Grenke v. DNOW Canada ULC

Grenke v. DNOW Canada ULC
Court (s) Database
Federal Court Decisions
Date
2018-05-31
Neutral citation
2018 FC 564
File numbers
T-1236-01
Decision Content
Date: 20180531
Docket: T-1236-01
Citation: 2018 FC 564
BETWEEN:
DARIN GRENKE, as personal representative of the ESTATE OF EDWARD GRENKE, and 284849 ALBERTA LTD.
Plaintiffs
and
DNOW CANADA ULC,
NATIONAL OILWELL VARCO INC., and 769388 ALBERTA LTD.
Defendants
REASONS FOR JUDGMENT
TABLE OF CONTENTS
SECTIONS:
PARAGRAPH #
I. Introduction
[1] - [6]
II. Issues
[7]
III. Background
[8]
A. The Parties
[8] - [17]
B. 937 Patent/Technology
[18] - [21]
C. Witnesses
[22]
(1) Plaintiffs’ Fact Witnesses
[23]
(a) Wes Grenke
[23]
(b) Robert Moneta
[24]
(c) Shane Freeson
[25] - [26]
(d) David Garland
[27]
(e) Darin Austin
[28]
(f) John Gazdewich
[29]
(2) Plaintiffs’ Expert Witnesses
[30]
(a) Farley Cohen
[30] - [32]
(b) Cam Matthews
[33] - [34]
(3) Defendants’ Fact Witnesses
[35]
(a) Jared Kaluski
[35]
(b) Denis Blaquiere
[36]
(c) Craig Hall
[37]
(d) Glen Martinka
[38]
(e) Vern Hult
[39]
(f) Murray Robertson
[40]
(4) Defendants’ Expert Witness
[41]
(a) David Hall
[41] - [42]
D. Market
[43] - [47]
E. GrenCo
[48] - [50]
F. Corlac/NOV
[51] - [55]
G. Weatherford
[56] - [57]
H. Kudu’s Oryx
[58] - [60]
I. Oil Lift
[61] - [65]
J. Others
[66] - [68]
IV. Analysis
[69]
A. Overview of Damages
[69] - [77]
B. Number of Infringing Products
[78]
(1) ISSUE 1: How many drives did the Defendants make or sell with “Enviro” stuffing box products (including “Retrofit”, “Integral”, or “Griffin” stuffing boxes) during the 2000 to June 2010 timeframe [the Infringement Period or the relevant years]?
[78] - [84]
(2) ISSUE 2: How many standalone “Enviro” stuffing box products were made or sold during the Infringement Period?
[85]
C. Lost Sales
[86]
(1) ISSUE 3: Has GrenCo established that it lost sales of drives due to the infringement by the Defendants?
[86] - [90]
(2) ISSUE 4: Is estimated market share an appropriate method to determine lost sales and, if so, what is the relevant market? [Not addressed by the Defendants]
[91] - [97]
(3) ISSUE 5: What was GrenCo’s estimated market share in the relevant market? [Not addressed by the Defendants]
ISSUE 6: What would GrenCo’s market share have been if the Defendants were not in the market with their infringing products?
ISSUE 7: How many sales of drives would GrenCo have made but for the Defendants’ infringement (GrenCo’s “lost drive sales” in a “but for” analysis)?
[98] - [103]
(a) Market Share
[104] - [105]
(i) Years 2000-2002
[106] - [108]
(ii) Year 2003
[109]
(iii) Years 2004-2010
[110] - [113]
(iv) Conclusion
[114]
(4) ISSUE 8: What was GrenCo’s lost profit per lost drive sale during the Infringement Period: what were the price and incremental cost for drive sales at GrenCo?
[115]
(a) Wages/Salaries and Benefits
[116] - [117]
(b) Management Salaries
[118] - [119]
(c) Advertising, Travel, and Promotion
[120] - [121]
(d) Utilities
[122]
(e) Bank Charges and Interest
[123]
(5) ISSUE 9: What are the Plaintiffs’ total lost profits for lost drive sales?
[124]
(a) Direct Loss/Profit
[125] - [130]
D. Reasonable Royalty
[131]
(1) General
[131] - [136]
(2) ISSUE 10: What is the royalty rate on sales price that should be applied to the Defendants’ sales of infringing drives and stuffing boxes?
[137] - [145]
(3) ISSUE 11: How many drives and stuffing boxes are subject to a reasonable royalty and what prices were charged for those drives and stuffing boxes?
[146] - [147]
(4) ISSUE 12: What total royalties are the Plaintiffs entitled to based on the Defendants’ infringing sales of drives and stuffing boxes?
