court in the exercise of its equitable jurisdiction when the circumstances so warrant.” There must a basis in equity for granting an accounting and “putting as much money as possible into the pocket of the patentee” is not an equitable principle. Roy J did not consider AlliedSignal, presumably because it was not cited to him, and consequently his holding on this point cannot be considered to have any precedential value.

I would also point out that while Roy J also held that Angelcare was entitled to an accounting if it so elected, he relied entirely on caselaw that preceded the SCC decision in Nova v Dow 2022 SCC 43. In a two part article forthcoming in the IPJ and summarized in a series of blog posts, I have argued that Nova v Dow wrought such a major change in the principles on which the quantum of an accounting is assessed that the courts should revisit the principles on which an accounting is granted. I argued that Nova v Dow turned an accounting into a randomized quasi-punitive remedy, and consequently an accounting should only be awarded in cases in which the infringer tried to game the system by knowingly declining to take a licence to a patent which it knew to be valid, in the hopes of escaping detection.

Punitive damages

Roy J declined to award punitive damages [61], rightly, in my view. He noted that there is a very high threshold for awarding punitive damages, which are granted only in “exceptional cases for ‘malicious, oppressive and high-handed’ misconduct that ‘offends the court’s sense of decency’”: [46], quoting Whiten 2002 SCC 18 [36]. He further noted that “[a]llegations of willful and knowing infringement are alone insufficient to support a claim to punitive damages” [45], quoting Bauer 2014 FCA 158 [25]. This is because wilful infringement of a patent which the defendant reasonably believes to be invalid is not malicious at all; on the contrary, it does a public service by enabling a challenge to patents which were obtained without the quid pro quo of a truly new, useful and non-obvious invention. US law does allow for treble damages for wilful infringement, while carving out an exception for cases in which the infringer reasonably believed the patent to be invalid or not infringed, but the US experience, in my view, illustrates the futility of trying to assess the intent of the infringer for such purposes. The Canadian approach, in which wilful infringement alone is not grounds for punitive damages, is clearly preferable.

Bell Helicopter 2013 FCA 219 was the only case brought to his attention by the parties (and the only Canadian case known to me) in which punitive damages were awarded outside the context of litigation misconduct [44]. Roy J distinguished Bell Helicopter on the basis that in that case “Bell Helicopter used the invention as its own to promote its helicopter” [50]: see also [58]. More specifically, in passages quoted by Roy J at [50], the FCA in Bell Helicopter stated “Bell Helicopter promoted the infringing Legacy landing gear as its own invention,” knowing this to be untrue [191], and the FCA went on to say that “Where a person infringes a patent which it knows to be valid, appropriates the invention as its own, and markets it as its own knowing this to be untrue, punitive damages may be awarded” [192]. As Roy J stressed, this was the key fact which took the infringement in Bell Helicopter beyond wilful and knowing infringement to a case in which punitive damages could properly be awarded [58]. Consequently, in my view, Roy J was quite right to distinguish Bell Helicopter on this basis.

In this case, “the Defendants sought to create a product which would be compatible with the Plaintiffs’ pails,” [55], but as Roy J pointed out “there is nothing inherently wrong with developing compatible products. Unless there is patent infringement, that constitutes valid innovation,” which should not be discouraged [56]. “The Defendants chose to compete with the Plaintiffs in an area they believed was not covered by the Plaintiffs’ patents,” and while it turned out that they had failed in that effort, such failure is not morally blameworthy so as to justify punitive damages [56]. Patent remedies must strike a balance by protecting the incentive to invent without chilling competition, and, as Roy J pointed out repeatedly, the remedies of damages and an accounting (until Nova v Dow) strike the right balance except in the most egregious cases [56], [59].

One point which arose on the facts is worth noting, as it is likely a common scenario:

[60] The Plaintiffs seek to reproach that the Defendants’ cassettes were displayed in retail stores where the Plaintiffs’ cassettes were displayed. I cannot see anything wrong with a retailer displaying like products with like products. This is merely common sense. That is especially so with respect to large-surface retailers which represent 80% of the market. As such, there is nothing nefarious which could be held against the Defendants; it would be rather weird if the Defendants had chosen to refrain from marketing their wares in large-surface retailers where 80% of the market is.

This must be right. It is evidence that the defendants believed that their products were truly non-infringing, as they were sure to be caught if they sold their product side-by-side with the plaintiff’s product. If we are going to allow good faith competition, then we should allow vigorous good faith competition.

