Contributors
Mark Katz
Chris Bennett
Andreas Lober
Michael Fitzgibbon
Douglas A. Palmateer
Dale C. Hill
Jane Mundy
Teresa Scassa
Addendum is published by National magazine, the official magazine of the Canadian Bar Association. The views expressed in the articles contained herein are solely the views of the authors, and do not necessarily represent the views of the Canadian Bar Association.
An effective competition compliance program is a necessary proactive measure for Canadian businesses to adopt. The costs of a program are relatively small, and the benefits substantial, especially in comparison to the potential risks of not having one.
An effective compliance program must have an ongoing training and education component that reaches all personnel who are in a position to engage in, or be exposed to, anti-competitive conduct.
One of the main – and obvious – benefits of a compliance program is that it can help prevent employees from contravening Canada's Competition Act and thus avoid exposing the company and themselves to potential liability.
The need for prevention is acute because the costs of non-compliance are so high. For example, contraventions of the Act can lead to fines and jail terms, as well as to a variety of intrusive behavioural, or even structural, orders. Moreover, the penalties imposed in Canada for violations of the Act have been escalating in recent years. This is especially true of the conspiracy offence, which continues to be one of the Competition Bureau's key enforcement priorities. Many of these convictions have involved international cartels; however, the Bureau is now focusing its enforcement efforts on domestic cartel conduct as well. The Bureau is also seeking ways to shift more of the liability for penalties onto corporate officers and employees, based on the premise that this will enhance deterrence.
Exposure to official proceedings is not the only concern under the Act: there is also the real threat of private civil actions. For example, criminal conduct is now increasingly likely to lead to claims for civil damages, often brought as class actions, under s. 36 of the Act. Companies also must be concerned about the significant costs that will be incurred in dealing with proceedings under the Act and the Bureau investigations that precede them. These costs – lost management time, legal fees, negative publicity – are not to be underestimated.
Mitigation of penalties
An effective competition compliance program also may lead to the early detection – and cessation of – questionable (if not illegal) conduct. This is of critical importance in light of the Competition Bureau's "first-in" policy for granting immunity from prosecution. According to this policy, the Bureau limits grants of immunity to those parties that are the first to approach it with evidence of a hitherto undisclosed offence. In addition, even if a party does not qualify for complete immunity, it still may be able to obtain a lesser penalty ("leniency") by virtue of relatively timely co-operation. Early detection thus affords senior management with the necessary information to decide in a timely fashion whether or not to take advantage of the "immunity/leniency" opportunity.
The fact that a company has an effective compliance program may also, in and of itself, be relevant in determining whether it is entitled to more lenient treatment from the Competition Bureau. The Bureau may be more willing to consider alternative forms of case resolution that fall short of fully contested proceedings (criminal or civil), or a reduction in sentence, where an effective compliance program is in place. Conversely, a compliance program will be of little help, and in fact may work against a company, where senior personnel either participated in or condoned the improper conduct that conflicted with the direction of the program, or the compliance program is a "sham" used to conceal or deflect liability.
Encourages pro-competitive behaviour
Another benefit of a competition compliance program is that it can help avoid situations where companies do not pursue legitimate methods of competition out of an unwarranted concern that the conduct may be illegal. Knowledge of the law will also alert employees to possible violations of the Act by other parties (competitors, suppliers, customers) and provide an opportunity to use that awareness to obtain redress in the market or through legal avenues.
The Bureau's approach to compliance
The Competition Bureau has long recognized the benefits of implementing competition compliance programs. In 1997, the Bureau issued its Information Bulletin on Corporate Compliance Programs to provide companies with a clear understanding of its views on the topic.
The Compliance Bulletin identifies five elements which the Bureau considers to be fundamental to the success of any competition compliance program.
Senior management support: Senior management's clear and unequivocal support is the foundation of any effective compliance program. This support should be evident from the outset of implementation and should be reinforced and demonstrated at regular intervals thereafter.
Relevant policies and procedures: The substantive aspects of a compliance program should be set out in a written document. While the content and form may vary, typical components of a written program include a statement by the chief executive officer stressing the company's commitment to its compliance program and to adherence to the Act, a general description of the purpose of the Act and its enforcement, penalty and remedy provisions, a practical code of conduct for employees and specific illustrative examples, and a statement outlining the consequences of breaching the program.
Training and education: An effective compliance program must have an ongoing training and education component that reaches all personnel who are in a position to engage in, or be exposed to, anti-competitive conduct.
Monitoring, auditing and reporting mechanisms: A compliance program must incorporate monitoring procedures to ensure that it is functioning as designed and mechanisms whereby employees can report potential wrongdoing without fear of retaliation.
Discipline: To demonstrate the seriousness with which the company views breaches of its program and the law, a compliance program must set out a disciplinary code or policy for company personnel who initiate or participate in anti-competitive conduct.
Consultation process on Compliance Bulletin
Given the passage of time since the Compliance Bulletin was first published, the Competition Bureau announced on June 30, 2006 that it is considering whether an update of the Compliance Bulletin is necessary. In particular, the Bureau asked for the views of the business and legal communities on whether the Bureau should:
develop its own corporate compliance training tools;
publish a template for corporate compliance programs; and
“The costs of a competition compliance program are relatively small, and the benefits substantial, especially in comparison to the potential risks of not having one.”
