London information technology & internet law firm Crefovi is delighted to bring you this new technology & data privacy blog, to provide you with forward-thinking and insightful information on hot business and legal issues in the digital & high technology sectors.
This new technology & data privacy blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global information technology, media and internet community, in particular in the United Kingdom and France. This new technology & data privacy blog also provides timely updates and commentary on legal issues in the hardware, software and e-commerce sectors. It is curated by the IT lawyers of our law firm, who specialise in advising our information technology & internet clients in London, Paris and internationally on all their legal issues.
Crefovi practices in information technology, hardware & software since 2003, in Paris, London and internationally. Crefovi advises a wide range of clients, from start-ups in the tech world requiring legal advice on contractual, tax and intellectual property issues, to large corporations – renowned in the information technology and ‟Consumer discretionary” sectors – which require advice to negotiate and finalise their licencing or distribution deals, or to enforce their intellectual property rights. Crefovi’s ‟Internet & digital media” team participates in high-profile transactions. It assists leading established and emerging companies in mergers and acquisitions; litigation, including intellectual property litigation; financing transactions; securities offerings; structuring cross-border international operations; technology and intellectual property transactions; joint ventures and in matters involving online speech, privacy rights, advertising, e-commerce and consumer protection, and regulatory issues. Crefovi writes and curates this new technology & data privacy blog to guide its clients through the complexities of information technology, and internet & digital media, law.
The founding and managing partner of Crefovi, Annabelle Gauberti, regularly attends, and is a speaker on panels organised during, important events from the calendar of the world of information technology and internet, such as the tradeshows CES, Slush, SXSW, Viva Technology, Wired and Web Summit.
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. Some of these industry teams are the ‟Information technology, hardware & software”, as well as the ‟Internet & digital media” departments, which curate this new technology & data privacy blog below, for you.
Annabelle Gauberti, founding and managing partner of London information technology & internet law firm 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.
Even in a downturn, private equity money picks Hollywood as a smart bet. Investment firms now view star-driven production banners (and major soundstages) as a long-term play in a crowded content marketplace. How did this happen? Why the sudden change of heart, since finance people had previously always viewed investing in media content production a very risky bet, at best? Is this ‟all in” investment strategy in media content production, implemented by private equity funds, financially sound?
On the back of the Star Wars Battlefront 2 debacle in 2017, many European regulators, including the UK and French ones, have started to take an increasingly scrutinising and judging stance, on loot boxes offered for purchase to children and young persons who play video games. Why are loot boxes potentially dangerous? What are the UK and French regulators – and other governments in the world – doing, to protect vulnerable players from these random reward mechanisms?
Film distribution remains inefficient and not user-friendly enough, despite the many disruptions caused by online piracy and the advent of film streaming. Is the outcome of the streaming wars going to bring more consolidation in film distribution? What about aggregating film streaming services together, to make them more affordable to end-users? Let’s explore.
Since Microsoft announced its acquisition of Activision Blizzard, the largest independent video games’ developer and publisher worldwide, competitors and national competition authorities alike have been busy, around the world, in assessing the potential substantial lessening of competition that such a large deal may entail. Let’s dive in, and assess where this acquisition is at, in each country in which the competition authority is investigating its impact on competition in the respective national market.
While at the Podcast show on 25 May 2022, I struck a conversation with Kevin Fairburn, senior account manager for the Japanese musical products brand Zoom at Sound Service MSL Distribution Ltd, who mentioned that online retailing of musical instruments (‟MI”) and products was more strictly regulated, in the United Kingdom (‟UK”), since its Competition and Markets Authority (‟CMA”) had handed down several decisions against top MI suppliers and retailers, such as Roland and Fender. Intrigued, I decided to dive in, and get to the bottom of these CMA cases which, according to Kevin, did a lot to make MI online retailing a better place for fairer competition. Here is what I found.
Gaming, and the competitive games sector, in particular esports and virtual sports, are growing exponentially. The magnitude of such growth can be measured by global financial, economic and social metrics. While this development is no doubt advantageous for the sports, gaming and esports sectors, it raises issues in relation to the most adequate ways to resolve contractual, tort based, disciplinary and doping and digital doping disputes and cases arising out in this new ecosystem. Let’s explore what is at stake, here, and analyse the possible avenues to structure, and process in the most confidential, efficient and diligent way any dispute arising in the gaming, esports and virtual sports spheres.
Four Tet v Domino: why pacific renegotiation of royalties’ rates on music streams is the best strategy for all involvedCrefovi : 31/07/2022 12:32 pm : Articles, Copyright litigation, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Music law, Webcasts & Podcasts
The case Four Tet v Domino is the UK’s most recent example of music labels and recording artists battling it out, during the renegotiation of their respective share, on music streams’ royalties, away from sales, and as licenses. Why did Four Tet have to file his claims in court? What was the outcome? Was such strategy to escalate this royalties negotiation into full-blown litigation the smartest thing to do, for Domino, and for Four Tet?
