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The Cassels Brock Report

The Cassels Brock Report - July 2011

Published: 07/28/2011

By Catherine M. Dennis Brooks, Jessica Fingerhut, Bernice Karn, Chad Matheson, John McKeown, Ravi Shukla

In This Issue

1. BAM!
2. CHAMPAGNE Domain Names
3. Trade-mark Confusion Analysis and First-to-Use v. First-to-File Clarified by Supreme Court of Canada
4. Landmark Counterfeiting Case Awards Louis Vuitton and Burberry $2.5 Million in Damages: Louis Vuitton Malletier S.A. v. Singga Enterprises (Canada) Inc.
5. Canada’s Anti-spam Legislation – Regulations Now Open for Comment
6. Service Level Agreements in Hosted Software As A Service (SaaS) Agreements
7. Back-Dated Copyright Assignments
8. Updating the Standards for Reporting on Controls at Service Organizations

BAM!

By John McKeown

A recent decision of the Trade-marks Opposition Board illustrates the care that must be taken in determining the positions to be taken in response to an opposition.

The Facts

The owner of the trade mark BAM! (the “Applicant”), for use in association with food products namely vinegar; salad dressings namely marinades and dipping sauces ( the “Wares”), filed trade-mark applications to register the trade-mark BAM! BULLY! and the mark BAM! BOOZLED! (collectively the “Marks”) based on proposed use in association with the Wares.

Emeril's Food of Love Productions, LLC ( the “Opponent”) opposed both applications on the ground, among others, that the Applicant was not the person entitled to registration because at the filing date of each application, the Marks were confusing with the Opponent's trade-mark BAM!, previously used and made known in Canada in association with "food, namely food seasoning; apparel; footwear; cookware, cooking utensils and accessories; printed matter; books; television shows; cooking demonstrations, wine and/or food tastings.” 

The Onus and Burden of Proof

The Hearing Officer stated that the legal onus was on the Applicant to show that the Marks were not confusing with the Opponent's trade-mark, but there was an initial evidential burden on the Opponent to adduce sufficient admissible evidence from which it could reasonably be concluded that the facts alleged to support the ground of opposition existed.

The Opponent successfully showed prior use of its trade-mark BAM! as of the Applicant's filing dates and that such use was not abandoned at the advertisement date of the applications. As a result, the Applicant had to prove, on the balance of probabilities, that the Marks were not likely to cause confusion with the Opponent's trade-mark BAM!.

The Decision

The Applicant mistakenly admitted that the Marks were confusing with the Opponent’s trade-mark BAM!, but asserted priority as result of its prior use and registration of its BAM! trade-mark. Presumably the Marks were confusing with the Applicant’s BAM! registration but not with the Opponent’s trade-mark.

The Hearing Officer refused to accept this argument. He stated the fact that the Applicant obtaining the registration of a trade-mark prior to the relevant date (the filing date of the applications for the marks) did not necessarily give it the right to obtain the registration of a similar trade-mark.
The rights conferred by the Trade-marks Act (the “Act”) on the owner of a registered trade-mark did not give the owner of a registration the automatic right to obtain any further registrations no matter how closely they may be related to the original registration. 

The Hearing Officer also said that any use of a trade-mark similar to the Marks by the Applicant was not a relevant factor. This may be correct in light of the admission, but is otherwise questionable, since the fact that the respective marks coexisted presumably without confusion is relevant. Also, it is relevant that the Opponent obtained its mark over the Applicant’s registered mark.

Comment

The rights conferred by the Act on the owner of a registered trade-mark do not give the owner of a registration the automatic right to obtain any further registrations of the same or related mark no matter how closely they may be related to the original registration. Each new application, including an extension application, must stand or fall on its own merits at the relevant date.

Obviously, care needs to be taken when an admission is made during the course of an opposition.

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CHAMPAGNE Domain Names

By John McKeown

A recent decision under the Uniform Domain Name Dispute Resolution Policy (the “UDRP”) deals with unregistered rights in the CHAMPAGNE mark which, it was asserted, were protectable in the United Kingdom under the common law doctrine of passing off.

