International commercial developments impacting US businesses

Written on 14 Jan 2015

France: Reform of publishing contracts in the digital area: the search for balanced contractual relationships between authors and publishers, within a secure legal framework

In publishing, an inter-professional standard framework agreement between authors and publishers has been produced following several years of negotiations between their respective unions. The government regulation n° 2014-1348 dated 12 November, 2014 amends the existing French Intellectual Property Code to add various rules which follow the new agreement. 

This reform applies to literary but not musical publishing, both to digital and traditional contracts, and will therefore impact upon many in the publishing industry. 

When will the reform take effect?

The Regulation came into effect on 1st December, 2014. However, most of the rules it introduces are effective retroactively and will be incorporated into all on-going publishing contracts, even those which were entered into before the regulation came into force, in accordance with specified time limits.

What are the main changes? 

The authors’ union had requested implementation of a separate contract of a more limited duration in relation to the exploitation of digital rights, though that request has been disregarded. However, the Regulation has restored the balance for authors with the following provisions, some of which make it considerably easier to automatically terminate a publishing contract.

The Regulation draws a distinction between two specific obligations which apply to publishers: the publisher is required to ensure a permanent and continuous exploitation of the published work in a printed form or in a digital form.

In order to respect the distinction between these two types of exploitation, the terms of an assignment of digital exploitation rights must be specified separately from the rest of the contract. The penalty for the failing to comply with this rule is that the assignment of rights will be invalidated

Moreover, an author’s rights are reinforced by the following provisions:

  • The assignment of the right to exploit a work in printed form will automatically terminate if the publisher does not meet its obligations in this respect within 6 months of the date of receipt of a formal notice from the author.
  • The assignment of the right to exploit a work in digital form will terminate automatically if the publisher does not meet its obligations in this respect within 6 months of the date of receipt of a formal notice from the author.
    Any such termination will only affect the part of the contract relating to the relevant exploitation rights, whether digital or printed.

As with traditional publishing, any digital exploitation must give rise to remuneration for the authors proportional to the revenues and must be subject to a clause providing for review of the financial conditions.

The scope of the reporting obligation of the publisher, on one hand, has been clearly reinforced for printed publishing and, on the other hand, has been adapted to take account of the specifics of digital publishing. Going forward, a publisher will be required to report to the author at least once a year and a part of this reporting must be dedicated to any digital exploitation. In this respect, the publisher must provide the author with specific information relating to the exploitation of dematerialized copies of the work, by distinguishing between income arising from unit sale and income arising from other types of exploitation (i.e. from an advertising-based economic model). The penalty for failure to comply with these obligations is the automatic termination of the entire contract at the discretion of the author.

A publishing contract may be terminated by the author or the publisher if, during 2 consecutive years beyond the first 4 years after the publishing of the work, the statement of accounts does not show any benefits for any of the following operations:

(i) unit sales of the work in a printed form,(ii) unit sales of the work in a digital form,
(iii) digital for fee consultations of the work,
(iv) translations of the work in a printed or in a digital form. 

Though this reform substantially clarifies the regime and the content of publishing contracts, it does not reduce the parties’ freedom. Instead, it provides the author with more effective protection as he is not required to bring an action before the courts for termination of a publishing contract in the case of non-use of his rights by the publisher as that right is now automatic. 

Moreover, the Regulation grants quite a large regulatory power to the professional unions representing both publishers and authors as they are tasked with specifying certain rules of implementation for these new provisions by signing a further agreement (i.e. a “code of practice“). 

This additional agreement will set out the exact terms of the publisher’s obligation to permanently and continuously exploit a work in both digital and printed form, the terms of the digital right assignment, the form of the publisher’s reporting, the deadline for the publisher to pay the author’s fees or the terms for review of the financial conditions of the digital rights assignment (frequency, dispute settlement procedure, etc.).

We must therefore await that before we have full details of how this new agreement will work in practice. The French Minister of Culture has ordered the unions to reach an agreement on these points but should they fail to do so, the government will step in and adopt a decree.
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Germany: Digital goods and consumer protection – German best practices after implementation of CRD

The EU Consumer Rights Directive has introduced a number of new provisions specifically ad-dressing the distribution of digital content such as apps, digital games and any other kinds of digital goods.

