Blazik v. Brown, docket T-2582-94

Date: 20000221

Docket: T-2582-94

BETWEEN:

     LOUISE BLAZIK and

     TRAVEL TRAINING CAREER CENTRE LTD.

     Plaintiffs

     - and -

     JUDY BROWN, RUDOLPH NAREEN, 995941 ONTARIO LTD.,

     980969 ONTARIO LIMITED, 907687 ONTARIO INC., and

     915652 ONTARIO LTD.

     Defendants

     REASONS FOR JUDGMENT

DUBÉ J.:

[1]      This appeal is from the Report of Referee Peter A.K. Giles, Associate Senior Prothonotary dated July 16, 1998, by which he assessed the damages of the plaintiffs ("Travel Training") against three of the Ontario numbered defendants.

1. The Facts

[2]      Travel Training operates private vocational schools specializing in travel and tourism and is owned by the plaintiff Louise Blazik ("Blazik"). The defendant 907687 Ontario Inc. ("Ontario Inc.") operates the International Institute of Travel, a private vocational school in competition with Travel Training. The owner is defendant Rudolph Nareen ("Nareen").

[3]      Ontario Inc. has been located since 1987 in Toronto and has three franchises, in Mississauga, Scarborough and Brampton. All the locations of Ontario Inc. offered a diploma program in Travel and Tourism consisting of six course modules. In addition, some of the locations offered a Flight Attendant Diploma. Fees were paid by the students for either the entire diploma program or on a per module basis.

[4]      The defendant Judy Brown was employed by Travel Training as a teacher from the Fall of 1989 until April 1993 after which she was employed by Ontario Inc. as a teacher up to October 1994. When Judy Brown arrived at Ontario Inc. that defendant was in the process of improving its teaching material and she offered to provide and did provide teaching material which were subject to Travel Training's copyright. Ontario Inc. caused these materials to be printed and included in books of which 1,000 copies were printed. Some of these books were used in the teaching operations of Ontario Inc. and some were sold to its franchisees namely Scarborough and Mississauga.

[5]      On November 14, 1994, Jerome A.C.J. of this Court (as he then was) rendered judgment by default to the plaintiffs declaring that the plaintiffs are the sole owners of the copyright in the literary work entitled "Travel Course Materials" and the defendants have infringed the copyright. He adjudged that the plaintiffs are entitled to damages and profits. He appointed Mr. Giles as a referee "for the purpose of determining the amount of damages, including punitive damages, and the amount of profits to which the plaintiffs are entitled".

[6]      On July 16, 1998, Mr. Giles released his report which is the subject of the present appeal. He assessed damages against Ontario Inc. at $90,993.53 plus costs of $21,449 (such costs being joint and several with the other defendants); against defendant Mississauga at $15,541; against Brampton at $15,375. The finding against Scarborough is not under appeal.

[7]      It is worthy of note that no defendant filed a defence or responded to or attended upon the motion for summary judgment before Jerome A.C.J. and no defendant appealed against his November 14, 1994 judgment. Judy Brown moved to set aside the summary judgment but her motion was dismissed by Wetston J. on January 16, 1995. The remainder of the defendants filed a separate motion to set aside the summary judgment but that motion was adjourned sine die on December 1, 1994, and was never brought on for hearing. Thus, the instant hearing before me is limited to the assessment of damages. The defendants Ontario Inc., Mississauga and Brampton are the only three appellants involved in the instant appeal.

2. Findings of the Referee

[8]      According to the defendants in their written representations, the Referee made the following fifteen findings:

a.      The Plaintiffs' copyright was infringed by the Defendant IIT Toronto in preparing printed materials and using those printed materials in the teaching of courses, and by the defendant Judy Brown providing and using other copyright material when teaching, and by the remaining corporate defendant making use of a textbook which had been prepared incorporating the infringing materials.

b.      All courses taught by the defendant Judy Brown, while employed at IIT Toronto, were taught using infringing materials.

c.      Infringement by IIT Toronto occurred, firstly in preparing the textbook, secondly in using the textbook, and thirdly in selling the books to franchisees.

d.      The "program" was the item for which a charge was made to the students and, while the infringed material was used in one of the six course modules, that course module itself consisted of more than supplying the text.

e.      The comparative method of determining profit attributable to infringement was inapplicable since the proper book to use for comparative purposes would be the book which the defendant IIT Toronto was going to create but did not.

f.      The revenue made by infringement, so far as the courses were concerned, was one-sixth of the fees paid by the students for their diploma program.

g.      The financial statements of the Defendants were not deemed appropriate for purposes of the reference hearing.

