DEA Initial Obligations Code – second time lucky?

After months of enforced inaction during BT and TalkTalk’s legal challenge to the Digital Economy Act 2010 (DEA), Ofcom has now published a revised draft of the Initial Obligations Code (Code). ¹

The Code is required to implement the DEA provisions on tackling online copyright infringement, a process that has been under way since the DEA was passed in the final days of the previous government.  This article examines the key requirements of the revised Code, and assesses the potential implications for the main stakeholders in the UK – copyright owners, internet service providers and content users.

What are the “initial obligations”?

The DEA amended the Communications Act 2003 to create two new obligations for ISPs, referred to as the “initial obligations”:

(a)	ISPs are required to notify their subscribers if the IP addresses associated with them are reported by copyright owners as being used to infringe copyright.
(b)	ISPs must monitor the number of reports on each subscriber and compile an anonymous “copyright infringement list” of those who have received three or more notifications within a 12-month period. 2

After obtaining a court order to obtain personal details, copyright owners can take action against those included on the list under the Copyright, Designs and Patents Act 1988 (CDPA).  While the CDPA already enables copyright owners to take action against online copyright infringement, the DEA regime will enable copyright owners to focus legal action on persistent infringers.

The initial obligations must be set out in the Code, along with an appeals process, and approved by Ofcom.  Section 7 of the DEA prescribes the basic contents of the Code, the latest draft of which is available from the Ofcom website. ³

Key requirements of the revised Code

The revised Code includes two main new requirements:

(a)	for Ofcom to establish a publically available standard in order to promote good practice in gathering evidence; and
(b)	for ISP notification letters to include the number of copyright infringement reports connected with a subscriber’s account.

Subscribers who receive notification letters will have up to 20 working days to appeal against an allegation of infringement under the procedure set out in the Code. ⁴  In the event of an appeal, the onus is on the copyright owner to prove that the infringement has taken place, and on the ISP to show that it is associated with the subscriber’s IP address. ⁵  Under the DEA, the appeals body must find in favour of the subscriber where it determines that the alleged infringement was not committed by the subscriber and the subscriber took “reasonable steps” to prevent others from infringing copyright by means of the subscriber’s internet access. ⁶

Which ISPs will be subject to the Code?

Ofcom has proposed that the Code will initially cover ISPs with more than 400,000 broadband fixed-line subscribers.  At the time of writing, those comprise BT, Virgin Media, TalkTalk, Sky, Everything Everywhere (Orange and T-Mobile) and Telefonica O2 – which together constitute 93.5% of the fixed-line broadband market in the UK. ⁷  The 400,000-subscriber threshold is intended to capture all the major ISPs.  Dropping the threshold to 50,000 would only include another five ISPs (with a combined market share of only 2.3%).  At the same time, Ofcom believes that those smaller ISPs would face disproportionately higher costs to deliver their obligations under the Code. ⁸

So providers of mobile internet (e.g. through USB “dongles”) are, at present, to be completely excluded from obligations under the Code.  Although several copyright owners suggested that mobile ISPs should be included, Ofcom noted that no copyright owner presented evidence that mobile broadband was responsible for significant levels of infringement. ⁹  Ofcom also concluded that mobile broadband is generally lower-quality than fixed-line services and is currently less conducive to online copyright infringement, due to speed and capacity constraints (such as caps on uploading and downloading) and traffic management policies (e.g. bandwidth throttling at certain times and locations).  Based on evidence received by Ofcom, mobile ISPs are also likely to incur significantly higher costs in order to comply with the Code, which would probably achieve only a minimal reduction in overall levels of infringement. ¹⁰

Cost-sharing arrangements

In addition to the revised Code, Ofcom has published a consultation on the sharing of costs. ¹¹  The relevant Costs Order ¹² requires Ofcom to set the fees payable by copyright owners to ISPs and to Ofcom for use of the subscriber notification scheme.  The Costs Order essentially requires copyright owners to bear all costs incurred by Ofcom, the majority of the costs incurred by the appeals body, and 75% of costs reasonably and efficiently incurred by ISPs in carrying out their obligations.

To determine the fees payable for sending copyright infringement reports, copyright owners must provide Ofcom with an estimate of the number of reports that they wish to make to ISPs, and will have the chance to accept or reject the fees that Ofcom proposes on the basis of those estimates until an agreement is reached.  If agreement is ultimately not reached on costs, the copyright owner cannot take advantage of the notification scheme.

