Intellectual Capital Governance and the Knowledge Economy in Canada

Anthony Michael Hoffmann Faculty of Law, McGili University, Montréal

August, 2003

Athesis submitted to McGiII University in partial fulfilment of the requirements of the degree of Master of Laws

© Anthony Michael Hoffmann, 2003

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Abstract

Intellectual capital, as opposed to traditional conceptions of intellectual property, is neither as simple to define nor as straightforward to protect and regu­late. As companies in the financial services sector attempt the efficient manage­ment of increasingly voluminous and strategically important information and knowledge, governance mechanisms currently available in the Canadian context have not kept pace.

This thesis is at once a retrospective and prospective examination of the regulation and control of intellectual capital. The first two substantive sections of this thesis are primarily definitive and contextualizing - first defining the nature of contemporary legal and managerial concepts of intellectual capital and property, then examining the varied legal frameworks from which an intellectual capital governance scheme is distilled. The final chapter attempts a synthesis of these definitions and legal approaches to the governance of intellectual capital. The keystones of this synthesis are twofold: first, uniform Canadian legislation; and second, a more focused incorporation of 'property rights' in intellectual capital.

Résumé

Le capital intellectuel, à l'opposé des conceptions traditionnelles de la pro­priété intellectuelle, n'est pas aussi facile à définir, et sa réglementation ainsi que sa protection sont encore plus compliquées. Au fur et à mesure que les compa­gnies dans le secteur des services financiers tentent la gestion efficace d'un vo­lume d'informations et de connaissances de plus en plus important, les procédu­res et les règlements actuellement disponibles au Canada n'ont pu se développer assez rapidement pour soutenir les exigences.

La présente thèse est un examen à la fois rétrospectif et prospectif de la réglementation et du contrôle du capital intellectuel. Les deux premiers chapitres de la présente thèse ont pour principal but la définition et la mise en contexte du problème - en premier lieu, la définition de la nature des concepts légaux et de gestion à la fois du capital et de la propriété intellectuelle, et, en deuxième lieu, l'examen de l'encadrement contemporain des lois qui créent le capital intellec­tuel. Le dernier chapitre constitue une synthèse de ces définitions et de ces ap­proches juridiques afin d'obtenir une structure cohérente du capital intellectuel. Les clés de cette synthèse sont au nombre de deux: premièrement, l'uniformité de la législation canadienne; et deuxièmement, une synthèse plus ciblée des concepts de la propriété dans le capital intellectuel.

Acknowledgements

This thesis would not have been possible without the support and assistance of a number of individuals, ail of to whom 1 owe an immense debt of gratitude. The mental gymnastics 1 have tried to perform were with the certain knowledge that 1 would be caught without question before hitting the ground.

ln particular, 1 would like to express my gratitude ta my advisor, Professor David Lametti, for his patience, understanding, and critical and constructive eye, as weil as for his trust in my abilities. Professor Lametti never failed to let me do my own thing, and for that 1 am very grateful.

Equally important was the continued maintenance of my mental health by so many of my friends. Near or far, their ability to make me laugh when 1 least felt like laughing was more important than 1 can adequately express. Cheryl Plam­beck, Nathalie Cousserans, Jono Kalles, Jon Greer and many others were ail an enormously important part of making this thesis possible.

At the last, there is no way 1 can thank my parents, Dr. Joan Eakin and Chris Hoffmann, and my sisters Willa and Marian enough. They gave me the opportu­nit y to get where 1 am today and their unconditional love and help along the way.

- Tony Hoffmann August, 2003

ii

Table of Contents

Acknowledgements ............................................................................................. ii Table of Contents ............................................................................................... iii Table of Figures .................................................................................................. iv Chapter 1 Thesis Overview ............................................................................ 1

1.1 Introduction ........................................................................................... 1 1.2 Intellectual Property & Intellectual Capital ......................................... 2 1.3 Thesis Objective: .................................................................................. 5 1.4 Thesis Methodology: ............................................................................ 6

1.4.1 Preliminary Definitions ..................................................................... 6 1.4.2 Current Legal Regimes .................................................................... 8 1.4.3 A Reconceptualization of Intellectual Capital Governance ............. 10

1.5 Applied Comparative Legal Methodology ......................................... 11 Chapter 2 Defining Terms in an Intellectual Capital Protection Regime .. 13

2.1 Introduction ......................................................................................... 13 2.2 Intellectual Capital .............................................................................. 13

2.2. 1 The Zurich Insurance Model .......................................................... 17 2.2.1.1 Human Capital ............................................................................................ 18 2.2.1.2 Structural Capital ........................................................................................ 21

2.3 Intellectual Property ........................................................................... 27 2.4 Conclusion .......................................................................................... 28

Chapter 3 Current Legal Regimes ................................................................ 30 3.1 Introduction ......................................................................................... 30 3.2 Intellectual Property in the Intellectual Capital Context .................. 31 3.3 Trade Secrets and Intellectual Capital Governance ......................... 39

3.3.1 Trade Secret in United States ....................................................... .42 3.3.2 NAFTA Treatment of Trade Secret ............................................... .45 3.3.3 World Trade Organization Treatment of Trade Secret .................. .48 3.3.4 Trade Secret in Canada ................................................................. 50

3.3.4.1 The Mutual Fund Industry Example ........................................................... 55 3.4 Persona"nformation Regulation Regimes ....................................... 59

3.4.1 Introduction .................................................................................... 59 3.4.2 Personal information and privacy in the commercial context ......... 61 3.4.3 Canadian Federal Treatment ......................................................... 64

3.4.3.1 Financiallnstitutions Regulation ................................................................. 69 3.4.4 Canadian Provincial Treatment ...................................................... 70 3.4.5 American Treatment ...................................................................... 75 3.4.6 Conclusion ..................................................................................... 78

3.5 The Employment Law Regime ........................................................... 79 3.5.1 Contractual Governance of Intellectual Capital .............................. 82

3.6 Civil Litigation and Criminal Law Regimes ....................................... 88 3.6. 1 The Civil Litigation Regime ............................................................ 89 3.6.2 The Criminal Law Regime .............................................................. 91

3.7 Conclusion .......................................................................................... 92

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Chapter 4 Toward Reconceptualizing Intellectual Capital Governance ... 94 4.1 Introduction ......................................................................................... 94 4.2 An Intellectual Capital Governance Framework ............................... 95 4.3 Intellectual Property Law Contributions ........................................... 97 4.4 Trade Secret Law Contributions ...................................................... 100 4.5 Personallnformation Protection Law Contributions ..................... 102 4.6 Employment Law Contributions ...................................................... 104 4.7 Civil Litigation Regime Contributions ............................................. 106 4.8 Conclusion ........................................................................................ 107

Bibliography .................................................................................................... 108 Legislation Cited .......................................................................................... 108 Jurisprudence Cited .................................................................................... 109 Books Cited .................................................................................................. 111 Articles Cited ............................................................................................... 113 Other Material Cited ..................................................................................... 116

Table of Figures

Figure 1: Intellectual Capital (IC) Management Continuum ................................. 16 Figure 2: Converting Knowledge to/from information .......................................... 33 Figure 3: Current Intellectual Capital Governance Framework ............................ 96

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Chapter 1 Thesis Overview

1.1 Introduction

The 21 st century is the age of the information economy. What you know,

and how you protect that knowledge from your competitors, is a critical aspect of

a successful business. Nowhere does this axiom ho Id more true than in the ser-

vice industry, where it is ideas, theories, and business methods that are bought,

sold, traded, and licensed. In their 2002 Annual Review, for example, the ac-

counting and consulting giant PriceWaterhouseCoopers stated that for the previ-

ous year, their revenue was $13.8 billion, not including $5 billion of revenue from

PWC Consulting, which was sold to IBM Inc., another giant 'idea company,.1

PWC states proudly not only these astronomical revenue figures, but also de­

clares that it employs over 142,000 people in 142 countries worldwide.2 This is

not, however, the end of the story, since accounting and consulting firms, mas-

sive as they may be, are derivative industries - they rely on other organizations

for their bottom line. In the knowledge economy then, it seems reasonable to fol-

low the money trail. In the United States, as of the end of 2002, there were 3,672

commercial banks with assets of over $100 million, and the total assets of these

represented a staggering $6.6 trillion.3 ln Canada, though the figures are less

monumental given the smaller overall economy, they are nevertheless impres-

sive: Canada's 14 chartered banks manage $1.7 trillion dollars, which accounts

1 PriceWaterhouseCoopers, 2002 Global Annual Review, available online: www.pwc.com at 3. 2 Ibid. at 4. 3 United States Federal Reserve Board, "Insured U.S.-Chartered Commercial Banks that have Consolidated Assets of $100 million or more Ranked by consolidated assets", December 31, 2002, available online: http://www.federalreserve.gov/releases/lbr/currentllrg bnk Is1.tx1.

1

for more than 70 percent of the as sets of the financial services sector.4

But what is their product? What do they sell? The answer, very simply, is

their ideas and their expertise. But how do they leverage these ideas and this ex-

pertise and, more importantly, how do financial services firms, be they banks,

mutual fund companies, insurance companies, or any of the myriad players in the

'information economy' protect these ideas and expertise? This is particularly im-

portant in an environ ment which, from a regulatory and legislative point of view, is

more open and more onerous than ever?5 The answer is, as with so many others

in the field of legal academics, it depends.

1.2 Intellectual Property & Intellectual Capital

Companies founded on intellectual property and intellectual capital must

operate in an environ ment fraught with obstacles, both legislative and competi-

tive. On the one hand, financial services companies are heavily regulated, while

on the other, competition between industry players is fierce. In this environment,

financial services firms have been forced to keep pace, both from a regulatory

compliance point of view and from a competitive point of view. This business

paradigm is perhaps no more evident than in how the industry has dealt with both

rapidly developing technology and, as a consequence, rapidly developing ques-

tions of how a service industry can protect itself in a competitive market. A manu-

facturing company can protect itself quite weil with the use of copyright, patent,

4 Government of Canada, Department of Finance, "Canada's Banks - Fact Sheet", August 2002. available online: http://www.fin.gc.ca/access/fininste.html 5 For example, in response to the Enron disaster, the United States recently enacted the Sar­banes-Oxley Act, legislation designed to increase accountability and transparency for public cor­porations. See the Sarbanes-Oxley Act of 2002, H.Res. 3763. Available online: http://thomas.loc.gov/bss/d107guery.html.

2

and trademark law. A service company based on the provision of intellectual

capital, however, is less able to protect itself. This is primarily because while intel­

lectual 'property' can be protected by the legal system, intellectual capital gov­

ernance is a far more difficult problem.

To facilitate an understanding of the insufficiency of current intellectual capi­

tal governance mechanisms, a parallel may be drawn with questions surrounding

the regulation and prohibition of hate speech and the policy goals of such regula­

tion. Despite best intentions, regulating anything beyond the physical or literai

manifestation of hatred cannot seriously be considered. Disturbingly, the same

problem is faced by policy-makers and corporate citizens in attempting to protect

intellectual capital. The problem is as follows: as hateful thought is to acts of hate,

so intellectual capital is the primordial seed of intellectual property. However,

since it exists in the minds of employees or in the form of information that is not

physically manifest (or for which a property interest is not adequately defined), it

is in many respects as unprotectable as hateful thought is unpreventable.

Intellectual property regimes have traditionally dealt with the regulation of

'intellectually capitalized' firms on an almost ad hoc basis, and the result has

been a patchwork of statu te and jurisprudence pulled from numerous legal re­

gimes. The jurisprudential and regulatory framework, therefore, is ineffective be­

cause intellectual property governance is based on iII-defined precepts. The legal

notion of trade secrets, for example, relies simply on keeping something secret

and ultimately being able to maintain that confidentiality. This non sequitur re­

veals an important logical flaw in intellectual capital governance: if, in defending a

3

claim of trade secret, one is to say "this information is a trade secret because it

was at ail times kept confidential, and should thus be protected", then one must

ask the question "if that information was kept secret, then how was that confi­

dence breached?" The question that this thesis will attempt to resolve is: how can

the definitions and legal treatments of intellectual capital be clarified so that both

the legal and business participants have the most robust intellectual capital gov­

ernance mechanisms at their disposai?

The above paradox further reveals inherent flaws in the governance regime.

If it can be shown that the secret information was divulged through nefarious

means, then a further problem arises: the governance of the unprotectable

amounts to the use of public resources (i.e., the enforcement of the Criminal

Code if theft can be shown) to enforce the interests of private citizens. While such

a structure is not uncommon, the question remains as to whether corrective jus­

tice is the appropriate mechanism with which to govern the intellectual property

and intellectual capital landscapes.

Financial service firms including banks, investment firms, trust companies,

and mutual fund companies ail face an enormous challenge with respect to pro­

tecting their assets. Why? Because such firms, despite their status as banks or

other sol id financial institutions, are to a large degree dependent not on 'what

they make' per se, but on 'how they interact with a client'. In order to be success­

fui in the knowledge-based economy, such financial service institutions must

have a clear understanding of how their intellectual capital is protected by the le­

gal system. They must also be aware of the system's limitations and the duties

4

placed on them. The definition of, and the maintenance of the integrity of, this 'in-

tellectual capital' and its application to the financial services sector is the focus of

this thesis.

1.3 Thesis Objective:

This thesis will examine how current legal regimes - ranging from employ-

ment law jurisprudence (a recent motion judgment denied an injunction restricting

a money manager's ability to move between two Canadian financial services

firms6) to copyrighf and patent8 law (traditional intellectual property regimes) to

the interaction of such regimes with privacy and consumer protection legislation -

are synthesized towards the efficient governance of intellectual capital. Though a

necessary precursor to any subsequent proposais, it is not the primary purpose

of this thesis merely to survey how legislation and jurisprudence can affect the

maintenance of a financial service~ firm's intellectual capital. Rather, the purpose

is to address a number of fundamental inconsistencies in intellectual capital gov-

ernance. Although the an artificial segregation of the components of intellectual

capital and intellectual property is not entirely realistic in the context of current

business models, it is the most effective method of examining the component

parts of the framework as a whole. The resulting questions, in their broadest

sense, are as follows9: what is the nature of the intellectual capital that financial

services firms wish to govern; how has this intellectual capital been protected to

6 TAL Global Asset Management Inc. v. Virginia Wai-Ping et al. (17 January 2003), Toronto 02-CV-00241164CM3 (Ont. S.C.). online: http://www.canliLorg/on/cas/onsc/2003/20030nsc10027.html(date accessed: 19 April 2003) ~herein~fter TAL].

Copyright Act, R.S.C. 1985, c. C-42. 8 Patent Act, R.S.C., c. P-4. 9 Note that each of these subdivisions will address more precise and concrete questions.

5

date in countries with weil developed intellectual property regimes (to wit, this

thesis will attempt to draw from the experiences of financial services firms across

Canada and in other common law jurisdictions.); and finally, having described the

state of the current governance framework, how can that structure, diverse and

disconnected as it is, be enunciated or restructured to reflect a more comprehen­

sive treatment of intellectual capital in the modern financial services sector?

1.4 Thesis Methodology:

There are a number of crucial steps in the analysis. The analytical structure

will follow a fundamentally similar pattern to that of any other legal argument.

However, issues not explicitly legal in nature will inevitably be addressed. On a

very fundamental level, therefore, this thesis will proceed from a standard argu­

mentative perspective with a view to accomplishing a number of milestones, each

of which will build a solid foundation for any proposed changes or improvements

that come to light as a consequence.

1.4.1 Preliminary Definitions

First and foremost, in order for the conclusion to logically follow from the

premises, it is necessary to understand what the 'object' of intellectual capital

governance is. That is, in order to understand how intellectual capital is treated

by the legal system, one must first understand precisely what intellectual capital

is. This thesis, the refore, will canvass the wide variety of intellectual capital in the

financial services sector. Such intellectual capital include business processes,

employees, client lists and personal information lists, investment and other profit­

making strategies, and goodwill. The preliminary section will proceed from a

6

number of established definitions, both legal and extra-Iegal, of intellectual capi-

tal, property, and rights and interests.

The intention in basing the analysis on currently accepted conceptions of in-

tellectual property and capital is rooted in the desire to provide a 'jumping off

point' towards a re-conceptualization of how such capital and property can be

governed. In the context of this thesis, 'Intellectual Capital' can be generally de­

fined as 'knowledge that can be converted into profit.,,1o There is no doubt that

this is a very inclusive definition, but two reasons militate against taking a nar-

rower view: first, if the goal is the effective governance of those aspects of intel-

lectual capital either totally unprotected or marginally protected by current legal

regimes, then it serves no purpose to exclude any su ch capital from the outset;

and second, it is precisely this unknown capital landscape that a new intellectual

capital protection regime should be addressing, and eliminating the object of

governance implicitly eliminates the need to govern them. If, at the outset, it is

averred that a particular piece of information or skill or knowledge is not intellec-

tuai capital, then the need to govern it evaporates. A further breakdown of the no-

tion of 'capital' in the legal and business contexts will also be made between hu-

man and structural capital. This parsing is based on the view that such artificial

distinctions, convenient as they may be, are detrimental to a robust governance

scheme.

Intellectual 'property' in this thesis is a legal term describing intellectual as-

sets for which legal protection has already been obtained. That is, this head of

10 Intellectual Capital Management Group, "Intellectual Capital", online: http://www.icmgroup.com/gp.asp?pld=4.

7

governance is comprised of knowledge for which there exists protections such as

those offered by the laws of copyright, patent, trade-mark etc. Importantly, this is

knowledge which has been fixed, as such fixation is a necessary precursor to

protection under the current system. Simple fixation, however, does not neces­

sarily imply governability, and this 'fuzzification' of the boundaries of legal protec­

tion offers the first indication that the foundation for knowledge and intellectual

capital governance may not be as solid as previously thought.

1.4.2 Current Legal Regimes

Chapter Three will address current intellectual property and other legal re­

gimes which presently - or may in future - address intellectual capital and intel­

lectual property governance. This thesis proposes that, as a first step, it is impor­

tant to understand how current law protects such types of intellectual capital as

were defined in the previous canvass. That is, how do the intellectual property

regimes, employment law regimes, and civil liability regimes both in Canada and

in other countries, purport to both protect the players in the financial services sec­

tor and maintain a manageable, fair, and practical governance structure.

With a view to simultaneously compartmentalizing and unifying the various

legal and jurisprudential regimes mentioned above, each will be addressed indi­

vidually in the financial services context and in the context of the definitions more

clearly defined and expanded in Chapter Two. Accounting for what is established

as common financial services intellectual property, therefore, this section of

Chapter Two will examine how intellectual property as sets are governed by legal

mechanisms such as the Copyright Act and the Patent Act. It is important to note

8

that even at such a preliminary stage of the analysis, problems are expected,

since there are a number of areas in which the concept of property interests in

certain assets is unclear. Personal information, for example, is an area under

much debate. 11 While a business may have an interest in the physical manifesta-

tion - that is, the list itself - there is doubt as to who has the primary interest in

the personal information. If it is the client - the consumer - who owns the 'right' in

their own personal information (and this would seem to be the direction in which

legislation is moving on both a federal and provincial level), then copyright in the

'Iist' is not entirely an asset. Interestingly, there is more than a passing similarity

between such intellectual capital assets and certain objects of copyright law. It

can be argued, for example, that the various property interests in personal infor-

mation mirror the disparate interests in a compilation and the difficulties that the

courts have had in determining where the copyright lies. 12 ln the case of cus-

tomer lists, personal information protection legislation increases the complexity if

this definition since there is an underlying privacy right which must now be con-

sidered in addition to deciding copyright issues.

Governance of employees and other human capital is also a critical factor in

the overall governance of intellectual capital. In fact, since intellectual capital is

not explicitly protected by legislation, the human capital of a firm (defined, in gen-

eral, as the 'people element') may be inherently difficult to govern. Firms never-

11 See B. von Tigerstrom, "Protection of Health Information Privacy: The Challenges and Possibili­ties of Technology" (1998) 4 Appeal 44 [hereinafter Tigerstrom]. See also E. Paton-Simpson, "Pri­vacy and the Reasonable Paranoid: The Protection of Privacy in Public Places" (2000) 50 Univ. of Toronto L.J. 305. 12 See, for example, Index Téléphonique (N.L.) de Notre Localité v. Imprimerie Garceau Ltée, (1987) 18 C.I.P.R. 133 (Que. S.C.). With respect to finding copyright in a compilation or business directory, see also Tele-Direct (Publications) Inc. v. American Business Information Inc. (1997) 76 C.P.R. (3d) 296 (Fed. CA) aff'ing (1996) 113 F.T.R. 123 (T.D.).

9

theless try to assert a type of 'ownership interest' in their personnel or staff. This

interest is expressed in the contracts that employees may be obliged to sign prior

to employment. Non-Disclosure Agreements (NDAs) and Non-Competition

Clauses (NCCs) are currently the preferred methods of controlling human capital,

yet even these mechanisms have limits. The goal of this section is to clarify the

limits of such contracts, and the limits of the control that firms can exert over cur­

rent and former employees in governing their intellectual capital.

The civil liability mechanism of intellectual capital governance - that is, the

ability to sue for damages for copyright, patent, or trademark infringement, and

for damages in contracts and tort - is the traditional governance mechanism.

From a market efficiency as weil as a legal perspective, recourse to civil liability

and corrective justice is not necessarily the most effective way to regulate and

protect intellectual property and capital. Indeed, in the case of trade secrets

quantifying damages is highly complex; potential damage is extremely difficult to

predict, even after a trade secret has been revealed. The goal of this section will

to be examine how the civil liability regime has either contributed to, or detracted

from, the effective regulation and protection of intellectual capital.

