Norac Systems International Inc., docket T-1973-95

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docket T-1973-95

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T-1973-95

Ottawa, Ontario, this 7^th day of March, 1997.

Present: The Honourable Mr. Justice Nadon

Between:

NORAC SYSTEMS INTERNATIONAL INC.,

Plaintiff,

and

PRAIRIE SYSTEMS AND EQUIP. LTD. and

CALGARY SCALE SERVICES (1988) LTD. c.o.b. as

CALGARY SCALE SERVICES LTD.,

Defendants.

UPON MOTION on behalf of the plaintiff for an Order:

1. Allowing the plaintiff to join as additional party defendants the individuals William Elliott and Marcel Fendelet and Massload Technologies, a partnership and to amend its Amended Statement of Claim as detailed below and shown in the proposed Twice Amended Statement of Claim attached to the Notice of Motion as Schedule "A":

(i) To amend the style of cause of this action to add as defendants thereto William Elliott, Marcel Fendelet and Massload Technologies, a partnership:

(ii) To add paragraphs 3a, 3b and 3c as follows:

3a. The defendant William Elliott (hereinafter referred to as, "ELLIOTT") is an individual residing at 507 Spencer Crescent, Saskatoon, Saskatchewan, S7K 7T1. The defendant ELLIOTT is the President of the defendant PRAIRIE SYSTEMS.

3b. The defendant Marcel Fendelet (hereinafter referred to as, "FENDELET") is an individual residing at 447 Peberdy Court, Saskatoon, Saskatchewan, S7K 7N3. The defendant FENDELET is the Vice-President and Secretary-Treasurer of the defendant PRAIRIE SYSTEMS.

3c. The defendant Massload Technologies, a partnership (hereinafter referred to as "MASSLOAD") is registered in the province of Saskatchewan as a business partnership and shares a place of business at 301-47^th Street East, Saskatoon, Saskatchewan with the defendant PRAIRIE SYSTEMS. The defendants ELLIOTT and FENDELET are registered as the only partners of the defendant MASSLOAD.

(iii) To change reference to "the defendant PRAIRIE SYSTEMS" to "the defendant MASSLOAD and/or PRAIRIE SYSTEMS" throughout the Amended Statement of Claim together with any consequential amendments;

(iv) To further add paragraphs 11a and 11b as follows:

11a. The defendants ELLIOTT and FENDELET without the consent of the plaintiff NORAC, have made or caused to be made and make or cause to be made mobile weighing systems and weighing cells for use in mobile weighing systems and have used, sold and offered for sale such mobile weighing systems and weighing cells in Canada. More particularly, said individual defendants have designed, made, used and sold the aforesaid ML1200 modular weighing system of the defendant MASSLOAD and/or PRAIRIE SYSTEMS.

11b. The defendant ELLIOTT has, personally and on behalf of the defendant MASSLOAD and/or PRAIRIE SYSTEMS, deliberately, wilfully and knowingly engaged in the designing, making, marketing and selling of weighing cells and modular weighing assemblies including the ML1200 weighing cells of the defendant MASSLOAD and/or PRAIRIE SYSTEMS.

(vi) To amend paragraph 20(b), in part, as follows:

(b) interlocutory and permanent injunctions restraining each of the defendants, their respective officers, directors, servants, agents, and partners, as the case may be, and all those persons over whom they exercise control from:

2. If leave to join party defendants is granted, allowing the plaintiff to dispense with personal service of its Twice Amended Statement of Claim and service of all other previous pleadings on the joined defendants and allowing the plaintiff to serve its Twice Amended Statement of Claim on all defendants by service upon the solicitors of record for the present defendants.

3. If leave to join party defendants is granted, directing that each of the defendants including any joined defendants must file and serve any pleadings in response to the plaintiff's Twice Amended Statement of Claim including any Affidavits of Documents as may be applicable within ten days of the receipt of the plaintiff's Twice Amended Statement of Claim amended pursuant to any Order received.

