Documentation

49 File No. CT-2015-COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34 (the “Act”); AND IN THE MATTER OF an application by Stargrove Entertainment Inc. for an order pursuant to section 103.1 of the Act granting leave to bring an application under sections 75, 76, and 77 of the Act;

AND IN THE MATTER OF an application by Stargrove Entertainment Inc. for an order pursuant to sections 75, 76, and 77 of the Act;

AND IN THE MATTER OF an application by Stargrove Entertainment Inc. for an order pursuant to section 104 of the Act;

BETWEEN: STARGROVE ENTERTAINMENT INC. Applicant - and – UNIVERSAL MUSIC PUBLISHING GROUP CANADA, UNIVERSAL MUSIC CANADA INC., SONY/ATV MUSIC PUBLISHING CANADA CO., SONY MUSIC ENTERTAINMENT CANADA INC., ABKCO MUSIC & RECORDS, INC., CASABLANCA MEDIA PUBLISHING, and CANADIAN MUSICAL REPRODUCTION RIGHTS AGENCY LTD.

Respondents ———————————————————————————————— MEMORANDUM OF FACT AND LAW OF THE APPLICANT (Application for Leave Pursuant to Section 103.1 of the Competition Act)

————————————————————————————————

WEIRFOULDS LLP Barristers & Solicitors 4100 - 66 Wellington Street West P.O. Box 35, Toronto-Dominion Centre Toronto, ON M5K 1B7

Nikiforos Iatrou Scott McGrath Bronwyn Roe Tel: 416-365-1110 Fax: 416-365-1876 niatrou@weirfoulds.com smcgrath@weirfoulds.com broe@weirfoulds.com

Lawyers for the Applicant

TO: The Registrar Competition Tribunal 90 Sparks Street, Suite 600 Ottawa, ON K1P 5B4 Tel: 613-957-7851 Fax: 613-952-1123

AND TO: John Pecman Commissioner of Competition Competition Bureau 50 Victoria Street Gatineau, QC K1A 0C9 Tel: 819-997-4282 Fax: 819-997-0324

AND TO: Universal Music Publishing Group Canada (A Division of Universal Music Canada Inc.) 2450 Victoria Park Avenue, Suite 1 Toronto, ON M2J 5H3 Tel: 416-718-4000 Fax: 416-718-4224

50 DIMOCK STRATTON LLP 20 Queen Street West, 32nd Floor Toronto, ON M5H 3R3

Sangeetha Punniyamoorthy Thomas Kurys Tel: 416-971-7202 Fax: 416-971-6638 spunniyamoorthy@dimock.com tkurys@dimock.com

51 AND TO: Universal Music Canada Inc. (A Division of Universal Music Group) 2450 Victoria Park Avenue, Suite 1 Toronto, ON M2J 5H3 Tel: 416-718-4000 Fax: 416-718-4224

AND TO: Sony/ATV Music Publishing Canada Co. 1670 Bayview Avenue, Suite 408 Toronto, ON M4G 3C2 Tel: 416-489-5354

AND TO: Sony Music Entertainment Canada Inc. 150 Ferrand Drive Toronto, ON M3C 3E5 Tel: 416-589-3000

AND TO: ABKCO Music & Records, Inc. 85 5th Ave #11 New York, NY 10003 United States Tel: 212-399-0300

AND TO: Casablanca Media Publishing 249 Lawrence Avenue East Toronto, ON M4N 1T5 Tel: 416-921-9214

AND TO: Canadian Musical Reproduction Rights Agency Ltd. 320-56 Wellesley Street West Toronto, ON M5S 2S3 Tel: 416-926-1966 Fax: 416-926-7521

52 TABLE OF CONTENTS Page PART I THE APPLICATION IN A NUTSHELL ...................................................... 1 PART II STATEMENT OF FACTS ......................................................................... 2 A. The Parties ........................................................................................... 2 B. Licensing Musical Works in Canada..................................................... 4 C. Stargrove’s Business Model................................................................. 4 D. Stargrove’s Business Was Immediately Successful ............................. 6 E. The Respondents Ordered CMRRA To Stop Issuing Stargrove Mechanical Licences ........................................................................... 8

F. Universal Tried to Prevent or Harm Stargrove’s Business.................... 9 G. The Respondents Campaigned to Shut Stargrove Out ...................... 10 H. Stargrove Seeks Relief at the Competition Tribunal........................... 12 PART III ISSUE..................................................................................................... 12 PART IV ARGUMENT ........................................................................................... 12 The Applicable legal test......................................................................... 12 Question #1: Stargrove has been directly and substantially affected in its business by the respondents’ conduct............................................ 14

