Medicine Shoppe Canada Inc. v Devchand, 2012 ABQB 375

Court of Queen ’ s Bench of Alberta Citation: Medicine Shoppe Canada Inc. v Devchand, 2012 ABQB 375 Date: 20120607 Docket: 1103 05878 Registry: Edmonton Between: Medicine Shoppe Canada Inc. Plaintiff - and - Neil Anil Devchand, Rocky Mountain Wholesale, 927051 Alberta Ltd.. O/a Rocky Mountain Wholesale Defendants And Between: Neil Anil Devchand and Heritage Hill Pharmacy Inc. Plaintiffs by Counterclaim (Applicants) - and - Medicine Shoppe Canada Inc. and Katz Group Canada Inc. Defendants by Counterclaim (Respondents) _______________________________________________________ Reasons for Decision of the Honourable Madam Justice J.E. Topolniski

_______________________________________________________ I. Introduction [ 1 ] There are two applications before the Court. [ 2 ] The first is brought by Neil Devchand, a pharmacy store franchisee, and his company Heritage Hill Pharmacy Inc. (collectively Devchand), for an order compelling answers to questions posed to an officer of the franchisor, the Defendant Medicine Shoppe Canada Inc. (Medicine Shoppe).

The Defendant Katz Group Canada Inc., which did not participate in the applications, is a former shareholder of Medicine Shoppe. [ 3 ] The questions which the officer refused to answer arose in questioning on an affidavit made in support of an application by Medicine Shoppe to stay a counterclaim pending arbitration. The counterclaim was issued in litigation commenced by Medicine Shoppe to enjoin Devchand from allegedly breaching a contractual restrictive covenant.

The main action has been resolved by consent. [ 4 ] The second application is brought by Medicine Shoppe, which applies for a temporary sealing order of documents containing trade secrets. II. The Issues [ 5 ] The issues to be dealt with are: 1. Is the questioning permissible? 2. Is a temporary sealing order warranted? III.

The Factual Background [ 6 ] A brief overview of the parties' relationships and the triggers for their respective applications is required. [ 7 ] On March 10, 1993, the parties entered into a license and franchise agreement which included an arbitration clause that only exempts claims for injunctive relief concerning the enforcement of restrictive covenants (Agreement). In April 2011, Medicine Shoppe sued Devchand for alleged breach of a restrictive covenant precluding Devchand from buying pharmaceutical products from any third party. The claim was for declaratory and injunctive relief.

Devchand defended and counterclaimed, alleging breaches of contract, trust and fiduciary duty among other claims (Counterclaim). The relief sought in the Counterclaim includes an accounting of all incentives, program funds and benefits under the Agreement since inception. [ 8 ] Rather than defending the Counterclaim, Medicine Shoppe applied for a stay pending arbitration (Stay Application). Medicine Shoppe's officer, Ross McKay, swore a bare bones affidavit in support of the Stay Application that referenced and attached the Agreement.

[ 9 ] During questioning on his affidavit, McKay refused to answer any questions which related only to the merits of the Counterclaim, thereby prompting Devchand's application. In the course of that questioning, Devchand put to McKay various documents which Medicine Shoppe considers highly confidential. As a result, Medicine Shoppe now seeks a temporary sealing order in relation to those documents. A. The Motion to Compel Answers to Questions on Affidavit 1.

Statutory backdrop [ 10 ] Rules 1.2, 1.7, 5.25, and 5.3(1) of the Alberta Rules of Court ( Rules ) and s 7 of the Arbitration Act , RSA 2000, c A-43 are germane. [ 11 ] Rule 1.2(1) describes the purpose of the Rules generally as being a means for identifying the real issues in dispute and providing a fair, just, expedient, and cost-efficient means for the resolution of claims. The notions of proportionality (Rule 1.2(4)) and contextual

interpretation (Rule 1.7) are embodied in the Rules . [ 12 ]

Part 5 of the Rules speaks to disclosure of information which includes questioning. Rule 5.2(1) explains that questions are relevant and material only if the answer could significantly help determine one or more of the issues raised in the pleadings. Rule 5.25 provides that questions may be objected to if irrelevant and immaterial, if the answer is privileged or if the questions are unreasonable or unnecessary. Rule 5.3(1)(

b) allows a variance from application of the Rules if compliance would cause expense, delay, danger or difficulty grossly disproportionate to the likely benefit of compliance. [ 13 ] Section 7(1) of the Arbitration Act mandates that the Court grant a stay of proceedings if the parties have contracted to have their disputes arbitrated, subject to limited discretionary exemptions described in s 7(2). Section 7(2)(

