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.
This music & entertainment law blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global media and entertainment community, in particular in the United Kingdom and France. This music & entertainment law blog also provides timely updates and commentary on legal issues in the cinema, book publishing and music sectors. It is curated by the entertainment lawyers of our law firm, who specialise in advising our media & entertainment clients in London, Paris and internationally on all their legal issues.
London entertainment & media law firm advises, in particular, the fashion and luxury goods sectors, the music sector, film sector, art sector & high tech sector. Crefovi writes and curates this music & entertainment law blog to guide its clients through the complexities of media law.
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.
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.
Moreover, Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. One of these industry teams is the Media & entertainment department, which curate this music & entertainment law blog below, for you.
Annabelle Gauberti, founding and managing 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.
In the creative industries, the talent is often represented by middle men, who reach out to end customers, and find avenues whereby, and marketplaces on which, the products and/or services and skillset of the talent they represent are marketed, sold, distributed, licensed, etc. So, in the art world, these middle men are art galleries and auction houses. In the book publishing sector, these middle men are called literary agents, while in the film industry, those representing the above-the-line talent (actors, directors, writers) are called acting agents and agencies. Even music composers have their own composer agents, with a handful of players in this niche, in France and the United Kingdom (‟UK”). So, why do you need an agent, as a creative? How do you find an agent? How will your relationship with the agent work?
1. Why do you need an agent, as a creative?
As a creative, as a talent, you have mostly honed your creative skills, be it your painting skills, your sculpting skills, your acting skills, your writing and literary skills, your fashion design skills, etc.
This is a completely different skill set than the one needed to:
- getting substantial work in your creative field, relying on smooth marketing tactics, social media and public relations skills;
- networking with the major players in your creative field, be it the most bankable film directors, the most skilled film producers, the stalwart book publishers, the most wealthy art collectors, the largest fashion brands who will hire you as a model for their catwalk presentations, etc.
- negotiating sales, licensing, distribution agreements;
- negotiating service providers agreement to act in a film or write the musical composition and soundtrack to a film;
- negotiating publishing agreements of a literary work with books publishers and online content providers;
- managing, in a strategical and optimal manner, the career of the talent, and
- doing some reputation management work, when and if the career and image of a talent is getting tarnished for some reason.
Well, in a nutshell, you have the required job description of an agent, set out above!
This is why you need an agent: because he or she will do all the things mentioned above, for you, in order to enhance your career as a talent, and get you some jobs, some bookings or some sales, depending on what you have to offer.
Also, there are very low barriers to entry to most creative fields, since everyone can become a player in that field without having to obtain a particular practising license or authorisation from one’s government to become an artist, a book author, a painter, an actor, a film director, etc.
Indeed, unlike regulated industries, such as the legal profession, the medical profession, the accountancy profession, the banking and finance profession, creatives do not need to pass any stringent test or exam to be granted the right to work their creative jobs.
Therefore, the gatekeepers in the creative industries are the agents: since it is in their interest to only work with the best talent, they will pick and choose only the most successful and skilled gamers, designers, artists, painters, actors, film directors, writers, models, music composers, etc. to represent.
So, if you want to be part of the club, in your creative field, and land those big fat contracts, you must find yourself a good agent.
2. How do you find an agent?
Most of the time, it is by word of mouth, or through connections that one finds an agent.
Of course, being an alumni from a prestigious creative school, such as the National Film and Television School (‟NFTS”), in the UK, or the Royal Academy of Dramatic Art (‟RADA”) helps tremendously, especially since agents love mingling with young graduates there, attending their final and graduation presentations and reviewing their final graduation projects, to assess the amount of talent such graduates may have.
Think Alexander McQueen, the famed, and now deceased, fashion designer who was immediately spotted as a major player among top fashion designers, by the most elitist fashion press, when he presented his MA graduation collection, at his college Saint Martin’s in 1992.
Having a family member or friend in the business also helps, and there are countless examples of film actors who gave a major push to their offsprings, in France, the UK and the United States (‟US”) by ‟connecting them” to their agents.
If you are not one for nepotism, then you could also approach and cold-call the best agents for your particular creative field, and present them with your portfolio of works and CV, in the hopes that they will retain you as their client. However, this route is the toughest one, and you will probably get a lot of rejections, if and when you get picked by an agent.
The web is an excellent source of information to find the best agents in your creative field, in France, the UK and the US.
For example, on the best articles I have ever read on the highly-secretive agenting business is ‟Le fascinant business des agents de stars”, which dissects the rarified group of famous acting agents in Paris, France.
3. How will your relationship with the agent work?
The agenting business is mostly an unregulated one, although France, ever the formalistic one, has put in place some rules and regulations relating to the agenting profession in its labour code and a decree on the remuneration of artistic agents, which caps the agents’ earnings at 10 percent of the gross remunerations paid to the talent.
The excellent French streaming series, ‟10 pour cent” (‟Call my agent” on English streaming channels) gives a great example of what acting agents do, for a mere 10 percent of the actors’ earnings.
In the UK and the US, there is way more of a ‟laissez-faire” approach to the agenting business, although the UK has some statutory regulations set out in the Employment Agencies Act 1973 and the Employment Businesses Regulations 2003, which set some standards in terms of:
- providing relevant information and advice to the agents’ clients (i.e. the talent);
- conducting all affairs on behalf of the agents’ clients, and
- keeping records, in particular of the contracts and visa application processes, entered into by the agents’ clients during the course of the creative activities.
UK and US agents usually get 15 percent commissions, although I have seen percentage rates going as high as 50 percent, in the case of art galleries selling consigned art works on behalf of artists they represent.
These discrepancies in the commission rates, and the various obligations owed by the agent to the talent, are caused by the variance in the provisions set out in the representation agreements entered into between the talent and his or her agent. Since the ‟freedom to contract” principle applies, the terms of the contractual agreements entered into between the parties are left mostly to the freedom of those parties, except for the rare statutory points mentioned above.
Very often, at our law firm Crefovi, we get approached by creatives who signed very poorly drafted, and very unbalanced, representation agreements with their agents in the past. Therefore, we support them in terminating such agenting agreements, while attempting to recover any earning unpaid to them by these agents.
Therefore, as a talent, it is always advisable to instruct an entertainment lawyer, in order to review, amend and negotiate the terms of any draft representation agreement sent by the agent, before such talent signs it.
Also, it is useful to become a member of a trade union for creative practitioners, such as Equity, which may provide you with ongoing career, business and legal advice, along the way.
If you want to be successful in the arts, you need a top agent in your creative field to represent you. However, an agent is not your friend, but your future business partner, so you need to establish some clear, transparent and fair working conditions with him or her, from the outset. The best way to achieve this is to instruct a seasoned entertainment lawyer, like us at Crefovi, to negotiate such representation agreement for you. Then, it should be plain sailing, a lot of hard work and, hopefully, success and recognition at the end of the line, in your creative field!
During the ‟Lawfully Creative” podcast recorded with Joe DiMona, Crefovi’s founding and managing partner Annabelle Gauberti and Joe briefly discussed how hard it can be, for book authors such as Joe’s late father, Joseph DiMona, to earn a steady income as professional authors. We also queried what the main income sources for book authors were, and how they could be maximised to avoid a ‟peaks and troughs” lifestyle, which has unfortunately come to be associated with a life dedicated to literary works and creativity. Here is Crefovi’s take on income streams for authors and book publishers, in the publishing industry, and how to maximise copyright in the book publishing industry.
1. Transfer of copyright in the book publishing industry
The first owner of copyright, in any literary work (i.e. a novel, a biography, a letter, an essay, some lyrics for a song, a film script) is the person who wrote it (leaving aside national legislation, such as the one in the United Kingdom (‟UK”), which gives the employer the copyright in an employee’s work created in the course of employment). Therefore, the first owner of copyright in the book publishing industry, is the author.
At the international level, copyright in literary works is recognised, and protected, by:
- the Berne convention for the protection of literary and artistic works (the ‟Berne convention”), and
- with regard to publishing in the digital environment, the World Intellectual Property Office (‟WIPO”) copyright treaty (the ‟WIPO treaty”).
There are also some national laws, relating to the recognition, and protection, of copyright in literary works, such as:
- Section 3(1) of the UK Copyright designs and patents act 1988 (‟CDPA”), which defines a literary work as being ‟any work written, spoken or sung, other than a dramatic or musical work”;
- Article L112-2 of the French Intellectual property code (‟IPC”) which provides that books, brochures and any other literary, artistic and scientific writings, are ‟works from the mind” (‟oeuvres de l’esprit”) and as such, protected by copyright (‟droits des auteurs”).
Therefore, the first owner of copyright has the exclusive right to do certain restricted acts in relation to his or her literary work, such as to:
- copy the work (known as the reproduction right);
- issue copies of the work to the public (known as the distribution right);
- rent or lend the work to the public (known as the rental and lending rights);
- perform, show or play the work in public (known as the public performance right);
- communicate the work to the public (known as the communication right), and
- make an adaptation of the work, or do any of the above acts in relation to an adaptation of the work (known as the adaptation right),
which, collectively, are referred to as primary copyright rights.
Moreover, the first owner of copyright has the right to make a commercial use of his or her literary work, by:
- importing copies;
- possessing copies;
- selling, exhibiting or distributing copies;
- dealing with items that are used for the making of copies of the literary work, and
- permitting premises to be used for a performance, or providing apparatus for such performance of the literary work,
which, collectively, are referred to as secondary copyright rights.
Finally, there are personal rights, called moral rights, conferred upon the author of primary copyright works, which are quite distinct from the economic interests in the literary work. There are four moral rights, as follows:
- Right to paternity: authors of literary works have the right to be identified as such, by requesting that their name be tied, or associated, with the work. In order to benefit, the author must assert his or her right.
- Right to integrity: this is the right for the author of literary works to object to the derogatory treatment of his or her work, that is, that the work has been added to, altered or deleted in such a way to amount to a distortion, mutilation or otherwise prejudicial treatment. In other words, that is the right to respect his or her creation.
- Right to disclosure: this is the right for the author to let go of his or her intellectual asset, which then goes from the private sphere to the public space. The author is the sole judge of the moment, and form, of the first communication to the public of his or her literary work.
- Right to object to attribution: any person has the right for literary works not to be incorrectly attributed to him or her. The attribution may be express, but it can also be implied. Also, the author may, after the publication of his or her literary work, decide to repent and withdraw from the attribution of this literary work. This provides the author with a unilateral right to terminate his or her contractual obligations, and terminate any exploitation of his or her intellectual asset, provided that this author first indemnifies the publisher of the damages and consequences suffered by such publisher, upon termination of exploitation of his or her literary work.
While the moral rights cannot be transferred from the first owner of copyright of a literary work, to another person, the primary and secondary copyright rights can be transferred to a third party, either temporarily or permanently, as bundles of rights.
Usually, in the book publishing industry, the author/writer of a manuscript enters into a legal relationship with a publisher in order to publish the work and issue copies of it in sufficient quantities to satisfy the needs of the public.
The author does this by virtue of a contract in which it either assigns, or grants an exclusive or non-exclusive license, to the publisher. In the case of an assignment, the transfer of copyright is permanent and irreversible, while in the case of a license, the transfer of the copyright in the literary work will terminate, and revert back to the author, on a termination date set out in the license agreement.
The publishing agreement mainly grants the publisher primary copyrights, such as the rights of reproduction and distribution over a literary work, thus providing the publisher with the legal means necessary to publication.
However, the publishing agreement often also specifies how secondary and subsidiary rights are to be dealt with. The author may decide to grant the publisher the right to exploit his or her work in other ways, by selling translation rights, for example, or negotiating with a magazine or newspaper to serialize extracts from his or her work, or organising the digital and electronic exploitation of a printed work.
Sometimes, though, the author and/or his or her agent, will reserve these rights. In these cases, the agent of a successful and widely-known author may have very good contacts with TV and film companies and be better placed to negotiate options or deals directly with them. Or the agent and/or author may prefer to negotiate directly with the best players in the digital and electronic publishing space, rather than leaving an unsophisticated publisher of the print work do these negotiations or even exploit such digital rights.
Regulation of the contract between the author and publisher is left to national legislation (i.e. the Berne convention and the WIPO treaty do not apply with respect to contracts between authors and publishers). While in some legal traditions there are few, if any, rules on the form and content of that contractual relationship, other countries dispose of detailed legislation on the formalities of the publishing contract and its content, as well as the rights and obligations of the parties and the way the contract ends.
Indeed, on the one hand, the French IPC sets out several rules which narrowly explain what is allowed, and what is not allowed, in a French law-governed publishing agreement, since the French legislator has always the content creators’ best interests at heart. These are articles L.131-1 to L136-4 IPC.
