Wednesday, July 23, 2014

Copyright Board Approves SOCAN Tariffs For Performance Of Musical Works Contained In Audiovisual And User-Generated Media Transmitted Over The Internet

The Society of Composers, Authors and Music Publishers of Canada (SOCAN) proposed two tariffs (Tariff 22.D.1 and 22.D.2) for the collection of royalties for musical works performed as part of audiovisual works transmitted over the internet. Several stakeholders including Facebook, Netflix and Bell objected and made submissions in opposition to the proposed Tariffs. On July 18, 2014, the Board rendered its Decision allowing the SOCAN Tariffs. 

Image by Renjith Krishnan
The royalty rates set in these Tariffs are based on an agreement reached during settlement negotiations between SOCAN and some of the original objectors. The Board addressed the setting of general tariffs based on agreements reached by copyright collectives and users in its decision in Re:Sound Tariff 5. That Tariff deals with the public performance of sound recordings. Before allowing an agreement to form the basis for a tariff, the Board said that it is “generally advisable” to consider: 

(a) The extent to which the parties to the agreements can represent the interests of all prospective users; and 

(b) Whether relevant comments or arguments made by former parties and non-parties have been addressed.

Since the Settlement Agreements here involved some of the biggest players, including Apple, Bell, Rogers and Cineplex, the Board found that the parties to the Agreement were sufficiently representative of the interests of other users. It also found that those objectors who were not party to the Agreement had ample opportunity to make their submissions. The Board also noted that the rates fixed in the Agreement were the fruit of extensive negotiations between skilled and savvy counsel.
Several grounds were raised by the objectors. Among them, Facebook and Netflix’s arguments bear some discussion. 

Facebook argued that it has a strict copyright enforcement policy and has implemented software to make sure that any protected uses of copyrighted works are prevented from being uploaded to its network. Facebook noted that any use of copyright protected works not caught by its software would qualify under the new UGC exception found at s.29.21 of the Copyright Act

Facebook also argued that an “audiovisual page impression” (defined in the Tariffs as “a page impression that allows a person to hear an audiovisual work”) should only give rise to a royalty when the work in question is actually viewed or heard. The wording of the Tariffs make it so that once a web page that contains the audiovisual work is loaded, a royalty is payable regardless of whether the work is ultimately accessed or not. 

The Board rejected the first argument out of hand. Whether Facebook’s activities would fall under the Tariffs is irrelevant. The Copyright Board sets tariffs of general application. If Facebook does not feel its activities fall under these Tariffs, it does not have to pay royalties until a court of competent jurisdiction says otherwise. To say that the Tariffs should not be allowed because it does not apply to Facebook is a non-sequitur.

The Board also rejected the argument on page impressions. It simply said that SOCAN’s proposed method of calculation was acceptable and consistent with other Tariff 22 classes. 
Netflix argued that its one-month free trials should not be captured by the Tariffs. It based this position on two arguments:

1) The free trial is fair dealing for the purpose of research along the lines of the Supreme Court of Canada’s decision in SOCAN v. Bell (discussed here). In that case, the issue before the Court was whether the sampling of 30-90 second excerpts of musical works constituted fair dealing for the purpose of consumer research.

2) Paying SOCAN for free trials of the service would cause double compensation contrary to the principle of technological neutrality as set out by the Supreme Court in ESA v. SOCAN (discussed here).

On the fair dealing argument, the Board found the analogy between Netflix’s free trial period and the song previews in SOCAN v. Bell to be tenuous. There is a big difference between a low quality sample of a portion of a song and a high-quality, full version of a television show or movie. The Board also declined to look any further into fair dealing as no one (including Netflix) led sufficient evidence to make such a determination. 

The Board was equally unconvinced by Netflix’s technological neutrality argument. It reasoned that there is no technological alternative to Netflix’s free trial period that is or has been used in the offline world: “There is no alternative-technology equivalent to a Netflix free trial. Video stores never offered a free month’s membership with the right to rent as many videos as the customer wanted for no additional charge. Thus, there is no issue with technological neutrality.”