h.      It was necessary to find the expenses of the Defendants which were properly deductible by referring to original invoices, and without such invoices expenses were not properly deductible.

i.      Rent expenses should be allocated as between the various aspects of the Defendants businesses (the course program, its franchising in Canada, its international aspects, and a flight attendant training program) and rent expenses should therefore be divided into eight parts, and only one part thereof should be deductible.

j.      Advertising expense for IIT Toronto should be divided into seven parts, and only one part thereof should be deductible.

k.      Stationary expenses and course materials (other than the books in question) for IIT Toronto were not deductible.

l.      Management fees, travel expense and professional fees (apart from this proceeding) paid by IIT Toronto are not deductible.

m.      The estimated retail value of $50 per book is the proper value to place on the infringing books, in determining damages for conversion.

n.      It is appropriate to award a lump sum of $10,000 against the defendant IIT Toronto on account of damages for loss of reputation, damages for loss of business opportunities, damages at large and negligence.

o.      With respect to the defendant IIT Brampton, it is reasonable to allocate one half of the revenues derived from the two courses where infringing material was present, in determining the profits of that defendant.

3. The Scope of the Appeal

[9]      In Reading & Bates Construction Co. v. Baker Energy Resources Corp.¹, the Federal Court of Appeal dealt with an appeal from a Referee's Report on accounting of profits under Rule 506 (now Rule 163). In its analysis of the role of the Court on such an appeal, the Federal Court of Appeal established several basic principles.

[10]      The reviewing judge should not interfere with findings of law and fact unless a Referee has committed some error of law, or findings of fact are wrong in that they were made in a perverse or capricious manner, or as the result of some palpable and overriding error. The exercise of the Referee's discretionary power ought not to be disturbed unless it is clearly wrong, i.e., it is based upon a wrong principle or a misapprehension of the facts, or unless it raises questions vital to the final issue of the case. A judge who reviews findings of fact based upon an assessment of credibility made by a referee who has heard witnesses is not at liberty to reverse those findings and substitute his own views for those of the Referee.

[11]      In its written and oral representations counsel for the defendants, over and above the fifteen specific findings of the Referee under attack, raised seven different issues some of which are very general and others deal with specific findings. Some of these issues are indirect attacks on the pronouncement of the judgment and ought to have been made before Jerome A.C.J. and not at this stage of the proceedings. For instance, issue number 1 alleges that the Referee "erred in not finding that the plaintiffs ought to be disentitled to their claim for damages, since they themselves condoned and actively participated in copyright breaches in the production of their own material". That issue has been decided by the judgment. The role of the Referee is to assess the damages and not to deal with an alleged contributory participation by the plaintiffs in the infringement.

[12]      I will therefore address the fifteen findings in the same order as outlined by the defendants.

4. Review of the Referee's findings

[13]      Finding (a) - The Plaintiffs' copyright was infringed by the Defendant IIT Toronto (Ontario Inc.) in preparing printed materials and using those printed materials in the teaching of courses, and by the defendant Judy Brown providing and using other copyright material when teaching, and by the remaining corporate defendants making use of a textbook which had been prepared incorporating the infringing materials.

[14]      Decision - The finding of infringement of the plaintiffs' printed materials has already been made by the default judgment. Not reviewable.

[15]      Finding (b) - All courses taught by the defendant Judy Brown, while employed at IIT Toronto, were taught using infringing materials.

[16]      Decision - This finding is merely a logical conclusion from what the Referee wrote in paragraph 4, namely that Judy Brown used "her notes" which consisted of materials which she had accumulated since she started teaching in a Travel Agency Business. Those materials "were included in the plaintiffs' copyright materials and were held to have infringed". This matter has already been decided. Not reviewable.

[17]      Finding (c) - Infringement by IIT Toronto occurred, firstly in preparing the textbook, secondly in using the textbook, and thirdly in selling the books to franchisees.

[18]      Decision - In his paragraph 5 the Referee deals with the measurement of profit resulting from the infringement and notes that the infringing material was used in three ways. It is common ground that the textbook entitled "Travel Agency Operations" was used by Ontario Inc. and sold by it to Mississauga who also used that textbook. Brampton also used portions of the textbook in two of its courses. These are the acts which gave rise to the default judgment and the reference on damages and profits. Not reviewable.

[19]      Finding (d) - The "program" was the item for which a charge was made to the students and, while the infringed material was used in one of the six course modules, that course module itself consisted of more than supplying the text.

[20]      Decision - Still in his paragraph 5 the Referee states that the program was the item for which a charge was made to the students and that the infringed material was used in one of the six courses. He adds that "the services of an instructor at least were supplied in addition to the text and those instructors may have supplemented the textual material". It cannot be said that these findings of fact were made in a perverse or capricious manner as they appear to reflect the situation. Not reviewable.

