The Copyright Tribunal (“Tribunal”) handed down its first ever substantive decision (Neway Music Limited v Hong Kong Karaoke Licensing Alliance Limited CT 2/2010 (“Decision”)) on 23 December 2019. The action was initiated by Neway Music Limited (“Neway”) who sought a determination from the Tribunal as to whether the fees charged under the license scheme (“Scheme”) operated by Hong Kong Karaoke Licensing Alliance Limited (“HKKLA”) for reproducing karaoke music videos (“KMVs”) in the Neway’s karaoke outlets were reasonable.
1. Jurisdiction of the Tribunal
The Tribunal is an independent quasi-judicial body established in 1997 under section 169 of the Copyright Ordinance (the “Ordinance”). The Tribunal is empowered to hear and resolve specific types of disputes relating to the use and licensing of copyright works. One of the specific disputes concerns licenses granted by, or licensing schemes operated by, licensing bodies in the copyright and related areas. The terms “licensing schemes” and “licensing bodies” are defined in sections 145(1) and 145(4) of the Ordinance respectively. Broadly speaking, anyone who considers the terms of an offered licence unreasonable, or has been unreasonably refused a license under a licensing scheme, may refer to the matter to the Tribunal.
Neway is a member of the Neway Group operating different karaoke outlets under the trade names of “Neway”/ “CEO” / “CEO Neway” in Hong Kong. To secure music licenses for karaoke outlets within the Neway Group, Neway entered into the Scheme with HKKLA which commenced on 1 July 2010 and ended on 30 June 2015.
HKKLA was a licensing body authorized by the three major record labels (namely Sony Music Entertainment Hong Kong Limited, Warner Music Hong Kong Limited and Universal Music Limited, collectively “Record Companies”) to negotiate and grant licenses for approved KMVs and collect licence fees from physical outlets / establishments providing karaoke entertainment in Hong Kong.
There are no disputes that HKKLA was a “licensing body” and the Scheme was a “licensing scheme” within the Ordinance and the Tribunal’s jurisdiction in the present case is not challenged. KMVs fall within the definition of “film” under section 7 of the Ordinance, and reproduction of KMVs amount to “copying” of a film restricted under section 23 of the Ordinance such that license from the copyright owner (ie HKKLA) is required for the reproduction in order to prevent infringement of the copyright work.
3. Issues at the Trial
While the Scheme covers the licensing of two types of KMVs (ie “New Releases” and “Old KMVs”), only licensing of the Old KMVs was in issue at the trial. The main issues for the Tribunal to determine were :-
a. whether the tariff of license fees charged under the Scheme in respect of the repertoire of Old KMVs were reasonable, having regard to the terms upon which the license were being offered and granted; and
b. if the Tribunal finds the tariff to be unreasonable, what the reasonable tariff should be.
4. Factors to consider under the Ordinance
In determining whether a licensing scheme or a license is reasonable, section 167(1) of the Ordinance sets out the following factors to be considered :-
a. the availability of other schemes, or the granting of other licences, to other persons in similar circumstances;
b. the terms of those schemes for licences;
c. the nature of the work concerned;
d. the relative bargaining power of the parties concerned; and
e. the availability to the licensees or prospective licensees of relevant information relating to the terms of the licensing scheme or licence in question.
The Tribunal in exercising its power shall ensure that there is no unreasonable discrimination between licensees (or prospective licensees) under the same scheme or different schemes operated by the same person (section 167(2)). Further, the Tribunal has a general obligation to consider all relevant factors and in particular, whether the exercise of its power will result in a conflict with a normal exploitation of the work or will unreasonably prejudice the legitimate interests of the copyright owner (section 167(3)).
5. Valuation approach taken by the Tribunal
The Tribunal considered the following three approaches when assessing the reasonableness of the license fee of the Old KMVs under the Scheme :-
5.1 Economic benefits approach
Under this approach, part of the profits which the licensee is expected to make out of the license is to be identified as reasonable license fee.
To adopt this approach in the present case, the profits information of Neway (or the Neway Group) relating to the licensed rights of the Record Companies’ KMVs (“financial information”) is required. Neway rejected this approach and in fact did not provide such financial information. The Tribunal indicated that the approach could have been considered if it was not for Neway’s failure to disclose such financial information.
