Court File and Parties

COURT FILE NO.: CV-14-497387 DATE: 20191105 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: GAC International, LLC, Plaintiff AND: Orthoarm Inc., Defendant

BEFORE: Mr. Justice Chalmers

COUNSEL: A. Turco, for the Plaintiff G. Luftspring and A. Sanche, for the Defendant

HEARD: August 23, 2019

Endorsement

Overview

[1] Orthoarm Inc. (“Orthoarm”) brings this motion for summary judgment to dismiss the action on the basis that GAC International, LLC (“GAC”) is estopped by its conduct from bringing the claim.

[2] Effective December 1997, Orthoarm entered into an agreement with GAC (the “GAC Agreement”) which granted GAC a licence to manufacture and sell orthodontic brackets which used U.S. Patent 5,630,715 (“715 Patent”). The patent is owned by Orthoarm. Pursuant to the agreement, GAC sold the In-Ovation bracket. GAC paid Orthoarm a royalty in the amount of 10% of net sales.

[3] In a subsequent agreement dated July 19, 2001, GAC and Orthoarm acknowledged that at the time of the agreement, GAC was the only party selling a bracket which used the 715 Patent. The agreement goes on to state that if any party in the future sells a bracket which uses the 715 Patent, the royalty to be paid by GAC will drop from 10% to 5%.

[4] In 2009, American Orthodontics Corporation (“American”) began selling the Empower bracket, which had similar features to the In-Ovation bracket. On December 12, 2012, Dr. Voudouris, the principal of Orthoarm and the inventor of the bracket subject to the 715 Patent, provided discovery evidence in a separate action. He testified that the Empower bracket used the 715 Patent.

[5] GAC took the position that this was its first notice that another party was selling a bracket which used the 715 Patent. By letter dated February 4, 2014, GAC advised Orthoarm that the royalties payable to Orthoarm ought to have been 5% from the time American began selling the Empower bracket. GAC brought this action seeking a declaration that the royalties are 5% of the net sales of the In-Ovation bracket. GAC also claims damages for all amounts it says it overpaid in royalties from the time American began selling the Empower bracket.

[6] Orthoarm argues that from 2009 to 2014, it relied on GAC’s conduct in paying the 10% royalty, to its detriment. If it had known that GAC was taking the position that the royalty amount was reduced to 5% it would have licensed the 715 Patent to another entity. Orthoarm brings this motion for summary judgment on the basis that GAC is estopped by its conduct from proceeding with the action.

[7] GAC argues that it paid the 10% royalties in the mistaken belief that the Empower bracket was not subject to the 715 Patent. GAC denies that estoppel by conduct applies and takes the position that this is not an appropriate case for summary judgment.

[8] For the reasons that follow, I dismiss the Defendant’s motion for summary judgement.

Background Facts

The American Agreement

[9] On October 28, 1992, Orthoarm entered into an agreement with American which grants to American the exclusive licence to manufacture and sell the product subject to the 715 Patent and any improvements to the 715 Patent (the “American Agreement”). The American Agreement provides that if American fails to sell a reasonable number of units covered by the licence in any one year after December 31, 1995, Orthoarm may license the 715 Patent to other manufacturers. In those circumstances, American would be entitled to a pro-rata share of the costs it incurred to develop and market the product.

[10] American was not able to proceed to market quickly enough and in July 1997, Orthoarm provided notice to American that it was making the licence non-exclusive.

The GAC Agreement

[11] Orthoarm entered into the licence agreement with GAC effective December 1997, which granted to GAC a worldwide licence to make and sell the product subject to the 715 Patent. The GAC Agreement was subject to the earlier American Agreement:

2.1 Subject to an agreement dated October 28, 1992 entered between Dr. Voudouris and American Orthodontics Corporation (“American”), [Orthoarm] hereby grants to GAC, a worldwide licence to make, have made, use and sell the Licenced Product including the right to grant sublicences. [Orthoarm] undertakes that no other companies will be licenced after this date. GAC agrees to re-imburse American for a pro-rata share of developmental expenses incurred by American as per the Agreement of October 28, 1992.

