DISPUTE RESOLUTION NEWSLETTER

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1 FALL 2011 AN OVERVIEW OF BUSINESS DEFAMATION DISPUTE RESOLUTION NEWSLETTER Traditionally, a reputation carefully fostered over decades could be lost in minutes through a defamatory comment. The Internet accelerates this destruction to mere seconds. Communicative attacks on businesses come in all flavours. A few hypothetical examples: a cosmetic surgery clinic accuses a rival of having a higher surgery complication rate; a disgruntled customer sets up a copycat website based on a web address similar to the name of a company, that features shoddy visuals and inaccurate information; an environmental activist falsely accuses a company of polluting a river; a corporate press release accuses a rival of stock manipulation; a company is accused of not owning the intellectual property rights to the movie it is distributing, and a threat is made to sue any purchasers of the show; a blogger accuses a mining company of salting core samples and making false statements about preliminary exploration results in an area thought to be rich in minerals. A swift legal response can help to counteract the harm caused by such attacks. Recent cases confirm that the law of defamation protects the reputations of corporations and businesspeople as well as other individuals. Defamation is the intentional publication of a false and harmful statement. A publication is defamatory if it has the tendency to lower the reputation of someone in the estimation of reasonable persons in the community. IN THIS ISSUE 1 An Overview of Business Defamation David A. Crerar 5 More Protection from Defamation Liability for Website Owners Casey L. Leggett David A. Crerar Michael A. Skene 7 British Columbia Court of Appeal Broadens CGL Coverage for Defective Products David Claassen 9 Remedies Under Canada s Foreign Investment Protection Agreements with Latin American States J. Cameron Mowatt

2 2 DISPUTE RESOLUTION NEWSLETTER FALL 2011 Generally, to succeed in a defamation claim, a plaintiff must prove three things: 1. Is the statement defamatory? A statement is defamatory if is harmful to the trading reputation of the company. An attack on the products or services of a company is only defamatory if it attacks the integrity, competence or other reputational value of the business. It is the overall effect of the statement that matters. If something disreputable is said about the company in one part of a statement, but is qualified or corrected in another, the overall effect may not be defamatory. 2. Does the statement refer to the plaintiff? The issue is not whether the defendant intended to refer to the plaintiff, but whether the people who read or hear the statement would reasonably understand it to refer to the plaintiff. The actual recipients of the defamatory statement must have associated it with the plaintiff. Generally, a defendant will only be responsible for their own defamatory statement and not for republication by others, unless the defendant requests or authorizes someone to communicate defamatory remarks to others, the person to whom the original publication was made was under a moral, legal, or social duty to repeat or publish the words to someone else, or the republication was a natural and probable consequence of the original publication. It is no defence that one is merely repeating someone else s defamation. Repeating a statement has the same legal consequences as making it in the first place. The Supreme Court of Canada has very recently confirmed that, generally, providing a hyperlink to a website on which defamatory material is posted will not make the person providing the hyperlink liable for defamation (see More Protection From Defamation Liability for Website Owners, p. 5). If, however, the person providing the hyperlink adopts or endorses the contents of the hyperlinked defamatory page as their own, they may be liable for republishing the words themselves. DEFENCES A business may be sufficiently identified even though it is not named, where a reference is made to something or someone over which it exercises control or for which it has some responsibility, for example, its directors or employees. 3. Was the statement published? The essence of publication is communication of the defamatory statement to a person other than the plaintiff. Every instance of repetition of a defamatory statement is a separate wrong, with a separate potential claim resulting from it. This has important significance for limitation periods, which may restart years after the initial publication. Truth (also known as justification ) is a complete defence to a claim for defamation. The defendant must prove that their statement was true. The test is whether the published statements are substantially true in the setting, context and circumstances in which they were used. The defence of fair comment protects statements of opinion. It permits a person to comment on a matter of public interest, ranging from an attack on a politician s competence to a scathing restaurant review. The Supreme Court of Canada has recently significantly broadened the defence. The test now only requires that the opinion be one that anyone could honestly have expressed, including a person prejudiced, exaggerated or obstinate in his views.

