Society of Composers, Authors and Music Publishers of Canada v. 348803 Alberta Ltd., docket T-26-97

     T-26-97

Between:

     SOCIETY OF COMPOSERS, AUTHORS AND

     MUSIC PUBLISHERS OF CANADA,

     Plaintiff,

     - and -

     348803 ALBERTA LTD. AND

     DAMIR ZORANIC,

     Defendants.

         REPORT OF REFERENCE

As to the amount of damages, interest and costs owing by the Defendant to the Plaintiff for the period 01 January 1994 to 09 January 1997.

JOHN A. HARGRAVE

PROTHONOTARY

     This Reference, pursuant to the designation of the Administrator of the Court, 12 March 1997, to determine the profits, damages, interest and costs owing by 348803 Alberta Ltd. and Damir Zoranic to the Society of Composers, Authors and Music Publishers of Canada (the "Society of Composers") arises out of the Plaintiff's action claiming an accounting and various other relief for the use of copyright music, including royalties payable in accordance with the applicable tariffs set out from time to time in the Supplement to the Canada Gazette. The claim for relief is based on a Judgment obtained by the Society of Composers, in default of defence, on 20 February 1997.

     The Reference took place at Vancouver, BC, on the afternoon of 24 June, 1997. The Defendants, who are now in the position of judgment debtors, with profits, damages, interest and costs payable to the Plaintiff to be determined by this reference, all as set out in Federal Court rules 500 through 507, have had ample notice from time to time of these proceedings, including the present reference. No one attended to represent the Defendants.

APPLICABLE TARIFFS

     The Society of Composers is the only performing rights society authorized by the Copyright Board of Canada to issue licences and to collect licence fees from parties wishing to perform copyright musical works in public in Canada. The tariffs and fees are authorized by Section 67 through Section 67.2 of the Copyright Act, R.S.C. 1985, Chapter C-42. The Copyright Board publishes, each year, in the Canada Gazette, a statement of the royalties which the Society of Composers may collect. These are in the form of tariffs. The relevant tariff, in this instance, is Tariff 18, applicable to recorded music for dancing. In the present instance the applicable tariffs are those of 13 August 1994, for the 1994 year, 11 March 1995 for 1995, and 21 September 1996 for 1996. the Plaintiff's evidence establishes the Defendants' establishment is still in operation, but not that it presently plays recorded music. Thus there is no claim for 1997.

APPROACH TO ASSESSMENT

     The relief sought in this case involves the determination of a royalty or licence fee as damages, the portion of net profits to go to the Society of Composers and exemplary damages.

Damages

     Where it is customary to licence the use of a work, music in this instance, damages may be measured on the basis of the usual royalty or licence fee. The licence fees for music are calculated using given figures and rates from the Copyright Board Tariffs and various statistics as to the operation of the licensee. Where a licence fee alone is inadequate recompense, general damages at large may be in order: Hay v. Sloan (1957) 27 C.P.R. 132 at 140 (Ont. H.C.).

Profits

     Recompense does not necessarily end with damages, but may also, in a copyright infringement matter, at a court's discretion, include an accounting of profit. This is touched on indirectly in section 34 (1.01) of the Copyright Act, in the context of an accounting, and is specifically provided for in section 35 (1) of the Act. I have treated damages and profits not as alternative, but as cumulative relief.

     To the contrary, there is a statement in Hughes on Copyright and Industrial Design (Butterworths) in the 1997 update of section 55, that damages and profits, in a performers' rights context, are alternatives:

When considering performers' rights, remedies are somewhat different, the right to damages is not in addition to profit, but rather in the alternative, ...(issue 34-3/97-page 602).

This requires some further consideration. The only reference cited in Hughes is to section 34(1.01) of the Copyright Act, a 1994 amendment, which seems to have been added with the World Trade Organization amendments in 1994. Section 34(1.01) reads:

In any proceedings for an infringement of a performer's right, the court may, subject to subsection (1.02), grant to the owner of the performer's right all remedies by way of injunction, damages, accounts or delivery up and otherwise that are or may be conferred by law for the infringement of a right. (Emphasis added).

