Canada: Federal Court Decision Signals Continued Uncertainty Surrounding Foreign Ownership and Control in the Canadian Telecom Sector

On Friday, February 4, 2011, the Federal Court of Canada struck down a controversial decision of the federal Cabinet that had overruled an October 2009 ruling of the Canadian Radio-television and Telecommunications Commission ("CRTC") and arguably had set a new precedent for the interpretation of foreign ownership rules affecting the Canadian telecommunications sector.

The Federal Court's decision represents another twist in a process to introduce more competition into Canada's wireless industry, raises serious questions about Globalive's ability to continue operating in Canada under its current structure and increases the pressure on the Canadian government to amend the Telecommunications Act (the "Act") in such a way so as to enhance the efficiency and competitiveness of the Canadian telecommunications sector by encouraging access to foreign capital, technology and expertise.

Globalive Wireless Management Corp. ("Globalive") bid $442,099,000 for 30 spectrum licences in the AWS spectrum auction in which Industry Canada had set aside 40 MHz of spectrum for new entrants. Globalive's bid was funded by Orascom Telecom Holding S.A.E. ("Orascom Telecom"), controlled by Egyptian billionaire Naguib Sawiris.

Following the close of the auction, which ended on July 21, 2008, Globalive was provisionally awarded the 30 spectrum licenses by Industry Canada subject to compliance with the eligibility criteria in section 10(2) of the Radiocommunication Regulations, including the requirement that Globalive be "Canadian owned and controlled". On March 13, 2009, after reviewing the ownership and control documentation submitted by Globalive and requiring certain modifications, Industry Canada determined that Globalive satisfied the ownership and control criteria in the Radiocommunication Regulations.

However, in order to operate as a telecommunication common carrier, Globalive was also required to meet the ownership and control requirements contained in section 16 of the Act.1 On October 29, 2009, more than a year after the auction and six months after Industry Canada determined that Globalive was "Canadian owned and controlled", the CRTC took the opposite view, and determined that Globalive was ineligible to provide wireless services in Canada because it is controlled in fact by Orascom Telecom, a non- Canadian. For more background on the case and information on the Globalive decision and the law governing foreign investment in the telecom sector in Canada please click here.

Cabinet, on its own motion, undertook a review of the CRTC's decision and, on December 10, 2009, overruled the CRTC, arguably setting a new precedent for the interpretation of foreign ownership rules affecting the telecom sector. Globalive launched its wireless services in Canada on December 16, 2009 under the WIND Mobile brand and since then has gained approximately 250,000 subscribers in Toronto, Ottawa, Calgary, Edmonton, and Vancouver.

Public Mobile, another new entrant into Canada's wireless sector, then applied for judicial review of Cabinet's decision on January 8, 2010, arguing that Cabinet had erred in law in deciding that the Act should be interpreted to encourage access to foreign capital, technology and experience for the purpose of promoting competition.

In quashing Cabinet's 2009 ruling, the Federal Court held that Cabinet had "misdirected itself in law" by interpreting the Canadian ownership and control requirements of the Act "in a way that ensures access to foreign capital, technology and experience is encouraged". The Court held, "[t]here is no policy objective in the Act that encourages foreign investment." Rather, the Court concluded, "[w]hat the Act does say is that telecommunications has an essential role in the maintenance of Canada's identity and sovereignty and provides a policy objective which requires Canadian ownership and control to be promoted". The Court concluded bluntly that "[i]t is for Parliament not [Cabinet] to rewrite the Act."

The Federal Court's decision raises serious questions about WIND Mobile's ability to continue operating in Canada under its current structure and increases the pressure on the Canadian government to amend the Act. As the Court issued a stay for 45 days, there is no immediate impact on the operations of WIND Mobile who is currently examining the options available to it.

The challenge for the government is how to deliver on its goal of promoting increased competition in the wireless sector while ensuring fair treatment for all participants. This may ultimately compel the government to address the legislative restrictions on foreign ownership and control in the telecom sector. However, given the effect that liberalizing foreign ownership restrictions in the telecom sector is likely to have on the Canadian broadcasting sector, some Canadians believe that Canadian cultural identity and sovereignty is at stake. With a possible federal election this spring, the government may not wish to wade any deeper into this potential political minefield any sooner than it must.


1 Section 10 of the Radiocommunication Regulations and section 16(3) of the Telecommunications Act contain the same ownership and control test.

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