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  • Adoption of Bill 64: what do public bodies need to know?

    Bill 64, also known as the Act to modernize legislative provisions as regards the protection of personal information, was adopted on September 21, 2021, by the National Assembly of Québec. This new bill amends some 20 laws relating to the protection of personal information, including the Act respecting Access to documents held by public bodies and the Protection of personal information ("Access Act"), the Act respecting the protection of personal information in the private sector (“ARPIPS”) and the Act to establish a legal framework for information technology (“AELFIT”). While these changes will affect both public bodies and private businesses, this article focuses exclusively on the new requirements for public bodies covered by the Access Act.  We have prepared an amended version of the Access Act in order to reflect the exact changes brought about by Bill 64. 1. Strengthening consent mechanisms and increasing individual control over personal information By way of Bill 64, some important changes were made to the notion of consent when disclosing personal information to public bodies. From now on, any time an individual’s consent is required by the Access Act, public bodies must ensure that the concerned individual’s consent is given separately from any other disclosed information (s. 53.1). Furthermore, any consent to the collection of sensitive personal information (e.g., health or financial information that gives rise to a reasonable expectation of privacy) will have to be expressly obtained from the data subject (s. 59). The amended Access Act now also provides that minors under the age of 14 must have a parent or a guardian consent to the collection of their personal information. For minors over the age of 14, consent can be given either directly by the minor or by their parent or guardian (s. 53.1). The right to data portability is one of the new rights enforced by Bill 64. These added provisions to the Access Act allow data subjects to obtain data that a public body holds on them in a structured and commonly used technological format and to demand that this data be released to a third party (s. 84). Whenever a public body renders a decision based exclusively on automated processing of personal information, the affected individual must be informed of this process. If the decision produces legal effects or otherwise affects the individual concerned, upon request, the public body must also disclose to the individual (i) the personal information used in reaching the decision, (ii) the reasons and main factors leading to the decision, and (iii) the individual’s right to have this personal information rectified (s. 65.2).  Furthermore, public bodies that use technology to identify, locate or profile an individual must now inform the affected individual of the use of such technology and the means that are available to them in order to disable such functions (s. 65.0.1). 2. New personal data protection mechanisms Public bodies will now be required to conduct a privacy impact assessment whenever they seek to implement or update any information system that involves the collection, use, disclosure, retention or destruction of personal data (s. 63.5). This obligation will effectively compel public bodies to consider the privacy and personal information protection risks involved in a certain project at its outset. In fact, the Access Act now states that every public body must create an access to information committee, whose responsibilities will include offering their observations in such circumstances. 3. Promoting transparency and accountability for public bodies The changes brought about by Bill 64 also aim to increase the transparency of processes employed by public bodies in collecting and using personal data, as well as placing an emphasis on accountability. As such, public bodies will now have to publish on their websites the rules that govern their handling of personal data in clear and simple language (s. 63.3). These rules may take the form of a policy, directive or guide and must set out the various responsibilities of staff members with respect to personal information. Training and awareness programs for staff should also be listed. Any public body that collects personal information through technological means will likewise be required to publish a privacy policy on their website. The policy will have to be drafted in clear and simple language (s. 63.4). The government may eventually adopt regulations to specify the required content of such privacy policies. Moving forward, public bodies will also have to inform data subjects of any personal data transfer outside of the province of Quebec (s. 65). Any such transfer will also need to undergo a privacy impact assessment, which will include an analysis of the legal framework applicable in the State where the personal information will be transferred (s. 70.1). Furthermore, any transfer of personal data outside of Quebec must be subject to a written agreement that takes into account, in particular, the results of the privacy impact assessment and, if applicable, the agreed-upon terms to mitigate the risks identified in the assessment (s. 70.1). A public body that wishes to entrust a person or body outside of Quebec with the task of collecting, using, communicating or retaining personal information on its behalf will have to undertake a similar exercise (s. 70.1 (3)). 4. Managing confidentiality incidents Where a public body has reason to believe that a confidentiality incident (which is defined in Bill 64 as the access, use, disclosure or loss of personal information) has occurred, public bodies will be required to take reasonable steps to mitigate the injury caused to the affected individuals and to reduce the risk of further confidentiality incidents occurring in the future (s. 63.7). In addition, where the confidentiality incident poses a risk of serious harm to the affected individuals, these individuals and the Commission d’accès à l’information (“CAI”) must be notified (unless doing so would interfere with an investigation to prevent, detect or suppress crime or violations of law) (s. 63.7). Public bodies must now also keep a register of confidentiality incidents (s. 63.10), a copy of which must be sent to the CAI upon request. 5. Increased powers for the CAI Bill 64 also grants the CAI an arsenal of new powers aiming to ensure that public bodies, as well as private companies, comply with privacy laws. For example, in the event of a confidentiality incident, the CAI may order any public body to take appropriate action to protect the rights of affected individuals, after allowing the public body to make representations (s. 127.2). Furthermore, the CAI now has the power to impose substantial administrative monetary penalties, the value of which may reach up to $150,000 for public bodies (s. 159). In the event of repeat offences, fines will be doubled (s. 164.1). 6. Coming into force The amendments made by Bill 64 will come into force in several stages. Most of the new provisions of the Access Act [DM1] will come into force two years after the date of assent, which was granted on September 22, 2021. However, some specific provisions will take effect one year after that date, including: The requirements regarding actions to be taken in response to confidentiality incidents (s. 63.7) and the powers of the CAI upon disclosure by an organization of a confidentiality incident (s. 137.2); and The exception to disclosure without consent for research purposes (s. 67.2.1). Conclusion The clock is now ticking for public bodies to implement the necessary changes in order to comply with the new privacy requirements outlined in Bill 64, which received official assent on September 22, 2021. We invite you to consult our privacy specialists to help ensure proper compliance with the new requirements of the updated Access Act. The Lavery team would be more than pleased to answer any questions you may have regarding the upcoming changes and the potential impacts on your org

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  • Amendments to Privacy Laws: What Businesses Need to Know

