Why DOJ’s Mandate of 100% Licensing of Works by ASCAP and BMI is 100% Lunacy

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On August 4, the Department of Justice (DOJ) publicly released its “Statement of the Department of Justice on the Closing of the Antitrust Division’s Review of the ASCAP and BMI Consent Decrees” (DOJ Statement).  The Justice Department issued the DOJ Statement after nearly two years of reviewing, at ASCAP and BMI’s request, whether the decades-old consent decrees under which these performing rights organizations (PROs) operate should be modified.

By way of background, ASCAP and BMI are the two major PROs and license the non-dramatic public performing right in copyrighted musical works. So when songs are broadcast on radio and TV, streamed over the Internet or performed in nightclubs, concert halls and arenas, the PROs issue “blanket licenses,” which allow the user to perform any and all of the works in ASCAP and BMI’s respective repertories as often as the user wishes.

The ASCAP and BMI Consent decrees were entered into between DOJ and the two PROs in 1941 (back when 78s were big and TV was in its infancy) in settlement of antitrust litigation instituted by the Justice Department.  A third PRO, SESAC, controls a small, but important share of licensable songs and is not currently regulated by a consent decree. BMI’s Consent Decree hasn’t been amended since 1994 and ASCAP’s Consent Decree was last amended in 2001.  Since the music licensing landscape has changed dramatically since these decrees were last updated at the dawn of the digital age, ASCAP and BMI sought modifications that would allow for more licensing flexibility, such as the ability to issue licenses covering more than just the public performing right.

DOJ’s review began in 2014 and included two rounds of public comments and I submitted mine in the second round.  During its review, DOJ, asked for comment on the issue of 100% licensing, something that took most of the music business community, especially songwriters and music publishers, by surprise. We’ll do a quick review of basic copyright and contract principles in order to understand what “100% licensing” is about.

As a matter of basic copyright law, when two or more people choose to collaborate in writing a song, they create a “joint work” under the US Copyright Act.  This means that, in the absence of a written agreement to the contrary, each songwriter controls an equal share in an “undivided interest” in the song they wrote together. This is best illustrated by example:  Jack and Jill decide to write a song together.  Jack writes the music and Jill writes the lyrics. Who owns what? The answer is that both Jack and Jill each own 50% of both the music and the lyrics.

While this may seem counter-intuitive at first,  a copyright like a patent, is a form of intellectual or intangible property. And the law of intellectual property borrowed from the law of tangible property, such as real estate. For example, if Jack and Jill buy a house, they are tenants and common and each will own a share in the entire property. So absent some weird agreement between them, Jack wouldn’t be confined to just 50% of the property but would have a share of the front and back yards, as well as the kitchen, family room and bedrooms. So, since Jack and Jill have created a joint work of copyrighted property, their song, they each own an undivided 50% interest in the entire song.  This means, for example, that Jack can license 100% of the rights in the song for use in a TV commercial and doesn’t have to get Jill’s permission to do so. Jack would, however, have to pay Jill her 50% share of the proceeds.  This default or “off-the-rack” rule of US copyright law is what DOJ refers to as 100%  or full-work licensing.

Remember, however, I said that this rule applies in the absence of a written agreement. Imagine that Jack and Jill are professional songwriters. They may be represented by different music publishers and different PROs.  And what if Jill is a deal-making genius while Jack doesn’t know jack about the music business? Clearly Jill wouldn’t want Jack making deals for her share without her consent.

So what typically happens in the music business is that collaborators (often through their music publishers) enter into contracts that state that each party will separately administer its respective share in the work.  And having multiple songwriters, each with different publisher and PRO representation, is more common than ever. Many contemporary hits contain samples or are written by multiple songwriters and producers, one who may produce beats, another top line melody and others may write lyrics.

“Fractional licensing” is where parties separately administer their shares – and only their shares– in co-written works. The music business, generally, and ASCAP and BMI, in particular, have operated on a “fractional licensing” as opposed to a “100% licensing” basis for decades.  For example, users typically purchase both ASCAP and BMI licenses. The PROs price their licenses based upon the proportional market share of the works in their repertories. ASCAP pays its member writers and music publishers in accordance with their membership agreements and rules and BMI does likewise.  Neither ASCAP nor BMI currently pay writers that aren’t signed up with them.

