Dnow Canada ULC v. Grenke Estate

Dnow Canada ULC v. Grenke Estate
Court (s) Database
Federal Court of Appeal Decisions
Date
2020-03-11
Neutral citation
2020 FCA 61
File numbers
A-201-18, A-244-18
Decision Content
Date: 20200311
Docket: A-244-18
A-201-18
Citation: 2020 FCA 61
CORAM:
DAWSON J.A.
RENNIE J.A.
RIVOALEN J.A.
BETWEEN:
DNOW CANADA ULC,
NATIONAL OILWELL VARCO INC., and
769388 ALBERTA LTD.
Appellants
and
DARIN GRENKE, AS PERSONAL REPRESENTATIVE OF
THE ESTATE OF EDWARD GRENKE, and 284849 ALBERTA LTD.
Respondents
Heard at Toronto, Ontario, on November 25, 2019.
Judgment delivered at Ottawa, Ontario, on March 11, 2020.
PUBLIC REASONS FOR JUDGMENT BY:
DAWSON J.A.
CONCURRED IN BY:
RENNIE J.A.
RIVOALEN J.A.
Date: 20200311
Docket: A-244-18
A-201-18
Citation: 2020 FCA 61
CORAM:
DAWSON J.A.
RENNIE J.A.
RIVOALEN J.A.
BETWEEN:
DNOW CANADA ULC,
NATIONAL OILWELL VARCO INC., and
769388 ALBERTA LTD.
Appellants
and
DARIN GRENKE, AS PERSONAL REPRESENTATIVE OF
THE ESTATE OF EDWARD GRENKE, and 284849 ALBERTA LTD.
Respondents
PUBLIC REASONS FOR JUDGMENT
DAWSON J.A.
Blank/En blanc
Para.
Introduction
1
The parties
12
The issues
15
The standard of review
16
Applicable legal principles
17
Did the Federal Court err by finding there was a causal connection between the infringing sales made by the appellants and the lost sales suffered by the respondents?
22
Did the Federal Court err by finding that the respondents’ historical market share provided a reliable basis on which to calculate the respondents’ lost sales in the “but for” world?
33
Did the Federal Court err by accepting the modified version of the respondents’ market share advanced by the respondents in closing argument after the evidence of their expert witness on market share was discredited on cross-examination?
33
Did the Federal Court make factual errors in its calculation of market share in the “but for” world?
88
a. The number of infringing units sold by the appellants
88
b. The sales of electric versus hydraulic wellhead drives from 2004 onward
105
c. International sales
110
d. Weatherford’s sales
121
Did the Federal Court err by finding that the appellants’ infringing sales caused the respondents to lose “convoyed” sales?
142
Did the Federal Court err by accepting the respondents’ witness Shane Freeson as a properly qualified expert witness?
171
Conclusion
173
Introduction
[1] A stuffing box is a seal assembly used to prevent leakage of fluid between sliding or turning parts of machine elements. To illustrate, a stuffing box is used where the propeller shaft of a boat passes through the hull.
[2] In the oil production industry a stuffing box seals off the top of an oil well from the oil being drawn up the well by a turning rod called the polished rod. The purpose of the stuffing box is to prevent leakage of well fluids into the atmosphere. In heavy oil regions, such as those found in Alberta and Saskatchewan, progressive cavity pumps are used to bring crude oil, laden with sand and water, to the surface. A central component of such progressive capacity pumps is the wellhead drive unit. The wellhead drive unit houses the entire seal assembly system.
[3] In the early 1990s, serious environmental concerns arose from leaking stuffing boxes. Traditional stuffing boxes in use at the time squeezed rope style material against the polished rod. Regular manual tightening was required. However, rope style stuffing boxes were not effective in progressive cavity systems. Oil leaks and spills, causing unplanned well shut downs, were frequent. By the late 1990s, the governments of Alberta and Saskatchewan had greatly increased their efforts to enforce environmental regulations. Escalating penalties were imposed for infractions. Oil producers sought better sealing solutions.
[4] Canadian Patent Number 2,095,937 was designed to address the problems inherent in traditional, rope style stuffing boxes. Edward Grenke, a machinist, was the inventor and owner of the 937 Patent.
