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High Court overrules decision of Copyright Tribunal relating to royalty rates for music video broadcasts

10/01/2011

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United Kingdom

High Court overrules decision of Copyright Tribunal relating to royalty rates for music video broadcasts

Introduction

Music videos: are they promotional marketing tools or offerings of audio-visual entertainment in their own right? Does the balance in terms of financial reward lie with the broadcasters which give airtime to these "advertisements" or with the copyright owners which provide the "entertainment"?

These are questions which both the Copyright Tribunal (the Tribunal) and High Court (the Court) have had to grapple with recently (CSC Media Group Limited v Video Performance Limited [2010] EWHC 2094). In a case relating to what the appropriate royalty rate paid by television broadcasters to licensors for music videos should be, on appeal, the Court remitted the issue back to the Tribunal on the basis that the Tribunal had applied a defective two-stage test in determining a figure of 12.5%.

With the music industry currently riddled with issues of piracy and broadcasters suffering huge drops in advertising revenues, there is a lot at stake for the respective players in the music industry pending this rehearing.

Background

CSC Media Group Limited (CS") is a television broadcaster which operates a number of music television channels, including Chart Show TV, The Vault, Scuzz, Flaunt and Bliss.

Video Performance Limited (VPL) is a collecting society, which collects royalties in relation to the use of music videos, on behalf of the copyright owners. It licences broadcasts of its music video repertoire to music television channels, most commonly in return for a royalty calculated by reference to the gross revenue that is to be received by a licensee in respect of the broadcast of the television channel, pro-rated by reference to the broadcaster’s use of VPL's repertoire.

The Dispute

CSC had been licensed by VPL since 2002 under the terms of a written licence agreement (the 2003 Licence) which provided for the payment to VPL of a pro-rated fee based on the headline rate of 20% of gross revenue, together with a non-refundable annual advance. That licence was never signed, and expired in 2005. Since then CSC has been licensed under the terms of a letter of extension, the purpose of which was to give the parties three months within which to negotiate new terms.

Copyright Tribunal

CSC made an application to the Tribunal under s.126 of the Copyright, Designs and Patents Act 1988 (CDPA), claiming that the 20% figure was unreasonably high, putting forward a rate of 8% instead. This was the first case relating to music videos to be dealt with in the Tribunal, which was left to determine the level of royalty which was, in accordance with s.126, "reasonable in the circumstances". While s.129 of the CDPA states that, in making such a determination, the Tribunal should consider relevant "comparators" (i.e. other licences granted in similar circumstances), s.135 imposes an obligation on the Tribunal to have regard to "all relevant factors" in making its decision. In light of these obligations, the Tribunal considered a broad range of issues in coming to its decision that a 12.5% royalty rate, pro-rated based on a formula different to that agreed between the parties, was "reasonable in the circumstances".

(i) The 2003 Licence and "Non-Precedential" Licences

VPL argued that the previous unsigned 2003 Licence with a royalty rate of 20% was a "strong and compelling comparator", pursuant to s.129 of the CDPA. However, the Tribunal disagreed, stating that the licence was intended to be a temporary arrangement and not a "concluded agreement, freely entered into" by CSC.

Moreover, the Tribunal considered a host of other licences entered into with VPL, however these too were rejected for achieving only "short-term, interim legitimacy without necessarily, ongoing finality".

(ii) Justification for the 20% Rate

VPL argued that the 20% royalty rate was a well-established industry standard. The Tribunal rejected this argument too on the basis that the 20% rate was more "aspirational", an "imposition" on licensees and could not therefore be a "tariff".

(iii) The Radio Comparison

CSC argued that the licences granted by PPL (VPL's sister-organisation, a collecting society for sound recordings) to radio stations would be appropriate comparators since music drives both music television and commercial radio and have a similar audience and therefore the rates applied to radio licences (ranging between 2-5%) should be applied to music video licences. The Tribunal however disagreed, and stated that although VPL’s demand for 20%, being four times the upper commercial radio rate, was "unreasonable", it reiterated that music videos were a "genre of entertainment independent of others...[and] obviously worth more than commercial radio music as a licensing commodity" and therefore the royalty rate should be set above the 8% starting point.

