As a follow-up to our earlier post (Combating Counterfeit Products Act), we wrote in March 2013 that Parliament had introduced a bill (Bill C-56) to amend the Copyright Act and the Trade-marks Act, to combat counterfeit products. With Prime Minister Harper’s decision to prorogue Parliament, this Bill will die on the order paper.

There was a time when the word “prorogue” sent people running to their constitutional dictionaries. Since the prorogations in 2007, 2008 and 2010 this manoeuver has become a common feature of Canadian legislative and political life. The Bill will have to be reintroduced in the next session. Assuming the current senate expense scandal can be resolved, the Bill may make it through the next session of Parliament and be passed into law. Stay tuned.

Calgary – 08:00 MDT

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Agreements which contain non-disclosure obligations (also known as a confidentiality agreements, CAs, NDAs or confidential disclosure agreements) are common in many industries – from licensing deals to franchise agreements, from manufacturing to retail industries. Confidential information may be disclosed during early-stage negotiations, even before a formal contractual relationship is concluded. Or it may be disclosed in the course of an ongoing contract, for example, a licensing or manufacturing agreement. In all of these cases, the exact definition of “Confidential Information” may be critical.

In CONVOLVE, INC. AND MASSACHUSETTS INSTITUTE OF TECHNOLOGY v. COMPAQ COMPUTER CORPORATION and SEAGATE TECHNOLOGY, LLC, the US Federal Circuit Court of Appeals dealt with a claim for misappropriation of trade-secrets and breach of confidence, arising out of a certain Non-Disclosure Agreement (NDA) signed between the parties.

The Court noted that: “The NDA states that, to trigger either party’s obligations, the disclosed information must be: (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later designated confidential in a written memorandum summarizing and identifying the confidential information.” This definition of confidential information meant that certain disclosures by Convolve which failed to include a written designation or notification of confidentiality were not considered to be confidential. The failure to mark that information as “confidential” meant that the information was not caught by the agreement. The Court also decided that Convolve’s remedies under the California Uniform Trade Secrets Act (CUTSA) were pre-empted by this NDA, leaving Convolve (the disclosing party) without any remedy for misappropriation of this information by the other side.

Lessons for business?

• While this decision turns, in part, upon an interpretation of US law (remember there is no equivalent of the Uniform Trade Secrets Act in Canada), the take-away is the same: NDAs are not just “boilerplate”. They protect the secrets of your organization, the information that gives you an advantage over the competition.
• The definition of “Confidential Information” is important, and following the definition of “Confidential Information” is just as important. The first may be easy to focus on while the agreement is being negotiated and vetted by legal. The second is more difficult to remember as the parties engage in fast-paced negotiations, and information is disclosed by personnel within the organization who may never actually see the written NDA.

Calgary – 07:00 MDT

While “famous” marks are handled differently in Canada than they are in the US, there is nevertheless a great advantage for marks such as the well-known  McDonald’s “family” of marks when it comes to effective trade-mark protection. In the recent case of CHEAH v MCDONALD’S CORPORATION, the Federal Court dealt with an application for the mark MACDIMSUM in association with a number of food items. The application was opposed by McDonald’s restaurants.

Anyone seeking to register a mark using the prefix “MAC” or “MC” in association with food and restaurant services should expect some scrutiny by McDonald’s trade-mark lawyers.

As noted by the Court, McDonald’s owns “a large number of trade-marks referred to as a ‘family’ of trade-marks registered and used by McDonald’s in Canada in association with foods and drinks and restaurant services. These are referred to in argument as the MC plus food item, or MAC plus food item, marks.” By presenting evidence of the dozens of these MAC / MC marks, coupled with survey evidence of the public’s likely perception of the mark MACDIMSUM as yet another one of McDonald’s marks, McDonald’s as the opponent of this application was able to persuade the Trade-Marks Oposition Board that this application should not be permitted to proceed. The Court agreed. A few interesting points to note:

