Pre-appointment Disclosure - a debatable amendment to the UK's Arbitration Act 1996

On 6 September 2023, the Law Commission for England and Wales published its Review of the Arbitration Act 1996: Final report and Bill. The Commission notes "the consensus that the Act works well, and that root and branch reform is not needed or wanted", but nonetheless proposes amendments. One would insert a new section 23A on "Impartiality: Duty of Disclosure". This amendment tries to address the position of potential arbitrators, creating a legal duty of disclosure on them before they have been appointed as arbitrators. This approach seems problematic as a matter of principle and questionable in its proposed implementation.

Background

Section 33(1) of the United Kingdom's Arbitration Act 1996 provides that an arbitrator "shall... act fairly and impartially as between the parties." In Halliburton Company v Chubb Bermuda Insurance Ltd [2020] UKSC 48, the UK Supreme Court held that this implied a duty on the arbitrator to disclose to the parties any circumstances that might reasonably give rise to a conclusion by an objective observer that there was a real possibility of bias on the arbitrator's part in relation to the dispute (per Lord Hodge, para. 153). A party to an arbitration may apply to the court for the removal of an arbitrator where "circumstances exist that give rise to justifiable doubts as to his impartiality" (s. 24(1)). According to Halliburton, this is an objective test (paras 52-55).

The new section 23A

The Law Commission's new section would read as follows:

23A Impartiality: duty of disclosure

(1) An individual who has been approached in connection with their possible appointment as an arbitrator must, as soon as reasonably practical, disclose to the person exercising the power of appointment any relevant circumstances of which the individual is, or becomes, aware.

(2) An arbitrator must, as soon as reasonably practical, disclose to the parties to the arbitral proceedings any relevant circumstances of which the arbitrator is, or becomes, aware.

(3) For the purposes of this section— 

(a) “relevant circumstances”, in relation to an individual, are circumstances that might reasonably give rise to justifiable doubts as to the individual’s impartiality in relation to the proceedings, or potential proceedings, concerned, and

(b) an individual is to be treated as being aware of circumstances of which the individual ought reasonably to be aware.

This would be a "mandatory provision" within s. 4(1) of the 1996 Act. It would "have effect notwithstanding any agreement to the contrary". Parties would hence be unable effectively to modify the requirement, whether of their own volition or at the request of any potential arbitrator.

The new s. 23A(1) takes its inspiration from Article 12(1) of the UNCITRAL Model Law on International Commercial Arbitration, which provides:

(1) when a person is approached in connection with his possible appointment as an arbitrator, he shall disclose any circumstances likely to give rise to justifiable doubts as to his impartiality or independence. An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall without delay disclose any such circumstances to the parties unless they have already been informed of them by him.

However, the Model Law does not in terms impose any "duty" on the potential arbitrator.

The Arbitration (Scotland) Act 2010, which is based on the Model Law, addresses the same issue in Schedule 1, rule 8:

8 (1) This rule applies to—

(a) arbitrators, and

(b) individuals who have been asked to be an arbitrator but who have not yet been appointed.

(2) An individual to whom this rule applies must, without delay disclose—

(a) to the parties, and

(b) in the case of an individual not yet appointed as an arbitrator, to any arbitral appointments referee, other third party or court considering whether to appoint the individual as an arbitrator,

any circumstances known to the individual (or which become known to the individual before the arbitration ends) which might reasonably be considered relevant when considering whether the individual is impartial and independent. [Emphases added.]

Scope of persons bound

The Scottish Act says that the candidate arbitrator "must" (i.e., shall) make the relevant disclosure. It is not clear whether this "must" is anything more than directory. In this context one might recall Lady Arden's concurring opinion in Halliburton, in which she said in relation to the "duty of disclosure" of an arbitrator:

"There is scope for debate as to whether it is a duty at all in the strict sense. The duty [to disclose related arbitral appointments] only arises if the arbitrator wants to take a further appointment in a different arbitration." (para. 161)

It will be noted that whereas the Scottish Act refers to "individuals who have been asked to be an arbitrator", the Law Commission's amendment imposes its "duty" on any "individual who has been approached in connection with their possible appointment as an arbitrator".

