Monday, November 24, 2014

“The reasonable person thinks in terms of economics, not principle"

Apotex Inc v Canada 2014 FC 1087 Hughes J

This decision emerged from a test case in which Apotex and Health Canada battled over the question of whether a generic could apply for an NOC on the basis of a foreign reference product. The case settled on terms favourable to Apotex, but HPB did not live up to the settlement agreement. In this decision Hughes J held Canada liable for breaching that agreement (though because of quirks in the pleadings, the formal ground of liability was in tort rather than contract). In an interesting part of the decision, Hughes J held that Apotex was subject to a duty to mitigate, which would essentially have required it to abandon its test case and leave the question of legal principle unanswered. Hughes J held that the duty to mitigate was nonetheless applicable, because “the reasonable person thinks in terms of economics, not principle” [159].

In the late 1980s, the attitude of what was then the Health Protection Branch (HPB) of Health Canada towards the use of a foreign drug product as the reference product in a generic’s application for an NOC was uncertain. It was the usual practice to use a product approved in Canada as a reference product, but occasionally an NOC would be granted on the basis of a foreign reference product. Apotex wanted a test case to establish whether it was entitled to use a foreign reference product [105]. It picked trazodone, and in January 1988 Apotex filed a New Drug Submission comparing its Apo-Trazad product to the innovator’s US product. On the particular facts, the use of a foreign reference product was scientifically sound, but HPB was concerned that allowing the use of a foreign reference product might set a precedent for circumstances in which the comparison was not appropriate [39]. Consequently, HPB “insisted on a Canadian standard, unless the United States reference product could be ‘conclusively proven to be identical’ to the Canadian product” [44]. The requirement of identicality made it effectively impossible to use a foreign reference product [44]. In other words, both Apotex and HPB were treating this as a test case. In light of this impasse, in 1990 Apotex sought judicial review of the Minister’s position. That litigation was settled on terms favourable to Apotex by a Settlement Agreement in November of 1990 in which HPB agreed to assess the application on the basis of “equivalency” rather than identicality [51].

At this point matters took a turn for the worse. HPB did not follow the terms of the Settlement Agreement. It continued to insist on identicality, while deliberately misleading Apotex as to its position [55]. In 1993 there was a shake-up in the upper management at Health Canada, but even then, “[t]here continued to be procrastination, delay, unnecessary consultation, and the like.” [93] “[T]here was a deliberate attempt to frustrate Apotex’s submission for an NOC. There appears to have been endless circling around the internal idea that a Canadian reference product must be used, and the insistence that Apotex must prove the impossible – identicality” [95]. This intransigence in the face of the settlement was not motivated by malice towards Apotex specifically, but was largely the product of bureaucratic bungling [103]. Finally, under pressure from the new management, Apotex was granted its NOC on the basis of the US reference product in February of 1995 [89]. Three years later, in 1998, Apotex commenced this action, claiming damages for its losses caused by the delay in obtaining its NOC under various causes of action.

Most straightforwardly, Apotex claimed that the refusal to honor the Settelement Agreement was a breach of contract. On the facts, Hughes J had no difficulty in concluding that HPB had breached the Agreement [133-34]. However, Hughes J also held that this claim was barred by the application six year limitation period, as the cause of action had arisen by early summer of 1991 at the latest, when it had become clear that HPB was acting in breach of the Agreement [138].

Apotex also made claims in tort, based in particular on misfeasance in public office and negligence. Hughes J upheld both of these claims [119], [131]. It is crucial to recognize that Apotex’ success in respect of both of these claims was entirely parasitic on HPB’s breach of the Settlement Agreement:

[149] I have founded my decision respecting liability in tort based on HPB’s representations in the Settlement Agreement and failure of HPB to follow through upon its commitments.

See also [117-18], [123], [127-29]. Thus, this decision does not stand for the proposition that Health Canada will be liable for refusing to issue an NOC in a test case in which its position is ultimately proven to be wrong.

Nor does this decision show that a claim in tort will allow an end-run around the contractual limitations period. The limitations period was not applicable to the tort claims simply because it had not been pleaded by the Crown [136]. The case law reviewed by Hughes J indicates that the discoverability rule applies equally to claims in tort and contract [142], but given that it had not been pleaded in tort, the question of whether the tort claim was barred simply did not arise.

Hughes J held that Apotex was therefore entitled to damages for the delay in receiving its NOC. Since the Crown’s substantive wrong was its failure to abide by the Settlement Agreement, Hughes J held that damages were to be assessed on the basis of the “but for” world in which HPB would have implemented the Settlement Agreement with reasonable diligence. Given the backlog of submissions, Hughes J held that Apotex would have received its NOC one year after the Settlement Agreement, namely in November of 1991 [149].

However, Hughes J also held that Apotex was subject to the duty to mitigate. On the facts it was readily established that Apotex could have established equivalency using a Canadian reference product. This would have cost it $200-$300k, and taken three to six months [162]. Therefore Apotex is entitled only to losses for the period beginning in November of 1991, when it should have received its NOC, until approximately 18 months after Apotex became aware that HPB would not live up to the Agreement, and so it would have been reasonable to take steps to mitigate, which is to say November 1992 [163]. (The extent of damages is to be assessed in a later trial.)

The interesting point is that Apotex did not take steps to mitigate by using a Canadian reference product precisely because it wanted a test case to establish whether it was entitled to use a Canadian reference product [158]. If it had “capitulated” and used the Canadian reference, that point would not have been established [150]. Presumably, it would not have been able to establish the point by pursuing a legal challenge to the HPB’s refusal to grant the NOC, because that would have been moot once the NOC was granted. Hughes J acknowledged all this, but said (my emphasis):

[159] However, the Court should not view the question of damages and mitigation from the point of view of a party wanting to make a point. Here, we are dealing with economic circumstances, loss by one party, and payment out of the public purse by another. Damages here are not an award for winning a point, damages are to provide reasonable compensation for unavoidable loss. The reasonable person thinks in terms of economics, not principle.

I am inclined to think that Hughes J is right on this point, but it is not an easy question. It was entirely reasonable of Apotex to want the law clarified, and Hughes J’s decision makes it abundantly clear that no such clarification would be voluntarily forthcoming from the sclerotic bureaucracy of the HPB at it existed prior to 1993. At the time, Apotex’s continued insistence that HPB consider the application on the basis of the US reference product was the only practical way to clarify the law. While capitulation would have been in Apotex’s immediate economic self-interest, its longer term interest lay in clarifying the law. As it actually happened, Apotex did stick to its position, and did not mitigate, and the legal point was resolved, no doubt in large part because of Apotex’ persistence. But presumably in the future, plaintiffs will be less inclined to pursue a test case knowing that mitigation would be required. That is undesirable because clarification in the law would be to the benefit not just to Apotex, but also its competitors and Canadian consumers generally. On the other hand, it is probably not be desirable to make the Crown liable for the losses sustained by the private party in a test case, simply because the Crown’s position is ultimately not sustained. Note in particular that in this case, it seems clear that the Crown incurred no liability for the delay prior to the Settlement Agreement; delay resulting because of the novel legal issue did not give rise to any duty in tort [123].  Moreover, generally speaking, the spillover benefits to third parties consequent on a clarification of the law are not considered in assessing damages. The law is often clarified through litigation between two private parties – indeed, including the law of mitigation – and it is uncontroversial that the duty to mitigate applies even though it may reduce the incentive to pursue the case and clarify the law. That is the legal principle encapsulated by Hughes J’s pithy phrase.

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