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Competition Bureau Submission to the Consultation on a Modern Copyright Framework for Artificial Intelligence and the Internet of Things

Unlocking Competition

September 28, 2021

Table of Contents

I.   Overview

The Competition Bureau (“Bureau”) is pleased to make this submission to Innovation, Science, and Economic Development Canada’s (“ISED”) Consultation on a Modern Copyright Framework for Artificial Intelligence and the Internet of Things (“Consultation Paper”).Footnote 1

In brief, this submission supports certain amendments to the Copyright Act to allow for repair and interoperability of Internet of Things (“IoT”) devices. Such measures could make it easier and cheaper for Canadians to repair their IoT devices and allow a greater number of small- and medium- sized businesses to offer new and innovative products and services.

II.   Introduction

IoT devices have the potential to revolutionize markets across the country. From sensors that allow farmers to measure the topography and soil quality of their fields, to a smart fridge that lets you order items you have run out of online, IoT devices are increasingly impacting the way businesses operate and how Canadians carry out their day-to-day lives.

The shift to software-based IoT devices has important implications for intellectual property (“IP”) rights. Original equipment manufacturers (“OEMs”) use technological protection measures (“TPMs”) to prevent access to the underlying software of an IoT device, which helps safeguard their IP. TPMs serve as an additional layer of protection on top of the legal protection afforded by existing copyright law, and circumvention of TPMs, with limited exceptions, is prohibited under the Copyright Act.

However, the framework for TPMs is raising challenges not contemplated at the time of their introduction, including challenges related to competition. Namely, TPMs can restrict legitimate non-infringing activities, such as repairs and enabling interoperability, which can have a chilling effect on competition and innovation. This has spawned considerable attention to what is generally referred to as the “right to repair” in Canada and elsewhere.

The Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. As part of its mandate, the Bureau promotes and advocates for the benefits of competition based on the guiding principle that competition is the best way to improve choice, lower prices, and spur innovation in the Canadian economy.

This submission will examine the TPM provisions of the Copyright Act that may impact competition in the marketplace by limiting repairs and interoperability, and discuss how proposed legislative amendments can foster competition and innovation. In particular, the Bureau supports amending the TPM provisions in the Copyright Act to introduce the following explicit exceptions for repair and interoperability.

Together, these proposed pro-competitive policy measures can lower barriers to entry in aftermarkets — particularly for small- and medium-sized businesses — spur follow-on innovation, and give Canadians more choice.

III.   TPM exception for the purpose of repair

Canadians spent over $12 billion on repair and maintenance services in 2020.Footnote 2 Repair services span nearly every sector of the economy, from agricultural equipment to household appliances.Footnote 3 As more everyday products have software- and copyright-protected work embedded in them, there are growing concerns that the current framework for TPMs is impeding ISO’s ability to access underlying software necessary to diagnose and repair those products.Footnote 4

The current prohibitions against TPM circumvention limit the ability of consumers and ISOs to service and repair IoT devices.Footnote 5 TPMs prevent third-parties, including the device owner and independent repairers, from accessing embedded repair data (such as diagnostic data), as well as from reading and interpreting fault codes.Footnote 6 TPMs can also prevent effective installation of third-party parts.Footnote 7

Removing barriers that impede the ability of ISOs to repair IoT devices can have a number of pro-competitive benefits for repair and aftermarkets. Reducing barriers to entry in the repair industry can lead to greater choice, better prices and higher quality services, as IoT device owners would have the additional choice of self-repair or having repairs performed by a greater number of third parties. A wider variety of repair options can particularly benefit consumers and businesses in rural and remote areas that may face long wait times and greater difficulty accessing an OEM’s authorized repairer than those in urban areas.Footnote 8 For example, a farmer faced with delays in repairing agricultural equipment during peak harvesting time may face a significant loss of income.Footnote 9 Reducing barriers to the installation of third-party parts can also increase the availability and reduce the price of replacement parts, allowing customers to extend the lifespan of their products and equipment.

Given these pro-competitive benefits, the Bureau supports introducing a TPM exception to facilitate the repair of IoT devices with embedded software. To maximize benefits for both consumers and businesses, the exception should apply to device owners and ISOs that engage in non-infringing circumvention activities for the purpose of diagnosing, maintaining or repairing devices with embedded software.

As mentioned in the Consultation Paper, amending the copyright framework to create an exception to the prohibition of TPM circumvention for the purpose of repair will not fully address all barriers to engaging in repairs. Contract law and consumer protection law regarding warranties and access to replacement parts are often also barriers for consumers and ISOs seeking to diagnose and repair a device. However, changes to the copyright framework can be a necessary step and can complement other efforts, including enforcement of the Competition ActFootnote 10 and legislative changes at the provincial and territorial levels, such as those currently being contemplated in Québec.Footnote 11

Set out below is an assessment of the available options described in the Consultation Paper. The assessment applies a competition lens to each option, with the aim of:

  1. creating a level playing field between ISOs and OEMs’ preferred repairers;
  2. providing choice to IoT device owners for self-repair or repair by their preferred third party; and
  3. enabling the operation of IoT devices with non-OEM replacement parts.