Back in 2018, I wrote an article on the use of alternative dispute resolution (‟ADR”) – in particular, arbitration – in the creative industries. On the back of the California arbitration week, and the Paris arbitration week, which both took place earlier this year in March and April 2022, it is worth revisiting whether ADR is really becoming the tool of choice, for the creative industries, to resolve their disputes.
1. More and more ADR institutions have specialty panels of neutrals specialising in creative industries
One major trend which erupted since 2018 is that ADR institutions (i.e. bodies which have sprung up over the years, specialising in providing either mediation and/or arbitration services) have understood the need to provide a pool of arbitrators and mediators (i.e. neutrals) who are deeply cognisant of the inner workings of a particular industrial sector.
For example, the Court of Arbitration for Art (‟CAfA”) was set up in 2019, in the Netherlands, as a specialised arbitration and mediation tribunal exclusively dedicated to resolving art law disputes. While it is not clear whether CAfA has already been used yet, to resolve many art disputes, its ‟raison d’être” is to administer domestic and international arbitrations conducted by arbitrators with significant expertise in art and art law. On this note, I am an arbitrator and mediator registered on CAfA’s panel of neutrals specialised in art law.
As far as the films and entertainment sector is concerned, the big news from 2021 were that the Independent Film & Television Alliance (‟IFTA”), based in Los Angeles, USA, devolved the whole management of its panel of entertainment law-focused arbitrators to another ADR centre, i.e. the American Arbitration Association (‟AAA”) and its international posting, the International Centre for Dispute Resolution (‟ICDR”). So, as a neutral on the IFTA panel, I was inducted into the AAA/ICDR entertainment panel in February 2022, during a mandatory case management training conducted on Zoom, along with most other arbitrators from the IFTA panel.
For the information technology sector, the Silicon Valley Arbitration & Mediation Center (‟SVAMC”) really took off, since 2018. While SVAMC is not an ADR institution providing mediation or arbitration services per se, it publishes the Tech List each year, which it brands as ‟the list of the world’s leading technology neutrals, peer-vetted and limited to exceptionally qualified arbitrators and mediators known globally for their experience and skill in crafting business-practical legal solutions in the technology sector” (sic). While this list is still very US-centric, as well as male-centric, it may prove useful for parties who want to ensure that the arbitrators appointed to resolve their disputes are tech-specialised and understand the international tech business world.
2. More and more disputes taking place in the creative industries are resolved through arbitration
While my 2018 ADR article was a bit of wishful thinking, ADR has since really found its place, as the tool of choice for the creative industries to resolve their disputes, in a confidential, efficient and technology-savvy way.
With the management of the COVID 19 pandemic causing a vast backlog of court cases, on the dockets of almost all courts in the world, for the last two years, and with an inability from public courts to adopt virtual hearings and electronic case management methods, creatives around the world have really started to appreciate using mediation and arbitration services to decisively and efficiently sort out their civil and commercial conflicts.
This is a bonanza for ADR institutions, with Chris Poole, the CEO of Los Angeles-based Judicial Arbitration & Mediation Service (‟JAMS”) bragging, during an interview, that even the Kardashians are using JAMS’ services to resolve their commercial disputes!
As highlighted during the first edition of the California International Arbitration Week, California-based ADR institutions, such as JAMS and AAA/ICDR, and California-located neutrals, have everything to win from this newly-found interest in ADR, from the entertainment, music, information technology and media industries, which stakeholders are majorly based in Los Angeles and Silicon Valley. It is therefore possible that California may become a prominent arbitration location, in the future, on a par with Paris or London.
ADR institutions are also positioning themselves at the forefront of dispute resolution, by adopting tech-solutions and tools, such as:
- conducting arbitration via virtual hearings;
- using electronic signatures to sign arbitral awards and other official documents;
- making the most of proprietary electronic case management platforms that are simultaneously used by neutrals, parties and ADR case managers during arbitrations or mediations, and
- putting robust data privacy terms & conditions, and cyber-attack firewalls, in place, to protect all stakeholders’ data which is disclosed online, during the resolution of such disputes,
so that parties and neutrals alike may virtually meet, despite the lockdowns and travel restrictions, to get on with the arbitration or mediation processes and issue some timely arbitral awards or mediation decisions.
The 2022 Paris arbitration week hosted several events on sports’ and esports’ disputes and ADR, highlighting how essential arbitration has become to resolve conflicts in sports, and, potentially, esports, via the services of the quasi-monopolistic ADR institution called Court of Arbitration for Sports (‟CAS”). Indeed, established in 1984 by the International Olympic Committee, Geneva-based CAS deals with disciplinary and commercial disputes directly and indirectly linked to sport. Via its two main divisions, the Ordinary Arbitration Division (which functions as a court of sole instance), and the Appeals Arbitration Division (which hear cases brought to it on appeal from federations and sports organisations), CAS has delivered arbitral awards on the most high-profile recent sports disputes, such as the Caster Semenya v International Association of Athletics Federations (‟IAAF”) case and China’s Sun Yang anti-doping saga.
