Nova Chemicals Corp v Dow Chemical Co 2022 SCC 43 Rowe J: Wagner CJ, Moldaver, Karakatsanis, Brown, Martin, Kasirer and Jamal JJ concurring; Côté J dissenting affg Nova Chemicals Corporation v Dow Chemical Company 2020 FCA 141 Stratas JA: Near, Woods JJA affg Dow Chemical Co v Nova Chemicals Corp 2017 FC 350, 2017 FC 637 Fothergill J
2,160,705 / film-grade polymers / ELITE SURPASS
The Intuition / The Legal Background / Causation as a Matter of Fact / The Concession / What Role for “But For” Causation in Identifying the NIO? / Summary of the Summary / Causation Concept in the Absence of an NIO / What is the NIO?
To this point, I have argued that Rowe J’s decision is unprincipled, in the literal sense that there is no unifying causation concept, and incoherent, in the sense that it does not provide any practical guidance as to how to identify the non-infringing alternative (NIO), which is at the center of his three-part test. In my first post in this series, I suggest that the reason for this is that Rowe J was driven by a powerful intuition that the value of the invention should not depend on fluctuations in unrelated markets. It is now time to return to that intuition and show why it is wrong, appealing though it is.
The basic problem with Rowe J’s decision is that he rejected but for causation, without providing any other causation concept in its stead. I suggest that his rejection of “but for” causation was driven by his commitment to the use of conventional seed as the appropriate NIO in Rivett 2009 FC 317, even though, as Rowe J specifically noted, conventional seed was in fact unavailable and so could not have been the appropriate comparator on strict “but for” causation. I suggest that the central intuition driving Rowe J’s decision is that the value of the patented invention is the difference between the profit that was made with the patented soybean and the profit that could have been made with conventional soybean, whether or not conventional soybean was actually available. The idea is that the value of the invention is an intrinsic property that cannot depend on the happenstance of whether conventional soybean is or is not in stock at the local Feeds ‘n Needs. As Stratas JA put it in his FCA decision:
[78] The patent is not valuable because it just so happens to be unavailable in a particular locale. It is valuable because it has some inventive quality that increases the infringing product’s profitability or marketability.
While Rowe J did not specifically approve this comment, I suspect that he was persuaded by the same intuition. This view is supported by Rowe J’s repeated insistence that the profits to be disgorged are those causally attributable to “the invention,” specifically rejecting Cote J’s emphasis on profits attributable to “the infringement” [61] and also rejecting Côté J’s suggestion at [91] that the focus was on the “value of the invention in the hands of the infringer” [60].
In the first post in this series I gave two examples to illustrate why the use of “but for” causation can lead to counter-intuitive results. Suppose it can be established that Nova would indeed have made $300m in profit in the market for commodity grade plastic. If we were to apply “but for” causation, this means that the profits to be disgorged would be $300m instead of $600m. Now put a twist on the facts, and suppose that while Nova was actually making infringing food-grade plastic film, a prominent Instagram influencer started wearing Crocs as a fashion accessory, with different colours to match different outfits, with the result that Crocs took the world by storm. The craze was so dramatic that the price of commodity grade plastic rose 20%. In that environment, but for the infringement, Nova could and would have made $400m in the market for commodity grade plastic. If we apply “but for” causation to this hypothetical, the amount to be disgorged would be only $200m.
This result is very counter-intuitive. What actually happened is that Nova made and sold infringing food-grade plastic. How can it be that some quirky fashion trend in an unrelated market could reduce the amount to be disgorged by $100m, even though the value of the infringing plastic remains exactly the same?
To take a more extreme example, what if Nova could show that it could have made a profit in a tight market for Chinese tea? Should that profit be deducted? The principle is no different than the example of commodity grade plastic, but surely the price of tea in China has nothing to do with the profit attributable to Nova’s infringement of a patent on plastic food wrap. As Dow put it, if there is no market substitute, there is no logical basis for limiting disgorgement of the actual profits simply because “the infringer might, in a but-for world, have hypothetically sold completely different products, in a completely different market, to completely different customers” (Dow Factum [73]).
The appeal of Rowe J’s approach is that it avoids these paradoxes. Under his approach, the profit to be disgorged remains the same, regardless of the vagaries of unrelated markets. What Nova might have done but for the infringement is irrelevant: if there is no NIO, then the amount to be disgorged is $600m in any scenario; and if there is an NIO, that NIO remains the same, regardless of what else Nova might have done, and the amount to be disgorged therefore remains the same, regardless of what might be going on with footwear fashion or the price of tea in China.
