$644 million patent infringement award upheld by the Supreme Court of Canada

On November 18, 2022, the Supreme Court of Canada (SCC) released its decision in Nova Chemicals Corp. v. Dow Chemical Co., 2022 SCC 43 (Nova v. Dow). The decision upholds a record-setting $644 million patent infringement award. It demonstrates that patents are powerful business tools that create competitive strategic and financial advantage for those who are invested in developing them as assets. Indeed, in the case of infringement, several remedies exist to protect patents, including accounting of profits. In Nova v. Dow, the SCC provides important guidance on how to calculate an accounting of profits remedy in the case of patent infringement.

Facts & procedural history

This case involves a patent infringement dispute between Nova Chemicals Corporation (Nova) and The Dow Chemical Company and its subsidiaries (Dow). At issue was Dow's Canadian Patent No. 2,160,705 (the 705 Patent) for metallocene plastics (the Patented Plastics), which feature superior strength and "processability" characteristics, making them useful for creating household items like garbage bags and food wrappings.

Dow sold the Patented Plastics under the name ELITE. Nova manufactured and sold plastics covered by Dow's patent under the name SURPASS, leading Dow to file an infringement claim against Nova in 2010. Dow's patent expired in 2014. The liability phase of the patent infringement action ended in 2016, with the Federal Court of Appeal upholding the trial decision, which found that: (i) the 705 Patent was valid; and (ii) Nova's SURPASS product infringed the 705 Patent.

A remedies phase then started with a reference to the Federal Court to quantify the compensation Nova owed to Dow as a result of the infringement. Since Dow had elected an accounting of Nova's profits as its remedy, the reference judge awarded Dow a sum equal to Nova's actual revenue from selling the Patented Plastics, minus its full costs associated with producing Patented Plastics. Importantly, the reference judge held that the applicable costs included Nova's actual costs for ethylene, and not market ethylene costs, despite the fact that Nova produced its own ethylene at a cost lower than market price.

The reference judge also awarded springboard profits to Dow, a first for patent infringement in Canada.

On appeal, among other things, Nova argued that a portion of the profits earned by selling the Patented Plastics was due to its own manufacturing efficiencies, rather than Dow's patent. Thus, Nova maintained that the accounting of profits calculation should be discounted to reflect such efficiencies. The Federal Court of Appeal dismissed these arguments and Nova's appeal, upholding the reference judge's award.

Issues

1. How is an accounting of profits calculated?
2. Can courts award springboard profits in the case of patent infringement?

The SCC proposes a simplified method of calculating an accounting of profits

The SCC recognized that an accounting of profits is sometimes presented as a choice between three approaches: (i) differential costs; (ii) full costs; and (iii) differential profits, each with its own calculation method. However, the SCC clarified that the starting point for all three methods is the same. In each case, the following three-step test applies (the Test):

1. Calculate the actual profits earned by selling the infringing product (based on full or differential costs, as applicable);
2. Determine whether there is a non-infringing option that isolates the profits causally attributable to the invention from the portion of the infringer's profits not causally attributable to the invention; and
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.

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 non-infringing option need not be a strict market substitute for the patented product.

The SCC made two key findings in applying the Test. First, a "patentee must leave the infringer as they find them". If an infringer is an inefficient manufacturer and makes less profit than theoretically possible, a patentee cannot claim profits that the infringer should have made. The opposite is also true – when an infringer is an efficient manufacturer, the patentee is entitled to all profits actually made, even if the patentee itself could not achieve similar profits. Thus, under the first step of the Test, the SCC found that Nova's actual ethylene costs, and not market costs, should be deducted from its revenue.

Second, an infringer's "best non-infringing option" is not synonymous with the infringer's "most profitable" alternative option. Under the second step of the Test, the SCC considered Nova's new argument that if it did not manufacture its SURPASS product, which incorporated the Patented Plastics, it would have manufactured high-density polyethylene to make pails, crates and buckets. The SCC disagreed that Nova's high-density plastics could be non-infringing alternatives simply because they would have generated profit.

The SCC noted that if an infringer is allowed to rely on any prior profitable business venture as a non-infringing option, then they would always be incentivized to switch their business to a more profitable infringing product. This could allow an infringer to keep all the profits they would have earned selling the non-infringing products that they sold before, or keep some or all of the extra profits earned from the infringement. Large businesses (like Nova) could disproportionally benefit from this approach, as they have multiple potential products they could have or would have produced had they not infringed on the patent.

Ultimately, the SCC concluded that Nova failed to establish that there were any relevant non-infringing options. Indeed, Nova even made this concession before the reference judge.

Courts may award springboard profits for patent infringement

Springboard profits require an infringer to disgorge all profits causally attributable to infringement of the invention, even after the expiry of the patent, if it is established that the infringer was able to accelerate into the market before its competitors by virtue of its infringing activities.

As Canadian courts had never awarded springboard profits before, Nova's main argument was that this remedy is not legally permissible. However, the SCC held that Canadian courts have consistently recognized and awarded springboard damages for the same principled reason, where the infringer was able to unlawfully accelerate its entry into the market, interfering with the patent owner's market share enjoyed in the absence of meaningful competition post-patent expiry. Consequently, the SCC found that springboard profits are legally permissible and that Dow was entitled to all springboard profits attributable to Nova's infringement.

Takeaway

Nova v. Dow sets out a simplified three-step test for calculating an accounting of profits in the case of patent infringement. It also provides that springboard profits are available in the case of patent infringement.

While the Supreme Court set out a new simplified test for an accounting of profits, navigating remedy issues in patent infringement litigation is still complex. The BD&P team is experienced in technology litigation and is here to help you.