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This Document Contains Chapters 18 to 19 Chapter 18 Intellectual Property Instructor’s Manual–Answers by Dorothy DuPlessis I. Teaching Objectives After studying this chapter, students should have an understanding of • the nature of intellectual property • the rights that attach to intellectual property • how intellectual property is acquired • how to protect the intellectual property assets of an organization This chapter presents the view that intellectual property is one of the most, if not the most, valuable assets of any business. The knowledge economy has given rise to competition in which intellectual assets rather than physical assets are the principal sources of shareholder wealth and competitive advantage. With this perspective in mind, the chapter not only attempts to define intellectual property rights but also endeavours to explore the possibilities for realizing wealth by protecting and exploiting intellectual property. The challenge for students is to understand the basics of the various categories of intellectual property rights and how they relate and intersect. More importantly, however, students are urged to contemplate how intellectual property rights form the foundation of many businesses and inform strategic decisions. II. TEACHING Strategies The material in this chapter tends to be technical. Indeed, a good portion of the chapter is devoted to defining the categories of intellectual property, explaining how each is created or acquired, and outlining the rights that attach to each category. The following questions and textbook page references provide an outline for a review of the forms of intellectual property. • What is intellectual property? Describe the various categories. • What is the importance of intellectual property to business? Patents • What can be patented? Situation for Discussion (SD) 8 (page 473) • Are life forms patentable? What are the advantages and disadvantages of patenting life forms? See Monsanto v Schmeiser (page 441) • Are business methods patentable? What are the advantages and disadvantages of business methods patents? See Canada (Attorney General) v Amazon.com Inc. (page 443), QCT 4 (page 471) • What are the requirements for patentability? Teva Canada Ltd. v Pfizer Canada Inc. (page 446) • What are the legal risks with patents? QCT 5 (page 472), SD 5 (page 473) Industrial Designs • What is an industrial design? • What are the requirements for an industrial design? SD 5 (page 473) Trademarks • What is a trademark? What is the difference between a common law trademark and a registered trademark? • What are the requirements to register a trademark? What rights does registration give to the trademark owner? SD 1 (page 472) • How can a trademark be lost? How can a trademark be infringed? QCT 2 (page 471), SD 7 (page 473), Business Application of the Law: Canada Goose Sues for Trademark Infringement (page 453) • What is the relationship between trademarks and domain names? QCT 3 (page 471), SD 6 (page 473) Copyright • What works are protected by copyright? • Who owns the copyright? SD 2, SD 3 (page 472) • What rights attach to the works? Ethical Considerations: The Business of Counterfeit Goods (page 458) • What are moral rights? What are the justifications for the moral rights of authors? Snow v The Eaton Centre Ltd (page 460) • What exemptions or defences are available for copyright infringement? Cinar Corporation v Robinson (page 457) Confidential Business Information • What is confidential business information? What are the requirements for information to be considered confidential? • How does confidential business information receive protection under the law? LAC Minerals Ltd v International Corona Resources Ltd (page 462) • What are the limits on protection of confidential business information? SD 4 (page 472) Risk Management • How can a business protect its intellectual property? Business Application of the Law: Corporate Espionage at Coca-Cola (page 466) As an alternative to reviewing all of the detail regarding each category of intellectual property, instructors may want to examine various business applications of intellectual property. For example, an instructor may want to consider how copyright affects a particular business, such as broadcasting, multimedia, or the music industry. Another alternative that an instructor could examine is the relationship between business arrangements (discussed in Chapter 14) such as franchises and intellectual property. The following section outlines the relationship between intellectual property and franchising. Intellectual Property and Franchising Franchising is a common method of doing business. It is prevalent in both product-oriented and service-oriented businesses. In fact, virtually any type of business may be the subject of a franchise arrangement. There are variations of the specifics of a franchise arrangement but the most common arrangement is called the “business format franchising.” Business format franchising involves an entire business concept, including products, services, support, intellectual property, marketing operations, and standards. The franchisor has ownership of intellectual property rights, which the franchisee wants and needs to use. The franchise agreement will, among other things, deal with the ownership and use or licensing of these rights. The following intellectual property issues may arise in a typical franchise arrangement: • Patent: a franchise may involve the sale of a patented product, but unless the franchisee is going to be involved in the manufacture of the product, a patent licence would not be required. Conversely, the franchise may involve a service that includes a patented process. This being the case, a patent licence may be needed. This could be granted in the franchise agreement. An issue that needs to be addressed is improvements in the patent developed by the franchisee: Is the franchisee required to disclose improvements? Who has property in the improvements? Who may use the improvements? • Copyright: many elements of the franchise would receive copyright protection: franchisor’s operating manual, computer program, advertising materials and copy, training manuals, architectural elements in custom designed locations, and possibly photographs. Although all these works would normally be unpublished, copyright arises automatically once they are expressed in some form. These works would need to be licensed to the franchisee. Issues that arise in this respect are as follows: Is the licence to use exclusive? What is the territorial limit? Does the licence cover translation into another language? • Industrial design: industrial designs are not often part of franchise arrangements. Part of the reason for this is that designs can be registered only in relation to a specific manufactured article. It is not often economically feasible to register