How fair and justified are private copying levies?

Armands Leimanis Law & Business Y1 B011081

Riga, 2012

Table of Contents

Introduction ........................................................................................................................................ 3 Legal basis of private copying levies in the European Union ......................................................... 4 Ruling of the European Court of Justice in the Padawan case ...................................................... 6 Private copying in Latvia ................................................................................................................... 7 Private copying in the United Kingdom ........................................................................................... 8 Abolishing the levy ............................................................................................................................. 9 Bibliography ..................................................................................................................................... 13

Introduction
In this paper I will look at the legal background, justification and fairness of private copying levies, with additional emphasis on the situation in Latvia. The objective of this research is to highlight the legislation regarding the levies, evaluate their justification and analyze the fairness of levy systems by reviewing their underlying assumptions. This is a very timely topic, considering that the Constitutional Court of the Republic of Latvia ruled on regulations regarding levies just last month, and a heated debate on this issue has been seen not only in the media, but also in parliaments of several other European countries. In this research I will evaluate a fairly recent proposal for policy changes with regard to levies from the United Kingdom and look at several pieces of empirical evidence that support my thesis private copying levies should be abolished. Although there are several alternatives proposed to the private copying levies, such as a cultural flatrate (a levy that is paid for the use of Internet) and technological protection measures (such as Digital Rights Management tools), in this paper I will exclusively focus on the system of private copying levies itself, arguing that they do not have a solid economical basis, which renders the assumptions made in respective legislations flawed. I believe that private copying should be seen as a de minimis case with regard to the harm caused to rights holders, and the right to make a private copy should be priced into the purchase itself. Before I go any further, it is important to define the terms that will be used in this research, beginning with private copying although general definitions may include illegal copying (piracy) or legal copying based on specific arrangements between the rights holders and the licensees, for the purposes of this paper private copying will exclusively refer to copying from a legal source by natural persons, which is permitted in national legislations. This type of private copying can manifest itself in several forms, such as platform-shifting (copying the work to another device, maintaining its structure), format-shifting (copying the work for use in a different kind of device, such as making a digital copy from an analogue tape), time-shifting (recording a broadcast for later use), making backups (having an archival copy of the works), et cetera. Private copying levies (also sometimes referred to as copyright levies) are the statutory exceptions (private copying exceptions) in the laws that allow private citizens to make a copy of a copyrighted work for personal use, provided that fair compensation is paid, e.g., rights holders are compensated for the harm that acts of private copying may cause through a levy system on devices 3

or materials that can be used to store or reproduce the works. I will now turn to legislation that provides the legal basis for private copying levies in the European Union.

Legal basis of private copying levies in the European Union

Private copying levies were first introduced in 1965 German Copyright Act (Gesetz ber Urheberrecht und verwandte Schutzrechte), following a ruling of Federal Supreme Court with regard to inability of licensing and enforcing copyright within the private sphere. 1 The levy applied to sales of audio and video recording equipment, followed by blank tapes twenty years later.2 This practice was later adopted in several other European countries, but with significant differences. To remedy this and arrive at a more coherent legislation in the European Union, in 2001 the European Parliament passed Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society (also known as InfoSoc Directive), Article 5.2 (b) of which reads: [Member States may provide for exceptions or limitations to the reproduction right provided for in Article 2 in the following cases:] (b) in respect of reproductions on any medium made by a natural person for private use and for ends that are neither directly nor indirectly commercial, on condition that the rightholders receive fair compensation3 Fair compensation is explained as follows: In certain cases of exceptions or limitations, rightholders should receive fair compensation to compensate them adequately for the use made of their protected works or other subjectmatter. When determining the form, detailed arrangements and possible level of such fair compensation, account should be taken of the particular circumstances of each case. When evaluating these circumstances, a valuable criterion would be the possible harm to the rightholders resulting from the act in question. In cases where rightholders have already received payment in some other form, for instance as part of a licence fee, no specific or
1

P. Akester and R. Akester, Digital rights management in the 21st century, European Intellectual Cabrela Javier Francisco Blzquez, Private Copying Levies at the Crossroads, Iris Plus, no. 4 Directive 2001/29/EC of The European Parliament and of The Council, 2001. 4

Property Review 28, no. 3 (2006): 159.

