COURT FILE AND PARTIES

COURT FILE NO.: CV-11-422801
DATE: 20120824
SUPERIOR COURT OF JUSTICE - ONTARIO

RE: George Yemec and Anita Fern Rapp, Plaintiffs / Responding Parties

AND:

The Atlantic Lottery Corporation Inc., Defendant / Moving Party

BEFORE: Justice E. P. Belobaba

COUNSEL: Frederick C. McElman and Lesley Mercer for the Moving Party
David E. Wires and John Wires for the Responding Parties

HEARD: March 14 and June 29, 2012

ENDORSEMENT

[ 1 ] For almost ten years, George Yemec and Anita Rapp have been trying to undo the damage that was done in 2002 when U.S. authorities, on misleading affidavit evidence, wrongfully obtained ex parte injunctions shutting down their lottery resale business and effectively destroying their lives. [^1] Now, confronted with a $19 million American judgment that can be enforced against them personally in Ontario, [^2] Mr. Yemec and Ms. Rapp have sued the Atlantic Lottery Corporation (“the ALC”) for contribution and indemnity and related declaratory remedies.

[ 2 ] The plaintiffs say that over the nine years of working with an authorized ALC retailer based in Charlottetown, P.E.I. they generated more than $20 million in revenues for the ALC and, in turn, the Atlantic provinces. Their claim, in essence, is that the ALC should pay all or a large part of the $19 million American judgment. The claim is based mainly on unjust enrichment and was served ex juris for trial in Ontario.

[ 3 ] The ALC which has its head-office in Moncton, New Brunswick, brings this motion under Rules 17.06 and 21.01(3)(a) to stay or dismiss the action on the basis of jurisdiction. The motion was heard in part on March 14, 2012 but was adjourned to allow the plaintiffs to amend their statement of claim to plead the “carrying on business” connection and to await the Supreme Court’s decision in Van Breda [^3] which was expected sometime in April. That decision was released on April 18, 2012 and argument on this motion was completed on June 29, 2012.

[ 4 ] In Van Breda, the Supreme Court reaffirmed that a real and substantial connection must exist between the subject matter of the litigation and the forum in order for a court to assume jurisdiction over a dispute. The Court also clarified the presumptive connecting factors that can be considered in establishing this connection. There is only one plausible connecting factor outlined in Van Breda that the plaintiffs can rely on: “the defendant carries on business in the province”. [^4]

[ 5 ] The ALC submits that it has done nothing that would constitute carrying on business in Ontario. Over the nine years in question, 1993 to 2002, the defendant was happily headquartered in New Brunswick successfully running the Lotto 6/49 and Super 7 national lotteries for customers in the four Maritime provinces and doing its best to ensure that its authorized retailers, also in these provinces, complied with the law. The ALC had no physical presence in Ontario; did not advertise or promote any of its lottery products, or make any sales, to Ontario residents; and never visited this province on a regular basis for any business-related reasons. It had no contractual relationship of any kind with either of the plaintiffs or any of their companies. The ALC submits that this court has no jurisdiction and asks that the action be stayed or dismissed.

[ 6 ] I agree with this submission. In my view, the most that can be said is that over the nine years in question the ALC, through its authorized retailer in P.E.I., did business with the plaintiffs’ telemarketing operation in Ontario. But this does not mean that the ALC carried on business in Ontario.

[ 7 ] For the reasons that follow, the motion is granted and the action is stayed.

[ 8 ] I must add the following. Anyone who reviews the decade-long background to this action will agree that the plaintiffs have not been well served by either the Canadian or American judicial systems. Their effort to try to recover some or all of the $19 million U.S. judgment by suing the defendant for contribution and indemnity is understandable – as is the decision to sue in Ontario. And, I remain sympathetic. But sympathy alone is not a connecting factor for the purposes of jurisdiction. This action is stayed. The lawsuit against the ALC, if it proceeds, must proceed in New Brunswick.

Background

[ 9 ] The factual backdrop for the issues presented in this motion and for the analysis that follows was set out by me in some detail in United States of America v. Yemec. [^5] In this lengthy 2009 decision, I described the Canadian lottery resale business; the applicable federal and provincial law; the business of the Atlantic Lottery Corporation, the Lottery Store, Express Purchase Services, the plaintiffs’ Toronto-based telemarketing operation including the sale by the latter of “shares in lottery-pools” to American consumers; and the significance of the Earth Future Lottery decision. [^6] None of this will be repeated here. Instead, I intend to move directly to the analysis, which I know will be understood by the parties and their counsel.

