INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE 2007…

   INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE
             2007 SPECIAL 301 REPORT
                                                    CANADA
Special 301 Recommendation: IIPA recommends that Canada be elevated to the Special
301 Priority Watch List in 2007.

EXECUTIVE SUMMARY
         Canada's long tenure on the USTR Watch List seems to have had no discernible effect
on its copyright policy. Almost alone among developed economies in the OECD, Canada has
taken no steps toward modernizing its copyright law to meet the new global minimum standards
of the WIPO Internet Treaties, which Canada signed a decade ago. Its enforcement record also
falls far short of what should be expected of our neighbor and largest trading partner. Pirates
have taken advantage of the gaps in Canadian law to make it a leading exporter, both of
camcorded masters that feed audio-visual piracy worldwide, and of devices ­ illegal in most
global markets besides Canada ­ that are intended to circumvent technological protection
measures used by the publishers of entertainment software. Canada lacks effective border
controls on pirated products, and most of its other enforcement efforts suffer from insufficient
resources and a lack of deterrent impact. To underscore U.S. insistence that Canada take
action to address the serious piracy problem it has allowed to develop just across our border,
and that it bring its outmoded laws up to contemporary international standards, IIPA
recommends that Canada be elevated to the Priority Watch List in 2007.

Actions Which the Canadian Government Should Take in 2007:
          Copyright Law Reform

    ·     Enact legislation bringing Canada into full compliance with the WIPO "Internet" Treaties
          (WIPO Copyright Treaty [WCT] and WIPO Performances and Phonograms Treaty
          [WPPT])
    ·     Create strong legal incentives for Internet Service Providers (ISPs) to cooperate with
          copyright owners in combating online piracy
    ·     Amend the Copyright Act to clarify the scope of the private copying exception for sound
          recordings
    ·     Amend the Copyright Act to clarify that illicit file-sharing services are a violation because
          they authorize infringement
    ·     Amend the Criminal Code to make unauthorized camcording an indictable offense

          Enforcement

    ·     Make legislative, regulatory or administrative changes necessary to empower customs
          officials to make ex officio seizures of counterfeit and pirate product at the border
    ·     Increase resources devoted to anti-piracy enforcement both at the border and within
          Canada




Copyright 2007 International Intellectual Property Alliance                          2007 Special 301: Canada
                                                                              Issued February 12, 2007, Page 9
    ·     Direct the RCMP, CBSA, and Crown prosecutors to give high priority to intellectual
          property rights enforcement, including against retail piracy and imports of pirated
          products, and to seek imposition of prison sentences for material infringements


                                                         CANADA
                                     Estimated Trade Losses Due to Copyright Piracy
                                               (in millions of U.S. dollars)
                                            and Levels of Piracy: 2005-20061
                                                                2006             2005
                              INDUSTRY
                                                          Loss      Level    Loss    Level
                              Records & Music                NA         NA     NA       NA
                              Business Software2           551.0      34%    491.0     33%
                              Motion Pictures                NA         NA   118.0      8%
                              Entertainment Software         NA         NA     NA       NA
                              Books                          NA         NA     NA       NA
                              TOTALS                       551.0             609.0


COPYRIGHT LEGAL REFORM AND RELATED ISSUES
         Canada remains far behind virtually all its peers in the industrialized world with respect
to its efforts to bring its copyright laws up to date with the realities of the global digital networked
environment. Indeed, even most of the major developing countries have progressed further and
faster than Canada in meeting this challenge. Although the new Canadian government that took
office in March 2006 expressed its commitment to modernization of Canada's copyright laws, to
date it has not even released a draft of legislation.

        The globally accepted benchmark for modern copyright legislation can be found in the
WIPO "Internet" Treaties, the WIPO Copyright Treaty (WCT) and the WIPO Performances and
Phonograms Treaty (WPPT). Although Canada was one of the original signatories to the WCT
and WPPT a decade ago, Canadian copyright law remains far out of compliance with the
standards set in these treaties. The previous government unveiled legislation (Bill C-60) in 2005
that, while positive in some respects, fell far short of meeting the WCT and WPPT benchmarks.
While we continue to urge the current government to jettison the approach taken by Bill C-60, in
favor of legislation more consistent with international norms for nations that have already
implemented these treaties, the direction Canadian copyright reform will take remains unknown.

