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International tax planning endorsed by the Court
In the recent decision in Agracity Ltd. v. The Queen1, the Tax Court of Canada (the “Court”) endorsed the Canadian tax consequences of business transactions between a Canadian corporation (“Agracity”) and its Barbados affiliate (“NewAgco-Barbados”) within a group of companies operating in the agrochemical industry (the “Group”). NewAgco-Barbados is an offshore company established for the purpose of negotiating and purchasing a particular herbicide (the “Herbicide”) internationally for resale in Canada. All of NewAgco-Barbados’s profits were generated by the resale of the Herbicide, which were subject to Barbados’s low tax rate. Agracity was in charge of receiving and filling orders for the Herbicide from Canadian consumers, under a service agreement with NewAgco-Barbados for the logistics, storage and transportation of the Herbicide from abroad to Canadian consumers. The Canada Revenue Agency (the “CRA”) attempted to allocate all of NewAgco-Barbados’s profits to Agracity, relying primarily on sham transaction rules and secondarily on transfer pricing rules under subsection 247(2) of the Income Tax Act2 (the “Act”). The Court held that the negotiation and procurement of the Herbicide by NewAgco-Barbados constituted a legitimate commercial objective and a genuine function within the Group. It ruled in favour of Agracity in this case and confirmed that the transactions between Agracity and NewAgco-Barbados were not deceptive and did not warrant any adjustment to Agracity’s profits under transfer pricing rules. This case sheds new light on how to interpret the business role of foreign subsidiaries and the limits of the CRA’s remedial authority with respect to transfer pricing provided for in the Act, making it easier for domestic businesses to implement international business structures. When properly set up and operated, these structures can provide substantial tax savings. The decision in Agracity v. The Queen has not been appealed. Our taxation team can assist you with national and international tax planning for your business transactions. 2020 CCI 91 R.S.C. 1985, c. 1 (5th suppl.);
E-commerce: Protecting Your Work
As distribution channels with a global reach, websites are a powerful tool for doing business, and during the pandemic, they even play a critical role. A website consists of a set of webpages accessible from an address hosted on a server through the internet or an intranet. A website is a collection of various elements protected by intellectual property laws. We will focus on the following: Copyright It protects an original work (i.e., the author’s own creative work), insofar as it involves the exercise of skill and judgment. This exclusive right allows the owner to produce or reproduce the work in any material form, to perform, represent or publish it, and to exercise other exclusive rights. A website may include the following works: the content of screen page, graphic designs, animation, texts, still and animated images, sounds, databases (which comprise a collection of works, data or other independent elements), software, as for example the ones relating to the creation, operation and launch of the website, computer programs, photographs, cartoons, videos. Ownership of Copyright Copyright is the author’s property, unless the author (i) has assigned his or her right, or (ii) has created the work in the course of his or her employment, in which case the copyright belongs to the employer. It is important to identify the various copyright owners of the works appearing on a website. If a company mandates an external firm to develop a website (website developer), the company will not immediately own the copyright to the website. A development contract entered into with a website developer will usually include a provision regarding the ownership of copyright. It is often provided that the assignment of intellectual property rights to the client who has commissioned a website will take place after payment for said website has been made in full. This poses a problem when the website developer does not complete the website or when a dispute arises over the course of the mandate. Stock Photos Generally speaking, websites that offer photographs do not transfer the copyright of the photographs to the users. They grant a licence to use (a right to use) for a limited time and for a specific purpose. The conditions of these licences must therefore be read carefully. Assignment of Rights An assignment must be in writing in order to transfer the copyright to the company that commissioned the website. Moral Rights Moral rights allow the author or performer (even if he or she is not the copyright owner) to: Claim authorship of the work; Claim respect for the integrity of the work (to protect the work against distortion, mutilation or modification or to prevent use that prejudice the honour or reputation of the author or performer or if the work is associated with a product or service without the consent of the author or performer). Recognition of Copyright in Other Countries Given that Canada is a party to the Berne Convention, copyright owned by a Canadian national, such as a company incorporated in Canada or a Canadian citizen, is recognized in other countries members of the Convention , and said copyright need not be registered in those other countries to acquire rights. In Canada, copyright registration is not mandatory, but it does give rise to a presumption of law that it is advisable to register, at the very least, for works that are important to the business, in order to more effectively act against infringement. Copyright infringement is the reproduction of an entire protected work or any substantial part of it without permission. In the same manner that website contents owned by the copyright owner may not be copied without permission, one must ensure that he or she does not import or publish on his or her website any work protected by copyright without first obtaining permission. Domain Name Some domain names are protected by trademark laws, and some are not. This depends on the nature of the domain name and the use made of it. Merely registering a domain name does not create a right that could prohibit the use of a conflicting domain name or trademark. Using a distinctive domain name could confer upon its owner the right to oppose the subsequent use by third parties of a confusing domain name, trademark or trade name. Effective domain name arbitration mechanisms exist for .com and for .ca in the event of misappropriation of a conflicting domain name. Trademark A website owner using a trademark on his or her website in order to identify his or her products or services should protect said trademark by registration. Without listing all the benefits of registering a trademark, suffice it to say that registering one’s rights is significantly less costly than trying to recover said rights once they have been appropriated by a third party. The trademark owner may oppose any confusing third party’s trademark, trade name or domain name (the test of confusion takes into account various factors) if his or her rights precede those of the other. In the case of unauthorized appropriation of a third party’s logo or figurative mark, the owner may, in many cases, not only invoke trademark infringement but also copyright infringement. Right to One’s Image and Privacy The Civil Code of Québec provides that every person is the holder of personality rights, such as the right to life, the right to the inviolability and integrity of his person, and the right to the respect of his name, reputation and privacy. Similar provisions exist in other legislation, such as the Quebec Charter of Human Rights and Freedoms and the Canadian Charter of Rights and Freedoms. The law is similar in other Canadian provinces, and comparable legislation exists in various countries around the world. Thus, as a general rule, a website owner may not: (i) Publish, for example, a photograph or image of a person without that person’s consent. This rule must be weighed against the rule relating to public interest in the right to freedom of expression and the right to information; (ii) Damage a person’s reputation; (iii) Imply or suggest that a person endorses a product or service without that person’s consent. The Civil Code of Québec further provides that the use of a person’s correspondence, manuscripts or other documents without his or her consent constitutes an invasion of his or her privacy. Trade Secret Various components of a website may be protected by trade secret if a confidentiality agreement was signed and the information remains secret. This could be the case with the website coding. Many people have preconceived ideas about intellectual property in the world of e-commerce. Often, they wrongly assume that since they commissioned their website, they own its intellectual property rights or that they can post a photo of a product copied from another website without authorization because they sell the product. Although it is easy, fast and free to access, a website is governed by a legal framework regarding intellectual property, with which website operators must comply. We did not cover the wide array of rights that are involved in a website in just a few lines. For example, for some websites, there may be patent and industrial design issues to deal with. All these legal considerations are not self-evident. Several rules must be followed to avoid engaging in illegal practices, to avoid the unpleasant surprise of discovering that you do not own the intellectual property rights to parts or all of the website, and to avoid facing threats of legal action for violating the rights of third parties. Furthermore, all the work invested in the creation and operation of the website may not provide any additional value to your company if the intellectual property rights have been neglected, even though in many cases it is a significant asset to the company. It is important to become familiar with these rules, protect your rights and resolve legal pitfalls-ideally before launching a website. If the issue of intellectual property rights is only addressed after launching the website, there may still be time to seek protection or to attempt to overcome legal problems. Whether the website is already online or is about to be launched, an audit should be carried out to determine the situation and, if necessary, obtain protection, sign contracts and find solutions to problems that could lead to illegal or disadvantageous situations.