    Bill 64, also known as the Act to modernize legislative provisions respecting the protection of personal information, was adopted on September 21, 2021, by the National Assembly of Québec. It amends some 20 laws relating to the protection of personal information, including the Act respecting access to documents held by public bodies ("Access Act"), the Act respecting the protection of personal information in the private sector ("Private Sector Act") and the Act respecting the legal framework for information technology. While the changes will affect both public bodies and private businesses, this publication will focus on providing an overview of the new requirements for private businesses covered by the Private Sector Act. We have prepared an amended version of the Private Sector Act in order to reflect the exact changes brought about by Bill 64. Essentially, the amended Private Sector Act aims to give individuals greater control over their personal information and promote the protection of personal information by making businesses more accountable and introducing new mechanisms to ensure compliance with Québec’s privacy rules. The following is a summary of the main amendments adopted by the legislator and the new requirements imposed on businesses in this area. It is important to note that, for the most part, the new privacy regime will come into effect in two years. 1. Increasing transparency and individual control over personal information The new Private Sector Act establishes the right of individuals to access information about themselves collected by businesses in a structured and commonly used technological format. Data subjects will now also be able to require a business to disclose such information to a third party, as long as the information was not “created or inferred” by the business (s. 27). This right is commonly referred to as the “right to data portability.” Businesses now have an obligation to destroy personal information once the purposes for which it was collected or used have been fulfilled. Alternatively, businesses may anonymize personal information in accordance with generally accepted best practices in order to use it for meaningful and legitimate purposes (s. 23). However, it is important that the identity of concerned individuals can never again be inferred from the retained information. This is a significant change for private businesses which, under the current law, can still retain personal information that has lapsed. In addition, Bill 64 provides individuals with a right to “de-indexation.” In other words, businesses will now have to de-index any hyperlink that leads to an individual’s personal information where dissemination of such personal information goes against the law or a court order (s. 28.1). Additionally, whenever a business uses personal information to render a decision based exclusively on an automated processing of such information, it must inform the concerned individual of the process at the latest when the decision is made (s. 12.1). The individual must likewise be made aware of their right to have the information rectified (s. 12.1). Bill 64 provides that the release and use of nominative lists by a private company for commercial or philanthropic prospecting purposes are now subject to the consent of concerned data subjects. Furthermore, in an effort to increase transparency, businesses will now be required to publish their rules of governance with respect to personal information in simple and clear terms on their website (s. 3.2). These rules may take the form of a policy, directive or guide and must, among other things, set out the various responsibilities of staff members with respect to personal information. In addition, businesses that collect personal information through technology will also be required to adopt and publish a privacy policy in plain language on their website when they collect personal information (s. 8.2). The amended Private Sector Act further provides that businesses that refuse access to information requests, in addition to giving reasons for their refusal and indicating the relevant sections of the Act, must now assist applicants in understanding why their request was denied when asked to (s. 34). 2. Promoting privacy and corporate accountability Bill 64 aims to make businesses more accountable for the protection of personal information, as exemplified by the new requirement for businesses to appoint a Chief Privacy Officer within their organization. By default, the role will fall upon the most senior person in the organization (s. 3.1). In addition, businesses will be required to conduct privacy impact assessments (“PIA”) for any information system acquisition, development or redesign project involving the collection, use, disclosure, retention or destruction of personal information (s. 3.3). This obligation forces businesses to consider the privacy and personal information protection risks involved in a project at its outset. The PIA must be proportionate to the sensitivity of the information involved, the purpose for which it is to be used, its quantity, distribution and medium (s. 3.3). Businesses will likewise be required to conduct a PIA when they intend to disclose personal information outside Québec. In these cases, the purpose of the PIA will be to determine whether the information will be adequately protected in accordance with generally accepted privacy principles (s. 17). The extra-provincial release of personal information must also be subject to a written agreement that takes into account, among other things, the results of the PIA and, if applicable, the terms and conditions agreed to in order to mitigate identified risks (s. 17(2)). The disclosure of personal information by businesses for study, research or statistical purposes is also subject to a PIA (s. 21). The law is substantially modified in this regard, in that a third party wishing to use personal information for such purposes must submit a written request to the Commission d'accès à l'information (“CAI”), attach a detailed description of their research activities and disclose a list of all persons and organizations to which it has made similar requests (s. 21.01.1 and 21.01.02). Businesses may also disclose personal information to a third party, without the consent of the individual, in the course of performing a service or for the purposes of a business contract. The mandate must be set out in a written contract, which must include the privacy safeguards to be followed by the agent or service provider (s. 18.3). The release of personal information without the consent of concerned individuals as part of a commercial transaction between private companies is subject to certain specific requirements (s. 18.4). The amended Private Sector Act now defines a business transaction as “the sale or lease of all or part of an enterprise or its assets, a change in its legal structure by merger or otherwise, the obtaining of a loan or other form of financing by it, or the taking of a security interest to secure an obligation of the enterprise” (s. 18.4). Bill 64 enshrines the concept of “privacy by default,” which means that businesses that collect personal information by offering a technological product or service to the public with various privacy settings must ensure that these settings provide the highest level of privacy by default, without any intervention on behalf of their users (s. 9.1). This does not apply to cookies. Where a business has reason to believe that a privacy incident has occurred, it must take reasonable steps to reduce the risk of harm and the reoccurrence of similar incidents (s. 3.5). A privacy incident is defined as “the access, use, disclosure or loss of personal information” (s. 3.6). In addition, businesses are required to notify concerned individuals and the CAI for each incident that presents a serious risk of harm, which is assessed in light of the sensitivity of the concerned information, the apprehended consequences of its use and the likelihood that it will be used for a harmful purpose (s. 3.7). Companies will furthermore be required to keep a confidentiality incident log that must be made available to the CAI upon request (s. 3.8). 3. Strengthening the consent regime Bill 64 modifies the Private Sector Act to ensure that any consent provided for in the Act is clear, free and informed and given for specific purposes. This means that consent must be requested for each of the purposes of the collection, in simple and clear terms and in a clearly distinct manner, to avoid consent being obtained through complex terms of use that are difficult for individuals to understand (art. 14). The amended Private Sector Act now provides that minors under the age of 14 must have a parent or a guardian consent to the collection of their personal information. For minors over the age of 14, consent can be given either directly by the minor or by their parent or guardian (s. 14). Within an organization, consent to the disclosure of sensitive personal information (e.g., health or other intimate information) must be expressly given by individuals (s. 12). 4. Ensuring better compliance The Private Sector Act has likewise been amended by adding new mechanisms to ensure that businesses subject to the Private Sector Act comply with its requirements. Firstly, the CAI is given the power to impose hefty dissuasive administrative monetary penalties on offenders, which can be as high as $10,000,000 or 2% of the company's worldwide turnover (s. 90.12). In the event of a repeat offence, the fine will be doubled (s. 92.1). In addition, when a confidentiality incident occurs within a company, the CAI may order it to take measures to protect the rights of affected individuals, after allowing the company to make observations (s. 81.3). Secondly, new criminal offences are added to the Private Sector Act, which may also lead to the imposition of severe fines. For offending companies, such fines can reach up to $25,000,000 or 4% of their worldwide turnover (s. 91). Finally, Bill 64 creates a new private right of action. Essentially, it provides that when an unlawful infringement of a right conferred by the Private Sector Act or by articles 35 to 40 of the Civil Code of Québec results in prejudice and the infringement is intentional or the result of gross negligence, the courts may award punitive damages of at least $1,000 (s. 93.1). 5. Coming into force The amendments made by Bill 64 will come into force in several stages. Most of the new provisions of the Private Sector Act will come into force two years after the date of assent, which was granted on September 22, 2021. However, some specific provisions will take effect one year after that date, including: The requirement for businesses to designate a Chief Privacy Officer (s. 3.1); The obligation to report privacy incidents (s. 3.5 to 3.8); The exception for disclosure of personal information in the course of a commercial transaction (s. 18.4); and The exception to disclosure of personal information for study or research purposes (s. 21 to 21.0.2). Finally, the provision enshrining the right to portability of personal information (s. 27) will come into force three years after the date of official assent. The Lavery team would be more than pleased to answer any questions you may have regarding the upcoming changes and the potential impact of Bill 64 on your business. The information and comments contained in this document do not constitute legal advice. They are intended solely for the use of the reader, who assumes full responsibility for its content, for their own purposes.

