T-1879-83
Reading & Bates Construction Co. and Reading &
Bates Horizontal Drilling Ltd. (Plaintiffs)
v.
Baker Energy Resources Corporation and Baker
Marine Corporation (Defendants)
T - 344 - 84
Reading & Bates Construction Co. and Reading &
Bates Horizontal Drilling Ltd. (Plaintiffs)
v.
Gaz Inter -Cité Québec Inc. (Defendant)
INDEXED AS: READING & BATES CONSTRUCTION CO. V. BAKER
ENERGY RESOURCES CORP.
Trial Division, Reed J.—Toronto, January 11;
Ottawa, January 15, 1988.
Practice — Judgments and orders — Enforcement — Judg
ment for plaintiffs in patent infringement action but reference
as to damages incomplete — Application for payment into
Court of holdback — Application allowed — R. 470(1)
authorizing preservation of property "as to which any question
may arise in litigation" — Right to profits (holdback) made
from use of technology described in infringed patent question
arising in litigation — Equity demanding defendant not receive
improperly made profits.
Injunctions — Application for payment into Court of hold-
back for work done utilizing technology in infringed patent —
Similar to interlocutory injunction application as purpose to
ensure enforcement of judgment — Applicants in stronger
position than applicant for interlocutory injunction as liability
established — Mareva injunctions applicable where, as here,
danger of dissipation of assets — Choice of posting security or
ceasing activity complained of not inherent element of inter
locutory injunction.
These were applications to have certain sums of money paid
into Court, or to have the defendant Baker Energy Resources
Corporation (BERco) post a bond or a letter of credit for an
amount equal to those sums. The plaintiffs had obtained judg
ment against BERCO for patent infringement. A reference to
determine the amount of damages has not been completed, but
profits or damages were likely to exceed the funds in question.
BERCO has no assets or place of business within Canada and is
in serious financial difficulty. Pursuant to the contract between
Gaz Inter -Cité Québec Inc. and BERCO for work done utilizing
the technology in the infringed patent, Gaz Inter -Cité Québec
Inc. withheld 5% of the contract price ($226,450) as a "retain-
age fund" to guarantee completion of the contract. The plain
tiffs sought to have these funds paid into Court. The plaintiffs
argued that the Court had jurisdiction pursuant to paragraph
59(1)(b) of the Patent Act or Rule 470 of the Federal Court
Rules. They cited decisions in interlocutory injunction applica
tions where a party was ordered to provide security for dam
ages in lieu of having an injunction issued. They also cited
various decisions in Mareva injunction cases where assets were
ordered seized prior to judgment. There was no evidence that
the defendant would suffer any damage as a result of the
order—it never had the use of the funds and there was no
evidence of prejudice to other creditors.
Held, the applications should be granted.
Rule 470 gave the Court jurisdiction to grant the order
sought. Rule 470(1) authorized preservation of property "as to
which any question may arise" in the litigation. The right to the
profits made from the use of the technology described in the
infringed patent was a question which arose in the litigation.
The retainage funds were those very profits. Equity required
that the defendant be stripped of profits which were improperly
made.
Although the purpose of this application was similar to that
for an interlocutory injunction application (to ensure that the
plaintiff will be able to recover damages), the applicant was in
a stronger position because liability had already been estab
lished. Mareva injunctions may be used not only where there is
an apprehension that assets will be removed from the jurisdic
tion, but also where there is danger of assets being dissipated.
Once the elements for the granting of an interlocutory
injunction have been proven, the applicant was entitled to an
order. The defendant did not have a choice of posting security
or ceasing the offending activity. A choice may arise when a
respondent attempts to stave off an injunction by opting to take
substitutive action, such as the paying of security, the posting
of a bond or letter of credit. But choice is not an inherent
element of an interlocutory injunction order itself, nor is it a
crucial aspect of the type of order sought here.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Federal Court Rules, C.R.C., c. 663, R. 470.
Patent Act, R.S.C. 1970, c. P-4, s. 59(1)(b).
Rules of Civil Procedure, O. Reg. 560/84, R. 45.02.
CASES JUDICIALLY CONSIDERED
APPLIED:
Teledyne Industries, Inc. et al. v. Lido Industrial Prod
ucts Ltd. (1982), 68 C.P.R. (2d) 204 (F.C.T.D.).
