Court File and Parties

Court File No.: CV-15-54 3181 Date: 2024-04-03 Ontario Superior Court of Justice

Between:

MJL Enterprises Inc., Plaintiff – and – SAL Marketing Inc., Defendant

Counsel: J. Gardner Hodder, for the Plaintiff Christopher Stanek, for the Defendant

Heard: April 17, 18, 19, 20, 21, 24, 25, 26, 27, 28, May 1, 2, 8, 9, 10 and 11, 2023 Plaintiff’s Written Submissions received May 26, 2023, Defendant’s Written Submissions received June 9, 2023

Reasons for Decision Carole J. Brown J.

[1] This action arises from a Distribution Agreement entered into between MJL Enterprises Inc. (“MJL”) and SMI, on August 13, 2013.

[2] MJL seeks damages for the alleged breach of a distribution agreement. Said damages are claimed under four categories, as follows:

1. Damages for the alleged failure to market its software;
2. Damages of $90 million pursuant to the Distribution Agreement, section 4.7 and in damages for breach of contract, breach of confidence and fraudulent misrepresentation;
3. Damages for failure to pay three invoices, issued without warning, allegedly for programming work MJL undertook to upgrade its software product at the request of SMI, in the total amount of $822,669.60; and
4. Damages for allegedly copying or reverse engineering MJL’s software, which SMI maintains was not marketable in any form.

The Parties

[3] MJL was a start-up company, based in PEI. It was incorporated in December 2004, with four shareholders, Jason Macdonald, his father, Matt Macdonald, and two family friends.

[4] MJL brought this action against SAL Marketing Inc. (“SMI)”, which is in the automotive business of aftermarket products or financing and insurance (“F & I”) products for vehicles.

[5] SMI is a fully owned subsidiary of Industrial Alliance Financial Services (“iA”). SMI was formed in order to sell any products that cannot be sold by regulated entities in the insurance business, such as warranty products, or, as in this case, computer software.

[6] SMI is not licensed to sell insurance products to automobile dealerships or, indeed, to any customers. iA sells certain insurance products (such as life and disability) to automobile dealerships, and has other subsidiaries that sell other types of insurance products (such as property and casualty).

[7] SMI was developing a software platform called UniFI 1.0, which was released for production in 2008.

[8] MJL has referred to iA-SAL throughout its submissions. iA-SAL is not a legal entity, despite MJL’s assertion, but rather one of iA’s lines of business or divisions. iA is not a named defendant in this action and is not a party to the Distribution Agreement.

MJL’s History and Financial Status

[9] Jason Macdonald had worked in a car dealership in Pembroke, Ontario in a sales role for 20 years, selling aftermarket products, including vehicle warranties, life and disability insurances, rust proofing and paint protection on vehicles and doing the associated paperwork.

[10] In 2000, online market finance portals became available, initially through Curomax, such that when a vehicle was sold, it would be possible for a sales agent to input, online, rather than manually, customer information, including vehicle, personal and financial information to be submitted to a bank of choice for approval of a purchase loan. Mr. Macdonald believed that this data could be extracted and utilized to streamline the vehicle business through development of a software platform. In 2004, he borrowed money and hired a Charlottetown software developer to design such a program, as he was not a computer programmer. In December 2004, he incorporated MJL Enterprises Inc (“MJL”) as a PEI Corporation.

[11] At that juncture, the system only allowed for the business office data to be stored and reported on an online Internet-based system. Automating the business office had to wait until integration with the portals at a later time.

[12] He envisioned a computer platform that would replace annual inputting of transaction data to logbooks and allow for usage of the data in new ways. He wished to create a software program to extract and utilize data.

[13] He convinced two companies to grant him integration with their financial portals such that his software could access customer data. He intended to sell his software to automotive dealers and F & I providers like the defendant. He intended to market his software as a means to increase F & I sales. The principal features of his software were to follow up with purchasers after sale and to provide employee accountability and advanced reporting of data.

[14] In and after 2005, MJL developed and marketed a software platform called iAthlete. This was an athletic scouting platform for the Buffalo Sabres hockey team. This was followed by a player development and training platform which it marketed to the Toronto Maple Leafs, the Chicago Blackhawks and multiple universities in the United States. The platforms led to development of video capabilities.

[15] MJL entered into dealership service agreements with Curomax and DealerAccess in 2007 and achieved integration with DealerTrack in 2008 to permit it to interface with their software systems.

[16] By 2008, it integrated with leading finance portals, including DealerAccess, DealerTrack and RouteOne and began marketing its offerings to several companies.

[17] These integrations included XML (Extensible Markup Language), computer programming that permits two computer systems to communicate and interact, or API (Application Programming Interface), an advanced, more powerful form of XML. It is of note that integration with API and XML were never part of the agreement with SMI.

[18] In 2009, MJL entered into an agreement with the Ontario Automotive Dealers Association (“OADA”) to market the FIRST software platform to automotive dealerships to increase the sale of its F & I offerings. However, MJL learned that SMI had purchased this portion of OADA’s business and as a result, the agreement became moot, as OADA no longer had F & I products to sell.

[19] MJL thereafter sought to negotiate the same deal with SMI. MJL was finally introduced to SMI in 2012 and was able to demonstrate its platform. An agreement was concluded with SMI in August 2013.

Plaintiff’s Financial History

[20] MJL was funded by investors, family and friends, with the principal funding coming from government grants and loans.

[21] Pursuant to the financial statements produced at trial, the first of which was dated December 31, 2006, the amortized cost of MJL’s software (iSTAR), the F & I platform was $27,675, which was approximately the amount that Mr. Macdonald testified he had paid to the third-party platform developer.

