Is the cost of atmospheric music, stratospheric? Part 1

Ever found yourself tapping your foot at the till of your favourite clothing store or doing something more violent in that funky denim studio? Can you blame your compulsion to purchase that new bag solely on a mild personality disorder or should the background beat-of-the-street shoulder some of the blame? Facts are that atmospheric music is played by retailers and not just to soften the ring of the register but also because it is enjoyable and encourages sales. But how much do they pay and is it proportionate?

Late last year the Supreme Court of Appeal (the SCA - RSA’s highest commercial court) grappled with a rare case involving music royalties. The case, originally brought by a group of prominent retailers against the South African Performance Rights Association (SAMPRA) for charging excess rates for the licensing of background music that they played in their stores, is interesting because it is one of the very few cases on the determination of a reasonable royalty in South Africa. In this case, the court determined royalties based on international norms but not before dealing with a number of arguments related to the construction of the legislation, onus, competition law and property rights. The full case can be found here.

http://www.sampra.org.za/

Background

The retailer's obligation to pay a royalty is contained in s 9(A)(1)(a) of the Copyright Act 98 of 1978 (the Act). This section provides that in the absence of an agreement to the contrary no person may broadcast a sound recording without payment of a royalty to SAMPRA which is an accredited collecting society. This royalty is payable according to a tariff which is determined by agreement between the user and the performer and in the absence of an agreement, the determination may be referred to the Copyright Tribunal set up under the Act.

As one might expect there was a failure to reach an agreement and the matter was referred to the tribunal which then issued a ruling. No unsurprisingly too, after much debate this ruling found that a reasonable tariff lay somewhere between what the retailers and SAMPRA each thought was reasonable, with a cost order in favour of the retailers. SAMPRA appealed and there was no cross appeal from the retailers. Apparently cross though, the retailers opposed the appeal.

Basis of appeal

This can be summarised as follows:

1. There was a failure of the tribunal to consider principles of competition law in determining the royalty;
2. The tribunal’s authority to make a ruling only triggered once the retailers had established that the tariff was unreasonable which they had not done. This was effectively an argument based on onus and jurisdiction of the tribunal which SAMPRA thought had been misconstrued; and
3. That the retailers were obliged to disclose the Rand value derived from the use of  the sound recordings, which they had not done, in determining the reasonableness of the tariff

Findings

On the question as to whether completion law principles were applied, the court gave short shrift to the argument and held that these were entirely new submissions and that it would be unfair to allow this now. Afro Leo suggests that procedurally this was the right approach and that although the competition arguments would have been very interesting to understand it appears somewhat desperate of SAMPRA. In any event, this Leo wonders whether, when determining reasonableness, competition elements are naturally considered without formal recourse to of this silo of law/economics?

The construction of the Act was much debated and considered by the SCA. The Act is ambiguous in its construction and described (with reference to Dean’s Handbook of South African Copyright Law) as a “rather tortuous statutory scheme in terms in terms of which the tribunal derives its power”. Afro Leo agrees. For those interested in the doing some mind gym have a look at paras 12-30 of the judgment. Essentially, the court held that all that is required of retailers or claimant is to place evidence before the tribunal that the claim is well founded (there is no formal onus of proof) and “At the end of the day for the claimant to succeed the tribunal is required to be satisfied, on all the evidence placed before it [presumably including that of the respondent], that the claim is well founded.” This seems sensible.

Necessity of showing rand value

The question of whether the retailers should have lead evidence of the rand value they derived from use of the sound recording was considered; the argument essentially being that under the construction of S33(5)(b) of the Act, only once it had been established that this value was disproportionately lower than the proposed tariff could it be unreasonable, and that it would need to cause economic harm to the retailer. In addition, the recordings needed to sustain their business and no available alternative would serve the retailers economic interests (see paras 31- 37) . And you thought Everest was a challenge!

After hearing various experts on whether this information was available, how such a study would be conducted, what its probative value would be and sensitivities over confidentiality [the arguments are interesting], the court held that such evidence would be “prohibitively expensive and impractical as it would take too long to complete. In addition, it cannot be said that any conclusion reached could apply to all retailers” and therefore “not necessary”.

Afro Leo thinks that this is the correct ruling and wonders whether the court would take such a pragmatic approach to the evidence required to prove economic harm in trade mark dilution cases. Another reason why it seems correct is that in the Copyright Act, there exists a concept of a reasonable royalty in lieu of showing damages; implicitly recognising the difficulty of showing actual damage.

Market forces

Reasonableness and other methods for determining the tariff

The two proffered by resident Profs were the “market-based solution” and by benchmarking with tariffs used in other jurisdictions.

The market based approach essentially meant that, in the absence of an agreement, the market should be left to naturally determine the tariff. This approach was given short thrift by the court (just a single paragraph) after the Prof conceded that he was not aware of the legal framework which directed the tribunal to determine the tariff.  The court was perhaps too hasty here in its reasoning for it is still possible for the tribunal to determine the tariff, and then use a market based approach in its determination.

The remainder of the judgment focuses on benchmarking and this will be dealt with in a separate post. Ever wondered what the relationship is between Big Macs and music royalties? You will get the Whopper lowdown in Part 2.