Court File and Parties

COURT FILE NO.: 16-68872 DATE: 2017/04/12 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: ORBCOMM INC. and SKYWAVE MOBILE COMMUNICATIONS INC., Plaintiffs AND: RANDY TAYLOR PROFESSIONAL CORPORATION, Defendants AND RE: PUI-LING CHAN and ANI TOURIAN, Plaintiffs AND: ORBCOMM INC., MARC EISENBERG and SKYWAVE MOBILE COMMUNICATIONS INC., Defendants

BEFORE: Mr. Justice Calum MacLeod

COUNSEL: Geoff R. Hall & Sapna Thakker, for the Moving Parties (ORBCOMM et. al.) Ronald F. Caza & Gabriel Poloquin, for the Responding Parties (Chan et. al.)

HEARD: February 27, 2017

Endorsement

Introduction

[1] These motions were heard in the context of two related court actions consolidated by order of Justice Beaudoin on September 23rd, 2016. While the consolidation order joins the proceedings under court file number 16-68872, the pleadings remain distinct. For simplicity, I refer to action 16-68872 brought by the ORBCOMM parties as the “main action” and what was action 16-69691 brought by Mr. Chan and Ms. Tourian as the “defamation action”.

[2] Both motions were brought by the ORBCOMM parties. There is a motion in the main action for the return of property said to belong to Skywave. There is also a motion to strike the statement of claim in the defamation action.

[3] Each of these motions raise issues that are of importance in commercial litigation, but on the specific facts of this proceeding, they are readily disposed of. For the reasons that follow, the plaintiff is not entitled to an interlocutory replevin order in the form it seeks. For reasons I will also address, the defamation action should be struck but with leave to amend.

Background

ORBCOMM & Skywave Acquisition and Merger

[4] The context of this dispute is a corporate acquisition effected through a Plan of Arrangement under s. 182 of the Ontario Business Corporations Act [1]. Pursuant to an “Arrangement Agreement” and the “Plan of Arrangement” contemplated by that agreement, ORBCOMM Inc. acquired all of the shares of SkyWave Mobile Communications Inc. in January of 2015 through a subsidiary. I need not delve into the intricacies of the agreement or the plan for purposes of these motions. In effect it was an agreement of purchase and sale. The plan of arrangement was necessary to ensure that all shares could be tendered for purchase even if there were dissenting shareholders.

[5] Although ORBCOMM would have done its own due diligence to satisfy itself about the value of the business it was acquiring, there were certain specific representations and warranties secured by an escrow fund. The fund is in effect a holdback from the purchase price. This provides a mechanism for price adjustment if the representations and warranties are breached. As is typical in such agreement, adjustment to the purchase price by recourse against the fund is the only remedy provided to the purchaser. In essence the escrow fund is money that would ultimately accrue to the vendor shareholders if there are no claims within a specified period of time.

[6] In the agreement, the representations and warranties are given by the target corporation, SkyWave Mobile Communications Inc. (“old Skywave”) and not by the vendor shareholders or management of the corporation in their personal capacity. Randy Taylor Professional Corporation (a vehicle owned by old Skywave’s mergers and acquisitions lawyer) is named as the “representative shareholder”. Any claims against the escrow fund are to be addressed to the representative shareholder and it is the entity which will be named as the defendant in any subsequent litigation. This structure is necessary because after closing, the shares of old Skywave were to be transferred and ownership of the corporation passed to the purchaser (Soar Acquisitions Inc., a subsidiary of ORBCOMM) and the purchaser was subsequently amalgamated with Skywave to continue under that name (“new Skywave”). New Skywave cannot sue old Skywave because they are one and the same.

[7] ORBCOMM and new Skywave allege that there have been breaches of representations and they are therefore making a claim against the escrow fund. This is the main action. The plaintiffs allege that business projections material to the valuation of the shares were inflated and the former management failed to disclose information material to the risk that the numbers would not materialize.

[8] Because of the structure of share purchase agreements such as this, there are some peculiarities to the structure of this kind of litigation. The information about past performance, business plans and future projections typically comes from the management of the company to be acquired (“the target corporation”). The senior managers may be shareholders with a financial interest in the escrow fund but as is the case here, they are not named parties. The claim against the escrow fund follows the structure set out in the agreement and is not a claim against the individuals (former management) who are said to be authors of the misrepresentation nor the entity (old Skywave) which gave the representations and warranties. Instead the defendant is the “representative shareholder” which is to say a nominal defendant specified in the agreement of purchase and sale and the escrow agreement.