According to current estimates of the likely costs to copyright owners, if 70,000 copyright infringement reports are sent by copyright owners to the largest ISPs each month – BT, Virgin, TalkTalk and BSkyB – the total cost to copyright owners will be £14.4 million, with each letter costing £17.  It is forecast to become more cost-effective for copyright owners to foot the bill for significantly more copyright infringement reports to go out to ISPs each month – 175,000 would cost them £15.2 million, but the cost per letter would drop to £7.20. ¹³  Add to this Ofcom’s estimated costs, which are £1.8 million for 2010/11, £0.7 million for 2011/12, £1.6 million for 2012/13 and £3.1 million for 2013/14 (to February), ¹⁴ and copyright owners face a significant liability in initial costs.

The costs, however, pale into insignificance in comparison with the estimated loss of revenue to the UK creative industries as a result of internet piracy.  For instance, according to figures from Jupiter Research, between 2007 and 2012 in the UK the cumulative cost to music companies of internet piracy will be £1.2 billion. ¹⁵  So a successful copyright enforcement regime that reduces these losses by even a relatively small proportion could more than offset the set-up costs.

Impact on content users – scope of the “reasonable steps” defence

Respondents to Ofcom’s consultation on the Code have pressed for clarification on how a subscriber should take “reasonable steps” to prevent others from infringing copyright via the subscriber’s internet access.  While domestic internet subscribers can more realistically monitor and control household usage of an internet connection, there is great concern on the part of businesses that customarily provide internet access to patrons – for example, in cafés, hotel lobbies, pubs and other public places.

The current draft of the Code provides no guidance on “reasonable steps”, leaving it to the appeals body to impose its own objective standard of reasonableness.  Ofcom has, accordingly, removed the proposal in its previous consultation that the appeals body should take account of the subscriber’s subjective technical ability and knowledge in making its determination.¹⁶

This approach has caused particular consternation for businesses.  For example, the UK statutory watchdog Consumer Focus believes that Ofcom should “mitigate the chilling effect on internet access provided to consumers by WiFi providers, businesses and public bodies that would result from lack of guidance on reasonable steps … particularly in relation to open WiFi”.  The watchdog cited expert evidence from Dr Richard Clayton, who concluded that subscribers cannot technically establish which machine, or which individual, is responsible for an alleged copyright infringement, leaving the subscriber little option but to establish a defence by non-technical means (e.g. by showing that they were not at home at the time of the alleged infringement, in the case of a domestic household). ¹⁷  Another joint submission to Ofcom concluded that: “If the Act is eventually implemented in full, many of our members are likely to withdraw internet/wi-fi facilities.” ¹⁸

Is this type of regime working in other territories?

Similar copyright enforcement regimes have been put in place in other jurisdictions, most notably in France and New Zealand, which provide useful comparative case studies.

France

	Regime – France’s much-vaunted HADOPI body has been sending subscriber notices since October 2010.  If a subscriber ignores two notices within six months and infringes copyright law for a third time in a year, HADOPI can notify a criminal court, which can suspend the internet account for up to a month and levy a fine of up to €1,500.  To date there have been more than 700,000 notices sent, which IFPI estimates to have reached around 10% of P2P users in France.
	Impact on piracy – There has been a 26% reduction in P2P use in France since October 2010. 19  Despite these notifications, however, only 134 cases have been prosecuted, and so far no internet subscriptions in France have been disconnected for copyright infringement.
	Costs burden – With a payroll that includes 60 agents, HADPOI comes at a significant cost to the French tax payer, reportedly running at €12 million.  A cost-benefit analysis has led the French government to launch a consultation to re-examine internet piracy, and some French commentators are questioning the viability of HADOPI. 20

New Zealand

	Regime – In New Zealand, a similar online copyright enforcement regime was implemented in September 2011, enabling copyright owners to require that ISPs issue up to three warning notices to consumers alleged to be illegally using copyright-protected content.  Copyright owners must pay the ISPs a processing fee of NZ$25 to issue a notice.  After the third notice, users face a claim before the New Zealand Copyright Tribunal, which can issue fines of up to NZ$15,000 (around £7,600). 21
	Impact on piracy – The regime appears to have halved internet piracy in New Zealand.  The Recording Industry Association of New Zealand (RIANZ) noted that 2,766 infringement letters have been sent out, and RIANZ’s data suggest that the incidence of top-200 movies being viewed illegally decreased from 110,000 in August 2011 to 50,000 in September 2011, when the new law came into force. 22
	Costs burden – RIANZ has been lobbying for the NZ$25 processing fee to be reduced to allow 5,000 letters to be sent per month.  ISPs in New Zealand argue that they are spending heavily to comply with the law, but have not sent that many notices out.  For example, Telecom New Zealand claims that it has spent NZ$534,416 complying with the law, but that it has only been asked to send 1,238 notices, at an individual cost of NZ$431.68. 23  Accordingly, New Zealand ISPs continue to question the cost-effectiveness of this process.