[5] The 937 Patent provided an improved seal assembly for restraining oil leakage from oil well pumps. Mr. Grenke licensed the 937 Patent to GrenCo Industries Ltd. Ultimately, all rights, title and interest in the 937 Patent were assigned to GrenCo, which manufactured the GrenCo wellhead drive that incorporated the patented seal assembly. This corporation is now named 284849 Alberta Ltd.
[6] Weatherford Canada Ltd. and Weatherford PC Pump Ltd. were licensed to sell the GrenCo drive. Later, a new license was issued to Weatherford Canada Partnership. Together, these entities are simply referred to as Weatherford in these reasons.
[7] When GrenCo introduced its wellhead drive, incorporating its patented seal assembly, oil producers discovered its benefits, including durability, ease of maintenance, environmental friendliness and lower operating costs. The introduction of the GrenCo drive with its patented sealing system was described as a “paradigm shift” for the progressive cavity pump industry.
[8] In Weatherford Canada Ltd. v. Corlac Inc., 2010 FC 602, 370 F.T.R. 54, the Federal Court found that the 937 Patent was valid and had been infringed by Corlac Inc., Corlac Equipment Ltd., National Oilwell Inc. and National-Oilwell Canada Ltd. The Court issued a permanent injunction restraining further infringement and concluded that the plaintiffs were entitled to an accounting or to damages. The judgment of the Federal Court was substantially affirmed on appeal (2011 FCA 228; 2012 FCA 261).
[9] The plaintiffs elected to recover damages. In reasons cited as 2018 FC 564 the Federal Court provided its assessment that the defendants were obliged to pay to the plaintiffs damages in the amount of $7,915,000.
[10] Subsequently, the damages were increased to $8,207,000 in a corrected, amended judgment.
[11] This is a consolidated appeal from the original and the amended judgments of the Federal Court. A copy of these reasons shall be placed on each file.
The parties
[12] The plaintiffs before the Federal Court were Darin Grenke, as the personal representative of his father, the inventor of the 937 Patent, and 284849 Alberta Ltd. They are the respondents to this appeal. In these reasons they are together referred to as the plaintiffs, the respondents or GrenCo.
[13] The defendants before the Federal Court were DNOW Canada ULC (a corporate successor to National-Oilwell Canada Ltd.), National Oilwell Varco Inc. (formerly National Oilwell Inc.) and 769388 Alberta Ltd. (formerly Corlac Inc.). In these reasons they are together referred to as the defendants, the appellants or Corlac. In the reasons of the Federal Court and in some testimony quoted in these reasons reference is made to “NOV” as a short form of National Oilwell Varco Inc.
[14] For completeness, I note that Corlac Equipment Ltd. (found to be an infringer at trial) was purchased by and amalgamated with National Oilwell Canada Ltd.
The issues
[15] The appellants assert a number of issues on this appeal. I would state the issues to be decided as:
Did the Federal Court err by finding there was a causal connection between the infringing sales made by the appellants and the lost sales suffered by the respondents?
Did the Federal Court err by finding that the respondents’ historical market share provided a reliable basis on which to calculate the respondents’ lost sales in the “but for” world?
Did the Federal Court err by accepting the modified version of the respondents’ market share advanced by the respondents in closing argument, after the evidence of the respondents’ expert witness on market share was discredited on cross-examination?
Did the Federal Court make factual errors in its calculation of market share in the “but for” world by:
Erroneously calculating the number of infringing units sold by the appellants?
Accepting an artificial and inconsistent distinction between electric and hydraulic wellhead drives from 2004 forward?
Failing to appropriately consider international sales data?
Relying on the volume of sales made by Weatherford, a licensee of the 937 Patent, as set out in Exhibits P56 and P57?
Did the Federal Court err by finding that the appellants’ infringing sales caused the respondents to lose “convoyed” sales?
Did the Federal Court err by accepting the respondents’ witness Shane Freeson as a properly qualified expert witness?
The standard of review
[16] The standards of review applicable to the issues raised in this appeal are as described by the Supreme Court in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. The standard of review to be applied to questions of law is correctness. Findings of fact and inferences of fact are to be reviewed on the basis of palpable and overriding error. Findings of mixed fact and law are to be reviewed on the same deferential standard unless an extricable legal error can be demonstrated, in which event such error is reviewed on the correctness standard.
Applicable legal principles
[17] Before turning to the analysis of the issues raised by the appellants, it is helpful to restate some of the legal principles applicable to these issues.