Injunctive Relief

The main issue relating to injunctive relief was whether an injunction should be granted in respect of early generation products which were no longer being actively marketed, and which (according to the defendants) had been removed from Canada, and which may no longer have been in existence [7]. While there is a maxim to the effect that equity does not act in vain, Roy J pointed out that “if the Defendants have no intent to commercialize in Canada their cassettes of generations 1, 2 and 3, they should not be concerned that an injunction is issued until the various patents at issue have expired” [9]. In light of the uncertainty as to whether those products were still available outside of Canada, it was not clear that the injunction would be futile [12], and Roy J consequently granted the injunction.

Standing

The standing issue concerned the entitlement of the various plaintiffs to claim damages under s 55(1) as persons “claiming under the patentee” during certain periods of time. There were three plaintiffs, Edgewell and Playtex, which were affiliated companies [65] and Angelcare, a member of a separate family of companies [66], [68]. At the risk of glossing over a very complicated set of facts, the gist of the problem is that the three plaintiffs cooperated in selling diaper pail systems in Canada over an extended period of time without always having fully formalized the licensing of the various patents which they each owned. Roy J held that this was not an insurmountable hurdle to standing. The courts have taken an expansive approach to the interpretation of s 55. It is now clear that a licence does not have to be exclusive, nor does it have to be in writing, for a person to qualify as claiming under the patentee [119]. Indeed, it is not even necessary that the person be a licensee: “[A] person ‘claiming under’ the patentee is a person who derives his rights to use the patented invention, at whatever degree, from the patentee” [80], quoting Signalisation de Montréal [1993] 1 FC 341 (FCA) 356-357. In light of this expansive definition, Roy J had little difficulty holding the plaintiffs were all persons claiming under the patentee during the relevant period, in light of the close working relationship between them in the manufacture and distribution of the patented diaper systems [122]–[125], [139]. “I find that there was ample evidence in this case that the Plaintiffs were operating together towards a common goal, thus granting each other the right to use the patents” [129].

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.

Nova v Dow: Three Policy Arguments

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

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 have a two-part article on the decision forthcoming in the IPJ. Part I of that article analyzes Nova v Dow at a doctrinal level. What did Rowe J mean by “cause”? What did he mean by “the non-infringing option”? What did he mean by “the value of the invention”? I summarized Part I in a series of blog posts, listed above. Part II addresses the policy implications of Nova v Dow. Are the policy reasons given by Rowe J persuasive? Will Nova v Dow chill innovation? What is the appropriate response to the decision? This is the first in a series of posts summarizing Part II.

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 the 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 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 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.

As discussed in Part I, Rowe J did not define the terms “non-infringing option” or “causally attributable.”

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.

Purpose of the accounting remedy

Rowe J began his discussion of policy considerations by noting, uncontroversially, that the purpose of the Patent Act is to encourage innovation for the public benefit [43]. He then adverted to three rationales for the accounting remedy: (1) to preserve the patent incentive; (2) a proprietary rationale; (3) a deterrence rationale.

Preserve the patent incentive

Rowe J stated that an accounting serves to “protect the patent bargain,” saying:

[42] Disgorgement is necessary because allowing infringers to appropriate the benefits of the patent monopoly for themselves “discourages research and development, and the disclosure of useful inventions” (Merck [2015 FCA 171], at para. 42). If infringers could keep the profits earned from patent infringement, they could appropriate the time, effort, and risk associated with making the invention for their own benefit. This would make disclosure less likely, and the public would receive fewer innovative products.

[48] Disgorging anything less [than the profits caused by the invention] would reduce the incentive to invent (Merck, at para. 42; ADIR, [2020 FCA 60] at para. 39).

With respect, this paragraph reflects a basic conceptual error. It is true that the primary objective of patent remedies is to preserve the incentive to innovate. It is wrong to suggest that this is the purpose of the accounting remedy; that purpose is served by damages.

The patentee’s incentive to innovate is provided by the profits the patentee expects to make from the exploitation of its invention in the absence of any infringement. The damages remedy preserves the incentive to innovate by restoring the patentee to the position it would have been in but for the infringement: Merck [48], [49]. That is why damages are available as of right, while an accounting is discretionary; that is why TRIPS requires that damages are available as a remedy (Art 45.1), while an accounting is merely permitted (Art 45.2); that is why an accounting is not available at all in the United States.

