Co-Counsel Technology LawQuarterly McCarthy TétraultCo-Counsel: July –September2008 Volume 4,Issue3 Co-Counsel: Technology Law Quarterly Volume 4, Issue 3

Welcome to Volume 4, Issue 3 of McCarthy Tétrault Co-Counsel: Technology Law Quarterly. In this issue, copyright and privacy developments dominate. In the privacy area, a report from the United States indicates that security breaches are increasing. In the event that your organization suffers a security breach, we have put together a list of steps that you should promptly follow to mitigate the risks.

The safeguarding of sensitive information features in two other TLQ articles: one on cross-border travel and one on credit card receipts. Employers with employees travelling across the Canada—US border carrying confidential information on their laptops or other electronic devices should be aware that customs officials may search those devices, and should take steps to protect sensitive material. As well, we review the state of the law in Canada regarding what credit card information may be printed on receipts.

We also look at two recent reports from the Alberta Information and Privacy Commissioner on biometrics in the workplace. The Commissioner faulted two employers (that had sought to use thumbprint/hand scans to manage employees as part of a sign-in/out process) for not providing sufficient notice to the employees about collecting the information.

Regarding copyright, we describe two initiatives across the pond aimed at strengthening copyright holders’ rights. The E.U. has adopted a proposal to extend the term of protection for performers and sound recordings from 50 years to 95 years. As well, the UK government and six leading Internet service providers recently signed a memorandum of understanding on illegal file sharing. In Canada, copyright reform has stalled yet again — Bill C-61 died on the order paper when the federal election was called.

This edition of the TLQ includes the first in a series of articles on 10 common mistakes made by young tech companies that can diminish their value in buyers’ eyes. We discuss three of these mistakes: using open source software in a careless or cavalier way, inadvertently relinquishing ownership rights in intellectual property to employees or subcontractors, and failing to address local legal nuances in cases of offshore development.

On the communications front, the Do Not Call List has finally launched in Canada and Canadians are registering their phone numbers in droves. Telemarketers should familiarize themselves with the accompanying restrictions on their operations, as non-compliance with the new regime may result in significant fines. We also highlight a US decision in which a court ruled that a cellphone provider’s early termination fee was illegal.

These and many other key topics are discussed in this issue of the TLQ. Browse through this PDF using the table of contents, which contains “clickable” links to articles. If you wish to read these articles in HTML format, you can click on the links in the covering e-mail or go directly to our website, where all the articles are posted. You can search the publications on our website and find additional informative articles on many subjects. If you would prefer to receive a paper copy of the TLQ in the future or wish to change your subscription information, please contact me at the link below.

McCarthy Tétrault is recognized by the foremost ranking publications as a leader in technology law and other practice areas. The 2008 edition of Chambers Global, a guide to the world’s leading lawyers, confirms McCarthy Tétrault’s continued top ranking in Canada for information technology as well as telecommunications & broadcasting. PLC Which Lawyer?, in its 2008 edition, ranks McCarthy Tétrault as the leading firm in Canada for IT and e-commerce law. The Canadian Legal Lexpert Directory 2008 recognized McCarthy Tétrault as having the most recommended technology law practice in Toronto. Our Co-Counsel: Technology Law Quarterly demonstrates our commitment to maintaining this position of leadership.

Heather J. Ritchie Editor-in-Chief October 2008

Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Table of Contents

Internet/E-World ...... 1 E-COMMERCE ...... 1 Canada: Using User-Generated Content in Online Contests — Playing by the Rules ...... 1

RECORDS RETENTION ...... 4 Canada: Credit Card Data Printed on Sales Receipts: The State of Law and Policy in Canada ...... 4

SPAM...... 6 US: Virginia Anti-Spam Law Ruled Unconstitutional — Spammer’s Conviction Thrown Out ...... 6

E-CONTRACTING ...... 7 Canada: E-Procurement ...... 7 Canada: First-Ever Comprehensive Canadian Guide on E-mail Law Published...... 11

Technology Finance...... 12 TECH-RELATED FINANCE...... 12 Canada: 10 Ways to Avoid Destroying Value in Your Technology Company — Part I...... 12

Technology Contracting...... 16 OUTSOURCING ...... 16 Canada: Negotiating Outsourcing Contract Renewals ...... 16

Intellectual Property ...... 20 COPYRIGHT ...... 20 Canada: Copyright Amendment Bill Dies on the Order Paper ...... 20 US: $222,000 Damages Award Nullified in P2P File-Sharing Case ...... 20

Co-Counsel: Technology Law Quarterly Volume 4, Issue 3

US: Violation of Open Source Licence Agreement Creates Liability for Copyright Infringement ...... 22 US: Six Questions — The Horcrux of the Matter (The Harry Potter Lexicon Case) ...... 23 UK: ISPs and the UK Government Sign Memorandum of Understanding on Illegal File Sharing ..... 30 Europe: Proposed Extension of Copyright on Sound Recordings and Performances to 95 Years in Europe...... 31

TRADE-MARKS ...... 32 UK: Gifts Not on the List — The Narnia Decision ...... 32

Privacy...... 35 CASES/LEGAL DEVELOPMENTS...... 35 Alberta: A Brave New World: Biometrics in the Workplace...... 35 Canada: Privacy Commissioner’s Powers Do Not Extend to Inspecting or Compelling Production of Solicitor-Client Privileged Records ...... 38 UK: Court Awards Damages for Defamation and Breach of Privacy for Facebook Postings ...... 40 North America: Cross-Border Travellers Beware: Confidential Information is at Risk...... 41 US: 2008 Security Breaches Exceed 2007 Total ...... 45

Communications ...... 48 CASES/LEGAL DEVELOPMENTS...... 48 Canada: National Do Not Call List Launched ...... 48 US: California Court Rules Sprint’s Early Termination Fees Are Illegal ...... 49

Clean Technology ...... 52 CASES/LEGAL DEVELOPMENTS...... 52 US: Google Greens its Investments in Hopes of a Coal-Free Future ...... 52 Canada: Becoming a “Clean Energy Superpower” — Drawing Inspiration from Other Countries...... 53

Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Internet/E-World E-COMMERCE Competition Act

Canada: The Competition Bureau has taken the position Using User-Generated that the Competition Act provisions pertaining Content in Online Contests — to false or misleading representations apply Playing by the Rules to Internet contests. Therefore, the same basic rules that govern traditional marketing Humans are naturally drawn to corporate practices apply to online contests, including contests, such as Tim Horton’s Roll Up the requirement of fair disclosure and The Rim To Win® or McDonald’s restaurants’ the prohibitions on false and misleading MONOPOLY® game. Advertising contests such advertising. The disclosure requirements as these have long been used to promote include number and approximate value of the business interests and drive public attention. prizes, odds of winning, regional allocation of With the advent of the Web, many of these prizes, and contest closing date. contests have moved online and some now include user-generated content (UGC). For contest disclaimers, the Competition Bureau states that it is not sufficient for Contest organizers who choose to host their contest disclaimers to be present. These contests online and exploit UGC must abide by disclaimers must also be “likely to be read.” all the traditional legislative regimes designed In determining whether a contest disclaimer to ensure fairness, transparency and legality of is sufficient, the Competition Bureau looks such contests. They must also pay strict at its location on the website, page layout, attention to the additional complexities that use of attention-grabbing devices, size of font, stem from the online nature of the contest. accessibility to users, and the appropriate use and location of hyperlinks. To ensure Statutory Requirements transparency and fairness for contestants, contest organizers should pay particular Contests held to promote a particular attention to these areas. corporation are subject to regulation at both the federal and provincial level. Relevant The Criminal Code federal statutes include the Competition Act, Criminal Code, and Personal Information The trend in online contests is to require Protection and Electronic Documents Act contestants to submit an artistic product: (PIPEDA). video, slogan or theme music. The Criminal Code contains a provision prohibiting the disposal of any “goods, wares or merchandise”

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 by way of any contest in which contestants pay Québec residents. The Act respecting lotteries, money or “other valuable consideration.” The publicity contests and amusement machines development and submission of UGC by (Québec Lotteries Act) defines “publicity contestants would likely be considered “other contest” very widely, and includes “any valuable consideration.” To avoid violating the operation that results in the awarding of a provision in the Criminal Code, contest prize.” Therefore, contest organizers must be organizers must provide a non-purchase option. aware of and comply with the requirements in Québec Lotteries Act as well as the Charter of The Personal Information Protection the French Language. and Electronic Documents Act The Québec Lotteries Act imposes duties In executing any contest, organizers must on virtually all publicity contests permitting adhere to PIPEDA, the federal privacy participation by Québec residents, and also legislation, and all related provincial privacy gives authority to the Régie des alcools, des legislative regimes. These laws require that courses et des jeux to create rules governing contest organizers obtain consent for the publicity contests in Québec. collection, use, storage and disclosure of any personal information received through The contest organizer must pay duties to the the administration of their contest. Régie, calculated on the value of the prizes and the contest’s geographic participation Contestants should be informed, through base. The duties are equal to 10 per cent the contest rules or entry form, of the ways of the prize value for contests offered to their information will be used. The contest Québec contestants exclusively, 3 per cent for organizers should also advise contestants Canadian contests open to Québec contestants of their policies and practices relating to and 0.5 per cent for all other contests open to information security and destruction of Québec contestants. information after the contest has wrapped up. Duties are payable upon filing required contest A common privacy issue that arises in the notice forms and contest advertising materials. administration of online contests occurs when For non-resident contest organizers, the Régie contest organizers ask participants to provide usually requires security be filed to ensure personal information about “friends” or other delivery of the prizes won by Québec residents. individuals, then use the information without the third party’s consent. In addition, regulations to the Consumer Protection Act set out mandatory content Québec Rules for the contest rules, and include contest notice, document retention and reporting Contest organizers must meet additional requirements. requirements when operating a contest open to

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Finally, the Charter of the French Language UGC considerations legislates that all contest materials, including the contest rules and advertising, must be If the organizer of the online contest intends made available in French. A version of the to use UGC, a number of potential minefields rules or advertising in another language must also be avoided. The following could all may also be published, provided that it is land contest organizers in hot water: soliciting accompanied by a French version which is or publishing submissions that disparage at least as prominent as the version in any individuals, other companies or population other language. groups, or submissions that depict unsafe or illegal activities or infringe copyright. Online Issues As mentioned in a previous TLQ article, Technical problems Subway is currently suing Quiznos over a contest in which Quiznos invited the public In addition to complying with relevant to submit home-produced videos depicting legislation, a number of unique technical Quiznos’ sandwiches as superior to Subway’s. considerations arise in online contests and We continue to monitor the progress of the should be addressed. To minimize exposure Subway case to see if it will impact the extent for technical problems, contest rules should a website can shape solicited UGC entries. be drafted to: In another case, Fair Housing Council of San • limit contest organizers’ liability for Fernando Valley v. Roommates.com LLC, the technical errors, accessibility of the operator of a roommate-matching website was website or inaccuracy of the information sued for violating housing discrimination laws. provided by the participants; The website asks the subscriber a series of questions, including some about the person’s • limit contest organizers’ liability in the sex and sexual orientation, then assembles a event of damage to users’ computers; profile based on the responses. A US appeals court found that because the website operator • address alternative ways to conclude the materially contributed to the creation of contest upon a server failure or inability to a subscriber profile and was therefore an judge UGC contributions due to technical “information content provider,” the operator malfunction or issue; and was not entitled to immunity under the Communications Decency Act of 1996. • address issues surrounding the number of times a contestant can enter, as well as While the Fair Housing Council case did not the age and geographic location of the involve an online contest, it did involve an contestant. aspect of UGC and represents a possible shift in

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 the courts’ interpretation of what constitutes RECORDS RETENTION an “information content provider.” Canada: McCarthy Tétrault Notes: Credit Card Data Printed on Sales Receipts: The State of Law Jurisprudence in the areas of online and Policy in Canada contests and UGC continues to develop. Against this changing landscape, contest In 2003, the United States Congress passed organizers capitalizing on the popularity the Fair and Accurate Credit Transactions Act, of UGC by using it in contests would be intended to enhance existing provisions against advised to: identity theft and to better protect consumers. It included the mandatory requirement, also • avoid contests that pit the sponsor’s incorporated into the federal Fair Credit product against that of a competitor’s; Reporting Act, that credit (and debit) card numbers be truncated on electronically printed • provide tools that are neutral, such receipts. This US legislative requirement as technology platforms and online has prompted interest regarding the state editing capabilities; of the law in Canada as to what credit card information may be printed on customer and • provide general contest parameters merchant sales receipts. outlining the ad campaign’s subject matter, judging guidelines and Current Canadian legislation has no similar technical requirements, but avoid explicit restriction regarding what credit specific examples in an attempt card data may be included on such receipts. to guide the contestants; and However, the policies of both the federal and provincial Privacy Commissioners indicate it is • include prohibitions in the contest best practice to limit the details printed so as rules on false, misleading, defamatory to safeguard privacy and curb identity theft. or fraudulent content. The Office of the Privacy Commissioner of Canada (OPCC) has indicated businesses should Contact: avoid creating so-called “dangerous receipts,” Kai Brown in Toronto at that is, credit card receipts that include [email protected] complete credit card numbers. Under the or federal Personal Information Protection and Peter S. Martin in Montréal at Electronic Documents Act (PIPEDA), businesses [email protected] are required to protect personal information, and they are encouraged to use equipment that does not print the entire credit card number on

