Supreme Court of Canada upholds $644-million award for patent infringement; provides fresh guidance for conducting an accounting of profits

9 minute read
18 November 2022

In an 8 to 1 decision (2022 SCC 43), the Supreme Court of Canada has upheld the largest monetary award ever by a Canadian court for patent infringement: $644 million in favour of Dow Chemical for Nova Chemicals' infringement of Dow's patent.  In so doing, the Supreme Court provided fresh guidance and a preferred framework for conducting an accounting of profits.

Background

In 2014, and again on appeal in 2016, Dow Chemical was successful in its action for patent infringement against Nova Chemicals on its patent related to metallocene linear low-density polyethylene.

As the successful plaintiff, Dow Chemical sought and was awarded the remedy of an accounting of Nova Chemicals' profits.  As previously discussed in our earlier article here, the trial judge awarded Dow Chemical $644 million, and that award was upheld on appeal.  This award comprised reasonable compensation in the form of a royalty for infringement during the pre-grant publication period of the patent, an accounting of profits for the post-grant period, and an accounting of "springboard profits" for a period of 20 months following expiry of the patent.

Notably, the Court of Appeal emphasized in its decision that the purpose of the accounting of profits remedy can be contrasted with the purpose of the damages remedy.  The latter restores those whose patents have been infringed to the position they would have been in had the infringement never taken place.  The former serves the purpose of preventing an infringer from coming out ahead relative to the patentee and addressing the concern that the compensatory damages remedy may in some cases be a boon for efficient infringers.

Following the Court of Appeal decision, Nova Chemicals sought and was granted leave to appeal to the Supreme Court of Canada.

The parties' main arguments before the Supreme Court of Canada

Nova Chemicals, the appellant, argued that an infringer should not be put in a worse position than had it not infringed the patent as a result of application of the accounting of profits remedy.  From Nova Chemicals' perspective, had it not infringed, it claims it would have nonetheless earned profits from the sale of non-infringing ethylene.  Therefore, Dow Chemical should not be awarded those profits, as they are not causally connected to Dow Chemical's patent monopoly. 

Dow Chemical, the respondent, argued that the proper approach is to compare the profits earned as a result of infringement to the profits the infringer could have made from a suitable non-infringing option that customers or users would have accepted as a substitute to the patented product.  This is in contrast to comparing to any hypothetical profits earned from any hypothetical non-infringing activity that an infringer says it could have engaged in, as the resulting profits under that scenario would not be representative of the value of the patented invention.

The Supreme Court of Canada's decision

Non-infringing options

In dismissing the appeal, the Supreme Court concluded that "while in certain circumstances the hypothetical profits that an infringer could have earned by selling a non-infringing option are relevant to a calculation of an accounting of profits, this is not such a case."

The Supreme Court sets out a three-step framework for conducting an accounting of profits, with the second step being the primary issue on appeal:

  • 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.
  • 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.

The onus of establishing the non-infringing option rests with the infringer. The Court specifically notes that "there are no strict rules around this factual exercise." Rather, the non-infringing option must be established through relevant evidence. Non-infringing options will be more frequent or more relevant where the patented invention is only for one portion or one feature of a product, but non-infringing options can also be relevant where the entire product is covered by the patent.  Moreover, the non-infringing option need not be a strict market substitute for the patented product. 

In considering non-infringing options, the Court seeks to ensure that the accounting of profits does not capture profits which were not generated or causally attributable to the patented subject-matter. "In sum, a non-infringing option is any product that helps courts isolate the profits causally attributable to the invention from the profits which arose at the same time the infringing product was used or sold, but which are not causally attributable to the invention." The aim is to determine how the patented subject-matter contributed to the value of what the infringer sold, not to asses what proportion of the infringer's product fell within patent.

In setting out its framework, the Supreme Court rejected the approach that the non-infringing alternative is necessarily the most profitable alternative option that the infringer could have pursued had it not infringed.  In this regard, the Supreme Court specifically cautioned against the situation where an infringer simply relies on other product lines as a non-infringing option to protect those profits in the event their new product infringes a patent. Instead, and relying on its previous decision in Schmeiser, the Court re-iterates that the objective is to quantify the profits that are causally attributable to the invention. 

As for whether a non-infringing option existed and should have been used in this case, the Supreme Court relied on the decisions and factual findings of the Courts below. One of the key findings in this regard was that customers only purchased Nova's infringing products because they contained the features captured by Dow's patent.  The Supreme Court concluded that there were no non-infringing options in this case, such that all profits realized from the infringing products were to be disgorged.

Springboard profits award also upheld

Also at issue was whether "springboard profits" can be sought and awarded to the patentee. Springboard profits are profits that arise post-patent-expiry but that are causally attributable to infringement of the invention during the period of patent protection. The Supreme Court rejected the argument that springboard profits are not legally permissible, and that the patentee was already compensated for the infringer's "ramp-up" into the market.

While this was the first case where an award of springboard profits had been made, Canadian courts have recognized and awarded springboard damages. The patent monopoly includes the right to build sales capacity and market share without any market competition. An infringer that begins selling the patented invention before the patent expires interferes with the patentee's right to build sales capacity and market share in the absence of competition, which in turn can reduce the patentee's post-patent-expiry profits.  If the patentee can prove that it lost sales post-patent-expiry as a result of infringing activity occurring during the life of the patent, the patentee is entitled to springboard damages to compensate for that loss. The Supreme Court found that the same applies to an entitlement to springboard profits in cases where an accounting of profits is claimed.

With respect to the argument that the patentee was already being compensated for "ramp-up" of the infringing product through the award of reasonable compensation, the Supreme Court rejected the argument.  In particular, the Supreme Court stated that disgorgement of springboard profits is a means to prevent an infringer from gaining from its infringement that is different from, but which may be complementary to, compensating a patentee for initial market ramp-up. As found by the Courts below, royalties paid to cover the post-filing, pre-grant time period were unrelated to the quantum of profits earned as a result of infringement during the period of patent protection.

Dissent of Justice Côté

While Justice Côté agreed with the majority with respect to the availability of springboard profits as a remedy, she did not agree with respect to the broader issue of causation, and would have allowed the appeal.  In Justice Côté's view, courts should determine a reasonable hypothetical as to what an infringer could have and would have done but for the infringement.  The burden in this regard rests with the infringer, and factors such as what transpired in the real world and the brazenness of the infringement may be relevant. In seeking to meet this burden, an infringer need not demonstrate that its non-infringing option is a true consumer substitute.  As a result, Justice Côté would have remitted the matter back to the Federal Court to address the issue of causation.


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