Archive for September, 2015

Limitations of Liability: Do they work in the Alberta Oilpatch?

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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

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Apple’s Liability for the Xcode Hack

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By Richard Stobbe

I don’t think I’m going out on a limb by speculating that someone, somewhere is preparing a class-action suit based on the recently disclosed hack of Apple’s app ecosystem.iphone6_34fl_3_color_spaced_homescreen_landing.jpg

How did it happen? In a nutshell, hackers were able to infect a version of Apple’s Xcode software package for iOS app developers. A number of iOS developers – primarily in China, according to recent reports – downloaded this corrupted version of Xcode, then used it to compile their apps. This corrupted version was not the “official” Apple version; it was accessed from a third-party file-sharing site. Apps compiled with this version of Xcode were infected with malware known as XcodeGhost. These corrupted apps were uploaded and distributed through Apple’s Chinese App Store. In this way the XcodeGhost malware snuck past Apple’s own code review protocols and, through the wonder of app store downloads, it infected millions of iOS devices around the world.

The malware does a number of nasty things – including fishing for a user’s iCloud password.

This case provides a good case study for how risk is allocated in license agreements and terms of service. What do Apple’s terms say about this kind of thing? In Canada, the App Store Terms and Conditions govern a user’s contractual relationship with Apple for the use of the App Store. On the face of it, these terms disclaim liability for any “…LOSS, CORRUPTION, ATTACK, VIRUSES, INTERFERENCE, HACKING, OR OTHER SECURITY INTRUSION, AND APPLE CANADA DISCLAIMS ANY LIABILITY RELATING THERETO.”

Apple could be expected to argue that this clause deflects liability. And if Apple is found liable, then it would seek the cover of its limitation of liability clause. In the current version of the terms, Apple claims an overall limit of liability of $50. Let’s not forget that “hundreds of millions of users” are potentially affected.

As a preliminary step however, Apple would be expected to argue that the law of the State of California governs the contract, and Apple would be arguing that any remedy must be sought in a California court (see our post the other day: Forum Selection in Online Terms).

Will this limit of liability and forum-selection clause hold up to the scrutiny of Canadian courts if there is a claim against Apple?

Calgary – 07:00 MT

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Forum Selection in Online Terms

By Richard Stobbe

Let’s say you’re a Canadian company doing business with a US supplier – which law should govern the contract? ‘Forum selection’ and ‘governing law’ refer to the practice of choosing the applicable law and venue for resolving disputes in a contract.

Software vendors and cloud service providers often include these clauses in their standard-form contracts as a means of ensuring that they enjoy home-turf advantage in the event of disputes. This is very common in consumer-facing contracts, such as Facebook’s Terms of Service. That contract says: “e laws of the State of California will govern this Statement, as well as any claim that might arise between you and us, without regard to conflict of law provisions.

In our earlier post (Two Privacy Class Actions: Facebook and Apple), we looked at a BC decision which reviewed the question of whether the Facebook terms (which apply California law) should be enforced in Canada or whether they should give way to local law. The lower court accepted that, on its face, the Terms of Service were valid, clear and enforceable and the lower court went on to decide that Facebook’s Forum Selection Clause should be set aside in this case, and the claim should proceed in a B.C. court.

Facebook appealed that decision: Douez v. Facebook, Inc., 2015 BCCA 279 (CanLII), (See this link to the Court of Appeal decision). The appeal court reversed and decided that the Forum Selection Clause should be enforced.

Interestingly, the court said “As a matter of B.C. law, no state (including B.C.) may unilaterally arrogate exclusive adjudicative jurisdiction for itself by purporting to apply its jurisdictional rules extraterritorially.” (See the debate regarding the Google and Equustek decision for a different perspective on the extraterritorial reach of B.C. courts.)

The Douez decision was fundamentally a class-action breach of privacy claim, and that claim was stopped through the Forum Selection Clause.

Calgary – 07:00 MT

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What Happens When a Franchise Agreement Ends, Part Three: Rescission

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

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Patent Update: Infringement and “Non-Infringing Alternatives”

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

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Is the Mark used as a Trademark or a Trade Name?

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:

  • Some of the evidence showed use of the mark in a trade show outside of Canada, which would not qualify as use in Canada;
  • Some of the evidence was in the form of a business card which, according to the owner, was distributed to potential clients in Canada;
  • Some of the evidence showed use of the GDC COMMUNITIES on the owner’s website;
  • Lastly, the owner tendered email correspondence evidence, showing the display of GDC COMMUNITIES.
  • 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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