TLQ Vol4 Issue1 E draft2 - McCarthy Tétrault · surveillance conducted in violation of an insured’s privacy right. In a third article, we examine whether an employee has a right

Co-Counsel

McCarthy Tétrault Co-Counsel:

Technology Law Quarterly Volume 4, Issue 1

January – March 2008

Co-Counsel: Technology Law Quarterly Volume 4, Issue 1

Welcome to Volume 4, Issue 1 of McCarthy Tétrault Co-Counsel: Technology Law Quarterly. In this issue of the TLQ, we continue our series on taking your tech company public — this time delving into the process of the initial public offering. In another article, we discuss a new disclosure requirement that has implications for public companies and private companies contracting with public companies. The changes to National Instrument 51-102 Continuous Disclosure Obligations now require reporting issuers to publicly file certain “material contracts” entered into “in the ordinary course of business” on SEDAR (such contracts could include, among others, material outsourcing agreements and patent licences).

Earlier this year, the Ontario and federal governments delivered their 2008 budgets, with some good news for technology companies and their investors. We highlight a few of the relevant tax initiatives including: changes to the federal Section 116 withholding and clearance certification obligations; the 10-year corporate tax holiday for new corporations that commercialize intellectual property (IP) developed by qualifying Canadian universities, colleges or research institutes; and the Ontario Innovation Tax Credit.

Privacy developments continue to generate headlines, with video surveillance now coming under close scrutiny. We review the guidelines issued by the federal, British Columbia and Alberta privacy commissions on the use of video surveillance by private sector organizations. We also highlight a case from Québec, in which an insurance company was ordered to pay punitive damages for illicit video surveillance conducted in violation of an insured’s privacy right. In a third article, we examine whether an employee has a right to privacy over data created for work purposes and stored on a computer.

User-generated content (UGC) on the Internet is another area that has exploded in recent years. Companies are now looking for ways to harness UGC for commercial purposes but they face perils in doing so. In one article, we explore some of potential risks associated with incorporating UGC into a corporate website and outline steps companies can take to minimize their liability.

The technology and communications sectors saw a flurry of M&A activity in 2007. In early 2008, two large acquisitions announced in 2007 cleared significant regulatory hurdles. We discuss the European Commission’s approval of Google’s purchase of DoubleClick and, closer to home, the CRTC’s approval of the sale of BCE.


We continue our series on offshore business process outsourcing (BPO). In this issue, we discuss some key legal considerations in offshore BPO transactions — such as ownership of IP, dispute resolution, protection of confidential information, and compliance with local laws.

These and many other key topics are discussed in this issue of the TLQ. Browse through the publication using the table of contents, which contains ‘clickable’ links to articles. All the articles can also be found on our website. You can search our publications database 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. In its 2008 edition, Chambers Global, a guide to the world’s leading lawyers, confirms McCarthy Tétrault’s continued 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 will not be published until this summer, but the 2007 edition recognized McCarthy Tétrault as having Canada’s premier technology law practice. Our Co-Counsel: Technology Law Quarterly demonstrates our commitment to maintaining this position of leadership.

Heather J. Ritchie Editor-in-Chief April 2008

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


Table of Contents

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

Canada: Website User-Generated Content: Avoiding the Pitfalls..........................................1 Canada: Internet Jurisdiction in the Global Age: Desjean v. Intermix and the Adaptation of the Real and Substantial Connection Test ...................................................3 Ontario: Fraud Alert Requirements in Ontario’s Consumer Reporting Act ...............................6 North America: Real or Illusory — Legal Rights in a Virtual World?........................................7 Europe: Microsoft Ordered to Pay Record Fine for EC Competition Law Violations ....................8 International: Google Completes Acquisition of DoubleClick...............................................9 International: ICANN Recommendations Could Significantly Increase New Generic Top-Level Domain Names ...................................................................................... 10

SOFTWARE LICENSING .................................................................................. 11

International: Open Source Software and Open Content Licensing: From Copyright to Copyleft — Part III ........................................................................ 11

Technology Finance..............................................................................17

TECH-RELATED FINANCE................................................................................ 17 North America: Taking Your Tech Company Public — Part III............................................. 17 Canada: Proposed Canadian Tax Changes Expected to Impact Cross-Border Private Equity and Venture Capital Investors ................................................................................. 20 Ontario: Ontario 2008 Budget: Limited Tax Breaks for the Tech Space ................................ 21

Technology Contracting.........................................................................23

OUTSOURCING ........................................................................................... 23 International: Offshore Business Process Outsourcing 101 — Part II..................................... 23

TECHNOLOGY AGREEMENTS ........................................................................... 26

Canada: New Filing Requirement for “Material Contacts” Entered into in the Ordinary Course of Business ................................................................................... 26


Intellectual Property ............................................................................28 COPYRIGHT............................................................................................... 28

Canada: iPod Levy Struck Down............................................................................... 28

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

CASES/LEGAL DEVELOPMENTS......................................................................... 30 Canada: Video Surveillance Guidelines Issued by Privacy Commissioners .............................. 30 Québec: Insurance Company Ordered to Pay Damages for Illicit Surveillance and Flaunting the Court’s Rulings .................................................................................. 31 Canada: Who Owns What: Do Employees Have a Reasonable Expectation of Privacy With Respect to Data Stored on Computers? ................................................................ 33

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

CASES/LEGAL DEVELOPMENTS......................................................................... 36 Canada: CRTC Approves Sale of BCE.......................................................................... 36 Canada: Six Questions: Sex, Tax and Bill C-10.............................................................. 42 Canada: Canadian Cultural Product and the Long Tail: The New Economics of Production and Distribution in Canada — Part III ........................................................... 45

Clean Technology ................................................................................53

CASES/LEGAL DEVELOPMENTS......................................................................... 53 B.C.: B.C.’s Carbon Tax ........................................................................................ 53 International: Eco-Patent Commons — Patent-sharing for a Cleaner and Greener Environment ... 54

Biotechnology/ Life Sciences ..................................................................56

CASES/LEGAL DEVELOPMENTS......................................................................... 56 Canada: Amendments to the Patented Medicines Regulations: Changes to Reporting Requirements and Deadlines........................................................ 56

Page 1 Co-Counsel: Technology Law Quarterly Volume 4, Issue 1

Internet/E-World E-COMMERCE

Canada: Website User-Generated Content: Avoiding the Pitfalls

With the availability and popularity of Web 2.0 functionality, corporations are increasingly encouraging their website visitors to participate in the overall web experience by uploading user-generated content (UGC). UGC exists in a variety of forms, such as photographs, videos, podcasts, articles and blogs. Through UGC, users can provide their input and express their creativity in a number of exciting ways.

The incorporation of UGC into corporate websites can produce many benefits to its hosts (e.g., boosting website traffic, attracting new customers, generating brand awareness and increasing customer loyalty). At the same time, companies seeking to use UGC should be aware of the potential risks associated with such activities and take all the necessary steps to limit their exposure. These risks include loss of brand image; claims of false advertising; and liability for infringement of intellectual property (IP), defamation and invasion of privacy.

Loss of Brand Image

When a company allows customers and website visitors to develop and contribute web content, it risks losing control of the company brand image. Although many customers may genuinely

love a particular company or product at the core of a website, others may delight in the opportunity to disparage the company or product. A company that intends to include UGC in its website should consider the merits of including both automated and manual moderation services to screen uploaded material. In addition, the company should make significant efforts to articulate the website’s terms of use, clearly defining acceptable and prohibited content and conduct.

Claims of False Advertising

UGC, by its very nature, has the capacity to blur the distinction between commercial content (i.e., advertisements) and non-commercial content (i.e., entertainment and commentary). A recent example relates to a contest launched by Quiznos, the toasted-sandwich chain. It invited the public to submit home-produced videos depicting Quiznos’ sandwiches as superior to Subway’s. Subway, which is Quiznos’ top competitor, has since sued Quiznos in the Connecticut Federal District Court, alleging that the home-produced videos made false and misleading claims and depicted Subway’s brand in a derogatory way.

While disputes over advertisements are not new, the video contest raises a novel legal question: should Quiznos, because it ran the contest, be liable for content it did not create? Since any decision rendered in this case could have significant implications for the use of UGC on company websites, this case bears close scrutiny.


Liability for Infringement of IP, Invasion of Privacy and Defamation

By providing customers with the opportunity to post UGC on its website, a company must be diligent in limiting its liability for IP infringement, privacy violations and defamation. One way to reduce exposure is to ensure that the website’s terms of use:

• instruct contributors to restrict their submissions to material for which they own all rights;

• provide guidelines for use of trade-marks, names and likenesses of other people, and copyrighted materials owned by third parties;

• prohibit users from posting any material that violates these provisions;

• permit the company to remove any material that violates the terms of use; and

• include language indemnifying the company for all posted UGC.

Companies should also consider implementing a program to moderate content and take down any materials that that are identified as IP infringements, violations of an individual’s right to privacy, or instances of defamation of character — particularly since, in the event of a claim, an indemnity from an individual content creator may not provide much in the way of protection.

The US Digital Millennium Copyright Act is another tool to protect companies interested in using UGC. This Act insulates an online service provider in the US from copyright liability if the service provider adheres to certain prescribed safe harbour guidelines and promptly blocks access to allegedly infringing material (or removes such material from its website) upon notification of infringement from a copyright holder or the copyright holder's agent.

Companies should also ensure that they obtain broad rights from the contributor to use the UGC. One way to do this is for the company to receive a license from the contributor at the time of submission giving the company the right to “use, copy, edit, publish and distribute the material, in any media, forever, as well as the right to use the contributor’s name, likeness and performance.”

Through this license, the contributor will retain ownership in the UGC but the company will have the ability to use the content to fulfill its website objectives. This approach is generally more palatable to contributors and less open to legal challenge than the alternative approach of requiring contributors to assign ownership of their UGC to the company.

Conclusion

Encouraging website visitors to submit original content can be an effective way to attract new customers and develop consumer loyalty, but incorporating UGC can be disastrous if companies have not addressed the issues involved. Companies that wish to fully exploit


this trend must consider employing all of these protective measures: carefully wording your site’s terms of use, monitoring and removing offending materials, and obtaining sufficient rights from the creator to use the UGC.

Contact: Kai Brown in Toronto at [email protected]

Canada: Internet Jurisdiction in the Global Age: Desjean v. Intermix and the Adaptation of the Real and Substantial Connection Test

In the last decade, Canada has witnessed two important developments: the rise of Internet and the proliferation of class actions. These two phenomena intersect in Desjean v. Intermix, a class proceeding filed in the Federal Court. The issue raised by the case is a relatively novel one: can an individual who acquires a web product sue the provider in the forum where that product was downloaded? What test should be applied to determine whether a Canadian court can assert jurisdiction?

Before the Federal Court

In 2005, Patrick Desjean filed a Statement of Claim in the Federal Court in which he sought to certify a class action against Intermix Media Inc., an American Internet company based in California. The claim alleged that the company deceptively bundled spyware and adware with

the free software that consumers downloaded from its websites. In response to the claim, Intermix moved to dismiss the claim on the basis that the court lacked jurisdiction over Intermix and the underlying matter. The Federal Court granted the motion and the Federal Court of Appeal upheld this ruling.

In his original Statement of Claim, Mr. Desjean alleged that Intermix breached Section 52 of the Competition Act by engaging in deceptive, fraudulent and illegal practices, as well as false advertising. More specifically, he alleged that Intermix offered consumers free software, such as screensavers and games, without disclosing the fact that additional software was attached to these downloads. The additional software included, according to Mr. Desjean, spyware or adware programs that were designed to deliver ads and invasive content to computers. Mr. Desjean additionally alleged that Intermix attempted to prevent consumers from detecting and removing the additional software. According to Mr. Desjean, such practices allowed third parties to implement various schemes that led him to experience computer problems and entitled him to damages under Section 36 of the Competition Act.

Before the case moved towards a certification hearing, Intermix filed a motion to dismiss the claim on the basis that the Federal Court lacked jurisdiction. The matter was heard by Mr. Justice de Montigny. The court began its legal analysis by observing that the development of the law in the context of virtual communications technology is still in its infancy. It proceeded to survey the recent case



law on the assumption of jurisdiction by a court against an out-of-country defendant. In particular, the court referenced Morguard Investments Ltd. v. De Savoye, in which the Supreme Court of Canada set out the “real and substantial connection” test. The court also referred to Muscutt v. Courcelles, in which the Ontario Court of Appeal developed eight factors for courts to use when determining whether a real and substantial connection between the action and the forum exists.

Based on the evidence filed by Intermix and the application of the factors in Muscutt, the Federal Court concluded that the real and substantial test had not been met. In particular, with respect to the factor that considers the connection between the forum and the defendant, the court noted that Intermix has no servers, employees, offices or bank accounts in Canada. It also noted that Intermix has not availed itself of Canadian laws, that it does not pay taxes in Canada and that it has no advertising, marketing or specific content aimed at the Canadian market.

Further, with respect to the factor that considers the unfairness to the defendant of assuming jurisdiction, the court held that it would be manifestly unfair to subject Intermix to its jurisdiction because it would place too great an onus on a foreign website operator with no real presence in Canada. Another important factor is whether the case is interprovincial or international in nature because jurisdiction is more easily justified in interprovincial cases than in the context of international litigation. The cross-border nature of the dispute between

Mr. Desjean and Intermix was yet a further element that favoured a finding of an absence of jurisdiction.

