By Richard Stobbe

Imprisonment in intellectual property infringement cases is rare – although not unheard of. The message from a recent Canadian Federal Court decision is… don’t mess with the Court. They expect compliance with their orders and a contempt order can lead to a “warrant of committal”, resulting in imprisonment.

In 2013, a Federal Court ruled that Hightimes Smokeshop and its officer and director, Ameen Muhammad had infringed the “HIGH TIMES” trademark owned by Trans-High Corporation (See: Trans-High Corporation v Hightimes Smokeshop and Gifts Inc., 2013 FC 1190 (CanLII)). In spite of this judgment, the judgement was ignored, and trademark infringement continued on the shop signage, sales receipts and printed materials of Hightimes Smokeshop.

Then in June 2015, Hightimes Smokeshop and Mr. Muhammad each pleaded guilty to five counts of contempt which resulted in the issuance of a Contempt Order, and an award of $62,500 in costs, payable by Hightimes Smokeshop and Mr. Muhammad, jointly and severally. However, that Contempt Order was also ignored and no money was paid to Trans-High Corporation.

In Trans-High Corporation v. Hightimes Smokeshop and Gifts Inc., 2015 FC 1104 (CanLII), Trans-High Corporation brought another motion to compel compliance with the Contempt Order, citing a ruling by the Supreme Court of Canada, that a person who is ordered by a court to pay money may be imprisoned for contempt if he or she shows “a certain degree of intention to evade his or her obligations”; or, put another way “he or she is unwilling to pay the debt despite having the ability to pay” (see paragraph 11).

The Court issued a warrant for the arrest and imprisonment of Mr. Muhammad, arising from contempt in a trademark infringement case.

Calgary – 07:00 MT

By Richard Stobbe

The Google and Equustek Saga has garnered attention across Canada and even among US commentators (something rare for Canadian decisions). In September, 2015, Google Inc. filed an application for leave to appeal the decision to the Supreme Court of Canada (SCC), and as of January, 2016, the leave application materials have been submitted to the court. With luck, the SCC will take up the case, and we’ll see a decision in late 2016.

If the case does proceed, you can expect the intervenors to line up for a place at the table.

The Electronic Frontier Foundation (EFF), for example, unsuccessfully argued against the “dangerous ruling” at the BC Court of Appeal level, and they can be expected to advance their arguments at the SCC. Their position is that “a worldwide injunction would set a dangerous precedent that could later be used to limit the legal and equitable rights of others to receive speech.” The EFF raised US free speech arguments – okay, so the US Constitution may not be persuasive at the Canadian court, but worth a try. They maintain that “No single country should have veto power over Internet speech.”

Further reading: Is Google “Feeling Lucky” at the Supreme Court?

Stay tuned for more updates – this is one to watch.

Calgary – 07:00 MT

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By Richard Stobbe

This is a case that became something of a lightning rod in the storm of subscriber privacy rights vs. copyright. As we wrote in our earlier post, a copyright owner can only enforce its rights against online infringement if it knows the identity of the infringer. It can seek a court order (called a Norwich order) to disclose the identity of those alleged infringers. Canadian law is clear that “A court order is required in every case as a condition precedent to the release of subscriber information.”

Such an order was used by Voltage Pictures to obtain the names and addresses of some 2,000 subscribers of an ISP known TekSavvy Solutions Inc. TekSavvy sought reimbursement of its costs for complying with the order: TekSavvy claimed recovery of a total of $346,480.68. Voltage offered to pay $884.00. The lower court concluded that Voltage should pay $21,557.50 to cover TekSavvy’s legal costs, administrative costs, and disbursements of abiding with the Order.

TekSavvy appealed that order.

In Voltage Pictures LLC v. John Doe, 2015 FC 1364 (CanLII), the court awarded TekSavvy an additional amount of $11,822.50. A win? Not really, considering how much they claimed, and what it would have cost to run the appeal.

The court also wagged a finger at TekSavvy. Since TekSavvy was only obliged to deliver the subscriber info after payment of its costs, the payment issue resulted in a significant delay in the supply of the subscriber names. The court complained that “…Voltage has not been able to obtain the information that it was lawfully entitled to for more than two years after Prothonotary Aalto’s Order. The failure to provide this information, on all accounts, appears to be due to TekSavvy’s unwarranted and excessive cost claims in the amount now of $350,000…”

It went on to note that “…the background circumstantial results do not sit well with the Court. They confirm that the policy in these types of motions should normally be to facilitate the plaintiff’s legitimate efforts to obtain the information from ISPs on the prima facie illegal activities of its subscribers. In my view, courts should be careful not to allow the ISP’s intervention to unduly interfere in the copyright holder’s efforts to pursue the subscribers, except where a good case is made out to do so. While it may be a practice to require prepayment of the ISP’s costs of the motion, the court must not let this issue delay unnecessarily the execution of the order to the extent possible. Reasonable security for costs may be preferable in some cases.” [Emphasis added]

As with the earlier decision, this case serves as guidance to copyright holders who are seeking the information of anonymous infringers, and to ISPs who must balance the privacy rights of subscribers.

Calgary – 07:00 MT

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By Richard Stobbe

What if a competitor cut and paste the metatags from your website and used them on the competitor’s site? Is there a remedy under Canadian law? Are metatags subject to trademark protection? The answer is… it depends.

