On 21 January 2019, the Swedish Supreme Court delivered a judgment regarding the assessment of the reasonable compensation which is payable due to a copyright infringement of a film work. Although the judgment specifically concerns the situation where a copyright protected work has been made available on an illegal streaming site, the court also presents interesting views on related issues, such as the relationship between reasonable compensation and damages, and the burden of proof. The case is also interesting as the right-holder chose to pursue reasonable compensation regarding only one of many film works infringed.
Facts of the case and the legal framework
According to the Swedish Act on Copyright in Literary and Artistic Works (the “Copyright Act”), anyone who exploits a work in violation of the act must pay a reasonable compensation to the creator or his or her successor for the exploitation. The liability to pay reasonable compensation applies regardless whether the infringer acted in good or bad faith, and whether the copyright owner has suffered any actual losses. These provisions of the Copyright Act are based on article 13 of Directive 2044/48/EC on the enforcement of intellectual property rights.
Under Swedish law, the reasonable compensation of copyright protected works is usually determined based on applicable tariffs or other industry-specific models. In these cases, a so-called hypothetical licence fee is determined as if the parties involved would have beforehand entered into an agreement regarding the compensation for an exploitation of the work which is equal to the actual, illegal exploitation. If no established calculation principles exist for the exploitation in question, the copyright holder’s claim may instead be calculated by simulating a fictional licence agreement concerning the exploitation of a work of the present kind and under the same circumstances. As a last resort, if the circumstances do not allow for any of the above calculation methods, the court may determine the compensation with consideration to the evidence presented by the parties. Furthermore, additional compensation, e.g. damages for loss of profit, may be awarded provided that the exploitation has been carried out intentionally or with negligence.
The case before the Supreme Court concerns two individuals who have been found guilty of copyright infringement in criminal proceedings. Between December 2013 and January 2015, the individuals had made 45 film works, to which a Swedish film company held the copyright, available to the public on an illegal streaming website. The civil part of the proceedings in question concerned the amount of the compensation for the exploitation of one of the film works. The reason for this is that the plaintiff pursued a precedential judgment concerning reasonable compensation for unauthorised exploitation of only one film work.
In the first instance court proceedings, the copyright owner had claimed SEK 9 million (approx. EUR 900 000) as compensation for the infringement of the sole film work. Of the amount claimed, 8 million related to reasonable compensation for the use of the work whereas the remainder related to damages, including loss of profit. According to the film company, the rationale for the claimed reasonable compensation was that the amount should correspond to the fee for a licence granting the right to freely make the film available to the public on the internet. However, since no such licences actually existed on the market, the film company asserted that the amount should be estimated based on what a fictional licensee would have had to pay for such a licence. In support of its claim, the film company invoked an expert opinion by two persons with extensive experience within the film industry. The experts concluded that the fictional licence would be equal to the whole production costs and an additional 20 percent profit margin. Since the production costs for film in question were approximately SEK 20 million, the licence fee could theoretically be as high as SEK 24 million. However, according to the film company, a cautious valuation of a licence fee in this case could be estimated to SEK 8 million.
The first instance court held that the calculation method applied by the film company had several deficiencies as it was, inter alia, based on an unfamiliar distribution model and could not be performed with regard to how the market worked. The reasonable compensation was therefore set to SEK 1 million (and SEK 50 000 for damages for loss of profit). The court of appeal, on the other hand, found that the calculation method itself could be applied. However, the court had doubts regarding the value of the film to the copyright holder during a fictional licence negotiation. The court of appeal held that the film company had not shown that the reasonable compensation should amount to SEK 8 million, and instead concluded that a sensible estimate was SEK 4 million. No damages were awarded since the film company had not shown that the loss of profit exceeded the reasonable compensation.
Decision of the Supreme Court
The specific question before the Supreme Court was how reasonable compensation should be determined in relation to the illegal exploitation of a film work. A key question in this matter is the relationship between reasonable compensation and damages. According to the court, the reasonable compensation could be higher as well as lower than the actual damage or loss incurred due to the exploitation. Also, if the right-holder is entitled to both reasonable compensation and damages, it must be clarified that the assessment of the damage does not include what is already covered by the compensation for the exploitation.