       When Canada signed the WCT and WPPT a decade ago, it pledged support for treaties
that were designed to respond to what were then new technologies. Notably, as a crucial
element to foster the healthy development of e-commerce in copyrighted materials, these

1
   The methodology used by IIPA member associations to calculate these estimated piracy levels and losses is
described in IIPA's 2007 Special 301 submission at http://www.iipa.com/pdf/2007spec301methodology.pdf. For
information on the history of Canada under Special 301 review, see Appendix D at
http://www/iipa.com/pdf/2007SPEC301USTRHISTORY.pdf                    and                Appendix          E         at
http://www.iipa.com/pdf/2007SPEC301HISTORICALSUMMARY.pdf of this submission.
2
   BSA's 2006 statistics are preliminary. They represent the U.S. publishers' share of software piracy losses in
Canada, and follow the methodology compiled in the Third Annual BSA/IDC Global Software Piracy Study (May
2006), available at http://www.bsa.org/globalstudy/. These figures cover, in addition to business applications
software, computer applications such as operating systems, consumer applications such as PC gaming, personal
finance, and reference software. BSA's 2005 piracy statistics were preliminary at the time of IIPA's February 13, 2006
Special 301 filing; the 2005 data was revised and posted on the IIPA website in September 2006 (see
http://www.iipa.com/statistics.html), and the 2005 revisions are reflected above.



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treaties obligated adhering countries to enact effective legal regimes to protect technological
measures used by copyright owners to control access to and copying of their works. While
nearly every other OECD country either has met this obligation or is well on the way to doing so,
Canadian law remains hopelessly outdated in this area. IIPA urges Canada to fulfill its pledge by
enacting laws that deal with technological protection measures (TPMs) in a manner that fully
complies with the WCT and WPPT. This means legislation that:

          ·     comprehensively protects TPMs, both in so far as they manage access to copyright
                works and in their use to prevent unauthorized copying and the exercise of other
                exclusive rights;
          ·     outlaws trafficking in devices aimed at circumventing TPMs, or providing
                circumvention services, and defines violations without imposing onerous intent
                requirements;
          ·     defines exceptions or defenses with care, so as to avoid the creation of a market for
                circumvention devices or services; and
          ·     provides strong civil and criminal remedies for violations.

        Canada's failure to provide legal protection for TPMs is not a mere theoretical lapse: it
has already had concrete consequences. In the absence of strong prohibitions to the contrary,
Canada now finds itself one of the world's epicenters of the manufacture and export of important
categories of tools aimed at circumventing TPMs ­ so-called "modification chips" and similar
devices that enable pirated and counterfeit video games to be played on videogame consoles.
Highly organized international crime groups have rushed into the gap left by Canada's
outmoded copyright law and now use the country as a springboard from which to undermine
legitimate markets in the United States, the United Kingdom, Australia and elsewhere, through
the export of circumvention devices. It is long past time for Canada to put into place the legal
tools that will enable it to put a stop to this increasing pollution of the markets of its trading
partners.

        Copyright reform legislation in Canada is also needed to counter the growing problem of
Internet piracy. It can best do so by conditioning liability limitations for Internet Service Providers
(ISPs) on affirmative cooperation with copyright owners in combating online infringements. As
recommended by the Supreme Court of Canada in SOCAN v. CAIP, legislation should also
provide a true "notice and takedown" system that offers an expeditious means of shutting off
access to infringing online activity, rather than confining itself to the mere "notice and notice"
regime of Bill C-60. While an obligation for an ISP to forward notices from copyright owners to
end-users would be a useful supplement to a system that gives ISPs strong incentives to "take
down" infringing materials, it is no substitute for it.

        New legislation must also address the scope of the private copying exception for sound
recordings. While IIPA hopes that further judicial interpretation of Canada's current law will more
clearly establish that the private copying exception applies only to individuals who make copies
for their own use, a legislative amendment is also required to clarify that the exception applies
only to copies of non-infringing recordings owned by the person who makes the copies. Any
broader application of the private copy exception would raise serious questions about Canadian
compliance with its WTO TRIPS obligations.