Red Label Vacations (redtag.ca) sued its rival 411 Travel Buys for use of metatags, including “Red Tag Vacations” in the 411 Travel Buys website. The Federal Court dismissed the trademark and copyright claims of Red Label Vacations (see: No copyright or trademark protection for metatags). Red Label Vacations appealed.

In Red Label Vacations Inc. v. 411 Travel Buys Limited, 2015 FCA 290, the Federal Court of Appeal dismissed the appeal, and upheld the lower court decision.

The court agreed that 411 Travel Buys had copied the metatags from Red Label’s site, but noted that none of the metatags appeared in the visible portion of the 411 Travel Buys website. Therefore, consumers did not see any of the metatags. In that sense, there was no “use” of the metatags as trademarks for the purposes of determining infringement.

Interestingly, there was one instance where the metatags were visible, and that was in the Google search result, where the words “Book Online with Red Tag Vacations & Pay Less Guaranteed” appeared in connection with the 411 Travel Buys site. The court considered that this would have the effect of sending consumers to Red Label’s site.

The court did leave the door ajar for other metatag trademark infringement cases, noting “in some situations, inserting a registered trade-mark (or a trade-mark that is confusing with a registered trade-mark) in a metatag may constitute advertising of services that would give rise to a claim for infringement…” [Emphasis added]

Calgary – 07:00 MT

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By Richard Stobbe

As an update to our earlier post, we note that the Intellectual Property Institute of Canada, in its most recent bulletin, is estimating that the anticipated changes to Canada’s intellectual property laws – including the overhaul of trademark laws under new Trademarks Regulations, as well as changes to the Patent Rules and Industrial Design Regulations – will not begin until late 2016. This pushes the patent law changes into late 2017, with the trademark amendments to be implemented by early 2018.

The impact of the Trans-Pacific Partnership (TPP) on Canada’s IP laws is still being assessed. If ratified in Canada, the TPP is expected to require further consequential amendments to Canadian laws – such as copyright term extensions.

Stay tuned. Just don’t hold your breath.

Calgary – 07:00 MT

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By Richard Stobbe

A confidentiality agreement is signed. So… confidentiality is covered, right?

This 2014 case, nClosures Inc. v. Block and Company, Inc., No.13-3906 & 14-1097 (7th Cir., Oct. 22, 2014), shows that the answer is “not so fast”. In the nClosures case, two companies entered into a confidentiality agreement to explore a potential business deal to manufacture iPad cases based on nClosures’ so-called “Rhino” and “Rhino Elite” designs. However, the first confidentiality agreement was specifically directed to the purpose of initial discussions exploring the possibility of a deal. nClosures disclosed its confidential Rhino and Rhino Elite designs to Block.

However, in the following months, the parties circulated a draft manufacturing agreement but did not ultimately sign any written agreement, nor did they address confidentiality obligations that extended beyond those initial discussions. Eventually, the parties settled on a vague verbal arrangement to manufacture and sell iPad cases.

In this decision, the U.S. Seventh Circuit Court of Appeals provides us an important reminder. For confidentiality to apply, that first agreement is important, but remember:

1. As the business relationship expands beyond those initial discussions, additional confidentiality obligations should be imposed, to cover the new expanded purposes;

2. A non-disclosure or confidentiality agreement is not effective if the disclosing party does not make reasonable efforts to preserve confidentiality over its confidential information. In this case, the court found that nClosures had disclosed the same confidential design information to other contractors and designers without any confidentiality obligations.

In the words of the Court: “…no additional confidentiality agreements were required of individuals who accessed the design files for the Rhino or Rhino Elite devices. Additionally, neither the Rhino nor the Rhino Elite drawings were marked with words such as ‘confidential’ or ‘contains proprietary information’. Furthermore, the drawings were not kept under lock and key, nor were they stored on a computer with limited access.”

Lessons for business? A confidentiality agreement is an important first step, but it must be followed up with additional confidentiality agreements as the relationship evolves, and it must be backed-up with internal policies of proper marking, restricted access, and lock-and-key protections, in order to preserve confidentiality.

Calgary – 07:00 MT

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By Richard Stobbe

A U.S. court recently decided that it would take jurisdiction over a seller who sold allegedly infringing products through online retailers such as Amazon.com. PetEdge Inc. a Massachusetts-based manufacturer, owns a patent and certain trademarks for its folding steps to enable pets to climb onto a bed.

Alleging patent and trademark infringement, PetEdge wanted to sue rival Fortress Secure Solutions, based in Washington State, a company with no operations, personnel or offices in Massachusetts.

To justify its lawsuit in Massachusetts district court, PetEdge argued – and the court agreed – that Fortress purposefully directed its sales to Massachusetts residents by making its sales through Amazon.com, and the infringement claims arose from those activities. Thus, the court took jurisdiction over the out-of-state defendant.

Lessons for business?

Canadian retailers should take note that if they use national retailers such as Amazon.com to sell products into the U.S., the use of this distribution channel could result in a local state court taking jurisdiction over the Canadian seller, under the same analysis applied to Fortress.

