CITATION: 3 Genius Corp. v. Locationary Inc. et al., 2015 ONSC 1439
COURT FILE NO.: CV-14-00497239-0000
DATE: 20150424
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
3 GENIUS CORP.
Plaintiff
– and –
LOCATIONARY INC. et al.
Respondent
David Vaillancourt and Wendy Sun, for the Plaintiff-Respondent
Sangeetha Punniyamoorthy and Nikolas S. Purcell, for the Defendant-Moving Party
HEARD: February 23, 2015
DOW, j
reasons
[1] The defendant seeks summary judgment dismissing the claims of the plaintiff for declaratory relief and monetary damages arising from the intellectual property ("IP"), specifically software, created by the corporate parties but operated by two brothers, Harlan Ritchie (on behalf of the plaintiff) and Grant Ritchie (on behalf of the defendant). The defendant seeks summary judgment on two grounds: first, that a quitclaim signed by the parties releases the very rights the plaintiff seeks to assert in the action; and second, that the plaintiff's claims are being raised after the expiry of the applicable limitation period and therefore are statute barred.
[2] For the reasons that follow, I dismiss the defendant's motion.
Background/Facts
[3] When 3 Genius Corporation ("3 Genius") began in 2000, both brothers were officers, directors, and shareholders in the business along with a third person, Jason White. Other members of the Ritchie family were involved, including brother David, sisters Shea and Moussette, and the mother, Musetta. The business concept involved an online gaming site (called Moola) which was to be supported by advertising revenue. It struggled after its launch in 2006.
[4] However, through the efforts of Harlan Ritchie starting in 2002, the business also became involved in an internet search optimization business, Diamond 21, which was more successful. It provided significant cash flow, and its profit was deposed to be $1.9 million dollars in 2002-2003. Genius purchased Diamond 21 in June 2003. Its profits were shared without dispute and facilitated the funding of the software development team.
[5] By July 2009, the defendant Grant Ritchie had the idea to create an online Yellow Pages business, initially a numbered corporation, 2211056 Ontario Inc., which becomes Locationary Inc. By that time, a dispute had arisen between the Ritchie brothers and Jason White, which resulted in protracted and costly litigation ultimately ending in a court-ordered buyout of Jason White and his aligned shareholders. This created investment and financial difficulties for 3 Genius and would appear to have been a significant factor in creating Locationary as a separate company, owned and operated by the defendant, Grant Ritchie. The parties agree that Locationary used and was billed by 3 Genius for its software development, which culminated in a June 2013 sale of Locationary Inc. to Apple for an amount of money purported to be up to $30,000,000 (without evidence of same). The defendants refused to disclose the purchase price, citing confidentiality issues with the purchaser.
Analysis - Quitclaim September 14, 2009
[6] The first argument made by the defendant in support of its motion is the existence of an assignment and quitclaim dated September 14, 2009 (Exhibit I of the affidavit of Grant Ritchie sworn November 21, 2014) whereby, in exchange for $100, 3 Genius (at paragraph two) "hereby sells, transfers, signs and quitclaims unto Locationary, its successor and assigns, all of 3 Genius' right, title and interest in and to the Locationary IP". Remarkably, it is signed by Grant Ritchie as president of 2211056 Ontario Inc/Locationary and also by Grant Ritchie on behalf of 3 Genius as a director.
[7] Grant Ritchie says Harlan Ritchie knew of and agreed to this and cites other versions of the draft agreement with Harlan's name indicated as the signatory for 3 Genius. He also alludes to contact between the two brothers to complete the agreement while he was at the offices of Cassels Brock to sign this document. An exchange of emails (Exhibit L to the affidavit of Grant Ritchie sworn November 21, 2014) and cell phone records appear to verify contact but do not contain any specific agreement by Harlan Ritchie to have Grant Ritchie execute the document on behalf of 3 Genius.
[8] The evidence of Harlan Ritchie is that not only did he not agree with execution of the quitclaim, he disagreed with the approach and had an argument over the value of the IP with Grant Ritchie previously. Harlan's evidence was that he was not aware this document, as executed, existed until searching for documents in preparation for litigation after the sale of Locationary to Apple in June 2013. The plaintiff, through Harlan Ritchie, did provide evidence from other sources, including Harlan's brother David and his mother, Musetta to support his position. There was no evidence put forward by either party with regard to those involved at Cassels Brock.