        New legislation should also clarify liability under Canadian law for illicit peer-to-peer
(P2P) services. In contrast to the international trend, exemplified by successful lawsuits in
Australia, Korea, Taiwan and the U.S. against P2P services that were facilitating massive


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worldwide infringement, recent Canadian case law on liability for authorizing infringement raises
questions as to whether a comparable enterprise would be found liable under Canadian law.
The Copyright Act should be amended to enable rights holders to obtain effective remedies
against those who in the Internet context knowingly facilitate infringements (such as P2P service
providers and distributors of file sharing software who offer services or software knowing that
their actions will likely result in infringement), or who encourage, induce or materially contribute
to the infringement.3

         Bill C-60 contained several positive features, notably the specification of an exclusive
right of "making available," and a new section banning dissemination or public performance of a
copy of a sound recording made under the private copying exception. These should be brought
forward in new copyright reform legislation. On the other hand, Bill C-60 also included flawed
proposals in the area of educational and library exceptions, such as an ill-defined new exception
for use of a work in a "lesson, text or examination" in educational settings, and a provision
authorizing interlibrary distribution of digital copies, that would have had a significant detrimental
impact on publishers of scientific, technical and medical materials in particular. These should be
carefully re-examined. The Canadian government should ensure that any legislative proposals it
makes on educational and library exceptions to copyright can pass muster with its existing and
anticipated international obligations, and that they provide ample room for market solutions.

        Finally, along with reform of Canada's substantive copyright law, legislative changes are
necessary, though not alone sufficient, for Canada to begin to remedy its serious deficits in
copyright enforcement (discussed in more detail in the next section). Among other critical
changes, the Canadian Border Services Agency (CBSA) must be given the independent
authority it currently lacks to act ex officio against any suspected pirate or counterfeit imports;
and unauthorized camcording of films in Canadian theaters must be made an indictable criminal
offense through an amendment to Canada's Criminal Code.


COPYRIGHT PIRACY AND ENFORCEMENT
       There is no doubt that the piracy problem within Canada is getting worse, not better.
Canadian piracy is also a serious problem for markets in other countries, including the U.S. For
example, Canada is becoming notorious as one of the world's leading sources for "mod chips"
and other videogame circumvention devices, and for the camcorded master copies for digital
audio-visual piracy.

         Pirate and counterfeit videogame products continue to flow into and out of Canadian
territory. Pirate games are manufactured throughout the country, notably in
Vancouver/Richmond, Calgary, Toronto/Markham, and Montreal. Much of the pirate product in
the market continues to flow in from Asia across Canada's porous borders. Disturbingly,
Quebec, Ontario and British Columbia have become havens for the manufacturers and
3
   Bill C-60 failed to address this problem, and would in fact have exacerbated it, because it would have provided
sweeping safe harbors to network service providers without creating any incentives for them to cooperate with
copyright owners to deal with copyright infringements that take place in the digital network environment. In particular,
it would have immunized service providers against liability even when they had actual knowledge of infringement and
the power to restrict or prevent it, until an independent court order was obtained; would also have sheltered P2P file
sharing services that contribute to massive infringement; and would have prevented rights holders from even
obtaining injunctions against service providers whose services are used to facilitate infringement. Such an approach
failed to comply with the mandate of the WIPO Internet Treaties that national law "permit effective action against any
act of infringement of rights covered by this Treaty."



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distributors of devices that bypass TPMs that entertainment software publishers use to protect
their product from piracy. "Mod chips" for videogame consoles such as the Sony PlayStation 2,
Microsoft Xbox and Nintendo GameCube are made in Canada, both for domestic consumption
and for export to the United States, Europe and parts of southeast Asia. Other devices, such as
the "Flash ROM Linker" that enables piracy of games designed for play on the Nintendo
console, are assembled in Canada for distribution both domestically and internationally. Burned
pirate optical discs are manufactured in "micro-replication facilities," often located in private
residences, and are then distributed either in local retail markets or via Internet websites
maintained by the pirates. However, much of the thriving activity in importation, manufacturing
and distribution of pirate entertainment software products and circumvention devices appears to
be controlled by organized crime rings, such as the Hells Angels in Quebec, and the Big Circle
Boys in Ontario and British Columbia.