In addition, the court referred to Canadian and American case law on Internet jurisdiction. According to the court, it is now well-established in the American authorities that there must be certain “minimum contacts” between the defendant and the jurisdiction. This idea was clarified by Millennium Enterprises, Inc. v. Millennium Music, LP, which outlined a spectrum of contact. On one end of that spectrum, the defendant conducts business over the Internet with residents of the forum, and the assumption of jurisdiction is usually appropriate. On the other end, the defendant simply posts information that is accessible to users in the forum, and the assumption of jurisdiction is usually inappropriate.

In between these two extremes, a defendant operates an interactive website and allows users to exchange information with the host computer. In such instances, the court must analyze the level of interactivity. An application of this approach led the court to conclude that the websites Intermix operated were not interactive and did not justify a finding of minimum contact.

In addition to concluding that jurisdiction was not appropriate because there was no “real and substantial connection” or “minimum contacts” between the defendant and the forum, the court also held, in obiter, that even if it could have assumed jurisdiction, it would have declined to do so because there was a more


appropriate forum in which to resolve the dispute. California, or possibly another US state, was deemed to be a more convenient jurisdiction. Consequently, the Federal Court struck Mr. Desjean’s Statement of Claim for lack of jurisdiction.

Before the Federal Court of Appeal

Mr. Desjean appealed this decision, placing special emphasis on Moran v. Pyle National (Canada) Ltd., in which the Supreme Court of Canada held that a manufacturer has the burden of defending its products wherever they cause harm, as long as the forum is one that it should have reasonably contemplated when it made its goods available. Mr. Desjean further argued that the trial judge should have held that there was a real and substantial connection between Intermix and Canada.

In a judgment rendered in November 2007, the Federal Court of Appeal (per Létourneau, Pelletier and Trudel, JJ.A.) unanimously dismissed the appeal. The court held that because the appeal was based on an alternative appreciation of the facts, Mr. Desjean needed to demonstrate palpable and overriding error on the part of the trial judge. Further, it ruled that Mr. Desjean failed to satisfy this requirement: he made no reference to the trial judge’s reasoning in his submissions and he was simply substituting his analysis of the relevant facts for those of the trial judge.

The court also addressed the applicability of Moran to the facts of the case. It noted that Mr. Desjean had based his claim against Intermix on alleged violations of the

Competition Act, a statute aimed at preventing fraudulent and misleading practices, and not on allegations that Intermix had placed defective products on the market. As a result, the court ruled that Moran could not be relied upon to support jurisdiction in a case based on false or misleading advertising.

McCarthy Tétrault Notes:

Desjean v. Intermix represents a further step in the evolution of the real and substantial connection test. Although the digital age and the advent of class actions pose new challenges for litigants, counsel and judges alike, the Federal Court and the Federal Court of Appeal have reaffirmed and adapted Morguard to contend with this modern reality. In so doing, they have emphasized that the mere act of downloading a product is not enough to settle the question of jurisdiction. Instead, it is necessary to evaluate the actual nexus between the forum in which the class proceedings are filed, the parties and the substance of the proposed lawsuit. In this respect, the revolutions that have so changed our world have also, ironically, brought us full circle.

Louis M. Brousseau and Shaun Emery Finn acted as counsel to Intermix.

Contact: Louis M. Brousseau in Montréal at [email protected] or Shaun Emery Finn in Montréal at [email protected]




Ontario: Fraud Alert Requirements in Ontario’s Consumer Reporting Act

In the last issue, we reported on federal proposals to combat identity theft. At the provincial level, concerns about identity theft have resulted in recent amendments to Ontario’s Consumer Reporting Act, which came into force on January 1, 2008. In certain situations, credit grantors will be required to take additional steps prior to completing a transaction with an individual. The amendments allow for an individual to have a “fraud alert” notice put in a credit file that a consumer reporting agency (CRA) maintains about him or her. If a business conducts a credit check on that individual and discovers a fraud alert in his or her file, the business shall not proceed with the transaction without taking reasonable steps to verify the identity of the person involved in the transaction.

The alert that a consumer may require a CRA to include in his or her file will warn persons to verify the identity of any person purporting to be the consumer. The fraud alert in the CRA’s file will include a telephone number or method of contacting the consumer to verify the identity of a person purporting to be the consumer. The CRA is required to take reasonable steps to verify the identity of the person requesting the alert before placing it in the consumer’s file.

If a business conducts a credit check that reveals a fraud alert in the consumer’s file, the business must not proceed with certain

prescribed transactions involving a person purporting to be the consumer without taking steps to verify the identity of the person. The Act and associated regulations provide that such steps are required where the transaction with the consumer involves:

• the extension of credit or the loaning of money (including an increase in an individual’s open credit limit, the issuance of additional credit cards or the lending of money on the security of a mortgage);

• the purchase, assignment or collection of a debt of the person;

• a tenancy agreement involving the person;

• an agreement for the purchase, lease or rental of goods or services involving the person;

• an employment arrangement of the person; or

• the underwriting of insurance involving the person.

A fraud alert in the CRA file will expire six years after it is included in a consumer’s file or upon the consumer’s earlier request.

Contact: Wendy Gross in Toronto at [email protected]

http://www.mccarthy.ca/article_detail.aspx?id=3844



North America: Real or Illusory — Legal Rights in a Virtual World?

The question of whether video gamers acquire real-world legal rights for their in-game property has spilled over into the US Southern District Court of Florida. A longtime player of World of Warcraft commenced a class action lawsuit against Internet Gaming Entertainment, Ltd. (IGE), claiming IGE breached the World of Warcraft terms of use and End User License Agreement (EULA). He accuses IGE of “gold farming” — it allegedly pays workers in developing counties to amass currency in the game, which it then sells to other users for real money. In January, IGE filed an answer to the suit, denying the allegations. The action has yet to be certified.

The player is upset with IGE, asserting that its actions negatively affect the gameplay by devaluing currency, putting players who do not infringe the EULA at a competitive disadvantage and reducing the enjoyment of playing the game. In his claim, he accuses IGE of a host of contractual and tortuous ills from breach of third-party beneficiary contract and violation of the US Computer Fraud and Abuse Act to trespass to chattel.

The player bases his allegations on his assertion that the game “has a property system with all the familiar real-world features, such as exclusive ownership, persistence of rights and a currency to support trade.”


If this case proceeds, it would present an opportunity for the courts to rule on the nature of virtual property compared to real-life rights. Such a decision will have important implications for individual users, as well as for companies that wish to promote themselves and their wares in an emerging medium.

Currently, hundreds of companies, including adidas, Reuters, L’Oréal, Dell, IBM and Toyota, have created presences in virtual worlds such as Second Life, where they can promote their company and sell virtual wares to in-game users, as well as sell real-world products to in-game users for purchase.

Linden Labs, the creator of Second Life, has notably recognized the right of Second Life users to “retain full intellectual property protection for the digital content they create in Second Life.” It has gone so far as to respond affirmatively to takedown notices under the US Digital Millennium Copyright Act.

At the same time, in-game creations such as the “CopyBot” have allowed users to make unlimited, free copies of property theoretically covered by the same intellectual property rights that cover real life.

While there have been a number of settlements and consent judgments in cases involving copyright infringement,


neither Canada nor the US has had a ruling deciding the nature of virtual rights compared to real-life rights. Given the growing popularity of virtual worlds, the competing interests at stake and the amount of money involved, we expect to see an increase in litigation in this area in the future.

Contact: Robert Chaplick in Toronto at [email protected]

Europe: Microsoft Ordered to Pay Record Fine for EC Competition Law Violations

On February 27, 2008, the European Commission ordered Microsoft to pay a record €899-million penalty for failing to implement remedial measures imposed in 2004 to address conduct that the Commission had found to be an abuse of dominant position. The penalty is the latest and last battle in a decade-long war between the Commission and Microsoft over the Windows operating system and Media Player. The €899-million penalty brings the total fines imposed on Microsoft by the Commission to €1.68 billion.


In 2004, following a five-year investigation, the European Commission found that Microsoft had abused its dominant position in the PC operating system market by

(i) refusing to supply competitors with information necessary for their products to operate with Windows, and (ii) tying Media Player with the Windows operating system. In addition to ordering Microsoft to supply interoperability information to competitors and to cease tying Media Player to Windows, the Commission ordered Microsoft to pay a fine of €497 million. At the time, it was the largest penalty ever imposed.

Microsoft challenged the Commission’s decision before the European Court of First Instance (CFI) and requested an order suspending the Commission’s remedies until the challenge had been determined. Microsoft argued that the decision was contrary to its intellectual property rights, undermined innovation and interfered with its commercial interests. It also contended that the penalty and remedies would cause irreparable harm.

In December 2004, the CFI rejected Microsoft’s request to suspend the remedies, pending determination of Microsoft’s challenge, because Microsoft had not demonstrated that the remedies would cause serious and irreparable harm. The CFI issued its decision on Microsoft’s challenge in September 2007. The CFI’s reasons largely upheld the Commission’s 2004 findings.

Between December 2004 and the CFI’s decision in September 2007, the Commission monitored Microsoft’s implementation of the remedies imposed in 2004. In March 2007, the Commission



objected to the measures implemented by Microsoft to comply with the Commission’s decision. Microsoft was obliged, under the order, to provide the complete and accurate interoperability information on reasonable terms. The Commission alleged that Microsoft had not provided complete and accurate information and was charging too much money to competitors for the information. The Commission warned that Microsoft could be fined up to €3 million per day for every day that Microsoft was not in compliance with the 2004 decision.

After the release of the CFI’s decision in September 2007, Microsoft began offering interoperability information to competitors at a lower price. The €899-million penalty was for non-compliance from 2004 to fall 2007. It is interesting to note that the penalty for Microsoft’s abuse of dominant position far exceeds penalties imposed by the Commission for price-fixing agreements, regarded by many as the most egregious form of anti-competitive conduct.

Contact: Randal T. Hughes in Toronto at [email protected] or Donald B. Houston in Toronto at [email protected] or Jeanne L. Pratt in Toronto at [email protected]

International: Google Completes Acquisition of DoubleClick

After waiting for almost a year, search engine giant Google cleared the final regulatory hurdles and closed its acquisition of DoubleClick. Back in April 2007, Google announced its $3.1-billion US purchase of DoubleClick, an online ad placement firm. However, the deal was held up due to thorough antitrust scrutiny by antitrust agencies in both the US and Europe.

On December 20, 2007, the US Federal Trade Commission (FTC) allowed the acquisition to proceed, notwithstanding opposition to the merger by companies including Microsoft Corp., Yahoo! and AT&T Inc., as well as by industry groups and politicians. The FTC concluded that the merger is unlikely to substantially lessen competition in any relevant antitrust market.

On March 11, 2008, the European Commission also approved the acquisition. Following a lengthy investigation, the Commission concluded that the merger would not significantly impede effective competition in Europe. It observed that Google and DoubleClick were not competitors. Even if they ultimately became rivals, the Commission determined that the other competitors would likely exert sufficient competitive pressure in the market. Also, the presence of credible ad-serving alternatives for consumers, such as Microsoft and Yahoo!, would prevent the merged entity from being able to marginalize competitors.





Contact: Lorne P. Salzman in Toronto at [email protected]

International: ICANN Recommendations Could Significantly Increase New Generic Top-Level Domain Names

There was a time when companies only concerned themselves with the “.coms” and “.nets” of the world as part of their trade-mark and domain name strategies. But now, with specialized generic top-level domain names (gTLDs) like “.travel” and “.pro,” it may be time for companies to re-examine their domain name portfolios. Indeed, with the Internet Corporation for Assigned Names and Numbers (ICANN) moving forward with the potentially dramatic expansion of gTLDs, this re-examination may become more pressing.

The ubiquitous “dot-something” is part of the Internet's domain name system (or DNS) that allows users to refer to website domain names (such as “www.mccarthy.ca”) rather than cumbersome numeric Internet Protocol addresses assigned to each computer on the Internet. Along with the 20 gTLDs now in existence, somewhere close to 260 other top-level domains currently exist, including some 240 country-code TLDs (each a ccTLD).

In August 2007, ICANN’s Generic Names Supporting Organization tabled its final report titled Introduction of New Generic Top-Level Domains. The document includes a series of

recommendations which, if implemented, could open the way for a large number of new gTLDs. In particular, the report recommends that all applicants for new gTLD registries should be evaluated against transparent and predictable criteria that would be available to the applicants prior to initiating the process. Upon full implementation of these recommendations, technical and financial resources could very well be the most significant restraints in the granting of new gTLDs. This would greatly expand the potential for new gTLDs.

To demonstrate the importance of top-level domain names, it may be helpful to look at the experiences of the tiny nations of Tuvalu and the Federated States of Micronesia. Through the happenstance of naming conventions, these two countries have gained a disproportionately high strategic value for certain media companies. Tuvalu has been given the ccTLD of “.tv” and the Federated States of Micronesia has been given “.fm.” These ccTLDs have brought in tens of millions of dollars in licensing fees from third-party registrars otherwise unconnected with the two countries.


There is little doubt that some of the new gTLDs will catch on and that many others will fizzle. However, in today’s reality of continued cyber-squatting and the growing sophistication of online fraud, companies should start to consider the implications of a world with hundreds instead of dozens of gTLDs. The decisions as to which domain names to register and which processes to implement to deal with potential trade-



mark or trade-name infringers will become even more important. Companies should expect some uncertainty and potential growing pains to come with the future expansion, but with proper planning and expertise, these risks can be managed. Ultimately, the new gTLDs may even provide further opportunities for entrepreneurs.

Contact: Steven Hennig in Ottawa at [email protected]

SOFTWARE LICENSING

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

This article is the third in a four-part series focusing on open content licensing, particularly the copyleft regime under Version 2 of the GNU General Public License (GPL). This part discusses the challenges in identifying the governing law and the safe harbour exceptions to the copyleft obligations of the GNU GPL.


