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.

An Action under the PM(NOC) Regs Has the Same Effect as an Action under the Act

Janssen Inc v Apotex Inc 2023 FCA 253 Locke JA: de Montigny CJ, Goyette JA revg 2023 FC 912 Manson J

2,655,335 / paliperidone regimens / INVEGA SUSTENNA / NOC

This decision addresses two issues of interest: abuse of process under the PM(NOC) Regs and the kinds of activities that may properly be enjoined. This post deals with each in turn.

Apotex sought to launch a generic version of Janssen’s INVEGA SUSTENNA. To that end, Apotex served an NOA alleging non-infringement. Janssen responded by bringing an action pursuant to s 6 of the PM(NOC) Regulations. Apotex lost: 2022 FC 107 discussed here. (An appeal has been heard and the FCA decision is pending [4]). After losing that action, Apotex served a second NOA in respect of the same product, this time alleging invalidity instead of non-infringement. Janssen again brought an action pursuant to s 6, which Apotex defended on the same invalidity basis as in its NOA. Janssen moved for summary judgment on the basis that this is an abuse of process by relitigation. Manson J held it was not, and dismissed Janssen’s motion for summary judgment. The FCA has now reversed.

The overarching point emerging from Locke JA’s decision is that “an action under section 6 of the Regulations is to proceed and have an effect much like a normal patent infringement action” [46]. In the absence of special circumstances, a defendant in a normal patent infringement action that defended itself on the basis of non-infringement, without challenging the validity of the patent, would not be allowed to commence a separate impeachment action concerning the same patent [47]. The same reasoning applies to actions under the Regulations [47]. That follows from the general principles of “judicial economy, consistency, finality and the integrity of the administration of justice” which underpin the law related to abuse of process by relitigation: [10]–[11], citing C.U.P.E. 2003 SCC 63 [37]. While Manson J’s decision relied on a rather technical reading of the Regulations (see here) to distinguish actions under the Regulations from actions under the Act, this distinction is not sound. There is no tension between general principles of abuse of process and the principles applicable under the Regulations. On the contrary, the RIAS to the 2017 amendments “makes it clear that a principal aim was to avoid multiple proceedings concerning patents on medicines, regardless of whether those proceedings are within or outside the Regulations” [44]; moreover, “the aim of avoiding multiple proceedings was front and centre” [45].

Under the old Regs, the second person was held strictly to its NOA, and this might have provided a reason for distinguishing NOC proceedings from a regular action. But Locke JA noted that under the new Regs, it is now established that it is permissible to amend the pleadings in an action under s 6 so as to introduce issues not raised in the underlying NOA: [46], citing Sunovion v Taro 2021 FCA 113 (see here).

Locke JA pointed out that the other arguments made by Apotex as to why there are good reasons to permit sequential NOAs can equally be made in the context of normal patent infringement actions, and are no more persausive in the NOA context [48]. Consequently:

[53] In my view, it was intended that the second person should raise all of its allegations in its NOA, and it should not to keep some in reserve in the event that it is not initially successful. Though this might lead to more complicated proceedings, it would meet the explicit goal of addressing all issues in a single action.

Locke JA therefore held that Manson J had erred in law by not recognizing that the same principle applies in the context of an action under the Regs as in an action under the Act [43]. Neither party asked that the matter be remitted, and Locke JA consequently considered Janssen’s motion anew [59] and declared that Apotex’s invalidity defence to be an abuse of process [60]. If Apotex wished to raise an invalidity argument, it should have done so in the first action [60]. Janssen was accordingly granted the relief it sought [71].

An entirely separate point of interest was raised regarding the remedy. Janssen requested an injunction prohibiting Apotex from making, selling or using the invention; these are the patentee’s express rights under s 42. This much was uncontroversial. But the injunction sought by Janssen also included prohibitions on “(i) offering for sale, (ii) marketing, (iii) having marketed, (iv) importing, (v) exporting, (vi) distributing, or (vii) having distributed” [64]. The exclusive right to engage in these activities is not explicitly granted by the Act. Apotex objected to the inclusion of these acts in the injunction on the basis that they fall outside the scope of the patentee’s rights.