[ 10 ] For ease of reference I will refer to the plaintiffs as “Yemec”. Whether I mean Mr. Yemec, Ms. Rapp or one of the Yemec companies should be apparent from the context.

Analysis

[ 11 ] As already noted, the only plausible connecting factor to establish a real and substantial connection between the subject matter of the litigation and Ontario is “the defendant carries on business in the province”. The plaintiffs argue that the ALC carried on business in Ontario based on the following:

(i) The ALC authorized Yemec to market and sell the ALC’s brand of 6/49 and Super 7 lottery tickets from Toronto;

(ii) Two ALC employees conducted a compliance audit of Yemec’s operation in Toronto for two weeks in 2001; and

(iii) The ALC de facto admitted it was carrying on business in Ontario by terminating this “special sales” activity on the authority of the Earth Future case.

[ 12 ] In my view, none of these propositions, alone or in combination, is sufficient to constitute carrying on business in Ontario. Let me explain each of these points in turn.

(i) The “authorization” argument

[ 13 ] This submission does not succeed.

[ 14 ] The most that can be said, on the evidence before me, is that the ALC authorized the Lottery Store to provide a dedicated and high-volume supply of lottery tickets that the ALC knew would be used by Yemec in the “direct marketing operation into the United States.” Yemec and Hooley (the owner of the Lottery Store) discussed their business plan with the two ALC representatives at the October 1993 meeting in Charlottetown. The ALC was told that the Lottery Store would sell tickets to a Yemec P.E.I. company (Express Purchase Services) that in turn would deal directly with the Yemec telemarketing operation in Toronto. The actual lottery tickets would remain in P.E.I. at the Lottery Store as required by the ALC. The lottery tickets would not be sold as actual tickets but would be repackaged by Yemec into pre-determined lottery ticket pools and then chances or shares in these lottery pools would be sold by the Toronto-based telemarketers to interested U.S. consumers. The Yemec P.E.I. company would pay the Lottery Store for the tickets and the Lottery Store in turn would forward the ticket revenues to the ALC. [^7]

[ 15 ] I pause to note that internally, ALC auditors referred to this sales scenario as “special sales activity.” I assume that ‘ordinary sales’ were those in which ALC authorized retailers, typically small convenience stores, sold lottery tickets on-shore, that is within the four Maritime provinces, to individual buyers. “Special sales” apparently had a high-volume component and involved off-shore “ticket brokers.” An ALC draft audit report, that will be discussed below, defined “special sales” as “sales by an ALC ticket retailer to a ticket broker [such as Mr. Yemec’s business] located outside of Atlantic Canada ... [T]he ticket broker acts as an intermediary organization that purchases tickets on behalf of the actual [overseas] player.” The ALC was satisfied that the “special sales” were lawful as long as the lottery tickets remained physically in P.E.I. [^8]

[ 16 ] Over the course of the nine years in question, the Lottery Store sold more than $20 million worth of ALC lottery tickets via Express Purchase Services to the Yemec Ontario telemarketing operation. Approximately 40 per cent of all tickets sold in P.E.I. from 1993 to 2002 were sold by the Lottery Store and almost all of these sales made their way to the Yemec Ontario telemarketing operation.

[ 17 ] To return, then, to the analysis. Carrying on business in Ontario requires some form of presence in the province, and is distinct from simply doing business with an Ontario-based company. As the Supreme Court noted in Van Breda, “The notion of carrying on business requires some form of actual, not only virtual, presence in the jurisdiction, such as maintaining an office there or regularly visiting the territory of the particular jurisdiction.” [^9] None of these indicia, indeed no indicia of ‘carrying on business’ can be found in the facts herein.

[ 18 ] The ALC authorized the Lottery Store to do a high-volume business with Express Purchase Services and knew that Express Purchase Services was the link to Yemec’s Ontario-based telemarketing operation into the U.S. However, this does not mean that the ALC was carrying on business in Ontario. Even if one were to find that Express Purchase Services was at best a nominal intermediary and that, de facto, the Lottery Store was supplying ALC lottery tickets directly to the Toronto-based telemarketing company, one could not conclude that either the Lottery Store or the ALC was carrying on business in Ontario. As I have already noted, simply doing business with an Ontario-based company is not the same as carrying on business in Ontario.

[ 19 ] In any event, there is no evidence that Express Purchase Services, the P.E.I. company that formally purchased and paid for the ALC lottery tickets (that physically remained at the Lottery Store) was intended or understood to be a mere technicality. [^10] In other words, there may well be merit in the ALC’s submission that the Lottery Store did business only with Yemec’s company in P.E.I. and not with Yemec’s telemarketing operation in Ontario. But, again, even if it were otherwise, the outcome of this motion would be the same.

