Court File and Parties
CITATION: Factor Gas v. Jean, 2010 ONSC 2454
DIVISIONAL COURT FILE NO.: 581/09
DC-08-77
DATE: 2010-07-14
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
SWINTON, SACHS AND WILTON-SIEGEL JJ.
BETWEEN:
FACTOR GAS LIQUIDS INC. Plaintiff/Appellant
– and –
NORMAN JEAN, MARGARET JEAN, 309947 ONTARIO LIMITED, BIGLER, L.P., BIGLER MANAGEMENT INC., and BIGLER FUELS, L.P. Defendants/Respondents
Peter J. Lukasiewicz, for the Plaintiff/Appellant
Angelo C. D’Ascanio, for the Defendants/Respondents Norman Jean, Margaret Jean and 309947 Ontario Limited
Thomas J. Corbett, for the Defendants/Respondents Bigler, L.P., Bigler Management Inc. and Bigler Fuels, L.P.
HEARD AT TORONTO: April 21, 2010
Reasons for Judgment
WILTON-SIEGEL J.
[1] The plaintiff Factor Gas Liquids Inc. (“Factor”) appeals with leave the order dated February 26, 2008 of Hambly J. (the “Set Aside Order”), in which he set aside his earlier order dated December 19, 2006 (the “Anton Piller Order”) and subsequent amending orders dated December 19, 2006 and March 23, 2007. The appeal highlights the significant responsibilities assumed by plaintiffs seeking an Anton Piller order on an ex parte motion.
Procedural Background
[2] On December 18, 2006, Factor commenced an action by way of statement of claim against a former senior sales manager of Factor, Norman Jean (“Jean”), his personal holding corporation 309947 Ontario Limited (“309947”), and Jean’s wife Margaret Jean (collectively, the “Jean Defendants”). The statement of claim alleges two broad causes of action:
(1) damages in the amount of $5 million against Jean and three Texas entities, Bigler, L.P., Bigler Management Inc. and Bigler Fuels, L.P (the “Bigler Defendants”), resulting from Jean’s theft of confidential information and use of the confidential information by Jean and the Bigler Defendants to divert business of Factor to the Bigler Defendants and to enable the Bigler Defendants to compete unfairly with Factor; and
(2) fraud and deceit in respect of a secret commission obtained by the Jean Defendants.
[3] On December 19, 2006, the motion judge granted the Anton Piller Order on an ex parte basis. There is no transcript of the hearing on that date and the motion judge did not provide written reasons. The Anton Piller Order was served on December 20, 2006.
[4] The salient portion of the Anton Piller Order for this appeal is paragraph 10, which provides:
- THIS COURT ORDERS that the Authorized Persons:
(a) locate, inspect, access, retrieve, remove, copy and/or image information from any device or media capable of containing or storing data, including computers (including laptops), CD-ROMs, CD-RWs, USB keys, floppy disks, flash drives, cell phones, Blackberrys, Personal Digital Assistants (PDA), telephones (collectively “Electronic Data”); and
(b) to [sic] locate, inspect and remove any paper documents pertaining to the business of or making reference to:
(i) Factor Gas Liquids Inc. (“Factor”);
(ii) the Defendants’ interactions with or business with any of the following: Joel Herger (“Herger”), Greg Cox (“Cox”), Larry R. Cook, Larry R. Cook & Associates P.C., DMJ Services L.L.C, David M. Johnson;
(iii) the Defendants’ interactions with or business with any of the following: Bigler L.P. and any related or affiliated entities, including Bigler Management, Inc., Bigler Petrochemical, L.P., Bigler Terminals, L.P., Bigler Trading Company, Inc., Bigler Fuels LP, or any their officers, directors, agents or employees and related or affiliated companies (collectively the “Bigler Entities”); and
(iv) LANXESS Inc. or any of their respective affiliate companies (the “Lanxess Entities”);
[5] Motions to set aside the Anton Piller Order were served shortly after the execution of the Anton Piller Order but were not argued until February 25 and 26, 2008. The two orders amending the Anton Piller Order relate to procedural matters and are not relevant for present purposes.
[6] By order dated February 26, 2008, the motion judge set aside the Anton Piller Order. In doing so, the motion judge provided oral reasons on the same date (the “Oral Reasons”), which he supplemented with written reasons dated April 8, 2008 (the “Written Reasons”). The Oral Reasons and the Written Reasons are collectively referred to as the “Reasons”.
[7] In addition, on the following day, February 27, 2008, the motion judge heard a summary judgment motion brought by Factor against the Jean Defendants in respect of the secret commission. At that hearing, Jean and 309947 consented to an order finding them jointly and severally liable in the amount of $381,537.81 and the motion judge found that their actions in respect of the secret commission constituted fraud, deceit and breach of fiduciary duty.
[8] Later, the motion judge issued written reasons dated July 9, 2008 (the “Costs Reasons”) dealing with both costs of the Anton Piller Order proceeding, including the defendants’ motions to set aside the Anton Piller Order, and costs of the summary judgment motion. In respect of the Anton Piller Order, the motion judge awarded costs payable to the Jean Defendants in the amount of $228,507 and to the Bigler Defendants in the amount of $357,867. In respect of the summary judgment motion, he awarded costs in favour of Factor in the amount of $236,954 to be offset to the extent of the costs of the Anton Piller Order proceeding.
[9] Factor acknowledges that it has pursued this appeal for the sole purpose of setting aside the associated costs order. The Jean Defendants argue that Factor’s appeal is either moot or academic because, if successful, Factor does not propose to reinstate the Anton Piller Order. We do not agree. A successful appeal has meaningful consequences for the parties, even if Factor does not seek to reinstate the Anton Piller Order. In such circumstances, the cost award against Factor in respect of the Anton Piller Order would necessarily be set aside, requiring a further hearing regarding Factor’s possible entitlement to costs. This is sufficient to exclude the Jean Defendants’ argument that the appeal is moot or academic.
