Mr Justice Floyd:
Introduction
- This is an appeal by Video Performance Limited ("VPL"), from a decision of the Copyright Tribunal (His Honour Judge Fysh QC SC, Rear-Admiral James Carine and Colonel Roderick Arnold) dated 7 September 2009 in which the Tribunal resolved a number of issues about the terms on which the Respondent CSC Media Group Limited ("CSC") should be licensed to use VPL's music video repertoire in the operation of CSC's broadcast television music channels.
- VPL is a licensing body within the meaning of section 126 of the Copyright Designs and Patents Act 1988 ("the CDPA"). Its members are record companies and other persons who are owners or exclusive licensees of the rights to broadcast and perform certain music videos in public and the right which permits the copying of those videos for the purpose of subsequent broadcast or public performance. VPL licenses broadcasts of music videos on behalf of its members (and copying for the purpose of such broadcasting). VPL seek to grant licences to their repertoire in return for a royalty calculated by reference to the gross revenue that will be received by a licensee in respect of the broadcast of the television channel, pro-rated by reference to the channel's usage of VPL Repertoire, but have also granted licences on a fixed fee basis. Their licensees are generally broadcasters of 'music television channels' (i.e. television channels where a substantial proportion of the broadcasting output comprises music videos).
- CSC was incorporated by Mr Keith Macmillan in May 2002. It was originally known as Chart Show Channels Ltd and carried on business as a broadcaster of music television channels. CSC initially operated three music television channels but from 2004 it additionally managed three music television channels for BSkyB (Scuzz, Flaunt and Bliss). The BSkyB channels were then purchased by CSC in 2006. CSC now operates seven music television channels and a similar number of non-music channels.
- CSC has effectively been licensed by VPL since September 2002 under the terms of a written licence which provided for the payment to VPL of a pro-rated fee based on the headline rate of 20% of gross revenue ("the CSC 2003 Licence"). The CSC 2003 Licence was never signed, and it expired on 17th September 2005. Thereafter CSC has been licensed under the terms of a letter ("the Extension Letter") whose purpose was to give the parties three months in which to negotiate new terms. Following the making of the application to the Copyright Tribunal under section 126 of the CDPA (see below), CSC have been licensed by virtue of section 126(3).
- Before the Tribunal, CSC's position was that the royalty rate should be 8% of gross revenue, pro-rated for usage, whilst VPL's position was that it should be 20% (also pro-rated). The Tribunal fixed a rate of 12.5%, pro-rated as well. The royalty rate is the target of the principal ground of appeal. The Tribunal, by its order, backdated the commencement of the licence to 2006.
- The parties were agreed on the way in which the pro-rating should be done, which was based on a formula which differed from that contained in CSC's 2003 licence. However at the end of its decision, the Tribunal expressed dissatisfaction with the formula, replacing it with that found in the CSC 2003 Licence. This alteration of the pro-rating formula forms the second ground of appeal now pursued.
- VPL's Notice of Appeal contained two other grounds on which it attacked the Tribunal's decision. However, in the course of the argument in this court, Mr Mill QC, who appeared for VPL, indicated that these grounds were no longer pursued in relation to the CSC licence in the circumstances as they currently stood. That leaves only the two grounds which I have mentioned.
- The hearing before the Copyright Tribunal lasted three weeks. There was voluminous written evidence. Many witnesses, both factual and expert, were required to attend for cross-examination. Mr Mill's primary submission was that, if he was successful on his ground of appeal concerned with royalty rate, this court could and should substitute for the Tribunal's decision, the rate contended for by VPL. I indicated at an early stage that I did not think that such a step could be justified. On any view, there was evidence which could support a royalty rate of less than 20%. Mr Mill wisely did not suggest that I could, in the course of a hearing of less than two days, set some intermediate royalty rate. The hearing before me was accordingly conducted on the basis that, if the appeal demonstrated that the Tribunal had erred to the necessary high standard (see below), then the matter would have to be remitted to a differently constituted Tribunal for it to look at the matter afresh.
The statutory provisions
- Section 126 provides as follows:
" (1) A licensee under a licence which is due to expire, by effluxion of time or as a result of notice given by the licensing body, may apply to the Copyright Tribunal on the ground that it is unreasonable in the circumstances that the licence should cease to be in force.
(2) Such an application may not be made until the last three months before the licence is due to expire.
(3) A licence in respect of which a reference has been made to the Tribunal shall remain in operation until proceedings on the reference are concluded.
(4) If the Tribunal finds the application well-founded, it shall make an order declaring that the licensee shall continue to be entitled to the benefit of the licence on such terms as the Tribunal may determine to be reasonable in the circumstances.