Many individuals in the software industry, and even in legal practice, readily assume that the GNU GPL will be interpreted and governed by US law under all circumstances, given that it originated in the Unites States. However, the GNU GPL is merely akin to a licensing template or drafting precedent. For operative licensing, its terms are required to be specifically adopted by the relevant copyright owners of the material intended to be licensed under it.

As with any other matter of contract law or tort law, and absent a valid selection of law by the parties involved, the appropriate governing law in any given context of distribution under the licensing terms of the GNU GPL will depend on a number of connecting factors that point to the jurisdiction with a real and substantial connection to the matter at hand. These



include the respective domiciles of the copyright owners and licensees, the places where the software was authored, and the respective jurisdictions in or from which the software was distributed and used.

The foregoing analysis could be rendered more complex by taking into account that multiple contributors to a work that was originally licensed under the GNU GPL may engage in further development and distribution activity in other jurisdictions than those in which the licensed software was originally distributed under the license. To take the simplest scenario, however, it is hard to conceive that US law would govern the interpretation of the GNU GPL in a situation involving software authored and owned in Canada, where such software is distributed under the GNU GPL and used in Canada.

Issues of conflicts of law pertaining to open content licensing are beyond the scope of this article, but one should always bear in mind that the governing law of the GNU GPL may vary from situation to situation. When considering questions of compliance with the GNU GPL in a critical business context, it is often appropriate to hedge a legal analysis across multiple jurisdictions having some conceivable relevance to the circumstances. An appropriate course of action can then be determined according to the law of the jurisdiction whose law is the most onerous or unfavourable regarding the issues at hand.

Safe Harbour Exceptions to the Copyleft Obligations of the GNU GPL

We now address the second stage of our two-part analysis for determining whether a particular utilization of software code subject to GNU GPL will attract the copyleft obligations of the license in respect of a resulting work that incorporates all or a part of the originating open source material. Having determined under relevant law that the utilization of the licensed open source code ordinarily constitutes an actionable infringement of copyright, one then proceeds to an analyze whether any safe harbour considerations make the prima facie actionable activity otherwise permissible. As discussed in the last issue, these may be found in (i) the operative language of the GNU GPL, (ii) the associated GPL FAQ as published by the Free Software Foundation, or (iii) any other authorizing and binding pronouncement made by or on behalf of the relevant copyright owners for the open source material in question.

As an example of the first type of safe harbour exception, the express language of the GNU GPL indicates that the mere aggregation of another work with a work based on the licensed open source software on a common volume of a storage or distribution medium does not attract the application of the copyleft provisions of the license to the other work. Thus, a collective work as understood in the sense of the license likely requires that the


constituent works forming part of the collective work make up a unitary contextualized whole. In this case, the constituent works are otherwise identifiable from one another. For the reasons explained previously, this interpretation is consistent with the nature of collective works under Canadian copyright law.

The language of the GNU GPL that allows for mere aggregations of works to escape the copyleft requirements of the license may provide a false sense of comfort. One must always bear in mind that some software works may start out as a permissible aggregation of works on a substrate or other volume at the time of distribution of a software product. But thereafter, they may impermissibly combine during the compilation or execution of the product to form a derivative work that would be caught by the GNU GPL copyleft provisions under the license. For instance, two separately distributed software works of a product may be merged into a single executable upon compilation. These works may ultimately execute together as a unitary whole within the same address space during the runtime of the compiled product. This would prima facie offend the literal language of the GNU GPL, as the combined works during compilation or runtime would constitute infringing reproductions of the licensed work under copyright law.

The second type of safe harbour exception is found in the language of the GPL FAQ. As its name implies, the GPL FAQ is a series of comments couched in question-and-answer format. These comments provide some practical guidelines and assistance for interpreting and applying the various provisions of the GNU GPL.

It remains uncertain whether the terms of the GPL FAQ can, in every given circumstance, be considered binding and enforceable at law in respect of a particular adoption of the terms and conditions of the GNU GPL by a copyright owner of licensed open source material. Suffice it to say that practitioners versed in open source licensing, as well as their clients in the software industry, have frequent recourse to the GPL FAQ in addressing legal issues that arise with open source licensing under the GNU GPL.

For licensed software under the GNU GPL, of which the underlying copyright is owned by the Free Software Foundation, it is not inconceivable to surmise that the GPL FAQ becomes ancillary to the GNU GPL’s terms and conditions: both documents are produced and promoted by the same entity and made available by it on the same website. Further, one can presume that any interpretive guidance found within the text of the GPL FAQ is likely to be binding as against the Free Software Foundation, whether by express contractual adoption or by way of the operation of the doctrine of estoppel.


Where a copyright owner other than the Free Software Foundation has adopted the template terms and conditions of the GNU GPL in the licensing of an open source software product, it becomes more difficult to argue that such unrelated third parties have also incorporated the GPL FAQ together with their acceptance of the GNU GPL. In such circumstances, it may be challenging to establish the grounds of express contractual adoption or estoppel as may apply in the case of software licensed by the Free Software Foundation.

What can be argued, perhaps, is that dependence on the GPL FAQ for guidance in resolving legal issues surrounding open source software licensing is so prevalent in the legal community and in industry that its terms constitute a “usage of trade” or “custom.” This would render the language of the GPL FAQ binding on the open source licensor as a matter of contract law.

Establishing a practice or activity as a “custom” or as “customary” entails a heavy evidentiary burden. Such practices or activities typically rise to the level of custom only if they are regularly observed by “long and unvarying habit.” Canadian courts have required a showing that a custom or usage be “notorious and certain” before they will accommodate it. Along the same lines, the Uniform Commercial Code refers to custom as a “usage of trade” and limits it to “activity having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be

observed.” Notwithstanding this high threshold for finding a custom or usage of trade, the recourse to the GPL FAQ has been so widespread and accepted by lawyers and their clients alike that the wholesale incorporation of its terms into the GNU GPL would not be unreasonable or unwarranted, even with respect to third-party adoptions of the GNU GPL.

An important example of a safe harbour exception, which is grounded in the GPL FAQ, is the one that permits both open source and proprietary programs to be executed together without attracting the copyleft obligations of the GNU GPL, if the two types of programs communicate at arm’s length.

In general, the GPL FAQ provides a two-step test to determine whether an open source program that has been licensed under the GNU GPL is being utilized in a sufficiently separate and isolated manner with an existing proprietary product so as to avoid the imposition of copyleft obligations to the combined whole. The relevant commentary of the GPL FAQ indicates that the determination is made by taking into account first the mechanism of communication between the two program types, and second, the semantics of that communication.

Regarding the mechanism of communication, the GPL FAQ considers that if the two programs are included in the same executable file or are designed to run linked together in a shared address


space, the result would be a combined program or derivative work within the meaning of the GNU GPL. The copyleft obligations of the license would then be imposed on the proprietary software forming part of the combined program, with the attendant consequences of having to meet the source code disclosure requirements under the GNU GPL.

On the other hand, the GPL FAQ states that certain specified communication techniques between the two programs, such as the use of pipes, sockets and command-line arguments, indicate a degree of separateness that would not ordinarily attract the copyleft obligations of the license for any proprietary software that interacts with open source software solely in this manner.

Nevertheless, with respect to the second leg of the test, the GPL FAQ indicates that sufficiently intimate semantics of communication between an open source program and a proprietary program will militate in favour of a finding of a combined program. In this situation, the copyleft obligations of the GNU GPL would be imposed in relation to the proprietary software. The two programs in question would then effectively become a single program, notwithstanding the adoption of acceptable mechanisms of communication that would otherwise promote separateness between the two programs. As an example of semantics for communication that result in a single combined program for purposes

of the GNU GPL, the GPL FAQ states that the exchange of complex internal data structures between two programs would so qualify.

The final form of safe harbour exception may be pronounced by the copyright owner. This form falls outside of the template terms and conditions of the GNU GPL and is external to the GPL FAQ, both of which we have previously described. For instance, in adopting the GNU GPL for the distribution of software according to the open source model, a copyright owner may make specific exceptions or exclusions to permit various combinations of open source software with a proprietary product, and to ensure that the copyleft obligations of the GNU GPL are thereby avoided in respect of the proprietary program.

Perhaps the best-known example of this type of safe harbouring is a so-called “clarifying note” to the GNU GPL, which Linus Torvalds allegedly put forward in relation to Linux software. The note in question assured the developer community that proprietary-user programs making use of Linux kernel services by way of normal system calls would not fall under the heading of a derived work for purposes of the GNU GPL.

This type of external statement may very well be binding on its maker, once again as a matter of contract law or estoppel. But in order to have any practical benefit, the statement must emanate from the entirety of the owner or owners of copyright in the


licensed work at the time the statement is made. In the case of open source software, the many numbers of potential contributors to an open source product may make such attribution difficult.

It is not clear, for instance, that Mr. Torvalds was the sole owner of all of the Linux components potentially affected by the safe harbour exception when the exception was advanced.

Timing is of consequence because a copyright owner may validly pronounce a safe harbour exception at a specific time when all copyright and moral right in an underlying work reside with that owner. Should other third parties thereafter come to handle the underlying work and modify it for redistribution to others, their involvement with the work and subsequently that of other third parties will be subject to the very same terms and conditions as those of the underlying work. This of course follows from the copyleft nature of the GNU GPL.

On the other hand, if the copyright owner of the underlying work licensed under the GNU GPL makes a safe harbour pronouncement after third parties may have contributed modifications to the work, the pronouncement would not be expected to be binding on those third parties. Moreover, it could very well constitute a contravention of such parties’ rights to the modifications in the work as protected by the originating terms and

conditions of the GNU GPL prior to the attempted pronouncement.

While this article has focused on the problems inherent in the copyleft requirements of the GNU GPL, many more concerns and challenges with open source licensing exist. These will be introduced in the next instalment of this article.

Contact: Alfred Macchione in Toronto at [email protected]



Technology Finance TECH-RELATED FINANCE

North America: Taking Your Tech Company Public — Part III

In the last two issues, we outlined why some private tech companies go public — and why many do not. If you have worked through the pros and cons of becoming a public company, and you do want to sell your shares in the public market, we now turn to the process of the initial public offering (or IPO as it is colloquially known).

The Internal IPO Team

The first process step is to organize the team that will stickhandle through the complicated legal, regulatory and financial exercise that is an IPO. Internally, your CFO and CMO (Chief Marketing Officer, often a VP Marketing) will be the two key people, usually with important input from the CEO and various other senior officers of the company.

One challenge you have is that the IPO process will suck up a large amount of the CFO’s and CMO’s time (up to six to nine months, the typical length of an IPO process). It will mean that these two important people will have much less time for their “daily jobs.” So, ideally your company has planned for this and is able to shift some of their usual duties to others.

However, it is not uncommon, particularly with small tech (and other) companies that go public, that several others from the senior management team (in particular, the VP Sales) get too involved in the IPO process, such that the company takes its eye off the ball for a couple of quarters (especially in terms of pursuing and closing sales). The result can be, for example, that sales suffer in the quarter or two following the IPO. This can then lead to a drop in the (now publicly traded) share price of the tech company to below the IPO issue price, a situation that can be very discouraging to investors and employees alike (employees because they typically have options to buy shares of the company).

Therefore, it is critical that you have all senior management exercise great discipline in terms of the amount of time devoted to the IPO process. The team cannot lose sight of the fact that as exciting — and challenging and important — as the IPO process is, there is still a business to run as well (if not more so, now that you will soon be a public company, and everyone will see your next quarterly financial results).

External Advisors

In addition to your internal team, the IPO process will require you to harness the talents and efforts of at least three different external advisors. First, you will need an investment banker (and their investment bank) to be your underwriter for the going public exercise. The


banker will tell you whether the financial markets will want to buy shares of your company, and at what price. They will conduct due diligence (they will have a law firm assist them with this process) on your company (more on diligence in next issue), and will help craft the all-important prospectus document (more on this key document below and in the next issue).

Most importantly, the banker will help sell your shares. They will determine with you what mix of retail and institutional public shareholders makes the most sense for your company. Then they will reach out through their distribution channels to build an order book for your shares towards the tail end of the IPO process. Particularly if you are a younger tech company without a significant track record, the credibility and reputation of your banker will be important.

The IPO process is an extremely intensive legal exercise. In order to protect the investing public, and generally the integrity of the public stock markets, a host of legal rules and regimes surrounds the prospectus document and other aspects of the IPO process. Therefore, you will need a law firm with two strengths to assist you through the going public exercise. Of course the law firm must have solid expertise in securities law, and specifically with IPOs. But it should have deep experience in the tech sector as well, so that it fully understands your technology and your unique business model. This knowledge will be invaluable in crafting the prospectus and conducting due diligence.

Finally, you will need an accounting firm to help you work through the numerous regulatory requirements surrounding your financial statements and other accounting-related requirements. As a threshold matter, your prospectus will have to include audited financial statements for the last three fiscal years. But the accountant will help in other ways as well, including assisting with financially oriented portions of the prospectus, such as the MD&A section (Management Discussion and Analysis), where you have to give a meaningful explanation of your financial results in narrative terms.

Sound Expensive?

Yes, all this hired help is going to be expensive. The banker will typically charge a fee equal to six per cent of the amount of money raised from the new public shareholders through the IPO process. The lawyers and accountants typically charge on an hourly rate basis. Then there are printing costs for the prospectus, as well as French translation costs for the prospectus if you want to see your shares sold in Québec. And if you want to sell some of your shares in the US, there will be additional costs for US legal assistance.