         The problem of unauthorized camcording of films in Canadian theaters is now nearing
crisis levels. MPAA analysis of counterfeit copies of recently released movies on DVD seized
throughout the world reveals that more than 90 percent can be sourced back to theatrical
camcording. As of August 2006, MPAA had documented 179 member company titles that had
been stolen in this manner since 2004, providing the source copies for pirate DVDs discovered
in the markets of 46 other countries on every inhabited continent. In 2006, 20-25 percent of
camcorded masters worldwide were sourced to Canada. Through sophisticated pirate
replication and distribution networks, DVDs produced from camcorded masters are on the street
literally within hours: for instance, pirate DVDs of Poseidon were being sold a mere 13 hours
after the film's theatrical debut in Canada.4 The number of titles affected is consistently trending
upwards, and the problem is national in scope; theaters from Nova Scotia to British Columbia
have been identified as sites of unauthorized camcording, although the worst problem is in
Montreal.
        The estimated piracy rate for business software in Canada of 33% far exceeds that of
the U.S. or of most Western European countries. Servers at universities continue to act as
digital storage facilities for large quantities of pirate intellectual property, including, games,
music and movies. In the United Kingdom and Germany, the number of regular buyers of legal
downloads of music now exceeds the number of regular unauthorized file-swappers.5 In
Canada, by contrast, unauthorized file-swapping swamps legal sales of digital music on the
order of 100 to 1.6 According to the OECD, Canada has the highest per capita incidence of
unauthorized file-swapping in the world.7 In short, Internet piracy appears to be on the increase
in Canada, aided by the uncertain legal environment and serious shortfalls in enforcement.
       These realities point to serious deficiencies in enforcement against piracy. Much of the
problem is attributable to the inaction of Canada's government on law reform. For instance,
Canada has become a leading global source of camcorded pirate master copies of films
because there is no federal criminal prohibition against unauthorized camcording in movie
theaters unless it can be established that it is for commercial purposes. Because of this gap in
the law, neither Canada's federal law enforcement agency (the Royal Canadian Mounted Police
[RCMP]) nor local authorities will take action against the practice. Remarkably, one theater
owner who sought assistance from law enforcement was told that the only reason the police

4
  MacDonald, "Pirates of the Canadians," Globe & Mail, Jan. 13, 2007.
5
  International Federation of Phonographic Industries (IFPI), Digital Music Report 2006 (Jan. 2006), p. 15.
6
  IFPI, The Recording Industry 2006 Piracy Report (July 2006), p. 11.
7
  Organization for Economic Cooperation and Development, "Digital Broadband Content: Music," Dec. 13, 2005, p.
75, http://www.oecd.org/dataoecd/13/2/34995041.pdf.



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would attend the theater was to arrest the theater owner if he tried either to confiscate the
recording equipment or detain the person operating it. Making unauthorized camcording an
indictable criminal offense is the indispensable first step toward cracking down on this serious
problem.

        Similarly, Canada's outmoded copyright law contains no criminal prohibitions on the
manufacture or distribution of devices (such as mod chips and the like) whose only plausible
use is to circumvent technological protection measures used by copyright owners to fight piracy.
Consequently, although both RCMP and local authorities are well aware of the organized
criminal groups in Canada who dominate trade in these circumvention devices, they are
powerless to act against them. Only when Canada's copyright law is modernized to include
clear criminal prohibitions against this activity will Canadian law enforcement even have the
legal authority to enforce against mod chip manufacturers, distributors and exporters. Until then,
rather than attacking the problem at its source, the burden of combating this activity is unfairly
shifted to law enforcement in the countries to whose markets these devices are being exported,
and whose governments (unlike Canada's) have already stepped up to the problem by adopting
laws to enable implementation of the WIPO Internet Treaties.