Rowe J cited Merck for the proposition that disgorgement is necessary to preserve the incentive to invent. Merck does not stand for that proposition. Merck was a damages case, and the passage quoted by Rowe J specifically addressed “[t]he purpose of an award of damages” [41], not the purpose of disgorgement. Moreover, the FCA in Merck specifically endorsed the “but for” test for causation [45], which was rejected by Rowe J in Nova v Dow.

Nor does ADIR support Rowe J’s proposition. While ADIR was an accounting case, the cited paragraph simply says that an accounting is not punitive and nothing in that paragraph or the decision as a whole says that an accounting preserves the incentive to invent. Moreover, ADIR [47] also explicitly endorsed “but for” causation.

In summary, Rowe J’s assertion the purpose of the disgorgement remedy is to preserve the incentive to invent is wrong in principle and is not supported by the authorities he cites.

Proprietary interest

The second rationale given by Rowe J was that “any profits improperly received by the defendant as a result of its wrongful use of the plaintiff’s property. . . having been earned through the use of the plaintiff’s property, rightly belong to the plaintiff” [46]. This correctly links the accounting remedy to the fact that a patent is a property right. However, this link directly implies “but for” causation should be used in assessing an accounting. As Professor Lionel Smith puts it: “[i]f disgorgement is allowed, the effect is that rights cannot be taken; they must be purchased”: (1994), 24 Can Bus LJ 121, 123. Saying that the defendant is required to restore to the plaintiff all profits earned by the defendant through the use of the plaintiff’s property is equivalent to saying that the defendant should be restored to the position it would have been in if it had been prevented from taking the patentee’s rights by an injunction granted quia timet. This directly implies that an accounting should be based on “but for” causation, looking to the position the infringer would have been in had it been prevented from infringing.

The notion that an accounting reflects the principle that rights must be purchased, not taken, also reflects the rationale for injunctive relief set out by Calabresi & Melamed in “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral”(1972), 85 Harv L Rev 1089, one of the most cited law review articles of all time.

Thus, the proprietary nature of the accounting remedy, both in terms of the historical doctrinal link and in terms of the most widely accepted theory of injunctive relief, supports “but for” causation as the correct approach to assessing the quantum of the disgorgement.

Deterrence

Third, Rowe J [47] adverted to the need for deterrence:

Deterrence flows from disgorgement. The incentive to infringe is minimized if an infringer has to disgorge all profits causally attributable to the invention.

At the same time, Rowe J stated repeatedly that an accounting is not punitive and he emphasized (original emphasis) that:

[48] [D]eterrence should not be conflated with punishment. An infringer can be liable for patent infringement even if they had no knowledge of the patent or genuinely believed that the patent was invalid. An accounting of profits should therefore discourage infringement but do no more. This requires disgorging only the profits causally attributable to the invention. Requiring infringers to disgorge anything more would constitute punishment and risk chilling public innovation and competition.

Thus, Rowe J was evidently of the view that his approach would not chill innovation because it is not punitive and the reason it is not punitive is that the profits to be disgorged are causally attributable to the invention.

With due respect, this is nothing more than word games. The incentive effect of a $500m award is the same whether or not we affix the label “punitive” to it. The chilling effect doesn’t turn on the words used to describe the remedy; it turns on the incentive structure created by the remedy, which in turn depends on the nature of the causation concept. The mere fact that the remedy incorporates a causation concept does not guarantee it will not have a chilling effect; it matters which causation concept.

Rowe J cited the FCA decision in ADIR [37] for the proposition that an accounting ensures that infringers are deterred “but not punished” [44]. While the FCA did indeed so hold, the Court emphasized that it is “but for” causation specifically that ensures the accounting remedy is not punitive: see ADIR [39]–[49], esp [47].

In short, the mere fact that Rowe J stated that his approach is not punitive does not mean it does not have a chilling effect. The chilling effect depends on the actual nature of the remedy, not the terminology that is used to describe it. While Rowe J rejected “but for” causation, the FCA cases cited by Rowe J support the view that an accounting must be based on “but for” causation to avoid the chilling effect. As I will discuss in the next post, the FCA is correct on this point, and Rowe J is wrong.

Nova v Dow: Rivett on the Facts

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

In my last post on Nova v Dow I argued that Rowe J’s rejection of “but for” causation was driven by his commitment to the use of conventional seed as the appropriate NIO in Rivett 2009 FC 317 aff 2010 FCA 207, even though, as Rowe J specifically noted, conventional seed was in fact unavailable and so could not have been the appropriate comparator on strict “but for” causation. I suggested that the central intuition driving Rowe J’s decision is that the value of the patented invention is the difference between the profit that was made with the patented soybean and the profit that could have been made with conventional soybean, whether or not conventional soybean was actually available. In that post I critiqued that intuition, arguing that an accounting must distinguish between the profits attributable to the use of the invention and the profits attributable to the special attributes of the infringer.

