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Full-work Licensing Requirement 100 Percent Rejected: Second Circuit Rules in Favor of Fractional Licensing

By Martin Miernicki

On 19 December 2017, the Second Circuit handed down a summary order on the BMI Consent Decree in the dispute between the Department of Justice (DOJ) and Broadcast Music, Inc. (BMI). The court ruled that the decree does not oblige BMI to license the works in its repertoire on a “full-work” basis.

 

Background[1]

ASCAP and BMI are the two largest U.S. collective management organizations (CMOs) which license performance rights in musical works. Both organizations are subject to so-called consent decrees which entered into force 2001 and 1994, respectively. In 2014, the DOJ’s Antitrust Division announced a review of the consent decrees to evaluate if these needed to be updated. The DOJ concluded the review in August 2016, issuing a closing statement. The DOJ declared that it did not intend to re-negotiate and to amend the decrees, but rather stated that it interpreted these decrees as requiring ASCAP and BMI to license their works on a “full-work” or “100 percent” basis. Under this rule, the CMOs may only offer licenses that cover all performance rights in a composition; thus, co-owned works to which they only represent a “fractional” interest cannot be licensed. In reaction to this decision, BMI asked the “rate court” to give its opinion on this matter. In September 2016, Judge Stanton ruled against the full-work licensing requirement, stating that the decree “neither bars fractional licensing nor requires full-work licensing.”

 

Decision of the court

On appeal, the Second Circuit affirmed Judge Stanton’s ruling and held that fractional licensing is compatible with the BMI Consent Decree. First, referencing the U.S. Copyright Act – 17 U.S.C. § 201(d) –, the court highlighted that the right of public performance can be subdivided and owned separately. Second, as fractional licensing was common practice at the time the decree was amended in 1994, its language does indicate a prohibition of this practice. Third, the court rejected the DOJ’s reference to Pandora Media, Inc. v. ASCAP, 785 F. 3d 73 (2d Cir. 2015) because this judgment dealt with the “partial” withdrawal of rights from the CMO’s repertoire and not with the licensing policies in respect of users. Finally, the Second Circuit considered it to be irrelevant that full-work licensing could potentially advance the procompetitive objectives of the BMI Consent Decree; rather, the DOJ has the option to amend the decree or sue BMI in a separate proceeding based on the Sherman Act.

 

Implications of the judgement

The ruling of the Second Circuit is undoubtedly a victory for BMI, but also for ASCAP, as it must be assumed that ASCAP’s decree – which is very similar to BMI’s decree – can be interpreted in a similar fashion. Unsurprisingly, both CMOs welcomed the decision. The DOJ’s reaction remains to be seen, however. From the current perspective, an amendment of the decrees appears to be more likely than a lengthy antitrust proceeding under the Sherman Act; the DOJ had already partly toned down its strict reading of the decree in the course of the proceeding before the Second Circuit. Yet, legislative efforts might produce results and influence the further developments before a final decision is made. A recent example for the efforts to update the legal framework for music licensing is the “Music Modernization Act” which aims at amending §§ 114 and 115 of the U.S. Copyright Act.

[1] For more information on the background see Transatlantic Antitrust and IPR Developments Issue No. 3-4/2016 and Issue No. 5/2016.

 

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International Investment Tribunal Accepts Jurisdiction over Trademark Dispute involving US-company

By Gabriel M. Lentner

Background

On 13 December 2017, an international investment tribunal delivered its decision on expedited objections, accepting jurisdiction to hear the trademark dispute in the case of Bridgestone v Panama. The dispute arose out of a judgment of the Panamanian Supreme Court of 28 May 2014, in which it held the claimants liable to a competitor to pay US $5 million, together with attorney’s fees, due to the claimants’ opposition proceedings regarding the registration of a trademark (”Riverstone”). The claimants argued that the Supreme Court’s judgment weakened and thus decreased the value of their trademarks (“Bridgestone” and ”Firestone”). The tribunal rejected most of the expedited objections raised by Panama. The decision is particularly interesting because it is the first detailed exploration of the question whether and under what conditions a trademark and license can be considered covered investments.

