Archive for April, 2019

Are we getting Canadian Regulations for Crypto Trading?

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By Richard Stobbe

In February 2019, we reviewed the story of QuadrigaCX, and raised the question of how this would impact the adoption of cryptocurrencies or other tokens that are powered by the same blockchain or distributed ledger technologies (DLT) that underpin BitCoin. In particular we suggested that some regulatory oversight might be warranted. See: QuadrigaCX and the Missing Millions: A Crypto Cautionary Tale .

In March 2019 the Joint Canadian Securities Administrators (CSA) and IIROC (Investment Industry Regulatory Organization of Canada) issued a Proposed Framework for Crypto-Asset Trading Platforms (PDF). From a regulator’s perspective, many of these crypto-questions fall into the crack between CSA and IIROC.

Setting the stage to close that gap with regulatory engagement in Canada, the report notes that there are over 2,000 “crypto assets” in the wild, some trading for fiat currencies and others for various types of crypto-tokens, using over 200 different platforms. “Many of these Platforms,” say the report’s authors, “operate globally and without any regulatory oversight.”

There are a variety of crypto assets but currently they can generally be categorized from a regulatory perspective in one of two ways:

  1. Either they are akin to a commodity or currency, often referred to as “utility tokens”, which are created to allow holders to access or purchase goods or services on a DLT network. Crypto assets that are a “form of payment or means of exchange on a decentralized network, such as bitcoin”, says the report, “are not currently in and of themselves, securities or derivatives. Instead, they have certain features that are analogous to existing commodities such as currencies and precious metals”;
  2. Alternatively, crypto assets can be more akin to tokenized versions of traditional securities, derivatives or investment contracts, in the sense that they operate like shares in a company, or an interest in assets. If the crypto assets mimic the features of securities or derivatives, and are traded on an exchange platform, then that platform should be subject to existing securities regulatory requirements.

One of the regulatory problems is that the feature-sets of many crypto assets continually blur the lines between “currency” and “security”. Existing securities legislation may still apply to exchange platforms that offer trading of crypto assets even if those are tokens more like commodities, particularly where the investor’s contractual right to the cryptocurrency asset behaves like a security or derivative. Among the challenges that are unique to crypto exchange platforms is that these tokens and coins trade on a global basis, both on exchange platforms and off, both inside and outside regular trading hours, without any central source for pricing or reliable reference data. The values are “illiquid and highly volatile”. From a market surveillance point of view, this makes the regulatory enforcement uniquely challenging.

Essentially, the CSA/IIROC proposed platform framework would apply to “Crypto-Asset Trading Platforms” that are subject to securities legislation and that may not otherwise fit into other existing regulatory categories. Among the recommendations in the paper, crypto-trading platforms may have to become registered as investment dealers and meet compliance requirements for IIROC dealer and marketplace members.

Notably, this regulatory scheme would apply both to Platforms that operate in Canada and to those that have Canadian participants.

Enforcement is not really addressed here, but that’s another debate altogether.

The comment period is open until May 15, 2019.

 

 

Additional Reading: CSA Staff Notice 46-307 Cryptocurrency Offerings and CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens, NI 21-101 Marketplace Operation, NI 23-101 Trading Rules and NI 23-103 Electronic Trading and Direct Access to Marketplaces.

Calgary – 07:00 MST

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Attacking Bad Faith Trademark Registrations in Canada

By Richard Stobbe

There are a number of monumental changes coming soon (June, 2019) to the trademark regime in Canada. One small change was actually first introduced in 2018, a change that may come in handy in some trademark disputes once the rest of the new provisions are in force. 

The concept of “bad faith” became a formal part of the Trademarks Act in Canada in late 2018, and it remains to be seen how it might be developed as a tool to prevent unmeritorious applications or registrations. 