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 a receipt. Where a business keeps a merchant it was necessary to amend legislation to copy sales receipt, it must ensure that the specifically address the masking of credit personal information collected is used and card information. stored in a manner consistent with PIPEDA, and that such information is not disclosed The committee heard a proposal to amend without authorization. Consumers are advised PIPA’s implicit consent section to address to keep receipts with full credit card numbers credit card truncation. Under the proposed in a safe place and to destroy them when no provision, a purchaser would be deemed to longer needed. have consented to the collection, use and disclosure of personal information when Industry representatives had advised the OPCC conducting business with a credit card, that the masking of credit card receipts would and to have provided consent to use the soon be an industry-wide practice, and that by card information to process the business 2007 all equipment used to process credit card transaction. Nonetheless, this consent would payments would mask or truncate numbers. not extend to posting the full card number, the Despite these assurances, the Privacy expiration date, and the purchaser’s name and Commissioner noted in March 2008 that signature on the receipt for anyone to access. unmasked receipts continue to be printed and that this issue requires attention from credit- The committee concluded that such legislative processing organizations. change was unnecessary, as businesses operating in British Columbia are increasingly Privacy statutes and Privacy Commissioner using point-of-sale technology that includes policy in Ontario, Alberta and British Columbia only the last four digits of a customer’s credit maintain an approach consistent with card number and omits the expiration date. that at the federal level. This includes recommendations that businesses truncate The committee did consider that some small or otherwise obscure credit card numbers, businesses would still be making imprint copies but without explicit statutory requirements of the credit card. A proposed “identity tag” to do so. system, which would identify the person who accepted the credit card and hold them In April 2007, the Legislative Assembly of accountable for credit card information sold British Columbia appointed a Special or stolen for financial fraud purposes, was Committee to conduct a statutory review of considered too impractical to implement. the Personal Information Protection Act (PIPA), Rather, the committee recommended that which came into force on January 1, 2004. The the Office of the Information and Privacy Report of the Special Committee, Streamlining Commissioner use its website to encourage British Columbia’s Private Sector Privacy Law, small business owners to use safe methods in was released on April 17, 2008. It considered processing credit and debit card transactions, the safety of credit card receipts and whether and to highlight the risks associated with the

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 improper handling and disposal of such SPAM receipts. US: McCarthy Tétrault Notes: Virginia Anti-Spam Law Ruled Unconstitutional — Spammer’s The current Canadian consensus is that, Conviction Thrown Out despite the absence of specific laws requiring number truncation on receipts, The Virginia Supreme Court recently ruled it remains good practice for businesses that Virginia’s anti-spam law violates the free to convert to technology that permits the speech protections in the First Amendment masking of cardholder information in order to the US Constitution, and overturned the to protect personal data in accordance 2004 conviction of spammer Jeremy Jaynes. with privacy and personal information legislation. Jaynes, who had sent over 10,000 unsolicited e-mails in a 24-hour period on three occasions, This article previously appeared in was convicted of three counts of violating McCarthy Tétrault Co-Counsel: Business Virginia’s anti-spam law and was sentenced Law Quarterly. to nine years in prison.

In finding that the statute was Contact: unconstitutionally overbroad, the court Barbara A. McIsaac, Q.C. in Ottawa at observed that the Virginia law outlawed [email protected] all forms of speech, not merely that of a commercial nature. By also banning anonymous transmission of political and religious speech, the court ruled that the law encroached upon the First Amendment. The court noted that, by comparison, the federal CAN-SPAM Act was limited to unsolicited commercial bulk e-mail.

McCarthy Tétrault Notes:

Canada is reportedly the only G8 country without anti-spam legislation. During the recent election campaign, Prime Minister Stephen Harper pledged to introduce anti-spam legislation if his Conservative Party were re-elected. Now that the Conservatives have been returned to

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 power, it will be interesting to see if they E-CONTRACTING act on Harper’s promise and, if so, what form the legislation will take. Canada: E-Procurement

Governments have spent billions on information technology (IT) projects over the years. Yet, unfortunately, the public sector generally (with some notable exceptions) has not yet achieved the same positive results from this IT investment that have occurred in the private sector. One important exception is e-procurement, where IT enablement of the purchasing function has brought some very real tangible benefits, at least to jurisdictions that have implemented sophisticated, online tendering and bidding systems.

More than Paper on Steroids

Consider www.bcbid.gov.bc.ca, the e- procurement Internet site of the British Columbia government. On this site, prospective bidders on government projects can find a range of information related to the relevant tender. In this sense, bc.bid fulfills the first objective of government going online — namely, “iGovernment” (or the process by which governments save costs and increase ease of use by uploading otherwise paper-based forms to a website, from which the public can then download them).

Some government online procurement sites are only capable of making available tender forms. But bc.bid goes much further. For example, as a supplier, you can register for the site’s bid-watching service. You create a profile of the types of government contracts that would

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 interest you, and every time one becomes Over the past 10 years, several legal available, the site automatically sends you developments related to effecting commerce an e-mail. This is a win-win service. It’s easy over the Internet have coalesced to produce for the government to implement, and it a legal environment that is as safe and sound produces more bidders per project. It’s also for doing business electronically as it has long great for suppliers because it means they will been for doing business with paper-based tools not miss a bidding opportunity. On the other such as written contracts. hand, suppliers’ bid-to-win rates will likely fall, given the greater competition from the larger Helpful E-Commerce Laws number of bidders. Every jurisdiction in Canada (except the Moreover, the bc.bid site does not just make Northwest Territories, but including Nunavut available bid documents for downloading. and Yukon) today has an e-commerce statute Companies can also post their bids and like Ontario’s Electronic Commerce Act proposals online. Thus, the site contains (or, in respect of bc.bid, B.C.’s Electronic more than just “information”; it also offers Transactions Act). These statutes establish “interactivity.” The result is easier and several important principles. cheaper bidding, so the government gets more participants in each bid. Although each One is that information will not be legally bidder’s bid-to-win ratio may drop at bc.bid, ineffective merely because it is in electronic the total number of bidding opportunities will form. Now, that is not to say all information expand as all other Canadian governments in electronic form is legally effective. There adopt similar e-procurement systems. Bidders are still many ways information (whether will thus be able to bid easily in more distant in electronic or paper-based form) can be jurisdictions, resulting in benefits to both ineffective, such as when it results from fraud, governments and bidders. mistake or lack of capacity, as with a minor. Therefore, it is still imperative that online Nagging Legal Concerns? bidding systems (such as bc.bid) be designed to effectively create binding contracts. While the benefits from online bidding are clear, those governments who have not Canada’s e-commerce statutes also provide adopted e-procurement, and potential bidders, how any legislative rule, requiring that certain still have concerns about the legality of online information be in “writing,” may be satisfied tendering, the main one being: “Is online in an electronic environment. Equally, the bidding as legally effective as traditional statutes confirm that an “electronic signature” paper-based bidding?” The answer, in a is any electronic information that a person nutshell, is “Yes.” creates or adopts (including a PIN or password) in order to sign a document, so long as it is in, attached to or associated with the document.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 There are, however, a few exceptions. Therefore, it is a “best practice” to keep a log Manitoba has not yet implemented the of the operational history of your computers. e-signature part of its e-commerce statute, Such a log should show how rarely they failed and PEI requires a “digital signature” under its to operate properly, and ideally show that e-commerce statute (which is a more secure whenever a computer glitch occurred, it version of an “electronic signature”). As noted did not result in a corruption or loss of data. above, the NWT has no such statute. In these For example, bc.bid follows this approach, three jurisdictions, however, reliance can as the site operators keep an audit trail of be placed on the common law, which has the operational history of their online system. recognized in Canada the effectiveness of e-signatures through judge-made law. In this regard, we now have in Canada an official “standard” (called Electronic Records The e-commerce statutes in the other as Documenting Evidence) that sets out how jurisdictions are still helpful because their to establish the integrity and authenticity of e-signature provisions confirm statutorily electronic records through the creation of the ability of websites to implement various an electronic records management program. technologies and processes to authenticate Your program would be reflected in a manual users. For example, bc.bid issues a password that would address security, quality assurance, (they call it an “e-bidding key”) that a indexing and various other matters. In essence, bidder uses when submitting binding bids. if you follow this program, it is very unlikely Each particular password designates only that a copy of your electronic records will one particular entity. In this way, bc.bid is not be admitted as evidence in court should comfortable knowing who submitted which you need to do this some day. specific bid, and is also confident that this type of process is blessed by B.C.’s Electronic Sensible Jurisprudence Transactions Act. Not only legislators are doing their part to Useful New Evidence Laws create a legal environmental hospitable to e-procurement. Judges are assisting as well, The federal and various provincial evidence in several helpful decisions dealing with laws have also been amended usefully to help various novel questions emanating from facilitate e-commerce. The question here is: online commercial arrangements. “Is a copy of the electronic bidding information equally admissible as evidence in court as the In one Canadian case, the court concluded traditional paper-based bidding material?” that clicking the “I agree” button at the end Again, the answer is “Yes,” provided you can of a set of terms and conditions presented show that your computer system was working on a computer screen was functionally the properly at all the relevant times. equivalent of signing a paper-based contract. When one party in the litigation argued that he

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 hadn’t read all the terms because they weren’t carefully design your e-procurement site in a all displayed on the single initial screen, the manner that ensures that binding bids and judge (sensibly) responded that a signatory contracts are indeed made on it. You should, to a multi-page paper contract does not see for example, require bidders to register all the terms on one page either. Signatories on the site, and as part of the registration have to turn the various pages, just as an process they should agree to some sensible, online contract has to be scrolled through. and even-handed, terms and conditions.

In another case, a judge was asked to approve One problem that often arises regarding a novel online shareholder voting system where such terms is that site operators make shareholders were sent a password by e-mail the terms far too one-sided by inserting and could then register on an Internet site provisions that are extremely onerous for where they could vote. The question to the users. In the consumer context, such judge was: “Is such a system as good as the overreaching terms are sometimes found traditional paper-based means of voting, where to be unenforceable by courts. But even paper-based ballots/proxies are sent by regular in the commercial world, it is a good idea mail to shareholders, who mark the ballots and to use sensible, even-handed terms. send them back by regular mail?” Here is one example. Some e-procurement The judge in this case compared the various site operators say, in their terms, that they respective features of the paper-based and can discontinue the online service without online systems, and concluded (sensibly) that notice to users of the site. Well, imagine the the online method is preferable because it is scenario where a bidder has come to rely safer, more secure and more efficient. Now, of exclusively on the site (and quite reasonably course neither system is perfect, in the sense so, because the government wants to wean that both are capable of being subject to bidders off the expensive paper-based process). fraud, but the key point is that the paper-based The bidder submits an online bid, only to be process was itself not immune from forged told later that it was never effectively received signatures. Consequently, the electronic system because the online procurement site (without should not seek perfection either. Rather, both any notice) had been terminated. It is an should aim for a reasonable degree of security interesting question whether the bidder would and authenticity. have any recourse against the government, notwithstanding the site’s terms and conditions Careful Website Design to the contrary.

That the legal environment in Canada today In short, the legal terms that bind the bidders facilitates e-commerce and e-procurement (and the entity hosting the site) need to be is only half the battle. The other half is to drafted carefully and sensibly. But if this is

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 done, parties using the site can be confident Canada: that their e-procurement activities on the site First-Ever Comprehensive Canadian are as effective as traditional paper-based Guide on E-mail Law Published measures. The first-ever comprehensive Canadian Contact: guide on e-mail law has been published. George S. Takach in Toronto at Authored by Charles Morgan and Julien [email protected] Saulgrain, technology lawyers in the firm’s Montréal office, E-mail Law provides a comprehensive overview of the major legal ramifications related to e-mail, the world’s most-used technological application. The book includes systematic analyses of current and upcoming trends, cutting-edge information on e-contracts, spam, e-mail monitoring, document retention and e-mail as evidence.

Designed for legal counsel, human resource professionals and business leaders, E-mail Law draws upon Canadian and US precedents, legislation, policy documents and years of practical experience in the field.

