ARIEL KATZ ASSOCIATE PROFESSOR INNOVATION CHAIR, ELECTRONIC COMMERCE

July 19, 2011

- BY EMAIL -

Mr. Gilles McDougall Secretary General The Copyright Board of Canada 56 Sparks Street, Suite 800 Ottawa, Ontario K1A 0C9

Dear Mr. McDougall, Re: Reply to Access Copyright’s Submission Regarding the AUCC’s Application for

Amending the Interim Tariff Pursuant to the Board’s notice from June 16, 2011, I wish to reply to Access Copyright’s (AC) submission regarding the AUCC’s application from June 8, 2011. As the Board will recall, in my earlier submission of June 27, 2011 I shared many of the concerns that the AUCC raised in its application, and added a few others. Nevertheless, I was not persuaded that amending the Interim Tariff to require Access Copyright to grant transactional licenses on a per copy basis—as the AUCC requests—would be the optimal remedy for these issues. After having the opportunity to carefully read AC’s submission, I wish to reaffirm the positions from my previous submission. Nevertheless, there are a few points with which I agree with AC. I agree that the inclusion of digital licensing in the Interim Tariff does not reflect the status quo that prevailed until Dec. 31, 2011, and I agree that the AUCC’s proposed remedy, as it applies to digital copying, is inadequate. Therefore, I fully endorse AC’s position that “the Board should

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2 take a principled approach and simply remove the digital option altogether from the Interim Tariff.”1 The optimal solution at this interim stage would be to let Access Copyright continue doing what it does best, namely administering a collective blanket license for the non-digital reproduction of works under its repertoire, while ensuring that Institutions who do not wish to operate under the Interim Tariff have a genuine option to secure transactional or other licenses directly from publishers or other market intermediaries. Removing the digital option from the Interim Tariff will be an important step in this direction. It will ensure greater fidelity to the status quo, and to a large extent might obviate the need for the Board to consider the more complicated issues that all parties raise in their respective submissions. If, however, the Board insists on keeping the digital option in the Interim Tariff, there is no escape from adequately addressing the developments that have occurred since the issuance of the Interim Tariff. Therefore, the rest of my submission will concentrate on these issues. In my previous submission, I dealt with three main issues: (a) what a non-mandatory tariff entails; (b) the abusive and anti-competitive nature of Access Copyright’s (and some of its members’) alleged conduct; and (c) the appropriate remedy. Unfortunately, despite its considerable length, AC’s submission contains very little substantive response to these issues. In essence, AC’s submission boils down to four main themes: • “I didn’t do it”: flatly denying any wrongdoing without providing any evidence or theory to refute the evidence-based allegations made against it; • “I’m entitled to do it”: maintaining that it and its affiliates are entitled to engage in the acts complained; • “No-one can touch me”: asserting that the Board has no jurisdiction to regulate these activities and that they are also immune from scrutiny under the Competition Act; and • “I’m a victim”: accusing everyone else of making false accusations and conspiring against it.

1

AC Submission, p. 2.

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3 These themes run through the various parts of AC’s submission. Individually, almost each and every argument that AC raises lacks merit. Cumulatively, they only strengthen the case against it. I. AC is estopped from arguing against the jurisdiction of the Board to mandate transactional licensing 1. The concern that if approved, the Interim Tariff would be mandatory has been fundamental to most objectors’ opposition to its approval, including mine. Among other issues, I maintained that a mandatory interim tariff could not be legally valid. 2. The Board responded to this concern by noting that the interim tariff we adopt in this matter is not mandatory. An Institution can avoid its application by purchasing the work, negotiating a licence to copy the work with Access or its affiliates, not using any work in the repertoire of Access or engaging only in conduct exempt from liability.2 3. The Board did not come to this conclusion out of thin air. Indeed, the Board relied directly on AC’s submission and incorporated it almost verbatim into its decision. For instance, on p. 6 of its Dec. 22, 2010 submission, AC stated the following: [A] concern is expressed that an interim tariff will be “mandatory”. Any institution can avoid application of the tariff by: (1) purchasing the work; (2) negotiating a licence with the rightsholder to copy the work; (3) not using any work in Access Copyright’s repertoire; (4) by engaging in conduct exempt from liability, e.g., fair dealing; or (5) negotiating a licence with Access Copyright. 4. The essence of the AUCC complaint—backed by evidence—is that AC and some of its affiliates have taken steps to eliminate the option of avoiding the application of the Interim Tariff, contrary to the express representation AC made to the Board, and contrary to the Board’s ruling. AC’s opponents therefore ask the Board to make sure that these options remain available. Contrary to its previous representations, and to evidence before the Board, it now maintains that transactional license never truly existed, and goes further to argue that they should not exist. The Board should ignore these contentions.

2

Board’s Reasons, March 16, 2011, paragraph 50.