4. Directing the defendants Prairie Systems and Equip. Ltd. and Calgary Scale Services (1988) Ltd. to each file and serve a more accurate or complete affidavit of documents respectively within ten days of the date of any Order received.

ORDER AND REASONS FOR ORDER

The plaintiff, by its motion, firstly seeks to obtain an order directing the defendants Prairie Systems and Equip. Ltd. ("Prairie Systems") and Calgary Scale Services (1988) Ltd. ("Calgary Scale") to file and serve more accurate or complete affidavits of documents. Prior to the hearing of this motion, the defendant Calgary Scale filed a supplementary affidavit of documents. That affidavit is that of Christopher William Hood, filed on February 27, 1997. As a result, no one appeared on behalf of Calgary Scale at the hearing of the motion. The plaintiff was satisfied with this supplementary affidavit of documents.

With respect to the defendant Prairie Systems, it has refused to file a supplementary affidavit of documents. Specifically, the plaintiff seeks to force Prairie Systems to list in Schedule 1 of its affidavit all documents relating to sales of ML1200 Massload weighing scales and mobile weighing cells effected by Prairie Systems to its customers. In the affidavit of documents filed by Prairie Systems on January 28, 1997, the documents sought by the plaintiff appear in Schedule 2 thereof as documents in respect of which Prairie Systems claims a privilege. The entry which appears in Schedule 2 is the following: "Sales invoices directed to specific customers of Prairie Systems and Equip. Ltd.".

As appears from the entry in Schedule 2, the defendant Prairie Systems objects to the production of the sales invoices on the ground that there is a privilege attaching to the documents. As I indicated to counsel during the hearing, it is my view that no such privilege exists. Counsel for Prairie Systems argued that it would not be fair to force his client to disclose these documents as the information which appears therein might be used by the plaintiff for purposes other than obtaining information relating to possible infringement or for determining the amount of financial compensation in the event of a successful lawsuit. Specifically, Prairie Systems is concerned that the plaintiff might use the information to contact Prairie Systems" clients and also to obtain Prairie Systems" trade secrets. Even if that is the case, that does not give rise to privilege but rather to a possible confidentiality order.

Consequently, the defendant Prairie Systems shall be and is hereby ordered to file a supplementary affidavit listing all documents related to the purchase and/or sale of ML1200 massload weighing scales and mobile weighing cells. Prairie Systems shall have until April 4, 1997 to file and serve a supplementary affidavit in compliance with this order.

The second part of the plaintiff"s motion seeks to obtain an order allowing the plaintiff to join, as additional defendants, Messrs. William Elliott and Marcel Fendelet, respectively president and vice-president/secretary treasurer of Prairie Systems. Further, the plaintiff seeks to add as a defendant Massload Technologies, allegedly a partnership between William Elliott and Marcel Fendelet. For the reasons that follow, that part of the plaintiff"s motion seeking to add as a defendant the partnership will be denied.

The evidence before me, by way of the affidavit of William Elliott, is that the name Massload Technologies was registered a number of years ago as a trade name under which the defendant Prairie Systems would carry on business. Mr. Elliott states that there is no partnership under the name Massload Technologies. Mr. Elliott further states that the name Massload Technologies was registered "purely for the benefit of Prairie Systems and Equip. Ltd. which uses the trade name". Mr. Elliott further states that neither he nor Mr. Fendelet carry on, on a personal basis, the business carried out by the defendant Prairie Systems.

The plaintiff has submitted in evidence a copy of the Saskatchewan business name registration in regard to the name Massload Technologies. The form adduced in evidence by the plaintiff is a renewal of registration of the name Massload Technologies. This form is signed by Mr. William Elliott who states that he "the proprietor/partner of the firm do hereby certify that the foregoing information respecting the firm is correct as of March 6, 1996". That document does not demonstrate that there is in existence a partnership by the name of Massload Technologies. All that the document shows is that Mr. Elliott has rights to the name Massload Technologies. Consequently, I will not allow the plaintiff to add as a defendant the alleged partnership Massload Technologies.