Overall the Board’s decision appears to be reasonable. Its rejection of Facebook’s argument regarding page impressions strikes me as a little dubious. Is there some technological reason why royalties should be calculated this way? Surely it would be more accurate to track the number of clicks received by the media player on the page than the raw number of times that the page is loaded. Some dynamic webpages have auto-refresh features that refresh parts of the page while leaving other parts untouched. This may skew results in favour of more compensation. Still, this outcome seems far from unreasonable. 

Netflix’s argument based on technological neutrality was puzzling. It asserted that allowing SOCAN to collect royalties for free trials would lead to “double dipping” (presumably because Netflix would have to pay a different royalty rate if the free user eventually subscribed). This seems a little simplistic. Surely Netflix is capable of –and certainly is- monitoring which free users eventually subscribe to its service. What is so difficult about subtracting the free trial royalty rate from the higher subscriber royalty rate and paying SOCAN that amount? 

To take a basic example, assume that the free trial royalty rate is $12/year (or $1 for a one-month free trial period) and that the regular royalty rate is 5% of the subscription fee which is $25/month. This would produce an annual royalty of $15 per subscriber.  For a subscriber who takes advantage of the free trial month and then signs up and pays the subscription fee for the rest of the year, all you have to do is subtract the free trial month amount ($1) from the annual royalty ($15) in order to assure that SOCAN is not paid twice for the same period of time (once at the free trial rate and once at the full rate).

While Netflix’s argument was ill-founded, I think the Board may have made a mistake in its reasons. Instead of rejecting Netflix’s argument for the reason set out above, the Board justified its decision by noting that in reality, video rental stores never offered free trials. It reasoned that given the lack of an analogue to Netflix’s free trials in the offline world, the latter’s argument based on the Supreme Court’s establishment of the principle of technological neutrality in ESA was moot. 

The principle of technological neutrality stands for the proposition that copyright protected works should be given the same treatment regardless of the technological medium by which they are conveyed. The Board uses the following example to illustrate: “…since only the reproduction right is triggered when a CD is sold in a store, only the reproduction right should be triggered when a digital album is sold online. The CD is an alternative technology to the digital download.”

The Board is essentially saying that technological neutrality only applies when there is an alternative technology that has been marketed to the public to compare the technology in question to. That need not necessarily be the case. There is nothing in the Supreme Court’s decision in ESA that limits the principle of technological neutrality to comparing extant (or previously extant) business models. This view cheapens the value of this interpretive principle. 

Take the facts from SOCAN v. Bell as an example. In that case, users could access previews of songs by clicking an icon on a service provider’s website. That decision has nothing to do with technological neutrality. However, for illustrative purposes, assume one of the parties wanted to make an argument for more or less compensation based on the principle of technological neutrality. They would have to come up with some analogous technology to the service provider’s website. One potential analogue to the website could be a business method by which music stores send individuals door to door with samples of music they have for sale. The sales representative would play the samples on CD’s or some other physical media; kind of like the Avon lady, but for music. 

To the best of my knowledge, this “Avon lady” sales model was never employed by record stores. This should not matter.  This method of distribution is conceivable and therefore ripe for comparison for copyright purposes. 

This hypothetical technological analogue theory has not been addressed in the case law. In ESA, the Court was comparing two modes of distribution (online digital delivery and shelf display in stores) that do in fact exist side by side. The Court in ESA did not expressly state whether the technological alternatives being compared must be ones that not only exist, but have been implemented in commerce. Given the Act’s statement of the s.3 right as the right to produce or reproduce a work “in any material form whatever”, the lack of limiting language in the Court’s decision should not rule out hypothetical technological alternatives concocted for the purpose of comparison. In that regard, the Board gave the principle of technological neutrality a more narrow interpretation than the one expressly prescribed by the Supreme Court. 

Finally, whether this decision is appealed to the Federal Court of Appeal is an interesting and open question. While it appears that the Board’s decision is reasonable, in light of the Majority of the Supreme Court’s ruling in ESA, the decision may be reviewed, at least in part, on a correctness standard.

