Provisional Legislative Council

PLC Paper No. CB(1) 1186

Ref : CB2/BC/6/97

Paper for the House Committee meeting
on 13 March 1998
Report of the Bills Committee on Prevention of Copyright Privacy Bill

Purpose

This paper reports on the deliberations of the Bills Committee on Prevention of Copyright Privacy Bill.

Background

2. There is at present no registration requirement for optical disc manufacturers in Hong Kong. Customs officers have difficulties in locating the places of manufacture and in identifying the operators involved, and they do not have the legal power to make routine inspection of these places. Moreover, Customs officers often have difficulty tracing the source of optical discs to determine whether they are copyright infringing or not. Timely action is needed to empower Customs officers to better monitor optical disc manufacturing plants and prevent them from being used for copyright infringing activities. A source identification requirement may assist to a limited extent the tracking process.

The Bill

3. The Bill seeks to introduce a licensing scheme for the manufacture of optical discs in Hong Kong and to require optical discs produced in Hong Kong (but not on imported ones) to be permanently embossed or marked with a code indicating their source of manufacture. The licensing scheme will be administered by the Commissioner of Customs and Excise (the Commissioner). The new system is designed to create minimum disruption for legitimate optical disc manufacturers as well as to help enforcement agencies to identify the factories for the manufacture of optical discs, empower them to inspect these factories and ensure that the production of optical discs in these factories is lawful.

The Bills Committee

4. A Bills Committee to study the Bill was formed at the House Committee meeting on 23 January 1998. Hon MA Fung-kwok and Dr Hon Charles YEUNG Chun-kam were elected Chairman and Deputy Chairman respectively. The membership list of the Bills Committee is in Appendix I.

5. The Bills Committee has held six meetings with the Administration and met with deputations at two of the meetings. It has also invited public views on the Bill by placing advertisements in two local newspapers and writing to 68 organisations/individuals which/who have made written submissions to the Administration on the draft Bill. A list of the organisations which have submitted views and/or met with the Bills Committee is in Appendix II.

Deliberations of the Bills Committee

6. The Bills Committee notes that the deputations support the new initiatives introduced by the Administration to protect intellectual property rights and agree that the Bill represents an important step forward in the right direction. However, some deputations representing the optical disc manufacturing industry have expressed concerns about certain provisions of the Bill and put forward proposals to safeguard their interests. They stress that the Bill should aim at striking a balance between prevention of copyright piracy and protecting law abiding optical disc manufacturers from unnecessary disruption to their businesses. The main deliberations of the Bills Committee are summarized in the following paragraphs.

Manufacturer's code

7. Clauses 15 and 16 of the Bill require each optical disc manufactured in Hong Kong to be embossed or otherwise marked with a manufacturer's code. The manufacturer's code is defined as any code, mark, sign, symbol, or device that indicates the source of manufacture of an optical disc. The code used must be one of the kinds approved by the Commissioner.

8. While the deputations received by the Bills Committee are in support of the mandatory source coding requirement for optical discs manufactured in Hong Kong, some in the copyright and optical disc manufacturing industries are concerned that the formulation of the Bill for the Commissioner to approve any suitable coding system that may be submitted by an optical disc manufacturer might create confusions in the local and international market, in case the Commissioner inadvertently approved a particular code which was already in use by other people elsewhere. They consider that a centrally administered coding system that takes into account coding schemes currently being used in the international market will work better than the scheme proposed under the Bill. They call for the Government to assign, instead of approve, the codes and to adopt a standard coding system which will allow manufacturers to continue to use existing codes recognised by the international market. One of the deputations, the International Federation of the Phonographic Industry (IFPI), proposes that the Government should consider adopting the source identification coding scheme (SID Code) managed jointly by IFPI and Philips. The primary objective of the SID Code, a security-enhancing programme, is to identify the source of optical discs. According to IFPI, the SID Code has grown into an internationally recognised coding scheme which has been adopted by around 72% of all known optical disc manufacturers around the world and by 90% of known optical disc plants in Hong Kong. The IFPI stresses that its involvement in the SID Code is strictly administrative and non-commercial. Two deputations however point out that with the adoption of only one source coding system, optical disc manufacturers who have adopted other schemes will be required to change to the new system. Apart from costs considerations, this might lead to disruption to production. They are also concerned that the use of the IFPI codes, albeit assigned by the Commissioner following a statutory requirement, may establish some contractual relationships between the licensees and IFPI and therefore subject them to imposition of charges by the latter.