The Bureau's consultation period closed on Sept. 22, 2006. It would be fair to say that the responses were underwhelming in terms of numbers and skeptical in terms of tone. All of the respondents voiced their strong support for competition compliance programs and for the Bureau's role in supporting these programs. However, they queried whether the Compliance Bulletin is truly in need of amendment. They also expressed doubts as to how the questions posed by the Bureau would help advance the goal of promoting the wider use of competition compliance programs in Canada.
For example, no pressing need was identified for the Bureau to develop additional compliance tools. The point was made that there are already many options available from both law firms and companies specializing in the area.
There also was no support for Bureau templates. Concern was expressed that companies might be reluctant to deviate from the Bureau's format, which would detract from the basic principle (echoed in the Compliance Bulletin) that an effective compliance program ought to be tailored specifically to a company's situation rather than consist only of boilerplate. At most, the suggestion was made that the Bureau might publish "examples" of written guidelines that it considers to be particularly appropriate.
The responses also dismissed the suggestion that the Bureau monitor or approve compliance programs as a general matter. The Bureau may undertake this type of monitoring when companies are required to adopt a compliance program as part of the resolution of an alleged violation of the Act, but it was suggested that a more comprehensive form of approval/monitoring would be a waste of Bureau resources and increase the regulatory burden on the private sector. It was also noted that other competition enforcement agencies do not appear to include the monitoring/approval of compliance programs among their responsibilities.
Whether the Bureau will press ahead with its proposed changes to the Compliance Bulletin or if it will accept the verdict of respondents to its consultation process that no changes are required remains to be seen.
Conclusion
A competition compliance program can be effective in explaining the requirements and purpose of Canadian competition law, underscoring the high-risk areas, and providing mechanisms to ensure that if violations do occur, they can be detected and remedied in a way that exposes the company to the least risk possible. The Competition Bureau's Compliance Bulletin is a helpful resource in understanding what an effective program should entail. Implementing and maintaining an effective program, however, requires more than simply taking a precedent off the shelf and announcing it as company policy. Like any corporate undertaking, it requires development, senior management commitment and follow-through.
Mark Katz is a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP, where he is a member of the firm's competition and law and foreign investment review group. He has appeared at every level of court in relation to competition matters, up to and including the Supreme Court of Canada and has acted as counsel on several leading cases before the Competition Tribunal, including the first abuse of dominance and merger cases heard by that body. Mark can be reached at 416-863-5578 or mkatz@dwpv.com.
By Chris Bennett, Davis & Company LLP, Vancouver, and
Andreas Lober, SchulteRiesenkampff, Germany Tag and save to del.icio.us
(Ed.’s Note: With lawyers and their firms alike increasingly looking across borders to tap into new markets, there’s a new economy developing right here at home: the online gaming economy. With millions of gamers inhabiting virtual worlds that have their own systems of trade, agreements, and property, these virtual economies are translating into real-world legal issues, from virtual IP rights to contracts to taxation. "Video game law" has become a rapidly expanding field as courts worldwide try to keep pace with the sudden explosion of game-related legal issues. This article provides a quick thumbnail of some of the issues developing in this new market.)
More than 100 million gamers play massively multiplayer online (MMO) games each month, generating more than $4 billion per year in subscription revenue for game companies. The user base of World of Warcraft(WoW) alone is at least 8 million players, grossing hundreds of millions of dollars per year for Blizzard/Vivendi.
It’s not just the gaming companies, who design the games, sell the startup kits and charge a monthly subscription fee for users to access the game on company servers, which are profiting from MMO games. Plenty of MMO gamers make significant incomes form MMO games by buying and selling in-game property. For example, last year a gamer spent US$100,000 in the real world to buy an in-game space station with its very own nightclub in Project Entropia (now Entropia Universe). He thought it was a great investment, both in-game and out, because he taxed anyone who hunted on his land in the game, and he claimed these taxes generated up to $500 per hour for him. More recently, Entropia’s competitor Second Lifehas produced its first virtual millionaire.
But what would happen if someone hacked into the gamer’s account and stole the space station? What if the operator decided to shut down the gamer’s account, or even the entire game? Would the gamer have any remedies?
Virtual property
At least one real-world court has treated in-game items as property. A few years ago, a Chinese court ordered a gaming company (Beijing Arctic Ice) to return a stockpile of virtual weapons to a gamer whose Hongyue account had been hacked and whose items were stolen by the hacker. The court found the gaming company liable for security vulnerabilities in its software.
Early in-game issues regarding virtual property usually focused on intellectual property and ownership. The general consensus now is that the IP (if any) in MMO virtual property is owned by the game’s creators. In games where the player has great freedom to create IP, such as Second Life, where there are players who make real-world livings by creating in-game property, the player may own the IP in some or all of the work the player creates. But even if the game’s creators own the IP, in the event of a breach, players may have claims against the game’s creators or operators, or against other players. That’s where contracts fit in.
This video offers a brief overview of how companies, including Telus Inc., are making use of Second Life and how they're dealing with their intellectual property in-game.