The Consumer Rights Directive (2011/83/EU – “CRD”) has introduced quite a number of provisions specifically addressing the distribution of digital content such as apps, digital games and any other kinds of digital goods. In theory, the idea of implementing special regulations for digital businesses is not a bad one. But in practice there are some serious pitfalls to consider. We give an overview of the new rules and guidance on how to comply with the new consumer rights. 

The new consumer rights are largely harmonized within the EU and member states have little discretion for implementation – which means that the new regulations that came into force in June 2014 are almost identical in all countries of the European Union. However, Germany has a special status to some extent: the CRD was widely inspired by German law. As a result, Ger-many already has experience with many of the CRD’s regulations and German case law could be a blueprint for future European court decisions. 

Therefore, it is worth taking a deeper look into the legal situation in Germany.

New consumer rights for apps, digital games and other digital content 

The CRD has introduced several new obligations which affect publishers of apps, software, digital games and all kinds of digital content. The most important are several new duties to provide information about products and their features as well as the revised right of withdrawal, which now explicitly includes digital goods.

Digital goods and the right of withdrawal 

As a basic principle, consumers are entitled to withdraw their contractual statement within 14 days after they entered the contract – without any obligation to give any reason. If the consumer cancels the contract he loses the right to use the purchased item and the seller has to refund the full price. In other words: Every sale is in principle temporary until the 14 days cancellation notice period has passed. 

The period of 14 days is now harmonized and applies equally in all member states of the EU. However, it can even be extended if certain formal requirements, such as duties to provide certain information in a certain way, are not met precisely. 

The right of withdrawal now also explicitly applies to digital goods such as apps, games, soft-ware, in-game items or any other virtual purchases. Obviously, it is not always possible to actually “return” a digital item. And even if it is – in most cases it would be impractical to allow users to return their items for a full 14 days. Fortunately, the CRD implemented a way to effectively exclude the right of withdrawal. 

According to Article 16 (m) CRD, the right of withdrawal terminates immediately after the contractual performance has begun, if the user has expressed their consent. So it is possible to exclude a right of withdrawal for digital goods. But this solution has one catch: It requires the users’ consent. 

The courts have not yet determined whether such consent needs to be explicit or whether it would be sufficient to obtain the consent within general terms and conditions. However, the CRD requires that users “express” their consent which implies at least some kind of action. Therefore, the exclusion of a right of withdrawal probably requires a dedicated checkbox or some equivalent pro-active step. Not surprisingly, consumer watchdog organizations and certification bodies have also taken this conservative position. 

Whenever possible, publishers should require their users to give explicit consent to immediately begin contractual performance of the purchase contract. Additionally, users need to be informed that this operates as a waiver of their right of withdrawal.

Mandatory information 

The CRD also requires publishers to provide a variety of information about the offered product, the purchase process and company information. The most important new obligations are to provide information about the exact functionality and interoperability of digital goods as well as information about technical protection measures. 

Publishers should provide this information on the content (e.g. app, software or game) description page. We recommend providing at least the following information:

  • System requirements and technical restrictions (e.g. “Requires Android 4+ and internet connection”)
  • Details on the core features (e.g. “3D action shooter – includes 7+ levels, 10+ different characters, 8+ weapons, chat feature”)
  • Details on known limitations that customers should be aware of (e.g. “Does not work on Sony Xperia phones”)
  • Detailed information about in-app sales for freemium apps or games (e.g. “Additional weapons may require payment; character level beyond 10 requires paid add-on”)
  • Information about TPM (e.g. “Requires registration”; “Cannot be installed on multiple devices”).

Furthermore, the following information should be provided:

  • Clear and unambiguous prices including VAT
  • Information that VAT is included in the displayed price
  • For subscriptions: potential costs that may incur in the future 

Additionally, there is some further mandatory information that does not specifically address digital items but is nevertheless important to consider:

  • Name and geographic address of the publisher’s company
  • Contact information (e-mail and phone)
  • VAT number
  • Register and registration number 

This information should be made available on the publisher’s website, the distribution platform and within the software, app or game as well, e.g. in the credits section. The information must be continuously available and easy to find. German courts have held that a user must never be further than two clicks away from this information anywhere on a website. 

If publishers fail to fulfill these duties, the legal requirements could be enforced both by consumer watchdogs and competitors with written warning letters or court proceedings, and depending on the violated law, the violation could also lead to extended customer rights, for example a right to withdraw from a contract up to a year after the initial purchase. 