1.4.3 A Reconceptualization of Intellectual Capital Govemance

Finally, Chapter Four will attempt to determine if the current legal structure,

in a decentralized and disparate form, is adequate for the fair and practical gov­

ernance of intellectual capital in the financial services sector. Such a determina­

tion should be very useful insomuch as it should both shed light on any deficien-

10

cies that currently affect the system and allow for the proposition of a more robust

governance mechanism.

1.5 Applied Comparative Legal Methodology

There are three levels of comparison inherent in the structure of this thesis,

and each level will contribute to the primary goal of governance improvement.

First, there are the implicit comparisons between the diverse legal, jurispruden­

tial, and economic regimes which currently govern intellectual property and capi­

tal. Each of the above regimes will be examined from a legal, theoretical, and

public policy perspective in the hope of extracting the most attractive, useful, and

efficient governance mechanisms. In this sense the comparison is descriptive.

However, given the disparate regimes involved in this area of law, it is the result

of this descriptive comparison that may le ad to a system with fewer gaps and less

complexity. In the latter sense, the analysis is also prescriptive.

Second, the globalization of both the financial services industry and the

laws which govern intellectual property and capital internationally necessitate an

examination of multiple jurisdictions to determine the level of protection and the

general framework of that jurisdiction. To that end, regard will be had as to how

the American legal framework compares to the Canadian model. This compari­

son will suggest areas of cross-pollination between both legislation and jurispru­

dence; these similarities and differences will be highlighted in an effort to find the

best of both worlds.

The third and final area of implicit comparative legal methodology is be­

tween the conception of 'what we have now' and 'what we could have'. In order to

11

make this comparison - to be able to draw from existing systems and establish a

better governance structure - it remains critical to understand not only the legal

jurisdictions and the legal regimes, but also how they interact. This final level of

comparison will turn on the clarity of the analysis of the individual systems them­

selves.

This methodology is, by necessity, a synthetic work - that is, it draws from

numerous sources of law towards the creation and the establishment of a more

fluid, more adaptable, and more robust intellectual capital regulation and protec­

tion regime. The ultimate hope is that this thesis will encourage further thinking

with respect to intellectual capital governance in the Canadian financial services

sector and the knowledge economy.

12

Chapter 2 Defining Terms in an Intellectual Capital Protection Regime

2.1 Introduction

The most appropriate way to delineate the 'object' of a governance frame-

work is by reference to what that regime controls and what it does not control. In

the knowledge-based economy in general, and the financial services sector spe-

cifically, it is crucial to define what the participants control and what they do not

control vis-à-vis that knowledge. Control may be based on a number of govern-

ance mechanisms: the common law and jurisprudence, for example, generally

govern the intangible intellectual assets of the financial services sector; con-

versely, legislation, regulations, and international law and treaties - black-Ietter

law - are the governance mechanisms for the more tangible intellectual assets.

This chapter will attempt to define, survey, and categorize the tangible and intan-

gible intellectual assets of financial services sector participants with a view to pro-

viding a sound foundation for analysing how these assets are controlled by cur-

rent legal regimes.

2.2 Intellectual Capital

Intellectual capital is not a term easily described - indeed, opinions vary

widely as to its precise meaning. In general, intellectual capital is defined as

knowledge that can be converted into profit.13 Stewart and Edvinsson have dis-

tilled and defined the resource further to include the following:

• The sum of an enterprise's: o collective knowledge, experience, skills, competences, and ability to

acquire more; o work outcomes, services and other intangible manifestations of the

application of these to the strategic intent of the enterprise;

13 Supra note 10

13

o relationships and processes that facilitate this application, its deliv­ery of value to the marketplace, and its delivery of strategic advan­tage back to the enterprise.

• An enterprise's competences; the artefacts and measurements of its in­tangible resources; the capabilities and interactions of its formai organiza­tions, informai communities, customers, and partners; and the knowledge, skills, and potential of its employees and other stakeholders.14

Arian Ward, of the Community Intelligence Labs, offers another definition when

she says that it can be defined as "Intangible material and relationships that have

been or could be formalized, captured, and leveraged to produce a higher-valued

asset.,,15 ln their intellectual capital management model, which will be addressed

in more detail in a later section, Zurich Insurance (one of the world's largest in-

surance companies) defines intellectual capital in their organization as "the com-

bination of human capital, social capital, structural capital, and customer capi­

tal.,,16 This breakdown of the umbrella term 'intellectual capital' is useful because

it offers a more practical understanding of the way in which a financial services

firm understands its own intangible intellectual assets.

One final categorization of intangible knowledge assets is offered by

Lewison, of the Institute of Management and Administration. Referring to knowl-

edge management, he breaks the field down into:

1. Explicit knowledge, which is a company's collective documents, files, poli­cies, procedures, and training (such as the general ledger). It is explicit because it is tangible and readily identifiable.

2. Tacit knowledge, which actually may be more important to a company, is the collective wisdom within a company of learned ways of doing things on

14 L. Edvinsson & M.S. Malone, Intellectual Capital: realizing your company's true value by finding its hidden brainpower (New York: HarperBusiness, 1997). 15 Arian Ward, "Definition of Intellectual Capital and Knowledge", online: http://www.co-i­Lcom/coil/knowledge-garden/ic/arianic.shtml (Last modified: 02/26/00). 16 Zurich Insurance Company, "Zurich Financial Services Group Corporate Brochure 2000", online: http://www.zurich.com/about zurichlintellectual capitaLjhtmL

14

the job, as weil as life experiences learned inside and outside the com­pany, and the sharing of those experiences.17

Right away, it is easy to see how a legal/regulatory framework might have great

difficulty establishing a standard treatment for intangible intellectual assets in the

same way as for a tangible asset like real estate or equipment. In Carpenter v.

U.S., for example, a court upheld a newspaper's property right in prepublication

confidentiality and exclusive use of the information compiled by its reporters. 18

The fact that the United States Supreme Court conferred a property right in the

notion of confidentiality is indicative of the extent to which courts in various juris-

dictions have so far been willing to go in extending private property interests to

intangibles. It must be noted that, by virtue of the economic value of intellectual

capital, the ability to profit from an asset must be distinguished from the simple

property interest in that asset. This distinction is made in Théberge v. Galerie

d'Art du Petit Champlain Inc. where the Court cites Professor Gendreau:

Unfortunately, the present text of the Copyright Act does little to help the promotion of the fusion of moral rights with the economic prerogatives of the law, since there is no comprehensive definition of copyright that embodies both. Section 3 of the Act, which is drafted as a definition of copyright, only refers to the economic dimension of copyright. Moral rights are defined and circumscribed in entirely dis­tinct sections. This absence of cohesion leads to the separate men­tion of "copyright" and "moral rights" whenever Parliament wants to refer to both aspects of copyright law and to the near duplication of the provision on remedies for moral rights infringements. 19

17 J. Lewison, "How to Use Knowledge Management to Gain a Competitive Edge" (2001) Manag­ing the General Ledger - The Institute of Management and Administration at 4. 18 Carpenterv. United States, 484 U.S. 19 (1987). 19 Y. Gendreau, "Moral Rights" in G. F. Henderson, ed., Copyright and Confidentiallnformation Law of Canada (Scarborough, Ont. : Ca rswe Il , 1994) , 161, at p. 171. As cited in Théberge v. Galerie d'Art du Petit Champlain Ine. [2002] S.C.C. 34 at para. 59.

15

Given this distinction, it may be more useful to describe intellectual capital

not in legal terms, but in management terms. A typical continuum of intellectual

capital management appears as follows:

Figure 1: Intellectual Capital (IC) Management Continuum2o

Figure 1 iIIustrates the extent to which the term intellectual capital is inclusive of

ail the ideas and knowledge that an organisation might possess. The continuum

also iIIustrates how intellectual property (and its management) is only a small

component of overall intellectual capital governance. The continuum iIIuminates

two specifie points in the present context: first, the diagram begs the question of

what governance mechanisms exist or function beyond the pure intellectual

property regime; and second, that an effective intellectual capital governance

20 The Canadian Performance Reporting Initiative, "Background on Intellectual Capital", online: http://cprLmatrixlinks.ca/icmlicm.html.

16

framework requires the extension of sorne of theoretical underpinnings of the in­

tellectual property regime. This thesis is, in part, an examination of the outer con­

centric circles of the continuum, and an attempt to make sense of their govern­

ance in light of existing legal treatments. In the financial services context specifi­

cally, the question is what are the elements of intellectual capital that exist in

those outer rings, and how might they be legally classified in the absence of a

clear legal interest in, or treatment of, those elements?

2.2.1 The Zurich Insurance Model

The Zurich Insurance Group has broken intellectual capital down into four

subsets: human, social, structural, and customer capital. This breakdown is not

only useful fram a conceptual point of view, but also fram a legal point of view; to

a large degree, each of the subsets is governed by different legislation, regula­

tion, and jurisprudence. The implication is that each subset may also have a dif­

ferent interpretation of property rights and interests. In this model, it is human

capital that is the nexus for the other three subsets. In the context of the contin­

uum in Figure 1, human capital forms a part of the outer three rings of the prac­

ess. Financial capital (which refers to monetary inflow into an organization) is be­

yond the scope of this analysis and as such, it can be assumed that an organiza­

tion with the ability to leverage its intellectual capital - that is, its human and

structural capital - will have addressed the governance of its financial capital

elsewhere. For this thesis, the two most critical subsets are those of human and

structural capital, and each will be examined in turn.

17

2.2.1.1 Human Capital

One of the most important as sets that a financial services company draws

on is its people - its employees. A mutual fund management company, a bank,

or an investment company is based on the expertise that it can offer its clients.

Yet a company's personnel is not an asset in the traditional accounting or legal

sense of the word - it cannot easily be valued, and the law cannot easily affix

property rights or interests to it. It is, in the global sense, an almost limitless

spring, since ideas, knowledge and ability are not limited in the same sense as a

bank account or the sale value of equipment. In order to be able to protect this

fountainhead in a competitive and regulated market, a legal understanding of the

rights that attach to the 'asset' is imperative.

The way a financial services firm protects its rights to a person's mind is

generally focused on the product of that mind. That is work done in the course of

employment is generally considered to be the property of the employer. Ali as­

pects of this relationship are usually governed by an employment contract which

stipulates that the product of an employees labour becomes the property of the

employer. However, the terms intellectual capital and human capital imply some­

thing quite apart from ownership or property rights in the product of labour, and

establishing that characterization is more difficult because an individual em­

ployee's ability, knowledge, and experience are intangible.

The motion judgment in TAL, for example, is an indication that a corpora­

tion's 'ownership' of its personnel has limits and illustrates how employment law

and employment contracts can have a significant impact on the governance of

18

human intellectual capital. The judgment in TAL, which involved the enforceabil-

ity of the non-competition clause of an employment contract, ties the limits of

ownership to the potential for damage to the owner/corporation:

It appears to me that any damages which TAL may suffer by way of a loss of existing clients or business, as a result of Wai-Ping being employed by a competitor, can be quantified in monetary terms. The fact that it may be difficult to collect the necessary information and to do the calculation of such damages does not mean that they are damages which cannot be quantified in monetary terms. Dam­ages resulting from a loss of potential new clients or business are, in my view, entirely based on speculation and do not satisfy the test of irreparable harm.21

Interestingly, the court in TAL cites the old case of Maguire v. Northland Drug

Company Limited, which established the original limits of a covenant in an em-

ployment contract. As Dysart J. stated in that case:

The practical question then is this, (1) what are the rights which the employer is entitled to protect by such a covenant, and (2) does the covenant not go beyond what is reasonably adequate in furnish­ing that protection. Proprietary rights, such as secrets of manufactur­ing pro cess and secret modes of merchandising, clearly come within the group of rights entitled to protection. So also is the right of an em­ployer to preserve secret information ... (5). The information and train­ing which an employer imparts to his employee become part of the equipment in skill and knowledge of the employee, and so are beyond the reach of such a covenant. .. The covenant in any event must not go further than is reasonably adequate to give the protection that is to be afforded [emphasis added].22

Despite their intangibility, these assets are valued differently for each employee

of a financial services firm. Variations in salaries and compensation packages

are often justified by the fact that the individual totality of a chief executive officer

is more valuable to a firm than that of a frontline customer service representa-

21 Supra note 6 at para. 10. 22 Maguire v. North/and Drug Company Limited (1935) S.C.R. 412 at 416.

19

tive. 23 Of course, higher compensation and responsibility within an organization

brings with it a higher degree of control over the employee or manager. That is,

the rights or interests that employers have in their employees and managers is

established by both contract and the common law. The judgment in Canadian

Aero Service Ltd. v. O'Malley4 was the first instance of this dut Y cum fiduciary

obligation. More recently, Felker v. Cunningham re-iterated the position of Cana-

dian law on the matter:

Since Canadian Aero it has been established law in Canada that high echelon managers and directors of an organization owe their em­ployer a fiduciary obligation that transcends their implied dut Y of fidel­ity as a regular employee. Thus, an employee who stands in a fiduci­ary relationship to his or her employer has an equitable obligation of loyalty, good faith, honesty and avoidance of conflict of dut Y and self­interest. The employee must act honestly, in ~ood faith and with a view to advancing the employer's best interests. 5

What is more, the governance of human capital - a company's employees,

personnel, and management - can be analogized to what amounts to a property

interest in that capital. This thesis argues in favour of finding this type of interest

because another characterization of the relationship, that of fiduciary duties,

does not do justice to the nature of intellectual capital. The strength of the prop-

erty-based analysis over the fiduciary duty-based analysis is that it accounts for

both the object and the relationship that are the component parts of intellectual

capital. Framing the relationship as simply a dut y, and not a dut Y with respect to

23 The Chairman & CEO of Toronto-Dominion Bank, for example, earned $1.3 million dollars in the year 2002. See 2002 Management Proxyllnformation Circular (25 February 2003), online: www.sedar.com. 24 Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592. 25 Felkerv. Cunningham (2000) 191 D.L.R. (4th

) 734 (Ont. CA) at 739.

20

a parlicular object implicitly ignores the object itself. Lametti highlights the impor-

tance of this inclusive view when he writes that:

ln this understanding of property as both relationship and object, nei­ther rights nor duties are prior to each other, as some rights or obliga­tions may exist with specific resources but not with others. Of course, for most kinds of resources owners will have mainly rights and non­owners mainly duties, but recognizing the possibility of duties in rem for some resources is an important addition to a fuller understanding of this institution.26

Thus, the intellectual capital and the duties to which Lametti refers are

linked, and each is necessary in understanding the other. The proposed property

right in intellectual capital, unlike other more traditional property rights, is dy-

namic rather than static in nature, at least insomuch as it depends on the position

the employee holds or held within an organization. Further, the limits of this in-

terest, while initially created in contract, are subject to judicial scrutiny rather than

being enshrined in legislation or regulation. 27 As such they are effectively gov-

erned by common law. This effects-based approach to the limitation of the prop-

erty interest in human capital is cause for continued concern, as it permits for too

much uncertainty. The legal treatment and current protection of the pseudo-

property interest in human capital will be examined in more detail below in sec-

tion 3.5.

2.2.1.2 Structural Capital

Structural capital is a relatively new concept in the literature of business

management. Avramovich describes it as follows:

26 D. Lametti, "The Concept of Property: Relations through Objects of Social Wealth" (July, 2003) U. of T. L.J. [forthcoming]. 27 A notable exception to this observation, in the Canadian context, is section 122(1) of the Can­ada Business Corporations Act, R.S.C. 1985, c. C-44, as am.

21

Structural capital is a firm's organizational capabilities for meeting mar­ket requirements. It involves the organization's routines and structures that support employees' quests for optimum intellectual perform­ance ... Structural capital allows intellectual capital to be measured at an organizational level. 28

As a general rule, structural capital refers to the physical and infrastructure sup-

port that financial services firms provide to their human capital - their employees

- in order to maximize their potential and take advantage of their knowledge and

skills. InteliectualCapital.org describes structural capital, paradoxically, as "tangi­

ble intangibles,,29 such as product documentation databases, market analysis

models, and any of a myriad of other documentary-type assets. Such capital,

since it exists in a very real sense, is more conducive to categorization and, im-

plicitly, legal protection. While this remains a common-sense and straightforward

management definition of this type of intellectual capital, as a category for legal

and judicial treatment it is virtually ignored.

This situation begs the questions of if and how the component parts of

structural capital are defined in law. A closer examination reveals a thoroughly

inconsistent definition of what constitutes this subset of intellectual capital. Much

like the legal definition of human capital, structural capital is dependent on the

physical manifestation of that asset. Further, even physical, tangible manifesta-

tions remain legally ill-defined in certain cases. For example, to the extent that

such tangible intangibles can be shoe-horned into the definition of copyrightable

material in the Copyright Act, they are defined by necessity. An internai proce-

28 M.P. Avramovich, "The Protection of Internationallnvestment at the start of the twenty-first cen­tury: Will anachronistic notions of business render irrelevant the OECD's Multilateral Agreement on Investment?" (1998) 31 J. Marshall L. Rev. 1201 at 1274. 29 InteliectualCapital.org, "Exploring Intellectual Capital", online: http://www . i ntellectu alcap ital. org/intelcaplindex. htm 1.

22

durai guide or software library, for example, would fall under the definition of "Lit-

erary Work" as it appears in the Copyright Act, which "includes tables, computer

programs, and compilations of literary works."30 Patent, trade secret, and confi-

dential information law may also govern, at least in part, such structural capital.

The decision in Apple Computer Inc. V. Mackintosh Computers Ltd., for example,

affirms that the form of a literary work is irrelevant to its being covered by the

Copyright Act.31 Thus, legally speaking, this type of structural capital seems to be

nothing more than a literary work or computer programs as defined by legislation,

and the property interest vests in the author organization. Other aspects of struc-

tural capital, however, are not so amen able to having a property right or interest

attached.

ln the knowledge economy, one of the fundamental elements of structural

capital is a financial service company's client lists and files. While these lists may

only exist in customer relationship management software - that is in digital format

on an organization's systems - they quite clearly forms part of the structural capi-

tal. The ownership and property interest in the customer information contained in

these databases, however, is far more convoluted, as it involves a property inter-

est in information. The protection and regulation of personal information neces-

sarily imports questions dealing with the right of privacy. Interestingly, discussion

of the right to privacy has always used the language of property rights and, even

30 Supra note 7 at s. 2. 31 App/e Computer, Inc. V. Mackintosh Computers Ltd., [1988] 1 F.C. 673 (CA), aff'd [1990] 2 S.C.R. 209. See also Accusoft Corp. v. Pa/o, 923 F. Supp. 290; 1996 (U.S. Dist.), aff'd in part 237 F.3d 31, 2001 (U.S. App.).

23

in their differentiation from private property rights, legal scholars and jurists alike

employ what amounts to 'possessory' language.

Morgan, in a discussion of the expectation of privacy vis-à-vis electronic

mail, writes that:

[I)nformational privacy [has) come to be notionally distinguished from the concept of ownership over time. Rather than finding [a) basis in property rights, doctrinal writers, courts, and legislators in the United States and Canada have ail come to hold that the right of privacy is a "personality right". The very nature of a personality right is that it is held by everyone and that it cannot be alienated. It is extra-­patrimonial. It is in part for this reason that it is inappropriate to suggest that ownership rights negate privacy rights. The two kinds of rights are each of a different nature; they overlap, they are not mutually exclu­sive.32

ln this sense, then, the notion of ownership of a database of customer informa-

tion, the property and ownership interest in which is protected by the Copyright

Act, is subordinate to an individual's right to the privacy of his or her personal in-

formation. The recently enacted Personal Information Protection and Electronic

Documents Acf3, a federal statute that addresses precisely this issue, requires

the consent of an individual for the collection, use or disclosure of personal infor-

mation. The statute appears to parallel Warren and Brandeis, who wrote of the

right of privacy that "[t)he rights, so protected, whatever their exact nature, are not

rights arising from contract or special trust, but are rights against the world;

and ... the principle which has been applied to protect these rights is in reality not

the principle of private property ... [but rather) the right of privacy.,,34

32 C. Morgan, "Employer Monitoring of Employee Electronic Mail and Internet Use" (1999) 44 McGiII L.J. 849 at 855. 33 Personallnformation Protection and Electronic Documents Act, R.S.C. 2000, c.5, s. 5 et seq. 34 S. Warren & L. Brandeis, "The Right to Privacy" (1890-91) 4 Harv. L. Rev. 193 at 213.

24

This brief introduction to privacy and personal information can be further

distilled: first, there is certainly a property interest in the compilation and collec-

tion of personal information - information that forms the structural capital of a fi-

nancial services organization; second, the right to privacy that resides in the

communication of personal information and - and the consent to that communi-

cation and collection - appears to outweigh the property interest he Id by the or-

ganization; third, that despite this trump card having many of the hallmarks of

property, it appears to have, per Warren and Brandeis, an even more inviolable

status as a 'personality right'; and finally, if the privacy right trumps the property

interest in personal information (and thus in structural capital), an organization's

assets can lose significant value.

