What is the test a party must meet to establish a claim for interest as damages arising from lost profits? On the first appeal in connection with the quantification of damages for the infringement of the cefaclor patents, the Federal Court of Appeal (the "FCA") held that damages for interest on lost profits cannot be presumed and "must be proved in the same way as any other form of loss or damage."1 Recently, on the second appeal in this matter, it had the opportunity to consider the approach that Justice Zinn of the Federal Court ("FC") used for assessing such a claim: Apotex Inc. v. Eli Lilly and Company, 2021 FCA 149.
Justice Zinn adopted the "would have" and "could have" framework from jurisprudence establishing that damages in patent cases are generally assessed by a comparison between real and hypothetical worlds.2 The FCA accepted that this framework — as previously used in Pfizer Canada Inc v. Teva Canada Limited 3 for assessing section 8 damages under the PM(NOC) Regulations4— also applies in assessing damages that turn on a lost opportunity to generate profits.
The decision is significant because it offers guidance on how a claim for interest as damages should be pursued and on what evidence is suitable to establish that interest would and could have been earned but for the adverse party depriving its adversary from using its profits.
For nearly 25 years, Eli Lilly and Company and Eli Lilly Canada Inc. ("Lilly") battled against Apotex Inc. ("Apotex") in the Federal Courts over Apotex's bulk importation of cefaclor for use in its antibiotic product, Apo-cefaclor, in Canada. The liability judgement held that Apotex had infringed at least one valid claim in each of Lilly's eight patents covering cefaclor.5
Lilly was awarded damages in the form of lost profits that it would have earned from selling cefaclor during the relevant infringing period (i.e., 1997 to 2001). The quantification of these damages winded its way back to the FC for determination by way of reference, which was heard by Justice Zinn.6
On the appeal of the original reference, the FCA affirmed the FC decision that compound interest was available in patent disputes when claimed as a head of damages, but it reversed Justice Zinn's ruling that this loss could be presumed.7 The FCA also held that it was not "readily apparent"8 how the FC had arrived at the annual rate of profit on sales (i.e., the interest rate), and so these two aspects of the computation damages in the form of interest were remitted to the FC for reconsideration.9
On remand, Justice Zinn reached the same conclusion as before and thus maintained the award of compound interest.10 On the appeal of the remand decision, which we discuss in detail below, the FCA found no reviewable error in the legal tests applied or in the assessment of the evidence conducted by Justice Zinn.
The Issues Under Appeal
Lilly's claim was that it had lost the opportunity to generate profits by reinvesting in their business the $31 million that Lilly would have earned from the lost sales of cefaclor from 1997 to 2001 through to the date of judgment — the compound interest being used as a proxy for compensating that lost opportunity. Justice Zinn reviewed the instructions provided by the FCA for reconsideration of the issue and adopted the following considerations for assessing Lilly's claim for lost opportunity:
- Damages in patent cases are generally assessed by a comparison of the real-world with the hypothetical but-for-world in which the wrong did not occur, where the real-world informs the hypothetical but-for-world;11
- The "could-have" and "would-have" causation framework used to assess damages in the hypothetical world can be applied for assessing damages for lost opportunity, and those components must be examined separately such that proof of one does not entail proof of the other;12 and
- A finding of lost opportunity must be made with reference to the question: "But for Apotex wrongfully depriving Lilly of profits from lost sales of cefaclor [...] what could and would Lilly have done with the Lost Profits at the time when they should have been received?"13
As to the quality of evidence, Justice Zinn noted that "clear and non-speculative evidence of a lost opportunity" is required, meaning that, "more than a mere statement without foundation, Lilly might have conducted itself in a particular manner".14 The could-have component was met as nothing made it impossible for Lilly to be in the position to generate the selected Rate of Return on the lost profits, and the would-have component was satisfied as Lilly showed what the result would have been if the lost profits had been pooled with its other profits and invested together.15
As Apotex failed to adduce sufficient and credible evidence to prove its version of what could have and would have happened in the hypothetical world, Justice Zinn ultimately accepted Lilly's evidence that (a) it would not have kept the lost profits without earning any return; (b) its business model was to maximize return on investments and maximize return on revenue, and; (c) the adequate rate of return to be used for calculating the total award was the average of the annual rates of return.
Apotex's appeal turned primarily on the two grounds discussed below, and the FCA considered Apotex's arguments in light of the "could-have" and "would-have" framework adopted by the FC, as set out above.
a) Error for failing to assess causation
Apotex argued that Justice Zinn failed to assess whether Apotex's infringement, which resulted in lost profits on lost sales of cefaclor of $31million, was a necessary cause of the alleged lost opportunity to invest that amount and earn a return of more than $75 million. Apotex submitted that Lilly had a significant amount of unused funds at the bank at only 2.5930% compounded interest, and so no causation could be established due to Lilly not having the $31million available.
