Long player: 5 year dispute ends successfully for BPI against CD Wow!

5 July 2007

Last month saw the conclusion (or did it…?) of a long running battle between the BPI, on behalf of record companies and CD Wow!, effectively fighting on behalf of consumers everywhere.

The story behind the dispute

 The case had its genesis in 2002, when the BPI issued proceedings against CD Wow! alleging that it had illegally imported discs into the UK, from Asia.  That case was settled in January 2004, when CD Wow! gave undertakings to the court.

The allegation was that CD Wow! was buying discs in the Far East and selling them to consumers in the UK. CD Wow! accepted that it was selling cut-price CDs but claimed that they were all licensed to sell in the UK and that there was nothing improper, let alone illegal, about what they were doing. Not so, said the BPI, who felt it was a clear case of “parallel importing”.

Parallel importing is what happens when copyright material that is intended for a market outside the EEA (European Economic Area) is introduced for sale in Europe without the consent of the copyright owner.  Such a practice contravenes UK and also European copyright law and is therefore illegal.

Less than a month after the first settlement in 2004, CD Wow! increased its prices by £2 per disc and alleged it had done so because the BPI had imposed a surcharge.  The BPI promptly went back to court and got an injunction requiring CD Wow! to withdraw that claim.  The retailer was forced to admit that the price rise was entirely of its own making and, indeed, it restored its prices to their original level.

There was then a further flurry of proceedings in September 2005, when it became apparent to the BPI that the illegal importation of CDs - in particular the Live Aid DVD - by CD Wow! was still happening.  In that particular case, the charity had been deprived of income.

The BPI spent some time gathering further information and then brought contempt of court proceedings against both CD Wow! and its principal share holder, Philip Robinson, in October 2006.

Counsel for CD Wow! Shareholder, Philip Robinson confirmed that Mr Robinson accepted that CD WOW! was in breach of its undertakings to the court and that Robinson bore some responsibility for failing to comply with the court undertakings. Counsel apologised on his behalf and confirmed that he had agreed to pay £50,000 to the music industry for costs incurred by the industry in bringing the case against him. But it argued that it should not have to pay a fine, damages or costs. 

That case was due to come to court in July 2007 but in fact the court short-circuited that process and dealt with the case in mid May.  That followed a 4 day hearing in March when the High Court ruled that CD Wow! was in breach of the 2004 agreement and CD Wow! was ordered to pay £37 million damages plus costs and interest, altogether totalling c. £41 million.

In the hearing, CD Wow! admitted to breaches of copyright law but put them down to human error in its despatch process.  The court would have none of it and that evidence was unhesitatingly rejected.   

The court said there was clear evidence that CD Wow! was committing widespread breaches of the undertakings that it gave in 2004.  In fact, not only was it in breach, but even after the application for contempt of court had been pursued, in September 2005, the court found evidence that even then, CD Wow! had taken no effective steps to ensure compliance with the 2004 undertakings.

Trial Judge, Justice Evans-Lombe continued in his ruling that in "meeting the criminal burden of proof" the BPI had established "beyond reasonable doubt" that CD WOW!'s actions were a "substantial breach of the court order" and that it had "no tenable ground of defence to the claimants' claim for damages for primary infringement of the claimants' copyright".

Although the damages enquiry was due to take place in July 2007, the court felt the matter was so serious it could not wait until then.  In particular, given CD Wow!’s alleged failure to co-operate with the court orders for disclosure of documentation and for payment of security, the court assessed damages in May 2007.  The BPI had then already obtained a freezing order against CD Wow!’s assets and bank account in Hong Kong.

The arguments for and against

Is this the Robin Hood story updated?  That is to say, is CD Wow! the champion of the poor and the downtrodden, in this case consumers who are apparently paying too much for their music?  And are the BPI the big, bad guys determined to protect the vested interests of the music industry and record companies in particular, whatever the cost, i.e., even if it results in the elimination of fair competition?

Looking at some of the statistics surrounding the case is constructive. Buying CDs in the UK is no more expensive than in other markets, such as the US and Japan.  Interestingly, a recent survey of CD prices in London found that they are cheaper than most other international cities.

At the beginning of 2000, the average price of a CD was £11.37.  By the end of 2006, this price has fallen to £9.40.  If you apply the RPI to an album over the same period, its price at the end of 2006 would be £13.41. You might be surprised to know that over 75% of single CD albums in the UK retail for less than £10.  The current average price for a single CD is £8.85.

The BPI’s case was quite simple: the record industry is a business like any other.  It may have artists, media and artistic work at its heart but essentially everyone needs to be fed.  Artists need to be paid and record companies need to receive a return on their investment i.e. in artists and new acts.  Record companies not only need a return but they need something extra, so that they can sustain and support investment, in new artists, new music and new markets.