[18] When the owner of a patent or anyone claiming under the patent (plaintiff), seeks damages for infringement of the patent, the following general principles apply:
The purpose of an award of damages is to compensate the plaintiff for any and all losses suffered by the plaintiff as a result of the infringement.
When assessing damages, the plaintiff is entitled to the profits on the sales of patented wares it could and would have made but for the presence of the infringing product in the market.
For those sales made by the defendant that the plaintiff would or could not have made, the plaintiff is entitled to a reasonable royalty based on the defendant’s sales.
When considering what sales a plaintiff could and would have made but for the presence of the infringing product, the Court is to consider a theoretical and hypothetical “but for” world. What would have happened in that hypothetical world must be established on the basis of admissible evidence and any permissible inferences arising from that evidence (Pfizer Canada Inc. v. Teva Canada Limited, 2016 FCA 161, 483 N.R. 275, at paragraph 46).
To “prevent the hypothetical from lapsing into pure speculation” evidence is required of both the nature of the market and the likely outcomes with infringement factored out of the market (Apotex Inc. v. Merck & Co., Inc., 2015 FCA 171, [2016] 2 F.C.R. 202, at paragraph 55).
The task of constructing the hypothetical world for the purpose of assessing compensatory damages is a factual inquiry requiring “robust common sense” (Apotex, paragraph 45, Pfizer, paragraph 55, each case citing Clements v. Clements, 2012 SCC 32, [2012] 2 S.C.R. 181, at paragraphs 8 and 9).
Because of its hypothetical nature, the “but for” world is not a world where “the loss is capable of correct appreciation in stated figures.” (Teva Canada Limited v. Janssen Inc., 2018 FCA 33, 420 D.L.R. (4th) 493, at paragraph 36, citing Watson, Laidlaw & Co. Ltd. v. Pott, Cassels, and Williamson (1914), 31 R.P.C. 104, at pages 117 to 118).
The plaintiff bears the burden of proving the hypothetical world on the balance of probabilities (Pfizer, paragraph 54).
[19] On an appeal to this Court from a judgment of the Federal Court assessing damages for patent infringement, it is inappropriate for this Court to retry the case or substitute its view for the Federal Court’s view of the evidence. As stated by this Court in Pfizer, at paragraph 69:
It must be remembered that judges’ reasons—particularly after long complex trials involving many issues—are often the product of synthesis and distillation. When it comes time to draft reasons in a complex case, trial judges “are not trying to draft an encyclopedia memorializing every last [relevant] morsel.” Rather, they are trying to “distill and synthesize masses of information, separating the wheat from the chaff,” in the end “expressing only the most important…findings and justifications for them”: Canada v. South Yukon Forest Corporation, 2012 FCA 165, 431 N.R. 286 at para. 50.
[20] Accordingly, reasons must be “read as a whole, in the context of the evidence, the issues and the arguments at trial, together with ‘an appreciation of the purposes or functions for which they are delivered’” (R. v. Villaroman, 2016 SCC 33, [2016] 1 S.C.R. 1000, at paragraph 15, citing R. v. Laboucan, 2010 SCC 12, [2010] 1 S.C.R. 397, at paragraph 16, citing R. v. R.E.M., 2008 SCC 51, [2008] 3 S.C.R. 3, at paragraph 16).
[21] Reasons must, however, provide a basis for meaningful appellate review. This requires that the decision and the basis of the decision be intelligible, or capable of being made out on a fair reading of the reasons. A logical connection between the decision and the basis for the decision must be apparent. To determine whether a logical connection between the decision and the basis for the decision is established, a reviewing court is to look at “the evidence, the submissions of counsel and the history of the trial to determine the ‘live’ issues as they emerged during the trial.” (R v. R.E.M., at paragraph 35).
Did the Federal Court err by finding there was a causal connection between the infringing sales made by the appellants and the lost sales suffered by the respondents?
[22] The Federal Court concluded that the plaintiffs had demonstrated causation. The Court found as a fact “that there were lost sales due to the infringement by the Defendants” (reasons, paragraph 90).
[23] The appellants argue that on the evidence before the Federal Court causation was not proven; in consequence, a reasonable royalty is the only fair measure of damages.
[24] I reject the appellants’ submission for the following reasons.
[25] First, at paragraphs 74, 75, 86 and 87 of its reasons, the Federal Court correctly directed itself to the legal test for causation: in respect of lost sales, the plaintiffs “must establish they would have had the sales but for the infringement” by the defendants.
