COURT FILE NO.: CV-20-00641310-00CL
DATE: 20200924
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Manny Kapur and Xthetica Inc., Plaintiffs
AND:
Zoran Konevic, Xthetica Canada Inc., Tesla Energy Corporation, and Notox Technologies Inc., Defendants
AND BETWEEN:
Zoran Konevic, Xthetica Canada Inc., and Notox Technologies, Plaintiffs by Counterclaim
AND:
Manny Kapur also known as Manvinder Kapur, Xthetica Inc., Karen Dirstein, Ekaterina Kotyleva, Mia Wells, Jennifer Kapur also known as Jennifer Jane Ruscio also known as Jennifer Ruscio and Laser Advantage Limited trading as Laser Advantage Medspa, Defendants to Counterclaim
BEFORE: C. Gilmore, J.
COUNSEL: Sean N. Zeitz, Counsel for the Defendants and Plaintiffs by Counterclaim.
Howard Wolch, Counsel for the Defendants, Manny Kapur and Xthetica Inc.
HEARD: September 4, 2020
ENDORSEMENT
OVERVIEW
[1] The moving party Defendants (“Xthetica Canada”) bring a motion to restrain the Defendants to the Counterclaim from competing with Xthetica Canada including soliciting vendors, interfering with its relationships, collecting on its assets or accounts receivable, interfering with its lenders, disclosing confidential or proprietary information, using its URL or email addresses or using its brand, logo or website.
[2] In addition, Xthetica Canada seeks an order compelling TD Bank to unfreeze its accounts, and compelling the Defendants by Counterclaim to deliver an accounting, produce books and records and deliver back any products obtained through Xthetica Canada.
FACTUAL BACKGROUND AND POSITIONS OF THE PARTIES
[3] Notox Technologies Inc. (“Notox”) is a publicly traded corporation which is in the business of developing unique medical and beauty products. Xthetica Canada is a Canadian Federal Corporation incorporated in 2019 in contemplation of the agreements pleaded in the Statement of Claim. The Defendant Zoran Konevic (“Konevic”) is the sole officer and director of Xthetica Canada and an officer and director of Xthetica Canada’s sole shareholder, Notox.
[4] Xthetica Inc. (“XI”) is an Ontario corporation incorporated in 2012 and owned by Manny Kapur (“Kapur”).
[5] In 2016 Notox was looking to raise money for a new technology. In December 2018 Notox was introduced to Kapur as a prospective investor. Notox and Kapur entered into discussions which led to a Letter of Intent (“LOI”) between XI, Kapur and Notox dated July 19, 2019. As part of the business proposal, Xthetica Canada was incorporated on July 11, 2019. Xthetica Canada is wholly owned by Notox.
[6] Kapur’s position is that he wanted to build XI and that Konevic approached him and pressured him about entering the LOI. Kapur then obtained tax advice based on a certain structure of the business deal which he wanted done through his holding company XI. The agreed upon structure between XI, Kapur, Notox and Xthetica Canada was set out in two agreements, the Assignment Agreement (“Assignment Agreement”) and the Option and Put Agreement (“the OPA”). The agreements were signed by Kapur and Konevic. Kapur complained that he was pressured by Konevic to sign the agreements without legal or tax advice because a $10 million investor was waiting in the wings. Konevic denied this and pointed to a memo to Kapur dated October 30, 2020 from Cadesky Tax on the tax implications of the proposed transaction with Notox. The memo refers to a suggestion that Kapur’s legal counsel “Paul” review the legal documents related to the transaction. It is Konevich’s position that Kapur had every opportunity to obtain both legal and tax advice on the agreements.
[7] XI assigned specific assets to Xthetica Canada by way of the Assignment Agreement including XI’s rights and obligations under the Croma Distribution Agreement, the Croma Austria license agreement and the Universkin license agreement, inventory, trade accounts, goodwill including customer lists, accounts receivable less than 90 days old, all unfilled product orders as of July 1, 2019 and the right to solicit and engage employees recommended by Kapur. In short, Xthetica Canada acquired XI’s business, brand and goodwill through the Assignment Agreement.
