Court of Appeal for Ontario
Date: 2019-12-24
Docket: C66767
Judges: Lauwers, Paciocco and Fairburn JJ.A.
Parties
Between
CTT Pharmaceutical Holdings, Inc. Plaintiff (Appellant)
and
Rapid Dose Therapeutics Inc. Defendant (Respondent)
Counsel
For the Appellant: Robert Trifts
For the Respondent: Brendan Morrison and Derek Knoke
Hearing and Lower Court
Heard: November 25, 2019
On appeal from: The order of Justice Edward M. Morgan of the Superior Court of Justice dated March 4, 2019, with reasons reported at 2019 ONSC 1444, 163 C.P.R. (4th) 463.
Reasons for Decision
A. Overview
[1] This is an appeal from a motion for summary judgment dismissing CTT Pharmaceutical Holdings Inc.'s ("CTT") claim against Rapid Dose Therapeutics Inc. ("RDT") for breach of confidence.
[2] In 2017, CTT and RDT entered into an agreement with the objective of jointly producing and marketing cannabis-infused rapid release oral dissolvable strips to take advantage of the impending legalization of cannabis in Canada.
[3] After CTT terminated that agreement, RDT contacted a professor at McMaster University and requested that he develop a formulation for a sublingual thin film drug delivery system on behalf of RDT. Around the same time, RDT entered into an agreement with New Jersey-based HED International Inc. ("HED") and acquired the exclusive rights to distribute HED's machines, which could be modified to produce sublingual thin film strips, to cannabis growers and licensed producers in Canada.
[4] CTT sued RDT, alleging that it misused confidential information that CTT supplied to it in confidence to CTT's detriment. The motion judge dismissed CTT's claim, finding that CTT had failed to demonstrate that it had suffered any detriment as a result of RDT's actions.
[5] CTT appeals from the motion judge's determination. For the reasons that follow, the appeal is dismissed.
B. Background
(1) The Asset Purchase and Sale Agreement
[6] On May 29, 2017, CTT and RDT (then CTC Pharma International Ltd.) entered into an Asset Purchase and Sale Agreement ("APS") under which CTT agreed to sell two patents for oral dissolvable strips in exchange for shares in RDT. The APS included a due diligence period. During its investigations, RDT became concerned with the effectiveness of CTT's patented technology, particularly as it related to its ability to achieve the objective of rapidly providing the sublingual delivery of cannabis extracts. It turned out that the only clinical study involving CTT's technology had just 13 participants, took place at an unidentified university in Spain, and showed a very slow rate of absorption.
[7] CTT's CEO, Dr. Pankaj Modi, took offence to RDT inquiring into the effectiveness of his patented technology, as expressed in an email he sent to RDT on October 8, 2017:
I am just totally unwilling to move forward with RDT. I am sure you will find much better IPs and doctor scientist better than me who is much more capable of proving Sublingual vs Stomach absorption etc…. I am just NOT in a position to do any clinicals and prove it to world and YOU in this life time that it is flash dose etc. It is a[n] impossible task.
I am unwilling to work with you guys looking at the current conditions and situation as I don't like to work with management who doesn't have faith and trust and respect in the technology they are planning to acquire….
[8] Dr. Modi officially terminated CTT's relationship with RDT on October 31, 2017.
(2) The Events Following the Termination of the APS
[9] In November 2017, RDT met with Dr. Alex Adronov, a chemistry professor from McMaster University. This ultimately led to a contract between RDT, Dr. Adronov, and McMaster University to develop a proprietary formulation for sublingual thin film drug delivery technology. The result was called QuickStrip.
[10] In addition, on November 15, 2017, RDT entered into a distribution agreement with HED, which manufactures tape casting machines. RDT and HED agreed that RDT would be HED's exclusive distributor of HED's tape casting machines for cannabis-related accounts in Canada.
(3) CTT's Claims Against RDT
[11] In September 2018, CTT brought a claim against RDT alleging breach of confidence and tortious interference with economic relations. RDT was successful in obtaining security for costs because, among other things, CTT's operations had never generated cash flow, there was no value assigned to CTT's patents, and the patents had never been commercialized.
[12] RDT brought a motion for summary judgment and succeeded. This is an appeal from that judgment.
