Bird & Bird

This Copyright Levies Newsletter briefly outlines and analyses the following issues:

(i) recent developments at the European level;
(ii) the recent judgments in the key copyright levy jurisdictions of France, Germany and Spain; and
(iii) the recent announcement from the UK Government that it intends to implement a limited private copying exception without a corresponding levy obligation.

What are copyright levies?

Copyright levies are systems that impose fees on the manufacture, import and/or sale of devices and media which can be used to reproduce and/or store third party copyright works, such as recordable CDs and MP3 devices. Broadly, the system is based on the device and media end users being exempted from liability for copyright infringement for certain defined permitted acts in return for the payment of a flat fee in form of the levies (which are imposed on the device and media). These private copying exceptions were introduced in the 1960s and have been implemented in the legislation of many European Member States. When introduced in the analogue age, the private copying and levy system was seen as a sensible recognition that preventing private copying would be impossible but that right holders should be compensated for the licence revenues they lose in respect of the unlicensed copies of their works made by private individuals. At the time of their introduction, levies were charged on single-function devices designed and intended to be used for private copying.

Due to the rapid pace of technological change, including the digitisation of content protected by copyright, the emergence of multifunctional and multipurpose devices and the development of technological protection measures (digital rights management), the traditional justification has come under increasing attack, and copyright levies have become a major legal, economical and political issue. At present levy schemes are being debated and re-examined Europe-wide. The ground-breaking "Padawan" judgment of the European Court of Justice ("ECJ") in the autumn of 2010 is having a major impact on many pending cases and has triggered discussions as to whether the judgment should give rise to fundamental changes to the present copyright levy regimes in Europe. In some Member States (e.g. France and Spain), national courts and institutions have already rendered judgments on the basis of the ECJ ruling, annulling existing levy tariffs and dismissing claims of collecting societies.

Legislative background

EU Directive 2001/29/EC ("Information Society Directive") permits Member States to introduce or maintain an exception to the reproduction right for private copying accompanied by "fair compensation" for right holders. The Information Society Directive does not state the means for calculating fair compensation in detail (it provides only some general principles which played a key role in the "Padawan" case described below). Consequently, there is no European harmonization of copyright levies.

At present, 22 out of the 27 Member States of the European Union ("EU") provide for private copying and similar end-user copying exceptions, which are accompanied by copyright levy schemes compensating the right holders for the otherwise unlicensed copying. Ireland, Cyprus, Malta, Luxembourg and the UK have refrained from legalising private copying and introducing private copying levies. The UK, however, has recently announced its intention to introduce a limited private copying exception without a corresponding copyright levy regime.

In the 22 Member States in which copyright levies have been introduced, the scope of the exceptions, the level of the levies and the products to which levies will pertain all vary materially from Member State to Member State. The application and the amount of levies are hotly disputed and are increasingly being challenged in courts in nearly all of these 22 Member States, especially with regard to modern IT and digital entertainment hardware and storage media.

The lack of harmonisation (which has distortional effects on the single market in the EU), legal uncertainty and the absence of synergy between traditional levy systems and the new technical digital environment all cause serious economic problems for the IT and entertainment hardware industry in Europe, as well as for right holders.

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ECJ "Padawan" Judgment

On 21 October 2o10 the ECJ handed down a significant decision on copyright levies which may require Members States to change their copyright levy systems (C-467/08 – "Padawan"). The key points of the judgment are:

There should be a proper distinction between business and consumer products. Levies have not been applied consistently to devices and media that are used for private copying. They have often been applied to devices and media that are supplied to businesses that could not avail themselves of the private copying exception.
Manufacturers, importers and distributors should not be burdened by levies. Private copying should be paid by those benefiting from the exception, i.e. only private end-users shall pay levies (via the product price) for private copying devices and media. Levy payments should neither be borne by business users nor remain with the device manufacturers, dealers or importers.
Levies should be calculated according to the harm sustained by right holders by the private copying in question. Levies must thus not compensate harm caused by illegal copies or provide licence revenues for copies that right holders have already licensed. There must be a de minimis rule, i.e. harm which is "minimal" does not give rise to a payment obligation.

Notwithstanding the importance of this landmark decision and the guidance it gives, it does not provide an answer to all questions, such as how levies should be applied to multifunctional devices and the relevance of the ability of right-holders to use technical protection measures (digital rights management). Further, the judgment gives rise to new questions such as whether a distinction between business and consumer products is practically possible if levies are imposed at the manufacturer/importer/distributor level and whether levy systems need to be changed significantly to avoid burdening business users with private copying levies.