Locke JA dismissed Apotex’ objection. He noted that injunctions in such terms had been granted in other cases [65]–[66] — though I don’t think much weight can be put on that unless the terms were contested. More significantly, he noted that “[w]hile section 42 of the Patent Act refers specifically to the patentee having ‘the exclusive right, privilege and liberty of making, constructing and using the invention and selling it to others to be used’, it is well understood that this does not constitute a definition of infringement” [67]. The SCC in Monsanto v Schmeiser 2004 SCC 34 [34] defined infringement as being “any act that interferes with the full enjoyment of the monopoly granted to the patentee.” As Locke JA noted [68], the SCC in Schmeiser [58] also held that “[i]f there is a commercial benefit to be derived from the invention, it belongs to the patent holder.” Consequently, Locke JA held that

[69] I am satisfied that the wording proposed by Janssen for the injunctive relief is appropriate. All of the activities that Apotex objects to including in the injunction are commercial in nature, and would presumably be done for a commercial benefit. The activities of distributing and having distributed are essentially sales and are thus clearly infringing. The other activities involve commercial use of the patented invention as contemplated in Schmeiser, and would therefore presumably also be infringing. The principle goal of the injunction is to prevent future infringement of the exclusive rights granted by the 335 Patent. In my view, the proposed injunction achieves this, and in clear terms.

Locke JA is of course quite right to say that the rights of the patentee are not limited to the rights enumerated in s 42, per Schmeiser. But there remains a question as which specific non-enumerated rights are exclusive to the patentee. Locke JA’s discussion might well be taken as holding that the activities listed in the injunction and objected to by Apotex — (i) offering for sale, (ii) marketing, (iii) having marketed, (iv) importing, (v) exporting, (vi) distributing, or (vii) having distributed — are per se infringement, at least when done for commercial purposes. While there is caselaw that comes close to saying that activities such as importing and exporting are infringing, I don’t think the point is quite settled. While it would certainly be consistent with Schmeiser to hold that these activities are infringing, it does not flow inexorably from Schmeiser, and there are some issues with so holding that were not addressed in this brief paragraph.

So, Locke JA stated that “distributing and having distributed,” are “clearly infringing” because they are “essentially sales.” This strikes me as potentially problematic, depending on what is meant by “distributing.” Does this mean that the common carrier which transports infringing goods from the manufacturer’s warehouse to a retailer is an infringer? Is a logistics company which organizes distribution of infringing goods on behalf of the manufacturer an infringer which can be named as a defendant in an infringement action? These activities do not seem to me to be “essentially sales.” Perhaps these activities should be considered infringing, but this is a different question from whether Apotex, which has been found to infringe on the enumerated grounds, should be prohibited from engaging in distribution.

Locke JA also said that the other activities are “presumably” also infringing. There is some difficulty with “offering for sale” in particular. In Domco Industries v Mannington Mills (1990) 29 CPR(3d) 481 (FCA) 492, the FCA held that a sale was not established even though “[t]here is no doubt that [the defendant] offered infringing goods in Canada” (491). It might be argued that Domco, which predates Canada’s accession to TRIPS, is no longer good law in light of TRIPS Art 28, which requires that a patent shall confer on its owner the exclusive right of “offering for sale.” On the other hand, a treaty such as TRIPS has to be implemented in legislation, and the statutory language defining the patentee’s exclusive rights has not changed since Domco. It might also be argued that Domco is no longer good law because it is inconsistent with Schmeiser. Or Domco might be distinguished because of the cross-border nature of the activity in that case. But it is difficult to accept that Locke JA intended to hold definitively that “offering for sale” is infringing in a decision that didn’t even mention Domco. I don’t mean to comment on the scope or continued vitality of Domco, one way or the other, but I don’t think Locke JA meant to either.

Consequently, I think it is probably better to read Locke JA’s decision more conservatively, as holding only that an injunction is properly granted to prohibit these activities, even if they are not infringing per se, essentially on a quia timet basis. That does not imply any change in the law. Even under Domco it is clear that once infringement has been established, the infringer may be enjoined from offering to sell: see eg AlliedSignal (1995) 61 CPR(3d) 417 (FCA) 446. And in appropriate circumstances offering to sell or marketing may form the basis for a quia timet injunction: see eg No-Fume (1935) 52 RPC 231 (CA) 251–52. This interpretation implies that an infringer, like Apotex, which has been found to infringe on the basis of the enumerated grounds, might properly be enjoined from “distributing and having distributed,” while leaving open the question of whether a logistics company or common carrier engaged in distribution would itself be an infringer.

