Court File and Parties

COURT FILE NO.: 17-CV-75995 DATE: 2018/07/19 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: KNOWMADICS, INC., Plaintiff (Defendant by Counterclaim) -and- LISA CINNAMON and LDX INC. , Defendants (Plaintiffs by Counterclaim)

BEFORE: Madam Justice S. Corthorn

COUNSEL: Nicholas McHaffie, for the Plaintiff Danesh Rana, for the Defendants

HEARD: July 17, 2018

RULING ON MOTION FOR INTERIM INJUNCTION and other relief

Introduction

[1] The plaintiff’s motion is for an interim, interim injunction restraining the defendants from offering for sale and selling certain software and requiring that the corporate defendant remove the software from its website. The motion was brought on short notice, on an urgent basis.

Background

[2] Knowmadics sells specialized computer software that permits its customers to monitor, track the location of, and co-ordinate multiple hardware devices and data feeds. The software is intended for use in the fields of law enforcement, intelligence, and security, and by the military.

[3] From August 2013 to May 2017, Knowmadics employed Lisa Cinnamon (a) on the development of software titled “SilverEye”, and (b) with respect to the integration of SilverEye and a mobile application developed by Knowmadics, referred to on this motion as “CASES”. As an employee of Knowmadics, Ms. Cinnamon signed an Employee Agreement. That agreement includes a term addressing the confidentiality of information and a one-year non-competition provision.

[4] While employed by Knowmadics, Ms. Cinnamon was also a principal of Buzzer Apps Mobile Solutions Incorporated (“Buzzer Apps”). In March 2014, Knowmadics entered into a Services Agreement with Buzzer Apps, with the latter to provide “mobile app development and testing services”. The Services Agreement was signed on behalf of Buzzer Apps by someone other than Ms. Cinnamon. She is said to have been present when the Services Agreement was signed.

[5] Paragraph 3 of the Services Agreement addresses Ms. Cinnamon’s position as an employee of Knowmadics:

Buzzer Apps shall provide the Services as an independent contractor and its employees, and agents shall not be deemed to be employees of Knowmadics for any purpose, providing however that Lisa Cinnamon shall remain as an employee of Knowmadics and as a principal of Buzzer Apps.

[6] Paragraph 4 of the Services Agreement identifies that Buzzer Apps services would be provided through Ms. Cinnamon or other employees of Knowmadics as might be directed by the President of Knowmadics.

[7] For the purposes of this motion, Knowmadics highlights the “Intellectual Property” term of the Services Agreement. Paragraph 11 of that agreement states:

The Parties acknowledge that the performance of this Agreement will result in the development of new and proprietary concepts, methods, techniques, processes and ideas, including but not limited to the creation of new mobile apps (collectively referred to as the “Products”) to be marketed to law enforcement, other governmental agencies as well as for various commercial applications of the technology. The Parties acknowledge and agree that Knowmadics shall own all right, title and interest in and to all Products developed in connection with the performance of the Services hereunder.

[8] Paragraph 11 of the Services Agreement addresses Buzzer Apps’ use of its proprietary development and testing software and tools in carrying out the work for Knowmadics.

[9] Ms. Cinnamon resigned from her position with Knowmadics in the spring of 2017. She thereafter carried on business under a company in which she is the principal, LDX Inc. Following Ms. Cinnamon’s resignation from Knowmadics, LDX entered into sub-contract with Knowmadics to provide technical support (the “Sub-Contract”). The Sub-Contract identifies Ms. Cinnamon as the “Key Personnel” involved in providing that support. LDX provided technical support for approximately one month following the date of Ms. Cinnamon’s resignation from Knowmadics.

[10] LDX also entered into a non-disclosure agreement with Knowmadics (“NDA”). The terms of the NDA include that LDX agrees “to take all reasonable precautions to hold in confidence and not disclose to other parties, any Confidential Information provided hereunder.” “Confidential Information” is defined in the NDA to include but not be limited to, “software, software documentation, [and] source code”.

[11] The NDA confidentiality provision specifically addresses SilverEye and CASES, stating:

For the avoidance of doubt, all information regardless of form related to SilverEye, CASES, CASES Agent or any other Knowmadics or Guardian product shall be considered Confidential Information and handled as such, without the requirement of marking or other form of identification.