2

(2011): 7-21.
3

separate payment may be due. The level of fair compensation should take full account of the degree of use of technological protection measures referred to in this Directive. In certain situations where the prejudice to the rightholder would be minimal, no obligation for payment may arise.4 Although the Directive does not explicitly name private copying levies as a tool to provide for fair compensation if private copying exception is granted, most Member States have chosen to adopt a levy scheme. As professor Martin Kretschmer notes in his empirical study of copyright levies in Europe: Following the Information Society Directive of 2001 (introducing the concept of fair compensation for private copying into EU Law), total collection from levies on copying media and equipment in the EU tripled, from about 170m to more than 500m per annum. Levy schemes exist now in 22 out of 27 Member States.5 It is important to emphasize that Member States are not required to adopt the Directive's rule on private copying, leaving them complete discretion not to adopt any rules allowing private copying.6 The Directive permits Member States to provide the exception, but does not oblige them to do so, which is why in the United Kingdom and Ireland no exceptions exist, sans one for making copies of broadcasts for time-shifting purposes. This is the reason why I chose to study the recent policy proposals from the United Kingdom, which suggest for private copying right without the need for fair compensation. However, the user right to make a private copy does not stem from the Directive itself, but rather a landmark ruling from the European Court of Justice, which I will turn to now.

4 5

Ibid., 35 M Kretschmer, Private Copying and Fair Compensation: An empirical study of copyright levies in

Europe, An independent report commissioned by the UK Intellectual Property Office, 2012, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2063809.
6

Natali Helberger and P. Bernt Hugehnoltz, No Place Like Home for Making a Copy: Private

Copying in European Copyright Law and Consumer Law, Berkeley Technology Law Journal 22, no. 3 (2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2010007. 5

Ruling of the European Court of Justice in the Padawan case

The scope and application of private copying and levies was further explained by the European Court of Justice in the ruling on Padawan SL v Sociedad General de Autores y Editores de Espana (SGAE) (C-467/08) case. As explained in the study by the European Audiovisual Observatory, The parties to this case were a Spanish collecting society for authors and editors (SGAE), and Padawan, a company that markets CD-Rs, CD-RWs, DVD-Rs and MP3 players. SGAE requested from Padawan payment of the private copying levy for the years 2002 to 2004. The defendant Padawan opposed the claim on the ground that the indiscriminate application of a levy to digital media, regardless of the purpose for which they were used (private use or other professional or commercial activities), was incompatible with the InfoSoc Directive. 7 This case was referred to the European Court of Justice, which ruled favorably for Padawan, asserting that the levies were only applicable to private, non-commercial activities. However, more importantly, the ruling also established a positive right to private copying, which beforehand in the national courts was generally treated just as an exception from the authors rights.8 The ruling states: Those natural persons are rightly presumed to benefit fully from the making available of that equipment, that is to say that they are deemed to take full advantage of the functions associated with that equipment, including copying. It follows that the fact that that equipment or devices are able to make copies is sufficient in itself to justify the application of the private copying levy, provided that the equipment or devices have been made available to natural persons as private users.9 In addition to establishing the right to private copy, the Court explained that there is no requirement to prove whether or not actual copying has taken place it is enough with the fact that the equipment and blank media can be used to do so. Padawan made it clear that fair compensation should be regarded as remuneration for the possible harm that might be suffered from private copying, and since there are difficulties in identifying the private users, Member States may use a levy system for this purpose. The main question I want to address is whether this positive right of

7 8

Blzquez, Private Copying Levies at the Crossroads., 11 Stavroula Karapapa, Padawan v SGAE: a right to private copy?, European Intellectual Property C467/08 Padawan SL v Sociedad General de Autores y Editores de Espaa (SGAE), 55-56 6

Review 33, no. 4 (2011): 252-259.

9

private copying can be sustained even without the need for fair compensation, which, as I will explain in the next chapter, might be the case that might be adopted in Latvia.

