The Supreme Court recently rejected the application of a hypothetical licence fee to calculate reasonable compensation for massive copyright infringement through the operation of an illegal streaming site. The decision raises several interesting questions, including to what extent an infringer's illegal business model should be taken into account when calculating reasonable compensation.

Facts

Dreamfilm was one of the largest illegal streaming sites in Sweden. When it was shut down by the Swedish police, the site had approximately 1,000 free movies available for streaming. In the criminal case against Dreamfilm's operators, a Swedish rights holder joined as an injured party seeking damages for copyright infringement. In what the rights holder likely viewed as a pilot case to gauge the amount of damages that could be awarded on a per-movie basis, damages were sought for only one movie for which the rights holder held the copyright.

The district court sentenced the operators to prison and ordered them to pay damages of approximately €125,000 to the rights holder. The appeal court gave them conditional sentences instead of prison time; however, it increased the damages to approximately €400,000.

Regrettably, such differing damages awards, based on the same evidence and calculated according to the same legal principle, are not uncommon in Swedish cases of this kind. Calculating damages in cases of massive online copyright infringement is notoriously complicated due to many unknown factors, such as how many illegal streamers would have legally streamed the movie or bought a physical copy had it not been available illegally.

Unhappy with the legal uncertainty created by this situation, the Supreme Court has shed some light on how one type of damages under Swedish copyright law, so-called 'reasonable compensation', should be awarded in similar cases.

Decision

Under Section 54 of the Copyright Act, anyone who commits copyright infringement must pay the rights holder reasonable compensation. Further, if the infringement is carried out intentionally or negligently, compensation must also be paid for additional damage caused by the infringement. Swedish litigants can also rely on the general provision in Chapter 35, Section 5 of the Code of Judicial Procedure, which states that if full proof of the extent of damages cannot be invoked, the court may estimate the damages at a reasonable amount.

In Swedish case law, the application of hypothetical licences which correspond with infringing use has long been championed as the most efficient way to calculate reasonable compensation. It is a good method in cases where the rights infringed are available on the open market. However, applying this principle to cases where there is no licensing market or licensing model that corresponds with the infringing use has proven problematic. Further, its use in cases against file-sharing services has resulted in notably different compensation levels for arguably similar infringements. For example, one court of appeals judgment considered €70,000 per movie reasonable compensation against The Pirate Bay, while another found €200,000 per movie reasonable compensation against Swefilmer.

In the case at hand, the rights holder based its claim for reasonable compensation on a hypothetical licence that was:

  • unlimited in time, number of views and geographical use;
  • free for viewers; and
  • free from copying safeguards (ie, a near-exclusive licence to the movie).

Such licences are rarely seen on the market. The rights holder argued that the licence fee for such a licence would need to cover all of the movie's production costs, plus 20% as a profit add-on.

The Supreme Court found the hypothetical licence too broad and not based on the defendants' use of the movie (ie, being time limited and covering only streaming). Such a broad licence is perhaps what the rights holder would have demanded to license the defendants' service, but it is not reasonable to think that it would have been accepted by the defendants. Interestingly, the court indicated that attempts to use a hypothetical licence as a tool to calculate reasonable compensation for infringement must take into account the infringers' illegal business model.

According to the court, the hypothetical licence in this case was too far removed from reality to serve as a tool for calculating reasonable compensation, which must instead be based on a model that accounts for the totality of the evidence invoked by the rights holder. In light of the disparate data points on the period of infringement, the lack of data on the number of streams, the rights holder's commercialisation of the movie and general licensing models for movie broadcasting and renting, the court deemed €40,000 to be reasonable compensation for the defendants' use of the movie's copyright.

Comment

It may seem surprising that the Swedish courts consider an infringer's illegal business model relevant when calculating damages for copyright infringement. However, under the Copyright Act, this principle makes sense. Claims for reasonable compensation that are based on a hypothetical licence must accord with a licensing model that bears a resemblance to a real-world licensing market. If no real-world licensing model corresponds with the infringing use, litigants must base their claim for reasonable compensation either on the more nebulous basis suggested by the court in this case (ie, the court makes an educated guess based on the totality of evidence) or on additional damage.

In practice, if the evidence invoked to substantiate damages is strong, it will make little difference to litigants whether the claim is based on reasonable compensation or additional damage. Further, as operators of illegal file-sharing or streaming sites have usually infringed the rights of hundreds (if not thousands) of movies by the time they are caught, litigants may simply base their claim for reasonable compensation before the Swedish courts on approximately €40,000 per movie multiplied by the number of movies required to get as much money from the infringers as possible.

For further information on this topic please contact Hans Eriksson at Westerberg & Partners Advokatbyrå Ab by telephone (+46 8 5784 03 00) or email (hans.eriksson@westerberg.com). The Westerberg & Partners Advokatbyrå Ab website can be accessed at www.westerberg.com.

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