Central licensing of mechanical rights in Europe: the journe

European Intellectual Property Review

1994
Central licensing of mechanical rights in Europe: the journey towards the single copyright

Robert Montgomery

Subject: Intellectual property. Other related subjects: Media and entertainment

Keywords: Copyright; European Community; Licensing; Music; Recordings

*E.I.P.R. 199  There have been significant developments in recent years within the European Community (EC) with regard to the licensing of mechanical rights -- that is, the right of recording copyright music -- as record producers and ?music ?publishing interests grope their way towards a pan-European solution.

The issue of central European licensing (‘CEL’) covers the transition from the licensing of mechanical reproduction territory by territory to the issuing of a single licence covering reproduction, distribution and sale throughout the EC.

This article chronicles the developments, both legal and practical, up to mid-1993, and discusses the possible outcome.
 Background

The owner of the copyright in a musical work has two main sources of income: public performance, that is, the performing right, and, when the musical work is recorded, the mechanical right. The main exercise of the mechanical right is in relation to commercial records, where it is referred to as the phono-mechanical right (to differentiate it from recording for broadcast use), and it is this use which the article examines.
 History

With the development of both performing and mechanical rights during this century has come the development of the Copyright Society, responsible for licensing the rights given to it, distribution of the subsequent royalties, and policing the market-place.

There have developed two approaches to the administration of copyright in musical works, which have particularly affected the control of mechanical rights within Europe.

Throughout the world, where there is effective copyright legislation, the performing right is administered collectively, on behalf of composer and music publisher, by such organisations as the UK Performing Right Society, with royalties being distributed in appropriate shares direct to composer and publisher. Performing right societies are members' companies.

In the case of the mechanical right there are two systems. In general in non-English-speaking countries the mechanical right is administered collectively in the same way as the performing right, with distributions direct to composer and publisher. In English-speaking countries when a work is published it has been the custom for the composer to assign the mechanical right in his compositions to his publisher, and so it is the publisher who is responsible for collecting the royalties and paying the appropriate share to the composer. Mechanical rights organisations in English-speaking countries tend to be publisher-owned.

The reason for this difference of approach to mechanical rights lies largely in the copyright legislation. The Anglo-Saxon approach of copyright has lent itself to assigning rights, whereas the approach of ‘droit d’auteur' is that of an inalienable creator's right.

All mechanical rights societies are members of BIEM,1 founded in 1929 primarily to establish a standard contract between the ‘droit d’auteur' societies and the international record companies, represented by IFPI.2

There is a network of national mechanical rights societies spread round the world, each having reciprocal agreements with each other, so that any record producer in any EC country can obtain from the local society a licence to record virtually any copyright musical work.

Within the EC there are therefore two different and potentially conflicting systems of administering mechanical rights.
 Mechanical Rights in the United Kingdom

The UK Copyright Act of 1911 established the mechanical right, and laid down a statutory royalty rate for copyright music on commercial records of 5.0 per cent of the retail price, later increased to 6.25 per cent. Since there was a fixed rate which by and large the record companies paid, there was initially no need for a mechanical rights society to stand between copyright owner and record company. Up to 1988, when the statutory rate was abolished under the 1988 Copyright, Designs and Patents Act, most royalties on the use of copyright ?music on records were collected directly by the ?music publishers without the intervention of the UK organisation, the MCPS. MCPS3 collected perhaps 25 per cent of record royalties in 1988.
 Mechanical Rights in the rest of the EC

The power of the member societies of BIEM is considerable, given that they each have assignments from their national composer members, and reciprocal representation agreements with other BIEM societies with similar rights. Generally speaking, there have never been *E.I.P.R. 200  statutory rates of royalties outside the United Kingdom, and BIEM managed to establish by contract with the international record industry a higher royalty rate than that imposed by statute in the United Kingdom. In 1988 the BIEM royalty rate which applied throughout continental Europe, with local variations, was 9.504 per cent of published dealer price (‘PDP’), although under the new BIEM/IFPI standard agreement it has been reduced to 9.306 per cent from January 1992. The BIEM societies would also claim that the level of copyright protection in continental Europe, which is in general more extensive than that of the United States and the United Kingdom, is in good measure due to their strength. This extra protection has increased the value of the mechanical right, by the addition of ‘piggyback’4 mechanical royalties from such sources as blank tape levies and rental income.

