Court of Justice rules on scope of fair compensation for private copying exceptions

Authors: Ben Allgrove, Michael Hart and Victoria Dockrell (Baker & McKenzie)

Padawan SL v Sociedad General de Authores y Editores de España (SGAE) Case C-467/08, Court of Justice of the European Union, 21 October 2010

Journal of Intellectual Property Law & Practice (2010), doi: 10.1093/jiplp/jpq189, first published online on 17 December 2010

The Court of Justice of the European Union has ruled that the concept of ‘fair compensation for copyright levies must be interpreted uniformly in all Member States which have a private copying exception and must be calculated on the basis of the criterion of the harm, if any, caused to authors of protected works by that exception, so levies should not be applied to equipment, devices and media not made available to private users and clearly reserved for uses other than private copying’.

Legal context

Under Article 2 of Directive 2001/29 (the Information Society Directive), authors, producers and performers have an exclusive right to control the reproduction of their works. However, Article 5(2)(b) providesthat Member States are entitled to provide for a private copying exception to infringement where the copying is ‘made by a natural person for private use and for ends that are neither directly nor indirectly commercial’ provided that the rightsholders obtain ‘fair compensation’ for that use to the extent it is not restricted by technological measures. Such an exception to infringement has been implemented in the vast majority of the 27 EU Member States, with only a few, including the UK and Ireland, electing not to do so. The EU Member States with such exceptions have provided for the required ‘fair compensation’ by giving statutory backing to copyright levy regimes which apply a levy to various forms of reproductive media and/or equipment used for such activities. The types of equipment and media to which such levies are applied and the rates of such levies vary considerably between the Member States.

Facts

SGAE, a Spanish collecting society, applied a levy to the sale of all digital reproductive devices, equipment and media (the ‘Equipment’), payable by retailers, manufacturers and importers into Spain of this Equipment. Under this system Padawan, who markets such Equipment including CD-R, CD-RW, DVD-R, and MP3 devices, was required to pay a levy on its products. Padawan refused to pay the demanded levy claiming that the indiscriminate application of the levy to its products was unfair given that the majority of its customers used the Equipment in question for professional and commercial use, and thus did not fall under or benefit from the private copying exception in Spanish law. Having failed at first instance, Padawan appealed and certain questions were referred to the Court of Justice for the European Union (CJEU), which ruled as follows:

‘1. Fair compensation’ is an EU concept which must be interpreted in a uniform manner across all Member States, even though Member States have the right to choose the system of collection.

2. Whatever the system of fair compensation implemented by a Member State, it must ensure a fair balance is struck between rights holders and those liable to pay the compensation. Fair balance means that fair compensation is calculated on the basis of any harm caused to authors through the private copying of their works. Where Equipment capable of copying is supplied to natural persons as private users, the fact of this harm will be presumed.

3. There must be a link between the application of a levy and the presumed use of the equipment or media on which it is levied.

4. The indiscriminate application of a levy to undertakings and professional persons who clearly purchase digital reproduction devices and media for purposes other than private copying is not compatible with the concept of ‘fair compensation’ in the Directive.

5. The decision as to whether or not the specific Spanish levy in question has been imposed indiscriminately by SGAE on all digital reproduction equipment, devices and media is a matter for the referring court'.

Analysis

This decision has attracted considerable comment in the market from both sides of the debate on copyright levies. Rights holders are heralding the ruling as confirmation of the legitimacy of levy regimes. Véronique Desbrosses, Secretary General of the European Grouping of Societies of Authors and Composers saying: ‘What is very positive is that the court clearly gave support to the compensation schemes that exist in most member states.’ On the other side Bridget Cosgrave, Director-General of DIGITALEUROPE, an industry group for consumer electronics manufacturers, says: ‘The most important result to come out of this decision is that lawmakers recognise the unfair and untransparent methods used by collecting societies when calculating and claiming copyright levies. The judgment presents an opportune moment to address the other inadequacies in the current regime.’ Can these views be reconciled?