The above list is not exhaustive. There are many more regulations that only apply in certain cases, for example if financial transactions or certain goods are involved. Furthermore, there are several national regulations such as data privacy or youth protection that publishers should keep in mind. 

As of 2015 there are also new tax regulations regarding VAT in the European Union apps and games publishers should have on the radar.

Responsibility when distributing digital goods through third-party app stores and digital platforms? 

A big question in dealing with the implementation of these consumer rights is who is actually responsible for ensuring compliance? This can be particularly tricky when publishers distribute their products through third-party platforms such as app stores or online distribution platforms for games. This is likely to be one of the key issues for digital distribution. 

In general, the person responsible for complying with consumer rights is the vendor of the product. Who is the vendor of an app or a game on a game distribution platform like Steam? 

The situation is fairly easy if the operator of the distribution platform unambiguously acts as the vendor – i.e. if the operator is distributing software, apps or games in its own name and on its own account. Then the platform operator is also responsible for compliance with consumer rights. Publishers should keep in mind, though, that they often stay responsible for any compliance issues in the context of their in-app or in-game sales as the relevant contracts are made with the publisher and not with the platform. 

The situation gets more complicated if the platform, as usual, states that it acts solely as an agent or commissionaire for the publishers. In this case the publishers are the vendors of their products, although the customer might have a different impression when purchasing digital goods. 

For example, if you want to buy an app at Apple’s AppStore, you first have to create an account – with Apple. Then you have to provide your payment information – to Apple. Now you can browse the AppStore – provided by Apple. If you choose to buy an app, you have to accept the terms and conditions – of Apple. After that, the payment is processed – by Apple. And finally the app is being installed on your device – by Apple. 

However, Apple’s terms and conditions, similar to other app store and platform terms and conditions, clearly say that Apple itself does not sell any third-party apps but solely acts as an agent or commissionaire. Moreover, product pages in Apple’s app store clearly disclose the publisher as “seller” of his app – despite the different first impression of the customer. 

All in all, one has to come to the conclusion that apps are indeed sold by their publishers in this constellation. Accordingly, solely the publishers as the vendors of the apps and games are responsible for the compliance with the new consumer laws. 

This leads to a serious problem: neither app stores nor gaming platforms usually allow publishers to actually control implementation of many of the legal requirements. For example, publishers have only limited control over how their game or app is presented to the customer and practically no control over the design of the purchase process on digital distribution platforms such as checkboxes to avoid a right of withdrawal for apps or digitally distributed games resulting from distant selling laws. 

How to ensure compliance on third-party digital distribution platforms?

This situation seems like a déjà vu. eBay sellers had similar problems back when eBay had not yet implemented all required features to fully comply with consumer rights. The common recommendation then was: do not just lean back and wait. Instead, demonstrate best efforts to be as compliant as possible with consumer rights. This approach still holds true today. 

The working group of German data protection watchdogs recently published guidelines for app developers on how to ensure data protection compliance, which may include a solution as to how to implement this in practice. The guidelines address the problems with digital distribution platforms and suggest integrating the required information into the product page in the respective app store and, additionally, within the app itself. If there is not enough space for all information, publishers can use links to websites providing the required information. 

This data protection guidelines are also a reasonably passable route for ensuring compliance, at least with information duties arising from consumer protection regulations. 

Furthermore, publishers can and should consider the new consumer rights when designing their in-game and in-app sales processes. In particular, the user should be provided with all required information before the actual purchase is made. Additionally, publishers should obtain the users’ explicit consent that the items or services are provided instantly after the purchase with the consequence that they lose their right of withdrawal. 

The fact that publishers do not have any influence on how exactly the right of withdrawal is implemented in app stores or game platforms may even work as a defense in court if consumer protection organizations were to start considering them as responsible for the compliance with this specific aspect of consumer protection regulations. After all, it seems unreasonable to blame publishers for something they do not have any influence on.

Conclusion

Publishers should definitely have the new consumer rights on their agenda. Failure to comply with them can lead to serious consequences, but most of them are more or less easy to implement. 

However, things can get complicated on digital distribution platforms. Unless the platforms expressly act as vendor for the apps and games, companies may find themselves in the less than ideal situation where full compliance requires a close cooperation between publishers and platforms without having clear responsibilities, and which may not be possible. Fortunately, there are at least a few practical ways for publishers to take some initial steps and hopefully limit their risk.