CITATION: Nlogic Inc. v. Microtherapy Inc., 2017 ONSC 722

COURT FILE NO.: CV-16-558526

DATE: 20170131

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

NLOGIC INC.

Applicant

– and –

MICROTHERAPY INC.

Respondent

Peter E.J. Wells, for the Applicant

Nicholas McHaffie, for the Respondent

HEARD: January 10, 2017

V.R. CHIAPPETTA j.

Overview

[1] The applicant, NLogic Inc., is wholly owned by Numeris, which is organized under the Canada Not‑for‑profit Corporations Act S.C. 2009, c.23. Numeris describes itself as Canada’s leading radio and television ratings service. The applicant was previously known as BBM Analytics Inc./BBM Analytique Inc. It changed its name to NLogic on January 12, 2016.

[2] The applicant carries on its business of television and radio data analysis throughout Canada using the data collected and compiled by Numeris. The applicant states that this is a highly specialized business, in that it requires intimate knowledge of the Canadian radio and television industries and sophisticated mathematical tools and skills. In order to provide this service, the applicant provides its customers with computer software applications (some of which the applicant has created) including the application in issue, known as AirWare, which was developed by the respondent, Microtherapy Inc.

[3] The terms of the parties’ relationship are governed by an agreement dated September 22, 2010 (the “AirWare agreement”). The AirWare agreement provided the applicant with AirWare, a marketable product focused on radio scheduling. Buyers of radio advertising time use AirWare to analyze individual markets in order to understand the audiences of each station. Using that information, buyers put together schedules and costs for radio advertising campaigns. The AirWare agreement reads in relevant part:

Product/Ownership

The product is AirWare Software, Radio Schedules. microtherapy shall retain sole ownership of the source code and full responsibility for the product, including all variations, improvements and modifications and for product development.

Marketing

BBM Analytics’ role will be that of distributor. BBM Analytics will provide active and ongoing marketing support for the product.

It is understood that the AirWare Software name, with a statement identifying microtherapy as the developer and owner and BBM Analytics as the distributor of the product, will appear on the opening computer screen.

Exclusivity

BBM Analytics will be the exclusive distributor of the product to BBM Analytics clients. BBM Analytics will not market nor develop a product competitive to the AirWare Software, Radio Schedules product. microtherapy will not develop a radio ratings product for a competitive service to BBM Analytics.

Updates/Revisions

The product will be undergoing constant revisions by microtherapy, at no cost to BBM Analytics, based on user input. BBM Analytics will make the final decision on when a revision of the product is ready for release.

Length of Agreement

Length is one year with succeeding renewal options of one year. Renewal is automatic unless either party gives the other notice of termination at least 60 days before the then current expiry date of the agreement. microtherapy will then be able to take up marketing of the product to new clients. If either party terminates, there will be a one year “winding‑up” period where BBM Analytics maintains existing client revenues (less royalties), but does not market the product to anyone else.

If either BBM Analytics or microtherapy terminates the agreement, BBM Analytics will continue to service existing BBM Analytics accounts with the same royalty arrangement of 50% to microtherapy, through to the end of the “winding-up” period.

A contract between microtherapy and BBM Analytics will withstand staff changes at BBM Analytics. In the event of bankruptcy or [sic] either party, the agreement will be terminated. BBM Analytics has the first right of refusal should microtherapy decide to sell the product or company. In the event of a major change in ownership of microtherapy, BBM Analytics reserves the right to renegotiate the agreement with the new owners.

[4] On July 18, 2016 each party gave the other notice of termination of the AirWare agreement.

[5] The applicant caused this proceeding to be commenced by a Notice of Application issued August 12, 2016, seeking a declaration of its rights under the AirWare agreement. It argues that the respondent breached the AirWare agreement by developing a product to compete with the applicant’s services and marketing it to the applicant’s existing clients before the end of the one-year winding-up period following the termination of the AirWare agreement. The applicant is further seeking injunctive relief against the respondent to remove what it describes as the respondent’s improper “springboard” advantage.

[6] The respondent disagrees with the applicant’s interpretation of the AirWare agreement. It argues that the agreement does not preclude it from developing or marketing its own software during the winding‑up period. The respondent further resists the equitable relief sought by the applicant arguing that the applicant does not come before the court with clean hands.

The Issues

The following issues are presented by this application:

1. Whether the respondent developed competing software prior to the effective termination of the AirWare agreement and in doing so breached the AirWare agreement.

2. Whether the respondent marketed a competing product prior to the end of the winding‑up period and in doing so breached the AirWare agreement.

3. Whether the applicant is precluded from the equitable relief it seeks for lack of clean hands.

4. Whether the applicant is entitled to springboard relief.

[7] For reasons set out below, I have concluded that the respondent did not breach the AirWare agreement.

Analysis

1. Whether the respondent developed competing software prior to the effective termination of the AirWare agreement and in doing so breached the AirWare agreement.

[8] Both parties gave their respective notices of termination of the AirWare agreement on July 18, 2016. Pursuant to the agreement therefore the effective termination date is September 21, 2016. Throughout the term of the agreement, the respondent was obligated not to develop a radio ratings product for a competitive service to the applicant.

[9] The AirWare software was significantly updated in 2007 with the result that the version of the software in use at the time of termination is often referred to as “AirWare 2007.” The respondent’s evidence is that development of an update called AirWare C# began in 2013 and was continuing through 2016. AirWare was also distributed in the United States, where it has been known by the name “RADIUS” since 2004. The respondent states that when it became clear in June 2016 that the applicant was no longer interested in being involved with the AirWare C# product, the respondent decided to use the RADIUS name for the C# product rather than develop two versions of that product, one for Canada showing the AirWare name and one for the US market showing the RADIUS name. It is agreed that RADIUS is the same product as AirWare C#, which had been under development in cooperation with the applicant for years.