One of the fears among some trademark owners is the perception that “use” has been dropped as a requirement for registration, clearing a pathway for trademark squatters who file extortionist or opportunistic applications where legitimate use was never intended. In fact, “use” remains a fundamental requirement under Canadian trademark law, but it is true that under the revised Act, a “Declaration of Use” will be dropped as a necessary step before registration; it is currently required for applications filed on the basis of proposed use, and that requirement falls away under the revised  Act.

The ability to attack a trademark on the basis of “bad faith” is supposed to provide an easier way to challenge opportunistic applications which might be filed without any intention of actual commercial use.  This is a new ground for invalidating a trademark registration or  opposing an application, which is embedded in Section 18 of the Act (“The registration of a trade-mark is invalid …. if the application for registration was filed in bad faith”). There is no definition of “bad faith” in the Act but at least one Canadian case considered the issue several years ago:  HomeAway.com, Inc. v. Hrdlicka, 2012 FC 1467 (CanLII)  

In HomeAway, the Federal Court considered a case where an individual, Mr. Hrdlicka, filed an application for the mark VRBO, and obtained a registration for that mark in association with “Vacation real estate listing services”. 

The VRBO mark is, of course, an acronym for “vacation rental by owner”, and a well-known brand owned by HomeAway.com Inc.  Mr. Hrdlicka obtained registration of the mark in Canada because he apparently filed a blank “Declaration of Use”, thus somehow securing the registration despite the lack of any declaration of use, or any actual evidence of use in Canada.  The Federal Court found that the applicant never used VRBO as a trade-mark in Canada (until dubious evidence emerged after the dispute arose), and that, at the time he applied to register that trade-mark in Canada, Mr. Hrdlicka was aware of HomeAway’s business. The evidence showed that he registered the mark for the purpose of selling it back to HomeAway “for a large sum of money and/or for employment or royalties.”  This is reminiscent of many dot-ca domain name disputes. 

As a result, the Federal Court concluded that Mr. Hrdlicka, in filing the application for registration, “had no bona fide intent of using it in a legitimate commercial way in Canada. His intent was to extort money or other consideration from HomeAway. Such activity should not be condoned or encouraged.” The court decided to expunge the registration, relying on its general powers under Section 57 of the Act. 

This is precisely the circumstance that concerns current brand owners in light of the pending changes to the Trademarks Act: opportunistic registration, no bona fide purpose, and no evidence of actual use.

While the term “bad faith” does not actually appear in the HomeAway judgement, the result is clear: the application or registration of a mark without any bona fide intent or legitimate commercial use, will be considered to be filed for an improper purpose, and such conduct lacking good faith intent should be considered “bad faith” within the scope of Section 18(e).  

It remains to be seen whether courts apply this decision to future Section 18(e) challenges.

 

Calgary – 07:00 MST

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Privacy Update: Will Consent be Required for Outsourcing Canadian Data?

By Richard Stobbe

 

Here’s a familiar picture:  You are a Canadian business and you use a service provider outside of the country to process data. Let’s say this data includes personal information. This could be as simple as using Gmail for corporate email, or using Amazon Web Services (AWS) for data hosting, or hiring a UK company for CRM data processing services. 

Until now, the Federal Office of the Privacy Commissioner (OPC) has taken the position that data processing of this type is a “use” of personal information by the entity that collected the data for the purposes of the Personal Information Protection and Electronic Documents Act (PIPEDA).  Such use would require the consent of the individual for the initial collection, but would not require additional consent for the data processing by an out-of-country service provider, provided there was consent for that use at the time the information was first collected.  

The privacy laws of some provinces contain notification requirements in certain cases, though not express consent requirements, for the use of service providers outside of Canada.  For example, Alberta’s Personal Information Protection Act, Section 13.1, indicates that an organization that transfers personal information to a service provider outside Canada must notify the individual in question. 

