Universal Music Australia v EMI Music Publishing Australia Pty Ltd [2000] ACopyT 5

COPYRIGHT TRIBUNAL OF AUSTRALIA

Universal Music Australia v EMI Music Publishing Australia Pty Ltd

[2000] ACopyT 5 COPYRIGHT TRIBUNAL – mechanical royalties – application for determination of amount of royalty and manner of payment – interim orders – nature of power – whether restricted by relief that may be granted under ss 152A and 152B of the Copyright Act 1968 (Cth) Copyright Act 1968 (Cth) ss 55, 152A, 152B, 160

Owners of "Shin Kobe Maru" v Empire Shipping Co Inc (1994) 181 CLR 404, referred to Reference by Australasian Performing Right Association Limited (unreported, Copyright Tribunal, 7 October 1994), applied

UNIVERSAL MUSIC AUSTRALIA and Others v EMI MUSIC PUBLISHING AUSTRALIA PTY LIMITED and Others

CT 2 of 1999 TRIBUNAL: FINKELSTEIN DP, PROFESSOR PEARCE, MS BOWNE DATE: 14 JUNE 2000 PLACE: SYDNEY

IN THE COPYRIGHT TRIBUNAL CT 2 of 1999

BETWEEN: UNIVERSAL MUSIC AUSTRALIA and Ors

Applicants

AND: EMI MUSIC PUBLISHING AUSTRALIA PTY LIMITED and Ors

Respondents

TRIBUNAL: FINKELSTEIN DP, PROFESSOR PEARCE, MS BOWNE

DATE: 14 JUNE 2000

PLACE: SYDNEY

REASONS FOR DECISION THE TRIBUNAL 1 The exclusive right of songwriters and composers to authorise the mechanical reproduction of their work is subject to the compulsory licensing system in the Copyright Act 1968 (Cth). The licence system has it origins in the Berne Convention for the Protection of Literary and Artistic Works 1886 and was first introduced in Australia when the Copyright Act 1912 (Cth) made applicable the Copyright Act 1911 of the United Kingdom. An Australian manufacturer is entitled to reproduce a musical work by making a record, (which term includes a compact disc and a cassette tape) upon compliance with the conditions in s 55. In return for the licence, the manufacturer must pay a royalty to the owner of the copyright in the musical work. In the absence of an agreement or a determination by the Copyright Tribunal, the royalty is an amount equal to 6.25 per cent of the retail selling price of the record. 2 Songwriters usually assign their copyright in a musical work to a publisher. The terms and conditions of the assignment will vary from case to case, but it is a common feature of such agreements that both the songwriter and the publisher will take a share of the royalty. A division of 80 per cent to the songwriter and 20 per cent to the publisher is not uncommon, although in the early days of the recording industry the position was much less favourable to the songwriter. 3 Since the 1970s various agreements have regulated the payment of royalties by record manufacturers to most copyright owners. The agreements were negotiated by representative organisations, the principal bodies being Australian Record Industry Association Limited (ARIA) representing approximately 80 record manufacturers and Australian Musical Copyright Owners Society Limited (AMCOS), whose business is managed by Australasian Performing Right Associated Limited (APRA), representing most publishers. 4 The latest agreement was made on 20 April 1990 and amended by Heads of Agreement and Further Heads of Agreement, each dated 10 May 1995. The term of the agreement expired on 31 December 1999. The parties, through their representative organisations, have been unable to complete negotiations on a further agreement. For this reason the manufacturers have applied to the Tribunal under s 152A, to determine the amount of royalties to be paid to the owners of copyright for a period of not less than four years commencing on 1 January 2000 and under s 152B, to determine the manner in which the royalties are to be paid. 5 The hearing of the application will occur early next year. In the meantime, however, ARIA contends that an interim arrangement should be put in place and this is the matter that is presently before the Tribunal. The power of the Tribunal to make an interim order is found in s 160 which provides: "Where an application or reference is made to the Tribunal under this Act, the Tribunal may make an interim order having effect until the final decision of the Tribunal on the application or reference." The precise ambit of this power will need to be considered. 6 Before considering whether an interim order should be made pending the resolution of the applications under ss 152A and 152B, it is necessary first to explain the principal features of the expired agreement. We should point out that the agreement is a detailed and comprehensive document comprising 26 paragraphs, many of which contain sub-paragraphs, and 12 schedules. It is the product of lengthy and detailed negotiations. There are many provisions in the agreement which the Tribunal would not have the competence to order in an application under s 152A or s 152B. What follows are the main elements of the agreement before it was amended. 