Canada: Ex Parte Redux - Justice Hughes Revisits Without Notice Injunctions in Copyright Cases

Article by Mark Hayes and Antonio Turco, ©2006, Blake, Cassels & Graydon LLP

In Netbored Inc. v. Avery Holdings Inc. et al., the Federal Court confirmed that ex parte injunctions and Anton Piller orders are only to be granted in "exceptional cases" and that a party seeking such an order must make "full and frank" disclosure to the Judge hearing the application for the order.

The decision by Mr. Justice Hughes arose out of a motion to review an ex parte injunction and Anton Piller order granted in an action involving allegations of copyright infringement, breach of confidentiality and breach of fiduciary and contractual duties as between an employer and ex-employee.

An ex parte proceeding is one brought without notice to the other side. An Anton Piller order is a court order that compels the defendant, upon threat of a finding of contempt, to permit the plaintiff to enter upon the defendant’s premises in order to search for and remove certain specified items. Anton Piller orders are almost always obtained on an ex parte basis.

A critical factor in respect of a proceeding taken ex parte, and, in particular in Anton Piller situations, is the heavy obligation of the applicant to make full and frank disclosure of all material facts relating to the application, including facts detrimental to the applicant’s own case. The consequences of failing to make such disclosure can be severe, and include the setting aside of the order and an award of costs against the applicant.

To obtain an interim injunction, an applicant must establish that (i) there is a serious issue to be tried; (ii) if the injunction is not granted, it will suffer irreparable harm that cannot be compensated in damages; and (iii) the balance of convenience favours granting the injunction. If the injunction is to be granted without notification to the defendant, the applicant must also demonstrate why it is necessary to obtain the relief sought without giving the defendant notice of the hearing or providing it with an opportunity to be heard.

Anton Piller orders are extreme remedies that can easily be abused. Courts are, therefore, wary about granting them. One concern is that the order will amount to the judicial legitimization of a fishing expedition through a defendant’s records. Another concern is that there is a potential for the order to be sought for the sole purpose of destroying a defendant’s business.

Against this background, courts have set three essential pre-conditions for granting an Anton Piller order in addition to the usual requirements in an ex parte injunction application. First, there must be a strong prima facie case. Secondly, the damage, potential or actual, must be very serious for the plaintiff. Finally, there must be clear evidence that the defendants have in their possession incriminating documents or things, and that there is a real possibility that they may destroy such material before a motion on notice to the defendant can be made. A fourth condition was noted by Justice Hughes, namely that the inspection would do no real harm to the defendant or its case.

In his decision, Justice Hughes examined whether this case raised "exceptional circumstances", meeting the four criteria, and whether full and frank disclosure had been made by the plaintiff.

The plaintiff Netbored Inc. (Netbored) is an Ontario-based corporation that offers its products, notably plasma television sets and audio equipment, to its customers exclusively via the Internet. Netbored operates a number of different Web sites through which it offers its products for sale, including www.plasma.com.

The defendant Avery Holdings Inc. (Avery) is also an Ontario- based corporation involved in a similar business, through its Web site, www.discount-plasma.com, which it launched in September 2003. Two other defendants were the principals of Avery. The final defendant was the brother of one of the Avery principals, who had previously worked for Netbored and provided assistance in designing Avery’s Web site.

The practice of offering and selling products to retail customers exclusively via the Internet is known as e-tailing. Customers usually located Netbored through Internet search facilities, the principal one being Google. It is important for an e-tailer to maximize the possibility that a customer will find its Web site through a search facility like Google. While the manner in which Google searches the Internet and ranks the results is not a matter of public record, it is widely believed to be influenced by meta tags (text which is contained in the coding of a Web site but is not ordinarily shown on the user’s display). It is also believed that Google changes the manner in which it ranks its results so as to frustrate those who may artificially seek high rankings. This is known in the trade as the "Google dance".

Netbored alleged that, in mid-October 2003, it noticed that traffic to its Web site, and its ranking on the Google search engine, had dropped significantly, resulting in a decrease in sales. Netbored discovered the existence of Avery’s Web site and alleged that much of the text, images and compilations of materials were identical or substantially identical to the material on Netbored’s Web site.

Netbored attempted to have Avery’s Web site, at the time hosted in the United States, taken offline through the "notice and takedown" provisions of the United States Digital Millennium Copyright Act. After being taken offline twice by its U.S. host at Netbored’s insistence, Avery moved the Web site to a Canadian server. Netbored continued to make demands of the host that the Web site be taken down. In an effort to cease this perceived harassment, Avery commenced an action in the Ontario courts against Netbored and its principal. At the time the Anton Piller order was issued in the Federal Court, the parties, through their lawyers, were discussing a date for the delivery of a statement of defence.