[8] Through the Assignment Agreement, Xthetica Canada also acquired the Defendant by Counterclaim Laser Advantage Limited (“Laser Advantage”) which is owned by Kapur’s spouse Jennifer Kapur (“Jennifer”). Jennifer is an officer and director of Laser Advantage.
[9] The OPA sets out the manner in which Kapur was to be compensated by Xthetica Canada by way of Put Rights exercisable upon Xthetica Canada generating certain levels of EBITDA.
[10] Xthetica Canada and XI also entered into a Professional Services Agreement (“PSA”) setting out the terms of Kapur’s work with Xthetica Canada. The terms of the PSA are very broad and entrust Kapur with running every aspect of Xthetica Canada. The large degree of responsibility was delegated to Kapur by Notox and Xthetica Canada because of Kapur’s industry experience and contacts. The PSA also entitled Kapur to bonuses and incentives based on achievement of certain percentages of sales targets.
[11] Xthetica Canada employed several of the Defendants to the Counterclaim including Ekaterina Kotyleva (“Ms. Kotyleva”), Karen Dirstein (“Ms. Dirstein”) and Mia Wells (“Ms. Wells”). All three were employed by Xthetica Canada between July 22, 2019 and July 22, 2020. None of their employment contracts were extended. The PSA and the employment contracts all contained non-solicitation and non-competition clauses.
Problems with the Business Plan
[12] Kapur’s initial representations to Xthetica Canada made in June 2019 were that by the end of 2019 there would be cash of $636,943 available to Xthetica Canada. However, according to Konevic, Kapur’s representations changed almost immediately once he had entered into the agreements with Xthetica Canada including changes in cash flow and sales projections. Kapur’s evidence was that he took on debt in Xthetica Canada because he was led to believe it was his company and was surprised to learn in October 2019 that it was not.
[13] Konevic began to monitor Kapur’s activities more closely and became concerned that Kapur’s promises were impossible to fulfill and that under Kapur’s management Xthetica Canada was behind on bill payments and did not generate any profit.
[14] In April 2020 Notox decided it was necessary to step in and manage Xthetica Canada after a Profit and Loss statement showed that Xthetica Canada had losses of over $1.4M.
[15] Konevic became further concerned when he discovered that inventory valued in excess of $250,000 was missing and that sales reps had been running unjustified expenses through Xthetica. For example, Kapur’s sales reps gave away $375,480 in samples to generate $554,516 woth of business. According to Konevic, samples of this magnitude should have generated $3,750,000 in sales.
[16] Further, XI’s contract with McKesson and certain inventory owned by Croma was to be transferred to Xthetica Canada pursuant to the agreements. Konevic has discovered that Kapur halted this process leaving Xthetica Canada liable for over $1,000,000 in inventory. According to Konevic this has given Kapur considerable leverage in the litigation allowing him to strip away inventory from Xthetica Canada and leaving it with debt.
[17] Konevic alleges that Kapur has been in a serious conflict of interest all along in that he never ceased being a director of Croma despite the agreements between Kapur and Xthetica Canada. He has used this position to misappropriate inventory owned by Xthetica Canada.
[18] Kapur blames Konevic for the failure of Xthetica Canada claiming that it would have succeeded had Konevic provided sufficient working capital and not incurred debt with huge inventory buys. Kapur accuses Konevic of stealing money from the company which should have been used to pay employees and suppliers. He claims that Konevic was very difficult to work with and refused to infuse the necessary investment to pay for inventory. At most, he put $20,000 to $50,000 into the business rather than the required $250,000.
[19] Despite Konevic’s complaints, Kapur’s position is that Xthetica Canada did show initial revenue growth. However, Konevic did not understand the business and failed to contribute as required. Kapur was funding the business’ liabilities through his own credit cards and line of credit and now is being blamed for its failure.
