ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-15-526736
DATE: 20151124

BETWEEN:

2393134 ONTARIO INC., XTG HOLDINGS (ONTARIO) INC., IT XCHANGE (ONTARIO) CORP., XTG HOLDINGS (USA) INC., XTG HOLDINGS 2 (USA) INC., IT XCHANGE FINANCIAL SERVICES (2013) INC., PARTSTOCK COMPUTER (2013) INC., IT XCHANGE (2013) CORP. and BLUERANGE TECHNOLOGY (2013) CORP.

Plaintiffs

– and –

JEFFREY MCFARLANE, TRIATHLON COMPUTER, LLC, XCHANGE TECHNOLOGY RENTALS, INC., XCHANGE TECHNOLOGY GROUP, INC., DEAN PEJCINOVSKI, ASHLEY RUSAK, CHRISTOPHER DESBRISAY, SIMON LAM, JOSH WILSHIRE, RANDY MARKOVICH, ERIC ESTES, LEE CHAMBERS, MICHAEL THOMAS, MAURO SINAGOGA, ANNEMARIE GUTIERREZ and CATHY MCFARLANE

Defendants

Lisa S. Corne for the Plaintiffs

Alan B. Merskey and Nicole Marcus for the Defendants Jeffrey McFarlane, Cathy McFarlane, Triathlon Computer, LLC, Xchange Technology Rentals, Inc., and Xchange Technology Group, Inc.

HEARD: November 16, 2015

PERELL, J.

REASONS FOR DECISION

[1] The Defendants, who I shall refer to as: (a) Mrs. McFarlane; and (b) Mr. McFarlane and his businesses, bring a motion to strike 15 paragraphs (i.e., paragraphs 28, 50, 52-55, 75-77, 97-100, and 105-106 of the Statement of Claim).

[2] The Plaintiffs, who I shall refer to as the “New-XTG Group” do not concede that any of these paragraphs should be struck, but they do concede that the Statement of Claim does not disclose a cause of action for fraudulent or negligent misrepresentation, or unlawful interference with economic relations, and, therefore, the New-XTG Group offers to strike the references to those causes of action (i.e., paragraphs 1(a)(i)(5) and (8), 1(b)(i)(3) and (6), and 1(c)(iii)(5) and (8)) from the Statement of Claim, without prejudice to their rights to seek leave to amend the Statement of Claim to assert those causes of action in the future.

[3] I shall ignore the New-XTG Group’s concession as such, and for the reasons that follow, I shall: (a) strike out paragraph 28 of the Statement of Claim, which is the essential paragraph that joins Mrs. McFarlane to the action; (b) strike her joinder to the action; (c) grant leave to New-XTG Group to deliver an amended Statement of Claim to plead an amended claim against Mrs. McFarlane and to rejoin her to the action within 30 days; (d) strike out the claim for interference with economic relations in paragraph 1 of the Statement of Claim with leave to amend within 30 days; and (e) otherwise dismiss Mr. McFarlane and his businesses’ motion to strike.

[4] The New-XTG Group is a group of subsidiary or associated corporations that supply computer and technology products and services. The New-XTG Group consists of: 2393134 Ontario Inc., XTG Holdings (Ontario) Inc., IT Xchange (Ontario) Corp., XTG Holdings (USA) Inc., XTG Holdings 2 (USA) Inc., IT Xchange Financial Services (2013) Inc., Partstock Computer (2013) Inc., IT Xchange (2013) Corp., and Bluerange Technology (2013) Corp.

[5] The New-XTG Group purchased its assets and business from the XTG Group, which was a group of corporations established by Mr. McFarlane in 1996 and which business had grown to be an integrated global operation with head offices in Oakville, Ontario and Morrisville, North Carolina.

[6] Mr. McFarlane was the majority shareholder and CEO of the XTG Group until June 6 2013, when pursuant to what has been called the “Ceding Letter,” he agreed to relinquish all his authority as an officer and employee of the XTG Group. In October 2013, the XTG Group, then under the management of a court appointed receiver, dismissed Mr. McFarlane as an employee.