CONSIDERED:
Reading & Bates Horizontal Drilling Co. et al. v. Spie,
Horizontal Drilling Co. Inc. et al. (1986), 13 C.P.R. (3d)
37 (F.C.T.D.); Aetna Financial Services Ltd. v. Feigel-
man et al., [1985] 1 S.C.R. 2; 4 C.P.R. (3d) 145; Chitel
et al. v. Rothbart et al. (1982), 141 D.L.R. (3d) 268; 39
O.R. (2d) 513; 69 C.P.R. (2d) 62 (Ont. C.A.).
REFERRED TO:
Apple Computer, Inc. v. Computermat Inc. et al. (1985),
3 C.P.R. (3d) 407 (Ont. H.C.); T.D. Williamson, Inc. et
al. v. Electronic Pigging Systems, Inc. et al. (1984), 79
C.P.R. (2d) 197 (F.C.T.D.); Halliburton Co. et al. v.
Northstar Drillstem Testers Ltd. et al. (1981), 58 C.P.R.
(2d) 73 (F.C.T.D.); Third Chandris Shipping Corpn v
Unimarine SA, [1979] 2 All ER 972 (Q.B. Div.); Rotin v.
Lechier-Kimel [sic] (1985), 3 C.P.C. (2d) 15 (Ont.
H.C.).
COUNSEL:
Ronald E. Dimock and Gordon J. Zimmer-
man for plaintiffs.
D. N. Deeth and E. M. McMahon for
defendants.
SOLICITORS:
Woolley, Dale & Dingwall, Toronto, for
plaintiffs.
MacBeth & Johnson, Toronto, for defend
ants.
The following are the reasons for order ren
dered in English by
REED J.: The plaintiffs bring applications to
have certain sums of money, presently held by Gaz
Inter -Cité Québec Inc. paid into Court, or to have
the defendant Baker Energy Resources Corpora
tion (BERco) post a bond or a letter of credit for
an amount equal to those sums. Alternatively, an
order or declaration is sought stating that Gaz
Inter -Cité Québec Inc. holds the sums in question
in trust for the plaintiffs.
The plaintiffs obtained judgment against the
defendant BERCO for infringement of patent
number 1,140,106 (the "pull-back" patent), see:
decision of Mr. Justice Strayer dated March 20,
1986 (Court File No. T-1879-83) affirmed on
appeal in a decision dated November 20, 1987
(Court File No. A-199-86). The companion action
against Gaz Inter -Cité Québec Inc., was dis
missed; see: judgment dated March 20, 1986
(Court File No. T-344-84) affirmed on appeal in a
decision dated November 20, 1987 (Court File No.
A-198-86). These decisions also dealt with claims
which alleged the infringement of patent number
1,037,462 (the "follow liner" patent). This patent
was found to be invalid.
The judgment of Mr. Justice Strayer dated
March 20, 1986 (Court File No. T-1879-83)
ordered that there be either an accounting of
profits or a payment of damages, at the plaintiffs'
election, by the defendant BERCO with respect to
the acts of infringement which had been found.
The accounting for profits, or the assessment of
damages was to be determined by way of refer
ence. There were numerous interlocutory applica
tions concerning this reference. In summary, they
consisted of the defendant seeking a stay of the
reference, until the Court of Appeal had rendered
decisions in the above-noted actions which had
been appealed to it. Such stay was granted by the
prothonotary, Mr. Giles, on condition that the
defendant, BERCO, pay a bond of $100,000 as
security (order dated March 6, 1987). This bond
was never paid. The reference procedure is still not
concluded. Thus, the plaintiffs have a judgment of
liability against the defendant BERCO but no
amount has been quantified with respect to an
accounting of profits or an assessment of damages.
There is considerable evidence that profits or
damages are likely to be substantial. The work
undertaken by BERCO for Gaz Inter -Cité Québec
Inc., which gave rise to the infringement action,
was the laying of a gas pipeline under the St.
Lawrence River in the region of Trois-Rivières.
This task involved the drilling of a hole horizontal
ly under the river, through the river bed, from the
north side of the river to the south and then, the
attaching of a pipe to the mechanism which had
drilled this hole, and the pulling back of that
mechanism from the south side of the river to the
north so that the attached pipe was pulled into the
hole and installed in place. (This is a highly simpli
fied description of the process, the details of which
can be found in the decisions referred to above.)
The first part of the process involved the use of
technology covered by the "follow liner" patent;
the second involved technology covered by the
"pull-back" patent.
