Universal Music Australia v EMI Music Publishing Australia Pty Ltd

[2000] ACopyT 5

COPYRIGHT TRIBUNAL OF AUSTRALIA

Universal Music Australia v EMI Music Publishing Australia Pty Ltd

[2000] ACopyT 5

COPYRIGHT TRIBUNAL – mechanical royalties – application for determination of amount of royalty and manner of payment – interim orders – nature of power – whether restricted by relief that may be granted under ss 152A and 152B of the Copyright Act 1968 (Cth)

Copyright Act 1968 (Cth) ss 55, 152A, 152B, 160

Owners of “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404, referred to
Reference by Australasian Performing Right Association Limited (unreported, Copyright Tribunal, 7 October 1994), applied

UNIVERSAL MUSIC AUSTRALIA and Others v EMI MUSIC PUBLISHING AUSTRALIA PTY LIMITED and Others

CT 2 of 1999

TRIBUNAL:             FINKELSTEIN DP, PROFESSOR PEARCE, MS BOWNE

DATE:  14 JUNE 2000
PLACE:  SYDNEY

IN THE COPYRIGHT TRIBUNAL		CT 2 of 1999
BETWEEN:	UNIVERSAL MUSIC AUSTRALIA and Ors Applicants
AND:	EMI MUSIC PUBLISHING AUSTRALIA PTY LIMITED and Ors Respondents
TRIBUNAL:	FINKELSTEIN DP, PROFESSOR PEARCE, MS BOWNE
DATE:	14 JUNE 2000
PLACE:	SYDNEY

REASONS FOR DECISION

THE TRIBUNAL

1. The exclusive right of songwriters and composers to authorise the mechanical reproduction of their work is subject to the compulsory licensing system in the Copyright Act 1968 (Cth).  The licence system has it origins in the Berne Convention for the Protection of Literary and Artistic Works 1886 and was first introduced in Australia when the Copyright Act 1912 (Cth) made applicable the Copyright Act 1911 of the United Kingdom. An Australian manufacturer is entitled to reproduce a musical work by making a record, (which term includes a compact disc and a cassette tape) upon compliance with the conditions in s 55. In return for the licence, the manufacturer must pay a royalty to the owner of the copyright in the musical work. In the absence of an agreement or a determination by the Copyright Tribunal, the royalty is an amount equal to 6.25 per cent of the retail selling price of the record.

2. Songwriters usually assign their copyright in a musical work to a publisher.  The terms and conditions of the assignment will vary from case to case, but it is a common feature of such agreements that both the songwriter and the publisher will take a share of the royalty.  A division of 80 per cent to the songwriter and 20 per cent to the publisher is not uncommon, although in the early days of the recording industry the position was much less favourable to the songwriter.

3. Since the 1970s various agreements have regulated the payment of royalties by record manufacturers to most copyright owners.  The agreements were negotiated by representative organisations, the principal bodies being Australian Record Industry Association Limited (ARIA) representing approximately 80 record manufacturers and Australian Musical Copyright Owners Society Limited (AMCOS), whose business is managed by Australasian Performing Right Associated Limited (APRA), representing most publishers.

4. The latest agreement was made on 20 April 1990 and amended by Heads of Agreement and Further Heads of Agreement, each dated 10 May 1995. The term of the agreement expired on 31 December 1999. The parties, through their representative organisations, have been unable to complete negotiations on a further agreement. For this reason the manufacturers have applied to the Tribunal under s 152A, to determine the amount of royalties to be paid to the owners of copyright for a period of not less than four years commencing on 1 January 2000 and under s 152B, to determine the manner in which the royalties are to be paid.

5. The hearing of the application will occur early next year. In the meantime, however, ARIA contends that an interim arrangement should be put in place and this is the matter that is presently before the Tribunal. The power of the Tribunal to make an interim order is found in s 160 which provides:

   “Where an application or reference is made to the Tribunal under this Act, the Tribunal may make an interim order having effect until the final decision of the Tribunal on the application or reference.”

   The precise ambit of this power will need to be considered.

