The serious hidden problem facing Canada’s agricultural innovators

by Anthony Rosborough, Carlo Dade. Originally published on Policy Options
February 25, 2021

Canada is facing the loss of an export and innovation champion responsible for breaking new ground, creating middle-class jobs, and opportunity in Canada’s rural communities. The crisis is in Canada’s rural agricultural equipment sector (shortline manufacturing). It stems from the way original equipment manufacturers (OEMs) have over the past decade begun designing agricultural equipment – tractors and combines, for example – to increasingly rely on computers and software. Modern farm tractors are now heavily computerized and internet-connected machines.

OEMs rely on copyright law protections over their software to prevent third-party equipment from working with their platforms. This is precluding competition by century-old Canadian innovators and killing the economic engine of many rural communities. Policy-makers ought to view what is happening in the shortline sector as the canary in the coal mine for other areas of Canadian innovation and take prompt action.

Shortline manufacturing is most simply understood as “add-on” equipment for tractors and combines – the attachments that harvest grain and seed crops. Most Canadian agricultural equipment and implement manufacturers started with farmers solving problems for themselves and their neighbours. Innovation is therefore not only in the DNA of these firms, it is their raison d’être. Some firms in this sector have close to 100 patents approved or pending. They fill a niche in Canada and abroad by making customized equipment to meet the unique climate, soil and crop-specific needs of farmers. These aspects are largely ignored by the OEMs.

Canadian exports of agricultural equipment grew at a rate of more than 30 per cent annually between 2015 and 2018. In the Prairie provinces alone, exports of Canadian-made add-on equipment for combines and tractors grew 47 per cent during the same period. There is reason to believe that this trend will only grow into the future unless strangled by the OEMs.

As evidenced in a recent economic impact study of the industry conducted by Western Economic Diversification Canada, this activity supports more than 500 companies, mostly small and mid-sized, predominantly in Ontario, Quebec, Manitoba and Saskatchewan. The economic contribution may be lost in national GDP numbers but stands out in rural communities where the loss of 100 or 200 good middle-class manufacturing jobs can mean the senseless loss of economic viability for rural regions.

The problem for Canada’s shortline sector (and others) is that OEMs are increasingly moving away from manufacturing their products within the traditional open ecosystems that allow innovation space for other firms to a closed-platform model governed by proprietary standards.

For instance, in 2020, John Deere introduced the X9 combine, the first major piece of agriculture equipment to prevent interoperability with shortline equipment in the history of agriculture in Canada.

Until recently, shortline manufacturers could design and produce equipment that would be directly compatible with OEM machines. Closing off access to the platforms upon which tractors and combines operate replaces innovation, choice and competition engendered by an open system with a monopoly that benefits only the OEMs.

Today’s agricultural machines are also software systems running on proprietary platforms. Laptops have become more important than wrenches to do repairs and diagnostics. On balance, the improved efficiency and safety that results from the OEM application of technology has come at the cost of Canadian innovation.

What is the solution?

The nature of the problem points to multiple legal and regulatory hurdles. The effect of the closed platform approach by OEMs finds its basis in both competition and consumer law. Not only are shortline manufacturers restricted in their ability to compete with OEMs, but consumers and farmers are left with fewer choices when it comes to optimizing their equipment for their particular needs. The key source of the problem, however, is rooted in Canada’s copyright laws. The policy solution therefore must be multipronged.

The Copyright Act provides protection for “digital locks,” which safeguard computer software as a copyrightable work. Digital locks, prevalent in many other applications and affecting many other industries, can come in many forms (proprietary connectors, software encryption, non-standard formats). It is unlawful to circumvent them without authorization from the OEM. For shortline innovators, this means that accessing and manipulating the central computer and system software of agricultural machinery may be unlawful.

Digital lock provisions were incorporated into Canada’s copyright legislation in 2012. Though protection for digital locks has not been without controversy, Canada has joined most other countries in the world in implementing protections of this sort. Canadian courts have since adopted a strict and heavy-handed approach to any unauthorized acts of digital lock circumvention.

To encourage innovation, the Copyright Act does contain exceptions to digital lock protections. Nevertheless, these exceptions have proven to be insufficient for Canada’s shortline industry. Though the act allows circumvention of digital locks to access a computer program for the purposes of “interoperability,” shortline innovators are left with insufficient clarity or guidance. What if it is data that is needed rather than a computer program? What is meant by interoperability? The act fails to address these questions but envisions interoperability primarily as a relationship between two computer programs. It remains unclear how this exception is to be applied in cases where only one computer program or system onboard a tractor is involved.

Shortline innovators are left to determine how to define and conceptualize the interoperability exceptions and assess their legal risks in carrying on business. The most broadly accepted definition of interoperability is “the ability of a system, software or product to exchange and make use of information and services with other systems.” Clearer language like this would be extremely helpful to Canada’s shortline sector if it were added to the Copyright Act. With an increasing need to circumvent digital locks and achieve interoperability, many shortline innovators are unsure whether they can rely on the exceptions in the act for developing their products. And even if shielded from liability, this may not be enough. If OEMs can design equipment with such sophistication that digital locks cannot be circumvented even with a clear right to do so, greater statutory clarity alone may be insufficient.

For these reasons, Canada needs to also assess market competition and fairness within the agricultural equipment market. To safeguard this productive, innovative and profitable industry, shortline companies need assurances that interoperability is both within their legal right and is technically possible. For this, Canada needs to update regulations governing the manufacture and sale of agricultural equipment to mandate open standards to allow for follow-on innovation.

When Canada’s digital lock provisions were introduced in Parliament, MP Peter Braid commented during committee hearings that the intent of the interoperability exceptions was to “encourage follow-on innovation in the (information and communication technology) sector.” One can think of few things more consistent with this intent than follow-on innovation in the field of agricultural machinery, which protects Canadian agriculture while providing middle-class jobs to those who make the machinery they use.

The agricultural sector has been recognized as unique for more than two centuries in being the subject of regulation regarding the manufacture and sale of tractors and combines in Canada. Regulation of this sort contradicts the conventional view that market intervention is detrimental to competition. In reality, a blossoming sector of Canada’s economy depends upon it. In line with this tradition, it is time that Parliament takes a hard look at mandating interoperability for agricultural equipment by clarifying the statutory language in the Copyright Act and ensuring market fairness for shortline innovators.

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This is not entirely new. It is an updating of a fix for an old problem. There is precedent in Canada for restricting the ability of agricultural equipment manufacturers to manipulate markets and stifle innovation. Canadian provinces have mandated conditions and obligations under which agriculture equipment (including tractors and combines) could be sold. An expansion of this type of regulation can protect farmers from anti-competitive OEM practices while fostering competition in the shortline and aftermarkets. The market regulation in this area must keep up with the times. The power of OEMs to preclude competition and innovation in the shortline sector is unprecedented. The OEM interest in ensuring uniformity and brand purity must not be able to undermine the ability of Canadian farmers to develop their own techniques and practices. Government should safeguard and nurture Canadian agricultural competitiveness and made-in-Canada innovation to ensure it remains a growing export success story.

This article first appeared on Policy Options and is republished here under a Creative Commons license.