But what about Rivett itself? Of course, the SCC is not bound by Rivett, and a single decision does not constitute a strong line of authority. But nonetheless, if Rivett was correctly decided on its facts, this seems to present a challenge for the “but for” approach to an accounting.

While Rowe J characterized Rivett as being inconsistent with “but for” causation [64], Zinn J in Rivett [24] expressly endorsed “but for” causation. If Zinn J accepted “but for” causation, how could he have assessed the accounting based on a comparator that Rivett could not in fact have used?

The answer is that the use of conventional soybean as a comparator in Rivett was not a matter of principle, but rather a matter of evidence. Rivett was the first decision after Schmeiser to address the question of an accounting. Monsanto argued that the differential profit approach only applied to an “innocent infringer,” and Rivett should therefore be required to disgorge his entire actual profit. This was the main legal issue at trial. Zinn J held that the differential profit approach should indeed be used: [42]–[56].

The next question was as to the comparator. Rivett failed to establish what he would in fact have done but for the infringement. It seems that he simply assumed that the appropriate comparator was conventional soybean, presumably in reliance on Schmeiser. It’s not clear whether he even led evidence as to what he would in fact have done: that conventional soybean was unavailable was elicited only in cross-examination [60]. 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 Zinn J noted, this would be tantamount to making the unreasonable assumption that but for the infringement, Rivett would have left his fields fallow [59]. It is now clear that the onus is on the infringer to establish the availability of the non-infringing alternative. But the doctrine was just developing at this time, and it would have been very harsh to require disgorgement of the full profits, knowing that is grossly excessive, on the basis that Rivett had failed to discharge an onus that was not yet clearly established in law. Moreover, as the Court of Appeal pointed out, it was Monsanto’s own evidence comparing conventional and patented soybean which established that the profit differential was 18%: [FCA 47, 56]. And Rivett had actually grown a substantial crop of conventional soybeans [FCA 57]; the lack of availability must have been temporary or otherwise idiosyncratic. In the circumstances, Monsanto should not be permitted to put Rivett to the strict proof of the NIO in order to extract a disgorgement that was shown to be excessive by Monsanto’s own evidence.

What Causation Concept Is to Be Used in Allocating Fixed Costs?

GreenBlue Urban North America Inc v DeepRoot Green Infrastructure, LLC 2023 FCA 184 Gleason JA: Woods, Mactavish JJA varg 2021 FC 501 McDonald J

            2,552,348 / 2,829,599 / Integrated Tree Root and Storm Water System

DeepRoot’s 348 and 599 patents relate to a landscaping system to promote healthy urban trees using a subsurface structural cell system that supports the hardscape (eg sidewalk and paving). At trial, McDonald J held DeepRoot’s patents to be valid and infringed, in a straightforward decision which turned on the facts: see here. McDonald J denied DeepRoot’s request to be granted an accounting because she was not satisfied that GreenBlue had in fact made a profit on infringing sales [FC 280]. GreenBlue appealed on liability and DeepRoot cross-appealed McDonald J’s refusal to grant an accounting. The FCA dismissed GreenBlue’s liability appeal on the basis that McDonald J had not made any material error of law and her findings of fact were supported by the evidence.

The FCA held that McDonald J erred in refusing to grant an accounting. The contentious issue was the deductibility of fixed costs. These are costs, such as the cost of lighting the factory or the cost of the financial department, which are necessary to the infringement—you can’t make infringing widgets if the lights are off—but which do not vary with the extent of the infringement and which would have been incurred even if there had been no infringement at all—the lights will be on whether the widgets the factory is making are infringing or non-infringing.

Deductibility of fixed costs is a tricky question. On the one hand, if the fixed costs are the same whether or not the product is infringing, this means that those costs are not caused by the infringement, and so should not be deducted. On the other hand, fixed costs are actual costs of production; the plant cannot make infringing products if the lights are turned off and a business that does not cover its fixed costs will not be profitable. In Nova v Dow 2020 FCA 141, Stratas JA was persuaded by the latter argument, and held that “[a]ny infringer, regardless of whether it is operating at full capacity, should be able to deduct a proportion of its fixed costs” [162]. This is referred to as the “full costs” approach, in contrast with an “incremental costs” approach in which only costs that vary with the infringement are deductible. See here for a more extended discussion. (The issue of deductibility of fixed costs was not addressed by the SCC on appeal in Nova v Dow 2022 SCC 43.)