MCPS is a member of BIEM, but because of the compulsory licence in the United Kingdom did not follow the standard BIEM/IFPI contract. After the abolition of the compulsory licence, MCPS developed its own contract, an anglicised version of the BIEM agreement.
 The Two Systems

This is not the place to argue the relative merits and successes of the two systems, but in practical terms, when the move came from the international record companies to seek pan-European mechanical licences, the continental European copyright societies were better placed to negotiate than was MCPS in the United Kingdom. They could act as principals in negotiation and conclude agreements which would bind their members, whereas MCPS, as an agent, could only negotiate within a limited mandate. They were also used to handling 100 per cent of record royalties in their territories, and by and large had computer systems better able to handle pan-European licensing.

The limitation in the MCPS mandate showed itself early. RCA's and Polygram's initiative in 1986 to seek a pan-European licensing deal with MCPS foundered when the UK music publishers declined to give MCPS additional rights so that it could conclude such an agreement. It was a decision they would come to regret.
 The Move to Central Licensing

The move towards a single licensing point came in stages. The trigger was the centralisation of production by the record producers. WEA which manufactured in Germany sought licences from GEMA, the German society. CBS which manufactured in the Netherlands went to the Dutch society, STEMRA.

In the mid-1970s it was standard practice for publishers' agreements to be constructed so that ownership of rights in a territory was on the basis of either what was sold or what was manufactured.

After the Polydor case (Deutsche Grammophon v Metro )5 in 1971, which effectively prevented a record company stopping parallel imports within the EC, this distinction became increasingly difficult to apply, and ownership on the basis of what was manufactured in a territory became the only practical way. Two approaches emerged with regard to the distribution of royalties on records centrally pressed, best referred to as the GEMA and STEMRA approaches:

(1) GEMA maintained that if a copyright was registered as controlled by the manufacturing clause, royalties on central pressings would be paid to the German publisher, irrespective of the country of destination, that is, sale, of the record.

(2) STEMRA collected the royalties on central pressings and passed them to the society in the destination country, which could then be considered to be the de facto country of manufacture.

The first central accounting agreement was in 1982, when CBS, which manufactured in the Netherlands, arranged to obtain licences for the whole of the EC except for the United Kingdom, from STEMRA, and to account to STEMRA for all the royalties. As STEMRA then passed those royalties out to the country of sale, there was no objection from the other copyright societies, except from the French society, SDRM, which refused to accept royalties in respect of CBS French sales from STEMRA for some years.

Polygram, which at that time mainly manufactured in Germany, accounted to GEMA, which besides interpreting the manufacturing clause in favour of the German publisher, also insisted on collecting royalties in Germany on Polygram exports to the United States.

It was GEMA which was responsible for the next step. Early in 1984, GEMA, which at that time controlled the only CD pressing plant in the EC, announced its intention to collect royalties in Germany, at the German rate, on all records pressed in Germany. This meant that when records were custom pressed6 in Germany on behalf of, say, a UK record company, royalties would be paid to GEMA, and thence to the German copyright owner. This spurred the Competition Directorate into action, and an investigation was commenced which resulted in the ‘Re GEMA’ press release dated 6 February 1985, which stated:

In the Commission's opinion, a licence granted by a Community copyright protection society is valid throughout the Community, and authorises manufacture, even by way of custom pressing, in any member State. In that event, *E.I.P.R. 201  however, it is in principle for the supplier alone, and not for the pressing firm, to obtain a licence to manufacture sound recordings and pay royalties. A separate requirement to pay royalties to the national copyright protection soceity having ‘jurisdiction’ over the place of manufacture according to the rates applicable there would in practice mean the re-erection of national barriers by contractual means between member States. The Court of Justice in 1981 decided that this is not permitted under Community law, even if the royalty fees differ from one member State to another.7

GEMA withdrew, and although the content of the press release has never been tested before the European Court of Justice, the record companies felt that centralised licensing was now approved.

RCA (in 1985) and Polygram (in 1986) approached MCPS to ask if MCPS would undertake a central accounting function on their behalf. RCA, now BMG, proposed paying 6.25 per cent, the statutory UK royalty, on all European sales, and MCPS refused to consider the suggestion. As the UK publishers would not give MCPS a mandate to enable it to conclude an agreement with Polygram, STEMRA made a pan-European agreement with Polygram in 1987. The original intention was for a central accounting agreement, under which royalties would be accounted to STEMRA, but the UK publishers, anxious to protect their sub-publishing network, managed, by an ‘Accord’ with STEMRA, to amend the agreement so that royalties were passed to the country of sale. Under this agreement the United Kingdom was included except for analogue recordings and cassettes manufactured in the United Kingdom, so the effect of the change on UK publishers was delayed, until Polygram closed its UK factories in 1989, and until royalties on sales of CDs, which were predominantly pressed outside the United Kingdom, became significant. In 1988 BMG, now a German company, made an agreement with GEMA for the EC, this time fully excluding the United Kingdom for all formats.

