London entertainment law firm Crefovi is delighted to bring you this music & entertainment law blog, to provide you with forward-thinking and insightful information on hot business and legal issues in the music and entertainment sectors.
London entertainment & media law firm advises, in particular, the fashion and luxury goods sectors, the music sector, film sector, art sector & high tech sector.
We support our clients, who all work in the creative industries, in London, Paris and globally, in finding the best solutions to their various legal issues relating to business law, either on contentious or non-contentious matters.
Annabelle Gauberti, founding partner of London entertainment and media law firm for the creative industries Crefovi, is also the president of the International association of lawyers for creative industries (ialci). This association is instrumental in providing very high quality seminars, webinars & brainstorming sessions on legal & business issues to which the creative industries are confronted.
Crefovi has a roster of music clients, ranging from music artists to record labels, and is a regular attendee of, and speaker at, entertainment business events, such as MIDEM, MaMa, SXSW, Comic Con, the Berlinale and EFM, the Cannes Film Festival & seminars organised by AIM, BPI, MPA and SACEM.
London entertainment law firm Crefovi believes that, due to exponential streaming of entertainment content, the music and film industries have radically and irrevocably changed in the last five years and that it is time for the entertainment sector to take stock and foster mutually beneficial partnerships between the music and film world, high tech companies and famous brands making their mark in the consumer goods & retail arena. Crefovi is there to support its entertainment clients in achieving this delicate balance in a fast-evolving environment.
When a competitor which used to reign as a warlord in a particular market becomes challenged by a new player, this competitor may use tactics such as systematic and heavy-handed enforcement of alleged intellectual property rights, as well as aggressive smearing and denigration campaigns, to deter this new entrant. The situation may soon become untenable for the new kid on the block, as potential customers are scared away and dissuaded by the blasts forcefully and repeatedly inflicted upon by the dominant player. What to do if you and your business are targeted by such hyper-aggressive competitor? How can you defend yourself against these abuses of dominant position?
The right balance between intellectual property rights (“IPRs“) and free competition is very difficult to strike, especially in markets and jurisdictions which are hyper protective of IPRs of right owners, like in Europe. When the right owner is manipulative, hyper-aggressive and unprepared to share his or her turf, they may use the so-called enforcement of IPRs to drive any new entrants in their specific market away; thus creating many abuses of dominant position.
1. What’s going on?
Nowhere as seriously have I witnessed such anti-competitive behaviour from a competitor occur, than in the automotive sector.
I was instructed to attend a trade show in the South of France, last year in September 2019, in order to assist a Chinese automotive company and its Spanish distributor on their stand, as they were systematically and repetitively subjected to court-ordered police raids and interim seizures, on any European trade fair that they had attended, and were attending, since the launch of their new automotive business two years’ prior.
As you might have guessed, it is their competitor, a German company in a monopolistic situation on that particular segment of the automotive sector, which was behind this constant derailing of each one of my clients’ trade exhibitions in Europe.
None of my clients’ trade shows in the USA were perturbed by these court-ordered seizures and police raids and court orders to immediately close down their stand on the tradeshows, based on the allegations of IPR counterfeiting made by such German competitor: no US court was accepting to grant the German competitor such overarching measures to stop free competition on a pretence of infringement of IPRs.
However, each one of the European courts to which such over-the-top interim and immediate measures were requested by such German competitor, in the context of European trade fairs held in Germany, Spain, France and Monaco, happily obliged and granted such court orders. As a result, these interim measures had forced my clients to close down their stand on each of these European trade shows prematurely, because my clients were deprived of their products and prototypes taken away during those police-led raids and seizures on their stands, as well as forced sales and seizures of their prototypes and products, ordered by some of these European courts.
Not only was the German competitor using its monopolistic status to manipulate European courts into driving its Spanish and Chinese competitors (my clients) away, alleging some IPRs infringements right and left, but it also conducted a vast, well-oiled and well-orchestrated denigration and smearing campaign against my clients, through the use of private eyes in various European locations, as well as through listening and taping the phone calls and text messages exchanged by my clients on their mobile phones. As a result, the German monopolist was able to always contact, before my clients, all the trade fair organisers, potential distributors and other third parties and business partners interested in my clients’ products, in order to denigrate my clients as “Chinese counterfeiters” who manufactured “dangerous and unfit automotive sea products” (sic). Consequently, European trade show organisers, potential European distributors and potential European end-consumers of my Chinese and Spanish clients were spooked, and took an enormous amount of convincing and cajoling, in order to establish, or re-establish, a rapport with my two clients.
Thanks to my intervention, during two of my clients’ trade fairs in Cannes, France, and Monaco, in September 2019, the humiliating option of having to close down their stand before the end of these trade shows was spared, since I efficiently liaised with the bailiff instructed by the French lawyers of the German competitor, in order to salvage some of my clients’ prototypes from a forced sale imposed by the Paris “tribunal de grande instance” on some quaint and unfounded allegations of patent and design infringement made by this German competitor.
I had seen some prior abuses of dominant position, in particular in the fashion sector and the fashion textile trade shows’ segment, perpetrated by luxury conglomerates and the largest fashion textile trade fair in the world, in the past. However, this first-hand experience of abuse of IPRs, abuse of dominant position and smearing and denigration campaigns against my automotive clients was on another level.
2. What can you do to protect yourself against some abuses of IPRs and of dominant position perpetrated by a competitor?
The enforcement of IPRs across the European Union (“EU“) has been harmonised, to some extent, by the Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights (the “Enforcement directive”). However, nothing is set out, in the 21 articles of the Enforcement directive about any restrictions on the enforcement of IPRs due to a breach of competition law by the IPRs owner.
Consequently, and since France is extremely protective of IPRs owners, there are no restrictions on how IPRs may be enforced by right owners against third parties, in the French Intellectual property code; provided that any mandatory prior depositing and registration procedures (which are applicable to industrial IPRs such as design rights, trademarks and patents) have been complied with.
Under English law, there are some key restrictions on the ability to enforce IPRs, which include:
- the risk of incurring liability for groundless threats of IPRs infringements, the law of which has been significantly reformed in the United Kingdom (UK) by the Intellectual Property (Unjustified Threats) Act 2017, and
- specific defences to infringement and restrictions on available remedies for each IPR.
Therefore, if your dominant competitor raises some alleged IPRs infringement claims against you and your business in the UK, then you may make the most of these legal tools offered to you, from the “actionable threats” defense, to the “unjustified threats” defense, via UK civil court proceedings.
When an IPRs owner abuses its dominant position, it starts with obtaining some interim IPRs measures, such as the seizures and force sales on my clients’ stands in their trade show, against its competitors. Then, the dominant abuser lodges some IPRs infringement proceedings in front of the competent civil – and sometimes criminal – courts, against its smaller competitors, to obtain some damages for the alleged acts of IPRs infringements.
In France, the Tribunaux judiciaires (district courts) have exclusive jurisdiction in hearing cases concerning copyright, national trademarks and national design rights; while the Paris Tribunal judiciaire has exclusive jurisdiction in hearing cases concerning patents and EU rights (i.e. EU trademark and design rights). For example, after the Cannes yachting trade show in September 2019, the German monopolist lodged a fully-fledged patent infringement lawsuit against the Spanish distributor of the Chinese manufacturer, with the Paris Tribunal judiciaire, within 30 days from the day of the seizure and forced sale which took place during the Cannes trade fair. Copyright holders can also take action in the French criminal courts for counterfeiting.
In the UK, IPRs are primarily enforced via civil court proceedings, and the English High Court is the most common venue. IPRs proceedings in the English High Court are heard in the Chancery division, and different specialist lists are available:
- the Intellectual Property Enterprise Court (“IPEC“) can hear any IPRs claim of relatively low complexity and value: the IPEC is suitable for claims which can be tried in two days or less, damages are capped at GBP500,000 and recoverable legal costs are subject to a cap of GBP50,000;
- the Patent Court can hear claims relating to patents, registered designs, semiconductor rights and plant varieties. There is no cap on damages or recoverable legal costs; and
- all other IPRs claims can be heard in the Intellectual Property List of the Chancery Division, of which the Patents Court and IPEC are sub-lists.
The problem, though, is that aside from the above-mentioned “actionable threats” and “unjustified threats” defenses, which can only be invoked in front of UK courts, neither the French Tribunaux judiciaires, nor the English High Court and its specialist lists, can review and decide on any anti-competitive behaviour and abuse of dominant position claims raised, as a counter-offensive, by the new entrant in a particular industrial sector, which is being subjected to IPRs infringement claims in front of these IP courts by the dominant player in that particular industry.
So, to continue with the example of my Spanish and Chinese clients, the Spanish distributor which is now the defendant in the patent infringement lawsuit lodged by the German monopolist in the automotive sector (the claimant), with the Paris Tribunal judiciaire, cannot make some counterclaims of abuse of dominant position and anti-competitive behaviour, as a counter-offensive, within the scope of that lawsuit with the Paris Tribunal judiciaire. Why? Because the Paris Tribunal judiciaire is not competent to review such claims relating to breaches of competition law: it is only competent to review claims in relation to breaches of IPRs and laws on intellectual property.
So what is a quashed new entrant in this industrial sector to do then, under these circumstances? Well, the first priority is to find and retain expert and very aggressive legal counsel who will defend it against the wrongful allegations of IPRs infringement made by the monopolistic competitor. Such lawyer specialised in intellectual property matters shall also file some counterclaims against such abusive competitor, on behalf of its client, for like-for-like breaches of its client’s IPRs, invoking free riding and unfair competition (if in front of French courts) or passing off (if in front of UK courts).
The second priority, for the new entrant being wrongfully sued for alleged IPRs infringement by its dominant competitor, is to simultaneously file a claim against that abusive competitor with the national authorities responsible for reviewing and investigating the competitive effects of conduct related to the exercise of IPRs.
In France, the French Competition Authority (“FCA“) is the independent administrative body that specialises in analysing and regulating the operation of competition on markets to protect the economic public order. Its goal is to supervise the free play of competition in France. It can issue an opinion on the investigations it carries out, which can be subject to appeal only to the Paris Court of appeal. The rulings of the Court of appeal can also be the subject of recourse to the French Supreme court (“cour de cassation”). However, any judicial action relating to an infringement concerning the application of competition law can be taken before the Marseilles, Bordeaux, Lille, Fort-de-France, Lyon, Nancy, Paris and Rennes Commercial tribunals on the first instance jurisdictions.
Therefore, our Spanish and Chinese clients (now ex-clients) should not only fight the patent infringement allegations lodged by their German dominant competitor in front of the Paris Tribunal judiciaire, but also file some claims against that German competitor with either the FCA, or the Paris Commercial tribunal, for abuse of dominant position and anti-competitive behaviour. The claimants will try to obtain a judgment against these anti-competitive practices, as well as some paid damages for the prejudice suffered.
In the UK, the competition authority is the Competition and Markets Authority (“CMA“), which reviews and investigates compliance with competition law. The CMA’s remit includes the review and control of the exercise of IPRs insofar as they affect competition. The Competition Appeal Tribunal (“CAT“) is a specialist competition tribunal and hears appeals against the decisions of the CMA. An appeal from the CAT can be made to the Court of Appeal. Follow-on and standalone claims for competition law damages can be raised in the High court and in the CAT.
As you might have inferred from the above, the new entrant who is subjected to these various IPRs infringement claims by the abusive and dominant competitor, better have very deep pockets and unlimited wells of patience and resilience, in order to not only fight off an IPRs infringement lawsuit against its monopolistic competitor, but also drive through to completion some well-evidenced abuse of dominant position and anti-competitive behaviour claims in front of the competent competition authorities or courts, in either France or the UK.
It may all be worth it in the long term, though, as the recent high-profile cases dealing with the intersection of competition law and IPRs detailed below attest.
In 2014, the FCA ruled against Nespresso, the market leader for machines and capsules. Nespresso linked the purchase of its capsules with that of its coffee machines, thereby excluding manufacturers of competing capsules. Such exclusionary practices were reported by its competitors DEMB and Ethical Coffee to the Competition Authority, as abuse of dominant position. In the decision issued by the Competition Authority dated 4 September 2014, Nespresso was required to make several commitments intended to remove the obstacles to the entry and development of other manufacturers of capsules that would work with the brands’ coffee machines.
In 2016, the CMA fined GSK and two other pharmaceutical companies (the generic companies) in relation to anticompetitive patent settlement agreements. The CMA also found that GSK abused its dominant position in the UK market, by seeking to delay the generic companies’ entry into the market.
3. What can you do to protect yourself against some the acts of denigration and smearing perpetrated by a competitor?
A new form of abusive conduct has been identified, namely the practice of dominant companies excluding or reducing competition from competitors, by identifying exactly what non-price parameters are important for competition, and setting up some strategic campaigns to influence the purchasing behaviour of customers, typically by portraying competing products or services as unsafe and/or inefficient or of significantly lower quality.
These practices are usually referred to as “denigration” and “smearing campaigns”. Denigration means to criticize a competitor’s products or services in a derogatory manner, ultimately with a view to influencing customers purchasing patterns.
While such practices are usually dealt with under the unfair marketing rules in national legislations, some very serious cases found their way into the competition law arena.
Indeed, in several cases, the denigrating conduct has been part of dominant companies’ communication strategies with the clear object of disseminating information to customers about a competitor in order to create an air of uncertainty and/or doubt regarding either the competitor’s ability to carry out certain activities or putting a question mark on the quality, safety or efficacy of their products and services.
Denigrating conduct is most often seen in the form of dissemination of negative information based on false or misleading assertions in regard to competing products with the intention of having an impact on customers’ purchasing decisions.
Denigration of competitors’ products have long-lasting effects in the market because the unjustified doubts or fears can only be overcome with a significant effort by the target company to (re)educate and (dis)prove the denigrating statements in front of end-customers, distributors, etc.
Whilst at European level, the European Commission has not yet had the opportunity to take a decision on a dominant company denigrating competitor products, there is considerable body of law at national level under article 102 TFEU, in particular in France.
The French cases have covered not only the pharmaceutical sector, but also the telecoms, electricity and pay-TV industries. Common to all these cases is that the dominant player has attempted to hinder market entry and product switch through denigrating competitor products in a number of different ways. Typically, the dominant company conducted a consistent, widespread strategy of misinformation to people who took or influenced purchasing decisions.
For example, in the example with my Chinese and Spanish ex-clients, their German dominant competitor would spread the word, before each trade show, that they had been sentenced to paying some counterfeiting damages to such German competitor, by a German court, and that their China-made sea scooters were of inferior quality and breaking all the time. This false information was diffused to the trade fair organisers, by the German competitor, in order to push the trade fairs to refuse access to their show to my clients, who were branded “counterfeiters” by their German competitor. But this denigration was also done with each one of the European potential distributors my clients, with threats made by the German competitor that it would stop trading with the distributor if the latter started any business with the Chinese manufacturer and its Spanish representative.
In France, the FCA has thus in its more than 10 denigration cases consistently held that denigration of competitors or their products, does not constitute competition on the merits and as as result, denigration can constitute an abuse of dominant position in certain circumstances. In French case law, for denigration to infringe article 102 TFEU, four clear elements have to be proven:
- there is denigration of a competitor’s product with a view to obtaining a commercial advantage;
- a link between the dominance and the practice of denigration has to be established;
- it has to be verified whether the statements put forward in the market by the dominant company are based on objective findings or assertions that are not verified, and
- whether the commercial statements are liable to influence the structure of the market.
The denigration cases assessed by the FCA and other European competition authorities have so far turned on the dominant company identifying the most important non-price parameters to be able to compete in a market and concluding that the relevant customer decision process could be influenced by instilling fears or concerns that are then conveyed to decision makers and stakeholders in a systematic and consistent smearing campaign.
Therefore, it seems that abuse of a dominant position as a consequence of denigrating conduct is more likely to be sanctioned in sectors where non-price competition parameters are more relevant than price. The more important a given parameter is, the more critical it is when a dominant company tries to exclude competitors through either false or misleading information, or tries to make information credible in a covert manner.
To conclude, a new entrant in a market, which is subjected to an abuse of IPRs and/or a smearing campaign to systematically denigrate its products, by the dominant player in that particular industry, has more than one string to its bow in order to fight back. However, such new kid on the block must brace himself or herself for lengthy, draining and expensive legal battles, both as a defendant against the wrongful alleged claims of counterfeiting of its IPRs, raised by the dominant and abusive competitor, and as a claimant in front of the competent European competition authority, through which it will have raised some claims against such competitor for abuse of dominant position, in particular by way of denigration and smearing campaign.
These various legal battles will eventually neutralise the dominant competitor, while having a rigorous and well-organised IPR registration and maintenance strategy in place, for the new entrant in the market, is essential. All new models, products, brands, services should have their respective IPR registered, and then listed in a catalogue of IPRs maintained by the legal counsel of the new entrant. All evidence, and certificates, of registration should be kept and archived meticulously, to anticipate any IPRs infringement claim that the dominant competitor may bring. Non-disclosure and confidentiality clauses should be set out in all the contracts entered into with new employees, distributors, service providers who will assist the new entrant before and during the trade shows (PR agencies, hostesses’ agencies, logistics companies, etc).
Why the valuation of intangible assets matters: the unstoppable rise of intangibles’ reporting in the 21st century’s corporate environmentCrefovi : 15/04/2020 8:00 am : Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Entertainment & media, Fashion law, Hospitality, Information technology - hardware, software & services, Insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Litigation & dispute resolution, Mergers & acquisitions, Music law, News, Private equity & private equity finance, Technology transactions, Trademark litigation
It is high time France and the UK up their game in terms of accounting for, reporting and leveraging the intangible assets owned by their national businesses and companies, while Asia and the US currently lead the race, here. European lenders need to do their bit, too, to empower creative and innovative SMEs, and provide them with adequate financing to sustain their growth and ambitions, by way of intangible assets backed-lending.