(5) An order of the Tribunal under this section may be made so as to be in force indefinitely or for such period as the Tribunal may determine."
- Section 128(3) provides, so far as material:
"(3) The Tribunal may direct that an order under section … 126 … has effect from a date before that on which it is made, but not earlier than the date on which the … application was made or, if later, on which the licence was granted or, as the case may be, was due to expire."
- Section 129 sets out certain matters to which the Tribunal is to have regard under section 126:
"In determining what is reasonable on a reference or application under this Chapter relating to a licensing scheme or licence, the Copyright Tribunal shall have regard to—
(a) the availability of other schemes, or the granting of other licences, to other persons in similar circumstances, and
(b) the terms of those schemes or licences,
and shall exercise its powers so as to secure that there is no unreasonable discrimination between licensees, or prospective licensees, under the scheme or licence to which the reference or application relates and licensees under other schemes operated by, or other licences granted by, the same person."
- Section 135 provides that the obligation to have regard to these specific matters "does not affect the Tribunal's general obligation in any case to have regard to all relevant considerations".
- Rule 17 of the Copyright Tribunal Rules 1989 (which has, since the Decision, been repealed but replaced by a similar provision in Rule 30(1) of the Copyright Tribunal Rules 2010) provided:
"The final decision of the Tribunal on a reference or an application … shall be given in writing and shall include a statement of the Tribunal's reasons."
The general approach in law
- The task for the Tribunal is to set terms which are "reasonable in the circumstances". The Tribunal has been said to have in this connection "a discretion in the widest possible terms" per Harman J in Association of Independent Radio Companies Ltd v Phonographic Performance Ltd (unreported, 16 January 16, 1986) ("AIRC v PPL 1986").
- When considering comparable licences, as required by section 129, the correct approach has been described by the Tribunal in this way in Association of Independent Radio Companies v Phonographic Performance Limited [1993] EMLR 181 ("AIRC v PPL 1993") at 218:
"'It is for the Tribunal in assessing the transactions cited as comparable to decide to what extent the rights licensed are of the same or a similar kind, whether the transactions were concluded at arm's length with neither side affected by stress, and whether they were affected by legal factors which do not apply in this case. It is then for the Tribunal to adapt any relevant comparators to the case under review.' "
- Also on the subject of comparators, the Tribunal said this, in my judgment correctly, in AEI Rediffusion Music Limited v Phonographic Performance Limited [1998] RPC 335 ("AEI v PPL"):
"It is well established that, if the Tribunal is satisfied that there exist other licences which are sufficiently comparable to the licence they are going [semble to be] asked to settle, the Tribunal should adopt a similar rate absent any special circumstances. (See section 129 of the Act, Smith Kline & French Ltd's (Cimetidine) Patents [1990] RPC 203 and British Phonographic Industry Ltd v Mechanical Copyright Protection Society Ltd ...No 2) [1993] EMLR 86. Thus had there been a number of pre-existing licences for satellite broadcast background music which the Tribunal had either settled, or was satisfied had been entered into consensually by parties with equal bargaining power, the Tribunal would adopt similar if not identical rates and conditions."
- A revenue-based royalty system may be justified in some cases. After a review of the cases in British Sky Broadcasting v The Performing Right Society Limited [1998] EMLR 193, the Tribunal concluded at 219 (paragraph 6.10) that:
"What the decided cases show is that, before one can use revenue as a measure of the value of music to a broadcaster, one must be satisfied that there is an adequate nexus between the use of music and the revenues earned."
The nature of an appeal from the Copyright Tribunal
- The authorities concerning the function of an appellate court on appeal from the Copyright Tribunal have recently been helpfully drawn together by Arnold J in Phonographic Performance Limited v The British Hospitality Associations and other interested parties [2009] EWHC 209 (Ch) (12th February 2010). I can do no better than repeat them here:
"77. Section 152(1) of the 1988 Act provides that an appeal lies "on any point of law arising from a decision of the Tribunal". Although section 152(1) does not say so explicitly, it is well established that this means that an appeal only lies on a point of law. As Hoffmann J (as he then was) said in Performing Rights Society Ltd v British Entertainment and Dancing Association Ltd [1993] EMLR 325 at 330, "The determination of the amount of the royalty is not the most promising material in which to find an error of law." He went on to observe at 331 that the Tribunal in that case had been "engaged in an exercise in which it is notoriously easier to be right than to explain why".