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  • Limitation of insurer’s duty to defend: The Draft Regulation specifying the categories of contracts covered is published

    On September 8, 2021, Mr. Éric Girard, Minister of Finance, presented his Draft Regulation specifying the classes of liability insurance contracts that may derogate from public policy rules previously applicable to liability insurance (the “Draft Regulation”), namely those set out in articles 2500 and 2503 of the Civil Code of Québec (“CCQ”) concerning the insurer’s duty to defend and the exclusive application of insurance coverage to injured third parties. Background Since May 27, 2021, article 2503 CCQ reads as follows: The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts. When Bill 82 was introduced for adoption, the Minister of Finance seemed to suggest that the categories that would benefit would be public companies and liability insurance for directors and officers. Although small and medium-sized enterprises are not covered by the Draft Regulation, it does provide for several categories of insureds that may benefit from exemptions. Draft Regulation – covered categories The Draft Regulation appears to cover “any liability insurance contract,” but sets out conditions that must be met by an insured in order to benefit from exemptions. Finally, many businesses and their directors and officers will be entitled to subscribe to policies that do not comply with articles 2500 and 2503 CCQ. Here is a summary of exemptions:  Section 1 Category of insured Drug manufacturers under the Act respecting prescription drug insurance; Certain corporations incorporated under a private bill;1 and Directors, officers and trustees of such businesses, except for their activities as members of a pension committee. Exemptions These insureds may subscribe to policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ.2 Section 2 Category of insured Companies not referred to in section 1, but meeting one of the following conditions “where the total coverage under all the civil liability insurance contracts subscribed by that insured is at least $5,000,000”: Large businesses for the purpose of the Act respecting the Québec sales tax; that is, businesses that have total taxable sales in a given fiscal year in excess of $10 million; A reporting issuer or subsidiary of such reporting issuer within the meaning of the Securities Act; A foreign business corporation within the meaning of the Taxation Act (chapter I-3) or the Income Tax Act; that is, a company that is not resident in Canada; and A corporation that pursues an activity outside Canada and derives income from that activity. Directors, officers and trustees of such businesses, except for their activities as members of a pension committee. Exemptions These insureds may subscribe to policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ. Section 3 Category of insured Businesses not referred to in sections 1 and 2 that conduct activities to provide services provided for in the Act respecting health services and social services as: An intermediate resource not referred to in the Act respecting the representation of family-type resources and certain intermediate resources and the negotiation process for their group agreements (chapter R-24.0.2) and who is a support for elderly autonomy-type resource; A private seniors’ residence; or A private health and social services institution operating a residential and long-term care centre or rehabilitation centre. Directors, officers and trustees of such businesses, except for their activities as members of a pension committee. Exemptions These insureds may subscribe to policies that depart from the rules set out in article 2500 CCQ and those set out in the second paragraph of article 2503 CCQ only. Section 4 Category of insured Businesses that are not covered by section 2, for example because they do not have total coverage of at least $5,000,000, and that have operations outside of Canada and earn income from them. However, exemptions are possible only for coverage of these foreign activities. Policies covering the Canadian operations of businesses must comply with the rules set out in the public interest.   Exemptions These insureds may purchase policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ. Section 6 Category of insured Businesses not referred to in any of sections 1 to 3 having primary liability insurance contracts in accordance with the provisions of articles 2500 and 2503 CCQ, covering legal costs and expenses resulting from actions against them, including those of the defence, and interest on the proceeds of the insurance. Exemptions These insureds may subscribe to complementary policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ. The Draft Regulation also stipulates that where an insurance policy does not provide for an obligation for an insurer to assume an insured’s defence (first paragraph of article 2503 CCQ), the insured retains the right to select counsel, but must keep the insurer informed of the progress of the proceedings and allow it to participate in the defence. Finally, the government, in article 8 of the Draft Regulation, provides that the proceeds of the insurance that are not applied exclusively to the payment of injured third parties may not exceed 50% of the proceeds of the insurance, unless the insured is found not to be liable or unless the payments to injured third parties do not reach such 50%. However, where a minimum amount of liability insurance coverage is required by law, that amount must be applied in full to the payment of injured third parties without regard to the exceptions discussed above. What to expect While some will welcome the government’s openness in allowing policyholders and insurers to relax certain obligations that may have contributed to a tightening insurance market in Quebec, others will fear the consequences that these changes may have, in particular on the availability of “non-exempt” insurance policies for insureds covered by the Draft Regulation.  In any case, this is a significant change that will generate much discussion between risk managers, market intermediaries and underwriters.  Also, some may be interested in obtaining additional information or commenting on the Draft Regulation. Information requests may be directed to the Direction générale du droit corporatif et des politiques relatives au secteur financier, Ministère des Finances, and comments may be made in writing to the attention of the Minister of Finance before October 23, 2021. Do not hesitate to contact a member of Lavery’s insurance team in connection with the above. Act constituting Capital régional et coopératif Desjardins (C-6.1), Act to establish Fondaction, le Fonds de développement de la Confédération des Syndicats Nationaux pour la Coopération et l'emploi (F-3.1.2) and Act to establish the Fonds de solidarité des travailleurs du Québec (F-3.2.1). As reproduced above, the first paragraph of article 2500 CCQ concerns the insurer’s obligation to assume the defence of the insured with respect to covered claims, and the second paragraph specifies that the insurer assumes the legal costs, interest and expenses, over and above the proceeds of the insurance.

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  • Winkler v. Hendley: The Federal Court applies a subjective standard to the notion of “history”

