Rules for settling legal disputes

Some time ago, I travelled to Calgary to try to settle a legal dispute through mediation.  In mediation, a mediator attempts to guide the parties to a negotiated settlement. However, in this case the arrangement was that if the parties could not arrive at a settlement, the mediator would change roles and become an arbitrator, that is, authorized to impose a settlement upon the parties. My client and I travelled to Calgary for the weekend, in the expectation that we would fly back Sunday night having resolved the dispute.  My client’s view was the same as mine, that even a poor settlement would be better than a great lawsuit.  Time was also important, as my client had to resolve the dispute with the Calgary Company, before he would be free to enter into a new agreement with another company that was waiting in the wings for the dispute to be resolved. The mediation did not go well.  Every time we made progress, the opposing lawyer would inflame the discussions with allegations of “facts” that my client strongly disputed.   The point was reached where my client told me that he had had enough and he wished to move on to the arbitration phase. The matter then took an unexpected turn.  Instead of hearing submissions and rendering a prompt decision, the arbitrator  required a “Statement of Claim” to be prepared and served by a first date, a “Statement of Defence” to be prepared and served by a second date, an exchange of relevant documents to take place by a third date, examination of the parties under oath by a fourth date, and a “trial” at the Alberta Law Society Offices in Calgary on a fifth date, and indicated that a written decision would be rendered by him by a sixth date.  Under the schedule set forth by the arbitrator, it took another 11 months for the dispute to be resolved.  In another matter, I attended a settlement meeting in Edmonton with the General Manager of a biotech company.  The General Manager had to report to a wealthy individual who was the major shareholder and financial backer of the biotech company.  On the other side of the negotiating table was a person from the University’s commercialization office and a person heading up a biotech research team.   The person from the University’s commercialization office had to report to a University oversight committee.   The people in the room rapidly had a meeting of the minds and reached agreement on all issues, subject to approval of the persons to whom we reported.  It was in the reporting back that the agreement fell apart.  The major shareholder and financial backer, and the University oversight committee repeatedly came back with further conditions which made the job of settling the matter more difficult.  The first settlement meeting gave rise to a second and then a third settlement meeting, as each side tried to cope with shifting and evolving instructions.  I recently read an article regarding Federal Court Prothonotary (type of judicial officer) Mireille Tabib’s experiences as a mediator, which inspired this commentary.  The article, along with my own experiences, provides the following “rules” to follow when entering into negotiations of a legal dispute.  The first rule is to start at an early stage, where the focus is still on business concerns and has not yet shifted to “winning” the legal case at all costs.  The second rule is to focus on commercial realities, that is, what will “work” as a settlement and not the details of the claim that are often in dispute.  The third rule is that everyone doing the actual negotiating must have full authority to settle.

Limitations of Non-Disclosure Agreements

Non-Disclosure PhotoI recently read an article entitled “The scope and limitations of Non-Disclosure Agreements”.  The article explained that a non-disclosure agreement is an agreement in which a party receiving information (Receiving Party) agrees to take reasonable precautions to protect from disclosure information received from a party disclosing information (Disclosing Party).   The article then went on to list a series of matters that must be addressed in a well drafted non-disclosure agreement, including: identifying the information that is to be protected, identifying that the information is being disclosed in order to permit the Receiving Party to complete a specified task for the Disclosing Party, setting forth rules regarding disclosure to employees and safe storage of the information while the task is being undertaken and  requiring the destruction or return of the information when the Receiving Party has completed the specified task.  The article also touched upon remedies available to the Disclosing Party in the event of a breach of the agreement.  Although the article was well written, in my opinion, the author neglected to touch upon a significant limitation of non-disclosure agreements.   Most non-disclosure agreements contain the following provision: “The Receiving Party shall have no obligation with respect to such information where the information has become publicly known through no wrongful act of the Receiving Party”.   Entrepreneurs carefully go around and have non-disclosure agreements signed by parties who are assisting them by manufacturing and supplying components.   Non-disclosure agreements are also signed by parties who are assisting in the preparation of business plans, creating brand names and logos, setting up websites, and setting up marketing plans.  Finally, non-disclosure agreements are signed by parties being approached for investment capital and by parties being approached to assist in marketing and wholesale distribution.   Then on the day of the launch of the product or service, all of the Receiving Parties who signed non-disclosure agreements are released from their obligations, as the Disclosing Party has publicly released the information and thus that information has become “publicly known through no wrongful act of the Receiving Party”.     Non-disclosure agreements are fine for having preliminary discussions, but  once the Receiving Party is working with you, a further agreement needs to be put in place that prevents the Receiving Party from competing with you while they are working with you and for a period of time (for example 2 years) after they cease working with you.  As a practical matter, one or more of the parties you are relying upon as a member of your team may have better connections and more resources than you do.  Once they are released from their obligations under the non-disclosure agreement by your public disclosure, they may come to the realization that they are in an excellent position to deliver the product or service and they no longer need you.  Of course, they will delay acting until they have the opportunity to gauge the market response to your new product or service.  Get the additional agreements signed.  After you have taken all the risks and proven there is a market for the product or service, there will be imitators.  Make sure the imitators are not parties who you thought were members of your team.