78. In Phonographic Performance Ltd v Candy Rock Recording Ltd [1999] EMLR 806, Sir Richard Scott V-C (as he then was) said at 812:
"There are … certain well-known bases on which dissatisfaction with a finding of fact can be presented as a challenge on a point of law. Paragraph 70 of volume 1 of Halsbury's Laws, 4th ed., sets out the principle:
'Errors of law include misinterpretation of a statute or other legal document or a rule of common law; asking oneself and answering the wrong question, taking irrelevant considerations into account or failing to take relevant considerations into account when purporting to apply the law to the facts; …; giving reasons which disclose faulty legal reasoning or which are inadequate to fulfil any express duty to give reasons … Determination of the primary facts is not a matter of law, but to make a finding unsupported by any evidence is an error of law.'"
He added at 822:
"It cannot be necessary for a Tribunal to mention expressly every relevant matter that has been placed before it in argument or in evidence. Remarks made by Lord Hoffmann in Piglowska v. Piglowski [1999] 1 WLR 1360, are apposite. Lord Hoffmann commented that: 'The exigencies of daily court room life are such that reasons for judgment will always be capable of having been better expressed …', and warned that: 'an appellate court should resist the temptation to subvert the principle that they should not substitute their own discretion for that of the judge by a narrow textual analysis which enables them to claim that he misdirected himself'."
79. In Phonographic Performance Ltd v Virgin Retail Ltd [2001] EMLR 139, Jacob J (as he then was) quoted the first of these passages and added at [16]:
"I would add this. Many of the questions faced by the Tribunal are of fact and degree, for instance whether a prior agreement or decision of the Tribunal can be used as a comparator for the case in hand. Adapting the words of Lord Simon of Glaisdale in the tax case of Ransom v Higgs [1974] STC 359 at 561:
'There lies a "no man's land" of fact and degree where it is for the Tribunal to evaluate whether the prior agreement or decision is an appropriate comparator or not. The court can only interfere where the degree of fact is so inclined towards one frontier or the other as to lead it to believe that there is only one conclusion to which the Tribunal could reasonably have come.'"
80. As counsel for the Interested Parties submitted, it is important to bear in mind that the Copyright Tribunal is a specialist tribunal created by Parliament specifically for the purpose of regulating collective copyright licensing. As Baroness Hale of Richmond said in AH (Sudan) v Secretary of State for the Home Department [2007] UKHL 49, [2008] 1 AC 678 at [30]:
"… This is an expert Tribunal charged with administering a complex area of law in challenging circumstances. To paraphrase a view I have expressed about such expert Tribunals in another context, the ordinary courts should approach appeals from them with an appropriate degree of caution; it is probable that in understanding and applying the law in their specialised field the Tribunal will have got it right: see Cooke v Secretary of State for Social Security [2001] EWCA Civ 734, [2002] 3 All E R 279 at [16]. They and they alone are the judges of the facts. It is not enough that their decision on those facts may seem harsh to people who have not heard and read the evidence and arguments which they have heard and read. Their decisions should be respected unless it is quite clear that they have misdirected themselves in law. Appellate courts should not rush to find such misdirections simply because they might have reached a different conclusion on the facts or expressed themselves differently."
81. This passage was recently cited by both Jacob and Toulson LJJ in Commissioners for Her Majesty's Revenue and Customs v Procter & Gamble UK Ltd [2009] EWCA Civ 407, [2009] STC 1990. Mummery LJ added at [74]:
"I cannot emphasise too strongly that the issue on an appeal from the Tribunal is not whether the appellate body agrees with its conclusions. It is this: as a matter of law, was the Tribunal entitled to reach its conclusions? It is a misconception of the very nature an appeal on a point of law to treat it, as too many appellants tend to do, as just another hearing of the self-same issue that was decided by the Tribunal."
The decision in this case
- Because a part of the appeal is based on the way in which the decision is structured it is necessary to summarise the way in which the decision is arranged.
- The Tribunal divided its decision into 18 sections identified by Roman numerals. In section I, headed "Introduction", the Tribunal describes the history of music videos. It explained at [5] that music videos began to be made some thirty years ago purely to promote the recordings of a group or singer. By the mid-1980s these "pop promos" had evolved into a genre, often achieving sophisticated quality. They were by then a mature part of the entertainment market. In 1981, MTV introduced the first broadcast music video channel, stringing together music videos, head to tail, interspersed with advertising. The Tribunal also explained that it had seen a demonstration of music videos both alone and as broadcast. This had involved stripping the video of sound and vice versa. The demonstration had satisfied it that (a) the VPL repertoire formed the principal attraction of CSC's business; (b) the music stripped of the video retained much of the appeal of a commercial pop radio station, and the video stripped of the music seemed pointless: however it recognised this process as artificial and unrealistic; and (c) whilst somewhat sceptical as to whether anyone would settle down to watch music videos, it recognised that advertisers paid substantial sums to advertise on these channels, presumably on the basis that someone is watching.
