Court File and Parties

Court File No.: CV-15543370 Motion Heard: 2018-08-14 Superior Court of Justice - Ontario

Re: 6Points Food Services Ltd., Plaintiff And: Carl’s Jr. Restaurants LLC, CKE Restaurants Holdings Inc., Ned Lyerly Jr., Michael Woida, and Jeff Branton, Defendants

And Between: Carl’s Jr. Restaurants LLC, Plaintiff by Counterclaim And: 6Points Food Services Ltd., Michael Meekins and Michael Levine, Defendants by Counterclaim

Before: Master P.T. Sugunasiri

Counsel:

• E. Mayzel, Counsel for the Defendants and Carl’s Jr. Restaurants LLC as Plaintiff by Counterclaim
• L. Hoffer, Counsel, for the Plaintiff and Defendants by Counterclaim

Heard: September 14, 2018

Reasons for Decision

[1] This is an action among sophisticated parties to a failed franchising enterprise. None of the parties are ordinarily resident in Ontario. The Defendants complain that the Plaintiff is attempting to “bludgeon” them into settlement them by its massive and unorganized overproduction of 24,000 documents. They seek a further and better affidavit with fewer documents. They also seek security for costs to the end of discovery. The Defendants by Counterclaim, also seeks security for costs. For the reasons that follow, I order the Plaintiff to categorize its productions for ease of reference for all parties and both 6Points and Carl’s Jr. shall post security for costs.

Background

The Parties

[2] The litigation concerns a series of contracts entered into by 6Points Food Services Ltd. (“6Points”) and Carl’s Jr. Restaurants LLC (“CJR”) whereby 6Points was to establish four Carl’s Jr. Restaurants in Waterloo, Guelph and two locations in Toronto.

[3] CJR is a “fast service” restaurant group. Its business model is in part premised on franchising Carl’s Jr. Restaurants. CJR is a Delaware company wholly owned by CKE Restaurants Holdings Inc. (“CKE”) with its principal place of business originally in California but now in Tennessee. In any event, its corporate headquarters is domiciled in the United States. Jeff Branton, Ned Lyerly and Michale Woida are all officers of CJR.

[4] 6Points is a corporation incorporated under the laws of Ontario for the purpose of entering into a development agreement with CJR. It is wholly owned by Westbridge Capital Ltd. (“Westbridge”) who has its principal place of business in Saskatchewan. Westbridge is owned by Michael Meekins, Michael Levine, Jim Hutch and Kemco Holdings Inc – all residents of Saskatchewan. Levine is President of 6Points.

[5] On November 13, 2013, CJR and 6Points entered into a “Development Agreement for Use in Canada” (“DAC”), two addenda to it, and a Letter of Credit Agreement (“LCA”). According to CJR, 6Points was to open 33 restaurants by January 31, 2020.

[6] The DAC contained a choice of law provision making the DAC subject to Ontario law and a forum selection clause allowing the parties to sue in the state where CJR’s principal offices are located, or in Ontario. Accompanying the DAC were four subsequent agreements specific to each of the 4 franchises that 6Points was to open (“Franchise Agreements”). The entire franchising arrangement was made pursuant to Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 (“Wishart Act”).

The Litigation

[7] On November 10, 2015, 6Points rescinded the DAC and all of the related agreements pursuant to section 6 of the Wishart Act on the basis that CJR failed to meet its disclosure obligations.

CJR initiates California proceedings

[8] On December 22, 2015, CJR initiated litigation against 6Points, Levine and Meekins (“6Points Parties”) by filing a “Complaint for Declaratory and Money Judgment” in the United States District Court Central District of California (“California Proceedings”). In the California Proceedings, CJR made four main allegations. First, it alleged that the 6Points Parties breached the DAC by failing to open restaurants on the contractually required dates. Second, it alleged that 6Points failed to pay royalties and fees as required under the Franchise Agreements. Third, CJR complains that 6Points breached its obligation to deliver a letter of credit to CJR in the amount of CAD $1,000,000 to secure 6Points’ obligations under the various agreements and in lieu of personal guarantees from Meekins and Levine. Fourth, CJR alleges that 6Points’ Notice of Recission constitutes an anticipatory repudiation of the DAC and Franchise Agreements.

6Points Launches Ontario Proceedings

[9] On December 23, 2015, 6Points issued a Statement of Claim in Ontario and a second claim in February naming CKE, Lyerly, Woida and Branton as additional defendants (collectively “CJR Parties”).

