XY, Inc. v. IND Lifetech, Inc.

2008 BCSC 1215err1 XY, Inc. v. IND Lifetech, Inc.

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: XY, Inc. v. IND Lifetech, Inc., 2008 BCSC 1215 Date: 20080905 Docket: S076862 Registry: Vancouver Between: XY, Inc. Plaintiff And IND Lifetech, Inc. Defendants - and - Docket: S082044 Registry: Vancouver Between: XY, Inc. Plaintiff And International Newtech Development Incorporated, IND Lifetech Group Ltd., IND Lifetech, Inc., now known as JingJing Genetic Inc., IND Lifetech (U.S.A.) Incorporated, IND Lifetech (USA) Inc., IND Lifetech (Quingdao) Co. Ltd., IND Lifetech (Zoupng) Co. Ltd., IND Lifetech (Beijing) Co. Ltd., IND Lifetech Co., Ltd., IND Embryontech Inc., Jesse Jia-Bei Zhu, Richard Remillard, Zhen Hong Liu, Shu Xi Wang, Selen Zhou, Tang Jin, John Doe #1, John Doe #2, John Doe (Manufacturing), and John Doe (Shanghai JingJing) Defendants Before: The Honourable Mr. Justice Slade Reasons for Judgment In Chambers Counsel for the Plaintiff: D.R. Bennett C.S. Wilson G. Bowman Counsel for the Defendant, IND Lifetech Inc, now known as JingJing Genetic Inc: T. Manson B. Toy Counsel for the Defendants, International Newtech Dev Inc., IND Lifetech Group Ltd., IND Lifetech (USA) Inc., IND Lifetech (Quingdao) Co. Ltd., IND Lifetech (Zouping) Co. Ltd., Jesse Jia-Bei Zhu. Selen Zhou, and Tang Jin: R. Josephson Date and Place of Hearing: July 21-22, 24-25, 2008 Vancouver, B.C. I. INTRODUCTION [1] The plaintiff, XY Inc. ("XY"), has

developed technology used for separating spermatozoa into X chromosome and Y chromosome bearing populations. The products of this separating are used in artificial insemination as a reliable means of producing offspring of a desired sex. XY's technology is embodied in both equipment and methods. The technology is protected from exploitation at large in part by patents and in part by keeping certain information confidential to a limited number of actors. [2] The plaintiff contends that the defendant JingJing Genetic Inc. ("JJG"), which is a licensee of the plaintiff's technology, is planning with the other corporate defendants to establish a sperm sorting operation in China, and that the confidentiality that protects XY's technology would be compromised if the defendants' plans are carried out. [3] This is the relief sought in the plaintiff's notice of motion dated April 25, 2008: 8. The Defendants, by themselves, their servants, agents or any company owned or controlled by any of them or otherwise, be restrained from transferring, selling, leasing, licensing, or in any other way disclosing Confidential Information, as defined in the Statement of Claim, until the trial of this matter or further Order of the Court; 9. Further, the Defendants, other than JJG and the individual Defendants Jesse Zhu, Richard Remillard, Selen Zhou and Tang Jing acting strictly within the scope of

their employment with JJG, be restrained from using such Confidential Information, until the trial of this matter or further Order of the Court; . [4] The following paragraphs from the statement of claim contain the definition of "Confidential Information": 23: XY is the owner of certain confidential information, trade secrets, know-how, technical data, masks, code programs, designs, processes, methods, operations, devices, innovations and inventions (collectively, the "Confidential Information") which it uses or licenses in the ordinary course of its business.

24. The Confidential Information includes, but is not limited to: (a) techniques, processes and protocols for adapting and using flow cytometry equipment, and making parts for such equipment, to separate spermatozoa into X-chromosome bearing (female) and Y-chromosome bearing (male) populations ("Sex-Selected Inseminates); (b) techniques, processes and protocols for using Sex-Selected Inseminates for in vitro and in vivo fertilization of cattle oocytes; (c) techniques, processes and protocols for producing sex-selected cattle embryos from the Sex-Selected Inseminates ("Sex-Selected Embryos"); (d) techniques, processes and protocols for the cryogenic storage of cattle semen, Sex-Selected Inseminates, and Sex-Selected Embryos. II. THE ORDER SOUGHT BY THE PLAINTIFF [5] These are the terms of the injunction sought by the plaintiff: 1. The Defendants, by themselves, their servants, agents, owners, or any company owned or controlled by any of them or otherwise, are restrained from transferring, selling, leasing, licensing, or in any other ways disclosing or assisting others to disclose the following to anyone (other than direct employees of JJG who have signed confidentiality agreements on the terms of Exhibit "I" to the commercial License Agreement dated May 13, 2004) until the trial of this matter or further Order of the Court: (a) information imbedded in and the design and

composition of MoFlo® SX flow cytometers or any part thereof that uses the technology for the SX designation, including software, circuitry and beam-shaping optics, nozzle assemblies, nozzle assembly tips, SortEnsure™ sheath fluid and FloClenz™ cleaning fluid; and (b) any technical information, know how, methods, operations, protocols, processes and techniques used to produce sex-selected inseminates using the MoFlo® SX flow cytometers (referred to herein as the "Inseminates"); 2. The Defendants, other than JJG, by themselves, their servants, agents, owners, or any company owned or controlled by any of them or otherwise, are restrained from the following in any manner until the trial of this matter or further Order of the Court: (a) using any MoFlo® SX flow cytometers or any part thereof that uses the technology for the SX designation, including software, circuitry and beam-shaping optics, nozzle assemblies, nozzle assembly tips, SortEnsure™ sheath fluid and FloClenz™ cleaning fluid; [and] (b) producing, reselling or otherwise transferring Inseminates or embryos produced using Inseminates; 3. The Defendant JJG is restrained from producing embryos from Inseminates other than through in vitro fertilization of cattle embryos, until the trial of this matter or further Order of the Court; 4. Nothing in this Order precludes JJG from: (a) producing in Canada for sale to end-users in