I am not convinced this amendment changes the Canadian position that civil remedies provided for in the Copyright Act are cumulative. Granted section 34 (1.01) contains the word "or". This may be contrasted with the wording of section 34(1) which entitles the owner of a copyright "...to all remedies by way of injunction, damages, accounts and otherwise": section 34(1) it omits the word "or". Further, section 34(1) does not specifically refer to payment of profit as a remedy.

     There are several points to make in commenting on all of this. First, "or" may be either disjunctive or conjunctive, depending upon its context: see for example Leach v. RCMP Public Complaints Commission (1992) 45 F.T.R. 35 at 43 through 46. Second, in interpreting a statutory provision, one should refer to other parts of the legislation:

It is beyond dispute, too, that we are entitled and indeed bound when construing the terms of any provision found in a statute to consider any other parts of the Act which may throw light upon the intention of the Legislature and which may serve to show that the particular provision ought not to be construed as it would be if considered a loan and apart from the rest of the Act. Colquhoun v. Brooks (1889) 14 A.C. 493 at 506 (H.L.).

To bring this principle of statutory interpretation up to date, the Federal Court of Appeal referred to a similar concept: "The modern approach to statutory interpretation is the words-in-total-context approach..." (Upper Lakes Group Inc. v. National Transportation Agency (1995) 181 N.R. 103 at 111) and went on to approve the formulation of this approach by E.A. Driedger in the second edition of Construction of Statutes (Toronto): Butterworths, 1983) at page 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act and the object of the Act, and the intention of Parliament.

     Applying this approach to the question of whether damages and profits are cumulative, one should look at sections 34(1.01) and 35(1) of the Copyright Act. Profits are not a remedy under section 34(1.01) of the Act, which provides for disclosure of sales and accounting material. Rather the claim for profits arises indirectly from the reference in section 34(1.01) to "and otherwise". One must then look to section 35(1) where profits are clearly in addition to damages. Section 35(1) of the Copyright Act clearly provides that in addition to damages the owner of an infringed work may have "...such part of the profits that the infringer has made from the infringement as the court may decide to be just and proper." I have therefore treated confiscation of a portion of the Defendants' profits as a remedy which is in addition to the recovery of licence fees as damages.

     An award of profits is, in a sense, an equitable approach, although one that by recognition in the Copyright Act has become a legal remedy to be applied equitably. It is a determination of the Defendants' gain by reason of wrongful use of the Plaintiff's property, an amount which is awarded to the Plaintiff.¹ One must, however, in the present instance, keep in mind that the award of profit is based on a default judgment specifying profit as a remedy: the outcome might well have been different had the Defendants appeared.

Estimating Licence Fees and Profits

     By reason of the absence of representation on behalf of the Defendants, and the fact that there has been no access to the Defendants' records, an accurate calculation of the licence fees owing and of profits is not possible. Therefore I must calculate the licence fees and profits as best I can: see for example Performing Rights of Canada Ltd. v. 497227 Ontario Ltd. (1986) 11 C.P.R. (3d) 289 at 293. Similarly, in Alma Veneer Felt Company Ld. v. Fisher (1896) 14 R.P.C. 159, Lord Justice Lindley, of the Court of Appeal, was faced with an omission on the part of the defendant to produce reliable books. He referred to the principle that the court will do the best that it can and leave the wrong-doer to suffer any injustice:

What are you to do? Are you to say to a Plaintiff who is entitled to a royalty, "Because we cannot find it out, owing to "the omission of duty on the part of the Defendant, we will give you "nothing," or are we to say that we will do the best we can, and leave the wrong-doer to suffer if injustice is really done? The latter has always been the principle upon which the Court has proceeded. (page 167).