 

Trademarks are investments

On this issue, the tribunal first followed the text of the definition of investment under the applicable investment chapter of the United States—Panama Trade Promotion Agreement (TPA) (Article 10.29 TPA). It held that the investment must be an asset capable of being owned or controlled. The TPA also included a list with the forms that an investment may take, including ”intellectual property rights”, as many BITs do (paras 164 and 166). However, the TPA also requires that an investment must have the ”characteristics” of an investment, giving the examples of commitment of capital or other resources; expectation of gain or profit; assumption of risk (para 164). The tribunal also noted that other characteristics, as those identified in the case of Salini v Morocco, are to be found, such as a reasonable duration of the investment and a contribution made by the investment to the host state’s development. In this respect, the tribunal held that “there is no inflexible requirement for the presence of all these characteristics, but that an investment will normally evidence most of them” (para 165).

In deciding this issue, the tribunal reviewed the way in which trademarks can be promoted in the host state’s market. The tribunal found that ”the promotion involves the commitment of resources over a significant period, the expectation of profit and the assumption of the risk that the particular features of the product may not prove sufficiently attractive to enable it to win or maintain market share in the face of competition.” (para 169) However, the tribunal noted that “the mere registration of a trademark in a country manifestly does not amount to, or have the characteristics of, an investment in that country” (para 171). According to the tribunal, this is because of the negative effect of a registration of a trademark. It merely prevents competitors from using it on their products and does not confer benefit on the country where the registration takes place. Nor does it create any expectation of profit for the owner of the trademark (para 171).

The exploitation of a trademark is key for its characterization as an investment (para 172). This exploitation accords to the trademark the characteristics of an investment, by virtue of the activities to which the trademark is central. It involves a “devotion of resources, both to the production of the articles sold bearing the trademark, and to the promotion and support of those sales. It is likely also to involve after-sales servicing and guarantees. This exploitation will also be beneficial to the development of the home State. The activities involved in promoting and supporting sales will benefit the host economy, as will taxation levied on sales. Furthermore, it will normally be beneficial for products that incorporate the features that consumers find desirable to be available to consumers in the host country.” (para 172)

 

Licenses are investments, too

Another way of exploiting a trademark is licensing it, i.e. granting the licensee the right to exploit the trademark for its own benefit (para 173). The tribunal then brushes aside the following counter-argument raised by Panama:

“Rights, activities, commitments of capital and resources, expectations of gain and profit, assumption of risk, and duration do not add up an ‘investment’ when they are simply the rights, activities, commitments, expectations, and risks associated with, and the duration of, cross-border sales.” (para 175)

The tribunal responded that Panama did not provide any authority for this argument and only rebuts that the “reason why a simple sale does not constitute an investment is that it lacks most of the characteristics of an investment.” (para 176 It further noted that ”[i]t does not follow that an interrelated series of activities, built round the asset of a registered trademark, that do have the characteristics of an investment does not qualify as such simply because the object of the exercise is the promotion and sale of marked goods.” (para 176).

The problem with this argument is that it is precisely the point raised by Panama that the legal requirement for characteristics of investments were developed to distinguish an investment from a mere cross-border sale of goods. Arguably, the tribunal did not explain how the characteristics related to the trademarks at issue differ from those related to the marketing of ordinary sales of goods.

Against this background, the finding of the tribunal that trademark licenses are also investments is even less convincing. Here the tribunal refers to the express wording of Article 10.29(g) of the TPA, which provides that a license will not have the characteristics of an investment unless it creates rights protected under domestic law of the host state (para 178). After reviewing the arguments and expert testimony presented during the proceedings, the tribunal concluded that the license to use a trademark constitutes an intellectual property right under domestic law (para 195), and is thus capable of constituting an investment when exploited (para 198). It reasoned that ”[t]he owner of the trademark has to use the trademark to keep it alive, but use by the licensee counts as use by the owner. The licensee cannot take proceedings to enforce the trademark without the participation of the owner, but can join with the owner in enforcement proceedings. The right is a right to use the Panamanian registered trademark in Panama” (para 195).