China and internationally, up to 50,000 artificial insemination straws of Inseminates to produce a single preganancy per straw; [and] (b) producing in Canada for sale to end-users in China and internationally sex-selected embryos through in vitro fertilization of cattle oocytes using sex-selected inseminates; 5. Nothing in this Order precludes the Defendants (other than JJG) from: (a) using sex-selected embryos already in their inventory (including the embryos currently cryogenically stored in Qingdao, China) or otherwise purchased from JJG; and (b) using sex-selected straws purchased from JJG for artificial insemination purposes as an end-user to produce a single pregnancy per straw. [6] The proposed injunction, if granted, would go well beyond preventing the disclosure of confidential information as that term is defined in the statement of claim. The proposed injunction would prevent JJG, and the defendants generally, from engaging in the following: 1. the production of sex-selected inseminates in China, and 2. the use of sex-selected inseminates in the production of embryos, by methods other than in vitro fertilization. The latter prohibition relates to the plaintiff's concern that JJG and certain other defendants intend to use the sex-selected inseminates for the production of embryos using in vivo fertilization. The process of in vivo fertilization, also known as MOET, has

the ability to produce multiple embryos with a single application of inseminate, where in vitro fertilization has the capacity to produce only one embryo. III. BACKGROUND A. The Parties [7] International Newtech Development Incorporated ("IND") was the original corporate vehicle of the defendant Jesse Zhu in the research, development and manufacturing of advanced in vitro diagnostic testing systems. With Zhu as owner, IND entered into a Commercial License Agreement with XY. IND came to be owned by the defendant Zhen Hong Liu, and on February 8, 2008 IND changed its name to Jing Jing Genetic Inc. ("JJG"). [8] IND Lifetech Group Ltd. ("IND Group") is a corporation incorporated under the laws of the Cayman Islands. It is being used as a vehicle to facilitate Zhu's business plan to provide affordable and high-quality milk for the Chinese market. The plan includes using embryos manufactured in Canada from Canadian cattle to develop a herd of high-quality dairy cows in China. The plan also contemplates a financing through an initial public offering (IPO) of shares in a Canadian public company that, through a reverse merger, will comprise a number of the corporate defendants. IND Group is part of the group of companies going public. [9] IND Embryontech Inc. ("Embryontech") is a company incorporated under the laws of Quebec. At one time it bought sexed semen from JJG to produce embryos

and then sold the embryos back to JJG. It did not use any other products whose creation involved XY's technology. It did not sell any other products whose creation involved XY's technology to any other entity or individual. From March 7, 2008 through June 10, 2008, Embryontech closed its operations. On June 10, 2008, it resumed operations, but has since used only unsexed semen to produce Kobe beef embryos. Embryontech is part of the group of companies going public. [10] IND Lifetech (Qingdao) Co. Ltd. ("Qingdao") is a Chinese corporation, now known as IND Lifetech (China) Co. It purchases embryos from JJG for importation into China, and implants the embryos into cows in China. Qingdao also purchases sexed-semen from JJG and sells it to individual farmers in China. Qingdao is part of the group of companies going public. [11] IND Lifetech (Zouping) Co. Ltd. ("Zouping") is a Chinese corporation. It buys sexed-semen and unsexed-semen from Quingdao and distributes both kinds of semen to farmers in Shangdong Province in China. Zouping is part of the group of companies going public. [12] Beijing IND Lifetech Co. Ltd. ("Beijing IND") is a Chinese corporation. It buys sexed semen and non-sexed semen from Quingdao and distributes both kinds of semen to farmers in Northern China. Beijing IND is not part of the group of companies going public. [13] The defendant Jesse Jia-Bei Zhu is a

scientist and businessman. He is the sole shareholder and director, and president and secretary of IND. He is also the sole director of IND Group and Embryontech. He is also the legal representative and executive director of Qingdao and the legal representative of Zouping. Though he was the original principal of JJG, he is no longer a principal, director or officer of JJG, though he serves as a consultant to that company. [14] The defendant Zhen Hong Liu is a Chinese businessman. Zhen Hong Liu is the sole shareholder of JJG. [15] The defendant Shu Xi Wang is a Canadian businessman, with experience in the livestock business, and coincidentally the brother-in-law of the defendant Jesse Zhu. He purchased some of the defendant Jesse Zhu's shares in JJG, but later sold these shares to the defendant Liu. [16] The defendant Selen Zhou was employed by IND from 1997 to 2001. Since that time, she has been employed by other companies, such as IND Diagnostic Inc. and IND Pharmaceutical Inc., and has provided management services to IND and JJG. There is no evidence to suggest that she, in her personal capacity, participates in the actions that the plaintiff believes are a threat to its interests. [17] The defendant Tang Jin is employed by Embryontech as a production manager. She was formerly employed by JJG as its laboratory manager. Her employment for JJG ended on May 31, 2008, as a result

of the change of ownership of JJG in January 2008. There is no evidence to suggest that she, in her personal capacity, participates in the actions that the plaintiff believes are a threat to its interests. [18] The defendant Dr. Richard Remillard is a veterinarian with expertise in embryo transfer. From 2001 to 2004 he was a Vice President of JJG, and from 2004 to 2007 the President of JJG. He continued with JJG as its regulatory affairs officer after the sale of shares to Liu. B. The Commercial License Agreement [19] XY licenses its technology to various companies around the world, including the defendant JingJing Genetic Inc. ("JJG"). XY and JJG initially entered into a Commercial License Agreement (CLA) on February 6, 2004. This agreement was amended on May 13, 2004, and supplemented by an addendum dated October 26, 2004. Under the amended CLA, JJG is has certain rights in respect of XY's technology, and agrees to abide by certain conditions, including conditions directed at maintaining the confidentiality of information regarding XY's technology. [20] Clause 2.1 of the CLA provides a grant of license that gives JJG the right to manufacture, use and sell Licensed Products in the Territory, subject to restrictions in the Field of Use, so long as JJG complies with the Licensed Technical Information and meets specified performance criteria. 2.1 GRANT OF LICENSE: Subject to

