Thursday 27 January 2011

Digital Economy Act Costs - an unlawful Prisoners Dilemma

On 17 January 2010, the draft Online Infringement of Copyright (Initial Obligations) (Sharing of Costs) Order 2011 was laid before parliament. It is the first substantive item of secondary legislation made under the Digital Economy Act 2010 and concerns about the simplest thing possible: how much copyright owners and ISP's will have to pay under the Initial Obligations Code (IOC). Despite its simplicity it has been misdrafted and it may also be unlawful.


In case you haven't been following (and why should you?), the Initial Obligations Code is intended to allow copyright owners to send "copyright infringement reports" or CIR's to ISP's, that allege, roughly speaking, that the copyright owner has reason to believe that there has been some copyright infringement associated with one of the ISP's IP addresses. Some of these reports (which and how many to be determined by later legislation) must then be reported by the ISP to its subscriber. If a subscriber collects enough CIR's over a certain period of time (again to be determined) their IP address will go on a list which the copyright owner can then demand from the ISP which will (in theory at least) allow the copyright owner to match up different CIR's to the same subscriber.

There is no such thing as a free lunch. All this has to be paid for. OFCOM which polices the system will need funds to do so, ISP's will incur costs processing CIR's and there will also be an appeal system for subscribers who believe that a CIR was given wrongly which will have to be paid for. The Order is intended to split the cost 75:25 as between copyright owners and ISP's.

I want to avoid engaging in a discussion as to whether the principle of the act is a useful way to encourage people to stop infringing copyright, or a hopelessly misguided waste of time for everybody. I think my views on that are sufficiently well known. What interests me is whether there is anything technically wrong with the order itself, and I think there may be.

A technical miscalculation

Copyright owners are supposed to pay ISP's 75% of the costs that (OFCOM thinks) they will incur in handling the CIR's. OFCOM sets a rate per CIR that copyright owners must pay, which it can change from time to time. Copyright owners pay in advance, and this is where things come unstuck.

Paragraph 2 of the Order's schedule requires the copyright owner to notify in advance any ISP to which it intends to submit CIR's and give an estimate of the number of CIR's it expects to be submitting. Before the start of each notification period, the copyright owner must submit another estimate for the coming notification period and then pay the rate set by OFCOM multiplied by:

(a)the number of copyright infringement reports which the qualifying copyright owner estimates it will make to the qualifying internet service provider under the Code during the notification period; less
(b)the difference between the number of copyright infringement reports which that qualifying copyright owner estimated it would make to that qualifying internet service provider under the Code in the previous notification period and the number it actually made to that qualifying internet service provider in that period, if lower.
Read that carefully. It means that if the copyright owner systematically under estimates the number of CIR's, it will never have to pay the difference. Indeed there is nothing to stop the copyright owner giving an estimate of "1" in each year and paying the fee for exactly one report.

The proportion of fees payable by any copyright owner (or ISP for that matter) to OFCOM are also based on the copyright owner's estimates. The actual number of CIR's submitted never enters into the calculation. This amounts to a zero-sum game between all copyright owners. Each will have an incentive to submit the lowest estimates possible.

Unless I have completely misread the Order this seems quite mad and must (surely) be the result of a misdraft.


I have been told that OFCOM stated at a stakeholders' meeting that the initial obligations code would limit the number of CIR's a copyright owner could submit in any notification period to the number it had estimated at the start of that period. This would be a change from the draft code published last year and is as suggested by Malcolm Hutty in the comments below.

This does avoid the strong incentive to underestimate the number of CIR's to be submitted, but it does not leave the scheme in a satisfactory state. It is still the case that fees payable to OFCOM are based on estimates and not reality. While that will penalise a copyright owner that overestimates, it will also penalise any ISP that receives an over-estimate of CIR's. The ISP's have no recourse in such a situation.

There is nothing in the Act that prevents the costs regime from dealing with reality and apportioning costs according to actual use (with balancing payments where necessary). OFCOM's suggestion looks like a quick and dirty bug fix, rather than a well thought through statement of policy.

Is the Order lawful?

According to James Firth, it appears that a different concern has been raised by the European Commission. Does the rule on cost sharing comply with the the "Authorisation Directive" (2002/20/EC).

The Authorisation Directive is, as EU directives go, pretty straightforward. The idea behind it is that regulation of those wishing to offer public communication networks should be extremely lightweight. Member States may regulate, but only within fairly tightly defined limits. In particular they may only impose conditions on the operator of a public communications network that fall within one of a list of type of condition (found in Annex A of the Directive).

The list is fairly long, but much of it is pretty common sense. There are only two which could plausibly allow the UK via OFCOM to make ISP's pay for the operation of the Initial Obligations Code.

First, which is what is being referred to in James's post, the UK (via OFCOM) could require ISP's to pay "administrative charges" in order to be authorised to operate a public communications network. Article 12 of the Directive makes it quite clear that "administrative charges" must be just that — charges for the administration of the general authorisation scheme for public communication networks. That does not include an obligation to pay for an appeals body to hear subscriber appeals or money to OFCOM to monitor and run a scheme for assisting copyright owners enforce their rights.

Second, it is permissible to impose a condition restricting the transmission of "illegal content" (such as content which infringes copyright) and "harmful content" (such as indecent images of children). It seems to me that the CIR/initial obligations scheme of the Digital Economy Act 2010 is not a "restriction" on the transmission of illegal content, but something quite different. What is more, a requirement to pay fees cannot be a "restriction" even on a fairly relaxed reading of the Directive.

In other words I cannot see anything in the Authorisation Directive that could allow the UK to impose a requirement to pay for the initial obligations scheme that is compatible with the Authorisation Directive. Unless I am missing something, the Order, as it stands is unlawful.

Interestingly, the 1709 blog asks whether the Order complies with the Technical Standards Directive and suggests that it does, because the imposition of fees and costs under the Order is a restriction permitted by the Authorisation Directive. Alas, whatever view one might take about technical standards, I don't believe the Order complies with the Authorisation Directive.


The Order isn't really news and I am sure the government believes they are complying with the Authorisation Directive. We disagree and only time (and perhaps the ECJ) will tell, but it does worry me that in this already contentious area the first piece of subordinate legislation is already buggy.


Malcolm Hutty said...

Ofcom might be able to correct this apparent defect in the Cost Sharing Order if it stated in the Initial Obligations Code that rightsholders may only make as many complaints under the Act as they have previously estimated. However no such measure appeared in the Draft Code Ofcom published last year.

I'd be interested in your view as to whether this could be effective.

The incompatibility with the Authorisation Directive seems to me to be irremediable, however. Interestingly, last year the European Commission told France and Spain to abandon taxes on ISPs intended to support national broadcasters, so there is a precedent for this sort of objection.

Andrew Cormack said...

Francis: I don't think you have misread the incentive. I came to the same conclusion in responding to the original consultation, so BIS can't say they weren't told :(

Unknown said...

Fascinating. I wonder who came up with the draft language.