[ 20 ] There is a further point. The product that the Lottery Store sold to Yemec P.E.I., that is, actual lottery tickets, was not the product that Yemec Ontario telemarketed to U.S. customers. The Yemec Ontario telemarketing operation did not sell or resell lottery tickets but “chances” or “shares” in pre-determined packages or pools of lottery tickets (that remained on-shore in P.E.I.). The package prices ranged from about $100 to $500. Yemec’s mark-up for providing these “lottery purchase services” was significant – the American purchaser was charged about $9 for every $1 of lottery tickets purchased on his or her behalf. [^11] In short, what Yemec sold from Ontario to customers based in the U.S. was a different lottery product.

[ 21 ] But even if this last point is rejected and one concludes that the ALC, through its authorized retailer the Lottery Store, supplied lottery tickets at face value prices directly to the Toronto-based telemarketing company, which in turn resold the lottery tickets at a mark-up to American consumers, this still would not mean that the ALC (through its sales agent) was carrying on business in Ontario. Again, simply selling product to an off-shore Ontario company (without more) does not mean that one is carrying on business in Ontario. [^12] The result, in terms of judicial jurisdiction, would be different if the applicable sales contract was made in Ontario or if the product caused injury in Ontario. Here, however, these connecting factors do not exist. The only question is whether the ALC carried on business in this province.

[ 22 ] It is important to remember that this was not a joint venture. This is not a case where the ALC agreed with Yemec and Hooley that it would participate in the “direct marketing operation into the United States” and share in the venture’s profits or losses. There were no such discussions or agreements. The most that was authorized by the ALC was the Lottery Store’s role as a high-volume supplier for the telemarketing operation. The only requirement imposed by the ALC, given its understanding of the current law, was that the actual tickets had to remain “on the island.” Any money made by Yemec on his telemarketing venture, after paying face value for the tickets, was his to keep.

[ 23 ] In sum, the plaintiffs may be correct in suggesting that the ALC de facto “authorized” Yemec to sell chances or shares in ALC lottery ticket packages - in the sense that the ALC on five days notice [^13] could easily have shut down the ticket source (the Lottery Store) and thus could have terminated the Ontario telemarketing operation, and because it did not do so it must have de facto approved. This, however, does not mean that the ALC was therefore carrying on business in Ontario. Anymore than an off-shore oil supplier can be said to be carrying on business in Ontario simply because it sells oil to an Ontario refinery that is completely dependent on its product.

(ii) The audit visit of November, 2001

[ 24 ] The plaintiffs say that the fact that two ACL internal auditors visited Yemec Ontario for two weeks in 2001 and conducted a compliance audit provides the necessary jurisdictional evidence or indicia.

[ 25 ] I do not agree.

[ 26 ] The audit visit in November 2001 was the only time over the nine years in question that ACL representatives visited the Yemec Ontario operation and they did so with Yemec’s full co-operation and consent. The audit was performed to ensure (by sampling Lottery Store transactions) that the sale of lottery tickets occurred in P.E.I. and that the tickets remained there as required, and to verify that controls were in place with respect to the customer’s purchase of ticket-pool numbers and the payment of prizes.

[ 27 ] During the two-week audit visit in Toronto, the ALC auditors reviewed Yemec’s entire business operation and were shown “everything”, including the telemarketing scripts that Yemec used to sell the lottery pool packages to American consumers.

[ 28 ] The draft audit report that was prepared shortly thereafter was generally, very positive. The auditors found that the Lottery Store sales complied with the ALC’s rules and regulations. The auditors further found that Yemec’s ticket broker business was “operated in a business-like manner” and went on to recommend that “contracts between the ALC Retailer and the Ticket Broker … be formalized and documented with input as required from ALC.”

[ 29 ] As it turned out, the draft report was never finalized and the recommendation that “contracts between the ALC Retailer and the Ticket Broker … be formalized and documented with input as required from ALC” was never implemented. The plaintiffs say that the Toronto visit, and especially the recommendation just noted, demonstrate the ALC’s involvement in the “special sales” program, not just in P.E.I. via the Lottery Store but also in Ontario with Yemec’s telemarketing operation.