a design in relation to numerous articles, such as tableware, furniture, wallpaper, and dishes. In short, it is often too expensive to register them so the franchisor does not have industrial designs to license. Other deterrents are the limited time for protection and the relatively short time in which the registration requirements must be completed. • Trademarks: trademarks are by far the most common and important element of the franchise arrangement. One of the most important points in this respect is that a licence to use a trademark must be registered. Failure to do so may result in the franchisor effectively losing the trademark. The licence should address any restrictions on its use, such as use only pursuant to the franchise arrangement, use in a particular location or area, use for a specific time, use in relation to goods or wares approved by the franchisor, and the like. • Trade secrets: trade secrets and confidential information are often referred to as “know-how” and can be a part of a franchise agreement. This type of information is not protected by statute but can be protected by contract. One key point in protecting confidential information and trade secrets is isolating exactly what is confidential, being able to describe, and being able to separate it from what is not a trade secret or confidential information. For example, general skill and knowledge—knowledge generally known to people in the trade or readily ascertainable by people in the trade—would not be protectable. III. STUDENT ACTIVITIES Task 1: As an introduction to intellectual property chapter or as a closure to the chapter, have students consider the following questions? • What is intellectual property? What is the value of intellectual property? • What are the challenges in protecting intellectual property? How do these challenges differ from protecting other types of property? • What are the components of a risk management plan for intellectual property? Are the components different for different types of intellectual property? Task 2: The DVD that supports the Instructor’s Manual includes a segment titled “Counterfeit Culture.” After students view the segment, assign Ethical Considerations: The Business of Counterfeit Goods (page 458) and have students consider the legal, ethical, and economic issues posed by the manufacture, importation, sale, and purchase of counterfeit goods. Task 3: Assign Business and Legislation: Amendments to the Trade-marks Act (page 452). Have pairs of students present the business arguments for and against the amendments. IV. Explanation of selected features Page 441 Case: Monsanto v Schmeiser, 2004 SCC 34, [2004] 1 SCR 902 Critical Analysis: Are there any concerns with manipulating genes in order to obtain better weed control or higher yields? How does this decision support the Canadian biotechnology industry? Most of the reasons for not patenting life forms, including plant life, are based on public policy. Many of those who oppose it are concerned that scientists are “playing God” and interfering with the natural order, which could ultimately lead to terrible and unforeseen consequences. It is feared that experiments will introduce repugnant and potentially dangerous life forms or mutations into our environment. Opponents also warn that genetic research and related technological developments may spread pollution and disease, result in the loss of genetic diversity, and depreciate the value of life. The decision supports the Canadian biotechnology industry in a number of ways. It acknowledges that patents on modified genes have effects beyond the genes themselves and therefore have greater value. It suggests that the effective scope of patent protection in Canada is similar to the scope of protection provided in other countries. It provides an incentive to conduct research and invest in this area of technology because of the protection provided to the plants. Source: Grace S Law and Jennifer A Marles, “Monsanto v. Schmeiser: Patent Protection for Genetically Modified Genes and Cell in Canada” (2005) 13 Health LR 44. Page 442 Photo caption: What are the benefits of granting patents for life forms? Many of the benefits of granting patents for life forms are articulated by the dissent in the Supreme Court of Canada’s Harvard Mouse case. The dissenting judges noted that there were many advantages, such as improving both human and animal life, and gaining more efficient agricultural yields. Further, as inventors had made a profound and far-reaching discovery, their work should be protected. “It is in the public interest to shorten the time and reduce the cost of research designed to minimize human suffering, and to reward those who develop research tools that might make this possible, provided the inventors disclose their work for others to build on.” The dissent also noted the high cost of research and the time investment that was required to come up with new products in biotechnology and the fact that research is significantly financed by private investment. “The grant of a patent simply reflects the public interest in promoting the disclosure of advancements in learning by rewarding human ingenuity. Innovation is said to be the lifeblood of a modern economy. We neglect rewarding it at our peril.” It should also be noted that other countries recognize patents for higher life forms: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, Japan, New Zealand, the United Kingdom, and the United States have all recognized patents on life forms. This fact is important to note because of the “global mobility” of intellectual property. See also Eileen Morin, “Of mice and men: The ethics of patenting animals” (1997) 5 Health LJ 147. “Genetically altered animals can provide improved sources of food, produce valuable pharmaceutical products, serve as models to study human diseases and test drugs, and are being developed to donate organs for transplantation in humans.” Page 443 Case: Canada (Attorney General) v Amazon.com Inc, 2011 FCA 328 (CanLII) Critical Analysis: This decision affirms that there is no legal rationale for excluding business methods from patent protection. What will be the likely impact of this decision on business sectors such as insurance, banking, financial services, and securities? It is unclear at this time what the likely impact will be on business sectors because it is not known how broadly the Canadian Intellectual Property Office and the courts will interpret and apply this decision and of course, the decision is most likely to be appealed. That said, the decision signals that, for the time being, business methods are patentable. This has far-reaching implications for many businesses. First, “methods and steps involved in the creation, use and analysis of financial data, methods for managing financial portfolios and investments, methods for creating and managing insurance contracts, methods used to