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? / The Value of the Invention / Rivett on the Facts
In Nova v Dow, Rowe J, writing for an 8-1 majority, addressed the proper method of calculating an accounting of profits in the patent context. I have a two-part article on the decision forthcoming in the IPJ. Part I of that article analyzes Nova v Dow at a doctrinal level. What did Rowe J mean by “cause”? What did he mean by “the non-infringing option”? What did he mean by “the value of the invention”? I summarized Part I in a series of blog posts, listed above. Part II addresses the policy implications of Nova v Dow. Are the policy reasons given by Rowe J persuasive? Will Nova v Dow chill innovation? What is the appropriate response to the decision? This is the first in a series of posts summarizing Part II.
The Facts
Dow had a patent on specialized plastic film, used for items such as food packaging. Nova made and sold a competing film that was found to be infringing. Dow was awarded an accounting of Nova’s profits from sales of the infringing film, with a quantum of $644 million. The major input to the infringing plastic is ethylene, an unpatented bulk commodity. Nova had a very efficient process for making ethylene—the “Alberta Advantage”—and so could make ethylene for far less than it would have cost to buy on the open market. On the facts, if Nova had not infringed, it would have used its ethylene to make commodity grade “pail and crate” plastic [FC 158]. Nova argued that because of the Alberta Advantage, it would have made approximately $300 million in profit on the sale of that plastic, despite the competitive nature of that market [FCA 187]. The question was whether Nova was entitled to deduct the amount it would have made in the pail and crate market, on the view that that part of the overall profit was caused by its efficient ethylene production process and not by the infringement.
Rowe J stated that it is a "fundamental principle" that the infringer must disgorge "all profits causally attributable to infringement of the invention" [4] and at the same time he emphasized that the profits to be disgorged in an accounting are "only the profits causally attributable to the invention" [48] (original emphasis). Rowe J set out a three-step test to “conceptualize” an accounting of profits [15]:
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. . . .
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.
As discussed in Part I, Rowe J did not define the terms “non-infringing option” or “causally attributable.”
On the facts, Rowe J held that Nova was not entitled to deduct the amount it would have made in the commodity plastic market, because commodity plastic was not a “non-infringing alternative” (“NIO”) under Step 2, so the entire actual profits were to be deducted.
Purpose of the accounting remedy
Rowe J began his discussion of policy considerations by noting, uncontroversially, that the purpose of the Patent Act is to encourage innovation for the public benefit [43]. He then adverted to three rationales for the accounting remedy: (1) to preserve the patent incentive; (2) a proprietary rationale; (3) a deterrence rationale.
Preserve the patent incentive
Rowe J stated that an accounting serves to “protect the patent bargain,” saying:
[42] Disgorgement is necessary because allowing infringers to appropriate the benefits of the patent monopoly for themselves “discourages research and development, and the disclosure of useful inventions” (Merck [2015 FCA 171], at para. 42). If infringers could keep the profits earned from patent infringement, they could appropriate the time, effort, and risk associated with making the invention for their own benefit. This would make disclosure less likely, and the public would receive fewer innovative products.
[48] Disgorging anything less [than the profits caused by the invention] would reduce the incentive to invent (Merck, at para. 42; ADIR, [2020 FCA 60] at para. 39).
With respect, this paragraph reflects a basic conceptual error. It is true that the primary objective of patent remedies is to preserve the incentive to innovate. It is wrong to suggest that this is the purpose of the accounting remedy; that purpose is served by damages.
The patentee’s incentive to innovate is provided by the profits the patentee expects to make from the exploitation of its invention in the absence of any infringement. The damages remedy preserves the incentive to innovate by restoring the patentee to the position it would have been in but for the infringement: Merck [48], [49]. That is why damages are available as of right, while an accounting is discretionary; that is why TRIPS requires that damages are available as a remedy (Art 45.1), while an accounting is merely permitted (Art 45.2); that is why an accounting is not available at all in the United States.