The OPC’s guidance, dating from 2009, took a similar approach, allowing Canadian companies to address the cross-border data processing through notification to the individual.  In many cases, a company’s privacy policy might simply indicate in a general way that personal information may be processed in countries outside of Canada by foreign service providers. In the words of the commissioner in 2009:  “[a]ssuming the  information is being used for the purpose it was originally collected, additional consent for the transfer is not required.”  As long as consumers were informed of transborder transfers of personal information, and the risk that local authorities will have access to information, the organization was meeting its obligations under PIPEDA. 

A recent consultation paper published by the OPC has signalled a potential change to that approach.  If the changes are adopted by the OPC, this will represent a significant shift in data-handling practices for many Canadian companies. 

Draft guidance from the OPC, issued April 9, 2019, indicates that recent high profile cross-border data breaches, such as the incident involving Equifax, have inspired a stricter consent-based approach.  Today, the OPC issued a supplementary discussion document to explain the reasons for the proposed changes. (See: Consultation on Transborder Dataflows)

Reversing 10 years of guidance on this issue, the OPC now explains that a transfer of personal information between one organization and another should be understood as a “disclosure” according to the common understanding of that term in privacy laws. 

If the draft guidelines are adopted by the OPC, any cross-border transfers of personal data to an outsourced service provider would be considered a “disclosure”, mandating a new consent, as opposed to a “use” which could be covered by the initial consent at the time of collection.  Depending on the circumstances, the type of disclosure and the type of information, this could require express consent, and it’s not clear how this would apply to existing transborder data-processing agreements, or whether additional detail would  be required for consent purposes, or if the specific names of the service providers would be required as part of the consent. This could significantly impact data-processing, e-commerce operations, and the consent practices of many Canadian businesses. 

Consultations are open until June 4, 2019. Please stay tuned for further updates on this issue and if you want to seek advice on your company’s privacy obligations, please contact us.

Calgary – 16:00 MST

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Meeting Mike Tyson does not constitute consideration for Canadian copyright assignment

By Richard Stobbe

When is a contract really a contract and when is it just a type of unenforceable promise that can be revoked or cancelled?

Glasz c. Choko, 2018 QCCS 5020 (CanLII) is a case about ownership of raw documentary footage of Mike Tyson, the well-known boxer, and whether an email exchange was enough to form a binding contract between a promoter and a filmmaker.

The idea of “consideration” is supposed to be one of the important elements of an enforceable contract. There must be something of value exchanging hands between two parties as part of a contract. But that “something of value” can take many forms. The old English cases talk about a mere peppercorn as sufficient consideration.

In this case, a boxing the promoter, Mr. Choko, promised a pair of filmmakers that he had a special relationship with Mike Tyson, and could give them special access to obtain behind-the-scenes footage of Mr. Tyson during his visit to Toronto in 2014. An email was exchanged on September 4, 2014, in which the filmmakers agreed that, in exchange for gaining this access, the copyright in the footage would be owned by the promoter, Mr. Choko.

The filmmakers later revoked their assignment.

The parties sued each other for ownership of the footage. Let’s unpack this dispute: the footage is an original cinematographic work within the meaning of section 2 of the Copyright ActThe issues are: Was the work produced in the course of employment? If not, was the copyright ownership to the footage assigned to Mr. Choko by virtue of the Sept. 4th email? And were the filmmakers entitled to cancel or revoke that assignment?

There was no employment relationship, that much was clear. And the filmmaker argued that the agreement was not an enforceable contract since there was a failure of consideration, and that the promoter misrepresented the facts when he insisted on owning the footage personally. In fact, he misrepresented how well he really knew the Tyson family, and mislead the filmmakers when he said that Mrs. Tyson has specifically requested that the promoter should be the owner of the footage. She made no such request.

The promoter, Mr. Choko, argued that these filmmakers would never had the chance to meet Mike Tyson without his introduction: thus, the experience of meeting Mr. Tyson should be enough to meet the requirement for “consideration” in exchange for the assignment of copyright. However, the court was not convinced: “every creative work can arguably be said to involve an experience…” If we accepted an “experience” as sufficient consideration then there would never be a need to remunerate the author for the assignment of copyright in his or her work, since there would always be an experience of some kind.

