The Federal Court recently released its decision on a motion to determine questions of law arising out of an action by a group of mobile service providers. The action involved the return of approximately $15 million in royalties on ringtones that the plaintiffs claim were wrongfully collected and distributed by SOCAN. The Honourable Mr. Justice O’Reilly held that SOCAN was not required to return the royalty monies. The decision is currently under appeal.

The plaintiff mobile services providers claimed that two 2012 decisions of the Supreme Court regarding music downloads1 invalidated SOCAN’s tariff on ringtones. The plaintiffs argued that, since ringtones are also distributed as downloads, SOCAN’s tariff was void and that SOCAN was unjustly enriched. The plaintiffs argued that SOCAN ought to repay approximately $15 million in royalties that it had collected since 2003 pursuant to the tariff.

SOCAN argued that the decision of the Copyright Board to certify the tariff was res judicata and that the plaintiffs had already exhausted their rights to appeal. The plaintiffs had even entered into an agreement with SOCAN to extend the term of the certified tariff. Furthermore, SOCAN argued that, it was not clear that the decisions of the Supreme Court could be applied to ringtones, and even if they could, SOCAN was not enriched by collecting royalties pursuant to the tariff. SOCAN collects royalties on behalf of its members and the majority of the ringtones royalties had already been distributed. In any event, any enrichment that may have resulted was justified. The juristic reason for the enrichment was the certified tariff, which had been certified by the Copyright Board, affirmed by the Federal Court of Appeal and which, until 2012, all parties viewed as valid.

Justice O’Reilly agreed that SOCAN had not been unjustly enriched and that the plaintiffs were not entitled to repayment of the royalties collected before the release of the two Supreme Court decisions on downloads. Until the release of the two Supreme Court decisions, SOCAN was not put on notice that the legal basis for the ringtones tariff was in jeopardy. Thus, the tariff constituted a juristic reason for the payment of the royalties. Since the plaintiffs stopped paying royalties after these decisions were released, no repayment was necessary.

In reaching this conclusion, however, Justice O’Reilly rejected SOCAN’s arguments based inres judicata and estoppel. Justice O’Reilly held that, due to the Copyright Board’s power to vary its own decisions,2 decisions of the Board are “never really final” and, as such, cannot give rise to issue estoppel. Similarly, Justice O’Reilly held that the plaintiffs were not estopped by their agreement with SOCAN to the terms of the ringtones tariff for the years 2006-2013. Tariffs are often certified pursuant to agreement and this ruling may affect how collective societies draft future agreements. 

Justice O’Reilly’s decision also dealt with equitable tracing orders. The plaintiffs had claimed a tracing order to enable them to recover royalties that had already been distributed by SOCAN to its members, in reliance upon the agreement that SOCAN had reached with the ringtones providers. SOCAN argued that to trace distributed royalties into the hands of SOCAN’s members (Canadian composers and music publishers, and affiliated foreign performing rights organizations) would be unfair and contrary to the principles of equity. At the time the distributions were made, SOCAN was acting on the bona fide belief that the tariff was valid. Furthermore, SOCAN’s members likely had either spent the money (in the case of individual composers) or further distributed it (in the case of affiliated PROs).

Despite these arguments, Justice O’Reilly mused that “[h]ad the plaintiffs continued to make royalty payments after the Supreme Court of Canada issued ESA and Rogers, a tracing order might have been justified in order to permit them to recover those payments.”

In our view, Justice O’Reilly’s decision could be seen as endorsing the emerging practice of copyright users of ceasing royalty payments based on their legal position on the applicability of a tariff before seeking a determination on that position either in the Courts or before the Board. In this case, the plaintiffs simply stopped paying royalties on ringtones once the Supreme Court had rendered its decisions in an unrelated case. In the plaintiffs’ view, these decisions nullified the ringtones tariff; however, this assertion had not been legally tested.

This practice, along with Justice O’Reilly’s conclusion that tariffs certified by the Board are “never really final”, creates real difficulty for the collective societies who are charged with administering copyright in accordance with Board-certified tariffs.  If they cannot rely on settlement agreements and Board decisions (particularly decisions that have been upheld on appeal), how can a collective society safely proceed to distribute the royalties it has collected? And if distributed funds can subsequently be traced into the hands of the members of a collective society, can those members safely enjoy the compensation they have received for the use of their creative works?

The plaintiffs have appealed the decision denying them recovery of the $15 million in royalties paid to SOCAN and distributed by SOCAN to its members. SOCAN has filed a cross-appeal on the other aspects of the decision.