3 3 The defence of absolute privilege protects communications of traditionally special importance, where complete freedom of communication is considered crucial for society. Common examples are statements made in Parliament or court. The defence of qualified privilege applies where the defendant has a legitimate interest or a duty legal, social, or moral to communicate information, and where the recipients of the communication have a corresponding duty or interest to receive it. It is sufficient that the defendant honestly and with some reason believed that such an interest or duty existed. In such circumstances, the defendant can get it wrong and still be protected from liability, because society does not wish to chill such communications. Occasions of qualified privilege in business include employee reference letters, credit reports and warnings issued by a company about the potential dishonesty or dangerousness of an employee or customer. The Supreme Court of Canada recently confirmed a new defence of responsible communication on matters of public interest. To establish it the defendant must prove the publication was on a matter of public interest and was responsible, in that the defendant showed diligence in trying to verify the allegations, having regard to all of the circumstances. To qualify as a matter of public interest, the public must have some substantial concern about the subject, either because it affects the welfare of citizens or because it has attracted considerable controversy. Almost any statement concerning a business activity with a potential public effect could be protected, if the defendant exercised reasonable care in making the statement. This defence is not only available to professional journalists, but is anyone who publishes material of public interest in any medium. It extends to bloggers and other online media. The defences of fair comment and qualified privilege will be defeated if the defendant was predominantly motivated by malice, or if the publication was excessive in terms of communication or distribution. Malice is shown where the defendant published a falsehood deliberately or recklessly, without regard to its truth or falsity, or to advance an ulterior purpose rather than for the sake of the social purpose protected by the qualified privilege. This ulterior purpose must be the dominant motive for the defamatory publication and is usually the desire to injure the person who is defamed. In a business context, the fact that the plaintiff and a defendant are bitter competitors will be helpful in leading to an inference that the defendant made the communication for the purpose of harming the plaintiff and improving its own economic interests. The defendant may also lose a qualified privilege defence if the communication is sent to too many people, or contains additional statements unnecessary to achieve the social purpose of protecting the kind of communication in question. The information communicated must be reasonably appropriate in the context of the circumstances existing on the occasion when that information was given. DAMAGES Traditionally, courts have treated individual plaintiffs and business plaintiffs very differently in awarding damages. A business plaintiff could generally only recover a nominal amount unless it could show the defamation had a direct effect its business: harm to its credit, or loss of customers or sales. Recent case law indicates, however, that a corporation may now recover damages for injury to its reputation without proof of specific business loss. That said, potential corporate defamation plaintiffs should be cautioned that, absent proof of specific business loss, damages will likely be modest. Where the defamatory words are likely to produce a general loss of business, damage to loss of earnings or customers may be inferred. It is not necessary to prove a direct link between the loss

4 4 DISPUTE RESOLUTION NEWSLETTER FALL 2011 of specific contracts and the defamatory publications. Canadian courts have noted that Internet-based defamation holds the potential for much greater harm, and thus may warrant larger damages awards. STRATEGIC CONSIDERATIONS There are a number of strategic considerations a business should keep in mind when dealing with disparaging statements about it. When a business suspects that a defamatory statement has been made, it is prudent to adopt a multi-pronged response, focused on preserving customers and evidence. Websites on which defamatory items appear should be printed and preserved and all copies preserved. Employees with likely exposure to customers or members of the public who have seen the defamatory publications should be instructed to keep precise and accurate notes about all inquiries and comments that they receive about them. They should be provided with a script to counteract the defamatory claims. It may be useful to set up a phone line for concerned customers to ask questions about the statements. A demand letter to the publisher of a defamatory statement should provide sufficient detail to establish the credibility of the complaint, as well as to allow the recipient to investigate the defamation and take steps to stop further statements. All, or a selection of, the falsehoods should be quoted or paraphrased, and their falsity explained. In drafting the demand letter, one should consider the likely response, and make sure that the business does not suffer insult added to injury by a refusal to comply with an unreasonable demand. all websites and other locations. The letter may demand a listing of all places the defamatory statement was published, and to whom the statements were made. It will typically demand that the individuals or employees making the defamatory statements be specifically told that such statements must not be made, and could result in personal liability. Finally, the demand letter should seek reassurances that no further defamatory statements will be issued. Caution must be exercised with respect to a demand for a retraction or an apology because these may have the detrimental effect of reminding people of the original defamation. CONCLUSION Attacks on reputation, products, or personnel of a business require a rapid business response. They may also require a rapid legal response. As set out above, this area of law is full of complicated pitfalls, and errors in made in the early stages of a crisis can have lasting negative ramifications in the business s struggle to retain and regain its damaged reputation. This article is very much a broad and high-level survey of the law. Because defamation claims turn primarily on their unique facts, it is imperative that a business obtain careful legal advice as part of any comprehensive business reputation rehabilitation strategy. A typical demand letter will ask for confirmation that the defamation will not be repeated, that all copies of the defamatory statement have been retrieved and destroyed, and that copies of the defamatory statement have been removed from dc David A. Crerar dcrerar@blg.com