[9] Because the purchaser acquires the shares of the target corporation, following the change of control, the corporation continues with all of its assets, obligations, records, property and liabilities intact. Thus the purchaser will generally have control of all of the books and records of the corporation it is acquiring following the sale. ORBCOMM now has complete control over Skywave. Typically, as in this case, there is a change in management following the sale. Any property or rights that belonged to old Skywave continue to be property and rights of new Skywave accessible to ORBCOMM.

[10] Sometimes, as is the case here, the new owner will change the corporate structure. In this case after closing, Skywave was amalgamated with Soar Acquisitions Inc. and continued under the Skywave name. Nothing much hinges on this but technically new Skywave is a continuation of both old Skywave and old Soar. What a change in ownership, particularly a change in ownership followed by an amalgamation, may bring with it is a disruption in the books, records and computer systems as the new corporation creates a single system out of systems that were previously separate. This is frequently disruptive and can result in a loss of corporate memory. I do not know if this is a factor in the current dispute but it is not uncommon that the new owners have questions that can only be answered by the previous management or by consulting records that may not have been preserved.

[11] A further complication arises because of the operation of computer backup systems. Where computer records have been deleted or moved following a change in management, they may be retained in computer backup systems. Such systems retain information for a period of time but may be overwritten. From the evidence before me, some of the information now sought by the moving parties may have remained in the backup system but may how have been overwritten because it was not apparent that steps were necessary to preserve it.

The Senior Managers and Retention of Records

[12] Pui-Ling Chan was the Chief Executive Officer of old Skywave prior to the sale. Ani Tourian was the Chief Financial Officer both prior to the sale and for a short period thereafter. Although Mr. Chan was the CEO, he was not an employee of Skywave. He provided his CEO services through his own corporation, 1168433 Ontario Inc. The contract between his corporation and Skywave under which he provided his services between 2003 and 2015 acknowledged that as CEO of Skywave he would acquire private and confidential information belonging to Skywave and he agreed that he would not divulge such information or misuse it. Nowhere in the agreement does it state that he is not entitled to make or retain copies of such information.

[13] When the sale was concluded and Mr. Chan ceased to be the CEO, he made or retained electronic copies of certain information. Those documents are the subject of the motion in the main action. They consist of the following:

a. Mr. Chan’s OneNote backup file as of December 26th, 2014; b. Mr. Chan’s Executive Office Backup File as of December 26th, 2014; c. Mr. Chan’s Outlook Backup File, as of December 26th, 2014; d. A copy of the data room used in respect of ORBCOMM’s acquisition of Skywave; and, e. Ms. Tourian’s Outlook folder.

[14] He also made a backup of his personal laptop hard drive in December of 2014 which he has also preserved.

[15] In simplest terms, Mr. Chan made copies of his e-mails, correspondence, calendar and documents created by management software and a copy of all of the data provided to ORBCOMM via the data room. He acknowledges he has this data in his possession. He acknowledges that whether it is relevant to the litigation or not, it is data to which Skywave is also entitled and if Skywave does not have a copy he is prepared to furnish it. In addition, he acknowledges his obligation to make production of all relevant documents in his possession, power or control through the discovery process. Though he maintains that his personal computer was never the property of Skywave, he will have the hard drive reviewed for relevant documents and produce them.

[16] Ms. Tourian also kept copies of e-mails and documents pertinent to her work as CFO. Though she did not provide her services through a corporation like Mr. Chan and was an employee, she maintains that as a senior officer of old Skywave, she was entitled to retain her own copies of records. She is prepared to provide copies of all documents dating from the period when she was CFO for Skywave and she is prepared to undertake to destroy any records created when she was CFO for new Skywave. She maintains the right to keep copies of information relating to her work as CFO for old Skywave.

[17] Skywave takes the position that all of the data held by Mr. Chan and Ms. Tourian is its property. It argues that whether the property consists of data or some more concrete and material property should not matter. Arguably, the law would be clear if the property was a computer, a desk or a paper document. It should be returned to the rightful owner if that is correct.

Chan & Tourian & the Defamation Action

[18] The issue driving the claim against the escrow fund relates to two customers of Skywave who apparently significantly reduced the value of their orders after the change in control. The central issue is whether Skywave management knew that this was probable and either failed to disclose it or concealed this knowledge such as to constitute a misrepresentation or breach of warranty under the escrow agreement.