Back in May 2004, I published an in-depth study on the financing of luxury brands, and how the business model developed by large luxury conglomerates was coming out on top. 16 years down the line, I can testify that everything I said in that 2004 study was in the money: the LVMH, Kering, Richemont and L’Oreal of this word dominate the luxury and fashion sectors today, with their multibrands’ business model which allows them to both make vast economies of scale and diversify their economic as well as financial risks.
However, in the midst of the COVID 19 pandemic which constrains us all to work from home through virtual tools such as videoconferencing, emails, chats and sms, I came to realise that I omitted a very important topic from that 2004 study, which is however acutely relevant in the context of developing, and growing, creative businesses in the 21st century. It is that intangible assets are becoming the most important and valuable assets of creative companies (including, of course, luxury and fashion houses).
Indeed, traditionally, tangible and fixed assets, such as land, plants, stock, inventory and receivables were used to assess the intrinsic value of a company, and, in particular, were used as security in loan transactions. Today, most successful businesses out there, in particular in the technology sector (Airbnb, Uber, Facebook) but not only, derive the largest portion of their worth from their intangible assets, such as intellectual property rights (trademarks, patents, designs, copyright), brands, knowhow, reputation, customer loyalty, a trained workforce, contracts, licensing rights, franchises.
Our economy has changed in fundamental ways, as business is now mainly “knowledge based”, rather than industrial, and “intangibles” are the new drivers of economic activity, the Financial Reporting Council (“FRC“) set out in its paper “Business reporting of intangibles: realistic proposals”, back in February 2019.
However, while such intangibles are becoming the driving force of our businesses and economies worldwide, they are consistently ignored by chartered accountants, bankers and financiers alike. As a result, most companies – in particular, Small and Medium Enterprises (“SMEs“)- cannot secure any financing with money men because their intangibles are still deemed to … well, in a nutshell … lack physical substance! This limits the scope of growth of many creative businesses; to their detriment of course, but also to the detriment of the UK and French economies in which SMEs account for an astounding 99% of private sector business, 59% of private sector employment and 48% of private sector turnover.
How could this oversight happen and materialise, in the last 20 years? Where did it all go wrong? Why do we need to very swiftly address this lack of visionary thinking, in terms of pragmatically adapting double-entry book keeping and accounting rules to the realities of companies operating in the 21st century?
How could such adjustments in, and updates to, our old ways of thinking about the worth of our businesses, be best implemented, in order to balance the need for realistic valuations of companies operating in the “knowledge economy” and the concern expressed by some stakeholders that intangible assets might peter out at the first reputation blow dealt to any business?
1. What is the valuation and reporting of intangible assets?
1.1. Recognition and measurement of intangible assets within accounting and reporting
In the European Union (“EU“), there are two levels of accounting regulation:
- the international level, which corresponds to the International Accounting Standards (“IAS“), and International Financial Reporting Standards (“IFRS“) issued by the International Accounting Standards Board (“IASB“), which apply compulsorily to the consolidated financial statements of listed companies and voluntarily to other accounts and entities according to the choices of each country legislator, and
- a national level, where the local regulations are driven by the EU accounting directives, which have been issued from 1978 onwards, and which apply to the remaining accounts and companies in each EU member-state.
The first international standard on recognition and measurement of intangible assets was International Accounting Standard 38 (“IAS 38“), which was first issued in 1998. Even though it has been amended several times since, there has not been any significant change in its conservative approach to recognition and measurement of intangible assets.
An asset is a resource that is controlled by a company as a result of past events (for example a purchase or self-creation) and from which future economic benefits (such as inflows of cash or other assets) are expected to flow to this company. An intangible asset is defined by IAS 38 as an identifiable non-monetary asset without physical substance.
There is a specific reference to intellectual property rights (“IPRs“), in the definition of “intangible assets” set out in paragraph 9 of IAS 38, as follows: “entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights“.
However, it is later clarified in IAS 38, that in order to recognise an intangible asset on the face of balance sheet, it must be identifiable and controlled, as well as generate future economic benefits flowing to the company that owns it.
The recognition criterion of “identifiability” is described in paragraph 12 of IAS 38 as follows.
“An asset is identifiable if it either:
a. is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
b. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations“.
“Control” is an essential feature in accounting and is described in paragraph 13 of IAS 38.
“An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way“.
In order to have an intangible asset recognised as an asset on company balance sheet, such intangible has to satisfy also some specific accounting recognition criteria, which are set out in paragraph 21 of IAS 38.
“An intangible asset shall be recognised if, and only if:
a. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
b. the cost of the asset can be measured reliably“.
The recognition criteria illustrated above are deemed to be always satisfied when an intangible asset is acquired by a company from an external party at a price. Therefore, there are no particular problems to record an acquired intangible asset on the balance sheet of the acquiring company, at the consideration paid (i.e. historical cost).
1.2. Goodwill v. other intangible assets
Here, before we develop any further, we must draw a distinction between goodwill and other intangible assets, for clarification purposes.
Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process (= purchase price of the acquired company – (net fair market value of identifiable assets – net fair value of identifiable liabilities)).
The value of a company’s brand name, solid customer base, good customer relations, good employee relations, as well as proprietary technology, represent some examples of goodwill, in this context.
The value of goodwill arises in an acquisition, i.e. when an acquirer purchases a target company. Goodwill is then recorded as an intangible asset on the acquiring company’s balance sheet under the long-term assets’ account.
Under Generally Accepted Accounting Principles (“GAAP“) and IFRS, these companies which acquired targets in the past and therefore recorded those targets’ goodwill on their balance sheet, are then required to evaluate the value of goodwill on their financial statements at least once a year, and record any impairments.
Impairment of an asset occurs when its market value drops below historical cost, due to adverse events such as declining cash flows, a reputation backlash, increased competitive environment, etc. Companies assess whether an impairment is needed by performing an impairment test on the intangible asset. If the company’s acquired net assets fall below the book value, or if the company overstated the amount of goodwill, then it must impair or do a write-down on the value of the asset on the balance sheet, after it has assessed that the goodwill is impaired. The impairment expense is calculated as the difference between the current market value and the purchase price of the intangible asset. The impairment results in a decrease in the goodwill account on the balance sheet.
This expense is also recognised as a loss on the income statement, which directly reduces net income for the year. In turn, earnings per share (‟EPS”) and the company’s stock price are also negatively affected.
The Financial Accounting Standards Board (“FASB“), which sets standards for GAAP rules, and the IASB, which sets standards for IFRS rules, are considering a change to how goodwill impairment is calculated. Because of the subjectivity of goodwill impairment, and the cost of testing impairment, FASB and IASB are considering reverting to an older method called “goodwill amortisation” in which the value of goodwill is slowly reduced annually over a number of years.
As set out above, goodwill is not the same as other intangible assets because it is a premium paid over fair value during a transaction, and cannot be bought or sold independently. Meanwhile, other intangible assets can be bought and sold independently.
Also, goodwill has an indefinite life, while other intangibles have a definite useful life (i.e. an accounting estimate of the number of years an asset is likely to remain in service for the purpose of cost-effective revenue generation).
1.3. Amortisation, impairment and subsequent measure of intangible assets other than goodwill
That distinction between goodwill and other intangible assets being clearly drawn, let’s get back to the issues revolving around recording intangible assets (other than goodwill) on the balance sheet of a company.
As set out above, if some intangible assets are acquired as a consequence of a business purchase or combination, the acquiring company recognises all these intangible assets, provided that they meet the definition of an intangible asset. This results in the recognition of intangibles – including brand names, IPRs, customer relationships – that would not have been recognised by the acquired company that developed them in the first place. Indeed, paragraph 34 of IAS 38 provides that “in accordance with this Standard and IFRS 3 (as revised in 2008), an acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of the acquiree, irrespective of whether the asset had been recognised by the acquiree before the business combination. This means that the acquirer recognises as an asset separately from goodwill an in-process research and development project of the acquiree, if the project meets the definition of an intangible asset. An acquiree’s in-process research and development project meets the definition of an intangible asset when it:
a. meets the definition of an asset, and
b. is identifiable, i.e. separable or arises from contractual or other legal rights.“
Therefore, in a business acquisition or combination, the intangible assets that are “identifiable” (either separable or arising from legal rights) can be recognised and capitalised in the balance sheet of the acquiring company.
After initial recognition, the accounting value in the balance sheet of intangible assets with definite useful lives (e.g. IPRs, licenses) has to be amortised over the intangible asset’s expected useful life, and is subject to impairment tests when needed. As explained above, intangible assets with indefinite useful lives (such as goodwill or brands) will not be amortised, but only subject at least annually to an impairment test to verify whether the impairment indicators (“triggers”) are met.
Alternatively, after initial recognition (at cost or at fair value in the case of business acquisitions or mergers), intangible assets with definite useful lives may be revalued at fair value less amortisation, provided there is an active market for the asset to be referred to, as can be inferred from paragraph 75 of IAS 38:
“After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be measured by reference to an active market. Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ materially from its fair value.”
However, this standard indicates that the revaluation model can only be used in rare situations, where there is an active market for these intangible assets.
1.4. The elephant in the room: a lack of recognition and measurement of internally generated intangible assets
All the above about the treatment of intangible assets other than goodwill cannot be said for internally generated intangible assets. Indeed, IAS 38 sets out important differences in the treatment of those internally generated intangibles, which is currently – and rightfully – the subject of much debate among regulators and other stakeholders.
Internally generated intangible assets are prevented from being recognised, from an accounting standpoint, as they are being developed (while a business would normally account for internally generated tangible assets). Therefore, a significant proportion of internally generated intangible assets is not recognised in the balance sheet of a company. As a consequence, stakeholders such as investors, regulators, shareholders, financiers, are not receiving some very relevant information about this enterprise, and its accurate worth.
Why such a standoffish attitude towards internally generated intangible assets? In practice, when the expenditure to develop intangible asset is incurred, it is often very unclear whether that expenditure is going to generate future economic benefits. It is this uncertainty that prevents many intangible assets from being recognised as they are being developed. This perceived lack of reliability of the linkage between expenditures and future benefits pushes towards the treatment of such expenditures as “period cost”. It is not until much later, when the uncertainty is resolved (e.g. granting of a patent), that an intangible asset may be capable of recognition. As current accounting requirements primarily focus on transactions, an event such as the resolution of uncertainty surrounding an internally developed IPR is generally not captured in company financial statements.
Let’s take the example of research and development costs (“R&D“), which is one process of internally creating certain types of intangible assets, to illustrate the accounting treatment of intangible assets created in this way.
Among accounting standard setters, such as IASB with its IAS 38, the most frequent practice is to require the immediate expensing of all R&D. However, France, Italy and Australia are examples of countries where national accounting rule makers allow the capitalisation of R&D, subject to conditions being satisfied.
Therefore, in some circumstances, internally generated intangible assets can be recognised when the relevant set of recognition criteria is met, in particular the existence of a clear linkage of the expenditure to future benefits accruing to the company. This is called condition-based capitalisation. In these cases, the cost that a company has incurred in that financial year, can be capitalised as an asset; the previous costs having already been expensed in earlier income statements. For example, when a patent is finally granted by the relevant intellectual property office, only the expenses incurred during that financial year can be capitalised and disclosed on the face of balance sheet among intangible fixed assets.
To conclude, under the current IFRS and GAAP regimes, internally generated intangible assets, such as IPRs, can only be recognised on balance sheet in very rare instances.
2.Why value and report intangible assets?
As developed in depth by the European Commission (“EC“) in its 2013 final report from the expert group on intellectual property valuation, the UK intellectual property office (“UKIPO“) in its 2013 “Banking on IP?” report and the FRC in its 2019 discussion paper “Business reporting of intangibles: realistic proposals”, the time for radical change to the accounting of intangible assets has come upon us.
2.1. Improving the accurateness and reliability of financial communication
Existing accounting standards should be advanced, updated and modernised to take greater account of intangible assets and consequently improve the relevance, objectivity and reliability of financial statements.
Not only that, but informing stakeholders (i.e. management, employees, shareholders, regulators, financiers, investors) appropriately and reliably is paramount today, in a corporate world where companies are expected to accurately, regularly and expertly manage and broadcast their financial communication to medias and regulators.
As highlighted by Janice Denoncourt in her blog post “intellectual property, finance and corporate governance“, no stakeholder wants an iteration of the Theranos’ fiasco, during which inventor and managing director Elizabeth Holmes was indicted for fraud in excess of USD700 million, by the United States Securities and Exchange Commission (“SEC“), for having repeatedly, yet inaccurately, said that Theranos’ patented blood testing technology was both revolutionary and at the last stages of its development. Elizabeth Holmes made those assertions on the basis of the more than 270 patents that her and her team filed with the United States patent and trademark office (“USPTO“), while making some material omissions and misleading disclosures to the SEC, via Theranos’ financial statements, on the lame justification that “Theranos needed to protect its intellectual property” (sic).
Indeed, the stakes of financial communication are so high, in particular for the branding and reputation of any “knowledge economy” company, that, back in 2002, LVMH did not hesitate to sue Morgan Stanley, the investment bank advising its nemesis, Kering (at the time, named “PPR“), in order to obtain Euros100 million of damages resulting from Morgan Stanley’s alleged breach of conflicts of interests between its investment banking arm (which advised PPR’s top-selling brand, Gucci) and Morgan Stanley’s financial research division. According to LVMH, Clare Kent, Morgan Stanley’s luxury sector-focused analyst, systematically drafted and then published negative and biased research against LVMH share and financial results, in order to favor Gucci, the top-selling brand of the PPR luxury conglomerate and Morgan Stanley’s top client. While this lawsuit – the first of its kind in relation to alleged biased conduct in a bank’s financial analysis – looked far-fetched when it was lodged in 2002, LVMH actually won, both in first instance and on appeal.
Having more streamlined and accurate accounting, reporting and valuation of intangible assets – which are, today, the main and most valuable assets of any 21st century corporation – is therefore paramount for efficient and reliable financial communication.
2.2. Improving and diversifying access to finance
Not only that, but recognising the worth and inherent value of intangible assets, on balance sheet, would greatly improve the chances of any company – in particular, SMEs – to successfully apply for financing.
Debt finance is notoriously famous for shying away from using intangible assets as main collateral against lending because it is too risky.
For example, taking appropriate security controls over a company’s registered IPRs in a lending scenario would involve taking a fixed charge, and recording it properly on the Companies Registry at Companies House (in the UK) and on the appropriate IPRs’ registers. However, this hardly ever happens. Typically, at best, lenders are reliant on a floating charge over IPRs, which will crystallise in case of an event of default being triggered – by which time, important IPRs may have disappeared into thin air, or been disposed of; hence limiting the lender’s recovery prospects.
Alternatively, it is now possible for a lender to take an assignment of an IPR by way of security (generally with a licence back to the assignor to permit his or her continued use of the IPR) by an assignment in writing signed by the assignor (1). However, this is rarely done in practice. The reason is to avoid “maintenance”, i.e. to prevent the multiplicity of actions. Indeed, because intangibles are incapable of being possessed, and rights over them are therefore ultimately enforced by action, it has been considered that the ability to assign such rights would increase the number of actions (2).
Whilst there are improvements needed to the practicalities and easiness of registering a security interest over intangible assets, the basic step that is missing is a clear inventory of IPRs and other intangible assets, on balance sheet and/or on yearly financial statements, without which lenders can never be certain that these assets are in fact to hand.
Cases of intangible asset- backed lending (“IABL“) have occurred, whereby a bank provided a loan to a pension fund against tangible assets, and the pension fund then provided a sale and leaseback arrangement against intangible assets. Therefore, IABL from pension funds (on a sale and leaseback arrangement), rather than banks, provides a route for SMEs to obtain loans.
There have also been instances where specialist lenders have entered into sale and licence-back agreements, or sale and leaseback agreements, secured against intangible assets, including trademarks and software copyright.
Some other types of funders than lenders, however, are already making the “intangible assets” link, such as equity investors (business angels, venture capital companies and private equity funds). They know that IPRs and other intangibles represent part of the “skin in the game” for SME owners and managers, who have often expended significant time and money in their creation, development and protection. Therefore, when equity investors assess the quality and attractiveness of investment opportunities, they invariably include consideration of the underlying intangible assets, and IPRs in particular. They want to understand the extent to which intangible assets owned by one of the companies they are potentially interested investing in, represent a barrier to entry, create freedom to operate and meet a real market need.
Accordingly, many private equity funds, in particular, have delved into investing in luxury companies, attracted by their high gross margins and net profit rates, as I explained in my 2013 article “Financing luxury companies: the quest of the Holy Grail (not!)“. Today, some of the most active venture capital firms investing in the European creative industries are Accel, Advent Venture Partners, Index Ventures, Experienced Capital, to name a few.
2.3. Adopting a systematic, consistent and streamlined approach to the valuation of intangible assets, which levels the playing field
If intangible assets are to be recognised in financial statements, in order to adopt a systematic and streamlined approach to their valuation, then fair value is the most obvious alternative to cost, as explained in paragraph 1.3. above.
How could we use fair value more widely, in order to capitalise intangible assets in financial statements?
IFRS 13 “Fair Value Measurements” identifies three widely-used valuation techniques: the market approach, the cost approach and the income approach.