[22] In 2007, MJL received from two government assistance programs almost $44,000. In 2009, MJL received government assistance in the amount of $88,499. In 2010, MJL received an additional $131,707 in government assistance. In 2009 and 2010, MJL’s sales generated under $20,000. Accordingly, during these years, MJL was subsisting basically on government assistance.

[23] In 2011, MJL’s revenue was solely derived from iAthlete. It ran a deficit of $1,790,867.

[24] By the end of 2013, MJL’s deficit amounted to $2,445,019.

[25] As of the time of trial, MJL owed the Canada Revenue Agency between $400,000 and $500,000, all of which debt was incurred prior to 2015.

[26] MJL was introduced to SMI in 2012 and, as of 2013, negotiated a distribution agreement, which the parties entered into on August 13, 2013.

[27] There were those at SMI who were enthusiastic about the iSTAR software platform and those who were less enthusiastic, as well as those who were dubious and not enthusiastic. Gordon Swail was enthusiastic and was the designated contact at SMI for Mr. Macdonald.

[28] Mr. Jiwani of SMI saw the benefit to be derived from the agreement as obtaining some income from payment of monthly fees and enhancement of training. In the end, SMI’s investment, as explained by Mr. Jiwani, was limited to $100,000, with additional amounts to be advanced if the platform proved marketable.

Positions of the Parties

Position of the Plaintiff

[29] MJL alleges breach of the Distribution Agreement entered into with SMI on August 13, 2013, and seeks damages as above indicated.

[30] MJL maintained that the Distribution Agreement created a partnership with SMI and that SMI would promote and market MJL’s software product, iSTAR.

[31] MJL alleges that SMI failed to promote and market its software, and instead, SMI developed its own software, in-house, using iSTAR features, essentially copying iSTAR’s program.

[32] MJL maintains that SMI failed to pay invoices that MJL issued to SMI for development work it performed on its iSTAR program, which development work it alleges was requested by SMI.

[33] MJL posits that much of SMI’s motivation in signing the Distribution Agreement was for an improper purpose. MJL’s theory is that it was to keep iSTAR off the market and afford itself an opportunity to conduct market intelligence.

Position of the Defendant

[34] SMI maintains that the Distribution Agreement entered into between MJL and SMI was simply that, a distribution agreement. It was not, as maintained by MJL, a partnership agreement or a joint venture, but simply a distribution agreement, as set forth in the document.

[35] It was the position of SMI that MJL’s menu function was not ready for marketing, but continued to be changed and upgraded by MJL in order to make the software marketable and more user-friendly. MJL maintained that the software was ready from the beginning and did not require changes. MJL further maintained that all changes to the software platform were “modifications” requested by SMI.

[36] SMI maintains that the invoices rendered by MJL to SMI were for programming work by MJL to upgrade its own product in order that SMI could market said product, and that none of the process, as set forth at section 3.4 for issuing invoices, was followed by MJL, in breach of the Agreement.

[37] When these invoices were not paid by SMI, given the clear breach of the issuance of the invoices without prior approval of the incurring of such expenses by MJL in contravention of the Distribution Agreement, and given MJL’s insistence that the invoices be paid before the Distribution Agreement could continue, MJL cut off SMI’s access to the software in or about May 18, 2014.

[38] It is the position of SMI that there was no evidence that it copied or reverse engineered any of MJL’s software. Indeed, SMI maintains that the MJL software was not marketable in any form during the material time.

[39] SMI further maintains that, in the course of the lawsuit, MJL failed to produce the software in contravention of the Rules of Civil Procedure 30.01(1)(a) and 30.02(1), such that the features and functionality of the software can be seen, reviewed or compared by this court.

[40] SMI maintains that MJL, in its closing submissions, relies on misleading and incorrect statements regarding the facts and evidence led at trial. I have reviewed and considered the table prepared by SMI in this regard.

[41] Finally, in calculating its damages, MJL has relied upon sales figures of SMI’s parent company, and not from SMI, relating to the sale of insurance.

The Issues

[42] The issues to be determined in this action are as follows.

1. Did SMI breach the Distribution Agreement?
2. Were the invoices issued to SMI issued pursuant to the Distribution Agreement?
3. Did SMI copy MJL’s software?
4. Does SMI owe MJL damages, and if so, under what heads of damage and in what amounts?

The Distribution Agreement

[43] The seminal provisions of the Distribution Agreement, executed between MJL and SAL on August 13, 2013, relied on by the parties are as follows.

WHEREAS MJL has developed an Internet-based software program called the Finance & Insurance Reporting & Sales Tool (FIRST), for the automotive industry hereinafter (“the FIRST Software Program”);

WHEREAS SMI desires to act as distributor for the FIRST Software Program in Canada (the “Territory”), subject to the terms and conditions of this Agreement.

2. License Grant and Terms

2.1. Distribution Rights to End-Users. MJL hereby appoints SMI as the authorized distributor of the FIRST Software Program during the Term to the End Users in the Territory, subject to the terms and conditions set out herein. In connection with such appointment, MJL grants to SMI a non-transferable right and license during the term to market, offer and demonstrate the FIRST Software Program to potential End Users. MJL expressly agrees to not market the FIRST Software Program to competitors listed in Schedule 1 (“Competitors”), which may be amended from time to time. Original equipment manufacturers will be handled mutually and as agreed to by SMI and MJL.

3. Obligations of MJL.

MJL will provide the web-based FIRST program for marketing and distribution to SMI in three (3) package levels described in Schedule 2. The Bronze level package will be available for marketing and distribution no later than three weeks from the effective date. The Silver and Gold level packages will become available within six months and 12 months of the effective date, respectively, and as determined by system requirements.

3.1. Program Material. MJL will provide End-User sign-up forms and installation in strict instructional material, and MJL contact information to SMI to be used in marketing and distributing the FIRST Software Program to End-Users.

