Docket: T-438-19
Citation: 2019 FC 1373
Ottawa, Ontario, October 31, 2019
PRESENT: Mr. Justice Norris
| BETWEEN:
|
| DOUBLE DIAMOND DISTRIBUTION, LTD.
|
| Plaintiff
|
| and
|
| CROCS CANADA, INC., CROCS, INC.,
CROCS RETAIL, LLC, WESTERN BRANDS HOLDING COMPANY, LLC
|
| Defendants
|
ORDER AND REASONS
[1]
The plaintiff and the defendants are competitors in the manufacture and sale of molded footwear made of ethylene vinyl acetate, particularly sandals and clogs.
[2]
The plaintiff Double Diamond Distribution, Ltd. is a corporate body formed pursuant to the laws of the Province of Saskatchewan with its principal place of business in Saskatoon, Saskatchewan.
[3]
The defendant Crocs, Inc. is an American company with its principal place of business in Niwot, Colorado. The defendants Western Brands Holding Company, LLC and Crocs Retail, LLC are subsidiaries of Crocs, Inc. whose offices are also in Colorado. The defendant Crocs Canada, Inc. is a subsidiary of Crocs, Inc. with a head office in Richmond Hill, Ontario.
[4]
In a Statement of Claim issued in this Court on March 8, 2019, the plaintiff alleges that the defendants made or permitted to be made representations, statements and descriptions that misrepresented the nature of the CrosliteTM material used in the defendants’ footwear products. In particular, the plaintiff alleges that the defendants have represented CrosliteTM as being patented when in fact this is not the case. The plaintiff further alleges that these acts harmed it economically. The plaintiff seeks a declaration that the defendants acted contrary to section 52 of the Competition Act, RSC, 1985, c C-34 and subsections 7(a) and 7(d) of the Trademarks Act, RSC, 1985, c T-13. The plaintiff also seeks damages or disgorgement of the defendants’ revenues or profits as well as punitive damages.
[5]
The defendants have not filed a Statement of Defence yet.
[6]
Several motions by the parties were returnable at the Saskatoon General Sittings of the Court on June 20, 2019. With the consent and cooperation of the parties, I heard these motions by videoconference from Ottawa. Counsel for the plaintiff was in Calgary. Counsel for the defendants attended in person in Ottawa.
[7]
Most of these motions were disposed of in my Order and Reasons dated June 27, 2019 (2019 FC 868). The remaining motion, the defendants’ motion for security for costs, was adjourned on consent to July 11, 2019. On that date, once again the hearing was conducted by videoconference. I reserved my decision at the conclusion of the hearing.
[8]
For the reasons that follow, I am allowing the defendants’ motion for security for costs.
[9]
Rule 416(1) of the Federal Courts Rules, SOR/98-106, provides for a number of grounds upon which a Court may, on the motion of a defendant, order the plaintiff to give security for a defendant’s costs. The defendants in the present matter rely on two of these grounds, namely:
(b) the plaintiff is a corporation, an unincorporated association or a nominal plaintiff and there is reason to believe that the plaintiff would have insufficient assets in Canada available to pay the costs of the defendant if ordered to do so;
and
(e) the plaintiff has another proceeding for the same relief pending elsewhere.
[10]
Rule 416(2) provides that the Court “may order that security for the costs of a defendant be given in stages, as costs are incurred.”
[11]
An order for security for costs can have a significant impact on the course of litigation. Rule 416(3) provides that, unless the Court orders otherwise, until the security required by an order under subsections (1) or (2) has been given, the plaintiff may not take any further step in the action, other than an appeal from that order.
[12]
Looking first at the request under Rule 416(1)(b), the onus is initially on the defendants to establish a reason to believe the plaintiff would have insufficient assets in Canada available to pay the defendants’ costs if ordered to do so. If the defendants meet this initial threshold, the onus shifts to the plaintiff to establish either that it does have sufficient assets or that it should be permitted to proceed without providing security for costs because its case is meritorious but it is impecunious (cf. Rule 417) (Early Recovered Resources Inc v Gulf Log Salvage Co-Operative Assn, (2001), 205 FTR 127, 2001 FCT 524 at para 9 [Early Recovered Resources]).
[13]
The plaintiff has not filed any evidence of its assets or its ability to pay the defendants’ costs if so ordered. Neither has the plaintiff pled impecuniosity. The plaintiff’s position is simply that the defendants have failed to discharge their initial burden under Rule 416(1)(b) and, as a result, the motion on this ground should fail.
[14]
The burden on the defendants at this point under Rule 416(1)(b) is not a heavy one. The jurisprudence suggests that they only need to establish on a prima facie basis that the plaintiff might be unable to pay costs (Early Recovered Resources at para 10).