     The Supreme Court of Canada dealing not with a royalty, but with damages, adopted a similar philosophy in Wood v. Grand Valley Railway Co. (1915) 22 D.L.R. 614 at 618:

It was clearly impossible under the facts of that case to estimate with anything approaching to mathematical accuracy the damages sustained by the plaintiffs, but it seems to me to be clearly laid down there by the learned Judges that such an impossibility cannot "relieve the wrongdoer of the necessity of paying damages for his breach of contract" and that on the other hand the tribunal to estimate them whether jury or Judge must under such circumstances do "the best it can" and its conclusion will not be set aside even if "the amount of the verdict is a matter of guess work."

In summary, it is not improper to calculate damages and profit in a rough and ready manner, particularly if the necessity to do so is the result of omissions on the part of defendants to attend and to protect their interests by providing appropriate information and documents.

Material Tendered by the Plaintiff

     Rather than make a completely blind guess as to profits, Counsel for the Society of Composers has looked at four recent references² and has devised from them a table of comparisons showing a ratio between the statutory licence fee and the profit which was awarded in each instance. I have re-worked some of the figures in that in the two cases involving the Society of Composers the operators of the club facilities also charged their customers a substantial cover charge: in the present instance there is no indication that the Defendants' establishment, Blue Diamond Restaurant and Checkers Lounge, at Ft. McMurray, Alberta, levied a cover charge on its customers. In three instances the Referees attributed 50% of the net profit of the operation to the provision of music. In the fourth instance the figure was 75%. These awards are substantial.

     The operations in the four instances analysed by Counsel are analogous to those in the present instance, except that the defendants in each of the four instances used live music. On the one hand live music might arguably be more attractive and draw more spending customers, resulting in a larger gross profit than for recorded music. On the other hand the cost of musicians is a substantial expense item, which the referees in three instances estimated at 25% of the gross profit. I am therefore assuming that the one factor more or less cancels out the other, thus the ratio of licence fee to the portion of the net profit to be awarded to the copyright holder remains fairly constant, whether the establishment uses live or recorded music. I find it noteworthy that the ratios, licence fee to the portion of net profit awarded the owner of the music used, fall within a fairly narrow range, between 15.2 times the licence fee to 21.33 times the licence fee.

     I have also considered whether I should use an average ratio computed only from the three instances in which the Referees awarded 50% of the net profit to the copyright holder, rejecting the instance in which the Referee awarded 75% of the net profit to the copyright holders of the music used. Interestingly, in the fourth instance, the award of 75% of the net profit resulted in the lowest ratio of all of the four instances. It is a lower ratio that slightly favours the Defendants. I have thus decided to use all four examples in computing an average ratio. The figures are in a close enough range that the average ratio, 18.38, is a meaningful figure from which to work. However in order to use this ratio I must first determine the licence fees for the three years in question.

     To assist me in arriving at licence fees for the years 1994 through 1996, the Plaintiff has filed the affidavit of Wayne Saunders, a field representative in the Licensing Department of the Society of Composers. I note that he has substantial experience in his work.

     Mr. Saunders sets out that he visited the Defendants' Blue Diamond Restaurant and Checkers Lounge on 5 and 6 June 1992, 11 and 12 March 1994, 9 and 10 November 1995, 3 and 4 May 1996 and 8 and 9 May 1997. He established that the Checkers Lounge portion of the establishment, which has a capacity of 250 patrons and contains a dance floor, has had, for at least a substantial portion of the period 1992 through to the end of 1996, either a disc jockey playing recorded music, or recorded music for dancing when a disc jockey is not present.

     In calculating damages, I have used the usual licence fee, being that set out in Tariff 18, as published from time to time in the Supplement to the Canada Gazette. I now turn to the calculation of the licence fees.

