tlq vol4 issue2 e - mccarthy tétrault · 2008. 9. 4. · co-counsel: technology law quarterly...

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McCarthy Tétrault Co-Counsel:

Technology Law Quarterly Volume 4, Issue 2April – June 2008

Co-Counsel: Technology Law Quarterly Volume 4, Issue 2

Welcome to Volume 4, Issue 2 of McCarthy Tétrault Co-Counsel: Technology Law Quarterly. In this issue of the TLQ, you will find articles on a wide range of topics — including the bankruptcy of software suppliers, the relationship between companies and outsourcing vendors, the online sale of goods, privacy developments in B.C., a proposed settlement of the TJX consumer class actions and climate change.

What happens in the event your software supplier goes bankrupt and the trustee in bankruptcy terminates your software licence? We outline the current state of the law, examine the proposed amendments to the bankruptcy legislation, and set out a way you can protect yourself in this unclear area.

If you have just completed or will soon be closing an offshore business process outsourcing (BPO) deal, you will want to read the final instalment in our BPO series. It examines the ongoing relationship between a company and its outsourcing vendor, and suggests ways to keep the deal on track.

This edition also features a number of articles about the sale of goods online; these will be of interest to Internet companies, brand owners and software suppliers alike. In one article, we discuss actions brought by luxury goods makers against eBay for the sale of counterfeit goods. In another article, we examine a case where an individual sought to resell software on eBay.

We highlight recent caselaw involving downstream purchasers of computer products. In one case, a computer chip and systems patents holder sued a computer manufacturer who had purchased chipsets and microprocessors from the patent licensee and incorporated those parts into its computers. In two other cases, indirect purchasers of DRAM products (memory chips) sought unsuccessfully to certify actions against DRAM manufacturers.

On the privacy front, we summarize the proposed settlement of consumer class actions launched following the security breach of TJX’s computer systems. We also discuss two key developments out of British Columbia: (i) the report of the Special Committee on B.C.’s Personal Information Protection Act (PIPA), which proposes an express breach notification requirement; and (ii) the enactment of the e-Health (Personal Health Information Access and Protection of Privacy) Act, which makes B.C. the first province in Canada to enact a specific legislative framework governing access and privacy for electronic health information databases.


Climate change continues to be a hot topic. In one article, we describe the federal plans for a carbon cap and trade system and carbon trading framework to reduce greenhouse gas (GHG) emissions, and explain how to adequately prepare for the new regime. We also look at efforts underway in the airline and oil & gas industries to reduce GHG emissions.

These are just some of the topics discussed in this issue of the TLQ. Browse through this PDF using the table of contents, which contains “clickable” links to articles. If you wish to read these articles in HTML format, you can click on the links in the covering e-mail or go directly to our website where all the articles are posted. There, you can search the publications and find additional informative articles on many subjects. If you would prefer to receive a paper copy of the TLQ in the future or wish to change your subscription information, please contact me at the link below.

McCarthy Tétrault is recognized by the foremost ranking publications as a leader in technology law and other practice areas. The 2008 edition of Chambers Global, a guide to the world’s leading lawyers, confirms McCarthy Tétrault’s top-ranking in Canada for information technology as well as telecommunications & broadcasting. PLC Which Lawyer?, in its 2008 edition, ranks McCarthy Tétrault as the leading firm in Canada for IT and e-commerce law. The Canadian Legal Lexpert Directory 2008 recognized McCarthy Tétrault as having the most recommended technology law practice in Toronto. Our Co-Counsel: Technology Law Quarterly demonstrates our commitment to maintaining this position of leadership.

Heather J. Ritchie Editor-in-Chief July 2008

http://www.mccarthy.ca/lawyer_detail.aspx?id=6684


Table of Contents

Internet/E-World .................................................................................. 1

E-COMMERCE .............................................................................................. 1 International: ICANN Approves Expansion of Top Level Domains ..........................................1

SOFTWARE LICENSING ................................................................................... 2

International: Open Source Software and Open Content Licensing: From Copyright to Copyleft — Part IV ..........................................................................2 North America: Technology Licences upon Bankruptcy .....................................................4 US: Resale of Computer Software on eBay Does Not Infringe Copyright..................................7

Technology Finance............................................................................... 9

TECH-RELATED FINANCE................................................................................. 9 North America: Taking Your Tech Company Public — Part IV ..............................................9

Technology Contracting.........................................................................13

OUTSOURCING ........................................................................................... 13 International: Offshore Business Process Outsourcing 101 — Part III .................................... 13

Technology Litigation ...........................................................................16

CASES/LEGAL DEVELOPMENTS......................................................................... 16 US: Court Certifies Class Action for Technical Writers’ Unpaid Overtime.............................. 16 Canada: A “Monster of Complexity” — Certification Denied in DRAM Price-Fixing Cases............ 17

Intellectual Property ............................................................................20

COPYRIGHT............................................................................................... 20 Canada: Proposed Canadian Copyright Reform — Bill C-61 ............................................... 20


PATENTS .................................................................................................. 23

US: Downstream Purchasers Protected by Exhaustion Doctrine in the Face of Method Patents .... 23 US: Patent Infringement Lawsuit Filed by Seagate Technology against STEC Inc. .................... 25

TRADE-MARKS ............................................................................................ 25

International: eBay Wins Some (in the US), Loses Some (in France) .................................... 25

Privacy..............................................................................................30

CASES/LEGAL DEVELOPMENTS......................................................................... 30 B.C.: Committee Recommends Amendments to British Columbia’s Private Sector Privacy Legislation .............................................................................................. 30 B.C.: British Columbia Enacts e-Health Legislation ........................................................ 31 North America: TJX Enters into Proposed Settlement Agreement of Customer Class Actions ...... 32 Canada: Appeal Court Refuses Stay in case over Disclosure of eBay PowerSeller Information to Canada Revenue Agency .................................................................................... 35

Communications ..................................................................................36

CASES/LEGAL DEVELOPMENTS......................................................................... 36 Canada: Recent Developments in Canadian Communications Law and Policy ......................... 36 Canada: Canadian Cultural Product and the Long Tail: The New Economics of Production and Distribution in Canada — Part IV............................... 38

Clean Technology ................................................................................41

CASES/LEGAL DEVELOPMENTS......................................................................... 41 Canada: Changes and Opportunities — Federal Climate Change Legislation........................... 41 US: Low Carbon Resolutions on the Agenda — Shareholder Activism and Exxon ...................... 43 Europe: Airline Emissions Reduction Takes Off ............................................................. 43


Internet/E-World E-COMMERCE

International: ICANN Approves Expansion of Top Level Domains

In the last issue, we discussed issues relating to the final report of the Generic Names Supporting Organization, which recommended the introduction of new top-level domains (TLDs). At a recent meeting in Paris, the board of the Internet Corporation for Assigned Names and Numbers (ICANN) passed a resolution approving the expansion, although the implementation plan has yet to be finalized.

Currently, proposals for new TLDs undergo a stringent approval process and hence the number of TLDs is quite small. The new procedure will eliminate some of the barriers to establishing a new TLD, making it much easier for new TLDs to be introduced. Once the ICANN board has agreed upon the implementation plan, hundreds of new TLDs are expected to be available for choosing. While this development will create a wealth of new marketing options and provide greater variety for domain name seekers, it will also raise considerable issues for organizations seeking to protect their trade-mark rights.

The ICANN board also passed a resolution limiting the number of registrations that registrars can add and delete during the grace period. The purpose of this resolution is to curtail “domain tasting,” the process whereby individuals or companies register a domain,

test it out to determine its value, and delete it if it does not meet certain profitability standards. Under the current regime, if the domain is deleted within the five-day “add-grace period,” the cost of the domain is refunded. The new process will curtail the number of deletions for which money is refundable, and may lead to less domains being snapped up for pay-per-click purposes.

Contact: Jennifer A. Ross-Carriere in Ottawa at [email protected]



SOFTWARE LICENSING

International: Open Source Software and Open Content Licensing: From Copyright to Copyleft — Part IV

This article concludes our four-part series on open content licensing, particularly the copyleft regime under Version 2 of the GNU General Public Licence (GPL). In addition to the copyleft considerations discussed in previous instalments, other legal risks are associated with open source licensing in general, and with the GNU GPL, in particular. This article discusses those risks.

McCarthy Tétrault Notes:

Previously, we discussed the loss of the proprietary character of a software product that has been combined by its owner with an open source product having copyleft requirements. However, the copyleft problem may also arise in circumstances where proprietary software licensed from a third party has been improperly combined with open source software. This will lead to potential liability under the terms of the third-party licence in question. Verifying proper use of open source products in the face of licensed proprietary software has become an increasingly common component of intellectual property (IP) due diligence in large-scale corporate, commercial and financing transactions.

Open source development often occurs with a multitude of contributors who may

work without central direction or control. As development contributions are made over time, the likelihood of encountering potentially misappropriated or infringing elements of code increases. For that reason, open source products are thought to carry a higher risk of infringement than commercial software.

When coupled with the typical lack of warranty protection related to such software, the decentralized development practices associated with open source software add operational risk to an acquisition involving software assets affected by open source software components. This is because of a perceived higher exposure to liability for deficiencies in the functionality and performance of open source software.

Both the IP infringement risks and the risks of software defects associated with open source software are addressed, in practice, by way of specific indemnities from a vendor or borrowing party for the business or assets involved.

Unlike many other transactional risks that appropriate representations and warranties can address, the typical approach of vendor’s or borrower’s counsel is to exclude open source components from the representations and warranties involving IP and product performance once the purchaser’s or lender’s due diligence confirms the use of open source software. This exclusion necessitates the introduction of special stand-alone indemnities to


address the risks in question. The usual indemnification provisions, on the other hand, are based entirely on the occurrence of losses incurred as a result of an inaccurate or untrue representation or the breach of an express contractual warranty.

Thus, when the typical array of representations and warranties found in transactional agreements ordinarily is modified by vendor’s or borrower’s counsel to exclude open source software from their ambit, any existing global indemnification provisions related to those representations and warranties are rendered ineffectual in seeking to address the risks of using open source software.

Another set of practical issues with open source software in the context of corporate and commercial transactions relates to proper compliance with the terms and conditions of the GNU GPL. For instance, Section 1 of the licence requires that an appropriate copyright notice and disclaimer of warranty be provided conspicuously on each copy of the licensed open source software that is distributed. Section 1 also mandates that a copy of the licence terms be provided along with each distribution of the licensed program.

As with any other material agreement encountered in the context of a transaction involving a target technology business or its assets, verifying compliance is an expected part of a purchaser’s or financing party’s transactional due diligence. With the increasing prevalence of open source

products in business, this practice has now been extended to assessing the specific concerns involving compliance with open source licensing terms such as those mentioned above in relation to the GNU GPL.