9. The Administration has assured members that the scheme proposed under the Bill will not prejudice any existing codes advocated by the IFPI or any other organisations and will not upset any international order that may prevail for the industries concerned. It has explained that clause 16(2) of the Bill empowers the Commissioner to stipulate conditions to the use of codes to be approved by him. It is the Administration's intention to require as one of the conditions the applicant to pledge that the code he has applied for is to the best of his knowledge, unique to his manufacturing firm and not already used in other parts of the world. For manufacturers who are already using the IFPI's SID Code, they will be allowed to continue to use the existing codes and they should have no difficulty in making the said pledge. For those not using the IFPI system, they will be required to use a code that refers to "Hong Kong" as the ultimate source of manufacture. While recognising that IFPI's SID Code is used widely, it is doubtful whether it is appropriate for the Administration to be seen as making mandatory the use of coding systems managed by private organisations representing commercial interests. It is preferable to leave some flexibility to allow the market players to decide what is the best for them. In addition, there is at present no coding system which is administered by internationally recognised accreditation bodies such as the International Standards Organisation, the American Society for Testing and Material or the British Standards Institute. The Administration has also clarified that optical disc manufacturers are legally obliged to pay royalties on the use of compact disc technology to Philips, irrespective of whether they are users of the IFPI codes.

10. Noting that manufacturers who are not using the IFPI system will be required to modify their existing codes by including a reference to "Hong Kong" under the Administration's proposal and that the additional expense for engraving a code in the mould is minimal, most members hold the view that a uniform set of codes to be assigned by the Commissioner will better ensure the integrity of the source coding system and reinforce the protection of intellectual property rights. After consideration, the Administration agrees to amend the Bill to empower the Commissioner to assign, instead of approve, manufacturer's codes. However, the alternative formulation will not limit the Administration to exclusively adopting one coding scheme at any one time, and the Administration retains flexibility in the law to allow for future developments in coding technology. To put in place the new arrangement, Committee stage amendments to clauses 5, 6, 8, 15, 16, 22, 31 and 34 will be moved by the Administration. The amendment to clause 16 will empower the Commissioner to determine the standards for the marking of the manufacturer's codes on optical discs, and to require him to publish these in the Gazette.

11. To address some deputations' concern about the question of contractual obligations arising from using the IFPI codes, members have requested the Administration to reach an understanding with the IFPI about the adoption of their SID system as a coding standard. The Administration has subsequently advised that the IFPI will undertake formally the following -

1. to allocate a set of SID codes (new ones as well as ones already used in Hong Kong) to the Commissioner with no charge and no obligations on the part of the Government or the prospective licensees;
   
   
2. to allocate further sets of codes on the same conditions upon request by the Commissioner;
   
   
3. to assign to the Commissioner the right to manage the codes and distribute them to the licensees at the Commissioner's full discretion;
   
   
4. to provide technical assistance regarding the implementation of the codes; and
   
   
5. to forgo the right to sue for infringement of any intellectual property rights vested in those codes which are under the management or custody of the Commissioner or assigned to licensees for the manufacture of optical discs in Hong Kong.

Imported optical discs

12. Some members share the concern of the deputations that exempting imported optical discs from the mandatory source coding requirement is a big loophole in the Bill. The Administration has explained that the Bill is designed primarily to help eliminate and prevent copyright piracy at source in Hong Kong. In fact, the Mainland China and Hong Kong are probably the only jurisdictions having adopted or prepared to adopt a mandatory coding requirement for optical discs with criminal liabilities. Additional requirements on imported optical discs are outside the legislative intent of the Bill and might limit the availability of overseas non-mainstream products in Hong Kong and restrict consumer choice, without necessarily facilitating Customs' enforcement efforts at the retail level. In addition, importation of infringing copies of copyright works into Hong Kong is already an offence under the Copyright Ordinance.

Licence conditions

13. Clause 5(2) stipulates that the Commissioner may impose such conditions as he thinks fit in granting a licence. Members note the basic conditions to be imposed by the Commissioner in granting a licence, and the additional conditions to be imposed in the case of an application which is marginal, in order not to resort to immediate revocation or refusal to renew or grant a licence. On members' suggestion that these conditions should be expressly provided in the Bill, the Administration does not consider it practicable or appropriate to specify in the Bill an exhaustive list of conditions that the Commissioner is likely to impose. The Administration has advised that it is already the implied duty of the Commissioner to act reasonably and any conditions specified by him under clause 5(2) can be subject to appeal in case of dispute. Notwithstanding, in compliance with the Code of Access to Information, a licensee may request the Commissioner to furnish him the reasons and criteria for the imposition of any licensing conditions. In cases of revocation or refusal to renew or grant a licence, the Commissioner is obliged under clauses 11(2) and 12(5) to inform the applicant in writing within 14 days the grounds for the refusal or revocation.

14. Despite the Administration's explanation, and in order to enhance transparency of the licensing system, members have requested the Administration to consider setting out the general conditions in the form of a schedule to the Bill which can be subject to amendment by the Administration. After discussion, members accept the proposal of the Administration that the Commissioner shall publish all the general licence conditions to be imposed by him from time to time by notice in the Gazette, but the notice shall not be regarded as subsidiary legislation. While the Commissioner would have the discretionary power to impose any additional conditions that individual cases may justify, these conditions will only relate to areas stipulated under clause 5(2). The Administration will move an amendment to clause 5 accordingly.