[10] The applicant argues that, contrary to its obligations under the AirWare agreement, the respondent developed a radio ratings product, namely RADIUS, for a competitive service to the applicant prior to termination. The applicant submits that while the respondent was developing AirWare C# for distribution by the applicant, its activity was in support of the AirWare agreement. However, once the respondent decided in June 2016 to terminate the agreement, it could not continue work to further develop the product to compete with the service the applicant provided to its clients. Specifically and exclusively, the applicant relies on the fact that during the first week of June 2016 the respondent wrote the code to replace the notice on the first screen displayed by the AirWare C# software that indicated that AirWare was distributed by the applicant with a notice that indicated that the product is called RADIUS and is owned by the respondent.

[11] Mr. Parkinson, the President of the respondent, testified in cross examination, however, that the RADIUS name did not show on the opening computer screen of any copy of the product in the hands of end users outside the United States between June and September 21, 2016, the effective termination date. This evidence is uncontradicted. The respondent was never precluded from developing products in the United States. Mr. Parkinson confirmed in cross examination that the C# development was to be RADIUS in the United States regardless. In my view, therefore, the development in the form of the code written in June 2016 did not breach the AirWare agreement.

2. Whether the respondent marketed a competing product prior to the end of the winding‑up period and in doing so breached the AirWare agreement.

[12] To resolve this issue, it is necessary to interpret the Length of Agreement provision of the AirWare agreement, which reads in relevant part:

Length of Agreement

Length is one year with succeeding renewal options of one year. Renewal is automatic unless either party gives the other notice of termination at least 60 days before the then current expiry date of the agreement. microtherapy will then be able to take up marketing of the product to new clients. If either party terminates, there will be a one year “winding‑up” period where BBM Analytics maintains existing client revenues (less royalties), but does not market the product to anyone else.

If either BBM Analytics or microtherapy terminates the agreement, BBM Analytics will continue to service existing BBM Analytics accounts with the same royalty arrangement of 50% to microtherapy, through to the end of the “winding-up” period.

[13] The parties interpret the language of this provision differently. The applicant argues that the agreement precludes the respondent from marketing its own product to the applicant’s clients during each of the notice and the winding‑up periods. The respondent argues that the agreement only prohibits it from marketing its product to new clients until notice of termination of the agreement is given by either party.

[14] Both parties agree that when interpreting a contract, the words of a provision are not to be read in isolation but rather should be considered in harmony with the rest of the contract and in light of its purposes and commercial context (Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at para. 64). I am further guided in my interpretation by the Supreme Court’s statement in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 58, that the nature of the surrounding circumstances that will be relevant to the interpretive exercise will vary from case to case, but will always be limited to objective evidence of the background facts at the time of the execution of the contract.

[15] The respondent argues that in this case the clear language of the AirWare agreement is such that extensive consideration of the surrounding circumstances or the commercial context is not required. It submits that the applicant’s position is not supported by the language of the agreement. The agreement, it is argued, sets out only two terms with respect to the winding‑up period – that the applicant maintains existing client revenues (less royalties) but does not market AirWare to anyone else and that the applicant will continue to service existing accounts with the same royalty arrangement of 50% to the respondent. Neither of these provisions creates a non-compete arrangement whereby the respondent agrees not to market its own product for a year and allows the applicant to spend a full year transitioning the mutual clients away from the respondent’s product to another product. One commercial party ceding the vast majority of the market to the other for a total of 14 months, it is argued, would require clear language.

[16] The applicant disagrees. The applicant argues that notions of commercial reasonableness support the conclusion that the winding‑up period was intended to provide time to the applicant to develop a competitive product as it is restricted from doing so during the term of the agreement and therefore unable to compete against the respondent upon effective termination of the agreement. If the respondent is not limited in its marketing efforts during the year of the applicant’s development efforts, the respondent is granted a windfall in the form of first and prolonged access to the existing clients and a resultant full market share. The winding‑up period therefore, it is argued, is intended to level the playing field and allow the parties to compete fairly for the business of the existing clients.

[17] In Consolidated-Bathurst Export Limited v. Mutual Boiler and Machinery Insurance Company, 1979 10 (SCC), [1980] 1 S.C.R. 888, 29 O.R. (2d) 720, a case dealing with the interpretation of an insurance contract, Estey J., writing for a majority of the court, described the following generally applicable approach to contract interpretation (at p. 901):

[T]he normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two con­structions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the inten­tion of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result.

[18] In Eli Lilly & Co. v. Novopharm Ltd., 1998 791 (SCC), [1998] 2 S.C.R. 129, 161 D.L.R. (4th) 1, at para. 56, Iacobucci J., writing for the court, added the following observation:

When there is no ambiguity in the wording of the document, the notion in Consolidated-Bathurst that the interpretation which produces a “fair result” or a “sensible commercial result” should be adopted is not determinative. Admittedly, it would be absurd to adopt an interpretation which is clearly inconsistent with the commercial interests of the parties, if the goal is to ascertain their true contractual intent. However, to interpret a plainly worded document in accordance with the true contractual intent of the parties is not difficult, if it is presumed that the parties intended the legal consequences of their words.

[19] The problem with the applicant’s position is that it is neither supported by the language of the length of agreement section of the agreement nor the agreement when read as a whole. I agree with the respondent that the length of agreement section places only two conditions on the parties during the winding‑up period. Neither of these conditions prohibit the respondent from marketing to the parties’ mutual clients during the winding-up period.