7 The royalty payable on records made in or imported into Australia and sold by wholesale was 10 per cent of the published price to dealer (commonly referred to as PPD), being the published catalogue price of the record including the cost of insurance and freight and any surface charges but excluding sales tax. The royalty payable on records made in Australia or imported into Australia and sold by retail was 7.28 per cent of the recommended retail price, being the maximum suggested selling price, excluding sales tax. The royalty payable on records sold by wholesale or retail was to be no less than 1 cent in respect of each musical work included on the record. No royalty was payable on promotional records. Promotional records were defined as records disposed of at no charge. They included records supplied to a radio or television broadcaster or to the operator of a venue at which records were played for entertainment. The manufacturers were entitled to a credit against royalty in respect of records supplied on a sale or return basis, if those records were returned to the manufacturer. In the case of records that were exported for sale, no royalty was payable when exporting to specified countries. In all other cases the applicable rate of royalty was payable except that the list price or the recommended retail price was the invoice price plus 20 per cent. Specific provision was made for the calculation of royalty on records imported to satisfy a specific order by a member of the public. One element in the calculation was the list price or PPD. Records in the form of compact discs attracted royalty at 90 per cent of the applicable rate. 8 The amendments that were introduced by the Heads of Agreement included the following. The rate of royalty on records sold by wholesale was reduced to 9.306 per cent of the list price. The rate of royalty on records sold by wholesale was reduced to 5.73 per cent of PPD including sales tax, or 6.4 per cent of recommended retail price excluding sales tax. The rebate on compact discs was removed. There was a change to the definition of PPD to take account of the situation where there was more than one catalogue price. The new definition also provided that discounts, incentives, bonuses and the like were not to be taken into account. The minimum royalty was increased to 5 cents with different rates for compact discs and cassette tapes. 9 The reason why the representative organisations are unable to reach a new agreement for the payment of royalties is their disagreement on whether it is appropriate to continue to use the list price as the basis upon which the royalty is to be calculated for records that are sold by wholesale. Wholesale sales, in particular the wholesale sale of compact discs, constitute by far the largest number of records sold. 10 Discounting from the list price has always been a feature of the wholesale record market. But ARIA says that since about 1990 there has been a significant increase in the rate of discounting. The evidence provides some support for this contention although the degree of discounting is uncertain. The following are some of the factors that have led to discounting. Discounts are offered to sell new releases of recordings by new artists. Volume rebates or discounts are offered to attract sizeable orders. Large record retailers have significant "buying power" and are able to demand discounts even on smaller selling lines. Competition from other forms of entertainment induce manufacturers to sell records at prices substantially below the list price. 11 Two other important features have contributed to a reduction in the wholesale selling price of records. First, there are the changes to the Copyright Act made in 1998 to allow parallel importation of records from other countries without the consent of the local copyright owner. Second, the retail market has become more competitive. As a result, retailers have come to expect discounts, especially on compact discs. A number of witnesses have described this practice as one that is now "firmly entrenched". Personal experience provides some confirmation for this view. 12 These changing market conditions have caused manufacturers to form the opinion that it is undesirable that mechanical royalties should continue to be paid as a percentage of the list price. They say that the list price no longer reflects the underlying value of a record. The manufacturers argue that the royalty should be a fixed percentage of the actual retail selling price of a record. That is, the royalty should be paid on the revenue received by the manufacturers and not on what they regard as an artificial value. 13 Needless to say, the publishers and other copyright owners strongly resist any change to the basis upon which mechanical royalties are paid. APRA points out that there has always been discounting and the royalty rates that have applied over the years have taken this into account. The copyright owners also contend, with some force, that some benefit must accrue to the manufacturers by maintaining a list price that is much higher than the selling price, otherwise the list price would be reduced. Thus it is to be presumed that the maintenance of differential pricing provides benefits which outweigh the burden of a royalty assessed on the list price. 14 APRA also criticises the basing of a royalty on the actual selling price of a record. One criticism is the alleged unfairness of a record company being able to shift to a publisher some of the cost of discounting a record when the discounting is intended to promote sales of other records. Another criticism is that certain discounting, a concept which has a rather wide meaning, is in reality no more than a component of the cost of selling a product which should be borne by the manufacturer and not be transferred to the copyright owner. 