CASL 2.0: The Computer Program Provisions (Part 3)

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By Richard Stobbe

The CRTC has released guidelines on the implementation of the incoming computer-program provisions of Canada’s Anti-Spam Law (CASL). Software vendors should review the  CASL Requirements for Installing Computer Programs for guidance on installing software on other people’s computer systems. Remember, the start-date of January 15, 2015 is less than 2 months away. Here are a few highlights:

  • CASL prohibits the installation of software to another person’s computing computer - which includes any device, laptop, smartphone, desktop, gaming console, etc.) in the course of commercial activity without express consent;
  • Downloading your own app from iTunes or Google Play? CASL does not apply to software, apps or updates that are downloaded by users themselves; 
  • Maybe you still use a CD to install software? CASL does not apply to “offline” installations by a user;
  • Where implied consent cannot be relied upon, then express consent is required. The guidelines state the following:

“When seeking consent for the installation you must clearly and simply set out:

  1. The reason you are seeking consent;
  2. Who is seeking consent (e.g., name of the company; or if consent is sought on behalf of another person, that person’s name);
  3. If consent is sought on behalf of another person, a statement indicating which person is seeking consent and which person on whose behalf consent is being sought;
  4. The mailing address and one other piece of contact information (i.e., telephone number, email address, or Web address);
  5. A statement indicating that the person whose consent is sought can withdraw their consent; and
  6. A description in general terms of the functions and purpose of the computer program to be installed.”  

 

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Indirect Patent Infringement in the US

By Richard Stobbe

In a recent decision in the US (Riverbed Technology, Inc. v. Silver Peak Systems, Inc.), a company was found liable for indirect patent infringement even though the infringing features of its product were disabled when the product was sold. In the post-sale period, customers enabled the infringing features.  This was enough for the court to find the company liable for indirect infringement.

This case arose between two rivals in the wide area network market - Riverbed and Silver Peak. Riverbed sued Silver Peak for infringement of a number of US patents. Silver Peak counterclaimed, alleging infringement of three US patents. A jury trial eventually returned a verdict in favour of Silver Peak. Silver Peak asserted indirect infringement against Riverbed with respect to two patents. Specifically, the jury concluded that Riverbed “contributorily infringed” one of the patents and “induced infringement” of the other.

Riverbed challenged these conclusions, arguing that there was insufficient evidence of customer use of the accused features in the United States. Riverbed pointed out that the feature of its product that was allegedly infringing - a feature known as SDR-Adaptive - was disabled before the product was sold to consumers in the US. No-one disputed that fact. However, through user forums on the Riverbed website, as well as product manuals issued by Riverbed, consumers were taught how to enable and use this feature.

The court reviewed this surrounding evidence and concluded: “In sum, Silver Peak has offered evidence of Riverbed’s high sales volume, an instruction manual describing how to activate SDR-A, and several blog entries on Riverbed’s U.S. support forum from people who used their Riverbed devices with SDR-A enabled. Taken together, this circumstantial evidence is sufficient…” Riverbed was found to have indirectly infringed the Silver Peak patents.

Lessons for business? Canadian companies selling into the US should be aware that sales of their products may form the basis for liability in the US if used by customers in the US in infringing ways.

Related Reading: A Company May Be Liable for Indirect Infringement Where Its Customers Enable an Infringing Feature Even Though the Company Sells Its Product with That Feature Disabled

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The Troubles with Patent Inventorship

By Richard Stobbe

Determining inventorship is answering the question: who contributed enough to an invention to be named as an “inventor” on the patent application? It’s critical, as reviewed by my colleague Shohini Bagchee in her article Whose Invention Is It Anyway? – Some Thoughts on Patent Inventorship and Ownership.

Although the US case Ethicon Inc. v. U.S. Surgical Corp. (135 F.3d 1456) is not a new decision, it’s worth reviewing since it neatly illustrates the troubles that can arise. In Ethicon, a first inventor, Dr. Yoon, obtained a patent covering a certain surgical device. The patent contained 55 claims. Yoon granted a license to Ethicon. On the stregth of this license, Ethicon turned around and sued its competitor U.S. Surgical for infringing two of the claims in the Yoon patent. U.S. Surgical in the course of preparing its defence found that Mr. Choi had contributed to the invention and he should have been named as co-inventor on the Yoon patent.

Mr. Choi contributed to only two of the 55 claims - two claims which were not at issue in the infringement action. In its defence, U.S. Surgical sought - and the court granted - an order that Mr. Choi be added as a co-inventor to the patent. Even though Mr. Choi had contributed to a small percentage of the overall invention (and had contributed to claims that were not at issue in the lawsuit), his status as a co-inventor permitted him under US law to grant a license to the whole patent. Ethicon’s patent infringement lawsuit was dismissed after Choi granted a retroactive patent license to U.S. Surgical.

Lessons for business?

