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Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.

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  • Insurer's Duty to Defend: Bill 82 Opens the Door to Possible Limitations

    On December 11, 2020, the Minister of Finance, Éric Girard, introduced and tabled Bill 82 entitled An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020 (hereinafter the “Bill”) before the National Assembly.  The Bill opens the door to possible limitations on the duty to defend with respect to certain categories of liability insurance contracts to be determined by regulation. Background The Civil Code of Quebec (“C.C.Q.”) provides in articles 2500 and 2503 C.C.Q. that the insurance limits provided for in liability insurance contracts and the costs resulting from actions against the insured, including those associated with the defence, are borne by the insurer in excess of these limits. Since these provisions are of public order, the parties to the contract cannot agree to the contrary and the insurer's obligation to pay these defence costs is practically unlimited. The increase in the frequency and size of claims, as well as the explosion in costs associated with the defence of insureds, have contributed to a hardening of the market since 2019.  In such a market, insurance companies are applying stricter pricing and demanding higher premiums. In some cases, some insurers are withdrawing completely from the market or from certain industries, creating real difficulties for many companies. The absence of a possible limitation on the insurers' duty to defend, a principle specific to Quebec, was likely to make this market less attractive to national and international insurers. Proposed legislative change The Bill provides that the insurers' duty to defend under articles 2500 and 2503 C.C.Q. may be limited with respect to certain liability insurance contracts that will be determined by regulation. If the proposed amendment is accepted in its present form, the new article 2503 C.C.Q. will henceforth read as follows: 2503. The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts  [Emphasis added] This amendment has no practical impact in the short term since a regulation will have to be adopted to specify the contracts that may be subject to this limitation. We anticipate that the legislator will first target more special classes of liability insurance contracts, often purchased by more sophisticated insureds, such as Directors and Officers liability insurance contracts. Nevertheless, this is a significant step forward that will undoubtedly stimulate the interest of certain specialized insurers for Quebec risks. Upcoming steps The Bill, although tabled, must go through several stages before the proposed amendment becomes law. Even if the Bill could be assented to in the coming months, a regulation giving effect to the new paragraph of article 2503 C.C.Q. will also have to be drafted and passed. We will therefore continue to monitor the progress of this legislative matter.

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  • The Court of Appeal Adds a Few More Shades to Canada’s Grey Market