I now turn to William Elliott and Marcel Fendelet, the two individuals who the plaintiff seeks to add as defendants. As I indicated earlier, Mr. Elliott is the president of Prairie Systems and Mr. Fendelet is the vice-president/secretary-treasurer of the company. The plaintiff seeks to add these individuals as defendants so that it may make the following allegations against them:

The plaintiff"s submission is that the proposed individual defendants ought to be added as defendants on the ground that by reason of their conduct they have incurred personal liability to the plaintiff. In support of its submission, the plaintiff referred me to the decision of the Federal Court of Appeal in Mentmore Manufacturing Co., Ltd. et al. v. National Merchandise Manufacturing Co. Inc. et al. , (1978), 40 C.P.R. (2d) 164. In that case, the plaintiffs had sued the corporate defendant for infringement of a patent and had also sued, as a separate defendant, the president and principal shareholder of the defendant company. The plaintiffs in Mentmore had taken the position that the individual defendant had directed the company"s infringement and was thus personally liable. The Trial Judge found for the plaintiff against the corporate defendant but dismissed the action against the individual defendant. The plaintiffs appealed the decision and their appeal was dismissed. At pages 171 through 174, Mr. Justice Le Dain, who gave the reasons for judgment of the Court, explained the nature of the proof which a plaintiff must adduce in order to succeed against individual defendants in a case similar to the present one:

What is involved here is a very difficult question of policy. On the one hand, there is the principle that an incorporated company is separate and distinct in law from its shareholders, directors and officers, and it is in the interests of the commercial purposes served by the incorporated enterprise that they should as a general rule enjoy the benefit of the limited liability afforded by incorporation. On the other hand, there is the principle that everyone should answer for his tortious acts. The balancing of these two considerations in the field of patent infringement is particularly difficult. This arises from the fact that the acts of manufacture and sale which are ultimately held by a Court to constitute infringement are the general business activity of a corporation which its directors and officers may be presumed to have authorized or directed, at least in a general way. Questions of validity and infringement are often fraught with considerable uncertainty requiring long and expensive trials to resolve. It would render the offices of director or principal officer unduly hazardous if the degree of direction normally required in the management of a corporation"s manufacturing and selling activity could by itself make the director or officer personally liable for infringement by his company.

This is a principle that should apply, I think, not only to the large corporation but also to the small, closely held corporation as well. There is no reason why the small, one-man or two-man corporation should not have the benefit of the same approach to personal liability merely because there is generally and necessarily a greater degree of direct and personal involvement in management on the part of its shareholders and directors. This view finds support, I believe, in the cases. It has been held that the mere fact that individual defendants were the two sole shareholders and directors of a company was not by itself enough to support an inference that the company was their agent or instrument in the commission of the acts which constituted infringement or that they so authorized such acts as to make themselves personally liable: see British Thompson-Houston Co., Ltd. v. Sterling Accessories, Ltd. (1924), 41 R.P.C. 311; Prichard & Constance (Wholesale), Ltd. v. Amata, Ltd. (1924), 42 R.P.C. 63. It is the necessary implication of this approach, I think, that not only will the particular direction or authorization required for personal liability not be inferred merely from the fact of close control of a corporation but it will not be inferred from the general direction which those in such control must necessarily impart to its affairs. I,therefore, have no difficulty in concluding, with respect, that the learned trial Judge was correct in holding that the fact "Goldenberg and Berkowitz imparted the practical, business, financial and administrative policies and directives which ultimately resulted in the assembling and selling of some goods (in National"s overall stock of goods) which I have found infringed the plaintiffs" rights" was not by itself sufficient to give rise to personal liability.

