CHAPTER 2

Copyright Amendment Bill (No.2) 1997

CHAPTER 2

BACKGROUND TO THE BILL

Introduction

2.1 The purpose of this Chapter is to provide the background to the policy issues underlying the Bill. In Australia, these policy issues have been under active consideration for more than 10 years. During that time, they have also been canvassed overseas.

Copyright

2.2 In general terms, copyright is a collection of legal rights provided to the authors of literary, dramatic and artistic works, and to the producers of films and sound recordings. It might broadly be characterised as a right to prevent people from dealing with another's intellectual property without rightful authority. [1]

2.3 The purposes for providing copyright protection are:

2.4 Copyright also has an economic rationale, which derives from the existence of `market failure' – a situation in which a free market does not maximise economic welfare.

2.5 In the case of copyright material (and other forms of intellectual property), the market failure in a totally free market would derive from “free-riding” by copiers, who would not pay for a product at the market price which would prevail if property rights were properly protected. In the words of the US Supreme Court earlier this century, copyright prevents a person from `reaping where they have not sown'. [3] Without such protection, there would be little incentive to produce or invest in musical works or sound recordings if the assets created as a result could be freely exploited by copiers. This would tend to discourage investment in the production of copyright material. [4]

2.6 As indicated in its name, copyright originally provided simply a right to control the copying of creative work. By a process of evolution in the face of changing circumstance, it now comprises “a bundle of individual rights giving the copyright owner the right to control the various ways in which his property can be exploited”. [5]

2.7 For recorded music, this bundle of rights includes the right to copy the recording, the right to issue copies to the public, the right to play the recording in public and the right to broadcast the recording.

2.8 A number of preliminary points about copyright should be made here. First, copyright is a property right. As such, it can be sold; its use can be licensed; it can be given away and bequeathed; and it can be protected through legal proceedings.

2.9 Secondly, copyright is generally an exclusive right. This means that third parties need the copyright owner's authority to reproduce the work.

2.10 Thirdly, copyright is a right of limited duration. In broad terms, copyright in a musical work such as a song expires 50 years after the death of the composer. Copyright in a recording of that song expires 50 years after the year in which the recording was made.

2.11 Finally, copyright has historically been defined on a territorial basis. This has meant that the rights and protections provided to a copyright owner or licensee have varied between different jurisdictions. However, the effects of international trade and the growing integration of nations into a world economy have placed this approach under considerable pressure. Since the late 19th century, there have been concerted moves by national governments to create legal and institutional frameworks to foster international recognition of intellectual property rights such as copyright. Since then, several agreements have been arrived at which create international disciplines for the protection of intellectual property. [6]

Copyright and recorded music

2.12 Any given product may embody several copyrights. The original owners of these rights may differ. For recorded music, rights exist in the sound recording, and also in the music and lyrics of the underlying composition.

2.13 The copyright in the underlying composition is, in the first instance, owned by the composer, who may assign or licence this right to someone else, usually a music publisher who collects royalties on the composer's behalf.

2.14 The copyright in a sound recording is, in the first instance, owned by the person who “makes” the recording. However, where a person makes an agreement with another person, for valuable consideration, for the making of a sound recording by the other person, then the first mentioned person is the owner of the copyright in the sound recording (in the absence of any contrary agreement). [7]

2.15 In practice, the copyright in a sound recording is almost always owned by a record company. [8] Such copyrights comprise the capital asset base (or catalogue) of record companies.

Parallel imports

2.16 The Bill before the Committee is concerned with a single “peripheral and ancillary” [9] right in the bundle of rights that attaches to recorded music – this being the right to control the importation into a territory of copies made. The effect of this right currently is to give the copyright owner or exclusive licensee power to prevent the importation of recordings lawfully produced under licence in another territory for sale in that territory. Such imports are generally known as “parallel imports”. [10]

2.17 The Attorney-General's Department notes that the right to control importation is a right of long standing, but is also a “secondary right”. It is not a right comprised in the copyright under the Act. As a secondary right, it requires an additional feature for infringement – the person/importer must have known that if they had made the sound recording in Australia, this would have infringed copyright in Australia. [11]

2.18 The rationale for the importation right was set out in the 1952 report of the UK Gregory Committee as follows:

2.19 In 1977, the High Court of Australia addressed the issue of parallel imports (in relation to books) in Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV. [13]

2.20 In that case, the owner of the copyright in a series of cookbooks in the US and Australia had granted an affiliated company an exclusive licence to publish and sell the books anywhere in the world except the US and Canada. An American wholesaler bought a quantity of the books from the copyright owner's general distributor in the US. The wholesaler then sold these books to an Australian bookseller. The recommended retail price of the books in Australia was $A16.95. By buying the books from the American wholesaler, the Australian bookseller was able to retail them at $A8.95. Neither the copyright owner nor the distributor had imposed any restriction on the resale of the books by the American wholesaler. The Australian bookseller did not seek the consent of anyone to import or sell the books.

