Court File and Parties
Court File No.: CV-13-489853 Date: 2015-07-21 Superior Court of Justice - Ontario
Re: Robert Teti and ITET Corporation / Plaintiffs / Responding Parties And: Mueller Water Products Inc., Mueller Co., Mueller Canada Ltd., and Mueller International LLC / Defendants / Moving Parties
Before: Justice Edward P. Belobaba
Counsel: Kenneth Hanna and Christopher Langan for the Moving Parties Joseph Etigson and Paul Lomic for the Responding Parties
Heard: July 7, 2015
motion for partial summary judgment
[1] The decision of the Supreme Court in Hryniak v. Mauldin[^1] clarified the law of summary judgment in Ontario. The Court made clear that the analysis should proceed in two steps: the motion judge should first determine if there are any genuine issues requiring trial without using the enhanced fact-finding powers set out in Rule 20.04. If there are such issues, the judge should then decide if the need for a trial can be avoided by using the enhanced powers. But the enhanced powers should only be used if this would lead to a fair and just result. Summary judgment is not appropriate where it is in the interest of justice that the matter be decided at trial.[^2]
[2] There will therefore be cases where there are genuine issues requiring trial, where a trial could in theory be avoided by using the enhanced powers, but the use of these powers to achieve a summary adjudication would not be fair or just or in the interest of justice. All the more so, when the motion is only for partial summary judgment and there will be a trial in any event.
[3] This is such a case.
[4] For the reasons set out below, the defendants’ motion for partial summary judgment is dismissed.
Background
[5] Robert Teti is an inventor and the president and sole owner of his company, ITET Corporation (Teti spelled backwards.)
[6] In 2002, Robert Teti conceived of a technology that would deal more effectively with the problem of opening and closing a “curb stop” water valve. The curb stop valve (installed near the street curb, hence the name) regulates the delivery of water from the municipal water main to the home or building’s water service pipe. Mr. Teti’s idea was to use a motor controlled by a remote electrical signal to open or close the curb stop, rather than having to attend on-site and do this manually. The market for a remote curb stop regulator was significant.
[7] Mr. Teti decided to take his ITET Digital Water System concept (“the ITET System”) to Mueller, a long-established water products company. Teti hoped that Mueller would help him develop, manufacture and market the ITET System to their existing and potential municipality-customers.
[8] In April 2002, Teti and Mueller Canada executed a confidentiality agreement. In September 2009, ITET and Mueller Canada entered into “an agreement for the exclusive supply of the ITET Digital Water System.” Under the 2009 agreement (which had a two-year term) ITET continued to own the product’s intellectual property but granted Mueller Canada exclusive North American marketing rights. Mueller Canada in turn agreed, at its own cost, to provide the resources and expertise to complete the development and testing of the ITET System and then begin mass production and distribution.
[9] The 2009 agreement, although extended for one year, was terminated by Mueller in 2012. According to the plaintiffs, Mueller never completed the development of the ITET System because it was secretly working on a competitive remote curb-stop product, called the “420 RDM.” (RDM for “remote disconnect meter.”) It is undisputed that by the summer of 2012, the 420 RDM was being promoted and marketed by a Mueller company called Mueller Systems.
[10] Mr. Teti alleges that the 420 RDM is the very product that Teti expected the defendants to develop with him.
[11] The plaintiffs have sued four Mueller entities – the parent company Mueller Water Products Inc., Mueller Co. (which the parties refer to as Mueller US), Mueller International LLC and Mueller Canada Ltd. I will refer to these defendants as MWP, M-Co, M-Int and M-Can. The plaintiffs have not sued Mueller Systems because of an apparent admission by the defendants that M-Sys is a “division” of MWP. In actual fact, M-Sys is an incorporated subsidiary of MWP. However, nothing turns on this – if the plaintiffs want to amend their claim to add M-Sys as a fifth defendant they can probably do so.
