Thursday, August 7, 2014

A Principled Approach to Prejudgment Interest

Teva Canada Limited v Pfizer Canada Inc 2014 FC 634 Zinn J [Venlafaxine Quantum]
            1,248,5402,199,778 – venlafaxine – EFFEXOR XR

Pre-judgment interest can be a substantial part of a damages award when many years pass between a cause of action arising and the final judgment: in this case, $32m on top of $92m in damages. Yet pre-judgment interest has tended to be assessed on a fairly mechanical basis of the bank rate + 1%, not compounded (see here). This approach certainly has the advantage of simplicity, and when the quantum of interest is low it may be the most efficient approach. With recent awards in the region of $100m, interest becomes more important, and we may expect to see more attention paid to the details of interest calculations. This is evident in Zinn J’s Venlafaxine Quantum decision.

In his reasons for judgment in the NOC s 8 damages action in Teva v Pfizer / venlafaxine 2014 FC 248 [262] Zinn J was unable to finalize the quantum of damages, and directed the parties to attempt to do so in light of his reasons. The parties agreed on the quantum of principal, but were unable to agreed on the calculation of pre- or post-judgment interest, which were addressed in Venlafaxine Quantum (along with costs).

Section 8 damages compensate a generic which has been successful in an NOC proceeding for having been wrongly kept out of the market by the statutory stay triggered under s 7(1)(e) by the patentee’s application for an order of prohibition. The generic’s loss stems from its failure to make sales which it would otherwise have made during the relevant period, which, in this case was from January 2006 to August 2007 [11]. The lost sales were assessed on a monthly basis [1]. The plaintiff (generic) sought prejudgment interest on the full amount of the damages, running from January 2006 [12]. The patentee responded that the generic would not have been able to earn interest on profits it had not made, so interest should be awarded on profits as they would have arisen, over the entire 19 month period [11].

In holding for the patentee on this point, Zinn J, citing Bank of America Canada v Mutual Trust Co, [2002] 2 SCR 601 (often referred to as Clarica Trust), emphasized the compensatory nature of prejudgment interest [9-10]. Zinn J particularly relied on the OCA decision in Celanese Canada v CNR [2005] OJ No 1122, 2005 CanLII 8663 (OCA) which held that prejudgment interest should not result in a windfall to the plaintiff [10], [15]. He therefore held:

[16] In my view, where the damages claimed are for pecuniary loss that accrues over a period of time, it is appropriate when calculating prejudgment interest to do so in a manner that prevents overcompensating the plaintiff and that recognizes that the loss occurred over time.

Consequently, prejudgment interest was to be calculated on the monthly profit only as it arose [20].

While this is entirely correct as a matter of principle, the point that prejudgment interest is compensatory cuts both ways. While the plaintiff should not get a windfall, it should be fully compensated. In this case, Zinn J awarded only simple interest. Presumably this is all that was asked for, as Zinn J did not address the question of compound interest directly. (The award of simple interest is not explicit, but is evident from the calculations.) In Clarica Trust, the SCC noted that simple interest is not fully compensatory:

[24] Simple interest makes an artificial distinction between money owed as principal and money owed as interest. Compound interest treats a dollar as a dollar and is therefore a more precise measure of the value of possessing money for a period of time. Compound interest is the norm in the banking and financial systems in Canada and the western world and is the standard practice of both the appellant and respondent.

[38] Although not historically available, compound interest is well suited to compensate a plaintiff for the interval between when damages initially arise and when they are finally paid.

The Court therefore held that compound interest is therefore available at common law [44]. (And see discussion here).

The Court did go on to hold that "[a]n award of compound pre- and post-judgment interest will generally be limited to breach of contract cases where there is evidence that the parties agreed, knew, or should have known, that the money which is the subject of the dispute would bear compound interest as damages" [55]. This is curious, because there is nothing in the Court’s prior logic which leads to this conclusion, the point of which was that the successful plaintiff is entitled to be fully compensated, and simple interest does not achieve this goal. I don’t see why a victim of a wrong should be entitled to full compensation only if the wrong-doer had actually contract to that effect. In any event, the Court did go on to say that “It may be awarded as consequential damages in other cases but there would be the usual requirement of proving that damage component” [55].

In summary, the SCC decision in Clarica Trust apparently implies that compound interest may be awarded in patent cases, at least so long as it is properly pleaded and proven as a loss. While the result in Venlafaxine Quantum was a lower award of interest than the successful plaintiff had asked for, Zinn J’s emphasis on the compensatory nature of prejudgment interest opens the door to compound interest in the appropriate case.

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