DARIN GRENKE, as personal representative of the ESTATE OF EDWARD GRENKE, v. 284849 ALBERTA LTD., 2018 FC 564

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 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]? 2 . How many standalone " “Enviro” " stuffing box products were made or sold during the Infringement Period? LOST SALES 3 . Has GrenCo established that it lost sales of drives due to the infringement by the Defendants? 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] 5 . What was GrenCo’s estimated market share in the relevant market? [Not addressed by the Defendants] 6 . What would GrenCo’s market share have been if the Defendants were not in the market with their infringing products? 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)? 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? 9 . What are the Plaintiffs’ total lost profits for lost drive sales? REASONABLE ROYALTY 10 . What is the royalty rate on sales price that should be applied to the Defendants’ sales of infringing drives and stuffing boxes?

11 . How many drives and stuffing boxes are subject to a reasonable royalty and what prices were charged for those drives and stuffing boxes? 12 . 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 13 . Has GrenCo established that the Defendants’ infringement caused GrenCo to lose the sale of rebuilt drives? 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? 15 . Has GrenCo established that the sale of infringing products by the Defendants caused it to lose sales of other non-infringing products? 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? 17 . What are GrenCo’s total lost profits on lost drive servicing? NON-INFRINGING ALTERNATIVE 18 .

Are the SAI stuffing boxes or other sealing systems non-infringing alternatives? 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? PUNITIVE DAMAGES 20 . Is an award of punitive damages, in addition to what may otherwise be awarded, warranted in this case? INTEREST 21 . Is GrenCo entitled to claim pre-judgment interest? 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? COSTS 23 . 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 (4 th ) 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 FC494 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 ajury assessment in round figures.

It would be wrong and indeed an intolerable expenditure of judicial time and money of theparties 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 damagesfor 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 theburden of demonstrating the amount of loss, including that they would have made the sales if the infringing product had not been on themarket: 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 forthose 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 FederalCourt of Appeal stated as follows: [50] Both “would have” and “could have” are key. Compensatory damages are to place plaintiffs in the position they wouldhave been in had a wrong not been committed. Proof of that first requires demonstration that nothing made it impossible forthem to be in that position—i.e., they could have been in that position.

And proof that plaintiffs would have been in aparticular 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 “couldhave”: • Evidence that a party would have done something does not prove that it could have done something. I might swear up anddown that I would have run in a marathon in Toronto on April 1 aiming to complete it, but that says nothing about whether Icould 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 mighttestify that I was fit enough to complete a marathon race in Toronto on April 1, but that says nothing about whether I wouldhave 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, (FC), 78 CPR (3d) 129, 1998 CarswellNat 271 (WL Can) at para 34(FCTD), aff`d (1999) (FCA), 86 CPR (3d) 324 (FCA) [AlliedSignal], the Federal Court laid out a number of factors tobe considered in assessing damages: The process of examining the hypothetical situation where one assumes that the infringing product never entered the marketis 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 wouldnot 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 appropriatemethod 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 Corlac/NOV that GrenCo would not have made, GrenCo is entitled to a reasonable royalty. [ 88 ] The Plaintiffs submit that Grenke gave evidence to the effect that GrenCo had the ability to sell its drives in all of the relevant markets. This evidence was confirmed by Kaluski for Weatherford and Hult for Oil Lift. The Plaintiffs emphasize the similarity between the GrenCo Product and the Corlac/NOV product: " “the Corlac/NOV products were seen in the market to directly compete with the GrenCo drives.

Both sealing units were seen as ‘mechanical’ or ‘lip seal’ products, not pressurized, with multiple leak detection ports. The two suppliers offered the same solution for both electric and hydraulic units in the market” " .

The Defendants do not contest that GrenCo was in all of the relevant markets, but they argue that the Plaintiffs have not put forward any reliable data on market share or produced evidence to show that market share is a reasonable proxy for what could have or would have occurred in the " “but-for” " world. [ 89 ] In reality, the market had a choice between the GrenCo Product and the Corlac/NOV sealing system (the infringing product).

Non- lip seal systems or systems not using the invention’s sealing system were not direct competition. [ 90 ] In my view, the Plaintiffs have established, on a balance of probabilities, that there were lost sales due to the infringement by the

Defendants: the parties were in the same geographic markets and they offered similar products (or " “the same product” " , as the Court found in the liability phase of this case). There was also evidence of losses of specific sales such as the Penn West situation.