compliance with the terms and conditions of this License Agreement, including, but not limited to, payment of all amounts due, Licensor hereby grants to the Licensee: a) a non-exclusive license to manufacture Licensed Products in the United States and Canada in the Field Of Use; b) a non-exclusive license to use, offer for sale, or sell Licensed Product(s) in the People's Republic of China in the Field Of Use; c) a non-exclusive license to use the Trademark Rights with Licensed Product(s) in the Territory in the Field Of Use; and d) a non-exclusive license to reproduce and distribute the Licensed Technical Information only to the extent reasonably necessary to the exercise of rights under this License Agreement in the Territory in the Field Of Use; However, as to each of the above, it is understood that no rights are granted for the manufacture of any Licensed Product(s) for any use other than to meet the performance criteria set forth in attached Exhibit B, Threshold Criteria For Commercialization Date and when Licensee provides written documentation to Licensor that such performance criteria have been met, Licensor shall within thirty (30) days provide notice that Licensee may utilize the rights granted to manufacture, use, offer for sale, or sell Licensed Product(s) in the Territory in the Field of Use so long as Licensee complies with the Licensed Technical Information and

so long as Licensee continues to meet the performance criteria set out in Exhibit B in all material respects. The above being the only rights granted to Licensee under this License Agreement. [21] Clause 1.8 defines "Territory": 1.8 "Territory" means: a) the United States of America and Canada only with respect to the separation of spermatozoa in cattle semen into sex selected subpopulations of cattle spermatozoa based up on the presence of an X-chromosome or a Y-chromosome, use of such sex selected subpopulations of cattle spermatozoa for in vitro fertilization of cattle oocytes, the production of sex selected cattle embryos utilizing in-vitro fertilization, cryogenic storage of such cattle semen, such sex selected subpopulations of cattle spermatozoa, and such sex selected cattle embryos produced utlizing in-vitro fertilization; and b) means the People's Republic of China only with respect to the use or sale of such sex selected cattle embryos. [22] According to this definition "Territory" means People's Republic of China only with respect to the use or sale of sex-selected cattle embryos produced using in-vitro fertilization. [23] Clause 1.9 defines "Licensed Product(s)": 1.9 "Licensed Product(s)" means any apparatus, product, process, method, service, code, program, management scheme, business method, or the like, manufactured, used, offered for sale, sold, or otherwise

developed or commercialized utilizing or resulting from the Technology or otherwise involving any element or component of the Proprietary Rights or any Improvement(s) thereof. Services means application of any portion of the Technology, the Proprietary Rights or any Improvements thereof to obtain, process, flow sort, use, or store semen or spermatozoa for a third party. [24] Clause 1.2 define "Proprietary Rights": 1.2 "Proprietary Rights" with respect to the Technology means the collection of all Patent Rights, Trademark Rights, Trade Secret Rights, and Copyright Rights, or other rights which are or may be asserted as protectable under the law of the United States or the laws of any foreign country. [25] Clause 1.1 defines "Technology": 1.1 "Technology" means any and all Proprietary Rights or confidential information, trade secrets, know-how, technical data, masks, code, programs, designs, processes, methods, operations, innovations, or inventions, whether or not patented, and any patents, patent applications, copy rights, or other intellectual property of any kind that Licensor, now or hereafter, owns, controls, licenses, or has an interest in. [26] Paraphrasing these definitions, Licensed Products are products that use XY's Technology or Proprietary Rights. Proprietary Rights are generally defined as rights arising through operation of law (e.g., trade secret rights,

copyrights, common law trademark rights) and rights acquired by government grant (e.g., patent rights, trademark rights); these rights are enforceable at-large. Technology is defined at its broadest as any intellectual property that XY owns, controls, licenses or has an interest in, and specifically includes XY's Proprietary Rights and confidential information. The term "confidential information" is not defined in the CLA, and nothing in the CLA indicates what confidential information the Plaintiff provided to JJG. [27] Clause 1.10 defines "Field of Use": 1.10 "Field of Use" means the collection and preparation of cattle semen, the separation of spermatozoa in such cattle semen into sex selected subpopulations of cattle spermatozoa based upon the presence of an X-chromosome or a Y-chromosome, use of such sex selected subpopulations of cattle spermatozoa for in-vitro fertilization of cattle oocytes, the production of sex selected cattle embryos using in-vitro fertilization of cattle oocytes, cryogenic storage of such cattle semen, such sex selected subpopulations of cattle spermatozoa, and such sex selected cattle embryos using in-vitro fertilization, in accordance with the Technical Information or otherwise by prior written agreement with XY. [28] Clause 2.9 provided JJG with an option to amend the Field of Use to further include a non-exclusive license to manufacture up to

50,000 artificial insemination straws containing sex-selected subpopulations of cattle spermatozoa each year in the United States for sale only in the People's Republic of China. [29] This option was amended by an addendum agreed between the parties on October 26, 2004. [30] On or about October 26, 2004, JJG exercised the option set out in clause 2.9(c): c) an additional option to amend the Field Of Use and the non-exclusive license granted under Section 2.1(a) to further include a non-exclusive license to manufacture up to 50,000 artificial insemination straws containing sex selected subpopulations of cattle spermatozoa each year in Canada for sale only in the People's Republic of China which Licensee may exercise at its sole discretion during the twelve (12) month period following the Commercialization Date (thereafter by written consent of Licensor) and after meeting the additional performance criteria set forth by Exhibit B, Performance Criteria To Exercise Option To Amend License, and by payment to Licensor of an additional licensing fee in the amount of two hundred and fifty thousand dollars (US$250,000.00) of which one-hundred thousand dollars (US$100,000.00) shall be paid by Licensee upon execution of this Addendum and the remaining amount of one-hundred and fifty thousand dollars (US$150,000.00) shall be paid by Licensee in six consecutive monthly payments each in the

amount of twenty five thousand dollars ($US25,000.00) commencing with the first calendar month immediately proceeding the calendar month in which this Addendum is executed with each payment made to Licensor by not later than the 15th day of each of such six consecutive calendar months. The Field Of Use as amended shall be subject to the terms and conditions of this License Agreement including payment of royalty amounts set forth in Section 3.1. [31] The CLA also provides for JJG's agreement not to do certain things. Under clause 2.6, JJG agrees not to sublicense to any third party any right to manufacture, use, offer for sale, or sell Licensed Product(s) without XY's written consent, with the exception that JJG should utilize end user licenses to limit utilization of Licensed Product(s) to those uses approved by XY. [32] Under clause 2.7, JJG agrees not to use, offer for sale, or sell any Licensed Product(s) outside of the Territory without the written consent of XY. 2.7 EXPORTS: Licensee agrees not to use, offer for sale, or sell any Licensed Product(s) outside of the Territory without the prior written consent of Licensor. [33] Clause 2.7, read together with the definition of "Territory", provides the JJG cannot use or sell sex-selected cattle embryos produced using in vitro fertilization of cattle oocytes with sex-selected inseminates outside of the People's Republic of