The Facts

The complainant, Comité Interprofessionnel du vin de Champagne of Épernay, is a body established by statute under the laws of France. Among the complainant’s statutory purposes are defending, preserving, and promoting the interests of all those involved in the production and marketing of the wines sold under the appellation of origin CHAMPAGNE. All producers of champagne in the Champagne district of France are required by law to subscribe to the complainant. The complainant’s powers include the power to sue and be sued, and the complainant represents all such producers in the complaint.

Sales of wine under the name CHAMPAGNE in Europe and elsewhere have been very substantial for over two centuries, both in volume and value. Large sums of money have been spent to promote and enhance the name CHAMPAGNE, over and above the separate brand advertising undertaken by the individual producers represented by the complainant.

The complainant asserted that the expression CHAMPAGNE is distinctive only of wine produced in the Champagne region of France.

The respondent operates an IT consultancy and computer sales business in London. He did not trade in champagne or beverages of any kind. He became aware of the proposed .co launch in July 2010, and decided to register a number of generic “.co” domain names with a view to future sale. He applied for over 100 such domain names, and all were registered in July/August 2010. One of these was <champagne.co>.

The UDRP

Under paragraph 4(a) of the UDRP, a complainant has the burden of proving that:


         (i) the disputed domain name is identical or confusingly similar to a trade-mark or service mark in
             which the complainant has rights; and

         (ii) the respondent has no rights or legitimate interests in respect of the disputed domain name;
              and

         (iii) the disputed domain name has been registered and is being used in bad faith.


A panel must decide a complaint on the basis of the statements and documents submitted in accordance with the UDRP and principles of law that it deems applicable.

Paragraph 4(a)(i) of the UDRP requires that the complainant show that it holds rights in a trademark or service mark. The WIPO Overview, 2.0, which summarizes the consensus view of WIPO panels concerning various issues under the UDRP, contains the following statement relating to rights in a geographical term:

Consensus View: the report of the Second WIPO Internet Domain Name Process declined to recommend specifically extending protection to geographical terms under UDRP. Some geographical terms, however, can be protected under the UDRP, if the complainant has shown that it has rights in a term and that the term is being used as a trademark for goods or services other than those that are described by or related to the geographical meaning of the term (secondary meaning).

The Decision

The panel was not convinced that the complainant had established that CHAMPAGNE was an unregistered trade-mark of the kind contemplated by paragraph 4(a)(i) of the UDRP. First, it was noted that it is generally accepted that to be a trade-mark, a sign must be capable of distinguishing the goods or services of an individual undertaking from those of other undertakings. The name CHAMPAGNE does not distinguish the wine of one champagne producer from the wine of another, and so does not fulfill the fundamental function of a trade-mark. A geographical indication is essentially designed to protect the producers of a particular region from loss caused by traders wrongfully applying that identifier to goods which have not been produced in the particular region. A geographical indication speaks fundamentally of the quality and reputation of the goods produced according to certain standards in a specific geographic area, but not of any particular or individual trade source as such.
Second, it appeared that the framers of the UDRP did not intend that a geographical term should be protected under the UDRP.

Comment

A geographical indication can be protected under the passing off doctrine, despite the fact that it is not distinctive in the sense of denoting a specific source. If the impugned domain name was to be used inappropriately an action could be brought in the United Kingdom. However, this type of indication may not be protected under the UDRP.

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Trade-mark Confusion Analysis and First-to-Use v. First-to-File Clarified by Supreme Court of Canada

By Catherine M. Dennis Brooks

In a decision released on May 25, 2011, Masterpiece Inc. v. Alavida Lifestyles Inc. (2011) SCC 27, the Supreme Court of Canada has provided guidance with respect to the test for confusion pursuant to section 6 of the Trade-marks Act and has confirmed that Canada is a first-to-use jurisdiction which recognizes the priority of trade-marks on the basis of first use in Canada and not registration.