[7] Mr. McFarlane lost his businesses and his employment because the XTG Group defaulted on a $36.9 million loan to Callidus, and it enforced its security for the loan. The loan, among other things, was secured by Mr. McFarlane’s personal guarantee. The Ceding Letter was part of a Forbearance Agreement between the XTG Group and Callidus. On October 10, 2013, Callidus obtained the appointment of Duff & Phelps Canada Restructuring Inc. as Court-Appointed Receiver of the XTG Group. The Receiver sold Mr. McFarlane’s former businesses to the New-XTG Group.

[8] In this action, the New-XTG Group alleges that after his departure from the XTG Group, Mr. McFarlane started up a rival group of corporations by misappropriating New-XTG’s assets, including its human resources of employees and its goodwill of customers and clients.

[9] Thus, the New-XTG Group sues: Mr. McFarlane; Triathlon Computer, LLC, Xchange Technology Rentals, Inc.; and Xchange Technology Group, Inc. for $10 million for: (1) breach of fiduciary duty; (2) inducing breach of non-disclosure and non-solicitation agreements; (3) breach of the Ceding Letter; (4) breach of the duty of confidentiality; (5) fraudulent or negligent misrepresentation; (6) injurious falsehood; (7) false and misleading statements in contravention of s. 36 and s. 52 of the Competition Act; (8) unlawful interference with the Plaintiffs’ economic relations; (9) misappropriation of business opportunities; (10) conversion; and (11) unjust enrichment.

[10] The New-XTG Group also sues the former XTG Group employees whom it alleges were lured away by Mr. McFarlane to join his rival businesses. Thus, it sues the Defendants, Dean Pejcinovski, Ashley Rusak, Christopher DesBrisay, Simon Lam, Josh Wilshire, Randy Markovich, Eric Estes, Lee Chambers, Michael Thomas, Mauro Sinagoga, and AnneMarie Gutierrez for $10 million for: (1) breach of non-disclosure and non-solicitation agreements; (2) breach of the duty of confidentiality; (3) fraudulent or negligent misrepresentation; (4) injurious falsehood; (5) false and misleading statements in contravention of s. 36 and s. 52 of the Competition Act; (6) unlawful interference with the Plaintiffs’ economic relations; (7) misappropriation of business opportunities; (8) conversion; and (9) unjust enrichment.

[11] Further, the New-XTG Group sues Cathy McFarlane, who is Mr. McFarlane’s wife. It alleges that during Mr. McFarlane’s tenure as CEO of the XTG Group, “certain assets including the Defendant Triathlon Computer LLC, were put into Mrs. McFarlane’s name.” The New-XTG Group alleges that Triathlon Computer was one of XTG Group’s divisions and operated as a subsidiary of the business.

[12] Thus, there are three classes of Defendants; namely: (1) Mr. McFarlane and his businesses; (2) the former employees of the XTG Group; and (3) Mrs. McFarlane.

[13] As against all the Defendants, the New-XTG Group claims: (1) an accounting of moneys received from their wrongful conduct; (2) disgorgement of moneys received from their wrongful conduct; (3) punitive damages of $500,000; (4) a variety of interim, interlocutory and permanent restrictive and mandatory injunctions and declarations; and (5) in the alternative, damages of $10 million for conspiracy to commit: (i) breach of fiduciary duty; (ii) breach of non-disclosure and non-solicitation agreements; (iii) breach of the Ceding Letter; (iv) breach of the duty of confidentiality; (v) fraudulent or negligent misrepresentation; (vi) injurious falsehood; (vi) false and misleading statements in contravention of s. 36 and s. 52 of the Competition Act; (vii) unlawful interference with the Plaintiffs’ economic relations; (viii) misappropriation of business opportunities; (ix) conversion; and (x) unjust enrichment.

[14] The New-XTG Group’s claim is primarily against Mr. McFarlane, and in the Statement of Claim it pleads that before leaving the XTG Group, he changed the Non-Disclosure and Non-Solicitation Agreements of some of its employees and before and after leaving he induced employees to breach their contracts with the XTG Group. It is alleged that he misappropriated confidential information, computers, databases, and trade secrets and that he induced various employees to leave XTG Group to join his new competing business, which wrongfully used Triathlon Computer, which had operated as an XTG Group division, as a business vehicle for competing for business. It is alleged that Mr. McFarlane and the former employees disparaged and published false information about their former employer, the XTG Group.