[9] It is important to note the document resurfaces in a "dropbox" email dated May 17, 2011, (Exhibit Q to the affidavit of Grant Ritchie sworn November 21, 2014) and that it was apparently opened by Harlan Ritchie. However, in response to an undertaking to advise of the number of files in the dropbox, counsel for the defendants advises that as of February 2, 2015, there were 151 files and/or 13 subfolders. This suggests a greater likelihood that it was not reviewed by Harlan.
[10] The parties agree that the law applicable to this motion is set out in the Hryniak v. Mauldin, 2014 SCC 7, decision, dated March 26, 2014, dealing with the Ontario amendments to r. 20.04 and whether there is a "genuine issue requiring a trial". In those amendments the Court was given enhanced fact finding powers such that a trial is not the default procedure (at paragraph 43). It is this Court's view that the legitimacy of this quitclaim raises issues of credibility to the point where the evidence of one party will have to be preferred over another. The Court is mindful of the statement in Hryniak at paragraph 50, that "a process that does not give a judge confidence in her conclusions can never be the proportionate way to resolve a dispute".
[11] In paragraph 51 Karakatsanis J. indicates,
...concerns about credibility or clarification of the evidence can be addressed by calling oral evidence on the motion itself. However, there may be cases where, given the nature of the issues and the evidence required, the judge cannot make the necessary findings of fact, or apply the legal principles to reach a just and fair determination.
[12] This is reinforced by the reasons of our Court of Appeal in Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450, in which Lauwers J. A., at paragraph 44, held as follows:
Evidence by affidavit, prepared by a party's legal counsel, which may include voluminous exhibits, can obscure the affiant's authentic voice. This makes the motion judge's task of assessing credibility and reliability especially difficult in a summary judgment and mini-trial context. Great care must be taken by the motion judge to ensure that decontextualized affidavit and transcript evidence does not become the means by which substantive unfairness enters, in a way that would not likely occur in a full trial where the trial judge sees and hears it all.
[13] As a result, on this issue, the defendant's motion fails.
Analysis - Limitation Issue
[14] The defendant's position is that even if the quitclaim is not valid, the three-year limitation period under s. 43.1 of the Copyright Act and/or the two-year limitation period under the Limitations Act, s. 4 applies and the claims should be dismissed on that basis.
[15] The evidence returns to the allegation that the quitclaim was forwarded to Harlan Ritchie on May 17, 2011, by a dropbox shared folder. Harlan Ritchie denies receipt or review of the document at that time or until June, 2013. It is clear the siblings were in the process of severing their business interests, which severance culminated on July 1, 2011, when Grant Ritchie resigned as a 3 Genius director. The defendants raised the discoverability principle, noting the Statement of Claim was not issued until January 27, 2014.
[16] There are several post-September 2009 documents to which the defendants point as opportunities where Harlan Ritchie could have raised the ongoing need to negotiate and complete evaluation of 3 Genius' intellectual property, which it contends was transferred for use by Locationary. The defendants point to a May 1, 2010, exchange of emails initiated by Grant Ritchie about having to "represent and warrant again that the IP is free and clear" asking his sibling, "Have we finalized this re: Moola? ... I don't know where we left it ... I don't know where we left it". The response by Harlan Ritchie was, "Dunno - we should chat about it. Maybe TMR?" Counsel for the defendants agreed with the Court that this would have been stronger evidence had Grant Ritchie referenced the quitclaim.
[17] There is a February 1, 2011, email relied upon by the defendants from Harlan Ritchie which raises a variety of points about the ongoing relationship (Exhibit V to the affidavit of Grant Ritchie sworn November 21, 2014) and does not raise the outstanding issue of the value of the intellectual property. There is an August 10, 2011, email to investors in 3 Genius from Harlan Ritchie (Exhibit CC to the affidavit of Harlan Ritchie sworn January 23, 2015) in which he advises that Locationary Inc. is a "totally separate unrelated company" and that any ability to acquire shares in Locationary Inc. would require a direct discussion with Grant Ritchie. There is a September 20, 2011, email (Exhibit ZG to the affidavit of Grant Ritchie sworn November 21, 2014) in which "Inter-company action items" are listed with Harlan Ritchie indicating "OK, I think that's it," in which, again, there is no mention of valuation of the intellectual property.