Now, however, DOJ has concluded that ASCAP and BMI must license on a 100% basis, negating decades of industry practice and myriad privately negotiated agreements among entities who are not party to either consent decree, namely all the songwriters and music publishers who license through ASCAP and BMI. This means that if either ASCAP or BMI has a miniscule share of a given song (e.g. 5%), they have to license 100% of the song:

As discussed in detail below, the consent decrees, which describe the PROs’ licenses as providing the ability to perform “works” or “compositions,” require ASCAP and BMI to offer full-work licenses. The Division reaches this determination based not only on the language of the consent decrees and its assessment of historical practices, but also because only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses that distinguish ASCAP’s and BMI’s activities from other agreements among competitors that present serious issues under the antitrust laws. Moreover, the Division has determined not to support modifying the consent decrees to allow ASCAP and BMI to offer “fractional” licenses that convey only rights to fractional shares and require additional licenses to perform works.

DOJ justifies this position because the ASCAP Consent Decree states that ASCAP shall “license to perform all the works in the ASCAP repertory” and BMI’s Consent Decree states that it must provide music users with access to its “repertory” which includes “those compositions, the right of public performance of which [BMI] has or hereafter shall have the right to license or sublicense.”  DOJ defines “works” and “compositions as entire works (i.e., 100% of the work), even though ASCAP and BMI have never operated in this way and other forms of licensing such as mechanical (licenses for audio-only recordings like CDs and MP3s) and synch (use of music in audio-visual works like film, TV, videogames) continue to be done on a fractional basis.

It is a basic principle of contract law that you can’t grant greater rights than you’ve been given. That’s why fractional licensing has long been the norm in the music business. It’s also a principle of contract interpretation (and a consent decree is a contract) to look to course of conduct or industry practice to determine the parties intent as to the meaning of words like “works” and “compositions.” For instance, BMI’s writer affiliation agreements have long stated that the member grants to BMI only “all the rights that you own or acquire” and asks requires its members to submit works registration forms specifying co-writer and co-publisher’s PRO affiliation and shares in each registered song. DOJ should be aware of this given that these form agreements have been used hundreds of thousands of times over several decades.

Acknowledging that it can’t abrogate contracts between private parties that aren’t bound by either Consent Decree, DOJ concludes that its 100% licensing mandate may require ASCAP and BMI to delete from their respective repertories those works where private contracts preclude 100% licensing:

To the extent allowed by copyright law, co-owners of a song remain free to impose limitations on one another’s ability to license the song. Such an action may, however, make it impossible for ASCAP or BMI – consistent with the full-work licensing requirement of the antitrust consent decrees – to include that song in their blanket licenses.

DOJ distinguished synch licensing from the blanket licenses ASCAP and BMI issue as follows:

Unlike synch licensing, where a producer knows in advance what songs to license and can make substitutions where all fractional instances are not available, this doesn’t work for TV and radio stations and other users who don’t control song selection and fractional licensing, if allowed, would leave these users “exposed to infringement liability” to the point where they might “simply turn off the music.”

Of course, this belies more than seven decades of actual practice, where as DOJ, admits, most users get licenses from all three PROs.  Moreover, 100% licensing is a creature of US law. There is only fractional licensing under the copyright laws of many European countries so many works that originate overseas would have to be excluded from the ASCAP and BMI repertories under DOJ’s new view (which in an Orwellian twist DOJ maintains has always been how the Consent Decrees have been interpreted). But in its infinite magnanimity, DOJ has decided to refrain from enforcing its new “old” interpretation for one year to allow ASCAP and BMI to sort through the chaos DOJ has created.

For example, DOJ blithely suggests that co-writers of songs with agreements that stipulate fractional licensing (i.e., separately administered shares) can simply amend their contracts. Of course, the transactions costs for these contract revisions are imposed upon the songwriters and publishers who are not even parties to the Consent Decrees. And many of these agreements are decades old. Is one writer going to contact a former band mate from thirty years ago to amend a contract – if they can find it? And what if one or more of the writers is deceased? This “suggestion” from DOJ is not terribly practical. The probable outcome, however, is that thousands of enormously popular songs will not be licensable through PROs’ blanket licenses. Hardly a pro-competitive outcome.

But don’t take my word as to the improper and impractical nature of DOJ’s 100% licensing mandate. The Copyright Office did not mince words when it expressed its views on DOJ’s 100% licensing proposal back in February:

The Office believes that an interpretation of the consent decrees that would require these PROs to engage in 100-percent licensing presents a host of legal and policy concerns. Such an approach would seemingly vitiate important principles of copyright law, interfere with creative collaborations among songwriters, negate private contracts, and impermissibly expand the reach of the consent decrees. It could also severely undermine the efficacy of ASCAP and BMI, which today are able to grant blanket licenses covering the vast majority of performances of musical works – a practice that is considered highly efficient by copyright owners and users alike.