[15] The New-XTG Group pleads that the Defendants engaged in unfair or deceptive acts or methods of competition to usurp the use of the XTG Group’s subsidiary, Triathlon Computer, to directly compete with the XTG Group and to interfere with and disrupt the New-XTG Group’s economic relations. It pleads that it has suffered irreparable injury that cannot be adequately compensated by monetary damages, including without limitation, disclosure of confidential information, loss of proprietary information, loss of business opportunities, and loss of reputation and goodwill.

[16] Mrs. McFarlane and Mr. McFarlane and his businesses bring this motion to strike paragraphs from the Statement of Claim. As noted above, the attacked paragraphs are paragraphs 28, 50, 52-55, 75-77, 97-100, and 105-106, which state:

28. The Defendant, Cathy McFarlane (“Ms. McFarlane”), is the wife of McFarlane. During McFarlane’s tenure as Chief Executive Officer of the XTG Group, certain assets rightfully belonging to the XTG Group, including the Defendant Triathlon, were put into Ms. McFarlane’s name.

29. Prior to his departure and continuing to do so after, McFarlane engaged in a directed campaign to undermine the XTG Group’s business. This campaign included soliciting the Employee Defendants and other XTG Group employees, making false statements regarding the viability of the XTG Group’s future business and stealing confidential and trade secret information.

30. In addition, McFarlane solicited the Employee Defendants by making false and deceiving statements with regard to the continued viability of the XTG Group, including, but not limited to, stating that:

(a) “The XTG Group will not last beyond the next six months, a year at best”;

(b) “The XTG Group is losing money rapidly and I have insider knowledge that the XTG Group will be closed by July 2014”;

(c) “The XTG Group is planning to do a massive layoff in July 2014”;

(d) “There is no one running the XTG Group”;

(e) “The XTG Group is losing $2 million a month”;

(f) “The XTG Group is going out of business”;

(g) “The XTG Group is being dismantled”; and

(h) “The XTG Group is winding down its business units”.

53. McFarlane knew that the statements were false or, in the alternative, acted with reckless disregard of the statement’s truth or falsity.

54. McFarlane knew or should have known that the false statements would cause pecuniary loss to the XTG Group.

55. The XTG Group has been harmed by the statements made by McFarlane. Without restricting the generality of the foregoing, the XTG Group has incurred costs of having to replace and train employees to fill the positions vacated by the Employee Defendants.

56. In allowing or acquiescing to the reduction of the duration of the Non-Disclosure & Non-Solicitation Agreement, the Employee Defendants and McFarlane conspired together to harm the XTG Group for their direct or indirect benefit. Specifically, McFarlane and the Employee Defendants conspired to reduce the duration of their contractual obligation not to solicit the XTG Group Customers in order to wrongfully solicit those customers and obtain the business for Triathlon, McFarlane and Ms. McFarlane (the “Conspiracy”).

57. The Defendants wrongfully conspired with one another with the intent to and for the purpose of committing the tortious acts as more fully set forth herein, and including, but not limited to, commercially disparaging and publishing false information about the XTG Group regarding its business viability, tortiously interfering with the XTG Group’s contracts and economic relations and confidential and proprietary information of the XTG Group.

58. In furtherance of the Conspiracy, McFarlane, prior to his termination but after ceding power as the Chief Executive Officer, acted in concert with other employees of the XTG Group to wrongfully change the Non-Disclosure & Non-Solicitation Agreement of at least one employee to reduce the duration of such employee’s obligations. Such attempted modifications would benefit the Defendants, at the expense and detriment of the XTG Group.

59. In his attempts to solicit XTG Group Customers to Triathlon, McFarlane and the Employee Defendants have made a significant number of false and misleading statements to the XTG Group Customers about the XTG Group’s business viability. These misrepresentations include that the XTG Group is winding down some of its business units, or being completely dismantled, and that the XTG Group employees have been or will be without employment.

60. McFarlane and the Employee Defendants knew that the statements were false or, in the alternative, acted in reckless disregard of the statements’ truth or falsity.