1. Yes, let’s face it, there is an undeniable advantage to having dozens of marks to present as part of a billion-dollar chain of restaurants. A ‘lesser’ opponent (with less recognition, lower sales, less advertising and a smaller family of marks) simply would not be in a position to present such evidence in opposition proceedings.
2. Survey evidence is expensive to obtain but can be effective, as it was in this case. However, note Justice Hughes’ comments that:  “The Court has been suspect as to the growing use of and reliance upon surveys in proceedings such as this. The remarks of Rothstein J, in the Supreme Court of Canada decision in Masterpiece Inc v Alavida Lifestyles Inc, [2011] 2 SCR 387 at paragraphs 78 to 101, stating that survey evidence should be used with caution and not supplant the role of the judge, are apt.”

Calgary – 07:00 MDT

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As a follow-up to our earlier post about Revoking an “Implied” Software License, this interesting US case (Davis v. Tampa Bay Arena Ltd.) deals with the use of photographs on Facebook postings. A freelance photographer, Davis, worked for the Tampa Bay Arena, taking photos for various events. The photographer and arena had a verbal agreement since 1996, and then a written agreement since 2000. The written agreement stated that the arena had “rights to reproduce images for newsletter, advertising, display prints, broadcast, and the [Forum] web site.” The agreement was also clear that Davis retained copyright in the images.

That was the language dating from 2000. Fast forward 10 years, and the arena started posting Davis’s photos to its Facebook page, something not contemplated in the scope of the original agreement. However, for months Davis permitted the images to be posted, and even set up a upload site to allow the arena’s marketing department to easily resize images for the Facebook page. By this course of conduct and the email record, the court found that Davis granted an implied nonexclusive license to the arena to make use of the images in this way. Davis countered by saying that if an implied license was granted, it was only granted with certain strings attached – conditions regarding additional payment that were never met. Because these conditions were not met, the use of the photographs was unauthorized, giving rise to a copyright infringement claim.

The court disagreed. On the copyright claim, the court decided that “even assuming that Davis attached conditions to the Forum’s use of his images on Facebook, the record is clear that these conditions were covenants, not conditions precedent to the granting of the implied license. Accordingly, any breach on the Forum’s part of these covenants provides Davis with a breach of contract claim against the Forum, not a copyright infringement claim.” (Emphasis added.)

Lessons?

• A chain of emails can easily establish a contract, such as the implied copyright license in this case;
• For any license – particularly copyright, media or trade-mark licenses – check the original terms of the license. Social media can cause problems when its use is unauthorized by the scope of the original license, even though it seems like a natural extension of what is authorized within the scope of the original license.

Related Reading: Click & Copy: Breach of Online License Agreements & Copyright Infringement

Calgary – 07:00 MDT

In two earlier posts (see here and here), we reviewed the Alberta Court of Appeal’s guidelines to assist with basic contract interpretation (in Bhasin v. Hrynew). In this post we wrap up our primer on the Court’s guidelines. According to the Court:

• Mental suffering is not compensated in contracts law (the only caveat is whether “harsh modes of termination” might trigger damages in the case of an employment contract).

• What if one of the parties is at a significant disadvantage in bargaining power? Where two parties are negotiating and there is some inequality in “bargaining power, need, or knowledge”, that alone is not enough to justify an amendment to the terms of a contract. However, the court might be willing to step in and amend the terms of a contract in the case of “actual unconscionability”. What does “unconscionable” mean? It depends…. Here’s an example: In the recent case of Maloney v. Dockside Marine Centre Ltd., 2013 BCSC 395, an exclusion clause in a standard purchase-and-sale contract was consider by the court to be “unconscionable” because there was an inequality in the position of the parties, with a sophisticated and experienced vendor versus an unsophisticated purchaser.

