[English]
EVIDENCE
[Recorded by Electronic Apparatus]
Tuesday, March 28, 2000
• 1108
[English]
The Vice-Chair (Mr. Dennis J. Mills (Broadview—Greenwood, Lib.)): Good morning. Welcome.
The witnesses could maybe introduce themselves, and we would begin. You each will have 10 minutes, and then we will have questions.
Would you like to begin, Ms. Curran?
Ms. Carla Curran (Chief, Publishing Policy (English), Cultural Development Sector, Department of Canadian Heritage): Sure.
The Vice-Chair (Mr. Dennis Mills): Introduce yourself so that the audience knows who you are and who you represent.
Ms. Carla Curran: Okay. My name is Carla Curran. I'm with the cultural sector investment review division at the Department of Canadian Heritage.
Mr. Jeff Richstone (Senior Counsel, Legal Services, Department of Canadian Heritage): I'm Jeff Richstone from legal services, Department of Canadian Heritage.
Ms. Wanda Noel (Individual Presentation): Good morning. My name is Wanda Noel. I think I'm familiar to most members around the table. I'm a lawyer in private practice, and I specialize in copyright law.
The Vice-Chair (Mr. Dennis Mills): First we'll hear from Ms. Curran and Mr. Richstone, who are from the Department of Canadian Heritage. Then we will take questions. We would have Ms. Noel as the second witness, and that would be followed by the second round of questions. Is everyone in agreement with that?
Some hon. members: Agreed.
The Vice-Chair (Mr. Dennis Mills): Okay. We can begin.
Ms. Carla Curran: I'd like to thank you, Mr. Chairman and honourable members, for the opportunity to provide you with some information on the Investment Canada Act. I hope this information will be useful to the committee in its review of the book publishing and distribution industry. I gather that everyone has a copy of my presentation. We did provide copies. It's really a primer on the Investment Canada Act. I'll walk you through it briefly.
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The purpose of the act is to encourage investment in Canada that
contributes to economic growth and employment opportunities and to
provide for the review of investments to ensure net benefit to Canada.
The act applies to an investor who is not either a Canadian citizen
or an entity controlled or beneficially owned by a Canadian. The act
applies when an investor commences a new business activity in Canada
or acquires control of an existing Canadian business.
[Translation]
As you know, in June 1999, the authority to review investments related to the cultural industries was transferred from the Minister of Industry to the Minister of Canadian Heritage. Since that time, investments by foreign investors in the cultural sector have been reviewed and improved by the Minister of Canadian Heritage in accordance with the Investment Canada Act and Regulations.
Under the Regulations to the Act, a “cultural business” is one that carries on any of the following activities: the publication, distribution or sale of books, magazines, periodicals or newspapers; the production, distribution, sale or exhibition of audio or video music recording; or the publication, distribution or sale of music.
[English]
For investments in the cultural sector, the act has established particular rules that allow the minister to review all investments by non-Canadians in that sector if she so wishes. Any investment involving a cultural business is subject to notification or an application for review, depending on the size of the investment. An investment in a cultural business is reviewable when the asset value of the Canadian business being acquired exceeds $5 million for a direct acquisition and $50 million for an indirect acquisition. Any investment in a cultural business below this asset value is subject to notification, and the government has the opportunity during the notification period to decide whether or not to issue an Order in Council directing a review.
When a review of an investment is undertaken, the act sets out specific provisions to guide the minister in her decision as to whether or not the investment will be of net benefit to Canada. The investor, in preparing plans and undertakings designed to demonstrate net benefit, is encouraged to take these provisions into account.
The following factors are to be considered, and these factors are set out in section 20 of the act: the effect of the investment on the level and nature of economic activity in Canada; the degree and significance of participation by Canadians in the Canadian business; the effect of the investment on productivity, industrial efficiency, and technological development; the effect of the investment on competition; the compatibility of the investment with national industrial, economic, and cultural policies, taking into consideration provincial, territorial, industrial, economic, and cultural policy objectives; and the contribution of the investment to Canada's ability to compete in world markets.
[Translation]
In addition to the provisions set out in the Act itself, the Department of Canadian Heritage, in its review of applications, takes into account foreign investment guidelines for the book industry. These guidelines flow out of current government policy in relation to the book publishing sector and provide examples of undertakings. These guidelines are posted on the Internet at: http://investcan.ic.gc.ca.
Under the guidelines, international investors interested in establishing a Canadian business in the book sector will be limited to Canadian-controlled joint ventures. If an international investor wishes to purchase a foreign-owned business operating in the Canadian book sector, the investor must send in a notification. The policy requires that such proposed investments be reviewed for net benefit. Canadian-owned businesses in the book sector cannot be acquired by non-Canadians except under extraordinary circumstances: the Canadian business is in financial distress and Canadians have had a full and fair opportunity to purchase the business. Such an investment would be reviewed for net benefit.
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[English]
During the course of an investment review, undertakings and/or plans are made by the investor to demonstrate net benefit to Canada. Undertakings are simply commitments, made by investors, that cover a broad variety of issues, such as Canadian content.
This could relate to the distribution and sale of Canadian products; marketing; expenditure in the promotion of Canadian products; employment with respect to the number of Canadians employed in the Canadian business; development, which relates to research, technology, and know-how; management in terms of whether the head office of the business will be in Canada, Canadians will be on the board of directors, or Canadian managers will be running the business; ownership, or whether there will be partnerships with Canadians; capital expenditures, or whether the investor will upgrade the Canadian business facilities in Canada; operations; production; finance; and a number of other areas in relation to potential undertakings.
The foreign investment guidelines for the book publishing and distribution sector set out specific publishing-related undertakings—for example, a commitment to support the infrastructure of the book distribution system, which could be anything from distributing imported titles via a Canadian-controlled publisher or agent to active participation in industry co-op ordering endeavours; accessibility of the company's Canadian marketing and distribution infrastructure or international network to interested and compatible Canadian-controlled publishers on a contractual basis; or possibly a commitment to education and research through financial and professional assistance to institutions offering programs and publishing studies.
How long does the review process take? For notification, once the department has received a notification form from an investor the government has 21 days to determine whether or not it will seek a review through an Order in Council.
An application for review involves a 45-day period, during which the government has the opportunity to review the investment to determine whether it will be of net benefit to Canada. This period can be extended by 30 days by the minister. If additional extensions are required beyond that period, both the minister and the investor must agree.