New Developments in the Canadian Music Business

SOCAN (the Society of Composers, Authors and Music Publishers of Canada) collects royalties based upon tariffs approved by the Copyright Board of Canada for Canadian performances of songs for Canadian and international songwriters and music publishers. Tariffs have been set for recorded or live music ranging from concerts to restaurants to fitness classes.  Of particular relevance to this article are the tariffs for performance of songs on the internet and on mobile devices. In May of 2016 SOCAN announced that it had acquired Seattle-based MediaNet.  This was followed by an announcement by SOCAN in July of 2016 that it had acquired New York-based Audiam.  As with all performing rights organizations, SOCAN’s main functions are firstly to determine what music is being performed and, secondly, to collect the applicable royalty prescribed by Canadian law.  Collection of royalties relating to the internet and mobile devices create technological challenges.   MediaNet has more than 51 million sound recordings in its database, each containing a unique audio identifier.  By acquiring MediaNet, SOCAN will be able to identify digital performances from around the world in real-time. Audiam similarly, has one of the world’s most complete databases of sound recording and underlying song/composition metadata.  In addition, Audiam has technology to proactively find works that are not licensed and for which royalties have not been paid. With the combined strength of MediaNet and Audiam, SOCAN can identify the use of music on digital services such as Spotify, Apple Music, YouTube, and Google Play.  When songs are performed, in addition to royalties compensating the songwriters and music publishers, there are also royalties compensating the artists who perform the songs and music recording companies.  Prior to acquiring Audiam, SOCAN was not involved in collecting royalties for performing artists and music recording companies.  In contrast, a significant portion of the business of Audiam was the collection of royalties for performing artists and music recording companies.  With the acquisition of Audiam, SOCAN now has the capability to collect songwriter-music publisher royalties and performing artist-music recording companies royalties.  With changes brought on by the internet, songwriters and performing artists had become frustrated by the ineffectiveness of the performing rights organizations in the collection of royalties, resulting in a fracturing, with new performing rights organizations being formed by the disenchanted.  Through its acquisition of MediaNet and Audiam, SOCAN has greatly increased its ability to be effective at identifying uses of music on the internet and collect royalties.   SOCAN’s acquisition of Audiam’s expertise in collecting royalties for performing artists and music labels, has been heralded by some commentators as an important new development that raises the possibility of SOCAN becoming a “one stop shop” on the Canadian music scene.  The fact that MediaNet and Audiam are U.S. based also suggests that SOCAN will become more active in collecting royalties in the United States.

