David Kent is a litigation partner and a member of the KNOWlaw and Competition groups in the Toronto law firm McMillan Binch. He represented the Canadian Association of Broadcasters in the Copyright Board hearings described in this article.

The Copyright Board issued a decision earlier this year which makes important changes to socan’s television performing rights royalties.

After a 1997 hearing which pitted socan against the Canadian Association of Broadcasters, the board decided to change socan’s royalty in two ways. First, it reduced the royalties paid by television broadcasters. Second (and perhaps more interesting), it introduced a new Modified Blanket Licence as an option to socan’s traditional standard licence.

Public performance royalties

socan collects copyright royalties from television broadcasters for the public performance of the music found in television programming. These royalties are then distributed by socan to the composers, lyricists and publishers of television music.

These performing rights payments are different from and in addition to the ‘synch’ rights payments made by television producers. The synch licence allows the music to be placed in the soundtrack, but the performing rights licence is what permits the finished product to be broadcast.

The previous regime

socan has had a tv royalty structure in place since the 1950s. The royalty has been calculated as a percentage of advertising revenues since 1959. In that year the rate was 2.1%. The rate rose to as high as 2.4% in 1974, and was reduced by the Copyright Board back to 2.1% in 1986. In 1996, private Canadian television broadcasters paid socan nearly $28 million.

The licence has always been offered on a blanket basis. Any use of socan’s repertoire required a licence. Once licensed, however, a broadcaster could use as much as or as little socan music as it wanted, all without prior approval.

The broadcasters’ concerns

The cab made two main complaints about socan’s royalties in 1997. The cab had unsuccessfully made similar complaints based on different material in 1993.

The first complaint was that the royalty rate was now too high. The cab pointed out the increasing competitive pressures on the private television broadcasting industry. It also pointed to changes in the regulatory environment.

In addition, the cab demonstrated the wide gulf between Canadian and u.s. rates. The royalty rate paid by u.s. broadcasters was more than 3.3% (versus 2.1% in Canada) in 1959 but had since dropped to 0.85% in 1996. And the music is largely the same. About 60% of tv broadcasters’ socan royalties are derived from ad revenues on u.s. programs and socan distributes more than half its Canadian television royalties to u.s composers and publishers.

The cab’s second complaint was that socan’s standard licence was inflexible. Broadcasters received no ‘credit’ for clearing performing rights directly with composers.

By contrast, socan’s u.s. counterparts (bmi and ascap) had in place licensing options which granted royalty reductions to broadcasters who made direct arrangements to clear performing rights. prs in England had made similar arrangements to permit its members to directly negotiate licences for live concerts.

The hearing

The board held a hearing over 14 days in the middle of 1997. It considered a huge amount of evidence: 35 witnesses gave testimony filling 3,649 pages of transcript and over 130 exhibits were filed.

socan and the cab presented hundreds of pages of written argument after the witnesses were through.

The decision

The board has three members. Two of the three wrote a majority decision which addressed some (but not all) of the cab’s concerns. The third member dissented. He would have maintained the status quo and would have given the cab nothing that it asked for.

The royalty rate

The board was considering the royalties to be paid for the four years from 1994 to 1997. The cab had suggested that the royalty rate be between 0.86% and 1.54% of advertising revenues. The majority set the royalty rate at 1.8%.

As a trade-off, however, the board ruled that the royalty reduction would only begin in 1997. Even as reduced, socan’s 1997 private television royalties exceeded $25 million.

The majority took into account the changing economic environment in which conventional tv broadcasters operate. It noted the incremental changes in the way music has been used on television since the 2.1% rate was first established in 1959. It also decided that the rate paid in an adjacent market for the same music was relevant to determining the appropriate rate to be paid in Canada.

The modified blanket licence option

The majority also introduced the mbl option. Broadcasters can now elect an alternative royalty calculation which excludes ad revenues for programs which do not use socan music.

In other words, if a tv station clears the performing rights in its news music directly from the publisher or composer, it can reduce the revenue base on which it pays the 1.8% royalty to the extent of its news revenues. The same thing occurs if it broadcasts a program for which the producer has cleared the rights.

However, the majority imposed a price for making this election. Broadcasters which elect the mbl must still pay certain minimum royalties even on programs without socan music.

In part, this is designed to compensate socan for the incremental cost of administering the mbl. In addition, however, this is to preserve the contribution to socan’s general overhead, which historically came from programs which might now be excluded.

When all of the math is done, a station which clears the music in programs representing 40% of its ad revenues will get a 26% reduction in its socan royalty. It will also be responsible for paying either the licence fees required to directly clear that music or else possibly higher licence fees to producers who have themselves cleared the rights.

The majority agreed to add the mbl option for a number of reasons. It noted that tv producers already deal directly with composers or publishers for composition fees and for synch rights and that (unlike in radio, for example) it would not be difficult to negotiate performing rights licences at the same time. It noted that composers already deal directly on performing rights with producers in areas like live theater.

The majority also noted the unequivocal assurances given by broadcaster witnesses that broadcasters would deal fairly with composers. The majority stated that the board ‘will not allow a situation to develop in which composers deal from a position of weakness.’

The dissenting member of the board was unambiguously opposed to the decision made by the majority. He believed that the royalty rate reduction was unwarranted and that the mbl would upset the balance between the owners and users of performing rights.

Practical impact of the decision

The new mbl option opens the way for new arrangements between producers and composers or publishers. The variable royalty arrangement provides an economic incentive to direct licensing arrangements between copyright owners and producers or broadcasters.

socan’s current distribution rules allocate distribution credits without regard to the revenues (and therefore the royalties) earned on individual programs. It is not uncommon for broadcasters to pay royalties to socan on a particular program which are many times greater than the royalties subsequently distributed by socan to the composers and publishers of the music that program contained.

The mbl, however, introduces price sensitivity at the individual program level. Accordingly, the combination of the mbl structure and socan’s distribution rules may encourage composers who write for high-revenue Canadian programs to enter into direct arrangements.

Unknown factors are composers’ willingness to engage in these negotiations and socan’s willingness to revisit its internal rules.

Composers cannot be required to negotiate directly – they are entitled to continue to collect their television royalties through socan’s standard licence. And socan’s rules prohibit its members from direct negotiations with producers – socan itself owns its members’ performing rights during each two-year membership period.

Reaction to the decision

socan reacted strongly to the decision. It has complained to key decision makers in the federal government and has asked the Federal Court of Appeal to set the decision aside. This legal challenge will likely be heard this fall. The future of the board’s decision will remain up in the air until then.

(This article contains general comments only. It is not intended to be exhaustive and should not be considered as advice in any particular situation.)