[20] The applicant argues that the agreement obligates the applicant to maintain existing client revenues during the winding‑up period and that this supports its interpretation, since it could not maintain the revenues if the respondent is permitted to market to existing clients. The argument is grounded in speculation of a direct link between the respondent’s marketing efforts and client revenues. Further, the agreement merely provides that during the winding up-period the applicant continues to earn any ongoing revenues from existing AirWare clients, less royalties; it does not require that revenues be maintained at a specific level.

[21] The agreement specifically contemplates marketing restrictions and obligations. It restricts the applicant’s efforts in marketing a competitive product throughout the term of the agreement. It permits the respondent’s marketing efforts to new clients during the notice period. It suspends the applicant’s marketing obligations with respect to the product during the winding‑up period. The agreement is silent with respect to the rights of the respondent to market during the winding‑up period. The agreement is similarly silent with respect to the rights of the applicant to market any new product it develops during the winding‑up period. A restriction such as the one proposed by the applicant cannot properly be read into the agreement, particularly as the parties specifically turned their attention to and accounted for the obligations of and restrictions on marketing in the agreement at the time of entering into the agreement.

[22] The applicant submits that the agreement grants it a full year after the effective termination of the agreement to develop and market a competitive product while restricting the respondent’s right during this time to market its product to existing clients, although maintaining its existing client revenues. In my view, considering the restrictive consequences of such an interpretation on the business of the respondent, the agreement lacks language sufficient to demonstrate the intention of the parties to allow the applicant a full year of unrestricted competition to transition its clients to its new software.

[23] Finally, even if the language of the exclusivity and length of agreement provisions of the AirWare agreement could be said to be ambiguous and capable of supporting the applicant’s preferred interpretation, I would nonetheless reject the applicant’s interpretation of the agreement as unrealistic in the commercial atmosphere in which the contract was entered into. This is particularly so as both parties agree that as of today the existing clients represent at least 90% of the market share.

[24] I have found that the AirWare agreement does not prohibit the respondent from marketing a competitive product during the notice or the winding‑up periods. The factual analysis of whether the respondent marketed a competitive product prior to the end of the winding‑up period is therefore moot. In the event that I am incorrect with respect to my interpretation of the AirWare agreement, however, I will go on to consider the factual question of whether the respondent marketed a competitive product prior to the end the notice or winding‑up periods.

[25] The applicant alleges that the respondent marketed a competitive product prior to the end of the winding‑up period in three ways: a. by means of a press release of July 18, 2016; b. by means of an email of July 18, 2016; and c. through end user testing.

a. The press release of July 18, 2016.

[26] Within six minutes of the end of the meeting wherein the parties gave one another notice of their intentions to terminate the AirWare agreement, the respondent issued a press release which stated in relevant part:

For immediate release

July 18, 2016

microtherapy ends its AirWare distribution agreement with NLogic

After 21 years, microtherapy has ended its AirWare [sic] distribution agreement with NLogic. Microtherapy believes users deserve more… far more… and that’s changing today.

What does this mean for AirWare users?

In the short term, nothing. Current AirWare 2007 licenses are still valid and will continue as is.

So what is changing?

microtherapy has invested considerable time and resources to develop the successor to AirWare 2007 [sic]. We will be phasing out AirWare 2007 [sic] to make room for its replacement, RADIUS.

More details will be provided soon.

[27] The release was made during the notice period, prior to the effective termination of the agreement. In my view, the press release does not constitute marketing. It was an informative and factual announcement about the respondent’s plans for the future, a subject that was sure to be a topic of discussion in the industry. The competing product was mentioned by name but it is relevant that at the time of the announcement it was not available for commercial use.

b. The email of July 18, 2016

[28] On the day the parties gave one another notices of termination but later on in the afternoon, the respondent sent an email to users of its complementary computer program ATC. The email reads in relevant part:

Changes are Coming to ATC

As microtherapy has issued its intent to end its AirWare distribution agreement with NLogic, changes to ATC will occur.

What does this mean for you?

In the short term, nothing. Your current AirWare 2007 and ATC licenses are still valid and you can continue to use them as is.

So what’s next?

microtherapy is restricted from using current Numeris data until it has reestablished its TPP (third party processor) status with Numeris. This is expected to occur at the next board meeting in September 2016. Once we have acquired TPP status, we will release a version of ATC that is compatible with RADIUS, AirWare’s successor. We will be phasing out AirWare 2007.

If you wish to try RADIUS, we would be happy to send you an evaluation copy. RADIUS will not impact your current AirWare/ATC installations.

More information on these changes will be provided in the coming weeks. In the meantime, if you have any questions, please contact us.

We are here to help.

[29] Again, in my view, this email cannot fairly be described as marketing. While RADIUS is referred to, the information was more informative than promotional and the ATC program was not subject to the AirWare agreement. The offer is made to try RADIUS by way of an evaluation copy. The evidence is however that end user testing did not begin until October 2016. As set out below, in my view, such testing is fairly described as development over marketing.

c. End user testing

[30] Mr. Parkinson’s evidence was that “end user” or “user acceptance” testing of RADIUS began in October 2016, after the notice period and during the winding‑up period. Mr. Phillips, President and Chief Operating Officer of the applicant, gave evidence that the applicant has been informed by the applicant’s clients that they installed and tested RADIUS prior to September 2016. However, Mr. Phillips’ evidence that clients installed RADIUS prior to September 2016 is hearsay, and he did not identify the source of his information. There was no evidence from any of the clients involved in the testing. Mr. Parkinson’s evidence is direct and he was not cross examined on this point. For these reasons I accept Mr. Parkinson’s evidence that the user acceptance testing of RADIUS began in October 2016.