[Translation]
Undertakings are generally made by investors for a specified period of time. Following the approval of an investment by the Minister, the Department conducts an evaluation of the performance of the investment on a periodic basis. The investor is invited to submit to the Department a progress report concerning the realization of its undertakings.
All information provided during the process of notification, review and monitoring is protected under the Act. Decisions are made public on a quarterly basis on the departmental website: www.pch.gc.ca.
[English]
Thank you.
The Vice-Chair (Mr. Dennis Mills): Do you want to add anything, Mr. Richstone?
If not, we'll go directly to questions, starting with Mr. Mark.
Mr. Inky Mark (Dauphin—Swan River, Canadian Alliance): Thank you, Mr. Chairman.
I'd like to thank our witnesses for being here this morning.
On the investment side, with regard to foreign investment and cultural products, because the investment is made and the product is produced, does that guarantee the investor access to the Canadian market?
Ms. Carla Curran: The investor can have access to the Canadian market through a joint venture with Canadians and through an indirect acquisition, which is an acquisition of a foreign-controlled business operating in Canada. Those are the key ways an investor can have access to the Canadian market.
Mr. Inky Mark: Is that guaranteed? Is that automatic? Is there a guarantee that they have access to the Canadian market?
Ms. Carla Curran: Only if the minister finds the investment to be of net benefit to Canada.
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Mr. Inky Mark: I relate this to another issue with regard to blockbuster films. I've been told that if the investment comes to this country and creates jobs, then they feel, in that context, they should have access to the Canadian market. I just wanted to hear your comments.
Ms. Carla Curran: The access ultimately depends on the compatibility of the investment with the Investment Canada Act, the net benefit factors set out in the act, and the compatibility of the investment with Canadian cultural policy as defined in the foreign investment guidelines for the book trade or the film industry or whichever industry.
Mr. Inky Mark: Thank you.
The Vice-Chair (Mr. Dennis Mills): I'm missing something.
Mr. Inky Mark: I'll be more specific.
Regarding the television networks' use of blockbuster films, if the networks do not purchase the right to use these films, I am told, then.... For example, if Hollywood comes here, spends all kinds of money, and creates jobs here through our film investment program, then should they feel, because it was produced here, they have a right to make sure the product is shown in this country?
The Vice-Chair (Mr. Dennis Mills): This is book publishing.
Mr. Inky Mark: I understand that. But it can relate to books as well, to any cultural product.
Ms. Carla Curran: An investment in the book sector or in any sector means they have a business established in Canada. They have employees here. They have assets, and they have a place of business.
I'm not sure if I've answered your question.
The Vice-Chair (Mr. Dennis Mills): Are you concerned...?
Mr. Inky Mark: Cultural products.
The Vice-Chair (Mr. Dennis Mills): But it only gets approved if there's a net benefit.
Mr. Inky Mark: Okay.
[Translation]
The Vice-Chair (Mr. Dennis Mills): Mr. de Savoye.
Mr. Pierre de Savoye (Portneuf, BQ): This is an interesting issue which can assume unexpected dimensions in the context of globalization. It is understood that except under extraordinary circumstances, acquisitions by non-Canadians cannot be authorized, to invest in a book-distribution business. Even under extraordinary circumstances, there would have to be a net benefit.
My question is simple: what happens if an American firm decides to challenge before the WTO and before world trade tribunals our right to prevent foreigners from investing in Canada in this way? Has this been put to the test? Is there a definite cultural exemption that protects us, and have we ever won such a case in the past?
Mr. Jeff Richstone: I can answer that question. Existing WTO rules do not prohibit the enforcement of the Investment Canada Act. There is no international rule preventing us from enforcing the policy set out in this legislation. So there is no problem at the moment. The rules set out in the Act have not been tested with the WTO precisely because the current agreement does not prohibit the terms and conditions of investment provided for under the Act.
Mr. Pierre de Savoye: If the Multilateral Agreement on Investment, the AMI, had been passed, and if Canada had been one of its signatories, would our ability to use the defence you've mentioned have been lessened?
Mr. Jeff Richstone: I am very reluctant to answer your question, because I would be indulging in pure speculation. Naturally, we would expect that the negotiators would uphold the Act in its present form and that they would have the mandate to protect Canadian initiatives, but this is just speculation, of course. As you well know, that agreement never went very far in defining special characteristics in a detailed enough manner as to allow these questions....
Mr. Pierre de Savoye: I will ask a question that involves less speculation. You are aware that, about one year ago, the negotiations were scuttled because France withdrew from them. However, Canada found itself at the negotiation table and, consequently, had to advance its own arguments.
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Were you, at the Department of Canadian Heritage, consulted with
regard to this act and its possible repercussions on the negotiations
concerning the Multilateral Agreement on Investment? Were you involved
in these negotiations?
Mr. Jeff Richstone: I am very reluctant to answer that question because, although I was invited here, it was the entire government that found itself at the negotiating table, including all the departments concerned. I would be very reluctant to say more, because I am not really the right person to tell you exactly who was on the negotiating team and what they did.
Mr. Pierre de Savoye: You understand the nature of my concern. You have assured me that, in the past, we have never been in conflict with the WTO because the WTO does not place any restrictions on this type of law. However, we know that our world is changing very fast. In six months, in a year, in two years, new agreements will be concluded because multilateral and bilateral negotiations are continuing, even if the MAI talks are not.
I am interested in knowing how long the foundations of what you have described to us will remain firm. Do we have any assurance that these foundations will last? The committee's recommendations cannot be based solely on past experience. Our outlook is shaped by what may happen. The future is what interests us. If you cannot tell us how probable it is that these foundations will last five, six or seven years, this would be disturbing and I am concerned.
[English]
The Vice-Chair (Mr. Dennis Mills): Would you like to reflect on that and get back to the committee after you discuss it in the department?
Mr. Jeff Richstone: With all due respect, I would suggest that perhaps this is more of a political question that should be answered in terms of the government's political.... What we're talking about here is the Investment Canada Act. The question I understand from the deputy was whether the Investment Canada Act would have been in any way menaced by the World Trade Organization agreement, and that was answered.
In terms of future responsibilities, I'm not sure—
The Vice-Chair (Mr. Dennis Mills): If I understood Mr. de Savoye correctly, there's always work in progress with officials in anticipation of things happening. If you're suggesting that there isn't anything out there that would alter the current trajectory that we're on, then you can say that.