3.2. Training. MJL will provide training to SMI online and at no charge.

3.3. Installation and Support. MJL agrees that they are responsible for ensuring the dealer installation of FIRST software program. MJL will provide End-Users with telephone technical and engineering support relating to the functionality and troubleshooting of the FIRST software program at no additional cost to the End-User. This service will be available between 8 AM and 8 PM ET Monday to Friday.

a. On-site technical support. Any MJL expenses related to on-site technical support to end-users will be the responsibility of MJL.

b. On-site sales support. If requested and only upon preapproval by both parties, MJL will provide on-site sales development support. SMI agrees to pay MJL expenses related to on-site sales development support for travel, lodging and meals within 30 days of receipt of invoice. MJL expenses related to sales development support to Original equipment manufacturers will be the sole responsibility of MJL.

3.4. New Functionality and Fixes. Any costs associated with the MJL initiated development to the FIRST Software Program, (whether it be new functionality or related to “bugs” or “fixes”) will be the sole responsibility of MJL. Any requests by SMI for modifications or enhancements to the functionality of the existing FIRST Software Program will be addressed on a case-by-case basis. MJL will price all custom development work by work hours required, once a detailed scope, priority and timeline is defined mutually by both parties. The MJL custom development rate per hour will not exceed $100/hour in the first year of the agreement, $110 per hour in the second year, and $120 per hour in the third year of the agreement. MJL will not charge the functionality of the FIRST Software Program unless both parties mutually agree to such changes. MJL shall advise SMI of any proposed upgrade, modifications or discontinuance and both parties will mutually agree on a launch date for these modifications.

4. Obligations of SMI.

4.1. Software Service Agreement. SMI will ensure that each End-User executes an End-User service level agreement and license agreements in the format set out in schedules 3 and 4.

4.2. Training. SMI must undergo MJL’s annual online training.

4.3. Support Personnel. SMI will train and maintain a sufficient number of training and sales personnel including at least one (1) representative to service End-Users of the FIRST Software Program, and to provide service and support of the FIRST Software Program at each SMI regional office.

4.4. Support. SMI will support MJL’s installation responsibilities by marketing and identifying the attributes of the FIRST Software Program to End-Users, assisting in the online registration sign up process, and providing basic on-site support.

11. Limitation of Liability. Subject to MJL’s indemnity obligations under section 13.1 and SMI’s indemnity obligations under section 13.2 in no event will either party be liable for any loss of profit or any other commercial damage, including but not limited to special, incidental, consequential or other indirect damages under any causes of action or legal theory arising out of or relating to this agreement, including, without limitation, claims arising from malfunction or defects in the software of MJL services

14.3. Entire Agreement

This Agreement contains the entire understanding between MJL and SMI and supersedes any prior understanding and agreements between them respecting the subject matter herein. There are no representations, agreements, arrangements, or understandings, oral or written, between the parties hereto relating to the subject matter of this Agreement which are not fully expressed or described herein. In the event of any conflict or inconsistency between the terms in the body of this Agreement and any schedule attached hereto, the terms in the body of this Agreement shall govern and control.

[44] The Distribution Agreement was a typical distribution agreement, which gave SMI the right to act as distributor for MJL’s Finance & Insurance Reporting & Sales Tool (FIRST) software program in Canada. Nowhere in the language of the Distribution Agreement did it make SMI a partner in MJL’s software project, as MJL urged. As stated at section 2.1 of the Distribution Agreement, above, MJL appointed SMI as the authorized distributor of the FIRST software program during the term of the agreement to market, offer and demonstrate the FIRST software program, within the terms of the Agreement. The contract was for the distribution of a software product, with the intent of attracting a large number of users, and not a contract for custom software, developed to fit a specific purpose.

[45] Prior to execution of the Distribution Agreement, when reviewing a draft memorandum of understanding between the parties which sought to prevent SMI from marketing or distributing any similar automotive industry product that directly competed against iSTAR, SMI, through Gordon Swail, clearly advised Mr. Macdonald that SMI could not sign the Agreement with that provision included and could not guarantee that it would not one day have menu, video hosting or a CRM component in its service package. He sent the memorandum of understanding back and the provision was removed by MJL.

[46] The Agreement between the two corporations was executed after lengthy negotiations. While the plaintiff has attempted to argue that it was a naïve, unsophisticated party, it was a corporation, with a Board of Directors on which was seated a lawyer. MJL has attempted to argue that that lawyer was not conversant with or an expert in licensing agreements. However, if that were the case, the Corporation, Board of Directors and/or the lawyer should have had the licensing agreement reviewed by another lawyer conversant with such agreements. I do not accept the plaintiff’s argument as valid.

[47] Further, from 2005, MJL had marketed its iAthlete scouting platform to the Buffalo Sabres hockey team, as well as a player development and training platform to the Toronto Maple Leafs, the Chicago Blackhawks and numerous universities in the United States. It appears from this, that MJL was not naïve and unsophisticated.

[48] As a corporation, with investors, government borrowing and a Board of Directors, it should have been sufficiently responsible to ensure that any significant agreement entered into by MJL, like the Distribution Agreement, was properly vetted, with proper legal advice obtained.

[49] It is of note that there was no provision for access by MJL to SMI’s XML or API in the agreement. I do not accept MJL’s arguments in this regard. Indeed, MJL and Mr. Macdonald had previously contracted with other corporations, including RouteOne and DealerTrack, for access to their APIs. In those instances, the agreements concluded were detailed and lengthy, as admitted by Mr. Macdonald. Thus, MJL was familiar with such agreements.

[50] The FIRST software contemplated three levels of membership, with three different fees to be charged: Bronze package (fee $199), Silver package (fee $299) and Gold package (fee $399). The Bronze package was to be made available within three weeks of the execution of the agreement, the Silver package within six months and the Gold package within 12 months. MJL was only able to offer the Bronze package.

