iiNet, Film industry face financial hangover

Later this morning the High Court of Australia will hand down its long-awaited judgment in the copyright battle between ISP iiNet and the film industry.

Industry lobbyists, right holders and policy wonks will spend the weekend poring over the detail to identify implications of the judgment.

For the immediate parties in the litigation, a win or loss is about policy, market power and financial compensation.

If the Australian Federation Against Copyright Theft (AFACT) wins, ISPs will be obliged to follow the agenda of rights holders.

AFACT will be able to approach ISPs and argue the court found them liable under 'x' set of circumstances. The federation can continue making ISPs liable for the actions of users by sending infringement notices - and there is little ISPs will be able to do about it.

If the judgment goes comprehensively against iiNet, all Australian ISPs could ultimately be paying for all downloads of infringing material by their customers, presumably at a retail rate - like the cinema ticket rate of $15 a pop.

This threatens to impact the future of the ISP business model. We may see ISPs require customers to pay an additional “infringement insurance” fee to cover the cost of complying with anti-piracy measures set out by the film industry, such as a graduated response mechanism.

Such measures are likely to be reflected in an industry code that sets out procedures that draw on the judgment, and guidelines for ISPs to investigate future allegations of internet piracy.

Something quite similar will occur even if iiNet wins.

The main difference will be that setting an agenda for the industry code and the requisite costs to be paid for investigation of infringement allegations can be done on terms more favourable to the ISPs.

In New Zealand where there are legal provisions for a 'three strikes'-like policies, this is exactly what is happening.

ISPs and rights holders are mainly concerned with how much they will have to pay to process a note of alleged infringement. ISPs will be allowed to charge rights holders NZ$25 a notice. Rights holders had sought to pay only NZ$2 a notice.

Even the NZ$25 fee is less than estimates of the actual processing costs. However, the battle has been to find a charge amount that shares risk appropriately.

Whoever wins this litigation will have the advantage of setting an appropriate fee and the required procedures for dealing with alleged infringements, drawing on the High Court’s advice.

If the rights holders win, the fee will be set low as the liability falls substantially on ISPs.

If iiNet wins again it will be set higher as it is effectively a fee for service that is not their core business or liability.

Fatter damages claims?

There is no legal precedent in Australia for financial damages that might stem from today's outcome.

Even so, it's hard to imagine a damages claim would amount to much, if anything. The case was run on the basis of a sample of 20 infringing accounts only.

This is small beer compared with the huge legal fees and bearish share run iiNet would sustain in the event of a major loss.

Law lecturer Kim Weatherall notes that damages were not considered so far in the case.

The judgments to date dealt only with the issue of liability, so no evidence has been put on on the question of damages.

As a matter of procedure, it is likely that the parties would discuss settlement, but if settlement is not forthcoming, the matter could go back to the Federal Court.

The only analogous case - the Kazaa case back in 2005 - settled while it was pending before the full bench of the Federal Court. So there was no damages award there.

It’s worth noting the courts in Australia have considerable discretion on damages awards.

Although AFACT would have to put on evidence of harm suffered, they could also rely on sections 115(5) and (6) of the Copyright Act.

 These sections allow the court to have regard to 'likely infringements' over and above proven infringements in assessing damages (this was introduced specifically to deal with internet infringements where proven infringements may be fewer than those which are likely to have occurred.

But there is no case law backing the implementation of this provision.

Overseas offers little guides either. The Grokster case was settled, apparently with a $50 million payment to the RIAA.

Kazaa's many rounds of litigation (here and overseas) apparently involved damages payouts of $151 million.

Note also that those cases involved so called rogue concerns - not ordinary commercial ISPs.