Federal Court of Appeal: Netflix Has the Right to be Heard Before Copyright Board

On December 17, 2015, the Federal Court of Appeal released its decision in Netflix, Inc. v. SOCAN in which it granted an application for judicial review from the Copyright Board's decision dealing with a Tariff for musical compositions in audiovisual webcasts. Netflix opposed the section of the Tariff that imposed a monthly minimum fee on free trial subscriptions. The Court found that the Copyright Board breached its duty of procedural fairness with regard to Netflix in disallowing it from participating in the tariff certification proceedings.

Background

The Society of Composers, Authors and Music Publishers of Canada (SOCAN) began filing royalty statements for use of musical compositions in audiovisual works transmitted over the internet in 2007. In 2011, the Copyright Board opened the tariff certification process; Netflix did not participate at this initial phase. The Board suspended the proceedings in order to facilitate settlement negotiations between SOCAN and a group of industry stakeholders. Netflix again abstained from engaging and did not take part in the negotiations. 

Image by Renjith Krishnan

SOCAN and the other parties to the negotiation reached an agreement and SOCAN filed a joint request on behalf of all parties to have the Tariff certified in accordance with their agreement. However, the Tariff's content had changed from the version initially published in the Canada Gazette. The Tariff’s first iteration made no distinction between subscription-based and on-demand services; it also did not provide for compensation in relation to free trial subscriptions. The new version of the Tariff addressed both.

Netflix's interest in the Tariff fundamentally changed at this point. Unlike the signatories to the settlement agreement, Netflix's offerings are subscription-based and it is well known for its one-month free trial. The agreement, to which Netflix was not a party, therefore became a major concern, spurring Netflix into action before the Copyright Board. 

Since Netflix did not take part in the process from the beginning, the Board did not invite it to make submissions on the Tariff as proposed following the agreement; Netflix did so anyway. It argued that the free trials were fair dealing in light of the Supreme Court of Canada's recent case law relating to technological neutrality and consumer research fair dealing (ESA v. SOCAN and SOCAN v. Bell respectively). 

The Board refused to make Netflix’s submissions part of the record. The Board's decision to exclude Netflix was based on: 1) the fact that Netflix raised issues that could not adequately be addressed with the record as it stood and would require additional evidence; and 2) the fact that none of the parties to the proceedings had raised those issues prior. The Board also noted that Netflix had every opportunity to get involved in the proceedings from the beginning and failed to do so.

Despite this decision, the Board chose to commence a new process based upon the Tariff resulting from the settlement discussions, citing exceptional circumstances and the fact that Netflix is such a major player in this space. The Board nonetheless required parties to make submissions based on the record as it stood and without introducing new evidence that did not consist of “noncontroversial facts which shed significant light on the proper course of action". Netflix made its fair dealing argument and requested leave to lead new evidence. SOCAN opposed and the Board refused to allow Netflix's request. The Board ultimately certified the Tariff, more or less as proposed by SOCAN.

Appeal

Writing for the Court, Justice Nadon (Justices Boivin and De Montigny concurring) held that the Copyright Board erred in failing to allow Netflix to make its submissions. After briefly noting that the applicable standard of review was correctness, the Court held that the Board failed to discharge its duty of procedural fairness vis-à-vis Netflix. 

The thrust of the Court’s reasons was that Netflix never had a chance to participate in the certification process relating to the Tariff as approved by the Board. SOCAN argued that Netflix abstained from participating because it chose to rely on other objectors to field its concerns. The Court held that regardless of whether this was the case, even if Netflix had participated at the pre-settlement negotiation phase, its submissions would have been in relation to a proposed tariff that was materially different (especially from Netflix’s perspective) from the one ultimately certified. In that respect, Netflix’s failure to participate from the get go could not serve was a waiver of its right to participate once the Tariff, and stakes, had changed significantly. 

Justice Nadon observed that since the tariff-setting process is one that concerns the industry as a whole, it is that “industry interest”, and not only Netflix’s individual interest, that must be safeguarded. He found this to be a relevant factor in deciding as to whether the Board met its procedural fairness obligations. 

