The Canadian media featured extensive coverage over the weekend of the federal court decision that opens the door to TekSavvy disclosing the names and addresses of thousands of subscribers and establishes new safeguards against copyright trolling in Canada. While some focused on the copyright trolling issues, others emphasized the disclosure of the names and the possibility of lawsuits.

What comes next is anyone’s guess – Voltage indicates that it plans to pursue the case – but the economics of suing thousands of Canadians for downloading a movie for personal purposes may not make sense given current Canadian law. This post examines the law and estimated costs of pursuing file sharing litigation against individuals, concluding that the combination of copyright reform, the Voltage decision, likely damage awards, and litigation costs will force would-be plaintiffs to reconsider their strategies.

Start with the likely damage award if a case went to court. The maximum liability for an individual for non-commercial infringement in Canada is $5,000 for all infringements. With nothing more than IP addresses, there is unlikely to be any evidence of commercial intent or benefits (going for a commercial claim would require far more evidence and expensive litigation). While $5,000 is the cap, the actual number is likely to be far lower as the law sets a minimum award of $100. The law provides some additional guidance for judges:

in the case of infringements for noncommercial purposes, the need for an award to be proportionate to the infringements, in consideration of the hardship the award may cause to the defendant, whether the infringement was for private purposes or not, and the impact of the infringements on the plaintiff.

I would argue that the actual number is likely to be at the low-end of the scale for a first-time case. These are non-commercial cases involving movies with a market value for consumers of around $15 to $25 with some selling for under $10. Moreover, the impact of the infringements on the plaintiff are also low since Voltage chose relatively low-profile movies (see page 9), some of which had minimal earnings (for example, Puncture earned $68,945 worldwide). Contrary to some reports, the Hurt Locker is not one of the films in this case.

Perhaps the best comparable is the New Zealand copyright tribunal three strikes cases which have awarded actual market value for the copyright work (eg. $2.39 for a song) and added tribunal and application fees, a deterrence fee, and a portion of the cost of obtaining the user’s information. Tribunal and application fees would not apply to a demand letter in Canada. The deterrent fee has been as low as zero with others around $100 per infringement. There is often also a fee for obtaining the name and address, typically at about $50 for three notices.

Since Canadian demand letters would not involve tribunal or application fees, a reasonable number is going to be very close to the $100 minimum for a first-time, non-commercial infringement with no other warnings or notices. The federal court hinted at this last week, noting that “damages against individual subscribers even on a generous consideration of the Copyright Act damage provisions may be miniscule compared to the cost, time and effort in pursuing a claim against the subscriber.”

As discussed in my post on the case, the decision establishes a system of court oversight for the demand letters as the contents will be approved by the parties (including CIPPIC) and the case management judge. The letter must also “clearly state in bold type that no court has yet made a determination that such subscriber has infringed or is liable in any way for payment of damages.” With a full review of the letter, a court is unlikely to grant its approval if the demands are viewed as excessive. Indeed, it seems likely that the court will require settlement demands that are consistent with likely damage awards.

Even if Voltage were successful in convincing a court to award ten times the marketplace value of a $15 movie – $150 – the economics do not make sense. Assuming Voltage manages to convince 75% of recipients to settle for the $150 demand, the campaign would generate $225,000 in revenue. Yet that must be offset by paying the TekSavvy costs before any names are released (which alone were estimated at $200,000 at the federal court hearing), covering their own costs (assume a matching $200,000 to collect the IP addresses, retain experts, and fund the litigation), and dealing with thousands of demand letter recipients (if each letter costs $30 in time and money that adds another $45,000).

Under this scenario, Voltage will have settled three quarters of its cases for ten times the market value of a $15 movie and will have lost hundreds of thousands of dollars in the process. In fact, even if the demands were doubled to $300 per subscriber, the case will still just break even. Moreover, there are still the remaining 25% of recipients who have not responded, many of whom may believe they have (in the words of the federal court) “perfectly good defences to the alleged infringement.” If Voltage pursues them in court, the costs of the litigation (the federal court ruled all follow-on cases will be subject to case management) will far outstrip any likely award as every court case is a money loser. If Voltage does not fight in court, the decision to only send demand letters will be used as evidence of copyright trolling in any future case and the federal court ruled that “improper motive” (ie. demand letters without intent to litigate) could be enough to deny future motions for subscriber information.

In sum, file sharing lawsuits against individuals in Canada do not make economic sense if the goal is to profit from the litigation (the Voltage case is different from earlier industry-backed lawsuits that were geared toward deterring file sharing). First, since Canadian law points to very low damage awards and court oversight will make it difficult to demand anything beyond the likely damage awards, settlements may not even cover costs. Second, some cases will require litigation and every case that goes to court will result in losses for the rights holder. Third, failure to litigate those cases will make it difficult to obtain future court orders for subscriber information since those litigants will be suspected of copyright trolling.