Date: 19980115
Docket: T-2151-97
BETWEEN:
SIMMONDS CAPITAL LIMITED and
MIDLAND INTERNATIONAL CORPORATION
Plaintiffs
- and -
EUROCOM INTERNATIONAL LIMITED,
UNITEL INTERNATIONAL INC.,
LYLE JONES, JEFF GAWLICKI
and TERRY JONES
Defendants
REASONS FOR ORDER
JOHN A. HARGRAVE,
PROTHONOTARY
[1] Eurocom International Limited ("Eurocom") and Jeff Gawlicki, wish a stay of this Federal Court action, which action seeks, among other things, declaratory and injunctive relief and damages arising out of an allegation that the Defendants purchased old two-way radio parts and products, previously used by the Plaintiff Midland International Corporation ("Midland") and, from these parts and products, the Defendants manufactured and sold two-way radios, bearing the trademark and infringing on the copyright packaging of Midland. Midland, in a separate portion of the Statement of Claim, seeks damages for breach of a license agreement with Eurocom. Eurocom and Jeff Gawlicki refer to an arbitration clause governing disputes arising out of or relating to the agreement between Midland and Eurocom, point to the close connection between Eurocom and the balance of the Defendants and submit the entire Federal Court action should be stayed in favour of an existing arbitration.
[2] For various reasons and particularly because the substantial part of the subject matter of this litigation and the majority of the Defendants do not fall within the scope of the arbitration clause, the motion is dismissed. Before turning to an analysis of my decision to dismiss the motion some pertinent background information is in order.
BACKGROUND
[3] The Plaintiffs, Simmonds Capital Limited ("Simmonds") and Midland, are the suppliers of hand-held two-way radio units, sold in distinctive copyright packaging under the trademark "Midland". At some point, the Plaintiffs granted the right to market these radio units, in Western Canada, to S.C.L. Distributors (Western) Ltd. Subsequently the principles of S.C.L. Distributors, the Defendant Lyle Jones and Charles Gawlicki (since deceased), with the consent of Simmonds, set up a numbered Alberta company, which is now Eurocom, for the purpose of employing their sons, the Defendants Jeff Gawlicki and Terry Jones, through export of two-way radios into eastern Europe. The use of Eurocom, as a vehicle for this marketing, is set out in a License Agreement between Midland and what is now Eurocom, dated 28 December 1993 ("License Agreement"). By the License Agreement Eurocom, which is to pay a license fee and a commission, must buy the radios for the eastern European market from Midland or from Midland's manufacturer.
[4] Difficulties have arisen out of these background facts. The Defendants and particularly Eurocom, say there have been breaches of the License Agreement by Midland, breaches apparently relating to the supply of radio units and to the exclusivity of the market area in eastern Europe.
[5] The Plaintiffs, in a substantial portion of the Statement of Claim, allege that the Defendants have produced counterfeit radio units, under the Midland trademark, packaged in Midland's copyright packaging, being units of a lower quality than those manufactured for and sold under the Midland trademark and have marketed those units into eastern Europe. The Plaintiff, Midland, goes on to claim damages against Eurocom for breaches of the License Agreement, specifically a failure to pay a license fee on a certain minimum number of radio units each year. The Plaintiff, Simmonds, also seeks damages against the Defendant, Lyle Jones who was a director of Simmonds, alleging breach of fiduciary duty.
[6] Accepting these characterizations of the arbitration and of the Federal Court litigation, one must keep in mind various differences between the two proceedings. While both the litigation and the arbitration have similar fact aspects, in that they arise out of the two-way radios, the two proceedings are free-standing, neither depending upon the other: neither proceeding is a derivative of the other. Second, while there are common parties in the litigation and in the arbitration, the Plaintiff Simmonds and the Defendants Unitel International Inc., Lyle Jones, Jeff Gawlicki and Terry Jones are not parties to the License Agreement and its arbitration provision. Finally, while some of the evidence in the arbitration, which arbitration could be completed more quickly than this present action, might be common with that in the litigation, the arbitrators in Missouri have no jurisdiction over the Canadian patent and copyright matters which form the basis of this Federal Court action.