E-commerce: Your Obligations regarding Consumer Protection and Competition Matters
Before selling your products and services online, you will need to determine the form and content of your contract, and ensure that you comply with the provisions of the Consumer Protection Act (the “CPA”). The CPA applies to any contract between a consumer and a merchant entered into in Quebec, including online contracts of sale, which are known as “distance contracts.” Rules applicable to contracts entered into on the internet Form Contracts concluded on the internet must be in writing and must contain the name and address of the merchant, as well as the date of the transaction. In addition, certain information must be provided to consumers before a contract is concluded, in particular: information identifying your business; a detailed description of the goods or services you are selling, including their characteristics and technical specifications; the price of each item or the terms of payment; all the applicable fees, whether required by law or charged by the merchant; the delivery date or the date on which the service will be provided; and other details regarding delivery, cancellation policies and any other applicable restrictions or conditions. This mandatory information must be presented prominently and in a comprehensible manner, and be expressly brought to the consumer’s attention. This could be done through a web page containing said information, which must appear on the screen before the consumer pays for the items in the shopping cart. It is good practice to ensure that the information is easy to print or save in PDF format. Acceptance Before the contract is entered into, the merchant must provide the consumer with an express opportunity to accept or decline the offer and to correct any errors. Copy The merchant must provide the consumer with a copy of the contract within 15 days after the contract is entered into, in a manner that ensures that the consumer may easily retain it and print it. Delivery A consumer may cancel a contract if the goods are not received (or the service is not performed) within 30 days after the date specified in the contract or within 30 days after the contract is entered into in the case of a contract that does not specify a delivery date. Note that goods for which delivery was attempted on the agreed date will be considered delivered. Cancellation The CPA allows consumers to cancel the contract in a number of cases, in particular when the merchant does not comply with the provisions set out above. Each merchant is free to establish a cancellation policy and set its conditions, so long as these are in accordance with laws of public order. The consumer must be informed of said policy before entering into the contract, which must include the cancellation policy. Warranties Legal warranty The Consumer Protection Act provides for a legal warranty that automatically applies to a good, whether purchased in store or remotely. Under said legal warranty, goods must be fit for the purposes for which goods of the kind are ordinarily used, durable for a reasonable length of time, having regard to their price, the terms of the contract and the conditions of their use. Goods must also match their description under the contract. Finally, a consumer is also entitled to a recourse against the merchant should there be a latent defect in the good. Additional warranty A merchant may offer consumers an additional online warranty, provided that said warranty complies with the relevant provisions of the CPA. Application and exceptions It is noteworthy that the aforementioned rules are the consumer protection rules which generally apply to the sale of goods and services, but they may not apply in certain instances, such as in the case of contracts for the sale of goods which are likely to deteriorate rapidly, such as food. One must be mindful that the Consumer Protection Act contains exceptions or provisions that are specific to certain commercial sectors. Different laws and regulations may also apply to certain types of goods and services that are sold. Competition law issues The CPA contains competition-related obligations that are specific to Quebec. All merchants in Quebec must also comply with the provisions of the Canadian Competition Act. The purpose of the Competition Act is to (i) maintain and encourage competition between businesses in Canada, (ii) provide consumers with competitive prices and product choices, and (iii) to protect consumers from fraudulent or prohibited practices. Prohibited business practices Misleading price display Under the CPA, when you advertise the price of a product or service, you are required to advertise an “all-inclusive” price, which includes all amounts that the consumer will have to pay for the product or service. The all-inclusive price should be more prominent than the sums of which it consists. Taxes (GST/QST), among other things, may be excluded from the advertised price, but must be added at the time of payment. Price-related representations and price display are also subject to specific rules under the Competition Act. False or misleading representations Advertising that contains false or misleading representations, or fails to mention an important fact is prohibited under the CPA. The Competition Act prohibits the making of materially false or misleading representations to the public. The provisions of the Competition Act dealing with false and misleading representations apply to a number of cases, including the following: Performance representations not based on adequate and proper tests: The making of representations to the public about the performance, efficacy or longevity of a product, which is not based on an adequate and proper test, is prohibited. Untrue or unauthorized use of tests and testimonials: The unauthorized use of product performance tests and testimonials (e.g., scientific tests, consumer testimonials, etc.) is prohibited. Needless to say, these cannot be distorted. Misleading warranties: Giving a consumer a warranty containing materially misleading representations that could influence the consumer’s decision to purchase goods or services is prohibited. The overall impression conveyed by a representation and the literal meaning of said representation is used to determine whether the warranty is misleading. Misleading promotional contests: Certain information related to the holding of promotional contests must be disclosed to the public. In addition, the sending of any documentation that would mislead the recipient into believing that he or she has won a prize or other benefit is prohibited. It is noteworthy that in Quebec, there are specific rules related to promotional contests. Other prohibited practices The Competition Act aims to prevent abuse of a dominant position and therefore provides stricter standards that apply to businesses holding a dominant position in a market. Conspiracy provisions aim to prevent a business from unduly reducing competition or unreasonably increasing the price of a product. This law also prohibits the refusal to sell a product, insofar as a business has no right to harm a customer by refusing to supply it sufficiently under normal market conditions. Finally, vertical restraints, that is, practices such as exclusive dealing, tied selling and market restriction, are prohibited, as they generally impose conditions that restrict the freedom of consumers. The CPA prohibits making use of commercial advertising directed at persons under thirteen years of age. Penalties Both the Consumer Protection Act and the Competition Act provide for penalties for prohibited practices. Judges can order punitive damages for certain violations of the CPA. Under the Competition Act, certain acts are considered criminal if a person does them knowingly or recklessly, regardless of the consequences they may have on the public.
E-commerce: Some Laws and Rules You Should Be Aware of
Various ways of doing e-commerce E-commerce can take different forms. For the purposes of this article, we will refer to e-commerce where the contract of sale or of supply of services is concluded by electronic means, E-commerce will be said to be “direct” when the product or service is delivered electronically, such as in the online conclusion of a contract for a subscription to an online-only publication, and “indirect” when the item sold is tangible or the service is rendered otherwise than online. E-commerce can be conducted entirely online or in a hybrid manner, where the vendor operates both online and through brick-and-mortar stores. It is considered “closed” when it is between a relatively small number of participants who already have a contractual or professional relationship with each other. It can be conducted between a business and a consumer, in which case it is called “B2C,” or between a business and another business and is then known as “B2B.” E-commerce poses particular challenges for businesses and if these challenges are not properly addressed, they are likely to expose the business to additional liability. This means that e-commerce can be particularly risky for novice businesses that start to do carry out business electronically, without adequate preparation. For example, a merchant who transacts electronically will necessarily have to take direct possession of some of its customers’ personal data, such as their names, addresses and credit card numbers, or have an e-commerce service provider take indirect possession of it. The use of such personal data is subject to the provisions of privacy laws, and, given that the data is of great value to potential thieves or fraudsters, it must be protected. A merchant may also be the victim of fraudulent orders or payments made with stolen credit cards numbers. To better control its risks, a novice in e-commerce may be better off doing business with established e-commerce service providers such as Shopify, BigCommerce, Squarespace or GoDaddy, which have set up robust infrastructures for their customers. A corporation should nonetheless do its homework before choosing an e-commerce service provider. It should, for example, inquire about the terms and conditions of the service agreement to be entered into with the chosen provider, and, in particular, about the services offered (including how returns and chargebacks are handled), how the service provider protects its customers in the event of data theft or fraud, what fees are charged, and so forth. In all cases, whether or not a corporation does business with an e-commerce service provider, it should ensure that the information kept on its own servers and computers is limited to what is absolutely necessary. Likewise, once a transaction is completed, it should avoid, as far as possible, keeping personal data belonging to its customers, such as their names, addresses and credit card numbers. Moreover, a corporation that decides to engage in e-commerce must be aware of certain specific legal aspects relating first, to the particularities of e-commerce itself and second, to the fact that its customers may be located anywhere in the world. For the purposes of this article, we will focus on the rules generally applicable to all types of e-commerce. A future article will deal with the specific rules provided in the Consumer Protection Act (Quebec). Consumption tax The majority of governments impose a consumption tax on goods (and sometimes services) sold within their jurisdiction. Applicable consumption tax laws generally provide that businesses with a presence in a jurisdiction must collect applicable taxes and remit them to the competent tax authorities. For a corporation that is otherwise not present in a jurisdiction, the mere fact of selling goods in that jurisdiction is generally not sufficient to require registering with its tax authorities and collecting and remitting applicable taxes. However, the definition of what constitutes a sufficient presence to require business registration and the collection and remittance of consumption taxes varies from one jurisdiction to another. A corporation wanting to sell its goods and services electronically must therefore ensure that it is aware of the applicable consumption tax rules in the main jurisdictions where it will sell these goods or provide these services. Licences and permits Although it is generally not necessary for a manufacturer or seller to obtain a license, permit or other governmental authorization for the vast majority of goods typically sold online, they may be required before certain products, in particular medical or pharmaceutical products, can be sold online or otherwise, domestically or internationally. It is also important to note that a licence, permit or other authorization may not be required to sell goods in a jurisdiction while the sale of the same goods in another may require such license, permit or other authorization. Thus, if a merchant wants to sell its product in a jurisdiction where a permit, licence or other authorization is required, it will be required to obtain it before proceeding with any sales. In addition, in some territories, the sale of certain goods must necessarily be done through a State monopoly. For instance, such restrictions are still the norm in Canada for the sale of alcoholic beverages. For example, a resident of Ontario may not order alcoholic beverages directly online from a producer in another province and have them delivered to Ontario, which prevents a small-scale producer of alcoholic beverages in Quebec from selling its products online to Ontario customers, for delivery in Ontario. Shipping Not all goods can be shipped in the same way. Some must be specially packaged, and some may even not be shipped by regular means, such as Canada Post and major courier companies. For example, Canada Post requires that fish, game, meat, fruit, vegetables or other perishable products be properly prepared and meet certain other applicable requirements for mailing. Other products, such as objects classified as hazardous materials, may simply not be shipped by mail. To ship these products, it will be necessary to deal with a specialized courier service. Finally, Canadian laws prohibit the export of certain goods or require special permits for their export. In addition, merchants must ensure that the laws of the destination jurisdiction allow the goods shipped to be imported into that jurisdiction. Indeed, all countries either prohibit the import of certain goods into their jurisdiction or require the importer to obtain a permit or licence issued by their government. Age restrictions Under applicable laws and regulations, certain goods may only be sold to persons who have reached a certain age or may not be sold to children. These restrictions vary from jurisdiction to jurisdiction. For instance, in Quebec, one must be 18 years old to legally buy alcohol, while elsewhere in Canada the age is 19 and in the United States, 21. Merchants wishing to sell alcoholic beverages online must take these restrictions into account. The same applies to the sale of any other goods that are subject to age restrictions. PCI DSS compliance In 2006, the main credit card issuers, American Express, Discover Financial Services, JCB International, MasterCard and Visa formed the PCI Security Standards Council to standardize the rules and standards applicable to payments made with their credit cards. The council adopted a set of rules called “Payment Card Industry Data Security Standard,” better known by its acronym, PCI DSS. All merchants wishing to accept credit card payments, including direct online payments, must adhere to these rules. Any merchant, regardless of its size, wishing to process credit card payments on its website must also be PCI DSS compliant, unless it is doing business through a compliant payment service provider. The PCI DSS include the following 12 compliance requirements, which are grouped into six categories called “control objectives.” The following table, taken from the document entitled “Payment Card Industry (PCI) — Data Security Standard — Requirements and Security Assessment Procedures”1, provides a summary of these requirements. Control objectives PCI DSS conditions Build and Maintain a Secure Network and Systems 1. Install and maintain a firewall configuration to protect cardholder data 2. Do not use vendor-supplied defaults for system passwords and other security parameters Protect Cardholder Data 3. Protect stored cardholder data 4. Encrypt transmission of cardholder data over open, public networks Maintain a Vulnerability Management Program 5. Protect all systems against malware and regularly update anti-virus software or programs 6. Develop and maintain secure systems and applications Implement Strong Access Control Measures 7. Restrict access to cardholder data by business need to know 8. Identify and authenticate access to system components 9. Restrict physical access to cardholder data Regularly Monitor and Test Networks 10. Track and monitor all access to network resources and cardholder data 11. Regularly test security systems and processes Maintain an Information Security Policy 12. Maintain a policy that addresses information security for all personnel Although the PCI DSS are mandatory, only Visa and MasterCard require merchants and service providers that accept their cards to comply with these standards. However, a non-compliant corporation will nevertheless be held fully liable if fraud associated with theft of cardholder data occurs. In addition, should a security breach occur, all exposed merchants that are not PCI DSS compliant will be fined. It is up to merchants and service providers to achieve, demonstrate and maintain compliance through annual validations. Merchants may use the services of specialized service providers to help them comply with PCI DSS standards. Useful tools to ensure compliance are also available online for these purposes2. Should a merchant not wish to go through the PCI DSS compliance process, it may always use the services of a PCI DSS compliant payment service provider3. PCI Security Standards Council, Payment Card Industry (PCI) Data Security Standard Requirements and Security Assessment Procedures (Version 3.2.1, May 2018), online (PDF): Official website of the PCI Security Standards Council These can be found through a search using the keywords “PCI DSS compliance” or “PCI DSS conformity.” These can be found through a search using the keywords “PCI DSS Payment Gateway.”
