Nova v Dow: What is to be Done?

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 / Three Policy Arguments / The Source of the Chilling Effect / Miscellaneous Policy Issues / Doctrinal Implications / Will Nova v Dow Create a Chilling Effect?

This is the last in a series of posts summarizing my two-part article in the IPJ on Nova v Dow: 35 IPJ 249 and 36 IPJ 81. The accounting remedy as it had developed since Schmeiser 2004 SCC 34 was a useful tool that could dissuade ‘catch-me-if-you-can’ tactics, in which the infringer intentionally avoids taking a licence, knowing that if caught the only remedy will be damages equal to the royalties it would have agreed to if it had taken a licence in the first place. That tool has now been broken beyond repair: as summarized in previous posts, Nova v Dow is unprincipled and incoherent, and is likely to have a chilling effect that will impede innovation.

What is to be done?

The best response would be to abolish the accounting remedy entirely in the patent context. Any attempt to use it will almost certainly do more harm than good. An accounting remedy is not an essential part of the patent system. It was abolished in US law in 1946 and has not been missed. It is available in the UK, but is rarely used. The main difficulty with this solution is that the formal abolition of an accounting would require legislative action, which is unlikely, certainly in the short term.

An alternative response would be for the courts to restrict an accounting to cases in which the infringer is trying to game the system by avoiding taking an ex ante licence. An accounting under Nova v Dow is quasi-punitive in effect, in that it puts the infringer in a worse position — potentially very dramatically worse — than it would have been in had it never infringed. The risk of the chilling effect arises because innocent infringers may avoid an entire field rather than risk exposure to such a remedy. The chilling effect can therefore be avoided if the remedy is confined to cases in which the infringer actually knew of the patent or was willfully blind as to its existence. And the best justification for an accounting is to deter the catch-me-if-you-can problem, which only arises if the infringer actually knew of the patent or was willfully blind as to its existence. That implies that the chilling effect can be avoided by confining the accounting remedy to that specific context.

This implies that an accounting should not be granted against infringers who did not know of the patent and had no reasonable grounds for knowing of it. But it is not enough to condition the remedy on the infringer’s knowledge of the patent. A party that actually knew of the patent but chooses to infringe, knowing an action will be brought, with the intention of launching a validity action in response, is not trying to game the system. A party who challenges a patent which it reasonably believes is invalid is doing an important public service by invalidating patents that otherwise result in unjustifiably high prices and restrictions on improvements. We do not want to disincentivize socially beneficial challenges of that type.

In order to ensure that the accounting remedy does not have a chilling effect on innocent infringers or dissuade challenges to suspect patents, an accounting should not be granted unless two criteria are satisfied: (1) the infringer actually knew of the patent or was willfully blind to its existence, and (2) the infringer did not have a reasonable belief that the patent was potentially invalid. This is essentially the US requirement for awarding treble damages; the parallel makes sense, since an accounting under Nova v Dow is essentially punitive, and may result in substantially more than treble damages. The problem with this proposal is that we know from the US experience with treble damages that such an inquiry is likely to be very unsatisfactory, Establishing subjective belief in the validity of the patent is very difficult. An objective test may devolve into the formality of getting an appropriate opinion letter, and a more rigorous subjective test risks error and arbitrariness.

But we need not follow the US treble damages approach exactly. Rather than using those criteria as a test, so that the patentee would be entitled to an accounting when those two criteria are satisfied, we should use those criteria as a threshold, so that an accounting may only be granted when those criteria are satisfied, but will not necessarily be granted when those criteria are satisfied. That would leave the courts the discretion to award an accounting only when it is abundantly clear on the particular facts that the infringer was trying to game the system.

Now, this can already be done with punitive damages. Moreover, punitive damages allows the court to tailor the punitive element of the award to the degree of fault, while the punitive element under a Nova v Dow accounting is essentially random, as it depends on whether there is a non-infringing option, and on the difference between the award under ‘but for’ causation and the award under Nova v Dow causation. Because Nova v Dow causation is unprincipled, that difference is arbitrary. That is why I am of the view that it would be better to abolish the accounting remedy entirely.

As noted above, it would require legislative intervention to formally abolish the accounting remedy. But this could be done de facto if the courts were to use their discretion inherent in the award of an equitable remedy such as an accounting to restrict an accounting to cases of egregious bad faith by the infringer. That, in my view, is the best course available to the courts.

I’ll finish with these observations of Edelman J, in his book on Gain-Based Damages (2002) 85–86, writing academically before his appointment to the High Court of Australia, who pointed out that there is an important difference between disgorgement as a remedy for breach of fiduciary responsibilities and as a remedy for infringement of property rights:

[T]he high degree of institutional protection afforded to fiduciary relationships can be justified as necessary to place the fiduciary on constant alert even to the possibility of innocent breach. Such vigil is necessary in relationships characterised by vulnerability and susceptibility to abuse. In comparison, the possibility of an innocent commission of a property wrong is not something against which a vigil can be maintained. The existence of property rights is not as obvious to a defendant as the existence of a relationship of trust and confidence or the vulnerability of the claimant. An innocent recipient of property, no matter how alert, often has no means to determine whether rights are held in the property by some unseen future claimant.

Consequently, Edelman argued that there is no justification for disgorgement damages for innocent breach of property rights. He noted also that in fact disgorgement is generally not available for innocent breach of property rights. Edelman’s comment regarding the difficulty of determining whether a property right has been infringed applies a fortiori to patent rights. Accordingly, with respect to patent rights in particular, Edelman wrote that “disgorgement damages should not be awarded for the infringement of a patent unless the infringement is shown to be wilful or cynical.”