[51] MJL learned that in order to implement the Silver package, its integrations with ADP and Reynolds & Reynolds would have required it to pay to ADP $50,000 upfront in addition to the monthly fee per dealership to offer the Silver package. With respect to Reynolds and Reynolds, it would have had to pay approximately $100,000 in costs, as well as an increased monthly fee for dealerships, plus certification and re-certification fees totaling $20,000 and an installation fee of $250 per dealer. This would have made the Silver package unprofitable, if not prohibitive for MJL to offer. It never did offer the Silver package and, without the Silver package, could not offer the Gold package.

[52] The Gold integration package would have involved API/XML interface with SMI. The Gold level was never reached nor was the intermediate Silver level, which had to be offered before the Gold level, as they would both have been prohibitive for MJL to implement, as explained above.

[53] I do not accept MJL’s argument that it should have had access to SMI’s API and XML from the beginning. There is nothing in the Distribution Agreement that would have required this.

No Market Research

[54] The evidence indicates that when MJL entered into the Distribution Agreement, it had done no market research with respect to penetration rates of software such as iSTAR. Knowledge of the market was reliant entirely on Mr. Macdonald’s personal experience. MJL had no survey information or data regarding the likelihood of the use of iSTAR, nor what target customers would be prepared to pay for the use of iSTAR. No active dealerships were using the software prior to the Distribution Agreement. It was the position of Mr. Macdonald that the pilot projects to be conducted by SMI after the Agreement was signed were for test marketing.

[55] MJL’s former employee, Jared Piccioni, testified that there was no specification documentation for the software, defining how the software would meet business needs, such that it was difficult to develop software that met all business needs and end-user needs.

[56] When the pilot projects had occurred, Mr. Macdonald received the results of the pilot projects, but did not share them with anyone at SMI. It appeared from his testimony that he preferred to rely on his own view of the product. At trial, the results of the pilot project were in evidence and showed the following:

1. Jonker Nissan had three users who joined in October of 2013, two never logged back in after the day they joined, the third never used the platform again after February 28, 2014;
2. Precision Hyundai: one user joined on October 24, 2013 and stopped logging in a little over one week later; and
3. Jonker Honda: two users joined in October of 2013, one never used the platform again after November 18, 2013, the other never used it again after February 8, 2014.

[57] The document further shows that Jonker Nissan had only done one transaction using iSTAR, Jonker Honda four, and Precision Hyundai none.

[58] The evidence suggests that the software was not found to be sufficiently necessary, helpful or “user-friendly” to be of use to the dealerships in the pilot program.

[59] Following the market exposure, feedback, advice and changes, the software continued to have limited value to its target market. In cross-examination, MJL’s damages expert admitted that after the distribution agreement was terminated, iSTAR, was not “commercially viable”.

Witnesses

[60] Numerous witnesses were called by both parties. All witnesses were generally straightforward in their testimony.

[61] However, I did find Mr. Macdonald’s evidence to be problematic in that he, on occasion, particularly in cross-examination, gave evidence that did not make commercial or business sense. While the plaintiff’s attempted to explain this as being unsophisticated and naïve, I note that MJL had been incorporated since 2004, with a Board of Directors, and had raised funding from government loans and investors, which bespeaks a certain amount of sophistication. Further, as above mentioned, they had marketed their iAthlete software platform to the Buffalo Sabres, Toronto Maple Leafs and Chicago Blackhawks, as well as to several universities in the United States. Additionally, they had negotiated contracts with corporations for access to their APIs. All of this, in my view, evidences a certain business acumen.

[62] Some of Mr. Macdonald’s evidence seemed defensive, even when a straightforward answer would not have harmed the theory of his case. His evidence appeared fixed and rigid in his version of events. He constantly read bad motives into SMI’s conduct and, throughout his testimony, was continually ready to blame SMI.

[63] I did not find his evidence to be as reliable as the other witnesses. I have taken this into account as I consider and assess the evidence in this action.

Issue One: Did SMI Breach the Distribution Agreement?

[64] Generally, MJL alleges that SMI did not genuinely market its software platform, as required by the Distribution Agreement. The evidence indicates that the initial marketing and distribution efforts were delayed due to the platform’s lack of readiness. This is disputed by MJL, which maintained throughout that its software platform was ready for rollout at the time the Distribution Agreement was executed. Thereafter, the pilot projects resulted in poor interest and uptake in the market.

[65] I do not find, on the evidence before the court, that SMI breached a general duty to market MJL’s software. If there was poor uptake in the market, it appears to have been due to the platform itself and the fact that users found it not to be user-friendly. The evidence indicates that there had been no market research by MJL prior to its attempts to market its software through the Distribution Agreement.

[66] MJL identifies several provisions of the Distribution Agreement which it alleges were breached by SMI.

[67] MJL alleges a number of breaches relating to the support that SMI was to provide to the software, citing articles 4.2, 4.3 and 4.4, as set forth above at paragraph 43.

[68] Section 4.2 states that SMI must undergo MJL’s annual online training. MJL states that it did not do so. However, MJL’s reciprocal obligation, set forth at section 3.2, required MJL to provide the training to SMI online, at no cost, and section 6.1(b) required that MJL was to complete the online training within 60 days after the Distribution Agreement was executed.

[69] There is no evidence before this Court that the training was organized and offered to SMI by MJL, nor that any such training dates were proposed by MJL to SMI. There is no evidence to indicate that the training was available within the first 60 days as provided in the Agreement. There was no evidence regarding what the training covered, nor that any such training was organized by MJL, other than Mr. Macdonald’s testimony that the training was available to SMI. MJL appears to maintain that SMI never raised or requested the online training and has thereby breached the Agreement.