Revocation or non-renewal of a licence

Civil liability

15. Members share some deputations' reservation about the power of the Commissioner to revoke or refuse to renew a licence on the basis of records of previously adjudged civil liabilities of copyright infringement as provided for under clause 11(1)(c). The deputations point out that the standard of proof for civil cases of copyright infringement is quite low, and that it is unfair to impose double penalty on civil wrong. The consideration to revoke or refuse to renew a licence should only be based on records of criminal convictions of copyright infringement. The Administration has explained that the intention of the provision was to provide an additional deterrent against licensees repeatedly infringing copyright albeit falling short of being convicted. Taking into account the worries of the manufacturing industry and the fact that the provision is not expected to be invoked on a frequent basis, the Administration agrees to delete clause 11(1)(c) and will move an amendment to this effect.

Criminal conviction

16. Some optical disc manufacturers stress that inadvertent copyright infringement should be distinguished from deliberate pirate activities. In the absence of a comprehensive registry of copyright, it is very difficult for them to verify copyright ownership. To safeguard the interests of legitimate optical disc manufacturers, they have proposed that the Commissioner should consider revocation or non-renewal of a licence only in case of "subsequent" convictions under the Bill or the Copyright Ordinance, and that they should be exempted from criminal liabilities if they have exercised their best endeavour to protect the rights of the copyright owners.

17. The Administration explains that clauses 11 and 12 do not oblige the Commissioner to automatically revoke or refuse to renew a licence upon the first conviction of an offence under the Bill or the Copyright Ordinance. Instead, the Commissioner is required to take into consideration all the circumstances before deciding on an application, including where even a first conviction is of a serious nature. As an additional safeguard, any person who is aggrieved by the Commissioner's decision regarding non-renewal or revocation of licences may appeal to the Administrative Appeal Board. However, the Administration agrees to add a provision to section 21 such that it will be a defence for the accused to show that he has taken all reasonable steps to avoid committing an offence under the Bill.

Licence suspension mechanism

18. To further allay the manufacturers' worries, members have explored the need to empower the Commissioner to suspend, in addition to the authority to revoke or refuse to renew, a licence. Instead of resorting to revocation or non-renewal of a licence, the suspension provision might be invoked in less serious cases. The Administration has advised that the Commissioner would have already taken into full account the circumstances and all relevant materials before any decision is made on revocation or non-renewal of a licence. Additional powers for suspension of licences will not necessarily assist the Commissioner to resolve licensing difficulties with licensees; instead, the licensing procedures will become unduly complicated and time-consuming. While appreciating the good intention behind, the Hong Kong Optical Disc Manufacturers Association is not in favour of the introduction of a licence suspension mechanism which, in its view, might be subject to abuse.

Registry on copyright

19. Members agree to the view of the deputations that a registry on copyright should be set up to assist the industry in copyright verification and urge the Administration to take positive action in this respect. The Administration has advised that copyright, like other intellectual property rights, is a private property right. It will not be appropriate or efficient for the Government to intervene with the management of private property rights. However, in recognising the benefits of an up-to-date database on popular copyright titles and licensing rights, the Administration has agreed to work with the copyright industry on how best to promote the concept.

Fees for application, renewal and transfer of licence

20. Members have sought clarification about the basis for setting the fees for an application, renewal and transfer of a licence at $5,500. Some members opine that the fee for renewal of licences should be lowered than that for a new application as the amount of processing work should not be as great as the latter.

21. The Administration has explained that the proposed fees are to cover the administrative costs of processing application, renewal and transfer of licences and do not take into account the resources needed for the enforcement of the Bill. On the assumption that a licensing team of five officers will have to deal with 100 licence applications per year and the time spent on each application is 8.25 hours which is already on the lean side, the unit cost of each application is worked out to be around $5,500. The number of estimated applications has taken into account known optical disc manufacturers, an estimation of unknown cases and potential new-comers to the industry. In processing an application, other than the supervisor, the other team members are expected to, inter alia, conduct physical inspection of the premises and related machinery. As the procedures and the amount of work involved in an application for renewal or transfer of licence will be substantially similar to that for an application for a new licence, and in the interest of a simple system, the same fee of $5,500 is proposed.

22. Pointing out that routine inspections at licensed premises will be conducted by separate dedicated inspection teams, a member is of the view that the procedures involved in processing applications for renewal should be simplified with a view to reducing the fee for such applications. The Administration has maintained that the responsibilities of the licensing team are unlikely to be further simplified to reduce staff cost. However, it agrees that it will need time to validate the assumptions in the calculations given that the licensing regime is a new one. In view of members' concern, the Administration undertakes to review, in the light of experience, the costs involved and adjust, downwards if necessary, the fees for application, renewal and transfer of licences. It is of the view that any adjustments made at this stage will be arbitrary.