[13] The motion judge determined that the only claim that was "conceivably viable" was the breach of confidence claim. Although CTT and RDT were bound by a contract for about five months, CTT did not seek damages for breach of contract. Nor did it seek damages for patent infringement. Of the claims that were advanced, the motion judge determined that the tortious interference with economic interests claim could not possibly succeed given that there was no contractual relationship with an identifiable third party with which RDT had interfered. There is no challenge to that finding in the appellant's written or oral submissions.
[14] As it related to the alleged breach of confidence/misappropriation of confidential material claim, the statement of claim alleged that there were multiple pieces of information that were disclosed to RDT during the due diligence period and that were later inappropriately used by RDT to CTT's detriment. CTT advanced only three of those claims in response to the summary judgment motion. The motion judge rejected all three.
C. CTT's Position on Appeal
[15] In this court, CTT confined its submissions to one alleged breach of confidence, specifically the one related to HED. That allegation is set out at para. 13(b) of the statement of claim:
In particular, the plaintiff, through Dr. Modi disclosed the following to the defendant, through Messrs. Upsdell and Sanders:
(b) the identity of the plaintiff's proposed contract manufacturer of film casting machines in New Jersey, Hed International (and travelled with the representatives of RDT to New Jersey to personally introduce them). [Emphasis added.]
[16] CTT says that on June 9, 2017, it provided RDT with a list of names and contact information for four potential manufacturers of the equipment necessary to make the dissolvable strips. There is no dispute that HED was the third suggested manufacturer on that list. CTT told RDT to follow the list in the order provided.
[17] Although RDT acknowledges receipt of the email containing the list, Mr. Jason Lewis, who is the Senior Vice President of Business Development at RDT, swore an affidavit and confirmed on cross-examination that he already knew about the existence of HED through an internet search he had conducted prior to receiving the email that contained the list. Representatives of CTT and RDT attended at HED and determined that HED did not have a machine capable of making CTT's thin film technology without modifications.
[18] CTT argues that the identity of HED as its proposed equipment manufacturer was confidential information that RDT gained during the due diligence process and that RDT misused it in two ways.
[19] First, by entering into the distribution agreement with HED, RDT used confidential information obtained from CTT while the APS was still in place. As evidence of this fact, CTT points to a September 15, 2017 agency agreement between HED and RDT, entered into while the due diligence period was still operative. CTT says that this shows that RDT went behind its back while the APS was still live. RDT says it did nothing of the sort, claiming that the agency agreement was entered into in contemplation of its ongoing agreement with CTT. By November 15, 2017, though, when the distribution agreement was entered into, it had become an exclusive agreement because the APS with CTT had ended at Dr. Modi's insistence.
[20] Second, CTT argues that RDT might have provided the information about HED's machines to Dr. Adronov. In particular, CTT argues that "[t]he use of the design of HED's film casting equipment as a parameter to inform the design of Dr. Adronov's thin-film cannabis wafers … would constitute a misuse of confidential information provided by CTT to RDT" to CTT's detriment.
[21] CTT takes aim at the motion judge's finding as it relates to HED. The impugned aspects of the judgment follow:
Finally, the Plaintiff claims that the Defendant misused confidential information by entering into a distribution agreement with HED International Inc. for tape casting machines. These devices supposedly allow for oral thin film to be imbued with chemical products such as cannabis extract, and the agreement permitted the Defendant to make them available to licensed Canadian producers of cannabis products.
The Defendant's position is that HED … is well-known for this technology and that there is nothing proprietary about the Plaintiff's knowledge of this fact and thus nothing confidential about the passing on of this knowledge. Whether or not that is the case, the Defendant's affiant deposed that the HED … machines turned out not to be effective for cannabis-imbued oral strips and so the distributorship agreement never got off the ground. The Defendant thus incurred no gain and the Plaintiff suffered no loss. There is no evidence in the record to suggest anything to the contrary.
The courts have observed that for a breach of confidence claim to succeed there must be actual evidence of financial loss. The goal of the remedy in this type of action is to restore the Plaintiff to the position it was in prior to the breach. Failure to prove an actual loss is failure to prove the grounds for a remedy ….
The state of the record before me is such that the Plaintiff cannot possibly succeed on any of its claims. The one cause of action which is conceivably viable under the circumstances, breach of confidence, has no evidentiary foundation. [Emphasis added.]
