Industry Committee on June 7th, 2012

[Dale Ptycia]

Just to clarify, we estimate that we intercepted about 20% of the jerseys we thought came into the country. That was based purely on the information we received from the RCMP and the Canada Border Services agents about how many packages were entering the country through the mail facility, coupled with the number of jerseys we were seizing on the street with our investigators and counsel compared to the number of jerseys we actually sold.

It was virtually impossible to do an accurate count of the actual people wearing the jerseys, but it was quite evident to us, for example, that it is easy to spot counterfeit jerseys when you're in a group of fans. Our authentic jerseys at the Olympics had the inukshuk and the five Olympic rings all in one colour. That was an emblem on the left sleeve. All the counterfeit jerseys had the same emblem, a little bit larger in size, but the rings were in the five Olympic colours.

The counterfeiters thought we were making mistakes with the authentic jerseys, when in fact they were in error, which obviously gave us a signal that a jersey was counterfeit.

As we were watching people walk into the venues across the Olympics, it was quite easy to see those numbers were quite accurate. Almost three out of four were counterfeit.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Still with Hockey Canada, governments are often criticized as imposing sin taxes, for example on alcohol and cigarettes, which drive the black market in those products.

When we look at consumers, essentially it's the price of the product that drives them to the underground market. Consumers perceive that they're paying in excess of what they need to pay, because it's available, as you know, elsewhere.

How do we or how do you convey to the people—and in some cases they don't even realize it's counterfeit—that there is value in paying a much higher price for the authentic versus the counterfeit?

[Dale Ptycia]

I'd first like to respond by saying education is always important, and we continue to educate as many consumers and other participants in the supply chain as possible. We have colleagues through the Canadian Anti-Counterfeiting Network, etc., who do a public education campaign, and so on, but that's just the tip of the iceberg.

Hockey Canada also actively engages for Team Canada products for all Canadians at all price levels. We have Team Canada jerseys at lower-priced levels at mass merchants for families under budget constraints, if you will. We have replica jerseys that are middle of the road. We also have the authentic on-ice versions for the true collector, which are obviously quite a bit more expensive.

I think other leagues and other brands mirror that approach in their retail commerce. We all try to reach out to all Canadians at all price levels and all price points.

So the excuse of trying not to support the cost might be weak at best when made by some consumers, because there are products out there at the $50 mark, there are products out there at the $100 mark, and there certainly are products out there at the $400 mark as well.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

So when we go to a discount store and we find jerseys from Hockey Canada, they're not necessarily counterfeit. We don't have to worry about that.

[Dale Ptycia]

The jerseys are generally found in bona fide retailers. We wouldn't have jerseys in discount retailers or at flea markets. The channels are relatively protected to try to ensure we're providing bona fide retailers with bona fide product. We would see a lot of counterfeit product in discount chains, flea markets, for example, online sites, etc.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Ptycia. That's all the time we have.

Madam Gallant, thank you.

Now we'll move to Mr. Regan for seven minutes.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you very much, Mr. Chairman.

Thanks, gentlemen, for coming today.

Let me start with Professor Gold. You talked about the need for building incentives for collaborations and partnerships. Over the past 15 years some government programs have in fact required for research grants that there be collaboration among different researchers across the country and have encouraged that sort of thing. Is that the sort of incentive, or can you give me some examples of the kinds of incentives you're talking about?

[Richard Gold]

Thank you for the question.

There certainly has been a move through most of the major granting agencies, including Genome Canada, which requires matching funds. It's been on a “you have to get partners” basis. I think it was a good start, but it hasn't necessarily translated into the type of innovation we're hoping for. We still don't have many of those complementary assets I was talking about.

What I am suggesting is actually something I think the government has already been contemplating. It came out of the committee looking at innovation in the fall—the Jenkins committee—moving away from the subsidies and the tax code or direct subsidies just for innovation blankly and trying to invest strategically.

