Federal Court of Appeal: Netflix Has the Right to be Heard Before Copyright Board

On December 17, 2015, the Federal Court of Appeal released its decision in Netflix, Inc. v. SOCAN in which it granted an application for judicial review from the Copyright Board's decision dealing with a Tariff for musical compositions in audiovisual webcasts. Netflix opposed the section of the Tariff that imposed a monthly minimum fee on free trial subscriptions. The Court found that the Copyright Board breached its duty of procedural fairness with regard to Netflix in disallowing it from participating in the tariff certification proceedings.

Background

The Society of Composers, Authors and Music Publishers of Canada (SOCAN) began filing royalty statements for use of musical compositions in audiovisual works transmitted over the internet in 2007. In 2011, the Copyright Board opened the tariff certification process; Netflix did not participate at this initial phase. The Board suspended the proceedings in order to facilitate settlement negotiations between SOCAN and a group of industry stakeholders. Netflix again abstained from engaging and did not take part in the negotiations. 

Image by Renjith Krishnan

SOCAN and the other parties to the negotiation reached an agreement and SOCAN filed a joint request on behalf of all parties to have the Tariff certified in accordance with their agreement. However, the Tariff's content had changed from the version initially published in the Canada Gazette. The Tariff’s first iteration made no distinction between subscription-based and on-demand services; it also did not provide for compensation in relation to free trial subscriptions. The new version of the Tariff addressed both.

Netflix's interest in the Tariff fundamentally changed at this point. Unlike the signatories to the settlement agreement, Netflix's offerings are subscription-based and it is well known for its one-month free trial. The agreement, to which Netflix was not a party, therefore became a major concern, spurring Netflix into action before the Copyright Board. 

Since Netflix did not take part in the process from the beginning, the Board did not invite it to make submissions on the Tariff as proposed following the agreement; Netflix did so anyway. It argued that the free trials were fair dealing in light of the Supreme Court of Canada's recent case law relating to technological neutrality and consumer research fair dealing (ESA v. SOCAN and SOCAN v. Bell respectively). 

The Board refused to make Netflix’s submissions part of the record. The Board's decision to exclude Netflix was based on: 1) the fact that Netflix raised issues that could not adequately be addressed with the record as it stood and would require additional evidence; and 2) the fact that none of the parties to the proceedings had raised those issues prior. The Board also noted that Netflix had every opportunity to get involved in the proceedings from the beginning and failed to do so.

Despite this decision, the Board chose to commence a new process based upon the Tariff resulting from the settlement discussions, citing exceptional circumstances and the fact that Netflix is such a major player in this space. The Board nonetheless required parties to make submissions based on the record as it stood and without introducing new evidence that did not consist of “noncontroversial facts which shed significant light on the proper course of action". Netflix made its fair dealing argument and requested leave to lead new evidence. SOCAN opposed and the Board refused to allow Netflix's request. The Board ultimately certified the Tariff, more or less as proposed by SOCAN.

Appeal

Writing for the Court, Justice Nadon (Justices Boivin and De Montigny concurring) held that the Copyright Board erred in failing to allow Netflix to make its submissions. After briefly noting that the applicable standard of review was correctness, the Court held that the Board failed to discharge its duty of procedural fairness vis-à-vis Netflix. 

The thrust of the Court’s reasons was that Netflix never had a chance to participate in the certification process relating to the Tariff as approved by the Board. SOCAN argued that Netflix abstained from participating because it chose to rely on other objectors to field its concerns. The Court held that regardless of whether this was the case, even if Netflix had participated at the pre-settlement negotiation phase, its submissions would have been in relation to a proposed tariff that was materially different (especially from Netflix’s perspective) from the one ultimately certified. In that respect, Netflix’s failure to participate from the get go could not serve was a waiver of its right to participate once the Tariff, and stakes, had changed significantly. 

Justice Nadon observed that since the tariff-setting process is one that concerns the industry as a whole, it is that “industry interest”, and not only Netflix’s individual interest, that must be safeguarded. He found this to be a relevant factor in deciding as to whether the Board met its procedural fairness obligations. 

He also took issue with the Board’s assessment of the “ReSound 5 factors”, elements the Board should consider when deciding whether to certify a tariff based on an agreement between the petitioning copyright collective and interested stakeholders. In Re:Sound 5 the Board identified two factors that ought to be evaluated in such a situation: 1) the extent to which the parties to the agreements can represent the interests of all prospective users; and 2) whether relevant comments or arguments made by former parties and non-parties have been addressed.

In Justice Nadon’s opinion, the Board was wrong to conclude that a negotiation process which excluded Netflix, the largest player in the space, adequately represented all perspective users’ interests. This is especially true in this case where the provisions in question were seemingly targeted at Netflix, and by extension its user-base. 

