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Infringers held accountable with the springboard profits and accounting for profits remedies

The SCC dismissed Nova Chemical’s appeal of Dow Chemicals’ accounting of profits and springboard profits award in an 8:1 (Côté J. dissenting) split and provided a guide for quantifying the remedy as well as further explaining what a non-infringing option entails.  The SCC also confirmed that spring-boarding profits may be awarded as part of an accounting of profits.

Background

Dow successfully sued Nova for infringement of its CA 2,160,705 covering certain types of polyethylene (2017 FC 350) and elected to recover Nova’s profits from the sale of its infringing products. The Federal Court awarded Dow $644 million (2017 FC 637) inclusive of prejudgment interest and springboard profits + approximately $4.35 million in fees and disbursements (2017 FC 759). The FCA majority upheld the award including the amounts claimed for springboard profits. Nova appealed to the SCC.

Of particular significance was that Nova produced the key intermediate used to make its polyethylene – ethylene glycol – at its own plant and therefore its profits were thought to be significantly higher than Dows.  Nova argued at the lower courts that it should be able to deduct the market costs of ethylene glycol from its profits.  The lower courts only allowed Nova to deduct its actual costs of manufacturing the ethylene glycol.

SCC Clarifies Accounting for Profits Remedy

Justice Rowe, for the majority, provided a three-step test for accounting of profits:

  1. The Court should calculate the actual profits earned by selling the infringing product (i.e., revenue minus full or differential costs).
  2. The Court should determine whether there is a non-infringing option that can help isolate the profits casually attributable to the invention from the portion of the infringer’s profits not casually attributable to the invention (i.e., differential profits).
  3. If there is a non-infringing option, the court should 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.

At step one, the courts should consider the actual revenues and costs of the infringer.  It is irrelevant whether the infringer is an inefficient or efficient manufacturer to this calculation.  For instance, if the infringer is an efficient manufacturer, the patentee is still entitled to all of the profits actually made by the infringer regardless of whether the patentee could have achieved a similar profit level.

At steps two and three, the SCC defined a “non-infringing option” as “any product that helps courts isolate the profits casually attributable to the invention from the profits not casually attributable to the invention.” They explained this would achieve the goal that all profits causally attributed to the invention are disgorged to the patentee.

The SCC also clarified that there are no strict rules surrounding the identification of a non-infringing option.  The option does not always include “an infringers ‘most profitable’ alternative sales product that it ‘would have’ and ‘could have’ sold had it not infringed” because that would create a form of business insurance where large corporate infringers could use previous product lines as a non-infringing option in the event their new product infringes a patent. This would create no incentive not to infringe and undermine the Patent Act’s patent bargain.

Springboard Profits are Allowable

Springboard profits are post-expiry profits that the infringer would not have made but for the infringing activity that occurred during the life of the patent. The SCC explained that springboard profits are an available remedy if the profits are shown to be causally attributable to infringement of the patent and the causation is tied to infringement that occurred during the life of the patent.

Application to Case

The SCC addressed two issues on the appeal:

  1. Did the lower courts err in calculating the profits payable to Dow under an accounting of profits?
  2. Is Dow entitled to springboard profits?

Nova wanted to deduct from its profits the market price of ethylene as opposed to its actual cost of making the ethylene, which was significantly lower than the market price.  The SCC disagreed with this approach on the basis that the courts should only consider actual revenues and costs and not whether the infringer is an efficient or inefficient manufacturer.

With respect to whether Nova could advance a non-infringing alternative argument, the SCC majority found that Nova did not meet their burden of establishing that there were relevant non-infringing options available for the purpose of applying the differential profits approach. Therefore, the profits payable to Dow that included the cost of ethylene in Nova’s polyethylene product were calculated properly.

Finally, the SCC found Dow was entitled to springboard profits from the sales capacity and market share Nova gained from selling the infringing polyethylene product before the patent expired.

The full decision can be read here.