For more detailed information on the "Padawan" judgment, please see the Bird & Bird Newsflash "European Court of Justice questions legitimacy of existing copyright levy regimes" dated 22 October 2010 (mail.twobirds.com/ve/ZZWLitU62uL7059Ok3).

In addition to widespread litigation relating to levies, the EU Commission adopted on 24 May 2011 a proposal for "A Single Market for Intellectual Property Rights", the so called EU IP Rights Strategy 2011, which is part of the Digital Agenda for Europe initiated by Vice-President of the EU Commission Neelie Kroes. An independent mediator will be appointed by the end of this year to explore possible approaches to harmonize the methodology used to impose levies, the administration of levies, specifically the type of equipment that is subject to levies, the setting of tariff rates and the inter-operability of the various national systems in light of cross-border effects that a disparate levy system has on the internal market. However, this political initiative will need time and it is unclear whether and if it will provide any concrete guidance.

In the meantime, there have been major developments in some key jurisdictions. Below we summarize the recent developments in France, Germany, Spain and the UK.

Spain

Levies are claimed by collecting societies on most hardware and storage media which are suitable for storing or reproducing of copyright content (such as CDs, DVDs, MP3 Players, mobile phones, DVD/CD writers, printers, copiers etc).
Levy rates claimed range from €0.17 up to € 227.00 depending on the device and the storage capacity.
Levies and levy rates on most digital reproduction devices will be reviewed as the relevant regulation has been declared void.

The aforementioned ECJ ruling arose from a dispute between the Spanish collecting society SGAE and Padawan, a company marketing CDs, DVDs and MP3 devices. Padawan refused payment on the grounds that it considered the Spanish levy system to be incompatible with the Information Society Directive. It alleged that the Spanish private copying levy was applied generally without distinguishing between blank equipment sold to private users and equipment sold to commercial users who are unlikely to make copies for private purposes. Although ordered to pay the levies at first instance, Padawan appealed before the Provincial Court of Barcelona, which referred preliminary questions to the ECJ to clarify the criteria to be taken into consideration when determining "fair compensation" for private copying.

After the delivery of the ECJ Judgment the Barcelona Court of Appeal decided on 2 March 2011 to dismiss the collecting society's claim against Padawan because "the imposition of the levy is only justified on digital media sold or made available to private persons, and not to a professional activity" (N°89/2011, 2 March 2011). Further the court pointed out that "nowadays digital media are not only used for that purpose (here: private copying) but are also work tools used very extensively for storing commercial, business, professional, and individuals' own documents, and therefore very different from being tools for private copying of works protected by intellectual property rights."

Moreover, two claims filed by collecting societies were dismissed on the grounds of the ECJ decision in the first instance by the Juzgado de lo Mercantil de Madrid (N°386/2010, 21 December 2010; N°120/2011, 25 February 2011). Besides the need to differentiate between business and consumer devices, the Madrid court pointed out that copyright levies have to be "founded on the compensation for real and effective damages" and that regulations implementing compensation for digital private copies must therefore take into account the "objective technical characteristics of devices".

In a further decision, the Spanish Audiencia Nacional (Spanish National Court) annulled in March 2011 a government regulation which imposed levies on digital reproduction devices such as hard drives due to a procedural defect (no report of the State Council) (N°704/2008, 22 March 2011). Currently the appeal is pending in front of the Spanish Supreme Court (SSC) and until the SSC finally decides, the governmental regulation remains in force.

Furthermore, copyright levies are a political hot topic in Spain. The socialist party (currently in power) has been supportive of collecting societies, while the conservative party has opposed copyright levies for years. Polls in advance of the November 2011 general elections to the Spanish Parliament predict a conservative party victory. If the conservative party takes power, it would not be a surprise if copying for private use were to disappear as an exception to the reproduction right in Spain.

Germany

Copyright levies are claimed by collecting societies on almost all hardware and storage media which can be used to store or copy material protected by copyright (such as PCs, handheld computers, single function printers, multifunctional printers, mobile phones or GPS devices with music function, MP3 players, TV set-top-boxes, CDs, DVDs, memory cards and USB sticks).
Levy rates claimed so far range from € 0.10 up to € 87.50 depending on the product and the storage capacity; however, collecting societies have not yet specified all of their claims and have not yet proposed tariff levels for many products in relation to which they claim to be entitled to levies.
Many levies are hotly disputed (e.g. PCs and mobile phones).

Germany, the country which invented copyright levies in the 1960s, amended its copyright levy regime with effect from January 2008 (but unfortunately did not modernise it for the digital age). The new law does not provide for any fixed tariffs (neither in the Copyright Act nor in any decree), but puts the burden on the industry and the collecting societies to agree on the rates. If they fail to agree, the courts will set the levy rates. So far, the proposed system of mutual agreement has not worked and the court has had, or will have, to set the levies in most cases.

