Top 10 Legal Risks for Business in 2018

BLG’s Top 10 Legal Risks for Business in 2018 report provides the business community with deeper insight into the key trends and regulatory changes that will have legal implications in the year ahead.

Cybersecurity, Privacy and Data Protection

Personal Information Security Breach Obligations

Canada’s federal Personal Information Protection and Electronic Documents Act (“PIPEDA”) will soon impose record-keeping, reporting and notification obligations on organizations that suffer a “breach of security safeguards” regarding personal information under their control. At this time, Alberta is the only Canadian jurisdiction that has personal information security breach reporting obligations. PIPEDA’s security breach obligations, when in force, will require that an organization create and maintain a record of every personal information security breach, and provide those records to the Privacy Commissioner on request. In addition, if a personal information security breach creates a “real risk of significant harm to an individual”, then the organization will be required to: (1) report the breach to the Privacy Commissioner; (2) give prescribed notice of the breach to all affected individuals; and (3) give notice of the breach to other organizations or government institutions that might be able to reduce the risk of harm that could result from the breach or mitigate that harm. A knowing contravention of the security breach obligations will be an offence punishable by a fine of up to $100,000. The security breach obligations will come into force after required regulations are finalized. The federal government issued proposed regulations in September 2017.

European Union General Data Protection Regulation

The European Union General Data Protection Regulation (the “GDPR”), which comes into force in May 2018, will apply to Canadian organizations that have an establishment in the European Union or that collect or process personal data of European Union residents in connection with an offering of goods or services or to monitor European Union residents’ behaviour. The GDPR gives regulators the ability to impose on a non-compliant organization fines of up to the higher of €20 million or 4% of worldwide annual revenue of the organization’s undertaking (corporate group) during the previous year. The GDPR is a significant evolution in personal information protection laws, and is materially different in important respects from Canadian laws. Compliance with Canadian laws will not satisfy GDPR requirements. Preparing for compliance with the GDPR may require significant effort, time and expense, and may involve changes to business models and corporate structures.

Rethinking Consent and Enforcement

In September 2017, the Office of the Privacy Commissioner of Canada published a Report on Consent to provide detailed comments and guidance regarding meaningful consent in the digital environment, and recommend amendments to relevant parts of PIPEDA. The Report also recommends PIPEDA amendments to give the Privacy Commission order-making powers and the authority to impose administrative monetary penalties on organizations that violate PIPEDA.

Transforming Our Infrastructure

As the public and private infrastructure sectors continue to evolve, changes or clarity brought to one area create potential questions or challenges in others.

With the 2017 federal budget, additional clarity was provided for the funding of public sector infrastructure projects in Canada. The federal government has renewed its commitment to such spending, with planned investments of over $180 billion over the next 12 years, on both new and existing programs, focused primarily in the areas of public transit, green infrastructure, community culture and recreation, and rural and northern communities. However, concern has arisen over perceived delays by the federal government in providing funding, and its failure to spend all funds announced, for certain projects. For example, some observers point to the recent federal decision to delay expenditures of some $2 billion of the approximately $5 billion in funding budgeted for 2017 to later years as demonstrating problems with the implementation and delivery of federal infrastructure programs. Others contend, though, that any such delay is simply the result of different-than-expected project cash flows or other factors outside of the control of the federal government. Additional detail on federal spending may be included in the 2018 budget, to be released in late February.

Clarity was also recently provided for the Canada Infrastructure Bank, through the enactment of its legislative framework in June 2017. The relevant legislation provides that the Bank’s purposes include investing, and seeking to attract investment from both private sector and institutional investors, in revenue-generating infrastructure projects located wholly or partly in Canada that are in the public interest. Among other concerns, some critics have suggested that the revenue generation element of the Bank’s purpose may be viewed as ultimately necessitating or encouraging the imposition of user or other fees on public infrastructure, or resulting in privatization in some form.

The federal government tabled Bill C-69 in February, 2018 An Act to enact the Impact Assessment Act and the Canadian Energy Regulator Act, to amend the Navigation Protection Act and to make consequential amendments to other Acts. It is expected that the scope of considerations that must be taken when considering and conducting impact assessments and issuing certificates to proponents will be expanded. As the Bill progresses through Parliament further details are likely to arise on the scope of the legislation.