Contact: Charles S. Morgan in Montréal at [email protected] or Julien Saulgrain in Montréal at [email protected]

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Technology Finance TECH-RELATED FINANCE representations and warranties, that all is well with the company and its key assets Canada: (namely, its intellectual property, its people 10 Ways to Avoid Destroying Value in and its balance sheet). If these promises prove Your Technology Company — Part I to be untrue, then after the liquidity event you will find yourself giving back to them a You own and operate a young but fast-growing good chunk of the money they paid to you technology company. You make and sell when they bought your company. software, hardware, semi-conductor chips or Internet-based services. You have a solid, Given this process, it is worth understanding and ever-expanding, base of loyal customers. now, well before you are contemplating a sale You have identified a problem they have, and of the company, the problems that typically through clever technology — implemented by come to light during a sale of a tech company your even-smarter staff — you are able to solve that can diminish its value. Remember when their problems. To show their appreciation, our parents taught us to learn from our own your customers pay princely sums for your mistakes? While that is an effective pedagogical products and services. method, it is quite painful. Learning from the mistakes of others is a much better route to Eventually (in the life of a Canadian tech success. Therefore, what follows (in this and company, that usually means in the next three to the next couple of editions) are 10 common five years), you will likely do one of two things: mistakes made by young tech companies that can diminish their value in buyers’ eyes. 1. take your company public (by selling The good news is, with some attention to the shares of it to public investors on a management of these risks, they can indeed be stock exchange); or stick-handled successfully, so that you and your fellow shareholders can maximize the economic 2. even more likely, you will sell your return on your hard work when it comes time company to a bigger technology to selling your company or taking it public. company (that will integrate your products and services into their 1. Owning Your Intellectual Property broader suite of customer solutions). A buyer prepared to give you millions of In either case, upon such a so-called “liquidity dollars for your intellectual property (IP), be event,” someone is proposing to pay you a lot that software code, trade secrets, patents and of money for your tech business. But they will the like, will want absolute comfort that your not hand over the money until you have assured company actually owns all the IP you say it them, through a series of legal promises called does. And sadly, many tech companies make

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 silly mistakes early on in their lives with the because Canadian copyright law gives an result that they in fact end up not owning employer the ownership of any materials all their IP. created by employees in the course of their employment (but even employees must Consultants and independent contractors agree explicitly to waive moral rights). (essentially, any type of creative/development Nevertheless, it’s a good practice to require staff who are not employees) constitute a everyone who touches your IP crown jewels major risk. Legally they can end up owning to sign an agreement that confirms your the IP on which they worked for you (and ownership of their work product and that you merely are given a licence to use it), waives moral rights. unless they have expressly signed over to your company ownership of it in a written 2. Offshore Nuances document. We cannot tell you how sad — and frustrating — it is to be sitting in one of our Additional considerations arise if you have IP boardrooms with all the parties’ papers laid developers (whether employees or contractors) out, ready to sell a tech company —and to have resident outside of Canada. For example, you to wait for the owner to finish pleading with might have a software development group in a key contractor to have him confirm the Romania, or India, or you might contract with company’s ownership of a critical item of IP a third-party supplier in one of these countries. (which he developed for the company’s flagship Canadian tech companies are tapping into such software product) because the purchaser will foreign talent pools with increasing frequency, not close the deal until this happens. What typically because of a shortage of suitable skills makes it a difficult moment, of course, is that in Canada. Incidentally, non-tech companies the contractor — at the 11th hour — decides he with large information technology (IT) needs is only willing to sign the transfer document if are doing the same thing. Senior management he receives some percentage of the sale price of many of corporate Canada’s largest players of the company. are tapping into IT resources offshore to ensure a steady supply of IT skill sets. Again, The way to avoid this invidious scene is to when software applications development and make sure any consultant/contractor signs maintenance services are being performed in a piece of paper at the beginning of their faraway places, the Canadian company will engagement that clearly gives you all the IP want to ensure it owns all the resulting rights in whatever they work on for you (they software code and other materials. should also waive all moral rights in copyright works). It’s also a good idea to get this paper As with domestic staff, you’ll want to have the signed by all your regular employees as well. foreign developers sign tight proprietary rights Nonetheless, it’s not fatal if you do not have agreements to ensure you own all IP in their work this paper signed by your Canadian employees product. But here’s the additional risk: local laws, wherever they might be based, may well

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 have additional rules that you need to comply And sensibly so, given that these are efficient with in order to end up owning the relevant IP. and cheap software building blocks. For example, India’s copyright act has a specific rule that, in certain circumstances, actually OSS is perfect for use by students in school allows the ownership of the copyright in the projects because typically the licences for OSS created work (say, your company’s software) provide that it can be used for free so long as to revert to the individual developer, unless the source code resulting from it is disclosed to this rule is expressly overridden in the written the public and the developer does not charge contract with the developer. Thus, your standard any fees for the use of the resulting software. form IP transfer clause needs to be importantly Now, while this is a perfectly sensible licensing modified for use in India. model for the academic world, it can wreak havoc on the proprietary nature of your own In today’s intensely global talent market, IP when applied to your software products. In it’s easy to forget about such legal nuances. essence, it is very easy to transform your own The result can be a material loss of IP proprietary software (that you wish to charge ownership as there is much IP development your customers good money for) into OSS that taking place outside of Canada for Canadian you cannot exploit for revenue. tech companies and IT departments. Don’t let this mistake erode the value of your IP, The result can be the following real-life especially when the solution is as simple as a situation. A Canadian software company is short piece of paper signed by the relevant being sold. The American purchaser (assisted people at the appropriate time. by a phalanx of tech-law-savvy M&A lawyers) performs an audit on the selling company’s 3. The Perils of Open Source Software software code to check for OSS. In fact, there exists an audit product for exactly this purpose Another way to jeopardize the proprietary — the audit program scans the subject software nature of the software your company develops to detect all instances of OSS embedded within is to use open source software (OSS) in a it. The audit uncovers more than 100 instances careless or cavalier way. There is certainly of OSS, and puts in doubt the seller’s assertion a role for OSS in your company, including in that its software product is truly proprietary. the development environment for your home- grown software. A great deal of really useful This deal ultimately closed, but at a lower and inexpensive OSS is available out there valuation. The selling shareholders were (especially on the Internet), and your particularly displeased because they had programmers will likely be very keen to use no idea the company’s software engineers some of it (continuing a long-standing practice, were making such extensive use of OSS. when they were in university or college, of This ignorance proved to be very expensive. embedding chunks of OSS into their projects).

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 The result could have been avoided easily with some proactive oversight and management of the software development process. You have to educate your staff about the risks of using OSS, and you have to teach them how to use it in a way that does not turn your own code into OSS. This can be done fairly easily, assuming it is done early in the design of the product. It is a much more difficult task to retrofit after the fact, i.e., after the OSS has been carelessly misused.

As well, management should double-check compliance with these safe OSS programming practices by running the OSS audit software against early alpha and beta versions of the product. This way, if any problems are detected, they can be dealt with easily and cheaply, thus helping to preserve the IP value of your company.

Next edition, four more value-destroying common mistakes committed by tech companies — and how to avoid them.

Contact: George S. Takach in Toronto at [email protected]

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Technology Contracting shouldn’t come as a surprise to you. Your OUTSOURCING current deal may be seven to 10 years old — some that we’re working on go back 15 years, Canada: well into the 1990s, once you consider they Negotiating Outsourcing Contract Renewals have gone through one, two or even three previous renewals (and these prior renewals You have an important outsourcing agreement typically have not gone through the rigour that is coming to an end. It’s a significant I suggest below). contract for your organization. Under it, a Well, the world has changed fairly dramatically supplier is taking care of all your hardware in the last decade. Your requirements have needs (mainframes, servers and desktops), changed. The technology has changed. The otherwise known in the trade as information demands of the increasingly global marketplace technology (IT) infrastructure, as well as have changed. But very likely, your outsourcing operating your software on a hosted basis agreement has not changed — or not nearly and doing software development for you. enough. Even if it were performing just one of these three functions, it would still be a very The agreement’s description of the services important supplier relationship for you. you actually use, or actually need, may be extremely out-of-date. The service levels You’re not alone. Estimates differ, but you have may be measuring the wrong things, probably around 200 of these critical, large- or not enough of the new things that really scale outsourcing deals are coming up for should be measured. Your service-level credit renewal in Canada over the next few years. mechanism (if indeed you have one — some And while the mix of services covered by these older agreements don’t have this importance deals may vary, the common denominator to device) may be incentivizing the wrong all of them is that they are very important, and behaviour — and not doing enough to promote if the renegotiations are managed properly, the the right behaviour on the part of the supplier. result can be better renewals. You also have the queasy feeling that you’re Making Your Contract “Market” paying too much for what you’re getting. Many The importance of the outsourcing contract hardware and software costs have dropped over renewal opportunity is driven largely by the past 10 years. As for people costs, while the fact that your present deal is likely not human resource expenditures have increased in reflective of current market conditions. This North America, the movement of a range of IT and business process functions to lower wage

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 jurisdictions like India and the Philippines incumbent supplier, you’ll need 12 to 15 has had a dramatic impact on overall labour months to go to market for another supplier costs as well. And you’re concerned you’re (or two or three of them), including transition not seeing the benefits of these cost savings. time. Hence the importance of starting early.

As for the outsourcing contract’s terms and If you are in the last year of your current conditions, again, much has happened in the agreement, however, consider negotiating a marketplace since the late 1990s. To mention one- or two-year extension to your present but one example, many agreements from deal, on essentially the same terms. This is that era that are still being used today don’t merely to bridge you over so you can do the even contain the word “privacy.” Given the full, proper renewal process in that year or changes in privacy law over the past decade, two. In some agreements, the customer has the current sensitivity to privacy breaches, and this right of extension built into the current the importance of security and confidentiality agreement — it can be a very useful provision policies in today’s Internet-based and indeed. networked world, you can be sure that privacy issues are front and centre in today’s terms Realigning Services and conditions for outsourcing and offshoring deals (so your current agreement, if it dates An important — and time consuming — part of from the 1990s, or even the early 2000s, may your homework is to realign the outsourcing be woefully out-of-date). agreement’s services description with your business. Inevitably, your business has changed Start Homework Early in a number of fundamental ways over the past decade. Your markets and customers may In order to be able to meaningfully address have changed — sometimes dramatically. Your the relevant service, price and contract terms own products may be quite different — or if issues in an outsourcing contract renewal, the they are relatively unchanged, the way they key is to start your homework early. Sadly, are produced, marketed and sold likely has if you’re already in the final year of your undergone a minor revolution. current agreement you are probably too late. So, the first step is to reach out to your To be effective, you have to start your business units, and their leaders, and have full homework about 24 months before the end and frank discussions about the services being of the current term. Your homework phase outsourced, and how they can be modified — or will take four to six months. Then you must sometimes redesigned altogether. This can be a allot about two to three months for Term good opportunity for a wholesale rethinking in Sheet negotiations with your current supplier. some cases of which IT services you need — and And if you can’t come to a new deal with the which ones you no longer require.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Updating Service Levels bids are submitted, you would typically negotiate price (and other terms) with at least two of them You will often find, in the course of such a to truly determine what their best price and review, that even where a specific sub-service terms would be. is still required in more or less the same fashion as it was provided 10 years ago, what If you decide against a fully competitive has changed is the required service level. A RFP, there are still ways of reviewing decade ago, a 98.5% uptime standard for a what market prices should look like for your particular IT support function may have been suite of outsourced services. One method is adequate — or that level of service may have benchmarking, where you tap into the database been all that was available in the market place. of relevant prices kept by a firm that collects precisely such data for just such a purpose. Today, by contrast, the best practice standard While benchmarking is not an exact exercise — for the same service may be “five nines,” some say it’s far more art than science — it can that is, 99.999% uptime. To use a low tech give you a meaningful sense of generally where analogy, you still need more or less the same you are on a continuum of price points for automobile, but 15 years ago the windows had similar services. hand cranks, while today power windows are standard. In essence, you don’t want to go Updating Contract Terms through another contract renewal without getting the equivalent of power windows. Another area that requires attention is your contract’s terms and conditions. In essence, Recalibrating Price there are many provisions that would be included in an outsourcing agreement today Not only do you want the equivalent of power that were only rarely — if at all — addressed windows, you can remember from the last time 10 years ago. Therefore, it is strongly you upgraded your car that a lot of the new recommended that your agreement be brought features — like front and side air bags — were up-to-date as part of your contract renewal included in the price, and that that price with your vendor. was fairly competitive (particularly in light of all the new features that were “standard”). The kinds of clauses that we see being inserted Meanwhile, you have a sense that the prices in effectively negotiated renewals include under your legacy outsourcing agreement may those dealing with: benchmarking (essentially, no longer be competitive. the process mentioned above is enshrined in the agreement for subsequent use), privacy, The surest way to test what is current market security, confidentiality, service-level pricing is to go out to the market with a thorough remedies, and new approaches to intellectual RFP process, and to invite leading suppliers to property indemnities and limits on liability submit competitive proposals. Then, when their (to name just a few).

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Term-Sheet-Based Negotiations

Once you have done your homework on services, service levels, pricing and contract terms, you should reflect your wish list in a meaty Term Sheet. Then, assuming you decide not to undertake a competitive RFP process, you would present your current vendor with the Term Sheet accompanied by a succinct message: “If you and we cannot come to an agreement on the provisions contained in this Term Sheet, we will go out to market with a full RFP.” And you might add that your current vendor will not be invited to respond to that RFP.

What then follows is typically a very meaningful negotiation period, capped off by a sensible win-win renewal/amendment of the current contract, but containing a range of changes that address your reasonable requirements. Renewing outsourcing agreements on any other basis amounts to wasting a golden opportunity.

