The Canadian Internet community has been buzzing for the past week over reports that a Montreal-based company has captured data on one million Canadians who it says have engaged in unauthorized file sharing. While that represents a relatively small percentage of Internet users in Canada, the possibility of hundreds of thousands of lawsuits over alleged copyright infringement would be unprecedented and raise a host of legal and policy issues.

My weekly technology law column (Toronto Star version, homepage version) notes the prospect of mass lawsuits will be of particular interest to the federal government, which just completed a major round of copyright reforms. The new copyright bill established a cap on damages that was explicitly designed to dissuade would-be litigants from targeting individuals. In fact, during hearings into the copyright reform bill, Members of Parliament were given assurances that the industry had no desire to launch file sharing lawsuits.

The practice of suing individuals for copyright infringement arising from file sharing started in 2003 in the United States, where tens of thousands of people have since received letters alleging infringement. The letters typically claim that liability could run into the millions of dollars based on U.S. rules that provide for up to US$150,000 per infringement. Recipients are encouraged to settle for several thousand dollars, a steep price to pay for a few songs or movies.

Canadians first encountered file sharing lawsuits in 2004, when members of the Canadian Recording Industry Association filed actions against 29 alleged file sharers. The Canadian initiative was a failure, however, as a federal court judge expressed concern about the privacy implications of the lawsuits, doubts about whether downloading music constituted copyright infringement, and misgivings with the evidence tendered by the industry.

With an eye on the ongoing U.S. lawsuits, the Canadian government made reforms to discourage file sharing lawsuits against individuals a priority. For example, Industry Minister Christian Paradis told the House of Commons “we are concerned about the threat of major penalties that hang over Canadians who infringe copyright for non-commercial purposes. Currently, those who have been found to violate copyright can be found liable for damages from $500 to $20,000 per work. If people illegally download five songs, for example, they could theoretically be liable for $100,000. In our view, such penalties are way out of line.”

The solution was to change Canada’s statutory damages rules by distinguishing between commercial infringement (which still carries liability of up to $20,000 per infringement) and non-commercial infringement, which now features a maximum liability of $5,000 for all infringements. While $5,000 is still very expensive for a downloaded movie, the law permits judges to award damages as low as $100 in such cases.

In fact, the law instructs judges to consider “in the case of infringements for non-commercial 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.”

Rights holders can elect to pursue actual damages from copyright infringement instead of statutory damages, but those are likely to be even smaller in the case of a downloaded movie or song. The net effect, as the government indicated in its advisory on the bill, is supposed to be that “Canadians will not face disproportionate penalties for minor infringements of copyright.”

Despite the government’s intentions, the prospect of hundreds of thousands of lawsuits is apparently still a real possibility. With the law instructing judges to award as little as $100 for all non-commercial infringements, the question is now whether these cases will lead to clogged courts as individuals rely on recent legal reforms to challenge demands for thousands of dollars to settle infringement claims.