Any owner who has tried to stop copyright and trade-mark infringement can attest to the difficulty of pursuing an effective practical remedy; websites come and go, distributors of pirated software disappear and rematerialize under a different name, and servers are taken down merely to pop up in a different jurisdiction.

Microsoft Canada can chalk up a win in a recent Canadian Federal Court decision (Case name: Microsoft Corporation v. 9038-3746 Quebec Inc., 2006 FC 1509).  In the decision, the Federal court slapped a Quebec-based distributor of pirated Microsoft software with a $700,000 damage award for copyright and trade-mark infringement.  The award was based on the maximum statutory damages under the Copyright Act of $20,000 per infringement, for a total of half a million dollars, plus punitive damages of $200,000.  Cerrelli, the director of the corporate defendant was personally liable with the corporation, due to his personal involvement and knowledge of the infringement.  The total damages may not come close to Microsoft’s actual loss in sales, nor the infringer’s profits, but the number is enough to drive a point home.

This case underscores two points: there can be a practical and effective remedy for copyright infringement, with a carefully prepared case. Secondly, directors can and will be held personally liable with their corporations, when the circumstances are right.  

 

Calgary – 11:20 MST

The use of copyright as a tool to control distribution channels and protect product lines is not new. Neither is it confined to the traditional fields of music or software. Take for example the 2005 case of Euro Excellence, Inc. v. Kraft Canada Inc., 2005 FCA 427, where the Federal Court of Appeal upheld an injunction against an unauthorized distributor of “gray market” Toblerone chocolate bars, based on a claim of copyright infringement. Gray marketing refers to the distribution of genuine goods by a distributor who is outside the manufacturer’s official supply channel.

Manufacturers of all stripes seem to be employing copyright as a way to control unauthorized uses of their product. Take for example Viacom’s well-drafted copyright license terms on the back of its “Dora the Explorer” branded stickers: “This product is intended solely for non-commercial home use. No license has been granted to apply this product to decorate articles which will thereafter be sold. Any such use is an infringement of copyright in the characters portrayed and is specifically prohibited.” Viacom’s Dora figure is big business. In 2005, Viacom’s revenues in Canada alone were $214 million, generated in part from licensing and merchandising of branded products such as Dora stickers. Copyright can be a very useful tool which should be considered when developing a strategy for product distribution.

Just don’t let your pre-schoolers put any Dora stickers on the cups at their sidewalk lemonade stand.

Calgary – 16:04 MST

In October 2006, open source software company OpenLogic announced that it is offering an indemnity against lawsuits for customers using its code [story link].  The indemnity covers intellectual property infringement claims (including defense of claims, replacement of infringing software, and up to four times the value of the contract for damage awards) for claims arising out of the use of certain open-source software products. These products are listed in its Certified Library.  Of course, there are limitations to the coverage, one of which is that the indemnity does not cover code which is modified by the customer.

The business issue? For licensors, offering such an indemnity is a calculated risk. In this case, it’s designed to give customers confidence in the face of the questions swirling around the open-source community in the wake of the SCO Litigation. Software licensors, whether in the open-source or traditional software market, need to balance the costs associated with risk allocation. The risk allocation analysis has to take into account the potential threat posed by software patents.  Different companies will take different approaches depending on their overall strategy.  For example, Red Hat has developed its own strategy on such litigation, and has taken out a number of software patents for defensive purposes. 

We will be watching these developments closely as open source software legal issues continue to be front-and-centre for many software companies. 

Online contracts can provide fertile ground for disputes. The trick is to set-up your online click-through agreement in such a way that the court will have no choice but to uphold it.  In October 2006, in the decision in Person v. Google Inc. 2006 WL 2884444 (S.D.N.Y. Oct. 11, 2006) [See Law Professor Eric Goldman’s link], the internet behemoth successfully deflected a lawsuit brought in New York State. Google won based on the forum selection clause in its mandatory click-through AdWords contract, which forces disputes to be brought in California, Google’s home turf.  Google won the same battle in a different lawsuit in 2004 (American Blind & Wallpaper Factory Inc. v. Google, Inc., 1:04 cv 00642 LLS (S.D.N.Y. 2004)). This doesn’t mean the dispute is over. Merely that it must go forward in California.