Lastly, transactional risks involving open source products can arise on the basis of whether various open source components encountered in a target’s commercial products are procured from compatible licensing models.

Compatibility concerns arise whenever two open source licences that are applicable to a given software product contain provisions that are inconsistent with each other, such that it is impossible to satisfy the requirements of both licences at the same time. The simplest example of this begins with the consideration that the terms of the GNU GPL require any resulting product that incorporates GNU GPL licensed code to itself be made subject to the GNU GPL as a whole. If such code is combined with other open source code whose licence does not permit for migration to another licensing model (e.g., by also requiring a copyleft treatment of any resulting combined work), then the two licensing models are incompatible with each another and a breach of either or both licences may result. Where warranted by materiality considerations, verifying open source licensing compatibility is also an emerging aspect of purchaser or lender due diligence in large-scale business transactions.


Conclusion

While associated with many recognized benefits and opportunities, we have seen that open source software also brings some material legal risks, especially the imposition of copyleft obligations on proprietary software that has been inappropriately combined with existing open source components.

The ever-increasing adoption and acceptance of open source and open content licensing by corporations involved in the production and dissemination of technology and other creative content means that legal practitioners will encounter questions and challenges relating to open content licensing with far greater frequency when advising clients who are contributors, users or transacting parties in respect of open content material.

Contact: Alfred A. Macchione in Toronto at [email protected]

North America: Technology Licences upon Bankruptcy

Imagine that a critical part of your business is dependent on a software program that you licence from a software supplier. This scenario is not that hard to imagine, because in fact most businesses and other organizations are indeed reliant on licensed software — it is simply a fact of life in the computer age.

Now, imagine that your software supplier goes bankrupt and the trustee in bankruptcy terminates your software licence. Gulp! Can that really happen?, you ask (nervously). Well, it can, but thankfully the legislation to fix (most of) this problem should come into effect later this year. But why, you might ask, has it taken so long?

Before turning to the legal issues raised by tech licences upon bankruptcy, it is worth noting that this important issue of course does not arise, from a practical perspective, when you are dealing with most larger software companies. Not much thought has to be given to this concern when licensing software from a huge, profitable multinational software company with billions in worldwide revenues.

At the other end of the spectrum, however, are small software suppliers that have a few bright people and some (rented) desks, chairs and computer workstations. You want to do business with them because they have some great ideas and are about to release a powerful new software product. But alas, their risk profile is quite problematic from a bankruptcy



perspective. It is when dealing with these sorts of companies that the following discussion is relevant.

The US Lubrizol Case

As often happens in intellectual property (IP) and technology law matters, the US addressed the issue of bankruptcy and tech licensing well before we did. Their wake-up call came in the form of the Lubrizol case, a 1985 decision in which a court concluded that a trustee in bankruptcy for a bankrupt licensor of a metal coating process could terminate all of the debtor’s non-exclusive licences in order to improve the terms of sale of the technology to another company from the bankrupt licensor. The result in Lubrizol was that the licensee lost its right to work the technology.

The Lubrizol case sent shock waves through the American technology community. A cloud of uncertainty hung over software licences (as well as other technology and IP licences). Users were nervous and quickly lobbied Congress for a change in the law to fix this problem.

US Law Reform

The result in the US was the relatively swift adoption of Section 365(n) of the US bankruptcy statute. Under this section, if a bankruptcy trustee disclaims an IP licence, the user may nevertheless affirm the licence. In that case, the user can continue to use it in return for giving up the right to sue for any damages from the bankrupt estate.

Usefully, Section 365(n) makes it clear that rights that can be so affirmed include a right to enforce any exclusivity provision of such contract. As well, the affirmed right is for the duration of the contract, as well as any period for which such contract may be extended by the licensee as of right.

Canada after Lubrizol

The Lubrizol case prompted a debate in legal circles in this country as to whether a similar result could be expected here. Some commentators argued that Lubrizol was unique to the specific “executory contracts” provisions of the US bankruptcy statute. However, others warned that, conceptually, judges in Canada could come to the same conclusion if they wanted to.

Several years ago, one judge in Canada did just that and upheld the disclaimer of a trade-mark licence upon the trade-mark owner’s insolvency. For all intents and purposes, this was Canada’s Lubrizol, and the heat was turned up for a legislative response (just as Section 365(n) of the US bankruptcy statute fixed the US’s Lubrizol problem).

Canadian Law Reform

At long last, in 2005, the government amended Canada’s bankruptcy laws (essentially, the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act) to expressly provide a regime for the disclaimer of agreements to which the debtor is a party. A provision was added in this regime that if the debtor has granted in any agreement the use of


any IP, the disclaimer does not affect the licensee’s right to use the IP so long as the licensee continues to perform its obligations in relation to the use of the IP.

This is a very useful law reform measure, though none of the revisions to the law made in 2005 ever came into force, as the government wanted to fine-tune the new provisions. In the event, a revised set of amendments was passed in December 2007 (generally known as Bill C-12).

The Current Statute

The current bankruptcy statute (which, please note, is not yet in force!) provides as follows for the disclaimer of agreements. Essentially, the bankrupt company can decide if it wishes to disclaim certain contracts. If the trustee in bankruptcy agrees with the disclaimer, then the counter-party can contest the disclaimer in court. And if the trustee does not agree with the disclaimer — typically done to enhance the prospects of a viable restructuring proposal being made in respect of the debtor — the debtor may apply to the court as well.

Additional protection, however, is extended to the counter-party if the agreement being disclaimed pertains to the licensing of IP. In that case, in language fairly reminiscent of Section 365(n) of the US bankruptcy statute, the disclaimer does not affect the party’s right to use the IP. And, as with its American counterpart, the right to use includes the licensee’s right to enforce an exclusive licence.

As well, the duration of the use includes any period for which the licensee extends the agreement as of right.

Not Quite Perfect

The new Canadian bankruptcy law rule relating to IP licences — once it comes into force — is a very useful development (and, frankly, should have been done years ago). But it’s not perfect.

For example, the section speaks only of a “right to use.” There are, however, often other IP rights granted by software (and other IP) licences, such as the right to modify, copy or distribute. Will these rights withstand a contract disclaimer under the new law?

On the face of the new legislation, the answer is unclear. The rationale behind the contract disclaimer regime in the bankruptcy law is to permit debtor companies to shed uneconomic contracts that present an obstacle to a viable restructuring of the debtor. The policy decision reflected in preserving rights to use IP is presumably that a licensee’s internal right to use some IP would likely not detract from the IP’s value in the context of a sale of the debtor licensor.

Can the same be said for a licensee’s modification or distribution rights? Reasonable arguments can be marshalled on both sides of this question, and we will have to wait for jurisprudence under the new section to clarify the question. In the meantime, if you are a distributor or reseller of some one else’s IP,


you might want to continue thinking about ways to protect yourself from the new bankruptcy law’s contract disclaimer rules.

One such vehicle might be to take a partial ownership interest in the relevant IP. Such a co-ownership interest arguably should survive any disclaimer because the grant of the interest occurred prior to the bankruptcy filing. But again, it will likely take some jurisprudence to clarify this question.

In conclusion, the IP licensing provisions of the new bankruptcy law are helpful, but still leave some important questions unanswered.

Contact: George S. Takach in Toronto at [email protected]

US: Resale of Computer Software on eBay Does Not Infringe Copyright

An estimated 1.3 million people worldwide make some or all of their living selling goods on eBay, and Timothy Vernor is one of them. In a recent US District Court ruling, the court found that Mr. Vernor could invoke the “first sale” doctrine. This decision means that his resale of AutoCAD packages on eBay is not a copyright violation.

In 2005, Mr. Vernor put up for auction on eBay authentic used packages of Autodesk’s AutoCAD software. Autodesk sent eBay a takedown notice under the Digital Millennium Copyright

Act claiming copyright infringement, and eBay suspended the auction. When Mr. Vendor responded that his sale was lawful, eBay reinstated the auction and he sold the packages. This scenario repeated itself a number of times.

In 2007, Mr. Vernor acquired more packages of the software from a third party, Cardwell/Thomas Associates (CTA). CTA had received the packages from Autodesk in a settlement of an unrelated dispute. The Settlement Agreement required CTA to adhere to the terms of the Autodesk Software Licence Agreement, which imposed restrictions on the transfer of the software without Autodesk’s consent.

Anticipating that Autodesk would likely try to block his sale of the CTA packages, Mr. Vernor sought a declaration that his resale was lawful. Autodesk moved for dismissal or summary judgment in response.

At issue was whether Autodesk’s transfer to CTA was a sale or a mere transfer of possession pursuant to license. If the transfer to CTA was a sale, the “first sale” doctrine would apply and Mr. Vernor’s resale of the packages on eBay would not constitute copyright infringement. That doctrine “permits a person who owns a lawfully made copy of copyrighted work to sell or otherwise dispose of the copy.”

Relying on decisions dealing with prints of films, the court concluded that the transfer of the packages from Autodesk to CTA was a sale with contractual restrictions on use and transfer of the software. The court based its



conclusion on the fact that the Settlement Agreement and Licence:

• allowed CTA to retain possession of the software copies in exchange for a single up-front payment;

• imposed onerous restrictions on transfer of AutoCAD copies; and

• required CTA to destroy the software in the event that it purchased a software upgrade.

Consequently, Mr. Vernor could invoke the “first sale” doctrine and legally resell the packages on eBay. The court noted that “although technology has changed, the question at the core of this case is not technological. Mr. Vendor does not seek to take advantage of new technology to ease copying, he seeks to sell a package of physical objects which contain copies of copyright material. The essential features of such sales vary little whether selling movie prints via mail … or software packages via eBay.”

Autodesk had also failed, on the motion, to establish that its licence binds Mr. Vernor or his customers. The court noted that the licence was expressly stated to be “non-transferable,” and therefore Autodesk would have to explain how the licence could bind downstream transferees. While the court denied the motion for dismissal or summary judgment, it did indicate that Autodesk could file a new motion to address that argument.

Contact: Wendy Gross in Toronto at [email protected]



Technology Finance TECH-RELATED FINANCE

North America: Taking Your Tech Company Public — Part IV

This is the second-last instalment in a series on what is involved in taking a tech (or other) company public (the so-called “initial public offering,” or IPO, process). After the first and second instalments debated the advantages — and disadvantages — of being a public company, the last article focused on the IPO process itself. It introduced the all-important prospectus document, which must provide “full, true and plain” disclosure about the shares being sold, including disclosure about your company and its business. In this issue, we look at the various particular requirements of the prospectus, and the due diligence process that needs to underpin the document.