[26] Second, having instructed itself on the legal principles at play, the Federal Court found as a fact that the infringing stuffing boxes sold by the defendants were “a direct substitute” for the stuffing boxes sold by the plaintiffs (reasons, paragraph 52). The Court went on to find that the parties marketed their products in the same geographic markets (reasons, paragraph 90). These factual findings are not challenged by the appellants and formed a basis for the finding of causation.
[27] The Federal Court also referenced evidence of specific lost sales (reasons, paragraph 90).
[28] Wesley Grenke testified at trial as a representative of the plaintiffs. The Federal Court found that he gave “useful evidence” in terms of “market behaviour” during the relevant period. He was found to be a “straightforward, modest witness who gave generally credible evidence” and the defendant’s criticism of his evidence was characterized as “unwarranted.” (reasons, paragraph 23). Mr. Grenke testified as follows:
Q. You talked about NOV being a competitor to GrenCo. Was there a time that you considered that you lost a sale to NOV because of NOV’s drive products?
A. Absolutely. I mean, this happened as soon as they came out with their infringing product. We noticed in a number of different areas that we saw some of their product coming into play. It was either 2000 or 2002 where we saw them promoting it in oil shows and literature. We saw a definitely saw a big push of their products and our customers were trying out their products and they were starting to buy their products. It made a big difference in our business.
Q. Can you give any specifics in terms of examples where you recall that happening, in particular?
A. Yes. Corlac was located in the Lloydminster area. They were known to be selling used equipment. They were a used equipment dealer. They bought and repaired old equipment and were selling it to the end users. When they came out with this product that they used our sealing technology on, we started to see a reduction in sales in the areas initially closest around the Lloydminster area.
There is the Elk Point area, their Bonnyville area, Provost area, Kerrobert area. There are a lot of these areas that were closer to the Lloydminster area that we started to see our sales drop off, and this continued on to the other areas within Alberta and Saskatchewan.
Q. In terms of the oil producers, do you have any in mind that you recall going to NOV in the way you have described?
A. Absolutely. A couple that come to mind was one of them was Penn West in the Kerrobert area. We were selling a lot of equipment to them. When they went to electrify their field and move to electrical-powered equipment, they went out for bid and NOV got that business because they had a competing product.
Likewise, I mean, there was harvest energy in the Provost area and then the whole Bonnyville, Elk Point area, there are so many companies there that changed hands. There are multiple companies now, a big one being CNRL. They switched from GrenCo to using a competing product.
(underlining added)
(appeal book, tab 114, page 3764, line 1 to page 3765, line 15)
[29] Further, on discovery the defendants’ representative Anthony Moore testified:
Q. Let’s go back. There’s a bit of confusion. The question is: Are you aware that on the sale of drives, GrenCo was competing with your company, National?
A. Yes.
Q. In terms of competition at your company, do you ever consider that when you’re competing for a sale with another company and you make the sale, knowing the other company has pitched it, that you have taken that sale away from the other company? Are you familiar with that kind of concept?
A. Well, it’s a zero sum game.
Q. So that does happen?
A. The market share is yours or theirs.
Q. As a factual matter, are you aware of any times during the timeframe we’re talking about that National has competed with Weatherford to sell drives and National has made the sale at the expense of Weatherford?
A. Specifically?
Q. Yes.
A. I’m not aware of any.
Q. But you take that to be the case?
A. We’re in the same marketplace.
Q. So that did happen?
A. It may have happened.
Q. It would be pretty astounding if it did not happen, would it not?
A. Yes.
Q. Can you say the same thing for GrenCo?
A. Yes.
(underlining added)
(appeal book, tab 47, page 2058, paragraph 36, citing transcript October 6, 2011, page 275, line 2 to page 276, line 13)
[30] This evidence on discovery was read in at trial by the plaintiffs (Exhibit P63, appeal book, tab 47).
[31] I am satisfied that there was sufficient evidence to support the Federal Court’s finding that the defendants’ infringing product competed directly in the same market with the plaintiffs’ product and that the plaintiffs lost sales of their drives to the defendants’ competing infringing product.
[32] The Federal Court made no palpable and overriding error in finding that the plaintiffs had met their burden to establish, on a balance of probabilities, that there were lost sales due to infringement by the defendants.
Did the Federal Court err by finding that the respondents’ historical market share provided a reliable basis on which to calculate the respondents’ lost sales in the “but for” world?
