CITATION: Marshall & Swift/Boeckh LLC v. SCM Insurance Services Inc., 2017 ONSC 788
COURT FILE NO.: CV-14-517992
DATE: 20170201
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
MARSHALL & SWIFT/BOECKH LLC and MARSHALL & SWIFT/BOECKH (CANADA) LTD.
Plaintiffs
– and –
SCM INSURANCE SERVICES INC., SCM RISK MANAGEMENT SERVICES INC., OPTA INFORMATION INTELLIGENCE INC. and SYNTECH ASSOCIATES LTD.
Defendants
Brendan van Niejenhuis and Carlo Di Carlo, for the Plaintiffs
Mel Hogg, for the Defendants
HEARD: November 2, 2016
R.F. GOLDSTEIN J.
REASONS FOR JUDGMENT
[1] The Plaintiffs own a database and software designed for use by the property inspection and insurance industries. They licensed the use of these proprietary products to the Defendants. The Defendants provide claims management and risk management services to the insurance industry. The Defendants used the Plaintiff’s proprietary products.
[2] The Plaintiff’s product is called Residential Component Technology, or RCT. RCT is made up of a calculator, called the RCT Engine, and a database, called the RCT Database. Insurance adjusters use RCT to estimate reconstruction costs for destroyed properties. Insurance brokers use RCT to establish replacement cost values for the purpose of underwriting insurance policies.
[3] The Defendants have developed their own product. The product is called iClarify. The Plaintiffs say that the Defendants used their proprietary software to develop iClarify. The Plaintiffs say that this use violated the licence agreement.
[4] The Plaintiffs have sued the Defendants for allegedly breaching the licence agreement. They seek an order under Rule 32.01 for an inspection of the computer systems of the Defendants. The Plaintiffs say that they cannot resolve the issue through traditional documentary discovery. Discovery has not yet taken place.
[5] The Defendants say that any order for inspection is premature. They do not say that there can never be an inspection, only that it should not be done unless the traditional methods of discovery fail to properly narrow the issues. In any event, there have already been two inspections.
[6] For the reasons that follow, I agree with the Defendants. The motion is dismissed, without prejudice to the Plaintiffs to bring it back on after documentary discovery.
BACKGROUND
[7] When a homeowner purchases insurance, an insurance broker needs to figure out how much it would cost to replace the house in the event of a flood or a fire. The broker then uses the cost estimate to underwrite an insurance policy. If the house should, unfortunately, burn down or be swept away, the insurance company needs to figure out what it will cost to rebuild it. Claims adjusters need to know how much new bricks, wiring, insulation and so forth will cost.
[8] The Plaintiff Marshall & Swift/Boeckh LLC (an American corporation) and its Canadian operating subsidiary, the Plaintiff Marshall & Swift/Boeckh (Canada) Ltd., sell a tool that is used to make these calculations (I will simply refer to the two entities together as “the Plaintiffs”). As noted, that tool is called Residential Component Technology, or RCT. RCT is made up of a calculation engine called “the RCT Engine” and a dataset called “the RCT Data.” The RCT Data is compiled from a set of specific costs. The costs are obtained from the U.S. market. The replacement cost value of a property is estimated using the RCT Engine based on specific information. An adjuster or claims evaluator obtains that information by conducting an on-site inspection.
[9] The Defendant SCM Insurance provides claims management, risk management, and related services. The Defendant Risk Management Services (which I will refer to as “RMS”) is a subsidiary of SCM Insurance. RMS provides property inspections, reports, and valuations for the insurance industry. The Defendant Opta Information Intelligence (which I will refer to as “Opta”) is also a subsidiary of SCM.
[10] On October 1, 2008 the Defendant RMS and the Plaintiffs entered into a license agreement. The agreement expired on May 31, 2014. Initially, RMS accessed RCT through a web portal maintained by the Plaintiffs. In 2010 the parties agreed that RMS could access RCT through software delivered via a CD-ROM. That meant that RMS field agents could access the RCT software locally, rather than through the web portal maintained by the Plaintiffs.
[11] According to the evidence of the Defendants, RMS maintained an internal platform called the Web Inspection & Evaluation System (generally referred to as “WIES”). WIES was used by field agents for field data collection but also had much broader applications. It was also used for billing, payroll, scheduling, and the like. Field agents typically collected information about a property. They then entered the information into the WEIS interface in order to build a profile. The RCT engine would then use this number to generate the replacement cost of the property. According to the Defendants, however, the process did not stop there. RMS field agents, they say, were required to make adjustments in accordance with Canadian market conditions and their own judgment. Field agents created a “WIES Report”. The WIES Report incorporated the property information including the replacement value. RMS called that number the “WIES Number”. RMS then uploaded the WIES Number into its own database. Field agents created their own values specific to the Canadian market based not only on the RCT calculations, but on the WIES report, and, ultimately, their own judgment and experience.
[12] The licence agreement prohibited any use by of RCT by RMS for anything other than the generation of property inspection reports. The licence agreement also prohibited RMS from granting third parties access to RCT. It even prohibited RMS from sharing with or granting access to RCT by affiliated corporations and subsidiaries.