61. McFarlane and the Employee Defendants knowingly and intentionally made the false statements to cause pecuniary loss or reasonably should have recognized that their statements would result in pecuniary loss to the XTG Group, and would benefit Triathlon.

62. As a result, the XTG Group’s reputation has been harmed and it has suffered and will continue to suffer loss. Without restricting the generality of the foregoing, the XTG Group’s customers and suppliers, having heard the false statements from the Defendants, requested assurances from the XTG Group that it can continue to service and operate adequately and that, going forward, the customers and suppliers will be hesitant in its dealings in the industry.

63. The Defendants further engaged in deceptive and unfair competition as they have created new entities with deceivingly similar names to the XTG Group (e.g., “Xchange Technology Group, Inc.”) for the purpose of confusing the marketplace and customers of the XTG Group. Adding to the confusion, the Defendants have intentionally and maliciously published false and misleading statements regarding the continued viability of the XTG Group, which has impacted the XTG Group’s economic relations.

64. The Defendants are using confidential and trade secret information of the XTG Group to directly and unfairly compete with the Plaintiffs and are disrupting the XTG Group’s economic relations by disseminating false and misleading statements regarding the business viability of the XTG Group.

[17] I agree with Mrs. McFarlane’s submission that no reasonable cause of action has been pleaded against her. The truth of the matter is that no elements of any cause of action are pleaded against her, and she does not appear to be a necessary party to the claims against other Defendants.

[18] Apart from paragraph 28 of the Statement of Claim, Mrs. McFarlane is barely mentioned in the pleading, and rather, she is simply lumped together with Mr. McFarlane, his businesses, and the former employees of the XTG Group as a Defendant to the conspiracy claim. What role she played in any conspiracy or in any cause of action, apart from being the recipient of the shares of a company owned by her husband and transferred to her before the XTG Group defaulted on its loan, is not explained. What she did with respect to any of the myriad causes of action is not elucidated at all. There is nothing for her to defend, and even a general denial of the allegations made against her is nonsensical because no allegations of the elements of a claim are made against her. I, therefore, dismiss the action against her without prejudice and with leave for the Plaintiffs to deliver an Amended Statement of Claim against her within 30 days.

[19] Turning then to Mr. McFarlane and his businesses’ motion to strike paragraphs 50, 52-55, 75-77, 97-100, and 105-106 from New-XTG Group, this is a motion pursuant to Rule 21, but Mr. McFarlane is candid to concede that the problem with the Statement of Claim is not that it is plain and obvious that the New-XTG Group cannot plead a reasonable cause of action, rather, the problem is that the New-XTG Group has not yet done so.

[20] The most important rule about pleadings is rule 25.06(1), which provides that every pleading shall contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved. This rule directs the disclosure of the “material” facts, which include facts that establish the constituent elements of the claim or defence. The causes of action must be clearly identifiable from the facts pleaded and the cause of action must be supported by facts that are material: Cerqueira v. Ontario, 2010 ONSC 3954 at para. 11. If a material fact necessary for a cause of action is omitted, the statement of claim is bad and the remedy is a motion to strike the pleadings, not a motion for particulars: Regional Plaza Inc. v. Hamilton-Wentworth (Regional Municipality) (1990), 1990 (ON SC), 12 O.R. (3d) 750 (Gen. Div.); Balanyk v. University of Toronto, 1999 (ON SC), [1999] O.J. No. 2162 (S.C.J.).

[21] The elements of a claim of negligent misrepresentation are: (1) duty of care based on a special relationship between the plaintiff and the defendant; (2) an untrue, inaccurate, or misleading representation; (3) the defendant making the representation negligently; (4) the plaintiff having reasonably relied on the misrepresentation; and, (5) the plaintiff suffering damages as a consequence of relying on the misrepresentation: Queen v. Cognos, 1993 (SCC), [1993] 1 S.C.R. 87.

[22] The elements of a claim of fraudulent misrepresentation are: (1) a false statement by the defendant; (2) the defendant knowing that the statement is false or being indifferent to its truth or falsity; (3) the defendant having an intent to deceive the plaintiff; (4) the false statement being material and the plaintiff having been induced to act; and, (5) the plaintiff suffering damages: Parna v. G. & S. Properties Ltd. (1970), 1970 (SCC), 15 D.L.R. (3d) 336 (S.C.C.) at p. 344; Fiorillo v. Krispy Kreme Doughnuts, Inc. (2010), 2009 (ON SC), 98 O.R. (3d) 103 (S.C.J.) at paras. 66-67; Derry v. Peek (1889), 14 App. Cas. 925 (H.L.).