Exception under subsection 41.21(1) of the Copyright Act

Subsection 41.21(1) of the Copyright Act gives the Governor in Council (“GiC”) the power to make regulations to exclude any TPM or class of TPMs from the application of the prohibitions under section 41.1 if the GIC considers the application of the prohibitions would unduly restrict competition in the aftermarket sector.

Use of this regulatory power has a number of potential benefits. Under subsection 41.21(1) of the Copyright Act, an exception could apply to the circumvention activities of device owners and third parties. This would allow the GiC to remove an important barrier to repairs for ISOs. If the GiC considers it to be appropriate, it could also apply the exception to the manufacture, import, distribution, offer for sale, rental or provision — including by selling or renting — of circumvention technology, devices or components for the purpose of diagnosing, maintaining or repairing devices.

Under this regulatory power, Parliament has granted a discretionary powerFootnote 12 to the GiC pertaining to:

  1. the assessment of undue restrictions to competition in the aftermarket sector in which the TPMs or class of TPMs is used; and
  2. the TPM or class of TPMs that would be excluded from the application of section 41.1.

1) Assessment of the ‘undue’ restriction to competition in the aftermarket sector in which the TPMs or class of TPMs is used

Assessing an ‘undue’ restriction to competition in the context of the Competition Act can often involve in-depth, case-by-case analysis based on complex economic analysis.Footnote 13 Such an assessment can be time consuming and resource intensive. However, different approaches to assess competition in repair markets have been used in other jurisdictions in different contexts. For example, a recent ‘Right to Repair’ study by the Australian Productivity Commission (“APC”) used a largely qualitative approach to assess competition in repair markets based on the following assessment criteria:Footnote 14

If the GiC makes the determination that a TPM or class of TPMs unduly restricts competition in a given aftermarket sector, it may need to weigh the risks that an exception may pose to other policy objectives against the benefits to competition. Where possible, the benefits to competition should be maximized while also fulfilling other policy objectives.Footnote 15 Policy objectives that may be implicated by a TPM exception for repairs, as well as considerations for how they may be preserved while promoting greater competition, are outlined below.

2) The TPM or class of TPMs that would be excluded from the application of section 41.1

Under subsection 41.21(1) of the Copyright Act, the TPM or class of TPMs that would be excluded from the application of section 41.1 are those that the GiC has considered that the application of section 41.1 to them would unduly restrict competition in the aftermarket sector in which they are used.

There are a large variety of technologies used as TPMs to protect copyright works.Footnote 26 They are often classified by their function – TPMs that control access to works, and those that control the use of works.Footnote 27 However, this classification may be illusory as TPMs often exhibit both characteristics.Footnote 28 This creates a challenge for legislators who may only want to confer anti-circumvention protection to one class of TPMs but not to the other.Footnote 29

To level the playing field between OEM preferred repairers and ISOs, as well as to provide greater choice to consumers, it is important to identify the type of TPM or class of TPMs preventing access to the embedded software for the purpose of diagnosing, maintaining or repairing devices.

Exception under subsection 41.21(2) of the Copyright Act

Paragraph 41.21(2)(a) allows the GiC to make regulations prescribing additional circumstances in which the prohibition against circumventing a TPM, set out in paragraph 41.1(1)(a), does not apply, having regard to a number of factors. The use of this regulatory power would exempt the act of circumventing a TPM as defined in the Copyright Act.

However, the regulatory power provided in paragraph 41.21(2)(a) of the Copyright Act does not cover paragraph 41.1(1)(b) of the Copyright Act, which applies to persons offering services to the public or providing services related to the circumvention of TPMs, such as ISOs.Footnote 30 Therefore, this exception may only provide protection to those device owners that have the knowledge and capability to circumvent TPMs on their own devices. It would not protect third parties, such as ISOs, from circumventing TPMs for the purpose of repair.Footnote 31 Device owners who do not have the knowledge and capability to circumvent the TPMs on their own devices may not benefit from this exception. They would be unable to obtain the required technology, as the regulatory power does not cover paragraph 41.1(1)(c) of the Copyright Act, which applies to the manufacture, import, distribution, offer for sale, rental or provision — including by selling or renting — any technology, device or component.

Exception under the legislative powers

Beyond the authority to make regulations under section 41.21 of the Copyright Act, new legislative exceptions may also be proposed to enable non-infringing circumvention of TPMs for the purpose of repairs. Depending on the policy objectives, this may be an approach worth exploring. For example, a legislative exception that provides an  exception for self-repair and third-party repair could be created, if deemed appropriate.

IV.   TPM exception for the purpose of interoperability

The number of IoT devices is expected to grow to 43 billion globally by 2023.Footnote 32 As the number of IoT devices grows, interoperability will be a key challenge to realizing their full economic and social potential.Footnote 33 Interoperability can also be a key enabler of competitive markets. It can allow businesses to build off existing products and services to develop new innovations and can make it easier for consumers to switch between products and services and take their data with them.

