The Netherlands Update: Martin Garrix is coming to Den Bosch! A reminder for record companies to make their own investments in the creation of the phonograms to be finally exploited explicit.

On December 17th. the Supreme Court ruled in the case between record label Spinnin’ Records and its affiliated management agency Music All Stars (MAS) on the one hand and DJ Martin Garrix on the other. Both parties had appealed against the earlier judgment of the Arnhem-Leeuwarden Court of Appeal. In that judgment, the Court of Appeal had ruled (among other things) that the record label had not misinformed garrix, who was still a minor at the time, when entering into the agreement. A provision allowing Spinnin’ to deduct costs from royalties due was not considered unreasonably onerous. However, the court found that a provision that unilaterally allowed Spinnin’ Records to extend the contract was unreasonably onerous. The Court of Appeal also ruled that DJ Garrix must be legally regarded as a phonogram producer with regard to the songs he made. The Supreme Court made a different choice than the Court of Appeal with regard to the unreasonable onerousness of the contract provisions.

Facts

What had happened? In 2013, a young, not yet world-famous Garrix signed agreements with both Spinnin’ Records and the management agency MAS affiliated with that record label. Garrix was represented by his father, who in turn had sought professional help. In principle, there is a conflict of interest between a management agency that is supposed to make the best deals for an artist, and a record label with which an artist closes one of those deals. At the same time, there may be good reasons for an artist to enter into such a combination of agreements. Garrix chose to enter into contracts with Spinnin’ and MAS. It is clear from the history contained in the Court’s judgment that he was aware of the possible conflict of interest between Spinnin’ and MAS.

The agreements were entered into for two years (mid-2013 – mid-2015), with an extension option for Spinnin’ and MAS of another two years on the same terms. By the time the extension was discussed, garrix was already dissatisfied. Negotiations came to nothing, and Spinnin’en MAS invoked the extension clause. Garrix then proceeded to annul, dissolve or terminate the agreements (you better be sure of your case). Spinnin’ and MAS disagreed and with that the dispute came before the court. After an interim judgment of the court, the case came to the court.

Judgment under appeal of the Court of Appeal

The Court of Appeal rejected an appeal for error (which would lead to voidability) by Garrix in entering into the agreements. Garrix, represented by his father and assisted by professionals), knew what he was getting into. However, the Court of Appeal also ruled that copyright contract law applies to both agreements. This is a section of the Copyright Act that is intended to protect authors and performers when entering into exploitation agreements with generally stronger counterparties. Because of the interdependence with the contract with Spinnin’, the management contract was also considered to fall under that department. The Court of Appeal considered (paragraph 7.54):

The Court of Appeal will then assess, on the basis of the open standard of Article 25f paragraph 2 of the Dutch Civil Code, whether the co-management agreement and the production agreement 2013 or the individual provisions thereof are unreasonably onerous. This requires not only a concrete review of the individual provisions of the contract, but also a concrete assessment of the other circumstances, including the manner in which the agreements were concluded.

The Court then ruled that an article determining the amount of the royalty to be paid to Garrix is not unreasonably onerous. That article allowed, without limitation, costs to be deducted from the royalties to be paid out and Garrix argued that it was unreasonably onerous that in theory he would hardly be able to have any money left over. In practice, however, such a disadvantage had not materialized, so the clause was not unreasonably onerous, the Court of Appeal ruled.

7.62 The next point concerns the amount of the royalty allowance in Article 5. The fact that the amount of the royalty fee is exceptionally low in the given circumstances is not further specified by [G] and [the respondent], so that the Court of Appeal ignores this. The accusation that the provision is unreasonable because it allows Spinnin to deduct unlimited costs because the fee is calculated on net income, lacks a factual basis. It has not been stated or shown that Spinnin deducted unlimited or uncontrolled costs. In the specific circumstances of this case, the clause is therefore not unreasonable.