Thanks to Finnegan LLP for their link to the decision: PetEdge, Inc. v. Fortress Secure Solutions, LLC

Calgary – 07:00 MT

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By Richard Stobbe

Defamatory content on the internet?? Throw a metaphorical rock into the ether and you’ll hit something that meets the definition of defamatory content. In order to establish a claim for defamation, a plaintiff must establish that:
(a) the words are defamatory, in the sense that they would tend to lower the plaintiff’s reputation in the eyes of a “reasonable person”;
(b) the words refer to the plaintiff; and
(c) the words were published, in the sense that they were communicated to at least one person other than the plaintiff.

In Canada, this is the same basic test whether the medium is an old-school print newspaper, a neighbourhood newsletter, a personal blog, or an online comments section. While defamation can be difficult to establish, the law appears to have settled on a few rules around linking to allegedly defamatory content. Two recent U.S. cases addressed this issue, and U.S. commentators have even pointed back for guidance to a watershed Canadian case from 2011 (which we wrote about here).

In Life Designs Ranch Inc. v. Sommer the court reaffirmed that linking to defamatory content does not, by itself, constitute a publication of that content: “…a URL is not qualitatively different from a mere reference. Therefore, we hold Mr. Sommer did not republish allegedly defamatory material when he posted on his website: ‘For more info click or cut and paste the link ….’ ”

Going one step further, what if the link is more than just a link? The court in Slozer and Donches v Slattery reviewed a situation where the defamatory content was linked in a post, and then that post was “Liked” on Facebook by the defendant. The court said: “…by providing a link to the challenged posting, without reiterating the content of that posting did not initiate a republication. Her motivations and her designation of the link with a “like” as alleged by Appellants, is not equivalent to a reiteration of the defamatory content as to constitute republication.”

Calgary – 10:00 MT

By Richard Stobbe

Change is not always good, particularly in the world of registered trademarks. If your trademark changes over time – due to the vagaries of marketing trends, fashion, style – you may find that your mark no longer matches the form in which it was registered. Minor changes will be tolerated. Major changes can be fatal to the mark.

As noted in our earlier post “It is important that a mark is used as registered. Where the mark changes over time, the mark owner should consider filing a new application for the modified form of the mark. Otherwise, the evidence of usage may show use of the modified mark, which may not be accepted as evidence of use of the mark as it was registered.”

This point was illustrated in the recent decision in Guess? IP Holder L.P. v Les Montres Marciano Inc., 2015 TMOB 108 (CanLII), in which the design mark SPORT MARCIANO which was registered in association with watches, had evolved over time to show the word MARCIANO alone, as shown above.

The result was that Guess – the mark owner – could not tender evidence of any use of the mark SPORT MARCIANO in association with watches.

The registration was cancelled.

Lessons for business? Get advice on your brand portfolio – not just during the initial searching and registration process, but also during the lifecycle of your marks, including change management, the development of brand guidelines and enforcement protocols.

Calgary – 07:00 MT

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By Richard Stobbe

Let’s consider that contract you’re about to sign. Does it contain a limitation of liability? And if so, are those even enforceable? It’s been several years since we last wrote about limitations of liability and exclusion clauses (See: Limitations of Liability: Do they work?) and it’s time for another look.

A limitation of liability seeks to reduce or cap one party’s liability to a certain dollar amount – usually a nominal amount. An exclusion clause is a bit different – the exclusion clause seeks to preclude any contractual claim whatsoever.

To understand the current state of the law, we have to look at the decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII), 315 D.L.R. (4th) 385, where the Supreme Court of Canada laid down a three-part framework. This test requires the court to determine:

(a) whether, as a matter of interpretation, the exclusion clause applies to the circumstances established in the evidence;

(b) if the exclusion clause applies, whether the clause was unconscionable and therefore invalid, at the time the contract was made; and

(c) if the clause is held to be valid under (b), whether the Court should nevertheless refuse to enforce the exclusion clause, because of an “overriding public policy, proof of which lies on the other party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts”.

We can illustrate this if we apply these concepts to a recent Alberta case. In this case, the court considered a limitation of liability in the context of a standard form industry contract, the terms of which were negotiated between the Canadian Association of Oilwell Drilling Contractors and the Canadian Association of Petroleum Producers. Anyone doing business in the Alberta oilpatch will have seen one of these agreements, or something similar.

The court describes this agreement as a bilateral no-fault contract, where one party takes responsibility for damage or loss of its own equipment, regardless of how that damage or loss was caused. Precision Drilling Canada Limited Partnership v Yangarra Resources Ltd., 2015 ABQB 433 (CanLII) dealt with a situation where one of Precision’s employees caused damage to Yangarra’s well. In the end Yangarra lost $300,000 worth of equipment down the well, which was abandoned. Add the cost of fishing operations to retrieve the lost equipment (about $720,000), and add the cost of drilling a relief well (about $2.5 million). All of this could be traced to the conduct of one of Precision’s employees – ouch.

Despite all of this, the court decided that the bilateral risk allocation (exclusion of liability) clauses in the contract between Yangarra and Precision applied to allocate these costs to Yangarra, regardless of who caused the losses. The court decided that enforcing this limitation of liability clause was neither unconscionable nor contrary to public policy. The clause was upheld, and Precision escaped liability.