I’ll suggest that there are two aspects to this intuition. One aspect is that an invention has some inherent value that can be revealed by a proper comparison. We might call this the positive intuition. Another aspect is that even if the invention does not have any inherent value, at least we can say that the amount to be disgorged should not vary with the vagaries of entirely unrelated markets. We can call this the negative intuition.
The positive intuition can be addressed briefly (though I go on at more length in the article itself). A comparison between Schmeiser and Rivett, both of which were approved and relied on by Rowe J, shows that an invention does not have an inherent value. Both involved infringement of the same patent and the same comparator, namely conventional seed, but in Schmeiser the disgorgement was zero while in Rivett the disgorgement was substantial. This is because the nature of the infringement was different: Mr Schmeiser did not take advantage of the unique properties of the patented invention, while Mr Rivett did. Thus, the quantum disgorged turned not just on the invention, but on the infringement. With all due respect to Rowe J, it is perfectly clear, on the authorities approved by Rowe J himself, that the amount to be disgorged does indeed reflect the “value of the invention in the hands of the infringer” [60].
However, this does not address the negative intuition. It seems entirely reasonable that the quantum to be disgorged should vary according to the infringer’s use of the infringing invention itself, or fluctuations in the market for the infringing product. But it is a very different thing to say that the amount to be disgorged should vary with fluctuations in entirely unrelated markets, such as the market for Crocs or the market for Chinese tea. I suspect that this is the fundamental intuition that was driving Rowe J.
The general point is that on a “but for” accounting, the infringer will be permitted to deduct the profits it would have made in whatever other endeavour it would in fact have engaged in, no matter how unrelated to the invention itself; and to the extent that profits in that alternative market fluctuate, the profits to be disgorged will fluctuate, even if the market for the patented product itself is perfectly stable. How can that make sense?
This intuition is powerful but misguided. It is true that the value of the invention does not vary with fluctuations in an unrelated market. But in an accounting, it is the profit earned by the infringer as a result of the infringement that is disgorged. This turns on the value derived from the attributes of the invention, in combination with value derived from the attributes of the infringer. The value of the infringer’s unique attributes might very well change with fluctuations in other markets in which those attributes might also be exploited. So, in this case, Nova’s special attribute is its efficient ethylene production method. That is an advantage in making the patented plastic, but it is also an advantage in making commodity plastic. If the market for commodity plastic fluctuates, the value of the patented plastic will not change, but the value of Nova’s efficient ethylene production method does change. The profits to be disgorged will therefore also change because those profits reflect the infringer’s special attributes as well as the invention’s special attributes.
It may seem unfair to the patentee that the amount to be disgorged may vary with fluctuations in some unrelated market. Even if the infringer had special advantages in that other market, what is that to the patentee? And indeed, it would be wrong if the patentee’s incentive to invest in the patented technology were to vary with some unrelated market. The easy answer to this problem is that the patentee can seek damages, which will not vary with fluctuations in unrelated markets, whether or not the infringer has any special expertise in those markets. This is why damages are used to preserve the patent incentive.
The power of the paradox arises because it is true that the value of the invention itself does not change with fluctuations in unrelated markets, and it is also true damages awarded will not change with fluctuations in unrelated markets. But it is wrong to transfer this intuition from the damages context to the accounting context because the difference between damages and an accounting is precisely that the special characteristics of the infringer do matter in the accounting context, but do not matter in the damages context. In an accounting, the focus is on the infringer. The amount to be disgorged can fluctuate according to the market for an entirely unrelated product because a comparison with the profits the infringer would have made in the unrelated market is what allows us to distinguish the value of the infringement from the value contributed by the infringer’s specialized assets. The other market may be unrelated to the market for the infringing product, but it will be related to the infringer’s special advantages, and as the other market fluctuates, the value of the infringer’s advantages will fluctuate correspondingly.
This resolves the tea in China example I gave above. If the infringer did not have any special advantage in the Chinese tea market, it will not be able to prove that it would have invested in that market; and even if it does, it will not be able to prove that it would have made any extra profit. The market for Chinese tea is an efficient market and so the return that a naive investor makes will simply be the risk adjusted return to capital. There is nothing wrong with deducting that, as it reflects the cost of capital in the same way as borrowing or investing in bonds, which seem much less outlandish.
So, if we conceive of the purpose of an accounting as being to disgorge the value of the invention in the hands of the infringer, or, equivalently, as requiring disgorgement of profits caused by the infringement, then it makes perfect sense that the quantum may depend on what happens in markets that are unrelated to the market for the invention, but which are related to the infringer’s special attributes or expertise.
The real question is normative. Should we conceive of the disgorgement as focusing on the value of the invention in the hands of the infringer, or should we try to isolate the value of the invention in isolation from the value contributed by the infringer? That question is addressed in Part II of my article.
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