The contract price to be paid by Gaz Inter -Cité
Québec Inc. to BERCO, for the work under
taken, was $4,529,000. The cost to BERCO was
$1,195,325.89 (exhibit 4 to Mr. Greer's cross-
examination of April 22, 1987). Thus, the profit
from the job is in the neighbourhood of
$3,334,000. The costs listed in exhibit 4 to Mr.
Greer's cross-examination are identified by refer
ence to sub-categories (e.g.: set up procedures,
field office, personnel safety, site plant, demobili
zation). By far the largest expenses are those
associated with the drilling of the hole from the
north side of the river to the south ("surveyed
hole—$389,620.86") and the pulling back of the
drilling mechanism with the pipe attached from
the south side of the river to the north so that the
pipe is thereby installed ("customer installation—
$648,735.74"). If a straight ratio comparison is
done attributing the profit to various stages of the
job in proportion to the cost of each particular
stage, it becomes obvious that that part of the job
which required the use of the "pull-back" tech
nology accounts for a large percentage of the
profit. In addition, there is evidence that it is
reasonable to attribute a large proportion of the
profit to high risk aspects of the procedure (para-
graphs 11, 12 and 13 of the affidavit of John D.
Hair, dated December 9, 1987).
The defendant BERCO has no assets or place of
business within Canada. BERCO is in a very pre
carious financial position. Its financial statements
for the years ending 1984 and 1985, carry a note
by the auditors dated May 20, 1986, which indi
cates that the company may be unable to continue
in existence. See also the affidavit of Mr. Hair
dated June 26, 1986 (paragraph 24) and that
dated December 9, 1987 (paragraphs 8 and 15).
The contract between BERCO and Gaz Inter -
Cité Québec Inc. was such that the latter was
authorized to withhold 5% of the contract price
($226,450) as a "retainage fund" until some time
after the contract had been completed. This is the
practice in the industry. The retainage fund serves
as a guarantee of complete performance of the
contract. In this case, the retainage funds were not
paid to BERCO on the completion of the contract,
possibly because of the patent litigation, which, by
that time, had been commenced. In the summer
and fall of 1984 the defendant, BERCO, sought
payment of those funds, asking that they be remit
ted by wire transfer, to the credit of a bank
account in Houston, Texas. The funds were not
remitted. The plaintiffs are of the view that they
are still held by Gaz Inter -Cité Québec Inc.,
together with the accrued interest thereon. The
Court of Appeal decisions have now been ren
dered. The plaintiffs are concerned that the funds
may be paid to BERCO and thereby removed from
the jurisdiction or otherwise dissipated. Counsel
for BERCO gave an undertaking that they would
not be removed from the jurisdiction.
Counsel for the plaintiffs' argument is that the
Court has jurisdiction pursuant to paragraph
59(1)(b) of the Patent Act [R.S.C. 1970, c. P-4]
or Rule 470 of the Federal Court Rules [C.R.C.,
c. 663] to order the money held by Gaz Inter -Cité
Québec Inc. to be paid into Court, or in the
alternative to require the defendant BERCO to post
a bond or letter of credit for that amount. He
argues that: (1) the money is really BERCO's
money; (2) there are no other assets of BERCO in
the jurisdiction; (3) BERCO is in a precarious
financial situation; (4) the money is part of the
"fruits" of the wrongful infringement; (5) if the
money is paid to BERCO there is a real danger it
will be removed from the jurisdiction or otherwise
dissipated. In support of the order sought are cited
the decisions in interlocutory injunction applica
tions where a party is ordered to provide security
for damages in lieu of having an injunction issued
prohibiting the activity which is alleged to be an
infringement. In particular, counsel referred to:
Apple Computer, Inc. v. Computermat Inc. et al.
(1985), 3 C.P.R. (3d) 407 (Ont. H.C.); T.D. Wil-
liamson, Inc. et al. v. Electronic Pigging Systems,
Inc. et al. (1984), 79 C.P.R. (2d) 197 (F.C.T.D.);
Halliburton Co. et al. v. Northstar Drillstem
Testers Ltd. et al. (1981), 58 C.P.R. (2d) 73
(F.C.T.D.). Also cited are various decisions in the
Mareva injunction cases where assets are ordered
seized prior to judgment: Reading & Bates Hori
zontal Drilling Co. et al. v. Spie, Horizontal
Drilling Co. Inc. et al. (1986), 13 C.P.R. (3d) 37
(F.C.T.D.); Aetna Financial Services Ltd. v.
