UK: Digital Economy Act: Government Confirms Cost Allocation Ratio for Initial Obligations

Last Updated: 11 October 2010
Article by Chris Watson, Susan Barty and Scott Fairbairn

The new coalition Government has published its response to the recent on the allocation of costs of implementing the initial obligations set out in the  Digital Economy Act (the 'Act').  Under the Act, Internet Service Providers (ISPs) will be required to process copyright infringement reports produced by rights holders, to notify subscribers that their accounts have been associated with copyright infringement, and keep lists of alleged infringers. The Government has determined that the apportionment of costs should be split in the ratio of 75:25, with rights holders paying the majority share.

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Under the Digital Economy Act, ISPs will be required to send notifications to subscribers who have been identified in relation to alleged infringements of copyright. ISPs will also be required to maintain (anonymised) records of the number of times an individual subscriber has been so identified, to maintain lists of those most frequently identified and to provide copyright owners with anonymised lists on request (together the 'Initial Obligations'). It is envisaged that these Initial Obligations will be underpinned by a Code of Practice to be drawn up by Ofcom.

These proposals have been subject to considerable scrutiny and have attracted significant attention due to concerns that 'infringers' may be identified without due process of law and that account holders identified as infringers may have 'technical measures', including disconnection, taken against them. In addition rights holders, ISPs and consumers hold predictably differing views on who should bear the costs of the new proposals.

In its latest consultation response the new coalition Government has decided that rights holders should bear 75% of the costs of the Initial Obligations, and that ISPs should bear the remaining 25%. These costs will be calculated on the basis of the costs of an 'efficient operator' as determined by Ofcom. The costs concerned include the cost of sending notifications to alleged infringers, maintaining records of alleged infringements, establishing and running an appeals mechanism, and Ofcom's incurred costs as regulator.

The Minister for Communications, Ed Vaizey, explained that the 75:25 split was decided upon because rights holders would be the main beneficiaries of the system.

Rights holders had been campaigning for a 50-50 split with ISPs, whilst ISPs argued that they should not bear any of the costs at all. The service providers' trade body the ISP Association (ISPA) has criticised the decision, saying:

"ISPA has consistently argued for the beneficiary pays principle and is disappointed with today's announcement...full costs recovery for serious law enforcement cases is an established rule and ISPA sees no reason why it should not be the case here".

ISPs have also expressed concern that this decision may also have the effect of pushing up the price of home broadband for consumers. However, the Government has responded to ISPs' concerns by explaining that "placing part of the costs on ISPs mean they have a real incentive to ensure they adopt the most effective and efficient process in processing copyright infringement reports and issuing notifications".

One of the main criticisms of the plans raised by rights holders has been that their detection costs are not included in the costs, which the Government considered to be largely "business as usual" costs that "copyright owners would face as part of protecting their own copyright material".

Meanwhile Ofcom has consulted on the Draft Code of Practice that will underpin the Initial Obligations. Many interested stakeholders have responded to the Draft Code, and their responses have been published. A number of respondents are critical of various aspects of the Draft Code, including the proposal of a cumbersome system whereby rights holders must notify ISPs in advance of the number of copyright infringement reports they are likely to submit. They have also raised concerns over the reliability of technology that will be used.

The current proposals allow subscribers to appeal against their inclusion on lists of alleged repeat infringers to an independent appeals body. The precise details of how this will work in practice are yet to be determined. However, oral hearings are framed in the Draft Code as likely to be appropriate only in 'exceptional circumstances'. The appeals process (as outlined in the Draft Code) allows a subscriber not to disclose his or her identity to the rights holders involved.

The Government response on costs also confirms that subscribers will not be charged for making an appeal against notification letters or their inclusion on lists of infringers, rather the costs will be apportioned in the 75:25 ratio between rights holders and ISPs discussed above. However, the Government reserves the right to introduce a charge if it believes that a large number of 'vexatious appeals' result. This language may concern consumers and advocates of human rights, many of whom will believe that the right to an independent review of the material facts in each case is fundamental and that the notion of "appeal" against a unilateral decision without verified evidence is inappropriate.

The Digital Economy Act was in the press again recently when in July two of the UK's largest ISPs, BT and TalkTalk, sought to judicially review the Digital Economy Act in the High Court on the basis that the legislation was rushed through Parliament without sufficient scrutiny and that it could harm the basic rights and freedoms of citizens. The court's verdict is expected shortly, as is Ofcom's final Code of Practice.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 11/10/2010.

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