An Ottawa software developer is taking the Government of Canada to court, alleging a federal department is using its intellectual property without paying licensing fees – a claim the feds dispute.
Ottawa-based SageTea Software filed a claim in Federal Court this summer alleging Employment and Social Development Canada is using its source code without a proper licence for artificial intelligence-based software developed in relation to a contract with the federal department.
The software in question came with a promise to transform work at the federal department: taking a decade’s worth of dense audit reports and quickly converting them into useful, organized data.
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SageTea’s management tells OBJ that the alleged misuse of its intellectual property – and the ensuing battle with ESDC to settle the dispute – caused the company to drastically miss its 2019 financial projections, leading to layoffs and leaving the small firm empty-handed when it reports to its shareholders.
The federal government declined to answer questions about the lawsuit, saying it could not comment on matters before the courts.
But in a statement of defence and counterclaim filed in response to the Ottawa firm’s suit, the feds deny the company’s allegations and instead claim that SageTea is the one inappropriately using the federal government’s data to develop its own proprietary software.
Build in Canada Innovation Program
The lawsuit stems from a contract issued in October 2017 through the Build in Canada Innovation Program. The government initiative, which has since become a testing stream for Innovative Solutions Canada, is designed to help Canadian companies commercialize their technology: a chance to use the latest tech to improve the efficiency of the public sector and give firms a powerful reference customer in the form of the federal government.
To SageTea president Scott MacGregor, the conflict with ESDC flies in the face of the BCIP’s raison d’etre.
“The BCIP program is to help innovative companies commercialize their intellectual property. It’s not meant for government to take that intellectual property and commercialize it.”
“The BCIP program is to help innovative companies commercialize their intellectual property. It’s not meant for government to take that intellectual property and commercialize it. They’re not supposed to be going into competition with the people in the BCIP project,” he says.
SageTea secured a BCIP contract worth $500,000 with ESDC to develop and test database software. The initial project could transfer information between databases, but SageTea eventually started to work – outside the scope of the BCIP deal – on a more advanced solution for ESDC. Specifically, the firm looked to create software that could read information from an unstructured set of data – in this case, 10 years’ worth of audit reports covering student loans, employment insurance payments and more – and translate that into a functional database that categorizes risks and controls based on insights gleaned from the original documents.
While the end result sounds technical, it’s not hard to imagine the potential time saved: AI can read long, dense audit reports in a fraction of the time it takes a set of human eyes.
“The AI, once we got it working, was able to actually tell you definitively, ‘Here are the top 10 risks, here are your top controls,’ and really get to the needle in the haystack as to what the issues of the day are,” says SageTea CEO David Long.
“It was a colossal breakthrough,” he says of the product, which became known as SageTea Link.
According to Long, ESDC seemed pleased with the results of the BCIP project and this new innovation. Based on feedback throughout the project, he expected to sign a licensing deal for the AI solution with ESDC and another federal department.
Source code dispute
As the BCIP contract wrapped up, the firm was asked to provide the source code for its SageTea Link product. According to MacGregor, who spent two decades as a consultant with the federal government, this is common practice: source code is provided and usually held in escrow, which the feds would only use if the company it was working with suddenly went out of business.
“Generally what that means is if the company goes under, the government does not lose its investment,” MacGregor says.
However, according to SageTea’s statement of claim, that’s not what happened in this case. Instead, the SageTea lawsuit says the department downloaded the source code for “unlawful use” – to the extent that ESDC officials have even been demonstrating the solution in action at audit community conferences across Canada.
The counterclaim
The government’s counterclaim disputes this interpretation of events. Neither it, nor SageTea’s claims, have been proven in court.
The counterclaim begins by denying that any of SageTea’s proprietary information was used in the development of a database management solution at ESDC.
ESDC says in court documents that the department had been working internally on software to comb through its audit reports before SageTea was awarded a BCIP contract.
According to the counterclaim: “While ESDC had the technical capability to create a solution, ESDC made the decision to allow SageTea to create the solution through the BCIP program.”
The counterclaim continues, breaking the BCIP project down into different products, differentiating SageTea Link from other applications developed in relation to the program – including source code developed by a SageTea subcontractor. ESDC says in its defence filings that it was granted independent access to this source code, and its use does not contravene SageTea’s proprietary information.
Elsewhere in the counterclaim, ESDC alleges that the fundamental issue with SageTea’s software was that the product itself did not work and was “ultimately unusable.”
“There were numerous issues with the functionality of the interface and the reliability of the results generated by the proposed solution,” the claim reads.
Any functional database management solution that ESDC developed after the close of the BCIP contract, the counterclaim states, was developed by the department’s in-house staff, using ESDC’s own proprietary data and without any of SageTea’s intellectual property that was not provided under the terms of the original deal.
SageTea’s executives tell OBJ they find little substance in the government’s defence. Long argues that SageTea’s solution must have been an integral part of the feds’ final solution and that SageTea Link received glowing reviews from federal bureaucrats when the product was presented.
The firm also alleges a misrepresentation of the SageTea Link product. While the ESDC counterclaim differentiates Link from its connected applications, the SageTea team says all of these elements comprise the total product – there’s no way to separate the pieces and claim it’s no longer Link.
The final crux of the legal dispute is over “weights data” – information that the AI uses as parameters when making decisions. ESDC provided proprietary data for this purpose over the course of the BCIP project and alleges in its defence that SageTea is improperly using that data by continuing to sell the software in question. SageTea says it has deleted any such data and replaced the information with different “weights.”
Finding a solution
Public Services and Procurement Canada and ESDC are both named as defendants in SageTea’s statement of claim. MacGregor says the company has no quarrel with PSPC but had to name the department in the suit because of how the BCIP contract was structured.
SageTea alleges that the company has lost opportunities with other federal departments based on bad references from ESDC.
As the company was expecting two major federal government contracts to come through this year, Long says revenues in 2019 are 90 per cent lower than initially forecast. As a result, the company has had to lay off the majority of its full-time employees in the past year, paring the operation down to Long, MacGregor and a few regular contractors.
As part of its claim, SageTea is seeking punitive damages – as determined through the trial – and a declaration of ownership over the SageTea Link solution. The firm is also looking to receive appropriate licensing revenues for any ESDC use of the database management solution. SageTea couldn’t provide any monetary estimates of the damages, except to say that they are “significant” and that the firm’s financial position has been “greatly” affected.
Similarly, the feds claim they’re owed damages for SageTea’s alleged use of its proprietary data.
SageTea’s management says the company would prefer to settle the dispute out of court and get back on track as a technology vendor for the federal government.
“This is an issue that matters for any company that has source code or intellectual property.”
Long says he hopes that when SageTea’s problems are finally resolved, the situation will lead to changes in how intellectual property issues are handled in Canada’s procurement system.
“If this is allowed to happen, this won’t be the last time. This is an issue that matters for any company that has source code or intellectual property. It’s important to businesses in general, not just us,” he says.
