COURT FILE NO.: CV-20-644351 DATE: February 18, 2023

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

TICKETOPS CORPORATION Plaintiff/Respondent – and – COSTCO WHOLESALE CORPORATION, COSTCO WHOLESALE CANADA LIMITED, COSTCO de MEXICO, S.A. de C.V., and COSTCO WHOLESALE UK LIMITED Defendants/Moving Parties

Counsel: Nancy J. Tourgis, for the Plaintiff Paul-Erik Veel, for the Defendants/Moving Parties

HEARD: October 18, 2022

Justice P.T. Sugunasiri

REASONS FOR JUDGMENT

Overview:

[1] Costco Wholesale Canada Ltd. (“Costco CA”) is a wholly owned subsidiary of Costco Wholesale Corporation (“Costco US”). TicketOps Corporation (“TicketOps”) is an Ontario company that provided digital services to Costco CA and Costco US to facilitate the online delivery of third-party products. The first platform facilitated Costco CA and Costco US members to purchase tickets to attractions, and gift cards for third-party retailers through costco.ca and costco.com. TicketOps claims that it also developed three other platforms to facilitate Costco CA members obtaining Costco cash cards to use for their Costco purchases from the warehouse and the services of a third-party phone plan vendor. Costco CA and Costco US entered into several agreements with TicketOps that contain arbitration clauses, referring disputes with Costco CA to a neutral arbitrator in Ottawa and disputes with Costco US to a neutral arbitrator in Seattle, Washington.

[2] TicketOps sues Costco CA, Costco US, and its UK and Mexico affiliates (“collectively “Costco Defendants”) in the Superior Court of Justice for breach of contract, negligent misrepresentation, and conversion of intellectual property in relation to all four platforms it allegedly created for the Costco entities, collectively. The parties agree that the motion is limited to the Statement of Claim as against Costco CA and Costco US. Costco CA and Costco US move to stay this action, relying on section 7 of the Arbitration Act, 1991, S.O. 1991, c. 17, and the International Commercial Arbitration Act, 2017 S.O. 2017, c. 2, sch. 5. TicketOps argues that their Claim is in pith and substance about platforms #2, #3, and #4 which are not subject to the arbitration clauses in the various agreements between TicketOps and Costco CA and Costco US, and should therefore not be stayed. Costco has the onus of showing that there is an agreement to arbitrate that arguably applies to any disputes arising from these platforms. [1] I find they have done so. TicketOps has not met its onus of demonstrating that it is clear that the arbitration provision in the drop ship agreements are inoperative. I stay the action in favour of arbitration.

Analysis:

[3] In Haas v. Gunasekaram, 2016 ONCA 744 [2] the Court of Appeal for Ontario set out an analytical framework for determining whether to stay an action under section 7 of the Arbitration Act, 1991, S.O. 1991, c. 17 [3]. It requires the court to ask whether there is an arbitration agreement, what is the subject matter of the dispute, what is the scope of the arbitration agreement, does the dispute arguably fall within the scope of the arbitration agreement and are there grounds that the court should refuse to stay the action. There is no dispute that the same analysis applies when invoking the ICAA. In Trade Finance Solutions Inc. v. Equinox Global Limited, the Court of Appeal emphasized the importance of the competence-competence principle even when determining if there is a binding arbitration agreement. The court wrote:

Generally speaking, the approach in Ontario is that in cases where “the existence or validity of the arbitration agreement” is not clear (i.e. the agreement is arguably, but not clearly: (a) null and void; (b) inoperative; or (c) incapable of being performed), it is preferable for the arbitrator to decide the issue: Dalimpex Ltd. V. Janicki, (2003), 64 O.R. (3d) 737 (Ont.C.A.), at paras. 21-22 [4].

[4] In other words, the court may decide whether there is a valid arbitration agreement or may refer even that issue to the arbitrator. If the issue is unclear, the proper route is to send it to the arbitrator. The exception to this is if the challenge to the arbitrator’s jurisdiction is based solely on a question of law, or one of mixed fact and law that requires for its disposition only a superficial consideration of the documentary evidence in the record. [5] I turn to the platforms that TicketOps alleges it created.

Platform #1 is subject to an arbitration clause

[5] In its Statement of Claim, TicketOps alleges that a Costco buyer in Canada approached it to customize digital delivery service so that Costco CA could sell tickets and gift cards to attractions and third-party retailers to its members from the costco.ca website without incurring the cost and delay of physical ticket delivery. TicketOps designed and built a custom platform for Costco CA, and Costco CA started using it in 2007.

