COURT OF APPEAL FOR ONTARIO

CITATION: PreMD Inc. v. Ogilvy Renault LLP, 2013 ONCA 412

DATE: 20130620

DOCKET: C53264

Laskin, Blair and Epstein JJ.A.

BETWEEN

PreMD Inc.

Plaintiff (Appellant/Respondent by way of Cross-Appeal)

and

Ogilvy Renault LLP, Swabey Ogilvy Renault S.E.N.C. and Robert Carrier

Defendants (Respondents/Appellants by way of Cross-Appeal)

William G. Horton and Amandeep S. Dhillon, for the appellant/respondent by cross-appeal

Alan J. Lenczner, Q.C. and Marguerite Ethier, for the respondents/appellants by cross-appeal

Heard: October 5, 2012

On appeal and cross-appeal from the order of Justice Alexandra Hoy of the Superior Court of Justice, dated December 31, 2010, with reasons reported at 2010 ONSC 7141, and from the costs order, dated March 11, 2011, with reasons reported at 2011 ONSC 1599.

Laskin J.A.:

A. overview

[1] The main issues on this appeal and cross-appeal concern the measure of damages for a law firm’s negligence and breach of contract.

[2] The appellant, PreMD Inc., was a Canadian-based developer of medical tools to predict and prevent disease. In 1993, PreMD acquired the technology and related patent rights for methods of measuring cholesterol on the skin. Two United States patents were granted in 1996. PreMD then entered into licensing agreements to develop and market its skin cholesterol tests.

[3] In 1999, PreMD retained the respondent law firm Ogilvy Renault to manage its world-wide patent portfolio. Ogilvy failed to pay the required maintenance fees on the two United States patents, and the patents lapsed.

[4] PreMD carried on its business but was unable to obtain unqualified regulatory approval in the United States for its skin tests or successfully market them. Eventually, the licensees terminated their agreements with PreMD. In 2009 PreMD went out of business.

[5] PreMD sued Ogilvy Renault for negligence, breach of contract, and breach of fiduciary duty. At the beginning of the trial, Ogilvy admitted its liability for negligence and breach of contract for failing to maintain the two patents. The trial judge dismissed PreMD’s claim for breach for fiduciary duty. She also dismissed PreMD’s claim for damages for loss of profits and loss of the value of its patents. However, she awarded PreMD damages on what she characterized as a “cost recovery approach”. She assessed those damages at $1,063,069, which included an amount equal to what PreMD had paid for the technology. She also awarded PreMD costs of $675,000.

(a) The appeal

[6] PreMD appeals the dismissal of its claim for breach of fiduciary duty. It submits that the trial judge erred by not finding that Ogilvy Renault intentionally failed to disclose it had not paid the fees on the two United Stated patents. PreMD does not appeal the dismissal of its claim for damages for loss of profits or loss of the value of its patents. It does appeal the trial judge’s assessment of cost recovery damages.

[7] PreMD’s overall submission is that the trial judge’s assessment was too restrictive. It makes three specific submissions. First, the trial judge erred by failing to award damages for the expenses PreMD incurred in the period before Ogilvy Renault was retained (between 1993 and 1999). Second, the trial judge erred by failing to award damages for the costs of clinical trials and of seeking United States regulatory approvals before it became aware the two patents had lapsed (between 1999 and 2004). Third, the trial judge erred by failing to award damages for the costs of clinical trials and of seeking United States regulatory approvals in the period after PreMD learned its two patents had lapsed and could not be reinstated (2004 to 2006). PreMD seeks damages of $14,400,000.

(b) The cross-appeal

[8] Ogilvy Renault makes three submissions on its cross-appeal. First, Ogilvy submits that the trial judge erred by awarding damages for the entire cost of acquiring the technology and related patent rights. Ogilvy contends that the trial judge ought to have awarded only half of PreMD’s acquisition cost because only the United States market was affected by the lapse of the two patents.

[9] Second, Ogilvy Renault submits that if PreMD is awarded only half of its acquisition cost, then Ogilvy Renault’s Rule 49 offer to settle will come into effect. If it does, then the trial judge’s costs award in favour of PreMD must be set aside.

[10] Finally, Ogilvy submits that even if rule 49.10 does not directly apply to its offer to settle, its offer was close enough to the damages awarded that the trial judge ought to have applied rule 49.13 and ordered that each party bear its own costs.

B. relevant facts

I. The period from the date PreMD acquired the technology to the date it retained Ogilvy Renault (1993 to May 1999)

(a) Acquisition of the technology and patent rights

[11] In 1993, Dr. Brent Norton, a physician, formed PreMD. The company then acquired from Russian investors technology and corresponding patent rights for methods of measuring cholesterol on the skin. At the time of acquisition, patents were pending in the United States, Canada, and Europe. The total acquisition cost was $510,750.

[12] PreMD then set out to develop a skin cholesterol test through the use of enzyme reagents. The underlying premise of the test was that cholesterol accumulation in the skin mirrors that in the arteries. A skin test could therefore be as effective as and less invasive than a blood test in measuring cholesterol levels and predicting heart disease.

[13] PreMD’s skin cholesterol test was called PREVU, and PreMD developed three versions of the test:

• PREVU POC: a point of care test to be read by the patient’s doctor;
• PREVU LT: a lab tape test to be sent to medical laboratories for analysis and targeted for use by the insurance industry; and
• PREVU PT: a palm test to be used by consumers.