[12] In December 2017, Knowmadics commenced this action. The allegations made on behalf of Knowmadics include that subsequent to Ms. Cinnamon’s resignation from Knowmadics, the defendants developed, and are promoting for sale, software products known as FireCat and GhostCat. Knowmadics alleges that both products (a) directly compete with SilverEye and CASES, (b) were developed by the defendants with the use of Knowmadics’ Confidential Information, and (c) constitute an infringement of Knowmadics’ copyright in SilverEye and CASES.

[13] FireCat and GhostCat are not the subjects of this motion for an interim, interim injunction. The subject of this motion is the software product that allows the CASES application to be installed on a mobile device in a manner that appears to be a different application. This type of product, known as a “cover app”, allows the users of CASES to avoid suspicion when accessing the CASES application on their mobile devices.

[14] The cover app is a functioning slot machine game that allows the user to either play a slot machine or to access the underlying CASES application. Knowmadics says that it was not until July 10, 2018, that it became aware that the defendants are offering for sale the same cover app—a functioning slot machine—for their FireCat and GhostCat software.

[15] The defendants do not deny that the cover app for their FireCat and GhostCat software is a functioning slot machine, similar in appearance to the cover app used as part of the CASES application. The defendants’ position is that (a) Ms. Cinnamon developed the cover app in 2013, before she became an employee of Knowmadics, (b) the cover app does not fall within the scope of any protection provided by one or more of the agreements and sub-contract referred to above, and (c) the sale of the cover app as part of the FireCat and GhostCat software does not constitute a breach of any of the agreements or sub-contract with Knowmadics.

[16] The defendants acknowledge that ownership of the cover app is a triable issue. They question (a) the timing of the discovery by Knowmadics of the inclusion of the cover app as part of the FireCat and GhostCat software, and (b) the impact of that timing on the merits of Knowmadics’ position with respect to the three-part test for entitlement to the interim, interim relief requested.

[17] Given that this motion was heard on short notice, there was no cross-examination on the affidavits filed. The motion is determined on the basis of the affidavit evidence only.

The Issues

[18] The only substantive issue to be determined on this motion is whether Knowmadics has satisfied the three-part test for entitlement to an interim injunction (RJR MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311, 111 D.L.R. (4th) 385):

a) Is there a serious issue to be tried? b) Will Knowmadics suffer irreparable harm if the injunction is not granted? c) In which party’s favour does the balance of convenience rest?

[19] Knowmadics did not formally request but requires procedural relief in order for the motion to be heard. The procedural relief required is with respect to the timing of service and filing of the motion record.

Analysis

Substantive Issues

[20] It is not always possible to consider in three distinct categories, the evidence and the issues relevant to the three-part test for entitlement to an interim injunction. There is overlap between the issues, in particular the issues of irreparable harm and balance of convenience. For ease of reference, I discuss each part of the test discreetly. It is clear, however, that (a) there is overlap in the evidence applicable to each part of the test, and (b) the outcome on the issue of balance of convenience is affected by the determination on the issue of irreparable harm.

Serious Issue to be Tried

[21] The parties are in agreement that there exists a serious issue to be tried: which of the parties is the owner of the cover app? The parties disagree as to the strengths and weaknesses of their respective cases.

[22] Ms. Cinnamon’s claim of ownership of the cover app rests on her assertion that she developed the cover app in 2013, before she began to work with Knowmadics pursuant to the Employment Agreement. The defendants also rely on evidence from another principal of Buzzer Apps, Andrew Smiley. Mr. Smiley’s evidence is that (a) to his knowledge the cover app was developed by Ms. Cinnamon, and (b) the intellectual property in the cover app was never transferred by Ms. Cinnamon to Buzzer Apps.

[23] The defendants also rely on the evidence of an individual who worked for Empire Theatres in 2013 (Daron J. Wong). Mr. Wong’s evidence is a single statement to the effect that in April 2013 he received from Ms. Cinnamon a “cool slots machine app that she was working on.” There is no evidence of a comparison between the cover app that is the subject of this motion and the app that Mr. Wong saw in April 2013. The evidence does not support a finding that the cover app seen by Mr. Wong in April 2013 is the same as the cover app currently offered by LDX as part of FireCat and GhostCat or by Knowmadics as part of CASES.

