Swedish Supreme Court finds hypothetical licence fee too hypothetical

The Swedish Supreme Court

When it comes to calculation of damages in copyright infringement cases, what is the correct approach to follow? Is the price of a 'hypothetical licence' a good criterion?

Katfriend Hans Eriksson (Westerberg & Partners) discusses a very recent decision of the Swedish Supreme Court, which has answered the latter question ... in the negative.

Here's what Hans writes:

“There have been several recent high-profile criminal copyright infringement cases against the operators of illegal filesharing services in Sweden, most notably against operators of the Pirate Bay, a much-litigated service avid readers of this blog will recognize from this case (or perhaps your kids’ internet browsing history).

Defendants have been given stiff prison sentences (by Swedish standards), rightsholders have been awarded significant compensation and ill-gotten gains have been gotten-good by the state. All was well and Swedish IP practitioners and rightholders rejoiced.

But in a recent decision against the operators of illegal streaming site Dreamfilm, the Swedish Supreme Court delivered some stern words about how compensation should be calculated in these cases.

Not so fast with your $£€s the court says, let’s see your evidence first.

Under Section 54 of the Swedish Copyright Act, anyone who commits copyright infringement shall pay the rightholder ‘reasonable compensation’. If in addition the infringement has been carried out intentionally or negligently, compensation shall also be paid for ‘additional damage’ caused by the infringement. Swedish litigants also find solace in the general provision in Chapter 35 Section 5 of the Code of Judicial Procedure, if full proof of the extent of damages cannot be invoked, the court may estimate the damage to a reasonable amount (i.e. shoot wildly from the hip with a blunderbuss).    

In Swedish case law and literature, the application of hypothetical licences corresponding to the infringing use has long been championed as the most efficient way to calculate reasonable compensation. This is a good method to use in cases where the rights infringed were available on the open market. Such hypothetical licences are simply not that hypothetical. But the application of this principle to cases where there is no licensing market or no licensing model that corresponds to the infringing use has proven problematic. In cases against filesharing services, the use of such models has resulted in notably different compensation levels for arguably similar infringements. One Court of Appeals found EUR 70,000per movie a reasonable compensation against the Pirate Bay, while another found EUR 200,000 per movie to be reasonable compensation against Swefilmer.

In the present case, the lower courts had taken the defendants on a wild ride. The District Court sentenced them to prison terms in the range of 6-10 months and to pay damages of about EUR 125,000. The Court of Appeals gave them conditional sentences instead of prison but increased the damages to approximately EUR 400,000. Unhappy with the legal uncertainty, the Supreme Court decided to shed some light on how reasonable compensation should be calculated.

The price of consent

In this case the rightholder had based its claim for reasonable compensation on a hypothetical licence that was unlimited in time, number of views, geographical use, was free for the viewer and had no copying safeguards – a virtually total exclusive licence to the movie. A type of license rarely - if ever-  seen on the market. The cost of such a licence would have to cover all the production costs of the movie, with a 20 percent profit add-on (because surely all movies make a profit ...). That amounted to approximately EUR 2 million, but the rightholder magnanimously, and without explanation, limited its claim for reasonable compensation to approximately EUR 800,000 (by itself quite a shot with the blunderbuss, but I digress).

The Supreme Court found the hypothetical licence too broad and not based on the use the defendants had made of the movie, which was for example limited in time and only covered streaming. Such a broad licence is perhaps what the rightholder would have demanded to license the defendants’ service, but it is not reasonable to think that it would have been accepted by the defendants. Interestingly, the court thus indicated that if you want to use a hypothetical licence as a tool to calculate reasonable compensation for infringement, you must take into account the infringers’ (illegal) business model. And EUR 400,000 per movie was simply not commercially viable for the criminals.

This hypothetical licence was thus too far removed from reality to serve as a tool for calculating reasonable compensation in this case. Reasonable compensation must instead be based on the totality of the evidence invoked by the rightholder. Loosely based on a slew of disparate data points about how long the infringement had been, the lack of evidence of numbers of streams, the rightholder’s own commercialization of the movie and general licensing models for broadcasting and rental of movies, the court found that approximately EUR 40,000 would constitute reasonable compensation for the defendants’ use of the copyright in the movie.

(With the smoke settling from the Supreme Court’s own final shot of its mighty blunderbuss,) Swedish copyright litigants have a new general feeling of what amounts to reasonable compensation on a per movie basis in these cases. But exactly how the Supreme Court arrived at this sum is anyone’s guess. In practice, it may not make much difference. Since operators of illegal filesharing or streaming sites, once they are caught, usually have infringed the rights to hundreds if not thousands of movies, rightholders should just base their claim for reasonable compensation before Swedish courts on approximately EUR 40,000per movie multiplied with the number of movies needed to get as much money from the infringers as can be expected to be found in their bank accounts.”