[13] The licence agreement also included a very broad audit provision:
MSB shall have the right to audit Licensee’s use of the Software or Services during the term of this Agreement and for a period of one (1) year thereafter (“Audit”). An Audit may include, without limitation, inspection and review of any computer(s) or server(s) on which the Software or Services have been installed or hosted, and any records, procedures or business practices that related to Licensee’s performance under and compliance with the terms of this Agreement.
[14] The audit provision also contained clauses dealing with such routine matters as the hours of inspection, notice, and payment.
[15] The Plaintiffs claim that in 2009 SCM (the parent company of RMS) developed a new property valuation tool called iClarify. iClarify was created as an underwriting tool. Responsibility for marketing and delivering iClarify was transferred to Opta, another subsidiary of SCM. The Plaintiffs say that in 2014 they discovered RCT source codes in the WIES program. They allege that the use of those source codes suggested that Opta was making use of those source codes in its iClarify product. Because iClarify is an underwriting tool, use of the RCT source codes violated the licence agreement. The Plaintiffs then triggered their rights of audit under the licence agreement. They say that the Defendants, collectively, failed to properly comply with the audit provisions under the licence agreement. The result was that the audit was not successful. Another audit was subsequently arranged. The allegations in the statement of claim state that the Defendants breached the terms of the licence agreement first through an improper use of RCT source code, and then through a failure to comply with the audit provision.
[16] According to the Defendants, they ceased using RCT when the licence expired. They also deny that they used RCT to create their database. They say that the RCT database is separate and distinct from RCT and does not interact with RCT. They specifically deny “reverse engineering” iClarify from RCT and using RCT source code.
[17] The Defendants, not surprisingly, argue that they have already accommodated two inspections by the Plaintiff’s auditor. In June 2014 the Canadian plaintiff notified RMS that its auditor, KPMG, would conduct an audit. KPMG conducted the audit between June 16 2014 and September 29 2014. KPMG issued its report in November 2014, and in December 2014 the Plaintiffs filed their Statement of Claim.
[18] According to the Statement of Defense, RMS subsequently agreed to a further audit on a “without prejudice” basis. The scope of the second audit was substantially increased from the scope of the first audit. KPMG carried out this second audit in January and February 2015. KPMG identified what it said were several breaches of the licence agreement. The Plaintiffs propose an inspection that is very broad. In the Notice of Motion they ask for:
…. an order that would allow a computer forensic specialist to inspect:
(a) The computer systems and servers of the Respondents to allow the specialist to determine and draft a report on which of the Respondents use the RCT as well as what uses these entities make of the RCT; and,
(b) The RMS database to determine:
(i) What changes RMS field inspectors make to the RCT Number in order to create the WIES Number;
(ii) what information is stored in the RMS Database outside the WIES numbers;
(iii) what percentage of information in the RMS Database consists of RCT derived information;
(iv) what information iClarify relies on to provide its predictive values outside of the RMS database; and
(v) a quantified measure of how reliant iClarify is on the RMS Database to derive its predictive values.
ANALYSIS
[19] The Plaintiffs argue that the Defendants breached the licence agreement. The licence agreement permitted RMS to use RCT for a very narrow purpose. That purpose was to generate replacement cost or cash value estimates for residential properties. The licence agreement specifically prohibited RMS to use RCT for telephone estimating, data collection processes, claims processing, underwriting, or any other use other than in connection with field inspection services. The Plaintiffs say that RMS further breached the license agreement by obstructing the two inspections. They say that they need to conduct another inspection because the first two inspections have not yielded enough, and traditional discovery methods will not suffice. In doing so, they rely on the evidence of Martin Musters, the director of Computer Forensics Inc. Computer Forensics Inc. specializes in digital forensics. Mr. Musters proposes to conduct a further inspection of RMS’s computer systems, and sets out what he believes such an inspection could discover. Moreover, he sets out the reasons why he believes traditional discovery would not be sufficient.
[20] I accept Mr. Muster’s point that his audit may well reveal more information than the first two audits, but I am unable to accept is view that traditional discovery would not be sufficient. Mr. Musters did not file his affidavit as an expert so his opinion on that point is not admissible. I do not doubt that Mr. Musters could be qualified as an expert, and I do not suggest that expert evidence is required on a motion of this nature (it may or may not be helpful, but it is not mandatory), but his opinion is of no moment in some important respects. For example, he says that “questioning a discovery witness would be a deeply inefficient method” for obtaining the information. Efficiency, while certainly to be encouraged, is not the only value at stake in discovery.
[21] The test for inspection is set out in Rule 32.01(1) of the Rules of Civil Procedure:
32.01 (1) The court may make an order for the inspection of real or personal property where it appears to be necessary for the proper determination of an issue in a proceeding.