(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 ] The Federal Court has used market share as a proxy for determining a plaintiff’s lost sales, as is demonstrated by Jay-Lor : [208] [T]he Defendants’ own witness, Mr. Barran, an expert in these matters, presented his estimate of JAY-LOR lost sales using a market share approach. Mr. Barran appeared to have no doubt that a reliable estimate of lost sales could be obtained on the information provided to him.

Had this case involved sales of only a few infringing products, more customer-specific evidence might have been required, as was the case in AlliedSignal , above at 141: It should be noted that courts usually avoid “requiring the plaintiffs to establish . . . that any definite number of retailers would have come to the plaintiffs if the defendants had not supplied infringing instruments”( Meters Ltd. v. Metropolitan Gas Meters Ltd. (1911), 28 R.P.C. 157 (C.A.) at 161, per Cozens-Hardy M.R.).

However, in the case at bar, there are only nine customers in question, and as a factual matter it is clear that a review of the evidence on a customer-by-customer basis is necessary. […] [209] In this case, with a total of over 800 sales during the time of the alleged infringement, the market share approach is an appropriate methodology for establishing lost sales.

Such methodology is not “just marshmallow”. [ 92 ] As noted above, in Pfizer the Federal Court of Appeal indicated that the plaintiffs must 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. [ 93 ] The Defendants submit that the Plaintiffs have failed to present reliable data on market share. Further, the Plaintiffs are said not to have provided any reason to believe that market share is a reasonable proxy for what could have or would have occurred in the but-for world.

The Plaintiffs did not put forward any evidence on how customers would have behaved in the absence of Corlac/NOV’s infringing sales.

The factors influencing the decision to purchase from a certain supplier include price, service, maintenance, relationships, and products, and " “[i]t cannot simply be assumed that the customers of the defendants would have purchased drives from GrenCo in the ‘but for’ world” " . [ 94 ] The Plaintiffs submit that the market shares of competitors can stand as proxies for determining what the buyers of infringing products would have done (i.e., buy GrenCo Products) if the infringing products were not available, since " “market share factor has been identified as one of the factors that is relied upon to determine the number of NOV sales that would have been captured by GrenCo if NOV’s products were not available” " . [ 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.

(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 ] As noted above, the Defendants indicate that the Plaintiffs have not established GrenCo’s estimated market share in the real world or the but-for world.

The expert evidence of Freeson, which was intended to provide the necessary market share information, was flawed – both of the parties agree that it cannot be trusted for certain periods. Although Freeson was knowledgeable with respect to the players in the market, the evidence showed that in particular from 2004 onwards he underestimated the size of certain competitors including Kudu and Oil Lift.

Therefore, both the Plaintiffs and the Defendants have constructed their own market share analyses from the available data from which the Court can draw its own conclusions. [ 99 ] I would note that the Plaintiffs submit that " “there is no completely accurate set of figures that can be used to fix on the actual market shares at the relevant time” " . However, as the Defendants point out, the Plaintiffs did not acquire or put forward evidence as to the sales of Oil Lift, Kudu, and the other competitors during the Infringement Period.

Therefore, if there are deficiencies in the data, the Plaintiffs must accept some blame for this situation. [ 100 ] As discussed earlier, the Plaintiffs’ expert, Freeson, on the market and market share was shown to be wrong in respect of the share of some competitors. While it is open to reject Freeson’s evidence, his evidence in respect of the product market generally and the size and nature of the competitors was reliable up to the market entry of Oil Lift and some other competitors.

[101] With the more accurate evidence produced at trial, the Court can examine the competing market analyses now put forward by theparties.

This is not a case of no evidence being available but of evidence which can be used to draw reasonable conclusions. [102] In piecing together the evidence to determine if the Plaintiffs have made out a case for damages and the quantum which canreasonably be set, I have followed the reasoning of this Court and of the Ontario Court of Appeal. [103] In the Federal Court, in Xerox of Canada Ltd v IBM Canada Ltd, 33 CPR (2d) 24, 1977 CarswellNat 669 (WL Can) at para 30(FCTD), Justice Collier stated as follows: In respect of the use of those tendered opinions, I endeavoured to instruct myself in the way juries are instructed in respect ofevidence put before them by non-expert and expert witnesses.