[70] In my view, based on the wording of the agreement, MJL should have therefore organized the training and proposed dates, with some follow-up for questions and clarifications of the online training. Given that there is no evidence as to the training or whether it was even available within the first 60 days as provided in the Agreement, or offered to SMI, I do not find that this provision was breached.

[71] Section 4.3 of the Agreement required that SMI train and maintain sufficient training and sales personnel, including at least one representative to service end-users of the FIRST software program and to provide service and support of said program at each SMI office.

[72] The evidence at trial was that Gordon Swail was the designated SMI person responsible. The MJL person responsible to liaise with SMI as regards personnel was Matt Macdonald, who admitted, in his cross-examination, that SMI did not have to worry about the software once installed as it was MJL’s obligation to provide support. This obligation of MJL is provided for at section 3.3 of the Agreement, as set forth above. That section provides that MJL is to provide SMI and end-users support services and specifies that MJL is responsible for ensuring dealer installation of iSTAR.

[73] I do not find, based on these provisions, that there was any breach of that provision of the Agreement.

[74] Further, MJL maintains that SMI only provided limited support for installation in alleged breach of section 4.4. However, pursuant to MJL’s obligations, installation was MJL’s responsibility and section 4.4 only provided, with respect to the installation itself, that SMI would assist “in the online registration sign-up process” and provide “basic on-site support”.

[75] As regards marketing of iSTAR, MJL alleges that SMI breached section 4.4(a) by failing to utilize its performance specialist team to market and distribute MJL’s FIRST software program to all of SMI’s client dealerships throughout Canada. MJL further alleges that SMI breached section 4.4(b) by failing to present the FIRST software program to all iSTAR accounts by the end of 2013, as well as to all active accounts no later than 12 months after completion of the initial training and the pilot program.

[76] Pursuant to the wording of section 4.4(a), it is mutually expected that SMI will utilize its performance specialist team to market and distribute MJL’s program. There are no deadlines stipulated by which SMI was to market and distribute to all client dealerships. Further, section 4.4(b) provides that SMI will endeavour to present iSTAR by certain deadlines, not that it will present iSTAR.

[77] I am satisfied, based on all of the evidence, that SMI made commercially reasonable efforts to market iSTAR. Indeed, in March 2014, SMI set out a plan to develop video content and voiceovers for iSTAR, although there was no obligation to do so. SMI felt that this would make iSTAR more marketable and Mr. Macdonald agreed that such content would be very helpful to iSTAR. Also at that time, SMI went out to market iSTAR to some 40 dealerships, and also travelled to PEI to work on voiceovers for the video content, at SMI’s expense. However, the dealerships where iSTAR was marketed and installed never made extensive use of the program and/or completely stopped using the program. The product was simply not attractive and marketable to SMI’s network of dealerships.

[78] By 2014, MJL was over $2 million in debt. Further, the software product it had designed and attempted to push out to the public through SMI did not generate significant interest in the marketplace and was never extensively used. I note that no market research was ever done prior to MJL entering into the Distribution Agreement. MJL insisted that the market research would come from the pilot projects after the Distribution Agreement was signed. In my view, that is too late. While the results of the pilot project only went to Mr. Macdonald, and he did not show the results to SMI, those results indicate that there was not interest for uptake in the marketplace.

[79] I am of the view that the fact that there was not interest for uptake in the marketplace does not indicate that SMI was in breach of its obligations under the Distribution Agreement. Rather, the product was either not easily used or of interest to the marketplace. Further, there were other similar programs also in circulation at that time.

[80] As testified by software expert, Dr. Wasserman, during the trial:

“It takes a lot of effort to build a product that will attract a sizable number of customers and retain them over enough time for the product to be successful. If you look at the history of startups, as they exist in today’s world, it’s well known that 90% of them fail.”

[81] MJL also alleges breach of contract under the License Grant and Terms relating to section 2.1, Distribution Rights to End-Users. The last sentence of that section states “Original equipment manufacturers will be handled mutually and as agreed to by SMI and MJL.” The article concerns the distribution of iSTAR to end-users and also specifies that MJL cannot market the iSTAR software to certain competitors. MJL maintains that any dealings that SMI has with any original equipment manufacturers (“OEMs”), regardless of whether it involves the distribution of iSTAR, must involve MJL. This does not make reasonable commercial sense in the context of the Distribution Agreement. The sentence quoted, based on the wording of the section, concerns distribution rights of iSTAR to OEMs regarding the license grant.

[82] MJL alleges that SMI/iA, in response to a request for proposal issued by Marsh Canada in 2013, was preparing for a presentation to Honda Canada. The request for proposal was to partner with Honda to offer Honda branded insurance products. Honda was looking for an insurance provider to provide the products which would be branded as a “Honda” warranty plan or insurance to be offered in Honda dealerships.

[83] In preparing for the request for proposal, SMI advised MJL of said presentation and asked MJL for support. It advised MJL of the content it wanted to present concerning iSTAR. Mr. Macdonald provided slides to be used in the presentation. SMI also included the price to be paid by dealers for the use of iSTAR, and explained that this would be an add-on for dealerships who would choose to also use iSTAR. Honda would not be involved with said decisions at the dealership level.

[84] The subscription fee as presented to Honda regarding iSTAR had nothing to do with the underlying deal with Honda. The use of iSTAR would be an add-on for dealerships and thus the dealerships that would choose to use iSTAR would pay the subscription fees. Honda would not be involved with those decisions at the dealership level.

[85] I do not accept MJL’s argument that it was not involved in the presentation to Honda. While it did not attend the presentation, it was asked for content, which it provided. Said content was used and the presentation indicated a breakdown of fees that a dealership would need to pay should it decide to use iSTAR as an add-on to the Honda warranty plan or insurance to be offered.

[86] It is of note that the Distribution Agreement was terminated prior to any deal with Honda being reached, such that SMI could no longer offer subscriptions for iSTAR to any OEMs.