What, however, is the kind of participation in the acts of the company that should give rise to personal liability? It is an elusive question. It would appear to be that degree and kind of personal involvement by which the director or officer makes the tortious act his own. It is obviously a question of fact to be decided on the circumstances of each case. I have not found much assistance in the particular case in which Courts have concluded that the facts were such as to warrant personal liability. But there would appear to have been in these cases a knowing, deliberate, wilful quality to the participation: see, for example, Reitzman v. Grahame-Chapman & Derustit Ltd. (1950), 67 R.P.C. 178, Oertli A.G. v. E.J. Bowman (London) Ltd. et al., [1956] R.P.C. 282; Yuille v. B. & B. Fisheries (Leigh), Ltd. and Bates, [1958] 2 Lloyd"s Rep. 596; Wah Tat Bank Ltd. et al. v. Chan Cheng Kum , [1975] A.C. 507 (P.C.).

Although American decisions on this question must be consulted with caution because of the particular legislative provisions concerning patent infringement that apply in the United States, they are instructive, I think, on the general approach which they reflect to the policy issue involved in the personal liability of managing officers for patent infringement by a corporation. There were at one time two rather distinct lines of authority: one that tended to hold managing officers liable merely by virtue of their having authorized the acts which were held to have constituted infringement; the other holding that they should only be personally liable where they have acted "outside the scope of their official duties": see Dangler et al. v. Imperial Mach. Co. et al. (1926), 11 F. 2d 945, where the two lines of authority are discussed at length, and the Court declares its preference for the second approach, with the following observation [p. 947]:

After due consideration of the various authorities, as well as the reasons back of the two positions, we adhere to the Crazier v. Mackie-Lovejoy Mfg. Co. decision, [138 F. 654], and hold that, in the absence of some special showing, the managing officers of a corporation are not liable for the infringements of such corporation, though committed under their general direction. The uncertainty surrounding the questions of validity and infringement make any other rule unduly harsh and oppressive.

This approach would appear to have prevailed: see Panther Pumps & Equipment Co. Inc. v. Hydrocraft, Inc. et al. (1972), 468 F. 2d 225 at p. 233, in which the analysis in Dangler is quoted in full with approval. In Southwestern Tool Co. et al. v. Hughes Tool Co. (1938), 98 F. 2d 42 at p. 45, I find the following statement of this approach:

An officer of a corporation participating in the corporation"s manufacture and sale of an infringing article is not personally liable for damages flowing from such piracy unless he acts wilfully and knowingly, or uses the corporation as an instrument to carry out his own deliberate infringement, or knowingly uses an irresponsible corporation with the intended purpose of avoiding personal liability.

I do not think we should go so far as to hold that the director or officer must know or have reason to know that the acts which he directs or procures constitute infringement. That would be to impose a condition of liability that does not exist for patent infringement generally. I note such knowledge has been held in the United States not to be material where the question is the personal liability of directors or officers: see Deller"s Walker on Patents, 2nd ed. (1972), vol. 7, pp. 117-8. But in my opinion there must be circumstances from which it is reasonable to conclude that the purpose of the director or officer was not the direction of the manufacturing and selling activity of the company in the ordinary course of his relationship to it but the deliberate, wilful and knowing pursuit of a course of conduct that was likely to constitute infringement or reflected an indifference to the risk of it. The precise formulation of the appropriate test is obviously a difficult one. Room must be left for a broad appreciation of the circumstances of each case to determine whether as a matter of policy they call for personal liability. Opinions might differ as to the appropriateness of the precise language of the learned trial Judge in formulating the test which he adopted - "deliberately or recklessly embarked on a scheme, using the company as a vehicle, to secure profit or custom which rightfully belonged to the plaintiffs" - but I am unable to conclude that in its essential emphasis it was wrong. Nor am I able to conclude that the facts of this case are such as clearly to give rise to personal liability on a proper application of the law. National was legitimately engaged in the business of assembling and selling retractable pens before Rotary entered into a relationship with it and before any question of possible patent infringement arose. There was considerable uncertainty as to the scope and application of the relevant patent claims. Moreover, the trial Judge refused to find that the molds obtained by National were made by copying the essential Rotary parts. These were all circumstances which clearly distinguish the present case, for example, from that of Reitzman , supra, in which the managing director of the defendant company had acquired his familiarity with the patented process in his former capacity as technical director of the plaintiff company, and there was a finding that the defendant company had in effect copied the process of the plaintiff company.