[10] The defendants have also drawn the Court’s attention to an order dated March 30, 2010 of Templeton J. in respect of a stay of proceedings against the Bigler Defendants resulting from their insolvency proceedings in the United States. The order of Templeton J. recognizes such insolvency proceedings as a “foreign main proceeding” for the purposes of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended. In view of the disposition of this appeal, it is unnecessary to address the issues raised by the defendants regarding the significance of such stay for the appeal and, accordingly, we decline to do so.
Factual Background
[11] Factor employed Jean as a senior sales manager from September 4, 2001 until August 8, 2006. On or about September 1, 2006, Jean began working for Bigler Fuels, L.P. (“Bigler”) as a marketing manager. As Bigler had no office in Canada, Jean’s home became the Canadian place of business of Bigler.
[12] In late October, 2006, Factor began reviewing images of Jean’s work computer screen taken during the time he was employed by Factor. The images revealed a spreadsheet in which Jean monitored his on-going receipt of moneys pursuant to the secret commission arrangements that were the subject of the summary judgment motion. The images also revealed that Jean had copied confidential Factor information onto portable USB storage discs, although the actual content of the files that were copied was not determinable. Lastly, the images also revealed that Jean communicated with representatives of the Bigler Defendants through at least one personal, rather than Factor, e-mail account. In addition, the snapshots revealed that Jean had purchased, installed and used software designed to erase and destroy electronic files on his computer.
[13] As mentioned, Factor commenced its action on December 18, 2006 and brought its ex parte motion for the Anton Piller Order on December 19, 2006. The evidence in support of the requested relief was set out in an affidavit of Barry Vosburg (“Vosburg”), the president of Factor (the “Vosburg Affidavit”).
[14] In addition to reciting the results of Factor’s review of the snapshots of Jean’s computer described above, the Vosburg Affidavit contains the following specific allegations by way of statements of Vosburg’s belief:
that Jean communicated confidential Factor information to representatives of the Bigler Defendants while a Factor employee using personal email accounts;
that Jean was working with the Bigler Defendants to appropriate a particular corporate opportunity regarding a mothballed Louisiana plant to produce LPG products, which should have been offered to Factor;
that Jean, in concert with the Bigler Defendants, was diverting Factor’s business arrangement with a third party, Lanxess Inc. (“Lanxess”), to the Bigler Defendants;
that Jean was diverting Factor’s customers to the Bigler Defendants. In this connection, Vosburg identified two specific customers, KCS Energy Inc. (“KCS”), described as a “substantial customer”, and Elkorn Field Services Company (“Elkorn”). The affidavit stated that the KCS business had been lost and, as a result of solicitation efforts that Vosburg was concerned had occurred, there was a “strong possibility” that the Elkorn business would also be lost when Factor’s contract with Elkorn came up for renewal in the spring of 2007;
that, if left unchecked, Jean will continue to use Factor’s confidential information to misappropriate business from Factor and that the KCS deal was merely the first of which Factor had become aware; and
that Jean had received a secret commission in excess of $360,000 in respect of a supply contract between Factor and Lanxess, for which a spreadsheet prepared by Jean was attached showing extensive detail pertaining to the calculation of his secret commission based on Factor’s own transaction files.
[15] The Vosburg Affidavit describes the evidence sought in the application for an Anton Piller order as (1) the confidential information removed by Jean and any documents created by Jean from such information, (2) electronic files that confirm the secret commission arrangement and (3) electronic files that confirm Jean’s business development discussions with the Bigler Defendants.
Set Aside Decision of the Motion Judge
Oral Reasons
[16] In the Oral Reasons, the motion judge recited the four essential conditions for an Anton Piller Order, which were set out by Binnie J. in Celanese Canada Inc. v. Murray Demolition Corp., 2006 SCC 36, [2006] 2 S.C.R. 189 at para. 35 as follows:
First, the plaintiff must demonstrate a strong prima facie case. Second, the damage to the plaintiff of the defendant's alleged misconduct, potential or actual, must be very serious. Third, there must be convincing evidence that the defendant has in its possession incriminating documents or things, and fourthly it must be shown that there is a real possibility that the defendant may destroy such material before the discovery process can do its work.
The motion judge also noted that the onus of proof on a motion for such relief is a high one, as an Anton Piller order is the civil equivalent of a criminal search warrant. He also noted that the applicant for such an order is obligated to make full, frank and fair disclosure.
[17] In his brief description of the relevant facts, the motion judge concentrated on Factor’s allegation that Jean used confidential Factor information obtained while an employee to divert clients from Factor to the Bigler Defendants after he started working for them. The motion judge then excerpted the following disclosure from paragraph 89 of the Vosburg Affidavit:
“On or about June 30, 2006 Lanxess gave a year’s advance written notice that it wished to terminate our exclusive agency relationship on or about June 30, 2007. The Lanxess relationship has been a long term and mutually profitable relationship for both Factor and Lanxess and I am concerned that Mr. Jean in concert with Bigler or a related entity is diverting that relationship to Bigler or a related entity.”
[18] The motion judge understood this excerpt to imply that Jean attempted to divert the Lanxess business to Bigler while still employed by Factor and that the Lanxess notice of termination to Factor on June 30, 2006 (prior to Jean’s departure) was strong evidence to this effect. It is common ground that Vosburg did not disclose that there had been a long-standing dispute between Factor and Lanxess regarding calculation of monies owed to Factor under an agreement between them and that, shortly after the Lanxess notice of termination, Factor commenced an action against Lanxess claiming $2.8 million in relation to that dispute.