Private copying in Latvia

The private copying exception in Latvia is implemented under Section 34 Blank Tape Levy of the Latvian Copyright law (amended April 27, 2011), Article 1 of which states: Without the permission of the author, a natural person shall be permitted to reproduce (including in a digital format) in one copy works that have been included in lawfully acquired films or phonograms or in other form of expression that is to be protected, as well as visual works for personal use without direct or indirect commercial purpose. Third persons shall not be involved in the production of such copy. The author is entitled to receive a fair compensation (blank tape levy) for the production of such copy.10 The rest of the articles detail who has the obligation to pay the levy (manufacturers and those who import equipment into Latvia, excluding those who use the media professionally) and how the legal documentation should be handled, while Article 7 states that The amount of the blank tape levy, procedures for collection, repayment and payment of the levy, as well as proportional distribution among authors, performers and phonogram and film producers shall be determined by the Cabinet [of Ministers].11 To comply with the provisions set out in the Copyright Law, Cabinet of Ministers adopted Regulations No. 321, which specify the leviable devices, amount of levies and the administration of levies. The Regulations also contain an informative reference to the aforementioned Directive.12 Since coming into effect on May 14th, 2005, the Regulations have not been amended, which was the subject matter of the recent case in the Constitutional Court of the Republic of Latvia.

10 11 12

Law of Latvian Republic, Autortiesbu likums (Saeima, 2000). Ibid. Regulations of the Cabinet of Ministers No. 321 of May 10, 2005 Noteikumi par tuko materilo

nesju un reproducanai izmantojamo iekrtu atldzbas lielumu un ts iekasanas , atmaksanas , sadales un izmaksas krtbu. 7

Several rights holders organizations of Latvia (including Copyright and Communication Consultations Agency/Copyright Agency of Latvia (AKKA/LAA) and the Society of Authors of Latvia (LAA)) challenged the legality of the Regulations No. 321, claiming that since the list was not updated, a considerable harm was done to the authors interests, which was against the Article 113 of the Latvian Constitution which provides for protection of authors rights. The Supreme Court ruled in favor of the claimants, stating that the Regulations shall be amended by November 1st, 2012, or lose their effect.13 This seems like a definite victory for the claimants, yet after the decision was passed a representative from the Ministry of Culture hinted that the government is working on a new set of proposals which may abolish the levies entirely, instead opting for a system that is in place in the United Kingdom.14 Although the details of this proposal are vague, I what could have been meant by such an assertion, drawing from experience of the United Kingdom.

Private copying in the United Kingdom

United Kingdom is one of the countries without a statutory private copying exception, which would make private copying for personal, non-commercial purposes illegal without the permission from rights holder. This does not mean that all private copying is illegal such permission may be granted by pricing it into the purchase of the copyrighted work itself. However, as professor Ian Hargreaves pointed out in a review on intellectual property, The UK has a thriving market for personal media devices which rely on private copying. We see no economic argument for adding an extra charge to these devices in order to authorise reasonable private acts which are part of the normal use of devices. Indeed, without that copying, normal use of those devices would be largely restricted to playing music or films bought online. We are not aware of strong evidence of harm to rights holders

13

Decision of the Constitutional Court of the Republic of Latvia in the case No. 2011-17-03, Sanita Igaune, Grib atteikties no datu nesju atldzbas, Dienas Bizness, 2012,

http://www.likumi.lv/doc.php?id=247274.
14

http://www.db.lv/tehnologijas/grib-atteikties-no-datu-neseju-atlidzibas-372486. 8

