Hertzog v. Highwire Information Inc., docket T-1753-95

     T-1753-95

Between:

     STUART HERTZOG,

     Plaintiff,

     - and -

     HIGHWIRE INFORMATION INC.,

     BUTTERWORTHS CANADA LTD., and

     ROBERT MacDONALD,

     Defendants.

     REPORT OF REFERENCE

     As to the profits, damages, costs and pre and post

     judgment interest owed by the Defendants, Highwire

     Information Inc. and Robert MacDonald to the

     Plaintiff arising from infringement of copyright

     This reference, by the Order of the Administrator of the Court, 29 November 1996, arises out of an Order of 21 May 1996 by which the Plaintiff was granted judgment against Highwire Information Inc. and Robert MacDonald, with a reference to follow to provide the Plaintiff with an accounting and an award of profits, damages and costs and to establish the rate of pre and post judgment interest to apply.

     The reference took place at Vancouver, B.C. on the afternoon of 12 June 1997. Although notice of time and place of the reference, together with copies of the record for the reference, were served on Highwire Information Inc. and on Robert MacDonald, neither were represented at the reference. Counsel for Butterworths Canada Ltd. did attend and made helpful contributions.

BACKGROUND

     By way of background, the Plaintiff, Stuart Hertzog, who has an interest in the Defendant, Highwire Information Inc. ("Highwire"), together with a co-author, developed two guides to using the internet for Highwire. Mr. Barry Shell, the co-author of the guides, who had an interest, perhaps a fairly minor interest, in the works, assigned his interest to MacDonald and to Highwire, apparently for $7,500.00.

     The two guides were, at the instigation of the Defendant MacDonald, through his company, Media Studio Publishing Inc., published and distributed by the Reed Book Division of the Defendant Butterworths.

     The two guides were quite successful, producing royalty revenue to-date of $49,966.01 (including GST) but not including Butterworths's hold back of $11,674.30. Counsel for Butterworths advises that one of the two guides has been sold out and sales of the other guide, or as much of it as will sell, should be completed in the near future and thus there could be a complete settling of accounts before too long.

     The Plaintiff, who estimates he did 85% of the work on the two guides, complains he has been paid nothing for his work, which he neither assigned to anyone, nor gave permission to anyone to publish. Before commencing this action, the Plaintiff tried, over a number of months, to obtain a contract with or payment from the Defendants MacDonald and Highwire and from Media Studio Publishing Inc., but to no avail. His lawyers then sent a demand letter to Highwire and MacDonald on 28 February 1995, concluding with advice that Mr. Hertzog would, if not properly recognized, commence legal action. That letter was ignored, resulting in the present action.

     Initially, Highwire and MacDonald defended, but subsequently ignored the Court's Order as to the production of documents and appointment of counsel, the result being a default judgment in favour of the Plaintiff, Hertzog.

     Returning to the royalties, the publishing agreement for the two guides, between Highwire and the Reed Book Division of Butterworths, requires the royalties to be paid to Media Clones Inc., an Ontario company administered by Mr. MacDonald and said to be his holding company.

    

     After substantial royalties were paid to Media Clones and to Highwire, the latter agreed, in about October of 1995, that future royalties be paid into an escrow account set up by a Toronto lawyer, Roslyn Tsao. Payment of the royalties to date are thus:

Media Clones

Media Clones

Highwire

Roslyn Tsao in trust

Roslyn Tsao in trust

January 5, 1995

January 26, 1995

July 27, 1995

February 22, 1996

August 22, 1996

$10,700

$21,400

$8,038.95

$5,630.18

$4,196.88

The $49,966.01 figure for royalties is as of 24 February 1997. As I have indicated, there is a hold back of $11,674.30, which was to have been released last month, but is still subject to adjustments for the return of unsold guides.