When you are working up the budget for your professional advisors, however, we would suggest you look beyond the raw dollar amount of the fees, and instead consider these costs relative to the total funds raised in the IPO process. Moreover, saving professional fees by cutting corners on items like due diligence is not a good idea, given that significant personal and corporate liability can attach to a faulty


prospectus. So, as with all premium legal, accounting and other professional services, the real touchstone ought not to be cost but value.

The All-Important Prospectus

Once you’ve assembled your working group (of internal company people and your external advisors), the focus of the IPO process turns to the crafting of the all-important prospectus. This is the document that the law says you must give to prospective investors in your soon-to-be-public company. The prospectus is a critically important document.

To understand the pivotal role of the prospectus, consider the difference between selling shares of your company to hundreds of retail (i.e., individuals) and perhaps tens of institutional (i.e., mutual funds) investors (which is essentially what the IPO process is about) to selling shares to a venture capital investor (VC), which you likely did a few years ago when you were at an earlier stage of development as a tech company.

The VC was a seasoned investor in tech companies, and in particular in your space (be it software, hardware, chips, etc.). So the VC thoroughly understood your market, business and your challenges, and then personally conducted due diligence on your management team, your technology and your financials. In short, the VC got to know you really well, and by sitting with you in numerous meetings over the space of six to eight weeks, the VC had all of its specific questions answered. Then the VC’s lawyer prepared a share purchase document in which you gave a

long list of representations and warranties about your business. Only after all of this information exchange did the VC invest several millions of dollars in your shares.

For practical purposes it is, of course, impossible to repeat this detailed, personalized information exchange process when selling shares to hundreds of public investors. The alternative is the prospectus. This document must give “full, true and plain” disclosure of all material facts relating to your company and its business, so that prospective investors can come to understand your circumstances before they decide to buy your shares. This is the core public policy “deal” reflected in the securities legal regulatory system — namely, you can sell your shares to people you have never met before, provided you deliver to them a meaningful prospectus document so that they can make an informed decision.

In the next issue, we look at the various particular requirements of the prospectus, and the due diligence process that needs to underpin the document.

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



Canada: Proposed Canadian Tax Changes Expected to Impact Cross-Border Private Equity and Venture Capital Investors

Current Canadian tax law creates barriers to efficient cross-border investment. In particular, many international private equity investors, particularly US-based venture funds, have complained about the additional time and expense associated with exiting Canadian-based investments. Proposed changes to the Section 116 withholding and clearance certificate obligations, announced in the federal budget on February 26, 2008, should come as good news to US venture capital investors active in Canada.

Under current Canadian tax law, a US-based fund investing directly in a Canadian operating company, on a disposition, will generally be required to obtain a certificate from the Canada Revenue Agency (typically referred to as a “Section 116 Certificate” after the relevant section in the Income Tax Act (Canada)), file a Canadian tax return and provide certain details regarding each of its limited partners. Private equity sponsors are often precluded from doing this under the terms of their limited partnership agreements. Even if they are permitted to do so, compliance with the requirements can be an organizational headache.

To avoid these administrative burdens, many US venture funds have resorted to structuring their investments in Canada through an exchangeable share transaction. These funds

invest directly in a newly established Delaware company into which all of the shares of the existing Canadian operating company are exchangeable upon the occurrence of certain events.

Other US funds have been known to structure their Canadian investments through a corporate vehicle resident in a third jurisdiction (e.g., Barbados or Luxembourg) that mitigates the administrative burden and may otherwise be more favourable from a tax-planning standpoint.

In many cases, these complexities have resulted in significantly higher transaction costs or have chased away investors that might otherwise have considered investing in Canada. In fact, some commentators have blamed the lack of venture funds available to Canadian entrepreneurs on these tax restrictions.

In the 2008 federal budget, the Canadian government proposed revisions to the Section 116 withholding and clearance certificate obligations, and the hope is that these revisions will alleviate some of the cost and inconvenience associated with certain cross-border transactions. The effect of the proposals may be to ease the compliance burden imposed on certain non-resident sellers and to allow such sellers to avoid the related purchase price withholding on closing.

To qualify for the proposed relief, several requirements must be satisfied. Given the potentially significant exposure to buyers seeking to hold-back, buyers will need to diligently assess whether the relevant criteria


can be adequately satisfied. In certain instances, opinions, representations and certificates may be inadequate to provide buyers with the required level of assurance.

On a separate note, but relevant to venture funds, the budget also proposed enhancements to Canada’s scientific research and experimental development incentives, in particular for R&D undertaken by Canadian-controlled private corporations and for certain eligible R&D to be undertaken outside of Canada.

For a more detailed discussion of the revisions to the Section 116 withholding and clearance certificate obligations, please read our firm's federal budget commentary.

Contact: W. Ian Palm in Toronto at [email protected] or Patrick McCay in Toronto at [email protected]

Ontario: Ontario 2008 Budget: Limited Tax Breaks for the Tech Space

On March 25, 2008, Ontario released its budget. Budget measures relevant to technology companies and their investors include a limited 10-year corporate tax holiday, the Ontario Innovation Tax Credit and the Ontario Interactive Digital Media Tax Credit.

10-Year Corporate Tax Holiday (Commercialization Activities)

The budget proposes a 10-year tax exemption for new corporations that commercialize intellectual property (IP) developed by qualifying Canadian universities, colleges or research institutes.

Qualifying corporations established after March 24, 2008 and before March 25, 2012 would be exempt from Ontario corporate income tax and corporate minimum tax for their first 10 taxation years. The exemption would apply to corporations incorporated in Canada that derive all or substantially all of their income from eligible commercialization activities carried on in Ontario. Such activities would generally include the development of prototypes and the marketing and manufacturing of products related to IP in priority areas such as bio-economy/clean technologies; advanced health technologies; and telecommunications, computers and digital technologies.





Ontario Innovation Tax Credit

The Ontario Innovation Tax Credit (OITC) is a 10 per cent refundable tax credit available to small- and medium-sized corporations that carry on scientific research and experimental development (SR&ED). The budget proposes to extend the OITC by paralleling enhancements to the federal SR&ED tax credit proposed in the 2008 federal budget.

The budget further proposes to increase the OITC expenditure limit from $2 million to $3 million and to increase the taxable income phase-out limit to $700,000 while maintaining the current taxable capital phase-out limit of $50 million.

Ontario Interactive Digital Media Tax Credit

The budget proposes to increase the Ontario Interactive Digital Media Tax Credit (OIDMTC) rate for certain corporations from 20 per cent to 25 per cent for qualifying expenditures incurred after March 25, 2008 and before January 1, 2012. The budget also proposes to extend the enhanced 30 per cent OIDMTC rate for small corporations to January 1, 2012.

For information on the other proposals in the budget, please read our firm's commentary.

Contact: Patrick McCay in Toronto at [email protected] or Stefanie Morand in Toronto at [email protected]





Technology Contracting OUTSOURCING

International: Offshore Business Process Outsourcing 101 — Part II

This article is the second part of a three-part series on the basics of offshore business process outsourcing (BPO). In the last issue, we explored business trends and strategies in offshore BPO. In this issue, we discuss certain key legal considerations that arise in offshore BPO transactions. The last instalment will examine the ongoing relationship between a company and its outsourcing vendor after the offshore BPO transaction has been consummated.

Protecting Your Company’s Information

To a company considering offshore BPO, the most important issue is often that of protecting the company’s information, especially the personal information of the company’s customers and employees. An information breach can result in a variety of legal liabilities, regulatory intervention, and harm to a company’s goodwill and reputation.

Your company is obligated to protect its sensitive, proprietary or confidential information or data through a variety of sources, such as:

• statutory law (e.g., privacy and employment laws);

• regulatory requirements (e.g., the rules and processes promulgated by banking authorities and industry-based review boards);

• agreements with third parties (e.g., non-disclosure agreements and agreements allocating intellectual property rights);

• and internal policies (e.g., privacy and security policies).

Few of these sources will likely directly govern the conduct of your outsourcing vendor, but they may make your company liable for breaches by its service providers. In addition, some regulators may require your company to restrict the transmission of company data outside Canada. While your outsourcing vendor may need to comply with privacy and data security requirements in their jurisdiction, the laws of foreign jurisdictions governing the protection of information typically are not as robust as Canadian laws.

In order to address your company’s own legal requirements, you will need to rely on the outsourcing contract to set out the outsourcing vendor’s responsibilities for protecting your company’s information. The remedies and liability provisions in the contract should give the vendor an incentive to comply.

These standards are typically articulated through appropriate confidentiality provisions;


obligations to comply with privacy and related laws, policies and practices that govern your company (as opposed to relying on the privacy laws governing the outsourcing vendor in its home jurisdiction); and detailed security requirements that meet or exceed the standards by which your company would protect its information and data. As technology advances both in the protection and exploitation of sensitive data, the vendor should be required to suggest and implement new security measures to meet industry best practices.

Intellectual Property (IP) Ownership in Trans-Oceanic Transactions

A typical outsourcing contract includes provisions that apportion ownership of IP, including IP created during the course of the contract. The outsourcing contract should give your company all the ownership and license rights it needs to run its business following expiration or termination of the contract. Business processes themselves may be patentable under US patent laws, so consider whether your company needs the competitive advantage of patent ownership in new processes (or improvements to existing processes) created under the outsourcing contract.

Regardless of what is to be owned under the outsourcing contract, and by whom, it is a good idea to have the IP provisions reviewed by counsel in any country whose IP laws may apply. The statutory rules (e.g., for effecting an assignment or for the automatic reversion of IP rights) of that jurisdiction may differ from Canadian and US laws. These rules can often

be superseded by contract, but doing so may require specific references to the applicable statutory scheme in order to be effective.

Dispute Resolution (and How to Enforce the Outcome)

Outsourcing customers rarely sue their vendors, and vice versa, preferring instead to resolve contractual disputes through internal escalation and negotiation. If a dispute cannot be resolved this way, then the parties may decide to pursue litigation or arbitration. If a decision is obtained from a court or an arbitrator, the courts in the vendor’s country must enter a judgment in favour of that decision in order for it to be enforceable there.

By some estimates, it can take several years, for example, for an Indian court to hear a proceeding based on a foreign court judgment. Binding arbitration is often a more practical formal dispute resolution mechanism for offshore outsourcing. Generally, the wait is significantly shorter to enforce foreign arbitral awards, as long as they have been made under international arbitration regimes to which India (or your vendor’s country of operations) is a signatory.

Leveraging the Onshore Relationship

To be able to enforce any judgments and to manage the relationship with your offshore outsourcing vendor, your company will want to have some assurances that the entity signing the outsourcing contract on behalf of the vendor has some skin in the game. Many offshore outsourcing vendors today look more


like international conglomerates than the local models of 10 years ago. Thus, make sure you are dealing with an entity that has assets and revenue streams to back up its obligations under the outsourcing contract.

If the vendor has Canadian operations, you may want to require the Canadian entity sign the outsourcing contract, in addition to the offshore entity that will actually perform the services. Furthermore, if your company has an existing relationship with the Canadian entity’s personnel, consider making those personnel part of the governance and escalation structure in the outsourcing contract. This will help to ensure accountability within the vendor’s organization both in Canada and offshore.

Minding Local Tax and Employment Laws

It’s always a good idea to have an offshore outsourcing contract reviewed by competent local counsel in any country to which your company’s processes are being outsourced. The host country’s tax and employment laws are particularly important.

Certain countries (India, again, is the most well-known example) have tax laws that may subject certain of your company’s income to tax by the host country’s taxing authorities by virtue of the outsourcing arrangement. Under Indian tax law, a company may be deemed to have created a “permanent establishment” in India — thus creating potential Indian tax liability — if the taxing authorities conclude that the outsourcing relationship is more like an extension of the company’s onshore operations than an arm’s-length transaction.

Similarly, some foreign laws may deem your outsourcing vendor’s employees to be employees of your company and may require your company to comply with local employment laws. This is sometimes referred to as a “co-employment” problem.

The test for a permanent establishment and co-employment is often multi-factored and may take into account several characteristics of the planned arrangement. In the case of the permanent establishment test, these factors can include the amount of time your company’s employees spend in India, whether your company is entitled to use the vendor’s offshore facilities to conduct business operations, and whether the vendor’s employees are empowered to enter into contracts on your company’s behalf.

Schedule the local law analysis as early as possible and ensure it has been completed before the vendor starts providing services for your company. There are a number of ways to mitigate local tax risk, ranging from adjusting the specific ways your company manages its outsourcing vendor on a day-to-day basis to restructuring your organization at a corporate level. In any case, these measures should be implemented sooner rather than later.

In the next issue, we will survey ways for a company to maximize its ongoing relationship with its offshore BPO vendor.

Contact: Joel Ramsey in Toronto at [email protected]



TECHNOLOGY AGREEMENTS

Canada: New Filing Requirement for “Material Contacts” Entered into in the Ordinary Course of Business

Privately held companies that enter into contracts with Canadian reporting issuers (public companies) may be surprised to learn that those contracts may become publicly available through the Internet. Recent changes to National Instrument 51-102 Continuous Disclosure Obligations now require reporting issuers to publicly file certain “material contracts” entered into “in the ordinary course of business” on SEDAR. Material contracts entered into on or after January 1, 2002 and still in effect will also be subject to this new filing requirement if they were not previously filed.

Before these changes came into effect on March 17, 2008, reporting issuers were not required to file on SEDAR material contracts entered into “in the ordinary course of business.” A material contract is a contract to which a reporting issuer or any of its subsidiaries is a party that is material to the reporting issuer. It generally includes a schedule, side letter or exhibit referred to in the contract, as well as any amendment to the material contract.