[6] Costco CA’s relationship with TicketOps for Platform #1 was reflected in a contract called the Drop Ship Vendor Agreement, first executed on June 8, 2007. The parties entered into a second Drop Ship Vendor Agreement on January 25, 2008, in respect of e-tickets issued by US vendors. Both agreements were identical but for the currency and locus of the attractions and third-party retailers. The material provision of these agreements makes the parties’ relationship subject to the Drop Ship E-Standard Terms which refers all disputes to arbitration in Ottawa, Ontario:

Agreement Documents: All sales and deliveries of all Merchandise by Vendor to costco.ca’s Customers purchased by costco.ca from Vendor and sold through the internet e-commerce site(s) of costco.ca or its Affiliate Purchasers (as defined below), will be covered by and subject to the definitions in the Drop Ship E-Standard Terms and the terms of each of the following documents…

[7] The “Vendor” is TicketOps. The other documents that form the totality of the agreement documents include the Drop Ship Vendor Agreement, the Drop Ship E-Standards Terms, each Vendor Purchase Program Agreement, costco.ca E-Item Agreement, or any other agreement that has or will be signed between the Vendor and costco.ca.

[8] The Drop Ship E-Standards Terms state at para. 32 that all disputes must be arbitrated:

All claims and disputes that arise out of or relate to the Agreement Documents or their subject matter, interpretation, performance, or enforcement, or any other agreement, transaction or occurrence--- (including without limitation any tort or statutory claim) (“Dispute”), shall be arbitrated under the rules of ADR Institute of Canada Inc…. The arbitration shall be conducted in Ottawa, Ontario, before one neutral arbitrator…

[9] On May 20, 2012, Costco US entered into an identical agreement with TicketOps, except that it was called the Drop Ship Supplier Agreement (with TicketOps referred to as a “supplier” instead of a “vendor”) and the dispute resolution clause in the Drop Ship E-Standards Terms refers the parties to arbitrate all disputes in Seattle, Washington. On August 8, 2012, TicketOps signed a General Admission Agreement (also known as the Ticket/Gift Card Program Agreement) with Costco US which also contains a similar arbitration clause. In July 2018, the parties executed the Master Tickets and Program Agreement (“MTPA”) which contains the same dispute resolution mechanism. An arbitrator has already adjudicated Costco’s Claim against TicketOps in relation to the MTPA.

[10] In its Statement of Claim, TicketOps alleges it suffered damages when Costco CA and Costco US took Platform #1 offline in March 2020. It also seeks an accounting from both entities. It is clear, or at minimum arguable, that disputes with Costco US and Costco CA arising from Platform #1 must be arbitrated. Even by TicketOps’s own admission, Platform #1 was a “drop ship” arrangement to which the various agreements apply. TicketOps argues however that its Statement of Claim in pith and substance is not about Platform #1. In my view, the relevant inquiry is not what the pith and substance of the Claim is. What the court must review is what the Claim alleges, however big or small that aspect of the Claim might be. As pleaded, TicketOps clearly alleges a breach of contract when “Costco” (defined in the Statement of Claim as all the Costco entities) took Platform #1 offline in March 2020. A plain reading of the Claim puts in issue Costco CA and Costco US’s behaviour with respect to this platform. The complaint about Platform #1 as against Costco US should be arbitrated in Seattle. The Claim against Costco CA is more complicated. Currently, TicketOps’s Statement of Claim does not plead the June 8, 2007 nor January 25, 2007 agreements even though it now admits that these agreements exist. To the extent that Costco CA’s alleged liability is based on a breach of these agreements, that would trigger arbitration in Ottawa.

Platforms #2, #3 and #4 are arguably subject to arbitration and should be decided by an arbitrator

[11] According to TicketOps, Platform #1 was a springboard to Platforms #2, #3, and #4 and forms the pith and substance of its Claim. By 2014, TicketOps had completed an integration and certification process with the First Data and Bank of America for the sale of the Costco Digital Cash Cards online in Canada. The idea behind the card was to allow Costco CA’s customers to purchase a Costco cash card using Visa and Mastercard and receive digital delivery of it in the form of a downloadable or printable barcode. At the time, Costco CA only accepted American Express in its warehouses and this program would permit Costco CA members to indirectly use credit cards other than AMEX to purchase Costco CA products and services.