PATENT & DESIGNS FOR CORPORATE LAWYERS

Attached is a SLIDESHARE link that relates to a presentation given to the COWICHAN VALLEY BAR ASSOCIATION on July 26, 2016.   The presentation was intended to give this gathering of experienced corporate lawyers background on the law relating to patents and designs, along with some practical insight based upon my years of experience.  It was an enjoyable evening and there was a great dialog that arose out of questions that were asked.http://www.slideshare.net/ThompsonCooperLLP/patents-designs-for-corporate-lawyers

Balancing of Interests under Copyright Law

johnny-automatic-scales-of-justice-300pxCopyright law often includes a consideration of a “balancing the rights”, usually balancing the rights of content users and the rights of content creators.  Some recent court decisions illustrate how this “balancing” takes place and explore some new issues in copyright law. Maltz v. Witterick (a decision issued by the Federal Court of Canada in May 2016) relates to balancing rights as between two competing content creators.  A writer by the name of Jennifer Witterick was “inspired” to write a fictional novel after viewing a documentary produced by Maltz and some others regarding the life of Francizska Halamajowa and her daughter Helena, who hid three Jewish families when the German army occupied Poland during the Second World War.   Upon becoming aware of the novel, Maltz noted a number of factual similarities between the documentary and the novel, and commenced an action for copyright infringement against the author Witterick and the author’s publisher.  By way of background, the Courts have long held that copyright does not apply to historical facts, such as the German occupation of Poland during the Second World War.  The Judge in Maltz v. Witterick noted that the novel was a fictional story aimed at young readers and had a much different “feel” than the documentary.  The only thing that had been taken were some factual underpinnings for the story.  Counsel for Maltz argued that there was a difference between historical facts in which no one can own copyright and “small facts” drawn from diary entries relating to events on a particular date. In  concluding that the writer Witterick’s use of some actual facts from the life of Halamajowa did not amount to infringement, the Judge made a finding that facts are facts and no one owns copyright in them no matter what their relative size or significance.  A second case, Geophysical Services Incorporated v. Encana et al (a decision of the Alberta Court of Queen’s Bench in April 2016) relates to balancing rights as between content creators and public authorities.  Geophysical Services Incorporated (GSI) was in the business of selling seismic data.   This seismic data was filed with a government board pursuant to a regulatory regime established under the Canada Petroleum Resources Act (CPRA).  After a period of 5 years, the seismic data was made available to the public by the board.   GSI commenced a legal action for copyright infringement against Encana and many other companies that were making use of the seismic data without GSI’s permission.  The Judge confirmed that GSI owned copyright in its seismic data, but held that to the extent that the regulatory regime of the CPRA conflicts with the Copyright Act, the CPRA regulatory regime prevails. The wording of the CPRA, properly interpreted, allows for disclosure without restriction after a defined period of time. It is a complete and specific code that applies to all oil and gas information in the offshore and frontier lands, including seismic data. Its provisions supplant any more general pieces of legislation, such as the Copyright Act.  Both of the foregoing decisions have been met with criticism.  The Maltz v. Witterick case is criticized as it allows a party to use intimate details of someone else’s life without compensation. The Geophysical services v. Encana et al case is criticized as amounting to expropriation by the government without compensation.  What do you think?  Please communicate your views to dthompson@tcllp.ca

Legal Aspects of Art

The link below leads to SLIDESHARE of a presentation sponsored by Community Arts Council of Greater Victoria that I gave at the Victoria College of Art on Wednesday June 29, 2016.

 

Link: http://www.slideshare.net/ThompsonCooperLLP/community-arts-council

Questions and Answers regarding Licensing Technology

LicensingQuestion:  I filed for patent protection. Should I still have potential Licensees sign a secrecy agreement?
Answer:  Secrecy Agreements can get in the way of licensing discussions. Many companies you approach will not sign secrecy agreements.  In fact, large companies often require you to sign an agreement confirming that they are not bound by secrecy.   If discussions are going well, do not hesitate to reveal more information. Bear in mind that a patent application is not “made public” until 18 months after its filing date. The company you are negotiating with can only see such information as you choose to share with them.  If you feel that they are just pumping you for information, do not share more information until they show their good faith by placing a serious proposal before you. These types of proposals are called Letters of Intent, they contain a financial proposal that is subject to receiving and reviewing further information.

Question:  What should I ask for?

