Interest is very . . . interesting

Eli Lilly Co. v. Apotex Inc. 2009 FC 991, 80 C.P.R. (4th) 1, aff'd 2010 FCA 240.

Since I don't have any current cases to blog about, this post reflects on an aspect of one of last year's more interesting decisions. Interest was traditionally not awarded on damages at law, as it was thought to be punitive. A fortiori, compound interest was not permitted. This has been statutorily remedied in each province to the extent of permitting interest to be awarded, both pre- and post-judgment. The Federal Courts Act s 36-37 provides that if a cause of action arises solely in one province (i.e. infringement occurs entirely and only in one province), the laws of that province govern the award of interest, and otherwise the provisions of the Federal Courts Act are applicable. Section 36(2) gives the Court the discretion to award pre-judgment interest “at any rate that the Federal Court of Appeal or the Federal Court considers reasonable in the circumstances.” The Court of Appeal in Wellcome / AZT [2001] 1 FC 495 at [123] has said that “the exercise of discretion in awarding interest "must be related to the task of putting the plaintiff in the same position, so far as money is concerned, as he would have been if he had not suffered the loss.” However, the Federal Court not uncommonly specifies pre-judgment interest at the annual average Bank of Canada bank rate – the rate of interest the Bank of Canada charges on one-day loans to major financial institutions – without consideration of whether this rate would in fact provide full compensation: see Merck & Co., Inc. v. Apotex Inc. 2006 FC 524 [240] affm’d 2006 FCA 323; Laboratoires Servier v. Apotex Inc. 2008 FC 825, [513] affm’d 2009 FCA 222. If the successful plaintiff is not able to borrow at the bank rate, then such an award would arguably not put it in the position it would have been in had it not suffered the loss in the first place.

Another difficulty with the statutory scheme is that many of the Acts, including both the Federal Courts Act, and the Ontario Courts of Justice Act, which is substantially similar, prohibit compound interest pre-judgment. The Federal Courts Act, s 36(4)(b) provides that "[i]nterest shall not be awarded under subsection (1), (b) on interest accruing under this section." (The Onario Act, ss 128(4)(b) is in the same words.) It is clear that an award of simple interest will not provide full compensation to a successful party, particularly when the time between the infringement and judgment is long, or when prevailing interest rates are high.

That the traditional common law prohibition on interest, and the statutory prohibition on compound interest, fail to restore the plaintiff to the position it would have been in but for the wrong, was recognized by the Supreme Court of Canada in Bank of America Canada v. Mutual Trust Co. 2002 SCC 43. The Supreme Court recognized that interest is not punitive, but compensatory: “[t]o award the plaintiff damages equal to the value of the contract as if it had been performed on time, the court must . . .apply the appropriate interest rate and method of calculation to account for the time during which the plaintiff was not paid what was rightfully due.” The Supreme Court noted that interest reflects the time-value of money and that compound interest is more appropriate in this regard: “[s]imple 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.” Consequently, “[a]lthough 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.” [38] The Court concluded that “[i]t is for reasons such as these that the common law now incorporates the economic reality of compound interest. The restrictions of the past should not be used today to separate the legal system from the world at large." [44]. The Court held that the prohibition on compound interest under the Ontario Act, which was at issue in the case, was not applicable, because that prohibition applies only to interest awarded under the Act, and the interest was being awarded on the basis of common law, not on the basis of the statute [43]. The Federal Courts Act is the same as the Ontario Act in the relevant provisions, so it seems clear that this conclusion applies under the Federal Act as well.

However, the Court’s decision in the Bank of America Canada case was limited in that the Court held 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] On the facts, the contract in question was a contract to lend money, and compound interest was specified in the agreement itself. In other cases [compound interest] “may be awarded as consequential damages in other cases but there would be the usual requirement of proving that damage component.” [55]

Thus it would appear that compound interest is available in an intellectual property case in the Federal Court, so long as it is proven as damages, rather than claimed under the Federal Courts Act. This result was to some extent anticipated by the FCA in holding Wellcome / AZT; as well as noting that the goal of damages is to place the injured party in the position it would have been in but for the wrong, the FCA remarked that “ the parties will have the opportunity, to the extent they consider it relevant and necessary, of adducing evidence respecting interest in the assessment of damages stage of these proceedings” [125]. Nonetheless, to date the Bank of America Canada decision does not appear to have penetrated into Federal Court practice. A recent significant case is the decision of Gauthier J in Eli Lilly Co. v. Apotex Inc. / cefaclor, 2009 FC 991 affm’d 2010 FCA 240. In that case Gauthier J reviewed the jurisprudence, including the Supreme Court decision in Bank of America Canada case, and concluded that the successful patentee would be entitled to compound interest if it could be proven that this was necessary to achieve full compensation [674]. Because that proof was not available to her, she awarded only simple interest at the bank rate, but left it open to the patentee to establish a higher rate, including compound interest, on the reference. [674]. Gauthier J’s holding on this point appears to be clearly consistent with the Bank of America Canada decision. It remains to be seen what kind of proof will be required to established an entitlement to compound interest. There not appear to many patent reported decisions on point, but it seems that in the absence of at least some proof, compound interest will be denied: see Elders Grain Co. v. The "M/V Ralph Misener" 2004 FC 1285 [10]. Would it be enough to prove that the plaintiff could have deposited money in an interest bearing account?

On a final point, the Acts typically distinguish between pre- and post-judgment interest. The Federal Courts Act, s 37(2), gives discretion to the court set post-judgment interest “at the rate that court considers reasonable in the circumstances,” and there is no specific prohibition on compound interest. Curiously, however, Gauthier J held that “it is well established that the appropriate rate is 5%, not compounded” [675]. While it is true that this is the normal award, none of the authorities she cited considered the Bank of America Canada decision, and in that decision the Supreme Court expressly held “[t]his analysis applies equally to pre-judgment interest and post-judgment interest.” It may be that in the current climate 5% is close enough to a realistic rate as to not be worth disputing one way or the other. With that said, there is no evident reason on the Act, or on in light of the Bank of America Canada decision, for treating post-judgment interest differently. Perhaps there is a functional reason to distinguish: a slightly higher than realistic rate on post-judgment interest encourages the defendant to pay promptly, whereas pre-judgment a rate that is too high would unduly encourage settlement despite a potentially meritorious defence.