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4 5. Moreover, AC argues that “If the AUCC is successful, this would mean Institutions could avoid paying the FTE rate through the requirement that Access Copyright enter into a pay per use transactional license for paper or digital copies. … Both are, in effect, trying to do an “end run” around the operation of the interim Tariff and the regime established by the Act for the collective administration of copyright.” This argument, which only reveals AC’s arrogance, should be rejected. What AC is complaining about is exactly what the Board ruled. 6. The Board has decided to grant the Interim Tariff under the premise that the availability of transactional licenses is not an “end run” around the tariff, but are a viable and legitimate alternative, and their existence is crucial to the legitimacy of the Interim Tariff. Again, the Board reached this decision on the basis of the unequivocal representation of AC that these alternatives exist. AC is now estopped from arguing that they never existed and should not exist. AC is estopped from arguing that the Board has no jurisdiction to require transactional licensing when it relied on the existence of transactional licenses to convince the Board that there is no jurisdictional problem with the grant of an Interim Tariff. 7. Furthermore, by characterizing its opponent’s complaint as an attempt to do an “end run” around the operation of the interim Tariff, AC actually confirms the allegation made against it. By making this statement, AC explicitly acknowledges that it is not interested in letting the Institutions have an option of operating outside the Interim Tariff. Because this is AC’s clear and admitted position, it should come as no surprise that it has actually taken steps to advance it. Therefore, AC’s statement provides direct support to the evidence presented by the AUCC and the ACCC. The AUCC and the ACCC provided the evidence of AC and the publishers’ refusal to grant transactional licenses; AC provided the rationale and motivation behind these refusals. II. The Board has jurisdiction to compel alternative forms of licensing 8. AC argues in length that the Board has no jurisdiction to compel it or its affiliates to issue alternative types of licenses. Its argument is based on the following propositions: first, that absent explicit statutory mandate, copyright owners cannot be compelled to license their

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5 works, and second, that the provisions of the Copyright Act governing this proceedings to not grant the Board such powers. This argument is wrong. 9. It is beyond dispute that generally, without something more, an individual copyright owner, like owners of other intellectual property rights, has the full liberty of deciding whether to license her works, to whom, for what price, and under what terms and conditions. 10. It must also be beyond dispute that when multiple copyright owners set up a collective society, which operates a licensing scheme as defined in sections 2 of the Copyright Act, they submit themselves to the regulatory framework established by the Act, which is, in essence (and contrary to AC’s surprising assertions) a system that has many characteristics of compulsory licensing. This regulatory framework, established by Parliament, vests in the Board various powers to determine license fees for licenses issued by collective societies and related terms and conditions, and as a consequence it deprives copyright owners of their otherwise unfettered liberty to determine whether and how to exercise their copyrights. Not only has Parliament the powers to set the price and related terms and conditions for the use of the works administered collectively, it also deprives them of the liberty of refusing to license at all. However, unlike a compulsory license issued pursuant to s. 65 of the Patent Act, there is nothing truly compulsory in the regulation of collective societies pursuant to the general regime. The truth is that this system is entirely voluntary. Nobody compels any copyright owner to belong to a collective society, and nobody forces a rightholder to license her work on a collective basis. A copyright owner who does not wish to be bound by the obligations that may be imposed on her under the general regime can, at any time, simply choose not to be part of the collective scheme, as many copyright owners do. But a copyright owner, who chooses to opt into a collective licensing theme, voluntarily submits herself to the limitations that it entails. 11. The Act contemplates three methods of collective licensing under the general regime. Collectives can ask the Board to approve filed tariffs, they can enter into voluntary licensing transactions, and either collectives or users can ask the Board to determine the license fees and all related terms and conditions. In all these three avenues the Board has explicit powers to determine the license fees and the licensing terms and conditions. In all of these three routes individual copyright owners, by voluntarily deciding to act collectively, submit

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6 themselves to a regulatory regime that narrows their exclusive rights and interferes with their discretion how to exercise them. 12. It seems that AC’s position that the Board has no jurisdiction to compel it or its affiliates to issue transactional licenses is based on fundamental misunderstanding of the regulatory framework established by Parliament in general, and on curious interpretation of s. 70.15(1) in particular. Apparently, AC’s view is that 70.15(1), which reads: “The Board shall certify the tariffs as approved, with such alterations to the royalties and to the terms and conditions related thereto as the Board considers necessary, having regard to any objections to the tariffs” means that the terms and conditions referred to are only terms and conditions “under which users may make copies”,3 but that the Board has no jurisdiction to impose any terms or conditions on AC or its affiliates. The argument makes no sense. Literally, the Act uses the language “terms and conditions related [to the tariff] as the Board considers necessary”. It does not use language such as “terms and conditions under which users may make copies”. Therefore, the only limitation on the jurisdiction of the Board to impose terms on copyright owners when they decide to act collectively licensors is (in addition to general limitations that apply to all judicial or administrative tribunals) that the terms and conditions are: (a) related to the tariff; (b) the Board considered them necessary; and (c) having regard to any objections to the tariff. 13. Not only this conclusion flows from the language and structure of the Copyright Act, it is a direct corollary to the rationale that motivated Parliament to create this particular regulatory regime in the first place. The enactment of this regime has been premised on Parliament’s view that it is necessary to regulate the exercise of the power acquired by collective societies. As the Supreme Court explained as early as 1943, “Seven years after the Act of 1921 came into force the legislature realized that in respect of performing rights a radical change in the statute was necessary. Societies, associations and companies had become active in the business of acquiring such rights, and … have more or less successfully endeavoured to get control of the public performing rights in the vast majority of popular musical and dramatico-musical compositions which are

3

AC Submission, p. 6.

