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Alberta Court Rules that Licensee Broadcaster is not Presumptively Entitled to Claim Copyright Infringement on Behalf of the Rights-Holder and Refuses to Grant Injunction Based on General-Phenomenon Evidence as Proof of Harm

May 7, 2021

By Bruna Kalinoski

In Allarco Entertainment 2008 Inc. v. Staples Canada ULC, 2021 ABQB 340, the Court of Queen’s Bench of Alberta (the “Court”) found that the plaintiff Allarco Entertainment 2008 Inc. (“Allarco”), a licensee broadcaster, did not discharge its burden under section 41.23(2)(c) of the Copyright Act, RSC, 1985, c C-42 (the “Act”) of proving that the interests of justice dispensed with the statutory requirement of adding the copyright owners (i.e., licensors) as parties to the main action. The matter involved a claim for copyright infringement, as well as other non-copyright-related claims, against four major retailers who were allegedly “fanning the flames of piracy” through the promotion and sales of certain devices (i.e., TV set-top boxes) and advice on how to modify or program those devices to access pirated content.

The Court rejected Allarco’s position that all that was required before a broadcaster could sue for copyright infringement was some sort of right – whether that of a copyright owner, or someone with exclusive or non-exclusive rights, or contractual rights – and in the end stayed the main action to allow Allarco to join the copyright owners as parties. By contrast, the Court did not stay Allarco’s interlocutory application seeking to enjoin the retailers from selling the alleged piracy devices, as interlocutory proceedings are an exception to the requirement that “the copyright owner shall be made a party” unless the interests of justice require otherwise (section 41.23(2)(b) of the Act). However, as Allarco failed to establish that the promotion and sales of the TV set-top boxes have caused and would continue to cause the loss of revenue through the loss of actual and potential subscribers, the Court denied the injunction sought.

This decision is noteworthy for its analysis of the “interests of justice” factor, as well as its comments on the quality of the evidence adduced by the litigants (including general-phenomenon evidence, investigations, and expert evidence premeditated to produce an advantageous opinion to a particular party). Additionally, the decision offers a lesson on the lengths a party can go in formulating its pleadings and written arguments without risking severe costs consequences for abuse of process due to unsubstantiated allegations. Below I provide a contextual summary of these interesting points.

Allarco’s obligation to join the copyright owners as parties 

Allarco owns a Canadian premium cable and satellite television English-language channel named Super Channel, which broadcasts various successful and popular shows, including the two programs at issue in the proceeding. Allarco adduced affidavit evidence of its President and CEO, Mr. Don McDonald, that Super Channel had exclusive rights to broadcast those programs in Canada for which the broadcaster had paid substantial licensing fees. Despite the popularity of those programs, Super Channel had lost many subscribers in a short timeframe, which Allarco attributed to the coordinated efforts by the four retailer defendants to promote, encourage, and profit from a culture of piracy.

Allarco had not notified the copyright owners (i.e., the licensors) about its copyright infringement proceeding; nor had Allarco made any efforts to join them as parties in the proceeding or to justify why it could not do so. The limited statutory exceptions to the obligation of adding copyright owners as parties to a copyright infringement proceeding required Allarco to satisfy the Court that it was in interests of justice to dispense with the statutory requirement and allow the proceeding to follow its course.

After reviewing the relevant case law on the “interests of justice” factor (at paras. 11-14) and considering the parties’ respective positions on this point (at paras. 15-18), the Court tabulated twelve key factual considerations informing the “interests of justice” analysis in this case which, in the circumstances, did not justify dispensing with the requirement to add the copyright owners.

In brief, the Court noted that: (i) the default position, per the statute, is mandatory addition; (ii) Allarco had the onus of establishing why those parties were not necessary; (iii) Allarco neither added the copyright owners nor notified them of the action, and provided no explanation in this respect; (iv) only two parties had to be added as Allarco grounded its infringement claim on two shows only; the non-copyright-related claims were irrelevant in light of the “shall add” obligation under the Act; and it did not matter whether the licensors would take an identical position as Allarco in the litigation because distinct positions is not a factor to be considered for the interests of justice; (v) no evidence showed that Allarco had the copyright owners’ authorization to bring the claim; (vi) no evidence showed the copyright owners’ intention to participate, not to participate, or their indifference; (vii) with copyright owners not made parties, there was a risk of multiple proceedings as no evidence indicated delegation of their litigation rights to the licensee or their willingness to be bound by the outcome of the action; (viii) no evidence showed that the pleadings were being amended to add the copyright owners; (ix) the defendants raised the requirement to add copyright owners in a timely way; (x) no evidence showed that joining the required parties would have been impossible, impractical, or burdensome; (xi) the documentary evidence (two confidential contracts) did not show that litigation responsibilities were allocated as between licensor and licensee in a way that supports Allarco bringing the claim on its own; and (xii) given the unclear terms of the confidential contracts in this respect, it is reasonable to add the copyright owners to eliminate any uncertainty about Allarco’s standing to enforce copyright (at para. 19).