Contact: George S. Takach in Toronto at [email protected]

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Intellectual Property US: COPYRIGHT $222,000 Damages Award Nullified Canada: in P2P File-Sharing Case Copyright Amendment Bill Dies on the Order Paper The much-watched proceeding, testing the robustness of copyright in the digital age, has In the last TLQ, we discussed the amendments taken yet another twist. In Capital Records Inc. to the Copyright Act proposed in Bill C-61. v. Thomas, a federal judge in Minnesota has Because the Conservative government called an nullified the jury’s $222,000 judgment against election for October 14, 2008 and Parliament a woman who “made available” downloads was dissolved, the copyright amendment bill of copyrighted music in the share folder of died on the order paper. If the new government her computer via the peer-to-peer (P2P) wishes to resurrect the bill, it will have to file-sharing application Kazaa. The jury had re-introduce the bill as a new bill in the next found that the woman wilfully infringed 24 of session. the plaintiffs’ sound recordings and awarded them $9,250 for each wilful infringement. The previous Liberal government’s attempt to update Canada’s Copyright Act in 2005 On his own motion, US District Court Judge suffered a similar fate — that government’s Michael Davis ruled that he had made a bill also died on the order paper. manifest error of law in his instructions to the jury. He had told the jurors that “the act of Contact: making copyrighted sound recordings available Barry B. Sookman in Toronto at for electronic distribution on a peer-to-peer [email protected] network, without license from the copyright owners, violates the copyright owners’ exclusive right of distribution, regardless of whether actual distribution has been shown” (our emphasis).

On a reassessment of the law, the judge concluded that the US Copyright Act required proof of an “actual dissemination” to ground distribution liability. In light of his error, the judge vacated the judgment and ordered a new trial.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 McCarthy Tétrault Notes: 3. The judge left the door open to circumstantial proof of an actual On its face, this decision is a defeat for dissemination of copyrighted work the plaintiff copyright owners. However, over a network. This suggests that this ruling has at least three significant plaintiffs will be able to identify facts silver linings for Canadian rights-holders or circumstances that would indicate seeking to enforce their rights against a likelihood that an unauthorized parties who upload unauthorized copies of distribution occurred by reason works to shared folders for dissemination of making a file available on a through P2P networks: shared public folder. Such facts or circumstances might include expert 1. The ruling does not affect the technical reports or statistical studies, possibility of plaintiffs to assert the long-standing use of a P2P network, reproduction right against individuals examination of log files or other who copy files to shared folders for forensic evidence, or the intentional the purpose of distributing them. removal of such evidence from a personal computer. As case law 2. The judge concluded that copyright develops, these categories will likely holders can prove an actual expand. dissemination by having investigative firms capture and chronicle downloads While Capital Records Inc. v. Thomas is as users on P2P networks. This limited to claims of infringement against a conclusion scuttled the attempt of single uploader, these findings may also aid defendant’s counsel and amici curiae in creating a foundation for broader-based (friends of the court) to argue that the authorization or joint or contributory investigators’ downloads were in fact liability theories in order to stem more “authorized” uses. In so ruling, the systemic acts of Internet-based piracy. judge drew on case law deeming the

investigator’s assignment to be part of the copyright owner’s attempt to stop Contact: infringement, and found that the act of Barry B. Sookman in Toronto at placing copyrighted materials on a [email protected] network specifically designed for easy, or unauthorized copying substantially Daniel G.C. Glover in Toronto at assisted an infringing act. [email protected]

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 US: injunction, the lower court denied Jacobsen’s Violation of Open Source Licence motion for a preliminary injunction. Agreement Creates Liability for Copyright Infringement On appeal, the court made a determination as to whether the terms of the licence were The US Court of Appeals for the Federal Circuit conditions or mere covenants. It noted that the has ruled that an open source software licence licence imposed its obligations through the use was enforceable and can attract liability for of the words “provided that” — language that is copyright infringement. generally viewed as imposing a condition rather than a covenant. Therefore, under the terms of In this case, the plaintiff Jacobsen had the licence, the defendants could be liable for developed model railroad design software. copyright infringement as well as for breach He made it available for public download of contract, and the plaintiff could potentially free of charge, under the so-called “Artistic obtain an injunction against the defendants to License” (a form of open source licence). prevent them from distributing their infringing The licence permits users to copy, modify or commercial software. distribute the licensed content provided that they restate the attribution information found Also significant in the judgment is the appeals in the software, repeat all copyright notices court’s discussion of consideration in open and document any modifications made to source licensing. Even though open source the software from its original form. software is often offered royalty-free, the court opined that open source licensing Jacobsen alleged that the defendants Katzer is supported by economic consideration: and Kamind Associates downloaded his code, “[t]here are substantial benefits, including included it in their competing software economic benefits, to the creation and program and failed to comply with the terms distribution of copyrighted works under public of the Artistic License. He sued Katzer and licenses that range far beyond traditional Kamind for copyright infringement and sought license royalties.” These benefits can include a preliminary injunction. growth in market share and professional reputation. The lower court ruled that the defendants’ alleged violation of the licence merely gave The appeals court declined to award the rise to an action for breach of contract and not plaintiff an injunction because the lower for copyright infringement. While copyright court had not made factual findings on the infringement would give rise to a presumption likelihood of success on the merits in proving of irreparable harm under relevant US law, a that the defendants violated the conditions of breach of contract would not. Since irreparable the licence. Instead, it reversed the lower’s harm is a requirement for the award of an decision and remanded the case back to the lower court for further determination.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 McCarthy Tétrault Notes: US: Six Questions — This decision confirms the risk avoidance The Horcrux of the Matter advice that Canadian intellectual property (The Harry Potter Lexicon Case) (IP) practitioners have been providing to clients with respect to open source “Of the Horcrux, wickedest of magical software. Namely, open source licences inventions, we shall not speak nor give are to be treated as enforceable contracts direction.” ― from the introduction of Magick and their contravention will likely attract Moste Evile, Hogwarts library (HBP18)” infringement liability under copyright law. Thus far, however, Canadian case law — excerpt from The Harry Potter Lexicon, online has not drawn a meaningful distinction at http://www.hp-lexicon.org/magic/devices/ between contractual covenants or horcruxes.html (25 Sept 08) conditions in interpreting IP licences Although author J.K. Rowling has finished for purposes of assessing whether writing the Harry Potter series of novels, fan infringement has taken place. Accordingly, conferences and websites continue to flourish. all terms, conditions or restrictions found There has been no shortage of fan anger, in an open source licence should be disappointment and hate mail to film studio adhered to carefully in order to avoid Warner Bros. Entertainment Inc. over its liability for infringement in Canada. recent decision to delay the release of the

film Harry Potter and the Half-Blood Prince Contact: by eight months to July 2009. Alfred A. Macchione in Toronto at The Harry Potter brand is estimated to be [email protected] worth more than £7 billion, according to the telegraph.co.uk. The Wall Street Journal recently reported that the five prior Harry Potter films grossed almost $4.5 billion in worldwide box-office revenue, making the series “the biggest franchise in history.” Potter-branded merchandise abounds ― including toys by Mattel, video games by Electronic Arts, bandages by Johnson & Johnson and booger-flavoured jellybeans by Jelly Belly.

In the past, Warner Bros. invited operators of Harry Potter fan websites to movie premieres to help generate buzz before upcoming

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 theatrical releases. It flew one such fan, RDR Books, seeking injunctive relief and Steven Vander Ark, to the set of the fifth film, statutory damages for claims including The Order of the Phoenix, in 2006. Vander Ark copyright infringement. The court awarded had launched a fan website called “The Harry the plaintiffs a permanent injunction and Potter Lexicon” in 2000 as a hobby. The site statutory damages. organizes information about characters, places, spells, creatures and physical objects in the WHO? J.K. Rowling is the author of the Harry world of Harry Potter. Potter series of books. She also authored two short companion books to the series, Quidditch In 2004, Rowling gave the site her fan site Through The Ages and Fantastic Beasts & award and wrote that she had consulted Where to Find Them (the latter being an A to Z the site to check facts about her books. She encyclopedia of imaginary beasts and beings described the Lexicon site as “A website for in the Harry Potter fictional world). She also the dangerously obsessive; my natural home.” authored “Daily Prophet” newsletters, and a American publisher Scholastic Inc. and the series of “Famous Wizard Cards” used in Harry producer of the films acknowledged to Potter video games produced by Electronic Arts Vander Ark that they used the Lexicon site under licence from Warner Bros. Warner Bros. for reference. In 2007, Vander Ark visited the Entertainment Inc. owns exclusive worldwide studios of Harry Potter video game producer distribution rights in the Harry Potter films Electronic Arts, and claimed that he saw the and related ancillary merchandise. walls of the studio covered with printouts from the Lexicon site. RDR Books is the publishing company that planned to release a book version of the By fall 2007, Vander Ark had made a deal with Lexicon site. Steven Vander Ark is a Harry RDR Books to publish a print book version of the Potter fan, former teacher and librarian, Lexicon site, in the format of an A to Z guide who owns and is the principal author of the to the facts of Harry Potter. Warner Bros. popular Lexicon fan site. and Rowling sued RDR Books. During the trial, Vander Ark cried on the witness stand. Rowling WHEN? The Lexicon book was scheduled for said she “came close to tears” during her release in late October 2007. The court action testimony. Where did it all go wrong? This was commenced on October 31, 2007. The trial six-question primer looks at the recent court ended on April 16, 2008. The court rendered its decision over the Lexicon book. written Opinion and Order on September 8, 2008. (The court had earlier ― on November 8, 2007 ― WHAT? Warner Bros. Entertainment Inc. and issued a temporary restraining order, on J.K. Rowling v. RDR Books, U.S. District Court, consent, against RDR Books, preventing it Southern District, New York (07 Civ. 9667 from typesetting, printing, distributing, selling, (RPP)). Plaintiffs Warner Bros. and Rowling advertising, soliciting or accepting orders for commenced a court action against defendant the Lexicon book.)

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 WHERE? Rowling initially published the first In finding that the plaintiffs had established of seven Harry Potter books in the United a prima facie case of infringement, the court Kingdom, and owns US copyright registrations considered a range of factors: in each of the seven books, the two companion books, “The Daily Prophet” newsletters and • Rowling’s ownership of copyright in the “Famous Wizard Cards.” Warner Bros. owns key Harry Potter works —Judicial notice US copyright registrations in the Harry Potter was taken of Rowling’s copyright films. Warner Bros. and Electronic Arts jointly registrations in the various works. own copyright in Harry Potter video games, However, the court only addressed in which Electronic Arts owns US copyright infringement in respect of the seven registrations. RDR Books is based in the US novels and the two companion books, state of Michigan, where Vander Ark also since copies of the works of “The Daily resides. The case was tried in the Federal Prophet” and “Famous Wizard Cards” District Court in Manhattan, New York. were not entered into evidence.

WHY? The court held that the Lexicon book • The Lexicon book is a non-fiction reference infringed the copyright of Warner Bros. and guide — The Lexicon book does fit within J.K. Rowling in the Harry Potter works, and the narrow genre of non-fiction reference RDR Books failed to establish its defence of guides to fictional works. The Lexicon fair use. The plaintiffs established that: book was an A to Z guide to the creatures, characters, objects, events, spells, potions, 1. actual copying had occurred; and magical items or devices, forms of magic, and places in the world of Harry Potter. 2. the copying amounted to an improper or The manuscript had 2,437 entries organized unlawful appropriation. alphabetically. Most entries gathered and synthesized pieces of information from The court stated that copying is actionable among the Harry Potter novels. where the second work bears a substantial similarity to protected expression in the The Lexicon book stated that the only earlier work. The substantial similarity test source of its content was the work of examines whether the copying is qualitatively Rowling, including the novels, her and quantitatively sufficient to demonstrate interviews and other materials she that infringement (actionable copying) has developed or wrote herself. The Lexicon occurred. A lower threshold of copying may book included commentary and background meet the substantial similarity test where the information from outside knowledge on work copied is creative, original expression. occasion. However, claims that Vander Ark had also used outside reference sources could not be substantiated since no other

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 citations to third-party works appeared in cobwebs.” Rowling provided the court with the manuscript, apart from four dictionary numerous examples of verbatim copying or citations. close paraphrasing.