(iv) The "Pop-Promo Effect"

The Tribunal recognised that although the original function of music videos was purely promotional (i.e. "pop-promos"), today music videos are "self-standing offerings of audio-visual entertainment". Although VPL argued that in light of this shift, the promotional value of music videos was now redundant, the Tribunal held that the "pop-promo effect" was still significant, and should therefore serve to reduce the royalty rate levied on broadcasters.

(v) Changes in the market

Another factor given weight by the Tribunal was how the market was rapidly changing; "advertisers are increasingly switching from buying television airtime to alternative methods of advertising", particularly the internet, as a result of which, broadcasters were "suffering declining advertising revenues", and ultimately, "this change will be reflected in the royalty again being reduced".

The Tribunal's "Diminished Window"

Having rejected the 2003 Licence and various non-precedential licences as comparators, the Tribunal determined that taking the radio comparison, the "pop-promo effect" and the "changing market" into account, a "diminished window" of royalty rate was to be fixed between 10-15%. Having set the "diminished window", the Tribunal then considered various other licences in "fine-tuning" the "diminished window" to a "reasonable royalty rate" of a pro-rated 12.5%.

Appeal

VPL appealed against the Tribunal's decision on two grounds:

(i) Royalty Rate

Firstly, VPL argued that in the first stage of its test, the Tribunal failed to take account of the relevant comparators as required by s.129 and therefore the "diminished window" of 10-15% was set on a flawed basis.

VPL argued that the most relevant comparator, a licence entered into between VPL and BSkyB (the BSkyB Licence) which essentially was an agreement to pay 20% with limited pro-rating, was only dealt with after the "diminished window" was set, at the "fine-tuning" stage. The Tribunal had accordingly failed in its s.129 obligation. The Court agreed, describing the BSkyB Licence as "an example of the Standard Licensing Approach being accepted by a major player" and was clearly "the single most significant comparable".

Further, the Court was critical of the weight given to the radio comparison by the Tribunal since even the Tribunal had expressed doubt as to its relevance.

The Court stated that the two factors taken into consideration in setting the "diminished window" in the first place, namely the "pop-promo effect" and the "changing market", were indeed relevant factors in "exerting a downward pressure on royalty rate", however such consideration would have been more appropriate during the "fine-tuning" exercise rather than in determining the "diminished window".

(ii) Pro-Rating

Secondly, VPL appealed on the basis that the Tribunal had wrongfully altered the agreed pro-rating formula, previously agreed between the parties. The Tribunal's view in altering the formula was that the pro-rating was wrong in principle because it levied royalties on material in which VPL did not own the copyright. VPL argued that the Tribunal had in fact misunderstood the formula, and that "non-VPL material was simply part of the denominator in the pro-rating calculation". The Court agreed with VPL; the Tribunal did not have "a proper or rational basis for departing from the agreed formula".

In allowing both grounds of the appeal, the Court remitted the application to be re-heard before a differently constituted Tribunal.

Comment

Much now rests on the outcome of the re-hearing. Since CSC's Application was launched in 2005, several other parties have inserted clauses into their licences with VPL to the effect that they would be entitled to the CSC royalty rate if it is determined to be lower than their current royalty rate. A lot is at risk for VPL should the Tribunal settle at a rate significantly lower than 20%.

It seems likely that a rate higher than 12.5% will be determined second time round; a result to be welcomed by VPL but a significant blow to broadcasters, who, as a result of the changing market, have suffered huge drops in advertising revenues. The flipside is that the rate is equally likely to be a figure below 20%, and so any drop in rate is likely to impose a significant burden on licensors, who, as it is, are continuing to battle piracy wars.

With so much at stake, it will be interesting to see where between the 12.5 to 20% marks the Tribunal will land in applying this reformulated test. Ultimately however, in light of the conflicting interests of broadcasters and licensors, it seems likely that this will not be the last we see of the music video royalty debate.

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