    In Canada, as elsewhere in the world, intellectual property owners have made numerous attempts to control their distribution channels through trademark law, copyright law, or exclusive contracts, without much success. However, in a recent decision (Costco Wholesale Canada Ltd. c. Simms Sigal & Co. Ltd.,1 hereinafter referred to as “Costco”), the Court of Appeal of Quebec found that Costco Wholesale Canada Ltd. had committed the fault of contractual interference in a situation involving the grey market, also known as “grey marketing.” This decision calls into question a long series of decisions on the legality of the grey market and the principle of free competition, which is well established in Quebec law.2 The grey market is defined as follows: Goods that are imported contrary to the wishes of the copyright holder or an authorized importer in a specific territory. It refers to goods which, as a general rule, are legitimately marketed in the foreign market, but whose presence in the local market is clouded by allegations of infringement. For this reason it is referred to as the ‘grey market’ in contrast to the black market, in which copyright is infringed, and the white market, where there is no copyright infringement.1 The Court of Appeal for Ontario recently confirmed that grey marketing is a legal way of buying genuine branded products abroad and reselling them in competition with a local distributor of the foreign manufacturer.3 In Costco, Simms Sigal & Co. Ltd. (“Simms”) imported and distributed high-end clothing to retailers in Canada. In 2006, Simms entered into an exclusive distribution agreement with Rock & Republic Enterprise Inc. (“R & R”) for the distribution of R & R’s denim line, ready-to-wear clothing, and accessories. R & R jeans were not only high-end; they were also in high demand, selling for between $250 and $325 a pair. In November 2009, Costco Wholesale Canada Ltd. (“Costco”) was approached by a distributor who offered to sell it R & R jeans at a very low price. The evidence shows that R & R knew that those jeans would end up in the Canadian market— R & R would sell to a first distributor who would then sell to a second distributor, who would in turn sell to Costco. Thus, Costco bought R & R jeans through two intermediaries and offered them to its customers for $98.99. Simms sent a formal notice to Costco demanding that it cease selling the R & R jeans, alleging that it was the exclusive distributor and that the jeans Costco was selling were counterfeit. After checking with its distributor, Costco received a letter from R & R confirming that the jeans were genuine products. Costco’s distributor added that R & R “are already dealing with the mad distributor” and asked Costco to “please [not] release this letter to the distributor”.4 With this letter in hand, Costco answered Simms that the jeans were genuine products acquired on the grey market, and that it was entitled to sell them in Canada. In July 2010, Simms sent a second formal notice to Costco, reiterating that it had exclusive distribution rights to R & R jeans in Canada. Simms then instituted proceedings against R & R and Costco, but R & R filed for bankruptcy. At trial, the Superior Court judge held Costco liable for damage caused to Simms as of November 2009, when it had received the first formal notice.5 According to the judge, Costco chose to ignore the existence of the exclusive distribution agreement between Simms and R & R, adopting a position of wilful blindness, whereas it should have inferred, based on its distributor’s behaviour, that an exclusive distribution agreement did indeed exist and that R & R was breaching it. Costco was ordered to pay the sum of $361,005.44 in damages to Simms. Costco was also ordered to pay exemplary punitive damages of $500,000.00 as a result of the gravity of its fault of contractual interference and the effect on Simms’ reputation on the Canadian market. The Court of Appeal of Quebec upheld the Superior Court’s decision and held Costco liable. Contractual interference and the notion of fault In Quebec civil law, under the principle of relativity of contracts, contractual obligations and undertakings may bind only the contracting parties. The fault of contractual interference is an exception to this principle. In the 1975 decision Trudel v. Clairol,6 which dealt with a form of grey market, the Supreme Court of Canada defined the fault of contractual interference as “an act of dishonesty to be associated knowingly with a breach of contract.”7 Simply put, to justify granting remedy for contractual interference, a plaintiff must show: “The existence of a contract and valid contractual obligations that the third party allegedly contravened”;8 “The constituent elements of the fault of a third party,” which are: “the third party’s knowledge of the contractual rights; incitement to or participation in the breach of the contractual obligations; and bad faith or disregard for the interests of others.”9 In Costco, the Court of Appeal specified that “receipt of a copy of the contract by the third party or even that the exclusivity clause was read by the third party”10 is not required to find that the third party committed a fault, and that the analysis of the third party’s knowledge of the contract is contextual.11 In this regard, the Court of Appeal confirmed that the formal notice of November 2009 was not ambiguous, given that Simms’ assertion that it was the exclusive distributor of R & R products was “clear and require[d] no interpretation”.12 It added that Costco’s conduct was not that of a normally prudent and diligent person, and that it had adopted a position of wilful blindness by continuing to sell R & R jeans even though R & R’s letter concerning its rights was not signed and predated the request for confirmation. In the Court of Appeal’s opinion, these facts combined with the formal notice should have been sufficient to conclude that there was indeed a breach of contract.13 Although the Court of Appeal concluded that the trial judge did not impose an additional burden on Costco to inform itself,14 the introduction of the notion of “wilful blindness” makes the situation highly subjective. The Superior Court judge wrote: [186] Costco relies on the fact that they were dealing with a trusted intermediary. Costco has filed no evidence that it was ever advised that, in fact, R & R had “resolved promptly” the matter with Simms. Accordingly, there was no reason for Costco to believe it could ignore the cease and desist letters. [187] Costco allowed itself to limit its focus to the issue of authenticity of the Product despite being put on notice by Simms that the up-front issue with Simms was the EDA (Exclusive Distribution Agreement). If Costco was not prepared to deal directly with Simms to resolve the issue, it needed to have the issue of the EDA asked and answered by R & R. Costco failed to do either. [188] […] Ms. Janek on behalf of Costco was at fault in not seeking: (a) some confirmation emanating from R & R that they knew the goods were being sold in Canada by Costco and (b) that there was no Simms EDA that would prevent such sales. […] 15 [Our emphasis] The Court of Appeal appears to agree with the trial judge’s reasoning. Echoing the Superior Court’s analysis quoted above, the Court explained: [61] Not only did Costco not obtain the confirmations demanded by Ms. Janek, it also chose to ignore information it received indicating that Simms was the exclusive Canadian distributor of R & R products [...].16 Even though no duty to inquire exists, Costco was criticized for having settled for questionable answers to its request for confirmation from the distributor and R & R that the goods were genuine and that they could be sold in Canada.   Would the ruling have been different if Costco had only asked R & R to confirm that the goods in question were genuine, while also asking its distributor whether it was bound by a contractual obligation not to sell in Canada?  If the answer is yes, the Court of Appeal’s conclusions make little sense. If, as the Court of Appeal stated, Costco had no duty to inquire, its mistake was to have inquired to R & R directly about Costo’s right to sell the jeans in Canada and it actually would have been preferable for it to ask as few questions as possible.  If a minimal duty to inquire had indeed existed, what should Costco have done? The Superior Court judge concluded on the basis of facts proven at trial that Costco should have obtained a letter signed by the owner of the trademarks in question confirming or denying Simms’ exclusive rights. The Court of Appeal appears to agree, adding that: [66] There is no question here of ambiguity or interpretation regarding Simms’ exclusivity that would have prevented Costco from understanding its scope or extent, but only of Costco’s knowledge of its existence.17 Thus, the Costco decision seems to create a duty to inquire that must be fulfilled to avoid a fault of contractual interference. However, the scope of this duty remains vague. Free competition and the grey market If such duty to inquire is interpreted broadly, it would be possible for an intellectual property right holder to arrange its distribution network in such a way as to make it difficult for a third party to claim ignorance of contractual restrictions with respect to exclusivity in a given territory. At trial, Costco alleged that the R & R jeans that it was selling at a low price had been legitimately acquired on the grey market and that it was entitled to sell them. With respect to the grey market, in Consumers Distributing Co. v. Seiko18 the Supreme Court explained that “[t]he concepts of restraint of trade and free competition [...] would be battered because of an implied recognition of a right of an individual marketing a product to entail and control the sale of identical personal property, however legitimately acquired, of another person.”19 In the present case, the Superior Court determined that Costco could not exonerate itself by alleging its right to purchase and resell grey market goods, as the contract between R & R and Simms was a juridical fact that was opposable to Costco.20 Did the particular facts of this case affect both the outcomes in Superior Court and the Court of Appeal? Certainly, but given that a contract is a juridical fact that is opposable to third parties; that such third parties have a form of duty to inquire about such juridical facts; and that one cannot be wilfully blind, the combination of these decisions seems to give greater weight to honouring contracts than to the principle of free competition.21 Is this a particularity of Quebec civil law (as opposed to common law)? How far does the duty to inquire go following the receipt of a formal notice? What degree of ambiguity is required for a party to claim that it has no knowledge of contractual obligations? The Canadian Courts will likely have to shed more light on the various legal shades of grey in the coming years. 2020 QCCA 1331. Free competition is a well-established principle in civil law. In Excelsior (L’), compagnie d’assurance-vie c. Mutuelle du Canada (La), compagnie d’assurance vie, the Court of Appeal recognized free competition as [TRANSLATION] “a fundamental principle to the organization of economic activities [...] subject to its legislative or regulatory framework.” Thus, competition is unique in that it can voluntarily cause harm to others without constituting a fault. Competition is only considered a fault if it is illicit or unfair; that is, if dishonest practices are used. Excelsior (L’), compagnie d’assurance-vie c. Mutuelle du Canada (La), compagnie d’assurance vie, [1992] R.J.Q. 2666 (C.A.), p. 30. Mars Canada Inc. v. Bemco Cash & Carry Inc., 2016 ONSC 7201, para. 7; conf. 2018 ONCA 239. Costco Wholesale Canada Ltd. c. Simms Sigal & Co. Ltd., supra note 1, para. 18. Simms Sigal & Co. Ltd. c. Costco Wholesale Canada Ltd., 2017 QCCS 5058. [1975] 2 SCR 236. Id., p. 241. Costco Wholesale Canada Ltd. c. Simms Sigal & Co. Ltd., supra note 1, para. 51. Id. para. 50. Costco Wholesale Canada Ltd. c. Simms Sigal & Co. Ltd., supra note 1, para. 57. Id. Id. para. 58. Id. para. 64; Simms Sigal & Co. Ltd. c. Costco Wholesale Canada Ltd., supra, note 6, para. 181 to 183. Costco Wholesale Canada Ltd. c. Simms Sigal & Co. Ltd., supra note 1, para. 64. Simms Sigal & Co. Ltd. c. Costco Wholesale Canada Ltd., supra note 6, para. 186–188. Costco Wholesale Canada Ltd. c. Simms Sigal & Co. Ltd., supra note 1, para. 61. Costco Wholesale Canada Ltd. c. Simms Sigal & Co. Ltd., supra note 1, para. 66. 1984 1 SCC 583. Id., p. 584. Simms Sigal & Co. Ltd. c. Costco Wholesale Canada Ltd., supra note 6, para. 94 and 214. Excelsior (L’), compagnie d’assurance-vie c. Mutuelle du Canada (La), compagnie d’assurance vie, [1992] R.J.Q. 2666 (C.A.), p. 30.

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  • Use of patents in artificial intelligence: What does the new CIPO report say?

