ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 3660/2011
DATE: 2012/01/25
B E T W E E N:
NEXUS SOLUTIONS INC.
W. Scott Gallagher, for the Plaintiff
Plaintiff
- and -
VLADIMIR KROUGLY, LIMESOFT INC. and SERGIY BATEYSHCHYKOV
Michel Castillo, for the Defendants
Defendants
HEARD: December 2, 2011
HOCKIN, J.
[1] The plaintiff Nexus Solutions Inc., (“Nexus”) is in the business of developing and selling software in the continuous emissions monitoring industry. Its software is sold under the trade name CEMView.
[2] Nexus was incorporated in 1999. Its market is a world market, e.g. there are customers of its software in Germany and Saudi Arabia.
[3] The defendant Limesoft Inc., was incorporated on December 1, 2009 by the defendant Sergiy Bateyshchykov (“Mr. Bays”) when he was a third year student in the computer engineering programme at the University of Western Ontario. His course work at the time involved the creation of original software. The company was incorporated for the purpose of its ownership and for use as a business vehicle at some point. Its software is known as LiMeDas.
[4] The defendant Vladimir Krougly (“Mr. Krougly”) is from Belarus. He has worked in the software development field since his immigration to Canada in 1998.
[5] Mr. Krougly worked for Nexus. At one point, he was a director and shareholder of Nexus but on June 3, 2008, his shares were sold and he resigned as an officer and director of Nexus. He resigned his employment with Nexus on December 13, 2010. His last day of employment was January 4, 2011. He worked without a written agreement and in particular, without a restrictive covenant.
[6] Mr. Krougly is Mr. Bays’ brother-in-law. When he left the employ of Nexus, he started with Mr. Bays. Their intention was to continue to develop LiMeDas and to sell it.
[7] In late January, 2011, Nexus learned from a customer in Germany that Mr. Krougly on January 25, 2011, by e-mail, transmitted several “screenshots” from LiMeDas to its customer with an invitation “to work together” at some point. There is no evidence of anything more than this. There is no evidence of a sale to anyone.
[8] Nexus did not deliver to Mr. Krougly or Limesoft a “cease and desist” letter.
[9] On March 8, 2011, Nexus issued its statement of claim. Its claim against the defendant is a damages claim in the amount of $1,000,000, punitive damages in the amount of $500,000 and a claim for an interlocutory and permanent injunction “prohibiting these defendants from using CEMView (Nexus software) software source code, any derivatives thereof, as well as all confidential information of Nexus Solutions Inc.” See para. 1(d) of the statement of claim.
[10] The important parts of the statement of claim, at least for my purpose, are paras. 16 to 22 which read as follows:
Limesoft Inc. software uses the source code, or derivatives of the source code, that are the basis of CEMView software.
The Limesoft Inc. software employs third party licences that are provided exclusively to Nexus Solutions Inc. as licensee from third party licensors.
Limesoft Inc. is using confidential information obtained by Nexus Solutions Inc. from manufacturers of equipment in the continuous emissions monitoring industry. This information was obtained by Nexus Solutions Inc. on a confidential basis in order to allow the Nexus software to work with that equipment.
Limesoft Inc. is using protocols available to Nexus by virtue of its membership in the OPC Foundation. Limesoft Inc. had no registration with OPC until January 27, 2011.
The actions of Vladimir Krougly, Limesoft Inc. and Sergiy Bateyshchykov are a wrongful taking of, and a conversion of, the intellectual property of Nexus Solutions Inc. being its CEMView software.
The actions of the defendants are an infringement of the copyright of Nexus in its CEMView software.
The plaintiff pleads and relies on the Copyright Act, R.S.C. 1985 c. C-42 and amendments thereto and in particular, among other sections, s. 2 “computer program”, s. 3(1) , s. 34, s. 34.1, s. 35, s. 38, and s. 39.1.
[11] On March 11, 2011, Mr. Krougly was served with the statement of claim and the motion material for an injunction. The motion was returnable March 15, 2011. He was unaware of the importance of the March 15, 2011 date. He understood from the statement of claim that he had twenty days to respond.
[12] On March 15, 2011, the Nexus motion for an injunction was unopposed. At that point, Mr. Bays had not been served. The injunction was granted by Gorman J. with terms which one might find in an Anton Pillar order. As well, Limesoft was prohibited from marketing and selling its software. Although para. 11 of the order provided that the costs of the motion were reserved to the judge “hearing this matter on its further return before the court”, the motions judge made a costs order against Mr. Krougly and Limesoft in the amount of $10,000 payable within thirty days. Counsel for Nexus, Mr. Gallagher advised that this was not requested.
[13] The defendants retained Mr. Castillo March 25, 2011. Responding material was quickly organized including a cross-motion to set aside the order of Gorman J.