Did the Federal Court err by accepting the modified version of the respondents’ market share advanced by the respondents in closing argument after the evidence of their expert witness on market share was discredited on cross-examination?
[33] The next two issues are interrelated and it is convenient to deal with them together. It is first necessary to explain how these issues arose before the Federal Court.
[34] The defendants commenced selling infringing products in late 1999 or early 2000. The Federal Court issued a permanent injunction restraining such sales on June 3, 2010. Therefore, the plaintiffs claim loss incurred during the period from January 1, 2000 to June 3, 2010.
[35] Throughout this period there were three dominant manufacturers in the market selling environmentally friendly wellhead drives. Referred to as the Big 3, these manufacturers were the plaintiffs, the defendants and Weatherford (the licensee of the 937 Patent). In the course of this litigation sales data was produced for each of the Big 3 (notwithstanding this, the sales volumes of both the defendants and Weatherford were, and are, disputed).
[36] During this period, in an attempt to compete with the Big 3, other manufacturers developed technology and began entering the market.
[37] The plaintiffs engaged Shane Freeson, a professional engineer experienced in the oil and gas industry, to provide an opinion estimating the relative market share possessed by each manufacturer who sold environmentally friendly drives during the relevant period.
[38] However, Mr. Freeson did not know the total number of environmentally friendly drives sold either in Canada or internationally for each of the years in question (cross-examination, appeal book, tab 115, page 3947, lines 4 to 19). Nor did he have information about the volume of sales of the other manufacturers who competed against the Big 3 in the relevant period. This obviously complicated his analysis.
[39] Faced with this lacuna in the data, Mr. Freeson relied upon his “general awareness of drives which were being deployed in the oil fields,” to provide the following estimate of the market share of the “other” competitors:
(Exhibit P47, expert report Mr. Freeson, appeal book, tab 18, paragraphs 93 to 94)
[40] Based on these estimated market shares, and on the sales data provided with respect to the sales of the Big 3 as calculated by the plaintiffs’ accounting expert, Mr. Farley Cohen, Mr. Freeson “created” his view of the marketplace (direct examination Mr. Freeson, appeal book, tab 115, page 3923, line 13 to page 3924, line 7, referencing Appendix S to Mr. Freeson’s expert report).
[41] To illustrate, in his original report, Exhibit P50, (appeal book, tab 21) Mr. Cohen calculated the sales of the Big 3 to be 2,033 units in 2000. Based on the assumption that “other manufacturers” had a 5% market share in 2000, Mr. Freeson calculated that the “others” would have sold 107 units. It followed that a total of 2,140 environmentally friendly units would have been sold that year. Mr. Freeson was unaware that some sales data for some of the Big 3 manufacturers included international sales.
[42] Mr. Freeson’s estimate of sales volumes for the years 2000 to 2010, and his estimate of respective market shares were set out in Tables 2 and 3 to his report:
(Exhibit P47, expert report Mr. Freeson, appeal book, tab 18, paragraph 117)
[43] Mr. Freeson also opined in his report that:
124. As stated earlier, if Corlac/National were not in the market with their Enviro drives, oil producers would have turned to one of GrenCo, Weatherford, or one of the other manufacturers. In my opinion, it is reasonable to assume that oil producers would have went [sic] to these manufacturers in proportion to their relative market share after removing Corlac/National. I come to this conclusion because I do not consider that there were any specific reasons why the customers of Corlac/National would have preferred Weatherford (and later Oil Lift) over GrenCo.
[44] In turn, Mr. Cohen relied upon this data and this opinion to provide an estimated market share of the market participants in the “but for” market, excluding the defendants. From the drive sale quantities and the market share percentage estimates in the “but for” world, Mr. Cohen then calculated the plaintiffs’ asserted lost profits for lost drive sales (see Schedules 2b and 3 to his report, as revised in his reply report, Exhibit P51, appeal book, tab 22).
[45] At trial the plaintiffs sought to qualify Mr. Freeson as an expert to give opinion evidence about “the history and development of [progressive cavity pump] systems, and also to provide an opinion on the size and behaviour of the market for surface wellhead equipment in [progressive cavity pump] systems in Canada from 2000 to 2010” (examination on qualifications Mr. Freeson, appeal book, tab 115, page 3853, lines 23 to 28).