    “Historical facts”1 are not protected by copyright. Referring to the Storming of the Bastille or the Battle of the Plains of Abraham will not get an author sued in Federal Court, but must these events have really happened to be considered “historical facts”? The Federal Court recently ruled on this issue in Winkler v. Hendley.2 In its decision, the Federal Court stated that if an author presents their literary work as a history book,3 as long as this assertion is plausible, the events that they describe must be treated as “historical facts” even if they are not. Therefore, the author cannot claim originality when an assessment is made of whether there has been a substantial taking of their work. Originality remains only in the selection and arrangement of the facts. Background This case deals with the following three books written about the Donnelly family, whose crimes made headlines in late 19th century Ontario: The Black Donnellys (hereinafter referred to as The Black Donnellys), a history book published in 1954 by Thomas P. Kelley (hereinafter referred to as Kelley); Vengeance of the Black Donnellys (hereinafter referred to as Vengeance), a work of fiction published in 1962 by Kelley (the same author); and  The Black Donnellys: The Outrageous Tale of Canada’s Deadliest Feud (hereinafter referred to as The Outrageous Tale), a history book published in 2004 by Nate Hendley (hereinafter referred to as Hendley). John Winkler (hereinafter referred to as Winkler), Kelley’s heir and copyright holder, accused Hendley of copying, in The Outrageous Tale, a substantial part of both The Black Donnellys and Vengeance. He argued that both works are fiction, as many of the events described in them are objectively false. Winkler claimed that Hendley repeated the same mistakes in his work. He also asserted that Hendley copied the structure, tone, theme, atmosphere and dialogue in his telling of events. For his part, Hendley admitted that he referred to both of Kelley’s literary works when writing The Outrageous Tale. However, he contended that The Black Donnellys should be considered a history book, as Kelley originally described and presented it as such. Given that “historical facts” are not protected by the Copyright Act4 (the “Act”), Hendley denied having copied Kelley’s work and claimed that The Outrageous Tale is an original literary work. In support of their motions for summary judgment, both parties filed affidavits. In addition, Winkler filed two expert reports. The first compared excerpts from The Black Donnellys and Vengeance to excerpts from The Outrageous Tale.The second was an analysis of the factual nature of The Black Donnellys. The Federal Court’s findings were as follows: Facts that are credibly presented by the author as historically factual must be excluded from copyright protection. Therefore, the author cannot claim originality when an assessment is made of whether there has been a substantial taking of their work. Hendley did not infringe Winkler’s copyright on The Black Donnellys by referring to “historical facts” without copying the structure, tone, theme, atmosphere or dialogue used in presenting them in The Outrageous Tale. Hendley did not infringe Winkler’s copyright on Vengeance, although he did copy various aspects of a fictional character in The Outrageous Tale in a non-literal way.This copying does not concern a substantial part of the literary work Vengeance whenviewed as a whole. Facts that are credibly presented by the author as historically factual must be considered as such The Federal Court ruled that The Black Donnellys was a history book, and, for all intents and purposes, considered it to be an account of “historical facts.” First, the Court relied on Kelly’s statement that he presented The Black Donnellys as “The True Story of Canada’s Most Barbaric Feud” when it was published.5 Second, the Court referred to the introduction in the original 1954 edition in which Kelly stated that the information that he used was gathered from old newspapers, police and court records, trips to the area, and other “unimpeachable sources.”6 The Court determined that it did not have to consider the conclusions of the expert report that the work was “two-thirds fiction.” The law is not a tool to ensure the accuracy of various historical accounts, and its role is not to decide between them based on an objective standard.7 Thus, the notion of “historical facts” must necessarily include those that the author plausibly presents as such.8 The Court has therefore introduced a subjective standard in the assessment of the factual nature of history books. The Federal Court found that Hendley was justified in relying on the version of events presented in The Black Donnellys. The purpose of the law is to maintain a balance between, on the one hand, protecting the talent and judgment of authors and, on the other hand, allowing ideas and material to remain in the public domain for all to build upon. To allow Kelley to present something as a “historical fact” and then allow Winkler to sue another author on the grounds that such “historical fact” is false would unduly impede the flow of ideas and disturb this fair balance.9In short, Winkler cannot seek to refute the historical nature of Kelley’s book and claim copyright over the fabricated facts it contains.10 Given that they are considered “historical facts,” Winkler cannot claim originality as part of the assessment of whether there has been a copying of a substantial part of his work. Hendley did not copy a substantial part of Kelley’s work The Federal Court reiterated that the law protects original literary, dramatic, musical and artistic work. Thus, copyright protection exists whether a literary work is a history book or a piece of fiction. However, in the case of a history book, the protection does not extend to “facts of history” or their chronological sequence.11 The originality of Kelley’s work lies solely in the means of expression and thus in the selection and arrangement of facts. Consequently, the Court analyzed the copying of structure, tone, theme, atmosphere and dialogue in the telling of “historical facts,” not the facts themselves. The Supreme Court advocated a holistic and comprehensive approach to determining whether a substantial part of a plaintiff’s work was copied by a defendant.12 However, given the format of the expert report, the Federal Court found it necessary to analyze every single excerpt and then assess whether their cumulative effect amounted to a substantial copying of each of Kelley’s works.13 A) The Outrageous Tale does not amount to a reproduction of a substantial part of The Black Donnellys The Federal Court concluded that the expert report did not demonstrate any significant similarities in the comparison of some twenty excerpts from The Black Donnellys with allegedly analogous excerpts from The Outrageous Tale. Winkler alleged that the mere copying of fictional events in The Outrageous Tale constituted an unauthorized reproduction. The Court rejected this argument because to consider The Black Donnellys a history book implies that the “historical facts” it contains are not part of the originality of the work.14 Consequently, the Federal Court excluded the 20 or so excerpts because they merely mentioned the same “historical facts.”15  As for the excerpts that show some significant similarities, the Federal Court criticized the expert’s method of analyzing isolated words out of context to demonstrate greater similarities between the two texts. Instead, the Court chose to rely on more complete passages taken directly from the works to assess similarities in the selection and arrangement of facts.  The reproduction of fictional events is more easily detectable. Indeed, describing the same “historical facts” means that some significant similarities are inevitable. The Federal Court said the following regarding the description of a street battle:   In the foregoing passage, the linguistic similarity—references to Flanagan, the gun, the road, the 17 men—are all important parts of the factual aspect of the event. There may be a vast number of ways in which to recount facts. However, it would be difficult if not impossible to describe an event in which Flanagan, carrying a shotgun, went down the road with 17 men without using those terms. Here, the lack of copyright in “facts,” whether actually factual or simply asserted to be factual, becomes particularly important. If these descriptions of a fight were found in two works of fiction, there would be a stronger case that copying these elements contributed to a substantial taking. In a work of nonfiction, these factual elements are not part of the work’s originality.16 The Federal Court rejected the allegations of copying in the other passages based on the same argument. It concluded that the analysis carried out on the structure, tone, theme, atmosphere and dialogue of the work does not demonstrate that Hendley copied in The Outrageous Tale any substantial part of The Black Donnellys.  The decision is surprising in that the protection given to works under copyright and the assessment of whether there has been a substantial taking of the work should be objective: Was a substantial part of the first work copied in the second work in terms of quality? A fact is either historical or it is not. That an author may reasonably believe that such fact is historical should not affect the originality of the first work, nor should it affect the issue of “substantial taking” in the second work. While one understands that the judge was trying to achieve a fair outcome, one might question whether the legal means adopted were adequat For the purposes of this text, “historical facts” refer to events of a factual nature. 2021 FC 498 In this text, the notion of “history book” refers to a work of “history,” understood as the branch of knowledge that studies the past and seeks to reconstruct “historical facts.”  R.S.C., 1985, c. C-42 Winkler v. Hendley, supra note 2, para. 72 Id., para. 73 Id., para. 96 Id., para. 92 Id., para. 92 Id., para. 92 Id., para.  56 Cinar Corporation v. Robinson, 2013 SCC 73; Copyright Act, supra note 6, s. 3  Id., para. 113 Winkler v. Hendley, supra note 2, para. 58 Id. Id., para. 122

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  • Transportation infrastructure: A pillar of economic recovery

    Like many other governments, the Government of Quebec decided to invest in infrastructure to help mitigate the impact of the COVID-19 pandemic and stimulate Quebec’s economy. A significant number of investments will be made in the transportation sector, and the government wants to accelerate the realisation of several previously announced transportation infrastructure projects in the greater Montréal area. This focus on construction as a way of speeding up the recovery from the crisis arises in a context where construction contractors’ and professionals’ interest in public contracts has fallen sharply. According to a recent study conducted by three Raymond Chabot Grant Thornton professionals1, mandated by six major players in the Quebec construction industry, this lack of interest in public contracts can be explained by a number of factors: poorly structured payment terms, unappealing contract clauses, issues related to the tender process, cumbersome contract management, and, as far as construction professionals are concerned, hourly rate ceilings set out in existing government regulations. The Quebec government is acutely aware of this decline in interest for public contracts and tabled an action plan for the construction industry in late March 2021 to address it. Four categories of measures are included in this action plan. First, the government has reiterated its desire to accelerate the realisation of a number of projects already included in the Québec Infrastructure Plan and to implement this plan more effectively. The Act respecting the acceleration of certain infrastructure projects introduced in June 2020 and adopted in December 2020, even before the action plan was tabled was a concrete example of the government’s intent. The other two categories of measures in the action plan aim to implement solutions to reduce the current labour shortages and to increase productivity in the construction industry. The Act respecting the acceleration of certain infrastructure projects covers approximately 180 projects, most of which are in the transportation, education and health and social services sectors. It focuses, in particular, on a number of transportation infrastructure projects in the greater Montréal area, such as the projects that will  link the east, northeast and southwest of Montréal to the city’s downtown area by way of an electric public transit system (including the REM de l’Est and the first phase of the pink metro line), to improve access to the Port of Montréal, to rebuild the Île aux Tourtes Bridge, to build the Longueuil tramway, to extend the REM to Laval and to implement an express bus service in Laval. The Act focuses onfour main areas. First, if expropriation required to carry out a particular project, its procedure has been simplified. Second, in connection with compliance with environmental legislation provisions, the requirement of a certificate of authorization will waived for certain projects; for others, the BAPE project assessment procedure has been simplified. An expedited process to authorize the use of governmental property is provided for projects where such use is necessary. Lastly, city or municipal authorizations have been simplified for projects that require such an authorization. Extraordinary measures were required to deal with the unique situation caused by the COVID-19 pandemic. We applaud the Quebec government’s efforts to address the impacts of this pandemic. The chosen approach, however, is not without risks. Some critics have warned the government about the risks of possible collusion between tenderers, as collusion is thought to be more likely to occur in a context where projects are being accelerated. To mitigate this risk, the Actconfers on the Autorité des marchés publics more oversight functions, and in clear cases of collusion, the power to suspend the performance of contracts. Concerns have also been raised as to the quality of the constructed works, thereby underscoring the importance of maintaining and not ditching adequate public consultations. Finally, the Act addresses the issue of delays in payments by the government that was not only raised in the Raymond Chabot Grant Thornton report, but also during public consultations preceding the adoption of the Act. The Act extends the existing pilot project to facilitate payment to enterprises applicable to all projects covered by the Act. Hopefully, the Act respecting the acceleration of certain infrastructure projects, paired with the other measures announced in the government’s action plan for the construction industry, will make infrastructure a key component of Quebec’s economic recovery, as we finally start to see the end of the COVID-19 pandemic. A short version of this publication was published as an open letter in La Presse. Click here to read it. Plante, Nicolas, Jean-Philippe Brosseau and Marie-Pier Bernard, Consultation visant à évaluer le niveau d'intérêt des entrepreneurs et des professionnels envers les marchés publics [French Only], Montréal, Raymond Chabot Grant Thornton, April 2021, 85 p. (see in particular pages 17 to 34).

