Judge sides with Mobilicity investors, orders Ottawa to repay hundreds of millions of dollars

Globe and Mail

4 days ago

An Ontario judge has sided with the original investors of a former independent mobile provider in a court battle that has lasted for more than a decade, ordering the federal government to repay hundreds of millions of dollars for unexpectedly altering its spectrum policy and causing them losses.
Justice Peter Osborne of the Ontario Superior Court of Justice ruled Wednesday that Ottawa committed negligence and negligent misrepresentation when it induced Quadrangle Group LLC and Obelysk Media Inc. to invest hundreds of millions of dollars in Mobilicity in 2008, only to change the rules for the resale of the startup's wireless licences in 2013.
Justice Osborne also ruled that the government wrongfully interfered with the sale of Mobilicity's spectrum assets, the invisible radio waves that carry wireless signals, when it extended what was supposed to be a five-year moratorium on new entrant spectrum transfers to incumbents.
In doing so, the judge said, the then-Harper government quashed proposed purchase offers by Telus Corp. T-T when Mobilicity was operating under court protection from its creditors. (Mobilicity was eventually sold to Rogers Communications Inc. for a lower price.)
Rita Trichur: Wheels of justice grind slowly for Mobilicity's initial investors
The lengthy and complex trial, which relied on 10 fact witnesses and five expert witnesses, underlines the question of investors' rights in the face of changing policy frameworks. The case also reinforces governments' 'duty of care' to ensure that their regulatory actions do not lead to unreasonable harm business interests.
The decision contributes to continuing debates over the effectiveness of Canada's telecom competition policy and the degree to which the government should put its finger on the scale when it comes to commercial matters.
'At its core, this action is about the transferability of spectrum licenses. But significantly, it is also about the extraordinary and unusual conduct of Government officials with respect to the Mobilicity spectrum licenses in particular,' Justice Osborne said in his decision.
Obelysk welcomed the decision in a statement, saying the plaintiffs are reviewing the details and will continue to pursue all appropriate remedies to recover their losses. While the judge did not specify the total damages, Jonathan Lisus, the lead lawyer for the investors, said the parties had calculated the amount at more than $500-million.
The case represents a rare instance of a government being found in breach of private law duty of care, Mr. Lisus said.
Innovation, Science and Economic Development Canada spokesperson Andréa Daigle said in an e-mail that the government has taken note of the court's decision and will review its finding carefully.
'As the decision remains subject to appeal, it would be inappropriate to comment further at this time,' she said.
David Berman: The question now facing telecom investors: Why bother?
The origins of the dispute date back to 2006, when the government approached Canadian businessman John Bitove about investing in a new wireless venture, according to the lawsuit filed in 2014. In order to increase competition, the government decided to set aside a portion of wireless licences in a forthcoming auction for new market entrants.
Mr. Bitove, who ultimately became the majority owner of Obelysk, and New York-based private equity firm Quadrangle Group LLC eventually did invest. They purchased spectrum licences worth $243-million in the 2008 auction.
Notably, they alleged that they did so under the understanding that, if Mobilicity were to fail, they could sell the licences – typically a telecom's most valuable asset – to an incumbent to recoup their investment after a five-year period, mitigating their risk.
But in 2013, the government retroactively altered the rules governing spectrum transfers, arguing that new entrant spectrum was never meant to fall into the hands of incumbent carriers. By taking away the company's ability to sell to incumbents including Telus, Justice Osborne said that the government caused a material and immediate devaluation of the value of Mobilicity's licences.
Industry Canada, which regulates spectrum auctions, maintained during legal proceedings that it did nothing unlawful, and provided the investors no assurances that spectrum transfers would be approved in their favour after the five-year moratorium.
But Justice Obsborne said there was overwhelming evidence that the plaintiffs understood the opposite, and said that if this was not the case, that the government had a duty to correct their understanding but did not do so. The judge rejected the government's view that it could alter the transferability attributes 'at any time it saw fit' and avoid liability to the plaintiffs.
'The actions of the Government were capricious, and they were inconsistent with the expectations which were in turn based on the representations made,' he said. 'Those representations were relied on by the investors who, as noted, did spend billions of dollars under the assumption that the rules would be respected.'
Canadian telecoms boost wireless prices, giving lift to sagging stocks
Furthermore, Justice Osborne found that Industry Canada later interfered in a bidding war for Mobilicity, which was struggling financially, disrupting Telus's efforts to acquire the company's spectrum.
Telus and Mobilicity had been engaged in talks for the sale of the company before the policy change, so the companies decided to go forward and seek approval, despite concerns that the regulator would not allow it.
Justice Osborne said the regulator interfered by threatening in 2014 that Telus would be excluded from future spectrum actions if it continued to pursue Mobilicity licences, and by 'unnecessarily, but intentionally, inappropriately, and for tactical purposes,' withholding the release of a response on a proposed licence transfer to Telus, 'at the specific request and with the direct involvement of the Minister's political staff,' the judge found.
The regulator eventually made an exception to its policy to allow Rogers Communications Inc. RCI-B-T to purchase Mobilicity and its wireless licences as part of a spectrum swap in 2015. Rogers paid $465-million, which was $82-million less than Telus's highest bid at the time.
By effectively removing Telus as one of the two bidders, the government prematurely and 'surreptitiously' terminated what was otherwise a competitive bidding process, and ultimately reduced the value of the licences, Justice Osborne ruled.
The government will be required to repay the shareholders for their initial investments in Mobilicity after the sale in 2015, plus prejudgment interest.