[10] By order dated July 7, 2016, the Central District Court of California dismissed CJR’s action on the basis of a forum non conveniens motion brought by 6Points. On August 8, 2016 the Superior Court of Justice consolidated the two Ontario actions under file number CV-15-543370. On August 18, 2016 6Points amended its Statement of Claim in that action to reflect to two claims (“Amended Claim”).

[11] In the Amended Claim, 6Points seeks a declaration of validity of its Notice of Recission and damages for: a) CJR’s failure to comply with disclosure obligations under the Arthur Wishart Act, misrepresentation, breach of contract and breach of the statutory obligation of fair dealing contained in section 3 of the Arthur Wishart Act.

CJR’s Counterclaim mirrors the dismissed California Proceedings

[12] On August 31, 2016, CJR served a Statement of Defence for the CJR Parties and a Counterclaim by CJR against the 6Points Parties. As against 6Points, CJR asserts the same four complaints for breach of the DAC, breach of the Franchise Agreements, breach of the Letter of Credit Agreement and wrongful repudiation. As against Meekins and Levine, CJR claims damages for breach of contract to provide a letter of credit and payment of all amounts owing by 6Points pursuant to a personal guarantee.

[13] On November 16, 2016, 6Points delivered its Reply and the 6Points Parties’ Defence to Counterclaim. On December 5, 2016, CJR served a Reply to the Defence to the Counterclaim.

The Parties negotiate a discovery plan

[14] The parties then negotiated their discovery plan between January and July of 2017. It includes a document exchange protocol. The 6Points Parties delivered their productions electronically on November 28, 2017. The CJR Parties delivered theirs on November 29, 2017. Both sides are using sophisticated software to manage electronic production.

Issues

A. Discovery

[15] The CJR Parties take issue with two aspects of the negotiated discovery process. First, they complain of overproduction. The 6Points Parties have produced 23,204 documents from over 1000 different authors. Second, the 6Points Parties wish to have the same amount of discovery as the CJR Parties. Under the Rules of Civil Procedure, the CJR Parties are collectively entitled to 5 days while the 6Points Parties are collectively entitled to 3 days.

B. Security for Costs

[16] Both sides seek security for costs on the basis that no one resides in Ontario or has assets there. CJR asserts that it should not be required to post security because of its significant assets and its willingness to give an undertaking that it would not interfere with any attempts by the 6Points Parties to enforce a judgment in California or any other jurisdiction outside of Ontario. It also submits that counterclaimants are not required to post security where the counterclaim is inextricably tied to the issues in the main claim.

[17] The 6Points Parties argue that both sides are prima facie entitled to security for costs because CJR is as much a plaintiff as 6Points is, having converted its claim in California to a counterclaim in the within action. Further, as plaintiffs are not compensated for the prosecution of their actions, any award should be limited to any extra cost the parties incur to defend themselves.

Law Analysis

A. Discovery

The ghost of litigation past - money is no object

[18] For decades prior to 2010, every law graduate would have learned the rules of civil procedure as a tedious means to an exciting end - the trial. Litigators were focused on refining their clients’ legal positions by leaving no stone unturned and using every opportunity to explore and expose their opponent’s weaknesses. Document production required production of anything that had a “semblance of relevance”, there were no time limitations on oral discovery, and the courts did not involve themselves in interfering with a party’s litigation choices. If the practice of law was not also a livelihood, and money no object to the litigants, this model of litigation might still be viable.

[19] By 2010 however, the cost of litigation in Ontario had become prohibitive to the average Ontarian. As such, Ontario brought in sweeping reforms to the Rules of Civil Procedure on the recommendations of the Honourable Mr. Justice Coulter Osborne who was commissioned to conduct a critical review of civil litigation in the province. Some of those reforms included the codification of proportionality principles into what is the most central and often most costly pre-trial process – discovery.

The spirit of litigation present –affordable, efficient justice

[20] The new Rule 29.2.03(1) and the factors therein codify proportionality principles which are aimed at curbing unruly and costly discovery. The rule is normally used to compel further production from the opposing party. Before making such an order, a court is to consider five factors to assess whether or not further production is proportional, cost effective, and necessary to the just resolution of the action. The Rule reads as follows:

29.2.03(1) In making a determination as to whether a party or other person must answer a question or produce a document, the court shall consider whether: (a) The time required for the party of other person to answer the question or produce the document would be unreasonable; (b) The expense associated with answering the question or producing the document would be unjustified; (c) Requiring the party or other person to answer the question or produce the document would cause him or her undue prejudice; (d) Requiring the party or other person to answer the question or produce the document would unduly influence the orderly progress of the action; and (e) The information or document is readily available to the party requesting it from another source.