On the other hand, the UK CDPA is way more permissive, letting the parties fend for themselves when negotiating their contractual publishing arrangements, except for the obligation to have the license or assignment set out in a written agreement (section 90(3) CDPA) and that any license granted by the author is binding on every successor in title to his or her interest in the copyright (section 90(4) CDPA).
So, how do book authors get paid? And how much?
2. Work for hire payments
The simplest form of payment, of an author, is a fee paid in exchange for work completed – whether it is an article for a magazine, contributions to an encyclopaedia, or a short non-fiction title for children. These ‟work-for-hire” payments are not normally repeated. In other words, it is a one-off fee for a specific job.
This method almost always applies to artists and photographers providing illustrations (i.e. drawings, pictures) to accompany a publication.
Additionally, in a ‟work-for-hire” contractual relationship, copyright is often assigned to the publisher, and this transfer of copyright can be a condition of payment.
More specifically, many professional writers work to a standard range of payments based on the number of words, usually calculated per thousand. The sum per 1,000 words could be, for example, between Euros 200 and Euros 300, though much lower – and higher – figures are common, since the publisher may have to pay more if the writer is an expert in his or her field, or is required to do the work quickly because there is pressure on a deadline.
Some kinds of publishing projects almost always carry a fixed fee. For example, authors of non-fiction titles for school pupils or children are typically paid a fee for the whole job, and this includes help with finding illustrations or photographs, writing captions, producing a glossary and index, as well as researching and writing the book. Hence, a 32-pages 6,000-words book might earn a fee of Euros 2,500 (a little over Euros 300 per 1,000 words). Writing a film script also carries a fixed fee.
Usually, fees are paid once only. However, they can also be broken down into staged payments: for example, 25 percent paid on signature of the publishing agreement, 50 percent when the publisher receives an acceptable manuscript and the outstanding 25 percent balance when the additional work (including checking proofs and layout) has been completed. This is cash in hand, paid regardless of how the book sells when it is published.
The writer, a ‟work-for-hire”, will not normally be paid anything further, even if the title is translated into many different languages.
Consequently, the gross margin for reprints or translations can be substantially higher than the gross margin of the first print. This is because the writer’s fee and other one-off costs do not recur in the reprint costs.
However, for authors of full-scale works (i.e. novels, essays, poetry books or textbooks), the usual method is to pay a royalty.
Paying authors a royalty in the form of a percentage of sales revenue can favour publishers in two important ways:
- First, authors may identify more closely with the progress of their book and will therefore make a greater commitment to its success. Also, publishers may want to build a long-term relationship with their authors in the hope that they will write several books and build on the reputation of their earlier titles, and royalties can contribute to that sense of partnership.
- Second, paying authors as and when sales revenue is created can support cash flow.
This royalty takes the form of a ‟pro-rata” percentage based on actual sales of the book. Typically, a novelist may receive a share of the sales price, expressed as a percentage of the local published, or retail, selling price for each copy sold.
Educational and scientific publishers, however, often pay royalties based on the net sums received (i.e. net receipts) by publishers after discounts to booksellers or retailers.
There is no such thing as a ‟normal” royalty rate, although many publishers use 10 percent as a reasonable benchmark.
Authors of consumer titles, particularly those whose agents negotiate the publishing contract, may demand that royalties are paid on the selling price of their book (i.e. ‟recommended retail price”). However, publishers will remind such authors and agents that some sales channels can only be serviced by way of very large discounts. For example, a chain bookstore that takes important quantities of a lead title, holding stock as well as promoting the book in-store, may demand large discounts. So if the publisher pays a 10 percent royalty based on a selling price of Euros 20, but is receiving only Euros 10 in sales revenues, then the Euros 2 payment such publisher is making to the author (10 percent of Euros 20) is, in effect, a 20 percent royalty on the sum received (20 percent of Euros 10). A compromise can be reached, by which the royalty rate is lowered if the discount exceeds a certain level. From a publisher’s standpoint, paying authors on ‟net receipts” means that payments are kept more closely in line with the funds available from actual sales. However, authors reply back that their income should not be dependent on how big a discount the publisher has to make – they should be getting, as much as possible, the same amount on every copy of their book which is sold.
Royalty accounts for authors are prepared at an agreed time or at regular intervals, for example, every six months, and any payments due remitted after that.
These royalty payments may have some deductions made. For example, authors may have to pay for any of their own corrections in the proofs that exceed 10 percent of the setting cost. This is partly to discourage them from making last minute changes to the set text (which is an expensive process for the publisher).
Publishers will consider paying authors an advance on this royalty, if such authors write for a living.
This money on account does two things:
- it is a statement of commitment from the publisher, and
- it supports the author to live and pay bills and living costs, while writing the book.
Many authors of educational, business and scientific books do not write for a living. The books, or contributions to publications such as journal articles, represent an important part of their reputations and career advancement, but their main source of income derives from their practice as teachers, researchers, lawyers. Consequently, publishers of books for these sectors seldom pay any advance to such authors.
An advance is not an additional fee. It is an up-front payment that has to be ‟earned out” (i.e. paid back) before further payments are made. Unearned advances will need to be written down, in the accounts, and will constitute a loss on the ‟Profit and loss” account.
It is considered wise to only pay an advance that amounts to less than half of that which would be paid in royalties, when the first printing has been sold. Therefore, an advance rarely exceeds half the amount that would have been earned in royalties from a complete sell-out of the first printing.
Advances are usually paid in stages: for example, 25 percent on signature of the head agreement, 25 percent on delivery of an acceptable and publishable manuscript, and the outstanding 50 percent balance on publication. Authors (and/or their agents) will demand a larger share upfront, while publishers will try to keep their cash by paying the largest portion of the advance nearest to the date when revenue starts to come in to cover that advance. A compromise could be a division into equal shares – a third on signature, a third on acceptance of the manuscript, and a third on publication.
Large advances paid to celebrity authors can sometimes only be recouped if substantial additional income is derived from sales of film and TV options or serialization rights.
5. Additional income
Publishing contracts should specify what share of any additional and subsidiary income the author is going to receive.
This money may come from translation rights or sales of editions to publishers in another country.
Large lump sums may come from serialization rights sales to newspapers and magazines, or options on film, TV and broadcasting rights.
Substantial sums can also come from merchandising rights, based on sales of goods showing famous children’s characters or personalities.
Often, income derived from sales of subsidiary rights is shared between the publisher and author.
In other cases, the role of the publisher is solely limited to traditional publishing without further involvement in other forms of exploitation.
Money received as subsidiary rights income is remitted at the next accounting period, in addition to royalties owed to the author, and is set against any remaining advance or any expenses the author may have incurred.
6. Monetising copyright in the digital environment
Dealt with above was the primary agreement between the author and publisher (sometimes called the ‟head contract”), through which the author grants the publisher a license, or assigns his or her rights, to reproduce and distribute a literary work in tangible form (in print or by means of digital copies contained in tangible carriers such as CD-roms).
However, making the manuscript into a print book, or even an e-book, is by no means the only way in which the potential in a manuscript can be exploited to the mutual financial benefit of author and publisher.
Depending on the nature of the literary work, the publisher can do much more to take full advantage of the intellectual property entrusted to him, than merely publish a book, especially in the digital economy we live in today. There are many ways of raising secondary income by exploiting the assets represented by the book.
Indeed, the potential may exist for the book to be serialized in a newspaper or magazine, digitized in whole or in part.
The rights that enable the publisher to exploit these, and other possibilities, are known as subsidiary rights, one of the most commonly used of which is the right to reprographic reproduction, or the making of a photocopy.
Crucially important in the digital era, are the electronic version/publishing rights because more and more print books are also published as e-books, and the mechanical reproduction rights (i.e. audio and video rights) because more and more print books are also published as audio books (even Spotify is diversifying further outside music with audiobooks).
When the head contract is an assignment, the author assigns copyright to the publisher and therefore he or she transfers permanently over to the publisher the entire bundle of rights (subsidiary rights included), which the publisher is free to exploit, or not. Therefore, often, an assignment means the author receives no share of any subsidiary rights income. However, in some cases, the publisher will be obliged to pay the author his or her share of the financial rewards of such exploitation. The head agreement will then need to stipulate the proportion paid to the author, on the one hand, and to the publisher, on the other hand, with respect to this exploitation of subsidiary rights. For example, the split could be 50/50 and if so, the clause in the contract setting this out would be known as the ‟half profits clause”.
When, however, the head agreement is an exclusive license, rather than an assignment, author and publisher are at liberty to negotiate the grant of rights – including the management of subsidiary rights. If the author authorises the publisher to exploit any or all of the subsidiary rights on his or her behalf, he or she will also determine in the contract the proportions in which the proceeds from the sale of these rights are to be divided.
7. Collective administration of copyright in the book publishing industry
To a large extent, the relationships in the book publishing industry are traditionally managed on an individual, or rather on a one-to-one basis, between the author and the publisher.
Yet, the increasingly widespread use of the photocopier has led to an explosion of the unauthorised reproduction of printed works.
As copying takes place everywhere and by everybody, it is a massive use of intellectual property which, if unauthorised and unpaid, represents huge losses to right holders. However, seeking permissions for every individual act of copying is materially impossible.
Consequently, rights holders mandate organisations to manage their rights collectively. Such organisations issue licenses for the reproduction of literary works. These licenses permit copying only of extracts, and are not substitute fo the purchase of a book. These organisations collect the fees and channel them back to the authors and publishers. In the case of literary works, such collecting societies are known as Reproduction Rights Organisations (‟RROs”).
RROs exist in some 50 countries around the world, and are linked by their umbrella organisation, the International federation of reproduction rights organisations (‟IFRRO”).
For example, the Copyright Licensing Agency Ltd (‟CLA”) and NLA Media Access Limited (‟NLA”) are the two UK RROs, while the ‟Centre Français d’exploitation du droit de Copie” (‟CFC”), the ‟Société des Editeurs et Auteurs de Musique” (‟SEAM”) and the ‟Société Française des Intérêts des Auteurs de l’Ecrit” (‟SOFIA”) are the three French RROs.
Further links, indeed a network of rights and obligations, stem from the bilateral agreements that RROs conclude between each other so that, for example, when a license is granted in France for a work published in the UK, the French RRO transmits the fees collected to the UK RRO, which disburses them as royalties to UK right holders. And vice versa.
In a voluntary system, such as in the UK, the RRO gets its authority from the mandates of its participating rights holders, which means that its repertoire could be limited by the exclusion of non-participating publishers or authors. In this case, users would still need to apply directly to rights holders in respect of excluded works.
In other countries, such as in France, the national legislation supports collective management, and deals with the problem of non-represented rights holders by stipulating that, where an agreement is concluded, it covers the works of both represented and non-represented rights holders. This is an extended collective license, which creates compulsory collective management. The French RRO therefore collect royalties on behalf of participating and non-participating publishers and authors, and then distribute such royalties to all of them.
In certain countries, such as in France, a legal, or statutory, license, means that although rights holders cannot prohibit the use of their material (under limitations of private use), they have the right to be remunerated for that use. This regime is therefore based on the existence of a copyright limitation that allows reproduction for private use, which takes place in a private sphere, on a non-commercial scale and from a legitimate source. Remuneration may take the form of a fee negotiated by rights holders and users, or ir may be set by law. In some cases, the legislation finds an indirect way to generate remuneration, by imposing a levy on copying equipment.
Remuneration for reprography is part of the publishers’ return on their investment and creates revenue streams that enable them to bring new products to the marketplace. Moreover, even when a book is out of print and a return no longer accrues to the publisher, or royalties to the author, revenue streams from licenses may continue to flow. This applies equally to back issues of journals, magazines, and backlists of book publishers.
Some RROs, such as the UK RROs NLA and CLA, and the French RRO CFC, have been mandated to manage reproduction in the digital environment. In this case, RROs need to be authorised to exercise this right on behalf of creative workers, when their mandate includes digital rights. It covers the transmission of content over the internet.
Public performance rights (such as poetry readings) can also be managed by RROs. Some RROs are also authorised to administer mechanical reproduction rights such as the licensing of audio books. However, in France and the UK, such public performance rights and mechanical reproduction rights are not directly managed by French and UK RROs, so it is the respective syndication offices of French and UK publishers who deal with the management of those rights.
In France, CFC manages exclusively the royalties on reprography (both for photocopy and digital reproduction), on behalf of all French publishers, while SOFIA manages the royalties collected on the right to borrow and lend books, on behalf of all French authors and publishers.
In the UK, NLA manages the royalties on reprography rights, lending rights as well as the reproduction rights in the digital environment on behalf of its registered magazines and newspapers. CLA covers royalties on reprography rights, lending rights as well as reproduction rights in the digital environment, on behalf of its registered book publishers and certain registered magazines.