CALCULATION OF LICENCE FEES

     The amount payable under Tariff 18, the licence fee for recorded dance music, is based on the number of patrons permitted on the Defendants' premises and the number of days operated per week over either a period of 6 months or less or a period of more than 6 months. The Defendants' premises falls into the category of an enterprise operating four to seven days per week for more than 6 months per year.

     The base rate of the licence or royalty is for a premises accommodating not more than 100 patrons. For each additional 20-patron capacity (or part thereof) there is an increment of 20% of the base rate. In the case of the Defendants' premises, with a 250 person capacity, the licence fee is thus 260% of the basic licence fee.

     The claim of the Society of Composers is for the years 1994 through 1996 inclusive. Given that Mr. Saunders visited the Defendants' premises in 1992 and in March of 1994 and at various times since then, I will assume that the operation was a continuing one. Thus the full licence fee for 1994 is payable, as are the fees for 1995 and 1996.

     To summarize, I have calculated the licence fee for the full years 1994 through 1996 as though the lounge operated between four and seven days a week at the basic licence fee, together with a premium of 160% for the 150 patron capacity over the basic 100 patrons.

     The calculations are as follows:

1994              $334.93 x 260% =          $868.40

     1995              $347.34 x 260% =          903.08

     1996              $359.72 x 260% =          935.27                                          ________     

         Total                           $2,706.75

         GST @ 7%                       193.72     

                             _________

         TOTAL                      $2,900.47

                            

CALCULATION OF AWARD OF PROFITS

    

     As I noted earlier, an award in the nature of profits derived from infringement is an equitable approach, made into a legal remedy by section 35(1) of the Copyright Act. It is the confiscation of and transfer to the Plaintiff of the portion of profits made by the Defendants through their unauthorized use of the Plaintiff's works. I have decided to recommend this transfer of profit, in addition to damages, for an award merely of the usual licence fee and of the court's tariff based costs for legal expenses does not adequately reimburse the Plaintiff for the time and trouble it has taken to enforce its rights. It is thus proper to transfer a portion of the profit. The more difficult conclusion to reach is the value of the Plaintiff's music to the Defendants.

     Mr. Justice Holmes of the Supreme Court of the United States recognized the inherent value of music in a restaurant setting in a 1917 case, Victor Herbert v. Shanley Company, reported (1917) 61 Law. Ed. 511. The case involved infringement of Mr. Herbert's "Sweethearts" by a live performance in a Broadway restaurant. The Defendant argued that there was no infringement because diners paid nothing at the door, but only for their food and drink. A portion of the final paragraph of the reasons is worth reading:

The defendants' performances are not eleemosynary. They are part of a total for which the public pays, and the fact that the price of the whole is attributed to a particular item which those present are [595] expected to order is not important. It is true that the music is not the sole object, but neither is the food, which probably could be got cheaper elsewhere. The object is a repast in surroundings that to people, having limited powers of conversation, or disliking the rival noise, give a luxurious pleasure not to be had from eating a silent meal. If music did not pay, it would be given up. If it pays, it pays out of the public's pocket. Whether it pays or not, the purpose of employing it is profit, and that is enough. (page 514).

     It matters not that the Defendants had no specific charge, for example a cover charge at the door, for the music at their establishment. Music adds an ambiance to such establishments. The music added a value to the Defendants' operation, otherwise they would have given up playing music. Just what the value of the music might be I must now arrive at in a rough and ready manner.

     Earlier in this report I referred to ratios of profit to statutory licence fees derived from four references in which the plaintiffs were either The Performing Rights Organization of Canada Ltd. or, as in the present instance, The Society of Composers, Authors and Music Publishers of Canada. I also noted the circumstances in each of those four cases were analogous to those in the present instance, with obvious differences in the facts cancelling out each other.