  • Internal IP policies and invention-disclosure protocols should be designed to capture all inventors who contributed to inventorship.
  • In joint research agreements or joint development agreements, don’t ignore co-inventorship issues.
  • Remember that invention-disclosure and inventorship should dovetail with invention assignment agreements, as well as the IP provisions in employment agreements and consultant agreements.
  • Ensure you are getting legal advice regarding inventorship as it relates to the jurisdiction in which you are filing your patent application.
  • Remember that the law in Canada and the US differs on this point: A co-owner’s interest in a co-owned patent can be licensed without the consent of the other owner in the US and there is no need to account to the other owner for licensing revenue; but in Canada the patent cannot be licensed without the consent of the other co-owner.

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Two Privacy Class Actions: Facebook and Apple (Part 2)

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Courtesy of Apple

By Richard Stobbe

In Part 1, we looked at the B.C. decision in Douez v. Facebook, Inc.

Another proposed privacy class action was heard in the B.C. court a few months later: Ladas v. Apple Inc., 2014 BCSC 1821 (CanLII).

This was a claim by a representative plaintiff, Ms. Ladas, alleging that Apple breached the customer’s right to privacy under the Privacy Act (B.C.), since iOS 4 records the location of the “iDevice” (that’s the term used by the court for any Apple-branded iOS products) by surreptitiously recording and storing locational data in unencrypted form which is “accessible to Apple”. The claim did not assert that this info was transmitted to Apple, merely that it was “accessible to Apple”. This case involved a different section of the Privacy Act (B.C.) than the one claimed in Douez.

The Ladas claim, curiously, referred to a number of public-sector privacy laws as a basis for the class action, and the court dismissed these claims as providing no legal basis. The court did accept that there was a basis for a claim under the Privacy Act (B.C.) and similar legislation in 3 other provinces. However, the claim fell down on technical merit. It did not meet all of the requirements under the Class Proceedings Act: specifically, the court was not convinced that there was an “identifiable class” of 2 or more persons, and did not accept there were “common issues” among the proposed class members (assuming there was an identifiable class).

Thus, the class action was not certified. It was dismissed without leave to amend the pleadings.

Apple’s iOS software license agreement did not come into play, since the claim was dismissed on other grounds. If the claim had proceeded far enough to consider the iOS license, then it would surely have faced the same defences raised by Facebook in Douez. As the judgement noted: Apple argued that “every time a user updates the version of iOS running on the user’s iDevice, the user is prompted to decide whether the user wants to use Location Services by accepting the terms of Apple’s software licensing agreement. Apple relies on users taking such steps in its defence of the plaintiff’s claims. The legal effect of a user clicking on “consent” or “allow” or “ok” or “I agree” would be an issue on the merits in this action.”

Any test of Apple’s license agreement will have to wait for another day.

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Two Privacy Class Actions: Facebook and Apple

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By Richard Stobbe

Two privacy class actions earlier this year have pitted technology giants Facebook Inc. and Apple Inc. against Canadian consumers who allege privacy violations. The two cases resulted in very different outcomes.

First, the Facebook decision: In Douez v. Facebook, Inc., 2014 BCSC 953 (CanLII), the court looked at two basic questions:

  1. Do British Columbian users of social media websites run by a foreign corporation have the protection of BC’s Privacy Act, R.S.B.C. 1996, c. 373?
  2. Do the online terms of use for social media override these protections?

The plaintiff Ms. Douez alleged that Facebook used the names and likenesses of Facebook customers for advertising through so-called “Sponsored Stories”.  The claim alleges that Facebook ran the “Sponsored Stories” program without the permission of customers, contrary to of s. 3(2) of the B.C. Privacy Act which says:

“It is a tort, actionable without proof of damage, for a person to use the name or portrait of another for the purpose of advertising or promoting the sale of, or other trading in, property or services, unless that other, or a person entitled to consent on his or her behalf, consents to the use for that purpose.”

Interestingly, this Act was first introduced in B.C. in 1968, even before the advent of the primitive internet in 1969 .

Facebook argued that its Terms of Use precluded any claim in a B.C. court, due to the “Forum Selection Clause” which compels action in the State of California. The court accepted that, on its face, the Terms of Service were valid, clear and enforceable. However, the court went on to decide that the B.C. Privacy Act establishes unique claims and specific jurisdiction. The Act mandates that claims under it ”must be heard and determined by the Supreme Court” in British Columbia. This convinced the court that Facebok’s Forum Selection Clause should be set aside in this case, and the claim should proceed in a B.C. court.

The class action was certified. Facebook has appealed. Stay tuned.

Next up, the Apple experience.

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CASL 2.0: The Computer Program Provisions (Part 2)

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By Richard Stobbe

In Part 1 we looked at some basic concepts. In Part 2, we look at “enhanced disclosure” requirements.

If the computer program that is to be installed performs one or more of the functions listed below, the person who seeks express consent must disclose additional information. This disclosure must be made “clearly and prominently, and separately and apart from the licence agreement”. In this additional or enhanced disclosure, the software vendor must describe the program’s “material elements” including the nature and purpose of the program, and the impact on the user’s computer system. A software vendor must bring this info to the attention of the user. This applies if you, as the software vendor, want to install a program that does any of the following things, and causes the computer system to operate in a manner that “is contrary to the reasonable expectations of the owner”. (You have to guess at the reasonable expectations of the user.) These are the functions that the legislation is aimed at:

  • collecting personal information stored on the computer system;
  • interfering with the owner’s or an authorized user’s control of the computer system;
  • changing or interfering with settings, preferences or commands already installed or stored on the computer system without the knowledge of the owner or an authorized user of the computer system;
  • changing or interfering with data that is stored on the computer system in a manner that obstructs, interrupts or interferes with lawful access to or use of that data by the owner or an authorized user of the computer system;
  • causing the computer system to communicate with another computer system, or other device, without the authorization of the owner or an authorized user of the computer system;
  • installing a computer program that may be activated by a third party without the knowledge of the owner or an authorized user of the computer system.