Thursday, July 10, 2014

One Broadcast = One Infringement: Leuthold v. CBC et. al. (FCA)

On June 27, 2014, the Federal Court of Appeal affirmed a decision of the Federal Court denying the Plaintiff's appeal on the quantum of damages for the CBCs admitted infringement of the copyright in five of the Plaintiff’s works.             
Catherine Leuthold, a professional photo-journalist, sued the CBC for multiple acts of copyright infringement stemming from its use of her photographs of the September 11, 2001 terrorist attacks in a documentary. In 2002, the CBC wanted to use five of the Plaintiff’s photos for a documentary to be aired on its network. The parties entered into negotiations. 

There was some ambiguity as to whether the license negotiated by the parties allowed the CBC to use the images on its “Newsworld” specialty channel in addition to the CBC network. The CBC and Leuthold re-entered negotiations in which the CBC was granted the right to broadcast the images for “…one broadcast on CBC’s Network and Regional TV stations.” However, the CBC broadcasted the documentary containing the images on September 10 (on CBC and Newsworld) and September 11 (on Newsworld alone), 2002. Despite the limited nature of the license, and a CBC official’s direction to remove the images form the documentary, a version of the documentary including the Plaintiff’s images was broadcast again in 2003 and 2004. 

At the Federal Court, CBC admitted to infringing Ms. Leuthold’s copyright. The difference of opinion between the parties turned on the number of infringements committed and the quantum of damages due.

The Plaintiff asked for $22,000,000 in damages. She argued that the licenses only permitted CBC to broadcast the images once, on only one network, and in only one time-zone. The Federal Court disagreed and awarded her $22,000. Scott J. found not only that the licenses agreements implied the right to broadcast the images in multiple time-zones, but also that the language of the agreements included the right to broadcast on both CBC and Newsworld. This determination was based on the following: 

1) CBC’s practice was to always include Newsworld when it was clearing rights;
2) It was not commercially sensible to conclude that CBC would have agreed to terms which ran counter to its normal usage; and
3) The contra proferentum rule does not apply because any ambiguity can be resolved with reference to industry practice.
The Federal Court of Appeal determined that the standard of review of the Trial Judge’s decision should be the more deferential “palpable and overriding error” standard. As to whether the Newsworld broadcasts were contemplated by the license, the Court found that the Trial Judge “reached a conclusion that was reasonably open to him”. 

With regards to the number of infringing broadcasts that took place, the Court did not disturb Scott J.’s finding that there were only six such broadcasts. The Plaintiff argued that each transmission to a Broadcast Distribution Undertaking (BDU) by the CBC amounted to a discreet act of infringement. This argument was based on s.2.4(1)(c)(i) if the Copyright Act:

For the purposes of communication to the public by telecommunication,
(c) where a person, as part of:
(i) a network, within the meaning of the Broadcasting Act, whose operations result in the communication of works or other subject-matter to the public
transmits by telecommunication a work or other subject-matter that is communicated to the public by another person who is not a retransmitter of a signal within the meaning of subsection 31(1), the transmission and communication of that work or other subject-matter by those persons constitute a single communication to the public for which those persons are jointly and severally liable.
The Court, rejecting the Plaintiff's argument, read this to mean that when a work is transmitted by the network to the public by way of an intermediary (the BDU), a “single network-wide infringement” for which both the broadcast and the BDU are jointly and severally liable. In other words, one communication to the public equals one instance of infringement, regardless of whether the transmission is direct or via an intermediary.


The Court’s decision with reference to the number of infringements that took place seems to be sound. s.2.4(1)(c) states unambiguously that when a broadcaster transmits a work to a BDU which then communicates the work to the public, a single communication of the work has occurred. The Plaintiff’s argument is clearly unsupported by this provision.

The finding that the license agreements should be read to include use on the Newsworld Network is another matter. I will deal with each of the three grounds listed above in turn:

1) The relevant part of the license agreement granted to CBC the “right… to broadcast the [images] on Canadian television for one broadcast on CBC’s Network & Regional TV stations (emphasis added). 