Injunction factors did not favour Allarco

Although the main action was stayed on the basis of the copyright infringement claim (for which the copyright owners were required), Allarco’s statement of claim had raised an additional five causes of action, namely, conspiracy, criminal and public nuisance, intentional interference with economic relations, trademark infringement, and circumventing technological protection measures under section 41.1 of the Act. The Court found nonetheless that Allarco did not establish any of the factors that would justify granting an injunction based on any of its asserted causes of action (at paras. 114 and 117).

a. No serious case to be tried

The Court concluded that the retailers have no control over how consumers use the devices purchased in their stores. Allarco failed to establish that the alleged pirate devices were inherently objectionable (at para. 116); although the devices were capable of transmitting pirated content if programmed and modified for that purpose, they also performed other legitimate and non-offending functions. Given that users may or may not use the devices for unlawful purposes, Allarco failed to establish that the retailers’ advertising and selling activities were necessarily linked to the decrease in its subscription base for Super Channel and its overall business difficulties (at para. 115).

Allarco had adduced expert evidence by Dr. Eric Cole aimed in part at demonstrating that there was no legitimate use for the devices in question. The expert opined that, in his technical experience, “the designed purpose of the pirate devices…is to gain access to pirated content”, and that the “pirate devices are not a viable or cost-effective use of technology for any other purpose”. However, Dr. Cole’s opinion presented a huge gap because none of his findings were supported in his affidavit. Given the objectivity issues raised against Dr. Cole for not being an impartial expert, the Court rejected Dr. Cole’s report as entirely unhelpful, noting that “[a]n expert is expected to be helpful to the Court, he or she is also expected to be objective and transparent…[t]his report raised more questions than it answered, and it did not answer, or shed any helpful light on, any issue in these proceedings” (at paras. 80-81).

Critical to the Court’s conclusion on this point was its analysis (at para. 108) of the Supreme Court of Canada (the “SCC”)’s leading case CCH Canadian Ltd v. Law Society of Upper Canada, 2004 SCC 13, where the SCC held that the Law Society and the Great Library could not be held responsible for unlawful copying-in-the-library because they lacked control over how individuals used their books and premises. The Court recognized that the retailers had even less control over a purchaser’s activities beyond the retailers’ stores, and cited paras. 38 and 45 of the SCC authority for the proposition that:

 “… a person does not authorize [copyright] infringement by authorizing the mere use of equipment that could be used to infringe copyright, Courts should presume that a person who authorizes an activity does so only so far as it is in accordance with the law ... This presumption may be rebutted if it is shown that a certain relationship or degree of control existed between the alleged authorizer and the persons who committed the copyright infringement… even if there were evidence of the photocopiers having been used to infringe copyright, the Law Society lacks sufficient control over the Great Library’s patrons to permit the conclusion that it sanctioned, approved or countenanced the infringement”.

b. General-phenomenon evidence not sufficient as proof of harm

The Court refused to draw any inferences from Allarco’s indirect and general-phenomenon evidence about the financial impact of content piracy on its business. It held that purely speculative evidence could not support a finding that Allarco had in fact suffered, and will continue to suffer, from content piracy. Allarco had pointed to marketplace reports on the financial costs of content piracy which showed that copyright piracy costs the broadcast and content creation industry about 11% to 24% of gross revenues in the United States of America (“U.S.”) based on estimates of the extent to which piracy is assumed to displace legal purchases. Allarco submitted that it was reasonable to infer that the same would be true for Canada’s relatively smaller industry, which would be “more vulnerable, hit harder and be less resilient to copyright piracy than the huge American content creation and broadcasting industry”.

In the same vein, Allarco argued that a 2019 Federal Court decision showed that certain streamers had annual gross revenues of CDN $1.72 billion dollars servicing approximately 8 million piracy customers throughout Canada and the U.S., and “even smaller commercial pirates and sellers of pirate devices can earn millions of dollars per year operating from garages, flea markets and small retail outlets” with their piracy customers paying each “about $200 a year for pirated content that includes thousands of channels, programs and movies plus approx. $150 for a device” (at para. 30).