In conclusion, it will be interesting to see how future tribunals will deal with this question and react to the precedent set in this case.

ECJ Rules on Excessive Licensing Fees for Copyrights

By Martin Miernicki

On 14 September 2017 the Court of Justice of the European Union (“ECJ”) handed down its decision in AKKA/LAA v. Konkurences padome (C-177/16). The case originated in a fine imposed on the Latvian collective management organization (CMO) AKKA/LAA – which possesses a legal monopoly in Latvia – by the national competition authority. The authority asserted that the CMO had abused its dominant position by charging excessively high license rates. In the following, the Latvian Supreme Court made a reference for a preliminary ruling, asking the ECJ, inter alia,[1]

  1. whether it is appropriate to compare the rates charged by a national CMO to those rates charged by CMOs in neighboring and other member states, adjusted in accordance with the purchasing power parity index (PPP index);
  2. whether that comparison must be made for each segment of users or the average level of fees;
  3. above which threshold the differences between the compared fees indicate abusive conduct; and
  4. how a CMO can demonstrate that its license fees are not excessive.

 

Background

Article 102(a) of the TFEU declares the imposition of “unfair purchase or selling prices” as an abuse of a dominant position. The seminal case for the interpretation of this provision is United Brands v. Commission (case 27/76). Furthermore, the ECJ has repeatedly been asked to gives its opinion on this matter in the context of copyright management services. Relevant case law includes Ministère public v. Tournier (case 395/87), Kanal 5 v. STIM (C-52/07) and OSA v. Léčebné lázně Mariánské Lázně (C‑351/12). In contrast, U.S. antitrust doctrine does not, as a principle, recognize excessive pricing as an antitrust violation.

 

Decision of the court

The ECJ largely referred to the opinion of the Advocate General and confirmed that a comparison of fees charged in other member states, relying on the PPP index, may be used to substantiate the excessive nature of license rates charged by a CMO. However, the reference member states must be selected according to “objective, appropriate and verifiable” criteria (e.g., consumption habits, economic factors and cultural background) and the comparison must be made on a consistent basis (e.g., similar calculation methods). For this purpose, it is, in principle, permissible to refer to a specific segment of users if indicated by the circumstances of the individual case (paras 31-51). With regard to the level license fees, the ECJ ruled that there is no minimum threshold above which a license fee can be considered abusive; yet, the differences between the compared fees must be both significant (not a minor deviation) and persistent (not a temporary deviation). CMOs can justify their rates by reference to objective dissimilarities between the compared member states, such as differing national regulatory regimes (para 52-61).

 

Implications of the decision

The court reconfirmed its approach taken in the former decisions which introduced the comparison of fees charged in different member states as well as the “appreciably higher” standard. In the case at hand, the court further elaborated on this general concept by providing new criteria for the analysis which should assist competition authorities and courts in assessing excessive pricing under the EU competition rules. Clearly, however, it will still be challenging to apply those guidelines in practice. Furthermore, it seems that the ECJ does not consider the method of comparing license fees in other member states to be the only method for the purposes of Article 102(a) of the TFEU (see also paras 43-45 of the AG’s opinion); this might be of special relevance in cases not related to CMOs. In this connection, it is noteworthy that the ECJ expressly permitted authorities to consider the relation between the level of the fee and the amount actually paid to the right holders (hence, the CMO’s administrative costs) (paras 58-60).

Lastly – although the finding of abusive pricing appears to be the exception rather than the rule in European competition law practice – the decision supplements the case law on CMOs which is especially important since the rules of the Collective Management Directive 2014/26/EU (CMD) are relatively sparse in relation to users. Nevertheless, it should be noted that said directive contains additional standards for the CMOs’ fee policies. Article 16(2) states that tariffs shall be “reasonable”, inter alia, in relation to the economic value of the use of the licensed rights in trade and the economic value of the service provided by CMOs. These standards may be, however, overseen by national authorities (CMD article 36) which are not necessarily competition authorities. A coordinated application of the different standards by the competent authorities would be desirable in order to ensure the coherence of the regulatory regime.