Answer:   Generally it is best to capture the company’s interest and then invite them to make the first proposal.   There are a number of reasons for this.  A first reason is that you may undervalue the technology, whereas if you let them make the first proposal you generally will get more.  A second reason is that you may overvalue the technology.  If the company feels you have unrealistic expectations, the company may break off negotiations. A third reason is that every industry has “industry norms”, for example 5% is a typical royalty in some industries.  A fourth reason is that many companies have a “history” of past dealings that they are influenced by (i.e., “this is how we generally structure our licensing deals”).  If you can get a company to make any form of proposal at all, there is potentially a deal to be made.  The greatest problem in licensing is facing the enormous inertia in every industry.  Unless a prospective licensee is actively looking for a better way of doing things, it can be difficult to get their attention if what the industry has been doing for years is still “working” just fine.  An industry executive can lose his or her position spending money on a solution when there was no generally understood problem.

Question:  What should I expect to see in the proposals received from companies?

Answer:  It is unlikely that you will be offered a single large lump sum payment.    Instead you are likely to receive an offer that includes an initial payment of $10,000 to $50,000 and a royalty percentage of sales.  The reason for this is that an executive who pays a huge lump sum on a technology that does not work out is placing his or her career in jeopardy.   If the technology proves itself over time, a buyout offer may come down the road.

Question:  How do I know if the proposal is reasonable?

Answer:   There are “rules of thumb” that are applied to gauge whether a proposal makes sense.  One such rule is the “rule of 25”.   The rule of 25 is sometimes criticized as not taking into account all factors.  This is true, but it works for many situations.   Under the Rule of 25, the labour and materials required to manufacture a product are deducted from a wholesale price for the product to arrive at a gross profit figure.  This gross profit figure intentionally does not include overhead, advertising or administrative costs.   According to the Rule of 25, the company is taking all of the risks and should be entitled to 75% of the gross profit.  You receive 25% of the gross profit for bringing this opportunity to them and providing patent protection to protect their market.  However, the final royalty percentage is never set out in a license agreement as 25% of percent of gross profit. Instead the royalty is converted to a percentage of the wholesale invoice price.  The reason for this is that you need a number that can easily by audited by an inspection of customer invoices.

We stated above that the Rule of 25 does not take into account all factors.  For example, the Rule of 25 does not take into account additional costs that may be incurred in preparing to manufacture a new product.  This can easily be accommodated through a “step royalty”.   A step royalty is a royalty that steps up or down, depending upon the circumstances.  To accommodate the costs incurred in preparing to manufacture, you may agree to take a lower royalty until those costs are recovered and then your royalty will “step up” to a higher level.  Step royalties are used in a variety of situations.  For example, to get volumes up, royalties sometimes “step down” with volume.  In such a situation there may be a royalty of 7 % on the first 50,000 units sold each year, a royalty of 5% on the next 50,000 sold each year and a royalty of 4% on all units over 100,000 sold each year.

Question: Is there any rule of thumb for assessing a lump sum offer?

Answer:  Accounting firms can make projections to determine the amount of royalties expected to be generated over the life of a patent. The accounting firms can then give you a “current value assessment” so that you have a calculation of what lump sum is appropriate as a replacement for the royalty.  This works well when you have been receiving royalties for a number of years.   When the product has not even been on the market and has no sales history, the number is essentially a creative fiction, even working from the best information available.  Even when royalties have been paid for a number of years, the accounting firm must make some assumptions regarding changes to product price due to cost of living and growth of market share that may turn out to be false.  When you have a large lump sum offer presented to you, consider what the alternatives are and how receiving the funds will affect your life.

One client of mine received a 10 million dollar offer and turned it down.  The reason was that he was perfectly happy with the quarterly royalties he was receiving and it did not take an accountant to see that he would be making well over 10 million dollars over the next 5 years by simply keeping his existing royalty stream.  Another client of mine received a 2 million dollar offer and accepted it.  There were no sales.  He could not afford to put the product on the market himself.  If the 2 million dollar offer was withdrawn he had no viable alternative.  He had a wife, two young children, a mortgage and debts incurred in developing the technology.  Receiving the 2 million dollars now would have a major positive impact on his life.