done by this kind of private copying in the normal course of using digital equipment to play works. There is considerable evidence of overall public benefits from consumer use.15 We can see that Hargreaves is strongly opposed towards adoption of private copying levies and highlights the lack of evidence for the economic harm caused to the rights holders, which I will discuss in the next chapter. As for changing the governments policy, Hargreaves suggests: The Review favours a limited private copying exception which corresponds to what consumers are already doing. As rights holders are well aware of consumers behaviour in this respect, our view is that the benefit of being able to do this is already factored into the price that rights holders are charging. A limited private copying exception which corresponds to the expectations of buyers and sellers of copyright content, and is therefore already priced into the purchase, will by definition not entail a loss for right holders. The Government should introduce an exception to allow individuals to make copies for their own and immediate familys use on different media. Rights holders will be free to pursue whatever compensation the market will provide by taking account of consumers freedom to act in this way and by setting prices accordingly.16 In effect, this would mean adopting the private copying exception provided for in the Directive without a levy scheme to ensure fair compensation, leaving it to the free market. This is a very interesting proposal, and if passed could radically alter how private copying is treated not only in the United Kingdom, but also in the rest of European Union. However, there are legislative obstacles that have to be overcome, namely implications from the Padawan ruling, which assumes that private copying indeed causes economic harm to the rights holders and thusly justifies the need for fair compensation schemes.

Abolishing the levy

Hargreaves poses a valid question what evidence is there that private copying causes sufficient harm to merit compensation that across the European Union amounts to several million Euros annum? Could it be that abolishing the levies has a positive effect not only on the consumers but also the rights holders? Levy system also has some inherent unfairness to it there is no way to
15 16

Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property and Growth, 2011., 48 Ibid., 49 9

discriminate between those who indeed use the media and devices to make private copies of copyrighted works and those who use them to merely store their own files or non-copyrighted data, yet both have to pay the levy. Following the Padawan ruling in European Court of Justice, Spain has chosen to abolish the private copying levies starting from January 1st, 2012. Since Royal DecreeLaw 20/2011 passed, manufacturers and importers are no longer obliged to pay the levy; it is instead paid from the State budget.17 Although this would be preferable with regard to administration costs of levy collecting, in the end it is still the taxpayers who carry the burden, without taking into account the actual usage of copyrighted works. There are other pieces of evidence which speak against the levies: Overall, music industry revenues during the past few years have been growing by about 4% per year Countries with high copyright levies do not have better-performing music industries (measured by growth in sales) Several studies suggest that some of the devices which are subject to levies are not primarily used for private copying Copyright levies deter rights holders and music service providers from introducing new licensing-based business models18 These are substantial issues, yet I believe that the strongest case for abolishment is critically evaluating the economic harm caused to rights holders. As defined by the European Comission, A 'private copying levy' is a form of compensation for rightholders based on the premise that an act of private copying cannot be licensed for practical purposes and thus causes economic harm to the relevant rightholders.19 This premise of economic harm and the inability of licensing should not be taken at face value, and instead evaluated through empirical studies. It is worth adding that the concept is also legally problematic: From the jurisprudence on awarding damages, harm in law is likely to be interpreted as a lost licensing opportunity, i.e. a fee that could have been charged. However, there is a circularity here: if there is a copyright exception, there is no

17 18 19

Clifford Chance, Cost reduction: Say goodbye to the private copying levy, 2012. Oxera Consulting, Is there a case for copyright levies? An economic impact analysis, 2011., iii-iv European Comission, Fair Compensation For Acts Of Private Copying (2008),

http://ec.europa.eu/internal_market/copyright/docs/levy_reform/background_en.pdf. 10

infringement, and no licence could have been issued. Thus by definition there is no harm in law from a permitted activity.20 The economic harm that stems from copying is generally thought of as a lost sale which otherwise would have been made through a purchase of an additional copy of the work. This is based on an unfounded assumption that the original purchaser would have acquired such a copy. In the United Kingdom, right holders have either explicitly permitted format shifting, or decided not to enforce their exclusive rights. There is no lost sale, and the European criterion of harm may be treated de minimis, i.e. no compensation is due. 21 Indeed a limited reproduction right can easily be priced into the purchase, waiving the need for levies. Unfortunately, rights holders are unwilling to do so, since levy schemes provide an easy path for remuneration (as mentioned before, levies deter rights holders and music service providers from introducing new licensing-based business models). The most daunting piece of evidence against private copying levies comes from a 2011 study Is

there a case for copyright levies? An economic impact analysis study by Oxera Consulting. Oxera modeled several scenarios in which copyright levies were abolished, an all of them point towards a significant and positive welfare gain in the European Union. Oxera asserts: Without copyright levies, consumers would buy more devices at lower prices and consume more digital music. Manufacturers gain because they sell more devices and can take part in new business models for distributing music. [..] Rights holders as a group can also make significant gains from the removal of copyright levies. The two biggest drivers are the growth in digital music sales and the effective compensation that rights holders can extract from selling music through the various new business models. The analysis indicates that, if there is further dynamic growth in the European digital market, song writers, performers, record labels and music publishers will all benefit directly from the removal of copyright levies. 22