The Supreme Court considered four issues relating to the assessment of a likelihood of confusion:

1. whether the location in which a trade-mark is used is relevant when considering the likelihood of confusion between a registered mark and a prior unregistered mark;
    
2. the considerations applicable in the assessment of the resemblance between a proposed use trade-mark and an existing unregistered mark;
    
3. the effect of the nature of the business and the cost of the wares or services in the confusion analysis; and
    
4. the role of expert evidence in the trade-mark confusion analysis.

Masterpiece Inc. (“Masterpiece”) had used MASTERPIECE THE ART OF LIVING and other trade-marks including the word MASTERPIECE, as trade-marks in association with retirement residence services in the Province of Alberta since 2001. Alavida Lifestyles Inc. (“Alavida”) offered retirement residence services in Ontario and filed a proposed use trade-mark application on December 1, 2005 for MASTERPIECE LIVING. Alavida obtained a trade-mark registration despite the prior common law trade-marks used by Masterpiece as Masterpiece did not oppose the application. Masterpiece later filed applications for MASTERPIECE and MASTERPIECE LIVING in 2006 based on use since 2005. The applications were rejected on the basis of the prior registration for MASTERPIECE LIVING owned by Alavida as the Trade-marks Office found the marks to be confusingly similar to MASTERPIECE LIVING.

Masterpiece brought an application to expunge Alavida’s registration for MASTERPIECE LIVING based on its prior use of a confusingly similar mark. The application was not successful and the Federal Court of Appeal upheld the decision on appeal. The Supreme Court, however, considered the issues and allowed the appeal, expunging Alavida’s registration for MASTERPIECE LIVING.

With respect to the issue of the location where a mark is used, it was held by the Supreme Court that this fact is irrelevant in the confusion analysis. In order for the owner of a registered trade-mark to have exclusive use of the trade-mark throughout Canada, there cannot be a likelihood of confusion with trade-marks used anywhere in Canada. The International Trademark Association was an intervener in this case with respect only to this issue.

In assessing the resemblance between a proposed use trade-mark and an unregistered mark used in Canada, the Supreme Court confirmed that it is the use of a mark and not registration that confers priority of title and the exclusive right to the trade-mark. Rights are granted to the first user of a trade-mark in Canada and the first user of a mark has the right to oppose applications or apply to expunge registrations based on its earlier use of a confusingly similar trade-mark. The confusion analysis should begin with the assessment of the resemblance of the marks in issue. In considering this issue, the Supreme Court held that there is a strong resemblance between MASTERPIECE THE ART OF LIVING and MASTERPIECE LIVING, in terms of the unique aspect of each mark, MASTERPIECE, as well as the idea evoked by each mark.

With respect to the issue of the effect of the nature of the business and the cost of the wares or services on the confusion analysis, the Supreme Court held that the trial judge erred in considering that consumers of expensive goods and services would generally take the time to inform themselves as to the source of the goods and services, thereby reducing the likelihood of confusion. The issue of confusion is to be assessed on the basis of the first impression of a consumer approaching a costly purchase at the time he or she first encounters the trade-mark. The possibility that careful research could later remedy confusion does not eliminate the likelihood of confusion. In assessing a likelihood of confusion, the consumer’s reaction, upon encountering Alavida’s mark in the marketplace, with an imperfect recollection of Masterpiece’s marks, is the appropriate test to apply. It was held that where there is a strong resemblance between the marks, the high cost of the services offered in association with the marks is to be considered, but is not determinative on its own.

Finally, with respect to the role of expert witnesses in trade-mark confusion cases, it was held that an expert should be permitted to testify only if the testimony is likely to be outside the experience and knowledge of the judge. If expert evidence is unnecessary or irrelevant or will distract from the issues to be decided, such evidence should be disallowed from being introduced. Proposed expert or survey evidence should be considered at an early stage of a proceeding so that the cost of engaging experts can be avoided if it will not be admissible at trial.

The Supreme Court applied this analysis and found that there was a strong similarity between MASTERPIECE LIVING and MASTERPIECE THE ART OF LIVING and that use of these marks in the same area would be likely to lead to the inference that the services associated with Masterpiece’s trade-marks were being performed by Alavida. As Masterpiece’s use predated Alavida’s proposed use, Alavida was not entitled to register its mark and it was expunged from the Trade-marks Register.