    Artificial intelligence is one of the areas of technology where there is currently the most research and development in Canada. To preserve Canada's advantageous position in this area, it is important to consider all forms of intellectual property protection that may apply. Although copyright has historically been the preferred form of intellectual property in computer science, patents are nevertheless very useful in the field of artificial intelligence. The monopoly they grant can be an important incentive to foster innovation. This is why the Canadian Intellectual Property Office (CIPO) felt the need to report on the state of artificial intelligence and patents in Canada. In its report titled Processing Artificial Intelligence: Highlighting the Canadian Patent Landscape published in October 2020, CIPO presents statistics that clearly demonstrate the upward trend in patent activity by Canadian researchers in the area of artificial intelligence. However, this increase remains much less marked than those observed in the United States and China, the champions in the field. Nevertheless, Canada ranked sixth in the world in the number of patented inventions attributed to Canadian researchers and institutions. International patent activity in AI between 1998 et 2017 Reproduced with the permission of the Minister of Industry, 2020   International patent activity by assignee's country of origin in AI between 1998 and 2017 Reproduced with the permission of the Minister of Industry, 2020   Canadian researchers are particularly specialized in natural language processing, which is not surprising for a bilingual country. But their strengths also lie in knowledge representation and reasoning, and in computer vision and robotics. We can also see that, generally speaking, the most active areas of application for artificial intelligence in Canada are in life sciences and medicine and computer networks, followed by energy management, in particular. This seems to be a natural fit for Canada, a country with well-developed healthcare systems and telecommunications and energy infrastructure that reflects its vast territory. The only shortcoming is the lack of representation of women in artificial intelligence patent applications in Canada. This is an important long-term issue, since maintaining the country's competitiveness will necessarily require ensuring that all the best talent is involved in the development of artificial intelligence technology in Canada. Regardless of which of these fields you work in, it may be important to consult a patent agent early in the invention process, particularly to ensure optimal protection of your inventions and to maximize the benefits for Canadian institutions and businesses. Please do not hesitate to contact a member of our team!

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  • Teleworking: What are the allowable expenses for employees and tax impacts for employers?

    The COVID-19 pandemic has changed Canadian workplaces. For many organizations, the pandemic and its containment measures have fast-tracked the shift to teleworking.  In this context, the Canada Revenue Agency (the “CRA”) and the Agence du Revenu du Québec (the“ARQ”) have published administrative positions regarding deductible expenses for employees working from home as well as for their employers. Eligible expenses for an EMPLOYEE The first condition for claiming employment expenses related to teleworking involves being obliged to work from home. The CRA has announced some flexibility in this regard, to the effect that if an employer did not require an employee to work from home but gave them the option to do so because of the COVID-19 pandemic, the CRA will consider the employee to have worked from home as a result of the pandemic. Temporary flat rate method: Federal and Quebec deduction of $2 per day without Form T2200 On December 15, 2020, the Government of Canada announced that employees who worked from home more than 50% of the time for at least four consecutive weeks in 2020 will be able to deduct $2 from their incomefor each day worked during that period and for each additional day worked outside that period, for a maximum of $400. The temporary flat rate method only applies to the 2020 taxation year. To qualify, the employee must only deduct only home office expenses and no other employment expenses. Details of expenses incurred for with teleworking or Form T2200 will not be required to claim this deduction. On December 16, 2020, the Government of Quebec followed the Government of Canada’s lead by announcing that taxpayers would be allowed to deduct $2 per day for each day worked from home, up to a maximum of $400, without supporting documents or a TP-64.3 form. Detailed method In general, an employee (whether a tenant or a homeowner) may deduct reasonable expenses directly related to the use of space in the home for work if and only if at least one of the following two conditions is met: (i)             The space devoted to work in the home is “the place where the individual principally (interpreted by the courts to be more than 50% of the time) performs the office or employment duties”; or  (ii)            The workspace in the home is “used exclusively [...] to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.”[1] The period used to assess eligibility criteria for 2020 must be at least four consecutive weeks. This period may last more than a month. If the workspace is part of a residence rented by the individual, a reasonable portion of the rent may be deductible. However, an individual may not claim any deduction for the rental value of the workspace in a home owned by the individual or for amortization, taxes, insurance or mortgage interest in respect of that home. Notwithstanding the above restrictions, the Income Tax Act provides that employees remunerated by commissions may deduct a reasonable portion of the taxes and insurance paid for the home they own, if one of the above criteria is met. It is important to note that these expenses are eligible only to the extent that they are not otherwise reimbursed by the employer. In order to determine the amount that can be deducted in this way, it is important to use a reasonable basis for calculation.For example, the calculation can be based on the area of the workspace in proportion to the total area of the home. Other possible uses of space must also be considered. The use of 100% compared to 75% of the space by an employee is an important factor in the calculation. For example, a kitchen table used as office space by an employee will have mixed use, which will have a direct impact on the amount of deductible expenses. Eligible expenses(salaried employees and those remunerated by commission) Electricity Heating Water Utility portion (electricity, heat and water) of the employee’s condominium fees Home internet service costs Maintenance and minor repair costs Rent paid for the house or apartment where the employee lives Eligible expenses(employees remunerated by commission only) Home insurance Property taxes   Rental of a cell phone, computer, laptop, tablet, fax machine, etc. that is reasonably related to commission income Ineligible expenses(salaried employees and those remunerated by commission) Mortgage interest Mortgage payments Internet connection fees Furniture Capital expenses (replacement of windows, floors, furnace, etc.) Wall decorations Note that if an employee can deduct an expense in calculating taxable income for income tax purposes, they may also qualify for a refund of the Goods and Services Tax / Quebec Sales Tax (“GST/QST”) paid. GST and QST refunds are taxable and must be included in the employee’s income tax return the following year. It is also important for the employee to keep supporting documents. The CRA recently developed an expense calculator to simplify calculating eligible expenses. An employee will have to complete the following forms to deduct expenses and obtain GST and QST refunds: a)    T777 – Statement of Employment Expenses; b)    TP-59 – Employment Expenses of Salaried Employees; c)     GST370 – GST/HST Rebate Application; and d)    VD-358 – QST Rebate for Employees. In order to deduct employment expenses from income, including certain expenses related to space devoted to working from home, the employee must have received two forms from the employer: a)    Form T2200 - Declaration of Conditions of Employment (“T2200”); and b)    Form TP-64.3 General Employment Conditions (“TP-64.3”) (Quebec employee only). Considerations for the employer On December 15, 2020, the CRA announced the launch of a simplified process to claim home office expenses for the 2020 tax year. Accordingly, a simplified version of Form T2200 was made available as Form T2200S. The form may be found here. In order for an employee to be able to deduct the expenses described above, Form T2200S must indicate: If the employee worked at home because of the COVID-19 pandemic; If the employer reimbursed or will reimburse the employee for some of the home office expenses; and If the amount was included on the employee’s T4 slip. Finally, the employer will have to certify that “this employee worked from home in 2020 due to COVID-19, and was required to pay some or all their own home office expenses used directly in their work while carrying out their duties of employment during that period.” It is expected that a large number of employees will meet the criteria for this deduction, at least as long as the workplace access restrictions attributable to COVID-19 remain in place. The ARQ, for its part, has announced that, exceptionally, an electronic signature of the employer on the TP-64.3 form would be permitted. In addition, on December 16, 2020, the Government of Quebec announced that it will launch, in early 2021, an online service for generating a large number of TP-64.3 forms to be sent to teleworkers. This service aims to reduce the administrative burden on medium and large companies. More information on the online platform is expected in 2021. Other eligible expenses for an employee An employee will also be able to deduct certain expenses for supplies consumed directly in the course of their duties to the extent that they are not reimbursed by the employer, such as: a)    Paper, pencils and ink cartridges; b)    Internet costs, if they are charged based on usage. To this end, the CRA has announced that for the 2020 taxation year, it will exceptionally accept monthly residential internet service costs (the cost of the plan must be reasonable). Expenses reimbursed by an employer Normally, an amount received from an employer to reimburse an expense is considered a benefit to the employee and must be added to the employee’s employment income, unless such expenses are necessary for the performance of the employee’s duties. Employees may not deduct reimbursed expenses. In addition, in the current context, the CRA and the ARQ have announced that the reimbursement of $500 by an employer to an employee to offset the cost of acquiring personal computer equipment or office equipment required for telework does not constitute a taxable benefit to the employee. For example, if the purchase is a $1,000 desk, the taxable benefit included in the employee’s income will be $500. The CRA has recently announced that this amount will not be increased. Allowance paid by an employer Some employers will prefer to pay an allowance directly to their employees who are teleworking to cover the additional costs they incur. In this context, the employer will be able to deduct this allowance in the calculation of its taxable income, provided that it is a reasonable amount. Normally, the amount of this allowance will be treated as a taxable benefit to the employee and will have to be included in employment income for the taxation year in which the employee receives it, except in the situation covered by the exception mentioned above. Other considerations for the employer It is also important for the employer to consider the tax implications—particularly with respect to source deductions—of the location where the employee primarily works during the pandemic if it differs from the location of the employer’s establishment where they normally report for work.  The CRA and the ARQ have announced relief in this respect for the 2020 taxation year. For example, the province of work will not change for employees who work from home because of the COVID-19 pandemic. The province for the purpose of calculating source deductions will continue to be the province of the normal place of work. However, if the employee performs their work in a foreign country, certain tax implications for both the employee and the employer should be considered. Lavery’s tax law team can guide you and answer your questions regarding your company’s tax compliance. Technical interpretation IT-352R2.