- At [15] of the decision, the Tribunal made an important finding relevant to the questions of comparability of pop radio:
"Commercial radio and music videos are rather different products and royalties payable to licensing bodies under commercial radio broadcasting agreements have, we consider, only a modest bearing on the major issues to be decided here."
- At [17] to [21] the Tribunal described the "pop promo effect". Mr Clark (VPL's witness) had suggested that the effect which the broadcast of pop videos had on the sales of recordings to which they related was no longer the factor that it had been in the past, and that it was accordingly no longer appropriate to have regard to this promotional effect when setting royalties. The Tribunal rejected this suggestion and concluded that the pop promo effect should serve, as it had in the past, to reduce the royalty rate.
- In Section II the Tribunal turned to "The music video market and the parties". It concluded that MTV, Box Television ("Box") and BSkyB were the three major players. Apart from these three, there were other smaller players, some of which had failed, who were referred to in argument as the "small fry". In this section, the Tribunal also described CSC's business as well as that of VPL. The Tribunal explained that in December 2006 there was a management buy-in of CSC by its present owners (including Mr Minute) and Mr Keith MacMillan, one of the founding members, left the company. At that stage CSC's business was valued at £58.1 million. The Tribunal found that Mr Minute was well aware of the ongoing licensing obligations, including the 20% royalty payable to VPL, but that he regarded it as "an ongoing negotiation". Two out of seven of CSC's channels were described as loss-making, but the Tribunal accepted that there were commercial reasons for maintaining the full width of CSC's offering.
- Section III of the decision is headed "What is on offer?". Here the Tribunal referred to what VPL called their Standard Licensing Approach consisting of the deal based on a royalty of 20% of revenue and the alternative fixed fee deal. It recorded that it was not always easy to translate the fixed fees into a percentage of revenue. In addition it found that VPL's approach to offering licences to minor players was "take it or leave it".
- Section IV described the Tribunal's approach in law. It is not suggested that the Tribunal got any of this wrong. It drew attention to the importance of comparables. Having set out the passage from AIRC v PPL [1993] which I have cited above, it said this:
"[69] Thus, starting with a cited comparator, it is open to the Tribunal to take notice of it (or of parts of it) and to use it (or reject it entirely) as the case may require. The authorities show that whilst the utility of comparators has frequently occupied the Tribunal's time, in practice they appear to have been more of a legitimate quarry (or template) for particular terms and figures rather than as full precedents for a particular license.
[70] On the issue of royalty rates, comparators have featured strongly in the arguments of VPL reliance being placed upon the antecedent licensing of the same rights to CSC (e.g. in the 2003 Licence) and two others. Comparators have also featured in the case of CSC in respect of the rates charged by PPL for its standard commercial radio licences. Not surprisingly VPL characterised the 2003 Licence as being 'a compelling comparator'."
- The Tribunal also reminded itself of the passage I have cited above from AEI v PPL, namely that, where there are sufficiently comparable licences, the Tribunal should adopt a similar rate absent special circumstances.
- In Section V the Tribunal made its findings about the witnesses. Material for present purposes is that the Tribunal found Mr MacMillan, the founding member of CSC, to be an accurate and fair witness, blessed with a good memory, whose evidence it preferred where it conflicted with that of Mr Clark of VPL. Mr Clark was described as "helpful in explanation, fair in memory but tainted with a streak of the partisan … We have therefore received his evidence without criticism let alone censure, but with some caution nonetheless". The Tribunal did not find Mr Clark to be untruthful.
- The Tribunal also heard from two principal experts, Mr Andrew Mainz and Mr Daniel Ryan for CSC and VPL respectively. In this section the Tribunal comments on the scope of their evidence.
- Section VI of the decision deals with "CSC's 2003 License with VPL – and after". This section describes the proposals, starting in 2001, which led to the terms of the CSC 2003 licence, which was never signed. The Tribunal rejected VPL's contention that the 2003 licence represented a concluded agreement under which the parties operated without difficulty for 5 years. It accepted a submission by counsel for CSC that the CSC 2003 licence represented a convenient record of a temporary modus vivendi and that it was not a record of the terms of a concluded agreement, freely entered into. It went on to hold that this was consistent with a term in the Extension Letter which followed the expiry of the CSC 2003 licence:
"The extension of the 2003 License pursuant to this letter shall be without prejudice to the following matters:
(a) CSC does not accept that '20% of gross revenue' royalty formula applied under the 2003 license is necessarily the appropriate basis for calculating the license fees that should be due under the Proposed New License; …
- The Tribunal rejected arguments put to it that the 2003 Licence was a "strong and compelling comparator". It also rejected arguments concerned with what it described as "the niceties of the law of contract". It concluded this section by saying:
"In our view, [the 2003 licence] is not a relevant comparator and moreover the line originally taken by Mr MacMillan is fully consistent with that maintained by CSC following his departure."