        A third anti-piracy battlefield where Canadian government inaction has effectively
handcuffed its law enforcement agencies is at the border. Canadian customs officers in the
CBSA lack statutory authority to seize even obviously counterfeit products as they enter
Canada. Unless a court order has been previously obtained8, only the RCMP can carry out an
ex officio seizure, and coordination between the two agencies is generally not effective. As a
result, virtually no seizures at the border have occurred, and Canada's borders are effectively
wide open to imports of pirate CDs, DVDs or videogames and other infringing materials. CBSA
must be given independent authority to act against any suspected pirate or counterfeit imports.
Although the Canadian government has acknowledged this deficiency and has been studying
the issue for years, it has failed to introduce the necessary legislative changes. It is long past
time for the Canadian government to identify which statutes, regulations or policies must be
amended in order to confer meaningful ex officio authority on border enforcement agencies, and
to act promptly to institute the needed changes.

        The same deficiencies that undercut enforcement efforts in Canadian movie theaters, at
"mod chip" factories, and at the border also hamper attempts by copyright owners or law
enforcement to combat piracy on the Internet. Though the online piracy problem is pervasive
and growing, Canadian law lacks the fundamental legal tools for addressing it. Notably absent
are clear legal incentives for network operators to cooperate in anti-piracy efforts, whether
through a notice and takedown system such as the regime that has been in place in the U.S.
since 1998, or through the use of liability doctrines to encourage network operators to take more
proactive steps to detect and deal with pirate activity online. Until Canada adopts a modernized
legal regime that includes such incentives, prospects for progress against online piracy will
remain dim.


8
  Court orders, however, can only be obtained upon the filing of an application by the right holder, supported by
affidavit evidence, including information regarding the identity of the importer, exporter or vendor; country of origin or
export; quantity and value of the infringing goods; estimated date of arrival in Canada; mode of importation; identity of
the ship, train or truck used to transport the infringing goods, and (if available) the serial number of the container in
which these goods may be found. In many instances, a right holder will not have access to this information and the
necessity of obtaining the court order is itself unduly burdensome and not designed to prevent pirated and counterfeit
imports from entering the country.



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        However, not all enforcement problems in Canada can be traced to deficiencies in the
law. Even when pirate activity is clearly illegal, Canada's response to it all too often falls short.
While Canadian authorities may say that combating copyright piracy is an important objective,
their actions ­ in terms of priority setting, resources, training, and the outcome of prosecutions ­
suggest the contrary. Piracy is a serious problem in Canada, but the evidence is that the
Canadian government is not taking it seriously.
        In its Special 301 announcement last April, USTR called for more anti-piracy resources
and training to be provided both to CBSA and to domestic law enforcement officials. This has
not happened. Both CBSA and RCMP remain short of dedicated resources ­ including
manpower and data and intelligence management ­ to address Canada's growing piracy
problems. CBSA officials also lack training in identification of pirate imports; while training by the
private sector has been offered, and some law enforcement agencies have responded
positively, CBSA personnel have rarely been made available for training. Nor is there progress
to report on interagency cooperation, another problem flagged by USTR last year. The existing
arrangement under which CBSA can refer cases to the RCMP through designated RCMP
liaison officers is unwieldy and impractical.
         The continued prevalence of pirate product in Canada's retail market indicates another
enforcement shortcoming: the RCMP's long-standing reluctance to target retail piracy. Its record
of cooperation with right holders to attack piracy is spotty at best. Examples of unwillingness to
share information, reluctance to disclose the inventory of pirate entertainment software product
seized, and insistence on formalities such as Canadian copyright registration are all too
common. Although the RCMP has now listed intellectual property crimes among its top stated
priorities, its actions too often belie this label. Under the Justice/RCMP Copyright Enforcement
Policy, RCMP still will not take action against retail outlets engaged in piracy, except in
exceptional cases in which it is shown that the target is a repeat offender. The Enforcement
Policy does not account for the reality that as technology constantly advances, the "retailers"
now use ordinary computer equipment to become mass manufacturers, producing literally
hundreds of thousands of pirated DVDs, CDs, software and video games. Not surprisingly, the
retail piracy problem in communities such as Vancouver, Montreal, Edmonton, Calgary and
Greater Toronto continues to worsen. While there have been some important successes ­ for
instance, RCMP criminal actions have been critical in the near-total suppression of the pirate
retail videogame market in Quebec City ­ on the whole the Canadian law enforcement
commitment to enforcement against retail piracy is inconsistent and generally under-resourced.