• What if you are negotiating and the other side makes a promise that never makes it into the agreement? There is a concept in contract law called “parol evidence”. This refers to evidence of verbal or extraneous negotiations or agreements between the parties, that might explain, interpret or alter the written terms of a contract. Think of all the discussions and email exchanges that never appear in the final written document … but they might help explain or shed light on certain provisions of the written agreement. The Court has indicated that such evidence should be used very conservatively. An “entire agreement” clause can validly exclude this type of evidence of previous negotiations or promises (assuming there is no actual fraud). In other words, do not rely on this type of evidence to explain the written agreement. If you want a certain term or promise in the agreement, then it should appear in writing.

• “Courts should be especially wary of altering or interpreting creatively formal contracts carefully negotiated and written, with legal advice”; and finally

• “Courts should not attempt after the fact to rewrite a contract to accord with what the court now thinks, or one party now believes, is more just or more businesslike, especially in the full light of hindsight.”

Calgary – 07:00 MDT

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As mentioned in Part 1, the Alberta Court of Appeal (in Bhasin v. Hrynew) has provided some helpful guidelines to assist with basic contract interpretation.

If you deal with contracts in your job, then here are some tips to see how the courts will interpret your agreements.

From time to time a question comes up about what terms are “implied” in the written agreement. Yes, the terms appear clear to one side, but the other side argues that certain provisions should be included by implication, even though those terms are not specifically written in the contract. What is the Court’s view on this? To paraphrase from the judgement:

• Courts are generally against implying terms into a written agreement.
• Courts can imply terms in contracts only when the new term is: (i) so obvious that it was not even thought necessary to mention, or (ii) truly necessary to make the contract work at all. This is not a question of making the contact “merely reasonable” or “fair” for both sides, but a question of what is completely obvious or absolutely essential for the contract to make sense.
• Merely foreseeing that something might happen is not enough to justify adding implied terms; both parties “must have intended the term” to be included.
• A term cannot be implied in a contract which would contradict an express term of that contract. In other words, an implied term cannot be added where it would go against the clear written provisions that the parties agreed to.

More to come.

Calgary – 07:00 MDT

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The criminal defence lawyers have their TV shows and movies. What about those humble lawyers who draft online agreements and terms of use all day long? It’s not every day that this kind of legal fine print gets time on the silver screen. Check out this documentary Terms and Conditions May Apply.

Playing next weekend at the Vancouver International Film Festival and Hot Docs Canadian International Documentary Festival.

Calgary – 07:00 MDT

Intellectual property (IP) contracts in Alberta are interpreted just as any contract would be. The same basic rules of interpretation apply, whether it is an IP assignment or transfer, a software license, a complex techology asset acquisition, the hiring of a technology employee or consultant, a non-disclosure agreement or any commercial agreement with an IP element.

The Alberta Court of Appeal in Bhasin v. Hrynew, 2013 ABCA 98, has provided some helpful guidelines to assist with basic contract interpretation. If you deal with contracts in your job, then here are some tips to see how the courts will interpret your agreements:

• Think there is a duty to perform contractual obligations in “good faith”? Guess again. “There is no duty to perform most contracts in good faith.” The court cited an Ontario decision (Transamerica Life Canada v ING Canada 2003 CanLII 9923 (ON CA) (para 51)) and two Alberta Court of Appeal cases (Mesa Operating Partnership v Amoco Canada Resources (1994) 149 AR 187 (CA) and Klewchuk v Switzer, 2003 ABCA 187 (CanLII)). The courts in these cases found no general duty of “good faith”, and they involved very different types of contract.
• What about in employment agreements, where (arguably) there is an imbalance of power in favour of the employer? The court said there is a relatively narrow duty of good faith in employment contracts: Employers must not announce or implement termination in a “harsh or demeaning way”. This applies to the method of termination, not the reasons for the termination. Other than that, there is no general duty of good faith in employment contracts. The Court cited two cases which state that employment contracts are not generally contracts of good faith in all respects. (Wallace v United Grain Growers 1997 CanLII 332 (SCC),  and Keays v Honda Canada, 2008 SCC 39 (CanLII).

More to come.

