) ) CANA INTERNATIONAL DISTRIBUTING INC., c.o.b. as SEXY LIVING Plaintiff – v. –, 2010 ONSC 6273

CITATION : Cana International Distributing Inc. v. Standard Innovation Corporation, 2010 ONSC 6273 COURT FILE NO.: 10-49230 DATE: 20101118 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) CANA INTERNATIONAL DISTRIBUTING INC., c.o.b. as SEXY LIVING Plaintiff – and – STANDARD INNOVATION CORPORATION Defendant ) ) ) ) ) ) ) ) )))) Howard J. Wolch, for the Plaintiff Peter Mantas and Alexandra Logvin, for the Defendant ) ) ) HEARD: September 30 and November 1, 2010. REASONS FOR JUDGMENT C.

McKinnon J. [ 1 ] The Plaintiff, Cana International Distributing Inc., a Vancouver based company carrying on business as “Sexy Living”, one of the largest Canadian distributors of adult sex toys, seeks an interlocutory injunction to restrain the Defendant, an Ottawa based company named Standard Innovation Corporation, the inventor and maker of the “We-Vibe”, a sex toy designed for couples, from breaching what the Plaintiff alleges to be exclusive territorial and customer rights provisions found in an alleged agreement between the parties. [ 2 ] The parties do not dispute that Sexy Living enjoys exclusive distribution rights for the We-Vibe pursuant to the terms of a “Mainstream Agreement”.

The Mainstream agreement permits Sexy Living to distribute the We-Vibe in Canadian food stores and drug stores. This is a significant and growing market. There are more than 5,000 brick and mortar mainstream food and chain drug stores in Canada. The agreement giving Sexy Living the exclusive rights to distribute the We-Vibe to these stores was finally signed on November 26, 2009. In this application for an interlocutory injunction that agreement is not in issue.

The parties have agreed that the Mainstream agreement shall remain in full force and effect pending any alteration of the agreement as may be mutually agreed to, or upon further order of this court. [ 3 ] What is at issue in this action is what Sexy Living and its principal, Ms. Micheline Ciolli, claim to be an agreement to exclusively distribute the We-Vibe to the “Adult” or “Sex Toy Industry” market, including brick and mortar sex stores, of which there are approximately 1,500 in Canada. The Defendant, represented by its president Nelson Wood, says there is no agreement granting Sexy Living and Ms.

Ciolli the exclusive right to distribute the We-Vibe to the adult market in Canada. Throughout the records filed, the agreement is referred to as either the “Adult agreement” or the “Sex Toy Industry agreement”. [ 4 ] The Motion records comprise numerous emails passing between Ms. Ciolli and Mr. Wood, including numerous draft agreements pertaining to both the Mainstream agreement and the Adult agreement.

The Adult agreement would give Sexy Living the ability to sell the We-Vibe to virtually all retailers in Canada including, but not limited to, home party companies, e-commerce companies, mail order companies and retail outlets, with one exception for a Canadian home party company originating from the United States with its head office located in Calgary, Alberta. It also provided for the wholesaling of the We-Vibe to a number of independent web stores. The names of all these entities need not be mentioned.

There is no need to unduly titillate the reader and skew the focus on the central issues to be resolved. [ 5 ] In her affidavit, Ms. Ciolli deposes that the Adult agreement was entered into on November 3, 2009. In support of this allegation she relies on an email from Mr. Wood dated October 27, 2009, attaching a version of the agreement, followed by an email from her to Mr. Wood dated October 28 indicating her suggested comments and revisions, together with responses back and forth dated November 1 and 2, 2009. She then relies on an email dated November 2, 2009 from Mr.

Wood attaching a further revised version of the Adult agreement. She states that she signed two copies of this revised agreement and sent them to Mr. Wood on November 3. She relies upon a Canada Post delivery tracking and waybill dated November 3. The waybill indicates that on that date Sexy Living sent 13 items

in the mail, one of which is sent to the postal code of the Defendant. [6] Counsel for Sexy Living submits that Mr. Wood, in his affidavit, did not specifically deny that he had received signed copiesof the agreement on November 3. In his affidavit Mr. Wood simply states that there was no agreement concluded between the parties. Counsel for Ms. Ciolli submits that the rule in Browne v. Dunn (1893), 6R67 (H.L.) should operate against Mr. Wood because thespecifics of Ms. Ciolli’s assertions were not challenged. I am satisfied when considering the entire record that Mr.

