Fair Play?
Article by Florian Koempel for Copyright World
July/August 2004
International discontent as the US refuses to reconsider the "Bars and Grills" exception. Florian Koempel, of British Music Rights, details an international dispute that has seen the US take an unaccustomed position on copyright.
Persistent US non-compliance with the World Trade Organisation (WTO) ruling on the "Bars and Grills" exception is depriving music creators and publishers around the world of the remuneration they are due; but the bad news doesn't end there, and its not only the music industry that should be worried.
The small compensation awarded by WTO arbitrators establishes a dangerous precedent on the value of intellectual property with potentially damaging repercussions for any industry which relies on intellectual and industrial property protection as its economic driver, be it the United States, Europe, or anywhere else.
The three-year period covered by the arbitrators' award will conclude at the end of 2004, but given the derisory compensation, the impetus for a repeal of the "Bars and Grills" exception has proven rather weak. This argument becomes even less persuasive in view of more urgent US policy developments such as the upcoming elections and other trade disputes. From the point of view of right holders, however, it seems remarkable that of all countries holding out on honouring intellectual property rights, it should be the United States which refuses to fulfil its international obligations by repealing the infringing legislation.
The international rights owning community will watch very closely to see what developments will occur in 2005. Will the United States finally change its legislation, or will it once more disregard its international obligations?
The story so far… (see note 1)
The rather curiously titled US "Fairness in Music Licensing Act" of 1998 introduced an exception into the US Copyright Law, Section 110 (5) (b), de facto exempting some 70 percent of outlets in the US such as bars and restaurants and more than 45 percent of shops and boutiques, from having to pay copyright royalties for the public performance of music (through the use of TV or radio) in their premises. This has become commonly know as the "Bars and Grills" exception.
Following a complaint by the Irish collecting society administering the performing right in copyright music (IMRO), the European Commission instigated proceedings against the US before the WTO Dispute Settlement Body. In a ruling in July 2000, a WTO Panel found that the "Bars and Grills" exception is in breach of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, and that subsequently the US legislation needs to be amended.
Exceptions to the internationally accepted rights of authors (see note 2) are restricted by the so-called three-step test, Article 13 of TRIPS. The "Bars and Grills" exception was found incompatible with all three aspects of the three step test:
Members shall confine limitations and exceptions to exclusive rights to
The Panel ruling elucidates some aspects of the three step test which might be useful for its interpretation.
- Section 110(5) is not limited to 'certain special cases.' In a 1999 study, it had been estimated that 70 percent of eating establishments, 73 percent of drinking establishments, and 45 percent of retail establishments would qualify for the exemption. The Panel found, as one would have thought, that an exception of this size would not qualify as special case in the sense meant by the three step test. (See note 3.)
- Section 110(5) conflicts with a normal exploitation of the work. This prong of the three step test means that an exception must not interfere with the normal mode in which the author exploits his work in his own market (see note 4); the Panel stated that exempted uses may not compete with actual or potential sources of gain from economic exploitation of the right in question, and "thereby deprive them of significant or tangible commercial gains" (see note 5). In establishing the compensation, the Arbitrators seemed not to have given particular consideration to this reference to potential gains.
The Panel also rejected the US' 'double payment' argument, that is that right holders already receive royalties from other uses such as broadcasting royalties, and that consequently there would be no conflict with the normal exploitation of the work. Assessing this argument the Panel noted that the TRIPS Agreement confers a number of exclusive rights under copyright, and thus "whether a limitation or an exception conflicts with a normal exploitation of a work should be judged for each exclusive right individually" (see note 6). It also emphasised that the current licensing practices of collecting societies would not necessarily be indicative of the scope of normal extraction of economic value under the second prong of the three-step test. This was another point which was not taken on board by the arbitrators.
- Section 110(5) unreasonably prejudices the legitimate interests of the right holder. The Panel found that:
- While a certain degree of 'prejudice' to legitimate interests must always be presumed, such prejudice becomes 'unreasonable' when an exception causes or has the potential to cause an unreasonable loss of income to the copyright holder (see note 7)
- Both actual and potential prejudice to rightholders caused by the exemption in question must be taken into account.