As a trier of fact I am entitled to accept the whole or part ofthe evidence of one witness, and to reject all or other parts. Equally in the case of expert witnesses the trier of fact mayaccept or reject the beliefs or opinions tendered, or any part of those beliefs or opinions.

Always, opinion evidencemust be scrutinized with great care. [Emphasis added.] The Ontario Court of Appeal in R v Abbey, 2009 ONCA 624, 97 OR (3d) 330, made the following similar statement in the context of juryinstructions regarding expert evidence: [63] A determination of the scope of the proposed expert opinion evidence and the manner in which it may be presented tothe jury if admissible will be made after a voir dire. The procedures to be followed on that voir dire are for the trial judge todecide.

Sometimes the expert must be examined and cross-examined on the voir dire to ensure that the proposed evidence isproperly understood. At the conclusion of the voir dire, the trial judge must identify with exactitude the scope of theproposed opinion that may be admissible. He or she will also decide whether certain terminology used by the expert isunnecessary to the opinion and potentially misleading: see R. v. G. (P.) (2009), 2009 ONCA 32 , 242 C.C.C. (3d)558 (Ont. C.A.), at para. 16. Admissibility is not an all or nothing proposition.

Nor is the trial judge limited to eitheraccepting or rejecting the opinion evidence as tendered by one party or the other. The trial judge may admit part ofthe proffered testimony, modify the nature or scope of the proposed opinion, or edit the language used to frame thatopinion: see, for example, R. v. Wilson (2002), (ON SC), 166 C.C.C. (3d) 294 (Ont. S.C.J.). [Emphasis added; footnotes omitted.] (

a) Market Share [104] Just as the parties were able to create their market share models based on a number of sources including the fact evidence ofFreeson, it is therefore possible to reach conclusions on market share in the real world and the hypothetical but-for world. [105] With respect to market share, the focus should be on what customers of the Defendants would have done if the Defendants’infringing products were not on the market.

Based on their real world purchases, such customers were looking for an "“environmentallyfriendly”" option – therefore, I find the Defendants’ inclusion of and focus on rope style stuffing boxes to be misplaced. It distorts themarket share analysis and is contrary to the product market already described. The market at issue is the "“environmentally friendlystuffing box market”". (

i) Years 2000-2002 [106] There was conflicting evidence with respect to when Kudu’s Oryx came onto the market, which plays the biggest role in thedifference between the market share estimates of the Plaintiffs and the Defendants during this time. Garland testified that the Oryxproduct was not launched until 2003, while Martinka suggested that it was available as of 2002. [107] I prefer the Plaintiffs’ determination of market share for these early years.

These numbers take into consideration that there wereminimal sales by certain competitors identified by the Defendants, including Robbins & Myers, Kudu, and Baker Hughes/Enerstar.

Iaccept the evidence provided by the Plaintiffs that, during this time period, the attempts by these companies to create environmentallyfriendly stuffing boxes were largely unsuccessful and therefore these competitors had very little market share, and would have had littlemarket share in the but-for world. [108] Because of the vagaries with the count of units sold and made and other problems with the data discussed here and later, someadjustment must be made to the numbers which can be more readily done by discounting the Plaintiffs’ monetary calculation of this headof damage. (ii) Year 2003 [109] The parties agree that Oil Lift’s market share increased in 2003, and that it would have done so in the but-for world.

Similarly,Kudu’s Oryx solution would have been available on the market after 2002. The Plaintiffs’ market share model takes these increases intoaccount. (iii) Years 2004-2010 [110] There is a disagreement between the parties as to the appropriate conceptualization of the market in these later years. ThePlaintiffs submit that, given the Defendants’ switch to the non-infringing SAI stuffing box on its hydraulic drives in early 2004, theinfringing sales by the Defendants "“became entirely infringing electric drive units”".

I find the Plaintiffs’ approach (the alternativemodel considering hydraulic units separate from electric units) to be logical, and I find it to be the best method of assessing the perfect

compensation due to the Plaintiffs. A similar model was used by Hall in one of his scenarios.

The alternative approach is likely to under- compensate the Plaintiffs for the infringement. [ 111 ] The Plaintiffs’ model takes into account the evidence at trial of significant sales by Oil Lift in both the hydraulic and electric markets, although the evidence of Hult was that the vast majority of Oil Lift sales were in the hydraulic market. [ 112 ] I find that the inclusion of Oil Lift’s extremely high hydraulic drive sales in the electric market share would be problematic – the evidence at trial indicated that " “if a well site had an electric connection, the drive would be electric” " .

