Digital Rights Management – Foreclosure, Leverage and IP Law Issues

Alain StrowelAttorney, Covington & Burling, Brussels,

Professor, Universities of Brussels and Liège,

Sébastien EvrardAttorney, Jones Day, Brussels

Brussels - 12 May 2006Institute for European Legal Studies, University of Liège,

TILEC, Tilburg University

Table of content

• DRMs: definition and technologies• IP issues

– DRMs and private copying– DRMs and levies– Anti-circumvention protection– DRMs and “market locks”

• Competition law issues– DRMs and competition for online music– DRMs and interoperability provisions

“Solid copyright law and digital rights management should allow us to give away some music safely while building healthy new models”

Alain Levy (CEO EMI - FT, 8 Jan. 2006)

What is DRM?

“DRM is a system of IT components and services along with corresponding law, policies and business models which strive to distribute and control intellectual property and its rights. Product authenticity, user charges, terms-of-use and expiration of rights are typical concerns of DRM.” *Source: American National Institute of Standards and Technology

A few key elements regarding DRM:

• DRM is a combination of technologies, not a single technology

• DRM requires the interaction of technology, market and law to work

• DRM exists in both the on-line and off-line environments

Some DRM technologies

• Physical media – consortia DVD CCA – CSS – DVD movies AACS – High def DVD movies to replace CSS 4C CPPM/CPRM – DVD audio to replace CDs

• Internet protocol download – proprietary Apple Fairplay Sony’s Open MG RealNetworks Helix DRM Microsoft WMDRM

• Cellphones OMA DRM WMDRM

Who benefits from DRMs?

• Creators and cultural industries: serve to prevent infringements permit to obtain a remuneration for the lawful use of works

Ability to monetize

• Consumers facilitate new distribution models, new formats and more

flexible pricing models: distribution: purchase and download, subscription services, rental,

VOD, previews, real-time distribution, etc. (music) formats: ringtunes, ringbacks, video clips, etc.

Wider range of access

IP law aspects

DRM to prevent legitimate uses of works?How to ensure levies take into account DRMs? What is the “adequate protection” of DRM?Technical means and anti-circumvention rules used as market locks?

Private copying v. DRM• France:

– Supreme Court, 28 Febr. 2006 – Mulholland Drive• the private copying exception does not allow to oppose DRM

implementation if private copies would « conflict with the normal exploitation of the work »

• « normal exploitation is assessed with regard to the risks inherent to the new digital environment » and to « the economic importance » of the exploitation to « recoup production costs »

• Germany:– Federal Constitutional Court, 25 July 2005 – Kopierschutz

• no Constitutional protection of property on medium

• Belgium: – Court of Appeal, Brussels, 9 Sept. 2005 - Test-Achat

• no standing for consumers based on private copying or no right to private copying?

How to combine DRMs and levies?

• How should levies (fair compensation) take into account DRMs (full compensation guaranteed by the access/copy controls)?– Risks and issues:

• levies will slow the introduction of DRM

• multi-purpose devices/media are levied irrespective of actual use

• double ‘payment’ of legitimate users erodes the legitimacy of copyright

• Framework: Art. 5 (2) (b) of the 2001 InfoSoc Directive:– Private copies on any medium can be 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» (hereafter DRMs)

How to implement the limitations re levies?

• The “level of fair compensation” should take “full account of the degree of use of DRMs” (rec. 35)– Need of close monitoring to assess the « degree of use »

• “Availability” of “effective DRMs” must be taken into account (rec. 39)– Availability of DRMs rather than use

• Exceptions (for private copying) and levies shall not “inhibit the use of DRMs or their enforcement against circumvention” (rec. 39)

The “adequate protection” of DRMs

• DRM protection framework (Art. 6 InfoSoc Directive):– Art. 6 (1) : prohibition of acts of circumvention

• if knowledge– Art. 6 (2) : prohibition of preparatory acts: manufacture, sale,

possession, rent, promotion etc. of devices or provision of services

• if “primary purpose” = circumvention– Art. 6 (3) : definition of “effective” DRMs which are protected

• covers control and access systems– Art. 6 (4) : enabling mechanism to ensure accommodation of

copyright exceptions where necessary• does not apply to works delivered on-line

How to find a right balance?