[14] As matters turned out, PreMD’s skin tests were a commercial failure. The PT test was quickly shelved as unworkable. PreMD had difficulty marketing the POC test because doctors found it too expensive and because PreMD could not obtain unqualified regulatory approval for its use and sale in the United States. Even though PreMD eventually focused its efforts on developing the LT test for use by the insurance industry, that test too could not be marketed successfully. The evidence shows that the commercial failure of PreMD’s skin cholesterol tests was not related to the loss of the two United States patents.

(b) The two United States patents: patents 510 and 295

[15] The two United States patents whose lapse led to this litigation were “510” and “295”. These patents provided patent protection for aspects of the PREVU skin tests. The United States Patent and Trademark Office (“USPTO”) granted patent 510 on February 6, 1996 and patent 295 on December 24, 1996. Each patent was granted for a term of 17 years, and therefore, 510 would have expired on February 6, 2013 and 295 on December 24, 2013. Three-and-a-half-year maintenance fees required to keep the patents in good standing were due on August 6, 1999 for 510 and on June 24, 2000 for 295. PreMD obtained patents substantially the same as 510 and 295 in Canada, Europe, Australia, and Korea.

II. The period from PreMD’s retainer of Ogilvy Renault to its discovery of the lapse of the patents (May 1999 to August 2004)

(a) The licensing agreement with McNeil Canada

[16] PreMD’s business plan was to develop its skin cholesterol tests and license the technology to a large multinational pharmaceutical or diagnostics company. Beginning in 2001, it discussed a licensing agreement with McNeil Canada, a subsidiary of Johnson & Johnson. Johnson & Johnson is a large public company with consumer, pharmaceutical, diagnostic, and medical devices businesses around the world.

[17] In May 2002, PreMD and McNeil Canada entered into a licence agreement (the “Canadian Agreement”). PreMD granted McNeil Canada a licence to sell in Canada products embodying PreMD’s patents and knowhow for its skin cholesterol tests. In exchange, PreMD would receive royalty payments based on a percentage of net sales.

[18] Other important terms of the Canadian Agreement were as follows:

• McNeil Canada would not make any upfront payments but would make various “milestone” payments when net sales exceeded specific amounts;
• PreMD agreed to conduct at its expense various clinical trials and research to develop a product for home use;
• The agreement could be terminated by McNeil on short notice, for example, on 60 days’ notice if PreMD committed a material breach of the agreement; and
• PreMD warranted that its patents were valid and undertook to maintain them.

[19] As I said earlier, doctors were not interested in the POC test. Insurance companies, however, were interested in the LT test. PreMD and McNeil Canada, therefore, decided that they would focus their marketing on the LT test for the insurance laboratory market. In December 2002, the parties entered into an amending agreement. McNeil exercised its option in the Canadian Agreement to acquire a licence for the laboratory field in Canada.

[20] PreMD accepted that the tape test would be the first product launched and would be initially targeted to the insurance laboratory market. The parties agreed to work together to complete a large clinical trial. PreMD accepted that its launch plan would not include the use or sale of the POC test.

(b) Regulatory approvals

[21] PreMD’s skin tests required regulatory approval before they could be sold. In January 2001, Health Canada approved the POC test for sale in Canada.

[22] In June 2002, the United States Food and Drug Administration (“FDA”) gave limited approval for the use of the POC test in the United States. It approved the use of the test as part of a risk assessment for people with coronary heart disease. Not only was the FDA’s approval of the POC test limited, it also came with a warning: the warning specified that the safety and effectiveness of the test for screening the general population for coronary artery disease could not be established.

[23] PreMD’s regulatory strategy in the United States was to obtain broader FDA approval for its POC test. It would then pursue FDA approval for its LT and PT tests. Beginning in 2002, PreMD tried to obtain expanded FDA approval of its POC test, so that the test could be used on asymptomatic patients. The FDA refused this expanded approval, for the last time in 2008. PreMD’s various appeals from the FDA’s refusal were dismissed.

(c) The Worldwide Licensing Agreement

[24] In May 2004, PreMD entered into a global licensing agreement (the “Worldwide Agreement”) with McNeil Canada and its sister company, McNeil US. The parties agreed jointly to develop and market PreMD’s technology for measuring cholesterol on the skin for the worldwide market.

[25] Important terms of the Worldwide Agreement included the following:

• McNeil US paid PreMD $3 million on the signing of the Worldwide Agreement and agreed to pay a further $1.5 million when PreMD completed two specified clinical trials for its LT test;
• PreMD undertook to conduct clinical trials for its LT and PT tests and to use diligent efforts to obtain FDA approval of the LT test by May 2008;
• McNeil agreed to make further milestone payments of as much as $15.75 million, on obtaining FDA and other regulatory approvals and reaching sales thresholds;
• PreMD warranted that it owned the patents and agreed to maintain them; and
• McNeil US could terminate the agreement on short notice.

[26] The Worldwide Agreement had a short operational life. By the end of June 2004, McNeil US ended its involvement in PreMD’s business. It did not see a viable commercial opportunity. It decided that the United States market would be managed out of Canada, using Canadian personnel.

(d) PreMD’s retainer of Ogilvy Renault and the lapse of patents 510 and 295

[27] In May 1999, PreMD retained Ogilvy Renault to manage its worldwide patent portfolio. Ogilvy Renault accepted that it was obliged to pay or make arrangements for the payment of any necessary maintenance fees.

[28] Ogilvy Renault had a “tickler” or reminder system called Jurivox. All patents that the law firm maintained were supposed to be entered in Jurivox. Patents 510 and 295 were not entered, and therefore, the maintenance fees required to maintain these two patents in good standing in the United States were not paid. When the fees were not paid, the USPTO registered patents 510 and 295 as abandoned.