Now, reporting issuers must file certain types of material contracts which are entered into in the ordinary course of business. These contracts include franchise, licence or other agreements to use a patent, formula, trade

secret, process or trade name. In addition, material contracts on which the reporting issuer’s business is substantially dependent are also subject to the new filing requirement. Thus, material technology licensing agreements and outsourcing agreements may need to be filed and could therefore become publicly available.

The National Instrument permits redacting or omitting certain contractual provisions if an executive officer of the reporting issuer reasonably believes the disclosure of that provision would be seriously prejudicial to the interests of the reporting issuer or would violate confidentiality provisions. A one-sentence description of the type of information omitted or redacted must be included.

It should be noted, however, that no omission or redaction is possible if a provision relates to:

• debt covenants and ratios in financing or credit agreements;

• events of default or other terms relating to the termination of the material contract; or

• other terms necessary for understanding the impact of the material contract on the business of the reporting issuer.

For material contracts entered into prior to March 17, 2008, regulators may consider granting an exemption to redact certain provisions if the disclosure of that provision would violate a confidentiality provision. In considering whether


to grant an exemption, regulators will take into consideration a number of factors, including:

• whether an executive officer of the reporting issuer reasonably believes the disclosure of the provisions would be prejudicial to the interests of the reporting issuer; and

• whether the reporting issuer is unable to obtain a waiver of the confidentiality provision from the other party.


Privately held companies may want to include confidentiality provisions in their contracts that include a right to approve any redaction of the contract. While any approval right will always be subject to the requirements of applicable law (including those of the National Instrument), such a provision would give privately held companies some ability to review what sensitive contractual provisions are publicly available.

Reporting issuers will need to carefully review material contracts still in effect that were entered into on or after January 1, 2002 and that have not been previously filed. As part of this review, close attention should be paid to any existing confidentiality obligations in the agreements. Before posting the contracts on SEDAR, confidential or prejudicial information in the contracts and the schedules should be redacted or omitted (if permitted by the National Instrument)

and a one-sentence description added. In addition, reporting issuers must be careful not to disclose personal information in contravention of privacy legislation.

Reporting issuers should also be mindful of the new filing requirements when negotiating material contracts. In particular, they should ensure that the confidentiality provisions permit filing the contract on SEDAR. In adapting to the new requirement, reporting issuers should also identify standard form material contracts and establish a systematic review process for those contracts.

Contact: Patrick Boucher in Montréal at [email protected] or Frédéric Cotnoir in Montréal at [email protected] or Vanessa Grant in Toronto at [email protected]





Intellectual Property COPYRIGHT

Canada: iPod Levy Struck Down

Back in Volume 3, Issue 1, we reported that the Canadian Private Copying Collective (CPCC) had proposed a new tariff for 2008 and 2009 under the Privacy Copying Regime. Among their requests was a proposed levy on digital audio recorders, such as iPods. The Copyright Board of Canada agreed and granted the levy. However, on January 10, 2008, less than 24 hours after hearing the matter, the Federal Court of Appeal emphatically rejected the Copyright Board’s decision.

In an earlier case, the CPCC asked the Copyright Board to apply the levy to the non-removable memory of digital audio recording devices. The Board granted this request. The Federal Court of Appeal, however, concluded that the non-removable memory was not leviable and that the Copyright Board had no authority to certify a levy on digital audio recorders or their embedded memory.

While the CPCC tried to argue that the court’s previous ruling was not binding because digital audio recorders themselves were not specifically at issue, the court did not agree. It found that its earlier decision conclusively addressed the issue.


Although the court’s decision did not specifically address the scope of the Private Copying Regime, its ruling was a major victory for rights holders. If the Copyright Board’s decision had not been set aside, its sweeping language would have potentially expanded the Private Copying Regime to include not only digital audio recorders, but also a broad range of electronic devices such as computers and cellular phones.

Based on statements by the Copyright Board in previous decisions, the decision could have been interpreted to include copying from illegal peer-to-peer file-sharing sources within the Private Copying Regime. This result would have violated Parliament’s intent to limit the scope of the regime to provide compensation for copying music already owned by an individual for the person’s own private use. It also would have undermined the fundamental importance of exclusive rights and growing markets for the legitimate online distribution of music.

The Copyright Board’s decision also arguably violated Canada’s international and bilateral copyright treaty and convention obligations by failing to confine any exceptions to exclusive rights to narrow circumstances.



As of this date, the CPCC has not sought leave to appeal the Federal Court of Appeal decision from the Supreme Court of Canada, but we will keep you apprised of any further developments.

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




Privacy CASES/LEGAL DEVELOPMENTS

Canada: Video Surveillance Guidelines Issued by Privacy Commissioners

The Federal, British Columbia and Alberta Privacy Commissioners have jointly issued new guidelines for the use of video surveillance by private sector organizations. While recognizing that private sector organizations do have certain legitimate reasons to use video surveillance techniques, the Commissioners note that (i) privacy laws impose restrictions on the collection, use and disclosure of personal information, and (ii) video surveillance involves the collection of personal information.


The guidelines are directed to organizations subject to the Personal Information Protection and Electronic Documents Act (PIPEDA), which applies to organizations carrying out commercial activities in all provinces except B.C., Alberta and Québec; to all organizations carrying out commercial activities where personal information is transmitted across an international or provincial border, no matter where the organization is located; and to the employment relationship between federally regulated organizations such as banks, airlines and railway companies and their employees.

The guidelines are also directed to organizations that are subject to the B.C. and Alberta Personal Information Protection Acts.

Under these legislative regimes, the key legal test for the collection, use or disclosure of personal information is that these should be reasonable in the circumstances and done only with the consent of the individual involved.

The guidelines list 10 factors to consider when considering using video surveillance and when implementing a video surveillance plan:

1. Determine whether a less privacy-invasive alternative to video surveillance would meet your needs.

2. Establish the business reason for conducting video surveillance and use video surveillance only for that reason.

3. Develop a policy on the use of video surveillance.

4. Limit the use and viewing range of cameras as much as possible.

5. Inform the public that video surveillance is taking place.

6. Store any recorded images in a secure location, with limited access, and


destroy them when they are no longer required for business purposes.

7. Be ready to answer questions from the public. Individuals have the right to know who is watching them and why, as well as what information is being captured and what is being done with recorded images.

8. Give individuals access to information about themselves. This includes video images.

9. Educate camera operators about the obligation to protect the privacy of individuals.

10. Periodically evaluate the need for video surveillance.

The guidelines also discuss a number of other issues relating to video surveillance through a series of questions and answers.

Contact: Barbara A. McIsaac, Q.C. in Ottawa at [email protected]

Québec: Insurance Company Ordered to Pay Damages for Illicit Surveillance and Flaunting the Court’s Rulings

Employers or insurers looking to conduct video surveillance had better watch out — improperly conducting surveillance can attract stiff penalties in Québec. In February 2008, the Québec Court of Appeal ordered Penncorp Life Insurance Company to pay $125,000 in punitive damages to the insured, André Veilleux, after Penncorp tried to obtain evidence even though it knew the surveillance would infringe the privacy right of the insured, protected under Section 5 of the Québec Charter of Rights and Freedoms.

Mr. Veilleux, a 54-year-old who had operated a garage from 1982 to 2000, liquidated his business due to illness. He began receiving monthly disability insurance payments from Penncorp in 1998. In April 1999, Penncorp stopped issuing the disability payments. Mr. Veilleux sued Penncorp in 2001 for payment of the benefits. During the trial, Penncorp sought to introduce videocassettes from surveillance operations conducted in May and August 2002.

The Québec Superior Court refused to admit the tapes on the basis that the insurer lacked reasonable grounds to conduct surveillance and ordered Pencorp to pay the monthly disability payments Mr. Veilleux should have received from April 1999 to February 2003. The Court of Appeal upheld this decision in March 2004.



In June 2003, Penncorp hired the same investigation company to conduct another surveillance operation of Mr. Veilleux and his son. Mr. Veilleux and his son sued Penncorp for invasion of privacy in August 2005. In September 2006, the Québec Superior Court ordered Penncorp to pay Mr. Veilleux $12,500 for moral damages and $25,000 in punitive damages for invading Mr. Veilleux’s right to privacy, as well as flaunting the judiciary. Both Mr. Veilleux and Penncorp appealed the decision. In its February decision, the Québec Court of Appeal upheld the lower court judgment but increased the damages award to $125,000.


The Court of Appeal had previously ruled in the Bridgestone case that surveillance would not violate the Charter in all instances. In deciding whether to admit surveillance evidence, the court will consider whether:

• the surveillance was rationally justified and obtained through reasonable means;

• the company had a rational justification for conducting the surveillance before making the decision to conduct the surveillance — motives cannot be constructed after the fact;

• any shadowing was necessary and was conducted in the least intrusive manner possible;

• the company took steps to verify the information through less intrusive means before resorting to surveillance; and

• surveillance, carried out in public places, infringed the individual’s dignity.

Intentional intrusion occurs when the author of the illicit conduct demonstrates the intention to invade the right of privacy of another or acts knowing that infringement is very likely to occur. In light of the Veilleux decision, evidence obtained in such circumstances may not be admissible in court. Furthermore, Section 49 of the Charter provides that the victim is entitled to obtain compensation for the moral or material prejudice resulting therefrom and that the court may condemn the author to punitive damages. The plaintiff has to demonstrate that the behaviour of the author is outrageous or unreasonable, not justified, severe and repetitive.

In Mr. Veilleux’s case, the surveillance carried out in May 2002 was an illicit infringement of his right to privacy. The surveillance carried out in August 2002 constituted an excessive intrusion because it was carried out after the court had refused Penncorp the right to examine Mr. Veilleux and to request a medical examination. Penncorp took the matter in its own hands and sought justice itself. Penncorp tried to avoid the effects of the court’s ruling by conducting surveillance systematically and repetitively over three


days, in non-public places. Its financial motivation appeared to be malicious.

The Veilleux decision demonstrates the increasing importance that courts are affording privacy rights in the context of litigation. Insurance companies and employers that might have interpreted the Bridgestone decision as allowing surveillance should carefully consider whether the surveillance is warranted and should exercise prudence when using it.

Contact: Charles S. Morgan in Montréal at [email protected] or Julie Elmlinger in Montréal at [email protected]

Canada: Who Owns What: Do Employees Have a Reasonable Expectation of Privacy With Respect to Data Stored on Computers?

Is an employee entitled to privacy over e-mail and other data created and stored on a computer used for work purposes? What rights does an employer have to access that information? The answer to these questions depends on whether the employee has a reasonable expectation of privacy over the information stored on a given computer.

What is a Reasonable Expectation of Privacy?

Two criteria must be established to show a reasonable expectation of privacy. First, an employee must have a subjective expectation of privacy, which is usually demonstrated through steps taken to protect the information in question. Second, the employee’s expectation of privacy must be objectively reasonable.

Determining whether the subjective and objective criteria are present involves asking key questions such as:

• Who owns the physical equipment on which the data is stored?

• Has the data been transferred to the employer’s system or network or to third parties?

• Does the employer have an information management/employer access policy in place?

• How is the data arranged on the computer? Is employer data segregated from other material on the employee’s personal computer?

• Has the employee attempted to password-protect his or her computer and/or selected files?

Employer’s Ownership of the Computer

An employer’s ownership of a computer used by an employee for work purposes is a strong




factor militating against an employee’s reasonable expectation of privacy over data stored on that computer, even over data generated by incidental personal use. Several Canadian arbitrators have ruled that employees who use an employer system to send and receive e-mail messages and to post messages on discussion boards have no right to privacy. In one of these cases, the arbitrator stated that an employee could not expect to have any right of privacy when using the employer’s e-mail and Internet facilities.

Ownership is such a significant factor that in one case an arbitration board held that where a terminated employee had used the employer-owned laptop both at home and at work to access an independent Internet-based e-mail service (Hotmail), any reasonable expectation of privacy over his Hotmail e-mail account was trumped by the employer’s right to search its own property.

Employer Policies

Another significant factor in determining if a reasonable expectation of privacy exists is whether an employer has a policy governing e-mail and Internet use or not. In one case, the existence of an employer’s policy against the use of the e-mail system for unacceptable purposes, and a clear log-on warning that the system would be monitored in accordance with such policies, were found to undermine an employee’s expectation of privacy.

Employee’s Ownership of the Computer

If the employee owns the computer personally but uses it for work purposes, does a reasonable expectation of privacy exist with respect to the data stored on that computer? In Canada, the answer to this question is unclear.

In the US, certain decisions have favoured an employer’s right of access where an expectation of privacy is not objectively reasonable. For example, there was no reasonable expectation of privacy over the files stored on an individual’s own laptop, which had been connected to a military base network with a shared drive. Similarly, there was no reasonable expectation of privacy over the information stored on an employee’s computer, where an employee voluntarily brought his own computer to work to use for work purposes and took no steps to password-protect the data.


Many employers wish to monitor employee use of computers and networks for a variety of reasons, including preventing the collection and dissemination of illegal material (such as child pornography) and preventing employee theft of time associated with prolonged personal use of the Internet and the employer’s e-mail network.

Given the uncertainty of the law in Canada, employers should implement clear-cut and comprehensive policies governing their right to access data and systems. If an employer does not want an employee to


have a reasonable expectation of privacy over any data found on a computer, then this should be clearly stated. Employees should be required to acknowledge that they have read, understood and agreed to abide by the policies.

Employers should also make clear that copies of employer-owned data remain the employer’s property regardless of where the data is stored.

Finally, employers may manage employee privacy expectations over information stored on laptops by providing company laptops to employees for offsite work and capitalizing on their ownership of the equipment.