[148]
E. Lost Service, Drive Rebuilds and Convoy Products
[149]
(1) ISSUE 13: Has GrenCo established that the Defendants’ infringement caused GrenCo to lose the sale of rebuilt drives?
[149] - [152]
(2) ISSUE 14: If the answer to ISSUE 13 is yes, how many sales of rebuilt drives did GrenCo lose? What was GrenCo’s lost profit per lost sale of a drive rebuild during the Infringement Period? What are GrenCo’s total lost profits on lost sales of drive rebuilds?
[153] - [154]
(3) ISSUE 15: Has GrenCo established that the sale of infringing products by the Defendants caused it to lose sales of other non-infringing products?
[155] - [165]
(4) ISSUE 16: If the answer to ISSUE 15 is yes, what products did GrenCo lose sales of and over what period of time? How many of each of those products did GrenCo lose the sale of? What was GrenCo’s lost profit on sales of these products? What are GrenCo’s total lost profits on lost sales of other products?
[166] - [169]
(5) ISSUE 17: What are GrenCo’s total lost profits on lost drive servicing?
[170] - [174]
F. Non-Infringing Alternative
[175]
(1) ISSUE 18: Are the SAI stuffing boxes or other sealing systems non-infringing alternatives?
[175] - [182]
(2) ISSUE 19: If the answer to ISSUE 18 is yes, what was the impact of the availability of the SAI stuffing box (or others) as a non-infringing alternative on the market? What are GrenCo’s total lost profits taking into account the SAI stuffing box (or other sealing systems) as a non-infringing alternative?
[183]
G. Punitive Damages
[184]
(1) ISSUE 20: Is an award of punitive damages, in addition to what may otherwise be awarded, warranted in this case?
[184] - [190]
H. Interest
[191]
(1) ISSUE 21: Is GrenCo entitled to claim pre-judgment interest?
[191] - [203]
(2) ISSUE 22: Prior to the sale of GrenCo’s assets to a third party, should pre-judgment interest on damages be calculated on a compound basis?
[204] - [212]
I. Costs
[213]
(1) ISSUE 23: What are the costs payable for the liability and remedies phases of this proceeding and to whom?
[213]
V. Conclusion
[214]
PHELAN J.
I. Introduction
[1] This is the damages phase of the patent infringement action. It has taken a long time to reach this point. On June 3, 2010, in Weatherford Canada Ltd v Corlac Inc, 2010 FC 602, 370 FTR 54 [Weatherford Canada], the Court found that Canadian Patent No 2,095,937 [937 Patent], relating to seals in stuffing boxes on oil drilling equipment, was valid and had been infringed.
The infringers were Corlac Inc, Corlac Equipment Ltd, National Oilwell Inc (now known as National Oilwell Varco Inc), and National Oilwell Canada Ltd.
[2] The Court concluded that the Plaintiffs were entitled to an accounting or to damages to be assessed by the Court including claims for exemplary or punitive damages and pre and post-judgment interest as of June 3, 2010.
The Plaintiffs elected to recover damages rather than an accounting of profits.
[3] On appeal, the Federal Court of Appeal [FCA] upheld the trial decision with the exception of “Claim 17”, the issue involving inducement. This issue was re-determined by the Court in accordance with the FCA directions. The FCA then found the first FCA decision in error and directed a second re-determination which occurred in the context of the assessment of damages.
[4] Despite continuing to pursue Claim 17, the Defendants now agree at the damages phase that Claim 17 is irrelevant because it has no impact on the award. The Defendants claim the issue is moot and ask this Court not to decide the matter. However, the FCA directed this Court to consider the matter and it will. It is the subject of a separate Judgment and Reasons.
[5] The Plaintiffs originally sought an award of:
a) $13,118,000 in damages, including interest;
b) $1,882,000 in punitive and exemplary damages; and
c) Costs to be determined after written submissions of the parties.
[6] As a result of evidence at trial, the Plaintiffs have reduced their damages claim to between $9,517,000 and $9,995,000. The difference depends principally on which royalty rate the Court accepts.
II. Issues
[7] The parties largely agree on the issues to be considered in this assessment of damages:
NUMBER OF INFRINGING PRODUCTS
How many drives did the Defendants make or sell with “Enviro” stuffing box products (including “Retrofit”, “Integral”, or “Griffin” stuffing boxes) during the 2000 to June, 2010 timeframe [the Infringement Period or the relevant years]?
How many standalone “Enviro” stuffing box products were made or sold during the Infringement Period?
LOST SALES
Has GrenCo established that it lost sales of drives due to the infringement by the Defendants?