Calgary – 07:00

By Richard Stobbe

In our previous posts (See Part 1 and Part 2), we reviewed restrictive covenants and cancellation rights under franchise laws. In a recent decision out of the Ontario Court of Appeal, the dispute focussed on the right of rescission. As the court put it, the case of Caffé Demetre Franchising Corp. v. 2249027 Ontario Inc., 2015 ONCA 258 (CanLII) “is another case from the franchise world involving whether the franchisor met its disclosure obligations…”

Specifically, the franchisee complained that the franchisor’s disclosure document was deficient – so deficient, in fact, that it entitled the franchisee to rescind the franchise agreement. In the disclosure document, the franchisor failed to disclose ongoing litigation commenced by the franchisor against a competitor. Was this failure a material deficiency giving rise to a right of rescission?

A disclosure document must disclose “all material facts”. A material fact is described in the legislation as any information about the business or operations of the franchisor, or about the franchise system “that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.”

The court in this Ontario case decided that the failure to disclose the franchisor’s litigation was a deficiency but not “sufficiently significant” that the franchisees were entitled to rescission. To qualify as a deficiency that gives rise to a right of rescission, the disclosure document must suffer from “stark and material deficiencies,” such that a court can conclude that it amounts to no disclosure at all. It is worth noting that the court was clear that litigation must be disclosed if it falls within the description contained in s. 2(5) of the Ontario regulations (the equivalent in Alberta is the Franchises Regulation, Alta Reg 240/1995), which mandates disclosure of any past or pending lawsuit or court order which involves allegations of “misrepresentation, unfair or deceptive business practices” including a failure to provide proper franchise disclosure. If the litigation in question involved any of these issues, then the decision would have been different.

Calgary – 07:00

By Richard Stobbe

If you are a patent owner, you are entitled to damages if someone infringes your patent. The measure of damages is compensatory damages, lost profits or a “reasonable royalty”. Is it fair for the infringer to say that the damages should be reduced because the infringer could have made the same sales using an available alternative that did not infringe the patent?

Marck sued its rival Apotex for patent infringement for sales of the drug lovastatin. The trial judge awarded Merck a total damages award of $119 million. In the decision in Apotex Inc. v. Merck & Co., Inc. 2015 FCA 171, the court considered Apotex’s argument about “non-infringing alternatives”. In a nutshell, Apotex was saying, okay, we infringed when we sold lovastatin using the patent process, but we could have made the same sales of lovastatin using another process that did not infringe. Therefore, the measure of damages should be lower, since the loss of profits could still have been suffered by the patent holder without any patent infringement.

The court describes it this way: “The principal issue raised on this appeal is whether, when calculating damages for patent infringement, it is relevant to consider the availability of non-infringing alternative products available to the infringer. For the reasons that follow I have concluded that, as a matter of law, the availability of a non-infringing alternative is a relevant consideration. The issue arises in the following context: Apotex has been found liable for patent infringement. On the issue of remedy, Apotex submits that the damages it is liable for should be reduced because it had available a non-infringing product that it could and would have used.” (Emphasis added) In other words, the patent holder’s sales could have been reduced simply by legitimate competition as opposed to infringement. In the end, the court agreed that non-infringing alternatives should be considered, but disagreed that there was any non-infringing alternative available in this case.

The damages award (one of the largest damage awards in Canada) remained in place and Apotex’s appeal was dismissed. This kicks open the door to arguments about using “non-infringing alternatives” to reduce damages in future patent infringement lawsuits.

Calgary – 05:00 MT

By Richard Stobbe

Apple Inc. sells Apple-branded computers. Is Apple a trademark or a trade name? And what’s the difference anyway? And perhaps most importantly, why should you even care?

A trademark is a protectable brand that distinguishes the source of goods or services in the marketplace. A trade name is merely a business name that may or may not overlap with a company’s trademark rights. It could be a trading name, doing-business-as, or operating-as, such as 1234567 Alberta Ltd. doing business as ABC Trading, where ABC Trading is the trade name. In the case of Apple, the company name “Apple Inc.” mirrors the company’s core mark (no pun intended). If we think back to earlier times, the trade name “Research in Motion” was used by a certain business whose main product was sold under a different trademark: BLACKBERRY.

If you are a trademark owner, this kind of thing matters because of the requirement in Canada to continually use a trademark in order to maintain trademark rights. This means that a registered trademark is vulnerable to be cancelled if it falls out of use. There is a mechanism in the Trademarks Act to challenge an owner’s entitlement to a registered mark, where the owner must show evidence of use. This is a challenge under Section 45 (and is commonly verbed in Canada, as in “we section fortyfived that mark”).

In the recent decision by the Trademarks Opposition Board in Borden Ladner Gervais LLP v GDC Communities, 2015 TMOB 50 (CanLII), this issue was addressed. Someone challenged the registered mark GDC COMMUNITIES which was registered in association with various services of engineering, development, financing and management of real estate, real estate marketing and residential home construction. The mark owner responded with evidence showing use of the mark:

The evidence was unconvincing because the decision-maker concluded that wherever the mark appeared, it functioned as a trade name (the name of the company), as opposed to a brand. The decision puts it this way: “GDC COMMUNITIES is not set apart from the surrounding text, but appears in the same size and font. In addition, the copyright notice at the bottom of the web page lists the copyright owner as GDC COMMUNITIES, immediately followed by the Registrant’s address, suggesting that GDC COMMUNITIES is being used to identify the legal entity that owns the copyright and is not being used as a trade-mark. This is consistent with how GDC COMMUNITIES is used in the rest of the web page. In all cases in which GDC COMMUNITIES appears in the Registrant’s evidence, it is not presented in a manner which sets it apart from other corporate information or in a manner such that it would be perceived by a consumer as a trade-mark.” (Emphasis added).

