South Africa: Copyright Tribunal Rules On Sound Recording Royalties

Last Updated: 6 December 2013
Article by Rachel Sikwane

Most Read Contributor in South Africa, September 2016

We had a rare decision of the Copyright Tribunal recently. The Copyright Tribunal is basically a process that's been created by the Copyright Act to deal with some of the licensing-type disputes that might arise in the context of copyright.  What happens is that the matter is heard by the judge who is designated as the Commissioner of Patents - presently Judge Phatudi - who then sits as the Copyright Tribunal.  One of the issues that can be referred to the Copyright Tribunal is a royalty dispute between the owners of the copyright in sound recordings (or their representatives) and people who play sound recordings in public. This is what this case was about.

The case pitted various major retailers – including Foschini, Pepkor, Mr Price, Pick 'n Pay and New Clicks – against an organisation known as the South African Music Performance Rights Association (SAMPRA). SAMPRA is an accredited collecting society that represents and collects royalties for almost the entire recording industry, including the four major record companies who do business in South Africa, namely Sony, EMI, Universal and Gallo.  All of the retailers play music in their stores, but the two sides could not agree on the royalties to be paid.

The retailers' main gripe was that SAMPRA had unilaterally set a tariff, and that it basically adopted a take-it-or-leave-it approach, when demanding payment. The retailers claimed that the tariff was inflated and without economic justification. They said that they had tried to negotiate with SAMPRA, but that the parties had been unable to reach agreement, hence the referral.

SAMPRA, on the other hand, claimed that its tariff was reasonable. It said that it had considered various factors and that it had looked at international best practice, with the UK, Australia and Canada being mentioned.   It said that its tariff was based on the square meterage of the 'audible area', in other words those parts of the store where the music can be heard even if they're inaccessible to customers. By way of example, the tariff stated that the annual fee for a store of up to 50 square metres was R500, whereas the annual fee for a store of 9000- 10 000 square metres was R11 000.

No fewer than 16 witnesses gave evidence and these included experts in economics, copyright law and a music therapist.   SAMPRA called an expert from the International Federation of Phonographic Industry (IFPI), who told the Tribunal that IFPI follows European Court of Justice principles, ensuring that performers and producers are paid equitable remuneration.  He said that the royalty should reflect the value of the performer's rights, but conceded that in reality factors like floor space are considered.  He said  that SAMPRA's model was in line with international practice, as were the amounts charged. He did, however, concede that retailers are very important customers of the recording industry, that there is a 'communality of interests', and that a negotiated tariff is the best way.

A music therapist gave evidence on how music can affect consumers' consumption in retail stores. And a specialist in environmental psychology gave evidence on the use by retail businesses of background music to achieve increased sales, and how music tempo can affect the speed at which shoppers do things. The judge said this: 'Music is not always there to be listened to, but it creates the right mood, the right environment and atmosphere for a typical shopper.'  The SAMPRA witnesses were, however, unable to help the Tribunal determine what the right tariff should be and, instead, made fairly general comments about how SAMPRA's task is to maximise royalty income, and how free markets should determine the tariff.

The retailers also led evidence.  The Tribunal was told that Foschini spends some R1 million per annum on royalties. But the retailers' main witness was the economist and the Dean of the UCT Commerce Faculty, Professor Don Ross.  He told the Tribunal that ideally prices are set by market forces and that a monopoly on the part of the service providers must be discouraged. He said this:  'Where there is competition, the market forces normally produce a reasonable price.' 

Ross said that he felt  SAMPRA's tariff was too high.  He said that it was higher than tariffs in developing countries, and that Australia's tariff was much lower than South Africa's.  He made the point that retailers don't refuse to pay for music – some had, as per the Copyright Regulations,  even paid money into escrow pending the outcome of the referral – but that they don't like having prices foisted on them. He said  he believed that some retailers would stop playing music if the current tariff was affirmed.

Ross described the Tribunal as being part of the bargaining process. He suggested that the Tribunal should try to find a tariff that 'optimizes public welfare', in other words 'a tariff that is neither too high nor too low, by which the service providers would realize profits, whereas the consumers would purchase voluntarily'. He recommended  a tariff which, for example, saw the annual cost for shops of up to 50 square metres drop down to R279.46,  which he felt was efficient but still higher than what a competitive market would  produce.

Judge Phatudi ruled that SAMPRA had been wrong to unilaterally impose a tariff. This had been wrong under both the Copyright Act and the Collecting Society Regulations:  'The section, regulations and the rule of law dictate to SAMPRA to use the correct legal process.'  The law, he said, 'obligates SAMPRA to enter into negotiations with retailers as users before determining the amount for the royalty.' The mere fact that some of the individuals at SAMPRA had previously worked at the South African Music Rights Organisation (SAMRO) and therefore knew of the retailers (reluctant!) attitude towards paying royalties did not  make SAMPRA's  take-it-or-leave- it approach procedurally fair.

The judge held that the Copyright Act, which talks of licensing 'schemes',  does allow the Tribunal to impose a tariff.  The judge therefore set aside SAMPRA's tariff and imposed a new one, making the point that this was not, as contended by SAMPRA, a deprivation of intellectual property.  He said that his tariff wasn't based on the economic value of the music (which he was unable to judge), although he did accept that music in stores does contribute to the ambience and can increase sales. He said that if retailers were to stop playing music in protest against SAMPRA's tariff, the 'ambience in South African public places will change for the worse'. But, he added,   'it will equally be undesirable to let the retailers communicate the sound recordings to the public for less, which may result in removing the bread from the table of the owners of the royalties.'   The tariff should therefore, as Professor Ross had suggested,   be one that optimizes public welfare. 

The tariff imposed by the judge did, by way of example, set the figure for stores of up to 50 square metres at R389. The judge ruled that the tariff would be operative until December 2014. He added that the CPI index could be used to determine a tariff adjustment for future years, or the parties could simply agree on a new tariff.

Let's see if the parties can reach agreement in a year's time!

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