[ 30 ] In my view, the draft audit report and the recommendation for contractual formalization “with input as required from ALC” demonstrate just the opposite. The draft audit report confirms that there were oral agreements or arrangements between the Lottery Store (Hooley) and the Toronto-based telemarketing operation (Yemec). This is not surprising. After all, it was Hooley and Yemec that first approached the ALC in 1993 with a business proposal that involved both the Lottery Store and the off-shore telemarketer. In my view, the recommendation that these oral agreements be “formalized and documented with input as required from ALC ” strongly suggests that the ALC had provided no such input to date. In other words, apart from appointing the Lottery Store as an authorized ACL retailer and insisting that the lottery tickets remain in P.E.I., the ALC had no further involvement with the Yemec/Hooley telemarketing operation.

[ 31 ] Needless to say, if the draft report’s recommendation had been implemented and a Hooley/Yemec/ALC agreement had materialized, the plaintiffs would have had a much more persuasive argument that the ACL was in fact involved in the Ontario telemarketing operation and hence was carrying on business in Ontario. But this did not happen.

[ 32 ] In sum, there is little to no support in the 2001 draft audit reports for the plaintiffs’ submission that the ALC was carrying on business in Ontario.

(iii) The termination of the Lottery Store’s retailer agreement

[ 33 ] The ALC terminated the Lottery Store’s retailer agreement in July 2002, just three months after the P.E.I. Court of Appeal released its decision in the Earth Future Lottery Reference. [^14] The ALC admits that its decision to terminate was prompted by the Court of Appeal’s reasons for judgment. The Court concluded that P.E.I.’s proposed Internet lottery would violate the territorial “in the province” restriction in s. 207(1) of the Criminal Code. The plaintiffs point to the following sentence in the reasons: “Although based in Prince Edward Island, it is obviously intended [that] the Earth Future Lottery will operate and carry on business in the worldwide market.” [^15] Therefore, argue the plaintiffs, by terminating the Lottery Store’s retail agreement, the ALC admitted that it had been carrying on business outside of P.E.I. - in this case, in Ontario.

[ 34 ] I do not accept the logic of this analysis.

[ 35 ] First, the Court of Appeal was not dealing with a question of judicial jurisdiction. The Court’s concern in the Earth Future Lottery decision was limited to s. 207 of the Criminal Code and whether the proposed lottery would be ‘conducted and managed in the province.’ There is no suggestion anywhere in the reasons that the comment about “carrying on business worldwide” was intended to be a comment of general application – that is, a comment that would also apply to issues of judicial jurisdiction. Indeed, it would be a startling proposition of law that by simply advertising your product on the Internet you would be, for jurisdictional purposes, carrying on business in every country in which your website is accessed and read. Indeed, the Supreme Court made clear in Van Breda that “active advertising in the jurisdiction or, for example, the fact that a website can be accessed from the jurisdiction would not suffice to establish that the defendant is carrying on business there.” [^16]

[ 36 ] Second, the ALC was probably wrong to terminate the Lottery Store’s licence simply because of this decision. The Court of Appeal’s comment about ‘carrying on business in the worldwide market’ was obviously directed at the provincial government’s intention to advertise and promote the lottery off-shore via the Internet. Here there is no suggestion (and no evidence) that the ALC itself had engaged in any off-shore advertising and promotion over the nine years in question. The only entity that did so was the Yemec Ontario telemarketing company based in Toronto. And the ALC’s connection with this Toronto telemarketer was at best indirect: the ALC, through its authorized retailer, sold lottery tickets (that remained on-shore) to an on-shore P.E.I. company which in turn transacted with the off-shore telemarketer. In short, there was nothing in the Court of Appeal’s decision that required the ALC to terminate the Lottery Store’s retailer agreement. So why was this done? This brings me to the third point.

[ 37 ] One cannot conclude with any degree of certainty what it was in the Earth Future Lottery decision that prompted the decision to terminate the Lottery Store’s licence. The reasons given by the ALC in its termination letter to the Lottery Store were opaque: “ALC has determined that to allow this activity to continue would be harmful to the integrity and reputation of ALC and therefore would be harmful to ALC’s relationship with its customers.” Was the real reason the ALC’s (wrong-headed) realization that by condoning the off-shore telemarketing operation and allowing it to continue (i.e. by not closing down its source of supply), the ALC itself was unlawfully carrying on business in Ontario? Was it a concern about its indirect linkage to the off-shore marketing of shares in ALC lottery ticket pools? Or was it simply a decision, made out of an abundance of caution, that the time had come to close down the off-shore oriented “special sales” program? We simply don’t know. The correlation between the Court of Appeal’s “carrying on business” comment and the ALC’s termination decision, as posited by the plaintiffs is ambiguous at best.

