SOCAN's Tariff 22 - the latest chapter

The Copyright Board has finally released its decision this past Friday, October 24, 2008 on the remainder of SOCAN’s Internet based “Tariff 22". This covers the period of 1996-2006. Here’s the decision. This is actually the second part of the second phase of the Board's reasoning on Tariff 22. The first part of the the actual tariff came out just over a year ago on October 18, 2007 and I blogged about it then here. That decision is available here. The hearings that gave rise to these two decisions took place in April and May of 2007.

The Board rejected SOCAN’s approach that would have seen a tariff on “uses” and, instead, imposed a tariff on “users”. In principle, according to the Board, SOCAN’s approach would actually have been more user friendly.

The Board evidently spent a lot of time on number crunching and considering a mound of evidence and came up with results that may or may not please the affected users. It is too early to say. The Board is clearly cognizant of the need to comply with recent appellate jurisprudence requiring that it provide adequate reasons for its calculations. The Federal Court of Appeal will rarely, if ever, set aside the Board’s rate calculations, unless there is inadequate reasoning to support them.

The gist of the rates is as follows, according to the Board:

• For commercial and non-commercial radio stations that already pay royalties to SOCAN for their conventional activities, the same rates are certified for their Internet activities. These rates are, for commercial radio, 1.5% of Internet-related revenues for a low music use station and 4.2% for the others. Non-commercial radio pays a rate of 1.9% of its gross operating costs. The rate bases are further reduced by at least 50% to account for the fact that not all of a radio station’s web pages contain sounds.
• For commercial, pay and specialty television, pay audio services and satellite radio services, the rates established are also the same as what these users already pay or will be paying to SOCAN. These rates are 1.9% for television and 12.35% for pay audio services (the rate for satellite radio has yet to be set). The rate base is also further reduced in the same way as radio.
• The Canadian Broadcasting Corporation (CBC), TVOntario and Télé-Québec will pay a proportion of 10% of the amounts they already pay to SOCAN, with an additional reduction of at least 85%. For the year 2006, this corresponds to amounts of approximately $125,000 for CBC, $4,500 for TVOntario and $2,700 for Télé-Québec.
• Websites that play music, but do not have a conventional counterpart, such as the Iceberg radio site, will pay a rate that depends on the amount of music they use: 1.5% with music use of 20% or less, 4.2% if music use is more than 20% and less than 80%, and 5.3% if music use is 80% or more. Again, the rate base will be discounted by at least 50%.
• Finally, the starting rate for game sites that use music will be 0.8%.

The Tariff is retroactive for ten years back to 1996, which is, in effect, twelve years because the rates for 2007 and on are likely to go up (they rarely, if ever, go down). The Board notes that “Only SOCAN can decide not to collect royalties retroactively.”

There may be legal arguments that the Board lacks jurisdiction to impose such retroactivity. However, the Board clearly doesn’t see it that way.

Of course, the main news is actually what was NOT decided - which pertained to “other sites.” These could range from little personal blogs to such mega sites as YouTube, Facebook, and MySpace. Other potentially affected sites could include countless restaurants, car manufacturers, retailers, film producers, and others that may use music on their websites for the purpose of selling other goods and services. SOCAN’s wording for this category was extremely vague and few if any of the potentially affected parties objected or maintained their objection. This is not surprising, given the usually enormous costs of participation with objector or even intervener status in Board hearings.

The Board decided in the end NOT to certify a tariff on “other sites” at this time. This part of the tariff has been rejected in a 2 to 1 split decision.

The majority said that it would not certify a tariff for these “other sites’ because:

• It would be unfair to reach back ten years to target hundreds of thousands of users for uses that are “extremely modest or that attract little or no attention.”
• In the absence of any reliable evidence for such disparate uses, any tariff would have to be “de minimis”;
• Social networking and similar sites are quite new and any music use would likely be quite modest; and,
• In the absence of sufficient evidence, the Board could not provide reasons that would satisfy the Federal Court of Appeal.