In the end, the Court of Appeal ruled that only the unilateral option to extend the contracts was unreasonably onerous as referred to in art. 25f paragraph 2 Aw. This means that the extension clauses are voidable, to that extent the destruction by Garrix is effective and the contracts were therefore not renewed in 2015 but ended. The Court of Appeal took into account in the considerations (paragraph 7.66):

Finally, spinnin’s unilateral extension option in Article 7 of the letter agreement. Article 7 gives Spinnin the possibility to extend the agreement for two years under the same conditions. The Court of Appeal is of the opinion that, in the light of the concrete circumstances of this case, namely the great commercial success of [the respondent] and the resulting disproportion between the remuneration to [the respondent] and the revenues for Spinnin, even if the agreed increase of 10% (from 30% to 33%) is taken into account, this provision must be regarded as unreasonably onerous. The clause was rightly annulled by [the respondent].

The Court of Appeal therefore takes into account the costs actually deducted from the royalties during the term of the contract when considering the royalty article. The Court of Appeal also takes the success of Garrix after the conclusion of the agreement into account as a relevant circumstance in the assessment in the context of art. 25f paragraph 2 Aw. The Court of Appeal therefore checks reasonableness twice at the time the case is before the Court of Appeal, or ‘ex nunc’.

Supreme Court

The Supreme Court thinks otherwise. Clauses must be assessed for unreasonable onerous onerousness as referred to in copyright contract law on the basis of the facts and circumstances known at the time of entering into the agreement, according to our highest court. Or ‘ex tunc’ testing.

3.1.3 The review of art. Article 25f(2) aw – which contains a ground for annulment as a sanction – by its very nature entails an assessment of circumstances that occurred before or at the time of the conclusion of the contract (ex tunc). Art. 25f paragraph 2 Aw does not relate to circumstances that have occurred after the moment of conclusion of the contract. The court serves the question whether a clause is unreasonably onerous as referred to in art. 25f paragraph 2 Aw therefore ex tunc.

According to the Supreme Court, the circumstances after the conclusion of the agreement (the success, the way of compliance and what can still be devised) can be given a different place. The Supreme Court also ruled that the Court of Appeal should have looked into whether the application of the articles might be contrary to reasonableness and fairness. In that test you look at all the circumstances of the case as known at the time of judgment. An ‘ex nunc’ assessment.

3.2.2 This complaint succeeds. The Court of Appeal, in so far as it ruled that the clauses mentioned by [plaintiff] were not unreasonably onerous within the meaning of art. Article 25f(2) aw, [plaintiff’s] alternative claim that the terms should remain inapplicable on the ground that they are contrary to reasonableness and fairness. It is important here that, unlike when assessing whether a clause is unreasonably onerous within the meaning of Article 25f paragraph 2 Aw (see above in 3.1.3), circumstances that have occurred after the conclusion of the contract may also be taken into account when assessing whether the application of a clause is unacceptable according to the standards of reasonableness and fairness, such as the manner in which the agreement has been executed.

In his Opinion, the Advocate General at the Supreme Court mentioned the ex tunc vs. ex nunc discussion and made the comparison with art. 6:233 of the Dutch Civil Code, which stipulates that general terms and conditions are voidable if they are unreasonably onerous (Conclusion AG, al. 4.202).

Art. 6:233 introductory wording and under a of the Dutch Civil Code does not relate to the execution of the agreement. For the rest, art. 25f paragraph 2 Aw just like art. 6:233 introductory wording and under a of the Dutch Civil Code by its nature relates to circumstances that occur before or at the time of the conclusion of the agreement.

So that also looks like an ex tunc test. Nevertheless, the AG had no problem with the court’s ruling:

4.204 With his judgment in para. 7.62 that it has not been stated or shown that Spinnin deducted unlimited or uncontrolled costs, the Court of Appeal has indicated that [the plaintiff] has not sufficiently stated the complex of facts from which the unreasonable onerousness of the clause follows. It would have been appropriate, as the party on whom the duty to state and the burden of proof rest, to provide more clarity about the circumstances of the case in which the clause leads to unreasonably onerous consequences, such as what costs Spinnin could deduct on the basis of the clause and why that is unreasonable.