As set out in the Consultation Paper, in recognition of the public policy benefits for innovation and competition of facilitating interoperability,Footnote 34 the Copyright Act sets out a TPM exception for interoperability of computer programs.Footnote 35 However, market participants suggest that the TPM exception for interoperability provides insufficient legal clarity with respect to how “interoperability” is defined and whether the exception applies to interoperability between non-computer programs. They argue that this has a chilling effect on competition and innovation.Footnote 36

The ability of businesses to offer add-on products or services for an IoT device relies on interoperability.Footnote 37 The inability to legally circumvent TPMs to achieve interoperability can create significant barriers to entry for businesses, particularly small- and medium-sized businesses, seeking to develop complementary products or services for IoT devices. Such barriers can reduce competition by limiting the number of complementary IoT products and services available in the market, and impair innovation over the long term by deterring start-ups.Footnote 38

The inability for businesses to legally circumvent TPMs to achieve interoperability can also create barriers to switching for customers. Data stored on an IoT device that cannot be migrated to a competing IoT device can create data-related switching costs, particularly for IoT devices that use technology such as machine learning where the importance of historical data is greater.Footnote 39 This ‘lock-in’ effect can dampen competition, lead to entrenchment of inferior products and services, and deter entry from nascent competitors that may be unable to gain traction in a market of data-rich incumbents.Footnote 40 It can also impede data portability and increase switching costs for consumers.

Allowing businesses to legally circumvent TPMs to achieve interoperability can increase competition for complementary products and services of IoT devices, which can lead to more choice and lower prices for consumers. It can also boost innovation by allowing a greater number of businesses to compete to provide users higher quality products and services and better functionality.Footnote 41 Reducing a barrier to interoperability can reduce ‘lock-in’ effects by allowing users to switch from one device to another without losing their historical data, and allow consumers to choose the complementary or add-on products and services that best meet their needs.

Exception under subsection 41.12(1) of the Copyright Act

The Bureau supports amending the TPM exception for interoperability under subsection 41.12(1) of the Copyright Act to provide clarity to industry participants seeking to exercise the exception. Regulatory certainty and predictability are key enablers of innovation. If businesses are not confident in their ability to conduct their activities on safe legal grounds, they may not engage in potentially costly and risky innovative activities.Footnote 42 This can have a particularly chilling effect on small innovators, which may be more likely to be discouraged from innovative risk-taking. Clarification of the TPM exception for interoperability can provide greater certainty to businesses on the circumstances in which they can legally exercise the exception. This can give businesses the confidence and legal clarity to develop interoperable products or services consistent with the exception, and consumers the benefit of a greater choice of products and services that those businesses may deliver to the market.

The current TPM exception for interoperability, which refers to interoperability of computer programs, may limit the ability for businesses to exercise the exception to achieve interoperability between two systems that are not defined as computer programs. Amending the definition of interoperability to reflect the systems, software and products relevant to modern-day IoT markets can serve to promote greater competition and innovation in those markets. In that respect, the Bureau supports amending the definition of interoperability to reflect current market realities, based on input from market participants.

While there are clear benefits to enabling greater interoperability, those may need to be weighed against other policy considerations related to innovation, reliability, security and privacy. For example, evidence brought forward during the course of this consultation may demonstrate that a broader exception may pose risks related to innovation, reliability, security and privacy for certain uses or sectors. In such cases, it may be appropriate to carve out uses or sectors for which the exception does not apply. However, as described in the previous section on repairs, where market participants suggest that an exception should not apply to a certain use or sector due to purported risks, such justifications should be substantiated by evidence. Issues related to innovation, reliability, security and privacy can pose legitimate risks, however they should not be used as a cloak to shield businesses from legitimate competition.

Finally, exceptions for interoperability should be reviewed regularly to reflect changing technology. IoT markets are rapidly evolving, with disruptive business models and technological advancements that can quickly change the competitive landscape and consumer experience. It is critical for exceptions to keep up with the rapid pace of change in IoT markets to avoid impeding new ways of doing business. Such a review could occur as part of the mandated statutory review of the Copyright Act.

V.   Conclusion

The inability to legally circumvent TPMs for legitimate non-infringing purposes, such as for repairs and enabling interoperability, can reduce choice for consumers and create significant barriers for businesses to compete in downstream and complementary markets. Given the pro-competitive benefits for consumers and businesses, the Bureau supports introducing an exception to facilitate repairs that applies to IoT device owners and ISOs. The Bureau also supports amending the TPM exception for interoperability to provide clarity to businesses seeking to exercise the exception to enable interoperability with IoT devices. Together, these proposed pro-competitive policy measures can make IoT and complementary markets more contestable by promoting entry and expansion of small- and medium-sized businesses and reducing “lock-in”, which can increase competition, lower prices and promote innovation.

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