5 MORE PROTECTION FROM DEFAMATION LIABILITY FOR WEBSITE OWNERS 5 The Supreme Court of Canada has just issued a judgment on the increasingly important issue of Internet defamation, in an appeal from a decision discussed in Dispute Resolution s Winter 2010 edition. The decision is vital to every person and business that publishes material on the Internet or operates a website. The judgment is good news to everyone who uses the Internet, confirming that just posting a hyperlink does not make a website owner or author liable for publishing defamatory material found on the hyperlinked website. Only when a hyperlinker presents content from the hyperlinked material in a way that actually repeats the defamatory content, should that content be considered to be published by the hyperlinker, leading to potential liability. Almost everyone who plays a role in writing, publishing or distributing a defamatory article may be found liable for defamation. It is not generally a defence that you re only repeating what another person originally said. The plaintiff in a defamation lawsuit must prove, among other things, that the defendant published the defamatory words. When the offending words are directly placed or quoted in a newspaper or on a website, publication is obvious. But what if the website does not directly publish the offending words, just provides a hyperlink to another website? The Supreme Court of Canada concluded that a reference to the existence or location of defamatory content by hyperlink, without more, is not publication of that content, and therefore the hyperlinker cannot be found liable. However, individuals may be liable for hyperlinking if the way they refer to content conveys defamatory meaning or shows they have adopted the defamatory statement as their own. The Supreme Court added that this can occur when the hyperlinker repeats defamatory content from a secondary source. The following are hypothetical examples: Likely publication and potential liability: Click here to learn the truth about Mr. Smith s history of fraud and corruption. As discussed in more detail in this article: Mr. Smith is fraudulent and corrupt. Unlikely publication: As shown here, Mr. Smith s business practices have been the subject of some (unproven) criticism and litigation. Some have said that Mr. Smith is corrupt: hyperlink For more information on Mr. Smith s business practice, we invite you to follow this interesting hyperlink to Jane s blog. Mr. Smith s restaurant is one of the best in Vancouver according to this website [website contains link to a defamatory article about Mr. Smith s business practices] Note that in this case one of the hyperlinks was a shallow hyperlink, which takes the reader to a