- Analysis of unreasonable prejudice should not be applied only to the interests of rights holders of the WTO Member that initiated the complaint, but should take into account the legitimate interests of copyright holders at large (see note 8).
This principle is particularly significant in light of the approach taken later by the Arbitrators.
Fair compensation? - the Arbitrators' award
In July 2001, the EC and the United States asked a WTO arbitration panel to determine "the level of nullification or impairment of benefits to the European Communities as a result of the operation of Section 110(5)(B) of the US Copyright Act."
The EC had argued for a compensation of US$ 25,486,974, using what was called a "top-down" methodology," based on the potential licensing revenue that would have been paid to EC rights holders if the US collecting societies ASCAP and BMI were to license all establishments exempted from royalties by the "Bars and Grills" exception.
On the other side, the US' "bottom-up" methodology had produced a calculation of between US$ 446,000 and 733,000, based on the actual royalties paid by the US collecting societies to EC rights holders in the three-year period 1996-98.
The parties agreed to use the dispute settlement mechanism provided in Article 25 of the WTO Dispute Settlement Understanding (i.e. direct arbitration) in this case because of this considerable discrepancy in calculation. The dispute mechanism usually used is provided in Article 22.6 of the WTO Dispute Settlement Understanding.
In an Award made public on November 9, 2001, the Arbitrators accepted the US "bottom-up" approach, as it focused on "historical figures" rather than the value of the public performance right based inter alia on theoretical higher levels of licensing of retail establishments by US collecting societies (see note 9).
The arbitrators determined that the level of EC benefits which are being nullified or impaired was €1,219,900, at that time amounting to US$ 1.2 million per annum.
It is worthwhile bearing in mind that in the three year period 1996-1998, on which the arbitrators based their calculation, the US Copyright Act of 1976 already provided for a so-called 'home-style' exemption to the right of public performance, which absolved small establishments from copyright liability for playing radio music using amplification equipment that would normally be used in a home setting. Additionally, such establishments were in fact not widely licensed by the US collecting societies, due to high transaction, administration and enforcement costs in relation to the licensing revenue likely to be generated.
As part of the Wartime Supplemental Appropriations Act, signed into law on 16 April 2003, the US Congress approved the $3.3 million appropriation for European music right holders; the sum was subsequently paid to the representative body of European right holders (GESAC). This enabled the EU and the US to implement a temporary arrangement regarding the trade dispute on s. 110 (5) for a three-year period ending in December 2004.
A fair deal?
The Panel Ruling and the Arbitrators' award raise several concerns, in particular in view of the fact that the period covered by the arbitration concludes on 31 December 2004 without it would seem any likelihood of a repeal of the "Bars and Grills" exception.
The failure to amend the law threatens confidence in the World Trade Organisation system as the Doha Development Agenda (DDA) progresses, despite the temporary breakdown of negotiations in Cancun last year.
The US' refusal to change its copyright law to comply with the Panel Report erodes the integrity of the entire WTO dispute settlement system, which was a major achievement of the Uruguay Round of trade negotiations that ended in 1994.
More specifically, the WTO dispute mechanism as provided under Art 25 of the WTO Dispute Settlement Understanding also needs to be closely reviewed. As outlined previously, the Arbitration Body chose to value the actual licensing revenue previously received by the claimants rather than the potential licensing revenue. The result was a derisory sum which ignored the fact that the rights were not capable of being fully licensed for a variety of reasons prior to the change in the law. It also ignores the respective findings of the WTO Panel in July 2000.
The more specific concerns on Article 25 relate to the absence of both an appeal mechanism on the decision of the arbitrator, and any statement on further procedure to solve the dispute, such as the suspension of trade concessions.
Generally, when a country fails to amend its legislation within a "reasonable period of time" following a Panel Report finding that the legislation is incompatible with a WTO agreement, under Article 22.6 the Dispute Settlement Body may authorise the country that initiated the dispute settlement procedure to suspend trade concessions in an amount corresponding to a mutually acceptable level of compensation for the non-compliance with the Panel Report after the reasonable period of time expires. If the countries disagree on the level of "mutually acceptable compensation," Article 22.6 provides for arbitration on the level of compensation for non-compliance.