[19] At some point ORBCOMM formed the belief that when Mr. Chan and Ms. Tourian left Skywave they deleted their e-mails and other relevant information. They regard this as evidence of a cover up of their alleged misrepresentations. This allegation found its way into the Notice of Claim and into the pleading in the main action. The Notice of Claim contains the following:

“Parent [ORBCOMM] also claims that the former Chief Executive Officer and Chief Financial Officer of the Company intentionally deleted or made unavailable their Company email records including emails regarding customers’ intentions to materially modify and reduce the purchase of, and/or existing pricing for, the Company’s products and services.”

[20] Similar allegations were made by Marc Eisenberg, the CEO of ORBCOMM at an “all-hands meeting” or townhall with Skywave employees in Ottawa on April 6th, 2016. At that meeting amongst other things he was addressing the fact that the sales figures were lower than expected and therefore bonuses might be affected. In the course of that meeting he alleged that there might be a problem with the representations made by former management and he told the employees that e-mails had been deleted which made it difficult to get to the bottom of why the revenue was less than expected.

[21] Mr. Chan and Ms. Tourian believe that the allegations of misrepresentation and cover up are false and defamatory. They believe that these allegations may damage their reputations. In response they sued ORBCOMM, Skywave and Mr. Eisenberg for defamation. The defendants seek to strike the statement of claim for disclosing no cause of action.

[22] The plaintiffs acknowledge that they cannot sue for defamatory remarks contained in a pleading. They have amended their pleading to address this issue and to provide further particulars. The defendants assert that the “notice of claim” is entitled to the same privilege as the pleading and the allegations relating to the “all hands meeting” lack the necessary particularity. This is the focus of the second motion.

Analysis

Motion No. 1 – Return of Property

[23] The motion before me is not a production motion. It is in effect a motion for an order pursuant to s. 104 of the Courts of Justice Act. There is agreement to give copies of all of the data to new Skywave. But this is not sufficient for the moving party. It seeks to have the responding parties divest themselves of this data by not only returning exact copies but by deleting the original copies in their possession. Then, with the information restored to its rightful owner, the moving party proposes to produce copies of the relevant non-privileged documents to the representative shareholder through the normal production and discovery process.

[24] This raises a number of issues. Firstly, is data property as contemplated by s. 104? Secondly, does the jurisdiction under the Act include the jurisdiction to order that the party with possession of the data refrain from keeping copies? Thirdly, is it appropriate to make such an order in the circumstances of this case?

[25] The question as to whether data is property may appear self-evident but in fact it is unclear. This is because ordinarily in “data theft” what is taken is a copy of the data and not the data itself so arguably the owner is not deprived of the use of the information. What the owner loses is the confidentiality of the information and it is far less clear that confidentiality is best addressed through remedies dealing with tangible personal property.

[26] In R. v. Stewart [2] for example, the Supreme Court of Canada held that acquiring a copy of confidential information could not support a charge of theft. Confidential information was held not to constitute property within the meaning of the Criminal Code. For civil purposes, while it appears that data can be a form of property, ordinarily when a party is sued for breach of fiduciary duty or breach of a duty of confidentiality, the focus is on the breach of duty rather than on classifying the confidential nature of the data as property. [3]

[27] Here we are dealing with electronic documents which can be copied multiple times and may be stored on various media. The evidence before me on the motion appears to indicate that even if Mr. Chan and Ms. Tourian deleted their e-mails and other documents when they left Skywave (which they deny) Skywave has or had copies of all of these documents available by means of the regular backup systems. In any event, Mr. Chan and Ms. Tourian acknowledge that Skywave is entitled to the information and agree to provide exact copies. The question is really whether the plaintiff can prohibit them from retaining copies.

[28] I would be reluctant to rule out the possibility that s. 104 could be used to order return of purloined data in appropriate circumstances. Nevertheless, an order requiring the return of confidential information where the moving party has a copy or will be provided with a copy should not be lightly made. In fact the test for making such an order is injunctive in nature and involves a balance of convenience that is not made out on the evidence before me. [4]

[29] In the case of Mr. Chan, there is nothing in his contract with Skywave to indicate that he is not entitled to keep his own records of what he did as CEO of the company. There are many perfectly legitimate reasons why he might have to consult his records either to defend himself against allegations of impropriety or simply to answer questions. I agree with Mr. Caza that the contract acknowledges he will acquire confidential information. There is no provision that he must not keep copies or that he must return any copies or delete or destroy such information. The contractual provision is that he must not misuse the information or disclose it to any other party.

[30] Accordingly, at least on an interlocutory basis, it is misguided to seek an order that he destroy the records in his possession under the guise of returning company property. Mr. Chan has agreed to provide exact copies of the information that he has which he concedes is information that should be in the possession of Skywave and he will produce any documents on his personal hard drive which are relevant to the dispute.