Contracts
There are several potential contracts in the MMO world. For example, gamers enter into end-user licence agreements (EULAs) with gaming companies before getting access to an MMO game. These contracts limit what a gamer can do in the game, and they often prohibit gamers from selling virtual property in the games. There can also be contracts between gamers. For example, two gamers who want to buy and sell virtual property to and from each other are entering into a contract when they agree to the deal.
But are these contracts enforceable?
“The general consensus now is that the IP (if any) in MMO virtual property is owned by the game’s creators.”
Enforceability
A contract between the in-game seller and purchaser is probably enforceable. The tougher question is whether the contract between the gaming company and the gamer can negate the gamer’s rights in what is clearly valuable online property. Gaming companies generally try to limit these rights through their EULAs.
Some courts won’t hesitate to ignore licence agreements and online terms that are unexpectedly harsh or onerous. In Europe, there are even special laws declaring unexpectedly harsh or onerous terms in EULAs void. These laws contain an extensive list of clauses which are always considered void, and other clauses which are usually, but not always, considered void.
The easy way to reduce this risk is to avoid putting harsh and onerous terms in agreements. But that’s hardly any fun, so another option is to notify customers of the harsh and onerous terms.
This will increase the chances that the terms will survive a judge’s scrutiny. However, in many countries, timing is important. European courts, for example, often refuse to enforce terms which were not brought to the customer’s attention before the customer bought the game.
As for online terms, it’s probably not good enough to make them available through a link buried at the bottom of a website. It’s much better to require gamers to click “I agree” before gaining access for the first time – after giving them the opportunity to read the full terms.
Game over
What if the game company shuts down the game? Gamers spend time and real-world money to acquire in-game property, and could sue a gaming company that shuts down a game should it cause them financial losses. The easiest way for a game company to limit its risk is to clearly advise gamers that the MMO portion of the game might be discontinued, or that the contract with the gamer might be terminated.
Cheating
Cheating is always a problem in MMO games. Cheating destroys the fun for other gamers, and it can drive people away from a game if it’s not stopped.
Most game companies rely on their EULAs to stop cheating. For example, leading game publisher Electronic Arts recently confiscated 15 trillion in-game gold pieces and shut down 200 Ultima Onlineaccounts for cheating, and Blizzard recently banned 5,000 players for violating the WoW terms of use. But this is sometimes easier said than done, especially if an EULA is not extremely comprehensive. For example, Second Life publisher Linden Labs recently terminated a gamer’s account after the gamer manipulated web addresses to buy land before that land was officially released into the game. The gamer is now suing Linden Labs for breach of contract and violation of consumer protection laws, saying his activities weren’t prohibited by the EULA, so his account should not have been terminated. The lawsuit is still pending at press time.
Other MMO legal issues
There are plenty of other legal issues that arise from MMO games. For example, what legal remedies does a player have if another player hacks into his account and wipes out all of his virtual gains?
Ge Jin, a PhD candidate in Communication at UCSD, is researching areas of the computer gaming culture in China, real money trade in online games and documentary filmmaking. In China, a new kind of factory hires people to play online games like World of Warcraft and Lineage and produce in-game currency, equipment, high-level characters and other virtual goods. Affluent gamers from Korea, Europe and America pay real money for these virtual goods to quickly raise their status in games. Jin's research takes a close look at how these factories, commonly known as "gold farms," organize the production and distribution of virtual goods.
What can games companies do legally to combat gold farming (the practice of letting an automated character – or a real person hired from overseas – repeat the same actions over and over to accumulate in-game wealth)? Is virtual property taxable? How does human rights legislation protect gamers from discrimination in the online world? We’ll save these and other topics for a future article.
Chris Bennett is a video game and intellectual property lawyer at Davis & Company LLP in Vancouver. He can be reached at 604-643-6308 or at cbennett@davis.ca. His firm’s video game law blog is at www.VideoGameLawBlog.com. Andreas Lober is a video gaming and intellectual property lawyer at SchulteRiesenkampff in Frankfurt am Main, Germany. He can be reached at (++49) (0) 69 900 266 or at alober@schulte-lawyers.de.
When the Supreme Court of Canada issued its landmark decision in Wallace v. United Grain Growers ([1997] 3 S.C.R. 701), employers scrambled to understand their new obligations, while terminated employees, in many cases, saw Wallace as a judicial “green light” to additional damages.
In Wallace, the court held that employers owed employees an obligation of good faith. Expressed in the negative, the court held that employers who acted in bad faith at the time of discharge or termination – the time when the employee was at his or her most vulnerable – would be required to compensate employees through notice that is in addition to that which the employer would otherwise be required to provide. In common-law provinces, this resulted in an extension of the period of reasonable notice or in a Wallace bump.
The court held that employers who acted in bad faith at the time of discharge or termination – the time when the employee was at his or her most vulnerable – would be required to compensate employees through notice that is in addition to that which the employer would otherwise be required to provide.
One unresolved issue was whether Wallace damages were subject to mitigation. Though not entirely free from doubt, there seems to be a developing trend towards a “non-deductibility” of mitigation earnings from Wallace damages.
