At first blush, the decision of the majority seems fine to me, and reflecting the approach to account of profits taken outside of the patents context. (Disclaimer, I haven’t thought about the detailed facts of the case yet).
On one view, the way we should calculate recoverable profits is using a counterfactual approach, the mirror image of the counterfactual approach we’re all familiar with from the context of compensation of loss. Comparing the world as it is, with the world absent the wrong, what profits has the defendant made (or loss the plaintiff suffered)? On that view, the decision of the SCC is wrong. We might then cut back that starting position (as we do in the context of compensation for loss) but that is where we begin.
I’d suggest the better view is that quantum of profits is not and should not calculated using a counterfactual approach. Rather we ask to what extent the profits actually made are attributable to the right that has been infringed. It is a rule of historic attribution.
The classic illustration in the context of breach of copyright is the SCOTUS decision in Sheldon v Metro Goldwyn Pictures Corp. The defendants had infringed the copyright to the plaintiff’s play “Dishonored Lady” in producing the Joan Crawford movie “Letty Lynton.” Negotiations had taken place for the acquisition of the rights for a price of $30,000 but these had fallen through and the studio had proceeded to make the film in flagrant breach of copyright. The total net profits were $587,604. Although this was an example of deliberate plagiarism, the plaintiff was not awarded the entire net profits made. As a counterfactual matter what profits would have been acquired but for the infringement was not determined. An apportionment was made, allowing the defendants to keep the proportion attributable to their original and creative work that had gone into the adaptation. Although no profits at all may have been made without the (mis-)use of the plaintiff’s play, the value of the input of Joan Crawford and others from the film studio was greater. The plaintiff was awarded twenty percent of the profits (still considerably higher than a reasonable licence fee).
In the patents context of Nova v Dow, we should similarly be unconcerned with what, as a matter of fact, the defendants would have done if they had not infringed the patent. We’re trying to ascertain what portion of the profits are attributable to the infringement, and how much to all the other inputs that there were. Which is why the court is trying to compare the profits made with those that could have been made from the nearest comparable non-infringing activity (and not with the counterfactual of what would otherwise have happened: we don’t care about that). There is not, of course, any scientific way for assessing that, anymore than we can say for sure that 20% of the profits from Letty Lyndon were attributable to the play, and, say, 70% to the brilliance of Crawford, 10% to MGM’s production values.
This method of quantification follows, I think, from the reason why IP rights give rise to an award of account of profits, when the infringement of most other rights don’t. In order to encourage the creation of works of art, cures for cancer, sports shoes that fit, we confer on the holders of copyrights, patents, and trademarks an entitlement to the profits that are attributable to their rights. That isn’t determined counterfactually (as it is in the context of consequential loss) but is instead a rule of attribution.
This rule can cut both ways (ie it can operate to the advantage of one or the other party). If the defendant can show that if he had not done the profit making activity he would instead have done another unrelated lawful activity that would have proven far more lucrative, that too is ignored.
[Letty Lynton hasn’t been shown since, and no good copies of the film survive. Which tells us something about whether IP law is an unequivocally good thing as it currently operates.]
Rob
From: Norman Siebrasse <norman.siebrasse@gmail.com>
Sent: 24 November 2022 14:53
To: Jason W Neyers <jneyers@uwo.ca>
Cc: obligations <obligations@uwo.ca>
Subject: Re: ODG: Account of Profits in the SCC
The basic issue in Nova v Dow is how to define "profits" in an accounting of profits remedy, in the patent context. In my view, the majority SCC decision is a complete train wreck and the dissent of Côté J was excellent.
The brief facts are that Dow had a patent on plastic film (eg chocolate bar wrappers). Nova was a competitor that made infringing film. (Liability was not at issue in this decision, only remedy.) Dow was awarded an accounting of Nova’s profits. The major input to the infringing film is ethylene, an unpatented bulk commodity. Nova had a very efficient process for making ethylene, so it could manufacture at far below market price. Nova’s accounting profit (revenue less its actual cost) on the infringing film was $600m. On the facts, if it had not infringed, Nova would have used its ethylene to make commodity grade “pail and crate” plastic. Because of its low cost ethylene, it would have made $300m in profit in the pail and crate market.
Prior to the FCA decision in Dow v Nova, the (emerging) law in the Federal Court was that the profit to be disgorged is the profit caused by the infringement, using “but for” causation. So, in this case, the actual profit from the infringement is $600m, the profit that would have been made but for the infringement is $300m, and the profit to be disgorged would be the difference, namely $300m.
The FCA in Dow v Nova used a different approach, comparing the actual profit with the profit that would have been made using the best non-infringing alternative (NIA). So the key question is how to define the NIA. In my view, the best non-infringing alternative is simply what the infringer would in fact have done but for the infringement. In other words, there is no difference between the NIA analysis and but for causation. This is really the underlying issue - is the "non-infringing alternative:" approach (1) simply a reflection of "but for" causation (my view), or (2) is it something else, and if so, what?
The FCA in Dow v Nova rejected (1) and held that on the facts that there was no NIA, and consequently, Nova was liable to account for the entire $600m actual profit. The SCC majority affirmed. So, on the facts, but for causation was rejected.
If the NIA is not simply a reflection of but for causation, what is it? Neither the FCA nor the SCC answered this question. The SCC majority said (a) it is a matter of fact and (b) there was a concession, so there is no reason to intervene..Côté J made two good points in response. Re (a), surely it can't just be an unprincipled and essentially arbitrary matter of fact - there must be some guiding principle, and if so, we need to know what it is. To illustrate how uncertain it is, the majority indicated that even the pail and crate market might count as an NIA if the TJ made a finding to that effect. Re (b) she has a good discussion of why the concession wasn't really a concession to that effect. But nonetheless, the point remains that the majority treated it as a concession, and that is why it was able to avoid applying a clear principle on the facts.
The key question in the patent context going forward will be how to define the NIA.
The broader issue is the extent to which this decision will impact other areas of the law. My sense is not very much - it will be possible to interpret it in a way that it is confined to patent law. I'd also be interested in your views on Côté J's discussion of general principles of restitution etc. I think she was entirely correct on the patent side, but I don't know the broader literature as well.
If you want more, I've written quite a lot on the FCA decision: FCA Radical FCA Subjective FCA Baseline FCA Fixed Costs FCA Sunk Costs FCA leave granted
On Thu, Nov 24, 2022 at 9:45 AM Jason W Neyers <jneyers@uwo.ca> wrote:
Dear Colleagues:
The Supreme Court of Canada recently released its 8-1 decision in Nova Chemicals Corp. v. Dow Chemical Co., 2020 FCA 141, 2022 SCC 43 (39439). The appeal concerned the proper calculation of an account of profits remedy for patent infringement. Amongst other issues, the Supreme Court dealt with whether deductions might be made for theoretical profits that the infringer could have earned on an entirely unrelated product had it not infringed (answer: no) and whether Springboard profits, i.e. profits that arise post-patent-expiry but that are causally attributable to infringement of the invention during the period of patent protection, are available in Canadian law (answer: yes). Justice Côté dissented.
Happy Reading,
Jason Neyers
Professor of Law
Faculty of Law
Western University
Law Building Rm 26
e. jneyers@uwo.ca
t. 519.661.2111 (x88435)
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Norman Siebrasse
Professor of Law
University of New Brunswick
Sufficient Description.com