China. Clause 2.1, read together with the definitions of "Territory" and "Field of Use" limit JJG to the manufacture of sex-selected semen and the use of sex-selected semen to produce sex-selected cattle embryos using in vitro fertilization to the United States or Canada. [34] I note that restrictions in clause 2.7 are defined by reference to Licensed Products and Territory, and do not refer to Field of Use. JJG's exercise of the option clause modified only Field of Use, and did not change the restrictions in clause 2.7 or the definition on which those restrictions depend. Because the term Territory is not defined with respect to artificial insemination straws, it appears that the Field of Use definition, as modified by the exercise of the option clause, provides the only restriction on what JJG may do with the artificial insemination straws it manufactures pursuant to the option. The amended definition of Field of Use provides that JJG has a license to "manufacture up to 50,000 artificial insemination straws for sale only in the People's Republic of China ". [35] Under clause 3.10 of the license agreement, JJG agrees to maintain the confidentiality of any and all information regarding, among other things, XY's Technology. [36] Clause 6.1.2 of the license agreement forbids JJG from taking any action, whether direct or indirect, or assisting or causing any third party to take

any action, that XY reasonably believes might impair or diminish its technology or proprietary rights. C. JJG's Acquisition and Use of, and Intentions with Respect to, XY's Technology [37] A third party, Dako, manufactures the devices that are used, employing XY's technology, to manufacture sex separated spermatozoa. These are known as SX cytometers. As a licensee of XY's technology, JJG was able to purchase SX cytometers from Dako. JJG obtained its first SX cytometer in March 2004. Around this time, XY sent a number of representatives to JJG's premises to assist JJG with the installation of the SX cytometers and the training of JJG staff. As well, JJG sent a number of its employees to XY's premises in Denver, Colorado to receive training on how to operate the SX cytometer to sort cattle spermatozoa. After the training, employees of JJG were able to operate the SX cytometer independently to sort cattle spermatozoa. [38] JJG purchased a second SX cytometer in October 2004. [39] By June 2006, JJG had received XY's approval to sell both sexed semen and embryos internationally under the terms of the license. XY's approval was obtained after JJG had demonstrated satisfactory quality levels of the products it made using XY's technology. [40] In July 2006, JJG obtained a price quote from Dako for three additional SX cytometers. However, JJG did not purchase any more SX cytometers from

Dako because it did not have a sufficient supply of semen to warrant the purchase of additional SX cytometers. [41] Between June and August 2006, JJG negotiated an agreement with Semex, an established distributor of cattle inseminates and embryos, under which JJG would use semen supplied by Semex to manufacture sex-selected inseminates for Semex. On the strength its dealings with Semex, JJG purchased a third SX cytometer. Both JJG and Semex required the approval of XY for their arrangement to proceed. Though JJG sought XY's approval, this approval was not forthcoming. JJG contends that XY did not approve the arrangement with Semex because control of XY had been acquired by a company engaged in the business of producing sex-selected inseminates using XY's technology. JJG contends that XY wanted to stifle competition. JJG maintains the XY's dual interest as a licensor of technology and producer of sex-selected inseminates has led it to embark upon a plan to restrict JJG's ability to carry out its business. [42] JJG says that XY's actions caused it to abandon its arrangement with Semex. In the result, it no longer had a sufficient supply of sperm to justify having three SX cytometers. Zhu deposed that as a result of XY's refusal to endorse the arrangement of Semex, he determined that "the future of JJG was no longer in the production of sorted sexed semen in North America". These

circumstances led Zhu to develop and explore his options with JJG. Zhu initiated a search for investors interested in developing in China herds of cows with the strong genetic makeup of Canadian cattle. As a result of these efforts Zhu was approached by Zheng Hong Liu and Shuxi Wang. [43] Contact with Liu led JJG to negotiate the sale of two of its SX cytometers to Liu's company, Shanghai Jing Jing Biotech Co. Ltd. On September 27, 2007, JJG agreed to sell two of its SX Cytometers to Shanghai Jing Jing, at a price of $600,000 USD each, for delivery in China. When JJG informed XY of this agreement, XY sought an injunction to stop the sale on the strength of the terms of the license agreement between XY and JJG. The court initially granted an interim junction, and later an interlocutary injunction. The court's reasons on this matter are reported as XY, Inc. v. IND LifeTech, Inc., 2007 BCSC 1666. [44] Wang suggested the possibility of a reverse take-over of JJG and the IND Group, with the aim of securing public financing through an IPO on the Toronto Stock Exchange. According to Zhu, the IPO concept was based on a plan for JJG to produce embryos and sexed semen, contained within artificial insemination straws, in North America, and supply these products to the IND Group in China. The IND Group would use the products to develop a herd of dairy cows. [45] Remillard, in his capacity

as JJG's regulatory affairs officer, deposed in his affidavit sworn January 31, 2008, that JJG has no intention to move any of its SX Cytometers or any part thereof that uses the technology for the SX designation to any location outside of British Columbia. Zhu deposes in his affidavit that he has no plans, either individually or through any company of his, to produce sex-selected semen in China. [46] On December 28, 2007, Zhu sold his shares in JJG to the defendants Liu and Wang for the consideration of $10,000,000RMB (which is approximately $1.2 million Canadian dollars). It was a term of the share transfer agreement that Zhu would remain as a consultant to the new company in order to enable its management to continue the operations of JJG. On May 7, 2008, IND Group entered into an agreement in principle with China One Corporation, a capital pool company listed on the TSX. [47] Apparently in connection with the IPO concept, Zhu approached Feng Lishe, the Chairman of China National Animal Breeding Stock Import and Export Corporation ("CABS"), a licensee of XY with rights to produce and sell sexed semen and sexed embryos in China, concerning the use of SX cytometers owned by CABS. The approach led to the signing of a letter of intent, by JJG and XY Breeding Livestock Co. Ltd., a CABS subsidiary, to collaborate and use SX cytometers to produce sexed semen from bulls at Shanghai