It is the characterization of the right or interest in personal information that

results in the overlap of interests in that information. In this respect, it is useful to

examine the civil law concept of personality rights - rights which are attached to a

person and are 'extrapatrimonial'. In the Civil Law framework, these are rights

which cannot be detached from the individual. Deleury and Goubau describe

them as follows:

Ils sont intransmissibles, c'est-à-dire qu'ile s'éteignent avec la mort de la personne et ne passent pas, en principe, aux héritiers. Parce qu'ils ne mettent en jeu des intérêts d'ordre moral, donc non susceptibles d'évaluation pécuniare, ils échappent à l'emprise des mécanises économiques. Ils sont par le fait même incessibles: ils ne peuvent faire l'objet d'une convention, d'une cession ou d'une renonciation. N'ayant pas «d'attache matérielle et ne constituant pas des biens économiques», les droits de la personnalité sont également insais­sisables. C'est pourquoi on dit généralement qu'ils sont hors com-

25

merce. Enfin, ce sont des droit imprescriptibles: le seul écoulement du temps ne peut entraîner la perte du droit.35

The problem in the case of the right of privacy and les droits extrapatrimoniaux is

that the reality of the knowledge economy is such that personal information as

described by both Warren and Brandeis and Deleury and Goubau does now

have economic value, and is valuable property. Declaring, therefore, that the pri-

vacy or extrapatrimonial right implicit in that personal information is sufficient to

establish a primacy of interests is false. Deleury and Goubau admit this weak-

ness in their characterization of personality rights, even admitting that in the

commercial context "ces droits peuvent donc, en quelque sort, se dédoubler,

pour comporter, à l'instar des droits d'auteur, un véritable caractère commercial,

à côté du droit extrapatrimonial. Le nom lui-même, lorsqu'il sert au ralliement

d'une clientèle commerciale, devient l'objet d'un véritable droit de propriété. ,,36 If

one accepts Deleury and Goubau's view, then, the civillaw has alreadyascribed

a property interest to an individual's name, creating a hybrid interest. This hybrid

property interest may be useful in a re-conceptualization of the property in per-

sonal information in the common law (see below, section 3.4).

If a bank, for example, wishes to spin off a subsidiary to deal with credit

cards currently held by its customers, the customer database (containing, per-

haps, the personal information of millions of individuals) would be valueless with-

out the required consent. Suddenly the structural capital, with its inherent poten-

tial to create profit is, for ail intents, handcuffed. The need for a more complete

35 E. Deleury & D. Goubau, Le Droit des Personnes Physiques (Montréal: Éditions Yvon Blais, 1994) at 72. 36 Supra note 35 at 74 [emphasis added].

26

definition of property in personal information is neatly outlined by Onyshko and

Owens, who wrote that

While the value of tangible property was a result of the ability of its owner to physically exclude others from possession, a single piece of information may be fully possessed by many different parties at the same time. In addition, there is a legitimate need for the circulation of sorne types of information about individuals; for example, information is necessary for government and business to make informed decisions about the treatment of individuals. Thus, there is a need for a more flexible conception of privacy.37

ln respect of financial services companies and their structural capital, there is a

very pressing need to re-examine the property interest in personal information.

This re-examination may ultimately result in an acceptance of a business reality

over an outdated legal fiction. As Douglas Adams put it "Even the sceptical mind

must be prepared to accept the unacceptable when there is no alternative. If it

looks like a duck, and quacks like a duck, we have at least to consider the possi­

bility that we have a sm ail aquatic bird of the family Anatidae on our hands.,,38

2.3 Infellecfual Property

As the continuum in Figure 1 and the components of the Zurich Model iIIus-

trate, pure intellectual property is only a small component of the treatment of in-

tellectual capital in a financial services firm. In the financial services context,

however, intellectual property can nevertheless form the backbone of a com-

pany's business. Copyright law, for example, will protect ail literary works that an

investment firm produces for sale or for its clients. A bank or mutual fund com-

pany may own patents for business methods that are tangible insofar as they ex-

37 T.S. Onyshko & R.e. Owens, "Debit cards and stored value cards: legal regulation and privacy concerns" (1997) 16 Nat'I Banking L. Rev. 65. 38 D. Adams, Dirk Gent/y's Holistic Detective Agency, (New York: Simon and Schuster, 1987) at 216.

27

ist as computer programs being used in the context of business. The U.S. recent

case of State Street Bank & Trust Co. v. Signature Financial Group, Inc. 39, for

example, "established the viability of the current patent system as a vehicle to

protect software-related intellectual property.,,40 Financial services companies

also rely on legislative and regulatory protection for their trademarks41 and trade

secrets. This last is used to a certain extent in the protection of intellectual assets

and capital as they have been described above. To the extent that there is a well-

established, coherent, and consistent standard which has emerged in the treat-

ment of the property rights in intellectual assets, it is sufficient to say that, in con-

trast to the legal status of intellectual capital, intellectual property - in ail its vari-

ous forms and permutations - is weil defined. This is because while human capi-

tal - that is, the knowledge, experience, and skill that has the pofenfial to create

profit - is not weil defined in legal terms, the product of human capital is weil de-

fined and delineated by law. Given the established body of law that defines intel-

lectual property in the financial services sector, only the aspects of that regime

which relate to intellectual capital governance will be examined in more detail.

2.4 Conclusion

This chapter has attempted to outline the legal, as opposed to lay, defini-

tions of the various components of intellectual capital. As the investigation shows,

there are significant problems with the governance of intellectual assets that can-

39 State Street Bank & Trust Co. v. Signature Finaneial Group, Ine., 149 F.3d 1368, 1998 (U.S. App.). The case was concerned with whether the transformation of data through particular mathematical algorithms was a practical application eligible for patent protection on grounds of utility. It should be noted that the effects of this judgment are still being debated. 40 C. King, "Abort, Retry, Fail: Protection for software-related inventions in the wake of State Street Bank & Trust Co. v. Signature Finaneial Group, Ine." (2000) 85 Cornell L. Rev. 1118 at 1120. 41 Trade-marks Act, R.S. 1985, c. T-13.

28

not be qualified or defined as pure intellectual property. Further, even in cases

where an asset can adequately be defined as intellectual property, and the prop­

erty interest established (as is the case for databases of personal information),

there remain unresolved issues with respect to the component parts of that prop­

erty. Unless they can be resolved in the creation of standard legislative and judi­

cial treatments of such hybrids, these inconsistencies threaten to upset the foun­

dations of the information and knowledge economies. Chapter Three will ad­

dress, in more detail, how current legal regimes have treated the components of

intellectual capital, including the human and structural subsets defined above and

will attempt to uncover a theoretical and practical foundation for a shift in the in­

tellectual capital governance framework as a whole towards a property based

conception of this valuable resource.

29

Chapter 3 Current Legal Regimes

3.1 Introduction

The importance of intellectual capital governance lies in the fact that such

intellectual capital and intellectual property is in large part how the marketplace

values a company. Chapter Three will examine in more detail how current legal

regimes can and do govern the intellectual property and intellectual capital that

very often forms the backbone of a corporation's competitive viability. As Edvins­

son says, U[w]hat is the true value of a company ... it is more than the tangible as­

sets; the company's value is in its intangible intellectual assets as weil as its abil­

ity to convert those assets into revenues.,,42 The purpose of this section is not to

present an in-depth method for the valuation of intangible intellectual assets -

that is a task better left to scholars and practitioners in the field of financial analy­

sis. 1 nstead , the focus here is on how 'knowledge firms' - an economic sector

that includes financial services firms - have governed and can govern those core

elements of their business which, while intangible, are critical to economic suc­

cess.

Chapter Two laid the framework of the elusive legal definitions towards

which the present argument progresses. This chapter, which builds a broad but

nevertheless detailed model of the various building blocks of a corporation's intel­

lectual capital foundation, hopes to provide a more comprehensive survey and a

more robust understanding of those blocks. The four broadly defined legal re­

gimes most responsible for intellectual capital governance in the financial ser­

vices sector are examined here. The reader should recall that the intellectual

42 Supra note 14 at 356.

30

capital management continuum (Figure 1) and the Zurich Insu rance Model list

human capital and structural capital as the two key components of intellectual

capital. These models are based not in the principles of legal analysis but in the

practice of corporate management. The two categories can nevertheless be ex-

amined from a legal perspective and deconstructed to that end. Such an analysis,

however, requires the adoption of a goal beyond that of simple asset valuation.

Instead of valuing an intangible asset in monetary terms, this analysis values an

intangible asset from what might be termed the governance perspective. From

within the latter framework, structural and human capital can be pigeonholed into

the legal regimes mentioned above, and their value ascertained beyond simple

cash value on a balance sheet. The sections that follow are a comprehensive re-

view of how each legal regime creates value for intellectual capital via their effec-

tive governance and a shifting mentality with respect to the property interests in

intellectual capital.

3.2 Intellectual Property in the Intellectual Capital Context

The broad category of intellectual capital necessarily includes the more

specific notions of intellectual property (copyright, patent and trademark). Note

that while trade secret is considered a part of intellectual property, it is treated

separately in the intellectual capital context. The crucial problem with applying a

tradition view of intellectual property to the more ephemeral conception of intel-

lectual capital, however, is precisely the latter's lack of concreteness. This di-

lemma, from a management perspective, is pointed out by 8ertels and Savage:

Typically assets are recognized items of worth. We count our assets on our balance sheet, we put asset numbers on machinery

31

and we recognize that these assets depreciate. As we move into the knowledge era we are faced with more than just things. Ideas begin to take on major business significance. Yet, we hardly know how to put asset numbers on them, unless they be patents or trademarked items.43

From a legal perspective, this appears to be a non sequitur given the

idea/expression dichotomy in copyright law (or the analogous science/applied

science dichotomy in patent law), but it nevertheless speaks to the fallibility of the

current system. Copyright law, for example, is far more comfortable in the domain

of the tangible than in the uncharted waters of the intangible and, as such, has

traditionally concerned itself with the 'fixation' of a work or expression. There is

increasing recognition that fixation is no longer the necessity that it once was.

Vaver notes that though "The [Copyright1 Act nowhere specifies that fixation is a

general condition of protection ... [a]lIowing some flexibility on the fixation issue

may nevertheless sometimes be beneficial.,,44 Intellectual capital, however, can-

not neatly be fit into the traditional intellectual property categories, and not ail in-

tellectual property rights can be analogized. As Vaver states elsewhere,

[n]ot ail intellectual property rights can technically be called property. Even those that can may not everywhere have ail the usual attributes of property ... in short, we can talk about intellectual property as we talk about military intelligence: as useful shorthand for a phe­nomenon, but with no implication that its components - intellectual or property - do or should exist.45

The same conception of the dichotomy between what something appears to

be and what the law says it is can be found again with reference to busi-

43 T. Bertels & C.M. Savage, "Understanding knowledge in organizations" in G. von Krogh, J. Roos & D. Kleine, eds., Knowing in Firms: Understanding, Managing and Measuring Knowledge iLondon: SAGE Publications, 1998) at 9 [hereinafter von Krogh).

4 D. Vaver, Copyright Law (Toronto: Irwin Law, 2000) at 63. 45 D. Vaver, Intellectual Property Law (Toronto: Irwin Law, 1997) at 5.

32

ness/management theory. Marchand writes that "although knowledge and infor-

mation are often used interchangeably, most managers and scholars recognize

that knowledge is different from but directly linked to information.,,46 Marchand's

ideas in this area, however, neatly parallel the classical idea/expression dichot-

omy in copyright law. His hypothesis relates to the similar dichotomy of knowl-

edge versus information, but not in purely legal terms. If illustrated graphically

(see Figure 2, below) the cross-pollination becomes far clearer:

K Id nowe Ige to n orma Ion 1 f f

T acit to tacit T acit to explicit

Knowledge Information transfer A person transfers between people knowledge through (conversation) documents, messages,

data from

Explicit to tacit Explicit to explicit

Information Documents, data, mes- Information about infor-sages mation: documents, data,

Convey meaning to a per- messages are organized son into indexes, maps, rules

and repositories

Figure 2: Converting Knowledge to/from information47

A close examination of the components of this table reveals a clear parallel of the

dichotomy facing the underlying theory of much of copyright law in particular and

intellectual property law in general.48 This pola rit y is expressed by an English

court in, for example, Moreau v. St. Vincent:

46 DA Marchand, "Competing with Intellectual Capital" in von Krogh supra note 43 at 255. 47 Supra note 46 at 256. 48 Though the central hypothesis of this thesis is grounded in the view that the protection of intel­lectual capital will necessitate a re-evaluation of both law and business practice as regards the

33

It is ... an elementary principle of copyright law that an author has no copyright in ideas but only in his expression of them. The law of copy­right does not give him any monopoly in the use of the ideas with which he deals or any property in them, even if they are original. His copyright is confined to the literary work in which he has expressed them. The ideas are public property, the literary work is his own. Every one may freely adopt and use the ideas but no one may copy his literary work without his consent.49

What is both interesting and problematic with the 'rights-based' discourse is that,

at least in the context of the valuation of knowledge-based companies such as

financial services firms, it has so far been obscenely difficult - and infinitely sub-

jective - to value rights as opposed to property. As Srooking points out,

Twenty years ago, we weren't bothered with intellectual capital. Its emerging importance reflects the organization's increasing depend­ence on intangible assets. New types of companies are born every day which have only intangible assets. Their products are intangible and can be distributed electronically in the 'market space' via Inter­net.50

How, then, can the need of knowledge-based businesses to value what

does not exist be reconciled with an intellectual property regime that does not

address the character of a business' most valuable asset? The business com-

munit y seems to have answered this question pragmatically through the liberal

use of the phrase 'ail rights reserved'. Intellectual property scholars and practitio-

ners commonly refer to only the right to exclude - that is, to the legislated mo-

nopoly that intellectual property laws create from thin air. They are, to a degree,

perfectly right. The Copyright Act, for example, states that:

so-called 'rights-based' interpretation of, for example, copyright law, it is nevertheless necessary to understand the opposition to this view. See, for example, A. Drassinower, "A Rights-Based View of the Idea/Expression Dichotomy in Copyright Law" (2003) 16 Cano J.L. & Jur. 3. 49 Moreau V. St. Vincent[1950] Ex. C.R. 198 at 203. 50 A. Brooking, Intellectual Capital: Core Asset for the Third Millennium Enterprise (London: Inter­national Thomson Business Press, 1996) at 17.

34

For the purposes of this Act, "copyright", in relation to a work, means the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever, to perform the work or any substantial part thereof in public or, if the work is unpublished, to pub­lish the work or any substantial part thereof ... 51

The Patent Act is also concerned with the rights of the patentee to control his or

her invention. Section 42 of the Patent Act states that:

Every patent granted under this Act shall contain the title or name of the invention, with a reference to the specification, and shall, subject to this Act, grant to the patentee and the patentee's legal representa­tives for the term of the patent, from the granting of the patent, the exclusive right, privilege and liberty of making, constructing and using the invention and selling it to others to be used, subject to adjudica­tion in respect thereof before any court of competent jurisdiction.52

The language of both the Copyright Act and the Patent Act serves to take the

qualification of intellectual capital a step further, as each deals explicitly with the

rights inherent in the object of the legislation. If, Q.E.D., rights equate to property,

then the 'assetization' or ownership of intellectual capital - at least to the satis-

faction of corporate managers, accountants, and legal practitioners - should not

prove too complex. It is not, however, altogether certain that rights equate to a

property interest. Such a conclusion requires further justification.

As the Patent Act and the Copyright Act demonstrate - not least in the for-

mulation of the powers granted by each of copyright and patent - the absolute

monopoly created is best understood as a collection, or bundle, of rights. The

origin of this 'bundle', and of the 'sticks' that make it up, is the seminal book by

Stephen Munzer entitled A Theory of Property.53 ln his proposai, Munzer draws

on the writing of Hohfeld and Honoré, both of whom give Munzer the building

51 Supra note 7 at s. 3( 1). 52 Supra note 8 at s. 42. 53 S. Munzer, A Theory of Property (Cambridge: Cambridge University Press, 1990).

35

blocks he needs to construct his conception of the nature of property. While it is

not the function of this thesis to provide a justification of property per se, an un-

derstanding of Munzer's ideas is useful, as his writing provides a building block

of its own in the present context. The comparison is appropriate insomuch as the

notions of property (in the case of Munzer) and of absolute monopoly or control

(in the case of current intellectual property legislation) are both constructed in

terms of their component parts. Paraphrasing Honoré, Munzer includes a list of

the 'incidents' of ownership.54 the claim-rights to possess, use, manage, and re-

ceive income; the powers to transfer, waive, exclude, and abandon; the liberties

to consume or destroy; immunity from expropriation; the dut Y not to use harm­

fully; and liability for execution to satisfy a court judgment. 55 This list, though im-

portant, is not nearly as critical as Honoré's interpretation and its subsequent

adoption by Munzer. In Munzer's words, U[i]f a person has ail of these incidents,

or most of them, with respect to a certain thing, then he or she owns it.,,56

The astute reader will have noticed four key points: first, that the Copyright

Act speaks of a 'sole right'; second, that the Patent Act speaks of an 'exclusive

right'; third, that Munzer and Honoré both speak of a 'thing' as being the subject

(and therefore the source) of rights; and fourth, that a particular combination of

rights, per Honoré and Munzer, results in ownership.57 Each of these points is

germane to the discussion of intellectual capital as property (and implicitly, that

there exists some justification for finding a property interest in intellectual capital).

54 A.M. Honoré, "Ownership" in A.G. Guest, ed., Oxford Essays in Jurisprudence (First Series) ~Oxford: Clarendon Press, 1961) pp. 107-47. 5 Supra note 53 at 22.

56 Ibid. 57 Note that intellectual property legislation also speaks of 'ownership' (e.g. Copyright Act, s. 13).

36

Again, in Munzer's terms:

The idea of property - or, if you prefer, the sophisticated or legal con­ception of property - involves a constellation of Hohfeldian elements, correlatives, and opposites; a specification of standard incidents of ownership and other related but less powerfu1 interests; and a cata­logue of 'things' (tangible and intangible) that are the subject of these incidents ... Metaphorically, they are the 'sticks' in the bundle called property ... Notice, too, that the idea of property will remain open-ended until one lists the kinds of 'things' open to ownership.S8

It is the last sentence of this excerpt that is most crucial for the purposes of this

thesis. If it can be shown that intellectual capital is one of the 'things' referred to

by Munzer, the next step must necessarily be to determine if there exists some

mechanism to govern that thing in the same manner that individuals' interests are

governed by current intellectual property laws. That is, despite the bright-line re-

quirements outlined in, for example, the Copyright Act and the Patent Act, is

there some method by which intellectual capital can be seen to fit into estab-

lished categories? This may prove difficult to answer in view of Roos' definition of

intellectual capital, which "suggests that intellectual capital is anything that can

create value but that you cannot drop on your foot - in other words, it is intangi-

ble; that is it is the difference between the total value of the company and its fi-

nancial value."S9

Importing intellectual capital as a whole into the tangible property realm,

and therefore within the ambit of intellectual property law, may be problematic.

The reasons for these difficulties relate to the implicitly ambiguous nature of intel-

lectual capital itself. First, one of the hallmarks of intellectual capital is that it en-

58 Supra note 53 at 23. 59 J. Roos, G. Roos, L. Edvinsson & N.e. Dragonetti, Intellectual Capital: navigating in the new business landscape (New York: New York University Press, 1998) at 27.

37

compasses a number of different rights, interests and even objects. Not ail these

rights or interests can be properly isolated and described in relation to the parties

that hold the right or the interest, primarily because of the intangible nature of the

intellectual capital. Further, this intangibility raises the issue of whether certain

intellectual capital can be described as patrimonial property or extrapatrimonial

property, as is sometimes the case in the Québec civillaw.60 The Supreme Court

of Canada appears not to have ruled out the finding of a patrimonial (or at least

pseudo-patrimonial) right in personality rights; in Aubry v. Éditions Vice-Versa,

the Court cited the patrimonial aspect of invasion of privacy:

With respect to the patrimonial aspect of the invasion of privacy, we are of the view that the commercial or promotional exploitation of an image, whether of a well-known person or a private individual, can cause the victim material prejudice.61

Of perhaps even more interest with respect to the judgment in Aubry are the

comments made in dissent by Lamer CJ, who wrote that:

1 also agree with my colleagues that the right to one's image is primar­ily a personality right, an interest of an extrapatrimonial nature. 1 do not consider it necessary to go further and determine whether there is also a right to one's image of a patrimonial nature ... 1 would note sim­ply that it is not contrary to public order for individuals, whether fa­mous or not, to profit from consenting to the use of their image.62

This thesis contends that the Court's reasoning, and the view of Deleury and

Goubau63 allows for the possibility that the 'patrimonial property' categorization

can be extended beyond one's image to include the consent for use of personal

information. Despite the fact that classifying personal information as property

60 See supra note 35 and accompanying text. 61 Aubryv. Éditions Vice-Versa Inc., [1998] 1 S.C.R. 591 at para. 74 [hereinafter Aubry]. 62 Ibid. at para. 22. 63 Supra note 35.

38

may be cause for concern from the corporate perspective (see below, section

3.4), itis a positive step since it moves toward a more standard and uniform legal

treatment of that class of property.

If this categorization is not possible, the alternatives are twofold: first, a le­

gal justification and methodology for governing the heretofore unprotectable must

be distilled, potentially based in current intellectual property law; second, if the

first alternative is not possible, the law must be made adaptable enough to gov­

ern, through other means, that which cannot, as Roos writes, be dropped on

one's foot. The latter of these two alternatives, that of finding a safe haven for in­

tellectual capital, will be dealt with in later sections. In particular, the nature of

employment law regimes and civil litigation regimes will be examined, both to

evaluate their current efficiency in the protection of intellectual capital, and to

evaluate the potential protection that these regimes might offer.