[12] At the time of the GAC Agreement, American was not selling brackets covered by the 715 Patent.

[13] The GAC Agreement provides that GAC is to pay royalties at the rate of 10% of net sales of the products covered by the 715 Patent for the life of the 715 Patent. GAC began selling the In-Ovation bracket and paid royalties in the amount of 10% of net sales to Orthoarm.

The Settlement Agreement

[14] American brought an action against Orthoarm for recovery of its expenses incurred in developing the bracket. GAC was added to the action as a third party.

[15] On July 19, 2001, GAC and Orthoarm entered into a settlement agreement with respect to the action brought by American (the “Settlement Agreement”). The Settlement Agreement provides that if any party in the future sells a bracket covered by the 715 Patent, the royalty payable by GAC shall be reduced to 5% of net sales.

Subject to the provisions below, GAC agrees to pay all past, present and future royalties from the sale of the Bracket at a rate of 10% of net sales for the life of the 715 Patent. Payment of royalties shall be consistent with section IV of the Licence Agreement. Although GAC is currently the only party selling a bracket that may be covered by the 715 patent, if any party in the future shall sell or offer to sell, without authority from GAC, a bracket that is covered by the 715 patent, then the Licence Agreement shall become nonexclusive with respect to the 715 patent and the royalty referred to in this paragraph shall drop to 5% provided that if such party discontinues selling such bracket within a period of not more than one (1) year, then the royalty hereunder shall revert to 10%.

The Empower Bracket

[16] In 2009, American began selling the Empower bracket. GAC became aware American was planning to launch the Empower bracket at the American Association of Orthodontists annual conference in May 2009. GAC was at the conference and would have seen the Empower bracket at that time.

[17] The Empower bracket had similar features to the In-Ovation bracket manufactured by GAC. GAC asked Tomy Incorporated, a Japanese company which manufactured almost all of its products, to consider whether the Empower bracket was covered by a patent which was co-owned by Orthoarm; U.S. Patent 6,368,105 (the “105 Patent”). Tomy reported that it believed the Empower bracket was covered by the 105 Patent. GAC took steps to try to secure a licence or ownership of the 105 Patent from Orthoarm but was unsuccessful.

[19] GAC also requested that Doug Hura, a patent lawyer and GAC’s Director of Patents, review the Empower bracket to assess whether it was covered by the 715 Patent. By e-mail dated April 1, 2010, Mr. Hura reported that it did not appear the Empower bracket was covered by the 715 Patent. He stated:

We have read over the 715 patent and compared it to the Empower drawing. Based on this review it DOES NOT appear that the 715 patent directly covers the Empower product as shown.

[20] GAC did not carry out any further assessments to determine whether the Empower bracket was covered by the 715 Patent. GAC continued to pay royalties to Orthoarm in the amount of 10% of net sales.

Discovery of Dr. Voudouris on December 12, 2012

[21] In 2008, Orthoarm brought a separate action against GAC in which it claimed that GAC owed it royalties for several of its orthodontic brackets. The action proceeded to trial in 2015. The action was dismissed.

[22] Dr. Voudouris was examined for discovery in that action on December 12, 2012. Dr. Voudouris testified that the Empower bracket was covered by the 715 Patent.

Q. 120 Are they [American] still licenced to produce orthodontic appliances under the 715 Patent? A. Yes. Q. 121 All right. Could I see a copy of that licence agreement, please? Mr. Lufspring: No. Q. 122. When was that licence granted? A. I believe it was near October 1993, if I recall correctly. Q. 123 And is it still in existence today? A. Yes. Q. 124 And are they producing product in connection with that licence? A. Yes. Q. 125 And they’re selling product? A. Yes. Q. 126 In the United States? A. Yes Q. 127 Throughout the world? A. Yes. Q. 128 Okay. And the brand or trade-mark that they’re using to manufacture and sell that orthodontic appliance is? A. Empower.