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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.);

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  • Canadian Patents: What to Keep in Mind One Year After the Coming into Force of the New Rules?

    The first anniversary of the entry into force of the new Canadian Patent Rules, which significantly changed certain practices surrounding the filing and prosecution of patent applications in Canada, is an opportunity to look back at the major changes that have had a significant impact on Canadian patent practice. Indeed, the past year has allowed us to observe the changes, which in certain aspects seem to be confusing for patent applicants, and to observe their effect in practical terms. We discuss below the scope of some of the legislative amendments that came into force on October 30, 2019, to clarify such issues and assist patent applicants in Canada. Things are moving faster Under the new Rules, the time limit for filing a request for examination has been reduced from 5 years to 4 years, and the time limit for responding to an examination report is now 4 months instead of 6 months, thus shortening the process of obtaining a patent in Canada. Although there are mechanisms to extend these time limits by a few months, they result in additional costs to patent applicants and may also jeopardize priority examination procedures under paragraph 84(1)(a) of the Patent Rules. As a result, we have noted a generally accelerated pace of examination over the past year.  Time is running out for “latecomers” Canada was for a long time one of the only jurisdictions where it was possible to defer entry into the national phase until the 42nd month after the priority date as a matter of right by simply paying a late filing surcharge. However, under the new Rules, PCT applications will only be eligible for so-called “late” national phase entry if the failure to meet the initial 30-month deadline occurred despite "due care" (a suitable explanation will be required to demonstrate such a showing of due care). It is important to note that PCT applications with an international filing date (not a national phase entry date) prior to October 30, 2019 are subject to the old Rules in this respect, and therefore ”late” national phase entry in Canada between the 30th and 42nd month following the priority date is still possible for such PCT applications by paying the surcharge, without justification. Patent applicants would be advised to identify their pending PCT patent applications that are still eligible for “late” national phase entry under the old Rules, and file in Canada before the 42nd month expires in those cases where protection in Canada is desired.  Stricter deadlines for examination requests and maintenance fees – be careful Under the old Rules, for most of the time limits set by the Patent Act or the Commissioner of Patents, failure to meet such a time limit triggered a further 12-month period to fulfil the requirement in question via the abandonment and reinstatement system (applications), or the late payment of maintenance fees system (patents). Under the new Rules, this additional 12-month period no longer applies in cases of failure to meet the deadline for requests for examination and maintenance fees. However, the new system offers additional protection to applicants since failure to comply with the time limits for these actions triggers the issuance of a CIPO notice requesting the completion of the required action within a new time limit (usually 2 months). However, a “due care” requirement comes into effect after the expiry of the period specified in the notice or six months after the initial missed deadline, whichever is later. In addition to the “due care” requirement, third party rights may apply during the abandonment period. This leads to situations where a patent application is abandoned for two different reasons, with different deadlines and requirements for reinstatement, increasing the risk of confusion for applicants. Consider a hypothetical case where an applicant who was unsure whether they wanted to pursue a patent application decided to allow the application to become abandoned by not responding to an examination report by the November 1, 2019, deadline, and to retain the option of reinstatement the following year. In this now abandoned application, the applicant also did not pay the maintenance fee initially due on December 1, 2019, triggering a 6-month delay to pay the maintenance fee and a late fee. Non-payment of the maintenance fee and late fee by June 1, 2020 would thus result in a second reason for abandonment. However, in October 2020, the applicant finally decided to continue with the application, and to respond to the examination report with a request for reinstatement and payment of the reinstatement fee, thereby removing the first reason for abandonment. However, for the second reason for abandonment, the request for reinstatement must also include a statement that the non-payment of the maintenance fee and late fee within the prescribed time limit occurred despite the fact that the applicant exercised “due care” in attempting to make the payment. It is therefore important that patent applicants who deliberately abandon an application, but wish to retain the possibility of reinstatement at a later date, be well aware of the “due care” requirement and of the third party rights that may apply in certain circumstances, including ensuring that the time limits for requests for examination and maintenance fees are respected in order to avoid loss of rights. Manage your priorities well You are now required to file a certified copy of any priority application, or to refer to a digital library providing access to this document (CIPO accepts the “WIPO-DAS” code assigned to a priority application in this regard). For Canadian applications resulting from PCT applications, if the PCT requirements for a certified copy in the international phase have been met, it is not necessary to resubmit a certified copy upon entry into the Canadian national phase. However, for Canadian applications with a priority claim under the Paris Convention, the certified copy or digital library reference must be filed within 4 months of filing or 16 months of the priority date, whichever is later. Also, it is now possible to restore the priority of a Canadian application within 14 months of the priority date where the failure to file an application within the prescribed 12-month period was unintentional. The time limit for requesting restoration of priority is two months from the filing date for non-PCT filings, and one month from the national phase entry date for PCT filings. No longer lost in translation – more flexibility for non-PCT filings Prior to October 30, 2019, it was required to submit a patent application in one of Canada’s two official languages (English/French) and pay the prescribed filing fee at the time of filing to get a filing date in Canada for both non-PCT filings and PCT national phase entries. Under the new Rules, and only for non-PCT filings, it is possible to file an application in a language other than the two official languages and/or not to pay the prescribed fee at the time of filing. In such cases, CIPO will issue a notice requiring that a French or English translation of the application be provided and/or that the filing fee be paid within a specified period of time. This flexibility for non-PCT filings does not apply to filings based on PCT applications. For national phase entries of a PCT application filed in a language other than English or French, applicants must ensure that they have a translation of the application on hand at PCT national phase entry in Canada. Registration of documents and transfers It was previously necessary to register a copy of a document evidencing a transfer of rights (e.g., an assignment) and pay a registration fee in order to effect a change in ownership of a patent application or patent. However, under the new Rules, the registration of a transfer of ownership and the registration of evidence of the transfer (e.g., a signed transfer document) are separate actions for which separate fees must be paid. It is important to note that the mere registration of a document evidencing a transfer only results in that document being recorded, but is not treated as a request to record a transfer.   It is also important to note that former section 51 of the Patent Act—which provided that any assignment is void against any subsequent assignee, unless the assignment is registered as prescribed by those sections, before the registration of the instrument under which the subsequent assignee claims—has been repealed and replaced by subsection 49(4), which in turn refers only to transfers of patents. Thus, the priority is to record the transfer. In light of this, it is strongly recommended that patent applicants and patent holders promptly register any transfer of rights with CIPO in order to update their Canadian file and to prevent any subsequent and illegitimate transfer registration in favour of a third party. Conclusion If you have any questions or require further information on these or any other aspects of Canadian patent practice, feel free to contact a member of our team!