Description of the Business

So important is the prospectus that the law expressly mandates the minimum information that it must contain. One such section — not surprisingly — is a description of the business. This is where you will recount some history of your company, and then explain what it does, by reference to your markets, products, competitors and the like.

The description of your business is not a simple section to write. It’s easy to describe the particular segment of the tech market that you

serve, but more challenging is to explain your particular strategy for success within that market. On which sub-sets of customers do you focus? How do you ensure that your value proposition resonates for them? What are you doing that your competitors are not? In essence, what is your “secret sauce?”

If you have a detailed business plan (that you may have used previously with venture capital investors), you may be able to use this pre-existing text as the basis for the description of the business section of the prospectus. But even so, it will simply take your Chief Marketing Officer a lot of time and effort to develop a first draft — and this will then be picked apart, sentence by sentence, by your banker and lawyer, until the story is both accurate and easy to understand. It will be a painful process, but when completed you will actually have a very useful document that explains — including to your own employees —the principal drivers of your tech business.

Financials

The prospectus will have to contain audited financial statements for the past three years (some exceptions are allowed, for example, if the company is not yet three years old). Your financial statements are obviously a critical part of the prospectus. Accounting is the language of business, so of course prospective investors will be keen to understand your balance sheet, as well as your income statement.


Your competitors will also be very interested in this information. They probably already have a general sense of your top-line revenues. But until they see your prospectus, they will not know your bottom-line profitability, or, if you are a software company, your mix of licence revenue versus recurring maintenance and support revenue. All of this is very useful insight for your competitors, and they will use it against you (just as you do with such information about your public company competitors).

As such, it will pain you to allow your competitors to have access to your detailed financials (not just once in the prospectus, but continually after you are public through your quarterly and annual financial statements). But this is simply a cost of being a public company — that exalted status comes with the requirement that the investing public have visibility into your affairs, including financial matters.

Predicting the Future, Financially

Interestingly, some companies go even further in their prospectus and include financial projections, that is, estimates for how the company will do financially over the next couple of years. This is a risky activity and expensive, too. The legal rules governing prospectuses require that the basis on which you make your projections must be audited, and the auditors charge quite a handsome fee for this service (partly because it is fraught with risk for them as well).

Predicting the future, however, is fiendishly difficult. A few years ago, the Ontario Securities Commission reviewed the subsequent actual results of companies that previously made financial projections in their prospectuses. The track record for the predictions was not good at all. The bottom line is, it’s just very hard to predict the future. So it is really worth thinking twice before putting financial projections in your prospectus.

How Much Do You Make?

It is a long-standing rule of polite society that you don’t ask others how much money they earn at work. Securities law has no such reservations. Indeed, the rule is that the prospectus must reveal the compensation of the CEO, CFO and next three highest-paid executives of your company.

Again, this rule will result in some operational downsides to you. For example, recruiters looking to entice away some of your top people will now know precisely what compensation package they have to match or exceed. On the other hand, in this day and age of websites, Internet search engines and blogs, much personal information is already available to the public, so perhaps this is not as serious a factor for you as it might have been 10 or so years ago.

The Risks of Investing

One very interesting section of the prospectus is called “Risk Factors.” Life and business are full of risks. As noted above, it’s so difficult to


predict the future because of various different risk factors and our inability to predict exactly which risks will come to pass. Nevertheless, securities law requires that companies about to go public list in their prospectus the various risks that are relevant to the business and the industry in which it operates.

The result is a fairly extensive list of items that, if they came to pass, would adversely impact your company. Some of these risks will be generic and apply equally to all players in your segment of the tech market (e.g., “if the economy slows down, there will be fewer purchases of our type of tech product”). Other risks will be more specific to your company (e.g., “our product depends on patents for intellectual property [IP] protection; thus, if our patents are successfully challenged, we are quite exposed from an IP perspective”). Again, the touchstone is “full, true and plain” disclosure.

Meaningful Due Diligence

The prospectus document is not created or written in a vacuum. Rather, it must be firmly anchored in an extensive and meaningful due diligence process. In effect, your lawyer and investment banker (and the underwriters and their lawyers) will want to be sure that each and every factual statement in the prospectus is buttressed by a document (e.g., an industry report, a contract of your company, etc.) that they have reviewed, and have satisfied themselves does indeed support the relevant proposition in the prospectus.

Conducting proper and thorough due diligence takes time. You must assign adequate staff to the job of compiling the materials. Increasingly, the materials are uploaded to a restricted website so that all relevant parties can access them quickly and simultaneously. But even if presented electronically, there is still the long job of compiling all the raw documents as the first step. Make sure you have enough staff on this project. And don’t forget to keep the material on the diligence website up-to-date over the course of the IPO process.

Filing and Finale

The prospectus is such an important document that before you “go final” with it, the securities law regulators must review it. Thus, you will have to file a “preliminary prospectus” with the regulators, who will then take 10 business days to go over it, at the end of which they will send you a comment letter that contains suggestions for improving the document. You will not be able to receive a “final receipt” from the regulators for the prospectus (and close your IPO) until the issues in their comment letter are all addressed to their satisfaction.

Around this time, your investment banker will start to build the order book for the shares you will be selling through the IPO. To support this effort, you will go on a “road show,” where your company’s CEO, CFO and perhaps one or two other senior officers will meet with prospective investors and answer any questions they may have. The six to nine months of


laborious IPO process will come down to this moment of truth — are investors willing to buy your shares, and most importantly, at what price?

Then follows an intricate negotiation between you and your investment banker about the final public issue price for your shares. If you price them too low and their price rises rapidly on the stock exchange after the IPO, perhaps you will have “left some money on the table” that investors will now pocket, instead of it going into your company. On the other hand, if the price is too high, and you meet significant resistance to buying your shares at all, you might not raise the amount of money you need.

In determining the final price for your shares, ideally you will have some wise members of your board of directors help you negotiate a sensible compromise with the investment banker (and then you can close the IPO, and behold, you are a public company). This illustrates but one useful role of the board — more on them, and other issues relevant to the now public company, in the next issue.

Contact: George S. Takach in Toronto at [email protected]



Technology Contracting OUTSOURCING

International: Offshore Business Process Outsourcing 101 — Part III

This article concludes our three-part series on the basics of offshore business process outsourcing (BPO). In Part I, we explored business trends and strategies in offshore BPO. In Part II, we discussed certain key legal considerations that arise in offshore BPO transactions. In Part III, we examine the ongoing relationship between a company and its outsourcing vendor after the offshore BPO transaction has been consummated.

You’re Finished … Now Get Started

You have just spent the last several weeks in a conference room (probably windowless) with about a dozen other people poring over hundreds of pages of documents, negotiating them top to bottom, tapping your internal subject matter experts in every corner of your organization. Congratulations, you have closed an offshore BPO deal.

Everything is done. Time to break out the champagne and throw that outsourcing contract in your desk drawer, right?

Not quite. Unlike other complex strategic deals that your company has closed (such as an acquisition or a major financing), an offshore BPO transaction is not actually complete at

closing. The reality is that execution of the outsourcing contract merely marks the end of one phase and the beginning of another, more challenging one. Now that you have successfully commenced (or renewed) the outsourcing, it’s time to get to work managing your company’s relationship with its offshore outsourcing vendor.

Does Anyone Know What the Contract Says?

The first step to establishing a productive working relationship with the vendor is to make sure all the key stakeholders actually know what’s in the contract. By the time negotiations are complete, a small number of individuals from each party’s negotiating team will likely be well-versed in the contents of the outsourcing contract. The challenge is transferring this knowledge from the negotiating teams to the people on the ground running the day-to-day operations for your company and your vendor.

Soon after the outsourcing contract is signed, consider hosting an internal session among key stakeholders, operational personnel, and internal and external counsel to review aspects of the contract that are relevant to them. This can also work well as a joint session between your organization and the outsourcer’s staff. You may be shocked to learn the extent to which members of both organizations don’t know — or have differing views about — what the contract says.


The contract itself may evolve over time (see the “change” discussion below), as well as the teams who manage it. Regularly scheduled “deal health” meetings can keep everyone apprised of these changes. You will also probably want to have your people visit the vendor’s offshore site at regular intervals for operational and relationship stewardship activities. However, keep in mind these trips and other “governance” activities between your company and an India-based vendor could raise permanent establishment issues (see Part II of this series).

Building the Relationship through Dispute Resolution

It may seem counterintuitive, but enforcing your contractual rights and remedies from day one may help, not hurt, your relationship with your outsourcing vendor. This is not to say that your company should go out of its way to nitpick every minor slip-up by the vendor. But set the expectation early that your organization intends to get the full benefit of its bargain. This is, after all, a business relationship.

Companies often have an aversion to escalating disagreements with vendors to the dispute resolution process prescribed in the outsourcing contract, as if not admitting something is a “dispute” will prevent it from becoming one. Experience tells us that the occurrence of contractual disputes is not a matter of “if” but “when,” and the dispute resolution mechanisms in the contract (often internal escalation followed by arbitration) are built

on that assumption. In other words, disputes don’t have to be viewed as catastrophic events, but as part of the ordinary course of business. And, when they get handed off to the appropriate people for resolution, the people on the ground can get back to what they do best: running their businesses.

Managing the Cost of Scope Creep with Change Control

Throughout the term of the outsourcing contract — and as early as the day after signing it — companies that have outsourced often find themselves reviewing proposals from their vendor for additional fees arising from purported changes in the scope of services. This is often referred to as “scope creep.” As discussed in Part I of this series, the first step to ensuring you get what you’re paying for is to define the scope of services as clearly as possible in the outsourcing contract or through some defined post-signing “blueprinting” process.

Unfortunately, even the most detailed service description and other contractual catch-alls, such as so-called “sweep” clauses, can leave room for scope creep. Your outsourcing contract should contain a change control process that describes the steps for proposing and negotiating changes, pricing parameters and a dispute resolution mechanism. It is important to demonstrate, early in the relationship, your adherence to the process. If the process doesn’t work, negotiate a new one, then stick to it.


Preparing for the Possibility of Transition and Attracting Prospective Suitors

It’s never too early to think about the process of transitioning to another outsourcing vendor. You don’t have to wait for the expiration or termination of the outsourcing contract to start the transition, if your contract permits you to do so. If the existing outsourcing contract has built-in flexibility to repatriate service towers at your convenience, then your company will be in a better position to avail itself of competitive bids at any time. And, as discussed in Part I of this series, having a second BPO vendor available to compete with your existing vendor can provide your company with negotiating leverage.

