Leuthold v CBC: “Industry Practice” in Interpreting Contracts

by Dentons
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When, if ever, can “industry practice” be used in interpreting contracts? That question is of particular relevance in the entertainment industries, as each facet of those industries (such as film, TV, music, book publishing, videogames, etc.) has their own jargon, standards and conventions, some of which are, if not contradictory, at least not obviously compatible (as an example, the term “publishing” has very different connotations as between the “worlds” of music, book publishing and film). If the parties to a contract come to the contract from different “worlds”, and they have different understandings of what a term in a contract means, whose understanding should prevail?

A couple of years ago, in a post entitled Leuthold v CBC: Damages for Copyright Infringement, I noted the Federal Court decision in Leuthold v CBC (2012 FC 748). As the title of that post indicated, the post focused on how the court in that case calculated the damages payable for copyright infringement when the CBC made unauthorized use of photographs in a documentary. I wrote at the time that the “decision goes into great detail about the various negotiations and conflicting understandings of the parties – potentially interesting in their own right but of limited application beyond the bounds of these particular disputants.” I think I got that wrong, and I’d like to re-visit the case now with particular reference to the issue of industry standards. A couple of weeks ago the Federal Court of Appeal released its decision in the appeal of the matter (2014 FCA 173) (spoiler alert: the CBC won again), and in reading the decision of the appeals court, I was struck by the fact that a portion of the decision seems to turn in large part on how to handle “industry practice” when interpreting contracts.

To refresh our memories, here are the relevant facts in the case (taken from the 2012 post):

The CBC commissioned a documentary entitled As the Towers Fell, about the September 11, 2001 terrorist attacks on New York City’s World Trade Center. Four different versions of the documentary were aired multiple times on the CBC main network and on the CBC Newsworld channel (since re-branded as CBC News Network). In most of the versions which were aired, still photographs which had been taken by and which were owned by the plaintiff appeared on-screen for a total of 18 seconds. Efforts had been made by CBC employees to “clear” (i.e., obtain permission to use) the photographs in the documentary – which is where the dispute arose.  The plaintiff originally faxed a short letter indicating authorization to use the photos – but the parties disagreed on the scope of the authorization and whether any conditions attached to it.  Eventually, following further discussions between the plaintiff and various CBC representatives, a license agreement was signed by the plaintiff.  Critically, the documentary had been broadcast on a number of occasions throughout the discussion/negotiation process (including at least one broadcast which occurred before the first faxed authorization had been received from the plaintiff).  Of relevance to the plaintiff’s position, the broadcasts took place on both the CBC main network and the Newsworld channel and was broadcast in all Canadian time zones, at the applicable local time, directly by the CBC or through affiliated stations.

Thus far, here is the nub of the case: a photographer gave authorization to the CBC to make use of her photographs in a documentary – but when the CBC broadcast the documentary on its “main” network and also on the CBC”s “Newsworld” channel, they did so in a way which did not accord with the photographer’s understanding of the scope of authorization she had given. Here is the relevant language of the license agreement:

[Plaintiff] hereby grants to CBC the non-exclusive and limited right to incorporate the Stills in the Production. CBC shall have the right (but not the obligation) to broadcast the Stills on Canadian television for one broadcast on CBC’s Network & Regional TV stations. [emphasis added]

The evidence at trial indicated that the plaintiff/photographer did not know about CBC’s Newsworld channel, and did not think that her license entitled the CBC to broadcast the documentary (containing her photographs) on the Newsworld channel. The CBC, by contrast, did think that the words “CBC’s Network & Regional TV stations” included both the CBC’s “main” channel and the Newsworld channel. How to resolve this disconnect?

The trial court decided in favour of the CBC, and provided the following reasons:

  1. “when clearing rights, the CBC always included Newsworld”
  2. the plaintiff’s expert evidence (to the effect that for purposes of the CRTC’s regulatory regime, Newsworld was indeed a separate “network” from the CBC’s main channel) was irrelevant because it spoke to regulatory matters, not copyright matters
  3. “industry usage clearly favors the defendants” and ”in considering what is commercially sensible, the Court cannot accept Miss Leuthold’s interpretation whereby the CBC would have agreed to terms that ran against their normal usage, that is to exclude Newsworld and affiliated stations”
  4. the contra proferentum rule of contractual interpretation (roughly, that ambiguous wording in a contract should be construed against the party that drafted it) did not apply because there was no need to apply it

Taken together, those four points really distill down to two points – we can discard 2 and 4 because they are negative arguments for not accepting the plaintiff’s position, not positive arguments for why we should accept the defendant’s position. Points 1 and 3 really boil down to something which is quite a bit different than “industry practice”: instead, 1 and 3 are effectively “the CBC normally conducts itself in a certain way, and how the CBC ‘normally’ conducts its business should be determinative when there is a dispute between CBC and another party over how to interpret the CBC’s contracts”. Really, “industry practice” in this decision meant “CBC practice” (although the court used the phrase “industry usage” in point 3, the court did not identify any producer or broadcaster other than the CBC who made use of language in a similar fashion).

The Court of Appeal affirmed the decision of the trial judge, but not because the trial judge was correct on this point: rather, the Court of Appeal declined to overturn the lower court’s conclusion because it was not a “palpable and overriding error” – rather, the trial judge’s decision, even if wrong, was “reasonably open to him” based on the evidence before him.

If we are to take the Leuthold decision at face value, then, it’s not necessarily the practice of the “industry” which can be determinative in a contract dispute, but rather the past practices of one of the contracting parties which can be determinative. In Leuthold, because the CBC was of the view that the phrase “CBC’s Network & Regional TV stations” included the CBC main network plus Newsworld, and because, in other situations, the CBC had always taken pains to “clear” materials for use on both the CBC main network and Newsworld (though it had not done so here) that was sufficient – irrespective of what the other party to the contract thought she was agreeing to and irrespective of the fact that the point was clearly an open one given the ambiguity of the contract’s wording.

So what is the importance of all of this? It means that it is much riskier to enter into short-form contracts in the entertainment industries which contain “terms of art” or terms which carry some kind of “industry accepted” meaning. It is critical that terms in contracts either be defined with specificity or, failing that, be illustrated with examples; failure to do so could mean that one party to the contract will be subject to the greater contractual interpretational “weight” accorded to the practices of the “institutional” party. Here’s an example: a film producer and a distributor enter into a distribution agreement under which the producer grants the distributor the exclusive right to distribute the producer’s file “by means of home video and the internet”. The producer thinks that means  that the producer has retained the rights to exploit the film by means of, for example, digital downloads on iTunes and by means of streaming via Netflix. The distributor thinks otherwise. Who wins in a dispute? On the basis of Leuthold, it seems that the controlling factor may be what the distributor has done in the past – has the distributor historically conducted its business such that in contracts with that wording (or similar wording!) it has exploited the films on iTunes and Netflix? That might be all that is required – it doesn’t appear that anything more than that decided the point in Leuthold.

In short: resist short-hand in contract drafting; insist on specificity when describing the scope of rights which have been granted; avoid ambiguity or assurances that “everyone knows what this means”; otherwise, contracting parties may find themselves giving up much more than they (thought they) bargained for.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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