The market approach “uses prices and other relevant information generated by market transactions involving identical or comparable” assets. However, this approach is difficult in practice, since when transactions in intangibles occur, the prices are rarely made public. Publicly traded data usually represents a market capitalisation of the enterprise, not singular intangible assets. Market data from market participants is often used in income based models such as determining reasonable royalty rates and discount rates. Direct market evidence is usually available in the valuation of internet domain names, carbon emission rights and national licences (for radio stations, for example). Other relevant market data include sale/licence transactional data, price multiples and royalty rates.
The cost approach “reflects the amount that would be required currently to replace the service capacity of an asset“. Deriving fair value under this approach therefore requires estimating the costs of developing an equivalent intangible asset. In practice, it is often difficult to estimate in advance the costs of developing an intangible. In most cases, replacement cost new is the most direct and meaningful cost based means of estimating the value of an intangible asset. Once replacement cost new is estimated, various forms of obsolescence must be considered, such as functional, technological and economic. Cost based models are best used for valuing an assembled workforce, engineering drawings or designs and internally developed software where no direct cash flow is generated.
The income approach essentially converts future cash flows (or income and expenses) to a single, discounted present value, usually as a result of increased turnover of cost savings. Income based models are best used when the intangible asset is income producing or when it allows an asset to generate cash flow. The calculation may be similar to that of value in use. However, to arrive at fair value, the future income must be estimated from the perspective of market participants rather than that of the entity. Therefore, applying the income approach requires an insight into how market participants would assess the benefits (cash flows) that will be obtained uniquely from an intangible asset (where such cash flows are different from the cash flows related to the whole company). Income based methods are usually employed to value customer related intangibles, trade names, patents, technology, copyrights, and covenants not to compete.
An example of IPRs’ valuation by way of fair value, using the cost and income approaches in particular, is given in the excellent presentation by Austin Jacobs, made during ialci’s latest law of luxury goods and fashion seminar on intellectual property rights in the fashion and luxury sectors.
In order to make these three above-mentioned valuation techniques more effective, with regards to intangible assets, and because many intangibles will not be recognised in financial statements as they fail to meet the definition of an asset or the recognition criteria, a reconsideration to the “Conceptual Framework to Financial Reporting” needs being implemented by the IASB.
These amendments to the Conceptual Framework would permit more intangibles to be recognised within financial statements, in a systematic, consistent, uniform and streamlined manner, therefore levelling the playing field among companies from the knowledge economy.
Let’s not forget that one of the reasons WeWork cofounder, Adam Neumann, was violently criticised, during WeWork’s failed IPO attempt, and then finally ousted, in 2019, was the fact that he was paid nearly USD6 million for granting the right to use his registered word trademark “We”, to his own company WeWork. In its IPO filing prospectus, which provided the first in-depth look at WeWork’s financial results, WeWork characterised the nearly USD6 million payment as “fair market value”. Many analysts, among which Scott Galloway, begged to differ, outraged by the lack of rigour and realism in the valuation of the WeWork brand, and the clearly opportunistic attitude adopted by Adam Neumann to get even richer, faster.
2.4. Creating a liquid, established and free secondary market of intangible assets
IAS 38 currently permits intangible assets to be recognised at fair value, as discussed above in paragraphs 1.3. and 2.3., measured by reference to an active market.
While acknowledging that such markets may exist for assets such as “freely transferable taxi licences, fishing licences or production quotas“, IAS 38 states that “it is uncommon for an active market to exist for an intangible asset“. It is even set out, in paragraph 78 of IAS 38 that “an active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique“.
Markets for resale of intangible assets and IPRs do exist, but are presently less formalised and offer less certainty on realisable values. There is no firmly established secondary transaction market for intangible assets (even though some assets are being sold out of insolvency) where value can be realised. In addition, in the case of forced liquidation, intangible assets’ value can be eroded, as highlighted in paragraph 2.2. above.
Therefore, markets for intangible assets are currently imperfect, in particular because there is an absence of mature marketplaces in which intangible assets may be sold in the event of default, insolvency or liquidation. There is not yet the same tradition of disposal, or the same volume of transaction data, as that which has historically existed with tangible fixed assets.
Be that as it may, the rise of liquid secondary markets of intangible assets is unstoppable. In the last 15 years, the USA have been at the forefront of IPRs auctions, mainly with patent auctions managed by specialist auctioneers such as ICAP Ocean Tomo and Racebrook. For example, in 2006, ICAP Ocean Tomo sold 78 patent lots at auction for USD8.5 million, while 6,000 patents were sold at auction by Canadian company Nortel Networks for USD4.5 billion in 2011.
However, auctions are not limited to patents, as demonstrated by the New York auction, successfully organised by ICAP Ocean Tomo in 2006, on lots composed of patents, trademarks, copyrights, musical rights and domain names, where the sellers were IBM, Motorola, Siemens AG, Kimberly Clark, etc. In 2010, Racebrook auctioned 150 American famous brands from the retail and consumer goods’ sectors.
In Europe, in 2012, Vogica successfully sold its trademarks and domain names at auction to competitor Parisot Group, upon its liquidation.
In addition, global licensing activity leaves not doubt that intangible assets, in particular IPRs, are, in fact, very valuable, highly tradable and a very portable asset class.
It is high time to remove all market’s imperfections, make trading more transparent and offer options to the demand side, to get properly tested.
3. Next steps to improve the valuation and reporting of intangible assets
3.1. Adjust IAS 38 and the Conceptual Framework to Financial Reporting to the realities of intangible assets’ reporting
Mainstream lenders, as well as other stakeholders, need cost-effective, standardised approaches in order to capture and process information on intangibles and IPRs (which is not currently being presented by SMEs).
This can be achieved by reforming IAS 38 and the “Conceptual Framework to Financial Reporting”, at the earliest convenience, in order to make most intangible assets capitalised on financial statements at realistic and consistent valuations.
In particular, the reintroduction of amortisation of goodwill may be a pragmatic way to reduce the impact of different accounting treatment for acquired and internally generated intangibles.
In addition, narrative reporting (i.e. reports with titles such as “Management Commentary” or “Strategic Report”, which generally form part of the annual report, and other financial communication documents such as “Preliminary Earnings Announcements” that a company provides primarily for the information of investors) must set out detailed information on unrecognised intangibles, as well as amplify what is reported within the financial statements.
3.2. Use standardised and consistent metrics within financial statements and other financial communication documents
The usefulness and credibility of narrative information would be greatly enhanced by the inclusion of metrics (i.e. numerical measures that are relevant to an assessment of the company’s intangibles) standardised by industry. The following are examples of objective and verifiable metrics that may be disclosed through narrative reporting:
- a company that identifies customer loyalty as critical to the success of its business model might disclose measures of customer satisfaction, such as the percentage of customers that make repeat purchases;
- if the ability to innovate is a key competitive advantage, the proportion of sales from new products may be a relevant metric;
- where the skill of employees is a key driver of value, employee turnover may be disclosed, together with information about their training.
3.3. Make companies’ boards accountable for intangibles’ reporting
Within a company, at least one appropriately qualified person should be appointed and publicly reported as having oversight and responsibility for intangibles’ auditing, valuation, due diligence and reporting (for example a director, specialist advisory board or an external professional adviser).
This would enhance the importance of corporate governance and board oversight, in addition to reporting, with respect to intangible assets.
In particular, some impairment tests could be introduced, to ensure that businesses are well informed and motivated to adopt appropriate intangibles’ management practices, which should be overseen by the above-mentioned appointed board member.
3.4. Create a body that trains about, and regulates, the field of intangible assets’ valuation and reporting
The creation of a professional organisation for the intangible assets’ valuation profession would increase transparency of intangibles’ valuations and trust towards valuation professionals (i.e. lawyers, IP attorneys, accountants, economists, etc).
This valuation professional organisation would set some key objectives that will protect the public interest in all matters that pertain to the profession, establish professional standards (especially standards of professional conduct) and represent professional valuers.
This organisation would, in addition, offer training and education on intangibles’ valuations. Therefore, the creation of informative material and the development of intangible assets’ training programmes would be a priority, and would guarantee the high quality valuation of IPRs and other intangibles as a way of boosting confidence for the field.
Company board members who are going to be appointed as having accountability and responsibility for intangibles’ valuation within the business, as mentioned above in paragraph 3.3., could greatly benefit from regular training sessions offered by this future valuation professional organisation, in particular for continuing professional development purposes.
3.5. Create a powerful register of expert intangible assets’ valuers
In order to build trust, the creation of a register of expert intangibles’ valuers, whose ability must first be certified by passing relevant knowledge tests, is key.
Inclusion on this list would involve having to pass certain aptitudes tests and, to remain on it, valuers would have to maintain a standard of quality in the valuations carried out, whereby the body that manages this registry would be authorised to expel members whose reports are not up to standard. This is essential in order to maintain confidence in the quality and skill of the valuers included on the register.
The entity that manages this body of valuers would have the power to review the valuations conducted by the valuers certified by this institution as a “second instance”. The body would need to have the power to re-examine the assessments made by these valuers (inspection programme), and even eliminate them if it is considered that the assessment is overtly incorrect (fair disciplinary mechanism).
3.6. Establish an intangible assets’ marketplace and data-source
The development most likely to transform IPRs and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded.
In particular, as IPRs and intangible assets become clearly identified and are more freely licensed, bought and sold (together with or separate to the business), the systems available to register and track financial interests will need to be improved. This will require the co-operation of official registries and the establishment of administrative protocols.
Indeed, the credibility of intangibles’ valuations would be greatly enhanced by improving valuation information, especially by collecting information and data on actual and real intangibles’ transactions in a suitable form, so that it can be used, for example, to support IPRs asset-based lending decisions. If this information is made available, lenders and expert valuers will be able to base their estimates on more widely accepted and verified assumptions, and consequently, their valuation results – and valuation reports – would gain greater acceptance and reliability from the market at large.
The wide accessibility of complete, quality information which is based on real negotiations and transactions, via this open data-source, would help to boost confidence in the validity and accuracy of valuations, which will have a very positive effect on transactions involving IPRs and other intangibles.
3.7. Introduce a risk sharing loan guarantee scheme for banks to facilitate intangibles’ secured lending
A dedicated loan guarantee scheme needs being introduced, to facilitate intangible assets’ secured lending to innovative and creative SMEs.
Asia is currently setting the pace in intangibles-backed lending. In 2014, the intellectual property office of Singapore (“IPOS“) launched a USD100 million “IP financing scheme” designed to support local SMEs to use their granted IPRs as collateral for bank loans. A panel of IPOS-appointed valuers assess the applicant’s IPR portfolio using standard guidelines to provide lenders with a basis on which to determine the amount of funds to be advanced. The development of a national valuation model is a noteworthy aspect of the scheme and could lead to an accepted valuation methodology in the future.
The Chinese intellectual property office (“CIPO“) has developed some patent-backed debt finance initiatives. Only 6 years after the “IP pledge financing” programme was launched by CIPO in 2008, CIPO reported that Chinese companies had secured over GBP6 billion in IPRs-backed loans since the programme launched. The Chinese government having way more direct control and input into commercial bank lending policy and capital adequacy requirements, it can vigorously and potently implement its strategic goal of increasing IPRs-backed lending.
It is high time Europe follows suit, at least by putting in place some loan guarantees that would increase lender’s confidence in making investments by sharing the risks related to the investment. A guarantor assumes a debt obligation if the borrower defaults. Most loan guarantee schemes are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers. Loan guarantee schemes level the playing field.
The proposed risk sharing loan guarantee scheme set up by the European Commission or by a national government fund (in particular in the UK, who is brexiting) would be specifically targeted at commercial banks in order to stimulate intangibles-secured lending to innovative SMEs. The guarantor would fully guarantee the intangibles-secured loan and share the risk of lending to SMEs (which have suitable IPRs and intangibles) with the commercial bank.
The professional valuer serves an important purpose, in this future loan guarantee scheme, since he or she will fill the knowledge gap relating to the IPRs and intangibles, as well as their value, in the bank’s loan procedure. If required, the expert intangibles’ valuer provides intangibles’ valuation expertise and technology transfer to the bank, until such bank has built the relevant capacity to perform intangible assets’ valuations. Such valuations would be performed, either by valuers and/or banks, according to agreed, consistent, homogenised and accepted methods/standards and a standardised intangible asset’s valuation methodology.
To conclude, in this era of ultra-competitiveness and hyper-globalisation, France and the UK, and Europe in general, must immediately jump on the saddle of progress, by reforming outdated and obsolete accounting and reporting standards, as well as by implementing all the above-mentioned new measures and strategies, to realistically and consistently value, report and leverage intangible assets in the 21st century economy.
Founding and managing partner of Crefovi
(1) “Lingard’s bank security documents”, Timothy N. Parsons, 4th edition, LexisNexis, page 450 and seq.
(2) “Taking security – law and practice”, Richard Calnan, Jordans, page 74 and seq.
How to lawfully broadcast your soundtracks in bars, restaurants, hotels & other public spaces, from France | Music law firm CrefoviCrefovi : 25/11/2019 8:00 am : Articles, Consumer goods & retail, Copyright litigation, Entertainment & media, Hospitality, Intellectual property & IP litigation, Internet & digital media, Music law, Outsourcing
When a France-based sound system provider reproduces some phonograms on soundtracks, in order to propose such soundtracks for broadcasting in public spaces such as restaurants, bars, hotels, or shops, he/she needs to have a proper strategy in place, to lawfully implement his/her business plan. Especially when it comes to fostering useful and productive relationships with French, as well as foreign, collecting rights societies. How can this legal compliance effort be done in the most time and cost efficient manner, to assist the developing business of any France-based budding sound system provider?
1. Registering as a user-reproducer with both SPPF and SCPP
There are four neighbouring rights collecting societies, in France, as far as music neighbouring rights are concerned, as follows:
- SPPF, which is a neighbouring rights collecting society for phonogram producers that are independent labels only;
- ADAMI, which is a neighbouring rights collecting society for artists and performers and
- SPEDIDAM, which is a neighbouring rights collecting society for session musicians and vocalists.
Any new sound system provider based in France needs to be aware of such neighbouring rights collecting societies, since some may come knock at his/her door, in order to collect royalties.
Indeed, which neighbouring rights collecting societies may have a legal, and financial, claim against a France-based sound system provider?
A distinction needs to be drawn, between:
- neighbouring rights’ royalties collected on the basis of broadcasting phonograms, and
- neighbouring rights’ royalties collected on the basis of reproducing phonograms.
As far as neighbouring rights’ royalties collected on the basis of broadcasting phonograms are concerned, the French intellectual property code (“IPC“) provides that 50% of the royalties paid by users (i.e. sites which broadcast phonograms, such as public spaces, TV channels, radio channels, etc.) are directed to the right owner of the phonogram, while the remaining 50% goes to artists-performers, session musicians and vocalists. Article L. 214-1 of the IPC provides for the payment of neighbouring rights’ royalties relating to the right to broadcast, on the basis of scales which are, themselves, provided for in article L. 214-4 of the IPC. These royalties paid in relation to the right to broadcast are entitled “fair remuneration” (“rémunération équitable“) and are distributed to phonogram producers via SCPP and SPPF, to artists-performers via ADAMI, as well as to session musicians and vocalists via SPEDIDAM.
However, as far as neighbouring rights’ royalties collected on the basis of reproducing phonograms are concerned, these are paid by users (i.e. sound system providers who provide sound via physical media, automated broadcasting systems, or satellite/ADSL) to phonogram producers only. Article L. 213-1 of the IPC provides for the payment of such neighbouring rights’ royalties relating to the reproduction right. These royalties are distributed to phonogram producers solely, via SCPP and SPPF.
Therefore, a France-based sound system provider, who reproduces phonograms on soundtracks which will then be broadcasted in the sites of his/her clients (i.e. bars, hotels, restaurants, retail stores, lifts, etc., collectively referred to as “Clients’ Sites“), located either in France and/or, for example, in the United Kingdom, will have a statutory obligation to negotiate, finalise and sign a common interest general agreement (“contrat général d’intérêt commun“) between a user sound system provider, and each one of the neighbouring rights’ collecting societies for phonogram producers solely, i.e. SCPP and SPPF. Following the execution of such agreements, the sound system provider will pay SCPP and SPPF some royalties due under the right of reproduction of phonograms.
Clients’ Sites, i.e. public places in which the soundtracks will be broadcasted via physical media, automated broadcasting systems, or satellite/ADSL, will pay neighbouring rights’ royalties pursuant to the right to broadcast phonograms, to SCPP, SPPF, ADAMI and SPEDIDAM.
2. On the agreements to be entered into, between users-sound system providers, and SCPP and SPPF respectively
The templates of common interest general agreements, between users-sound system providers, and each neighbouring rights’ collecting societies for phonogram producers, i.e. SCPP and SPPF respectively, are freely available on their websites (together, the “Agreements“).