This increase in public infrastructure spending and planning, while potentially transformative for Canada, should be considered against the backdrop of rising public opposition to certain private sector infrastructure projects. The liquefied natural gas and oil industries have recently experienced opposition to a number of their project development proposals, causing unforeseen obstacles and delays in start-up work. Social opposition to these controversial projects has become more organized and effective, with public stakeholders using both legal and non-legal means of challenging projects. The recent cancellation of certain high-profile projects may serve as notice to project proponents and participants that social and political concerns must be addressed from the outset in planning such initiatives. Consultation and collaboration by governments, as well as public and private stakeholders, is now necessary to ensure the successful undertaking and completion of any major infrastructure project in Canada, whether public or private.

Market Implications of Legalizing Cannabis

The Cannabis Act is expected to come into force during the summer of 2018. As the Canadian cannabis industry expands from exclusively servicing a medical market to including an adult-use market, a variety of highly disruptive changes will be introduced. The changes will expand the opportunities and challenges available to established businesses and new entrants – storefronts, product diversification, micro production (cultivation or processing), nurseries, research and development licences, clarity around advertising and packaging restrictions, natural health products, cosmetics and extraction from industrial hemp flowers. These changes will support the industry’s mandate to outcompete the illicit cannabis industry. By doing so, the industry will provide Canadians with greater choice in medical solutions, health maintenance and legal psychoactive products alongside caffeine, alcohol and tobacco.

As the number of ways to participate in the cannabis industry increases, competitive pressure may marginalize licensed producers lacking a focused plan with effective execution. Growing competitive pressure has and will continue to fuel consolidation as well-financed major producers make acquisitions to expand production capacity and fuel what is expected to begin as an insatiable market demand. Industry maturation will also bring commoditization. Coupled with new categories and form factors for destination products – notably infused foods and beverages, concentrates and pre-rolls – commoditization will elevate the importance of a deliberate approach to product choices, branding, technology and well-timed execution on financings.

Canada’s move towards a regulated commercial cannabis industry brings a shifting variety of paths to success. Predicting, managing and adapting to a rapidly-changing regulatory landscape requires an a reliable and focused approach to navigating Canada’s international first – a G20 country with a federally regulated commercial cannabis industry servicing medical and adult-use markets.

Failure to Consider Aboriginal and Treaty Rights

Despite the immense potential for emerging sources of renewable energy and the incessantly growing business opportunities afforded by more traditional energy and resource sectors across Canada, navigating through the complex regulatory and consultation processes continues to make advancing new projects a challenge. Where land and resources are subject to Aboriginal and treaty rights – which is the case of nearly the entire landmass of Canada – engaging with indigenous communities is often a major consideration.

In the eve of the 10th anniversary of the UN Declaration on the Rights of Indigenous Peoples, the federal government recently voiced its support for Bill C-262, which sets forth potentially game-changing principles, such as the requirement for the free, prior and informed consent of indigenous communities to development projects on their traditional territories and their right to self-government with respect to lands and resources.

Furthermore, the federal government recently tabled a comprehensive reform of current regulatory regimes relating to the approval of major projects in Canada. In addition to important institutional changes, Bill C-69 broadens impact assessment requirements to include, most notably, any adverse effects on constitutionally-recognized rights of Indigenous peoples, their current interests in the affected lands and resources and their traditional knowledge. It also provides for enhanced consultation and engagement obligations towards Indigenous groups throughout the approval process.

The governments’ duty to consult, accommodate and, in certain circumstances, obtain the consent of First Nations with respect to project proposals that could adversely impact their lands and rights is not new. However, given the uncertain state of the law regarding what constitutes proper consultation and accommodation in specific circumstances, it is increasingly in the project proponents’ interest to engage directly with affected indigenous groups and negotiate business agreements with them, in an effort to avoid the significant risks, delays and costs associated with potential legal challenges to the projects.

While lands that are subject to historical or modern treaties are often considered as providing more certainty for development initiatives, recent cases show that such lands could be encumbered with further treaty rights (e.g., reserve creation on treaty territories) or with Aboriginal rights of other indigenous groups, such as the Métis, who are not a party to the existing treaties.