3. Why arbitration is the way to go, to resolve cross-border disputes, post Brexit, between parties located in the European Union and the United Kingdom
As explained at length in my 2021 article ‟How to enforce civil and commercial judgments after Brexit?”, the new regime of enforcement and recognition of European Union (‟EU”) judgments in the United Kingdom (‟UK”), and vice versa, is uncertain and fraught with possible litigation with respect to the scope of application of the Hague convention dated 30 June 2005 on choice of court agreements.
In this context, which is unlikely to change until the UK enters into bilateral agreements with the EU on the enforcement and recognition of court judgments, it is high time for the creative industries to ensure that any dispute arising out of their new contractual agreements are resolved through arbitration.
Indeed, as explained in our article ‟Alternative dispute resolution in the creative industries”, arbitral awards are recognised and enforced by the Convention on the recognition and enforcement of foreign arbitral awards 1958 (the ‟New York convention”). The New York convention is unaffected by Brexit, since it was signed by the UK as a contracting state. Moreover, London, the UK capital, is one of the most popular and trusted arbitral seats in the world. Conscious of the issues caused by Brexit on the enforcement and recognition of court judgments, the UK government has decided to boost further its country’s attractiveness as an arbitration seat, by reviewing, and upgrading its Arbitration act 1996.
Creative companies and individuals would therefore be well-inspired to set out some arbitration clauses in their contracts, going forward, in order to:
- preserve long-established relationships with their cross-border trade partners;
- protect their reputation and goodwill via the confidentiality afforded by arbitration processes;
- resolve their disputes in tech-savvy environment, which limit any obligation to travel to the arbitration seat, via the wide-use of virtual hearings;
- entrust specialist arbitrators, who know the creative sector in which the dispute has arisen inside out, with delivering fair, accurate and impartial arbitral awards.
There is a frenetic desire and attempt, displayed by several UK members of parliament, to overhaul the current legal framework applicable to the UK music streaming market. Why all the commotion? What is in the works? How do such lobbying endeavours compare to the recent legal changes implemented in the European Union music market? What’s going to happen now, in the UK and elsewhere, to put back music creators at the heart of the music streaming ecosystem and supply chain?
1. Why are UK MPs investigating the music streaming industry?
Further to the digital revolution forced upon the global music industry by independent peer-to-peer file sharing service Napster, in the early noughties, music streaming has come out on top, as the most agile, flexible, user-friendly and wide-ranging music distribution channel.
Indeed, based on research conducted by the International Federation of the Phonographic Industry (‟IFPI”) across 21 of the world’s leading music markets, its 2021 ‟Engaging with music” report sets out that subscription audio streaming (e.g. Spotify, Apple Music, Deezer) represents 23 per cent of the ‟music engagement mix”, while ad-supported audio streaming (e.g. free tier of Spotify or Deezer) and video streaming (e.g. YouTube, DailyMotion) represents 9 per cent and 22 per cent, respectively. So, according to IFPI, total music streaming is 54 per cent, in the ‟music engagement mix”, while music on the radio (e.g. radio stations, broadcast live, catch-up) is 16 per cent and purchased music (e.g. CDs, vinyls, DVDs, downloads) 9 per cent. Live music (including livestreaming) is at a paltry 2 per cent.
The International Confederation of Societies of Authors and Composers (‟CISAC”), is prompt to underline, in its 2021 global collections report, that while music ‟streaming is fast heading towards being the most important source of creators’ earnings in the future”, ‟streaming revenues – however fast they grow – are currently simply not providing a fair reward when shared across millions of individual recipients”. Asking collecting societies to adapt to digital and re-invent themselves, CISAC’s main message conveyed through its 2021 report is better digital remunerations are needed for creators, via a fairer ‟digital split”.
The Standing Committee on Copyright and Related Rights of the World Intellectual Property Office (‟WIPO”) conveys a similar, if more subtle and rigorously facts-checked, message in its 2021 report entitled ‟Inside the global digital music market”: ‟there is an ongoing legal debate within the music industry (…) over the interpretation of certain legal rights as they are, or believe that they should be, applied to digital music services”. ‟The debate appears to boil down to who should control administering rights, pricing and certain revenue collections for recordings with digital music services, whether record companies (producers), which invest in featured artists and recordings and which typically secure exclusive rights in the recordings, or Collective Management Organisations (‟CMOs”), which are tasked to collectively manage certain rights of performers, which vary from region to region. (…) The argument by the groups for the CMOs’ position aligns with the beliefs that featured performers’ royalties should be greater than what they are receiving from the digital market, and background (and) session musicians should be entitled to ongoing royalties or other form of additional remuneration generated by recordings in the digital marketplace, regardless of the contractual provisions and transfer of exclusive rights to producers. (…) (Already some) statutory provisions granting remuneration to musicians are in place in many countries’ legislation for broadcasting and communication to the public uses. The record companies observe that streaming services are substituting physical sales as the main method of delivering recorded music to consumers, and revenue from these services has become the main revenue source for the industry. According to record companies, licensing of streaming services should be organised along similar lines to the distribution of physical products”.