6 DISPUTE RESOLUTION NEWSLETTER FALL webpage where articles are posted. Another was a deep hyperlink, which takes the reader directly to an article. Both shallow and deep hyperlinks require the reader to click on the link to be taken to the content, and both are captured by the principle set out by the Supreme Court. This case did not, however, deal with embedded or automatic hyperlinks, which automatically display the content of another publication when you scroll over them. These types of hyperlinks may not be captured by the same principle, and could potentially make the hyperlinker liable for the contents of the defamatory publication they reference. The plaintiff in a defamation action must also prove that the offending material was received and read by someone. This is also fundamental to whether it is appropriate to sue in a given jurisdiction. A plaintiff suing for defamation in British Columbia must prove that at least one person in British Columbia read the offending material. In this case the article providing the hyperlinks had been accessed a total of 1,788 times. But it was not clear whether anyone accessing the article had actually clicked on the hyperlinks to the offending material. It was not clear how many of these hits came from independent or repeat visits. It was not clear how many came from humans or from information-gathering Internet robot software. Nor was it clear whether any of the readers were in British Columbia. In those circumstances, the Court of Appeal for British Columbia had found that the bald fact that there was a certain number of hits on the website article did not prove that anyone had actually clicked the hyperlink and read the defamatory article. The Supreme Court of Canada did not overturn this finding, and one of its judges endorsed it. So the plaintiff failed to prove that anyone in British Columbia had read the article, and the British Columbia courts had no jurisdiction to hear the case. This decision provides useful guidance for Internet participants, and rules out the possibility that the simple act of hyperlinking is publication. But it also confirms that each case will turn on its own facts, including the wording and tone of, and placement of the introduction to, the hyperlink, about whether the manner in which content is referred to conveys defamatory meaning. A website owner or manager would be wise to seek legal advice before hyperlinking to a potentially defamatory website. Otherwise they risk a finding of publication and liability, just as if they were the author of the offending material. Casey L. Leggett cleggett@blg.com David A. Crerar dcrerar@blg.com Michael A. Skene mskene@blg.com mk

7 7 BRITISH COLUMBIA COURT OF APPEAL BROADENS CGL COVERAGE FOR DEFECTIVE PRODUCTS On April 12, 2011, the British Columbia Court of Appeal released the first appellate decision in Canada dealing with a commercial general liability (CGL) policy since the Supreme Court of Canada s September 23, 2010 decision clarifying CGL coverage (discussed in Dispute Resolution s Fall 2010 edition). It appears to have significantly broadened the scope of CGL coverage for loss of use of the insured s products. In this case a customer placed an order for printed plastic bags, to fill with soil and manure and sell to Canadian Tire. The manufacturer supplied over 1.1 million bags. The customer began to fill the bags, but quickly discovered that the ink was coming off them, making them unreadable and mixing with the soil and manure, making them potentially unusable as well. The manufacturer provided the customer with new bags and it used them to meet its commitments to Canadian Tire. The customer then sued the manufacturer for $784, in losses, arising from removing the materials from the defective bags and disposing of them, and the loss of about 10% of the soil and manure in the salvaging process. The manufacturer settled that lawsuit and then claimed indemnity from its insurer. The manufacturer s CGL policy was relatively standard. It provided that the manufacturer had coverage for property damage due to an accident or occurrence. It defined property damage as physical injury to or physical destruction of tangible property, including loss of use thereof, or loss of use of tangible property that has not been physically injured or destroyed. The trial judge ruled that the policy covered only the value of the lost soil and manure, about $12,000. The manufacturer appealed. In between the trial decision and the appeal being heard, the Supreme Court of Canada decided that there was nothing in the terms property damage or occurrence in CGL policies that restricted their application to a third party s property, rather than the insured s property. As a result, it became clear that property damage could include damage to any tangible property. In light of that, the insurer conceded that the manufacturer s claim was for property damage, because its faulty bags were injured and the customer lost the use of them. As well, the insurer conceded that the faulty workmanship that caused the defective bags was an accident or occurrence within the meaning of the policy and resulted in property damage to 10% of the customer s soil and manure. But, despite those concessions, the insurer argued that the policy s work and product exclusion excluded the manufacturer s claim. That exclusion stated that the policy did not apply

