Digital Economy – Act 2

Digital Economy - Act 2

In Austerity Britain, you would be forgiven for wondering what happened to Digital Britain.

The Digital Economy Act (DEA) [i] has resembled the British economy, facing its own double dip – with two challenges to its legality mounted by BT and TalkTalk. The first, an application for judicial review of the anti-piracy provisions of the DEA, was heard before the High Court, but largely failed.  The internet service providers (ISPs) then appealed to the Court of Appeal, which has essentially dismissed the ISPs’ claims.

The Court of Appeal’s reasoning is important.  This case turns on a vexed conundrum – in the wake of the digital boom, how to recalibrate the economic interests of three interested parties: copyright owners, ISPs and users.  Copying of creative content has proliferated online, giving users free access to content carried on the ISPs’ conduits.  While the copyright owners have yet to go bust, the old market certainties have disappeared in this new triangulation, and the DEA set out to provide a legislative stimulus for Britain’s creative industries through a package of measures aimed at tackling online copyright infringement.

At each point of the triangle stand fundamental rights and freedoms: the right to property, net neutrality and freedom of communication (alongside data privacy rights).  Balancing these is a tricky judgment call, but one which the Court of Appeal had little hesitation in taking.

Act 1 – the application for judicial review

Under the DEA, the ISPs will assist in policing online copyright infringement by sending notices to users suspected of illegally downloading copyright material and, potentially (if technical measures are approved by Parliament), suspending or limiting those users’ internet access.  The details of the ISPs’ initial obligations are to be set out in an Initial Obligations Code, which is to be introduced by Ofcom.  Two of the UK’s largest ISPs, BT and TalkTalk, decided to apply for judicial review of the DEA, contending that the proposed measures on online copyright infringement are incompatible with EU law and would result in an invasion of privacy, as well as running up disproportionate costs for ISPs and users.

At first instance,[ii] the High Court found against BT and TalkTalk on all counts (other than a costs point), but granted leave to appeal on four grounds, namely whether the contested provisions:
 

(a)	should have been notified in draft to the European Commission under the Technical Standards Directive;[iii]
(b)	are incompatible with certain provisions under the E-Commerce Directive;[iv]
(c)	are incompatible with the Data Protection Directive[v] and/or the E-Privacy Directive;[vi] and/or
(d)	infringed the Authorisation Directive.[vii]

Act 2 – the appeal

In a judgment handed down on 6 March 2012,[viii] the Court of Appeal dismissed the appeal and upheld the High Court’s decision on all grounds, bar one minor costs point.

1. Technical Standards Directive

The ISPs argued that the contested provisions amounted to a technical regulation and/or a rule on services that must be notified to the EU Commission to allow the Commission and other Member States to propose any amendments that might remove or reduce any restrictions on the free movement of services or the freedom of establishment.[ix]  No such notification has yet been made.  The main issue was whether the provisions to be notified were the DEA itself or the Initial Obligations Code that is to be put in place under the DEA.  In delivering the lead judgment, Lord Justice Richards was satisfied that, on the basis of relevant case law of the European Court of Justice (ECJ), legislation (such as the DEA) enacting a scheme of regulation that is conditional or contingent on future rules need not be notified to the Commission before those rules come into force.  In the judge’s view: “The purpose of the notification procedure will be better served by notification of the draft Code, accompanied by the statute as part of the package.”[x]

2. E-Commerce Directive

The ISPs submitted that the contested provisions render ISPs potentially “liable for the information transmitted”, contrary to Article 12 of the E-Commerce Directive, which provides ISPs with “mere conduit” immunity from online copyright infringement.  The Court of Appeal rejected this argument, finding that the judge’s interpretation of Article 12 gave effect to the natural meaning of the wording of Article 12 and pointing to the recitals under the Directive, which provide that such immunities “do not affect the possibility of injunctions of different kinds; such injunctions can in particular consist of orders by courts or administrative authorities requiring the termination or prevention or any infringement”.[xi]

The ISPs raised a further argument in relation to Article 3(2) of the E-Commerce Directive, which provides that Member States must not, for reasons falling within the “co-ordinated field”, restrict freedom to provide information society services from another Member State.  The definition of “co-ordinated field” expressly exempts copyright (among other intellectual property rights).[xii]  The ISPs argued that “copyright” should, however, be interpreted narrowly as referring only to the substantive laws of copyright under national laws and to copyright harmonisation measures under Directive 2001/29/EC, in which case the contested provisions would not benefit from this exemption (as not applying to copyright in that sense).  The Court of Appeal disagreed, finding that, when the E-Commerce Directive was adopted (a year before the harmonising Directive), “copyright” must have had its normal meaning, “encompassing all aspects of the law of copyright under national laws”, not the elaborate meaning claimed by the ISPs.[xiii]

3. Data privacy

The ISPs argued that the data processing required under the contested provisions would be incompatible with certain prohibitions on processing under the Data Protection Directive.  The key issue was whether processing copyright information requests and sending notices to infringers would fall within the exemption for “the establishment, exercise or defence of legal claims” under Article 8(2)(e) of the Directive.  The Court of Appeal held that the processing is “plainly necessary” for such purpose, even if in the majority of cases the infringing activity ceases and no further action is required once a notice is sent.[xiv]

The ISPs also relied on requirements under the E-Privacy Directive to keep traffic data confidential, subject to certain express exceptions under Article 15.  The ISPs argued that those exceptions did not apply to the contested provisions.  The Court of Appeal disagreed, noting that ECJ has interpreted Article 15 as extending to restrictions required to protect copyright.[xv]

4. Authorisation Directive

The Authorisation Directive requires schemes of “general authorisation” that allow persons wishing to provide electronic communications networks and services to do so in accordance with a publicly available set of conditions. The ISPs argued that the contested provisions should have been included within the general authorisation rather than being the subject of separate legislation.  The Court of Appeal rejected this argument, stating that the contested provisions can be classed as measures taken at national level to pursue general-interest objectives (in this case, copyright protection), so falling under one of the permitted derogations from the requirements of the Authorisation Directive.[xvi]

The ISPs did succeed on “one small point” – their contention that “case fees” relating to ISP subscriber appeals amount to administrative charges under Article 12 of the Authorisation Directive, and so should not be costs for ISPs to bear under the DEA cost-sharing arrangements.[xvii]

Double or quits?

