Date: 20011002
Docket: A-483-01
Neutral citation: 2001 FCA 288
CORAM: SHARLOW J.A.
BETWEEN:
CANWELL ENVIRO-INDUSTRIES LTD., CLIVE TITLEY, and
THE CITY OF MEDICINE HAT
Appellant(s)
and
BAKER PETROLITE CORPORATION,
PETROLITE HOLDINGS INC., BAKER HUGHES CANADA COMPANY
Respondent(s)
Heard at Ottawa, Ontario, on September 27, 2001
Order delivered at Ottawa, Ontario, October 2, 2001
REASONS FOR ORDER BY: SHARLOW J.A.
Date: 20011002
Docket: A-483-01
Neutral citation: 2001 FCA 288
CORAM: Sharlow J.A.
BETWEEN:
CANWELL ENVIRO-INDUSTRIES LTD., CLIVE TITLEY, and
THE CITY OF MEDICINE HAT
Appellant(s)
and
BAKER PETROLITE CORPORATION,
PETROLITE HOLDINGS INC., BAKER HUGHES CANADA COMPANY
Respondent(s)
REASONS FOR ORDER
Sharlow J.A.
[1] This is a motion by the appellants Canwell Enviro-Industries Ltd. ("Canwell"), Clive Titley and the City of Medicine Hat for a stay of the judgment of Mr. Justice Gibson pending the disposition of this appeal. The judgment under appeal was issued on August 15, 2001 after a trial in April, 2001. An interim stay was ordered by Mr. Justice Noël on August 24, 2001 pending the hearing of the motion for a stay pending appeal. I heard the motion on September 27, 2001. I reserved my decision, extending the interim stay pending my disposition of the motion.
[2] Some undisputed facts should be stated by way of background. The respondents Baker Petrolite Corporation, Petrolite Holdings Inc. and Baker Hughes Canada Company (collectively, "Baker Petrolite") are owners or licensees of a patent issued in February 7, 1995 for an invention entitled "Composition and Method for Sweetening Hydrocarbon". The application for the patent was laid open on June 23, 1990.
[3] Canwell Enviro-Industries Ltd. ("Canwell") is a corporation controlled and indirectly owned by Mr. Clive Titley. Mr. Titley is Canwell's sole directing mind. The business of Canwell consists of providing products and services for sweetening natural gas. At some point after 1990, Canwell produced and sold a product that Baker Petrolite believed infringed their patent. In 1994 Baker Petrolite put Canwell on notice that it considered Canwell to be infringing the patent. Canwell continued the challenged activities so that at present, substantially all of Canwell's business is based on the product that Baker Petrolite alleged in 1994 was an infringement of their patent.
[4] In 1995 Baker Petrolite commenced an action for infringement against Canwell, Mr. Titley and the City of Medicine Hat, one of Canwell's customers. Canwell counterclaimed on the basis that the patent was not valid, relying in large part on the allegation that in 1987, a product embodying the patent had been made available for sale to the public.
[5] The Trial Judge found that the patent was valid, that it had been infringed by the City of Medicine Hat between January of 1994 and August of 1997, and that Canwell had induced or contributed to its infringement from and after June 23, 1990. The counterclaim was dismissed.
[6] The judgment of the Trial Judge includes a permanent injunction against all appellants and an order for the delivery up of all infringing products and related items. In addition, he ordered Canwell and the City of Medicine Hat to account to Baker Petrolite for their profits. In the case of the City of Medicine Hat, the profits were fixed at $621,421.07 including prejudgment interest to May 1, 2001. In the case of Canwell, the profits were fixed as of November 30, 2000, at $8,094,325.39 including prejudgement interest to May 1, 2001. Against Canwell there is also an order for the payment of profits earned after November 30, 2000. Canwell and the City of Medicine Hat are also ordered to pay prejudgment interest after May 1, 2001 and postjudgment interest.
[7] In calculating the profits of Canwell, the Trial Judge permitted no deduction for legal fees relating to the patent infringement action, or for bonuses paid to Mr. Titley. With respect to the bonuses, the Trial Judge held that Canwell and Mr. Titley had failed to discharge the onus on them to justify the bonuses as deductible expenses for the purpose of an accounting of profits for infringement. He relied in part on the fact that Mr. Titley did not give evidence at the trial.