15 For present purposes it is neither necessary nor appropriate to determine whether a royalty based on the actual selling price is to be preferred over a royalty based on the list price. Nor is it necessary to consider whether some other method of calculating mechanical royalties would produce an equitable result between licensor and licensee. What can be said, however, is that the manufacturers' attempt to shift the royalty base away from the list price should not be seen as a frivolous case. The evidence suggests that changes in market conditions and market behaviour have reduced the profitability of selling records. The maintenance of a royalty based on the list price of a record, at least when the list price varies significantly from the actual selling price, may unduly burden the manufacturer to the advantage of the copyright owner. On the other hand, the manufacturers set the list price and, in that sense, are responsible for the position about which they now complain. These are issues that will have to be investigated in detail and may be resolved at the final hearing. In the meantime, it is appropriate to approach this application for interim relief on the basis that the Tribunal may find that the manufacturers are entitled to the whole or part of the relief they seek. 16 The precise order that the manufacturers seek is that as from 1 January 2000 the amount of royalty to be paid and the manner of payment is to be in accordance with the expired agreement as amended by the two Heads of Agreement, save that the royalty be calculated as a percentage of the actual selling price. They also ask for an order that the difference between a royalty based on the list price and a royalty based on an actual selling price be paid into an interest-bearing account pending the resolution of the proceedings. 17 The first point that arises in respect of this proposal is whether there is jurisdiction to make the orders sought. The issue arises in the following way. To take advantage of the statutory licence to make a recording, it is necessary for the licensee to pay the prescribed royalty to the copyright owner: s 55(1)(d)(ii). The prescribed royalty is the amount agreed between the manufacturer and the owner of the copyright or, if there is no agreement, the amount fixed by the Tribunal. In the event that there is neither an agreement nor a determination by the Tribunal as to the royalty to be paid, the royalty prescribed by statute is 6.25 per cent of the retail selling price of the record: s 55(6). The Tribunal's power to fix the royalty is restricted; the royalty cannot be less than 1 cent in respect of a record: see s 55(5). 18 The interim order sought by the manufacturers involves the continuation of an agreement which provides that no royalty is to be paid on records distributed free of charge for promotional purposes and on records sold on a sale or return basis. The publishers say that the Tribunal cannot make an interim order under s 160 which has this effect. That is, they contend that because the Tribunal does not have power to determine that no royalty is to be paid on certain records in an application under s 152A, it follows that the Tribunal could not make such an order under s 160. The publishers go further and say that if no royalty is paid in respect of a record, a statutory licence will not subsist in respect of that record. Perhaps another way of putting the argument is that if the Tribunal does not fix a royalty for a particular record then the royalty that is to be paid is the royalty prescribed by s 55(6), namely 6.25 per cent of the retail selling price of the record. 19 In Reference by Australasian Performing Right Association Limited (unreported, Copyright Tribunal, 7 October 1994) the Tribunal considered the ambit of s 160. The Tribunal had been invited to make interim orders in applications under ss 154 and 157 for the determination of royalties to be paid by commercial television stations for the right to broadcast music. It was proposed that the Tribunal make orders, the effect of which would have been to alter retrospectively the royalties that had been paid. It was argued that the Tribunal did not have power to make retrospective orders when it determined royalties under ss 154 and 157 and accordingly no such power could subsist under s 160. That is to say, so the argument went, the ambit of the power conferred by s 160 was confined by the nature of the final relief that could be granted. 20 The Tribunal was prepared to accept, without deciding, that there was no power to make retrospective orders under s 154 or s 157. However, as regards s 160 the Tribunal did not accept that the power was circumscribed in the manner argued. The Tribunal said (at 12): "The whole thrust of Part VI of the Act, which is entitled "The Copyright Tribunal", is to enable the Tribunal to achieve an appropriate balance between the interests of copyright owners, whose work is to be the subject of a licence, and the interests of those who wish to make use of that work for a reasonable fee and on reasonable terms and conditions. We see no reason why the ambit of s 160 should be circumscribed by the provisions of ss 154 and 157 assuming that it is correct to say that those sections do not authorise a final decision which has a retrospective effect." Later, the Tribunal said (at 13):