Court File and Parties

COURT FILE NO.: 15-64933 DATE: 2016/05/31 SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN

LBI BRANDS INC.

AND

AQUATERRA CORPORATION, ATLANTIC PACKAGING PRODUCTS LTD., RAPAK, LLC, JOHN DOE and JANE DOE

BEFORE: Justice P. E. Roger

COUNSEL: Kirsten Crain, counsel for the Plaintiff / Responding Party Geoffrey D. Mowatt, counsel for the Defendants / Moving Parties

HEARD: May 26, 2016

Endorsement

[1] The Defendants, AquaTerra Corporation (AquaTerra) and Atlantic Packaging Products Ltd. bring this motion seeking to strike various portions of the Statement of Claim, without leave to amend.

[2] The Plaintiff, LBI Brands Inc. (LBI), is a vendor of water, packaged in a large box format with certain icons on the box. The Defendant AquaTerra is also a vendor of water, also using a box format allegedly reproducing some of the Plaintiff’s icons. The Plaintiff alleges that by packaging its water in a large box format bearing LBI’s icon, AquaTerra seeks to target LBI’s customers by falsely representing its product as premium spring water. LBI’s Statement of Claim pleads: misleading advertisement under the Competition Act, R.S.C. 1985, c. C-34 (“Competition Act”); misleading description under the Trade-marks Act, R.S.C., 1985, c. T-13 (“Trade-marks Act”); tort of unlawful means (interference with economic relations); copyright infringements; and conspiracy.

[3] The issues for determination are, generally, whether the Statement of Claim discloses a reasonable cause of action under Rule 21.01(1)(b) and whether it is scandalous, frivolous or vexatious under Rule 25.11 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (“Rules”).

[4] At the outset of the motion, both counsel indicated that they had, prior to the motion, reached an agreement on the following issues and paragraphs of the Statement of Claim:

• Para. 1 (b) of the Statement of Claim is to be struck;
• Paras. (i), (ii), and (iii) of para. 1 (c) of the Statement of Claim are to be struck; and
• These Defendants are no longer seeking to strike the Copyright Act claims made in the Statement of Claim.

[5] The following are the specific issues raised on this motion, together with my analysis and disposition for each of these issues.

Whether paras. 33 to 39 of the Statement of Claim should be struck, without leave to amend, for being scandalous, frivolous or vexatious, pursuant to Rule 25.11?

[6] These paragraphs cover the Plaintiff’s allegations that the Defendants made false and misleading representations. Essentially, they allege that the Defendants’ packaging is false and misleading as it is calculated to give consumers the false impression that AquaTerra’s water originates from a natural spring known as Cataract or from a large waterfall located in a pristine mountainous environment and that, as a result, the Plaintiff suffers loss and damages.

[7] The Defendants have delivered affidavit evidence to attempt to show that these allegations are frivolous and vexatious. This evidence indicates that AquaTerra draws its water from the Cataract well and the Hillsburgh well. It indicates that their labelling was deliberately chosen to comply with provisions of the Food and Drug Regulations, C.R.C., c. 870 (“Food and Drugs Reg”). It also indicates that AquaTerra and its predecessors have been using mountain imagery in its Canadian Springs logo for many years. It further indicates that AquaTerra is the owner of various trademark applications and registrations that use mountains as an element of their mark.

[8] The Defendants argue:

(a) That the evidence filed on this motion is admissible for purposes of Rule 25.11 to establish that the facts alleged in the above paragraphs are incapable of proof and, therefore, scandalous, frivolous or vexatious.

(b) That AquaTerra is the owner of various trademark applications and registrations which use mountains as an element of the mark for Canadian Springs and Natural Spring Water. They argue that the holder of a trademark has the exclusive right to use that mark in Canada until such time as the mark is shown to be invalid. Consequently, they argue that they may use their mark in association with their products and that if a competitor, such as the Plaintiff, takes exception to that use, its sole recourse is to attack the validity of the trademark registration.

[9] No evidence is admissible on a Rule 21.01(1)(b) motion.

