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Canadian businessman John Bitove’s company, Data & Audio-Visual Enterprises Wireless Inc., is one of the plaintiffs claiming the federal Industry Department broke promises it made to entice them to invest in Canada’s wireless industry.

Peter Power/The Globe and Mail

A "novel claim" launched by wireless startup Mobilicity's original backers that seeks $1.2-billion in damages from the federal government has cleared another legal hurdle.

The Ontario Divisional Court last week rejected a motion seeking leave to appeal by government lawyers, who sought unsuccessfully to have the lawsuit dismissed earlier this year.

That means the case, which was filed in September, 2014, can move on to the next stage, with the government now expected to file a statement of defence.

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The plaintiffs – Canadian businessman John Bitove's company, Data & Audio-Visual Enterprises Wireless Inc., and New York-based private equity firm Quadrangle Group LLC – claim the federal Industry Department broke promises it made to entice them to invest in Canada's wireless industry.

The lawsuit alleges the government offered certain assurances in return for their investment, including that the investors would be able to sell to one of the national carriers after five years if necessary.

Mobilicity launched a cellular business after purchasing spectrum licences in 2008, but its business faltered and it eventually sought court protection from creditors. Ottawa blocked multiple attempts to sell to Telus Corp. and ultimately only permitted a sale to Rogers Communications Inc. as part of a deal that included the transfer of airwaves to fellow new entrant carrier Wind Mobile Corp.

Government lawyers argued that the case raises a "novel claim" that alleges "the existence of a separate duty of care owed by a Crown agency in respect of conduct directed towards, and damages suffered by, a corporation which they created. … This sort of claim appears not to have been considered by the Canadian courts."

In a decision rejecting the government motion, Justice Anne Molloy agreed with those points but added that she also agreed with the original motion judge that the claims should not be dismissed at this stage.

"They arguably fall within legal principles already established in long-standing legal precedent. It is certainly not plain and obvious that they will fail," she wrote before denying leave to appeal and awarding the plaintiffs $6,000 in legal costs.

Michael Huber, president and managing principal at Quadrangle, said he was pleased with the decision and looked forward to the discovery process as the case goes forward.

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"This gives us a chance to shine a light on decision making that seemed to be clubby and ad hoc and that didn't respect the government's legal commitments," he said. "As a result, Canadian consumers were deprived of the benefits of real competition in the wireless industry."

In March, Ontario Superior Court Justice Frank Newbould – who also presided over Mobilicity's creditor protection proceedings – rejected a motion by the government to strike the claim and refused to stay the litigation while the creditor protection proceeding was ongoing.

However, an administrative snafu at the Ontario court delayed a decision on the government's appeal of that ruling until last Friday as the motion was inadvertently not scheduled to be heard.

Mobilicity was sold to Rogers in June for $465-million and while the creditor protection proceeding is still wrapping up, most of the funds have been distributed.

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