ANALYSIS
[7] I note, in passing, that while Eurocom initially wished to arbitrate in Edmonton, counsel for Eurocom conceded, in argument, that the arbitration should properly be in Missouri. I also note, by reason of the uncommon parties as between the arbitration and the litigation, together with different subject matters, it is of no relevance that the Plaintiffs commenced this action after Eurocom requested arbitration. I realize that Midland has appointed its arbitrator, a proper step, but one that in this instance has no bearing or whether or not the action ought to be stayed.
[8] The arbitration clause, which governs contractual disputes between Midland and Eurocom, is limited and formal. The role of the arbitrators, who shall not have the power of amiable compounders to abate the strictness of the law in favour of natural equity, is limited by section 9.01 of the License Agreement, the relevant portion of which provides that:
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"... any dispute, controversy or claim arising out of or related to this Agreement or any breach thereof shall be resolved by arbitration in accordance with the existing Rules of Conciliation and Arbitration of the International Chamber of Commerce, as modified hereby." |
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The balance of the arbitration provisions, which provide for a conclusive final determination, are largely procedural.
[9] The arbitration provision in this instance is not mandatory, in the sense, for example, of a submission to arbitration pursuant to the Commercial Arbitration Code under the Commercial Arbitration Act, R.S.C. 1985 c. 17. Here the Court has discretion whether or not to order a stay. However, there is the basic principle: it is in the interest of justice that contractual undertakings, such as an agreement to arbitrate, be honoured. Mr. Justice Pratte put this forcefully in The Sea Pearl v. Seven Seas Dry Cargo Shipping Corporation of Santiago, Chile, [1983] 2 F.C. 161 at 176:
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"Prima facie an application to stay proceedings commenced in the Federal Court in defiance of an undertaking to submit a dispute to arbitration or to a foreign court must succeed because, as a rule, contractual undertakings must be honoured." |
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Mr. Justice Pratte goes on to point out that to depart from the rule there must be strong reasons leading to a conclusion that it would be unreasonable or unjust to keep the Plaintiff to the promise made with the Defendant.
[10] I would add to this another exception, that a court may analyze a claim in order to determine whether the matter said to be in dispute falls within the scope of the disputes and differences to be decided under the arbitration provision, a concept neatly put by Lord McMillan in Heyman v. Darwins Ltd. [1942] 1 All E.R. 337 (H.L.):
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"Where proceedings at law are instituted by one of the parties to a contract containing an arbitration clause and the other party, founding on the clause, applies for a stay, the first thing to be ascertained is the precise nature of the dispute which has arisen. The next question is whether the dispute is one which falls within the terms of the arbitration clause. Then sometimes the question is raised whether the arbitration clause is still effective or whether something has happened to render is no longer operative." (page 345) |
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[11] While Midland and Eurocom should, as a general rule, be held to their agreement to arbitrate, the rights of the balance of the Defendants, one of whom seeks a stay, is determined on another basis. In the case of a Defendant in their situation, the power to grant a stay should be exercised sparingly and then only in the clearest of cases. Jeff Gawlicki has the onus of showing that a continuance of this Federal Court action would be unjust and not cause any injustice to Midland and to Simmonds. Moreover, the stay should be granted only where it may be fully effective or where it applies to all parties. These concepts, which are well established, are touched on by Mr. Justice Rothstein in Figgie International Inc. v. Citywide Machine Wholesale Inc. (1993), 50 C.P.R. (3d) 89 at 92 (F.C.T.D.).
[12] As I understand the position of the Defendants who bring this motion it is that Midland and Eurocom have an agreement to arbitrate, which should result in a stay of their portion of the Federal Court action and indeed, of the whole action, the issues being identical in both the action and in the arbitration, except as to an injunction being sought in the Federal Court action, for if the result of the arbitration does not favour Eurocom, then the Plaintiffs may apply for summary judgment in the Federal Court. The fallacies with this argument are that only one of the Defendants is a party to the arbitration and the issues in the arbitration and in the litigation overlap at only one point, being a peripheral claim by Midland against Eurocom for breach of the License Agreement.