[1] Focus is put here on the most important aspects of the decision.

Tenth Circuit holds IPRs defense available to rebut a refusal to deal antitrust claim

By Valerio Cosimo Romano

On 31 October 2016, the United States Court of Appeals for the Tenth Circuit (the “Court of Appeals”) held that the invocation of IPRs is a presumptively valid business justification sufficient to rebut a refusal to deal claim.

The case involved a dispute between a software company and the developer of aviation terminal charts (which provide pilots with the information necessary to navigate and land at a specific airport). The developer holds copyrights for portions of its charts, which use a proprietary format. The parties negotiated and executed a license and cooperation agreement under which the developer would waive its standard licensing fee and grant the software company access to proprietary products that facilitate the integration of the developer’s terminal charts into third-party systems. In exchange, the software company would create a data management reader that works in conjunction with an e-book viewer. After the execution of the agreement, the software company registered with Apple as a software application developer and requested the necessary toolkit from the developer to develop an app. The developer did not provide the toolkit. Rather, it announced it had created its own app, offered to its customers at no additional cost beyond their terminal chart subscription fee.

The software development company sued the developer. The district court granted summary judgment for developer on the antitrust claims but denied summary judgment on the remaining claims for loss of profits, awarding more than $43 million in damages. The developer appealed, challenging only the district court’s ruling related to the loss of profits. The software company cross-appealed, challenging the dismissal of its antitrust claims, alleging a single anticompetitive conduct consisting in a refusal to deal, in violation of § 2 of the Sherman Act.

To determine whether a refusal to deal violates § 2, the Court of Appeals first looked at market power in the relevant market, in which the court assumed that the developer enjoyed monopoly power. Second, the Court of Appeals looked at the use of the product, and concluded that the assertion of IPRs is a presumptively rational business justification for a unilateral refusal to deal. In its legal reasoning, the Court of Appeals relied on the approach taken by both the First and Federal Circuits in Data General and Xerox, respectively. In Data General, the First Circuit held that while exclusionary conduct can be pursued by refusing to license a copyright, an author’s desire to exclude others from use of its copyrighted work is a presumptively valid business justification for any immediate harm to consumers. In Xerox, a Federal Circuit declined to examine the defendant’s motivation in asserting its right to exclude under the copyright laws, absent any evidence that the copyrights were obtained by unlawful means or used to gain monopoly power beyond what provided for by the law. Quoting Novell and Trinko, the Court of Appeals also recognized the existence of a limited exception, available only where the plaintiff can establish the parties had a preexisting, voluntary, and presumably profitable business relationship, and its discontinuation suggests a willingness to forsake short-term profits to achieve anti-competitive ends. On this last point, the Court of Appeals held that the software developer did not present any evidence.

Therefore, it concluded that the developer did not have an independent antitrust duty to share its intellectual property with the software company. Consequently, it reversed and vacated the jury’s award of lost profits, but affirmed the partial summary judgment on software company’s antitrust claims.

Partial victory for BMI: Federal judge rules against full-work licensing requirement

By Martin Miernicki

On 16 September 2016, Judge Stanton issued an opinion interpreting the BMI Consent Decree. He concluded that the decree does not require BMI to issue “full-work” licenses.

 

Background

On 4 August 2016, the U.S. Department of Justice (DOJ) published a closing statement concluding its review of the ASCAP and BMI Consent Decrees. It stated that said decrees prohibited ASCAP and BMI from issuing fractional licenses and required them to offer full-work licenses.[1]  Both ASCAP and BMI immediately announced to fight the opinion, the latter seeking a declaratory judgement, asking the “rate court” for its opinion.[2]

 

The court’s opinion

In its declaratory judgement, the court rejected the DOJ’s interpretation of the BMI Consent Decrees, ruling that “nothing in the Consent Decree gives support to the [Antitrust] Division’s view.” It held that the issue of full-work licensing remained unregulated by the Consent Decree; rather, this question should be analyzed under other applicable laws, like copyright or contract law. In conclusion, the court explained that the decree “neither bars fractional licensing nor requires full-work licensing.” The court furthermore distinguished the question at hand from its decision in BMI v. Pandora,[3] where it struck down attempts by major publishers to partially withdraw rights from BMI’s collective licensing regime.