[24] Knowmadics questions the credibility of Ms. Cinnamon’s assertion of ownership of the cover app. Knowmadics submits that at no time prior to the commencement of this action did Ms. Cinnamon claim ownership in the cover app.

[25] Knowmadics highlights that there were opportunities for Ms. Cinnamon to assert ownership of the cover app prior to resigning from her position with Knowmadics. Reference is made to the various agreements signed over time. Knowmadics points to the lack of a term in any one of the agreements that (a) identifies the cover app as Ms. Cinnamon’s intellectual property, and (b) exempts the cover app from any of the confidentiality and proprietary rights provisions by which one or more of Ms. Cinnamon, Buzzer Apps, and LDX are bound.

[26] In their pleading, served in February 2018, the defendants advance a counterclaim related to Knowmadics’ use of the cover app. Knowmadics’ evidence is that the counterclaim is the first time it was faced with an assertion by Ms. Cinnamon of ownership of the cover app, which the defendants refer to as the “slots machine game”. The counterclaim is for the revenue received by Knowmadics from its sale of CASES Agent or, in the alternative, an annual licensing fee ($30,000 per year).

[27] In their reply and defence to counterclaim, delivered in April 2018, Knowmadics responded to Ms. Cinnamon’s allegation that she owns the cover app. Knowmadics repeated its allegation of ownership in the cover app and added, “[t]o the extent that Ms. Cinnamon is continuing to use the slots machine game in her own software, this would constitute a further infringement of the intellectual property rights of Knowmadics, for which Knowmadics claims damages” (paragraph 24).

[28] The timing of the exchange of pleadings is relevant to the defendants’ submission that Knowmadics delayed in seeking relief with respect to the defendants’ use of the cover app (as a product for sale and as posted on the LDX website). The defendants submit that the delay is such that the request for the injunctive and other relief should be denied.

[29] I find that the delay, if any, on the part of Knowmadics in pursuing this motion is not sufficient to bar Knowmadics from the relief it is seeking. First, there is no evidence that Knowmadics was aware, prior to July 10, 2018—days before the trade show was to commence—that the cover app had been posted to the LDX website and was being offered for sale as part of the FireCat and GhostCat software. Knowmadics denies that it was aware, in April 2018, when their reply and defence to counterclaim was delivered, that the defendants were offering the cover app for sale and/or had the cover app on their website.

[30] Second, I note that in their pleading, the defendants do not identify that LDX is offering the cover app for sale as part of the FireCat and GhostCat software and, as a result, is suffering losses by reason of the use of the cover app by Knowmadics in its software. In the absence of any evidence that LDX had included the cover app as part of FireCat and GhostCat and any allegation by the defendants that they were doing so, there was no reason for Knowmadics to respond with a motion for injunctive and other relief related exclusively to the cover app.

[31] The defendants also do not identify in their pleading that the cover app had, as of February 2018 (the date of their pleading), already been posted to the LDX website. Once again, in the absence of an allegation to that effect and any evidence that Knowmadics was aware of the posting of cover app to the LDX website, there was no reason for Knowmadics to respond with a motion for an order requiring LDX to remove the cover app from their website.

[32] In its reply and defence to counterclaim, Knowmadics responds to Ms. Cinnamon’s allegation of ownership in a general way as would be expected in pleading form. I find that the timing of the motion for injunctive relief does not involve any delay on the part of Knowmadics.

[33] The defendants argue that if the injunctive relief is granted they will be unfairly prejudiced because the motion was heard on the second day of a four-day trade show in which they are participating in the United States. The defendants submit that they will be hamstrung in their participation in that trade show if LDX is required to remove the cover app from its website and refrain from offering the cover app for sale as part of FireCat and GhostCat.

[34] Given my finding that there has not been any delay on the part of Knowmadics in proceeding with this motion, it is not necessary for me to consider the submission of unfair prejudice to the defendants (Easyfinancial Services Inc. v. EZMoney Tario Inc., 2018 ONSC 1542, 292 A.C.W.S. (3d) 152 (Div. Ct.)). I would, in any event, find that the disruption to the defendants’ participation in a trade show is not unfairly prejudicial to them.