[12] TicketOps alleges in its Statement of Claim that Costco CA made representations about the fees it would receive for processing and delivering the Costco cash cards, including payment of $.50 per purchase by a member. TicketOps claims that it had an operational system that was ready to launch but Costco CA never went public with Platform #2. As a result, TicketOps claims damages from Costco CA.

[13] Although Platform #2 never went online, TicketOps alleges that Costco CA assured it that the technology would be used in the future. It alleges that in December 2016, Costco CA informed that it was ready to use the cash card software with Glentel to incentivize Costco members to purchase mobile phones, accessories and plans offered by Glentel through Costco CA. TicketOps alleges that it worked on what was to become Platform #3 with Glentel, only to suddenly find out in September 2017, Costco CA was putting its launch on hold. TicketOps claims it had significant development expenses and seeks to recover them from Costco CA.

[14] In 2018, Costco CA and Costco US allegedly asked TicketOps to incorporate the software it had already developed for Platforms #2 and #3 into an all-encompassing card control and delivery platform amounting to Platform #4. TicketOps claims that this Costco Card Manager was controlled by Costco CA and was operating until April 2020, when Costco CA advised that it was reducing its use. TicketOps claims damages for the development and operation of these platforms.

[15] Costco CA argues that these platforms were covered by the drop ship agreements previously entered into with TicketOps. TicketOps contends that these platforms were developed years after the initial drop ship agreements and in no way governs those platforms. There is no evidence to suggest that the drop ship agreements were intended to cover these subsequent platforms, and in any event, the cash card program is fundamentally not a “drop ship” transaction. There was, for example, no “Merchandise” as referred to in the drop ship agreements, that was delivered to the Costco member. Further, TicketOps would have just been performing a service and not delivering a product as contemplated by the material provision noted above.

[16] In my view, it is arguable that each of these platforms fall within the various drop ship agreements that contain arbitration clauses. The parties disagree on whether the fact that the cash card programs entailed the delivery of a Costco cash card to its members, rather than a voucher for a third-party business amount to delivering “merchandise” as that term is used in the drop ship agreements. On its face, either interpretation is possible. If the cash card is or can be included in the term “Merchandise”, then Platform #2 may meet the condition precedent that “All sales and deliveries of all Merchandise by Vendor to costco.ca’s Customers purchased by costco.ca from Vendor and sold through the internet e-commerce site(s) of costco.ca or its Affiliate Purchasers… will be covered by and subject to the definitions in the Drop Ship E-Standard Terms” which requires the parties to resolve disputes through arbitration. It is also debatable, without further inquiry, whether providing the cash card is a delivery of merchandise or whether a delivery is even necessary given that the clause refers to “All sales and merchandise…”. The proposed cash card transaction contemplated by Platform #2 could be considered a “sale” by TicketOps to costco.ca’s customers purchased by costco.ca from TicketOps and sold through costco.ca.

[17] All that is required is that Costco’s position is arguable. The fact that there is no evidence that the parties discussed the application of the drop ship agreements to Platform #2 does not make it clear that the arbitration clause does not apply. It is possible to find that TicketOps ought to have known that the broad wording of the drop ship agreements included Platform #2, especially since no new agreement governed it. As such, I defer to the arbitrator under the competence-competence principle to resolve the issue.

[18] The same analysis applies to Platforms #3 and #4. The affiants disagree as to whether the cash card program generally, and the one specifically involving Glentel had drop ship features. The mere fact of this disagreement on the nature of the proposed cash card transactions demonstrates that this is not a clear case that can be determined on a superficial examination of the documentary record. The test is not whether this court can decide the issue by choosing one affiant’s view over the other; it is whether it should. As it stands, it is arguable that the cash card platforms have drop ship features that put those transactions within the drop ship agreements. It is arguable, however slim, that even in the absence of discussion between the parties about the applicability of the drop ship agreements to platforms delivered years later, those agreements and their terms apply. Whether Costco CA’s arguments succeed or fail in the end, or are likely to succeed, is not the test. It is whether their position is arguable. I find that it is, and I must defer to the arbitrator.