2.21 The Court rejected an argument that the bookseller could be deemed to have had an `implied licence' to import from the copyright owner, and held that the importation infringed the Copyright Act. This finding was made even though the books had been obtained legitimately in the US.

2.22 In delivering his judgement, Stephen J observed (somewhat prophetically):

2.23 Murphy J was even more forthright, noting that the evidence suggested that “copyright is being used to manipulate the Australian market, and that the respondents will control the outlets and the price to the public will be almost doubled, and the Australian public will have delayed access to publications freely available in the United States”. [15]

2.24 While the majority in Time-Life gave full effect to the legal rights of the copyright owner, “the attention of commentators [since] has focussed on the consumer implications of a closed-market in the distribution of copyright articles”. [16]

2.25 These consumer implications exercised the mind of the PSA during its examination of the price of sound recordings in 1990. Observing that the parallel importation provisions gave protection which was different in kind rather than just in extent to the basic reproduction rights, the PSA reiterated that:

2.26 This focus on anti-competitive consequences also troubled the ACCC, which noted that the practical effect of the importation restriction was to prevent potential independent competitors from entering a distribution market. [18] It has also been noted by a number of prominent economists, including Dr John Quiggin, who observed that it enables record companies to practise international price discrimination. [19]

2.27 It was put to the Committee that copyright and competition policies have the same objective: to enhance social or community welfare by correcting market failures.

2.28 The question of whether the importation restriction provides copyright owners with `necessary' rights or `excessive' rights has seen the matter considered by successive Australian governments for more than 10 years.

Previous consideration of the proposal in Australia

The Copyright Law Review Committee

2.29 In 1988, the Copyright Law Review Committee (CLRC) undertook a major review of the import restriction. The CLRC concluded that, despite the potential for price discrimination and limitations on the availability of copyright material that flowed from the restriction, significant damage would be sustained by some domestic industries if the restriction were abolished:

The Prices Surveillance Authority

2.30 Following the CLRC report, the PSA commenced a series of inquiries which focussed on the effects of the importation restriction on prices, efficiency and economic welfare. In 1989, following an inquiry into book prices, the PSA recommended the repeal of the importation provisions, except with regard to pirate editions and Australian resident authors with separate Australian publishing contracts. [22] This latter exception was put forward as the best way of promoting the development of a separate Australian literary culture.

2.31 In 1990, the PSA similarly reported on its inquiry into record prices. Among its conclusions were:

2.32 The PSA concluded that the major beneficiaries of high record prices in Australia were the record companies, with much of that benefit accruing to overseas licensors. The import restrictions had had adverse consequences for competition and pricing in Australia, with no obvious benefits. Therefore the PSA's final recommendation was:

2.33 The PSA also recommended a series of related measures, including legislative changes in relation to piracy; compensation to artists from a blank tape levy; the establishment of a performers' levy similar to that in the USA; and the establishment of an Industry Council to examine industry development issues and future directions. [25]

The Copyright Amendment Bill 1992

2.34 In 1991, in response to the PSA's findings, the then Labor Government amended the parallel importation provisions as they applied to books, and, in 1992, introduced a Bill to partially remove the existing import restriction as it applied to recorded music. Among other things, the Copyright Amendment Bill 1992 proposed to:

2.35 This Bill lapsed with the 1993 election. In December 1993, the then Government reconsidered its 1992 decision, but deferred any final decision on the matter. In April 1995, the then Government reversed its 1992 decision, and resolved to retain the existing import controls. In explaining this decision, the then Minister announced that:

Reconsideration of the proposal

2.36 In 1996, following the change of Government, the Minister for Communications and the Arts, through an Interdepartmental Committee, commenced consultations with various interested parties on the best means by which lasting price reductions might be achieved in the high prices Australians paid for recorded music. In considering this, the Department of Communications and the Arts consulted widely. [29] The final recommendations and findings of the Interdepartmental Committee were presented to the Government late in 1997 and, on 8 October 1997, the Government announced its decision to amend the Copyright Act to permit the parallel importation of CDs.

