Ontario Superior Court of Justice
Court File No.: CV-23-782
Date: 2025-01-08
Between:
Tanya N. Svoboda and Antonella M. Ortiz Colosi, individually and on behalf of all others similarly situated (Applicants)
– and –
Modiface Inc. (Respondent)
Sean Flaherty, for the Applicants
Robin Linley, for the Respondent
Heard: In Writing
Decision on Costs
Justice E. ten Cate
Introduction
[1] On November 12, 2024, I released my decision concerning the Applicants’ request for an order giving effect to Letters Rogatory dated October 26, 2022, issued by the United States District Court for the Northern District of Illinois Eastern Division.
[2] The underlying claim is a class action lawsuit brought by the Applicants against Amazon regarding alleged breaches of Illinois legislation caused by its use of “virtual try on” (VTO) technology. The Respondent, Modiface Inc., is a Canadian corporation which developed and licensed the technology to Amazon; it is not a party to the American litigation.
[3] To advance their case, the Applicants sought production of original source code from the Respondent and requested that it submit to the deposition process in Illinois. The Respondent resisted the Illinois order because it alleged its scope is too broad, requiring it to provide its source code which would have devastating business consequences.
[4] Counsel for the Respondent advised that it was prepared to provide the source code in “compiled” and “obfuscated” form, and that it was prepared to submit to the deposition process provided it was afforded the protections of Rule 34.12 of the Ontario Rules of Civil Procedure. [1]
[5] For reasons set out in my decision, I did not grant the Applicants’ request, however, I ordered Modiface to provide their compiled and obfuscated code to the Applicants and to submit to a deposition as per the order attached at Schedule “A” to my reasons.
[6] Because my order limited the scope of production, I did not immediately order costs of compliance, or the costs associated with responding to the application based upon the materials filed for the hearing on August 19, 2024. In my reasons, I invited written cost submissions which were received on December 10, 2024, from both parties.
Positions of the Parties
[7] In general terms, the Respondent seeks recovery of “compliance” costs of the application on a full indemnity basis fixed in the amount of $74,250 which it says reflects the mid-range of the reasonably anticipated fees and disbursements Modiface will incur.
[8] Additionally, the Respondent seeks substantial indemnity costs of $185,203.05 ($163,596.50 in fees plus HST of $21,267.55 plus disbursements of $339.00). According to their costs outline, all-inclusive costs would amount to $123,620.08 on a partial indemnity basis and $205,807.47 on a full indemnity basis.
[9] Regarding the “compliance” costs, the Applicants take the position that the amount sought is a vague, unparticularized and unsupported “estimate” of legal costs which fails to allow the court to determine its reasonableness or proportionality and should be entirely rejected.
[10] Regarding the costs of responding to the application itself, the Applicants take the position that no costs are payable as per Perlmutter v. Smith. They submit that the quantum of costs sought are excessive and entirely disproportionate to the nature and conduct of the dispute, and well beyond the costs which the parties reasonably might have expected to incur. They suggest that having regard to all the circumstances, it would be fairer and more reasonable to award the respondent costs fixed at $35,000 as per Leach J.’s decision in Aker Biomarine AS v. KGK Synergize Inc..
Analysis
[11] The general indemnity principle that costs should follow the event can be found in Rule 57.01(1)(0.a).
[12] Section 131 of the Courts of Justice Act grants the court discretion when awarding costs: “the costs of and incidental to a proceeding or step in a proceeding are in the discretion of the court, and the court may determine by whom and to what extent the costs shall be paid”.
[13] Rule 57.01(1) outlines several factors the court may consider when exercising its discretion to award costs pursuant to s. 131.
[14] Rules 57.01(4)(c) and 57.01(4)(d) confirm that nothing in those provisions limits the court’s broad discretion to award costs on either a substantial or full indemnity basis.
[15] Although both parties referred to pre-hearing negotiations and offers, no Rule 49 compliant offers were provided to me.
[16] The Applicants provided a copy of an email exchange between counsel including a “without prejudice” email from Respondent’s counsel to Applicants’ counsel dated September 28, 2023, which says, in part:
As we know, the Illinois plaintiffs would never get a production order like this in Ontario against a non-party, and while I agree that fact is not itself determinative of the outcome of the application, I think an Ontario will not require a non-party Ontario based party with no connection to Illinois to produce such highly commercial sensitive information for use in an Illinois class action proceeding that has no Ontario legal equivalent and on terms other than Modiface is prepared to agree upon. (Emphasis in original).
[17] On April 22, 2024, the Respondents made a proposal to provide only the compiled (and obfuscated) code. On May 7, 2024, that proposal was rejected based upon the Applicants’ expert’s advice that such was inadequate.
[18] The Respondent demanded $125,000 to produce the documentation requested, which was countered with lower amounts. Ultimately, the parties were unable to agree on costs.
[19] The Applicants take the position that they obtained most of what they were seeking and that they worked with Modiface to resolve many issues, which “drastically” limited the scope of the application. They submit that Modiface has a “clear interest” in the outcome of the underlying litigation because it raises questions about the legality of its technology.
[20] In my view, based upon the correspondence exchange provided to me, the Respondents were largely successful because I ordered that Modiface produce only compiled and obfuscated code as opposed to the original confidential source code. I also limited the documentary productions and testimony to be obtained from Modiface consistent with Ontario law and attached the terms proposed by the Respondent to my reasons. Therefore, pursuant to Rule 57.01(1)(0.a), costs should follow the event.