 

The way forward

The court’s opinion is a clear success for BMI, but also for ASCAP, since it can be expected that Judge Stanton’s ruling will be influential in analogous questions regarding the ASCAP Consent Decree. However, this success is not final. BMI reported that the DOJ appealed the decision on 11 November 2016. It is hence up to the Court of Appeals for the Second Circuit to clarify the meaning of the decree.

[1] Under a full-work license, a user obtains the right to publicly perform the entire work, even if not all co-owners are members of the organization issuing the license. Conversely, a fractional license only covers the rights held by the licensing organization.

[2] For more information on the background of the decision see Transatlantic Antitrust and IPR Developments Issue No. 3-4/2016.

[3] BMI v. Pandora, Inc., No. 13 Civ. 4037 (LLS), 2018 WL 6697788 (S.D.N.Y. Dec. 19, 2013).

European Commission publishes a preliminary report on the e-commerce sector inquiry

By Nikolaos Theodorakis

On 6 May 2015, the European Commission launched a sector inquiry into e-commerce within the context of the Digital Single Market strategy, and in connection with Article 17 of Regulation 1/2003. In March 2016, the Commission published its initial findings on geo-blocking, which refers to business practices whereby retailers and service providers prevent the smooth access of consumers to the digital single market. In doing so, geo-blocking usually has three dimensions: (i) it prevents a consumer from accessing a website because of his IP address; (ii) it allows the consumer to add an item to his online shopping basket, but it cannot be shipped to his location and (iii) it redirects the consumer to another local website to complete his order.

As part of the sector inquiry, the Commission requested information from various actors in e-commerce throughout the EU, both related to online sales of consumer goods (e.g. electronics and clothing) as well as the online distribution of digital content. For that purpose, the Commission gathered evidence from nearly 1,800 companies operating in e-commerce and analyzed around 8,000 distribution contracts. The inquiry wished to look into the main market trends and gather evidence on potential barriers to competition linked to the growth of e-commerce.

E-commerce has been growing rapidly over the past years, and the EU is the largest e-commerce market in the world. As a result, any barrier in online trade may have severe consequences and distort healthy competition. In September 2016, the Commission published a preliminary report with certain findings. It identified issues arising from distribution agreements, which pertain to trade in goods, and licensing agreements, which pertain to trade in services.

 

Issues arising from distribution agreements

Distribution agreements may create geo-blocking restrictions, both from the manufacturers’ and the retailers’ side.

Manufacturers have adjusted to the increasing popularity of e-commerce by adopting a number of business practices that help them control the distribution of their products and the positioning in the market. These practices are not by default illegitimate, however under specific conditions, they can be.

For instance, manufacturers use selective distribution systems in which products can only be sold by pre-selected authorized sellers online. They also use contractual sales restrictions that may make cross-border shopping or online shopping more difficult and ultimately harm consumers since they prevent them from benefiting from greater choice of products and lower prices. The reasoning behind selective distribution systems is to control the quality of the product and safeguard brand consistency. This, nonetheless could classify as a vertical restraint and could be considered discordant with the principles of EU competition law.

Retailers use geo-blocking to restrict cross-border sales. Several retailers collect data on the location of their customers with a view to applying geo-blocking measures. This most commonly takes the form of refusal to deliver and refusal to accept payment from cards issued in other countries.

 

Issues arising from licensing agreements

With respect to digital content, the availability of licenses from the holders of copyrights in content is essential for digital content providers and a key determinant of competition in the market. The Preliminary Report finds that copyright licensing agreements can be complex and exclusive. The agreements provide for the territories, technologies and digital content that providers can use. As such, the Commission is expected to assess on a case-by-case basis whether certain licensing practices are unaccounted for and restrict competition.