Calgary – 07:00

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Consider this: A service organization we’ll call CloudCo collects and compiles personal information from its corporate customer. The individual whose personal information is being collected has a relationship directly with the corporate customer, but not with CloudCo. The personal information has been shared with CloudCo without the individual’s knowledge or consent. Sound familiar?

Many cloud service providers host personal information without any direct relationship with the individual. Maybe they rely on assurances from their own customer. Or they may simply collect personal information without thinking through the privacy implications. 

This recent decision of the Information & Privacy Commissioner of Alberta (Professional Drivers Bureau of Canada Inc. Case File Number P1884) deals with the collection of personal information of truck drivers by a private service company, called the “Professional Drivers Bureau”. This company collected personal information about drivers from trucking companies, created a database of information, and then offered a search service, by which trucking companies paid a fee for a report on the driver. In that report, the personal information about the driver was disclosed to the trucking company. The personal information was gleaned and compiled into a database over a long period of time, and it became clear during the Commissioner’s investigation that the individuals never consented to this collection, use and disclosure. The Commissioner ultimately decided that the “Professional Drivers Bureau” was in breach of Alberta privacy laws because it never obtained consent directly from the individual truck drivers.

What can other service companies – including cloud service providers – take away from this case?

• Cloud service providers should consider if they are “collecting” any personal information themselves, or merely providing a service which allows their customer to store information in the cloud. When a service provider collects personal information, it must obtain consent. In this case, the service provider did not provide any notice to the individual of its collection of her personal information, did not indicate its purposes, did not provide the name of someone who could answer her questions. It apparently did not inform the trucking companies about its purposes in collecting the personal information. All of this was in contravention of privacy laws.
• If a service provider is merely providing space on a server, the terms of service should address privacy issues, and make it clear that no personal information is collected, used or disclosed by the cloud provider. 
• Termination issues should also be addressed in the agreement. What happens to that data when the service relationship ends?
• Consider the position of the trucking company: in this case, the trucking company shared personal information about individuals with the “Bureau”. When personal information is disclosed in such a way, the trucking company should be asking: Was this disclosure authorized by the individual? What is the purpose of the disclosure? What contractual restrictions are placed on the recipient, to ensure that the personal information is used in accordance with the consent from the individual. In the cloud context, this means contractual terms that directly address the privacy issues.
• Get privacy advice when entering into cloud-based service agreements.

Calgary – 11:00 MDT

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License agreements often contain indemnities. An indemnity is a contractual obligation to step in and reimburse some financial obligation such as a liability, loss, or damage. In essence, the party giving the indemnity will make the injured party “whole” by recompensing losses and expenses.

The court in Coastal Contacts Inc. v. Elastic Path Software Inc., 2013 BCSC 133 reviewed the meaning and scope of an indemnity for intellectual property infringement, which is a common clause in many intellectual property (IP) license agreements. This is what’s known as an IP indemnity clause. What obligations does a software vendor take on, when they give an IP indemnity? For the full article, click here: Software Licenses and Indemnities: What Obligations Are You Taking On?

Calgary – 11:00

Not an IP story, dear readers, but worth noting: my firm has established the Field Law Community Fund to give back to the communities in which we work. Field Law, already supports charitable groups and organizations across Alberta and the North. The Field Law Community Fund Program has just been launched in addition to the firm’s current community involvement. The program empowers individuals, organizations, charities and community groups to access funding to bring their ambitious, creative community initiatives to life, such as initiatives focussed on education, healthcare, at-risk youth, homelessness, women’s organizations, sports, community and arts and culture. Check it out and apply!

Calgary – 07:00 MDT

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The protection of IP rights is a competitive tool in the global economy. A recent report from authored by Dennis Blair, former director of national intelligence in the U.S. and Jon Huntsman Jr. former governor of Utah and U.S. ambassador to China (and probably the most decent of the candidates running for the GOP last year) discuss this in their recent article in the Washington Post. They both work for the Commission on the Theft of American Intellectual Property (The IP Commission).