[ 38 ] Finally, even if I had found a stronger correlation and concluded that the ALC terminated the Lottery Store’s licence because it (wrongly) believed it was carrying on business in Ontario, I would still not have been persuaded that it was in fact doing so, given the findings set out above in paras. 14 to 23. I recognize that even a wrong-headed belief that one is carrying on business in an off-shore jurisdiction can have probative value. Here, however, the significance of this belief is more than off-set by the array of factual evidence discussed above that indicates otherwise.

[ 39 ] In sum, none of the plaintiffs’ submissions succeed. I am not satisfied on the evidence before me that the defendant ALC was carrying on business in Ontario at any time over the nine years in question.

Disposition

[ 40 ] The defendant’s motion is granted. The action is stayed for lack of jurisdiction.

[ 41 ] If the parties are unable to agree on costs, I would be pleased to receive a brief costs submission from the ALC within 14 days and a responding submission from Mr. Yemec and Ms. Rapp within 10 days thereafter.

[ 42 ] I am grateful to counsel for their co-operation and assistance.

Belobaba J.
Date: August 24, 2012

[^1]: See United States of America v Yemec, 2009 ON SC 44418, [2009] O.J. No. 3546 (S.C.J.).

[^2]: United States v. Yemec, 2010 ONCA 414, 100 O.R. (3d) 321.

[^3]: Club Resorts Ltd. v. Van Breda, 2012 SCC 17, [2012] S.C.J. No. 17.

[^4]: Ibid., at para. 90. I recognize that Van Breda established presumptive connecting factors for cases involving a tort, but this motion proceeded on the basis that the Van Breda factors also apply to cases involving claims for restitution.

[^5]: Supra, note 1.

[^6]: See Reference Re Earth Future Lottery, 2002 PESCAD 8, [2002] P.E.I.J. No. 34 (C.A.); aff’d 2003 SCC 10, [2003] 1 S.C.R. 123.

[^7]: The ‘ALC lottery ticket retailer agreement’ provided that all monies collected from the sale of lottery tickets by the retailer would remain the sole property of the ALC.

[^8]: The basis for this belief, at least for the years 1993 to 2000, is not clear from the evidence. In April 2001, the ALC received a legal opinion from the Nova Scotia Department of Justice advising that the “special sales activity” was lawful, so long as tickets remained in the province. I assume that the ALC must have received similar legal opinions before 2001.

[^9]: Supra, note 3, at para. 87.

[^10]: I note, for example, that in his cross-examination on December 7, 2011, the ALC’s internal auditor, Clarence Boudreau, stated that Express Purchase Services physically stored the purchased lottery tickets (and not the Lottery Store) – suggesting that the Yemec P.E.I. company was more than a file folder in a lawyer’s office. (I hasten to add that on the preponderance of the evidence I am persuaded that the tickets remained at the Lottery Store and were not stored at Express Purchase Services.)

[^11]: According to Mr. Boudreau, “it would cost Yemec about $19,000 to buy something that he would resell for $150,000.”

[^12]: I must respectfully disagree with the suggestion in Ontario v. Rothmans Inc. 2012 ONSC 22, [2012] O.J. No. 19 (S.C.J.) at para. 102, that the mere sale of product into Ontario by an out-of-province vendor constitutes carrying on business in Ontario. Consider the well-known mail-order clothing company that is located somewhere in New England and advertises worldwide via the Internet and direct mail. If an Ontario resident places an order and the order is delivered by FedEx or UPS to the customer’s home, is that New England vendor ‘carrying on business’ in Ontario? In my view, it is certainly ‘doing business’ with the Ontario consumer but no more than that.

[^13]: As per the ‘ALC lottery ticket retailer agreement’ signed by the Lottery Store.

[^14]: Supra, note 6. The reference is discussed in United States v. Yemec, supra, note 1 at paras. 36 - 40. Simply put, the P.E.I. Court of Appeal was asked if the provincial government’s proposed lottery was lawful under s. 207 of the Criminal Code. The lottery would be advertised and promoted worldwide via the Internet but the actual ticket sales and all related gaming activity would be concluded and conducted in the province. Contrary to authoritative legal opinions relied on by the province, the Court of Appeal, in reasons written by the Chief Justice, decided, in essence, that merely advertising and promoting the lottery worldwide via the Internet meant that the lottery was not being “conducted and managed in the province” as required by s. 207. A year later, the Supreme Court of Canada dismissed the province’s appeal in one sentence – “substantially for the reasons of the Chief Justice of Prince Edward Island.” No further analysis was provided.

[^15]: Supra, note 6, at para. 13.

[^16]: Supra, note 3, at para. 87.