• Inconsistent thoroughness of citation — • Summarizing key events provides synopsis Although information in the entries of primary narrative thread — The court was generally followed by citations in drew attention to longer entries that parentheses indicating its location in described important objects or events, or the Harry Potter works, (i) some entries traced the development of an important contained few citations relative to the character. The court did not see these information provided, and (ii) citations entries as abridgements or plot summaries, to the novels provided only the book and nor as character studies or analysis. chapter number, without reference to Rather, they were like synopses or outlines editions of the books. of the narrative revolving around those characters, objects or events. • Verbatim direct quotation or close paraphrasing from Harry Potter works — The entries proceeded chronologically, The court found the Lexicon book and did not follow the plot structure of contained “at least a troubling amount of the novels. However, they did provide a direct quotation or close paraphrasing of “skeleton of the plot elements that hold Rowling’s original language.” Occasionally, the story together.” Also, because the quotation marks were used, but more characters Harry Potter and Lord Voldemort often original language was copied without drive the narrative and appear in almost quotation marks. Sometimes the Lexicon every chapter of the series, describing the book used italics. Often it did not indicate events surrounding them “ultimately yields which language was original expression. a synopsis of the primary narrative thread” The book reproduced entire songs or of the series. poems appearing in the novels. • Extensive copying from Rowling’s Rowling’s “artistic literary devices” also companion books — Rowling’s companion were often copied in close paraphrase, books Quidditch through the Ages and including descriptive language and similes. Fantastic Beasts and Where to Find Them As an example, compare language from were both written in non-narrative the novel Harry Potter and the Order of form, presenting fictional facts without the Phoenix describing Professor Griselda commentary. The court found that the Marchbanks “with a face so lined it looked Lexicon book took wholesale from the as though it had been draped in cobwebs,” companion books, sporadically leaving out with her description in the Lexicon: “… material. In particular, the Lexicon book her face so lined it appeared draped in copied substantially from the descriptions

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 of beasts in the A to Z section of Fantastic (to report information about the series), Beasts and Where to Find Them. that expression would not take on the status of fact and lose its copyrightability. • A sufficient quantity of copying of “wholly If such facts are copied in fragments or in original” works — Most of the entries a different order than they appear in the contained direct quotations, paraphrases, original works, this rearrangement would plot details or summaries of scenes from not preclude a finding of substantial one or more of the Harry Potter novels. similarity. The court took the position that where copyrighted work is “wholly original,” a The court noted the use of fictional “facts” lower quantity of copying will support a in their factual capacity may be relevant finding of substantial similarity. The court to the question of fair use resulting from wrote: “Although hundreds of pages or transformative purpose of the second work. thousands of fictional facts may amount However, it does not influence the analysis only to a fraction of the seven-book series, of infringement and substantial similarity. this quantum of copying is sufficient to Also, the considerable amount of direct support a finding of substantial similarity quotation, close paraphrasing and synopses where the copied expression is entirely of major plot elements supported a finding the product of the original author’s of sufficient qualitative copying and imagination and creation.” The copying substantial similarity. was even more extensive in respect of the companion books. In rejecting the defendant’s defence of fair use, the court balanced factors including: • Qualitative copying of the creative, original expression from the Harry • The Lexicon book is not a derivative Potter works — The invented “facts” of work, its purpose is transformative — characters, plots and events are fictitious The Lexicon book was not a guidebook expressions that come from an author’s providing a detailed plot summary or imagination and are original elements abridgement of the original work. Rather, protected by copyright. The court the Lexicon book reorganized pre-existing considered past US cases involving the material and gave it another purpose, unauthorized use of fictional “facts” namely a reference purpose. It would not from the television series Seinfeld in serve the entertainment, aesthetic or a trivia game, and from Star Trek in expressive purpose of the original works. a fan book about the series. Here each It did not recast, transform or adapt the “fact” reported by the Lexicon book work into another medium, mode, language was expression invented by Rowling. or revised version. It no longer represented Even if used in its factual capacity the original works of authorship.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 The use of the companion books was preparing the book, Vander Ark had not marginally transformative: they are in used any material that was not already encyclopedic form and could be used for a available to the public. reference purpose, but they are marketed and packaged for an entertainment • Amount and substantiality of use weighs purpose. The Lexicon book’s use of more heavily against fair use — The court material from the companion books added found that on balance, the amount and some productive purpose by synthesizing value of original expression taken was the original material within a complete more than reasonably necessary. It was reference guide. The Lexicon book reasonably necessary for the Lexicon book occasionally added new information or to make considerable use of the original insights. The court found that nevertheless, works in order to fulfill the Lexicon book’s “verbatim copying in excess of what is transformative purpose as a reference reasonably necessary diminishes a finding guide. However, the extent of verbatim of transformative use.” copying and close paraphrasing, including the copying of the author’s literary devices • The commercial nature of the Lexicon or distinctive descriptions, was substantial. book weighs slightly against fair use — At times, the Lexicon book appeared to The Lexicon book was clearly intended retell parts of the storyline. The Lexicon for commercial gain. To the extent that book also took wholesale from the the book could provide a useful reference companion books. This extent of taking guide to the public, the use was fair and weighed against a finding of fair use given commercial gain only weighed slightly the expressive value of the language and against a finding of fair use. the amount taken.

• While the defendant RDR Books did not act • The creative nature of the Harry Potter in bad faith, its conduct weighs slightly works weighs against fair use by the against fair use — RDR Books reasonably Lexicon book — The court reiterated US believed that that its use of the Harry case law establishing that copyright law Potter works constituted fair use. RDR generally favours the protection of creative Books advised Vander Ark that it had and fictional works over factual works. looked into the legality of publishing the Lexicon site in book form and had • Market harm to the Harry Potter works determined that doing so would be legal. weighs against fair use — The Lexicon In response to Vander Ark’s concern about book is unlikely to cause market harm the legality of publishing the Lexicon book, to the sale of Harry Potter novels, since RDR Books agreed to defend and indemnify they are enjoyed for a different purpose. Vander Ark in the event of any lawsuits. In However, the sale of the Lexicon book could harm sales of the companion books.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Also, the unauthorized verbatim copying importance of the public interest and lack of of songs and poems could harm the market exclusivity in creating informational, reference for derivative works. The court noted that works. On one hand, the court saw that the although Rowling had publicly stated her amount of quantitative and qualitative taking intention to publish her own encyclopedia, from the original Harry Potter works, combined the market for reference guides is not with the commercial purpose and potential exclusive. market harm, surpassed an argument for fair use. On the other hand, the court left open Given that infringement was established and the possibility that reference works like the that the defendants could not establish fair Lexicon book could constitute fair use of use, the court found that irreparable injury original works, if the expressive and original was presumed as a result of publishing the content used was no more than necessary. Lexicon book. Monetary damages would not The fact that Rowling and Warner Bros. had compensate harm that could result from given past support to the Lexicon site as a RDR’s continuing infringement, including lost fan website had little effect on this decision. sales of Rowling’s companion books and injury to Rowling as a writer. Conversely, RDR Books THE LAST WORD: This case may be of did not identify any hardship it would suffer interest in the context of fans and user rights as a result of being enjoined. in the digital era. The court acknowledged the importance of dissemination and public The court made two notable final comments. interest, but drew distinctions as to when such use crossed the line into unlawful 1. Although the Lexicon book, in its current appropriation. state, was not a fair use of the Harry Potter works, reference works generally should be The case may also be of interest in other encouraged and not stifled. jurisdictions, including Canada. There are differences between the concepts of fair use 2. The court awarded only minimum statutory in the United States and fair dealing in Canada, damages in the amount of $6,750 ($750 even before addressing moral rights. However, for each of the seven novels and two Canadians are still waiting for their courts companion books). This award reflected to apply the concepts of (i) balancing public the fact that the Lexicon book had not interest versus creator reward and (ii) an open been published and no harm had been list of purposes and a flexible approach to suffered beyond the fact of infringement. interpreting fair dealing.

HOW? This decision is a detailed, systematic Following the Supreme Court of Canada balancing of the factors underlying copyright decisions in CCH Canadian Ltd. v. Law Society infringement and fair use under US law. of Upper Canada and Théberge v. Galérie d’Art The court acknowledged several times the du Petit Champlain inc., reasons like those in

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 the Lexicon case could provide guidance in UK: balancing infringement and fair use or dealing ISPs and the UK Government Sign factors, even if the hierarchy of factors may Memorandum of Understanding on differ between the countries. Here, it seems Illegal File Sharing unlikely that the end result would have been Recently, six of the United Kingdom’s largest much different in principle had these facts Internet service providers (ISPs) agreed to a been tried in Canada post-CCH and post- plan with the British record industry’s trade Théberge. However, the result would have association, the British Phonographic Industry given creators, users and copyright lawyers (BPI), the British government and the in Canada a recipe less like magic, and more independent regulatory body OFCOM to tackle like precedent. online piracy. The Department for Business, Contact: Enterprise & Regulatory Reform (BERR) has Jeanette Lee in Toronto at drawn up a memorandum of understanding [email protected] (MOU), which has been signed by the six ISPs and the Motion Picture Association of America.

The plan aims to significantly reduce copyright infringement within two to three years, and to change popular attitudes towards infringement.

The MOU sets out five guiding principles that provide an industry framework for action. Specifically, the signatories have agreed to work together to:

1. resolve the problem of unlawful peer-to- peer file sharing and agree on appropriate codes of practice to be approved by OFCOM;

2. educate consumers about the value of the creative process;

3. package content in attractive formats for consumers, as user-friendly alternatives to illegal file sharing;

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 4. notify users, as part of a three-month Europe: trial, that their accounts are being used Proposed Extension of Copyright on unlawfully to share copyright material and Sound Recordings and Performances point them towards attractive substitutes; to 95 Years in Europe and The European Commission has adopted a 5. identify alternative mechanisms to deal proposal to extend the term of protection with repeat infringers, to report back in for performers and sound recordings from the four months, and consider prosecuting current 50 years to 95 years. The Commission serious infringers in appropriate has stated that the proposal will bring circumstances. performers’ protection in line with that of authors in the European Union, which BERR also initiated a consultation on regulatory is 70 years after their death. options to address illegal peer-to-peer (P2P) file sharing of copyrighted works. The increased period will allow performers to earn greater remuneration from the McCarthy Tétrault Notes: exploitation of their works for a longer time. Proponents argue that this extension These measures can be viewed as an is important for those who often do not have evolution of the current UK approach — a salaried income and is especially relevant from education and limited legal action towards the end of the performers’ lives. toward codification and the eventual imposition of greater regulation by the The Commission also stated that this extension UK government. should benefit record producers who will generate additional revenue from retail and online sales of records. The overall intention Contact: of the copyright extension is, in part, to Matthew D. Wanford in Calgary at offset some of the loss of revenue caused [email protected] by the decline in the sales of physical media, such as CDs, and the slow development in strategies to effectively generate revenue from online sales.

A new proposed “use-it-or-lose-it” clause in contracts with record producers will also enable performers to recover their rights if the producer does not market the work during the extended period. In the event that neither party exploits the work within one year after

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 the term extension, the work will become TRADE-MARKS free for the public to use. UK: McCarthy Tétrault Notes: Gifts Not on the List — The Narnia Decision Currently in Canada, performers’ rights and rights of sound recording makers last A World Intellectual Property Office (WIPO) for 50 years from the first fixation or panel ordered the transfer of the performance. domain name to C.S. Lewis (PTE.) Ltd., the owner of the NARNIA trade-mark, after finding that the registrant did not have a legitimate Contact: interest in the domain name and had registered Matthew D. Wanford in Calgary at the domain name in bad faith. [email protected] In September 2006, Richard Saville-Smith registered the domain name following the close of the sunrise registration period for the dot-mobi rollout. Mr. Saville- Smith, owner of the Saville-Ferguson media and PR agency with his wife, claimed the registration was a future present for his then-nine-year-old son, a fan of C.S. Lewis’s The Chronicles of Narnia series. Saville-Smith said he planned to give his son the e-mail address associated with the domain name for his 11th birthday.

The initial registration coincided with the release of the first Chronicles of Narnia blockbuster movie, and the time that the son would received the gift would have corresponded to the release of the second Narnia film in the United Kingdom and Northern Ireland. In the meantime, the domain name resolved to a parked web page provided by global domain name marketplace Sedo. The page contained sponsored links to commercial websites, including links to websites offering

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 for sale merchandise and apparel related to birthday gift. Mr. Saville-Smith’s wife declared The Chronicles of Narnia books and movies. that she was “shocked by the decision.”