Dairy Breeding Co. Ltd. Though discussions regarding the collaboration have been ongoing, the arrangement contemplated by the letter of intent has not yet been put into effect. [48] In an affidavit sworn April 21, 2008, Remillard, who had become a defendant in the action, deposed in response to interrogatories delivered by the plaintiff. The interrogatories were directed to Remillard's knowledge of the defendants' Zhu, JJG, and IND Embryontech Inc. activities and intentions as they related to the production of sexed inseminates. His sworn answers to the interrogatories relate generally to his assertion of his belief that Zhu "continues to pursue the production of sexed semen in China". To the extent that this affidavit speaks to the use of sexed inseminates for embryo production, Remillard deposes that JJG produced and disseminated the sexed semen, and that IND Embryontech Inc. used the sexed semen for in vitro fertilization embryo production. [49] In his affidavit sworn July 15, 2008, Zhu deposes to his involvement with JJG and the other corporate defendants, the role of JJG and the other corporate defendants in the production of sex-selected inseminates and embryos, the role of certain of the corporate defendants in the use of the inseminates and embryos, the history of JJG's dealings with the plaintiff, and the past and present business activities in which he has been, and

is involved, as a former principal of JJG, and a principal of various of the other corporate defendants. [50] In paragraph 14 of his affidavit, Zhu deposes that JJG has, until March 10, 2008, produced sexed semen using the plaintiff's technology. He deposes further, as did Remillard, that JJG sells the sexed semen to IND Embryontech Inc. for production of embryos by that entity. [51] Zhu deposes to the changes in JJG's relationship with the plaintiff after control of the latter changed in or around June 2007. It was after this change in control that JJG's business undertaking, which was primarily the production of sex-selected inseminates under license from the plaintiff, was adversely affected by a reduced access to sufficient quantities of bull semen. At paragraph 199, Zhu deposes as follows: In and during August 2007, I determined that the future of the JJG was no longer in the production of sorted sexed semen in North America. By that time, we were aware of an opportunity in China to develop herds of cows in China that had the stronger Canadian genetic make-up. At that time, we began to explore the possibility of re-focusing the activities of the IND group (namely a group of companies related to JJG) in that direction. [52] Zhu deposes further, at paragraphs 211-215 of his affidavit: 211. In August 2007, we had been approached by Mr. Wang, a Canadian businessman, about the possibility of a reverse take-over of JJG and the IND Group and going public on the Toronto Stock Exchange by way of an initial public offering ("IPO").

212. At that time, we were interested in that possibility because the access to public financing would enable us to speed up the development of the herd in China by three times. We therefore started the initial work internally within the IND Group in order to see whether that possibility could become a reality. 213 Mr. Wang at that time began his process of due diligence and we engaged in serious discussions regarding this matter during the month of August 2007.

214. Towards the end of August 2007, the IND Group determined to proceed along the lines of this refocusing of our activities.

215. After the concept of the IPO was floated by Mr. Wang, our focus changed so that it would become: a) North America: JJG would become the supplier of the embryos plus sexed semen for China. b) China: The IND Group's focus would be on increasing the herd size in China by 3 times. [53] Zhu deposes to the reasons for its attempted sale of two SX cytometers to a company operating in China, which was the subject of an application for injunctive relief that was granted in October 2007. He goes on to depose of attempts to reach a resolution with the plaintiff, with the following objective: 237. The negotiations with the Plaintiff were based upon the following primary principles: a) JJG was to recover its costs that it had invested in the licence and the machines; b) We needed to guarantee that we could access sexed semen for the activities and business of JJG, particularly in order to enable us to proceed with our plans under the IPO and in particular to continue and develop our operations in China. These negotiations failed to produce an agreement. [54] Zhu deposes, at paragraphs 245 and 246, that the failure of these negotiations left him in a position in which his best alternative was to sell the shares of JJG to Messrs. Liu and Wang, both of whom had long-standing interests in the livestock business in China. Subsequent to the completion of this sale: 258. On March 7, 2008,

Embryontech closed its operations and stopped using sexed semen to produce embryos. The reason for this was to restructure the laboratory to produce kobe beef embryos. Embryontech's operation was closed from March 7, 2008 to June 10, 2008. Since June 10, 2008, Embryontech has been using only unsexed semen to produce kobe beef embryos. [55] Zhu deposes that steps have been taken toward a reverse take-over of the IND companies, known as the IND Lifetech Group Ltd., on the terms set out in an agreement of principle with the China One Corporation, a company listed on the Toronto Stock Exchange. [56] Zhu explains the ongoing role of JJG as follows: 255. The effect of the Share Transfer Agreement was to ensure that JJG was to be a supplier of sexed semen to the companies that were to become the IND Group, to enable the IPO to proceed. [57] In the penultimate paragraph of the affidavit, Zhu says: 272. Finally, in response to the entirety of this Application brought by the Plaintiff, I can say, on behalf of myself and the corporate entities referred to in paragraph 2 of this Affidavit, that: a) none of us have transferred, sold, leased, licenced or any other way wrongfully disclosed confidential information of the Plaintiff to anyone at all; b) none of the Plaintiff's technology has been disclosed to IND, IND Group Ltd., Embryontech, Qingdao, Zouping, or Beijing IND, in the normal

course of the dealing between JJG and those entities, or at all; and c) none of the Defendants have caused or permitted the MoFlo SX Cytometers or any part thereof to be sold or transferred to any third party. [58] In his affidavit sworn July 11, 2008, Zhu affirms and adds detail to some of the matters deposed to by Remillard, and controverts other matters stated by Remillard. He says: 9. In answer to paragraph 8 of the Remillard Affidavit #1 (Interrogatory #5), the facts are as follows: d) I categorically state under oath that I have no plans, individually or through any company of mine, to produce sex-selected semen in China. e) My current business objective, using the corporate vehicle being formed in Canada (under the IPO that is currently underway) is the development of high-grade genetic pedigree in Chinese cows, using embryos from Canadian cows. Those embryos have been produced by IND Embryontech Inc. in 2006 and 2007 are already in China. None of these embryos involved the Plaintiff's sorting technology. That is my sole focus at this time. Iv. The Plaintiff's Position and the Order Sought [59] The plaintiff says that the evidence establishes that the defendants intend to follow a business plan that will result in JJG breaching certain terms of the license agreement, including the obligation to maintain the confidentiality of XY's confidential information that JJG