[31] For similar reasons, Ms. Tourian has agreed to provide copies of the documents in her possession and she has agreed to destroy copies of any documents that were created after the change in control. She has some such documents because she continued in the role of CFO for some period of time after ORBCOMM acquired Skywave.

[32] While I do not have specific evidence of the terms of Ms. Tourian’s employment contract, I certainly have no evidence that she was under an obligation not to keep records or copies of records for her own protection and information. In any event it is not necessary for me to decide if Mr. Chan or Ms. Tourian have the ongoing right to retain copies of the data for purposes of the motion. They are not without some colour of right and they continue under legal obligations not to disclose or use that information for an improper purpose.

[33] Whether or not they improperly deleted the data from the Skywave servers is a matter of contention but they are prepared to provide Skywave with copies so there will be no immediate prejudice to Skywave if they retain copies.

[34] I am prepared to make an order for the return of an exact copy of the data in accordance with the undertakings of both parties to do so. I am not prepared to make an interlocutory order requiring them to delete information they may or may not be entitled to keep.

[35] There is a wrinkle to this. Although the motion was argued as if Mr. Chan and Ms. Tourian are the responding parties, in fact what was sought in the notice of motion is an order that the representative shareholder return all data in its possession and destroy all copies. It is apparent from the correspondence that Randy Taylor Professional Corporation has access to these documents and those exchanges do not distinguish between the representative shareholder and Mr. Chan. Randy Taylor Professional Corporation is a placeholder of course and it may be Mr. Chan that is instructing counsel.

[36] In any event the question as to whether Mr. Chan is in breach of his duty to Skywave if he makes information available to Randy Taylor Professional Corporation to assist with this litigation is not a question I have to decide.

[37] It is conceivable that Mr. Chan has possession of documents that turn out to be relevant but are the proper subject of privilege which ORBCOMM could assert against the representative shareholder. I doubt that is the case but if so it is best dealt with when and if it arises and not on the basis of a hypothetical risk. [5]

Motion # 2 – Striking the Pleading in the Defamation Action

[38] The defendants in the defamation action assert that the statement of claim must be struck out because it relies upon statements made on an occasion of privilege or because it fails to comply with the requirements of a defamation pleading.

[39] There is no dispute concerning the position of Mr. Hall that a party cannot be defamed in a pleading. A pleading, like the testimony of a witness in court or a statement made in court, is privileged and cannot be the basis for a defamation action. [6] Ordinarily a party wishing to contest a false and outrageous allegation, joins issue with it in the litigation. Where a pleading wrongfully asserts a claim that puts a person’s professional integrity in issue, the courts have been prepared to penalize the plaintiff by ordering substantial indemnity or even full recovery costs. [7]

[40] Similarly, I agree that the Notice of Claim which is a contractual prerequisite to bringing the action is also cloaked with privilege. There is some attraction to the argument put forth by Mr. Caza that grafting on a spurious irrelevant allegation to an otherwise proper notice should take it outside the zone of privilege. I accept that this may be so. In this case, however, the notice was a requirement of the right to sue and the precise allegation is that ultimately included in the pleadings. I conclude that the notice is part of the legal process and is also subject to privilege. [8]

[41] The “all hands meeting” is another matter. It is not an occasion of absolute privilege and even if Mr. Eisenberg was only reporting what was pleaded in the litigation, it would at best be an occasion of qualified privilege. He was speaking directly to employees that had previously worked with Mr. Chan and Ms. Tourian in a reporting relationship.

[42] I have read the transcript of the “all hands meeting”. I understand the plaintiffs’ concern that anyone attending the meeting would have understood Mr. Eisenberg to be saying former management was probably involved in preparing misleading financial information and had deleted e-mails. I need not comment on whether or not Mr. Eisenberg was sufficiently careful in his speech to avoid saying anything actionable.

[43] The difficulty with a defamation action is that it engages very specific rules of pleading including a high degree of particularity. In addition to identifying who spoke the words, who they were spoken to and the occasion on which they were spoken, the statement of claim must identify the words that were spoken, that the words in their ordinary context are untrue and defamatory and that the plaintiff suffered damage to his or her reputation. Here, uniquely, there is a transcript of the meeting because it was recorded. If defamatory words were spoken, there should be no difficulty in identifying the exact words in an amended pleading. Indeed, Mr. Caza attempted to do just that in his argument.

