Date: 20050225
Docket: T-1240-02
Ottawa, Ontario, this 25th day of February, 2005
Present: THE HONOURABLE MR. JUSTICE von FINCKENSTEIN
BETWEEN:
DIMPLEX NORTH AMERICA LIMITED
Plaintiff
and
GLOBALTEC DISTRIBUTORS LTD.
AIRIZONA ELECTRIC FIREPLACE CORP.
and
NINGBO JIAQING MACHINERY CO. LTD.
Defendants
REASONS FOR ORDER AND ORDER
[1] This is an appeal from an order of Prothonotary Lafrenière dated January 5, 2004, disallowing the addition of three personal Defendants to the Plaintiff's Statement of Claim.
[2] The facts are fairly straightforward. This action was commenced by Statement of Claim on August 2, 2002. The Plaintiff, Dimplex North America Limited ("Dimplex") is the owner of Canadian patents no. 2,175,442 and 2,310,367, invented by Kristoffer Hess and others ("Hess Patents"). The Hess Patents relate to flame simulating assemblies used in electric fireplaces. Dimplex has alleged that the Defendants are infringing certain claims of the Hess Patents.
[3] On December 5, 2003, the Defendants filed an Amended Statement of Defence. On September 7 - 8, 2004 examinations for discovery of the Defendant Globaltec Distributors Ltd. ("Globaltec") were held. Howard Nels Haugom ("Haugom"), Director and President of Globaltec, was examined as Globaltec's corporate representative. The examination for discovery, and the subsequent answers to undertakings, allegedly revealed facts which demonstrate that Haugom, Jixin Xu ("Xu") and Xiao Liang Chen ("Chen") are each personally liable for the acts of Globaltec and Ningbo.
[4] In the Notice of Motion dated December 6, 2004, Dimplex sought to further amend its Statement of Claim by adding Haugom, Xu and Chen as individual Defendants.
[5] Prothonothary Lafrenière justified his decision to refuse the additions as follows:
In my view, paragraphs 5 and 16 of the proposed amended statement of claim are simply insufficient to establish the personal liability of Haugom, Xu and Chen, since the allegations do not meet the test laid down by the Court of Appeal in Mentmore Manufacturing Co. Ltd. v. National Merchandise Manufacturing Co. (1978), 40 C.P.R. (2d) 164. In Mentmore, Le Dain J.A., speaking for the Court, stated that: "there must be circumstances from which it is reasonable to conclude that the purpose of the director or officer was not in 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 Plaintiff does not allege that any of the proposed defendants knowingly directed another entity to infringe the Plaintiff's patent, or were indifferent to the risk thereof, nor does it allege that they were acting outside the ordinary course as former or current officers or directors of the Defendants Globaltec and Ningbo. Knowledge or indifference must be pled with particularity, and cannot simply be inferred.
Being substantially in agreement with the analysis set out in paragraphs 32 to 46 of the written representations filed on behalf of the Defendants Globaltec and Ningbo, I would dismiss the motion for leave to amend. I conclude that the proposed amendments seeking to implead the individual defendants, after discarding immaterial and/or irrelevant allegations of fact, are nothing more than bald and conclusory allegations.
STANDARD OF REVIEW
[6] Both sides agree that the relevant law for appeals of a Prothonotary's order is laid down in Canada v. Aqua Gem Investments Ltd. [1993] 2 F.C. 425 as reformulated in Merck & Co. v. Apotex Inc., [2004] 2 F.C.R. 459, namely:
Discretionary orders of prothonotaries ought not be disturbed on appeal to a judge unless:
(a) the questions raised in the motion are vital to the final issue of the case, or
(b) the orders are clearly wrong, in the sense that the exercise of discretion by the prothonotary was based upon a wrong principle or upon a misapprehension of the facts.
[7] Both sides also agree that in light of the decision in Socan v. Landmark Cinemas Of Canada Ltd (2004) 30 CPR (4th) 257, it is established that this appeal raises an issue vital to the final issue of the case and accordingly, the Court can exercise its discretion de novo when disposing of this appeal.
[8] Dimplex is bringing its motion under Rules 3, 75 and 104. The purpose of this motion is to add individual Defendants to the corporate Defendants, with the effect of imposing personal liability on the directors of the corporate Defendants.
[9] The leading case for determining whether to allow such amendments is Mentmore Manufacturing Co Ltd v. National Merchandising Manufacturing co (1978) 40 C.P.R. (2d) 164, where Le Dain J.A. very succinctly stated the policy dilemma at page 171:
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.
[10] Le Dain J.A. also made the following observation regarding the practical difficulties posed by this dilemma at page 172:
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.
[11] He then proceeded to lay down the principle to be observed at page 174:
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 the 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 testis 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. (Underlining added)
[12] The specific pleadings that Dimplex wants to add to the Statement of Claim which in its view justify the addition of the individual Defendants state as follows:
5.A. Ningbo Jiaqing Machinery Co., Ltd. ("Ningbo") is a Sino-Canadian joint venture specializing in the production, marketing of residential and commercial electric heating products. The company is located in Zhedong Economic Development Zone of Yuyao City, Zhejiang. Ningbo has a North American office at #060-2844 Baainbridge Avenue, Burnaby, B.C., V5A 3W7.