Is estimated market share an appropriate method to determine lost sales and, if so, what is the relevant market? [Not addressed by the Defendants]
What was GrenCo’s estimated market share in the relevant market? [Not addressed by the Defendants]
What would GrenCo’s market share have been if the Defendants were not in the market with their infringing products?
How many sales of drives would GrenCo have made but for the Defendants’ infringement (GrenCo’s “lost drive sales” in a “but for” analysis)?
What was GrenCo’s lost profit per lost drive sale during the Infringement Period; what were the price and incremental cost for drive sales at GrenCo?
What are the Plaintiffs’ total lost profits for lost drive sales?
REASONABLE ROYALTY
What is the royalty rate on sales price that should be applied to the Defendants’ sales of infringing drives and stuffing boxes?
How many drives and stuffing boxes are subject to a reasonable royalty and what prices were charged for those drives and stuffing boxes?
What total royalties are the Plaintiffs entitled to based on the Defendants’ infringing sales of drives and stuffing boxes?
LOST SERVICE, DRIVE REBUILDS, AND CONVOY PRODUCTS
Has GrenCo established that the Defendants’ infringement caused GrenCo to lose the sale of rebuilt drives?
If the answer to ISSUE 13 is yes, how many sales of rebuilt drives did GrenCo lose? What was GrenCo’s lost profit per lost sale of a drive rebuild during the Infringement Period? What are GrenCo’s total lost profits on lost sales of drive rebuilds?
Has GrenCo established that the sale of infringing products by the Defendants caused it to lose sales of other non-infringing products?
If the answer to ISSUE 15 is yes, what products did GrenCo lose sales of and over what period of time? How many of each of those products did GrenCo lose the sale of? What was GrenCo’s lost profit on sales of these products? What are GrenCo’s total lost profits on lost sales of other products?
What are GrenCo’s total lost profits on lost drive servicing?
NON-INFRINGING ALTERNATIVE
Are the SAI stuffing boxes or other sealing systems non-infringing alternatives?
If the answer to ISSUE 18 is yes, what was the impact of the availability of the SAI stuffing box (or others) as a non-infringing alternative on the market? What are GrenCo’s total lost profits taking into account the SAI stuffing box (or other sealing systems) as a non-infringing alternative?
PUNITIVE DAMAGES
Is an award of punitive damages, in addition to what may otherwise be awarded, warranted in this case?
INTEREST
Is GrenCo entitled to claim pre-judgment interest?
Prior to the sale of GrenCo’s assets to a third party, should pre-judgment interest on damages be calculated on a compound basis?
COSTS
What are the costs payable for the liability and remedies phases of this proceeding and to whom?
III. Background
A. The Parties
[8] GrenCo Industries Ltd, a small machine shop in the Edmonton area, was founded by Edward Grenke. He was the President, General Manager, and a shareholder of the company, and the inventor and owner of the 937 Patent.
[9] Grenke originally licensed the 937 Patent to GrenCo Industries Ltd in December 1992, but then assigned all its rights, title and interest in the 937 Patent to GrenCo Industries Ltd on June 3, 2010, the day the Judgment of this Court in his favour was rendered.
On October 25, 2011, GrenCo Industries Ltd changed its name to 284849 Alberta Ltd [GrenCo], which is now a named party in the place of GrenCo Industries Ltd.
[10] Just over two months after the Court’s Judgment, Grenke died. Darin Grenke, one of Grenke’s sons, was the Personal Representative of the Estate.
[11] The Defendant, 769388 Alberta Ltd, formerly known as Corlac Inc [Corlac], is an Alberta company based in Lloydminster, Alberta.
[12] Corlac was the parent and sole shareholder of Corlac Equipment Ltd, which manufactured, assembled, and sold drive heads and stuffing boxes until 2003. Corlac Equipment Ltd was purchased by National-Oilwell Canada Ltd [NOC] on November 20, 2003 and amalgamated with NOC on January 1, 2004. NOC became the successor company.
[13] NOC is an Alberta corporation based in Calgary. From January 2004 onward, NOC sold Enviro stuffing boxes in Canada. The current Defendant, DNOW Canada ULC, is a corporate successor to NOC.
[14] The current Defendant, National Oilwell Varco Inc [NOV] is also a corporate successor of NOC. NOV is a Delaware corporation with a head office in Houston, Texas, and the ultimate parent of NOC.
[15] Weatherford Canada Ltd is an Alberta corporation based in Calgary. It had claimed under the patentee as the amalgamation successor to Weatherford PC Pump Ltd, who was the sole sub-licensee of the 937 Patent from GrenCo from February 1, 2000 to February 1, 2001.