I think we have to pick winners and losers. I think one of the problems is we don't. All technology is equal, and we fund whatever. When it comes to basic research, that's a really good idea. When it comes to developing a cluster, I don't think it is as good a deal.

The types of things I'm thinking about will include funding that specifically goes partially to acquiring patents. So either the research group itself creates the innovation or you buy it.

Michigan has had some success in purchasing patents in the plastics field, for example, and then anybody who locates in the state has access to it at a low cost, whereas other people don't. So the idea is to be a little bit more strategic about intellectual property management, rather than just saying come together and so on. But in doing so, I think you have to pick winners.

CRIAQ, obviously, in Quebec, would be a good example, as would the Structural Genomics Consortium. But not all consortia out there are real consortia. They're just a whole bunch of people who get together every once in a while to talk.

[Geoff Regan, Liberal, Halifax West, NS]

Let me take advantage of your mentionning winners and losers to segue to an area in which we're seeing some companies winning with a new approach to intellectual property, whereas others seem to be losing. I'm thinking, for example, of something I recently raised with Professor de Beer from the University of Ottawa, a law professor, about how some companies are kind of shooting themselves in the foot by very strictly adhering to old models. An example of that is what HBO, with the program Game of Thrones , is doing whereby they've taken a very restrictive approach to their distribution system. On the other hand, there was an article recently in the Globe and Mail about how Getty Images has gone to a different approach for promoting and getting revenue for its images by having a new kind of watermark that doesn't interfere with the main picture but has a web link in the corner that you can go to and then offer to pay. That's actually been wildly successful for them, it appears, and it's created real revenue. They are two very different approaches.

What does this tell us, in view of the fact that trying to control this kind of IP for a company is a bit like picking up mercury? It's very slippery, right? They're difficult to control—and very toxic, someone said. That's fair. Mercury would be, of course, right? But they're easily pirated.

The question is what are some guiding principles or legal structures that government could put in place that might be suited well to where the world is going in this regard and the kinds of models that are most likely to be successful in the future?

[Richard Gold]

The laws that need to be thought about are not IP laws. Our IP laws are perfectly flexible as they are. We just don't have much in terms of knowledge about intellectual property management. How do you use them?

Let me give you a couple of examples where government does go wrong.

There was a deal a while back between the Government of Canada and the universities about funding the so-called Canada research chairs and other funding agencies. The universities said that if the government did that the universities would double their commercialization and they would measure that based on licence fees, number of patents, and number of licences. The problem with that is it makes everybody look at the short term: let's just get patents out there; let's just increase them. You can always increase the number of patents. It doesn't mean any of them are useful. It doesn't mean they're used well.

What you want is strategic use. It looks increasingly as though universities shouldn't necessarily be in the patenting business. They won't make money off it. If you look at the United States, more than half either lose money or just break even on technology licensing. They're spending a lot of time and they're facing lots of litigation because of it, so their litigation costs are going up.

So the idea would be to change policies like that to say no, you don't have to go commercialize it; we want you to work with industry, within these key areas, and we'll facilitate that. A lot of it, contracting rules and so on, is going to fall within provincial jurisdiction, but it's taking away the measurements that we put on universities to commercialize.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you very much.

Mr. Page, I'm going to turn to you if I may.

I think what you've told us is a good example of how it's important to take a nuanced approach to intellectual property. In fact, the way the copyright bill has gone in relation to a company like yours and the kind of thing you are doing is that in trying to strengthen anti-circumvention measures it's in fact declawing one of our best resources against intellectual property circumvention, and that is the kind of work you do.

Can you give us some examples of how this actually works in practice? For instance, do you on some occasions talk to Microsoft or other companies and ask, "Can we have permission to mess around"—if you can put it that way—"with your software in order to work on it and develop things that will prevent problems with IP circumvention?” Is that how it works? How does it actually work in practice?

[Harry Page]

Typically we have a client—sometimes it's even my esteemed colleague here—come to us and identify that they feel someone has misappropriated their technology. Then we actually do the physical forensic work to be able to link what they have protected in their intellectual property rights with the products that people are making.