In general the early central agreements omitted the United Kingdom. The reasons were partly legal, in that there was a compulsory licence and hence a special industry agreement in the United Kingdom until 1988, partly practical, in that the United Kingdom kept its factories instead of relying on a central European factory, and partly political, in order not to be provocative. It was difficult for the continental European societies to object to receiving royalties from another society instead of collecting themselves, as society rules catered for it, whereas the UK publishers were used to collecting their royalties direct from the record producers, and would object.

When in 1989 Polygram closed its UK factories, and in 1991 WEA decided to include the United Kingdom in its CEL agreements with GEMA, the major UK publishers felt the effect of delays in receiving mechanical royalties, and of paying commission to two societies, where in the past they had collected their royalties direct, and paid no commission. The only mechanism by which the societies issuing the pan-European licence could send royalties to the United Kingdom was through MCPS, hence the two deductions.

By this time the 1988 UK Act was in operation, the compulsory licence and statutory royalty abolished, and a new membership agreement in place between MCPS and its members, which put MCPS in a position to be able to conclude central European licensing agreements.

MCPS policy on the coming into operation of the 1988 Act was to try to introduce an anglicised version of the BIEM/IFPI agreement, with the BIEM royalty of 9.504 per cent of PDP. The BIEM/IFPI Agreement had addressed the main issues of licensing outside the terms of the UK Copyright Act, and in particular had outlawed the ‘controlled composition clause’, rife in the United States. This was a clause in agreements between artistes and record companies by which the artiste, when recording his own compositions, undertook to procure that publishing royalties would be reduced. The BPI refused to accept the MCPS agreement and referred MCPS to the newly established Copyright Tribunal, which had been given jurisdiction over mechanical rights in the 1988 Act. The Copyright Tribunal amended the scheme as set out by MCPS, and fixed the royalty at 8.5 per cent of PDP, but also made the controlled composition clause ineffective in reducing the mechanical royalty. Subsequent to the UK Tribunal, under the new BIEM/IFPI agreement, the royalty in continental Europe was reduced to 9.306 per cent before application of local conditions.
 The Growing Objection by the Anglo/American Publishers to CEL

There had always been a coolness between the Anglo/American music publishers and the BIEM societies. The publishers were used to controlling their mechanical right societies, and often collecting direct, including collecting the composers' shares. The BIEM societies, which collected all record royalties in their territory, were authors' societies, and distributed the relevant share of any royalties due direct to the composers.

The UK publishers complained that the major European copyright societies, which combined mechanical and performing rights:

(1) were too slow distributing royalties;

(2) charged too much in commission;

(3) applied some of their commission to national cultural affairs;

(4) gave rebates to their own members out of commission partly earned on Anglo/American copyrights;

(5) gave financial inducements to multinational record companies to attract them to make CEL deals (there are unsubstantiated rumours of rebates given by STEMRA and GEMA, and the agreement by which SDRM will license CBS (now Sony) has been publicised as SDRM taking a 3.6 per cent commission, of which 2.5 per cent will be passed back to Sony);

(6) refused to allow music publishers connected with multinational record companies on their Boards.

In many ways the last point, which was not strictly true, was the most irksome. The BIEM societies did not subscribe to the idea that within a Group with both record and publishing operations, the two interests operated entirely separately, and to avoid testing the hypothesis, most tried to avoid having what might be termed ‘industry publishers’ on their Boards.

By 1991 the situation in the EC was:

*E.I.P.R. 202  (1) CBS accounted to STEMRA for all manufacture and sale within the EC, except for the United Kingdom.

(2) WEA accounted to GEMA, and had announced its intention to include UK sales.

(3) EMI was talking to STEMRA and MCPS, and known to be intending to include the United Kingdom in any agreement.

(4) Polygram accounted to STEMRA for the EC including the United Kingdom.

(5) BMG accounted to GEMA for the EC, excluding the United Kingdom for all formats.

(6) The UK publishers were feeling the effects of UK licences being granted and accounted for in continental Europe, by delays in royalties reaching them, and by double commission rates, where sometimes they had not had to pay commission previously. They considered that they had too little control over the licensing of their copyrights.

(7) There was a growing feeling that where a publisher owned rights for the entire EC, perhaps the royalties should be paid out at the collection point, and not passed round the other EC societies first.