     To simplify the calculation I have revised the average ratio from 18.38 to 18. Thus the portion of the net profit which I have attributed to music and which I recommend as an award of profit to the Plaintiff is 18 times the licence fee in

---

each year:

         1994      -      18 x $868.40 =      $15,631.20

         1995      -      18 x $903.08 =      $16,255.44

         1996      -      18 x $935.27 =      $16,834.86

                             ________                              Total              $48,721.50

                

PRE-JUDGMENT INTEREST

     Licence fees for any given year are, as I say, deemed payable in advance on the 31st of January in that year. In effect, the Society of Composers makes an estimate of licence fees based on the previous year's fees and presents an account on the 31st of January for the then current year. I will presume the account is payable within 30 days, interest to run thereafter.

     Counsel for the Plaintiff has provided material from the Bank of Canada showing weekly chartered bank prime business rates for the three years in question. Prime business rates have generally been low, stable and trending downward over the last several years. The average rates I have used are as follows:

         1994 to date of default judgment      6.25%

         1995 to date of default judgment      6.1 %

         1996 to date of default judgment      5.5 %

These are, as I say, rough rounded figures but, given the amount at stake, are satisfactory for my purposes. The same rate of interest should apply to the profits which I have recommended be awarded to the Plaintiff.

     Using these interest rates, the interest calculations to 27 February, 1997, the date of the default judgment, are as follows:

---

Year	Explanation	Amount
1994	The licence fee is $929.19 (including GST) which accumulated interest over 36 months @ 6.25%	$174.22
1995	The licence fee is $966.30 (including GST) which accumulated interest over 24 months @ 6.1%	$117.89
1996	The licence fee is $1,000.74 (including GST) which accumulated interest over 12 months @ 5.5%	$63.05
	Total	$355.16

     Similarly, I recommend interest run at the same rates on profit. However, the interest should run only from the end of the year, for that is when profit and loss would, as a practical matter, be determined. Thus, the recommended interest on profit is as follows:

Year	Explanation	Amount
1994	Interest on profit award of $15,631.20 @ 6.1% over 26 months	$2,064.88
1995	Interest on profit award of $16,255.44 @ 5.5% over 14 months	$1,041.97
1996	Interest on profit award of $16,834.86 @ 4.75% over 2 months	$132.99
	Total	$3,239.84

EXEMPLARY DAMAGES

     In its Statement of Claim the Society of Composers asks for exemplary damages. Exemplary damages, also referred to as punitive damages, are not compensatory, but rather are to punish and must be sufficient to act as a deterrent.

     In Vorvis v. ICBC [1989] 1 S.C.R. 1085, the Supreme Court of Canada dealt with exemplary damages at pages 1107 and 1108. There, Mr. Justice McIntyre, who gave the reasons for the majority, wrote as follows:

Moreover, punitive damages may only be awarded in respect of conduct which is of such nature as to be deserving of punishment because of its harsh, vindictive, reprehensible, and malicious nature. I do not suggest that I have exhausted the adjectives which could describe the conduct capable of characterizing a punitive award, but in any case where such an award is made the conduct must be extreme in its nature and such that by any reasonable standard it is deserving of full condemnation and punishment.

     This idea of punishment was coupled with the idea of deterrence, by the Supreme Court of Canada, in Hill v. Church of Scientology [1995] 2 S.C.R. 1130 at 1208 and 1209. The test applied by the Supreme Court of Canada was whether the conduct of the defendant was so outrageous that punitive damages were rationally required to act as a deterrent: see pages 1209 and 1210.

     Very recently the Federal Court of Appeal awarded punitive damages in Profekta International Inc. v. Theresa Lee, an unreported decision of 30 April 1997 in action A-23-96. The facts involved a continued violation of a copyright, which had included a criminal conviction and warnings issued by the plaintiff. The defendant took an irresponsible attitude and said that she would rather spend $5,000 in legal fees than to abide by the copyright and enter a licence agreement. In addition, the compensatory damage award was modest, considering both the financial benefit the defendant reaped by violating the copyright and the extra profit the defendant made by not paying licence fees. The Court of Appeal concluded that "... an award of punitive damages was required in addition to the compensatory damages in order to punish the respondent for flagrant conduct and to deter her and others from similar conduct in the future." (Page 4). The Court of Appeal awarded $10,000 in punitive damages.