On Wednesday, the IP Commission released its report: The Report of the Commission on the Theft of American Intellectual Property (PDF). Makes for interesting reading for Canadians.

The Americans have the Economic Espionage Act, the Foreign Economic Espionage Penalty Enhancement Act and the Theft of Trade Secrets Clarification Act.

Is it time for Canadian legislation on the protection of trade secrets?

Calgary – 07:00 MDT

 

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When a user dies, who owns the contents of that user’s account?

In Ajemian v. Yahoo Inc.  (May 7, 2013), a Massachusetts court considered this question. Two brothers, who administered their brother John’s estate, brought a lawsuit against Yahoo for access to email messages of their deceased brother, and a declaration that the email account was property of John’s estate. The court considered the Yahoo Terms of Service, which included this clause: “You agree that your Yahoo! account is non-transferable and any rights to your Yahoo! ID or contents within your account terminate upon your death. Upon receipt of a copy of a death certificate, your account may be terminated and all contents therein permanently deleted.”

The court looked at the central question of whether these terms – in particular, this “No Right of Survivorship and Non-Transferability” clause described above – was reasonably communicated to the user. The terms were amended before the time of death but the evidence was unclear on whether the deceased user had assented to this particular amendment. Because of the weak evidence on this point, the court decided that Yahoo could not rely on the forum selection clause which would have deflected the case to California.

The court took the view that the deceased user was a Massachusetts resident and courts in that state had a strong interest in the outcome of the case as it related to the assets of a deceased resident, as opposed to the nature of Yahoo’s services. The ultimate decision was remanded to the lower court, but we can take away a few important lessons:

1. The method of implementing Terms of Use and (just as important) amendments to those terms should be carefully reviewed by any Canadian company conducting business online. This includes everything from an email service like Yahoo, to cloud-computing service providers, online retailers, ebook sellers and software vendors.
2. Corporate accounts may not impacted by the death of a user, but anyone making consumer sales should review their online terms to address survivorship issues. And there are many cases where even a “corporate” user is signing up as an individual, without any clarity on what happens to that account as an “asset” of the business after death.

Get advice from our licensing and internet law experts in this complex area.

Related Reading: Is There Life After Death for Your Digital Assets?

Calgary – 07:00 MDT

A license can be granted without any written agreement. It happens more often than you might think. For example, a license by verbal agreement and a “course of conduct” was granted by one party in the case of  Planification-Organisation-Publications Systèmes (POPS) Ltée and Elizabeth Posada v. 9054-8181 Québec Inc., 2013 FC 427. In that case, the lack of a written agreement was irrelevant. The court found that there was an “implied” license. The next question was whether that license could be revoked or terminated? The software owner asserted it was entitled to revoke the licence that it had previously granted, because that licence had been granted for no consideration (or “à titre gracieux” – sounds better in French).

The court disagreed. It’s true that a license granted for no value or no consideration can be revoked unilaterally. The B.C. Court of Appeal came to this conclusion in Katz (c.o.b. Michael Katz Associates) v. Cytrynbaum, [1983] B.C.J. No. 2421 (C.A.), where an architect revoked consent to the transfer of copyright where it was given without any consideration. However, in the Planification decision, the court found significant value had been transferred over many years by the licensee, though it was never documented in writing as “consideration” for the grant of a license.  This came in the form of “conceptual contributions” to the software, software testing, compensation for developers, contributions of macros and other inputs for the software.

The lessons for business?

• Be aware that a software license can be granted verbally or through a course of dealing between the licensor and licensee. This results in an “implied” software license.
• Terminating or revoking such a license may be possible if the grant is gratuitous and there is a complete absence of any value flowing back to the licensor. However, consideration can also be implied. In this case, it was pieced together from various sources to make up valid consideration for the grant of the license.
• Any “free” licenses – including licenses between joint-venture partners, or licenses for beta or pre-release versions of software – should be handled carefully to avoid these pitfalls.