Question #2: The respondents’ conduct could be subject to an order pursuant to sections 75, 76, and 77 of the act............................... 15

PART V ORDER SOUGHT .................................................................................. 23 SCHEDULE A – AUTHORITIES SCHEDULE B – STATUTES AND REGULATIONS

53 PART I - THE APPLICATION IN A NUTSHELL 1. Stargrove seeks leave to commence an application to the Competition Tribunal against the Respondents pursuant to s. 103.1 of the Competition Act. Stargrove’s proposed application alleges that the Respondents have violated ss. 75, 76, and 77 of the Act by refusing to grant “mechanical licences” to Stargrove, which Stargrove needs to manufacture and sell low-cost CDs in Canada. 2. Stargrove is a record label that manufactures CD compilations of sound recordings of The Beatles, The Rolling Stones, and other artists for sale at low prices ($5.00) at Walmart stores. It can offer such low prices because the sound recordings from which it prepares the CDs are no longer protected by copyright; they are in the public domain. As such, Stargrove does not require a “master sound recording licence” to use the recordings. 3. Although the sound recordings are in the public domain, the musical works (songs) on the recordings continue to be copyright protected. Stargrove therefore requires what are known as “mechanical licences” for each song it seeks to use. In Canada, there are standard industry practices and terms that govern the issuance of mechanical licences; for the songs relevant to this application, these are administered by the Canadian Musical Reproduction Rights Agency. Stargrove is willing to abide by those terms and practices. The Respondents, however, have banded together to shut Stargrove out of the market, having CMRRA deny Stargrove any mechanical licences (not just for the titles in question).

- 2 - 54 4. Stargrove is being targeted for its low pricing model, but the real victims are consumers; instead of being able to buy popular titles for just $5.00 per CD, they pay much more. 5. The Respondents have campaigned to block Stargrove by pressuring Stargrove’s distributor, concocting false negative reviews of Stargrove’s CDs, and having CMRRA refuse to deal with Stargrove on standard terms. They have violated sections 75, 76, and 77 of the Competition Act, depriving consumers of competitive prices and artificially extending copyright over public domain recordings. This has negatively affected competition. 6. Stargrove’s proposed application readily meets the low threshold required on a leave application. The conduct complained of could be the subject of an order pursuant to each of sections 75, 76 and 77. It has directly and substantially affected Stargrove’s business and has resulted in a substantial lessening or prevention of competition. The Application should be granted. PART II - STATEMENT OF FACTS A. The Parties 7. The Applicant, Stargrove Entertainment Inc. (“Stargrove”), is a company incorporated in July 2014 under the laws of Ontario. Stargrove is a record label in the business of manufacturing and selling competitively-priced musical compact discs (“CDs”). 1 1 Affidavit of Terry Perusini sworn August 26, 2015 (“Perusini Affidavit”), para 3.

- 3 - 55 8. The Respondents Sony/ATV Music Publishing Canada Co. and Sony Music Entertainment Canada Inc. (collectively, “Sony”) and Universal Music Publishing Group Canada and Universal Music Canada Inc. (collectively, “Universal”) are music publishing companies and record labels located in Toronto, Ontario. The Respondent Casablanca Media Publishing (“Casablanca”) is a music publishing company located in Toronto. The Respondent ABKCO Music and Records Inc. (“ABKCO”) is a record label, music publisher, and film and video production company headquartered in New York, New York. 2 9. The Respondent Canadian Musical Reproduction Rights Agency Ltd. (“CMRRA”) is a music licensing collective representing music publishers. On behalf of music publishers, CMRRA issues licences for the reproduction of musical works on various media, including mechanical licensing for the reproduction of songs on CDs. 3 10. Sony, Universal and Casablanca are represented by CMRRA and have representatives on the Board of Directors of CMRRA. ABKCO is represented by CMRRA but, to Stargrove’s knowledge, does not have representatives on its Board of Directors. 4 11. Anderson Merchandisers Canada Inc. (“Anderson”) (which is not a party to the case, but plays an important role in the market) distributes CDs to major Canadian retailers, including Walmart and BestBuy. Anderson is the exclusive 2 Perusini Affidavit, ibid, paras 4-6. 3 Perusini Affidavit, ibid, para 7; Affidavit of Mario Bouchard, sworn August 27, 2015, Exhibit “A” (“Bouchard Affidavit”), para 25. 4 Perusini Affidavit, supra note 1 at para 8.