(8) MCPS had finished the Copyright Tribunal hearings, and with its new membership agreement controlled sufficient rights to be able to conclude a CEL.
 Next Moves

To obtain more control, the next move by the Anglo/American publishers had to be either: (1) a partial amalgamation of MCPS with some BIEM societies so that the United Kingdom could exert more influence on mechanical licensing; or (2) the withdrawal into the United Kingdom of rights where the owner owned the rights in a work for the whole of the EC, so that the works could only be licensed from the United Kingdom.

Although discussions had been in progress between MCPS and STEMRA since 1989 regarding a joint CEL company, which would administer any CEL agreement with which either was involved, sharing and hopefully reducing the costs, the UK publishers decided to take the initiative, and in late 1992 announced the formation of EMRO (the European Music Rights Organisation). EMRO was a subsidiary of the UK ?Music Publishers Association (‘MPA’), which also owns MCPS, and NMPA, the US ?Music Publishers' Association. It was intended as a vehicle to make CEL agreements on behalf of the Anglo/American repertoire. It issued a booklet entitled ‘EMRO the Vehicle for Change’, and certain BIEM societies issued a riposte named ‘The Emperor’s New Clothes', together with ‘Response to EMRO’. All three read like election manifestos, which to some extent they were, and as with all election manifestos the claims and statistics should be treated with a degree of scepticism.

In essence the publishers behind EMRO preferred collecting societies to act as agents rather than principals, wanted to have direct control over negotiations with users, and believed that costs could be cut. The BIEM societies stood behind their record of success in improving rights and controlling the use of their members' rights, and denied that they were profligate. As with all such disputes, truth lay somewhere in the middle.

In forming EMRO, the MPA laid down a gauntlet. Could EMRO deliver? Would publishers appoint EMRO to control European rights, and if significant companies did so, at what rate and under what conditions would EMRO license?

First, could EMRO obtain rights? In theory, yes. All the publishers had to do was to amend their agreements with their sub-publishers, so that the sub-publishers had no phono-mechanical rights to give to their local society and appoint EMRO to control for the EC instead. Any record company wishing to record the copyrights involved would have to apply to EMRO.

The reverse side of the coin would be if the continental societies which lost their mandate over Anglo/American repertoire refused to allow EMRO to license their works. In that case the multinational record companies, not all of whose records relied on Anglo/American copyrights, would lose the benefit of being able to obtain all their licences at one point.

Second, would it happen? No, apparently. EMRO announced in June 1993 that the company was not proceeding owing to lack of support. The strange thing here was not the decision not to proceed, but that the concept got so far before someone did their sums. In a way EMRO was an odd conception. What EMRO proposed was a withdrawal into the United Kingdom where it soon became apparent that it might be difficult to avoid the shadow of the UK Copyright Tribunal. If any agreement between EMRO and the international record industry were to be based on the BPI/MCPS agreement which emerged from the Copyright Tribunal decision, record companies would obtain EC-wide advantages over the BIEM/IFPI agreement in terms of such aspects as the lack of a minimum royalty per composition used, or not having to pay a surcharge if the playing time or number of tracks on a record exceeded an agreed number. Any pan-EC agreement which resulted in an average EC royalty of less than BIEM's 9.3 per cent and did not contain those BIEM-type conditions for which MCPS fought and lost in the UK Copyright Tribunal would surely be seen as a Pyrrhic victory. It would also raise the spectre of whether the agreement, which would have been negotiated between arms of the various multinational companies, was quite as transparent as it would seem.

Locating EMRO in the United Kingdom where the Copyright Tribunal had laid down a royalty lower than the BIEM rate, laid EMRO open to a record company asking for the UK royalty on all its pressings within the EC. It appears that EMRO was in negotiation with the record companies over a pan-European royalty less than that of BIEM, which would probably have resulted in a complaint to the Commission by BIEM. Had the rights been placed in a joint company with another BIEM society, there would have been less possibility that the royalty rate could have been eroded, as well as protecting the piggyback income.

Consider the case of a record company pressing in both the United Kingdom and, say, Germany:

(1) If EMRO was the only licensing point for the Anglo-American rights, the record company could try to insist that as it was applying for a licence in the United Kingdom, MCPS was bound to license at the UK rate of 8.5 per cent, reminding MCPS that in the ‘Re GEMA’ press release, the Commission had stated *E.I.P.R. 203  that a licensing body could not specify the territory of manufacture.

(2) If the rights were controlled within BIEM, whose members apply a royalty rate greater than that in the United Kingdom, all the record companies could do to reduce their royalty obligations would be to pay the BIEM rate to GEMA for the EC ex-the United Kingdom, and insist on being able to export to the United Kingdom royalty-free, to take the benefit of the lower UK royalty.

Putting its rights into the United Kingdom was a far riskier business than combining with another BIEM society.