calculate risk or analyze actuarial, mortgage or underwriting data, financial models and investment strategies and methods for conducting online banking” (Justice Trudel at the Federal Court of Appeal) may be patentable. Businesses, such as those in the insurance, banking, financial services, and securities, that are highly dependent on business methods should consider taking advantage of business method patent protection. Second, as business methods are patentable subject matter, they must be taken seriously and may be asserted against the business, particularly by a non-practising entity. In other words, entities may obtain business methods patents and bring action or threaten action for patent infringement. See Christopher Van Barr and Grant Tisdall, “Ten top tips for dealing with business methods patents in Canada,” Gowlings (1 September 2011) Association of Corporate Counsel at . Page 446 Case: Teva Canada Ltd. V Pfizer Canada Inc., 2012 SCC 60, [2012] 3 SCR 625. Critical Analysis: What is the likely impact of this decision on future patent applications? Why is full disclosure so important in patents? What is the likely impact of this decision on patent-dominated industries? The Supreme Court’s holding that full and fair disclosure is a fundamental principle of patent law and that patents may be invalidated for failure to disclose, will cause patent applicants to take pains to fully disclose their inventions. The Court sent a strong signal to patentees that gamesmanship will not be tolerated and patentees must be honest in dealing with the patent office. Full disclosure is important in patents because the patent holder receives a monopoly in return for disclosure of the invention. The patent system needs full and complete disclosure of information as many inventions are built on previous inventions. Failure to disclose may stifle further research and development in the field. It is likely that the decision will generate similar attacks on the validity of other patents for “insufficiency of disclosure.” Page 447 Photo caption: What is the effect on the patent holder when a patent is found to be invalid? The effect of a finding that a patent is invalid is that the patent holder’s monopoly is at an end. It clears the way for less expensive versions of the product covered by the patent. Page 448 Photo caption: What features of consumer goods may be protected by industrial design legislation? The features of consumer goods that may be protected by industrial design legislation are the shape, configuration, pattern, or ornamentation, or any combination of these applied to a finished product of manufacturing. The Act provides protection for the appearance of mass produced useful articles or objects. Page 452 Business and Legislation: Amendments to the Trade-marks Act Critical Analysis: By doing away with the use requirements, the proposed amendments may simplify the process of trademark registration. What are the concerns with the proposed changes to use? Antonio Turco and Sheldon Burshtein indicate that there are a number of concerns with the elimination of the use requirement. Rather than making life easier for Canadian businesses, it will make it more difficult in the following ways: • There will be a reduction in the availability of trademarks as it will be possible that trademarks that are not being used will be registered. Applicants will be able to specify long lists of goods and services for which they do not use or intend to use the trademark. • Trolls will be able to stockpile trademarks and force legitimate business to either take them to court or pay fees for the trademark. • There will be increased litigation with resultant cost, delay, and risk as businesses sue to prevent and cancel registrations that are not in use. Sources: See: Antonio Turco and Sheldon Burshtein, “Fundamental change to trade-mark law opposed by business and trade-mark professionals,” IP Osgoode (13 June 2014), online: IP Osgoode ; Susan Krashinsky, “The trouble with trademark: Rule changes spark worry,” The Globe and Mail (21 November 20) B1. Page 453 Business Application of the Law: Canada Goose Sues for Trademark infringement Critical Analysis: What is the harm in trademark infringement? There are potentially two harms in trademark infringement: • Trademark infringement erodes the property rights of the owner of the trademark. When the owner of a trademark has spent time, energy, and money in presenting her product or service to the public, infringement misappropriates this investment; • Trademark infringement harms the public in that the public may purchase a product or service bearing a particular trademark which it favourably knows, and because of the infringement it will get a product or service which it neither asks for nor wants. Sources: Jonathan Mesiano-Crookston, “Trademark case hinges on confusion,” The Lawyers Weekly (4 May 2012) 11; Allison Jones, “Sears accuses Canada Goose of bully tactics,” The Globe and Mail (8 January 2014) B4; Jennifer Brown, “Canada Goose lawsuit heats up trademark concerns,” Canadian Lawyer Magazine (28 February 2012) online: Canadian Lawyer Magazine ; Darah Hansen, “Canada Goose vs. Sears Canada: Bully or brilliant?” Yahoo Finance (8 January 2014) online: Yahoo Finance . What is the test for proving trademark infringement? Trademark infringement is not an exact science. Generally, it occurs when there exists goodwill, or a distinctive reputation of a business with respect to a particular product or service, and the public is deceived into thinking that another product or service is produced, sold, etc. by that business. The issue basically comes down to whether the consumer will be confused as to who makes the goods or services? When dealing with the issue of confusion between marks, the degree of resemblance in the appearance, sound, and ideas suggested by the marks is crucial. Section 6(2) of the Trade-marks Act provides this guidance: “The use of a trade-mark causes confusion with another trade-mark if the use of both trade-marks in the same area would be likely to lead to the inference that the wares or services associated with those trade-marks are manufactured, sold, leased, hired or performed by the same person, whether or not the wares or services are of the same general class.” In order to determine whether or not a trademark is confusing, the following factors are considered: 1. The inherent distinctiveness of the trademarks or trade-names and the extent to which they have become known 2. The length of time the trademarks or trade-names have been in use 3. The nature of the wares, services or business 4. The nature of the trade 5. The degree of resemblance between the trademarks or trade-names in appearance or sound or in the ideas suggested by them Page 455 Photo caption: Does copyright apply to body art or tattoos? This is an interesting question and although there have been some intellectual