[29] Robert Carrier, a partner at Ogilvy Renault, was responsible for PreMD’s files. He did not testify at trial because of ill health. The supervisor of Ogilvy Renault’s file management department also did not testify, as she had died before trial.

[30] In August 2000, before it discovered that its patents had lapsed, PreMD issued a prospectus, which described the patents as valid. Carrier reviewed and approved the patent section of the prospectus.

[31] PreMD learned on July 30, 2004 that the maintenance fees on patents 510 and 295 had not been paid and that the patents had lapsed. As I will discuss, it tried to reinstate the patents but was unsuccessful. The trial judge found – and her finding is not challenged on appeal – that McNeil US’s business decision to end its involvement with PreMD was not related to the lapse of the patents.

(e) Reaction to the lapse of patents 510 and 295

[32] On numerous occasions, PreMD said publicly that the lapse of patents 510 and 295 would have little impact on its business. For example, in August 2004, PreMD issued two press releases, in which it said that the loss of the patents “will not affect the commercialization plans for the skin cholesterol products” and that it would continue to develop its products.

[33] During a follow up conference call with investors, Dr. Norton said that the lapse of the patents was “not a lot of concern”. He gave three reasons: the technology had other components that did have patents and patents pending; patents 510 and 295 covered only some of the elements of the technology; and the FDA gave approval for a complete system.

[34] By mid-August 2004, even McNeil Canada had decided that the loss of patents 510 and 295 would have little impact on its overall plans. It resolved to carry on.

III. The period from the discovery of the lapse of the patents to the final notification the patents would not be reinstated (August 2004 – September 2006)

(a) Unsuccessful efforts to reinstate patents 510 and 295

[35] Up until February 2002 (for 510) and December 2002 (for 295), each patent could have been reinstated by showing the USPTO that payment of the maintenance fees was “unintentionally delayed”. By July 2004, however, when PreMD discovered the lapse of the patents, more than two years had gone by since the maintenance fees were due. By then, PreMD could reinstate its patents only if it established to the satisfaction of the USPTO that the maintenance payments were “unavoidably” missed.

[36] PreMD made three attempts to reinstate the two patents. In October 2004, it filed a petition for reinstatement. The petition was denied in February 2005. In June 2005, PreMD filed a petition for reconsideration. That petition was denied in December 2005.

[37] PreMD then announced in a press release that it would sue Ogilvy Renault. However, the press release also discounted the effect of the loss of the two patents:

That being said, it is important to remember that in the United States PreMD has an additional two patents in force covering other aspects of the technology as well as two patents pending, and that the two patents in question remain in force in all other jurisdictions. Our skin sterol test system is the product of years of proprietary development and expertise that is exclusive to PreMD, and for those reasons, we do not expect the PREVU Skin Sterol Test could be duplicated.

[38] In February 2006, PreMD filed a final petition for reconsideration. That petition was denied in September 2006, the “final notification date”. The USPTO held that PreMD had to accept the consequences of Ogilvy Renault’s failure to pay the maintenance fees.

(b) Poor sales

[39] In January 2005, the POC test became available for sale in Canada and the United States. It proved a challenge to sell. In 2005, net sales of the POC test in Canada were less than $100,000.

[40] Dr. Jay Kleiman, an American cardiologist who gave expert opinion evidence for Ogilvy Renault, testified that the POC test provides no benefit in guiding the diagnosis or treatment of known or suspected coronary artery disease. The problem with the test according to Dr. Kleiman is that it does not give the doctor a quantitative measure. The trial judge accepted Dr. Kleiman’s opinion.

(c) Amendment and termination of the licensing agreements

[41] Beginning in late 2002, the parties focused on the market for the LT test. In December 2005, they further amended the Canadian and Worldwide Agreements to reflect this focus and address issues that had arisen in the two agreements.

[42] However, in the fall of 2006, McNeil decided to terminate both the Canadian and Worldwide Agreements. It could not find a commercial model that made sense. Anticipated revenues were unattractive. In September 2006, McNeil gave written notice of termination effective in 90 days (by the end of December). It said that its decision to terminate the agreements was not related to the loss of the two patents.

[43] Dr. Norton also said publicly that he did not believe the loss of the two patents drove the termination. In his cross-examination at trial, he conceded that the parties had not achieved sales even close to the levels contemplated in the Canadian Agreement or the Worldwide Agreement.

IV. Events after September 2006

(a) Regulatory proceedings

[44] The day after McNeil terminated the agreements, Health Canada approved the LT test for sale in Canada.

[45] On November 2006, PreMD applied to the FDA for approval of the LT test in the United States. In March 2007, the FDA denied the application. And, as I have already said, the FDA refused to give approval to an expanded use of the POC test. PreMD appealed that refusal, but in August 2008, the FDA dismissed the appeal. It could find no clinical utility in the POC test.

(b) The agreement with AstraZeneca

[46] In 2007, AstraZeneca, a pharmaceutical manufacturer, was engaged in extensive clinical trials to determine whether its lipid-lowering drug Crestor was effective in stopping the progression of coronary artery disease. It thought that PreMD’s skin tests could be used on asymptomatic patients. If they could, the skin tests would be an ideal way to identify potential users of Crestor.

[47] In July 2007, PreMD and AstraZeneca entered into an agreement under which PreMD granted AstraZeneca a licence for use of its technology in the United States (other than the LT test in the life insurance laboratory field). AstraZeneca paid PreMD $500,000 on the signing of the agreement and agreed to pay a further $500,000 on FDA approval of an expanded use of the POC test. AstraZeneca also agreed to pay royalties and other milestone payments based on net sales.

