The Intervention of Public Authorities in the Determination of Tariffs Victoriano Darias

The Ideal Scenario: Agreement between CMO and User  In an ideal scenario a CMO and the users of its repertoire come to an agreement after a negotiating process.  This outcome may be facilitated by:  The existence of clear and useful criteria;  The intervention of a mediator.  If that is not the case, the tariff may be decided by a public authority:  Ordinary Court of Justice;  Specialized Court (Copyright Tribunal);  Other specialized body;  Competition Authority.

The Rationale for the Intervention of a Public Authority  CMOs manage intellectual property rights (legal monopolies);  They enjoy a legal or de facto monopoly status, or at least a dominant position;  As established in Lucazeau, tariffs and royalties charged by collecting societies may be subject to control by competition authorities;  It could be an abuse of the dominant position enjoyed by CMOs;  In fact, irrespective of the type of authority intervening in the setting of tariffs, the approach is mostly based on Competition Law.

The Rationale for the Intervention of a Public Authority This raises three fundamental questions:  What happens during the time the public authority is deciding on the issue?  How is the public authority suppose to establish the tariff?  Is it at all justified the intervention of a public authority in the determination of a tariff?

During the Procedure for the Determination of the Tariff  The issues at stake during the determination of the tariff are the following:  Can the CMO prevent the potential user form going ahead with the intended exploitation?  Note that:  Certain right holders do not have an exclusive right;  Certain legislations establish a prohibition (with some exceptions) for the CMO to refuse granting a licence (E.g.: Germany).  If this is not the case, is the user required to pay for the licence fee and if so, what amount?  In Germany, the user would have to pay the recognized licence fee to the CMO and pay the additional part of the fee as claimed by the CMO under reservation or to a deposit.

How to Determine the Disputed Tariff  We have seen that certain criteria can be useful, but are mere indications;  Often they referenced to another value (value of the entire act of use, other tariffs, etc.);  It should reflect the economic value of rights in trade, but it is difficult to calculate it;  Similar expressions can be found in US case-law regarding CMOs tariffs:  ASCAP v. Showtime: A reasonable rate must reflect the “fair market value” of the blanket license;  “Fair market value” is defined as “the price that a willing seller and a willing buyer would agree to in an arm’s length transaction” (Equal bargaining power and equal information);  A reasonable blanket fee is the price that would be charged in a competitive market for blanket licences.

How to Determine the Disputed Tariff  In a prototypical case of monopoly rate regulation involving utilities, the rate is set so as to ensure the utility a reasonable return on its investment given its operating costs;  This standard cannot be applied to blanket licences (or individual licences);  We can try to define the socially optimal fee: the one set precisely at the point where the additional works a higher fee would encourage are less valuable to society than the alternative goods or services to which the resources would otherwise be devoted;  It is a theoretical concept, but difficult to apply in practice (too much guesswork, uncertainty and relative valuation of different productive activities).

How to Determine the Disputed Tariff  No real factual basis for setting the tariff, so authorities have to rely on comparative rates, and the fees asked for by the CMO and those accepted by the user;  So authorities merely discount the fees asked for by CMOs depending on the authority’s own sense of potential influence of undue market power and adjusting them for differences in circumstances;  Basically, this means picking a fee somewhere between a low fee proposed by the user and a high fee proposed by the CMO.

Justification of the Intervention of a Public Authority  The intervention of a public authority in the setting of a tariff may be justified in order to reduce artificially inflated fees by CMOs (above the one under competitive market conditions);  We have seen that it is difficult to establish that fee;  The reason is twofold:  A blanket licence brings together a number of individual works or other subject matter protected by a legal monopoly;  Competition rules are difficult to apply on Intellectual Property Rights, let alone on a blanket licence.

Justification of the Intervention of a Public Authority  The usual starting point of an authority when addressing a dispute on tariffs is the determination (or rather confirmation) of the monopoly status or dominant position of the CMO.  This is usually taken for granted, but some elements might not have always been taken into account.  Dominance is defined as “the position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on a relevant market, by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers ” (United Brands).