Ms. Carla Curran: I'm not aware of any planned changes to the Investment Canada Act.
The Vice-Chair (Mr. Dennis Mills): Fair enough. That's fine. Thank you very much.
Ms. Bulte.
Ms. Sarmite Bulte (Parkdale—High Park, Lib.): Thank you very much, Mr. Richstone. Perhaps we could speak afterwards in my capacity as chair of the international trade subcommittee. There is a report on the MAI that the subcommittee did as well. The WTO committee made recommendations to the government, and there is a response.
In 1999 when the review was transferred to the Minister of Canadian Heritage, this was after the Bill C-55 aftermath, is that correct?
Ms. Carla Curran: Yes.
Ms. Sarmite Bulte: While we have not taken on obligations under the WTO with respect to investment and while they are not scheduled to be taking place in this next round, we do have chapter 11 of NAFTA, which deals with investment. So the question with an American company...how is this act protected under chapter 11 of NAFTA? Is it because of the cultural exemption that we have in NAFTA?
Mr. Jeff Richstone: Perhaps I can answer that question. It's both that and the fact that in chapter 11 there were specific carve-outs for the Investment Canada Act. So we definitely did not take on any new obligations. As a matter of fact, we carved out the obligations under chapter 11.
Ms. Sarmite Bulte: Okay, so that exists there?
Mr. Jeff Richstone: That exists.
Ms. Sarmite Bulte: That way it's completely....
Mr. Jeff Richstone: That's right.
Ms. Sarmite Bulte: That was my only question. Thank you.
The Vice-Chair (Mr. Dennis Mills): Mr. Limoges.
Mr. Rick Limoges (Windsor—St. Clair, Lib.): With regard to your role within the ministry, is there anything on the radar screen that particularly concerns you with regard to your ability to carry out your role? Is there anything out there that perhaps we ought to be looking at more closely or that you can anticipate may be a concern in the coming years?
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Ms. Carla Curran: No, not really. The act is quite clear in how it is to be administered and the net benefit factors are very clearly laid out. The policy that we have for the book, periodical and film areas is all very useful in guiding us and helping us. They're technologically neutral. The biggest challenge is the number of mergers we're seeing in the industry. That certainly will have an impact on our workload over the next year or two.
Mr. Rick Limoges: In terms of the need to review each of these based on their merits...?
Ms. Carla Curran: That's correct.
Mr. Rick Limoges: With regard to the advent of newer technologies, the Internet and so on, do you see this as a threat to our being able to control our destiny?
Ms. Carla Curran: It's challenging, I believe, but we can work within the policies and the guidelines we have.
Mr. Rick Limoges: For example, if there's a significantly dominant player on selling books in the world scene, as there are many, and with the Internet being minus borders as it is, how do we anticipate the impact of the next few years, for example, if the majority of people start buying all of their books on-line and the major sellers are coming from another country? How do we control that? How do we have any ability to ensure that Canadian artists and authors are able to produce and sell through those venues or have a presence in the market?
Ms. Carla Curran: Our book publishing industry needs to get on-line as quickly as it can to be competitive with foreign booksellers on the Internet. We have seen a number of companies that are on-line now and selling books on the Internet.
Mr. Rick Limoges: Do you think they're going to have to then sell through an American company on-line, for example, or are you suggesting that just our own competitive venues will suffice? Are we just going to throw them to the market competition and say, here you go, you're going to have to survive?
Ms. Carla Curran: It's really hard to say.
Mr. Rick Limoges: I guess what I'm implying is it's a different world.
Ms. Carla Curran: Yes, in terms of my role with respect to the Investment Canada Act and the administration of it, we want to ensure in investment cases that Canadian-authored books continue to be made available to Canadians. Through the net benefit process, we will endeavour to ensure that continues to happen for Canadian-owned businesses.
The Vice-Chair (Mr. Dennis Mills): Perhaps I could make a short interjection here. It's fairly tough for Investment Canada, in my mind, to put any kind of governance on anybody's e-commerce set-up.
Mr. Rick Limoges: I guess this is what I'm trying to get at. Because you're so intimately involved in this sector, I was wondering if you might have any suggestions on what we can look at in terms of policy or how we can help the publishers or the authors in order to ensure that they have longevity.
The Vice-Chair (Mr. Dennis Mills): We'd just better make sure our own book publishing industry that's on websites does some fairly fancy marketing, because in that world it's fairly tough to shut them down, isn't it? You really can't do anything, can you?
Ms. Carla Curran: No, the Investment Canada Act is not designed to shut down businesses. The Investment Canada Act is designed to ensure that investments in Canada are of net benefit to Canada and that they're compatible with our policies. As our policies are to make sure that Canadian books are made available to Canadians, we can only work through the Investment Canada Act to achieve that to the extent possible.
Mr. Rick Limoges: Do I have any time left?
The Vice-Chair (Mr. Dennis Mills): Yes, go ahead.
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Mr. Rick Limoges: As technology changes, I guess we might have some timed obsolescence here. With regard to your role in the market as it is today, if for example an American or a foreign enterprise wants to buy out some or most of the Canadian players in this market and they make some undertakings and promises and so on, how much control do you have that they're actually going to keep their promise once they have acquired these businesses and/or possibly devolved different corporate ownership within their company? Maybe they have a Canadian subsidiary controlled through a foreign company and so on. How do you ensure that they do what they said they were going to do when the decision was taken to allow them to go ahead?
Ms. Carla Curran: First of all, non-Canadians cannot purchase Canadian-owned businesses operating in the book sector except under extraordinary circumstances. That's the response to your first question.
Mr. Rick Limoges: So you fully investigate the corporate ownership, and a subsidiary of a foreign company does not qualify?
Ms. Carla Curran: In terms of purchasing a Canadian business?
Mr. Rick Limoges: Yes.
Ms. Carla Curran: No, only under extraordinary circumstances.
In terms of our enforcement or our monitoring of the undertakings made by investors in the context of an investment case, we monitor them on a yearly basis, generally speaking. We seek a performance report from investors. They are obligated to report to us once a year to demonstrate the extent to which they are fulfilling their commitment. That is how we ensure that those commitments are met.
Mr. Rick Limoges: I have one final question with regard to the ownership, if it has to be Canadian. What's the percentage ownership that is allowed to be foreign if it's a corporation?
