Nova v. Dow: The Supreme Court of Canada on Accountings of Profits

I expect Professor Siebrasse to publish a more detailed post on this decision over on Sufficient Description, so I will be brief here.  The case is Nova Chemicals Corp. v. Dow Chemical Co., 2022 SCC 43.  Long story short, in an 8-1 decision authored by Justice Rowe, the Supreme Court of Canada (SCC) affirms the decision of the Federal Court of Appeal (previously noted on this blog here, and with links to Professor Siebrasse's posts on the appellate decision here).  The principal legal issue is how, exactly, to apply the non-infringing alternatives concept to awards of the infringer’s profits.  The majority concludes that the appropriate baseline is the difference between the infringer’s actual profit and the profit it would have earned “on the sale of a similar product without the patented feature—i.e., the non-infringing option” (para. 51).  In a case, like the present one, in which the infringer’s most profitable alternative would have been to use the raw materials that were used to produce the infringing product to produce a different, non-substitute product, the court should not take this alternative into consideration:  “A non-infringing option is not . . . an infringer’s ‘most profitable’ alternative sale product that it ‘would have’ and ‘could have’ sold had it not infringed” (para. 59).  The majority concludes that the rejected definition of non-infringing alternative is flawed, both because of a perceived conflict with the SCC’s decision in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34, and because  

            [62] . . . this reading of non-infringing options would distort the purpose of an accounting of profits and, in turn, undermine the patent bargain underlying the Patent Act. If an infringer is allowed to use any prior profitable business venture as a non-infringing option, an infringer would always be incentivized to switch its business capacity to a more profitable infringing product. At worst, the infringer would keep all the profits they would have earned selling the non-infringing products that they sold before. At best, the infringer keeps some or all of the extra profits earned from infringement. Reading “non-infringing option” as Nova and my colleague suggest would have the effect of creating a form of business insurance for infringers: an infringer could always use their previous product lines as a non-infringing option and protect those profits in the event their new product infringes a patent.

 

            [63]   This distortion of the purpose of an accounting of profits gives rise to unacceptable consequences, one being that the quantum of profits to be disgorged would vary with the size of the infringing business and the breadth of its product lines. Nova’s suggested approach disproportionately benefits large corporations (like itself) that have diverse product lines. Such businesses have multiple products that they “could have” and “would have” produced had they not infringed. Nova, for example, produces numerous non-infringing plastics. In circumstances like these, my colleague’s reasons would provide no incentive not to infringe. At best, Nova would retain all profits from infringement. At worst, Nova could keep the profits it would have made on any of its other product lines. Nova’s approach would allow it and other large enterprises to infringe with relative impunity. This undermines the bargain provided for in the Patent Act.

In dissent, Justice Côté argues that

            [187] . . . under the differential profit approach, a non‑infringing option does not need to be a true consumer substitute for the patented product. There are two principled reasons for this conclusion: (1) a true consumer substitute requirement is legally irrelevant in an accounting of profits given the different purposes and focus of this remedy when compared to damages; and (2) limiting non‑infringing options to true consumer substitutes distorts the causation analysis.

In my view, Justice Côté has the better of the argument.  As she discusses, for purposes of awarding the patent owner its own lost profit on lost sales resulting from the infringement, the non-infringing alternative must be a substitute for at least some consumers, because otherwise there are no lost sales resulting from the infringement.  For purposes of an award of profits, however, this distinction is irrelevant, since the goal should be ensuring that the defendant does not profit from the infringement, and this goal is satisfied by returning the defendant to the position it would have occupied absent the infringement, whatever that might be (see, e.g., para. 185).  As Justice Côté writes, in effect the majority’s approach isolates “the value of the patent in the abstract,” which “needlessly disadvantages infringers that could have and would have produced a different product that would not have been a consumer substitute for the patented product” (para. 194).  I should note that Justice Côté cites some portions of my book Comparative Patent Remedies, as well as the “Lost Profits and Disgorgement” chapter I coauthored with lead author Christopher Seaman and Norman Siebrasse, Brian Love, and Masabumi Suzuki, from the edited volume Patent Remedies and Complex Products: Toward a Global Consensus (C. Bradford Biddle et al., Cambridge Univ. Press 2019).  Both majority and dissent cite work by Professor Siebrasse, though from his previous posts on the Federal Court of Appeal decision in this case (see especially here), his views appear to align more with Justice Côté’s.

Both majority and dissent agree that “springboard” profits are an available remedy, where the plaintiff proves that the defendant continues to enjoy some advantage, post-patent expiration, from having previously infringed.