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  • Tax Aspects of Insolvency and Bankruptcy

    The current crisis caused by the COVID-19 pandemic has already caused, and will continue to cause, significant liquidity problems for some businesses. Companies whose financial difficulties threaten their very existence will have to restructure in order to avoid bankruptcy, either by availing themselves of the protection of the Companies' Creditors Arrangement Act1 (the "CCAA") or by using the proposal mechanism of the Bankruptcy and Insolvency Act2 (the "BIA").  Tax considerations related to an arrangement or a proposal accepted by creditors  Making use of the provisions of the CCAA or the BIA entails tax considerations for the debtor corporation that directors and owner-operators need to consider. Some of these tax considerations are discussed below.  In the context of the restructuring of a debtor company, creditors may accept a partial settlement of their claim or a conversion of their claim into shares in the debtor company. If a corporation is not bankrupt within the meaning of the Bankruptcy and Insolvency Act, the settlement of a debt for an amount less than its principal will have tax consequences for the debtor corporation. For example, certain tax attributes of the debtor corporation such as the balance of loss carryforwards, the undepreciated portion of the capital cost of depreciable property or the adjusted cost base of capital assets will be reduced by the amount of the reduction in the receivable, if any.   In certain cases, if the tax attributes of the debtor corporation are insufficient to absorb the amount of debt forgiven, inclusion in the calculation of its taxable income may occur, creating a tax liability.  Several strategies can be adopted to limit undesirable consequences in the context of a restructuring under the Companies' Creditors Arrangement Act.  As mentioned, it may be possible, among other things, to convert the debt into shares of the debtor company without causing adverse consequences, if the fair market value of the shares issued upon conversion of the debt is equal to the principal of the debt.   In some cases, a debt held by a shareholder of the debtor company could be written off without consideration and without the need to issue shares.  Finally, it may be possible, in certain situations, to avoid inclusion in the income of the debtor corporation through the use of certain reserve mechanisms or through tax deductions.  Insolvency is a delicate situation for any business. Proper tax planning will allow the debtor company to maximize the effectiveness of the restructuring process offered by the CCAA.  Our taxation team can help you set up effective planning in this context.   R.S.C. 1985, c. C-36 and amendments R.S.C. 1985, c. B-3 and amendments

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  • The Unforeseen Benefits of Driverless Transport during a Pandemic

    The COVID-19 pandemic has been not only causing major social upheaval but disrupting business development and the economy as well. Nevertheless, since last March, we have seen many developments and new projects involving self-driving vehicles (SDV). Here is an overview. Distancing made easy thanks to contactless delivery In mid-April 2020, General Motors’ Cruise SDVs were dispatched to assist two food banks in the delivery of nearly 4,000 meals in eight days in the San Francisco Bay Area. Deliveries were made with two volunteer drivers overseeing the operation of the Level 3 SDVs. Rob Grant, Vice President of Global Government Affairs at Cruise, commented on the usefulness of SDVs: “What I do see is this pandemic really showing where self-driving vehicles can be of use in the future.  That includes in contactless delivery like we’re doing here.”1 Also in California in April, SDVs operated by the start-up Nuro Inc. were made available to transport medical equipment in San Mateo County and Sacramento.  Toyota Pony SDVs were, for their part, used to deliver meals to local shelters in the city of Fremont, California.  Innovation: The first Level 4 driverless vehicle service In July 2020, Navya Group successfully implemented a Level 4 self-driving vehicles service on a closed site. Launched in partnership with Groupe Keolis, the service has been transporting visitors and athletes on the site of the National Shooting Sports Centre in Châteauroux, France, from the parking lot to the reception area.  This is a great step forward—it is the first trial of a level 4 vehicle, meaning that it is fully automated and does not require a human driver in the vehicle itself to control it should a critical situation occur. Driverless buses and dedicated lanes in the coming years In August 2020, the state of Michigan announced that it would take active steps to create dedicated road lanes exclusively for SDVs on a 65 km stretch of highway between Detroit and Ann Arbour.  This initiative will begin with a study to be conducted over the next three years. One of the goals of this ambitious project is to have driverless buses operating in the corridor connecting the University of Michigan and the Detroit Metropolitan Airport in downtown Detroit. In September 2020, the first SDV circuit in Japan was inaugurated at Tokyo’s Haneda Airport. The regular route travels 700 metres through the airport.  A tragedy to remind us that exercising caution is key  On March 18, 2018, in Tempe, Arizona, a pedestrian was killed in a collision with a Volvo SUV operated by an Uber Technologies automated driving system that was being tested. The vehicle involved in the accident, which was being fine-tuned, corresponded to a Level 3 SDV under SAE International Standard J3016, requiring a human driver to remain alert at all times in order to take control of the vehicle in a critical situation. The investigation by the National Transportation Safety Board determined that the vehicle’s automated driving system had detected the pedestrian, but was unable to classify her as such and thus predict her path. In addition, video footage of the driver inside the SDV showed that she did not have her eyes on the road at the time of the accident, but rather was looking at her cell phone on the vehicle’s console. In September 2020, the authorities indicted the driver of the vehicle and charged her with negligent homicide. The driver pleaded not guilty and the pre-trial conference will be held in late October 2020.  We will keep you informed of developments in this case.   In all sectors of the economy, including the transportation industry and more specifically the self-driving vehicles industry, projects have been put on hold because of the ongoing COVID-19 pandemic. Nevertheless, many projects that have been introduced, such as contactless delivery projects, are now more important than ever. Apart from the Navya Group project, which involves Level 4 vehicles, all the initiatives mentioned concern Level 3 vehicles. These vehicles, which are allowed on Quebec roads, must always have a human driver present. The recent charges against the inattentive driver in Arizona serve as a reminder to all drivers of Level 3 SDVs that regardless of the context of an accident, they may be held liable. The implementation of SDVs around the world is slow, but steadily gaining ground. A number of projects will soon be rolled out, including in Quebec. As such initiatives grow in number, SDVs will become more socially acceptable, and seeing these vehicles as something normal on our roads is right around the corner.   Financial Post, April 29, 2020, “Self-driving vehicles get in on the delivery scene amid COVID-19,”.