[12] The defendants agree that the claim against M-Can will proceed to trial but ask that the actions against MWP, M-Co and M-Int be summarily dismissed.
The action
[13] The plaintiffs allege that the defendants are a “common enterprise”[^3] that together and in concert misappropriated their confidential information and used it as a “springboard”[^4] for the development of their own competing product, and did so in breach of their relationship of confidence and the obligation to perform the 2009 agreement honestly and in good faith. The plaintiffs say that M-Can together with M-Co developed and tested the Teti product and shared the information with M-Syst which led to the manufacturing and marketing of the defendants’ 420 RDM. The patent for the 420 RDM is held by M-Int. The plaintiffs seek damages, an injunction and a declaration that Mr. Teti is entitled to ownership or a constructive trust over the 420 RDM and its related intellectual property.
[14] The defendants insist that the 420 RDM is the independent work product of M-Sys and ask that this motion for partial summary judgment be granted. The defendants submit that the doctrine of “common enterprise” or “group enterprise” does not exist in Canadian law and that if the core complaint is the breach of the 2002 or 2009 agreements, the claims against MWP, M-Co and M-Int must be summarily dismissed because only M-Can signed these agreements.
Analysis
[15] My initial reaction, after reviewing the large volume of evidence filed by both sides and the detailed written submissions, was that this relatively complicated intellectual property dispute should be resolved at trial – especially since the claim against M-Can was going to trial in any event (because it was M-Can that signed the 2002 and 2009 agreements). Counsel for the defendants, however, was adamant that the “group enterprise” concept does not exist in Canadian law and the action against the other three defendants - MWP, M-Co and M-Int - should therefore be summarily dismissed.
[16] I have reviewed the legal and evidentiary submissions. I am persuaded that there is both a legal and factual basis for the plaintiffs’ “group enterprise” claim, that there are genuine issues requiring trial and that it is fair and just and in the interest of justice that this motion be dismissed and that the matter proceed to trial.
The legal basis for the “group enterprise” claim
[17] The plaintiffs agree that as a general rule, the “corporate veil” should only be lifted or pierced where there is agency and illegality. Known as the principle in Salomon v. Salomon, [^5] it is proper to disregard the corporate entity and to look to those who might be considered to be the persons "behind" the corporation where, but only where, the corporation is being employed as an agent of such persons and where those persons employ the corporation as a "sham, device or puppet" for the perpetration of harm.[^6]
[18] Neither factor has been established here, and certainly not the second.
[19] The plaintiffs also agree that the “group enterprise theory” is not a separate or free-standing doctrine that has superseded the principle in Salomon v Salomon.[^7] Rather, say the plaintiffs, (in my view correctly) the “group enterprise” concept is an exception to the general proposition just stated; its application depends on the particular circumstances and, as the Court of Appeal noted in Manley,[^8] it must be “carefully limited.”^9 The best explanation of the cases that have considered the “group enterprise” or “single business entity” concept can be found in the 1994 decision of Spence J. in MacKenzie Trust: [^10]
These decisions [Manley and others] do not support a claim that the test in Salomon v. Salomon has been superseded by a new "business entity" or "single business entity" test. They merely illustrate the principle that, in particular fact situations where the nature of the legal issue in dispute makes it appropriate to have regard to the larger business entity, the court is not precluded by Salomon from doing so. In a few cases, there are statements that the court will lift the corporate veil" where injustice would otherwise result". I am not able to conclude that such statements are intended to remove the authority of the Salomon principle. I think they may be more in the nature of a shorthand formulation reflecting the approach of the courts in the cases discussed above.[^11]
[20] Spence J.’s analysis was recently cited with approval by Strathy J., as he then was, in Fairview Donut[^12] and by Horkins J. in Durling.[^13]
[21] I therefore conclude that the “group enterprise” or “single business entity” theory does exist in Canadian law but only as a carefully limited exception to the well-established proposition set out in Salomon. As Spence J. noted in MacKenzie Trust, “in particular fact situations where the nature of the legal issue in dispute makes it appropriate to have regard to the larger business entity, the court is not precluded by Salomon from doing so.”