[16] Weatherford Canada Partnership was formed through the transfer of assets from Weatherford Artificial Lift Systems Canada Ltd, a successor of Weatherford PC Pump Ltd, and a predecessor corporation of Weatherford Canada Ltd. Weatherford Canada Partnership claimed under the patentee as the sole sub-licensee of the 937 Patent from GrenCo from February 1, 2001 onward.
[17] The Defendants entered into a settlement agreement with Weatherford Canada Ltd and Weatherford Canada Partnership [collectively, Weatherford] dated September 1, 2012. Although they have disappeared from this litigation, they were in the relevant market in 2000 onward.
B. 937 Patent/Technology
[18] The description of the 937 Patent and the rotary progressive cavity pump [PC or PCP] were fully described in this Court’s judgment in Weatherford Canada.
The 937 Patent claimed a seal assembly combination designed to fix a problem of leaking stuffing boxes on PC pumps. In simple terms, a stuffing box is the device which seals off the top of the oil well from the oil being drawn up by a turning rod.
[19] The 937 Patent was designed to limit leakage, which causes a loss of oil, environmental damage, and unplanned wellhead shutdowns. The patented device allowed for planned maintenance by having the seals in the stuffing box fail in sequence and permitting the inspection of the progress of seal failure to anticipate complete failure of the sealing mechanism.
[20] GrenCo’s wellhead drive with its unique design [the GrenCo Product] had, as the evidence in this proceeding confirmed (see, for example, the Freeson Report), many benefits including durability, ease of maintenance, environmental friendliness, and lower operating costs.
[21] The description of the introduction of the GrenCo Product as causing “a paradigm shift for the PC Pump industry” is an accurate one.
C. Witnesses
[22] It is not the Court’s intention to summarize each witness’ evidence. The important parts of such evidence are discussed in relation to the relevant issues in these Reasons. However, a brief review and some comments about the expert evidence will set some context for the findings on these issues.
(1) Plaintiffs’ Fact Witnesses
(a) Wes Grenke
[23] Wes Grenke gave useful evidence both in terms of background and market behaviour during the relevant Infringement Period. He was helpful in explaining how the company operated, some of which was relevant to the calculation of GrenCo’s costs. While he held a high opinion of GrenCo’s influence in the market which was not totally supported by other market evidence, he was a straightforward, modest witness who gave generally credible evidence even when retracting from evidence given years ago. The Defendants’ criticism of his evidence is unwarranted.
(b) Robert Moneta
[24] Robert Moneta was a senior applications technologist at Weatherford. He gave evidence about Weatherford’s business in stuffing box products although some of his evidence could not be admitted. He also gave general evidence of other players in the market.
(c) Shane Freeson
[25] Shane Freeson was called both as a fact witness in relation to his own work as well as a market expert on market behaviour and size. His general evidence of the market was useful, particularly up to 2004. As discussed later, his assumptions about later market shares proved to be incorrect because he had not seen the market evidence, particularly that presented by Hult.
[26] I assessed him as an honest witness who tried to assist the Court but did not always achieve that goal. His erroneous information was discounted and the Plaintiffs were able to work with more accurate information on market share. The other important failing of his evidence was his heavy emphasis on personal experience which was inconsistent with the role of an expert.
(d) David Garland
[27] David Garland, General Manager of Cougar Wellhead Services, gave evidence about the general market as well as Kudu’s sales, the Oryx product, and the dominant position Weatherford held for a period of time and its declining position. He was generally helpful to the Court.
(e) Darin Austin
[28] Darin Austin, an engineer, had worked for many operators in the PCP field including Kudu, Robbins & Meyers, and others. He described the various products with which he was familiar, the rise of GrenCo in the market, and the competitive landscape – all of which was useful background and context information.
(f) John Gazdewich
[29] John Gazdewich was a consultant in finance who had been involved with Weatherford and Oil Lift Technology Inc [Oil Lift]. His information was useful for purposes of calculating a reasonable royalty.
(2) Plaintiffs’ Expert Witnesses
(a) Farley Cohen
[30] Farley Cohen, a CPA, was GrenCo’s principal accounting expert for the quantification of economic damages. His evidence is referred to and relied upon in these Reasons’ canvassing of the issues to be addressed by the Court.
[31] He explained his approach and methodology clearly and succinctly. He supported his conclusions with logic, and admitted the areas of weakness and subjectivity, even in relation to the debate about what constitutes a fixed versus variable cost.
[32] I found Cohen to be highly credible, objective, and extremely helpful. I gave his evidence great weight and generally preferred it to others, particularly those who challenged his methods and conclusions.