- Section VII deals with certain litigation between the parties, not relevant here.
- Section VIII is entitled "'Non-precedential licenses': Are they of assistance?". Agreements before the Tribunal included a variety of terms designed to indicate the parties' non-acceptance that the royalty rate agreed should set a precedent. As to these licences, the Tribunal held that they were "of no real assistance to us in fixing that a headline rate."
- Section IX is headed "The origin of and justification for the 20% rate". The Tribunal rejected Mr Clark's position on behalf of VPL that the 20% rate had "evidently been established for a significant period of time" when he assumed responsibility for VPL licensing in March 2002. It preferred the evidence of Mr Drage, who had been imposed at the material time. He described 20% as an "aspirational rate". It concluded that [124]:
"The upshot of this section of our Decision is that a long shadow must fall over the very existence of VPL's so-called Standard Licensing Approach… We accept the fact of its 'imposition' by VPL in the case of nominal users of the Repertoire; but this does not elevate it to the status of in effect, a tariff."
- Section X is headed "changes in the market". The principal point made in this section was the change in the market in favour of Internet usage and how this had affected and will continue to affect advertising on music video channels. The Tribunal's view was that the effect of this evidence was greatly to diminish the value of the older licence agreements with VPL as comparators. The Tribunal decided to place less reliance on agreements with VPL which were made before January 2005.
- Section XI Deals with "the Radio Comparison". The Tribunal held that the rates charged by PPL for standard commercial radio licences spanned a range from 2% (for small stations) to 5% (for the largest stations). Having referred to some of the evidence on this topic the Tribunal said this at [133] –[135]:
"133. …in the circumstances we consider that a detailed analysis of the evidence on this topic is not required because the main point being made by CSC is a very general one and it is this: both offerings are driven by music and in the case of commercial radio, the rates are assumed to have been the outcome of arm's length negotiation and agreement. How can music video therefore reasonably be said to be worth four times that of commercial radio?
134. Music videos are a genre of entertainment independent of others; these are not fungible products. The music video is obviously worth more than commercial radio as a licensable commodity. But how much more?
135. Every product has its price. By now, as a result of both the evidence and the demonstration, we have had enough experience of music videos to form a prima facie view of their worth in the hierarchy of entertainment. In our view, VPL's demand for four times the maximum headline rate for commercial radio is unreasonable. The rate must be less than 20% of defined revenue on this ground alone. At the other end, the highest figure emerging from this evidence on commercial radio is possibly, 5.75% and we may therefore take this sum as the lower starting point. The CSC has proposed its 8% royalty with inter alia this in view, believing it to be generous. We think that the figure should be more than that.
- At this point, therefore, the Tribunal appears to have formed a view that the appropriate royalty rate lay somewhere in the range of 8 to 20%. This section concludes with two paragraphs under a heading "The reduced window". These form a crucial part of VPL's appeal. They read as follows:
"136. Taking this, the 'pop promo effect' and the evidence relating to a changing market into account, we consider that the right royalty rate must be over 10% and less than 15%. The rest is fine tuning - to which we now turn.
137. There are two main areas by which to fix the thus diminished window of royalty rate:
(a) Consideration of other music video licences as comparables, and
(b) The 'available profits' approach."
- Although, by this stage the Tribunal had considered and rejected the CSC 2003 Licence as a comparable and had considered and largely rejected the radio comparator, it had not yet considered the three major players in the music video market other than CSC. These are dealt with in Section XII of the decision, headed "Music video licenses". At [144]-[145] the Tribunal repeated its rejection of the CSC 2003 Licence as a comparable, along with all other "non-precedential agreements". It then dealt at [146]-[163] with "the Big Fish": MTV, Box, and BSkyB. Both sides are agreed on this appeal that MTV was rightly rejected by the Tribunal as a relevant comparator.
- VPL's position in relation to Box was that the fixed fees agreed with them, when translated into percentage terms, came out at about 20%, or slightly more. VPL's translation of the fixed fee into a percentage royalty figure was "so fraught with assumptions and imponderables as to render the exercise quite unreliable" for the Tribunal's purpose. Having considered the evidence in relation to the Box Licences, the Tribunal concluded that it could come to "no concrete conclusion over the Utility of the Box fixed fee licenses as legitimate comparators."
- With BSkyB on the other hand, the Tribunal concluded that it was "an example of the Standard Licensing Approach being accepted with a major player." The terms were agreed in July 2004, although it was signed only in 2007. The royalty rate was 20%, and pro-rating was only to take place in the event that more than 20% of programming content comprised non-VPL material.