[23] GAC takes the position that the discovery evidence of Dr. Voudouris was when it first learned that American’s Empower bracket was covered by the 715 Patent. Prior to Dr. Voudouris’ discovery, Orthoarm had not advised GAC that the Empower bracket was covered by the 715 Patent or that royalties were being paid by American to Orthoarm with respect to the Empower bracket.

The Second American Agreement

[24] On May 1, 2013, Orthoarm entered into a second agreement with American (the “Second American Agreement”) to settle a further dispute regarding the scope of rights under the American Agreement. The Second American Agreement provides that the subject of each of the 715 Patent and the 105 Patent has been embodied in the product sold by American under the trade designation, Empower. The Second American Agreement amended the first American Agreement and provided that American had a non-exclusive right to sell products within the scope of the 715 Patent and the 105 Patent.

GAC’s Decision to Reduce the Royalties from 10% to 5%

[25] On January 29, 2014, GAC commenced this action seeking a declaration that it had overpaid royalties under the GAC Agreement and that royalties should be calculated at 5% of net sales from the date American began selling products covered by the 715 Patent. On February 4, 2014, GAC sent a letter to Orthoarm stating that it would no longer pay any current or future royalties because it had overpaid royalties since 2009.

[26] Steven Jenson is a Vice-President at GAC. He was examined for discovery in this action on June 24, 2016. He was asked why GAC waited until February 4, 2014 to take the position that the royalties were reduced to 5%. He testified as follows:

Q. And why did you choose February 4 th of 2014 to advise and take that position? A. It was really three factors.

One is that we felt we had the right based on the agreement.

Two was prior to that time we were making a decision, in March ’11 we lost our supply to the Japanese earthquake. Post that period of time we were trying to get our business back on its feet.

Our agreement changed with Tomy, and at that particular point in time with the business disarray we chose that we didn’t want to put our business in more disruption, which we knew would occur with Dr. Voudouris if we reduced the royalty until that point in time that we felt we could reduce it, and we did at that time.

Q. So let me get this right. Leave aside that you thought you had the right. That will get litigated for sure. You made an economic decision in 2012 and all the way along, I suppose, that GAC would try to keep Dr. Voudouris at bay, not reduce his royalty until the patent was about to expire? A. It wasn’t just economics. There was also –

We were in dialogue with Dr. Voudouris about the ‘105. We were trying to collaborate with him to get access to the ‘105 so that we could self-manufacture and take care some of the IP options that we wanted to go forward.

So there was that component as well and that was in the documents as well as – that was a longstanding discussion for multiple years.

Q. That was in 2012, was it not? A. And that discussion never was closed for a period thereafter. In [2014] – when we reduced the royalty, we certainly felt there was no hope of a ‘105 agreement to be put in place.

Q. And the patent was expiring on 715? A. And the patent was expiring in May. At that point our business risk was less than it would have been with the disruption.

And not only that would not occur with Dr. Voudouris, and we also knew Dr. Voudouris’ view, that he felt – at times, again, we felt that he felt he could go out and licence people. We could litigate that.

We believed we were right, but nevertheless we would have a competitor out in the marketplace causing more disruption if we could not get an injunction. So that was another reason; Jenson Discovery Transcript, at pp. 93-96.

The Issue

[27] The issue to be determined on this motion is whether Orthoarm is entitled to summary judgment dismissing the action on the basis that GAC is estopped by its conduct from making the claim.

Analysis

Test For Summary Judgment

[28] A court may grant summary judgment if satisfied on the written record that there is no genuine issue requiring a trial: R. 20.04 of the Rules of Civil Procedure, R.R.O. 1990, Reg 194. There is no genuine issue requiring a trial, if the summary judgment process:

• allows the judge to make the necessary findings of facts, including any necessary findings of credibility;
• allows the judge to apply the law to those facts; and
• is a proportionate, more expeditious and less expensive means to achieve a just result: Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 49.

[29] In Hryniak, the court set out a two-part test for summary judgment. The first step requires the judge to determine whether there is a genuine issue requiring a trial based on the evidence contained in the motion record. There will be no genuine issue requiring a trial where the evidentiary record provides the judge with the evidence necessary to reach a fair and just determination, in a process that is timely, proportionate and affordable: Hryniak, at para. 66.