A leading case on this point is Prinzo v. Baycrest Centre for Geriatric Care (2002), 60 O.R. (3d) 474 (C.A.), where the employer dismissed a 17.5-year employee. At the time of termination, the employee had been on disability leave. Her employer was found to have made harassing telephone calls to her inferring that she was malingering, and also wrote a letter to Prinzo falsely implying that her physician had said she was fit to return to work.
When Prinzo did return to work, she was told she was terminated, and that the employer was concerned that her conduct not cause harm to the residents of the geriatric centre. These events led to Prinzo suffering emotional upset, increased blood pressure, weight gain, and return of diabetes symptoms. The trial judge found that the plaintiff suffered a loss of self-esteem and distress on a disabling basis for months after her dismissal. Weiler J.A., speaking for the Ontario Court of Appeal, upheld the award made by the trial judge for mental suffering, but overturned the award of damages for the independent tort of intentional infliction of mental suffering.
Weiler, J.A. then went on to discuss the alternative argument that if the actions of the employer were not a separate actionable wrong, then the appropriate length of notice should be extended by six months based on the “Wallace factor.” She indicated that given her conclusion on the “independent actionable wrong,” she “need not address this alternative submission.”
Nonetheless, Weiler, J.A. went on to make some “brief comments” in obiter. In that regard, she indicated that the “lack of candidness and forthrightness of Baycrest respecting its intentions for having Prinzo return quickly to modified duties, and the insensitive comment at the meeting of Feb. 9, 1998 that Prinzo’s conduct may cause harm to the residents …. caused more than injured feelings and emotional upset; it was humiliating and damaging to the self-esteem of a long-term employee" and that Wallace damages were warranted.
The court then turned to the question of whether mitigation income should be deducted from the Wallace notice extension, and observed that:
“If this deduction of earned income were also made from the damages awarded in relation to a ‘Wallace extension,’ Prinzo would not effectively be compensated for the injury done to her. This result would appear incongruent with the Supreme Court’s view in Wallace that the injuries resulting from bad faith conduct on the part of the employer are “sufficient to merit compensation in and of themselves” irrespective of whether the bad faith conduct affects employment prospects. On the basis that intangible injuries cannot normally and completely be mitigated by finding other employment, it has been suggested that the extended notice period be treated as akin to a severance payment which is not subject to mitigation. This issue was not, however, argued before us, and having regard to my earlier conclusion upholding the trial judge, I need not resolve it.“ [Emphasis added]
Although obiter, other courts have picked up on this view. In McCullouch v. Iplatform Inc., 2004 CanLII 48175 (ON S.C.), and in Carscallen v. Fri Corp., 42 C.C.E.L. (3d) 196 aff’d at 2006 CanLII 31723 (ON C.A.), Mr. Justice Echlin concluded, on the authority of Prinzo v. Baycrest Centre for Geriatric Care, that Wallace damages were not to be reduced by the mitigation income earned. The Court of Appeal, while not specifically dealing with the issue, upheld the decision in Carscallen.
In Bouma v. Flex-N-Gate-Canada Company, (2005) 40 C.C.E.L. (3d) 2 (Ont. S.C.J.) (Supplementary Reasons), counsel, following the delivery of the original reasons for judgment, sought clarification of a couple of matters, including whether mitigation income ought to be deducted from the four-month Wallace extension awarded. The court clarified that on the basis of Prinzo, mitigation income earned by the plaintiff ought not to be used to offset the Wallace damages. To hold otherwise would “appear incongruent with the Supreme Court of Canada’s view in the Wallace case that the injuries resulting from bad-faith conduct on the part of the employer are ‘sufficient to merit compensation in and of themselves.’”
The Nova Scotia Court of Appeal recently considered the issue in Jenssen v. CHC Helicopters International Inc. (2006) NSCA 81 (CanLII) overturning (2005) NSSC 241 (CanLII). In this wrongful dismissal case, a jury determined that the period of reasonable notice of termination was four months, and then went on to extend the notice period by a colossal 48 months based on the Wallace factors.
Not surprisingly, the employer appealed the Wallace award, arguing that it was a "wholly erroneous estimate of the damages suffered by the plaintiff." It seems that, pending the appeal, the parties tried to agree on the wording of the order that would reflect the jury’s award. They could not do so, as they disagreed about whether mitigation income earned by the plaintiff could be used to offset the damages during the "extended notice period" (48 months) as well on the issue of costs.
The plaintiff argued that mitigation income earned by her could only be set-off against damages for the period of reasonable notice (four months), but not against the Wallace extended notice period (48 months). The employer took a different view. The court disagreed with the plaintiff and held that:
Any extension to the period of reasonable notice arising out of the bad-faith conduct of the employer at the time of dismissal is not a separate head of damages that would be subject to new or different rules regarding mitigation. As such, the plaintiff is required to mitigate her damages throughout the period of reasonable notice which should include the additional notice period awarded by the jury.
“Any extension to the period of reasonable notice arising out of the bad-faith conduct of the employer at the time of dismissal is not a separate head of damages that would be subject to new or different rules regarding mitigation.”