[19] The motion judge also referred to the statements in the Vosburg affidavit asserting that Jean was responsible for the loss of the KCS and Elkorn business that Factor previously had with those companies. The motion judge noted that the annual revenue loss from KCS, which was between $110,000 and $125,000 according to the Vosburg Affidavit, had been revealed on cross-examination to constitute less than 2% of Factor’s annual gross profit. He also commented that there was no evidence of the impact on Factor of the loss of the Elkorn business nor was there any evidence of efforts by Factor, such as by a letter or a telephone call to these companies, to determine whether Jean had anything to do with the loss of the KCS or Elkorn business.
[20] The motion judge then stated his conclusion in the following terms:
All four conditions in Celanese must be met. The affidavit of Vosburg failed to make proper disclosure of any threat to Factor which would cause serious damage to Factor of Jean’s alleged misconduct. When the full story is told, this threat was minimal, if it was a threat at all. The motions are allowed.
There were many other points raised both in the factums and in argument before me. I reserve my right to supplement these reasons with further written reasons when time permits.
Written Reasons
[21] In the Written Reasons, the motion judge set out the facts as he now understood them regarding, among other matters,
- the supply agreement and related dispute between Lanxess and Factor;
- Factor’s investigation of Jean’s activities while he was an employee of Factor;
- the secret commission arrangement;
- a concurrent legal action commenced by Factor in Texas on December 19, 2006 against the Bigler Defendants and certain other parties, including a “Demand for Preservation of Evidence and Electronically Stored Information” (the “Texas Demand”) served on such defendants on the same day; and
- communications between Factor and Microsoft as a result of which Microsoft advised that it would preserve Jean’s emails on his hotmail account indefinitely (the “Microsoft commitment”) and would produce them if Factor obtained a United States court order to that effect.
[22] Four conclusions of the motion judge in the Written Reasons are relevant to this appeal.
[23] First, the motion judge noted that the dispute between Lanxess and Factor had not been disclosed in connection with disclosure of the termination of the Lanxess supply agreement. He also noted that, while in his opinion the inference to be drawn from paragraph 89 of the Vosburg Affidavit was that Jean was responsible for the Lanxess termination of the contract as a result of his efforts to divert the Lanxess supply business to the Bigler Defendants, or to the business that he and the Bigler Defendants were creating, the actual evidence was that neither Jean nor the Bigler Defendants had anything to do with the breakdown in the business relationship between Factor and Lanxess. He found Vosburg in breach of his duty to make proper inquiries of Lanxess regarding these facts before applying for an Anton Piller order. This is discussed further below.
[24] The motion judge then dealt with the allegations in the Vosburg Affidavit regarding the loss of business. He noted that the Lanxess business was important to Factor but that the KCS business represented a loss of only approximately 2% of gross margin and that no one at Factor had attempted to get the business back. He concluded that whether the loss of business of Lanxess or KCS would cause serious damage to Factor was for the judge, rather than Factor, to decide and that there was “a total absence of evidence” in the Vosburg Affidavit upon which a judge could make a decision to grant an Anton Piller order.
[25] Third, the motion judge noted that he had not been told of Microsoft’s commitment to preserve the emails. Through a court order directed to Microsoft, Factor was subsequently able to obtain the emails Jean sent to representatives of the Bigler Defendants with whom he had been communicating using his private email account. On this basis, the motion judge concluded that it had not been necessary to get these emails by means of an Anton Piller Order. Factor acknowledges that it did not disclose the substance of the Microsoft commitment at the time of the ex parte motion for the Anton Piller Order.
[26] Lastly, the motion judge concluded that the statements in the Vosburg Affidavit were false and misleading insofar as they failed to disclose the Texas Demand. He found that the Texas Demand required the Bigler Defendants named in this action to preserve the same evidence as was sought in the Anton Piller Order. While Factor did disclose the Texas litigation, it did so in the context of a request for an order excluding the operation of the deemed undertaking rule and did not disclose the Texas Demand.
[27] Accordingly, the motion judge concluded that Factor breached its duty of disclosure in failing to disclose that (1) Jean’s emails from his personal hotmail account were already preserved indefinitely (this is understood to be a reference to the Microsoft commitment); (2) Factor had commenced an action against the Bigler Defendants and other parties in Texas seeking the same relief as in Ontario; and (3) Factor failed to advise that service of the Texas Demand the same day as the motion would likely result in the preservation and production of the same documents sought in the Anton Piller Order. The motion judge concluded by stating that this material should have been before him in order that he, not Factor, could decide whether an Anton Piller order was appropriate, given the other steps already taken and being taken to preserve the evidence sought by Factor.
Standard of Review
[28] The issues involved in this appeal involve questions of law and of mixed fact and law. The standard of review on questions of law is correctness: see Housen v. Nikolaisien, 2002 SCC 33, [2002] 2 S.C.R. 235 at para. 8. The standard of review on matters of mixed fact and law lies along a spectrum. In this proceeding, the findings of the motion judge that Factor failed to establish the essential conditions set out in Celanese for an Anton Piller order, and that Factor failed to disclose material facts in its ex parte motion, involve issues of mixed fact and law. Factor alleges that the motion judge erred in making these findings based on errors of law pertaining to the correct legal standard. For the reasons set out below, we consider that the motion judge made no error of law in making such findings and that, accordingly, the applicable standard with respect to such findings is whether there is a palpable and overriding error in the appreciation of the facts upon which such findings are based.