(b) Cam Matthews
[33] Cam Matthews was an expert in PC pumps who gave evidence on the range of reasonable royalty applicable in this case. He explained logically how he came to a base of 6% reasonable royalty, which was accepted by the Defendants’ expert, and then bumped it up to take account of various factors and the unique circumstances of the case to 8%.
[34] Matthews’ attempt to explain how a reasonable royalty could rise to 10% based on his “maximum willing to pay/minimum willing to accept” analysis was flawed and I can find no real support for this higher figure. The Defendants’ attempt to attack Matthews’ personal credibility was unwarranted and unsustainable. Subject to some limitations, I found his evidence helpful, as is reflected later in these Reasons.
(3) Defendants’ Fact Witnesses
(a) Jared Kaluski
[35] Jared Kaluski was a procurement manager at Weatherford. He gave evidence on drive sales in the latter of the relevant years. His evidence was not of material assistance to this case and his efforts to downplay the merits of the GrenCo Products begged the question why NOV would go to such efforts to infringe on a product of such limited value.
(b) Denis Blaquiere
[36] Denis Blaquiere is the Managing Director of PCP Solution at Dover Corporation. He attempted to be helpful, gave some necessary information on Corlac’s record keeping practices, and some evidence about drive sales. His evidence, in many cases, was based upon limited knowledge or reliance on other people’s work.
(c) Craig Hall
[37] Craig Hall was co-owner of Brightling. He attempted to assist the Court with drive sales information during the Infringement Period. While the company was not competitive with GrenCo, his information as to the market and products generally was useful background and context.
(d) Glen Martinka
[38] Glen Martinka was a surface equipment sales and service manager at NOV. He gave some useful background about Kudu products and about drive sales, some of which was anecdotal.
(e) Vern Hult
[39] Vern Hult was the former president and co-founder of Oil Lift. He was a credible witness who gave the best evidence he could recall about Oil Lift drive sales during the Infringement Period. While his evidence was “ball park” numbers, it was sufficient for the Court’s purposes. He underscored the substantial technology and the market for pressurized hydraulic drives as distinct from electric drives.
(f) Murray Robertson
[40] Murray Robertson, an Oil Lift technician, gave evidence about Corlac and inventory lists and similar matters.
(4) Defendants’ Expert Witness
(a) David Hall
[41] David Hall is the Managing Director of Disputes & Investigations at Alvarez & Marsal in Denver with relevant experience for this case. The Court’s comments on his conclusions are set forth under the specific issues in these Reasons. He was a credible witness who generally explained the basis for his conclusions well. In many areas he was not appreciably different from Cohen.
[42] He put great focus on the reasonable royalty aspect of his reports, which is perhaps consistent with the Defendants’ theory of the case that a reasonable royalty was the best way to calculate compensation. He did not have the in-depth knowledge of GrenCo’s business that Cohen had, and therefore his costing analysis was less satisfactory. As indicated earlier, Cohen’s evidence was generally preferred as it was a better attempt to find fair and reasonable damages.
D. Market
[43] Historically, oil producers had thought of the down-hole pump as the most significant consideration when it came to choosing a supplier, with the drive being considered merely a “throw-in” item.
[44] When GrenCo introduced its drives and new sealing system – the surface equipment side of the oil drilling equation – oil producers defined two independent roles to manage PC pump operations, one focused on down-hole activities and another to deal with surface equipment, including drive heads. Customers were purchasing separately the down-hole equipment and the surface equipment including drive heads, depending on who had better products, among other factors.
[45] The market in which GrenCo operated and in which the Defendants sought to operate through their infringing products was environmentally friendly wellhead drives for general application in the oil industry. The oil producers were demanding – often spurred on by environmental concerns and government action – some form of environmentally friendly or leakless sealing system. Rope style stuffing boxes were generally declining in sales and use. The product at the root of the market competition was mechanical lip sealing mechanisms as opposed to hydraulic pressurized seals.
[46] By 2000, three major manufacturers dominated the market in terms of environmentally friendly wellhead drives: GrenCo, Corlac/NOV, and Weatherford. In addition to this “Big 3”, Oil Lift with its pressurized stuffing box on the market in 2000 used primarily by producers of sandy heavy oil and Kudu with its Oryx stuffing box on the market in 2002, competed in the market as well.
[47] There were other market players such as Brightling and Baker Hughes/Enerstar but their products were not a major factor in this market.
E. GrenCo
[48] After GrenCo came out with its GrenCo Product, the company grew from being a small machine shop to a major manufacturer of surface equipment for PC pumps.