- Section XIII dealt with "Unreasonable discrimination between licensees? CDPA s 129". The Tribunal was satisfied that no unreasonable discrimination was likely to arise as a result of the decision.
- Section XIV dealt with "The 'available profits' approach: Economic benefits." The Tribunal included in the decision two tables of figures for CSC's earnings for the years 2008-2011. The 2008 figures were based on management accounts supplied by CSC, Mr Mainz having rejected earlier figures. The Tribunal recognised that 2008 was an unusually bad year. The 2009-2011 figures were based on forecast earnings. The point was to show that CSC, if it paid royalty at 20% with pro-rating, would be left with a very small amount (in percentage terms 3.4%, 0.01%, 3.5% and 5.7% for the four years) after deduction of licence fees. The Tribunal appears to have accepted that 2008 produced a blemish in an otherwise healthy business. It concluded this Section by saying:
"Whilst we feel that both sides may have exaggerated their fortunes and misfortunes past and present, under this head, on any account we are certainly not looking at a rosy picture of untrammelled growth in CSC's fortunes on foot of its music video business."
- In Section XV the Tribunal dealt with "Risk sharing". It concluded that the licensee took the far greater share of the risk, and this factor pointed in CSC's favour. Section XVI dealt with Advances, which are no longer material for this appeal.
- In Section XVII the Tribunal dealt with "Programming Content". It points out that in the CSC 2003 Agreement the pro-rating was based on the proportion which VPL content bore to the total broadcast hours. By contrast, in the offered licence, pro-rating is the proportion which VPL repertoire bore to "Programming content" which is defined as VPL repertoire plus Non-VPL content. This definition excludes "advertising, promotions, sponsorship slots, trailers, station announcements and station identity signals."
- The Tribunal noted that "Programming Content" could include programmes made by the licensee, and appears to have concluded that this had the effect that "on its face, VPL is purporting to license and claim royalty in respect of material in which it neither owns nor controls the copyright". It observed further that the new formula had a dramatic effect of the amount of royalty. It decided that the old formula should be the one included in the new licence.
- Finally, in Section XVIII, the Tribunal concluded "in the light of the foregoing" that the reasonable royalty rate should be 12.5%, the midpoint of the range previously identified as the one in which the royalty rate must lie.
The first ground of appeal: royalty rate
- Mr Mill's overall attack on the decision of the Tribunal on his first ground of appeal was that the Tribunal had, in the first part of its decision, failed to take any account of relevant comparators. Accordingly the "diminished window" of 10-15% was set on a flawed basis. The most important and relevant comparator, BSkyB, on its face an agreement to pay 20% with limited pro-rating, was only dealt with after the diminished window had been set when the Tribunal was only concerned with fine tuning. It was impossible to see how the BSkyB comparator had been taken into account in the fine tuning exercise. Accordingly, Mr Mill submitted, it was clear that the Tribunal had failed in its obligation under section 129 of the Act to have regard to comparables and engaged in a process of such fallacious reasoning as to vitiate its decision.
- Mr Cullen, who appeared for CSC, reminded me of the principles on which I should approach an appeal of this nature, and in particular the respect which is due to a specialist tribunal such as the Tribunal, dealing with a matter which is central to its habitual function, and in which it is easier to be right than to explain why. He submitted that where there are two possible explanations, one irrational one rational, for the way in which the Tribunal might have reached a conclusion, one should not assume that the Tribunal had adopted an irrational approach. He submitted in essence that the Tribunal must already have had in mind the matters considered later in its decision when arriving at the diminished window.
- In my judgment it is clear on the face of the Tribunal's decision that it arrived at the diminished window without reference to the matters which it discussed later in the decision, in particular the BSkyB licence and the available profits. Firstly, the Tribunal expressly identifies the three matters to which it has had regard in arriving at the diminished window. These are: the conclusion which it reached from the radio comparison, namely that the royalty is in the range 8 to 20% (itself based on the demonstration and the "worth" of music videos in the hierarchy), the pop promo effect and the changing market. Other matters had been mentioned up to this point but are not dealt with: for example the CSC licences which were rejected as comparables. Secondly, the Tribunal makes clear at [137] that it will make use of comparable music video licences for the purpose of fine tuning. If so, it seems implausible to suggest that it had already been taken into account in fixing the window. I do not think it is possible to read the decision in the way contended for by Mr Cullen, so as to conclude that the Tribunal was factoring into its decision the impact of the BSkyB licence or the other matters dealt with subsequently, at this window-setting stage.
