Court File and Parties

COURT FILE NO.: CV-23-00699415-0000 DATE: 20231201 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: HOME COFFEE SOLUTIONS LTD. and 2079162 ONTARIO LTD., Plaintiff – and – MUHAMMAD ABBAS AMARSHI, MURTAZA SHABBIR KANJI, 14 MANAGEMENT INC., 2822514 ONTARIO INC. c.o.b. AS THE KITCHEN BARISTA & GIFTS, ERIC JOHN YOHANNAN, MIQDAAD KHIMJI, AZAMAT NOGOEV and ISMAT RHEMTULLA, Defendants

BEFORE: Justice E.M. Morgan

COUNSEL: Benjamin Salsberg and Ingrid Matckars, for the Plaintiffs Allison Speigel and Matthew Bradley, for the Defendants

HEARD: November 30, 2023

Motion for Interlocutory Injunction

[1] The parties are in the business of providing what they call “home coffee solutions.” The Plaintiffs seek an interlocutory injunction to protect the confidentiality and proprietary elements of this e-commerce trade.

[2] In short, the Plaintiffs accuse the Defendants – their former contractors or agents or joint venturers or partners, depending on which affidavit, transcript, or factum you have been reading – of “cloning” their work product, copying their product descriptions, scooping their customers, appropriating their methodology, breaching fiduciary duties, and generally causing them business grief that amounts to irreparable harm. They seek a wide range of injunctive relief that will effectively shut down the Defendants, who now run a competing business.

[3] The “home coffee solutions” concept that the Plaintiffs allege the Defendants appropriated from them is, essentially, the sale of coffee makers and packaged coffee for home use – mostly through Amazon and to a lesser extent through the business’ own website. I say this with great respect to the parties, and do not mean to belittle a successful business. Speaking personally, without home coffee I would likely be helpless in hearing civil motions.

[4] But the subject matter of the legal warfare between these two groups appears to be exaggerated in their minds. The business does not design or make any of its own products, it sells a large share of its products to a handful of re-sellers who do not use the website, and it sells another large share to consumers through Amazon.com. It sells only a small portion of its products through its website. Although the dispute has been percolating for some time, and the parties have now whipped themselves into a froth, the disagreement strikes me as a tempest in a coffee pot.

[5] The parties started doing business together in 2017. At the time, the Plaintiffs’ primary business was selling coffee equipment for office use. The Defendants proposed working with them to expand into a home coffee product line. The office product business remained separate and was sold by the Plaintiffs a number of years ago. The Defendants had nothing to do with that business, and it is not in issue here.

[6] As counsel explain it, when the home coffee business first started, it was very small. The understanding between the principals of the two sides was that the Plaintiffs would provide the financing for the new business, and the Defendants would run the business. The Defendants appear to have thought of their contribution as a form of ‘sweat equity,’ investing otherwise unpaid labour into a business in which they were a 50% partner. The Plaintiffs appear to have thought of the relationship as more arm’s length, and conceived as themselves as owners and the Defendants as contractors or consultants or, at most, a form of joint venturer.

[7] No written agreement was ever entered into that precisely defined the parties’ relationship. What is clear, however, is that the Defendants were not paid a fee or salaries for their efforts; rather, they shared the profits with the Plaintiffs on a 50-50 basis. After the first year of operation, this split in profit went from sharing the gross profits to sharing the net profits of the business.

[8] In effect, the parties split evenly all of the business’ expenses and all of its profits. The parties were also equal guarantors of the lease of the premises from which the business operated. The record shows that the Defendants, mostly through their personal companies, invoiced the business periodically for 50% of the profits less the business’ expenses.

[9] The parties also shared equally in paying the salaries of employees the business hired. They likewise split the expense of carrying the liability insurance required of all Amazon suppliers, and shared in paying the Amazon commissions and fees associated with the sales through that medium. One of the principals of the Defendants held the Amazon contract for the business, and so was himself liable to Amazon for all matters pertaining to that side of the business.