For the foregoing reasons I would dismiss the appeal with costs.

Mr. Justice Le Dain, at page 174, clearly states that the circumstances which a plaintiff invokes to allege personal liability on the part of a director or officer of a corporation must be such as to enable the Court "to conclude that the purpose of the director or officer was not the direction of the manufacturing and selling activity of the company in the ordinary course of his relationship to it but the deliberate, willful and knowing pursuit of a course of conduct that was likely to constitute infringement or reflected an indifference to the risk of it". In the case before him, Mr. Justice Le Dain concluded that no evidence had been adduced to lead him to such a conclusion. Mr. Justice Le Dain distinguished the case before him from cases where personal liability of directors or officers have been found. Specifically, he distinguished the case before him from the decision of the English High Court of Justice, Chancery Division, rendered in Reitzman v. Grahame-Chapman & Derustit Ltd. (1950), 67 R.P.C. 178. There, the trial Judge, Harman J., had concluded that the personal liability of a managing director had been proved but dismissed the action because the patents at issue were invalid. That judgment was confirmed by the Court of Appeal. Mr. Justice Le Dain distinguished the finding of liability in Reitzman on the ground that in that case the defendant company"s managing director had become familiar with the plaintiff"s patent by reason of his employment by the plaintiff as technical director. Further, the trial judge found that the defendant company had copied the plaintiff company"s process.

In Mentmore Mr. Justice Le Dain explained that he was not prepared to hold that liability of a director or officer would only follow where the director or officer knew or ought to have known that the activity which he directed or procured constituted infringement. However, Mr. Justice Le Dain went on to state that conduct on the part of the director or officer akin to the pursuit of a deliberate or willful course of action likely to constitute infringement or to reflect an indifference to the risk of infringement was required in order to bring about the liability of that individual. That is why, in the case before him, Mr. Justice Le Dain refused to find liability on the part of the president of the company.

I obviously do not have to decide whether the plaintiff"s allegations against Elliott and Fendelet will succeed. Rather what I have to decide is whether these allegations stand any chance of success. Put another way, is it plain and obvious, to borrow from the test used in relation to an application to strike under Rule 419, that the plaintiff"s case against the individual defendants will fail? In my view, it is not so obvious.

Consequently, my order will be the following:

1. The plaintiff is given leave to join as additional party defendants Messrs. William Elliott and Marcel Fendelet.

2. The style of cause of this action shall be amended to add William Elliott and Marcel Fendelet as defendants.

3. Proposed paragraphs 3a. and 3b. shall be added to the statement of claim.

4. Proposed new paragraphs 11a. and 11b. shall be added to the statement of claim. However, the words "the defendant MASSLOAD and/or" which appear in proposed new paragraphs 11a. and 11b. shall be deleted and shall not appear in the amended statement of claim.

5. Paragraph 20b. shall be amended as proposed by the plaintiff in its motion.

6. The plaintiff shall be dispensed with personal service of its twice amended statement of claim and service of all other previous pleadings on the joined defendants and the plaintiff shall be allowed to serve its twice amended statement of claim on all defendants by service upon the solicitors of record for the present defendants.

7. The defendants, including Messrs. William Elliott and Marcel Fendelet, shall file and serve their response to the plaintiff"s twice amended statement of claim by April 4, 1997.

8. The defendant Prairie Systems and Equip. Ltd. shall file and serve a more accurate affidavit of documents by April 4, 1997. The defendants William Elliott and Marcel Fendelet shall each file and serve their affidavit of documents by April 4, 1997.

9. Costs shall be in the cause.

"MARC NADON"

JUDGE

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Norac Systems International Inc., docket T-1973-95

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docket T-1973-95