Rowe J cited Merck for the proposition that disgorgement is necessary to preserve the incentive to invent. Merck does not stand for that proposition. Merck was a damages case, and the passage quoted by Rowe J specifically addressed “[t]he purpose of an award of damages” [41], not the purpose of disgorgement. Moreover, the FCA in Merck specifically endorsed the “but for” test for causation [45], which was rejected by Rowe J in Nova v Dow.
Nor does ADIR support Rowe J’s proposition. While ADIR was an accounting case, the cited paragraph simply says that an accounting is not punitive and nothing in that paragraph or the decision as a whole says that an accounting preserves the incentive to invent. Moreover, ADIR [47] also explicitly endorsed “but for” causation.
In summary, Rowe J’s assertion the purpose of the disgorgement remedy is to preserve the incentive to invent is wrong in principle and is not supported by the authorities he cites.
Proprietary interest
The second rationale given by Rowe J was that “any profits improperly received by the defendant as a result of its wrongful use of the plaintiff’s property. . . having been earned through the use of the plaintiff’s property, rightly belong to the plaintiff” [46]. This correctly links the accounting remedy to the fact that a patent is a property right. However, this link directly implies “but for” causation should be used in assessing an accounting. As Professor Lionel Smith puts it: “[i]f disgorgement is allowed, the effect is that rights cannot be taken; they must be purchased”: (1994), 24 Can Bus LJ 121, 123. Saying that the defendant is required to restore to the plaintiff all profits earned by the defendant through the use of the plaintiff’s property is equivalent to saying that the defendant should be restored to the position it would have been in if it had been prevented from taking the patentee’s rights by an injunction granted quia timet. This directly implies that an accounting should be based on “but for” causation, looking to the position the infringer would have been in had it been prevented from infringing.
The notion that an accounting reflects the principle that rights must be purchased, not taken, also reflects the rationale for injunctive relief set out by Calabresi & Melamed in “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral”(1972), 85 Harv L Rev 1089, one of the most cited law review articles of all time.
Thus, the proprietary nature of the accounting remedy, both in terms of the historical doctrinal link and in terms of the most widely accepted theory of injunctive relief, supports “but for” causation as the correct approach to assessing the quantum of the disgorgement.
Deterrence
Third, Rowe J [47] adverted to the need for deterrence:
Deterrence flows from disgorgement. The incentive to infringe is minimized if an infringer has to disgorge all profits causally attributable to the invention.
At the same time, Rowe J stated repeatedly that an accounting is not punitive and he emphasized (original emphasis) that:
[48] [D]eterrence should not be conflated with punishment. An infringer can be liable for patent infringement even if they had no knowledge of the patent or genuinely believed that the patent was invalid. An accounting of profits should therefore discourage infringement but do no more. This requires disgorging only the profits causally attributable to the invention. Requiring infringers to disgorge anything more would constitute punishment and risk chilling public innovation and competition.
Thus, Rowe J was evidently of the view that his approach would not chill innovation because it is not punitive and the reason it is not punitive is that the profits to be disgorged are causally attributable to the invention.
With due respect, this is nothing more than word games. The incentive effect of a $500m award is the same whether or not we affix the label “punitive” to it. The chilling effect doesn’t turn on the words used to describe the remedy; it turns on the incentive structure created by the remedy, which in turn depends on the nature of the causation concept. The mere fact that the remedy incorporates a causation concept does not guarantee it will not have a chilling effect; it matters which causation concept.
Rowe J cited the FCA decision in ADIR [37] for the proposition that an accounting ensures that infringers are deterred “but not punished” [44]. While the FCA did indeed so hold, the Court emphasized that it is “but for” causation specifically that ensures the accounting remedy is not punitive: see ADIR [39]–[49], esp [47].
In short, the mere fact that Rowe J stated that his approach is not punitive does not mean it does not have a chilling effect. The chilling effect depends on the actual nature of the remedy, not the terminology that is used to describe it. While Rowe J rejected “but for” causation, the FCA cases cited by Rowe J support the view that an accounting must be based on “but for” causation to avoid the chilling effect. As I will discuss in the next post, the FCA is correct on this point, and Rowe J is wrong.
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