On 23 December 2019, the Copyright Tribunal (“Tribunal”) handed down its decision on a reference brought by Neway Music Limited (“Neway”) concerning the reasonableness of the licence fees charged under a licence scheme operated by Hong Kong Karaoke Licensing Alliance Limited (“HKKLA”) for the reproduction of karaoke music videos (“KMVs”).
After 37 days of hearing, the Tribunal found the structure and the rates of the back-catalogue repertoire of HKKLA’s karaoke server licensing scheme (“Licensing Scheme”) to be reasonable and made no variation to the same.
The decision is the first ever substantive decision by the Copyright Tribunal since its establishment in December 1997 under the Copyright Ordinance (Cap. 528) (“Ordinance”).
Neway was part of the Neway Group which operates the largest karaoke chain in Hong Kong and was responsible for obtaining the relevant licences for the provision of karaoke services for the group.
HKKLA was a licensing body authorised by Sony Music Entertainment Hong Kong Limited, Warner Music Hong Kong Limited (and EMI) and Universal Music Limited for the negotiation and granting of reproduction licences of their KMVs to karaoke establishments in Hong Kong and Macau as well as the collection of licence fees from its licensees.
By Notice of Application dated 9 August 2010, Neway complained, inter alia, that the tariff of licence fees charged under the Licensing Scheme was unreasonable/excessive and sought adjustment of the same as the Tribunal might determine to be reasonable pursuant to s. 155(3) and/or s. 156(3) of the Ordinance.
As a result of Neway’s change of position in its written closing submissions, the main issues before the Tribunal were whether (a) HKKLA’s tariff of licence fees under the Licensing Scheme, and having regard to the terms upon which the licences for the same were being offered and granted, was unreasonable; and (b) if the tariff was held to be unreasonable, what would the reasonable tariff be.
Applicable principles (i):
Jurisdiction of the Tribunal
Under the Ordinance, the Tribunal is empowered to exercise control over licensing schemes operated by, or licences granted by, licensing bodies. The purpose of the establishment of the Tribunal is to prevent copyright owners from abusing a monopoly or near monopoly in their dealings with those who wish to exploit their copyright works.
Broadly speaking, such control is only exercisable where a licensing scheme or a licensing body is involved. It is important to note that a copyright owner is under no obligation to licence his works by way of a licensing scheme or having a licensing body to administer his copyright works on his behalf. If he does neither, the refusal of granting a licence and the terms under which the copyright works are to be licensed would not be subject to the jurisdiction of the Tribunal.
In this case, there was no dispute that HKKLA was a licensing body and its licensing scheme was a licensing scheme for the purpose of s. 145(4) and s. 145(1) of the Ordinance respectively.
Applicable principles (ii):
Approach of the Tribunal
Section 167 of the Ordinance provides for the factors which the Tribunal shall have regard to when determining what is reasonable in respect of a licensing scheme or a licence.
These factors include (a) the availability of other schemes or 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 scheme or licence in question.
In exercising its powers, the Tribunal is to ensure that there is no unreasonable discrimination between licensees under the scheme or licence to which the reference relates and licensees under other schemes operated by or other licences granted by the same person or any other person.
The Tribunal has a general obligation to have regard to all relevant considerations and particularly 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.
Insofar as the approach to be adopted in determining whether a tariff is reasonable, the Tribunal referred to the classic test of “willing buyer and willing seller” which has been frequently adopted by the UK Copyright Tribunal. In short, the test concerns the proper rate which would be agreed upon between a willing licensor and a willing licensee.
The importance of comparables is recognised by the Tribunal not only because s.167(1)(a) requires the consideration of schemes and licences “to other persons in similar circumstances”, but also because it amounts to the best available information concerning the level of a reasonable tariff.
In assessing whether a scheme or a licence would constitute a comparable, the driving consideration is commercial reality. The Tribunal noted the UK Copyright Tribunal’s view in AEI Rediffusion Music Limited v Phonographic Performance Limited that “the Tribunal is entitled to find a licence of a different legal right to the one in dispute as being relevant as a comparator if, in all circumstances, this is appropriate. Likewise, it can disregard a licence of the same legal right if it is inappropriate as a comparator. The task of the Tribunal is to settle rates of remuneration for the use of copyright material, and it seems to us that the driving consideration should be commercial reality.”