The complainant, C.S. Lewis (PTE.) Ltd. owns PR aside, there is nothing shocking about the trade-marks, copyright and other proprietary decision. The decision itself is consistent with rights in the literary works of C.S. Lewis, the approach favouring trade-mark owners including trade-mark registrations in various that WIPO has historically taken to domain countries for the trade-mark NARNIA and other name registrations involving famous names. NARNIA-composite marks. The complainant was unhappy with Mr. Saville-Smith’s decision The story is also more complex than the to register and commenced Saville-Smiths initially led WIPO to believe. proceedings pursuant to the Uniform Dispute Upon further inspection, the complainant had Resolution Policy (UDRP) at the World found that the respondent was actually the Intellectual Property Office (WIPO) Arbitration owner of a dozen or so other domain names and Mediation Center. at the same time he registered “the future present for his child.” The complainant then In order to succeed in a complaint under the filed supplementary submissions with WIPO UDRP, a complainant must prove three things: showing that all but one of the domain names were directed to Sedo parking pages, and five 1. the domain name registered by the also implicated third-party trade-mark rights. respondent is identical or confusingly similar to a trade-mark or service mark in No stranger to domain name registrations, which the complainant has rights; as the respondent himself admitted, the respondent’s trade-mark portfolio also 2. the respondent has no rights or legitimate included , and interests with respect to the domain name; , among other domains. and The respondent did not make any claim that these were also gifts. To top it off, two 3. the domain name has been registered and weeks after the complaint had been filed, the is being used in bad faith. respondent registered two further domains — and — a After hearing the complaint, WIPO ordered fact that was duly noted by the complainant. the transfer of the domain name to the complainant, finding that the complainant The respondent argued that his domain name had established all three elements. portfolio merely reflected his line of business, noting that in connection with the operation of Shortly after the verdict, the respondent’s his PR agency, he has had to register numerous family took to the press crying foul and domain names on behalf of clients and for the wondering who would try to take away a child’s purposes of the agency, including defensive

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 registrations. He also noted that he had that name, whereas in this case, the domain registered a number of generic domain name was chosen because of its association with names, which he claimed never to have used the Narnia books and movies. for any particular purpose. Further, he put forward evidence that he had never been With respect to the element of bad faith, the party to a proceeding under the UDRP, and panel found that the respondent’s admission so should not be considered a cybersquatter. that he knew of the complainant’s NARNIA mark suggested “opportunistic bad faith.” Equally The respondent also argued that he was not disturbing to the panel was the respondent’s profiting from the parked page use of the decision to register the and domain name, and claimed to receive no domain names subsequent to revenue from Sedo for advertising revenue the filing of the complaint. Moreover, while the generated by it. He claimed his only motive domain name was not being actively used, the for registering the domain was for the non- panel determined that the “passive holding of commercial purpose of providing his son with a domain name can also be considered as bad a cool e-mail address. Thus, while he knew faith where it is not possible to conceive of any “Narnia” was a famous name and associated plausible actual or contemplated active use of with C.S. Lewis’s The Chronicles of Narnia the disputed domain name that would be series, he did have a right and legitimate legitimate.” interest in the name. Moreover, because he had only registered the domain name as McCarthy Tétrault Notes: a gift for his son, there could be no evidence Registering a domain name that you know of bad faith. is famous, for the sole reason of giving the WIPO’s sole panellist disagreed. The panel domain name as a gift to a child, will not found the complainant had rights in the trade- be considered legitimate use. However, mark NARNIA, and the disputed domain name a legitimate use may exist if the domain was identical to the complainant’s mark. The name is being used in association with active panel also found that the respondent lacked non-commercial fan or criticism websites. any legitimate interest in the domain name, in Finally, if you are the respondent, do not part because the respondent was not actively register further domains containing the using the domain name for any legitimate mark that is subject of a challenge after non-commercial use or for fair use criticism. a complaint has been filed. What better way to convince a panel of bad faith? The panel also distinguished the respondent’s use from other UDRP decisions that had found the use of a domain name for e-mail purposes could be Contact: legitimate. In those cases, the panel found, the Jennifer A. Ross-Carriere in Ottawa at domain name was intended for persons known by [email protected]

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Privacy CASES/LEGAL DEVELOPMENTS in other employees who were absent or late (“buddy punching”). To address this problem, Alberta: the Ballroom required managers to initial A Brave New World: employees’ timecards when they came in and Biometrics in the Workplace left work. This turned out to be an onerous, inefficient process. As a result, the thumbprint Everyone is familiar with the use of fingerprints sign-in system became an attractive alternative. in the criminal context. But are you also aware that employers are increasingly using employees’ Unlike older biometric identification systems biological characteristics, such as a person’s such as police fingerprints, new biometric finger, hand, voice or facial features, to identify technology does not actually store copies and keep track of employees’ attendance and of employees’ thumbprints and identify work hours? The use of biometric technology in them one-to-one with the copy. Instead, the workplace gives rise to a number of privacy the thumbprint sign-in system used by the issues. Two recent Investigation Reports from the Ballroom first measures the unique attributes Alberta Information and Privacy Commissioner of an employee’s thumbprint, then using an provide guidance on these issues in this brave algorithm, turns those attributes into a unique new world. number that is stored and encrypted in the database. The number cannot be reverse- Empire Ballroom engineered to create an image or obtain the measurements of the employee’s actual The Empire Ballroom nightclub in Edmonton thumbprint. sought to introduce a thumbprint sign-in system to monitor employee attendance The Ballroom asked all employees to scan and calculate payroll. A former employee their thumbprints into the new sign-in system. complained to the Commissioner that, Employees were told that their thumbprints among other things, the thumbprint system were going to be used as a sign-in/sign-out was introduced contrary to the Alberta procedure, but were not informed how the Personal Information Protection Act (PIPA). technology worked or what information it collected. The complainant refused to scan The Ballroom had previously used a punch- her thumbprint because she felt that her clock system for attendance and payroll. fingerprints were highly sensitive information However, the punch-clock allowed employees and the use of such information for attendance to access each others’ timecards and punch and payroll was intrusive and unnecessary.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 The Commissioner confirmed that an employee’s The Commissioner stated that, under PIPA, biological characteristics and the unique number employers must inform employees about the stored in the system are the employee’s personal specific information to be collected, used information. In this case, the Commissioner also and disclosed for specific purposes, so that found that the information was “personal employees can make meaningful decisions employee information.” about their personal information. Because the Ballroom’s employees were not adequately “Personal employee information” under notified about the specific information being PIPA is information reasonably required collected, the Commissioner found that the by an organization that is collected, used Ballroom had breached PIPA. or disclosed solely for the purposes of establishing, managing or terminating the Southwood Care Centre employment relationship. Employers may collect, use and disclose such information A very similar approach was taken by the without consent, but must notify employees Commissioner in a case involving Southwood about the collection, use or disclosure and Care Centre, located in Calgary. In that case, the purposes of it. an employee complained about the employer’s plans to introduce a hand scanner for The Commissioner confirmed that attendance employees to use when clocking in and out and payroll are reasonable aspects of managing of work. As in the Empire Ballroom case, the employees. The Commissioner also found that Commissioner found the introduction of this the additional personal information collected technology to be acceptable in part because: by the thumbprint sign-in system was reasonable for attendance and payroll purposes • the hand scanner did not actually record because the Ballroom’s previous systems finger prints or palm prints — instead, an did not work. A key to the Commissioner’s algorithm converted these images into one decision was that the Ballroom was not actually mathematical value, which was then stored collecting employees’ thumbprints but simply in the system; and the unique identifying number. • the employer had sufficient evidence to However, the Commissioner also found that establish that alternative authentication while employees were notified of the purposes systems would not meet its business needs. of collecting the thumbprint information, they For example, there was evidence of a were not adequately informed about what problem with “buddy punching” and evidence personal information was in fact being collected of an administrative burden when employees and used. As a result, the complainant and forget, lose or damage swipe cards. other employees believed that their actual thumbprints were being collected and used, as However, as in Empire Ballroom, the opposed to just the unique identifying number. Commissioner found that the employer’s

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 notice to the employees of the collection Explain to employees exactly what of the information was not sufficient. The personal information is being collected, Commissioner stated the best approach used and disclosed by the technology, would have been to: as well as the purposes for doing so. In addition to being required by PIPA, • provide proper notice at the time employees who do not understand employees were initially registered in the limitations and safeguards of the the hand recognition system; and/or technology are more likely to feel like their privacy is being invaded and may • provide proper notice on a poster near refuse to co-operate. the hand scanner that would be seen each time employees clocked in and out. 3. Be prepared to justify the introduction of biometric technology by pointing to Proper notice includes informing the employees deficiencies experienced with other of (i) the purpose for which the information is time-keeping or attendance systems, collected; (ii) the specific legal authority for such as “buddy punching” or lost data. the collection; and (iii) the title, business address and business telephone number of 4. Do not immediately discipline an an officer or employee of the public body who employee who refuses to co-operate can answer the individual’s questions about with the introduction of new technology the collection. without investigating his or her concerns. Employees may have religious objections McCarthy Tétrault Notes: to such technology that must be accommodated. Alternatively, employees These two Investigation Reports from the may have a reasonable belief that the Information and Privacy Commissioner of technology infringes PIPA. It is important Alberta will help employers understand to remember that PIPA prohibits adverse their privacy obligations related to using action against an employee who refuses biometric technology in the workplace. to do something he or she reasonably and Here are some tips: in good faith believes is contrary to PIPA.

1. Use newer biometric technology that does not actually collect or store Contact: employees’ physical information, as it Tina Giesbrecht in Calgary at is more likely to pass privacy muster. [email protected] or 2. Give proper notice of the collection Cappone D’Angelo in Vancouver at to the employees, as described above. [email protected]

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Canada: evidence and other information, whether Privacy Commissioner’s Powers on oath, by affidavit or otherwise, that the Do Not Extend to Inspecting or Commissioner sees fit, whether or not it is Compelling Production of Solicitor- or would be admissible in a court of law…” Client Privileged Records The employer sought judicial review of the The Supreme Court of Canada ruled in order, but the reviewing judge concurred with Canada (Privacy Commissioner) v. Blood the Commissioner. The employer then appealed Tribe Department of Health that the Federal to the Federal Court of Appeal, which allowed Privacy Commissioner does not have the right the appeal and vacated the Commissioner’s to compel and inspect documents over which order. The Commissioner’s appeal to the solicitor-client privilege has been claimed. Supreme Court of Canada (SCC) was dismissed.

An employee of the Blood Tribe Department The SCC determined that the Commissioner’s of Health requested access to her personnel authority under Section 12 does not include file, after she was dismissed from her the power to compel documents over which employment. She suspected that her solicitor-client privilege is claimed — even employer had improperly collected inaccurate for the limited purpose of evaluating the information and used it to discredit her veracity of the claim. That role, the court said, before the department’s board of directors. was reserved for courts of law. Since solicitor- When the employer denied her access, the client privilege is “fundamental to the proper employee filed a complaint with the Privacy functioning of our legal system,” it could only Commissioner and the Commissioner demanded be abrogated by explicit statutory language, access to the employment information. The and PIPEDA contains no such language. employer supplied the relevant documents to the Commissioner except for correspondence The Commissioner had argued that such a between the employer and its solicitors, over ruling would allow organizations to hide which it claimed solicitor-client privilege. damaging records under the guise of a privilege claim. However, the SCC noted that there are The Commissioner ordered the production two statutory means to verify that the privilege of the solicitor-client documents, relying claim: the Commissioner can refer a question on Section 12 of the Personal Information of solicitor-client privilege to the Federal Protection and Electronic Documents Act Court, or she can bring an application to the (PIPEDA). That provision permits the Federal Court after reporting an impasse Commissioner to compel the production of over privilege. The court could then order any records to facilitate the investigation of the production of the documents and inspect a complaint and to “receive and accept any them to determine the veracity of the claim.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 McCarthy Tétrault Notes: In addition to restricting the Commissioner’s powers, this decision may impact the As a result of the SCC ruling, solicitor-client activities of other administrative regulators. privilege disputes between organizations By extension, officials and bodies operating and the Commissioner under PIPEDA will under other statutes may be similarly likely be resolved through reference to prohibited from compelling production of the Federal Court. solicitor-client privileged documents absent explicit statutory language. Currently, A Parliamentary Committee, in response approximately 14 other federal statutes to the earlier Federal Court of Appeal contain substantially similar wording to decision, recently recommended that PIPEDA’s investigatory powers section, PIPEDA be amended to provide for an including the Public Service Employment expedited Federal Court review mechanism Act, Employment Equity Act and Canadian for privilege disputes. This proposal has not Security Intelligence Service Act. yet been enacted, but it would comport with the SCC’s analysis and statutorily Should Parliament ever consider reversing entrench the result of this case. the decision, it could add a clause to PIPEDA similar to that included in British The decision’s result of requiring disputes Columbia’s private sector privacy over solicitor-client privilege under legislation, the Personal Information PIPEDA to be resolved judicially provides Protection Act (PIPA). PIPA specifically protection for organizations that could provides that all documents requested by otherwise be susceptible to an overzealous the B.C. Commissioner must be produced, and intrusive Commissioner releasing regardless of any privilege claim, allowing their privileged documents. Even if the the Commissioner to determine whether Commissioner agreed that a record was privilege was properly claimed. privileged, he or she could turn it over to the government in some cases (if the That said, even PIPA provision may now be Commissioner believed it disclosed open to challenge. The specific operative evidence of a crime). Or, if the language of the statute does not refer to Commissioner erroneously felt that the “solicitor-client privilege” explicitly, but privilege claim was unjustified, he or she rather to “any privilege afforded by the could order the document be provided to a law of evidence…” In Blood Tribe, the SCC third party. This ruling prevents these indicated that solicitor-client privilege has possibilities. such importance in the legal system that it has moved beyond a mere rule of evidence.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Because PIPA does not explicitly mention including the user’s IP address. That IP address, solicitor-client privilege, it might be argued as it turned out, belonged to one of Firscht’s that the B.C. Commissioner also cannot former school friends, Grant Raphael. force disclosure of documents over which solicitor-client privilege is claimed. Raphael did not have a substantive defence to either the defamation or the privacy claim. Rather, he denied setting up the false profile Contact: and the group — he claimed that a stranger, Barbara A. McIsaac, Q.C. in Ottawa at who had visited his apartment at the relevant [email protected] time, was the culprit. After reviewing the evidence, the court rejected Raphael’s account and found him liable.