property disputes over body art, the disputes have not been litigated. Under s. 2 of the Copyright Act, “artistic works includes paintings, drawings, maps, charts, plans, photographs, engravings, sculptures, works of artistic craftsmanship’s, architectural works and compilations of artistic works.” Tattoos are not mentioned, however the description is non-exhaustive. It would seem that tattoos could be considered an artistic work. This of course raised the question of who owns the work. Presumably, unless there is an agreement to the contrary the artist that created the work owns the copyright in the tattoo. This in turn raises another question, does the person with the tattoo need permission from the artist/copyright owner to use the tattoo (i.e., to have it photographed, filmed, reproduced)? The person with the tattoo may argue defences under the act (i.e. fair dealing) or an implied licence to use the tattoo in a certain manner. See: Tara Parker. “Copyright over body art,” The Lawyers Weekly (18 January 2013) 10. Page 457 Case: Cinar Corporation v Robinson, 2013 SCC 73, [2013] 3 SCR 1168 Critical Analysis: Do you think the compensation awarded Robinson was generous? What does this case say about access to justice? At first glance, it might seem that the award to Robinson is generous particularly as there has been a perception in Canada that relatively little compensation is available for copyright infringement. Of particular interest are the awards for non-pecuniary and punitive damages, which have not been common in copyright infringement cases. The award, however, needs to be viewed against the backdrop of a 20-year legal battle that dates to the mid-1990s, a debt load of nearly $2.5 million in legal fees and Robinson’s shock and depression. The case does say a lot about the inadequacy of access of justice in Canada. The length of time alone (over 20 years) not to mention the cost involved points to the difficulty of accessing justice. Sources: See: Jason Hayward, “Cinar Corporation v Robinson: Substantial protection for substantial infringement—Part II,” The Court (1 February 2014), online: The Court ; Casey Chisick, Peter Henein & Stephanie Voudouris, “Copyright castaway, Part II: the Supreme Court brings Robinson Crusoe ashore,” Cassels Brock (24 December 2013), online: Cassels Brock . Page 458 Ethical Considerations: The Business of Counterfeit Goods Critical Analysis: What are the legal, ethical, and economic problems posed by the manufacture and sale of counterfeit goods? Why do some people view counterfeiting to be a victimless crime? Do you agree with that view? The problems with counterfeit goods are manifold: • Legal: counterfeiters are infringing on intellectual property rights. Consumers assist in the infringement by purchasing the counterfeit goods. • Ethical: often the goods do not meet safety standards. This is of particular concern for counterfeit drugs, electronic products, car parts, healthcare products, and the like. Also, there are deplorable working conditions in counterfeiting factories, particularly in China, where most counterfeit goods are produced. • Economic: trade in counterfeit goods causes significant financial losses for rights holders and legitimate businesses. Lower prices, inferior products, and uncontrolled and unregulated labour practices used by counterfeiters all contribute to an uneven playing field, on which legitimate businesses cannot compete. In many instances, it is organized crime that benefits from the trade in counterfeit goods. Many who purchase counterfeit goods simply see the transaction as a means of getting a bargain, and the “victim” is simply a large, faceless corporation that produces goods and sells them at an enormous price. They do not consider the consequences in terms of the legal, ethical, and economic problems mentioned above. See: Vancouver: Canada’s Counterfeit Capital,” The Vancouver Sun (23 June 2007) online: canada.com ; John Cotter & Tara James, “Canada lands on U.S. trade rep’s priority watch list,” The Lawyers Weekly (7 August 2009) 11; Jeff Gray, “Fake purses, real money,” The Globe and Mail (6 July 2011) B7. Page 459 Photo caption: What is the harm in knock-off versions of mass-produced goods? See the commentary in Ethical Considerations: The Business of Counterfeit Goods above. Page 460 Case: Snow v The Eaton Centre Ltd (1982), 70 CPR (2d) 105 (Ont HC) Critical Analysis: Since the Eaton Centre paid for the sculpture, why should it not be able to do as it wants with the sculpture? Would the outcome have been the same if the sculpture had been sent to the dump or otherwise destroyed? Although the Eaton Centre purchased the sculpture, Snow still retained a certain measure of control over the sculpture and the use to which it would be put, by virtue of the moral rights accorded to him by operation of law. The sculpture was the form in which Snow’s ideas and opinions were expressed. As Fox notes, moral rights recognize the personal link between an artist and her work (Harold G Fox, Canadian Law of Copyright and Industrial Designs, 3rd ed. (Toronto: Thomson Canada Limited, 2000) at 248). Although moral rights are capable of being waived, Snow did not waive these rights simply by selling the sculpture to Eaton Centre. Vaver, in a leading Canadian text, outlines four possible justifications of the moral rights of authors that can also be applied to this case, which may help explain why Eaton Centre could not simply do what it wanted with the sculpture: • Truth in marketing: it is important to assure the public that the work in question is the named artist’s genuine production. • Author empowerment: moral rights give the artist some bargaining power, since they retain some control over the manner in which their work will be used. • Social reward: since the artist is the one who designed the sculpture, she is deserving of the merit that work may bring. • Cultural preservation: the public interest in preserving culture justifies authors’ moral rights as a private right to be exercised for the public good. See David Vaver, Intellectual Property Law: Copyright, Patents, Trade-Marks (Ontario: Irwin Law, 1997) at 95. The outcome of the case would have been the same if the sculpture had been sent to the dump or otherwise destroyed. These acts would also constitute an infringement of Snow’s moral rights. However, from a practical perspective, if the sculpture has been destroyed, an injunction to prevent the infringement of moral rights would be of little benefit. This illustrates the practical difficulties of enforcing moral rights. These difficulties are further exacerbated by digital technologies, which make it exceedingly easy to alter and modify works. Page 462 Landmark Case: LAC Minerals Ltd v International Corona Resources Ltd, [1989] 2 SCR 574, 61 DLR (4th) 14 Critical Analysis: What is the importance of this case for a business? How can a business