[10] In other words, the parties did not formally become partners, but they acted like they were partners. The principal of the Plaintiffs even confirmed in cross-examination that she considered the Defendants to be liable for the business’ debts or injuries any of its products might cause, just like partners would be who share in all profits and all liabilities.

[11] Plaintiffs’ counsel submits that despite the optics of appearing to be partners, the parties were not really partners. He analogizes the relationship to a law firm’s non-equity partners, who are treated as partners for tax and for some liability purposes, but who have no percentage ownership in the firm or its assets and are really employees with an elevated label.

[12] In my view, the distinguishing feature between a non-equity law firm partner and the Defendants is the financial relationship. Whereas non-equity partners typically take a fixed amount as their “draw” – i.e. a salary in everything but name – the Defendants were paying half the business’ expenses and taking half the net income. That is a lot more like an equity partner than a non-equity partner. While the Plaintiffs had provided the initial financing for the business as a start-up, the Defendants ran it on a day-to-day basis for years.

[13] In March 2023, the Plaintiffs decided they had had enough of the business and announced an intention to dissolve it. The parties entered into negotiations for a “Dissolution Agreement.” They agreed to a number of items: sharing rent due for payment, how to deal with vendors, etc. The Defendants agreed to take over the lease for the business premises, the Plaintiffs agreed to sell several million dollars of inventory to the Defendants for re-sale in the market.

[14] The one thing the parties could not agree on was entitlement to the $1.196 million that was coming to them from Amazon in respect of goods already sold. Those funds are currently in the Plaintiffs’ lawyer’s trust account. On consent of the parties, the money will be paid into court to the credit of this action.

[15] Plaintiffs’ counsel submits that since the parties did not agree on all of the items to be included in the Dissolution Agreement, there is no agreement. That is probably accurate, but it is also not relevant. The important thing is not whether the parties concluded a Dissolution Agreement; they did not. Rather, the important point is that they were negotiating a Dissolution Agreement.

[16] When a business breaks up, one need not negotiate a Dissolution Agreement with an employee or a non-equity partner. The reason for that is, simply, that they have no equity. The non-equity partner, like an employee, simply leaves and has no further stake in the business’ assets, liabilities, debts, salaries, rent, etc. The parties here may not have been able to conclude a Dissolution Agreement, but the very fact that they needed one supports the Defendants’ claim that there was a full partnership between them.

[17] The joint business finally terminated at the beginning of April 2023. For the first two weeks after that, the Defendants contacted the re-sellers with whom they were already doing business and started doing business with them under a new company. Counsel for the Plaintiffs says that for those two weeks, the Defendants had a website that was dark – i.e. it was inoperative and advised the viewer that it was “under construction.”

[18] When the Defendants’ new website finally appeared, it had a marked similarity to the previous website that the Plaintiffs claim was their own. That state of affairs lasted about 6 weeks until the Defendants changed their web design.

[19] Plaintiffs’ counsel advises that since mid-May 2023 his clients are satisfied that the Defendants’ website does not bear a resemblance to the one they consider their own. They are therefore no longer pursuing the request for an injunction with respect to the Defendants’ new website In this respect, both sides seem to have woken up and smelled the coffee solutions.

[20] I am not in a position on this motion to determine who owns the intellectual property of the website that the business used when the two sides were working together (and I gather, that the Plaintiffs continue to use). On one hand, the Plaintiffs originally paid for it to be made in 2017. On the other hand, there is a fair bit of evidence from the Plaintiffs themselves that the website underwent substantial changes when home shopping escalated with the outbreak of COVID in 2020.

[21] By the time the pandemic came around and the website was refurbished, the Defendants were running the business, the Plaintiffs were passive, and the expenses were split between them. It is an open question whether the Plaintiffs can claim ownership of the website when the entire operation had become jointly funded and profits shared equally between the two sides.

