It's becoming more and more difficult to determine how business has fared in Canadian courts. The reason? Increasingly, our Top 10 Business Decisions features cases that pit business against business, or commercial interests against commercial interests. So whether a ruling is pro-business or anti-business may well depend on which business or industry is analyzing the case.
Take, for example, the Amazon one-click patent decision. The ultimate ruling, which expands the patentability of business methods, makes the financial sector's business systems better fodder for patent trolls; on the other hand, it spurs innovation and keeps the notion of patentability current.
So is Amazon a pro-business decision or an anti-business decision? On the whole, we believe that broader patentability trumps individual industry interests. So we're calling it a pro-business decision, in keeping with our policy of looking at the impact of the business community as a whole in determining whether a decision is favourable or not.
As has been our practice, we considered decisions from any level of court or tribunal rendered between November 1, 2011, and October 31, 2012. We solicited the opinions of over 40 law firms in arriving at our choices.
Five of our Top 10 decisions, two more than last year and one fewer than in 2010, emanated from the Supreme Court of Canada (SCC) — and SCC cases were first and second on our list. Three of the remaining five cases came from the Ontario Court of Appeal and one each from the Federal Court of Appeal and the New Brunswick Court of Queen's Bench.
Geographically speaking, five of our cases originated in Ontario, and one each from Alberta, BC, Quebec and New Brunswick. The last case – and topping the list – Reference re Securities Act is a direct referral to the Supreme Court from the federal government.
As usual, the decisions engaged diverse areas of law, including two intellectual property cases in the form of patent litigation and copyright law, and two privacy law cases. Our other choices involved securities and constitutional law, tax law, employment law, the Competition Act, civil procedure and negligence law. Two of the cases engaged class-action-related issues.
Overall, business fared well. Seven of our 10 top cases can be fairly regarded as pro-business. Least palatable to the business community were rulings striking down the federal government's proposed legislation for a national securities regulator, creating a stand-alone form of privacy tort, and broadening the scope of misleading advertising.
On the positive side, our courts took a business-minded approach to transfer pricing and the collection of personal information; took a liberal view of what constituted patentable subject matter; made wage and overtime class actions harder to pursue and limited the use of aggregate damages as a path to certification in class actions; broadened the scope of fair dealing; promulgated a workable summary-judgment procedure; and made certification harder in health-industry negligence cases.
Reference Re Securities Act
Because of its truly national scope and day-to-day operational impact on the business community, Reference Re Securities Act made for an easier choice than usual for the decision that leads our list. Indeed, the importance of this SCC decision denying Canada a one-stop securities regulator speaks for itself. But the court's adherence to the traditionally strict confines it had set for the trade and commerce power also made it clear that Canada's high court had no intention of empowering the federal government to enact future legislation compelling the provinces to opt in to a federal scheme at the expense of provincial powers.
While characterizing the main thrust of the proposed regime as the day-to-day regulation of securities and, particularly, securities contracts – and therefore squarely within the provinces' authority over property and civil rights – the SCC did recognize that some aspects of securities regulation, such as those affecting systemic risk and market stability, might well fall within federal jurisdiction.
So while there may be an opening for a more focused federal initiative in securities regulation, what Reference Re Securities Act has ensured is that, absent an appropriate consensus among the provinces, Canada's business community will be working with a patchwork system of provincial securities regulation for the foreseeable future.
Still, David Tavender in the Calgary office of Fraser Milner Casgrain LLP, who argued the case on behalf of the Alberta government, says that it's not all doom and gloom. “I was prepared to argue, and did argue, that the existing system, which included the Canadian Securities Administrators, was highly ranked and regarded internationally and would work much better if the CSA had full support from Ontario,” he says.
A reading of the case and careful consideration of the result suggest that the Supreme Court was inclined to agree.
Canada v. GlaxoSmithKline
Given the growing internationalism of Canadian companies in the context of an ever more globalized world, the SCC's first pronouncement on transfer pricing was a likely candidate for inclusion in this list even before the decision was released.
To ensure that revenues and expenses are allocated fairly in cross-border, intra-corporate transactions, tax authorities in an increasing number of countries require taxpayers within the same group to ensure that any transfer of goods, services, intangibles or financing arrangements between them occurs on the same terms that independent parties would negotiate. This is known as the “arm's length principle.”
But implementing the arm's length principle is easier said than done. This is particularly true in Canada, where the statutory guidance found in s. 247(2) of the Income Tax Act (ITA) is sketchy and the interpretive jurisprudence is embryonic, despite the fact that the section and its similar predecessor, s. 69(2), have been in force since 1998. “Although GlaxoSmithKline dealt with s. 69(2), the court's comments will likely be applicable to the current rules,” says John Tobin, a tax partner in the Toronto office of Torys LLP.
GlaxoSmithKline (GSK) arose when GlaxoSmithKline Inc. (Glaxo), the Canadian subsidiary of Glaxo Group plc, a UK-based corporation, agreed to purchase ranitidine, the prime ingredient in the best-selling drug Zantac, from Adechsa, an affiliated company that was the Swiss subsidiary of the Glaxo Group, for between $1,512 and $1,651 per kilogram. Glaxo Group owned the intellectual property associated with the Zantac drug.
At the time, generic manufacturers were marketing a generic alternative to Zantac. They managed to purchase ranitidine in the market at significantly lower prices, between $194 and $304 per kilogram.