determine whether information is confidential? Would it have been easier for Corona simply to have had LAC sign an express confidentiality agreement at the outset? The importance of this decision is that in looking to industry custom, the court recognized the special relationship between the parties with respect to the information being relayed and, as such, found an implied duty of confidence. La Forest J stated, In the modern world the exchange of confidential information is both necessary and expected. Evidence of an accepted business morality in the mining industry was given by the defendant, and the Court of Appeal found that the practice was not only reasonable, but that it would foster the exploration and development of our natural resources. The institution of bargaining in good faith is one that is worthy of legal protection in those circumstances where that protection accords with the expectation of the parties. The LAC decision is particularly important because it expressly endorses the view that a breach of confidential information is subject to a constructive trust in favour of the owner of the information because the information was imparted in confidence. Confidential information can include almost any type of information, so it may sometimes be difficult to ascertain what constitutes confidential information. In assessing what it comprises, courts tend to look at a number of considerations, including the extent to which the information • is generally known or unknown to others; that is, the information must be private as opposed to public • is known to others within the specific industry or trade, that is, outside the actual business entity • is known to others within or connected to the business entity • is capable of acquisition elsewhere by those outside the business entity • is the subject of measures to ensure that the relative secrecy of the information remains intact • is in some minimum or basic way unique, original, or novel Source: Julie A Thorburn and Keith G Fairbairn, The Law of Confidential Business Information (Aurora, Ont: Canada Law Book, 2000) at 3-5. It may have been easier for LAC to have drafted an express confidentiality agreement. These agreements allow the parties to establish a relationship with reasonable precision and avoid unnecessary misunderstandings. Page 466 Business Application of the Law: Corporate Espionage at Coca-Cola Critical Analysis: What steps should companies like Coca-Cola take to protect confidential business information? The need to protect confidential information applies to all businesses. The key to protection is a program for maintaining secrecy and confidentiality: • Put the program in writing and bring it to the attention of all employees. • Advise employees that information they are dealing with is confidential. For example, have all employees sign a confidentiality agreement, and conduct exit interviews to remind employees of confidentiality agreement. • Restrict access to confidential information. • Implement physical security measures. For example, lock areas in which confidential information is stored. • Secure protection by labelling secret documents, limiting photocopying, monitoring employee access, and shredding unnecessary papers. • Maintain computer secrecy by regularly changing passwords and codes and by programming computers to shut off when not in use. • Screen speeches and publications to ensure confidential information is not inadvertently revealed. • Use third-party confidentiality agreements to require outsiders, such as lenders and investors, to maintain confidences • Review and audit periodically all security measures. See Charmane D Sing, “Canada: Don’t take confidentiality for granted” (18 November 2011) Borden Ladner Gervais at . Page 466 Photo caption: How does the law provide protection for trade secrets? There is no specific statutory protection for trade secrets. The law, however, provides protection by implying an obligation of confidence when information is conveyed in circumstances suggesting a relationship of confidence. As well, parties can sue for breach of a contract where there are express or implied obligations to keep information secret. Finally, parties may sue for breach of fiduciary duty as obligations of confidence arise in fiduciary relationships. Page 468 International Perspective: Protecting Intellectual Property Abroad Critical Analysis: What is the justification for providing protection for foreign intellectual property? When intellectual property protection is extended in this manner, whose interests are curtailed? Foreign intellectual property receives protection because of reciprocal intellectual property agreements. Canada extends protection to intellectual property created by nationals of other countries because other countries extend protection to the intellectual property created by Canadians. When the rights of the creators are extended in this manner, or in any manner for that matter, then the rights of users are curtailed. In particular, less-developed countries have often viewed intellectual property protection with criticism and a level of suspicion. These countries desperately need access to the technology from the advanced nations to grow, prosper, and become self-sufficient, yet they can ill afford to spend scarce resources on royalty payments. It is for these reasons that the underdeveloped and developing countries have argued for derogations from intellectual property rights. Chapter 19 Real Property Instructor’s Manual–Answers by Dorothy DuPlessis I. Teaching Objectives After studying this chapter, students should have an understanding of • the nature and ownership of real property • how ownership interests in land are protected • the various ways to acquire and transfer ownership • the steps in a typical real estate transaction • how a mortgage works • the rights and duties of landlords and tenants This chapter deals with all essential aspects of the law relating to real property, including • ownership of land: types of ownership interests in land, limits on land ownership, Canada’s registration systems, acquisition, leases and transfers of interests in land • purchase and sale of land • mortgages as vehicles for using land as security for credit • real estate leases as means of giving tenants possession while landlords retain ownership • responsibility for contaminated land The broad objective of the chapter is to explain to students of business law what they need to know about real property law. This is a departure from the traditional overview approach, which includes much technical detail beyond the needs of students and people in business. The approach in this chapter is to focus on relevant and practical aspects of the law and its application. Much of the detail that could be provided, while relevant to law students and students in highly specialized programs, is beyond the scope of what