The lessons for business?

• The mark must appear in marketing materials – such as packaging, website materials, email footers, signage – in a way that sets the mark apart from the surrounding text. It is not necessarily fatal to a mark that it appears above the company’s address. For example, an email or webpage showing “Apple, 1 Infinite Loop, Cupertino, CA” will not, by itself, jeopardize the strength of that mark. However, if that is the only use, it will lead to the conclusion that the mark is used merely as a corporate or trade name.
• The mark should appear in a different font, in bold, in a different size or colour, and the proper notation should be used. In this case, the mark was a registered mark and should be accompanied by the circle-R mark.
• Note: It is important that a mark is used as registered. Where the mark changes over time, the mark owner should consider filing a new application for the modified form of the mark. Otherwise, the evidence of usage may show use of the modified mark, which may not be accepted as evidence of use of the mark as it was registered.

Calgary – 07:00 MT

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By Richard Stobbe

Apparently Google does not appreciate being ordered by a Canadian court to remove worldwide search results. In Update on Injunction Against Google (Equustek Solutions Inc. v. Google Inc.) we reviewed a 2014 decision in which Google was ordered to de-index certain offending websites which were selling goods that were the subject of an intellectual property (IP) infringement claim (that decision was Equustek Solutions Inc. v. Jack, 2014 BCSC 1063 (CanLII)). Google appealed that decision to the B.C. Court of Appeal.

Last week, in Equustek Solutions Inc. v. Google Inc., 2015 BCCA 265, the B.C. Court of Appeal upheld the original order.

In the underlying action, Equustek alleged that Mr. Jack and Datalink Technologies designed and sold product which infringed the IP rights of Equustek. The original lawsuit was based on trademark infringement and misappropriation of trade secrets. Equustek successfully obtained injunctions prohibiting this original infringement. The infringement, however, continued through a variety of websites, and relying on search engines (such as Google) to attract customers. Equustek obtained another injunction prohibiting Google (“the world’s most popular search engine” – those are the court’s words) from delivering search results which directed customers to the offending websites.

Google appealed, arguing that this injunction was overreaching since it was beyond the Canadian court’s jurisdiction. After all, Google has no employees, business offices, or servers within British Columbia. The appeal court observed that Google’s “activities in gathering data through web crawling software, in distributing targeted advertising to users in British Columbia, and in selling advertising to British Columbia businesses are sufficient to uphold the chambers judge’s finding that it does business in the Province.” The court, therefore, was entitled to assert jurisdiction over Google even though it was not a party to the underlying litigation. Put another way, “the underlying litigation clearly has a “real and substantial connection” to British Columbia. Equally, Google’s services, which provide a link between the defendant’s products and potential customers, are substantially connected to the substance of the lawsuit.”

The court drew a parallel with a recent English case, Cartier International AG v. British Sky Broadcasting Limited, [2014] EWHC 3354 (Ch.), where Cartier sought an injunction against a number of ISPs in the UK in order to block access to the offending websites which sold counterfeit Cartier products. The court granted the order in that case.

The B.C. court rejected a creative free-speech argument (the argument that the injunction may have the effect of stifling freedom of expression from the blocked websites). (“There is no evidence that the websites in question have ever been used for lawful purposes, nor is there any reason to believe that the domain names are in any way uniquely suitable for any sort of expression other than the marketing of the illegal product.”)

The court also gave short shrift to the argument that the injunction should be restricted to “Canadian” results from google.ca as opposed to an injunction with worldwide effect (“…an order limited to the google.ca search site would not be effective.”)

If Google successfully appeals this decision, it will undoubtedly attract even more intervenors and will provide an opportunity for Canada’s top court to clarify the law in this area.

Need assistance with intellectual property disputes and internet law? Get advice from experienced counsel.

Calgary – 07:00 MDT

By Richard Stobbe

Wondering about outsourcing your data to the U.S.? What follows is an update to one of our most popular posts: Outsourcing by Canadian Companies: Another Look at the USA PATRIOT Act, originally written in January 2013.

In that post, we discussed the concern that U.S. government authorities may use the provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“PATRIOT Act”) to access the personal information of Canadians where that information is stored in the United States in the context of outsourcing or cloud-computing.

We also noted that for private sector businesses there are no specific legal prohibitions on outsourcing to the United States in light of the PATRIOT Act, provided (1) reasonable safeguards are built into the outsource contract (including confidentiality, use-restrictions, security, and provisions to meet monitoring and audit requirements), and (2) customers are notified in a clear way when their personal information will be stored or handled outside Canada. The only exceptions to this are within the public sector, as reviewed in our earlier post.

What Has Changed and What Remains the Same

This is a complicated area of law. Starting in June 2013, Edward Snowden’s revelations about N.S.A.’s pervasive warrantless surveillance programs triggered a broader debate about privacy, as well as the specific risks of outsourcing to U.S. companies.

Certain provisions of the PATRIOT Act expired under a sunset clause on June 1, 2015. The U.S. Congress passed the USA FREEDOM Act on June 2, 2015 (in keeping with the American penchant for legislative acronyms, the full name is “Uniting and Strengthening America by Fulfilling Rights and Ending Eavesdropping, Dragnet-collection and Online Monitoring Act“).