[8] The Trial Judge held that Mr. Titley would be liable, jointly and severally with Canwell, for the accounting of profits to the extent of the cumulative amount of bonuses paid to him since the commencement of the action. The basis of Mr. Titley's liability was said to be a constructive trust. The Trial Judge did not, however, quantify Mr. Titley's liability. Rather, he ordered a reference to determine whether and to what extent the bonuses could be traced.
[9] Canwell, Mr. Titley and the City of Medicine Hat were held jointly and severally liable for costs at trial. Canwell was held liable for the costs of the counterclaim.
[10] I have the discretion to stay the judgment pending appeal if the interests of justice require it: subsection 50(1) of the Federal Court Act, R.S.C. 1985, C. F-7, and Rule 398 of the Federal Court Rules, 1998, SOR/98-106. The relevant principles are stated inRJR-Macdonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311. On the basis of the reasoning in that case, a stay should not be granted unless there is a serious question to be determined on the appeal, the appellant would suffer irreparable harm if the stay is not granted, and the balance of convenience favours the granting of the stay.
[11] The first test represents a low threshold. It is met if the appeal is not frivolous or vexatious: RJR-Macdonald (cited above). Counsel for the appellants indicates that the principal issue on the appeal will be the effect of the 1987 sales on the validity of the patent. Another important issue will be the correctness of the determination of the existence of a constructive trust and the tracing remedy. I am satisfied that there is a serious question for appeal.
[12] The second test is met with respect to Canwell. (The situation with respect to the other appellants is dealt with below.) The material before me indicates that all or substantially all of Canwell's business consists of dealing in the product that has been found to infringe the patent. Canwell cannot cease the infringement without ceasing to carry on its business. In addition, its business requires it to maintain continuing relationships with its customers. Those relationships would come to an end if Canwell ceases to operate. It is unreasonable to expect that those relationships could be revived if Canwell's appeal succeeds.
[13] I have concluded that the determination of this motion must turn on the balance of convenience. I must assess which party will suffer the greater harm from granting or refusing the stay pending the disposition of the appeal, and the extent to which the harm can be limited by appropriate conditions.
[14] If the stay is granted and the trial judgment is upheld on appeal, Baker Petrolite will have been deprived temporarily of the benefit of the trial judgment. Baker Petrolite's decision to seek an accounting of profits rather than damages suggests that Baker Petrolite believed that Canwell's profits from its infringing activities exceeded any loss caused to Baker Petrolite by the infringement. From that I infer that further infringement by Canwell pending the disposition of the appeal would be compensable although, for the reasons explained below, any further amount that may be owed to Baker Petrolite from the continuation of Canwell's infringing activities may be uncollectible. The risk of uncollectibility may be lessened but cannot be eliminated. In my view, however, if the stay is granted and the appeal fails, any irreparable harm to Baker Petrolite would be on a minor scale considered against all the remedies granted by the Trial Judge. This leads me to conclude that the balance of convenience would favour granting a stay subject to conditions that will mitigate to a reasonable extent the diminution of Canwell's assets in the event the appeal fails.
[15] If Canwell is permitted to carry on its business pending the appeal, it may be possible to ensure that with appropriate management, Canwell's resources will be preserved and perhaps even enhanced, ultimately to the advantage of Canwell and Mr. Titley if the appeal succeeds and Baker Petrolite if the appeal fails. The terms of any stay should ensure that Canwell's ongoing business activities do not permit soliciting new customers or reducing customary prices.
[16] It appears that at present the net value of Canwell's assets is less than the amount of the judgment against it. That is due in part to the fact that Canwell paid substantial bonuses to Mr. Titley from 1995 to 2000 but those bonuses were found not to be deductible in computing profits for the purposes of the patent infringement action. Regardless of the cause of Canwell's current state of affairs, one result is that any new expenditure by Canwell that is not directly laid out to earn new sales revenue will reduce the assets of Canwell that would be available to satisfy the judgment if it is upheld. Another result is that if Canwell is required to use its present assets to pay what it can on the judgment, it will likely become bankrupt. It will then be unable to fund its appeal, nullifying its right to appeal the judgment. A third result is that Canwell is not in a position to post security for costs without further jeopardizing its ability to satisfy the judgment.
