Canada: Avoiding the Pitfalls – Application of Extra-Territorial U.S. Laws to Canadian Businesses

Article by Navin Joneja, ©2006, Blake, Cassels & Graydon LLP

The consequences of being subject to U.S. laws and the U.S. legal system – including its features of litigation, jury trials and high damage awards – can place a Canadian company unwittingly into a high stakes legal battle in the United States.

When Waterloo, Ontario-based Research In Motion (RIM) became entangled in its highly-publicized patent dispute with Arlington, Virginia-based NTP (NTP, Inc. v. Research in Motion Ltd.) (RIM case), it served as a stark reminder that the reach of U.S. laws and legal system can extend beyond the 49th parallel. Almost every sizeable Canadian company nowadays has some connection to the U.S. – through either U.S. ownership or investors, U.S.-based suppliers or a U.S. customer base. In addition, smaller Canadian companies (as RIM once was) often have their sights set on the lucrative U.S. market. As a result, Canadian businesses must be mindful of the different ways that U.S. extraterritorial laws can affect their operations. By the same token, Canadian subsidiaries and branches of U.S.-based companies need to ensure that conduct in Canada does not expose the entire company to legal risk.

Terms such as "jurisdiction", "sovereignty" and "extraterritoriality" have traditionally generated little concern for most lawyers. Seminal cases such as R. v. Libman; Morguard Investments Ltd. v. De Savoye; and Tolofson v. Jensen provide considerable guidance when dealing with a contract, insurance or tort dispute. However, there have been a number of recent developments in a number of more specialized legal fields which highlight the growing importance of these concepts for Canadian businesses.

A number of U.S. international trade sanctions regimes are also extraterritorial in nature and therefore affect Canadian companies’ ability to do business in third countries. The U.S. Cuban Assets Control Regulations and the U.S. Cuban Democracy Act, for example, prohibit virtually any dealings with or in Cuba by not only U.S. companies, but also their Canadian subsidiaries. Canada’s response was to enact the "1992 Blocking Order" and a 1996 amendment to it under the authority of the Foreign Extraterritorial Measures Act. As a result of the U.S. and Canadian legislation, Canadian subsidiaries of U.S. companies are often left to deal with conflicting U.S. and Canadian legal requirements: if they fail to comply with their U.S. parent’s instructions, they risk violating U.S. laws; and if they do comply, they risk violating the Canadian blocking statute.

In the competition/antitrust law area, for example, the extraterritorial reach of U.S. antitrust laws against conspiracies, abuse of dominance and anti-competitive agreements is codified in the U.S. Foreign Trade Antitrust Improvements Act, which U.S. Courts have traditionally taken an expansive approach in interpreting. Most recently, in F. Hoffman – LaRoche Ltd. v. Empagran S.A., the U.S. Supreme Court unanimously held that foreign claimants could not sue in U.S. courts for conduct that independently caused harm outside of the United States. In so doing, however, the U.S. Supreme Court confirmed that U.S. "courts have long held that application of [U.S.] antitrust laws to [non-U.S.] anticompetitive conduct is nonetheless reasonable" where anti-competitive effects are felt in the United States. Accordingly, plaintiffs could sue (for treble damages) under the much more onerous U.S. antitrust laws, based on conduct that occurred entirely on Canadian soil.

With respect to intellectual property law, the RIM case is likely to have a significant impact on Canadians doing business in the U.S. RIM challenged NTP’s interpretation of s.271(a) of the U.S. Patent Act, arguing the statutory requirement that all steps of the allegedly infringing activity take place "within the United States" was not satisfied on the basis that the key component to its wireless e-mail system (the BlackBerry Relay) was located in Canada. The U.S. Court of Appeals for the Federal Circuit disagreed. The Court found that, even though the BlackBerry system was not located in the U.S., it was "within" the U.S. "because all of the other components of RIM’s accused system are located in the United States, and the control and benefiting use of RIM’s system occur in the United States." The U.S. Supreme Court denied leave to appeal, thus raising several questions about the extent to which Canadian-based companies offering electronic and data services in the U.S. unknowingly subject themselves to U.S. intellectual property laws.

Finally, in the privacy law area, as a result of the amendments to the U.S. Foreign Intelligence Surveillance Act by the USA Patriot Act, U.S. authorities may order a U.S.-located corporation to produce records held in Canada that are under its "control". Some U.S. courts have determined that under U.S. law, control of records exists whenever there is a U.S.-Canadian corporate relationship, regardless of the actual contractual or practical arrangements, thus exacerbating the extraterritorial nature of the U.S. legislation.

These developments in fields such as international trade, competition, intellectual property and privacy suggest that lawyers and their clients need to be mindful of the myriad ways in which U.S. laws can apply extraterritorially in Canada.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.