[13] Counsel for the Plaintiffs submits I should look at the differences between the litigation claim and the arbitration claim. The appropriate starting point is the grant under the License Agreement to Eurocom, an exclusive right to use the Midland trademark in a designated eastern European market area, with Eurocom to purchase all of its requirements (with minimum purchases in specified years) from Midland, the agreement to run indefinitely, subject to certain cancellation privileges and obligations.
[14] Eurocom's complaint for arbitration is not only that it has had ongoing difficulties obtaining product from Midland to sell into the eastern European territory allocated to it under the License Agreement, but also that Midland has breached the License Agreement both by licensing another, American Digital Corporation, to sell Midland product into Eurocom's territory and by permitting other licensees to sell Midland product in Eurocom's territory: see paragraphs 3 and 4 of the Affidavit of Jeff Gawlicki, sworn 10 November 1997. These items of dispute are clearly within the scope of the arbitration provision in the License Agreement, that is they fall within "any dispute, controversy, or claim arising out of or relating to this Agreement or any breach thereof ..." (section 9.01 of the License Agreement).
[15] In contrast, as I have already noted, the litigation is largely concerned with the production of counterfeit radio products, the copying of some of Midland's product numbering, the purchase of old Midland parts and products, assembly of those items in Japan into two-way radios identical in appearance to Midland's units and then sale of the counterfeit product in Canada to Eurocom and to others. As a result of all of this the Plaintiffs allege there has been an infringement of copyright packaging and of users' manuals, being an infringement of the Plaintiffs' rights under sections 13 and 27 of the Copyright Act: see paragraphs 13, 14 and 23 of the Statement of Claim. Further, these competing products, manufactured and sold by the Defendants, bear the Midland trademark, without the permission of the Plaintiffs. In this regard the Plaintiffs plead rights, remedies and protection pursuant to sections 7, 19, 20 and 22 of the Trademark Act. These portions of the Statement of Claim, which relate to allegations of production and sale of counterfeit products and which rely on the Copyright Act and the Trademark Act, are clearly outside of the License Agreement. To elaborate on this concept, the submission to arbitration in this instance is as to "... any dispute, controversy or claim arising out of or relating to this Agreement or any breach thereof...". The Trademark Act and Copyright Act points which Midland wishes to litigate extend beyond the rights and duties created by the License Agreement. Only if a dispute meets the test for a submission, that is if Midland relies on the existence of the License Agreement to create the claim, ought it to be arbitrated. Here Midland does not require the existence of the License Agreement to create its cause of action.1 Further, trademark, copyright and counterfeit product aspects are beyond the strict jurisdiction of the arbitrators, for by section 9.03 of the License Agreement the arbitrators must apply the law strictly and may not try to enlarge their jurisdiction by compromising the Copyright Act and Trademark Act claims through some equitable process. Thus, it would be improper to stay these portions of the Statement of Claim, paragraphs 1 through 27.
[16] The balance of the Statement of Claim, paragraphs 28 through 33, which for the most part specifically deals with the License Agreement, stands on a different footing. This portion of the Statement of Claim sets out breaches of the Licensing Agreement by reason of a failure on the part of Eurocom to pay the required License fee based on minimum purchases, a failure to make specified minimum purchases and a failure to purchase exclusively from the Plaintiff Midland, as a result of which the Plaintiffs have suffered damage and the Defendants have realized improper gains. This section of the Statement of Claim falls, substantially, within the ambit of the arbitration clause and thus, unless there are strong reasons to the contrary, which there are not, should be dealt with in the arbitration forum. I recognize paragraph 30 of the Statement of Claim does touch on infringement of the Midland trademark, but that is merely background, for it is dealt with in substance in the portion of the Statement of Claim dealing specifically with infringement of the Midland trademark.
[17] This resulting state of affairs, an arbitration in Missouri and litigation in the Federal Court, is unfortunate. It will be costly. However it is not as if duplicate proceedings will take place. While there will be similar factual aspects, there is nothing the arbitrators may properly find or determine which will result in an inconsistent outcome, or have any real bearing on the present action, or impinge on the present action, for the real substance of this Federal Court proceeding involves counterfeit goods, and Trademark Act and Copyright Act violations, not contractual breaches of the Licensing Agreement.