[21]      Finding (e) - The comparative method of determining profit attributable to infringement was inapplicable since the proper book to use for comparative purposes would be the book which the defendant IIT Toronto was going to create but did not.

[22]      Decision - This is really an attack by the defendants against the comparative method used by the Referee. In his paragraph 6 the Referee notes that counsel for the defendants submitted that the correct way to determine the profit attributable to the infringement was to compare the profit made when infringing with the profit that would have been made if there had been no infringement. He notes that this was the method used in Siddell v. Vickers², an old patent case. The Referee decided that the comparison method was not the correct one. He pointed out in his paragraph 6 that "the evidence is that the defendant Toronto was determined to create a new instruction book and instead of creating one of its own authorship, elected to use the infringing material. The proper book to use for comparative purposes would be the book which Toronto was going to create but did not. Because that book was never created, it is not possible to determine the profit to be made using it. A comparative method can therefore not be used". This Court held in Wellcome Foundation v. Apotex³, a rather recent decision, that the differential cost accounting approach and not the comparative method is now the proper approach. Consequently, I cannot find that the Referee erred in law when he ruled in accordance with a very recent decision of this Court and did not follow an old English case dating back to the time of the industrial revolution. Not reviewable.

[23]      Finding (f) - The revenue made by infringement, so far as the courses were concerned, was one-sixth of the fees paid by the students for their diploma program.

[24]      Decision - In his paragraph 7 the Referee wrote that "the amounts paid by the students who took the courses which included the infringing materials were paid for those courses and five other courses and for a graduation ceremony and job finding assistance after graduation". He considered that the graduation ceremony and the job finding advice to be expenses incurred in connection with the provisions of the education of these students and properly divisible among the six courses making up the education of the students. Thus, he concluded that the revenue made by infringement was 1/6 of the fees paid by the students for their diploma program. It would appear that each student paid separately for the graduation expenses, over and above the course fees. Reviewable.

[25]      Finding (g) - The financial statements of the Defendants were not deemed appropriate for purposes of the reference hearing.

[26]      Decision - In his paragraph 8 the Referee writes that Ontario Inc. has produced financial statements from which it is purported that expenses may be properly deductible from the revenue, to arrive at the profit. He notes that the financial statements have been seen by an independent chartered accountant who concluded that: "readers are cautioned that these statements may not be appropriate for their purposes. They will be for corporate income tax purposes". The Referee found those statements not to be appropriate for the purposes of this reference. He gave two examples, the most glaring of which is the inclusion as an expense under the hearing "course materials" of the Canadian equivalent of a sum of "47,000 paid for an investigation conducted with respect to the possibility of opening a school in the United Kingdom. He cites as an second example "the disappearance of revenue and expense when the concept of cost recovery is employed". This is clearly a finding of fact made in the Referee's discretionary power and there is no evidence that it was made in a perverse or capricious manner, or as a result of some palpable overriding error. Not reviewable.

[27]      Finding (h) - It was necessary to find the expenses of the Defendants which were properly deductible by referring to original invoices, and, without such invoices, expenses were not properly deductible.

[28]      Decision - The Referee states in his paragraph 9 that the plaintiffs have retained their own chartered accountant who investigated the background materials provided by the defendants. The accountant gave evidence that "he was unable to justify the figures shown in the defendant Toronto's accounts because he did not have the background material". In some cases the background material could not be found. In addition, there were some 62 adjusting entries which were not explained. Clearly, the onus of establishing expense is on the defendants. Under the circumstances, the Referee was justified in arriving at that conclusion. Not reviewable.

[29]      Finding (i) - Rent expenses should be allocated as between the various aspects of the Defendants businesses (the course program, its franchising in Canada, its international aspects, and a flight attendant training program) and rent expenses should therefore be divided into eight parts, and only one part thereof should be deductible.

[30]      Decision - In paragraph 10, the Referee writes that some expenses such as rent of the premises are obviously in part attributable to legitimate expenses. Ontario Inc.'s operations included not only the program employing the infringing material but the whole franchising operation in Canada in relationship with companies in Holland and the United States. In the Referee's view, rent expenses should be allocated as between these various operations. He therefore divided the rent expense by eight. He included advertising for which there were vouchers. In my view, this is a reasonable exercise of the Referee's discretion. Not reviewable.

[31]      Finding (j) - Advertising expense for IIT Toronto should be divided into seven parts, and only one part thereof should be deductible.