5.B. The Defendant Howard Nels Haugom (Haugom") is the President and a founding Director of Globaltec. Haugom is an approximate one-third shareholder of Globaltec. Haugom's address is 4100 Burkehill Road, West Vancouver, B.C. V7V 3M2.
5.C. The Defendant Jixin Xu ("Xu") is the Secretary and Director of Globaltec. Xu is an approximate one-third shareholder of Globaltec. Xu's address is 6238 Malvern Avenue, Burnaby, B.C., V5E 3E8.
5.D. The Defendant Xiao Liang Chen ("Chen") is the owner of Ningbo. Chen is the directing mind of Ningbo. Chen is also an approximate one-third shareholder of Globaltec. Chen maintains an address in China at No. 5, Zhenxin Rd., Zhedong Economic Zone, Yuyao City, Zhejiang Province, China. Chen also maintains an address in British Columbia, Canada.
5.E. Collectively, Haugom, Xu and Chen are the directing minds of Globaltec.
5.F. Haugom, Xu and Chen have acted in concert together, and continue to so act, towards the common design of making, constructing, using, offering for sale and selling electric flame simulating assemblies in Canada and elsewhere.
Wilful Infringment - Personal Liability - Joint Tort Feasors
16.A. Dimplex states that Haugom, Xu and Chen are each personally liable for the acts of Globaltec and Ningbo. Chen, as the directing mind of Ningbo, and Chen, Haugom and Xu, as the directing minds of Globaltec, as more particularly set out below, have and continue to act beyond the scope of their duties and obligations as shareholders and directors of Ningbo and Globaltec as the case may be.
16.B. Moreover, as hereinafter set out, Haugom, Xu and Chen, together with Globaltec and Ningbo, have acted in concert with a view to entering the North American electric fireplace market. As a result, each of them is jointly and severally liable for the acts of the other.
16.C. Haugom, Xu and Chen, together withGlobaltec and Ningbo have had actual knowledge of Dimplex's patents at all material times. Dispite such knowledge, they embarked upon a deliberate, willful and knowing pursuit of a course of conduct which was likely to constitute infringement in Canada of the '442 Hess Patent and/or '376 Hess Patent, or at least reflected an indifference to the risk of it, in that:
(i). Chen desired to enter the electric fireplace market, and created a device which not only infringed Dimplex's patents, but was also a copy of Dimplex's product in terms of the log set, proportions and layout.
(ii). Chen enlisted the help of first Xu and then Haugom to enter the North American electric fireplace market. Chen then identified Don Befus a principal of Pacific Sales, a then current distributor for Dimplex electric fireplace assemblies, as a potential North American distributor.
(iii). Haugom and Xu then met with Don Befus purportedly for the purpose of engaging Befus as a North American distributor. With the benefit of the information obtained from Don Befus, Chen, Xu and Haugom then decided together to jointly enter the North American electric fireplace market on their own, to the exclusion of Don Befus and Pacific Sales. The above was all done prior to forming Globaltec.
(iv). Haugom then proceeded to create Globaltec was created for the purpose of selling and distributing fireplaces in Canada. At the same time, or shortly thereafter, Xu and Chen obtained each a one-third ownership interest in Gobaltec. Globaltec carries on no business other than the DBL-2000 fireplaces which infringe with '442 Hess Patent and the '376 Hess Patent, and has never carried on any other business.
(v). In the case of Chen's one-third interest in Globaltec, he acquired such interest in consideration of assignment of patent applications in Canada and the United States for electric fireplace technology. Chen, and not Ningbo, had taken ownership of the said patent rights and assigned them to Globaltec, all for his personal benefit, not for Ningbo's.
(vi). Haugom and Xu, own, direct and run other businesses together, including Quilts Etc., and Rocky Mountain Down & Feather. Haugom and Xu have directed the resources of their own businesses to be used for the benefit of Globaltec, Ningbo, Chen and their own benefit in furtherance of their efforts to manufacture and sell the electric fireplace assemblies at issue. Xu and Haugom supplied employees from their other businesses at Chen's request to represent Ningbo at a trade-show, providing them business cards which held them out as "Operations Manager" - Landy Luan; "Marketing Consultant" - Steve Larosa; and "VP of Sales & Marketing" - Graham McIntosh of Ningbo.
(vii). Ningbo is a Sino-Canadian joint-ventre. Ningbo has from time to time represented itself as operating out of 3149 Production Way, Burnaby B.C., the location of Quilts Etc., in its internet websites, advertising brochures, at trade-shows and on business cards. On other occasions, Ningbo has denied having an office in North America. On yet further occasions, it has advised that its address was #60-2844 Bainbridge Avenue, Burnaby, V5A 3W7. As a result of that information, Dimplex changed the Amended Statement of Claim to indicate that as the business address. Only when a process server attended at that location was it revealed that this is a postal outlet in a Green Grocer's call Bainbridge Market. In order to effect service on Ningbo, Ningbo was served with the Amended Statement of Claim by personally serving Graham MacIntosh at Quits Etc., at 3149 Production Way, Burnaby, B.C., where Mr. Steve La Rosa was also working.