[46] More particularly, counsel for the plaintiffs argued that:
The evidence of Mr. Freeson goes directly to that point and is relevant for the determination of the ultimate award. Relevance, I submit, is there. Reliability, I think, is the crux of my friend’s argument here. He does bring a unique, objective approach to this case. Mr. Freeson, as you heard, didn’t make or market the products in issue. He didn’t work for one of the suppliers. You are going to hear evidence from both sides of people who were on the supplier side.
JUSTICE PHELAN: We are not going to hear other evidence on market share?
MR. STRATTON: We are going to hear no [other] expert evidence on market share. This is it, in terms of expert evidence, but what we are going to hear is evidence from individuals who work for the companies that make the product, but no documents. Mr. Freeson is on the side where he investigated the products. He evaluated, he purchased, and as you heard, he was keenly aware and followed who else was doing the same thing.
He gives you the operator side, the purchaser side. It makes him objective, unbiased, and as currently advised, there is nobody else who is going to give you that operator side. There is a relatively small number of suppliers. There is a big number of operators. To get the operator side in a way that the Court -- we are not going to parade hundreds of operators to Court.
We need to bring an expert to give a number to the Court. That is what Mr. Freeson has done.
(underlining added)
(appeal book, tab 115, page 3889, line 5 to page 3890, line 4)
[47] The defendants objected.
[48] After cross-examining Mr. Freeson on his qualifications, the defendants did not maintain any objection to his qualification to speak “on the history of [progressive cavity] pumps”. Counsel for the defendants advised that they “really had no objection to him testifying to what he knew personally.” (appeal book, tab 115, page 3881, line 21 to line 26). The objection to the witness’ qualifications was that he was not qualified as a “market share expert” and was not qualified to provide opinion evidence about the sales and market share of manufacturers of wellhead drive systems other than the Big 3 (appeal book, tab 115, page 3881, line 27 to page 3882, line 3). The most important of these other manufacturers were Oil Lift Technology Inc., KUDU Industries Inc. and Brightling Equipment Ltd.
[49] The Federal Court ruled orally that it was prepared to accept the expertise of Mr. Freeson and to accept his expert report. Any deficiencies in Mr. Freeson’s evidence were said by the Court to go to weight (appeal book, tab 115, page 3898, line 4 to page 3899, line 19).
[50] Thereafter, Mr. Freeson made admissions on cross-examination that significantly undermined the reliability of the conclusions set out in his report, including his conclusions about the respective share of the market each participant possessed during the 10-year period in issue. The unreliability of these conclusions was conceded by the plaintiffs in closing argument. In their memorandum of fact and law on damages submitted at the conclusion of the damages hearing, the plaintiffs characterized Mr. Freeson’s evidence in the following terms:
[82] The only person qualified as an expert to provide assistance on market share numbers was Mr. Freeson, called by the Plaintiffs. Mr. Freeson was a clear and forthcoming witness who candidly admitted in cross-examination that his estimates of the market would have been better if he had had access directly to sales figures of competitors other than the parties to the action. Evidence relating to sales figures for Kudu and Oil Lift was led at trial that, if accurate, was completely inconsistent with the quantification of market share that Mr. Freeson made in his report. It is clear that Mr. Freeson understood very well the players in the market, when they entered the market and with what products. It is also clear, given the evidence that was provided at trial, that his conclusions cannot be relied upon when seeking to put that understanding into numbers of units sold by the market participants.
(underlining added)
[51] The Federal Court accepted that while Mr. Freeson’s “general evidence of the market was useful, particularly up to 2004. … his assumptions about later market shares proved to be incorrect” (reasons, paragraph 25).
[52] Faced with the absence of evidence about the market share held in the relevant period by manufacturers other than the Big 3, the plaintiffs turned to the evidence adduced at trial about their volume of sales. The plaintiffs submitted that the market share of the “other” competitors should still be estimated as a proxy that could be used to produce an estimate for the plaintiffs’ lost sales in the “but for” market. Put another way, it was submitted that the trial evidence permitted the Court to construct the “but for” market. It was particularly significant to this submission that there was no evidence that Mr. Freeson had overlooked any competitor in the market. He was found to have misunderstood the extent of the sales made by Oil Lift and KUDU after they entered the market. Thus, what was fundamentally in dispute was the share of the market possessed by the other manufacturers. Evidence had been adduced at trial about sales made by Oil Lift, KUDU and Brightling (the significant competing manufacturers) and this evidence allowed the respective market shares to be estimated.