Contact: Joel Ramsey in Toronto at [email protected]



Technology Litigation CASES/LEGAL DEVELOPMENTS

US: Court Certifies Class Action for Technical Writers’ Unpaid Overtime

The California Superior Court has certified a class action lawsuit for unpaid overtime and missed meal periods brought on behalf of and technical writers both currently and formerly employed by Sun Microsystems and SeeBeyond Technology Corporation, (Hoenemier v. Sun Microsystems, Inc.). According to US news reports, the Hoenemier lawsuit marks the first time a class action for overtime claims has been certified for “technical writers” in California. Up until now, these individuals were commonly understood to be exempt from the right to receive overtime pay under California’s Labour Code. That code contains an exemption for individuals employed as “computer professionals.”


Potential for Similar Lawsuits in Canada?

Under Canadian employment standards laws, most employees are eligible to receive overtime pay, subject to limited exceptions, most notably for employees who primarily perform supervisory or managerial functions. As a general principle, employees in Canada whose work involves the design, development, implementation, operation or management

of information or computer systems are eligible to receive overtime pay.

Employment standards laws in B.C., Nova Scotia, Alberta and Ontario provide a limited exception to this general principle, which exempts individuals employed as “technology professionals.” Although the specific definition of “technology professional” varies among these provinces, these exemptions are generally similar to the “computer professional” exemption at issue in the Hoenemier lawsuit.

In Canada, any exception to an employer’s general obligation to pay overtime pay will be narrowly construed. Not all individuals whose work involves information or computer systems fall within the “technology professional” exemption applicable in B.C., Nova Scotia, Alberta and Ontario.

In order to avoid lawsuits similar to the Hoenemier lawsuit, employers in these provinces should ensure that they do not cast too broad a net in exempting employees whose work involves information or computer systems from the right to receive overtime pay. The specific definition of “technology professional” in each province should be carefully reviewed. Employers in all other provinces should ensure that such employees are eligible to receive overtime pay, unless they fall within another specific exemption


provided under applicable employment standards legislation.

Employment-Related Class Action Lawsuits Are Becoming Increasingly Commonplace

The Hoenemier lawsuit reflects an increasing trend towards employment-related class action lawsuits in Canada and the US. In Canada, overtime class action lawsuits have been filed against several high-profile institutions this past year, including CIBC, The Bank of Nova Scotia and KPMG. Each of these lawsuits seeks millions in damages for unpaid overtime in relation to thousands of current and former employees. If certified, these lawsuits are expected to serve as a springboard for similar class action lawsuits targeting large employers in Canada.

In light of this increasing trend, employers must adopt strategies to assess their current exposure and to minimize future exposure. Such strategies should include, at a minimum, conducting (i) a comprehensive audit of current overtime policies for all employees to determine whether overtime policies are compliant with all applicable employment standards legislation, and (ii) an analysis of whether these overtime policies have actually been followed in practice. If they are not already doing so, managers should be required to keep accurate records of all hours worked by employees, including authorized overtime. Overtime policies should be regularly reviewed to ensure

ongoing compliance with all applicable employment standards legislation, and to ensure that such policies are followed in practice.

Contact: Trevor Lawson in Toronto at [email protected]

Canada: A “Monster of Complexity” — Certification Denied in DRAM Price-Fixing Cases

The B.C. Supreme Court recently refused to make what would have been the first-ever contested certification order in a class action brought on behalf of indirect and direct purchasers in a Canadian price-fixing case. The plaintiff sought to certify a class action on behalf of B.C. residents who had purchased dynamic random access memory (DRAM) or products containing DRAM, alleging that the defendants had engaged in an international conspiracy to fix prices of these computer memory chips. The court refused certification, finding that the plaintiff had failed to propose a viable class-wide method of establishing harm and liability. A related class action was similarly denied by the Québec Superior Court, albeit on different grounds.


When the US government proceeded against a handful of international



companies who manufacture DRAM — for having artificially raised the price of the product sold to certain original equipment manufacturers in the US between 1999 and 2002 — an inevitable tidal wave of class action lawsuits followed.

In the US, those suits fell into two general categories:

1. those brought on behalf of direct purchasers (i.e., those who purchased DRAM directly from the manufacturers); and

2. those brought on behalf of indirect purchasers (i.e., just about everyone else, including the ultimate consumers of the myriad products that contain DRAM).

Theses two categories of claimants must sue separately in the US because the US Supreme Court has held that, as a matter of policy, only direct purchasers can have a valid claim in a price-fixing case, regardless of whether (or the extent to which) they successfully passed the price increase on to their own customers.

The rationale for this rule arises from the difficulty inherent in trying to discern how far down the chain of distribution a particular price component may have been passed. The American rule arbitrarily stops the analysis at the first stage in the chain — thereby avoiding the issue and ensuring that at least the claims of direct purchasers can viably proceed.

To complicate matters, many American states have enacted legislation that repeals this rule, allowing indirect claims to proceed despite the Supreme Court’s decision. On the strength of such legislation, both direct and indirect purchaser suits have been launched. While many of the direct purchaser claims have settled, the indirect claims have recently been undermined by successful defence motions, leaving the question of their viability very much in doubt.

In Canada, there is no comparable rule precluding indirect purchasers from recovering, nor is there any clear guidance on how the “pass-on” issue would ultimately be dealt with. Nevertheless, the American jurisprudence has been influential.

In one of the leading Canadian cases, the Ontario Court of Appeal denied certification of a claim brought on behalf of homeowners (i.e., indirect purchasers) concerning an alleged overcharge in the price of the pigment used to colour bricks. This was largely because the evidence adduced was considered insufficient to demonstrate how harm could be proved on a “class-wide” basis, as would be necessary for the claim to succeed. Determining liability in that situation would turn the action into a “monster of complexity” — the court would be required to conduct a long series of individual trials dealing with many complex issues and many parties. Such a process would eliminate any


potential judicial efficiency that might be gained from certifying the action as a class proceeding.

The recent B.C. decision in the DRAM case follows in the same vein. The court concluded that the plaintiff had failed to establish that liability to the class members was a common issue. Specifically, the plaintiff did not demonstrate a “class-wide basis of establishing that any overcharge (in the price of DRAM) filtered down and was borne by direct and indirect purchasers of DRAM products in B.C.” Since liability to class members would have had to have been determined on an individual basis, the court concluded that a class action would not be the “preferable procedure” as required by the B.C. Class Proceedings Act.

The court also found that the proposed plaintiff would not be a suitable representative plaintiff because it could not show a class-wide basis for establishing liability, and because it was in a conflict of interest with other class members at different levels of the distribution chain.

In a related case by a Québec plaintiff, the Québec Superior Court also denied “authorization” (the Québec equivalent of certification in the common law provinces.) However, the court held that there were sufficient common issues, even though the class consisted of direct and indirect purchasers, and even though suppliers used various distribution chains for the different products they manufactured.

The court refused authorization because the US guilty pleas on which the motion was based failed to establish a prima facie cause of action under Canadian law, and because the plaintiff could not adequately represent the interests of the members of the proposed class. The Québec Court also found, as did the B.C. Court, that the proposed representative plaintiff was in a conflict of interest in representing the interests of direct and indirect purchasers.

To date, no Canadian court has certified a class action involving indirect purchasers in a price-fixing case, where certification has been contested. Therefore, the DRAM cases have been and will continue to be closely watched. The plaintiffs have filed appeals in both provinces. If the decisions are upheld, it will be much more difficult to advance price-fixing claims on behalf of both direct and indirect purchasers.

Warren Milman acted for one of the defendants on the B.C. certification motion, and Madeleine Renaud acted for one of the defendants on the Québec authorization motion.

Contact: Warren B. Milman in Vancouver at [email protected] or Madeleine Renaud in Montréal at [email protected]




Intellectual Property COPYRIGHT

Canada: Proposed Canadian Copyright Reform — Bill C-61

After much anticipation, the federal government released Bill C-61, An Act to Amend the Copyright Act. If passed, the Bill will (i) amend the Copyright Act in order to implement the World Intellectual Property Organization Copyright Treaty (WCT) and Performances and Phonograms Treaty (WPPT), (ii) create exceptions for certain uses of copyright material for private purposes, (iii) create exceptions for Internet service providers (ISPs), and (iv) permit certain uses for educational and research purposes of Internet and other digital technologies.

Implementation of WCT and WPPT

(a) Making available

The bill contains a making available right that applies to sound recordings. There is no express enactment of a making available right for works such as music, computer programs, books and films. In briefing documents accompanying the bill’s introduction, the government stated that this right already exists in Canadian law for works.

(b) Protection of technological protection measures (TPMs)

The bill contains legal protection against the circumvention of technological measures. It includes provisions against both circumvention of access control TPMs and trafficking in access control and copy control TPMs. It also includes generally accepted exceptions to the prohibitions on circumvention to allow for reverse engineering, security testing and encryption research, and creation of interoperable computer programs, and to enable persons with perceptual disabilities to access materials and consumers to protect their personal information.

The bill creates remedies for the circumvention of access control TPMs including injunctive relief, damages and statutory damages of up to $20,000. However, statutory damages are available only if the purpose of the circumvention is to enable infringement.

(c) Distribution and performers’ rights

The bill contains a number of other provisions designed to implement the WPPT and WCT:

• a distribution right to allow owners of works to control the distribution of tangible copies of copyright works, which provides control over the first sale of a medium such as a CD or DVD;


• an extension of the term of protection for producers and performers of sound recordings to 50 years after the publication of the recording;

• a reproduction right for performers to authorize the direct and indirect reproduction of their performances by, for example, broadcasters, consumers and record producers; and

• a moral rights provision for performers.

Exceptions for Private Uses of Copyright Material and Remedies for Violations

The bill contains a number of exceptions for private-non-commercial use:

(a) Private use of music exception

The bill will permit individuals to copy a legally acquired sound recording to each separate device they own, such as an iPod or other MP3 player and a computer. The copy must have been legally obtained; it cannot be borrowed or rented. The copy must also be made for private purposes. Also, the right to make copies for the exception is subject to any terms of use agreed to by the individuals with an online music site.

(b) Time-shifting exception

The bill will permit individuals to make a single recording of a television or radio program, including on-demand programs, cable and satellite programs, and programs aired simultaneously on the Internet and TV

or radio. No further copies can be made, and time-shifted copies cannot be sold, distributed or performed in public. The bill would also prohibit individuals from creating libraries of digital copies for subsequent viewing. Individuals can keep the recording no longer than necessary in order to listen to or watch the program at a more convenient time.

(c) Format-shifting exception

The new provisions respecting format-shifting allow users to make one copy of content they own for each device (e.g., a copy of a videocassette onto a DVD for use in a home device). The copies must be made for private purposes and cannot be given or sold to someone else. If the user sells or gives away the original, they must destroy all copies that they have made. The provision is restricted to content in certain formats, specifically books, periodicals, newspapers, photographs and videocassettes.