The Canada Revenue Agency (CRA) challenged the deductibility of Glaxo's payments to Adechsa, arguing that the expense was not “reasonable in the circumstances” as required by the ITA. A reasonable amount, the CRA argued, was the amount paid by the generics.
But Glaxo responded that a consideration of reasonableness should take into account a licence agreement between the Glaxo Group and Glaxo. The agreement allowed Glaxo to use the parent's trademarks and brand, including Zantac, and provided access to other drugs. Glaxo paid Glaxo Group a 6 per cent royalty on sales of drugs covered by the license agreement.
The trial judge refused to consider the licence agreement, reasoning that the two agreements covered separate matters. He ruled that the reasonable price for Glaxo to pay was the highest price paid by the generics subject to a small adjustment.
But the FCA overturned the Tax Court's decision and decided that the licence agreement was relevant. In its view, the trial judge had erred by equating the “fair market price” paid by the generics with what was “reasonable in the circumstances.” As the court saw it, what was “reasonable in the circumstances” required “an inquiry into those circumstances which an arm's length purchaser, standing in the shoes of [Glaxo's] would consider relevant” in determining what it was willing to pay for ranitidine.
Here, the relevant circumstances were that Glaxo Group owned the Zantac intellectual property and would have owned it even if Glaxo was arm's length; Zantac commanded a premium over generic drugs; and without the license agreement, Glaxo could not have used the Zantac trademark nor would it have had access to Glaxo Group's other products.
Although the FCA sent the case back to the trial judge to determine the appropriate transfer price in light of its guidelines and the Supreme Court of Canada upheld that decision, observers still consider GlaxoSmithKline a victory for taxpayers.
“What is important is the Supreme Court's acknowledgement that transfer-pricing decisions don't exist in a vacuum and don't operate outside business realities,” says Claire Kennedy, a tax partner in Bennett Jones LLP's Toronto office. “Here, the circumstances did not arise out of the non-arm's length relationship between Glaxo and the Glaxo group but from the business realities imposed by the market power of the product.”
More particularly, the SCC ruled that all “economically relevant characteristics” of the transaction, including the involvement of related companies and related transactions, merited consideration. Finally, the court recognized that transfer pricing was not an exact science and that some leeway was necessary in determining whether an allocation was reasonable.
Jones v. Tsige
Lawyers are divided on the impact of the Ontario Court of Appeal's January 2012 decision in this case, which recognized a new common law cause of action for invasion of privacy, on the business community. “I don't think business has anything substantive to worry about,” says Patrick Flaherty in the Toronto office of Torys LLP. “The court was very sensitive to the floodgates argument made by the defence and responded by putting clear limits on the new tort.”
Indeed, the court did not actually create a broad tort of invasion of privacy; rather, it limited the cause of action to “intrusion upon seclusion” and specifically confined its decision to the particular facts of the case before it.
Adopting the principles found in the US Restatement (Second) of Torts (2010), the court ruled that to succeed in a claim for intrusion upon seclusion, the plaintiff had to prove that (a) the defendant acted intentionally or recklessly and negligence alone would not suffice; (b) the defendant invaded the plaintiff's private affairs or concerns without lawful justification; and (c) a reasonable person would regard the invasion as highly offensive and causing distress, humiliation or anguish.
The upshot is that claims can arise only for deliberate, significant intrusions into highly offensive matters, such as financial or health records, sexual preferences, employment or private correspondence. As well, the court noted that the right to privacy is not absolute and must be balanced with the rights to freedom of expression and the press.
But Christopher Du Vernet of Mississauga, Ontario's Du Vernet, Stewart, who with colleague Carlin McGoogan represented the plaintiff Sandra Jones, says the case will have a wide-ranging impact. “The decision will have an impact on the law relating to celebrity privacy, media law, employment law, family law and property law,” he says. “If I was a private investigator involved in any dispute, I'd want to know the case backward and forward.”
Du Vernet also points out that the new tort does not require proof of actual economic loss. And he's not concerned about the limit of $20,000 that the court suggested for “symbolic” or “moral” damages in all but the most exceptional cases. “Jurisprudence, like that relating punitive damages, has proven that caps can quickly become history,” he says.
Canada v. Amazon.com, Inc.
After protracted and sometimes confusing litigation, the Canadian Intellectual Property Office (CIPO) in December 2011 granted Amazon.com Inc.'s patent application for a “one-click” shopping system that related to the placement of online purchase orders with a single mouse click.
Although a US patent for the one-click feature had issued in 1998, CIPO had in 2004 refused to issue a Canadian patent for the process. On appeal, Canada's Patent Appeal Board (PAB) shocked the intellectual property community with a definitive statement against the patentability of business-method patents (BMP) in Canada. The board also categorically stated that previous decisions allowing BMPs were wrong.
But in November 2011 the Federal Court of Appeal rejected the PAB's analysis and ordered CIPO to re-examine whether the one-click patent was “patentable subject matter.” Shortly thereafter, CIPO granted the patent.
“The Court specifically rejected CIPO's requirement that patentable subject matter must have a technological component,” says Michael Ladanyi, an associate in Heenan Blaikie LLP's Toronto office. “Unfortunately, the decision left some uncertainty as to how business-method patents would be handled both by CIPO and the courts going forward.”