[18] I have rejected the concept of a stay in order that all the parties might be referred to arbitration for two reasons. First, the trademark and copyright aspects of the claim are beyond the scope of the arbitration. Second, I have no authority to order all the parties to arbitrate unless all consent, which the Plaintiffs do not.
[19] I have also considered whether there is any value in staying the action because the individual Defendants are said to be the directing minds of the corporate Defendants. The most evident answer is that the outcome of the arbitration will not directly touch either upon the individual Defendants or upon Unitel International Inc. for those Defendants will neither participate in the arbitration as parties nor be bound by any decision of the arbitrators. In short, arbitration will effectively resolve only some of the claims between Midland and Eurocom, but will not assist with the resolution either of all of the claims by Midland against Eurocom or of the Plaintiffs claims against those who are not parties to the License Agreement. So far as the Defendant, Jeff Gawlicki, is concerned, he has not met the onus of showing this is a clear case for a stay, a situation in which continuance of the action would be unjust. Moreover, to delay remedies to the Plaintiffs, arising out of infringement, to no end, would be unjust.
CONCLUSION
[20] The Plaintiffs, in the absence of an applicable contractual bar to litigation, are entitled to select their forum. There is no abuse and no call for a stay where there are separate causes of action, one group of causes of action which clearly fall to be arbitrated in Missouri and another group which does not fall within the submissions to arbitration. Merely because some of the parties and some of the evidence are and will be common to both proceedings does not call for a wholesale stay of this action.
[21] There is no doubt that the License Agreement is mentioned in this litigation and indeed, underlies the whole of the arbitration. But this Federal Court action is primarily one for trademark and copyright infringement and for the consequent injunctive relief. Further, and this is a point touched upon in Micromar International Inc. v. Micro Furnace Ltd. (1989), 23 C.P.R. (3d) 214 at 218 (F.C.T.D.) and in Biologische Heilmittel Heel GmbH et al. v. Acti-Form Ltd. et al. (1996), 64 C.P.R. (3d) 198 at 202 and following (F.C.T.D.), there may be similar evidence in both the action and in the arbitration, but with the evidence being tendered in respect of different causes of action, there is no reason to stay this Federal Court proceeding. The Federal Court action, other than the portion of the Statement of Claim dealing with the License Agreement, paragraphs 28 - 33, may proceed.
[22] The Plaintiffs shall have 14 days within which to make the required amendments and any consequential amendments to their Statement of Claim. Here I would note that there is some useful background information in paragraphs 28, 29 and 30: it would be appropriate to include that information at an appropriate place in the Amended Statement of Claim. The Defendants shall have 30 days within which to file their defences.
[23] I thank counsel for good presentations. Costs will be in the cause.
(Sgd.) "John A. Hargrave"
Prothonotary
Vancouver, British Columbia
January 15, 1998
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT FILE NO.: T-2151-97
STYLE OF CAUSE: Simmonds Capital Limited and
Midland International Corporation
v. Eurocom International Limited et al.
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: November 19, 1997
ORDER AND REASONS FOR ORDER BY: Mr. John A. Hargrave, Prothonotary
DATED: January 15th, 1998
APPEARANCES:
Mr. Neil Belmore for the Plaintiffs
Mr. Grant Currie for the Defendants,
Unitel International Inc.;
Lyle Jones and Terry Jones
Mr. Glen Kosak for the Defendants,
Mr. Derek Spitz Eurocom International Limited
and Jeff Gawlicki
SOLICITORS OF RECORD:
Gowling, Strathy & Henderson
Toronto, Ontario for the Plaintiffs
Spitz & Carr
Edmonton, Alberta for the Defendants,
Eurocom International Limited
and Jeff Gawlicki
Robertson Stromberg for the Defendants,
Saskatoon, Saskatchewan Unitel International Inc.;
Lyle Jones and Terry Jones
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1 As an example of this sort of analysis, see Kaverit Steel and Crane Ltd. v. Kone Corporation et al. (1992), 40 C.P.R. (3d) 161 at 167 - 169, a decision of the Alberta Court of Appeal.
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