Wood has effectivelydenied the assertions of Ms. Ciolli and that no adverse inference should be drawn. [7] Significantly, Ms. Ciolli has not produced any signed copy of the agreement she alleges was signed by her on November 3. More to the point, however, is my observation that the agreement which Ms. Ciolli purports to establish as the one she signed wouldappear, looking at the terms in the fairest light, to be a draft agreement requiring further negotiation. By way of example, the agreementthat Ms. Ciolli states she signed has two sentences in red.

It is agreed that the red sentences were placed in the agreement by Mr. Wood. One sentence reads as follows: Sexy Living and SIC are to agree to sales support for retailers, and Sexy Living is to provide its proposed plan and budget. There follows in red these words: Budget to be approx. 7.5% of the respective We-Vibe revenues for Sexy Living, subject to some agreed minimum total base amount – tobe mutually agreed – say 75,000 ea. with the budget to be funded on a 50/50 basis between Sexy Living and SIC [8] In my view, this was clearly an invitation to negotiate with respect to those important issues.

They were not resolved. I findit difficult to believe that Ms. Ciolli would simply sign the agreement in the form presented. It stands in stark contrast to the Mainstreamagreement completed on November 26. Moreover, by its terms the agreement is non-exclusive. Numerous emails and documentsproduced by the Defendant suggest that the Adult agreement continued to be negotiated up until May of 2010, including the invitationfrom Mr. Wood that Ms.

Ciolli review the disputed items with her own lawyer. [9] The Plaintiff relies heavily upon press releases and emails which were issued in November wherein the Plaintiff andDefendant jointly inform the public and clients that Sexy Living is the exclusive distributor of the We-Vibe product. I have no doubtthat the parties intended such a relationship, but I have great difficulty in finding, on the material filed, that a final agreement with respectto the adult market was ever achieved. [10] There is no question that Sexy Living has been successful at distributing the We-Vibe product.

From November 2009 to theend of July 2010, Sexy Living sales under the distributorship agreement approached $2 million, which might indicate that Canada is notso cold a country as is generally believed. [11] Further evidence that the Adult agreement which Ms. Ciolli submits was signed by her and constituted a final agreement iscontradicted by an email from Mr. Wood to Ms. Ciolli dated November 26, 2009, which is the date that the Mainstream agreement wassigned by Mr. Wood. In that email he states: Micheline – I just signed the drug store industry agreement and am sending two copies to you by courier today.

Please return one signedco.(sic). I know you sent a signed copy already, but I have misplaced that – sorry – this will get us up to date on that paperwork...I’ll getthe Sex Toy Industry agreement done next. [emphasis added] [12] It seems obvious to me that Mr. Wood did not sign and return the Adult agreement. Critical issues remained unresolved,including the question of minimum buying requirements. This was important because the Defendant could not commit to an exclusivedistributor without having a guarantee that they would buy a certain amount of product.

In the absence of a guarantee, such an exclusivedistributor might sell only a small amount of product resulting in a drastic loss to the Defendant. [13] The Plaintiff submits that it needs an injunction which would bind the Defendant to an exclusive agreement giving to thePlaintiff all rights to distribute the We-Vibe to the adult market in Canada. The Test for an Injunction [14] In R.J.R.-MacDonald Inc. v. Canada (A.G.), (SCC), [1994] 1 S.C.R. 311, the Supreme Court of Canada setout the test for granting an interlocutory injunction as follows:

a) Is there a serious issue to be tried?

b) Will the applicant suffer irreparable harm if the injunction is not granted?

c) Does the balance of convenience favour the applicant? A Serious Issue to be Tried [15] The parties agree that there is a serious question to be tried. In my opinion the serious issue to be tried is whether the partiesin fact had an agreement with respect to the adult market in Canada and whether that agreement was exclusive. The Plaintiff seeks tobind the Defendant to an agreement which is the very issue to be decided at trial. In effect, it is seeking a mandatory injunction, not aprohibitory injunction.

[16] The caselaw suggests that when one seeks a mandatory injunction, whereby a defendant is ordered to act positively ratherthan refraining from acting negatively, a higher standard of proof is mandated, namely that the applicant establish a strong prima faciecase: see 674834 Ontario Ltd. (c.o.b. Coffee Delight) v. Culligan of Canada Ltd., (ON SC), [2007] O.J. No. 979 perPattillo J. and the cases cited therein; Jordash Co. v. R.E.D. Restaurant Equipment Distributors of Canada Ltd., [2001] O.J. No. 3981,(S.C.J.), per Chadwick J. and the cases cited therein; Erinwood Ford Sales Ltd. v.