[15]
The defendants submit that the following evidence shows that there is a reason to believe that the plaintiff does not have sufficient assets in Canada to pay their costs if so ordered:
A Dun & Bradstreet Credit Report dated June 10, 2019, concerning the plaintiff rates its overall business risk as “High”
.According to Dun & Bradstreet, there are “significant stability and payment behavior concerns,”
a “higher than average risk of discontinued operations or business inactivity”
and “a very high potential for severely delinquent payments”
on the part of the plaintiff.As a result, Dun & Bradstreet recommends not extending credit of more than $3000 to the plaintiff.
This same report itemizes a history of payments on invoices between April 2017 and June 2019 which shows that often, although certainly not always, the plaintiff is late in making payments.
This report also notes what is said to be an outstanding judgment against the plaintiff in the amount of $66,945.30 in favour of the Canada Revenue Agency.From Federal Court records obtained by the defendants, this appears to relate to unpaid taxes, penalties and interest under the Excise Tax Act dating from December 7, 2018.
In February 2019, the plaintiff was ordered to pay $12,219.01 (USD) as a costs sanction in litigation involving the defendants in Nevada.This payment was not made until, approximately three months later, the defendants requested an order for a show cause as to why the plaintiff should not be further sanctioned for failing to make the payment that had been ordered.
In early 2018, USA Dawgs, Inc., the plaintiff’s U.S. distributor for its DAWGS branded footwear products, filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code (11 USC §§ 101-1532).
[16]
Even though the defendants’ burden at this stage is not a heavy one, I am not satisfied that they have discharged it. The evidence relied on by the defendants says nothing about the plaintiff’s assets in Canada or, more to the point, its lack of assets sufficient to cover the defendants’ anticipated costs, if so ordered, as Rule 416(1)(b) requires. The plaintiff has been in business since 2005. It appears to still be a going concern. At most the evidence demonstrates that it has a history of managing its cash flow in ways that are not always to the benefit of its creditors. There is no basis in the evidence to conclude that its outstanding debts as of June 2019 would exhaust its asset base. As Justice Heneghan observed in Intertech Marine Ltd. v Náutica (Ship), 2004 FC 1456, the “mere existence of judgments is not enough to justify an order for security for costs, in the absence of evidence about the assets of the Plaintiffs”
(at para 27). Significantly, when it was required to, the plaintiff recently found a way to pay the costs order that was made against it in Nevada (even if this required some prompting from the defendants, which should not have been necessary but which was nevertheless effective). The evidence relied on by the defendants is insufficient to meet even their initial burden under Rule 416(1)(b). This ground for seeking security for costs must therefore fail.
[17]
On the other hand, I am satisfied that security for costs is warranted under Rule 416(1)(e) because the plaintiff has another proceeding for the same relief pending elsewhere.
[18]
The dispute between the plaintiff (along with its former distributor, USA Dawgs) and the defendants underlying the present matter appears to be a longstanding one. It has been pursued in several different actions in several different jurisdictions. There is evidence before me that litigation based on broadly similar allegations has been undertaken in at least two U.S. states – Colorado and Nevada. Apparently the Colorado litigation has been ongoing since 2006. As well, on the same day as the plaintiff commenced the present Federal Court action, it also commenced a related action in the Court of Queen’s Bench for Saskatchewan.
[19]
From my reading of at least some of the pleadings in the Colorado action, there appears to be substantial overlap between that action and the present one. However, particularly because that matter involves a foreign jurisdiction and foreign law, I am unable to determine on the basis of the record before me whether the same relief is being sought in the Colorado litigation as is being sought in the present matter. There is also considerable uncertainty about the status of that litigation and whether it will even be going ahead. While not abandoning their argument on the basis of the Colorado litigation, the defendants acknowledged that they may be on firmer footing with respect to the related Canadian litigation. I agree that this is the better approach.
[20]
The Canadian litigation has a somewhat unusual history. It began with a Statement of Claim issued by the Court of Queen’s Bench for Saskatchewan on October 27, 2017. Double Diamond Distribution, Ltd., was the plaintiff. The defendants were three of the four corporate defendants in the present action (Western Brands Holding Company, LLC was not named) along with nineteen individuals. The individual defendants were past or present members of the Board of Directors of Crocs, Inc., or current or former senior executives with Crocs, Inc. However, for reasons that are not disclosed in the record before me, proof of service of the Statement of Claim on the defendants was never filed and the matter went no further.