The evidence at trial showed that Mr. Leuthold was unaware of Newsworld at the time the agreements were negotiated. The fact that it was CBC’s practice to clear rights for Newsworld and the CBC Network simultaneously is irrelevant. To illustrate this, take the following example:

 Jimmy contracts with Stevie Ray to lend the latter his cream colored 1967 Fender Stratocaster for a show. The terms of the contract read “Jimmy grants Stevie Ray the right to use his cream colored 1967 Fender Stratocaster to play one show on one stage”. Stevie Ray meets his friend Slash from the band opening for him. Slash asks him if he can use Jimmy’s guitar for his set; Stevie Ray agrees.

When Jimmy sues Stevie Ray for breach of contract, Stevie Ray argues that it is and has always been his practice to share guitars with his fellow musicians. He proffers compelling evidence to that effect. If the evidence shows that Jimmy was not only unaware of this practice of Stevie Ray’s, but also that he did not even know Slash existed, can it really be said that the contract has not been breached? 

A fundamental principle of contract law is that there must be a “meeting of the minds” between the parties to the contract. It is apparent from this example that Jimmy and Stevie Ray had entirely different things in mind regarding the use of the guitar. Since that is the case, the objective intent of the parties must be construed through the words of the contract (with the help of legal interpretive principles to resolve ambiguities). Since the contract makes no mention of allowing others besides Stevie Ray to use the guitar, that permission cannot be implied simply because “that’s just the kind of guy that Stevie Ray is”. 

As the Court noted, the Plaintiff holds an exclusive right. A license grants an individual the right to do a select category of things that, but for the agreement, would constitute infringement. Ms. Leuthold’s failure to exclude Newsworld from the terms of the license does not mean Newsworld can therefore use the images simply because CBC is in the habit of clearing rights for both networks at the same time. By the terms of this license, they failed to do so here. 

Finally on this point, I would argue that the Trial Judge’s choice to favour CBC’s common business practices over the evidence that the Plaintiff did not know Newsworld existed at the time the agreements were being negotiated is an error of law. An error of law would have been reviewed on the non-deferential correctness standard.  This could have entirely changed the outcome given that the Court it did not endorse the Trial Judge’s decision as correct, only as reasonable. 

The Court wrote that since Ms. Leuthold had the wherewithal to sue CBC for the Newsworld infringement, she herself considers them to be a common entity: “…the fact that Ms. Leuthold seeks damages form the CBC for unauthorized broadcasts of the image by Newsworld suggests that she does not view Newsworld as a separate legal entity”. 

With deference to the Court, this is a misleading statement. It is true that at the time she brought the Action before the Federal Court, Ms. Leuthold had become aware of the connection between CBC and Newsworld. This does not lead to the conclusion, however, that she knew of that connection at the relevant time (the negotiation of the license agreements in 2002). 

2) This reason rests heavily on 1) above. While considering the commercial viability of a transaction to determine the intent of the parties can often be a valuable tool, it is the incorrect approach here for the reasons set out above. Ms. Leuthold cannot be expected to have been aware of CBC’s practices. Since she didn’t know of Newsworld at the time, it would be impossible for her to assess the “commercial reasonableness” of CBC’s licensing practices. 

3) I agree with the Court’s finding that the contra proferentum maxim should not apply in this case based on Ms. Leuthold’s apparent bargaining power. However, to say that contra proferentum should be trumped by industry practices (as a matter of law) I think misses the point of that interpretive tool. 

The contra proferentum maxim of interpretation is meant to protect the weaker party to a contract when there is a serious imbalance in bargaining power between the parties. The evidence showed that this was not in fact a contract of adhesion and that the Plaintiff was able to negotiate to some degree with the CBC. However, this rule exists to prevent the injustice that may result from “industry practices”, such as writing ambiguous and confusing terms in a contract to the detriment of the adhering (weaker) party. To say that industry practice trumps this principle in all cases renders it nugatory.