Needletime royalties: Finding the needle in the haystack

Royalties are serious business for artists in the music industry. So serious that, when Taylor Swift publicly criticised Apple for not paying any royalties to artists during the three month trial period after the launch of their new music streaming service, Apple “swiftly” reversed their policy within 24 hours.

Although royalties are clearly serious business for artists, until the recent below discussed cases, it was difficult to determine an appropriate tariff to be charged in South Africa, partially due to the fact that it is very difficult to determine the value of publicly played music.

Shops, restaurants, sport stadiums, banks, malls or other public spaces and radio stations obtain their background music or playlists from a collecting society in terms of Regulation 7(1) of the Collecting Society Regulations as a repertoire of copyright protected sound recordings against payment of royalties, which the collecting society collect on behalf of the copyright owners of such music.

The South African Music Performance Rights Association (SAMPRA) is currently the only accredited collecting society in terms of the Regulations on Establishment of Collecting Societies in the Music Industry, published under GN 517 in GG 28894 of 1 June 2006, section 9A of the Copyright Act 98 of 1978 and section 5(1)(b) of the Performer’s Protection Act 11 of 1967. Further to being the only accredited representative collecting society collecting royalties on behalf of its members, SAMPRA’s only member is the Recording Industry of South Africa (RISA). RISA, in turn, represents the so-called “big four” record companies in South Africa, being Sony BMG Music Entertainment Africa (Pty) Ltd; EMI Music South Africa (Pty) Ltd; Universal Music South Africa (Pty) Ltd and Gallo Music Company (Pty) Ltd. SAMPRA accordingly represented 95-99% of record companies in South Africa.

This situation looks like a monopoly of monopolies and was this one of the points the Foschini Retail Group put forward when arguing that SAMPRA was charging unreasonable and inflated tariffs when it came to the determination of royalties. In the matter of Foschini Retail Group (Pty) Ltd and 9 others v The South African Music Performance Rights Association (0003/2009) [2013] ZAGPPHC 304 (25 October 2013) they argued that SAMPRA was not only unable to provide any economic justification for the set tariff, but that SAMPRA also unilaterally set the tariff.

At this stage it is important to note that section 9A(1)(b) of the Copyright Act specifically determines that:

“…the amount of any royalty [pertaining to the broadcasting of sound recordings] shall be determined by an agreement between the user of the sound recording, the performer and the owner of the copyright, or between their representative collecting societies.”

(My underlining)

SAMPRA and the Foschini Group were accordingly obliged in terms of the Copyright Act to mutually agree on the royalty tariff.

SAMPRA defended their tariff by explaining the complex method of determining the tariff they have applied, stating that they cloned Australian tariffs and similarly calculated tariffs per square meter, while considering International Best Practice and the tariff scales of the Sound Recording Collecting Society in the United Kingdom, as well as a Canadian model. SAMPRA concluded that the market should determine the correct tariff. If the tariff is set to high, retailers will not pay for a SAMPRA licence to play their music in stores, which will negatively affect the amount of royalties to be earned by SAMPRA’s members. SAMPRA believes that they must act in the best interest of their clients.

The Foschini Group held strong in their argument that the tariff charged by SAMPRA was set as a result of SAMPRA’s monopoly and noted that SAMPRA’s tariff was even higher than the tariffs charged in developed countries, including Australia and that SAMPRA’s tariff was overpriced relative to the wealth of South African consumers. Notwithstanding the fact that the Foschini Group took this up with SAMPRA before, SAMPRA merely followed a “take it, or leave it” approach, aggravating an already tense relationship.

In circumstances where parties cannot reach an agreement relating to royalties, section 9A(1)(c) of the Copyright Act provides for the referral of a dispute of this nature to the Copyright Tribunal or arbitration. Regulation 7(5) of the Copyright Regulations determines that:

“…should a tariff proposed by a collecting society not be accepted by the trade associations and representative bodies or any potential user, user groups, or individual users, such potential users and user groups shall have the option to pay the amount demanded by the collecting society into an escrow account [similar to a trust account], pending the outcome of a referral to the Copyright Tribunal…”

The Foschini Group duly paid the set tariffs into an escrow account and referred their so-called needletime royalty dispute to the Copyright Tribunal. The tribunal held that SAMPRA contravened the provisions of section 9A(1)(b) of the Copyright Act by unilaterally determining the tariffs on the basis that the said act obliges SAMPRA to enter into negotiations with the retailers as users before determining the amount for the royalty. Accordingly SAMPRA’s “take it, or leave it” approach was also procedurally unfair.

The tribunal further found the current tariff, as set by SAMPRA, to be invalid on the basis that the tariff was not set in accordance with an agreement between the users and the owners or their representatives collecting societies, nor by a Copyright Tribunal where it was clear that the tariff was disputed and an agreement between the said parties were unlikely, as stipulated in the Copyright Act.

The tribunal also held that international practices could not be “cut and pasted” on a South African market. In the matter of National Association of Broadcasters v South African Music Performance Rights Association and Southern African Music Rights Organisation 2014 (3) SA 525 (SCA) (14 March 2014) the court explored this issue further and noted that there was no statutory prescribed rate of royalties to be paid by radio stations to record companies. Although the Copyright Review Commission recognised in their 2011 report the various lacunae in the legislation about the Collecting Society’s model for distribution of royalties to musicians and composers, no guidelines have emerged ever since. However, a universal principle applies in terms of which royalties are paid in relation to the time music played on the radio station, translated into layman’s terms: “pay for play”. The Court was struck by the complexity of regulation in this regard in the radio industry and is it clear from its judgment that our courts favour a much simpler approach. As in the Foschini Group-matter, the court also refused to let international practices dictate the determination of local royalties. In determining an appropriate royalty tariff, the Supreme Court of Appeal (SCA) tried to strike a balance between a tariff that allows for fair remuneration of the copyright owner and a tariff that is also in the best interest of the users of their work, thus emphasising public welfare as policy.

The SCA subsequently reduced the existing royalty of 10%, which was lowered by the court a quo to 7%, to 3% to bring the royalties earned by recording artists in line with the royalties earned by music composers, being 3% of the revenue reflected in a radio station’s financial statements. In this regard Navsa AJ said that:

“It does not appear that royalty rates for sound recordings internationally exceed composer royalty rates. It is arguable, though not definitive, that composers are the key component in relation to the production of music.”

Much of the royalty money collected by SAMPRA will in any event find its way to the United States of America or other countries which results in a negative revenue flow for South Africa.

 

By
Marietjie Botes
Senior Associate
marietjie@dyason.co.za