3.3 Trade Secrets and Intellectual Capital Governance

The intellectual capital of a financial services or knowledge-based firm is

based on an interest, property or otherwise, in the information it possesses, in

whatever form. If the firm does not own, or cannot adequately control, that infor­

mation then the intellectual capital itself is useless from both a competitive and

legal stand point. The discussion of the limits of governance offered by intellectual

property legislation and regulation has shown that there are intangible asset

classes which do not, or can not, fit into the tidy categories offered by the Copy­

right Act and/or the Patent Act (or any other intellectual property legislation, for

that matter). The solution offered by the law - and in particular the common law -

39

is the concept of trade secret.64 It should be noted here again that trade secret

has been treated traditionally as a part of intellectual property law. For the sake

of clarity, however, it is treated here apart from that category. As a subset of con-

fidential information, the concept of trade secret is essentially a catch-ail cate-

gory for whatever commercial knowledge or information that cannot be otherwise

protected by existed intellectual property law. The concept, and its application, is

nevertheless firmly entrenched in both the legal and business landscapes. The

concept as a whole, however, has seen varying application across the multitude

of legal jurisdictions in which it is considered 'good law'. What follows is a brief

discussion of the current state of trade secret 'Iaw' in Canada, the United States,

in the context of the North American Free Trade Agreement, and finally, on the

global scale under the World Trade Organization. The discussion is useful since

it contextualizes the later discussion of how trade secret law could conceivably

be applied in a more uniform, structured, and ultimately more powerful manner to

intellectual capital.

Despite the inherent instability in trade secret law, it does offer interesting

possibilities with respect to intellectual capital governance. It should be noted

that the broad scope of trade secret law is both blessing and a curse, as it is this

breadth that is often a weakness. As Vaver wrote in 1990,

the law relating to confidential information is entirely judge-made. This has been both a virtue and a vice: the law is flexible and can be easily modified as new circumstances arise, but its basis and thus the direc-

64 Note that other alternatives and solutions do exist in with respect to intellectual capital govern­ance in this area. The law of unfair competition, for example, addresses unauthorized use or dis­closure of commercially sensitive or secret information.

40

tion in which it will likely develop are not always clear or easily pre­dictable.65

ln the context of technology transfer agreements, for example, an "agree-

ment cannot be enforced if it is not clear what technical information is to be kept

secret. .. technical information sufficient to 'fence in' the trade secret information

to be licensed must be lifted from the comprehensive definition.,,66 Intellectual

capital governance in financial services particularly is not concerned primarily

with technology transfer per se, since any discussion of such transfer generally

implies that the transferor has some intellectual property interest in the informa-

tion. A practitioner whose primary concern is the intellectual capital of a firm

should nevertheless be aware of the overlap between pure intellectual property

and trade secretlconfidential information.

Establishing the limits of the overlap between trade secret and pure intel-

lectual property has, to a certain extent, confounded the Canadian legal system

and Canadian law-makers. In their 1986 report Trade Secrets, the Institute of

Law Research and Reform (now known as the Alberta Law Reform Institute)

wrote that "it is probably impossible to arrive at an intrinsic definition of a trade

secret. The potential subject-matter is limitless.,,67 ln spite of this formlessness,

there are a number of general prerequisites that are critical if trade secret protec-

tion is to be extended to a category or class of information. The lack of one of the

following general qualities will generally debar trade secret protection: first, in-

65 D. Vaver, "What is a Trade Secret?" in R.T. Hughes, ed., Trade Secrets (Toronto: The Law So­ciety of Upper Canada, 1990) at 4 [hereinafter Trade Secrets]. 66 J.H. Woodley, "Taking Care of Trade Secrets: Controlling and Exploiting" in Trade Secrets, ibid. at 59. 67 Institute of Law Research and Reform (Alberta), Trade Secrets, Report No. 46 (1986) at 157.

41

formation, knowledge, or any other intangible must be secret, but absolute se-

crecy is not critical68; second, the information or knowledge must have some ac-

tuai or future economic value; third, the information or knowledge must have a

modicum of novelty; and finally, a dut Y of confidence, whether explicit (in a con-

tract) or implicit (at common law), must be imposed clearly on the handling of the

information or knowledge.69 Note that the importance of each of these 'require-

ments' varies according to the forum and/or jurisdiction in which the veracity of a

trade secret claim is tested. The sections below will examine the trade secret

frameworks in four different jurisdictions or forums. The Canadian system is ad-

dressed last sim ply because it represents a fusion of the previous regimes, each

of which has significant bearing on the domestic trade secret landscape.

3.3.1 Trade Secret in United States

Twentieth and twenty-first century treatment of the law of trade secret can

be traced, at least in its black-line form, back to the Restatement (First) of Torts

(1939).70 This provenance is already an indication that it may be difficult to sepa-

rate trade secret law from the law of torts, civil liability, and the law of confidence.

The Restatement outlined its conception of trade secret as follows:

[a] trade secret may consist of any formula, pattern, device or compi­lation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it ... It is not simply information as to single or ephem­eral events in the conduct of the business ... A trade secret is a ~roc­ess or device for continuous use in the operation of the business. 1

68 Logically, absolute secrecy is: a) almost an impossibility; and b) practically untenable, given the restrictions that su ch a rule would place on business transactions. 69 J. T. Ramsay, Ramsay on Technology Transfers and Licensing (2d) (Toronto: Butterworths, 2002) at 147 et seq. 70 Restatement (First) of Torts (1939). 71 Ibid. at 757, comment (b).

42

To this definition, which had its roots in the common law of England the United

States in the latter part of the nineteenth and early twentieth centuries, was

added the Uniform Trade Secrets Acf2, the general text of which has now been

adopted by a large majority of American states.73 Section 1 (4) of the UTSA de-

fines trade secrets as:

"Trade secret" means information, including a formula, pattern, compi­lation, program, device, method, technique, or process, that:

(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertain­able by proper means by, other persons who can obtain eco­nomic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the cir­cumstances to maintain its secrecy.74

Finally, and most recently, the definition of trade secret is outlined in section 39

of the Restatement (Third) of Unfair Competition. The Restatement says that

A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and se­cret to afford an actual or potential economic advantage over others.75

This last, as Martin notes, is certainly the most comprehensive, but not necessar-

ily the most critical definition if the goal is uniformity rather than all-encompassing

coverage.76 What is interesting in the present context is that the most recent, and

72 The Uniform Trade Secrets Act (1985), online: http://www.law.upenn.edu/bll/ulc/fnact99/1980s/utsa85.pdf (accessed, 8 June 2003) [hereinafter UTSA]. 73 A comprehensive list of state adoption of the UTSA may be found online at the website of the National Conference of Commissioners on Uniform State Laws [hereinafter NCCUSL]: http://www. nccusl.org/nccusl/uniformact factsheets/uniformacts-fs-utsa.asp (accessed, 8 June 2003). 74 UTSA, supra note 72 at S.1. 75 Restatement (Third) of Unfair Competition (1995) at section 39. 76 TA Martin, "The Evolution of Trade Secret Law in Texas: Is It Time to Recognize the Doctrine of Inevitable Disclosure?" (2001) 42 S. Tex. L. Rev. 1361. At 1366 he wrote that "[m]ore important than the number of iterations of the definition of a trade secret is the question as to which version a particular jurisdiction chose to adopt. From a cross--jurisdictional perspective, the most impor­tant definition is the one set forth by the UTSA, which has been adopted by forty--two states and the District of Columbia."

43

comprehensive, definition of this term of art is contained in the Restatement not

of Torts but of Unfair Competition. As Peterson so critically points out, the two

most recent definitions

create a somewhat indefinite line between information that is part of the public domain, and information that may be protected as a trade secret. The Restatement speaks in terms of a competitive advantage while the UTSA speaks in terms of independent economic value. In both instances, however, the advantage or value flows from the fact that the subject matter is not generally known. Sorne courts view that analysis as creating a property interest.77

ln Electro-Craft Corp. v. Controlled Motion, Inc., for example, the court wrote that

"In defining the existence of a trade secret as the threshold issue, we first focus

upon the "property rights" in the trade secret rather than on the existence of a

confidential relationship.,,78 This view was echoed by Jager in his treatise entitled

Trade Secrets Law, when he stated that:

ln trade secret decisions, the discussion of confidential relationships or the breach of an express or implied contract is often accompanied by a discussion of whether or not the alleged trade secret is "prop­erty." Indeed, many of the earlier trade secret cases in the United States analyzed the trade secret in terms of a protectable "property right.,,79

Jager cited the court in Lariscey v. United States in addressing the application of

property interests in intangible property:

The court also observed that the creator of a machine that is not pat­ented or otherwise divulged to the public has certain common law rights that accompany the ownership of tangible personal property. Those rights include the right to the possession of the idea and its physical embodiments, the right to limit disclosure to others, and the

77 G.R. Peterson, "Trade Secrets in an Information Age" (1995) 32 Hous. L. Rev. 385 at 390 [em­~hasis added]. 8 Electro-Craft Corporation v. Controlled Motion, Inc., 332 N.W.2d 890 Sup Ct. Minn. At 897. See

also Kodekey Electronics, Ine. v. Mechanex Corp., 486 F.2d 449 (U.S. Ct. App. 10th Ciro 1973) 79 M.F. Jager, Trade Secrets Law at section 4.3 (Westlaw Database TRDSECRT) (updated May 2003).

44

right to contract the terms of use by others. The court concluded: "The laws governing ownership and use of un-patented property and un­published information thus der ive from theories of property, adapted to achieve fairness in commercial relationships, and are rooted in the common la w. 80

Though it must be noted that the court's judgment in this case has received

negative treatment, its reference to Ruckelshaus is informative. The court, in re-

ferring to 'theories of property', was presumably referring to nothing more com-

plex than the generally accepted common law construct of private property rights

which includes the liberty to use, the power to alienate, and control against the

interference of others. The court's view in Lariscey would seem to parallel the

'bundle of rights' property conception referred to above (see infra note 54 and

accompanying text). In conjunction with the definitions of trade secret in the re-

statements and the UTSA, this jurisprudential and doctrinal theme is a crucial

logical step that the Canadian legal system has not taken, and is an essential

aspect of intellectual capital governance in this country, since no such definitions

exist at Canadian law. The commoditization of trade secrets and the assignment

of property rights in those secrets, however, particularly at Canadian law, has

sorne pitfalls which will be addressed below and in Chapter Four.

3.3.2 NAFTA Treatment of Trade Secret

The introduction of the North American Free Trade Agreement has had a

significant impact on the way that judicial systems in Canada, the United States,

and Mexico treat the protection of intellectual property and trade secrets.81 The

80 Ibid., citing Lariscey v. United States, 949 F.2d 1137, 20 U.S.P.Q.2d 1845, 1848 (Fed. Ciro 1991), citing Ruckelshaus V. Monsanto Co., 467 U.S. 986, 104 S. Ct. 2862 [emphasis added]. 81 S.J. Fields, "An Overview of NAFTA's Impact on Intellectual Property" (1994) 10 Intellectual Property Today 14.

45

applicable sections of Agreement are found in Chapter 17 - Intellectual Property,

which states in part:

Article 17.01(1) - Each Party shall provide in its territory to the nation­ais of another Party adequate and effective protection and enforce­ment of intellectual property rights, while ensuring that measures to enforce intellectual property rights do not themselves become barriers to legitimate trade.

Article 17.11 (1) - Each Party shall provide the legal means for any person to prevent trade secrets from being disclosed to, acquired by, or used by others without the consent of the person lawfully in control of the information in a manner contrary to honest commercial practices, in so far as: (a) the information is secret in the sense that it is not, as a body or in

the precise configuration and assembly of its components, generally known among or readily accessible to persons that normally deal with the kind of information in question;

(b) the information has actual or potential commercial value because it is secret; and

(c) the person lawfully in control of the information has taken reasonable steps under the circumstances to keep it secret.

2. A Party may require that to qualify for protection a trade secret must be evidenced in documents, electronic or magnetic means, optical discs, microfilms, films or other similar instruments.

3. No Party may limit the duration of protection for trade secrets, so long as the conditions in paragraph 1 exist. .. 82

The imposition of the provisions relating to the protection of intellectual

property and trade secrets imports the idea of 'national treatment'83 between the

NAFTA trading partners. In effect, this raises the bar with respect to the protec-

82 North American Free Trade Agreement, Arts. 17.01 and 17.11 [hereinafter NAFTA]. 83 Supra note 82, Chapter 3 - National Treatment and Market Access for Goods. For a compre­hensive examination of 'national treatment', see W. Patry, "Choice of Law and International Copy­right" (2000) 48 Am. J. Comp. L. 383. See in particular, footnotes 62-117 and accompanying text.

46

tion that both Canada and Mexico must offer to the other NAFTA Parties.84 The

result is the importation (or, it might be said, imposition) of the legal framework

with the highest or most comprehensive degree of protection into systems with a

narrower conception of trade secret. As one American writer confidently averred:

The United States has the most comprehensive trade secret protec­tion doctrines of ail three countries. The Uniform Trade Secrets Act and the Restatement of Unfair Competition have the broadest defini­tions of trade secrets, the broadest elements of trade secrets, and the broadest of available remedies.85

The result of these jurisdictional variations in the treatment of trade secret is that

the country with the most restricted definition of trade secret - that is, the country

whose definition is most narrowly construed - is forced to accept a more com­

prehensive definition.86 The international homogenization of the treatment of

trade secrets, particularly in the NAFTA context, has profound implications on the

mechanisms which en able (and in some cases hinder) intellectual capital gov-

ernance in Canada. While the expansion of the definition of trade secret may weil

allow more comprehensive treatment, the fundamental differences between ju-

risdictions bring with them inconsistencies which will have to be addressed.

84 ln this context, it should be noted that 'Parties' reference to the respective states who are signa­tories to the NAFTA rather than to a particular 'enterprise of a Party' or 'person of a Party". The latter terms are defined as "an enterprise constituted or organized under the law of a Party" and "a national, or an enterprise of a Party", respectively. Ibid., art. 201. 85 D.L. Boyd, "Trade Secret Doctrines of the NAFTA Countries: The sources of law, the remedies available, and suggestions for improvement" (1997) 14 Ariz. J. Int'I & Comp. Law 879 at 903. 86 Given the doctrinal similarities between the American and Canadian treatments of trade secret, it was Mexico that was under the most pressure as a result of signing the NAFTA, and subse­quently saw the most drastic structural changes. See especially B. F. Kryzda & S. F. Downey, "Overview of Recent Changes in Mexican Industrial Property Law and the Enforcement of Rights by the Relevant Government Authorities" (1995) 21 Can.-U.S. L.J. 99 and D. L. Dubuque, "The implication of NAFTA to intellectual property protection in the U.S. and Mexico and the extraterri­toriality of U.S. intellectual property laws" (1996) 5 D.C.L. J. Int'I L. & Prac. 139. See also C. Brown & C. Manolakas, "Trade in Technology Within the Free Trade Zone: The Impact of the WTO Agreement, NAFTA, and Tax Treaties on the NAFTA Signatories" (2000) 21 N.W. J. Int'I L. &Bus.71.

47

3.3.3 World Trade Organization Treatment of Trade Secret

On January 1, 1995, the member states of the World Trade Organization

("WTO") saw the coming-into-force of the Agreement on Trade-related Aspects of

Intellectual Property Rights ("TRIPS'). This agreement addresses the interna-

tional protection and control of the full spectrum of intellectual property rights.

The text of the agreement includes a definition of trade secret. The definition, at

article 39(2), reads:

39(2). Natural and legal persons shall have the possibility of prevent­ing information lawfully within their control from being dis­closed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices10 so long as such information:

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its compo­nents, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

(b) has commercial value because it is secret; and (c) has been subject to reasonable steps under the cir­

cumstances, by the person lawfully in control of the information, to keep it secret.S7

Interestingly, the text of the TRIPS agreement appears to lean towards a mon op-

oly-based rather than a property rights-based conception of 'undisclosed informa-

tion' (within which trade secret, know-how and ultimately intellectual capital fall).

ln fa ct , the WTO commentary that accompanies the text of the agreement states

that:

The Agreement does not require undisclosed information to be treated as a form of property, but it does require that a person lawfully in control of such information must have the possibility of preventing it from being disclosed to, acquired by, or used by others without his or

87 The Agreement on Trade-related Aspects of Intellectual Property Rights (1995), WTO, article 39(2) [hereinafter TRIPS].

48

her consent in a manner contrary to honest commercial practices.88

[emphasis added].

The critical inconsistency between the TRIPS definition (and commentary)

and, for example, American treatment of trade secret is that the TRIPS "does not

require" a property treatment. On its face the refore, the current Canadian treat-

ment of trade secret (outlined below) is not inconsistent with international law.

The Canadian treatment, however, is further complicated by its membership in

the NAFTA (see section 3.3.2). As discussed, the NAFTA provisions which ad-

dress intellectual property in general, and trade secret in particular, appear to im-

port the American treatment into Canadian law. Practically speaking, the Cana-

dian system is faced with an uncomfortable choice as between fulfilling only the

requirements of the TRIPS agreement (and maintaining the status quo - the

common law treatment of trade secret) and a more comprehensive importation of

the American treatment. 89

If the proposition advanced by this thesis is correct in declaring that the

Canadian treatment of intellectual capital (and therefore trade secret as an inte-

gral part of that asset class) is insufficiently robust, two conclusions can be

drawn: first, that the Canadian legal system must look elsewhere for the means

to shore up that treatment; and second, that in doing so, one should be wary of

the effects of international law and trade agreement obligations on the sover-

88 TRIPS, supra note 87 Commentary, online at: http://www.wto.org/english/tratope/tripse/inteI2e.htm. 89 Though the concomitant effect that such importation has on Canadian sovereignty is not a sub­ject that can be addressed in the context of the present thesis, the homogenization of legal re­gimes on the international level is part and parcel of the refocusing that will be required in the Ca­nadian treatment of trade secret. See JAR. Nafziger, "NAFTA's regime for intellectual property: ln the mainstream of public international law" (1997) 19 Hous. J. Int'I L 807 and W.L. Hayhurst, "When Sovereignties May Coll ide -- Sovereignties and the Regulation of Business in Relation to Intellectual Property: A Canadian Perspective" (1994) 20 Can.-U.S. L.J. 195.

49

eignty of the Canadian treatment. Such caution is not intended as a prejudgment

as to the effectiveness of American (or other) treatments of intellectual capital

and trade secret; it does, however, mean that any legal transplantation should be

made with Canadian business realities, legal structures, and policy considera-

tions in mind. Section 3.3.4 is an examination of the Canadian treatment of trade

secret. The description and analysis are based on the fundamental assumption

that foreign legal regimes can, if incorporated carefully, have a positive impact on

the Canadian domestic trade secret regime and intellectual capital governance.

3.3.4 Trade Secret in Canada

On first examination, the Canadian position with respect to trade secrets (as

an integral component of an intellectual capital governance scheme) appears

similar ta that of the United States.90 There, however, case law, the Restatement

(First) of Torts (1939l1 and more recently, the Uniform Trade Secrets ACt?2 and

the Resfatement (Third) of Unfair Competition93 have collectively served as a

comprehensive example for other jurisdictions. In Canada, by contrast, the defini-

tion of trade secret is a creation of the common law. Discouragingly, as recently

as 2002, Ramsay wrote that

[t]o date, neither the federal government nor the nine common-Iaw provinces have passed any legislation covering the protection offered to trade secrets, let alone defining what a trade secret. Likewise, the Province of Québec, governed by civil law, has not enacted any codes specifically related to trade secrets.94

This paucity of legislative definition, however, does not mean that efforts have not

90 Supra note 69 at 146. 91 Ibid. 92 Supra note 72. 93 Supra note 75. 94 Supra note 69 at 146.

50

been made towards that end. In fa ct , as far back as 1989, the Uniform Law Con-

ference of Canada ("ULCC") ratified their version of a Uniform Trade Secrets Act

with the intention of promoting its enactment in Canadian provincial jurisdictions.

ln the text, the ULCC defines 'trade secret information' as including "information

set out, contained or embodied in, but not limited to, a formula, pattern, plan,

compilation, computer program, method, technique, process, product, device or

mechanism.,,95 Interestingly, the proposed Act specifically excludes so called

work product knowledge. At section five, the Act states that

Nothing in this Act is intended to impose on anyone any liability for the acquisition, disclosure or use of information acquired in the course of a persons work if the information is of such a nature that its acquisi­tion amounts to no more than an enhancement of that person's per­sonal knowledge, skill or expertise.96

The text of the Act, while it does give a limited sense of what a legislative defini-

tion of trade secret might look like in the Canadian context, is cause for concern

in the context of intellectual capital governance. In particular, the exclusion at

section five of the proposed Uniform Act with respect to 'knowledge' severely lim-

its the potential overall effectiveness of the definition. Further, given the time

elapsed since the Uniform Act was proposed by the ULCC, and the fact that no

Canadian jurisdiction has moved to enact the proposed legislation, the conclusion

must be that the Canadian system is content with the status quo - that is, an en-

tirely common law, judge-made, interpretation of trade secret. Lastly, given legis-

lative reticence to more thoroughly define the terms of Canadian trade secret, it

seems that legislators, the judiciary, and indeed the business community are say-

95 Uniform Trade Secrets Act (1989) (Canada), Uniform Law Conference of Canada, s. 1(2) 96 Supra note 95 at s. 5.

51

ing that "we don't know what a trade secret is, but we recognize it when we see

it." It is useful, in the context of such a comment, to closely examine other juris-

prudential sources, as weil as how other Canadian legislation might have some

impact on a more concrete definition of trade secret.