And that was just on page three of its 29-page report. You can read more about the background of the Copyright Office’s report, its prior Music Licensing Study and my comments to the DOJ here. But the Copyright Office pretty much sums it up:

In sum, an interpretation of the consent decrees that would require 100-percent licensing or removal of a work from the ASCAP or BMI repertoire would appear to be fraught with legal and logistical problems, and might well result in a sharp decrease in repertoire through these PROs’ blanket licenses. It would seemingly punish copyright owners who have chosen to exercise their rights under the Copyright Act to manage their separate interests through the PRO of their choice.

As hinted in the Copyright Office’s summation, a songwriter could be compelled to accept payment from ASCAP and its rates and rules regarding distribution when she decided to join BMI. ASCAP writers may similarly be tethered to BMI without their consent as well.

ASCAP and BMI intend to vigorously fight DOJ’s ruling. In a joint statement, ASCAP states that it will pursue legislation in Congress addressing the 100% licensing issue, partial withdrawal of works and other issues. Meanwhile, BMI intends to pursue a ruling in its Rate Court in favor of fractional licensing.

Who benefits from a 100% licensing regime, something that nobody in the music industry believed to be applicable? It’s certainly not songwriters. But Google/YouTube and other streaming services might welcome a 100% licensing regime which would theoretically enable users to purchase fewer blanket licenses, which would, in turn, create downward pressure on the price of those licenses.

[For a more in-depth discussion of 100% licensing, please click here to listen to my hour-long discussion with composer, Dennis Tobenski, on episode 14 of his Music Publishing Podcast]

The Art of the Bankruptcy Bluff

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Bankruptcy. A word that provokes more fear, loathing and foreboding failure than “world premiere” does to certain silver-haired symphony subscribers hoping to snooze again to Brahms. And no wonder when even venerable performing arts companies from the Philadelphia Orchestra to New York City Opera have gone through the reorganization wringer – and not always successfully.

But if you’re a financially troubled arts organization, one way to keep the wolves at bay may be bankruptcy — or at least playing poker with your creditors over possibly filing. To help me explain the potential benefits of pre-bankruptcy negotiations, I had my brother, New York bankruptcy Super Lawyer, Alec P. Ostrow, change from his cape and tights to a suit and tie and run his red pencil through my draft discourse on red ink.

Let’s say you’re the CEO of Washegon Opera and your company is nearly washed up and gone because attendance, fundraising and grant revenues are way down. And let’s say you think you can turn things around but you’re bleeding red ink and the sharks are circling. The time to talk about bankruptcy is well before Snidely Whiplash comes to padlock the door and cart away your costumes. But a Classic Comics digression into the bankruptcy process, with its own federal code and courts, is needed to understand why the “B” word bluff may be a helpful negotiating tactic.

Bankruptcy Basics

Washegon Opera’s pre-bankruptcy tango will revolve around the prospect of filing for reorganization under Chapter 11 of the Bankruptcy Code (as opposed to a Chapter 7 liquidation case where everything is sold off and the business is shuttered). Reorganization is premised on an entity, whether a for-profit or not-for-profit business, having at least a chance of being viable once the bankruptcy case is closed.

And post-bankruptcy viability is tested throughout the bankruptcy process, from the filing of the case and continuing after the approval of a plan of reorganization. This plan is essentially a very detailed post-bankruptcy business plan that once submitted, is then negotiated with (and sometimes challenged by) the creditors and is ultimately approved by the court.

If the bankruptcy debtor successfully emerges from this process like a phoenix from the ashes of its pre-bankruptcy pyre, the bankruptcy judge will give his blessing to the now-reorganized red inkster by granting a discharge of its debts in accordance with the reorganization plan. A typical plan is one where creditors get pennies on the dollar for their pre-bankruptcy claims – and sometimes nothing at all. Moreover, claims are often paid over a much longer period time and at a lower interest rate than had been previously agreed to. This is pretty powerful stuff for a creditor to swallow.

But there’s more. In order for all similarly situated creditors (e.g., secured creditors like lenders as one group, and trade creditors like vendors of costumes and office supplies as another) to get a fair deal from a clean deck, there are provisions in the Bankruptcy Code that are designed to give the reorganizing debtor breathing room to deal with them evenhandedly. Other Code sections prevent some creditors from having an unfair advantage over others. Let’s look at a few.

Bankruptcy Benefits – Four Examples

First, let’s assume you commence Washegon Opera’s case by filing a Chapter 11 petition in the local bankruptcy court. As soon the petition is filed, an automatic stay kicks in. Think of it as the big, clear dome from the TV series, Under the Dome dropping down on your business and preventing any creditors from clawing at you. This means that absent the court’s permission, a lender can’t foreclose on a loan, a landlord can’t commence or proceed with an eviction and trade creditors can’t repossess equipment or pursue a lawsuit or a lien against you. But, like the denizens of the dome, a bankruptcy debtor is under glass: it pays a price for the stay’s protection as its actions are closely scrutinized by the court and creditors – and sometimes subject to their approval – through intrusive mandatory disclosures and other provisions of the Bankruptcy Code.