There is no reason to avoid staying the action for unconscionability

[19] The Haas criteria requires a motions judge to assess whether there is any reason not to stay the action with respect to Platforms #1-4. TicketOps argues that the transactions were unconscionable because it did not have a choice but to enter into these agreements with a more powerful commercial player. I agree with Costco counsel that TicketOps has not led any evidence surrounding the formation of the drop ship contracts that addresses the relative sophistication of the parties, their bargaining power, and relevant aspects of the factual matrix relating to the drafting the agreement. The sum of Mr. Hall, evidence (TicketOps’ affiant) is the bare assertion that an arbitration process in the United States is unfair, and that TicketOps had no alternative but to agree to the various contracts. This falls short of the robust evidence needed to avoid a stay based on unconscionability. Further, on the competence-competence principle, the court defers to the arbitrator on a question of mixed fact and law (like the issue of unconscionability) where it requires more than a superficial examination of the documentary proof in the record. [6] On the current record, a superficial examination of the documentary proof does not lead me to conclude that the agreements in question were unconscionable.

The side effect of staying this action in favour of arbitration is that it may lead to piece-meal adjudication of overlapping issues in two countries with the potential of inconsistent findings by two arbitrators. Even on the issue of jurisdiction, one arbitrator may find that the drop-ship agreements extend to Platforms #2, #3, and #4 while the other finds that they do not apply. That may lead to Costco CA arbitrating the dispute with TicketOps while Costco US litigates the action. This might have been a reason not the stay the action and have all matters heard by the Superior Court or a court in the United States. However, this was not argued as a basis to resist the stay. The parties will have to determine how to move forward practically and efficiently.

Conclusion:

[20] In sum, I agree with Costco CA that TicketOps has advanced four claims which implicate it, all of which are, at least arguably, subject to arbitration under the Drop Ship E-Standard Terms. To apply the analytical framework in Haas:

A. There is arguably an arbitration agreement governing all platforms developed by TicketOps including Platforms #2, #3 and #4; B. Damages arising from breaches of contract, negligent misrepresentation and intellectual property infringement is the subject matter of the dispute; C. The arbitration agreement, if it applies, is broad; D. Breach of contract, negligent misrepresentation and intellectual property infringement arguably fall within the scope of the arbitration agreement; and E. There are no grounds that the court should refuse to stay the action.

[21] The fundamental question of whether the drop ship agreements between Costco CA, Costco US and TicketOps apply to all four platforms developed by TicketOps should be determined by an arbitrator. I stay the action in favour of arbitration. The parties have two arbitral locations depending on whether the dispute involves Costco CA or Costco US. The parties will have to determine the best way forward. TicketOps can move to lift the stay if an arbitrator decides that any part of the action falls outside of arbitration. In that case there may be a dispute as to the appropriate forum for claims against Costco US and issues surrounding the potential for conflicting findings of fact between the court and an arbitrator.

Costs:

[22] The Costco entities seek “in the range of $30-40,000” in partial indemnity costs. TicketOps’s bill amounts only to $17,761.34. I appreciate that Costco was the moving party, with three branches of Costco from three different countries needing to participate. Costco UK was not ultimately part of the motion, but I accept counsel’s submission that the concession did not come until after the materials were prepared. I also agree with TicketOps that the use of multiple counsel would have required unnecessary time for each lawyer to get up to speed and would cause a duplication of work and time billed. Having said that, Costco is seeking just more than half of its partial indemnity bill, at $61,499.03. I find their suggested reduction to be reasonable, especially in light of Ms. Tourgis’ submission that $25,000 would be a reasonable partial indemnity costs award to Costco. TicketOps shall pay the moving Costco entities all-inclusive costs of $40,000 payable within 30 days of today’s date.

Disposition:

[23] I stay the action. TicketOps shall pay the moving Costco entities all inclusive costs of $40,000 payable within 30 days of today’s date.

P.T. Sugunasiri J.

Released: February 21, 2023

Footnotes

[1] Trade Finance Solutions Inc. v. Equinox Global Limited, 2018 ONCA 12, [2018] O.J. No. 113 (QL) (“Trade Finance”), at paras. 22-23 and 26. [2] 2016 ONCA 744 (“Haas”), at para. 17. [3] S.O. 1991, c. 17 (“Arbitration Act”). [4] Trade Finance, supra note 1 at para. 14. [5] Haas, supra note 2 at para. 14. [6] Uber Technologies Inc. v. Heller, 2020 SCC 16, at para. 98.