Justification of the Intervention of a Public Authority  According to the Commission Communication on Dominance, the assessment of dominance has to take into account the competitive structure of the market, and in particular, i.a. the countervailing buyer power of the customers:  “Even an undertaking with a high market share may not be able to act to an appreciable extent independently of customers with sufficient bargaining strength. Such countervailing buying power may result from the customers' size or their commercial significance for the dominant undertaking, […]. If countervailing power is of a sufficient magnitude, it may deter or defeat an attempt by the undertaking to profitably increase prices.”  “Buyer power may not, however, be considered a sufficiently effective constraint if it only ensures that a particular or limited segment of customers is shielded from the market power of the dominant undertaking.”

Justification of the Intervention of a Public Authority  Can CMOs behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers?  The answer to the first and third elements (competitors and consumers) would be yes, basically because there are (usually) no competitors and it is a B2B business.  But this is not necessarily the case regarding a CMO’s customers (licensees).

Justification of the Intervention of a Public Authority  Consider a negotiation between a CMO and a user or association of users for whom the use of the works or other subject matter is not indispensable for their activity (e.g.: the use of music in department stores).  In this case we could argue that we are in a situation of a willing seller and a willing buyer in an arm’s length transaction, so there would probably not be a dominant position nor a need for the intervention of a public authority.  One could even argue that the less indispensable the use of a work or other subject matter is for a user, the less it is justified for a public authority to intervene to determine tariffs.

Justification of the Intervention of a Public Authority  What if the works or subject matter are indeed indispensable (or almost indispensable) for the activity of the user?  Is it actually unjustified for a CMO to charge a monopoly price?  Consider the following elements:  Copyright is a legal monopoly and its holder can indeed charge monopoly prices;  This monopoly price is however mitigated by the fact that to a certain extent it competes with other copyright holders;  But, were that not the case, he would also be able to charge a monopoly price without economic justification for an intervention of a public authority (see for example the case of patents).

Justification of the Intervention of a Public Authority  According to the GVL Decision “For legal reasons, as far as the royalty in respect of equipment is concerned, and also for practical reasons in the case of claims for payment of royalties in respect of secondary exploitation, it is practically impossible for artists themselves effectively to assert such rights. Any attempt to do so is bound to fail because the individual artist is not able to verify and prove in individual cases whether, when, by whom and how often his performance has been broadcast or otherwise made public. He would, moreover, as an individual in an economically weak position, have to enter into contractual relations with a multitude of economically strong users (e.g. broadcasting companies), from whom he is entitled to claim only the payment of a reasonable royalty, and whom he may not prohibit from using his performance.”

Justification of the Intervention of a Public Authority  If a blanket licence is the only way to effectively assert a right holder’s right to a legal monopoly and this legal monopoly includes the right to apply a monopoly price, is the tariff set by a CMO at that rate an abuse of its dominant position?  Should it be challenged by a public authority?  Why not let the CMO to set the tariff to a point where it maximizes the profit for its members?  Note that:  the CMO also has an incentive to reach an agreement with the user;  There is no price under competitive market conditions anyway.

Justification of the Intervention of a Public Authority  On the other hand take into account that the ECJ has consistently held that it is necessary to draw a distinction between the existence of an intellectual property right and its exercise:  “It is conceivable that certain aspects of the manner in which the right is exercised may prove to be incompatible […] with article 85 [now article 101] where they serve to give effect to an agreement, decision or concerted practice which may have as its object or effect the prevention, restriction or distortion of competition in the Common Market.” (Coditel II)

Justification of the Intervention of a Public Authority Conclusion:  It is difficult to determine if EU competition rules justify or even oblige public authorities to intervene in the setting of tariffs unilaterally by CMOs.  However:  Public authorities should justify such interventions;  This includes performing a more detailed case-by-case analysis as regards the dominant position of CMOs, and;  Whether the set tariff constitutes an abuse.