Which is not to say that Amazon has left the law entirely unclear. Both the Federal Court and the Federal Court of Appeal saw the PAB's ruling that a “traditional business method patent exclusion” existed in Canada as a radical departure from the country's patent regime.
In the Federal Court's view, there was not and there had never been any categorical prohibition of such patents. Rather, the test for what was patentable had been enunciated by the Supreme Court of Canada's 1982 decision in Shell Oil Co. of Canada v. Commissioner of Patents, in which the high court stated that a patentable “art” was not limited to “new processes or products or manufacturing techniques” but also embraced “new and innovative methods of applying skill or knowledge provided they produced effects or results commercially useful to the public.”
Shell had set out three conditions that an invention must meet in order to be patentable: it had to be a method of practical application that was more than an abstract idea; it had to be a new and inventive method of applying skill and knowledge; and it had to have a commercially useful result.
As the Federal Court saw it, Canadian patent legislation should be construed “in ways that recognize changes in technology such as the move from the industrial age to the electronic one of today.” This meant that BMPs were patentable if directed to subject matter that met the general test of what constituted an “invention” under s. 2 of the Patent Act.
Finally, it was not necessary to transform something material into another form to meet the subject matter requirement in the Act. It was irrelevant, then, that the goods ordered by the “one-click” method did not themselves undergo some physical change.
The Court of Appeal substantially affirmed the Federal Court's reasoning regarding patentable subject matter, ruling that no legal rationale existed for excluding business methods as potential patentable subject matter. The Court of Appeal also rejected CIPO's stance that patentable subject matter had to be scientific or technological in nature, and agreed with the Federal Court's view that what was “technological” was subjective and unpredictable and could not of itself be a bar to excluding certain inventions as patentable subject matter.
Fulawka v. Bank of Nova Scotia; Fresco v. Canadian Imperial Bank of Commerce; McCracken v. Canada National Railway Company
These three overtime class actions, two involving banks and one involving a railroad, have been closely watched by the business community — and for good reason. “There is significant risk out there because many employers are not in full compliance with provincial labour standards,” says Jeff Goodman in Heenan Blaikie LLP's Toronto office.
There are two main genres of overtime cases. The first are “off the clock” cases where the defendants don't really dispute the eligibility for overtime, but offer various defences, such as the fact that no claims were made. Plaintiffs, meanwhile, argue in part that there was systemic pressure against them not to make claims.
The actions against CIBC and BNS fall in this category, and the Ontario Court of Appeal's approval of their certification at first blush suggests that voluntary settlement and a lot of litigation involving this type of case will follow.
Certification aside, however, the decisions throw up a considerable roadblock to the class's success at trial. “What's most critical is the court's ruling that the class could not resort to the aggregate-damages provision as a way of calculating an award at trial, and what that means is that individual plaintiffs will now have to be involved in some way to prove damages,” Goodman says. “That may prove a disincentive to many claimants in these types of cases.”
For its part, McCracken is an example of the misclassification category of overtime class actions. This type of case generally involves allegations that an employer has improperly classified overtime-eligible employees as managers, making them ineligible for overtime. “Pronouncements in the lower courts led to a general belief that misclassification cases were more likely to be certified than off-the-clock cases,” Goodman says.
But the Court of Appeal denied certification in McCracken, ruling that such cases should only be certified when the class members – regardless of their titles – actually performed similar jobs, thereby providing the necessary commonality. “The decision fundamentally changes the viability of misclassification cases,” Goodman says. “And the primary lesson learned is that such cases will have to be category-specific and involve much more streamlined and smaller classes.”
At press time, only Fulawka was the subject of an application for leave to appeal to the SCC.
Richard v. Time Inc.
This misleading advertising case finds its origins in Quebec's Consumer Protection Act. But the key issue turned on the scope of the “general impression” test for determining whether advertising is misleading. This test is one applied by many provincial consumer-protection statutes as well as the federal Competition Act.
“The principles enunciated by the court will resound for years in courts around the country,” says Hubert Sibre in Davis LLP's Montreal office, who with colleagues Annie Claude Beauchemin and Jean-Yves Fortin represented the complainant Jean-Marc Richard.
Unfortunately for the business community, the court enunciated a relatively low threshold by ruling that the general impression created had to be considered from the perspective of the “ordinary hurried purchaser,” who must be viewed as “credulous and inexperienced.”
The court also ruled that first impressions carried a great deal of weight and that fine print in the form of disclaimers or conditions that were not prominently displayed should be ignored.
Leon's Furniture Limited v. Alberta
In a ruling that could well have implications for the interpretation of privacy legislation across the country, the Supreme Court of Canada refused leave to appeal from the decision of the Alberta Court of Appeal, which rejected the concept that privacy is the only interest to be considered under privacy statutes.
“The Alberta Court of Appeal's decision is an important recalibration of privacy law to focus on the balancing of competing interests between the right to protect information and the right to use it,” says Geoff Hall in McCarthy Tétrault LLP's Toronto office, who with colleague Kara Smyth in the Calgary office represented Leon's.
Smyth adds that the nod to business interests was not nearly as evident in previous jurisprudence. “Our retail clients followed this case closely because of its potential impact on their privacy practices,” she says.
In justifying Leon's policy of collecting driver's licence and plate information from
customers picking up furniture for fraud prevention and deterrence purposes only, the court noted that the “reasonableness” standard in the statute did not translate to a standard of necessity, minimal intrusiveness or best practices. “These are not interpretations that are available given the plain wording of the statute,” the court stated.
