Budget 2014: new money for broadband, new wireless rules and enforcement tools

David Elder -

The 2014 federal budget, introduced on February 11, 2014, included several items of interest to the telecommunications industry, including plans for revisions to the regulatory framework for wireless services and a commitment of federal funding to extend and enhance the access to high-speed broadband networks in rural and Northern communities.

As part of its “consumers first” strategy, the government has proposed, in its Economic Action Plan 2014, a number of measures intended to strengthen competition in the telecommunications market.  Notably, the new budget builds on an earlier announcement of plans to amend the Telecommunications Act to cap wholesale domestic wireless roaming rates, at least until such time as the CRTC, which is currently examining the issue, makes a decision respecting such roaming rates.

The budget also disclosed the government’s intention to beef up the enforcement tools available to the regulators of the wireless sector.  It was announced that amendments will be proposed to both the Telecommunications Act and the Radiocommunication Act, which will provide the CRTC and Industry Canada, respectively, with the power to impose “administrative monetary penalties” on companies that violate regulatory requirements, such as adherence to the newly in force Wireless Code, and rules requiring deployment of spectrum resources, extension of service to rural areas and tower sharing with other carriers.  Administrative monetary penalties are already available to the CRTC with respect to telemarketing violations, and will soon be available for violations of Canada’s new anti-spam law.

The government also announced plans to clarify prohibitions against violating spectrum auction rules, as well as prohibitions against the manufacture, sale or use of jamming devices.  Other planned amendments would streamline the certification process for telecommunications equipment.

Further planned amendments to the Telecommunications Act would provide the CRTC with the authority to directly impose conditions of operation on non-carriers (such as resellers).  Currently, the Commission imposes such obligations indirectly, by requiring regulated carriers to include specified terms in their agreements with non-facilities based telecommunications providers.

None of the proposed amendments have yet been introduced into Parliament.  Based on recent government practice, such amendments might well be included in an omnibus budget implementation bill.

In addition to proposed changes to the regulatory framework for wireless services, the budget announcement also indicated that the government will provide $305 million over 5 years to extend and enhance broadband service to rural and Northern communities, to a target speed of 5 Megabits per second.  The funding could mean enhanced service for up to 280,000 Canadian households.  Further details about the new funding program are to be released in the coming months.

Many business concerns remain following revisions to anti-spam regulations

David Elder -

Much-anticipated revisions to the originally proposed Electronic Commerce Protection Regulations provide some useful clarifications and additional exemptions with respect to Canada’s Anti-Spam Law (CASL), but many concerns remain with respect to the potential over-reach of the not-yet-in-force law and the unnecessary and burdensome financial and administrative obligations that it may impose on legitimate business activity.

In fact, while the revised Regulations do respond to some of the concerns raised with respect to the previously proposed regulations – and indeed, the Act as a whole - the new Regulations may be more notable for what they don’t include than for what they do cover. 

In this regard, many of the issues raised and exemptions requested by the business community following the pre-publication of the original proposed Regulations have not been accommodated, including:

  • Accepting as valid under CASL consents to the receipt of commercial electronic messages that are obtained in compliance with the federal private sector privacy law, the Personal Information Protection and Electronic Documents Act.  In the explanatory remarks accompanying the proposed Regulations, the Government explicitly indicates that CASL is intended to create a higher threshold for consent for the receipt of commercial electronic messages.
     
  • Allowing Canadian businesses to send, on behalf of foreign organizations, commercial electronic messages to recipients outside of Canada.  Concerned with the potential for abuse by spammers, the Government rejected submissions that the lack of an exemption for such activity would put Canadian outsourcing and cloud computing firms at a significant disadvantage with respect to their foreign counterparts.
     
  • Allowing manufacturers without a direct relationship with end users of their products (such as where the products are purchased from a retailer) to send commercial electronic messages to those end users.  The Government rejected an exemption for manufacturers as too broad, but as noted below, has created new exemptions with respect to sending warranty and recall information.
     
  • Reducing the complexity of the requirements for the collection and withdrawal of consent for the receipt of commercial electronic messages sent by as-yet-unknown third parties.  The Regulations continue to require organizations collecting such consents on behalf of such third party organizations to engage in detailed tracking of such consents and take responsibility for the actions of such third parties.
     
  • Expanding the “existing business relationship” exemption to include legitimate commercial electronic messages sent in the context of additional ongoing business relationships, which do not clearly fall within the narrow definition of the current exemption.

Nevertheless, the revised regulations do provide some clarification of key legislative terms, as well as new exemptions for business activities that were not intended to be within the scope of CASL.  Moreover, the Government has indicated that Industry Canada and the CRTC are exploring the use of interpretational guidelines and other guidance material to provide clarity where appropriate.

Virtual Friends

One such clarification is that the revised Regulations amend the previous definition of “personal relationship” so as to correct what many argued was an unduly narrow exemption from the anti-spam requirements for commercial electronic messages sent between individuals.

CASL provides that its core anti-spam provision does not apply to commercial electronic messages that are sent by an individual to another individual with whom they have a “personal or family relationship.”  However, in the original regulations proposed by Industry Canada, the term “personal relationship” was defined so as to recognize only those relationships where the individuals concerned had actually met face-to-face within the previous 2 years.