The matter came before the Court of Appeal, who set aside the trial decision. On the issue of Wallace damages, the court noted that the trial judge pointed out two matters to the jury as possibly supporting the Wallace claim: namely, the delay in providing a record of employment, and the employer’s failure or refusal to provide a letter of reference. The Court of Appeal noted that “the courts have not considered these two forms of bad-faith conduct of themselves as particularly egregious.”
Even when combined with other factors, the court observed that the notice period would not have approached the 48-months' notice awarded in this case – the largest Wallace award in any decided case. The circumstances of this case were neither “strikingly egregious” nor “particularly exceptional.” Rather than sending the matter back for a new trial, the court ordered the employer to pay the equivalent of nine months’ pay, less applicable deductions, based on Wallace.
The court went on to consider the issue of mitigation. While noting that an argument could be made that the mitigation income ought to be applied to the Wallace damages just as it would be to the damages in respect of reasonable notice, the court decided to follow the Prinzo approach. Specifically, it concluded that reducing the Wallace damages by the amount of earned income would not be in accordance with the Supreme Court of Canada’s view in Wallace that an employee should be fully compensated for bad faith conduct.
It should be noted that there are a number of earlier cases that have reached the opposite conclusion and reduced the Wallace bump on account of mitigation income, including Boule v. Ericatel Ltd. [1998] B.C.J. No. 1353 (S.C.), Musgrave v. Levesque Securities Inc. (2000), 183 N.S.R. (2d) 349 (N.S.S.C.), Pauloski v. Nascor Inc. (2002), 16 C.C.E.L. (3d) 202 (Alta. Q.B.), and Frank v. Federated Co-operatives Ltd. [1998] A.J. No. 12 (Q.B.).
Being in the nature of “contractual” type damages, albeit based on “conduct” in the manner of termination, there is an argument that these types of damages ought to be subject to mitigation income in the same or similar manner that damages for wrongful dismissal are subject to reduction on the basis of such income.
In common-law provinces, Wallace damages, where they are awarded, result in an extension to the period of reasonable notice and, in that sense, are “not a separate head of damages.” This is in contrast with the approach that has developed in Quebec, where “moral damages” are awarded separately from the indemnity in lieu of notice (Fitzgibbon, M.P. and Vachon, P.C., “Off the Beaten Path” Damages in Employment Law: How to Stay on the Trail, presented at the Canadian Bar Association’s 2006 Administrative Law and Labour and Employment Law conference). Nevertheless, the court in Jenssen addressed some of the contrary arguments and disposed of them in favour of the Prinzo approach.
Michael P. Fitzgibbon is a partner at the national law firm of Borden Ladner Gervais LLP, where he practices management-side labour and employment law. He runs the labour law blog Thoughts from a Management Lawyer.
Englefield v. Wolf (2006 CanLII 27994, 2006 CanLII 9600, 2005 CanLII 42483) is a significant decision in the interpretation of s. 119 of the Canada Business Corporations Act (CBCA). The decision confirms that a director is liable for unpaid wages (including vacation pay) that relate to the period when the person was a director, but not for unpaid amounts that became owing after the person ceased to be a director. The decision – in fact, three separate ones involving three separate hearings – also clarifies that a director may not escape such liability by resigning before termination of employment.
In an action certified under the Class Proceedings Act, Englefield represented himself and more than 4,500 other former employees of Dylex Ltd. whose employment was terminated in August 2001. The claim was for more than $18 million for unpaid termination pay, severance pay, wages, vacation pay, health benefits and reimbursement of expenses, and was asserted against Hardof Wolf as director of Dylex, pursuant to s. 119 of the CBCA. Section 119(1) provides as follows:
“Directors of a corporation are jointly and severally liable to employees of the corporation for all debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.”
Wolf did not defend the action and did not appear at any of the hearings.
Counsel for the plaintiff argued that an individual who is a director of a corporation at the time of termination of employment is liable under s. 119 for all amounts that are then owing to employees for unpaid wages, vacation pay, and expense reimbursements.
In the initial reasons for decision, Cullity J. rejected the claims for termination pay, severance pay and benefits. Cullity J. was prepared to grant judgment for the claims for unpaid wages, vacation pay and reimbursement of expenses, but required further affidavit evidence and submissions to determine the exact amount owing. At the time of the second hearing, the plaintiff’s counsel notified him that notice of appeal from the decision with respect to termination pay and severance pay had been filed.
On the second hearing, the main issue was the extent of a person’s liability as director under s. 119 where the person was not a director during the entire period for which the amounts in question were unpaid. The issue arose because Wolf was a director of Dylex only for the period of approximately three months preceding the employee terminations.
Counsel for the plaintiff argued that an individual who is a director of a corporation at the time of termination of employment is liable under s. 119 for all amounts that are then owing to employees for unpaid wages, vacation pay, and expense reimbursements. Cullity J. did not accept this interpretation.
Cullity J. relied primarily on the decision of the Manitoba Court of Appeal in Brown v. Shearer (1995), 33 C.B.R. (3d) 314, in which it was held that directors who had resigned two months before the termination of the plaintiff’s employment were liable under s. 119 of the CBCA for vacation pay that accrued before the date of their resignations but not for vacation pay that accrued subsequently. Cullity J. noted that the Brown decision was approved in this respect, although otherwise distinguished, in Bell v. British Columbia (Director of Employment Standards) (1996), 41 C.B.R. (3d) 145.