Regarding the evidentiary requirements related to copyright compensation, the court stated that reasonable compensation for an exploitation should be considered as a common price for a grant of a right to the exploitation. The right-holder must demonstrate what such a common price could be, or, if a common price is missing, the circumstances which are decisive for the court’s assessment of what could be a reasonable compensation. However, the question whether the compensation is reasonable or not, always remains a legal issue.
Keeping in mind that fictional licences are based on an assumption that the parties in a negotiation situation will have agreed on a certain licence fee, the court presented a number of deficiencies related to the calculation method asserted by the film company. According to the court, it could be held for sure that a negotiation between a copyright owner and a licensee, whose business model was to offer streaming services from a large film catalogue for free, could not have led to an agreement where the licence fee for one film would amount to SEK 4 million. The court also stated that the fictional licence grant was deficient as it was not based on the fact that the actual exploitation had been limited in time and only concerned transfer to the public via streaming. Instead, the film company’s starting point had been a licence grant for an eternal and unlimited “full-licence” with a licence fee based on the film production costs and profitability.
Since there was no established compensation model applicable to the exploitation in question, the Supreme Court decided that the compensation be determined with regard to the evidence produced by the parties. The film had not been subject to theatrical release and was instead released on DVD as well as on one of the film company’s streaming sites. It was also shown on television six months after the initial release. In this regard, the court noted that the demand for a film is usually very high when it is released, but shortly thereafter, it decreases rapidly. The film in question had been made available by the defendants for 13 months on a well-known illegal streaming site – however, it should be noted that the film was also available on other illegal streaming sites.
Turning to the evidence presented by the film company, the court held that a large part of the information regarding for example the number of legal transactions, the profits made by online film-rental distributors, the proportion between legal and illegal consumption, had to be assessed with great caution – including the information that a film licence for pay television or free television often amount to between SEK 500 000 and SEK 1.5 million. The court further noted that there was no investigation on the number of occasions where the film had illegally been made available through the streaming site or the time during which the legal transactions had taken place. Further, the court found reasons to believe that other information, for example with a clearer connection the film company’s own use of the work, could have been presented. However, the court acknowledged that it was clear that certain relevant information could not be obtain without difficulties.
From the judgment, a number of factors can be identified as relevant for the assessment of the reasonable compensation for illegal exploitation: the time during which the infringement lasted; when and in which forms the film was legally made available by the film company and other actors; information about existing licence fees, the actual sale, and illegal streaming; the income (once related costs for online rental has been deducted). Assessing and weighing all these aspects, the Supreme Court found that a reasonable compensation in this case was SEK 400 000 (approx. EUR 40 000), i.e. no more than one tenth of the compensation granted by the court of appeal.
The problem arising in cases like the present one clearly is that a plaintiff cannot claim reasonable compensation on the basis of a right to dispose a copyright protected work which the parties in a negotiation would never had agreed on. Usually, it is not difficult to determine the amount of the reasonable compensation – provided that there are established tariffs or fee models. When such common practice is missing and no solid basis for calculation can be relied upon, the Supreme Court judgment shows that the plaintiff must make its case and calculations on other related factors. However, the judgment stops plaintiffs from presenting factors and sequences of events which are too hypothetical. In the present case, it can be also noted that the awarded reasonable compensation for one film (SEK 400 000) is close to the lower end of the presented range of a pay/free television film licence (SEK 500 000).
Right-holders now have exemplifying case law which sheds light on the basis for calculating the reasonable compensation, in comparison to the already existing criteria in the Copyright Act regarding the assessment of additional damages. As a litigation attorney, it is apparently important to present a case closely related to the actual infringing actions and to produce evidence which, inter alia, has a clear connection to the plaintiff’s own use of the invoked copyright protected work.