Key points to note, in relation to the Agreements, are that:
- there is some leeway while negotiating with SCPP and SPFF the terms of the Agreements, before they are finalised;
- SCPP owns 77% of the social repertoire of phonograms in France, while SPPF owns 23% of the social repertoire of phonograms registered in France, and these prorata numeris are set out in the calculation formula used to determine the amount of the royalty owed under the right of reproduction, as explained below;
- both SCPP and SPPF have entered into reciprocal agreements with the UK neighbouring rights’ collecting society PPL, which implies that, a priori, it is not needed that a France-based sound system provider enters into a similar contract than the Agreements, with PPL, even if his/her soundtracks are broadcasted on Clients’ Sites located in the United Kingdom;
- both SCPP and SPPF warrant and represent that the phonogram producers, members of their respective social repertoires, have obtained prior authorisation from artists-performers, session musicians and vocalists, to the reproduction of each of the phonograms registered in their social repertoires, in compliance with article L. 212-3 of the IPC;
- the annual turnover, exclusive of tax, generated by the sound system provider, will be the sole amount taken into account by SCPP and SPPF, when computing the royalty due under the right of reproduction;
- the formula to calculate the royalty is equal to ((annual turnover excl. tax * 15%) * 23%) for SPPF, where 23% represents the prorata numeris applicable to SPPF, as explained above;
- the formula to calculate the royalty is equal to ((annual turnover excl. tax * 15%) * 77%) for SCPP, where 77% represents the prorata numeris applicable to SCPP, as explained above;
- both SCPP and SPPF have put in place some guaranteed minimums, for royalties, depending on the number of phonograms reproduced on a Client’s Site per year; which amounts must be set out in the Agreements;
- SCPP requests the sound system provider to pay a royalties’ deposit, while SPPF does not request any deposit;
- sound system providers have strenuous reporting obligations, as they need to send to SCPP and SPPF, on a regular basis, a filled-out excel spreadsheet, which sets out all the data to be reported, in relation to each one of the phonograms reproduced on their soundtracks, which belong to the respective social repertoires of SCPP and SPPF;
- soundtracks, as well as automated broadcasting systems, must allow for phonogram protection tools, such as digital rights management tools, which protect phonograms from unauthorised copy and
- data about phonograms can be traced and found in the databases of SCPP and SPPF, in particular their IRSC numbers.
SCPP and SPPF legal teams are useful to better understand the Agreements, as well as to negotiate, possibly customise, and then finalise such Agreements.
To conclude on this note, neighbouring rights’ royalties that any France-based sound system provider must pay represent 15% of his/her annual turnover, exclusive of tax.
What about any eventual royalties on copyright?
3. Relationships between users – sound system providers and SACEM-SDRM
Sound system providers do not have any statutory obligation to register with SACEM, i.e. the French music copyright collecting society, or to the “Société pour l’administration du droit de reproduction mécanique des auteurs” (« SDRM »).
Indeed, Clients’ Sites will pay royalties to SACEM and SDRM, relating to public performance rights and mechanical reproduction rights, provided for in article L. 122-4 of the IPC, through a representation agreement entered into by the authors, their beneficial owners as well as SACEM and SDRM, pursuant to article L. 132-18 of the IPC.
For example, a restaurant located in Paris will pay an annual fixed price exclusive of tax of 1,783.69 euros, pursuant to the royalties due under the public performance rights and the mechanical reproduction rights of the musical compositions of authors-composers registered with SACEM and SDRM.
Therefore, there is no obligation for a sound system provider to register with SACEM, in order to pay any royalties due under the right to reproduction, since his/her Clients’ Sites located in France will pay such royalties, which are included in the annual fixed price exclusive of tax, that they will directly pay to SACEM and SDRM.
However, SACEM and SDRM recommend that professional sound system providers share their digital declarative forms (i.e. the reporting data on each phonogram which needs to be set out on an excel spreadsheet provided by SCPP and SPPF) with them. This way, SACEM and SDRM can make a realistic and exact sharing of the rights due under the mechanical reproduction, because they have the accurate information relating to each phonogram and musical composition reproduced on a soundtrack, which is then broadcasted in each Client’s Site located in France. So SACEM is currently putting together a charter, for the attention of professional sound system providers, in order to educate them on the need to report about the musical compositions which have been reproduced, to SACEM.
As far as Clients’ Sites located in the United Kingdom are concerned, SACEM has entered into a reciprocity agreement with the UK music copyright collecting society, PRS, in order to ensure that royalties collected by PRS in the name and on behalf of SACEM, be then sent to SACEM as soon as possible, for distribution to the appropriate authors and their beneficial owners, all members of SACEM.
To conclude, setting up a profitable sound system provider business in France comes with a few hoops and hurdles, from a regulatory standpoint. However, if these intricacies are rightly tackled, through appropriate software solutions (especially to deal with the strenuous reporting obligations on each phonogram reproduced on each soundtrack) as well as tactical and effective legal advice, nothing should come in the way of any savvy and business-minded sound system provider because he/she will have set up constructive and mutually beneficial relationships with French collecting rights societies.
How to break into the French film music market: leveraging available film rebates and tax credits in France to your advantageCrefovi : 03/06/2019 8:00 am : Articles, Banking & finance, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Gaming, Intellectual property & IP litigation, Internet & digital media, Music law
Many music composers want to break into the French film market, which is known the word over for its steady production stream of art films, as well as its “cultural exception”, aimed at protecting films with a French touch.
What is the state of play? What avenues can music composers explore, in order to be retained as part of the below-the-line crew on French film productions?
1. Understanding the dynamics of the French film market: a “how-to” guide for film music composers
In 2012, Vincent Maraval, one of the founders of top dog French production and distribution company Wild Bunch, published a column in Le Monde entitled “French actors are paid too much!“, which got a lot of attention. In substance, Maraval decried a doomed system, in which the French above-the-line personnel (such as the director, the screenwriter and the producers) and, in particular, French actors, were benefiting from inflated salaries and remunerations, while the receipts made by French theaters on such French film productions had gone down 10 times in the last year or so.
To prove his point, he cited the payment scale for French film stars (such as Vincent Cassel, Jean Reno, Marion Cotillard, Gad Elmaleh, Guillaume Canet, Audrey Tautou, Léa Seydoux), ranging from 500,000 to 2 millions euros on French film productions, while the same actors command salaries of only 50,000 to 200,000 euros when they work on American film productions. Apparently, French actors are among the best paid in the world, even ahead of most American movie stars. Maraval cited as culprit the direct subsidy system (pre-sales by public TV channels, advances on receipts, regional funding), to which French cinema is eligible, but most importantly the indirect subsidy system (mandatory investment by private TV channels).
Seven years down the line, Maraval’s statement still rings true as nothing has changed: the above-the-line crew, in particular French actors, still syphons most of the available budget of French film productions. Indeed, in order to obtain financing from TV channels – which upper middle class managements despise the pleb’s taste for reality TV shows such as “La Star Ac”, yet remain slaves to it – French film producers must belly dance in front of, and prove to, the likes of France Télévisions and TF1, that bankable and locally popular French actors are attached to their film productions.
The takeaway for film music composers, who are all part of the below-the-line crew, and therefore come after French actors in the pecking order, is that the financial pot is tight, on French film productions, as far as they are concerned.
Therefore, what is the margin of negotiation of film music composers, when schmoozing their way with French film directors and producers, to get a job on set?
2. Being able to sell yourself as a film music composer aspiring to do work on French film projects
As brilliantly explained by Anita Elberse in her book “Blockbusters”, the entertainment business works around a “winners take all” economic model, where only the 1% thrive. The situation described by Maraval above is a gleaming example of that, where French actors command salaries which are even higher than those paid to most American movie stars on Hollywood film projects. As a result, French film projects are uber costly, because not only do producers have to allocate at least 70% of their budget to salaries paid to fickle French film stars, but also production costs in France are very high (due to labour costs, in particular prohibitively expensive social security contributions, a 20% standard VAT rate, stiffly work regulations, etc.).
As a result, music composers are left to fend for themselves when pitching for work on French film productions. They can only count on their standout back catalogues of music compositions and recordings, to advertise their skillsets, as well as their own gifts of the gab, to become part of the chosen few.
Indeed, while all French actors, with the notable exception of Jean Dujardin who is managed by his own brother and lawyer, are represented by a handful of French agents, who have total and absolute control on the talent acting pool in France, film music composers struggle to get representation in other European countries and/or in Hollywood, let alone in France. Indeed, only a handful of French music composers, such as Alexandre Desplat, Nathaniel Méchaly and Evgueni Galperine have proper representation, with agents located both in Paris and Los Angeles. However, 99% of music composers, active on the French film market, are unrepresented and can only rely on their inner capabilities and charm, to befriend a rising French film director and/or shrewd French film producer, and hence be given the top music job.
This is a hard task for most, but especially for music composers who are often introverted and socially-shy people.
The attitude of French music supervisors, who work on behalf of French film production companies such as EuropaCorp, in order to get them original music scores commissioned and made per film project, does not help either. Indeed, upon receiving a new assignment, their first port of call is to contact French agents and tap their internal roster of music talent, using such agents as gatekeepers and “quality controllers” of the French film music market.
As a result, only 1% of the film music composers’ pool available on the French film music market gets to participate in tenders for French film productions, leaving the remaining 99% out of reach … and out of their depth.
3. The winning formula: leveraging the French state subsidy system to your advantage, as a film music composer aspiring to work on French film productions
When approaching French film producers, film music composers – especially foreign ones – need being completely on top-of-things, soft funding wise.
As explained in my daily-read article “How to finance your film production?“, many nations have attractive tax and investment incentives for filmmakers, whereby individual regional and country legislation unables film producers to subsidise spent costs for production.
France is no exception to that, with tax finance structured in the following manner:
- for non-French film productions, the Tax Rebate for International Productions (TRIP) is a tax rebate which applies to projects wholly or partly made in France. It it selectively granted by the French national centre for cinema (CNC) to a French production services company. TRIP amounts up to 30% of the qualifying expenditures incurred in France: it can total a maximum of Euros 30m per project. The French government refunds the applicant company, which must have its registered office in France. “Thor” (Marvel Studios), “Despicable Me” and “the Minions” (Universal Animation Studios), as well as “Inception” (Warner Bros), have benefited from TRIP.
- for European film co-productions, the Crédit d’impôt cinéma et audiovisuel (CICA) is a tax credit that benefits French producers for expenses incurred in France for the production of films or TV programmes. The CICA tax credit is equal to 20% of eligible expenses – increased to 30% for films for which the production budget is less than Euros 4m.
3.1. TRIP: making sure to get the points needed to pass the cultural test
To qualify into the TRIP, a film project must:
- be a fiction film (live action or animation, feature film, TV, web, VR, short film TV special, single or several episodes of a series, or a whole season, etc.)
- pass a cultural test and
- shoot at least 5 days in France for live-action production (unless VFX/post).
For film music composers, the aspect of TRIP relevant to them is the cultural test: they want to make sure that, should the film producer and director select them as music composer and author on the project, they will fulfil the criteria to pass that TRIP cultural test.
The document entitled “9. Grille de critères de sélection pour une oeuvre de fiction” sets out that, in order to be eligible, a project must obtain at least 18 points. Criteria n. 10, on page 2, sets out that at least one of the music composers must be:
- a French citizen;
- a citizen of a European country (that includes all citizens of EU member-states) or
- a French resident,
for the film project to score 1 point out of the 18 necessary for eligibility.
Therefore, film music composers who are really serious about getting into the French film sector must meet one of the above criteria, to secure this 1 point for the TRIP’s cultural test, which is the maximum amount of points even a French citizen music composer could ever contribute towards the film project.
3.2. Co-productions: making sure to get the points needed on the French and European scales
European co-productions can benefit from France’s film financing system, notably the French selective schemes, such as, inter alia:
- CICA, the automatic support for the French producer and distributor from French TV channels and Free-to-air networks (as Canal +, TF1, France Televisions, ARTE and M6 must invest a percentage of their annual revenues on French and European films);
- automatic subsidies referred to in French as “compte de soutien” or “soutien automatique”, where each qualifying movie producer or distributor receives automatic subsidies in proportion to the film’s success at the French box office, and also in video stores (a percentage of DVD bluray sales revenues) and in TV sales (a percentage of broadcasting rights sales);
- French regional funds and
- Sofica funds (private equity).
To qualify into the French tax credit and subsidies system, as an official co-production, the French co-producer will submit the project to the CNC.
The CNC is responsible for assessing applications for qualifications of a feature film, and uses the following criteria:
- two scales are used to determine whether it is European enough and whether it is French enough (European scale and French scale). Films must score enough points on both scales;
- when the co-production is made within the framework of a bilateral treaty, the citizens of the other country qualify as European. On this note, France has entered into bilateral co-production agreements with many countries.
Film music composers must therefore check whether employing them as a music composer on the film co-production would allow the project to get some points on the French and European scales above-mentioned.
Under the European scale, it is necessary for the authors (including the music composer), primary actors, technicians and collaborators to the creation of the film be:
- French citizens;
- Citizens from a EU member-state;
- Citizens from the country with which France has a bilateral co-production agreement in place, or
- Residents in France, in another EU member-state.
Therefore, film music composers who are serious about getting their foot in the door, must meet at least one of the criteria above. If they do, and out of the 18 points in the European scale, they will provide 1 point as a qualifying music composer in the European official co-production.
Under the French scale (“barème du soutien financier”), it is necessary for the project to score 100 points; except for the notable cases of Franco-Spanish, Franco-Italian and Franco-British co-productions, which do not have to comply with any minimum number of points to be eligible for “financial support” (“soutien financier”).
Music composers can bring up to 1 point, on this French scale, for fiction films, and up to 5 points, for a documentary, for example.
In order to obtain those points, under the French scale, it is necessary that the assignment agreements of the copyright, as well as the employment agreement of the film director, be governed by French law.
Therefore, film music composers will qualify under the French scale, for financial support (“soutien financier”) of the official European co-production, if the assignment agreement of copyright on the songs and tracks that they write and produce are governed by French law.
From a business standpoint, and in order to bolster the chances of getting the tax credit CICA, which comes from French TV channels and Free-to-air networks (as Canal +, TF1, France Televisions, ARTE and M6 must invest a percentage of their annual revenues on French and European Films), it is really worth highlighting and playing up any TV experience and clout that a film music composer may have. This should appeal to any French film producer, since they face a lot of competition from other French film producers, in order to get the best tax credit support from French TV channels, when pitching their film projects to them.
3.3. French regional funds: agreeing to assigning your copyright under a French language, French law-governed assignment agreement
As mentioned above, European official co-productions, but also – of course – French film productions, can benefit from the support and subsidies of French regional funds, such as:
- Fonds images de la francophonie;
- CNC support for creation of original music/score;
- Ile de France Authority Cinema and audiovisual support, and after shooting support, and
- Provence Alpes Côte d’Azur Creation and production film fund, documentary support (all stages) and animation support.
There is no points system in place, for any of these four French regional funds. However, Ile de France Authority Cinema and audiovisual support and Provence Alpes Côte d’Azur Creation and production film fund, documentary support (all stages), animation support, do have a cultural test in place.
As far as film music composers are concerned, the only requirement under these two cultural tests are that the film music composer would enter into a French language, French law-governed agreement, relating to the transfer of his/her copyright in the film soundtrack, to the France-based film production company. Film music composers do not need to have French citizenship, or be a French resident, to contribute towards the film project successfully passing the cultural test of either of these two French regional funds.
Therefore, the best way film music composers can ensure that their contributions to the film project will be weighting in a positive manner towards securing regional funding for the film production, is by having a polished and up-to-date CV listing all their musical compositions, awards and achievements, a catalogue of their best artistic work in good order, both online (soundcloud, Spotify, Deezer, etc.) and on CDs; and by contributing with the film director and producer in compiling the information and necessary data for each regional funding submissions.
For example, for the submission to the CNC Support for creation of original music/score (“aides à la création de musiques originales”), film music composers merely have to work with the film director and producer to ensure that they provide together all the deliverables required by the special commission of the CNC, such as the “note d’intention”, their respective CVs, and the CDs and DVDs requested.
The CNC, Ile de France Authority and Provence Alpes Côte d’Azur Authority, each request film music composers to enter into a French language, French law-governed agreement, relating to the assignment of copyright on the film soundtrack, with the French film production company.
To conclude, film music composers need to perfectly master the intricacies of the French soft funding system, and therefore skillfully demonstrate to French film producers and directors that, not only do they bring all possible qualifying points in any cultural tests put in place by the French film authorities, but also that they are willing to assign their copyright in their musical compositions and tracks’ masters, to the French film production company, under a French language, French law-governed assignment agreement.
To hit the ground running, and facilitate the work of any French film producers, film music composers should already be registered as members of French copyright collecting society SACEM, and French neighbouring rights collecting societies ADAMI and/or SPEDIDAM, if applicable.
Another major bonus would be for film music composers to already be registered with the French Centre des impôts des non-résidents, Inspection TVA, which is responsible for VAT registration of non-resident tax payers, and open a French VAT account. That way, if film music composers are paid service fees and/or a “prime de commande” by the French film production company, they can set out their VAT intra-community number, as well as the French production company’s VAT intra-community number, on their invoices.
Finally, since royalties, commissions, consultancy fees and fees for services performed or used in France, which are paid to a non-resident (either a company or an individual), are subject to a domestic 33.33% withholding tax, film music composers need to check whether any double-taxation treaty may be in place, between the country in which they are tax-resident, and France, which would provide full or partial relief of withholding tax on such income sources generated in France.
Be bold, do your homework, and your musical passion, skills and enthusiasm should become a great asset to any French film project and production!
On 30 March 2019, the UK will crash out of the EU without a withdrawal deal in place, and without a request for an extension of the 2 years’ notification period of its decision to withdraw. No second referendum will be organised by the current UK government. Therefore, what’s in the cards, for the creative industries, in order to do fruitful business with, and from, the UK in the near future?
My previous article on the road less travelled & Brexit legal implications, published just after the Brexit vote, on Saturday 25 June 2016, delivered the main message that it was worth monitoring the negotiation process that would ensue the notification made by the United Kingdom (UK) to the European Union (EU) of its intention to withdraw from the EU within 2 years.