The inconsistency between the US' failure to conform its law to WTO rules and its aggressive stance on global intellectual property protection under TRIPS has potentially wide ramifications which could reverberate well beyond copyright. The refusal to comply with a WTO Panel Report ruling that a provision of its law is inconsistent with TRIPS demonstrates that the US is happy to pursue other countries for breach of WTO commitments but content to ignore or buy them off when they occur at home.
For instance, in the section 301 special report 2004 the US Trade Representative stated that the "European Union (EU) will remain on the Priority Watch List because it has not demonstrated any willingness to address certain IP-related concerns in a sufficient manner, despite encouragement by the United States including through the U.S.-EU Trans Atlantic Economic Partnership."
They continue pointing out that regarding the question at hand - regarding geographical indications- that "(d)espite over four years of consultations since June 1999, we were unable to resolve this matter, and so, in August 2003, we requested the establishment of a WTO dispute settlement panel to review the consistency of the EC's GI Regulation with WTO rules."
In the executive summary the Report states that "full implementation of TRIPS obligations has yet to be achieved in certain countries, particularly with respect to the Agreement's enforcement provisions." It seems that most European right holders would happily sign up to the latter statement.
Wider implications?
What if the US film or software industry wanted to tackle problems in the copyright protection of a new WTO member where there was a major loophole in the substantive law contrary to TRIPS so that licensing was made impossible or subject to unreasonable exceptions or conditions?
Let's assume that the industry is only a recent entrant to that new market and so minimal licensing is taking place anyway and revenues are at a low base. Even if the US were to win a case at the WTO that the country should comply with TRIPS, the precedent set by the Arbitration Body in the music copyright dispute would value the compensation to the US at the very lowest end. In effect the message which the US Government is giving out to all other countries is: don't worry about having IP exemptions which are in breach of TRIPs, you will probably be able just to buy your way out of them.
IP rightowners do not want to rely on compensation for their income, whether derisory as in the case of this award, or even in the unlikely case it would reflect more realistically the actual damage suffered. Relying on awards of compensation is not the way of the creator, entrepreneur or growth business. What businesses want is exactly what the TRIPs agreement was to lead to: good international standards for the protection of their rights and on the basis of which they can make their businesses grow.
It should be emphasised that public performance of music through television and radio is an increasingly important part of the service which outlets like bars, restaurants and shops give to their customers and also an important part of selling and marketing strategies. Research has shown the power of music to influence consumer choice and buying patterns. It is entirely unfair that such outlets should be able to maintain and grow their businesses whilst denying the creators of the music they use any income from such use.
And as stated, exactly the same considerations could have serious consequences for all other IP rightholders.
The extent to which the Award in the Fairness in Music licensing case has any of the negative consequences outlined above for holders of copyright or in fact any other intellectual/ industrial property rights depends almost entirely on whether (and when) the United States amends the Copyright Law to comply with the Panel Report. If the exception in Section 110(5)(B) is removed, the Award becomes redundant. The longer the exception remains in place, the more damaging its outward ripple effects may be to TRIPS standards and the WTO dispute settlement system as a whole. Further, ideally joint activities by the international right holder community might help to achieve the ultimate objective, that is to get the US to put an end to its breach of the TRIPs Agreement and repeal the "Bars and Grills" exception.
Notes:
1. Based on a British Music Rights paper presented at the 10th Fordham Law School Annual Conference on International Intellectual Property Law and Policy, New York, April, 2002.
2. In this case Articles 11bis (1)(iii) and 11 (1) (ii) of the Berne Convention as amended.
3. Panel report WT/DS160/R, 15 June 2000 , p. 38.
4. Sam Ricketson, Berne Convention, para 9.7
5. Panel report WT/DS160/R, 15 June 2000, p. 48.
6. Ibid, p. 45.
7. Ibid, p. 59.
8. Ibid, p. 61.
9. Award, pp. 21-23.