[49] By 2000, GrenCo had expanded operations to provide a product line of surface equipment and services for the rotary wellhead market. Rebuilding and maintenance services for its drives and associated products became a major part of GrenCo’s business. In the period 2000-2010, GrenCo’s business model included marketing to its own customer base an “exchange program” for drives by which GrenCo offered to exclusively rebuild and refurbish its own drives. GrenCo also provided other services for its own drives and sealing system.
[50] GrenCo was active in every part of the Canadian oil market such that wherever NOV was competing, GrenCo was also in that area. GrenCo directly competed with NOV and, as NOV said, competition in this market was a “zero sum game”, so any sales made by NOV were at the expense of GrenCo. This is borne out throughout the period by the direct infringement of GrenCo’s Product.
F. Corlac/NOV
[51] Initially Corlac refurbished, repaired, and resold equipment made by other manufacturers. In late 1999 to early 2000, Corlac entered the market manufacturing and selling Enviro stuffing boxes which came in different designs referred to as “Integral”, “Retrofit”, and “Griffin”. The Court found that these stuffing boxes infringed the 937 Patent.
During the Infringement Period of 2000 to June 2010, the Defendants also sold non-infringing stuffing boxes such as rope style and pressured boxes as well.
[52] The infringing Enviro stuffing boxes were a direct substitute for the GrenCo Product.
[53] Corlac/NOV experienced considerable growth in the volume of wellhead drives sold from 2000 onwards. With the Enviro products, Corlac would offer complete pumping solutions through related products in a single package. These pumping solutions were highly successful.
[54] In early 2004, NOV began offering a pressurized hydraulic product – the SAI sealing system. NOV moved its hydraulic drive sales to the SAI sealing system such that over time NOV’s infringing sales were electric drive units.
[55] The SAI is different from the 937 Patent invention and the infringing Enviro product as it does not have multiple leak passages for monitoring whether a seal had failed. It is a very different type of leak detection system compared to the infringing Enviro product.
G. Weatherford
[56] Weatherford offered a broad range of related products. As a licensee of GrenCo’s 937 Patent, Weatherford manufactured royalty bearing products under licence, the bulk of which was sold in Canada.
[57] Weatherford did well in the field of PC pump applications using drive equipment until the late 2000s when problems with their stuffing boxes continually surfaced and Oil Lift with its pressurized hydraulic products took significant hydraulic sales away from Weatherford.
H. Kudu’s Oryx
[58] Kudu sold down hole pumps, service equipment, and anything related to a PC pump system, including drive heads. Its stuffing box was the rope type – a type being rejected in the market in favour of the GrenCo Product. It is common ground that the rope type stuffing box was slowly falling out of favour.
[59] Kudu developed in about 2002 the Oryx stuffing box as its environmentally friendly seal housing. That product went on the market about August 2003 but for various reasons was not really competitive with the GrenCo Product. From 2005 onward, when Kudu linked its Oryx with a VH60, drive sales of Oryx increased from about 200 to 320, until 2009 to June 3, 2010, when the sales dropped to 200-250 units. Kudu also sold non-Oryx drives.
[60] The evidence does not establish Kudu as a significant competitor to GrenCo Products.
I. Oil Lift
[61] Oil Lift manufactured surface equipment for progressive cavity pumping systems, principally drive heads with stuffing boxes which were part of a pressurized system.
[62] The vast majority of the sales were pressurized hydraulic drives where the hydraulic oil pressure kept the seals or the stuffing box pressurized.
[63] The Oil Lift product sales started slowly in 2000 and had trouble gaining acceptance and distribution until 2008. During that period sales went from approximately 250 units to 1,600 in 2008, of which 400 were electric. The evidence showed that in any year electric drives were about 25% of the Oil Lift sales.
[64] Like almost all participants in the oil business, Oil Lift was negatively impacted by the 2009 market crash.
[65] The impact of the crash was acknowledged in all the financial analysis performed by both parties. For Oil Lift sales dropped back in 2009 to 2010 to 300-400.
J. Others
[66] There were a number of other “small players” in the stuffing box market. Some, such as R&M, sold a drive which came with an environmentally friendly stuffing box but did not have a material effect on the market for the GrenCo-like Products.
[67] There were other players like Amik, Tierra Alta, and Can-K which were even less influential in the market.
[68] The experts on both sides accounted in different ways for the impact of the sales of all competitors, even the smaller ones, on GrenCo’s market share and lost sales, as discussed under the relevant issues heading below.
IV. Analysis
A. Overview of Damages
[69] The first principles of this case are that the Defendants infringed, knowingly, the Plaintiffs’ 937 Patent and the Plaintiffs are therefore entitled to a damage award that will compensate them for the harm they have suffered. The Plaintiffs exercised their right to claim damages rather than a disgorgement of the Defendants’ profits.