[21]
On March 8, 2019, Double Diamond Distribution, Ltd., commenced two new actions. In effect, the defendants in the 2017 action were split into two groups. An action against the corporate defendants was commenced in Federal Court (with Western Brands Holding Company, LLC now named as a defendant). An action against the individual defendants (and a number of John and Jane Does) was commenced in the Court of Queen’s Bench for Saskatchewan. The allegations underlying these actions are substantially the same as those set out in the 2017 Statement of Claim. The same counsel acts for Double Diamond Distribution, Ltd. in both matters. No explanation has been offered in the record before me for why what began as a single action had now become two.
[22]
The question I must answer is whether the same relief is being sought in the Saskatchewan action and the present action. There is, of course, a notable difference between the two – the Saskatchewan action is against individual defendants while the action in this Court is against corporate defendants. Despite this, I am satisfied that the same relief is being sought in both proceedings.
[23]
The essence of both actions is a claim by Double Diamond Distribution, Ltd. to entitlement for damages due to alleged misrepresentations concerning CrosliteTM. As enumerated in the two Statements of Claim, the conduct which is alleged to give rise to the plaintiff’s entitlement to damages is essentially the same. Indeed, substantial parts of the two Statements of Claim are word-for-word identical. It is also clear that the plaintiff’s theory of the case in Saskatchewan is that the individual defendants were, to one degree or another, directing minds behind the US corporate defendants and/or knew of the alleged conduct by Crocs that is said to give rise to liability. (The Saskatchewan Statement of Claim states that, unless otherwise specified, “Crocs”
means the four corporations that are the defendants in the present action.)
[24]
Most significantly, there is a key point of intersection in the relief sought in the two actions. The present action against the corporate defendants seeks, inter alia, “damages or, at the Plaintiff’s election after the conclusion of discovery, an accounting and disgorgement of revenues or profits in an amount to be determined pursuant to s. 53.2(1) of the Trade-marks Act.”
The Saskatchewan action against the individual defendants states that the plaintiff “reserves the right at trial to waive the tort and to have restitution assessed in an amount equal to the gross revenues earned by Crocs, or the disgorgement of all income received by Crocs through the sale of these products.”
The specific relief sought then includes “at Double Diamond’s election for waiver of tort, restitution through an accounting and disgorgement of revenues or profits.”
Read in the context of what came immediately before, this must be a reference to the revenues and profits of Crocs – that is, the four corporate defendants that are named in the present action. This is the same relief, inter alia, as is sought in the present action.
[25]
Thus, even though two distinct groups of defendants are named in, respectively, the Saskatchewan action and the present action, I am satisfied that the same relief is sought in both proceedings. The substantial overlap between the two actions described in the preceding paragraphs gives rise to the mischief that can be caused by duplicative proceedings and which Rule 416(1)(e) is intended to guard against.
[26]
The defendants requested the sum of $50,000 as security for anticipated costs to be incurred through to the completion of the first round of written and oral discoveries. As is provided for by Rule 416(2), they requested that the security be provided in stages according to the following schedule:
a)
$25,000 within thirty (30) days from the date of the present Order; and
b)
$25,000 at least thirty (30) days prior to the first day of oral discovery.
[27]
The defendants expressly reserved the right to seek increased security at a later date if circumstances justify such an increase. It is also implicit in their request that, should the matter continue past the first round of written and oral discoveries, the defendants could seek security for costs with respect to subsequent stages of the litigation.
[28]
I agree with the defendants that staging is appropriate. As for the quantum, based on the draft bill of costs provided by the defendants, the anticipated length and complexity of this matter, and my own knowledge of the history of the case to date, the defendants’ request is reasonable. The plaintiff has suggested that, if security for costs is ordered, the amount should be substantially lower than what the defendants have requested. However, the plaintiff has not provided any evidence that it could not continue with the litigation if it is required to provide security in the amount requested. In the absence of such evidence, there is no reason to depart from the amount proposed by the defendants, which provides them with a reasonable degree of protection in the event that costs are ordered in their favour.
[29]
At the defendants’ request, I am not specifying the form in which the security for costs should be provided. Obviously whatever form it takes must be satisfactory to the defendants. I expect that reasonable counsel will be able to come to an agreement on this without too much difficulty. The parties are asked to advise the Registry in writing when the first stage of the security for costs has been provided if it does not take the form of a payment into court. This shall be done no later than thirty (30) days from the date of this Order.
[30]
The defendants also requested that, in the event that the plaintiff fails to provide security for costs as ordered, I order that this action be dismissed without further notice to the plaintiffs. I am not prepared to make such an order at this time. This is without prejudice to the right of the defendants to renew this request at a later date, if so advised.
[31]
The defendants are entitled to their costs on the present motion as well as on the motions I disposed of earlier. I would ask the parties to try to come to an agreement on those costs. Failing this, they may provide brief written submissions on costs.
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