Justice Nadon also found that the Board failed to properly assess the second Re:sound factor in that it chose to ignore Netflix’s arguments on fair dealing. Since this factor contemplates non-parties, Netflix’s lack of participation in the proceedings is no excuse for failing to consider its arguments.

The Court also failed to accept the Board’s reasoning that ruling on Netflix’s submissions would have required it to consider evidence that was not on the record. Justice Nadon noted that while this was true, the only reason why the required evidence was not on the record was because the Board failed to admit it. The Board is therefore precluded from relying on a lack of evidence caused by its failure to accept same. 

Nadon J.A. concluded by stating that though administrative tribunals do and should exercise a broad discretion over their procedural rules, the end goal of those rules are to assure that justice is done. In his view, failing to allow Netflix to advance its arguments ran counter to the interest of justice. Denying their right on procedural grounds is therefore inconsistent with the very goal that procedure is meant to encourage. 

Conclusion

This was a tight and well-reasoned decision. From a practical perspective, the Board’s decision did not pass the smell test. The proposed Tariff as published in the Canada Gazette made no mention of subscriber-based services and free trial subscriptions. The parties to the settlement negotiations did not offer subscription-based services or free trials; they were therefore effectively negotiating with Netflix’s chips. To allow this to stand would not only deny Netflix the opportunity to defend its interests, it would have allowed Netflix’s competitors to benefit from a more favourable compensation regime while stifling their biggest competitor’s business model. 

Due to the decision’s proximity to the holiday season, we will have to wait until the New Year to find out whether SOCAN will ask for leave to appeal to the Supreme Court of Canada.

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.”

Thoughts

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.

SCC Copyright Pentalogy 3 of 5: SOCAN v. Bell

                                             

In December 2011, The Supreme Court of Canada heard five major copyright cases. All five cases are appeals from decisions of the Canadian Copyright Board. The Court released its decisions in these five cases on July 12^th, 2012. This series will analyse each of the five decisions in turn. 
 

In Society of Composers, Authors and Music Publishers of Canada v. Bell Canada, the Supreme Court of Canada (Justice Abella writing for the Court) decided whether or not 30-90 second previews of musical works that consumers can listen to before purchasing the work online constitute a fair dealing for the purpose of consumer research.

Image by Renjith Krishnan

            Fair dealing is a doctrine of copyright law that protects certain uses of copyright protected works that, but for the fair dealing doctrine, would constitute copyright infringement. Fair dealing is considered to be a limitation on the scope of the copyright in favour of the public interest. 

            Like ESA v. SOCAN (discussed here) and Rogers v. SOCAN (discussed here), SOCAN v. Bell is an appeal originating from a Copyright Board decision regarding the application of SOCAN’s Tariff 22- a tariff meant to capture the communication to the public by telecommunication of copyright protected musical works. The Board decided that while the downloading (overturned in ESA v. SOCAN) or streaming (affirmed in Rogers v. SOCAN) of complete musical works over the internet should be subject to Tariff 22, the previewing of short excerpts of songs should not be covered and constitutes a fair dealing for the purpose of consumer research. The Federal Court of Appeal affirmed the Board’s decision which was later affirmed by the Supreme Court. 

            The Fair dealing analysis as outlined in CCH Canadian Ltd. v. Law Society of Upper Canada consists of two parts: First, the dealing must fit into one of the allowable purposes: research, private study, criticism, review or news reporting. Second, providing the dealing does fit into one of the aforementioned categories, a “fairness analysis” is conducted. Six factors are considered: The purpose of the dealing; the character of the dealing; the amount of the dealing; the existence of alternatives to the dealing; and the effect of the dealing on the work. Each step will be analyzed in turn.

Fair dealing for the purpose of “consumer research”

            SOCAN contends that the Copyright Board and Federal Court of Appeal misconstrued the scope of “research” under fair dealing.  They identified what they thought were two errors: First, the Board gave too broad a definition to the term research; and second, that the purpose of the dealing should have been analysed not from the perspective of the consumer, but from that of the online service provider (OSP). 

            The Court disagreed with SOCAN’s first contention by exposing the latter’s definition of the word research as too narrow. CCH tells us that the fair dealing categories must be given a “large and liberal interpretation”. This is due in large part to the fact that the five categories (research, private study, criticism, review and news reporting) are exhaustive. As such, in order to maintain the balance between the strength of the copyright owner’s monopoly and the public interest of having artistic works widely disseminated, the existing categories-few as they may be- must be given a broad interpretation if they are to have a significant effect on the copyright landscape of Canada. SOCAN offered a dictionary definition of the word research which the Court viewed as far too restrictive in light of the large and liberal principle set down in CCH.