(d) Statutory damages amendments

The bill would substantially reduce the potential liability of individuals who infringe copyright for private, non-commercial purposes to a maximum fine of $500 for all infringements involved in the suit, regardless of the number of copies made, the number of different works copied or the number of owners who pursue claims against the individual. Commercial infringers could still be liable for up to $20,000 in damages for each work infringed (e.g., posting music using the Internet or peer-to-peer [P2P] technology).


In all cases, the court would retain the power to award damages, including punitive damages, to ensure an appropriate deterrent against future infringement.

Internet Service Providers

The bill contains exceptions for search engines such as Google and Yahoo! and for ISPs where they act as a mere conduit, provide caching or provide hosting services. The immunities also apply in most cases, even if the ISPs have knowledge of infringing activities.

The bill does not adopt a notice and takedown regime as exists in the US and Australia, but rather prescribes a “notice and notice” regime to deal with online infringement. That is, the ISPs would have to pass on notices from the content holder to the subscriber. Upon receipt of a notice, ISPs must also retain for prescribed periods information required to identify infringers. The failure to comply with the notice and notice regime results in a fine in the range of $5,000 to $10,000.

Access for Research and Education

The bill contains several provisions to address concerns from educators and research about reasonable access by:

• allowing schools to use publicly available material that has been legitimately posted on the Internet by rights holders to sites that are not protected by TPMs, or which do not contain a clearly visible notice that prohibits the relevant act;

• allowing schools to transmit materials used in classroom study to students located off-campus so that they can interact with the teacher during the lesson or view it at a time chosen by them, provided that the institution takes reasonable measures to restrict access to students only;

• allowing schools that already have licences to make photocopies of works to make digital copies of those works to send to students, subject to payment; and

• enhancing the ability of researchers to gain quicker access to material stored in distance libraries via the Internet.


According to the government, the reforms in Bill C-61 represent a balance between the rights of copyright owners and the needs of users to access copyright works. From the content holders’ perspective, the adoption of the WIPO treaties, the protection of TPMs and the legal remedies for unauthorized copying are welcome changes. As well, the amendments should help ISPs to clarify their liability in cases of infringement. The bill is also very favourable for individual users of copyright materials.

Contact: Barry B. Sookman in Toronto at [email protected]



PATENTS

US: Downstream Purchasers Protected by Exhaustion Doctrine in the Face of Method Patents

If you are a patent licensee, are you permitted to sell your products without the risk of exposing your customers to patent infringement or royalty claims from the patentee? The recent ruling from the US Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc. clarifies a patent licensee’s position by finding that the patent exhaustion doctrine applies to method patents. According to this decision, if a licence agreement authorizes the sale of components that “substantially embody” a patented method, then the patent holder will not be entitled to collect further royalties from downstream purchasers.

LG licensed three computer chip and system patents to Intel Corporation. Under the terms of the licence agreement, Intel was authorized to make and sell its own microprocessors and chipsets that use the LG patents. The agreement also permitted Intel to “make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of” its own products practising the LG patents. The agreement between LG and Intel disclaimed any licence to downstream users if they were to combine the licensed products with non-LG or non-Intel products.

Intel and LG had entered into a separate agreement that required Intel to give its

customers written notice that the licence did not extend to a product made by combining an Intel product with a non-Intel product. A breach of that agreement, however, did not terminate the licence agreement.

Quanta purchased Intel microprocessors and chipsets, then manufactured computers using Intel parts, without modification, in combination with non-Intel components in ways that practise the LG patents. LG sued Quanta, alleging that the combination of the Intel products with non-Intel memory and buses constituted patent infringement.

The Supreme Court found in favour of Quanta, concluding that LG could no longer assert its patents against Quanta. As part of its analysis, the Supreme Court considered the following:

• Does the patent exhaustion doctrine apply to method claims?

• What triggers patent exhaustion?

• Did an authorized sale occur?

Does Patent Exhaustion Apply to Method Claims?

Under the doctrine of patent exhaustion, the “initial authorized sale of a patented item terminates all patent rights to that item.” LG argued that the doctrine does not apply to method claims, because method patents are linked to a process as opposed to a tangible article — and therefore they could never be exhausted through a sale.


While the Supreme Court accepted that a patented method may not be sold in the same way as an article or device, methods could still be “embodied” in a product and the sale of that product would exhaust patent rights. Otherwise patentees would be able to circumvent the doctrine simply by inserting method claims into the patents, and expose downstream purchasers to liability.

What Triggers Patent Exhaustion?

The court observed that the Intel microprocessors and chipsets could not function until they were connected to buses and memory in a computer system. Because the components had no reasonable non-infringing use and included all the inventive aspects of the patented methods, the court found that the Intel components “substantially embodied” the LG patents. Consequently, it determined that the exhaustion doctrine was triggered by the sale of the Intel components.

Did an Authorized Sale Occur?

The court then considered whether Intel’s sale to Quanta exhausted LG’s patent rights. LG argued that the sale to Quanta was not authorized by the licence agreement. However, the court found that the agreement did not restrict Intel’s right to sell its microprocessors and chipsets to purchasers who intended to combine them with non-Intel parts.

LG tried to rely on the clause in the licence agreement that disclaimed any downstream licence in the circumstances, but the court

held that Quanta’s right to practise the patents was based on exhaustion and not on implied licence. Since it found that the agreement authorized Intel to sell products that practised the LG patents, the court determined that the patent exhaustion doctrine prevented LG from further asserting its patent rights against Quanta and other downstream purchasers of the Intel products.


In light of this decision, current licence agreements should be reviewed carefully with the extended notion of exhaustion in mind. If a licence agreement excludes the right to sell, or provides for limited rights to sell, the licensor may be entitled to royalties or damages from unauthorized purchasers since the exhaustion doctrine only applies to authorized sales. If the agreement provides for broad rights to sell, the licensor may consider increasing the royalties payable by the licensee to take into account any unrecoverable royalties from downstream customers.

Contact: Alfred A. Macchione in Toronto at [email protected] or Sharon Ho in Toronto at [email protected]




US: Patent Infringement Lawsuit Filed by Seagate Technology against STEC Inc.

In April, Seagate Technology filed a US patent infringement lawsuit against STEC Inc. Seagate is a leading manufacturer of secondary storage devices for computers. Secondary storage devices include hard drives and newly emerging solid state drives (SSDs). Seagate is asserting that STEC infringed four of its US patents relating to interfaces between storage devices and computers. STEC is a worldwide manufacturer of interfaces for memory devices and SSDs.

The lawsuit is in its very early stages, and STEC has denied Seagate’s claims. Since SSDs are gaining momentum in the enterprise market and are starting to show up in many household devices (including laptops and MP3 players), lawsuits involving patent rights in the SSD-related fields may become more prominent in the near future.

Contact: Robert Nakano in Toronto at [email protected]

TRADE-MARKS

International: eBay Wins Some (in the US), Loses Some (in France)

France — eBay Ordered to Pay Damages to Hermès and LVMH

A French court has ordered eBay to pay damages to Hermès, after determining that eBay did not sufficiently ensure that its website would not be used for illegal activities. Hermès had sued eBay and the user who sold two fake Hermès handbags on eBay. It alleged that eBay had participated in trade-mark infringement by allowing the sale to occur through its website.

eBay had argued that it could not be held responsible because it was acting solely as a host and thus was not involved in the sale of the counterfeited items. As a host, it had neither an obligation to monitor all information hosted on its servers, nor an obligation to track down illicit activities. eBay relied on Section 6 I-2 of the Loi pour la confiance dans l’économie numérique (LCEN) and asserted that it was not liable unless it became aware of the illicit nature of such information and did not remove or deny access to it. In this case, Hermès had not notified eBay of the counterfeited product, so eBay was not aware of it.

eBay also pleaded that it had put in place several measures to protect intellectual property (IP) rights of third parties, including a prohibition on illegal activities in its website terms of use and implementing the Verified



Rights Owner (VeRO) program, which allows IP owners to easily report listings that infringe their rights.

The court analyzed the role of eBay as a firm specializing in online brokerage services. It determined that even though eBay organizes the display of the listings, eBay is not an editor of content since the content of the listings is provided by the users. At the same time, the court concluded that eBay is not simply a host; it is also an editor of communication services specializing in online brokerage. As such, eBay does not have an obligation to confirm that all goods sold through its services are genuine, but it is required to ensure that its website will not be used for illegal activities.

In that regard, the court found that eBay’s preventive and detection programs were limited and not sufficient to meet its obligations. According to the court, eBay should have been more active in taking all means in order to force sellers using its services to identify their products as precisely as possible (e.g., serial number, make, origin, etc.), which would assist IP rights owners in verifying if the products for sale are genuine. Moreover, mere mentions in the eBay terms of use about illegal activities, which cannot be distinguished from the other terms of use of the services, were not sufficient. eBay should have emphasized, on a separate webpage and in sufficient clarity, that civil and penal consequences can be imposed on those who sell or buy counterfeits.

Therefore, the court ordered the seller and eBay to jointly pay €20,000 in damages to

Hermès, and ordered the publication of the judgment on eBay’s website, Hermès’ websites and up to four magazines selected by Hermès. An appeal of this decision has not yet been lodged.

Critics of the decision contend that the court has created a new liability regime for editors of communication services; one that is not set out in the LCEN. Further, although the court concluded that eBay had committed trade-marks infringement activities, its reasoning seems to base the liability of eBay on the common liability regime. Therefore, the source of liability of eBay in that case remains unclear.

Shortly after the Hermès decision, the Tribunal de Commerce de Paris ordered eBay to pay to the French luxury goods company LVMH and its affiliates damages in the amount €38.6 million in three separate judgments. Unlike in the Hermès case, the source of liability of eBay in the LVMH case is clear. The court concluded that eBay was not solely acting as a host but also as a broker. As such, eBay was subject to the common civil liability regime. In that regard, the court determined that eBay had committed a gross fault by allowing counterfeited goods to be sold through its website. eBay has indicated that it intends to appeal those decisions.

U.S. — eBay Not Liable to Tiffany for Trade-mark Infringement

Across the pond, a US district court recently dismissed a trade-mark infringement claim brought by the famous jeweller Tiffany


against eBay. The court found that eBay was not liable for either direct trade-mark infringement or contributory trade-mark infringement.

The court pointed out that the law does not impose on eBay a duty to take pre-emptive steps to prevent sales of counterfeit goods, even if eBay may have a general knowledge that counterfeit goods might be sold on its website. The court noted that when eBay was specifically advised that a specific item was infringing the rights of Tiffany, eBay immediately removed the listing.

