SUPERIOR COURT OF JUSTICE - ONTARIO
Court File No.: 10-49230
Date: 20120104
RE: Cana International Distributing Inc., c.o.b. as Sexy Living, Plaintiff (Respondent)
AND:
Standard Innovation Corporation, Defendant (Moving Party)
BEFORE: Hackland R.S.J.
COUNSEL:
Howard J. Wolch for the Plaintiff (Respondent)
Peter N. Mantas and Alexandra Logvin for the Defendant (Moving Party)
ARGUED: In Ottawa November 10 and 22, 2011
ENDORSEMENT
[ 1 ] This is a dispute between the defendant the manufacturer of an adult sex toy, a type of personal vibrator known as “we-vibe”, and the plaintiff distributor of this device, operating under the name “Sexy Living”.
[ 2 ] By order of McKinnon J. in this proceeding dated November 18, 2010, see 2010 ONSC 6273 , [2010] O.J. No. 4919, the plaintiff’s application for an interlocutory injunction was dismissed. The plaintiff had sought to enjoin the defendant from breaching an alleged oral agreement to exclusively distribute the “we-vibe” device in Canada to the so-called “adult market”. The court held that the plaintiff had failed to demonstrate a strong prima facie case (as the requested relief was in the nature of a mandatory order) and had also failed in establishing the need for injunctive relief considering the criteria of irreparable harm and balance of convenience.
[ 3 ] Also before the court in this earlier hearing was another agreement between the parties, the so-called “Mainstream Agreement” pursuant to which the plaintiff enjoyed exclusive distribution rights in Canada for the device in relation to the mainstream market i.e. food and drug stores as opposed to specialist adult sexual product stores and similar customers. There was a dispute then, as there is now before this court, as to whether the Mainstream Agreement had expired or whether it continued in force. However, McKinnon J. was not required to decide that matter, due to an agreement by the parties which he explained as follow:
The parties do not dispute that Sexy Living enjoys exclusive distribution rights for the We-Vibe pursuant to the terms of a “Mainstream Agreement”. The Mainstream agreement permits Sexy Living to distribute the We-Vibe in Canadian food stores and drug stores. This is a significant and growing market. There are more than 5,000 brick and mortar mainstream food and chain drug stores in Canada. The agreement giving Sexy Living the exclusive rights to distribute the We-Vibe to these stores was finally signed on November 26, 2009. In this application for an interlocutory injunction that agreement is not in issue. The parties have agreed that the Mainstream agreement shall remain in full force and effect pending any alteration of the agreement as may be mutually agreed to, or upon further order of this court .
(underlining added)
[ 4 ] In the present motion the defendant seeks a “further order of the court” as contemplated in McKinnon J.’s previous reasons. The parties are not in agreement as to what they intended in the underlined phrase in the previous paragraph. No order was taken out so the disagreement remained unidentified and unaddressed. The defendant submits that the enforceability of the Mainstream Agreement was simply not dealt with by the court in the previous hearing and its consent or agreement that the Mainstream Agreement remain in full was in the nature of an undertaking that could be relieved against by court order for valid reasons such as a material change in circumstances. The plaintiff submits that the agreement is in the nature of a consent interlocutory injunction which should remain in force in the absence of some material breach on its part, which is denied.
[ 5 ] I prefer the defendant’s position. Due to the parties’ agreement before McKinnon J., he did not determine whether or not the plaintiff was entitled to injunctive relief in relation to the Mainstream Agreement. He simply accepted the parties’ position that it was to remain in full force and effect pending a further court order. In my opinion, this disposition of the matter permitted the injunction motion to be brought back on with leave of the court and that is what in substance is before the court at this time. If the previous consent required the defendant to demonstrate good faith or a material change in circumstances then I hold that such requirements have been met.
[ 6 ] The defendant has placed before the court affidavit material establishing on-going marketing disputes between the parties arising out of the operation of the Mainstream Agreement. The plaintiff admits that it is attempting to sell the we-vibe devices into the adult market. It maintains that it has the right to do so under the adult agreement it alleges exists and as a lawful means of mitigating its damages for the defendant’s breach of contract. The defendant complains of a series of sales and marketing practices on the plaintiff’s part which allegedly violate the Mainstream Agreement and the intent of the parties when they agreed to continue the Mainstream Agreement at the previous court hearing. The plaintiff denies the allegations or dismisses them as exaggerated or as temporary and harmless events causing no harm to the defendant. I regard these as triable issues not capable of resolution on the written record currently before the court.
