Copyright Law Review Committee

IFPI Comments on the Copyright Law Review Committee Issue Paper

'Copyright and Contract'.

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1 August 2001

EXECUTIVE SUMMARY

The Copyright Law Review Committee comments paper looks at the contractual arrangements between right holders and the end user of creative content.

Copyright provides a system of protection to right holders that is available irrespective of a contract between the right holder and the user. Naturally, licensing contracts develop within this framework and often specify usage rights that are also covered by Copyright. Aside from that, licensing contracts, like any kind of contract, have to relate to a wider variety of aspects of the transaction in order to be useful and to create a basis of understanding among the parties. In so far, contracts with the end user may go beyond mere copyright provisions and touch upon other areas of the law. This is not only a phenomenon of rather general nature but also seems inevitable given the purpose of contractual arrangements.

In this light, it is little surprising that none of the legal systems surveyed in the course of preparing this response have found it necessary to create specific links between copyright and contract law in general terms. Indeed, IFPI is not aware of any frictions between contractual practice and Copyright in this area.

INTRODUCTION

IFPI, the international federation representing the recording industry, represents more than 1,700 producers of sound recordings world-wide.

IFPI welcomes the opportunity to comment on the discussion paper on 'Copyright and Contracts' issued by the Copyright Law Review Committee in June 2001.

The following comments address first the questions raised in regard to Copyright exemptions and mass market agreements in Australia, provide the international background information that might be useful, and finally refer to the implications on Copyright of developments in the area of applicable law and jurisdiction.

I. THE SITUATION IN AUSTRALIA

IFPI is not aware of any friction between Copyright and contractual arrangements with users of creative content.

Contractual arrangements are used in the area of Copyright as well as anywhere else in so far as they are necessary and useful to either party to understand the nature of the transaction. As far as the sale of physical copies (i.e. of CDs) is concerned, the transaction does not usually entail the use of a detailed contractual agreement. The use of online means of dissemination and licensing may - for music just as much as for other products and services - offer more flexibility and more room for consumer choice. As always, the level of detail in the contract will depend on the need to describe the transaction. The specifications of the product or service (which may be a physical copy, a license and/or a usage right), and of the obligations and benefits resulting from the agreement, are the very essence of any contractual arrangement.

Consequently, Copyright does not, for creative content in general, provide for restrictions on modes of agreements with end users. There is, both in Australian law and in the law of the other countries surveyed, an exemption to the general rule as far as computer programs are concerned: in regard to a very specific kind of use a rule has been formulated to ensure that contracts do not preclude users from doing the most essential things necessary to make sensible use of the software.

The specific situation for Computer Programs:

S. 47H of the Australian Copyright Act contains a rule about the validity of contracts as regards two main groups of activities:
- certain narrowly defined acts necessary on the side of the user in order to make the software run and function properly (i.e. to run the program, make a back-up copy, correct errors as a self-help measure where necessary, ensuring security levels)
- acts done in order to create an interoperable product in the absence of other means of obtaining the information necessary. This provision is aimed at dealing with competition law concerns and is therefore not well placed in the Copyright Act neither does it carry much weight in practice.

There is no need to single out certain exemptions for the purposes of contract law:

In academic circles it has been argued that there may be a benefit in differentiating between different classes of exemptions depending on their basis and purpose. Though this may be at first glace intellectually satisfying it bears no benefit and makes little sense on the market place.

All exemptions in Copyright are carve-outs and limitations to the exclusive rights bestowed by the Copyright Act inter omnes. They merely prevent right holders from invoking exclusive rights against the beneficiary of the exemption. In so far, both the right of the rightholder and the carve-out from it in the form of an exemption are distinctly different from and unconnected to contractual agreements that are valid only inter partes. In particular, exemptions do not create any prejudice to individual agreements and do not call for a move to impede the reliability of agreed terms among parties.

As a matter of fact and as shown above, the existing specific rules on contractual arrangements with end users of software do not attempt to secure any such specific kind of use. They merely aim to prevent obvious contradictions in arrangements that could result if clauses were interpreted in a way that would hinder those ways of use that are necessary for the fulfillment of the contract or required by competition law concerns.

In this light, a change in the system at this stage would not only be untimely but also it would seriously lessen the level of predictability that is the very basis for the development of the new business models that have only recently started to emerge.

II. SURVEY OF THE SITUATION IN NATIONAL LAW AND REGIONAL REGULATION OUTSIDE AUSTRALIA

The following overview of international legislation and regulation refers to the issues raised in the CLRC and is meant to provide background information on those countries and regions of interest (European Union, US, Canada).