This debate and tensions between pro-creators and pro-music labels have picked during the governments’ management of the COVID 19 pandemic, since multiple national lockdowns and statutory restrictions towards non-vaccinated citizens have grinded to a halt most live music events and concerts, all over the world. Music performers and songwriters therefore had even less revenues to sustain them, in the last two years, with many of them having to find additional side jobs in order to make rent.
The negative effects of the pandemic have been strongly compounded, in the United Kingdom (‟UK”), by Brexit, since not only does the EU-UK withdrawal agreement not provide for any specific music visa provision system, which would have allowed UK touring musicians to easily continue performing and touring in the 27 member-states of the European Union (‟EU”), but certain cross-border copyright mechanisms – especially those relating to CMOs and other rights management societies, as well as those relating to the EU digital single market (‟DSM”) – stopped applying in the UK on 1 January 2021.
In this context, it is no wonder that UK musicians – songwriters and performers alike – are getting increasingly concerned about getting a slice of the pie which would allow them to keep on creating, and performing, in the music industry. Their urgency and various acts of lobbying have not fallen on deaf ears, and many compassionate UK members of parliament (‟MPs”) have decided to take this matter in their own hands, so that UK music creators could benefit from a level playing field, in particular with respect to their EU peers, post Brexit.
2. What process is followed by UK MPs, to implement change in the music streaming sector?
MPs on the House of Commons Digital, Culture, Media and Sport Committee (the ‟Committee”) launched an investigation in October 2020, during which they heard from music creators, industry experts and streaming services, held roundtables with musicians to hear their views and wrote to major UK record labels and tech companies for their explanations.
Several publications were issued as a result, among which:
- written evidence on the economics of music streaming, from witnesses such as streaming services Apple and Spotify, major record labels such as Warner Music UK, Sony Music UK & Ireland and Universal Music UK & Ireland, various trade associations such as UK Music, BPI and Association of Independent Music, and CMOs such as PPL;
- a 122 pages report, entitled ‟Economics of music streaming”, published by the Committee on 9 July 2021 (the ‟Committee’s report”);
- a 17 pages report relating to the UK government’s and Competition and Markets Authority’s (‟CMA”) responses to the Committee’s report, published on 22 September 2021 (the ‟Responses”), and
- extensive research and analysis papers published on 23 September 2021 by the UK Intellectual Property Office (‟UKIPO”) on ‟Music creators’ earnings in the digital era”.
The main takeaways from the inquiry and Committee’s report are that:
- the Committee recommends to classify music streaming as an income source subject to equitable remuneration. To implement this, the Committee’s report recommends that the UK government legislate so that performers enjoy the right to equitable remuneration for streaming, by amending the Copyright, Designs and Patents Act 1988 (‟CDPA”) ‟so that the making available right does not preclude the right to equitable remuneration, using the precedent set by the co-existence of the rental right and right to equitable remuneration in UK law”. The Committee’s report asks for the remuneration to be paid by the rightsholders (i.e. record labels) – rather than the streaming services – to the performers, through their CMOs.
- since the music industry market, and in particular the UK music market, is dominated by a small number of large buyers of music rights (i.e. the major record labels Warner, Sony and Universal), the UK government should expand creator rights by setting out, in the CDPA, a right to recapture works, and a right to contract adjustment, where an artist’s royalties are disproportionately low compared to the success of their music. Such right to recapture should occur after a period of 20 years, so short enough to occur within an artist’s career.
- concerns about the above-mentioned oligopoly currently in place in the music industry – in terms of overall market share in recording and publishing, but also through vertical integration, acquiring shares in streaming services and a cross-ownership system – should be escalated to the CMA, to undertake a full market study into the economic impact of the music majors’ dominance and assess whether any infringement of competition law may be taking place.
- a renewed safe harbour protection should be put in place by the UK government, so that music rightsholders may be protected on a par, compared to EU rights owners who benefit from the provisions of the EU directive on copyright in the DSM 2019/790 (the ‟DSM directive”), when their music content is uploaded on user-generated content platforms such as YouTube (‟UGCs”). The Committee recommends that the UK government introduces robust and legally enforceable obligations to normalise licensing arrangements for UGCs, ensuring that these obligations are proportionate so as to apply to dominant players such as YouTube and Facebook, without discouraging new entrants to the UGCs’ market.