UK: In determining the size of the damages, the Court Awards Damages for judge noted that the extent of the publication Defamation and Breach of Privacy was not clear. Because Facebook does not for Facebook Postings keep statistics on the number of people who view group pages, it was not known how many A UK High Court awarded Matthew Firsht people had seen the offensive materials. Based and his company damages for defamation on the evidence before the court, it appears and breach of privacy after false statements that only a handful of people had visited the about him and his company, as well as his group page. The judge also considered the personal information, appeared on Facebook. limited time that the group and profile pages The information, which was not all accurate, were visible. was posted on a fake profile page and included Firsht’s supposed sexual orientation, At the same time, the judge noted “Facebook relationship status, birthday, and political is a medium in which users do regularly search and religious views. In addition, a Facebook for the names of others whom they know, and group had been created which insinuated anyone who searched for the name Mathew that Firsht owed significant money and that (sic) Firsht during those days will have found he had avoided paying his debt by lying. the false group without difficulty.” The fake profile and group were visible on The judge awarded £15,000 to Firsht and Facebook for 16 to 17 days before Firsht £5,000 to his company for defamation and discovered them and asked Facebook to take £2,000 to Firsht for breach of privacy. Since them down. Firsht then obtained a court order the judge awarded aggravated damages as part requiring Facebook to disclose the registration of the defamation award, the judge declined to information of the user who was responsible award them again for breach of privacy, even for creating the false profile and group, though the breach was apparently motivated

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 by spite, was deliberate and would otherwise North America: have attracted such damages. Cross-Border Travellers Beware: Confidential Information is at Risk McCarthy Tétrault Notes: Much attention has been paid recently to the Two points of particular interest arise extent to which customs officials can search out of this decision. The first is a warning electronic media devices such as laptops, to those who would attempt something digital music players, personal data assistants similar and think that their actions will be and BlackBerry® devices accompanying anonymous. When faced with a court order, travellers when crossing international borders. social networking sites like Facebook can Most of this attention has focused on the US be required to disclose a great deal of Customs and Border Patrol (CBP), as it has information about a site user. recently published a policy statement affirming its position that border patrol officials may Second, the court endorsed the existing conduct “suspicionless” searches of electronic jurisprudence that has awarded only devices entering the United States. However, relatively modest damages for breach the topic is equally important with respect to of privacy rights per se. The decision, the Canada Border Services Agency (CBSA), as if it carries any weight in Canada, many business professionals enter and re-enter suggests that courts will award generous Canada daily with electronic devices in hand damages for breaches of privacy rights and the CBSA has stated that its examination only (i) when malice is involved, such authority under the Customs Act extends to that aggravated damages are appropriate; electronic storage devices. or (ii) if actual harm flows directly from the breach, such as losses attributable to Although this article has been prepared from identity theft. a Canadian legal perspective, given the recent US policy statement on the topic, as well as the vast number of business ties binding the Contact: two countries, it is very useful to consider each Barbara A. McIsaac, Q.C. in Ottawa at issue as it applies to both sides of the border. [email protected] Organizations developing strategies to protect confidential data carried by employees when

crossing the Canada—United States border should consult with both Canadian and US customs counsel.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 1. Electronic Devices Are “Ordinary Goods” document in any form,” suggesting no special for Customs Purposes treatment for electronic documents. Canadian case law also supports this interpretation. In Electronic devices are unlike other items a 2008 Ontario Court of Justice decision, the travellers typically carry in their luggage. court stated that it saw no intrinsic difference These devices often contain important, between a computer search and a detailed confidential information, such as trade examination of the contents of one’s suitcase. secrets or legal documents. Unfortunately, border officials from both the United States 2. Searches without Suspicion and Canada do not treat electronic devices any differently than other goods. Given their characterization as ordinary goods, it follows that a border official can Following closely on the heels of a decision of search travellers’ electronic goods even in the the US Court of Appeals for the Ninth Circuit absence of suspicion regarding the traveller or affirming the CBP’s right to search electronic the electronic device. devices, the CBP recently issued a policy statement clarifying its position on searches US officials have clearly stated this as their of electronic devices at the border. This was policy. In its recent statement, the CBP not intended to be a declaration of new law. asserted that its officers can review and Rather, the CBP insisted that searching analyze information transported by an electronic devices is part of its long-standing individual crossing the US border absent practice. It emphasized that the examination individualized suspicion. of electronic devices is a crucial tool for detecting criminal behaviour and regulatory Canadian policy on this matter is not clearly violations. Thus, these devices ― like all other spelled out, though sources suggest that it is goods entering the United States ― may be similar to the American one. From their press searched by the CBP. releases concerning the confiscation of child pornography, it is evident that CBSA officers The CBSA has yet to publish a report detailing regularly perform spot-checks of laptops its policy on border searches of electronic at the border. Moreover, in another recent devices. That said, the CBSA has stated that its Ontario Superior Court of Justice case, the examination authority under the Customs Act court justified a customs search of a computer extends to electronic storage devices. Other disc by reasoning that searches at the border sources of information also suggest that, like are routinely held to be reasonable simply its American counterpart, the CBSA does not because they are searches at the border. This accord electronic devices special status at the suggests that electronic devices may also be border. For example, the Canadian Customs subject to suspicionless examinations at the Act broadly defines “goods” to include “any Canadian border.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 It should also be noted that the CBSA does not a justice of the peace so orders, or judicial treat items shipped by mail any differently proceedings have been instituted in which than those brought across the border with a the records might be required. traveller, unless that mail weighs 30 grams or less. Thus, shipping a laptop into Canada by 4. Border Officials’ Duty of Confidentiality mail will not provide you any greater is Permeable protection of your privacy. Both CBP and CBSA officials have made efforts 3. Detention of Electronic Devices to assure travellers that their confidential for Customs Review information will be protected. Despite this attempt, there are many exceptions to the The detention of a laptop or BlackBerry® general rule of confidentiality. Thus, travellers device at the border could have very are vulnerable to the possibility of their private harmful effects for the business traveller. information being made public. These travellers should be aware of their potential vulnerability when crossing the The recent CBP policy statement highlights Canada—United States border. the great potential for exposure of sensitive information during border searches. For The CBP policy statement affirms that example, documents detained at the border officers may detain electronic devices in order without individualized suspicion may be to properly search them, which may include shared with third parties in order to translate, translating and decrypting the documents. decrypt or receive explanations regarding This search can occur on-site, or the device complex subject matter. Where officers retain may be shipped to an off-site location. While documents or devices based on probable cause the CBP insists that the detention will only last of unlawful activity, they may share copies for a reasonable period of time to perform a with federal, state, local and foreign law thorough border search, what qualifies as a enforcement agencies, albeit only to the extent “reasonable time” has not been specified. consistent with applicable law and policy.

Without a clear policy statement, the extent The Canadian Customs Act provides many to which CBSA officers can detain electronic exceptions to the general rule of devices without suspicion in order to search confidentiality. For example, information them is uncertain. However, under the Customs gathered during a customs search can be Act, officers may seize and detain goods when released for use in any criminal proceedings they have reasonable grounds to believe a and also for civil proceedings when those contravention has occurred. If records are proceedings relate to the administration or seized as evidence, they cannot be detained enforcement of legislation such as the Income for longer than three months unless the Tax Act, the Customs Act, the Employment person from whom they were seized consents, Insurance Act and any other legislation that

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 provides for the imposition or collection the privileged document after seeking advice of a tax or duty. from the Associate/Assistant Chief Counsel or appropriate US Attorney’s office. Information obtained by the CBSA can also be disclosed in a wide variety of fora, including Neither the Canadian Customs Act nor the courts of record in Canada, courts outside of CBSA’s publications have directly addressed Canadian jurisdiction, international the issue of border searches of documents organizations, dispute settlement panels and covered by solicitor-client privilege. While other bodies. the Customs Act does provide protection for such documents in the context of an official The clearest reflection of the weakness of the demand for production, it does not necessarily confidentiality guarantee is encompassed in follow that a declaration of privilege in a subsection 107(6) of the Customs Act, which document will prevent a border official from permits the Minister of National Revenue to searching that document. Thus, lawyers and provide customs information to any person others crossing the Canadian border should solely on the basis that the Minister believes be cautious when transporting privileged that “the public interest in providing the information. information clearly outweighs any invasion of privacy, or any material financial loss or 6. Protect Yourself and Your Clients prejudice to the competitive position of the person to whom the information relates.” It is important to seek both Canadian and US customs advice on how to best protect sensitive 5. Vulnerability of Information Subject material when crossing the Canada—United to Legal Privilege States border. The following are suggestions from a Canadian legal perspective for those A further concern is the potential search of who plan to enter or re-enter Canada. electronic devices containing information covered by solicitor-client privilege. Know how to characterize your sensitive information — Not all types of information are In its recent policy statement, the CBP treated equally. Indeed, the CBSA distinguishes declared that although material covered by “biographical core information” and accords solicitor-client privilege may be subject to it a greater level of confidentiality. While special handling procedures, that material is there is no precise definition of this type not necessarily exempt from a border search. of information, it does include income tax, Moreover, if the documents are privileged banking and health records. Characterizing but the CBP officer suspects that the content your sensitive information as biographical of the document may constitute a crime or core information may help to improve your otherwise pertain to a determination within chances of maintaining confidentiality. the CBP’s jurisdiction, the officer may search

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Know your rights — Remember that these broad Orlando E. Silva in Toronto at investigative powers are limited to border [email protected] searches. Canadian case law tends to justify or these powers by emphasizing the reduced Brenda C. Swick in Ottawa at expectation of privacy at the border. Officials [email protected] therefore generally must have individualized suspicion before searching your electronic device once you are inside Canada’s borders. Being aware of your rights can help prevent the US: 2008 Security Breaches unnecessary exposure of sensitive information. Exceed 2007 Total Minimize risk — No matter which international The Identity Theft Resource Center (ITRC) border you are crossing, it is always wise to has reported that the number of data security take positive steps to minimize the risk of breaches to date in 2008 has already surpassed exposing sensitive information. Encrypting this the total number in 2007. As of August 22, 2008, information might not be sufficient since, at the centre counted 449 confirmed data breaches, least in the United States, border officials may while it documented 446 data breaches in all of seek decryption assistance even in the absence 2007. The ITRC speculates that the true number of individualized suspicion. A more effective is likely much higher due to under-reporting. alternative is to bring a clean laptop when In addition, some of the breaches reported travelling internationally. This should not affect multiple businesses, but are listed as pose any strategic difficulties if it is possible single events. to connect remotely to the company’s server in order to access any required electronic The ITRC, a non-profit association established documents. In order to keep the laptop clean to raise awareness of identity theft and to for the border crossing back into the home help identity theft victims, records breaches country, be sure not to save any new documents that have been published in various media to the local drives on the clean laptops. sources or have appeared on notification lists of state governmental agencies. To qualify for Contact: the ITRC’s breach list, a breach must involve John W. Boscariol in Toronto at personal identifying information that could [email protected] lead to identity theft (e.g., social security or number or date of birth). Simon V. Potter in Montréal at [email protected] The breaches on the ITRC list were categorized or as follows:

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 • hacking — 12.9 per cent; (iv) review existing policies and procedures to ensure the breach does not recur. • accidental exposure — 13.8 per cent; To deal with a security breach, your • employee theft — 15.6 per cent; organization should:

• subcontractors — 10.9 per cent; and 1. Assemble an appropriate team to investigate the breach (e.g., • data on the move (e.g., stolen or lost individuals from privacy, security, IT, laptops and portable storage devices) — communications and legal), and develop 21.2 per cent. and implement your organization’s action plan (including an internal McCarthy Tétrault Notes: communications plan to communicate The ITRC data categorizing the causes of to employees and management). data security breaches clearly illustrates 2. Investigate the facts surrounding the the fact that the majority of these breach, including the chain of custody incidents are the result of the acts or for the data, the date the breach omissions of an organization's personnel occurred, how the breach occurred, rather than an external malicious intrusion, when the breach was discovered, the and are in many cases preventable. number of individuals affected by the Effective internal controls and processes, breach, the nature of the information along with regular training programs and that was the subject of the breach incentives that build privacy and data (e.g., health, financial or contact security into an organization's corporate information, social insurance numbers, culture and ethic, will help to mitigate etc.). Also investigate whether there an organization's risk by reducing the are any physical or technological frequency of privacy incidents. impediments to unauthorized access If your organization experiences a to the information (e.g., password security breach, you should assess the protection, encryption, etc.), situation and implement an appropriate whether the information has already action plan in a timely manner. The key been inappropriately used or disclosed, objectives should be to (i) contain the and the likelihood that it will be in breach; (ii) assess and mitigate the risk to the future. your organization’s employees, clients and 3. Determine the jurisdiction(s) that are customers; (iii) develop and implement a affected by the breach and the law(s) notification strategy that is timely and that may apply. comprehensive (where appropriate); and

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 4. Assess the risk of harm if the 8. Develop and implement a information is in fact inappropriately communications plan to manage used or disclosed (e.g., physical harm, follow-up questions and requests fraud, identity theft, embarrassment from affected individuals, employees, or inconvenience to the individuals, regulators, law enforcement and loss of business or employment the media. opportunities, etc.).