Termination of the Distribution Agreement

[87] The evidence indicates that the Distribution Agreement was terminated because MJL issued to SMI invoices which were not agreed to or approved pursuant to the Distribution Agreement and MJL refused to provide support for the pilots contrary to the Distribution Agreement.

[88] Beginning in March 2014, Mr. Macdonald began to demand additional monies from SMI. He wrote to Mr. Jiwani, stating that MJL, through SMI, should have sold a minimum of 50 licenses per month and should have reached the 250 license sales milestone pursuant to the Distribution Agreement by March 2014. This was an assumption on his part, unsupported by any market research. He requested the third and fourth milestone payments of $50,000 each “as a sign of good faith” by the end of March to help offset MJL’s operating costs. The evidence indicates that, at that time, MJL’s indebtedness amounted to over $2 million.

[89] The request was repeated in July 2014 and MJL was advised by SMI that a third payment of $50,000 would be made.

[90] Just prior to this request, MJL had sent an invoice to the attention of Mr. Swail for alleged additional work done on iSTAR, allegedly at the request of SMI, in the amount of $473,328, said to represent 4,152 hours of “modification programming” from November 1, 2013 to June 30, 2014. This invoice was not distributed to anyone else at SMI. This invoice came without warning and was not issued in compliance with section 3.4 of the Distribution Agreement.

[91] On August 15, 2014, MJL again wrote to Mr. Swail, proposing that SMI pay $200,000 in partial payment of the first invoice and stating that it would withhold the amounts due to SMI until MJL would recoup the full balance of the invoice through sales of licenses.

[92] This was not accepted by SMI. MJL then wrote to iA’s CEO demanding full payment of the invoice by close of business day or for the partial payment of $200,000, failing which it would have no other option than to commence legal proceedings against SMI.

[93] MJL was advised that neither Mr. Jiwani nor Mr. Ricard had ever received an invoice from MJL and that it was SMI’s position that it was not responsible for the invoice pursuant to the Distribution Agreement, as there had been no discussions, agreements or approvals of any modifications to iSTAR by SMI as set forth at section 3.4 of the Agreement.

[94] On October 1, 2014, iA received a requirement to pay from the Canada Revenue Agency in the amount of $134,958.29 regarding MJL as “tax debtor”.

[95] SMI was nevertheless prepared to continue with the Distribution Agreement, but would not pay the $473,328 invoice. It appears that MJL was not prepared to proceed without payment. Mr. Macdonald indicated that he would be willing to discuss with Mr. Sampson the work he said had been done at SMI’s request, which was accepted by Mr. Sampson. However, there is no evidence to indicate that Mr. Macdonald followed up to set up such a meeting, and no evidence that such a meeting ever occurred.

[96] The next correspondence from MJL was to Yvon Charest, President and CEO of iA. This was another demand for payment of the invoice.

[97] SMI would not pay an unsolicited invoice for unidentified and unspecified “modification” work that it had not approved. In turn, MJL indicated that it would not participate in the pilot projects that were proposed by SMI. This led to a final breakdown of the relationship between the parties and the termination of the Distribution Agreement.

Issue Two: Invoice Payments

[98] MJL claims that SMI owes it for payment of invoices, issued as follows:

1. July 14, 2014: $473,348 for 4,152 hours of “modification programming” from November 1, 2013 to June 30, 2014;
2. September 15, 2014: $254,664.60 for 2,174 hours of “modification programming” from July 1, 2014 to August 13, 2014.
3. September 29, 2014: $94,677 for 755 hours of “modification programming” from September 1, 2014 to September 19, 2014.

[99] MJL maintains that these invoices were issued pursuant to the Distribution Agreement for work allegedly done at SMI’s request.

[100] Pursuant to the Distribution Agreement, any development work on MJL’s software is addressed at section 3.4, as follows:

3.4. New Functionality and Fixes

Any costs associated with the MJL initiated development to the First Software Program, (whether it be new functionality or related to “bugs” or “fixes”) will be the sole responsibility of MJL. Any requests by SMI for modifications or enhancements to the functionality of the existing First Software Program will be addressed on a case-by-case basis. MJL will price all custom development work by work hours required, once a detailed scope, priority and timeline is defined mutually by both parties. The MJL custom development rate per hour will not exceed $100/hour in the first year of the agreement, $110 per hour in the second year, and $120 per hour in the third year of the agreement. MJL will not change the functionality of the first software program unless both parties mutually agree to such changes. MJL shall advise SMI of any proposed upgrade, modifications or discontinuance and both parties will mutually agree on a launch date for these modifications.

[101] Said section distinguishes between MJL initiated work and that requested by SMI. Where SMI requests modifications or enhancements, the following process must be followed:

1. First, “a detailed scope, priority and timeline is defined mutually by both parties” for any “modification or enhancement”;
2. Second, once the “detailed scope, priority and timeline” is defined and agreed, “MJL will price all custom development work by work hours required”; and
3. Finally, once the price is provided (in hours, with a defined hourly rate), “MJL will not change the functionality of the FIRST software program unless both parties mutually agree to such changes.”

[102] Thus, SMI would pay for modifications it requested once the changes requested were defined as to scope, timing and price by hours required for the work and said price was approved by SMI.

[103] Pursuant to the evidence, Mr. Macdonald admitted that MJL had never submitted to SMI any written scope of work, cost estimate or timeline for any modifications or enhancements he says were made to the software at SMI’s request. He stated that he spoke with Mr. Swail of SMI most evenings, they would talk about change requests and Mr. Swail would know exactly how many people would be needed and how long it would take.

[104] Said testimony contradicts that of Messrs. Swail and Jiwani, who stated that there was never any scope of work, estimate or timeline for enhancements discussed and no discussions on an ongoing basis about costs, scope of work or proposals for work to be done nor approved by SMI for any work to be done.