The revised Regulations exempt commercial electronic messages sent between individuals who have had direct, voluntary two-way communications, in circumstances where it would be reasonable to conclude that the relationship is personal.  In reaching such a conclusion, all relevant factors are to be considered, including the nature and frequency of such communications, the length of time over which the parties have communicated and whether the parties have met in person.  The two-year limitation period has been removed.  Recipients of exempted “personal relationship” messages may opt-out of receipt of such messages, in which case the exemption no longer applies.

The exemption may be most relevant for businesses where they may facilitate or encourage customers to send commercial electronic messages to their personal networks, such as through “forward to a friend” features.

B2B Exemptions

One of the chief criticisms of the earlier regulations, and of CASL as a whole, has been that the since the definition of “commercial electronic message” is so broad, the Act could impose unnecessary consent and disclosure requirements on regular business communications that should not be within the scope of the law.

In response, the revised Regulations introduce new exemptions for commercial electronic messages sent within a business, or sent between businesses that are already in a business relationship, where the messages are sent by employees, representatives, contractors or franchisee and the message concerns the organization or the individual recipient’s role, functions or duties within or on behalf of the organization.

Messages in Response

Again, due to the broad definition of “commercial electronic message”, concerns were raised that businesses responding to inquiries could be caught by the anti-spam law.  While CASL includes an exemption for individuals contacting an organization to inquire about its business, there was no corresponding exemption with respect to the organization’s response.

Accordingly, the revised regulations include a new exemption for commercial electronic messages that are sent in response to a request, inquiry or complaint, or that is otherwise solicited by the recipient.

Incidentally in Canada

One of the key concerns of many foreign companies was that CASL applies to commercial electronic messages that are either sent from or accessed through a computer system located in Canada.  Accordingly, concerns arose about the potential application of the law to commercial electronic messages sent from outside Canada, to recipients who are ordinarily resident outside Canada, but who may access such messages during visits to Canada.

A new provision in the revised Regulations appears to largely satisfy this concern, by exempting such messages, provided that they relate to a product, good, service or organization located or provided outside Canada, and that the sender did not know and could not reasonably be expected to know that the message would be accessed using a computer system located in Canada.  However, uncertainties still remain, for example with respect to the treatment of a non-Canadian sender who also makes the product or service in question available through a Canadian subsidiary or affiliate.

Non-Transactional Business Communications

The revised Regulations also include a new provision exempting commercial electronic messages sent for purposes relating to the satisfaction, notification or enforcement of legal or juridical rights and obligations, such as sending warranty or recall information, electronic bank statements, notices of copyright infringement, etc..  Again, such an explicit exemption was considered necessary by some in view of the broad definition of commercial electronic message found in the Act.

Referral Messages

The revised Regulations contain a new exemption for commercial electronic messages sent based on a referral by one or more individuals, where such individuals have an existing business or non-business relationship or a personal or family relationship with the sender and the recipient.  The exemption applies only to the first commercial electronic message sent to contact the recipient, and the message must disclose the full name of the referring individual or individuals.  Several stakeholders had previously expressed concern that without such an exemption, they could not directly act upon referrals from friends, family and clients without first obtaining consent.

Telecom Service Provider Software

Finally, the revised regulations add two types of telecom service provider (TSP) software to the list of specified computer programs (such as HTML code, Java scripts, cookies, etc.), for which express consent is assumed if the individual’s conduct leads to a reasonable belief that they consent to such an installation.  The new exemptions relate to TSP programs to prevent unauthorized or fraudulent use of a service or system, or to update or upgrade systems on their networks.

Next Steps

While passed into law in December 2010, CASL has yet to be proclaimed in force, in part because the Government was awaiting the finalization of two sets of regulations: one to be made by Industry Canada, and one to be made by the CRTC.  The Electronic Commerce Protection Regulations (CRTC) were finalized last year, and the CRTC has issued two interpretation bulletins to provide guidance as to how it intends to apply those Regulations.

The proposed revisions to the remaining Electronic Commerce Protection Regulations were officially published for comment on January 5th, 2013, starting CASL on the final leg of its long journey to coming into force.  Following a 30 day comment period, it is expected that the Regulations will be finalized, and a date will be announced for the coming into force of the new anti-spam regime.

CRTC guidance on check-boxes for e-marketing likely to tick off business community

David Elder -

Although the date on which Canada’s Anti-Spam Legislation (CASL) may come into force is uncertain, the CRTC has issued two bulletins that provide guidance as to how to comply with the new law, once proclaimed in force.

But while some of the new guidance is helpful, other provisions will likely create significant operational concerns for businesses.

The Commission is the body charged with oversight and enforcement of most provisions of the new law, including the core provisions respecting commercial electronic messages (CEMs), alteration of transmission data and the installation of computer programs.  In addition, the CRTC has the power to make regulations under the Act with respect to certain matters.

As we noted previously, the CRTC registered its Electronic Commerce Protection Regulations (CRTC) in March of 2012, providing additional clarification of these new regulations in a subsequent Regulatory Policy.

The first of the new Compliance and Enforcement Bulletins provides further, and in some cases helpful, guidance on the interpretation of these Regulations, such as providing details on acceptable unsubscribe mechanisms for each of email and SMS messages, including visual mock-ups of acceptable approaches.

However, the Bulletin also indicates that the Commission considers that, where included in general terms and conditions of use or sale of a product or service, requests to send commercial electronic messages, alter transmission data or download computer programs must be obtained through separate positive affirmations of the user, such as the proactive checking of a tick-box to signify consent to each of these actions, in addition to the acceptance of other contractual terms or an organization’s privacy policy. 