In fact, one of the key determinants of competition in digital content markets is the scope of licensing agreements that determine online transmission. These agreements, between sellers of rights, use complicated definitions to define the reach of the service, creating differences in technological, temporal and territorial level. These contractual restrictions are practically the norm, whereas access to exclusive content increases the attractiveness of the offer of digital content providers.

A striking 70% of digital content providers restrict access to their digital content for users from other EU Member States. Further, the 60% of digital content providers are contractually required by rightsholders to geo-block. This practice is more prevalent in agreements for films, sports and TV series. Licensing agreements enable rightsholders to monitor that content providers comply with territorial restrictions, otherwise they ask for compensation. These agreements usually have a very long duration and they may make it more difficult for new online business services to emerge and try to win a stake in the market.

Additional questions arise when online rights are sold exclusively on a per Member State basis, or bundled with rights in other transmission technologies and then are not used. This might signal a semi perfect price discrimination policy depending on how much money each Member State is willing to pay, and a consequent further balkanization of the digital single market.

 

Next Steps

After publishing the preliminary report, the Commission is soliciting views and comments of interested stakeholders until 18 November 2016. The final report of the sector inquiry is expected in the first quarter of 2017. As a follow-up to the sector inquiry, the Commission may further explore if certain practices are compatibility with the EU competition rules and launch investigations against specific distributors and/or resellers on matters of both goods and digital content.

Finally, the results of the sector inquiry provide useful information for the debate on Commission initiatives relating to copyright and the proposed geo-blocking regulation.

ASCAP and BMI consent decrees: Review ends and struggles begin

By Martin Miernicki

On 4 August 2016, the U.S. Department of Justice (DOJ) announced the conclusion of its review of the consent decrees applicable to the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). The authority decided not to propose any modifications to the decrees. Furthermore, it set forth its (controversial) opinion that said decrees require ASCAP and BMI to offer “full work” licenses.[1]

 

Background

ASCAP and BMI are the most important performance rights organizations (PROs) for the management of performance rights in musical works in the United States and have for several decades operated under consent decrees negotiated with the DOJ. The organizations entered into these decrees due to claims based on antitrust violations of the Sherman Act. The current versions of the consent decrees date from 2001 (ASCAP) and 1994 (BMI). In 2014, the DOJ’s Antitrust Division initiated a review in order to evaluate if these decrees needed to be updated. In the course of this review, numerous public comments were submitted to the DOJ.

 

The closing statement

In a closing statement, the DOJ explained its reasons for not modifying the decrees and prohibiting ASCAP and BMI from issueing “fractional licenses”. With regard to the update of the decrees, the DOJ stated that “the industry has developed in the context of, and in reliance on, these consent decrees and that they therefore should remain in place” (page 22). However, it also suggested the need for comprehensive legislative reform. As for “fractional” licenses, the Antitrust Division interprets the language of the decrees and the case law based thereon as requiring PROs to provide access to “all works” in their repertoire, meaning that a license issued by such entity must eliminate the risk of infringement liability for the user. Thus, ASCAP and BMI may only i) offer licenses to the entire works, even if they represent not all co-owners; ii) include in their repertoires only works which they are able to license on such a basis.[2] Similarly, an amendment to the decrees to allow fractional licensing was found to be not in the interest of the public.

 

What can be expected?

The closing statement is in conflict with long-standing practices of copyright licensing in the United States. If enforced, it is likely to have a major impact on the music industry. It has also triggered a heated debate. The concerns expressed include the rise of administrative costs, a reduced royalty flow to right holders, and obstacles to creative production. Both ASCAP and BMI have announced that they will challenge the authority’s reading of the consent decrees; ASCAP aims to induce a legislative reform while BMI plans to pursue litigation.

[1] Under a “full work“ license (or 100 percent license), a user obtains authorization to use a work without risk of infringement liability, whereas a “fractional” license covers only the rights which are controlled by the PRO issuing the license, implying the need for further licenses.

[2] Under U.S. copyright law co-owners of joint works are treated as tenants in common. Thus, each co-owner can issue a non-exclusive license to the entire work (unless an agreement stipulates otherwise), provided that she accounts for and pays to the other co-owners their pro-rata shares of the revenues.