[105] In cross-examination, Mr. Macdonald stated that he did not issue invoices previously because he was too busy focusing on the “delivery”. He also indicated that SMI had never asked for invoices. This evidence makes no commercial or business sense.

[106] Instead, MJL appears to have proceeded with undefined development work on its software and subsequently issued invoices to SMI for all of its development time, in breach of following the clearly stipulated procedures set forth at section 3.4 of the Distribution Agreement.

[107] The invoices are devoid of any description of work done, scope of work, breakdown of hours per task, individuals working on the tasks, and how many hours each spent on a task.

[108] Based on the testimony of Paige McInnis of MJL, the first invoice that was prepared calculated 40 hours per week for three developers over a period of 34 weeks +3 days, including holidays, for a total of 4,152 hours, with no breakdown of any tasks done, by whom said tasks were done or for how many hours. Ms. McInnis testified that two developers worked full time, but was unable to say whether the third developer, herself, was split with other projects or was also full time. MJL admitted in cross-examination that the inclusion of holidays was an error.

[109] Said work was never sent to nor approved by SMI, as required by the Distribution Agreement.

[110] Moreover, I find the invoices to be inflated and unrealistic. The number of hours are difficult to understand or believe, given the fact that no description of work or breakdown of tasks was presented. As an example, the third invoice, which was for a period of 19 days, was in the amount of $94,677 for 755 hours of “modification programming”.

[111] The invoices were issued by MJL in breach of the clear procedures set forth in the Distribution Agreement, section 3.4.

Issue Three: Did SMI Copy MJL’s Software?

[112] MJL alleges that SMI copied its software. It refined this allegation to indicate that SMI had copied the features and functionalities of its software.

[113] MJL points to software developed by Birchwood, called SimpliFI, and to software of SMI, called UniFI, which had been in development prior to execution of the Distribution Agreement, alleging that SMI had copied features of its iSTAR, and imported them into both SimpliFI and UniFI.

[114] The facts at trial revealed the following.

[115] Neither Custom Connect/SimpliFI nor UniFI belong to SMI.

[116] MJL never provided its software or software code to SMI and, therefore, the allegation regarding copying has no foundation.

[117] Birchwood, an independent dealership network unrelated to iA developed its own software called Custom Connect/ SimpliFI, for its independent, internal use at Birchwood. There was no input for this development from iA. In 2017, iA licensed Custom Connect, but did not pursue development of it, and ultimately shelved it.

[118] The evidence indicated that the developers at Birchwood had never heard of MJL or its software.

[119] While both Custom Connect and iSTAR were beginning to be developed in October 2012, the defendant takes the position that their initial development had nothing to do with SMI or IA. A software developer working on Custom Connect from its inception, Mr. Funk, testified that iA was never involved in directing the design or functionality of Custom Connect, nor did it give Birchwood any functions and features to implement into Custom Connect. The functions for Custom Connect came principally from Birchwood’s primary business stakeholder, Michael Locke, who had the original vision for the application. Mr. Funk testified that iA only provided Birchwood with data about their products. I accept the defendant’s argument in that regard.

[120] Prior to any relationship with MJL, iA had its own software called UniFI. UniFI had several of the basic, generic features also displayed by MJL’s software. Based on the evidence, it would appear that said basic functions were common to a number of platforms that were being developed at that time, including SimpliFI and Symtech, and were not exclusive to iSTAR. The functions alleged to have been copied were known functions, available in other products in the public domain at the material time.

[121] The evidence further indicates that the developers at MJL, who worked on UniFI 2.0, had never heard of MJL or seen its software. UniFI 2.0 was the successor to UniFI 1.0 which launched in 2017, three years after the termination of the Distribution Agreement.

[122] It is of note that MJL does not allege copying or copyright infringement in this action, but rather alleges that SMI independently developed or implemented certain functionalities that may have been included in MJL’s software iSTAR. There is however no concrete evidence to assess such allegations.

[123] At the same time, it appears that MJL is arguing that SMI breached sections 4.6 and 4.7 of the Distribution Agreement by modifying, translating, de-compiling, creating or attempting to create by reverse engineering or otherwise, the software source code from the object code of any software supplied by MJL. There is no evidence to establish this. MJL has not discharged its burden of proof in this regard.

[124] MJL now argues that the slides provided by MJL at SMI’s request for the presentation to Honda were “copied” by SMI and that SMI passed off the new IT platform as its own rather than MJL’s during the presentation.

[125] I do not accept this argument. As explained at trial, the iSTAR platform and fees were presented to Honda as an add-on to the request for the proposal presentation requested by Marsh Canada regarding Honda. Indeed, MJL and SMI discussed the content to be presented prior to the presentation itself. The presentation was not wrongfully or nefariously copied by SMI. It was provided knowingly and willingly by MJL to SMI for the presentation by SMI to Honda at the request of Marsh Canada.

[126] It further argues that the Distribution Agreement required that it also be present for any presentation to an OEMs. This was dealt with and rejected above.

[127] It is trite law that there is no ownership over ideas, concepts or functionality. Copyright does not protect concepts, ideas or functionality: Pyrrha Design Inc. v Plum and Posey Inc., 2022 FCA 7 at para 11; Stevens v Robert Simpson Co., 1964 CarswellOnt 32. There is no assertion of a patent in this case.

[128] There is no confidential information involved in this case. The functionality that was allegedly copied was publicly known and, indeed, presented to dealers as part of the public disclosure when iSTAR was marketed. Thus, the information cannot be considered confidential. And see: sections 7.1(c) and 7.1(d).