The Supreme Court does not choose that way of reading, and that is understandable. After all, the Court of Appeal ruled that Garrix should have demonstrated that Spinnin’ deducted unlimited or uncontrolled costs during the term of the agreement:

The accusation that the provision is unreasonable because it allows Spinnin to deduct unlimited costs because the fee is calculated on net income, lacks a factual basis. It has not been stated or shown that Spinnin deducted unlimited or uncontrolled costs. In the specific circumstances of this case, the clause is therefore not unreasonable.

The Court of Appeal does not refer to a kind of circumstance that could be unreasonably onerous after the conclusion of the agreement, the Court of Appeal refers to actual events after the conclusion of the agreement that Garrix would have had to invoke in support of the unreasonable onerousness. That is not an ex tunc test.

Concrete meaning

Whether the difference between ex tunc and ex nunc will lead to a difference in the final judgment in this practical case will have to be determined by the Court of Appeal of s’-Hertogenbosch. In theory, at least, there is a difference. We know from the restrictive effect of reasonableness and fairness (6:2 and 6:248 BW) that it is applied with restraint in practice. A situation must be unacceptable by standards of reasonableness and fairness before the restrictive effect occurs.

Copyright contract law was specifically created to protect authors and ‘only’ asks for unreasonable onerousness instead of unacceptableness. The legislative history explicitly shows that a lower threshold is intended.

Authors and performers therefore seem to be less well off at the Supreme Court when it comes to circumstances in their favour that occurred after the conclusion of the agreement. The mirror image is also true: circumstances to their disadvantage after the creation should also have no role in the ex tunc assessment. From the Explanatory Memorandum to art. 25f paragraph 2 Aw:

The second paragraph stipulates that a clause that, in view of the nature and other content of the operating agreement, the manner in which the agreement was concluded, the mutually known interests of the parties and the other circumstances of the case, is unreasonably onerous for the creator, is voidable. Unlike in the preliminary draft, there is no longer any talk here of obviously unreasonably onerous in order to express that no heavier test should be used than already applies on the basis of Article 6:2 of the Dutch Civil Code. On the contrary, by including a separate provision on the voidability of unreasonably onerous provisions in the Copyright Act, the legislator sends the signal that a lighter test is appropriate. Examples of unreasonably onerous provisions are provisions where royalties are based on gross amounts from which unlimited deductions, such as promotional costs and the like, can be deducted, so that nothing net is paid to the creator. Or the mandatory affiliation with a particular music publisher affiliated with the operator in record contracts. In its opinion, the Copyright Committee has suggested prohibiting such agreements that amount to forced shopping.

The way in which the explanatory memorandum is drafted could support the argument that the events following the conclusion of the agreement may be relevant to the test. After all, reference is made to an actual result of a provision (‘so that nothing is paid to the creator net’) in order to assess its reasonableness. Whether that result occurs can necessarily only be assessed after the conclusion of the agreement. However, the Supreme Court did not decide that. He keeps it for art. 25f paragraph 2 Aw op ex tunc and brings the circumstances that arise after the conclusion of the agreement under (the heavier test of) art. 6:2 and 6:248 BW where ex nunc is looked at.

It will be interesting to see how the Court of Appeal of ‘s-Hertogenbosch will deal with the facts and with the two assessment frameworks. Everything is still possible, and that also says everything about the open nature of these standards.

The Court of Appeal and the Supreme Court each come to the conclusion that Garrix must be regarded as the producer thereof with regard to the phonograms he produced on his own and supplied to Spinnin’, since he has made the predominant investments for that purpose. It was not the agreement between the parties but the actual course of events that was decisive for this, since it is not a matter that is freely determined by the parties themselves. A reminder for record companies to make their own investments in the creation of the phonograms to be finally exploited explicit. Transfer of the rights as a phonogram producer is an alternative that is less robust to them than a right of their own that arises in their own right.

By Joep Meddens, Hocker, Netherlands, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact netherlands@transatlanticlaw.com

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