Analysis and Conclusions
[29] The test for an Anton Piller order, as set out in Celanese at paragraph 35, has been recited above. It is common ground that, on a motion to review an Anton Piller order previously granted, the Court is to conduct a de novo hearing regarding the entitlement of the plaintiff to continuation of the Anton Piller order: see e.g. Bell ExpressVu Limited Partnership v. Rodgers, [2007] O.J. No. 4569 at para. 11 (S.C.J.) per Pepall J., which also confirms that, on a review of an Anton Piller order, the Court is entitled to consider evidence obtained since the granting of the order, including the “fruits of the search”, as well as the evidence before the judge who made the order.
Preliminary Observations
[30] Before addressing the decision of the motion judge, we set out a number of principles and observations that govern the conclusions reached herein.
[31] First, as the motion judge notes in his reasons, an Anton Piller order is an extraordinary remedy. In Celanese at para. 32, Binnie J. stated that such orders should only be granted in the clear recognition of their exceptional and highly intrusive nature and, where granted, the terms should be carefully spelled out and limited to what the circumstances show to be necessary.
[32] Second, the purpose of an Anton Piller order is limited to ensuring that unscrupulous defendants are not able to circumvent the courts’ processes by, on being forewarned, making relevant evidence disappear: see Celanese at para. 32. The purpose of an Anton Piller order is therefore to preserve evidence. This is reflected in the four conditions to obtaining such an order.
[33] In particular, an Anton Piller order is not a means of conducting a pre-action discovery process with a view to determining whether, or to what extent, a cause of action exists. This is reflected in the need to establish both a strong prima facie case on the merits and convincing evidence that the defendant has incriminating evidence in its possession. An Anton Piller order should not be granted where the purpose is to conduct a “fishing expedition”. The right of a plaintiff to pre-action discovery is governed by the principles emanating from the cases following the decision in Norwich Pharmacal Co. v. Comrs. of Customs and Excise, [1974] A.C. 133 (H.L.).
[34] Third, the purpose of an Anton Piller order is to preserve evidence of past wrongful conduct, not to prevent future conduct, although it may have that result indirectly to the extent that seizure of evidence in a defendant’s hands may render the defendant incapable of continuing the activity that gave rise to the claim based on past wrongful conduct.
[35] To prevent future wrongful activity, a plaintiff has available the remedy of injunctive relief. Indeed, a request for such injunctive relief is often included in a motion for an Anton Piller order. In the present proceedings, the Anton Piller Order included provisions restraining the defendants from disclosing or using any of the confidential information allegedly taken by Jean, or any documents generated by the defendants based on such confidential information.
[36] However, the test for such injunctive relief in respect of prospective breaches is different from that of an Anton Piller order. To obtain an Anton Piller order, the plaintiff must satisfy the higher, more onerous, standard of a strong prima facie case on the merits in respect of alleged wrongful conduct prior to the order and must demonstrate very serious damage, potential or actual, resulting from such conduct.
[37] Fourth, the combined effect of the first and second conditions in Celanese is that an Anton Piller order is only available if a plaintiff is able to establish a strong prima facie case that the defendant has engaged in wrongful conduct that has resulted, or will potentially result, in very serious damage to the plaintiff.
[38] Factor submits that it is sufficient for the purposes of the second condition to establish a substantial risk of an inability of a plaintiff to prosecute its case should the defendant destroy the incriminating documents in its possession. It relies on comments of Farley J. in Ontario Realty Corp. v. P. Gabriele & Sons Ltd., [2000] O.J. No. 4341 (S.C.J) at para. 38 citing Capitanescu v. Universal Weld Overlays Inc., [1996] A.J. No. 1038 at para. 23 (Q.B.) per Paperny J.
[39] While a plaintiff’s inability to prove its case is a relevant consideration in respect of the second requirement of Celanese, we do not think it displaces entirely the need to demonstrate a strong prima facie case not only of wrongful activity but also of damage resulting from such activity that is sufficiently serious to warrant the issue of the extraordinary remedy of an Anton Piller order. While it may be unclear from the case law whether this requirement to demonstrate a serious damage claim is subsumed under the first or the second condition in Celanese, such a requirement is an important component of the test for an Anton Piller order. Wrongful activity that does not result in a serious damage claim, actual or potential, cannot justify the issuance of an intrusive order of this nature.
[40] Fifth, as is the case with other mandatory injunctive relief of an extraordinary nature, the plaintiff is required to provide an undertaking as to damages in applying for an Anton Piller order. This reflects the fact that a plaintiff could be liable for a defendant’s damages, including the defendant’s costs, if it is unable to establish the conditions for a continuation of the order on the review motion. Such a circumstance could result for two general reasons – a failure to satisfy the conditions in Celanese based on an assessment of the evidence before the Court or, alternatively, a failure to disclose material facts or other behaviour disentitling the plaintiff to the court’s exercise of discretion.
[41] With respect to the former, it should be emphasized that the fact that the plaintiff was able to satisfy the Court on an ex parte basis that it appeared to have a strong prima facie case does not remove its exposure to costs if it fails to satisfy the Court to the same effect on the review motion. The requirement of a strong prima facie test at the ex parte stage protects a defendant against unwarranted intrusion of its premises in recognition of the extraordinary nature of an Anton Piller order. It does not provide a “safe harbor” to plaintiffs.
[42] This result is consistent with the onus placed on plaintiffs seeking such relief on an ex parte basis. The strong prima facie case requirement is, in substance, a form of assurance from the plaintiff to the Court of the existence of a substantial likelihood of success in the action that justifies extraordinary relief at the very commencement of the proceeding. It also provides some assurance to the Court that the relief is being sought for purposes of preservation of evidence pertaining to wrongful behaviour that has actually occurred of which the plaintiff already has knowledge, rather than for the purposes of a fishing expedition.