obtained under the CLA. The plaintiff also says that if the defendants' plan is carried out, XY's confidential information will be shared with third parties such that JJG will have committed the tort of breach of confidence. The plaintiff submits that a quia timet interlocutary injunction is warranted because there is a serious question to be tried, and because the balance of convenience, weighing the irreparable harm that would ensue from JJG's intended conduct, favours the granting of an injunction. [60] The plaintiff says that the value of its technology is tied to the quality of the products made by the licensees of the technology, and that it protects the value of its technology through its licensing regime, which controls the use of its patent rights and confidential information, as well as the quality of the sex-selected inseminates and embryos that are created by its licensees. The plaintiff also says that it ensures that purchasers and end-users of sex-selected inseminates and embryos are also under license to XY. [61] In response to the Court's question, Mr. Wilson for the plaintiff stated that the troublesome activities that XY alleges JJG intends to pursue include: 1. the use of XY's sorting technology in China, in other words, creating sexed inseminates in China; 2. the production of non-in vitro fertilization embryos using sex-selected inseminates anywhere; and 3.

the production of any kind of embryos in China using sex-selected inseminates. A. The Defendants' Objection to the Position Taken by the Plaintiff at the Hearing [62] Mr. Manson, for JJG, objects to the terms on which XY framed its argument at the hearing. He says that the Notice of Motion seeks to enjoin disclosure of confidential information, not the particular conduct referred to by Mr. Wilson. Mr. Wilson says that the plaintiff did not have detailed knowledge of the defendants' intentions until after the notice of motion was filed and the plaintiff had received Mr. Zhu's affidavit. [63] While the notice of motion is couched in terms that appear to restrict the relief sought to an injunction preventing the dissemination of confidential information, these proceedings have, from the outset, raised the plaintiff's concerns founded in a belief that JJG, a licensee of the plaintiff, intends to embark on the production of sex-selected inseminates in China, in contravention of the terms of the license. This concern is responded to in the Zhu affidavits. The plaintiff's concern based on a belief that JJG, and other defendants, may use sex-selected inseminates produced under license for the manufacture of multiple embryos by means of in vivo (MOET) fertilization is also addressed in affidavits filed by the plaintiff and responsive affidavits by JJG. [64] I consider that the issues

that relate to the broad relief sought by the plaintiff are properly before the court on this application. V. The Test for a Quia Timet Injunction [65] The law that applies with respect to whether an interlocutory injunction will be granted is well-settled. The Law and Equity Act, R.S.B.C. 1996, c. 253, provides, in s. 39(1), that an interlocutory injunction may be granted where it is just or convenient to do so. In British Columbia, the courts have applied a two-prong test to determine whether an interlocutory injunction ought to be granted. In B.C. (A.G.) v. Wale (1986), 9 B.C.L.R. (2d) 333 (C.A.), McLachlin J.A., as she then was, stated the test as follows (at 345): The traditional test for the granting of an interim injunction in British Columbia is two-pronged. First, the applicant must satisfy the Court that there is a fair question to be tried as to the existence of the right which he alleges and a breach thereof, actual or reasonably apprehended. Second, he must establish that the balance of convenience favours the granting of an injunction. The decision in American Cyanamid Company v. Ethicon Limited, [1975] A.C. 396 (H.L.), may be read as suggesting a three-stage test for the granting of interlocutory injunctions rather than the two-stage test to which I have referred, the requirements being (1) a fair question to be tried; (2) irreparable harm and (3) balance of

convenience favouring the injunction. While I prefer to view the requirement of irreparable harm as integral to the assessment of the balance of convenience between the parties, the practical effect of the two approaches is the same. [66] In this case, the applicant seeks the court's aid in anticipation of the defendants' future actions, and in fear of the harm those anticipated actions might cause. An injunction granted in these circumstances is known as a quia timet injunction. In an application for a quia timet injunction, the requirement for proof of irreparable harm is refined to account for the fact that the applicant, seeking an injunction in anticipation of future harm, has not yet suffered any harm. The applicant must lead clear evidence showing how such harm will occur and establishing a high probability that, without the injunction, the harm will occur imminently or in the near future: Merck & Co. v. Apotex Inc. (2000), 8 C.P.R. (4th) 248 (F.C.A.); Canadian Pacific Ltd. V. Highland Valley Cattle Co., [1990] B.C.J. No. 1860 (C.A.) (QL). In Highland Valley Cattle, the Court of Appeal explained the meaning of "imminent" at ¶45: To justify granting a quia timet injunction, the plaintiff must establish on the balance of probabilities that there is an imminent threat of danger of damage to Canadian Pacific's property. "Imminent" does not necessary imply immediacy, but it

does suggest the virtual inevitability of an event. [67] In Acquila Network Canada (B.C.) Ltd. v. Borgnetta, 2004 BCCA 188, our Court of Appeal, citing Operation Dismantle v. Canada, [1985] 1 S.C.R. 441, said the applicant "must establish the likelihood that the apprehended behaviour will occur" (¶13). In Bayer HealthCare AG v. Sandoz Canada Inc., 2007 FC 352, it was explained that establishing a likelihood of future harm is a matter of providing an evidentiary basis showing how such harm will occur and why it will be irreparable (¶35): mere assertions of harm through loss of personnel or sales are insufficient to prove irreparable harm. In a motion for a quia timet injunction, there is no evidence of actual harm because the allegedly infringing party is not yet in the marketplace. Therefore, logical inferences must be drawn from the evidence. However, to demonstrate irreparable harm, an applicant must lead clear evidence showing how such harm will occur and why it will be irreparable. In the absence of such evidence, there is nothing on which an inference of irreparable harm can reasonably and logically be based. [68] In Tele-Mobile Co. v. Bell Mobility Inc., 2006 BCSC 161, Groves J., relying on Sulco Industries Ltd. v. Jim Scharf Holdings Ltd., (1996), 68 C.P.R. (3d) 170, and Maritime Travel Inc. v. Gold Travel Direct.com Inc., 2003 NSSC 17, concluded at ¶25 that "where the