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ANALYSIS

Remedies

     As this reference arises out of infringement, the Plaintiff judgment creditor may have not only damages and, at the Court's discretion, the profits of the infringement, but also, in appropriate circumstances, exemplary or punitive damages, such remedies being cumulative: see for example Prise de parole Inc. v. Guerin, editeur Ltee (1996), 104 F.T.R. 104 (F.C.T.D.) and Pro Arts Inc. v. Campus Crafts Holdings Ltd. (1981), 50 C.P.R. (2d) 230 (Ont.H.C.). In the present instance I recommend to the Court that the Plaintiff be awarded loss of profits, damages and exemplary damages. However, before dealing specifically with these three remedies, some comments on the approach to their assessment is in order.

     Dealing first with loss of profit, the Plaintiff need only prove the revenue received by the Defendant. The onus then shifts to the Defendant to prove its cost and expenditures, that is the deductions, in order to arrive at an appropriate net profit to go to the Plaintiff, or in this instance, to go to the judgment creditor, Mr. Hertzog: see section 35(2) of the Copyright Act.

     In a situation in which the judgment debtor does not provide records to show profit, I must make a broad assessment, doing the best I can, as a matter of common sense: if there is anything approaching an injustice, that is as a result of the Defendants, Highwire and MacDonald, failing to attend and to provide records to show what might be a proper profit figure. Indeed, such a best estimate will not be set aside even if it is a matter of guesswork. See for example Wood v. Grand Valley Railway Co. (1915), 22 D.L.R. 614 at 618 where Mr. Justice Davie of the Supreme Court of Canada, comments on a situation in which it was impossible to estimate damages with anything approach mathematical accuracy:

"It was clearly impossible under the facts of that case to estimate with anything approaching to mathematical accuracy the damages sustained by the plaintiffs, but it seems to me to be clearly laid down there by the learned Judges that such an impossibility cannot 'relieve the wrongdoer of the necessity of paying damages for his breach of contract' and that on the other hand the tribunal to estimate them whether jury of Judge must under such circumstances do 'the best it can' and its conclusion will not be set aside even if 'the amount of the verdict is a matter of guess work.'"

This passage from the Grand Valley Railway case and similar jurisprudence is commented on by the Supreme Court of Canada in Penvidic Contracting Co. Ltd. v. International Nickel Co. of Canada Ltd. (1975), 53 D.L.R. (3d) 748 at 756-757. In short, it is not wrong to proceed to calculate profit in a rough and ready manner, particularly if that is the result of the omission of the Defendant to provide appropriate information and documents.

     Here, as I have said, there is the additional difficulty in calculating profits for the Defendants, after filing a defence, completely ignored the proceedings. They have thus lost the opportunity to explain their costs. As a result I have no costs to weigh against gross profit in order to arrive at a net profit to go to the Plaintiff. Counsel for the Plaintiff submits I should, without further question, award the Plaintiff the gross profits, that is the total of the royalties paid for the two guides.

     In Alma Veneer Felt Company Ld v. Fisher (1896) 14, R.P.C. 159 (C.A.) Lord Justice Lindley, who wrote one of the concurring judgments, referred to a situation in which the Plaintiff was entitled to a royalty, but because of omissions on the part of the Defendant, the court could find out no details of the amount of the royalty. He referred to the principle that the court will do the best that it can and leave the wrong-doer to suffer any injustice:

What are you to do? Are you to say to a Plaintiff who is entitled to a royalty, "Because we cannot find it out, owing to the omission of duty on the part of the Defendant, we will give you nothing," or are we to say that we will do the best we can, and leave the wrong-doer to suffer if injustice is really done? The latter has always been the principle upon which the Court has proceeded. (Page 167)

This lack of any records produced by a wrong-doer, referred to by Lord Justice Lindley, reflects the present situation in which neither Highwire nor MacDonald have seen fit to attend and either explain their costs or produce records to show proper deductions from profits to arrive at a net figure.