is required for students at this level. Some topics that have been traditionally included in business law texts have been omitted because they are either not especially relevant to business managers today or they have relevance to only a specialized group. In their place is greater emphasis on other topics identified by users as particularly important, such as the typical stages of a real estate transaction and the importance of due diligence for purchasers of real property, such as ensuring appropriate investigations are undertaken for possible environmental contamination, for example. II. TEACHING STRATEGIES The following is a series of suggestions for the presentation of the chapter material: • Use the Business Law in Practice and Situation for Discussion (SD) 2 as a basis for explaining the approach described above. Explain that real property law is vast, complicated, and of limited direct relevance to business, unless the business is real estate development or management. This chapter condenses material that in other business law texts occupies up to five chapters. It covers what students need to understand business situations dealing with land as a business asset and outlines the aspects of the law that should be considered in making decisions. • The approach of this chapter dictates that many topics that would be included in a typical survey approach to real property law are not covered. Instructors who want to take the more traditional and detailed approach or who are teaching students in specialized areas may deal with additional topics, such as – the historical development of the law – life estates – matrimonial property – condominiums – mineral rights – riparian rights – the variety of remedies for default on mortgages – closing and adjustments statements for real estate transactions • Begin discussion with ownership of land in the broad sense as absolute control that can be divided and disposed of just as the owner wants. Temper that with an outline of the large number of restrictions on ownership (see page 476 in the textbook). The following situation can be used as an example of how intrusive and arbitrary (at least from the owner’s point of view) these limits can be. That can lead to a discussion on the competing interests involved in ownership and control of land: Janus owns a farm on the route for a new natural gas pipeline. He has been notified that the pipeline developer has the right to come onto his property to lay the pipe and to visit in future for pipeline maintenance. Janus thinks natural gas is a dangerous substance and sees the pipeline as a hazard for his farm and family. He is strongly opposed to the pipeline being anywhere near his farm. Is the pipeline a justified imposition on landowners, such as Janus, along its route? Should Janus be able to refuse permission to use his land? Should he be able to claim increased compensation for the use of his land because of his opposition to natural gas? This situation relates to the limits on ownership discussed on page 476. The pipeline developer likely has statutory authority to lay the pipe along the approved route whether affected landowners agree or not. Since this interference with ownership comes close to expropriation, there is likely a scheme to compensate the owners. Although Janus may have a valid reason for objecting to the use of his land, such objections are likely heard in the process leading to approval of the pipeline route. To allow him or any other owner to opt out of the route would either halt the line entirely or result in a less direct and cost-efficient route to accommodate a small number of objectors. The level of compensation may be the means of addressing Janus’s objections without undue disruption to the line. This is a good example of when the public good overrides individual objections, but there must be a process in place that monitors safety (Janus’s major concern) and guarantees minimum encroachment on private property. • Question for Critical Thinking (QCT) 2 can be used to focus discussion on the unique business risks arising from contaminating land or even acquiring land that has been contaminated by a previous owner. This discussion can be linked to the Environmental Perspective (page 484). • QCT 3 introduces a mild historical flavour. • Use QCT 1 as the focus for discussion of the registration of interests in land. Explain the two types of registration systems and outline the key elements of the system operating in the local area. • Use Figure 19.1 as the focus for the purchasing transaction. It portrays the participants and the three major stages of the transaction. • Use SD 1 and SD 4 to demonstrate the importance of a complete and detailed agreement. SD 5 is useful for focusing on the need for full investigation of land before purchase and the significant risk in failing to do so. • Use Covlin v Minhas (page 487) to illustrate the challenges involved in determining compensation if the deal goes wrong. This case can also be used to explain the usefulness of the remedy of specific performance for certain failed real estate transactions and the limits of its availability. • Use SD 3 as a basis for the various aspects of mortgage law, such as the terms of the agreement, the risk involved, and the results of failure to make payments. SD 3 and QCT 4 can be used to explore negotiation of the mortgage agreement, the extent of risk, and fairness. Scotia Mortgage Corporation v. Gutierrez (page 489) explores the pitfalls of high ratio mortgages and also the dangers of unscrupulous dealers who take advantage of beleaguered homeowners, particularly in periods of economic downturn. • Use QCT 5 to explore the major distinctions between commercial and residential tenancies. This will provide a good basis for discussing the key aspects of commercial tenancies. The Sobeys case on page 496 and SD 2 can be used to demonstrate the perils of long-term leases. • The following situation illustrates the importance of land to a business and the options for transferring or disposing of ownership of land: Johan is the owner and founder of his own business. Three of his children are actively involved in running the business, and one other daughter is a doctor. Johan is 52 years old and is beginning to think about retirement and the need to pass on his business to his children. How important is the ownership of the land on which the business is located for the succession of the family business? Johan can sell or give the land to some or all of his children. What factors should he consider before making his decision? Johan could dispose of the land separately from the business, but he would risk creating animosity between the landowners and the business operators that could seriously disrupt the business. Johan’s dilemma is the classic family succession challenge. His business may be his only significant asset. He wants to provide an inheritance