[48] When the FDA refused to approve an expanded use of the POC test, AstraZeneca lost interest in its agreement with PreMD. In September 2008, it gave PreMD notice that it was terminating the agreement.

(c) PreMD’s skin tests are a commercial failure

[49] PreMD did not achieve any of its revenue forecasts. In the first nine months of 2006, sales under the agreements with McNeil dipped to $44,000. Also, PreMD failed to complete clinical trials on the LT test. Even in countries with existing patents, the skin tests were never successfully marketed. And, no one else has developed a skin test for cholesterol in United States or anywhere else in the world.

(d) PreMD goes out of business

[50] By the fall of 2008, PreMD was in trouble. In the spring of 2009, it ceased operating. In August 2010, it sold all its assets, save a few excluded items and the right to bring this lawsuit, for $400,000.

C. the appeal

I. Did the trial judge err by not finding that Ogilvy Renault breached its fiduciary duty to PreMD?

[51] Lawyers owe a fiduciary duty to their clients. Lawyers breach that duty when they have material information, which they know, or ought to know, might affect their client’s decisions and fail to disclose that information to the client.

[52] PreMD submits that Ogilvy Renault knew by July 7, 2000 that the maintenance fees on patents 510 and 295 were not paid and for reasons not shared with the court, intentionally concealed this information. Therefore, Ogilvy Renault breached its fiduciary duty, and the trial judge erred by not making this finding.

[53] Specifically, PreMD contends that as Carrier was the only living witness who could explain what happened, he ought to have testified. As he did not and Ogilvy Renault tendered no medical evidence why, the trial judge ought to have drawn an adverse inference from his failure to testify. Instead, she held, wrongly:

The evidence is that Mr. Carrier is unwell and has no coherent or consistent recollection of the events at issue. I draw no inference from his failure to testify.

[54] I do not accept PreMD’s submission that the trial judge erred by failing to find a breach of fiduciary duty. Various pieces of evidence and inferences from the evidence reasonably support her finding of no breach of duty. They include:

• PreMD was aware of Carrier’s ill health from the various sworn declarations filed with the USPTO by members of Ogilvy Renault in an effort to get the patents reinstated. These declarations say that Carrier was under medical and psychiatric care and had no clear or coherent recollection of why the maintenance fees were not paid.
• Robert Mitchell, an Ogilvy Renault partner, conducted a thorough internal investigation and could find no indication that anyone in the firm knew of the lapse of the patents. The lapse was an oversight, which grounds a claim in negligence, not breach of fiduciary duty.
• PreMD has not suggested any possible motive why Ogilvy Renault would conceal the lapse of the patents.
• In August 2000, Carrier reviewed and approved the patent section of a prospectus, which described the patents as valid.

[55] The trial judge concluded that it was “not plausible” Carrier was aware the maintenance fees had not been paid and intentionally did not disclose this fact. Similarly, she concluded that it was “inconceivable” Carrier intentionally misrepresented the status of the patents in a prospectus. I am not persuaded that she erred in these conclusions. I would not give effect to this ground of appeal.

II. Damages

(a) PreMD’s damages claim at trial

[56] At trial, PreMD advanced four different scenarios to compensate it for Ogilvy Renault’s breach of contract and negligence:

1. In the first scenario, PreMD claimed loss of profits on the ground that but for the loss of the two patents, McNeil would not have terminated the Canadian Agreement and Worldwide Agreement.
2. In the second scenario, PreMD claimed loss of profits on the ground that but for the loss of the two patents, PreMD could have forced McNeil US to use reasonable efforts to market its skin tests.
3. In the third scenario, PreMD claimed that but for loss of the patents, it would have received top-up payments from McNeil and significant upfront payments from AstraZeneca (“the value to the owner approach”).
4. In the fourth scenario, PreMD essentially claimed to recover the expenses it had incurred in reliance on the existence of the two patents (“the cost recovery approach”).

[57] The trial judge found that none of PreMD’s claims under scenario one, two, or three was made out. PreMD does not appeal these findings – with good reason. PreMD’s venture was a commercial failure, and its failure had nothing to do with the loss of the two United States patents. The venture failed because doctors were not interested in the POC test, the FDA would not give unqualified approval for the use and sale of the POC test, and the medical profession and health administrators concluded that the skin cholesterol tests had no clinical utility.

[58] The trial judge did award damages under the fourth scenario, mainly based on reliance principles. I will summarize what PreMD sought under this scenario and what the trial judge awarded.

(b) The trial judge’s damages award

[59] At trial, under its cost recovery approach, PreMD sought damages in six categories:

(i) The entire amount that it paid to Russian investors to acquire the technology and related patents: $510,750;

(ii) All of its expenditures for the filings of its skin cholesterol patents since it started in business: $804,966. Of this amount, $122,461.72 was spent on patents 510 and 295 before PreMD discovered that they had lapsed;

(iii) Expenses incurred trying to reinstate the patents: $333,117;

(iv) The cost of all clinical trials both before and after PreMD discovered the two patents had lapsed: $4,996,147;

(v) All the development expenses it incurred for its skin testing technology: $5,145,798; and

(vi) Between $10,215,675 and $16,867,736 for general and administrative expenses since it commenced business.

[60] Overall, on a cost recovery basis, PreMD sought between $14,400,000 and $21,100,000.