The future is bright for book authors and publishers who know how to make the most of their copyright, and we, at Crefovi, are here if you need a hand in maximising income streams from your portfolio of copyright and other intangible assets!
In the creative industries, many intellectual property rights, such as copyright, trademarks, registered designs and patents, are subjected to licenses, in order for right owners and creators to monetize such rights. However, things do not always go smoothly during and after the term of the licensing agreement, between the licensor and the licensee. Therefore, what are the remedies that the licensor may put in place, in order to ensure that his or her intellectual property rights are fairly monetised? How to remedy a breach of license which term is overran?
1. What is a license agreement?
A license is the contract which authorises the use of a certain intellectual property right (‟IPRs”), be it copyright, a trademark, a design or a patent, for commercial purposes, by a licensee, in exchange for the payment of royalties to the licensor, i.e. the right owner. These royalties are usually computed as a percentage of the turnover generated by the sale of products manufactured, or services provided, by the licensee under this license agreement.
A license is different from an assignment agreement, in that the former has a limited term, whereby the authorisation to use the IPRs granted to the licensee by the licensor will expire, after a period of time explicitly set out in the license agreement. On the contrary, an assignment is a perpetual and irreversible transfer of ownership of some designated IPRs, from the assignor to the assignee, in exchange for the payment of a consideration (usually, a one-off sum of money).
To resume, a license is temporary and reversible upon expiry of a term, while an assignment is irrevocable and irreversible if made for consideration.
2. How are licenses used in the creative industries?
Licenses are often used in the creative industries, in order for creatives to monetise the IPRs that they created.
For example, in the music industry, many copyright licenses are entered into, in order for music distributors to distribute the masters of sound recordings to new territories, which are difficult to reach for the music label which owns such masters because this label is located in a totally different geographical area. Therefore, the licensor, the music label, relies on the expertise of the local licensee, the national distributor, to put in place the best local strategy to broadcast the masters of its sound recordings, via radio plays, local streaming websites, TV broadcasting, and then to generate revenues through these various income streams and local neighbouring rights collecting societies.
Another example of a copyright license, in the fashion and luxury sectors, is when a brand commissions an artist or designer to make some drawings and designs, which the brand will then display on its website(s), as well as in its various stores. These drawings and designs being protected by copyright, the brand, as licensee, will enter into a license agreement with the artist, as licensor, to obtain the right to use these drawings and designs in set locations and premises of this brand.
Licenses are also extremely widely used in the context of trademarks, especially with respect to distribution of luxury and fashion products on new geographical territories by local distributors (who need to have the right to use the trademark to advertise, market and open retail locations), and also with respect to deals where the licensee manufactures products in which it has a lot of expertise (such as perfumes, cosmetics, children’s garments), which the licensee then sells under the trademark of a famous fashion or luxury brand, i.e. the licensor.
In the technology sector, patent and/or copyright licenses are the norm. Indeed, softwares and sources codes are protected by copyright, so many tech companies make a living licensing their copyright into such inventions, to their retail or business customers, in exchange for some royalties and/or licensing fees. As far as technological products are concerned, those can be protected by patents, provided that they are novel, that an inventive step was present in creating such products, and that the invention is capable of industrial application. Therefore, most technological hardware products, such as mobile phones, computers, tablets, are protected by patents. And whenever there is a dichotomy between the creator of these products, and the manufacturers and distributors of such products, then some patent license agreements are entered into.
Technology licenses are, indeed, so critical, that fair, reasonable and non-discriminatory terms (‟FRAND”) have been set up in order to level the playing field: FRAND terms denote a voluntary licensing commitment that standards organisations often request from the owner of an IPR (usually a patent) which is, or may become, essential to practice a technical standard. One of the most common policies, is for the standard- setting organisation to require from a patent holder that it voluntarily agrees to include its patented technology in the standard, by licensing that technology on FRAND terms. Failing or refusing to license IPRs on FRAND terms could even be deemed to infringe antitrust rules, in particular those of the European Union (‟EU”). For example, the EU commission sent a statement of objections to Motorola Mobility, for breach of EU antitrust rules, over its attempt to enforce a patent infringement injunction against Apple in Germany. The patents in question relate to GPRS, a part of the GSM standard, which is used to make mobile phone calls. Motorola accepted that these patents were standard essential patents and had, therefore, agreed that they would be licensed to Apple on FRAND terms. However, in 2011, Motorola tried to take out, and enforce, a patent infringement injunction against Apple in Germany, based on those patents, even although Apple had said that it was willing to pay royalties, to use the patented technology. Samsung was also the recipient of a statement of objections from the EU commission, after it sought patent infringement injunctions to ‟prevent Apple from infringing patents”, despite Apple apparently being willing to pay a license fee and negotiate a license on FRAND terms.
3. How to remedy a breach of license which term is overran: what to do if the license has expired but your licensee keeps on using your IPRs?
Due to poor management and in-house record-keeping, as well as human resources disorganisation and high turnover rate of staff, the licensee may breach the licensing agreement by keeping on using the licensed IPR, although the license agreement has reached its term.
For example, in the above-mentioned case of the copyright license on some masters of sound recordings, the French local distributors and licensees of such masters overran the term of the license and kept on collecting royalties and revenues on those masters, in particular from French neighbouring rights collecting societies, well after the date of termination of this license. How, on earth, could have this happened? Well, as I experienced first hand at the music trade show Midem, many music distributors, labels and catalogues’ owners, such as music publishers, often mingle together in order to buy and sell to each other music catalogues, be it of copyrighted musical compositions and lyrics, or of copyrighted masters of sound recordings. Therefore, the terms of the first license agreement, between the licensor and the initial first licensee, become more and more blurry and forgotten, with basic provisions, such as the duration of the initial license, being conveniently lost into oblivion by the generation of successive licensees. Yes, I guarantee you, it happens very often.
Another example, relating to the above-mentioned case of a copyright license granted by an artist, on his drawings and designs commissioned by a luxury brand, which used these drawings on its website(s) and stores, in order to promote its luxury products … even after the termination date of the license!
So what can a licensor do, when he or she notices that the licensee has, or is, breaching the terms of the license agreement by overrunning its duration? How to remedy a breach of license which term is overran?
First and foremost, the licensor must gather as much pieces of evidence as possible of such breach of the term of the license agreement, by the licensee. For example, the music label, licensor, may reach out to French neighbouring rights collecting societies and ask for the royalties statements for the French distributor, ex-licensee, up-to-date, in order to have some indisputable evidence that this ex-licensee kept on collecting the neighbouring rights royalties on the sound recordings which were the subject of the license, even after the termination date of this license. The French artist, whose designs and drawings kept on being used by the luxury brand after the term of his license with this brand expired, instructed our law firm to liaise with a French bailiff, in order to have this bailiff execute a detailed report of copyright infringement on internet, by taking snapshots of the webpages of this brand’s website displaying his drawings and designs.
These pieces of evidence are indispensable, in order to prove the IPR infringement (since the license expired), to show it to the ex-licensee, if necessary, and to use it in any future lawsuit for IPR infringement lodged with a local court, if and when the ex-licensee refuses to settle further to receiving the ex-licensor’s letter before court action.
You will have guessed by now that, indeed, once the ex-licensor has gathered as much conclusive evidence as possible that his or her IPR is being infringed by the ex-licensee because the latter keeps on using such IPR outside the contractual framework of the now-expired license agreement, the second stage is to instruct counsel, in the country where such IPR infringement is taking place, and have such counsel send a robust, cordial yet frank letter before court action to the ex-licensor, asking:
- for the immediate cessation of any IPR infringement act, by stopping using the IPR at once;
- for the evidence of, and information about, turnover and sales, relating to the sale of products and/or services, generated thanks to the use of the IPR beyond the term of the expired license, and
- for the restitution of all those revenues generated by the sale of those products and/or services, generated thanks to the use of the IPR beyond the term of the expired license, as well as accrued late payment interests at the statutory interest rate,
within a short deadline (usually, no longer than 14 days).
Here, the ex-licensee has an option: either it decides to cave in and avoid a tarnished reputation by immediately complying with the terms of the ex-licensor’s letter before court action, or it may decide to act as a blowhard and ignore the requests set out in this letter. The first approach is favoured by anglo-saxon companies, while the second option is usual among French, and all other Mediterranean, ex-licensees.
If the dispute may be resolved out-of-court, a settlement agreement will be drafted, negotiated and finalised, by the lawyers advising the ex-licensor and the ex-licensee, which will provide for the restitution of a very clearly defined sum of money, representing the sales generated by the ex-licensee during the period in which it overran the use of the litigious IPR.
If the dispute cannot be resolved out-of-court, then the ex-licensor will have no other option left than to lodge a lawsuit for IPR infringement against the ex-licensee, which – provided the former has strong evidence of such breach of licensing agreement – it will won.
Once the slate is clean again, i.e. after the ex-licensee has paid damages or restituted sums to the ex-licensor with respect to its use of the IPR after the termination date of the first license agreement, then ex-licensor and the ex-licensee may decide to resume doing business together. Here, I strongly advise that the parties draft a transparent, clear and straightforward new license agreement, which clearly sets out the termination date of this new future license, and foreseeable consequences in case the future licensee keeps on using the IPR beyond the end of such termination date. Using the services of either in-house lawyer or external counsel is very much advisable, in this instance, in order to avoid a repeat of the messy and damaging business situation which occured in the first place, between the licensor and the licensee.
On 8 September 2020, the Court of Justice of the European Union (‟CJEU”) handed down a judgment which may have a groundbreaking effect on how European Union (‟EU”) collecting societies for music copyright, as well as EU music neighbouring rights collecting societies, distribute royalties collected on sound recording performance rights. This has stirred up controversy, with EU music performers, songwriters, composers, publishers and session musicians, crying foul, lamenting their future loss of income, as a direct consequence of this judgment. What happened exactly? Why are these EU music stakeholders up in arms? Is their reaction appropriate, in view of how royalties collected on sound recording performance rights are distributed, by non-EU collecting societies?
1. The CJEU judgment places ‟fairness” above the principle of reciprocity
The dispute debated about, in the CJEU judgment dated 8 September 2020 (the ‟Judgment”), revolves around monies collected by the Irish neighbouring rights’ collecting society, Phonographic Performance Ireland (‟PPI”) and whether such monies are and, if not, should be, distributed back to all performers, including performers who are nationals in, or residents of, states located outside the EU (‟Third states”).
Indeed, PPI’s practice is that performers who are residents of, or nationals in, Third states, and whose performances come from sound recordings carried out in Third states, are not entitled to receive a share of the fees that become payable when those performances are played in Ireland. According to PPI, this regime is perfectly compliant with the provisions set out in Directive 2006/115/EC of the European Parliament and the council of 12 December 2006 on rental right and lending right and on certain rights related to copyright in the field of intellectual property (‟Directive 2006/115”) and the international agreements to which Directive 2006/115 refers, such as the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organisations concluded in Rome on 26 October 1961 (the ‟Rome convention”) and the WIPO performances and phonograms treaty (‟WPPT”) signed in 1996.
According to PPI, to pay those performers from Third states for the use in Ireland of phonograms to which they have contributed, would fail to have regard to the approach of international reciprocity legitimately adopted by Ireland. In particular, if PPI was to pay those performers a share of the above-mentioned fees, performers from the United States of America (‟USA”) would be paid in Ireland even though that Third state grants Irish performers the right to equitable remuneration only to a very limited extent.
Here, I need to clarify this point about the USA not reciprocating in paying Irish (and all other EU residents and nationals) performers a share of the fees that become payable when the performances of these EU performers are played in the USA. As explained at length in my article on ‟Neighbouring rights in the digital era: how the music industry can cash in”, while the USA is the main market for neighbouring rights, the collection of such rights is limited to the public performance of sound recordings on digital medium only (such as online radio like Pandora, satellite broadcasting like Sirius/XM and online streaming of terrestrial radio transmission like iHeartRadio). Unlike most of the world, the USA does not apply sound recordings performance rights to broadcast radio, terrestrial radio and performance of sound recordings in bars, restaurants or other public places. Therefore, the pool on which royalties of sound recording performance rights are collected is much smaller, in the USA, than the pool on which royalties of sound recording performance rights are collected, in the EU.
In the Judgment, the High Court of Ireland, which had decided to stay the proceedings between the parties in order to ask for a referral to the CJEU, asked the latter to answer four questions. Only the fourth question is relevant to the topic of this article, as follows:
‟Is it permissible in any circumstances to confine the right to equitable remuneration to the producers of a sound recording, i.e. to deny the right to the performers whose performances have been fixed in that sound recording?”.