How to Negotiate Temporary Agreements or Contracts in Times of Crisis?
The rapid spread of COVID-19 and the introduction of strict government measures are limiting or changing many businesses’ operations. These measures impose unusual restrictions that make it more difficult to meet certain contractual obligations. In such a situation, many companies will want to assess the possibility of modifying certain undertakings and terms of their contracts in order to get through the pandemic and resume their business activities post-crisis. To that end, we have gathered a few thoughts on how to look into negotiating a temporary agreement, some legal principles that can be applied to begin discussions and negotiations, and some other elements to consider in a negotiation approach, which we share with you below. How to do it and where to begin: some ideas It is relevant to review all your contracts and sort them to determine which are essential for your business operations and which have the most significant financial impact. Think about the other contracting party as well, who may also be affected by the pandemic. Has the other party defaulted of performing its correlative obligations to you, or is your inability to meet your obligations causing it prejudice in any way? Most of the obligations included in a contract cannot be changed unilaterally. However, contracting parties must still perform their respective obligations in good faith. The occurrence of an exceptional situation such as COVID-19 is likely to force each of the parties to act more flexibly in order to comply with their duty of good faith. It is possible to validate whether some of these contracts, by their very nature, are still relevant or whether they will remain relevant once the curve flattens and economic activity recovers. For less relevant contracts, you can check whether they include provisions allowing for unilateral termination, by the mutual agreement of the parties or by a particular mechanism. Otherwise, you could then consider initiating a discussion with the other contracting party to negotiate certain terms of the agreement in order to mitigate negative impacts, if any, during the pandemic. For each contract that must be maintained, you can list all the obligations that you are unlikely to be able to meet, in whole or in part, as well as those that your contracting party might not be able to meet, in order to open the door to an out-of-court negotiation of certain provisions for the coming months. In your analysis, you should pay particular attention to the following clauses: Default: What constitutes a default under the terms of the contract? What are the consequences of defaulting? Does a default under this contract constitute a default under another contract? Does the contract provide for a time period to cure a default? On what conditions? Time limit: Does the contract set specific time limits for the performance of certain obligations? Which ones? Does the contract provide for the possibility of postponing the time limit for its performance? Should a notice be sent to this effect? Does it expire soon? Exclusivity: Is the contract exclusive? Can this exclusivity be overridden? Under what circumstances and on what conditions? Force majeure: Does the contract include a superior force clause (most commonly called a “force majeure”) forgiving a party’s inability to perform its obligations? What happens to each party’s obligations, especially financial obligations, in a context of superior force? Although the Civil Code of Québec defines such a notion, the contract can always provide its own definition. A case of superior force usually requires the presence of an unforeseeable, irresistible event external to the party invoking it. Continuous information: Does the contract provide for the obligation to keep the other contracting party informed when certain events occur? If so, which ones? Is COVID-19 or any other pandemic included? Negotiation: Does the contract provides for the parties the possibility to renegotiate certain terms ? Which ones? When? On what conditions? Payment: Does the contract set out time limits for payments to the other contracting party or for making any other kind of payment, depending on the nature of the contract? Does it provide for additional time limits to proceed to the payments? What is the impact of delaying or not making a payment? Financial performance: Does the contract establish financial performance criteria (e.g. compliance with certain financial ratios)? How often? What are the consequences of not meeting these financial criteria? Penalties: Does the contract contain penalties for late payment of certain amounts or for failure to meet certain contractual obligations? When is this penalty due? What amount can it reach? Liability: Is the liability of the contracting parties unlimited under the terms of the contract or does the contract instead provide for limits on the amount that may be claimed?(maximum/minimum amount)? Is there a predetermined time limit to make a claim? Does the contract provide for a notice to be sent to this effect? Dispute resolution: Does the contract provide for a dispute resolution process? Mediation or arbitration? Under which conditions can these mechanisms be applied? List all the impacts that result from a breach of obligations (e.g., penalties, notice of default, interest), and make a list of viable proposals that you can submit to the other contracting party as an alternative. What legal principles can you use to negotiate a temporary agreement with your contracting party or a postponement of your obligations? Certain provisions or legal principles may make it possible to terminate a contract or may serve as arguments for a temporary agreement or a postponement of your obligations. Here are a few examples. (This list is non-exhaustive, of course.) Force majeure Some parties to a contract will want to invoke the concept of superior force to terminate or temporarily suspend the effects of the contract. Although this concept is interesting, it applies only to very specific situations and its application is not generalized. As previously mentioned, the Civil Code of Québec1 provides that superior force is an unforeseeable and irresistible event that must not arise from the actions of the contracting parties. Depending on the nature of the obligations covered, a contracting party may be released from its obligations or have its successive obligations suspended during the superior force period. The contract may also provide for other parameters and circumscribe the terms of what may constitute a case of superior force between the parties. The right to invoke superior force requires a case-by-case assessment of each contract and of the relationship between the parties. In any event, a party that is unable to perform its obligations, in whole or in part, must take all steps at its disposal to minimize its damage. You will find more information on the concept of superior force and its application in the bulletin The Impact of COVID-19 on Contracts. Right to terminate Certain contractual provisions may allow for resiliation (termination) by either party, on specific terms or for specific reasons. Some contracts will provide for a termination mechanism at either party’s discretion or further to their mutual consent. In the absence of such clauses in the contract, it remains essential to characterize the nature of the contract, since legislative provisions could allow its resiliation. That is also the case of a contract of enterprise or a contract for services, which the client may unilaterally resiliate as permitted by sections 2125 and following of the Civil Code of Québec, subject to certain limits, of course. Before deciding to unilaterally resiliate a contract, it is important to consult your legal advisor in order to properly determine the nature of the contract, validate its terms and conditions with respect to resiliation and determine the possible impacts of such resiliation (e.g., penalties, prejudice to the other party, etc.). Obligation of good faith in contractual performance The obligation of good faith imposes certain contractual duties, including those of loyalty and cooperation. The duty of loyalty entails certain prohibitions such as not increasing the burden on a contracting party, not compromising the contractual relationship, and not engaging in excessive and unreasonable2 behaviour. The duty of cooperation, on the other hand, is more positive in nature and aims for assistance and collaboration between the contracting parties to encourage contract performance. Thus, beyond the contractual relationship between the parties, the obligation of good faith allows for a genuine collaborative relationship, a partnership, even, between the parties. A party being a victim of its contracting party’s actions, which are not in accordance with its obligation of good faith under the terms of the contract or which are implicitly derived from those terms, may be in a favourable position to claim damages. Thus, if a party experiences difficulties in performing its obligations because of an event beyond its control, it is entitled to expect the other contracting party to show good faith in the performance of the contract and to act reasonably. Abuse of rights A party’s exercise of its contractual rights may, in certain situations, constitute an abuse of rights. For example, a party that is in default of its payment obligations under the contract, due to the closure of its business as required by government authorities, may trigger the application of a contract default clause by the other party. Such other partycould proceed with the immediate resiliation of the contract upon simply providing notice. While the terms of the contract may be clear, the other party’s haste in resiliating the contract may constitute an abuse of rights. Indeed, the nature of the relationship between the parties, the duration of the business relationship and the facts that led to the default have an impact on the way a party may exercise its rights under the contract. The exercise of rights provided for in the contract in such a way as to create devastating or catastrophic effects for one of the contracting parties could constitute an abuse of rights in the performance of the contract. Mediation The contract may provide for dispute resolution processes such as mediation or arbitration. To the extent that a dispute arises between the contracting parties and that the contract provides for recourse to alternative dispute resolution mechanisms, it will be possible or even mandatory to submit the dispute to a process such as mediation before a third party, which will attempt to help the parties find an acceptable common ground. In the event of non-performance by a contractual party, this may be a very good option, insofar as the contract contains a provision providing for recourse to such mechanisms, of course. How can a temporary agreement be negotiated, and are there elements that can be put forward as part of the discussions? Given the exceptional current situation, it may also be appropriate for the contractual parties to communicate and verify the impacts of the pandemic on the contractual performance. In this way, the parties may jointly conclude that there are particular difficulties in performing certain obligations under the contract. In such a case, propose solutions or present scenarios that aim to minimize the negative impacts for your respective businesses. Rely on the mutual aid factor to meet certain obligations and/or suspend others (performance, manufacture, delivery, time limits, forbearance, etc.). It is possible to suggest performing certain obligations in consideration for the performance of your contracting partner’s correlative obligations. Where feasible, consider partial payments, deferred payments, staggered payments over time or a reimbursement based on a percentage of revenues or sales once operations resume after the pandemic. If it is possible, offer additional guarantees to the other contracting party (e.g. collateral security, personal suretyship, third party guarantee). Validate whether your insurance covers the cessation of your operations, business interruption, delays in the performance of your obligations, or financial losses arising from some of your contracts, to enable you to propose viable alternatives. Determine which suppliers or partners are willing to conclude a temporary arrangement and those who refuse or are less open to it. You can then to try to optimize your agreements with the more conciliatory partners, allowing you to continue performing certain obligations with your more reluctant contracting parties. Innovate! Think about alternatives that might not have been possible, or that you might not have considered before the pandemic, that allow you to optimize your business practices or relationships. In short, think outside the box. A few thoughts before undertaking a negotiation Do not restrict your thinking to the period of restriction on non-essential activities which is, at the time of writing, until May 4, 2020. Think instead about the weeks and months that will be required to re-establish your business relationships and resume normal business operations, while performing your ongoing obligations and any deferrals negotiated during the pandemic; The inability to adapt, or the maintenance of a hard line, will bring some businesses to the brink and force them to consider various insolvency processes. You must be in a position to show your contracting parties why a position that is too firm or inflexible will not, in the long term, be satisfactory or serve the parties’ interests, in addition to being detrimental to those parties who are likely to require flexibility in the performance of their contractual obligations. You need to be able to identify the considerations specific to your business and business model, and determine the elements that may influence your decisions, such as the nature of the relationship with the other contracting party, particularly if it is a long-standing customer or supplier, whether it is a relationship that will continue into the future or if it is a one-time contract that is non-recurring, and what impacts and reputational risk your actions may entail. Beyond legal principles, the long-term business relationship must be prioritized and protected. This argument should not be underestimated. The objective of most Quebec businesses is to find satisfactory common ground for the parties involved, while trying to minimize the impacts on both sides. The watchword the parties should keep in mind is “flexibility.” During these times when solidarity is in order, it seems to us that it would be wise for each party to make the effort to reach a duly negotiated temporary agreement. We are sharing these options to provide you with ideas on how to approach the negotiation of ongoing contracts, knowing that each contract, relationship and situation are unique. For more information, our corporate law team remains at your disposal to accompany you during the pandemic. #WeWillGetThroughThis Section 1470 para. 2 C.C.Q. Didier Luelles, La bonne foi dans l'exécution des contrats et la problématique des sanctions, Canadian Bar Review, Vol. 83, 2004, pp. 189-190.