     An accounting of profits is an equitable remedy. One of the established maximums of equity is that equity aids the vigilant. The Defendants Highwire and MacDonald have slept through an opportunity to possibly limit, to some degree, an award against them. I am not about to guess at what, if anything, might have been the overhead of those Defendants in signing a contract with Butterworths for publication of the guides produced, in large measure, by the Plaintiff.

     Damages are not in the alternative, but rather are at large and if not proved may be of a nominal variety. But because they are characterized as nominal does not mean they are necessarily small: see for example Underwriters' Survey Bureau Ltd. v. Massie & Renwick Ltd., [1942] Ex.C.R. 1 at 4 through 6. When such damages are awarded they are to be dealt with broadly. In the Underwriters' Survey Bureau case (supra), the Plaintiff was unable to prove actual damages. The registrar, on a reference, rendered nominal and exemplary damages of $5,000.00 relying upon the circumstances of the case, which included a willful and fraudulent invasion of the Plaintiff's right of ownership. This award was appealed by the Plaintiff to the Exchequer Court, where the President of the Court was struck by the infringements and acts of conversion, accomplished with deliberation, persistency and premeditated secrecy. This forced the Plaintiff to take action, at substantial cost, a cost well above the Plaintiff's eventual taxed costs, to protective copyright. The Exchequer Court valued this, together with the annoyance, inconvenience and disturbance in the conduct of the Plaintiff's business at $10,000.00.

     I would make two observations about the award in the Underwriters' Survey Bureau case. First, some forty-five inflationary years have gone by and thus an appropriate present day award, assuming a case embodying similar circumstances, would be much larger. Second, in the Underwriters' Survey Bureau case, there was no award for loss of profits. Taking this a step further, there ought not to be duplication going to an enhanced total recovery to the Plaintiff, beyond what is necessary to put the Plaintiff into the same position, so far as an award of damages is able, as he would have been in if he had not been wronged. But here I may also take into account non pecuniary injury to the Plaintiff, including inconvenience, stress and disruption to the Plaintiff's life, brought about by having to pursue a wrong-doer, as well as expenses of the Plaintiff remedy which are not reflected in taxed costs.

     Finally, there is the matter of punitive or exemplary damages. The leading authority is Hill v. Church of Scientology of Toronto and Manning, [1995] 2 S.C.R. 1130. The general principle to keep in mind is that "... punitive damages should only be awarded in those circumstances where the combined award of general and aggravated damages would be insufficient to achieve the goal of punishment and deterrence." (ibid page 1208). Certainly punitive damages contain an element of punishment, but deterrence is also a substantial factor. In Church of Scientology, the Supreme Court put it this way: "...was the misconduct of the defendant so outrageous that punitive damages were rationally required to act as deterrence?" (ibid page 1209).

     Justice of Appeal Linden, writing for the Court of Appeal in Profekta International Inc. v. Theresa Lee, an unreported 30 April, 1997, decision in Action A-23-96, added $10,000 in punitive damages to the amount already awarded for compensatory damages, a situation in which there was a continuing violation of copyright by the respondent. In that case there were other factors, including ignoring a cease and desist letter, and an attitude, on the part of the respondent, that she would rather pay legal fees in order to contest the plaintiff's claim than to abide by the copyright. The Court of Appeal felt that this award satisfied the test put by Hill, being that of outrageous conduct requiring punitive damages to act as a deterrent.

     In short, punitive damages are awarded where the actions of a defendant have been high handed or contemptuous, so as to both punish the defendant for wrongdoing and to make an example of him or her in order to deter others. It is conduct that is "...extreme in its nature and such that by any reasonable standard it is deserving of full condemnation and punishment.": Vorvis v. Insurance Corporation of British Columbia, (1989) 1 S.C.R. 1085 at 1108. I now turn to the application of the general principles to the claim of the Plaintiff in this particular instance.

Profits

     Beginning with profits, I recommend that the Plaintiff receive all of the profits, including GST, paid to date. This might well be more than the Plaintiff would have received had the Defendants participated, but the Plaintiff ought not to be penalized because of that failure to participate.