This wording is fuzzy at best, so here is the key legal question asked by the Irish High Court, in plain English: is it compliant with the provisions of Directive 2006/115, the Rome convention and the WPPT for a EU neighbouring rights collecting society to refrain from paying any share of the fees that became payable, when performances coming from sound recordings carried out in Third states, by performers who are residents or nationals of Thirds states, are played in the EU?
The short answer, set out with much flourish in the Judgment, is no. It’s not because US neighbouring rights collecting societies cannot pay a share of the fees on performances coming from sound recordings carried out in the EU, by performers who are residents or nationals of the EU, from sources such as broadcast radio, terrestrial radio, bars, restaurants and other US public places, that the EU collecting societies can retaliate by withholding all royalties that THEY collect on EU performances coming from sound recordings carried out in the USA, by performers who are residents or nationals of the USA. According to the CJEU, there is no justification to do that, in any provisions set out in the Directive 2006/115 and/or the Rome convention and WPPT. The principle of equitable remuneration must prevail, for all performers involved, wherever they come from, in the world.
2. Why do EU performers and collecting societies lost their cool, when made aware of the Judgment?
Across Continental Europe and Latin America, there is a long-established practice for collecting management societies (i.e. music copyright collecting societies and neighbouring rights societies) (‟CMOs”) to deduct amounts, from the monies they collect from the use of music, with an intention to spend those deducted sums on social and cultural purposes, such as aid.
And where do these EU collecting societies derive the main of their income for ‟aid” and other ‟cultural” and ‟social” purposes from, mainly? Well, from the undistributed share of the fees on EU performances coming from sound recordings carried out in the USA, by performers who are residents or nationals of the USA, of course!
So, for example, French performers’ neighbouring rights society ADAMI, expects that, as a direct consequence of the Judgment, its ‟aid” budgets are going to decrease by 35 percent, with annual ‟losses” valued between Euros12 million and Euros15 million, while French non-featured musicians and vocalists’ neighbouring rights society SPEDIDAM has publicly announced a decrease of 30 percent of its ‟aid” budgets, with a freeze on all allocated grants to boot. According to Irma, between Euros25 million to Euros30 million of ‟aids” and ‟grants” are directly threatened this year, in France.
As set out in La Lettre du Musicien, ‟it is the whole ecosystem of the (EU) creation that has been struck, which is the last straw for a sector which already had to contend with an almost total alt to its activities (due to the lockdown caused by the COVID 19 pandemic)”.
The bill could be even more difficult to foot, EU CMOs say, if the Judgment was deemed to have a retroactive effect, which may imply that payments in arrears could be in the region of Euros140 million.
However, the Judgment is in line with the European Commission’s work to promote the EU’s digital economy, which is aligned with the Anglo-American approach to collecting music royalties (i.e. promoting the author’s creativity, through his/her copyright and neighbouring rights, for the benefit of the public, therefore, in more economic terms).
Indeed, the Directive 2014/26/EU on collective rights management and multi-territorial licensing of rights in musical works for online uses (the ‟Directive 2014/26”) was adopted in order to reign in EU CMOs, and impose more rigour and transparency, as well as enhanced accountability and intra-EU competition, in a shambolic and deeply flawed EU-based CMOs landscape.
As far as deductions for social, cultural or educational purposes are concerned, the Directive 2014/26 sets out that:
- EU member-states must ensure that where a rightholder authorises an EU CMO to manage his/her rights (such as a songwriter, composer, performer, producer, label, publisher, session musician), this EU CMO is required to provide this rightholder with information on management fees and ‟other deductions”, from the rights revenue, before obtaining his/her consent to managing the rights, and
- EU member-states must ensure that an EU CMO does not make deductions, other than for management fees, from the rights revenue generated by the rights it manages for other CMOs (‟derived from the rights it manages on the basis of representation agreements”), unless these other CMOs to these agreements ‟expressly consent to such deductions”.
The problem is that, in pragmatic terms, many EU CMOs, in particular those from Continental Europe, fail to comply with national laws which transposed the Directive 2014/26, in this respect. Multiple EU CMOs completely ignore requests, made by either rightowners or other CMOs, to no longer deduct any amounts for social or cultural purposes, from the amounts due to the rightowners or other CMOs (the latter being a party to a representation agreement with the EU CMOs).
Anyway, by 10 April 2021, the European Commission will have to release a report assessing how the provisions of the Directive 2014/26 have been applied by EU member-states and EU CMOs, which will then be submitted to the European Parliament and European Council. That report shall include an assessment of the impact of the Directive 2014/26 on the development of cross-border services and on the relations between CMOs and users and on the operation in the EU of CMOs established outside the EU, and, if necessary, on the need for a review. The European Commission’s report shall be accompanied, if appropriate, by a legislative proposal.
Therefore, I bet that the European Commission will mention, in its upcoming 2021 report, the fact that EU legislation needs to be clarified, so that EU CMOs must pay performers from Third states, their share on EU performances coming from sound recordings carried out in Third states, by performers who are residents or nationals of the Third states, in compliance with the Judgment.
3. What’s going to happen now, in the USA, knowing that EU CMOs must pay royalties collected on sound recording performance rights to US performers, from now on?
Of course, the US recording industry had become increasingly vocal about the EU payment limitations debated in the Judgment in recent years, especially since neighbouring rights have become such a critical portion of music stakeholders’ total annual revenues.
SoundExchange, the US organisation responsible for distributing royalties collected on sound recording performance rights, was leading the charge, arguing that it is unfair and an incorrect interpretation of global copyright and neighbouring rights treaties.
Once the Judgment was handed down, SoundExchange exulted, releasing a statement praising ‟equal treatment” for creators, and setting out that the unfair treatment in question ‟denies US music creators an estimated USD330 million in direct global royalty payments a year”.
Yes, well, ‟equal treatment” my foot! SoundExchange conveniently avoids dealing with the elephant in the room, which is that the USA must now immediately change its obsolete collecting management system, by widening the pool of sound recording performance collections to US monetary sources such as broadcast radio, terrestrial radio, bars, restaurants and other US public places.
If the USA does not start reciprocating, by paying all sound recording performance royalties to EU performers, derived from all acceptable income sources, including broadcast radio, terrestrial radio, bars, restaurants and other US public places, I guarantee that a USA-EU cultural trade war is going to spring out, sharpish.
EU CMOs must lobby hard and join forces, with US music stakeholders who have everything to win, in widening the pool of sound recording performance rights from which royalties are collected in the USA. US performers and artists will be of course on board, but they do not have much gravitas, all by themselves. SoundExchange seems like the best ally to EU CMOs, in this battle, but I am under the impression that SoundExchange does not want to rock the boat, what with US telecommunication behemoths and streaming and other tech companies to contend with, and a SoundExchange board of directors rife with top brass and lawyers on the payroll of these various US media and tech conglomerates.
Cancel culture is upon us. This is what we are currently being told by British and French mass media, who have finally caught up with the content of the latest, and first non-fictional, book ever published by acclaimed, yet heavily criticised, American author Bret Easton Ellis, ‟White”. The polemic rages on both sides of the pond, ignited by more than 150 public figures signing a controversial letter denouncing cancel culture. So, what’s going on? What is ‟cancel culture”? Why should you pay attention to, and be cautious about it, as a creative professional? Is this even a thing in Europe and, in particular, in France and the United Kingdom? If so, how should you position yourself, as a creative, on, and about, cancel culture?
1. What is it? Where does it come from?
Following the 1990s’ culture wars, which sprung up in the United States of America as a way of denouncing and forbidding contemporary art exhibitions and other medium of creative expression judged by those instigating such culture wars as indecent and obscene, ‟cancel culture” has taken off in the early 2000s on social media, and has since become a cultural phenomenon in the USA and Canada – especially in the last five years or so – pervading every aspect of Northern America’s mass media.
‟Cancel culture” refers to the popular desire, and practice, of withdrawing support for (i.e. cancelling) public figures, communities or corporations, after they have done or said something considered objectionable or offensive. ‟Cancel culture” is generally performed on social media, in the form of group online shaming.
Therefore, as a result of something said or done, which triggered negative reactions and emotions such as anger, disgust, annoyance and hate from some members of the public, a natural person or legal entity or group of natural persons ends up being publicly shamed and humiliated, on internet, via social media platforms (such as Twitter, Facebook and Instagram) and/or more localised media (such as email groups). Online shaming takes many forms, including call-outs, cancellation or cancel culture, doxing, negative reviews, and revenge porn.
While the culture wars of the 1990s were driven by right-wing religious and conservative individuals in the US (triggered by ‟hot-button” defining issues such as abortion, gun politics, separation of church and state, privacy, recreational drug use, homosexuality), the cancel culture of our 21st century is actually a left-leaning supposedly ‟progressive” identity movement which has taken hold in recent years due to the conversations prompted by #MeToo and other movements that demand greater accountability from public figures. According to the website Merriam-Webster, ‟the term has been credited to black users of Twitter, where it has been used as a hashtag. As troubling information comes to light regarding celebrities who were once popular, such as Bill Cosby, Michael Jackson, Roseanne Barr and Louis C.K. – so come calls to cancel such figures”.
Yep. Check out your Twitter feed by typing in the search bar the hashtags #cancelled, #cancel or #cancel[then name of the individual, company, organisation you think might be cancelled], and you will be able to review the top current cancellation campaigns and movements launched against Netflix, British actress Millie Bobby Brown, twitter user @GoatPancakes_, etc.
So under the guise of defending laudable causes such as the recognition of the LGBTQ community and fighting against racism, sexism, sexual assault, homophobia, transphobia, etc., some communities of online ‟righteous” vigilante use violent methods, such as cancellation, in order to administer a virtual punishment to those who are on their radar.
This call-out and cancel culture is becoming so pervasive and effective that people lose their jobs over a tweet, some upsetting jokes or inappropriate remarks.
The Roseanne Barr’s story is the ultimate cancellation example, since her ABC show, ‟Roseanne”, was terminated with immediate effect, after Ms Barr posted a tweet about Valerie Jarrett, an African-American woman who was a senior advisor to Barack Obama throughout his presidency and considered one of his most influential aides. R. Barr wrote, in her litigious tweet, if the ‟muslim brotherhood & planet of the apes had a baby = vj”. Whilst Ms Barr’s remark was undoubtedly in extreme bad taste, it is fair to ask whether her tweet – which could have easily been deleted from Twitter to remove such kick well below the belt dealt to Ms Jarrett – justified wrecking Ms Barr’s long-lasting entertainment and broadcasting career in one instant, permanently and for eternity.
To conclude, social media channels have become the platforms of virtual trials, where justice (i.e. cancellation) is administered in an expeditious manner, with no possibility of dialogue, forgiveness and/or statute of limitation. This arbitrary mass justice movement is not only cruel, but tends to put everything under the same umbrella, indiscriminately: so a person who cracked a sexist joke on Twitter would become vilified and even ‟cancelled”, in the same manner than an individual effectively sentenced for sexual assault by an actual court of justice.
How did we get to this point? Why does a growing number of Northern Americans feel the uncontrollable need to call-out, cancel and violently pillory some of their public figures, corporations and communities?
A pertinent analysis, although skewed by a European perspective, is that made by French sociologist Nathalie Heinich in French newspaper Le Monde and explained on the podcast ‟Histoire d’Amériques”, dedicated to Bret Easton Ellis’ ‟White”.
According to Ms Heinich, there is no legal limitation to freedom of speech – a personal liberty which is enshrined in the first amendment to the US constitution, in the USA. As a consequence, the US congress cannot adopt laws which may limit or curb freedom of expression, as is set out in this first amendment. Therefore, according to N. Heinich, since the US authorities cannot forbid speech and freedom of expression, it is down to US citizens to take on the role of vigilante and organise spectacular information and public campaigns, in order to request the prohibition of such expression and such speech.
This analysis made by this French sociologist needs to be nuanced: whilst it is true that no US statute or law may curtail freedom of speech in the USA, there is consistent and ample body of case law and common law, which rule on the categories of speech that are given lesser or no protection by the first amendment of the Bill of rights. Those exceptions include:
- incitement (i.e. the advocacy of the use of force when it is directed to inciting or producing imminent lawless action, Brandenburg v Ohio (1969));
- incitement to suicide (in 2017, a juvenile court in Massachusetts, USA, ruled that repeatedly encouraging someone to complete suicide was not protected by the first amendment);
- false statement of fact and defamation (Gertz v Robert Welch, Inc. (1974));
- obscenity (Miller v California (1973) established the Miller test whereby speech is unprotected if ‟the average person, applying contemporary community standards, would find that the subject or work in question, taken as a whole, appeals to the prurient interest”, and ‟the work depicts or describes, in a patently offensive way, sexual conduct or excretory functions specifically defined by applicable state law”, and ‟the work, taken as a whole, lacks serious literary, artistic, political or scientific value”), and
- child pornography (New York v. Ferber (1982) which ruled that if speech or expression is classified under the child pornography exception at all, it becomes unprotected).