Hall says the decision is directly relevant to BC privacy legislation, which is similarly worded. “Its application is not as clear in terms of federal privacy law, but it's important to note that the federal statute embraces similar balancing concepts,” he says.
Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada; Rogers Communications Inc. v. Society of Composers, Authors and Music Publishers of Canada; Society of Composers, Authors and Music Publishers of Canada v. Bell Canada; Alberta (Education) v. Canada Copyright Licensing Agency (Access Copyright); Re: Sound v. Motion Picture Theatre Associations of Canada
These five cases, all of which pitted distributors and users of copyrighted materials against collective societies representing creators, deal with the correctness of Copyright Board tariff decisions governing music downloading and streaming, Internet game distribution over the Internet, textbook photocopying and film and TV soundtracks. They establish the extent to which creators of audio and visual works can claim royalties for the use of their works by others.
“These cases have an important impact on the cost structures impacting business in a wide range of sectors that make use of copyrighted material for various purposes,” says Stephen Zolf of Heenan Blaikie.
The cases expand the concept of fair dealing, stating that the enumerated purposes in the
Copyright Act, such as the one for “research or private study,” must be given a “large and liberal interpretation.” Therefore, consumers who listen to brief excerpts of music before making purchases were fair dealing for the purpose of research, and creators were not entitled to collect royalties for these previews. “This principle, which focuses on looking at the purpose of the user to determine whether the user's activity is fair dealing, will have a significant impact in terms of carving out much greater scope for users to copy works,” Zolf says.
The SCC also established that downloads of musical works were not subject to a “communication” tariff because they amounted to “deliveries” to end users and not communications or performances. There was no communication, the court concluded, because there was no practical difference between buying a copy of the work in the store, receiving it by mail, or downloading it from the Internet.
By contrast, the SCC found that streams of musical works were communications inasmuch as streaming involved an intention that the same work undergo repeated transmissions, even if each transmission was initiated by an individual consumer.
Combined Air Mechanical Services Inc. v. Flesch; Mauldin v Hryniak; Bruno Appliance and Furniture v. Hryniak; Lakeshore v. Mikes; Parker v. Casals
In these five cases, the Ontario Court of Appeal promulgated a new and far-reaching rule for determining whether a case is appropriate for summary judgment under Ontario's new summary-judgment rules.
“These cases are mandatory reading for Ontario lawyers,” says Sarit Batner in McCarthy Tétrault's Toronto office, who represented the defendant, Robert Hryniak, in Mauldin and in Bruno Applicance.
The test enunciated was the “full appreciation test,” one that requires courts to decide whether the forensic machinery of a trial is necessary for full appreciation of the evidence and issues and a fair adjudication. In making this determination, judges can supplement the record with limited oral evidence, weigh evidence, evaluate credibility and draw inferences.
“Most lawyers would say that the court's interpretation of the new rule has had a significant impact on the fundamental decisions lawyers make about where to direct their cases in terms of applying for summary judgment or proceeding straight to trial,” Batner says. “The courts have indicated that they are looking to the profession to think about creative ways to get matters to court efficiently and effectively to promote access to justice.”
Business clients have demonstrated a high degree of awareness regarding the decision. “Clients are now looking to their lawyers to decide whether the case is an appropriate one to short-circuit the trial process and obtain a faster and cheaper result,” Batner says.
The Supreme Court of Canada has granted leave to appeal in Mauldin and Bruno Appliance.
Gay v. Menon
In this case, Justice Ouellette of the New Brunswick Court of Queen's Bench, Trial Division, refused to certify a class of 15,000 patients affected by a hospital's pathology review, which indicated roughly 100 cases in which a pathologist's diagnosis of benign changed on review to malignant.
“This is an important decision for public-health authorities who are balancing the best interests of the public and patients when determining parameters for care look-backs and reviews,” says Barry Glaspell, who does class action defense work at Borden Ladner Gervais LLP. “Class action litigation, potential or actual, has the potential to skew health-care decisions and spending priorities.”
Ouellette's key finding was that the issue as to whether a standard of care was breached was an individual issue, making a common-issues trial unmanageable.
Ouellette found that causes of action existed against both the hospital and Menon. But “proof of these allegations inevitably breaks down into individual claims,” he concluded. “Each claimant must … make proof of Dr. Menon's misinterpretation of their initial tissue sample, i.e. that Dr. Menon fell below the standard of care expected of a reasonable and prudent pathologist in the circumstances; [and that] his failure to meet the standard of care expected of him resulted in injury suffered by the individual claimant and that the injury suffered is one that is compensable in law.”
It followed, Ouellette reasoned, that a class action was not the preferable procedure for resolving the action. “A great deal of work at a common issue trial will be of no utility for an individual claimant and will offer little in the way of judicial economy,” he wrote.
But Joel Rochon of Toronto's Rochon Genova LLP, a class-action firm that represents plaintiffs, says it is “quite evident” that there was a serious breakdown in the pathology processes undertaken by Menon, for which the hospital was vicariously liable. “The facts of this case approach the high water mark for systemic negligence in medical settings in Canada, and in these circumstances, the standard of care cannot properly be characterized as an individual issue,” he says. “This is a very important case that the court needs to examine carefully on appeal.”