[20] Kapur denies that there is missing inventory or inappropriately claimed expenses. He submits that this is simply a smokescreen for Konevic’s fraudulent removal of funds from the TD account and his failure to pay any creditors when Xthetica Canada had over $900,000 in liabilities. As a result of unpaid accounts, large clients such as Croma and Universkin terminated their Distribution Agreements with Xthetica Canada.
The Mask Deal
[21] In April 2019 Kapur ordered 5,000,000 medical masks from China through XI. He did this without notice to Xthetica Canada. Konevic only found out about the order through newspaper articles. Ultimately the deal was aborted. During a conference call on March 24, 2020 with Kapur, the mask order was never mentioned.
[22] Kapur’s position is that the mask order was a completely charitable venture from which he made no profit. Kapur viewed the venture as good publicity for Xthetica Canada.
The Chloe Fraud
[23] In January 2020 Ms. Wells ordered $13,222 of filler product for Chloe Medspa (“Chloe”) in Montreal. Chloe was a client of Xthetica Canada and the product was shipped from Xthetica Canada’s inventory through McKesson, its distributor. Reports were received in January concerning adverse effects relating to the product and Ms. Wells emailed Kapur and requested that a stop payment be put on the January 31, 2020 invoice until further notice.
[24] On April 9, 2020 Xthetica Canada charged Chloe’s credit card for $22,957.19 for the product. Chloe objected to the charge as unauthorized as they had never received the product. They threatened legal action. Ms. Wells admitted that the product was defective. Konevic was not aware that Chloe had never received the product.
[25] Kapur’s position is that there was no fraud. When the adverse effects were discovered, Chloe was given a more expensive replacement product to make up for the problem, but the only charge was to be for the original invoice. However, Kapur alleges that under Konevic’s direction Chloe was charged for both invoices which led to Chloe alleging credit card fraud against Xthetica Canada. The wrongful credit card charge was ultimately reversed.
Accounts are Frozen
[26] On April 11, 2020 Kapur removed Konevic’s access to Xthetica Canada’s shared server. Between April 17 and 24, 2020 Kapur froze Xthetica Canada’s operating account at TD Bank. As of July 22, 2020 the account contained $79,293 of Xthetica Canada’s operating capital. Despite requests by Konevic, TD will not unfreeze the account.
[27] Kapur’s explanation for freezing the account is that Konevic removed $90,000 from the account and refused to provide an explanation. Kapur froze the account in order to protect it from further depletion. Konevic explained that he needed the funds to obtain a valuation of Xthetica Canada in order to account for the acquisition by way of public disclosure. Valuation, legal and audit fee estimates came in close to a total of $90,000. According to Konevic, Kapur was aware of the intended use of the $90,000 and approved it.
[28] On April 24, 2020 Xthetica Canada, Notox and Konevic received a demand letter from Kapur claiming that Xthetica Canada had breached its agreements with him and demanded that Xthetica Canada give up its brand, domain and email address and cease operating.
[29] On May 1, 2020 Konevic reported the irregularities he alleged had been committed by Kapur and his associates. By way of shareholder resolution passed by Notox on that date, Kapur was removed from office.
[30] On June 12, 2020 Konevic’s lawyers wrote to TD and provided a copy of Xthetica Canada’s articles of incorporation and a copy of the shareholder resolution confirming that Kapur had been removed from office. Despite written requests from Konevic’s counsel, TD refuses to unfreeze the account. According to Konevic, Kapur refuses to cooperate to unfreeze the account. Kapur claims Konevic removed him from office so that he could unfreeze the TD account.
[31] As the account remains frozen, Xthetica Canada is unable to deposit cheques and pay suppliers.
Allegations of Passing Off
[32] According to Konevic, and despite his removal from office, Kapur continues to use the Xthetica Canada logo and brand on social media and Zoom, listing himself as “President.” Konevic is concerned because clients are confused as to which is the “correct” Xthetica Canada. He is further concerned that Xthetica Canada is losing customers and market share and its orders have trickled to almost nothing. Konevic’s position is that he was unable to assess the amount of market share that Xthetica continues to lose while the TD account remains frozen and Kapur continues to use Xthetica Canada’s brand.