- Of course, if at this point in the decision the Tribunal was merely reaching a provisional conclusion as to the approximate range within which the royalty would lie, then it would not matter that this conclusion was arrived at without considering all the evidence, provided that it went on to factor in the effect of that evidence. Reluctantly, I have concluded that the Tribunal reached a concluded as opposed to a provisional view on the range of royalty without regard to the matters discussed subsequently. Firstly, the Tribunal expressly identifies the purpose for which it will use comparable music video licences and the available profits approach: to "fine tune". In context, it is clear to me that this fine tuning was intended to mean pinpointing the precise position within the window at which to set the royalty. Although the Tribunal speaks at [137] of "fix[ing] the thus diminished window", I do not think that it can sensibly be suggested that it contemplated moving outside the window. Secondly the Tribunal says, at [136], that the royalty rate "must" be over 10% and under 15%. That, it seems to me, can only be read as setting a range in which the royalty must fall.
- Thus far I have concluded that the Tribunal had come to a concluded view that the royalty should lie within the 10-15% diminished window, without consideration of the BSkyB licence (or other comparable music video licences other than CSC) and the available profits approach. There would, I suppose, be nothing wrong in that approach were it clear that the remaining materials considered later in the decision also pointed clearly to a royalty in that range. But that was far from being the case. The BSkyB licence was at 20% with limited pro-rating. The available profits approach indicated that 20% was too high, but the Tribunal formed, or at least recorded, no view on what royalty the available profits approach indicated.
- It is of course fair to say that the Tribunal had already given a reason, the date on which the licence was agreed, on the basis of which one could give the BSkyB licence less weight. It is also fair to say that the fact that one large company had agreed this rate does not establish that there was an established rate akin to a tariff: it had CSC's evidence of a hard fought resistance to such a rate, and evidence of the small fry going out of business when paying it.
- Notwithstanding these considerations, it seems to me that it is wrong in principle to relegate the single most significant comparable to the role of fine tuning a royalty rate which has already been decided to lie in a range considerably below the rate appearing in that licence. That is particularly so where the diminished window has itself been fixed by reference to a comparable (radio) which the Tribunal considered less relevant. That approach is contrary to what I believe to be the correct one, namely that suggested in AEI v PPL [1998] RPC 335 in the passage which I have quoted earlier in this judgment. That approach involves starting with the most relevant comparable and adapting it to the circumstances of the present case. It seems to me that the almost inevitable consequence of adopting the Tribunal's approach in the present case is that the comparable will be given insufficient weight. Accordingly, in my judgment, the Tribunal has fallen into error here. Although the Tribunal clearly set out to apply the statutory obligation to have regard to comparables in general, the two stage process which it applied has prevented it from doing so.
- Mr Mill also undertook a frontal attack on the Tribunal's process of reasoning in arriving at the 10 to 15% band. He identified the four matters taken into account in this first stage of reasoning as (a) the highest rate for commercial radio was 5%: music videos cannot be worth four times that, (b) the "worth" of the product, (c) the "pop promo" effect and (d) the changing market. He attacked the reasoning of the Tribunal in relation to each of these as flawed.
- As I have decided that it is necessary to remit the case to a differently constituted Tribunal in the light of the error which I have already identified, I think it is unnecessary for me to enter into a detailed discussion of each of these issues. I would observe only the following in relation to setting the diminished window:
i) The rate being demanded by VPL was not four times the commercial radio rate, given that the VPL rate was subject to pro-rating. If the Tribunal set its top figure of 15% as being three times the commercial radio rate, then given pro-rating at a typical figure of 80%, this is not far from the figure VPL were asking for;
ii) The Tribunal's assessment of the worth of the product in the hierarchy of entertainment does not seem to be based on any evidence or reasoning. So far as the demonstration went, the Tribunal expressly put aside any subjective view of the merit of the product. Mr Cullen did not identify any other material (apart from the radio comparator) which could have been used to establish this hierarchy. It was wrong in principle, as it seems to me, for the Tribunal to arrive at a view of the worth of the product without considering the comparable licence and the available profits;
iii) The other two factors, the pop promo effect and the changing market were factors exerting a downward pressure on royalty rate to which the Tribunal was perfectly entitled to have regard. But it seems to me that the right place in principle to consider these matters would be in adjusting, to the extent it is appropriate to do so, any comparable royalty rate. This is an exercise which the Tribunal has not performed.
- I reach the conclusion that the matter must be remitted for a rehearing with considerable regret, not least because of the very substantial effort involved by all those involved in the hearing before the Tribunal. The directions to be given for the rehearing will be a matter for the newly constituted Tribunal, but I would hope that the matter could be case managed in such a way as to avoid the expenditure of equivalent sums in costs to those expended for the first hearing. I note that there were transcripts taken of all the evidence. I would not anticipate it being necessary or desirable for the process of taking this evidence to be repeated.