The Public Interest Factor in Norwich Orders

Seismotech IP Holdings Inc v Apple Canada Inc 2023 FC 1649 Grammond J

Seismotech owns patents related to intelligent thermostats and it wishes to sue consumers who bought and used such devices in their homes [1]. In a previous motion in the same litigation, 2023 FC 1335, Seismotech resisted adding the manufacturer of the allegedly infringing product to the action it brought against the consumers. As discussed in my post on that motion, Seismotech appears to be a patent assertion entity (PAE), which is focusing on consumers as they will be soft targets who will prefer to enter into nuisance value settlements rather than defending the patent vigorously.

This decision relates to a Norwich order sought by Seismotech which would have required Apple to disclose the names and addresses of consumers who downloaded the apps controlling such intelligent thermostats from the App Store [1]. The factors usually taken into consideration for granting a Norwich were recently summarized in Voltage Pictures 2018 SCC 38 [18], quoted at [12]. Grammond J refused to grant the order, on the basis that Seismotech failed to show that it has a bona fide claim (the first factor), and because the public interest does not favour the granting of a Norwich order (the fifth factor) [2]. Grammond J’s analysis on both points is of interest, but I will start with the public interest analysis as it bears on Seismotech’s litigation strategy and will be relevant to PAE litigation more broadly.

The thrust of the decision is that the courts will not exercise their discretion to facilitate a litigation strategy that is designed to extract settlements from consumers who are not in a position to effectively defend the claims made against them and so will settle simply to avoid getting embroiled in litigation. I entirely agree with his analysis, and I can’t do any better than to reproduce the key paragraphs.

Grammond J noted that while the public interest prong typically focuses on privacy concerns, that is not the only relevant consideration [40]. More broadly, “a Norwich order facilitates the search for the truth” [41].

[42] This, however, works both ways. Access to justice is important not only for plaintiffs, but also for defendants. Civil litigation is an adversarial process. Truth is expected to emerge from the process because assertions made by one party are subject to challenge by the other. For this to happen, both parties must have a genuine opportunity to put their cases forward. There is a serious risk that a matter will not be correctly adjudicated if the defendant is deprived of access to justice or is ill equipped to assert available defences.

[44] Special considerations arise when a party proposes bringing an action in patent infringement against a large number of individual consumers, each having a relatively modest amount at stake. Patent infringement cases are inherently complex. Patents are intended to be read by a person of skill in the art, not by persons who lack technical skills, such as judges and lawyers and, a fortiori, individual consumers. For this reason, prosecuting or defending an action in patent infringement almost always requires the presence of expert witnesses. In a large proportion of such cases, the validity of the patent is challenged on a number of grounds, which reinforces the need for expert evidence. The quantification of damages also often raises complex issues. For all these reasons, patent litigation is costly. Costs awards made by this Court provide a glimpse of the magnitude of the financial resources needed to defend such an action, which are often measured in millions of dollars. . .

[45] The nature of the technology at stake in this case compounds the difficulty of defending the claim. Very broadly, Seismotech’s patents involve the use of information technology to provide sophisticated manners of controlling devices such as heaters, gas fireplaces and the like. End-users of intelligent thermostats cannot be expected to read the patents at issue and to construe their claims. Moreover, they do not have access to the inner workings of the device they own or the app they downloaded. Without the assistance of the manufacturer, it would require considerable effort and expertise to disassemble the device and its code to ascertain whether it infringes the claims of Seismotech’s patents. This is unlike simpler mechanical inventions that a layperson may more easily understand. . . .