[30] The onus is on the moving party to show that there is no genuine issue requiring a trial. If the moving party discharges this onus, the burden shifts to the responding party to prove there is a genuine issue requiring a trial.

[31] The second step is activated when the judge finds that there is a genuine issue requiring a trial. The judge must then determine whether the issues can be decided using the powers set out in Rules 20.04(2.1) and (2.2) of the Rules of Civil Procedure. The decision to use the additional fact-finding powers is within the discretion of the judge. The question of whether it is in the interest of justice to use the expanded fact-finding powers depends on the nature and complexity of the litigation, a comparison of the evidence that will be available at trial and on the motion, the proportional procedure considering the nature of the issues, as well as the size, complexity and cost of the dispute along with other contextual factors: Hryniak, at para. 59, 68 and 82.

[32] The Supreme Court of Canada in Hryniak recognized that some cases will require a trial to allow a just and fair determination of the issues in dispute.

These principles are inter-connected and all speak to whether summary judgment will provide a fair and just adjudication. When a summary judgement motion allows the judge to find the necessary facts and resolve the dispute, proceeding to trial would generally not be proportionate, timely or cost effective. Similarly, a process that does not give a judge confidence in the conclusion can never be the proportionate way to resolve a dispute. It bears reiterating that the standard for fairness is not whether the proceeding is as exhaustive as a trial, but whether it gives a judge confidence that she can find the necessary facts and apply the relevant legal principles so as to resolve the dispute.

Often concerns about credibility or clarification of the evidence can be addressed by calling oral evidence on the motion itself. However, there may be cases where given the nature of the issues and the evidence required, the judge cannot make the necessary findings or fact or apply the legal principles to reach a just and fair determination: paras. 50-51.

[33] The Court of Appeal for Ontario recently provided further direction with respect to the use of the summary judgment procedure.

With respect, the cultural shift referenced in Hryniak is not as dramatic or as radical as the motion judge would have it. The shift recommended by Hryniak was away from the very restrictive use of summary judgment, that had developed, to a more expansive application of the summary judgment procedure. However, nothing in Hryniak detracts from the overriding principle that summary judgment is only appropriate where it leads to, “a fair process and just adjudication”: Hryniak at para. 33. Certainly there is nothing in Hryniak that suggests that trials are now to be viewed as the resolution option of last resort. Put simply, summary judgment remains the exception, not the rule: Mason v. Perras Mongenais, 2018 ONCA 978, at para. 44.

Estoppel by Conduct or Representation

[34] Orthoarm asserts that GAC is estopped from taking the position that the sales of the Empower bracket by American entitle it to a retroactive reduction in the royalties. Orthoarm argues that GAC is estopped from taking this position because it knew the Empower bracket used the 715 Patent in 2009 but did not inform Orthoarm of its decision to reduce royalties until February 2014.

[35] The elements of estoppel by conduct or representation are as follows:

(i) Conduct amounting to a representation intended to induce a course of conduct on the part of the person to whom the representation is made; (ii) An act or omission resulting from the representation by the person to whom the representation is made; and, (iii) Detriment to such person as a result of the act or omission: Canacemal Investment Inc. v. PCI Realty Corp., 24 B.C.T.C. 355 (S.C.), at para. 43.

i) Conduct Amounting to a Representation

[36] Orthoarm alleges that GAC knew in 2009 that the Empower bracket was or may have been covered by the 715 Patent. Orthoarm argues that GAC’s conduct in continuing to pay the 10% royalty amounted to a representation that it would not be seeking a reduction in the royalties after American began selling the Empower bracket. Orthoarm further argues that the representation was intended to induce Orthoarm into taking certain actions or refraining from taking steps which may have been adverse to GAC.

[37] GAC states that it did not know the Empower bracket was covered by the 715 Patent until the date of Dr. Voudouris’ discovery on December 12, 2012. After learning the Empower bracket was covered by the 715 Patent, GAC believed that it was entitled to reduce the royalty to 5% based on the Settlement Agreement.