The Court was not swayed by this evidence and concluded that, no matter the legal label or cause of action considered, Allarco “will be unable to prove causation i.e. any link between anything the retailers have done or do on the devices front and Allarco’s subscription and overall business difficulties” (at para. 128). Moreover, Allarco did not establish that an award of damages would not suffice to remedy the wrong if no injunction was granted (at para. 119). The Court’s practical view was also that an injunction would be ineffective and futile to achieve Allarco’s intended goal – i.e., if granted, the injunction would enjoin only the select four retailers from selling the alleged pirate devices while several other competitors would continue selling similar products in the market (at para. 121). This was critical because Allarco’s corporate representative, Mr. Best, had admitted in cross-examination that “he did not investigate whether alleged ‘pirate devices’ were also being sold by others, such as Amazon, and he didn’t investigate a lot of places’” (at para. 120).

c. Allarco’s delay disentitled it to any injunctive relief

Allarco also failed to show that there was any true urgency justifying an injunction as it had been in a position to seek an injunction at least as early as March 2019. Allarco’s private investigations of the alleged piracy of its licensed content started in late 2017. As early as March 2018, Allarco’s private investigator, Mr. Best, was attending the retailers’ stores and recording his interactions with their employees trying to gather information/evidence that the employees had knowledge and were trained to advise customers of the ability to use the TV set-top boxes to access pirated content. These efforts continued through September 2019 when Allarco ultimately commenced a lawsuit at the Federal Court without, however, filing a motion for an injunction.

Only after abandoning the Federal Court action and starting the proceeding before the Alberta provincial court in December 2019 did Allarco file an injunction application without ever explaining the delay of approximately eighteen months to do so. Allarco also failed to explain the usefulness of Mr. Best’s “long secret-shopper mission” which served solely to prove that some of the retailers’ employees were aware and others unaware of how the TV set-top boxes could potentially be used to access pirated content. Mr. Best’s investigative efforts and conclusions were inapt to allow any general inference to be drawn about the retailers’ activities in the set-top box market. Allarco’s delay and futile investigative efforts were factors which weighed heavily in disentitling it to an injunctive relief.

d. Balance of convenience favoured the retailers

After a thorough analysis of the evidence adduced and causes of action raised by Allarco, the Court held that it was virtually certain that the retailers would prevail in the litigation (at para. 128). The Court concluded that the balance of convenience favoured the retailers and that the injunction should not be granted so the retailers could continue selling their legitimate-use products and enjoying their market share for these devices. If the injunction was granted, only four retailers would be prevented from selling the alleged pirate devices, and the retailers’ customers would be able to buy those products from other retailers such that Allarco would remain in a similar position as it would be without the injunction.

Costs consequences

In the end, the Court awarded costs to the retailers on a solicitor-client basis recognizing that a higher scale costs was warranted to discourage abuses such as those incurred by the plaintiff. Beyond the stay to join the copyright owners, the Court stayed Allarco’s action until such costs were paid to each of the retailer respondents. Solicitor-client costs are the highest possible scale of costs and are rarely granted. They are mostly used to penalize a litigant for abuse of process as the award represents an almost complete indemnity to the successful party. In the circumstances, Allarco had suffused its pleadings, affidavit, written argument, and sworn testimony on cross-examination with allegations and statements which served the sole purpose of defaming and harming the reputation of the retailers rather than supporting its causes of action. Allarco’s unsubstantiated allegations of conspiracy and misconduct disclosed no serious issue of fact or law requiring an expensive proceeding. The Court also noted that Allarco’s counsel had a reproachable conduct during cross-examinations delaying and further complicating litigation with baseless interruptions (his name appeared over 1,000 times in the two-day transcript of one of the defendant’s cross-examination alone) and answering and reframing the questions that were asked (at paras. 131-134).

Conclusion

As noted, this decision provides useful insights into the factors underpinning the “interests of justice” analysis in the context of section 41.23(2) of the Act, the quality of evidence required to support an injunction, and offers a sobering lesson with respect to litigation strategy and the severe cost consequences that can accompany a finding of abuse of process and unsubstantiated allegations.

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Author(s):

Bruna D.D. Kalinoski Bruna D.D. Kalinoski
LL.B., L.L.M.
Associate
416.957.1648  email Bruna D.D. Kalinoski