[31] In his cross examination, Mr. Parkinson testified that the applicant’s clients do not like change. The applicant submits therefore that end user testing of RADIUS gives the respondent a market advantage as the client will ultimately want the RADIUS product over one unfamiliar to them. There is no evidence in the record demonstrating that end user testing is a form of marketing in the industry. Rather, end user testing is contextually a step in development of the product, albeit the final step where the product is tested for functionality. This is supported by the fact that the end user testing began in October 2016 and RADIUS remains in the testing stage. I find that end user testing therefore is a step in the development process, and is not a form of marketing.

d. Conclusion

[32] For reasons set out above, I have found that the respondent did not market a competitive product prior to the end of the winding up period and, in any event, the AirWare agreement does not prohibit the respondent from marketing a competitive product during the notice or the windup period.

Whether the applicant is precluded from the equitable relief it seeks for lack of clean hands.

[33] The respondent argues that the applicant, having itself breached the AirWare agreement through development and marketing of its own competing product and through its failure to meet the duty of honest performance, has disentitled itself to the equitable relief it seeks as it does not come to the court with clean hands.

[34] I have already concluded that the respondent did not breach the AirWare agreement and that, therefore, the applicant is not entitled to the equitable relief it seeks. The issue of whether the applicant is precluded from the equitable relief it seeks for lack of clean hands is therefore moot. I will nonetheless consider the issue in the event that I am incorrect in my conclusion that the respondent did not breach the AirWare agreement.

[35] The exclusivity terms of the AirWare agreement restrict the applicant from marketing or developing a product competitive to AirWare during the term of the agreement. The respondent argues a. that the applicant engaged in the development of a competing product during the term of the AirWare agreement; b. that the applicant marketed a competing product during the term of the AirWare agreement and; c. that the applicant breached its duty of honest performance as that duty is defined in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494.

1. Whether the applicant engaged in development of a competing product during the term of the AirWare agreement

[36] The respondent relies on evidence from a third party customer, Mr. McDonald, Vice-President and Director of Radio Investments at IPG Mediabrands, and the cross examination of Mr. Lee, a Senior Product Manager with the applicant, and argues that during the term of the AirWare agreement, the applicant was engaged in development of its own product that was designed to compete directly with AirWare. The applicant had meetings with clients, compiled flow charts and prepared detailed analysis of requisite statistics. The respondent argues that the applicant was therefore in breach of the exclusivity obligations of the AirWare agreement. The respondent relies on the following evidence:

(i) Mr. McDonald, who explained that he leads a team that assists advertisers in planning and purchasing radio campaigns and to this end uses AirWare more than any other software, testified that he and his team took part in approximately six meetings with the applicant between the fall of 2015 and the time of his examination for discovery in November 2016. Mr. McDonald testified that he understood the purpose of the meetings as being for the applicant to better understand the process by which Mr. McDonald and his team assist their clients – from the time the team is first approached by a client through to billing and reconciliation – with a view to the applicant developing an improved data analysis and scheduling product for use in this work. To this end, the applicant produced charts describing the process and then sought Mr. McDonald’s and his team’s feedback. According to Mr. McDonald, Mr. Lee was present for all of these meetings, and another of the applicant’s staff, Mr. Gokhale, was present for most of the meetings. Mr. McDonald testified that it became clear to him by February 2016 that the applicant was looking to develop its own product rather than an upgraded version of AirWare; he also understood that by February 2016 the applicant had in-house developers and programmers. Mr. McDonald testified that members of his team received beta versions of Lens, a new product developed by the applicant, approximately two to six months prior to November 2016. Mr. McDonald testified that he believed Lens had data analysis, but not scheduling, capability.

(ii) Mr. Phillips was cross examined on a partial transcript of a November 9, 2015 meeting between Mr. McDonald and two representatives of the applicant, Mr. Lee and Ms. Redpath. The transcript was entitled “Dave McDonald, VP, Director Radio Investments – Interview date: November 9, 2015” and was made exhibit 2 to Mr. Phillips’ cross examination. Mr. Lee agreed in cross examination that the transcript was a “fair transcription of the meeting.” The transcript indicates that during the interview, Mr. Lee and Ms. Redpath questioned Mr. McDonald about his process for evaluating, scheduling, and buying radio advertising time; how he uses various computer applications, including AirWare, in that process; the capabilities and limitations of those applications; and how the process and technology could be improved. They also asked him about changes and trends in the radio advertising industry. The transcript indicates that Ms. Redpath explained that she and Mr. Lee were intending to talk to people in the industry because they wanted “whatever [they were] building to reflect how people are working.” In response to a comment by Mr. McDonald about some issues with AirWare, Mr. Lee stated “we’re working with George, but we’re also doing our own thing.” (The reference to “George” appears to be a reference to Mr. Parkinson, of the respondent).

(iii) Mr. Lee also testified in cross examination about another meeting that took place on or around November 15, 2015 between Ms. Walker, a radio buyer at the advertising agency Cossette, Mr. Gokhale, and Mr. Lee. (Mr. Lee explained in cross examination that Mr. Gokhale was a consultant hired by the applicant.) A partial transcript of the meeting, entitled “Notes: Kandy Walker,” was made exhibit 2 to the cross examination of Mr. Lee. The transcript reveals that during the meeting Mr. Gokhale and Mr. Lee asked Ms. Walker about her process for buying radio advertising time and how she uses AirWare and other applications in this process. The transcript also reveals that during the meeting Ms. Walker referred to an email she received from the applicant or its representatives. This email was not produced by the applicant. When questioned about this in cross examination, Mr. Lee testified that he had tried to find all of the documents that were responsive to the respondent’s request and that the applicant has been “as fulsome as [it was] able in the time.” In response to questions from counsel for the respondent about whether Mr. Lee had done a specific search for the email sent to Ms. Walker and whether the respondent could get a copy of the email, counsel for the applicant replied that it could not.

