Presumption That Marginal Rate of Return Equals Average Rate of Return

Apotex Inc v Eli Lilly and Company 2021 FCA 149 Boivin JA: Webb, Near JJA affg 2019 FC 1463 Zinn J [Cefaclor Interest]

            1,133,007 – 1,146,536 – 1,133,468 – 1,150,725 [the Lilly Patents]

            1,095,026 – 1,132,547 – 1,136,132 – 1,144,924 [the Shionogi Patents]

Is the Cefaclor litigation finally winding to a close, 25 years after the action was commenced? In Cefaclor liability FC 2009 FC 991 affd Cefaclor liability FCA 2010 FCA 240, Gauthier J found that at least one valid claim of each of Lilly’s patents had been infringed by Apotex. After Gauthier J was appointed to the FCA, Zinn J was assigned to hear the damages reference. His lost profits damages award of $31m was affirmed by the FCA, except in respect of the interest calculation: Cefaclor Damages FC 2014 FC 1254 affd Cefaclor Damages FCA 2018 FCA 217. Zinn J had awarded compound interest on the basis of a presumption that a plaintiff would have generated compound interest [FC 118] (see here), and the FCA remitted on the basis that there is no such presumption [FCA 156] and “a loss of interest must be proved in the same way as any other form of loss or damage” [FCA 158] (as discussed here).

The decision under appeal in this case is the interest decision on remand, which I’ll call Cefaclor Interest FC. In Cefaclor Interest FC, Zinn J set the compound interest rate by assuming that Lilly would use the money it would have had in such a way as to maximize its rate of return [30], [FC 27]. That’s fine, but he also set the rate at a rate equal to Lilly’s average rate of return [72]. The problem, as discussed here, is that as a matter of financial logic, the marginal rate of return—what Lilly would have done with the extra money—is necessarily lower than the average rate of return. Now of course, this is a matter for financial evidence, not just financial logic, but Zinn J considered the evidence of the financial experts to be “unhelpful”, because they carried out their analysis on the assumption that the lost profits were “a sum separate and apart from the other Lilly profits” [12], [FC 53]. That is, he disregarded the expert evidence as to the rate of return precisely because they carried out a marginal analysis. He preferred the evidence of Lilly’s fact witness, which was to the effect that Lilly would have spread the extra money among the same investments that it had made in the real world [13], [FC 55–56]. But there is actually no conflict between the financial experts and the fact witness. That Lilly would have spread the extra money among the same projects does not imply that the rate of return on extra money spent on those projects would be the same as the average rate of return on those projects. On the contrary, as a matter of financial logic, even if it is true that in fact Lilly would have spread the money among the same uses, the marginal return from an extra investment in those uses would have been less than the average return from those uses, again as discussed here. So far as I can tell, there was no evidence on the issue of the marginal rate of return on the same projects, presumably because the experts had focused their analysis on treating the extra money as a separate sum. In effect, Zinn J applied a presumption that the marginal rate of return would be the same as the average rate of return: “Where 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” [FC 57].

Where does this leave the law? The FCA decision establishes that a trial judge is entitled to find that the marginal rate of return is the same as the average rate of return. But the issue was treated as a matter of fact at both levels of court, so this doesn’t establish a legal rule that the marginal rate of return is equal to the average rate of return. There is a “heavy burden” on a party seeking to show that average and marginal rates of return are different, but presumably that burden can be discharged by evidence directly on point, which we now know is necessary.