[43] If, therefore, a plaintiff brings an motion for an Anton Piller order having as its principal purpose the prevention of future wrongful activity or a search for evidence to establish whether wrongful activity has occurred, the plaintiff will run a serious risk of being unable to establish the conditions for a continuation of the order on the review motion, however honestly and strongly it believed at the time of the ex parte hearing that the wrongful activity had occurred. As a practical matter, in such circumstances, plaintiffs also run a serious risk of being found to have omitted material disclosure, particularly where strongly held beliefs of wrongful activity are, in effect, put forward as statements of fact without any actual verification.
[44] Lastly, an Anton Piller order is discretionary relief issued by the Court in the exercise of its inherent jurisdiction. Two important consequences follow from this observation.
[45] The first consequence is that it is a relevant consideration in the exercise of the Court’s discretion whether preservation of the evidence is necessary to prove the plaintiff’s case or merely confirmatory of a case for which the plaintiff already has substantial evidence. Similarly, it is a relevant consideration whether the evidence is available to the plaintiff by other means that are not as intrusive as an Anton Piller order. Being an extraordinary remedy, an Anton Piller order is available only in circumstances in which the plaintiff can demonstrate a valid need for relief in order to obtain and preserve the relevant evidence.
[46] A second consequence is that the Court may decline to exercise its discretion to grant or continue an Anton Piller order if it determines that, in seeking the ex parte relief, the plaintiff failed to honour its obligation to make full, frank and fair disclosure by omitting or misrepresenting material facts: see United States of America v. Friedland, [1996] O.J. No. 4399 at para. 28 (Gen. Div.) per Sharpe J. (as he then was). At para. 27 of that decision, Sharpe J. stated that it was incumbent on a moving party to make a balanced presentation of the facts and law, which includes informing the Court of any points of fact or law known to it which favour the other side. He did caution, however, in para. 31 that the defects complained of pertaining to non-disclosure must be relevant and material to the discretion to be exercised by the Court.
[47] Courts have defined materiality objectively, rather than subjectively, for present purposes. In Pazner v. Ontario, 1990 6649 (ON SC), [1990] O.J. No. 1089 (Gen. Div.), at para. 11, Then J. defined “material facts” to constitute “all those facts of which the judge hearing the motion may need to be aware in coming to his or her decision, non-disclosure of which may affect the outcome of the motion.” Most recently, this test has been articulated in terms of a consideration of whether, if full disclosure had been given, the ex parte order “may well not have been made”: see Cantar Pool Products Ltd. (Re), [2006] O.J. No. 3693 at para. 16 (S.C.J.) per Spies J. On the other hand, it is also important to have regard to the caution expressed by Sharpe J. in Friedland at para. 31 that a plaintiff should not be deprived of a remedy because of mere imperfections in the affidavit material or because of non-disclosure of inconsequential facts.
Analysis of the Decision of the Motion Judge
[48] From the statement of his conclusion in the Oral Reasons, it is clear that the motion judge set aside the Anton Piller Order on two alternative grounds: (1) that Factor failed to satisfy the second condition in Celanese in failing to demonstrate a threat to Factor of serious damage resulting from Jean’s alleged misconduct; and (2) that Factor failed to make proper disclosure i.e. full, frank and fair disclosure at the time of the ex parte hearing. I will address each issue in turn.
Failure to Establish Serious Damage
[49] It is clear from the Reasons that the motion judge understood the serious damage alleged by Factor to be a loss of business diverted by Jean to the Bigler Defendants including appropriation of the corporate opportunity described in the Statement of Claim. It is also clear that the motion judge held that the Anton Piller Order should be set aside because Factor failed to demonstrate that the alleged loss of business constituted serious damage. It should be stressed that the motion judge reached this conclusion on the basis of the evidence before him on the review of the Anton Piller Order independently of his findings of a failure to disclose material facts pertaining to this issue. In my view, his conclusion was supported by the evidence and involved no error of law.
[50] Based on the Vosburg Affidavit, there were two possible grounds for an Anton Piller order: (1) use of confidential Factor information by Jean and the Bigler Defendants to divert Factor business and opportunities to the Bigler Defendants; and (2) the secret commission arrangement. The motion judge focused exclusively on the former in his Reasons. I will therefore address first his conclusions relative to this alleged threat of serious damage. The issue of whether the motion judge erred in not continuing the Anton Piller Order based on the existence of the secret commission arrangement is addressed below in the context of Factor’s criticisms of the Set Aside Order.
[51] In the Vosburg Affidavit, Factor alleged four principal circumstances evidencing very serious actual or potential damage resulting from Jean’s alleged misconduct: (1) termination of the Lanxess supply contract; (2) loss of the KCS business; (3) loss of the Elkhorn business; and (4) loss of the alleged corporate opportunity.
[52] By the time of the hearing to review the Anton Piller Order, it had become clear that (1) Jean and the Bigler Defendants had nothing to do with the termination of the Lanxess supply contract; (2) the KCS business lost represented less than 2% of the gross profit of Factor; and (3) neither Jean nor the Bigler Defendants had appropriated, or were in the process of appropriating, the alleged corporate opportunity. In addition, there was no evidence of any loss of business with Elkorn and no evidence that Jean actually had anything to do with Factor’s loss of the KCS business.
[53] Taken collectively, there is ample evidence to support the motion judge’s conclusion that Factor failed to demonstrate any threat that would cause serious damage to it and therefore failed to satisfy the second condition in Celanese.
[54] Faced with this reality, which Factor does not deny, Factor makes two submissions to the effect that the motion judge erred in law in reaching these conclusions.