The idea is hence that when someone is contacted with a view to possible appointment as an arbitrator, that person comes under a legal duty to disclose potentially sensitive details about his prior dealings and, if he is a partner, for example, those of his law firm. The enquirer is under no obligation to appoint the potential arbitrator from whom it has received the requested disclosure. In contrast with the Scottish Act, the enquirer does not even have to have asked the candidate arbitrator to accept the appointment.

Modification of the duty?

The candidate arbitrator will seek in vain to negotiate the scope of his disclosure, by reason of the status of the new section as "mandatory" under s. 4 of the 1996 Act. Section 23A will "have effect notwithstanding any agreement to the contrary". The parties to the arbitration agreement cannot effectively limit the required disclosure by the candidate arbitrator, even though Lord Hodge said in Halliburton that under the present Act the parties could do so (paras 136-7), no doubt because the duty of disclosure of disclosure of an appointed arbitrator arises simply as an offshoot of the general obligation of fairness under s. 33 of the 1996 Act. This might affect partners in large, international firms for whom the task of checking firm conflicts is burdensome or emergency arbitrators who do not have time to carry out a full conflicts check.

Functional relevance

Is the s. 23A duty a legal duty "in the strict sense"? The general duties of arbitrators in English-seated arbitrations post-appointment, whether deriving from contract or status, can be enforced against them by injunction (see, e.g., Compagnie Européene de Cereals SA v Tradax Export SA [1986] 2 Lloyd's Rep. 301; Cole v Silvermills Estates and Land Ltd [2012] S.C. 1), even if s. 29 gives them immunity from liability for acts done in good faith; and, subject to that immunity, by claims for damages. Some jurisdictions provide less protection against suit than England (see: Born, Gary B., International Commercial Arbitration, Ed. 3, Kluwer Law International, §13.05[A]).  

Although it is difficult to imagine a disappointed party suing a candidate arbitrator for failing to disclose a conflict, it is not impossible.  If an arbitration were delayed for several months by reason of the late disclosure of a conflict by a candidate arbitrator who never in fact was appointed, a trouble-making party might bring a claim.  But the difficulty of identifying a case in which a legal duty "in the strict sense" would have to be enforced encourages doubt as to whether such a duty is actually useful.

If the pre-appointment obligation introduced by s. 23A is not to be enforceable as a strict duty, it is hard to see how it would be enforced. Notably, non-compliance with the s. 23A duty has not been added as a ground for removal of an arbitrator under the 1996 Act.

This brings us back to the supposed function of the new provision. In order to remove an arbitrator for bias it is still necessary to show "that circumstances exist that give rise to justifiable doubts as to his impartiality" (s. 24(1)(a), 1996 Act). To set aside an award on grounds of serious irregularity, it is still necessary to show "failure by the tribunal to comply with section 33 (general duty of tribunal)" (s. 68(2)(a), 1996 Act). Aside from the marginal point that the mere failure to disclose relevant information may in itself support an allegation of partiality, the new section provides no functional link between the hypothetical duty of a potential arbitrator under s. 23A and the objective of preserving the impartiality of the arbitrator once appointed. So the creation of the duty would seem essentially irrelevant. If the objective is to obtain conflict information prior to appointment, why can parties not just ask for it? And add a warranty to the arbitrator's contract, if it concerns them, in the event the party proceeds to appointment?

If one insists on an explicit and effective connection between non-disclosure and the actual terms of the 1996 Act, it could be achieved without creating a duty. One could simply include a presumption that an arbitrator's failure to disclose a relevant fact on being requested to serve or during his appointment will give rise to a presumption that "circumstances exist that give rise to justifiable doubts as to his impartiality" (s. 24) and that there has been "failure by the tribunal to comply with section 33 (general duty of tribunal)" (s. 68). Such a solution was adopted in s. 12(e) of the Revised Uniform Arbitration Act of the United States National Conference of Commissioners on Uniform State Laws (2000), which provides:

An arbitrator appointed as a neutral arbitrator who does not disclose a known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party is presumed to act with evident partiality under Section 23(a)(2) [court's power to vacate award].

However, as will be evident from the above, this does not seem to me to be a very pressing reform.

Incidentally...