The clarification provided by the Supreme Court with respect to the appropriate analysis to be applied in assessing the likelihood of confusion of trade-marks will assist trade-mark users in assessing the availability of potential marks they are considering using in Canada. This also underscores the importance of obtaining full trade-mark availability searches which disclose the use of unregistered trade-marks in Canada to assess the availability of a potential new mark for use and registration in Canada.

The judgment in this case will also likely discourage the use of survey evidence in some trade-mark cases as it was held that Courts must play the role of gatekeeper to ensure that “unnecessary, irrelevant and potentially distracting expert and survey evidence is not allowed to extend and complicate proceedings.”

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Landmark Counterfeiting Case Awards Louis Vuitton and Burberry $2.5 Million in Damages: Louis Vuitton Malletier S.A. v. Singga Enterprises (Canada) Inc.

By Jessica Fingerhut

A recent landmark decision by the Federal Court awarded luxury brands Louis Vuitton and Burberry $2.48 million, the highest amount of damages awarded in a Canadian anti-counterfeiting case. 

Louis Vuitton Malletier S.A. and Burberry Limited, and their Canadian subsidiaries, commenced a trade-mark and copyright infringement action in August 2010 against Toronto-based Altec Productions and Vancouver-based Singga Enterprises Inc. and Carnation Fashion Company, and their respective owners and operators. Louis Vuitton and Burberry claimed that the defendants had been selling counterfeit handbags and other fashion accessories in their stores and online.  

The Defendants’ Large-Scale Manufacture, Importation and Distribution of Counterfeit Goods

The evidence demonstrated that the defendants knowingly and wilfully manufactured, imported, advertised and sold counterfeit and infringing handbags and other fashion accessories in Canada bearing trade-marks owned by Louis Vuitton and Burberry and/or trade-marks confusingly similar. The activities were carried out over a sustained period of time with full knowledge of Louis Vuitton and Burberry’s intellectual property rights and involved the large-scale manufacture and importation of bulk quantities of the counterfeit goods and Canada-wide distribution and sale of the merchandise.    

The Federal Court found that given that the items sold by the defendants bore trade-marks identical and/or confusingly similar to Louis Vuitton and Burberry trade-marks, the public could be led to believe that the counterfeit merchandise was authentic or that such items had been authorized, approved or manufactured by Louis Vuitton or Burberry. Such use of the trade-marks would therefore likely cause confusion between the defendants’ wares and business and the wares and business of Louis Vuitton and Burberry.

The Federal Court further held that the defendants’ sale of substantially inferior quality counterfeit merchandise caused serious damage and irreparable harm to the reputation and goodwill generated by the superior character and quality of the genuine Louis Vuitton and Burberry products bearing the well-known trade-marks.

Piercing the Corporate Veil

In awarding damages against the individual operators of the defendant corporations, the Federal Court upheld a British Columbia Supreme Court decision that found that a corporation will not be allowed to be used to shield officers, directors and principal employees from their actions in the wilful and knowing sale of counterfeit and infringing goods. The Federal Court held that the individual operators of the defendant corporations were personally involved in the operation of their respective businesses and had engaged in an illegal course of conduct outside the ordinary scope of a legitimate business purpose.

Calculating the Damages

In addition to awarding a permanent injunction against the defendants from further infringing activity and a demand that all offending merchandise be destroyed, the Federal Court ordered the defendants to pay a cumulative amount of $2.48 million to Louis Vuitton and Burberry.  

Damages for Trade-Mark Infringement

The defendants’ refusal to provide documentation in respect of the scope of their activities and their sale of the counterfeit and infringing items frustrated any possible assessment of damages. The Federal Court therefore applied a scale for the quantification of damages used in a previous counterfeiting case where business records of infringing sales were not available. In that case, it was held that damages per plaintiff could be quantified in the amount of $3,000 where the defendants were operating from temporary premises (such as flea markets), $6,000 where the defendants were operating from conventional retail premises and $24,000 where the defendants were manufacturers and distributors of counterfeit goods.