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7 commonly performed in public. The legislature evidently became aware of the necessity of regulating the exercise of the power acquired by such societies …4 14. After describing the elements of the regime then in force, the Court added, That seems like a revolutionary change, but it is evident that the legislature realized in 1931 that this business in which the dealers were engaged is a business affected with a public interest; and it was felt to be unfair and unjust that these dealers should possess the power so to control such performing rights as to enable them to exact from people purchasing gramophone records and sheets of music and radio receiving sets such tolls as it might please them to exact. It is of the first importance, in my opinion, to take notice of this recognition by the legislature of the fact that these dealers in performing rights, which rights are the creature of statute, are engaged in a trade which is affected with a public interest and may, therefore, conformably to a universally accepted canon, be properly subjected to public regulation.5 15. Evidently, Parliament has never decided to control the power of collective societies by prohibiting their existence, a choice that must have reflected the view that when properly regulated, their operations are consistent with the public interest. Nevertheless, the Court went on the emphasize that care must be taken lest the exclusive rights, or monopolies, given to the individual copyright owners for good and just reasons, should not be made instruments of oppression and extortion, when those rights are administered collectively.6 This was, in the Court’s eyes the raison d'être of the enactments under consideration.7 In other words, the Supreme Court recognized clear distinction between the broad liberties given to individual copyright owners as to how to exercise their rights when they exercise them individually, and the justified limitations on such rights when they choose to act collectively. This is exactly the quid quo pro that I referred to in my previous submission. There is nothing novel about this proposition. It is elementary. 16. Apparently, the party having difficulty accepting Parliament’s decisions is not I, but AC. AC’s contention that the Board has no jurisdiction to regulate the conduct of AC and its

4 5 6 7

Canadian Performing Right Society Ltd. v. Vigneux, [1943] S.C.R. 348, at para. 4. Ibid, at para. 7. Ibid. Ibid, at para. 8.

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8 members and the types of licenses they grant stands in direct conflict with the system Parliament had set up, and turns the Copyright Act on its head. 17. Moreover, if the Board has the power to regulate the fees charged by AC (and AC clearly admits that), it must have the power to regulate AC’s licensing practices. AC’s argument that the Board lacks jurisdiction to intervene in its licensing practices is akin to an argument that the CRTC can only set the prices for, say, a basic phone service, and how consumers ought to pay for the service, but cannot require the phone company to adhere to certain quality standards or impose obligations on how to deliver the service. 18. AC attempts to rely on the decision in SOCAN v. CAB,8 which upheld the Board’s power to order SOCAN to grant a modified blanket license (MBL), to support its claim that the Board cannot compel it to grant transactional licenses is also without merit. While I question the desirability of compelling AC to grant transactional licenses, the Board clearly has the jurisdiction to order it. As AC concedes, the court in SOCAN v. CAB ruled that “the Board’s power to set tariff rates and append terms and conditions … were sufficiently broad to encompass its decision to include the MBL.”9 Although the terms and conditions imposed in that case were different than the ones the AUCC currently requests, that decision provides no grounds to support a narrow approach to the Board’s regulatory powers over collectives and their rightholders. The court endorsed an expansive view of the Board’s power to regulate collectives and the decision itself provides no guidance about limitations to this powers. Obviously, if the Board’s powers under s. 67.2(1) are sufficiently broad to include, under the similarly worded s. 70.15(1), the power to order SOCAN to grant an MBL against its will, they are in principle sufficiently broad to compel AC to grant other types of licenses that it may not be interested in granting. 19. Although it may come as a surprise to AC, Parliament did not create the Board and gave it regulatory powers in order to empower AC and give the imprimatur of law to all its wishes.

8 9

(1999) 1 CPR (4th) 80 (FCA). AC Submission, p. 5.

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9 Quite the contrary, the Board was given regulatory powers to constrain collectives when the public interest so demands. Such constraints, by definitions, include the powers to compel AC and its affiliates to refrain from acts that they wish to pursue and perform others that they may dislike. Nobody forces AC’s members and affiliates to license their works collectively, and they may escape the Board’s regulatory powers and exercise their rights with lesser interference by acting individually. They cannot, however, have it both ways. They cannot choose simultaneously to act collectively, and then demand full discretion to exercise their rights as if they acted alone. Therefore, the question is not whether the Board has the powers to compel AC or its members to grant transactional or other types of licenses. Rather, the only questions are whether any proposed term or condition is related to the tariff and necessary in light of the Board’s mandate to regulate the collective administration of copyright in the public interest. III. AC’s denials of any wrongdoing 20. AC denies that it has ever told its affiliates, including publishers, not to issue transactional licenses to Institutions, and seems to be offended by “the insinuation … that publishers have colluded with Access Copyright to refuse to enter into transactional licenses”. Unfortunately for AC, the evidence presented by the AUCC and the ACCC suggest otherwise, and rather than providing any evidence to refute these allegations, its own submission confirms them. 21. As I have already noted, AC’s own assertion that the Institutions’ demand to be able to operate outside the Interim Tariff is an “end run” around its operation provides credence to the evidence that it has attempted to eliminate the option of operating outside the Interim Tariff, and to the claims that AC has been trying to force the Institutions into operating under the Interim Tariff. AC’s submission further confirms this conclusion. 22. In its letter to AC’s affiliates (Appendix D to AC’s submission), AC’s Executive Director characterizes possible requests for transactional licenses “attempt to circumvent the interim tariff” and explicitly recommends that publisher deny such requests. This evidence is not only consistent with the evidence submitted by the AUCC and the ACCC, it confirms that publishers’ refusal to grant transactional licenses were not unrelated incidents. It emphasizes that AC’s involvement in such refusals was not the initiative of some junior AC officials.