Most problematically, in a second Compliance and Enforcement Bulletin, the CRTC seems to be ruling out default settings that favour consent, even where the user can uncheck a box to exercise their choice (a process that the Commission refers to as “toggling”) and where the user does provide a positive affirmation to a set of terms or an agreement.  The following example, included in the Bulletin, shows that even where the pre-checked box and related consent is featured prominently, and is adjacent to a button that the user must pressed to signify agreement to a contract, the CRTC will not consider this to be valid consent to the receipt of CEMs under the anti-spam law.

Another area of likely concern for businesses relates to CRTC guidelines respecting the collection of oral consent, a form of consent which is explicitly authorized by the Electronic Commerce Protection Regulations (CRTC).  The Bulletin suggests that in order to be able to discharge the onus of proving that it obtained oral consent, a business would have to have that consent verified by an independent third party or retain a complete and unedited audio recording of the consent.

We would note that, while these methods may work where consent is collected by telephone, through a call centre, they would create significant operational problems where consent is collected during a face-to-face interaction, such as might commonly occur at point of sale.

While the Bulletins do not have the force of law, they do provide a clear indication of how the CRTC will interpret the law and regulations that is charged to enforce.

CRTC clarifies anti-spam regulations: consent can include electronic forms

David Elder -

Following the registration, three weeks ago, of its new anti-spam regulations, the CRTC has issued a regulatory policy explaining the changes made to the draft regulations that it had originally proposed, as well as providing some guidance as to how some of the requirements will be interpreted.

In Telecom Regulatory Policy CRTC 2012-183, issued to coincide with the publication of the Electronic Commerce Protection Regulations (CRTC) in the Canada Gazette, the Commission notes that many of the changes to the originally proposed version of the Regulations were made in response to public comments, and in most cases were amendments intended to be less prescriptive and more technology neutral.

In an earlier post, we had summarized the main changes in the final regulations. Helpfully, the new Regulatory Policy appears to clarify several uncertainties that had been raised by these changes.

Perhaps most significantly, the Commission explicitly indicates in the Regulatory Policy that consent obtained “in writing” includes electronic forms of consent, putting to rest one of the more significant concerns of companies operating over the internet. In other contexts, the Commission has accepted electronic forms of consent where a user signifies agreement through some positive action, such as clicking on an “I agree” box.

Although in their final form, the Regulations are not yet in force. They will come into force on the day on which the core sections of Canada’s Anti-Spam Law come into force, which is expected to occur later this year.

CRTC tweaks anti-spam regulations

David Elder -

Final regulations made by the CRTC under Canada’s Anti-Spam Law (CASL) include a number of revisions that respond to concerns raised by Canadian businesses; but while some additional flexibility has been provided, the Commission appears to have left a number of other concerns unanswered.

On 7 March 2012, the CRTC registered its Electronic Commerce Protection Regulations (CRTC), a final version of draft regulations that were originally proposed in June 2011.  Those regulations, and the related Electronic Commerce Protection Regulations that were proposed by Industry Canada, attracted significant criticism from the business community, which expressed concern that the regulations omitted some important clarifications of the requirements of the law, failed to provide exemptions for certain business and behaviours that should not be caught by the legislation and imposed unworkable and unnecessary requirements that may have had a disproportionate impact on technologies such as text messaging. 

Those hoping for significant additions to the CRTC Regulations will be disappointed, as the revised Regulations remain in the same form, and appear intended to accomplish the same end, as the earlier version: namely clarifying the sender identity and contact information that must be included in commercial electronic messages and requests for consent to send such messages.  However, to be fair to the CRTC, this narrow focus is consistent with the scope of the regulation-making power provided to the Commission under CASL.

The final Regulations include the following changes from those originally proposed:

  • Clarification that persons sending a message, or persons on whose behalf a message is sent, must identify themselves by the name by which they carry on business.
  • Greater choice with respect to the contact information to be provided.  Senders, and those seeking consent to send messages, may now provide either a telephone number providing access to an agent or a voice messaging system, an email address or a web address.  The original proposal seemed to require the provision of all of these, as well as a physical address.
  • Revised requirements that web-based information be “readily accessible” and that the required unsubscribe mechanism must “be able to be readily performed.” The original proposed Regulations specified these requirements with reference to a maximum number of “clicks.”
  • The revised Regulations now indicate that consent for the receipt of a commercial electronic message may be obtained orally, as well as in writing, as the original proposed regulations provided; however, the Regulations do not provide certainty as to whether electronic forms of consent will be considered to be “in writing,” which was the chief concern of many stakeholders with this requirement. See our earlier post for a discussion of this issue.
  • The Regulations still require that when seeking consent, requestors must include a statement indicating that consent can be withdrawn, but no longer requires the requestor to specify through which avenues such a withdrawal of consent could be made.

The publishing of the CRTC Regulations puts the country one step closer to CASL being proclaimed in force.  The other shoes to drop include finalization of the Industry Canada Regulations (a revised version of which is expected to be published in the near future) and the selection of a vendor to run the Spam Reporting Centre contemplated by the Act.

Supreme Court to consider whether ISPs are broadcasting undertakings

David Elder -

The Supreme Court of Canada has announced that it will hear an important “convergence” case respecting regulatory treatment of Internet access to broadcasting content.

On March 24, the Court granted leave to appeal last summer’s judgement of the Federal Court of Appeal, which found that Internet Service Providers (ISPs) do not carry on “broadcasting undertakings”, within the meaning of the Broadcasting Act, when they provide access through the Internet to broadcasting material requested by users.