[46] It is obvious that meaningfully defending Seismotech’s action is entirely out of reach for the individual consumer. Even accepting Seismotech’s theory that it is entitled to recover each consumer’s utility bill savings, the amount at stake for each defendant is unlikely to exceed a few thousand dollars. The Court is not aware of any realistic manner of providing individual consumers with adequate legal representation in the defence of such an action that would be proportionate to their own potential liability. Seismotech explicitly declined to attempt to certify this action as a reverse class action. Seismotech’s suggestion that defendants could pool their resources to defend the action appears out of touch with reality, given the number of individual consumers involved and the amount at stake for each of them.

[47] Given the practical impossibility of defending the action, it is foreseeable that many defendants will feel compelled to accept an offer to settle regardless of the merits of the case.

With all that said, in some circumstances the end-users are appropriately named as defendants.

[48] The complexity of mounting a defence sets this case apart from copyright infringement cases in which a Norwich order was issued to identify a large number of individual defendants. In those cases, there is rarely any debate about the plaintiff’s copyright over the musical or cinematographic work that was copied or downloaded by the defendants. It appears that the defence is usually that the owner of the IP address is not the person who illegally copied the work. It stands to reason that the factual and legal complexity of such a defence bears no relationship to a patent infringement action.

While I agree that complexity is a distinguishing factor, there is another difference that I would suggest is relevant to the public interest analysis. The consumer in most patent cases — certainly in this one — is an innocent infringer, who purchases the goods from a mainstream outlet in the reasonable belief that any intellectual property issues have been dealt with. In copyright cases, the individual defendants typically know full well that the uploading or downloading is illegal, even if they might express ‘information likes to be free’ style arguments as to why the law is wrong. (I recall the horror on the face of one of my students after we discussed the reverse class action copyright cases.) Another distinguishing feature is that the copyright owners in such cases have made very considerable efforts to go after larger entities, such as ISPs, and they have been led to pursue individual defendants because their strategies aimed at ISPs have not proven entirely satisfactory.

Another example where end-users are appropriately pursed is where the end-user is a large entity, with the resources and interest to defend the case on the merits:

[49] Seismotech also relied upon Wobben Properties GmbH v Siemens Public Ltd Co, [2014] EWHC 3173 (Pat), to argue that a Norwich order can properly be used to reveal the identity of the end-users of patented technology. It is obvious, however, that the proposed defendants in that case were large businesses that, one can assume, had the resources to defend a patent infringement action involving complex technology. If anything, this case shows that the character of the parties and the manner in which the proposed litigation is likely to unfold are relevant factors for deciding whether a Norwich order should be issued.

In some cases, where a small entity inventor supplies a crucial patented component to a large entity end-user, the end-user may even be better placed to defend the action.

When I say that in some cases it is appropriate to pursue the end-user while in others it is not, I am of course not saying that the plaintiff does not have a legal right to pursue the end-user in the latter category. The question is whether it is appropriate in the sense of being in the public interest, so as to properly come into play in a discretionary order such as a Norwich order. The difficulty of drawing any bright line between cases in which it is, or is not, appropriate shows the wisdom of making this one factor in a holistic consideration.

On the first point, the requirement of a bona fide case, Seismotech sought to have the motion granted on the basis of a bare assertion of belief that the defendants infringed, without any supporting evidence [23]; Seismotech’s owner refused to even explain the basis for his belief [25]. Seismotech argued that evidence that a wrongful act has been committed is not necessary to obtain a Norwich order and that all that is required is to show that the plaintiffs really do intend to bring an action [15]. Grammond J rejected this argument, holding that while a plaintiff need not show that the claim is likely to succeed [14], “the mere assertion of a cause of action, without any factual foundation, is insufficient” [16]. I won’t go through Grammond J’s analysis of the cases except to say I agree with it, but I will highlight one comment:

[29] A useful way of looking at the matter is to ask whether the statement of claim, together with [Seismotech’s owner’s] evidence, would withstand a motion to strike. The test for striking out a claim does not have the exact same purpose as the requirement for a bona fide claim in the test for a Norwich order. Nevertheless, it is difficult to contemplate the issuance of a Norwich order where the statement of claim is so deficient that it is liable to be struck.

This does strike me as a very useful test, at least for the minimum evidentiary threshold. If a statement of claim would be struck when asserted against a defendant, how can it be the basis for an order against a third party?

