Case Number

CA 5365/11

Date Decided

9-3-2013

Decision Type

Appellate

Document Type

Full Opinion

Abstract

[This abstract is not part of the Court's opinion and is provided for the reader's convenience. It has been translated from a Hebrew version prepared by Nevo Press Ltd. and is used with its kind permission.]

In 2004 the Director-General of the Antitrust Authority determined that the activity of ACUM (a corporation that operates to manage its members’ copyrights in musical works in Israel) constitutes a monopoly on managing copyright over musical works. In 2011 the Antitrust Tribunal (“the Tribunal”) approved the activity of ACUM as a cartel, subject to a series of requirements (“the permanent requirements”), which would be in force for five years starting from the date of their approval. The disputes at the center of the appeals related to the requirement that at least a third of ACUM’s board of directors consist of external directors (the ACUM appeal) and the requirement regarding the exclusion of rights in a work from management by ACUM. It was argued that the mechanism was overly narrow, as consent of all joint owners of a work is necessary for exclusion, or for segmentation under the four specific categories that permit partial exclusion of the rights (the EMI Israel appeal).

The Supreme Court (opinion written by Justice D. Barak-Erez, Justice Z. Zylbertal and Justice E. Rubinstein concurring) dismissed both appeals on the following grounds –

The requirements for ACUM’s operation should balance the authors’ property rights in their works with the public interest in a market free of monopolistic effects, a unique interest when in the context of a market of works, which inherently must be accessible to the public (albeit for payment). The analysis focused on two issues: the requirement to appoint public directors and the scope of the rights exclusion mechanism. Both should be examined from the unique perspective that combines the purpose of copyright law with that of antitrust law, considering the balance that both fields of law must achieve between individual property rights and economic interests, on the one hand, and the general public interest, on the other hand.

Regarding the requirement that at least a third of appointed members to the board of directors be external public directors (the practical meaning of which was the appointment of a total of four such directors), ACUM failed in its challenges to both the requirement itself and the number of external directors it was obligated to appoint.

The appointment of public directors is one of the mechanisms that facilitates supervising a company’s conduct and that of its directors and controlling shareholders. It helps deal with the various representative problems associated with its activity. Their appointment also adds a professional dimension to the company that would increase its adequate management; the appointment of public directors to ACUM’s board is consistent with the purpose of the cartel’s approval. Although ACUM is not a public company, it effectively manages a resource that has clear public aspects, and in fact those aspects of ACUM’s activity are the basis for the cartel's approval. At the same time ACUM’s monopolistic characteristics and its status as a cartel in the copyright of musical works per se grant it a public dimension. The requirement to appoint public directors to provide another layer of supervision over ACUM’s activity is therefore warranted by and inherent to the rationale of the cartel’s approval from the point of view of protecting both authors and users. The Court added that making the cartel’s approval subject to the appointment of public directors, even when a public corporation in the ordinary sense is not involved, has already been done in the past, for example with respect to the recycling corporation. Moreover, the public directors might represent cross-group interests that carry broader considerations as to the general interest of artists as a whole, rather than representing the interest of certain artists groups, which may conflict. Moreover, without laying down rigid rules, there is prima facie basis for the argument that the importance of a public director is in fact greater in a corporation like ACUM, which is not led by a clear control group and has diverse ownership.

In fact, ACUM itself also acknowledged the advantages of appointing public directors, and the updated language in its articles of incorporation now requires the appointment of two public directors. The basic aspect of the dispute, which had to a certain extent become one of extent and degree, had thereby been somewhat resolved. In this respect, the Court believed that the proportion of directors that was fixed – one third of the total members of the board – was not excessive or unreasonable, considering the character of ACUM as a corporation with diverse ownership and especially in light of the concern for abuse that always exists regarding a cartel.

Under the circumstances, there is no need to rule on whether ACUM should be regarded as a hybrid entity, and in any event a complete discussion of the criteria for recognizing an entity as such is unnecessary. However, it is not superfluous to note that ACUM’s activity does fit many of the factors mentioned in case law as indicative of a hybrid entity. Those factors, even if insufficient to categorize ACUM as a hybrid entity in the ordinary sense of the term, do shed further light on the basic justification of the Director-General’s requirement. Although the appointment of public directors is not ordinarily considered one of a hybrid entity’s duties, the fact that ACUM is an entity that owes important duties to the public can serve as a factor in how the Director-General of the Antitrust Authority exercises power when subjecting a cartel to requirements.

Two questions were at the root of the dispute regarding the requirements about the rights exclusion mechanism. First, whether the requirement for consent by all joint owners of a work in order to exclude it from ACUM’s catalog is justified or whether that power should be held individually by each of the artists; and secondly, how delicate and precise should the “segmentation” mechanism be in the scope of the exclusion ability, in light of distinctions between a work’s different types of use.