Advertising, loyalty programs and consumer credit: what’s new and what’s coming up
This publication was co-authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. Following the adoption of the Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs1in November 2017, major legislative and regulatory provisions affecting the rights and obligations of Québec merchants and consumers were assented to and published in the Gazette officielle du Québec on July 18, 2017. Substantial changes and additions were made to the Regulation respecting the application of the Consumer Protection Act,2 the Regulation respecting the application of the Act respecting the collection of certain debts,3 and the Regulation respecting travel agents.4 The progressive dates of coming into force of the provisions of Act 24 were enacted at the same time. The amendments to the Consumer Protection Act,5 its application regulation and the new provisions come into force on four different dates next year. Overview of amendments substantially affecting the obligations of merchants Commercial and advertising practices The following provisions came into force on August 1st, 2018: - Under the new s. 231.1 CPA, any picture of goods or services in an advertisement that also discloses their price or value must accurately depict the goods or services provided. - The new s. 244.1 CPA prohibits merchants from falsely or misleadingly representing to consumers in an advertisement that credit may improve their financial situation. - The new s. 251.1 CPA prohibits any person from withholding an amount of money on a credit card unless the person discloses, before the transaction, why and for how long it is to be withheld. - The new s. 251.2 prohibits merchants from informing a personal information agent that a consumer has exercised a right to cancel or rescind a contract under a law supervised by the OPC or information unfavourable to the consumer concerning amounts that are no longer payable following the exercise of that right. Under the new s. 223.1 CPA, merchants must present the information contained in an advertisement in a clear, legible and understandable manner. This provision comes into force on February 1st, 2019. Clarification on loyalty programs The many merchants offering loyalty programs under which consumers can obtain goods or services valued at over $50 may have to change their practices once the new provisions in ss. 79.6.1 et seq. of the Regulation come into force on August 1st, 2019: - The new s. 79.6.4 provides that the conditions that allow consumers to receive exchange units, the terms applicable to the exchange, the terms applicable to the expiry, and the conversion factor used to convert exchange units, is information that loyalty program merchants must give to the consumer. - The new s. 79.6.7 limits a merchant’s ability to increase the number of exchange units required to obtain goods and services, unless the increase is justified by a significant increase in the market value of the goods or services. Under the new s. 187.8 CPA, since August 1st, 2018, exchange units obtained by a consumer remain valid and cannot expire at a given date or after a determined period. The effect of this new provision will be relaxed one year later by the new s. 79.6.4 of the Regulation. High-cost credit The provisions concerning high-cost credit come into force on August 1st, 2019: - According to the new s. 61.0.3 of the Regulation, a credit contract is high cost when its credit rate is 22 percentage points higher than the Bank of Canada bank rate. - The additions under the new s. 93 of the Regulation require that merchants offering high-cost credit hold a special permit. The new s. 18 of the Regulation provides, however, that banks, financial services cooperatives, trust and loan companies, mortgage lenders and insurance companies are exempt from the obligation to hold a permit. - Under the new s. 73 of the CPA, a high-cost credit contract may now be cancelled within 10 days after the date on which each of the parties is in possession of a duplicate of the contract. Tightening the rules on assessing the consumer’s repayment capacity The following provisions will apply as of August 1st, 2019: - Under the new ss. 103.2 et seq. CPA, and the new ss. 61.0.1 et seq. of the Regulation, the merchant must assess the consumer’s capacity to repay before granting credit, and the consumer’s capacity to repay will now be assessed according to the criteria set out, in particular the consumer’s gross income, the total of the monthly recurring disbursements related to housing, the total of the disbursements required under a credit contract or long-term lease of goods contract, the information contained in a credit report prepared at the time the capacity to repay is assessed and, where applicable, the credit history with that merchant. - The new s. 103.3 CPA states that a merchant who fails to conduct the assessment under s. 103.2 may lose the right to claim the credit charges. Where applicable, such merchant may have to refund any credit charges already paid by the consumer. - The new s. 61.0.5 of the Regulation provides that lenders who enter into high-cost credit contracts must provide consumers with a document summarizing the result of the assessment of their repayment capacity, their debt ratio, the methods for calculating the debt ratio, the elements used in the calculation of the consumer’s debt ratio and, where the debt ratio exceeds 45%, the document must include a compulsory warning. - The new s. 103.5 CPA states that any consumer having entered into a high-cost credit contract with a debt ratio in excess of 45% is presumed to have contracted an obligation that is excessive, abusive or exorbitant. - The new s. 103.1 CPA provides that any ground of defence raised by a consumer concerning a good financed is enforceable against the lender; in addition, in certain circumstances, the consumer can assert his or her rights against the merchant against the lender. Information on consumer credit The following provisions come into force on August 1st, 2019: - For variable credit contracts, under the new wording of s. 126 CPA, merchants must give consumers specific information in every statement of account, in particular the consumer’s rights and obligations regarding billing errors. - Under this section, credit card statements must indicate the estimated number of months or years required to repay the entire outstanding balance. - The new s. 126.1 CPA provides that the minimum monthly credit card payment may not be less than 5% of the outstanding credit card balance. All new contracts entered into after August 1st, 2019 are subject to this provision. For existing contracts, the transition period is six years. Therefore, the minimum payment will gradually increase by half a percentage point per annum, from 2% to 5%. - For the purposes of s. 127 of the CPA and s. 69.0.1 of the Regulation, statements of account sent electronically by credit card issuers must be available to cardholders for a period of two years. In accordance with the new s. 21 of the Regulation, umbrella mortgages will be subject to a double consent. The act constituting the hypothec must identify the consumer credit contracts secured by such a hypothec. In addition, the contract must also explicitly stipulate that the credit contract is secured by a hypothec on the value of the consumer’s property. Merchants who enter into credit contracts must comply with the provisions on umbrella mortgages starting August 1st, 2019. Note that this provision does not apply to first-ranking immovable hypothecs. Use of standard contracts As of August 1st, 2019, money lending contracts, credit card application forms, variable credit contracts, variable credit contracts entered into for the use of a credit card, instalment sales contracts, contracts of lease with guaranteed residual value, and contracts involving credit other than an instalment sale contract must now contain certain specific information found in a box at the very beginning of the contract, and satisfy several requirements as to form. Conclusion Other obligations will gradually come into force over the coming year. This is particularly true for the rules applicable to travel agencies that came into force on August 1st, 2018, and others that will come into force on January 1st, 2019, and for provisions on the issuance of certificates for representatives of collection agents and stipulations that must be included in contracts entered into by debt settlement service merchants, applicable starting February 1st, 2019. Finally, merchants will have to comply with all the other provisions in Act 24 and its regulations commencing August 1st, 2019. Merchants should pay special attention to the consumer law provisions that come into force over the coming year. The CPA contains penal provisions that impose considerable fines for those who contravene the Act or its regulations, ranging from $600 to $100,000. Finally, please note that all contracts covered under the Consumer Protection Act must now be drafted on good quality white paper. At least while paper still exists.... and with regards to that, there is unfortunately nothing in the new law. Let’s hope that the legislature will enact provisions in the near future that expressly permit merchants to enter into consumer contracts using electronic tablets. SQ 2017, c. 24 (hereafter “Act 24”). CQLR, c. P-40.1, r. 3 (hereafter the “Regulation”). CQLR, c. R-2.2, r. 1 CQLR, c. A-10, r. 1 CQLR, c. P-40.1 (hereafter the “CPA”).
