Canada: E-Commerce Comes of Age: Legal Challenges Continue

Although e-commerce has been around for about a dozen years, in many ways it really only came into its own in 2006. If you consider that online sales still account for only one per cent of all retail purchases, you might wonder whether e-commerce has actually progressed all that much. However, keep in mind that about another 20 per cent of offline transactions start with consumers conducting research over the web.

Consider also the explosion in so-called ‘social networking’ sites, like These sites generate huge online communities centred on a common activity. Particularly for the younger generation (18–24 years old), participating in these sorts of online vehicles is an important part of their social makeup. And notice the commercial advertising that appears throughout such sites - clearly there is gold in capturing these youthful eyeballs. While still a relatively small percentage of the total ad spending budget, online advertising is growing incredibly quickly.

Selling Bits over the Internet

The real explosion in 2006 in online selling, however, has occurred in digital product distribution, such as, for music. Just a few years ago, the music industry was reeling from the effects of unauthorized music downloads. Yet in 2006, more legitimate online music sales happened than illegitimate downloads.

A big part of this story is Apple, whose iTunes online music store experienced its one billionth download in 2006. The low price per track in this online business model is paying huge dividends.

The online exploitation of other digital products is also exploding. YouTube is doing for video what Apple’s iTunes and iPod has done for music. This revolutionary site serves up 100 million videos per day. No wonder Google paid $1.6 billion for YouTube in 2006. And then there’s the phenomenal Google story. At one point in 2006, its market cap surpassed IBM’s.

E-Legal Challenges

Over the past decade, Canadian legislatures and courts have done a reasonably good job of addressing the legal challenges posed by this explosion in e-commerce. We now have modern e-commerce legislation that gives legal support for certain types of electronic information. Evidence laws have been amended to provide that copies of the digital information in computers are essentially admissible in court if the computers themselves can be shown to have operated properly. More recently, the Canadian Standards Board has issued a standard that provides a very helpful guideline of the steps organizations need to take to be able to show that their computers operated properly.

However, that’s not to say that all legal challenges posed by the e-commerce/ Internet revolution have been resolved. For example, the design of a seller’s website is critical and must ensure that the buyer’s web experience flows in a manner that results in enforceable offers and acceptances. Recent case law gives guidelines on how to do this, but vendors must still apply thought and creativity in equal doses if they are to achieve effective online terms and conditions that bind purchasers.

Online Criminal Behaviour

Another challenge is ‘click fraud.’ Criminals have shown a recurring propensity to abuse just about every advance in e-commerce technology and business processes. Thus, certain bad apple employees at some companies have been known to click on the ads of their competitors (without any intention of buying anything), for the sole purpose of driving up the competitor’s advertising costs. This strategy works because most online ads are paid for by a fee that is generated every time an Internet user clicks on the ad. Some criminals automate this fraudulent clicking so that huge numbers of click-throughs are replicated.

Identity theft also has become a major challenge in the e-commerce world. It is estimated that in Canada alone, the personal information of 11,000 individuals was compromised (in general, linking a name to a social insurance number constitutes a compromise). A good percentage of these instances happened through misuse of information given over the Internet.

Data theft, particularly of personal information, has also become a material issue in our digital, networked world. Determined hackers often are able to overcome the best computer security measures available, and gain access to personal, financial or health information. In such cases, the organizations victimized by this criminal behaviour need to have an established plan to deal with the many resultant legal and public relations issues. One threshold question is whether, and when, the organization should disclose the criminal event to the data subjects whose information may have been compromised. Currently, this is one of the toughest questions facing e-commerce and privacy lawyers, particularly in those jurisdictions that have not legislated a disclosure requirement.

Email Legal Challenges

On a less problematic note, so much email is now generated that litigators and judges have collectively developed so-called ‘e-discovery guidelines,’ because the time, effort and expense of a full production of all electronic records in a litigation are becoming prohibitive. The guidelines achieve several goals, but none more important than having opposing counsel sit down at the beginning of a case and agree to what e-items will be produced by each side, and how.

The threshold challenge with email is that people continue to say the most startling things in emails. And the problem is that once something silly is said in an email, it is virtually impossible to get rid of. Thus, an important role of corporate counsel in our digital, networked world is to raise awareness of this phenomenon and to encourage email best practices. Often, this means picking up the phone and having a real-time conversation, rather than reducing some sensitive message to an email, that subsequently will be taken out of context. Remember what our parents used to tell us (paraphrased for the Internet age): "If you don’t have anything nice to say in the email, don’t say anything at all."

Intellectual Property Law Challenges

On the intellectual property front, e-commerce presents the law with a number of continuing conundrums. For example, the application of patent law to Internet-based business models continues to intrigue and bedevil tech lawyers and clients alike. And while years ago Internet-based patent risk was thought to be restricted to the U.S., these sorts of patents are now coming to Canada. In an example from early 2006, Data Treasury, a holder of patents on network-based cheque imaging processes, obtained its first Canadian patent (based on a U.S. predecessor), a development that has Canadian financial institutions on high alert.

With respect to copyright, the Supreme Court of Canada released its decision in the Robertson case in 2006, concluding that a paper-based newspaper is no longer a newspaper when its articles are put online in a database. The newspaper’s licence to freelancers’ articles for the physical edition of the paper thus does not extend to the online database version of the articles. Consequently, freelancers must be paid extra for that specific online news. The next online copyright battle will be fought over the downloading of ringtones, which has ballooned into a booming business in a very short time.

A final IP issue worth noting is that more and more of the intellectual property created to run our software systems and Internet sites is now developed by companies located in places like India, courtesy of the outsourcing/offshoring phenomenon (again facilitated by the Internet revolution). Therefore, it is imperative that you understand the nuances of India’s copyright law if, for example, you want to end up owning the software code developed by your Indian supplier. A certain rule in India’s copyright law can give the original author ownership of the works authored by him or her unless the agreement with the author overrides this rule. These are the sorts of legal challenges that must be addressed in our e-commerce enabled world.

However, it should be noted that in spite of their novelty, most of the legal challenges presented by e-commerce can be managed well with forethought and a healthy dose of contracts, technology, common law or law reform.

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.

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