Furthermore, courts in Québec and British Columbia have recently opened the door for indigenous groups to sue private companies directly for past or ongoing environmental harm caused to lands and resources on which they claim an interest, even where the interest in question is asserted, but not yet proven. The Supreme Court of Canada has made it clear that third parties wishing to develop a project on land over which Aboriginal title or other Aboriginal rights are asserted could have an obligation to seek the affected groups’ prior consent, failing which the government may be required to cancel the project upon establishment of the Aboriginal title.

In addition to business agreements, partnership opportunities with First Nations, ranging from resource exploitation on their traditional territories to more recent cases of medical cannabis production on reserve lands also merit serious consideration by both parties.

Reforming Our Tax System

Since 2010, seven of ten Canadian governments have raised tax rates on high-income earners. Additionally federal corporate tax rates have increased on investment income earned by Canadian-controlled private corporations, with certain provincial governments increasing general corporate tax rates.

Increases to marginal income tax rates place Canadian businesses at a competitive disadvantage for attracting skilled labour, investment and entrepreneurs. Forty-two US jurisdictions have combined top tax rates that are lower than those of all Canadian provinces. Internationally, Canada has the 13th highest combined top tax rates for individuals (of 34 countries).

Recent tax proposals by the Department of Finance will adversely affect the after-tax financial results for Canadian private enterprises, as well as the retention of after-tax corporate income to address cash flow, reinvestment, retirement savings and other cash requirements of private enterprises.

The recent US tax reform lowered both corporate and personal tax rates and introduced new rules that have raised concerns about the potential for double taxation of cross-border investment.

A less competitive Canadian tax regime, combined with difficult regulatory and political constraints, is expected to reduce the amount of inbound investment, placing yet another barrier on attracting funds for the development and expansion of Canadian businesses, including the natural resource sector.

Trade Agreements and Cross-Border Commerce

2018 promises to be a year of both significant uncertainty and profound change for Canadians in the areas of international and internal trade. While a number of ongoing trade disputes, such as the softwood lumber standoff, will continue to plod along during 2018, it is in the area of trade negotiations where the most important developments will occur.

US President Trump triggered a renegotiation of the North American Free Trade Agreement (NAFTA) during 2017, in a stated effort to improve the terms of trade between the US and its NAFTA partners. The partners are aiming to conclude negotiations by March 2018. The US has tabled a number of controversial proposals that Canada and Mexico have largely dismissed as non-starters. The negotiations are now entering a crucial phase, where President Trump’s attachment to these proposals, and NAFTA generally, will be tested. US withdrawal from NAFTA sometime during 2018 remains a distinct possibility, which could have major economic effects throughout the NAFTA area. No “successful” conclusion to the negotiations for Canada is likely to occur without at least some major changes to the current Agreement, with concomitant economic impacts.

President Trump, shortly after taking office, also gave notice that the US was withdrawing from the Trans-Pacific Partnership (TPP). Undaunted, a number of the remaining TPP parties continued to push to bring the Agreement into effect without the US. These efforts appear to be meeting with success and it is likely that a somewhat amended TPP will be concluded and opened for ratification during 2018. The revised TPP, now renamed as the “Comprehensive and Progressive Agreement for Trans-Pacific Partnership” (CPTPP), remains substantially the same, but contains a list of 20 “suspended provisions” that were added to the TPP at the US’s insistence and are now no longer binding. These provisions primarily relate to investment, government procurement and intellectual property.

After years of negotiation and subsequent difficulties related to implementation, the Canada-EU Comprehensive Economic and Trade Agreement (CETA) entered into provisional effect in September 2017. While not yet definitively in force, the Agreement’s provisional application means that much of the Agreement is now applicable, creating significant new export opportunities for Canadian exporters and increased competition within Canada from EU imports. Canada’s trade relationship with a post-Brexit UK, which will ultimately now not be covered by CETA, remains a further trade arrangement to watch in 2018.