The model used by the Plaintiffs, which takes into account Oil Lift’s increased electric drive sales, is to be preferred. Further, the Plaintiffs’ model takes into account increased market share for the Kudu Oryx system, which could be used on either an electric or a hydraulic drive. Sales by Brightling were also included in the Plaintiffs’ model. [ 113 ] In the final two years of the Infringement Period, 2009-2010, the evidence indicates that the Defendants’ infringing sales were very limited.

The captured market for these years will be extremely small. (iv) Conclusion [ 114 ] Overall, I would accept the conceptualization of the market, the numbers, and the models put forward by the Plaintiffs subject to adjustments discussed. I find the Defendants’ conceptualization of the market to be problematic in that it takes into account matters inconsistent with the better evidence and thus leads to under compensation of the Plaintiffs.

(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 ] The parties generally agree on the approach to be taken with respect to determining GrenCo’s lost profit per lost drive sale. The controversy in this case is with respect to the identification of certain variable costs versus fixed costs. Variable costs vary with product output while fixed costs remain static regardless of output. The key question is " “what costs of GrenCo would have increased simply to handle an increase in business due to capturing some of the NOV drive sales?” " (

a) Wages/Salaries and Benefits [ 116 ] I accept Cohen’s conclusion with respect to these costs. The evidence at trial indicated that the number of " “front office” " employees remained relatively static over the Infringement Period and commissions and bonuses were not based on sales volumes. Increases in employees for the field locations were connected to new product lines rather than increased sales.

The Defendants submit that Grenke’s evidence was that bonuses increased with increases in revenue. [ 117 ] In my view, Cohen’s analysis accords more closely with the evidence in this case, which indicates that increases in wage expenses were not related to increases in revenue. Hall’s analysis may be logically sound, but it is not supported by the evidence in this case. The evidence indicated that wages and benefits varied over time, but they did not track with increases in revenue. Therefore, this should not be included as a variable cost. (

b) Management Salaries [ 118 ] According to Grenke’s evidence, bonuses to management were a method of pulling profits out of the business for tax purposes. I accept the Plaintiffs’ rationale that " “it does not make sense to include the way of paying out profits to the owners as an expense” " . This is particularly germane in closely held family companies. [ 119 ] Nonetheless, the Defendants submit that some management salaries and bonuses were paid out to non-shareholder employees. Some small variability here, as suggested by the Defendants, might be warranted but it is not the Court’s role at this point to become lost in the accounting minutiae. (

c) Advertising, Travel, and Promotion [ 120 ] Cohen’s approach to this cost is appropriate. GrenCo had a website and brochures for advertising. The evidence indicates that it was well-known in the marketplace. There is no reason to believe that increased advertising would be necessary to deal with increased revenue. [ 121 ] The figures cited by the Defendants do not take into account that any increase in advertising may be connected to the introduction of new product lines rather than simply increases in revenue. Therefore, I accept Cohen’s conclusion on these costs. (

d) Utilities [ 122 ] Cohen admits that utilities are variable, but puts them at 25% rather than Hall’s 50%. I find Cohen’s approach to be consistent with Grenke’s evidence as to the " “minimal” " increased costs of increased use of the manufacturing machine electric motors. (

e) Bank Charges and Interest [ 123 ] The evidence does not indicate that the day-to-day operations of GrenCo were financed through debt or that increased production would lead to an increase in debt.

(5) ISSUE 9: What are the Plaintiffs’ total lost profits for lost drive sales? [ 124 ] The consideration of this issue must be divided into two sub-issues:

a) sales by the Defendants which the Plaintiffs would have made but for the Defendants’ sale of infringing products (direct loss/profit for which the Plaintiffs are entitled to their own profit); and

b) sales by the Defendants that the Plaintiffs would not have made or for which the Plaintiffs cannot show it would have made but for the presence of the infringing product for which the Plaintiffs are entitled to a reasonable royalty. (

a) Direct Loss/Profit [ 125 ] On this sub-issue the Court must consider the number of infringing units sold by NOV, for which there are some ambiguous records, the estimated captured market by GrenCo in the " “but-for” " world, which involves a consideration of the errors in the Freeson market share evidence, and the determination of the lost profit per drive (price minus cost), which takes into consideration the costing issues discussed in the above areas. [ 126 ] In addressing the " “but-for” " market shares, I find Hall’s approach to be less helpful in that he developed different scenarios based on assumed GrenCo market share of 10 to 30%.