As Lady Arden observed in Halliburton, "the conclusion that as a matter of the law of England and Wales an arbitrator is to be treated as aware of a conflict of interest of which he is not actually aware would on the face of it take English and Wales beyond Scots law, which appears to require actual awareness" (para. 162). Despite citing this observation, the Law Commission comes down in favour of the test of constructive knowledge, driving a wedge between English and Scottish law. Given that the issue is the preservation of impartiality, one might wonder how an arbitrator could be influenced by facts about which he is ignorant... But that is a debate for another day.

Back to London

 

  

After nine and a half years at the World Intellectual Property Organization in Geneva, I have come back to London to practise as a lawyer, arbitrator and mediator.  I had lived in Brussels for several years when I worked at the Motion Picture Association, so I was accustomed to a French-speaking environment.  Although I had made many visits to WIPO over the years, it was a new experience, and an educational one, to work in an intergovernmental organization in the United Nations system.

The defects of bureaucracies are well-known, but of all the UN specialised agencies, WIPO seems to be among the most useful.  As a result of some of the international treaties which it administers, WIPO streamlines the registration of patents, trade marks, designs and geographical indications.  It runs other niche programs such as WIPO ALERT, which was my own project to improve information sharing about copyright piracy with the advertising sector.  Now in the hands of my talented former colleagues at WIPO, the concept may grow to encompass cooperation with other actors in the online environment which are in a position to help secure the rule of law in cyberspace.  So much can be achieved by voluntary cooperation by good-faith actors in the online sphere.

No longer subject to the requirement of neutrality applicable to an international civil servant, I plan to make the occasional foray into the public sphere with comments on legal and policy issues which catch my attention.

Note: as I am currently acting as a Counsellor at the World Intellectual Property Organization, I am not updating the GR Blog.

Microsoft Xbox One: Regulatory puzzles in a converging marketplace

On Thursday, 12 September 2013, the Royal Television Society's Cambridge Conference heard Nancy Tellem, Microsoft's Entertainment & Digital Media President, explain the thinking behind the Microsoft Xbox One console, due for release on 22 November 2013. Xbox One is a "state of the art gaming console, a new generation TV and movie system, and a whole lot more". Gaming, internet browsing, Skype telephony and watching films and television all take place through a single set-top box. Users can rapidly switch between uses or enjoy them simultaneously, using vocal or gestural controls. 

When I asked Nancy Tellem, who started her career as an attorney, where she expected Xbox One to be regulated, and whether as television or video game or both, she engagingly confessed that she "would have to get back to me". 

As the European Commission observed in its April 2013 Green Paper on convergence in audiovisual services, we are experiencing an "on-going transformation of the audiovisual media landscape, characterised by a steady increase in the convergence of media services and the way in which these services are consumed and delivered". Different set-top boxes and interfaces are vying to become the dominant gatekeeper to the digital household. Microsoft's new product seeks to do so by offering an immersive, highly interactive experience, breaking down the border between gaming and filmed entertainment. Microsoft proposes a truly interactive form of television. Understandably, they are beginning with a live action version of a popular game, Halo, created in partnership with Steven Spielberg.

Now, it is not clear precisely how interactivity will be integrated into these live action dramas, but it is obvious that elements of gaming will be part of the user experience. In the UK, the sale of computer games is regulated by the Video Recordings Act 1984 (as amended in 1994 and re-enacted in 2010). However, this does not cover streamed content, as there has to be a supply of a disc or other storage device before the Act bites. Similarly, the Video Recording (Labelling) Regulations 2012 apply only to physical carriers. While PEGI Online, a voluntary scheme for rating online games, is made available by the Interactive Software Federation of Europe, this important category of gaming is essentially unregulated (save by the law of obscenity). Xbox One will make the regulatory gap more troubling to policy-makers and parents alike.

However, the Audiovisual Media Services Directive 2010/13/EU, as implemented by Regulations in 2009 as part 4A of the Communications Act 2003 (further amended in 2010), envisages that EU Member States will regulate on-demand services which are "television-like". As the Xbox One service will involve "the provision of programmes the form and content of which are comparable to the form and content of programmes normally included in television programme services" (section 368(1)(a), 2003 Act), it seems likely (subject to the crucial jurisdictional question) that Microsoft will be subject to regulation by the Authority for Television on Demand and, in relation to advertising associated with its on-demand services, the Advertising Standards Association. Among the many requirements of the 2003 Act is this: "If an on-demand programme service contains material which might seriously impair the physical, mental or moral development of persons under the age of eighteen, the material must be made available in a manner which secures that such persons will not normally see or hear it" (s. 268E(2)). The Directive requires Member States not only to prevent advertising for tobacco products, control product placement, discourage discrimination and so forth, but also to require such services to promote "the production of and access to European works".