(iv) In cross examination, Mr. Lee testified that in November 2015 he, Mr. Gokhale, and Mr. Sam, another employee of the applicant, met with representatives of Canadian Broadcast Sales, a radio advertising agency. Mr. Lee agreed that the purpose of the November 2015 meetings with the representatives of IPG Mediabrands, Cossette, and Canadian Broadcast Sales was for the applicant to assess its customers’ work flow, work processes, and business needs.

(v) When Mr. Phillips was asked in cross examination whether he asked Mr. Lee or anybody involved in product development for the applicant to undertake the November 2015 meetings with industry, Mr. Phillips replied that the applicant met with people in the industry “all the time” and that it was not something that he would “specifically tend to direct.” However, when Mr. Lee was asked in cross examination whether the meetings with Mr. McDonald, Ms. Walker, and Canadian Broadcast Sales were initiated by him or whether someone else had asked that the meetings take place, he replied that Mr. Phillips had asked him to arrange the meeting with Canadian Broadcast Sales, though he could not recall whether he was asked to arrange the meetings with Mr. McDonald and Ms. Walker.

(vi) On February 16, 2016 Mr. Lee sent an email with the subject line “Process diagrams” to Ms. Walker. The email was made exhibit 6 to the cross examination of Mr. Lee. To the email were attached two documents: the first, entitled “Radio Transaction Process - Demand-Side Buy - Current” was made exhibit 6A to the cross examination of Mr. Lee; the second, entitled “Radio Transaction Process - Demand-Side Buy - Future” was made exhibit 6B. Both documents contain process flowcharts. In the email, Mr. Lee states: “We are trying to capture the process that should apply to most, while also staying aware of exceptions.” In the email Mr. Lee asks Ms. Walker a number of questions about the process of buying radio advertising time and to email him when she had a chance to respond. The respondent argues that this addresses the future of the applicant’s business and it was not shared with the respondent.

(vii) Mr. Lee testified in cross examination that the “Radio Transaction Process - Demand-Side Buy-Current” flowchart (exhibit 6A to his cross examination) describes the current radio transaction process and is based on research conducted with Canadian Broadcast Sales and Ms. Walker. He testified that this process can be performed using AirWare or another application called microBBM; however, Mr. Lee agreed that AirWare has “the vast majority of the market for the demand side buy.” Mr. Lee testified that the “Radio Transaction Process - Demand-Side Buy - Future” flowchart represents a proposed future transaction process. He agreed with the characterization that having done a needs analysis on the client, the applicant was “mapping out” how to address client needs through process, including through software.

(viii) Mr. Lee also testified in cross examination about preparing a document entitled “Statistics for transaction,” made exhibit 7 to his cross examination. Mr. Lee testified that the document was initially prepared in February 2016 and went through several different iterations. He agreed that an earlier iteration of the document included the statement “Assumption: Beta: scheduled for release on September 1 2016 [sic]. It’s an MVP.” Mr. Lee testified that “MVP” stands for “minimal viable product” – a very early version of the product that can be shown to the client in order to get the client’s feedback. The “Statistics for transaction” document also contains a chart in which each row relates to a statistic, including statistics involved in the radio advertising scheduling and buying and selling processes. Mr. Lee agreed that a column of the chart describes where each statistic currently is in the AirWare program. When asked whether a reference to a “transaction module” was a reference to the transaction module of Lens, Mr. Lee replied in the negative, indicating that that was a reference to the transaction part of the process.

(ix) When Mr. Phillips was asked in cross examination whether the November 2015 meeting with Mr. McDonald was part of planning for the development of NLogic software, he replied that it was “general market research which informs some of our development.” He indicated that the applicant wished to know about “what people thought” and “about their processes and about how they felt about the industry.”

(x) Mr. Lee testified in cross examination that under the software development approach that the applicant adopts (“agile software development”), planning and requirements analysis is an important part of development. He also stated that he did not advise Mr. Parkinson or the respondent of the November 2015 and January 2016 meetings with Cossette, IPG Mediabrands, and Canadian Broadcast Sales.

[37] The applicant’s position is that it gathered user input on the software it supplied to its customers, including gathering user input on AirWare as part of its active and ongoing marketing support for the product. Only one part of this information gathering related to radio schedules. Further, the applicant submits that the information gathering was market research and that there is nothing improper about the market research being performed during the term of the AirWare agreement. The applicant states that once it decided in early 2016 that it was going to terminate the AirWare agreement, it sought legal advice and this work stopped effective April 2016. It did not resume until the termination of the AirWare agreement took place. The applicant relies on the following evidence:

(i) Mr. Phillips was asked in cross examination whether, at the time of the November 2015 meeting with Mr. McDonald, the applicant was “doing [its] own thing” unrelated to the development of AirWare C# (as suggested by Mr. Lee’s comment to Mr. McDonald at that meeting that “we’re working with George, but we’re also doing our own thing”). In response, Mr. Phillips testified that “working with George was referring to most likely [AirWare] C#, and our own thing, we’re referring to the other development, any other needs that we were looking to service.” He explained that “the use case or the needs that AirWare covers are a subset of broader needs and use cases that we service in the industry.”

(ii) In his affidavit sworn November 11, 2016, Mr. Phillips stated that the applicant’s Lens family of products are not new products. These products have different functionality than AirWare, and, unlike AirWare, cannot be used to create campaigns and schedules. Mr. Phillips stated that the applicant only began development of a product competitive to AirWare in late September 2016, after the termination of the AirWare agreement became effective.