The Federal Court held that where a defendant is engaged in continuous and blatantly recidivist activities over a period of time, such as in this case, such activities warrant a much higher award of damages, calculated on a “per instance of infringement” or “inventory turnover” basis. Adjusting for inflation, the appropriate base of damages for each group of defendants in this case was held to be $30,000 per instance of infringement or inventory turnover per plaintiff. Taking into account each of the instances of infringement submitted into evidence, the defendants were held liable for a cumulative amount of $1.02 million to Louis Vuitton and $840,000 to Burberry.     

Damages for Copyright Infringement

In addition to the damages awarded for trade-mark infringement, the Federal Court awarded against each of the groups of defendants the maximum statutory amount of $20,000 per work infringed for each of the two Louis Vuitton copyrighted works which were found to be infringed by the defendants.  

Punitive Damages

The Federal Court found that given the egregious nature of the defendants’ activities, the normal trade-mark and copyright profit or damages assessments would not be sufficient and that punitive and exemplary damages should be awarded against them. The Federal Court found the “recidivist actions” of the defendants in infringing Louis Vuitton and Burberry’s intellectual rights were deliberate and knowing, and evidenced “a complete lack of regard for the laws of Canada, the process of this Court, and the intellectual property rights of Louis Vuitton and Burberry”. The Federal Court held that a substantial monetary award against the defendants was required to adequately compensate Louis Vuitton and Burberry for past activities and to prevent the defendants’ activities from continuing in the future. Accordingly, the Federal Court awarded $500,000 as punitive and exemplary damages.

Comment

It will be interesting to observe whether the Federal Court’s clear message that wilful and deliberate counterfeiting activities will be taken seriously by the courts and will result in significant monetary repercussions for all those involved will deter other infringers from engaging in counterfeit activities. 

Click here to read the decision.

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Canada’s Anti-spam Legislation – Regulations Now Open for Comment

By Bernice Karn

Readers of the Cassels Brock Report will recall our previous report on Canada’s new anti-spam legislation, enacted in December of 2010 but not yet fully proclaimed in force. Many of the provisions of this legislation refer to matters that will be dealt with by regulation. Industry Canada and the CRTC recently issued two separate sets of draft regulations for comment.

Observers expecting major developments or simplification of the legislation through the regulations are sure to be disappointed. The Industry Canada draft regulations define “family relationship” and “personal relationship”, which are two categories of electronic messages that are exempted from the consent and message format requirements of the legislation. These draft regulations also define the meaning of “membership” in a “club, association or voluntary organization”, one of the “existing non-business relationships” that qualifies for implied consent, provided that certain time parameters are met. More interestingly, where organizations are obtaining consent on behalf of unidentified third parties, the Industry Canada proposed regulations impose obligations on those organizations to ensure that individuals have an effective means of withdrawing their consent from any third parties to whom the original consent had been provided.

The draft regulations issued by the CRTC set forth the minimum identification and contact information that is to be included within a “commercial electronic message” and information that must be included in a request for consent. Readers should note that unsubscribe mechanisms must be two clicks, maximum - a welcome relief for those of us who have clicked our way through tedious unsubscribe web pages.

The provisions in the anti-spam legislation that have not received as much press are the sections dealing with computer programs. Intending to regulate spyware in addition to spam, the legislation requires express consent of the computer’s owner or authorized user to allow the installation of a computer program on that system, or the sending of an electronic message from that system, that has been caused by the installed program.

If the program is one of several program types specified in Section 10(5) of the legislation (e.g., a program that collects personal information stored on the computer, a program that changes or interferes with settings, preferences or commands without the owner’s or user’s knowledge, etc.), then, separately from the license agreement, when the program supplier is requesting consent, users are to be provided, in a clear and prominent manner, with a description of “the program’s material elements that perform the function, or functions, including the nature and purpose of those elements and their reasonably foreseeable impact on the operation of the computer system”. The CRTC draft regulations take this disclosure and consent requirement a step further by requiring an acknowledgement in writing that the user understands and agrees that the program performs the specified functions.

In addition, for the programs described in Section 10(5), in spite of any express consent in place, for one year following installation the supplier has obligation to provide an electronic address to which requests for removal may be sent and in certain situations, the supplier may have to assist in removing or disabling the program at no charge.