6. Before considering whether an interim order should be made pending the resolution of the applications under ss 152A and 152B, it is necessary first to explain the principal features of the expired agreement. We should point out that the agreement is a detailed and comprehensive document comprising 26 paragraphs, many of which contain sub-paragraphs, and 12 schedules. It is the product of lengthy and detailed negotiations. There are many provisions in the agreement which the Tribunal would not have the competence to order in an application under s 152A or s 152B. What follows are the main elements of the agreement before it was amended.

7. The royalty payable on records made in or imported into Australia and sold by wholesale was 10 per cent of the published price to dealer (commonly referred to as PPD), being the published catalogue price of the record including the cost of insurance and freight and any surface charges but excluding sales tax.  The royalty payable on records made in Australia or imported into Australia and sold by retail was 7.28 per cent of the recommended retail price, being the maximum suggested selling price, excluding sales tax.  The royalty payable on records sold by wholesale or retail was to be no less than 1 cent in respect of each musical work included on the record.  No royalty was payable on promotional records.  Promotional records were defined as records disposed of at no charge.  They included records supplied to a radio or television broadcaster or to the operator of a venue at which records were played for entertainment.  The manufacturers were entitled to a credit against royalty in respect of records supplied on a sale or return basis, if those records were returned to the manufacturer.  In the case of records that were exported for sale, no royalty was payable when exporting to specified countries.  In all other cases the applicable rate of royalty was payable except that the list price or the recommended retail price was the invoice price plus 20 per cent.  Specific provision was made for the calculation of royalty on records imported to satisfy a specific order by a member of the public.  One element in the calculation was the list price or PPD.  Records in the form of compact discs attracted royalty at 90 per cent of the applicable rate.

8. The amendments that were introduced by the Heads of Agreement included the following.  The rate of royalty on records sold by wholesale was reduced to 9.306 per cent of the list price.  The rate of royalty on records sold by wholesale was reduced to 5.73 per cent of PPD including sales tax, or 6.4 per cent of recommended retail price excluding sales tax.  The rebate on compact discs was removed.  There was a change to the definition of PPD to take account of the situation where there was more than one catalogue price.  The new definition also provided that discounts, incentives, bonuses and the like were not to be taken into account.  The minimum royalty was increased to 5 cents with different rates for compact discs and cassette tapes.

9. The reason why the representative organisations are unable to reach a new agreement for the payment of royalties is their disagreement on whether it is appropriate to continue to use the list price as the basis upon which the royalty is to be calculated for records that are sold by wholesale.  Wholesale sales, in particular the wholesale sale of compact discs, constitute by far the largest number of records sold.

10. Discounting from the list price has always been a feature of the wholesale record market.  But ARIA says that since about 1990 there has been a significant increase in the rate of discounting.  The evidence provides some support for this contention although the degree of discounting is uncertain.  The following are some of the factors that have led to discounting.  Discounts are offered to sell new releases of recordings by new artists.  Volume rebates or discounts are offered to attract sizeable orders.  Large record retailers have significant “buying power” and are able to demand discounts even on smaller selling lines.  Competition from other forms of entertainment induce manufacturers to sell records at prices substantially below the list price.

11. Two other important features have contributed to a reduction in the wholesale selling price of records.  First, there are the changes to the Copyright Act made in 1998 to allow parallel importation of records from other countries without the consent of the local copyright owner.  Second, the retail market has become more competitive.  As a result, retailers have come to expect discounts, especially on compact discs.  A number of witnesses have described this practice as one that is now “firmly entrenched”.  Personal experience provides some confirmation for this view.

12. These changing market conditions have caused manufacturers to form the opinion that it is undesirable that mechanical royalties should continue to be paid as a percentage of the list price.  They say that the list price no longer reflects the underlying value of a record.  The manufacturers argue that the royalty should be a fixed percentage of the actual retail selling price of a record.  That is, the royalty should be paid on the revenue received by the manufacturers and not on what they regard as an artificial value.

13. Needless to say, the publishers and other copyright owners strongly resist any change to the basis upon which mechanical royalties are paid.  APRA points out that there has always been discounting and the royalty rates that have applied over the years have taken this into account.  The copyright owners also contend, with some force, that some benefit must accrue to the manufacturers by maintaining a list price that is much higher than the selling price, otherwise the list price would be reduced.  Thus it is to be presumed that the maintenance of differential pricing provides benefits which outweigh the burden of a royalty assessed on the list price.