So the question is: in what circumstances would the UK have jurisdiction over Microsoft's Xbox One service? To (over)simplify a complex set of provisions, an EU Member State will regulate where the operator is substantially established in that state (either by having its head office there or, where the head office is in another Member State, maintaining a significant part of its relevant workforce there) or uplinks to a satellite from or uses satellite capacity appertaining to that Member State (unlikely to be relevant to Xbox One). 

Although Microsoft has staff working on this service in the UK, they might choose to deliver the service wholly from the US. Would that put them in the clear? Largely. However, the Xbox One service seems to be a "television licensable content service" within section 232 of the 2003 Act. Under section 329 of the 2003 Act, Ofcom can ask the Secretary of State to proscribe a foreign service that is "unacceptable" on grounds that it repeatedly contains matter which offends against taste or decency, or is likely to encourage or to incite the commission of crime, lead to disorder, or be offensive to public feeling. If an order is made, the service may not be included in a cable package - which might be a problem for Microsoft in sub-distributing their service, if that was what they hoped to do. So in practice in the event of concern on Ofcom's part as to the content of the Xbox one service, Microsoft would in fact find itself subject to regulatory pressure.

Be that as it may, the reality is that regulation of streamed services must surely come, even if they emanate from the US. As Professor Joel Reidenberg has argued for some years, it is clear that cyberspace will eventually be subject to regulation, even (or especially) in democratic countries. Recently the British Prime Minister, David Cameron, pushed ISPs to provide better protection for children. As technology and commercial innovation break down the borders between traditional product categories, the process of assimilation of the online to the offline world will accelerate. Xbox One seems to be a new challenge to those product definitions, and if it succeeds, regulatory change must be likely.

Ireland: Data Protection Commissioner loses in Supreme Court over GR

On 3 July 2013 the Irish Supreme Court gave its judgment in the appeal by the Irish Data Protection Commissioner ("DPC") in EMI Records (Ireland) Limited & ors v The Data Protection Commissioner [2013] IESC 34. Although this represents an endorsement of the voluntary graduated response scheme agreed between ISP Eircom and the record labels, the decision was based essentially on technical grounds. It offers an interesting example, however, of the attitude of an authority charged with enforcing data protection laws.

As described in an earlier post, EMI and other record labels had sued Eircom for participating in the infringement of copyright by its Internet access subscribers. The case was settled by a contractual GR scheme, under which an infringing user would on his third notification be suspended from Internet access for one week; after a fourth notification, Eircom would terminate his access agreement. The user was free to find another ISP if he could.

The DPC had taken the position that the conventional process of gathering anonymous data and its transmission and processing by Eircom was in some way an infringement of the rights of internet users under data protection law. The parties to the original action took the matter back to court to get a ruling on the issue, but the DPC refused to take part in it. He had asked the parties to pay his costs, win or lose, or at least not claim costs against him, which the parties had declined to agree. Nonetheless, Charleton J gave a judgment on the issue, robustly holding that there was no valid data protection objection to the GR scheme. 

Nothing daunted, the DPC issued an enforcement notice against Eircom under the Data Protection Acts 1988-2003, ordering it to stop operating the scheme. Eircom sought to appeal using the statutory procedure and the labels sought to be joined in that appeal. In an impressive display of fairmindedness, the DPC opposed their joinder, demanding in any event that the labels agree that they would receive no costs if allowed to take part. The labels, who had no automatic right to participate in the appeal, applied for judicial review of the enforcement notice, alleging that the DPC was wrong in law and, in any case, had failed to state any reasons in his notice (a requirement under the Data Protection Acts).

On 27 June 2012 Charleton J ruled on the judicial review application ([2012] IEHC 264), holding that the enforcement notice was bad in law, confirming his earlier analysis that peer-to-peer enforcement involved no breach of privacy, and held that the notice was bad in any event for lack of reasons.

