IN THE SUPREME COURT OF NOVA SCOTIA
Citation: E.B.F. Manufacturing Ltd. v. White, 2008 NSSC 346
Date: 20081121
Docket: SH 247580
Registry: Halifax
Between:
E.B.F. Manufacturing Limited,
Electrobraid Fence Limited and Electrobraid Fence Inc.
Plaintiffs/Defendants by Counterclaim
- and -
Eric White and White Rhino Inc.
Defendants/Plaintiffs by Counterclaim
Judge: The Honourable Justice Charles E. Haliburton
Heard: November 12, 2008, in Halifax, Nova Scotia
Counsel: George W. MacDonald, Q.C., for the plaintiffs/defendants by counterclaim
Colin D. Piercey, for the defendants/plaintiffs by counterclaim
By the Court:
[1] This is an Application for Production of Documents pursuant to Civil Procedure Rules 20.02 and 20.06. The Defendants (hereinafter referred to as “White”) seek an order requiring the production of the year-end financial statements of Electrobraid Fence Inc. (hereinafter referred to simply as “Inc.”). In particular, the Defendant seeks the year‑end financial statements from its incorporation to date, together with internal financial statements for the same period, together with documentation relied upon by the principal of the several Plaintiff corporations with respect to the calculation of royalties payable to the Defendant.
[2] The Plaintiff objects to the production of the financial statements and the internal statements arguing that they are not relevant to the issues raised in this proceeding.
[3] There is a history.
Eric White
[4] The Defendant, Eric White, invented and holds the patent on an innovative type of electric fencing which combines braided polyester rope with conductive copper wire. In 1988, Mr. White granted E.B.F. Manufacturing Limited (“E.B.F.”) an irrevocable and exclusive right to use that patent and any patents pending related to the manufacture of “braided electrical fencing.” Therefore E.B.F. has the exclusive right to manufacture and sell “Electrobraid” fencing. Initially White and Bryson and White’s wife, Jennifer Fried, were shareholders in E.B.F; subsequently, as a result of exercising a shotgun provision, Bryson became the sole owner. My understanding is that Bryson is presently the sole shareholder of the three Plaintiff companies with “Inc.” having been recently incorporated in Delaware - I infer that the Delaware incorporation provides some advantages in relation to sales and promotion in the U.S.A., particularly since “Inc.” is said to be in the business of contracting to install or erect electric fences using Electrobraid along highways and around airports in the U.S.A.
[5] The dispute between the two parties has its own history. A previous action, White v. E.B.F. Manufacturing Limited (2005), N.S.C.A. 167, concluded with a decision of the Court of Appeal September 29, 2005. That was an action taken by White which claimed for unpaid royalties. In that earlier action, White recovered against E.B.F. the sum of $241,255.87 for unpaid royalties and costs.
[6] Perhaps because of the friction between these former partners White has incorporated his own company, White Rhino Inc. which has commenced a business of selling and installing or erecting electric fencing. White Rhino Inc. employs a product similar to Electrobraid. Some two years ago Bryson established the company referred to as “Inc.” in the U.S. with similar objectives.
[7] As noted above, it is the financial records of “Inc.” which are the subject matter of this application and the object of having those records disclosed is to analyze and evaluate the value of the royalties or licensing fee owing by the Bryson Group of companies to White.
[8] This action involves the same parties and is very closely related to the dispute which culminated in the decision of the Court of Appeal mentioned above. The Bryson companies claim damages against White and White Rhino Inc. for breaching the licensing agreement by selling a new generation electric fence and associated materials. E.B.F. claims that to be in contravention of their exclusive licensing agreement. The Plaintiffs seek to permanently enjoin the production and sale of this new product by White.
[9] There is an added twist since the decision in White v. E.B.F., supra, in that Bryson has now incorporated “Inc.” Bryson takes the position that “Inc.” is not subject to the requirement to report to White with respect to its sales of Electrobraid nor is it obliged to pay the royalty fee.
[10] E.B.F.’s Statement of Claim alleges that White and his new company began marketing and selling ElectroPlus “braided electrical fencing”, a product substantially similar to Electrobraid in direct open and express competition with the Plaintiffs. In paragraph 16:
By engaging in [that business]...White has breached the Licence Agreement, causing the Plaintiffs damage and loss....EBF has and continues to have an “irrevocable and exclusive” license to all White patents and patents pending...
[11] To this claim the Defendants, Eric White and White Rhino Inc. respond that (para.3):
The Plaintiffs have breached the licensing agreement...failed to make royalty payments...and such other breaches as may appear...