defendant has stated their intention not to engage in the conduct which aggrieves the plaintiff, any claim for irreparable harm is speculative and cannot justify the extraordinary remedy of injunction". Groves J. drew this conclusion in relation to a particular set of advertising claims, which Bell had publicized but withdrawn, and in respect of which a senior officer of Bell had committed by affidavit to refrain from making while the matter was litigated. On the same application, Tele-Mobile also sought a quia timet injunction to enjoin Bell from continuing to engage in what Telus viewed as a pattern of false advertising. Groves J. declined to make that order as well, and based this decision on similar grounds (¶35-38): Telus Mobility invites the court to grant an injunction as a preventative matter. That, in my view, does not, have a proper legal foundation. The decision of Coffin v. Coffin (1821), 37 E.R. 776, stands for the proposition that court should not grant injunctions on the principle that they will do no harm to the defendant, if in fact the defendant does not intend to commit the act in question. Additionally, the case of Bridlington Relay Limited v. Yorkshire Electricity Board, [1965] Ch. 436 stands for the principle that it would be wrong for the court in a quia timet proceeding to grant relief by way of injunction to compel a defendant to do something which it

appears to be willing to do without the imposition of an order by the court. Here I am satisfied that Bell does not intend to advertise in any of the three offensive ways in any of the three clearly misleading ways [sic] that it was doing prior to the advice to Bell by Telus Mobility of its error. It would not be appropriate for the court to grant an injunction faced with a defendant who has stated in affidavit that it does not intend to do what the injunction seeks to prohibit it from doing. That may be different if the defendant had a bad history or a history of making improper undertakings or representations to the court. That is not the case here. As a result, I find that Telus Mobility has not met the test for establishing that irreparable harm will result if an injunction is not granted. [69] This proposition is also the ratio decidendi in Arxx Building Products Inc. v. Polyform Cellular Plastics Inc. (2001), 12 C.P.R. (4th) 350 , where the court stated at ¶33: Finally, Arxx asked for an injunction on the basis of preventing future loss to its interests, a quia timet application. In fairness to the defendants, the material filed did not raise this as an issue. However, the better answer to this request is that quia timet lies where an intention to engage in damaging conduct is shown. It does not lie where the defendants have affirmed an intention to avoid causing

harm. [70] In summary, to obtain a quia timet injunction restraining a particular anticipated activity, the plaintiff must show (1) that there is a high probability that if an injunction is not granted, the anticipated activity will occur imminently or in the near future, (2) that there is a serious question as to whether the plaintiff has a right that would be breached by the activity and (3) that the balance of convenience, weighing the likelihood of irreparable harm to the plaintiff, favours granting the injunction. VI. Application to the Facts [71] XY's claim for an injunction relies on the proposition that the defendants' (other than JJG) plan to engage in activities that require knowledge of XY's confidential information. The injunction that XY seeks would prohibit the defendants other than JJG from engaging in certain activities, and would prohibit JJG from sharing information necessary to enable these activities. With XY's objective in mind, the activities that XY seeks to enjoin may be conveniently paraphrased as follows: 1. The transfer by JJG of SX cytometers to an unauthorized third party.

2. The use of SX cytometers, or any part thereof that uses the technology for the SX designation, by the defendants other than JJG.

3. The sharing by JJG with the other defendants of technical information, know how, methods, operations, protocols, processes or techniques necessary for using SX cytometers to produce sex-selected inseminates.

4. The production, sale or transfer of sex-selected inseminates by defendants other than JJG.

5. The production, sale or transfer of embryos created using sex-selected inseminates by defendants other than JJG.

6. The sharing of confidential information by JJG with the other defendants necessary to them to produce, sell or transfer embryos created using sex-selected inseminates.

7. The sorting of semen by JJG in China.

8. The production of embryos using sex-selected inseminates other than through in vitro fertilization by JJG. [72] To obtain a quia timet injunction restraining any of these activities, XY must show (1) that there is a high probability that if an injunction is not granted, the anticipated activity will occur imminently or in the near future, (2) that there is a serious question as to whether XY has a right that would be breached by the activity and (3) that the balance of convenience, weighing the likelihood of irreparable harm to the plaintiff, favours granting the injunction. A. The Transfer by JJG of SX Cytometers to an Unauthorized Third Party [73] XY seeks to enjoin JJG from transferring SX cytometers to any unauthorized third party because, it says, such transfers would cause the disclosure of confidential information imbedded in the SX cytometers. JJG has provided affidavit evidence that categorically denies any intention to transfer SX cytometers to any third party. This Court has not been given any reason to doubt the truth of this denial. Faced with a defendant who has stated in affidavit that it does not intend to do what the plaintiff seeks to prohibit it from doing, I decline to enjoin JJG from transferring its SX cytometers. B. The Use by the Defendants Other Than JJG of SX Cytometers, or Any Part Thereof That Uses the Technology for the SX Designation [74] XY

applies for an order prohibiting the defendants other than JJG from using SX cytometers, or any part thereof that uses the technology for the SX designation. XY has not persuaded me that the defendants other than JJG are at all likely to use SX cytometers, or any technology related to the SX designation. In fact, according to the defendants' plans, which are set out in affidavit evidence, JJG will be the only entity using SX Cytometers, and the only entity producing sex-selected inseminates. The plaintiff has adduced no evidence that would found a reasonable belief that any of the defendants, other than JJG, will use the SX cytometers. JJG has the right under the license to use this equipment. C. The Sharing by JJG with the Other Defendants of Technical Information, Know-how, Methods, Operations, Protocols, Processes or Techniques Necessary for Using SX Cytometers to Produce Sex-Selected Inseminates [75] It follows from my conclusion that XY has not established a probability of the defendants other than JJG using the SX cytometers, that XY has not established that JJG will be sharing confidential information to enable third party use of SX cytometers. D. The Production, Sale or Transfer of Sex-Selected Inseminates by Defendants Other than JJG [76] The evidence establishes that Qingdao and Zouping distribute sexed-semen manufactured by JJG to customers in China. JJG has the

contractual right to sell sexed semen in China. XY has no contractual rights against Qingdao or Zouping and did not, on this application, rely on any specific intellectual property rights enforceable against these defendants. Accordingly, there is not a serious question raised as to whether these activities will cause XY harm in violation of its rights. E. The Production, Sale or Transfer of Embryos Created Using Sex-Selected Inseminates by Defendants Other than JJG [77] There is no evidence that the plaintiff has purported, in reliance on clause 2.6, to control the use of Licensed Products (in particular, sex-selected inseminates) created by JJG by insisting that JJG impose end-user licenses to limit utilization to uses approved by XY. [78] XY has no contractual relationship with the other defendants and did not, on this application, rely on any specific intellectual property rights enforceable against them. Accordingly, there is not a serious question raised as to whether these activities will cause XY harm in violation of its rights. This is not to say that XY does not have a right to prevent the defendants other than JJG from using its technology. It is only that XY has not asserted a right on this application that would be contravened if the defendants other than JJG acted according to the defendants' plans. F. The Sharing of Confidential Information by JJG with the Other