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10 Instead, AC provided clear evidence that not only the collusive refusals to grant transactional licenses were orchestrated by AC, but that its highest officials orchestrated them. 23. In words that cannot be clearer, AC admits that it is strongly averse to Institutions’ attempts to opt out of the Interim Tariff. AC’s own documents, written by its counsel and Executive Director, confirm that it has had the motivation to deny Institutions the ability to opt out of the Interim Tariff and that it has recommended its member publisher to deny Institutions’ requests for transactional licenses. Notwithstanding AC’s protestations and assertions that it has not engaged in any wrongdoing, its own words and acts indicate otherwise. 24. Moreover, not only AC decided to circumvent the Board’s ruling regarding the availability of transactional licenses, its submission reveals yet another level of misconduct. In its submission, AC states that “as part of regular updates to interested affiliates, [AC] explained the facts surrounding the tariff, including a potential correlation between an affiliate granting permission [i.e. transactional licenses] and the value of the tariff (i.e., the possible removal of previously authorized content from a volume study) and the impact that granting permission would have on an affiliate’s distribution from Access Copyright.”10 AC then brazenly concludes that “there is nothing improper, anti-competitive or illegal about any of these initiatives.” 25. The truth is that there is. Not only, contrary to its own representations to the Board regarding the Interim Tariff last December about the availability of transactional license, and contrary to the Board’s ruling that was based on these representations, it acted to prevent them from being offered; and not only it did so in order to deny Institution competitive alternative and compel them to pay for its blanket license; AC’s submission reveals yet another type of misconduct. Apparently, as explained in the previous paragraph, AC has decided to attempt to influence the nature and substance of the evidence that might come before the Board, for the purpose of inflating the value of its blanket license in the hope that this would yield a higher tariff. That is, contemplating a possibility that the Board will initiate a “volume

10

AC Submission, p. 10.

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11 study”, AC openly admits that it has encouraged its affiliates to refrain from what otherwise would be their normal course of business in order to skew the results of such future “study”. There is much that is improper, anti-competitive or illegal about these initiatives, and in the other initiatives described in my previous submission. IV. AC is not a victim of a monopsony 26. In its submission, AC argues that the AUCC has been engaged in a strategy of “collective assertion of monopsony power.” This argument is without merit. Indeed, in an earlier submission to support the Interim Tariff, AC complained that AUCC informed it that it had no mandate to negotiate a new license on behalf of its members.11 It explained that because the AUCC had no mandate from its members to negotiate a new license AC had no choice but to file the Proposed Tariff. That is, according to AC, it was interested in negotiating with the AUCC rather than its individual members, and complained that it could no longer do so. Presumably, AC thought that negotiating with the AUCC would be advantageous compared to negotiating with universities directly. This statement and AC’s long history of negotiating with the AUCC reveal to futility of its argument about monopsony power. If the AUCC was an organization that enabled universities to exercise collective market power (or monopsony power), AC had no reason to complain when the AUCC notified it that it had no mandate to negotiate collectively. To the contrary, AC should have welcomed this development and should have been extremely pleased, because if the AUCC was a monopsony, negotiating directly with its members instead of their “collective” would allow AC to charge higher prices and earn greater profit. 27. Moreover, economically speaking, the charge that the AUCC exercises collective monopsony power implies that otherwise universities would be competitors in the purchase of licenses. This makes no sense. Universities do not compete with each other over the purchase of licenses. Furthermore, the economics of monopsony in the case of tangible assets is not readily applicable to the case of intangible assets like intellectual property. In the case of