[10] The Plaintiff argues that on a Rule 25.11 motion, evidence is admissible but not for the purpose of disproving the truth of the allegations pleaded. Consequently, the Plaintiff argues that it would be an error to consider evidence on a Rule 25.11 motion for purposes of assessing whether disputed facts are true or not as material facts pleaded must be deemed to be true. On this, I agree with the Plaintiff.

[11] The law is clear that the Court must accept the facts alleged in the pleading as proven or true unless they are patently ridiculous, or incapable of proof. It must be plain and obvious that the claim cannot succeed, or that the pleadings are defective. Pleadings should be read generously with allowance for inadequacy due to drafting deficiencies. Similarly, a fact that is relevant to a cause of action cannot be scandalous, frivolous or vexatious, but, on the other hand, a pleading that has no material facts is frivolous and vexatious and a pleading that is superfluous or can have no effect on the outcome of the action is also scandalous, frivolous and vexatious. Pleadings that are irrelevant, inflammatory, argumentative or inserted only for colour will also be struck as scandalous. However, unpleasant allegations of facts that are relevant to a cause of action are not scandalous, frivolous or vexatious. Nevertheless, the Court has jurisdiction to strike pleadings that are marginally relevant if their probative value is outweighed by their prejudicial effect (see Canadian Railway v. Brant, 2009 ONSC 32911, 96 O.R. (3rd) 734 (S.C.)).

[12] In this case, the pleadings at paragraphs 33 to 39 of the statement of claim are relevant to the various claims made by the Plaintiff. They are obviously disputed but are material facts to the pleadings. As such, they are not scandalous, frivolous or vexatious. This is not the appropriate forum to test their veracity.

[13] This brings us to the Defendants’ argument that these paragraphs should be struck as the Defendant, AquaTerra, may use its mark in association with its products subject only to a competitor attacking the validity of the trademark registration.

[14] While I completely agree with the legal principle articulated in Molson Canada v. Oland Breweries Ltd., 2002 ONCA 44947, 59 O.R. (3d) 607 (C.A.), I disagree with the Defendants regarding its application to the facts of this case. Unlike the situation in Molson, which dealt with a passing-off action and an alleged breach of s. 7(b) of the Trade-marks Act, this case is not a passing-off action nor are any claims made under s. 7(b) of the Trade-marks Act. Rather, the claims made under the Trade-marks Act are made under s. 7(d) of that Act, alleging a use by the Defendants of a description that is false and likely to mislead the public. Consequently, the principle of Molson is not applicable as the Plaintiff is not alleging that AquaTerra’s marks are confusing or invalid but rather that they mislead the public. In any event, these paragraphs are not scandalous, frivolous or vexatious as the exercise of these powers should be limited to clear cases.

Tort of unlawful means (intentional interference with economic relations) paragraph 40 of the Statement of Claims

[15] These Defendants advised, at the return of the motion, that they are no longer asking the Court to strike paragraph 40 of the Statement of Claim (unless the Court agrees to strike paragraphs 33 to 39). They agree with the submissions of the Plaintiff that the recent Supreme Court of Canada’s decision in A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177 answers their concerns as it resolved the long standing uncertainty by concluding that the tort of “unlawful means” is not limited to situations where the Defendant’s conduct is not otherwise actionable by the Plaintiff. They agreed that sufficient material facts have been pled.

Statutory breach allegations – Paras. 1(c)(i), (ii), (iii) and 42

[16] As indicated above, the Plaintiff did not oppose the striking out of paras. 1(c)(i), (ii) and (iii). It was agreed that these provisions do not confer on the Plaintiff a direct cause of action against the Defendants. However, the validity of para. 42 will depend on how this Court deals with the Plaintiff’s claims made under the Competition Act and claims of conspiracy as it is pleaded as particulars of these claims.

Statutory breach allegations – S. 36 of the Competition Act, – paras. 42 - 43 of the Statement of Claim

[17] The Defendants argue that under s. 36(1) of the Competition Act, it is not enough for a Plaintiff to plead that it has suffered damages as a result of the Defendants’ conduct. They argue that the Plaintiff must plead a causal connection between the breach of the statute (s. 52 of that Act) and damages and that this can only be met by pleading that a breach or misrepresentation caused the Plaintiff to do something in reliance thereon to his or her detriment. In support of this proposition, the Defendants rely upon the following decisions of this Court: Singer v. Schering-Plough Canada Inc., 2010 ONSC 42, 87 C.P.C. (6th) 276; and Magill v. Expedia Canada Corp., 2010 ONSC 5247, 1 C.P.C. (7th) 129.

