The report, which was carried out independently at the Commission's request, concluded that the Directive must be changed if the potential of Europe as a single marketplace for online services is to be realised.
"The Directive has at best only partly achieved its main goal of promoting growth and innovation in online content services," said the report. "As our benchmark test has revealed, the Directive deserves particularly low marks for its (lack of) harmonising effect and its (lack of) legal certainty."
The Copyright Directive was passed in 2001 and was intended to update EU law on copyright for the internet age. Amongst other things it protected the use of digital rights management technology.
The report, carried out by the Institute for Information Law at the University of Amsterdam and the Queen Mary Intellectual Property Centre in London, investigated the various implementations of the Directive into member states's laws, and the effect the Directive has had on the market.
Its most serious criticisms were reserved for the effects the Directive was found to have had on the market. It found that a lack of specificity in some parts of the Directive served to undermine its very purpose.
The report said a particular problem existed in the vagueness of the Directive's rules on when a country can enshrine exceptions to it and limitations to its laws in their own national laws.
"Here, actual harmonisation has hardly been achieved, for a number of reasons. In the first place, the provisions of the Directive are mostly phrased in broad and categorical terms, leaving wide discretion to the member states," said the report. "Even worse, from a perspective of approximation, is the Directive’s failure to come up with a set of mandatory limitations."
"Member states are left with near-total freedom to pick and choose from the Directive list of optional limitations those that they see fit. The result is a mosaic of exceptions and limitations that vary from Member State to Member State, which might seriously impede the establishment of cross-border online content services," it said.
While the Directive was intended to make doing business across European borders cheaper and easier by providing a common legal framework, it has failed in relation to the rules on limitations and exceptions, the report said.
"As to limitations, the lack of harmonised rules directly affects legal certainty of market players offering online services across national borders," it said. "A serious consequence of the prevailing uncertainty regarding the scope of limitations in the digital networked environment has been to force users to negotiate the conditions of use of protected works with every single rights holder, for every territory involved. This clearly raises transaction costs."
The report said that the Directive changed the philosophical as well as the technical legal landscape. It tipped the balance of power in favour of rights holders, it said, and away from users.
"The broad scope of the right of reproduction … gives right holders near-absolute control over acts which in the off-line world were never the right holder’s prerogative," it said.
The report recommended introducing some form of consistency by creating a short list of mandatory exemptions to the restrictions imposed by the Directive. Countries would be permitted to add further exemptions if they wished.
The report was scathing about the Directive's rules on digital rights management. "The Directive’s convoluted rules on [DRM] have little more to offer to the member states and its market players than confusion, legal uncertainty and disharmonisation," it said.
It recommended that Europe follow Germany's lead in making it compulsory to declare on a product that digital rights management is a part of that product, and to declare the "scope and characteristics" of that technology to consumers.