snIP/ITs

Insights on Canadian Technology and Intellectual Property Law

Funding your Start-Up: Stages and Types of Financing

Posted in Startups
Jeremy Busch-HowellNathan Montgomery

Stages of Financing

There are a number of issues start-ups need to consider to be able to effectively raise capital. Focusing your efforts on developing your products or services and establishing strong and efficient leadership are essential in preparing your start-up for the increased scrutiny of prospective investors. In addition, entrepreneurs often overlook or fail to appreciate how important it is to structure initial rounds of financing with later rounds (and more sophisticated investors) in mind. Continue Reading

Federal Court Strikes Claim Where Allegations of Patent Infringement Were Speculative

Posted in Intellectual Property, Litigation, Patents
Bart NowakFiona Legere

On June 12, 2017, Prothonotary Aylen of the Federal Court issued her decision in Mostar Directional Technologies Inc. v Drill-Tek Corporation et al., 2017 FC 575. Prothonotary Aylen struck the Plaintiff’s claim, holding that the pleading was speculative and failed to provide sufficient material facts for the allegation of patent infringement.

In this case, the Plaintiff alleged that the Defendants infringed Canadian Patent Nos. 2,666,695, 2,544,457, 2,584,671, and 2,634,236 which relate generally to down hole drilling technologies. The Plaintiff’s claim identified the Defendants’ model names and listed the patent claims that were alleged to be infringed. After demanding and receiving some particulars relating to infringement, the Defendants moved to strike the Plaintiff’s claim as disclosing no reasonable cause of action. Continue Reading

“Not There Yet”: Bank of Canada Experiments with Blockchain Wholesale Payment System

Posted in Fintech
Maureen GillisAlexandru Trusca

The Bank of Canada has issued a report on Project Jasper, its recently completed experiment testing the viability of distributed ledger technology (DLT) as the basis for a wholesale payment system. The experiment was a combined effort by the Bank of Canada and Payments Canada, along with Bank of Montreal, Canadian Imperial Bank of Commerce, HSBC, National Bank of Canada, Royal Bank of Canada, Scotiabank and TD Canada Trust. The experiment revealed that such technology is not more beneficial, at least for now, than the current centralized system of wholesale payments. However, the successful proof-of-concept highlighted best practices for wide-scale public/private cooperation and uncovered other opportunities for the implementation of the technology within the financial industry.

Bank of Canada and Project Jasper

The Bank of Canada embarked on Project Jasper to learn more about the feasibility, benefits and challenges of using DLT as the basis for a wholesale interbank payment system. These systems are crucial mechanisms for the financial industry that allow large financial institutions to process payments to each other as well as to and from central banks. Canada’s wholesale payment system, the Large Value Transfer System (LVTS), is operated by Payments Canada and processes an average of $175 billion in payments each business day. Despite the large sums processed, LVTS payments are relatively simple and thus presented a reasonable starting point for practical testing of a DLT system.

Project Jasper involved the building and testing of a simulated wholesale payment system using a DLT-based settlement asset. The experiment’s dual objectives were to evaluate whether a test system could meet international standards for systemically important payments infrastructure, including the Principles for Financial Market Infrastructure (PFMIs), and to collaborate with the private sector on a practical DLT application.

The first phase of the project involved the building of a settlement capability on an Ethereum platform and the demonstration of the ability to exchange the settlement asset between participants. The second phase was built on a Corda platform[i] and introduced a liquidity saving mechanism (LSM) where only the net difference between transactions actually settles, mirroring the LSM function in the existing centralized system. Project Jasper required the creation of a novel LSM designed specifically for a distributed ledger, believed to be the first of its kind. The second phase also used a consensus system that allowed the Bank of Canada to serve as a notary with access to the entire ledger, allowing the Bank of Canada to verify the funds involved in transactions. Relying on these two custom features built within the Corda platform, the Bank of Canada, along with Payments Canada, ran a set of simulated transactions.

