With harmonisation of collective rights management in the EU having been on the European Commission’s agenda since as far back as 1995, 4 November 2013 saw the conclusion of negotiations concerning the Directive on collective management of copyright and related rights, and multi-territorial licensing of rights in musical works for online uses in the internal market (the “Directive”). The legal affairs committee of the European Parliament approved the text of the proposed Directive on 26 November 2013. With Parliament approving the Directive at first reading on 4 February 2014, Member States will be required to incorporate the Directive into domestic law by 2016.
What does it say?
The two complementary objectives of the new Directive are those of promoting “greater transparency and improved governance of collecting societies through strengthened reporting obligations and rightsholders’ control over their activities”, and encouraging and facilitating “multi-territorial and multi-repertoire licensing of authors’ rights in musical works for online uses in the EU/EEA”.
In what is being touted as a major overhaul of current practice, music service providers will now be able to obtain licences from a small number of authors' collective management organisations operating across EU borders, instead of having to deal with separate organisations in each EU member state. In the mind of the regulators, the Directive will change the licensing environment for digital music services, enabling them to address a smaller number of collective right management societies for a pan-European licence, instead of at least twenty-eight in order to use the worldwide musical repertoire. The overall aim of the Directive is to simplify the multi-territory system and the necessity for requiring numerous music licences to access the European market.
The Directive implements a further set of rules surrounding the financial management of collection societies and the powers of rights holders. Royalty payments must be paid to rights holders no later than nine months from the end of the financial year in which the royalty revenue is collected, whilst all applicable deductions by the collecting society must be specified clearly in its agreements with rights holders.
What is the likely impact of the Directive?
Make no mistake, the primary purpose of the legislation is to try and protect the songwriters, not enable the growth of digital services. In its press release, the Commission says “the functioning of some collecting societies has raised concerns as to their transparency, governance and the handling of revenues collected on behalf of right-holders. Cases of risky investment by certain collecting societies of royalties that should have gone to rightholders highlighted the lack of oversight and influence of rightholders on the activities of a number of collecting societies, contributing to irregularities in their financial management and investment decisions”. In other words, regulators have finally accepted the idea that collection societies can be antiquated and badly managed, and have been forced to take action.
Can the Directive benefit music users?
The challenge for music users is more economic than legal. Broadly speaking, there are three types of digital music user: (1) multi-disciplinary international companies for which a music service forms only a small and complementary part of their overall business; (2) well-funded digital music companies that have grown through venture financing and marketing, but are yet to produce a return on investment; (3) innovative (and not so innovative) smaller services that serve more targeted markets and operate in fewer European countries.
The first group do not necessarily need their music services to be profitable on a standalone basis. If necessary, their music offering can be cross-subsidised by other parts of their business. The second group of digital music services are able to grow only, so far, by raising significant sums of money to feed the dragon while operating on a loss-making basis. The third group are a mixed bag; some are able to raise funds while growing their niche market and moving into the second band, while others fall by the wayside when their model fails.
One unifying feature among all the services, however, is that the process of obtaining licences in Europe can be daunting. Substantial progress has been made among the societies and rights holders in recent times. They return your calls. They respond to emails. They want to do business. These are great strides compared with licensing digital music ten years ago. However, the lack of an efficient and reasonable forum for price control, coupled with a ‘feed the dragon’ dynamic to funding the growth of digital music services, has enabled royalty pricing to spiral out of line with consumer ideals. Several rights holders announced significant price increases at the beginning of 2014. Meanwhile, the profit margins in digital music are tiny, and are diminishing.
The recitals of the Directive make a weak attempt to address pricing, by saying that the licence fees determined by collective management organisations be reasonable in relation to the economic value of the use of the rights in a particular context. They also say that societies should have the flexibility to provide individualised licences for innovative online services without setting a precedent. More interestingly, the Directive includes a provision which is intended to ensure that disputes between collective management organisations and users concerning proposed licensing conditions can be submitted to a court or other independent and impartial dispute-resolution body. If implemented properly by member states, this raises the useful prospect of national copyright courts to make decisions in the case of royalty rate disputes. This contrasts with the current position, where only a few European countries operate copyright courts or tribunals to deal with music licensing issues.
The UK Regulations
Whilst the Directive is yet to come into force, the consultation on the Copyright (Regulation of Relevant Licensing Bodies) Regulations 2014 (the “Regulations”) came to a close in October 2013. Following the 2011 Hargreaves Review and the implementation of the “Minimum Standards for UK Collection Societies” (the “Minimum Standards”), a one-year grace period was provided to collection societies to implement individual codes of practice which would improve fairness towards rights holders, transparency and overall governance. With outstanding concerns surrounding overall governance, particularly in relation to the collection, handling and distribution of royalties, the Regulations will implement the following changes:
- Collection societies must comply with a code of practice which adequately implements a “specified criteria.” The Secretary of State is granted the power to impose a code of practice if a collection society fails to implement an adequate code (or not at all).
- The “specified criteria” required is set out in the schedule to the Regulations. Obligations on collection societies include a duty to act with transparency, disclose material information to rights holders, and fully comply with monitoring and reporting requirements.
- The Secretary of State may establish an ombudsman which can investigate and determine complaints regarding a collection society’s failure to comply with an adequate code of practice. In addition, a code review can be appointed to research and report on general industry practice.
- The Regulations permit the Secretary of State or ombudsman to make information requests during an investigation. Failure to comply or adequately self-regulate could lead to fines of up to £50,000.
A code of a practice is unlikely to be imposed on a regular basis as the majority of UK collection societies have already adopted and operate by their own code of conduct. Whilst these new statutory powers indicate a clear intent to combat poor collection society governance, the government has mentioned that sanctions shall be reserved for “serious and persistent breaches” upon the receipt of “robust evidence.” If so, this may be a toothless attempt at introducing secondary legislation which ensures a minimum standard in self regulation. The establishment of an ombudsman is an essential tool, ensuring rightsholders can challenge a collection society's failure to comply with a code of practice.
Currently sitting before Parliament as a draft statutory instrument, the Regulations are expected to enter into force on 6 April 2014.
The Directive is generally a positive step towards assisting the multi-territorial licensing of rights in musical works across Europe. The UK Regulations complement the Directive in relation to governance rules. Question marks remain, however, as to whether the threat of the Secretary of State stepping in will be sufficient to encourage collection societies to adopt adequate codes of practice or, better yet, to act reasonably in their licensing practices.
While all of this is happening, the Commission is undertaking a broader review of copyright law in Europe. See here for details.
Client Alert 2014-064