Ford Motor Co. of Canada, (ONSC), [2005] O.J. No. 1970 per Spies J. and the cases cited therein, in particular, the case of TDL Group Ltd. v. 1060284 Ontario Ltd.,[2001] O.J. No. 3614 (Div.

Ct.) in which Lane J. noted: An order preventing the denial of a right previously agreed to is very different from an order establishing a new right never agreed to andrequiring a party to act accordingly...In such a case, it is our view that a much higher standard than a serious issue to be tried isappropriate before the court will in effect create a right not contemplated by the parties in their contract. [17] In the case at bar, where the very issue is whether a contract existed, I would hold that the Applicant must demonstrate astrong prima facie case.

On the evidence contained in the records, I cannot conclude that the Applicant has established a strong primafacie case. Irreparable Harm [18] Irreparable harm is harm which either cannot be quantified in monetary terms or which cannot be cured, usually because oneparty cannot collect damages from the other or where one party will be put out of business by the court’s decision or where one party willsuffer permanent market loss or irrevocable damage to its business reputation: R.J.R.

MacDonald, supra. [19] In its affidavit material the Plaintiff took pains to quantify what it alleged to have been its losses due to the failure of theDefendant to treat the Plaintiff as its exclusive distributor in the adult market. Specifically it alleged that it had lost nearly $370,000. Inmy view, the very specific calculations supplied by the Plaintiff proves that their action, if successful, can be compensated for indamages. [20] Irreparable harm must be clear and not speculative. Loss of sales and market share are compensable in damages. They do notrepresent irreparable harm: see Barton-Reid Canada Ltd. v.

Alfresh Beverages Canada Corp. (ON SC), [2002] O.J.No. 4116 (S.C.J.); Healthy Body Services Inc. v. Muscletech Research and Development Inc., [2001] O.J. No. 3257 (S.C.J.); Jordash,supra. The Balance of Convenience [21] This test requires a review of which of the two parties will suffer the greater harm if the injunction is or is not granted pendinga decision on the merits.

The factors which must be considered in assessing the “balance of inconvenience” are numerous and will varyin each individual case: RJR MacDonald, supra. [22] In the exclusive distribution context, when the court is of the view that the manufacturer of goods is likely to suffer hardshipas a result of enforcement of an alleged exclusive distribution agreement, it will deny injunctive relief. Examples of hardship include,but are not limited to, cancellation of orders from retailers and other impediments to sales: Saan Stores Ltd. v. Effigi Inc., [2006] O.J. No.4685 (S.C.J.) per J.M. Wilson J.

The evidence contained in the record indicates that sales have been threatened because of the litigationbetween the parties and its effect upon third party distributors. Cancellation of orders is a looming threat to the business of theDefendant. [23] Courts have viewed a grant of injunctive relief sought to enforce an exclusive distribution agreement as creating anundesirable need to police specific performance of a relationship that has already sustained a significant deterioration, which has beensaid to be not only burdensome for the judiciary, but also contrary to commercial reality in general.

As a result, courts have beenreluctant to endorse this kind of relief, finding that damages, when and if assessed at trial, would be an adequate tool to sever “sourcommercial relationships”: see Healthy Body Services Inc., supra, and Jordash, supra. [24] The Defendant is the manufacturer of one device. The Plaintiff distributes a banquet of sex toys. To bind the Defendant tothe Plaintiff where the agreement for exclusivity is the very issue for trial would unfavourably submit the business of the Defendant tothe power of the Plaintiff.

I find that the balance of convenience favours the Defendant. [25] In the result, the application for an interlocutory injunction is dismissed. [26] In the event that the parties are unable to agree on costs, submissions may be made within 45 days on a

schedule agreed to bycounsel. The Hon. Mr. Justice C. McKinnon Released: November 18, 2010

CITATION : Cana International Distributing Inc. v. Standard Innovation Corporation, 2010 ONSC 6273 COURT FILE NO.: 10-49230 DATE: 20101118 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: CANA INTERNATIONAL DISTRIBUTING INC., c.o.b. as SEXY LIVING Plaintiff – and – STANDARD INNOVATION CORPORATION Defendant REASONS FOR JUDGMENT C. McKinnon J. Released: November 18, 2010