The approach was unrealistic as it assumed a GrenCo market share much lower in the early years than all the evidence suggests. In those early years 2000-2004, GrenCo was " “the” " or " “a” " dominant player. [ 127 ] As I generally preferred the approach of Cohen as more realistic and balanced, as said before, I found the modified

Schedule 2b from Cohen’s Reply Report to be very helpful. It was modified to take account of the evidence which developed at trial – including adjusting for the evidence of Oil Lift/Kudu which countered Freeson’s erroneous market share assumptions. [ 128 ] I am satisfied, after detailed review, that the facts proven in this case, including by the Defendants’ witnesses, support the modified

Schedule 2b approach and calculation in respect of loss of profits on original drives. [ 129 ] In

summary, modified

Schedule 2b establishes in the period 2000 to June 3, 2010: Units sold by NOV – original drives 2,592 Estimated GrenCo’s market share average 40.5% Estimated Units lost by GrenCo 1,051 GrenCo’s weighted average price per unit $10,955 Total original drive revenue $11,513,722 Estimated contribution margin 38.8% Lost profit – original drive unit $4,468,000 [ 130 ] Given some of the vagaries of the evidence and debatable cost elements as well as a " “broad axe” " approach, I consider that on this matter the proper award should be $4,400,000. D. Reasonable Royalty

(1) General [ 131 ] Turning to the matter of the reasonable royalty, the parties advanced considerably divergent royalty percentages at the outer edges but with greater consistency in the middle. [ 132 ] The Plaintiffs are entitled to a reasonable royalty for any sales made by the Defendants that the Plaintiffs would or could not have made in the " “but-for” " world: Jay-Lor at para 119 .

In AlliedSignal , the Federal Court stated as follows: [199] A reasonable royalty rate is “that which the infringer would have had to pay if, instead of infringing the patent, [the infringer] had come to be licensed under the patent”: Unilever PLC v. Procter & Gamble; Consolboard Inc. v. MacMillan Bloedel (Saskatchewan) Ltd .

The test is what rate would result from negotiations between a willing licensor and a willing licensee. [Footnotes omitted.] [ 133 ] Furthermore, in Jay-Lor , the Federal Court stated as follows: [126] This notion is premised on the assumption that someone who wishes to use patented technology would normally have sought permission and been willing to pay a royalty for its use. The patentee, if prepared to license its invention, would then negotiate the terms of the licence, including the amount of royalty, with the intended licensee.

The construct is obviously artificial in the sense that the infringer, in this case, did not make the choice to seek permission from the patentee when it began to use the patented technology in its own device. Assumptions on how parties might have negotiated must be made. However, licensing is a very common practice in the intellectual property field and has developed into an area of academic study. It appears that the methodology is well established and somewhat consistent. Accordingly, evidence of how parties negotiate licence agreements and the theory applicable to the negotiations is available.

In other words, from studying what is happening in the real world of licensing practices and applying generally-accepted methodology to the known facts in a specific case, we can form an opinion as to what would have happened in hypothetical negotiations between the parties in

this case. [ 134 ] In Merck & Co, Inc v Apotex Inc , 2013 FC 751 at para 159 , 437 FTR 1, aff’d 2015 FCA 171 , leave to appeal refused 36655 (April 14, 2016) [ Merck FC ], the Federal Court agreed with an expert witness that the timing of hypothetical negotiations was prior to the first infringement of the patent: [T]he underlying premise of the hypothetical negotiations . . . is that, by entering into the licensing agreement, an infringer avoids all future acts of infringement, no matter how such infringement might occur or no matter how much infringement might take place. [Underlining in original.] [ 135 ] A number of approaches have been used by the Federal Court to arrive at reasonable royalty rates.

In this case, the parties both used the " “anticipated profits approach” " ( AlliedSignal , Jay-Lor ) and supplemented this analysis with the " “minimum willingness to accept (MWA) versus maximum willingness to pay (MWP)” " approach. [ 136 ] In constructing the hypothetical negotiation of the royalty rate, it is important to take into account the realities on the ground.