And it will. The plaintiffs have obtained leave to appeal from the New Brunswick Court of Appeal.
Take, for example, the Amazon one-click patent decision. The ultimate ruling, which expands the patentability of business methods, makes the financial sector's business systems better fodder for patent trolls; on the other hand, it spurs innovation and keeps the notion of patentability current.
So is Amazon a pro-business decision or an anti-business decision? On the whole, we believe that broader patentability trumps individual industry interests. So we're calling it a pro-business decision, in keeping with our policy of looking at the impact of the business community as a whole in determining whether a decision is favourable or not.
As has been our practice, we considered decisions from any level of court or tribunal rendered between November 1, 2011, and October 31, 2012. We solicited the opinions of over 40 law firms in arriving at our choices.
Five of our Top 10 decisions, two more than last year and one fewer than in 2010, emanated from the Supreme Court of Canada (SCC) — and SCC cases were first and second on our list. Three of the remaining five cases came from the Ontario Court of Appeal and one each from the Federal Court of Appeal and the New Brunswick Court of Queen's Bench.
Geographically speaking, five of our cases originated in Ontario, and one each from Alberta, BC, Quebec and New Brunswick. The last case – and topping the list – Reference re Securities Act is a direct referral to the Supreme Court from the federal government.
As usual, the decisions engaged diverse areas of law, including two intellectual property cases in the form of patent litigation and copyright law, and two privacy law cases. Our other choices involved securities and constitutional law, tax law, employment law, the Competition Act, civil procedure and negligence law. Two of the cases engaged class-action-related issues.
Overall, business fared well. Seven of our 10 top cases can be fairly regarded as pro-business. Least palatable to the business community were rulings striking down the federal government's proposed legislation for a national securities regulator, creating a stand-alone form of privacy tort, and broadening the scope of misleading advertising.
On the positive side, our courts took a business-minded approach to transfer pricing and the collection of personal information; took a liberal view of what constituted patentable subject matter; made wage and overtime class actions harder to pursue and limited the use of aggregate damages as a path to certification in class actions; broadened the scope of fair dealing; promulgated a workable summary-judgment procedure; and made certification harder in health-industry negligence cases.
Reference Re Securities Act
Because of its truly national scope and day-to-day operational impact on the business community, Reference Re Securities Act made for an easier choice than usual for the decision that leads our list. Indeed, the importance of this SCC decision denying Canada a one-stop securities regulator speaks for itself. But the court's adherence to the traditionally strict confines it had set for the trade and commerce power also made it clear that Canada's high court had no intention of empowering the federal government to enact future legislation compelling the provinces to opt in to a federal scheme at the expense of provincial powers.
While characterizing the main thrust of the proposed regime as the day-to-day regulation of securities and, particularly, securities contracts – and therefore squarely within the provinces' authority over property and civil rights – the SCC did recognize that some aspects of securities regulation, such as those affecting systemic risk and market stability, might well fall within federal jurisdiction.
So while there may be an opening for a more focused federal initiative in securities regulation, what Reference Re Securities Act has ensured is that, absent an appropriate consensus among the provinces, Canada's business community will be working with a patchwork system of provincial securities regulation for the foreseeable future.
Still, David Tavender in the Calgary office of Fraser Milner Casgrain LLP, who argued the case on behalf of the Alberta government, says that it's not all doom and gloom. “I was prepared to argue, and did argue, that the existing system, which included the Canadian Securities Administrators, was highly ranked and regarded internationally and would work much better if the CSA had full support from Ontario,” he says.
A reading of the case and careful consideration of the result suggest that the Supreme Court was inclined to agree.
Canada v. GlaxoSmithKline
Given the growing internationalism of Canadian companies in the context of an ever more globalized world, the SCC's first pronouncement on transfer pricing was a likely candidate for inclusion in this list even before the decision was released.
To ensure that revenues and expenses are allocated fairly in cross-border, intra-corporate transactions, tax authorities in an increasing number of countries require taxpayers within the same group to ensure that any transfer of goods, services, intangibles or financing arrangements between them occurs on the same terms that independent parties would negotiate. This is known as the “arm's length principle.”
But implementing the arm's length principle is easier said than done. This is particularly true in Canada, where the statutory guidance found in s. 247(2) of the Income Tax Act (ITA) is sketchy and the interpretive jurisprudence is embryonic, despite the fact that the section and its similar predecessor, s. 69(2), have been in force since 1998. “Although GlaxoSmithKline dealt with s. 69(2), the court's comments will likely be applicable to the current rules,” says John Tobin, a tax partner in the Toronto office of Torys LLP.
GlaxoSmithKline (GSK) arose when GlaxoSmithKline Inc. (Glaxo), the Canadian subsidiary of Glaxo Group plc, a UK-based corporation, agreed to purchase ranitidine, the prime ingredient in the best-selling drug Zantac, from Adechsa, an affiliated company that was the Swiss subsidiary of the Glaxo Group, for between $1,512 and $1,651 per kilogram. Glaxo Group owned the intellectual property associated with the Zantac drug.
At the time, generic manufacturers were marketing a generic alternative to Zantac. They managed to purchase ranitidine in the market at significantly lower prices, between $194 and $304 per kilogram.