e) provides that the court may refuse to stay the proceedings if the matter in dispute is a proper one for default or

summary judgment (Summary Judgment Exemption). [ 14 ] It is common ground that the arbitration clause in the Agreement requires disputes of the nature alleged in the Counterclaim to be arbitrated. At issue is whether Devchand can elicit evidence by questioning McKay on his affidavit to show that the matter is suitable for

summary judgment. [ 15 ] With this backdrop I turn to the parties' positions and the analysis. 2. The parties' positions [ 16 ] According to Devchand, McKay refused to answer questions on the following issues: (

i) Must Devchand buy generic medications from manufacturers chosen by Medicine Shoppe? (ii) Is Medicine Shoppe negotiating contracts which provide for allowances to Devchand and is it entitled to or paid a fee for same? (iii) Is Devchand entitled to an accounting? (iv) Is Medicine Shoppe entitled to a fee for these negotiations?

[17] Devchand's view is that the broad scope typically afforded a questioner on questioning an affiant permits exploration of themerits of the Counterclaim since the Stay Application brings the

Summary Judgment Exemption into play. Further, since a stay isanalogous to

summary dismissal, all of the issues raised in the McKay affidavit and the Counterclaim are relevant and, therefore, subjectto questioning. [18] In turn, Medicine Shoppe submits that the questions posed to McKay are irrelevant to the Stay Application and constitute anabuse of process. In Medicine Shoppe's view, Devchand's motive for the questioning has nothing to do with the Arbitration Clause andeverything to do with avoiding the onus of establishing that the

Summary Judgment Exemption applies. 3. Analysis [19] A brief review of the (sometimes competing) fundamental principles in the Arbitration Act and the Rules is warranted. [20] A respondent to a motion need not file a responsive affidavit before questioning the applicant and may elect to proceedwithout any responsive affidavit (WA Stevenson and JE Côté, Alberta Civil Procedure Handbook (Edmonton: Juriliber, 1997), c 45, PtN; Bullex Developments Ltd v Terra Mines Ltd (1984), (AB KB), 31 Alta LR (2d) 93 at paras 5-6 (QB); Triple D &GL Ranches Ltd v Duncan, 2011 ABQB 401 at para 56).

This applies equally to a party resisting an application for a stay. [21] While the scope of questioning is not restricted to the four corners of an affidavit (Dow Chemical Canada Inc v ShellChemicals Canada Ltd, 2008 ABQB 671 at para 7, 459 AR 68), there are limits concerning relevance and materiality.

This is especiallygermane where the burden of answering the questions or providing undertakings would be grossly disproportionate to the benefit of theanswers (Rule 1.2(4); WA Stevenson and JE Côté, Civil Procedure Encyclopedia (Edmonton: Juriliber, 2003) at 6-53). [22] In Alberta Mortgage and Housing Corp v Klapstein, 1998 ABCA 185, 216 AR 335 at 336, Côté JA observed thatquestioning cannot be carried to an excessive or abusive extent, stating: Though a number of cases were cited on the broad scope of examinations for discovery, this is not an examination for discovery.

It maywell be that the deponent cross-examined in this particular case could be required to inform herself on certain topics, and to producecertain documents. But the decided cases on cross-examination on an affidavit say that it cannot be carried to an excessive or abusiveextent. Furthermore, rule 255 and rule 216.1 say much the same thing… [23] The court has inherent discretion to control the process of a proceeding, including cross-examination on an affidavit (Alberta(Treasury Branches) v Leahy, 1999 ABQB 829 at para 29, 216 AR 335, citing Burndy Canada Ltd v Brown (1978), 5 CPC 266 at 274(Ont HCJ)).

This is codified in Rule 1.4. [24] A number of authorities discuss the principles governing contractual arbitration clauses and the

Summary JudgmentExemption. These principles can be summarized as follows: (

i) The competing policies at play with the Default/Summary Judgment Exemption are upholding contractual arrangements andexpeditious dispute resolution (Balancing Pool v Transalta Utilities Corp, 2009 ABQB 631 at paras 40 and 47, 492 AR 344). (ii) The party moving for a

Summary Judgment Exemption bears the onus of establishing that

summary judgment would besuccessful on the evidence then before the court (Balancing Pool at para 58). The court cannot consider what evidence might beadvanced later (Balancing Pool at para 48). (iii) The