It is particularly relevant that GrenCo had market strength because of its technology and also important is that all the evidence suggests Grenke would have been an unwilling seller, difficult to deal with, and prepared to push the limits of " “reasonableness” " to the edge (and perhaps over). This all suggests a rate at the upper end of reasonableness. It is somewhat ironic that Grenke would be deemed, under this hypothetical negotiation, to accept any amount of royalty rate given his general intransigence to the point of " “going down with his ship” " rather than to settle.

However, the Court must accept some of the realities in constructing the hypothetical negotiation and resolution.

(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 ] The parties agree that the Plaintiffs are entitled to a reasonable royalty for any infringing sales made by the Defendants that the Court does not believe would have been made by the Plaintiffs in the but-for world.

This includes sales of " “stand alone” " stuffing boxes and sales of NOV drives outside of the captured market, including, from 2004-2010, sales of all infringing NOV hydraulic drives and sales of infringing NOV electric drives that would not be captured by GrenCo. [ 138 ] The parties further agree on the approach to be taken and the relevant jurisprudence. Both of the experts on this topic, Hall and Matthews, used the anticipated profits approach to determine a reasonable royalty.

The experts were not terribly far apart in their determinations of a reasonable royalty rate: Matthews ultimately determined that a reasonable royalty rate was 8-10% while Hall determined it was 7%. Both of the experts arrived at the same base rate (6.3%) and the discrepancy is due to a difference in the " “bump” " for special circumstances of this case – a somewhat subjective assessment, discussed further below.

In addition to the anticipated profits approach, both of the experts also considered the approach in Merck FC , minimum willing to accept v maximum willing to pay. [ 139 ] As noted above, a consideration of the factors in AlliedSignal led both experts to the same base royalty rate. The controversy in this case is with respect to the subsequent " “bump” " . The parties agree that such a bump is warranted in this case, but disagree on the magnitude of the bump. [ 140 ] I prefer the approach of Matthews.

Although Hall is an expert in business valuation and licensing arrangements, Matthews has expertise in the industry. In Jay-Lor , the Federal Court found that a 1% increase was warranted due to factors such as anticipated penetration into the market and the benefit of being a manufacturer and distributor. Those factors were also relevant in this case, as were the potential for convoy sales, repairs, and maintenance, and refurbishment opportunities. Matthews concluded that all of these factors warranted an additional bump above the Jay-Lor 1%, leading to a royalty rate of 8%.

Hall reached a number of similar conclusions as Matthews, but ultimately found that a smaller bump was warranted. [ 141 ] In my view, Hall placed too much emphasis on Corlac’s status as a larger company with more products, and not enough emphasis on the benefits of the patented technology. I conclude that Matthews’ analysis is more rigorous and is better supported by the jurisprudence, including Jay-Lor . [ 142 ] Further, in my view, the Weatherford royalty rates (3.1% to 4.7%) should not be used as " “confirmation” " that a 7% rate would be accepted by GrenCo (as suggested by the Defendants).

Those lower royalty rates were the result of a unique set of circumstances, including cross-licensing, that would not be at play in the hypothetical GrenCo-Corlac negotiations. [ 143 ] With respect to the MWP versus MWA analysis, although I agree with Matthews that GrenCo was in a strong bargaining position, in my view a royalty rate of 10% cannot be supported by Matthews’ testimony during the trial.

Although Matthews indicated in his Expert Report that GrenCo’s MWA would be 10%, during cross-examination he indicated that a reasonable range for GrenCo’s MWA would be 8-10%. [ 144 ] In Merck FC , the Federal Court indicated that if there were no overlap between the MWA and the MWP, then the reasonable royalty is the MWA. The " “minimum” " of the MWA must, logically, be the lower end of the range – therefore, the application of Merck FC to this case leads to the conclusion that 8% is a reasonable royalty rate. [ 145 ] Therefore, I find that the appropriate royalty rate is 8%.