[55] First, Factor argues that it nevertheless satisfied the second condition in Celanese by demonstrating a threat of serious damage in the form of the secret commission monies taken by Jean. While there is no transcript of the ex parte hearing, the clear implication from the Reasons is, however, that the motion judge did not consider the circumstances pertaining to the secret commission as sufficient on their own to justify the issuance of an Anton Piller order. I note that this conclusion is consistent with the overall approach in the Vosburg Affidavit and in Factor’s statement of claim, which stress the theft of confidential Factor information and its use by Jean and the Bigler Defendants to divert Factor business and opportunities to the Bigler Defendants.
[56] The question remains, however, whether the motion judge erred in setting aside the Anton Piller Order notwithstanding the evidence of loss to Factor in the form of the secret commission arrangement. This is a matter of mixed fact and law: did the facts alleged in the Vosburg Affidavit justify an Anton Piller order solely on the basis of the secret commission arrangement? I conclude that it did not on the reasoning set out below.
[57] As mentioned above, the purpose of an Anton Piller order is to preserve evidence which is necessary to prove the plaintiff’s case and of which there is a serious risk of destruction by the defendant. In respect of the secret commission arrangements, the Vosburg Affidavit, itself, sets out a description of the pricing of the sales under the relevant supply contract and the basis for Factor’s allegations. It includes spreadsheets and other documentary evidence taken from Factor’s own records, including a snapshot of Jean’s own spreadsheet, establishing the specific details of the payments to Jean.
[58] In these circumstances, while Factor has established a strong prima facie case of the secret commission, that is not sufficient, on its own, to warrant an Anton Piller order. The fact of a secret commission, while a wrongdoing, does not automatically justify an order for preservation of evidence of such wrongdoing. In this case, Factor could not establish serious damage that would result if the order were not granted. There was no evidence that the amount in question, $360,000, constituted “serious damage” to Factor. In addition, the transactions in question had already terminated. Therefore, there was no potential risk of serious damage in the future. The only damage that could be alleged was a loss of evidence that was necessary to prove the plaintiff’s case. However, Factor already possessed more than adequate means of establishing the arrangement. This is evidenced by the fact that, as Factor did not obtain any relevant evidence on the execution of the Anton Piller Order, it follows that Factor obtained the summary judgment in its favour in reliance on the evidence set out in the Vosburg Affidavit.
[59] In the Vosburg Affidavit, Factor submitted that it sought an Anton Piller order in respect of the secret commission arrangement because access to Jean’s personal computer records would clear up whether the commission was taken in association with any of the other companies or individuals involved in the transactions. In making this statement, Factor has in effect admitted to seeking an Anton Piller order for an improper purpose of obtaining pre-action discovery.
[60] Accordingly, I conclude that the evidence respecting the secret commission arrangement did not, on its own, warrant the issue of an Anton Piller order. Therefore, the motion judge made no error of law in setting it aside.
[61] Factor’s second submission is that, for the purposes of the second condition in Celanese, it was sufficient for Factor to demonstrate a threat of serious damage in the form of a loss of its ability to prosecute its action if the Anton Piller Order had not been granted. With respect to the claim in respect of the secret commission, this is manifestly not the case for the reasons set out above. In respect of the claim of damage based on use of the confidential information, this submission also fails. Indeed, the reason why it fails reinforces the reasonableness of the motion judge’s conclusion.
[62] Factor has made out a strong prima facie case that Jean had appropriated confidential Factor information. Admittedly, as Factor argues, the only clear evidence of such appropriation would have been the presence of electronic files on Jean’s personal computing or storage devices containing such information. However, theft of confidential information without use cannot result in damage, much less serious damage, although it would entitle a plaintiff to mandatory injunctive relief requiring the return of the information and preventing future use.
[63] The critical issue in Factor’s action was proof of actual loss of business. Factor was in at least as good a position as Jean to establish such evidence based on knowledge of its client base and a review of its own financial records. If it had lost business, the loss would have been reflected in its own revenues. The reality, however, is that, at the time of the Vosburg Affidavit, there was no such evidence because there had been no actual loss of business attributable to Jean’s misconduct, apart from the loss of the KCS business in which Jean might have been implicated.
[64] Even on its own reading of the second condition in Celanese, Factor could not establish serious damage in the form of an inability to prosecute its case when it was unable on the basis of its own records to establish any loss of business attributable to Jean. It simply had no viable case for serious damage. As discussed further below, all that Factor had were suspicions and a concern that it might lose business in the future. As with the secret commission arrangement, Factor sought the Anton Piller Order in order to determine whether its suspicions regarding its loss of the business of KCS and Elkorn were correct. It also sought the order to prevent future loss, for which an injunction is the appropriate remedy. I do not accept that the second condition in Celanese can be satisfied by demonstrating a need to preserve Jean’s records in respect of appropriated confidential information when Factor’s claim for damages for use of such information could not succeed, except, at best, for a modest amount.
[65] Based on the foregoing, I conclude that the motion judge did not err in law in reaching the conclusion that Factor failed to satisfy the second condition in Celanese for the granting of an Anton Piller order.
Failure to Make Full, Frank and Fair Disclosure
[66] In his Written Reasons, the motion judge also finds that Factor failed to make full, frank and fair disclosure in respect of a number of matters set out above. In broad terms, the non-disclosure that the motion judge identified falls into two categories:
(i) non-disclosure of facts relating to his prior determination that Factor had demonstrated serious potential or actual damage resulting from the alleged misconduct of Jean and the Bigler Defendants; and
(ii) non-disclosure of facts that were relevant to the issue of whether it was necessary to issue the Anton Piller Order in order to ensure the preservation of the evidence in Jean’s hands that was relevant to Factor’s claim.