Ms. Carla Curran: There's legal control, which is 50% plus one, but eventually we tend to look at businesses where the percentages are borderline, because we have the opportunity through the Investment Canada Act to determine that there is control in fact.
Mr. Rick Limoges: The mind and management of this company, for example, might be considered to be Canadian for all intents and purposes. But because of integration and partial ownership with a foreign company that might also be a major supplier and might have some other levers to pull with that company, in effect exercising control over the company de facto.... How can you guard against that? The decisions might tend to reflect a larger corporate mentality or a larger corporate sphere of control. Is there anything we can do to protect against that if that type of evolution occurs?
Mr. Jeff Richstone: There are powers in the act that allow the minister to undertake reviews. There are also investors. The existing Canadian businesses will come to us if there's a new corporate arrangement and ask whether this is an acquisition of change of status or an acquisition of control. The minister has full powers to do all the necessary investigation to determine whether or not that happens.
In terms of the de facto control test, as you mentioned, in the de facto control test you look at a host of different factors, including supply arrangements, financing arrangements, all those kinds of things. Under the act, you're allowed full discretion to really fully explore those issues. It's often very much a weighing factor. You weigh all the factors on one side and weigh all the factors on the other and the minister decides finally whether there is a control factor.
The Vice-Chair (Mr. Dennis Mills): We will move on now to our next witness. At the end of the witness's presentation, the first questioner will be Ms. Lill. You can question whoever you want. Is that fair? We've run a little over time.
Go ahead, Ms. Noel.
Ms. Wanda Noel: Thank you, Mr. Chairman.
I was asked to come here today because copyright issues have come up on a couple of occasions in the inquiry into the book publishing industry. The research staff has ferreted out those questions and has asked me to come and provide some background information to committee members on those issues. I'm going to talk about two issues, one going back to the 1997 amendments to the Copyright Act in Bill C-32, and another one looking forward to the e-commerce world of the future.
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The first issue is the effect of the 1997 amendments to the Copyright
Act in Bill C-32 on the Canadian book business. I'd like to begin by
explaining the change that was made in Bill C-32 in 1997. Earlier
witnesses before the committee have referred to this amendment as the
parallel importation provision, so when you hear those words, what
we're really talking about is the 1997 amendment to the Copyright Act.
Simply put, importation rights in the Copyright Act permit markets to be divided up geographically. A simple example is that Margaret Atwood authorizes McClelland & Stewart to publish her book in Canada. She authorizes a different publisher to publish her book in the United Kingdom and a different one in the United States and so on and so on and so on. Importation rights under the Copyright Act give Margaret Atwood as the author, and her publisher as an assignee of the copyright rights, the legal right to stop books from flowing from one market to another. If you import without the legal authority of the copyright owner, you commit copyright infringement and there are legal consequences for doing that.
Copyright owners and assignees such as publishers have always had the legal right to control the flow of books between markets. It's been there since 1923. But book distributors, who have and still do negotiate exclusive distribution rights for the Canadian market, did not have these rights. Bill C-32 gave this importation protection for the Canadian market to exclusive book distributors. That was the change. Before, only copyright owners had the rights. Bill C-32 gave the same rights to exclusive book distributors.
The policy reason for providing the new rights to distributors was to allow them to protect their investment in the purchase of exclusive distribution rights for the Canadian market. They argued before this committee that their investment was being diminished when booksellers and institutional book buyers bought around, i.e. they bought books from someone other than the person who had the exclusive distribution rights in Canada.
Bill C-32 also protected the book-buying public, which is the other side of this coin. The bill provided a public policy balance between the new rights they gave to exclusive distributors, which were strong market rights, and the book-buying public. The public policy fear was that exclusive distributors would abuse the new rights they'd been given. How could they do that? They could charge whatever they wanted if you had to buy from them. They could ship books over long periods of time, take a long time to deliver, because you had no choice; there was only one source of supply.
So the policymakers of Bill C-32, to protect the book-buying public from these potential abuses, provided that exclusive distributors had these new rights to enforce their distribution agreements, but they only had them if they met certain performance standards. These performance standards are very important in the e-commerce context. The performance standards are very complex. They go on for pages in regulations. I'm going to give you a couple of examples, just so you can get the feel of what it is they do.
Exclusive book distributors are required to supply books in a timely manner. If the book is in stock in Canada, they have to supply it in three days. If it's coming from the U.S., they have to do it in 12 days. If it's from Europe, they have to do it within 30 days. Another performance standard is that there are limits on price markups. They have to be within acceptable limits. You can't have a markup of more than 10% with a book coming from the United States. You can't have more than 15% if the book comes from Europe.
All of this was designed to protect the book-buying public. These performance standards are in regulations under the act. They cover several pages, and it took two years for the book-buying public and the publishing and distributing industries to work them out. They only came into effect six months ago, on September 1, 1999.
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What happens if these performance standards are not met? Bookstores
and libraries can buy around. You can buy a book from a foreign
supplier if these delivery times and markups are not respected.
The Copyright Act also provides exceptions to these new rights of book distributors. One exception is a very important one, because it allows an individual to import two copies of any book for personal use. This exception is not new. It existed long before Bill C-32 was ever passed. But it's important to note in the work this committee is doing that this exception is becoming increasingly important when you can buy books on-line. People now, under this exception, can realistically buy their books on-line directly.
I think of this almost as the genie having been let out of the bottle, because book buyers have now been empowered by the Internet. They're out of the publishers' bottle of territorial markets, and it's going to be very hard to try to contain that book-buying practice by individual book buyers, even if Parliament or this committee decided it was a desirable thing to do so, which is a very important policy question.
I want to give you an example, because I always understand things best when I have an example. There's a series of books for kids called Harry Potter books. The U.S. publishers decided they were going to delay the publication of the second volume to jack up the interest in it. Well, guess what happened? The kids went on the Internet and found out the book was available from Amazon U.K., and they went and bought it on the Internet. The U.S. publishers had a total flop with their second edition. That's an example of how the genie is out of the bottle. Geographical control of territorial markets is almost a thing of the past.
The point I want to make here by giving you these examples is that the piecemeal territorial rights that were enshrined by the amendments to the Copyright Act in 1997 reflect an old and increasingly less relevant way of buying and selling books.
Let's focus now on Pegasus and Chapters, which is the issue this committee is talking about or considering. Have the amendments in Bill C-32 had the result of a few large companies being able to monopolize the Canadian book business? That view has been expressed by a number of witnesses. I have some thoughts I'd like to share with the committee on that.