The second ground of appeal: pro-rating
- Given my conclusions in relation to the order I am compelled to make in the light of the first ground of appeal, it is not strictly necessary to consider this second ground of appeal. As it was fully argued, however, and as I believe it forms an independent basis for making that order, I will express my views.
- The Tribunal's view seems to have been that the newer basis for pro-rating was wrong in principle because it levied royalties on material in which VPL did not own the copyright. It accordingly substituted the older basis, even though the parties had operated on the basis of the new formula.
- CSC's position had been that the new formula had a significant effect on the amount of royalty payable. It accordingly argued the case on the basis that the royalty rate in the new licence should be lower than the CSC 2003 licence on this additional ground. It also contended that the new formula was another reason why the Box licence could not be translated into a percentage equivalent. It did not, however, contend that the new formula was wrong in principle or that there should be a return to the broadcast hours approach. After the hearing CSC's solicitors wrote to the Tribunal to indicate that it had not been arguing for a return to the broadcast hours approach, but if the new approach were to be adopted instead a reduction in royalty would be appropriate. VPL did not take an opportunity which it had at the hearing on 7th September 2009, before the decision was signed, to argue further on this point.
- Mr Mill submitted for VPL that the Tribunal was wrong in asserting that the result of the new formula was that CSC would be charged for non-copyright material. The Tribunal had misunderstood the effect of the change, and that non-VPL material was simply part of the denominator in the pro-rating calculation. The royalty did not increase if the amount of non-VPL material increased.
- Mr Cullen submitted that the findings of the Tribunal on this point were findings it was entitled to make. He submitted that the effect of excluding the broadcast material which is excluded by the definition of "Programming Content" is that VPL becomes entitled to a higher percentage of CSC's revenue than is represented by the percentage of the number of minutes in every hour given over to VPL repertoire. He submits that the Tribunal was entitled to take the view that it was more reasonable for the pro-rating to be done by reference to complete broadcast hours. In any case, he submitted that the Tribunal must have taken this factor into account in setting the rate: and thus, if the new formula is to be substituted, this should result in a lowering of the percentage royalty.
- The Tribunal is of course not bound by the proposals of the parties: see British Airways v PRS [1998] EMLR 556 at 564. The Tribunal is under a statutory duty to settle terms which are reasonable in all the circumstances, and it is entirely possible where there are rival terms that the Tribunal should settle some compromise. However, where the parties are agreed on a particular term, and where the case has been argued on the footing of that term, it would, I think, be an unusual case where the Tribunal was justified in departing from that term. The fact that neither party is prepared to argue that the term itself is unreasonable is a powerful factor on its own for concluding that it is not. Certainly, the departure from the agreed term would have to be supported by valid reasoning.
- I do not consider that the Tribunal had a proper or rational basis for departing from the agreed formula. The reason it gave, that VPL was charging for programmes made by the licensee, was wrong.
- I do not think it is realistic to suggest that the matter could have been sorted out if VPL had raised the point after the decision was communicated to them but before the decision was finally signed. It would have required unpicking the effect of the change in question from the body of its decision, and possibly further consideration of the evidence. VPL were justified in raising the matter by way of appeal, as with any other error of a court or tribunal of first instance. What is not permissible is to save up merely technical points, capable of easy remedy, so that they may form the basis of an appeal.
- Does this error matter, given that the Tribunal was aware of the impact of the change on royalty? The issue is certainly mentioned in the Section of the decision immediately before the conclusion on royalty, and the Tribunal states that what it describes as the "vice" has a dramatic impact on the outcome of the dispute. But this section is itself in the part of the decision identified at [136] as being concerned with "fine tuning" within the 10-15% diminished window. It is not one of the matters mentioned as a "main area" for fixing the rate within the diminished window at [137]. Accordingly, I think it likely that the Tribunal has not taken this important difference into account in setting the royalty.
- The older basis of pro-rating, as contained in the 2003 CSC Licence, is undoubtedly less favourable to VPL. But the Tribunal had effectively rejected any reliance on the CSC licence, essentially on the basis that it was non-consensual. If the Tribunal had taken a valid comparable as its starting point, such as the BSkyB licence which had only limited pro-rating, then there would have been a hierarchy of pro-rating terms in the order (in terms of advantage to VPL) of BSkyB, new formula, old formula. This would have illustrated a very stark difference between the sums payable under the BSkyB licence (20% with limited pro-rating) and the licence the Tribunal was approving (12.5% with the most generous pro-rating).
- When the matter is remitted to the Tribunal, it should consider the parties' evidence and arguments on the basis of the agreed formula.
Result
- For the reasons given, the Appeal is allowed and the application remitted to the Copyright Tribunal for a rehearing before a differently constituted Tribunal. I will hear counsel in connection with any consequential orders or directions.