[17] It is my view that if a stay is granted, it must be on terms that permit the appeal to proceed. That will require some money, although in an amount which I assume will be relatively modest compared to the costs of the trial and pre-trial matters. Canwell wishes to be permitted to continue to pay the costs of this appeal. It is argued for Baker Petrolite that the appeal should not be funded from the assets of Canwell because, given the financial condition of Canwell, the costs of the appeal will be borne solely by Baker Petrolite if the appeal fails. Baker Petrolite argues that the two other appellants could fund the appeal. It is not disputed that Mr. Titley has some personal resources. However, at this point the extent of Mr. Titley's personal resources is a matter of speculation. What is clear is that if the appeal fails, Mr. Titley's personal assets may be reduced as a result of the reference ordered by the Trial Judge. In my view it would be unreasonable to require Mr. Titley, before the conclusion of the reference, to decide whether to fund the appeal personally or stop it altogether. As between Canwell and the City of Medicine Hat, it appears that Canwell has taken the lead in this litigation. The interest of the City of Medicine Hat in this appeal is limited to the award against it. There is no reason to believe that it would be prepared to fund an appeal even if it could do so. Considering the liability facing Canwell compared to the liability facing the City of Medicine Hat, it would be unreasonable to make an order that might preclude the appeal from proceeding unless it is funded by the City of Medicine Hat. In my view, that leaves only Canwell as the source of funds for the appeal.
[18] Canwell has indicated that it would consent to an order prohibiting the payment of bonuses to Mr. Titley but would seek to continue to pay him $7,000 per month as a salary and to also to continue to pay Mr. Titley's quarterly tax instalments. Baker Petrolite would not object to the payment of a salary to Mr. Titley of $7,000 per month but would object to the payment of dividends or any other payments to Mr. Titley or to any corporations controlled by him. In my view, Baker Petrolite is justified in these objections.
[19] Canwell is liable to indemnify the City of Medicine Hat for any liability it may have in relation to the patent infringement. If the City of Medicine Hat satisfies the judgment, it could and probably would seek payment of its indemnity from Canwell. Such a payment by Canwell, or a grant of security for such payment, would reduce the assets of Canwell that would be available to Baker Petrolite if the judgment is upheld on appeal. That is a result that could and should be avoided at this stage.
[20] Mr. Titley has also indicated that if the stay is granted, he is prepared to consent to a condition that would preclude any transfer of his own property or any payment of his own money pending the disposition of the appeal. That condition could and should permit Mr. Titley to pay the living costs of himself and his family, which presumably would be covered by the salary of $7,000 per month referred to above, and also to pay his personal income tax obligations, including his tax instalments which I assume are in part a consequence of his receipt of bonuses from Canwell.
[21] Baker Petrolite argues that Mr. Titley should also pledge some of his personal assets (including his real estate, his investment portfolio, his shares of Capture Energy Limited, Terradelta Investments Inc. and IP Plus Wireless Corp. and real estate owned by Clematis Chemical Corp.) to secure Canwell's liability in the event the appeal fails. In my view, it would not be reasonable, before the completion of the reference, to require Mr. Titley to provide security for Canwell's obligations. However, it would be reasonable to require Mr. Titley to provide security for his own potential liability.
[22] I note that there is no evidence that the City of Medicine Hat would suffer irreparable harm if the stay is granted. Similarly, there is no evidence that Mr. Titley would suffer irreparable harm if the order for a reference is not stayed. I agree with Baker Petrolite that the stay, if granted, should not extend to the monetary award against the City of Medicine Hat or the order for a reference.
[23] As to the injunction, I note that the infringing activities alleged against the City of Medicine Hat ceased in 1997, which suggests that the injunction has no present effect on the operations of the City of Medicine Hat. If that is so, then even if the appeal succeeds, the City of Medicine Hat will not have been prejudiced by the injunction. I conclude that there is no reason to stay the injunction as against the City of Medicine Hat.
[24] In light of the foregoing, I will order, pending the disposition of this appeal, a stay of the injunction against Canwell and Mr. Titley, a stay of the order for delivery up of infringing products and related items, a stay of execution of the monetary award against Canwell, and a stay of execution of the award of costs of the claim and counterclaim, subject to the conditions set out in the order attached to these reasons as Appendix A.