Contact: Barbara A. McIsaac, Q.C. in Ottawa at [email protected] or Helen Gray in Ottawa at [email protected]




Communications CASES/LEGAL DEVELOPMENTS

Canada: CRTC Approves Sale of BCE

On March 27, 2008, the Canadian Radio-television and Telecommunications Commission (CRTC) granted conditional approval of the deal to privatize Bell Canada Enterprises (BCE), Canada’s largest telecommunications company.

Under the transaction, BCE, which is also Canada’s most widely held publicly traded company, would become owned by a small group of investors that includes the Ontario Teachers' Pension Plan (Teachers’) and three American private equity firms, Providence Equity Partners International VI L.P. and its affiliated investment funds (Providence), Madison Dearborn Capital Partners V L.P. and its affiliated investment funds (Madison) and Merrill Lynch Global Partners, Inc. (Merrill Lynch). The transaction, valued at $51.7 billion, is the largest corporate acquisition in Canadian history and reputedly the largest private equity transaction in the world to date.

The transaction was subject to approval by several Canadian regulators, including CRTC approval under the Broadcasting Act. Although BCE’s main business unit, Bell Canada, is a telecommunications carrier, it has interests in several broadcasting licensees, leading to the requirement for Broadcasting Act approval. The CRTC review was primarily aimed at ensuring that BCE will remain “Canadian owned and controlled” within the meaning of Canadian

communications laws. These laws restrict the number of voting shares that can be held by non-Canadians in regulated Canadian communications businesses and the number of board members that can be non-Canadian. More significantly, they require the regulators to ensure that non-Canadians cannot exercise “control in fact” over the business, through any shareholder agreements or other arrangements.

The CRTC’s approval and the conditions it imposed on BCE are generally consistent with recent regulatory precedents, applied to the specific circumstances of the BCE transaction.

The CRTC reiterated the legal test for control that it approved when it reviewed the sale of Alliance Atlantis Broadcasting Inc.’s broadcasting companies. According to that test, “ ‘control in fact’ generally can be viewed as the ongoing power or ability, whether exercised or not, to determine the strategic decision-making activities of an enterprise. It can also be viewed as the ability to manage and run the day-to-day operations of an enterprise.”

Applying this test to the facts of the BCE transaction, the CRTC required:

• changes to ensure that the majority of BCE’s Board of Directors would always comprise directors who are both (i) Canadian by citizenship or residency and (ii) whose appointments are not directly or indirectly controlled by non-Canadians


• increases in the thresholds for future BCE transactions that non-Canadian shareholders could veto (e.g., incurring debt, selling assets and making investments) to at least 5 per cent of the value of the broadcasting undertakings;

• changes to the proposed Independent Programming Committee to ensure broadcast programming decisions were made by Canadians; and

• other changes to the corporate governance structure, including the makeup of the executive committee and the quorums for board meetings, to satisfy itself that BCE would not be effectively controlled by non-Canadians.

The CRTC also expressed concerns about whether the structure of the transaction complied with Ontario pension legislation, but, as discussed below, deferred to an opinion from the Ontario pension regulator that the deal was compliant.

The BCE transaction remains subject to regulatory approval by Industry Canada under the Radiocommunication Act. In addition, the transaction has been the subject of litigation by certain Bell Canada bondholders. On March 7, 2008, the Québec Superior Court approved BCE’s plan of arrangement for the transaction and dismissed all claims of the bondholders. The decisions dismissing these claims are currently under appeal. The transaction is also subject to the successful completion of financing arrangements made by Teachers’ and its private equity co-investors.

Background of the Proposed Transaction

BCE Inc. is the incumbent telecom service provider in most of Ontario and much of Québec and the Maritimes. Its subsidiaries include Bell Canada, Bell Mobility Inc., Bell Aliant Regional Communications Income Fund and Bell ExpressVu Inc. The companies provide telecom services including local and long distance phone service, wireless voice and data, and wireline Internet access. They are also involved in the distribution of broadcast services by satellite and terrestrial networks, as well as pay-per-view and video-on-demand services.

The CRTC received an application by BCE and some of its affiliates (the applicant) for authority to transfer effective control of the applicant to a corporation to be incorporated (BCE Holdco). BCE Holdco would hold the shares of BCE through its subsidiary 6796508 Canada Inc. (Bidco).

BCE and Bidco entered into a definitive agreement, effective June 29, 2007, pursuant to which Bidco agreed to purchase all of BCE’s issued and outstanding common and preferred shares (BCE proposal). The BCE proposal was approved by a majority of BCE shareholders at a special shareholder meeting that took place on September 21, 2007 in Montréal.

The proposed transaction is to be effected by way of a Plan of Arrangement under Section 192 of the Canada Business Corporations Act. The estimated value of the transaction is $51.7 billion.


Following the completion of the transaction, BCE Holdco would be privately owned, with share capital consisting of Class A voting, non-participating shares (Class A shares); Class B non-voting, participating shares (Class B shares); and Class C non-voting, participating shares (Class C shares). The Class B and Class C shares would be economically equivalent and would together represent the total equity value of BCE Holdco.

Morcague Holdings Corp. (Morcague) would hold 66.7 per cent of the Class A shares of BCE Holdco, with the balance of 33.3 per cent held by non-Canadians, namely Providence, Madison and Merrill Lynch. The Class A shares would be subject to a voting agreement between Morcague and Teachers’ Private Capital, a division of Teachers’.

The majority of the Class B shares and all of the Class C shares of BCE Holdco would be held by Canadians, with Teachers’ holding the largest equity stake in the company at 51.6 per cent. Non-Canadians would hold approximately 42 per cent of the equity of BCE Holdco, with Providence (17.3 per cent), Madison (9.0 per cent) and Merrill Lynch (6.1 per cent) being the largest non-Canadian shareholders.

Bidco and BCE would have Class A and Class B shares issued and outstanding. BCE Holdco would own 100 per cent of the Class B shares and 58.1 per cent of the Class A shares of Bidco, with the balance of 41.9 per cent of the Class A shares held by Morcague. Similarly, Bidco would own 100 per cent of the Class B shares and 58.1 per cent of the Class A shares

of BCE, with the balance of 41.9 per cent of the Class A shares held by Morcague. A summary of the proposed equity structure can be found on the CRTC’s website.

Regulatory Approvals

The transaction required approvals from a number of regulatory agencies, including the CRTC, Industry Canada, Investment Canada and the Competition Bureau.

The CRTC must approve the proposed transaction under the Broadcasting Act, as a result of the proposed transfer of BCE’s broadcasting assets (the subject of the March 27, 2008 decision). The CRTC also reviews ownership of telecommunications carriers under the Telecommunications Act on a periodic basis. Industry Canada, which acts as Canada’s spectrum regulator, must also review the proposed transaction under the Radiocommunication Act.

The tests for Canadian ownership and control are similar under all three acts, and stricter than those under the Investment Canada Act, which is therefore unlikely to pose a significant hurdle for the transaction. The fact that the investors acquiring BCE do not directly compete with it simplifies the Competition Act review.

Ownership and Control Review under the Broadcasting Act

The CRTC has authority under the Broadcasting Act to regulate the broadcasting system in Canada to implement identified policy objectives, including the requirement that the

http://www.crtc.gc.ca/Broadcast/eng/HEARINGS/2007/ex2007-19.htm


Canadian broadcasting system be effectively owned and controlled by Canadians.

The Governor-in-Council has issued a direction to the CRTC, pursuant to subsection 26(1) of the Act, respecting the classes of applicants to whom licences may not be issued or to whom amendments or renewals thereof may not be granted (the Direction). Pursuant to the Direction, no broadcasting licence may be issued, and no amendment or renewals thereof may be granted, to an applicant that is a “non-Canadian.” A “Canadian” is defined to include a “qualified corporation.”

The Direction defines a qualified corporation as a corporation that is incorporated or continued under the laws of Canada or a province, and that meets the following conditions:

• the CEO and 80 per cent of the directors are Canadians; and

• Canadians beneficially own and control, directly or indirectly, in the aggregate and otherwise than by way of security only, at least 80 per cent of all votes and all voting shares, both issued and outstanding.

In the case of a corporation that is a subsidiary corporation,

• the parent corporation must be incorporated or continued under the laws of Canada or a province; and

• Canadians must beneficially own and control, directly or indirectly, in the aggregate and otherwise than by way of

security only, not less than 66 2/3 per cent of all votes and all voting shares, both issued and outstanding.

Further, if a corporation does not meet the criteria set out above (i.e., the CEO or more than 20 per cent of directors are not Canadian, or Canadians do not own and control 80 per cent of all votes or of all issued or outstanding voting shares), then neither that corporation nor its directors may exercise control or influence over any programming decisions of a subsidiary that is a broadcasting licensee. Instead, an “independent programming committee” must be established, with responsibility for the programming decisions of the subsidiary corporation.

“Control” is an important aspect of the test. Under the Direction, the CRTC is to determine whether an applicant is controlled by a non-Canadian, on the basis of personal, financial, contractual or business relations, or any other considerations relevant to determining control in fact.

An important factor in determining whether non-Canadians exercise effective control over a broadcasting licensee is the degree of influence that non-Canadian investors can exercise through the board of directors and its committees. In that respect, the CRTC examines such elements as the number of board and committee members appointed by Canadian investors and by non-Canadian investors, respectively, and whether directors designated by Canadian investors are adequately represented at all board and committee meetings.


Specific Rulings on Canadian Control

After considering the issues related to Canadian control, the CRTC made its approval of the transaction conditional on specific amendments to the “Principal Investor Agreement” between the investors. The CRTC’s conditions were aimed at achieving the following objectives:

• to fix the membership of the Board of Directors at 13 including, within the total membership, six designees of Teachers’, one Independent Director and the CEO, all of whom must be Canadians;

• to provide that the Chair of the Board will have a tie-breaking vote over the appointment and dismissal of the CEO;

• to provide that a Chair will be appointed to the Board at all times, that the Chair will be a member of the Board but will not be a designee of a non-Canadian shareholder, will be a Canadian, and will not also serve as the CEO;

• to include a requirement that any vacancy on the Board or on a committee of the Board caused by Teachers’ losing the right to designate a member be filled by the designee of the Canadian investor who acquires the largest number of shares from Teachers’, and that any such designee must be a Canadian;

• to require BCE Holdco to maintain the same quorum requirements for the committees of the boards of Bidco and BCE as those that apply to BCE Holdco;

• to deem members of the Board designated by the non-Canadian principal investors to be non-Canadian for purposes of determining whether a quorum is present at any meeting of the Board;

• to add a second Teachers’ designee to the Executive Committee;

• to increase the threshold for transactions requiring investor approval to $110 million (so satisfying the five per cent of undertaking value adopted by the CRTC in its CanWest/Alliance Atlantis decision); and

• to incorporate specific definitions of “independent” (in the context of “independent directors”) and “ordinary course” (in the context of shareholder approval of transactions not in the ordinary course of business).

In addition to requiring BCE to file the amended Principal Investor Agreement, the CRTC directed it to file:

• an executed amended bylaw establishing the Independent Programming Committee, and providing that no member of the committee will be a director, officer or employee of any non-Canadian shareholder; and

• an executed amended Advisory Services Agreement, including amendments providing that the services rendered under that agreement by non-Canadian investors will not relate to programming and that


Teachers’ will be entitled to review and provide input with respect to the services.

Subject to compliance with these conditions, and its determinations regarding the tangible benefits package (summarized below), the CRTC approved the application.

Compliance with Ontario Pension Legislation

The CRTC also considered the issue of whether the structure of the transaction complied with Ontario pension legislation. The relevant law prevents a pension plan from investing directly or indirectly in securities of a corporation to which are attached more than 30 per cent of the votes that may be cast to elect the directors of the corporation (director-voting shares).

Under the proposed transaction, Teachers’ would not own more than 30 per cent of the director voting shares; indeed it would own no voting shares at all. However, a company owned by a former Teachers’ executive, Morgan McCague, would own 66.7 per cent of the Class A voting shares in BCE Holdco. An agreement between Teachers’, Mr. McCague, Mr. McCague’s company and related companies requires the shares to be voted in accordance with Teachers’ instructions and gives Teachers’ the right to require Mr. McCague to transfer the shares.

The CRTC accepted this arrangement only after being provided with a letter from the Financial Services Commission of Ontario stating that the proposed structure complied with the 30 per cent restriction on Teachers’ holding director-voting shares.

Tangible Benefits

The broadcasting assets involved in this transaction include Bell ExpressVu, cable assets in the province of Québec and a minority stake in CTVglobemedia Inc. The CRTC generally expects applicants to commit to specific benefits to the broadcasting system representing a financial contribution of 10 per cent of the value of the broadcasting assets transferred in a transaction. However, no benefits are required for the transfer of control of broadcasting distribution undertakings (such as Bell ExpressVu or the Québec cable assets), but only broadcast programming undertakings.

BCE allocated $109.6 million of the transaction value to the applicable broadcasting assets for the purpose of calculating the associated tangible benefits.

The CRTC revised the value of BCE's applicable broadcasting assets from $109.6 million to $219.1 million, based largely on inclusion in the valuation of an identified acquisition premium, the value of BCE’s “IPTV” service (Internet Protocol pay-per-view and video-on-demand) and the value of operating lease commitments. This higher valuation increased the tangible benefits package to $21.9 million. As part of this package, the CRTC has directed that $10.5 million be placed in a fund whose annual revenues will support new media initiatives.

Conclusion

The CRTC’s decision is generally consistent with recent precedents involving other transactions reviewed by the CRTC and Industry


Canada. However, the decision provides useful guidance on issues related to the specific circumstances of the BCE transaction.

The full text of the CRTC’s decision is available on its website.