[32]      Decision - In his paragraph 12, the Referee says that he disallowed a $10,507.64 hotel bill in Amsterdam. He concluded by stating that he was unable to distinguish between advertizing related to the six courses and advertising for the travel agent course so he divided the allowed amount for advertizing by seven to arrive at the sum of $14,928.47. This was a reasonable exercise of his discretion. Not reviewable.

[33]      Finding (k) - Stationary expenses and course materials (other than the books in question) for IIT Toronto were not deductible.

[34]      Decision - In his paragraph 13, the Referee says that management fees, stationary expenses and travel expenses are not deductible. There appears to be no satisfactory explanation for that finding. In my view, he should have used the same formula as for advertising and divide the allowed amount by seven. Reviewable.

[35]      Finding (l) - Management fees, travel expense and professional fees (apart from this proceeding) paid by IIT Toronto are not deductible.

[36]      Decision - As mentioned above, he should have allowed one seventh (1/7) to the course in question. Reviewable.

[37]      Finding (m) - The estimated retail value of $50 per book is the proper value to place on the infringing books, in determining damages for conversion.

[38]      Decision - In his paragraph 16, the Referee deals with damages for conversion and finds that the 25 books not returned to the plaintiffs have been converted and the plaintiffs are entitled to "their value". He accepts that the actual costs of each book was something less than $7 a book, although the retail value of some similar texts were shown to be in the $50 dollar range. He notes that the plaintiffs had no intention of selling the infringed material and yet he finds that the proper value to put on these books is $50.00 for each book. In my view, that is an error. If neither of the parties intended to sell the books, the retail value is not to be taken in consideration. The actual cost of $7 a book should have been assessed for the 25 books not delivered to the plaintiffs. Reviewable.

[39]      Finding (n) - It is appropriate to award a lump sum of $10,000 against the defendant IIT Toronto on account of damages for loss of reputation, damages for loss of business opportunities, damages at large and negligence.

[40]      Decision - In his paragraph 17, the Referee finds that there is no evidence as to damages for loss of reputation, business opportunity or damages at large capable of quantification. He agrees that there is a degree of irritation and time loss. He notes that "there was no deliberate intent to infringe on the part of Toronto". He writes that the defendant Ontario Inc. "was negligent in not enquiring why Brown happened to have a disk from which a book could be produced". He awards $10,000 for all damages exclusive of the damages for conversion. In my view, that amount was within his discretion. Not reviewable.

[41]      Finding (o) - With respect to the defendant IIT Brampton, it is reasonable to allocate one half of the revenues derived from the two courses where infringing material was present, in determining the profits of that defendant.

[42]      Decision - In his paragraph 20, the Referee notes that Brampton did not use any of the books but only ten pages and "used 5 pages of notes in each of two courses". He concludes that "these notes infringed and contaminated the two courses". He writes that "a Referee should make a reasonable, generous to the plaintiffs, estimate". So he uses a revenue of one half of that derived from the two courses, to give a revenue attributable to the infringement of $18,975 from which he deducts $3,600 for instructor's fees. "The profit must therefore stand at $15,375". He does not see any evidence that the use of these 10 pages has caused the plaintiffs any damage and does not award nominal damages. That calculation, he writes, is based on one half of the revenues derived from the two courses. Yet he assessed the damages payable by Brampton at $15,375 (for five pages of notes on two courses). This is clearly a palpable error. Reviewable.

5. Profits Attributable to Infringement

[43]      The profits attributable to infringement are the revenues generated by student fees for the course in question, less the expenses. The relevant expenses must include the fractions of the total expenses of the school as apportioned by the Referee for the particular course. But student fees for that course were not paid exclusively for the Travel Course Materials, they were paid for the course itself which includes teaching by a qualified instructor, other materials and class room facilities. Consequently, the profits must be apportioned accordingly. It is not easy to determine a precise apportionment. In my view, fairness would dictate that the percentage of profits attributable to the Travel Course Materials be no more than 50%. Thus, the findings of the Referee on profits attributable to the infringing material are reviewable.

6. Disposition

[44]      Under Rule 163(3) the Court may confirm, vary or reverse the findings of the report of a referee and deliver judgment or refer it back to the referee, or to another referee for further enquiry and report. Consequently, I will refer the matter back to another Referee to dispose of the matter in accordance with my reasons for judgment and to report. Since the defendants have been partly successful in their appeal, each party will bear its own costs of the appeal.

OTTAWA, Ontario

February 21, 2000

    

     Judge

__________________

     ¹      (1994), 58 CPR (3d) 359 at 364.

     ²      (1892) 9 R.P.C. 152 (C.A.).

     ³      (1997), 82 C.P.R. (3d) 466 at 480-482 (F.C.T.D.).