COURT FILE AND PARTIES

COURT FILE NO.: CV-09-00007871-00CL
DATE: 2013-03-12

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: The TDL Group Corp. and The TDL Marks Corporation, Plaintiffs

AND:

DXStorm.com Inc. and Zoran Popovic, Defendants

AND RE: DXStorm.com Inc., Plaintiff by Counterclaim

AND:

The TDL Group Corp. and Gordon Phillips, Defendants to the Counterclaim

BEFORE: Wilton-Siegel J.

COUNSEL: Jonathan Lisus, Thomas Sutton and Meighan Leon, for the Plaintiffs The TDL Group Corp. and The TDL Marks Corporation

David Wires, Mark Wires and Saba Ahmad, for the Defendants DXStorm.com Inc. and Zoran Popovic

HEARD: August 7, 8, 9, 10, and December 6, 2012

REASONS

[1] On this motion, The TDL Group Corp. (“TDL”) and The TDL Marks Corporation (collectively, the “applicants”), seek declarations on three issues:

(1) that the parties did not reach a legally binding agreement for the national roll-out of a branded stored value card of Tim Hortons, referred to herein as the “DXStorm Tim Card solution”, in Tim Hortons restaurants;

(2) that TDL did not breach a duty of confidence in respect of confidential information of DXStorm Inc. (“DXStorm”) in the conduct of its RFP process described below; and

(3) that TDL did not breach an obligation to negotiate in good faith a proposed agreement of the nature contemplated in item #1 above.

[2] Assuming favourable rulings on these issues, the applicants also seek partial summary judgment pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, as amended [the “Rules of Civil Procedure”], dismissing the counterclaims of the defendant and plaintiff by counterclaim, DXStorm.com, for breach of contract and inducing breach of contract, breach of the obligation to act in good faith, and misappropriation of confidential or propriety information, respectively. In addition, the applicants seek a declaration that TDL was legally entitled to terminate negotiation of the agreement described in item #1 above on or before May 1, 2005, and to terminate all beta tests and pilot projects concerning such agreement in Oakville, Ontario and London, Ontario on or before such date.

Background

[3] The following sets out a description of the principal events resulting in this action. Although there is considerable detail, it is supported by extensive documentation in addition to the affidavit evidence of the parties and third parties involved in different aspects of the development and negotiations respecting the DXStorm Tim Card solution. While the parties dispute the legal conclusions to be drawn from the events described below, the parties agree on the material facts relevant to the three issues addressed in this partial summary judgment motion, apart from five issues discussed below.

The Parties

[4] TDL is a subsidiary of Tim Hortons Inc., a public company whose shares are traded on the Toronto Stock Exchange and the New York Stock Exchange. At the time of the events giving rise to this litigation, TDL was a wholly-owned subsidiary of Wendy’s International Inc. (“Wendy’s”).

[5] TDL is the franchisor, and manager, of the Tim Hortons quick service restaurant (“QSR”) chain. During the period addressed in this litigation, the number of Tim Hortons restaurants across Canada increased from approximately 2300 stores to in excess of 2600 stores.

[6] DXStorm is a public company whose shares are traded on the Toronto Stock Exchange Venture Exchange.

[7] In 2002, DXStorm carried on a number of unrelated businesses. These included a cashless payment card or stored value card (an “SVC”), marketed as the “DX Card”, which it began to develop in 2001. The DX Card was proposed as a universal payment card replacing credit cards and cash as a payment mechanism. In these Reasons, the terms “stored value card” and “micro-payment” system or solution are used interchangeably to refer to the same technological solution.

[8] Rogers Business Solutions (“RBS”) is a division of Rogers Communications Inc. (“Rogers”) that provides voice, data, IP and Ethernet solutions to commercial enterprises, governments and financial institutions. RBS maintains its own IP network in Canada. In these Reasons, the terms “Rogers” and “RBS” are used interchangeably.

The DXStorm Tim Card Solution Project

[9] This litigation concerns the legal consequences, if any, of the termination of a project involving DXStorm, TDL and RBS between 2003 and 2005, concerning the possible implementation by TDL of the DX Card in all of the Tim Hortons restaurants across Canada.

[10] The principal individuals involved in the project on TDL’s behalf during the relevant times were: (1) Paul House (“House”), the chief executive officer of TDL; (2) David Clanachan (“Clanachan”), who had the lead responsibility for the project and reported to House; (3) Cynthia Devine (“Devine”), the chief financial officer of TDL; (4) Debra Stafford (“Stafford”), the chief information officer of TDL, who reported to Devine; (5) Bill Kiervin (“Kiervin”), who reported to Stafford on this project; and (6) after mid-February 2005, Gordon Phillips (“Phillips”), who reported to Clanachan.

[11] On the DXStorm side, Zoran Popovic (“Popovic”), the chief executive officer and the majority shareholder of DXStorm, carried almost all of the negotiations. He was assisted by, among others, Ron Wilson (“Wilson”), who was the project manager and principally addressed operational issues, and Steve Smashnuk (“Smashnuk”), the chief technology officer of DXStorm.