Contact: Hank Intven in Toronto at [email protected] or Stephen Rawson in Toronto at [email protected]

Canada: Six Questions: Sex, Tax and Bill C-10

In February 2008, members of the Canadian film and TV industry publicly denounced amendments to the Income Tax Act contained in Bill C-10, labeling them “censorship.” Director David Cronenberg was quoted in Xtra.ca, an online magazine, as calling the provisions an assault on freedom of expression, and the source of potential catastrophe to financing a film “because the whole thing would fall apart like a house of cards.” Minister of Canadian Heritage Josée Verner rebuffed the censorship claims, asserting that Bill C-10 has nothing to do with censorship and its goal “is to ensure public trust in how tax dollars are spent.”

Why the fuss? This six-question primer covers key and background points in the current controversy over Bill C-10.

WHAT? Bill C-10, An Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that Act, amends the definition of “Canadian film or video production certificate” in subsection 125.4(1) of the Income Tax Act. A production must receive a Canadian film or video production certificate in order to qualify for certain federal tax credits administered by the Canadian Audio-Visual Certification Office (CAVCO).

Under the changes, a “Canadian film or video production certificate” will mean a certificate issued in respect of a production by the Minister of Canadian Heritage, certifying that the production is a Canadian film or video production in respect of which that minister is satisfied that certain criteria have been met concerning revenue share, and that “public financial support of the production would not be contrary to public policy [emphasis added].” This ‘public policy’ provision is the source of the controversy.

The heritage minister has stated that Bill C-10’s public policy provision will address “only the most extreme and gratuitous material.” News reports speculate that criteria for denying tax credits could include grounds such as gratuitous violence, excessive sex, significant sexual content that lacks an educational purpose, or denigration of an identifiable group.

In fact, the language of Bill C-10 provides no explanation of the criteria according to which a film could be considered, in the heritage

http://www.crtc.gc.ca/archive/ENG/Decisions/2008/db2008-69.htm




minister’s discretion, “contrary to public policy.” Bill C-10 also provides that the heritage minister shall issue guidelines under which a film or video production would satisfy the criteria. The bill expressly states that the guidelines will not be statutory instruments under the Statutory Instruments Act (and therefore not governed by the process of review and public comment afforded to regulations). At the time of writing of this article, the heritage minister had not released any guidelines nor given precise indications of their content, despite urging from members of the film and TV industry.

On April 2, 2008, the Department of Finance reportedly argued, before the Standing Senate Committee on Banking, Trade and Commerce, that the criteria for offensive film and TV productions should not be included in the legislation or its regulations — the court could void regulations due to vagueness but were likely to be more lenient with criteria contained in guidelines.

Minister of Canadian Heritage Josée Verner also appeared before the Senate banking committee, stating that Canadian Heritage would not apply the public policy provision until 12 months after Bill C-10 received royal assent. In addition, she invited input from the film and TV industry on the development of the guidelines. Members of the industry have subsequently voiced concerns about being involved in the development of censorship guidelines, since they are opposed to their very concept.

WHEN? The bill was passed by the House of Commons with all-party support on October 29, 2007. It received its second reading in the Senate on December 4, 2007. At the time of writing this article, the Senate banking committee was conducting hearings on Bill C-10, and concerned parties were appearing before the committee.

WHERE? The bill must undergo its third and final reading in the Senate. The Senate banking committee delayed a third and final reading of Bill C-10 in late February 2008, when public criticism of the bill erupted, putting the matter on hold until April 2008.

WHO? Objectors within the industry include a wide range of groups and individuals, including directors, actors and politicians who have publicly voiced opposition to the bill. Groups expressing concern or lobbying to challenge the bill include ACTRA (Alliance of Canadian Cinema, Television and Radio Artists), the Writers Guild of Canada, the Directors Guild of Canada, and the Canadian Film and Television Production Association.

WHY? A similar “public policy” provision was proposed in draft regulations to the Income Tax Act in 2003 by then Liberal Heritage Minister Sheila Copps. Ms. Copps was quoted in various press reports as explaining that the intention of her proposed provisions was to establish “reverse onus” for producers of extremely objectionable material, and to give the heritage minister discretion to prevent a film from receiving a tax credit in extreme cases.


The 2003 proposal arose in response to the film Karla about the lives of Paul Bernardo and Karla Homolka, and the hypothetical scenario where a film such as Karla might be eligible for tax credits had it been produced in Canada. However, the Income Tax Regulations enacted in 2005 did not contain the provision granting ministerial discretion to deny tax credits to films considered contrary to public policy.

The motivation for the Conservative government’s inclusion of the public policy provision in Bill C-10 is unclear. Traditionally, the tax credits have been highly labour-driven, designed to encourage producers to hire Canadians using relatively objective criteria that award points to a production based on Canadians hired for key positions. Current regulations already exclude content such as pornography, news, reality television, game shows, talk shows, corporate video and advertising.

HOW? The affected federal tax credits are not the only source of funding available to film and TV producers. Other direct and indirect sources are available from federal, provincial and private sources, including Telefilm Canada (also administered under Canadian Heritage), banks, provincial tax credit programs and other private financiers. Practically, however, CAVCO tax credits and Canadian Program certification are often critical components to secure funding for Canadian productions. Consider that:

• Domestic film and TV productions typically apply and may obtain subsidies at the script stage, but refundable tax credits are

subsequently applied for and received after completion of principal photography.

• Domestic productions often rely on funding from more than one source. Other sources of funding may base their funds or advances to the producer on the expectation or condition that the federal tax credit and certification as a Canadian Program by CAVCO will be received.

• A producer (or financiers) therefore will not know if a production is unacceptable until after it has been shot, monies have been spent and the reviewing committee has reviewed the film and rendered a decision, should it choose to do so.

• Producers who are denied tax credits could face a great risk of exposure to repay financiers whose grants or advances (e.g., Telefilm Canada, bank and distribution advances, etc.) were based on anticipated tax credits. This could potentially result in business or personal bankruptcy for the producer.

• The public policy provision may not affect foreign productions shooting in Canada that receive CAVCO-administered federal tax credits but are not considered “Canadian” productions. Canadian Heritage representatives have argued that such tax credits are intended to encourage investment based on spending in Canada and not on content.

Supporters of the public policy provision claim it is only fair that public monies not be used to


support the production of offensive content, and that nothing stops producers of such content from making their projects using other funding.

Opponents of the amendments raise numerous concerns, including:

• the importance of the tax credit and Canadian program certification to financing arrangements;

• the lack of clarity about who will decide what norms are “contrary to public policy”;

• the lack of guidelines or criteria;

• the discretionary nature of how review and decisions will be exercised;

• the volatile and practical effect of the timing and subjectivity of decisions;

• the resulting inability of producers to secure adequate financing for their productions; and, of course,

• the aftertaste of censorship.

Banks may be discouraged from providing the necessary loans to edgier, riskier productions if the projects may not be eligible for the tax credits on such subjective terms.

If the guidelines are put in place, some opponents argue self-censorship will result — writers and producers will write to the guidelines in order to ensure tax credits are received so the production can be made. Either way, they argue, the end result may

be a freeze on the artistic expression of edgy, unique Canadian voices in film and TV.

Contact: Jeanette Lee in Toronto at [email protected]

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

This article continues our four-part series exploring the effect of new technology on cultural products. This instalment looks at the future of the television sector in the face of technological change. The sector’s future health depends on maintaining a distinct Canadian marketplace for audiovisual rights.


Canadian broadcasters benefit from a number of protective measures. These include the following five measures:

1. limits to the licensing of new competing free-to-air TV broadcasters in Canada, including foreign-ownership requirements;

2. must-carry and priority provisions for local Canadian TV signals on cable and satellite companies;

3. the simultaneous substitution policy applicable to the imported signals of the “4+” US border stations, which



benefits Canadian free-to-air TV broadcasters carrying the same program at the same time;

4. Section 19.1 of the Income Tax Act, which disallows advertising expenses placed by Canadian advertisers on US border stations as a business expense; and

5. penal provisions for the unauthorized reception of encrypted signals.

It is interesting to note that these five protection measures are not unique to Canada. The US has exactly the same five protection measures in place to help their local broadcasters. In fact, the US is even more protective of its local TV broadcasters in two respects.

First, cable and satellite companies in the US are not permitted to carry alternative versions of network signals (whether time-shifted or otherwise) into local markets, but must honour the exclusive territory of local TV station network affiliates. By contrast, we allow time-shifted Canadian and US free-to-air TV signals to be carried by cable and satellite distributors into markets right across Canada. Local network affiliates in the US, jealous of their market exclusivity, would never allow that.

Second, as an alternative to “must-carry” rules, local TV broadcasters in the US can elect to require “retransmission consent” by local cable companies, which can translate into “fee for carriage.” The

Canadian Radio-television and Telecommunications Commission (CRTC) is currently considering whether to have a similar regime in Canada.

Canada does have a few protective measures of its own. For example, we prohibit the carriage of competing US pay and specialty services on Canadian cable and satellite companies, in order to support our local versions of those services. What we don’t prohibit is the US programming on those services. So we don’t get HBO. But we do get all the HBO programming.

People who argue for “broadcast deregulation” often fail to realize that US law matches ours in many respects.

For example, proponents of “open skies” — who want to erase any borders — may not realize that US law prohibits the reception of Bell ExpressVu and Star Choice in the US, just as Canadian law prohibits the reception of DirecTv or Echostar in Canada.

Both the US and Canadian laws and regulatory measures are intended to protect the integrity of the rights marketplace. (In addition to supporting copyright, Canadian law supports the CRTC’s rules.)

The important point to note is that the Canadian broadcasting system’s crucial underpinning is the fact that the Canadian broadcast marketplace for programs is distinct from that of the US. And copyright


owners on both sides of the border generally want to keep it that way.

In that regard, it is important to note that the US does not pressure Canada to “roll back” any of these measures. In fact, as shown in the iCraveTV case, US program rights holders completely support the strengthening of measures to protect the integrity of the Canadian border for copyright purposes. The only US trade pressure comes from suggestions that existing players that are allowed limited access to the Canadian market (e.g., Spike or Country Music Television) may have their current status diminished by CRTC policies.

Thus, insofar as the integrity of the Canadian rights market is concerned, the major players offer little support for any significant change in the policies supporting the industry.

And contrary to popular opinion, neither the advent of direct broadcast satellites nor the introduction of high-speed Internet access have eroded the strength of the Canadian broadcast sector in practice.

The penetration of US direct-to-home satellite services in Canada continues to be an irritant, and strengthened penalties against the black and grey satellite markets will continue to be necessary. But the penetration of DirecTv and Echostar is still only a fraction of the penetration of the authorized Canadian suppliers, Bell ExpressVu and Star Choice, which have been extremely successful.

Insofar as satellites are concerned, audiences show a clear preference for locally originated services that have a mix of national and imported programming. The television audience share of foreign-source channels available by cable or satellite in Britain, France, Germany, Italy, Greece, Spain and Portugal is less than five per cent. In a number of cases, it is effectively nil. The key is to occupy the field with local services in the popular program niches.

As for the Internet, it is certainly a powerful new medium. But far from being a threat to conventional broadcasting, the Internet has exhibited unique weaknesses as well as strengths.

In its report on the impact of technology to the Governor-in-Council, tabled on December 14, 2006, the CRTC divided audiovisual content on the Internet into three broad categories:

• User-generated content — This tends to be inexpensively produced, largely non-commercial, lower-quality content. This type of content is manifested in the success of social networking sites such as YouTube and MySpace.

• Relatively inexpensive, commercial content — This includes news and sports clips, music, and other information and entertainment content. Canadian content of this type abounds on Canadian television and radio today and is generally


viable in Canada without significant direct subsidy.

• High-quality, relatively expensive programming — This type of content, particularly drama and documentary, is popular on Canadian television but has generally not been produced in Canada without significant subsidy. Canadian content in this category remains largely “uneconomic.”

This three-way categorization is useful, since it allows us to focus on the third category, where Canadian content production needs the most help and where the economics are the most problematic. Programming in the first two categories does not face the same economic threats, and Canadian content in these categories appears to be flourishing on the Internet. In its report, the CRTC stated that:

The evidence shows that the open nature of the Internet and other new digital media is allowing user-generated, non-commercial audio-visual content generated by Canadians to flourish. This user-generated content would also appear to be outside the intended scope of the Act. In any event, user-generated content appears to require no regulatory intervention, at this time.

In the second category of relatively inexpensive commercial content, Canadian undertakings are, at the present time, showing evidence of

successfully competing without regulatory intervention. For example, Canadian websites dominate in the news and information category, with 17 out of the top 20 most popular sites (by monthly visitors). The Commission was not provided with specific evidence on the availability or usage of Canadian content on the Internet but, at least in this category, there appears to be no compelling evidence for regulatory intervention, at this time.

It is in the third category of high quality, relatively expensive content, still nascent on Internet and mobile platforms, that parties expressed the most significant differences of opinion.

It is this third category — “high quality, relatively expensive programming, such as drama and documentary” — where it is crucial that Canadian private broadcasters maintain the integrity of the rights marketplace, so that they can use the profits from imported high-quality programs to support the creation of Canadian drama and documentaries. Does the so-called “borderless” Internet threaten the integrity of the Canadian rights marketplace in this regard?

In fact, as rights holders begin to use the Internet to offer downloads of films and other audiovisual programs, they are beginning to use the same geographic borders and time windows as they apply to conventional television. Yes, in the US you can get downloads of


Desperate Housewives for $1.99 an episode. But only a day after the episode has been broadcast on the ABC Network. And those downloads cannot be received on computers outside the US.

Now how can borders be maintained on the Internet?

This is an interesting story. The key piece of information is the Internet Protocol (IP) address assigned to each computer that accesses the Internet through an Internet service provider. When you click on a website, you send that website your computer address. Why? So that the website can send data back to your individual computer.