We have therefore been monitoring those negotiations for you, in the last couple of years, and came to the following predictions, which will empower your creative business to brace itself for, and make the most of the imminent changes triggered by, the crashing of the UK out of the EU, on 30 March 2019.
1. End of freedom of movement of UK and EU citizens coming in and out of the UK
On 30 March 2019, UK citizens will lose their EU citizenship, i.e. the citizenship, subsidiary to UK citizenship, that provide rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or consulate in the country in which they require protection.
Since no withdrawal agreement will be signed by 29 March 2019, between the EU and the UK, UK nationals living in one of the 27 EU member-states will be on their own, as no reciprocal arrangements will have been put in place, in particular in relation to reciprocal healthcare and social security coordination, work permits, right to stand and vote in local elections.
UK nationals living in one of the states which are members of the European Free Trade Association (EFTA), i.e. Iceland, Liechtenstein, Norway and Switzerland, will also have no safety net, as the UK will also crash out of the EU bilateral agreements with EFTA members, such as the EEA Agreement which ties Iceland, Liechtenstein, Norway and the EU together, on 29 March 2019. Meanwhile, “the UK is seeking citizens’ rights agreement with the EFTA states to protect the rights of citizens“, as set out on the policy paper published by the UK Department for exiting the EU.
It therefore makes sense for UK nationals living in a EU member-state, or in one of the EFTA states, to reach out to the equivalent of the UK Home Office in such country, and inquire how they can secure either a visa or national citizenship in this country. Since negotiating some new bilateral agreements with EU member-states and EFTA states will take years, for the UK to finalise such negotiations, UK nationals cannot rely on these protracted talks to get any leverage and obtain permanent right to remain in a EU member-state or an EFTA state.
For example, France is ready to pass a decree after 30 March 2019, to organise the requirement to present a visa to enter French territory, and to obtain a residency permit (“carte de séjour”) to justify staying here, for UK citizens already living, or planning to live for more than three months, in France. Therefore, soon after 30 March 2019, British nationals and their families who do not have residency permits may have an “irregular status” in France.
While applying for a “carte de séjour” is free in France, and applying for French citizenship triggers only a 55 euros stamp duty to pay, EU nationals living in the UK, or planning to live in the UK, won’t be so lucky.
Indeed, it will set EU nationals back GBP1,330 per person, from 6 April 2018, to obtain UK citizenship, including the citizenship ceremony fee. However, there may be no fee to enrol into the EU Settlement Scheme, which will open fully by 30 March 2019, in particular if a EU citizen already has a valid “UK permanent residence document or indefinite leave to remain in or enter the UK”. The deadline for applying in the EU Settlement Scheme will be 31 December 2020, when the UK leaves the EU without a withdrawal deal on 30 March 2019.
Business owners and creative companies working in and from the UK will be impacted too, if they have some employees and staff. It will be their responsibility to ensure and be able to prove that their staff who are EU citizens, have all obtained a settled status: in a display of largesse, the UK government has therefore published an employer toolkit, to “support EU citizens and their families to apply to the EU Settlement Scheme“.
For short term stays of less than three months per entry, the UK government currently promises that “arrangements for tourists and business visitors will not look any different“. “EU citizens coming for short visits will be able to enter the UK as they can now, and stay for up to three months from each entry“.
To conclude, leaving the EU without a withdrawal agreement is going to create a lot of red tape, and be a massive time and energy hassle for EU citizens living in the UK, their UK employers who need to ensure that their staff are all enrolled into the EU Settlement Scheme, and for UK citizens living in one of the remaining 27 EU member-states. There will be no certainty of obtaining settled status from the UK Home Office, until EU citizens have actually obtained it further to enrolling into the EU Settlement Scheme. This is going to be a very anxiety-inducing process for EU citizens living in the UK, and for their UK employers who rely on these members of their staff to get the job done.
Contingency plans should therefore be put in place by UK employers who have EU citizens on their payroll, in particular by setting up offices and subsidiaries in one of the remaining 27 EU member-states, so that EU citizens whose settled status was refused by the UK Home Office may keep on working for their UK employers by relocating to this EU member-state where they will have freedom of movement thanks to their EU citizenships. Besides the Home Office and immigration lawyers’ fees, UK employers need to take into account the legal, accounting, IT and real estate costs of setting up additional offices and subsidiaries in a EU member-state, after 30 March 2019.
2. Removal of free movement of goods, services and capital
The EU internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU 28 member-states.
After 30 March 2019, the single market will no longer count the UK, as it will cease to be a EU member-state.
While it was an option for the internal market to remain in place, between the UK and the EU, as such market has been extended to EFTA states Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA), and to EFTA state Switzerland through bilateral treaties, this alternative was not pursued by the UK government. Indeed, the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers). The UK, as well as EFTA members who were less than keen to have the UK join their EFTA club, ruled out such option, not seeing the point of still contributing to the EU budget while not having a seat at the table to take any decisions in relation to how the single market is governed and managed.
2.1. Removal of free movement of goods and new custom duties and tariffs
As far as the removal of the free movement of goods is concerned, it will be a – hopefully temporary – hassle, since the UK does not have any bilateral customs and trade agreements in place with the EU (because no withdrawal agreement will be entered into between the EU and the UK by 30 March 2019) and with non-EU countries (because the 53 trade agreements with non-EU countries were secured by the EU directly, on behalf of its then 28 member-states, including with Canada, Singapore, South Korea).
On 30 March 2019, the UK will regain its right to conclude binding trade agreements with non-EU countries, and with the EU of course.
While the UK government laboriously launches itself into the negotiation of at least 54 trade agreements, including with the EU, customs duties will be reinstated between the UK and all other European countries, including the UK. This is going to lead to a very disadvantageous situation for UK businesses, as the cost of trading goods and products with foreign countries will substantially increase, both for imports and exports.
Creative companies headquartered in the UK, which export and import goods and products, such as fashion, design and tech companies, are going to be especially at risk, here, with the cost of imported raw material increasing, and the rise or appearance of custom duties on exports of their products to the EU and non-EU countries. Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas.
Since the UK has most of its trade (57% of exports and 66% of imports in 2016) done with countries bound by EU trade agreements, both UK companies and UK consumers must brace themselves for a shock, when they will start trading after 30 March 2019. The cost of life is going to become more expensive in the UK (since most products and goods are imported, in particular from EU member-states), and operating costs are also going to increase for UK businesses.
While some Brexiters claim that the UK will be fine, by reverting to trading with the “rest of the world” under the rules of the World Trade Organisation (WTO), it is important to note that right now, only 24 countries are trading with the UK on WTO rules (like any one of the 28 member-states of the EU because no EU trade deal was concluded with these non-EU countries). After 30 March 2019, the UK will trade with the rest of the world under WTO rules, as long as the other state is also a member of the WTO (for example, Algeria, Serbia and North Korea are not WTO members). Moreover, some tariffs will apply to all UK exports, under those WTO rules.
It definitely does not look like a panacea to trade under WTO rules, so the UK government and its Bank of England will weaken the pound sterling as much as possible, to set off the financial burden represented by these custom duties and taxes.
Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should now relocate their manufacturing operations to the EU or low wages and low tax territories, such as South East Asia, as soon as possible, to avoid the new customs duties and taxation of goods and products which will inevitably arise, after 30 March 2019.
While a cynical example, since James Dyson was a fervent Brexiter who called on the UK government to walk away from the EU without a withdrawal deal, UK creative businesses manufacturing goods and products must emulate vacuum cleaner and hair dryer technology company Dyson, that will be moving its headquarters from Wiltshire to Singapore this year.
Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. Non-tariff barriers are any measure, other than a customs tariff, that acts as a barrier to international trade, such as regulations, rules of origin or quotas. In particular, regulatory divergence from the EU will make it harder to trade goods, introducing non-tariff barriers: when the UK will leave the EU customs union, on 30 March 2019, any goods crossing the border will have to meet rules of origin requirements, to prove that they did indeed come from the UK – introducing paperwork and non-tariff barriers.
2.2. Removal of free movement of services and VAT changes
On 30 March 2019, UK services – accounting for eighty percent of the UK economy – will lose their preferential access to the EU single market, which will constitute another non-tariff barrier.
The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, on average, in all 28 EU member-states, most legislation in this area is not as developed as in other areas.
There are no customs duties and taxation on services, therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the exit of the UK from the EU without a withdrawal agreement.
However, since the UK will become a non-EU country from 30 March 2019 onwards, EU businesses and UK business alike will no longer be able to apply the EU rules relating to VAT, and in particular to intra-community VAT, when they trade with UK and EU businesses respectively. This therefore means that, from 30 March 2019 onwards, a EU business will no longer charge VAT to a UK company, but will keep on charging VAT to its UK client who is a natural person. Also, a UK business will no longer charge VAT to a EU company, but will keep on charging VAT to its EU client who is a natural person.
Positive changes on VAT are also in the works, because the UK will no longer have to comply with EU VAT law (on rates of VAT, scope of exemptions, zero-rating, etc.): the UK will have more flexibility in those areas.
However, there will no doubt be disputes between taxpayers and HMRC over the VAT treatment of transactions that predate 30 March 2019, where EU law may still be in point. Because the jurisdiction of the Court of Justice of the European Union (CJEU) will cease completely in relation to UK matters on 30 March 2019, any such questions of EU law will be dealt with entirely by the UK courts. Indeed, UK courts have stopped referring new cases to the CJEU in any event, since last year.
2.3. Removal of free movement of capital and loss of passporting rights for the UK financial services industry
Since the UK will leave the EU without a withdrawal agreement, free movement of capital, which is intended to permit movement of investments such as property purchases and buying of shares between EU member-states, will cease to apply between the EU and the UK on 30 March 2019.
Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This EU central payments infrastructure is based around TARGET2 and the Single Euro Payments Area (SEPA). This includes all member-states of the EU, even those outside the eurozone, provided the transactions are carried out in euros. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.
Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.
However, as the UK will crash out of the EU without a deal on 30 March 2019, such transfer costs, as well as new controls on capital movements, will be put in place and impact creative businesses and professionals when they want to transfer money from the UK to EU member-states and vice-versa. While the UK government is looking to align payments legislation to maximise the likelihood of remaining a member of SEPA as a third country, the fact that it has decided not to sign the withdrawal agreement with the EU will not help such alignment process.
The cost of card payments between the UK and EU will increase, and these cross-border payments will no longer be covered by the surcharging ban (which prevents businesses from being able to charge consumers for using a specific payment method).
It is therefore advisable for UK creative companies to open business bank accounts, in euros, either in EU countries which are strategic to them, or online through financial services providers such as Transferwise’s borderless account. UK businesses and professionals will hence avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU, and other non-EU countries.
Also, forging ties with banking, insurance and other financial services providers in one of the remaining 27 member-states of the EU may be really useful to UK creative industries, after 30 March 2019, because the UK will no longer be able to carry out any banking, insurance and other financial services activities through the EU passporting process. Indeed, financial services is a highly regulated sector, and the EU internal market for financial services is highly integrated, underpinned by common rules and standards, and extensive supervisory cooperation between regulatory authorities at an EU and member-state level. Firms, financial market infrastructures, and funds authorised in any EU member-state can carry out many activities in any other EU member-state, through a process known as “passporting”, as a direct result of their EU authorisation. This means that if these entities are authorised in one member-state, they can provide services to customers in all other EU member-states, without requiring authorisation or supervision from the local regulator.
The European Union (Withdrawal) Act 2018 will transfer EU law, including that relating to financial services, into UK statutes on 30 March 2019. It will also give the UK government powers to amend UK law, to ensure that there is a fully functioning financial services regulatory framework on 30 March 2019.
However, on 30 March 2019, UK financial services firms’ position in relation to the EU will be determined by any applicable EU rules that apply to non-EU countries at that time. Therefore, UK financial services firms and funds will lose their passporting rights into the EU: this means that their UK customers will no longer be able to use the EU services of UK firms that used to passport into the EU, but also that their EU customers will no longer be able to use the UK services of such UK firms.
For example, the UK is a major centre for investment banking in Europe, with UK investment banks providing investment services and funding through capital markets to business clients across the EU. On 30 March 2019, EU clients may no longer be able to use the services of UK-based investment banks, and UK-based investment banks may be unable to service existing cross-border contracts.
3. Legal implications of Brexit in the UK
On 30 March 2019, the European Union (Withdrawal) Act 2018 (the “Act“) will take effect, repeal the European Communities Act 1972 (the “ECA“) and retain in effect almost all UK laws which have been derived from the EU membership of the UK since 1 January 1973. The Act will therefore continue enforce all EU-derived domestic legislation, which is principally delegated legislation passed under the ECA to implement directives, and convert all direct EU legislation, i.e. EU regulations and decisions, into UK domestic law.
Consequently, the content of EU law as it stands on 30 March 2019 is going to be a critical piece of legal history for the purpose of UK law for decades to come.
Some of the legal practices which are going to be strongly impacted by the UK crashing out of the EU are intellectual property law, dispute resolution, financial services law, franchising, employment law, product compliance and liability, as well as tax.
In particular, there is no clarity from the UK government, at this stage, on how EU trademarks, registered with the European Union Intellectual Property Office (EUIPO) are going to apply in the UK, if at all, after 30 March 2019. The same goes for Registered Community Designs (RCD), which are also issued by the EUIPO.
At least, some clarity exists in relation to European patents: the UK exit from the EU should not affect the current European patent system, which is governed by the (non-EU) European Patent Convention. Therefore, UK businesses will be able to apply to the European Patent Office (EPO) for patent protection which will include the UK. Existing European patents covering the UK will also be unaffected. European patent attorneys based in the UK will continue to be able to represent applicants before the EPO.
Similarly, and since the UK is a member of a number of international treaties and agreements protecting copyright, the majority of UK copyright works (such as music, films, books and photographs) are protected around the world. This will continue to be the case, following the UK exit from the EU. However, certain cross-border copyright mechanisms, especially those relating to collecting societies and rights management societies, and those relating to the EU digital single market, are going to cease applying in the UK.
Enforcement of IP rights, as well as commercial and civil rights, is also going to be uncertain for some time: the UK will cease to be part of the EU Observatory, and of bodies such as Europol and the EU customs’ databases to register intellectual property rights against counterfeiting, on 30 March 2019.
The EU regulation n. 1215/2012 of 12 December 2012, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, will cease to apply in the UK once it is no longer an EU member-state. Therefore, after 30 March 2019, no enforcement system will be in place, to enforce an English judgment in a EU member-state, and vice-versa. Creative businesses will have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This will likely introduce additional procedural steps before a foreign judgment is recognised, which will make enforcement more time-consuming and expensive.
To conclude, the UK government seems comfortable with the fact that mayhem is going to happen, from 30 March 2019 onwards, in the UK, in a very large number of industrial sectors, legal practices, and cross-border administrative systems such as immigration and customs, for the mere reason than no agreed and negotiated planning was put in place, on a wide scale, by the UK and the EU upon exit of the UK from the EU. This approach makes no economic, social and financial sense but this is besides the point. Right now, what creative businesses and professionals need to focus on is to prepare contingency plans, as explained above, and to keep on monitoring new harmonisation processes that will undoubtedly be put in place, in a few years, by the UK and its trading partners outside and inside the EU, once they manage to find common ground and enter into bilateral agreements organising this new business era for the UK.
Copyright & neighbouring rights updates on both sides of the pond: progress in sight for right owners | Entertainment lawCrefovi : 14/10/2018 8:00 am : Articles, Copyright litigation, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Music law
Notable headway is being made, on both sides of the pond, to legislate for better protection and empowerment of right owners. While such parallel progresses, made in the European Union and the USA, do not relate to resolving the same business and legal issues pertaining to copyright and neighbouring rights, they are notable as they illustrate a power shift, away from tech companies and their VOD and streaming platforms, as well as other distribution channels such as satellite and online radio, towards right owners such as music composers, performers, producers, film directors, etc.
1. Adoption of the Directive on Copyright in the Digital Single Market
In my article on “Copyright in the digital era: how the creative industries can cash in“, I detailed how the European Commission president, Jean-Claude Juncker, published his political guidelines for a new Europe which had, at its core, a connected Digital Single Market (“DSM“).
Central to the development of the DSM, is the implementation of the EU directive on copyright in the DSM 2016/0280 (the “DSM Directive“) in the 28 member-states of the European Union (“EU“). The key provisions of the DSM Directive include:
- providing rights of fair remuneration in contracts for authors and performers (articles 14 to 16);
- creation of an ancillary right for press publishers (article 11);
- obligation of online service providers (social networks, platforms, etc) to take measures to prevent infringement (article 13);
- new mandatory exceptions to infringement (articles 3 to 4);
- facilitating the use of out-of-commerce works by cultural heritage institutions (article 5).
The essence of each of these key provisions in the DSM Directive is set out in my article on “Copyright in the digital era: how the creative industries can cash in“.
The aim of the DSM Directive is to reduce the differences between national copyright regimes and to allow for wider online access to copyrighted works by users across the EU, in order to move towards a proper DSM.
First introduced by the European Parliament Committee on Legal Affairs on 20 June 2018, the DSM Directive was approved by the European Parliament on 12 September 2018, and will now enter formal trilogue discussions (i.e. closed-door compromise negotiations held between the three bodies involved in the legislative process of the EU institutions, which are the European Commission, the Council of the European Union and the European Parliament, to finalise the wording of the DSM Directive). This trilogue is expected to conclude in January 2019, with a final plenary vote taken by the European Parliament then. Once the DSM Directive is signed into law, each of the 28 member-states of the EU will have to transpose it in its national legal framework, during a two-year transposition period.