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  • Bill 78 and the notion of ultimate beneficiary

    Bill 78 was introduced in December 2020 by Minister Jean Boulet and given assent on June 8, 2021. It amends the Act respecting the legal publicity of enterprises (the “Act”) and its regulation, the Regulation respecting the application of the Act respecting the legal publicity of enterprises (the “Regulation”). This legislative amendment is part of a process to prevent and fight tax evasion, money laundering and corruption, and will now require registrants to disclose more of their information. Disclosure of information relating to ultimate beneficiaries The amendments set out new requirements for corporate transparency and now require registrants to disclose information about the natural persons who are their ultimate beneficiaries, including their names, domiciles and dates of birth, in order to prevent the use of nominees for tax evasion, among other things. It should be noted that the obligation to disclose the ultimate beneficiary’s domicile can be circumvented by disclosing a professional address instead. New section 35.2 of the Bill provides that “a registrant who must declare the domicile of a natural person under a provision of this Bill may also declare a professional address for the natural person.” If such an address is declared, the information relating to the domicile of that person may not be consulted. Under the Bill, a “registrant” means a person or group of persons registered voluntarily or any person, trust or partnership required to be registered. The Bill specifies that “ultimate beneficiary” means a natural person who meets any of the following conditions in respect of a registrant1: Is the holder, even indirectly, or beneficiary of a number of shares or units of the registrant, conferring on the person the power to exercise 25% or more of the voting rights attached to the shares or units; Is the holder, even indirectly, or beneficiary of a number of shares or units the value of which corresponds to 25% or more of the fair market value of all the shares or units issued by the registrant; Exercises control in fact of the registrant; or Is a general partner of a limited partnership. The Bill also provides that where natural persons holding shares or units of the registrant have agreed to jointly exercise the voting rights attached to the shares or units and the agreement confers on them, together, the power to exercise 25% or more of those voting rights, each of those natural persons is considered to be an ultimate beneficiary of the registrant. Lastly, it provides that a natural person operating a sole proprietorship is presumed to be the only ultimate beneficiary of the sole proprietorship, unless he or she declares otherwise. Notwithstanding this definition of ultimate beneficiary, it is important to note that the government may make regulations determining other conditions according to which a natural person is considered to be an ultimate beneficiary. Search by name of an ultimate beneficiary The Bill provides that a natural person’s name may be part of a compilation of information or serve as the basis for a compilation, and may be used as a search term for the purposes of a search in the enterprise register. This will allow the public to identify all corporations with which a natural person is associated, where such a person has been named the ultimate beneficiary of a registrant. However, information that may not be consulted may not be part of such a compilation or serve as the basis for one. It should be noted that the Bill also allows the government to make regulations determining the information contained in the enterprise register that may not be consulted. Conclusion This legislative amendment, particularly with the addition of the notion of ultimate beneficiary, will considerably increase disclosure requirements for corporations that are already required to communicate certain types of information to the Registraire des entreprises du Québec. We can only hope that at the end of this legislative process, the government will implement a clear and effective information disclosure system, making it easier for registrants and their advisors to manage the information that they disclose. The new section 0.3 will now be part of the new Chapter 0.1 “Purposes and definitions.”

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  • Further Streamlining of Canadian Patent Examination on the Horizon

    Canadian Patent Practice has undergone several changes in recent years, in many cases to fulfill the requirements of various international treaties/agreements, including those of the Patent Law Treaty (PLT) and the Comprehensive Economic and Trade Agreement (CETA). On July 3, 2021, the Canadian government published proposed amendments to the Patent Rules, primarily to further streamline Canadian patent examination to pave the way for a future patent term adjustment (PTA) system in Canada as per the Canada-United States-Mexico Agreement (CUSMA), as well as to bring Canadian practice in line with upcoming Patent Cooperation Treaty (PCT) sequence listing requirements. The proposed amendments have been published for a 30-day consultation period and may be subsequently modified. Therefore, it is unknown which of the proposed changes will be retained and in what form, and when the final version of the amended Rules will come into force. However, the proposals provide a preview of the types of changes being considered by the Canadian Intellectual Property Office, which notably include the following: Excess claim fees Like many jurisdictions, Canada is considering the introduction of government fees for excess claims. The proposal is a fee on the order of $100 CAD for each claim beyond 20 claims, which will be payable when requesting examination, and will be re-assessed upon allowance to determine if further claim fees are due when paying the final fee based on changes in the number of claims during examination. It will thus be prudent to voluntarily amend the claims prior to or when requesting examination to control such fees. Request for Continued Examination (RCE) The objective of the new system is to reduce the pendency of patent applications, with a goal of putting an application in condition for allowance with no more than three Examiner’s reports. Continuing examination beyond three reports would require the filing of an RCE, which would entitle the Applicant to up to two further Examiner’s reports. The filing of an RCE is also proposed for returning an allowed case to examination, which would replace the current (and relatively recent) mechanism to withdraw an application from allowance. The proposed RCE fee is on the order of $816 CAD. Conditional Notice of Allowance (CNOA) Rather than issuing further Examiner’s reports relating to any outstanding formalities, the Canadian Intellectual Property Office will have a new tool to issue a CNOA, indicating that the application is in condition for allowance as long as certain outstanding minor defects are corrected. This provides a more efficient path for Applicants in such situations to both correct the defects and pay the final fee, following which the case would proceed to grant. New PCT Sequence Listing Standard In view of the upcoming introduction (on January 1, 2022) of the new PCT “ST.26” sequence listing standard, Canada plans to bring its sequence listing requirements in line with those of the PCT, which will similarly be adopted by patent offices around the world. Housekeeping matters Otherwise, the proposed amendments aim to provide greater flexibility for Applicants in certain areas such as the correction of various types of errors and fee payments, notably in view of the practical application of recent changes to Canadian patent practice gleaned since they came into force in late 2019. Stay Tuned! As noted above, the final form and timing of the upcoming changes are unknown. Please stay tuned for upcoming news in due course, and do not hesitate to contact a member of our patent team for guidance through the ultimate transition.