If the computer program or app that you, as the software vendor, want to install does any of these things, then you need to comply with the enhanced disclosure obligations, as well as get express consent.

There are some exceptions: A user is considered to have given express consent if the program is

  • a cookie,

  • HTML code,

  • Java Scripts,

  • an operating system,

  • any other program that is executable only through the use of another computer program whose installation or use the person has previously expressly consented to, or

  • a program that is necessary to correct a failure in the operation of the computer system or a program installed on it and is installed solely for that purpose; AND

  • the person’s conduct is such that it is reasonable to believe that they consent to the program’s installation.

Remember: These additional provisions in CASL which deal with the installation of software come into effect on January 15, 2015, in less than 3 months. An offence under CASL can result in monetary penalties as high as $1 million for individuals and $10 million for businesses.

If you are a software vendor selling in Canada, get advice on the implications for automatic installs and updates, and how to structure consents, whether this is for business-to-business, business-to-consumer, or mobile apps. There are already more than 1,000 complaints under the anti-spam provisions of the law. You don’t want to be the test case for the computer program provisions.

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Alberta Privacy Law Update: PIPA on Death’s Door

By Richard Stobbe

About a year ago on November 15, 2013, Alberta’s Personal Information Protection Act (PIPA) was declared invalid on constitutional grounds. The Supreme Court of Canada (SCC), in its wisdom, deferred the effect of this order for a 1 year period, to permit the Alberta legislature to revisit and amend the legislation to bring it in line with the Constitution. The legislature has drafted legislation in the intervening period, but is not due to return to work until November 17, 2014, two days after the court’s declaration of invalidity takes effect.

The Alberta government has filed a motion asking the SCC to extend the suspension period, to provide more time to address the issue, but an overhaul of PIPA is not an easy or quick task. Stay tuned.

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CASL 2.0: The Computer Program Provisions (Part 1)

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By Richard Stobbe

It’s mid-October. Like many businesses in Canada, you may be weary of hearing about CASL compliance. Hopefully that weariness is due to all the hard work you did 3 months ago to bring your organization into compliance for the July 1st start-date.

If you’re a software vendor, then you should gird yourself for round two: Yes, there are additional provisions in CASL which deal with the installation of software, and those rules come on stream in 3 months on January 15, 2015.

Section 8 of CASL ostensibly deals with spyware and malware. Hackers are not the only problem; think of the Sony Rootkit case (See our earlier post here) as another example of the kind of thing that this law was designed to address.

This is the essence of Section 8: “A person must not, in the course of a commercial activity, install …a computer program on any other person’s computer system… unless the person has obtained the express consent of the owner …” This applies only if the computer system is located in Canada, or if the person either is in Canada at the relevant time or is acting under the direction of a person who is in Canada at the time when they give the directions.

This relatively simple idea - get consent if you want to install an application on someone else’s system in Canada - has far-reaching implications due to the way the legislation draws the definitions of “computer program” and “computer system” from the Criminal Code. As you can guess, the Criminal Code definitions are extremely broad. So, what does this mean in real life?

  • Certain types of specified programs require “enhanced disclosure” by the software vendor. (I am saying ’software vendors’ as those are the entities most likely to bring themselves into compliance. Of course, hackers and organized crime syndicates should also take note of the enhanced disclosure requirements);
  • Express consent, under this law, means that the consent must be requested clearly and simply, and the purpose of the consent must be described;
  • The software vendor requesting consent must describe the function and purpose of the computer program that is to be installed;
  • The software vendor requesting consent must provide an electronic address so that the user can request, within a period of one year, that the program be removed or disabled;
  • Note that if a computer program is installed before January 15, 2015, then the person’s consent is implied. This implied consent lasts until the user gives notice that they don’t want the installation anymore. Or until January 15, 2018, whichever comes first. I’m not making this stuff up, that’s what the Act says.
  • One more thing: Enhanced disclosure does not apply if the computer program only collects, uses or communicates “transmission data”. Transmission data is what you might call envelope information. The Act defines it as data that deals with “dialling, routing, addressing or signalling” and although it might show info like “type, direction, date, time, duration, size, origin, destination or termination of the communication”, it does not reveal “the substance, meaning or purpose of the communication”. So there is effectively a carve-out for the tracking of this category info.

Don’t worry, Canadian anti-spam laws are kind of like Lord of the Rings: Sequels will keep coming whether you like it or not. Once we’re past January 15, 2015, you can look forward to July 1, 2017, which is the day on which sections 47 to 51, 55 of CASL come into force. These provisions institute a private right of action for any breach of the Act.