Take note: Meeting Mr. Tyson was insufficient consideration for the purposes of an assignment Canadian copyright law.

For advice on copyright issues, whether or not involving Mr. Tyson, please contact Richard Stobbe.

 

Calgary – 07:00 MDT

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The law in Canada on internet contracts: Part 2

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By Richard Stobbe

Go-karting in Saskatchewan as an internet law case?  Yes, and you’ll see why. In Quilichini v Wilson’s Greenhouse, 2017 SKQB 10 (CanLII), a go-kart participant is injured and sues the service provider. The service provider holds up the waiver as a complete defence, saying it contains a release of all claims.

In this case, the waiver is  provided to all participants through a kiosk system, where an electronic waiver is presented in a series of electronic pages on a computer screen. Participants have to click “next” to move from one page to the next; and finally click the “I agree” button on the electronic waiver before they can participate in the activity.

Variations of this happen everyday across Canada when users click “I agree”, “I accept” or some variation of a click, tap or swipe to indicate assent to a set of terms.

  • Can legally binding contracts be formed in this way?
  • And another question, even if it works for common-place transactions like a shopping-cart check-out, does it work for something as important as a release and waiver of the right to sue for personal injury?

The answer is a clear yes, according to the facts of this case. The judge in Quilichini had no trouble finding that the participant’s electronic agreement was just as effective as a signed hard-copy of the agreement. The participant had a full opportunity to read the waiver, and there was nothing obscure in the presentation of the waiver, or the choice whether or not to accept it. The court concluded: “there can be no question but that when the plaintiff clicked ‘I agree’, he was intending to accept and assume responsibility for any possible risk involved and knew he was agreeing to discharge or release the defendants from all claims or liabilities arising, in any way, from his participation.”

This conclusion is based in part on Canadian provincial laws such as Alberta’s Electronic Transactions Act, SA 2001, c E-5.5, (there’s an equivalent in Saskatchewan and other provinces), which generally indicate that if there is a legal requirement that a record be signed, that requirement is satisfied by an electronic signature. There are exceptions of course, such as wills or transfers of land.

In the Quilichini  decision, the court didn’t look outside the Saskatchewan Electronic Information and Documents Act, 2000. But there are other authorities to support the proposition that binding contracts can be formed online in a number of ways. Decisions such as Kanitz v. Rogers Cable Inc., 2002 CanLII 49415 (ON SC), even deal with passive assent, where a user is deemed to be bound by something even absent a formal “click-through” button. Kanitz dealt with the question of whether internet service subscribers were bound by a subscription agreement, where that agreement was amended, then merely posted to the service provider’s site, rather than requiring a new signature or a fresh “click-through”. The subscribers were bound by the terms merely by continuing to use the service after the amended terms were posted.

In considering this, the Court in Kanitz said: “…we are dealing in this case with a different mode of doing business than has heretofore been generally considered by the courts. [remember… this was 2002] We are here dealing with people who wish to avail themselves of an electronic environment and the electronic services that are available through it. It does not seem unreasonable for persons who are seeking electronic access to all manner of goods, services and products, along with information, communication, entertainment and other resources, to have the legal attributes of their relationship with the very entity that is providing such electronic access, defined and communicated to them through that electronic format. I conclude, therefore, that there was adequate notice given to customers of the changes to the user agreement which then bound the plaintiffs when they continued to use the defendant’s service.” [Emphasis added]

This is not to say that ALL electronic contracts are always enforceable, or that all amendments will be enforceable even without a proper mechanism to collect the consent of users. However, it does provide a measure of confidence for Canadian internet business, that the underlying legal foundation will support the enforceability of contractual relationships when business is conducted online.

Want to review your own internet agreements and electronic contracting workflows to ensure they are binding and enforceable? Contact Richard Stobbe.

 

Calgary – 07:00 MST

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