Therefore, there are some common law exceptions to the first amendment consecrating freedom of speech in the USA, but they are few and far between, and they need to be hotly, and expensively, debated in court, probably months or years after the triggering content was made available in the public space in the first instance, before being found, by a court, unprotected by freedom of speech, in favour of higher public policy interests.
As a result, many American and Canadian citizens resort to violent tactics, in order to request the immediate, swiftly-enforced and free of legal fees and court fees, prohibition of controversial art exhibitions, entertainment shows, movies, jokes, remarks, etc. first through the 1990s culture wars, and now through the 21st century’s cancel culture.
This is paradoxical since cancel culture and call-out culture are some of the tools used to advocate for worthy causes such as fighting against racism, sexism, sexual predation and aggression, promoting LGBTQ rights. However, the methods used, through cancel culture and online shaming, to achieve those laudable goals, are very violent and totalitarian, all taking place in the virtual realm of social media, but with very serious and long-lasting ‟real-life” consequences such as loss of employment, loss of reputation, self-harm and sometimes, suicide.
2. Can cancel culture enter through our European borders, in particular in France and the United Kingdom?
I hate to break it to you, but cancel culture is already upon us in France and the United Kingdom. We are in a globalised world, all of us are online and check the media and social media from all over the world, thanks to the internet. So this Northern American trend has, of course, reached our European shores.
It is worth noting that the recognition of ‟cancel culture”, and the realisation that is has become a sizable part of online culture, took place in the United Kingdom (‟UK”) at the beginning of the year 2020, when British television presenter and socialite Caroline Flack committed suicide allegedly because she was vilified on social media and by British tabloids, further to being sacked from British reality show ‟Love Island”. This UK epiphany about ‟cancel culture” arrived earlier than elsewhere in Europe, probably due to the shared language, and culture, that the British have with Americans and Canadians.
France is only now getting familiar with this new concept of ‟cancel culture”, further to hearing about the ‟letter on justice and open debate”, drafted, and signed, in July 2020, by more than 150 global intellectuals and authors (among whom Margaret Atwood, Wynton Marsalis, Noam Chomsky, J.K. Rowling and Salman Rushdie), and denouncing the excesses of online shaming and cancel culture. France is currently going through a phase of introspection, asking itself whether ‟la culture de l’annulation” could take off on its Gallic shores. And it is.
Proof is, I was interviewed for the 8.00pm TV News of France TV on Sunday 20 September 2020, to discuss the attempts made by no less than the new very controversial French minister of the interior, Gerald Darmanin – who was himself under criminal investigation for sexual coercion, harassment and misconduct in 2009, and then again between 2014 and 2017 – to eradicate from all SVoD services platforms such as YouTube, Spotify, Deezer, Dailymotion, the release of the first music album created by Franco-Senegalese 28 years’ old rapper, Freeze Corleone, ‟La Menace Fantôme” (‟LMF”). On which grounds is such cancellation requested? Provoking racial hatred and racial slander, no less.
Artist Freeze Corleone is an uncompromising rapper, abundantly peppering his raps with the French translations of ‟nigger” (‟négro”) and ‟bitches” (‟pétasses”) in the purest Northern American rap tradition (F. Corleone lived in Montreal, Canada, before settling down in Dakar, Senegal). He also obscurely refers to ‟Adolf”, ‟Goebbels”, ‟Ben Laden” and ‟Sion” in his rather enigmatic LMF lyrics. However, qualifying his body of work in LMF as racial slander and/or provoking racial hatred is a stretch. If you do not like it, because this content triggers you, just move on and don’t listen to it.
Freedom of speech is enshrined in the French declaration of rights of the human being and citizen, dated 1789. Article 11 of such declaration provides that the ‟free communication of thoughts and opinions is one of the most precious rights of the human being: any Citizen may therefore speak, write, print freely, except where he or she has to answer for the abuse of such freedom in specific cases provided by law”.
And such specific cases where freedom of speech may be curtailed, under French statutory law, include:
- Law dated 1881 on the freedom of the press which, while recognising freedom of speech in all publication formats, provides for four criminally-reprehensible exceptions, which are insults, defamation and slander, incentivising the perpetration of criminal offences, if it is followed by acts, as well as gross indecency;
- Law dated 1972 against opinions provoking racial hatred, which – like the four above-mentioned exceptions, is a criminal offense provided for in the French criminal code;
- Law dated 1990 against revisionist opinions, which is also a criminal offense in order to penalise those who contest the materiality and factuality of the atrocities committed by the Nazis on minorities, such as Jews, homosexuals and gypsies before and during world war two, and
- Law dated July 2019 against hateful content on internet, which provisions (requiring to remove all terrorist, pedopornographic, hateful and pornographic content from any website within 24 hours) were almost completely censored by the French constitutional council as a disproportionate infringement to freedom of speech, before entering into force in its expurgated finalised version later on in 2019.
Therefore, according to French sociologist Nathalie Heinich, France does not need ‟cancel culture” because freedom of speech is already strictly corseted by French statutory laws. By this, she means that French individuals won’t have to take to social media platforms, in order to ‟cancel” whoever is misbehaving, since the all-pervading French nanny state will strike the first blow to the ‟offender”, in the same manner than French minister of justice G. Darmanin unilaterally requested all cultural streaming and video platforms, from YouTube to Spotify and Deezer, as well as all French radio and TV channels, to immediately and permanently remove the songs of Freeze Corleone’s LMF, further to opening a criminal inquiry against the latter, for allegedly committing racial slander and/or provoking racial hatred through his lyrics.
Is this above-mentioned French regal method a better tool than having the populace publicly decrying and shaming an individual who ‟steps out of line”, by using ‟cancel culture”? By no means, because, at the end of the day, it’s our collective freedom of speech which is being breached and infringed, on a whim. And that is unacceptable, in a democracy.
On the other side of the channel, the legal framework around freedom of speech is no panacea either. Freedom of expression is usually ruled through common law, in the UK. However, in 1998, the UK transposed the provisions of the European Convention on human rights – which article 10 provides for the guarantee of freedom of expression – into domestic law, by way of its Human rights act 1998.
Not only is freedom of expression tightly delineated, in article 12 (Freedom of expression) of the Human rights act 1998, but there is a broad sweep of exceptions to it, under UK common and statutory law. In particular, the following common law and statutory offences, narrowly limit freedom of speech in the UK:
- threatening, abusive or insulting words or behaviour intending or likely to cause harassment, alarm or distress, or cause a breach of the peace (which has been used to prohibit racist speech targeted at individuals);
- sending any letter or article which is indecent or grossly offensive with an intent to cause distress or anxiety (which has been used to prohibit speech of a racist or anti-religious nature, as well as some posts on social networks), governed by the Malicious communications act 1988 and the Communications act 2003;
- incitement (i.e. the encouragement to another person to commit a crime);
- incitement to racial hatred;
- incitement to religious hatred;
- incitement to terrorism, including encouragement of terrorism and dissemination of terrorist publications;
- glorifying terrorism;
- collection or possession of a document or record containing information likely to be of use to a terrorist;
- treason including advocating for the abolition of the monarchy or compassing or imagining the death of the monarch;
- indecency including corruption of public morals and outraging public decency;
- defamation and loss of reputation, which legal framework is set out in the Defamation act 2013;
- restrictions on court reporting including names of victims and evidence and prejudicing or interfering with court proceedings;
- prohibition of post-trial interviews with jurors, and
In Europe, and in particular in France and the UK, there is already a tight leash on freedom of speech, whether at common law or statutory law. However, ‟cancel culture” is nonetheless permeating our European online shores, following the trend started in Northern America. As a result, it is a tough time to be a free and creative European citizen, let alone a public figure or corporation, in this 21st century Europe. Indeed, not only could you have trouble with the law, if you were to make triggering or contentious comments or jokes or lyrics in the public domain, but you could also be shot down in flames by the online community, on social media, for your speech and expression.
3. How to ride the storm of ‟cancel culture”, while remaining consistently creative and productive?
In the above-mentioned cultural and legal context, it is crucial for creative professionals to think long and hard before posting, broadcasting, speaking, and even behaving.
As a result, book publishers use the services of ‟sensitivity readers”, before releasing a new work, whereby such consultants read books to be published, in order to look for, and find out, any clichés, stereotypes, scenes, formulations that may offend a part of the readership. This use of sensitivity readers is becoming more and more systematic, especially when the author speaks about themes which he, or she, does not personally master.
For example, an heterosexual author who describes a gay character, or a white author who describes Mexicans, in his or her new book, will most definitely have a sensitivity consultant review his or her output before publication. Almost inevitably, such sensitivity reader will request that some changes be made to the written content, so as to avoid a boycott of the published book, or cancellation of the author and book, altogether.
Whilst some of the classics of global literature were perceived as very shocking when they were first released (think ‟Lolita” from Vladimir Nabokov about the obsession of a middle-aged literature professor with a 12 year’s old girl, which today would probably be described as a glorification of pedophilia), they would probably never see the light of day, if they were to be published in our era.
Therefore, today’s cultural sensitivities push towards the publication and broadcasting, of written, audio and visual creative content which is bland, right-thinking, watered-down, in which the author only refers to what he or she knows, in the most neutral way possible.
This need to use ‟auto-censorship” in any content a creator wishes to publish is compounded by the fact that today, consumers of creative content do not differentiate between the author of the work, and his or her creative output. There is no separation between the author and content creator, and his or her body of work and/or fictional characters. With Millenials and US universities becoming obsessed with identity questions (i.e. the identity or feeling of belonging to a group, such as the gay community, the black community, etc.), it is the person who writes the book, or song, or writes or directs a film, who is now also important, maybe even more important than the work itself.
As a result, any content creator who writes or sings or produces an audiovisual work about a community other than his or her own, may be accused of cultural appropriation (i.e. the adoption of an element or elements of one culture or identity by members of another culture or identity) and even become the object of victimhood culture (i.e. a term coined by sociologists Bradley Campbell and Jason Manning, in their 2018 book ‟The rise of victimhood culture: microaggressions, safe spaces and the new culture wars”, to describe the attitude whereby the victims publicize microaggressions to call attention to what they see as the deviant behaviour of the offenders, thereby calling attention to their own victimization, lowering the offender’s moral status and raising their own moral status).
In this climate, it is therefore easier to publish or broadcast creative content if you belong to a minority (by being, for example, homosexual, black, brown, or a female), while white heterosexual male creators have definitely become disadvantaged, and more susceptible to being targets of ‟cancel culture”.
To conclude, a lot of prior thoughts and research and preparation and planning need to be put into the creation, and then broadcasting and publication, of any creative content today, not only with respect to such output, but also in relation to the identity, and positioning, of his or her author. If this conscious effort of adhering to right-thinking and bland ideologies is appropriately and astutely done, you and your creative output may successfully ride the storm of, not only French and UK legal limitations to your freedom of expression, but also the nasty impact of cancel culture and online shaming, hence maximising your chances that your creative work generates a commercial success.
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 : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Entertainment & media, Fashion law, Gaming, Hospitality, Hostile takeovers, 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, Outsourcing, Private equity & private equity finance, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids
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 percent of private sector business, 59 percent of private sector employment and 48 percent 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. 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.
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 SMEs 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 co founder, 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 cooperation 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.
 ‟Lingard’s bank security documents”, Timothy N. Parsons, 4th edition, LexisNexis, page 450 and seq.
 ‟Taking security – law and practice”, Richard Calnan, Jordans, page 74 and seq.
When SGAE concluded an arbitration, in July 2017, to decide a dispute between it and major and indie music publishers, everybody thought that the Spanish collecting society would walk the line and comply with the arbitration award. Not quite. Here is why, and how such outcome could have been avoided.
SGAE is the Spanish collective rights management society which has the authority to licence works protected by music copyright, and collect royalties as part of compulsory licensing or individual licences negotiated on behalf of its respective members. Like other copyright collective agencies, SGAE collects royalty payments from users of copyrighted works and distributes royalties back to its copyright owners.
Music users (those that pay the licence fees) include TV networks, radio stations, public places such as bars and restaurants. Copyright owners (those that receive the royalties) include music writers and composers, lyricists, as well as their respective publishers.
