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Court of Appeal sends Netflix free trial streaming royalties back to Copyright Board

The Federal Court of Appeal in Netflix Inc. v. Society of Composers, Authors, and Music Publishers of Canada, 2015 FCA 289, granted Netflix’s application for judicial review of the Copyright Board’s decision certifying the tariff of royalties for audiovisual webcasts (the “Tariff) for the period running from 2007 to 2013 inclusively. Netflix objected to paragraph 3(b) of the Tariff, which imposed a monthly minimum fee for free trial subscriptions.

Underlying Procedure

The Society of Composers, Authors, and Music Publishers of Canada is a collective society under the Copyright Act; therefore, it is entitled to receive copyright royalties pursuant to tariff certified by the Board

From 2007 to 2012, SOCAN filed annual statements of royalties it proposed to collect for audiovisual works transmitted online, and these proposed tariffs were published in the Canada Gazette. In 2011, the Board indicated that it would consider certifying the proposed tariff. While there were objectors to this tariff, Netflix was not one of them. In 2012, SOCAN and the objectors reached a settlement. Importantly, some of the royalty provisions in the agreement were substantially different from those contained in earlier public versions. Specifically, the Tariff now included a minimum monthly fee per free trial subscriber. Interestingly, none of the objectors offered free trials, and consequently the extra royalties for free trials affected none of them.

The Board then convened a hearing to approve the settlement. Netflix participated in this hearing, and made written submissions pursuant to which it objected to the imposition of the extra royalties, arguing that the free trials constituted fair dealing under the Copyright Act, and that the extra royalties violated the principle of technological neutrality.

The Board’s Decision

The Board approved the settlement and certified the Tariff.. In coming to its decision the Board refused Netflix’s request to introduce new evidence in support of its arguments because it had not participated in the proceeding from the start and allowing new evidence would delay the proceeding further.

The FCA’s Ruling

In allowing Netflix’s application, the FCA ruled that the process by which the Board certified the Tariff was not procedurally fair, and therefore set aside the Board’s decision as it pertained to royalties on free trials.

Justice Nadon, writing for the Court, held that while Netflix had not participated in the proceeding from the outset, the nature of the proceeding shifted fundamentally once the proposed tariff was amended.

The Court also reviewed the Board’s application of the framework governing the approval of a settlement agreement as set out in Re: Sound Tariff 5 – Use of Music to Accompany Live Events, 2008-2012 (May 25, 2012) (Copyright Board). The Court ruled that by failing to fully consider Netflix’s submission the Board had not properly applied the framework. Specifically, the Court ruled that the Board failed to consider whether the parties before it represented all prospective users and whether arguments by non-parties have been addressed.

In allowing Netflix’s application, Justice Nadon noted that:

[51] Consequently, I am of the view that the Board erred in certifying provisions of the Tariff which did not affect any of the negotiating parties. In the circumstances of this case, procedural fairness required the Board to allow Netflix, if found to be a representative member of the affected industry (there does not appear to be any doubt that Netflix is a representative member of the affected industry), the opportunity to fully make its case, including the possibility of introducing fresh evidence and submitting new arguments on subject matters that were not included in the proposed Tariff published in the Canada Gazette. The Board’s refusal to allow Netflix to put forward its position constitutes, in my respectful view, a breach of Netflix’s procedural right to be heard.

[52] Before concluding, I would simply say that, in the end, rules of procedure are there to serve the interests of justice. In my view, justice in this case required that Netflix be given the opportunity of putting its case forward with regard to the issues of fair dealing and technological neutrality.

The FCA returned the matter to a differently constituted panel of the Board for redetermination in accordance with the FCA’s reasons.

The Court of Appeal’s decision is available here.