(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 ] As discussed above, and the parties agree, a reasonable royalty must be paid on standalone infringing stuffing boxes as well as the number of drives that are outside of the " “captured market” " in the but-for world. [ 147 ] Again, modified

Schedule 2b captures the estimated units sold by other competitors, pricing, revenue, and applies the 8% royalty rate. That analysis establishes as follows over the period 2000 to June 3, 2010: Estimated units sold by other competitors including hydraulic units (February 12, 2004 – June 3, 2010) 1,700 Weighted average price per unit $9,459 Total original drive revenues $16,080,115 Royalty amount (8%)/original drives $1,285,000

(4) ISSUE 12: What total royalties are the Plaintiffs entitled to based on the Defendants’ infringing sales of drives and stuffing boxes? [ 148 ] Therefore, the Plaintiffs are entitled to recover $1,285,000 in respect of a reasonable royalty. E. Lost Service, Drive Rebuilds and Convoy Products

(1) ISSUE 13: Has GrenCo established that the Defendants’ infringement caused GrenCo to lose the sale of rebuilt drives? [ 149 ] It is more likely than not that the infringement by the Defendants caused GrenCo to lose sales of rebuilt drives.

However, the fact that GrenCo offered such an option to its customers is not sufficient to establish, on a balance of probabilities, that GrenCo would have lost the number of rebuilt drive sales identified in the Cohen Report. [ 150 ] Further, as identified by the Defendants and admitted by Cohen, Cohen’s analysis would result in double counting of at least some of GrenCo’s losses.

That is, if the Defendants sold an infringing drive and then later sold another infringing drive as a replacement, the Plaintiffs would recover an amount for the second infringing drive as well as an amount for the loss of a rebuild sale (based on the sale of the first infringing drive). [ 151 ] The Defendants identified a number of other problems with Cohen’s model: the term " “rebuild” " was used liberally to refer to the sale of any used drive, the model did not differentiate between customers who purchased a rebuilt drive and those who " “exchanged” " a GrenCo drive for a rebuilt drive, and the model included warranty replacements as rebuild transactions. [ 152 ] Therefore, although it seems probable that GrenCo did lose sales of rebuilds, in my view Cohen’s model is not a trustworthy measure for calculating those sales.

It is overly speculative and would result in greater than " “perfect” " compensation. As the Plaintiffs have failed to establish the appropriate method for calculating these damages (or even if it is possible to calculate these damages), I must conclude that the only appropriate method of calculating such damages is according to the Defendants’ used drive sales.

(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 ] Bearing in mind Hall’s Sur-Reply Rebuttal Report and in particular Attachment 38R, the Defendants have established, subject to their primary position that no award for this heading should be made, that the Plaintiffs’ lost profit from services would be $327,835. [ 154 ] Therefore, the Plaintiffs are entitled to an award of $327,835 for this item of damages.

(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 ] In Jay-Lor , the Federal Court indicated that the loss of " “add on” " (or, in the language of this case, " “convoy” " ) sales may flow from the loss of sales of patented products, and in such cases these losses should form part of the damages claim: [198] Finally, I note one further related argument by the Defendants. They submit that the costs of certain components – most notably, the conveyors – should not be included in the assessment of costs.

In their view, these are separate “add-ons”, and are not part of the vertical feed mixer. The problem with this argument is that the conveyor and other add-ons are sold with a vertical feed mixer and form part of the same sale. Although conveyors are mentioned briefly, as an option to transport the mixture, in the specifications of the '092 Patent, JAY-LOR would not have sold a vertical feed mixer without a conveyor. When JAY-LOR lost a sale of a vertical feed mixer to Penta, it also lost the sale of the conveyor and other add- ons. Therefore, the Plaintiffs’ damages include the loss of the sale of the conveyors.

The costs of any add-ons, sold as a unit with the vertical feed mixer, should not be artificially severed from the assessment of the Plaintiffs’ losses. [199] In sum, this is not a case where the losses to the Plaintiffs should be apportioned and limited to the auger in the patented vertical feed mixer or to exclude add-ons. The assessment of damages on lost sales should be made on the entire vertical feed mixer as sold to the customer.

[Emphasis added.] [156] In Beloit Canada Ltd v Valmet-Dominion Inc (1997), (FCA), 73 CPR (3d) 321, 1997 CarswellNat 719 (WLCan) at para 130 (FCA), the Federal Court of Appeal indicated that "“[a] patentee is entitled to damages assessed upon the sale of non-infringing components when there is a finding of fact that such sale arose from infringing the patented component”". [157] In this case, the evidence indicated that a number of products were commonly sold with GrenCo drives, such as "“drive caps,clamps, wellheads, power transmissions, chemical pumps, recirculation pumps, electric motors, flow-tees, generators, drive caps,sheaves, bushings, belts, prime movers (engines), skids (which includes a hydraulic pump and hydraulic tank), enclosures, quiet shacks,tubing rotators, and variable frequency drives and enclosures (optional), and tubing rotators”".