- 4 - 56 distributor for CDs in Walmart in Canada and is the distributor for Stargrove’s CDs. B. Licensing Musical Works in Canada 12. For the purposes this Application, there are two copyrights that matter: 5 (1) The copyright in the musical work. In order to reproduce a musical work, a party must obtain a “mechanical licence” from the holder of the copyright in the musical work, if the work is protected by copyright. If the work has fallen into the “public domain”, no licence is required to use the work.

(2) The copyright in the master sound recording. In order to reproduce the sound recording on which a musical work is fixed, a party must also obtain a “master recording licence” from the holder of the copyright in the sound recording, if the sound recording is protected by copyright. If the sound recording has fallen into the “public domain”, no licence is required to use the sound recording.

C. Stargrove’s Business Model 13. Stargrove’s business is to manufacture and sell CDs. Its current business activity is to manufacture and sell CDs of musical works whose sound recordings are in the public domain. In order to do so, Stargrove needs to obtain mechanical licenses for the works, but does not need to obtain master sound recording 5 Perusini Affidavit, ibid at paras 9-10; Bouchard Affidavit, supra note 3 at paras 18-19.

- 5 - 57 licences. Stargrove then manufactures and sells these CDs at very competitive prices. 6 14. Although a record label in Stargrove’s position can seek to obtain a mechanical licence directly from the publisher, the common practice in Canada is for a record label to apply for mechanical licences from CMRRA, which is the authorized representative for most musical work copyright holders in Canada. CMRRA distributes royalties to publishers, who in turn pay royalties to the authors of musical works for which a licence was issued. 7 15. CMRRA offers two options for mechanical licences: (i) “pay-as-you-press” licencing and (ii) three standard Mechanical Licencing Agreements (“MLA”). CMRRA suggests that pay-as-you-press licences are appropriate for licensees who only occasionally manufacture products in Canada or who do so in small quantities. 8 16. For a record label of Stargrove’s size, the typical (and most cost-efficient) way to obtain such mechanical licenses is by entering into an MLA with CMRRA. 9 A record label that has signed an MLA obtains mechanical licences on standard terms and at standard rates. 17. The standard mechanical royalty rate in Canada is currently $0.083 per song, per copy (for recordings with a running time of five minutes or less). 10 The royalty 6 Perusini Affidavit, ibid at para 20. 7 Bouchard Affidavit, ibid at para 31. 8 Perusini Affidavit, ibid at para 16; Bouchard Affidavit, supra note 3 at note 17. 9 Perusini Affidavit, ibid at para 16. 10 Perusini Affidavit, ibid at para 17.

- 6 - 58 rate is fixed on a per song/per copy basis, irrespective of the price for which a CD is sold. Applications by record labels to CMRRA for mechanical licences are granted as a matter of course at this standard rate. 11 18. CMRRA’s contracts with the publishers it represents (called “Affiliation Agreements”) contemplate that CMRRA “shall” issue the mechanical licences on standard terms, unless the publisher decides that it wants to deal directly with the record label to issue the licence. 12 This is the only situation in which the MLA provides that CMRRA may decline to issue a licence to a record label that has otherwise complied with the terms of its MLA. 13 19. In practice, the market for the issuance of mechanical licences operates as though it were a compulsory system. The process is so automatic that record labels press and sell CDs before obtaining mechanical licences. Royalties owed on these CDs are held pending the identification of the copyright owner. 14 D. Stargrove’s Business Takes Off 20. In January 2015, Stargrove made an application to CMRRA for mechanical licences for five titles (collectively, the “Titles”): The Beatles Love Me Do, The Beatles Can’t Buy Me Love, The Rolling Stones Little Red Rooster, Bob Dylan It

11 The mechanical royalty rate may be lower for certain budget-priced CDs. Bouchard Affidavit, supra note 3 at paras 36-37. 12 Bouchard Affidavit, ibid at para 34. 13 Bouchard Affidavit, ibid at para 34. 14 Bouchard Affidavit, ibid at paras 29, 41-49.