Question:  What should I look out for in any proposal?

Answer:  It is a mistake to focus just on the financial details of the offer.  One should look carefully at what obligations are being imposed back upon you.   Those obligations could cost you more than you will receive.  Who has to pay the expenses associated with completing and maintaining patents in Canada and the United States? If the company wants foreign patent protection, who has to pay the expenses associated with completing and maintaining the foreign patents?  Who has to pay the expenses associated with enforcing the patent against infringers?
If you have granted an “exclusive” license (which often is the case), you need minimum performance requirements to ensure that your technology is not shelved.

On a human level, you and your technology need a “champion” within the company.  Someone you feel is committed to the technology and will drive the implementation of the technology within the company.   Preferably, someone you can relate to.

Infringement Insurance

Abatement InsuranceAmericans are reputed to be more litigious than the people of other nations, including Canada.  A number of our firm’s clients have been involved in legal actions in the United States.  These legal actions generally occurred when our client had commercial success, or was on the verge of having success, in the United States.   In some of the lawsuits, our client was the defendant, that is, our client was being sued for patent infringement.  For example, a client with a natural gas control product was taking substantial business away from a major company in the field.  The major company sued the client asserting infringement of a group of patents, including a claim for “convoyed” sales.   “Convoyed” sales are sales of non-patented products (wire, tubing, etc.)  sold along with infringing products, the thinking being that such convoyed sales would not have occurred except for the infringement.   In other lawsuits, our client was the plaintiff, that is, our client was suing for patent infringement.   For example, a client in the field of   non-destructive testing had patented technology for checking for gas leaks that used a non-toxic vapour that carried a dye.   When the client starting taking substantial business away from the industry leader in gas leak detection technology, the industry leader copied the technology to avoid a further erosion of its market share.  This forced our client to bring legal proceedings in the United States to enforce its patent rights.    Our client spent well over a million dollars in legal fees before finally achieving success in the litigation.  However, in order to avoid a repetition of such an expense, the non-destructive testing client subsequently purchased a policy of infringement insurance.  There are two types of infringement insurance, defensive policies to protect you when you are sued and abatement policies to protect you when your intellectual property rights are infringed.  The cost of the policies depends upon industry sector, gross revenues and other factors.  There is generally a minimum 10% co-pay requirement.  The important take away is that infringement insurance exists.  It is provided by specialized insurance companies and not by general commercial insurance companies.  Since acquiring infringement insurance, the non-destructive testing client has become involved in five U.S. patent lawsuits.  They estimate that having the infringement insurance has saved them at least 2 million dollars.  There is a further benefit in having infringement insurance.  For example, not too long ago, we sent a “cease and desist” letter to an alleged infringer, and received a very aggressive and belligerent response.  We notified the infringement insurance company.  After receiving a letter from the infringement insurance company, the attitude of the alleged infringer changed completely.    Presumably because the presence of infringement insurance demonstrated to the alleged infringer that our client had the financial backing to litigate the dispute, the alleged infringer got in touch with our office and the matter quickly settled. If your company is having commercial success in the United States that is at least in part based on your intellectual property rights, or you are operating in a field in which other players have intellectual property rights, you may wish to review your circumstances to determine whether infringement insurance would be beneficial for you.