[35] Ms. Cinnamon’s evidence is that she does not have any clients in the United States. She has been operating her business through LDX for approximately one year since her resignation from Knowmadics. There is no evidence from the defendants as to the loss of existing or potential customers for LDX in the event the injunctive and other relief is granted. There is also no evidence from the defendants as to the manner in which they are using the cover app—other than that it has been posted to the LDX website. In summary, there is no evidence to support a finding of unfair prejudice to the defendants.

[36] As noted above, the parties agree that the question of ownership of the cover app is a serious issue to be tried. Knowmadics submits that with their motion they raise another serious issue to be tried: regardless of which of the parties owns the cover app, is the use of the cover app by LDX an infringement of the NDA? I agree that the issue of potential infringement of the NDA is a serious issue to be tried.

[37] In summary, the motion by the plaintiff corporation raises at least two serious issues to be tried.

Irreparable Harm

[38] The evidence on behalf of Knowmadics as to the irreparable harm it will suffer, pending the hearing of a motion for an interlocutory injunction, is set out in the affidavit of the company’s President, Claire Ostrum (the “Ostrum Affidavit”). Irreparable harm is considered in two ways.

[39] First, Ms. Ostrum sets out in general terms the irreparable harm that Knowmadics says it will suffer if the injunctive and other relief is not granted on an interim, interim basis:

• Confusion in the minds of customers and potential customers as to the relationship between CASES and FireCat/GhostCat, including whether the software sold by Knowmadics and by LDX is the same software;
• Negative effects on the relationships that Knowmadics has carefully built with its customers over a number of years;
• Devaluation of Knowmadics’ investment (said to be over $6,000,000) in the CASES software and, more broadly, the SilverEye platform; and
• Loss of sales, loss of future sales, and loss of market share.

[40] Knowmadics does not provide a specific example of any of the forms of irreparable harm listed above. For instance, no example of the loss of a sale to a particular customer is provided. Nor is an example provided of communication from a customer or a potential customer expressing confusion as between CASES and FireCat/GhostCat.

[41] With respect to the lack of specific examples of irreparable harm, I consider the following. Ms. Ostrum’s evidence is that it was not until July 10, 2018, that she learned that the defendants are listed as registered exhibitors at the NATIA annual conference in Phoenix, Arizona. The conference runs from July 16 to 19, 2018. Knowmadics is also an exhibitor at the conference. Ms. Ostrum says that as a result of learning of the defendants’ participation in the conference she (and Knowmadics) became aware that LDX (a) is offering the cover app for sale as part of its FireCat and GhostCat software, and (b) has the cover app posted to its website.

[42] The Ostrum Affidavit was sworn on July 14, 2018. I draw an inference and find that in less than four days it was not possible for Knowmadics to gather specific examples of the types of irreparable harm listed in paragraph 39, above.

[43] I also consider that, “irreparable harm refers to the nature of the harm suffered rather than its magnitude” (Morguard Corp. v. InnVest Properties Ottawa GP Ltd., 2012 ONSC 80, 211 A.C.W.S. (3d) 952, at para. 41 quoting from RJR MacDonald, at para. 59). The lack of specific examples of a lost sale or a confused existing or potential customer is not fatal to Knowmadics’ position on the issue of irreparable harm.

[44] The second way in which irreparable harm is considered in the Ostrum Affidavit is with respect to the effectiveness of the cover app. Ms. Ostrum’s evidence is that the very nature of the work that the cover app is intended to facilitate requires that there not be public dissemination of information about the cover app. I draw an inference and find that it is important within the fields in which this type of software is used that it not be readily available to the public.

[45] In response, the defendants rely on Ms. Cinnamon’s evidence as to the length of time for which the cover app has been on the LDX website. At paragraph 6 of her responding affidavit (sworn on July 16, 2018 in Phoenix), Ms. Cinnamon says, “The slots-machine app has been on LDX’s website since the end of July 2017.”

[46] Much was made by the defendants as to the passage of time between when the defendants say the cover app was posted to the LDX website (July 2017) and when Knowmadics first became concerned about the FireCat and GhostCat software LDX was developing (August 2017). The defendants request that I (a) draw an inference and find that Knowmadics either went or could have gone to the LDX website at a much earlier date than July 10, 2018 and seen the cover app posted to the website, and (b) find that there has been delay on Knowmadics’ part in seeking the relief it requests on this interim motion.