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  • Time limit extensions: What are the possible consequences on limitation periods for tax purposes?

    A recent Ministerial Order1 from the Minister of National Revenue has formally extended certain deadlines under the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”). The Order is retroactive to March 13, 2020. The extension is 6 months or until December 31, 2020, whichever is earlier. This Ministerial Order will have various implications for taxpayers and registrants, in particular in terms of limitation periods. For example, notices of reassessment may be issued until December 31, 2020, for taxpayers whose reassessment period under the ITA expired between May 20, 2020, and December 30, 2020, even in circumstances where there is no misrepresentations attributable to negligence, carelessness or wilful default in tax returns and no waivers of the regular reassessment period have been signed. As a result, the taxation years subject to the Order (in particular 2016 or 2017, depending on the taxpayer) and reporting periods would not be statute-barred in these circumstances. Reporting periods and taxation years that became statute-barred on or before May 19, 2020, are not subject to the Order. It remains to be seen how the Canada Revenue Agency (“CRA”) intends to apply the Ministerial Order. The CRA has stated that “generally, taxpayers would be informed of the details of a potential (re)assessment, including whether or not the CRA is applying an extension to a (re)assessment period under the Ministerial Order.”2 Time limits extended by 6 months The period for claiming SR&ED expenditures (Form T661), normally 12 months after the corporation’s filing due date for a return;3 The period for claiming an SR&ED investment tax credit (Form T661 and Schedule 31 or Form T2038), normally 1 year after the corporation’s filing due date for a return; The normal reassessment period for a taxation year (normally 3 years or 4 years after the issuance of a notice of assessment under the ITA) that would normally have expired after May 19, 2020, but before December 31, 2020; The normal reassessment period for a reporting period (normally 4 years following the issuance of an assessment under the ETA) that would normally have expired after May 19, 2020, but before December 31, 2020; The deadline for applying for an extension of time to file a Notice of Objection under the ITA and the ETA that would normally have expired after March 12, 2020 (normally 1 year after the expiry of the time limit for filing a Notice of Objection), as well as the time limit for appeal of the Minister’s decision dismissing such an application with the Tax Court of Canada. Our taxation team can help you manage your deadlines and your interactions with the tax authorities.   Canada Gazette, Part I, Vol. 154, No. 37: COMMISSIONS, September 12, 2020 https://www.canada.ca/en/revenue-agency/services/covid-19-ministerial-orders/time-period-other-limits-faq.html For corporations and trusts with a tax year-end from September 13, 2018, to December 31, 2018, and an SR&ED reporting deadline from March 13, 2020, to June 30, 2020, the deadline is extended by 6 months. For corporations and trusts with a tax year-end from January 1, 2019, to June 29, 2019, and an SR&ED reporting deadline from July 1, 2020, to December 29, 2020, the deadline is extended to December 31, 2020. For individuals who operated a sole proprietorship for which the tax year ended on December 31, 2018, and whose SR&ED reporting deadline was June 15, 2020, the deadline is extended to December 15, 2020.

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  • Court upholds deductibility of carrying charges

    The Tax Court of Canada (the “Court”) recently upheld the deductibility of carrying charges incurred in connection with an issuance of shares.  In so doing, the court upheld the tax benefits arising from a common financing practice. In addition, the Court reiterated the principle in tax matters according to which, save in exceptional cases, the legal relationships established by one or more taxpayers must be respected. In this case1, Laurentian Bank (the “Bank”) issued shares from its share capital to the Caisse de dépôt et placement du Québec (“CDPQ”) and the Fonds de solidarité des travailleurs du Québec (“FSTQ”) totalling $120M, through a private placement.  In addition to assuming a portion of the costs incurred by CDPQ and FSTQ in connection with this issuance of shares, the Bank agreed to pay each of the investors, as professional fees for services rendered in connection therewith, an amount corresponding to 4% of the total amount of their investment.  The Canada Revenue Agency challenged the Bank’s deduction, over 5 years, of the total amount of $4.8M paid to CDPQ and FSTQ, in particular on the grounds that no services had been rendered to the Bank by the two investors and that the expense was unreasonable. The Court ruled in favour of the Bank and allowed it to deduct the amount of $4.8M in computing its income on the basis of paragraph 20(1)(e) of the Income Tax Act, namely, in 20% increments over five fiscal years. Not only did the Court recognize the merits of the Bank’s arguments as to the fact that it had incurred an expense for services obtained from the CDPQ and the FSTQ, but the Court also confirmed that the expense was reasonable under the circumstances. In this decision, the Court recognized the favourable tax consequences for an issuer of shares arising from a common practice in the field of financing through share issuance. It also appears that the reasons for the Court’s decision could be applied to other costs incurred in the context of financing activities and thus allow entities incurring such costs to obtain a significant tax advantage.   It is therefore to the advantage of corporations issuing shares or borrowing to carefully analyze and negotiate the financing agreements they are considering in order to maximize their tax benefits. Our taxation team can assist you in setting up a share issuance that is both successful and optimal from a tax standpoint.   Banque Laurentienne du Canada c. La Reine, 2020 CCI 73

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  • Artificial Intelligence and Telework: Security Measures to be Taken