Not satisfied with NAFTA, CETA and the TPP, the federal government is now in preliminary discussions on a possible free trade agreement with China, with formal negotiations likely to commence in 2018. The entry into force of CETA and TPP will present very considerable export opportunities for Canadian businesses during 2018. The successful conclusion of a trade agreement with China would further and substantially supplement those opportunities. This collection of trade agreements, coupled with our preferential access to the US market under NAFTA, will reinforce that Canada is a destination for foreign investment. These agreements could also serve as potential economic safety nets, in the event that NAFTA cannot be successfully renegotiated, at least while President Trump remains in office.

Challenges Relating to Sexual Harassment in the Workplace

The latter half of 2017 demonstrated that the uproar over high profile cases of sexual harassment in the workplace has not ceased. We expect 2018 to bring renewed emphasis on how employers address concerns of sexual harassment in the workplace.

With this in mind, how should businesses react to a renewed emphasis on proper workplace conduct? What actions can be taken by employers to remain vigilant against acts of sexual harassment in the workplace?

First, employers should undertake a thorough review of their harassment-related policies and procedures and confirm that these meet the applicable legal obligations of the jurisdictions in which they operate. Beyond meeting these obligations, employers should focus on whether the harassment policies they have in place actively encourage victims of sexual harassment to step forward and report misconduct in a timely manner.

Second, businesses should examine whether they have the appropriate resources devoted to investigating and resolving sexual harassment complaints. This includes, in particular, implementing employee hotlines, designating company representatives who can promptly respond to and investigate harassment claims, as well as providing managerial guidance for handling the time commitments entailed in conducting harassment investigations (whether for the investigators, witnesses, alleged harassers or the complainant). Also, proper legal guidance should be obtained to assist harassment investigators in recognizing prohibited harassment versus other milder forms of office conflict or inappropriate behaviour.

Third, employers must be proactive in identifying to what degree they remain at risk for harassment-related claims. This includes promoting the existence of harassment policies, clarifying the company’s expectations as regards workplace conduct, as well as implementing regular training sessions that make workplace standards of conduct clear for all personnel. Particular attention should be paid to management staff that are asked to implement harassment policies.

Liability for sexual harassment claims across Canadian jurisdictions will likely increase as this issue becomes even more socially unacceptable. Sexual harassment claims that involve allegations of employer negligence or complacency may aggravate damages claimed by and awarded to employee complainants. Steps should be taken by employers to address these concerns and limit their liability.

Disruption Caused by Technology

We are witnessing sweeping changes in numerous industries, driven by new technologies. Cryptocurrencies, blockchains and autonomous vehicles, for example, are among the developments disrupting the core of the financial and the automotive industries, with far-reaching repercussions.

Cryptocurrencies, whether “securities” tokens or utility tokens, are poised to become a new and potentially critical asset class for Canadian and global investors. In 2018, securities regulators will continue grappling to achieve an appropriate balance between protecting investors and fostering this new financing vehicle. Many remaining questions will hopefully be answered in 2018: whether markets generally will accept cryptocurrency as a medium of exchange, whether governments will enter the space with fiat-backed cryptocurrency in core jurisdictions, whether transaction processing can be improved to make cryptocurrency more viable for daily use as “money”, and if cryptocurrency will remain a speculative investment with expected future value or transform into a more broadly accepted medium of exchange.

As highly reliable distributed ledger systems, blockchains can address a broad variety of problems, ranging from supply chain verification, to reduction of counterfeiting, to maintenance and proof of ownership records, to logistics management, and streamlining regulatory compliance in the financial services sector. 2018 will see a broadening and deepening of blockchain technologies, in applications outside and apart from cryptocurrencies. While they will not remedy all the world’s ills, blockchains provide great opportunity for commerce, data management and transparent, automated contracting. 2018 will see ever greater use of blockchains, moving from theoretical to real market applications and increasing real market value. They will also pose a challenge to regulators.

Autonomous vehicle technology is attracting billions of dollars in investment. In a number of cities around the world, small samples of self-driving cars and trucks are now being tested on city streets. All this development, however, raises the question: how will autonomous vehicles impact the potential liability of vehicle owners, drivers, retailers, and manufacturers? The answer to that question is not clear. Further cause for concern arises in the context of data security and privacy protection. Autonomous vehicles rely on their ability to communicate with GPS satellites, software providers, and other devices. Consequently, this high-value data needs to be secure, especially given the rise of cybercrime and privacy breaches.