A. European Union

(1) Copyright Directive[1]

The Copyright Directive does not contain any provisions on contracts between right holders and user. The Directive applies to all groups of works and objects of neighboring rights but leaves existing directives in the area of Copyright such as the Computer Programs Directive and Database Directive untouched.

The Copyright Directive provides for strong exclusive rights and contains an agreed maximum standard of exemptions that member states may not go beyond. Member states do not have to and, as far as the implementation process allows for conclusions, do not aim to amend their laws to include new exemptions.

The Copyright Directive also provides for strong protection of technological measures against circumvention as well as prohibition of circumventing devices. The Copyright Directive respects the rightholders need to create a market place to begin with and puts forward incentives to take the existing balance and expectations into account. The Directive creates the basis for member states to react to market developments and to influence and steer the market by means of appropriate measures mainly in view of so called public purpose exemptions. However, the Directive does not in itself limit the overreaching protection against circumvention and circumventing devices.

It is important to note that for on demand services, member states are prevented from intervening in the market if these services are offered in the framework of contractual arrangements. Article 6 (4)(4) provides that subparagraphs 1 and 2 (on national adaptation of the level of integrity) do not apply 'to works and other subject-matter made available to the public on agreed contractual terms in such a way that members of the public may access them from a place and at a time individually chosen by them' (emphasis added) - stressing by reference to contractual terms the importance of respecting the contractual arrangements on the online market place.

(2) Computer Programs Directive[2]

As the paper of the CLRC points out, Article 5(1) expressly recognises the possibility that the exceptions may be contractually modified. The Directive contains provisions on contracts with end users, which are aimed at dealing with specific characteristics of the exploitation and use of software. The provisions are limited to narrowly defined specific situations and are subject to a catalogue of conditions. The limitations to contractual freedom can be found in Article 9 with regard to decompilation, back-up copying or observation, study or testing in the course of normal use. In so far, these provisions apply only to lawful users and do not lend themselves to any conclusions with regard to other works or subject-matters. Article 5(2) only allows the making of one back-up copy. Article 9(1) only prevents contractual provisions that would prohibit the making of the back-up copy itself. It does not aim to prevent contractual provisions that specify e.g. the further transfer/distribution of the back-up copy. In so far, it is a very limited provision touching upon the chore or of what is necessary from the user point of view merely to prevent self-contradicting contractual arrangements.

The provisions on interoperability are motivated by competition policy considerations which are unique to the market place for software. With regard to decompilation, Article 6 (3) states that, in accordance with the Berne Convention, the provisions of this Article may not be interpreted in such a way as to allow its application to be used in a manner which unreasonably prejudices the right holder's legitimate interests or conflicts with a normal exploitation of the computer program.

(3) Database Directive[3]

The Database Directive, adopted in 1996, requires the recognition of two separate protection systems. Member States have to protect databases by copyright as intellectual creations and introduce a sui generis right for compilations of data, including non-creative databases, based on the substantiality of the investment. In both cases, the protection does extend to the information and elements contained in the database. Under the sui generis rights regime, the exclusive rights do not cover the use of insubstantial parts of the database.

The directive contains one provision for each protection regime (Copyright and sui generis right) limiting contractual freedom in respect to contracts with end users. For databases protected on the merit of their originality, Article 6 (1) provides that the lawful user of a database, i.e. somebody who has concluded a contract about the use of the database, shall always have the right to access the contents of the database and to make the normal use of its contents as far as necessary. For databases protected under the sui generis right regime, (Article 8 (1)) provides that the maker of a database which has been made available to the public may not prevent the lawful user of the database from extracting and/or re-utilising insubstantial parts of its contents for any purposes whatsoever.

Again, these provisions are limited in application and based on very specific reasoning that do not apply to any other works and subject-matter. Both Article 6 and Article 8 are restricted to the lawful user and motivated by the intention to prevent self- contradictory contractual arrangements.