Moreover, on 21 June 2011 the German Federal Court of Justice (FCoJ) suspended proceedings regarding reprographic levies on printers and PCs and referred some preliminary questions of general importance for European copyright levy systems to the ECJ (I ZR 30/11, I ZR 29/11, I ZR 28/11 and I ZR 162/10, 21 June 2011). The underlying disputes were based on the old German copyright levy regime, but at least two of the questions referred to the ECJ are equally relevant to the new German copyright levy regime (in fact, under any copyright levy regime). Besides the preliminary decisive question whether reproductions made with printers and PCs are reproductions "effected by the use of any kind of photographic technique or by some other process having similar effects" for the purposes of Art. 5(2)(a) of the Information Society Directive, the FCoJ has asked the ECJ the following two questions of general importance: (i) whether the availability of digital copying protection in respect of a digital copying device or media precludes any claim to "fair compensation" for the respective device or media, and/or (ii) whether the right to fair compensation terminates if right holders agree expressly or impliedly to the reproduction of their works (particularly relevant when content is made available on the internet, whether free-of-charge or by payment of a fee).

The ECJ's answer to the FCoJ's questions will not only be of major importance for German reprographic levy proceedings, but for all copyright levy regimes in Europe. If the ECJ answers the questions of the FCoJ affirmatively, the protection offered by copyright levies on digital devices may be diminished greatly.

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France

Levies claimed for a wide range of media storage products (analogue media such as audio and VHS tapes; digital media such as CD, DVD, minidiscs; memory or hard drives embedded into a TV/player of any kind; USB keys, memory cards, standard/multimedia external hard discs; mobile phones; dedicated memories or hard discs integrated in GPS or car radio, multimedia tactile tablets etc).
Rates range from €1 to €125 depending on the device and the storage capacity.
The current scope and level of levies are often challenged by the levy debtors and, recently, have been denounced by the French Administrative Court.

On 17 June 2011 the French Conseil d'Etat (the upper administrative court) annulled Decision n°11 of the French Commission on Copyright Levies (Commission pour la Rémuneration de la Copie Privée – "Commission"), dated 17 December 2008, which set most levy amounts. This annulment forces the Commission to re-examine the French copyright levy system (N°324816, 325439, 325463, 325468 and 325469, 17 June 2011).

In order to understand the Conseil d'Etat's decision and its consequences for the French system, it is necessary to point out that French law does not provide any definition of the type of media concerned or any levy amount. The Commission was created in order to determine the types of media in question, the compensation rates and the conditions of payment of such compensation. Decision n°11 was taken by the Commission following the annulment of Decision n°7 by the Conseil d'Etat in July 2008 (the administrative court had ordered the Commission to exclude private copying from illegal sources from the scope of the remuneration) setting new levy amounts for the majority of leviable devices and media. The Conseil d'Etat annulled the new decision of the Commission declaring that Decision n°11 does not comply with the principles set by the ECJ in the Padawan case as it does not exonerate media bought for business purposes. According to the Conseil d'Etat, it was not enough for the Commission to take into account the business use of some products when setting the tariffs.

Most levy debtors have applauded the Conseil d'Etat's decision and have called for in-depth reform of the French copyright levy system.

In theory the annulment of Decision n°11 should have a retroactive effect, but the Conseil d'Etat decided to annul Decision n°11 of the Commission only six months after its notification to the secretary of Culture and Communication.

Nevertheless, new levy tariffs must now be set.

On October 26, 2011, the French government issued a draft law aimed at implementing principles laid down by recent case law and intending to take into account the "Padawan" and French Administrative Court's decisions. In this respect, the current draft stipulates that:

only private copies of lawfully obtained copyright content may fall under the levies;
the levy amounts shall be set on the basis of surveys. In the meantime, the Commission is entitled to set temporary amounts, based on objective criteria, for a maximum period of one year;
Purchasers shall be informed of the amount and purpose of the copyright levies;
Levies shall not be due for media bought for business purposes where use of the device precludes a presumption that it will be used for private copying. The French Government proposes a refund mechanism in relation to devices sold for business purposes.

Professional unions have questioned the draft, particularly in relation to the proposed purposes. They also question whether the levies set in Decision n°11 should remain in force for twenty-four months from the coming into force of the law (instead of the six month period specified by the Conseil d'Etat).

Therefore, it is very likely that further controversial discussions will take place within the Commission and French Parliament over the coming weeks.

United Kingdom

No private copying exception or levies.
Government intends to introduce a private copying exception without levies.
Consultation on the proposal due to commence imminently.

