Supreme Court Clarifies Accounting of Profits Remedy in Patent Infringement Cases

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On November 18, 2022, the Supreme Court of Canada (“SCC”) released its decision in Nova Chemicals Corp v Dow Chemical Co (2022 SCC 43). This decision upheld the largest monetary award to date in a Canadian patent infringement proceeding, and provided the SCC with an opportunity to clarify the framework for calculating an accounting of profits, including the implementation of a “non-infringing option”, as well as confirming the availability of springboard profits.

Background Facts

Canadian patent infringement actions are often bifurcated into a liability phase and, if liability is established, a phase to establish the quantum of the claimed monetary remedy (i.e., damages and/or an accounting of profits).

During the liability phase in this proceeding, the Federal Court found that the patent in issue owned by Dow Chemical Co. (“Dow”) was valid and had been infringed by the manufacture and sale of certain plastics by Nova Chemicals Corp. (“Nova”) (2014 FC 844). The finding of infringement was affirmed by the Federal Court of Appeal (2016 FCA 216) and leave to appeal to the Supreme Court of Canada was denied.

At the quantification phase, the Federal Court awarded Dow an accounting of Nova’s profits arising from its infringing activities, totaling approximately $645M (2017 FC 350). A portion of the award was for “springboard profits” for activities that occurred after the expiry of the patent, which was the first time that such profits were awarded in a Canadian patent action. The Federal Court of Appeal upheld this award (2020 FCA 141). Nova then sought, and was granted, leave to appeal to the Supreme Court of Canada.

Nova pursued the appeal to the Supreme Court of Canada on two primary grounds:

  • Non-infringing option: Nova argued that had it not manufactured the infringing plastics, it would have manufactured and sold a non-infringing option. As such, Nova argued that the profits from the sale of the non-infringing option should be deducted from the profits award.
  • Springboard profits: Nova argued that (i) the remedy of springboard profits was not legally permissible; and (ii) Nova had already compensated Dow for its “ramp-up” into the market through its payment of a reasonable royalty.

Analysis

In an 8-1 decision, the Supreme Court of Canada dismissed Nova’s appeal (2022 SCC 43).

In doing so, the Supreme Court established a three-step framework for an accounting of profits analysis:

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. Causation “need not be determined by scientific precision: it is ‘essentially a practical question of fact which can best be answered by ordinary common sense’”.

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 majority of the Court clarified that a “non-infringing option” under the second step of the test “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 are not causally attributable to the invention.” The majority expressly stated that while the non-infringing option need not be a “strict market substitute” for the patented product, a non-infringing option is not the “most profitable” alternative product that the infringer “would have” and “could have” sold had it not infringed.

The majority stated that the infringer must “adduce sufficient evidence to satisfy the court that the profits from its infringing product arose by virtue of features other than the patentee’s invention and that there is a non-infringing option that can help the court isolate this value.” Since (i) the reference judge found as a fact that customers only purchased Nova’s infringing plastics because they contained the features captured by Dow’s patent and (ii) Nova did not establish that there were relevant non-infringing options (and in fact conceded that there were no relevant non-infringing options), the majority held that the reference judge did not err in concluding that all of the profits earned by the sale of the infringing product were causally attributed to the invention.

The majority also held that an award of springboard profits was legally permissible as “an extension of the fundamental principle that, in calculating an accounting of profits, the infringer must disgorge all profits causally attributable to infringement of the invention”. Justice Malcom Rowe, writing on behalf of the majority, stated that “[a]rtificially limiting an accounting of profits in the manner suggested by Nova would leave gains that are causally attributable to infringement of the invention in the hands of the infringer and thus undercut the bargain underlying the Patent Act.”

The majority also saw no merit in Nova’s argument that it had already compensated Dow for its “ramp-up” into the market by virtue of its payment of a reasonable royalty.

Key Takeaways

The Supreme Court of Canada has provided guidance on the accounting of profits remedy in patent infringement cases by articulating a three-step test for conducting an accounting of profits, while clarifying the meaning of “non-infringing option” under the second step of that test.

This case will provide significant guidance to plaintiffs considering initiating patent litigation as well as defendants faced with such suits.

The author would like to acknowledge the support and assistance of Renée Taillieu and Zach Rudge, articling students at law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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