Although certain exceptions exist and a number of types of programs qualify for a form of deemed consent (e.g., installation of a cookie, HTML code or Java scripts), these provisions are sure to be a headache for the technology community for years to come.

Both the Industry Canada and CRTC draft regulations will come into force on the day they are registered. They are presently open for public comment until September 7, 2011 in the case of Industry Canada, and August 29, 2011 in the case of the CRTC. We will continue to monitor developments and keep our readers posted.

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Service Level Agreements in Hosted Software As A Service (SaaS) Agreements

By Ravi Shukla

The process of negotiating commercial agreements is at least as important as the end product documentation. By working through a comprehensive list of outstanding issues the parties will, in almost all cases, shed light on previously unexamined aspects of their nascent relationship and, in so doing, will enhance the probability of its success. Equally, it seems fair to say that in most cases the negotiated agreement will simply “sit on the shelf”; however, to the extent that a dispute does arise, it frequently will have been caused by the parties’ failure to properly define their respective performance obligations.

In the particular context of “traditional” software as a service models (leaving aside particular issues associated with cloud computing), via which data may be dispersed across and stored in multiple data centers all over the world), it is common practice for the parties to in effect define the services to be provided at a granular level via a Service Level Agreement (“SLA”) attachment to the overall Services Agreement, although the length and complexity of the SLA will be varied to fit the circumstances.

By defining a suite of both Critical Performance Indicators (CPIs) and Key Performance Indicators (KPIs), the former having associated fee claw-backs, the customer will also cause the service provider to put “skin in the game” as a means for incenting it to provide the agreed upon quality of service(s) – the maximum credit available against the upcoming monthly fee(s) is almost always defined as a percentage of such fee(s). The fee credit / refund regime is generally positioned as a sole remedy in the event of such relatively modest failures.

Additionally, by detailing in the SLA the point at which very poor service will be considered to be a material breach of the Services Agreement, the parties will have agreed upon the threshold beyond which the customer will be entitled to elect to seek additional remedies up to and including termination and recovery of its damages arising from such breach – such damages amount usually mediated by reference to the agreed upon cap on direct damages set out in the limitation of liability provision.

COMMON SLA CONCEPTS

At Risk Amount / Percentage of Fees: a defined percentage of monthly service fees paid by the customer to the service provider.  This defined number (usually in the 10% to 12% range, but can go all the way up to 50%) is used in calculating the amount of the refund/credit the customer will be entitled to if the service provider fails to meet a CPI.

Critical Performance Indicators (“CPIs”): performance obligations with minimum service levels attached.  If these targets are not met, the customer will have remedies against the service provider.

Increased Impact Service Level Default: where the provider fails to achieve the service level multiple times during a specified time period, it may be liable to increased penalties (e.g., failures in two consecutive months, or failures in any four months during a twelve-month period will double the severity weight used in calculating credits owing to the customer).

Key Performance Indicators (“KPIs”): KPIs are items that are monitored using a range of quantitative and qualitative metrics but a failure to achieve a KPI will not trigger the remedies associated with a breach of a CPI.  The contract may provide the customer with an option to convert a KPI to a CPI, exercisable, for example, twice per year.

Minimum Service Level: the minimum quantitative level or degree of performance that must be met to satisfy a CPI.  In complex transactions there will generally be a suite of CPIs, each with a specific target level (e.g., 99.90% for one, 97% for another etc.). 

Service Level Credit: credit available to the customer should the service provider fail to meet minimum service levels for a CPI.

Service Level Default: a defined state where the provider has fallen short of meeting a CPI.  These events of default are used to calculate credits owing to the customer and may count towards enabling a trigger a termination right.

Severity Weight: the failure to meet a particular CPI may be more, or less serious to the customer.  In more complex SLAs, each CPI is assigned an individual severity weight to account for its unique impact to the customer.  The total will generally exceed 100%. For example:
 

SERVICE LEVEL CONSIDERATIONS

Common service levels found in Hosted Services Agreements

For very small-scale projects, all services to be performed under the contract may be defined by a single CPI:

e.g.: "Services will be available to the customer for not less than 99.75% of the time on a 24 hours a day, 7 days a week basis each calendar month, minus any Excused Down Time Events."