2.37 It is the Copyright Amendment Bill (No 2) 1997 which gives effect to this decision, and which has been referred to this Committee.

Consideration of the proposal overseas

2.38 The import restriction has also been considered in recent years in some overseas jurisdictions, notably the United Kingdom, Norway and the United States

United Kingdom

2.39 During 1991-92, the Office of Fair Trading (OFT) undertook an investigation into the recorded music market in Britain with particular reference to the price of CDs. In May 1992, OFT concluded that there was no evidence of any collusion between record companies and/or retailers; that the price of CDs had settled at the level which the market was willing to bear; and that there was no evidence that the profits of record companies were excessive. In the absence of any evidence of collusion or anti-competitive conduct, OFT proposed to take no further action. [30]

2.40 However, in July 1992, a new Director-General of OFT announced that he proposed to undertake a further inquiry. One of the three objectives of this inquiry was “to examine the impact upon competition in the UK market for CDs of the copyright legislation and of restrictions on the importation of CDs offered for sale in the USA.

2.41 Before OFT had completed its further inquiry the National Heritage Committee of the House of Commons (in December 1992) announced its intention to conduct an inquiry into the price of CDs in the UK. Among its conclusions, published in May 1993, the Committee expressed a belief that the operation of the UK Copyright Act as it related to parallel imports could work against the public interest. Accordingly, the Committee recommended that the Department of Trade and Industry re-examine current legislation on copyright with particular reference to its anti-competitive effects in the recorded music industry.

2.42 On 14 May 1993, the Director General of Fair Trading referred the supply of recorded music to the Mergers and Monopolies Commission, which produced its report in June 1994.

2.43 The MMC summarised its conclusions as follows:

2.44 However, it has been suggested that the MMC conducted its price comparisons at a time when the pound sterling was suffering a devaluation. Had the longer run exchange rate relativities been applied, the price differences in CDs would have been more than double those relied on by the MMC. [32]

2.45 It should also be noted that, in 1993, the European Union enacted the Rental Directive, which permits free trade within the EU but requires that the common border of the EU states continue to restrict parallel imports. [33]

Norway

2.46 In 1993, at the end of a session, a private member's proposal to prohibit parallel imports was proposed to the Storting (Norwegian Parliament) and subsequently passed. The proposal was introduced in the belief that it would benefit local musicians and encourage the development of Norwegian music.

2.47 Following the passing of the proposal, a Norwegian research institute, Stiftelsen for Naeringslivsforskning (SNF) produced a report on the operation of the restriction:

2.48 In April 1997, a proposal was introduced by three members of the Storting in which they now proposed to repeal the import restrictions imposed in 1993. This proposal was not dealt with in the 1996-97 session, and so was reintroduced in October 1997.

2.49 This proposal was referred to the Ministry of Cultural Affairs for consideration and consultation. During these consultations, organisations representing the holders of legal rights, record producers and wholesalers claimed that the prohibition was working as predicted, and argued that it should be upheld. The trade and competition authorities and the major organisation for trade and services argued that parallel imports should be permitted. Consumer authorities did not comment on the proposal.

2.50 The Ministry itself concluded that abolishing the prohibition would probably not lead to lower CD prices. It reasoned that “the introduction of the prohibition did not lead to a significant increase in CD prices and that parallel importers normally choose to follow the normal price level”. According to the organisation representing wholesalers, Norwegian prices correspond with the European average.

2.51 The Ministry also concluded, contrary to the SNF report referred to above, “that the international record companies have increased the number of releases of Norwegian artists … However it is not possible to show any clear correlation between this increase and the prohibition on parallel imports”. The Ministry concludes that there was insufficient evidence to prove whether the prohibition has had the predicted effect of increasing the promotion of Norwegian artists.

2.52 The Committee understands that the proposal to reverse the import restriction in Norway has yet to be debated or voted on.

The United States

2.53 The US Government strongly supports the import restriction. It unsuccessfully put forward proposals to restrict parallel importing at the time of the negotiation of the TRIPs agreement. And in correspondence to the Committee, the US Ambassador states:

2.54 However, on 9 March 1998, the US Supreme Court delivered judgment in Quality King Distributors Inc v L'anza Research International Inc – a case involving the parallel importation of branded and labelled hair care products.