Feigelman et al., [1985] 1 S.C.R. 2; 4 C.P.R. (3d)
145; Chitel et al. v. Rothbart et al. (1982), 141
D.L.R. (3d) 268; 39 O.R. (2d) 513; 69 C.P.R.
(2d) 62 (Ont. C.A.); Third Chandris Shipping
Corpn y Unimarine SA, [1979] 2 All ER 972
(Q.B. Div.).
Counsel for the defendant BERCO argues that as
a policy matter the plaintiffs' application should
not be granted because the purpose of the applica
tion is to place the plaintiffs ahead of other credi
tors of the defendant. No evidence was adduced by
the defendant to substantiate the claim that there
are other creditors, or to identify them or to
indicate whether such creditors are within or out
side the jurisdiction. That there probably are other
creditors, somewhere, is a fair assumption from
BERCO's financial statements referred to above. In
the absence of any concrete evidence concerning
the existence or identity of other creditors, I do not
find this line of argument convincing.
Counsel for the defendant BERCO argues that
the plaintiffs themselves are now without assets in
Canada and that there have been various corporate
transfers and changes of the ownership of the
patents in issue so that the plaintiffs' status in
Canada is no more substantial than that of the
defendant. I do not think this is relevant to the
applications. Counsel argues that the order sought
seeks to bind Gaz Inter -Cité Québec Inc. and its
successors but that neither the successors nor Gaz
Inter -Cité Québec Inc. were properly served.
There is no evidence before me, on this motion,
that there are any successors to Gaz Inter -Cité
Québec Inc.; there is no evidence that the clause in
question is anything more than a "boiler-plate"
type clause. Gaz Inter -Cité Québec Inc. was
served by service on its solicitor (who is also
solicitor for the defendants BERCO and Baker
Marine); no objection was taken to such service.
Gaz Inter -Cité Québec Inc. did not choose to
appear on this motion.
Counsel for BERCO argues that neither para
graph 59(1)(b) of the Patent Act nor Rule 470 of
the Federal Court Rules gives this Court jurisdic
tion to grant the order sought and that neither the
interlocutory injunction cases nor the Mareva
injunction cases are applicable. It is argued that
the interlocutory injunction cases are ones in
which a defendant is given a choice whether or not
to continue a certain activity. If the choice is made
to continue the activity, then security is required to
be paid into court, to give the plaintiff some
guarantee that if damage results from that activ
ity, damages or an accounting of profits will be
recoverable. In this case, the defendant is engaging
in no disputed activity. The activity is long past.
Counsel argues that there is no choice given to the
defendant.
It is argued that the Mareva injunction cases are
not applicable because they are granted to prevent
the removal of assets from the jurisdiction. Coun
sel states that he is authorized to give an undertak
ing that the assets in this case will not be removed
from the jurisdiction. He argues that Mareva
injunctions are not granted to protect plaintiffs
from bankruptcy proceedings which might befall
defendants. He argues that the Court does not
have jurisdiction to give the order sought, at this
late stage of the proceedings; an order which it is
argued could determine the rights of creditors not
before the Court.
With respect to the argument that this Court
lacks jurisdiction to give the order sought, I think
such can be found in Rule 470. Counsel for
BERCO'S argument is that Rule only applies when
the fund in question is one which is the very
subject-matter of the litigation and that in this
case, it is not the fund, but the patent which has
been the subject of the litigation.
There is no doubt that the patent rights were the
focus of the litigation. Nevertheless, Rule 470(1)
authorizes preservation of property "as to which
any question may arise" in the litigation. The right
to the profits made from the use of the technology
described in the infringed patent is a question
which arises in the instant litigation. The retainage
funds are those very profits. Whether or not only
part of the funds should be considered to be
attributable to the profits from the use of the
"pull-back" patent was not argued in front of me.
If it had been, I would not feel constrained to so
partition the fund.
Mr. Justice Addy in Teledyne Industries, Inc. et
al. v. Lido Industrial Products Ltd. (1982), 68
C.P.R. (2d) 204 (F.C.T.D.), at pages 208-209
referred to the equitable nature of the accounting
of profits which applies in an industrial property
case:
As to the nature of an equitable accounting for profits
improperly made in industrial property cases, one finds the
following statement in 38 Hals., 3rd ed., pp. 647-8, para. 1059:
In taking an account, of profits, which is an equitable
relief, the damage which the plaintiff has suffered is totally
immaterial; the object of the account is to give the plaintiff
the actual profits which the defendant has made and of
which equity strips him as soon as it is established that the
profits were improperly made.