     In recommending an award of the full amount of the profit, that is of the royalties paid to date, I have not lost sight of the fact that Highwire may have purchased an interest in the guides when it paid $7,500 in order to obtain whatever minority interest was held by Mr. Shell as a co-author. My Order of 21 May, 1996, explicitly recognizes that Mr. Hertzog is a co-owner. If the other co-owner, probably Highwire, is interested in protecting and capitalizing on its interest, there remains the substantial sum held back by the Reed Book Division of Butterworths, which I recommend be paid out either pursuant to a court order, or by the consent of Hertzog, Highwire and MacDonald.

Damages

     Damages, if awarded to Mr. Hertzog for anything other than inconvenience, stress (which inconvenience and stress are readily apparent from his lengthy, futile and rather one-sided correspondence with Hertzog and MacDonald in order to try to obtain some of his entitlement as an owner of the two successful internet guides) and the cost of pursuing the litigation beyond that recoverable as tax costs, would be a duplication of the award of the royalties paid to date by Butterworths. For proper items of non-pecuniary damage and for the costs of litigation not reflected in taxed costs, I recommend an award of $7,000. While this falls short of the amount suggest by Plaintiff's counsel, it is in the spirit of nominal damages, which are not small, given the recommended substantial award of profit.

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Exemplary Damages

     In this instance it would be remiss to fail to recommend an award of exemplary damages. The conduct of Highwire and of MacDonald, who engineered the sale to Butterworths of the right to publish the guides, was generally reprehensible, all of the circumstances considered.

     The Defendants, MacDonald and Highwire, induced the Plaintiff to carry on with the substantial and time-consuming project of preparing the internet guides. Both Highwire and MacDonald knew of and were constantly reminded by the Plaintiff, and subsequently by Plaintiff's counsel, of the Plaintiff's rights as an author. Both knew they needed the authorization of the Plaintiff in order to deal with the guides, yet set about to frustrate the Plaintiff's rights. That the Defendants, Highwire and MacDonald, proceeded with a sale of the right to publish the guides and collected royalties, without either the Plaintiff's permission or without making some substantial offer, is bad enough. But the Defendant MacDonald went further: he had Butterworths pay a substantial portion (65%) of the royalties not to Highwire, in which Mr. Hertzog had an interest, but into his own Ontario holding company, Media Clones Inc. This fast and loose conduct is reprehensible. It deserves censure, both in order to punish and in order to provide an example by which to deter others from similar behaviour. All this calls for a substantial award of exemplary damages.

     I recommend exemplary damages in the amount of $10,000. The figure is not higher only because the Defendant MacDonald apparently instructed Butterworths to pay a third royalty payment, some 16% of the total royalty payments made, into Highwire's account and, rather late in the day, that the two last royalty payments, some 18% of the total royalty, be paid into trust.

Interest

     The actions of the Defendants Highwire and MacDonald have deprived the Plaintiff of the use of his money. This can, to a substantial degree, be compensated for by allowing pre and post judgment interest. Such interest will only be on that portion of the royalties paid to Media Clones Inc. and to Highwire, for I assume that the funds held in the lawyer's trust account are at interest. Here I recognize that interest on the lawyer's trust account, which contains about $10,000, will not reflect proper prejudgment interest, but in my recommendations I have allowed for that in estimating general damages.

     While this action involves a British Columbia Plaintiff and a British Columbia corporate Defendant, it also involves a Defendant, MacDonald, who has an Ontario address and who manages an Ontario holding company and here I refer to the material in the Ontario company search of Media Clones Inc. Media Clones Inc. holds $32,100 of the Plaintiff's money. These facts allow me to recommend an award of prejudgment interest at a rate reasonable in all of the circumstances pursuant to Section 36(2) of the Federal Court Act. The order resulting in this reference was, at that point, an unliquidated claim. Interest therefore runs, pursuant to Section 36(2)(b) of the Federal Court Act from the date of notice in writing of the claim. Plaintiff's counsel sent an appropriate demand letter to the Defendant Highwire, attention of the Defendant MacDonald, in Ontario on 28 February, 1995. Interest thus runs from that date to the date of the order for default judgment, 21 May, 1996.