That decision, Re Canadian Radio-television and Telecommunications Commission (2010) FCA 178, was initiated by a Reference Order issued by the CRTC, in order to resolve fundamental questions respecting the distinction, for the purpose of the Broadcasting Act and the Telecommunications Act, between telecommunications service providers and broadcasting undertakings.  In that case, the Federal Court of Appeal found that in providing content-neutral access to “broadcasting” material on the Internet, ISPs do not transmit programs, are therefore are not broadcasting undertakings, and accordingly do not fall within the regulatory ambit of the Broadcasting Act.

The reference arose from a proceeding initiated to consider issues pertaining to broadcasting in new media, in which the CRTC heard proposals from various cultural groups to impose a levy on ISPs, to be paid into a fund to support the creation and presentation of Canadian new media broadcasting content.  Stakeholders opposed to the levy, including many ISPs, argued that the CRTC lacked jurisdiction to impose such a levy, since ISPs were not properly considered to be “broadcasting undertakings”, and therefore fell outside of the Commission’s jurisdiction under the Broadcasting Act.  Extensive and contradictory legal opinions were submitted.

Although in its subsequent decision, Review of broadcasting in new media, the Commission determined that additional funding for new media content was neither necessary nor appropriate at this time, resolution of the threshold question of applicability of the Broadcasting Act to ISPs would clarify, in the near term, whether the reporting requirements and undue preference restrictions currently applicable to new media broadcasting undertakings would apply to ISPs.  In the longer term, a finding by the Court that ISPs were broadcasting undertakings could allow the CRTC to impose a levy, or other regulatory restrictions, at some future date.

Federal Court of Appeal says broadcasting policy trumps copyright law: CRTC has power to allow local broadcasters to demand fee for carriage

David Elder -

“Free-to-air” local television signals may no longer be free to cable and satellite subscribers, following a recent court decision affirming the scope of the powers of the Canadian Radio-television and Telecommunications Commission (CRTC) under the Broadcasting Act.

In an important ruling that addresses the intersection of broadcasting and copyright law and policy, a majority of the Federal Court of Appeal found, in the case of Reference re the Canadian Radio-television and Telecommunications Commission’s Broadcasting Regulatory Policy CRTC 2010-167 and Broadcasting Order CRTC 2010-168, 2011 FCA 64, that the Copyright Act permits the CRTC to limit the statutory retransmission rights of broadcasting distribution undertakings (BDUs), such as cable companies, by imposing any regulatory or licensing condition that is consistent with the Commission’s statutory authority under the Broadcasting Act. In fact, the majority went so far as to state that Parliament has ranked the objectives of Canada’s broadcasting policy ahead of the statutory retransmission rights granted to BDUs under the Copyright Act.

The case arose in the context of a CRTC decision finding it necessary, in light of financial challenges for local broadcasters in an increasingly fragmented market, to provide the licensees of private local television stations with the right to negotiate a fair value for the distribution of their programming services by BDUs. In the course of the proceeding that led to that decision, the Commission was presented with two conflicting legal opinions respecting the CRTC’s jurisdiction to create a “Value for Signal” (VFS) regime, both of which it found worthy of consideration. In light of the importance of the jurisdictional question to the ability of the Commission to fulfill its mandate under the Broadcasting Act, as well as the continuing need for regulatory certainty, the Commission itself referred the following question to the Federal Court of Appeal, pursuant to subsections 18.3(1) and 28(2) of the Federal Courts Act:

Is the Commission empowered, pursuant to its mandate under the Broadcasting Act, to establish a regime to enable private local television stations to choose to negotiate with broadcasting distribution undertakings a fair value in exchange for the distribution of the programming services broadcast by those local television stations?

The resulting Federal Court of Appeal decision focuses on the interpretation of subsection 31(2) of the Copyright Act, which creates a statutory retransmission right for BDUs - as an exception to the rights granted, in subsection 21(2) of that legislation - to broadcasters with respect to their signals. The retransmission right is subject to 5 important conditions. These are that:

(a) the communication is a retransmission of a local or distant signal;

(b) the retransmission is lawful under the Broadcasting Act;

(c) the signal is retransmitted simultaneously and without alteration, except as otherwise required or permitted by or under the laws of Canada;

(d) in the case of the retransmission of a distant signal, the retransmitter has paid any royalties, and complied with any terms and conditions, fixed under this Act; and

(e) the retransmitter complies with the applicable conditions, if any, [imposed by the Governor in Council]

The majority interpreted the second sub-paragraph broadly, essentially finding that the phrase “lawful under the Broadcasting Act” means “in compliance with the Broadcasting Act, any regulations made under the Broadcasting Act, and any conditions that Commission has attached to the retransmitter’s broadcasting licence.” Accordingly, the majority found that the fact that the Copyright Act does not provide for the payment of a royalty for the retransmission of a local signal does not necessarily indicate “any intention on the part of Parliament to preclude the Commission from adopting the proposed value for signal regime in the interests of Canada’s broadcasting policy.”

However, in a strong and persuasive dissent, Justice Nadon found that the VFS regime was ultra vires the CRTC, because it conflicts with Parliament’s clear statement in the Copyright Act that royalties must be paid only for the retransmission of distant signals (those not normally receivable in a BDUs service area), not for local signals. 