• Three layers of protection:– copyright protection– technical/DRM protection– legal protection of DRM

• Two issues/criticisms: – the built-in balance of copyright (1st level) is thrown away

through the legal protection (3rd level) of DRM (2d level)– no exception to the protection of DRMs (2d level)

• Two means to ensure a right balance:– Respect of the underlying copyright exceptions in Art. 6 (4):

• first best solution = voluntary measures (ex. hard copy available) to ensure that the beneficiaries of some exceptions can benefit

• second best solution = intervention of Member States to promote voluntary measures

– Exceptions to protection of DRMs (as software):• not in the text of the Directive 2001/29 (>< DMCA)• recital 48 : research in cryptography• recital 50 : study and reverse engineering for computer programs

under 1991 Software Directive

The balance in the InfoSoc Directive

Anti-circumvention as “market lock”• Use of anti-circumvention rules to prevent

aftermarkets– toner cartridges: Lexmark v. Static Control

• US Court of Appeal (6th Cir., Oct. 04): no violation of DMCA as the lock-out chip on printer is not designed to prevent acts “in respect of a [protected] work”

– garage door openers: Chamberlain v. Skylink• US Court of Appeal (Fed. Cir., Aug. 04): to fall under DMCA,

access control must be linked to copyright protection - dismissed

• Competition issue (possible anti-competitive effect depending on market conditions)

Competition law aspects

Using DRM to foreclose competition for online music?

The Sony/BMG and VirginMega experiences

Sony/BMG

• Concentration between Sony and BMG • Sony is vertically integrated:

– content

– online music service • sells music in the ATRAC3/OpenMG format

– devices• only devices compatible with ATRAC3/OpenMG

Sony/BMG: third parties’ claims

• SonyBMG’s repertoire would yield considerable bargaining power

• SonyBMG could decide to sell its content only in Sony’s proprietary format (ATRAC/OpenMG)

• Connect would be the only service with a complete repertoire– online services need repertoire from all Majors to be

successful

• Sony would boost sales of devices compatible with Connect

Sony/BMG: Commission’s decision

• No data to assess Sony Connect’s market share in the retail market– To what extent is SonyBMG’s content a “must-stock”

product?

• SonyBMG would have no incentive to refuse to sell to other online services as it would forego “considerable license revenues” – “considerable license revenues” v “Sony’s revenues

from online music were quite low”

VirginMega (‘04): VM’s claims

• In order to be a viable provider of online music, I need to be able to sell to iPod users

• I order to sell to iPod users I need access to FairPlay

• By refusing to license FairPlay, Apple is abusing its dominant position in the markets for portable players with hard drive and for online music

VirginMega: Apple’s market position in relation to portable players (market share)• Apple would have 25% of all MP3 players, and

53% of players with hard drive• FCC: market is rapidly expanding, new competitors

are entering, prices are decreasing, functionalities are increasing: today’s market share do not reflect actual market power

• FCC: difficult to see how Apple could behave independently; however, at early stage of investigation, dominant position cannot be excluded

VirginMega: Is Apple’s refusal abusive?

• FCC: Refusal to grant access to FairPlay would constitute an abuse if FP were to be indispensable to compete in the online music business

• FairPlay is not indispensable:– VM can sell to other users than iPod users

• MP3 player is not main means to listen to online music

– many new VM compatible devices are entering the market

– iPod users can transfer VM music to their iPod by ripping

VirginMega: link between FairPlay and Apple’s success

• Many factors, other than the absence of access to FairPlay explain VM’s lack of success compared to iTMS:– limited catalogue (350,000 v 700,000 tracks)

– prices (€1,19 v €0,99)

– marketing expenditures

– more liberal content usage rules

Conclusion

• Criteria: indispensability for competing in downstream market: forward looking assessment

• Today’s market shares are not indicative of market power

• markets at stake are growing exponentially• compatibility with a brand only one of the means

to compete

Forcing interoperability: the French experience or the “end of legal online music” ?

Text voted by the Assemblée Nationale

• TPMs should not have the effect of preventing interoperability

• Suppliers of TPMs shall supply all information necessary to implement interoperability for free

• Anybody can request the Courts to force TPM suppliers to provide interop information

• No criminal sanction for the circumvention of TPMs for interop purposes

What’s wrong with the French initiative?

• Text voted violates multiple provisions:– Article 6 Copyright Directive

– compulsory license on IP rights protecting patents, business secrets, other property rights

• Text would spare DVD Jon efforts to find the way to hack DRMs and would stifle innovation in TPMs

• End of legal distribution of online music ?

Text voted by the Senate

• Creation of a new regulatory body (ARTPM)• ARTPM can mediate between suppliers of TPM

and third parties for the provision of interop information

• ARTPM can impose to TPM suppliers to provide interop information

Thanks for your attention