Inspection and enforcement

23. In response to members, the Administration has explained that under clause 18(2), an authorized officer may seize, remove or detain any optical disc manufactured in contravention of the Bill; and any machinery, equipment or other thing which constitutes evidence of an offence. Only in cases where it is not practicable to remove any machinery, equipment or other thing, an authorized officer may seal the machinery, equipment or other thing or the place where it is kept under clause 18(5). Some optical disc manufacturers have grave concern about Customs' power to seal a manufacturing plant under clause 18(5) because they would suffer great financial loss if production is disrupted.

24. The Administration has advised that the period for which a place may be sealed is unlikely to be long because offences under the Bill are technical in nature, and in general do not require prolonged investigative work to gather the necessary evidence. The offences basically only relate to operating an optical disc manufacturing facility without a valid licence, or to the failure to apply for or the forgery of an assigned manufacturer's code. However, members consider that additional safeguards and re-assurances should be provided for the manufacturers and suggest that a time limit within which the place may be sealed should be specified in the Bill. A member suggests that an authorized officer may only seal a place for a specified period of time for the purpose of collecting evidence in proceedings; beyond that, the Commissioner must apply to a court for an order. Having considered members' views, the Administration agrees to move amendments to clause 18 to specify that the period for which a place is sealed under clause 18(5) shall not exceed 14 days, and the Commissioner may apply to a magistrate for an order that the period be extended or further extended.

25. The Administration agrees with members that the reference to "outer and inner door" in clause 18(4)(a) is too narrow and thus restricts the execution of the powers under the provision. It will move an amendment to the subclause such that an authorized officer "may break into or forcibly enter a place", consistent with the language of clause 17(3).

Forfeiture procedures

26. In response to members and in order to clarify beyond doubt that the forfeiture procedures set out in the Copyright Ordinance apply to this Bill, the Administration agrees to move amendments to clause 20 to the effect that any optical disc, machinery, equipment or other thing sealed, seized, removed or detained under clauses 18(2) and (5) are liable to forfeiture, and that sections 131 and 133 of the Copyright Ordinance shall apply with such modifications as the circumstances require. In brief, an owner may, within 30 days following the date of the seizure or detention of any item, give notice of claim that the item is not liable to forfeiture. Where a notice of claim is given, the Commissioner shall make an application for forfeiture to a court, unless he is satisfied within a reasonable period after the receipt of the notice of claim that the item concerned should be delivered to the claimant. Where the claimant is the defendant in criminal proceedings, the forfeiture application shall be heard immediately following the criminal proceedings.

Compensation for damages

27. In response to members' request for clarification concerning clause 33, the Administration has advised that in order to protect the officers and ensure efficiency of the enforcement action, the Commissioner, his authorized officers and persons assisting authorized officers are not liable for any loss or damage suffered by any person as a result of any action taken by them in good faith in the exercise of powers or the performance of their duties under the Bill. However, a person who is aggrieved by wrongful acts of authorized officers exercising their powers under the Bill can claim damages from the Government under common law. Such liabilities will include the just and equitable compensation in money or kind that the circumstances of the case may warrant.

28. Making reference to other statutes which include specific provisions on compensation for goods lost or damaged as a result of actions taken by enforcement agencies, members request the Administration to consider including similar provisions in the Bill. After consideration, the Administration agrees to adopt section 35 of the Trade Descriptions Ordinance, with suitable modifications, to make it beyond doubt the liability of the Government to compensate an owner for any loss suffered by him as a result of Customs' enforcement actions under clauses 18(2) and (5). However, the owner shall not be entitled to compensation for any such loss if the items in question are forfeited under clauses 20 and 27 or the owner has been convicted of an offence under the Bill or the Copyright Ordinance committed in relation to such items. A Committee stage amendment (new clause 33A) will be moved to reflect this.

Committee stage amendments (CSAs)

29. Apart from the CSAs highlighted in this report, the Administration will also move other consequential and technical amendments to the Bill. A full set of the CSAs agreed by the Bills Committee and to be moved by the Administration is in Appendix III.

Recommendation

30. The Bills Committee recommends that, subject to the CSAs to be moved by the Administration, the Second Reading debate on the Bill be resumed on 25 March 1998.

Advice sought

31. Members are invited to support the recommendation of the Bills Committee in paragraph 30 above.



Provisional Legislative Council Secretariat
11 March 1998

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Appendix I

Bills Committee on Prevention of Copyright Piracy Bill

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Appendix II

Bills Committee on Prevention of Copyright Piracy Bill

List of organizations which have submitted views and/or met with the Bills Committee