The Supreme Court has now confirmed his decision, affirming that the lack of reasons was fatal. Given this procedural point, however, the court does not reach the substance of data protection law, beyond saying, en passant: 

"it appears to be accepted that the method by which the Protocol works is that all Eircom does is to receive a series of IP addresses from the record companies, write the appropriate letter to the customer corresponding with that IP address, and invoke the suspension or termination provisions of the Protocol as appropriate. On that basis it is not inherently obvious as to why such activity necessarily involves a breach of data protection law." 

No doubt the DPC will return to the fray in due course. 

UK: Regulation of the press – judicial review in prospect?

The Leveson Inquiry into the culture, practice and ethics of the press was announced in July 2011 and concluded its first part with the publication of Lord Justice Leveson’s Report in November 2012. Although the recommendations of the Report raised controversy, there seemed little doubt but that some fairly radical strengthening was likely in the control of the news media. After so much time, it is reasonable to ask: where are we?

It is ironic that so far the only concrete change in press regulation has been the passing of the Defamation Act 2013, which makes it easier for newspapers to escape liability for libel. However, it does seem as if we are edging towards a new settlement in regulation of the press which will benefit from greater independence from industry and be sustained by more substantial enforcement powers. The intrusion of the law, however tentatively, into this field is likely to produce administrative law challenges to the regime. In this post I want to summarise the proposals and speculate briefly about what may subsequently happen in the administrative court.

On 18 March 2013, Prime Minister David Cameron announced agreement between the political parties as to the way forward, which involved the creation of a body to oversee self-regulation by the press. A draft Royal Charter was published by the Government, which, if approved by the Privy Council, would create a body corporate, the Recognition Panel, the job of which will be to approve and review the performance of self-regulatory “Regulators”. The Recognition Panel exercises what is explicitly a public function (clause 4.4 of the Charter) and is clearly susceptible of judicial review. It approves or withdraws approval of Regulators by reference to “recognition criteria” set out in Schedule 3 of the Charter.

These criteria include the Regulator’s independence (no current newspaper editors or MPs need apply to serve on the board of a Regulator) and the terms of its “standards code”, which must take into account freedom of speech, the interests of the public, the need of journalists to protect confidential sources and the “rights of individuals” (such as rights to privacy). There is no reference to the need to have regard to the commercial interests of subscribers (save in so far as that impliedly enters into the requirement of proportionality).

The Regulator shall have authority to pursue issues on its own initiative and subscribers (i.e., newspapers and online news services) must be required to cooperate with any such investigation. The Regulator must have power to impose a fine of up to 1% of turnover, up to a maximum of £1m, and to require corrections and apologies. It must create a “ring-fenced enforcement fund”. It must also establish an arbitration scheme to resolve civil claims by aggrieved persons against subscribers.

In the meantime, on 25 April 2013 a group of press trade associations published an alternative draft Royal Charter and submitted it to the Privy Council for approval. Although this has delayed the presentation of the Government’s proposal to the Privy Council (originally intended for the Privy Council meeting of 15 May 2013), it seems unlikely that it will prevent the eventual approval of the Government’s draft.

But why would a publisher sign up with a Regulator under any such self-regulatory scheme? The Crime and Courts Act 2013, which received Royal Assent on 25 April 2013, provides certain negative and positive incentives.

By sections 34 to 39, a publisher who is not a subscriber to a recognised Regulator may be held liable for damages which are exemplary (i.e., punitive) or aggravated (i.e., compensating for the hurtfulness of the wrong) in a claim for libel, slander, breach of confidence, misuse of private information, malicious falsehood or harassment, where that claim is “related to the publication of news-related material”. These provisions come into force one year after the establishment of the Recognition Panel (or some equivalent body under Royal Charter).

However, where the claim could have been dealt with through the Regulator’s arbitration scheme, irrespective of the outcome the publisher who is a subscriber to a Regulator will not normally be ordered to pay the costs of a claim of this sort; but must normally be ordered to pay the costs where he could have been a subscriber and was not, and the claim could have been arbitrated under the Regulator’s arbitration scheme (section 40).