    Cybersecurity will generally be a significant issue for businesses in the years to come. With teleworking, cloud computing and the advent of artificial intelligence, large amounts of data are likely to fall prey to hackers attracted by the personal information or trade secrets contained therein. From a legal standpoint, businesses have a duty to take reasonable steps to protect the personal information they hold.1 Although the legal framework doesn’t always specify what such reasonable means are in terms of technology, measures appropriate for the personal information in question must nevertheless be applied. These measures must also be assessed in light of the evolution of threats to IT systems. Some jurisdictions, such as Europe, go further and require that IT solutions incorporate security measures by design.2 In the United States, with respect to medical information, there are numerous guidelines on the technical means to be adopted to ensure that such information is kept secure.3 In addition to the personal information they hold, companies may also want to protect their trade secrets. These are often invaluable and their disclosure to competitors could cause them irreparable harm. No technology is immune. In a recent publication,4 the renowned Kaspersky firm warns us of the growing risks posed by certain organized hacker groups that may want to exploit the weaknesses of Linux operating systems, despite their reputation as highly secure. Kaspersky lists a number of known vulnerabilities that can be used for ransom attacks or to gain access to privileged information. The publication echoes the warnings issued by the FBI regarding the discovery of new malware targeting Linux.5 Measures to be taken to manage the risk It is thus important to take appropriate measures to reduce these risks. We recommended in particular that business directors and officers: Adopt corporate policies that prevent the installation of unsafe software by users; Adopt policies for the regular review and updating of IT security measures; Have penetration tests and audits conducted to check system security; Ensure that at least one person in management is responsible for IT security. Should an intrusion occur, or, as a precautionary measure for businesses that collect and store sensitive personal information, consulting a lawyer specializing in personal information or trade secrets is recommended in order to fully understand the legal issues involved in such matters.   See in particular: Act respecting the protection of personal information in the private sector (Quebec), s. 10, Personal Information Protection and Electronic Documents Act (Canada), s. 3. General Data Protection Regulation, art. 25. Security Rule, under the Health Insurance Portability and Accountability Act, 45 CFR Part 160, 164. https://securelist.com/an-overview-of-targeted-attacks-and-apts-on-linux/98440/ https://www.fbi.gov/news/pressrel/press-releases/nsa-and-fbi-expose-russian-previously-undisclosed-malware-drovorub-in-cybersecurity-advisory

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  • An introduction to Trade Secrets: What they are and why they matter to your business

    One of the most common questions we receive as intellectual property lawyers is “How can I prevent others from using technology that I have developed and that has significant value to my business?” That question can often be answered by advising clients to file a patent application. However, there exists another type of intellectual property protection, known as a “trade secret,” that may be more suitable for certain situations and technologies. This brings us to the main topic of this newsletter: the importance of trade secrets. Specifically, this newsletter will first provide a general definition of trade secrets, including examples thereof, followed by information regarding the various ways trade secrets can be effectively used and protected by a business. Brief overview of trade secrets The definition of a trade secret is incredibly broad; in fact, the term “trade secret” can include any valuable business information that derives its value from secrecy. This information can be, for example, financial, business, or scientific information, such as patterns, plans, compilations, formulas, programs, codes, prototypes, or techniques. As indicated by the Canadian Intellectual Property Office, to protect and benefit from trade secrets in Canada, a business must: Obtain value from the secret; Keep the information a secret; and Take all possible measures to ensure that the information remains a secret. Generally, if the above criteria are met, then the information in question can be considered a trade secret. Some of the most famous examples of trade secrets are for recipes (such as the Coca-ColaTM recipe or the KFC Original RecipeTM); chemical formulas (such as WD-40TM); and the client information of social media platforms and dating apps (such as FacebookTM or TinderTM). While the definition of a trade secret may seem quite broad, this breadth is precisely why trade secrets can be such a powerful tool: they can allow your company to monopolize information or technology that may not be protected using other means, such as patents. In addition, the protection granted by keeping valuable information secret can last indefinitely (or at least until the secret is revealed). The premise behind trade secrets is that, by keeping this valuable information secret, third parties are prevented from accessing and using the information in question, thereby giving your business an advantage over competitors. Accordingly, if your company has information from which it derives value (such as a newly developed piece of technology), trade secrets may be an appealing alternative to patents and other forms of IP protection. Best practices for businesses with respect to their trade secrets Having provided a brief overview of trade secrets, we will now focus on practical considerations, specifically with respect to helping ensure that trade secrets are kept confidential even when the information in question needs to be shared with an employee or a third party. Frequently, businesses will have to share their trade secrets with others. For example, specific employees of a company will often have access to some (or all) of that company’s trade secrets. Similarly, companies will often have to share their trade secrets with third parties; for example, a company that hires an external consultant may be required to furnish that consultant with trade secret information. Also, a company that has developed a new piece of technology it aims to keep secret may be required to divulge how to make said technology to a third-party manufacturer. In such situations, it is important to have certain measures in place that will better ensure that your trade secret remains a trade secret. Contractual obligations When employed correctly, the use of contractual clauses can provide ample protection with regard to a company’s trade secrets. Specifically, for any employee or third party that may gain access to trade secrets, it would be prudent to ensure that a robust written agreement is signed that stipulates what said employee’s or third party’s obligations are with respect to the trade secrets to which they gain access. Some examples of clauses pertaining to trade secrets that can be included in an employment contract or a contract with a third party include the following: Definition of "Confidential Information" or “Trade Secrets”: This clause would give a definition as to what information to be provided to the employee or third party is considered a trade secret. Obligation of non-disclosure and non-use: This clause would specify that the employee or third party in question is not allowed to use or disclose the confidential information they receive except in accordance with “permitted uses.” Definition of "permitted uses”: This clause would define the manner in which an employee or third party is allowed to use or disclose the confidential information they receive. Undertaking not to use/disclose/publish/reproduce confidential information of third parties (e.g., a former employer): This clause would remind an employee or third party that they are forbidden from using or disclosing confidential information they have received from a previous employer or contractor. Data destruction/return of documents: This clause would specify that the employee or third party is required to destroy and/or return all confidential information they have received to the company upon termination of their contract. Obligation to report if information was inadvertently transmitted: This clause would specify when and how an employee or third party must notify the company should any confidential information in their possession be disclosed or used in a manner that contravenes their contractual obligations. Penalty clause (articles 1622 and 1623 of the Civil Code of Quebec): This clause would specify that the employee or third party is obliged to pay the company a certain fee should any confidential information they receive be disclosed or used in a manner that contravenes their contractual obligations. The above clauses represent but a few examples of important clauses that can be included when drafting a written contract for any employee or third party that will be given access to a company’s trade secrets. However, it is not always feasible to draft a robust written agreement. Accordingly, there are other ways to implement the above clauses; for example, the above clauses can be defined in a company’s policy manual that would be provided to employees when they are being hired by the company. It is also important to remind employees or third parties of their obligations regarding your company’s trade secrets at the relevant times. For instance, when a contract with an employee or a third party is to be terminated, that might be an opportune moment to remind the employee or third party that they have a duty to return and/or destroy all confidential information and documents they have received from your company. This reminder can be made in an email, in a release to be signed by the employee, or even during an exit interview. Employee duty of loyalty It should be mentioned that, in Quebec, all employees have a duty of loyalty to their employers, due to article 2088 of the Civil Code of Quebec, which states inter alia that “The employee is bound […] to act faithfully and honestly and not use any confidential information he obtains in the performance or in the course of his work. These obligations continue for a reasonable time after the contract terminates […].” [emphasis added]. Accordingly, even without a written employment contract containing the above-discussed clauses, employees are still required to keep trade secrets confidential and to not appropriate the material or intellectual property of the employer. However, this protection is quite limited (for example, it only applies for a reasonable time once the employment contract is terminated), and so it is always more prudent to explicitly define an employee’s obligations regarding trade secrets in, for example, an employment contract or a company policy manual. It should also be mentioned that article 2088 of the Civil Code of Quebec concerns employees only, and does not apply to third parties who gain access to trade secrets. Remedies Even with the best of safeguards in place, a current or former employee or third party may nonetheless use or disclose your company’s trade secrets. While such a situation is unfortunate, there are a number of legal remedies that can allow you to mitigate the damage done, as well as to recover amounts from the rule-breaking parties. Specifically, it is generally possible to obtain injunctions or safeguard measures against parties that have misappropriated your company’s trade secrets. In addition, it is generally possible to recover damages from said parties. While the above remedies may seem relatively inconsequential, they can be quite severe under certain circumstances. One recent example is a lawsuit commenced in 2017 by Motorola Solutions against Hytera Communications in the United States. In their lawsuit, Motorola Solutions alleged inter alia that three former Motorola Solutions employees had gone to work for Hytera and taken Motorola trade secrets with them, after which Hytera used these trade secrets to develop its Digital Mobile Radio (DMR) products. Motorola was eventually awarded a jury verdict of $764.6 million earlier this year. The above example not only demonstrates how powerful legal remedies regarding trade secret protection can be, but it also demonstrates why it is important to respect the trade secrets of others. Otherwise, your company may find itself on the receiving end of a lawsuit similar to the one commenced by Motorola. It is also worth mentioning that, despite the lawsuit taking place in the United States, the injunction sought by Motorola (which has yet to be ruled upon) would forbid Hytera from selling any of the contested DMR products worldwide. In addition to civil remedies (such as the example provided above), there are also criminal ramifications for violating the trade secrets of others.  In Canada, the newly implemented Canada-United States-Mexico Agreement (CUSMA) has required Canada to implement criminal procedures and penalties specifically for trade secret theft. Said regulations no doubt serve as an additional incentive to respect the trade secrets of competitors. Conclusion We hope that the above has demonstrated the importance of trade secrets, both in terms of how they can be used and why the trade secrets of competitors should be respected. However, while the above guidelines may serve as a good starting point for protecting your company’s trade secrets, the best strategy (including whether or not trade secrets are preferable over, say, patents) will depend heavily on your business, the information/technology in question, and various other factors. Accordingly, our intellectual property team would be happy to help you with any questions you may have regarding how to best protect your business’ most valuable information and technology.  