A good example of where we see the TPMs and the Copyright Act and the nuance needed for IP is around gaming, for example. Obviously there's a growing gaming community in Canada. Someone could produce a gaming console and they could actually be the legitimate author and creator of the game itself, but the physical implementation of that, the hardware and some of the software that's actually used to implement and create that game, could actually be misappropriated by somebody else, actually knowingly. Perhaps that could include some of the algorithms for running the images, some of the hardware that is embodied into the console itself.

That would allow the particular author of that to actually hide behind the TPM, to say the TPM prevents you from looking at the underlying implementation of my game, and in violating the anti-circumvention provisions it might be questionable to use anything you find in allowing the original intellectual property holder of the underlying physical technology to enforce their rights. We feel that it could hinder the investigative process that would allow our clients to actually implement their IP rights.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Page.

We went over substantially, but I thought that answer would be something everybody wanted to hear.

Now we're on to five-minute rounds, beginning with Mr. Carmichael.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Chair, as we shorten up here.

The testimony from our witnesses today has been very interesting, and I thank you all for your contribution to this study, which I hope will benefit the country.

Mr. Tortorice, we talked today about IP and some of the issues around reverse engineering and some other things. Talk to, if you would, your perspective on Canada's IP regime. Are we doing it right? Are there gaps we need to pay strict attention to right away? Who else is doing it? What other regimes and what other governments are doing it that we might look to, to take an example of best practices?

[Chris Tortorice]

Thank you for that.

There are actually a lot of things we're not doing quite right, and I think our trading partners are reminding Canada of that on a regular basis, whether that's the U.S. government, whether that's the European Union in the CETA negotiation, or whether it's through Canada attempting to gain admission to the Trans-Pacific Partnership negotiation. There has been some reluctance on the part of some of the other countries in that negotiation to allow Canada to participate.

I've highlighted a few of the things I think are gaps for Canada. Obviously Bill C-11, once it's passed, will take us a long way towards the gaps in copyright. I would point out, when it comes to anti-circumvention measures with respect to TPMs, there are a number of exceptions in the act. One of them includes getting consent, which is something that was just discussed. But that list of exceptions isn't closed. So I would say there's ample opportunity in the regulatory process, if different organizations think there are gaps, to add other exceptions. I think there's room there to make that work for Mr. Page and companies like his.

On the trademark side, I've identified some of the problems we have. We don't have a specific offence for counterfeiting in Canada. There are gaps between offences in the Criminal Code and what the Copyright Act and Trade-marks Act say. We need to bring those closer together to make sure those systems work. When you go and try to enforce your rights in Canada, you're quite often dealing with two different sets of prosecutors—provincial and federal. You're dealing with two different sets of laws, and a lot of times the prosecutors don't want to take the case because it's not in their jurisdiction or it's not what they're familiar with. We have a long way to go on the enforcement side as well.

As far as other countries you asked about go, Japan is a good example of a country with an IP crime task force with people right up to the president being responsible for leading their efforts in battling counterfeiting. Some of the recommendations in the paper on counterfeiting identify those best practices. There are lots and lots of those best practices in there. I'd commend them to you.

[John Carmichael, Conservative, Don Valley West, ON]

Good. Thank you. I'm sure we'll have an opportunity to examine some of them.

I have a bunch of questions for you here, but I wonder if you could just talk about the impact of counterfeiting on Microsoft, on your company specifically. You talked about viruses. You talked about the bad guys and their intent with regard to identity theft. What's the dollar cost? How significant an issue are you dealing with every day?

[Chris Tortorice]

Well, I can't talk about numbers globally. There are estimates that put the software industry's losses to counterfeiting and piracy each year at over $60 billion. For the companies that make software, develop it, manufacture it, and distribute it, if they're not getting paid for it, that's money they can't put back into development, and money they can't put back into employing people, and money they can't put forward towards developing new products. So it definitely has a major impact on software companies.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you.