The factual basis for the “group enterprise” claim
[22] The plaintiffs have presented two categories of evidence that the four Mueller defendants worked in common as a group enterprise or single business entity when dealing with the plaintiffs’ invention.
[23] The first category consists of evidence that the Mueller defendants themselves conducted business as a group enterprise with few if any walls separating them as corporate entities:
There is evidence that each of the companies had different roles and undertook discrete functions: the parent MWP provided legal, tax and marketing services to its subsidiaries; the R&D department at M-Co developed new products or product extensions and provided that development service for other Mueller companies; and M-Int held the licenses and enforced the intellectual property rights developed internally or acquired from third parties.[^14]
Corporate filings indicate that the parent MWP managed its business through “business segments” reflecting products and markets rather than through corporate entities. There is evidence that the name M-Co referred to a MWP business segment rather than the incorporated subsidiary.
There is evidence of common trademarks and counter-intuitive correlations. For example, Mueller® was a trademark (amongst other trademarks) that was used by the various entities in the M-Co business segment and Mueller Systems™ was actually an M-Co brand name. Mueller® and Mueller Systems™ were owned by M-Int.
[24] The second category of evidence that the four Mueller defendants worked in common as a group enterprise when dealing with the plaintiffs’ invention consists of the evidence of the defendants’ actual interaction on the facts herein:
There is evidence of cooperation between M-Can and M-Co in the development and marketing of the ITET System. In the marketing material, M-Co is identified as the exclusive source of the “Mueller® “ITET” Digital Water System.”
In April 2010, M-Co launched a project described as: “IDEA Project H-1 001 Mueller Co. / Mueller Systems” that led to the development of the 420 RDM.
There is evidence that both M-Co and MWP participated in the development of the 420 RDM and that MWP itself was involved in its manufacture and sale. MWP issued a press release about the new product. Product advertising carried the names MWP and M-Sys. The patent for the 420RDM was held by M-Int.
MWP has admitted that as early as July 2012, “Mueller Systems, a division of Mueller Water Products, Inc.” began distributing a product brochure advertising the 420 RDM.
Various inter-company emails provide further evidence that the four defendants were working together as a common undertaking consistent with the description in the corporate filings that MWP managed its business through segments rather than separate legal entities.
The defendants have not presented any evidence from any person at M-Sys that the 420 RDM was independently conceived by Mueller Systems.
[25] There is thus compelling evidence of a factual nexus amongst the four defendants and a factual basis for the “group enterprise” claim.
Genuine issues requiring trial
[26] It is important to note that the plaintiffs are not placing all their eggs in the “breach of contract” basket, whether the 2002 or the 2009 agreement. They also allege an equitable breach of confidence that does not require a contractual relationship.[^15] Nonetheless, in my view, the two most viable issues requiring trial, broadly stated, are these:
(i) Did the defendants operate as a common or group enterprise when dealing with the plaintiffs and their ITET System invention? And, tracking the language in MacKenzie Trust,[^16] does the nature of this dispute make it appropriate to have regard to the larger business entity?
(ii) Did the defendants misappropriate the plaintiffs’ confidential information and use it as a “springboard” for the development of their own competing product, in breach of their relationship of confidence and the obligation to perform the 2009 agreement honestly and in good faith?
[27] The defendants have presented detailed evidence aimed at rebutting the allegations of group enterprise and misappropriation of confidential information. The defendants say this court can and should dismiss the claims as against MWP, M-Co and M-Int by using its enhanced fact-finding powers under Rule 20.04 (2.1) and (2.2). I am not persuaded.
[28] In my view, this is not a case for summary adjudication.
Why a trial is needed
[29] Given the complexity of the evidence about the inter-corporate connections and interactions as set out above, the “group enterprise” allegation alone requires a trial. These are not findings that can or should be made summarily. The same can be said about the breach of confidence/springboard claim that will, in any event, involve the same defendants and the same parade of evidence.