- the Advertising Standards Authority (‟ASA”) should regulate music playlist curators, who have an important role in the discovery and consumption of digital music, and are therefore influential in how creators are remunerated. However, since the extent of their paid-for activity is currently undisclosed, and since the selection methods of platform editorial playlists are non transparent, music playlist curators should comply with a code of practice drafted by ASA, similar to the one focusing on social media influencers, to ensure that the curation decisions they make are transparent and ethical.
The Responses, from the UK government and the CMA, were, circonspect and measured, yet pragmatic and ‟enthusiastic”.
In particular, the UK government set out three main pillars, in its Responses:
- establishing a music industry contact group with senior representatives from across the music industry to drive action and examine stakeholders’ view on the key issues, including equitable remuneration, contract transparency and platform liability rules introduced by the EU;
- launching a research programme, alongside stakeholders’ engagement, and
- establishing two technical stakeholders’ working groups, the first focused on creating standards for contract transparency and establishing a code of practice for the music sector, and the second addressing data issues and developing minimum data standards for the music industry.
With respect to equitable remuneration, the Responses set out that the UK government will launch work to better understand issues of fairness in songwriters’ and performers’ remuneration. As part of this work, the UK government will assess different models, including equitable remuneration, to explore how likely they are to affect different parts of the music industry and how that might be achieved, including through potential legislation. It will also explore these issues through the above-mentioned music industry contact group.
As far as safe harbour is concerned, the UK government agreed that righsholders should be properly remunerated when their works are shared on UGCs, and that the UK had a unique opportunity to learn lessons from EU member-states that have implemented the DSM directive, as well as from approaches taken by other countries. Therefore, the UK government will analyse how EU member-states are implementing the DSM directive, to understand its impact on different parts of the music industry, other creative sectors, and UGCs alike.
In relation to the recommendation of expanding creators’ rights by restricting contract freedom, the UK government will commission research on these issues, particularly by looking into countries that have implemented similar measures.
With respect to launching a CMA investigation into the economic impact of the music majors’ dominance, the UK government pointed out that the CMA is an independent regulator, which should therefore decide autonomously how best to allocate its resources to protect fair competition. However, the Responses also include the CMA’s initial response, which stated that a new digital markets framework was being finalised, before its implementation, by the UK government and the CMA’s own ‟Digital Markets Unit”. Upon implementation of this new digital markets framework, the CMA’s ‟Digital Markets Unit” will assess the pertinence of launching an investigation into the majors’ oligopoly in the UK music industry.
Finally, the UK government agreed with the Committee’s recommendation to subject music playlist curators to a code of practice developed by ASA. It is also in contact with Ofcom, the UK’s communication regulator for TV, radio and video on demand sectors, with respect to this issue.
3. When are reforms to UK music law likely to take place?
While the ‟enthusiastic” above-mentioned plans, set out in the Responses by the UK government, may be currently implemented, a member of the Committee, Kevin Brennan MP, erred on the side of caution, with respect to the follow-through abilities of the UK government, by introducing a bill to make provision about the rights and remuneration of musicians, on 24 November 2021 (the ‟Bill”).
The timeline of the Bill, currently on its 2nd reading in the House of Commons, is now firmly on hand by the UK parliament.
This will put adequate pressure on the UK government, as well as the CMA and Ofcom, to deliver on all the exciting measures and goals that they had set out in the Responses.
The Bill proposes to introduce legislation giving effect to some of the recommendations made by the Committee, in the Committee’s report, in particular with respect to equitable remuneration for streaming, contract adjustment, right of revocation and transparency.
Using similar wording as the equitable remuneration already provided for under section 93B of the CDPA, the Bill proposes to amend the CDPA and introduce a right to equitable remuneration for performers, where they have transferred their making available right, in relation to a sound recording, to the producer of the sound recording (usually, their record label). This new right to equitable remuneration cannot be assigned, except to be administered by a CMO, or via testamentary disposition. Equitable remuneration is payable by the person to whom the right was transferred, or any successor in title of that person. Therefore, where performers have transferred their making available right to their record company, the record company pays the equitable remuneration. How much is paid can be negotiated by the performer and producer, or the Copyright Tribunal where no agreement is met.
The Bill also provides for contract adjustment: it sets out a right for performers and composers of musical works to receive additional and fair remuneration for their works, where their arrangement provides them with a disproportionately low level of remuneration, compared to the overall revenue generated from their work. The remuneration is paid by the person exploiting the work.
The Bill sets out a right for performers and composers, who have transferred their rights, to revoke the transfer of their rights after 20 years. The right is not automatic, notice must be provided within two years.
The Bill finally provides for a right for performers and authors of musical works (or literary works accompanying a musical work) to receive ‟up to date, comprehensible, relevant and complete information on the exploitation of such work or works”. This will enable music creators to determine whether the remuneration they are receiving is accurate and fair, or whether they may seek to renegotiate via the Bill’s contract adjustment rights.