[23] Relying on the what the British Columbia Court of Appeal stated in Chudy v. Merchant Law Group, 2008 BCCA 484 at para. 168 and what Justice Cameron stated in Balanyk v. University of Toronto, supra at para. 28, New-XTG Group submits that the impugned paragraphs contain insufficient material facts to support claims for fraudulent or negligent misrepresentation.

[24] In Chudy v. Merchant Law Group, the British Columbia Court of Appeal stated:

It is a fundamental rule that fraud must be scrupulously pleaded: Rainbow Indust. Caterers Ltd. v. C.N.R. (1988), 1988 (BC CA), 30 B.C.L.R. (2d) 273 at 303, 54 D.L.R. (4th) 43 (C.A.), Wallingford v. Mutual Society (1880), 5 A.C. 685 (H.L.) at 697. The rule is embodied in Rule 19(11), which requires a pleader alleging fraud to state in the pleading “full particulars, with dates and items if applicable.” The purpose of the rule is to give notice of the claim in order to prevent the opposite party being taken by surprise and to allow him or her to prepare to meet the claim. To find fraud without notice and an opportunity to be heard denies the condemned litigant a hearing contrary to the rules of natural justice and vitiates the finding (Canada Trustco Mortgage Company v. Renard, 2008 BCCA 343, paras. 34-42).

[25] In in Balanyk v. University of Toronto, Justice Cameron stated:

The full particulars of allegations of fraud, breach of trust or misrepresentation required by Rule 25.06(8) must set out precisely what each allegation of such wrongful act is, and the when, what, by whom and to whom of the relevant circumstances.

[26] I agree with the sentiments of the courts in Chudy v. Merchant Law Group and Balanyk v. University of Toronto, but these sentiments do not assist Mr. McFarlane in the immediate case because the challenged paragraphs must be read in the context of the whole Statement of Claim and not just in the context of 15 impugned paragraphs. The Statement of Claim is no masterpiece, but it does not have to be a masterpiece, and read in its entirety, it is adequate for Mr. McFarlane and his businesses to know the nature of the fraudulent misrepresentation and negligent misrepresentation claims being made against them.

[27] When the whole Statement of Claim is read, the details that New XTG-Group submits are missing turn out to be more in the nature of missing particulars than missing material facts to constitute a cause of action. In my opinion, the misrepresentation claims are adequately pleaded.

[28] Much the same thing can be said about the New XTG-Group’s complaints about the cause of action for injurious falsehood.

[29] The elements of a claim of injurious falsehood are: (1) the publication of false statements reflecting adversely on the plaintiff’s business, property, or title to property; (2) the statements are made maliciously without just cause or excuse; (3) the statements are calculated to induce persons not to deal with the plaintiff; and, (4) the plaintiff suffered damages: Lysko v. Braley (2006), 2006 (ON CA), 79 O.R. (3d) 721 (C.A.) at paras. 133-34.

[30] In my opinion, read as a whole, the Statement of Claim pleads the material facts of this cause of action.

[31] Turning to the claim of civil conspiracy, the elements of this claim are: (1) two or more defendants make an agreement to injure the plaintiff; (2) the defendants: (a) use some means (lawful or unlawful) for the predominate purpose of injuring the plaintiff, or (b) use unlawful means with knowledge that their acts were aimed at the plaintiff and knowing or constructively knowing that their acts would result in injury to the plaintiff; (3) the defendants act in furtherance of their agreement to injure; and, (4) the plaintiff suffers damages as a result of the defendants' conduct: Hunt v. T & N plc, 1990 (SCC), [1990] 2 S.C.R. 959; Canada Cement Lafarge Ltd. v. British Columbia Lightweight Aggregate Ltd., 1983 (SCC), [1983] 1 S.C.R. 452; Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 (ON CA), 37 O.R. (3d) 97 (C.A.); Knoch Estate v. John Picken Ltd. (1991), 1991 (ON CA), 4 O.R. (3d) 385 (C.A.); Pro-Sys Consultants v. Microsoft, 2013 SCC 57.

