H.R.C. Tool & Die Mfg. Ltd. v Naderi, 2013 ABQB 429

Court of Queen ’ s Bench of Alberta Citation: H.R.C. Tool & Die Mfg. Ltd. v Naderi, 2013 ABQB 429 Date: 20130730 Docket: 0803 17309 Registry: Edmonton Between: H.R.C. Tool & Die Mfg. Ltd. Plaintiff - and - Mehrdad Naderi, Onkar Bahra and Prowest Machine Ltd. Defendants _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice Brian R.

Burrows _______________________________________________________ [ 1 ] Mehrdad Naderi, Onkar Bahra and their company, Prowest Machine Ltd., seek an order relieving their counsel from trust conditions which were imposed by counsel for H.R.C. Tool & Die Mfg. Ltd. and which were accepted by their counsel, when certain financial information of H.R.C. was disclosed in the disclosure stage of this action.

H.R.C. opposes on the basis that the trust conditions provide reasonable and necessary protection to H.R.C. from the misuse of the financial information by its commercial competitor, Prowest and its principals, Naderi and Bahra. [ 2 ] Naderi, Bahra and Prowest also seek production of further financial information for periods following the periods for which information has already been disclosed subject to the trust conditions.

[3] The action was commenced in 2008. H.R.C. claims that Naderi and Bahra, who were employees of H.R.C., each breachedthe terms of employment, nondisclosure and confidentiality agreements between each of them and H.R.C., conspired to harm H.R.C.,interfered with H.R.C.’s economic interests, and breached fiduciary duties they owed to H.R.C. It claims that Naderi and Bahracommitted these wrongful acts when they left H.R.C.’s employ and started a competing business, Prowest.

It claims that as a result ofthese breaches it has suffered and will continue to suffer, among other things, “loss of opportunity to compete and earn revenue, resultingin loss of profits”. Naderi and Bahra have counterclaimed for constructive dismissal, arrears of salary and unpaid bonuses. [4] In January and May 2009, H.R.C.’s counsel forwarded Naderi and Bahra’s counsel financial information relevant to itsclaim on trust conditions. Naderi and Bahra’s counsel accepted the trust conditions. The trust conditions were: a.

The Financial Statements . . . shall not be disclosed or made available to your clients, nor referred to in any such way as to allowyour clients to calculate the Plaintiffs’ profit; b. The Financial Statements may be disclosed under conditions of confidentiality (in a form agreed by all parties) to any accountantand/or financial advisors designated by Defendants’ counsel in order to obtain advice with respect to the Information, for the purpose ofthis litigation; c.

Any and all Justices presiding over this matter or applications in this matter shall be asked to limit the communication of theInformation to the public; d. These trust conditions shall attach to the Financial Statements . . . and thus exist throughout the entire litigation and afterconclusion of the litigation until such time as they are altered by agreement of all parties or by Court Order; and e. The Defendants will be at liberty to make application before the Court to vary the terms and conditions of the trust conditions. [5] The financial statements disclosed subject to these trust conditions were: a.

Profits for each of the last 5 months of 2008 b. Financial Statements for 2007, 2008 and 2009 c. Income Statements for 10 months of 2009 d. Customer Sales

Summary Reports for each month beginning March, 2009 and ending May, 2011. [6] In September 2010, Naderi and Bahra applied to vary the trust conditions to allow Naderi and Bahra personal access to thedisclosed materials. Sanderman J. dismissed the application but granted Naderi and Bahra liberty to bring a similar application at a laterdate if there was a change in circumstances.

That grant of liberty to bring another application is not reflected in the formal order, butcounsel appear to agree that Sanderman J. did put that condition on the dismissal of the application. [7] The trust conditions imposed and accepted here accomplish the same end as a confidentiality order which the court canimpose in appropriate circumstances under Rule 216.1. The application of this Rule was discussed by S. L. Martin, J. in Phoenix Technology Services v. Braisher (2007) 2007 ABQB 261 , 74 Alta. L.R. (4th) 328.

She observed that the starting point is theparty’s right to know the case against it and to instruct counsel.

However, where the party seeking the confidentiality protectionestablishes by compelling evidence that honouring the other party’s right to know would give rise to a danger or difficulty for thedisclosing party that would be grossly disproportionate to the likely benefit to the receiving party, the order should be granted. [8] If this were an application by H.R.C. for a confidentiality order, the question would be whether H.R.C. had established thatthe danger or difficulty created for it if required to disclose the financial information without the confidentiality protection, was grossly

disproportionate to the benefit Naderi and Bahra would derive in defending H.R.C. ’ s claim and pursuing their counterclaim, if they had normal pre-trial access to the financial information. However, in my view, by accepting the trust conditions imposed by H.R.C., Mr. Bahra and Mr. Naderi can be taken as having accepted that the circumstances justified the confidentiality protection – that H.R.C. had or could meet the test just described. In my view this puts the burden on Mr. Bahra and Mr.