[22] CTT argues that the motion judge erred in fact when he concluded that the distributorship agreement never got off the ground and erred in fact and law when he determined that it did not suffer a detriment as a result of RDT's breach of confidence.
D. Analysis
(1) The Motion Judge Did Not Misapprehend the Evidence on the Distribution Agreement Between RDT and HED
[23] We do not agree that the motion judge erred in fact when he said that, regardless of whether RDT had misused confidential information, the "machines turned out not to be effective for cannabis-imbued oral strips and so the distributorship agreement never got off the ground." In this portion of the judgment, the motion judge was merely summarizing RDT's position, as captured by his reference to what the "Defendant's affiant deposed" about HED. Clearly, the motion judge knew that the "distributorship agreement got off the ground", in the sense that he acknowledged that it had been entered into.
[24] RDT's position about the distributorship agreement not getting "off the ground" related to the fact that, while the agreement was in place, nothing had happened under it. Not a single machine had been ordered and, indeed, another manufacturer from outside of North America was manufacturing RDT's products. We understand RDT's position – and the motion judge's summary of that position – as being rooted in the fact that, as of the date of the motion, nothing had happened under that agreement.
(2) RDT Did Not Misuse Confidential Information to CTT's Detriment
[25] There are two elements to this claim. The first relates to CTT's claim that RDT shared CTT's confidential information with Dr Adronov. CTT provided no direct evidence to support this claim.
[26] CTT argues that the motion judge erred in failing to consider whether an adverse inference should be drawn from RDT not leading the evidence of Dr. Adronov. CTT argues that what was used in the development of QuickStrip, created through the partnership of RDT and Dr. Adronov, is a contested fact. According to CTT, RDT should have elicited evidence from Dr. Adronov to respond to the allegation that RDT had misused confidential information in developing QuickStrip. The motion judge is said to have erred by failing to consider drawing an adverse inference from RDT's failure to elicit that evidence.
[27] There was no error in the circumstances. CTT has not identified any confidential information that could have been misused by Dr. Adronov, apart from the fact that HED could manufacture machines capable of producing oral strips with modifications. RDT's evidence was that Dr. Adronov's design was used to inform HED's modifications and not the other way around. Importantly, HED's machines were not instrumental to RDT's manufacturing process, since it does not use the HED machines in its own production.
[28] In addition, the claim was not directed at Dr. Adronov or the university where he worked. There was no suggestion that Dr. Adronov or McMaster University used any confidential information when they created QuickStrip. Nor was the statement of claim for patent infringement.
[29] This leaves the question of whether the motion judge erred in fact and law when he determined that CTT had not suffered a detriment as a result of the potential misuse of the confidential information. We say "potential misuse" because the motion judge did not come to a factual determination on whether the information was confidential at all. The motion judge found it unnecessary to resolve that matter. Instead, he went directly to the question of detriment.
[30] Staying within the parameters of what the motion judge decided, while we find error in the motion judge's approach – specifically, his statement that detriment can only arise from financial loss – we nonetheless conclude that CTT suffered no detriment in this case.
[31] As Rosenberg J.A. held in Lysko v. Braley (2006), 79 O.R. (3d) 721 (C.A.), at para. 17, there are three elements to a claim for breach of confidence:
- that the information conveyed was confidential,
- that the information was conveyed in confidence, and
- that the confidential information was misused by the party to whom it was communicated to the detriment of the confider.
See also: Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, at pp. 608, 635-36 and Cadbury Schweppes Inc. v. FBI Foods Ltd., [1999] 1 S.C.R. 142, at paras. 52-54.
[32] Accordingly, as the final consideration in a breach of confidence claim, the plaintiff must prove detriment in order to establish liability: The Catalyst Capital Group Inc. v. VimpelCom Ltd., 2019 ONCA 354, 145 O.R. (3d) 759, at para. 41, leave to appeal ref'd, [2019] S.C.C.A. No. 284. The concept of detriment is not tied to only financial loss, but is afforded a broad definition, including emotional or psychological distress, loss of bargaining advantage, and loss of potential profits: Catalyst, at para. 41; Lysko, at paras. 18, 20; Rodaro v. Royal Bank of Canada (2002), 59 O.R. (3d) 74 (C.A.), at paras. 56-57; and Cadbury, at paras. 52-53, 64.