More often, a hosted services provider will offer the type of service levels described below. The example below distinguishes between managed services and mere co-location services. 

If the provider fails to meet specified service levels, the SLA will describe a formula for determining the credit amount owing to the customer.  The SLA may also provide for increasing credits according to the number of times per given time period (e.g., one month) that the services are not performed at an acceptable level.  Credits are set by a formula that computes variables such as time, severity of the failure and a percentage of fees paid.

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[1] The US National Institute of Standards and Technology has provided the following definition of “cloud computing”: cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. For more information on cloud computing, including its five essential characteristics, three service models, and four deployment models please see “Data Security – The Case Against Cloud Computing” (Cassels Brock Report, May 2011).

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Back-Dated Copyright Assignments

By John McKeown

Back-dated or retroactive copyright assignments are quite common. However, in a recent case a Judge of the Federal Court was not prepared to accept the assignment on its face.

The Facts

The defendant carried on a truck haulage business. It wished to modernize its dispatching and invoicing systems. The defendant engaged the plaintiff, who ran a computer programming business, to implement an electronic system.

The author of the computer programs personally developed them by building on the Microsoft Access database platform. Some of these programs were compilations of multiple modules organized according to function. The software in question consists of the following programs:
 

a.  Petro Dispatch 2000: The primary software used for order inputting, dispatching, post-order reconciliation, invoicing and forecasting delivery requirements.

b.  Card Lock Invoicing Program: This program produced the invoices for card lock customers.

c.  Railmaster Program: The rail car management section of this program tracked inventory in rail cars, invoiced for time on rail sidings and dispatched bulk products. The dispatch module was for the dispatch of cement, heavy oil products, asphalt and waste oil.

d.  Modifications: There were numerous modifications and "add-ons" to enable the software to function for  the defendant.

Software licence agreements were entered into relating to the programs. The term of each licence was perpetual. The agreements provided for, among other things, the payment of a "Product and Support and Maintenance" fee and the plaintiff was required to deliver corrections and enhancements to the programs.

The relationship between the parties disintegrated. The plaintiff took the position that the defendant was in default of its licence obligations and attempted to disable the programs. The defendant engaged a third party to undo the plaintiff’s attempts to disable the programs and to provide continuing support relating to the programs.

The plaintiff brought an action against the defendant alleging copyright infringement. Eventually the defendant replaced the programs with new programs created by other suppliers.

The Subsistence of Copyright in the Programs

In the action the defendant challenged the subsistence of copyright. The Trial Judge referred to paragraph 34.1(1)(a) of the Copyright Act, which creates a presumption that copyright subsists in the work unless proven otherwise.

The Trial Judge concluded that packaging together with the specific sets of user inputs, dispatching, forecasting, reconciling and invoicing tools was original and was compiled with the requisite degree of skill and judgment. On this basis, copyright subsisted in some but not all of the programs.

The modifications, which are "fixes" to included features allowing them to function in the manner originally intended, were not entitled to separate and additional copyright protection on their own. The "fixes" were trivial, not original, and dictated by the Microsoft Access program and functionality.

The Ownership of the Copyrights

Paragraph 34.1(1)(b) of the Copyright Act provides that in any proceeding for infringement, where the defendant challenges the existence or title of the copyright, the author of the work is presumed to be the owner unless proven otherwise. There was no issue  concerning who was the author of the programs in issue.

The plaintiff relied on a nunc pro tunc assignment of copyright from the author to the plaintiff that gave retroactive effect to the assignment. The evidence of the author was that the assignment occurred in his mind at the retroactive date of the assignment. The Trial Judge categorized the evidence as a purely a self-serving attempt to avoid the problems arising from the fact that the author was not a party to the action.