It is worth mentioning that, on 20 June 2018, when the European Parliament Committee on Legal Affairs proposed the negotiating mandate on the DSM Directive to the European Parliament, such proposal was rejected.
While Members of the European Parliament (“MEPs“) generally agree that most provisions set out in the DSM Directive are non-controversial, the most contentious aspects of the DSM Directive are its articles 11 and 13. The former prevents online content platforms and news aggregators sharing links without paying for them, while the latter requires online platforms to monitor and effectively enforce copyright laws.
So what is the fuss all about?
Article 11 of the DSM Directive concerns press publications and deals with links to, or copies of, press publications. Today, 57% of internet users access press content through social networks or search engines; while the media cannot claim any rights on these hyperlinks. Article 11 sets out that right holders shall be able to obtain a fair and proportionate remuneration for the digital use of their press publications from tech platforms, such as Facebook, Linkedin, Google, etc.
As the right owners to press publications most often will be the publishers, there is also a paragraph incorporated, ensuring that the publishing houses will remunerate the actual authors, i.e. the journalists.
Merely sharing hyperlinks to articles, accompanied by “individual words” to describe them, can be done freely.
Despite those restrictions to the scope of article 11, several MEPs view this article as a “link tax” (tax on hyperlinks), and consequently an infringement of the freedom of expression.
Article 13 of the DSM Directive provides for the use of protected content – for instance, pictures, music, code, videos – uploaded by someone other than the right holder to online content sharing service providers, which store and give access to large amounts of works, such as YouTube or DailyMotion.
When article 13 of the DSM Directive will enter into force, platforms will have to enter into licensing agreements with right holders, regarding the use of the protected content. This will probably be done through a compulsory licensing system, which already exists for other areas relating to the use of intellectual property protected material.
If it is not possible to enter into licensing agreements with the right holders, the platforms and right holders must cooperate in order to ensure that unauthorised protected works are not available on these platforms.
Therefore, article 13 requires the platforms to proactively work with right holders to stop users from uploading copyrighted content without right holders’ prior consent. This will require automatic scanning and filtering of all material being uploaded to platform sites, such as YouTube, Dailymotion or Facebook.
Small and micro platforms will not be subjected to article 13, while Wikipedia and other open source platforms will also be exempted.
Despite those restrictions to the scope of article 13, several MEPs view the mandatory and automatic filtering and scanning of content as potentially too onerous for small and start-up platforms, thereby encouraging centralisation and consolidation of the internet since only large platforms will have the means and tools to implement this automatic filtering.
While there will be some costs involved for tech platforms, in connection with the establishment of security measures for securing that protected content is dealt with in the right manner, right holders will have much more financial incentives to upload their content to these platforms, once the DSM Directive is adopted by final vote in January 2019 and then transposed by each member-state.
Online providers of user-generated content will no longer be able to hide behind any Safe Harbor provisions, which essentially set out that, when users share content that infringes someone else’s copyright, the conduit through which that content is shared is not liable for the users’ infringing activity, as long as such platform, if and when a copyright owner notifies it of such infringement, for example by way of a “take down” notice, takes action to remove that content.
For the first time in history, through the DSM Directive, it is recognised that online content sharing service providers are not meant to be protected by Safe Harbor law, but should license any content first, as well as take proactive measures to prevent users from uploading unlicensed content.
2. Signature of the Music Modernization Act into US law
As explained in my article “Crefovi’s take on Midem 2015: wider income streams, that transparency issue and levelling the playing field“, the US congress ignored the copyright reform bills, such as the Songwriter Equity Act, the Allocation for Music Producers Act and the Fair Play Fair Pay Act, drafted by the US music industry, for many years.
While US radio broadcasters and other stakeholders fiercely pushed back on any introduction of a sound recording public performance royalty for AM/FM (terrestrial) radio in the USA, the collection and distribution of digital sound recording public rights, made by the US non-profit organisation established by Congress, SoundExchange, on behalf of artists and producers, was not as efficient and wide-ranging as it could have been.
As a consequence, many US artists, producers and managers worked from abroad, mainly in Europe, in order to benefit from wider sources of income and, in particular, from sound recording public performance royalties, also called neighbouring rights royalties.
This sorry state of affair is now over, with the Music Modernization Act (“MMA“) signed into law on 11 October 2018, further to being passed through both the House and Senate.
The MMA is a combination of three bills, as follows.
The Music Modernization Act which aims at improving how music licensing and royalties would be paid in consideration of streaming media services in the three following ways:
- It sets up a non-profit governing agency that will create a database relating to the owners of the mechanical license of sound recordings – i.e. the copyright that covers the composition and lyrics of a song (not the rights over the performance and recording of such song, which are held under a different license and collected by SoundExchange); such new agency will establish blanket royalty rates, which will be applied to pay composers and songwriters, when their songs are used by streaming services, and when such songs are recorded in this database. Such new agency and database should eliminate the difficulty previously faced by streaming services to properly identify any mechanical license holders. These royalties will be paid by streaming services, to the new agency, as a compulsory license, not requiring the mechanical license holder’s permission. The agency will then be responsible for distributing such royalties.
- It ensures that songwriters, composers and lyricists are paid a portion of mechanical license royalties for either physical or digital reproduction of a song with their lyrics or musical composition, at a rate set by contract.
- It revamps the rate court process when disagreements over royalty rates arise, with a random judge in the United States District court for the Southern District of New York assigned to oversee and handle such cases, from now on.
The Compensating Legacy Artists for their Songs, Service, and Important Contributions to Society Act (the “CLASSICS Act“), which addresses the situation of sound recordings made before 15 February 1972, which were not covered under federal copyright law, leaving them up to the individual states to pass laws for recording protection. This had created a complex series of laws that made it difficult for copyright enforcement and royalty payments. The CLASSICS Act sets out that sound recordings before 1972 are covered by copyright until 15 February 2067, with additional language to grandfather in older songs into the public domain at an earlier time. Indeed, recordings made before 1923 will enter the public domain on 1 January 2022, with recordings made between 1923 and 1956 being phased into the public domain over the next few decades.
The Allocation for Music Producers Act (“AMP“) set outs that SoundExchange must also distribute part of the royalties on sound recordings, collected on digital sound recording public rights, to “a producer, mixer or sound engineer who was part of the creative process that created the sound recording“.
While the Music Modernization Act streamlines the music-licensing process in the digital era, it is worth noting that the more beefy provisions set out in the Fair Play Fair Pay Act have not been incorporated in it. Indeed, the Fair Play Fair Pay Act had been designed to harmonize how royalties were paid by terrestrial radio broadcasters and internet streaming services, on sound recording public rights. While songwriters and composers will now receive mechanical license royalties on both digital streaming and radio plays, performing artists and music producers will remain at a disadvantage since their performance royalties will keep on only being collected by SoundExchange on digital and streaming plays; not on terrestrial radio plays. It is baffling that the US government still considers such use of songs and sound recordings on radio to be merely “promotional” and therefore devoid of royalties for performers.
While the MMA is, without any doubt, a step in the right direction, to improve the financial well being of US songwriters, composers and lyricists, and, to a degree, of US artists, producers and performers as well as US music professionals such as music producers, engineers and mixers, these US reforms are nowhere as forward thinking and protective towards right owners than the DSM Directive or, even, the current EU copyright and neighbouring rights protection framework. Indeed, all the provisions set out in the MMA relate to the protection and remuneration of rights which have long been fully protected, and monetised, in the EU.
To conclude, the EU remains at the forefront of protecting right owners in the digital era, compared, in particular, to the USA, and it will be interesting to watch which side of the protection spectrum the United Kingdom decides to take, once it fully withdraws from the EU and ceases to have any obligation to transpose the DSM Directive in its national law, as a member-state, on 29 March 2019.
Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries. Having worked with creative clients for more than sixteen years, Annabelle is an avid believer in the importance and value of looking forward, and planning ahead, to thrive in the current music industry and its new paradigm. The work undertaken by her regularly includes advising songwriters and composers on publishing deals; producers and performers on record deals and all of the latter on streaming deals and sync transactions; as well as intellectual property registration and protection, intellectual property and commercial litigation, negotiating merchandise deals and partnerships between brands and bands. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.
Annabelle is also the president of the International association of lawyers for the creative industries (ialci).
What are business owners obligations, in terms of registering beneficial ownership of their companies? How do these obligations differ, in France and the United Kingdom, even though such obligations stem from the same European legislation, i.e. the European Directive 2015/849 dated 20 May 2015 on money laundering?
1. What is this all about?
On 20 May 2015, the Directive (EU) 2015/849 of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council, was published (the “Directive“).
As set out in the recitals of the Directive, and in order to better fight against money laundering, terrorism financing and organised crime, “there is a need to identify any natural person who exercises ownership or control over a legal entity (…). Identification and verification of beneficial owners should, where relevant, extend to legal entities that own other legal entities, and obliged entities should look for the natural person(s) who ultimately exercises control through ownership or through other means of the legal entity that is the customer“.
In addition, “the need for accurate and up-to-date information on the beneficial owner is a key factor in tracing criminals who might otherwise hide their identity behind the corporate structure“.
Chapter III (Beneficial ownership information) of the Directive relates to such topic.
In particular, article 30 of the Directive provides that “member states shall ensure that the information (on beneficial ownership) is held in a central register in each member state, for example a commercial register, companies register or a public register (…). Member states shall ensure that the information on the beneficial ownership is adequate, accurate and current” and accessible “to competent authorities, without any restriction; (…) and to any person or organisation that can demonstrate a legitimate interest“.
These persons or organisations shall access at least the name, the month and year of birth, the nationality and the country of residence of the beneficial owner as well as the nature and extent of the beneficial interest held.
2. Registration of beneficial ownership in French companies
With typical Gallic nonchalance, and while the deadline to transpose the Directive in each member-state was 26 June 2017, France transposed the Directive almost one year later, through its Ordinance n. 2016-1635 of 1 December 2016 reinforcing the French mechanism against money laundering and the financing of terrorism and of the Decree n. 2017-1094 of 12 June 2017 relating to the registry of effective beneficiaries as defined in article L. 561-2-2 of the French monetary and financial code (the “Ordinance” and the “Decree” respectively), with a compliance deadline of 1 April 2018.
The Ordinance and Decree, which have now been incorporated in the French monetary and financial code, compel all companies operating in France to register their beneficial owners with the Registry of Commerce and Companies of the competent Commercial court (the “Registry“).
2.1. Beneficial ownership and filing with the Registry
The notion of beneficial ownership is not defined in the Decree, although is it defined in the Directive as including each natural person who either ultimately owns, directly or indirectly, more than 25% of the share capital or voting rights of the company, or exercises, by any other means, a supervisory power on the managing, administrative or executive bodies of the company or on the shareholders general assembly.
The information that must be filed is essentially identical to that required by financial institutions and other entities such as law firms, in order for them to carry out their mandatory Know-Your-Client (KYC) procedures.
2.2. The initial filings
The declaration of beneficial ownership must be filed at the Registry when a company is first registered with the Registry or, at the latest, within 15 days as of the date of issuance of the receipt of registration (article R. 561-55 of the French monetary and financial code) i.e. when it is created or opens a branch in France.
2.3. Corrective filings
For companies already registered, the deadline for the declaration is 1 April 2018. If subsequent updates are required, new filing must be made within 30 days as of the fact or the act giving rise to a required update (article R. 561-55 of the French monetary and financial code).
2.4. On the beneficial owner
The declaration must set out the owner’s name and particulars, as well as the means of control exercised by the beneficial owner and the date on which s/he became a beneficial owner (article R. 561-56, 2. of the French monetary and financial code).
2.5. Persons having access to the register of beneficial owners
Access to the register of beneficial owners is limited to magistrates of the civil courts and the Ministry of Justice; investigators working for the Autorité des Marchés Financiers (French financial markets regulator); agents of the Direction Générale des Finances Publiques (Directorate-General for Public Finances); qualifying credit institutions, insurance and mutual insurance companies and investment services providers; and any person authorised by a court decision to this effect.
2.6. Penalties for non-compliance
The new provisions of the French monetary and financial code provide remedial penalties with the possibility for any person having a legitimate interest to bring an action in order to force the defaulting company to fulfil its obligation to declare its beneficial owners (article R. 561-48 of the French monetary and financial code).
Punitive provisions have also been introduced: failure to declare the beneficial owners to the Registry or filing a declaration involving incomplete or inaccurate information is punishable by 6 months of imprisonment and a fine of Euros 7,500 (article 561-49 of the French monetary and financial code).
3. Registration of beneficial ownership in British companies
Well within the deadline to transpose the Directive in each member-state of 26 June 2017, the United Kingdom transposed the Directive on time, through its new paragraph 24(3) of Schedule 1A of the Companies Act 2006, as amended by Schedule 3 to the Small Business, Enterprise and Employment Act 2015 (the “Companies Act” and “Enterprise Act” respectively), with a compliance deadline of 30 June 2016.
The Companies Act and Enterprise Act, compel all companies operating in the United Kingdom to keep a register of Persons with Significant Control (“PSC register“) and to file this PSC information via their confirmation statements, upon the due filing date of their respective confirmation statements with Companies House, i.e. the British equivalent to the French Registry of Commerce and Companies of the competent Commercial court (“Companies House“).
3.1. Beneficial ownership and filing with Companies House
The notion of beneficial ownership, or significant influence or control, as set out in the Companies Act, is defined in the Companies Act as including each natural person who either ultimately owns, directly or indirectly, more than 25% of the share capital or voting rights of the company, or exercises, by any other means, a supervisory power on the managing, administrative or executive bodies of the company or on the shareholders general assembly.
UK companies, Societates Europae (SEs), Limited liability partnerships (LLPs) and eligible Scottish partnerships (ESPs), will be required to identify and record the people with significant control.
3.2. The initial filings
The PSC information must be filed with the central public register at Companies House when a company is first registered with Companies House, i.e. when it is created or opens a branch in the UK.
In addition, new companies, SEs, LLPs need to draft and keep a PSC register in relation to them, in addition to existing registers such as the register of directors and the register of members (shareholders).
3.3. Corrective filings
For companies already registered, on 6 April 2016, the Companies Act required all companies to keep a PSC register and, from 30 June 2016, companies started to file this PSC information via their confirmation statements.
As each company has a different filing date, based on the anniversary of their respective incorporation, it took up to 12 months (i.e. 30 June 2017) to develop a full picture of all UK companies’ PSCs.
3.4. On the beneficial owner
Before a PSC can be entered on the PSC register, you must confirm all the details with them.
The details you require are:
- date of birth;
- country, state or part of the UK where the PSC usually lives;
- service address;
- usual residential address (this must not be disclosed when making your register available for inspection of providing copies of the PSC register);
- the date s/he became a PSC in relation to the company (for existing companies, the 6 April 2016 was used);
- which conditions for being a PSC are met;
- this must include the level of shares and/or voting rights, within the following categories:
- over 25% up to (and including) 50%;
- more than 50% and less than 75%;
- 75% or more;
- the company is only required to identify whether a PSC meets the condition relating to the control and significant influence, if they do not exercise control through the shareholding and voting rights conditions;
- this must include the level of shares and/or voting rights, within the following categories:
- whether an application has been made for the individual’s information to be protected from public disclosure.
3.5. Persons having access to the register of beneficial owners
A company’s PSC register should contain the information listed in paragraph 3.4 above, for each PSC of the company. However, that may not always be possible. Where, for some reason, the PSC information cannot be provided, other statements will need to be made instead, explaining why the PSC information is not available. The PSC register can never be blank and such information must be provided to Companies House.
Unlike in France PSC information is freely available, for each company, on Companies House’s website.
As the PSC register is one of the company’s statutory registers, each UK company must keep it at its registered office (or alternative inspection location). Anyone with a proper purpose may have access to the PSC register without charge or have a copy of it for which companies may charge GBP12.
If compared with the French situation, it is therefore much easier to obtain the PSC register for a UK company, than for a French company.
3.6. Penalties for non-compliance
Company officers who fail to take all reasonable steps to disclose their PSCs are liable to be fined or imprisoned (by way of a prison sentence of up to two years) or both. If an investigated person fails to respond to the company’s request for information, the company is allowed to “freeze” the relevant shares by stopping proposed transfers and dividends in relation to those shares.
Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their corporate and business law requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.
Annabelle is also the president of the International association of lawyers for the creative industries (ialci).
The GDPR is upon us: what is it? How is it going to impact you and your business? What do you need to do in order to become GDPR compliant?
There is not a moment to waste, as the stakes are very high, and since becoming GDPR compliant will definitely bring competitive advantages to your business.
On 27 April 2016, after more than 4 years of discussion and negotiation, the European parliament and council adopted the General Data Protection Regulation (“GDPR”).
Why the GDPR?
The GDPR repeals Directive 95/46/EC on the protection of individuals with regards to the processing of personal data and on the free movement of such data (the “Directive”).
The Directive, which entered into force more than 20 years’ ago, was no longer fit for purpose, as the amount of digital information businesses create, capture and store has vastly increased.
Data, the bigger the better, is here to stay. Today’s data more and more greases our digital world. Control of data is ultimately about power and data ownership does seriously impact competition on any given market. By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on. Data assets are, today, at least as important as other intangible assets such as trademarks, copyright, patents and designs, to companies. The stakes are way higher, today, as far as data ownership, control and processing are concerned, and GDPR addresses that data flow in the 21st century, as we all engage with technology, more and more.