On the facts, Grammond J found the claim to be “purely speculative” and hence it was not bona fide [35]. He also helpfully distinguished this case from the typical copyright infringement cases:

[36] Typically, the plaintiff provides a forensic investigation report showing that a person using a certain IP address downloaded a file containing music or a movie, in which the plaintiff holds the copyright. In such a case, the report provides a plausible basis for assuming that there was a copyright infringement, as the very act of unlawfully downloading the copyrighted work is the infringing act. The investigator is able to report that the work downloaded by the user and the copyrighted work are the same. In contrast, the mere fact that consumers downloaded the apps in this case does not give any indication that the apps, the devices or their use by the consumers infringe Seismotech’s patents.

What Is the Evidentiary Threshold for Denying a Permanent Injunction on Public Interest Grounds?

AbbVie Corporation v JAMP Pharma Corporation 2023 FC 1520 McVeigh J

2,504,868 / 2,801,917 / 2,904,458 / adalimumab / HUMIRA / SIMLANDI

As discussed in a previous post, in this decision McVeigh J denied a permanent injunction to AbbVie even though she found that its 458 patent was valid and infringed. This is very unusual. While it is clear that an injunction is a discretionary remedy, it is also well-established that a permanent injunction will only be refused in “very rare circumstances” (Valence v Phostech 2011 FC 174 [240]), as McVeigh J acknowledged [642]. Indeed, I believe this is the only decision apart from Unilever (1993) 47 CPR(3d) 479 (FCTD) to entirely refuse a permanent injunction to a successful patentee. In Jay-Lor 2007 FC 358 [263], Snider J declined to grant a permanent injunction on the basis that it was unnecessary, as the defendant had not manufactured an infringing product for over two years; and in Janssen v Abbvie 2014 FC 489 Hughes J granted a partial injunction, for reasons I will return to. There have also been a few cases in which the permanent injunction was tailored with a short run-off period in which infringing sales or delivery was allowed: Janssen-Ortho v Novopharm 2006 FC 1234 and Weatherford 2010 FC 667; in the UK see similarly Virgin Atlantic v Premier Aircraft [2009] EWCA Civ 1513.

As a matter of law, property rights of all kinds are normally protected by injunctive relief. Why? That question was famously answered by Calabresi & Melamed in one of the most cited law review articles of all time: “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral” (1972) 85 Harv L Rev 1089. Calabresi & Melamed argued that when a right is protected by injunctive relief the owner of the right can set the price at which the right is purchased in a voluntary negotiation, whereas when a right is protected only by damages it is the court that determines the value of the right. The advantage of property rights is that the parties will always know the true value of the right better than the court; the advantage of liability rules is that transaction costs and related problems, such as holdout, may mean that a voluntary negotiation does not reflect the true value of the property.

With that in mind, we can divide cases in which an injunction is properly refused into two broad categories. One is where the grant of an injunction would allow the patentee to extract substantial sunk costs. The classic article is Lemley & Shapiro, “Patent Holdup and Royalty Stacking” (2007) 85 Tex L Rev 1991. This is well-recognized as the main issue in the FRAND context, as well as with patent assertion entities (PAEs) aka ‘patent trolls.’ As a result, injunctions are regularly refused to PAEs in the US. Tailoring of injunctions to allow a runoff period or to allow for redesign, such as in Janssen-Ortho v Novopharm and Weatherford, may be an appropriate partial solution to this problem: see generally Contreras & Husovec (eds), Injunctions in Patent Law: Trans-Atlantic Dialogue on Flexibility and Tailoring (Cambridge University Press, 2022) (and see my Canada chapter in that volume for a discussion of Unilever).

The second is a more amorphous category of cases turning on traditional equitable principles, such as clean hands, laches etc. Jay-Lor is an example of the application of the maxim that ‘equity does not act in vain.’ Sometimes these cases can be explained in sunk cost terms: for example, undue delay in bringing an action may give time for an innocent infringer to invest substantial sunk costs in the infringing goods; while the injunction might be refused on the basis of laches, the result would be the same on a sunk cost analysis. This case, in which the injunction was refused on public interest grounds, falls into the second category. While JAMP no doubt has incurred some sunk costs in developing its biosimilar, costs of that nature are regularly incurred by infringing pharmaceutical companies and are never in themselves grounds for refusing an injunction.