Cullity J. was also required to consider an Ontario case, Vopni v. Groenewald (1991) 10 C.B.R. (3d) 292, in which McKeown J. held that a director who resigned five months before the dismissal of the plaintiff was not liable for vacation pay that had accrued prior to his resignation. The Manitoba Court of Appeal described the reasoning in Vopni as “wrong” in Brown. Cullity J. stated that while ordinarily he would consider himself bound to follow Vopni, he preferred the reasoning in Brown, and, given that the plaintiff had already filed a notice of appeal, he stated his intention to follow Brown. Because there was no evidence of the amounts owing for unpaid wages, vacation pay, and reimbursement of expenses that were referable to the period while Wolf was a director, Cullity J. dismissed the motion for judgment.
“A director may not escape liability for unpaid wages (including vacation pay) by resigning before termination of employment.”
(Neither McKeown J. in Vopni nor Cullity J. in the subject case was referred to the decision of Lennox J. in Darrah v. Wright (1914), 7 O.W.N. 233. In that case, the court dealt with s. 98(1) of The Ontario Companies Act, R.S.O. 1914, c.178, which provided as follows:
“The directors of the company shall be jointly and severally liable to the labourers, servants and apprentices thereof for all debts not exceeding one year’s wages due for services performed for the company while they are such directors respectively.”
In Darrah, the plaintiff employee’s wages were not paid from April 14, 1913 to Dec. 12, 1913. The defendants were directors of the employer, Wright from April 5, 1913 to Dec. 3, 1913, and McLaren from Aug. 26, 1913 to Dec. 12, 1913. The court found that Wright alone was liable for wages for the period from April 14 to Aug. 25, both Wright and McLaren were liable for the period from Aug. 26 to Dec. 3, and McLaren alone was liable from Dec. 4 to 12.
The court’s interpretation of the words “debts … for services performed for the company while they are such directors respectively” was consistent with the interpretation of substantially similar words in s. 119 of the CBCA made by the Manitoba Court of Appeal in Brown and by Cullity J. in the subject case.)
Following the second hearing, on counsel’s advice, the plaintiff decided to abandon the appeal. The plaintiff did, however, find evidence of the amounts owing for wages, vacation pay and expense reimbursements, and moved to vary the second order.
At the third hearing, Cullity J. expressed the view that, because the earlier order had not been entered, he remained seised of the proceeding, and that he had authority to vary the second order. He decided to accept the new evidence, even though it could have been adduced at the second hearing. His reasons for doing so included the fact that there was no prejudice to the defendant, Wolf, who chose to ignore the process of the court from the outset, and that the additional evidence related to a question of fact that could be resolved on an uncontested basis without a significant expenditure of court time.
Cullity J. then considered the new evidence, found it to be sufficient to establish the amounts of the debts for wages, vacation pay and reimbursement of expenses that were referable to Wolf’s tenure as a director and gave judgement for the representative plaintiff in the amount of $286,089.68.
Doug Palmateer has been with the Air & Berlis LLP since 1985 and a partner since
1988. Doug is a member of the firm's Financial Services Group. Contact Doug at 416-865-7759.
Note: This article combines two articles that appeared in the newsletter of the Insolvency Law Section of the Ontario Bar Association, Insolvency News, Vol. 21, No. 3 and Vol. 22, No. 1. Reprinted with permission of the author.
If a multinational corporation had the luxury of perfect hindsight, it would make sure it migrated its intangible assets well before those assets proved to be valuable. These companies, however, do not have such luxury, and the decision to migrate assets often comes well after their value is realized.
An intangible asset is any asset that has no physical presence but nevertheless can generate significant profits to a multinational organization. Examples include trademarks, trade names, manufacturing know-how, and intellectual property. Migrating these intangible assets before they become valuable requires the asset to be sold to related parties in a different tax jurisdiction at fair market value.
It comes as little surprise to hear discussions about government crackdowns on tax havens, as more and more multinational organizations move profits offshore to low-tax jurisdictions.
Ascertaining that value often depends on the asset’s stage of development, its ability to generate future profits, and its remaining useful life. Tax authorities, however, might not agree to the price at which the intangible asset’s owner hasmigrated it, raising the spectre of a tax dispute with various authorities around the world.
Accordingly, it comes as little surprise to hear discussions about government crackdowns on tax havens, as more and more multinational organizations move profits offshore to low-tax jurisdictions.
From a tax perspective, any financial planning by multinationals that involves moving profits offshore is justifiable if the corresponding functions, assets, and risks borne to earn these profits are also shifted offshore. With the economy’s increasing globalization, the imperative to minimize after-tax profits is not only advantageous to improve corporate profits, but it is also necessary simply in order to stay competitive.
While implementing such a framework is a long and complex process, it is beneficial for all involved — if done correctly.
The hows and whys
Tax authorities around the world have begun to target firms that have structured their internal affairs so that profits are migrated to low-tax jurisdictions. As a result, multinational companies need to ensure that documentation is sufficient to support the migration of valuable intangibles and the profits they drive.