Moreover, many legal cases, brought up in various member-states of the European Union (“EU”), pinpointed the severe weaknesses and gaps in providing satisfactory, strong and homogeneous protection of personal data, relating to EU citizens, and controlled by companies and businesses operating in the EU. For example, the Costeja v Google judgment, from the Court of Justice of the European Union (“CJEU”), commonly referred to as the “right to the forgotten” ruling, was handed down on 26 November 2014. This ground-breaking judgment recognised that search engine operators, such as Google, process personal data and qualify as data controllers within the meaning of Article 2 of the Directive. As such, the CJEU ruling recognised that a data subject may “request (from a search engine) that the information (relating to him/her personally) no longer be made available to the general public on account of its inclusion in (…) a list of results”. Through this decision, the CJEU forced search engines such as Google to remove, when requested, URL links that are “inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed”. It was a huge step forward for personal data protection in the EU.
In addition, data breaches at, and cyber-attacks of, thousands of international businesses (Sony Pictures, Yahoo, Linkedin, Equifax, etc.) as well as EU national companies (Talktalk, etc.) make the news, consistently and on a very regular basis, dramatically affecting the financial and moral well being of millions of consumers whose personal data was hacked because of these data breaches. These attacks and breaches raise very serious concerns as to whether businesses managing personal data of EU consumers are actually “up to scratch”, in terms of proactively fighting against cyber-crime and protecting personal data.
Finally, the GDPR, which will be immediately enforceable in the 28 member-states of the EU without any transposition from 25 May 2018, unlike the Directive which had to be transposed in each EU member-state by way of national rules, standardises all national laws applicable in these member-states and therefore provides more uniformity across them. The GDPR levels the playing field.
When will the GDPR enter into force?
The GDPR, adopted in April 2016, enters into force on 25 May 2018, ideally giving a 2-year preparation period to businesses and public bodies to adapt to the changes.
While many EU business owners take the view that the changes brought by the GDPR onto their businesses, will be of little or no importance or just as important as other compliance issues, there is not a minute to spare to prepare for compliance with the new set of complex and lengthy rules set out in the GDPR.
What is at stake? Which organisations are impacted by the GDPR?
A lot is at stake. All businesses, organisations or entities which operate in the EU or which are headquartered outside of the EU but collect, hold or process personal data of EU citizens must be GDPR compliant by 25 May 2018. Potentially, the GDPR may apply to every website and application on a global basis.
As most if not all multinationals have customers, employees and/or business partners in the EU, they must become GDPR compliant. Even start-ups and SMEs must be GDPR compliant, if their business model infer that they will collect, hold or process personal data of EU citizens (i.e. customers, prospects, employees, contractors, suppliers, etc).
The stakes are very high for most businesses and, for many companies, it is becoming a board-level conversation and issue.
To ensure compliance with the new legal framework for data protection, and the implementation of the new provisions, the GDPR introduced an enforcement regime of very heavy financial sanctions to be imposed on businesses that do not comply with it. If an organisation does not process EU individuals’ data in the correct way, it can be fined, up to 4% of its annual worldwide turnover, or Euros 20million – whichever is greater.
These future fines are way larger than the GBP500,000 capped penalty the UK Data Protection Authority (“DPA”), the Information Commissioner Office (“ICO”), or the maximum 300,000 euros capped penalty that the French DPA, the “Commission Nationale Informatique et Libertés” (“CNIL”), can currently inflict on businesses.
What are the GDPR provisions about?
The GDPR provides 99 articles setting out the rights of individuals and obligations placed on organisations within the scope of the GDPR.
Compared to the Directive, here are the new key concepts brought by the GDPR.
4.1. Privacy by design
The principle of privacy by design means that businesses must take a proactive and preventive approach in relation to the protection of privacy and personal data. For example, a business that limits the quantity of data collected, or anonymises such data, does comply with the “privacy by design” principle.
This obligation of “privacy by design” implies that businesses must integrate – by all appropriate technical means – the security of personal data at the inception of their applications or business procedures.
Accountability means that the data controller, as well as the data processor, must take appropriate legal, organisational and technical measures allowing them to comply with the GDPR. Moreover, data controllers and data processors must be able to demonstrate the execution of such measures, in all transparency and at any given point in time, both to their respective DPAs and to the natural persons whose data has been treated by them.
These measures must be proportionate to the risk, i.e. the prejudice that would be caused to EU citizens, in case of inappropriate use of their data.
In order to know whether a business is compliant, it is therefore necessary to execute an audit of the data processes made by such company. We, at Crefovi, often execute some audits certified by the CNIL or the ICO.
4.3. Privacy impact Assessment
The business in charge of treating and processing personal data, as well as its subcontractors, must execute an analysis, a Privacy Impact Assessment (“PIA”) relating to the protection of personal data.
Businesses must do a PIA, a privacy risk assessment, on their data assets, in order to track and map risks inherent to each data process and treatment put in place, according to their plausibility and seriousness. Next to those risks, the PIA sets out the list of organisational, IT, physical and legal measures implemented to address and minimise these risks. The PIA aims at checking the adequacy of such measures and, if these measures fail that test, at determining proportionate measures to address those uncovered risks and to ensure the business becomes GDPR compliant.
Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests.
4.4. Data Protection Officer
The GDPR requires that a Data Protection Officer (“DPO”) be appointed, in order to ensure the compliance of treatment of personal data by public administrations and businesses which data treatments present a strong risk of breach of privacy. The DPO is the spokesperson of the organisation in relation to personal data: he or she is the “go to” point of contact, for the DPA, in relation to data processing compliance, but also for individuals whose data has been collected, so that they can exercise their rights.
In addition to holding the prerogatives of the “correspondant informatique et liberté” (“CIL”) in France, or chief privacy officer in the UK, the DPO must inform his/her interlocutors of any data breaches which may arise in the organisation, and analyse their impact.
Profiling is an automated processing of personal data allowing the construction of complex information about a particular person, such as her preferences, productivity at work or her whereabouts.
This type of data processing can generate automated decision-making, which may trigger legal consequences, without any human intervention. In this way, profiling constitutes a risk to civil liberties. This is why those businesses doing profiling must limit its risks and guarantee the rights of individuals subjected to such profiling, in particular by allowing them to request human intervention and/or contest the automated decision.
4.6. Right to be forgotten
As explained above, the right to be forgotten allows an individual to avoid that information about his/her past interferes with his/her actual life. In the digital world, that right encompasses the right to erasure as well as the right to dereferencing. On the one hand, the person can have potentially harmful content erased from a digital network, and, on the other hand, the person can dissociate a keyword (such as her first name and family name) from certain web pages on a search engine.
4.7. Other individuals’ rights
The GDPR supplements the right to be forgotten by firmly putting EU citizens back in control of their personal data, substantially reinforcing the consent obligation to data processing, as well as citizens’ rights (right to access data, right to rectify data, right to limit data processing, right to data portability and right to oppose data processing), and information obligations by businesses about citizens’ rights.
Is there a silver lining to the GDPR?
5.1. An opportunity to manage those precious data assets
Compliance with GDPR should be viewed by businesses as an opportunity, as much as an obligation: with data being ever more important in an organisation today, this is a great opportunity to take stock of what data your company has, and how you can get most advantage of it.
The key tenet of GDPR is that it will give you the ability to find data in your organisation that is highly sensitive and high value, and ensure that it is protected adequately from risks and data breaches.
5.2. Lower formalities and one-stop DPA
Moreover, the GDPR withdraws the obligation of prior declaration to one’s DPA, before any data processing, and replaces these formalities with mandatory creation and management of a data processing register.
In addition, the GDPR sets up a one-stop DPA: in case of absence of a specific national legislation, a DPA located in the EU member-state in which the organisation has its main or unique establishment will be in charge of controlling compliance with the GDPR.
Businesses will determine their respective DPA with respect to the place of establishment of their management functions as far as supervision of data processing is concerned, which will allow to identify the main establishment, including when a sole company manages the operations of a whole group.
This unique one-stop DPA will allow companies to substantially save time and money by simplifying their processes.
5.3. Unified regulation, easier data transfers
In order to favour the European data market and the digital economy, and therefore create a favourable economic environment, the GDPR reinforces the protection of personal data and civil liberties.
This unified regulation will allow businesses to substantially reduce the costs of processing data currently incurred in the 28 EU member-states: organisations will no longer have to comply with multiple national regulations for the collection, harvesting, transfer and storing of data that they use.
Moreover, since data will comply with legislations applicable in all EU countries, it will become possible to exchange it and it will have the same value in different countries, while currently data has different prices depending on the legislation it complies with, as well as different costs for the companies that collect it.
5.4. A geographical scope extended by fair competition
The scope of the GDPR extends to companies which are headquartered outside the EU, but intend to market goods and services in the EU market, as long as they put in place processes and treatments of personal data relating to EU citizens. Following these residents on internet, in order to create some profiles, is also covered by the GDPR scope.
Therefore, European companies, subjected to strict, and potentially expensive, rules, will not be penalised by international competition on the EU single market. In addition, they may buy from non-EU companies some data which is compliant with GDPR provisions, therefore making the data market wider.
5.5. Opening digital services to competition
The right to portability of data will allow EU citizens subjected to data treatment and processing to gather this data in an exploitable format or to transfer such data to another data controller if this is technically possible.
This way, the client will be able to change digital services provider (email, pictures, etc.) without having to manually retrieve all the data, during a fastidious and time-consuming process. By lifting such technical barriers, the GDPR makes the market more fluid, and offers to users enhanced digital mobility. Digital services providers will therefore evolve in a more competitive market, inciting them in providing better priced and higher quality services, as their clients will no longer be hostages to their initial provider.
5.6. Labels and certifications
The European committee on data protection, as well as EU institutions, will propose some certifications and labels in order to certify compliance with the GDPR of data processes performed by businesses.
Cashable recognition and true asset for the brand image of a company, labels and certifications will also become a strong commercial tool in order to gain prospects’ trusts and to win their loyalty.
What are the actionable steps to take, right now, to become GDPR compliant?
There is not a moment to lose to implement the following steps, below:
- Decide on the ownership of implementing the GDPR provisions in your organisation; assign ownership to the best suited department or team (Legal? Compliance? Technology?);
- Liaise with your one-stop DPA, as several of them have prepared useful explanatory information or guidance to comply with GDPR, such as the ICO in the UK, the CNIL in France and the Data Protection Commissioner in Ireland (the latter being the DPA of many a digital giant, such as Google, Facebook and Twitter);
- Draft a map of the data processes in your organisation, and identify the gaps in GDPR compliance in relation to these various processes – we, at Crefovi, have drafted some detailed documents on how to make this mapping of data processes and treatments and to support you on identifying the gaps in GDPR compliance;
- Value the various data processes and treatments and assess which ones are high risk and make a list of your high-risk data assets;
- Execute a PIA on those high-risk data assets (such as Human resources’ data, customers’ data) – Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests;
- Implement legal, technical, organisational and physical measures to lower risks on those data assets and become GDPR compliant;
- Ensure that your contractors and sub-contractors have put compliant security measures in place, by sending them a list of points to check;
- Do privacy awareness training for your employees as they must understand that personal data is anything that can be linked directly to an individual and that there will be some consequences if they break the GDPR provisions and steal personal data;
- Develop a Bring Your Own Device policy (“BYOD”) and enforce it within your organisation and among your employees, since you are accountable for all data user information stored in the cloud and accessible from both corporate devices (tablets, smartphones, laptops) and personal devices. Also, when employees leave or are terminated, make sure that you have included BYOD in your off-boarding process, so that leaving staff lose access to company confidential data immediately on their devices;
- Check and/or redraft the information notices or confidentiality policies in order that they set out the new information required by the GDPR;
- Put in place automated mechanisms in order to obtain explicit consent from EU citizens, especially if your business deals with behavioural data collection, behavioural advertising or any other form of profiling;
- Put in place a solid management plan in case personal data breaches happen, which will allow you to comply with the mandatory requirement to notify your DPA within 72 hours – our in-depth experience of alert, risk management, analytical and notification plans, in France and the United Kingdom, put us, at Crefovi, in a great position to support our clients to prepare for the demanding requirements set out in the GDPR.
 “The world’s most valuable resource is no longer oil, but data”, The economist, 6 May 2017.
 “Preparing for the general data protection regulation: a roadmap to the key changes introduced by the new European data protection regime”, Alexandra Varla, 2017.
Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their personal data and cybersecurity requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.
Annabelle is also the president of the International association of lawyers for the creative industries (ialci).
Why authors, songwriters, composers, music publishers, movie producers, scriptwriters as well as digital service providers have everything to win in finding a consensus on copyright in the digital era.
Back in July 2015, I wrote a detailed article on neighbouring rights in the digital era and how the music industry may cash in on this exponentially expanding source of income.
Two years down the line, and further to attending the 2017 Cannes Film Festival and Midem, I am convinced that the dominance of digital distribution channels, and streaming in particular, is accelerating in the creative industries.
Focus 2017, the report on world film market trends published by the Marché du Film at the 2017 Cannes Film Festival, notes that, while films available on transactional Video On Demand (TVOD, such as iTunes) and subscription VOD (SVOD, such as Netflix or Amazon Prime) are on the rise, there are still barriers to release on VOD in Europe. The main obstacle being the perception that the level of revenues from VOD exploitation is still low, with 80% of revenues generated by 20% of films as well as high marketing costs. Another hurdle to full scale development of VOD services is the legal protectionism that some countries, such as France with its “cultural exception”, put in place to limit the disruptions that any blatant financial and commercial success of digital service providers would trigger, towards local theatres, national exhibitors, locally-made film productions and the local public.
Be that as it may, such obstacles will not pass the test of time and will be swept away by the sheer force of consumers’ demands and expectations, driven by a more tailored, user-friendly and personalised approach to consuming audio or video content, at any point in time, in any geographical location and on any device.
Already, the music sector, which has always been the creative industry the most quickly affected and disrupted by the digital revolution, is much more attuned to the potentialities of streaming and adapting its own business model in order to monetise such digital revolution for the benefit of all stakeholders involved. For example, the largest digital music service provider, Spotify, confirmed that it had over 140 million active users worldwide, in June 2017, up from the 100 million figure that was declared a year ago.
At Midem 2017, much talk was made about transparency, fair remuneration, the value gap, to sensibilise Midem attendees and the music business in general, to the needs of including copyright owners in this digital success story. Indeed, how can such supply chain of great audio content work, if copyright owners (i.e. publishers, songwriters, composers) feel disenfranchised and left out of the commercial and financial boon represented by streaming? They will just refuse to keep their songs on digital services providers’ platforms, such as Spotify, Apple Music and Deezer, if they do not get well compensated for such use, potentially crippling the expansion of audio digital distribution channels in the process.
As I had promised I would do, in my earlier article on neighbouring rights, I now turn my attention to how deals are done with digital service providers, in the streaming arena, in relation to the licensing aspects of copyright, in particular performance rights for right owners in the musical composition (as opposed to the sound recording). Here, we focus only on copyright and the situation of right owners in songs and musical compositions – typically, songwriters, composers, music publishers – in films – typically, scriptwriters, film producers – and in books – typically, authors and press publishers.
1. Getting to grips with copyright in the digital era
Copyright was consecrated by law, step by step, in order to ensure that people who create, author and/or produce original content or work (such as authors, writers, composers, songwriters and artists) have exclusive rights for its use and distribution.
Copyright came about with the invention of the printing press and was established first in Britain, as a reaction to printers’ monopolies at the beginning of the 18th century. The English parliament was concerned about the unregulated copying of books and passed the Licensing of the Press Act 1662, which established a register of licensed books and required a copy to be deposited with the Stationers’ Company, thus continuing the licensing of material that had long been in effect.
Copyright has grown from a legal concept regulating copying rights in the publishing of books and maps to one with a significant effect on nearly every modern industry, covering such items as songs, films, photographs, artworks, architectural works, software, etc.
Such exclusive rights granted to content creators are usually for a limited time (in most jurisdictions, the author’s life plus 70 years after the death of the author) and may be limited by exceptions to copyright law, such as fair use in the USA and fair dealing in the UK and Canada. Also, copyright protects only the original expression of ideas, not the ideas themselves, which is referred to as the “idea-expression dichotomy”.
Copyright frequently includes reproduction, control over derivative works, distribution, public performance, transfer of these rights to others, and moral rights, such as attribution.
Copyrights are considered territorial rights, which means that they do not extend beyond the territory of a specific jurisdiction. However, the geographical scope of copyright has been extended thanks to international copyright agreements, such as the 1886 Berne Convention for the protection of literary and artistic works. The Berne Convention introduced the concept that a copyright exists the moment the work is “fixed”, rather than requiring any registration: under the Berne Convention, copyrights for creative works do not have to be asserted, declared or registered, as they are automatically in force at creation. The Berne Convention also enforces a requirement that countries recognise copyrights held by the citizens of all other parties to the convention. Therefore, foreign authors are treated in the same way than domestic authors, in any country signed onto the Berne Convention. The regulations of the Berne Convention are incorporated into the World Trade Organisation’s TRIPS agreement (1995), thus giving the Berne Convention effectively near-global application. These multilateral treaties have been ratified by nearly all countries, and international organisations such as the European Union (“EU“) or World Trade Organisation require their member-states to comply with them.
Since works protected by copyright are consumed more and more online, on digital channels (VOD for video content and streaming and downloads for audio content), a new challenge has arisen to ensure that copyright owners can monetise the exploitation of their works online.