The USA FREEDOM Act restores many of the expired provisions of the PATRIOT Act through 2019. Some provisions of the Foreign Intelligence Surveillance Amendments Act will expire in 2017 (including Section 702, a provision which underpins some of the N.S.A.’s bulk surveillance of online communications). Under the FREEDOM Act, certain sections of the Foreign Intelligence Surveillance Act of 1978 were amended in an effort to delimit the NSA’s mass data collection programs. However, the restrictions on bulk data collection don’t take effect for 6 months after the USA FREEDOM Act is enacted. There is also a carve-out to permit the government to obtain FISA orders during this 180-day period. The effect of this is unclear, but commentators have speculated that during this 6-month grace period the N.S.A. can continue bulk collection, and obtain FISA orders which are not constrained by the requirement for a “selection term”.

Furthermore, bulk collection of phone data is not necessarily coming to an end – arguably, it is merely being delegated to the telecoms: “The Freedom Act does take the bulk collection of Americans’ telephone records out of the hands of the National Security Agency and leaves those records with the phone companies; it sets up procedures for the NSA to get access to those records when it wants to.”

The new law does introduce reforms for oversight of government surveillance. In a nod to transparency, some FISA Court opinions may become available, and technology companies will have the ability to publicly report the number of government surveillance requests or investigation inquiries they receive. Previously, companies were prohibited from reporting that such requests had been received.

Generally, under the FREEDOM Act, indiscriminate bulk data collection is to be reformed by requiring the use of “specific selection terms”. In other words, government agencies such as the NSA must use a search term – the name of a specific person, account, address, or personal device, or any other specific identifier – to limit the scope of data collection “to the greatest extent reasonably practicable”.

In 2004, after the initial flurry of anxiety about US government surveillance under the PATRIOT Act, the Privacy Commissioner of Canada noted: “The [PATRIOT] Act is simply one example of a law that can give the United States government or its agencies access to personal information about Canadians that has been transferred to the United States. Research done by the Office of the Privacy Commissioner and discussions with the Department of Justice suggest that the USA PATRIOT Act is not likely in the normal course of events to be used to obtain personal information held in the United States about Canadians.” (Emphasis added)

In light of the 2013 Snowden revelations (and the 2007 Mark Klein disclosures), we now know that, in fact, the bulk collection of phone and internet data by the N.S.A. would have resulted in a lot of personal information about Canadians being collected by the N.S.A. in the United States through the N.S.A.’s PRISM, ECHELON and related surveillance programs.

Data access by Canadian or American government authorities in the course of investigations is not new. Don’t forget that the PATRIOT Act itself was merely an amendment and expansion to a series of existing government investigation tools which were already part of U.S. law, such as the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, Foreign Intelligence Surveillance Act, Money Laundering Control Act and the Bank Secrecy Act. Going back even further, NSA’s cooperation and information-sharing with Canadian security agencies actually dates to the 1940s (see: the UK-USA Agreement). However, the sheer scope, breadth and depth of surveillance was new.

The Americans are not the only ones who carry on surveillance. There are a number of Canadian laws that enable police, security agencies and government investigators to obtain access to information held in Canada in the course of an investigation. And as in the U.S., Canadian security agencies have also been caught exceeding the legal limits on their online surveillance (see X (Re), 2013 FC 1275; aff’d 2014 FCA 249, where the Federal Court and Federal Court of Appeal decided that CSIS breached the duty of candour owing to the Court in seeking and obtaining search warrants fro surveillance on Canadians outside Canada).

Canadian police and security agencies can also obtain information held in the U.S., just as American security agencies can obtain records held in Canada through information-sharing agreements, protocols and a bilateral treaty between the United States and Canada known as the Mutual Legal Assistance Treaty (the “MLAT”). Other countries have similar investigative powers.

While the Americans are making some modest reforms to their surveillance laws, Canadian authorities are actually expanding their reach; the Anti-terrorism Act, 2015 (Bill C-51) was passed on June 9, 2015, and is awaiting royal assent. This new law expands the information-gathering powers between CSIS, police investigators and other Canadian government agencies.

Further, the effect of so-called “boomerang routing” means that online information flowing between a Canadian sender and Canadian recipient is still often routed through the US. (See: IXMaps.ca) Thus, even where data is not physically stored in the US, it may be caught by ongoing N.S.A. surveillance at the point the data traverses through an internet exchange point located within the United States.

Conclusion

As a matter of risk-assessment for Canadian companies outsourcing data to cloud-computing service providers, should you be concerned that your (or your customers’) Canadian online data will be subject to access by the U.S. government?

1. We know that for Canadian private sector businesses there are still no legal prohibitions against outsourcing data to the United States (note that the public sector is treated differently);

2. Best practices still dictate that (a) reasonable safeguards should be built into the outsource contract (including confidentiality, use-restrictions, security, and provisions to meet monitoring and audit requirements), and (b) customers should notified in a clear way when their personal information will be stored or handled outside Canada.