However, note that the majority said that the “parties will be expected to provide the necessary evidence to allow the Board to assess the situation.”

A dissenting member disagreed with the majority’s analysis of the “other sites”. Her reasons, at page 47, suggest that she would have been inclined to set a tariff for at least the “uses” that would generate significant royalties. She gives MySpace, Facebook, Google and Yahoo as examples. But she also concedes that SOCAN offered “no evidence” that would allow for a tariff to be set for “MySpace”, for example. She is also expecting users to be present at the next hearing. She says at para. 47 “I would expect users or their representatives to participate in the next proceedings to provide the Board with the information it requires in order to property assess the situation.”

The issue of “other sites” has clearly NOT gone away. Since a number of important parties have not filed objections for 2007 and 2008 or even 2009, the Board will likely permit full fledged interventions from any latecomers and hear all of these years together. The Board has virtually invited this to happen. There are a number of very good arguments that can be made against the incredibly vague wording that SOCAN has used over the years, and the absurd results to which it could lead.

For example, imagine the potential liability of YouTube or Amazon or a traditional large retailer selling widgets online based upon “ the greater of 10% of the Gross Revenues earned by the Site or Service or 10% of the Gross Operating Expenses of the Site or Service.” I should disclose that I filed written submissions on issues regarding these “other sites” pursuant to the Board’s Directive on Procedure on behalf of Retail Council of Canada.

There is a real possibility of more judicial review of Friday’s ruling. Thus, a thirteen year old tariff may still be far from a done deal.

Once again, the question arises as to why these things take so long, cost so much and still leave many affected parties out of the matrix. Indeed, the Board found that “It is through no fault of SOCAN (or the users) that the matter took as long as it did to reach a conclusion.”

This is not about “fault” or blame. It’s just that there’s got to be a faster way of dealing with these things, and Chairman Vancise is clearly seized of this problem. As he has stated,

If the Supreme Court of Canada can render a decision within six months of a hearing, there is no reason why this Board cannot do the same. My goal is to see that this occurs.

In fact, despite some exceptions, most litigation - even very complex cases - in Canada can go from start of the proceeding at the trial level to final judgment in the Supreme Court of Canada (if it gets that far) in about five years or even less. Given the rarity of Supreme Court involvement, most litigation is actually concluded much faster.

HK

The "Single Malt Tariff" - aged 12 years

Twelve (12) years is a good length of time for a single malt Scotch (or Canadian Whisky) to mature. But, it is an extraordinarily long amount of time for the imposition of a retroactive tariff. This, however, is what the Copyright Board has just done in respect of music downloads from the internet in the first scene of the latest act in the ongoing melodrama of SOCAN’s proposed Tariff 22, which was first filed in 1995. The tariff as certified will reach back to January 1, 1996 - in other words, almost a dozen years. Mercifully, the Board refrains from imposing compound interest or penalties, because, after all, the amount could not have been estimated by users. The Board states that the CAB “concedes that the Board has the power to certify a tariff that takes effect in 1996.”

There are good legal arguments that can be made against such extreme retroactivity. However, they will clearly have to made in the Courts. And/or, the Government may need to step in with regulations or even legislation.

The other key findings will also raise eyebrows.

The Board held that there is a “communication to the public by telecommunication.” This very point is now before the Federal Court of Appeal, and will be the centerpiece of the judicial review hearing that will take place in Toronto on October 22, 2007 - next Monday. The fact that there is so much uncertainty now on this issue results in part from the length of time (14 months) it took for the Board to render its ring tones decision - and the fact that the objector in that case inexplicably conceded at first instance that there was a “communication”, but has now changed its mind.

On the issue of whether there can be liability when servers are located outside of Canada, the Board apparently is once again punting that issue to another day, notwithstanding the clear finding of the Supreme Court of Canada (per Binnie, J.) that there could be such liability where there is a real and substantial connection. The Board finds that there is a “problem with this proposition” and that “The proposition also creates the possibility of a “layering of royalty obligations” which might need to be addressed in future proceedings.” (Footnote omitted - but the Board cites to LeBel, J. of the SCC who dissented). Once again, the Board seems to avoiding what the reviewing Courts - in this case the Supreme Court of Canada - have ruled. This is particularly curious, given that the Board itself said in its first ruling on this file in 1999 that “the issue of whether an entity that provides content outside Canada with the intention to communicate it specifically to recipients in Canada is communicating it in Canada remains open.”