Because autonomous vehicles bring with them increased emphasis on product liability, manufacturers and suppliers will have a greater need for product liability insurance. This may also lead to risk slicing between drivers and manufacturers, depending on whether a vehicle is being operated by the driver or in autonomous mode. While there are certainly technological, safety, and regulatory hurdles to be surmounted before autonomous vehicles are commercially available for the average consumer, it is clear that autonomous vehicle technology is here to stay. Thus, the legal and regulatory frameworks on which business and our society are based will have to anticipate the magnitude of this particular change, prepare for it, and adjust accordingly.

Environment and Climate Change

International commitments and domestic legislation are set to transform the energy sector in Canada and abroad. The Paris Agreement under the United Nations Framework Convention on Climate Change, for example, has initiated a global plan to phase out fossil fuels in an attempt to reduce energy-related carbon emissions. In an effort to achieve this goal, we can expect to see an increase in the rate of carbon taxes, and larger decreases on the limit of allowable carbon pollution in cap-and-trade systems. This will impact Canada’s energy sector, among others, influencing changes to fossil fuel companies, power utilities, car manufacturers, and other players in Canada’s hydrocarbon-heavy economy. The implications will extend as far as the Canadian housing market and consumer credit.

The rise of clean and renewable energy technologies, from batteries to electric vehicles, are quickly filling the void left by the decreasing reliance on fossil fuel energy. These technological advancements, alongside the risks from climate change, are becoming increasingly hard to ignore. This means that investors, auditors and regulators must react to rapidly evolving requirements – and public expectations – on how they respond to climate change. There has been a rise in the number of international investment disputes that address environmental regulatory obligations, and this trend is expected to continue. A further key issue to watch in 2018 will be the impact on reclamation of oil and gas interests addressed in the Redwater dispute, to be heard by the Supreme Court of Canada.

As we continue to search for viable solutions to address climate change, it is clear that Canada will feel the impact. Whether or not one believes that carbon emission targets are going to be successfully met, businesses must begin to acknowledge the risks and opportunities linked to the resulting transformation of the global energy sector.

Class Actions

All signs indicate that 2018 will continue the trend of class actions becoming more common and broader in scope.

With large-scale data breaches dominating headlines on both sides of the border, expect to see plenty of litigation around privacy and cybersecurity. We expect a dramatic increase in claims once the repeatedly-postponed private right of action, envisaged by Canada’s Anti-Spam Legislation (CASL), comes into force. Among other effects, this will expose companies to lawsuits over unsolicited or allegedly misleading emails.

By the same token, a spate of publicly-announced product recalls across various industries will likely give rise to more product liability class actions. Other “trendy” areas that will generate claims include competition and securities law, financial services, and labour and employment (especially overtime claims).

Expect Québec to solidify its status as the “jurisdiction of choice” for class counsel, with a recent Court of Appeal decision arguably further lowering the bar for authorization (certification). By contrast, judges in Ontario have been more willing to dismiss class actions at certification, which may cause plaintiffs’ counsel to choose other provinces (especially BC and Québec) as lead jurisdictions for national proceedings.

While the Supreme Court of Canada has recently cleared the way for judges from different provinces to sit together on settlement approval hearings, there will continue to be disputes about how competing class actions in different provinces should interact, especially with different class counsel competing for lucrative retainers in an increasingly aggressive fashion.

To complicate matters further, the Ontario Court of Appeal has recently confirmed the validity of global opt-out classes. In other words, in certain cases it is possible to bring an action in Ontario on behalf of every person with a potential claim (located anywhere in the world) who does not take an active step to indicate that they do not want to benefit from, or be bound by, the outcome. As a result, Canadian-based multinational corporations can expect claims in Ontario relating to their foreign supply chains and their interactions with customers in other countries.

Finally, the Law Commission of Ontario is currently involved in a consultation process to assist it in preparing a report with recommendations for reforming class actions legislation in Ontario. Stakeholders will be following this process attentively to see what changes will result.

Conclusion

Conducting business is an ever-increasing challenge in a world that is more complex, connected and interdependent. This report aims at providing business leaders an insight on potential legal risks affecting their organizations, so that they can identify business opportunities stemming from these complex and evolving trends.