As a point of departure it can be assumed that works of the type that ACUM manages are often ones to which several artists share the rights. Conditioning exclusion upon the consent of all rights owners will undoubtedly burden the individual artist who seeks to exclude her own work. However, this is not an undue burden considering the purpose of the permanent permit.

The most important tool available to ACUM in the collective management of the rights is the grant of a sweeping license, known as a “blanket license,” which permits the licensee to use ACUM’s entire catalog. From the perspective of transaction costs, the advantages of a blanket license are the primary reason for ACUM’s activity, despite the conflicts with antitrust law. Given the typical ownership structure of a musical work, an exclusion ability that is not conditional upon the consent of other owners effectively means that a single author, regardless of their role in creating the work, may exclude the entire work from ACUM’s blanket license system. Thus, a user who wishes to make lawful use of the work would have to negotiate with the excluding author in addition to acquiring the blanket license from ACUM. Such a state of affairs would greatly limit the benefit the cartel provides the user public to the point that it is doubtful whether the cartel is indeed “in the public interest” in terms of section 9 of the Antitrust Law. Furthermore, accepting that consent by all joint owners of the work is not necessary in order to exclude it might also allow for some of the artists’ opportunistic exploitation of the exclusion, creating “extortion” or “free-riding” problems.

Ultimately, even in the narrow exclusion regime joint artists can contractually regulate the scope of the work’s exclusion from collective management in advance. Indeed, the narrow exclusion regime merely provides the default for the inclusion of a joint work in ACUM’s catalog. Insofar as the authors wish to regulate decision-making differently in managing joint works, they are at liberty to do so. Presumably such an arrangement, which would be made in a timely manner and before any of the parties is in a position to potentially exploit or become a free rider, would help to limit the coordination challenges in obtaining consent for excluding joint work, as detailed by EMI Israel and Anana. Therefore, the default prescribed – that in the absence of agreement to the contrary between owners of rights in a joint work, all of their consent is necessary in order to exclude it from management by ACUM – is a proper one.

Finally, the Court considered the rights exclusion mechanism that enables artists to exclude their rights in some – rather than all – uses but only in one of four specific alternatives – “exclusion packages” that make limited “segmentation” possible according to types of use. The dispute between the parties revolved around the precision of the necessary segmentation. While the current segmentation mechanism essentially distinguishes between audio and audio-visual uses, EMI Israel (supported by Anana) also wished to distinguish between use in “old media” – like television and radio – and use in “new media” – like Internet and cellular phone services.

Here, the Court held that the exclusion mechanism approved by the Tribunal should be upheld, subject to the question of excluding “new media” – on conditions and restraints – being comprehensively reviewed during the cartel approval’s renewal proceeding.

The distinction between “new” media and “old” media raises fundamental and practical difficulties. The issue is a developing one and more experience and study are necessary to achieve a proper balance. The world of communications is characterized by constant, rapid technological development. In light of this reality the distinction between “old media” and “new media” is not a binary dichotomy, nor is it permanent or stable.

Reviewing the implications of excluding “new media” shows that there is not necessarily any justification for completely prohibiting excluding works from “new media” uses. Nevertheless, there are clear indicators that the same applies only to a limited exclusion mechanism, which focuses on certain types of “new media” uses and strives to minimize harm to users. Such exclusion mechanisms cannot be based merely on the technological distinction between “old media” and “new media” and allow a sweeping exclusion of all uses of the latter, as EMI Israel and Anana propose. In any event, examining the possibility of another “new media” exclusion category and fashioning the boundaries of that category should be done with care after studying interested parties’ positions about the issue and all the relevant facts. As mentioned, this is a matter that the Antitrust Tribunal ought to consider when the extension of the cartel’s approval comes before it. This position is also supported by a factor that concerns the temporary nature of the approval – for only five years. At the end of that period (two years of which have already elapsed), the Tribunal will reconsider approving the cartel, at which time it can also reconsider the extent of the exclusion mechanism’s “segmentation,” in light of the five years’ experience gained with a “narrow” exclusion mechanism. International experience could also enrich the set of information available to the Tribunal.

In conclusion, the Court dismissed the appeals, deciding not to intervene in the requirements attached to the cartel’s approval. Currently, the requirements for the permanent permit, including those challenged in the appeals, are all necessary to dispel the concerns naturally raised by a cartel concerning the collective management of copyright. These conditions are necessary to ensure that the cartel’s benefit to the public does indeed exceed the harm perceived from it. At the same time, the possibility remains that the proper balance between the rights of authors and the general public interest might in the future dictate a result different from that reached by the Tribunal in terms of integrating the distinction between different types of “new media” and “old media” in the rights exclusion mechanism.

Keywords

Administrative Law -- Licenses, Antitrust, Communications, Constitutional Law -- Freedom of Expression, Constitutional Law -- Property Rights, Contracts -- Illegality, Contracts -- Remedies, Contracts -- Frustration, Contracts -- Estoppel, Contracts -- Compensation, Copyright -- Remedies, Trademarks, Internet Law

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