Nadon, J. differed from the majority with respect to the scope of the CRTC’s power to determine the applicability of the retransmission right in the Copyright Act through the imposition of regulations or conditions imposed under the Broadcasting Act. In contrast to the majority, Justice Nadon found that each of the 5 conditions found in s. 31(2) of the Copyright Act are co-equal; none can be found to rank ahead of the others. Accordingly, he rejected what he saw as the Majority’s effective determination that paragraph 31(2)(d) of the Copyright Act means that “royalties may only be charged for the retransmission of distant signals and may not be charged for the retransmission of local signals, unless the CRTC decides otherwise.” 

Justice Nadon further noted that the VFS regime was “functionally equivalent” to the distant signal royalty payment regime in that in both cases, a royalty is paid, the payor and payee are the same, the obligation to pay attaches to the same activity and the protected property is the same. Accordingly, and contrary to the “exhaustiveness of statutory copyright law,” he found that the CRTC was attempting to “create a royalty that is essentially the same as the royalty Parliament has, in effect, forbidden” in the Copyright Act.

In light of the split decision, as well as the economic importance of the issue to both broadcasters and BDUs, it would appear highly likely that the decision will be appealed by one of the BDUs that participated in the reference to the Federal Court of Appeal. However, many have speculated that recent acquisitions, by BDUs, of some of the most vocal broadcaster proponents of the VFS regime may make the Court’s decision all but moot in that the broadcasters involved will no longer be inclined to negotiate VFS terms with distributors.


UPDATE: The Globe and Mail reports that Rogers Communications Inc. will seek leave to the Supreme Court of Canada to hear an appeal of the VFS Reference decision.

A change in the Wind: Federal Court reins in cabinet power to vary CRTC decision on foreign ownership

David Elder

In the latest chapter in the ongoing saga of the eligibility of foreign-backed telecommunications carriers to operate in Canada, the Federal Court of Canada has quashed a decision of the federal cabinet that found that Globalive Wireless Management Corp. (Globalive) met Canadian ownership requirements under the Telecommunications Act

The Court’s decision in the case of Public Mobile v. Attorney General of Canada et al  threatens the ability of a new wireless entrant to operate in Canada, effectively lowers the amount of foreign investment that is acceptable under Canadian ownership rules for telecom carriers and offers new guidance respecting the scope of the federal cabinet to overturn the decision of an administrative tribunal.

The cabinet decision in question had itself overturned a CRTC decision that found that Globalive, which provides wireless service in Canada under the Wind Mobile brand, was effectively controlled by a non-Canadian (Orascom Telecom Holding (Canada) Limited (Orascom) -- an Egyptian-controlled company) and was therefore ineligible to operate in Canada.  That CRTC decision was at odds with the government’s issuance to Globalive of a spectrum  licence, since holders of such licences must meet the same Canadian ownership requirements.

The Telecommunications Act provides that telecommunications common carriers must meet Canadian ownership requirements to be eligible to operate in Canada.  In order to be so eligible, at least 80% of the members of a corporation’s board must be Canadian, at least 80% of its voting shares must be held by Canadians and the corporation may not be otherwise controlled by non-Canadians.  Each of the CRTC’s decision and the Federal Court decision focused on Globalive’s compliance with the latter criterion.

The CRTC had found that a number of factors combined to indicate that Globalive was controlled in fact by a non-Canadian.  The Commission noted that Orascom held 2/3 of Globalive’s overall equity, was the principle source of its technical expertise, owned and controlled the Wind trademark under which Globalive offered service and, significantly, held 99% of Globalive’s debt.  The federal cabinet disagreed with the CRTC, finding that these factors did not support the conclusion that the company was controlled by a non-Canadian, and suggesting that the Canadian ownership and control requirements “should be interpreted in a way that ensures that access to foreign capital, technology and experience is encouraged.”

The federal cabinet (formally, the Governor in Council) is empowered by s. 12 of the Telecommunications Act to vary, rescind or refer back for reconsideration any CRTC decisions under that Act, although the section provides no guidance on the factors to be taken into account by the cabinet in making such a decision.

In quashing the cabinet decision, the Court found that the cabinet had misdirected itself in law in two important respects.  First, it found that the cabinet misdirected itself in suggesting that the ownership requirements should be interpreted in a way that ensures access to foreign capital, noting that there is no policy objective in the Telecommunications Act that encourages foreign investment.  In this regard, the Court referenced earlier case law requiring a decision-maker such as the cabinet not only to take into consideration the relevant statutory scheme, but also to exclude irrelevant criteria.  Next, the court found that the cabinet went outside the legal parameters of the Act in stating that its decision applied only to Globalive, since the interpretation must also necessarily apply to others who may find themselves in similar circumstances.

This decision is important to telecommunications providers and potential investors as it effectively lowers the degree of foreign investment and control that will meet Canadian ownership requirements.  The “control in fact” test is often at issue in acquisitions of Canadian broadcasters and telecom carriers that include investments by foreign companies.

The decision is also important in that it confirms that the federal cabinet’s power to vary CRTC decisions is strictly constrained by the overall scheme of the Telecommunications Act and, in particular, by the telecommunications policy objectives found therein.  The federal cabinet may not vary CRTC decisions based on new factors or objectives that are not set out in the Act.  This raises some uncertainty with respect to the cabinet’s ability to vary other CRTC decisions, such as its recently announced intention to overturn the CRTC’s decision on usage-based billing.