[32] It should be noted that there are, doctrinally speaking, two types of civil conspiracy; namely: (1) unlawful means conspiracy; and (2) predominant purpose conspiracy (intention to injure conspiracy). The second type of conspiracy has the potential of making group activity unlawful notwithstanding that the alleged misconduct would be lawful for an individual. It should also be noted that the unlawful conduct for the tort of civil conspiracy is different than the unlawful conduct that is a constituent element of the tort of intentional interference with economic relations: Agribrand Purina Canada Inc. v. Kasamekas, 2011 ONCA 460.

[33] In Pro-Sys Consultants v. Microsoft, supra at para. 74, Justice Rothstein described predominant purpose conspiracy as follows:

Predominant purpose conspiracy is made out where the predominant purpose of the defendant’s conduct is to cause injury to the plaintiff using either lawful or unlawful means, and the plaintiff does in fact suffer loss caused by the defendant’s conduct. Where lawful means are used, if their object is to injure the plaintiff, the lawful acts become unlawful (Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., 1983 (SCC), [1983] 1 S.C.R. 452, at pp. 471-72).

[34] In my opinion, in the case at bar, reading the totality of the Statement of Claim, New XTG-Group has adequately pleaded a claim for unlawful means conspiracy and a claim for predominant purpose conspiracy.

[35] There is, however, merit in Mr. McFarlane’s submissions that the Statement of Claim does not properly plead a cause of action for intentional interference with economic relations.

[36] A defendant commits the tort of an intentional interference with economic relations when: (a) he or she commits an unlawful act against a third party (i.e. an act that would be actionable if the third party had suffered loss); and, (b) he or she intends to economically harm the plaintiff or he or she intentionally harms the plaintiff for some ulterior purpose. This intentional tort is available even if the plaintiff has another claim against the defendant arising from the alleged misconduct. The tort allows a plaintiff to sue a defendant for economic loss resulting from the defendant’s unlawful act against a third party: A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12.

[37] In my opinion, the material facts to support a claim for intentional interference with economic relations have not been pleaded. The remedy for this deficiency is to strike this claim from paragraph 1 of the Statement of Claim with leave to amend the Statement of Claim to properly plead the claim within 30 days from the release of these Reasons for Decision.

[38] Although the impugned paragraphs do not provide the missing elements for the claim, these paragraphs are material facts for one or more of New-XTG Group’s other causes of action and accordingly, these paragraphs should not be struck.

[39] Orders accordingly. If the parties cannot agree about the matter of costs, they may make submissions in writing, beginning with the moving Defendants within 20 days after the release of these Reasons for Decision followed by New-XTG Group’s submissions within a further 20 days. I alert the parties, that my current inclination is to order costs to Mrs. McFarlane in any event of the cause and otherwise order the costs of this motion in the cause.

Perell, J.

Released: November 24, 2015

COURT FILE NO.: CV-15-526736
DATE: 20151124

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

2393134 ONTARIO INC., XTG HOLDINGS (ONTARIO) INC., IT XCHANGE (ONTARIO) CORP., XTG HOLDINGS (USA) INC., XTG HOLDINGS 2 (USA) INC., IT XCHANGE FINANCIAL SERVICES (2013) INC., PARTSTOCK COMPUTER (2013) INC., IT XCHANGE (2013) CORP. and BLUERANGE TECHNOLOGY (2013) CORP.

Plaintiffs

– and –

JEFFREY MCFARLANE, TRIATHLON COMPUTER, LLC, XCHANGE TECHNOLOGY RENTALS, INC., XCHANGE TECHNOLOGY GROUP, INC., DEAN PEJCINOVSKI, ASHLEY RUSAK, CHRISTOPHER DESBRISAY, SIMON LAM, JOSH WILSHIRE, RANDY MARKOVICH, ERIC ESTES, LEE CHAMBERS, MICHAEL THOMAS, MAURO SINAGOGA, ANNEMARIE GUTIERREZ and CATHY MCFARLANE

Defendants

REASONS FOR DECISION

PERELL J.

Released: November 24, 2015