The Copyright Board of Canada: A Regulator Lacking a Theory of Regulation

I appeared today before the Senate Committee on Banking, Trade and Commerce, in the course of its study of the operation and practices of the Copyright Board of Canada. Here is my testimony:

Mr. Chairman, Members of the Committee,

My name is Ariel Katz. I am a law professor at the University of Toronto, where I hold the Innovation Chair Electronic Commerce. Before coming to Canada I worked at the Israeli Competition Authority where, among other things, I was responsible for designing and implementing a framework for the regulation of copyright collectives under Israel’s competition legislation. I would like to thank you for conduction this timely study of the operations of the Copyright Board and for inviting me to appear before this Committee today.

There have been growing complaints about the Copyright Board’s operations recently, mostly about the length and cost of the proceedings, or the unpredictability and quality of the Board’s decisions. I largely agree with these complaints, but I believe they are only symptoms of a more fundamental problem, not the problem itself.

Therefore, I would like to talk about the real underlying problem with the Copyright Board today and how to fix it. I would also explain why the solutions, for the most part, do not require legislative reform.

What is the problem with the Copyright Board?

The Copyright Board is possibly larger and better funded than any other tribunal of its kind in the world. It lacks resourcefulness not resources. Most of the problems with its procedures stem from the absence of a substantive theory of regulation. Let me explain.

The Board describes itself “as an economic regulatory body”^[1] or “an independent, quasi-judicial tribunal”,^[2] and it explains that its mandate is to set “fair and equitable royalties”.^[3] The Board can describe what it does, but it is not very capable of telling why it exists and what problems it is supposed to solve.

More specifically, the Board’s decisions do not convey a coherent view of why the royalties that it sets are indeed “fair” and “equitable” and how to distinguish them from royalties that would be “unfair” or “inequitable”.

Similarly, while it views itself as a regulator, the Board is sometimes confused about the identify of the regulatees: does the Board exist to regulate copyright collectives (because otherwise they would charge too much); or is its job to regulate users (because otherwise they would pay too little)?

These are fundamental questions. Different answers to these questions would entail different regulatory mechanisms and different procedures. The answers would determine the issues that need to be proven, the kind of evidence that the Board needs for deciding, and the allocation and weight of burdens of proofs. The answers may also impact the constitutional validity of the regulatory scheme and whether it is intra vires federal competence.

Without a clear theory of regulation the Board’s mission has become vague and creeping. Its current operations reflect that. I’ll be happy to elaborate in the Q&As.

How did it happen?

This hasn’t always been the case. The Copyright Board, the first of its kind in the world, was established following the recommendation of the Parker Commission from 1936.

The Commission understood that collective administration of copyrights presents a competition policy problem, not a copyright doctrine problem. It explained that when copyrights are administered collectively “[c]ompetition no longer exists” and “[a] monopoly, or super-monopoly, has arisen.”^[4]

The Parker Commission recognized, however, that collective administration might be the most convenient way to grant licenses, and it described copyright collectives as an “inevitable monopoly”.^[5] The Commission viewed the regulatory challenge as a familiar one, namely the regulation of natural monopolies, and it was of the opinion that like other natural monopolies providing important services,^[6] copyright collective should be regulated to prevent them from abusing their market power or exercising it arbitrarily.^[7] The Copyright Board^[8] was set up to implement this recommendation.^[9]

This rationale is also the dominant one in the academic literature,^[10] and in the legislative history, including that of the major reforms of the Copyright Act in the 1980s and 1990s.^[11]

The Supreme Court, the Privy Council and the lower courts in almost every decision that discussed the matter have also understood and endorsed this theory.^[12]

What changed?

But more recently, the Board has taken the view that its role is not limited to controlling the exercise of market power by collectives, but “to preserve the balance of power” between collectives and users. The Board went even further and stated that its role is actually to protect collectives from users.^[13] This is probably a classic example of what the literature calls “regulatory capture”—a situation where over time the regulator abandons its original public interest mandate and begins to identify with its regulatees and protect their interest.^[14]

This dramatic, but unaccountable, shift in the Board’s view of its own mandate resulted in a vague, shifting, and indeterminate standard, which is the source of present state of affairs.

The Board may also suffer from another layer of capture, by the small group of practitioners (lawyers and experts) whose practice revolves around Board proceedings and often benefit from the byzantine nature of its proceedings. [During the Q&As period I mentioned another possible layer of capture, that by large monopolistic or oligopolistic commercial users who take advantage of this inefficient and costly regulatory scheme as a barrier to entry by new and smaller competitors].

What can we do to fix it?

To fix the current problems, we need to adopt a principled regulatory scheme. At its basis, the scheme should acknowledge that collective administration of copyright is an anomaly in a market economy. Very rarely does the law allow competitors in an entire industry to deal with downstream users collectively instead of competing with each other.

The regulatory scheme should comprise the following three elements:^[15]

• Screening
• Minimal impairment of competition
• Periodical review and reversibility

Screening

The goal of screening it to identify those situations where collective administration genuinely increases efficiency, as opposed to circumstance where collective administration only increases copyright owners’ market power (and profit) without clear offsetting benefits to users and the public.