These products were not marketedindependently of the drives. [158] It was common for oil producers to purchase a surface equipment "“package”" from one manufacturer, although producers alsopurchased different components from different manufacturers. Other manufacturers, including the Defendants, sold convoy products withtheir driveheads.

The Plaintiffs submit that "“[t]he lost sales of convoy products was foreseeable and was a consequence of the businessmodel of GrenCo as well as its competitors in the industry”". [159] On the other hand, the Defendants submit that the Plaintiffs must establish that the sale of the infringing product caused the losswith respect to convoyed sales, and "“[a] patentee is not presumed to be entitled to lost profits on convoyed sales as a portion of itsdamages”".

The Defendants cite Monsanto Canada Inc v Schmeiser, 2004 SCC 34, [2004] 1 SCR 902, wherein the Supreme Court ofCanada emphasized the causal relationship in a case concerning the accounting of profits: 101 It is settled law that the inventor is only entitled to that portion of the infringer’s profit which is causally attributable tothe invention: Lubrizol Corp. v. Imperial Oil Ltd., (FCA), [1997] 2 F.C. 3 (C.A.); Celanese InternationalCorp. v. BP Chemicals Ltd., [1999] R.P.C. 203 (Pat. Ct.), at para. 37.

This is consistent with the general law on awardingnon-punitive remedies: “[I]t is essential that the losses made good are only those which, on a common sense view ofcausation, were caused by the breach” (Canson Enterprises Ltd. v. Boughton & Co., (SCC), [1991] 3 S.C.R.534, at p. 556, per McLachlin J. (as she then was), quoted with approval by Binnie J. for the Court in Cadbury SchweppesInc. v.

FBI Foods Ltd., (SCC), [1999] 1 S.C.R. 142, at para. 93). [160] The Defendants suggest that a patentee cannot recover lost profits that were derived from convoyed products protected by otherpatents, and cite an English case, Celanese International Corp v BP Chemicals Ltd, [1999] RPC 203 (Pat Ct).

The Defendants wish thisCourt to follow the American jurisprudence, wherein "“[t]he Court held that if the convoyed sale had a use independent of the patenteddevice, that suggests a non-functional relationship”": Warsaw Orthopedic, Inc v Nuvasive, Inc, 778 F (3d) 1365 (Fed Cir 2015), amendedon other issues, 824 F (3d) 1344 (Fed Cir 2016). [161] Although the Defendants are correct in asserting that there is limited Canadian jurisprudence with respect to add-on or convoyedsales, in my view they have not succeeded in differentiating Jay-Lor from this case.

The Defendants argue that "“[i]f an item’s onlypurpose is to function with the infringing unit, such as the conveyor ""in ""Jay-Lor"", then it may be a conveyed [sic] sale on a commonsense view of causation.

However, if a product can be sold separately or sold for a different purpose, then it is not being sold onlybecause of the infringement, but likely for business reasons or convenience”". [162] I see two problems with the Defendants’ reasoning: first, Jay-Lor does not implicitly or explicitly reference such a limitation whenspeaking of "“add-on”" sales (in that case, the Federal Court simply states that the add-on items were "“sold with a vertical feed mixerand form part of the same sale”"), and second, the fact that convoyed products were sold for "“business reasons or convenience”" doesnot negate the fact that such products would have been sold by the patentee "“but-for”" the Defendants’ infringement. [163] If compensation is not provided for such add-on items, then the patentee is not being put in the position that they would have beenin but-for the infringement (resulting in less than perfect compensation).

If the Plaintiffs can show, on a balance of probabilities, thatsuch sales would have been made by the Plaintiffs in the but-for world, then in my view this is a loss for which they should becompensated.

This approach is consistent with the limited Canadian case law on the topic, and I would reject the requirement suggestedby the Defendants that such convoyed sales must have no function independent of the patented object. [164] I conclude that a common sense view of causation indicates that these products were convoyed sales that, on a balance ofprobabilities, would have been made by the Plaintiffs but-for the infringement by the Defendants. [165] I agree with the Defendants that the purchase of "“associated products”" was up to the customer and that certain products could beinterchangeable.

However, in my view, the evidence amply demonstrates that associated pr

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