- 7 - 59 Ain’t Me Babe and The Beach Boys Fun, Fun, Fun (each of these titles is a compilation of 11 songs). 15 21. For each of these titles, copyright in the musical work still exists (hence the need for a mechanical license), but copyright in the sound recording has expired. As such, the sound recording is in the public domain, meaning that the public has the right to use and copy that recording without permission. 22. Although an MLA would be more appropriate for a record label like Stargrove, CMRRA required Stargrove to apply for a pay-as-you-press licence for the mechanical licences. 16 With its application, Stargrove submitted the required royalty payment of $13,799.10. 17 23. CMRRA cashed Stargrove’s cheque and Stargrove began producing its CDs for sale. The CDs went on sale at Walmart on February 3, 2015 for a retail price of $5.00 each. Consumers reacted positively to this offering. In the first week of sales, The Beatles’ Love Me Do was Walmart’s top-selling CD, with 1,488 copies sold. Three of Stargrove’s other titles also had strong initial sales: Fun, Fun, Fun, It Ain’t Me Babe, and Can’t Buy Me Love sold a combined total of 755 units in their first week of sales. 18 15 Perusini Affidavit, supra note 1 at paras 24, 25, 27 and 31. 16 Perusini Affidavit, ibid at para 32. 17 Perusini Affidavit, ibid at para 32. 18 Perusini Affidavit, ibid at para 34.

- 8 - 60 E. The Respondents Order CMRRA to Stop Issuing Stargrove Mechanical Licences 24. The publishers associated with the Titles include ABKCO, Casablanca and Sony Publishing (collectively, the “Title Holders”). One by one, and in quick succession, each of the Title Holders gave instructions to CMRRA in January or February 2015 to refuse to issue the mechanical licences for Stargrove. 25. A CMRRA representative professed her surprise to Stargrove at these instructions from the Title Holders, but CMRRA followed their instructions. In fact, CMRRA went even further, and refused to grant Stargrove any mechanical licences, whether from one of the Title Holders or not. 19 Stargrove’s attempts to enter into an MLA were stymied by CMRRA, which erected barrier after barrier to Stargrove’s application. 26. CMRRA refunded Stargrove’s royalty payment for the Titles at the end of February, 2015, causing the sale of Stargrove’s CDs to grind to a halt. 20 27. On multiple occasions, Stargrove requested explanations for the refusals to grant mechanical licences, both from CMRRA and from the Title Holders directly, and asked them to reverse course. Stargrove has been refused an explanation, other than in a letter from CMRRA, which stated that the Title Holders’ “refusal to deal is at least partially related to the fact that there are public domain master recordings on the products in question.” 21 The responses that Stargrove received from ABKCO and Casablanca representatives stated, in part, that ABKCO and

19 Perusini Affidavit, ibid at paras 40-43. 20 Perusini Affidavit, ibid at para 45. 21 Perusini Affidavit, ibid at para 60.

- 9 - 61 Casablanca were not required to provide an explanation for their refusal to grant licences. 22 28. The Title Holders are withholding mechanical licences in order to artificially extend copyright over recordings that should be in the public domain. They are doing so in direct response to the legitimate competition that Stargrove’s low pricing policy was bringing to the market. As set out above, some Title Holders have record label divisions, while others are affiliated with record labels. They do not like the fact that Stargrove was able to gain market share so quickly. F. Universal Tried to Prevent or Harm Stargrove’s Business 29. In February 2015, fabricated, negative reviews were posted on Walmart’s website about Stargrove’s Beatles’ titles. 23 30. Randy Lennox, the CEO of Universal Music Canada, sent an e-mail to the principals of Anderson, the distributors of Stargrove’s CDs, asking Anderson not to carry Stargrove’s products and to partner with Universal to resolve what he called a “public domain issue”. 24 31. Brian Greaves, an account manager at Universal Music Canada, created reviews on Walmart’s website, complaining of the poor quality of Stargrove’s products. He also encouraged other Universal Music Canada employees to do the same and help him with his “campaign” to discourage Anderson from distributing

22 Perusini Affidavit, ibid at paras 64-65. 23 Perusini Affidavit, ibid at paras 46-49. 24 Perusini Affidavit, ibid at para 51.

- 10 - 62 Stargrove’s products in the future. 25 Walmart subsequently removed all the fake reviews from its site. Stargrove’s CDs had a low return rate: of the over 2000 Stargrove CDs sold, only one CD was returned. 26 32. Mr. Greaves noted that Stargrove’s CDs were taking away from Universal’s sales and market share, and claimed that Universal had already successfully removed a Rolling Stones title from the CDs offered by Stargrove for sale, despite the fact that the copyright in question was held by ABKCO, not Universal. 27 Clearly, Universal worked with ABKCO and CMRRA to have the title pulled from shelves. 33. Universal’s reaction shows what an effective competitor Stargrove was going to be. The fact that Stargrove could attract so many customers in such a brief time, ousting major record labels’ stranglehold on Top Ten lists at Walmart, had clearly provoked concern among the Title Holders, and prompted this concerted effort to prevent Stargrove from entering the market and competing for CD sales. G. The Respondents Campaign to Shut Stargrove Out 34. The Respondents mean to punish Stargrove for its low pricing and ability to compete with established record labels. Ultimately, this keeps the prices of CDs high. Mechanical licences are ordinarily issued as a matter of course within the MLA structure. The process is so automatic that record labels almost always produce CDs even before they have obtained mechanical licenses. 28 The 25 Perusini Affidavit, ibid at paras 50 and 52. 26 Perusini Affidavit, ibid at paras 49, 53. 27 Perusini Affidavit, ibid at para 52. 28 Bouchard Affidavit, supra note 3 at para 29.

