ONCA Holds Pre-contractual Expenses Are Recoverable Only If the Parties Reasonably Contemplated that the Expenses Would Likely Be Wasted In the Event of Breach

ONCA Holds Pre-contractual Expenses Are Recoverable Only If the Parties Reasonably Contemplated that the Expenses Would Likely Be Wasted In the Event of Breach

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

This appeal and cross-appeal concerned the measure of damages for Ogilvy’s negligence and breach of contract in failing to pay maintenance fees for two of PreMD’s US patents and allowing them to become abandoned. The patents covered a technology for measuring cholesterol levels using skin tests.

PreMD sued Ogilvy for negligence, breach of contract, and breach of fiduciary duty. 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 of 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”. Her assessment of those damages included an amount equal to what PreMD had paid for the technology.

PreMD appealed the dismissal of its claim for breach of fiduciary duty. PreMD also appealed the trial judge’s assessment of cost recovery damages, and made three specific submissions: first, the trial judge erred by failing to award damages for the expenses PreMD incurred in the period before Ogilvy was retained. Second, the trial judge erred by failing to award damages for the costs of clinical trials and of seeking US regulatory approvals before it became aware the two patents had lapsed. Third, the trial judge erred by failing to award damages for the costs of clinical trials and of seeking US regulatory approvals in the period after PreMD learned its two patents had lapsed and could not be reinstated.

Ogilvy cross-appealed, and argued that the trial judge erred by awarding damages for the entire cost of acquiring the technology and related patent rights. Ogilvy contended that the trial judge ought to have awarded only half of PreMD’s acquisition cost because only the US market was affected by the lapse of the two patents. Finally, Ogilvy argued that its settlement 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.

Both the appeal and cross-appeal are dismissed.

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

The Court rejected PreMD’s submission that the trial judge erred by failing to find a breach of fiduciary duty.

The Court rejected PreMD’s argument that Ogilvy knew that the “maintenance fees on patents 510 and 295 were not paid and for reasons not shared with the court, intentionally concealed this information.” [52] The Court also rejected PreMD’s submission that the trial judge ought to have drawn an adverse inference from the failure of the responsible partner at Ogilvy to testify.

Mitigating Damages

The Court upheld the trial judge and held that Ogilvy “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.” [63]

Did the trial judge err by failing to award PreMD pre-contractual damages for the expenses it incurred in the period before Ogilvy was retained?

The Court dismissed this ground of appeal.

The Court held 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.” [78] The Court found no evidence that PreMD and Ogilvy contemplated that PreMD’s expenses in the period after acquiring the technology and before retaining Ogilvy would be wasted if Ogilvy breached its agreement to maintain the two US patents. Indeed, there was “no evidence at all that the parties contemplated Ogilvy Renault would reimburse PreMD for its expenses in this first period under any circumstances.” [78]

Did the trial judge err by failing to award PreMD damages for the period from the retainer of Ogilvy to the discovery of the lapse of patents 510 and 295?

The Court dismissed this ground of appeal.

PreMD argued that the trial judge erred in her assessment for this period because she took “too narrow an approach”. [84] For this period, PreMD asked for reliance damages “largely representing the cost of clinical trials, the cost of seeking regulatory approvals in the US, and related development costs.” [84]

The Court rejected this argument and held that 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.” [85] The Court held that the evidence did not support PreMD’s argument that the expenses it incurred would not have been incurred but for the contract.

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?

The Court dismissed this ground of appeal.

The Court accepted that during this period PreMD was trying to reinstate the two patents and that it had contractual commitments 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 showed that they would have been incurred regardless of the contract.” [95]

The Cross-Appeal

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

The Court dismissed this ground of the cross-appeal.

Ogilvy contended that the trial judge ought to have apportioned the acquisition cost and awarded PreMD only half. Ogilvy pointed to evidence that the US accounted only for 50% of PreMD’s market and that “PreMD had a significant market outside of the United States.” [99]

The Court rejected Ogilvy’s argument for two reasons: first, there was “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.” [101] The trial judge decided to award the entire amount, which she was entitled to do. The second and more important reason was that the trial judge’s awarded amount served as a “proxy to compensate PreMD for its overall loss and was not intended to reimburse PreMD for its cost of acquisition.” [102] Indeed, the trial judge expressly refused to make any award of damages for the expenses PreMD incurred before it retained Ogilvy.

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

The Court rejected this ground of the cross-appeal, and deferred to the trial judge’s discretion in rejecting this argument.