CD Wow! said (in effect) fine, all well and good.  But…..you should be targeting pirates, in particular, in the Far East rather than us.    All we are doing is selling a licensed product, at a discount.  You still get your royalty payments from all the discs we ship.

The difficulty is that although it was part of the CD Wow! case that it was simply selling in the UK discs that it was entitled to sell, where royalties still went to the record company in question, an anonymous survey by the BPI and random purchases that it carried out, showed that the reality was somewhat different.

The BPI had made repeated test purchases of albums from CD Wow!  Discs such as Robbie Williams’ “Greatest Hits” and the Live Aid DVD that were being despatched from Hong Kong to UK consumers, were not discs that were licensed to be sold in the UK.

Those were the instances that CD Wow! referred to as “a little human error”.   Unfortunately for them, the court found that though one or two incidences of human error could be excused, the same could not be said where it happened, as it did, on a wholesale basis (the BPI produced evidence to show 33 instances in total).

On a wholesale basis, selling in the UK albums that were despatched from Hong Kong but that were licensed to be sold in the UK, contravened the relevant legislation and was a clear case of parallel importing.

What do we know about CD Wow!?  Not a great deal.  It is an internet-based CD and DVD retailer, based in Hong Kong.  It had retail sales of £21.7 million in the UK in 2005 alone.  It is Britain’s second biggest online music retailer and it is reckoned to have a 23% share of the online CD album market.

There had been a similar case in 2001 between Tesco and Levi.  Levi successfully sued Tesco for importing low-cost Levi jeans from outside Europe into its UK stores.  Levi’s argument was that its brand would be sullied, if retailers sold products from outside its officially distribution regime.

Tesco’s argument was that customers would vote with their feet, or rather, their wallets.  Levi had a supply chain that it wished to preserve.  It felt that Tesco had circumvented that supply chain.  Tesco’s argument was simply that consumers would not be bothered where they bought the jeans, as long as they were Levi jeans.

The BPI’s argument was very similar.  Whereas CD Wow!’s initial purchase of the CDs i.e. the bulk purchase, was legitimate, even though it happened outside of the EEA, when it resold that CD in the UK, it did so illegally.

CD Wow!’s argument was simplicity in itself.  It was a Hong Kong based company.  It purchased its products in Hong Kong and distributed from there.  If, from Hong Kong, it sold a product to a customer in the UK, that sale was a personal import by that customer.  That, it claimed, was not parallel importing.

The implications

The BPI disagreed and sued.  Having reached agreement in 2004, the further flurry of litigation in 2004 and then in 2005, the court last month has resoundingly come down in the BPI’s favour.

Interestingly, the Consumer Association described the initial CD Wow! settlement as a “sad day for consumers and a sad day for e-commerce”.  It felt that the whole purpose of the internet and internet shopping would be circumvented, if customers in the UK were not allowed to use the internet to buy goods from abroad.

The BPI’s case is that there is no objection to that conduct, in principle.  Its objection however is to customers buying whatever they like and ignoring the law of copyright. The Entertainment Retailers' Association (Era), which represents companies like HMV, Fopp and Amazon, also welcomed the ruling, stating that it is vital that all retailers compete on a level playing field, in order to protect British jobs. Cynically, one might say ‘well they would say that, wouldn’t they’, as they seek to protect their interests from competition from other retail entities.

We do have some sympathy for the statement by CD Wow!’s founder, Henrick Wesslen, who condemned the BPI’s pursuit of its company.  He said that at a time when the record industry was losing out vastly to piracy, it seemed ludicrous that the BPI could set out to destroy a section of the market that was actually making it money.

Interestingly, even a past anti-piracy director at the BPI felt that the BPI resources should be better applied elsewhere.  His point was that whether that CD was sold in Hong Kong or elsewhere, ultimately if it was a genuine CD, the royalties would go to the record company in question and the creator of the work in question.  He too felt that efforts should be expended in other directions and, in particular, against people committing real crimes such as counterfeiting and piracy.   We should all look to the Far East as being the major protagonist or, at least, the market where piracy and counterfeiting flourish.

So where does this all leave us?  5 years down the line we have a substantial judgement and an authoritative statement of the law on parallel importing and copyright laws. But… we are left with the uncomfortable feeling that free trade or, at least, healthy competition has been suppressed.   If nothing else, we are still left feeling that consumers in the UK are still paying far too much for their music, now as much as ever. However, we may not have heard the end yet, as CD-Wow! says it will fight the High Court judgement in the European Courts if it can.

This article was published in:

Internet Business Law Services Portal
British Computer Society
Society of Computers & The Law
E-commerce Law & Policy