[129] Further, some of the “functionality” alleged to have been copied was actually suggested to MJL by SMI prior to the Distribution Agreement. As an example, a “menu selling” feature was proposed to MJL by Stephen Hancock, Performance Specialist at iA on January 20, 2013 with an example of a menu attached. Said example of menu selling sent to MJL is very similar to MJL’s alleged menu selling feature. Indeed, Mr. Macdonald admitted in cross-examination that it was possible that is where MJL got the idea for the functionality of its menu. He further admitted that menus are used in multiple industries, and he had seen menus in his business from the late 1990s, initially manual menus.

[130] I have taken into consideration that UniFI is iA’s software, not that of SMI. The iA software developers, Scott Topham and iA software programmer, Askan Khosrovi, both employees of iA, testified that they did not begin working on UniFI 2.0 until 2015. Indeed, Mr. Topham was not hired by iA until October 2014. Further, Mr. Topham testified that UniFI did not have the same features that were alleged to have been copied. MJL’s software contained a video training platform and follow-up features for aftersale of vehicles. These features are not part of UniFI 1.0 or 2.0. The evidence indicates that other than the menu selling feature, the features alleged to have been copied existed in UniFI 1.0 prior to the Distribution Agreement or do not exist in UniFI 2.0.

[131] I do not agree with the arguments of the plaintiff that the presentations to Hyundai and Toyota, after the Distribution Agreement was terminated, is relevant to the argument of copying.

[132] I am of the view that MJL has failed to establish that SMI breached the Distribution Agreement as alleged, or copied MJL’s software features and functionality.

Misrepresentation/Fraudulent Misrepresentation

[133] MJL submits that SMI knowingly misled MJL regarding its intentions for its own software development. However, the Distribution Agreement does not provide that SMI would not distribute competing products. Further, SMI specifically advised MJL, prior to entering into the agreement, that it could not guarantee that it would not some day develop its own UniFi software features such as a menu, video hosting or CRM component, none of which were unique to iSTAR (see para. 45, above). UniFi was indeed known to MJL and referenced in the Agreement.

[134] The legal test for fraudulent misrepresentation requires that MJL establish the following:

1. A false representation of fact by SMI to MJL;
2. Knowledge that the representation was false, absence of belief in its truth, or recklessness as to its truth;
3. An intention that MJL act in reliance on the representation;
4. That MJL acts on the representation; and
5. That MJL suffers a loss in doing so.

[135] In this case, MJL has not established any of the above. As a result, I find there to be no misrepresentation or fraudulent misrepresentation.

Breach of Confidence

[136] MJL claims damages for breach of confidence. Based on the facts and the evidence before this Court, there was no breach of confidence.

[137] In order to establish breach of confidence, MJL must establish that:

1. it had confidential information which was shared with SMI;
2. it conveyed its confidential information to SMI in confidence and
3. the information was misused by SMI to its detriment.

[138] I note that there is no evidence that MJL provided any information to SMI which was confidential, namely information that is not public property and public knowledge. Based on the evidence, all information provided by MJL to SMI was information that was also publicly available on its website, or would have been distributed to the end-users who purchased access to the software, such as the “Help Document”.

Reliance Damages

[139] MJL also seeks “reliance damages” for breach of contract, including the total amount of development costs incurred by MJL from the inception of the software to the execution of the Distribution Agreement.

[140] Expenses incurred prior to the entry into a contract can only be recovered where the parties had reasonably contemplated that the expenses would likely be wasted if the contract were breached. In this case, the historical expenses were incurred well before any discussions of a distribution agreement between MJL and SMI.

[141] Moreover, the court has not found there to have been any breach of the Distribution Agreement, and, as a result, no reliance damages are awarded.

Conversion

[142] MJL has withdrawn its allegations of conversion.

Damages

[143] As a result, MJL is not entitled to any damages as set forth in the Distribution Agreement or as claimed in its proceedings. It is not entitled to the payment of the invoices, which its damages expert indicated amounted to $773,000. Nor is it entitled to any disgorgement of profits to the date of breach or on an ongoing basis, as claimed, in the amount of $71,400,000 to the end of November 30, 2021 and $1,100,000 per month accruing thereafter.

[144] The plaintiff further seeks damages pursuant to section 4.7, which it argues is “a stipulated remedy” clause. I do not find section 4.7 to be a stipulated remedy clause and, in any event, the plaintiff is not entitled to damages, based on the findings of this Court.

[145] I do not accept the plaintiff’s argument that the Distribution Agreement is unconscionable. I do not accept the argument of the plaintiff that it was unsophisticated, nor that SMI took advantage of it for the reasons stated above. The Distribution Agreement was negotiated over many months, the Agreement was revised numerous times by the parties, and each had legal advice. I do not accept the plaintiff’s argument that the legal advice it obtained was from a Board member and not from an expert in distribution agreements. If that was, indeed, the case, the Corporation, its Board members and the lawyer on the board should have ensured that the Corporation had proper legal advice from an expert in the area prior to entering into the Agreement.

Punitive Damages

[146] The plaintiff further seeks punitive damages. As recognized by the plaintiff, there is a high threshold for punitive damages in a breach of contract case. The actions justifying punitive damages must be conduct that departs markedly from ordinary standards of decency, conduct that is malicious, oppressive or high-handed and that offends the court’s sense of decency. The purpose of punitive damages is not to compensate the plaintiff, but to give the defendant just retribution to deter the defendant and others from similar misconduct in the future.

[147] Even had I found there to have been a breach of contract warranting damages, which I did not, there is nothing in this case which would warrant punitive damages.

[148] In the end, the plaintiff has not established its claims for breach of the distribution agreement and is not entitled to any damages.

Costs

[149] This Court urges that the parties agree upon the damages to be paid in this matter. In the event that the parties are unable to agree to damages, each is to submit his bill of costs in three pages, within 60 days of the release of this decision.

C.J. Brown J. Released: April 3, 2024