Influencers Must Disclose Who Is Influencing Them
This publication was co-authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. The rise of social media and influencers has led us to consume incredible quantities of content every day, often without realizing that advertisements are disguised within it. When merchants and advertising agencies use the services of an influencer, they expose themselves to both reputational risks and legal risks, because there can be a fine line between sponsored content and spontaneous recommendation. In fact, this line is governed by Advertising Standards Canada (“ASC”) and the Competition Bureau (the “Bureau”). The Competition Act or the Consumer Protection Act (“C.P.A.”) may also apply. Influencer marketing covers all practices by which an advertiser promotes products through influencers with accounts on various social media platforms, such as Twitter, Facebook, Instagram, Snapchat, and YouTube. Influencers’ power in the digital marketing world is undeniable. Their social media presence allows them to have a direct connection with consumersand this genuine connection then enables advertisers to reach their target clientele. A material connection is conclusive in determining the responsibilities of the parties Any testimonial, endorsement, review or other representation (regardless of the medium used) must clearly indicate the existence of a material connection between the person making the representation and the entity that makes the product or service available to the endorser.1 The following may constitute a material connection: receipt of a product free of charge in exchange for mentioning it on social media; loan or rental of a product free of charge in exchange for mentioning it; payment in exchange for mentioning the product; being an employee of the advertiser; and an incentive to promote the product (such as a coupon or discount for a subsequent purchase). Under the Canadian Code of Advertising Standards, the material connection must be clearly and prominently disclosed in close proximity to the representation about the product or service,2 by: Publishing a clearhashtag (#Ad, #Sponsored, or #Promoted) within the first three lines of a post’sdescription,3 in order to allow viewers to see the sponsored content disclosure without scrolling down the page;4 Using the tools available on social media platforms, such as the “paid partnership with” designation on Instagram, so that users can clearly identify sponsored content while also enabling advertisers or agencies to access the post’s statistics. The following should be avoided: Hashtags such as #Ambassador, #Client, and #Partner, which are ambiguous and do not explain the nature of the relationship between the influencer and the brand.5 Does disclosure of a material connection, through a hashtag or one of the other measures discussed above, necessarily lead consumers to conclude that influencers are representatives of the merchants whose products they are praising? The definition of “representative” in the C.P.A. includes a person “regarding whom a merchant or a manufacturer has given reasonable cause to believe that such person is acting for him”. When this is the case, statements made by the influencer may become an advertisement within the meaning of the C.P.A., and the influencer could be considered an “advertiser” within the meaning of the C.P.A.6 An influencer need not disclose the nature (free travel, free products, direct payment, purchase discount, etc.) or total value of the incentive received.7 Can the advertiser dictate the influencer’s message? An influencer’s representation must be true and accurate. Section 238 C.P.A. provides: “No merchant, manufacturer or advertiser may, falsely, by any means whatever,(a) hold out that he is certified, recommended, sponsored or approved by a third person, or that he is affiliated or associated with the latter;[or] (b) hold out that a third person recommends, approves, certifies or sponsors certain goods or services.”8 This means that testimonials, opinions or statements of preference that are part of an advertising message must not contain inaccurate, deceptive or otherwise misleading claims.9 In addition, failure to disclose a material connection between the advertiser and the influencer could amount to failure to mention an important fact, which is prohibited under section 228 C.P.A. Below are some recommendations for composing an influencer’s message: The message must not make any omissions that would render the advertisement deceptive or misleading.10 The message must not exaggerate the nature or importance of competitive differences or disparage competing products or services11 under the Canadian Code of Advertising Standards. The message must present real opinions about the products or services, as expressed by users of these products or services. Advertisers must not use influencers to convey a message that would be a false or misleading representation if it were published directly by the advertiser. See the real-life case below: In 2016, American retailer Lord & Taylor, in collaboration with the virtual magazine Nylon, recruited 50 influencers to publish, all on the same day, a photograph of a specific dress, along with a link to an article in the magazine (advertising content ordered by Lord & Taylor) as well as the link to buy the dress. Lord & Taylor’s sponsorship of the magazine article and the material connection (receipt of the dress free of charge and payment of between $1,000 and $4,000 per influencer)12 were not disclosed. The campaign reached 11.4 million Instagram users. The FTC ruled that this failure to disclose constituted false and misleading advertising and the company was required to agree to an approval program for subsequent advertising campaigns, among other sanctions.13 In Quebec, the combined effect of the Canadian Code of Advertising Standardsand the C.P.A. could lead to a similar result. Must disclosure still occur when the consideration received for the social media mention is minimal? Yes. Whenever a consumer places weight on a recommendation, it is best to be transparent and disclose the material connection. Who is responsible for disclosing the connection: the advertiser or the influencer? Because the Canadian Code of Advertising Standardsapplies specifically to agencies, corporations, institutions or organizations seeking to improve their image or advance a point of view,14 it can be said that the responsibility for disclosing the connection rests on the advertiser. However, if the question is considered from the standpoint of the C.P.A., the obligation to disclose could also rest on the influencer. What consequences can arise out of non-compliance with disclosure obligations? In the United States, the FTC has the power to investigate and impose sanctions on offenders under section 5 of the Federal Trade Commission Act,15 which prohibits false or deceptive commercial practices. In Canada, ASC is a self-regulatory body, meaning that it can only respond to complaints and has no power to impose fines or penalties. In cases of flagrant refusal to cooperate, however, ASC could refer the complaint to the Competition Bureau, which deals with false and misleading commercial advertising if the effect of the representations is to interfere with free competition. The Bureau has also confirmed that influencers and advertisers who do not disclose a material connection are engaged in “astroturfing”, a practice by which false comments by consumers are published online, thereby affecting consumers’ perceptions of a product.16 In Quebec, the Office de la protection du consommateur has broad investigative powers and could also take action in a situation involving false or misleading representations or where influencers fail to disclose the material connection between themselves and the entity providing them with the product. Does disclosure of a material connection interfere with the impact of the advertising message? Disclosing that a product or service is sponsored does not diminish the influencer’s authenticity. On the contrary, failing to disclose the sponsorship can mislead consumers who are looking for information online, thereby having a negative effect on the company’s image and eroding consumer confidence in the digital economy. The onus is now on stakeholders to adopt exemplary practices regarding their relationships with influencers and the disclosure of the material connections that exist in these relationships. The social media sector is a hotbed of creativity, and advertisers can use this obligation to disclose, which allows their company’s name to reach a wider audience, to their advantage. Appendix: Bodies that oversee influence marketing practices In Canada: Advertising Standards Canada (“ASC”) Canadian Code of Advertising Standards (published by ASC); Interpretation Guideline #5 - Testimonials, Endorsements, Reviews (published by ASC) Competition Bureau (the “Bureau”) The Deceptive Marketing Practices Digest (published by the Bureau); Guidelines for Traders and Marketing Professionals (published by the International Consumer Protection and Enforcement Network,of which the Bureau is a member) A number of sources lay down the criteria for acceptable advertising in social media and the responsibilities of influencers,such as: Guides Concerning the Use of Endorsements and Testimonials in Advertising (published by the FTC), to which Interpretation Guideline #5 expressly refers. General statutes could also apply to influencer marketing. One example is the Competition Act and the provisions of that Act regarding deceptive marketing practices;17 another is the Consumer Protection Act (Quebec), which provides that merchants or participants in the advertising industry may not, by any means whatsoever, make false or misleading representations to a consumer, or fail to mention an important fact.18The Office de la protection du consommateur is responsible for enforcing the C.P.A. and the president of the Office may investigate any matter relating to it. Ad Standards, Interpretation Guideline #5 - Testimony, Endorsements, Reviews, October 2016, available online: http://www.adstandards.com/en/Standards/interpretationGuideline5.aspx. Ibid. Federal Trade Commission, Influencers, are your #materialconnection #disclosures #clearandconspicuous?, Tips & Advice, April 2017, available online: https://www.ftc.gov/news-events/blogs/business-blog/2017/04/influencers-are-your-materialconnection-disclosures. Federal Trade Commission, How to Make Effective Disclosure in Digital Advertising, March 2013, p. 9, available online: https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-staff-revises-online-advertising-disclosure-guidelines/130312dotcomdisclosures.pdf. See footnote 3. Section 2 C.P.A.: “advertiser” means a person who prepares, publishes or broadcasts an advertisement or who causes an advertisement to be prepared, published or broadcast; Federal Trade Commission, Endorsement Guides: What People Are Asking, September 2017, available online: https://www.ftc.gov/tips-advice/business-center/guidance/ftcs-endorsement-guides-what-people-are-asking. An “advertiser” is defined a follows in section 1(m) of the C.P.A.: “a person who prepares, publishes or broadcasts an advertisement or who causes an advertisement to be prepared, published or broadcast”. Section 1(a), Canadian Code of Advertising Standards; ss. 219 and 229 C.P.A. Section 1(b),Canadian Code of Advertising Standards. Section 6, Canadian Code of Advertising Standards; s. 228 C.P.A. https://www.ftc.gov/system/files/documents/cases/160315lordandtaylcmpt.pdf. Ibid. Definition in the Canadian Code of Advertising Standards. Section 5, Federal Trade Commission Act. Reference? Maybe: “What Canadian Influencers Need to Know About Disclosure Rules”,https://www.newswire.ca/blog/Influencer-Marketing-Disclosure-Canada.html Section 52(1), Competition Act, R.S.C. c. C-34. Title II of the C.P.A.