[22] I can leave that as an open question for trial since, in any case, there is no evidence in the record to indicate that the Plaintiffs suffered any loss related to the website. The only losses they say they actually suffered were related to the business of the re-sellers, which is not web-based.

[23] According to the Defendants, even the Plaintiffs’ supposed loss of sales to the re-sellers is not real. That is, the Defendants started serving a number of the re-sellers and so those re-sellers did not buy anymore from the Plaintiffs, but the Defendants themselves bought over $1 million in inventory from the Plaintiffs to sell in turn to the re-sellers. The Plaintiffs apparently suffered no loss, just a change in the way the market worked.

[24] Furthermore, the Plaintiffs have conceded that with a few phone calls to the re-sellers, the re-seller business has been returning to them. As far as I can tell, the Defendants did nothing wrong in selling goods to the re-sellers who they knew from their time working with the Plaintiffs, and the Plaintiffs in any case suffered no significant loss (if any at all).

[25] Likewise, the Defendants did nothing wrong in continuing to sell products through Amazon. They already had established their account with that online retailer, and simply continued using it. The Plaintiffs cannot claim that they invested anything in that relationship that would give them sole proprietorship over it.

[26] What this injunction request really seems to be about is that the Plaintiffs consider the Defendants to be unfairly competing with them, but they have a difficult time pinpointing the unfairness. It is worth recalling that the Defendants did not have a non-competition or non-solicitation agreement with the Plaintiffs. Without agreements like that in place, employees and contractors are not bound by non-competition or non-solicitation obligations: King v. Merrill Lynch Canada Inc, 2005 ONSC 43679; South Side Manufacturing Ltd v. SS Decking Ltd., 2022 ABCA 103.

[27] Nothing in the law prohibits former employees, associates, consultants, or contractors from competing with their former employer or contractor and, importantly, from using the knowledge of business that they gained from their former employment: Nativelands Specific Claims Group v. Justice Risk Solutions, 2023 ONSC 4305, at paras. 14-15, 32. That is really what the evidence shows the Defendants did here.

[28] Since the website is at best ambiguous and the re-sellers were already in a relationship with the Defendants, the Plaintiffs’ counsel hung his hat at the hearing on seeking return of the business’ “customer lists” that the Plaintiffs allege the Defendants are using. Although there is no non-solicitation agreement between the parties, if the Defendants were actually using the Plaintiffs’ customer list from the previous business that could form the basis of an injunction. Plaintiffs’ counsel submits that the Defendants, whatever their precise relationship to the Plaintiffs may have been, were fiduciaries of the business and owed a duty to the business not to appropriate for themselves confidential information such as the customer list.

[29] It turns out, however, that there are two weaknesses in Plaintiffs’ counsel’s argument. First, the Defendants state that they may have been fiduciaries of the business, but that is because they and the Plaintiffs were partners. As partners, any customer list from the former business would be at least as much the property of the Defendants as it would be that of the Plaintiffs’.

[30] But even more to the point, the Defendants state, and the Plaintiffs concede, that no such document appears in the record. There is, in fact, no customer list.

[31] There are customers who used to use the business’ website, and their contact information is searchable and ascertainable in different ways buried in the digital data and emails of the former business. Both sides have this digital material. The Defendants have it, of course, because it was they, and not the Plaintiffs, who ran the business. As for the Plaintiffs, they do not contend that they are missing their customers’ addresses and contact information; rather, they say that they do not want the Defendants to have this information. They want it returned, or deleted, or both.

[32] The Defendants respond that there is nothing that they are obliged to return. They contend that any web customer information is already theirs, or at best belongs to both sides equally, since the customers were all developed by the Defendants themselves as operators of the previous website.

[33] The Defendants also say that the customer information is buried and difficult to access, and that as a result they do not use it and are in the process of developing a new retail customer base. For that reason, their web-based sales have so far been very small. During the Defendants’ first two months or so of operations in April-May 2023, they earned only $3,500 in sales from the website. The vast majority of their business is from the re-sellers and from Amazon.