The Trial Judge concluded that reliance on such an assignment required evidence as to the intention  of the assignor concerning the purpose and effect of the assignment. In addition it was observed that an assignment must be in writing to be effective. The evidence presented was insufficient to support the inference that a valid assignment was made as of the retroactive date. As a result the plaintiff did not own the copyrights in issue and could not succeed with its action for infringement.

Comment

While the Trial Judge accepted the author’s evidence concerning the creation of the programs in issue, the author was categorized as being an unsatisfactory witness who was also responsible for the overreaching actions of the plaintiff. In addition, the author choose not to be a party to the action with personal exposure for claims for costs. No doubt these factors influenced the Trial Judge and are specific to this case. However, the decision needs to be carefully considered by anyone who is relying on a a nunc pro tunc assignment of copyright.

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Updating the Standards for Reporting on Controls at Service Organizations

By Chad Matheson

In April 2010, the American Institute of Certified Public Accountants introduced a new attestation standard, the Statement on Standards for Attestation Engagements 16 (SSAE 16).  With an effective date of June 15, 2011, SSAE 16 supersedes the Statement on Auditing Standards No. 70 (SAS 70), which provided guidance regarding the examination of control activities at service organizations.  Although SAS 70 was a globally recognized and accepted standard, there was a need to update and improve this standard so that it aligned with more globally accepted international accounting principles.

As with SAS 70, SSAE 16 outlines the standards to be used by auditors when they examine and report on the control activities of service organizations.  In particular, service organizations must demonstrate that they have the appropriate controls and safeguards in place when they host or process data belonging to their customers.  This provides customers with the assurance that their confidential information is under sound internal control.

Although there are many similarities between SAS 70 and SSAE 16, there are key changes that should be noted.  These changes are outlined below:

Description of the System

Pursuant to SSAE 16, service organizations are now responsible for preparing a description of their “system” (defined to include aspects of the service organization’s control environment, risk assessment process, information and communicating systems (including relevant business processes), control activities and monitoring activities that are relevant to the services provided) rather than simply their “controls”, as was required under SAS 70.  It is largely agreed that this is a more onerous requirement, and service organizations are encouraged to re-examine their prior description(s) of “controls” to ensure compliance with SSAE 16 going forward.

Management Assertion

SSAE 16 also requires that service organizations provide a written assertion by management that: (i) the description fairly presents its “system”; (ii) the control objectives were suitably designed and operating effectively; and (iii) the criteria used for making these assertions were in place and consistently applied.  This written assertion may be included in the description of the “system” or attached to the description of the “system” itself. 

Additional Changes

SSAE 16 provides several other relevant changes, including the requirement to describe the use of subservice organizations through either an inclusive or carve-out method of presentation:

• Carve-Out Method:  The service organization must include, in the description of the “system”, the nature of the services performed by any subservice organization, excluding the subservice organization’s control objectives and related controls; however, the controls in place for monitoring the effectiveness of the controls at the subservice organization should be set out.
   
• Inclusive Method:  The service organization must include, in the description of the “system”, the services performed by the actual subservice organization, along with the relevant control objectives and related controls of the subservice organization.

In addition, the service organization must formally identify risks that threaten the achievement of the control objectives in the description of the system, and if it uses the work of internal auditor(s) to examine its controls, the objectivity and competency of the internal auditor must be evaluated, and the work must be supervised and reviewed by independent service auditors.

The Canadian Perspective

In response to the introduction of SSAE 16, and its international equivalent (ISAE 3402), the Auditing and Assurance Standards Board has issued a new Canadian Standard on Assurance Engagements, Reporting on Controls at a Service Organization (CSAE 3416), which replaces the Auditor’s Report on Controls at a Service Organization, Section 5970 (S 5970). 

CSAE 3416 has been modeled after SSAE 16 and, as a result, is materially aligned with the new standards in the United States; however, it is important to note that an auditor’s report can be tailored to meet the criteria of multiple standards.

CSAE 3416 will be effective December 15, 2011.   

Conclusion

The introduction of SSAE 16, as well as CSAE 3416, provides needed changes to the approach to the examination of control activities at service organizations, and allows service organizations to facilitate consistent reporting world-wide.  Going forward, service organizations will need to be aware of the changes to ensure compliance with the new standards.

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