While the Bill is following its course in the UK parliament, the UKIPO is commissioning further research on equitable remuneration, contract adjustment and right of revocation.
4. How do the UK music streaming suggested changes compare to EU policies and, in particular, the Digital Single Market directive?
The Bill’s provisions are in line with existing EU rules on transparency, safe harbour protection, a right to appropriate and proportionate remuneration for music streaming income, as well as a right to revocation and contract adjustment.
In the EU, two directives include transparency provisions:
- article 19 of the DSM directive which provides that authors and performers receive on a regular basis, at least once a year, up to date, relevant and comprehensive information on the exploitation of their works and performances from the parties to whom they have licensed or transferred their rights, or their successors in title, in particular in relation to modes of exploitation, all revenues generated and remuneration due.
- for CMOs in the EU, the 2014/26 directive on collective management of copyright requires CMOs to provide to rightsholders reports of revenue (royalty statements) that include the revenue attributed to the rightholder, the amount paid by the CMO to the rightholder per category of rights managed and per type of use, the period during which the use took place and deductions made for the CMO’s fees for managing the rights.
In addition, chapter 3 of the DSM directive establishes:
- a so-called appropriate and proportionate remuneration principle (article 18). EU member-states can choose to implement the fair remuneration principles set out in the DSM directive by relying on different or already existing mechanisms such as collective bargaining;
- a contract adjustment mechanism (also referred to as a ‟best-seller”clause) (article 20). Armed with information obtained through the transparency obligations, authors and performers can seek ‟additional, appropriate and fair remuneration” where the original remuneration is ‟disproportionately low compared to the relevant revenues derived from the subsequent exploitation”. If a re-negotiation is unsuccessful, creators have the option to bring a claim with a voluntary alternative dispute resolution body to be set up in each EU member-state for this purpose;
- an alternative dispute resolution (‟ADR”) mechanism (article 21). EU member-states are required to establish a voluntary ADR body to deal with disputes arising from the transparency obligations and the contract adjustment mechanism (without prejudice to the right to take court proceedings);
- a revocation right. It can be used when a copyright work licensed exclusively is not being exploited by the licensee. The parameters of this right are to be set out in domestic legislation (article 22);
- a specific ban on contractual overrides such that certain of these provisions (articles 19, 20 and 21) are considered to be of a mandatory nature (article 23).
Article 17 of the DSM Directive also provides that UGCs must enter into licensing agreements with rightsholders, regarding the use of protected content (e.g. images, music, code, videos) downloaded by someone other than the rights holders. If it is not possible to conclude license agreements with the rightsholders, the platforms and the rightsholders must cooperate in order to ensure that unauthorized protected works are not available on these T&Cs. Therefore, Article 17 requires platforms to work proactively with rightsholders to prevent users from uploading copyrighted content without the rightsholders’ prior consent. This will require automatic analysis and filtering of all material uploaded to UGC platform sites, such as YouTube, Dailymotion or Facebook. Farewell, safe harbor protection!
The DSM Directive had to be transposed into national law by EU member-states by 7 June 2021. Only a few countries have done so on time, including France, Italy and the Netherlands.
5. How are the music industry stakeholders reacting to the suggested changes to UK music law, in the US?
To say that the Committee’s report and recommendations were met with contempt in the United States is an understatement.
The debate, raised by the Committee during its investigation, as to whether a stream is a sale, a license or a rental, is considered by American commentators, such as Susan Butler of ‟Music confidential”, as a means of manipulating the record labels to split 50 percent of streaming royalties under existing recording deals, made with artists long ago. These old recording contracts stipulate that artists’ royalties are calculated as a percentage of sales but, for licensing, a 50 percent share of licensing fees is collected by music creators. If a stream is classified not as a sale, but as a license, record labels would have to share 50 percent of their streaming revenue with artists, even under old agreements.
American music journalists hate that the Committee appears to be aiming to reshape business models for streaming music. They are quick to point out that the UK parliament only legislates in the UK, which implies that the UK cannot, on its own, interfere in the global contractual arrangements of the three majors with their talent, or go to against established licensing agreements put in place by streaming services such as Spotify, Apple Music, Amazon Music and Google Play.
Claiming that the Committee’s data and investigation are based on ‟unrealistic expectations”, ‟truncated data”, ‟misunderstandings, misinformation, speculation and misrepresentation”, these American commentators ruthlessly reject the Committee’s report and findings, raising concerns that calls for transparency, including disclosing the terms of record companies’ agreements with streaming services, may result in violations of privacy and competition rights.
6. My take on the UK music streaming reform
The Committee is not the first institution that has attempted to shift the balance of power from music majors and streaming services to music creators in order to make music streaming a viable source of revenue, for all music players.
Indeed, as mentioned above, the EU commission and parliament have been on the case since 2016, and are now changing the paradigm in the 27 EU member-states, via the transposition of the DSM Directive.