In Canada, we’ve got the benefit of a number of cases, such as Rudder v. Microsoft, a 1999 decision which upheld the validity of Microsoft’s online MSN agreement.  In a number of provinces we also have the benefit of the Electronic Transactions Act [Alberta Version] which sets out a number of requirements for e-commerce businesses.

 

The 2006 decision by the Ontario Court of Appeal in the case of CivicLife.com Inc. v. Canada is instructive in how not to treat your software developer. The case involved a botched pilot project known as Access.ca which was touted as a ground-breaking portal for communities across Canada, designed to make all information and services of federal ministries and agencies accessible on-line. This was in 2000, back when we all used the endearing term “Information Superhighway.” The project foundered for a number of reasons and ended in litigation between Industry Canada and one of its contractors, a software company known as CivicLife.com Inc. It makes for a good case study, so here are a few of the lessons:

Lesson 1: Keep Track of the Cooks in the Kitchen
Sometimes you need to bring a number of technology providers together to get a project done. That’s business. However, make sure you know how many you really do need, and ensure there is a clear structure in place to deal with communication and governance. In the CivicLife case, the government engaged two contractors to work on the project: CivicLife and another software company called Smartsources.com Technologies Inc. Smartsources was the junior partner, hired to provide some of the minor components of the portal. The parties did turn their minds to the issue of communication and cooperation: in the legal agreements the two contractors were obliged to cooperate and communicate with each other and the government had established a communication structure between itself and each contractor.

But at some point in the process, someone at Industry Canada decided that Smartsources should take the lead and develop its own portal. Problem is, no-one ever told CivicLife, who continued to toil away at the project wondering why their partners weren’t cooperating. If you decide that one contractor needs to be dropped, do it early and negotiate a resolution of the issue or a termination of that contractor. Secretly encouraging one contractor while stonewalling the other will only breed confusion, inefficiency and ultimately litigation. The court found that: “The misconduct was carried out in secret while all along Industry Canada was telling CivicLife the project was proceeding as agreed, and when CivicLife learned of the portal submitted by SmartSources, Industry Canada invented a false story to convince CivicLife that its position was not altered.”

Lesson 2: The Duty of “Good Faith”
The court was clear that Industry Canada breached its duty of good faith when dealing with CivicLife. What does that mean? Essentially, the government secretly encouraged Smartsources while stringing along CivicLife with no intention of making the relationship work. According to the court, they “acted in such a way as to undermine the very objectives of the contract.” The government’s lawyers (hey, they were doing their job) argued that it was not a specific term of the contracts that the government act in good faith. Okay, they were technically correct, there was nothing expressly imposing such an obligation in the text of the government’s contracts. But that didn’t stop the court from “reading in” or implying a duty of good faith in its dealings with CivicLife. You may have a duty to act in good faith even if there is no such obligation written in your contract.

Lesson 3: The Fine Print
Of course the fine print can always come back to haunt you. And there’s nothing like litigation to shine a light on it. Here are a few nuggets from this case:
• If you have a duty to use “best efforts” you must exercise your discretion reasonably and fairly.
• If you can do something in a contract in your “sole discretion” don’t think that means you can ride roughshod over the other party. When exercising your discretion, these words can mean acting reasonably, honestly and in good faith and with regard to how the other party’s interests are affected.
• An “entire agreement” clause will not stop the court from implying a term of the contract, such as a duty of good faith or the duty not to abuse a discretion.

Lesson 4: The Value of Good Evidence
Industry Canada never provided any evidence to explain whether it ever rejected or found fault with any of CivicLife’s deliverables. It could never explain why it decided to ask SmartSources to provide a stand-alone portal or why it did not proceed with the national launch of Access.ca. If they had the evidence, it would have come out. On the other side, CivicLife could show that it sent written correspondence to Industry Canada, and this documentation helped win the case. In the court’s words: “Even though Industry Canada knew CivicLife was in dire financial straits and needed to be told the truth as soon as possible, it deliberately chose not to respond to CivicLife’s many letters and kept silent to allow CivicLife to drown in useless and expensive attempts to keep the project alive.”

This case isn’t a cutting-edge Supreme Court of Canada judgement, but it neatly illustrates some of the practical business issues to watch for. You may as well take a few tips: CivicLife ended up in receivership.