[61] In assessing PreMD’s damages, the trial judge limited its recovery in three ways:

• She declined to award any damages for the expenses PreMD incurred before it entered into its contract with Ogilvy Renault – that is, in the period 1993 – May 1999;
• She held that reliance damages would end in July 2004, when PreMD discovered Ogilvy Renault’s breach of contract; and
• She held that even if PreMD had known that its patents would lapse prematurely, she was “not satisfied that the plaintiff would have ceased operations entirely, or abandoned its skin test technology, given its then level of investment and remaining assets”.

[62] The trial judge then awarded the following damages:

• The entire amount in category (i), $510,750, plus the portion in category (ii) spent on the two patents before PreMD discovered they lapsed, $122,461.72 – for a total of $633,211.72. However, she awarded this amount not as pre-contractual expenses but as a flexible and imaginative measure of PreMD’s net out of pocket costs in the period from June 1999 to July 2004 “in reliance on the contract”;
• The entire amount in category (iii), $333,117;
• An additional expense of $75,741.89, which PreMD incurred to strengthen its remaining United States patent portfolio after the loss of patents 510 and 295; and
• An additional expense of $20,998 to prosecute an action recommended by an American patent attorney to provide patent protection for the POC test.

[63] The total of these four amounts is $1,063,069. The trial judge did not characterize the amounts she awarded under the last three bullet points above. I do not regard those amounts as reliance damages. They are better characterized as mitigation expenses and properly recoverable on that basis. Ogilvy Renault should be liable for the expenses PreMD incurred in a reasonable attempt to mitigate its loss, even though its attempt was unsuccessful. The expenses PreMD incurred in trying to reinstate patents 510 and 295 and in strengthening its remaining patent portfolio were reasonable: see Stephen Waddams, The Law of Damages, looseleaf (Toronto: Thomson Reuters, 2012), at para. 15.290.

[64] I turn now to PreMD’s appeal, which essentially argues that the trial judge did not fully compensate it for its reliance losses. I will first consider the nature of reliance damages and then consider PreMD’s submissions in each of three timeframes: the period before Ogilvy Renault was retained; the period after Ogilvy Renault was retained until PreMD discovered that the two patents had lapsed; and the period from the discovery of the lapse of the patents to September 2006, the date when the USPTO dismissed PreMD’s final petition to reinstate the patents. PreMD does not claim damages for any expenses incurred after September 2006.

(c) Reliance damages

[65] The ordinary measure of damages in tort is reliance damages. The court tries to put the injured party in the position it would have been in had the tort not been committed. The ordinary measure of damages for breach of contract is expectation damages. The court tries to put the injured party in the position it would have been in had the contract been performed.

[66] In some breach of contract cases, an injured person cannot prove expectation damages or loss of profits, or the contract has been unprofitable. In those cases, an injured party may elect to claim reliance damages. In awarding reliance damages, the court recognizes that the injured party has changed its position in reliance on the contract. The court tries to put the injured party in the position it would have been in had it not entered into the contract at all. Thus, reliance damages amount to wasted expenditures – expenses that the injured party incurred in reliance on the contract but would not have incurred had it known that the contract would be or had been breached: see generally, John McCamus, The Law of Contracts (Toronto: Irwin Law, 2005), at pp. 832-37; Chitty on Contracts, Vol. 1 (United Kingdom: Thomson Reuters, 2012), at paras. 26-019 to 26-031.

[67] A plaintiff’s claim for reliance damages is limited in two important ways. First, it is entitled to recover only those expenses that were truly wasted – that would not have been incurred but for the contract. This is the essence of reliance damages. If PreMD would have incurred an expense even knowing it had only four and a half years of patent protection on patents 510 and 295 or knowing the patents had already lapsed, then that expense is not recoverable as reliance damages.

[68] Second, a plaintiff is not entitled to recover expenses that would have been wasted regardless of the breach. If PreMD would not have recouped an expense even if Ogilvy Renault had performed the contract and maintained the patents for their full life, then the expense is not recoverable as reliance damages because it was not caused by the breach of contract: see, e.g., Pacific Playground Holdings Ltd. v. Endeavour Developments Ltd., 2002 BCSC 126, 1 R.P.R. (4th) 280.

[69] For example, suppose a defendant breaches a contract and the plaintiff incurs a total loss of $120,000. Suppose, as well, that the plaintiff would have incurred a loss of $100,000 if the defendant had performed the contract. In this example, the plaintiff should be entitled to reliance damages of the amount caused by the breach – in this simple example, $20,000.

[70] This second limitation ensures that an award of reliance damages will not put an injured party in a better position than it would have been in had the contract been performed: see Agnoss II Partnership v. Trifox Inc., [1997] O.J. No. 4969 (Gen. Div.), at para. 219, aff’d (1999), 1999 CanLII 1168 (ON CA), 126 O.A.C. 293 (C.A.), leave to appeal to S.C.C. refused, [1999] S.C.C.A. No. 588. See also Waddams, at para. 5.210. The defendant, however, bears the onus of showing that the injured party would not have recouped the expense even if the defendant had met its obligations under the contract. See Bowlay Logging Ltd. v. Domtar Ltd. (1978), 1978 CanLII 1940 (BC SC), 87 D.L.R. (3d) 325 (B.C.C.A), aff’d (1982), 1982 CanLII 449 (BC CA), 135 D.L.R. (3d) 179 (B.C.C.A.); and Agnoss II Partnership v. Trifox Inc., at para. 219.

(d) Did the trial judge err by failing to award PreMD damages for the expenses it incurred in the period before Ogilvy Renault was retained (1993 – May 1999)?