The court also found that the use of Tiffany’s marks by eBay to advertise that Tiffany’s items were offered for sale on its website was protected by the doctrine of nominative fair use. This allows one who trades a branded product to describe it by its brand name. The result of this ruling is that Tiffany, and not eBay, must ultimately bear the burden of protecting its trade-mark.

Another US district court reached a similar conclusion in 2001. The court dismissed a copyright infringement lawsuit against eBay, where the plaintiff alleged that unauthorized DVD copies of its work were sold on eBay. The US court concluded that, under the Digital Millennium Copyright Act, eBay was not liable since the company did not have the ability to control the authenticity of all items auctioned on its site and that, in this case, eBay did not have actual knowledge that pirated copies were being sold.


In Canada, the potential liability of an auction firm may vary depending if trade-marks or copyrights are involved.

Copyrights

Authorization

The Copyright Act not only grants to the owner of a copyright certain exclusive rights, such as the right to copy the work, but also the right to authorize these exclusive rights. Such authorization right constitutes a distinct right granted to the copyright holder. Therefore, a person may be held liable for an infringement of that right, if he or she authorizes another person to perform an exclusive right in breach of the Copyright Act. The courts have interpreted the term “authorize” to include anyone who “sanctions, approves and countenances” the infringing activities.

So far, to our knowledge, the Canadian courts have not dealt with the concept of “authorization” in the context of an online auction firm such as eBay. However, the Canadian courts have ruled on whether an Internet service provider (ISP) that provides online services or network access is authorizing, encouraging, inducing or promoting infringement by the fact that it provides Internet access to users who commit infringement activities.

The Supreme Court of Canada has recognized that an ISP’s knowledge that


someone might be using its services to violate copyright is not necessarily sufficient to constitute “authorization.” However, it added that if the ISP has received notice of the infringing content, the failure to respond by “taking it down” may lead, in some circumstances, to a finding of “authorization.”

Obviously, to avoid the finding of “authorization,” the services or equipment made available by the provider should also have a non-infringing use. In that regard, the courts should presume that a person who authorizes a third party to use its services does so only so far as the conduct of the third party is in accordance with the law. The fact that the operator implemented certain types of prevention and detection programs to prevent infringing material from being sold through its website should not be sufficient to rebut this presumption.

Therefore, in Canada, the mere fact of operating an online auction system, which could be used for legitimate sale activities, should not be sufficient to conclude that the operator has authorized the infringement activities conducted through the website.

Further, the federal government recently released Bill C-61, An Act to Amend the Copyright Act, which proposes certain exceptions and immunities for search engines and for ISPs where the latter provide means for telecommunications or reproduction of work through the Internet.

Unlike in the US and under the LCEN, Bill C-61 does not adopt “a notice and takedown regime,” but rather obliges the ISP to pass on an infringement notice received from the copyright owner to the subscriber of its services. Because “providing services related to the operation of Internet” can encompass various types of services, it will be interesting to see whom the courts will allow to shelter under these exceptions if this bill is passed.

Secondary infringement

Under Section 27 of the Copyright Act, any person who distributes a copy of a work that the person knows or should have known infringes copyright may be held liable for secondary infringement. Therefore, one may consider that an online auctioneer might be held responsible for secondary infringement if counterfeited items are sold through its website.

Unlike a traditional auction house, online auction services providers are not actively involved in the listing, bidding, sale and delivery of the items offered for sale on their websites. In such a case, the online website provider does not have possession of, or the opportunity to inspect, the counterfeited item, which is only in the possession of the seller. When an item is sold, it passes directly from the seller to the buyer without the auctioneer’s involvement. Therefore, it might be difficult to prove that the online auctioneer is indeed involved in the distribution of the counterfeited goods or has knowledge of


the infringement activities conducted by a user of its services.

Trade-marks

For trade-mark infringement to occur, the infringer must have used the other party’s trade-mark. The concept of “use” is therefore central and occurs if, in the normal course of trade, at the time of the transfer of property, the mark appears on the product or its packaging. Unlike copyright, trade-mark law does not have the concept of secondary infringement or the concept of “authorization.” Since the regimes are different, it remains to be seen whether analogies may be drawn between copyright and trade-marks in this context.

As noted above, the online auction provider is not involved in either the sales or the transfer of property occurring between the seller and the buyer. Thus, one may conclude that the auctioneer has not used the third-party mark. However, courts have already decided that an intermediary such as a selling agent can be liable for “passing off,” if it knowingly and deliberately aided and abided an act of passing off.

Ultimately, the potential liability of an online auctioneer, under trade-mark law or copyright law in Canada, will remain a matter of fact and the court will have to examine the involvement of the auctioneer in the sale and its knowledge of counterfeited goods being sold through its services.

The French court’s finding, to the effect that an online auctioneer must take better measures to ensure that services are not used for illegal activities, not only impacts companies offering services over the Internet, but also other service providers or producers of goods in the “real” world.

Contact: Philippe Boivin in Québec at [email protected]



Privacy CASES/LEGAL DEVELOPMENTS

B.C.: Committee Recommends Amendments to British Columbia’s Private Sector Privacy Legislation

A Special Committee recently presented to the Legislative Assembly of British Columbia its report arising from the statutory review of B.C.’s Personal Information Protection Act (PIPA). Appointed in 2007, the committee was commissioned to examine the provincial legislation governing the collection, use and disclosure of personal information by private sector organizations. Generally speaking, the recommendations in the committee’s report represent only a minimal tweaking of the existing legislation and reflect a perception that the legislation is working well for both individuals and organizations.

The recommendations include:

• expressly requiring organizations to notify affected individuals of privacy breaches in particular circumstances (such as regarding unauthorized disclosure or use of sensitive financial or health information);

• expressly requiring organizations to be responsible for personal information that they transfer to a third party for processing outside Canada;

• restricting the use of “blanket” consent forms by provincially regulated financial institutions;

• streamlining PIPA’s complaints processes; and

• strengthening the powers of the Information and Privacy Commissioner.


For many organizations subject to PIPA, the most significant proposed change may be the addition of an express breach notification requirement. The recommendation is similar, though, to those recently tabled on Canada’s federal Personal Information Protection and Electronic Documents Act and Alberta’s private sector privacy legislation. In addition, many organizations have already started the process of developing and implementing policies and procedures for detecting, responding to, and notifying individuals and regulators about the occurrence of privacy breaches.

Although it may be some time before the committee’s recommendations are implemented as amendments to PIPA, organizations should revisit their current privacy policies to ensure that the appropriate mechanisms are in place. This may include, for example: (i) requiring that service providers notify the organization


of any breaches involving personal information provided to the service providers by the organization; and (ii) ensuring that IT staff, risk management professionals, human resources personnel and other relevant individuals are prepared to respond to breaches.

Contact: Cappone D’Angelo in Vancouver at [email protected]

B.C.: British Columbia Enacts e-Health Legislation

British Columbia recently enacted the e-Health (Personal Health Information Access and Protection of Privacy) Act (e-Health Act), which facilitates the creation of consolidated databases of electronic personal health information (Health Information Banks) and is intended to provide patients with “faster, safer, and better health care” by providing health-care professionals with secure access to patients’ information in a timely and effective manner.

Features of the e-Health Act include the following:

• creating a framework for the creation of Health Information Banks;

• allowing individuals to exercise control over disclosure of their personal health information, through the issuance of “disclosure directives” by which the individual may request that access to his or her personal health information be blocked;

• creating a Data Stewardship Committee, whose members are appointed from the healthcare sector, to evaluate request for information in Health Information Banks for research purposes;

• providing that information obtained from Health Information Banks may not be disclosed for market research purposes;



• providing whistle-blower protection to ensure timely reporting of any breaches of the legislation; and

• providing for a maximum fine of $200,000 for breaches of the legislation, including for breach of the privacy protection provisions.

In addition to amending the Health Act, the e-Health Act amends legislation regulating pharmacies and PharmaNet, the current database system used by pharmacists to record and monitor all prescriptions filled in the province.

An important aspect of the e-Health Act is the ability for researchers to access electronic personal health information for research purposes. Researchers’ requests are subject to approval by the Data Stewardship Committee, which may impose additional security and confidentiality requirements on disclosure. For planning and general research, upon approval by the committee, the information requested will be disclosed only after the administrator and the requesting party have entered into an information-sharing agreement. For health-related research, the requests are approved on the condition that the information cannot be used for contacting an individual to participate in health research. If a researcher wishes to directly contact the individual whose information has been disclosed, the researcher must receive approval from the Information and Privacy Commissioner for B.C.


Upon introduction of the proposed legislation, various interest groups raised privacy concerns over the creation of Health Information Banks. After the draft legislation was revised, in part to address such concerns, the e-Health Act was enacted on the last day of the spring legislative session. This makes B.C. the first province in Canada to enact a specific legislative framework governing access and privacy for electronic health information databases. Although the e-Health Act has received royal assent, the substantive provisions have yet to be proclaimed into force.

Contact: Cappone D’Angelo in Vancouver at [email protected] or Vincent K.S. Yip in Vancouver at [email protected]

North America: TJX Enters into Proposed Settlement Agreement of Customer Class Actions

TJX Companies, Inc. has agreed to settle numerous customer class actions launched following the security breach of TJX’s computer systems. The breach affected millions of credit and debit card holders. The terms of this settlement are interesting in that they require TJX to provide vouchers,




cash benefits (cheques), credit monitoring services, identity theft insurance, reimbursements and sales events to eligible claimants.

On January 17, 2007, TJX Companies, Inc. announced that it had suffered intrusions into its computer system responsible for processing and storing information related to consumer transactions, and specifically to credit card, debit card, cheque and merchandise return transactions. TJX is the parent company of Winners and HomeSense in Canada. The breaches occurred between July 2005 and January 2007, affecting approximately 45.6 million credit and debit card holders.

Predictably, the TJX security breach led to a number of class actions against TJX, including six class actions seeking compensation on behalf of all Canadians who may have been affected by the breach. The class action plaintiffs allege that TJX failed to maintain adequate security for consumer information, and that, as a result, unauthorized individuals were able to gain access to this information. The plaintiffs claim that TJX’s inadequate security allowed unauthorized individuals to steal consumer information and to commit fraud and identity theft.

On November 14, 2007, TJX entered into a proposed settlement agreement with the representative plaintiffs. The settlement class for the purposes of the proposed settlement agreement includes anyone in the US, Puerto Rico or Canada who made a purchase or return at certain TJX stores during specific time periods, who had or

allege having personal or financial data stolen or placed at risk of being stolen, and who were or may be damaged or who allege they were damaged by the intrusion.