(viii). The Defendants maintain a website at WWW.JIAQING.CA. Only Canadian entities are allowed to hold and maintain .ca domain names. This website is registered in the name of Ningbo Jiaqing Machinery Co. Ltd., and lists 3149 Production Way, Burnaby, B.C., V5A 3H1 Canada as its address, with an e-mail address of sales@quiltsetc.com.
17. The aforesaid activities of the Defendants have been without the consent or authority of Dimplex.
[13] A survey of the jurisprudence would indicate that in order to meet the Mentmore, supra, criteria:
a) actual actions of corporate officers must be pleaded if a motion to add personal defendants is to succeed. (See Sunsolar Energy Technologies (S.E.T.) Inc. v. Flexible Solutions Int. Inc., 2004 FC 1205).
b) besides being a director and officer of the company in issue, there must be an allegation that the individual ordered or authorized the acts complained of. (See Windsurfing International Inc. v. Novocation Sports Inc. (1987), 18 C.P.R. (3d) 230 (FCTD)
c) liability attaches when the actions of the director or officer are either such that the director's own behaviour is tortious or when the corporation is used as a cloak for the personal activities of the director. (See Halford v. Seed Hawk Inc., [2004] F.C.J. No. 189)
d) being a director and officer of the company in issue is not sufficient to allow the addition of personal defendants in an infringement action. (See Harnishchfeger Corp. Of Canada v. Kranco Material Handling Ltd. (1988), 23 C.P.R. (3d) 431 (FCTD))
[14] Assuming that every one of the facts pleaded can be proven, I can only find one allegation that specifically meets the criteria set out above namely the allegation in para 16.C. (i), to wit:
Chen desired to enter the electric fireplace market, and created a device which not only infringed Dimplex's patents, but was also a copy of Dimplex's product in terms of the log set, proportions and layout.
[15] The actions allegedly took place before Globaltec was incorporated. Thus, any copying of Dimplex's product by Chen would be in his personal capacity and not as director of the company. Accordingly, it would render him liable for infringement if such infringement is proven.
[16] No such allegation however was made with regard to Haugon or Xu. If all the other allegations regarding Chen, Xu or Haugom are proven I fail to see how one can reasonably conclude (using the Mentmore criteria) "that the purpose of the director or officer [Haugom, Xu or Chen] 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".
[17] None of the facts pleaded in the Further Amended Statement of Claim (other than 16.C.(i)) otherwise meet the criteria set out in a, b or c of paragraph 13 above.
[18] Accordingly, the Prothonotary was not correct in dismissing the motion with respect to all three individual Defendants. Chen should be added as an individual Defendant in light of the allegations pleaded in paragraph 16.C.(i). The addition of Chen should not cause any prejudice as he will be discovered as a corporate representative of Ningbo in any event.
[19] I have also been asked to issue an order for substituted service permitting the Plaintiff to serve its Further Amended Statement of Claim on all Defendants by service upon the solicitors of record for the corporate Defendants. Given that Chen is already implicated in this lawsuit and will be discovered, I see no reason for denying this request.
[20] Accordingly, this appeal will be partially allowed by ordering the addition of Chen as an individual Defendant to this action.
ORDER
THIS COURT ORDERS that this appeal is partially allowed.
1. Xiao Liang Chen is added as an individual Defendant to this action.
2. The Plaintiff is permitted to serve its Further Amended Statement of Claim on Xiao Liang Chen by service upon the solicitors of record for the Defendants Globaltec Distributors Ltd., Ningbo Jiaqing Machinery Co. Ltd. and Airizona Electric Fireplace Corp.
3. Costs of this appeal shall be payable to the Plaintiff in the event of the cause.
"K. von Finckenstein"
Judge
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1240-02
STYLE OF CAUSE: DIMPLEX NORTH AMERICA LIMITED v.
GLOBALTEC DISTRIBUTORS LTD.
AIRIZONA ELECTRIC FIREPLACE CORP. and
NINGBO JIAGING MACHINERY CO. LTD.
PLACE OF HEARING: TORONTO
DATE OF HEARING: FEBRUARY 15, 2005
REASONS FOR ORDER: THE HONOURABLE MR. JUSTICE VON FINCKENSTEIN
APPEARANCES:
Mr. Peter W. Choe
416-862-4413 FOR THE PLAINTIFF
Mr. Stewart Hayne
416-862-5750 FOR THE PLAINTIFF
Mr. Michael Manson
604-682-7780 FOR THE DEFENDANT
SOLICITORS OF RECORD:
David Aylen & Peter Choe
Gowling Lafleur Henderson LLP
FOR THE PLAINTIFF
Michael Manson & Franc Boltezar
Smart & Biggar
FOR THE DEFENDANT