- 11 - 63 decision to instruct CMRRA to refuse to issue mechanical licences to Stargrove surprised even the employees of CMRRA. 35. Since Stargrove has been shut out of the market, it has missed out on several lucrative opportunities to market its CDs. 36. For instance, Anderson wanted Beatles CDs that Stargrove would have otherwise produced. Anderson continues to identify opportunities for Stargrove through Walmart that Stargrove is unable to pursue because of CMRRA and the Respondents’ refusal to issue it mechanical licenses. 29 As recently as three weeks ago, Anderson noted a lack of stock of Beatles and Rolling Stones CDs; it wanted Stargrove to help it fill its orders. 30 Stargrove cannot do so, as long as it is being unfairly and unlawfully blocked from the market. 37. Stargrove was offered the opportunity to put 20,000 CDs of its two Beatles titles in Walmart locations for a promotional “front of store” bin sale for three weeks, from July 25 to August 14, 2015. It was unable to seize this opportunity because of the Respondents’ refusal to grant mechanical licences to Stargrove. 31 38. These lost opportunities alone have resulted in an estimated loss to Stargrove of $150,000 in wholesale sales. 32 39. Stargrove’s CDs have been pulled from Walmart’s shelves, and its sales – given that it can obtain no mechanical licenses from CMRRA – are now zero.

29 Perusini Affidavit, supra note 1 at paras 78-79. 30 Perusini Affidavit, ibid at para 79. 31 Perusini Affidavit, ibid at paras 76-77. 32 Perusini Affidavit, ibid at paras 76-77.

- 12 - 64 H. Stargrove Seeks Relief at the Competition Tribunal 40. Based on the foregoing, Stargrove filed this Application for leave to commence a proceeding against the Respondents pursuant to s. 75, s. 76 and s. 77 of the Competition Act (“Act”). At Schedule “A” to its Notice of Application for Leave, it has attached its proposed Notice of Application against the Respondents if leave is granted. 41. Stargrove has concurrently filed an Application seeking an interim and interlocutory order to compel the Respondents to deal with Stargrove on CMRRA’s ordinary trade terms pending the result of this leave Application and, if it is granted, the application on the merits. 33 PART III - ISSUE 42. The sole issue on this Application is whether Stargrove should be granted leave to make an application under ss. 75, 76, and/or 77 against the Respondents. PART IV - ARGUMENT The Applicable Legal Test 43. Section 103.1 of the Act grants private parties the right to commence an application pursuant to ss. 75, 76 or 77 of the Act, with leave of the Competition Tribunal (“Tribunal”):

33 Application for Interim Order.

- 13 - 65 Leave to make application under section 75, 76 or 77 103.1 (1) Any person may apply to the Tribunal for leave to make an application under section 75, 76 or 77. The application for leave must be accompanied by an affidavit setting out the facts in support of the person’s application under that section.

44. Subsections 103.1(7) and 103.1(7.1) set out the tests to be employed by the Tribunal for requests for leave under that section to commence an action pursuant to s. 75 and s. 76, respectively: Granting leave to make application under section 75 or 77 (7) The Tribunal may grant leave to make an application under section 75 or 77 if it has reason to believe that the applicant is directly and substantially affected in the applicants’ business by any practice referred to in one of those sections that could be subject to an order under that section.

Granting leave to make application under section 76 (7.1) The Tribunal may grant leave to make an application under section 76 if it has reason to believe that the applicant is directly affected by any conduct referred to in that section that could be subject to an order under that section.

45. When determining whether to grant leave, the Tribunal is to ask whether the leave application is supported “by sufficient credible evidence to give rise to a bona fide belief that the applicant may have been directly and substantially affected in the applicant’s business by a reviewable practice, and that the practice in question could be subject to an order.” 34 46. The standard of proof on a leave application pursuant to s. 103.1 is lower than when the application is considered on its merits. The Tribunal needs to be 34 National Capital News Canada v Milliken, 2002 Comp Trib 41 at para 14.