The Canada Revenue Agency (CRA) challenged the deductibility of Glaxo's payments to Adechsa, arguing that the expense was not “reasonable in the circumstances” as required by the ITA. A reasonable amount, the CRA argued, was the amount paid by the generics.
But Glaxo responded that a consideration of reasonableness should take into account a licence agreement between the Glaxo Group and Glaxo. The agreement allowed Glaxo to use the parent's trademarks and brand, including Zantac, and provided access to other drugs. Glaxo paid Glaxo Group a 6 per cent royalty on sales of drugs covered by the license agreement.
The trial judge refused to consider the licence agreement, reasoning that the two agreements covered separate matters. He ruled that the reasonable price for Glaxo to pay was the highest price paid by the generics subject to a small adjustment.
But the FCA overturned the Tax Court's decision and decided that the licence agreement was relevant. In its view, the trial judge had erred by equating the “fair market price” paid by the generics with what was “reasonable in the circumstances.” As the court saw it, what was “reasonable in the circumstances” required “an inquiry into those circumstances which an arm's length purchaser, standing in the shoes of [Glaxo's] would consider relevant” in determining what it was willing to pay for ranitidine.
Here, the relevant circumstances were that Glaxo Group owned the Zantac intellectual property and would have owned it even if Glaxo was arm's length; Zantac commanded a premium over generic drugs; and without the license agreement, Glaxo could not have used the Zantac trademark nor would it have had access to Glaxo Group's other products.
Although the FCA sent the case back to the trial judge to determine the appropriate transfer price in light of its guidelines and the Supreme Court of Canada upheld that decision, observers still consider GlaxoSmithKline a victory for taxpayers.
“What is important is the Supreme Court's acknowledgement that transfer-pricing decisions don't exist in a vacuum and don't operate outside business realities,” says Claire Kennedy, a tax partner in Bennett Jones LLP's Toronto office. “Here, the circumstances did not arise out of the non-arm's length relationship between Glaxo and the Glaxo group but from the business realities imposed by the market power of the product.”
More particularly, the SCC ruled that all “economically relevant characteristics” of the transaction, including the involvement of related companies and related transactions, merited consideration. Finally, the court recognized that transfer pricing was not an exact science and that some leeway was necessary in determining whether an allocation was reasonable.
Jones v. Tsige
Lawyers are divided on the impact of the Ontario Court of Appeal's January 2012 decision in this case, which recognized a new common law cause of action for invasion of privacy, on the business community. “I don't think business has anything substantive to worry about,” says Patrick Flaherty in the Toronto office of Torys LLP. “The court was very sensitive to the floodgates argument made by the defence and responded by putting clear limits on the new tort.”
Indeed, the court did not actually create a broad tort of invasion of privacy; rather, it limited the cause of action to “intrusion upon seclusion” and specifically confined its decision to the particular facts of the case before it.
Adopting the principles found in the US Restatement (Second) of Torts (2010), the court ruled that to succeed in a claim for intrusion upon seclusion, the plaintiff had to prove that (a) the defendant acted intentionally or recklessly and negligence alone would not suffice; (b) the defendant invaded the plaintiff's private affairs or concerns without lawful justification; and (c) a reasonable person would regard the invasion as highly offensive and causing distress, humiliation or anguish.
The upshot is that claims can arise only for deliberate, significant intrusions into highly offensive matters, such as financial or health records, sexual preferences, employment or private correspondence. As well, the court noted that the right to privacy is not absolute and must be balanced with the rights to freedom of expression and the press.
But Christopher Du Vernet of Mississauga, Ontario's Du Vernet, Stewart, who with colleague Carlin McGoogan represented the plaintiff Sandra Jones, says the case will have a wide-ranging impact. “The decision will have an impact on the law relating to celebrity privacy, media law, employment law, family law and property law,” he says. “If I was a private investigator involved in any dispute, I'd want to know the case backward and forward.”
Du Vernet also points out that the new tort does not require proof of actual economic loss. And he's not concerned about the limit of $20,000 that the court suggested for “symbolic” or “moral” damages in all but the most exceptional cases. “Jurisprudence, like that relating punitive damages, has proven that caps can quickly become history,” he says.
Canada v. Amazon.com, Inc.
After protracted and sometimes confusing litigation, the Canadian Intellectual Property Office (CIPO) in December 2011 granted Amazon.com Inc.'s patent application for a “one-click” shopping system that related to the placement of online purchase orders with a single mouse click.
Although a US patent for the one-click feature had issued in 1998, CIPO had in 2004 refused to issue a Canadian patent for the process. On appeal, Canada's Patent Appeal Board (PAB) shocked the intellectual property community with a definitive statement against the patentability of business-method patents (BMP) in Canada. The board also categorically stated that previous decisions allowing BMPs were wrong.
But in November 2011 the Federal Court of Appeal rejected the PAB's analysis and ordered CIPO to re-examine whether the one-click patent was “patentable subject matter.” Shortly thereafter, CIPO granted the patent.
“The Court specifically rejected CIPO's requirement that patentable subject matter must have a technological component,” says Michael Ladanyi, an associate in Heenan Blaikie LLP's Toronto office. “Unfortunately, the decision left some uncertainty as to how business-method patents would be handled both by CIPO and the courts going forward.”
Which is not to say that Amazon has left the law entirely unclear. Both the Federal Court and the Federal Court of Appeal saw the PAB's ruling that a “traditional business method patent exclusion” existed in Canada as a radical departure from the country's patent regime.