Mr. Ptycia, could you talk quickly about your issue with counterfeit product, which is obviously significant? Who's doing it right, from your perspective? Is there any other area we should be looking at in order to plug the gap and facilitate some corrections to your industry?

[Dale Ptycia]

What I might be able to do is to echo Chris's remarks about enforcement. We find the remedies or the tools that are available to us civilly, and even through the respective acts, very weak and in need of a lot of shoring up and support and momentum from all groups across the country and across government to help us find those solutions.

Thank you very much.

[The Chair, Conservative, David Sweet]

Thank you.

Now we go to Mr. Masse, for five minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

I'll start with Mr. Ptycia and Mr. Tortorice.

I'm just curious. Where are the counterfeit products that undermine your products coming from, and what ports of entry are used? Do you know? Are they coming from Asia via the U.S. into Canada, or are they going into Vancouver or Montreal or Halifax? Where are they coming from?

[Chris Tortorice]

Typically, things don't come through the U.S., because they do a better job of dealing with counterfeit shipments at the border than Canada does. As is the case with Canada, in the U.S. it's hit and miss as well. There's a good example from the port in Prince Rupert, B.C. The CBSA group there said they were not going to inspect any containers that went outside of their region any more, and when they decided to do that, that meant every container went through unchecked.

There's a project the RCMP in the Toronto North detachment have been doing called Project O-Scorpion—I think because it's Division O of the RCMP—and in just a seven-month period they've found containers with close to $70 million worth of counterfeit goods. They're just scratching the surface.

Now, for our company, it's not so much the containers as it is the small packages in the mail and courier services. It's very easy to do business over the Internet. It's easy to do business with people overseas. When you do business with people overseas and you place an order, those shipments come in through the mail and through a courier. Less than 1% of things coming in get looked at by CBSA, and counterfeit product is flooding into the country that way.

[Dale Ptycia]

Just to support some of Chris's comments, we see that pipeline through the Internet coming from overseas as a primary source of jerseys. We've worked closely with the criminal intelligence analytical unit from the Canadian Anti-Fraud Centre in North Bay. They have a project in place now—if you're not familiar with it—through which they're trying to hit the money of the counterfeiters overseas. They're working with the Visas and the MasterCards through their merchant accounts. Through their merchant account agreement, if there's any breach of the agreement, their merchant account can be suspended indefinitely. So once the folks at the Competition Bureau are able to identify suspect product on the Internet, we make a purchase. We inspect that purchase once it arrives in Canada, and confirm it's counterfeit. Then they'll go back and spend some time with the folks at the merchant account, whether it's Visa, MasterCard, or PayPal, tell them it's counterfeit, make a declaration, and those folks will then suspend the merchant account of the exporter in Asia.

Eventually we hope to try to stop it at the money source, and we see those sites coming down. For example, last fall, through our pilot project, between August and September, we actively shut down over 75 sites out of China based on counterfeit Team Canada product only.

There are hundreds of other sites that are doing other counterfeit product, from fashion brands to software brands, etc. But this is just one small project led by Mr. Barry Elliott that has found a solution outside of the formal cross-border legislation, to help us fight counterfeit products.

[Brian Masse, NDP, Windsor West, ON]

Is most of the material coming across going through Canada Post's courier service, or are mainly private courier services being used? How do we regulate that? Because there would seem to be an opportunity to cut that off there too.

I agree, and in the past this committee has actually recommended that CBSA be empowered for the seizure, but the government has not acted on that recommendation. We've done that, and we've seen no action on that and just cuts at the border.

Is it coming through Canada Post or private couriers? Where is this coming from predominantly?

[Dale Ptycia]

We see primarily the flood coming through the mail system, and there is probably less inspection of mail parcels than there is of commercial packages in commercial containers. It was only when one or two officers observed that many packages of 10, 20, 30, or 40 jerseys were going to the same address with different names that it became suspicious.

As they mentioned to us, they're sometimes overwhelmed with the volume, and they don't have enough front-line resources to deal with the volume that comes through the mail system.