Reactions to the Code from UK stakeholders

The revised draft of the Code has elicited strong opinions from all sides.  In contrast to the negative comments from business users of copyright content, the UK music industry – having suffered extensively from illegal file-sharing sites such as BitTorrent and Limewire – is unsurprisingly supportive of the DEA regime, while noting the important role that the DEA can play in supporting educational initiatives and legitimate services.  BPI chief executive Geoff Taylor has called for the law to be implemented “… to educate consumers about illegal downloading, so that artists and creators are fairly rewarded for their hard work”.  The chief executive of UK Music, Jo Dipple, has commented that the DEA will “play a significant part” in achieving UK Music’s aim “to grow the digital market and encourage the use of licensed online music services”. ²⁴

The UK government also continues to support the DEA.  Stressing the importance of creating the right conditions for growth, the Minister for Culture, Communications & the Creative Industries, Ed Vaizey, has urged: “We must ensure our creative industries can protect their investment. They have the right to charge people to access their content if they wish, whether in the physical world or on the internet.” ²⁵

Comment

It seems clear now that the UK creative industries cannot be rescued by offering compelling legitimate services alone.   Internet piracy is still rife in the UK, even though it has one of the richest offerings of legal online content in the world, with more than 70 legal online music services, for instance. 

With the first notices under the DEA regime not due to be sent out until 2014 at the earliest, there is still some time to go until its true impact can be measured.  Statistical evidence from other jurisdictions suggests that notification regimes are having a meaningful effect on reducing internet piracy, even without further technical measures (such as limiting or suspending a subscriber’s internet access).  This appears to vindicate the UK government’s decision to impose the “initial obligations” regime first, before assessing the need for technical measures.

The tricky question remains – as illustrated by overseas experience – at what cost, and to whom.  The Costs Order provides an initial answer, but legislation of this nature has economic and social costs for all stakeholders that are hard to quantify in advance.  The cost burden – and cost-effectiveness – of the regime will clearly need to be kept under review.

While the costs are significant, the potential positive effect on consumer behaviour could be huge for copyright owners.  That could ultimately assist ISPs too, by curbing illicit internet traffic that is unprofitable for ISPs and clogs up ISPs’ services.  For content users, the issue of content users’ “reasonable steps” is perhaps the single hardest practical hurdle to overcome; but the defence is nonetheless available, Ofcom’s insistence on an objective standard is reasonable, and clarity on the scope of the defence would ultimately emerge from decisions made by the appeals body – which will inevitably take time, as users will not necessarily fall neatly into categories.

Ultimately, all stakeholders stand to benefit if a coherent and workable system of online copyright enforcement can emerge from the framework set out in the Code.  In many ways, the system can only be fine-tuned as it goes along, as the UK government has always envisaged.  The creative industries will certainly hope it succeeds: the effectiveness of copyright in the digital age could well depend on it.

Luke Anthony

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Article written for Entertainment Law Review.

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[1] Published on 26 June 2012.
[2] DEA, ss. 3 & 4.
[3] http://stakeholders.ofcom.org.uk/binaries/consultations/online-notice/summary/notice.pdf
[4] Code, s. 25.
[5] Code, s. 29.
[6] DEA, s. 13.
[7] Notice of Ofcom’s proposal to make by order a code for regulating the initial obligations (26 June 2012), para. 3.109.
[8] Notice, paras 3.111 to 3.113.
[9] Notice, para 3.85.
[10] Notice, para 3.90.
[11] Ofcom consultation on Costs Order (26 June 2012).
[12] Online Infringement of Copyright (Initial Obligations) (Sharing of Costs) Order (Costs Order) 2011.
[13] Consultation, p. 54.
[14] Consultation, p. 26.
[15] http://www.bpi.co.uk/our-work/protecting-uk-music/article/online-faqs.aspx.
[16] Notice of Ofcom’s proposal to make by order a code for regulating the initial obligations (26 June 2012), para. 7.41.
[17] Consumer Focus response to Ofcom notice on draft Initial Obligations Code, July 2012.

[18] Response of British Hospitality Association, British Beer and Pub Association, and British Holiday and Home Park Association (July 2010), para. 20.
[19] IFPI Digital Music Report 2012, p. 17.
[20] The Register website: http://www.theregister.co.uk/2012/08/06/hadopi_under_fire/.
[21] Copyright (Infringing File Sharing) Amendment Act 2011.
[22] BBC website: http://www.bbc.co.uk/news/technology-18953353.
[23] New Zealand Herald: http://www.nzherald.co.nz/technology/news/article.cfm?c_id=5&objectid=10821492&ref=rss.

[24] Music Week: http://www.musicweek.com/news/read/music-industry-responds-to-ofcom-initial-obligations-code/049358.
[25] The Guardian: http://www.guardian.co.uk/technology/2012/jun/26/ofcom-outlines-anti-piracy-rules.