8 8 DISPUTE RESOLUTION NEWSLETTER FALL 2011 to claims for property damage to goods or products manufactured or sold by the manufacturer. The insurer argued that the losses suffered by the customer was caused by its loss of use of the damaged bags and that the exclusion of the manufacturer s claims was consistent with the general purpose of liability coverage and the own product exclusion. The Court of Appeal rejected this argument, concluding that, while the clause excluded claims for damage to the manufacturer s bags, it did not exclude compensation for the customer s costs of separating those bags from its soil and manure, repackaging it in different bags and salvaging the old soil and manure later. The Court found that the clause did not exclude coverage for claims that flow from the manufacturer s defective work or work product. It excluded only coverage for property damage to goods supplied by the manufacturer. To hold otherwise, according to the Court, would be a perversion of the Supreme Court of Canada s decision. However, the Court rejected this argument too, concluding that it was clear that the 10% of the soil and manure that had remained in the defective bags was physically injured or destroyed, at least in the sense that it had ceased to be useable for its intended purpose. This decision of the Court of Appeal about the work and product exclusion appears to broaden CGL coverage for damages caused by defective products supplied by insureds. If the defective product costs money to replace and repair, or causes damage to other property, it appears likely that the work and product exclusion will not bar coverage, and the insurer will be required to indemnify the insured for these amounts. The insurer also argued that the work performed exclusion in the policy, which stated that there was no coverage for claims arising from the loss of use of tangible property that was not physically injured or destroyed by the failure of the manufacturer s products or work performed, operated to exclude the manufacturer s claim. dc David Claassen dclaassen@blg.com

9 REMEDIES UNDER CANADA S FOREIGN INVESTMENT PROTECTION AGREEMENTS WITH LATIN AMERICAN STATES 9 More than 2,300 bilateral investment treaties (BITs) have been negotiated since World War II. The United Kingdom, Luxembourg and the Netherlands were leaders in this field, each negotiating over 100 BITs with developing countries. Canada was a relative latecomer to investment treaty scene, with only four foreign investment protection agreements (FIPAs in Canadian parlance) in force before the negotiation of the North American Free Trade Agreement (NAFTA). When Canada, the United States and Mexico incorporated the terms of a typical BIT in Chapter Eleven of the NAFTA, three large neighboring economies agreed for the first time to give broad investment protection to each other s investors, including national treatment, most-favored nation treatment, treatment in accordance with international law and protection from direct and indirect expropriation. Importantly, the NAFTA states also agreed to allow each other s investors to make direct claims against them for compensation for breaches of those rights, either under the auspices and arbitration rules of the International Centre for Settlement Disputes (ICSID) or by ad hoc arbitration under the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). Canada now has 27 FIPA s in force, and 20 more under negotiation or awaiting entry into force. There are seven FIPAs plus four free trade agreements (FTAs) containing FIPA protection with Latin American states. FIPAs by year of entry into force: Argentina 1993 Ecuador 1997 Venezuela 1998 Panama 1998 Uruguay 1999 Costa Rica 1999 Peru 2007 FTA s by year of entry into force: NAFTA (Mexico) 1994 Chile 1997 Peru 2009 Colombia 2011 Investor-state arbitration has seen a massive increase over the past 15 years, beginning in 1996 with the first cases under NAFTA Chapter Eleven. As investor-state claims rarely seek compensation of less than US$10 million and very often exceed US$100 million, the growing number of claims has been a matter of considerable concern to the

10 10 DISPUTE RESOLUTION NEWSLETTER FALL 2011 states involved, particularly where their fiscal resources are limited. The treaty claims experience in Latin America is heavily weighted to three states Argentina, Venezuela and Ecuador which together account for more than 90% of the more than 110 treaty claims initiated to date in the region. Argentina alone has faced over 50 claims, most arising from fiscal measures implemented in response to the collapse of its economy in Argentina also faces judgments and ongoing actions in the United States, Germany and Japan by bondholders seeking to recover the face value of dollar-denominated bonds. In the meantime, foreign investors which have won arbitral awards against Argentina remain unpaid. have expressed discontent with the investorstate arbitration regime and have renounced the ICSID Convention. As the Canada-Ecuador FIPA provides for both ICSID and UNCITRAL arbitration, Canadian investors will remain protected under that agreement. Canada does not have a FIPA or FTA with Bolivia. In addition to claims arising from expropriation of natural resources, Canadian resource sector investors may find it necessary to consider FIPA claims arising from interference by local governments. A clue can be found in an unusual provision in the investment chapter of the recent Canada-Colombia FTA: ARTICLE 816: CORPORATE SOCIAL RESPONSIBILITY Although Venezuela first sought to settle claims of foreign investors whose business assets were expropriated or subjected to forced sale, there are now at least ten pending claims arising from expropriations in the oil and gas, mining, telecommunications and cement production sectors. Of interest to Canadian investors is the US$3.8 billion claim by Crystallex International Corporation for the expropriation of its Las Cristinas gold mining project. Crystallex recently announced a US$120 million public offering of rights to share in the proceeds of any award or settlement in the arbitration, as a means of meeting its current debt obligations and financing its claim. Each Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles address issues such as labour, the environment, human rights, community relations and anti-corruption. The Parties remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies. Ecuador has faced at least 18 claims, most arising from a windfall profits tax on oil and gas concessions and other disputes in the energy sector. Bolivia has fewer claims but, like Ecuador, favors the re-establishment of domestic control over natural resources. Both Bolivia and Ecuador While this provision is not binding on investors, it may be interpreted by arbitral tribunals as notice that they should expect to encounter problems with local communities if they don t engage in socially responsible practices and that they should manage their investment risks accordingly.