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  • Federal Court clarifies the assessment of patent-eligible subject matter in Canada

    In Yves Choueifaty v. Attorney General of Canada1, the Federal Court of Canada has issued a significant decision concerning the assessment of patent-eligible subject matter, including the approach to be used for such assessment during the examination of Canadian patent applications. Historical perspective In keeping in step with advances in technology, the Canadian Courts have assessed and established certain principles in assessing patent-eligible subject matter. A key decision in this regard related to the patentability of Amazon.com’s “one-click” method for online purchasing. In the Amazon decision2, the Federal Court of Appeal in particular established that the assessment of patent-eligible subject matter requires a “purposive construction” of the claims, utilizing the criteria and approach long established by the Supreme Court3, and notably requiring the assessment as to whether or not a claim element is essential. As summarized by the Federal Court, two questions in particular are to be asked in this regard: Would it be obvious to a skilled reader that varying a particular element would not effect the way the invention works? If modifying or substituting the element changes the way the invention works, then that element is essential. Is it the intention of the inventor, considering the express language of the claim, or inferred from it, that the element was intended to be essential? If so, then it is an essential element. Importantly, the Supreme Court established that such an assessment should not be based on what is considered to be the “substance of the invention.” Subsequent to the Amazon decision, the Canadian Intellectual Property Office (CIPO) established examination guidelines to assess the patent-eligibility of subject matter in various technology areas. Such guidelines in particular followed a problem-solution approach to determine whether an element is essential and in turn the patent eligibility of a claim. Background The Choueifaty case concerns Canadian Patent Application No. 2,635,393 entitled “Method and Systems for Provision of an Anti-Benchmark Portfolio”, claiming a computer-implemented method for providing an anti-benchmark portfolio. Briefly, the method entails acquiring and processing data regarding securities in a portfolio via particular steps and calculations to generate an anti-benchmark portfolio, the various steps being carried out using a computer. During examination and appeal proceedings at CIPO, the assessment of patentable subject matter was performed via the problem-solution approach set forth in the examination guidelines relating to computer-implemented inventions. Using this approach, it was determined that the solution and in turn the essential elements of the claims were “directed to a scheme or rules involving mere calculations”, and that using a computer was not an essential element of the claims. The claims were thus rejected by CIPO on the basis that: When a claim’s essential elements are only the rules and steps of an abstract algorithm, however, that claim is non-statutory. The Court’s decision On appeal to the Federal Court, it was determined that CIPO did not apply the proper test, noting that the problem-solution approach of CIPO’s examination guidelines not only did not follow the purposive construction test of the Supreme Court, but further is an approach that the Supreme Court established should not be used: The Appellant submits, and I agree, that using the problem-solution approach to claims construction is akin to using the “substance of the invention” approach discredited by the Supreme Court of Canada ... Notably, the Court noted that CIPO’s approach failed to consider the second factor noted above, concerning the inventor’s intention, which is contrary to the test established by the Supreme Court. The Court thus allowed the appeal and set aside CIPO’s decision to reject the application, requesting that CIPO undertake a fresh assessment of this issue in accordance with the Court’s reasons. Future considerations This decision brings much needed clarity to the assessment of patentable subject matter in Canada and is a welcome development for patent applicants in a variety of technology areas. The Court’s clear instructions to use the criteria of purposive construction established by the Supreme Court will assist in the analyses of various issues of patentability during patent examination. It will be interesting to see how CIPO will proceed in light of the decision, in respect of its fresh assessment as directed by the Court and also the possibility of pursuing an appeal. Stay tuned and please do not hesitate to contact a professional of our Patents team for more information!   2020 FC 837. Canada (Attorney General) v. Amazon.com, Inc., 2011 FCA 328. Free World Trust v. Électro Santé Inc., 2000 SCC 66; Whirlpool Corp. v. Camco Inc., 2000 SCC 67

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