If you are a software vendor selling in Canada, get advice on the implications for automatic installs and updates, whether this is for business-to-business, business-to-consumer, or mobile apps. There are already more than 1,000 complaints under the anti-spam provisions of the law. You don’t want to be the test case for the computer program provisions.

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Drafting IT Agreements: Oct. 14-15

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By Richard Stobbe

I will be speaking next week at the 10th Essentials of Commercial Contracts Course in Calgary, Alberta (Download PDF) on the subject of IT contracting. This session will discuss key considerations in IT licensing and service agreements including:

  • Key clauses in IT agreements and common mistakes
  • Various models for licensing software
  • Overlap between licenses and service agreements
  • Service level metrics and remedies for non-compliance
  • Statements of work in IT consulting and the lawyer’s role
  • Other issues: privacy, vendor lock-in, third party and open source software.

If you want additional information, please contact me.

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What, exactly, is a browsewrap?

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By Richard Stobbe

Browsewrap, clickwrap, clickthrough, terms of use, terms of service, EULA. Just what are we talking about and how did we get here?

In Nguyen v. Barnes & Noble, Inc., 2014 WL 4056549 (9th Cir. Aug. 18, 2014) the US Ninth Circuit wades into the subject of online contracting. Law professor Eric Goldman (ericgoldman.org) argues that these terms we’re accustomed to using, to describe ecommerce agreements, only contribute to the confusion. The term ”browsewrap” derives from “clickwrap”, which is itself a portmanteau derived from the concept of a shrinkwrap license. As one court described it in 1996: “The ’shrinkwrap license’ gets its name from the fact that retail software packages are covered in plastic or cellophane shrink wrap, and some vendors… have written licenses that become effective as soon as the customer tears the wrapping from the package.”

The enforceability of a browsewrap - it is argued - is based not on clicking, but on merely browsing the webpage in question. However, the term browsewrap is often used in the context of an online retailer hoping to enforce its terms, in a situation where they should have used a proper click-through agreement.

In Nguyen, the court dealt with a claim by a customer who ordered HP TouchPad tablets from the Barnes & Noble site. Although the customer entered an order through the shopping cart system, Barnes & Noble later cancelled that order. The customer sued. The resulting litigation turned on the enforceability of the online terms of service (TOS). The court reviewed the placement of the TOS link and found a species of unenforceable browsewrap - the TOS link was somewhere near the checkout button, but completion of the sale was not conditional upon acceptance of the TOS.

There is a whole spectrum upon which online terms can be placed. At one end, a click-the-box agreement (in which completion of the transaction is conditional upon acceptance of the TOS) is generally considered to be valid and enforceable. At the other end, we see passive terms that are linked somewhere on the website, usually from the footer, sometimes hovering near the checkout or download button.  In Nguyen, the terms were passive and required no active step of acceptance. The court concluded that: “Where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on —without more — is insufficient…”

This leaves open the possibility that browsewrap terms (where no active step is required) could be enforceable if the user has notice (actual or constructive) of those terms.

In Canada, the concept was most recently addressed by the court in Century 21 Canada Limited Partnership v. Rogers Communications Inc., 2011 BCSC 1196 (CanLII). In that case, there was no active click-the-box terms of use, but the “browsewrap” terms were nevertheless upheld as enforceable, in light of the circumstances. Three particular factors convinced the court that it should uphold the terms: 1. the dispute did not involve a business-to-consumer dispute (as it did in Nguyen). Rather the parties were “sophisticated commercial entities”. 2. The defendants had actual notice of the terms. 3. The defendants employed similar terms on their own site.

The lessons for business?

The “browsewrap” is a passive attempt to impose terms on a site visitor or customer. Such passive terms should not be employed where the party seeking to enforce those terms requires certainty of enforceability. Even where there is a “conspicuous hyperlink” or “notice to users” or “close proximity of the hyperlink”, none of these factors should be relied upon, even if they might create an enforceable contract in special cases. Maybe it is time to retire the term “browsewrap” and replace it with “probably unenforceable”.

Now, do you still want to rely on a browsewrap agreement?

Related Reading: Online Terms - What Works, What Doesn’t

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Update on Injunction Against Google (Equustek Solutions Inc. v. Google Inc.)

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By Richard Stobbe

Last summer, Google was ordered by a Canadian court to de-index certain offending websites which were selling goods that were the subject of an intellectual property (IP) infringement claim (Equustek Solutions Inc. v. Jack, 2014 BCSC 1063 (CanLII), see our earlier post: Court Orders Google to Remove Site from Worldwide Search Results).

The underlying dispute involved a trade-secret misappropriation and passing-off claim by a manufacturer against a rival company. Google appealed the lower court decision. In Equustek Solutions Inc. v. Google Inc., 2014 BCCA 295 (CanLII), the BC Court of Appeal has rendered a decision.

Google applied for a stay of the original injunction on a number of grounds, including the argument that the original order was “unprecedented in Canadian law”, the order was “overly broad”, and that the order will have a “direct and irreversible impact” on Google. Google argued that it would suffer “irreparable harm” for two reasons: first, Google customers would be impacted, although it was not clear how exactly; and second, Google argued that this Canadian court order would open the floodgates to other similar orders against Google in other jurisdictions.