[33] CTT argues that the motion judge failed to appreciate that, with modifications, the HED machines would be functional for the purpose of producing cannabis-infused strips. This is not a controversial proposal. Indeed, Mr. Lewis (on behalf of RDT) accepted that the "modifications [required to produce Dr. Adronov's formula] were accepted and incorporated by HED for very specific use." He also acknowledged that the exclusive distributorship agreement between HED and RDT remains in place.
[34] CTT argues that the motion judge erred by failing to take into account the fact that RDT's actions left them unable to purchase the necessary equipment directly from HED. CTT claims that it was delayed as a result – or set back from the "pole position" – in bringing its product to market while RDT was able to get a "head start".
[35] While we agree that the motion judge should have considered this argument, essentially that CTT lost a competitive advantage, as part of whether there had been a "detriment", granting summary judgment against CTT was still appropriate on the facts of this case.
[36] As RDT points out, CTT was in no position to begin manufacturing its products in November 2017. One of the directors of CTT, Dr. Allen Greenspoon, swore an affidavit saying that, to that date, CTT had not found another potential supplier of machines, something that was "effectively delaying its commercialization efforts." In cross-examination, though, Dr. Greenspoon admitted that CTT was not ready to move forward with manufacturing at the time that the exclusive distributorship agreement was entered into. Moreover, Dr. Modi himself had identified a number of other equipment suppliers in his June 9, 2017 email. Yet, as Dr. Greenspoon confirmed, CTT "didn't need a machine" to manufacture its products at the time.
[37] CTT was facing enormous hurdles in getting its product to market. According to its Quarterly Report, while CTT had obtained patents, it was "making no products, ha[d] no suppliers, ha[d] no distribution chains, ha[d] no operation, ha[d] no customers and ha[d] no cash flow", even as late as June of 2018. Indeed, it had no employees and no commercial activity whatsoever. These were some of the findings that persuaded a master to award security for costs against CTT: CTT Pharmaceutical Holdings v. Rapid Dose Therapeutics, 2019 ONSC 731, at paras. 4, 7.
[38] Even at the time that Dr. Greenspoon was giving evidence on the motion under appeal, he acknowledged that CTT was still not ready to manufacture its products, although it was getting close. Accordingly, even if CTT had been free to order machines directly from HED, (though it was and is free to buy a HED machine from RDT), nothing would have been different. There is therefore no detriment to CTT that is attributable to RDT's actions.
[39] For its part, RDT has received no independent benefit from the distribution agreement. RDT has not sold a single machine under the agreement. Nor does RDT use HED machines in its own production of its sublingual strips.
[40] For these reasons, the motion judge was correct to dismiss CTT's claim for breach of confidence. As a result, the motion judge was not required to consider CTT's request for other remedies, such as declaratory or injunctive relief. Contrary to CTT's position on appeal, a remedy must be preceded by a finding of liability. Having failed to establish that RDT misused confidential information that was supplied to it in confidence to CTT's detriment, no relief was in order: Catalyst, at paras. 40-41.
(3) Other Arguments
[41] Although it was not pressed in oral submissions, CTT also claims that the motion judge erred by relying on hearsay evidence to conclude that CTT's technology was not commercially viable. This is said to have "coloured" his approach to the issues.
[42] CTT maintains that Dr. Modi provided the only admissible evidence relating to CTT's technology and the product's efficacy. There is no basis to dispute the results of the clinical study of 13 individuals from the unidentified university in Spain.
[43] Although the motion judge noted that the patents were not commercially viable, that was a finding that was well-rooted in the record. Indeed, it partly came from Dr. Modi's admission in his October 8, 2017 email, where he stated that he was not in a position to prove the efficacy of his product. He simply wanted RDT to "trust" him. We noted that the one clinical study that was provided showed that peak absorption only took place after 3 hours, far from the rapid absorption claimed.
[44] As well, the motion judge had available to him both the determinations made on the security for costs motion, as well as CTT's own financial disclosure under securities laws. Those disclosures showed CTT had no customers and no distribution channels.
[45] The other arguments have no merit.
E. Disposition
[46] The appeal is dismissed. Costs are awarded to the respondent in the agreed upon amount of $20,000, H.S.T. and disbursements included.
"P. Lauwers J.A."
"David M. Paciocco J.A."
"Fairburn J.A."
