THE SUPREME COURT OF CANADA HAS RULED.
Nova Chemicals: Accounting for differential profits and springboard profits
Lawyers, patent and trademark agents
After more than a decade of proceedings, the Supreme Court of Canada has issued its long-awaited decision in the Nova Chemicals Corp. v. Dow Chemical Co. legal saga regarding the accounting of profits awarded to Dow for Nova’s infringement of its patent on a type of thin, resistant plastic.
The most important court in the country was asked to consider the principles governing the accounting for profits and the awarding of springboard profits as a remedy in patent law. This decision, rendered by an 8 to 1 majority (with the Honourable Côté dissenting), clarifies the framework previously suggested in Monsanto Canada Inc. v. Schmeiser regarding the differential profits approach and formally recognizes the award of springboard profits.
In 2017, the Federal Court ordered Nova to pay Dow the equivalent of more than $645 million in accounting for profits for infringing Dow’s patent, a decision that was confirmed by the Federal Court of Appeal in 2020. Nova subsequently appealed this decision to the Supreme Court of Canada.
The accounting for profits and its objectives
In its judgment, Justice Rowe reminded the Court that accounting for profits consists of requiring the infringer to return all profits made that are causally related to the patented invention. The different “approaches” used by the courts to determine the amount to be awarded to the patentee as accounting for profits are: (1) the differential costs approach, (2) the full costs approach and (3) the differential profits approach.
Despite some aspects that may tend to differentiate them, the Court clarifies that they are not entirely distinct so that a common three-step analytical framework can be used to better conceive the general accounting for profit regime:
- Calculate the actual profits from the sale of the counterfeit product (revenues minus total or differential costs);
- Determine whether there is a non-infringing option that can help isolate the profits causally related to the invention from the portion of the infringer’s profits not causally related to the invention (the differential profits);
- If a non-infringing option exists, subtract the profits that the infringer could have made if he had used the non-infringing option from his actual profits to determine the amount to be disgorged.
The parties did not submit arguments to the Supreme Court as to which of the differential or full costs approach should be preferred, and the Court did not rule on this point. The Federal Court of Appeal’s analysis favouring the full costs approach therefore remains the authority on this issue. Instead, the Supreme Court is called upon to rule on the second stage of the accounting for profit regime and the notion of a non-infringing option.
Differential profits and the non-infringing option
The main issue in the case was whether Nova could consider hypothetical profits that it could have earned on an entirely unrelated product as a non-infringing option for the purpose of calculating differential profits.
Based on the decision in Schmeiser, the Supreme Court confirmed that the differential profits approach is the preferred approach for calculation of profits. This approach seeks to disgorge the profits made by an infringer that are causally related to the patented invention. In other words, one wants to establish the value that the patent or the protected element has allowed the defendant’s merchandise to acquire in order to disgorge only the profits linked to the increase in value of these protected elements.
The non-infringing option allows the court to isolate the part of the product or a similar product that is without the patented features of an invention. Thus, where a non-infringing option exists, which is the infringer’s burden of proof, the courts must use it to establish the profits derived from the patented invention to the exclusion of profits made in connection with the value of other elements of the product that are not patented.
Furthermore, the majority argues that the best non-infringing option is not to establish what is the most profitable similar product that the infringer would have or could have sold had it not infringed. Indeed, this approach would have the effect of encouraging infringement by acting as a form of insurance for infringers. An infringer would still be able to keep an amount equal to the profits it could have made if it had decided to market a previous profitable product line instead of the infringing product.
While an accounting for profits does not seek to punish an infringer or make it end up worse off than if it had never infringed the patent, the approach proposed by Nova necessarily relies on hypothetical notions of what might have happened if the infringer had not infringed the patent. In contrast, the approach advocated in Schmeiser seeks to determine the value of profits causally related to the patented invention, and to disgorge only those profits.
Ultimately, the Supreme Court considers that Nova has not met its burden of showing that its profits were due, in whole or in part, to unpatented features of its product and refuses to grant Nova’s requests to reduce the value of the profits payable to Dow.
The springboard profits
At the same time, a first in Canada, the Supreme Court also confirmed the right to springboard profits for a patentee. Springboard profits are the additional profits made by an infringer once the patent has expired. It is therefore a complementary concept to the accounting for profits made by the infringer during the life of the infringing patent.
The logic behind these profits is based in particular on the springboard rule, whereby the granting of a patent not only confers a monopoly to its holder during the life of the patent, but also allows the patentee to use this monopoly as a market advantage against competitors after the patent expires.
Indeed, a patentee inherits a greater market share and sales capacity than its competitors who cannot compete with him during the life of the patent. When the patent expires, this strategic position in the market continues to benefit the patentee while its competitors must catch up. This advantage acts as a sort of “springboard” or lead over competitors, which is a direct result of the initial monopolistic rights of a patent. There is therefore a direct causal link between these rights and the profits generated upon their expiration.
According to the Court, it is then valid to grant a patentee an accounting for profits made after the expiry of the patent by an infringer who has built up a market share for its own version of the patented product during the life of the patent. Indeed, through these infringing activities, such infringer earns post-expiry profits that it would otherwise never have earned and that would have benefited the patentee instead. The emphasis is therefore not on when the profits were made, but rather on the existence of this causal link.
The Supreme Court’s decision in Nova Chemicals shedsvaluable light on the place of non-infringing options in the determination of differential profits, as well as the ancillary issue of the right to springboard profits. While the decision is relatively comprehensive on these points, several questions remain unanswered.
Notably, the Court did not rule on the suggested approach for determining the costs associated with the revenues earned by an infringer. In many cases, this amount can be a very important value in the calculation of profits. In some circumstances, this amount may have a greater impact on the calculation of profits than the profits of the non-infringing option. It remains to be seen whether the Supreme Court will eventually be called upon to rule on this issue or whether the Federal Court of Appeal’s decision favouring a full costs approach will continue to be the authority on this matter.
Moreover, while we have a relatively clear picture of the application of this approach at the theoretical level, even the Court notes that some types of situations are more suited to this approach than others, namely improvement patents or patents covering only a portion of the infringing product. What about more complex products that cannot be divided as easily as the examples raised by the Court? It will also be interesting to see how these principles will be applied to other forms of intellectual property in the future, such as trademarks and copyrights.