The appeal court acknowleged the importance of the case, musing that “the order of the court below raises profound issues as to the competence of Canadian courts to issue global injunctions that affect what content users around the world can access on the Internet.”

However, after balancing the arguments, the Court of Appeal did not grant the stay, so the injunction remains in place.

There are a few interesting points about this decision:

  • Although Google was not a party to the original lawsuit (remember, it was an IP dispute between two rival manufacturers) and no-one claimed anything against Google itself, Google took the extraordinary step of undertaking to pay damages to Equustek, for damage it might suffer if the injunction was lifted. Google said it would track traffic to the offending websites (which it is supposed to de-index) and disclose that information to Equustek. If Equustek lost profits as result of traffic to these sites, then Google would make good the damages.
  • Equustek counter-argued that this was cold comfort, asking: “What value is it to have the right to sue Google for damages?”  If access to the offending websites was not blocked by Google, said Equustek, then Equustek would still face the burden of proving damages, and then suing Google for those damages, and in the meantime its intellectual property would continue to be devalued.

The appeal will go ahead, and while the appeal is underway, the order against Google will remain. This is one to watch.

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    Crowdfunding: Tips for the Start-Up

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    By Richard Stobbe

    If you are a start-up considering the crowdfunding route, let’s talk. Here are a few tips to consider:

    • IP: Most crowdfunding portals require extensive disclosure of the start-up’s business plans and product prototypes. That makes sense - after all, investors want to know what they’re investing in. The start-up should consider the scope of disclosure in light of intellectual property issues. Will the technical info, drawings, or descriptions constitute a public disclosure of the company’s inventions, and if so, this may impact patentability, in Canada or the US or other important markets. Consider patent issues, and also make sure you mark your trademarks and display copyright notices where appropriate.
    • Securities Laws: Raising money from investors? In Canada, perhaps the best way to approach the issue is not to ask ”is crowdfunding legal?“. Rather, decide what you want to accomplish and then make sure your efforts are compliant with current laws. Every company must comply with securities laws. An offering to sell shares requires a prospectus or an exemption, and there are a number of exemptions which may be suitable for your start-up. “Crowdfunding” is a nebulous term, and depending on how it is implemented, it may run afoul of current securities laws, or it may be so cost-prohibitive to your start-up that you will choose a different path. The crowdfunding exemption is being developed. Some provinces (such as Saskatchewan) have implemented rules permitting equity crowdfunding. Other provinces such as Alberta are considering such rules.
    • Corporate Issues: As equity crowdfunding rules become more mature, you should consider the implications. Let’s say the rules permit equity crowdfunding in your province. You want to raise $1.5 million (which is the maximum under the proposed Crowdfunding Exemption).  Let’s say each investor kicks in $2,500 for shares in the company (which is the maximum single investment under the proposed Crowdfunding Exemption). That’s 600 shareholders. That means 600 people (most of whom are total strangers) own a piece of your company. Next, you want to raise $2 million from venture capital investors. How will VCs view your company if they are joining 600 minority shareholders? Equity crowdfunding may be a great option for your start-up, it may be the way to get your product to market. Or it may be a bad fit in light of your long-term strategy. Either way, you should go in with your eyes open so you know what you are signing up for.

    Get some practical advice as you consider your financing options.

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    Crowdfunding: A Canadian Update

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    By Richard Stobbe

    A Canadian company, Vrvana, Inc. is seeking $350,000 through Kickstarter, to finance its development of a virtual reality headset marketed as the Totem. Vrvana has elected to pursue a reward-based crowdfunding model. For example, minimal donations of $15 come with a newsletter subscription and event invitations. The top end contribution of $8,000 will net a Totem VR headset and a dinner date with the team of engineers.

    Crowdfunding attracts headlines and cash, but in Canada the rules and laws surrounding equity crowdfunding are still in development. The securities or equity-based model of crowdfunding refers to small investments in exchange for securities - which has a broad definition meant to capture shares in the start-up company, including pref shares or convertible securities, non-convertible debt securities, or units of a limited partnership. In plain terms, a company could use this method of crowdfunding to raise money by selling a piece of the company, rather than selling products or services.

    In Canada, a number of provinces are considering some varation of crowdfunding rules, either for a “Crowdfunding Exemption” or a “Start-up Exemption” or both. Ontario, B.C., Manitoba, Quebec, New Brunswick and Nova Scotia are considering the exemptions. Alberta is considering the public comments, but has not formally published any proposed rules.

    Here are the highlights of the proposed Start-up Exemption for crowdfunding in a number of Canadian provinces.

    • There is a cap. The start-up can only raise a  maximum of $150,000 under each offering.
    • The distribution cannot remain open for more than 90 days.
    • There is a limit on the number of times the company can go back to the trough each year - the exemption only be used twice each calendar year.
    • The offering document must disclose the minimum and maximum offering size.
    • One crowdfunding offering at a time. A start-up cannot have two concurrent offerings.
    • The offering materials must be made available to potential investors through a regulated portal (like Kickstarter), which will also be subject to rules.
    • Investor are restricted on what they can contribute - there is a cap of $1,500 for each investment under the exemption.
    • Securities are subject to an indefinite hold period.
    • There are other restrictions, such as the requirement for the start-up to file a report of distribution within 30 days of the closing of the distribution.