The court stayed its decision for a period of forty-five days, to allow Globalive and any other relevant person to pursue an appeal to the Federal Court of Appeal.  The decision will almost certainly be appealed; however, the quashing of the CRTC decision will also increase the pressure on the government to amend the Telecommunications Act so as to liberalize foreign ownership restrictions for telecommunications carriers, an initiative that the government indicated last year it was considering.


UPDATE:  As expected, Globalive filed an appeal to the Federal Court of Appeal on 17 February 2011.  The 45 day stay of judgement granted by the Federal Court in its decision was subsequently extended by the Federal Court of Appeal, which granted a motion for an expedited timeline, setting down the appeal to be heard in Ottawa on May 18, 2011.

CRTC considering relaxing prohibition on broadcasting misleading news.

In a Broadcasting Notice of Consultation issued on January 10, the CRTC indicated that it is seeking comments for the amendment of several regulations to allow for more leeway in broadcasting false or misleading news. According to the CRTC, it is considering these amendments because of the Parliament’s Standing Joint Committee’s concern that the existing prohibitions on broadcasting false or misleading news is too broad and vague. Fearing that it would not withstand a Charter challenge, the CRTC was urged by the Committee to revise the language of the regulations.

Currently the regulations prohibit the broadcasting of “any false or misleading news” whereas if the proposed language to the amendments were accepted, it would lower the standard to "any news that the licensee knows is false or misleading and that endangers or is likely to endanger the lives, health or safety of the public." In other words, a broadcaster would be permitted to air news that it knows is false or misleading as long as it does not endanger the lives, health or safety of the public.

University of Ottawa law professor Michael Geist finds the proposition for amendment to be ironic in light of the American news media being blamed for the recent shooting deaths in Arizona. He remarked that the same fears over low broadcast standards exist in Canada and the amendments would only give a freer license to provide misleading information to Canadians. If passed, the revised regulations would come into affect September 1 of this year. CRTC’s proposed change is currently open for comment until February 9th, 2011.

Government overrules CRTC, declares Globalive Canadian

Industry Minister Tony Clement announced today that he was overruling the Canadian Radio-television and Telecommunications Commission (CRTC) and allowing Globalive Wireless Management Corporation (Globalive) to become the fourth national wireless carrier in Canada. The CRTC had previously declared that Globalive was not eligible to operate as a telecommunications carrier in Canada because it was not Canadian-controlled, relying on the fact that almost all of Globalive’s financing had come from an Egyptian company. Clement acknowledged a foreign influence over Globalive, but found that control was in Canada. The majority of Globalive’s voting shares are held by Canadians, and its board is not foreign-controlled. Clement later said that this decision did not indicate an intention to change Canada’s foreign ownership rules for wireless carriers.

CRTC follows the money, concludes Globalive does not satisfy Canadian ownership and control requirements

Gregory Kane Q.C., Sean Vanderpol and Colin Yao

Canada's federal telecommunications regulator, the Canadian Radio-television and Telecommunications Commission (CRTC or Commission), has recently released the stunning decision that Globalive Wireless Management Corporation (Globalive) is not currently eligible to operate as a telecommunications common carrier (TCC). According to the CRTC, Globalive, which recently purchased 30 advanced wireless spectrum licences at auction from Industry Canada, may not act as a TCC because it does not meet the requirements set out in section 16 of the Telecommunications Act (the Act).

The decision is stunning because the conventional wisdom to date has been that parties found to be offside foreign ownership and control requirements would be given an opportunity to remedy any offending aspect of their business in order to achieve CRTC approval. In fact, the Globalive proceeding before the CRTC played out in such a manner, with Globalive proposing changes during the course of the public hearing to address express or implied concerns raised by the CRTC Commissioners and intervening parties. Despite the effort and an approach consistent with past practices, the CRTC found that Globalive has not met the Canadian ownership and control requirements, a first in the case of a prospective TCC.

Section 16 of the Act and its associated regulations set out the framework within which Canadian TCCs are eligible to operate (the Ownership and Control Regime). The Ownership and Control Regime requires that TCCs be Canadian-owned and controlled. Specifically, the Ownership and Control Regime sets out certain quantitative benchmarks that a TCC must meet, and also provides that a TCC must "not otherwise [be] controlled by persons that are not Canadians". Control, for this purpose, means control in any manner that results in control in fact. Thus, the Ownership and Control Regime sets out both a de jure and a de facto control test. In practice, the question of de facto control is usually the principal issue considered by the CRTC and is assessed in light of the applicable personal, financial, contractual and/or business relationships, as well as any other considerations considered relevant to the determination of control.

In July of this year, the CRTC reconsidered its method of reviewing compliance under the Ownership and Control Regime. Previously, the CRTC had conducted confidential hearings involving only the potential carrier and the Commission. This method did not result in a public record or public release of a decision. In an attempt to add transparency to the process, the CRTC established a new method of reviewing eligibility under the Ownership and Control Regime. This method assigns matters to one of four types of hearings depending on the features of the ownership and governance structure to be considered.

A Type 1 hearing is similar to the old method of determination and is conducted on a confidential basis between the Commission and the applicant. Type 2 hearings are also conducted on a confidential basis between the Commission and the applicant, but will result in a public decision with reasons. Type 3 hearings are public hearings with multi-party proceedings, whereby third party submissions will be limited to written submissions. A Type 4 hearing is the most public of the four types and involves a public multi-party hearing in which third parties provide both written and oral submissions. Type 4 hearings are reserved for those exceptional instances where the CRTC determines that a complex and novel ownership and governance structure is likely to provide precedential value.