[71] PreMD seeks damages of approximately $1.9 million for this period. This amount consists of patent fees, costs of clinical trials, and related development and administrative expenses.

[72] In the well-known, brief, and controversial decision of the English Court of Appeal, Anglia Television Ltd. v. Reed, [1972] 1 Q.B. 60 (C.A.), Lord Denning awarded damages for expenses incurred before the contract was entered into with the defendant. The plaintiff had undertaken preparations for a television drama. It arranged for a filming location, the employment of a director and other staff members, and other preparatory work. The plaintiff did all of this before it found a leading actor for the movie. Less than two weeks before filming was to start, the plaintiff hired the defendant, Reed, for the lead role. Regrettably, his agents had double-booked him. Less than a week before filming was to start Reed repudiated his agreement with the plaintiff. The plaintiff tried to find a substitute in time to begin filming but could not do so.

[73] Apparently, the plaintiff could not prove that its television drama would have been profitable even with Reed in the lead role. It therefore sued him for its wasted expenses. Reed argued that he could only be liable for expenses incurred after he had signed his agreement with the plaintiff. The English Court of Appeal disagreed and held that the plaintiff was entitled to all of its wasted expenses, including those incurred before the contract was formed. Lord Denning reasoned that when Reed entered into the contract, he must have known that expenses had already been incurred and would be wasted if he did not perform in the television drama:

If the plaintiff claims the wasted expenditure, he is not limited to the expenditure incurred after the contract was concluded. He can claim also the expenditure incurred before the contract, provided that it was such as would reasonably be in the contemplation of the parties as likely to be wasted if the contract was broken. Applying that principle here, it is plain that, when Mr. Reed entered into this contract, he must have known perfectly well that much expenditure had already been incurred on director’s fees and the like. He must have contemplated – or, at any rate, it is reasonably to be imputed to him – that if he broke his contract, all that expenditure would be wasted, whether or not it was incurred before or after the contract. He must pay damages for all the expenditure so wasted and thrown away. [Emphasis in original.]

[74] The trial judge held, at para. 218 of her reasons, that “I am not convinced that perhaps, except in certain fact specific circumstances, of which this is not one, reliance damages extend to damages incurred before the contract was entered into”. At footnote 20, she recognized the theoretical objection to pre-contractual reliance damages: “The expenses were not incurred in reliance on the contract, because the contract had not yet been entered into”.

[75] PreMD makes two main arguments in support of its submission that it is entitled to damages for the period before it contracted with Ogilvy Renault. Its first argument is that the trial judge awarded damages for one pre-contractual expense, the cost of acquiring the technology and related patent rights in 1993, and consistent with Anglia Television Ltd. v. Reed,there is no reason in principle not to award its other pre-contractual expenses.

[76] I do not accept this argument. Although the trial judge did award an amount equal to PreMD’s cost of acquiring the technology, she did not award this amount as a pre-contractual expense. As I said earlier, she awarded this amount as a way to compensate PreMD for its reliance losses in the second period, after it had retained Ogilvy Renault. Indeed, she unequivocally rejected pre-contractual damages.

[77] The award of pre-contractual damages in Anglia v. Reed has been criticized: see, for example, A.1. Ogus, “Note,” 35 Mod. L. Rev. 423 (1972). However, some academics say damages for pre-contractual wasted expenses may be justified in limited circumstances. The authors of Chitty on Contracts give this example: A plaintiff incurs overhead costs (for accommodation, staff and the like) before entering into a contract with a defendant. When entering into the contract, the defendant reasonably contemplates that the plaintiff will expect to recoup its overhead costs during the performance of the contract. If the defendant breaches the contract, these pre-contractual overhead costs may be recoverable as wasted expenses. See Chitty on Contracts, Vol. 1, at paras. 26-022 to 26-031; McCamus, The Law of Contracts, at pp. 832-37.

[78] It is not necessary to decide whether we should apply Anglia v. Reed because PreMD cannot satisfy its requirement for an award of pre-contractual damages. The reasons of Lord Denning and indeed the example from Chitty show that pre-contractual expenses can be recovered only if the parties reasonably contemplated that the expenses would likely be wasted if the contract were breached. In this case, we have no evidence that PreMD and Ogilvy Renault contemplated that PreMD’s expenses in the period 1993 to 1999 would be wasted if Ogilvy Renault breached its agreement to maintain the two United States patents. Indeed, we have no evidence at all that the parties contemplated Ogilvy Renault would reimburse PreMD for its expenses in this first period under any circumstances.

[79] PreMD’s second argument rests on the observation that the trial judge made near the end of her lengthy reasons. At para. 226, she said:

In my view, the plaintiff should be entitled to the entire $510,750, in addition to the amounts described above, which the defendant agrees are costs incurred, or to be reasonably incurred, as a result of the breach of the contract. I suspect that if, in 1993, Dr. Norton was advised that the patent at that time pending in the U.S. would be granted, but have an effective term of only four and one half years (calculated from the date of issue to the date of discovery of the loss), rather than seventeen years, he may have passed on the business opportunity. No doubt, given the chance, Dr. Norton would have chosen to avoid the many stressful days after the discovery of the loss of the Patents.

[80] PreMD submits that the trial judge failed to consider the consequence of her observation. By implication, PreMD says it should be entitled to recover all of its expenses in this first period.

[81] I do not take the trial judge’s observation as a finding that would give rise to any additional damages award. As I will discuss in the next section, there is a great deal of evidence and a specific finding of the trial judge that show the loss of patents 510 and 295 had little or no effect on PreMD’s overall business plan or on its agreements with McNeil. At para. 226, the trial judge is sympathizing with the human toll on Dr. Norton caused by the lapse of the patents, as a justification for the award of reliance she did make, approximately $633,000.