One can foresee judicial review challenges at various levels:

• To the Privy Council, as to its decision to approve the draft charter proposed by the Government (as opposed to the rival charter of the industry) - cf ECHR Art. 10/EU Charter Art. 11 (freedom of expression); EU Charter Art. 16 (freedom to conduct a business)
• To the Recognition Panel, as to its recognition of or withdrawal of recognition from Regulators (no doubt based on independence/terms of the proposed standards code); and as to the possible removal of members of its own board (by 2/3rds majority of the board)
• To decisions of Regulators (under the Nagle v Feilden [1966] 2 QB 633 principle), as to specific decisions to punish subscribers, for example on grounds of proportionality or procedural fairness (the Regulator will be both prosecutor and judge).

It will also be interesting to see whether the courts discover any friction between the proposed regulation of news web sites and the Audiovisual Media Services Directive 2010/13/EU. In addition to publishers of newspapers or magazines containing news-related material, the Royal Charter scheme would apply to a “website containing news-related material (whether or not related to a newspaper or magazine)”. In relation to television-like services delivered online, Article 4(7) of the Directive requires Member States to “encourage co-regulation and/or self-regulatory regimes at national level”. Such regimes “shall be such that they are broadly accepted by the main stakeholders in the Member States concerned and provide for effective enforcement”.

Given the indications from the press that some publishers will boycott the proposed system, it is likely that the Royal Charter will not be (or ever have been) “broadly accepted by the main stakeholders”. In relation to news web sites falling within both regimes (admittedly a small category), the Directive would offer an argument against the enforceability of the new regime.

One way or another, the administrative court is likely to scrutinize the operation of the new regime before long.

UK: Speech is free - and so are private copies

On 7 June 2013 the Government published four short consultation papers, setting out for technical comment the draft statutory wording by which it proposes to implement new exceptions for private copying, parody, quotation and public administration. I should like briefly to discuss the private copying exception.

The consultation paper states that it is the Government’s intention that the exception be available to an individual, not a body corporate; that the individual must have lawfully acquired the copy from which the further copy is made and on a permanent basis; and that the further copy must be made for the individual’s private use, for non-commercial ends. The Government contends that no compensation should be payable to the right holder, on the basis that its proposal “allows for appropriate compensation to be paid at the point of sale, and ensures the exception will cause minimal harm to copyright owners”.

The Government proposes to insert the following section 28B in the 1988 Act:

28B Private copying

(1) Copyright is not infringed where an individual uses a copy of a copyright work lawfully acquired by him to make a further copy of that work provided that:

(a) the further copy is made for that individual’s private use for ends that are neither directly nor indirectly commercial;

(b) the copy from which the further copy is made is held by the individual on a permanent basis (for example it is not a copy that is rented to the individual for a specified period or borrowed from a library); and

(c) the making of the further copy does not involve the circumvention of effective technological measures applied to the copy from which it is made.

(2) Copyright is infringed where an individual who has made a further copy of a copyright work pursuant to subsection (1):

(a) permanently transfers the copy to another person; or

(b) permanently transfers the copy from which it is made without destroying the further copy

and the further copy shall in those circumstances be treated as an infringing copy.

(3) Nothing in subsection (2) prevents an individual from storing a further copy made pursuant to subsection (1) in an electronic storage facility accessed by means of the internet or similar means, where that facility is provided for his sole private use.

(4) To the extent that the term of any contract purports to restrict or prevent the doing of any act which would otherwise be permitted by this section, that term is unenforceable.

The Government will add this new exception to the list of exceptions falling within the intervention mechanism under section 296ZA of the 1988 Act.

It will be recalled that Article 5(2)(b) of the Copyright Directive 2001/29/EC permits an exception “in respect of reproductions on any medium made by a natural person for private use and for ends that are neither directly nor indirectly commercial, on condition that the rightholders receive fair compensation which takes account of the application or non-application of technological measures … to the work or subject-matter concerned”. Application of any exception “shall only be applied in certain special cases which do not conflict with a normal exploitation of the work or other subject-matter and do not unreasonably prejudice the legitimate interests of the rightholder” (Article 5(5)).

There are some interesting and, for right holders, concerning aspects to the proposal.