11

AC Submission, Dec. 15, 2010, p. 7

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12 tangible assets, whose quantity is finite, competition between bidders tends to increase the asset price and encourages sellers to produce higher quantity. In such situations, collusion among buyers will allow them to exercise monopsony power, resulting in a lower selling price and lower quantity. The dynamics of bidding in the case of intellectual property, which, being non-rivalrous, can be provided without any limits on quantity, are not identical. Unless buyers bid over exclusive licenses, buyers do not compete over the purchase of such licenses, in the same manner that they compete over the purchase of tangible goods. As a result, it is not obvious what collusion among buyers means in such context and how monopsony power can be achieved. 28. AC’s repeated reference to “collective exercise of monopsony power” in its submission sounds like a fancy theory, but it turns out to be fanciful. AC fails to explain what monopsony power in this context is and how universities could achieve it. Moreover, AC does not explain the apparent puzzle of its eagerness to negotiate with this alleged “monopsony”. Therefore, the Board should dismiss this allegation in its entirety. V. AC’s misguided reliance on the Competition Act 29. In my previous submission I argued that Access Copyright's conduct amounts not only to “bad faith”, “misconduct” and “gross abuse of the collective administration of copyrights” as AUCC counsel wrote, and constitutes not only an “improper use of collective monopoly power” in some general sense. Indeed, the conduct complained of may as well constitute an “abuse of dominant position”, “tied selling”, as well as other types of deceptive or restrictive trade practices within the meaning of the Competition Act. I also noted that, to the extent that Access Copyright and its member/affiliate copyright owners or some of them have agreed or otherwise arranged that they would refrain from licensing their works independently, such conduct may amount to an offence under section 45 of the Competition Act, to which the immunity under section 70.5(3) of the Copyright Act will not apply. Alternatively, such conduct could at least be subject to an order under section 90.1 of the Competition Act. 30. I pointed out that AC’s practices may violate the Competition Act or constitute reviewable practices under it, but I did not ask the Board to make any finding in this regard. I explicitly stated my confidence in the Board’s ability to address the current concerns by amending the

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13 Interim Tariff without delving into a thorough analysis of the Competition Act and I did not propose that the Board conduct such an analysis at this stage. I did note, however, that while the Board does not need to decide whether AC has violated the Competition Act, it must not—unless absolutely necessary for fulfilling its own statutory mandate—issue rulings that mandate or endorse practices that contradict or disrupt the objectives and application of the Competition Act, lest that might be interpreted to give rise to immunity from the reach of the Competition Act that would not otherwise exist, and I proposed some specific language for that effect. 31. Like AC, I am prepared to address these issues in greater detail should the Board believe it of assistance, although my request was and is that the Board will clearly state that its order is not intended to replace or preclude any remedy available under the Competition Act or otherwise and should not be taken as the basis for any regulated conduct defence by AC or any of its members in any concurrent or subsequent proceeding in the Competition Tribunal or the courts on whatever basis and however arising. 32. AC seems to be confident that none of it and its affiliates’ activities engage any provisions of the Competition Act, and seems to adopt the view that the Copyright Act provides it broad immunity. If AC is correct, then it should have no objection to the clarification that I requested, as the clarification is not intended and cannot create any liability that does not otherwise exist. 33. I will leave it to AC and its counsel to determine how confident it can be in this regard, but for the Board’s assistance I wish to highlight that AC’s arguments regarding the applicability of the Competition Act in the present case have no merit. 34. AC’s reference to s. 75 of the Competition Act, as interpreted in the Warner case is completely beside the point. In the same way AC fails to distinguish between how the Copyright Act treats copyright owners when they exercise their rights independently and collectively, AC fails to recognize how the Competition Act distinguishes between unilateral and concerted exercise of IP rights. The current issue is not whether an individual copyright owner can be liable under s. 75 when it refuses to license the reproduction of its works, and it is common ground that generally a copyright owner has the right to refuse to license her work to a prospective licensee. However, the current issue is whether a concerted refusal to
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14 license and the collective decision of separate copyright owners not to issue licenses independently can implicate the Competition Act. S. 75 does not deal with this matter at all. To the extent that AC’s use of the plural in its statement that “copyright holders have the right to refuse to license their copyright to a prospective licensee” (my emphasis) is meant to suggest that as a general matter copyright owners can collectively decide to refuse to license the copyrights in their respective works with impunity, this statement is plainly wrong. The following statement from the IP Enforcement Guidelines issued by the Competition Bureau nicely clarifies this distinction: The unilateral exercise of the IP right to exclude does not violate the general provisions of the Competition Act no matter to what degree competition is affected. … The Bureau applies the general provisions of the Competition Act when IP rights form the basis of arrangements between independent entities, whether in the form of a transfer, licensing arrangement or agreement to use or enforce IP rights, and when the alleged competitive harm stems from such an arrangement and not just from the mere exercise of the IP right and nothing else.12 35. The AUCC application does not concern a unilateral exercise of an IP right, but a collective or concerted exercise of such right. Such collective or concerted exercise of IP rights is clearly subject to the general provisions of the Competition Act. 36. AC further argues that there cannot be any abuse of dominance or tied selling because the Board had already found that it lacks market power and because there is no evidence of any anti-competitive effect. These arguments too have no merit. 37. With respect, the Board’s remarks in the March 16, 2011 Reasons about AC’s lack of market power cannot be construed as a firm finding that AC has no market power, at least not as this term is understood in competition law. The fact that AC does not control the entire worldwide repertoire is not indicative in any way of the degree of market power that it possesses, and in any event the Board’s remarks were based on its belief that Institutions “remain free to deal directly with [AC’s] affiliates.” Even if such freedom would eliminate any market power held by AC (and I expressly do not concede that it does), the AUCC’s

12

Competition Bureau, Intellectual Property Enforcement Guidelines, Sept. 2000, para. 4.2.1.