Calgary -07:00 MDT

Self-replicating technologies present intellectual property law with some unique challenges.

In the case of Bowman v. Monsanto Company (May 13, 2013), the US Supreme Court has weighed into this thorny field, and on Monday it delivered a unanimous judgment upholding the rights in Monsanto’s patented soybeans. (See our earlier post: Self-Replicating Technologies (Patents in the Field, Part 2).)

Monsanto sells its patented seeds under a license agreement. Farmers are permitted to plant the beans in one, and only one, growing season. Collection and replanting is prohibited under the terms of the license. Bowman bought seeds from a local grain elevantor, planted, harvested, collected and replanted those seeds in successive years. In this way, he was able to take advantage of the “Round-Up Ready” qualities of the genetically modified beans, without paying the usual fee that would be owed to Monsanto as the patent owner. In the court’s view, this deprived Monsanto of the reward that patent law provides for the sale of each patented article. The court was clear that “Patent exhaustion provides no haven for that conduct.”

According to the court: “…we think that blame-the-bean defense tough to credit. Bowman was not a passive observer of his soybeans’ multiplication; or put another way,the seeds he purchased (miraculous though they might be in other respects) did not spontaneously create eight successive soybean crops. …Bowman devised and executed a novel way to harvest crops from Roundup Ready seeds without paying the usual premium. He purchased beans from a grain elevator anticipating that many would be Roundup Ready, applied a glyphosate-based herbicide in a way that culled any plants without the patented trait, and saved beans from the rest for the next season.”

The US Supreme Court sided with Monsanto and upheld the Federal Circuit Court of Appeals decision.

Calgary – 07:00 MDT

There was considerable interest in our earlier post (Trade-mark Oppositions: When “Close” becomes “Too Close”) which reviewed the competing marks POMPURE vs. POM WONDERFUL for beverages, and the marks CAMILION vs. CAMÉLÉON & Design, both for software.

In another recent case Reynolds Presto Products Inc. v. P.R.S. Mediterranean Ltd., 2013 FCA 119, the Federal Court of Appeal reviewed the competing marks GEOWEB and NEOWEB, both for “cellular confinement systems”. The owner of the GEOWEB mark sought an order to strike out NEOWEB on the basis of confusion. At trial, the judge sided with the owner of the NEOWEB mark. The owners of GEOWEB appealed.

The Trade-marks Act tells us that in determining whether trade-marks are confusing, the court should consider “all the surrounding circumstances” including:

• the distinctiveness of the trade-marks and the extent to which they have become known;
• the length of time the marks have been in use;
• the type of products, services or business in question;
• the “nature of the trade” which looks at the marketplace, sales and distribution channels; and
• the degree of resemblance between the trade-marks in appearance or sound or in the ideas suggested by them.

In this case, the appeal court overturned the lower court decision. Proper emphasis should have been placed on the fact that both companies were direct competitors, selling the same products into the same market. The test to be applied is “a matter of first impression in the mind of a casual consumer somewhat in a hurry who sees the [mark], at a time when he or she has no more than an imperfect recollection of the [prior] trade-marks, and does not pause to give the matter any detailed consideration or scrutiny, nor to examine closely the similarities and differences between the marks”. The court should not conduct a careful examination of the two marks through a side-by-side comparison.

In the end, the NEOWEB was found to be confusing with GEOWEB and was ordered to be struck from the register.

Calgary – 07:00 MDT

In Pelchat v. Zone 3 Inc., 2013 QCCS 78, a Quebec court decision has addressed the dichotomy between the idea for a TV show, and the “form and expression” of ideas, as embodied in a TV show. In this case, the defendant Zone 3 was sued for a claim of copyright infringement related to its makeover TV show called “Métamorphose”. The lawsuit was brought by Mr. Pelchat, who claimed that his own show “Look” (which aired in the late 1980s) was infringed by Zone 3’s show. Mr. Pelchat claimed his infringed work was a “beauty makeover of a woman on TV through hair, makeup and clothes”.  Copyright law is clear that it will only protect original expressions of an idea, not the idea itself. Thus, there is no infringement where the ideas between two shows are similar, but there is no actual copying of protected original expression.