It’s fair, as the UK government says it wants to do, to watch the space and see how these 27 EU member-states are doing, in terms of forcing the music majors and record companies independents, as well as publishers, to share a greater share of music streaming revenue with EU-based music creators. Sweden, in particular, which has a very large music market and many successful music exports, relative to its size in the EU, will be a test case to watch, in order to better understand ‟how to do it right”.
However, by taking this ‟wait and see” approach, I think the UK will start to lose its edge as an attractive music market for music creators: indeed, why would you want to go all out, as a songwriter or performer, to produce hits, if your UK record label and publisher is still dominating you, trying to get you into record deals and publishing deals where your share of streaming revenue will be insignificant , the ‟American style”? As a music creator, you’re better off signing with EU-based record companies and publishers, which agreements will be subject to national legislation transposing the many contractual protections offered by the DSM Directive and Directive 2014/26 on the collective management of copyright.
Therefore, I think that, given the Conservative leadership currently in place in the UK government, there is no way the Bill, or any new iteration of it, will be adopted in the UK, anytime soon. While music majors, record labels and independent publishers will be fully content with this status quo, I bet business-savvy UK music makers will cross the Channel and sign with EU-based labels and publishers, to launch or further their career, in the music industry.
Perhaps surprisingly in a Conservative government, the IR35 rules have been tightened, in order to ensure that the taxman gets its fair share of revenues, when creators and their clients enter into entertainment, film, media and professional sports contractual arrangements. What is at stake for the creative industries in the UK? How to make the most of loan-out companies and loan-out agreements, while ensuring compliance with the revised IR35 rules?
1. What are loan-out companies?
In the entertainment industry, accountants often advise their clients, who work as key talent and crew in the film, TV, sports and media sectors, to set up a personal service company (‟PSC”) with Companies House, the United Kingdom (‟UK”) registrar of limited companies.
Such personal service companies are also called ‟loan-out” corporations because this is the jargon term they are referred by, which comes from the USA. Indeed, the US, as a global leader in the entertainment industry, was the first country where creators used this form of US business entities to loan-out their services, via the corporate body, to their end-clients.
The creator is usually the sole shareholder and director of the loan-out company.
The loan-out entity is engaged by external third parties (i.e. the end-clients) to fulfil entertainment, media or professional sports services, which are going to be performed and executed solely by the creator. Consequently, it is the talent’s loan-out company that is referred to, and liable, in contracts to perform the services required.
Since the creator’s services are typically performed on individual contract bases, in exchange of large, irregular sums of income throughout the year, the loan-out business model is especially prominent in the entertainment, media and professional sports industries.
Article 17 of the OECD Model Income Tax treaty of 1930 appears to be the foundation by which loan-out corporation structures may be used, as it provides that athletes, celebrities, artists who operate across several countries, and who therefore earn income under several national taxation systems, may only be taxed in their home jurisdiction’s source of income (even without an established corporate body).
By the 1970s-1980s, loan-out companies, or PSCs as they are more commonly referred to by the UK taxman, HMRC, and UK lawmakers, were widely used by entertainers, top talent and crew, as well as professional sportspeople, in the UK.
2. How to use PSCs and loan-out agreements?
Loan-out companies are used as a means to reduce the personal liability of the talent, as well as protect their personal assets.
Indeed, since the SPC is the sole party to any services agreement entered into with the end-customer, then, such end-client cannot go after the personal assets and liability of the creator, in case things go south during the execution phase of such services. The end-client – who is the counterparty to that loan-out agreement – will only be able to sue the SPC and trigger the limited liability of such loan-out company.
Moreover, in the UK, private companies limited by shares (which represent over 95 per cent of all companies in existence in that country), limit the liability of their shareholders to creditors of the company, to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. Therefore, a shareholder’s personal assets are protected in the event of the company’s insolvency or increased liability to a third party.
Also, in the UK, the corporate veil is thick and not often, or easily, pierced: UK company directors incur no personal liability because all their acts are undertaken as agents of the SCP. While there are certain circumstances where personal liability may be imposed by the UK courts, particularly in respect of wrongful or fraudulent trading, it is rare that the corporate veil is pierced, and that the owners are held accountable, on their own assets, to pay off the limited company’s debts.
In a loan-out agreement, the party which is the loan-out company is typically responsible for dealing with the tax and/or any applicable national insurance contributions (‟NICs”) on any payments made under this agreement, by the counterparty.
This loan-out structure is therefore beneficial to, and flexible for, the end-client, who is unencumbered by HMRC’s rules on income tax and employer NICs payable on employees’ salaries, as well as protective employment law regulations applying to employees and self-employed people/freelancers relating, in particular, to a right to holiday, the national minimum wage, workplace pension and the maximum amount of 48 work hours per week.