The terms of the settlement agreement require TJX to compensate the settlement class by way of vouchers, cash benefits (cheques), credit monitoring, identity theft insurance and reimbursements. As well, under the terms of the proposed settlement agreement, TJX will host a one-time three-day sale event at TJX stores for the plaintiff class where all merchandise will be reduced by an additional 15 per cent. The settlement agreement does not include an admission of guilt or wrongdoing on the part of TJX.

Compensation will be in the form of either $30 vouchers for use at TJX stores or $15 cheques. Customers can claim up to two vouchers, with the number of vouchers based on whether the class member has proof that he or she shopped at a TJX store and proof of out-of-pocket expenses. If the total value of claims for customers with such proof exceeds $7,000,000, the amount per voucher will be reduced proportionately. Similarly, the amount per voucher for those customers without proof will be reduced proportionately where the total value of claims exceeds $10,000,000.

Those customers who have been notified that their driver’s licence or other identification information was compromised and where it is the same as their social security number, and who lost more than $60 from identity theft (excluding credit and debit card charges) may be eligible for additional reimbursement.


However, again, if the amount needed to pay these claims exceeds $1,000,000, each payment will be reduced in proportion to all settlement class members’ claims.

The proposed settlement agreement also provides three years of credit monitoring and $20,000 worth of identity theft insurance for consumers who returned merchandise to TJX stores without receipts and who received letters from TJX stating that their names or identification numbers were believed to have been compromised. These customers will also be reimbursed for the cost of drivers’ licences replaced between January 17, 2007 and June 30, 2007.

Under the proposed settlement agreement, TJX will also pay the plaintiffs’ legal fees, up to $6,500,000.

In addition, the settlement agreement gives the plaintiffs one month to have its independent security experts determine whether recent improvements to TJX’s computer system constitute a prudent and good faith attempt to minimize the likelihood of intrusions in the future. The settlement is contingent upon plaintiffs’ counsel’s acceptance of these enhancement actions as prudent and in good faith.

While the US District Court for the District of Massachusetts has preliminarily approved the settlement, the agreement must first be approved at a fairness hearing. Claims will be paid after all appeals from the fairness hearing

have been heard and the court grants final approval of the settlement agreement.

If approved at the fairness hearing, the settlement agreement will settle the class action proceedings in Canada. The Canadian plaintiffs agreed to a stay of the Canadian actions pending implementation of the settlement. As outlined in the settlement agreement, all settlement class members — including those in Canada — will be permanently barred and enjoined from commencing, prosecuting or participating in any action asserting any of the claims released by the agreement.

Note that this proposed settlement agreement, if approved, will only settle the class action lawsuit involving customers of TJX stores: lawsuits against TJX from banks and other financial institutions are not settled under the settlement agreement. Individual class members were also able to opt out of the proposed settlement by providing notice by June 24, 2008.

On the credit card side, TJX entered into a $40.9-million pact with Visa in November 2007, and a $24-million pact with MasterCard in April 2008, in each case to cover breach-related expenses incurred by the issuing banks, such as replacement of credit cards. These settlements would be paid in exchange for the issuing banks’ agreeing to waive their rights to sue TJX for breach-related costs.

And in March 2008, TJX agreed to a settlement with the Federal Trade Commission, under


which TJX agreed to submit to an independent security audit every other year for 20 years.


The response to the terms of the class action settlement agreement has generally been critical. The prevailing view is that TJX is escaping too easily (e.g., providing marketing gimmicks of relatively small vouchers for use in stores and a sale event) and that it will not suffer any significant financial repercussions as a result of the breach. Concern has also been raised over the fact that such an early settlement will leave important issues regarding responsibility and liability for such security breaches unresolved.

Contact: Wendy Gross in Toronto at [email protected]

Canada: Appeal Court Refuses Stay in case over Disclosure of eBay PowerSeller Information to Canada Revenue Agency

In TLQ 3:4, we reported on a Federal Court decision requiring eBay Canada to provide information on high-volume sellers to the Canada Revenue Agency (CRA). It ruled that the CRA had the right to examine the records of an estimated 10,000 Canadian “PowerSellers” who generated monthly sales of more than $1,000 US through the online marketplace

eBay, regardless of the fact that this information is stored in data facilities owned and controlled by another party outside of Canada. eBay Canada subsequently appealed that decision and sought a stay pending disposition of the appeal.

In dismissing the motion for a stay, the Federal Court of Appeal considered whether:

• eBay Canada had an arguable case on appeal;

• eBay Canada would suffer irreparable harm should the stay not be granted; and

• the balance of convenience lay with eBay Canada or the Minister of National Revenue.

Although the court found that eBay Canada had an arguable case, it concluded that eBay Canada had not established that it would suffer any harm from being compelled to disclose the information. On this basis, the court dismissed eBay Canada’s motion for a stay. The court also noted that the public interest, in maintaining the integrity of the Canadian income tax system, outweighed any interest eBay Canada had in not disclosing information about the PowerSellers.

Contact: Wendy Gross in Toronto at [email protected] or Joel Ramsey in Toronto at [email protected]




http://www.mccarthy.ca/article_detail.aspx?id=3845


Communications CASES/LEGAL DEVELOPMENTS

Canada: Recent Developments in Canadian Communications Law and Policy

In the telecommunications and broadcasting sector, a number of significant developments recently occurred, including several important decisions by the Canadian Radio-television and Telecommunications Commission (CRTC), the announcement of hearings on new media and traffic-shaping, and the introduction of new rules on essential services and telemarketing.

New Regulatory Framework for Wholesale Telecom Services

The CRTC articulated new rules for the regulation and pricing of wholesale telecom services provided by incumbent telecom carriers in Telecom Decision CRTC 2008-17. The rules apply mainly to the services and facilities provided by incumbent local exchange carriers (ILECs), such as Bell Canada and Telus, to competitive service providers including alternative local and long distance carriers, resellers and Internet Service Providers (ISPs).

CRTC Allows Foreign Investors to Acquire Large Stakes in Canadian Broadcasting Companies

The CRTC issued two important decisions involving the transfer of effective control of prominent Canadian broadcasting companies Alliance Atlantis and BCE. In each case, foreign

investors acquired sizeable stakes despite the Canadian ownership and control rules.

In Broadcasting Decision CRTC 2007-429, the CRTC approved the transfer of effective control of Alliance Atlantis Broadcasting Inc. and its 13 broadcasting properties to an acquisition company jointly owned by a subsidiary of CanWest Global Communications and investment funds controlled by Goldman Sachs.

In Broadcasting Decision CRTC 2008-69, the CRTC gave conditional approval to the transfer of effective control of BCE Inc. to a group of private equity investors, both Canadian and non-Canadian. The transaction, valued at $51.7 billion, was the largest Canadian corporate acquisition to date, and one of the largest-ever private equity deals globally.

AWS Spectrum Auction

Canada’s Advanced Wireless Services (AWS) Spectrum Auction has concluded, with 15 companies bidding almost $4.3 billion for licences. Ninety MHz of AWS spectrum was auctioned off in six paired frequency blocks (three of 20 MHz; three of 10 MHz). Three of the paired frequency blocks were reserved for new-entrant applicants, while the other three paired blocks were open to all bidders.

New Media Proceeding

The CRTC has announced that it will conduct a hearing in 2009 to examine broadcasting delivered and accessed over the Internet and


over mobile devices. A highly controversial issue will be whether ISPs should contribute to the creation and presentation of Canadian programming, just as Canadian cable and satellite distribution undertakings currently do under the broadcasting regime.

Traffic Shaping Debate: CAIP v. Bell Canada

The CRTC has initiated a public process to examine Bell Canada’s traffic-shaping of wholesale Internet access, following a complaint by the Canadian Association of Internet Providers (CAIP), a group of independent ISPs. Bell had recently begun applying traffic management tools to its Gateway Access Service (GAS). GAS is a CRTC-mandated wholesale service, subject to CRTC-approved tariffs, used by ISPs to provide Internet access to customers in areas where the ISP has no facilities.

CAIP sought an interim and final order requiring Bell to cease and desist from shaping its wholesale ADSL services, and asking the CRTC to find that Bell’s traffic-shaping infringes upon CRTC regulations and the Telecommunications Act. While the CRTC denied CAIP’s application for interim relief, it initiated a proceeding to consider the matter more fully. The ensuing decision may provide some policy guidance on issues of network neutrality.

Competition Policy Review Panel Report

The Competition Policy Review Panel recently released Compete to Win, its highly anticipated report on recommended policy changes to enhance Canada’s competitiveness.

The report criticizes the current restrictions on foreign ownership in the Canadian telecommunications and broadcasting sector, and makes recommendations for liberalizing these restrictions.

Unsolicited Telecommunications Rules and the National Do Not Call List

Canada will soon have a National Do Not Call List (National DNCL). Back in December 2007, the CRTC awarded a five-year contract to Bell Canada to operate the National DNCL. This contract implements a key aspect of Telecom Decision CRTC 2007-48, which establishes a comprehensive framework for unsolicited telemarketing calls and other unsolicited telecommunications received by consumers. The framework includes rules for a National DNCL registry, as well as rules regarding telemarketing and automatic dialling-answering devices. The CRTC expects the National DNCL to be launched by September 30, 2008.

To read more about these developments, visit the firm’s website.

Contact: Hank Intven in Toronto at [email protected]

http://www.mccarthy.ca/home.aspx



Canada: Canadian Cultural Product and the Long Tail: The New Economics of Production and Distribution in Canada — Part IV

This article concludes our four-part series exploring the effect of new technology on cultural products. This instalment looks at the music industry.


No industry has suffered more from illegal downloads than the music industry. So it is difficult to say anything positive about new technology to people in the music business — sales of CDs have plummeted in the last five years and digital sales have not made up the difference.

Nonetheless, there are a few positive points to be made about the music industry.

The first is that we have a remarkable success story to celebrate. If you look at the top 200 albums sold in Canada in 2006, more than 25 per cent were albums by Canadian artists.

That’s very impressive. But it’s interesting to note that only about 16 per cent of overall record sales were by Canadian artists. So here’s an interesting paradox. In the music field, Canadian musical performers do better in the bestseller lists than they do in the long tail. What’s going on here?

There are two equally plausible explanations. The first relates to airtime on Canadian radio stations. Radio broadcasters in Canada are required to devote at least 35 per cent of their playlist to Canadian recordings. But they tend to focus their Canadian airplay on the stars and don’t give much airplay to the Canadian talent in the long tail. So the result is that we do better on the music bestseller list than we do in the long tail.

