Damages Calculations Are a “Broad Axe” Not a “Rapier Point”

Apotex Inc v Merck Canada Inc / alendronate (NOC) 2012 FC 1418 Hughes J, further reasons in respect of 2012 FC 1235

            2,294,595 – alendronate

These supplementary reasons by Hughes J resolve a narrow question regarding the calculation of damages, but they also illustrate the more general point that calculation of damages is not an exact science.

The decision concerned the calculation of Apotex’s damages under s 8 of the NOC Regulations for having been wrongly excluded from the market for alendronate. The applicable general principles were set out by Hughes J in his first damages decision, blogged here. One specific question concerned the calculation of rebates. As Hughes J explained in his first decision at [92]-[93], rebates are often paid by the seller, such as Apotex, to the purchaser, such as a pharmacy. The amount of the rebate varies considerably, depending on the relative bargaining power of the parties [94]. The rebate, which is usually calculated as a percentage of the sale price, will be smaller when the first generic in the market is the sole generic supplier, and so has more market power, and it will be larger after entry by multiple generics, when there is more competition. In his first decision, Hughes J held that one amount YY% (the actual number was redacted) should apply during the period when Apotex would have been the exclusive generic supplier, and another, larger, number XX%, should be applied in the subsequent period after entry by other generics, which, on the facts, would have been Novopharm [101].

The parties were unable to agree on how these numbers should be applied, and this second damages decision by Hughes J was to resolve this disagreement. The calculations by Merck’s expert simply applied a rebate of YY% up until the date when Novopharm entered the market, and XX% thereafter [5]. Apotex’s expert, in contrast, argued that in reality the rebate would not have suddenly have jumped from YY% to XX%, but would have adjusted gradually. This would have meant greater hypothetical profits for Apotex, and thus larger damages.

Hughes J preferred Merck’s approach, for two reasons. First, the approach advocated by Apotex’s expert had not been advanced at trial, where it was accepted that two figures would be applied, representing pre- and post-entry rebates [7].

Of more general interest, Hughes J also pointed out that Apotex’s approach involved a false sophistication. Even if it was true that in reality the rebate would have adjusted gradually, the fact is that the whole calculation was fraught with uncertainty. To adjust the XX figure to reflect a gradual entry was not likely to be more accurate than a simple two stage calculation, given that the XX percentage itself was a best guess, rather than a truly correct figure:

[8] As I expressed in my October Reasons, the whole area of rebates is a murky one. There is no one correct or absolute figure that can be established. At best, one can approximate what “would have” happened. It is not an area where exactitude or sophisticated calculations have a place. As some judges have said, the approach is more of a “broad axe” approach than that of a “rapier point”.

This is a reference to Lord Shaw’s remark in Watson Laidlaw (1914), 31 RPC 104 at 117-18 (H.L.) that “[t]he restoration by way of compensation is therefore accomplished to a large extent by the exercise of a sound imagination and the practice of the broad axe.”

That damages calculations are uncertain is important for two reasons. Most directly, as this case illustrates, there comes a point at which attempts to overly refine the damages calculation will add expense without adding accuracy. Secondly, it is important in the context of the irreparable harm requirement for obtaining an interlocutory injunctions. As I have argued in my article, Interlocutory Injunctions and Irreparable Harm in the Federal Courts, (2010) 88 Can Bar Rev 517, the fact that damages calculations are inherently unreliable implies that in most cases a party who is wrongly denied an interlocutory injunction will suffer irreparable harm, in the sense that damages will not provide full compensation for the loss.