Three methods commonly used to migrate these intangible assets are cost-sharing agreements, buy-in payments, and the sale of intangibles. We will examine each of these in turn.
Cost-sharing agreements (CSAs)
CSAs are one of the most effective ways to migrate intangibles. A CSA is an agreement between two parties that states the contributions each party will make in terms of costs expended and the associated benefits that will be returned for such an investment. In order for a CSA to be effective, it must:
make business and economic sense;
include upfront and well-documented terms;
indicate costs incurred by each party relative to the reasonability of expected profits; and
if providing entry, exit, or termination of a CSA, involve arm’s-length prices.
Companies that fail to draft effective cost-sharing arrangements increase their audit risk. In this respect, they must take great care to ensure that CSAs make both economic and business sense.
Buy-in/buy-outs
Buy-in/buy-out payments are another way to migrate intangible income offshore. Buy-in payments require a party in a related-party setting to “buy in” to a cost-sharing agreement or “buy out” of one. In order to do so, the buy-in/buy-out payments must represent arm’s-length prices.
“Migrating intangible assets before they become valuable requires the asset to be sold to related parties in a different tax jurisdiction at fair market value.”
Buy-in options are valuable, given they provide many opportunities with associated risks and must be reflected in the price. Subsidiaries must pay fair market value to buy in. Again, companies that fail to do so will increase their risk of an unfavourable audit.
Sale of intangibles
The final approach to migrating intangible assets is through the sale of the intangibles themselves. Intangibles are a major source of profits, and selling them to offshore affiliates ensures that the profits generated from these assets’ sales are taxed in these offshore jurisdictions.
It is important, however, that this be done at arm’s-length prices, and determining the arm’s-length sale of intangibles is complicated. The most common way of determining the price at which this should be transacted involves the Comparable Uncontrolled Price methodology. This requires finding external comparables that involve the sale of very similar intangibles – often a difficult task to achieve.
Conclusion
Migrating intangibles to low-tax jurisdictions is beneficial for minimizing multinationals’ corporate taxes. However, the migrating process should ensure that the functions, assets and risks borne are in the tax jurisdiction to which the intangibles are migrated. Migrating the intangibles in such a way that the transfer represents arm’s-length prices is important in order to defend against a potential audit by tax authorities.
Dale C. Hill, CMA, is the National Transfer Pricing Leader in the Transfer Pricing and Competent Authority Group of Gowling Lafleur Henderson LLP in Ottawa. A version of this article appeared in CCCA Magazine, the official publication of the Canadian Corporate Counsel Association.
It started out as a class action suit in Illinois against one of the world’s biggest multinationals, but it may have ended up redefining the Canadian class action.
The case in question, Boland et al. v. Simon Marketing and McDonald’s Corp. No. 1 CH 13803, began as an Illinois action against a marketing company McDonald’s had hired to run one of its contests. The plaintiffs held that employees of the marketing company had embezzled game pieces and redirected them to specific individuals, thus affecting the game’s overall payouts. The case was settled, and, as apart of that settlement, the defendants were released from most claims. The Illinois court held that the settlement also applied to potential Canadian class members.
Boland et al. v. Simon Marketing and McDonald’s Corp. started out as a class action suit in Illinois against one of the world’s biggest multinationals, but it may have ended up redefining the Canadian class action.
But before the close of proceedings, a group of Canadians moved for leave to intervene, saying that the defandants’ notice to Canadians – conducted through ads in Macleans, La Presse, Le Journal de Québec and Le Journal de Montréal as well as some U.S. publications with Canadian circulation – was inadequate. The Illinois court rejected this argument.
In a twist, however, an employee of the marketing company testified during his criminal trial that McDonald’s had ordered that no large prizes should be awarded in Canada. This claim was never raised in the Illinois action, so a Canadian class action, headed by Greg Currie, was launched to collect $80 million in damages from McDonald’s. Currie also sought an order that the Boland settlement should not apply to Canada, while McDonald’s insisted that it should.
The Ontario Court of Appeal found that while there was a “real and substantial” connection to Illinois, the principles of “order and fairness” – two tests for the enforcement of foreign judgments laid out by the Supreme Court of Canada in Morguard Investments Ltd. v. De Savoye – had not been met, and rejected McDonald’s motion, freeing the Canadian class action to proceed despite the Illinois court’s finding that its judgment bound Canadian class members.
“The Currie case will not be appealed,” said Chris Paliare of Paliare Roland in Toronto, who represented Currie. “As a matter of comity, the Canadian courts will recommend jurisdiction-approved settlements of U.S. class actions as binding on Canadian members of the subject class.” He also said that would occur “if the foreign court has met the twin principles of real and substantial connection and proper notice of fairness.”
“The notice was found woefully inadequate both in terms of what it said, how it was said, and the method of distribution of notice, said Paliare. In addition, the notice wasn’t readable or understandable in any real way to the potential class. “Procedural fairness was the underpinning of Currie v. McDonald’s decision.”
“However, even with terrific notice, if the court didn’t have real and substantial connections to Canadians to ensure the class fell in with the American class, the decision would not be binding.”
