Neway Music Limited V Hong Kong Karaoke Licensing Alliance Limited
Copyright Tribunal
CT 2/2010
Mr Huen Wong (Chairman), Ms Grace Chu (Member), Mr Kenneth Wong (Member)
Intellectual Property
23 December 2019

The Copyright Tribunal (“Tribunal”) was established in 1997 and has recently issued its first ever Decision.

The originator (“Neway”) was responsible for obtaining copyright licences for the reproduction of karaoke music videos (“KMVs”) on the computer servers (“K-Server”) of the Neway Group, a local karaoke chain. The respondent (“HKKLA”) administered and granted these licenses under a K-Server licensing scheme (“HKKLA Scheme”) on behalf of three major record labels, namely Sony, Warner, and Universal.

Neway initially raised a few complaints, but in the end the only issue that the Tribunal needed to decide on was “whether the tariff of licence fees under the HKKLA Scheme in respect of the repertoire of back catalogue KMVs1 was unreasonable”.

Reference of Licensing Scheme to the Tribunal

Under ss156(3) and 167 of the Copyright Ordinance, the Tribunal may confirm or vary a licensing scheme referred to it as it may determine to be reasonable in the circumstances by considering public interest and matters such as the availability and the terms of comparable schemes, the nature of work concerned, the relative bargaining power of the parties, and the availability to the licensees or prospective licensees of relevant information relating to the terms of the subject licensing scheme. The Tribunal 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 and has a general obligation to consider all relevant factors, in particular to “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”.

Valuation Approaches

Neway referred the HKKLA Scheme to the Tribunal to assess its reasonableness. Three valuation approaches were mentioned in the Decision.

  1. The economic benefits approach suggests that “a part of the profits which the licensee is expected to make out of the licence is to be identified as the reasonable licence fee.” Neway maintained that this approach was not reliable as there were many drivers to Neway’s profits, and the back catalogue KMVs were only one such driver. The Tribunal found that the position taken by Neway was “not satisfactory”, but was unable to consider the reasonableness of the HKKLA Scheme under this approach, as Neway refused to disclose the relevant financial information.
  2. The cost of substitution approach suggests that the licence fee should be “determined by reference to the cost of obtaining alternative intellectual property rights”. The parties agreed that this approach was not relevant. This was because even if Neway were to produce its own KMVs, the KMVs would not have featured the original artists and hence would not be a proper “substitution” to the back catalogue KMVs.
  3. The comparables approach compares other licensing schemes and is recognised by case laws as well as the Copyright Ordinance. The Tribunal considered the below as comparables.
  1. PPSEAL’s K-Server Licensing Scheme: Although the parties agreed that the starting rate of PPSEAL’s scheme was reasonable, HKKLA was of the view that the structure of the scheme was unreasonable as it did not provide for a linear increase in fees with the increase in the number of karaoke rooms and discriminated against smaller operators. The Tribunal agreed that it was unreasonable for PPSEAL to (i) charge the same licence fee for a 4-room karaoke operator as a 50-room operator or (ii) charge a substantially smaller fee per room (at a 41.53% discount) for a 120-room operator compared to 50-room operator, which amounted to unreasonable discrimination against smaller operators. Accordingly, the scheme “should not be adopted or used as an appropriate comparable in assessing the reasonableness of the structure” of the HKKLA Scheme.
  2. K-Net K-Server Licensing Scheme / Music Link Licensing Scheme: For these two licensing schemes, the Tribunal found that only the starting rates (for venues with 1 to 3 rooms) were relevant. The structures and the other rates of these schemes were not relevant, as they were designed for small karaoke bars with a few rooms and not for karaoke chains with many more rooms.
  3. June 2008 Agreement / December 2008 Offer: The Tribunal rejected the prior dealings between Neway and K-Net as comparables, as these were lump sum payments and each was not “a tariff with a scale of charges”.

Reasonableness of the HKKLA’s Licensing Scheme

The Tribunal accepted HKKLA’s submission that its K-Server Licensing Scheme tariff was reasonable as (1) it took into account that a larger operator with more rooms would have more usage of the KMVs and thus should be charged more, but (2) did not discriminate against smaller operators by charging larger operators “disproportionately smaller amount of licence fees per room” as PPSEAL did. In this regard, the HKKLA Scheme adopted a gradual sliding scale and applied a bulk discount from 5.6% to 23.9% depending on the number of rooms.

HKKLA also submitted that its scheme was reasonable when considered against what Neway needed to pay to other record labels for KMVs that have been released for 6 months or more (“Old KMVs”). The Tribunal accepted that the aggregate of the licence fees which should have been payable by Neway to EEG, East Asia and Gold Typhoon in 2013 (HK$15.4 million) could be used as a reference point on reasonableness of HKKLA’s scheme but did not accept the figure as a basis for adjustment for the HKKLA Scheme. This was because there was no evidence on the number of KMVs provided by these three record labels to Neway (to compare against the “not less than 8,000” HKKLA back catalogue KMVs) and also that the Tribunal rejected the accuracy and reliability of the hit rate data prepared by Neway as to how many times the relevant KMVs were played in the karaoke (therefore it was not possible to compare the usage of these KMVs against the HKKLA KMVs).

Under other licensing arrangements, Neway had to pay Sony BMG HK$20,000 per annum for each Old KMV of a popular artist Jay Chou and pay Sony Music HK$5,000 per annum for each Old KMV of other artists. The Tribunal noted that these figures were much higher than what HKKLA was charging, which was around HK$2,000 per back catalogue KMV under the HKKLA Scheme.

Conclusion

The Tribunal concluded that the structure and rates of the HKKLA Scheme for the back catalogue KMVs were reasonable and did not require any variation.

The Copyright Tribunal’s Powers under s156(4)

The Tribunal confirmed that it has no power to make an order to protect Neway against any claim for infringement of copyright brought by any of the record companies whose repertoire was included under the HKKLA Scheme in respect of use of the copyright works of such record companies beyond 30 June 2015, the date the HKKLA Scheme ceased operation. While s156(4) of the Copyright Ordinance states that the Tribunal’s order to confirm or vary a licensing scheme may be made so as to be “in force indefinitely”, it did not mean that the Tribunal can mandate a scheme operator to “continue a scheme indefinitely if the operator cannot or does not want to do so”. Section 156(4) empowers the Tribunal to “determine the duration of the order and not the longevity of the scheme”, thus the Tribunal does not have the power to make any order under s156(3) in relation to a time period for which no licensing scheme was in operation.