    The proposed Crowdfunding Exemption is a variation, with a few notable differences: it would have higher thresholds and would be open to both reporting issuers and non-reporting issuers:

    • The company would be able to raise up to $1.5 million during every 12 month period.
    • Investors could invest up to $2,500 per single investment, with an aggregate cap of $10,000 per calendar year.

    Remember this is currently proposed, but not yet “legal”. The comment period closed in June, 2014, and Canadian securities regulators are considering comments. Rule changes will not likely come into effect until 2015. However, Saskatchewan has already launched its Equity Crowdfunding Exemption which is similar to the Start-up Exemption summarized above.

    In the US, the 2012 Jumpstart Our Business Startups Act (JOBS Act) promised new rules on equity crowdfunding. While the federal rules have not yet been finalized, equity crowdfunding is currently allowed in a number of states that have passed “intrastate” rules. For example, a Maryland company may raise funds from Maryland investors. A dozen US states are considering such rules. Make sure you get US legal advice if you are considering crowdfunding from US investors.

    This is a complex area of law, and the current landscape is more splintered than harmonized. If you are a start-up, get some practical advice as you consider your financing options.

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    Ownership of Photograph by Employee

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    By Richard Stobbe

    While our last post dealt with the creation of photographs and other works of authorship by primates, robots and divine beings, this story is a little more grounded in facts that you might see in the average work day.

    When an employee takes a photograph, who owns copyright in the image?

    In Mejia v. LaSalle College International Vancouver Inc., 2014 BCSC 1559, a BC court reviewed this question in the context of an employment-related complaint (there were other issues including wrongful dismissal and defamation which we won’t go into). Here, an instructor at LaSalle College in Vancouver took a photograph, and later alleged that the college infringed his copyright in the picture after he discovered that it was being used on LaSalle’s Facebook page.

    The main issue was whether the picture was taken in the course of employment. The instructor argued that the photograph was taken during his personal time, on his own camera. He tendered evidence from camera metadata to establish the details of the camera, time and date. He argued that s. 13(3) of the Copyright Act did not apply because he was not employed to take photos. He sought $20,000 in statutory damages. The college argued that the photo was taken of students in the classroom and was within the scope of employment, and copyright would properly belong to the college as the employer, under s. 13(3) of the Act.

    The court, after reviewing all of this, decided that the instructor was not hired as a photographer. While an instructor could engage in a wide variety of activities during his employment activities, the court decided that “the taking of photographs was not an activity that was generally considered to be within the duties of the plaintiff instructor, and there was no contractual agreement that he do so.” It was, in short, not connected with the instructor’s employment. In the end, the photograph was not made in the course of employment. Therefore, under s. 13(1) of the Copyright Act, the instructor was the first owner of copyright, and the college was found to have infringed copyright by posting it to Facebook.

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    Monkey See, Monkey Do… However Monkey Does Not Enjoy Copyright Protection

    By Richard Stobbe

    I know this story crested a few weeks ago, but who can resist it? A famous 1998 Molson Canadian ad posed a Canadian version of the infinite monkey theorem. The cheeky ad, showing a seemingly endless array of monkeys on typewriters, sidestepped the more important question about whether the monkeys as authors would enjoy copyright protection over the works they created.

    A wildlife photographer’s dispute with Wikimedia over ownership of photographs taken by primates in Indonesia has brought international attention to this pressing issue. The “Compendium of U.S. Copyright Office Practices, Third Edition” now explicitly states that photographs by monkeys are not eligible for copyright protection. Nor are elephant-paintings deserving of copyright. “Likewise,” the Compendium notes dryly, “the Office cannot register a work purportedly created by divine or supernatural beings.” Robots are also out of luck.

    There is no word on whether Canada is directly addressing this question.

    Calgary - 09:00 MST

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    Confidentiality & Sealing Orders in Software Disputes

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    By Richard Stobbe

    Two software companies wanted to integrate their software products. The relationship soured and one of the parties - McHenry - purported to terminate the Software Licensing and Development Agreement and then launched a lawsuit in the Federal Court in the US, claiming copyright infringement and breach of contract. The other party - ARAS - countered by invoking the mandatory arbitration clause in the software agreement. The US court compelled the parties to resolve their dispute through arbitration in Vancouver. After the arbitration, the arbitrator’s decision was appealed in the BC Supreme Court. In that appeal, McHenry sought a “sealing order” asking the BC court, in effect, to order confidentiality over the March 26, 2014 Arbitration Award itself. This is because ARAS, who prevailed at arbitration, circulated the arbitration award to others.

    In the recent decision (McHenry Software Inc. v. ARAS 360 Incorporated, 2014 BCSC 1485 (CanLII)) the BC Supreme Court considered the law of “sealing orders” and confidentiality in the context of a dispute between two software companies.