[14] On March 28, 2011, Mr. Gallagher and Mr. Castillo appeared on the return of the motion. It was heard by Mr. Justice Bryant. For the reasons which follow, I consider the order he crafted to be important because the parties agree in this case that whether there has been a breach or an infringement of the Nexus copyright in CEMView will be revealed by a comparison of its source code and source code control system and the source code and source code control system of the LiMeDas software.
[15] This fact is reflected in the order. The order required each side to file with the court its source code and source code control system. The parties were then to agree on an expert to make the comparison. If an agreement on an independent expert could not be reached, they were to return to Bryant J.
[16] As well, the prohibition against Limesoft selling its software ended; the order included a term that the defendants were permitted to sell the LiMeDas software on the understanding that particulars of any sale were to be filed in a sealed envelope.
[17] Since the order of Bryant J. what he must have feared has occurred: a battle without result at great expense to the parties. There are now a great number of lengthy affidavits. Expensive experts have been retained. There have been cross-examinations (931 pages of transcript). Despite this great effort and expense, the case has not advanced.
[18] There are two motions before me. First, Nexus moves for a return to the injunctive relief granted by Gorman J. To this end, it asks that the orders of Bryant J. and Jenkins J. (to a similar effect) that LiMeDas be permitted to sell its software be set aside and that the defendants “shall cease and desist” selling LiMeDas software, including Data Logger or any derivative thereof.” Second, Limesoft and the defendants Bays and Krougly move by cross-motion to set aside the injunction granted by Gorman J. and her costs order. In the alternative, the defendants ask that the status quo be maintained.
[19] For the reasons which follow, the motion for an injunction is dismissed. The status quo will continue. There will be terms, as set out below, on the matter of disclosure. The costs order of Gorman J. will be set aside.
[20] In my view, what Nexus received from Gorman J. was a quia timet injunction. The best that one can say about the evidence presented to the court at that point was that Nexus feared that harm might flow from the start up of Limesoft. There was no evidence of actual harm. Nexus could only point to the Krougly e-mail to Germany, which was nothing more than an invitation to treat. There is still no evidence of harm.
[21] On the subject of quia timet relief, Mr. Justice Robert Sharpe in his text, Injunctions and Specific Performance, looseleaf, (Toronto: Canada Law Book, 2011) at paras. 1.660-1.680 under the title “Prematurity” explained the difficulties in issuing an injunction where the alleged harm is prospective, as follows:
All injunctions are future looking in the sense that they are intended to prevent or avoid harm rather than compensate for an injury already suffered. When the plaintiff has already suffered harm, although the remedial focus is often on the future, what has happened in the past provides the basis for assessing the appropriateness of the remedy. The court is able to see from what has already happened the nature and extent of the future threat posed by the defendant’s conduct and is able to assess the appropriateness of injunctive relief on the basis of that experience. The situation has crystallized in the sense that the defendant’s course of conduct is settled, its effect upon the plaintiff is known and the relative benefits to the plaintiff, and the burdens an injunction would impose on the defendant can be assessed.
Where the harm to the plaintiff has yet to occur the problems of prediction are encountered. Here, the plaintiff sues quia timet – because he or she fears – and the judgment as to the propriety of injunctive relief must be made without the advantage of actual evidence as to the nature of harm inflicted on the plaintiff. The court is asked to predict that harm will occur in the future and that the harm is of a type that ought to be prevented by injunction. Thus, while all injunctions involve predicting the future, the label quia timet and the problem of prematurity relate to the situation where the difficulties of prediction are more acute in that the plaintiff is asking for injunctive relief before any of the harm to be prevented by the injunction has been suffered.
After noting that the jurisdiction to award quia timet injunctions is undoubted, at para. 1.690, he added this cautionary note:
…, the courts have adopted a cautious approach when asked to award an injunction prior to actual harm being suffered and have said that there must be a high degree of probability that the harm will in fact occur.
[22] There is no evidence of this sort in this case. Irreparable harm has not been established.
[23] However, there is a more significant problem for Nexus than prematurity. As mentioned above, it is common ground between the parties that a comparison of the source codes and source code control systems of Nexus and Limesoft will determine whether Limesoft copied the Nexus software. The defendants have always been in favour of the comparison. One need only read the correspondence between counsel after the March 28, 2011 order of Bryant J. to see this. It reveals the following:
Limesoft at the hearing before Mr. Justice Bryant suggested two candidates as the independent expert to review the codes and source code control systems.
Nexus did not.
Paragraph 6 of the order of Bryant J. allowed that if there was no agreement on an independent expert, the parties were to agree on a “mechanism for selecting the independent expert by April 6, 2011”. On April 8, 2011, a comprehensive mechanism was submitted by Limesoft to name the expert but there was no response.