The first one is that for individual book buyers, such as the kids buying the Harry Potter books, the painstaking negotiation of the performance standards under the Copyright Act, which took two years and specify things such as delivery times of 12 and 30 days, are really laughable in an e-commerce environment, because deliveries that take less than 24 hours in the e-commerce world are considered bad service, and we have a piece of legislation that's talking about 30-day periods.
My second thought is that the parallel importation amendments in Bill C-32 have really not been a motivating factor in what's happened in the Canadian book distribution business over the past five years. First of all, the Chapters-Pegasus issue has developed over a five-year period, and the timing is way wrong. It's not possible that Bill C-32 is responsible for that, because those amendments have only been in force for the last six months. You can't take a law that's six months old and blame it for something that's happened over a five-year period.
That has left me with the question, what caused that? For what it's worth, I'll tell you what I think. It doesn't make it right, but I'll tell you what I think.
The Chapters-Pegasus situation has emerged for two reasons: one, Internet retailing has changed the business; and two, there's been an industrial move to big-box retail stores with a national presence. This hasn't happened only in Canada; it's happened in the United States and every big domestic with a book-buying industry.
I'd like to explain why I think that. E-commerce requires a very large inventory of books. To justify the costs of having a very large inventory requires lots and lots of orders for books. To have lots of orders for books requires big-box stores such as Chapters and Indigo to place those orders. Pegasus was created in order to have the large inventory, and Chapters is thriving because it has Pegasus to supply the books. One depends on the other.
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This development has not happened because of the Copyright Act, in my
view. It's happened because of the emergence of Internet retailing as
a new way of doing business and the international move to these
big-box stores such as Chapters.
The third point I'd like to make is that the amendments to the Copyright Act, when we sit here and look back on them three years later—and I know Mr. Bélanger sat through hours and hours of committee hearings on it.... That was three years ago. When I look at that three years later, in the year 2000, I think in some senses we were legislating for an old way of doing business, a way that's becoming increasingly irrelevant in an e-commerce business world full of on-line retail purchases of books and countries full of big-box stores.
To understand how the Copyright Act affects the book business, I thought it would be helpful for committee members to be able to identify each of the players and each of the roles those players play in copyright terms, so that we can clarify how copyright controls or affects this.
Under the Copyright Act, Chapters is a retail bookseller and Pegasus is a wholesale bookseller. Neither, under the Copyright Act, is necessarily an exclusive Canadian distributor. The protection that was given in Bill C-32 is available only to exclusive book distributors, as that is defined in the act. Because Chapters and Pegasus are not these exclusive Canadian distributors under the act in all cases, they are often not even entitled to this new protection that was enacted.
I'd like to speak for one second about who are the beneficiaries of the Bill C-32 amendments. Why did we do that?
The beneficiaries are Canadian agents who buy from foreign publishers exclusive rights to supply books to the Canadian market. It's these publishers who benefit from having the legal rights to enforce their contracts and to prevent buying around.
So in the real world of the companies you guys are looking at, who are these publishers? It's important to divide them between the Canadian-owned sector and the foreign-owned sector. The information I have is that not many publishers in the Canadian-owned sector enter into exclusive distribution arrangements. I'm told there are a couple of exceptions: Stoddart and McClelland & Stewart do sometimes enter into exclusive distribution arrangements, and under these would be able to claim the benefit of the new protection under the Copyright Act. But the most exclusive distribution arrangements are entered into by the foreign-owned sector. These companies enter into exclusive distribution arrangements far more frequently than the Canadian-owned sector does. The examples given to me were Random and Penguin, which almost as a matter of course get exclusive distribution rights from their parent companies.
In conclusion on this issue, I would like to say the exclusive distribution arrangements, which now can be legally enforced because of Bill C-32, really have very little to do with the Chapters-Pegasus developments. The Copyright Act is a very small piece in a very big puzzle that this committee is looking at. The Chapters-Pegasus developments over the past five years, not five months, have been driven by technological change, globalization, and the new ways of doing business that have developed as a result of that.
Now I'd like to take two or three minutes to talk about another copyright issue that's come up in the evidence the committee has heard.
Submissions have been made that the government needs to amend the Copyright Act to enable the publishing industry to fully participate in this new e-commerce environment. All the cultural industries—not just publishers, but the sound recording industry and others—have been saying to the government the Copyright Act absolutely has to be amended, or else they're not going to be able to fully participate in the e-commerce environment.
Specifically, the committee has heard that the cultural industries want strong punishments for those who circumvent copyright owners' technological protection measures, which in non-legal language means people who break encryption and password. They also want very strong punishments, such as going to jail and heavy fines, for anyone who tampers with rights management information put on an electronic version of a work in order to monitor use and get paid.
• 1155
At the moment, that is a work in progress, so there is not much that
I or anyone is going to be able to say to that, except that there is
extensive work going on to deal with how the Copyright Act needs to be
amended to take into account digital technology.
I have a colleague who practises law in Washington. She was invited to come here today and was unable to do so because flight connections proved to be impossible and she had other commitments. She sent me an e-mail yesterday of a page and a bit, with a statement she asked me to read to members of the committee. The point she is making is right on to the questions Mr. Limoges was asking about the role of the publishing industry in this new e-commerce environment.
So if the committee is agreeable, I would read that statement.
The Vice-Chair (Mr. Dennis Mills): Agreed.
Ms. Wanda Noel: She says:
—in Ms. Harris' opinion—
She cites four reasons for this conclusion. The first deals with shipping costs:
The second reason is that e-commerce sites are expensive. She says:
The third reason is that:
Fourth, and finally, she says:
—because it signed them—
For these reasons, in Ms. Harris' opinion:
I think that goes very much to the questions that you were asking.
The Vice-Chair (Mr. Dennis Mills): Thank you very much, Ms. Noel. That was very enlightening.
Ms. Lill.
Ms. Wendy Lill (Dartmouth, NDP): Thank you.
Thank you for coming.
I must admit I was thinking that I was going to be asking questions of the Competition Bureau today. It's interesting, this is such a complex issue we are delving into. It is focusing on the Pegasus-Chapters situation and the impact it's having on book publishing. I find we are often introduced to new pieces of information that we then have to assimilate and figure out how they relate.
Carla, I'd like to ask you a specific question, and then a general one.