    The essence of McHenry’s complaint was that the arbitrator’s award should be treated confidentially, since it contained confidential and sensitive information about the dispute, which could harm or disadvantage McHenry in its negotiations with future software development partners.

    The court reviewed the legal principles governing sealing orders. A “sealing order” is simply court-ordered confidentiality over court records or evidence. While there is a presumption in favour of public access in the Canadian justice system, there are times when it is appropriate to deny access to certain records to prevent a “serious risk to an important interest” as long as “the public interest in confidentiality outweighs the public interest in openness”. (To dig deeper on this, see: Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41 (CanLII), 2002 SCC 41.)

    If you were hoping for a handy three-part test, you’re in luck:

    1. First, the risk in question must be real and substantial, and must pose a “serious threat” to the commercial interest in question.
    2. The interest must be tied to a public interest in confidentiality. The SCC said: “a private company could not argue simply that the existence of a particular contract should not be made public because to do so would cause the company to lose business, thus harming its commercial interests.” Courts must remember that a confidentiality order involves an infringement on freedom of expression, so it should not be undertaken to satisfy purely commercial interests.
    3. Third, the court must consider whether there are any reasonable alternatives to a confidentiality order, or look for ways to restrict the scope of the order as much as possible in the context.

    Ultimately, the BC Court was not sympathetic to McHenry’s arguments for a sealing order. If McHenry was so concerned about the confidentiality of these proceedings, the court argued, then McHenry would not have launched a lawsuit against ARAS in the US Federal Court, where there is no confidentiality. In pursuing litigation, McHenry filed numerous documents in the public record, including its Arbitration Notice, its Statement of Claim in the Arbitration and its petition in the BC Court proceedings, some of which contained potentially sensitive information.

    “Moreover,” the court continued, “there is no general principle that the confidentiality of arbitration proceedings carries over to court proceedings when the arbitration is appealed. On the contrary, such court proceedings are generally public.”

    This case serves as a reminder of the confidentiality issues that can arise in the conext of a dispute between software companies, both in arbitration proceedings and in the litigation context. Make sure you seek experienced counsel when handling the complex issues of confidentiality, sealing orders and licensing disputes.

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    When Milk is Not Milk: Dairy Farmers of Canada v. Cytosport, Inc.

    monster_product_hero_339x415_chocolate.pngBy Richard Stobbe

    You can’t get a trade-mark registration for a word that will deceive consumers. Put into legalese, section 12 of the Canadian Trade-marks Act says a trade-mark is not registrable if it is either “clearly descriptive or deceptively misdescriptive … of the character or quality of the wares or services in association with which it is used or proposed to be used…”

    If a trade-mark applies the word “MILK” to a non-dairy product, can that be considered deceptively misdescriptive? This question came up in the trade-marks opposition case of Dairy Farmers of Canada v Cytosport, Inc., 2014 TMOB 148 (CanLII), in which the Dairy Farmers of Canada opposed the registration of the marks the trade-marks MONSTER MILK and MONSTER MLK for use with “Dietary and nutritional supplements for use in athletic training, namely for improving body strength and building muscle, excluding ready to drink beverages.”

    The Dairy Farmers essentially argued that the average consumer would believe that the drinks sold under the brand MONSTER MILK would contain “real milk”. In a wide-ranging analysis, which covered the Food and Drug Act, to consideration of Nourishing Coconut Milk Shampoo, as well as references to “milk” in the Oxford Dictionary, the Board ultimately decided that the average consumer would not be deceived, since it would not be apparent which meaning of milk would apply in the case of the MONSTER MILK brand.

    This case illustrates the importance of strong affidavit evidence in opposition proceedings: here, the applicant submitted evidence from dictionary meanings, Google search results, and shopping excursions to show common uses of the word MILK in association with other non-dairy products.

    Calgary - 07:00 MST

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    Online Terms - What Works, What Doesn’t

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    By Richard Stobbe

    The online fine print - those terms and conditions that you agree to when you buy something online - it really does matter where those terms are placed in the checkout process. A recent US case illustrates this point. In Tompkins v. 23andMe, Inc., 2014 WL 2903752 (N.D. Cal. June 25, 2014), the court dealt with an online checkout process for DNA testing kits sold by 23andMe. When completing a purchase, customers were not presented with any mandatory click-through screen for the transaction to complete. There was a passive link at the footer of the transaction page, something the court dismissed as a “browsewrap”, which was ineffective to bind the customers. In other words, the Terms of Service were not effective at that point in the transaction.

    In order to obtain test results, however, customers were obliged to register and create an account with 23andMe. In this (post-sale) registration process, a mandatory click-through screen was presented to customers, not once but twice. The court decided that this second step was valid to bind the customers who purchased the DNA testing kits.

    While this shows that courts can take a position that is sympathetic to online retailers, this should not be taken as an endorsement of this contracting process. In my view, the better approach would be to push customers through a mandatory click-through screen at both stages. This is particularly so in a case like 23andMe, where the first transaction is for sale of a product (the kit) and the second step relates to a service (processing test results). The two, of course, are intertwined, but the double click-through reduces risk and plugs the holes left by the single click-through. For example, a customer may buy a kit and never create an account, or use a kit without have purchased it. As the court notes: “it is possible for a customer to buy a DNA kit, for example, as a gift for someone else, so that the purchasing customer never needs to create an account or register the kit, and thus is never asked to acknowledge the TOS.”

