Thursday, February 5, 2015

Compound Pre-Judgment Interest Arrives in Canadian Patent Litigation

Eli Lilly and Co v Apotex Inc / cefaclor, 2014 FC 1254 Zinn J [Cefaclor Damages]
            1,133,0071,146,5361,133,4681,150,725 [the Lilly Patents]
            1,095,0261,132,5471,136,1321,144,924 [the Shionogi Patents]

Zinn J’s Cefaclor Damages decision is a major step in taking the law of pre-judgment interest in an economically sound direction. The first step was taken by Gauthier J in the liability phase of this bifurcated action, Cefaclor Liability 2009 FC 991 aff’d 2010 FCA 240. As described in more detail in my blog post on the interest issue in that decision, the common law traditionally prohibited interest and while that prohibition was statutorily reversed those statutes did not allow for compound interest. In Bank of America 2002 SCC 43, (aka Clarica Trust), the SCC recognized that simple interest is not fully compensatory, and consequently, the SCC held that even if compound interest was not available under the relevant statute, it was available under the common law of contract as compensation, so long as it was claimed as such and proven.

In Cefaclor Liability Gauthier J discussed Bank of America at some length and while she ultimately awarded simple interest on the judgment, this was subject to being displaced by damages awarded as compensation:

that is not to say that the reference which will deal with the quantification of damages or profits (depending on Lilly's election) cannot award compounded pre-judgment interest (even at an elevated rate) as an element of compensation, provided it is adequately proven by Lilly. When so awarded, interest becomes part of a damage award and is not itself an award of interest. [667]

In Cefaclor Damages Zinn J was faced with this issue. The first legal issue was the interpretation of Bank of America, in which the SCC focused on the common law of contract, and suggested some limitations on the availability of compound interest:

55 An 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. It may be awarded as consequential damages in other cases but there would be the usual requirement of proving that damage component.

Each sentence is important. The first suggests that compound interest is generally limited to contract cases, while the second suggests that it may be generally available if proven.

Zinn J grasped the second the second branch of this passage, and rightly so. There is no reason in principle to restrict compound interest to contract cases. If a tortfeasor smashes my car, and I have to withdraw $10,000 in savings to have it repaired, my loss includes the foregone compound interest at the rate I would have earned on that money.

As a technical matter, Zinn J pointed out that the basis for the claim of compound interest in this case is s 55(1), so the question isn’t really one of common law at all, but whether the loss of the opportunity to earn compound interest is “damage sustained. . . by reason of the infringement” [116]. Consequently, Lilly would be entitled to compound interest so long as it could provide that it would have generated income on the lost profits [116].

Apotex argued that Lilly had failed to prove any such loss [118]. Zinn J held that “the patentee is not required to prove exactly what use it would have made of the profit it has lost as a result of the infringer's actions,” and indeed:

I would go further and say that in today's world there is a presumption that a plaintiff would have generated compound interest on the funds otherwise owed to it and also that the defendant did so during the period in which it withheld the funds. [118]

This presumption strikes me as entirely sound in a modern economy.

Apotex also argued that an award of compound interest would over-compensate Lilly unless tax implications were properly accounted for, and simple interest avoided this problem while allowing for easier calculations. This relates to the main argument in favour of restricting Bank of America to contract cases, which is that on the facts of that case at least, calculation of the rate was easy because it had been specified in the contract itself. But Zinn J held that “The ease of calculation is not a relevant consideration in determining damages” [119]. I’m not sure I’d go so far as to say it is never relevant, but in this case, where the interest totaled over $70m, and the difference between simple and compound interest was doubtless well into the many millions of dollars, the extra effort needed to assess compound interest is worth it.

There was also the problem that compound interest exaggerates the effect of delay in litigation:

[123] Apotex submits that Lilly's "leisurely approach" to this litigation militates against an award of compound interest at a high rate. It submits that such an award effectively sanctions Lilly's actions.

The answer to this is that the problem cuts both ways:

[113] In Astrazeneca Canada Inc v Apotex Inc, 2011 FC 663 at para 33, Justice Hughes stated: "A party should not be encouraged not to pay a Judgment simply because it is cheaper to let the interest accumulate." Similarly, a party should not be encouraged to delay and prolong litigation because it is cheaper and more rewarding than paying the piper.

If properly calculated, compound interest does not encourage delay, because the plaintiff will be indifferent between having the money in hand at an earlier date, and having compound interest on its loss at a later date. As I noted in my post here on Hughes J’s decision, “Pre-judgment interest should be as close as possible to a truly compensatory rate: the prevailing plaintiff is entitled to full compensation, yet a defendant should not be reluctant to mount its defence due to fear of punitive interest rates.” Keep in mind that the defendant has had money available for investment that it would not have had but for the infringement, and this money is presumably earning compound interest, albeit not necessarily at the same rate that would have been earned by the patentee.

In summary, on all matters of principle, Zinn J’s reasoning strikes me as sound. The next question is how exactly to assess the compound interest. Lilly expert testified that [120]

the Weighted Average Cost of Capital [WACC] was the most appropriate rate to be awarded as it represented the best estimate of the forgone opportunity cost to Lilly, and this he said was [ .. Redacted .. ] %.

Zinn J rejected this, holding instead that “the best measure is to examine what profit it realized in its business activities in the relevant time period” [121].

If I understand correctly, the choice is between the rate that Lilly would have expected to earn and the rate it actually earned over the relevant period. If that is right, I am inclined to think that the former, which is to say the Weighted Average Cost of Capital is preferable. The reason is that the loss to the plaintiff – that which it would have had but for the infringement – is the opportunity to invest the lost profits, and that is reflected in the expected return. The rate of return actually earned reflects other factors that would have been unanticipated at the time of the infringement, such as how many competing products are introduced into the marketplace, or increasing prevalent of certain diseases, which are not caused by the infringement. Ultimately, this is the same reason that in an action for breach of contract damages are ascertained at breach date rather than time of trial: see eg s 48(3) Ont Sale of Goods Act. In any event, I don’t want to express any firm opinion on this issue, as Zinn J’s discussion is too brief to fully assess. The actual loss from compounding is a matter of evidence, so this particular holding is based on the facts and evidence before Zinn J and future cases may assess the evidence differently.

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