Until recently, Canadian plaintiff lawyers mainly instituted “copycat” actions in co-operation with U.S. class counsel and defendants often found themselves fighting multiple battles. But as a result of Currie v. McDonald’s, the Ontario Court of Appeal decision confirmed that it is willing, given the proper circumstances, to enforce American class action rulings and settlements binding Canadian class participants, even against their will.
“We will now have Canadian class action companies that will be consulted by U.S. plaintiff and defendant lawyers, in order to determine what appropriate notice will be in Canada,” said Christopher Rhone of Branch McMaster’s Vancouver office. “So long as they comply, according to the Currie v. McDonald’s precedent, our courts would defer to the U.S. court’s ruling.”
But in a recent Supreme Court of Canada decision – Pro Swing v. Elta Golf [2006] SCC 52 – “the court stressed the need to protect Canadian citizens and Canadian domestic values,” said Rhone. “While this is nothing new, the emphasis placed on it by the court is new, so I think that the decision on the enforcement of an American judgment against a Canadian in Canada is important; the courts here should always scrutinize any order that is issued from the U.S.”
Does this mean that the “copycat” action is dead, and that American class action lawyers, who are generally quicker off the mark in filing such actions than their Canadian counterparts, will be recognized by the courts as representing Canadians as well as Americans, thereby increasing the likelihood of such filings?
“American lawyers won’t be coming in droves, but we will see a slow increase,” said Rhone. “They will not be coming here to argue cases themselves, but their courts will assert jurisdiction, or will try to, over Canadians, as they did in the Currie case.”
“The Currie v. McDonald’s case has caused the Canadian bar and the Canadian court to face the issues that arise with a cross-border settlement,” said Sandra Forbes of Davies Ward Phillips & Vineberg in Toronto. “It brings up questions such as, how should the rules about cross border settlements evolve and when do you enforce judgments from one country to another, even one province to another?
“Given the global nature of commerce, it is inevitable that, with issues such as medical inventions and pharmaceutical products, we will end up with more multi-lateral court cases or one jurisdiction over another as the primary place where the issues can be litigated.”
“Cross-border settlements can be advantageous to both plaintiffs and defendants, and from the plaintiff’s perspective, they can be more cost-effective by stream-lining administrative costs so more money is distributed amongst class members and less money administering the settlement,” said Forbes. “From the defendant’s perspective, if you have decided to settle in the U.S., it is more efficient to settle one time only, given the factual background and motivation is the same; the court should be developing principles that allow the judges and lawyers that deal with these cases to assess whether cross border cases make sense.”
Forbes also sees American plaintiff counsel becoming increasingly interested in the Canadian market – the larger the class, the greater amount of money. “There is a relationship developing between the American and Canadian plaintiff class action bar,” said Forbes. Plaintiff counsel works together by notifying each other of cases.
“Anyone here can duplicate, but there should be one action and complicated jurisdiction issues have to be figured out,” said Forbes. “We have a good plaintiff class action bar developing in Canada and a lot of good class action counsel that researches and thinks long and hard before starting an action. If a Canadian plaintiff lawyer feels it is worthwhile, I don’t see the fees as being a big issue.
“If you give effective notice, there’s a good chance of getting the settlement approved and if you give proper notice to Canadian class members, you will have a good chance of having them bound by the U.S. settlement,” said Forbes. She sees more cross-border settlements, as long as a U.S. plaintiff lawyer is satisfied that the jurisdiction is sufficient.
Given the global nature of commerce, it is inevitable that, with issues such as medical inventions and pharmaceutical products, we will end up with more multi-lateral court cases or one jurisdiction over another as the primary place where the issues can be litigated. However, proper care must be given of proceedings in both jurisdictions to achieve the best solutions for both defendants and plaintiffs. “As we can expect to see more of these cases, there will be more discussion in courts regarding what kind of notice is required,” said Forbes.
In a nutshell, there is the potential for a more efficient resolution of a claim that transcends the border, but there are many different considerations. “These cases tell us to be careful and it’s worth spending the money to do it right, otherwise the Canadian court will find the U.S. settlement will not bind Canadian class members,” said Forbes. What may have been sufficient notice of settlement and its implications for a judge in Illinois may not be enough for a judge in Ontario.
Jane Mundy is a freelance writer and contributor to National.
Using copyright law to prevent parallel importation: A comment on
Kraft Canada, Inc. v. Euro Excellence, Inc.
By Teresa Scassa, Dalhousie Law School, and Director, Law and Technology Institute Tag and save to del.icio.us
In Kraft Canada, Inc. v. Euro Excellence, Inc., the Federal Court of
Appeal ruled that the secondary infringement provisions of the
Copyright Act could be used to prevent the parallel importation into
Canada of chocolate bars, due to copyrights in the trademark logos on
the product labels. The effect of this decision, currently on appeal to the
Supreme Court of Canada, is to give trademark holders a tool to prevent
parallel importation in contexts where trade-mark law has generally
been ineffective. While the use of copyright law to achieve a result in
these circumstances is problematic, the author argues that the solution
lies in legislative amendment rather than in creative interpretations of
the Copyright Act.
