CITATION: Lauren International, Inc. v. Reichert, 2008 ONCA 382
DATE: 20080514
DOCKET: C47999
COURT OF APPEAL FOR ONTARIO
MACPHERSON, ROULEAU and EPSTEIN JJ.A.
BETWEEN:
LAUREN INTERNATIONAL, INC. (formerly known as LAUREN MANUFACTURING COMPANY)
Applicant (Respondent in Appeal)
and
GERHARD REICHERT, MICHAEL GLOVER and BYSTRONIC SOLUTION CENTRE INC. (formerly known as EDGETECH I.G. LTD.)
Respondents (Appellant)
Aiyaz Alibhai and Carla White for the appellant
Todd Burke and Andrew McKenna for the respondent
Heard: April 1, 2008
On appeal from the order of Justice Robert J. Smith of the Superior Court of Justice dated October 22, 2007.
MACPHERSON J.A.:
A. INTRODUCTION
[1] The appellant, Gerhard Reichert (“Reichert”), appeals from the order of Justice R. Smith of the Superior Court of Justice dated October 22, 2007.
[2] The application judge held that the respondent, Lauren International, Inc. (“Lauren”), was not obligated to continue to pay a 1% royalty to Reichert on the manufacture and sale of “Super Spacer” products in jurisdictions where patents for these products had expired.
[3] The appellant advances three issues on the appeal. Two issues involve the interpretation of the contract the parties entered into in 1989. The third issue relates to Lauren’s conduct under the contract and presents a question of promissory estoppel.
B. FACTS
(1) The parties and events
[4] On December 1, 1989, Reichert and Michael Glover, the principals of an Ottawa firm called Edgetech I.G. Ltd., entered into an Agreement of Purchase and Sale with Lauren. Lauren is a custom extrusion company located in New Philadelphia, Ohio that specializes in closed-cell sponge and dense polymer products.
[5] Under the agreement, Reichert and Glover agreed to assign several patents and patent applications relating to window technology to Lauren. Some of these patents and patent applications were for insulating foam spacer for insulated glazing units that Reichert and Glover named “Super Spacer”. The patents and patent applications assigned under the agreement were defined as “Principals’ Patent Rights”.
[6] In consideration of the transfer of Principals’ Patent Rights, Lauren agreed to transfer shares in Lauren to Reichert and Glover and to pay each of them a royalty of 1% of monthly gross sales of Super Spacer products manufactured and sold by Lauren under the Principals’ Patent rights.[^1]
[7] The key provisions of the agreement governing the royalty arrangement between Reichert and Lauren are sections 1.01(s), and 2.02(b) and 2.04:
Section 1.01 Definitions
(s) “Principals’ Patent Rights” means any and all right, title and interest of the Principals in and to all patents and patent applications relating to multiple layer insulated glazing units, including, without restriction, the patents and patent applications listed in Schedule H, including all reissues, divisions, continuation and extensions thereof;
Section 2.02. Purchase Price. The Purchase Price shall be payable by way of:
(a) [Shares in Lauren].
(b) Payment by Lauren to the Principals, equally, monthly in arrears, of an aggregate amount equal to 2% of Monthly Gross Sales by Lauren of “Super Spacer” Products commencing in the month immediately following attainment of any of the sales tests specified in Subsection 2.02(a) and ending on the expiry of the Principals’ Patent Rights … .
Section 2.04 Definitions. The term “‘Super Spacer’ Products” shall mean flexible strip foam insulating spacer material for sealed glazing units manufactured and sold by Lauren under Principals’ Patent Rights. “Monthly Gross Sales by Lauren of ‘Super Spacer’ Products” shall mean the sales value of “Super Spacer” Products shipped to customers by Lauren during a calendar month, less all credits and discounts.
[8] The agreement governed the relationship between Lauren and Reichert, who was employed by Lauren, from 1989 to 2006. In those years, Lauren paid Reichert $2,876,745 under s. 2.02(b) of the agreement. Of this amount, $69,744 was paid to Reichert for sales of Super Spacer products in jurisdictions where there was no patent protection.