The Tribunal would consider the circumstances leading up to the outcome of a potential comparable to check whether special considerations would deprive its comparability in relation to the tariff under review.
A karaoke server (“K-Server”) system is a local area network in which a main computer is used as a server in the network for the uploading, storing and reproduction of copies of all digital KMV files in that local karaoke network. The network is connected to karaoke terminals located in each karaoke rooms where patrons will be able to play and sing the KMVs on demand. When a KMV is selected by a patron, a copy of the digital file of that KMV will be reproduced and stored as a transient or cache copy in the karaoke terminal’s system.
Therefore, since s. 23 of the Ordinance restricts, inter alia, the storing of a work in any medium by electronic means and making of copies which are transient, a K-Server licence is required to lawfully carry out the aforesaid reproduction.
An important feature of the K-Server licence in question is that it is granted in the form of a blanket licence i.e. the licensee is granted the right to reproduce all licensed KMVs for a single stated fee regardless of the KMVs usage.
The Tribunal accepts and attaches significant weight on the fact that the right to use, the immediate access and playing of KMVs of an extensive library of KMVs from different periods of times by a variety of artists, and the enabling of simultaneous access by different patrons all constituted important benefits to operators of karaoke establishment like Neway.
Turning to the tariff of HKKLA’s K-Server Licensing Scheme for “back catalogue” KMVs (KMVs which have already been commercially released in the market for a certain period of time), the Tribunal noted that (a) it is calculated by reference to number of rooms with karaoke facilities. According to HKKLA, number of rooms was adopted as the basis of calculation for ease of administration; (b) it is granted in the form of blanket licence; and (c) the repertoire offered by HKKLA was highly valuable since the record companies were local companies of the largest record labels in the world.
One of the most contested issues before the Tribunal is the comparability of PPSEAL’s K-Server licensing scheme. This scheme was introduced in 2005 when karaoke establishments had to purchase KMVs in physical discs to provide karaoke service to their patrons. At that time, karaoke establishments had to maintain a large library of KMVs in their premises to make available to their patrons a sufficient selection of KMVs. They would also need to replenish the physical discs of each KMVs due to wear and tear. Record companies were able to generate substantial profits from the sale of physical discs of KMVs. However, subsequently, karaoke establishments stopped purchasing physical discs to play KMVs when they began to use k-server system.
The tariff of PPSEAL’s K-Server licensing scheme from Jan 2007 up to March 2012 in question was as follows:
- Up to three rooms: HK$16,000 x CPI(B) (ie Consumer Price Index B) per location per annum; or
- Four to 50 rooms: HK$32,000 x CPI(B); and
- Each additional room in excess of 50 rooms: HK$160 x CPI(B) per room per annum.
Whilst HKKLA and Neway agreed that the starting rate of the PPSEAL’s K-Server licensing scheme was reasonable, the reasonableness of the structure of the scheme was disputed by HKKLA.
HKKLA’s submissions is that the PPSEAL tariff structure fails to reflect the difference in usage of KMVs between a small and a large karaoke operator. In short, there is no reason why a karaoke operator with four rooms would pay the same licence fee as a karaoke operator with 50 rooms since the more rooms there was, the more usage there would be. It follows that the tariff structure was biased in favour of big karaoke establishments resulting in unfair discrimination against smaller operators, which the Tribunal was obliged to avoid under the Ordinance. The PPSEAL tariff’s failure to account for higher usage of copyright works by large karaoke operators resulted in a conflict with a normal exploitation of the copyright works under s. 167(3) of the Ordinance.
The Tribunal rejected Neway’s characterisation of usage under the K-Server licence, namely to merely compensate for the loss of sales of physical discs, because such characterisation disregards the value and enhanced benefits of a K-Server system over physical discs. The Tribunal also regarded that the public performance licence was irrelevant to the determination of the reasonableness of HKKLA’s tariff and which is currently the subject matter of another reference. The Tribunal accepted HKKLA’s submissions and came to the conclusion that the structure of the PPSEAL tariff was and is unreasonable.
After dismissing the relevance of other comparables before the Tribunal and considering all the relevant circumstances, the Tribunal found the structure and the rates of HKKLA’s K-Server licensing scheme to be reasonable as it reflected the difference in usage amongst different sizes of karaoke operators both in terms of total licence fees payable and per room licence fees and made no adjustment of the same.