Intellectual Property and Artificial Intelligence
Although artificial intelligence has been evolving constantly in the past few years, the law sometimes has difficulty keeping pace with such developments. Intellectual property issues are especially important: businesses investing in these technologies must be sure that they can take full advantage of the commercial benefits that such technologies provide. This newsletter provides an overview of the various forms of intellectual property that are applicable to artificial intelligence. The initial instinct of many entrepreneurs would be to patent their artificial intelligence processes. However, although in some instances such a course of action would be an effective method of protection, obtaining a patent is not necessarily the most appropriate form of protection for artificial intelligence or software technologies generally. Since the major Supreme Court of the United States decision in Alice Corp. v. CLS Bank International1, it is now acknowledged that applying abstract concepts in the IT environment will not suffice to transform such concepts into patentable items. For instance, in light of that decision, a patent that had been issued for an expert system (which is a form of artificial intelligence) was subsequently invalidated by a U.S. court.2 In Canada, case law has yet to deal specifically with artificial intelligence systems. However, the main principles laid down by the Federal Court of Appeal in Schlumberger Canada Ltd. v. Canada (Commissioner of Patents)3 are still relevant to the topic. In that case, it was decided that a method of collecting, recording and analyzing data using a computer programmed on the basis of a mathematical formula was not patentable. However, in a more recent ruling, the same Court held that a data-processing technique may be patentable if it “[…] is not the whole invention but only one of a number of essential elements in a novel combination.”4 The unpatentability of an artificial intelligence algorithm in isolation is therefore to be expected. In Europe, according to Article 52 of the 1973 European Patent Convention, computer programs are not patentable. Thus the underlying programming of an artificial intelligence system would not be patentable under this legal system. Copyright is perhaps the most obvious form of intellectual property for artificial intelligence. Source codes have long been recognized as “works” within the meaning of the Canadian Copyright Act and in similar legislation in most other countries. Some jurisdictions have even enacted laws specifically aimed at software protection.5 On this issue, an earlier Supreme Court of Canada ruling in Apple Computer, Inc. v. Mackintosh Computers Ltd6 is of some interest: In that case, the Court held that computer programs embedded in ROM (read only memory) chips are works protected by copyright. A similar conclusion was reached earlier by a US Court.7 These decisions are meaningful with respect to artificial intelligence systems because they extend copyright protection not only to the codes programmed in complex languages or on advanced artificial intelligence platforms but also to the resulting object code, even on electronic media such as ROM chips. Copyright however does not protect ideas or the general principles of a particular code; it only protects the expression of those ideas or principles. In addition to copyright, the protection afforded by trade secrets should not be underestimated. More specifically, in the field of computer science, it is rare for customers to have access to the full source code. Furthermore, in artificial intelligence, source codes are usually quite complex, and it is precisely such technological complexity that contributes to its protection.8 This approach is particularly appealing for businesses providing software as a remote service. In these cases, users only have access to an interface, never to the source code or the compiled code. Therefore, it is almost impossible to reverse engineer such technology. However, when an artificial intelligence system is protected only by the concept of trade secret, there is always the risk that a leak originating with one or more employees will allow competitors to learn the source code, its structure or its particularities. It would be nearly impossible to prevent a source code from circulating online after such a leak. Companies may attempt to bolster the protection of their trade secrets with confidentiality agreements, but unfortunately this is insufficient where employees act in bad faith or in the case of industrial espionage. It would therefore be wise to implement knowledge-splitting measures within a company, so that only a restricted number of employees have access to all the critical information. Incidentally, it would be strategic for an artificial intelligence provider to make sure that its customers highlight its trademark, like the “Intel Inside” cooperative marketing strategy, to promote its system with potential customers. In the case of artificial intelligence systems sold commercially, it is also important to consider intellectual property in the learning outcomes of the systems resulting from its use. This raises the issue of ownership. Does a database generated by an artificial intelligence system developed by a software supplier while being used by one of its customers belong to the supplier or to this customer? Often, the contract between the parties will govern the situation. However a business may legitimately wish to retain the intellectual property in the databases generated by its internal use of the software, specifically where it provides it with its operational data or where it “trains” the artificial intelligence system through interaction with its employees. The desire to maintain the confidentiality of databases resulting from the use of artificial intelligence would suggest that they are assimilable to trade secrets. However, whether such databases are considered works in copyright law would be determined on a case-by-case basis. The court would also have to determine if the databases are the product of the exercise of the skill and judgment of one or more authors, as required by Canadian jurisprudence order to constitute “works”.9 Although situations where employees “train” an artificial intelligence system are more readily assimilable to an exercise of skill and judgment, cases where databases are constituted autonomously by a system could escape copyright protection “No copyright can subsist in […] data. The copyright must exist in the compilations analysis thereof”.10 In addition to the issues raised above, is the more prospective issue of the inventions created by artificial intelligence systems. So far, such systems have been used to identify research areas with opportunities for innovation. For example, data mining systems are already used to analyze patent texts, ascertain emerging fields of research, and even find “available” conceptual areas for potential patents.11 Artificial intelligence systems may be used in coming years to mechanically draft patent applications including patent claims covering potentially novel inventions.12 Can artificial intelligence have intellectual property rights, for instance, with respect to patents or copyrights? This is highly doubtful given that current legislation attributes rights to inventors and creators who must be natural persons, at least in Canada and the United States.13 The question then arises, would the intellectual property of the invention be granted to the designers of the artificial intelligence system? Our view is that at present the law is inappropriate in this regard because historically, in the area of patents, intellectual property was granted to the inventive person, and in the area of copyright, to the person who exercised skill and judgment. We also query whether a patent would be invalidated or a work enter the public domain on the ground that a substantial portion is generated by artificial intelligence (which is not the case in this newsletter!). Until that time, lawyers should familiarize themselves with the underlying concepts of artificial intelligence, and conversely, IT professionals should familiarize themselves with the concepts of intellectual property. For entrepreneurs who design or use artificial intelligence systems, constant consideration of intellectual property issues is essential to protect their achievements. Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal particularities, particularly the various branches and applications of artificial intelligence that will rapidly appear in all businesses and industries. 573 U.S._, 134 S. Ct. 2347 (2014). Vehicle Intelligence and Safety v. Mercedes-Benz, 78 F. Supp.3d 884 (2015), maintenue en appel Federal Circuit. No. 2015-1411 (U.S.).  1 C.F. 845 (C.A.F.). Canada (Procureur général) v. Amazon.com, inc.,  2 RCF 459, 2011 CAF 328. For example, in Brazil: Lei do Software No. 9.609 du 19 février, 1998; en Europe : Directive 2009/24/CE concernant la protection juridique des programmes d’ordinateur.  2 RCS 209, 1990 CanLII 119 (CSC). Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3d Cir. 1983) (U.S.). Keisner, A., Raffo, J., & Wunsch-Vincent, S. (2015). Breakthrough technologies-Robotics, innovation and intellectual property (No. 30). World Intellectual Property Organization- Economics and Statistics Division. CCH Canadian Ltd. v. Law Society of Upper Canada, 2004 CSC 13,  1 RCS 339. See, for example: : Geophysical Service Incorporated v. Canada-Nova-Scotia Offshore Petroleum Board, 2014 CF 450. See, for example: : Lee, S., Yoon, B., & Park, Y. (2009). An approach to discovering new technology opportunities: Keyword-based patent map approach. Technovation, 29(6), 481-497; Abbas, A., Zhang, L., & Khan, S. U. (2014). A literature review on the state-of-theart in patent analysis. World Patent Information, 37, 3-13. Hattenbach, B., & Glucoft, J. (2015). Patents in an Era of Infinite Monkeys and Artificial Intelligence. Stan. Tech. L. Rev., 19, 32. Supra, note 7.
Deceptive Online Marketing Practices: Intermediaries, what is your legal exposure?
In recent decades, online advertising has become the single most efficient and interactive way to reach consumers and assess their behaviour. While television and print audiences continue to dwindle and overall marketing strategies that focus on these mediums are less able to effectively measure and assess performance, online advertising targets a growing market whose technological medium allows for the direct measurement of a marketing campaign’s success. These changes in the marketing world, exciting and new as they may be, pose an important set of legal risks. In using and displaying online ads, merchants and intermediaries should be wary of consumer protection and competition laws, both provincial and federal, so as to avoid unpleasant surprises in the form of pricy sanctions and lawsuits. The law may not have evolved as much as the technologies, but its broad language can adapt to the modern reality so as to protect those who receive the merchant’s new messages. The two main types of online marketing are Search Engine Marketing (“SEM”) and Social Media Marketing (“SMM”). Search engine companies index website content to organize and present the available information in an understandable format. Merchants offering products at retail can present themselves on top of these rankings, targeting specific keywords consumers search for. SMM is a form of display advertising that allows advertisers to present their services in an engaging manner on various popular social media platforms. This targeted conversation with consumers increases brand awareness and provides insights and feedback. Both SEM and SMM represent advertising formats governed by law. Provincial legislation The Consumer Protection Act1 of Québec (“CPA”) regulates and governs advertising activities in the Province of Québec. Namely, the CPA prohibits false or misleading advertising. The provisions of the CPA are aimed at both the merchants and the actors of the advertising industry. The CPA indicates that “no merchant, manufacturer or advertiser may, by any means whatever, make false or misleading representations to a consumer.”2 This prohibition applies to all media including print, radio and television, the Internet being no exception. The Province also enacted the Act to establish a legal framework for information technology3 (“LCCJIT”), in force since 2001, which provides for the liability of online intermediaries such as search engines and website hosts, in a context that is not specific to advertising. Indeed, Justice Rochon in the Court of Appeal case of Prud’homme c. Rawdon4 explains that while “a contributory fault may be committed by third parties who communicate, broadcast, or host the information [...] sections 22, 26, 36 and 37 of the Act to establish a legal framework for information technology (R.S.Q., c. C-1.1) appear [...] to reduce if not remove certain third parties from any liability.” Section 22 establishes that a non-search engine host will be exempt from liability unless it has knowledge that the information it stores is being used for illegal activity or if it does not promptly act to impede access to such illegal documentation. Similarly, a search engine will be liable if it has knowledge that the service it provides enables illegal activity and if it does not promptly cease to provide such a service to the people it knows are engaged in that activity. Either way, the determining factor is knowledge. Section 27 of this same Act states that: A service provider, acting as an intermediary, that provides communication network services or who stores or transmits technology-based documents on a communication network is not required to monitor the information communicated on the network or contained in the documents or to identify circumstances indicating that the documents are used for illicit activities. As such, knowledge is not presumed and hence, there is an implicit necessity of notifying the intermediary of the existence of such illicit content. Once such notice is given, the intermediary, as defined in section 22, must act promptly to take down the content or limit access to it. Federal legislation The Competition Act5 (“CA”) regulates most business conduct in Canada, its main purpose being to prevent anti-competitive practices in the marketplace. The CA prohibits false or misleading representation and deceptive marketing practices in promoting the supply of a product or any business interest. Moreover, persons who “caused the representation to be made” are held liable for false or misleading representations or deceptive practices. This implies that not only is liability imposed on the person who crafts misleading or false advertisement, but also on the person who permits a representation to be made or sent. The “Enforcement Guidelines – Application of the Competition Act to Representations on the Internet” mention that, in the online environment, the Competition Bureau will be called upon to consider the respective roles of the different intermediaries involved in advertising on the Internet. It is further explained that: [i]n its enforcement efforts, the Bureau focuses on the party who “causes” the representation to be made. Determining causation requires an analysis of the facts to ascertain which player possesses decision-making authority or control over content and to assess the nature and degree of their authority and control.6 [our emphasis] Thus, the level of liability attributed to a given party will largely depend on the level of control they have over the content and whether they played a part in deciding whether the ad ran or not. Under the CA, there are two adjudicative regimes which sanction false or misleading representations: a civil track or the criminal track. The civil regime applies to most instances of misleading representations and deceptive marketing practices since the burden of proof is lighter. The general criminal process, however, covers “the most egregious matters” and requires that a component of criminal intent be demonstrated.7 Potential liability for advertising generators Merchant The merchant is the party that has the authority to decide whether an ad is run or not. As such, it is usually easiest to attribute liability to the merchant, who is the party most often held liable for deceptive marketing practices, be it with respect to the CPA or the CA. Media planning agency The media planning agency can have a dual role. That is, it may act as a creative agency that creates the advertisement (liable under the CA) and/or may assist an advertiser in determining which media to use, be it television programs, newspapers, bus-stop posters, in-store displays, banner ads on the web, or a flyer on Facebook. The liability of an Internet media planning agency will naturally depend on the exact role it plays in the advertisement. In terms of the criterion of authority and control, if the agency acts as “the creative” and is responsible for the ad content, then it is likely to be held liable for false or misleading representation. If, on the contrary, the media planning agency is solely responsible for speculating on the viewer demographics and accordingly elaborating strategies as to which media would be the most effective to run ads in, then it is not likely to be held liable for deceptive marketing practices. As the agency’s participation increases so does its duty of care.8 Participation, in the eyes of the Federal Trade Commission and the courts is taken to mean when the agency carries out the will of the advertiser.9 Ultimately, whether an agency’s participation is “active” depends on a case-bycase analysis.10 There could also be instances where the agency would be responsible towards the merchant. Potential liability for advertising disseminators Media placement agency The media placement agency, also known as media buyer, is responsible for the negotiation and placement of the media campaign. Its role includes optimizing and evaluating the ad’s effectiveness both during and after the advertising campaign’s completion. Additionally, the media placement agency generates added value by either negotiating lower rates with the host or adding layers of behavioural or location based targeting through ad-platforms (typically not liable). Website or web page host The host, also known as the publisher, is an entity that owns a web page or a website and that, in exchange for some economic compensation, is willing to publish ads of other parties in some spaces of its page or site. LCCJTI establishes that a non-search engine host will be exempt from liability unless it has knowledge that the information it stores is being used for illegal activity or if it does not promptly act to impede access to such illegal documentation. Similarly, a search engine will be liable if it has knowledge that the service it provides enables illegal activity and if it does not promptly cease to provide such a service to the people it knows are engaged in that activity. Either way, the determining factor is knowledge. With respect to the CA, a host may benefit from the publisher’s defense and not be held liable in a civil suit provided it does not knowingly or recklessly partake in or allow false or misleading advertising. The take-away In navigating new online marketing strategies, one should bear in mind that as efficient as online advertising can be, it has also significantly contributed to a rise in the potential for false or misleading representations. The threshold in assessing false or misleading representations is particularly low, as it is evaluated from the average consumer’s perspective, i.e. a “credulous and inexperienced” consumer.11 Although the various players in the marketing world are no strangers to the concept of false or misleading advertising, they should be cautious in using new forms of marketing so as not to go beyond this low threshold. Indeed, there are certain considerations that are specific to the Internet medium, which involve among other things, the speed and efficiency with which consumers can perceive ads. One should also be wary of legislative changes regarding consumer protection and competition law. For instance, Bill 13412 has recently set out to amend the CPA so as to prohibit merchants from “falsely or misleadingly representing to consumers that credit may improve their financial situation or that credit reports prepared about them will be improved.”13 There is a considerable volume of credit offering advertising that circulates via SEM and SMM. Advertisers should be cautious and make sure they respect these measures once they are enacted as well as the other legislative tools mentioned in this publication. R.S.Q., c. P-40.1. Ibid., s. 219. R.S.Q., c. C-1.1. 2010 QCCA 584, para 75 [Unofficial English translation]. R.S.C. 1985, c. C-34. Innovation Government of Canada, “Application of the Competition Act to Representations on the Internet”, (October 16, 2009). Innovation Government of Canada, “Misleading Representations and Deceptive Marketing Practices: Choice of Criminal or Civil Track under the Competition Act”, (September 22, 1999). Kelley Drye & Collier Shannon, “Ad Agency Liability” (2005) Ad Law Advisory. Ibid. Ibid. Richard v. Time Inc., 2012 SCC 8,  1 SCR 265, para 78. An Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs, Bill 134 (Introduction – May 2, 2017), 1st Sess., 41st Legis (QC). Ibid., Explanatory Notes.