The difficulty with a full costs approach is determining what proportion of the fixed costs can be deducted. Nova v Dow itself doesn’t help us answer that question. Fothergill J at trial had allowed deductibility of some fixed costs, but on the basis of an opportunity cost approach endorsed in Dart Industries [1993] HCA 54, according to which the proportion of fixed costs to be deducted turns on the proportion of fixed costs which sustained the foregone opportunity: 2017 FC 350 [161] But Stratas JA explicitly rejected Dart Industries[154], which Fothergill J had relied on, which means that we cannot rely on an opportunity costs approach to tell us what proportion of the fixed costs should be deducted. (While he rejected the reasoning underpinning Fothergill J’s deduction, he nonetheless approved the deduction itself, apparently on the view that Dart Industries is a kind of fixed cost approach, and since a full costs approach is not unsound, it was not an error for Fothergill J to use a full costs approach even though it was based on a wrong principle [163]. As discussed here, the Dart Industries approach is arguably a variation on the incremental cost approach, but that doesn’t really matter at this point.) The point of all this is that while we know the principle applied by Fothergill J in Nova v Dow itself, that does not help us decide what proportion of the fixed costs are to be deducted, because the principle applied in Nova v Dow was wrong.

Turning back to the case at hand, the discussion of this point at trial is brief and cryptic. McDonald J [FC 278] noted the statement in Nova v Dow 2020 FCA 141 that “the ‘full costs’ approach should always be available to an infringer” [145] and then remarked that “[h]aving accepted the financial evidence of GreenBlue, I am not satisfied that GreenBlue has in fact made a profit on sales of RootSpace” [FC 280]. Gleason JA’s decision is not much clearer as to the specifics, but it appears that the main fixed cost at issue was general overhead expenses [72] eg keeping the lights on, and it seems that McDonald J had allowed a deduction of fixed costs proportionate to the percentage of sales generated by the infringing product as a proportion of total sales [92]. (It was uncontested that incremental costs may be deducted [66].)

DeepRoot’s argument, which was accepted by the FCA, was that:

[72] the Federal Court erred in law by failing to conduct the necessary analysis to establish a causal connection between GreenBlue’s claimed overhead and the profits it earned through infringement, thereby allowing GreenBlue to wrongfully shield its profits from disgorgement. DeepRoot adds that there was no evidence to establish what portion of GreenBlue’s general overhead expenses were related to the infringing sales and that it was accordingly an error for the Federal Court to have accepted GreenBlue’s percentage allocation.

So, McDonald J’s error was a failure to establish a causal link between the fixed costs and the infringement.

In Nova v Dow, Stratas JA had implied that it is only the costs that are “caused by the infringement” that are disgorged: [153] (see similarly [157]). The requirement of a causal connection was emphasized even more strongly by Gleason JA in this case. In her review of the law, she stated that “An accounting of profits. . . requires that the defendant disgorge to the plaintiff the amount of profits earned by reason of the infringement” [79] and “With respect to both the remedy of damages and that of disgorgement, proof of a causal connection to the infringement is required” [81]. Similarly, she stated that the full costs approach allows deduction of “fixed overhead costs causally connected to the infringing sales” [85] and “fixed costs that are causally attributable to the infringing product” [88]. She concluded that:

[89] fixed non-incremental overhead costs may be deducted from sales to establish an infringer’s profit, but proof of causation is still required. In other words, the defendant must establish some link between the claimed portion of the overhead and the infringing sales.

This is all well and good. But what is the nature of the causal link? We need to know the causation concept for the parties to know what kind of evidence is relevant.

The most prominent causation concept in law is “but for” causation. On that view, costs are caused by the infringement if they would not have been incurred but for the infringement. In other words, if the causation concept is “but for” causation, then we end up at the incremental cost approach. Since Stratas JA rejected the incremental cost approach in Nova v Dow, “but for” causation can’t be the relevant causation concept. And indeed, Stratas JA also rejected “but for” causation fairly explicitly: see Nova v Dow FCA [148], [151], [153].