[18] The Plaintiff argues that Magill is an application of s. 36 of the Competition Act, that it must be limited to its facts and that it does not attempt to define the bounds of a s. 36 claim. In support thereof, the Plaintiff argues the decision of this Court in Fournier Leasing Company Ltd. v. Mercedes-Benz Canada Inc., 2012 ONSC 2752.

[19] It is well established that in a Rule 21 motion, the Court must be satisfied, assuming the facts as stated in the Statement of Claim, that it is plain and obvious that the allegations pleaded are incapable of supporting a cause of action. The Statement of Claim must be read generously, accommodating inadequacy resulting from drafting deficiencies. Further, the usual practice is to grant the Plaintiff leave to amend unless it is clear that the Plaintiff cannot improve its case by any further and proper amendments.

[20] The decisions of Justices Strathy and Perell, respectively in Singer and Magill, make it clear that the separate cause of action created under s. 36(1) of the Competition Act requires that the plaintiff must have suffered loss or damages as a result of the defendant’s conduct contrary to the provisions of s. 52(1) of that act. As held in both these decisions:

The plaintiff must plead a causal connection between the breach of the statute and his damages. In my view, this can only be done by pleading that the misrepresentation caused him to do something – i.e., that he relied on it to his detriment. (see Singer at para. 108, Magill at para. 106).

[21] The facts in Fournier are different, as in that decision the s. 36(1) cause of action relied upon an alleged breach of s. 45 of the Competition Act, which relates to conspiracies. The Plaintiff raised a number of arguments that do not persuade me that I should not follow the authority of the Magill and Singer cases. As pleaded, it is plain and obvious that this case cannot succeed. Consequently, and similar to the disposition of this Court in Magill, the portions of the Statement of Claim that advance claims under s. 36(1) of the Competition Act are struck with leave to amend. However, the portions of the Statement of Claim that plead a violation of s. 52 of the Competition Act are not struck out, as they are particulars, material to the conspiracy plea.

Statutory breach allegations – s. 7(d) of the Trade-marks Act – paras. 1(c)(iv) and 45

[22] The Defendants allege that the representations alleged in the Statement of Claim to be false and misleading, relating to the origin and quality representation, do not include any trade mark (or any other federal subject matter) and therefore cannot be the subject of a s. 7(d) allegation. They point out that while the Statement of Claim alleges copyright infringement, the copyright allegations are unrelated to the s. 7(d) allegations.

[23] The Plaintiff agrees that for an action under s. 7(d) of the Trade-marks Act, the acts complained of must be alleged to be effected by the use of intellectual property or to affect intellectual property. The Plaintiff alleges that it has pleaded the necessary material facts:

Elements of the Claim Statement of Claim No person shall make use, in association with wares or services, of any description that is false in a material respect and likely to mislead the public as to the character, quality, quantity or composition, or the geographical origin AquaTerra represents on its Canadian Spring Box that the water is from a spring in a pristine mountain environment, when in fact it is low-cost and low-value well water from farmers’ fields (paras. 33 and 38) The acts complained of must be alleged to be affected by the use of intellectual property or to affect intellectual property. LBI is the owner of the copyright in the Icon Display (para. 20) and has a registered trademark in HappyWater and WaterBox (paras. 3 and 13) Additionally, AquaTerra is the owner of the registered trademark that embodies the misrepresentation (Chan Affidavit, Exhibit D, p. 140) The plaintiff was harmed as a result. LBI has suffered damages including loss of business (paras. 38-39)

[24] As indicated in CSI Core Specialties Inc. v. Sonoco Ltd., 2001 FCT 801, 2001 F.C.T. 801, 14 C.P.R. (4) 70, at para. 9; “Section 7(a) is intra vires to the extent that it rounds out a scheme for the control of intellectual property. For that purpose, the acts complained of must be alleged to be effected by the use of intellectual property or to affect intellectual property. Particulars of the intellectual property connection are required”.