To make EMRO work there had to be enough publishers' catalogues in EMRO to persuade or force the multinational record companies to abandon their existing contracts with other BIEM societeies. Given the dominance of music ?publishing and the record industry by multinational companies, all of which had a foot in both camps, the outcome would depend on the balance between the two interests in each company. Whereas it would not be surprising if those Groups where ?publishing interests outweighed records were reluctant to join EMRO if the royalty were to be less than the BIEM royalty, those with predominantly record interests would see EMRO as an opportunity to pay lower royalties. ?EMI and Warners came into the first category, Polygram and Sony into the second, and it was the ?publishing companies of ?EMI ?music and Warner-Chappell which pulled out of EMRO in June 1993.

The demise of EMRO was followed by the announcement in October 1993 that EMI records had concluded a joint central licensing agreement with GEMA and SDRM, so positioning the control of the exercise of the mechanical right in Anglo/American copyrights by the major record companies firmly in continental Europe.

The details of commission to be charged by GEMA/SDRM, 3.6 per cent, of which 2.5 per cent would be rebated to EMI records, were similar to those in the SDRM and Sony agreement. It is difficult to see that the societies concerned can recover their costs from 1.1 per cent, but perhaps there will be economies of scale.
 Summary

The conclusion of the round of CEL agreements by the major record companies sets the scene for the next steps, and the interesting question is what comes next. The beneficiaries of CEL so far have been the record companies, in terms of cost savings and rebates, which have effectively reduced the royalty rate. The drawback for the rightsholders in CEL is the double commission and the time it takes to distribute royalties to the ultimate owners.

Speed of distribution is obviously important. UK music publishers were used under the old scheme to payment by record companies 45 days after the end of each calendar quarter, whereas in continental Europe, BIEM societies distribute every six months, although sometimes paying advances. With CEL involving two societies, delays have increased. Mechanical royalties on the sale of a record in England, which are accounted in Germany to GEMA will suffer delays at both GEMA and MCPS before distribution. UK or US composers, who collect through publishers, will have to await yet a further stage before the publisher distributes them.

So what next? It cannot be long before a rightsowner who owns a copyright for all EC territories instructs a society operating a CEL to pay out the royalties immediately, rather than passing them to the country of sale. To effect this the pop music publishers may have to dismantle their sub-?publishing networks, rather as the standard ?music publishers already have. The irony of this would be that it is a return to GEMA's position in the 1980s, and the original STEMRA/Polygram agreement. This would save the copyright owner commission, but would also reduce funds flowing through the non-CEL societies. The CEL societies of GEMA, STEMRA and SDRM are probably the nucleus which will put together the single European mechanical copyright society. Finally it may make UK composers reconsider whether it would be better to receive their share of mechanical royalties through MCPS rather than wait for distribution from their publishers.

E.I.P.R. 1994, 16(5), 199-203
1.
Bureau International des Sociétés Gérant les Droits d'Enregistrement et de Reproduction Méchanique. BIEM's main function is the negotiation with the International Federation of the Phonographic Industry (IFPI) of a standard contract governing the terms under which record companies can record the repertoire of the BIEM societies. Founded in 1929, its first contract with record producers was in 1930, and with IFPI in 1947.
2.
IFPI was founded in 1933, and concluded the first standard contract with BIEM on the payment of royalties in 1947.
3.
Mechanical Copyright Protection Society Ltd. This is the UK mechanical rights society, owned by the Music Publishers Association since 1976.
4.
Piggyback income is mechanical royalty income from peripheral sources such as tape levies and broadcasting, which is normally distributed on the back of record royalties. This income source is greater in continental Europe than in the United Kingdom, as for instance, most EC countries apart from the United Kingdom have tape levies.
5.
Deutsche Grammophon GmbH v Metro-SB-Grossmärkte GmbH & Co., Case 78/80 [1971] ECR 487.
6.
Custom pressing is defined in the ‘Re-GEMA’ press release of February 1985 as: the term used to describe the manufacture of sound recordings by independent pressing firms working to order and on account of sound recording suppliers. As a rule such suppliers obtain a licence from one of the copyright protection societies in the various member States for the reproduction of the musical works concerned. However, the actual manufacture of the sound recordings does not necessarily take place in the territory in which the copyright protection society issuing the licence is situated, but may for commercial reasons be entrusted from time to time to independent or affiliated pressing firms in other member States.
7.
Musik-Vertrieb Membran GmbH and K-Tel International v GEMA, Cases 55/80 and 57/80 [1981] ECR 147.

© 2013 Sweet & Maxwell and its Contributors