The FCA disagreed and held that the FC properly addressed the causation issue focusing on what Lilly "could have" and "would have" done with the lost profits when they should have been received based on the evidence. Moreover, Justice Zinn correctly identified that the damage award, in this case, has two components: the $31million in lost profits and the opportunity Lilly lost to use those profits over the relevant time period.
Apotex relied on two cases to the effect that causation cannot be established if a plaintiff has money available to pursue a lost investment opportunity. However, the FCA distinguished both cases as dealing with specific lost investment opportunities, whereas this case concerned the "time value"16 of money owed over 17 years, that is, "the general position that Lilly would have been in had it received its lost profits"17, as recognized by the FCA on the earlier appeal.
b) Error in appreciating the evidence of Apotex's expert regarding the Rate of Return
Lilly's fact witness, its Director of Finance, gave evidence that Lilly's lost profits would have been pooled with the other corporate profits to be invested or spent together by the company. In view of this evidence, Justice Zinn considered but did not give much weight to the evidence given by the financial experts of either party, as their respective opinions were focused on the lost profits being a "sum separate and apart" from Lilly's other profits — not treated as gross profits in Lilly's pool of resources.18 Apotex's and Lilly's experts approached the question of what Lilly would have done with its lost profits by assuming that the company's decisions about its use were being made after the fact, not over the period of time when the profits ought to have been available for Lilly.19
Thus, Justice Zinn preferred the evidence of Lilly's fact witness to the effect that Lilly would have put the $31 million lost profits into a pool of resources applied towards investments with Lilly's other profits, and would have spread that amount among the same investments that it had made in the real world.20 Justice Zinn held that "[w]here that proposed use of the slightly larger pool of profits parallels the use Lilly made in the real-world, there must be a heavy burden on Apotex to show that there was something making it impossible for Lilly to do so again."21
Justice Zinn then considered Lilly's financial documents showing that the opportunity lost was "by-and-large an opportunity lost to Lilly Canada", and that the Rate of Return selected represented the profit margin of Lilly Canada in the relevant period. The Rate of Return was the minimum average profit rate that represented the average return for Lilly Canada. As Apotex did not counter that with any evidence showing that it would have been impossible for Lilly to generate that Rate of Return on the lost profits, the FCA found no error in Justice Zinn's decision accepting Lilly's evidence and held that preferring one witness over another does not amount to palpable and overriding error.
Compound interest may compensate for a lost opportunity to reinvest the money that would have been available but for lost sales/profits. What could and would the party have done with that money is how a claim for interest as damages will be assessed by the courts. The FCA accepted the same "could-have" and "would-have" test used for constructing the hypothetical world more generally in damages assessments as the appropriate approach for considering a lost opportunity claim.
Although the FCA upheld the FC's factual finding that Lilly's lost profits should be treated as gross profits in Lilly's pool of resources for the purpose of calculating the rate of return, this endorsement is not deemed to have created a legal rule that lost profits are always going to be treated as gross profits. There is an evidentiary burden to establish by reliable evidence directly on point that the lost profits, in the real world, would have had the same destination as the company's other profits.
1 2018 FCA 217, at para. 158.
2 2019 FC 1463, at paras. 22-23 and 44-45.
3 2016 FCA 161, at para. 50.
4 Patented Medicines (Notice of Compliance) Regulations, SOR 93-133.
5 2009 FC 991 aff'd 2010 FCA 240.
6 2014 FC 1254.
7 2014 FC 1254 at para. 118: "in today's world, there is a presumption that a plaintiff ...would have generated compound interest on the funds otherwise owed to it".
8 2018 FCA 217, at paras. 161-162.
9 2018 FCA 217 at paras. 156-158, and 164.
10 2019 FC 1463.
11 2019 FC 1463 at para. 23.
12 2019 FC 1463 at para. 43-44, citing Pfizer Canada Inc. v. Teva Canada Limited, 2016 FCA 161 concerning a claim under section 8 of the PM(NOC) Regulations, S.O.R. 93-133 for damages in the form of sales that a generic company would have made of its generic drug but-for the innovator company's objecting market approval of the generic drug.
13 2019 FC 1463 at para. 22.
14 2019 FC 1463 at para. 37 and 39.
15 2019 FC 1463 at para. 50.
16 2021 FCA 149 at para. 23 referencing the earlier appeal 2018 FCA 217 at paras. 157 and 162.
17 2021 FCA 149 at para. 23 referencing the earlier appeal 2018 FCA 217 at paras. 157 and 162.
18 2019 FC 1463 at paras. 53-54.
19 2019 FC 1463 at para. 64
20 2019 FC 1463 at para. 13, 55-56.
21 2019 FC 1463 at para. 57.
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