When should an injunction be refused on public interest grounds? The premise of the patent system is that the return to the patentee is beneficial to society by inducing innovation. So, on the one hand, the return to the patentee must be protected. Harm to the public interest may be taken into account on the other side of the balance. This does not include harm in the form of higher prices, which is inherent in the patent exclusivity: the premise of the patent system is that the harm from higher prices for a limited term is more than outweighed by the concomitant incentive to innovate. The harm to the public that might warrant refusing an injunction is typically more idiosyncratic, turning on the facts of the case. In the US, harm to medical patients for whom the patentee’s product is not an adequate substitute for the infringer’s product is one of the more common reasons for refusing a permanent injunction, particularly in the context of medical devices: see Seaman “Permanent Injunctions in Patent Litigation After eBay: An Empirical Study,” (2016) 101 Iowa Law Review 1949, 1991.

In Canada, the point is illustrated by Hughes J’s decision in Janssen v Abbvie 2014 FC 489 (discussed here), which also related to HUMIRA. Janssen’s infringing product was STELARA, a biologic used to treat psoriasis, which, in its severe form, can be disabling [17]. While HUMIRA is used to treat psoriasis, and has significant market share, it is not a perfect substitute for STELARA: STELARA operates by inhibiting IL-12, while HUMIRA targets TNF-α [21]. There were also two other TNF-α drugs on the market. A common treatment scenario was for the physician to switch the patient among the TNF-α drugs before going to the sole IL-12 drug (STELARA) [23]. A permanent injunction would therefore have allowed AbbVie to prevent the sale of a drug which AbbVie itself does not supply, and which for some patients is the only effective treatment for a disabling condition. On these unusual facts, AbbVie did not even seek a complete permanent injunction. Instead, AbbVie sought a tailored injunction with an exception for existing patients and restrictions on new patients. The basic idea was to ensure that any patient who could effectively be treated by HUMIRA would be, and STELARA could only be used for patients who responded better to it. This is a classic example of the kind of case in which a permanent injunction might properly be denied for public interest reasons.

In this case, there were two key reasons why McVeigh J refused the permanent injunction. First, AbbVie has licensing agreements with seven other pharmaceutical companies in Canada that offer adalimumab biosimilars [632], [638]; second, JAMP’s SIMLANDI is the only product available as a low-citrate high-concentration (80 mg/0.8 mL) formulation [633]–[636].

The first point goes to the need to preserve the incentive to innovate. In lieu of an injunction, McVeigh J granted a AbbVie a reasonable, running royalty on future sales of SIMLANDI, saying “[t]his rate should easily be determined given the licensing agreements it has with seven other biosimilar pharmaceutical companies” [643].

With respect, the matter is not quite so simple.

There are broadly two reasons that AbbVie might have licensed. First, it might not have wished to enter the Canadian market directly. It is very common for innovative patentees to exploit their inventions by licensing, especially in secondary markets. Royalty rates paid by a voluntary licensee in such a situation are not directly comparable to the reasonable royalty assessed by a court. A voluntary licensee normally performs some kind of value-added services for the patentee, such as product development, reverse tech transfer, clinical trials, marketing, manufacturing or distribution, and may also receive additional value from the licensor, such as supporting IP such as trademarks or trade secrets relevant to the patented technology, or ongoing technical support. The royalty paid by the licensee reflects the value of those services in both directions, as well as the value of the patented technology itself. A compulsory licensee under a running royalty will not generally perform all the same services, though it may perform some. This means the royalty paid by the voluntary licensee cannot simply be applied to the compulsory licensee. Instead, the royalty should be adjusted to account for differences in the services provided by the infringer as compared with those provided by the voluntary licensee. See generally my article with Professor Cotter, A New Framework for Determining Reasonable Royalties in Patent Litigation, (2016) 68 Florida Law Review 929, esp 954ff and Ch 1 Reasonable Royalties § 1.3.6 Comparable Licenses in Biddle, Contreras, Love & Siebrasse (eds), Patent Remedies and Complex Products: Towards a Global Consensus (Cambridge University Press, 2019).