Lawful ownership

The Government was clear that the exception would apply only to copies lawfully owned by the copier. In a digital era, however, the defining of ownership requires some thought. The Government attempts to address this by providing that the original copy has been “lawfully acquired” by the copier and that it is held by him “on a permanent basis”. There is no requirement that he be the owner of the physical carrier in which the original copy is embodied. However, in digital transactions there is no transfer of a physical carrier, so it would be difficult to define the exception by using explicitly the concept of “ownership” - in the “sale” of a digital copy, nothing changes hands: the vendor performs a service which changes the condition of media in the prior possession of the purchaser. The drafting of sub-section (2), which appears to attempt to confine the use of private copies to temporary lending, can be expected to provoke much debate. 

Cloud storage

Sub-section (3) aims at legalising the use of online storage facilities for private copies. The proposed wording does not purport to insulate Cloud service providers from liability. It will be for the courts to decide who “makes” the copy when a user stores a copy in the Cloud. Cloud storage facilities usually encode the uploaded data and potentially perform various transformations upon them, all of which would appear to require a licence of the reproduction right. The problem with this draft provision is that it applies where the online storage facility “is provided for [the user's] sole private use”. This condition seems to focus on the setting up of the facility, not its use. It might be read as excepting the stored copy even if it could easily be accessed by others. Questions would then arise whether there was an infringing communication to the public and if so, by whom and in what jurisdiction.

Strictly sub-section (3) is unnecessary. If from a technical perspective the consumer is “making a private copy” within sub-section (1), it does not matter where it is stored. It might better for it simply to be omitted; or for the reference to provision of the facility amended so as to read: “where that facility is used [or “accessed”] solely by him”. In this way the copy would cease to be a private copy if the online account were accessed by others.

Compensation

As mentioned above, the Copyright Directive requires that where there is a private copying exception there be “fair compensation which takes account of the application or non-application” of TPMs. In Padawan the Court of Justice of the European Union held that “[c]opying by natural persons acting in a private capacity must be regarded as an act likely to cause harm to the author of the work concerned.”

The exception would apply whether or not the original copy was made by or with the consent of the holder of the UK copyright. Clearly it is the holder of the UK copyright who is entitled to compensation (if any). If, as the Government argues, the UK right holder can “compensate” himself at the point of sale it seems inadmissible that, for example, copies could be acquired from outside the UK and then copied pursuant to this exception without compensation. It would be more logical to provide that the original copy must be one which was put in circulation or made available to the public “by or with the consent of the owner of the [UK] copyright”.

As mentioned in previous postings, the Government’s argument that the value of the private copy is “priced in” at the point of sale has been undermined by recent research, which shows that in the audiovisual sector right holders can and do segment the market for licensed copying by price, charging more for content which can be format-shifted. In any case, the right holder may have nothing to do with the setting of the price in the UK.

The Government’s justification for denying compensation ignores the requirement of Recital 35 that “account should be taken of the particular circumstances of each case”. It would deny compensation even to right holders whose works have never been the subject of a sale. As mentioned above, it ignores the fact that the UK right holder often will not be the licensor of the copy from which the private copy is made. It treats all right holders in the same way, whatever their vulnerability to the copying of their works. It would seem also to apply to the entire legacy of physical copies in the market, even thought they were sold prior to the application of any private copy exception (a point which the 2006 Gowers Review recognised as preventing retrospective application of a format-shifting exception). Arguably, to impose a private copying exception on existing copies would be an expropriation of private property, contrary to Article 1, Protocol 1 of the European Convention of Human Rights: Balan v Moldova (2008) ECHR, application no. 19247/03.

The CJEU in Padawan held the Spanish system of private coping levies incompatible with the Directive because it failed to strike the correct balance between the need to compensate right holders and the interests of persons involved in production of private copies. An indiscriminate levy on all copying media, whether used privately or professionally, was not permissible. The court also held in Thuiskopie that, having regard to the Three-Step Test, a Member State which introduces a private copying exception “must guarantee, within the framework of its competences, the effective recovery of the fair compensation intended to compensate the authors harmed for the prejudice sustained, in particular if that harm arose on the territory of that Member State”.

In the present case, the reverse applies: instead of an indiscriminately broad levy on recording media, there is an indiscriminately narrow (or rather, non-existent) levy in respect of all works. It seems possible that the present wording, if enacted in a statutory instrument, would be struck down by the English court as being incompatible with the Directive.

The closing date for comments on the proposed exceptions is 17 July 2013. The UK Intellectual Property Office will hold a series of open meetings in the week commencing 8 July 2013 for discussion of the draft exceptions.