He also took issue with the Board’s assessment of the “ReSound 5 factors”, elements the Board should consider when deciding whether to certify a tariff based on an agreement between the petitioning copyright collective and interested stakeholders. In Re:Sound 5 the Board identified two factors that ought to be evaluated in such a situation: 1) the extent to which the parties to the agreements can represent the interests of all prospective users; and 2) whether relevant comments or arguments made by former parties and non-parties have been addressed.

In Justice Nadon’s opinion, the Board was wrong to conclude that a negotiation process which excluded Netflix, the largest player in the space, adequately represented all perspective users’ interests. This is especially true in this case where the provisions in question were seemingly targeted at Netflix, and by extension its user-base. 

Justice Nadon also found that the Board failed to properly assess the second Re:sound factor in that it chose to ignore Netflix’s arguments on fair dealing. Since this factor contemplates non-parties, Netflix’s lack of participation in the proceedings is no excuse for failing to consider its arguments.

The Court also failed to accept the Board’s reasoning that ruling on Netflix’s submissions would have required it to consider evidence that was not on the record. Justice Nadon noted that while this was true, the only reason why the required evidence was not on the record was because the Board failed to admit it. The Board is therefore precluded from relying on a lack of evidence caused by its failure to accept same. 

Nadon J.A. concluded by stating that though administrative tribunals do and should exercise a broad discretion over their procedural rules, the end goal of those rules are to assure that justice is done. In his view, failing to allow Netflix to advance its arguments ran counter to the interest of justice. Denying their right on procedural grounds is therefore inconsistent with the very goal that procedure is meant to encourage. 

Conclusion

This was a tight and well-reasoned decision. From a practical perspective, the Board’s decision did not pass the smell test. The proposed Tariff as published in the Canada Gazette made no mention of subscriber-based services and free trial subscriptions. The parties to the settlement negotiations did not offer subscription-based services or free trials; they were therefore effectively negotiating with Netflix’s chips. To allow this to stand would not only deny Netflix the opportunity to defend its interests, it would have allowed Netflix’s competitors to benefit from a more favourable compensation regime while stifling their biggest competitor’s business model. 

Due to the decision’s proximity to the holiday season, we will have to wait until the New Year to find out whether SOCAN will ask for leave to appeal to the Supreme Court of Canada.

Bill C-59 Modifies Canada’s IP Laws: Solicitor-client Privilege to Cover Trademark and Patent Agents and Copyright Term for Sound Recordings Extended

Bill C-59, which received royal assent this week, will require patent agents and trademark agents to treat communications with clients as privileged. The provisions to be inserted into the Patent Act and Trade-marks Act are identical. 

The requirement applies to “individuals whose name is entered on the register of (patent/trade-mark) agents”. The requirement also extends to foreign patent and trade-mark agents and their clients vis-à-vis their Canadian patent and trademark applications provided that a duty of confidentiality exists in their home jurisdiction as well. 

The Bill also puts into effect the controversial copyright term extension for sound recordings. Now, a sound recording that is published will be protected until the earlier of the two following periods: 70 years from the publication; or 100 years from the date of fixation. This is increased form 50 years from fixation (s.23(1.1)).

Federal Court Weighs In On Copyright and Trademarks Rights in Metatags

In Red Label Vacations Inc. (redtag.ca) v. 411 Travel Buys Limited (411travelbuys.ca), the Federal Court had occasion to consider whether using metatags could constitute copyright infringement, trademark infringement, passing off or depreciation of goodwill. Justice Manson dismissed all of these claims. This decision is of particular interest since the reasons (partly) extend beyond the facts of the case and make a broader legal statement on the status of metatags as IP in Canada.

A metatag is a piece of information contained in a webpage’s code. Its purpose is to describe the contents of the page to help search engines place the page in search results based on the search terms used. In this case, the Defendant used metatags that were either identical or very similar to the Plaintiff’s registered trademarks. It also evidently copied these metatags from the source code on the Plaintiff’s website. 