The motion judge concluded that the non-disclosure warranted an order setting aside the Anton Piller Order. As mentioned above, I understand this determination to be an alternative basis for the Set Aside Order.
[67] As addressed above, a Court may set aside an Anton Piller Order notwithstanding satisfaction of the conditions in Celanese if the Court is of the view that the plaintiff failed to disclose material facts within its knowledge at the time of the ex parte hearing respecting the order. Such a determination involves issues of mixed fact and law. A motion judge is entitled to reasonable deference in the exercise of the Court’s discretion. For this purpose, material facts are facts that, if disclosed, may well have affected whether the order would have been issued.
[68] In respect of each category of alleged non-disclosure, I will first address the findings of the motion judge that Factor failed to disclose material facts. I will then address whether the motion judge erred in determining to set aside the Anton Piller Order on the basis of such non-disclosure.
Alleged Non-Disclosure of Facts Pertaining to Serious Damage
[69] The motion judge found that there were three instances of material non-disclosure relating to his determination that Jean’s wrongful activity resulted in serious damage to Factor. There was ample evidence before the motion judge to find that Factor failed to disclose material facts in respect of each of these disclosures. In my view, the motion judge was entitled to set aside the Anton Piller Order on the basis of such non-disclosure in accordance with the principles articulated in Friedland, supra.
[70] First, the motion judge found that Factor’s failure to state the circumstances of the Lanxess notice of termination constituted non-disclosure of a material fact. I agree. As mentioned, the Vosburg Affidavit emphasizes serious damage to Factor’s business in support of its application. Lanxess was Factor’s largest single client. The language of paragraph 89 compels the inference that the Lanxess notice of termination resulted in some manner from Jean’s actions to move the Lanxess business to the Bigler Defendants. Even worse, it suggests that this activity occurred while Jean was still an employee of Factor. While Factor disputes this inference, it offers no reasonable alternative explanation for the presence of this paragraph in the Vosburg Affidavit.
[71] Second, the motion judge found that Factor failed to disclose the relative insignificance of the loss of the KCS business to Factor. Factor suggests that the purpose of the reference to the loss of the KCS business was to indicate the potential for additional loss of business if the Anton Piller Order were not granted. That is not, however, the purpose of such an order. As mentioned above, the purpose is to preserve evidence of past wrongful activity. In the context of an application for an Anton Piller order, the reference in a supporting affidavit to the loss of the KCS business must be read as a demonstration of actual serious damage to Factor. Moreover, if such evidence was intended to be merely illustrative of possible future harm, Factor failed to include any evidence of serious damage to it.
[72] Lastly, the motion judge found that Factor breached a duty to make proper inquiries before resorting to its application for an Anton Piller order. He mentioned two specific instances:
a failure to contact a named representative of Lanxess to ask “if Jean had approached him for Factor’s business”; and
a failure to contact KCS to determine whether Jean had anything to do with KCS moving its business to Bigler, as well as to determine whether Factor could retrieve the business.
For the reasons set out below, while the motion judge expressed his conclusions in terms of a breach of a duty to make proper inquiries, I consider that these conclusions are more properly characterized as elements of his conclusion that Factor failed to make full, frank and fair disclosure in respect of its allegations of serious damage.
[73] The motion judge based these conclusions on a statement of Ralph Gibson L.J. of the English Court of Appeal in Brink’s MAT Ltd. v. Ellcombe and others, [1988] 1 W.L.R. 1350 at p. 1356 (C.A.) to the effect that an applicant for extraordinary equitable relief (in that case, for a Mareva injunction) must make proper inquiries before making such application and that the duty of disclosure extends to any additional facts that an applicant would have known if it had made such inquiries.
[74] The motion judge’s findings must be put in their proper context. In addition to paragraph 89 set out above, the Vosburg Affidavit contains statements of Vosburg’s belief or of Vosburg’s suspicions regarding Factor’s loss of the KCS and the Elkorn business. The motion judge was entitled to assume on the ex parte hearing that the plaintiff put forward all such statements in good faith. In the context of a motion for an Anton Piller order where the requirement is demonstration of a strong prima facie case on the merits and of serious damage resulting from the defendant’s alleged misconduct, good faith implies that the plaintiff has knowledge, or very strong reasons to believe, that the defendant has documentary or other evidence that will confirm the plaintiff’s beliefs or suspicions. I agree with the motion judge that the duty required of a plaintiff to act in good faith carries with it a duty to make proper inquiries prior to bringing such a motion.
[75] In the present proceeding, however, the evidence before the motion judge on the review of the Anton Piller Order established that Factor lacked such knowledge and had no factual support for its suspicions or beliefs. The failure to indicate this fact – i.e., the failure to indicate that it had no more than a suspicion or belief and consequently was seeking an Anton Piller order as a means of obtaining pre-action discovery – constitutes non-disclosure of a material fact. While the motion judge does not express the issue of non-disclosure in these terms, I believe that the foregoing captures the essential issue as he dealt with it. On this basis, the motion judge had reasonable grounds for concluding that Factor failed to disclose material facts pertaining to the allegation of serious damage.
[76] Factor argues that the motion judge erred in reaching these conclusions because he proceeded on the basis that Factor failed to discharge a duty to take reasonable steps and make reasonable inquiries to obtain facts which could support the case for the opposing side not to grant the order. I do not agree for the following reasons. First, although the substance of paragraph 21 of the Written Reasons could have been expressed differently, I do not think that the motion judge intended to suggest more than that a plaintiff was required to make proper inquiries prior to bringing a motion for an Anton Piller order. I note that, in argument, Factor’s counsel accepted that it was subject to such a duty.
