[Guest post] Flat rates supported by clauses on universality of repertoire in contracts between CMOs and users are anti-competitive, says Spanish Competition Authority

The IPKat has received and is pleased to host the following guest contribution by Katfriend Lucius Klobučník (Aston University) on a recent decision of the Spanish Competition Authority regarding the compatibility of certain rates charged by collective management organizations (CMOs) with the prohibition of abuses of dominant position. Here’s what Lucius writes:

Flat rates supported by clauses on universality of repertoire in contracts between CMOs and users are anti-competitive, says Spanish Competition Authority

by Lucius Klobučník

Flat Kat

The Spanish Competition Authority - Comision Nacional de los Mercados y la Competencia (CNMC) – issued a decision in June 2024 according to which the design of licensing rates as ‘flat rates’ as opposed to ‘effective use rates’ and inclusion of the so-called ‘universality of repertoire’ and ‘indemnity’ clauses by CMO SGAE in their contracts with users, such as TV and radio stations, amounted to an abuse of dominant position according to Art. 2 of the Spanish Act on the Defence of Competition and Art. 102 of the TFEU. Such conduct generated exploitative effects by excessive pricing towards users as well as exclusionary effects towards SGAE’s competitors, representing a barrier to entry into the market for collective management as well as the market for licensing of copyright-protected works for other CMOs or independent management entities (IMEs). DAMA and UNISON, a CMO and an IME, respectively, were the applicants in this case.

CNMC noted that SGAE’s refusal to offer licensing rates based on effective use to radio and television
stations were supplemented by statements describing its musical repertoire as universal (i.e., covering all exploitation rights and all the owners), despite it not being so, as well as guarantees of indemnity in favour of the user against potential claims for the use of rights that could form part of the repertoire of third parties.

The musical rights in question are subject to voluntary collective management rights, so SGAE cannot be attributed the management of rights of authors who have not signed a management contract with them. Since 2020, UNISON had a musical repertoire, so the SGAE repertoire could not be universal. According to the CNMC, the disputed clauses create confusion for users, who do not have clarity on the repertoire covered in licensing contracts with SGAE and who may be consequently reluctant to enter into licensing contracts with other CMOs and IMEs with respect to their repertoire.

Market definition and particularities of the markets for copyright management and licensing

Before analysing SGAE’s market dominance and a potential or actual abuse of such dominance, it is important to highlight some particular features of the market for copyright management and licensing services. First, when it comes to musical content, there is no substitutability between products (in this case - repertoire) offered to users by various management entities, since rights to musical works cannot be substituted by rights to other musical works, and authorisation is necessary in order to use the protected repertoire. Secondly, due to factors such as transaction costs, copyright holders have a limited capacity to exercise direct management, so that that option is not a realistic alternative to collective management.

CNMC determined that SGAE has a dominant position on:

• Upstream markets for management of intellectual property rights of authors of musical works and authors of audiovisual works;
• Downstream markets for granting authorisations for use of the rights of reproduction and public communication of musical works and managing the remuneration rights of authors of audiovisual works.

SGAE's share in both markets is close to or greater than 90%. Economies of scale and scope also play in the favour of the incumbent dominant entity. The average cost of managing a right decreases with the increase in the volume of rights managed as well as with the increase of managed forms of rights exploitation. The market for the provision of copyright management services to copyright holders presents significant barriers to entry for new CMOs and IMEs, who, in order to provide repertoire sufficiently attractive to users, have to secure a large number of management contracts with copyright holders, which can be costly.

This represents a possible disincentive for potential market entrants, thus increasing the market power of established entities. Since SGAE's musical repertoire is very broad and significantly superior to that of any of its competitors, it is indispensable for users.

Abusive effects of flat rates occurring in both upstream and downstream markets

Although the mere holding of a dominant position does not automatically constitute an abuse, according to European case law, the dominant company bears the element of special responsibility of “not preventing the development of effective and undistorted competition in the market”. CNMC recalled that monopolistic management entities have a special duty of transparency. This was breached by SGAE by imposing flat rates, thus preventing users from knowing the portion of the tariffs corresponding to the use of each repertoire in such a way that they could compare the value proposals of SGAE’s competitors.

The Spanish Intellectual Property Code, Art. 164, implementing Art. 16 of the CRM Directive, emphasizes that the tariffs designed by CMOs must be "simple and clear". Effective use and the degree, relevance and intensity of use are the priority criteria when establishing tariffs. A CMO may be engaging in abusive practice if it only offers tariff rates that are de facto not related to effective use or when these do not constitute a true alternative to rates not based on the effective use of the repertoire. The mere fact that a negotiation has taken place with users does not guarantee that the negotiated tariffs are reasonable and fair. CNMC did not accept SGAE’s defence that users ATRESMEDIA and MEDIASET have a duopoly and thus the negotiating power to refuse the rates proposed by SGAE.

Another Art. 102 TFEU situation

CNMC considered it proven that such actions led to several relevant users refusing to contract with UNISON because they expected that the flat rate contracted with SGAE covered the entirety of existing rights to musical works and that, even if this were not the case, they would be covered by an indemnity guarantee. According to CNMC, universality and indemnity clauses effectively cemented SGAE’s dominant position and led to Unison’s difficulties in contracting with and collecting from users.

Relevance of the case

This case highlights the importance of providing repertoire definition and tariff structures by CMOs, but also by other licensing and management entities, such as IMEs, to users. This need corresponds to the changed reality of the markets for copyright management services for rights holders and copyright licensing to users in which CMOs may no longer represent 100% of the repertoire. While copyright management and licensing entities may be aware of this reality, the same may not be true for users. It is up to the copyright management and licensing entities to notify users of the changed circumstances.

As was shown in this case, the mere existence of the ‘universality of repertoire’ and ‘indemnity’ clauses has a potential to create confusion in users. If users believe that they have a contract with a management entity claiming to be the owner of the universal repertoire, they will not be willing to listen to other management entities, since according to their existing agreements, they are already paying for all the works they use. Although it may be economically more efficient for the new entrant to inform the different users about their repertoire, it should be for incumbent CMOs which already have contracts with users in place, to inform the users that these agreements no longer cover all the works that the user could use.