At the EU level, a whole legal framework has been put in place, in order to protect copyright within the 28 member-states and in the digital world. For example, the directive on the harmonisation of certain aspects of copyright in the information society (2001/29/EC) strives to adapt legislation on copyright to reflect technological developments, while the directive 2006/115/EC harmonises the provisions relating to rental and lending rights of works subject to copyright. However, it is mainly the directive 2014/26/EU on collective management of copyright (the “CRM directive“) that reshaped the EU legal framework towards more efficiency in monetising copyright in the digital era.
2. Collecting societies, music copyright and the CRM directive: a step in the right direction for EU right owners
A copyright collecting society, also called copyright collective, copyright collecting agency or licensing agency, is a body created by copyright law or private agreement which engages in collective rights management. Collecting societies have the authority to license works protected by copyright and collect royalties as part of compulsory licensing or individual licenses negotiated on behalf of their respective members. Collecting societies collect royalty payments from users of copyrighted works and distribute royalties back to copyright owners.
Collecting societies are organisations handling the outsourcing function of right management. Copyright owners transfer to collecting societies rights to:
- grant non-exclusive licenses;
- collect royalties on their behalf;
- distribute such collected royalties back to them;
- enter into reciprocal arrangements with other collecting societies around the world and
- enforce their rights.
To understand the role of collective rights management societies, we first need to talk about performing rights. Performing rights represent the greatest source of continuing royalty income. Throughout the world, writers and publishers receive in the area of USD6 billion in royalties each year, from performance rights. The performing right is a right of copyright which applies to the payment of licence fees by music users, when those users perform the copyrighted musical compositions of writers and publishers. This right recognises that a writer’s creation is a property right and that its use requires permission as well as compensation. For example, performances can be songs heard on the radio, underscores in a TV series or music performed live or on tape at a show, an amusement park, a sporting event, a major concert venue, a jazz club or a symphonic concert hall. Performances can be music on hold on a telephone or music channels on an airplane, or digital service providers such as Spotify and Apple Music.
Collecting societies also negotiate license fees for public performance and reproduction and act as lobbying interests groups. They grant blanket licences (i.e. they grant rights on behalf of multiple rights holders in a single blanket licence for a single payment), which grant the right to perform their catalogue for a period of time.
Music users (those that pay the license fees) include the major TV networks, radio stations, pay cable services, digital service providers, websites, concert halls, the hotel industry, nightclubs, bars, theme parks, etc.
Copyright holders will join a collecting society as members and instruct it to license rights on their behalf. The collecting society charges a fee for the licence, from which it deducts an administrative charge before distributing the remainder in royalties. Collecting societies are typically not for profit organisations and are owned and controlled by their members, the right holders.
Most countries in the world have only one collective music rights management society (SACEM in France, SIAE in Italy, PRS in the UK) but the USA have decided to have three organisations, in order to avoid monopolistic and anti-competitive behaviour. Therefore, ASCAP competes with BMI and SESAC, with 96% of the licence fees in performance rights being generated by either ASCAP or BMI in the USA.
For many years, collective rights management societies had a quiet life, apart in the USA where ASCAP, BMI and SESAC fiercely compete with each other, in order to get the best catalogues and music hits in their respective roster.
However, around 2008, quite a few European collective rights management societies were facing serious performance issues, compounded by a highly protective attitude towards other European societies, and an inability to cope with the changes in the way music is getting increasingly distributed online, on the internet.
On 16 July 2008, the European Commission adopted a decision (the “CISAC decision“) prohibiting 24 European collecting societies from restricting competition as regards to the conditions for the management and licensing of authors’ public performance for musical works. The collecting societies were found to have restricted the services they offered to authors and commercial users outside their domestic territory. While the CISAC decision made it easier for authors to select which collecting societies would manage their public performance rights (for example, an Italian author would become able to license his rights to PRS in the UK or SACEM in France), it was deemed to not be enough in order to force European collective rights management societies to make the necessary changes to open themselves up to the market.
Therefore, European institutions stepped up their game and, further to a proposal for a directive on collective rights management and multi-territorial licensing of rights in musical works for online uses, published on 11 July 2012, the EU adopted the CRM directive, the directive 2014/26/EU on collective rights management and multi-territorial licensing of rights in musical works for online uses.
Consequently, in the EU, the conduct of collecting societies is now governed by national regulations which implemented the CRM directive in the 28 member-states by the transposition date of 10 April 2016. Further to the entry into force of the CRM directive on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online use in the internal market, fairer competition – as well as sound collaboration – have at last arisen between all EU-based collecting societies.
The CRM directive aims to fulfil the following objectives:
- modernise and improve governance, financial management and transparency of the EU collecting societies, in particular ensuring that right holders have more say in the decision making process and receive royalty payments that are accurate and on time;
- promote a level playing field for multi-territorial licensing of online music and
- help create innovative and dynamic licensing structures that encourage the development of legitimate online music services.
EU collecting societies that grant multi-territorial licenses are now required to have “sufficient capacity” to process efficiently and in a transparent manner the data needed to administer multi-territorial licenses. “Sufficient capacity” includes at least capacity to invoice users, collect rights revenue and distribute amounts to rights holders. Also, EU collecting societies must, in response to a “duly justified” request from service providers, rights holders or other societies, provide up-to-date information regarding their online repertoire. Both these requirements are challenges to many EU collecting societies, as timely and accurate invoicing has never been a strong feature of collective licensing in Europe.
For digital service providers that wish to allow users to access easily a vast library of online content, the ability to obtain multi-territorial licenses is the critical factor in enabling service of a pan-European user-base. At a time where digital service providers are not only squeezed by labels, but pressured by authors and publishers to increase royalties, it is not yet clear whether the national transposition regulations of the CRM directive will go far enough to protect digital service providers’ interests.
At least, EU collecting societies are now embarking themselves into pan-European licensing collaborations such as ICE (an online music rights licensing and processing hub formed by three of the EU largest collection societies, PRS (UK), STIM (Sweden) and GEMA (Germany)) and Armonia (another online music rights licensing and processing hub formed by SACEM (France), SGAE (Spain), SIAE (Italy), SACEM Luxembourg, SABAM (Belgium), SUISA (Switzerland), AKM (Austria), SPA (Portugal), Artisjus (Hungary)) which both received clearance from the European Commission to enable faster and simplified rights negotiations for digital service providers operating in the EU. In May 2016, ICE signed its first license deal in the digital market place, partnering with Google Play Music.
3. The master stroke: copyright and the EU digital single market
In July 2014, ahead of his European Commission presidency, Jean-Claude Juncker published his political guidelines for a new Europe. Central to his agenda was a connected Digital Single Market (“DSM“), which triggered proposed EU legislation aimed at making the most out of digital technologies, and at the removal of restrictions to free movement of digital goods and services. Among the reforms, were changes to telecoms regulations (the end of mobile phone roaming charges), data protection (approval of the General Data Protection Regulation) and EU copyright laws.
The EU copyright reforms, in particular, are highly ambitious with a series of key proposals announced by the European Commission in September 2016:
- a EU regulation facilitating broadcasters by requiring only country of origin clearance for ancillary online services (for example, simulcasts, music, e-books, games or catch-up services) which are available across the EU, which was adopted on 8 June 2017;
- a EU directive and a EU regulation to implement the Marrakesh Treaty: the former providing a mandatory exception to facilitate access to published copyrighted works for people who are blind, visually impaired or print disabled, and the latter permitting the cross-border exchange of copies between the EU and other countries that are party to the Treaty and
- a proposal for a EU directive on copyright in the DSM (the “DSM proposal“).
The key provisions of the DSM proposal include:
- providing rights of fair remuneration in contracts for authors and performers;
- creation of an ancillary right for press publishers;
- obligation on online service providers (social networks, platforms, etc) to take measures to prevent infringement;
- new mandatory exceptions to infringement;
- facilitating the use of out-of-commerce works by cultural heritage institutions.
The DSM proposal aims at reducing the differences between national copyright regimes and allowing for wider online access to copyrighted works by users across the EU. It recognises that, despite the fact that digital technologies should facilitate cross-border access to works, obstacles remain, in particular for uses and works where clearance of rights is complex.
As regards audiovisual works, the DSM proposal sets out, despite the growing importance of VOD platforms, EU audiovisual works only constitute one third of works available to consumers on those platforms! Again, this lack of availability partly derives from a complex clearance process. The DSM proposal therefore provides for measures aiming at facilitating the licensing and clearance of rights process, to ultimately facilitate consumers’ cross-border access to copyright-protected content.
In particular, the DSM proposal provides for fair remuneration in contracts of authors and performers, in its articles 14 to 16. Since authors and performers often have a weak bargaining position when licensing their rights, the DSM proposal sets out a “transparency obligation” whereby member-states will be required to ensure that authors and performers shall have the right to information about the exploitation of their works. The obligation may be adjusted where it is disproportionate or disapplied where the contribution of the author is not significant. The provisions go on to provide a “contract adjustment mechanism” so that authors and performers can request additional remuneration from the party with whom they contracted when the remuneration originally agreed is disproportionately low to the subsequent revenues and benefits derived from exploitation of the works or performances. Member-states are also required to provide a voluntary, alternative dispute resolution mechanism. The EU parliament proposes two small amendments: recognising rights to equitable remuneration, and providing authors and performers with the option to appoint representatives for seeking contract adjustments on their behalf.
Another reform set out in article 11 of the DSM proposal, aiming at efficiently monetising copyright in the digital era, is the ancillary right for press publishers. The European commission has said the proposed right aims to address the difficulties faced by press publishers in licensing their publications online: the problem comes from recouping their investment as against those who reproduce their content online for free. Article 11 of the DSM proposal strives to fight this problem by requiring member-states to provide “publishers of press publications” with rights to control the “reproduction” and “making available to the public” rights that are available to authors. This ancillary right is intended to last for twenty years from January 1 in the year following the press publication. A “press publication” is defined as a “fixation of a collection” of journalistic literary works. Similar laws have been introduced in Germany and Spain and it has been reported that these have led to delisting of press publications on news sites, resulting in reduced traffic to publishers’ own sites.
The European Commission proposes to address the so-called “value gap” between licensed streaming services, which pay for the content they host, and intermediaries, such as social media networks (Facebook) and online platforms (YouTube), which host infringing content. The e-commerce EU directive provides a “safe harbour” defence to these intermediaries, with a notice and take-down regime. However, rather than make amendments to the e-commerce EU directive, article 13 of the DSM proposal sets out that “information society service providers that store and provide to the public access to large amounts of works uploaded by their users shall, in co-operation with right holders, take measures to ensure the functioning of agreements concluded with right holders for the use of their works or to prevent the availability on their services of works identified by rightholders through the cooperation with service providers“. The European Commission suggests that such measures may include the use of content-recognition technologies. This article 13 seems at odds with the e-commerce EU directive, its safe harbour provisions and the assurance of no obligation to monitor information transmitted or stored. Therefore, we can expect to see further discussion between the European commission and the EU parliament on how to properly address the “value gap”. One thing that is for sure is that music copyright owners, publishers in particular, are particularly irritated by existing safe harbour laws in place in the EU and the USA and want intermediaries to become fully accountable for the damage that infringement on their platforms causes to copyright owners.
Another notable reform brought by the DSM proposal is the improvement of licensing practices and wider access to content. The European commission puts forward measures to facilitate the digitisation and licensing of out of commerce works. These are works that are not available to the public through customary channels of commerce and which are often held by cultural heritage institutions. The purpose of these provisions is to provide wider access to these materials and to guarantee the cross-border effect of licensing agreements.
Let’s watch the space, as far as the DSM proposal is concerned, but it definitely constitutes a step in the right direction, in order to improve the monetisation of works protected by copyright in the EU single digital market.
4. Technological solutions to better monetisation of copyright in the digital era: a work in progress
Midem 2017 was a whirlwind of fancy technical propositions to tackle transparency, as well as efficient and accurate ways of paying royalties to copyright owners in the digital era.
The creation of a global database of musical copyrights and works was, yet again, envisaged, despite the fact that the Global Repertoire Database (“GRD“) was a resounding failure in 2014 due to a lack of appropriate coordination between, and funding from, various stakeholders such as Universal, EMI Music Publishing, tech companies such as Apple, Nokia and Amazon and collecting societies such as PRS (UK), STIM (Sweden) and SACEM (France).
Other technical suggestions envisaged were the use of sophisticated rights administration and management software solutions such as Counterpoint, the standardisation of data such as streamlining ISWC codes, the improvement of metadata provided to digital service providers by music publishers and labels, and using blockchain to structure a new database, with streamlined ISWC codes and accelerate payment of royalties through smart contracts and bitcoins.
It seems to me that all these technical solutions, in particular the creation of a copyrights’ database and the implementation of clear ISWC codes and sets of metadata will only be implementable when their installation is coordinated by pan-European and mandatory regulations enforceable in the 28 member-states of the EU.
To conclude, while the interests of copyright owners are increasingly being looked after, thanks to both legal and technical processes and tools more adapted to the fluid changes triggered by new means of consumption of copyrighted works in the digital era, it still feels like it is a “touch-and-go” approach that is put in place here. Although both copyright owners and digital service providers have everything to win in increasing transparency and prompt collection of digital royalties, while substantially reducing the value gap which greatly benefits intermediaries protected by safe harbour, I am under the impression that they do not really communicate efficiently together and do not think that their interests are aligned.
Annabelle Gauberti, founding partner of music law firm Crefovi, which specialises in advising the creative industries, out of Paris and London. Having worked with creative clients for more than fifteen years, Annabelle is an avid believer in the importance and value of looking forward, and planning ahead, to thrive in the current music industry and its new paradigm. The work undertaken by her regularly includes advising songwriters and composers on publishing deals; producers and performers on record deals and all of the latter on streaming deals and sync transactions; as well as intellectual property registration and protection, intellectual property and commercial litigation, negotiating merchandise deals and partnerships between brands and bands.
Crefovi partners up with Les Echos Formation to present cutting-edge one-day training on the law of luxury and fashion marketing: how to secure your practices.
This ground-breaking training day will provide a complete view on the legal aspects to pay attention to, when planning and organising marketing and advertising campaigns, as well as catwalk shows.
From image rights, publicity rights to brand ambassador deals, endorsement deals, as well as managing the brand’s relationships with agencies (modelling agencies, advertising agencies, music supervisors, etc), no stones will be left unturned by Crefovi during this seminar.
Dates of this training day:
- Tuesday 25 April 2017
- Thursday 30 November 2017
Goals of this training:
- master the essential aspects of a win-win negotiation with stars and models, their agents, as well as advertising agencies, sync agents and music supervisors
- Understand who are the stakeholders, their positions and differents roles in the decision taking process, in relation to the choice of brand ambassadors and endorsers, music tracks which will feature during the catwalk show or the advertising campaign, fashion models
- Compare the various strategies and negotiation tactics, in order to obtain the maximum investment in the advertising campaign or the partnership, from the brand ambassador or celebrity endorser, while fully complying with image rights and publicity rights
- Maximise the “marketing” potential of social media while minimising legal risks, in particular copyright infringement risks
- Use anti-counterfeiting campaigns as a marketing strategy of luxury wares
Outline for the daily programme:
09:30 – 11:30: the advertising campaign – a breeding ground for legal issues
- Relationships between the luxury brand and advertising agencies: how to ensure that the “brief” written by the luxury house is well understood?
- The deal with the celebrity: manage the agents, talent agencies and the contractual relationship with the start
- Synchronising music in the advertisement: a marked path
- Relationships with the media, image rights and intellectual property: written press, TV, streaming sites (YouTube, Vimeo)
- Social media and law: how to maximise the potential of digital while keeping legal risks down
11:45 – 13:30 – the fashion show each season – an important legal challenge!
- Agreements with models and other service providers: an important stake
- Photographers and catwalk shows: image rights, counterfeiting and royalties
- Music in fashion shows: how it works, from a legal standpoint?
Witness talk: a general counsel from a top luxury house shares his experience on negotiating and structuring various partnership agreements with brand ambassadors. He will detail the existing legal challenges during such negotiations
14:30 – 15:30 – case study
- Rihanna v Topshop.
- Catherine Zeta-Jones v Caudalie
- Why complying with image rights and publicity rights is paramount in the luxury and fashion sectors
15:45-17:15 – Fight against counterfeiting as a marketing and advertising tool
- Status of the fight against counterfeiting in the luxury and fashion sectors
- New tools to fight against counterfeiting – legal and non-legal
- Lobbying actions against counterfeiting with ECCIA, the Walpole, Comité Colbert, etc
17:15-18:00 – Final summary
Final summary of key points and takeaways, in order to best structure marketing and promotional campaigns for a luxury and fashion brand, while complying with existing laws and regulations
Annabelle Gauberti is a solicitor of England & Wales as well as a French “avocat” with the Paris bar. She focuses her practice on providing legal advice, either contentious or not contentious, to companies and individuals working in the creative industries in general, and the luxury and fashion sectors, as well as the music, film, TV and digital industries, in particular.
Ms Gauberti has more than thirteen years of experience in practicing the law of luxury goods and fashion. Since 2003, she has written numerous articles about this legal field.
Ms Gauberti is at the forefront of the expansion and development of the law of luxury goods and fashion, in particular by providing courses and seminars to luxury professionals at the Institut de la Recherche de la Propriété Intellectuelle (IRPI) and to MBA students in Luxury Brand Management, around the world.
Below are a few links to the seminars that Ms Gauberti organised and to which she participated as a speaker:
Les Echos Formation
Since 2003, Les Echos Formation works alongside large companies and public servants in developing their managerial capabilities with training sessions and conferences. Les Echos Formation is a content publisher (online and offline), aggregator and animator of customised and tailored training sessions focused on the needs of managerial teams, while leveraging its many resources and networks.
-- Download as PDF --