On the copyright claim, the Court had to determine whether the Defendant’s metatags met the originality requirement and, if so, whether a substantial part of the Plaintiff’s ‘work’ was copied. Justice Manson surveyed some cases that have addressed metatags. He cited Justice Hughes in Netbored Inc v Avery Holdings Inc in which, without speaking determinatively on the issue, Justice Hughes casted doubt onto whether metatags were protected by copyright.       

    

Justice Manson did not pronounce definitively on whether metatags were susceptible to being protected by copyright in general. Rather, he found that there was no copyright infringement because of a lack of originality on the facts of the case. The metatags used by the Plaintiff were largely copied from a Google keyword list. There was therefore insufficient skill and judgement exercised for the Plaintiff’s metatags to merit copyright protection. 

Even if the Plaintiff’s metatags did benefit from copyright protection, the Court found that the Defendant did not copy a substantial part of the overall work. The record showed that the Defendant copied the metatags on 48 individual pages of the 180,000 pages that make up the Plaintiff’s website. While recognizing that substantiality in copyright law is a qualitative and not quantitative measure, the Court refused to find infringement based on the small number of words copied even though they were identical to the metatags found on the Plaintiff’s site. 

On the passing-off and trademark infringement claims, the Court found that there was no likelihood of confusion. Even though using the metatags may have caused consumers to be presented with the option of navigating to the Defendant’s website, the website itself did not masquerade as the Plaintiff’s. This makes it unlikely that a user would be confused into thinking the Defendant was actually the Plaintiff. This reasoning applies more broadly to any instance in which a defendant, though using the plaintiff’s trademarks as metatags, does not represent itself as the plaintiff on its actual website. 

The Court refused to import the so called “initial interest confusion” doctrine applied by some United States courts. Under this theory, an infringement may be found when a potential customer’s initial interest is drawn away from the plaintiff’s offering and towards those of the defendant through use of the plaintiff’s trademark. The Court noted that even if it were disposed to consider initial interest confusion, the doctrine did not apply in the present case. This is because there must ultimately still be confusion as to the source of the goods. Once a person navigates to the Defendant’s website, it is immediately apparent that the site is not affiliated with the Plaintiff’s business. 

The claim for depreciation of goodwill under Section 22 of the Trade-marks Act was also rejected. Citing Veuve Clicquot Ponsardin v Boutiques Cliquot Ltée., the Court found that the Plaintiff’s trademarks were not being used as registered and that the claim under Section 22 must fail on that basis.

Whether metatags should be copyrightable is an open question. Some may say that they should be in principle, so long as they are original either in content or in their organization. For my part, I am doubtful as to whether they should qualify as a work. While it is settled law that a work need not be in a human readable format to attract copyright protection, the metatags are never really viewed in any format. They do not appear as an image or colour or effect on a website; they exist solely as a tool to help search engines index webpages.

Consider a fishing analogy: the website (the actual work) is the fish. The search engine is like a sonar fish finder and the metatags are sonar reflections that give away the positions of the fish. The sonar reflections are not the fish themselves. Likewise, the website is the protected work, not the metatags which simply help one find the website. 

While this is an interesting point of debate, I think the implications on trademark law are far more important. This decision demonstrates how the current trademark legal regime is ill-equipped to address an unfair business practice relating to the use of trademarks. 

I am not certain that it should. At the heart of trademark law is the effort to eliminate consumer confusion and allow consumers to be reasonably certain as to the origin of the goods and services they purchase. As the Court found here, that goal is not served by rending use of a trademark as a metatag infringement. While some may consider it a dubious business practice, the absence of confusion takes this scenario out of the realm of trademark law and into the realm of unfair competition. As the Federal Government has learned, it must be careful in how it attempts to address those issues under the Trade-marks Act lest the provision be struck down on constitutional grounds like Section 7(e).

Arguably the Court’s decision on the Section 22 claim was fact specific and leaves the door open to claims of depreciation when the trademark is used by the Defendant exactly as registered. In the absence of a claim in passing-off or trademark infringement, trademark owners may yet be able to avail themselves of that remedy when their competitors use their trademarks as metatags.