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  • Insurer’s Duty to Defend: The Court Rules in a Case of Contractual Breach

    The question of insurers’ duty to defend is back in the spotlight. On March 18, 2021, the Superior Court once again considered the issue in its application of the law to facts relevant to the dispute.1 Facts In April 2016, Cégerco Inc. (“Cégerco”), a general contractor, retained the services of Construction Placo Inc. (“Placo”) for the supply and installation of exterior cladding made of metal wall panels, which were manufactured by Kingspan Insulated Panels Ltd. (“Kingspan”). On May 24, 2017, Cégerco resiliated its contract with Placo on the grounds that Placo had caused numerous delays to the work schedule. Placo therefore instituted proceedings against Kingspan to recover sums advanced to the company, and against Cégerco for the damages resulting from the resiliation of the contract. Kingspan and Cégerco filed cross-applications, alleging non-performance by Placo. Faced with these cross-applications, Placo turned to its insurer for it to take up its defence.   However, the insurer adopted the position that it had no obligation to defend Placo or accept its insurance claim. Placo then applied to the Superior Court by way of an Wellington type application to have the insurer take up its defence in the dispute opposing it to Cégerco and Kingspan. Reasons After briefly reviewing the principles of Wellington type applications and the Supreme Court’s teachings in the landmark Progressive Homes2 decision, the Court concluded that the damages claimed in Kingspan’s cross-application did not arise from material damage or a loss. It did not dwell on this question any further, judging that insurance coverage did not apply. The Court then addressed Cégerco’s cross-application. Here again, it held that the damages claimed were not the result of material damage within the meaning of the insurance policy. Thus, after having analyzed Cégerco’s breakdown of damages claimed, it concluded that the sums represented monetary damage resulting from the fact that Placo had failed to fulfill its obligation to deliver compliant panels.  The Court further noted that [translation] “monetary losses related to defective or non-compliant products” did not fall within the scope of the commercial liability insurance’s coverage. The Court drew a distinction between the facts of this case and those of Progressive Homes cited above,3pointing out that the issue here was simply the non-performance of a contract. The Court held that the panels could not be the cause of the material damage that Cégerco suffered, as they had not been installed on the building, and that the material damage [translation] “rather resulted from a normal, if not foreseeable, incident that could have occurred in the normal course of any business.” Thus, according to the Court, although Cégerco was bound to take steps to remedy the delay in the delivery of the panels, and that such steps may have resulted in damage to the structure, Placo’s breach of contract did not result in a loss that would make insurance coverage applicable. For these reasons, the Court dismissed the plaintiff’s Wellington type application and that of the cross-applicant Placo. Conclusion What this decision means is that although an insurer’s duty to defend arises as soon as there is a possibility that material damage claimed falls within the scope of an insurance policy’s coverage, monetary damage suffered purely as a result of a breach of contract is not a sufficient legal basis for triggering an insurer’s duty to defend. Construction Placo inc. c. Kingspan Insulated Panels Ltd., 2021 QCCS 1230 Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33. [2010] 2 SCR 245. Id.

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  • Steps to a successful venture capital financing round

    An entrepreneur who invests time and energy raising the funds necessary to launch a startup, usually from family and friends (love money), will necessarily want their startup to grow exponentially. Achieving exponential growth requires always more capital, and so the entrepreneur will need to find additional sources of financing. One of these could be venture capital financing. For an entrepreneur, going this route may seem daunting, but if well prepared, it can also be a very wise choice. Here are the steps to take in order to succeed in a round of venture capital financing and get the most leverage out of this type of financing. What is venture capital? Venture capital is a non-guaranteed equity investment, made with an investment horizon of typically five to ten years, with a view to realizing an exponential gain and participating in the strategic decisions of the startup in which the capital is invested. Investors who provide venture capital do not undertake to play a passive role—quite the opposite! Entrepreneurs who opt for such financing must be prepared to exchange ideas with investors and justify certain decisions they intend to make as managers. On the flip side, they’ll also benefit from their investors’ advice and networks. Application for financial assistance Once you’ve grasped how venture capital works and resolved to resort to it, you’re ready to launch a round of financing with one or more potential investors. Our advice: don’t wait until you really need the funds to take this step. As soon as your startup takes off, get into networking mode! Meet with dozens of investors and present your vision, team and business plan. Investors will be more interested in your vision, talent and the growth potential of your business than in its current results, and they will probably be as much interested in these aspects as they are in your business plan. And if things don’t immediately go your way, don’t give up! Often all it takes is for one investor to bet on you for others to follow. Letter of intent If the ?nancing round is well received, investors will con?rm their interest by submitting a letter of intent. A letter of intent states an investor’s intention to invest under certain conditions, but it doesn’t constitute a binding undertaking. It will set out the terms and conditions of the proposed investment (form of investment, subscription price, etc.) which, while not binding on the investor, are nonetheless binding on the company once it has accepted them. Once an entrepreneur has accepted a letter of intent, it may be very dif?cult to get the investor to waive the rights granted in their favor by the letter. Due diligence Once the letter of intent is agreed to, the investor will conduct a due diligence review on the company. A due diligence investigation allows an investor to better assess the legal, ?nancial and other risks associated with a startup and validate certain statements or assumptions stated in the company’s business plan. In a due diligence review, the following will usually be scrutinized, among others : Accounting and corporate records Material contracts Intellectual property (patents, trademarks, etc.) Disputes involving the company Environmental aspects Negotiation of final agreements Generally speaking, in venture capital ?nancing, two main acts key documents will con?rm the terms of the agreement between the company and the investor: a subscription agreement and a shareholders’ agreement. A subscription agreement is a document similar to a share purchase agreement, except that it isn’t concluded with a shareholder but with the company itself. It speci?es the form of the subscription (common shares, preferred shares, subscription rights, etc.) and contains numerous representations and warranties on the part of the company for the bene?t of the investor, as well as an undertaking to indemnify the investor should one of the representations or warranties prove to be false and cause a loss for the investor to suffer prejudice. A shareholders’ agreement is a document signed by all the shareholders of a company and the company itself. Typically, such an agreement determines who will sit on the board of directors and how it will operate. It contains a number of clauses that govern the issuance and transfer of the company’s shares and grants the investor a right of oversigh —and often even veto power—over certain decisions. Closing Once the ?nal agreements are negotiated, closing can take place. At the closing, the parties will sign all relevant documents agreements and certi?cates, including the subscription agreement and shareholders’ agreement, and deliver the documents required to meet all conditions. The parties will also sign the subscription agreement and shareholders’ agreement. The company’s lawyers will provide a legal notice opinion to con?rm to the investors that the securities subscribed to are validly issued, that the company has the legal capacity to enter into all the agreements prepared by the investor’s legal counsel, that the agreements have been duly approved, and that the signatory has the authority to sign the agreements and bind the company. A forewarned entrepreneur is forearmed! You now understand that for an entrepreneur, the secret of a successful ?nancing round lies in being properly prepared, being realistic about investors’ expectations and requirements, and having a large dose of con?dence in the business. If you’ve started to solicit ?nancing from potential investors or are planning to do so soon, there’s still time to get legal advice to avoid unpleasant surprises at a critical moment.

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  • Entrepreneurs and Intellectual Property: Avoid These Thirteen Mistakes to Protect Yourself (Part 2 of 3)

