SUPERIOR COURT OF JUSTICE – ONTARIO
(COMMERCIAL LIST)
COURT FILE NO.: 09-CL-7950
DATE: 20130923
RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF NORTEL NETWORKS CORPORATION, NORTEL NETWORKS LIMITED, NORTEL NETWORKS GLOBAL CORPORATION, NORTEL NETWORKS INTERNATIONAL CORPORATION AND NORTEL NETWORKS TECHNOLOGY CORPORATION, Applicants
BEFORE: MORAWETZ J.
COUNSEL:
Matthew P. Gottlieb, Luis Sarabia, Paul Michell and Arden Beddoes, for the Joint Administrators of EMEA Debtors
Peter Griffin, for Ernst & Young LLP
Andrew Gray and Scott Bomhof, for Nortel Networks Inc. and the U.S. Debtors
Shayne Kukulowicz, for the Unsecured Creditors’ Committee
Christopher Naudie and Gillian Scott, for the Non-Party Deloitte LLP
Gavin Finlayson, for the Noteholder Group
John Finnigan and Michael Barrack, for the U.K. Pension Claimants
Elizabeth Allen Putnam, for the Nortel Directors & Officers
Jeff Galway, for the Non-Party KPMG LLP
Jessica Kimmel and Chris Armstrong, for the Monitor and Canadian Debtors
Derrick Tay, for Nortel Networks Limited
HEARD: SEPTEMBER 18, 2013
ENDORSEMENT
Background
[1] The joint administrators for the EMEA Debtors (the “Joint Administrators”) move for production of documents from Ernst & Young LLP (Canada) (“EY Canada”), under rule 30.10 of the Rules of Civil Procedure.
[2] The underlying proceedings concern, among other things, the allocation of assets of the Nortel Group of Companies amongst its individual entities.
[3] Production of documents has been ongoing for a number of months and discoveries are being conducted over the next few months.
[4] To date, over two million documents have been produced to the parties to the litigation.
[5] The trial, originally scheduled to commence on January 6, 2014, has already been postponed and will now commence in late March or early April 2014.
[6] Various Nortel entities performed research and development and developed intellectual property. According to the Joint Administrators, the Nortel Group of Companies entered into a “transfer pricing agreement” with the stated purpose of compensating the various entities on an arms-length basis for contributions to the global enterprise. The transfer pricing agreement is a central issue of contention in these proceedings, particularly as it relates to determining the appropriate allocation of proceeds which arose from the sale of Nortel assets, including its intellectual property.
[7] The Joint Administrators submit that, as an important third party consultant, EY Canada was “intimately involved” in the development of the agreement. They believe that EY Canada possesses documents related to the development of the transfer pricing agreement that are “highly relevant” to the dispute. They seek disclosure of these documents from EY Canada. The U.K. Pension Claimants support the Joint Administrators.
[8] The Monitor and Canadian Debtors oppose this motion. They advance two related arguments: (i) the production request must be viewed in light of the enormous volume of material already produced; and (ii) the production sought has already been produced from other sources. EY Canada submits that it does not wish to undertake the significant exercise involved in reviewing and producing these documents, given its position that the requested documents have already been produced. EY Canada advises that the working paper files amount to more than 7 boxes of hard copy files, as well as 150,000-170,000 pages of documentation.
Law
[9] Rule 30.10(1) provides as follows:
The court may, on motion by a party, order production for inspection of a document that is in the possession, control or power of a person not a party and is not privileged where the court is satisfied that,
(a) the document is relevant to a material issue in the action; and
(b) it would be unfair to require the moving party to proceed to trial without having discovery of the document.
[10] The moving party bears the burden of showing that it would be unfair to make them proceed to trial without the production: Ontario (Attorney General) v. Ballard Estate (1995), 1995 3509 (ON CA), 26 O.R. (3d) 39 (C.A.), at para. 16.
[11] An order under rule 30.10 should not be made as a matter of course; such an order should be made only in exceptional cases: Morse Shoe (Canada) Ltd. v. Zellers Inc. (1997), 10 O.A.C. 116 (C.A.), at para. 19 [Morse Shoe].
[12] In Ballard, the Court of Appeal articulated the principles that should guide the fairness analysis under subsection (b). The Court noted, at paras. 12-13:
In making the fairness assessment required by Rule 30.10(1)(b), the motion judge must be guided by the policy underlying the discovery regime presently operating in Ontario. [...] By its terms, Rule 30.10 assumes that requiring a party to go to trial without the forced production of relevant documents in the hands of non-parties is not per se unfair […] The discovery process must also be kept within reasonable bounds.
[13] The Court then listed six factors to be considered by the motion judge (Ballard, at para. 15):
the importance of the documents in the litigation;
whether production at the discovery stage of the process as opposed to production at trial is necessary to avoid unfairness to the moving party;
whether the discovery of the defendants with respect to the issues to which the documents are relevant is adequate and if not, whether responsibility for that inadequacy rests with the defendants;
the position of the non-parties with respect to production;
the availability of the documents or their informational equivalent from some other source which is accessible to the moving parties;
the relationship of the non-parties from whom production is sought, to the litigation and the parties to the litigation.