• 1200
The specific question is on the whole issue about investment. What
is the possibility that we might have a foreign company want to move
in and take over Pegasus if in fact it's possible that Chapters wants
to divest itself of Pegasus? In what kind of situation would you
consider it acceptable that this would happen?
What leads me to that is that we certainly have heard in our hearings that there's not a tremendous faith right now that Chapters is moving ahead with a really robust growth. We know that Barnes and Nobel does have 7% of the ownership of Chapters. There is a sense that this is a house of cards, that Chapters may have overinvested. I don't know what the various scenarios are out there, but the fact is that down the line, we may be facing another scenario in terms of Pegasus being up for sale and an American company wanting to take it over.
So what does that do for Investment Canada, and how would you see that rolling out?
Ms. Carla Curran: The only way an international investor could actually acquire Chapters or Pegasus would be if Chapters or Pegasus were in financial distress and Canadians had been given the opportunity to purchase the business, and if this was demonstrated to us in the context of a review. If no bids were coming forward from Canadian investors, and Pegasus or Chapters were in financial distress and the international investor were interested, then that could happen. But it would be subject to a net benefit test.
But we have no indication that Chapters is in financial distress that I know of.
Ms. Wendy Lill: What we've heard over and over is that the entire dynamic and nature of the publishing industry in this country is changing. The independents are losing their status, and many of them are going out of business. So we possibly are going to be seeing down the line, in the not-too-distant future, not a very vibrant industry that would be able to come out and purchase Pegasus...or be players any longer if the actual environment is getting weaker and weaker. Then the role of Pegasus and Chapters becomes more threatening in terms of their survivability. If they're not doing well, and the underbrush has been cleared away, where are we? That's a business thing.
But then you work for Heritage Canada and you're interested in the cultural aspect of it.
I'll move to my second question. As you listen to these hearings—and I'm sure you've been following them—how do you see the health of the publishing industry, in light of the fact that we are hearing over and over again that independent book sellers, which nobody disputes are the backbone of the generation and distribution of new Canadian works...? They are the ones in fact that have traditionally gotten Canadian titles out there.
So how does it look to you, sitting where you are? What do you think of what we're doing here? What does it mean to you? I guess I'm looking for some sort of overview statements.
Ms. Carla Curran: Well, I have been following the hearings, but I don't really feel I'm in a position to offer an opinion on the future of the industry or the health of the Canadian publishing industry. The focus of my work is more from the perspective of investment in the industry, and there is limited investment, given the guidelines that we have. I don't really feel I can predict what will happen down the road with the book publishing industry or the retail sector.
I think it's in a period of transition. It's a challenging environment. I think the government has a number of helpful measures in place to assist the publishing industry, and I know we're looking at other measures.
• 1205
[Translation]
The Vice-Chair (Mr. Dennis Mills): Mr. Bélanger, it is your turn.
Mr. Mauril Bélanger (Ottawa—Vanier, Lib.): Thank you, Mr. Chairman.
[English]
I find it rather disquieting that those taxed with Canadian book publishing and book industry policy would shy away from offering advice based on their knowledge. I'm a little surprised at that—
A voice: May I respond?
Mr. Mauril Bélanger: —but we'll let that pass for now.
I want to focus on Madam Noel's comments and then go back to some of things we've heard.
Madam Noel, in the amendments that I took part in for Bill C-32 and the provision of exclusive rights, did we or does the act currently or does the regulation attached to the act specify who can own exclusive distribution rights?
Ms. Wanda Noel: No.
Mr. Mauril Bélanger: Therefore, it is quite possible for an entity such as Pegasus to go out and obtain, from U.S. publishers, exclusive distribution rights. Correct?
Ms. Wanda Noel: Yes.
Mr. Mauril Bélanger: It doesn't have to be a publisher. In your comments, you suggested that exclusive distribution rights were usually held by publishers.
Ms. Wanda Noel: Usually.
Mr. Mauril Bélanger: Do you not agree that if you were a publisher in the United States and you were approached by someone that had a formidable share of the market in terms of physical and on-line retailing and an already set capacity to distribute and wholesale the book...you would not be tempted, as a foreign publisher, into granting and selling exclusive distribution rights to such an entity?
Ms. Wanda Noel: That very issue was raised, as you know, during the debates on Bill C-32. It was a fear that was expressed. I'm sure you, as a member of Parliament sitting on the committee, heard that from many people. In preparing for today, I made a few phone calls to people who are in the industry, and I am told that Chapters—through Pegasus, I guess—vigorously denies that this has happened, but I agree with you that there is certainly, under the amendments to Bill C-32, a potential for that to happen.
Mr. Mauril Bélanger: I take your point that when we were dealing with Bill C-32, the vertically integrated corporation that Chapters and Pegasus has become was not in existence. But it exists now, and should the government, the legislature, not consider restricting who can own exclusive distribution rights in Canada?
Ms. Wanda Noel: Are you asking me what my view is on that?
Mr. Mauril Bélanger: That's what I'm asking.
Ms. Wanda Noel: I for one don't believe in legislating for something that might happen. To some extent, when we enacted the right, we couldn't see what the future was—and we don't know today what the future is. So to say that Chapters and Pegasus will behave in this manner and therefore we need to legislate a potential.... Now, although I'm not an expert in competition law, I would also say that under the Competition Act, for that kind of dominance in the market, there may remedies under that act that could be sought on behalf of the industry or the government.
Mr. Mauril Bélanger: I have to say, Mr. Chairman, that the very nature of legislating is geared towards the future. You shouldn't legislate retroactively. From the very first time someone said “Thou shalt not kill”, it was geared towards the future, and if we can envision a situation where someone, some entity, by virtue of what they offer to those that they approach, could essentially guarantee or obtain such an advantage, then in my opinion it is the duty of the legislature to forecast what could happen and to act. I have to say that to me the nature of legislation is forward looking, not retroactive.
Now, on the matter of Investment Canada, would you be in a position to tell us what percentage of investments overall have been refused in, let's say, the past 10 years?
Ms. Carla Curran: No, I would not be in a position to tell you that, but I can perhaps try to get the information for you.
Mr. Mauril Bélanger: I would also be curious to see what percentage of foreign investments in the cultural fields have been refused. My view, and that's not based on any fact—
The Vice-Chair (Mr. Dennis Mills): Maybe the ones that have been approved.