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15 application concerns the narrowing of this very freedom to deal directly with AC’s affiliates, and the resulting increase in AC’s market power. The Board took AC’s word that competitive licensing options are available and was satisfied that as a result, AC will not be able to exercise its market power. AC’s cannot rely on this finding to justify the elimination of these competitive options for the purpose of exercising market power. 38. The anti-competitive effect of the practices complained of has been described in length in my and in the AUCC and the ACCC submissions. Other than flatly denying them and characterizing them as unfounded allegations, AC proffered no evidence to refute them, or explanation why the described anti-competitive effects are incorrect. Essentially, AC’s submission boils down to repeatedly saying “I didn’t do it” in the face of evidence to the contrary, and constant assertions of its entitlement to “do it”, without seriously engaging any argument to the contrary. 39. Similarly, AC’s assertions that sections 45 and 90.1 of the Competition Act are cannot apply to the present circumstances whether in law or based on the facts are based on flatly wrong propositions. As for the law, I did not argue that any collective or rightholder that acts pursuant to the collective administration provisions of the Copyright Act would be engaged in a hard core (criminal) cartel conduct, prohibited by s. 45 or reviewable under s. 90.1, nor have I argued that the Board would be guilty of facilitating such conduct. I had hoped that AC would give me more credit for my understanding of competition law. What I did argue is that to the extent that Access Copyright and its member/affiliate copyright owners or some of them have agreed or otherwise arranged that they would refrain from licensing their works independently, such conduct may amount to an offence under section 45 of the Competition Act, or could at least be subject to an order under section 90.1 of the Competition Act. The conduct that I referred to is not an act pursuant to the collective administration provisions of the Copyright Act, but extraneous to it. The Copyright Act permits copyright owners to file proposed tariffs and otherwise license their works collectively, but it neither compels nor expressly authorizes them to agree to refrain from licensing their works independently.13

13

See Apotex Inc. v. Eli Lilly and Co., 2005 FCA 361 (CanLII).

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16 Therefore, an agreement or an arrangement to that effect goes beyond what the Copyright Act permits, and therefore potentially subject to liability and scrutiny under the Competition Act. 40. Parliament has been well aware of the potential tension between the two acts in circumstances such as the current ones, and has been very careful not to grant sweeping immunity for collectives and their affiliate rightholders. In s. 70.5(3) Parliament provided that s. 45 of the Competition Act does not apply in respect of any royalties or related terms and conditions arising under an agreement filed in accordance with subsection (2). Notably, the immunity is only with respect to s. 45, but not from other provisions of the Competition Act; it exist only if an agreement was filed in accordance with subsection 70.5(2); and it applies only in respect of the royalties or related terms and conditions arising under an agreement with a user. Therefore, the immunity does not apply with respect to an agreement between the copyright owners themselves. Consequently, contrary to AC’s assertions, the horizontal aspects of agreements between copyright owners to collectively license their works are not categorically immune from scrutiny under the Competition Act. 41. In the same vein, when the Board determines the license fees and related terms and conditions in the course of tariff proceedings or arbitration proceedings, the lessening effect on competition of those fees, terms and conditions, cannot give rise to liability under s. 45 of the Competition Act because such fees, terms and conditions are set by the Board, performing its statutory duty, not by the copyright owners.14 That is why there is no explicit provision similar to s. 70.5(3) of the Copyright Act under such circumstances. At the same time, the lessening effect on competition of agreements between copyright owners to refrain from licensing their works independently is not a result of any Board’s decision. Since the Copyright Act neither compels such agreements, nor specifically authorizes them, such agreements are not immune from scrutiny under the Competition Act. 42. As for the facts, AC maintains that there is no evidence of any agreement between publisher affiliates not to license on a transactional basis, but as noted earlier, such evidence clearly

14

See Society of Composers, Authors and Music Publishers of Canada v. Landmark Cinemas of Canada Ltd, [1992]

60 F.T.R. 161, at para. 18.

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17 exists. AC further argues that its own decision not to license on a transactional basis is “a unilateral decision made by an incorporated entity, not an agreement amongst competitors or potential competitors”15 and therefore cannot be subject to scrutiny under s. 45 or 90.1 of the Competition Act. AC would like the Board to believe that competitors can collude with impunity by setting up an incorporated entity to act on their behalf. This is an absurd proposition, which, if accepted, would vitiate the conspiracy provisions of the Competition Act, not to mention common sense. Whether incorporated or not, a cartel is a cartel is a cartel. 43. I am mindful of the Board's rather unusual admonition in its order of June 17, 2011 (with respect to my “encouragement” that the Commissioner of Competition be requested, pursuant to s. 125 of the Competition Act to participate in the consideration of the issue of transactional licenses) that “parties will refrain from commenting in any way on the abovereferenced encouragement”, and I will refrain from pursuing this encouragement at this point.16 44. Nevertheless, the competition law issues arising from this application alone are clearly very substantial and controversial. Indeed, the great length, detail and intensity of AC’s protest concerning the applicability of competition law to the issues currently at hand confirm the essential importance of such issues and belie the validity of AC's blatantly defensive posture with respect thereto. Therefore, in order to avoid all manner of potential controversy and delay, I respectfully suggest that the Board issue the most narrow possible ruling in this instance that would avoid any reliance on the Competition Act and which could possibly be construed as a precedent in competition law or as a regulated conduct defence.