[53] Taking Schedule 3 to Mr. Cohen’s reply report, which set out the estimated market shares of the Big 3 and the other competitors, the plaintiff submitted that the evidence given orally at trial supported the following changes to Schedule 3 which were then carried into Schedule 2b which the Federal Court referred to as “modified Schedule 2b” (see, for example, reasons, paragraphs 95 and 128).
For the years 2000, 2001 and 2002 the market share of the “other” competitors was reduced in each year. In each year the “others” were originally said by Mr. Freeson to possess 5% of the market. This was revised to show other manufacturers possessing 0% of the market in 2000 and 4% in each of 2001 and 2002. This was based on oral testimony that there were no Oil Lift products in the market commercially in 2000, and that KUDU was not in the market until after 2002 (direct examination David Garland, appeal book, tab 118, page 4304, lines 2 to 9). In terms of units sold, Schedule 3 had attributed sales of 105, 83 and 75 units to others in these years. This was changed to sales of 0 units in 2000 and 60 units in each of the following years. The basis of these changes was the testimony of a representative of Oil Lift, Mr. Hult. He had testified that in 2001 Oil Lift had sold 50 plus drives to one project and that there were other purchasers (direct examination, appeal book, tab 123, page 4834, line 19 to page 4835, line 1).
For 2003, Mr. Cohen had attributed, based on Mr. Freeson’s opinion, 56 sales to other manufacturers. This was changed to 275 units, 250 attributed to Oil Lift and 25 attributed to KUDU. This was based on evidence from Mr. Hult that Oil Lift had sold 200 units in that year to one particular customer (direct examination, appeal book, tab 123, page 4835, line 15 to page 4836, line 7). A representative of KUDU, Mr. Garland, had testified that in 2003 their sales numbers were limited as their drive entered the market after August 2003 (direct examination, appeal book, tab 118, page 4304, lines 2 to 9).
2004 was said to bring two significant changes to the drive market in Canada that continued until 2010. First, the defendants began to offer an alternative sealing system, the SAI system, available to purchasers seeking hydraulically operated drives (as opposed to electrically operated drives). This system did not infringe the 937 Patent. The second development was that Oil Lift and KUDU began making significant sales and developing a significant presence in the market.
Mr. Cohen had already recognized the first change in his reply report, acknowledging that if the Court found the SAI stuffing box to be a non-infringing alternative for hydraulic drives, lost profits would still be an appropriate measure of damages with respect to electric drive sales and related convoy sales and service revenues. Therefore, in his reply report Mr. Cohen created a new Schedule b in which total losses were set out in Schedule 1b, while financial losses were detailed by category in Schedule 2b. To illustrate, in his original report Mr. Cohen had calculated lost profits based on sales by the defendants of 255 units in 2004, 283 units in 2005, 310 units in 2006 and the like. In the non-infringing alternative set out in Schedule 2b to his reply report, Mr. Cohen calculated profits based on electric units sold by the defendants in those years to be 115 units, 178 units and 243 units. Mr. David Hall, the defendants’ accounting expert, addressed this approach in his sur-reply report, without expressing any concern about the approach (Exhibit D85, appeal book, tab 27, at paragraph 69 and Attachment 47R).
On the basis of evidence adduced at trial the plaintiffs submitted that three types of adjustments had to be made to Mr. Cohen’s Schedule 2b. First, it required adjustment to include the evidence of much higher sales made by Oil Lift, which Mr. Freeson had not appreciated. However, it was said to be contrary to the market realities to include Oil Lift’s pressurized hydraulic sales as impacting on the plaintiffs’ captured market of the defendants’ electric drives. This reflected that if a well site had access to an electric connection, the drive of choice would be electric. Therefore, only Oil Lift’s estimated electric sales ought to be included. The next adjustment related to Mr. Freeson’s failure to understand KUDU’s increased sales of the Oryx stuffing box. Finally, it was necessary to include recognition of sales of drives made by the third competitor Brightling.
On the basis of Mr. Hult’s testimony that 75% or more of the drives sold by Oil Lift were for hydraulic applications only, post-2004 numbers were adjusted to reflect this. They were also adjusted to reflect his testimony with respect to sales that he believed Oil Lift made in 2004 and the following years. Most significantly, the business reached a “turning point” in 2008 when he believed Oil Lift reached sales of thousands of drives.