2.55 On the facts, L'anza, a Californian manufacturer, sold its hair care products both in the US and internationally. In the US, it sold only through distributors who had agreed to resell within limited geographic areas and then only to authorised retailers. The company promoted its domestic sales with extensive advertising and special retailer training. However, L'anza did not undertake comparable advertising or promotion for its international sales, and its foreign prices were substantially lower than its domestic prices.

2.56 L'anza's UK distributor sold a quantity of products to a distributor in Malta. That distributor then on-sold them to Quality King, which re-imported them into the US without L'anza's permission, and sold them at discounted prices to unauthorised retailers.

2.57 The Court had to consider the effect of two apparently inconsistent provisions in the US Copyright Act. One provision gives copyright owners the right to prohibit the unauthorised importation of copies. A second provision entitles the owner of a lawfully made copy to sell or otherwise dispose of the possession of that copy without the authority of the copyright owner. The Court construed the former provision as subject to the latter where the copyright article was “lawfully made under this title” (ie made in the US by or with the consent of the US copyright owner). This authorised the parallel importation in the case concerned. Stevens J, who delivered the judgment of the Court, observed:

2.58 Clearly, the question of parallel imports remains a live issue internationally, as well as in Australia.

Footnotes

[1] The MMC Report, para 4.2.

[2] Submission No 164, p 2 (Australian Copyright Council).

[3] International News Service v Associated Press (1918) 248 US 215 at 239.

[4] Prices Surveillance Authority, Inquiry into the Prices of Sound Recordings, Report No 35, (December 1990), p 19 (“PSA (1990)”).

[5] The MMC Report, para 4.4.

[6] These include the Berne Convention for the Protection of Literary and Artistic Works (1886); the Universal Copyright Convention of 1952; the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organisations (1961); and the agreement on Trade Related Aspects of Intellectual Property (1994). See, generally, Dr Ann Capling, `Trade in Intellectual Property Rights', annexed to Submission No 168.

[7] Copyright Act 1968, s 97.

[8] Transcript of Evidence, p 99 (Mr P Dwyer).

[9] Transcript of Evidence, p 99 (Mr P Dwyer).

[10] The MMC Report, para 4.27.

[11] Submission No 180, p 4 (Attorney-General's Dept).

[12] HMSO, Report of the Copyright Committee, London, 1952, para 280.

[13] (1977) 138 CLR 534.

[14] (1977) 138 CLR 534 at 555.

[15] (1977) 138 CLR 534 at 560.

[16] Catriona Dove, `A Case of Unparalleled Exploitation: The Parallel Importation Provisions of the Copyright Act' Copyright Reporter Vol 13, No 4 (December 1995) p 108.

[17] PSA, (1990) p 29.

[18] Submission No 159, p 2 (ACCC).

[19] Submission No 175, p 1 (Dr J Quiggin).

[20] Submission No 159, p 2 (ACCC).

[21] Lahore, Intellectual Property, Butterworths, para [34,570].

[22] See, generally, Inquiry into Book Prices, Interim Report, Report No 24 (1989) at pp 71-72.

[23] PSA, (1990) pp 150-153.

[24] PSA, (1990) p 160.

[25] PSA, (1990) pp xxxi-xxxii.

[26] The Committee was told that it is likely that this approach would now breach TRIPs/GATT rules: Submission No 153, p 39 (ARIA).

[27] Copyright Amendment Bill 1992, Explanatory Memorandum, pp 2-3.

[28] Hon Michael Lee, `New music, new talent, new technologies: speech to Contemporary Music Summit', Canberra, 27 April 1995, p 6.

[29] Submission No 186, p 5 (DOCA).

[30] The MMC Report, para 3.39.

[31] The MMC Report, paras 2.182 – 2.184.

[32] Submission No 159, p 6 (ACCC).

[33] Directive 92/100/EEC. See, generally, The MMC Report, paras 4.40 – 4.42.

[34] Correspondence dated 18 February 1998 from the Norwegian Embassy: see Appendix 3.

[35] Correspondence dated 4 March 1998 from the US Ambassador: see Appendix 3.

[36] See http://supct.law.cornell.edu/supct/html/96-1470.ZS.html