In the Federal Court's view, there was not and there had never been any categorical prohibition of such patents. Rather, the test for what was patentable had been enunciated by the Supreme Court of Canada's 1982 decision in Shell Oil Co. of Canada v. Commissioner of Patents, in which the high court stated that a patentable “art” was not limited to “new processes or products or manufacturing techniques” but also embraced “new and innovative methods of applying skill or knowledge provided they produced effects or results commercially useful to the public.”
Shell had set out three conditions that an invention must meet in order to be patentable: it had to be a method of practical application that was more than an abstract idea; it had to be a new and inventive method of applying skill and knowledge; and it had to have a commercially useful result.
As the Federal Court saw it, Canadian patent legislation should be construed “in ways that recognize changes in technology such as the move from the industrial age to the electronic one of today.” This meant that BMPs were patentable if directed to subject matter that met the general test of what constituted an “invention” under s. 2 of the Patent Act.
Finally, it was not necessary to transform something material into another form to meet the subject matter requirement in the Act. It was irrelevant, then, that the goods ordered by the “one-click” method did not themselves undergo some physical change.
The Court of Appeal substantially affirmed the Federal Court's reasoning regarding patentable subject matter, ruling that no legal rationale existed for excluding business methods as potential patentable subject matter. The Court of Appeal also rejected CIPO's stance that patentable subject matter had to be scientific or technological in nature, and agreed with the Federal Court's view that what was “technological” was subjective and unpredictable and could not of itself be a bar to excluding certain inventions as patentable subject matter.
Fulawka v. Bank of Nova Scotia; Fresco v. Canadian Imperial Bank of Commerce; McCracken v. Canada National Railway Company
These three overtime class actions, two involving banks and one involving a railroad, have been closely watched by the business community — and for good reason. “There is significant risk out there because many employers are not in full compliance with provincial labour standards,” says Jeff Goodman in Heenan Blaikie LLP's Toronto office.
There are two main genres of overtime cases. The first are “off the clock” cases where the defendants don't really dispute the eligibility for overtime, but offer various defences, such as the fact that no claims were made. Plaintiffs, meanwhile, argue in part that there was systemic pressure against them not to make claims.
The actions against CIBC and BNS fall in this category, and the Ontario Court of Appeal's approval of their certification at first blush suggests that voluntary settlement and a lot of litigation involving this type of case will follow.
Certification aside, however, the decisions throw up a considerable roadblock to the class's success at trial. “What's most critical is the court's ruling that the class could not resort to the aggregate-damages provision as a way of calculating an award at trial, and what that means is that individual plaintiffs will now have to be involved in some way to prove damages,” Goodman says. “That may prove a disincentive to many claimants in these types of cases.”
For its part, McCracken is an example of the misclassification category of overtime class actions. This type of case generally involves allegations that an employer has improperly classified overtime-eligible employees as managers, making them ineligible for overtime. “Pronouncements in the lower courts led to a general belief that misclassification cases were more likely to be certified than off-the-clock cases,” Goodman says.
But the Court of Appeal denied certification in McCracken, ruling that such cases should only be certified when the class members – regardless of their titles – actually performed similar jobs, thereby providing the necessary commonality. “The decision fundamentally changes the viability of misclassification cases,” Goodman says. “And the primary lesson learned is that such cases will have to be category-specific and involve much more streamlined and smaller classes.”
At press time, only Fulawka was the subject of an application for leave to appeal to the SCC.
Richard v. Time Inc.
This misleading advertising case finds its origins in Quebec's Consumer Protection Act. But the key issue turned on the scope of the “general impression” test for determining whether advertising is misleading. This test is one applied by many provincial consumer-protection statutes as well as the federal Competition Act.
“The principles enunciated by the court will resound for years in courts around the country,” says Hubert Sibre in Davis LLP's Montreal office, who with colleagues Annie Claude Beauchemin and Jean-Yves Fortin represented the complainant Jean-Marc Richard.
Unfortunately for the business community, the court enunciated a relatively low threshold by ruling that the general impression created had to be considered from the perspective of the “ordinary hurried purchaser,” who must be viewed as “credulous and inexperienced.”
The court also ruled that first impressions carried a great deal of weight and that fine print in the form of disclaimers or conditions that were not prominently displayed should be ignored.
Leon's Furniture Limited v. Alberta
In a ruling that could well have implications for the interpretation of privacy legislation across the country, the Supreme Court of Canada refused leave to appeal from the decision of the Alberta Court of Appeal, which rejected the concept that privacy is the only interest to be considered under privacy statutes.
“The Alberta Court of Appeal's decision is an important recalibration of privacy law to focus on the balancing of competing interests between the right to protect information and the right to use it,” says Geoff Hall in McCarthy Tétrault LLP's Toronto office, who with colleague Kara Smyth in the Calgary office represented Leon's.
Smyth adds that the nod to business interests was not nearly as evident in previous jurisprudence. “Our retail clients followed this case closely because of its potential impact on their privacy practices,” she says.
In justifying Leon's policy of collecting driver's licence and plate information from
customers picking up furniture for fraud prevention and deterrence purposes only, the court noted that the “reasonableness” standard in the statute did not translate to a standard of necessity, minimal intrusiveness or best practices. “These are not interpretations that are available given the plain wording of the statute,” the court stated.