[21] In this motion, CJR is seeking to use the rule by analogy in the inverse – to order the 6Points Parties to produce less. CJR urges that in the current litigation climate it is the Court’s role to be the gatekeepers of access to justice by intervening when the discovery choices of one party unduly burdens another. They say that production of over 20,000 uncategorized documents in what is a largely straightforward franchising case places an undue burden on them, even with sophisticated document management software. The CJR Parties also rely on Rule 30 which sets out a party’s obligation to serve an affidavit of documents. Under this Rule, the Court has jurisdiction to compel an affidavit of documents if one has not been produced or a further and better affidavit of documents if the one delivered does not comply with the rule, its spirit or intent.

[22] I agree with CJR that this Court must exercise its gatekeeping function if cost effective litigation is to become a reality in Ontario. I would add that the Court’s role is secondary to the parties who need to proactively measure their positions with proportionality and cost in mind. The need for a cultural shift in litigation has been repeatedly recognized by this Court and the Supreme Court of Canada. [1] This shift requires parties to think deeply about the case at the outset with a view to streamlining every step as much as possible. While the production rules have changed from semblance of relevance to relevance, I would suggest that in most cases, parties can, and should narrow documents to what is truly necessary to the resolution of the conflict. This is the case whether or not a party has access to sophisticated document management tools.

[23] In my view the factors listed in Rule 29.2.03(1) simply reflect the overarching principle that modern day discovery must be proportional and cost effective where possible. I need not apply them mechanically but can consider them in addition to all of the circumstances of the case to determine if I should exercise my discretion to order a further and better affidavit.

[24] It appears that the 6Points Parties has not done the work needed to streamline their productions. As Master McLeod (as he then was) aptly states in L’Abbé v Allen-Vanguard, 2011 ONSC 7575 at paras 25-26, “Generally speaking when huge numbers of documents are identified as potentially relevant, one suspects the ambit of relevance is being drawn too widely. Perhaps a more useful goal than mere relevance would be to consider utility. The massive number of documents identified as relevant suggests a failure to think clearly about probative value, and the matters which ultimately may have to be proven at trial. I recognize the ambit of relevance is broadly sketched by these pleadings but no one can possible believe 10,000 Schedule A documents will actually be introduced into evidence at trial.” In the present case, it is equally unlikely that even half of the documents produced will be needed.

[25] The 6Points Parties respond by stating that counsel has manually reviewed all 20,000 plus documents for relevance and that any further narrowing can be done by the sophisticated document management software that forms part of CJR’s legal arsenal. With respect, the problem with this submission is that the relevance of many of the documents is not clear on their face and no amount of technology can address that problem. It would also be difficult to know what search terms to use to isolate, for example, all of the documents that 6Points relies on to prove the validity of its recission. It is also possible that the CJR Parties might waste their time on groups of documents that do not ultimately matter. Technology may speed up the process but it does not replace the need for the parties and counsel to conduct manual reviews.

[26] The CJR Parties did a random sampling of the 6Points productions and it is clear that the 6Points Parties have cast their net very wide. For example, they have produced an email regarding an amendment to a dental plan benefit. They have produced plumbing receipts and hundreds of email threads with improper dates and authors. On its face, one questions what plumbing receipts and dental plans have to do with the litigation. Similarly, there are hundreds of uncategorized emails with missing information along with copies of documents from various locations at which no franchised restaurant was opened.

The remedy to potential overproduction is categorization

[27] Having recognized the Court’s gatekeeping role, it is important however to consider that litigation in the adversarial system is driven by the parties and not the Court. The Court must therefore be careful not to unduly intrude on choices that litigants make. In the present case, the 6Points Parties have chosen to produce broadly. The CJR Parties would like me to send them back to the drawing board to reduce the number of relevant documents. I decline to do so. This is an unenforceable remedy which will land the parties back before me and unduly intrudes on 6Points disclosure decisions.