(iii) Mr. Phillips testified in cross examination that he did not recall asking Mr. Lee to undertake the November 2015 meeting with Mr. McDonald. In response to the question whether he asked Mr. Lee or anybody else involved with product development for the applicant to undertake the meetings with industry in November 2015, he testified that the applicant met with people in the industry “all the time” and that meetings with industry was not something he “specifically would tend to direct.” Mr. Lee testified that Mr. Phillips ask that Mr. Lee arrange the November 2015 meeting with CBS.

(iv) Mr. Phillips was cross-examined on three slide presentations: a presentation entitled “AirWare Strategy v2” (dated February 29, 2016); “The future of AirWare: A smooth transition to the future” (dated March 9, 2016 (in footer)); and “The future of radio software: A smooth transition to the future” (undated). These presentations were made exhibits 3, 4, and 5, respectively, to the cross examination of Mr. Phillips. The February 29, 2016 document described some background on AirWare, including the disadvantages of the current arrangement with the respondent and key provisions of the AirWare agreement; indicated a “decision” to “[b]uild a replacement with existing dev team”; described a number of alternative options open to the applicant; and described objectives and strategies for the future. The March 9, 2016 document likewise included slides describing disadvantages of the current arrangement with the respondent; potential solutions to the problem that had been considered; reasons “[w]hy NLogic replacing AirWare is the right choice”; a “strategy overview”; and steps taken and to be taken with respect to the transition from AirWare to another product. Mr. Phillips explained that the documents dated February 29, 2016 and March 9, 2016 represented initial plans that changed once the applicant received legal advice. He specified that the March 9, 2016 document was a draft presentation for the applicant’s board of directors that was never given. In cross examination Mr. Phillips agreed that the March 9, 2016 document reflected a concern that the appellant was paying more in royalties for AirWare than it was for other third party vendors’ products it was distributing. He also agreed that the statement in the presentation that “[a]greement with microtherapy terminated March 22nd” refers to an action that was open to the applicant to take and that Mr. Phillips, in early March, thought would have been (but was not) taken by the time the draft presentation was to be given to the board. Mr. Phillips testified that the undated presentation (exhibit 5) was a presentation given to the applicant’s board of directors in October 2016. This presentation covered the same topics as the draft presentation of March 9, 2016, though including different details. The presentation describes steps taken to date (including the July 2016 notice of termination of the AirWare agreement) and future steps for replacing AirWare 2007. The presentation indicates that market and user research for a new product began September 23, 2016. Future steps and strategies described in the presentation include building on the “Lens for radio preview program” and creating a product between September 23, 2016 and September 23, 2017. A “Roadmap for Lens Radio” slide indicates that “Previews 1 and 2,” released in summer and fall of 2016, respectively, “contain no features that are AirWare-specific. They are enhancements to the Lens platform and cover use cases currently served by micro+, RadioApt and iPD. Preview 3 [with an indicated release date of spring 2017] and the release candidate [release in late spring/summer 2017] will focus on functionality that would replace AirWare2007.”

[38] The applicant’s conduct as described above from November 2015 through to July 18, 2016 was covert. It was conducting research about its business as a whole by speaking with its clients, conducting research and analysis. It did not disclose the results of these efforts, as they pertained to scheduling, to the respondent. Mr. McDonald testified, however, that he believed the beta versions of Lens that members of his team received two to six months prior to November 2016 had data analysis, but not scheduling capability. Exhibit 5 to Mr. Phillips’ cross examination evidences that the applicant was aware of its obligation not to develop during the prohibited time and that it purposively made efforts to respect this obligation. Considering the evidence as a whole, in my view, on a balance of probabilities, the applicant’s efforts were designed to determine if it could and if it should develop its own product to compete directly with AirWare. The evidence falls short in demonstrating that the actual development began prior to September 23, 2016.

2. Whether the applicant marketed a competing product during the term of the AirWare agreement

[39] The respondent argues that the applicant breached the AirWare agreement through its marketing of its AirWare replacement product. On August 18, 2016, the applicant sent an email to its customers that stated in its entirety:

From: David Phillips [mailto:dphillips@nlogic.ca] Sent: Thursday, August 18, 2016 10:10 AM Subject: AirWare2007 and the future of radio software

Dear ,

We’re excited to announce that we will soon start development of a modern, intuitive and robust replacement for AirWare2007.

Starting in late September, we will begin developing Canada’s first cloud-based radio tool to help you evaluate, pitch and negotiate more effectively. The industry is changing quickly and you need to be able to react just as quickly.

Over the past year we have recruited a superior in-house development team, the same team that has brought Lens for radio, Lens for TV and ConexAPI to the market in the last 18 months. Our new product will give you greater flexibility, efficiency and effectiveness than was possible before. It’s going to be way better than what you’re used to! Most importantly, you’ll have the ability to contribute to its constant development and improvement. To be built by our team in Toronto with the latest and most reliable technology, and backed by the same experienced client and technical support team that you’re used to, we’re really excited about what we’re going to be able to bring you.

Some of you may be wondering what happens to AirWare2007 in the meantime. The most important point to note is that AirWare2007 will remain supported and serviced by NLogic through until the end of September 2017. We’re committed to providing the same level of support, service and training that we always have. We care deeply about ensuring that your business is not disrupted in any way.

At its heart, this is about the future. We’re excited that we will soon be creating a tool for the radio industry that looks forward, not back. We’re excited that this will be a tool built not just for the industry, but by the industry; by you.

Stay tuned!