[44] In my view the amended pleading is not sufficiently precise to meet the requirements of pleading in a defamation action. Accordingly the pleading must be struck out. The question is whether or not there should be leave to amend.

[45] Ordinarily there might be policy reasons to discourage parallel collateral litigation. A defamation action may not be appropriate when the allegations are precisely the allegations that are made in the litigation and when the party who is supposedly defamed will have the right to prove the false nature of the allegations in the main action. While that rationale does not provide a blanket prohibition on a claim or counterclaim for defamation, the court must nevertheless be alert in such instances to abuse of process. That does not apply here.

[46] As I noted at the outset of these reasons, the nature of a share purchase agreement and litigation over the escrow fund means that the parties to the main action are somewhat artificial. The nominal defendant is a representative of the shareholders and not a member of the management team. Thus neither Mr. Chan nor Ms. Tourian are named parties to the main action and they have no mechanism to directly dispute the assertions that they destroyed evidence and were parties to misrepresentation. So their reputations are put in issue by allegations in an action in which they are technically only witnesses and not parties.

[47] To the extent that allegations in the main action are repeated outside of the litigation as if they are factual, it is possible that a defamation action is the proper vehicle. There is no injustice to the defendants if the plaintiffs are permitted to amend the pleading. The defendants know precisely what the plaintiffs are complaining about and the exact words of Mr. Eisenberg have been preserved in a transcript.

[48] In conclusion, because the plaintiffs in the defamation action are the former senior managers against whom the allegations are being made in the main action but they are not parties to that action, a defamation action is an appropriate vehicle for them to contest the truth of those allegations. They cannot be defamed in a statement of claim or the notice of action that was a precondition to suing. They could very well have been defamed at the town hall meeting or in any other forum where the allegations were repeated as if they were fact.

Need for Case Management

[49] Both of these motions are expensive sideshows to the main litigation because they do not advance the case towards determination of the merits. The central question in the litigation is whether the purchaser was misled about the future prospects of the company it was acquiring. The fact that the parties have focused their attention on pursuing these motions rather than finding a way to adjudicate the question in a streamlined manner is not encouraging.

[50] I referred earlier to the Allen-Vanguard litigation in which I was involved as a master. In that case there were thousands of productions, many motions and numerous case conferences. With the benefit of hindsight that action should have been rigorously case managed from an early stage. In particular the parties should have been required to engage in focused discovery planning. [9]

Conclusion and Order

[51] For the reasons given above, there will be an order that Mr. Chan and Ms. Tourian provide copies of all data and documents in his or her possession which were copied from Skywave sources during the time they served as senior officers of the target corporation. Until further order or agreement, they will be entitled to retain copies of those documents but they shall keep them confidential. At the request of Skywave, Ms. Tourian shall destroy any documents or data in her possession dating from after the change in control.

[52] Mr. Chan need not turn over his personal laptop or a copy of the hard drive but he is to preserve all information on that hard drive until further order. He will produce any relevant documents contained on that computer.

[53] The statement of claim in the defamation action is struck out with leave to amend.

[54] There will be a case conference in this matter before the master pursuant to Rule 50.13. At the case conference amongst other matters, the master may make an order bringing the action under Rule 77.

[55] Prior to the case conference, the parties are to seek agreement on a timetable and to a production and discovery plan.

Costs

[56] Costs were not argued. If the parties wish to argue the matter of costs, they may seek further direction within the next 30 days failing which there will be no order for costs.

Mr. Justice C. MacLeod Date: April 12, 2017

Footnotes

[1] R.S.O. 1990, c. B.16 as amended [2] R. v. Stewart, [1988] 1 SCR 963 [3] See Gauntlet Energy Corporation (CCAA), 2003 ABQB 718 @ paras 41 & 42 [4] See Assante Wealth Management Ltd. v. Dixon, (2004) 8 CPC (6th) 57 (SCJ), referred to with approval 2012 ONCA 475 – the latter deals with Rule 45 rather than s. 104 & Rule 44. [5] See my analysis of privilege in the context of a similar action, L’Abbe v. Allen-Vanguard, 2011 ONSC 7575 (Master). [6] 1522491 Ontario Inc. v. Stewart, Esten Professional Corp., 2010 ONSC 727 (Div. Ct.) [7] Bank of Montreal v. Murano, (1998), 41 OR (3d) 222 (C.A.) [8] See for example Big Pond Communications 2000 Inc. v. Kennedy, (2004), 70 O.R. (3d) 115 [9] 2011 ONSC 4000, 2011 ONSC 7331, 2011 ONSC 7575 and related decisions