15 16

AC Submission, p. 16. That said, it is clear from s. 125 of the Competition Act that the Commissioner of Competition need not wait to be

asked by a request or invitation from the Board in order to become involved in these proceedings, and indeed, the Minister of Industry can simply direct that she do so. Such a direction would clearly be binding not only on the Commissioner but also on the Board.

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18 45. I respectfully believe that my suggested remedy at the end of this submission, which is intended purely and simply to give effect to what the Board considered to be essential features of the Interim Tariff in this matter, would be just such a narrow result. This proposed remedy would achieve a limited but essential purpose without raising enormous, unnecessary and premature competition law concerns and without implying a regulated conduct exception. VI. The challenges presented by digital cannot be adequately addressed through transactional licenses 46. There is some merit in AC’s position that transactional licensing—to the extent that it means licensing on a per-copy basis—may not be the most cost-effective licensing model for copies made in digital form. To some extent, this claim echoes the concern I raised in my previous submission, namely that the remedy sought by the AUCC might lead to enormous liability, and require intrusive, extensive and expensive monitoring and reporting requirement. 47. Nevertheless, AC overestimates the issue, and draws the wrong conclusions. In part, this is a result of an ambiguity surrounding what the terms “transactional license”, “blanket license”, etc. exactly mean. There seems to be confusion in all parties' submission between the scope of a license (i.e., the works which it authorizes to copy) and the basis for calculating the associated fees (e.g., on a flat-fee basis, per-copy, etc.) In other part, AC relies on this ambiguity to rationalize licensing practices that cannot be justified. 48. Obviously, a blanket license, whereby a licensor gives permission to use each an every work in a given repertoire, in return to a fee that is irrespective of actual use is the easiest license to administer. Blanket licenses of this type, however, may, but need not necessarily, be granted by a collective society. When collective societies grant blanket licenses they typically cover the entire repertoire of works that the collective administers. However, a blanket license can be granted by individual copyright owners (e.g., a publisher granting a blanket license for its entire repertoire or a subset thereof), or they can be granted by other market intermediaries (e.g., a license granted by Westlaw to make copies of all the works in its collection). Moreover, a blanket license, thus defined, can be granted for an extended period and cover non-specific uses, or they can be granted on an ad hoc, or “transactional” basis (e.g., an

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19 organizer of a one-time event approaching SOCAN seeking a license to publicly perform any work from SOCAN’s repertoire, or approaching EMI and seeking a license to use any work from EMI's repertoire). Furthermore, a blanket license can encompass an entire repertoire, but in return to a fee calculated on a per-use basis (e.g., copy any work from the licensor’s repertoire, but pay according to the actual number of copies made). 49. It is also obvious that absent an automated tracking and reporting system, a per-work-per-use license may not be cost effective for both copyright owners and users, regardless of whether the licensor is a collective society, an individual copyright owner or a market intermediary. 50. Therefore, I am inclined to sympathize with AC’s reluctance to issue (and being compelled to issue) licenses whose fees are calculated on a per-copy basis. This, however, does not imply that the only option available to Institutions should be an annual flat-fee blanket license issued by AC, covering its entire repertoire. 51. Indeed, the cost saving associated with a blanket license can be realized not only by AC, but by many of its publisher members. In fact, increasingly, this is becoming the common practice by publishers, who license their entire repertoires on a blanket basis. At the same time, it cannot be concluded a priori that any request by an Institution to copy specific work and pay a flat fee is costly ineffective, or that a request to copy any repertoire work but pay on a per-use basis is costly ineffective, or that a request to copy specific works and pay on a per-use basis is costly ineffective. 52. It is virtually impossible to determine a priori which type of license is optimal for which situation, and one of the advantages of a competitive licensing marketplace is its ability to tailor optimal licensing options. At the same time, it is entirely clear that allowing copyright owners to eliminate competition between them and offer a comprehensive blanket license on an all-or-nothing basis can be highly profitable for them and detrimental to their licensees. Emphasizing this point and asking the Board to impose conditions that maintain the advantages of collective licensing while preventing its detrimental effects is neither

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20 “lobbying for legislative changes to the general collective regime under the Act”,17 nor an attempt to “counteract the authority Parliament has granted to collective societies.”18 To the contrary, it is exactly the type of regulation envisaged by Parliament and characterized by the Supreme Court as the raison d'être of the collective licensing regime, as I noted earlier. 53. Regrettably, AC dedicated the section entitled “Professor Katz’s suggested remedy” to yet another attack on the idea that the law sets limits to the collective exercise of copyrights and to another flat but empty denial of any wrongdoing, but did not engage at all with the proposed remedy on its merits. Apparently, AC cannot provide any counter argument to my proposed remedy, which enables realizing the benefits of collective licensing where they exist, while maintaining viable competitive alternatives. Rather than conceding that I have proposed a measured and reasonable solution to the current situation, which is true to what Parliament has envisioned in enacting both the Copyright Act and the Competition Act, and is also responsive to some of its own concerns, AC decided to repeat its astonishing claim that I have difficulty accepting Parliament’s decisions. VII. Conclusion and Requested Remedies

54. As I have explained in my earlier submission, while I support the AUCC’s diagnosis of the problem, I disagree with the remedies it asks the Board to prescribe. I believe that ordering AC to grant transactional licenses on a per-copy basis will not be the optimal solution to the problems or the needs and the interests of Institutions so aptly described by AUCC counsel, and might, over the longer run, aggravate the problem. While I am confident that this was not the AUCC’s intention, I believe that the remedy that it proposes could inadvertently backfire and serve the interests of AC to the detriment of Canadian academic institutions. 55. I also agree with AC that ordering it to grant transactional licenses calculated on a per-page basis will impose an unnecessary administrative burden on both AC and Institutions. In

17 18

AC submission, p. 3. AC submission, p. 17.