for all his children and do what he can to boost the future of the business. Although a complete analysis of this situation is beyond this chapter and even beyond this book, it provides a vehicle for discussion of many of the concepts presented in the chapter. For example, Johan could create a joint tenancy or tenancy in common. He could use a mortgage to provide a lump sum for the daughter who is not involved in the business. He could create a corporation to own the land and run the business, and then distribute the shares to the children. The key factor for Johan is to avoid a scheme that is too complicated and may lead to deadlock or that may be considered unfair by some of the children. • Revisit QCT 3 and SD 2 to bring together and conclude the discussion of the key points of the chapter. III. STUDENT ACTIVITIES Task 1: Have students find out how land registration works in their province by visiting the provincial government website and doing a site search. Task 2: Have students scan the local ads or listings for sale of commercial property. Have them choose a couple of properties and compile a list of investigations that a prospective purchaser should do before making an offer to buy (see the list beginning on textbook page 482). Task 3: Have students choose a business enterprise they would like to commence and then locate one or two local properties that might meet the needs of their proposed business enterprise. Ask students to consider what conditions (such as a financing condition, a zoning approval condition, a satisfactory environmental audit, etc.) they would want to place on their offers to purchase the relevant properties. Students could also be asked to consider what the seller’s perspective might be on each of these conditions and how the transaction will be impacted in the event one of the conditions is not met. Task 4: Have students explore title insurance by visiting the websites of companies that provide it, such as http://www.fct.ca or http://www.stewart.ca. Task 5: Have students obtain copies of real property documents, such as their own deeds, leases, or mortgages or those of friends, relatives, or business associates. Compare the contents to the lists of terms in the text: agreement of purchase and sale (page 482), mortgage (page 491), and lease (page 494). Task 6: Have students locate a copy of a purchase and sale agreement form, such as one recommended by the provincial real estate agent regulatory body. Have students discuss the purpose and effect of the various clauses in the form. IV. EXPLANATION OF SELECTED FEATURES Page 478 Technology and the Law: Electronic Developments Affecting Interests in Land Critical Analysis: Electronic systems are more vulnerable than paper systems in terms of issues such as documentation and security. Do the advantages in cost and efficiency compensate for these weaknesses? Who is responsible for the integrity of the electronic systems? This feature provides an opportunity for the instructor to highlight the developments in technology in the students’ province. Provincial government websites have information relating to those developments. The advantages include cost savings (i.e., no paper) and ease of access (it’s no longer necessary to visit the registry office to examine documents). In addition, the indexing and organization of documents is a logical operation to conduct electronically. In terms of disadvantages, an electronic system is dependent on the technology and is therefore vulnerable to the usual technical problems. For example, the system may crash and render the records inaccessible for a time. Lawyers and others who are in the habit of visiting the registry office and physically examining the documents may feel less secure with an electronic paperless system. It is very different from complete reliance on the documents themselves. The integrity of electronic systems is largely the responsibility of systems designers, programmers, and IT maintenance. Users may seem further removed from the operation of the system than in the old paper-based system. Page 482 Photo caption: What stages of a real estate transaction have occurred before these signs appear? The owners have decided to sell the properties and have engaged Royal LePage as real estate agents to find a buyer. The engagements will have taken the form of listing agreements. The “Sold” sign indicates that the agreement of purchase and sale has been negotiated and signed. This may have been preceded by some investigation by the buyer. The other property is still for sale. Page 484 Environmental Perspective: Responsibility for Contaminated Land Critical Analysis: Who should bear the cost of environmental protection: the businesses that generate profits or the public sector? What are the risks in encouraging redevelopment of land that may be contaminated? This feature presents a challenging aspect of purchasing land. Contamination may be difficult to discover and have far-reaching consequences in terms of risk. See the Environmental Perspective in Chapter 26 for detail on the investigations that could be undertaken. This feature explores the public policy debate concerning the use of contaminated land. First, there may be strong views on both sides of this issue. The feature suggests that a balance of interests is preferable. In our current climate of the diminishing role of governments, the balance may be shifting toward greater responsibility by the private sector. However, serious situations, such as the contaminated water in Walkerton, Ontario, demonstrate that there are considerable risks in downloading responsibility without adequate supervision. Responsibility for pollution whose source cannot be traced could be allocated to offending industries if that is practical. Otherwise, cleanup and compensation may be one of the remaining core functions of government. The other option is simply to let the pollution lie with those affected by it to cope as best they can, although it is doubtful that this option would be socially acceptable. Second, the risks relate to the extent of the contamination and the cost and responsibility if the land becomes unusable. The cost of cleanup may exceed the value of the land. Students can be asked to consider who should be responsible in the event the polluter becomes insolvent and unable to pay for remediation, as in the AbitibiBowater contamination in Newfoundland & Labrador. Should directors or shareholders share responsibility? How might governments ensure these situations do not happen again in the future? Page 487 Case: Covlin v Minhas, 2009 ABCA 404 Critical Analysis: Could Covlin have negotiated terms in the agreement to prevent this dispute? This property was considered unique because it was part of a development scheme. What other aspects of land might make it unique? The agreement appears to provide adequate protection for Covlin in terms of establishing