Interestingly, despite the lack of success in implementing a uniform trade

secrets act in Canada, there is nevertheless some legislative reference to the

term. The Access to Information Act ("AIA")97, for example, creates an exception

to disclosure by the government - for either the government or third parties (cor-

porations that are required to file documents with the federal government) - if

such disclosure would compromise a trade secret. The undefined references to

trade secret in the AIA appear at sections 18 and 20:

18. The head of a government institution may refuse to disclose any record requested under this Act that contains

(a) trade secrets or financial, commercial, scientific or technical information that belongs to the Government of Canada or a gov­ernment institution and has substantial value or is reasonably likely to have substantial value;

20. (1) Subject to this section, the head of a government institution shall refuse to disclose any record requested under this Act that con­tains

(a) trade secrets of a third party;

(b) financial, commercial, scientific or technical information that is confidential information supplied to a government institution by a third party and is treated consistently in a confidential manner by the third party;

(c) information the disclosure of which could reasonably be ex­pected to result in material financial loss or gain to, or could rea-

97 Access to Information Act, R.S.C., c. A-1.

52

sonably be expected to prejudice the competitive position of, a third party; or

(d) information the disclosure of which could reasonably be ex­pected to interfere with contractual or other negotiations of a third party.9B

This would seem a relatively clear admission of at least the existence of trade se-

cret as a legislative concept. In the context of the financial services industry - and

the governance of their intellectual capital - the above indirect definition appears

applicable. The fact remains that there is very little jurisprudence in respect of this

section of the AIA. Two cases that do deal with both trade secret and confidential

information are Société Gamma Inc. v. Canada (Department of Secretary of

Statel9 , which deals with trade secret in the context of the AIA at some length,

and Air Atonabee Ltd. v. Canada (Minister of Transport) 100, which addresses con-

fidential information. Both cases concerned the release of information which the

plaintiffs considered to be both trade secret and confidential information, and thus

exempt from disclosure by virtue of section 20 of the AIA. In Gamma, for exam-

pie, Justice Strayer wrote that:

The applicant appears to assert that it is the whole of the Proposai which is a IItrade secretll • There is unfortunately no authoritative juris­prudence on what is a "trade secret" for the pur poses of the Access to Information Act. One can, 1 think, conclude that in the context of sub­section 20(1) trade secrets must have a reasonably narrow interpreta­tion since one would assume that they do not overlap the other cate­gories: in particular, they can be contrasted to IIcommercial ... confi­dential information supplied to a government institution . . . treated consistently in a confidential manner . . . " which is protected under paragraph (b). In respect of neither (a) nor (b) is there a need for any

98 Supra note 97, 55. 18 & 20. 99 Société Gamma Inc. v. Canada (Department of Secretary of State) [1994] F.C.J. No. 589 [here­inafter Gamma]. 100 Air Atonabee Ltd. v. Canada (Minister of Transport), [1989] F.C.J. No. 453, (1989) 27 C.P.R. (3d) 180 [hereinafter Atonabee].

53

harm to be demonstrated from disclosure for it to be protected. There must be some difference between a trade secret and something which is merely "confidential" and supplied to a government institu­tion. 1 am of the view that a trade secret must be something, probably of a technical nature, which is guarded very closely and is of such pe­culiar value to the owner of the trade secret that harm to him would be presumed by its mere disclosure. 1

01 [emphasis added]

Atonabee, in contrast, addressed the nature of confidential information. It should

be recalled here that trade secret is treated as a subset of confidential informa-

tion. 102 ln Atonabee, MacKay J states that

whether information is confidential will depend upon its content, its pur poses and the circumstances in which it is compiled and commu­nicated, namely:

a) that the content of the record be such that the information it con­tains is not available from sources otherwise accessible by the public or that could not be obtained by observation or independ­ent study by a member of the public acting on his own,

b) that the information originate and be communicated in a reason­able expectation of confidence that it will not be disclosed, and

c) that the information be communicated, whether required by law or supplied gratuitously, in a relationship between government and the party supplying it that is either a fiduciary relationship or one that is not contrary to the public interest, and which relation­ship will be fostered for public benefit by confidential communica­tion. 103 [emphasis added].

Both Gamma and Atonabee suggest that a key aspect of a judicial determination

of confidential information or trade secret depends to a large degree on the inten-

tion of the party claiming that status for information or knowledge. This view is

confirmed by Handa, who writes that:

Canadian and British courts have applied three general requirements for a successful trade secret claim: (1) the information must have the necessary quality of confidence; (2) the information must have been

101 Supra note 99 at para. 7. 102 Supra note 69 at 145. 103 Supra note 100 at 202. See also Montana Band of Indians v. Canada (Minister of Indian and Norlhern Affairs), (1988) 26 C.P.R. (3d) 68 (F.C.T.D.).

54

imparted in circumstances importing an obligation of confidence (i.e. a "special relationship" must exist between the parties); and (3) there must be an unauthorized subsequent use of that information to the detriment of the party communicating it.104

It remains to determine if such a 'special relationship' exists between parties in

the financial services sector, and with respect to what information, trade secrets,

or knowledge.

3.3.4.1 The Mutual Fund Industry Example

A prime example of a financial services business domain in which enor-

mous amounts of information - most of it confidential - is used is the mutual fund

industry. Information transferred between companies (usually the a fund distribu-

tor and a fund company) is undoubtedly confidential, since the intention of the

parties transferring the information and documents is to maintain its integrity.105

Such compliance forms the subject of a large body of regulatory law106, and com­

pliance officers require certification in order to fulfil their duties.107 A typical mu-

tuai fund transaction - which takes place when an investor places a buy order

with his or her distributor - and the subsequent settlement of that order, involves

multiple parties exchanging information (which information is often proprietary).

The Canadian Investment Funds Operations Course states that

[g]enerally, the following information is required to place an order:

104 S. Handa, "Reverse engineering computer programs under Canadian copyright law" (1995) 40 McGili L.J. 621 at 648. 105 See section 3.4, below, for further discussion of confidential information. 106 The Mutual Fund industry is governed, in large part, by the provincial securities commissions and is regulated by National Instruments. See, for example, National Instrument 81-101 - Mutual Fund Prospectus Disclosure and National Instrument 81-102 - Mutual Funds. Online: http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Rules/rules.html(date accessed: 13 August 2003). 107 The Investment Funds Institute of Canada, The Practical Guide to Compliance for Fund Man­agers (Toronto: The Investment Funds Institute of Canada, 2002) and The Practical Guide to Compliance for Retail Distributors (Toronto: The Investment Funds Institute of Canada, 2002).

55

• Investor name and social insurance number • Account number • Fund name or number • Number of units or dollar amount (and currency, if available)108

While this particular transaction involves only the transfer of client information be-

tween firms, and cannot realistically be said to be 'trade secret', even by the pro-

posed ULCC definition, many transactions between mutual fund companies will

involve the transfer of intellectual capital. In the Canadian context for example,

the industry is in the process of conglomeration as the larger players in the indus-

try absorb the smaller ones. A recent example in the Canadian fund marketplace

was the acquisition of Spectrum Investments by CI Funds, a transaction that was

specifically designed to integrate not just the client information of the former, but

of the so-called 'back-office' systems.109 Such systems and procedures fit within

the definition of trade secret as proposed by the ULCC and, if the American

treatment of trade secret in this context is, for the moment, assumed to be a

model treatment, then the implication is that in such transactions, a higher level of

protection than simple contract is required for the effective and efficient function-

ing of the market.

The leading American case, mentioned above (supra note 39), is State

Street Bank & Trust Co. v. Signature Finaneial Group, Ine., in which the two par-

ties were at odds over a method of pooling mutual fund assets without sacrificing

the segregated nature of those funds. The result of the judgment in State Street

108 The Investment Funds Institute of Canada, The Canadian Investment Funds Operations Course (Toronto: The Investment Funds Institute of Canada, 2002) at 4-5. 109 Canada Newswire, "CI Funds announces successful integration of Spectrum Investments", online: http://www.newswire.ca/releases/September2002/03/c7342.html(accessed June 17, 2003).

56

was that !lafter State Street, the path to patentability of software--implemented

business methods appeared unobstructed.,,110 As Szczerbicki notes, however,

despite the fact that the patentability of software-based processes is now weil es­

tablished in the United States 111, commentators have suggested that

interest in patenting computer--implemented business methods will be short lived because the benefits of patent protection fail to outweigh the incumbent costs of obtaining a patent. Business methods have a short market time, thus, time-consuming and expensive patent protec­tion may not be obtained until after the market life of the innovation has expired, thereby leaving a company with a worthless patent. This is especially true of quantitative fund managers whose methods are continually in flux and whose innovations are obsolete within four to five years ... Other critics argue that computer software patents are redundant because most innovations are already protected by trade secret law. 112

The result in State Street, and the subsequent commentary, brings into fur-

ther focus the issue facing the Canadian system. Since there is currently no pre­

cise definition of trade secret,113 and the Canadian courts have been reluctant to

over-extend patent protection,114 a vacuum is created with respect to many of the

processes, methods, and procedures involved in the financial services sector in

general, and the mutual fund industry in particular. It is not the contention of this

thesis that patent protection such as that extended by State Street should be im-

plemented in Canada. The trade secret protection offered in the American con-

110 S. Szczerbicki, "The Shakedown on State Street", (2000) 79 Or. L. Rev. 253 at 270. 111 Szczerbicki, ibid. at footnote 105, writes that in the subsequent judgment in AT& T Corp. v. Ex­cel Communications, Inc., 172 F.3d 1352, 1355 (Fed. Ciro 1999), "reversed the lower court's sum­mary judgment invalidation of the patent's claims and remanded for further proceedings in light of the State Street holding since the lower court did not have the benefit of that decision when it au­thored its opinion." See also C. S. Cantzler, "State Street: Leading the Way to Consistency for Patentability of Computer Software" (2000) 71 U. Colo. L. Rev. 423. 112 Supra note 110 at 272. 113 Email from John T. Ramsay, Q.C. (11 June 2003). 114 K.Sykes, "Patents and the Public Interest: The Cipro Controversy" (2002) 60 U.T. Fac. L. Rev. 115 at 119. A recent example of this concern was the Supreme Court of Canada's decision in Harvard College V. Canada (Commissioner of Patents), [2002] S.C.J. No. 77, which denied the patentability of higher life forms such as animais.

57

text is a sufficiently robust governance scheme with respect to business methods,

but far more uniformity and consistency is needed in the Canadian treatment if

such protection is to be effective.

It is important in the context of the mutual fund industry example to recall

that there is a distinction between information and knowledge. While plans, proc-

esses, models, and other intangible intellectual capital fits within the category of

knowledge ('know-how', in the language of trade secret law), there remains the

question of how the law - and in particular trade secret law - treats pure informa-

tion, since information is often treated outside of the intellectual property

sphere.115 The distinction between knowledge and information has, as AI-Ali

writes, "been studied thoroughly, because if the process by which information is

converted into knowledge can be rationally analyzed, then it can be com­

puted.,,116 To this end, much has been written by both management and legal

scholars about converting intellectual capital into intellectual property. The current

system, as the preceding sections have illustrated, has a number of shortcomings

which have limited the extent to which intellectual capital - situated as it is out-

side the sphere of legal protection - has been and can be protected.

So far, the thrust of this thesis is that while intellectual capital management,

as a discipline as weil as a corporate structure and mentality, is one means to an

end, there is a road less-travelled that is ripe for development and discussion.

The current structure, in effect, begs the question of why more effort has not

115 Privacy of personal health information is of particular importance in view of technological ad­vances in medical record-keeping. See, for example J. 8ickle & M. Appleby, "Privacy Legislation and Health Care" (2001) 21 Health L. Cano 85 and Tigerstrom, supra note 11. 116 N. AI-Ali, Comprehensive Intellectual Capital Management: Step-by-Step (Hoboken: Wiley & Sons, 2003) at 82.

58

been expended doing precisely the reverse; that is, why not expand the current

legal protections, and make them more uniform, coherent, and effective rather

than attempting to insert the broad and vaguely delineated category of intellectual

capital into current intellectual property definitions?

Nowhere is the disconnect between the law and definitions of knowledge,

information, and property more in evidence than in the area of personal informa­

tion. Financial services firms are dependent on the information that they glean

from - and in some cases require from - their customers, and this information is

of immense value in the form of customer and transaction lists. Expanding the

reach of the law to include customer capital (see Figure 1 above and the Zurich

Model at section 2.2.1), however, brings with it a host of issues and concerns that

any expansion of the legal regime will have to address if intellectual capital of this

type is ta be effectively governed. Section 3.4 examines how the regulation of

personal information - and the protection of the consumer - places such regula­

tion in direct opposition to the control which knowledge-based companies such as

financial services firms desire.

3.4 Persona"nformation Regulation Regimes

3.4.1 Introduction

The right to control the dissemination of information that pertains to oneself,

otherwise known as the right to privacy, is a subject of critical- if indirect - impor­

tance to the establishment of a framework for the control and regulation of intel­

lectual capital in the Canadian financial services industry. Information about cli-

59

ents and customers can have immense value to a compani 17 and, in the case of

the financial services industry, can add as much as one hundred percent to the

market value of a company relative to the company's net book value. 118 Indeed,

as AI-Ali writes:

The extensive use of intangibles as raw resources is not limited to the high-tech, chemical, and consumer products industries. Organizations in traditional industries [such as banks] found it hard to succeed with­out a strong commitment to innovation as weiL .. [w]ith intellectual re­sources forming the majority of the required raw materials for rroduc­tion, the knowledge economy has created a [new] demand ... 11

Against this economic go Id mine stands the notion of the legal protection of pri-

vacy, both by legislation and the common law. While it is not within the scope of

this thesis generally to address privacy law in the Canadian context, one question

is crucial. The question can be asked in two parts; they are as follows: first, does

the concept of privacy (as contained in legislation and the common law) create a

real and definable property interest in the personal information that makes up

some or ail of the structural intellectual capital of financial services companies;

and second, if there is a property interest, is that interest in conflict with the inter-

ests that the companies currently hold in the information via traditional intellectual

property law and trade secret treatment?

117 K.E. Sveiby, The New Organizational Wealth: managing & measuring knowledge-based assets ~San Francisco: Berret-Koehler, 1997) at 6.

18 Net book value, as it relates to the measurement of the intellectual capital of a company, is defined by AI-Ali, supra note 116 at 6, as follows: "To arrive at an approximation of the value of company's intellectual capital, subtract the book value of a company - the total of its tangible and capital resources - from its market value ... it is noted that intellectual capital makes up around 80 ~ercent of the Standard and Poor's 500 companies ... ". 19 Supra note 116 at 8.

60

3.4.2 Personal information and privacy in the commercial context

ln positing that there is, at Canadian law, a property interest in the personal

information which can form the backbone of a service-based financial service in-

dustry, it is important to have workable definitions of the terms and some idea of

the history behind their current conceptions. In particular, it must be recalled that

this thesis is based on the critical nature of information and knowledge to the

competitive success of financial services companies. Jeffrey puts this relation into

stark relief in writing that with new technology and economies,

an awareness developed that possession and control of information could be as important to the success of a business as maintaining ac­cess to labour, materials, energy and marketplace.

An early study of computers and privacy concluded that infor­mation was "an extremely powerful commodity"; a commodity, more­over, which individuals wished to keep to themselves, but which was coveted by others.120

ln the context of this thesis, it is the use of the word 'commodity' which has the

effect of importing notions of property into the treatment of personal information

and the protection of that interest - from both the consumers' and marketplaces'

perspective. The essential point is, as Jeffrey points out is that

[i]t may be impossible, or at least untenable, to attribute to information the characteristics of tangible property. What is significant at this stage, however, is the fact that in the private sector, information is perceived and treated as a commodity.121

Despite the commoditization of personal property in the contemporary financial

services market, it should be remembered that 'information privacy,122 should be

differentiated from the right of privacy in general, as the latter is a far more inclu-

120 B. Jeffrey, Privacy and Free Enterprise: the legal protection of personal information in the pri­vate sector, 3d ed. (Ottawa: Public Interest Advocacy Centre, 1997) at 30. 121 Ibid. at 31. 122 Supra note 11 at 46.

61

sive category. The former, 'information privacy', has been defined variously as

"the right to control how information about oneself is used by those to whom it is

disclosed,,123 and as the "claim of individuals, groups and institutions to determine

for themselves when, how and to what extent information about them is commu­

nicated to others.,,124 ln either definition, the key element is the control over that

which is considered personal information.

When it is recalled that one of the criteria for ownership (the existence of a

property right or interest) is that there is a degree of control over the object of the

right, the parallel between personal information property and 'tangible' property

gains more credibility. There is limited scholarship on this point, particularly as it

relates to creating a new category of property interest in personal information,

and it is tempered with the view that the parallel is not absolute. Ferman, for ex-

ample, points out that though such a category is needed, it should not be equated

with absolute ownership.125 It can be assumed here that this reticence has its ori-

gins in Posner's economic analysis of privacy and social efficiency 126; Posner is

flatly against protecting privacy.

For the sake of the argument that is a central theme of this thesis - that the

law must adapt with respect to property interests in intellectual capital - it must

be assumed that a property interest can be attached to the intangible nature of

intellectual capital. This is not so far-fetched an idea since, as Weinrib notes,

123 S. B. Petersen, "Your Life as an Open Book: Has Technology Rendered Personal Privacy Vir­tually Obsolete?" (1995) 48 Federal Communications Law Journal 163 at 164. 124 A. Westin, Privacy and Freedom (New York: Atheneum, 1967) at 32. 125 L. Ferman, Protecting the Privacy of Personal Information (LL.M. Thesis, York University, 1987) [unpublished] at 100. 126 R. Posner, "The Right of Privacy" (1978) 12 Ga. L.R. 393.

62

even before the advent of intellectual property legislation, the common law of­

fered property interest protection to business goodwill and trademarks. 127 ln re-

viewing the case law (up to 1988, when the article was written), Weinrib pointedly

concludes that

[h]owever one characterizes the court's intervention, it amounts to preventing others from using that information and is an ascription of property rights to the plaintiff. To resist the application of the label 'property' in those circumstances is pointless. The actual term used in those cases in which the courts inevitably grant relief is hardly of much practical importance. But a proper conceptual foundation for the protection of confidential information is essential for the resolution of cases involving unconscious users, third parties, and unauthorized takers where the property concept is necessary to justify interven­tion. 128

Weinrib's conclusion strongly supports the central notion of this thesis - that a

pragmatic but soundly principled approach to the ascription of property rights in

information and intellectual capital is needed in order to prevent more confusion

in the minds of both consumers and financial services companies.

Indeed, Rickelson notes the effects of that confusion when he writes that

"unlike most other types of proprietary interests which are carved out of some

greater whole, it is hard to visualize greater or lesser interests subsisting in confi­

dential information.,,129 With some clairvoyance on this point, Lamer J. wrote in R.

v. Stewart that "it is possible that, with time, confidential information will come to

be considered as property in the civil law or even be granted speciallegal protec­

tion by statutory enactment.,,130 The following sections will examine the right of

127 A.S. Weinrib, "Information and Property" (1988) 38 U.T.L.J. 117 at 123. 128 Ibid. at 136. 129 S. Ricketson, "Confidential Information - A New Proprietary Interest?" (1977) 11 Melb. U.L.R. 223 (pt. 1) and 289 (pt. Il) at 314. 130 R. v. Stewart, [1988] 1 S.C.R. 963 at 976.

63

information privacy as it is currently conceived in legislation, and attempt to un-

tangle the various interests held in the valuable resource that is personal informa-

tion.

3.4.3 Canadian Federal Treatment

The Personal Information Protection and Electronic Documents Act131

(PIPEDA), is the most recent attempt by the federal government to solidify the

right of privacy for individuals in the face of growing pressure from private enter-

prise to allow unfettered use of personal information for commercial purposes.

Indeed the long title of PIPEDA reads, in part "An Act to support and promote

electronic commerce by protecting personal information that is collected, used or

disclosed in certain circumstances, by providing for the use of electronic means

to communicate or record information or transactions ..... 132 PIPEDA legislates the

requirement for consent to the use and dissemination of personal information by

ail organizations, including those in the financial services sector. 133 The critical

parallel that must be drawn between the effect of PIPEDA and intellectual capital

governance is that by requiring consent for the dissemination of personal infor-

mation, the government has thrown ownership and control of much commercially

valuable information into doubt. If the premise of this thesis is correct, and there

is a property interest in the information collected and used by financial services

131 Supra note 33. 132 Supra note 33 133 Since PIPEDA came into force on January 1, 2001, the three-year transitional period contained in section 30(1) will come to an end on January 1, 2004. At that time, PIPEDA will apply to ail in­formation collection in the course of commercial activity. The force of PIPEDA on the national scale will only be attenuated in provinces which have enacted "substantially similar" legislation, at which time the Governor-in-Council has the power to exempt by order. See PIPEDA section 26(2)(b).

64

companies, then business and the law is faced with a situation of dual or joint

ownership of that information.

Consider the situation wherein a corporation desires to spin-off a division of

its business which is highly dependent on information that has been collected by

the parent company for a particular purpose. First, PIPEDA places significant re-

strictions on the ability to complete such a transaction, since such a financial

transaction is not among the exceptions enumerated in section 7(2), which deals

with use requiring consent. Second, any information which went with the transac-

tion - any personal information contained in customer lists, for example - would

be both valueless and useless to the new corporation, since it could not be used

in any other way than that for which the information initially was collected. In this

example, the duality of the ownership in the personal information is far more fo-

cused. While the corporation may own the copyright in the customer list (via ei-

ther copyright or trade secret), the customer has the right to exclude the corpora-

tion from its use. The business community, therefore, is faced with competing in-

terests in the information which is on the one hand extremely valuable as part of

a firm's intellectual capital, and on the other hand, remains in the control of the

individual consumer. PIPEDA, therefore, has had the effect of substantially in-

creasing the property interests in personal information in the Canadian context.