The Commission's review of Globalive's ownership and governance structure was determined by the CRTC to be a Type 4 hearing, due to the complexity of Globalive's corporate structure and financing arrangements. It was also determined that third-party submissions would assist the Commission in making its ruling. As a result, over 22 parties applied to be a part of the hearing, including Shaw Communications Inc., three of which participated in the oral phase: Rogers Communications Inc., Bell Canada and TELUS Communications Company.

As is invariably the case when the CRTC examines issues of control, Globalive had structured its ownership and board composition so as to meet the quantitative tests prescribed by the Ownership and Control Regime (i.e., the de jure test of control). Thus, the principal issue before the CRTC was whether Globalive was otherwise controlled by persons that were not Canadian.

Globalive's ownership and governance structure

Initially, Globalive's proposed corporate structure involved a two-tier holding company structure. Globalive's immediate parent was Globalive Canada Holdings Corp. (Globalive Holdco), which was in turn owned as to a 66.67% voting interest by Globalive Investment Holdings Corp. (Investment Holdco) and as to a 33.33% voting interest by Orascom Telecom Holding (Canada) Limited, an indirect subsidiary of Orascom Telecom Holding S.A.E. (Orascom), one of the world's largest telecommunications carriers. Investment Holdco was in turn owned as to a 66.68% voting interest by AAL Telecom Holdings Incorporated (AAL) and as to a 32.02% voting interest by Orascom, with the remaining voting equity in the hands of other shareholders. Orascom also held non-voting shares. AAL is the holding company of Anthony Lacavera, a Canadian and Globalive's Chairman and CEO. Under the terms of the various governance agreements that were in place, Orascom was entitled to two nominees (out of five) to the board of Investment Holdco, and three nominees (out of seven) to the board of Globalive Holdco. These agreements also provided Orascom with a number of veto rights, including vetoes over the disposition of more than 5% of Globalive's assets or the incurring of expenditures in excess of $10 million. Orascom also held a call right over AAL's shares in Investment Holdco and a drag-along right that could, in some circumstances, force AAL to sell its interest in Investment Holdco in the event of a sale by Orascom.

In response to concerns expressed by the Commission during the hearing, Globalive revised its corporate structure by eliminating Globalive Holdco (making Globalive a wholly-owned subsidiary of Investment Holdco). The overall equity positions of the shareholders remained unchanged. The board of directors of Globalive was expanded to eleven individuals, at least nine of whom would have to be Canadians. Four directors were to be nominated by AAL, and four by Orascom. Globalive also removed the proposed call and drag-along rights, substituting in their place a mutual liquidity right with, in AAL's case, a guaranteed floor price.

Given this proposed structure, the equity of Globalive was effectively divided between AAL (Anthony Lacavera) and Orascom, with Orascom holding an approximately 65% interest in Globalive, and AAL holding an approximately 34% interest. In addition to being an indirect shareholder of Globalive, Orascom was also Globalive's principal lender, having extended secured loans to Globalive totaling approximately $508,403,000 (representing substantially all of the capitalization of Globalive). As a lender, Orascom enjoyed various rights under its loan agreements with Globalive, including the benefit of positive and negative covenants that circumscribed Globalive's activities and a secured interest in all of the property of Globalive. During the hearing, Orascom agreed to remove all of its positive and negative covenants and all indemnities from its loan arrangements with Globalive and granted Globalive an option to have its existing loans extended for up to three years from the current maturity date at the same or lower interest rates.

Orascom also provided a wide-ranging suite of technical services to Globalive pursuant to a technical services agreement. These services ranged from advice and assistance on the design of Globalive's network to assistance with negotiations with international and local vendors. Globalive was also provided with a licence to use the trademark WIND in association with Globalive's services in Canada. The WIND trademark is used by other Orascom affiliates in Greece and Italy and is controlled by the controlling shareholder of Orascom.

CRTC decision

The CRTC noted four areas as raising concerns relating to control in fact, namely, corporate governance, shareholder rights, commercial arrangements between Globalive and non-Canadians and the economic participation by AAL and Orascom in Globalive.

Many of the issues raised by the CRTC relating to corporate governance and shareholder rights were addressed by Globalive during the course of the hearing; as noted above, a practice that is usually followed in matters before the Commission. Despite the changes that had been proposed to the board composition of Globalive (i.e., a board of 11 members, with four nominated by each of AAL and Orascom), the Commission remained unsatisfied, referencing Broadcast Decision 2008-69 (the BCE decision) in its determination that not only must there be a majority of Canadians on a prospective carrier's board, but that the nominees of the Canadian shareholders must be sufficient in number to offset the substantial influence of non-Canadian investors on the board. In this case, the CRTC found that in order to comply with the Ownership and Control Regime, Investment Holdco's board composition would need to be revised to give AAL five nominees, or one more than Orascom. Although the CRTC seems to have been largely satisfied by the changes to the other shareholder rights in favour of Orascom (i.e., the removal of the call right and drag-along right and changes to the various veto rights of Orascom), the CRTC did note that even in their revised form, the various liquidity rights granted to Orascom under the Investment Holdco's unanimous shareholder agreement provided an indication of Orascom's influence over Globalive.