Second, the Bankruptcy Code allows a debtor to reject a burdensome executory contract which is an agreement where there are continuing obligations by both parties. Some examples are rent under a lease, payments under office equipment leases and salaries under an employment contract – even if it’s a collective bargaining agreement. Where an executory contract is rejected by the debtor, the rejected party is relegated to a pre-bankruptcy claim for damages. This means that the creditor under a rejected contract will probably be paid peanuts for what it’s owed, just like the others.

Of course, Washegon Opera can’t continue to reap the benefits of any contract it rejects. For example, if these contracts were rejected, Snidely Whiplash could padlock the door, you’d have to scratch the diva’s guest performance and the copiers and computers could be carted away under a canceled contract. For any agreements that are “assumed” and not rejected, Washegon would not only pony up past-due obligations but also pay these creditors full freight on a going-forward basis.

Moreover, most executory contracts are assignable, even those that have anti-assignment clauses, which are generally unenforceable. (Boilerplate provisions in contracts voiding the agreement or imposing other nasty consequences if you file for bankruptcy are also unenforceable). Contracts that aren’t assignable typically include personal services contracts and copyright licenses, both of which would require consent of the affected assignee.

Third, the Bankruptcy Code provides the debtor with the ability to prosecute “clawback” actions against certain pre-bankruptcy payments or other transfer of assets to creditors. There are two main types. A preference action is a lawsuit in the bankruptcy court where the debtor had paid some creditors prior to bankruptcy, but not others who are similarly situated. The ones who got paid, the “preferred” creditors, are required to give back the payments so that all similarly situated creditors get their proportionate share of the pot.

A fraudulent transfer is one where a financially strapped debtor makes a deal to transfer property with the intention of keeping those assets from creditors’ clutches. Regardless of intent, the debtor can reclaim these transferred assets (or the cash value of them) where the presumably insolvent debtor didn’t receive equivalent value in the exchange (e.g., a sweetheart deal like selling your Steinway to your sister for sixty bucks).

Fourth, a Chapter 11 debtor is often able to have better access to credit by offering lenders a statutory “superpriority” which means that the lender would be repaid first from estate assets that aren’t already collateral for secured loans. Moreover, they may also be able under certain circumstances to offer a lender a first priority or “priming” lien on collateral, thereby demoting the priority of an existing secured creditor’s lien. So, it’s possible that Washegon Opera may have better luck getting a loan against anticipated ticket sales to finance that new production of Aida after filing for bankruptcy.

This all sounds good for a debtor but there are many safeguards in the Bankruptcy Code to protect creditors and prevent abuse. For example, a company’s management can be kicked out and a bankruptcy trustee can be installed to manage the company in the best interests of the creditors.

And bankruptcy, like any legal proceedings, especially ones that may include side litigations like preference and fraudulent transfer actions, can be lengthy and expensive. Larger creditors will obtain their own counsel and various creditors may participate in unsecured creditors’ committees as part of the process. And the debtor’s lawyers and any court-appointed trustee get paid prior to the creditors.

All the Fun without the Fuss

Because of the extensive protections a bankruptcy proceeding provides debtors, hiring a bankruptcy lawyer to work out deals with creditors can be an expedient and cost-effective way to get the breathing room needed to survive. You could wind up with better terms with lenders, vendors, contractors, employees and other creditors. From their viewpoint, why go through the aggravation of a lengthy and costly reorganization where you’ll only wind up in the same place – or worse – than through a pre-bankruptcy settlement?

And these principles are applicable to any individual or entity, including arts-related ones like labels, recording artists and songwriters as well as dancers, painters, poets and photographers. But this post only scratches the surface. For example, the interplay between bankruptcy and the status of various copyright and other IP assignments, royalty streams and licenses can get pretty thorny. And my Super Lawyer sibling reminds me that some of the bankruptcy principles were simplified for illustrative purposes.

Bankruptcy counseling, like a symphonic world premiere, may be new and unfamiliar but need not be feared. But a pre-bankruptcy workout isn’t for everyone. If there’s no realistic prospect of a viable business or your idea of fundraising is a bake sale, it likely makes more sense just to fold your cards and walk away from the table. To paraphrase Jackie Mason, you probably can’t afford to go bankrupt. Or your creditors may call your bluff and force you into bankruptcy proceedings. But your attorney should be able to tell if potentially playing the bankruptcy card is for you.