The case is Dow
Chemical Co. v. Nova Chems. Corp., 2017 FC 350 (Apr. 19, 2017), decision by
Mr. Justice Fothergill. In an earlier proceeding, Mr. Justice O'Keefe
found the patent in suit, which relates to film-grade polymers, valid and
infringed. The more recent proceeding focused on the monetary award, and
addressed several interesting issues. Norman Siebrasse has published
detailed posts on these issues on Sufficient Description (see here,
here,
here,
and here),
and I'll just summarize the important issues here.
1. First,
Dow sought an award of "reasonable compensation" under section 55(2)
of the Canadian Patent Act for Nova's pre-grant use of what later issued as the
'705 Patent. Section 55(2) reads:
A person is liable to pay reasonable compensation to a patentee and to all persons claiming under the patentee for any damage sustained by the patentee or by any of those persons by reason of any act on the part of that person, after the application for the patent became open to public inspection under section 10 and before the grant of the patent, that would have constituted an infringement of the patent if the patent had been granted on the day the application became open to public inspection under that section.
As I discuss in
my book, many countries award some form of compensation for the unauthorized
use of what later issues as a patented invention, for the period of time
between publication and grant (though to my knowledge there aren't too many
published decisions addressing the question of how such awards should be
calculated). The counterpart in the U.S., for example, is Patent Act §
154(b), which (unlike the Canadian statute) expressly conditions such an award
on the defendant having had "actual notice of the published patent
application." (According to the Federal Circuit, however,
"actual notice" effectively means "actual knowledge," and
doesn't necessarily require an affirmative act on the part of the patent
owner. For my critique of the decision reaching this conclusion, see here.)
Anyway, the court in Dow concluded that "reasonable
compensation" means a reasonable royalty, which in turn implies use of a
hypothetical bargaining construct. The problem in the present case,
however, was that in the but-for world in which the defendant had sought
permission to use the invention, no bargain would have been reached, because
the minimum amount Dow would have accepted exceeded the maximum amount Nova
would have agreed to pay--a not uncommon circumstance, given that often the
profit margin of a practicing patent owner with an effective monopoly will
exceed the profit margin of the would-be user under duopoly. (In the
but-for world, in other words, the plaintiff would have excluded the defendant
and denied permission to use, rather than granting a license.) A lost
profits award therefore would make more economic sense than a reasonable
royalty, but according to Professor Siebrasse there is other Canadian precedent
holding (rightly or wrongly) that courts can't award lost profits as such for
pre-infringement use, only a royalty. The Dow court gets around
this dilemma by holding that the royalty should be Dow's minimum willingness to
accept, in effect granting a lost profit without calling it that. This
would appear to me to be the correct economic result under the circumstances.
2. For
the period covering the issuance of the patent through the end of the year
2015, Dow opted for an accounting of the defendant's profits. One
interesting issue here was whether the award of profits could include a
"springboard" award, that is, an award reflecting in part the
additional the profit the defendant was able to earn post patent
expiration, because the infringement provided it with a springboard to market
entry (earlier market entry than would have been possible absent the
infringement). The court held that this was permissible under Canadian
law, stating that "springboard damages are nothing more than a type of
loss to be proven with evidence, and I see no reason why this principle should
operate differently to a plaintiff’s gains in the context of an accounting of
profits" (para. 124). The second difficult issue was whether the
defendant should be able to deduct any portion of its fixed costs, which would
result in a reduction of the profit it would owe to Dow. Courts
throughout the world have reached differing conclusions on this issue (see,
e.g., my book pp. 206-08, 271-73, 325-26), and while there are reasonable
economic arguments in support of both sides of the issue I'm inclined to agree with
Stephen Margolis that the better rule is to allow such a deduction at least
where the defendant would have employed that overhead to other purposes absent
the infringement. In any event, in the present case the court held that
it would be appropriate under the circumstances to allow Nova to deduct its
apportionable overhead.
3. A third
set of issues related to prejudgment interest. With regard to the
pre-infringement royalty, the court used Dow's internal rate of return as the
benchmark, rather than the otherwise applicable bank rate, which seems correct
if the goal is to restore the plaintiff to the position it would have occupied
but for the infringement. In keeping with Mr. Justice O'Keefe's ruling in
the earlier proceeding, however, the court did not award compound interest
(which of course is not consistent with the goal of compensation, though
Canada is hardly alone in its reluctance to award compound interest).
With regard to the award of profits, the court used the defendant's rate of
return and did award compound interest (which seems more correct as a
matter of economics).
4.
Finally, the court had to decide what date to use to convert the award from
U.S. to Canadian dollars, and it opted for the date of judgment. I think
this generally makes sense for reasons of administrative convenience, rather
than converting the award on a year-by-year (or even more granular) basis in
cases in which the infringement spans a lengthy period of time.
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