The decision reaches a number of conclusions which challenge the existing approach to copyright levies. The CJEU's clear statement that the concept of ‘fair compensation’ is an autonomous EU law concept which must be interpreted uniformly is significant. Copyright levies vary widely across Europe without any clear uniform approach being applied across Member States. The CJEU decision has laid down a marker that a copyright levy can only be fair compensation if it is applied uniformly in all Member States. This raises the prospect of future challenges to levy regimes where there are material inconsistencies between Member States.

More significantly, the CJEU's confirmation that fair compensation must be linked to the harm, if any, suffered by the rightholder arising from the private copying exception sends the message that such harm must be demonstrated and related to both the application and rate of the levy. The CJEU has therefore opened the door for those subject to copyright levies to demand that the collecting society identify and quantify the harm for which the levy seeks to compensate. It clarifies that levies are not a licence but a means of compensation for demonstrable harm and also seems to preclude a restitutionary justification for copyright levies. If that is the case, does a rights holder suffer any harm if a lawful purchaser of a CD format shifts the tracks on that CD to an MP3 player? Is there really a lost sale? Up until 2008, German copyright levies applied a different tariff on printers depending on their speed and whether they printed in colour or black and white. These sort of criteria for levies would seem to have no basis in a regime rooted in addressing harm to the rights holder.

In contrast, rights holders will welcome the CJEU's ruling that there is, in effect, a presumption of harm, though that still leaves open the question as to how one quantifies that harm. Nor does the CJEU tell us whether or not that presumption is rebuttable.

Manufacturers will also welcome the CJEU's ruling that levies are not fair if they are applied indiscriminately. In this case, the CJEU left it to the referring court to decide if Padawan's sales of media to professional users were sales to users who would not benefit from the private use exception in Spanish law. If so, then the levy would be indiscriminate and contrary to European law. This ruling offers opportunities for pushback where media is primarily targeted at business customers.

The CJEU has not clarified the important threshold question in this area. It says that, to justify a levy as fair, a collecting society needs to show that the media/device is capable for being used for private copying: ‘It follows that the fact that that equipment or devices are able to make copies is sufficient in itself to justify the application of the private copying levy, provided that the equipment or devices have been made available to natural persons as private users’ (56). But it later qualifies this low threshold by saying that levies are not justified where devices/media are ‘clearly reserved for uses other than private copying’ (59). This takes us no further towards answering the question of where the line between these two positions is.

The CJEU's analysis of the threshold question is more liberal than the approach previously taken by Member State courts in this area, in particular in Germany. For example, in 2007 it was held in Germany that certain levies could only apply to a single function HP printer where that printer was used in conjunction with a PC and a scanner in a similar way to a traditional photocopier. In doing so the standard being applied was a higher one that merely that the device in question was capable of being used for copying, which the printer clearly was.

Practical significance

While this decision will not entirely satisfy either side of the debate, collecting societies may be more concerned about it; the ruling is likely to embolden those who are asked to pay levies to mount challenges which themselves might ultimately have to be resolved by the CJEU. In particular, further challenges to the application of levies to equipment or media clearly not used for private copying are likely as the CJEU has clearly ruled that such levies are not justifiable. One can expect more heated negotiations with companies with mixed B2C and B2B models.

This also raises the interesting question as to whether those companies that have paid levies on such products are entitled to claim back payments which have been made under what is, in effect, a mistake of law. Given that it is estimated that the consumer electronics industry alone paid some €2bn in levies in 2009, there is a significant enough amount of money involved for people to be taking a close look at this.

SGAE v Padawan is also a precursor to another CJEU reference, Stichting de Thuiskopie v Mijndert van der Lee and Others (Case C-462/09). In that case the CJEU will consider whether both Dutch and German levies are payable when a Dutch online retailer sells products into Germany. If the answer to that question is no, then positioning of services for copyright levy purposes will become a major strategic decision for businesses.

It currently appears that it will be the CJEU rather than the Commission which will lead the way to clarification of the confusion and serious lack of harmonization that exists in the copyright levy world. Previous considerations of intervention by the Commission have not proceeded. Indeed, it has stated that levies will not form part of the framework directive on collective rights management on which it is currently working (expected March/April 2011). This decision seems to indicate that the CJEU is willing to rise to this challenge and its future decisions should be watched with great interest.