[28] Instead, if they have not done so already, I order the 6Points Parties to categorize or index their productions, either according to the main issues as identified by the CJR Parties in their issues chart included as Schedule C to their factum, or by relating the productions to the pleadings directly. It appears from the materials that they have already indicated the relevance of some of the documents in relation to the pleadings. The chosen categorization scheme will be at the discretion of the 6Points Parties regardless of any dispute CJR has with the relevance of particular documents. At the very least if the 6Points Parties index or categorize their documents, their productions will be more meaningful and manageable.

[29] In my view, this is the minimal level of work any producing party should do to streamline discovery in document intensive cases. The parties know their own documents the best. One would think that in reviewing documents for production, the 6Points Parties would have turned their minds to what documents relate to which issues or allegations in the case. There is no reason why such information should not be conveyed to opposing counsel prior to oral discoveries. I would also add that going through this exercise would prepare the 6Points Parties themselves for oral discoveries which would inevitably include questions about which productions support the various claims and defences made by them. In the course of categorizing their documents, the 6Points Parties may find themselves reducing their productions or at the very least identifying which documents speak to the core issues and which documents are marginal. I agree with the CJR Parties that the 6Points Parties are in the best position to separate their wheat from the chaff.

There is no basis in the record to increase discovery time for the 6Points Parties

[30] This takes me to 6Points request for the same amount of oral discoveries as the CJR Parties. The 2010 reforms put an end to long and meandering discoveries that seek to leave no stone unturned. Rule 35.01.1 gives each party a total of 7 hours to examine all of the opposing parties. This means that the 6Points Parties have 21 hours (3 days). The CJR Parties have 35 hours (5 days). The Legislature has limited oral discovery as part of its 2010 reforms. The Rule affords me discretion to extend the number of hours available to the 6Points Parties. I decline to do so. The 6Points Parties have given me no basis to grant them more time other than parity. Parity is no longer a guiding principle in discovery rules.

B. Security for Costs

[31] The CJR Parties seek security for costs from 6Points because it is a shell company that is wholly owned by a non-resident corporation. The 6Points Parties seek security from CJR as an American company with no assets in Ontario. The CJR Parties seek $576,299.84 as security for costs up to the end of discoveries. The 6Points Parties seek $386,675.29. Rule 56.01 governs motions for security for costs. 6Points concedes that the CJR Parties have a prima facie right to security for costs. This is not, however, the end of the Court’s inquiry. According to a recent decision of the Ontario Court of Appeal, the Court must take a step back and consider the justice of the order sought in all of the circumstances of the case, with the interests of justice at the forefront.” [3]

[32] I summarize the relevant circumstances as follows: a. 6Points is a shell corporation wholly owned by a Saskatchewan corporation; b. CJR is a multi-million dollar company with an international presence; c. 6Points does not claim impecuniosity; d. 6Points has produced over 20,000 documents which need to be reviewed; e. CJR commenced the California proceedings before 6Points commenced the Ontario proceedings; f. CJR’s California proceedings were dismissed as against the 6Points Parties on the basis of a forum non conveniens motion brought by 6Points; g. CJR is willing to provide an undertaking not to oppose any collection proceedings the 6Points parties would have to take in California or any other foreign jurisdiction; h. CJR’s counterclaim mirrors its California proceedings; i. CKE, Lyerly, Woida and Branton were not plaintiffs in the California proceedings and j. Meekins and Levine are not plaintiffs in the main action.

[33] I also consider the following additional principles of law as provided by the parties in their joint book of authorities: a. A defendant is not required to post security to defend itself; [4] b. One factor a court may consider is the size and financial circumstance of the moving party and whether it really requires protection for its costs. A motion for security for costs should not be used as a litigation tactic; [5] c. Where a defendant’s counterclaim involves similar issues as the main action, the court may decline to order security for costs for the counterclaim; [6] d. The Court may decline to award security for costs against a plaintiff or plaintiff by counterclaim who has sufficient assets in a different jurisdiction to satisfy a costs award. [7]

[34] The CJR Parties seek security as defendants to the main action. While CJR has significant assets, it argues that it would be unjust for it to defend an action with 24,000 documents brought by a shell company. It also argues that it should not have to post security because it is a profitable company, it has assets in California, California is for all intents and purposes a reciprocating state, and it will give an undertaking not to oppose any proceedings the 6Points Parties need to take to enforce the Ontario judgment. Finally, CJR submits that because its defence to the main action is tied in facts and issues to its counterclaim, it should not have to post security because doing so would be tantamount to posting security to defend itself.