5.2 Cost of substitution approach
With this approach, a licence fee is determined by reference to the costs of obtaining alternative intellectual property rights.
The cost of obtaining licences from the Record Companies for reproduction and the cost of producing the KMVs by Neway would need to be referred to. Both Neway and HKKLA rejected this approach for reason that there is no such alternative intellectual property rights. If Neway were to produce its own KMVs, original artists would not participate in such KMVs and these KMVs could not have substituted the Old KMVs in question.
5.3 Comparables approach
In this approach, comparison would be made to other licensing schemes to determine the reasonable license fees. The Tribunal adopted this approach and considered whether any of the three KMV licensing schemes in Hong Kong in the past may constitute a suitable comparator against the Scheme.
A comparator is crucial in light of section 167(1)(a) which requires the Tribunal to have regard to other schemes and licenses “to other persons in similar circumstances” (see item 4 above). Following the UK Copyright Tribunal, the driving consideration in assessing whether a scheme or license would constitute a comparator is the commercial reality. When assessing the suitability of other schemes or licenses as a comparator, the Tribunal would consider not just the outcome of but also the circumstances surrounding the negotiation of such other schemes or licenses and see whether there were any special circumstances which may deprive these other schemes or licenses from supporting the tariff under review.
Having considered the three schemes above-mentioned, the Tribunal dismissed the relevance of those schemes and rejected them as being suitable comparators to the Scheme. In short, the three schemes were not relevant for reasons that the schemes either (i) discriminate smaller operators of karaoke outlets; (ii) were designed for small karaoke bars with a few rooms as opposed to karaoke chains under the Scheme; and/or (iii) offer lump sum payments instead of a tariff with a scale of charges under the Scheme.
6. Determination of the Tribunal
The Tribunal noted that the Scheme adopted a gradual sliding scale and depending on the number of rooms in the karaoke outlet, a bulk discount from 5.6% to 23.9% was applied. Therefore, the Tribunal found that the Scheme was reasonable since :-
a. The tariff structure under the Scheme aligned with the principle that the more one uses the copyright work, the more license fee one should pay; and
b. The Scheme did not discriminate against smaller karaoke outlet by charging larger karaoke outlet disproportionately smaller amount of license fees per room.
As the structure and the rates of the Scheme were reasonable, the Tribunal did not consider necessary to make any variation of the Scheme.
7. Other issues
Another notable issue in the Decision is the limitation of the Tribunal’s power under the Ordinance. Section 156(4) provides that the Tribunal’s order to confirm or vary a licensing scheme may be made to be “in force indefinitely or for such period as the Tribunal may determine”. Thus, Neway submitted that the Tribunal has power to protect Neway against any infringement claims brought by the Record Companies for use of the repertoire under the Scheme after 30 June 2015 (ie the date on which the Scheme ended). The submission was rejected by the Tribunal.
The Tribunal emphasised that section 156(4) empowers the Tribunal to determine the duration of its order but not the longevity of the Scheme. Section 156(4) does not give power to the Tribunal to dictate the operator of a licensing scheme to continue the scheme, in case the operator cannot or does not want to do so. Given that the Scheme ended on 30 June 2015, the Tribunal has no power to extend the Scheme. Therefore, Neway is exposed to potential claims of copyright infringement from the Record Companies for use of the KMVs concerned after 30 June 2015.
The Decision illustrates the extent of power and the limits of such power of the Tribunal in resolving disputes concerning the use and licensing of copyright works. In addition, the approach considered and adopted by the Tribunal in determining the reasonableness of a licensing scheme or license should give guidance to those (i) negotiating and drafting a licensing scheme / a license and (ii) considering whether to submit the licensing scheme / the license to the Tribunal for a determination. However, an appeal against the Decision has been filed and thus the Decision is not final.
If you have any queries regarding the above eNews or any other questions relating to licensing agreements or intellectual property disputes in Hong Kong or China, experienced lawyers in our Intellectual Property Department will be pleased to assist you.