Video Game Developer’s Worst Nightmare

PlayStation-5You spent over 1200 hours in developing a video game and that video game is now successful.  At some time during development, a friend had some free time and assisted by creating images of a couple of cars, accessory items like fuel cans and trees, and some background scenery.   The “friend”, hearing about the success of the video game, demanded 25% of the profits from the video game for his contribution.  You respond by removing the images from the video game.   This did not satisfy the now former-friend, who sued you claiming there was an express profit sharing agreement, claiming that even in the absence of an express profit sharing agreement his contributions made him a co-author of the video game and thus entitled to a share of the profits, and alternatively, that he was entitled to compensation commensurate with the value of his contribution.  This is the fact scenario from a Quebec case, Seggie v. Roofdog Games Inc, where Seggie, the “friend”, made a claim against a video game developer by the name of Germain and Germain’s company, Roofdog Games Inc.   Under the Canadian Copyright Act, except for some specified exceptions (including making a work subject to copyright in the course of employment) and absent an agreement to the contrary, the author of a work is the first owner of copyright in the work, and joint-authors (also referred to as co-authors) are the first co-owners of copyright.  The Judge in the Seggie case set out the following factors to consider in determining whether video game developers are “co-authors”:  1) each co-author must have made a substantial contribution, 2) the co-authors must work collaboratively toward a common goal, 3) there must be an implication that the co-authors must have intended a jointly-authored work, and 4) the contributions of the co-authors must be blended together and not distinguishable one from the other.  The Judge found the Seggie was not a co-author, as his contributions were minor in comparison to those of Germain, the disparity in contributions and other background evidence did not indicate that they were working toward a common goal or suggest an intention for a jointly-authored work, and Seggie’s contributions remained distinguishable from those of Germain.  However, the Judge found that Seggie owned copyright in the images of cars, fuel cans, trees and background scenery he had provided to Germain.  Since it was unclear that Seggie had permanently renounced his right to compensation for the use of the images, Germain was ordered to pay compensation for the use of the images in the sum of $10,000.  There is a lesson here for video game developers.  You should document in writing the relationship and, if applicable, compensation due anyone who makes even a minor contribution during the development of your video game.

The Copyright Act and Paywalls

Companies or individuals who wish to bypass paywalls should be aware that a Canadian court  recently held an association liable for copyright infringement because it requested and obtained a paywall-protected news article from a third party with a subscription to the news site.

The articles, images, and audio and video files found on the Internet are all works subject to copyright, meaning that some entity (e.g., an individual or company) owns copyright and thus has “the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever.” It is an illegal infringement of copyright to do what the copyright owner has the sole right to do, without the owner’s permission.  These aspect of copyright law are widely understood (though often ignored, e.g., music file sharing).

Less well known is a relatively new aspect of Canada’s copyright law relating to technical protection measures.  Under our Copyright Act: a technical protection measure is defined as any effective technology that in the ordinary course of its operation controls access to a work subject to copyright; and it is illegal to circumvent a technical protection measure.

A paywall is a system that prevents Internet users from accessing webpage content without a paid subscription.  For example, some general readership newspapers have implemented paywalls on their websites to increase their revenue, which has been diminishing due to a decline in print subscriptions and advertising revenue.

The recent court decision, Blacklock’s Reporter v Canadian Vintners Association, dealt with a dispute between a subscription-based paywall-protected electronic daily news service providing detailed information about the Government and courts in Ottawa (Blacklock’s), and an industry association (Canadian Vintners) that did not have a subscription but had requested and obtained a copy of an article relating to the association, from a person with a subscription.  Blacklock’s usually charged $157 for a single-use subscription and $11,470 for an institutional membership.  When Blacklock’s became aware that two individuals at Canadian Vintners had accessed the article, Blacklock’s billed Canadian Vintners for two single-use subscriptions ($314) and requested the name of the person who had provided the copy (who was in breach of the terms and conditions of their subscription).

Canadian Vintners refused to pay or to provide the person’s name, and the dispute led to a lawsuit.  The Ontario Superior Court Small Claims Judge held that the paywall constituted a technical protection measure, and held that requesting and obtaining a copy of a paywall-protected  article from someone with a subscription, constituted the illegal act of circumventing the technical protection measure.  As the copy of the article was obtained illegally, the exceptions to copyright infringement (e.g., “fair dealing for the purpose of research, private study, education,… ”) that may apply in some situations, were not available to Canadian Vintners.

Thus, although Canadian Vintners had not itself made the infringing copy, it was found liable for copyright infringement based on the circumvention of the technical protection measure.  Further, the Judge awarded Blacklock’s damages based on the institutional membership ($11,470) plus $2,000 in punitive damages for Canadian Vintners highhanded behaviour (which included refusing to give the name of the person who provided the copy of the article, until ordered to do so by the Court).