At the same time, if intellectual capital valuation models are correct and accu­

rate134, the legislation will have the effect of reducing the value and commercial

viability of information-intensive industries and corporations. As Scassa writes,

134 See, for example, the models for intellectual capital management and valuation presented by AI-Ali, supra note 116 and Brooking, supra note 50.

65

[c]onsent in law ... is an inherently variable concept. Notions of ex­press and implied consent add layers to the interpretation of adequate consent in areas such as tort and contract law. It is to be expected, therefore, that in any personal information protection legislation the notion of consent will be a flexible one. However, the normative provi­sions of PIPEDA render the notion of consent so mutable and con­text-specific as to raise concerns among businesses and consumers alike as to whether the ap!?/opriate consent is being sought in any given set of circumstances. 35 [emphasis added].

The idea of a consent requirement implying property in personal information

draws force from two sources. First, there is the parallel with intellectual property

laws such as the Copyright Act, the Trademark Act, and the Patent Act, ail of

which create an artificial monopoly vis-à-vis the use of property. This comparison

is particularly fruitful insomuch as intellectual property is, like personal informa-

tion, intangible. The Copyright Act, for example, protects the expression of an

idea, and gives the owner the exclusive right to permit or prohibit the use of that

expression.136 ln the same way, PIPEDA can be said to grant the 'owner' of per-

sonal information the exclusive right to permit or prohibit the use of his or her

personal information. PIPEDA treads a very thin line in balancing the interests of

the individual against the interests of corporations in using personal information

for financial gain. Admittedly, personal information cannot easily be fit into tradi-

tional categories of property since it lacks, in a certain sense, even the basic at­

tributes of property.137 It is, nevertheless, a thing which can and has been com-

modified by the knowledge economy. From a practical perspective, information

has now become something to which property rights can be attached - it is the

135 T. Scassa, "Text and Context: Making Sense of Canada's New Personal Information Protec­tion Legislation" (2000-2001) 32 Ottawa L.R. 1 at para. 9. 136 Supra note 7 , s.3(1). 137 Vaver, supra note 45 at 5.

66

nature of these rights which remains ambiguous. As Vaver writes, "the property

part of intellectual property should not close of debate about what rights attach or

should attach to a particular activity."138

The second source from which the notion of 'consent as ownership' draws

force is property theory itself. Penner expresses his view of the foundations of

property law in his 'exclusion thesis', which states that "the right to property is a

right to exclude others from things which is grounded by the interest we have in

the use of things.,,139 Penner's 'exclusionary thesis' appears strikingly similar to

the premise of PIPEDA - individuals have the exclusive right to use their per-

sonal information and, therefore, the exclusive right to that information as their

property. Further, Penner's view is buttressed by his acknowledgement that indi-

vidual owners of personal information exist outside of a social context. Here

again, PIPEDA forthrightly acknowledges that the regulation it contains is a bal-

ancing act of the private and social uses of personal information. Interestingly,

though his 'exclusionary thesis' tends to support the notion of property in per-

sonal information via consent, Penner's 'separability thesis' seems in direct con-

flict with the former view. 140 ln fact, the idea that for property to reside in some

'thing' there must be separation of 'owner' from 'owned thing,141 argues against

any ownership in personal information, since an individual cannot truly be sepa-

rated from his personal information; such information can only be copied.

138 Ibid. 139 J.E. Penner, The Idea of Property in Law (Oxford: Oxford University Press, 1997) at 71. 140 Supra note 139 at chapter five. 141 Penner's 'separability thesis', supra note 139 at 111, is as follows:

Only those 'things' in the world which are contingently associated with any particular owner may be objects of property; as a function of the nature of this contingency, in theory nothing of normative consequence beyond the fact that the ownership has changed occurs when an object of property is alienated to another.

67

Penner, however, inadvertently supports the PIPEDA conception of personal

information as property in citing the example of a state's rights to its official se-

crets. He writes that

[a]n actual right that may be close to a true right to an idea is the right of the State to its official secrets, which might be regarded as a property right to certain information, since the law imposes a general dut Y on everyone to exclude themselves from it. The problem with treating this as Eroperty is not its exclusionary structure, but the sepa­rability aspect.1

2

As noted in footnote 142, Penner made the case for his conception of the idea of

property before PIPEDA was enacted, and by the logic of his argument (as weil

as that of the current Canadian intellectual property regime), the effect of PIPEDA

would be artificially to create a property interest in personal information. The

premise of this thesis is that such an interest can be ascribed to personal infor-

mation in the same way that it has been ascribed to copyrighted, patented, or

trademarked ideas. It is the resultant overlap of legal property interests that will

cause the most uncertainty. Indeed, the effectiveness of PIPEDA, has come un-

der intense scrutiny since its enactment. Berzins, for example, writes that in the

debates which preceded PIPEDA, there was "Iittle evidence of serious analysis

and almost no reference to empirical data or to historical and comparative ex-

142 Ibid., at 120. Citing Weinrib, supra note 127, Penner writes in footnote 45 that: Rights of persons, in particular companies, to their confidential information do not count as property rights, for this information is protected directly not by the legal im­position of duties in rem but by contracts between the person or company which holds the information and other individuals, typically their employees. The only du­ties in rem in tort law or criminal law which assist are not directly aimed at the pro­tection of confidential information, but at prohibiting persons from interfering with the land or chaUels of the confidential information holder.

It should be noted that Penner wrote this before the advent of PIPEDA, and though beyond the scope of this thesis, the effects that the new Act would have on Penner's ideas with respect to property in information may invalidate his 'separability thesis' argument.

68

perience.,,143 These debates and, ultimately, the property status of personal in-

formation, will undoubtedly return to the fore as provincial governments draft and

enact what they feel to be legislation that is 'substantially similar' to PIPEDA.

3.4.3.1 Financial Institutions Regulation

Canadian financial institutions are among the most heavily regulated busi-

ness sectors in the Canadian economy, and this regulation extends to the protec-

tion of personal client or customer information. Such regulation, while nominally

protecting the consumer from cross-usage of personal information, is a heavy

burden on financial institutions. Section 8 of the Insurance Business (Banks and

Bank Holding Companies) Regulations reads in part:

8. (1) No bank shall (a) provide, directly or indirectly, an insurance company, agent or bro­ker with any information respecting (i) a customer of the bank in Canada, (ii) an employee of a customer of the bank in Canada, (iii) where a customer of the bank is an entity with members in Can­ada, any such member, or (iv) where a customer of the bank is a partnership with partners in Canada, any such partner. .. 144

This legislated ethical wall of sorts between Canadian banks and insurance com-

panies - that is, as between financial institutions in general - undoubtedly serves

only to reduce the value of intellectual capital in personal information should a

bank or other financial services sector company wish to make use of client or

customer information in any other way than the precise manner for which it was

143 C. Berzins, "Proteeting Personallnformation in Canada's Private Seetor: The Priee of Consen­sus Building" (2002) 27 Queen's L.J. 609 at para. 4. 144 Insurance Business (Banks and Bank Holding Companies) Regulations s. 8(1), SOR/2002-269, s. 5. online: http://laws.justiee.ge.ea/en/b-1.01/sor-92-330/18892.html. (aeeessed 25 June 2003).

69

obtained.145 The property interest in that information, therefore is reduced in di-

rect proportion to the extent to which its transfer is regulated (by either common

law or legislation, as above).

3.4.4 Canadian Provincial Treatment

As at the federal level, provincial governments have enacted both 'privacy'

legislation and, more recently, introduced legislation in line with PIPEDA that pro-

tects personal information (in particular, personal health information, a subject

which is beyond the scope of this paper but on which much has been written 146).

The process of protecting personal information (and the right of privacy) of indi-

viduals in Canada is made more complicated by the fact that both the federal and

provincial governments have a vested interest in guarding their jurisdiction

against the misuse of personal information. From the perspective of the commer-

cial enterprise, however, this makes compliance doubly difficult, since they must

comply with ever-increasing layers of regulation with respect to the information

they gather and use in the course of business. Though the ULCC has made an

ongoing effort (commenced in 1989147) to promote a Uniform Privacy Act, provin-

cial approaches vary widely. As Jeffery writes

There are dramatic differences in the approach, application and effect of the six existing statutes. Four of the provinces support legislation that establish tort liability for invasions of privacy; four provinces are

145 ln 2002, for example, the Royal Bank of Canada had over 11 million individuals, small and medium-sized businesses, and mid-market commercial clients. The logistics and cost efficiency of obtaining consent for such an enormous number of clients makes any transaction involving that information ail but untenable. Royal Bank of Canada, Annual Report 2002. Online: http://www.rbc.com/investorrelations/pdf/ar 2002 e. pdf. 146 See, for example, Tigerstrom, supra note 11 and B. von Tigerstrom et aL, ilLegal Regulation of Cancer Surveillance: Canadian and International Perspectives" (2000) 8 Health L.J. 1. 147 See Uniform Law Conference of Canada, Proceedings of the Seventy-First Annual Meeting (1989), Appendix G.

70

restricted to legislation applicable only to government; and only Qué­bec maintains a regime of fines for privacy infractions.148

It is not within the scope of this thesis to evaluate, at a detailed level, the ef-

ficiency of each of the provincial privacy acts, particularly since they are more

targeted at the use of personal information by governments rather than private

enterprise. Further, the various privacy acts that currently exist in a number of

jurisdictions 149 create a tort of invasion of privacy. Since the argument of this the-

sis is that ex post facto treatment of intellectual capital - even in the context of

trade secret protection for personal information intellectual capital - is insuffi-

cie nt, it is inappropriate to give it more than reference in passing.

Legislation tabled more recently - in accordance with the grandfathering

section of PIPEDA150 - is of more immediate interest and concern to an evalua-

tion of how personal information protection legislation will affect a financial ser-

vices or knowledge-based company's ability to remain commercially viable and

competitive. Though not yet in force, bills have been tabled in both British Co­

lumbia 151 and Alberta 152 which regulate - at the provincia/level - the collection,

use, and dissemination of personal information by most commercial 'organiza­

tions,153 in the respective provinces. As is the case with PIPEDA, both the Alberta

148 Jeffrey, supra note 120 at 71. 149 See, for example, Privacy Act, RS.B.C 1979, c. 336 as am., Privacy Act, RS.C. 1985, c. P-21 , Privacy Act, RS.M. 1987, c. P125, C.C.S.M., c. P125, Privacy Act, S.N. 1981, c. 6, Privacy Act RS.S. 1978, c. P-24. 150 See P/PEDA, supra note 33, s. 30. 151 British Columbia Bill 38 (2003) - Persona/Information Protection Act [herinafter BCP/PA]. 152 Alberta Bill 44 (2003) - Persona/Information Protection Act [hereinafter AP/PA]. 153 At section 1 of the British Columbia bill, for example, "Organization" includes:

a person, an unincorporated association, a trade union, a trust or a not for profit organization, but does not include

(a) an individual acting in a personal or domestic capacity or acting as an employee, (b) a public body, (c) the Provincial Court, the Supreme Court or the Court of Appeal,

71

and British Columbia bills are focused on the consent requirement for collection,

use, and disclosure of personal information. As discussed in the context of

P/PEDA, this thesis contends that the notion of consent implies a degree of own-

ership and property in the personal information that is being collected by any or-

ganization that is regulated by the provincial legislation. In view of this legal im-

port, the sa me problems come to light as did at the federal level.

The problem with consent and ownership issues is further exacerbated by

the scale of consent that BCP/PA and AP/PA (as weil as P/PEDA) have created.

The general rule is that consent is required for collection, use, and disclosure of

personal information, and the legislation then provides for certain circumstances

in which either consent is not required or consent may be implied. The BCP/PA,

for example, contains the following general prohibition and requirement for con-

sent:

6 (1) An organization must not (a) collect personal information about an individual, (b) use personal information about an individual, or (c) disclose personal information about an individual.

(2) Subsection (1) does not apply if (a) the individual gives consent to the collection, use or disclo­sure, (b) this Act authorized the collection, use or disclosure is author­ized without the consent of the individual, or (c) this Act deems the collection, use or disclosure to be con­sented to by the individual.154

The AP/PA, similar in many respects to the BCP/PA, defines the nature and lim-

its of the requirement for consent. Section 8 reads, in part, as follows:

(d) the Nisga'a Government, as defined in the Nisga'a Final Agreement, or (e) a private trust for the benefit of one or more designated individuals who are friends or members of the family of the settlor;

154 Supra note 151 at s. 6.

72

8(1) An individual may give his or her consent in writing or orally to the collection, use or disclosure of personal information about the individual.

(2) An individual is deemed to consent to the collection, use or disclosure of personal information about the individual by an or­ganization for a particular purpose if

(a) the individual, without actually giving a consent re­ferred to in subsection (1), voluntarily provides the infor­mation to the organization for that purpose, and (b) it is reasonable that a person would voluntarily provide that information ... 155

The fact that both federal and provincial legislation explicitly refer to degrees of

consent, and the circumstances in which that consent is required or not re-

quired156 tends to support the contention that the issue of property in personal

information (and the legislated and common law categorizations of that owner-

ship) has come to the fore, particularly with respect to the governance of intellec-

tuai capital such as that which is linked with the collection, use, and disclosure of

personal information.

ln contrast to the common law provinces, the province of Québec has, in

Jeffrey's words "been far ahead of the rest of Canada in protecting privacy.,,157

Whereas the common law provinces have yet to enact personal information pro-

155 Supra note 152 at s. 8. 156 With respect to finding property in personal information as part of intellectual capital, there ex­ists an interesting parallel with the real property concept of the easement. Rights su ch as profits à prendre, public usufructuary and certain rights to freedom of expression have been analogized to an easement. From the perspective of a commercial organization that uses personal information as a resource, for example, the profit à prendre could be said to exist in the fact that the company has expended considerable time and resources in the collection of personal information concern­ing their clients, and should thus have some ownership (or at least a significant right to use) in the property that is personal information. For a more detailed discussion of easements and interests analogous to easements, see especially B. Ziff, Principles of Property Law 3d ed. (Scarborough: Carswell, 2000) at 337 et seq. 157 Supra note 120 at 90. Jeffery notes that, in Québec, "protection is afforded first by the Civil Code, by the Québec Charter of Human Rights and Freedoms, by Québec's Act Respecting Ac­cess to Documents Held by Public Bodies and the Protection of Personallnformation, [R.S.Q., c. A-2.1 as am.), and most recently, [Bill 68, as it then was): An Act Respecting the Protection of Personallnformation in the Priva te Sector, [R.S.Q. c. P-39.1 as am.) [hereinafter QPPW.

73

tection legislation, Québec had done so (both with respect to government and the

private sector) by 1993. Québec's treatment of the protection of personal infor-

mation is particularly informative for two specific reasons. First, in the context of

intellectual capital governance, Québec's legislation "does not prohibit the ex-

change of bare nominative lists (Iists consisting of only names, addresses and

telephone numbers)".158 Companies in common law provinces that are faced with

both federal and provincial legislation that do prohibit such practices will cede

some control (and, therefore, some of the value in) in their customer lists and

their ability to transfer or disclose those lists. As Jeffery continues, however, any-

thing beyond the realm of such bare nominative lists is regulated and controlled -

and thoroughly so:

[the law] does require that indirect collection of information be restricted to what is legitimately required for the intended purpose, that data subjects be apprised of the secondary purposes, and that data subjects be permitted to opt-out (i.e., have one's name removed from the list being exchanged). Secondary purpose exchanges of lists containing information beyond the basic normative data may only be carried out for subjects who actively opt-in (i.e., specifically consent to the secondary use).159

158 Ibid. 159 Supra note 120 at 91. It should be noted, in support of the notion of a property right in personal information that, in Québec, an individual has a right to control one's image. In a recent case be­fore the Québec Court of Appeal, Malo c. Laoun [2000] J.Q. no 7, affd [2003] J.Q. no 80, which dealt with the unauthorized use of a person's image, the court wrote at para. 56 that "Un examen de la jurisprudence montre que les tribunaux ont toujours condamné l'utilisation de l'image d'une personne pour une fin autre que celle visée par le consentement, sauf si elle s'en infère claire­ment." Further, as the Canadian Historical Society writes, "article 35 [of the Québec Civil Code] states that 'every person has a right to the respect of his reputation and privacy. No one may invade the privacy of a person without the consent of a person or his heirs unless authorized by law.' The right to privacy is thus transformed into an inheritance which may be transmitted to one's heirs and continue to flourish after one's death." [emphasis added]. The Canadian Historical Society, The Right to Privacy in the Private Sector: What is at Stake for Historians and Historical Re­search. Online: http://www.cha-shc.calenglish/burgessbulle.html#N 2 (Iast accessed 25 June 2003).

74

Recent changes to the original legislation have allowed some latitude with re­

spect to allowing third party access to an individual's personal information 160, but

the principle of the legislation remains - that consent is required for the collec-

tion, use, and disclosure of personal information that a) forms part of an extra­

patrimonial right to one's identity and image 161; and b) is akin to a property right

in that information.

3.4.5 American Treafmenf

The United States' approach to the protection of personal information is

marked bya legislative and judicial reluctance to infringe on the right of privacy. It

is important to note that Warren and Brandeis, who were the progenitors of the

tort of invasion of privacy, conceived of privacy as apart from property rather than

as a part of property.162 Significantly, recent debate has addressed the treatment

of privacy and personal information as a property right, and much of this debate

has focused on the economic value of privacy (and, hence, personal informa­

tion).163 Richard Murphy, for example, argues that writers such as Posner164

have, in their zeal to promote freedom of economically valuable information, ig-

nored the implicit economic value of privacy in favour of commercial interests.165

Such scholarship, while important, is not a useful framework within which to

evaluate the American perspective on the commodification and valuation of per-

sonal information. A particular irony of the American discussion of this issue is

160 QPP/, supra note 157. 161 Code Civil du Québec, 1991, c. 64, s. 35; as am, 2002, c. 19, s. 2. 162 Supra note 34. 163 Richard S. Murphy, "Property Rights in Personal Information: An Economic Defense of Pri­vacy" (1996) 84 Geo. L.J. 2381. 164 Supra note 126. 165 Supra note 163 at 2381.

75

that Posner, who argues for very little protection of privacy and personal informa-

tion on a theoretical level, effectively renders his own arguments obsolete in the

face of pragmatic business and consumer interests. As Murphy states,

There are ... dynamic benefits to a legal regime that protects privacy, including the willingness of people to engage in activities that they would not in the absence of anonymity, the reduction of expensive ex­tralegal precautions, and the reduction of wasteful expenditures on reputation-enhancement. .. 166

It can be argued that such business interests - which necessitate not so much a

theoretical argument but a practical solution to the issues of property in personal

information - have outpaced legal scholarship's ability to address that issue. Fur-

ther, the existence of legislation - both directly relating to the protection of per-

sonal information and indirectly related to that protection - in the American con-

text tends to support the idea that, despite Posner's arguments to the contrary,

the American market and legal frameworks are leaning in the direction of per-

sonal information as property.

ln addition to American federallegislation such as the Personallnformation

Privacy Act of 2003167, the Privacy Act of 2003168

, the Online Privacy Protection

Act of 2003169, and the Consumer Privacy Protection Act of 200317°, ail of which

address consent with respect to the collection, use and disclosure of personal in-

formation in the commercial context, there are more indirect and more iIIustrative

examples of legislation which tend to create a property interest in personal infor-

166 Supra note 163 at 2416. 167 Personallnformation Privacy Act of 2003, H.R. 1931 (U.S.). 168 Privacy Act of 2003, Sen. R. 745 (U.S.). 169 Online Privacy Protection Act of 2003, H.R. 69 (U.S.). 170 Consumer Privacy Protection Act of 2003, H.R. 1636 (U.S.).

76

mation. The American Bankruptcy Code171 is one such example and though the

interest in the personal information is created ex post facto, it is reasonable to

assume that the American judiciary will - given the right circumstances - trace

this interest back prior to the application of the Bankruptcy Code. Indeed, juris-

prudence in the American context seems to support this contention. The case of

ln re Toysmarl172, in which a debtor's interest in the sale of customer database

was at issue after a bankruptcy, the court ruled that since their was a property

interest in the personal information contained in the customer database, no sale

of the 'asset' could occur without permission of the court. In there analysis, An-

drew Buxbaum and Louis Curcio write that:

What [the case suggests]is that the one constant that exists for section 363(f) [of the Bankruptcy Code] interest purposes is that "the term 'any interest' is intended to refer to obligations that are con­nected to, or arise from, the property being sold." Like the cases men­tioned above, the sale of Personal Information by debtors should be governed by section 363(f) since the owners of the Personal Informa­tion (the customers) have an "interest in such property" within the meaning of that section ... Hence, the customers' rights ... are directly related to the specific asset.173

The combination of judgments such as that in Toysmarl, and the plethora of re-

cent legislation addressing the rights of individuals to control their personal infor-

mation via consent to collection, use and disclosure indicates an increasing ten-

dency to treat such information as property.

Critics such as Posner have nevertheless pointed out that, at least in the

American context, the character of personal information does not lend itself weil

171 Bankruptcy Code,11 U.S.C. §§ 101--1330 (1994). 172 ln re Toysmart, LLC, No. 00--13995--CJK (Bankr. D. Mass. filed June 9, 2000) [hereinafter Toysmart]. 173 A. B. Buxbaum & LA Curcio, "When You Can't Sell to Your Customers, Try Selling Your Cus­tomers (But Not Under the Bankruptcy Code)" (2000) 8 Am. Bankr. Inst. L. Rev. 395 at 408.

