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Amazon Decision Demonstrates Shift in Government Policy

May 6, 2010

On April 12, 2010, James Moore, the Minister of Canadian Heritage (the Minister), announced that Amazon.com, Inc. (Amazon)  had been granted approval under the Investment Canada Act (ICA) to establish a fulfilment centre in Canada for Amazon.ca operations.

Although Amazon has been servicing Canadian consumers from outside Canada for several years, the government’s move signals a potentially significant shift in government policy with respect to foreign investment and the cultural business provisions of the ICA (which include the distribution of books) and the Revised Foreign Investment Policy on Book Publishing and Distribution issued under the ICA (the Book Policy).   The government’s approval of Amazon establishing a Canadian business suggests that the government may be more welcoming to foreign investment in the book sector.  Our experience in other matters indicates this is the emerging trend.

ICA Background

Under the ICA, investments by non-Canadians to establish a new Canadian business or to directly acquire control of a Canadian business may be subject to review and approval by the government where certain monetary thresholds are exceeded.  Reviews may also be required for direct and indirect investments and the establishment of new businesses by non-Canadians in industries identified as being important to Canada’s “national identity” or “cultural heritage,” often referred to as cultural businesses.  Such businesses include those involved in the publication, distribution or sale of books, magazines, periodicals, newspapers or music in print or machine readable form.  Also covered are businesses involved in the production, distribution, sale or exhibition of film or video products or audio or video music recordings. 

The Canadian government’s Book Policy provides that foreign investment in new business enterprises that are engaged in book publishing or distribution “will be limited to Canadian-controlled joint ventures.”  The Book Policy further prohibits the acquisition of Canadian-controlled book publishing or distribution businesses by non-Canadians except in “extraordinary circumstances” involving financial distress and requires that Canadians be provided  a “full and fair opportunity to purchase.”

Similarly, Canada’s Film Distribution Policy (Film Policy) prohibits foreign takeovers of Canadian-controlled film distribution businesses, and prohibits the establishment of new foreign-controlled film distribution businesses in Canada, except where the foreign investor is importing and distributing only its own proprietary products (as is done by the Canadian distribution arms of the major Hollywood studios).  Activities of foreign-owned studios operating prior to 1987 are also grandfathered under the Film Policy.

The terms “publishing” and “distribution” are not defined in the ICA (or in either the Book Policy or Film Policy).  Furthermore, these terms were included in the ICA at a time when no one could predict that the Internet would fundamentally change how films and other cultural products are delivered to end users.

Amazon.ca Background

Since 2002, when it launched Amazon.ca, Amazon has structured its Canadian service so that all of its web servers and facilities are located in the United States.  Product inventory (including cultural products such as books, DVDs and audio CDs) is shipped to and stored at a facility in Canada operated by a Canadian–owned third-party logistics provider, which packages the product and delivers it to the customer. 

When it launched Amazon.ca, Amazon took the position that it had not established a “Canadian business” and that, therefore, its investment was not subject to review and did not require approval under the ICA.  Under the ICA, a Canadian business exists where there is a place of business in Canada, individuals in Canada are employed in connection with the business, and assets in Canada are used to carry on the business.

At that time, the Minister also concluded that no “Canadian business” had been established.  This decision was challenged by industry stakeholders.  These parties ultimately filed proceedings in Federal Court to force the Minister to require Amazon to file a notification under the ICA and to undertake a review of the establishment of the Amazon.ca business.  The proceedings were ultimately dropped; however, filings made by the Minister in the case outlined the specific conclusions reached by the Minister on the Canadian business issue.  In particular, the Minister found that two of the four elements of the Canadian business “test” were not met:

  • Amazon had no employees in Canada working for, or in connection with, its business.  The employees of the third party logistics provider were not employed in connection with the Amazon.ca business.
  • Amazon had no place of business in Canada.  Its website was not a place of business despite the .ca domain name since the server was located in the United States.  The third party logistics provider’s warehouse was not an Amazon location.

The Government’s Recent Decision

In 2008, the Competition Policy Review Panel’s (Panel) final report “Compete to Win” specifically questioned the need to apply the Book Policy so broadly on the publishing side “as to capture even those companies that publish virtually no Canadian authors, sell the vast majority of their books outside Canada, and have no printing and distribution activities in Canada.”  The Panel further commented that “[t]his is likely to have the unintended consequence of driving investment, opportunity and talent outside Canada.”  The Panel also recommended periodic reviews of Canada’s cultural industry policies.

The Minister’s recent decision in Amazon may indicate that the government is prepared to take a pragmatic approach to foreign investment in cultural industries based on commitments given by the non-Canadian investor rather than continue to adhere to existing policies which have the effect of forcing foreign investors to serve the Canadian market from outside our borders in a manner that creates limited economic benefit in Canada.  In addition, a pragmatic approach will generally enhance the competitiveness of the cultural sector.  In a press release, the Minister stated that “Amazon has shown its willingness to promote Canadian cultural products, and we are pleased it is continuing to demonstrate this through this new investment.”  The Minister stated that the decision to allow Amazon to establish a Canadian business was based on commitments made by Amazon, which include the following:

  • new jobs for Canadians and improved service for Canadian consumers;
  • increased visibility for Canadian books on the Amazon.ca web page;
  • an investment of over $20 million, including $1.5 million in cultural events and awards in Canada and the promotion of Canadian-authored books internationally;
  • increased availability of French-language Canadian cultural products;
  • the establishment of dedicated staff to assist Canadian publishers and other suppliers of cultural products;
  • making more Canadian content available on Amazon’s Kindle e-reader; and
  • creating a summer internship program for Canadian post-secondary students.

 

Conclusion

Although far from a decision to repeal Canada’s foreign ownership restrictions on book publishing and distribution, the government’s decision in Amazon illustrates a new willingness to engage foreign investors in the book sector.  Importantly, this may provide new opportunities to foreign investors who are interested in entering the Canadian market.  The decision comes at an important time. Technological developments such as e-readers and electronic downloads of music and film are undermining the business models with respect to which cultural policies were formulated in the 1980s.  In the film sector, while the Film Policy continues to be strictly enforced, the enforcement authorities now interpret the term “distribution” narrowly such that it does not ordinarily include retail sales to consumers such as on-line sales. It remains too soon to tell whether the government’s decision in Amazon is an isolated exception or a permanent shift in Canadian foreign investment policy.  However, the decision provides some evidence that the door is no longer fully closed.

For more information about this topic please contact any member of Osler’s Competition/Antitrust Law Group.

For responses to 20 frequently asked questions about the Investment Canada Act and its application, click here.   

Osler’s Competition/Antitrust Law Group will update these FAQs as developments occur. Please feel free to contact one of us to discuss any of these FAQs, or call with your own questions.

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