UK copyright law provides some limited exceptions to copyright infringement, such as copying for the purposes of private study. However, unlike the exceptions in the copyright laws of the majority of Member States, UK copyright law does not permit copying for private use. Therefore, transferring music, movies and other copyright works onto devices such as iPods and smart phones constitutes copyright infringement in the UK for which the individual user will be liable to the copyright owner.

The approach of successive governments to such infringement has been consistent in leaving right holders to enforce their rights without State intervention. However, the creative industries have typically chosen not to enforce their rights to prevent such copying, resulting in some uncertainty amongst consumers as to what they can and cannot do with copyright works. In an attempt to introduce legal certainty, the current Government has bucked the trend and now intends to implement a statutory private copying exception without delay.

The Government's proposal derives from the recent independent review of the intellectual property framework by Professor Hargreaves and a panel of appointed experts. Their Review, published in May 2011, made ten recommendations, one of which includes a recommendation for the introduction of a private copying exception into UK copyright legislation.

In other Member States, such an exception is typically accompanied by a levy scheme. The legal basis for such levies is as mentioned above in the Information Society Directive's provision for "fair compensation" for the right holder. However, the ECJ pointed out in its aforementioned judgment that it would only become payable if the right holder has sustained harm. In its response to the Hargreaves Review, the Government stated that "the amount of harm to rights holders that would result in 'fair compensation' under EU law is minimal, and hence the amount of fair compensation provided would be zero. This avoids market distortion and the need for a copyright levy system, which the Government opposes on the basis that it is likely to have adverse impacts on growth and [is] inconsistent with its wider policy on tax." In coming to that conclusion, the Government relied on the findings of Professor Martin Kretschmer's draft report Private Copying and Fair Compensation: An empirical study of copyright levies in Europe, the final version of which was published in October 2011.

While the Government's position appears to be bad news for content owners and good news for technology manufacturers, the potential impact of the new legislation will not be known until its precise terms have been determined. For example, while the exception is expected to include copying onto personal devices such as iPods, will it also encompass copying digital music and movie files into cloud storage services? Another issue is whether the exception will distinguish between the copying of lawfully obtained digital files and those obtained unlawfully through peer-to-peer networks and other such means, an important issue when considering the potential liability of intermediaries, such as cloud service providers who might host privately copied content. With such issues in mind, the Intellectual Property Office, on behalf of the Government, is expected to announce a consultation imminently in which it will seek the opinions of interested parties as to how the new legislative exception should be formulated.

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Conclusion

In the analogue era, when devices had single functions and no technological measures existed to enable right-holders to control private copying, device-based copyright levy schemes might have been appropriate.

In the digital age, however, the technological reality has changed dramatically: multifunctional devices have been invented, which can be used for both private and business purposes, and which have many functions which are related to copying content at all (ie the user may potentially never take advantage of the copying functionality). Further, although it is no longer favoured in certain industries, it is possible to regulate copying to some extent using digital rights management technology.

It is therefore not very surprising that the Dutch Secretary of State for Security and Justice Teeven favours a drastic modernisation of copyright law. He stated that "technology has outpaced the home copy system", "home copy levies are out-dated" and "only result in double or unnecessary payment by the consumer". Consequently, Teeven's view is that it is undesirable to impose new levies on devices like MP3 players, laptops, DVD recorders and USB sticks as well as on Internet subscriptions, on the stated basis that copyright owners can include compensation for copying in the product price and regulate the copying technologically. Further, the expert report commissioned by the Finish Minister of Culture and Sport, Mr Stefan Wallin, recommends the introduction of an alternative compensation scheme in Finland.

The ECJ in its Padawan judgment has taken the first step towards challenging the need for the current levy schemes and the principles on which they are based. Fundamental reforms are needed in the interests of all - both the hardware industry and right owners.

It remains to be seen what impact the introduction of a private copying exception unaccompanied by a levy scheme in the UK might have on the situation in other Member States. If this approach is compliant with the requirements of the Information Society Directive, it may encourage further Member States to provide for a private copying exception without implementing a corresponding levy regime.

This Newsflash only constitutes a brief overview on current developments regarding copyright levies in Europe and aims to briefly outline the legal uncertainties and economic issues arising in this regard.

Bird & Bird has a copyright levy expert group comprising lawyers across all our offices in Europe (further details can be found here). The group has a strong track record advising on all aspects of copyright levies and providing a full range of legal services to industry players, including representation in court proceedings, compilation of risk assessments for pricing and accrual purposes, negotiations with collecting societies regarding master collective and individual agreements, and further copyright levy issues.

Dr. Fabian Niemann
Tel: + 49 (0) 69 74222 6000
fabian.niemann@twobirds.com

Phil Sherrell
Tel: +44 (0) 7415 6000
phil.sherrell@twobirds.com