Russian IP Industry At Center Of Massive Scandal

The Russian IP industry is in the centre of a massive scandal, with yesterday’s arrest of Sergei Fedotov, director general of the Russian Authors’ Society (RAO), a public association, which is responsible for the collection and distribution of royalties among rights holders, on the suspicion of multi-million dollar theft and withdrawal of funds to abroad.

To date, the Russian General Prosecutors’ Office has initiated criminal proceedings against Fedotov and other top managers of RAO, estimating potential damage as a result of their actions at about 1 billion rubles (approx. US$40 million).

In accordance with the case, Fedotov is suspected in the withdrawal of funds, which were allocated for the payment of authors’ royalties, through ‘fly-by-night’ companies.

According to an official spokesman of the Prosecutors’ Office, the investigations are currently ongoing, while the amount of potential damage may significantly increase during the next stages of the investigation.

Sergei Fedotov has been arrested by the Moscow Tagansky District court for a period of at least two months, and, according to some Russian media reports, the court has already seized bank accounts of the Society.

In the meantime, as the investigation is ongoing, many Russian rights holders that were members of RAO (the total number of which is estimated at more than 30,000 people) are assessing their losses associated with illegal activities of RAO, considering filling a collective lawsuit against RAO, demanding recovery of their losses.

The amount of the lawsuit may reach US$50 million, however final figures will be announced after the results of pretrial investigations.

Satisfaction of the claim by the Russian court may result in bankruptcy of the RAO and its inability to fulfill its obligations.

Meanwhile, the Russian government is aware of the current situation around RAO, considering several ways for the solution of the current crisis, one of which may result in the closure of the Society and the introduction of a ban on the further collection and distribution of authors’ royalties.

In the case of approval, the right for royalties’ collection will be transferred to a specially established state structure.

Nikolay Nikiforov, Russia’s Minister of Communications and the person responsible for the observance of IP rights in the Russian government, issued a comment:

“It hard to say about the future of RAO and all the system of management of IP rights in Russia, due to the current scandal. The Ministry of Communications has repeatedly suggested a number of approaches for the reform of the existing system of IP management. Some methods of work of RAO have been considered by us as quite archaic, while some of their initiatives, such as the introduction of the so-called tax on the internet, were also considered by the government as extremely strange from the point of view of protecting the rights of right holders, as they attempted to establish a tax on the legalization of piracy.”

The official spokesman for RAO has denied all charges of the Russian law-enforcement agencies, saying that the current scandal is the result of the activities of persons who are unhappy with the current status of RAO as a single organisation which distributes royalties among Russian rightholders and their plans to gain a control over cash flows, allocated for payment of authors’ royalties.

According to RAO, for the last 11 years the Society has been able to significantly expand the scale of its operations, as well as payments of royalties to authors, which have increased from RUB 900 million in 2004 to almost RUB 5 billion in 2015.

In addition, the Society has significantly increased the support of authors in the Russian regions since it completed the expansion of its branch network.

Finally, it has recently completed a successful launch of the unified information system, which allowed right holders to monitor their fees online and to conduct electronic document flow through a personal account.

The good financial position of the Society and its active development are the main reason of the current attacks on its head Sergey Fedotov, according to its management.

RAO is the successor of the All-Soviet Agency of Intellectual Property, that ceased to exist after the collapse of the USSR in 1991.

It is reported that the Russian government may consider the possibility of the withdrawal of a licence and state accreditation from the RAO already during the next several weeks.