14. APRA also criticises the basing of a royalty on the actual selling price of a record.  One criticism is the alleged unfairness of a record company being able to shift to a publisher some of the cost of discounting a record when the discounting is intended to promote sales of other records.  Another criticism is that certain discounting, a concept which has a rather wide meaning, is in reality no more than a component of the cost of selling a product which should be borne by the manufacturer and not be transferred to the copyright owner. 

15. For present purposes it is neither necessary nor appropriate to determine whether a royalty based on the actual selling price is to be preferred over a royalty based on the list price.  Nor is it necessary to consider whether some other method of calculating mechanical royalties would produce an equitable result between licensor and licensee.  What can be said, however, is that the manufacturers’ attempt to shift the royalty base away from the list price should not be seen as a frivolous case.  The evidence suggests that changes in market conditions and market behaviour have reduced the profitability of selling records.  The maintenance of a royalty based on the list price of a record, at least when the list price varies significantly from the actual selling price, may unduly burden the manufacturer to the advantage of the copyright owner.  On the other hand, the manufacturers set the list price and, in that sense, are responsible for the position about which they now complain.  These are issues that will have to be investigated in detail and may be resolved at the final hearing.  In the meantime, it is appropriate to approach this application for interim relief on the basis that the Tribunal may find that the manufacturers are entitled to the whole or part of the relief they seek.

16. The precise order that the manufacturers seek is that as from 1 January 2000 the amount of royalty to be paid and the manner of payment is to be in accordance with the expired agreement as amended by the two Heads of Agreement, save that the royalty be calculated as a percentage of the actual selling price.  They also ask for an order that the difference between a royalty based on the list price and a royalty based on an actual selling price be paid into an interest-bearing account pending the resolution of the proceedings.

17. The first point that arises in respect of this proposal is whether there is jurisdiction to make the orders sought. The issue arises in the following way. To take advantage of the statutory licence to make a recording, it is necessary for the licensee to pay the prescribed royalty to the copyright owner: s 55(1)(d)(ii). The prescribed royalty is the amount agreed between the manufacturer and the owner of the copyright or, if there is no agreement, the amount fixed by the Tribunal. In the event that there is neither an agreement nor a determination by the Tribunal as to the royalty to be paid, the royalty prescribed by statute is 6.25 per cent of the retail selling price of the record: s 55(6). The Tribunal’s power to fix the royalty is restricted; the royalty cannot be less than 1 cent in respect of a record: see s 55(5).

18. The interim order sought by the manufacturers involves the continuation of an agreement which provides that no royalty is to be paid on records distributed free of charge for promotional purposes and on records sold on a sale or return basis. The publishers say that the Tribunal cannot make an interim order under s 160 which has this effect. That is, they contend that because the Tribunal does not have power to determine that no royalty is to be paid on certain records in an application under s 152A, it follows that the Tribunal could not make such an order under s 160. The publishers go further and say that if no royalty is paid in respect of a record, a statutory licence will not subsist in respect of that record. Perhaps another way of putting the argument is that if the Tribunal does not fix a royalty for a particular record then the royalty that is to be paid is the royalty prescribed by s 55(6), namely 6.25 per cent of the retail selling price of the record.

19. In Reference by Australasian Performing Right Association Limited (unreported, Copyright Tribunal, 7 October 1994) the Tribunal considered the ambit of s 160. The Tribunal had been invited to make interim orders in applications under ss 154 and 157 for the determination of royalties to be paid by commercial television stations for the right to broadcast music. It was proposed that the Tribunal make orders, the effect of which would have been to alter retrospectively the royalties that had been paid. It was argued that the Tribunal did not have power to make retrospective orders when it determined royalties under ss 154 and 157 and accordingly no such power could subsist under s 160. That is to say, so the argument went, the ambit of the power conferred by s 160 was confined by the nature of the final relief that could be granted.