Another complication is that the value of a license will generally depend on the degree of exclusivity. The per unit rate the licensor charges to a single licensee will be higher than the rate it can ask if it licenses to two licensees who compete with each other in the same market. If the licensor does license to multiple licensees, it will typically provide some kind of territorial or product exclusivity to each. One way or the other, unless the market is already perfectly competitive, the entry of a new unrestricted competitor into the market will affect the rate that can be charged to voluntary licensees. So, even if the AbbVie now demands a royalty of $1/mg from its current licensees (to pick an arbitrary number), the entry of JAMP may reduce the value of the licence to those licensees, so future renewals may be at a lower rate due to the reduction in market power. This is a loss to AbbVie that must be compensated in the reasonable royalty paid by JAMP to AbbVie if the incentive to innovate is to be preserved. Further, it is not obvious that the current licenses will reflect some simple rate, such as $1/mg. The licenses may reflect individual bargaining power, or idiosyncratic advantages of the licensees, so that even if the voluntary licensees provide the same services, their royalties may be different.

Another possibility is that the current licenses were negotiated under the threat of litigation. In that case, the royalty rate would be discounted by the parties’ estimate that the patentee would prevail against the potential infringer / licensee in an infringement action. But after litigation, such as in this case, we know with certainty that the patent is valid and infringed, and the reasonable royalty must therefore be higher than the negotiated royalty to avoid the problem of double discounting. As we explained in Ch 1 of Patent Remedies and Complex Products at 22-23:

it is well established in U.S. law that the parties to the hypothetical negotiation are assumed to have known that the patent was valid and infringed, even though actual parties would not. This rule is required to achieve just compensation, because the opposite view – that the parties should be assumed to discount the royalty to allow for the probabilistic nature of the patent (as would presumably be done by parties to an actual negotiation) – would result in so-called double discounting; not only would the court-approved royalty derived from the hypothetical negotiation include a discount for the risk of nonliability, but then pre-litigation negotiations in which royalties were based on the expectation of such a court award occurring with a less than 100 percent probability would include a further discount for risk of non-liability.

Further, the rates in the various licenses might be quite idiosyncratic — there is no particular reason that each ‘generic’ would arrive independently at the same estimate of its probability of prevailing. And these royalties would also reflect the pricing issues with truly voluntary licenses, discussed above. It is also entirely possible that the current licensing situation is a combination, where AbbVie has entered into some licenses on a truly voluntary basis and others in contemplation of litigation.

There are some cases in which it is indeed easy to calculate an accurate reasonable royalty, such as when the patentee offers a licence to all comers on demand at a standard rate. This is clearly not such a case. With that said, it is possible that it will be easy to calculate an accurate reasonable royalty; not all of the difficulties described above will arise in every cases. But the mere fact that there are seven other licensees of similar products certainly does not give any guarantee that the reasonable royalty calculation will be easy.

The other side of the coin is the effect on patients of an injunction. McVeigh J relied on two points.

One is the potential that “non-medical switching” could negatively impact patients, through the “nocebo effect” which could result in a perception of increased injection site pain. It seems to me that if we give the nocebo effect any weight at all, a permanent injunction would never be granted against any infringing pharmaceutical that has actually been launched, as the effect, by definition, does not turn on any real difference in the product, but on the mere knowledge that the product is different [636].

The other point is that JAMP’s formulation is the only high-concentration / low volume, citrate-free product on the market. (It’s not clear to me whether YUFLYMA is on the market, but I’ll assume it’s not.) It is possible that the greater volume and / or the citrate could cause increased injection site pain for some patients, and “[t]hough the evidence is scant for those few patents, it could be very harmful” [635].

This raises two points of law. One is the threshold for the harm to the public interest. Though the point is not normally made explicitly, it is clear enough that we are willing to tolerate some degree of harm to the public beyond the increase in prices. For example, in Valence v Phostech 2011 FC 174, Gauthier JA refused to even tailor a permanent injunction by allowing a two year grace period for the completion of a new factory designed to use a non-infringing process. Presumably, requiring the infringing factory to shut down immediately would entail significant disruption to the workers, such as temporary or even permanent unemployment. (Moreover, in that case a strong argument can be made that tailoring would have been appropriate on substantive grounds, as the infringement appears to not have been intentional and the infringer had incurred very substantial sunk costs.) The question then is how much non-price harm to the public we are willing to allow.