On the basis of the testimony of Mr. Garland and Mr. Glen Martinka, who was employed by KUDU, estimated sales of KUDU products were increased.
On the basis of testimony given by Craig Hall, a co-owner of Brightling, this manufacturer’s estimated sales were included in the “others” market for the 2008 and 2009 years and the 2010 stub year.
[54] The cumulative effect of these changes to the plaintiffs’ estimated market share was to reduce their calculated lost profits on the sale of original drives from $5,111,000 to $4,468,000.
[55] Attached as an Appendix to these reasons is a chart that shows both the relevant portion of Schedule 2b found in Mr. Cohen’s reply report and the relevant portion of the modified Schedule 2b. The chart provides a basis for understanding the changes or modifications to Schedule 2b proposed by the plaintiffs during closing argument.
[56] With the benefit of this explanation I now consider whether the Federal Court erred by relying upon the plaintiffs’ historical market share to provide a reliable basis on which to calculate lost sales.
[57] The Federal Court considered the issue of the role of historical market share at paragraphs 91 to 97 of its reasons. In these paragraphs the Federal Court:
noted that in the past the Federal Court had used “market share as a proxy for determining a plaintiff’s lost sales” as demonstrated by Jay-Lor International Inc. v. Penta Farm Systems Ltd., 2007 FC 358, 313 F.T.R. 1 (reasons, paragraph 91);
instructed itself that the onus was on the plaintiffs to “establish both that they could have and would have done something, such as made sales or had a certain market share in the hypothetical but-for world.” (reasons, paragraph 92);
noted the defendants’ submission that the plaintiffs had failed to present reliable data on market share and had failed to put forward any evidence about how customers would have behaved in the absence of infringing sales (reasons, paragraph 93); and,
noted the plaintiffs’ responding submission that market share can stand as a proxy for determining what the buyers of an infringing product would have done in the absence of that product since the “market share factor has been identified as one of the factors that is relied upon to determine the number of [the defendants’] sales that would have been captured by [the plaintiffs] if [the defendants’] products were not available”. (reasons, paragraph 94, emphasis in original).
[58] The Federal Court then provided its reasons for finding market share to be “an appropriate method of determining damages”:
[95] In the Hall Sur-Reply Report, the captured market number (GrenCo’s Lost Drive Sales) is estimated at 911 in Scenario 1. In the Cohen Reply Report, this number (Estimated Units Lost by GrenCo) is estimated at 1,268 in Schedule 2 and 1,192 in the original Schedule 2b. As indicated later, I find Cohen’s modified Schedule 2b calculations to be of considerable assistance.
[96] In my view, market share is an appropriate method of determining damages.
[97] This is not a case with a small number of customers, referenced above in Jay-Lor, which might require “customer-specific” evidence, as was suggested by the Defendants. The more pressing question is whether the Plaintiffs have sufficiently established the market share that they would have had in the but-for world, as discussed below.
(emphasis in original)
[59] On this appeal the appellants acknowledge that at paragraph 92 of its reasons the Federal Court identified the proper test to be applied and referenced, at paragraph 93, a number of factors that can impact a customer’s purchasing decision (including things such as price, service, maintenance, relationships and products). However, the appellants submit that the Federal Court failed to consider whether the plaintiffs had proven causation. Simply proving the plaintiffs’ market share did not prove lost sales. A sound economic basis for adopting historical market share as a proxy for lost sales is required. The Federal Court’s failure to address whether historical market share was a reasonable proxy for what would have happened in the “but for” world is asserted to be an error of law.
[60] The respondents submit that given the Federal Court’s conclusion that the market had a choice between the plaintiffs’ product and the defendants’ sealing system (reasons, paragraph 89), the market share approach was a conservative way of looking at the captured market. The respondents did not allege at trial that they would have captured all of the appellants’ infringing drive sales. Rather, they sought only the proportion of those sales that was consistent with the respondents’ overall market share. The market share approach took into account other market players, evolving trends in the market (including developments with respect to pressurized hydraulic sealing systems which will be discussed below) and the choices customers had historically made with respect to the purchase of wellhead drives.
[61] In light of the importance of establishing the behaviour of the market and the share of the market possessed by the other competitors to the Big 3, it would have been helpful if the Federal Court had provided more ample reasons to support its finding that market share was an appropriate method of determining damages. In the absence of t