20. The Tribunal was prepared to accept, without deciding, that there was no power to make retrospective orders under s 154 or s 157. However, as regards s 160 the Tribunal did not accept that the power was circumscribed in the manner argued. The Tribunal said (at 12):

    “The whole thrust of Part VI of the Act, which is entitled “The Copyright Tribunal”, is to enable the Tribunal to achieve an appropriate balance between the interests of copyright owners, whose work is to be the subject of a licence, and the interests of those who wish to make use of that work for a reasonable fee and on reasonable terms and conditions.  We see no reason why the ambit of s 160 should be circumscribed by the provisions of ss 154 and 157 assuming that it is correct to say that those sections do not authorise a final decision which has a retrospective effect.”

    Later, the Tribunal said (at 13):

    “[We] do not construe [ss 154 and 155] as limiting the wide words of s 160 which, in our opinion, empower the Tribunal to make an order which, in a particular and common sense way, will provide appropriately for the period up to final determination.”

21. We would apply this reasoning in the present case while accepting that the position is not precisely analogous.  The now expired agreement, that had been reached by arm’s length negotiations, provided the copyright owners with what they regarded as adequate recompense for the right to manufacture and sell records.  The provision of free records for promotional purposes had the potential to benefit both the manufacturers and the copyright owner by increasing demand for their product.  Thus, although no royalty was payable on promotional records the expectation, no doubt, was that the royalties actually received overall would be higher.  The same is true of records provided on sale or return.  Placing records into the hands of a retailer will encourage sales.  In some cases a retailer might not take a large quantity of stock unless it had the right to return any stock that was not sold.  So, while it is true that no royalties were payable in respect of two classes of records the purpose of these provisions was to increase the overall royalty payable to the copyright owner.

22. We would be reluctant to find that the Tribunal lacks the power to allow such an arrangement to continue on an interim basis. We agree that there is force in the argument that the legislation contemplates that a royalty be paid on every record sold. But in the end we are of the opinion that the very wide powers conferred by s 160 do permit the Tribunal to make an interim order along the lines sought. As was said in the judgment of the High Court in Owners of “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404 at 421:

    “It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words.”

    The same is true of the powers given to the Tribunal.

23. We should now explain why the manufacturers ask for the establishment of a retention fund.  Under the expired agreement royalties are payable quarterly.  Upon receipt of a royalty payment, the publisher is often required to account for a share of the royalty to some other person, eg to an artist or songwriter.  All parties accept that once the publisher has accounted for a share of the royalty there is no practical means of recovering that share from the recipient.  Accordingly, if it turns out that royalties paid under any interim arrangement exceed those that are finally determined to be payable, the overpayment will not be recovered.  That money will be lost by the manufacturers.  The establishment of a retention fund is designed to overcome this problem.  If there is no reduction in royalty then the retention fund can be released to the copyright owners.  If the rate of royalty is reduced then some or all the fund can be returned to the manufacturers.

24. As regards the suggestion that an interim order should change the basis of calculating royalty from the list price to the actual selling price, we are quite satisfied this should not occur.  First, even if the discounting which we have briefly described should produce a reduction in the royalty, this can be achieved by ways other than adoption of a royalty that is based on the actual selling price.  Second, any change to the current practice will require the parties to alter their method of accounting for royalty purposes.  While this may not be as difficult as was first thought, it will cause the parties to incur considerable expense.  It is an expense that may turn out to be unnecessary.  Third, all that an interim arrangement need achieve is a measure of protection to the manufacturers against the risk that they may not be able to recover royalty overpayments.  Finally, a change to the present method of calculating the royalty, even if it is only for the purposes of an interim order, might be seen as an indication that the Tribunal is of the view that the manufacturers’ arguments will be adopted.  The Tribunal has certainly not formed any such view.  Nor has it formed a contrary view.  If an interim order is made, the maintenance of the present position of calculating the royalty is less likely to cause misunderstanding.

1. The immediate question then is whether any interim order should be made.  AMCOS says that it is unnecessary for the Tribunal to intervene.  It has indicated its willingness to continue the past arrangement until the Tribunal is able to resolve the applications.  AMCOS will not, however, agree that any part of the royalty that is payable under the old arrangement should be retained in trust. 