Of course, millions of these addresses exist. But enterprising firms, mostly in Japan, have worked up lists of these addresses tied to their location. They can determine that certain ranges of addresses are assigned to computers in Canada. Or the US. The lists are updated every hour. So when you click onto a website, the website can look up your address on these lists and say, “I’m sorry we don’t serve your territory.” Or it can refer you to a more appropriate website.

A number of such providers exist, including Akamai, Limelight, Tometa and RealNetworks. These are global companies with file servers in over 100 countries that manage Internet traffic around the world for the big media companies.

A review of the statements found on their websites is instructive. This is from the Akamai.com website:

Akamai License Delivery offers an integrated service for securing, delivering and monetizing valuable audio and video content across PCs and portable devices. It enables content owners to protect their content and make it available for e-commerce with a wide variety of consumer payment models — pay-per-view, subscription, limited usage, no replication and many others…Key Features: …Geolocation to control distribution.

This is from the Tometa Software website:

With a free SDK, free e-mail support and code examples in almost any language, Tometa WhereIs easily provides information on the geographic location of Internet visitors and IP addresses. Cutting edge IP geolocation technology and continuously updated databases allows just a single line of code in your program or website to give you the following information: City name (e.g. Spokane), State or Region name (e.g. Washington), Full country name (e.g. United States of America), Postal code, Area code (e.g. 509), Latitude, Longitude, IP address, Country code (e.g US), Country code (e.g USA), DMA Code (e.g. 881), Region code (e.g. WA), Country Flag Graphic (large or small), Get a Full Country List.


And this is from the Shareme.com website:

GeoBlock filters all traffic from the client to your web-server based on locations that you select. You can even block locations all the way down to the state and city level! It is a fact that most hack attempts come from certain areas and countries. Stop them before they start and protect your site with GeoBlock!...Utilizing the Tometa WhereIs web service for updates, GeoBlock keeps a constant and updated database of every IP on the internet and the location for that IP.

And finally, from the RealNetworks.com website:

Geo-Blocking allows you to configure business rules around the geographical location of your end users. Use Geo-Blocking to analyze where your users are located or to block access to certain geographical regions based on broadcast rights.

So are there borders on the Internet? Yes, there are. Not only are borders possible, but for high-value audiovisual product, they are necessary in order to have an orderly marketplace for the exploitation of rights. And everyone uses them. CBS, NBC, Fox, ABC, CTV, Global — they all use geolocation software to control distribution of high-value audiovisual programming. While the systems are not foolproof, they are considered to be 95 per cent effective.

The purpose of that control goes back to the economics of culture that we looked at earlier. Revenue in the TV world is driven by “high quality, relatively expensive programming, such as drama and documentary.” This programming has to be financed up front and is very risky. When those programs succeed, and become one of the Top 20 shows that everyone talks about around the water cooler, they can be very profitable. But only if they can be sold to multiple platforms in different territories at different prices. So borders become important.

With this in mind, let’s go back to the IBM report from 2006. Is the Internet going to spell the end of television as we know it?

Well, not really. In fact, if you talk to the people who run the television industry, you now find a remarkable consensus. Yes, the Internet is important. Yes, we want our programs to be promoted and downloaded, whether on the Internet or on cellphones. But these extra platforms, far from cannibalizing TV viewing, are actually accretive to TV viewing.

By promoting the program, and permitting people to catch up on missed episodes of scripted drama, these platforms are increasing the stickiness of television.

And that shows up in the numbers.

Looking specifically at television in Canada, despite the introduction of satellites and the Internet over the past decade, the


amount of viewing and the share of audience enjoyed by Canadian conventional, pay and specialty TV broadcasters has increased rather than decreased.

When you look at these numbers, and you examine how the Internet actually works, you have to conclude that it is highly unlikely that TV broadcasters will be cannibalized by the Internet or mobile TV in the next few years. While dramatic increases in revenue for free-to-air TV in the future do not appear to be likely, dramatic declines also appear to be unlikely. The consensus is emerging that, for a variety of legal and economic reasons, it is unlikely that the new services on unregulated media will cannibalize or cripple conventional TV.

In brief, it is becoming increasingly clear that the Internet will tend to complement, not replace, traditional media. The Internet shows no more likelihood of killing off television than television does of destroying radio, or than either of those older “new” media do of rendering books extinct.

Over the last five years, in fact, viewing of Canadian TV services has increased at the expense of US TV services, largely because of the drop in the viewing of US border stations. And the introduction of the Internet, DVDs and mobile phones has had negligible impact on TV viewing. And while growth in Canadian conventional TV revenues has slowed in the last five years, Canadian pay and specialty TV revenues

have increased significantly, again despite the introduction of the Internet, DVDs and mobile devices.

On March 20, 2007, the CRTC appeared in front of the Standing Committee on Canadian Heritage. In 2006, the CRTC carried out a major inquiry into the impact of new technology. It asked what effect new technologies would have on Canadian broadcasters. Here is what the CRTC said:

While the consumption of new technologies is growing, we observed that it is having a minimal impact on the regulated system. Canadians still consume the vast majority of programming through regulated broadcasting undertakings and new technologies have played a complementary role up to now…. (emphasis added)

These are important points to bear in mind for Canadian content production. As mentioned, the viability of Canadian broadcasters depends on maintaining a distinctive Canadian rights market for high-quality, relatively expensive productions. In the case of private TV, Canadian broadcasters need to control the distribution in Canada of the foreign shows that drive their profits. Only then is it possible for them to commission high-value Canadian programs that can enter the marketplace.

In the result, new technologies are likely to be additive and promotional, not


substitutional in effect. Cross-platform licensing will rise, and customized short-form content will be developed for mobile and Internet use. Generational distinctions in usage patterns will also emerge, as will the use of content in short snippets when available, to supplement conventional broadcasting in places such as transit, waiting rooms, lunch rooms, and so on. But television as we know it will survive. And our ability to regulate television will survive.

A 2007 study by Convergence Consulting Group supported this thesis. It noted that the economics of the Internet did not support migration of traditional TV shows to Web TV, both in terms of expense and convenience for the viewer and in terms of return to the rights holders. Increasingly, observers have noted that conventional and specialty television have real staying power.

This is not to minimize the negative effects of the Internet in terms of piracy. It is true that downloads of audiovisual material on an unauthorized basis are growing on the Internet. But guess what happened to YouTube as soon as Google bought it? It started removing illegal high-quality copyrighted content in the face of demands from copyright owners. And even then, Viacom has sued it for over a billion dollars.

In the US, the law is increasingly on the side of the copyright owners. In Canada, our copyright law needs to

be strengthened. There is no question that we need up-to-date copyright legislation to support our creators.

Having discussed the impact of technological change on Canadian film and TV sectors, we turn to the music industry in the last instalment of this series.

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



Clean Technology CASES/LEGAL DEVELOPMENTS

B.C.: B.C.’s Carbon Tax

B.C. is the first jurisdiction in North America to introduce a broad-based revenue carbon tax. The B.C. government announced the carbon tax as one component of its budget on February 19, 2008. Unexpectedly, criticism of the carbon tax has been muted, with the Board of Trade calling it a “smart carbon tax” and giving the budget an “A” grade. As well, recent polls show that just over a majority of B.C. citizens support the carbon tax.

How could a government introduce a new tax without incurring a political backlash? The answer is two-fold: first, the tax is revenue neutral and second, it starts low and then gradually moves up over time to the expected range per tonne as carbon markets develop.

The carbon tax is revenue neutral because every dollar raised from the carbon tax must be used for the reduction of personal and corporate income tax. The B.C. government has committed to include this mandate in the legislation so that neither the current nor future governments will be able to give in to the temptation of using the carbon tax money to fund special projects or to pay general expenses.

This approach of taxing carbon-intensive activities, while increasing the amount of

money in the economy in the hands of businesses and consumers, reflects the B.C. government’s underlying strategy of dealing with global environmental issues while developing the local economy. Several times during the budget speech, Finance Minister Carole Taylor emphasized the need to twin these two objectives.

The carbon tax is expected to generate about $1.85 billion in the first three years, and the entire amount will be returned to businesses and individuals in reduced income tax.

General corporate income tax will be reduced from 12 per cent to 11 per cent and small business corporate income tax reduced from 4.5 per cent to 3.5 per cent from July 1, 2008. Personal income taxes on the two lowest tax rates will be reduced by 2 per cent in 2008 and 5 per cent in 2009.

Starting July 1, 2008, the price for carbon will be $10/tonne and rising $5/tonne for the following 4 years. This means that in the first year, gasoline prices will increase by $.0241/litre and diesel by $.0276/litre. Purchase or use of biofuels, such as biodiesel and ethanol, are exempted from the carbon tax. B.C.’s carbon tax is similar to a consumption tax as it is payable by the end user at the point of purchase or use on fossil fuels in B.C.



B.C.’s carbon tax is only one of a variety of possible approaches, depending on the province’s carbon characteristics and view of the role of government. For example, Québec introduced a form of carbon tax last year that supports developing green technology by collecting just under one cent a litre from petroleum companies. Its tax raises about $200 million a year.

What may work in B.C. may not work in other provinces. In Alberta, for example, the oil sands significantly skew that province’s carbon characteristics, just as in B.C. the significant hydroelectric resources allow electricity generation without significant reliance on fossil fuels.

Over the next couple of years, it is expected that each province will introduce a variety of policies and regulations to deal with carbon emission and economic development in their region. Keeping abreast of these changes should prove to be a challenge.

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

International: Eco-Patent Commons — Patent-sharing for a Cleaner and Greener Environment

In view of growing concerns about environmental issues relating to the manufacture of electronics, a new initiative to share patents relating to environment-friendly inventions has been created. Earlier this year, IBM and the World Business Council for Sustainable Development Team partnered with Nokia, Pitney Bowes and Sony to establish the Eco-Patent Commons.

The Eco-Patent Commons aims to create a shared collection of such patents and to encourage innovations in the area of environment sustainability. The hope is that the collaboration and co-operation fostered through the sharing of these patents will produce a number of environmental benefits for its members, including energy conservation, water consumption reductions, pollution prevention and increased recycling.

To become a member of the Eco-Patent Commons, a company must submit at least one patent to it and pledge not to enforce it against other members. Approved patents will be made available for other members to use free of charge. Donors would have comparable access to patents submitted by other members. Nokia, for example, has pledged a patent relating to recycling technology that may help in recycling old mobile phones into new devices like digital cameras.




Participation in patent-sharing pools is a double-edged sword. While you may get access to third-party patents, you will also have to contribute some of your proprietary rights to the pool. Care should be taken to consider the filing and reporting requirements of the pool, which may not be suitable for your needs and goals. For example, you may have developed a particularly valuable patent that you may not wish to contribute to the pool, but may be obliged to do so.

Contact: Robert Nakano in Toronto at [email protected]



Biotechnology/ Life Sciences CASES/LEGAL DEVELOPMENTS

Canada: Amendments to the Patented Medicines Regulations: Changes to Reporting Requirements and Deadlines

Those in the pharmaceutical and biologics industry should be aware of recent changes to reporting requirements and deadlines under the Patented Medicines Regulations that came into force on March 6, 2008. Other changes, dealing with e-filing requirements, will come into effect on July 1, 2008. The stated objective of the amendments is to “increase efficiency and timeliness in the price review process by the Patented Medicines Prices Review Board (PMPRB).”

The PMPRB is the administrative body that oversees the regulations, which were originally enacted to control excessive pricing of patented medicines in Canada. Currently, patentees need to file certain information with the PMPRB for any medicines where a patent is being practiced or is capable of being practiced with respect to the medicine, whether the patent is actually being used or not. Although excessive pricing can be reviewed back to the date of publication of a patent, case law has made clear that the PMPRB cannot assert its jurisdiction with respect to excessive pricing until a patent has issued.

To facilitate compliance with the information requirements under the regulations, the PMPRB developed three key forms. These forms summarize the type of the information that patentees are required to file:

• Form 1: Medicine Identification Sheet, previously required to be filed 30 days after issuance of a Notice of Compliance (NOC), or 30 days after a patented drug product has been offered for sale in Canada, whichever came first.

• Form 2: Information on the Identity and Prices of the Medicine, filed according to the timelines described in Form 1.

• Form 3: Annual Revenues and Research and Development Expenditures, formerly required to be filed 60 days after the end of the calendar year.

The main changes to the regulations are:

1. Form 1 — the first information regarding the patented medicine must be provided within the earlier of seven days of issue of an NOC or seven days of first sale of the medicine. This information must also be accompanied by the product monograph or equivalent information. Updates to Form 1, such as new patents granted, can still be provided within 30 days of grant.


2. Form 2:

• Information pertaining to the identity and prices of a patented prescription medicine for human use shall now be provided for the day on which the medicine is first sold in Canada within 30 days after that day.

• Information pertaining to the identity and prices for veterinary and over-the-counter medicines shall now be provided on a complaints-based approach. Under this approach, a patentee shall provide to the PMPRB the necessary information for each six-month period beginning on January 1 and July 1 of each year, within 30 days after the date on which the PMPRB sends a request in response to a complaint about the price of a medicine, and during the two years following the request within 30 days after each six-month period.

3. New e-filing requirements apply to the information that must be provided to the PMPRB. Patentees will need to provide information to the PMPRB using a specified electronic document in its original format and file type, bearing the electronic signature of an authorized individual certifying that the information contained in the document is true and complete. These e-filing requirements will come into effect on July 1, 2008.

Contact: Anita Nador in Toronto at [email protected] or Ian K. Bies in Toronto at [email protected]



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