[77] Second, insofar as Factor’s real objection is that the inquiries suggested by the motion judge were not “proper inquiries” in the present context, I also do not think that the motion judge erred in a manner that vitiated his decision. With respect to the suggestion that Factor could have contacted Lanxess, I accept that such an inquiry might not have been a “proper inquiry” to the extent that it would have alerted a possible co-participant in Jean’s alleged wrongdoing. However, this issue is a side-show given the evidence that Factor itself knew the real reason for the termination of the supply arrangement and its loss of business. With respect to the suggestion that Factor could have contacted KCS, there was no suggestion that KCS was somehow involved in Jean’s alleged wrongdoing. The suggestion was therefore not inappropriate. In addition, in respect of each finding, Factor’s argument ignores the more fundamental issue that, if it wished the Court to proceed on the basis that Vosburg’s statements regarding loss of business were meaningful, it had an obligation to make a proper investigation, which it failed to do in the circumstances.
[78] Accordingly, I conclude that the motion judge committed no palpable and overriding error in determining either (1) that Factor failed to disclose material facts in respect of each of the three instances of non-disclosure pertaining to its allegation of serious damage, or (2) that, collectively, such non-disclosure justified the Set Aside Order.
Alleged Non-Disclosure of Facts Pertaining to Necessity for the Anton Piller Order
[79] The motion judge also found that, in omitting any reference to Microsoft’s commitment to it and to the Texas Demand, Factor failed to disclose that it had adequate, alternative means of preserving (1) the email traffic to and from Jean’s hotmail account and (2) any emails and confidential information received by the Bigler Defendants from Jean. The motion judge concluded that the Anton Piller Order should also be set aside on the basis of this non-disclosure.
[80] Factor submits that the motion judge erred in two respects in reaching this conclusion: (1) he erred in law in proceeding on the basis that Factor was required to show that there was “no other way to preserve the evidence”; and (2) he misapprehended the extent to which, as a factual matter, the Microsoft commitment and the Texas Demand would preserve the evidence sought by Factor.
[81] By its first submission, Factor argues that the requirement imposed by the motion judge is not included within either the third or fourth conditions of Celanese and that, accordingly, the motion judge has, in effect, created a fifth condition for the granting of an Anton Piller order. This submission misconstrues the approach of the motion judge to this issue.
[82] Celanese sets out four essential -- that is, necessary -- conditions for an Anton Piller order. Celanese does not, however, suggest that demonstration of such conditions is automatically sufficient to entitle an applicant to such an order. The granting of an Anton Piller order remains a discretionary exercise by the Court for which purpose other considerations, specific to the circumstances of each particular case, may also be relevant.
[83] In this proceeding the motion judge considered that, given the extraordinary nature of an Anton Piller order, the availability of alternative means of preserving the evidence was a relevant consideration in determining whether to exercise the Court’s discretion to grant the order. He committed no error in law in proceeding on this basis.
[84] Factor’s second submission misstates the narrower focus of the motion judge’s conclusion with respect to the significance of the non-disclosure of the Microsoft commitment and the Texas Demand. Viewed as a whole, the motion judge concluded that the form of order that Factor sought was overly broad insofar as it sought the information described in subparagraphs 10(b)(ii) and (iii), which are set out above. The information contemplated in those subparagraphs was obtainable from Microsoft or pursuant to the Texas Demand. In these circumstances, Factor’s legitimate objectives in seeking an Anton Piller order could have been satisfied by a narrower form of order, which would have significantly reduced the extent of the search of Jean’s electronic records required and the resulting dislocation and cost to the Jean Defendants.
[85] On the basis of this view regarding the necessary scope of the Anton Piller Order, the motion judge concluded that the non-disclosure also warranted an order setting aside the Anton Piller Order. While not made express, I understand the motion judge’s conclusion to be that, if the proper disclosure had been made, he might well have refused to grant the requested form of order and, instead, granted a narrower form of order.
[86] As mentioned, a motion judge is accorded a reasonable degree of deference in respect of issues of mixed fact and law, particularly, in respect of an exercise of judicial discretion to grant or withhold extraordinary equitable relief. On the basis of the foregoing analysis, I cannot conclude that the motion judge committed a palpable and overriding error in reaching the conclusion that Factor failed to disclose material facts in omitting any reference to the Microsoft commitment or the Texas Demand and in determining that such non-disclosure warranted setting aside the Anton Piller Order in the form granted on the ex parte motion. I note, however, that it appears that the motion judge reached his determination on this category of non-disclosure independently of his determination on the first category which, on its own, warranted setting aside the Anton Piller Order in its entirety.
Conclusion
[87] Based on the foregoing, the appeal is dismissed.
Costs
[88] If the parties are unable to agree on costs of this appeal, including the costs of the motion for leave to appeal, they shall have thirty days to make written submissions to the Court through the Divisional Court Office, not to exceed five pages in length.
Wilton-Siegel J.
Swinton J.
Sachs J.
Released: July 14, 2010
CITATION: Factor Gas v. Jean, 2010 ONSC 2454
DIVISIONAL COURT FILE NO.: 581/09
DC-08-77
DATE: 2010-07-14
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
SWINTON, SACHS, WILTON-SIEGEL JJ.
BETWEEN:
FACTOR GAS LIQUIDS INC. Plaintiff/Appellant
– and –
NORMAN JEAN, MARGARET JEAN, 309947 ONTARIO LIMITED, BIGLER, L.P., BIGLER MANAGEMENT INC., and BIGLER FUELS, L.P., Defendants/Respondents
REASONS FOR JUDGMENT
Wilton Siegel J.
Released: July 14, 2010