Experiment Assessment

While the experiment validated that a DLT-based wholesale payments system can likely satisfy risk concerns and PFMIs related to credit risk, liquidity risk and settlement risk, other areas such as settlement finality, operational risk, as well as access and participation requirements are still of concern. The highest operational risks relate to resilience:

  1. Continued back-up and security needs: While the project demonstrated that the core of a DLT-based wholesale payments platform can deliver high availability at a low cost, once additional technology components, such as digital keys, identity and system access management—all important elements of Project Jasper, but currently based on centralized models—are added to the system, the typical challenges associated with a single point of failure faced by existing centralized systems re-emerge. This vital information must be backed up and secured to ensure it is not lost, mishandled or abused, similarly to the current security measures of centralized systems. Up against the highly efficient existing system, the high costs of initial design of the DLT system suggested that the bulk of cost savings that might arise from the use of this kind DLT system would arise from a reduction in bank reconciliation efforts, not from the core system.
  2. Difficult balance between privacy and transparency: While Project Jasper partitioned data in such a way as to create a significant amount of privacy for transactions, it also introduced significant challenges for data replication across the network, a key feature and advantage of DLT, because each participant’s node had access to only a subset of data, introducing a point of failure at each node. More robust data verification requires wider sharing of information. The balance required between transparency and privacy poses a fundamental question to the viability of the system for such uses once its core and defining feature is limited.
  3. Settlement risk: Principle 8 of the PFMIs requires settlement finality. Defining the conditions under which a transfer in the wholesale payments system is considered irrecovable and unconditional is central to the system’s operation and involves both operational and legal components. Phase 1 of Project Jasper underlined some of the challenges the use of Ethereum poses for settlement finality, as its proof-of-work (POW) concensus mechanism is probabilistic, meaning that although settlement becomes increasingly certain as a transaction becomes progressively more immutable over time, there is always a small possibility that a payment could be reversed. The use of the Corda platform and the notarial function of the Bank of Canada have potentially introduced in Phase 2 of Project Jasper an element of irrevocability, but stress testing would be required to confirm that settlement risk had been adequately addressed.
  4. Potential for restricted DLT systems to create single point of failure: The notary consensus system implemented in Phase 2 of Project Jasper, while important for verification, also creates a single point of failure, with the implication that an event such as an outage at the Bank of Canada would prevent the processing of any payments. Activities such as permissioning of nodes and establishment of operational standards continue to require significant centralization. Given these considerations, it was concluded that restricted distributed ledger schemes such as Project Jasper may decrease operational resilience or incur more expense when compared against current centralized systems.

Conclusions

Despite Project Jasper highlighting significant limitations to the use of DLT within the wholesale payment space, it still proved valuable in the eyes of the stakeholders involved. The participants, including public-sector and private-sector partners, stated that they learned a great deal about the technical aspects of DLT technology, discovered best practices for wide-scale cooperation and uncovered insights into other paths that may be explored to help reap the benefits of such technology through other Fintech innovations. One key insight that Project Jasper illuminated is that cost savings or efficiency gains can be obtained “if a DLT-based core interbank payment system can serve as the basis for other DLT systems to improve clearing and settlement across a range of financial assets”, such as stocks, bonds, derivatives and other, more decentralized systems with long settlement times, interacting with the wider financial market infrastructure by combining different elements on the same ledger.

Notably, this proof-of-concept exercise excluded many governance and legal considerations of traditional wholesale payment systems, including anti-money laundering requirements, suggesting that a true production system could have significant additional complexity to address.

Commenting on the experiment, Carolyn Wilkins, senior deputy governor of the Bank of Canada, and Gerry Gaetz, president of Payments Canada, concluded that, as against the necessity for interbank systems to be safe, secure, efficient and resilient, as well as to meet all international standards, “DLT-based platforms are just not there yet.” Consequently, they indicated that near-term modernization of Canada’s payments system will not involve distributed ledgers. Nonetheless, it will involve wide-scale innovation and collaboration across many public and private parties, the benefits of which were also demonstrated in Project Jasper.

[i] R3 has created an open-source distributed ledger platform named Corda that is designed to record, manage and automate legal agreements between businesses. Two important differentiators from traditional blockchains include the ability to support various consensus mechanisms and the ability to restrict access to the data within agreements to those explicitly entitled to it.

This post appeared previously on the CyberLex blog.

For more information about our firm’s Fintech expertise, please see our Fintech group’s page.