On 19 July 2017, an arbitration panel from the Mediation and Arbitration Centre of WIPO decided a matter in dispute between major and independent music publishers BMG, Peermusic, Sony/ATV/EMI Music Publishing, Universal Music Publishing and Warner/Chappell Music, as well as AEDEM (i.e. a collective of over 200 small and medium sized Spanish music publishers), on one side, and SGAE, on the other side.
While the award drafted by the three WIPO arbitrators, published on 19 July 2017, was binding, CISAC, the international confederation representing collective copyright management societies in over 120 countries, decided to temporarily exclude SGAE from its roster on 30 May 2019 because SGAE was not in compliance with the terms of such award. This bold move highlighted that, despite the binding WIPO award, SGAE had failed to comply with its obligations and promised reforms, as these were set out in the arbitration award.
How could the failed enforcement of the SGAE arbitration award have been avoided?
1. Why was an arbitration done, and why was an award published as a result of it?
In June 2017, Spanish police raided SGAE’s Madrid offices, an operation that heralded another chapter in the continuing corruption saga of the troubled, yet powerful, copyright collection organisation.
The police searched the SGAE headquarters as part of an investigation aimed at various members of SGAE and employees of several Spanish television stations. The agents were looking for documentation related to ‟the creation of low quality music and registration of false arrangements of musical works which are in the public domain”.
After the music was going through that laundering process, it was registered in the name of ‟front men” and publishing companies owned by the Spanish TV stations themselves, such as Mediaset, Atresmedia and TV3.
The purpose was to broadcast it on late night programs, on various television stations in the early hours of the morning, at a barely audible level, generating copyright royalties. This scheme is known as ‟la rueda” (the wheel) and it sparked other schemes, at SGAE.
In addition to these criminal proceedings, on 19 July 2017, a WIPO arbitration panel decided a related matter in dispute between major and indie publishers, on one side, and SGAE, on the other side.
Indeed, while SGAE tried to remedy the problems caused by this endemic corruption within its ranks, and the subsequent ‟creative” schemes put in place by some of its members, by entering into a gentlemen’s agreement with some TV broadcasters in Madrid more than a decade ago, and then by entering a Good Practices Agreement with Mediaset (Telecinco) and Atresmedia (Antena 3) in 2013, these agreements were deemed anti-competitive and an abuse of SGAE’s dominant position, by the Spanish competition authorities. Very much to the liking of a number of TV operators and songwriters involved with night time music, who had raised such challenges before Spanish competition authorities, the latter found that SGAE was interfering with the freedom of the broadcasters to use the music of their choice, and subsequently that these agreements violated competition law.
While, inside SGAE, publishers board members tried to change the distribution rules by board vote a number of times, their efforts were blocked by a number of SGAE board members who write music used for ‟la Rueda”.
Exasperated, music publishers not owned by TV broadcasters sued SGAE in court over the Wheel and SGAE distribution rules. As the case was proceeding slowly, the publishers and SGAE instead agreed to submit the matter to a binding arbitration before a WIPO arbitration board of three arbitrators.
The parties were the group OPEM (made up of BMG, Peermusic, Sony/ATV/EMI Music Publishing, Universal Music Publishing and Warner/Chappell Music); the group AEDEM (made up of Spanish independent music publishers); and SGAE.
Please note that no TV broadcasters were parties to the arbitration because they declined to participate in it, after being contacted by the arbitrators to take part.
The WIPO award was published on 19 July 2017.
2. What was the outcome of the arbitration? What did the WIPO arbitration award have in store, for SGAE?
The SGAE arbitration focused primarily on two claims:
- the inequitable sharing of money received by SGAE from a music user and distributed by SGAE back to the user of that music, as a copyright holder and
- the improper distribution of royalties for the use of inaudible, or barely audible, music.
After considering the evidence, the three WIPO arbitrators decided:
- to have an equitable distribution, so as not to prejudice other authors, by implementing some changes in SGAE’s distribution rules: the rules must change so that the TV broadcasters receive, via their publishing companies for music uses in the early morning hours, a variance of 15% of the total collected from them, respectively;
- that distribution must stop for inaudible music, as identified by the technology used by Spanish tech company BMAT or a company using similar software and
- that SGAE should disperse its “scarcely audible fund” as described in the arbitration award.
The WIPO arbitrators also made the award fully binding, setting out that neither broadcasters, nor other individuals or companies, could cancel their decision.
Also, the WIPO arbitrators set out in their award that the competition authorities could not be able to cancel it because this award does not impact a broadcaster’s ability to decide what music to play or who owns the music it plays. The arbitration award merely relates to the rights to a distribution from SGAE and, therefore, only impacts its members.
3. Why was the SGAE arbitration award not enforced properly? What could have been done to ensure such timely enforcement?
Yet, the arbitration award, as well as the ongoing criminal investigation relating to the fraudulent registration of works, do not seem to be enough so trigger the necessary changes needed to clean up the act of Spain’s sole collective music copyrights management society.
Indeed, despite the WIPO award expressly requesting that SGAE should cap distributions to broadcasters-publishers at 15 percent of the broadcasters’ licence fees paid, the SGAE board of directors decided to increase such cap to 20 percent in May 2018. Altogether, in June 2018, the SGAE board decided to go back to the way it was operating before the publication of the international award, with TV broadcasters-publishers able to receive their share of distributions, which could amount to 70 percent of the licence fee paid by the TV broadcaster.
Consequently, in an unprecedented move, CISAC, the international confederation representing authors’ societies in over 120 countries, decided to temporarily exclude SGAE from its board, during its general assembly held on 30 May 2019.
This is because the requested reforms, set out in the arbitration award, were still not implemented by SGAE, two years further to the award’s publication date, with ‟la Rueda” still being a thing.
While the SGAE saga is definitely a festering and endemic issued, several action steps could have been taken, by the three WIPO arbitrators as well as the co-claimants to the arbitration, to avoid the arbitration award being ultimately ignored by SGAE’s board of directors and management.
Firstly, it was a mistake to not have any of the Spanish TV broadcasters act as parties to the arbitration and its resulting award. Indeed, since these TV channels and their publishing companies are the main culprits of setting up these fraudulent schemes at SGAE, the arbitration decision had to involve them, and be binding on them too, to become fully enforceable and efficient.
Secondly, the arbitration award did not set out anything about changing the makeup of the SGAE board of directors. However, many Spanish TV broadcasters hold, directly or indirectly, significant positions on SGAE board of directors, having massive influence on the board members’ votes and appointments to decision-making execute positions. Therefore, the arbitration award should have been bolder and also provide for a complete restructuring of SGAE board of directors and election rules. This way, the votes from SGAE’s newly appointed board of directors, needed to implement the reforms requested in the 2019 arbitration award, would have been successful and supporting change.
Thirdly, some fining mechanisms, and other strong incentives for SGAE to comply, should have been set out in the arbitration award, with clear deadlines and metrics by which the various requested reforms must have been implemented. Failing this, SGAE and its dishonest employees would keep on doing business as usual, bolstered by some of its directors and members sympathetic to the arguments made by Spanish TV broadcasters and their publishing companies. In other words, the penalty mechanisms should have been far more stringent, and expensive, for SGAE, in case it did not implement the requested reforms set out in the arbitration award, in a timely manner.
Finally, when some rumours started erupting in 2018, that SGAE was not complying with its obligations under the 2017 arbitration award, the group OPEM (made up of major and independent music publishers), as well as the group AEDEM (made up of Spanish independent music publishers), parties to such WIPO arbitration as co-claimants, should have immediately used the provisions of the New York Convention on the recognition and enforcement of foreign arbitral awards 1958 – to which Spain is a signatory since May 1977 –, as well as the enforcement mechanisms set out in such award, to obtain the swift recognition and enforcement of the WIPO award in Spain, by SGAE. It’s all very well to spend time and energy coining a forward-thinking arbitration award, but if it fails to be enforced, then its value and impact are severely limited, at best.
 Copyright in the digital era: how the creative industries can cash in, https://crefovi.com/articles/copyright-digital-era/, 14/06/2017
 SGAE statement on the WIPO arbitration award ending the conflict of night time slots on television, http://www.sgae.es/en-EN/SitePages/EstaPasandoDetalleActualidad.aspx?i=2190&s=5, 25/07/2017
 The expulsion of SGAE from CISAC: a regrettable but essential step towards reform, https://www.cisac.org/Cisac-Home/Newsroom/Articles/The-expulsion-of-SGAE-from-CISAC-a-regrettable-but-essential-step-towards-reform, 12/06/2019
 Spanish Authors’ Rights Society Raided in Latest Corruption Probe, https://www.billboard.com/articles/business/7840889/spain-authors-rights-society-sgae-raid-corruption-probe, 20/06/2017
 Music Confidential – Outrage in Spain – Part one of Two – 20/07/2017
 SGAE statement on the WIPO arbitration award ending the conflict of night time slots on television, http://www.sgae.es/en-EN/SitePages/EstaPasandoDetalleActualidad.aspx?i=2190&s=5, 25/07/2017
 Music Confidential, A defining moment: when enough is enough already (Part One), 07/06/2019
 MUSIC PUBLISHERS WARN SPANISH SOCIETY THEY’LL DUMP IT IF IT KEEPS UP TV ‘SCAM’, https://www.musicbusinessworldwide.com/music-publishers-warn-spanish-society-theyll-dump-it-if-it-keeps-up-tv-scam/, 11/06/2018
How to lawfully broadcast your soundtracks in bars, restaurants, hotels & other public spaces, from France?Crefovi : 25/11/2019 8:00 am : Articles, Consumer goods & retail, Copyright litigation, Emerging companies, Entertainment & media, Fashion law, Gaming, Hospitality, Intellectual property & IP litigation, Internet & digital media, Music law, Outsourcing, Technology transactions
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:
- SCPP, which is a neighbouring rights collecting society for phonogram producers (i.e. record labels) that qualify either as major or independent;
- 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 percent 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 percent 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 percent of the social repertoire of phonograms in France, while SPPF owns 23 percent 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 percent) * 23 percent) for SPPF, where 23 percent represents the prorata numeris applicable to SPPF, as explained above;
- the formula to calculate the royalty is equal to ((annual turnover excl. tax * 15 percent) * 77 percent) for SCPP, where 77 percent 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 percent 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 defend yourself in case the artwork bought at auction does not match its pre-sale description?Crefovi : 28/10/2019 3:06 pm : Art law, Articles, Consumer goods & retail, Entertainment & media, Law of luxury goods, Litigation & dispute resolution, Product liability
While collecting art works is becoming an increasingly popular & sexy hobby for affluent individuals, the financial & legal risks involved in such activities are very high, especially when such art pieces are bought at auction. Indeed, it is in the interest of auction houses to depict a rosy & partial portrait of any artwork on sale, which often does not reflect the exact provenance and/or condition of such work of art. How can a collector prevent such partial disclosures and inaccurate embellishments relating to the condition or provenance of a coveted artwork on sale, at auction?
1. A real risk
Our art law firm Crefovi currently advises several individuals – all art collectors – who have fallen into the following trap: they all based themselves on the (proven, later, to be incorrect) information provided by the auction house responsible for the sale of an artwork, to enthusiastically and successfully bid at auction for such work of art. When, or shortly after, they went to collect the artwork, deception ensued, as they found out that they had been the subject of deceit, as far as the condition and/or provenance of the artwork were concerned. Therefore, the artwork you bought at auction does not match its pre-sale description.
For example, one of our clients is a keen collector of Chinese antics who resides in the United Kingdom, on his Chinese passport and work visa. In an auction sale organised by the French auction house Tajan, he mostly relied on the condition report provided by such auctioneer, which set out that the Chinese vase was in ‟good aged-related condition (and had) normal age-related traces of wear”, to successfully bid for that lot. When he came to Tajan’s offices in Paris to view this Chinese vase for which he was now the successful bidder, further to obtaining a travel visa to France, he was floored to discover that this vase was not as described in the condition report. The state of the vase is, indeed, poor, since it is damaged by several marks and traces of wear and tear, in many places; there is a large crack at the base of such vase, which means that no water stays in the vase because it escapes from that crack; several enamel parts are missing; certains parts, such as the panels on the inferior part of the vase and the enamels on the neck of the vase, seem to have been added after the manufacturing stage of the vase, etc.