In the meantime, and without notice to Avery, Netbored commenced an action in the Federal Court. Netbored sought, ex parte, an interim injunction and an Anton Piller order. Netbored’s application was twice denied by one of the judges of the Federal Court who was not satisfied that a strong prima facie case had been made. On the third try, a different judge of the Federal Court heard the matter and granted the order sought by Netbored. The Anton Piller order was executed the next day.

On the review motion, Justice Hughes found that there was no strong prima facie case of copyright infringement. The Court found Netbored had not properly pleaded or particularized the works in which it claimed ownership and there was no evidence that any of the works were owned or authored by Netbored, other than assertions from its principal.

Specifically, Netbored had been vague about what was the subject of its copyright claim. Justice Hughes made it clear in this case that copyright claims must be pleaded and proved with particularity. Specifically, he stressed that it is not sufficient to allege copyright infringement without elaborating on "what the particular subject matter is, how copyright in that subject matter subsists in Canada, and how it is that the plaintiff asserts ownership in that copyright".

Justice Hughes reviewed certain aspects of copyright law in Canada. The Copyright Act provides that copyright subsists in a variety of works and compilations provided that the author was a citizen of Canada or other qualified country (such as a Berne Convention country) and, if the work was published, it was first published in Canada or such country. Thus, a claim alleging copyright infringement must state the identity of the work, describe it as a work or compilation within the meaning of the Copyright Act, and state the nationality of the author and place of first publication. These elements were missing from the pleading. A copyright registration, while not required, provides prima facie proof of the requisite factors as to identity, authorship and publication. Even without such a registration, on a prima facie basis, the subsistence of copyright in an identified work will be presumed, as will the authorship and ownership if the name of the author and/or owner appear on the work. However, such facts were not pleaded.

The Court questioned whether meta tags possessed copyright at all or whether they were "simply formulae derived arrangements designed to serve a business function." The Court noted that the meta tags could be analogous to the arrangement of information in telephone directories discussed in Tele-Direct (Publications) Inc. v. American Business Information. With respect to confidential information, Justice Hughes noted that the Federal Court does not have jurisdiction to hear and determine issues as to confidential information.

On the issue of serious damage to Netbored, Justice Hughes found that no damage had been demonstrated by Netbored in the Anton Piller sense. He stated that the damage that must be alleged to obtain an Anton Piller order must be connected to the need to preserve documents and materials, rather than in respect of some continuing business activity as in the case of an ordinary injunction.

The plaintiff also alleged that it had suffered damage because Avery copied and used the plaintiff’s meta tags and, thereby, hurt the plaintiff’s Google ranking. The Court stated that this was ultimately an issue for trial and, at the preliminary stage of the action, that damage was largely speculative and unproven.

Finally, Justice Hughes found no basis to justify a finding of a real possibility that evidence may be destroyed by the defendants. He noted that much evidence upon which the plaintiff’s case rested, i.e., Avery’s Web site, was publicly available to anyone accessing the Web site.

Justice Hughes noted that what Netbored was really after was an interim injunction. He found that Netbored had failed to meet the test for an injunction since it had, at best, shown a possible monetary loss which was compensable in damages. In addition, there was no reason why such an injunction could not have been sought on notice to the defendants.

With respect to Netbored’s duty of candour, Justice Hughes found that Netbored’s submissions and evidence in support of the ex parte orders lacked candour in two important aspects. One was that Netbored had not disclosed to the Court that one of the premises it wanted to enter was a residential apartment leased to someone who is not a defendant. The second was the failure of Netbored to disclose the ongoing discussions between its lawyers and Avery’s lawyers in the context of the Ontario action.

For all these reasons, the Court vacated the interim injunction and the Anton Piller order. Another interesting aspect of the Court’s decision was how it dealt with costs. The principals of Avery were granted their costs on a full indemnity basis since "no case" had been made against them. As a result, the plaintiff will likely end up with a very expensive lesson in how not to seek ex parte relief.

The decision confirms that the bar is set very high for a plaintiff in terms of making full and frank disclosure in the context of seeking an ex parte injunction or Anton Piller order. A plaintiff must ensure that all relevant facts are disclosed to the Court, even where those facts are less than favourable to its position.

With respect to copyright pleading and proof, Justice Hughes’ decision reinforces that allegations of copyright must be fully pleaded and particularized and that issues of ownership and chain of title must be dealt with. Although these requirements have always been there, this decision, and others recently rendered by Justice Hughes, serve as a warning that from now on plaintiffs must plead and prove their copyright claims with greater particularity.

The authors successfully represented some of the defendants in the motion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.