Analysis
[14] The Joint Administrators seek five categories of documents from EY Canada:
Documents showing the scope, duration, objectives, and nature of services rendered during the relevant period by EY Canada for any Nortel entity;
All documents, including working papers and e-mails, concerning transfer pricing arrangements considered or applied by the Nortel Group during the relevant period;
All documents concerning IP developed or created by one or more Nortel entities;
Documents showing bills or invoices prepared by EY Canada concerning services rendered for Nortel entities;
Documents showing the names of EY Canada personnel who recorded time for services rendered on behalf of any Nortel entities, and detailed information on time billed and descriptions of work.
30.10(1)(a): Relevancy
[15] The Joint Administrators submit that the documents it requests are “highly relevant” to the allocation dispute. The Monitor and Canadian Debtors neither concede nor deny the relevancy of the documents sought to the allocation dispute. However, in view of my conclusion, it is not necessary to determine the relevancy of the documents sought to the allocation dispute. Assuming that the documents are relevant, I have determined that the motion fails on the fairness assessment.
30.10(1)(b): Requiring the Joint Administrators to proceed to trial without production would not be unfair.
[16] There are two distinct types of documents requested by the Joint Administrators. Each engages different considerations under the fairness analysis. In my view, neither creates unfairness.
(i) Documents communicated to the client
[17] The first category contains documents in the possession of EY Canada that would have been communicated to the client. These include invoices, emails, engagement letters, and advice given to the client.
[18] The parties agreed on search parameters used for production that were designed to identify, and appear to have identified, communications between EY Canada and its clients. The Monitor and Canadian debtors submit that to organize production, the parties agreed upon “Consolidated Document Requests”, which listed various types of documents the parties would agree to find and produce. The Consolidated Document Requests specifically sought communications with EY Canada pertaining to transfer pricing matters and certain analyses that EY Canada is alleged to have performed in connection with Nortel's transfer pricing system. The parties also agreed to document "custodians" likely to have documents responsive to the Consolidated Document Requests. The searches used to search custodian records for potentially responsive documents included searching for instances of the terms "transfer pricing" (and various derivative and related terms) appearing along with "Ernst", "EY", "E&Y" or "E and y".
[19] Searches of the documents produced confirmed the presence of communications between EY Canada and its clients. For example, according to the Monitor and Canadian Debtors, the names of EY Canada professionals identified in the Norris-Jones Affidavit as being involved in EY Canada's transfer pricing related work appear thousands of times in the documents produced, and that “the search string ‘ca.ey.com’, being the usual suffix to EY Canada email addresses, hits nearly 23,000 documents”.[^1]
[20] Two of the principles listed in Ballard were: (i) whether the discovery of the defendants with respect to the issues to which the documents are relevant is adequate; and (ii) the availability of the documents or their informational equivalent from some other source which is accessible to the moving parties.
[21] I am satisfied that much of the documentation requested has been previously communicated to the client, and thus is already subject to production and ongoing production.
[22] In my view, it would not be unfair to require the Joint Administrators to proceed to trial without production of this information from EY Canada.
(ii) Documents not communicated to the client
[23] What remains are documents which EY Canada did not communicate to its clients (Nortel entities). These documents may not have already been produced from another source (except insofar as the information was shared with Ernst and Young US and subpoenaed by the Joint Administrators in the United States). It is unclear what these documents would be other than work product or internal memoranda.
[24] It seems to me that the Joint Administrators have not provided evidence that shows how these documents which were not communicated to the client are important in the litigation. There is no dispute that advice given to clients with respect to the transfer price agreements could be important, or that communication between the parties might shed light on the development of these policies. But, the Joint Administrators have not provided evidence of some kind of gap upon which internal EY Canada documents would shed light. The Joint Administrators, in explaining the importance of the documents sought, suggest that “EY Canada acted as an extension of the Nortel Group by performing high-level strategic analysis in respect of transfer pricing” and specifically, that EY Canada was “consulted, and provided advice… engaged on behalf of the Nortel Group… [and] engaged to advise on the drafting…”[^2] These are all activities that would have resulted in communication with clients. There is no allegation that what was communicated to the clients somehow represents an incomplete picture of what occurred. Nor is there an allegation that such an incomplete picture could be supplemented by work product.
[25] In Morse Shoes Austin J.A. stated that rule 30.10 orders should be granted only in “exceptional cases”. Morse Shoes was such a case. The plaintiff was defunct – its knowledgeable personnel had been dispersed and its documents had many gaps. An example of such a gap is instructive: the former comptroller was examined for discovery with respect to certain documents produced by the plaintiff. He agreed that there was a meeting between the company and a bank on a particular date but had no recollection about what happened at that meeting or even if he attended (Morse Shoes at para. 14).
[26] In my view, a consideration of the Ballard factors in light of Morse Shoes reveals that the Joint Administrators have not met their burden. It is clear that EY Canada is not a “true stranger” to the litigation and that the internal EY Canada documents may not be available from another source. However, the other factors outweigh these considerations. The Joint Administrators have failed to show that, should a particular issue arise, the unfairness could not be remedied by production at trial. Nor have they shown how the present disclosure of communicated materials is not sufficiently adequate to the issues to which the non-communicated documents are relevant.
[27] Again, it is my conclusion that it would not be unfair to require the Joint Administrators to proceed to trial without production of this information.
[28] In the result, the motion for production of documents from EY Canada is dismissed with costs.
MORAWETZ J.
Date: September 23, 2013
[^1]: Affidavit of Christina Ierullo, para. 18.
[^2]: Affidavit of James Norris-Jones, at paras. 17-18.