(2) For the purpose of the inspection, the court may,
(a) authorize entry on or into and the taking of temporary possession of any property in the possession of a party or of a person not a party;
(b) permit the measuring, surveying or photographing of the property in question, or of any particular object or operation on the property; and
(c) permit the taking of samples, the making of observations or the conducting of tests or experiments.
(3) The order shall specify the time, place and manner of the inspection and may impose such other terms, including the payment of compensation, as are just.
(4) No order for inspection shall be made without notice to the person in possession of the property unless,
(a) service of notice, or the delay necessary to serve notice, might entail serious consequences to the moving party; or
(b) the court dispenses with service of notice for any other sufficient reason.
[22] The order may be made where it is necessary for the “proper determination of an issue”. The Plaintiffs argue that the Rule should be liberally construed. An inspection order should only be ordered where there is some countervailing prejudice or the request constitutes an abuse of inspection rights: Moirier v. Michelin North American (Canada) Inc., [2010] O.J. No. 6131, 2010 CarswellOnt 615 (Sup.Ct.) at para. 21. The Plaintiffs point to this paragraph, where my colleague Penny J. stated:
The law is clear that Rule 32 should be construed liberally to permit inspections (Farhi v. Wright (1987), 26 C.P.C. (2d) 88 (Ont. H.C.)), and that more than one inspection may be permitted, although where there have been numerous inspections already (i.e., abuse/prejudice), the court may refuse to permit another (Adriatic Glass & Mirrors Ltd. v. Dolvin Mechanical Contractors Ltd. (1997), 18 C.P.C. (4th) 124 (Ont. Gen. Div.)).
[23] The Defendants also argue that the threshold is low. All that is required is a “reasonable possibility” that the inspection will reveal something useful for a trier of fact: Peel School District No. 19 v. 553518 Ontario Ltd., [2000] O.J. No. 3581 (Sup.Ct.).
[24] I am not persuaded that an inspection is “necessary” at this point. The two KPMG audits produced reports alleging breaches of the license agreement. Surely those reports, if accepted, could assist a trier of fact in determining whether there has been a breach. Furthermore, it is unclear to me how an inspection of the source codes of many other programs run by RMS, and its affiliates and parent are necessary to determine whether one product is “tainted” with RCT source code. I hesitate to call it a fishing expedition, but neither is it a focused inspection.
[25] I also point to two other factors. Both point towards exercising my discretion against granting an inspection, at least at the juncture. First, there has not yet been traditional discovery in this case. As I have already noted, I am not persuaded that traditional discovery will be ineffective. For example, are there memos, emails, or other documents generated by officers of the Defendants that will demonstrate that those people discussed how to use RCT source code in iClarify? Or how iClarify was developed generally? Given that there have already been two inspections of the computer systems of the Defendants, in my view it is time to let the traditional discovery route take its course.
[26] Second, I note that the proposed inspection is wide-ranging and highly intrusive. It is well outside the norm for inspections under Rule 32. As Brown J. (as he then was) noted in Petro-Diamond Inc. v. Verdeo Inc., 2013 ONSC 7914 at para. 7:
Typical examples of circumstances in which courts have ordered inspections of property have included: (i) a view of real property to prepare an appraisal where the value of the property was relevant to the issue of damages; (ii) examining a mobile boom to ascertain its method of operation and the degree to which it could be extended where liability turned on whether a cable, struck by the boom, had been suspended at the requisite height; and, (iii) inspecting the valves of tires which had blown out where it was alleged that the valves had not been installed by the tire manufacturer, but by the plaintiff.
[27] I am aware that in the leading case of Farhi v. Wright (1987), C.P.C. (2d) 88 (Ont.H.C.) Potts J. noted that the balance of convenience was “not the appropriate test here”. At some point, however, the balance of convenience must play some role. Given the wide-ranging nature of the inspection sought (wider than what is actually sought in the Statement of Claim) and the fact that two inspections have already taken place, that is another reason to exercise my discretion against granting the inspection.
[28] It may well be that the Plaintiffs are correct, and that traditional documentary discovery will not yield anything meaningful. At that point they may be in a position to make a further request. They may also have sufficient evidence that the request can be narrowed and focused.
DISPOSITION AND COSTS
[29] The motion is dismissed without prejudice to the right of the Plaintiffs to bring a new motion for inspection after discovery is complete.
[30] The parties will have 30 days to file costs submissions of no more than two pages, along with a costs outline and any cases they believe will be of assistance.
R.F. Goldstein J.
Released: February 1, 2017
CITATION: Marshall & Swift/Boeckh LLC v. SCM Insurance Services Inc., 2017 ONSC 788
COURT FILE NO.: CV-14-517992
DATE: 20170201
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
MARSHALL & SWIFT/BOECKH LLC and MARSHALL & SWIFT/BOECKH (CANADA) LTD.
Plaintiffs
– and –
SCM INSURANCE SERVICES INC., SCM RISK MANAGEMENT SERVICES INC., OPTA INFORMATION INTELLIGENCE INC. and SYNTECH ASSOCIATES LTD.
Defendants
REASONS FOR JUDGMENT
R.F. Goldstein J.