11 11 Finally, foreign investors should be mindful that investment treaty awards can be difficult to enforce. While states are deemed to have waived sovereign immunity for the purposes of enforcement of awards, immunity is not waived for the purposes of execution against their sovereign assets. Thus, if a state is unwilling or unable to pay an award, the claimant must find and execute against commercial assets it owns. Even the investors in Crystallex s litigation participation fund face the risk that Venezuela may refuse to honor, or be unable to pay, the very substantial arbitral award sought by Crystallex. Canadian investors in Latin America should be guided by the following basic points of advice: Investor-state arbitration should be seen as remedy of last resort for Canadian investors who face unwarranted government interference with their business activities. When problems arise, domestic remedies should be considered and evaluated in light of the specific terms of the applicable treaty, including any fork in the road provisions. Although time consuming and expensive, in certain situations investor-state arbitration may be the only realistic means of obtaining compensation for losses arising from arbitrary, discriminatory or confiscatory measures. With the notable exception of Bolivia, Canada has adequate investment treaty coverage with the Latin American states whose economic or political landscape currently present a significant risk. Canadians contemplating investment in Bolivia or other states that have no FIPA with Canada should consider investing through a third state that has treaty coverage, and obtaining political risk insurance. cm J. Cameron Mowatt cmowatt@blg.com

12 BORDEN LADNER GERVAIS LAWYERS PATENT & TRADE-MARK AGENTS VANCOUVER DISPUTE RESOLUTION DEPARTMENT MANAGER P.D. (Don) MacDonald EDITOR Stephen Antle sa Calgary Centennial Place, East Tower 1900, rd Ave S W Calgary, AB, Canada T2P 0R3 T F blg.com Montréal 1000, De La Gauchetière St W Suite 900 Montréal, QC, Canada H3B 5H4 Tél Téléc blg.com Ottawa World Exchange Plaza 100 Queen St, Suite 1100 Ottawa, ON, Canada K1P 1J9 T F (Legal) F (IP) ipinfo@blg.com (IP) blg.com Toronto Scotia Plaza, 40 King St W Toronto, ON, Canada M5H 3Y4 T F blg.com Vancouver 1200 Waterfront Centre 200 Burrard St, P.O. Box Vancouver, BC, Canada V7X 1T2 T F blg.com Waterloo Region Waterloo City Centre 100 Regina St S, Suite 220 Waterloo, ON, Canada N2J 4P9 T F F (IP) blg.com This newsletter is prepared as a service for our clients and other persons dealing with dispute resolution issues. It is not intended to be a complete statement of the law or an opinion on any subject. Although we endeavour to ensure its accuracy, no one should act upon it without a thorough examination of the law after the facts of a specific situation are considered. No part of this publication may be reproduced without prior written permission of Borden Ladner Gervais LLP (BLG). This newsletter has been sent to you courtesy of BLG. We respect your privacy, and wish to point out that our privacy policy relative to newsletters may be found at If you have received this newsletter in error, or if you do not wish to receive further newsletters, you may ask to have your contact information removed from our mailing lists by phoning BLG-LAW1 or by ing subscriptions@blg.com Borden Ladner Gervais LLP Borden Ladner Gervais LLP is an Ontario Limited Liability Partnership.