[70] Such a damages award seeks to put the Plaintiffs in the position they would have been in if not for the infringing actions of the Defendants.
[71] In Apotex Inc v Merck & Co, Inc, 2015 FCA 171 at para 42, 387 DLR (4th) 552, leave to appeal to SCC refused, 36655 (April 14, 2016) [Merck FCA], the Federal Court of Appeal described appropriate compensation as follows:
Thus, in the event of infringement, under-compensation of an inventor discourages research and development, and the disclosure of useful inventions. Equally, over-compensation of an inventor chills potential competition to the extent that a potential infringer is uncertain about the scope and validity of a patent. The balance at the heart of the Act requires perfect compensation.
[72] In Janssen Inc v Teva Canada Ltd, 2016 FC 593 at para 69, 269 ACWS (3d) 156 [Janssen], Justice Hughes indicated that compensation is determined by “the exercise of a sound imagination and the practice of a broad axe in seeking to restore a plaintiff by monetary means to the condition that it would have been had the infringement not occurred”.
[73] Justice Hughes’ approach is one of long standing. Justice Harrington in Société Telus Communications v Peracomo Inc, 2011 FC 494 at para 57, 389 FTR 196, referred to this broad approach by reference to Lord Justice Winn’s comments in Doyle v Olby (Ironmongers) Ltd, [1969] 2 All ER 119 at 124:
I think myself with confidence that there is already sufficient evidentiary material available to enable this court to make a jury assessment in round figures. It would be wrong and indeed an intolerable expenditure of judicial time and money of the parties to embark on any detailed consideration of isolated items in the account on which a balance must be struck.
[74] Each sale made by the Defendants of an infringing item is an illegal transaction and the Plaintiffs are entitled to recover damages for each one, as was held in Jay-Lor International Inc v Penta Farm Systems Ltd, 2007 FC 358 at paras 116-117, 313 FTR 1 [Jay-Lor], citing United Horse-shoe and Nail Co Ltd v John Stewart and Co (1888), 5 RPC 260 at 266-267 (HL (Eng)). The Plaintiffs bear the burden of demonstrating the amount of loss, including that they would have made the sales if the infringing product had not been on the market: see Jay-Lor at para 118.
[75] In calculating damages, the Court may assess the sales that the plaintiff patentee has lost due to the actions of the infringer (the “captured market”) and, if there are infringing sales that the plaintiff could not or would not have made, the quantum of damage for those latter sales will be a “reasonable royalty”. The Plaintiffs bear the burden of establishing what would have happened in that hypothetical world. In Pfizer Canada Inc v Teva Canada Ltd, 2016 FCA 161, 400 DLR (4th) 723 [Pfizer], Justice Stratas for the Federal Court of Appeal stated as follows:
[50] Both “would have” and “could have” are key. Compensatory damages are to place plaintiffs in the position they would have been in had a wrong not been committed. Proof of that first requires demonstration that nothing made it impossible for them to be in that position—i.e., they could have been in that position. And proof that plaintiffs would have been in a particular position also requires demonstration that events would transpire in such a way as to put them in that position—i.e., they would have been in that position.
[51] Both elements have to be present. “Could have” does not prove “would have”; “would have” does not prove “could have”:
• Evidence that a party would have done something does not prove that it could have done something. I might swear up and down that I would have run in a marathon in Toronto on April 1 aiming to complete it, but that says nothing about whether I could have completed it. Maybe I am not fit enough to complete it.
• Evidence that a party could have done something does not prove that it would have done something. A trainer might testify that I was fit enough to complete a marathon race in Toronto on April 1, but that says nothing about whether I would have completed it. Perhaps on April 1 I would have skipped the marathon and gone to a baseball game instead.
[76] In AlliedSignal Inc v DuPont Canada Inc, 78 CPR (3d) 129, 1998 CarswellNat 271 (WL Can) at para 34 (FCTD), aff`d (1999) 86 CPR (3d) 324 (FCA) [AlliedSignal], the Federal Court laid out a number of factors to be considered in assessing damages:
The process of examining the hypothetical situation where one assumes that the infringing product never entered the market is an uncertain one. Nonetheless, there are several factors that serve to answer the question, "What would have happened?" The following factors have been considered in various cases:
(a) Presence of competing products in the market;
(b) Advantages of the patented product over competing products;
(c) Advantages of the infringing product over the patented product;
(d) Market position of the patentee;
(e) Market position of the infringer;
(f) Market share of the patentee before and after the infringing product entered the market;
(g) Size of the market before and after the infringing product entered the market; and,
(h) Capacity of the patentee to produce additional products[.]
