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High Court Tackles Web Lottery; Online Music to Come

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While the public's attention has understandably been occupied with other events, the Canadian Supreme Court has recently been active on the technology law front. Late last month the court took action in two cases — bringing one case involving Internet lotteries to a swift conclusion, and subsequently opening the door to an online music case that is likely to attract the attention of the music industry, Internet service providers, technology companies, and end users worldwide.

First up for the court was a hearing in the Earth Future Lottery case. The case involved a Prince Edward Island-based lottery that obtained provincial approval to operate online. Its plans were quickly derailed last year when the P.E.I. Supreme Court ruled that the lottery ran counter to the Canadian Criminal Code since it was not conducted and managed in the province.

The lottery's promoters argued that it was intended to run exclusively within P.E.I. — the Web server, the lottery administration, the credit card approvals and the drawings were all to be situated within the province. Moreover, the lottery contract was to have included a clause that deemed the purchase and sale of tickets to occur within P.E.I.

The P.E.I. court disagreed, however, ruling that the lottery was "based in" P.E.I. but was not "conducted and managed in the province" as required by the law. It was convinced that the plans to sell tickets to a global market meant that the lottery was not conducted strictly within provincial borders. Moreover, it was not persuaded that the contractual jurisdiction language altered the analysis.

These issues were again raised before the Supreme Court of Canada. The high court wasted little time dismissing the case, however, as after the initial round of arguments, it announced that the appeal was dismissed on the same grounds as those reached by the P.E.I. Supreme Court.

Although in closing the door on the Earth Future Lottery case the court declined to reconsider issues of some importance to the Internet and e-commerce, it created a new opportunity to deal with many Internet and e-commerce law issues by granting leave to appeal in the much-anticipated Tariff 22 case.

The Tariff 22 case traces back to 1995, when the Society of Composers, Authors and Publishers of Music in Canada (SOCAN) filed an application with the Copyright Board of Canada for the creation of a new royalty to cover music on the Internet. SOCAN argued that all parties involved in an Internet transmission — from the poster to the Internet service provider to the recipient — are liable for the communication and thus all bear some responsibility to pay an appropriate licence or royalty fee.

Canadian Internet service providers (ISPs) led the opposition to the SOCAN proposal, characterizing themselves as mere intermediaries (much like phone companies) who should not be held liable for the content transmitted over their equipment.

Following extensive hearings, the Copyright Board issued a decision in 1999. The board ruled that music transmitted over the Internet qualified as a public performance under the Copyright Act and therefore could be subject to a royalty. It also determined that ISPs could rely on a provision that exempts intermediaries from liability where they function strictly in an intermediary capacity. Furthermore, the board ruled that its reach was limited to Canada's borders, so that the proposed royalty could only be applied to Canadian-based Web servers.

SOCAN appealed that decision to the Federal Court of Appeal, yielding a "who's who" of litigants that included the Canadian Association of Internet Providers, the Canadian Cable Television Association, the CBC, Time Warner and the Canadian Recording Industry Association.

After months of deliberations, the Federal Court issued its decision last May, arriving at several noteworthy conclusions. First, it upheld the board's determination that ISPs may rely upon the intermediary exemption in most circumstances, since they provide nothing more than the "means of telecommunications necessary" for their subscribers to communicate on the Internet.

The court identified at least one exception to this general conclusion, however. Focusing on the word "necessary," the court reasoned that ISPs that cache material to speed up delivery to subscribers go beyond what is strictly necessary to communicate. Accordingly, it ruled that caching was not protected by the intermediary exemption and that ISPs could be required to pay a royalty based on their caching activities.

That aspect of the decision has generated considerable controversy, with some arguing that legal liability for caching will likely slow down Internet access for some users. Others point to the need for immediate legislative intervention to address the question of caching liability since many other jurisdictions have addressed the issue within their copyright statutes.

The court also rejected the board's jurisdictional approach of limiting the reach of the proposed tariff solely to Canadian-based Web servers. Canvassing the current state of Internet jurisdiction law, the court pointed to a series of cases that adopt a "real and substantial connection" test for determining when assertion of jurisdiction is appropriate.

A review of Canadian Internet jurisdiction law reveals that there are some differences between decisions reached by appellate courts in Ontario, British Columbia and the Federal Court. Accordingly, the Supreme Court may use this opportunity to clarify the matter by enunciating a single Canadian standard for Internet jurisdiction.

Although arguments in Tariff 22 will not occur until late this year or early next, Web watchers will be monitoring the case as it is shaping up to be the most important Internet case to yet come before Canada's highest court.

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