Also, the Board (following CCH v. LSUC ) indicated that previews of music can be fair dealing, if the providers are able to show “that their own practices and policies were research-based and fair”. It will be interesting to see if the Board follows through on this user friendly aspect of the ruling in the Access Copyright file, and other instances where fair dealing could loom large.

As indicated yesterday, this covers only one of SOCAN’s shopping list of seven items, and doesn’t begin to touch such important issues of webcasting.

The amount of the tariff is significant - and bound to impact the online music business in Canada:

Permanent Downloads
3.4% of the amount paid by the consumer
Minimum fee:
1.7¢ per file in a bundle
2.3¢ per file in all other cases

Limited Downloads
6.3% of the amounts paid by subscribers
Minimum fee:
60.9¢ per month, per subscriber, if
portable limited downloads are allowed;
39.9¢ if not

On-demand Stream
7.6% of the amounts paid by subscribers
Minimum fee:
48.1¢ per month, per subscriber

My prediction is that there will be judicial review applications launched by several major parties here - quite possibly including SOCAN itself.

So, I’m calling this the “Single Malt” tariff - because of its 12 year maturation. And the fact that it deals with only a single one of SOCAN's seven proposed tariff ingredients. But the bottle, rich in flavour and generous in quantity that it may be, should not be opened yet. The Courts will likely be looking at this again, and as that great jurist Yogi Berra said, "It ain't over till it's over."

HK

Teaser from the Copyright Board - SOCAN's Proposed Tariff 22

The Copyright Board is teasing us today. Here’s an e-mail sent out earlier to the long list of counsel involved with SOCAN’s proposed Tariff 22 - which dates from 1995 and purports to cover music a wide and still vague range of uses of music on the internet:

The decision of the Board on SOCAN Tariff 22.A (Internet – Online Music Services) for the years 1996-2006 will be released tomorrow. It will state:

"For the following reasons, we have decided to deal at this time only with those uses that are targeted in CSI – Online Music. First, this item will, in all likelihood, generate the bulk of Tariff 22 royalties. Second, dealing with the other uses targeted in Tariff 22 raises administrative and wording issues that will require extensive consultations with the parties. The tariff for these uses will be certified at a later date. That being said, for the sake of convenience and coherence, the descriptive and analytical parts of these reasons are written as if we were dealing with all of proposed Tariff 22."

You will be notified as soon as the decision is posted on the Board's Web site.

Translation:

It looks like the decision will deal fully ONLY with the first item of SOCAN’s tariff - i.e. insofar as it concerns online music sites from which music can accessed through permanent downloads, limited downloads and on-demand streams. In other words, this is only one of SOCAN’s shopping list of seven fields. It looks like webcasting, game sites, and other uses are not yet ready for prime time - after 12 years of effort and one trip already to the Supreme Court of Canada.

Look tomorrow in particular for what the Board has to say about:

1. Whether there is a performance or communication to the public at all (as contrasted to reproduction, wherein SOCAN has no rights);
2. Recent American case law that held that ASCAP cannot collect for downloads;
3. If a tariff is awarded to SOCAN for some or all of this activity in its item #1, as today’s communication suggests, how much more will Canadians have to pay than Americans for the same product(s) and how much of the money raised will actually remain in Canada for the benefit of Canadian artists;
4. Multiple payments to the same parties for the same transaction; and,
5. Last, and by no means least, the question of retroactive application of this 12 year old proposed tariff that will apparently cover the period of 1996-2006.

In any event, Judge Vancise seems to be making good on his goal of getting decisions out in six months - even if it’s only going to be a partial decision in this instance. This hearing took place last April/May.

HK