            SOCAN’s second argument with regards to the Boards application of the research category fared no better. The Supreme Court agreed with the Copyright Board and Federal Court of Appeal when they determined that the proper perspective for assessing whether the activity falls under fair dealing is that of the consumer. While the OSP benefits from the effect of the previews being made available (in that it increases the likelihood of a sale), all they are doing is facilitating the research of the consumer.

The “fairness” analysis

            Having successfully survived the first step, the dealing is now subject to the six factor test established in CCH to determine if it is, in fact, fair:

          Purpose of the dealing   

        

Under this factor, the Court must assess the true motive or purpose for the dealing. SOCAN argued that the purpose of the dealing was purely commercial. The Court disagreed. Again, SOCAN was looking at the dealing from the perspective of the OSP and not the consumer. The Court writes that when properly viewed from the perspective of the consumer, the raison d’être of the preview is to facilitate identification of the musical work for the sake of purchase.  This is consistent with fair dealing for the purpose of research.

     

       Character of the dealing

Under this category, the Court is called upon to analyse the number of times the copy is reproduced. In general, it would be considered less fair if several reproductions of the copyright protected work are made. By contrast, if only a single reproduction of the work is made, the dealing would be deemed more fair. 

SOCAN argued that on average, consumers accessed ten times as many previews as paid downloads. Based on this, they argued that this factor should militate in favour of a ruling of “unfairness”. The Court was not persuaded by this line of reasoning. Justice Abella pointed out that regardless of the number of times the short previews were accessed, no durable copy of the work was stored on the consumers computer. Because the preview is automatically deleted from the consumer’s computer the instant it is done playing, the bare number of previews listened to is not the appropriate measure of the character of the dealing. 

      Amount of the dealing

This factor examines the proportion of the entire work that is being used. Here SOCAN argued that the applicable perspective is the aggregate number of previews streamed as opposed to the proportion of the individual preview to the entire song. This is simply inconsistent with the Court’s explanation of this factor in the CCH decision. Justice Abella writes that CCH is clear “that “amount” means “quantity of the work taken””.

       Alternatives to the dealing

Under this factor, the Court must determine whether there are non-infringing alternatives to the dealing in question. If there is a way that the user can effectively achieve the same result without using the copyright protected work, the dealing will be deemed less fair. SOCAN submitted a number of ways in which, in their view, the OSP’s could effectively achieve their goal- allowing consumers to browse and identify works for purchase- without actually offering audio samples. SOCAN suggested the display of album art, user reviews and “textual descriptions”. 

The Court was unconvinced that any of these measures were nearly as effective as offering previews. Since these works are auditory in nature, there really is no substitute for hearing a part of it. People simply don’t choose the music they like by reading user reviews or “textual descriptions”.    

      Nature of the dealing

The nature of the dealing refers to whether or not the work was meant to be widely disseminated. For example, if a work is unpublished and there is no reason to believe that the rights holder intends on publishing it, use of the work may be deemed less fair. If, on the other hand, the goal of the work is to be widely disseminated, the dealing is more prone to a finding of fairness. SOCAN’s argument here seems off point and is fairly unconvincing. In fact, it more closely resembles an argument that may be made under the next and final factor. 

 

      Effect of the dealing on the work

Here the Court must assess the effect, negative of positive, that the dealing has on the exploitation of the original work. If the dealing has a negative effect on sales or dissemination of the original work, the dealing may be deemed less fair. In this case, it was clear that the only effect the use of previews has on the musical works was to facilitate the identification and eventual sale of those works. Not only is this not a negative for the rights holder, it is substantially positive.

SOCAN’s earlier ill-conceived argument under the nature of the dealing was that despite the fact that the works are already widely available, the availability of previews does not improve the dissemination of the work. Again, this argument is unconvincing and was largely brushed off by the Court.

Conclusion

            The Court reached a rather uncontroversial unanimous decision in favour of Bell et al. It is settled law in Canada that the fair dealing factors must receive a large and liberal interpretation. SOCAN’s arguments were mostly predicated on unduly restricting that interpretation.

            Their arguments with reference to the fairness factors were unpersuasive and at times even disingenuous. It is clear that the appropriate view point for a fair dealing analysis is that of the person actually conducting the dealing. While it may at times be a valid consideration that another party is facilitating the dealing, it should not override the logical perspective from which the dealing should be analyzed. If nothing else, this case is a restatement of CCH and a reaffirmation of the principle that the fair dealing categories must be given a large and liberal interpretation.