[33] Kapur claims that he is owed more than $300,000 in consulting costs, expenses and bonuses under the PSA as well 20,000 stock options which he was to have received up front. He went into debt and paid Xthetica Canada’s bills personally on the assumption it was his company. He claims to have been completely mislead by Konevic.
[34] Kapur’s position is that Konevic has breached the PSA and therefore the non-competition clause is of no effect. Kapur continues to own XI and sees no reason why he cannot continue to post on social media on behalf of his company. Since Kapur has been in the aesthetics and dermatology business for twenty-five years, he has no other way of earning an income. Former suppliers to Xthetica Canada now refuse to do business with that company when they discovered the manner in which Kapur and his employees were terminated.
[35] Both parties claim that the other’s actions have crippled the business and caused its failure. Kapur adds that Konevic’s actions have caused him serious emotional, financial and reputational harm and destroyed an impeccable 30-year career.
[36] Kapur is further concerned as Xthetica Canada has no actual office address, a large amount of debt and is not in a position to give an undertaking as to damages. Konevic deposed that in terms of an undertaking as to damages, there is still $80,000 in the Xthetica Canada account plus another $60,000 in operating capital. If the TD account is unfrozen Xthetica will be able to generate revenue through regular operations.
Termination of Xthetica Canada Employees
[37] All Xthetica Canada employees were terminated as of July 22, 2020 at the end of their one- year contract. Those employees applied to their respective labour boards for wages and vacation pay. Orders were made in favour of Ms. Kotyleva and Ms.Dirstein totalling close to $100,000. Kapur suggests that the funds in the TD account be used to satisfy those orders. Ms. Wells’ application to the Quebec labour board is still under investigation.
[38] Konevic does not agree with the suggested payout and intends to appeal the labour board decisions. The sales team was laid off in April 2020 so that they could take advantage of CERB or EI benefits during the pandemic. After Kapur froze the TD account, Xthetica Canada had no access to funds to pay any severance to the employees. As such, Kapur himself was instrumental in the labour board complaints.
[39] The employees named as Defendants in the Counterclaim also filed affidavits in this proceeding.
[40] Ms. Wells deposed that she signed a PSA with Xthetica Canada and was retroactively terminated on March 15, 2020 by way of a conference call with Konevic on April 2, 2020. According to Ms. Wells, there was confusion about her termination and she sought to clarify her employment status. She was told she had to continue collecting on invoices in order to receive bonuses.
[41] By Ms. Wells’ calculations she was owed a bonus of $12,488 and business expenses of $4,467 plus consulting fees, vacation pay and three days’ regular pay totalling approximately $22,500. She claims she is also owed 5000 share options in Notox which was offered to her as a signing bonus.
[42] Ms. Wells denies using samples inappropriately. They were used for training and promotional reasons and approved by Konevic’s son Nicholas. She wants nothing to do with Xthetica Canada and is not competing against it.
[43] Ms. Kotyleva also swore an affidavit in this proceeding. She signed an employment agreement with Xthetica Canada on July 22, 2019. She did not obtain legal advice as she knew and trusted Kapur. Ms. Kotyleva claims that she was improperly terminated on April 2, 2020 and has never received her signing bonus or her fourth quarter bonus for 2019.
[44] Ms. Kotyleva deposed that despite her abrupt termination she was directed by Nicholas Konevic to continue collecting on Xthetica Canada accounts on a voluntary basis. Ms. Kotyleva made a complaint to the labour board and in their August 12, 2020 decision the labour board directed Xthetica Canada to pay. Ms. Kotyleva a total of $40,913 in unpaid wages. She denies that any of her submitted expenses were either inaccurate or unjustified and all her samples were approved by management.
[45] In her cross-examination, Ms. Kotyleva admits that she is still answering clients’ questions, responds to doctors’ calls about medical devices and generally keeps in touch in the hope of becoming re-employed. Her position is that she was wrongfully terminated by Konevic and does not want to be associated with Xthetica Canada.