[25] I am aware that these conditions will be a burden to Mr. Titley and to Canwell. However, it is my view that the burden is reasonable given the unusual circumstances of this case, in which the principal source of assets out of which the judgment will be satisfied if it is upheld is also the principal source of funding for the appeal itself.
[26] I am satisfied that this is a proper case for an order for an expedited hearing. I am advised that the parties have agreed on the contents of the appeal book. At this point I will not impose stricter time limits on the parties than provided in the Federal Court Rules, 1998. However, the Judicial Administrator has indicated that if the requisition for hearing is filed very soon, it may be possible to obtain a hearing date early in 2002.
"K. Sharlow"
J.A.
APPENDIX "A"
(ORDER)
UPON THE APPLICATION OF THE APPELLANTS for a stay pending appeal of the judgment of Mr. Justice Gibson issued on August 15, 2001 in Action No. T-913-95, and having reviewed the material filed by the parties and having heard their submissions:
THIS COURT ORDERS that:
1. Paragraphs 6, 7, 9, 11 and 15 of the judgment are stayed pending the disposition of this appeal, subject to the following conditions:
(a) Unless the respondents agree, or the court consents, the appellant Canwell Enviro-Industries Ltd. ("Canwell") must not transfer any property or make any payment to the appellant Clive Titley, including any payments for bonuses or tax instalments, or make any other payments that would not be considered as reasonably required to be made in the ordinary course of carrying out its natural gas sweetening business, except as follows:
(i) Canwell may pay all costs, including legal fees, reasonably incurred for this appeal.
(ii) Canwell may pay Mr. Titley remuneration for his services in an amount that does not exceed $7,000 per month.
(iii) Neither Canwell nor Mr. Titley may:
(A) pay or cause any payment to be made in respect of Canwell's indemnity obligations to the appellant the City of Medicine Hat or any other past, present or future customer of Canwell, or
(B) grant any security or cause any security to be granted for any such indemnity obligation.
(iv) Canwell must not pay any dividends and must not transfer any property or pay any amounts to its shareholder or shareholders or to any corporation controlled directly or indirectly by Mr. Titley.
(v) Mr. Titley must take no steps to:
(A) collect or cause the payment of any amounts Canwell owes to him (except the remuneration referred to above) or to any corporation he controls, or
(B) enforce or cause the enforcement of any security that Canwell has granted to him or to any corporation he controls.
(b) Unless the respondents agree or the court consents, Canwell must keep an account of its profits.
(c) Canwell must provide periodic statements to the respondents, as frequently as the respondents may reasonably require but no more than monthly, containing such information as may be required to determine the ongoing profits of Canwell from the activities that were found at trial to be an infringement of the patent, and to monitor compliance with the conditions in this order. The statements will be delivered as and when required by the respondents but no earlier than the 7th business day following the last day of the period to which the statement relates. Canwell may pay any costs reasonably incurred in preparing such statements.
(d) Unless the respondents agree or the court consents, Canwell must limit its activities to supplying its existing customers for existing customer sites and must not alter the terms of any existing arrangement in a manner that will reduce its expected revenue or profit from that arrangement.
(e) Unless the respondents agree or the court consents, Mr. Titley must not transfer any of his property or make any expenditures, except for expenditures not exceeding the remuneration referred to above, plus his tax instalments and tax on any gains realized on the disposition of property sold to pay his tax instalments.
(f) Mr. Titley will grant to the respondents such security as they may reasonably require for his potential personal liability in the event the appeal does not succeed. The security may encumber Mr. Titley's assets and the real estate holdings of corporations under Mr. Titley's control. The terms of such security must ensure that Mr. Titley may make the expenditures referred to in (e) above.
2. The conditions stated above may be varied by the Court upon the motion of any party. All parties have leave to apply for any directions that may be required to give effect to this order. Such directions are to be sought only if reasonable efforts are first made to resolve the matter by agreement.
3. After the filing of the requisition for hearing of this appeal, the hearing is to be scheduled by the Judicial Administrator, upon consultation with counsel and if necessary with the Chief Justice, for the earliest available dates at any sitting of the Court anywhere in Canada.
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