Regards, David Phillips President & COO 416-847-2071

[40] Mr. Phillips’ evidence is that this email was not marketing but merely an announcement that the applicant would soon start the development of the AirWare replacement. I accept this evidence as it is consistent with the content of the email notwithstanding that the applicant’s documents reflect that the email was identified as marketing and the responsibility of the applicant’s marketing director.

3. Whether the applicant breached its duty of honest performance as that term is defined in Bhasin v. Hrynew

[41] In Bhasin v. Hrynew, the Supreme Court of Canada of Canada recognized a new common law duty of honesty in contractual performance “that applies to all contracts as a manifestation of the general organizing principle of good faith” (para. 93). Cromwell J., writing for the court, explained that the effect of imposing this duty is that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract” (at para. 73). However, Cromwell J. distinguished the duty of honest performance from a duty of loyalty or of disclosure, explaining that the duty of honest performance does not impose a “general duty to subordinate [one party’s] interest to that of the other party” or oblige parties to disclose a material fact: “a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end the contractual arrangement, and active dishonesty” (at paras. 73, 86). Cromwell J. cited with approval the decision of the court in United Roasters, Inc. v. Colgate-Palmolive Co., 649 F.2d 985 (4th Cir. 1981), holding that where a terminating party decides in advance of the required notice period that it would terminate a contract, there is no duty on that party to disclose this intention other than as required by the stipulated notice period. Cromwell J. concluded, at para. 87:

United Roasters makes it clear that there is no unilateral duty to disclose information relevant to termination. But the situation is quite different, as I see it, when it comes to actively misleading or deceiving the other contracting party in relation to performance of the contract.

[42] On the facts of Bhasin v. Hrynew, the trial judge had found that Can-Am, one party to a commercial dealership agreement, had acted dishonestly toward the other party, Mr. Bhasin, throughout the period leading up to the exercise by Can-Am of a non-renewal clause in the agreement. Can-Am had misled Mr. Bhasin with respect to its intentions for Mr. Bhasin’s business as well as the role of Mr. Bhasin’s competitor in auditing Mr. Bhasin’s business: Can-Am “equivocated” when questioned by Mr. Bhasin about Can-Am’s plans for his business and lied about the appointment of Mr. Bhasin’s competitor to audit his business and the competitor’s confidentiality obligations (at paras. 100-102). Based on these findings, the Supreme Court concluded that Can-Am breached the parties’ agreement when it failed to act honestly in exercising the non-renewal clause in the agreement (at para. 103).

[43] The respondent argues that the applicant breached its duty of honest performance as it failed to disclose its meetings with customers in 2015/2016, the results of those meetings, and its decision, made as early as February 2016, not to pursue AirWare C#. The respondent relies on evidence given by Mr. Lee in cross examination that after finishing a round of AirWare C# testing in February 2016 he spoke with his superior, Mr. Sam, who then indicated that it was not worthwhile for the applicant to continue testing of AirWare C# “until the program coming back to us is in good shape.” The respondent also points to an email exchange between Mr. Parkinson and Mr. Sam that occurred on April 26 and 27, 2016, made exhibit 9 to the cross examination of Mr. Parkinson. In his April 26, 2016 email that was part of the exchange, Mr. Sam inquires of Mr. Parkinson about the respondent’s lead developer. The respondent argues that this evidence demonstrates the applicant’s efforts to mislead the respondent in terms of the applicant’s future plans.

[44] I disagree. In my view, the evidence does not demonstrate that the applicant misled the respondent with respect to its intentions about the future of their contractual relationship. The applicant failed to disclose its efforts to determine if it was in its best interest to continue the contractual relationship beyond the 2016 renewal. Their efforts were not directly linked to the performance of the contract; they were directly linked to the decision to terminate the contract. This is not active dishonesty in the performance of a contract. This is one party protecting its own self-interest in the context of an impending decision to renew its contractual obligations.

[45] The respondent further argues that the applicant breached its duty of honest performance in that it overstated its case in a lawyer’s letter prior to this application. The letter at issue is signed by Mr. Wells, counsel for the applicant, and is addressed to Mr. Parkinson. It is included in exhibit I to the affidavit of Mr. Phillips sworn on September 26, 2016. In his affidavit, Mr. Phillips indicates that the letter was sent to the respondent by courier on July 21, 2016. The letter alleges that the respondent has “contrary to its obligations while the [AirWare] agreement was in effect, ‘invested considerable time and resources to develop the successor to AirWare 2007’, namely RADIUS.” The respondent argues that, as Mr. Phillips admitted that he approved the demand letter and that at the time he strongly suspected that all there was was a change of name of AirWare C# to RADIUS, the letter represents a breach of the duty of honest performance.

[46] I disagree. The lawyer’s letter is not properly described as a breach of the duty of honest performance. Rather, it represents a statement of the applicant’s case at its fullest based on the lawyer’s interpretation of what the applicant believed may be true at the time, prior to examinations for discovery. The letter is properly described therefore as litigation conduct and is far removed from contract performance.

[47] Thirdly, the respondent states that the applicant breached its duty of honest performance by making unfounded allegations against Mr. Pandoff, who had become the respondent’s director of marketing and sales after having served on the board of directors of Numeris. In his affidavit sworn September 26, 2016, Mr. Phillips states that “[t]he fact that [the respondent] has hired a former director of Numeris who would have been privy to reports made by [the applicant] to Numeris regarding its future plans is a matter of concern.” However, in cross examination, Mr. Phillips agreed that he had no knowledge that Mr. Pandoff had breached any obligations to the applicant.

[48] Similarly, I disagree. The words “a matter of concern: cannot fairly be described as an “unfounded allegation.” Further, the statement is well outside matters directly linked with the performance of the contract.