[ 7 ] On this motion the plaintiff renewed its original request for an interlocutory injunction to continue in force the Mainstream Agreement, pending trial. The main issue here is whether the agreement expired on March 31, 2010 as the defendant maintains or was it continued by the parties’ subsequent discussions and conduct as the plaintiff alleges. It is not disputed that the parties were still trading under the agreement in November 2010 when the matter came on before McKinnon J. and, as noted, the agreement remains in full force and effect until this court declares otherwise. The end date of the Mainstream Agreement is clearly a triable issue in view of the parties’ conflicting positions.
[ 8 ] The Mainstream Agreement, which is dated August 18, 2009, contains the following provisions relevant to the issue of duration:
Term / Cancellation
- SIC agrees that Sexy Living has the right of first refusal for exclusivity in the Territory, until March 31, 2010, subject to mutually agreed performance criteria after that, with an initial three-year term, following that, and with subsequent renewals for two-year periods after the initial three-year term.
Cost from SIC…
- Since we don’t know the size of the market – SIC proposes a market development period for purposes of establishing reasonable exclusivity performance criteria.
SIC will sell product to SEXY LIVING at the price detailed herein, with an initial order quantity of 960 units
By the end of March, 2010, SEXY LIVING will have the right to obtain exclusive rights with the minimum monthly performance criteria being the average quantity purchased by retailers in the Territory during the period December, 2009 to March, 2010. This criteria will be reset annually thereafter at the average quantity purchased during the previous six months.
It would appear that in any event the agreement will expire on August 18, 2012 at the end of the initial 3 year term.
[ 9 ] Assuming there exists a substantial issue to be tried, the plaintiff’s entitlement to injunctive relief will turn on the criteria of whether it will suffer irreparable harm if the injunction is not granted and whether the balance of convenience favours the plaintiff, see R.J.R. MacDonald v. Canada (Attorney General), 1994 117 (SCC) , [1994] 1 S.C.R. 311.
[ 10 ] In terms of irreparable harm, I would note that the we-vibe device is one of a wide variety of sexual aids or sexual toys distributed by the plaintiff. The loss of this device from its product line will not irreparably damage the plaintiff’s business and its loss of profits should be capable of accurate calculation from sales and accounting records. The plaintiff argues that potential new markets for this device are opening up and estimates of loss of revenue from these sources will be difficult. I am not convinced that this will present an insurmountable problem. I note as well that the expiration of the three year term of the Mainstream Agreement will occur in the near future and accordingly there appears to be no likely scenario in which the parties’ difficult relationship is likely to continue in the long term in any event.
[ 11 ] In terms of balance of convenience, it is apparent from the affidavit evidence filed on this motion that a myriad of marketing issues are in dispute arising out of this business relationship and the terms of the Agreement remain in active dispute. Further requests for court intervention can be anticipated. I respectfully adopt McKinnon J.’s explanation of the approach of the courts to the granting of injunctive relief in this type of case:
[23] Courts have viewed a grant of injunctive relief sought to enforce an exclusive distribution agreement as creating an undesirable need to police specific performance of a relationship and has already sustained a significant deterioration, which has been said to be not only burdensome for the judiciary, but also contrary to commercial reality in general. As a result, courts have been reluctant to endorse this kind of relief, finding that damages, when and if assessed at trial, would be an adequate tool to sever “sour commercial relationships”: see Health Body Services Inc., supra, and Jordash, supra.
[ 12 ] For the reasons noted, the defendant is granted leave to bring this matter to the court for review as contemplated by the consent agreement concerning the Mainstream Agreement as outlined in the earlier reasons of McKinnon J. in this proceeding. The defendant’s request to be released from its agreement to maintain the Mainstream Agreement is dependent on the plaintiff’s ability to establish its entitlement to an interlocutory injunction. With respect to the plaintiff’s application for an interlocutory injunction to require the defendant to continue to maintain the Mainstream Agreement in full force and effect, this relief is refused because the requirements of the relevant test for this relief have not been made out by the plaintiff. However, I exercise my discretion to require that the said agreement is to be maintained in full force and effect for a temporary further period of 60 days following the date of this order, to allow the plaintiff a reasonable period to fill existing and new orders for the we-vibe device and to transition to such replacement products from other suppliers, as they may require.
[ 13 ] If the defendant wishes to seek costs, they are to provide a concise written submission within 30 days of this order and the plaintiff is to reply within 30 days of receiving the defendant’s submission.
Mr. Justice Charles T. Hackland
Released: January 4, 2012
Standard Innovation Corporation, 2012 ONSC 5 3
COURT FILE NO.: 10-49230
DATE: 20120104
BETWEEN: Cana International Distributing Inc., c.o.b. as Sexy Living, Plaintiff and Standard Innovation Corporation ENDORSEMENT
HACKLAND R.S.J.
Released: January 4, 2012