Hall says the decision is directly relevant to BC privacy legislation, which is similarly worded. “Its application is not as clear in terms of federal privacy law, but it's important to note that the federal statute embraces similar balancing concepts,” he says.
Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada; Rogers Communications Inc. v. Society of Composers, Authors and Music Publishers of Canada; Society of Composers, Authors and Music Publishers of Canada v. Bell Canada; Alberta (Education) v. Canada Copyright Licensing Agency (Access Copyright); Re: Sound v. Motion Picture Theatre Associations of Canada
These five cases, all of which pitted distributors and users of copyrighted materials against collective societies representing creators, deal with the correctness of Copyright Board tariff decisions governing music downloading and streaming, Internet game distribution over the Internet, textbook photocopying and film and TV soundtracks. They establish the extent to which creators of audio and visual works can claim royalties for the use of their works by others.
“These cases have an important impact on the cost structures impacting business in a wide range of sectors that make use of copyrighted material for various purposes,” says Stephen Zolf of Heenan Blaikie.
The cases expand the concept of fair dealing, stating that the enumerated purposes in the
Copyright Act, such as the one for “research or private study,” must be given a “large and liberal interpretation.” Therefore, consumers who listen to brief excerpts of music before making purchases were fair dealing for the purpose of research, and creators were not entitled to collect royalties for these previews. “This principle, which focuses on looking at the purpose of the user to determine whether the user's activity is fair dealing, will have a significant impact in terms of carving out much greater scope for users to copy works,” Zolf says.
The SCC also established that downloads of musical works were not subject to a “communication” tariff because they amounted to “deliveries” to end users and not communications or performances. There was no communication, the court concluded, because there was no practical difference between buying a copy of the work in the store, receiving it by mail, or downloading it from the Internet.
By contrast, the SCC found that streams of musical works were communications inasmuch as streaming involved an intention that the same work undergo repeated transmissions, even if each transmission was initiated by an individual consumer.
Combined Air Mechanical Services Inc. v. Flesch; Mauldin v Hryniak; Bruno Appliance and Furniture v. Hryniak; Lakeshore v. Mikes; Parker v. Casals
In these five cases, the Ontario Court of Appeal promulgated a new and far-reaching rule for determining whether a case is appropriate for summary judgment under Ontario's new summary-judgment rules.
“These cases are mandatory reading for Ontario lawyers,” says Sarit Batner in McCarthy Tétrault's Toronto office, who represented the defendant, Robert Hryniak, in Mauldin and in Bruno Applicance.
The test enunciated was the “full appreciation test,” one that requires courts to decide whether the forensic machinery of a trial is necessary for full appreciation of the evidence and issues and a fair adjudication. In making this determination, judges can supplement the record with limited oral evidence, weigh evidence, evaluate credibility and draw inferences.
“Most lawyers would say that the court's interpretation of the new rule has had a significant impact on the fundamental decisions lawyers make about where to direct their cases in terms of applying for summary judgment or proceeding straight to trial,” Batner says. “The courts have indicated that they are looking to the profession to think about creative ways to get matters to court efficiently and effectively to promote access to justice.”
Business clients have demonstrated a high degree of awareness regarding the decision. “Clients are now looking to their lawyers to decide whether the case is an appropriate one to short-circuit the trial process and obtain a faster and cheaper result,” Batner says.
The Supreme Court of Canada has granted leave to appeal in Mauldin and Bruno Appliance.
Gay v. Menon
In this case, Justice Ouellette of the New Brunswick Court of Queen's Bench, Trial Division, refused to certify a class of 15,000 patients affected by a hospital's pathology review, which indicated roughly 100 cases in which a pathologist's diagnosis of benign changed on review to malignant.
“This is an important decision for public-health authorities who are balancing the best interests of the public and patients when determining parameters for care look-backs and reviews,” says Barry Glaspell, who does class action defense work at Borden Ladner Gervais LLP. “Class action litigation, potential or actual, has the potential to skew health-care decisions and spending priorities.”
Ouellette's key finding was that the issue as to whether a standard of care was breached was an individual issue, making a common-issues trial unmanageable.
Ouellette found that causes of action existed against both the hospital and Menon. But “proof of these allegations inevitably breaks down into individual claims,” he concluded. “Each claimant must … make proof of Dr. Menon's misinterpretation of their initial tissue sample, i.e. that Dr. Menon fell below the standard of care expected of a reasonable and prudent pathologist in the circumstances; [and that] his failure to meet the standard of care expected of him resulted in injury suffered by the individual claimant and that the injury suffered is one that is compensable in law.”
It followed, Ouellette reasoned, that a class action was not the preferable procedure for resolving the action. “A great deal of work at a common issue trial will be of no utility for an individual claimant and will offer little in the way of judicial economy,” he wrote.
But Joel Rochon of Toronto's Rochon Genova LLP, a class-action firm that represents plaintiffs, says it is “quite evident” that there was a serious breakdown in the pathology processes undertaken by Menon, for which the hospital was vicariously liable. “The facts of this case approach the high water mark for systemic negligence in medical settings in Canada, and in these circumstances, the standard of care cannot properly be characterized as an individual issue,” he says. “This is a very important case that the court needs to examine carefully on appeal.”
And it will. The plaintiffs have obtained leave to appeal from the New Brunswick Court of Appeal.