77

to its classification or justification as property in the classical sense. Stan Karas

argues that:

personal information also lacks several central characteristics of property. First, unlike much property, personal information is inex­haustible and endlessly reproducible. In a click of a mouse, one data­base becomes two. Furthermore, personal information lacks the Lockean "mixing of labor" that in Western societies often bestows title to property. It takes little effort to purchase a box of cereal, and the process creates a valuable piece of information. Finally, the goal of protecting information for the sake of privacy does not easily map on to the core characteristic of property: alienability.174

With respect, Professor Karas' critique ignores two fundamental realities of per-

sonal information and intellectual capital in the knowledge-based economy: first,

many legal constructs which are considered property share the same characteris-

tic of inexhaustibility and endless reproducibility (the legal fictions of copyright,

patent, and trademark, for example); and second, while there is little argument

with respect to alienating an individual's name and the most basic of their per-

sonal details, the notion of 'personal information contracts' allows a degree of

control over personal information that approaches - if not mirrors - that which is

exercised by holders of classical intellectual property rights. 175

3.4.6 Conclusion

The consistent theme of this section is that intellectual capital in the form of

information forms the backbone of the commercial and competitive viability of a

knowledge-based financial services company. Insomuch as the personal informa-

tion of customers and clients is a large part of the intellectual capital of a firm, the

nature of that asset should be clear in the eyes of the law for two reasons: first,

174 S. Karas, "Privaey, Identity, Databases" (2002) 52 Am. U.L. Rev. 393 at 423. 175 S. Shorr, "Personal Information Contraets: How to proteet privaey without violating the First Amendment" (1995) 80 Cornell L. Rev. 1756 at 1834.

78

clarity with respect to the ownership or control of personal information will allow a

more exact valuation of a financial services company's intangible assets; and

second, such clarity will allow the law to balance the rights and interests of con­

sumers (who, as has been shown, tend towards increased privacy of personal

information) against the commercial interests and competitive advantage of

knowledge-based financial services companies.

It is the contention of this thesis that while there has been progress with re­

spect to legislation and scholarship which clarifies the nature of the interests in

personal information, the task is by no means complete. These inconsistencies

are due, at least in part, to the overlap of the various interests in the valuable as­

sets based in personal information and the inability of the law to adequately ad­

dress how those rights can be governed as part of intellectual capital. The section

that follows will address an aspect of intellectual capital which, in a similar way,

illustrates the overlapping interests in information that form intellectual capital. In

the employment law context, however, the overlap occurs within the scope of

human rather than structural capital. Further, the overlap in the employment law

context goes beyond the issue of ownership of information to ownership of

knowledge, an even more uncertain proposition.

3.5 The Employment Law Regime

The theoretical framework that this paper has so far propounded incorpo­

rates two basic components of intellectual capital: first, there is structural capital,

and second, human capital (see the continuum in Figure 1 and the Zurich Model

in section 2.2.1). The latter component deals with the human component of an

79

organization and imports further complexity into the governance of a firm's intel-

lectual capital as a whole. It is important to note here, as with the above discus-

sions of the other legal regimes and mechanisms for the protection of intellectual

capital, that the regime of 'employment law' does not exist in a vacuum. As is the

case with information protected under pure intellectual property regimes, em-

ployment law regimes are often intertwined - or overlap - other intellectual capi-

tal governance mechanisms. Further, like intellectual property, trade secret, and

tort law, employment law is a delicate balance, this time between the competing

interests of employees and employers. As Horan and Werker wrote in 1990,

there

are two competing policy considerations which the courts must at­tempt to balance. On the one hand, employees should be free to use their general ski Ils and knowledge freely for themselves or for em­ployers of their choice ... On the other hand, employers should be able to protect their business assets, tangible or intangible, from being used without authorization and/or to their disadvantage ... These two considerations are easi~ stated but difficult to reconcile on the facts of any particular case. 17

A careful reading of the above reveals that the limits of what the law will consider

the watershed between trade secrets, confidential information, and public knowl-

edge or tools of the trade are not static, but dynamic. As Horan and Werker con-

tinued, "[I]n any given factual situation, it can be difficult to find where an em-

ployee's general knowledge ends and where the employer's confidential informa­

tion begins.,,177 The policy considerations cited by Horan and Werker iIIuminate

further fundamental contradictions inherent in how the legal system deals with

176 M.G. Horan & I.D. Werker, "Trade Secrets, Confidentiallnformation and the Employment Rela­tionship", in Trade Secrets, supra note 65 at 76. 177 Supra note 176 at 78.

80

defining the limits of information and knowledge in the employer/employee rela-

tionship.

ln the current economic context - that is, the primacy of knowledge-based

rather than tangible as sets - the financial sector is faced with a property-theory

question. The problem is that intangible assets have been, as this thesis has at-

tempted to show, notoriously difficult to delimit (Iegally) and value. Not only is the

legal definition and valuation of intellectual capital intricate, but any ownership

chain to information or knowledge faces internai conflicts of law, as illustrated in

the previous section with respect to personal information and privacy. An indica-

tion of the law's reticence with respect to the hindrance of employee mobility ap-

peared in an article dealing with intellectual assets in The Lawyer's Weekly as far

back as 1995:

The court will not permit an employer to restrain an employee from using the talent, skills, education, ability or general ideas that an em­ployee takes with them to a competitor. "An employer does not own that asset, and cannot control its departure ... It is only information gained during employment that is clearly confidential, not part of the corporate marketplace, that will be protected.178

The goal, in this context, is for the employer to maintain as much control as

possible over what it considers to be its most important and commercially sensi-

tive intellectual capital. This control is defined by two principal factors in the em-

ployer/employee relationship: first, there is the common law/equitable dut Y of

good faith and confidentiality179; and second, there are the terms of any contracts

178 M. Conrad, "Who owns what an employee knows? How employers can safeguard intellectual assets" The Employers Weekly, March 10, 1995, (14:41). 179 It should be noted that these duties and equitable principles apply equally during and after any particular employment relationship. See, for example, Canadian Aero Service Ltd. v. O'Malley, [1974] 40 D.L.R. (3d) 371 at 381 (S.C.C.) which addressed the dut Y within an employment rela-

81

that the employee signs in the context of an employment relationship.180 Irrespec-

tive of this bifurcation of the legal aspects (as opposed to socio-psychological, or

other aspects) of the employee/employer relationship,

As firms and employees have come to recognize the enormous value of employee human capital, disputes over ownership of human capital have increased. Such conflicts may weil be endemic to the informa­tion--based workplace, in which the unique nature of human capital defies simple legal categorization. 181

The conflicts to which Stone refers are nevertheless preventable where employ-

ers such as financial services companies (and any other knowledge or informa-

tion centred business) require that employees contractually acknowledge their

rights, duties, and the limits that the particular employment relationship will place

on them during and after that employment.

3.5.1 Contractual Governance of Intellectual Capital

Contracts, or at least contractual provisions, are the touchstones which ex-

tend protection to confidential information beyond the uni-dimensional tort of

breach of confidence. Such an extension of the shield of law is crucial, since

breach of confidence is often a catch-ail for those actions not covered by a con­

tract. 182 ln the 1988 Ontario High Court case Computer Workshops Ltd. v. Banner

Capital Market Brokers Ltd., the court outlined the characteristics necessary for

tionship. A leading Canadian case applicable post-employment is Faccenda Chicken Ltd. v. Fow/er, [1986] 1 AIL E.R. 617 at 626 (CA). [hereinafter Faccenda]. 180 See Monarch Messenger Services Ltd. v. Hou/ding, (1984) 2 C.P.R. (3d) 235 (Alta. o.B.) \hereinafter Monarch].

81 K.v.w. Stone, "Knowledge at Work: Disputes Over the Ownership of Human Capital in the Changing Workplace" (2002) 34 Conn. L. Rev. 721 at 722. 182 See Faccenda, supra note 179 and Monarch, supra note 180 at 241, both of which address employee obligations with respect to the protection of confidential information by the implied dut Y of confidence.

82

information to form the subject of an action for breach of confidence. The infor-

mation must be:

1. confidential; 2. disclosed so that the recipient knew it was confidential; and 4. used by the recipient without permission to the detriment of the party who

disclosed the confidence. 183

An in-depth discussion of the law of breach of confidence is not within the pur-

view of this thesis. The notion of breach of confidence itself, however, is of more

than passing application, since there exists an interesting parallel between that

concept and the concept of trade secret. Where trade secret offers (depending on

jurisdiction) blanket coverage of secret information beyond the protection offered

by conventional intellectual property legislation, so too does 'breach of confi-

dence' cover that which, for whichever reason, is beyond the reach of express

contractual terms or relationships. As Horan and Werker noted in reference to

Faccenda,

[i]n the absence of express terms, the courts will imply terms into the contract of employment in order to restrict employees, regardless of rank, from using trade secrets and 'highly confidential' information af­ter the termination of their employment.184

If the terms of art used by Horan and Werker, such as 'trade secret', and 'confi-

dential' (even the term 'information' is unclear in the present context) were weil

defined in the Canadian context - and conventional wisdom is that they are not185

- it would be far easier to find an interest for the employer in the information and,

indeed, the knowledge acquired over the course of employment. Unfortunately,

183 Computer Workshops Ltd. v. Banner Capital Market Brokers Ltd., (1988) 21 C.P.R. (3d) 116 ~Ont. H.C.) at 129. 84 Supra note 176 at 82.

185 See Trade Secrets, supra note 65.

83

that 'property interest' line remains unclear, even in the United States (which has

both a mature labour market and a mature legal system): theoretically, 'property

in trade secret', as a framework, could be an efficient mechanism for parsing the

employer/employee relationship. However,

although recognizing employers' and employees' joint or concurrent property interests in trade secrets would account for both the employ­ers' interests in property and the employees' interests in employment, this divided property interest approach would result in valuation and efficiency problems as weil as disrupt the current ownership system for trade secrets. 186

The issue of divided ownership of trade secrets and other intellectual capital

has traditionally been addressed through the use of employment contracts and

other agreements between the employer and the employee. Such contracts will

often include provisions that relate to aspects of the employer-employee relation-

ship that at during two distinct periods: first, the period during which the individual

is in the employ of the company or firm; and second, the period afterthe termina-

tion of employment. During the latter period,

[i]n addition to any contractual obligation, ail employees, regardless of rank, owe a dut Y of good faith and loyalty to their employ­ers ... Employees, because of this dut Y of fidelity, may not use their general skills to the detriment of their employer while they are em­ployed.187

Assuming for simplicity that corporate espionage is not a concern 188, this dut Y of

good faith and loyalty is sufficient to cover most - if not ail - trade secrets, confi-

dential information, indeed intellectual capital - to which an employee has ac-

186 J. L. Koh, "From hoops to hard drives: an accession law approach to the inevitable misappro­wiation oftrade secrets" (1998) 48 Am. U.L. Rev. 271 at 274. 87 Supra note 176 at 79.

188 This assumption is made for the sake of not over-complicating the present analysis. For a more detailed review of how corporate espionage is a problem see, for example, A. Beckerman­Rodau, "Trade Secrets - The New Risks to Trade Secrets Posed by Computerization" (2002) 28 Rutgers Computer & Tech. L.J. 227.

84

cess. The latter period, after the termination of an employment relationship, is of

considerable concern vis-à-vis intellectual capital governance. It should be noted

that it is at this point - upon the termination of employment - that employment

law, like the other heads of control and governance so far discussed, takes on an

ex post facto rather than an ex ante character. Legislation and jurisprudence in

this area deals not with prevention of damage but with restitution and, in some

cases, punishment.189 Aspects of the various actions in tort related to intellectual

capital will be addressed below. Employment and other contracts, however, are

of significant importance, since they form the basis for the governance of an ex-

employee's behaviour and limitations.

ln general, the clauses (or separate contracts, depending on the case)

which anticipate the governance of intellectual capital are known as restrictive

covenants. Of such covenants, the most important to the present discussion are

those known as 'non-disclosure' and 'non-competition' clauses. These clauses

generally take the form of express terms of an employment contract, and courts

will generally enforce such terms provided that they are neither void for public

policy reasons nor unconscionable.190 It is the determination of this last, both dur-

ing and after a term of employment, which is of most cause for concern in as-

sessing the efficiency of the current legal regime in governing intellectual capital.

Despite their widespread use, restrictive covenants with respect to non-

disclosure and technology as an intellectual capital governance tool are not a

189 See, for example, Eli Lilly Canada Inc. V. Shamrock Chemicals Ltd. et al., (1985), 6 C.P.R. 5 ~Ont. H.C.) and International Corona Resources Ltd. v. Lac MineraIs Ltd., [1989] S.C.R. 574. 90 Supra note 176.

85

foolproof method for protecting a firm's intellectual capital. 191 The use of restric-

tive covenants in the protection of intellectual capital lacks robustness for pre-

cisely the same reasons as do many of the other intellectual capital governance

mechanisms: the overlap of interests in the intellectual capital - in this case the

contents of an employee's mind - and creates a tension between employees and

employers which leads to a lack of legal clarity and, ultimately, to valuation and

protection issues with respect to intellectual capital.

ln the present context, it is useful to examine an example of a standard

non-disclosure clause. It should be noted that Canadian courts, as a general rule,

proceed from the premise that such clauses are void unless the employer can

justify their application.192 The following is a recent example of a non-disclosure

restrictive covenant:

Except as required by law, the Executive shall not (either during the continuance of the Executive's employment under this Agreement or at any time thereafter):

disclose any information relating to the private or confidential af­fairs of the Corporation or relating to any secrets of the Corpora­tion to any person other than for the Corporation's purposes; and/or use for his own purposes or for any purposes other than those of the Corporation any such information or secrets he may ac­quire.193

Such a clause appears comprehensively to cover the intellectual capital which is

the focus of this thesis. However, the question remains: "Who owns the knowl-

edge and confidential information - the lists of customers and suppliers, sched-

191 The leading Canadian case - which is still good law - with respect to the enforceability of re­strictive covenants in employment contracts is Eisiey v. J.G. Collins Insurance Inc., (1978) 83 D.L.R. (3d) 1 (S.C.C.). 192 Kohler Canada Co. v. Porter, [2002] a.J. No. 2418 at para. 41. 193 McCarthy Tétrault LLP, Standard Non-Disclosure Clause Precedent, (2003).

86

ules, pricing, marketing strategies and business plans - that exist in the em­

ployee's head ... 1"194 Such knowledge, it can be argued, forms part of the per­

sonality of the individual employee and, though a fiduciary dut Y may be found195,

courts have so far been reluctant to impose such severe restrictions on employ-

ees:

the general interest of the public in free competition and the consid­eration that in general citizens should be free to pursue new opportu­nities, in my opinion, requires courts to exercise caution in imposing restrictive duties on former employees in less than clear circum­stances.196

While in some cases - the termination of a senior manager, for example - there

will be no doubt as to the existence of a dut Y of confidence on the part of the em-

ployee, information dissemination within financial services and other knowledge-

based organizations has advanced to such an extent that, in many cases, even

the most junior employee may have access to a company's intellectual capital

resources. In such a case, the onus of proof is on the employer to show the con­

fidential nature of information, knowledge or process.197 Irrespective of express

194 Supra note 178. 195 Hodgkinson v. Simms, [1994]3 S.C.R. 377 at paras. 32-33, 35. 196 Barton Insurance Brokers Ltd v. Irwin, (1999) 170 D.L.R. (4th) 69 (B.C.CA) at para. 39. 197 R.I. Crain Limited v. Ashton and Ashton Press Manufacturing Company Limited, [1949] O.R. 303 (Ont. H.C.); aff'd [1950] O.R. 62 (Ont. CA). The principle in this case is mentioned as re­cently as 2002 in Conceptions S.N. Ven a Ine. c.D.I. T. Équipements Ine., [2002] J.a. no 1728 at para. 46, a case involving patent infringement, where Reeves J wrote that:

Si l'on tient que le droit de propriété n'est pas ad rem mais -pour poursuivre l'expression latine- ad forman et famam rei, c'est-à-dire à l'achalandage résultant des forme et présentation de la chose, il ne répugne pas que ce droit soit perpétuel. Il suffira alors aux concurrents de reproduire la chose sous des forme et présentation différentes e.g. par des signes ou marques d'identification distinctives, pour que le consommateur puisse avoir la même chose sous une forme différente et qu'avec le temps, la valeur du droit de propriété sur le "secondary meaning" s'atténue au point de devenir négligeable.

The crux of this recent decision, though related to patent law directly, is that once intellectual cap­ital escapes the immediate control of the company to which it belongs, the property right or inter­est in that intellectual capital is significantly reduced simply because of its now-external position vis-à-vis the original company. Such treatment of patent law, if indeed it can be analogized to the rest of the intellectual capital domain, is not encouraging.

87

contractual terms addressing trade secrets or any other confidential information,

knowledge or process, such intellectual capital lacks a sufficient governance

framework or mechanism.

Financial services companies, and other knowledge and information­

intensive organizations, may have recourse to the courts, both civilly and crimi­

nally, but the fact remains that these are ex post facto solutions which do not ad­

dress the fundamental question of how the law can, in effect, allow companies to

close the stable door before the horses escape. Since the focus of this thesis is

on preventive measures for protecting intellectual capital, the following section

examines the civil and criminal regimes, and the way in which the regulatory

structure in these domains affects intellectual capital governance.

3.6 Civil Litigation and Criminal Law Regimes

The central theme of this thesis bears repeating: both legal and manage­

ment conceptions of intellectual capital governance have focused on remedying

rather than preventing the loss of intellectual capital. Both the civil law and crimi­

nal law regimes - vis-à-vis intellectual capital - are typical examples of how the

legal system has, in a way, failed the market economy. The paradox here is that

it is more rather than less regulation that may be the most effective governance

mechanism for intellectual capital. Since both civil law and criminal law are reme­

dial or retributive in nature, it is beyond the scope of this thesis to conduct a de­

tailed examination of their effect on the overall protection of intellectual capital.

The following sections, however, will provide a brief description of the framework

in each of these regimes.

88

3.6. 1 The Civil Litigation Regime

ln view of the previously discussed legal regimes and governance methods

for intellectual capital, it should now be established that the basic and fundamen­

tal enforcement mechanism with respect to intellectual capital is civil litigation.

Such litigation can be based on numerous claims and under various heads of

damage. These include, summarizing the previous chapters and sections: actions

for copyright, patent, and trademark infringement; actions for breach of confi­

dence (principally in case involving trade secrets and confidential information);

actions for breach of contract (in cases where there is a clear and legally binding

employment contract, confidentiality agreement, or where protection of personal

information forms an express or implied term of a contract); and finally, the com­

plaint system in cases of breach of confidentiality with respect to personal infor­

mation. Each of these actions, on a case-by-case basis, can have a significant

impact on the governance of intellectual capital assets. There are nevertheless

problems with each, and with the retributive model in general.

The principal stumbling block with respect to an ex post facto legal reaction

to loss - in whatever manner - of intellectual capital is that the damage has al­

ready been done. That is, the power and value of the intellectual capital, which is

intimately related to the organization or company to which it belongs, is lost once

the cat is out of the bag. It is highly unlikely, and economically unfeasible, for a

company to fundamentally change in response to the loss - or publication - of an

important fa cet of its intellectual capital. Corporations such as Zurich Insur-

89

ance 198, Skand ia 199, and many others for whom intellectual capital is their core

asset, cannot simply change a password to mitigate the damage that can be

caused by the loss of an individual employee200 or the publication of confidential

information or a corporate process. It is precisely because intellectual capital

goes to the heart of many corporations that the knee-jerk reaction in cases of

high-value intellectual capital is to sue to protect those rights and interests.201

Even should bringing an action to recover damages be deemed the best course

of action, however, it is far from clear how damages can be awarded. Cases of

intellectual property infringement, for example, might include lost sales, reason­

able royalties, and intangible losses.202 ln view of the ethereal nature of intellec-

tuai capital, however, it is not surprising that Vaver writes that:

For trade secrets, courts have developed a flexible regime by analogy to copyright and patent cases. Sometimes information is treated like stolen property: patentable ideas are then assessed at the rate a con­sultant would have charged. Other times, only the value of the head start the information gave the acquirer or the diminished value of the information as an asset is assessed. An acquirer's innocence or change of position may also reduce or extinguish liability. Once the damages award is paid, the information may sometimes continue to be used with out further liability.203

The fundamentally unsettled issue of quantifying damages was neatly summed

up by Marshall J in Enterprise Excellence Corp. v. Royal Bank of Canada when

he wrote that:

There is ample common law authority that judges, under certain cir­cumstances, will be required to establish damages that are difficult to

198 See supra note 16 and accompanying text. 199 See supra note 14 and accompanying text. 200 See supra note 6 and accompanying text. 201 S. Stewart, "Judge backs manager's freedom" The Globe and Mail (22 January 2003) B17. 202 Supra note 45 at 259. 203 Supra note 45 at 265. See also D. Vaver, "Civil Liability for Taking or Using Trade Secrets in Canada" (1981) 5 Cano Bus. L.J. 253.

90

quantify ... The Court is required here to fix damages on the basis of the facts of the case by the method that seems most appropriate.204

One final issue with respect to the inadequacy of civil litigation as an intellectual

capital governance tool is the internationalization of both law and of economies.

ln actions in which intellectual capital governance is at issue, plaintiffs are

likely to commence the action in the jurisdiction which affords the most protection

to whatever intangible asset they are trying to protect. Though the principle of ju-

dicial comity does go some distance to maintaining the integrity and sovereignty

of the Canadian jurisdiction205, the international character of both the law and

knowledge-based financial services companies will serve only to confuse the is-

sue further. The issue of intellectual capital governance on the international level

is beyond the purview of this thesis, however; it is sufficient to say that the inter-

nal inconsistencies in the treatment of intellectual capital at Canadian law will

only be magnified at the internationallevel, and need further study.