     In the present instance, I am of the view that there ought to be punitive damages for a number of reasons. First, the material shows that the Plaintiff visited the premises of the Defendants five times, over a period of 4 years, to ask them to voluntarily pay the required licence fee. Second, the Society of Composers provided the licence fee forms to the Defendants on a number of occasions. Third, the Society of Composers and subsequently their lawyers, sent some dozen letters to the Defendants, ranging from form letters enclosing the licence forms, through follow up letters, letters explaining what steps they would take if the licence fees were not paid, and finally, a letter from their lawyers not long before the present action was commenced, all of which appear to have been ignored. Fourth, at one point the affidavit of material indicates that the Defendant, Damir Zoranic, had thrown the licence application material in the garbage and subsequently said that he had no intention of paying the licence fees. Finally, the Defendants had ample notice of the present proceedings and yet chose to ignore them, thus putting the Plaintiff to additional expense. I would also observe that while many establishments using music for which the Society of Composers collects a royalty, pay the required fee, a number of others do not and thus an award of exemplary damages in this instance might act as a deterrent to those who use others' music without payment.

     In view of the substantial recommended award of profit to the Plaintiff, I have tempered what would otherwise be a larger exemplary award. However exemplary damages are in order as a caution to those who would capitalize by using another's property and then not only ignore requests for properly payable licence fees, but also ignore a copyright holder's rights in a willful and flagrant manner, or to those whose conduct is uncooperative and disdainful. I therefore recommend exemplary damages in the amount of $5,000.

TAXATION OF BILL OF COSTS

     Counsel for the Society of Composers presented a reasonable bill of costs, utilizing an average number of units under column 3 and claiming only basic disbursements, appropriately supported. The costs claimed for serving material are high, however, that is explained by the fact that the process server, on three occasions, had not only to serve the registered office of the Defendant company in Edmonton, but also to serve the individual Defendant at Ft. McMurray, Alberta. Had the Defendants instructed a lawyer when they were first served with the statement of claim, thus providing an address for service, this portion of the disbursements claim would have been nearly $500 less. A copy of the bill of costs is attached as Schedule A. I recommend that it be allowed as presented at $ 2,808.80.

CONCLUSION

     I recommend to the Court that the Plaintiff be awarded:

1.      Licence fees, including GST                  $2,900.47

2.      Interest on licence fees                      355.16

3.      Net profit attributable to use of Plaintiff's music          48,721.50

4.      Interest on net profits                      3,239.84

5.      Exemplary damages                          5,000.00

6.      Costs and disbursements                      2,808.80

                             _________

     Total                                  $63,025.77

This amount should be payable jointly and severally by the Defendants.

     I thank Counsel for the Plaintiff for good material and a complete presentation.

                                                                         (Sgd.) "John A. Hargrave"

                                 Prothonotary                                                   

July 3, 1997

Vancouver, British Columbia

__________________

¹For further discussion of this area, see Volume 2 of the Annotated Canadian Copyright Act, a looseleaf service edited by Richard & Carriere, published by Carswell, and a paper, Civil and Criminal Remedies for Copyright Infringement, by Emma Grell, appearing in Copyright and Confidential Information Law of Canada, edited by Henderson and published by Carswell in 1994.

²Performing Rights Organization of Canada Ltd. v. 497227 Ontario Ltd. (1986) 11 C.P.R. (3d) 289, Performing Rights Organization of Canada Ltd. v. Transon Investment Co. Ltd. (1987) 13 C.P.R. (3d) 97, Society of Composers, Authors and Music Publishers of Canada v. Port of Call Restaurant Limited, an unreported reference of 18 March, 1996, in Action T-59-95, and Society of Composers v. Capri Management Limited, an unreported reference of 18 March, 1996, in Action T-291-95.