2. This position is unsatisfactory.  It puts the manufacturers at some risk, a risk that we think is unacceptable in the circumstances.  We are of the opinion that an interim order should be made that a royalty be paid and that the manner of payment be in accordance with the expired agreement as amended.  What should be the rate of rate of royalty that is to be paid?  Should a retention fund be established?

3. As we have said the principal object of the establishment of a retention fund is so that “some measure of justice can be done between the parties”, to quote from the applicants’ written submissions.  Against this, the publishers say that the Tribunal simply has no information which would enable it to form even a tentative view as regards what portion of the royalty should be put into a retention fund.  They also point to certain aspects of the calculation of the levels of discounting that suggest that the figures that have been produced are neither reliable nor reflective of the true position.  Accordingly they contend that it is unsafe for the Tribunal to act on the evidence for the purposes of the creation of a retention fund. 

4. We accept that there is uncertainty concerning the rate of discounting.  Produced in evidence was a table showing the discount rate for six major record companies in the years 1995 through 1999.  The table shows that each company was discounting against its list price in 1995.  The discounts ranged from 1.72 per cent to 8.65 per cent.  The rate did not increase noticeably over the next three years, except in the case of one company.  But in 1998 and 1999 a number of companies did increase significantly the rates of discount.

5. The table seems to reflect the opinion, expressed at a meeting of the ARIA Finance Committee, that the earlier figures did not appear favourable to ARIA’s argument.  However the later figures, especially those taken when parallel importation commenced to have an effect on the market, does provide some support for the manufacturers’ arguments.

6. It seems to us, on balance, that it is reasonable to accord to the manufacturers some of the protection they seek.  This may be achieved by ordering that, pending the final determination of the applications, the previous agreement as varied by the two Heads of Agreement be continued, save that the rate of royalty shall be that specified in the agreement less 7.5 per cent, subject to any adjustment that the Tribunal might hereafter make when it finally disposes of the applications.  In the meantime the amount that is deducted should be placed into an interest-bearing account.  An order along these lines might also have the effect of avoiding the difficulty that the Tribunal may not be able to make a retrospective order.

7. Orders to give effect to these reasons will be made on the undertakings proffered by the applicants.  Thosee undertakings were to the effect that, in relation to the difference between the amount of mechanical royalties payable calculated as a percentage of the discounted PPD on the one hand and the amount of mechanical royalties payable calculated as a percentage of PPD on the other (the Difference):

   (a)within 60 days after the end of each quarterly period until a final decision of the Tribunal, the applicants will pay the amount deducted for that quarter from the rate of royalty that is specified in the agreement (as varied)Difference for that quarter into an interest-bearing account in the names of the solicitors for ARIA and the solicitors for AMCOS;

   (b)the applicants will maintain accounting records with respect to the calculation of the amount to be paid into the accountDifference which would permit an auditing of the accounts at the order or direction of the Tribunal and the payment of the amount in the accountDifference to any person in response to an order or direction of the Tribunal;

   (c)the applicants will submit to such orders (if any) as the Tribunal makes in relation to the payment of the amount in the accountDifference and will pay such funds as are assessed by the Tribunal or as it may direct, to any person whether or not a party, adversely affected by the operation of the interim order of the Tribunal or any continuation thereof;

   (d)the applicants will to pay to the respondents an additional amount by way of interest on any money received by the respondents out of the account, such amount being calculated as the difference between the amount of interest actually earned on the funds in the account and the amount of interest that would have been received had the interest rate applicable to the account been a rate that is 1.5% above the average 90-day bank bill swap rate as published in the Australian Financial Review (the average calculated over the period between 1 January 2000 and the date of payment) and applied to the account on the last business day of each calendar month.

8. The applicants should bring in short minutes of order within 14 days.

I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Decision herein of the Copyright Tribunal constituted by Finkelstein DP, Professor Pearce and Ms Bowne

Associate to the Deputy President:

Dated:  14 June 2000

Counsel for the Applicants:	Mr A J L Bannon SC Mr R Cobden
Solicitors for the Applicants:	Gilbert & Tobin
Counsel for the Respondents:	Mr R J Webb Mr M Green
Solicitors for the Respondents:	Banki Haddock Fiora
Date of Hearing:	14, 15, 16 March 2000
Date of Decision:	14 June 2000