[Footnotes omitted.]
[77] Broadly speaking, the positions of the parties are as follows:
The Plaintiffs submit that they are entitled to recover the profits that they would have made from sales in the “captured market” of the but-for world. Further, the Plaintiffs are entitled to recover a reasonable royalty for those infringing sales that they would not have made in the but-for world. The Plaintiffs also submit that they are entitled to punitive damages and compound pre-judgment interest.
The Defendants submit that the Plaintiffs have failed to establish their market share in the but-for world; therefore, the appropriate method of quantifying damages is a reasonable royalty.The Defendants deny that the Plaintiffs are entitled to punitive damages.
B. Number of Infringing Products
(1) ISSUE 1: How many drives did the Defendants make or sell with “Enviro” stuffing box products (including “Retrofit”, “Integral”, or “Griffin” stuffing boxes) during the 2000 to June 2010 timeframe [the Infringement Period or the relevant years]?
[78] The parties agree on the number of infringing units sold from 2006-2010, when NOV had a SAP accounting system. For 2005, the experts agree that an average number based on sales in 2004 and 2006 can be used as there was no accounting system in place for ten months of 2005.
[79] For 2000-2004, the two experts, Cohen for the Plaintiffs and Hall for the Defendants, disagree on the number of infringing drives that were sold. This is because a number of NOV’s sales records are ambiguous as to whether an infringing stuffing box was included in the sale. The difference amounts to about 330 units (Cohen claims the larger number, 2,751 in total, as infringing; Hall claims that the Defendants sold 2,416 new drives and 80 used drives).
[80] The experts took different approaches in assessing the ambiguous sales records. Hall assumed that if the records did not indicate that the units were infringing, then those sales were not infringing. Cohen relied on his understanding that the “market was moving away from rope style stuffing boxes, and on a reconciliation that he had carried out to categorize these unlabelled sales as being infringing”. This reconciliation attempted to match the number of units made to the number sold, and Cohen found a difference of about 2% (with more units being sold than made). When Hall’s numbers were used this difference was much larger.
[81] Cohen outlined a number of the inclusion discrepancies in his Reply Report. He noted that for the sale of certain units, Hall had included that type of unit where it was indicated to be infringing but had excluded that same type if the description was silent on the matter (i.e. DH565K – 108 units; DH682K – 34 units). In my view, it is a safe conclusion that if some of those units were described as infringing, then the sales of all of those units were infringing – therefore, I accept Cohen’s conclusion on these numbers. His approach is consistent with what was happening in the market whereas Hall’s approach was unduly narrow.
[82] However, during cross-examination, it was established that certain of Cohen’s numbers were incorrect. For example, the evidence showed that the invoices in Exhibit D-63 were of non-infringing sales. Further, Cohen’s count included more infringing units than were made:
Under cross-examination, it was apparent that Mr. Cohen had actually included more infringing units than were made for the periods 2000-2001, 2002, 2003 and 2004. As noted in the chart below, Mr. Cohen counted: (1) 103 more units sold than made from 2000 to 2001; (2) 115 more units sold than made from 2000 to 2002; (3) 197 more units sold than made from 2000 to 2003; and (4) 127 more units sold than made from 2000 to 2004.
(Defendants’ Closing Submissions.)
[83] The difference between the parties with respect to the number of infringing drives sold is relatively small. I agree that the evidence in this case was that the market was moving away from the rope style stuffing boxes. Further, the evidence clearly indicates that NOV did not sell any new drives with rope style stuffing boxes after 2006. Nonetheless, in my view, the Defendants have clearly established that Cohen’s count is problematic in that it includes more units sold than were made. As no explanation for these discrepancies was provided by the Plaintiffs, I would accept Hall’s count of new drives with the minor changes identified above.
[84] However, the error is small and consistent with the broad approach to the damages assessment. Although the Court will make some adjustment, it has no material impact.
(2) ISSUE 2: How many standalone “Enviro” stuffing box products were made or sold during the Infringement Period?
[85] The Parties agree that the Defendants sold 1,350 new and 2,497 used standalone stuffing boxes during the Infringement Period.
C. Lost Sales
(1) ISSUE 3: Has GrenCo established that it lost sales of drives due to the infringement by the Defendants?
[86] Causation is determined under the “but for” test, which requires a substantial connection between the Defendants’ conduct and the injury to the Plaintiffs.
[87] In respect of lost sales, the Plaintiffs must establish they would have had the sales but for the infringement of Corlac/NOV. For sales made by Cor