Wednesday, May 3, 2017

Should 36(1)(4)(b) of the Federal Courts Act be Repealed?

Dow Chemical Co v NOVA Chemicals Corp 2017 FC 350 Fothergill J
            2,160,705 / film-grade polymers / ELITE, SURPASS

In the liability phase of this action, Dow Chemical Co v NOVA Chemicals Corp 2014 FC 844 aff’d 2016 FCA 216, O'Keefe J held Dow’s 705 patent related to advanced film-grade “mLLDPE” polymers, to be valid and infringed by Nova, and he also held that Dow was entitled to damages under s 55(2) of the Patent Act for pre-grant ‘infringement’, and that Dow was entitled to elect between damages and an accounting for post-grant infringement. Dow subsequently elected an accounting [107]. Fothergill J’s decision in the remedies phase addresses various issues to allow the parties’ accountants to calculate the actual sums owed by Nova to Dow [6]. (For more background see last Wednesday’s post.) The question of pre-judgment interest arose both in the context of interest on the award of a reasonable compensation under 55(2), and also in terms of interest on the accounting. There are two basic questions as to interest: what is the rate, and should it be compounded?

In respect of the interest on reasonable compensation under s 55(2), [101]-[105], the only issue was the rate, as O’Keefe J had held that interest should not be compounded [101]. The Federal Courts traditionally tended to award interest at the annual average Bank of Canada bank rate, which may in practice be undercompensatory. The Federal Courts Act, s 36(3) does, however, give the court discretion to award a different rate. There seems to have been a trend over the last few years for parties to ask for a different rate (see here for an overview), and the question then arises as to what rate is appropriate. In this case, Dow asked for, and Fothergill J awarded, pre-judgment interest at a rate equal to Dow’s annual cost of borrowing [102]. This basis was largely undisputed [104]. A similar rate was also used in, for example, Cefaclor Damages 2014 FC 1254 (discussed here). This suggests that there is a trend towards using the plaintiff’s annual cost of borrowing as the appropriate pre-judgment interest rate. While I hesitate to express a firm view, interest assessed on this basis strikes me as sound, as it best reflects the actual loss to Dow. With that said, considerations of administrative efficiency might support a different rate, particularly when the quantum at stake is relatively modest. Roy Epstein, Prejudgment Interest Rates in Patent Cases: Don't Compound an Error, 24(2) IPL Newsletter (2006), has an interesting discussion suggesting that data on average actual short-term market interest rates paid on commercial and industrial loans might be a less expensive way at arriving at a reasonably reliable assessment of the plaintiff’s loss. (Hat tip to Professor Tom Cotter for bringing this article to my attention.)

Turning to the issue of interest on the award of Nova’s profits, O’Keefe J had left the question entirely open, in terms of rate and compounding [166]. Nova argued for prime rate + 1%, not compounded [167], while Dow argued that the applicable rate should be Nova’s weighted annual cost of borrowing, compounded [168].

Fothergill J held that the appropriate rate was Nova’s weighted average annual cost of borrowing [168], [173]. This is consistent with his holding in the context of reasonable compensation.

He also held that interest should be compounded [173], relying, inter alia on Reading & Bates Construction [1995] 1 FC 483, 486, stating “ the awarding of compound pre-judgment interest as deemed earnings on the profits is the rule,” and Beloit Canada [1995] FCJ No 733, 61 CPR(3d) 271 (FCA) reemphasizing the same point [171]. The rationale is compelling: as a result of the infringement, the infringer had use of money that it would not otherwise have had, and in light of “the modern reality that interest paid or earned on deposits or loans is compound interest,” the need to “achieve equity in the accounting of profits“ requires that interest be compounded, or the infringer to profit from its wrong: (Reading & Bates, ibid).

Given that compound interest is established as the norm in an accounting, it is curious that compound interest has only recently begun to be awarded in the context of damages. The rationale is equally compelling; the patentee was deprived of money it would otherwise have had, and in reality that money would have earned compound interest. The obstacle has been s 36(1)(4)(b) of the Federal Courts Act, which on its face prohibits compound interest. Bank of America Canada v Mutual Trust Co, 2002 SCC 43 generally, and Eli Lilly / Cefaclor Damages, 2014 FC 1254 in the context of damages, have gotten around this by awarding compound interest as being compensation, rather than interest on interest as such: see here. For reasons that are not clear to me, s 36(1)(4)(b) and its predecessors were not seen as posing the same problem in the context of an accounting. The provision prohibits “interest. . . on interest” accruing under 36(2), which refers to “an order for the payment of money,” and so on its face would also apply to an accounting.

In any event, notwithstanding s 36(1)(4)(b), compound interest is now available on both an award of damages and an accounting of profits, and this is sound in principle. It would appear best to repeal this provision entirely, at least so far as patent law is concerned.

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