When artificial intelligence is discriminatory
Artificial intelligence has undergone significant developments in the last few years, particularly in respect of what is now known as deep learning.1 This method is the extension of the neural networks which have been used for a few years for machine learning. Deep learning, as any other form of machine learning, requires that the artificial intelligence system be placed before various situations in order to react to situations which are similar to previous experiences. In the context of business, artificial intelligence systems are used, among other things, to serve the needs of customers, either directly or by supporting employees interventions. The quality of the services that the business provides is therefore increasingly dependent on the quality of these artificial intelligence systems. However, one must not make the mistake of assuming that such a computer system will automatically perform its tasks flawlessly and in compliance with the values of the business or its customers. For instance, researchers at the Carnegie Mellon University recently demonstrated that a system for presenting targeted advertising to Internet users systematically offered less well-paid positions to women than to men.2In other words, this system behaved in what could be called a sexist way. Although the researchers could not pinpoint the origin of the problem, they were of the view that it was probably a case of loss of control by the advertising placement services supplier over its automated system and they noted the inherent risks of large-scale artificial intelligence systems. Various artificial intelligence systems have had similar failures in the past, demonstrating racist behaviour, even to the point of forcing an operator to suspend access to its system.3 In this respect, the European Union passed in April 2016 a regulation pertaining to the processing of personal information which, except in some specific cases, prohibits automated decisions based on some personal data, including the “racial or ethnic origin, political opinions, religious or philosophical beliefs, or trade union membership, and the processing of genetic data, biometric data for the purpose of uniquely identifying a natural person, data concerning health or data concerning a natural person’s sex life or sexual orientation […]”.4 Some researchers wonder about the application of this regulation, particularly as discrimination appears in an incidental manner, without the operator of the artificial intelligence system intending it.5 In Québec, it is reasonable to believe that a business which would use an artificial intelligence system that would act in a discriminatory manner within the meaning of the Charter of Human Rights and Freedoms would be exposed to legal action even in the absence of a specific regulation such as that of the European Union. Indeed, the person responsible for an item of property such as an artificial intelligence system could incur liability in respect of the harm or damage caused by the autonomous action of such item of property. Furthermore, the failure to having put in place reasonable measures to avoid discrimination would most probably be taken into account in the legal analysis of such a situation. Accordingly, special vigilance is required when the operation of an artificial intelligence system relies on data already accumulated within the business, data from third parties (particularly what is often referred to as big data), or when the data will be fed to the artificial intelligence system by employees of the business or its users during the course of a “learning” period. All these data sources, which incidentally are subject to obligations under privacy laws, may be biased at various degrees. The effects of biased sampling are neither new nor are they restricted to the respect of human rights. It is a phenomenon which is well-known by statisticians. During the WW II, the U.S. Navy asked a mathematician named Abraham Wald to provide them with statistics on the parts of bomber planes which had been most hit for the purpose of determining what areas of these planes should be reinforced. Wald demonstrated that the data on the planes returning from missions was biased, as it did not take into account the planes that were taken down during these missions. The areas damaged on the returning planes did not need to be reinforced, rather the places which were not hit were the one that had to be. In the context of the operation of a business, an artificial intelligence system to which biased data is fed may thus make erroneous decisions – with disastrous consequences for the business on a human, economic and operation point of view. For instance, if an artificial intelligence system undergoes learning sessions conducted by employees of the business, their behaviour will undoubtedly be reflected in the system’s own subsequent behaviour. This may be apparent in the judgments made by the artificial intelligence system in respect of customer requests, but also directly in its capacity to adequately solve the technical problems submitted to it. Therefore, there is the risk of perpetuating the problematic behaviour of some employees. Researchers of the Machine Intelligence Research Institute have proposed various approaches to minimize the risks and make the machine learning of artificial intelligence systems consistent with its operator’s interests.6 According to these researchers, it would certainly be appropriate to adopt a prudent approach as to the objectives imposed on such systems in order to avoid them providing extreme or undesirable solutions. Moreover, it would be important to establish informed supervision procedures, through which the operator may ascertain that the artificial intelligence system performs, as a whole, in a manner consistent with expectations. From the foregoing, it must be noted that a business wishing to integrate an artificial intelligence system in its operations must take very seriously the implementation phase, during which the system will “learn” what is expected of it. It will be important to have in-depth discussions with the supplier on the operation and performance of his technology and to express as clearly as possible in a contract the expectations of the business as to the system to be implemented. The implementation of the artificial intelligence system in the business must be carefully planned and such implementation must be assigned to trustworthy employees and consultants who possess a high level of competence with respect to the relevant tasks. As to the supplier of the artificial intelligence system, it must be ensured that the data provided to him is not biased, inaccurate or otherwise defective, in such a way that the objectives set out in the contract as to the expected performance of the system may reasonably be reached, thus minimizing the risk of litigation arising from discriminatory or otherwise objectionable behaviour of the artificial intelligence system. Not only such litigation can be expensive, it could also harm the reputation of both the supplier and its customer. LeCun, Y., Bengio, Y., & Hinton, G. (2015). Deep learning. Nature, 521(7553), 436-444. Datta, A., Sen, S., & Zick, Y. (2016, May). Algorithmic transparency via quantitative input influence: Theory and experiments with learning systems. In Security and Privacy (SP), 2016 IEEE Symposium on (pp. 598-617). IEEE; Datta, A., Tschantz, M. C., & Datta, A. (2015). Also see: Automated experiments on ad privacy settings. Proceedings on Privacy Enhancing Technologies, 2015(1), 92-112. Reese, H. (2016). Top 10 AI failures of 2016. The case of Tay, Microsoft’s system, has been much discussed in the media. Regulation (EU) 2016/679 of the European Parliament and of the Council of April 27, 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). Goodman, B., & Flaxman, S. (2016, June). EU regulations on algorithmic decision-making and a “right to explanation”. In ICML Workshop on Human Interpretability in Machine Learning (WHI 2016). Taylor, J., Yudkowsky, E., LaVictoire, P., & Critch, A. (2016). Alignment for advanced machine learning systems . Technical Report 20161, MIRI.