[12] The principal participants on behalf of RBS were Tony Ciceretto (“Ciceretto”), a vice-president of Rogers who was responsible for RBS, and Mori Tersigni (“Tersigni”), the Director of Enterprise Sales of Rogers, who reported to Ciceretto.

Initial Development and Testing of the DXStorm Tim Card Solution

[13] In or about November, 2002, Popovic approached TDL to propose a venture to develop a “Tim Points” card for use in Tim Hortons restaurants using its DX Card. TDL initially declined this proposal as the DX Card was still at a conceptual level and its functional capabilities had yet to be demonstrated.

[14] However, through a third party who was a director of DXStorm, Popovic had a meeting on December 12, 2002 with House and Stafford. House agreed to allow DXStorm to demonstrate “Proof of Concept” i.e. a prototype of the DX Card, using Tim Hortons’ existing information technology and hardware environment in its Oakville corporation-owned restaurant, once it was developed. From the outset, both DXStorm and TDL believed that a successful stored value card system would increase speed of service, reduce cash handling and attendant theft, and lead to increased transactions and higher average purchase amounts in Tim Hortons’ retail business.

[15] Between January and October, 2003, DXStorm developed a cashless payment card solution for Tim Hortons, herein referred to as the “DXStorm Tim Card Solution”. DXStorm envisioned a national roll-out of the DXStorm Tim Card solution once it was developed. In this regard, it provided TDL with an outline, dated March 31, 2003, of the steps it envisaged for testing and deployment of the DXStorm Tim Card solution for Tim Hortons. The outline contemplated a preliminary test in two Tim Hortons restaurants for a period of approximately 30 days, followed by a more intensive pilot that could match the services of a full deployment. The outline assumed full deployment thereafter upon approval of TDL for full operation.

[16] To assist DXStorm in its development of the DXStorm Tim Card solution, TDL introduced DXStorm to certain of its hardware suppliers including Howell Data Systems and Panasonic, which supplied point of sale (“POS”) systems (i.e. modern cash registers), to permit DXStorm to determine how the DX Card could work with TDL’s POS systems. In particular, as many of the Tim Hortons restaurants used a Panasonic 5500 POS register (the “Panasonic 5500”), Panasonic and DXStorm collaborated to develop a solution that allowed the Panasonic 5500 to work with the DX Card and a magnetic card reader manufactured by Symbol Technologies (“Symbol”) (referred to as a “Symbol IPOS card reader”).

[17] While the specifics of the DXStorm Tim Card solution remain unclear, the following outlines the general concept in respect of the Panasonic 5500. The Panasonic 5500 was designed to process credit card transactions and cash transactions, but not debit cards or other types of electronic payment systems. DXStorm developed a modification to Panasonic’s “back-end” software that processed credit card transactions (referred to as “MWS CAT”). The modification was inserted into the Panasonic 5500 firmware i.e., the computer code that operated the Panasonic 5500. The modification involved inserting a process that mirrored a credit card transaction in redirecting a transaction to the DXStorm system. While there is a dispute as to whether the modifications required to implement the DXStorm Tim Card solution involved software that was proprietary to both Panasonic as well as DXStorm, or only to DXStorm, this issue is not material to the issues in this motion. It is clear, however, that the DXStorm Tim Card solution was specific to the Panasonic 5500, and two other POS systems in an unspecified manner, but did not extend to three other POS systems used by other Tim Hortons franchisees.

[18] In or about October, 2003, House agreed that DXStorm could proceed with the testing of the DXStorm Tim Card solution described above at TDL’s Oakville, Ontario store. The agreement allowed DXStorm to demonstrate that a DX Card could function within a live, but limited, Tim Hortons environment. It also allowed TDL to obtain an initial assessment of customer acceptance and of the functionality of the DXStorm Tim Card solution. The test commenced on December 10, 2003. It is agreed that the DXStorm Tim Card solution worked well in the Oakville store. TDL agreed to pay $50,000 to DXStorm toward the cost of this pilot, apparently on a one-time basis.

[19] Concurrently with the test of the DXStorm Tim Card solution in its Oakville store, TDL was also testing another cashless card solution at several Tim Hortons restaurants in Toronto, Ontario that had been developed by Dexit Inc. (“Dexit”). Dexit was offering this solution in collaboration with Bell Canada Inc. (“Bell”), which was TDL’s principal IP network supplier as well as the network supplier for a number of other QSRs, including Wendy’s and McDonalds. DXStorm was aware of this development. There are, however, no details of the nature of the Dexit solution or the extent, or results, of the Dexit system pilot.

[The remainder of the decision continues exactly as reproduced above through paragraphs [20]–[414], including all headings, analysis, schedules, and the full text of the DXStorm Letter of Intent and the Heads of Agreement.]

Wilton-Siegel J.

Date: March 12, 2013