As one last throw of the legal dice, it was still open to BT and TalkTalk to seek leave to appeal to the Supreme Court, which they must have done within 28 days of the date of the Court of Appeal’s decision.[xviii]  If permission has been granted, it would probably be at least six months until a Supreme Court hearing.  At the time of writing, it is unclear whether BT and TalkTalk will continue the fight.  Following the Court of Appeal decision, BT stated: “Now that the court has made its decision, we will look at the judgment carefully to understand its implications and consider our next steps.”[xix]  TalkTalk took a more robust position, stating: “Though we have lost this appeal, we will continue fighting to defend our customers’ rights against this ill-judged decision.”[xx]  

On the basis of the judgments to date, however, it seems unlikely that any appeal to the Supreme Court would be successful.  Besides, with legal costs for BT and TalkTalk reportedly well into six-figure sums, any continuation of their legal challenge would probably be an expensive delaying tactic.

Where next?

Even if there is no further challenge to the DEA, current estimates are already pointing to summer 2013 as a target date for ISPs to send out the first batch of notices to infringers.  There are three reasons for this continuing delay:
 

(a)	the ISPs need to put in place appropriate technical systems to produce and process copyright infringement reports and copyright infringement lists;
(b)	the Initial Obligations Code still needs to be agreed (and notified to the EU Commission); and
(c)	an appeals body will need to be created, a process that must be overseen by Ofcom.

Will the DEA work anyhow?

The question remains how far the DEA will succeed in tackling online piracy in the UK.  It is widely accepted that it can only work if implemented alongside attractive legal content services and educational initiatives.  But can the legislation make a significant difference?  Despite the ISPs’ and consumer groups’ concerns about the original evidence base for the legislation, there is now fairly compelling evidence from other jurisdictions that have implemented robust “graduated response” laws.  For example:

·According to the IFPI Digital Music Report 2012, the French “three strikes” authority, Hadopi, has so far sent over 700,000 copyright infringement notices, resulting in a 26% overall reduction in unauthorised peer-to-peer (P2P) network activity since October 2010.  Hadopi-commissioned research found in May 2011 that, among people who received a notice or knew someone who had, 50% stopped their illegal activity and a further 22% reduced their illegal consumption. 

·In South Korea, “graduated response” legislation was introduced in July 2009, since when 100,000 notices have been sent to ISPs requiring them to tell infringers to stop breaking the law.[xxi]  In April 2011 another law was introduced requiring cyberlockers and P2P services to register with the government and to implement filtering measures.  According to the South Korean government, 70% of infringers stop on receipt of a first notice and 70% of the remaining infringers stop after a second notice.  After three notices are ignored, the Ministry of Culture, Sports and Tourism issues a series of “correction orders”, after which very little infringing behaviour persists.

The path to recovery

In light of such statistical evidence, copyright owners will now hope that the DEA is back on track for full implementation.  The high costs of implementation remain a serious concern for copyright owners and ISPs alike. 

Yet the financial deficit to be addressed can be illustrated by the music industry, which is, to date, the worst hit of the creative industries.  Global physical record sales declined from $12.2 billion in 2009 to $10.4 billion in 2011, a drop of 14.2%. [xxii]  At the same time, global digital revenues from legitimate sales reached $5.2 billion in 2011, an increase of 8% on the previous year, [xxiii] but digital revenue still has some way to go to compensate for the steep decline in physical revenue.  Levels of piracy in the UK remain high, despite there being over 70 legal music services available to consumers.  According to figures reported by the BPI in February 2012, while digital revenue growth in the UK stands at 24.7%, this only offsets around two-thirds of the decline in income from sales of physical music products.  And with the UK’s few remaining high-street CD retailers facing increasingly uncertain times, copyright owners are keen for meaningful progress in implementing the DEA.

In the meantime, ISPs and content users have never had it so good, at least when it comes to the carte blanche that they have enjoyed in disseminating creative content over the ISPs’ networks.  ISPs’ and users’ reluctance to settle for less is understandable.  But less could be more.  ISPs value content in attracting custom (especially in the context of combined telecoms and content packages), and infringing content clogs up bandwidth that could be put to more profitable ends.  Content users that expect content for free are, in some ways, killing the goose that lays the golden eggs, by limiting the scope for investment in new music.  Even if the creative industries in some ways only have themselves to blame for failing to make the most of opportunities presented by the digital revolution, they cannot fairly be expected to accept the sole blame for this unprecedented downturn.

It is now back to the Government to seize the initiative.  As the Prime Minister has said of the recent double dip: “There is no complacency at all in this government in dealing with what is a very tough situation.”  That commitment should apply equally to the digital economy.

Ed Baden-Powell  and Luke Anthony

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Article written for Entertainment Law Review.

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[i] Digital Economy Act 2010.