Mr. Mauril Bélanger: Well, if you get the percentage that's refused, then you obviously—
The Vice-Chair (Mr. Dennis Mills): No, but the lists—
Mr. Mauril Bélanger: —get the percentage that's approved.
• 1210
My sense is it that it's rather minute, in the range of 1% to 2%
perhaps, and therefore I have a grave concern. Here's the question.
We have industries in Canada—I'm thinking of the banking industry,
newspapers, airline, and others—where there's a set limit, set by
law, of how much of that particular company can be owned by any one
individual or group or by non-Canadians. The question is, should we
be considering such legislation for the publishing industry or the
book industry in Canada, whereby we define limits by law and do not
leave it as a case-by-case approach?
Ms. Carla Curran: I believe that's a competition-related question.
Mr. Mauril Bélanger: Thank you, Mr. Chairman.
The Vice-Chair (Mr. Dennis Mills): Did you want to add something to that, Mr. Richstone?
Mr. Jeff Richstone: When we're dealing with something like this, I would say that there's something.... Obviously the committee has full liberty to look into it. As a lawyer, of course, the first time I hear something about changing investment rules I immediately think we have to be very careful about approaching it, in terms of our existing international obligations under the FTA and under the NAFTA.
Mr. Mauril Bélanger: Culture is excluded.
Mr. Jeff Richstone: Mr. Bélanger, as I said earlier, in terms of investment it's not exactly that culture is excluded. There is a cultural carve-out, but there are existing obligations under the FTA and they're covered by a different cultural carve-out under the FTA. Under the FTA, we grandfathered the Investment Canada Act as it read as of 1989. So to change our obligations one way or the other, we'd have to look at that in terms of how they fit in with our obligations.
That's what I would say as a lawyer, of course, immediately. That doesn't mean that changes cannot be made, but it has to be looked at in conformity with international trade law.
The Vice-Chair (Mr. Dennis Mills): Would it be possible for you to investigate the possibilities of Mr. Bélanger's query under existing trade agreements just to see what the possibilities would be? We seem to be very timid when it comes to these trade agreements.
Mr. Jeff Richstone: Well, one is prudent, Mr. Chair. One is prudent when it comes to trade agreements.
The Vice-Chair (Mr. Dennis Mills): Well, I think it's worth—
Mr. Jeff Richstone: We can look into it.
The Vice-Chair (Mr. Dennis Mills): Ms. Curran, before we move to the next questioner, because we only have about six minutes left, did you want to make a point regardingm...?
Ms. Carla Curran: Yes, I did, regarding my willingness to offer my opinion on the future of the industry. In fact my responsibility relates to the administration of the act and the implementation of the policy, not to the appropriateness or relevance of the policy and the future of the industry. It's more related to that.
Mr. Mauril Bélanger: Whose responsibility would that be? Perhaps it would be of interest to hear from those people.
Ms. Carla Curran: The minister is ultimately responsible for—
Mr. Mauril Bélanger: No, no—
The Vice-Chair (Mr. Dennis Mills): Hold it. I think what Mr. Bélanger was wondering.... For you who are involved on a daily basis in this issue, just because you have a thought or two that might seem creative, it doesn't mean that it's going to be automatically accepted by the politicians. But it's useful for us as legislators to hear if you have a thought or two as to the direction in which you think it may be going or as to some of the areas that you should flag us to be concerned about. That's not inappropriate.
Ms. Carla Curran: I just think that the Investment Canada Act will continue to be a very important tool in terms of ensuring that there is a healthy climate in Canada in the book sector and in other cultural industries. I believe the Investment Canada Act will be particularly important during the review of some of these mergers that we've heard announced recently. It will provide us with an opportunity to ensure that there is net benefit to Canada.
The Vice-Chair (Mr. Dennis Mills): Right. That's terrific.
We have a few minutes left. Do you have a short question, Mr. Mark? Then we're going to Mr. Shepherd.
Mr. Inky Mark: Thank you, Mr. Chair.
On the same topic of investments, as you know, 81% of the publishing industry requires a government grant just to be sustainable or viable. I guess you have data on the changes and the demand. My question relates to the demand. Do you see a change in demand in that sector in terms of investment?
• 1215
Ms. Carla Curran: By a change in demand, do you mean demand for access to the market?
Mr. Inky Mark: Access to market. Because of technological changes that are occurring, what is happening? Is it affecting the demand for investment?
Ms. Carla Curran: Not that I have seen, but we've only been dealing with this particular responsibility since June. I haven't seen any major changes, in terms of demand.
The Vice-Chair (Mr. Dennis Mills): Mr. Alex Shepherd.
Mr. Alex Shepherd (Durham, Lib.): Thank you, Mr. Chair.
Madam Noel, I guess we touched sort of briefly on this exclusivity under the Copyright Act. In your understanding of the industry, let's just look at Canada as being a market relative to some of the international book sellers and the size of that market. Is exclusivity a relevant issue when we look at the Internet and so forth? I'm just thinking of people marketing their products and saying “Look, I want to market all over the world. I don't want to give somebody just an exclusive portion of a small market.” What would your feeling there be?
Ms. Wanda Noel: I wouldn't dismiss the Canadian market in terms of an author and publisher negotiating how they're going to exploit a new title. The Canadian market is a market, and authors with the stature of Margaret Atwood, for example, are not only able to negotiate exclusive distribution arrangements, they can negotiate publishing arrangements, where it's not importing books from one country to another, but there's an actual publication of Margaret Atwood's books in Canada, the U.S., and the U.K.
It depends to some extent on the stature of the particular author. But in my view, the Canadian market is not irrelevant in any business arrangement that's entered into by a publisher, whether it's Canadian or someone who publishes internationally and then divides up their markets from one central place.
Mr. Alex Shepherd: So it would still be in somebody's best business interest, as a publisher in the United States, to deal with an organization like Pegasus and create an exclusive market there, an exclusive distribution policy.
Ms. Wanda Noel: Potentially, they're going to seek the most efficient and profitable ways of business that can be developed.
Mr. Alex Shepherd: Okay.
To Investment Canada, it is still not very clear to us where your responsibilities stop and start in this whole industry. I guess my concern is that first of all, we've heard that we subsidize or support book publishing in Canada, yet you talked at length of the WTO commitments. Are you comfortable with that relationship—that we provide a subsidy to our book publishers that may well be challenged under the WTO?