(4) Directive on Rental and Lending Rights and Related Rights

The Rental and Lending Directive deals with the relations between different groups of rightholders. While it is true that Article 4 of the directive provides for authors and performers limited unwaivable rights to equitable remuneration, this limitation of contractual freedom has a completely different purpose and application from the one discussed in general in the paper. The question of rights transfer and buy-out has no implications for the questions raised in the CLRC paper

(5) Directive on Unfair Terms in Consumer Contracts

The Directive applies to non-mandatory, non-negotiated contractual terms incorporated in contracts drawn up between a professional and a consumer (Article 1). The Directive establishes three important principles:

Article 3 (1) provides that, to be unfair, the contractual term has to cause a significant imbalance in the parties' rights and obligations contrary to the requirements of good faith. An allegedly unfair contractual term is assessed in the light of the nature of the goods or services covered by the contract, the circumstances in which the contract is drawn up and other terms in the contract or in another contract to which it relates (Article 4). An indicative and non-exhaustive list of terms which may be regarded as unfair is annexed to the Directive. Copyright has not been made an issue either in the list of unfair terms annexed to the law or in existing case law.

(6) Selected Country reports: Situation in the UK

The Copyright, Designs and Patent Act does not restrict contractual freedom aside from the known situations for computer programs and databases.

Chapter III of the CDPA deals with acts that are permitted in relation to copyright works. The introductory provisions establish the principle that the provisions in this Chapter 'relate only to the question of infringement of copyright and do not affect any other right or obligation restricting the doing of any of the specified acts.'[4] This means that an activity as covered by an exemption can still be a breach of some other right or obligation, such as an express contractual term.[5]

Any restrictions to contractual freedom are strictly limited to the narrow groups specified in the Computer Programs and Database Directives.

Caselaw on the Enforceability of Shrinkwrap Licenses affirms the respect for contractual arrangements.

Beta v. Adobe[6] has been the first British court decision dealing with the enforceability of shrinkwrap licenses. Adobe Systems had placed an order with Beta computers for the supply of Informix software. After procuring the software package and delivering it to Adobe, Beta sued for payment of the invoiced price. Adobe attempted to return the package which Beta refused. The shrinkwrapped package stated the words: 'Opening the software package indicated your acceptance of these terms and conditions'. The court had to decide the question whether a contract had been concluded at all and the validity of the shrinkwrap licence came up as an incidental issue. Lord Penrose found that there was one contract between the supplier Beta and the user Adobe for 'the [supply] of the medium in which the ... program material is recorded, associated with the conferment of a right of access to that material.'[7] As a result, Adobe had to pay for the software and could not return it. With regard to the shrinkwrap license terms, his lordship approved the importance of contractual agreements stating: 'There is little doubt, in my mind, that the interests of the industry as a whole in the efficient and sensible management of transactions requires that effect should be given to the conditions if possible.'[8]

A flexible approach to Unfair contract terms regulation

The Directive on Unfair Terms in Consumer Contracts was implemented into UK law first by the Unfair Terms in Consumer Contracts Regulations 1994, but these were revoked and replaced by the Unfair Terms in Consumer Contracts Regulations 1999[9]. The new Regulation follows even more closely the terms of the Directive. Schedule 2 contains an indicative and non-exhaustive list of terms which may be regarded as unfair. As in the directive, the listed terms do not cover the case where right holders try to limit copyright exceptions. Section 5 of the Regulation implements Article 3 (1) of the Directive providing that a term shall be regarded as unfair if, contrary to the requirements of good faith, it causes a significant imbalance in the parties' rights and obligations, arising under the contract, to the detriment of the consumer.

The Office of Fair Trading has attached very considerable significance to the notion of balance, so that a term which may look severely prejudicial to the rights of a consumer may yet be considered fair if it is counterbalanced by a corresponding term which could act to the consumer's advantage.[10]

The Unfair Contract Terms Act 1977 does not seek to control unfair contract terms generally. It applies mainly to terms that purport to exclude or restrict liability and is therefore of no relevance to clauses overriding copyright exceptions.

(7) Selected Country reports: Situation in France

France has implemented the sui generis database right of the database directive in Title IV of Book III of the French Code de la Propriete Intellectuelle, as amended on 1 July 1998.

On 7 May 1999, the Tribunal de commerce de Paris handed down one of the first decisions dealing with the database right in the case Electre v. T.I. Communication et Maxotex.[11] The case is particularly interesting as it deals implicitly with the issue of the relationship between the database right and rights arising out of contract. The case concerned the unlicensed use on a website of a CD-ROM comprising bibliographic information works published in France. In the subscription contract with Electre, T.I Communication had agreed not to disseminate the CD-ROM's content. The court held T.I. Communication liable for breach of contract and did not consider it necessary to examine whether the defendant was also liable for an infringement of the database right. This judgement clearly indicates that parties are not restricted in protecting their information against copying contractually even in the case that such information is not protected by copyright.

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