[12] The defence was amended after the decision of McDougall, J. in White v. E.B.F., supra, as a result of which an independent accounting resulted in a payment being finally paid as reported in the amended Defence dated September 2008.
3.15 On or about June 30, 2005, the Plaintiffs delivered a cheque in the sum of $241,255.87, representing the sum that they had been ordered to pay for past royalties, pre‑judgment interest and costs.
The amended Defence claims as they did in the earlier action, that the delay in complying with the court orders constitutes a breach of the license agreement and entitles the Defendants to a declaration that the agreement with E.B.F. has ended; and then in a counterclaim, damages are claimed as losses arising from an interim injunction obtained by the Plaintiff in this matter; and in the alternative, it is claimed that if the license agreement remains in full force and effect, White seeks a court‑ordered accounting process on a continuing basis. In the course of the discovery of Bryson in connection with these matters it appeared that it came to the attention of White that there existed the new Delaware company “Inc.”, which company began selling Electrobraid and related accessories in the Spring of 2006.
The Issues To Be Determined at Trial
[13] When this matter comes to trial, it seems clear that the Plaintiff, Bryson et al. must satisfy the Court that the licensing agreement and royalty fee arrangement continues to be in force. The Defendant, White will be attempting to prove that the required licensing fee has not been paid in accordance with the decision rendered by McDougall, J. and that it is thereby terminated as having been repudiated by the Plaintiffs. In aid of that proposition, White will attempt to establish that the licensing fee must be paid in relation to the gross sales of E.B.F. Manufacturing Limited, Electrobraid Fence Limited, and Electrobraid Fence Inc. The result most favourable to White would be a conclusion that the agreement calls for a two per cent fee on the gross income of all these companies including “Inc.” As noted earlier, this company is involved in the installation as well as sales of the Electrobraid fencing.
CONCLUSION
[14] In order to understand the ramifications of any interpretation which a Court may choose to give to those licensing fee arrangements if still in force, it will be necessary to have financial disclosure by “Inc.”
[15] Counsel for Bryson pointed out that Electrobraid Fence Inc., the Delaware company, is not simply a selling agency, but has embarked on the business of actually installing fencing using this technology under contract with highways and airports; he has suggested that only five per cent of the gross revenues of “Inc.” is derived from the actual sale or installation of Electrobraid and its accessories to third parties. He argues further that because White Rhino Inc. has embarked on the business of selling and installing the next generation product, these two companies are in fact competitors and that the disclosure of the financial statements by “Inc.” would be detrimental to its competitive position vis‑à‑vis the Defendant. It is argued that what is relevant is how much of the relevant product is purchased by “Inc.” from E.B.F. and what price or value should be attached to that sale.
[16] I conclude that Bryson has some difficulties in making that argument. The decision rendered by the Court and confirmed by the Court of Appeal in the earlier case makes it clear that at least insofar as E.B.F. Manufacturing and Electrobraid Fence are concerned, the number on which the two per cent is to be paid is the gross sales of the two companies. The inter‑company sales or transfers would not attract the royalty charge which is only to apply on the final sale to arm’s length third parties. The royalty is easily calculated at two per cent of gross sales and is payable monthly. Thus, one of the conflicting issues between the parties on the trial of this matter will be whether gross sales of “Inc.” attract the obligation to pay the two per cent royalty as an extension of the activities of the other Bryson companies. White will contend that to be the case.
[17] The position of Bryson will be that the original agreement could not have intended such a result. He will argue that the original agreement contemplated a two per cent obligation for only that product actually delivered to or for the benefit of a third party at a fair market value. The value added by “Inc.” in the course of constructing a fence will include materials and services additional to Electrobraid and its accessories. One assumes that Bryson will argue that the paying of a royalty on the total price generated in a contract to install a fence was never contemplated by the parties at the time of their agreement, and that such an interpretation would be unreasonable.
[18] A reading of the earlier decisions in the dispute between these parties discloses that the amount of the royalty was only to be determined after a review by an independent auditor or accountant of the financial statements of the two Bryson companies. It seems apparent that an analysis of the financial statements of Electrobraid Inc. will be necessary in order to assist the Court in determining to what extent Electrobraid and its accessories form a part of the gross revenues of Electrobraid Inc, and whether the contract between White and Electrobraid will bear the interpretation sought.
[19] Accordingly, the Application to Produce the Financial Statements requested will be ordered. They are relevant to matters in issue. The review and analysis of those statements and the nature of the business being carried on by Electrobraid Inc. by a qualified person will be a necessary ingredient in forming the decision of the Court about the appropriate and fair resolution of the royalty issue. The Application is allowed.
J.