Dow succeeds on major issues in patent infringement profits case

Introduction
Background
Award of springboard profits
Accounting of profits and deduction of costs
Currency conversion on profits
Additional product grades
Other issues

Introduction

The Federal Court has issued its public judgment and reasons concerning the financial compensation to be paid as a result of earlier patent infringement and validity proceedings between Dow Chemical Company and NOVA Chemicals Corporation.(1)

In his reasons, Justice Fothergill considered a number of significant and novel issues relating to patent infringement remedies and, in particular, the accounting of profits remedy available in Canadian patent infringement litigation. The final quantum of the award is still before the courts, but it is expected to be one of the largest ever awarded in a Canadian patent case.

Background

During the liability phase, the Federal Court upheld the validity of Dow's Canadian Patent 2,160,705 and found that NOVA's Surpass polymers infringed (for further details please see "Dow prevails over NOVA in polymer patent suit"). The polymers are polyethylene compositions used in packaging applications, including heavy-duty bags, pallet wrapping and food packaging.

The compositions comprise blends of two polymers with particular physical or mechanical characteristics. Dow sells such compositions under the name Elite.

As a result of the findings of infringement, the Federal Court awarded Dow various remedies, including:

• an election between damages and an accounting of profits;
• reasonable compensation for infringement that occurred between the publication date of the patent and its date of issuance;
• interest; and
• costs.

Dow subsequently elected for an accounting of NOVA's profits.

On September 6 2016 the Federal Court of Appeal upheld the Federal Court decision on the merits.(2) On April 20 2017 NOVA's application for leave to appeal to the Supreme Court of Canada was dismissed.(3)

Award of springboard profits

Dow claimed that NOVA's infringement of its patent provided it with a springboard into the market, which resulted in NOVA continuing to profit from its infringing activity after the expiry of the patent. Fothergill was satisfied that in a hypothetical 'but-for' world where NOVA was unable to enter the relevant market until the expiry of the patent in question, it would have taken time for NOVA to attain the same level of sales of the infringing products that NOVA enjoyed in the real world. Therefore, Fothergill found that NOVA's post-expiry profits resulting from its pre-expiry infringing activities should be included in the accounting of profits. The springboard profits covered a period of approximately 20 months post-expiry.

Accounting of profits and deduction of costs

Fothergill also considered the extent to which NOVA should be allowed to deduct its costs from its revenues to arrive at its profits. Two primary issues were before the court. The first issue related to the appropriate measure of the cost of ethylene, a key component used to make the infringing SURPASS products. NOVA claimed that it should be entitled to deduct an economic value of the ethylene as measured by its average selling price of ethylene to third parties. Dow claimed that because NOVA itself produced the ethylene used to make SURPASS, it was entitled to deduct only its actual costs incurred to manufacture the ethylene. Fothergill agreed with Dow's position that the actual cost to NOVA of manufacturing the ethylene should be used, noting that NOVA's position would result in deduction of a "theoretical cost that [NOVA] did not incur".

The second issue relating to NOVA's deduction of costs was whether non-incremental fixed costs and capital depreciation expenses could be applied against the relevant revenues. Fothergill indicated in his judgment that there are several recognised means of accounting for profits:

• Differential profit approach – the profits to be disgorged are those earned from the infringement less those profits that would have been earned had the infringer produced a non-infringing alternative.
• Incremental cost approach – the profits to be disgorged are the applicable revenue less any variable costs attributable to the invention and any increased fixed or capital costs attributable to the invention.
• Full cost approach – the profits to be disgorged are the applicable revenues less applicable variable, incremental fixed and a proportion of certain non-incremental fixed and capital costs.

NOVA contended that the full cost approach was the appropriate approach in this case since there were no direct non-infringing alternatives, such that the differential profits approach could not apply and its incremental costs would be negligible, such that the incremental costs approach would result in an inequitable outcome.

Fothergill ultimately concluded that NOVA should be entitled to deduct a proportion of certain of its claimed fixed costs and capital depreciation expenses relating to the production and sale of the infringing products.

Currency conversion on profits

The issue of the timing of the currency conversion was also before the court. While NOVA's profits from the sale of infringing SURPASS products were mostly earned in US dollars, the Currency Act requires that the judgment of a court be expressed in Canadian dollars. Dow argued that since NOVA retained its profits in US dollars, the date of currency conversion should be the date of the judgment. NOVA countered that its profits should be converted to Canadian dollars at the applicable exchange rate when they were earned (ie, annually during the period of the infringement). Fothergill found that the evidence supported that NOVA's profits were primarily retained in US dollars such that the date of conversion into Canadian dollars should be the date of the judgment.

Additional product grades

Also at issue were four grades of NOVA's SURPASS product that Dow claimed were identical or nearly identical to those that were specifically identified in Dow's original statement of claim, but were sold by NOVA under slightly different names at various times. NOVA conceded that these grades infringed the patent in question, but argued defences of res judicata, abuse of process and the application of a limitation period because they had not been specifically identified in the statement of claim during the liability phase of the proceeding. Fothergill ultimately determined that these grades were to be included in the calculation of profits, holding that it would be inconsistent with the liability judgment to exclude them merely because they were "sold under slightly different names by the infringing party".

Other issues

For the period between the publication date of the patent in question and its date of issuance, Dow was awarded a reasonable royalty at 8.8%.

Finally, Fothergill also found that Dow was entitled to recovery of pre-judgment interest on NOVA's profits at a rate of 5%, compounded annually, citing evidence of NOVA's actual cost of borrowing.

For further information on this topic please contact Daniel Hnatchuk at Smart & Biggar/Fetherstonhaugh by telephone (+1 613 232 2486) or email ([email protected]). The Smart & Biggar/Fetherstonhaugh website can be accessed at www.smart-biggar.ca.

Endnotes