[18] There is an independent consultant services agreement signed by the parties on December 30, 2011, upon which the defendants rely as it states, in paragraph five, that 3 Genius "hereby assigns to Locationary all rights, and waives all moral rights, that the consultant may acquire in such proprietary information in the consultant’s role as a consultant." This agreement was renewable on October 31 with reference to a February 13, 2012, email from Harlan to Grant that the "3g-Loca agreement is up so there is no contract in effect any longer."
[19] The plaintiff’s explanation for these series of documents, contained in paragraphs 130- 132 of Harlan Ritchie's affidavit sworn January 23, 2015, is that the resolution of the intellectual property issue was to be worked out directly between Grant and himself and that because some members of the Locationary Board of Directors were sensitive about the intellectual property ownership issue, it was expressly not raised in print. Harlan indicates that he acquiesced to this arrangement because he believed the brothers would eventually be able to work out a deal.
[20] In response to the reality that Locationary Inc. needed to show ownership of the intellectual property in order to secure additional EVP financing, the evidence of Harlan Ritchie is that his brother told him they accepted his personal guarantee (see paragraph 79-81 of the affidavit of Harlan Ritchie sworn January 23, 2015). This would appear to be plausible given the chairman of EVP was a former university roommate and friend of Grant Ritchie's by the name of Ray Sharma. This evidence was not contested.
[21] Again, given the credibility issue and divergence of the evidence of the parties as to what occurred, it is the Court's view that there remains a plausible claim by the plaintiff against the defendants that is not barred by the two-year time limit imposed by the Limitations Act (and thus the three-year time limit imposed by the Copyright Act). Specifically, the sale of Locationary to Apple in June, 2013, appears to have triggered the need to resolve the issue of the value of the software development created by the plaintiff, which it agreed the defendant corporation could use. I rely on the comments of Mew J. in the decision of Hancock v. Hancock, 2014 ONSC 5551 where, at paragraph 47, he states, "For a judge to assess what is really going on in this case, he or she will have to not only listen to and read the evidence, but will also want to observe the demeanour of the witnesses in respect of the full range of the issues between the parties and to consider the human dynamics involved."
[22] Similarly, I conclude that the use of the fact finding powers would not allow the Court to reach a fair and just adjudication on the merits of this matter at this time.
[23] As a result, the defendant’s motion is dismissed. In the circumstances, the Supreme Court of Canada in Hryniak at paragraph 78 directs that I consider whether there are any compelling reasons that I not remain seized of the matter. This matter does not appear to have economies to be achieved by applying trial management criteria. I have made no findings of fact on the evidence beyond concluding there are genuine issues for trial with regard to the status and value of the intellectual property in issue at the time it was sold to Apple. In my view, the parties would be better served by having the action now proceed in the normal course and I decline to remain seized of it.
Costs
[24] The parties did not agree on this issue and provided me with their separate cost outlines at the conclusion of submissions. The cost outline of the defendant/moving party is almost $175,000.00, of which $6,771.91 is claimed for disbursements. By comparison, the cost outline of the successful plaintiff was $80,401.32 plus $1,552.73 of disbursements for a total of $81,955.05 at the substantial indemnity level. I note there is precedent (although it is no longer mandatory) to award substantial indemnity costs to the party successful in defending a summary judgment motion. Given the disparity in the amount of costs being claimed, it is the Court's view that the appropriate work involved in bringing and defending this motion would have been more equal than the respective cost outlines suggests. As a result the Court will exercise its discretion to allow recovery by the Plaintiff of its costs on a substantial indemnity level. That is, the plaintiff shall recover its costs in the amount of $81,955.05, from the defendant payable forthwith.
Mr. Justice G. Dow
Released: April 24, 2015
CITATION: 3 Genius Corp. v. Locationary Inc. et al., 2015 ONSC 1439
COURT FILE NO.: CV-14-00497239-0000
DATE: 20150424
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
3 GENIUS CORP.
Plaintiff
– and –
LOCATIONARY INC. et al.
Respondent
REASONS FOR JUDGMENT
Mr. Justice G. Dow
Released: April 24, 2015