       The same problems extend to prosecutors and courts in Canada. Few resources are
dedicated to prosecutions of piracy cases; prosecutors generally lack specialized training and
(apparently) any interest in obtaining it; and too many judges seem to deprecate the
seriousness of copyright piracy. The result is that those few pirates who are criminally
prosecuted generally escape any meaningful punishment. An illustrative example is the story of
Chui Lau, a well known owner/operator of a pirate retail store in Richmond, British Columbia,
who pled guilty to over eighty counts of criminal copyright infringement over a three year period
beginning in 2003, as a result of a series of raids in which equipment for manufacturing
counterfeit DVDs was seized, along with a large quantity of pirate product. Despite being
charged on three separate occasions, the total punishment Mr., Lau received for his repeat
offenses was a fine of C$11,000 (US$9400) and an order to remain in his residence from 11pm
to 7am for 12 months. Even the RCMP acknowledges that the penalties for engaging in
copyright piracy in Canada ­ usually insignificant fines ­ remain simply insufficient to deter
people from engaging in this highly profitable and relatively risk-free crime.



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        The light penalties also encourage recidivism. As the RCMP concluded in recent policy
assessments of Canada's rampant piracy problem: "Counterfeiters have stated to police they
will continue to sell counterfeit goods because the deterrents offer no incentive. ... Minimal
sentences and low fines offer little incentive for law enforcement to pursue this issue more
vigorously, and every incentive for criminals to continue pirating copyrighted goods."9 A notable
example involves a Markham, Ontario pirate video game retailer: "Fun Desk," located at Pacific
Mall and owned by Ka Man Chan. In April 2005, RCMP officials raided "Fun Desk" and seized
thousands of pirate video game optical discs, mod chips and other counterfeit game devices.
Chan pled guilty to six offenses and was sentenced to pay a fine of C$67,000 (US$57,175).
Clearly that sentence did not deter Chan. After being sentenced, he purchased two new stores
at Pacific Mall, "Xtreme Video Entertainment Inc." and "Genesis Video Games," where he,
again, sold pirate video game optical discs and other circumvention devices. RCMP officials
also found Chan to be manufacturing much of the infringing products from his home, a short
distance away from Pacific Mall. In July 2006, Chan was arrested and charged with over twenty
counts of infringing on copyrighted works. Such recidivism will continue so long as the penalties
imposed for piracy amount simply to a cost of doing business for the pirates.

        USTR should press the Canadian government to initiate and adequately fund a
coordinated federal law enforcement effort against copyright piracy. This should include a
nationwide program to crack down on the importation of pirate goods at all major Canadian
points of entry. Raids and seizures against retail targets, as well as against the manufacturers of
pirate products, must be stepped up, and unnecessary roadblocks to enforcement eliminated
(such as the informal requirement in cities such as Vancouver, Montreal and Toronto that retail
targets must receive a formal "cease and desist" notice from a right holder before any raid will
be considered). Since the availability of pirated products will not be reduced without criminal
prosecutions against infringers and the imposition of deterrent sentences, Crown counsel
should be encouraged to take on more copyright infringement cases, and be provided with the
training and other support needed to fully prosecute them. Canadian courts should be looked to
for more consistent deterrent sentences, including jail time for piracy cases. Canadian
authorities should be encouraged to accord a high priority ­ in practice, not just in rhetoric ­ to
the serious piracy problems within their country, and to devote adequate resources to the
investigation and prosecution of these cases.




9
  RCMP, "An Assessment of Commercial Scale Criminal Copyright Piracy and Trade-mark Counterfeiting in Canada",
2000. See also, RCMP, "A strategic intelligence assessment of Intellectual Property Crime in Canada", 2004; RCMP,
"Intellectual Property Crime in Canada ­ Hazardous and Costly", 2005.



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