Another example is the successful bid made by another client of our firm, for a painting ‟attributed to Alighiero e Boetti” as per the catalogue and website of the auction house Bellmans. While our client took the time to view and inspect the painting prior to its auction at Bellmans’ Sussex Room, he was in great turmoil when he was turned down by the Archivio Alighiero Boetti (a cultural association based in Rome, founded by the heirs of the artist Alighiero Boetti, in order to authenticate works of art which are alleged to have been made by Alighiero Boetti) to which he had asked for a certificate of authenticity for that art work. Indeed, when he spoke to Matteo Boetti, son of Alighiero Boetti and president of Archivio Alighiero Boetti, he was told that this painting had already been unsuccessfully submitted to the authentication committee three times before, in order to obtain a certificate of authenticity! Archivio Alighiero Boetti declined to provide such certificate of authenticity to the previous owners of the artwork because, according to Matteo Boetti, it was a fake, a forgery, a counterfeit, and therefore not of the hand of Alighiero Boetti.
This risk of falling prey to the deceit of auction houses (and of their anonymous sellers of such flawed artworks) is definitely not mitigated by the terms and conditions of sale of such auction houses. Indeed, these T&Cs are riddled with liability waivers, such as this one extracted from Bellmans’ T&Cs: ‟Please note that Lots (in particular second-hand Lots) are unlikely to be in perfect condition. Lots are sold ‟as is” (i.e. as you see them at the time of the auction). Neither we nor the Seller accept any liability for the condition of second-hand Lots or for any condition issues affecting a Lot if such issues are included in the description of a Lot in the auction catalogue (or in any saleroom notice) and/ or which the inspection of a Lot by the Buyer ought to have revealed” or these gems set out in Tajan’s T&Cs: ‟If no information on restoration, an accident, retouching or any other incident is provided in the catalogue, the condition reports or labels or during a verbal announcement, this does not mean that the item is void of defects. The condition of the frames is not guaranteed” and ‟Buyers may obtain a condition report on items included in the catalogue that are estimated at more than €1 000 upon request. Information contained in such reports is provided free of charge and solely to serve as an indication. It shall by no means incur the liability of Tajan”. Of course it is very likely that such liability waivers, which remove any liability from the shoulders of a deceitful auctioneer, are unlawful. But it will take a protracted, expensive and painful lawsuit to demonstrate that such liability waivers are in severe breach of English or French contractual law. Which art collector has the time or appetite for that?
2. To pay or not to pay the hammer price?
In the two above-mentioned examples, our clients faced several scenarios: our fervent Chinese art collector refused to pay for the price of the Chinese vase, immediately rescinding his successful bid by way of a formal email to Tajan, sent on the same day that he discovered that the Chinese vase was not as per the description made of it in the condition report and Tajan’s catalogue. However, our Italian modern art enthusiast client dutifully paid the price of GBP25,912 by credit card to Bellmans, on the day of his successful bid for the painting ‟attributed to Alighiero e Boetti” (sic).
While not settling the price and not collecting the deceitful lot was the right move to make, for the Chinese art collector who immediately spotted the fraud upon close inspection of the Chinese vase post-auction, it opened the way to court litigation since Tajan and its anonymous seller contested, of course, that their condition report and catalogue had hidden the truth about the poor condition of such lot. Indeed, further to an unsuccessful attempt to mediate this dispute with the (rather useless) ‟commissaire du gouvernement près le Conseil des ventes volontaires de meubles aux enchères” (i.e. the statutory body which role is to regulate French auction houses), Tajan lodged a lawsuit against our client with the Paris Tribunal de grande instance in early 2017 which is still ongoing, to this day.
Meanwhile, our UK-based collector also did the right thing, by settling the hammer price and buyer’s premium including VAT, and by collecting the painting ‟attributed to Alighiero e Boetti” since he was still convinced that this was a genuine painting made by the hand of Alighiero Boetti; until he was proved otherwise by the authentication committee of Archivio Alighiero Boetti, a few weeks later.
To conclude on this point, the logical rule is that, as soon as you discover the deceit or forgery, you should let the auction house know that you rescind the successful bid by way of a formal communication with them; be it before you have paid the hammer price and buyer’s premium, or after. Ideally, you want to make such formal disclosure of the deceit or counterfeit to the auction house as soon as possible, since most auctioneers set out, in their T&Cs, that they will not consider claims of forgery by the successful bidder, if these claims are made after a short period following the successful bid. Here is, for example, Bellmans’ liability waiver on this topic: ‟You may return any Lot which is found to be a Deliberate Forgery to us within 21 days of the auction provided that you return the Lot to us in the same condition as when it was released to you, accompanied by a written statement identifying the Lot from the relevant catalogue description and a written statement of defects”.
3. Preemptive measures to avoid being the unhappy successful bidder of a deceitful lot
Buyers of art works have no mandatory obligations to conduct any due diligence, under French or English law or case law.
However, the principle of caveat emptor (i.e. ‟buyer beware”, in Latin) applies, by which the onus is on the buyer to investigate the property or object he is acquiring. Since such burden of due diligence rests with buyers, they typically search the stolen art database of the Art Loss Register and conduct enquiries on ownership, authenticity, condition, provenance and lawful export of art. Due diligence depends on the type of asset, its value, and the information volunteered by the seller.
As a rule of thumb, any buyer should, at the minimum, conduct the following searches:
- attend the auction’s location in person and inspect the coveted art work before taking part into a bid for it;
- research the coveted art work on price databases, such as ArtNet, in order to find some historical data about past sales of such art work;
- research lost or stolen art databases, such as the Art Loss Register and Interpol, since such databases include data about art works which authenticity is challenged, and therefore report authenticity issues. The database of the Art Loss Register is not publicly available but it can be searched on request. Some data on the Interpol database can be searched by members of the public and,
- if in existence, read the ‟catalogue raisonné” of the artist who the artwork is attributed to, in order to assess whether such artwork has been indeed recognised by the field as being of the hand of such artist.
If you, buyer, conduct such above-mentioned searches and due diligence steps, and provided that you are a consumer (and not acting as a professional, such as an art dealer or trader), the courts would probably find that you have complied with the principle of caveat emptor (buyer beware).
4. What are your options, after the successful bid and unhappy discovery that the artwork is unlike its description set out in the auctioneer’s documents?
As set out above in paragraph 2. above, you should send an official letter to the auction house, denouncing the forgery and/or poor condition (or any other undisclosed defect) of the art work, very soon after you have discovered it, rescinding the successful bid and requesting to return the disputed lot to the auctioneer, against the full refund of the hammer price, the buyer’s premium including VAT, any other costs associated with the bid (such as transport costs) and the costs relating to the authentication and/or inspection of the artwork.
While it is unlikely that the auction house, recipient of such formal letter of complaint, will accept to cover the authentication and/or inspection costs, any auctioneer who wants to keep his reputation intact would accept to take back the litigious lot and refund the rests of the requested costs; especially if you sent your official communication as close as possible to the date of the successful bid, and if you have gathered much strong evidence that the artwork is indisputably a forgery or not at all like it was described in the condition report and/or the catalogue.
If the French auction house and you, unhappy bidder, cannot see eye to eye, you can lodge a formal complaint and request for mediation with the ‟commissaire du gouvernement près le Conseil des ventes volontaires de meubles aux enchères” (i.e. the statutory body which role is to regulate French auction houses), bearing in mind, though, that the ‟Conseil des ventes volontaires de meubles aux enchères” may come across as biased, since it is not in its best interest to annoy its members, the French auction houses.
In the UK, there is no regulatory body in charge of watching and regulating UK auction houses. However, most UK auction houses belong to trade federations, such as the Society of Fine Art Auctioneers and Valuers, which have issued some guidance notes for good practice and often have complaint handling schemes in place, and even mediation services, when one of their members is the subject of a dispute with one of its buyers. Indeed, the strategy of ‟naming and shaming” is particularly effective in the UK, much less so in France where French auction houses act as if they were in contempt of any regulations or complaints handling schemes that may limit their ability to waive their liability vis-a-vis their buyers.
If the dispute between the auction house and the buyer escalates into a fully-fledged lawsuit, your defense, as a buyer, should be based around proving that the work of art was deceitfully sold at auction, because of gross misrepresentation and negligence committed by the auctioneer and, accessorily, the seller. As much evidence of the forgery, counterfeit and/or poor condition, as possible, should be provided to the court, even by way of requesting an expertise of the deceitful artwork, executed by an art expert, under supervision of the court.
Meanwhile, you, as a buyer and defendant in the lawsuit, should request and attempt mediation all the way, during the lawsuit, in order to demonstrate that you are ready to compromise and find a constructive, time-efficient and cost-effective resolution to this dispute. The other side, however, may not agree to such alternative dispute resolution, out of cheer stupidity or because their legal fees may not be covered by their legal insurance policy, should a mediation or any other alternative dispute resolution process be put in place between the parties.
To conclude, you really want to avoid finding yourself in the situation of an unhappy successful bidder who discovers, post-auction, that he has overpaid for an artwork which is not at all what it seemed, or was presented to be, by the auctioneer and its anonymous seller. Our guidelines, above, should save you from that headache and situation. However, if that is not the case, don’t worry and call us, since we are here, at Crefovi, to service you to find a solution to your bad auction experience and deceitful transaction, in the most cost-efficient and time-efficient way.
Almost any medium-sized and large creative business has overseas operations, in order to maximise distribution opportunities and take advantage of economies of scale. This is especially true for fashion & luxury businesses, which need strategically-located brick & mortar retail outlets to thrive. However, such overseas boutiques may need to be restructured, from time to time, in view of their annual turnover results, compared to their fixed costs. What to do, then, when you want to either reduce, or even close down, your operations set up in France? How to proceed, in the most time and cost efficient manner, to restructure your creative business in France?
One thing that needs to be clear from the outset is that you must follow French rules, when you proceed onto scaling back or even winding up your operations set up in France.
Indeed, in case you have incorporated a French limited liability company for your business operations in France, which is a wholly-owned subsidiary of your foreign parent-company, there is a risk that the financial liability of the French subsidiary be passed onto the foreign parent-company. This is because the corporate veil is very thin in France. Unlike in the UK or the US for example, it is very common, for French judges who are assessing each matter on its merits, to decide that a director and/or shareholder of a French limited liability company should become jointly liable for the loss suffered by a third party. The judge only has to declare that all the following conditions are cumulatively met, in order to pierce the corporate veil and hold its directors and/or shareholders liable for the wrongful acts they have committed:
- the loss has been caused by the wrongful act of a director or a shareholder;
- the wrongful act is intentional;
- the wrongful act is gross misconduct, and
- the wrongful act is not intrinsically linked to the performance of the duties of a director or is incompatible with the normal exercise of the prerogatives attached to the status of the shareholder.
The specific action of liability for shortfall of assets is generally the route that is chosen, to pierce the corporate veil and trigger the director and/or shareholder liability of a French limited liability company. However, there is numerous French case law, showing that French courts do not hesitate to hold French and foreign parent companies liable for the debts of French subsidiaries, especially in case of abuse of corporate veil, by way of intermingling of estates, either by intermingling of accounts or abnormal financial relations. This usually leads to the extension of insolvency proceedings, in case of intermingling of estates, but could also trigger the director and/or shareholder liability in tort for gross misconduct.
Indeed, if a shareholder has committed a fault or gross negligence that contributed to the insolvency of, and subsequent redundancies in, the French subsidiary, that shareholder may be liable to the employees directly. Pursuant to recent French case law, the shareholder could be held liable in the event its decisions:
- hurt the subsidiary;
- aggravate the already difficult financial situation of the subsidiary;
- have no usefulness for the subsidiary, or
- benefit exclusively to the shareholder.
Of course, any French court decisions are relatively easily enforceable in any other European Union (‟EU”) member-state, such as the UK, thanks to the EU regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. This regulation allows the enforcement of any court decision published in a EU member-state without any prior exequatur process. Therefore, the foreign parent-company will not be protected by the mere fact that it is located in the UK, for example, as opposed to France: it will be liable anyway, and the French courts’ judgments will be enforceable in the UK against it. Moreover, a new international convention, the Hague convention on the recognition and enforcement of foreign judgments in civil or commercial matters was concluded, on 2 July 2019, which will become a ‟game changer” once it becomes ratified by many countries around the world, included the EU. It will therefore become even easier to enforce French court decisions in third-party states, even those located outside the EU.
So what is the best route to restructure or wind up the French operations of your creative business, if so much is at stake?
1. How to lawfully terminate your French lease
Most French commercial operations are conducted from commercial premises, be it a retail outlet or some offices. Therefore, leases of such commercial spaces were entered into with French landlords, at the inception of the French operations.
How do you lawfully terminate such French leases?
Well, it is not easy, since the practice of ‟locking commercial tenants in” has become increasingly common in France, through the use of pre-formulated standard lease agreements which impose some onerous obligations on commercial tenants, that were not subject to any negotiation or discussion between the parties.
This evolution is rather surprising since France has a default regime for commercial leases, set out in articles L. 145-1 and seq. of the French commercial code, which is rather protective of commercial tenants (the ‟Default regime”). It defines the framework, as well as boundaries between, the landlord and its commercial tenant, as well as their contractual relationship.