3. There can be no doubt that surveillance practices under the (old) PATRIOT Act resulted in the mass indiscriminate collection of internet and phone data for many years (and very likely continues within the 6-month period after enactment of the FREEDOM Act). It appears very likely that Canadian data outsourced to the U.S. was subject to bulk collection by the N.S.A. Due to “boomerang routing”, it appears likely that even data stored on servers located within Canada often flows through internet exchange locations within the U.S., and therefore would be susceptible to bulk collection by the N.S.A. The USA FREEDOM Act (which is really the PATRIOT Act 2.0) does impose some mild but important reforms on the scope of N.S.A. surveillance. If bulk data and phone-record collection is actually curtailed, the ongoing risk is associated with “targeted” or “selection term” access, in situations where government security and law enforcement agencies exercise rights of accessing and monitoring online data in the course of investigations of a “specific person, account, address, or personal device” in the U.S. It is worth noting that this ongoing risk of access is similar on both sides of the Canada/U.S. border, since Canadian security and law enforcement agencies have similar powers of investigation, and the two governments can rely on MLAT requests and other information sharing protocols to share data.

When you weigh the issues and risks associated with outsourcing Canadian data to the U.S., consider these points and seek advice from experienced IT and privacy counsel.

Further reading: Law, Privacy and Surveillance in Canada in the Post-Snowden Era.

Calgary – 07:00 MDT

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By Richard Stobbe

A few weeks ago, Jawbone, a fitness tracking hardware and software maker, sued its arch-rival Fitbit, alleging that Fitbit lured its employees away to obtain access Jawbone’s confidential information and product plans. How would this play out in Canada? In our earlier post (Competing After Employment (Part 1)) we considered a case in which the employer could not describe the confidential information with enough specificity and detail, and the employer was unable to get its injunction form the court.

In Brandt Engineering Products Ltd v Rockford Engineering Works Ltd., 2014 SKQB 339 (CanLII), the employer enjoyed a different result.

After several employees left BEPL to join a competitor, BEPL sued its competitor alleging that the former employees of BEPL each breached their fiduciary duties, breached confidence, and breached their employment contracts, among other things. BEPL sought an injunction to prevent the use of confidential information by the ex-employees and their new employer.

The court noted that “each of these individuals were either professionals or they were engaged in doing, assisting or supporting the work of the professional/design team at BEPL. I am satisfied from the evidence that each of them would have been aware of the confidential and proprietary nature of the designs, processes, customer and supplier lists and generally and specifically financial, organizational and technical information respecting BEPL and its operations. Whether by virtue of their employment contracts, their status as professionals, the confidentiality and proprietary notices which much of BEPL’s documentation contained, or the role that each of the individual defendants played as members of the design group at BEPL, each could not help but be aware of and recognize the confidential and proprietary nature and character of much of the information to which they had access and were privy.” (Emphasis added)

It was discovered during the course of the lawsuit that the ex-employees had downloaded or removed various confidential documents (“approximately 9,713 documents” burned onto discs and a “banker’s box of BEPL materials”) and provided some of this information to the new employer, BEPL’s competitor.

The court granted the injunction restricting the ex-employees and their new employer from using confidential information and upholding the non-solicitation covenants. The court made a few important points which bear repeating:

1. “Where employees have a non-competition clause in their contract of employment or they are determined to be employees having fiduciary obligations – the employee has a continuing duty to maintain confidences for a reasonable period of time and the employee is not permitted to actively solicit the former employer’s customers nor to use confidential information to the employee’s own employment advantage…”

2. “An interim injunction should not issue for the sole purpose of eliminating competition or effectively reducing it. In cases such as this, the purpose of the injunction is to constrain improper competition — that is to say the use or potential use by former employees of confidential and proprietary information, the property of and acquired from a previous employer to whom the employees owe a fiduciary duty of confidentiality, to compete with that employer.”

3. It is also worth noting that:
– the terms of the employment agreements as well as internal confidentiality notices helped bolster the argument that these ex-employees were aware of their confidentiality obligations, and
– the evidence of misappropriation of specific documents avoided the problem in the JTT Electronics case regarding the need to describe the confidential information with enough specificity and detail.

In summary, this case succeeded in enjoining improper competition by departing employees. Get advice on departing employees, restrictive covenants and intellectual property protection from experienced counsel.

Calgary – 07:00 MDT

By Richard Stobbe

A startup in the oil-and-gas service sector sought to improve downhole well stimulation technology. After a few years, differences between the three founders culminated in the ouster of Mr. Groves, one of the founders. Mr. Groves was removed as President and then his employment was terminated. The company had, during those few years, filed for patent protection on a number of inventions which were invented by Mr. Groves. After his termination, he promptly sued his former employer based on a claim of ownership of those inventions which were created during the course of his employment.

In the recent decision in Groves v Canasonics Inc., 2015 ABQB 314 (CanLII), the court noted that the employment agreement between Mr. Groves and Canasonics included the following condition:

“The Company shall own any and all Copyright and Intellectual Property created in the course of Employment. Further, in the event there is a period when the Employee might be considered an independent contractor, all Copyright created and any Intellectual Property created shall be owned by the Company.” The Court had no trouble in concluding that the inventions were patented in the U.S. and Canada by their inventor, Mr. Groves in his capacity as an employee, who then assigned the inventions to Canasonics as the employer pursuant to terms of the employment agreement.

The lesson for business in any industry is clear: ensure that your employment agreements – and by extension, independent contractor and consulting agreements – are clear. Intellectual property and ownership of inventions should be clearly addressed. Get advice from experienced counsel to ensure that the IP legal issues are covered – including confidentiality, consideration, invention ownership, IP assignment, non-competition and non-solicitation.