20

Kretschmer, Private Copying and Fair Compensation: An empirical study of copyright levies in Ibid., 19 Oxera Consulting, Is there a case for copyright levies? An economic impact analysis., i 11

Europe., 17
21 22

The sheer vastness of Oxeras study and the limitations of this research paper forbid for a more thorough explanation of the models used in their research, yet they are logically sound and provide empirical data which speaks strongly against the levy schemes.

Figure 1

Figure 1 shows the effect of removing copyright levies. In the bottom row, this is shown as a welfare gain to the EU economy of between 975m and 1,880m per year. Consumers gain in each scenario. Without copyright levies, consumers would buy more devices at lower prices and consume more digital music. Manufacturers gain because they sell more devices and can take part in new business models for distributing music.23 According to the Directive, no compensation shall apply if rights holders have already received a payment in some form, for example as a part of a license fee. In cases where harm caused to the rights holders might is minimal, no compensation shall be due. 24 I believe that the right to a private copy could be established as a statutory license while having the private copying levies abolished, with the reproduction right being priced into the purchase itself (as suggested by Hargreaves) and the potential harm towards rights holders treated as a de minimis situtation. If Hargreaves proposal and interpretation of the Directive will indeed turn out to be a viable solution for the United Kingdom, the practice could be adopted in Latvia as well, without breaching the ruling of the Constitutional Court of the Republic of Latvia.
23 24

Ibid. Blzquez, Private Copying Levies at the Crossroads., 10 12

Bibliography
All hyperlinks have been last visited on 02.07.2012 Akester, P., and R. Akester. Digital rights management in the 21st century. European Intellectual Property Review 28, no. 3 (2006): 159-168. Blzquez, Cabrela Javier Francisco. Private Copying Levies at the Crossroads. Iris Plus, no. 4 (2011): 7-21. Clifford Chance. Cost reduction: Say goodbye to the private copying levy, 2012. C-467/08 Padawan SL v Sociedad General de Autores y Editores de Espaa (SGAE). Decision of the Constitutional Court of the Republic of Latvia in the case No. 2011-17-03, http://www.likumi.lv/doc.php?id=247274. Directive 2001/29/EC of The European Parliament and of The Council, 2001. European Comission. Fair Compensation For Acts Of Private Copying http://ec.europa.eu/internal_market/copyright/docs/levy_reform/background_en.pdf. Hargreaves, Ian. Digital Opportunity: A Review of Intellectual Property and Growth, 2011. Helberger, Natali, and P. Bernt Hugehnoltz. No Place Like Home for Making a Copy: Private Copying in European Copyright Law and Consumer Law. Berkeley Technology Law Journal 22, no. 3 (2012). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2010007. Igaune, Sanita. Grib atteikties no datu nesju atldzbas. Dienas Bizness, http://www.db.lv/tehnologijas/grib-atteikties-no-datu-neseju-atlidzibas-372486. 2012. (2008).

Karapapa, Stavroula. Padawan v SGAE: a right to private copy? European Intellectual Property Review 33, no. 4 (2011): 252-259. Kretschmer, M. Private Copying and Fair Compensation: An empirical study of copyright levies in Europe. An independent report commissioned by the UK Intellectual Property Office, 2012. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2063809. Law of Latvian Republic. Autortiesbu likums. Saeima, 2000. Oxera Consulting. Is there a case for copyright levies? An economic impact analysis, 2011. Regulations of the Cabinet of Ministers No. 321 of May 10, 2005 Noteikumi par tuko materilo nesju un reproducanai izmantojamo iekrtu atldzbas lielumu un ts iekasanas , atmaksanas , sadales un izmaksas krtbu

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