Artificial intelligence and its legal challenges
Is there a greater challenge than to write a legal article on an emerging technology that does not exist yet in its absolute form? Artificial intelligence, through a broad spectrum of branches and applications, will impact corporate and business integrity, corporate governance, distribution of financial products and services, intellectual property rights, privacy and data protection, employment, civil and contractual liability, and a significant number of other legal fields. What is artificial intelligence? Artificial intelligence is “the science and engineering of making intelligence machines, especially intelligent computer programs”.1 Essentially, artificial intelligence technologies aim to allow machines to mimic “cognitive” functions of humans, such as learning and problem solving, in order for them to conduct tasks that are normally performed by humans. In practice, the functions of artificial intelligence are achieved by accessing and analyzing massive data (also known as “big data”) via certain algorithms. As set forth in a report published by McKinsey & Company in 2013 on disruptive technologies, “[i]mportant technologies can come in any field or emerge from any scientific discipline, but they share four characteristics: high rate of technological change, broad potential scope of impact, large economic value that could be affected, and substantial potential for disruptive economic impact”.2 Despite the interesting debate over the impact of artificial intelligence on humanity,3 the development of artificial intelligence has been on an accelerated path in recent years and we witnessed some major breakthroughs. In March 2016, Google’s computer program AlphaGo beat a world champion Go player, Lee Sedol, by 4 to 1 in the ancient Chinese board game. The breakthroughs reignited the world’s interest in artificial intelligence. Technology giants like Google and Microsoft, to name a few, have increased their investments in the research and development of artificial intelligence. This article will discuss some of the applications of artificial intelligence from a legal perspective and certain areas of law that will need to adapt - or be adapted - to the complex challenges brought by current and new developments in artificial intelligence. Legal challenges Artificial intelligence and its potential impacts have been compared to those of the Industrial Revolution, a form of transition to new manufacturing processes using new systems and innovative applications and machines. Health care L’intelligence artificielle est certes promise à un bel avenir dans le Artificial intelligence certainly has a great future in the health care industry. Applications of artificial intelligence with abilities to analyze massive data can make such applications a powerful tool to predict drug performance and help patients find the right drug or dosage that matches with their situation. For example, IBM’s Watson Health program “is able to understand and extract key information by looking through millions of pages of scientific medical literature and then visualize relationships between drugs and other potential diseases”.4 Some features of artificial intelligence can also help to verify if the patient has taken his or her pills through an application on smartphones, which captures and analyzes evidence of medication ingestion. In addition to privacy and data protection concerns, the potential legal challenges faced by artificial intelligence applications in the health care industry will include civil and contractual liabilities. If a patient follows the recommendation made by an artificial intelligence system and it turns out to be the wrong recommendation, who will be held responsible? It also raises legitimate complex legal questions, combined with technological concerns, as to the reliability of artificial intelligence programs and software and how employees will deal with such applications in their day-to-day tasks. Customer services A number of computer programs have been created to make conversation with people via audio or text messages. Companies use such programs for their customer services or for entertainment purposes, for example in messaging platforms like Facebook, Messenger and Snapchat. Although such programs are not necessarily pure applications of artificial intelligence, some of their features, actual or in development, could be considered as artificial intelligence. When such computer programs are used to enter into formal contracts (e.g., placing orders, confirming consent, etc.), it is important to make sure the applicable terms and conditions are communicated to the individual at the end of the line or that a proper disclaimer is duly disclosed. Contract enforcement questions will inevitably be raised as a result of the use of such programs and systems. Financial industry and fintech In recent years, many research and development activities have been carried out in the robotic, computer and tech fields in relation to financial services and the fintech industry. The applications of artificial intelligence in the financial industry will vary from a broad spectrum of branches and programs, including analyzing customers’ investing behaviours or analyzing big data to improve investment strategies and the use of derivatives. Legal challenges associated with artificial intelligence’s applications in the financial industry could be related, for example, to the consequences of malfunctioning algorithms. The constant relationship between human interventions and artificial intelligence systems, for example, in a stock trading platform, will have to be carefully set up to avoid, or at least confine, certain legal risks. Autonomous vehicles Autonomous vehicles are also known as “self-driving cars”, although the vehicles currently permitted to be on public roads are not completely autonomous. In June 2011, the state of Nevada became the first jurisdiction in the world to allow autonomous vehicles to operate on public roads. According to Nevada law, an autonomous vehicle is a motor vehicle that is “enabled with artificial intelligence and technology that allows the vehicle to carry out all the mechanical operations of driving without the active control or continuous monitoring of a natural person”.5 Canada has not adopted any law to legalize autonomous cars yet. Among the significant legal challenges facing autonomous cars, we note the issues of liability and insurance. When a car drives itself and an accident happens, who should be responsible? (For additional discussion of this subject under Québec law, refer to the Need to Know newsletter, “Autonomous vehicles in Québec: unanswered questions” by Léonie Gagné and Élizabeth Martin-Chartrand.) We also note that interesting arguments will be raised respecting autonomous cars carrying on commercial activities in the transportation industry such as shipping and delivery of commercial goods. Liability regimes The fundamental nature of artificial intelligence technology is itself a challenge to contractual and extra-contractual liabilities. When a machine makes or pretends to make autonomous decisions based on the available data provided by its users and additional data autonomously acquired from its own environment and applications, its performance and the end-results could be unpredictable. In this context, Book Five of the Civil Code of Québec (CCQ) on obligations brings highly interesting and challenging legal questions in view of anticipated artificial intelligence developments: Article 1457 of the CCQ states that: Every person has a duty to abide by the rules of conduct incumbent on him, according to the circumstances, usage or law, so as not to cause injury to another. Where he is endowed with reason and fails in this duty, he is liable for any injury he causes to another by such fault and is bound to make reparation for the injury, whether it be bodily, moral or material in nature. He is also bound, in certain cases, to make reparation for injury caused to another by the act, omission or fault of another person or by the act of things in his custody. Article 1458 of the CCQ further provides that: Every person has a duty to honour his contractual undertakings. Where he fails in this duty, he is liable for any bodily, moral or material injury he causes to the other contracting party and is bound to make reparation for the injury; neither he nor the other party may in such a case avoid the rules governing contractual liability by opting for rules that would be more favourable to them. Article 1465 of the CCQ states that: The custodian of a thing is bound to make reparation for injury resulting from the autonomous act of the thing, unless he proves that he is not at fault. The issues of foreseeable damages or direct damages, depending on the liability regime, and of the “autonomous act of the thing” will inescapably raise interesting debates in the context of artificial intelligence applications in the near future. In which circumstances the makers or suppliers of artificial intelligence applications, the end-users and the other parties benefiting from such applications could be held liable – or not – in connection with the results produced by artificial intelligence applications and the use of such results? Here again, the link between human interventions - or the absence of human interventions - with artificial intelligence systems in the global chain of services, products and outcomes provided to a person will play an important role in the determination of such liability. Among the questions that remain unanswered, could autonomous systems using artificial intelligence applications be “personally” held liable at some point? And how are we going to deal with potential legal loopholes endangering the rights and obligations of all parties interacting with artificial intelligence? In January 2017, the Committee on Legal Affairs of European Union (“EU Committee”) submitted a motion to the European Parliament which calls for legislation on issues relating to the rising of robotics. In the recommendations of the EU Committee, liability law reform is raised as one of the crucial issues. It is recommended that “the future legislative instrument should provide for the application of strict liability as a rule, thus requiring only proof that damage has occurred and the establishment of a causal link between the harmful behavior of a robot and the damage suffered by an injured party”.6 The EU Committee also suggests that the European Parliament considers implementing a mandatory insurance scheme and/or a compensation fund to ensure the compensation of the victims. What is next on the artificial intelligence front? While scientists are developing artificial intelligence at a speed faster than ever in many different fields and sciences, some areas of the law may need to be adapted to deal with associated challenges. It is crucial to be aware of the legal risks and to make informed decisions when considering the development and use of artificial intelligence. Artificial intelligence will have to learn to listen, to appreciate and understand concepts and ideas, sometimes without any predefined opinions or beacons, and be trained to anticipate, just like human beings (even if some could argue that listening and understanding remain difficult tasks for humans themselves). And at some point in time, artificial intelligence developments will get their momentum when two or more artificial intelligence applications are combined to create a superior or ultimate artificial intelligence system. The big question is, who will initiate such clever combination first, humans or the artificial intelligence applications themselves? John McCarthy, What is artificial intelligence?, Stanford University. Disruptive technologies: Advances that will transform life, business, and the global economy, McKinsey Global Institute, May 2013. Alex Hern, Stephen Hawking: AI will be “either best or worst thing” for humanity, theguardian. Engene Borukhovich, How will artificial intelligence change healthcare?, World Economic Forum. Nevada Administrative Code Chapter 482A-Autonomous Vehicles, NAC 482A.010. Committee on Legal Affairs, Draft report with recommendations to the Commission on Civil Law Rules on Robotics, article 27. (2015/2103 (INL))
Artificial intelligence: contractual obligations beyond the buzzwords
Can computers learn and reason? If so, what are the limitations of the tasks that they can be given? These questions have been the subject of countless debate as far back as 1937, when Alan Turing published his work on computable numbers1. Many researchers have devoted themselves to developing methods that would allow computers to interact more easily with human beings and integrate processes used to learn from the situations encountered. Generally speaking, the aim was to have computers think and react like a human being would. In the early 1960s, Marvin Minsky, a noted MIT researcher, outlined what he regarded as the steps along the path to artificial intelligence2. The power of the latest computers and the capacity to store phenomenal amounts of information now allow for artificial intelligence to be integrated in business and daily life, using processes known as “machine learning”, “data mining” or “deep learning”, the last of which has undergone rapid development in recent years3. The use of artificial intelligence in business raises many legal issues that are of crucial importance when companies enter into contracts respecting the sale or purchase of artificial intelligence products and services. From a contractual perspective, it is important to properly frame the obligations and expectations of each party. For suppliers of artificial intelligence products, a major issue is their liability in the event of product malfunctions. For example, could the designers of an artificial intelligence system used as an aid in making medical decisions be held liable, directly or indirectly, for a medical mistake resulting from erroneous information or suggestions given by the system? It may be appropriate to ensure that such contracts expressly require that the professionals using such systems maintain control over the results, regardless of the context in which the system is operating, be it medical, engineering or business management. In return, companies wishing to use such products must clearly frame their targeted objectives. This includes not only a stated performance objective for the artificial intelligence system, but also a definition of what would constitute product failure and the legal consequences thereof. For example, in a contract for the use of artificial intelligence in production management, is the objective to improve performance or reduce specific problems? And what happens if the desired results are not achieved? Another major issue is the intellectual property of the data integrated and generated by a particular artificial intelligence product. Many artificial intelligence systems require the use of a large volume of the company’s data for such systems to acquire the necessary learning “experience”. However, who owns that data and who owns the results what the artificial intelligence system has learned? For example, for an artificial intelligence system to become effective, a company would have to supply an enormous quantity of data and invest considerable human and financial resources to guide its learning. Does the supplier of the artificial intelligence system acquire any rights to such data? Can it use what its artificial intelligence system learned in one firm to benefit its other clients? In extreme cases, this would mean that the experience acquired by a system in a particular company would benefit its competitors. Where the artificial intelligence system is used in applications targeting consumers or company employees, the issues related to confidentiality of the data used by the artificial intelligence system and protection of the privacy of such persons should not be overlooked. The above are some of the contractual issues that must be considered and addressed to prevent problems from arising. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries. Turing, A. M. (1937). On computable numbers, with an application to the Entscheidungsproblem. Proceedings of the London mathematical society, 2(1), 230-265. Minsky, M. (1961). Steps toward artificial intelligence. Proceedings of the IRE, 49(1), 8-30. See: LeCun, Y., Bengio, Y., & Hinton, G. (2015). Deep learning. Nature, 521(7553), 436-444.
Artificial Intelligence and the 2017 Canadian Budget: is your business ready?
The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.