The other main causation concept known to law is material contribution. But the material contribution test is disfavoured and is confined to special circumstances, in particular where it is impossible to determine which of a number of negligent acts by multiple actors in fact caused the injury, but it is established that one or more of them did in fact cause it: Clements v Clements 2012 SCC 32 [13], [17], [42]. While the SCC has not ruled out the possibility that material contribution might be applied in other contexts, but no one has ever said this is appropriate in the context of deduction of fixed costs. Moreover, it is difficult to see how it could be applied, since material contribution goes to liability, not apportionment. If the defendant is found liable under a material contribution approach, the defendant is jointly and severally liable for the entire loss: Clements [12]. It is an all or nothing result, which provides no basis for an apportionment.

What other causation concepts might be used? While Stratas JA in Nova v Dow rejected “but for” causation, he did not specify an alternative causation concept. In the absence of a clear causation concept, we might then look to the facts to discover what approach is appropriate. Nova v Dow itself does not provide an answer. Stratas JA only referred in passing to the causation requirement and he did not expressly endorse any causation concept. Nor did he give any example of an appropriate deduction. The closest he came was to say that an infringer would only be entitled to deduct a proportion of its fixed costs: “For example, if an infringing product occupies 1% of a factory’s production capacity or volume, only 1% of the fixed costs will be deducted” [161]. This was only by way of a passing example to show that the full costs approach does not imply that the infringer would be able to subsidize its non-infringing products. More importantly, what is the causation concept which supports deduction of a proportionate amount by sales, or profits, or weight, or plant capacity, or whatever it might be? Without a principled causation concept, a deduction based on any of these factors is arbitrary and unprincipled.

As noted, it appears that in this case that McDonald J allowed deduction of fixed costs proportionate to the percentage of sales generated by the infringing product as a proportion of total sales [92]. Gleason JA gave a convincing example to show why this is not always appropriate [94]. But it is unlikely that a deduction proportionate to volume or capacity is always preferable.

In this case, it seems that the failure to call evidence was the key deficiency: see [98]–[101]. It is reasonable that neither volume, nor capacity, nor sales would always be the correct basis for apportionment, but any of them might be, depending on the evidence. But in the absence of a causation concept, what exactly is that evidence trying to prove? How can we know what constitutes evidence of causation, if we don’t know what “causation” means?

Gleason JA gave the example of the trial decision in Nova v Dow, 2017 FC 637, in which Fothergill J allocated fixed costs based on “billed volume” in light of evidence that “the fixed costs per pound were substantially the same for infringing and non-infringing products” [98]. I must admit that I don’t understand what it means to say that fixed costs were the same for infringing and non-infringing products. Fixed costs are costs which do not vary with production, so I don’t see how such costs can be the same for different products, except in a trivial sense that the cost of keeping the lights on is the same no matter what the plant is producing. Perhaps the expert report itself would be more illuminating, but frankly, I doubt it. If an expert has developed a new and appropriate causation concept, it is important as a matter of law that the court tell us that is. In the absence of a specific causation concept which is to be applied to the facts at hand, evidence purporting to tie fixed costs to one product or another is nothing more than a campfire story—a tall tale spun by an expert, but a tall tale nonetheless.

Gleason JA did not specify a causation concept. Instead, she concluded her discussion by saying that “What the foregoing examples demonstrate is that the approach to quantifying overhead costs for purposes of establishing profits earned through infringement is highly fact-dependent” [95]. She then remitted the matter to McDonald J. It is true enough that application of the appropriate causation concept to the facts is highly fact dependent. As the SCC said in Clements v Clements [9], “[t]he ‘but for’ causation test must be applied in a robust common sense fashion.” But the SCC in Clements did specify the causation concept—namely “but for” causation. It is not enough to ask the trial court to look to the facts and apply common sense. Yes, the court must look to the facts — but what are they supposed to be looking for? It is the job of the trial court to apply the law to the facts, and it is the job of the Court of Appeal to tell the trial court what the law is, and the nature of the causation concept is a matter of law.

In the absence of any causation concept, the expert witnesses will tell some kind of story as to why their preferred deduction has some ‘causal’ link to the infringement. McDonald J will have to accept one side or the other, and as long as there is some kind of evidence to point to containing the word “cause”, presumably the FCA will review her decision on a deferential standard and that will be the end of it. But unless and until the FCA tells us what the causation concept is, the deduction of fixed costs in this case and in all future cases will simply be arbitrary and unprincipled.

In my view the appropriate causation concept is “but for” causation. If the FCA wants to abandon “but for” causation in this context, it is incumbent on the Court to tell us what to replace it with. I know the FCA is just following in the footsteps of the SCC in Nova v Dow, in which the Rowe J insisted on the need for a causal link while steadfastly refusing to tell us the causation concept. But the failure of the SCC to define causation is all the more reason that the FCA has to step up.