[47] The evidence is insufficient to support an inference that the LDX website has, since July 2017, appeared and functioned as it did on July 10, 2018, when Ms. Ostrum turned to the website. I am unable to find that if Ms. Ostrum or someone from Knowmadics had gone to the LDX website at any time from July 2017 forward, that individual would have been able to access the cover app in the same way that Ms. Ostrum accessed it on July 10, 2018. In summary, the evidence does not support a finding of delay on the part of Knowmadics in the context of this motion.

[48] Ms. Cinnamon’s evidence is that she does not have any US-based clients and that she is in the United States for a trade show. There is no evidence from Ms. Cinnamon or on behalf of LDX that one or both of them will suffer any irreparable harm in the event the cover app is taken down from the website and/or they are required to cease, on an interim, interim basis, selling FireCat and GhostCat with the cover app.

[49] There is no evidence from or on behalf of the defendants responding either generally or specifically to the evidence on behalf of Knowmadics, with respect to the irreparable harm it alleges it will suffer in the event the interim, interim injunction is not granted.

[50] In summary, on the basis of the current record, I find that Knowmadics has demonstrated that it will suffer irreparable harm if the relief requested is not granted on an interim, interim basis.

Balance of Convenience

[51] The balance of convenience, and weighing the impact on the parties of granting or denying the injunctive relief requested, requires consideration of factors that extend beyond that which can be compensated for in damages. For the reasons discussed above, I find that the balance of convenience favours Knowmadics and granting the injunctive and other relief requested.

[52] Those reasons include that Knowmadics has been in business for a number of years. Knowmadics has an established customer base. There is the potential for erosion of that base if the defendants are permitted to continue to use the cover app pending the motion for an interlocutory injunction being heard. The defendants have no customers in the United States. There is no evidence of potential erosion of the defendants’ customer base pending the motion for an interlocutory injunction being heard.

Procedural Relief

[53] Knowmadics requires relief in the form of an order validating the method of service of the motion record and factum, abridging the time for service of those documents, and abridging the time for filing of those documents. Knowmadics did not include a request for that relief in its notice of motion. The requirement for that relief was addressed by Knowmadics and the defendants by way of email communication between their respective counsel and the office of the trial co-ordinator.

[54] The request by Knowmadics to have the motion heard on an urgent basis was granted over the objection of the defendants. On the return of the motion, the defendants did not raise the issues of method of service, short notice, etc. The defendants delivered responding materials and, on the return of the motion, did not object to the motion proceeding. I note that the defendants also require procedural relief with respect to the timing of the delivery of their materials.

[55] In all of the circumstances, the procedural relief required by the parties is granted. That relief is reflected in the order below.

Disposition

[56] I therefore order as follows:

1. Each of the defendants is restrained from reproducing, selling, or offering for sale or installation of software consisting of the “slot machine game” software that is part of the CASES and CASES Agent mobile applications sold by Knowmadics.
2. The defendants shall cause to be removed from the website of the defendant corporation (www.ldxinc.com), and any other public source, any software consisting of the “slot machine game” software.
3. The terms of this order shall remain in force pending the hearing of a motion on behalf of the plaintiff for an interlocutory injunction or until a further order of the court is otherwise made.
4. Service of the plaintiff corporation’s motion record and factum by email on counsel for the defendants on or before Friday, July 13, 2018 is deemed to be valid service.
5. Service of the defendants’ responding affidavits and factum by email on counsel for the plaintiff corporation on or before Monday, July 16, 2018 is deemed to be valid service.
6. The time for service and filing of the parties’ respective motion record, responding affidavits, and facta is abridged.

Costs

[57] The motion for an interlocutory injunction will be determined on the basis of a more fulsome record. The outcome of the interlocutory motion may be different than the outcome of this interim motion. The appropriate time to determine costs of the interim motion is when costs of the interlocutory injunction are being determined.

[58] I remain seized of the matter and shall be determining the motion for an interlocutory injunction. The costs envelopes, delivered by counsel for the parties following the hearing for the interim motion, shall be kept on file and reviewed when costs of both this motion and the motion for an interlocutory injunction are determined and fixed.

[59] The costs of the motion for interim, interim relief shall, unless the parties otherwise reach an agreement with respect to costs, be reserved to the judge hearing the plaintiff’s motion for an interlocutory injunction.

Madam Justice Sylvia Corthorn

Date: July 19, 2018