Defendants Necessary to them to Produce, Sell or Transfer Embryos Created Using Sex-Selected Inseminates [79] This question turns on whether JJG's role in the plan includes the disclosure of XY's confidential information. [80] XY says that a serious question is raised because (1) confidential information relating to XY's Technology would be disclosed through the provision of end product sexed-semen, (2) confidential information relating to XY's cryopreservation methods for sexed semen would be disclosed and (3) confidential information relating to techniques for handling sexed semen are different from ordinary in vitro fertilization techniques. [81] I do not accept the plaintiff's contention that the transfer of sex-selected subpopulations of cattle spermatozoa in artificial insemination straws constitutes a disclosure of confidential information. The plaintiff has not provided evidence to supports this contention, and the uncontroverted evidence of Dr. Vanderwal is that it is impossible to reverse engineer the sex sorting process by examining the end product. It is, in addition, novel to suggest that engaging in an activity expressly permitted under the license would violate the confidentiality provisions of the same license. [82] As for the concerns raised in relation to the preservation and handling of sexed semen, the evidence of Zhu is that JJG uses the same techniques for

creating and storing embryos using sorted sperm as it does using unsorted sperm. It is also Zhu's evidence that JJG had the ability to preserve, store, and transport embryos prior to its becoming a licensee of the plaintiff. G. The production of sex-selected inseminates in China [83] The plaintiff's belief that JJG, Zhu, or any one or more of the other defendants intend to produce sex-selected inseminates in China is for the most part based on the following: 1. the October 2007 attempted sale of JJG's SX cytometers to an entity in China, which was enjoined by the court on October 12, 2007; 2. Zhu's efforts in relation to SX cytometers owned by CABS; 3. Zhu's assertion of his intention to focus operations elsewhere than North America; 4. Remillard's assertion of a belief that Zhu is acting on this intention. [84] The circumstances surrounding the attempt to sell the SX cytometers to a corporation in China is adequately explained in Zhu's affidavits. The explanation makes sense. Further, this attempted sale was not carried out surreptitiously. JJG notified the plaintiff of the intended sale in order that it might avail itself of its first right of refusal. This indicates that JJG believed that it was acting in accordance with the terms of the license, which contains the first right of refusal. [85] There is nothing sinister in Zhu's dealings, in relation to the SX cytometers

owned by CABS. CABS is a licensee of the plaintiff. It may be assumed that it has the right to produce sex-selected inseminates in China, and no reason has been offered why Zhu could not deal with a licensee for the purpose of gaining ready access to sex-selected inseminates produced by another license holder. [86] Considered in context, Zhu's intention to focus his efforts elsewhere than North America does not indicate an intention to produce sex-selected inseminates in China. Zhu's long involvement in the science and business of bovine embryo production, his association with China, and the changes in the relationship with the plaintiff, would naturally result in his taking up opportunities there. He has in fact pursued such opportunities by the agreement in principle between the IND Group and the China One corporation. [87] As for the Remillard evidence, it amounts to nothing more than vague recollections and a conclusory statement for which no real basis has been established. [88] There is no basis in the evidence for a finding that JJG, Zhu, or any of the defendants intend to produce sex-selected inseminates in China. H. The production of embryos using sex-selected inseminates other than through in vitro fertilization by JJG [89] There is evidence that IND Embryontech Inc. has, in the past, used sexed inseminates for the production of multiple embryos by means of in vivo

(MOET) fertilization. The plaintiff was aware of this, but there is no evidence that the plaintiff demanded that this activity cease. The plaintiff's concern, at that time, was the JJG pay royalties on the embryos thus produced. [90] The question remains whether there is a serious question to be tried in relation to the use of sex-selected inseminates for the production of embryos by means of in vivo (MOET) fertilization. [91] It is arguable that the grant of license to JJG limits its use of sex-selected inseminates to the production of embryos by means of in vitro fertilization. It is arguable that the use of sex-selected inseminates for anything other than the production of embryos by means of in vitro fertilization would be a breach of the terms of the licensing agreement. [92] The evidence does not establish a basis for a belief that JJG intends in the near future, or ever, to engage in the production of embryos. Its business activity is, as it has always been, the production of sex-separated inseminates under license from the plaintiff. The embryo production was undertaken by IND Embryontech Inc., using inseminates provided by JJG. JJG then purchased the embryos for resale. IND Embryontech Inc. is no longer engaged in the production of embryos. [93] The promotional materials related to the IPO indicate that the public company has the means of producing multiple embryos.

However, the IND Groups' present intention is to use only those embryos now located in China. The plaintiff does not, on this application, seek to enjoin them from doing so. [94] The evidence, in relation to this issue, does not satisfy the requirement that the apprehended wrong, in relation to which there is a serious question to be tried, is imminent or inevitable. A quia timet injunction is not, therefore, available. VII. DISPOSITION [95] The application is dismissed. The parties may speak to the issue of costs. "H.A. Slade J." The Honourable Mr. Justice H.A. Slade April 2, 2009 - Revised Judgment Corrigendum to Reasons for Judgment issued advising that: [1] Paragraph 2 will now read: (2) The plaintiff contends that the defendant JingJing Genetic Inc. ("JJG"), which is a licensee of the plaintiff's technology, is planning with the other corporate defendants to establish a sperm sorting operation in China, and that the confidentiality that protects XY's technology would be compromised if the defendants' plans are carried out. (amendment underlined) The Reasons for Judgment are amended accordingly. In all other aspects, the Reasons stand.