[46] Ms. Dirstein has worked in the Medical Aesthetics industry for 20 years. She was employed as a marketing manager with Xthetica Canada. In March 2020 she lost her father and her income. She deposed that she is the victim of dishonesty and bad faith on the part of Konevic. She has suffered financial hardship and mental anguish due to what she says are Konevic’s baseless claims against her.. Ms. Dirstein was retroactively terminated from Xthetica Canada on April 2, 2020 in the same manner as Ms. Kotyleva and Ms. Wells.
[47] Xthetica Canada has been ordered to pay Ms. Dirstein $22,437 in unpaid wages by the Ministry of Labour. That decision is also under appeal by Xthetica Canada. Similar to. Ms. Wells and Ms. Kotyleva, Ms. Dirstein denies any claim for improper business expenses.
[48] In her cross-examination, Ms. Dirstein confirmed that she was not competing against Xthetica Canada Inc. or soliciting its customers.
THE LEGAL ISSUES
[49] The moving party submits that Kapur’s arguments in this matter ring hollow as he does not seek to be reinstated as a director of Xthetica Canada thereby gaining entitlement to the benefit of the very agreements he says were rescinded. He continues to carry on business under the “Xthetica” brand using the Xthetica Canada logo on social media despite having assigned such rights to Xthetica Canada by way of the agreements.
[50] The moving party alleges that Kapur’s actions have caused customer confusion, termination of some business relationships and a diversion of business opportunities to Kapur’s own company XI.
[51] The moving party now seeks injunctive relief to prevent the Respondents by Counterclaim from competing with Xthetica Canada and enforcing the contractual covenants and unfreezing the TD account.
[52] In accordance with the test in RJR MacDonald Inc. v. Canada (Attorney General), 1994 SCC 117 paras 82-84, in order to grant injunctive relief the court must determine (i) if there is a strong prima facie case (or in some cases whether there is a serious case to be tried), (ii) if the granting of the injunction will cause irreparable harm, or; (iii) whether the balance of convenience favours the granting of an injunction.
[53] Both sides concede that the law in Ontario is divided as to which test is to be used with respect to seeking an interlocutory injunction on the basis of breach of a negative covenant. Patillo, J.’s comments in Van Wagner Communications Co., Canada v. Penex Metropolis Ltd. [2008] O.J. No. 190 (Ont. S.C.J.), leave to appeal refused, [2008] O.J. No. 1707 at para 35, are helpful in determining the appropriate test as follows:
“I find that to apply the appropriate test where an interlocutory injunction is sought on the basis of breach of a negative covenant the judge should use the following approach. To satisfy the first test he must undertake a preliminary and tentative analysis of the strength of the case put forward by the plaintiff. Is it overwhelming? Is it a prima facie case? Is it less than a prima facie case? Similarly he must make a tentative and preliminary assessment of the possible defences which may be offered, all with a view to a [sic] estimating the extent to which those defences reduce the strength of the case initially shown by the plaintiff. At the end of that process the judge must answer the question: Is the plaintiff left with a[t] least a prima facie case? If the answer is yes, the first test has been satisfied. As for the second and third tests, the strength of the case that the plaintiff is left with will determine how heavily the balance of convenience and irreparable harm must be weighed in the context of negative covenants. If the plaintiff is left with a strong prima facie case approaching a plain and uncontested breach of a clear covenant, then an injunction ought to be granted without much regard to the balance of convenience and irreparable harm. If the plaintiff is left only with a prima facie case then more regard needs to be had to the balance of convenience and irreparable harm.”
[54] I am of the view that a strong prima facie case is needed where an injunction will interfere with a person’s ability to earn a livelihood. This means the moving party must be able to demonstrate that its claim is almost certain to succeed.
[55] I am not persuaded that the Defendants have a strong prima facie case against Ms. Wells, Ms. Dirstein or Ms. Kotyleva. The manner in which they were terminated has led to claims to the Ministry of Labour. They want nothing to do with Xthetica Canada and Ms. Kotyleva and Ms. Dirstein are not even currently employed. They have been drawn into this motion by filing affidavits presumably in an attempt to defend themselves against claims relating to allegedly wrongfully submitted expenses.