    In the second entry of this three-part article series, we share with you the next set of intellectual property (IP)–related mistakes (mistakes #6 to #9) that we regularly see with startups. We hope you will find it useful for your business. Please be sure to read our first entry in this series, where we go over mistakes #1 to #5. Happy reading! Part 2 of 3: Mistakes concerning trademarks, industrial designs, copyrights, and trade secrets Mistake #6: Launching your product on the market without having verified the availability of your trademark Choosing a trademark can be a long and expensive process. People sometimes focus on the attractive qualities of a trademark, forgetting that its primary function is to distinguish a company’s products or services from those of others. To properly fulfil this function, the trademark must not be confusing with other trademarks, trade names, and domain names. In order to avoid conflicts with existing rights, an availability search should be conducted prior to a trademark’s adoption and the launch of a new product, service, or business. Furthermore, it may not be possible to register a trademark if it doesn’t have certain necessary intrinsic qualities, and a trademark may not be usable if it conflicts with the rights of third parties. A search will make it possible to determine where your desired trademark stands in terms of these two aspects; if necessary, a different mark may need to be adopted. Conducting a pre-adoption trademark search may prevent you from having to change trademarks after sales have begun or after the marketing development of your products or services is underway. Redesigning your advertising campaign; modifying your documentation, website, and packaging; and developing a new marketing strategy to transfer and retain the goodwill surrounding your initial trademark will be an expensive task, taking up time that could have been invested elsewhere. Such a process also carries the risk of tarnishing your reputation or losing your goodwill. Mistake #7: Not having your software or graphic designer sign a copyright assignment Many people think that a copyright is intended to protect a work with exceptional artistic qualities. However, such thinking is erroneous. As long as a text, drawing, graphic design or computer program is a creation that required a certain amount of effort and is not a copy of an existing work, it constitutes a “work” and is automatically protected by copyright. As a general rule, in Canada, the author is the first copyright owner; thus, just because the work was created in exchange for remuneration doesn’t mean that its copyright was transferred. For a startup business owner to ensure that they own a copyright, they should ask the artist or author to sign a written transfer of copyrights, thereby ensuring that the business can publish and use the work as it sees fit. It is also important to have the author of a work sign a waiver of moral rights or to outline the terms and conditions that will apply to the work’s authorship and integrity. If these steps are omitted, you’ll be limited in the use of such works. They won’t be part of your assets and will therefore not increase the value of your portfolio. In addition, you’ll be dependent on the consent of the actual holders of the rights to commence actions for infringement, should that ever be necessary. Mistake #8: Not having your employees, officers, and contractors sign confidentiality agreements (before entering into a business relationship) The sooner the better! Your company should see to having an agreement intended to preserve the confidentiality of its information signed by all those whom it mandates to perform work that is significant for its development, including its employees. The type of information that can be protected is virtually unlimited; at a minimum, it includes information related to R&D, market studies, prototypes, ongoing negotiations, marketing research of any kind, and lists of target customers. Ideally, in an employer-employee relationship, when an employee or officer leaves, a company should make sure to remind them of the confidentiality obligations that will continue to apply despite the end of the relationship. Applying these principles reduces the risk that an employee or partner will publicly share or independently use your strategic information at your company’s expense. Mistake #9: Not protecting your original products’ shapes and ornamentation within the prescribed time limit Many are unaware of the benefits of protecting an object’s shape, form, and ornamentation through the Industrial Design Act, or they learn of such benefits too late. In Canada, such protection has two key requirements: The industrial design must not have been published more than one year before the date on which an application for registration is filed; and The protection must be acquired by registration to exist. This type of protection is more effective than one might think and should not be overlooked. For example, a search of the industrial design register will reveal how many industrial designs tech giants have obtained. Some industrial designs have even been the subject of high-profile disputes, including one between Apple and Samsung over the shape of tablets. Apple Inc. uses such protection to prevent the presence of competing products that copy its designs on the market. As an example, in Canada, the shape of the headphones shown below was protected in 2021 and the shape of the phone shown below was protected in late 2020. For more detail on the protection of each of these articles, see Registration 190073 and Registration 188401. Conclusion Lavery’s intellectual property team would be happy to help you with any questions you may have regarding the above or any other IP issues. Why don’t you take a look at our Go Inc. start-up program? It aims to provide you with the legal tools you need as an entrepreneur so you can start your company on the right foot! Click on the following links to read the two previous parts. Part 1 | Part 3

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  • Crypto asset works of art and non-fungible token (NFT) investments: Be careful!

    On March 11, 2021, Christie’s auction house made a landmark sale by auctioning off an entirely digital artwork by the artist Beeple, a $69 million transaction in Ether, a cryptocurrency.1 In doing so, the famous auction house put non-fungible tokens (“NFT”), the product of a decentralized blockchain, in the spotlight. While many extol the benefits of such crypto asset technology, there are also significant risks associated with it,2 requiring greater vigilance when dealing with any investment or transaction involving NFTs. What is an NFT? The distinction between fungible and non-fungible assets is not new. Prior to the invention of blockchain, the distinction was used to differentiate assets based on their availability, fungible assets being highly available and non-fungible assets, scarce. Thus, a fungible asset can easily be replaced by an equivalent asset with the same market value. The best example is money, whether it be coins, notes, deposit money or digital money, such as Bitcoin. On the contrary, a non-fungible asset is unique and irreplaceable. As such, works of art are non-fungible assets in that they are either unique or very few copies of them exist. Their value is a result of their authenticity and provenance, among other things. NFTs are crypto assets associated with blockchain technology that replicate the phenomenon of scarcity. Each NFT is associated with a unique identifier to ensure traceability. In addition to the art market, online, NFTs have been associated with the collection of virtual items, such as sports cards and other memorabilia and collectibles, including the first tweet ever written.3 NFTs can also be associated with tangible goods, in which case they can be used to track exchanges and transactions related to such goods. In 2019, Ernst & Young developed a system of unique digital identifiers for a client to track and manage its collection of fine wines.4 Many projects rely on cryptocurrencies, such as Ether, to create NFTs. This type of cryptocurrency is programmable and allows for metadata to be embedded through a code that becomes the key to tracking assets, such as works of art or other valuables. What are the risks associated with NFTs? Although many praise the benefits of NFTs, in particular the increased traceability of the origin of goods exchanged through digital transactions, it has become clear that the speculative bubble of the past few weeks has, contrary to expectations, resulted in new opportunities for fraud and abuse of the rights associated with works exchanged online. An unregulated market? While there is currently no legislative framework that specifically regulates crypto asset transactions, NFT buyers and sellers are still subject to the laws and regulations currently governing the distribution of financial products and services5, the securities laws6, the Money-Services Business Act7 and the tax laws8. Is an NFT a security? In January 2020, the Canadian Securities Administrators (CSA) identified crypto asset “commodities” as assets that may be subject to securities laws and regulations. Thus, platforms that manage and host NFTs on behalf of their users engage in activities that are governed by the laws that apply to securities trading, as long as they retain possession or control of NFTs. On the contrary, a platform will not be subject to regulatory oversight if: “the underlying crypto asset itself is not a security or derivative; and the contract or instrument for the purchase, sale or delivery of a crypto asset results in an obligation to make immediate delivery of the crypto asset, and is settled by the immediate delivery of the crypto asset to the Platform’s user according to the Platform’s typical commercial practice.”9 Fraud10 NFTs don’t protect collectors and investors from fraud and theft. Among the documented risks, there are fake websites robbing investors of their cryptocurrencies, thefts and/or disappearances of NFTs hosted on platforms, and copyright and trademark infringement. Theft and disappearance of NFT assets As some Nifty Gateway users unfortunately learned the hard way in late March, crypto asset platforms are not inherently immune to the hacking and theft of personal data associated with accounts, including credit card information. With the hacking of many Nifty Gateway accounts, some users have been robbed of their entire NFT collection.11 NFTs are designed to prevent a transaction that has been concluded between two parties from being reversed. Once the transfer of the NFT to another account has been initiated, the user, or a third party such as a bank, cannot reverse the transaction. Cybercrime targeting crypto assets is not in its infancy—similar schemes have been seen in thefts of the cryptocurrency Ether. Copyright infringement and theft of artwork images The use of NFTs makes it possible to identify three types of problems that could lead to property right and copyright infringement: It is possible to create more than one NFT for the same work of art or collectible, thus generating separate chains of ownership. NFTs can be created for works that already exist and are not owned by the person marketing them. There are no mechanisms to verify copyrights and property rights associated with transacted NFTs. This creates false chains of ownership. The authenticity of the original depends too heavily on URLs that are vulnerable and could eventually disappear.12 For the time being, these problems have yet to be addressed by both the various platforms and the other parties involved in NFT transactions, including art galleries. Thus, the risks are borne solely by the buyer. This situation calls for increased accountability for platforms and others involved in transactions. The authenticity of the NFTs traded must be verified, as should the identity of the parties involved in a transaction. Money laundering and proceeds of crime In September 2020, the Financial Action Task Force (FATF)13 published a report regarding the main risks associated with virtual assets and with platforms offering services relating to such virtual assets. In particular, FATF pointed out that money laundering and other types of illicit activity financing are facilitated by virtual assets, which are more conducive to rapid cross-border transactions in decentralized markets that are not regulated by national authorities;14 that is, the online marketplaces where cryptocurrencies and decentralized assets are traded on blockchains. Among other things, FATF pointed to the anonymity of the parties to transactions as a factor that increases risk. Considering all the risks associated with NFTs, we recommend taking the utmost precaution before investing in this category of crypto assets. In fact, on April 23, 2021, the Autorité des marchés financiers reiterated its warning about the “inordinately high risks” associated with investments involving cryptocurrencies and crypto assets.15 The best practices to implement prior to any transactions are: obtaining evidence identifying the party you are transacting with, if possible, safeguarding your crypto assets yourself, and checking with regulatory bodies to ensure that the platform on which the exchange will take place is compliant with applicable laws and regulations regarding the issuance of securities and derivatives. https://onlineonly.christies.com/s/beeple-first-5000-days/lots/2020 On April 23, 2021, the Autorité des marchés financiers reiterated its warnings about issuing tokens and investing in crypto assets. https://lautorite.qc.ca/en/general-public/media-centre/news/fiche-dactualites/amf-warns-about-the-risks-associated-with-crypto-assets https://www.reuters.com/article/us-twitter-dorsey-nft-idUSKBN2BE2KJ https://www.ey.com/en_gl/news/2019/08/ey-helps-wiv-technology-accelerate-fine-wine-investing-with-blockchain Act respecting the regulation of the financial sector, CQLR, c. E-6.1; Act respecting the distribution of financial products and services, CQLR, c. D-9.2. Securities Act, CQLR., c. V-1.1; see also the regulatory sandbox produced by the CSA: https://www.securities-administrators.ca/industry_resources.aspx?ID=1715&LangType=1033 CQLR, c. E-12.000001 https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html; https://www.revenuquebec.ca/en/fair-for-all/helping-you-meet-your-obligations/virtual-currency/reporting-virtual-currency-income/ https://lautorite.qc.ca/fileadmin/lautorite/reglementation/valeurs-mobilieres/0-avis-acvm-staff/2020/2020janv16-21-327-avis-acvm-en.pdf https://www.telegraph.co.uk/technology/2021/03/15/crypto-art-market-infiltrated-fakes-thieves-scammers/ https://www.coindesk.com/nifty-gateway-nft-hack-lessons; https://news.artnet.com/opinion/nifty-gateway-nft-hack-gray-market-1953549 https://blog.malwarebytes.com/explained/2021/03/nfts-explained-daylight-robbery-on-the-blockchain/ FATF is an independent international body that assesses the risks associated with money laundering and the financing of both terrorist activities and the proliferation of weapons of mass destruction. https://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-Assets-Red-Flag-Indicators.pdf, p. 1. https://lautorite.qc.ca/en/general-public/media-centre/news/fiche-dactualites/amf-warns-about-the-risks-associated-with-crypto-assets