Naderi to establish that the confidentiality protection is no longer justified. [ 9 ] H.R.C. ’ s principal, Nicolas Papadopoulos, has sworn to the following as justification for the trust conditions: Permitting the Defendants access to the Plaintiffs ’ financial information would provide them with an unfair advantage. Through their employment with the Plaintiff, Naderi and Bahra were privy to the Plaintiff ’ s pricing strategy and gross sales figures but were not permitted access to full financial information.

Knowing the Plaintiff ’ s profit and expenses would provide the Defendants with the knowledge to strategically bid for and price various jobs. In my view experienced individuals in this industry, such as the Defendants, would not be able to erase the information from their mind and exposure to the confidential financial information would influence the way the Defendants do business in the future. [ 10 ] Mr.

Bahra swore at the time of the application before Sanderman J. that personal access by Naderi and himself to the financial information is necessary: We believe that the restrictions set out in the [trust conditions] have prevented us from effectively defending the Action, in that: a. the Plaintiff is claiming a loss of profits arising from its allegations that we have breached certain non-competition agreements but is refusing to allow us to see the Information which will be used to prove the alleged loss; b. we are not able to participate with any financial experts which we may engage to participate in our defence to the Action in their review of the Information; c. we are informed by our counsel and do verily believe that limiting our access to the Information is hindering our capacity to make full answer and defence and to present our case in that he needs to be able to provide the Information to us to provide opinions to us to the strengths and weaknesses of our defence; d. our experience includes many years of working for the Plaintiff in management positions and are best able to assess the Information and advise and direct our counsel with respect to the Information; and e. we have many years of experience within the machining business in Alberta and are best able to assess the Information and advise and direct our counsel with respect to the Information.

Mr. Bahra also swore that the information subject to the trust conditions is required to establish the amount of the bonuses claimed in the counterclaim. [ 11 ] In connection with the current application Mr. Naderi swore to the following additional information: I do not believe that the disclosure of any of the financial information provided by the Plaintiff to me or my Co-Defendant, Onkar Bahra, would or could have any adverse affect upon the present or future business of the Plaintiff. My justification of my belief is: a.

Prowest has been in business for more than 4 years and had successfully established its own profitable business practices without the knowledge of the Plaintiff ’ s financial information;

b. the pricing for the production of parts and equipment which are produced by both Prowest and the Plaintiff is established by the customers and are well known in our industry. Accordingly, the knowledge of the Plaintiff`s pricing is of no advantage or interest to us; c. the cost of production equipment is standardized within the industry. Accordingly, the knowledge of the Plaintiff`s equipment costs are of no advantage or interest to us; d. labour costs are an important aspect of our costs as we would expect they are for the Plaintiff.

Generally speaking, all of the employees within our industry receive the same or similar remuneration and the Plaintiff`s costs would be the same or similar to ours except that the Plaintiff`s would be on a larger scale; e. the cost of accommodation is really not a factor because we rent our space while the Plaintiff owns its accommodation (or rents it from an associated entity); and f. material costs are no longer an issue because the customers supply the materials to all of the manufacturers. [ 12 ] Mr. Naderi also observes that his and Mr.

Bahra ’ s “ operating ” knowledge is such that they are the only persons who could supply information necessary to their expert witness to allow him to analyze the Plaintiff ’ s expert report and prepare a response to it. Mr. Glenn Skolney, the Chartered Accountant who has been retained by the Defendants, has sworn an affidavit to the same effect. The materials indicate that H.R.C. ’ s expert report has not yet been provided. [ 13 ] Mr. Naderi also identifies several specifics of his and Mr.

Bahra ’ s knowledge of how H.R.C. ’ s business was run, which, he suggests, would be valuable in testing the accuracy of the financial information in question. [ 14 ] Having assessed this competing evidence, I conclude that Mr. Naderi and Mr. Bahra have not established that the confidentiality protection afforded by the trust conditions which they accepted is no longer appropriate. [ 15 ] The main feature of the grossly disproportionate danger and difficulty for H.R.C. which the trust conditions prevent is the unfair competitive advantage that would enure to Prowest, if Mr. Naderi and Mr.

Bahra were able to combine the knowledge they would obtain with the knowledge they were privy to when working for H.R.C. H.R.C. and Prowest operate in the same industry. They are competing for the business of the same customers. Knowledge by one of the details of the others costs, pricing and profit margins would undoubtedly be a useful tool in that competition. Neither Mr. Bahra nor Mr. Naderi has disputed or answered that fundamental point in their respective affidavits. [ 16 ] The Defendants ’ response to H.R.C. ’ s fundamental point is Mr.

Naderi ’ s suggestion, that the elements of pricing in the industry in which both H.R.C. and Prowest are engaged are determined externally and not matters in the control of either firm. He swears that prices are determined by the customers, costs of production are standard in the industry, labour costs are the same for both employers. He concludes that there would be nothing for Prowest to gain by knowing the elements of H.R.C. ’ s pricing. [ 17 ] Mr. Darin Labonte, H.R.C. ’ s general manager, has sworn an affidavit which directly refutes Mr. Naderi ’ s suggestion.