For example, article L. 145-4 of the French commercial code sets out that, in the Default regime, the term of the lease cannot be lower than nine years. Meanwhile, articles L. 145-8 and seq. of the French commercial code describe with minutia the Default regime to renew the lease after its termination, declaring null and void any clause, set out in the lease agreement, which withdraws the renewal right of the tenant, to the lease agreement.
But what does the Default regime say about the right of a tenant to terminate the lease? Nothing, really, except from articles L. 145-41 and seq. of the French commercial code, which provide that any clause set out in the lease agreement in relation to the termination of the lease will only apply after one month from the date on which a party to the lease agreement informed the other party that the latter had to comply with all its obligations under the lease agreement and, should such request to comply with its contractual obligations be ignored, the former party will exercise its right to terminate the lease agreement within a month. However, in practice, it is very difficult for French commercial tenants to invoke such articles from the French commercial code, and subsequently prove that their landlords have not complied with their contractual obligations under the lease. This is because such French lease agreements often set out clauses that exonerate the landlords from any liability in case the premises are defective, obsolete, suffer from force majeure cases, etc.
To summarise, the Default regime does not provide for any automatic right for a commercial tenant to terminate the lease agreement, for any reason. It is therefore advisable, when you negotiate the clauses set out in such lease agreement, to ensure that your French entity (be it a branch or a French limited liability company) has an easy way out of the 9 years’ lease. However, since the balance of power is heavily skewed in favour of commercial landlords – especially for sought-after retail locations such as Paris, Cannes, Nice, and other touristic destinations – there is a very high probability that the landlord will dismiss any attempts made by the prospective commercial tenant to insert a clause allowing such tenant to terminate the lease on notice, for any reason (i.e. even in instances when the commercial landlord has complied with all its obligations under the lease).
Still included in the Default regime, on the topic of termination of leases, is article L. 145-45 of the French commercial code, which sets out that the institutionalised receivership or liquidation (i.e. ‟redressement ou liquidation judiciaires”) do not trigger, in their own right, the termination of the lease relating to the buildings/premises affected to the business of the debtor (i.e. the tenant). Any clause, set out in the lease agreement, which is contradictory to this principle, is null and void, under the Default regime. While this article sounds protective for commercial tenants, it also infers that there is no point in placing the tenant’s business in receivership or liquidation, to automatically trigger the termination of the lease. Such a situation of court-led receivership or liquidation of the French entity will not automatically terminate the lease of its premises.
Consequently, the most conservative way out may be to wait the end of the nine years’ term, for a commercial tenant.
In order to have more flexibility, many foreign clients that set up French commercial operations prefer to opt out of the Default regime, which imposes a nine years’ term, and instead enter into a dispensatory lease (‟bail dérogatoire”) which is not covered by the Default regime.
Indeed, article L. 145-5 of the French commercial code sets out that ‟the parties can (…) override” the Default regime, provided that the overall duration of the commercial lease is not longer than three years. Dispensatory leases, which have an overall duration no longer than 3 years, are therefore excluded from, and not governed by, the Default regime set out in articles L. 145-1 and seq. of the French commercial code, and are instead classified in the category of ‟contrats de louage de droit commun” i.e. civil law ordinary law contracts of lease, which are governed by the provisions set out in the French civil code, relating, in particular, to non-commercial leases (article 1709 and seq. of the French civil code).
Therefore, if a foreign parent negotiates a dispensatory lease for its French operations, it will be in a position to call it a day after three years, instead of nine years. However, it will not be able to benefit from the tenants’ protections set out in the Default regime and will therefore need to negotiate very astutely the terms of the commercial lease with the French landlord. It is therefore essential to seek appropriate legal advice, prior to signing any lease agreement with any French landlord, in order to ensure that such lease agreement offers options, in particular, for the tenant to terminate it, in case of contractual breaches made by the landlord, and, in any case, upon the end of the three years’ term.
The tenant should keep a paper trail and evidence of any contractual breaches made by the landlord during the execution of the lease, as potential ‟ammunition” in case it decides to later trigger the termination clause under the lease agreement, for unremedied breach of contract.
2. How to lawfully terminate your French staff
Once the termination of the lease agreement is agreed, it is time for the management of the French operations to focus their attention on termination the employment agreements of French staff members (the ‟Staff”), which can be a lengthy process.
An audit of all the employment agreements in place with the Staff should be conducted, confidentially, before making a move, in order to assess whether such agreements are ‟contrats à durée indéterminée”, or ‟CDI” (i.e. indeterminate duration employment agreements) or ‟contrats à durée déterminée”, or ‟CDD” (i.e. fixed term employment agreements).
As part of this audit, the legal and management team should clarify the amount of the sums due to each member of the Staff, relating to:
- any paid leave period owed to her;
- in case of CDDs, if no express agreement is signed by the member of Staff and the employer upon termination, all outstanding remunerations due during the minimum duration of the CDD;
- in case of CDDs, an end of contract indemnity at a rate of 10 percent of the total gross remuneration;
- in case of CDIs, any notice period salary owed to her;
- in case of CDIs, any severance pay owed to her, and
- any outstanding social contributions on salary.
This audit will therefore enable the French business, and its foreign parent-company, to assess how much this Staff termination process may cost.
In France, you cannot terminate Staff at will: you must have a ‟lawful” reason to do so.
Justifying the termination of a CDD ahead of its term may be pretty complex and risky, in France, especially if the relevant members of Staff have behaved in a normal manner during the execution of such CDD, so far. It may therefore be worth for the employer to pay all outstanding remunerations due during the minimum duration of the CDD, in order to avoid any risk of being dragged to any employment tribunal, by such members of Staff.
As far as CDIs are concerned, there are three types of termination of CDIs, as follows:
- ‟licenciement pour motif économique” (i.e. layoff for economic reasons);
- ‟rupture conventionnelle du CDI” (i.e. mutually agreed termination of the employment agreement);
- ‟rupture conventionnelle collective” (i.e. collective mutually agreed termination of the employment agreement).
A ‟licenciement pour motif économique” must occur due to a real and serious economic cause, such as job cuts, economic difficulties of the employer or the end of the activity of the employer.
This option would therefore be a good fit for any French entity that wants to stop operating in France. It does come with strings attached, though, as follows:
- the employer must inform and consult the ‟représentant du personnel”, or the ‟Comité d’entreprise”;
- the employer asks the relevant Staff to attend a preliminary meeting and notifies them of the termination of their CDIs as well as the reasons for such termination;
- the employer sends a termination letter to the relevant Staff, at least 7 business days from the date of the preliminary meeting, or at least 15 business days from the date of the preliminary meeting if such member of Staff is a ‟cadre” (i.e. executive), which sets out the economic reason which caused the suppression of the job occupied by the employee, the efforts made by the employer to reclassify the employee internally, the option for the employee to benefit from reclassification leave and
- the employer informs the French administration, i.e. the relevant ‟Direction régionale des entreprises, de la concurrence, de la consommation, du travail et de l’emploi” (‟DIRECCTE”) of the redundancies.
Another route to lawfully terminate the Staff is via a ‟rupture conventionnelle du CDI”, i.e. mutually agreed termination of the employment agreement. This is only open to French operations where the Staff is ready to cooperate and mutually agree to the termination of its employment agreements. This situation is hard to come by, in reality, to be honest, by why not?
If the French entity manages to pull this off, with its Staff, then the ‟convention de rupture conventionnelle” must be signed, then homologated by the DIRECCTE, before any employment agreement is officially terminated.
If the DIRECCTE refuses to homologate the convention, the relevant Staff must keep on working under normal conditions, until the employer makes a new request for homologation of the convention and … obtains it!
Finally, in case an ‟accord collectif”, also called ‟accord d’entreprise”, was concluded in the French company, then a ‟rupture conventionnelle collective” can be organised. If so, only the Staff who has agreed in writing to the ‟accord collectif” can participate to this collective mutually agreed termination of its employment agreements.
It’s worth noting that French employees are rather belligerent and often file claims with employment tribunals, upon termination of their employment agreements. However, the Macron ordinances, which entered into force in September 2017, have set up a scale that limits the maximum allowances which could be potentially be paid to employees with minimal seniority, in such employment court cases. Thus, employees having less than one year’s seniority are allowed to collect a maximum of one month of salary as compensation. Afterwards, this threshold is grossed up by more or less one month per year of seniority up to eight years. However, such scale does not apply to unlawful dismissals (those related to discrimination or harassment) or to dismissals which occurred in violation of fundamental freedoms. While many French lower courts have published judgments rejecting such Macron scale, the ‟Cour de cassation” (i.e. the French supreme court) validated such Macron scale in July 2019, forcing French employment tribunals to comply with such scale.
While this should come as a relief to foreign parent companies, it is worth noting that the more orderly and negotiated the departure of the Staff, the better. Having to fight employment lawsuits in France is no fun, and can be cost and time intensive. They therefore must be avoided at all cost.
3. How to restructure your creative business in France: terminate other contracts with third parties and clean the slate with French authorities
Of course, other contracts with third parties, such as suppliers, local service providers, must be lawfully terminated before the French operations are shut down. The takeaway is that the French entity and its foreign parent company cannot leave a chaotic and unresolved situation behind them, in France.
They must terminate and lawfully sever all their contractual ties with French companies and professionals, before closing shop, in compliance with the terms of any contracts entered into with such French third parties.
Additionally, French companies must pay off any outstanding balances due to French authorities, such as the French social security organisations, the URSSAF, and the French tax administration, before permanently closing down.
4. How to restructure your creative business in France: you must properly wind up your business
Once all the ongoing obligations of the French operations are met, by lawfully terminating all existing agreements such as the commercial lease, the employment agreements, the suppliers’ agreements and the service providers’ agreements, as discussed above, it is time to wind up your business in France.
French limited liability companies have two options to terminate their business as an ongoing concern due to economic grounds, i.e. proceed to a ‟cessation d’activité”.
The first branch of the alternative is to execute a voluntary and early termination of the French business as an ongoing concern. It can be exercised by the French company, its shareholders and its board of directors, when it can still exercise its activity and pay back its debts. If the articles of association of such French company provide for the various cases in which the company may be wound up, such as the end of the term of the French company, or upon the common decision made by its shareholders, then it is possible for the French limited liability company and its directors to execute a voluntary and early termination of the business as an ongoing concern.
The second branch to the alternative, opened to French limited liability companies, occurs when a company cannot pay its debts anymore, and is in a situation of ‟cessation de paiements” i.e. it cannot pay its debts with its assets, in cessation of payments. In this instance, the French company must file a notification of cessation of payments with the competent commercial courts within 45 days from the date on which it stopped to make payments. Also, within that time frame of 45 days, the board of directors of the French company must open a ‟procédure de redressement ou de liquidation judiciaire” (i.e. receivership or liquidation institutionalised process, monitored by French courts) with the competent commercial court. This court will decide, further to examining the various documents filed with the ‟déclaration de cessation des paiements”, which institutionalised process (receivership? liquidation?) is the most appropriate, in view of all the interests that need being taken into account (debts, safeguarding employments, etc.).
If you want to exit the French territory in a graceful manner, you do not want to find yourself in a situation of cessation of payments, and then receivership or liquidation monitored by French courts. Not only this guarantees a protracted and painful judiciary process to terminate your French operations, but this may lead to situations where the money claims made against the French company would be escalated to its shareholders, directors and/or parent company, as explained in our introduction above.
Not only the parent company, and any other shareholder, could be dragged in the mud and found liable, but its directors, and in particular its managing director, too. French commercial courts have no patience for sloppy and irresponsible management, and many managing directors (‟associés gérants”) have seen their civil liability triggered because their actions had caused some prejudices to the French company or a third party. Even criminal liability of an ‟associé gérant” can be triggered, in case the French court discovers fraud. In particular, it is frequent that in collective insolvency proceedings, if the judicial liquidation of a French limited liability company shows an asset shortfall (‟insuffisance d’actif”), the courts order its managing director to pay, personally, for the company’s social liability, if she has committed a management error.
To conclude, the French company acts as a shield for its managing director, except if such director commits a personal mistake detachable from her mandate, in case the company is still solvent. However, if the company is in receivership, both the shareholders’, and the directors’ liability may be triggered in many ways, by French courts, the French social security contributions entity URSSAF and the French tax administration.
It is therefore essential to leave France with a clean slate, because any unfinished business left to fester may hit your foreign company and the management like a boomerang, by way of enforceable and very onerous French court decisions.
Don’t worry, though, we are here, at Crefovi, to service you to achieve this, and you can tap into our expertise to leave French territories unscathed and victorious.