[21] The Respondent has proposed “compliance” costs in the amount of $74,250 which is significantly lower than the original request for $125,000. In their submissions they advised that the previous request was revised to reflect the narrower scope of production required because of my order. According to their submissions, this amount represents the mid-point between $63,000 and $85,500 of the reasonably anticipated fees and disbursements Modiface will incur to enforce the Letters Rogatory.
[22] In examining these proposed costs, I note that only $2,500 to $5,000 was allocated for preparation of the obfuscated and compiled code which presumably is not a legal task. The remainder relates to fees associated with the production orders and responsive documents, the discovery process, and communicating with Modiface representatives.
[23] These anticipated costs were based on Canadian counsel’s full indemnity rates of $995.00 per hour for R. Linley (called to the bar in 2002) and $670.00 per hour for A. Irwin (called to the bar in 2023). The substantial indemnity rates were $895.00 and $603.00, and partial indemnity rates were $597.00 and $402.00 respectively.
[24] While I agree with the Respondent that the case law generally supports the proposition that the costs of witnesses examined pursuant to letters rogatory, as strangers to the litigation, should be paid on a full indemnity basis, a “blank cheque” is not appropriate. See Cunix v. Sol Global Investment Corp., 2023 ONSC 4845 at paras. 75 and 87; Scoular v. Detlefsen, 2016 ONSC 4001, and Aker Biomarine, supra, at para. 30. Although courts have consistently recognized the need to compensate respondents for the reasonable costs of compliance, Cunix, supra, at para. 80, citing Aker Biomarine, supra, at paras. 30-31, cost awards on unsuccessful letters rogatory applications have varied, with costs ranging from no costs to full indemnity costs. The appropriate award of costs on such an application will depend on the particular circumstances of each application, considered in light of the principles enumerated by s. 131 of the Courts of Justice Act, Rule 57.01, and the principle of proportionality expressed in Rule 1.04(1.1). Aker Biomarine, supra, at para. 25.
[25] I agree with Applicants’ counsel that while hourly rates charged by law firms in Toronto are generally higher than in other Canadian cities, there are limits to what is reasonable. With no disrespect to Mr. Irwin, he was called to the bar in 2023. It is simply unreasonable to expect the Applicants to pay $670.00 or even $603.00 per hour for a lawyer with one year of experience.
[26] As noted by Leach, J. in Aker Biomarine, supra, at para. 30, costs awarded on a full indemnity basis are still subject to the overriding principle of reasonableness. In my view, costs in the all-inclusive amount of $50,000 are reasonable under the circumstances with respect to future compliance with my order.
[27] I now turn to the costs of responding to the application itself.
[28] In this case, many of the considerations outlined in Rule 57.01 favour a generous cost award to the Respondent. In particular, (1) there is a sensible and fair rationale for providing a non-party with full indemnity for its reasonable litigation expense; (2) the Respondent was largely successful because the main issue was whether the code should be produced in obfuscated or unobfuscated form and that question was decided in their favour; and (3) there is no question that the issues raised in the application were of great importance to the Respondent as an adverse outcome could have effectively gutted their intellectual property.
[29] As Leach J. pointed out in Aker Biomarine, supra, at para. 15, our Court of Appeal has emphasized that awards on a partial indemnity basis generally strike the proper balance as to the burden of costs that should be borne by the “winner”, and that elevated cost awards should be reserved for “rare and most exceptional circumstances”.
[30] In Young v. Young, [1993] 4 S.C.R. 3 McLaughlin J. indicated that elevated cost awards are warranted “only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties”.
[31] I am not persuaded that the conduct of the Applicant rises to the demanding standard of misconduct outlined by the Supreme Court in Young.
[32] Additionally, I was surprised and troubled by the quantum of costs sought by the Respondent given that the law in this area is relatively straightforward, and the evidence not particularly complicated.
[33] I found it disturbing that full indemnity fees incurred by the Applicants totalled $42,764.00 representing a total of 90.6 hours. In contrast, for the same application, Respondent’s counsel spent a total of 223.90 hours which is almost 2.5 times the time spent by Applicants’ counsel. In my view, this is not an amount of costs that the Applicants could reasonably be expected to pay pursuant to Rule 57.01(1)(0.b).
[34] Again, I consider the hourly rates claimed by Respondent’s counsel to be excessive.
[35] The overall goal is to award costs in an amount that is “fair and reasonable for the unsuccessful party to pay in a particular proceeding” (Boucher v. Public Accountants Council (Ontario), at para. 26), keeping in mind Rule 1.04(1.1) which mandates proportionality.
[36] I therefore award costs of responding to the application in the amount of $100,000 inclusive of counsel fees, disbursements and HST.
[37] The grand total of all costs is therefore $150,000 all-inclusive, payable by the Applicants to the Respondent.
Justice E. ten Cate
Released: January 8, 2025
Endnotes
[1] R.R.O. 1990, Reg. 194 made under the Courts of Justice Act, R.S.O. 1990, c. C.43.
Cited Legislation
Cited Case Law
- Perlmutter v. Smith, 2020 ONCA 570
- Aker Biomarine AS v. KGK Synergize Inc., 2014 ONSC 1401
- Cunix v. Sol Global Investment Corp., 2023 ONSC 4845
- Scoular v. Detlefsen, 2016 ONSC 4001
- Isaacs v. MHG International Ltd.
- Foulis v. Robinson
- Young v. Young, [1993] 4 S.C.R. 3
- Boucher v. Public Accountants Council (Ontario)