[82] I would not give effect to this ground of appeal.

(e) Did the trial judge err by failing to award PreMD damages for the period from the retainer of Ogilvy Renault to the discovery of the lapse of patents 510 and 295 (May 1999 – August 2004)?

[83] As I have said, the trial judge awarded reliance damages of $633,211.72 for this period. She considered that this amount could be seen as a creative way to compensate PreMD in a complex commercial case: see Penvidic Contracting Co. v. International Nickel Co. of Canada, 1975 CanLII 6 (SCC), [1976] 1 S.C.R. 267.

[84] PreMD submits that the trial judge erred in her assessment for this period because she took too narrow an approach. For this period, PreMD asks for reliance damages of approximately $6.1 million, largely representing the cost of clinical trials, the cost of seeking regulatory approvals in the United States, and related development costs.

[85] I do not agree with this submission. PreMD can only recover reliance damages for expenses that it would not have incurred but for the contract and thus were wasted. In other words, it can recover only for expenses that it would not have incurred had it known patents 510 and 295 would not be maintained.

[86] The problem for PreMD in asserting this claim is that the evidence indicates the loss of patents was of little import. PreMD would have expended the money it did on clinical trials, in seeking regulatory approvals, and on other development initiatives even if it had known in 1999 that patents 510 and 295 would lapse after four and a half years. That evidence includes the following:

• After discovering the lapse of the patents, Dr. Norton made several public statements that their lapse would have little impact on PreMD’s business and was “not a lot of concern”;
• Even if one were to discount Dr. Norton’s statements as an attempt to sooth any concerns of his investors and potential customers of PreMD’s products, McNeil too emphasized that the loss of the patents would have little impact on its overall plan. Its eventual decision to terminate the agreements was made because PreMD’s skin tests could not be marketed. It was not made because of the lapse of the patents; and
• Patents 510 and 295 covered only part of PreMD’s technology. PreMD had patents, patents pending, and trade secrets covering other aspects of its technology, which taken together served as an effective barrier to entry for any potential competitor.

[87] I infer from this evidence that none of PreMD’s expenses in this period were incurred because of the contract. In other words, they were not truly wasted. The trial judge, in substance, came to the same conclusion. At para. 221, in a passage I have quoted earlier, she said: “I am not satisfied that the plaintiff would have ceased operations entirely, or abandoned its skin test technology, given its then level of investment and remaining assets.”

[88] The trial judge then asked herself the critical question, at para. 222: “what expenses, then, would the plaintiff not have incurred?” While acknowledging that this was a difficult question, her award of approximately $633,000 shows, implicitly, that she rejected PreMD’s contention that the other expenses it incurred in this period were wasted. The evidence outlined above supports the trial judge’s conclusion.

[89] Thus, I would hold that PreMD cannot meet the first limitation on an award of reliance damages. The evidence does not support its argument that the expenses it incurred would not have been incurred but for the contract. That holding is sufficient to dispose of this ground of appeal.

[90] I add, however, that I do not think PreMD meets the second limitation on an award of reliance damages: it would not have been able to recover the expenses it incurred even if Ogilvy Renault had performed its contract and maintained the two patents for their full term.

[91] Ogilvy Renault bears the onus of showing PreMD could not recoup its expenses, and admittedly we do not have precise calculations of what PreMD’s losses would have been if Ogilvy Renault had performed its part of the bargain, compared to the losses PreMD did incur. However, the evidence overwhelmingly demonstrates that PreMD’s venture was unprofitable from the beginning, even in countries where the company had full patent protection. The venture’s unprofitability stemmed from the lack of unqualified regulatory approval for its skin tests, their lack of market acceptance, and their apparent lack of clinical utility. The lapse of patents 510 and 295 played no role in the venture’s unprofitability.

[92] Reliance damages ought not to be awarded if to do so would put the injured party in a better position than it would have been in had the defendant performed the contract. It seems to me that a further award of reliance damages would do just that: it would put PreMD is a better position than it would have been in had Ogilvy Renault maintained patents 510 and 295.

[93] I would not give effect to this ground of appeal.

(f) Did the trial judge err by failing to award PreMD damages in the period from the discovery of the lapse of the patents to the final notification the patents would not be reinstated (August 2004 – September 2006)?

[94] The trial judge expressly declined to award reliance damages for this period. PreMD submits that she erred and seeks to recover as damages expenses of approximately $6.5 million for this period. This claim largely covers the costs of clinical trials and of seeking United States regulatory approvals.

[95] I am not persuaded that the trial judge erred in refusing to award damages for this period. I accept that during this period PreMD was trying to reinstate the two patents and that it had contractual commitments to McNeil to carry out certain clinical trials. However, the expenses PreMD incurred in this period were incurred knowing that the two patents had lapsed. They were not wasted expenses in the sense that they would not have been incurred but for the contract. The evidence shows that they would have been incurred regardless of the contract.

[96] As I said earlier, both PreMD and McNeil considered the loss of the patents of little concern. They resolved to carry on business as usual. Indeed, PreMD began a large clinical trial (the PASA clinical trial) in the fall of 2005, well over a year after it had discovered the lapse of the patents and after the USPTO had denied its initial petition for reinstatement. That it would invest in such a large clinical trial when it did shows that the expenses PreMD claims in this period cannot be characterized as wasted expenses.

[97] I would not give effect to this ground of appeal. Accordingly, I would dismiss PreMD’s appeal.

