In a ruling expected to rock Europe’s controversial copyright levy system, the European Court of Justice held on 20 October that governments may impose fees on digital reproduction equipment to compensate rights holders only when the devices are likely to be used for private copying.

Padawan SL versus Sociedad General de Autores y Editores de España (SGAE) involves a claim by collective management body SGAE for private copyright levy fees for 2002-2004 on CD-Rs, CD-RWs, DVD-Rs and MP3 players sold by Padawan. Padawan refused to pay on the grounds that imposing the levy on all digital media, regardless of whether it is used for private or professional use, violates the EU directive on harmonisation of certain aspects of copyright and related rights in the information society (2001/29/EC). The claim was upheld and Padawan appealed to the Provincial Court, Barcelona, which sought advice from the ECJ.

Levies Not Applicable to Business Uses

EU members opting for a private copying exception in their national law must ensure that rights holders receive “fair compensation,” the ECJ said. The concept must be interpreted uniformly throughout Europe because the directive does not contain any reference to national law, it said.

The directive makes clear that fair compensation is intended to compensate authors “adequately” for use of their protected works without their authorisation, the court said. To determine the level of compensation, governments must take account of the “possible harm” rights owners might suffer, it said. Copying by natural persons acting in a private capacity “must be regarded as an act likely to cause harm to the author,” it said.

But there are practical problems in identifying private users and requiring them to pay rights holders, and the harm caused by private copying may in individual cases be minimal, the ECJ said. Therefore, countries may set a private copy levy in order to finance fair compensation that is chargeable not to private users of the reproduction equipment but to those who have the devices available or provide copying services, it said. They, in turn, are free to pass the cost through to consumers, it said.

But a system for funding fair compensation is compatible with a fair balance between rights owners and users only if the digital reproduction devices, media and equipment are likely to be used for personal copying, the ECJ said. Indiscriminate application of levies to all types of digital reproduction equipment violates the copyright directive, it said. The Barcelona court must now decide whether Spanish law complies.

Change Coming?

“This judgment will shake up the copyright levies systems across Europe,” said attorney Christopher Thomas, an antitrust, competition and economic regulation partner in Hogan Lovells’ Brussels office. Many countries have exercised their right to impose taxes on equipment used for copying, but the situation has “degenerated in many cases into a situation in which the information technology [IT] industry is simply taxed to support the creative arts,” he told Intellectual Property Watch. Attempts several years ago to reform the patchwork of rules failed, leading inevitably to the ECJ, he said.

Germany, for instance, places levies on personal computers and some mobile phones, while other nations impose wide-ranging fees on CDs, DVDs, memory cards and the like, Thomas said. But the levies are usually set on very broad categories, regardless of whether copying is a minor potential use of a multi-function item such as a PC or the product is designed for business use or marketed to consumers, he said.

The ECJ ruling will force European countries to change their levy systems “because they simply cannot be imposed indiscriminately on categories of products without taking into consideration the identity of the customers to whom the items are actually sold,” Thomas said. Business and professional users should see a “real cut in the cost of their IT procurement,” he said.

The decision “paves the way for change,” said Bridget Cosgrave, director-general of DIGITALEUROPE, which represents the IT, consumer electronics and telecommunications sectors. It is a “welcome signal” to EU lawmakers to recognise the importance of adapting the antiquated system to today’s digital realities and “the unfair and untransparent methods used by collecting societies” in calculating and claiming copyright fees, she said.

The European Commission has tried to resolve the levy issue in recent years but could not agree with stakeholders on a way forward, a spokeswoman said. The ECJ decision “should help clarify some key issues in the debate,” particularly the scope of reproduction media that may be subject to levies, she said, adding, “We will now examine the judgment in more detail and see what action might be needed from the Commission.”