From the very beginning of the period in question the defend
ant, without any colour of right or authority, knowingly used
and benefited from the property of the plaintiffs, and the court,
previous to the accounting, has found that he is a wrongdoer.
[Underlining added.]
Mr. Justice Addy's statements were made, of
course, in the context of determining who has the
burden of proof in an accounting of profits. Never
theless, I think they are equally applicable in the
context of this case. It is my view that jurisdiction
to grant the order sought can be found, therefore,
in Rule 470(1). I do not find it necessary to
consider whether Rule 470(7) also founds jurisdic
tion: see by way of analogy: Rule 45.02 of the
Ontario Rules of Court [Rules of Civil Procedure,
O. Reg. 560/84] and Rotin v. Lechier-Kimel [sic]
(1985), 3 C.P.C. (2d) 15 (Ont. H.C.).
Since I am of the view that jurisdiction to give
the order sought flows from Rule 470(1), I do not
think it strictly necessary to consider counsels'
arguments with respect to interlocutory and
Mareva injunction, and whether or not the
requirements of either category are met by the
circumstances of this case. Nevertheless, I would
make the following observations. The order sought
is similar to those given in interlocutory injunc
tions proceedings in that its purpose is to try to
ensure that a successful plaintiff is not left with a
hollow victory. While the interlocutory injunction
cases require a plaintiff to prove a prima facie case
(or a reasonable question to be tried), in this case,
a finding of liability has already been made, thus,
a position far stronger, than that required to be
proved for an interlocutory injunction before trial,
exists. Also, I do not think that statements such as
those found in the Aetna Financial Services case
(supra) at pages 10-14 S.C.R.; 150-152 C.P.R.,
indicating that a Mareva injunction is not to be
used to effect execution before judgment, are ap
plicable. There has been judgment in this case.
While the quantum of the profits to be accounted
for, or the damages to be awarded, are still in
issue, the liability of the defendant BERCO is clear.
In addition, I do not think the use of a Mareva
injunction is limited only to cases where there is
reason to fear that the assets will be removed from
the jurisdiction. As I read the relevant cases, such
injunctions may also be applicable where there is
danger of assets being dissipated. At pages 25
S.C.R.; 160 C.P.R. of the Aetna Financial Ser
vices case, supra, the following is stated by the
Supreme Court:
The gist of the Mareva action is the right to freeze exigible
assets when found within the jurisdiction .... However, unless
there is a genuine risk of disappearance of assets, either inside
or outside the jurisdiction, the injunction will not issue. [Under-
lining added.]
And, at pages 27 S.C.R.; 162 C.P.R., quoting from
Chitel et al. v. Rothbart et al. (supra), at pages
289 D.L.R.; 532 O.R.; 83 C.P.R.:
The applicant must persuade the court by his material that the
defendant is removing or there is a real risk that he is about to
remove his assets from the jurisdiction to avoid the possibility
of a judgment, or that the defendant is otherwise dissipating or
disposing of his assets .... [Underlining added.]
With respect to counsels' argument that the type
of order sought should be assessed against the
requirements of an interlocutory injunction, and
that such involve the giving of a choice to the
defendant (i.e.: post security or cease the activity
complained of) I do not think an element of choice
is a crucial aspect of such orders. Mr. Justice
Cullen obviously did not consider it to be so in
Reading & Bates Horizontal Drilling Co. et al. v.
Spie, Horizontal Drilling Co. Inc. et al. (1986), 13
C.P.R. (3d) 37 (F.C.T.D.), especially at page 42.
What is more, once the elements for the granting
of an interlocutory injunction have been proven,
the applicant is entitled to an order. A choice
arises out of the respondent attempting to stave off
that order by opting to take substitutive action,
such as the paying of security, the posting of a
bond or letter of credit. But choice is not an
inherent element of an interlocutory injunction
order itself.
In this particular case: liability has been proven;
there is reason to believe the funds will be dissipat
ed if they are not seized; the profits (or damages)
payable to the plaintiff are likely to exceed, by a
wide margin, the amount of the funds in question;
the funds are the very "fruits" of the wrongful
infringement; there is no evidence that the defend
ant will suffer any damage as a result of the order
requested—the defendant has never had the use of
the funds; there is no evidence of any prejudice to
other creditors. In all the circumstances, the order
sought will be granted.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.