[9] In November 2006, Lauren realized that the United States patent under the Principals’ Patent Rights had expired in September 2006. Thereafter, Lauren stopped including sales of Super Spacer products in the United States in its calculation of 1% of monthly gross sales of Super Spacer products manufactured and sold by Lauren.
[10] Reichert objected to Lauren’s interpretation of the agreement and brought an application in Ottawa.
(2) The application
[11] The application judge agreed with Lauren’s position. He held that (i) the agreement entitled Lauren to stop including sales for Super Spacer products in the United States as part of the royalty payments due to Reichert, (ii) the agreement did not include inventions developed by Reichert after the agreement was concluded, and (iii) the agreement did not require Lauren to pay Reichert 1% of the monthly gross sales of Super Spacer products in jurisdictions where the patent rights had expired.
[12] Reichert appeals all of these conclusions.
C. ISSUES
[13] The appellant frames the issues in this fashion:
(1) Did the application judge err by concluding that Lauren’s obligation to make royalty payments to Reichert covered products sold only in jurisdictions where Lauren had existing patent rights?
(2) Did the application judge err by concluding that the agreement did not cover patents and patent applications after the agreement was concluded and Reichert had become an employee of Lauren?
(3) Did the application judge err by not concluding that Lauren was estopped from denying its obligation to continue paying royalties to Reichert based on its worldwide gross monthly sales of Super Spacer products?
D. ANALYSIS
(1) The scope of the patent rights
[14] Section 2.02(b) of the agreement imposes an obligation on Lauren to pay royalties to Reichert until “the expiry of the Principals’ Patent Rights”.
[15] Reichert submits that royalty payments owed to him from Lauren, pursuant to s. 2.02(b), are based on total sales of Super Spacer products manufactured and sold by Lauren under any patent right without restriction. So long as any patent right exists in any jurisdiction, royalties are payable to Reichert under the agreement. Accordingly, the trial judge erred in finding that the plain and ordinary meaning of section 2.02(b) of the agreement was to limit the 1% royalty payment to sales of Super Spacer products only in jurisdictions where patent protection existed.
[16] The core principles for interpreting a commercial contract are well-known. They were recently summarized in this court by Blair J.A. in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254 at para. 24:
Broadly stated … a commercial contract is to be interpreted,
(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;
(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;
(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),
(d) in a fashion that accords with sound commercial principles and good business sense, and that avoid a commercial absurdity. [References omitted.]
See also: Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, and BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 CanLII 145 (SCC), [1993] 1 S.C.R. 12.
[17] In my view, the wording of the agreement, the intention of the parties, and sound commercial principles all support Lauren’s interpretation of the agreement.
[18] The wording of s. 2.02(b) of the agreement cannot be read alone. In isolation, there is ambiguity about the words “the expiry of the Principals’ Patent Rights”: does it mean the expiry of the Principals’ Patent Rights in the jurisdiction in question or the expiry of the Principals’ Patent Rights in all jurisdictions.
[19] However, the ambiguity is removed if the agreement is read “as a whole”. Section 2.04 stipulates that Super Spacer products are products manufactured and sold by Lauren “under Principals’ Patent Rights”. These are the products for which royalties are to be paid to Reichert. With respect to products sold in the United States, Lauren paid these royalties for seventeen years, until the United States patent expired in 2006.
[20] I agree with Lauren’s interpretation of the contractual language. For a product to be a Super Spacer product, it must be manufactured and sold by Lauren under the Principals’ Patent Rights. A product sold in a jurisdiction where there are no Principals’ Patent Rights is not, by definition, a Super Spacer product. Accordingly, when a patent that was once included in the Principals’ Patent Rights expires, products sold in the jurisdiction where the patent has expired are no longer sold under Principals’ Patent Rights because those particular rights no longer exist.
[21] With respect to the other two interpretive principles – the parties’ intentions and sound commercial principles – I agree with what the application judge said about these points:
I find the reasonable expectations of the parties, which would accord with reasonable commercial expectations, were that where no benefit was any longer conferred, such as the exclusive right to market the patented product, then no royalty payment would be required. It would not be commercially reasonable for the parties to have intended that Lauren would continue making royalty payments for patent rights in a jurisdiction, after those patent rights had expired.
[22] Reichert submits that, in making these conclusions, the application judge was reasoning outside the record because there was no evidence about reasonable commercial expectations in this case.