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21 addition, a royalty rate of $0.10 per page is extremely high, and might easily accumulate to astronomical license fees when digital copies are made. 56. Therefore, I fully support AC’s proposal to remove the digital copying option from the Interim Tariff. It is noteworthy that most, if not all, objectors opposed to the inclusion of the digital option in the Interim Tariff, believing that the advantages of collective licensing do not exist in the evolving digital realm and that a competitive marketplace for digital licenses provides superior alternatives to AC’s licenses, and questioning whether AC has any meaningful repertoire of digital rights at all. Indeed, had the digital option not been included in the Interim Tariff, the current controversy likely would not occur. AC’s proposal to remove the digital option presents a rare moment of consensus in these proceedings, and the Board should have no difficulty accepting it. 57. In addition, in order to ensure that alternative and competitive licensing options exist and that the Interim Tariff does not become de facto mandatory, the Board should require AC’s members and affiliates to grant licenses for the copying of their respective works, on reasonable terms, and keep AC out of this area. For this purpose I propose the following language: 2.4 Upon request of an Institution, every rightholder whose works are part of Access Copyright’s repertoire, shall grant to the Institution a license to make a Copy or Copies of a specific work or works of that rightholder: (a) the license fees and relate terms and condition for such a license will be negotiated in good faith between the Institution and the rightholder or an agent for the rightholder. For the purpose of this section, Access Copyright shall not be regarded as an agent or a rightholder; (b) a rightholder shall not unreasonably deny such request by an Institution; and (c) Access Copyright shall not prevent, discourage or otherwise interfere with the grant of such licenses, and shall not attempt, directly or indirectly, to influence the license fees negotiated or the related terms and conditions. 2.5 Without prejudice to any other remedy available to it, an Institution believing that a request pursuant to section 2.4 has been
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22 unreasonably denied, or that the rightholder has not negotiated in good faith (for example, by not responding or delaying responses, or offering, having regard to industry practices and the rightholder’s licensing practices in other contexts, unreasonable license fees and related terms and conditions), or that Access Copyright acted contrary to subsection 2.4(c), shall notify the Board that it was unable to obtain a license under section 2.4. (a) Upon such notification, the Institution will be deemed to have been granted a royalty free license to copy the requested work or works; (b) the license referred to in subsection (a) shall stay in force until the Board rules otherwise, upon an application by the rightholder, and after being convinced that the rightholder negotiated in good faith, that the license had not been unreasonably denied, and that Access Copyright did not act contrary to subsection 2.4(c). 2.6 For greater clarity, for the purposes of sections 2.4 to 2.6, a rightholder with respect to a work means any person who has authorized Access Copyright to act on his behalf for the purpose of licensing his work or works, irrespective of whether that person is the owner of the copyright or any other interest in it. 58. I would note that the Board clearly has jurisdiction to issue such a ruling as suggested because AC is nothing more, for present purposes at least, than the voice and arm of its members and affiliates. If these entities and persons have presumably authorized AC to collectively administer their copyrights, and to take the position it is now does, they have placed themselves clearly and squarely under the Board's jurisdiction, and voluntarily acquiesced to be bound, (with respect to the works they empowered AC to administer) by whatever licensing terms and conditions the Board determines necessary. 59. I also request that in its order, the Board will explicitly state that its order is not intended to replace or preclude any remedy available under the Competition Act or otherwise and should not be taken as the basis for any regulated conduct defence by AC or any of its members in any concurrent or subsequent proceeding in the Competition Tribunal or the courts on whatever basis and however arising. 60. If, despite the above, there are concerns that, absent AC’s intermediation, Institutions will not be able to transact with publisher or through other market intermediaries, Access Copyright’s

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23 role should be limited to that of a broker or mere agent, facilitating transactions between users and owners, but under terms and conditions that are set independently by the copyright owner and not by Access Copyright, not even on a default basis.19 This requirement is necessary in order to ensure that the alternative of securing licenses through the market remains as competitive as possible, and that Access Copyright does not become a tool for facilitating collusion or coordination among those copyright owners who choose to use it as their licensing agent. 61. I believe that the remedies and proposed changes to the Interim Tariff adequately solve to issues raised by the AUCC application, they ensure that the benefits of collective licensing will be realized where appropriate, and that a competitive and vibrant marketplace for licensing works remains a viable option in Canada, for the benefit of rightholders, academic institutions, instructors, researchers and students.

Yours respectfully,

Ariel Katz

19

This means that Access Copyright should not be permitted to set default terms that apply unless the copyright

owner specifies other terms.

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