It is not clear what McVeigh J meant by “very” harmful and “few” patients, but this seems to be a far cry from Janssen v AbbVie in which it was uncontested that there were a significant number of patients whose potentially debilitating psoriasis could only be effectively treated by the infringing product. In this case, as I understand it, it is not disputed that the non-infringing alternatives will treat the disorder just as effectively as SIMLANDI, and the harm is increased injection site pain. (Since there are several citrate-free alternatives [638], it seems that the main issue is the increased volume.) In principle, the issue is not the pain from the alternative as such that is important, but the incremental pain of the alternative over SIMLANDI. So, SIMLANDI is available in a 40 mg/0.4 mL pre-filled syringe where most of the alternatives are a 40 mg/0.8 mL — so, double the volume for a 40mg dose. As I understand the evidence (as well as from people I know), many people do not find the 0.8 mL dose to be at all painful or even uncomfortable, so presumably those who do are unusually sensitive to dose volume and might find a 0.4 mL dose to be painful as well, though presumably less so. The harm if the injunction is granted is not the pain to those patients from the 0.8 mL dose, but the additional pain as compared with the 0.4 mL dose. It is not clear to me from McVeigh J’s reasons whether the “very harmful” pain refers to the pain of the larger dose, or the incremental pain. (Perhaps the main harm is to those who are particularly sensitive to both citrate and injection volume, which would imply a smaller subset of affected patients.) Now, perhaps the harm is more significant than intuition suggests. It may be that there are some patients for whom the additional pain is so substantial that they would skip injections and impair their treatment rather than endure the injections with HUMIRA or one of the licensed alternatives. That would align this case more closely with Janssen.

Of course, the degree of harm is a matter for evidence. My point here is that it seems reasonable that there should be some substantive threshold for the nature of the harm suffered in order to warrant denying an injunction on public interest grounds. If evidence established that 10 patients in Canada would suffer arm soreness for two minutes after an injection rather than for one minute, I would suggest that should not be a sufficient harm to warrant refusing a permanent injunction on public interest grounds. From McVeigh J’s brief description, the harm in this case appears to be substantially less, both in its nature and its extent, than the harm at issue in Janssen v AbbVie.

As noted, the extent of the harm is not clear from McVeigh J’s reasons. This raises the second point: what is the proper evidentiary threshold for refusing injunctive relief on public interest grounds? In this case, we do not know how many patients would be affected and how serious the harm is, because the evidence is “scant” and “limited” [635]. All we know is that it “could” be very harmful. When evidence is scant, any degree of harm is possible. Suppose an expert witness was asked whether the injection site pain might dissuade some of patients from following the correct dosage schedule, and the answer was “Anything’s possible.” Would that be enough to warrant refusing the permanent injunction on public interest grounds? More generally, can a permanent injunction be denied on the basis of a speculative harm? Surely the presumption in favour of granting injunctive relief to a successful patentee is strong enough that more than mere speculation should be required to overcome it. The more difficult question is whether the standard should be something like the balance of probabilities, or a lower threshold, such as evidence which is clear and not speculative.

The substantive threshold and the evidentiary threshold are distinct issues. It might be uncontested that 1% of the patients would suffer soreness for two minutes instead of one minute; or one expert might provide unsupported opinion evidence that large numbers of patients would fail to comply to their injection schedule dosage. Given McVeigh J’s explicit acknowledgment of the limited nature of the evidence, it might be easier for the FCA to address evidentiary threshold. It will be difficult to address the question of whether the substantive threshold has been met when the extent of the harm is not actually established in the evidence.

On the whole, the reasons given by McVeigh J strike me as very tenuous grounds for denying a permanent injunction. Further, even if some kind of significant harm to some patients could be established on a non-speculative basis, this does not strike me as a good case for denying a permanent injunction entirely. A tailored injunction, along the lines of that granted in Janssen v AbbVie, which would allow the use of SIMLANDI by the specific patients who cannot tolerate HUMIRA or one of the other licensed biosimilars, would seems to me to strike a better balance.

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.