The Power of an Inference: Federal Court Restores $125 Million S. 8 Damages Award

Posted in Intellectual Property, Litigation, Patents
Sanjaya MendisSteven TannerDavid Tait

In Teva v. Pfizer Canada, 2017 FC 526, the Federal Court reaffirmed and reissued a judgment awarding Teva a section 8 damages award in excess of $125 million relating to the drug EFFEXOR XR® (venlafaxine). This decision offers insight into the legal limits on what inferences can be drawn about a generic’s ability to source sufficient drug supply in the but-for damages world.

The key issue at this redetermination[1] was whether Teva would have had and could have had access to sufficient quantities of venlafaxine at the relevant time to support its notional sales in the but-for world that gave rise to its significant section 8 damages award. Continue Reading

Forming your Start-Up: Options for Business Entities in Canada

Posted in Startups
Jeremy Busch-HowellNathan Montgomery

There are a variety of business organizations that can be used to operate your tech start-up in Canada. Although many businesses are operated through a corporation, it is important to understand other forms of business organizations. As there are significant tax, legal, financial and practical implications, selecting the right business organization for optimizing your business’s chance for success. The following are three of the most commonly utilized business organizational structures for a start-up business in Canada. Continue Reading

Internal Technology Transfer Gone Wrong: Composite Technologies Inc. v. Shawcor Ltd., 2017 ABCA 160

Posted in Intellectual Property, Litigation
Hilary SmithKeith Rose

Intellectual property is transferrable. And you should be careful with how you transfer your IP among your corporate family, especially if it constitutes the principal value in your business – and in your life’s work!

One IP owner in Alberta had the misfortune of making a transfer to a subsidiary which he eventually allowed to be dissolved. When it came time to assert his ownership rights in the technology in a court, his suit was summarily dismissed as meritless.

Recently, the Alberta Court of Appeal ruled that this outcome was correct. Continue Reading

CASL Private Right of Action delayed and Government to review CASL

Posted in Anti-Spam
Barry B. Sookman

CASL in its present form was a big mistake. The private right of action (PRA) which was scheduled to come into effect July 1, 2017 would have compounded the adverse effects of this flawed, overly-broad, indefensible, and likely unconstitutional law. See,  CASL’s private right of action.

The Government strongly signaled today that it is prepared to fix or at least mitigate some of the excessive elements of the CASL regime. This is something that every sector of the Canadian public including charities, not-for profit and educational institutions, private individuals, small, medium and large businesses, retailers, publishers, financial institutions, technology and telecom companies had been asking for even before CASL came into force. See, Canada’s anti-spam law (CASL), too much of a good thing .

The first step is deferring the implementation of the private right of action. The second is a commitment by the Government to a legislative review of CASL. Continue Reading

3rd Edition of E-Discovery in Canada is now available

Posted in E-Discovery

E-Discovery_in_Canada_Cover_JAN2017Susan Wortzman, partner and Director of E-Discovery, and a team of experienced authors the third edition of E-Discovery in Canada. The book covers everything lawyers, in-house counsel and law clerks need to know about conducting e-Discovery, from preservation to proportionality to costs.

Learn from the professionals in Canada and find out how to leverage their know-how for better outcomes for your clients’ in this revised and updated edition. The third edition can be purchased here.

This article was original posted on the Canadian Class Actions Monitor blog on June 2, 2017

Federal Court Issues Trial Management Guidelines to Ensure Efficient, Expedient and Proportional Use of Court Time

Posted in Litigation
Bart NowakSteven Tanner

The underlying purpose of the Federal Courts Rules is to ensure the just, most expeditious and least expensive determination of every proceeding. The Federal Court has released notices to the profession help achieve this underlying purpose. Continue Reading

Fair, Reasonable and Non-Discriminatory: UK Patent Court Enjoins Huawei from using Standard Essential Patents Owned by a Non-Practicing Entity

Posted in Intellectual Property, Patents
Bart NowakFiona Legere

On April 4, 2017, the Honorable Justice Birss of the High Court of Justice (Chancery Division) issued his decision in Unwired Planet International v Huawei Technologies, [2017] EWHC 711 (Pat). The decision provides a comprehensive review of the application of Fair, Reasonable and Non-Discriminatory (FRAND) principles to the licensing of Standard Essential Patents (SEPs). Continue Reading