[38] GAC argues that Orthoarm has not alleged that GAC made any positive representations that it would not seek to reduce the royalties from 10% to 5% in accordance with the non-exclusivity provisions of the Settlement Agreement. GAC argues that there was no conduct amounting to a representation and therefore the first element of the test of estoppel by conduct or representation is not satisfied.

[39] Estoppel by representation has been described by the Supreme Court of Canada as follows:

Estoppel by representation requires a positive representation made by the party against whom it is sought to bind, with the intention that it shall be acted on by the party with whom he or she is dealing, the latter having so acted upon it as to make it inequitable that the party making the representation should be permitted to dispute its truth, or do anything inconsistent with it: Ryan v. Moore, 2005 SCC 38, [2005] 2 S.C.R. 53, at para. 5. [Emphasis added.]

[40] The Supreme Court went on to state that silence cannot constitute an estoppel by representation unless there is a legal duty on the party to speak.

[E]stoppel by representation cannot arise from silence unless a party is under a duty to speak. Silence or inaction will be considered a representation if a legal duty is owed by the representor to the representee to make a disclosure, or take steps, the omission of which is relied upon as creating an estoppel: Ryan v. Moore, at para. 76.

[41] The Court of Appeal for Ontario commented on the legal duty to make a statement:

Where a party seeks to invoke estoppel [by representation] on the basis of silence, they must show that the party to be estopped was under a duty to make a statement, in the sense that in all of the circumstances their failure to communicate the actual state of affairs to the other party is dishonest: Feather v. Bradford (Town), 2010 ONCA 440, at para. 57.

[42] GAC argues that it was not under any duty to inform Orthoarm of its interpretation of the Settlement Agreement or that it believed the non-exclusivity provision of the Settlement Agreement had been triggered. GAC states that the GAC Agreement and the Settlement Agreement did not impose a duty on GAC to speak or inform Orthoarm of an intention to reduce the royalties or to make an election as to rights.

ii) Act or Omission by Orthoarm

[43] Orthoarm argues that GAC did not advise Orthoarm of its position that the royalty was reduced to 5% to induce Orthoarm to take certain actions, or to refrain from taking certain actions which may have been adverse to GAC.

[44] Orthoarm argues that it did not licence a competitor of GAC to manufacture and sell a bracket which used the 715 Patent. When it was advised of GAC’s position in February 2014, the 715 Patent was due to expire in May 2014 and there was insufficient time left on the patent to licence the bracket to another manufacturer.

iii) Detriment to Orthoarm

[45] Orthoarm argues that its inability to license to a competitor, resulted in a significant loss of royalties. Orthoarm states that it detrimentally relied on GAC’s continued payment of royalties at the rate of 10%.

[46] The Supreme Court of Canada described “detrimental reliance” as follows:

Detrimental reliance encompasses two distinct, but interrelated, concepts: reliance and detriment. The former requires a finding that the party seeking to establish the estoppel changed his or her course of conduct by acting or abstaining from acting in reliance upon the assumption, thereby altering his or her legal position. If the first step is met, the second requires a finding that, should the other party be allowed to abandon the assumption, detriment will be suffered by the estoppel raised because of the change from his or her assumed position: Ryan v. Moore, at para. 69.

[47] Orthoarm asserts that if it had known of GAC’s position that the non-exclusivity provisions of the Settlement Agreement had been triggered, it would have licensed the 715 Patent to other parties. Not only must Orthoarm prove that it would have sought licences with other parties, Orthoarm must prove that it could have successfully pursued such arrangements.

[48] Orthoarm has not adduced any evidence on this motion of any attempts to seek licences with other parties. The only evidence of detrimental reliance is found in Dr. Voudouris’ affidavit sworn February 22, 2019. At para. 45 he states:

Just as Jenson has espoused, if GAC had attempted to reduce its royalty to 5% in 2009 on the basis that its licence was non-exclusive, I would most definitely have had Orthoarm licence other competitors of GAC. Jenson admitted that GAC was concerned about that.