[23] I disagree. The application of a standard of commercial reasonableness does not necessarily require the consideration of any evidence, extrinsic or otherwise. Rather, the standard of commercial reasonableness is akin to a mode of reasoning which must be done objectively: see Kentucky Fried Chicken Canada v. Scott’s Food Service Inc. (1998), 1998 CanLII 4427 (ON CA), 41 B.L.R. (2d) 42 at para. 27 (Ont. C.A.). That is what the application judge did in this case, especially in the above passage from his reasons.
(2) Post-agreement inventions
[24] Reichert submits that patents and patent applications flowing from his post-agreement employment with Canadian subsidiaries of Lauren are covered by the agreement and, therefore, generate royalties in his favour.
[25] The provision that needs to be interpreted on this issue is s. 1.01(s) which, for ease of reference, I set out again:
1.01(s) “Principals’ Patent Rights” means any and all right, title and interest of the Principals in and to all patents and patent applications relating to multiple layer insulated glazing units, including, without restriction, the patents and patent applications listed in Schedule H, including all reissues, divisions, continuation and extensions thereof; [Emphasis added.]
[26] Before the application judge, Reichert contended that the new post-agreement patents were extensions to the patents listed in Schedule H. The application judge rejected this submission on the basis that extension patents are not a concept recognized in Canada under the Patent Act, R.S.C. 1985, c. P-4.
[27] Reichert does not revive the ‘extension’ argument on this appeal. Nor does he contend that the new post-agreement patents were reissues, divisions or continuation of the patents listed in Schedule H. Rather, his submission is that the new patents come within the word “relating” in s. 101(s).
[28] I disagree. I do not think that s. 101(s) supports the very broad linkage suggested by Reichert. My reading of this provision is that the only patents and patent applications that constitute Principals’ Patent Rights are those listed in Schedule H. Additionally, the only way for a patent or patent application that is not listed in Schedule H to fall within the definition of Principals’ Patent Rights is if it is a reissue, division, continuation or extension of the patents or patent applications listed in Schedule H.
[29] In short, having lost before the application judge on his attempt to link the new post-agreement patents to the specific word “extensions”, Reichert cannot achieve the same linkage through the much more general word “relating”.
(3) Estoppel
[30] Reichert points out that for seventeen years Lauren paid royalties to him based on worldwide sales of Super Spacer products, not only on sales in jurisdictions with existing patents and patent applications. Based on this conduct, Reichert asserts that Lauren should be estopped from resiling from this position when the United States patent came to an end in 2006.
[31] In Maracle v. Travellers Indemnity Co. of Canada, 1991 CanLII 58 (SCC), [1991] 2 S.C.R. 50 at 57, Sopinka J. set out the components of the doctrine of promissory estoppel:
The principles of promissory estoppel are well settled. The party relying on the doctrine must establish that the other party has, by words or conduct, made a promise or assurance which was intended to affect their legal relationship and to be acted on. Furthermore, the representee must establish that, in reliance on the representation, he acted on it or in some way changed his position.
[32] Reichert’s submission founders on the first of these components. The application judge made this finding:
In this case, the only evidence before me is that Lauren made the payments without knowledge that it was not required to do so, and the payments were inadvertent. I find that Lauren’s conduct does not amount to having full knowledge of the deficiency and there was no evidence that Lauren intended to relinquish its rights.
[33] I can see no basis for interfering with this finding. Indeed, the fact that, during the seventeen year period, Lauren’s excess payments were only 2.4% ($69,744 out of $2,876,745) of the total royalty payments to Reichert strongly suggests that Lauren’s overpayments before the United States patents expired were based on mere inadvertence. Accordingly, the attempts to correct them were not a belated and unfair change of position.
E. DISPOSITION
[34] I would dismiss the appeal. The respondent is entitled to its costs of the appeal which I would fix at $25,000, inclusive of disbursements and G.S.T.
RELEASED: May 14, 2008 (“JCM”)
“J.C. MacPherson J.A.”
“I agree Paul Rouleau J.A.”
“I agree G. Epstein J.A.”
[^1]: Some years later, Glover and Lauren entered into a different contractual arrangement. Glover is not a party in this litigation.