[35] 6Points contend that CJR is not a true defendant because its counterclaim is identical to the action commenced in California. CJR’s defence and counterclaim are so inextricably tied that compensating CJR for defending the main action would be akin to improperly compensating CJR for the prosecution of its own action. It also states that it is unjust to force the 6Points Parties to pursue collection in California and that there has been no expert evidence tendered to show that an Ontario judgment could be enforced in California. Finally, the 6Points parties urge that because both CJR and 6Points are initiating plaintiffs, both are prima facie entitled to security but only for the cost of defending non-overlapping claims. Mr. Hoffer estimates this to be approximately 20% of each side’s case.

[36] Having considered the totality of the circumstances of this case, each side should post 20% of $400,000. The figure is based on Mr. Hoffer’s estimate and an adjustment to the bills of cost based on my disposition of the discovery portion of the motion. CJR is not just a defendant who has been dragged into litigation by a shell company. It commenced the California proceedings before 6Points commenced the Ontario actions. 6Points and CJR are therefore both initiating plaintiffs. The fact that CJR has asserted its claim by way of counterclaim does not derogate from the fact that it had pointed the litigation finger first. Because CJR is not a true defendant, CJR’s counterclaim limits its entitlement to security for costs and exposes it to the payment of security. This runs contrary to the principles that a defendant’s counterclaim does not normally limit its entitlement to security for costs in the main action and a defendant who is a plaintiff by counterclaim is shielded from posting security for the related counterclaim where the issues overlap. My conclusion is unique to the facts of this case.

[37] Even if I am incorrect in my analysis above, it is clear that CKE, Lyerly, Woida and Branton were not plaintiffs in California and are true defendants in this action. They should not be deprived of security for costs because of the California proceedings. Similarly, Meekins and Levine are also not plaintiffs and should have some measure of security for the cost of defending themselves. Contrary to CJR’s submissions, these defendants should not have to chase CJR for costs in a foreign jurisdiction. Even if one were to accept that California would enforce an Ontario judgment, this is of no comfort. It would be more costly to enforce in California than in Ontario. I do not accept CJR’s submissions, in any event, that Ontario Judgments can be enforced in California. I decline to make that determination without the expert evidence that usually accompanies such submissions.

[38] The parties did not provide any case law on if our how security for costs should be split as between 6Points and CJR as one group, and the other parties as a second group. As such, I do not make a distinction between the two groups, especially since they are represented respectively by the same counsel as CJR and 6Points.

Disposition

[39] I order as follows: a. The 6Points Parties shall categorize their documents by tying them to the pleadings or to issues identified by them as being the issues in the action; b. They shall do so within 80 days of today’s date. If that timeline cannot be met, they can seek to convene a case conference with me by emailing my assistant Christine.Meditskos@ontario.ca; c. 6Points shall post security for costs in the amount of $80,000.00 to represent security up to the end of discoveries; d. CJR shall post security for costs in the amount of $80,000.00 to represent security up to the end of discoveries; e. The parties are at liberty to seek further security for costs for the post-discovery period; f. The CJR Parties shall be examined for a maximum of 21 hours; g. The 6Points Parties shall be cxamined for a maximum of 35 hours; and h. Discovery time may be altered by mutual consent of the parties.

Costs

[40] I strongly urge the parties to settle on costs. However, if they cannot resolve the issue within 30 days of the date of this order, they may convene a case conference with me to set a 30 minute hearing on costs.

Original signed Master P. Tamara Sugunasiri

Release Date: December 19, 2018

Footnotes

[1] See Warman v National Post, 2016 ONSC 3776 at paras 84-5; Hanson Estate v Stollery Estate, 2017 ONSC 528 at paras 52 & 59; Hryniak v Mauldin, 2014 SCC 7 at para 32. [2] L’Abbé v Allen-Vanguard, 2011 ONSC 7575 at paras 25-26. [3] Yaiguaje v Chevron Corporation, 2017 ONCA 827 at paras. 22, 23. [4] Moneylogix Group Inc v Panacea Global Inc, 2018 ONSC 2534 at para. 5. [5] Chevron supra at para 26(c). [6] Wilkings v Velocity Group Inc at paras 24 and 26 (ON SCDC). [7] Turner v UA Inc, 2016 ONSC 696 at para. 25 ((iv)(a).