[49] This statement refers only to the steps Orthoarm would have taken if GAC had attempted to reduce the royalty to 5% in 2009. There is no evidence as to what steps Orthoarm could have taken if there is a finding that GAC first learned that the Empower bracket used the 715 Patent when Dr. Voudouris was examined for discovery on December 12, 2012. At that time, the 715 Patent was to expire within approximately 17 months. There is an issue as to whether the time remaining on the patent was sufficient for a competitor of GAC to enter into a licence agreement with Orthoarm.

[50] Orthoarm must prove it could have successfully pursued other licencing agreements, if it had been advised of GAC’s position that the non-exclusivity provision in the Settlement Agreement had been triggered. Other than the statement of Dr. Voudouris that he would have entered into other licence arrangements if GAC had taken this position in 2009, no evidence to support that statement has been introduced. There is no evidence of any negotiations or expressions of interest from possible manufacturers. Orthoarm has not tendered expert evidence which provides the opinion that manufacturers will pursue licence agreements with respect to patents which are set to expire. Importantly, there is no evidence as to what Orthoarm could have done if GAC attempted to reduce its royalty at the time of the discovery of Dr. Voudouris on December 12, 2012.

[51] There is also an issue as to whether the GAC Agreement and the Settlement Agreement permitted Orthoarm to enter into a licence with another entity after GAC took the position that the non-exclusivity provisions in the Settlement Agreement had been triggered. Article 2.1 of the GAC Agreement provides that Orthoarm grants a worldwide licence to GAC and undertakes that no other companies will be licenced after this date. There is nothing in the Settlement Agreement which alters this covenant in the GAC Agreement.

Summary

[52] I am satisfied that the documentary record is not sufficient to allow the court to reach a fair and just determination of the issues in this case. A trial is required with respect to the following issues:

• whether the Empower bracket manufactured by American is covered by the 715 Patent;
• whether American was paying royalties to Orthoarm for the sale of the Empower bracket;
• the date GAC reasonably knew the Empower bracket was covered by the 715 Patent;
• whether the non-exclusivity provision in the Settlement Agreement is triggered by American’s sale of the Empower bracket;
• the date GAC was obligated to advise Orthoarm of its position that the non-exclusivity provisions in the Settlement Agreement apply;
• whether there was an affirmative or implied representation made by GAC that it was not relying on the non-exclusivity provisions in the Settlement Agreement;
• whether Orthoarm relied to its detriment on GAC’s continuing payment of royalties in the amount of 10%;
• whether Orthoarm could have licenced the 715 Patent to another manufacturer if advised of GAC’s position at the time of the discovery of Dr. Vourdouris in December 2012;
• whether GAC is entitled to a retroactive reduction of the royalty from the date when American began selling the Empower bracket.

[53] In the circumstances, I find that Orthoarm has not met the evidentiary burden of establishing that there is no genuine issue of material fact requiring a trial. There are factual issues in dispute some of which involve credibility, which prevent the court from concluding that a just and fair result could be achieved on a motion.

[54] Given the disputed facts and credibility issues involved in this case, I find that the use of the fact-finding powers set out in Rules 20.04(2.1) and (2.2) of the Rules of Civil Procedure will not be in the interests of justice. In my view, the parties are better served by having the action proceed to trial in the normal course. I note that the action has been set down for trial and that the pre-trial conference and trial dates have been set.

[55] The Supreme Court of Canada in Hryniak directs that I consider whether there are any compelling reasons that I not remain seized of this matter. I have not made any findings of fact on the evidence beyond considering that the issue of estoppel by representation or conduct is a genuine issue requiring a trial. I decline to remain seized of the matter.

Disposition

[56] The Defendant’s motion for summary judgment is dismissed.

[57] The parties agreed that the appropriate amount of costs to be awarded to the successful party is $30,000.00 inclusive of fees, disbursements and HST. I therefore order costs payable to the Plaintiff fixed in the amount of $30,000.00.

Chalmers, J. Date: November 5, 2019