In this case, the court did review the overall expression of the two shows, the structure, dialogue, sets, characters and other elements of expression. It concluded that Zone 3 did not engage in any copyright infringement.

Thanks to the l’Association du Jeune Barreau de Montréal for its case summary and link to the original judgment.

Contact Field Law’s Entertainment Law experts for advice in this area.

Calgary – 07:00 MDT

Ever wondered if you would infringe a patent but wanted to know before any infringement occurred?

Honeywell International, Inc. and Arkema Inc. are competitors in the field of automotive air-conditioning systems. Honeywell owns certain United States patents covering refrigerant inventions – in this case, innovations for a cooling system with low global warming potential. Arkema was about to enter into certain long-term supply contracts but before doing so, it wanted an advance ruling from the court, to determine whether such conduct would infringe the Honeywell patents. To achieve this, Arkema sought a declaratory judgment under the (US) Declaratory Judgment Act that by entering into contracts with automobile manufacturers, it would not incur liability as an “indirect infringer” of the Honeywell patents.

According to this latest decision, the US Federal Circuit Court of Appeals has ruled that this situation created a controversy that was “sufficiently immediate” to access the relief under the (US) Declaratory Judgment Act.

Read this article from LES: Suppliers May Ask Courts to Rule that They Do Not Indirectly Infringe Patents when They Have Agreed to Supply an Allegedly Infringing Product Even Before Their Customers Have Had an Opportunity to Directly Infringe the Patents.

Thanks to Finnegan, Henderson, Farabow, Garrett & Dunner, L.L.P. who have posted a link to the decision here.

Calgary – 07:00 MDT

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“The world has changed dramatically in the last two decades… An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet.”

This statement from the New York Court of Appeals in the recent decision in Overstock v. New York Taxation and Finance (PDF) paved the way for an interesting conclusion on the taxing power of New York State – and by extension, the sales tax that may be applied to many online sales, including sales by Canadian online business into the US market.

Traditionally, a state’s taxing authority was based on “economic activities” by the seller, for example, through its employees or sales agents in that state. The question faced by the court in this case was whether click-through links on a “local website” (that is, a website owned by a local state owner) would qualify to establish “economic activities” in that state. For example, a link to Amazon from a local New York State website has the effect of driving sales to Amazon. The court decided that by compensating the local New York State website owner who has signed-on to an affiliate agreement, Amazon is deemed to have established an “in-state sales force”.  The site which hosts the link is paid a commission, flat fee or price-per-click, and this was considered enough to create a “substantial nexus” to the state. Passive advertisements, by contrast, would not by themselves create a substantial nexus.

It is not clear whether Overstock.com and Amazon will appeal the decision.

In other news, the U.S. Senate voted 74-20 to put The Marketplace Fairness Act of 2013 to a final vote, an Act which would allow states to collect online sales taxes. The OECD is also preparing guidelines on how to handle international value-added taxes, to deal with the current “uncertainty and risks of double taxation and unintended non-taxation”. The 2013 draft of the OECD Guidelines derives from the “neutrality” principle (the notion that value-added tax is a tax on final consumption that should be neutral for business), and the so-called “destination” principle (that tax should be paid in the jurisdiction of consumption).

In the meantime, Canadian online retailers selling into the US marketplace should consider reviewing their affiliate click-through agreements and assess sales-tax collection policies with tax advisors.

Related Reading: New York’s Highest Court Affirms Constitutionality of Click-Through Nexus

Calgary- 07:00 MDT

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Field Law is proud to host the Spring 2013 meeting of the Calgary Chapter of the Licensing Executives Society on May 16, 2013 on the topic of licensing negotiations between members of Canada’s Oil Sands Innovation Alliance (COSIA).

Calgary – 07:00 MDT