Although Globalive largely addressed, during the hearing, the control in fact concerns that had been raised by its proposed corporate governance structure and the various shareholder rights in favour of Orascom, the issues raised by the commercial arrangements and the overwhelming level of economic participation in Globalive by Orascom remained. The CRTC noted that the Technical Services Agreement entered into between Orascom and Globalive provided Globalive with "benefits that operate as a key determinant of its success [and that] this reliance by Globalive on Orascom.defines their relationship and allows Orascom the opportunity to influence a wide range of operating and strategic decisions". The Commission was of the view that Globalive's reliance on Orascom through the Technical Services Agreement was another measure of Orascom's control. The Commission also noted that Globalive's use and adoption of a trademark belonging to an Orascom affiliate provided Orascom with influence over Globalive, as Orascom would have the power to limit how the brand could be used.

The ultimate determinative factor for the CRTC, however, seems to have been the extent of debt and equity participation by Orascom. The ownership by Orascom of approximately 65% of the overall equity of Globalive was not in and of itself sufficient for a finding of control, although the CRTC did note that when a non-Canadian investor's equity participation exceeds 50% in a telecommunications carrier in Canada, it may raise red flags with respect to compliance with the Ownership and Control Regime. Orascom had also provided, however, through its various loans, the vast majority of Globalive's total financing. The CRTC noted that "the concentration of debt and equity in the hands of a single foreign entity can create an opportunity for undue influence over the venture by that non-Canadian entity". The Commission further found that the modifications to the covenants and terms of the loans that had been made during the hearing did little to reduce these concerns. It was ultimately the Commission's view that such a significant concentration of debt in the hands of Orascom, particularly given the difficulty of Globalive in raising substantial alternate financing, served to provide Orascom with leverage over Globalive. Given Orascom's equity interest in Globalive, such a high level of debt in the hands of a non-Canadian was unacceptable.

In its findings, the Commission was clear that it considered the overall equity participation of Orascom, as well as its provision of technical expertise and the WIND trademark, to raise significant concerns regarding the control in fact of Globalive. Such concerns would not necessarily have resulted in a conclusion of ineligibility, however, assuming that the revisions to the corporate governance and shareholder rights required by the CRTC were made. The Commission noted that control in fact is only established where influence is dominant or determining. While the CRTC found that the indicia of control outlined above, taken together, were significant, the tipping point in this instance would seem to have been the level of debt financing provided by Orascom. This influence, when coupled with the other levers of control, led the CRTC to conclude that Orascom would have the ongoing ability to determine Globalive's strategic decision-making activities.

Conclusion

It was clear when first reading the Globalive documents that, even with concessions by Globalive and changes to its corporate structure in order to address anticipated CRTC concerns, a CRTC decision to approve would have represented a significant change in acceptable ownership and control arrangements. The outright finding by the CRTC that Globalive is controlled in fact by a non-Canadian has sent a strong signal that there is now a risk in presenting corporate arrangements designed to satisfy Canadian ownership and control provisions on the basis that they may be resolved with bargaining in a regulatory proceeding before the Commission. The adage that it is "easier to ask forgiveness than to ask permission" has been rejected by the Commission in dramatic and forceful terms.

The Telecommunications Act provides for an appeal to the Governor in Council (effectively the Federal Cabinet) on a petition by an aggrieved party or on the Governor in Council's own motion. Within 24 hours of the CRTC decision, the Minister of Industry Canada (who, in a separate proceeding, had found Globalive to be Canadian owned and controlled pursuant to the Radiocommunication Act), announced that there would be a review of the CRTC Globalive decision. The stage, therefore, has been set for a renewed debate on foreign ownership restrictions in the Canadian telecommunications sector. 

CRTC sets Canadian "net neutrality" framework

Canada's federal telecommunications regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), has recently released a regulatory policy decision clarifying its legislative authority within Canada's Telecommunications Act to police discriminatory internet traffic management practices by ISPs and its position in favour of net neutrality. In addition, this decision also enhances the protection of personal information collected by ISPs by seeking to “impose a higher standard than that available under PIPEDA in order to provide a higher degree of privacy protection for customers of telecommunications services.”

In this decision, the CRTC sets out some ground rules to the internet traffic management practices (ITMPs) of internet service providers (ISPs) and attempts to balance the freedom of Canadians to use the Internet for various purposes with the legitimate interests of ISPs to manage the traffic thus generated on their networks, consistent with legislation, including privacy legislation. While the CRTC has deemed it inappropriate to create bright-line rules as to which types of ITMPs are acceptable, it has set out certain ground rules that:

  • mandate ISPs to disclose their ITMPs to retail customers, including: (i) why they are being introduced; (ii) who is affected; (iii) when it will occur; (iv) what type of Internet traffic is subject to the traffic management; and (v) how it will affect an Internet user's experience, including its specific impact on speed;
  • require prior regulatory approval for ITMPs applied by ISPs to their wholesale services that are more restrictive than those they apply to their own retail Internet services;
  • require prior notice, followed by a waiting period, before implementing or making changes to ITMPs;
  • prohibit the blocking of access to content unless prior approval is obtained from the CRTC;
  • prohibit the use of ITMPs resulting in noticeable degradation of time-sensitive Internet traffic unless prior approval is obtained from the CRTC;
  • provide a venue to challenge ITMPs that are unnecessary or disproportional; and
  • protect consumer privacy interest by directing ISPs, as a condition of providing retail Internet services, not to use personal information collected for the purpose of traffic management for other purposes and not to disclose such information.

Additionally, the CRTC expects mobile wireless internet services to abide by the principles set out in this decision.