There are also some tax advantages to this loan-out arrangement for the creator: first, the range of expenses which the PSC may set against its taxable profits will be much wider than that allowed to an employee to set against their taxable income. Second, there will be a cash-flow benefit in avoiding income tax being deducted at source each month. Third, the individual, as shareholder, may be in a position to be paid dividends by their loan-out company, which is a more tax-efficient alternative to only being paid earnings as the PSC’s employee, since this dividend form of income is not subject to NICs.
Therefore, loan-out agreements often lead to win-win situations, for the talent and their end-clients, provided that such services agreements are drafted correctly. In particular, the producing entity needs to ensure that all intellectual property created by the talent is assigned to the production.
Such loan-out agreements are typically called ‟producer agreement” or certificate of engagement (‟COE”). Indeed, a COE transfers to a studio or production company all rights in the results and proceeds of the services of an independent contractor (talent like an actor, producer, model, director or professional sportsperson) on an entertainment production, such as a television movie, theatrical motion picture film, TV or online series, social media content, or commercial. The COE includes work made for hire and assignment provisions. The parties negotiate and execute the COE promptly after agreeing to all deal terms before entering into a long-form agreement, such as a producer agreement, at a later stage.
As there can be some risks with the loan-out approach, in case the COE and/or long-form agreement are drafted incorrectly, it is best practice to seek expert legal advice when drafting, and reviewing as well as negotiating, a loan-out agreement.
3. What is the future of loan-out companies and agreements within the new IR35 landscape?
While I highlighted that loan-out agreements may be a win-win arrangement for the creator and their end-clients, there is one entity which has a lot to lose out of them: the taxman.
By the late 1990s, there were concerns that PSCs were being widely used, in the UK, to disguise the fact that, in many situations, individuals were working effectively as their client’s employee, while garnering the loan-out structure’s tax benefits.
To counter this type of tax avoidance in the March 1999 Budget, the Labour government announced it would introduce provisions to allow the tax authorities to look through a contractual relationship, where services were provided through an intermediary such as a PSC, but the underlying relationship between the worker and the client had the characteristics of employment. In those circumstances, the Labour proposals went, the engagement would be treated as employment for tax purposes.
Provision to this effect was included in the Finance act 2000, with effect from the 2000/01 tax year. The legislation is commonly called ‟IR35”, after the number of the Budget press notice which first announced this measure.
For the last 20 years, IR35 remained controversial, but were retained, even by the Conservative governments which succeeded the Labour one.
However, concerns escalated when it was discovered that the use of PSCs was common by senior staff in the public sector and by contractors working for the state-owned broadcaster BBC.
Since 2014, the various Tory governments went about cleaning the slate, by reforming the way the IR35 rules worked in the public sector. Following these reforms to the application of IR35 in the public sector, the government introduced legislation to make similar changes for the private sector to take effect from April 2021.
How do these changes affect creators in the entertainment, media and professional sports industries, since April 2021?
From 6 April 2021, IR35 rules applying to PSCs shift the responsibility from the PSC to the organisation receiving the talent’s services.
Before 6 April 2021, it was the loan-out company that was responsible for assessing and making payment of income tax and/or NICs for the services being provided by the creator/talent.
The government’s reforms for private sector companies are intended to improve compliance with the IR35 rules by moving the responsibility for tax assessment and payment from the contractor to the end-client. What this means, in the film, media and sports context, is that a producer engaging the services of a talent is now responsible for assessing whether that individual should be legally treated as an employee if they were being engaged directly by the producer, rather than through the loan-out company, and, if so, for accurately deducing income tax and NICs from the individual’s pay.
However, this change only affects large and medium size businesses, meaning that producers which fall into the category of a ‟small business” are not affected by the new IR35 provisions. It is not yet known how a ‟small business” will be defined by HMRC, and what criteria will be applied by HMRC to any assessment as to business size.
For example, our law firm Crefovi recently advised a client, whose producer services were retained by a production company working on behalf of the BBC, the commissioning broadcaster of an upcoming TV series, via his loan-out company. When I asked this client how much the budget of these TV series was, since such information was not disclosed in the draft producer agreement he had asked us to review and analyse on his behalf, he replied ‟GBP10 million”. I would argue that this budget size definitely places the BBC- commissioned production company into the category of ‟medium to large business”. Yet, the production company’s solicitor had drafted the loan-out agreement in such a way that the onus of paying any income tax and NICs liabilities, on the producer’s payments, layed solely with our client’s loan-out company, not with the production company.
Even if HMRC has confirmed, in its guidance on the new IR35 rules, that ‟customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance”, and that HRMC ‟will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour”, it seems that UK production companies and their accountants and lawyers still turn a blind eye on their new responsibilities, post April 2021. This will trigger quite a few compliance enquiries with HMRC and, no doubt, tax litigation in the coming years.
Watch that space and, if you are a responsible creator, or production company owner, do reach out to us, at Crefovi, so that we may advise you on how to still reap the benefits of loan-out companies and structures, while minimising heightened legal and tax risks caused by this more stringent IR35 framework.