3.6.2 The Criminal Law Regime

Intellectual capital is also offered some degree of protection by criminallaw.

There are, for example, provisions in the Copyright Aero6, the Patent AerO?, and

various other acts which impose criminal sanctions for contravention of the law. It

should be noted that criminal culpability in cases involving the misappropriation of

intellectual capital is often only used as supporting evidence in the assessment of

204 Enterprise Excellence Corp. v. Royal Bank of Canada, [2002] O.J. No. 3086 at para. 110. 205 See especially, Braintech v. Kostiuk [1991]171 D.L.R. (4th

) 46 (B.C.CA) leave to appeal re­fused, a case in which both parties to the action were located in British Columbia, whereas the suit was filed, and judgment obtained, in a Texas court. The British Columbia Court of Appeal re­fused to enforce the judgment. 206 Supra note 7 at ss. 27(2)-(4). 207 Supra note 8 at ss. 75 et seq.

91

damages in a civil action.208 There are also criminal offence provisions in

PIPEDA209 and similar legislation at the provincial level. Finally, the Criminal

Code of Canada contains provisions addressing the offence of invasion of pri­

vacy?10 As is the case with the civil litigation regime, it remains beyond the pur-

view of this thesis to examine, in detail, how the application of criminal sanctions

might affect the governance of intellectual capital assets.

A comparison with other jurisdictions, however, reveals that criminal penal-

ties, at least in respect of certain infringements of intellectual property rights are

attracting increased legislative attention.211 Irrespective of this increased scrutiny,

the application of criminal law to the governance of intellectual capital will remain

narrow due to implicit limits of scope. Trade secret law for example, which in

Canada is a construction of the common law, falls outside the ambit of the crimi-

nal law. Any intellectual capital that can be qualified as confidential information or

trade secret, therefore, is beyond the reach of the criminal justice system. Insofar

as the Canadian legal system is forced to adapt to international legal regimes

(such as TRIPS, see infra note 87), the jurisdiction will undoubtedly see changes

which will affect intellectual capital governance.

3.7 Conclusion

Chapter three has attempted two goals: first, it has endeavoured to present

a comprehensive survey of the various legal regimes which influence intellectual

capital governance; and second, it has undertaken to highlight the areas of in-

208 Supra note 44 at 287. 209 Supra note 33 at s. 28. 210 Criminal Code of Canada R.S. 1985, c. C-46, at s. 183 et seq. 211 ln the United States, for example, the Digital Millennium Copyright Act, P.L. 105-304 [H.R. 2281] (1998) makes copyright infringement a criminal offence.

92

consistency in those regimes with respect to that governance. As seen, these in­

consistencies exist on two principal levels. Not only are there conflicts within the

individual legal regimes in governing and controlling intellectual capital, but there

are also conflicts as between legal regimes; the conflict as between trade secret

protection and personal information protection regimes is only the most obvious

of these inconsistencies. Chapter Four will propose, to the extent that it is possi­

ble, how these regimes might be merged coherently into a more robust govern­

ance system.

93

Chapter 4 Toward Reconceptualizing Intellectual Capital Governance

4.1 Introduction

This thesis is based on two concomitant ideas: first, that the responsibility

for creating and maintaining a robust and effective regime for intellectual capital

governance lies with the legal system; and second, that the current olio of legal

regimes and governance mechanisms is insufficient for the task. Further this the­

sis has contended that both the legal system and the financial services sector are

asking the wrong questions with respect to how to govern their intellectual capital.

Instead of trying to shoehorn intellectual capital into established legal mecha­

nisms, the legal and management communities ought to be asking how the law

can be adapted and change to reflect the increased importance of intellectual

capital governance to the contemporary marketplace. Efforts such as that led by

the ULCC in promoting a Canadian Uniform Trade Secrets Acf12 are a first step

in the fundamental re-thinking of the Canadian legal treatment of intellectual capi­

tal.

ln order to unravel the various threads of the legal spider-web in which intel­

lectual capital exists, Chapters Two and Three defined the terms and limits of the

legal conception of intellectual capital, and then sought a more complete under­

standing of the various regimes which affect intellectual capital governance. The

goal in Chapter Three was to gain a clearer picture of the internai inconsistencies

within legal regimes and to understand how the effects of these legal regimes do,

or can, overlap in a more coherent treatment of intellectual capital governance in

the Canadian system. This chapter, in contrast, aspires to re-cast and re-

212 Supra note 72.

94

conceptualize the treatments of intellectual capital by the legal regimes referred

to in the previous chapters.

4.2 An Intellectual Capital Governance Framework

The proposed re-formulation of the Canadian legal system to bring it more

into line with the structure of modern knowledge-based economic sectors such as

the financial services sector is best described as a process of elimination through

which lawyers and corporate Chief Knowledge Officers should systematically

pass the intellectual capital as sets of their respective firms. A betler understand­

ing of how each component of the current governance framework does or does

not protect a company's intellectual capital is not only an essential step in deter­

mining not only where such capital is left unprotected, but is also crucial in the

process of encouraging the Canadian legal system to re-evaluate and re­

conceive its treatment of intellectual capital as a whole.

Figure 3, below, is a visual representation of how this thesis has understood

the most important components of the intellectual capital governance structure.

Once an intangible corporate asset such as a client database or the knowledge of

an employee has been identified as intellectual capital, it can then be evaluated

with respect to currently available intellectual capital governance mechanisms. It

should be noted that in many cases, the governance framework outlined below

will offer partial protection to - or will be partially regulated by - one or more of

the individual components of the current framework. Figure 3, therefore, should

offer practitioners a view of where intellectual capital governance mechanisms do

or do not regulate or protect intellectual capital as sets as a whole.

95

- Copyright - Patent - Trademark

SECTION 2.3

Traditional Intellectual Property

Intellectual Capital

- Human Capital - Structural Capital

SECTION 2.2

Figure 3: Current Intellectual Capital Governance Framework . )

Intellectual Property Regime

SECTION 3.3.4 SECTION 3.3.1

Common Law

Protection

American Trade Se­

cret Regime SECTION 3.4.3 SECTION 3.4.4 SECTION 3.5.1

Trade Personal Information - Secret

Regime Protection Regime

SECTION 3.3 SECTION 3.4

SECTION 3.4.5

SECTION 3.3.2 SECTION 3.3.3

EX ANTE GOVERNANCE

Employment Contracts

Employment Law

Regime

SECTION 3.5

" " " "

" " " " .. " " " " "

Civil! Criminal Regimes

SECTION 3.6

EX POST FACTO GOVERNANCE . )

Un­Governed 1 ntellectual

Capital

96

The sections that follow will attempt to expand on the framework and struc­

ture outlined in Figure 3 and, where gaps, inconsistencies, and overlap have

been found, will propose a theoretical and practical base for eliminating those in­

consistencies and overlaps. Finally, it is important to note that this thesis has ad­

vanced primarily the proposition that the most effective mechanism - though not

the only mechanism - through which the intellectual capital conundrum can be

solved is through the assignment of a property interest to that capital. Though the

ascription of such interests will allow for a more appropriate and policy-sensitive

legal treatment of this intangible asset class, it remains unclear whether such a

fundamental shift in legal treatment is either possible or desirable.

4.3 Intellectual Property Law Contributions

Throughout this thesis, intellectual property has been defined, in general

terms, as being those components of a financial services company's assets

which, while not tangible in the sense of real property such as factories and other

equipment, are nevertheless extremely valuable assets which contribute to both

the revenue stream and the balance sheet. In the case of financial services, for

example, substantial value may be extracted (in the short or long term) from in­

tangible assets such as copyright in research publications, educational materi­

als213, and other assets to which a traditional 'real property' label cannot be af­

fixed. Despite the fact that intellectual property law - that is, the legislative defini­

tions as weil as the jurisprudence - is weil established in the Canadian legal sys­

tem, this thesis contends that it is precisely the existence of these well­

established legal categories that has caused the disconnect between the legal

213 See, for example, IFIC, supra notes 107 and 108.

97

and business spheres. As illustrated in the survey of the current intellectual prop-

erty legal regime, most effort has been expended in attempting to find ways to

qualify or transform intellectual capital into protectable intellectual property, since

that protection is well-established. With very few exceptions, neither scholars nor

legal practitioners have been willing or able to make any headway in the opposite

direction. That is, instead of asking how a corporation which depends on the pro-

tection of its intellectual capital can fit that asset within the bounds of current

law214, the legal community should ask how the law could, or should, be adapted

to fit new categories and conceptions of property.

The intellectual property regime, despite its shortcomings with respect to in-

tellectual capital (that is, it offers far from comprehensive coverage of newer

categories of information, knowledge, and processes [see Figure 1 D, neverthe-

less potentially can contribute considerably to a re-conception of the legal treat-

ment of intellectual capital. In particular, the rights which are ascribed by statute

to the various types of intellectual property can be helpful. With respect to copy­

right, for example, given the recent amendments to the Copyright Acf15, it is not

unreasonable to assume that copyright could be extended beyond the current

categories and beyond the current criteria for copyrightability. The criterion of

'fixation', for example, is an area which is at best vague and flexible and, as

Vaver writes, "[t]he fixation requirement does, it is true, add some certainty to the

law ... But the whole concept of fixation needs to be rethought. A rule of conven-

214 See, for example, AI-Ali, supra note 116. 215 Supra note 44 at 30.

98

ience need not also be a rule of occasional justice.,,216 It is precisely from this 'oc-

casional justice' that intellectual capital governance mechanisms suffer. Though

the judiciary and legislators are faced with the competing policy interests implicit

in the arguments for and against intellectual property law, the paradox is that it is

only by adapting and updating the legal interpretation of sorne aspects of intellec-

tuai property law - such as the fixability criterion - that the law's foundations will

be solidified.

Canadian law could also benefit from the American notion of business

method patents. Despite the fact that the law with respect to this 'new' patentable

category remains unclear and undefined, it may nevertheless offer sorne meas-

ure of protection and a clearer governance mechanism for Canadian financial

services companies whose competitive advantage and value are intimately tied to

internai processes which have not so far been granted protection in the intellec-

tuai property framework. It should be made clear here that this thesis is not a

proponent of a wholesale importation of the American idea that anything "any­

thing under the sun that is made by man,,217 may be patented. Such importation is

both unnecessary and counterproductive give the maturity of the Canadian legal

landscape. However, if American jurisprudence and ideas can bolster the gov-

ernance mechanisms available in the Canadian context, then further study of

such protections is warranted. The applicability of the interests - and in sorne

cases the 'property' rights - that intellectual property law creates is not a static

216 Supra note 44 at 65. 217 Sen. Rep. No. 82-1979 at 5, H.R. Rep. No. 82-1923 at 6 (1952), online: http://www.ipmall.info/hostedresources/patentactlsenatereport1979.htm. (accessed 3 July 2003).

99

process, and should not be seen as su ch by scholars, practitioners or legislators;

the important issue is that such rights or interests be granted in cases where

there is a clear need for their protection and governance in the knowledge econ­

omy.

4.4 Trade Secret Law Contributions

Trade secret law in the Canadian context is perhaps the area most ripe for

development and reformulation in response to the exigencies of intellectual capi­

tal governance and new knowledge-based industries. This thesis has maintained

that the common law protection of trade secrets and confidential information in

the financial services sector is insufficient for the task of governing in the modern

marketplace. To that end, the Canadian framework should look to other jurisdic­

tions, notably the Unites States, for a clearer and more concrete conception of

trade secrets. This process will, referring to Figure 3 (above), allow for more con­

sistent governance of trade secret intellectual capital, both ex ante and ex post

facto. Put simply, a system whose theory and participants ail acknowledge what a

trade secret is, what confidential information is, and how those two assets are

protected and protectable is more effective on two fronts: first, the system and its

participants are ail aware of what is protected; and second, the participants are

aware of the risks and remedies, and the system more able to consistently re­

spond, when the governance mechanism breaks down.

A further benefit of a more con crete definition of trade secret is the bundle

of rights which accompany that definition. In the United States, as explained in

section 3.3.1, some courts have interpreted trade secret protection to imply a

100

property right in that intangible asset. While some authors have argued that cre-

ating such a property interest is neither desirable nor theoretically possible in the

Canadian context, trade secret protection, at least from the point of view of the

jurisprudence, has often analogized the rights in trade secret to those in intellec-

tuai property (at least for the purposes of damage assessment), and ascribing the

same rights as exist in intellectual property is not an inappropriate shift in the

structure of governance mechanisms.

This Pollyannaish perspective, however, should be tempered with the ac-

knowledgement that legislation and judicial reaction to a property right in trade

secrets is not without its theoretical and policy-based weaknesses. This thesis

has attempted to show that while ascribing property rights to trade secrets in the

Canadian context would solidify the governance mechanism, that ascription will in

certain cases bring a company's rights in their trade secrets in direct conflict with

both the employment law regime and the personal information protection regime.

While the pitfalls of joint ownership of patents has been addressed in-depth218,

the problem can be analogized to, for example, joint ownership of rights to the

knowledge and skill of an employee or the rights in personal information.

If, for the sake of the argument advanced by this thesis, it is assumed that a

property right in trade secret is a positive step towards more comprehensive intel-

lectual capital governance, then the next step in the process is to determine

which legislation and/or jurisprudence should take precedence. Intellectual capital

governance mechanisms are, in this situation, faced again with the balancing of

218 See especially, K.R. Terry, "Implications of Joint Ownership of Patents" (1998) 10 J. of the Ass. of Univ. Tech. Managers 23.

101

the rights of individuals and employees with the commercial viability and competi-

tiveness of financial services and other knowledge-based sectors of the econ-

omy. Despite the enormous inherent value that attaches to trade secret in the

commercial context, it is unlikely that that value or the interests of commercial en­

terprises will outweigh the rights of employees to their mobilitl19 or the individ­

ual's right to privacy and to control their personal information.22o The onus, there-

fore, should be on the commercial enterprise to prove that its property interest not

only outweighs the interests of employees or individuals, but that those rights are

not contrary to public policy in general.

4.5 Personallnformation Protection Law Contributions

The relative youth of the new federal and provincial legislation governing

the protection of personal information in Canada makes it difficult to prognosti-

cate with any real accuracy with respect to the effects that such protections will

have. This thesis, however, has concentrated on the notion of consent as creat-

ing an implied property interest in the personal information of an individual. This

interest, or right, can be analogized to the rights conferred by traditional intellec-

tuai property regimes, particularly with respect to the monopoly of use that the

two regimes create in an intangible. The situation is complicated, however, by the

fact that personal information, unlike copyrighted or patented material or informa-

tion, is characterized differently depending on the holder of that information. From

the individual's point of view, one's personal information - be it financial, medical,

or simply nominative - forms part of that individual's personality. This conception

219 Canadian Charter of Rights and Freedoms, Constitution Act, 1982, at s. 6(2). 220 PIPEDA, supra note 33.

102

is reflected, for example, in the Québec civil law, where legislation states, in part,

that a person's extrapatrimonial property is that which cannot be alienated or oth­

erwise transferred from that individual. From the individual's perspective, there­

fore, it is reasonable to expect a significant degree of control over that part of

one's extrapatrimonial property to the exclusion of others and other uses.

From the perspective of a financial services company, however, the per­

sonal information protection legislation now in place (or shortly to be in force) is

far more of a hindrance. The requirement of consent for collection, use, and dis­

closure of personal information reduces, or eliminates, the value of that informa­

tion, particularly in cases where the sale or transfer of the information is desired.

A company which, for example, wishes to divest itself of its customer service divi­

sion for economic reasons will find that, without the consent of the individual cus­

tomers in the company's database, not only will the financial transaction be pro­

hibited, but the value of that information to the company will have been reduced.

Finally, there are a number of issues which are raised as a result of the in­

fluence of Québec Civil Law. First, though the Québec Civil Law allows the trans­

fer of bare nominative lists, disclosure of personal information is otherwise strictly

limited. From the perspective of the financial services company, this limited ability

is a starting point; however, given the amount of information collected about indi­

viduals which is related - and almost always attached - to the bare nominative

details on a list, it remains an insufficient mechanism through which to govern

such intellectual capital. Second, and possibly more important, are the Civil Law

notions of property in information and extra-patrimonial property in personal in-

103

formation; the inconsistency in this case is that while some writers feel that Qué­

bec law offers protection to informational assets221, the Québec Charte des droits

et libertés de la personne222 states, as noted above, that a characteristic of extra-

patrimonial property is its inalienability. Financial services companies are left to

argue a catch-22: that an individual's personal information is, in effect, alienated

as part of a contract for services, and that that alienation disqualifies it from extra-

patrimonial status. If such information is alienable, however, and can be fit into

traditional formulations of property, then the personal information protection legis-

lation is perfectly correct in ascribing to the individual the absolute right to control

that information. In the final analysis, the effects of the enactment of the various

provincial personal information protection statutes, the federal statute, and the

Québec legislation will take some time to clarify. What is clear for the moment is

that the variations and overlap of interests and property interests in personal in-

formation intellectual capital are untenable from both a business and legal per-

spective and require further clarity of purpose and foundation.

4.6 Employment Law Contributions

The employment contract is, among the mechanisms discussed in Chapter

three, both one of the most powerful and one of the most tenuous intellectual

capital governance tools. Restrictive covenants in employment contracts, as has

been shown, are often found to be un-enforceable because of their overly vague

or overly restrictive natures. Further, the employment law regime must address

the same policy balancing issues as those facing other legal domains in intellec-

221 M. Bourgeois, "La protection juridique de l'information confidentielle économique - Étude de droit québecois et français" (1988) 1 C. de prop. Intel!. 1. 222 Charte des droits et libertés de la personne, L.R.Q., c. C-12.

104

tuai capital governance; legislators and the judiciary, as weil as practitioners and

financial services firms must ail tread a narrow path between the restriction of an

individual's mobility and the freedom and security of the marketplace for ideas,

knowledge, and information. As a result of this dichotomy, the task of clarifying -

and perhaps improving on - employment law's contribution to intellectual capital

governance is far from a simple exercise. By its very nature, the creation of indi­

vidual employment contracts (and the litigation that results if one party breaches

that contract) is on a case-by-case basis, a situation which does not lend itself

weil to either standardization or the imposition of some measure of consistency.

The efforts of the legal, academic, and business communities, therefore,

are best spent in establishing what amounts to a widely used and judicially ac­

cepted standard for what restrictive covenants can and can not control. Of

course, this will not prevent the malicious breach of such covenants in many

cases, but it is unreasonable to expect any standardization or legislation to ac­

complish such a goal. In fact, it could even be argued that, in the long term, even

companies that lose employees (and thus precious human intellectual capital) will

benefit from the increased mobility is that is a characteristic of the current em­

ployment marketplace. Restrictive covenants on trade secrets, confidential infor­

mation (and to an extent, non-competition and non-solicitation clauses) should,

therefore, be phrased as clearly as possible with reference to the specific areas

which they cover. The result of this self-regulation by knowledge-based economic

sectors would be that while there is a possibility that their employees may leave

with valuable human intellectual capital, there is also the possibility that employ-

105

ees of other firms will do the sa me in the opposite direction. Such a marketplace

fosters not only a high degree of competition but the desire and need to maintain

high quality employment standards within a knowledge-based company.

4.7 Civil Litigation Regime Contributions

The civil litigation framework for intellectual capital governance is, as has

been previously stated, of an ex post facto nature and is, therefore, not the focus

of this thesis, which contends that the most efficient governance strategy is not

one that addresses the problem after it has already occurred but attempts to pre­

vent that occurrence before-the-fact. It is nevertheless a fa ct , unfortunately, that

many of the issues with respect to the governance mechanisms addressed in this

thesis will eventually be resolved not by legislation or international law, but

through litigation. In this sense, the civil litigation mechanism is at once the least

and most important of the governance mechanisms; it is the least important since

it is not pro-active in its governance, and it is the most important because each of

the other mechanisms will ultimately rely on the judgment of the courts to clarify

the inconsistencies, redundancies, and overlap in the current legal structure (see

Figure 3, above). While it is certainly beyond the purview of this thesis to pre­

scribe a specifie way in which the Canadian judicial system, with its adversarial

character, should respond to the propositions in this thesis, the most important

factor will be the 'liberté d'esprit' shown by judges and legislators when consider­

ing how best to bring current intellectual capital governance mechanisms into line

with modern business reality.

106

4.8 Conclusion

Through a comprehensive examination of the legal definitions and various

legal regimes which are part of, or affect, intellectual capital governance, this the­

sis has attempted a synthesis of current academic and legal thinking and reaction

to a business reality and marketplace that appears far removed from the laws

and system which govern them. It is hoped that, while ail the questions and in­

consistencies that are implicit in such a synthesis are by no means answered,

this examination will serve as a springboard to more research and examination in

the field. A property rights-based analysis and conception of intellectual capital as

it relates to the field of financial services is by no means the only solution to the

problem of intellectual capital governance, but in view of the above analysis, a

strong argument is made in its favour. It has been the contention of this thesis

that property rights is the only global framework which has the capacity and flexi­

bility to both adapt to modern business practice and accommodate the rights of

individual consumers of, and employees within, financial services. Indeed, the

uniform treatment of intellectual capital governance, if it can be achieved, can

only be a benefit for ail parties involved.

107

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