Calgary – 07:00 MDT

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By Richard Stobbe

Let’s say you provide web-based software in a SaaS subscription model. What if your reseller or strategic business partner works against you to redesign and reverse engineer your software so they can launch a competing product?

This is what happened to Warehouse Solutions (WSI) in the recent U.S. case Warehouse Solutions, Inc. v. Integrated Logistics, LLC (May 8, 2015, Fed. CA 11th Cir.). WSI developed and sold a web-based software product known as “Intelligent Audit” which interfaced with UPS and FedEx tracking systems to allow companies to track and manage packages. Integrated acted as a reseller of “Intelligent Audit”, but was also a competitor to WSI, in the sense that Integrated sold its own package-tracking software. The reseller relationship between WSI and Integrated, however, was never documented in a written agreement. The parties had verbal discussions about the confidential and proprietary nature of the “Intelligent Audit” software.

Although Integrated never had access to the source code for “Intelligent Audit”, it had high level administrator access rights to the software, and therefore had much broader insight into the features, functionality and structure of the software, compared to the typical end-user.

On the side, unknown to WSI, Integrated developed its own web-based package-tracking software product that was visually and functionally similar to “Intelligent Audit”. Integrated even went so far as to give its own software developer access to “Intelligent Audit”. Eventually, Integrated dropped “Intelligent Audit” and began selling its own competing product under the ShipLink brand name.

WSI then sued Integrated for reverse engineering and copying its software, and through various court proceedings, the claims came down to the issue of trade secrets. The court drew a distinction between a software program’s underlying source code, which may be a trade secret, and the program’s “look and feel” and “functionality,” which cannot be protected as a trade secret, since these features are readily apparent to any user. Since WSI did not enter into a written confidentiality agreement with Integrated, the trade secret claim failed, and WSI’s claim was dismissed.

Lessons for business?

1. It’s worth noting that this case turns largely on U.S. concepts of “trade secret” protection under the Trade Secrets Act, and there is no equivalent legislation in Canada. Canadian software vendors are frequently bound by local U.S. laws in their dealings with American customers, resellers and strategic partners, so this case is an important one for Canadian SaaS providers, even though it involves U.S. law.

2. There are situations – such as in AirWatch, LLC v. Mobile Iron, Inc., (Unpublished) No. 1:12-cv-3571 (N.D. Ga. Sept. 4, 2013) – where a software licensor can protect its software as a trade secret, where it uses written agreements to clearly preserve the secrecy of the program’s functions and specifications.

3. Overall, the message for software vendors and SaaS providers is that clear written agreements will always be preferable to handshake deals and verbal warnings about confidentiality.

Calgary – 07:00 MDT

By Richard Stobbe

As we noted in our earlier post (See: this link) the bill known as Economic Action Plan 2015 Act, No. 1 was tabled in the House of Commons on May 7, 2015. It passed Second Reading in the House of Commons on May 25th and is now with the House of Commons Standing Committee on Finance.

The bill proposes to amend the Copyright Act to extend the term of copyright protection for sound recordings and performances fixed in sound recordings.

Copyright in a sound recording currently subsists until the end of 50 years after the end of the calendar year in which the first fixation of the sound recording occurs. However, if the sound recording is published before the copyright expires, then copyright protection would be extended to the earlier of the end of 70 years after the end of the calendar year in which the first publication of the sound recording occurs and the end of 100 years after the end of the calendar year in which that first fixation occurs.

The bill is expected to pass. Stay tuned.

Calgary – 07:00 MDT

By Richard Stobbe

What, exactly, does industrial design protect? The recent decision Zero Spill Systems Inc. v. Heide, 2015 FCA 115, reviewed this question. In the trial level decision, Zero Spill sued a competitor for infringement of Canadian Industrial Design No. 86,793 (the ’793 Design), based on the competitor’s sales of a similar-looking tray. The ‘793 Design protected a fluid containment tray for use in oil field operations. The Federal Court decided that there was no infringement because many features of the ’793 Design were in some way functional, and were therefore unprotectable under the Industrial Design Act by virtue of section 5.1(a) of the Act. The court of appeal reversed in part and clarified:

1. First, the Court made it clear that the right to sue for industrial design infringement depends on registration. Without a registered industrial design, there can be no basis for infringement. With a registered design, the law recognizes a presumption of validity. In other words, a presumption that the registered industrial design complies with the Act.

2. Secondly, it is worth noting that this presumption favours the owner, and places the onus on the alleged infringer to plead invalidity. If invalidity is not raised in the defence, and evidence is not raised on the issue of invalidity, then the court cannot make a determination of invalidity.

3. Third, the Court said clearly that “functional features of an industrial design may be protected by the Industrial Design Act.” Looking at section 5.1(a) of the Act, it is clear that features that are dictated solely by a utilitarian function of the article are ineligible for protection. Therefore, “features may be simultaneously useful and visually appealing.” The Court went so far as to say that Industrial Design Act would serve no purpose if it did not protect functional features. Only those features whose form are dictated solely by function are not protected.

Talk to experienced IP counsel at Field Law for advice on exploring the possible advantages of industrial design protection for your products.

Calgary – 07:00 MDT