[30] Recall that Hyrniak v. Mauldin[^17] encouraged summary adjudication using the enhanced fact-finding powers only where this would lead to a fair and just result and would “serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole.”[^18] Here the claim against M-Can is proceeding to trial in any event. Much if not all of the same evidence will have to be considered again at the M-Can trial. The defendants have presented no evidence that the trial will be any sooner or any shorter if three of the four defendants are removed from the proceeding. There is also a risk of duplicative proceedings and inconsistent judicial findings, neither of which is in the interest of justice.[^19]
[31] In sum, I am not confident that I can summarily adjudicate the claims against MWP, M-Co and M-Int and achieve a fair and just result. Exercising my discretion, I decline to use the enhanced fact-finding powers for a partial adjudication. In my view, it is in the interest of justice that the action proceed to trial in its entirety.
Disposition
[32] The motion for partial summary judgment is dismissed.
[33] If the costs of this motion cannot be resolved by the parties, the plaintiffs should forward brief written submissions within 10 days and the defendants within 10 days thereafter.
Date: July 21, 2015 Belobaba J.
[^1]: Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87.
[^2]: Ibid., at paras. 66-67.
[^3]: Also referred to in the case law as “group enterprise” or “single business entity”.
[^4]: Under the springboard doctrine as explained by the English Court of Appeal in Seager v. Copydex, [1967] 1 W.W.R. 923 at 931, and applied by the Supreme Court of Canada in Slavutych v. Baker, 1975 CanLII 5 (SCC), [1976] 1 S.C.R. 254 at 261, a defendant can be liable even if the plaintiff provided only the germ of an idea which the defendant developed over a prolonged period of time “and springboard it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public” (citing Terrapin Ltd. v. Builders’ Supply Co. [1960] R.P.C. 128 at 130.)
[^5]: Salomon v Salomon & Co., [1897] A.C. 22 (H.L.)
[^6]: The law on point is summarized in Miquelanti Ltda. v. FLSmidth & Co., 2011 ONSC 3293 at paras. 18-22. Also see Transamerica Life Insurance Co of Canada v. Canada Life Assurance Co, 1996 CanLII 7979 (ON SC), [1996] O.J. No. 1568 at para. 22 (Gen. Div.), aff’d [1997] O.J. No. 3754 (C.A.) and 801962 Ontario Limited v. MacKenzie Trust Co., [1994] O.J. No. 2105 (Gen. Div.) at para. 8.
[^7]: Supra, note 5.
[^8]: Manley v. Fallis, 1977 CanLII 3487 (ON CA), [1977] O.J. No. 1080 at para. 6 (C.A.).
[^10]: Supra, note 6.
[^11]: Ibid., at para. 37. (Emphasis added.)
[^12]: Fairview Donut Inc v. TDL Group Corp, 2012 ONSC 1252 at para. 657, aff’d 2012 ONCA 867.
[^13]: Durling v. Sunrise Propane Energy Group Inc., 2012 ONCA 592, 2012 O.J. No. 4196 at para. 109 (S.C.J.)
[^14]: The plaintiffs refer to the following excerpt from Blumberg on Corporate Groups (Looseleaf 2nd ed., 2015-1 Supp.) at 6.8: “To the extent that affiliated companies rely on affiliated corporations for these vital functions [i.e. legal, tax and other administrative services] instead of providing them themselves, the companies become increasing intertwined, and their resemblance to independent corporations diminishes.”
[^15]: As discussed in Maddaugh and McCamus, The Law of Restitution, (Looseleaf ed. 2014) at 28.1 et seq.
[^16]: Supra, note 6.
[^17]: Supra, note 1.
[^18]: Ibid., at paras. 60 and 66. (Emphasis added.)
[^19]: Baywood Homes Partnership et al. v Haditaghi et al, 2014 ONCA 450 at paras. 34 and 37.