[56] If I am wrong with respect to whether they continue to compete against Xthetica Canada, use its brand or remain fiduciaries, there is an issue as to whether their termination was wrongful and their employment contracts breached in which case the law would not enforce a non-solicitation agreement against them. This is an issue which cannot be resolved in the context of this motion.
[57] As for Kapur, that is a different matter. Kapur has taken a cavalier attitude towards the agreements he signed with Xthetica Canada. His view appears to be that he can continue to operate as XI because he needs to earn a living. It is clear that Kapur continues to post on Instagram as XI when that brand no longer belongs to him. An email dated May 18, 2020 to Konevic from a representative of Universkin asked why Xthetica Canada was still promoting its products when contractual relations with Universkin had ended.
[58] Kapur admitted in cross-examination that he continues to use the Xthetica Canada logo and brand because it is his company. He also conceded that the Xthetica Canada logo appeared on his Instagram postings. He deposed that he had “borrowed” it. In short, I find there is sufficient evidence to conclude that Kapur has treated all of the agreements at an end and now carries on as if they have no effect notwithstanding the claim in his Amended Statement of Claim for rescission of those same agreements.
[59] I also find that Kapur’s actions are contrary to the Assignment Agreement which assigned XI’s brand to Xthetica Canada. Further, the non-competition provision in the PSA signed by Kapur is clear that he “covenants and agrees not to compete in a sales or marketing function with the business of the Corporation in minimal-invasive aesthetic dermatology within 100 kilometres of any region or territory in which the business of the Corporation is carried out…”
[60] The PSA goes on to stipulate that any breach of the restrictions set out will result in irreparable harm and entitle the Discloser to “injunctive and other equitable relief.”
[61] As per Canpages Inc. v. Quebecor Media Inc., 2008 CarswellOnt 3193 at para 8, where there is a clear breach of a negative covenant, there is no need for proof of irreparable harm as it is difficult to quantify the loss of goodwill, market share or damage to customer relationships. In the case at bar, Xthetica Canada was operating as a viable business for less than a year. Kapur’s admitted decision to flout the agreements and carry on using the Xthetica Canada logo and brand has caused customer confusion and a serious decline in business. That will no doubt continue if Kapur is not prevented from further eroding any of Xthetica Canada’s market share. The clear irreparable harm to Xthetica Canada is that it may not exist if Kapur continues to blatantly compete with it.
[62] In terms of the balance of convenience, it is clear that Kapur has no intention of unfreezing the TD account except on very specific terms which are not acceptable to Konevic. Xthetica Canada cannot operate without access to the account and Kapur’s indirect control through his refusal to unfreeze the account must come to an end if Xthetica Canada has any chance of surviving.
[63] With respect to the accounting sought by the moving party I see no reason why a full accounting should not be provided. Laser Advantage should be included in the accounting since it was part of the Assignment Agreement.
ORDERS AND COSTS
[64] Given all of the above, the Defendants shall have the relief sought in paragraphs 1 through 5 of their Notice of Motion except that such relief shall only apply to the Defendants to Counterclaim Manny Kapur, Jennifer Kapur and Laser Advantage.
[65] The Defendants have had partial success on their motion. They seek full indemnity costs of $110,000 given the allegations of fraud and in the alternative, partial indemnity costs of $80,300.
[66] The Plaintiffs’ seek $151,000 in substantial indemnity costs and $100,900 in partial indemnity costs.
[67] Some reduction in the amounts sought by the Defendants is reasonable given that they were not successful in obtaining an injunction against Ms. Wells, Ms. Dirstein and Ms. Kotyleva. However, the reduction should not be significant given the main relief they sought was granted.
[68] The Defendants to Counterclaim, Manny and Jennifer Kapur and Laser Advantage shall pay total costs of $70,000 forthwith. They should not be surprised by this amount given what they sought if the motion was dismissed.
C. Gilmore, J.
Date: September 24, 2020