D. the cross-appeal

I. Did the trial judge err by failing to award PreMD only half of its cost of acquiring the technology?

[98] As I have said, one of the items of damages that the trial judge awarded PreMD was an amount equal to its entire cost of acquiring the technology and related patent rights in 1993 – $510,750. At trial, Ogilvy Renault accepted that PreMD ought to be awarded a portion of its acquisition cost as damages, on the ground of “fairness”. However, it argued that PreMD should not receive the entire amount because the lapse of the two patents affected only the United States market, and not the rest of the world market in which PreMD carried on business. The trial judge rejected this argument.

[99] Ogilvy Renault renews its argument on appeal. It contends that the trial judge ought to have apportioned the acquisition cost and awarded PreMD only half. Ogilvy points to Dr. Norton’s evidence that the United States accounted only for 50 per cent of PreMD’s market and that PreMD had a significant market outside the United States.

[100] This argument, were I to accept it, would have important cost consequences. About a month before trial, Ogilvy Renault served an offer to settle under Rule 49 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Ogilvy offered to settle PreMD’s claim for $1,200,000 inclusive of interest. PreMD did not accept the offer. It obtained a judgment (inclusive of interest) just in excess of Ogilvy’s offer – $1,216,955. If I were to reduce the damages award as Ogilvy contends I should, then PreMD would obtain a judgment less favourable than Ogilvy’s offer to settle and rule 49.10 would come into play. Consequently, the trial judge’s costs award in favour of PreMD would have to be set aside.

[101] However, I do not accept Ogilvy Renault’s argument for two reasons. The first reason is that I have no evidence PreMD’s acquisition cost was allocated across markets or countries. PreMD paid one lump sum for all of the technology and patent rights. The trial judge decided to award the entire amount, and it seems to me that was her call to make.

[102] The second and more important reason is that the trial judge’s award of $510,750 served as a proxy to compensate PreMD for its overall loss and was not intended to reimburse PreMD for its cost of acquisition. Indeed, she expressly refused to make any award of damages for the expenses PreMD incurred before it retained Ogilvy Renault. Instead, she viewed the acquisition cost and one additional cost of $122,461.72 – a total of $633,211.72 – as a “’flexible and imaginative’ measure of the plaintiff’s net out-of-pocket costs in the period June of 1999 to July 2004 in reliance on the contract”. In the light of the significant deference this court gives to a trial judge’s assessment of damages, I would not interfere with the trial judge’s award.

II. Should the trial judge’s costs award be set aside because of Ogilvy Renault’s Rule 49 offer to settle?

[103] This ground of appeal could succeed only if I reduced the trial judge’s damages award. As I have not done so, this ground of appeal must fail.

III. Did the trial judge err by failing to apply rule 49.13 and order that each party bear its own costs?

[104] Rule 49.13 stipulates that in exercising its discretion on costs, the court may take into account any offer to settle:

49.13 Despite rules 49.03, 49.10 and 49.11, the court, in exercising its discretion with respect to costs, may take into account any offer to settle made in writing, the date the offer was made and the terms of the offer.

[105] Ogilvy Renault submits that because its offer was so close to the amount of damages awarded, the trial judge ought to have taken into account its offer under rule 14.13 and then invoked the costs consequences of 49.10. It contends that an appropriate order is for each party to bear its own costs of the trial. Rule 49.10(2) provides:

Where an offer to settle,

(a) is made by a defendant at least seven days before the commencement of the hearing;

(b) is not withdrawn and does not expire before the commencement of the hearing; and

(c) is not accepted by the plaintiff,

and the plaintiff obtains a judgment as favourable as or less favourable than the terms of the offer to settle, the plaintiff is entitled to partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date, unless the court orders otherwise.

Ogilvy argues that its offer to settle was within the “spirit” of rule 49.10 and thus the costs provisions of that rule should govern.

[106] The trial judge rejected Ogilvy Renault’s submission, and I am not persuaded that, in doing so, she erred in the exercise of her discretion. Her ruling is consistent with this court’s judgment in Niagara Structural Steel (St. Catharines) Ltd. v. W.D. Laflamme Ltd. (1987), 1987 CanLII 4149 (ON CA), 58 O.R. (2d) 773 (C.A.), where Morden J.A. said, at p. 777, that a court should depart from rule 49.10 only in exceptional circumstances, where “the interests of justice require a departure”.

[107] PreMD obtained a judgment more favourable than Ogilvy Renault’s offer to settle. Therefore, invoking rule 49.10 would require a departure from its criteria. The trial judge concluded at para. 23 of her costs endorsement, that “having regard to the importance of reasonable predictability and the even application of Rule 49.10, the interests of justice do not, in my view, warrant the imposition of the cost consequences of Rule 49.10 in these circumstances.” I see no reviewable error in her conclusion.

[108] I would dismiss Ogilvy Renault’s cross-appeal.

E. conclusion

[109] I would dismiss both the appeal and the cross-appeal. At the end of oral argument, Mr. Horton and Mr. Lenczner advised the court that they had agreed on the costs of the appeal: $20,000, inclusive of disbursements and applicable taxes to the successful party. However, on my disposition of the case, success is divided. I expect that Mr. Horton and Mr. Lenczner can agree on an appropriate costs order. If they cannot, each party may make a brief submission in writing within two weeks of the release of these reasons.

[110] Finally, I express my appreciation to both counsel for a well-argued appeal in a difficult case.

Released: Jun 20, 2013 “John Laskin J.A.”

“JL” “I agree R.A. Blair J.A.”

“I agree Gloria Epstein J.A.”