5. Identify the steps that your Contact: organization should take to mitigate Wendy Gross in Toronto at the effect of the breach, both [email protected] internal (e.g., retrieve copies, change passwords or access rights, back-up databases) and external (e.g., notify affected individuals, law enforcement, privacy commissioners or regulatory authorities, review contractual reporting obligations if the data was being processed on behalf of another organization, etc.).

6. If your organization decides to notify individuals of the breach, develop a notification plan to provide such notification (e.g., direct notification of affected individuals or indirect notification through public announcements).

7. Identify and implement steps to be taken by your organization to help prevent a reoccurrence (e.g., changes to company procedures, policies and contractual templates; changes to physical or technological safeguards and employee training).

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Communications CASES/LEGAL DEVELOPMENTS • providing call number display of the originating telemarketing communication or Canada: an alternative telecommunications number National Do Not Call List Launched where the telemarketer can be reached for all telemarketing communications; and On September 30, 2008, the National Do Not Call List (DNCL) was launched. Back in 2007, • limiting their telemarketing the CRTC awarded a five-year contract to communications to the hours of 9:00 a.m. Bell Canada to operate the National DNCL. to 9:30 p.m. on weekdays, and 10:00 a.m. Now, consumers can reduce the number of to 6:00 p.m. on weekends. unsolicited telemarketing calls they receive by registering their telephone numbers with For a more detailed discussion of the DNCL and the National DNCL. Telecom Decision CRTC 2007-48, please read our website commentary. In its first day of operation, the system was overwhelmed by calls from people trying to Note that the CRTC has recently announced it register ― and crashed. Bell was able to add will review three requirements under the rules, additional capacity overnight and, by the including time-of-day calling restrictions for middle of the next day, over a million phone automatic dialing and announcing devices, as numbers reportedly had been registered. A poll the CRTC's restrictions are inconsistent with by conducted for the Marketing Research and certain provincial legislation. Intelligence Association has suggested that Contact: almost two-thirds of Canadians are planning to put their phone numbers on the DNCL. Charles S. Morgan in Montréal at [email protected] The rules for the National DNCL were part of a comprehensive framework for unsolicited telemarketing calls and other unsolicited telecommunications received by consumers, established in Telecom Decision CRTC 2007-48.

The rules currently require telemarketers to implement a number of procedures, including:

• maintaining their own “do not call” lists and honouring a consumer's request not to be called;

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 US: In this case, the judge found that: California Court Rules Sprint’s Early Termination Fees Are Illegal • Sprint decided to introduce ETFs to decrease customer “churn” (the number of A judge of the Superior Court of California customers who leave for another provider); recently ordered Sprint Nextel to pay $18.25 million to Sprint customers who paid • in adopting and setting the rate of the early termination fees (ETFs) and to cease ETFs, Sprint considered “whether the collecting $54.75 million in charged ETFs. competition had similar contracts and The judge determined that Sprint’s ETF was ETFs, whether customers would sign up with an unlawful penalty and, therefore, violated contracts with ETFs, and how the different California unfair business practices law. amounts of ETFs would impact financially”; and ETFs are fees charged to customers who leave their wireless contracts before the contract • to assess the financial impact of ETFs, term ends and often range between $150 and Sprint “analyzed different scenarios $200. Wireless carriers assert that ETFs and and considered the profitability of the long-term contracts are needed to guarantee proposed pricing change, but it did not revenue and offset the costs of subsidizing estimate damages caused by a potential handsets. breach.”

California cellphone customers commenced Since Sprint’s motivation for introducing the a class action lawsuit against Sprint, claiming ETFs was to decrease churn, and since it did that the ETF provision in Sprint’s cell phone not conduct a damages analysis to estimate contracts was not a valid liquidated damages its actual damages, the court determined that clause under California law. They sought to Sprint had not made a reasonable endeavour recover ETFs paid over a certain period and to approximate its actual damages. Therefore, to stop Sprint from collecting any further the court concluded the ETF provision was ETFs that had been charged. not a lawful liquidated damages clause under California law. Under California law, a liquidated damages provision in a consumer contract is lawful if the A jury had previously found that the class “liquidated damages represent a reasonable members had breached their contracts with endeavour by the parties to estimate the fair Sprint in terminating their contracts early and compensation for the loss sustained.” To that Sprint suffered $226 million in damages. determine whether a reasonable endeavour has However, because the jury appeared to been made, the courts consider the motivation assume the ETFs were valid, the judge did and purpose in imposing the charges and the not give effect to the jury’s ruling. effect of the charges.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Sprint had argued that federal law had pre- when customers terminate a service empted the claims, which were based on state contract prior to the end of the contracted law. Under the Federal Communications Act, term. Frequently, the customer will have the rates charged by wireless carriers are received some sort of handset discount or regulated federally. The judge rejected other financial advantage by signing a multi- this argument, finding that ETFs are not year agreement. The ETF is typically based “rates” and therefore California law was on payment of the greater of a fixed amount not pre-empted. She pointed to the fact that (e.g., $100) and a variable amount (e.g., Sprint charged an ETF when a contract was $20 per month multiplied by the number of broken, not during the course of contract. months remaining in the service contract) In addition, Sprint’s ETF was a fixed sum and sometimes subject to an overall that did not vary with the services provided. maximum payment amount.

McCarthy Tétrault Notes: The Canadian Radio-television and Telecommunications Commission (CRTC) The Sprint decision is reportedly the first has forborne from regulating rates charged ruling in the United States to declare by wireless carriers for wireless telephone ETFs illegal in a state. It should be noted, services. It still does regulate rates charged however, that the decision is a tentative by incumbent telephone companies for ruling and both parties have filed certain wireline telecommunications statements of objection. Thus, the judge services in some areas. Where the CRTC will hear further arguments before a final does regulate service rates, its regulatory decision is rendered. As well, there is jurisdiction will extend to applicable ETFs the possibility that Sprint may appeal. that carriers may charge.

The Federal Communications The following case illustrates how the CRTC Commission (FCC), which regulates the handled a wireline service complaint about telecommunications industry in the an ETF charged to a business customer. United States, may also decide to step In Telecom Order CRTC 2004 307, issued in and oversee this area. Back in June, by the CRTC in 2004, the CRTC ruled on a the FCC conducted a hearing to determine complaint by a customer of Bell Canada’s whether it should regulate ETFs. At that local link business telephone services. The hearing, the FCC chairman proposed that customer terminated use of the service prior ETFs be pro-rated over the life of the to the term of his service contract and was contract and some cellphone carriers in the charged a $170 ETF. The CRTC upheld Bell United States have adopted this practice. Canada’s tariffed termination charge. The CRTC considered that the issue in dispute In Canada, it is common practice for related principally to whether or not the wireless carriers to require payment of fees

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 complainant had consented to Bell Canada’s tariffed service terms on an informed basis. Ultimately, the CRTC found that Bell Canada had obtained valid consent and that the ETF was properly applied.

Contact: Charles S. Morgan in Montréal at [email protected] or Lorne P. Salzman in Toronto at [email protected]

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Clean Technology CASES/LEGAL DEVELOPMENTS Essentially, each vehicle is used as a potential battery that can be drawn upon during periods US: of peak power usage. The green aspect of the Google Greens its Investments project stems from the fact that the cars are in Hopes of a Coal-Free Future recharged by Google’s solar array during off- peak hours. In essence, the Vehicle-to-Grid Google, the Internet search engine, has started system increases power reliability and the a new strategic initiative to develop electricity amount of renewable energy available to from renewable energy sources that will be the grid during peak periods. cheaper than electricity produced from coal. The newly created initiative, known as RE

More recently, Google announced that it is Google’s investment model is not the only way investing $10.25 million in a pair of companies large companies are turning green in order to that are developing “enhanced geothermal increase the bottom line. Wal-Mart, the world’s systems”— basically generating electricity largest retailer, announced that the company by running water through hot rocks deep now aims to be supplied by 100 per cent underground. Google is clearly planning new renewable energy, to create zero waste and to ways to make money in a post-carbon future. sell sustainable products. Largely, Wal-Mart’s A recent study from MIT estimates that within green initiatives focus on cost reduction the United States, current geothermal energy throughout its own operations and within its technology could provide 2,000 times the supply chain. Beginning in 2009, the retailer energy that the country consumed in 2005. will start building new high-efficiency stores in Canada that will consume at least 30 per cent Google has also teamed with Pacific Gas and less energy — resulting in an estimated savings Electric Company (PG&E) to demonstrate of $25 million over a five-year period. Vehicle-to-Grid technology. Such technology allows for the sharing of electricity between Similarly, Wal-Mart determined it could electric vehicles or plug-in electric hybrid save $26 million a year in fuel costs by vehicles and the electric power grid. installing auxiliary power units on its fleet

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 of 7,200 trucks, enabling the drivers to keep Canada: their cabs warm or cool during overnight breaks Becoming a “Clean Energy from driving without having to keep the engine Superpower” — Drawing Inspiration continuously idling. from Other Countries

And most significantly, Wal-Mart announced In his latest book, Hot, Flat and Crowded, that the company will require its 60,000 Pultizer-Prize-winning New York Times suppliers to reduce the amount of packaging columnist Thomas L. Friedman peers into they use. Through the use of smaller, lighter the near future and sees a world in which packages that are easier to transport and clean technology is a baseline product, stock, Wal-Mart expects to save $3.4 billion with a major strategic advantage going to in direct costs and almost $11 billion through those countries having leadership in the the entire supply chain. area. In the last TLQ, we discussed the federal government’s forthcoming carbon McCarthy Tétrault Notes: cap-and-trade system, which is part of the government’s stated goal of turning Canada Given that the environment remains one into a “clean energy superpower.” Several of the most important issues in North initiatives elsewhere suggest additional American society, companies that focus on avenues that Canada might also pursue to “greening” their business will be seen as attain this vaulted status. responsible actors within the communities they operate and develop valuable Taking Demand “Off the Charts” corporate goodwill. But these proactive environmental programs are also leading The impressive growth in recent years of businesses to discover new, revenue- clean energy technologies, wind energy in generating opportunities, and to take particular, masks the true challenge facing advantage of substantial operational and the industry. Clean technology still is far supply chain cost reductions. In reality, from being in a position to entirely replace going “green” isn’t just good ethics — conventional energy resources. Major it’s good business. technological innovation is needed for this to change. Moreover, total energy consumption is set to rise due to economic and population Contact: growth, meaning that the clean technology Cheryl L. Slusarchuk in Vancouver at sector is chasing a moving target in terms of [email protected] the demand that needs to be satisfied.

According to Mr. Friedman, what the world needs is “wild, off-the-charts demand” that will create sufficient certainty to encourage

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 business to invest in the technology needed to Europe is not alone. In 2002, Brazil adopted meet that demand. And here is the problem: Proinfa, a program designed to encourage clean technology needs to be able to meet a investment in wind, small hydro and biomass huge demand in order to become a truly viable projects that has made it a clean technology alternative to fossil fuels, yet clean technology leader in Latin America. industry leaders need to see evidence of a huge demand for their products before they The initiatives in Brazil and Germany may take the risk and invest in innovation. How to suggest further avenues for Canada to explore break this cycle? in order to generate the broad-based demand needed for investment certainty and to Inspiration from Germany and Brazil position Canada among the world’s leaders in clean technology. The countries that lead the world in clean technology have adopted legally binding Contact: national targets requiring utilities to derive David A.N. Lever in Toronto at a fixed portion of their electricity from [email protected] renewable resources. These laws specify the prices utilities must pay for such electricity, usually over a 20-year period — enough time for businesses to earn a return on their investment. In most cases, prices vary depending on the manner in which the electricity was generated.

For example, Germany’s Renewable Energy Sources Act (RESA) sets higher rates for electricity derived from offshore wind farms (compared to onshore wind farms) because of the higher costs involved. Similar policies are to be found throughout Europe as a result of a European Union Directive requiring Member States to adopt legislation. With its many cloudy days and relatively moderate wind speeds, Germany seems, at first glance, a most unlikely world leader in either wind or solar energy. Yet, it is a global powerhouse in both areas, a success story widely attributed to the RESA.

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Co-Counsel: Technology Law Quarterly Volume 4, Issue 3 Co-Counsel to helpyouunderstandhowchangesanddevelopmentsin topics webelievearemostrelevanttoyou.Currently depth andprovidescommentaryinsightonthelegal McCarthy TétraultCo-Counsel law willaffectyourbusiness.EachCo-Counselexplores publish Co-Counselsfocusingonbusinesslaw, labour& a particularareaoflawwithexceptionalbreadthand To vieworsubscribetoourother Co-Counsel Labour &Employment McCarthy TétraultCo-Counsel: employment, litigation,andtechnologylaw. publications, pleasevisitour Technology Law Business Law publications aredesigned Litigation McCarthy Tétrault website .

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