That’s one explanation. But there is another. If you look more closely at the sales in the long tail, it includes a lot of older records — classic records of US and UK pop music stars from the past — and there, Canadian artists just don’t have the depth of inventory. So that may explain why we do well in current sound recordings that show up in the top 200 albums, and why we do less well in the long tail, where we’re competing with the extensive US and UK catalogues of older recordings.

A second point to make about the Internet is that digital download sales are gradually increasing. This is definitely the wave of the future. As we have seen, bricks-and-mortar-retail stores have limited inventories; this is particularly noticeable to those who try to get their CDs onto, say, Wal-Mart shelves. Sales of CDs in Canada were estimated to be about $650 million in 2006. That’s a new low, and less than half what they were in 1999.

However, digital downloads have increased. In 2005, they amounted to $20 million.


In 2006, digital sales in Canada reached an estimated $57 million. There are real teething problems with the proliferation of rights and confusion as to clearances. But this is where the future is.

The advent of Internet downloads does have a negative impact on the sale of albums, since music buyers can focus on the single songs they want. And some indie groups have argued that users should not be sued for illegal downloads, presumably on the thesis that touring and live performance fees will be more reliable and sustainable than sales of recordings in the future. Needless to say, however, the record labels are not prepared to give up on sales revenue. Although they have been criticized for appearing to lack a coherent digital strategy, they are beginning to respond with user-responsive downloading options. An important first step, however, will be to strengthen Canada’s copyright legislation in this area.

Looking at new technology from the perspective of Canadian artists, the question is, “How can they benefit from the Internet?” It is clear that they need more than availability — they need promotion.

One element of that can and should come from Canadian radio. And the CRTC decision on commercial radio policy does require radio stations to provide enhanced support for emerging Canadian talent.

The second element needs more creativity. This involves:

• creating websites for Canadian musical artists to build a fan base;

• integrating those websites with touring schedules and new releases; and

• including in these websites inside gossip about the band, daily news bulletins, moderated discussion groups where you gently remove the offensive fans and welcome the real supporters, places where you can buy tickets, and links to MySpace.

This can be done. Take a look at www.bluerodeo.com. This is a website managed by a company called The Official Community. It is an example of a sophisticated website that not only builds support, but makes money for the band.

What, then, can we conclude?

First, the Internet can be the friend of smaller titles. It is unlikely to kill existing broadcast media, or to jeopardize our ability to regulate conventional media. And the long-tail effect can increase sales for the smaller title. In the end, however, the long tail will not eliminate the horrendous economics of Canadian content production. Regulation of private broadcasters and government support will continue to be required if we want our film, television and music sectors to give


us the quality and diversity of Canadian content that we want.

As for regulation of the Internet itself, the cultural tool kit would have to be reinvented to deal with it. Obviously, program schedules cannot be regulated where everything is downloaded from a file server. But nations have other ways of ensuring that their citizens have a choice of local cultural products and that their creators enjoy shelf space for their work. In Canada, for example, video-on-demand services are licensed under the Broadcasting Act. Five per cent of the available titles in English must be Canadian, and a small levy on this revenue goes to a fund to subsidize Canadian drama.

The relationship of the Internet with conventional media can also be supportive instead of combative. If you look at the most popular sites on the Internet, guess who operates them? The answer is the conventional media. And this includes the public broadcasters, who have some of the best sites available. So to the extent that the tool kit of cultural diversity maintains pluralism in conventional media, the choices, range and varieties of expression are likely to carry through to the Internet. That is what is happening today.

To quote again from the CRTC presentation to the Standing Committee on March 20, 2007:

At the present time, there is a healthy Canadian presence in new user-generated content as well as in new media programming in short format, such as news and sports clips. For the expensive, long-form programming, such as drama and nation-building events, we found that the same challenges exist for Canadian content in new media as in broadcasting.

So that is our challenge — and our opportunity.

Contact: Peter S. Grant in Toronto at [email protected]



Clean Technology CASES/LEGAL DEVELOPMENTS

Canada: Changes and Opportunities — Federal Climate Change Legislation

The federal government recently announced details of a federal regulatory scheme involving a carbon cap and trade system, and carbon trading framework, as part of its “Turning the Corner” plan aimed at cutting greenhouse gas (GHG) emissions. The new carbon cap and trade system will apply initially to large industrial emitters across Canada, including those in the oil sands, electricity, mining, cement, pulp and paper, and chemical manufacturing sectors.

While the federal government has also announced and initiated a number of other GHG emissions reductions programs and incentives under the ecoACTION initiatives administered by Environment Canada, the carbon cap and trade system is pegged to be the source for major GHG emissions reductions. To properly prepare for this new regime, companies need to start thinking about their compliance options.

The federal government expects to publish regulations for the carbon cap and trade system in late 2008, and implement the system by January 1, 2010, with the 2010 calendar year to be the first compliance period.

To date, Alberta is the only jurisdiction in Canada that has legislated GHG emissions limits on large industrial emitters. Given that the planned federal GHG regulations will apply to many more facilities than the current Alberta regime, and that the federal compliance options are more limited and may be more onerous to comply with than the existing Alberta rules, commentators are suggesting that many regulated companies are not, and will not be, prepared to meet the rapidly approaching federal requirements. This is expected to be the case even in Alberta, where certain facilities have the benefit of experience.

Preparing for the 2010 compliance period may pose challenges for companies who have yet to focus efforts and properly consider the cost/benefit analysis of the various compliance options. Choosing the right mix will be a sector-specific and operations-specific determination. For example:

• Companies planning capital turnover, significant capital equipment or fleet investments in upcoming years should consider the pros and cons of meeting compliance obligations through abatement (which refers to in-house reductions of GHG emissions, such as improvements in technology or processes, or fuel-switching). This is a particularly strategic consideration for new or future facilities in all sectors.

• Companies for whom abatement may not be possible or economically feasible should


seriously investigate purchasing credits or offsets (both of which should be considered in contracting), or making contributions to the federal Technology Fund (or through certain pre-qualified expenditures which could be deemed to be Technology Fund contributions) to comply with the federal requirements. The Technology Fund will largely finance investments in technology and infrastructure deployment that have a high likelihood of reducing GHG emission in the near future.

Meeting emission reduction targets will be more complex under the federal plan than under the existing Alberta regime because the federal plan will limit the quantum of federal Technology Fund contributions. This limit will make participation in the domestic carbon trading market a practical necessity for many businesses.

Businesses involved in industries that may create or obtain legal rights to offsets (generally speaking, projects or practices that remove or forego GHG emissions from the atmosphere) will be able to register their projects in Environment Canada’s new registry. Registration will be required to sell and trade offsets in Canada. It will also serve as a public notice forum of any legal rights to offsets being claimed by an individual or business in Canada.


While the federal regulations will initially apply to large industrial emitters, regardless of the particular industry or the size of their current carbon footprint, all

companies need to consider and plan for climate change risk. This may include developing a comprehensive climate strategy and taking steps to reduce carbon impacts in advance of regulatory requirements.

While there are costs associated with climate change activities, there are also significant business opportunities, including carbon emissions trading schemes, bottom-line cost reductions by reducing energy intake and capitalizing on operational efficiencies, and the development of carbon neutral or “clean” technologies and products for which consumers and investors have an increasingly insatiable appetite.

Contact: Cheryl L. Slusarchuk in Vancouver at [email protected] or Catherine M. Samuel in Calgary at [email protected] or Lisa M. Asbreuk in Calgary at [email protected] or Douglas R. Thomson in Toronto at [email protected] or Joanna Rosengarten in Toronto at [email protected] or Anne-Marie Sheahan in Montréal at [email protected]








US: Low Carbon Resolutions on the Agenda — Shareholder Activism and Exxon

With crude oil prices at record levels, dividends up, profits unprecedented and Exxon’s stock hitting a record high in the first half of 2008, investors should be unequivocal in their support of Rex Tillerson, the CEO and Chairman of Exxon. But a significant block of Exxon’s investors are interested in more than just near-term profits. They are also concerned about the future, and they believe Exxon is not prepared for what many expect to be a turbulent time in the energy markets.

Unlike many other oil companies, Exxon has refused to invest in renewable energy and carbon capture technologies. Several institutional investors have joined the shareholders in their low carbon-related resolutions — none of which were supported by Exxon or its board of directors.

These resolutions included a proposal to split up the chairman and CEO positions, so that an independent chairman could spend time reviewing big-picture future energy issues, such as renewables, while Rex Tillerson, as CEO, could focus on running the company. Since 2003, this resolution has been gathering momentum, but appears to have reached a plateau in 2008. In 2003, a resolution to split the chairman and chief executive’s roles received 22 per cent of the vote, and last year it received 40 per cent. At the May 2008 meeting, it received slightly less than in 2007, with 39.5 per cent of the vote.

The low carbon-related resolutions also included a proposal to require Exxon to set specific goals limiting greenhouse gas (GHG) emissions and to engage in renewable energy research. These proposals were supported by 31 per cent and 27 per cent of the shareholders, respectively.

These low carbon resolutions were spearheaded by the descendants of J.D. Rockefeller and supported by several institutional investors, including F&C Asset Management, Co-operative Insurance Society, Morley Fund Management and West Midlands Pension Fund. London-based proxy advisory firm PIRC Ltd. had recommended that its clients support the low carbon-related proposals, which were already backed by RiskMetrics Group, Glass Lewis and Proxy Governance, Inc.

Contact: Cheryl L. Slusarchuk in Vancouver at [email protected]

Europe: Airline Emissions Reduction Takes Off

According to its 2008 Environmental Report, Boeing’s CO2 emissions from its facilities dropped 24 per cent from 2002 to 2007. Boeing also reports that CO2 emissions from its airplanes have dropped 70 per cent since 1968, and that it hopes to reduce CO2 emissions by 15 per cent with every new generation of plane. The company is also researching low-carbon aviation fuels. The fact that the



price of jet fuel has jumped 90 per cent in the past year has no doubt provided further impetus for airlines to find better alternatives.

Another impetus is looming regulations. European airlines, for example, will face stiffer CO2 emissions regulations one year earlier than expected. The European Parliament recently surprised already struggling airlines by voting to advance the date to include aviation GHG emissions in the European emissions trading scheme. European airlines now have just 2.5 years to prepare for tough standards: they'll have to reduce emissions 10 per cent from 2004—2006 levels by 2011, and the standard will be raised even higher in 2013. What’s more, the industry will only be given 75 per cent of their allotted emission credits, and will have to bid for the remaining 25 per cent.

Airlines are also looking at other ways to reduce emissions. Apparently, one practical way may be to slow down, adding a few minutes to each flight. According to The Guardian’s “Green Autoblog,” this alone significantly reduces emissions.

Contact: Cheryl L. Slusarchuk in Vancouver at [email protected]


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