     As to the rate of interest, the Plaintiff has provided a table of prime rates, which includes rates for the period between January of 1995 and May of 1996. Those rates, by inspection, average out to just over 8%. A reasonable rate would reflect both that prime rate and what might be the Plaintiff's borrowing rate from his bankers. I recommend prejudgment interest at 9%.

     As to post judgment interest, I see no reason to depart from the concept of what might be the Plaintiff's borrowing rate from his bankers. I therefore recommend, from 21 May, 1996, interest on the royalties paid to Media Clones and to Highwire, at the Plaintiff's borrowing rate, from time to time, from his bankers, which might be set at bank prime plus one percent. Interest will similarly run on the general damages, but not on either the exemplary damages or costs. I now turn to the issue of costs.

Costs

     The Plaintiff has provided a draft bill of costs, a copy of which is attached as Annex A. Overall the amounts claimed, which are within column 3, are relatively conservative. I differ with the bill of costs as presented at item 23, attendance on the reference, where I would recommend 4 units be allowed instead of 6 units, and on item 26, taxation of costs, where I would recommend 1 unit rather than 4 units. However I have also taken into account the substantial preparation of material for the reference and would allow 3 units, rather than 2 units under item 27, for such services as may be allowed by a taxing officer or by order of the court. Thus of the 24 units requested, 20 are allowed and when GST and PST are added the total taxable costs, which I recommend, are $2,280.

     The Plaintiff claims as disbursements, including GST on a portion of the disbursements, a total of $632.11. The disbursements are reasonably to be expected. While the photocopying charge is substantial, so has the photocopying of pleadings, material served and material provided to the court been substantial.

     I would recommend that a further disbursement item be allowed, being the account rendered by the Ontario lawyer holding some $10,000 in her trust account, and here I refer to the account of Roslyn Tsao in the amount of $125.59, which has been paid from the funds held in trust. Given the outcome that is a disbursement which should be reimbursed to the Plaintiff.

CONCLUSION

     I recommend to the court that the Plaintiff be awarded as against Highwire Information Inc. and Robert MacDonald:

1.      Profits (including GST) in the amount of $49,966.01, adjusted to reflect the amount of principal and interest on the money held by Roslyn Tsao in trust;

2.      Damages in the amount of $7,000;

3.      Exemplary damages in the amount of $10,000;

4.      Prejudgment interest from 28 February, 1995, to 21 May, 1996, at 9% on $31,000, the amount paid by Butterworths to Media Clones Inc. and to Highwire;

5.      Post judgment interest at the Plaintiff's borrowing rate, from time to time, from his bankers, set at bank prime plus one percent, on the $31,100 held by Media Clones and by Highwire until payment.

6.      Costs and disbursements in the amount of $3,037.70.

     The funds held back by Butterworths should be paid into an escrow account. In that the Ontario lawyer presently holding royalty funds in trust does not wish to continue, any future royalty received from Butterworths should be held in trust in a lawyer's account here in Vancouver, that lawyer and his firm to have no present connection with this litigation.

     Finally, I recommend that the funds to be received from the Reed Book Division of Butterworths not be paid out except by consent of the Plaintiff and of the Defendants Highwire and MacDonald or by order of the court, and that in the event of the latter, the Defendant Highwire, as a co-owner of the two guides to the internet, and the Defendant, Robert MacDonald, as a party interested in Highwire, be given notice of any application for payment out.

     I thank counsel for the Plaintiff for a clear and thorough presentation. I thank counsel for Butterworths for useful suggestions and helpful approaches.

                                 (Sgd.) "John A. Hargrave"

                                     Prothonotary

June 20, 1997

Vancouver, British Columbia

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