Mr. Jeff Richstone: The department studied its programs in light of the WTO commitments and feels comfortable that the existing policies are fully compatible. So there is a degree of comfort there.
Mr. Alex Shepherd: If they are compatible, then why aren't they compatible going out from there to defend the Canadian book publishing industry by laws that would require majority control in Canada, and so forth? You don't seem to be able to make that leap of faith somehow.
Mr. Jeff Richstone: I don't think there's anything in contradiction. We're talking about two different kinds of measures. We're talking about investment measures that, generally speaking, are not covered by the WTO agreement. I'm talking in very general terms. They don't speak to the WTO commitments.
If we do make new investment measures, we have other commitments under the NAFTA and the FTA. It would be under those two agreements that we'd have to look at the compatibility issues, the control, reception, and how all those things play in. It wouldn't be under the WTO that the first level of concern would be heightened; it wouldn't be there.
Mr. Alex Shepherd: Is that because you think the exempting provisions for culture support our ability to subsidize book publishers?
Mr. Jeff Richstone: I wouldn't want to go into making it a conclusion. I'm just saying, in response to a question from the chair, that if you're looking at changing the law, obviously as a trade lawyer I would have to see whether any kinds of changes.... Obviously the government has, under its commitments, a margin to act; there's no question about that. They can legislate. There is a carve-out for our cultural industries, but we have to act in accordance with that margin.
• 1220
I'm saying you clearly can. There's a certain level beyond which you
may run into concerns, and within which you don't. I'd just like to
leave it at that. I wouldn't want to close the door to those kinds of
discussions, obviously.
The Vice-Chair (Mr. Dennis Mills): Thank you very much.
[Translation]
Mr. de Savoye.
Mr. Pierre de Savoye: I would like to continue with the line of questioning undertaken by Mr. Bélanger.
Ms. Curran and Mr. Richstone, your statements worry me. None of us around this table has 5% of the expertise that you must have in the area that we are discussing. It is part of your normal work. I imagine that you have been examining such issues for many years. In inviting you here, we do not expect you to limit yourselves to the current situation. We also want you to share your expertise with us, and to tell us what needs to be done that has not already been done and what problems might arise.
I suppose that, in your work, you do not wear blinkers that prevent you from seeing beyond your office, but that your are able to catch site of certain possibilities, to see in which direction the wind is blowing and to know how to set a course in the right direction. If I judge by your answers, you are cautious and timid; you have not enlightened me, and I find that worrisome. I am concerned because I have the impression that you are somehow confined within some invisible boundaries that prevent you from freely sharing certain ideas that I am sure you must have. You appear to me to be normal, intelligent people. Therefore, you probably have some ideas.
The Vice-Chair (Mr. Dennis Mills): Excuse me, Mr. de Savoye.
[English]
I think it's important to remember that the witnesses we have here today, with the exception of Ms. Noel, are officials in the Department of Canadian Heritage and are essentially primarily responsible for administration of the act. If they were outside the government system, as private consultants who had expertise, they could educate us even further than they probably could in terms of being officials.
I think there's a fine line here. Once they become too creative, they essentially take on the role of private contributors to our legislative committee.
[Translation]
Mr. Pierre de Savoye: I understand perfectly what you're saying and I am not criticizing them. If I may, I was criticizing us. We are depriving ourselves of some expert knowledge because the system is designed this way, and I regret it. Mr. Bélanger attempted to obtain information and we realize that you cannot overstep these invisible boundaries. I am not blaming you; I'm blaming us.
However, I was very pleased with the presentation made by Ms. Noel who, unlike yourselves, is not subject to the same constraints and who told us about some of the problems that Bill C-32 has not solved. In some respects, the bill is even rendered obsolete, because the marketplace, with the help of technology, has gone far beyond what the bill was intended to cover. At the time of our deliberations, if I remember correctly, there was talk of a third phase. I remember mentioning at the time that we should move quickly because the second phase would quickly be out of date. It appears that this has happened.
Ms. Noel, you have provided us with several pieces of information on a number of problems, but we do not have a written document. I wonder if you could provide to us, through the clerk, the information that you have conveyed to us, including that given to you by the person from Washington.
In your opinion, Ms. Noel, how much time do we have to catch up, before it is too late?
• 1225
[English]
Ms. Wanda Noel: I will, with pleasure, send copies of my remarks to the clerk.
On the issue of how much time we have to legislate for digital copyright issues, it's my view that we are not far behind in terms of an international comparative law scenario. The United States, as is normally the case, is the first out of the box. They passed legislation some time ago now. There is a bill before the Australian Parliament. The European Union has a directive on some of these issues, but it is not law in the European Union at the moment. So when we look at where we are, we're behind the United States and somewhat behind Australia, but compared to the rest of the world we are progressing.
In terms of putting time windows around that, I don't think we have a long time. The copyright issues dealing with digital exploitation of material are important tools that are given to the cultural industries to enable them to maximize their ability to earn royalties in an on-line environment. So I think it's important and we should move with dispatch, but when I look at the rest of the world, I wouldn't say we're behind. We could fall behind if we do nothing. I would very much like to see a copyright bill tabled on these issues soon—within the next year or so.
The Vice-Chair (Mr. Dennis Mills): Thank you, Ms. Noel.
Ms. Lill, do you have a short question?
Ms. Wendy Lill: I actually just have a comment to make. I think Alex Shepherd made a reference to the fact that we know perhaps 2%, if that, of what you each individually know in your areas of expertise. We struck this particular committee to discuss a very particular problem that came to our attention, which is the health and welfare of the Canadian publishing industry in relation to the situation with Chapters and Pegasus. It's really important that everybody who comes before this committee be able to inform us on that issue, and not simply on their areas of expertise, be it the Investment Canada Act, the Competition Act, or the Copyright Act. Each one of those acts could keep us busy for a couple of years, I'm sure.
So I just want to advise and urge everybody to try to keep our focus sufficiently narrow, so we can be effective here. I need to know exactly how the Investment Canada Act relates to our particular problem at hand, and also the Competition Act and the Copyright Act. I just put that out as an important issue to deal with.
The Vice-Chair (Mr. Dennis Mills): Thank you very much, Ms. Lill.
I would like to thank our witnesses here today. It's been very helpful.
I would like to remind all members and participants to please come on Thursday, because we have one of our favourite government agencies, the Competition Bureau. That should be a very exciting session.
I now adjourn the meeting.