[49] Finally, the respondent argues that the applicant breached its duty of honest performance as it failed to disclose evidence of its own conduct now alleged by the respondent to represent a breach of the AirWare agreement prior to the cross examination of Mr. McDonald. Again, I disagree. The applicant has remained consistent in its position that its conduct in 2015/2016 amounted to information gathering and did not breach its obligations pursuant to the AirWare agreement. As noted above, the applicant’s efforts in researching the benefits, if any, to it in terminating the agreement did not violate the duty of honest performance; nor did their decision not to disclose these efforts.

3. Whether the applicant is entitled to springboard relief.

[50] I have concluded that the respondent did not breach the AirWare agreement. Specifically, I have concluded that the respondent was not restricted in its marketing efforts during the winding‑up period nor did the respondent engage in marketing activity during the winding‑up period. I have further concluded that the respondent did not breach the AirWare agreement by developing RADIUS during the term of the agreement. These conclusions render unnecessary a conclusion with respect to entitlement to springboard relief. I will nonetheless proceed to conduct the analysis in the event I am incorrect in my earlier findings.

[51] The applicant seeks an injunction preventing the respondent from marketing its software product known as RADIUS for 12 months beyond the effective termination of the AirWare agreement. Further, the applicant argues that the court ought to grant an injunction for an additional seven months (to April 21, 2018) because, it is argued, the respondent has had an additional seven months, from the time it converted AirWare C# into RADIUS in June 2016 until the hearing of this application in January 2017, to work toward converting the applicant’s clients to RADIUS. The applicant alleges that the respondent has taken a head start allowing it to springboard ahead of the applicant. If the respondent can succeed in converting the applicant’s clients to RADIUS, it is argued, it will make it virtually impossible for the applicant to displace the respondent when its own alternative is available. A an injunction restraining the respondent from continuing to market RADIUS to the applicant’s customers until April 21, 2018 will restore the applicant’s lost opportunity resulting from it having delayed development of a replacement for AirWare while the respondent began to actively compete with it.

[52] The applicant relies on the Supreme Court of Canada’s decision in Cadbury Schweppes Inc. v. FBI Foods Ltd., 1999 705 (SCC), [1999] 1 S.C.R. 142, 167 D.L.R. (4th) 577. That case involved a finding at trial that the plaintiffs had proven their claim for breach of confidence: the trial judge found that the defendants had wrongfully used confidential information received from the plaintiffs to create a product competitive with the plaintiffs’ product 12 months earlier than if they had not relied on the confidential information. The trial judge awarded the plaintiffs “headstart damages” in the amount that it would have cost the defendants to develop the competitive product as quickly as they did, but without the use of the confidential information.

[53] Binnie J., writing for a unanimous court in Cadbury Schweppes, at para. 67, explained the springboard doctrine as follows:

The “springboard” or “head start” concept descends from the judgment of Roxburgh J. in Terrapin Ltd. v. Builders’ Supply Co. (Hayes) Ltd., [1967] R.P.C. 375 (Ch. D. 1959), aff’d [1960] R.P.C. 128 (C.A.), at p. 391:

As I understand it, the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public.

[54] Binnie J. then cited a number of Canadian cases (including Lac Minerals Ltd. v. International Corona Resources Ltd., 1989 34 (SCC), [1989] 2 S.C.R. 574, 69 O.R. (2d) 287, on which the applicant also relies) that have referred to the springboard concept. Like Cadbury Schweppes, each of these cases dealt with misuse of confidential information.

[55] The applicant has not referred to any cases where the springboard doctrine has been applied in the absence of a breach of confidence, nor does the applicant discuss in any detail how the doctrine, accepting it could be applicable to a breach of contract case like this one, would be applied in such a context. The applicant seems to suggest that the applicability of the doctrine to the present case is supported by Binnie J.’s statements in Cadbury Schweppes, at para. 48, that “equity, with its emphasis on flexibility, keeps its options open” and that the choice of remedy should not be “driven by a label rather than a case-by-case balancing of the equities.”

[56] The most significant problem with the relief requested is that the evidentiary record fails to demonstrate the applicant’s assertion that the respondent has taken a head start and that the applicant has lost an opportunity. There is no evidence of a springboard advantage, no evidence that the applicant’s efforts in developing and marketing a new product have been impeded by the stated actions of the respondent, and no evidence of any harm to the applicant caused by the respondent’s conduct including the press release and email of July 2016 and the end user testing. Mr. Parkinson’s evidence, on which he was not cross examined, is that there has not yet been a launch of RADIUS and that all customers are using AirWare 2007 for commercial purposes. Likewise, there is no evidence of a high degree of probability that the harm in fact will occur, as required for a quia timet injunction (see Operation Dismantle Inc. v. The Queen, 1985 74 (SCC), [1985] 1 S.C.R. 441, 18 D.L.R. (4th) 481, at p. 458). Even if the springboard doctrine was applicable to the facts of this case, therefore, the applicant has failed to prove a loss sufficient to support their choice of remedy.

Conclusion

[57] For these reasons the application is dismissed. Should the parties be unable to agree on an appropriate costs award I will receive submissions in writing first from the respondent within 45 days, followed by the applicant within 30 days thereafter.

V.R. Chiappetta J.

Released: January 31, 2017

CITATION: Nlogic Inc. v. Microtherapy Inc., 2017 ONSC 722

COURT FILE NO.: CV-16-558526

DATE: 20170131

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

NLOGIC INC.

Applicant

– and –

MICROTHERAPY INC.

Respondent

REASONS FOR JUDGMENT

V.R. Chiappetta J.