



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 firms 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 PreMDs claim for breach for fiduciary
    duty.  She also dismissed PreMDs 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 judges assessment of cost recovery damages.

[7]

PreMDs overall submission is that the trial judges 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 PreMDs 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 Renaults Rule 49 offer to settle will come into
    effect.  If it does, then the trial judges 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]

PreMDs
    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 patients
    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, PreMDs 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 PreMDs 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 PreMDs 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]

PreMDs
    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 PreMDs 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]

PreMDs
    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 FDAs 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]

PreMDs
    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.  PreMDs various appeals from the
    FDAs 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 PreMDs 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 PreMDs 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)

PreMDs 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 PreMDs files.  He
    did not testify at trial because of ill health.  The supervisor of Ogilvy
    Renaults 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 USs 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 Renaults 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. Kleimans 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 PreMDs 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)

PreMDs 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
    clients 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 PreMDs 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 Carriers 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)

PreMDs damages claim at trial

[56]

At
    trial, PreMD advanced four different scenarios to compensate it for Ogilvy
    Renaults 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 PreMDs claims under scenario one, two, or three
    was made out.  PreMD does not appeal these findings  with good reason. 
    PreMDs 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 judges 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 PreMDs 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 Renaults 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
    PreMDs 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 PreMDs 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 PreMDs 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 PreMDs 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
    plaintiffs 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. (4
th
) 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, affd (1999), 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), 87 D.L.R. (3d) 325 (B.C.C.A), affd (1982), 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 directors
    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 PreMDs 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 PreMDs 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]

PreMDs
    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 judges 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
    PreMDs 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
, [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 PreMDs business and was not a lot of concern;

·

Even if one were to discount Dr. Nortons
    statements as an attempt to sooth any concerns of his investors and potential
    customers of PreMDs 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 PreMDs 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 PreMDs
    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 PreMDs 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 PreMDs contention that the other
    expenses it incurred in this period were wasted.  The evidence outlined above
    supports the trial judges 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 PreMDs 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 PreMDs venture was unprofitable from the beginning, even in
    countries where the company had full patent protection.  The ventures
    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
    ventures 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 PreMDs 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. Nortons evidence that the United States accounted only for 50
    per cent of PreMDs 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
    PreMDs 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
    Ogilvys 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
    Ogilvys offer to settle and rule 49.10 would come into play.  Consequently,
    the trial judges costs award in favour of PreMD would have to be set aside.

[101]

However, I do
    not accept Ogilvy Renaults argument for two reasons.  The first reason is that
    I have no evidence PreMDs 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 judges 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 plaintiffs 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 judges assessment of damages, I would
    not interfere with the trial judges award.

II.

Should the trial judges costs award be set aside because of Ogilvy
    Renaults Rule 49 offer to settle?

[103]

This ground of
    appeal could succeed only if I reduced the trial judges 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 Renaults submission, and I am not persuaded that, in doing so,
    she erred in the exercise of her discretion.  Her ruling is consistent with
    this courts judgment in
Niagara Structural Steel (St. Catharines) Ltd. v.
    W.D. Laflamme Ltd.
(1987), 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 Renaults 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 Renaults 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.