[25] Paragraph 45 of the Statement of Claim is a claim with respect to s. 7(d) of the Trade-marks Act. The intellectual property aspect is missing and particulars of the intellectual property connection are required and missing. This required intellectual property connection is not made any clearer by the pleadings contained in paras. 33 and 38 of the Statement of Claim. Similarly, this required connection with intellectual property is again not made any clearer by the allegations contained at paras. 20, 3 and 13 of the Statement of Claim as there appears to be no logical connection between the allegations made at theses paragraphs and those made at paras. 33, 38 and 45. Consequently, paras. 1(c)(iv) and 45 are struck with leave to amend. Leave to amend is granted as it is not plain and obvious that the required connection could not be properly pleaded.

[26] The decision of Osiris Inc. v. International Edge Inc. is of no assistance to the Plaintiff, considering the lack of required connection with intellectual property.

[27] Even if the Plaintiff owns Happy Water and Water Box and even if it owns a copyright on the icon display, the acts complained of at paras. 33 to 39 of the Statement of Claim relate to origin and quality representations (spring water and snow-capped mountain peak). The acts complained of have no connection with intellectual property. While the Statement of Claim alleges copyright infringement, the copyright allegations are unrelated to the s. 7(d) allegations. Similarly, the allegations at para. 39 are unrelated to a passing off action or trademark action or intellectual property action sufficient to be intra vires. Although complicated, it is plain and obvious that this claim cannot succeed as it is not alleged to be effected by the use of intellectual property or to affect intellectual property. Impacting the Plaintiff (who owns intellectual property) is not the same nor is it sufficient.

Conspiracy allegation – para. 41

[28] At para. 41 of the Statement of Claim the Plaintiff allege that the Defendants combined and conspired with each other by unlawful or improper means to obtain unlawful and unfair competitive advantages over the Plaintiff, knowing that their conduct would cause injury to the Plaintiff.

[29] Both parties agree that there are two types of conspiracy claim:

(1) Conspiracy to injure the plaintiff (whether or not the means used by the defendants are lawful or unlawful);

(2) Conspiracy to perform an unlawful act directed towards the plaintiff that would result in damages.

[30] I agree with the submissions of counsel for the Plaintiff that any failure to plead and provide particulars of special damages is answered by the provisions of Rule 25.06(9) of the Rules. I also agree with the submissions of counsel for the Plaintiff that it would be unfair to apply the doctrine of merger at this stage of the proceedings. As indicated by Justice Wilson in Hunt v. Carey Canada Inc., 1990 SCC 90, [1990] 2 S.C.R. 959, at pp. 991 – 992, it would be unfair on a motion to strike to assume that the plaintiff will necessarily succeed in proving that the other tortious acts have been committed.

[31] In considering the necessary material facts required to establish conspiracy to injure and conspiracy to perform an unlawful act, I am satisfied that these material facts have sufficiently been pleaded by the Plaintiff. The Plaintiff pleaded that the Defendants acted in combination. They pleaded that the purpose was to harm the Plaintiff and pleaded that the Plaintiff suffered damages as a result. They also pleaded that their conduct was unlawful, in violation of the Food and Drug Act, Competition Act, Trade-marks Act and Copyright Act. It is not plain and obvious that this claim cannot succeed.

[32] Consequently, for the above noted reasons, the following is ordered:

• Para. 1(b) of the Statement of Claim is struck without leave to amend.
• Paras. 1(c)(i), (ii) and (iii) are struck without leave to amend.
• Para. 1(c)(iv) is struck with leave to amend.
• Para. 43 of the Statement of Claim is struck with leave to amend.
• Para. 45 of the Statement of Claim is struck with leave to amend.
• Paras. 33 to 39 of the Statement of Claim are saved as they plead material facts to the tort of unlawful means.

[33] If the parties are unable to agree on the issue of costs of this motion, then, within the next ten days, the Defendants are to provide their brief costs submissions (not exceeding three pages) and within five days of receiving the Defendants’ submissions, the Plaintiff shall provide its costs submissions. The parties’ costs outline has already been delivered. The costs submissions are to be delivered to my assistant at SCJ.Assistants@ontario.ca. If none are received by June 11 it will be assumed that the costs have been resolved.

Justice P.E. Roger Released: May 31, 2016