Summary Judgment Exemption is to be granted only in the clearest of cases, "…where it is readily and immediatelydemonstrable on the record that the responding party to the proposed

summary judgment motion has no basis whatsoever for disputing

the claim or claims of the moving party" (Sehdev v Colours by Battistella Inc, 2008 ABQB 248 at para 23). [25] It is well established that

summary judgment may be suitable if the facts are clear and undisputed, or if the outcome hingeson the

interpretation of a statute or document, or some other issue of law that arises from undisputed facts (Tottrup v Clearwater(Municipal District No 99), 2006 ABCA 380 at para 11, 401 AR 88). There is no question that the bar for

summary judgment is high. [26] In the leading case on the scope of cross-examination on affidavits under the old Rule 314, Ed Miller Sales and Rentals Ltdv Caterpillar Tractor Co, (AB KB), [1981] 4 WWR 760 (QB), Feehan J held that cross-examination is limited to theissues arising from the affidavit as they relate to the motion for which the affidavit was filed in support (see also: Alberta TreasuryBranches at paras 24-25; Gardener v Katz Corp, 2002 ABQB 758 at para 2; Kerrigan Ventures Corp v Reynolds, Mirth, Richards &Farmer (1996) 1996 ABCA 14 , 178 AR 246 (CA); and Alberta Securities Commission v Institute for Financial LearningGroup, 2005 ABCA 268, 371 AR 144). [27] It appears that Devchand is seeking to employ the questioning of McKay to marshal sufficient evidence to make out theSummary Judgment Exemption without filing additional evidence. [28] In my view, if a plaintiff wishes to contend on an application for a stay pending arbitration that the

Summary JudgmentExemption applies, the plaintiff must first have filed a

summary judgment application together with the supporting affidavit. Until thattime, the

Summary Judgment Exemption is not in issue. Devchand has not done so. Accordingly, the questions posed of McKay areneither material nor relevant to the Stay Application. [29] It is only where a plaintiff seeking to rely on the

Summary Judgment Exemption files evidence in support of the

summaryjudgment application and the defendant elects to file a responsive affidavit that questioning of that affiant on the defence to the claim isappropriate. [30] I reject the proposition advocated by Devchand that the stay application is akin to one for

summary dismissal (andpresumably entitling him to a broad scope of questioning on the merits of the Counterclaim). The stay application is just that - it is for astay. The merits are not determined. It does not constitute a final disposition of the case as

summary dismissal would. In the context of acase involving arbitration clauses, the stay application is akin to an application to determine the forum conveniens. [31] In the result, Devchand's application to compel answers to the disputed questions is denied. B. The Motion for a Temporary Sealing Order 1. Documents sought to be sealed [32] The documents shown to McKay at questioning and sought to be temporarily sealed are: (

a) a “franchise prospectus”; (

b) versions of formulary setting out drugs that must be purchased and e-mails relating to changes to the formulary; (

c) documents relating to changes to an incentive program and payments made under the incentive program; (

d) budgets showing incentives as a percentage of profits; and

(

e) excerpts from an operations manual. 2. The parties' positions [ 33 ] Medicine Shoppe's view is that the confidential and commercial information contained in the documents warrants the order while Devchand effectively takes no position. 3. The Governing principles [ 34 ]

Part 6, Division 4 of the Rules deals with applications to seal or unseal court files. [ 35 ] A sealing order is a discretionary and extraordinary remedy.

It may be justified in cases concerning commercial interests only if it is required to prevent a serious risk to an important interest and when the salutary effects of the order outweigh the deleterious effects ( Sierra Club of Canada v Canada (Minister of Finance) , 2002 SCC 41 at para 53 , [2002] 2 SCR 522 ). [ 36 ] The undisputed evidence is that the documents sought to be sealed contain confidential trade secrets that, if released into the public domain, would cause serious harm to Medicine Shoppe.

In my view, both public and private interests are at stake given the need for commercial certainty and protection of proprietary information. Further, the salutary effects of temporarily sealing the documents outweigh any deleterious effects. [ 37 ] Compliance with

Part 6, Division 4 of the Rules was not addressed by Medicine Shoppe at the hearing of the application. Consequently: i. If Medicine Shoppe did not comply with

Part 6, Division 4 of the Rules , the temporary sealing order will expire in 7 days; ii. If Medicine Shoppe did comply with

Part 6, Division 4 of the Rules , the temporary sealing order will remain in effect pending the outcome of the Stay Application, and if successful, the arbitration. IV. Costs [ 38 ] If they cannot agree, the parties may speak to costs within 20 days. Dated at the City of Edmonton, Alberta this 7 th day of June, 2012. J.E. Topolniski J.C.Q.B.A.

Appearances: Roger C. Stephens Simons & Stephens for the Applicants Ellery Lew Witten LLP for the Respondent, Medicine Shoppe Canada Inc.