He swears that contracts are obtained through a bidding process in which Prowest and H.R.C. compete. H.R.C. does not publish its bids. Costs of production vary according to the specific machinery used for production. Labour costs are not the same for each employee or for every employee in both shops. The elements of price are variable – they are not fixed by forces external to the competitors. Mr. Labonte ’ s evidence seems more likely to be true than Mr. Naderi ’ s on this point. In any event, as I have noted, the burden here is on the Defendants.

A point of fact on which the affidavits conflict cannot be said to be established in favour of the party with the burden. [ 18 ] Rather than refute H.R.C. ’ s concern, Mr. Bahra and Mr. Naderi suggest that the practical difficulties arising from the restrictions on their counsel and expert witness discussing the financial information with them, outweigh the danger and difficulty

H.R.C. raises. While no doubt real, in my view those practical difficulties have not been shown to be insurmountable. [ 19 ] The issues in relation to the financial records are:

a) are they accurate?

b) do they prove a loss of profits?

c) what bonus would Mr. Naderi and Mr. Bahra have been entitled to? [ 20 ] Mr. Naderi and Mr. Bahra have provided their counsel with information which can be used in testing the accuracy of the financial documents. Mr. Naderi has identified elements of cost for which the H.R.C. and Prowest experience can be compared and differences questioned by counsel and the accounting expert, all without Mr. Naderi seeing the H.R.C. records. Mr.

Naderi has also identified several features of the way H.R.C. and its principal did business which can be used to test the accuracy of the financial records disclosed, again, without Mr. Naderi seeing them. [ 21 ] I cannot see that Mr. Naderi and Mr. Bahra would have much to offer personally to the determination of what the financial records establish about loss of profits.

Whether there was a loss and if so the amount of the loss would largely be an accounting determination upon which they could have little input. [ 22 ] As to the bonus calculation, it appears that is determined by a formula, the application of which would also be an accounting determination upon which the input of Mr. Naderi and Mr. Bahra personally has not, in my view, been shown to be essential. [ 23 ] I am not persuaded by the evidence of Mr. Naderi and Mr. Skolney that the latter requires the assistance of the former and Mr. Bahra to respond to the Plaintiff ’ s expert report.

As noted, that report has not been provided. I do not accept that it is possible for either Mr. Naderi or Mr. Skolney to state what is essential to the assessment of an expert report neither has yet seen. Mr. Skolney identifies several matters to be examined in the course of determining the accuracy of the financial statements and eventually the expert ’ s report. I do not accept that these matters can only be tested if Mr. Naderi and Mr. Bahra have access to the financial statements. [ 24 ] I conclude that Mr. Naderi and Mr.

Bahra have not shown that, contrary to what they must be taken to have conceded when the trust conditions were accepted, disclosure of the financial records without the confidentiality protection of the trust conditions is justified. Their application in that regard is dismissed. The trust conditions will remain in force. [ 25 ] I accept that defending the action and pursuing the counterclaim may be, because of the trust conditions, more difficult and expensive for the Defendants than it might otherwise be.

If it appears to the trial judge that the confidentiality protection and the inconvenience and extra expense it will have caused have been unnecessary, I expect it will be in the trial judge ’ s discretion to make a costs order which appropriately redresses the situation. Further Disclosure [ 26 ] Naderi, Bahra and Prowest also sought production of further financial records identified in the Application as: a. Income Statements for period 11/30/2009 to date, b. Customer Sales

Summary Reports from 05/31/2011 to date, and c. Financial Statements for August 31, 2010 and August 31, 2012.

[ 27 ] These records are all of the same type as records already produced. They are for different, generally later, periods of time than the records previously produced. [ 28 ] The only response H.R.C. makes to this aspect of the application is in its counsel ’ s written brief. It says that the records sought are not relevant. [ 29 ] It is difficult to conceive why the documents would not be relevant. Most of them are in respect of periods of time for which other documents have already been produced.

On the face of it, if the earlier records are relevant, so are the records now sought. [ 30 ] I order H.R.C. to produce the records sought in the Application. The trust conditions imposed, accepted, and still in force in respect of the records already produced will apply to these additional records. Production of Expert Reports [ 31 ] The Defendants also sought an order that “ the Plaintiff produce any expert report 120 days before any trial of this action and the Plaintiff produce any rebuttal report 60 days before any trial of this action ” . H.R.C. indicated in its brief that it agrees to this.

It is accordingly ordered. [ 32 ] The costs of this application will be for determination by the trial judge. Heard on the 29 th day of January 2013. Written submissions requested February 6, 2013 and received June 7, July 12 and July 19, 2013. Dated at the City of Edmonton, Alberta this 29 th day of July 2013. Brian R. Burrows J.C.Q.B.A. Appearances: J. Cameron Prowse, Q.C. for the Plaintiff

John E. McGee, Q.C. for the Defendants