    We can speculate on why the click-through appeared at the second account-creation step, and not the first kit-purchasing step. Sometimes, the purchasing process is modified over time due to changes in marketing or sales strategies. Perhaps the company broke a unified transaction process, which ended with account-creation, into two separate steps after market research or customer feedback. When something like this happens, it is important to repeat the legal review, to ensure compliance with e-commerce best practices.

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    Copyright Litigation and the Risk of Double Costs

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    By Richard Stobbe

    An American photojournalist, Ms. Leuthold, was on the scene in New York City on September 11, 2001. She licensed a number of still photographs to the CBC for use in a documentary about the 9/11 attacks. The photos were included in 2 versions of the documentary, and the documentary was aired a number of times betwen 2002 and 2004. We originally wrote about this in an earlier post: Copyright Infringement & Licensing Pitfalls. The court found that the CBC had infringed copyright in the photographs in six broadcasts which were not covered by the licenses. Though Leuthold claimed damages of over $20 million, only $20,000 was awarded as damages by the court.

    In Leuthold v. Canadian Broadcasting Corporation, 2014 FCA 174, the Federal Court of Appeal upheld an award of double costs against Leuthold. Early in the litigation process, the CBC had formally offered to settle for $37,500 plus costs. Ms. Leuthold did not accept the CBC’s offer and went to trial where she was awarded $20,000. Ms. Leuthold’s total recovery was substantially less that the amount of the CBC’s offer. When this happens, a plaintiff can be liable under Rule 420 for double costs, which was awarded in this case. Double costs amounted to approximately $80,000 in these circumstances, which means Ms. Leuthold is liable for about 4 times the amount of the damage award. Although Ms. Leuthold objected that such a disproportionate costs award was “punitive”, the court concluded:

    “The sad fact of the matter is that litigation produces winners and losers; that is why it is such a blunt tool in the administration of justice. But justice is not served by allowing persons who have imposed costs on others by pursuing or defending a claim which lacks merit to avoid the consequences of their behaviour. Such a policy would be more likely to bring the administration of justice into disrepute than the result in this case.”

    For copyright litigation and licensing advice, contact the Field Law Intellectual Property & Technology Group.

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    Court Orders Google to Remove Site from Worldwide Search Results

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    By Richard Stobbe

    In a recent decision by the British Columbia courts (Equustek Solutions Inc. v Jack , 2014 BCSC 1063), Google has been ordered to de-index a website selling goods that were the subject of intellectual property (IP) infringement claims. While this may seem quotidian - after all, Google does comply with de-indexing requests on a regular and voluntary basis - this decision has broader implications for several reasons. This decision is the first Canadian decision to compel Google to delist a website after the so-called “right to be forgotten” case in the EU, and while that case involved personal privacy rights rather than IP rights, both cases have far-reaching implications for Google’s role in providing a practical remedy for an aggrieved party. This is a role that Google has resisted, but cannot avoid in light of its ever-expanding presence in the lives of individuals and the affairs of business.

    The underlying dispute involved a trade-secret misappropriation and passing-off claim by a manufacturer against a rival company. Specifically, the plaintiff Equustek alleged that a competing product known as GW1000 was an unauthorized knock-off, built using trade secrets of the plaintiff. The plaintiff Equustek won an initial order barring sales of the offending GW1000 product and then engaged in a time-consuming process of chasing the defendant to obtain some meaningful and practical remedy. This involved repeated requests to Google to block hundreds of specific individual webpages and URLs from Google Canada search results, a game that the court described as “whac-a-mole”. Finally the plaintiff sought an order compelling Google to de-index the defendant’s sites from all Google search results worldwide. The resulting order is important for a number of reasons:

    1. In order to make its order, the court had to assert jurisdiction over Google Inc. rather than the Canadian subsidiary Google Canada. In coming to this decision, the B.C. court relied in part on the EU “right to be forgotten” case. Interestingly, the court commented that the California choice-of-law clauses in Google’s various user agreements and advertising contracts did not prevent the Canadian court from asserting jurisdiction. This is due to the fact that this dispute did not arise out of any contract-related claims. Rather, the court found that it had scope to make an order (with extra-territorial reach) over Google (a non-party) under its inherent jurisdiction under the Law and Equity Act.
    2. The court also commented on the fact that Google is not merely a passive site, but rather it conduct active and ongoing business with British Columbia companies and individuals.
    3. The court found that blocking individual URLs was not as effective as blocking so-called “mother sites”. In effect, the court agreed that Google’s current practice of voluntarily complying with individual requests to block specific URLs does not provide an effective remedy. This will certainly be cited in future website blocking cases.
    4. Regarding Google’s role, the court commented that “Google is an innocent bystander but it is unwittingly facilitating the defendants’ ongoing breaches of this Court’s orders. There is no other practical way for the defendants’ website sales to be stopped.”

    After renewing the traditional criteria for assessing the merits of an injunction application, the court granted the order. Google is appealing this decision.

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