liability. The vendors had several obligations under the agreement that they failed to meet. As a result, they were found to be in breach of the agreement. The challenge for Covlin is the remedies available to her. The agreement simply enables her to pursue all available remedies. She could have attempted to negotiate more specific remedies, such as liquidated damages or even specific performance in the event of breach by the vendors. Of course, a damages clause would need to represent a genuine estimate of her actual loss. The court would decide whether to enforce a term requiring specific performance. In a recent decision (Southcott Estates Inc v Toronto Catholic District School Board, 2012 SCC 51), the Supreme Court considered a transaction in which a corporation was formed for the sole purpose of buying an investment property. The issue was whether the buyer was required to mitigate damages by seeking a comparable investment property. In terms of aspects of land that would make it unique, location is a key success factor in many businesses so that another lot in the same industrial park would be different from a piece of land on the other side of the city. Another unique feature of land is zoning that would permit a use not easily found for other parcels of land. Page 489 Case: Scotia Mortgage Corporation v. Gutierrez, 2012 ABQB 683 Critical Analysis: The affidavit of default confirmed that the outstanding balance on the Gutierrez mortgage was $372 097.70 yet the appraised value of the home was only $360000. Why are high ratio mortgages considered risky for both purchasers and lenders? As of September 2012, purchasers must come up with minimum down payments of at least 5%. Is this enough, or do you think that Canada’s laws respecting high ratio mortgages should be changed further? Do you think the law does enough to protect desperate and unwary homeowners from unscrupulous dealers like the numbered company in this case?? This case provides a good illustration of the dangers of high ratio mortgages, particularly in the situation of a declining real estate market. The difficulty is that sometimes the amount outstanding on a mortgage will exceed the value of the property, creating a disincentive for the homeowner to honour the mortgage and a corresponding loss for the lender. This case would also be a good focus point for a discussion of personal covenants and how they might limit a homeowner’s ability to simply ‘walk away’ and allow the lender to foreclose. The case also illustrates the situation of high ratio borrowers in a declining market and their potential vulnerability to unscrupulous dealers such as the ‘dollar dealer.’ Students might be asked to consider the merits and drawbacks of high-ratio mortgages and ‘traditional’ mortgages which may require down payments of as much as 25% of the property value. Page 495 Photo caption: What are some key negotiation points for the tenants leasing space in outlet malls? There is a comprehensive list of terms on textbook pages 494-495. Some key negotiation points might be the permitted alterations, calculation of rent, responsibility for repairs and maintenance, time period of the lease, renewals, assignments and subletting, and a dispute resolution process, for example. Page 496 Photo caption: How can shopping mall leases deal with potential competition among tenants? The lease must be properly drafted with clear non-competition clauses. In particular, as more and more stores’ have services and products that overlap, such as Sobeys and Shoppers Drug Mart, there must be very specific definitions of what is competition. Page 496 Case: Goodman Rosen Inc v Sobeys Groups Inc, 2003 NSCA 87. Critical Analysis: How can the language of a long-term lease provide for developments in retail operations? What is likely to happen at the end of the Sobeys’ 25-year lease? This case illustrates an inherent weakness of long-term leases. A tenant, such as Sobeys, wants the stability of a long term but also needs flexibility to change its use of space to reflect strategic business decisions, such as expanding into pharmacies. Of course, a mall owner needs to reasonably accommodate all tenants. The challenge is to write the lease in terms that provide a reasonable balance of the landlord’s and tenants’ needs. Both parties must realize that the language of the lease may restrict their activities in ways that cannot be foreseen when the lease is created. The lease could provide for renegotiation under specified circumstances. It should also specify the remedies available to the parties in the event of breach—whether injunction, damages, or termination of the lease. Because of the outcome of this dispute, Sobeys may find other premises at the conclusion of this lease. Such a result is unlikely to benefit the current landlord, despite the victory in litigation. A U.S. case provides a comparable illustration. See Bret Thorn, “Burrito not a sandwich, judge rules in Panera v Qdoba Tiff,” Nation’s Restaurant News (13 November 2006). Panera Bread Co. (PBC) is a chain of bakery-café restaurants that was trying to keep a Mexican restaurant chain, Qdoba Mexican Grill, out of shopping malls where PBC already had a restaurant. PBC sued the shopping mall in an attempt to prevent it from leasing space to Qdoba. PBC relied on an exclusivity clause in their lease prohibiting the mall from leasing to any restaurant or bakery that obtained more than 10 percent of its sales from sandwiches. Mall representatives argued that Qdoba was not in the business of selling sandwiches, but rather burritos, tacos, nachos, and enchiladas. The mall recruited food experts who testified that a sandwich is of European roots and generally uses two pieces of leavened bread, while a burrito is specific to Mexico “and typically contains hot ingredients rolled into a flat unleavened tortilla.” The shopping mall also relied on the testimony of a representative from the U.S. Department of Agriculture, who stated that the department views a sandwich as a separate and distinct food product from a burrito or taco. PBC, conversely, argued for a broad definition of a sandwich, stating, “a flour tortilla qualifies as bread and a food product with bread and a filling is a sandwich.” The judge found that a sandwich was “two thin pieces of bread, usually buttered, with a thin layer (as of meat, cheese, or savory mixture) spread between them.” The ruling stated that “under this definition and as dictated by common sense, this court finds that the term ‘sandwich’ is not commonly understood to include burritos, tacos and quesadillas, which are typically made with a single tortilla and stuffed with a choice filling of meat, rice, and beans.” It stated there was no reason why the Qdoba Mexican Grill could not lease space in the mall. Instructor Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085

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