[34] For their part, the Plaintiffs have produced no financial information indicating that they have lost any revenue at all from the web business since the Defendants’ departure. I specifically inquired at the hearing if there is any evidence of losses incurred or any actual evidence that the Defendants are using customer data that belonged to the previous business. Plaintiffs’ counsel confirmed that there is no evidence of financial loss and no evidence that the customer data is actually being used.

[35] Plaintiffs’ counsel explained that his clients think that the Defendants are not using the customer data for “strategic reasons.” He stated, however, that his clients are very concerned that the Defendants might start using that data one day if they are not enjoined from doing so.

[36] Plaintiffs’ counsel did confirm that this is a fear based on suspicion, not hard evidence. There is nothing in the record that suggests that the Defendants have actually used any of the customer data to which the Plaintiffs think the Defendants have gained access. And there is likewise no evidence to show that this use of the data will imminently occur. The Plaintiffs themselves say something closer to ‘Who knows?’ when asked what the future is likely to hold in this respect.

[37] In seeking to enjoin the possible future use of customer data, the Plaintiffs are seeking an anticipatory remedy – a so-called quia timet injunction. That relief is not available against former employees or business associates who had access to confidential information, including databases and customer lists, where the moving party has provided no evidence that the information was actually used or is going to imminently be used. Suspicion or worry is not enough: Orpheus Medica v. Deep Biologics Inc., 2020 ONSC 4974, at para. 68.

[38] In the result, the website copying claim is not ongoing so is not the basis for an injunction. The sales to re-sellers, which was always the weakest of the Plaintiffs’ claims, have been agreed to by the Plaintiffs and so they no longer seek an injunction on that account. And the alleged misuse of the customer database is unsubstantiated by any evidence and, in fact, is acknowledged as not being taking place, albeit for “strategic reasons.” There is nothing left for the Plaintiffs to enjoin.

[39] It is elementary that to support an injunction, the Plaintiffs must show that: i) it has a strong prima facie case or that there is a serious question to be tried; ii) it will suffer irreparable harm in the absence of an injunction; and iii) the balance of convenience favours the moving party: RJR-MacDonald Inc. v. Canada (Attorney General), [1995] 3 S.C.R. 199, at para. 334. The Plaintiffs meet none of the three branches of the test.

[40] On the first branch, the Plaintiffs have what looks like more like a bald assertion than a prima facie case or serious claim to the property whose use they seek to enjoin. The evidence does not reveal them to be the sole owner of anything misappropriated by the Defendants. On the second branch, the Plaintiffs have nothing at all. That is, they have not evidenced any harm whatsoever, let alone irreparable harm. The only thing they have demonstrated is that they are suspicious that harm might occur at an indeterminate time in the future. As indicated, that is not the kind of harm that can support an injunction.

[41] In these circumstances, it is also self-evident that the third branch of the injunction test – the balance of convenience – favours the Defendants. They will be on the receiving end of an injunction and may not be able to operate, or will have their operations curtailed as a result, whereas the Plaintiffs have not shown that they have thus far suffered at all.

[42] If an injunction is not granted, the Plaintiffs will likely just continue along the business path that they are already on. They are using their website and conducting sales now, and will be able to continue to do so. An interlocutory injunction would add cream and, perhaps, a sweetener to the Plaintiffs’ business, but its absence will make little difference to them.

Disposition

[43] The Plaintiffs’ motion is dismissed.

[44] On consent, the funds held in the Plaintiffs’ lawyer’s trust account in respect of the Amazon sales at issue in this action will be paid into court. There will be an Order to go to that effect. Counsel for the Plaintiff may email a draft Order to my assistant, in Word format, indicating approval as to form and content by Defendants’ counsel.

[45] The parties may make written submissions on costs. I would ask Defendants’ counsel to email my assistant short submissions within two weeks of today, and for Plaintiffs’ counsel to email my assistant equally short submissions within two weeks thereafter.

Date: December 1, 2023 Morgan J.