The Benchmark Rate for Interest in an Accounting Is the Prime Rate or Slightly Higher, Compounded

AstraZeneca Canada Inc v Apotex Inc 2017 FC 726 Barnes J [Omeprazole Accounting]
            1,292,693 / omeprazole formulation / LOSEC

Barnes J’s decision on pre-judgement interest on the award of an accounting of profits is noteworthy for the statement that "the benchmark rate for profits-on-profits in cases like this one has consistently been set at the prime rate or slightly higher, compounded annually" [229]. Otherwise, it does not raise any new points of law, but it does provide a good illustration of the normal current approach. 

Generally, two question arise in respect of pre-judgment interest: the rate and compounding, or “profits on profits.” The issue of compound interest on prejudgment damages, as compared with an accounting, is complicated by the fact that s 36(4)(b) of the Federal Courts Act on its prohibits compound interest. Even though that provision refers to “an order for the payment of money,” which on its face also appears to refer to an award of an accounting, it has been interpreted as not applying to an award of profits: see eg Eli Lilly v Apotex /cefaclor, 2009 FC 991, [665]. It seems this is because historically courts of equity were much more open to the business reality of compound interest than were the common law (which originally did not award interest at all in tort cases): see Reading & Bates 58 CPR (3d) 359, 373-74; (FCA) Teledyne (1982), 68 CPR(2d) 204, 222-26 (FCTD) Addy J. Consequently, in an accounting “[c]ompounded interest is the presumptive approach” [223], Reading & Bates, 374, and it was awarded in this case.

So far as the rate goes, if it is possible to determine how the infringer put the specific profits to use, the compound interest will be based on the return to that particular investment. But often it is not possible to know precisely how the infringer put its profits to use. This case raised the common scenario in which the infringer “co-mingled the sales proceeds from all of its products and used those funds in the day-to-day operation of its business” [224]. In such a case the infringer “will be assumed to have made ‘the most beneficial use of them’. In that situation the Court will estimate the return based on relevant investment or borrowing proxies” [223].

Apotex proffered evidence of financial interactions with related companies to establish the appropriate rate of return. Barnes J rejected this as unreliable as being too easily manipulated [227]. Nor was other specific evidence helpful [225]. Consequently, Barnes J turned to the more general proxies. AstraZeneca had proposed prime plus two percent (compounded), while Apotex proposed the bank rate (not compounded) [220]. Barnes J took note of Gagné J’s observation in Perindropril FC 2015 FC 721 [147], that in a number of cases “Canadian courts have used the prime lending rate plus 1 or 2 % as proxy for a return on profits,” and he concluded that “the benchmark rate for profits-on-profits in cases like this one has consistently been set at the prime rate or slightly higher, compounded annually” [229]. However, “there is very little recent authority utilizing a rate as high as prime plus two percent.” Consequently, he awarded interest at the prime rate compounded annually [229].

Several years ago, in one of my blog posts on interest in the damages context, I noted that the Federal Court often specifies the bank rate, rather than the prime rate, citing a few cases to that effect. I also suggested that this was likely to be undercompensatory. There is some suggestion that the interest rate is treated differently between an accounting and damages: see 2008 FC 825 [512]-[513]. This is apparently on the view that profits-on-profits are inherent to the equitable determination of what the infringer has gained. But, as the SCC recognized in Bank of America 2002 SCC 43 [29], interest (and indeed, compound interest), is necessary to compensate the plaintiff for its loss, so I don’t really see the basis for the distinction. Perhaps there has been a shift to using the prime rate generally, though many of the cases cited by Gagné J were older, and some of the cases I cited held interest based on the bank rate was appropriate even before an election between an accounting and damages had been made: see 2006 FC 524 [240]. In any event, neither my sample, nor that of Gagné J purported to be statistically exhaustive. I’ll also note again Roy Epstein’s suggestion that the average actual short-term market interest rates paid on commercial and industrial loans might be used: Prejudgment Interest Rates in Patent Cases: Don't Compound an Error, 24(2) IPL Newsletter (2006).

Finally, it was acknowledged that a deduction for income tax would be warranted on the profits-on-profits assessment, but none was allowed because Apotex declined to produce its tax returns, and this meant that any adjustment would be too speculative [230]-[233].