Paragraph 7 of Bryant J.’s order allowed that the parties could re-attend before him on April 27, 2011 for further direction on the selection of the expert. On April 27, 2011 counsel for Limesoft reminded counsel for Nexus of this offer from the court and Limesoft’s interest in re-attending before Bryant J. but Nexus did not respond.
Limesoft told Nexus on May 14, 2011, that it was “inclined to consider Jeff Parmet” as the expert. Jeff Parmet was the plaintiff’s expert. There was no answer to this. This was an indication of the good faith of the defendants. In any event, this did not come to pass.
On August 9, 2011 and by e-mail, on August 14, 2011, counsel for Limesoft proposed again that Mr. Parmet be asked to review the material filed with the court to “get to the bottom of the issues.” The e-mail in its entirety reads as follows:
From: Michel Castillo (Office) mcastillolaw@gmail.com
Sent: August-14-11 11:56 AM
To: ` Scott Gallagher
Subject: REVIEW OF SOURCE CODE Nexus v. Krougly
Dear Sir,
Our respective clients continue to make numerous attendances at court and running up costs. We are now shortly going to have further expenses in cross-examinations on affidavit. Mr. Parmet is scheduled to be examined on September 7.
The simplest, most effective, and cost effective solution to this dispute would be to have one expert review the materials that have been filed with the court. The selection of an independent expert was frustrated by your client. Nevertheless, my clients are prepared to allow Mr. Parmet be the expert to review the materials, subject to agreement on a protective order and other safeguards to ensure that the information he reviews is kept private and confidential and that the contents of our client’s source code are not released to your clients, and conversely that your client’s information is kept private and confidential and not released to mine. With Mr. Parmet scheduled to be available on September 7, 2011 we should use that time to have him review the source codes and information filed with the court (again, subject to a protective order). We can do this based on a Consent Order. It would reduce costs and would resolve the allegations of theft, fraud, illegal copying, etc. that are advanced by your client.
Please advise whether your client is prepared to proceed to have the materials filed with the court reviewed so we can deal with your client’s allegations.
Yours truly,
Michel Castillo
[24] This was a clear, unconditional offer by Limesoft to allow the plaintiff’s expert to make the comparison. On September 27, 2011, when the plaintiff’s expert Parmet was cross-examined, at question 236, he volunteered that “what hasn’t been said is that ultimately the goal is to look at the source code and compare the two products and to see if that’s, in fact, the case.”
[25] The plaintiff’s only answer to this offer is that because Limesoft’s productions are unreliable or doctored, there was no point to a comparison. There is no evidence of this beyond conjecture or suspicion.
[26] There is a strong controlling policy in the law favouring settlement of disputes without litigation. This litigation is likely to end after a comparison of the source codes and source code control systems. There is an opportunity now to determine this as a matter of fact. The defendants are anxious that this comparison take place and have gone so far as to consent to the participation of the plaintiff’s expert for this purpose. It would be wrong for this court to grant relief by way of injunction where the defendants are prepared to submit their software to the test of a comparison when the plaintiff agrees the result will show whether there has been a breach of copyright. The court should not set the parties adrift to suffer great and unnecessary cost in these circumstances.
[27] This action is a quia timet proceeding. The plaintiff has not lost a contract to the defendants. Furthermore, the plaintiff has not established irreparable harm. Moreover, the balance of convenience favours the defendants. The defendant company is a new company which will undoubtedly wither or die if it is prohibited from selling its software to the time of trial. There is this useful reminder from Mr. Justice Sharpe in his text at para. 1.790:
The existing law reflects the notion that from the point of view of accommodating change and economic, industrial and social innovation, it is important to be able to postpone as long as possible up to the point where harm is actually sustained, the award of injunctive relief.
[28] For these reasons, I dismiss the plaintiff’s motion for an injunction. The status quo established by the orders of Bryant J. and Jenkins J. should be maintained. The defendants will continue to follow the obligations set out at paras. 8 and 9 of Mr. Justice Bryant’s order pending final determination of the action on the merits. The plaintiff’s letter of credit will remain until the comparison has been made. The costs order of Gorman J. is set aside for two reasons: one, it is clear from para. 11 of her order that costs were reserved to the next judge; two, the issue of costs was not argued.
[29] I am not unmindful of Mr. Gallagher’s view that the production of documents has been imperfect. I would have thought that the orders now in place and the production rules under the Rules of Civil Procedure were enough but if fine tuning is required, I may be spoken to. Everything which is reasonably required for the comparison should be available for the expert.
[30] It follows from these reasons that the plaintiff’s motion to strike the statement of defence and counterclaim is dismissed.
[31] The trial coordinator will arrange a time for counsel to speak to the issue of costs.
“ Justice P. B. Hockin”
Justice P. B. Hockin
Released: January 25, 2012