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  • Five good reasons to list your company on the stock exchange and opt for equity financing

    In 2020, the pandemic disrupted the Quebec economy and the trend continued in 2021. After a difficult year for local businesses, there is an opportunity for business owners to rethink their business model as they develop their recovery plan. In this context, an initial public offering and equity financing might be a good idea. While the process is relatively costly and time-consuming for senior management, not to mention that it results in a series of obligations for the company and its executives and major shareholders, the benefits far outweigh the disadvantages. Here are five good reasons to take your company public and use equity financing to ensure a successful future. 1. Equity financing: financing your company’s growth differently The moment your company goes public, you significantly expand and diversify your equity financing sources. You are no longer dependent on traditional bank loans. Your company can now raise capital much more easily and at a much lower cost, for example through the issuance of convertible securities, share capital, rights or warrants. In addition, your pool of funders expands considerably, going far beyond founding shareholders, your banker and your very close friends and relatives. All these equity financing tools make it possible to more aggressively manage the growth of your business and take advantage of new business opportunities. 2. Equity financing: facilitating mergers and acquisitions Having a company listed on the stock exchange means having a key advantage when it comes to your expansion plan. Once listed, you can acquire another business using your company’s shares as leverage. This added flexibility increases your chances of success in negotiations. You can thus be more bold in your growth management, as you will no longer be limited to conventional financing methods. 3. Equity financing: gaining notoriety By making the decision to take your business public and opting for equity ?nancing, you will give your business greater visibility. First, the initial public offering will be an opportunity to make your company known to investors through promotional events organized by the brokers participating in the issuance, among others. Second, public companies are often followed by ?nancial analysts, and such attention can be an asset when it comes to marketing products and services. In short, by having your company in the spotlight, it will inevitably gain notoriety, both with investors and economic partners. Finally, for many customers and suppliers, doing business with a publicly traded company is reassuring. They see it as a sign of a well-established business, and this perception can facilitate the conclusion of a sale or supply contract. 4. Equity financing: increasing the market value of your business Better ?nancing costs, greater liquidity for your company’s shares, improved growth potential and increased visibility will all make the market value of your company signi?cantly higher than it was before going public. Once listed, book value will no longer be the main indicator used to determine your company’s worth. It will be worth what investors recognize its value to be, based on its potential for growth and pro?tability and its performance relative to competitors. 5. Company succession made easier When the time comes, it will be much easier for you to retire from your business and bene?t from the fruits of your years-long effort. You will have a number of options, including disposing of your shares through a secondary offering. It will also be easier to attract talented people to take over your business because of the multiple bene?ts that come with the status of public company. The advantages of listing your company on the stock exchange and opting for equity ?nancing are many. In addition to the ?ve points presented here, we could add increased credibility with clients and suppliers, better compensation for key employees, less dilution during fundraising, and others. More companies entering the stock market will rebuild our economy. If you are thinking of transforming your company into a public one, opting for equity ?nancing and taking the plunge into the stock market, do not hesitate to call on one of our lawyers practicing in business law to guide and advise you in the process.

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  • Adoption of Bill 82: The insurer’s duty to defend can now be adjusted

    On Thursday, May 27, 2021, article 2503 of the Civil Code of Québec was amended as part of the adoption of Bill 82, titled An Act respecting mainly the implementation of certain provisions of the budget speech of 10 March 2020, which we had discussedin a publication last December. The added paragraph provides that in cases to be provided for by regulation, it will now be possible to depart from the insurer's duty to defend and the exclusive allocation of insurance coverage to injured third parties, within the meaning of article 2500 of the Civil Code of Quebec: 2503. The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts  This legislative amendment confirms the government’s desire to allow contractual limits to certain rules of public order previously applicable to liability insurance for “categories of insurance contracts” and certain “classes of insureds” to be established by regulation. According to the May 12, 2021 debates, the government does not intend to include insurance contracts for individuals and small and medium-sized businesses in the categories covered. Instead, Finance Minister Éric Girard referred to public companies and insurance for directors and officers. This is what he said when the bill was presented for adoption last May 27: In terms of insurance, there is also a change in defence costs, which can be excluded from the insurer’s liability, because we had, in Quebec’s Civil Code, a distinction with the rest of Canada that put large public companies in Quebec at a disadvantage with respect to their competitors. That is to say that insurance premiums for directors and officers were much higher in Quebec, and now, with what we are introducing here, we will be able to make a difference and help our companies to grow and encourage head offices to be here. We will continue to closely monitor the presentation of the regulation that will specify the departures allowed under the new article 2503 of the Civil Code of Québec.

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