United States: Are Cloud Service Providers Subject To Copyright Levies?

Summary

• The recent ruling of the European Court of Justice (ECJ) in Austro-Mechana (March 24, 2022, C-433/20) sheds light on two open questions: Whether private copies stored in a cloud fall under the EU private copying exception (they do) and whether cloud storage providers have to pay statutory levies for such copies (they might).
• EU copyright law allows for an exception to the reproduction right for copies made for private use, which has long been implemented into national laws by all Member States. Private copies, therefore, do not require the prior approval by the rights-holder.
• With the Austro-Mechana judgement, the ECJ has now clarified:
  • that the private copying exception is not limited to physical means, but also applies to private copies of works stored in a cloud; and
  • that Member States must provide for a fair compensation to right holders for the potential harm suffered by such permitted reproductions of their works, which can, but does not have to determine the cloud service provider as the debtor for such copyright levy. Details of the compensation scheme fall under the broad discretion of the Member States.

  A potential levy obligation for cloud service providers therefore needs to be determined based on an EU country-by-country basis and depends on the wording of the current national private copying exceptions in each Member State.

The case at hand: German cloud service provider and Austrian customers

The Austrian copyright collecting society Austro-Mechana had applied to the Commercial Court of Vienna for an order, seeking payment of private copying levies from "Strato," the provider of a cloud storage service called "HiDrive." While Strato has its seat and servers in Germany, it also offers its storage services to persons in Austria.

Under Austrian copyright law, "to place the storage media or reproduction device on the market" is the relevant act to which the Austrian private copy levy applies (Sect. 42b Austrian Copyright Act). Strato contested Austro-Mechana's request, arguing that the levy only applies to physical "storage media" but not cloud storage services. Strato further argued that it had already indirectly paid such a levy when buying its servers in Germany as a component the price charged by the manufacturer/importer of these servers. In addition, Strato argued, its Austrian users had already paid a levy as part of the price for the devices (e.g., mobile phones, PC, tablets) used for uploading content to Strato's cloud.

The Commercial Court Vienna dismissed Austro-Mechana's motion, outlining that Strato does not make "storage media" available to its customers, but rather provides them with an online storage service. Upon appeal, the Higher Regional Court of Vienna acknowledged that, under ECJ case law, it was not clear whether the storage of content via cloud computing falls under the scope of the InfoSoc-Directive's private copying exception. Accordingly, the court referred to the ECJ for clarification on this matter.

The ECJ's judgment in Austro-Mechana (March 24, 2022, C-433/20)

The ECJ's ruling sheds light on two questions: whether private copies stored in a cloud fall under the EU private copying exception (they do) and whether cloud storage providers have to pay levies for such copies (they might). In detail:

Private copies stored in a cloud fall under the EU private copying exception

Firstly, the ECJ finds that the private copying exception of Article 5 subsec.
2 b) InfoSoc-Directive does in fact cover the saving of copies of works for private purposes in a cloud storage space.

The relevant sticking point is the provision's term of reproductions on "any medium." As the legal text does not give any interpretation or limitations as to what devices deployed by the user might be covered by this term, the ECJ opts for a broad interpretation of this concept. In particular, the court expressly refers to the need for the current law to adapt in order to correspond to technological developments as well as to the principle of technological neutrality, which the court has highlighted in a number of previous judgements. In accordance with an earlier judgment from 2015 (C-463/12 – Copydan Båndkopi), the ECJ further underlines that the fact that the storage space made available to the user on a server belongs to a third party (i.e., to Strato and not the reproducing user) is not decisive in this regard.

As a result, cloud service providers are not at risk for being held indirectly liable for copyright infringing reproductions made by their users. This relief only applies where the reproductions made by cloud users actually serve private purposes only. As the ECJ points out, where the cloud is of a "dual functionality," i.e., where the content is not only stored in the cloud for the uploading user but also made available to the public (e.g., to registered users of the platform), this constitutes a separate relevant act under copyright law. Such making available would exceed the private copying exception.

Cloud storage provider may or may not be subjected to levy

Secondly, the ECJ finds that cloud storage providers may be subjected to the national levy scheme—but that it is not mandatory for the Member States to do so.

The ECJ stresses that rights-holders must be compensated for the private copying exception, which already follows from the clear wording of Article 5 subsec. 2 b) InfoSoc-Directive. Thus, the EU Member States are obliged to provide for a system of fair compensation. According to the ECJ's settled case law, however, any further details of such a compensation scheme are under the discretion of the Member States, including as to who must pay that compensation.

The ECJ finds it compatible with EU law, if a national compensation scheme

As stated in previous judgments, the ECJ underlines the fact that the national compensation schemes do not have to subject the copying users themselves to a demand for compensation where this would impose practical difficulties. Accordingly, for practical reasons, Member States have opted for levies on manufacturers, importers, and traders, considering that private copies made by a single person usually, on their own, would not amount to a compensable harm to the rights-holder. The ECJ finds that similar considerations apply with regard to cloud storage of copies.

• subjects  both the media used for copying content in a cloud on the user's end (e.g., mobile phones, PCs, and tablets) and the producer/importer of the servers deployed by the cloud storage provider, but not the actual provider of the cloud storage services  (i.e., Strato), to a demand for compensation under the private copying exception.

The ECJ has furthermore pointed out that the burden of the levy will ultimately be borne by the private user who pays that price, in a manner consistent with the "fair balance," since that system enables the persons responsible for payment to pass on the amount of the private copying levy in the price charged for making the reproduction equipment, devices, and media available, or in the price for the copying service supplied.

Correspondingly, the ECJ outlines that it falls within the discretion of the national legislator to define the fair compensation system. This includes the decision to provide for a scheme, in which the producer or importer of servers is required to pay the private copying fee, with the fee being passed on economically to the purchaser of such servers, in combination with the introduction of a private copying fee on the media integrated into the connected devices used for reproductions in cloud computing storage space (e.g., mobile telephones, computers, and tablets).

Thresholds for a national levy system governing cloud storage providers

If a Member State determines that cloud service providers owe compensation for private copying, such an obligation would have to meet the following criteria as established by the ECJ's case law and the InfoSoc-Directive:

• The compensation to be paid by cloud storage providers must be linked to and reflect the potential harm to rights-holders caused by reproductions by their users residing in the territory of the Member State.
• Where prejudice to rights-holders is minimal, a compensation obligation would not be justified.
• The overall fee paid to rights-holders (i.e., stemming from a multitude of devices, cloud storage) may not exceed the potential harm (i.e., no overcompensation).

Both legislators aiming to extend their levy provisions to cloud storage and national courts deciding on whether collective management organizations (CMOs) are rightfully asking for levy payments from cloud storage providers will have to consider these criteria. Such an assessment may require empirical studies.

Finally, the national legislator would have to determine how to cope with cloud services deploying servers that are located outside of their jurisdiction since current private copying levies are linked to physical media and storage produced in or imported to/placed on the market in the national territory.

Outlook

In the Austro-Mechana case, the Higher Regional Court of Vienna will now have to assess whether the current Austrian levy provision allows for a payment obligation of cloud service providers and, if so, whether such a compensation is in line with the criteria of EU law.

This judgment will have significant implications beyond this single case. CMOs have already taken the view that the decision opens the door for private copying levies from cloud service providers. However, such a compensation obligation will depend on the wording of the current national compensation provisions in each case, both as regards the subjected persons (e.g., manufacturers, importers, traders, persons putting storage on the market) as well as the storage media in question.

Based on the foregoing, it remains to be seen how the respective national legislators of the EU's 27 Member States will react to the Judgment and if adjustments to the existing levy schemes will be made.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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