Minimal Impairment of Competition

In line with modern approaches to the regulation of monopolies, in those instances where collective administration passes the screening stage, regulation should not focus exclusively on rate setting, but should also focus on identifying and removing barriers to competition to increasing competitive pressure on the collective.

Periodical review and reversibility

Lastly, the finding from the first two stages should be reviewed periodically and revised if necessary. Technological change and new business models can enable competitive licensing models even if those weren’t feasible before. Therefore, care must be taken to prevent the regulatory scheme from becoming a barrier to competition and measure should be implemented to minimize the entrenchment of monopolistic structures.

Who can do it (and why statutory reform isn’t necessary)?

This proposal might seem ambitious, but the good news is that in most cases it could be implemented under the present legislation.

Accomplishing that, however, will require a Copyright Board that understands its mandate and is willing to pursue it. If the Board doesn’t take the lead, then Regulations pursuant to s 66.91 could be implemented.

But change will also require a Competition Bureau that is willing to assist the Board and to take a much more active role than it has taken so far. I’ll be happy to elaborate on those issues in the Q&As.

If I could only make one simple recommendation, I would urge this Committee to recommend that the Competition Bureau use its powers: first to conduct a study of these matters, and then to play an active role in the oversight of collectives, both in the course of Copyright Board proceedings and outside of it.

Thank you very much and I’ll be pleased to answer any questions you might have.

1. Copyright Board of Canada, Annual Report 2014-15, at 7. ↑
2. Presentation delivered by Mr. Claude Majeau Vice-Chairman and Chief Executive Officer of the Copyright Board of Canada, House of Commons Standing Committee on Industry, Science and Technology, 42nd Parliament, 1st Session (May 5, 2016) at http://cb-cda.gc.ca/about-apropos/speeches-discours/20160505-en.pdf ↑
3. Copyright Board of Canada, Annual Report supra note 1, at 5. ↑
4. J Parker, Report of the Royal Commission Appointed to Investigate the Activities of the Canadian Performing Rights Society, Limited, and Similar Societies (Ottawa, ON: J.O. Patenaude, 1935) at 19. ↑
5. Ibid. ↑
6. Ibid at 49. ↑
7. Ibid at 49, 16. ↑
8. More precisely, its predecessor the Copyright Appeal Tribunal. ↑
9. Vigneux v Canadian Performing Right Society Ltd, [1943] 1943 SCR 348 (available on http://canlii.ca/t/fslvq), para 4; aff’d in part and reve’d in part Vigneux and Others v Canadian Performing Right Society Limited (Canada), [1945] UKPC 1 (available on http://www.bailii.org/uk/cases/UKPC/1945/1945_1.html). ↑
10. See e.g., Ariel Katz, “The Potential Demise Of Another Natural Monopoly: Rethinking The Collective Administration Of Performing Rights” (2005) 1:3 J Compet L Econ 541, at 551–52; Ariel Katz, “Copyright Collectives: Good Solution But for Which Problem?” in Harry First, Rochelle C Dreyfuss & Diane L Zimmerman, eds, Working Within the Boundaries of Intellectual Property: Innovation Policy For The Knowledge Society (Oxford: Oxford University Press, 2009). ↑
11. Ariel Katz, “Spectre: Canadian Copyright and the Mandatory Tariff – Part I” (2015) 27:2 IPJ 151, at 207–10. ↑
12. E.g., Vigneux, supra note 9; Vigneux and Others v Canadian Performing Right Society Limited (Canada), [1945] UKPC 1 (available on http://www.bailii.org/uk/cases/UKPC/1945/1945_1.html); Entertainment Software Association v Society of Composers, Authors and Music Publishers of Canada, [2012] 2 SCR 34, para 11; Canadian Broadcasting Corp v SODRAC 2003 Inc, [2015] SCC 57 (available on http://canlii.ca/t/gm8b0), para 112. ↑
13. Reprographic Reproduction, (Post-Secondary Educational Institutions – 2011-2013), decision from March 16, 2011, para 96, at http://www.cb-cda.gc.ca/decisions/2011/20110316.pdf ↑
14. Unfortunately, in 1994 the Federal Court of Appeal accepted this view, but without much discussion, without acknowledging the inconsistency with earlier case law, and without realizing that this view represents a radical shift in the Board’s mission, see Canadian Assn. of Broadcasters v. Society of Composers, Authors & Music Publishers of Canada, [1994] 58 C.P.R. (3d) 190, para 14.This view is legally incorrect. Parliament never intended to give the Board the power to regulate users, and when users aren’t industries subject to Federal jurisdiction, giving the Board such powers might be ultra vires, see Ariel Katz, “Spectre: Canadian Copyright and the Mandatory Tariff – Part II” (2015) 28:1 IPJ 39 at 91–93. But even if this view were correct, the Board has never bothered to develop a theory of how to identify, measure, the respective market power of owners and users, and what it means to “balance” it. ↑
15. I discuss this in greater detail in Katz, Copyright Collectives, supra note 7 at 424–27. ↑