Tag Archive for: BMI

Second Circuit Give Summary Victory to Songwriters

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Before getting to the Summary the Summary Order issued by the Second Circuit on December 19, a bit of a review is appropriate. The Second Circuit’s decision has to do with whether the consent decree under which BMI has operated for decades requires it to engage in “100% licensing” (also known as “full work licensing”) as the Justice Department argued or whether BMI (and ASCAP under its very similar consent decree) could engage in “fractional licensing” as both entities – and indeed the entire music industry – has done for decades.  As I’ve previously written extensively about this issue I won’t repeat the background here but I would implore my gentle readers to review my prior blog post, Why DOJ’s Mandate of 100% Licensing of Works by ASCAP and BMI is 100% Lunacy, for an explanation of what 100% and fractional licensing are and why the former, if adopted, would have upended decades of music industry practice and many thousands of individually negotiated contracts.  And to quote again from the U.S. Copyright Office’s  report on the issue:

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.

ASCAP and BMI adopted parallel strategies to deal with DOJ’s edict. BMI would seek judicial review in the Southern District of New York before Judge Louis L. Stanton, the judge overseeing the BMI consent decree. ASCAP would lobby Congress for a legislative fix.  As I again had previously written, on September 16, 2016, on what had been scheduled to be a pre-motion conference, Judge Stanton decided to hold an evidentiary hearing on the 100% licensing issue. He then issued a six-page summary opinion rejecting DOJ’s view that the BMI consent decree required works to be licensed on a whole work basis:

The phrase in Art. II (C) of the Consent Decree defining BMI’s repertory as “those compositions, the right of public performance of which [BMI] has… the right to license or sublicense” is descriptive, not prescriptive. The “right of public performance” is left undefined as to score or form, to be determined by processes outside the Consent Decree. The Consent Decree neither bars fractional licensing nor requires full-work licensing.

While BMI – and ASCAP were pleased with this result, DOJ was not. It appealed Judge Stanton’s order to the Second Circuit. Oral arguments on the appeal were held on December 1, 2017. A mere two weeks later, on December 19, 2017, the Second Circuit issued its seven-page Summary Order affirming Judge Stanton’s ruling.  The Court noted:

This appeal begins and ends with the language of the consent decree. It is a “well-established principle that the language of a consent decree must dictate what a party is required to do and what it must refrain from doing.” Perez v. Danbury Hosp., 347 F.3d 419, 424 (2d Cir. 2003); United States v. Armour & Co., 402 U.S. 673, 682 (1971) (“[T]he scope of a consent decree must be discerned within its four corners…”). “[C]ourts must abide by the express terms of a consent decree and may not impose additional requirements or supplementary obligations on the parties even to fulfill the purposes of the decree more effectively.” Perez, 347 F.3d at 424; see also Barcia v. Sitkin, 367 F.3d 87, 106 (2d Cir. 2004) (internal citations omitted) (The district court may not “impose obligations on a party that are not unambiguously mandated by the decree itself.”). Accordingly, since the decree is silent on fractional licensing, BMI may (and perhaps must) offer them unless a clear and unambiguous command of the decree would thereby be violated. See United States v. Int’l Bhd. Of Teamsters, Chauffeurs, Warehousemen & Helpers of Am., AFLCIO, 998 F.2d 1101, 1107 (2d Cir. 1993); see also Armour, 402 U.S. at 681-82.

(Opinion at p. 4).  The Second Circuit also noted that looking beyond the four corners of the consent decree was similarly of no avail:

Extrinsic evidence does not assist the DOJ. The decree was amended in 1994 at a time when fractional licensing was apparently common practice. “If the parties had agreed to such a prohibition, they could have chosen language that would have established the sort of prohibition that the Government now seeks.” Armour, 402 U.S. at 679.

(Opinion at p.5)

Not surprisingly, both BMI and ASCAP were delighted that the Second Circuit dispensed with DOJ’s purported mandate in the same summary manner as did Judge Stanton.  BMI, CEO, Mike O’Neill stated:

This is a massive victory for songwriters, composers, music publishers and the entire industry. We have said from the very beginning that BMI’s consent decree allowed for fractional licensing, and we are incredibly gratified that Judge Stanton and the Second Circuit agreed with our position. We thank all the songwriters, composers, publishers and organizations who supported us throughout this process, which unfortunately, has been a nearly two-year distraction from our original intent which was to update our outdated consent decree and modernize music licensing. We look forward to our continued efforts to protect and grow the value of music.

Similarly, ASCAP’s CEO, Beth Matthews, also applauded the decision:

The Second Circuit’s ruling today is an important victory for music creators across the country. The Court affirms what we have known all along, that the right of public performance allows for the fractional licensing of musical works in our repertories, and the consent decrees do not limit that right. ASCAP and BMI can now continue to offer blanket licenses to our hundreds of thousands of licensees that contain all the shares of works that are in our repertories and the livelihoods of our 650,000 ASCAP songwriter, composer and publisher members can continue to depend on a strong collective licensing system. ASCAP remains committed to making music licensing more efficient, effective and transparent for today’s digital music marketplace.

DOJ could try to seek review in the Supreme Court, a very uphill battle as that tribunal only elects to hear about 80 cases a year. Its only other option would be to seek review of ASCAP’s similarly worded consent decree in the Southern District of New York before Judge Denise Cote, who oversees that consent decree. And even if successful (a dubious proposition given the Second Circuit ruling on the BMI decree) such a ruling would only apply to ASCAP and would then be subject to appeal to the Second Circuit. Perhaps the 100% licensing issue has finally been dealt the death it so richly deserves.

Update: As of March 23, 2018, the deadline to file an appeal of the Second Circuit decision with the U.S. Supreme Court has passed.

BMI Rate Court Judge KO’s DOJ on 100% Licensing

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In what had been scheduled to be a mere pre-motion conference, the federal district judge overseeing the BMI Consent Decree, Louis L. Stanton, decided to hold a hearing on Friday, September 16. He then issued a six-page Opinion and Declaratory Judgment, ruling against DOJ’s interpretation of the decree which would have required 100% or “whole work” licensing:

The phrase in Art. II (C) of the Consent Decree defining BMI’s repertory as “those compositions, the right of public performance of which [BMI] has… the right to license or sublicense” is descriptive, not prescriptive. The “right of public performance” is left undefined as to score or form, to be determined by processes outside the Consent Decree. The Consent Decree neither bars fractional licensing nor requires full-work licensing.

Please read my prior post for more background, including a discussion on what is meant by the 100% or whole work licensing sought by the Justice Department as opposed to the fractional licensing regime under which ASCAP, BMI and the rest of the music industry operate.

Both BMI and ASCAP have operated on a fractional licensing basis for all of the 75 years since the consent decrees were entered into, offering licensees for only that percentage of a particular work that each respective performing rights organization (PRO) controls pursuant to its agreements with its member copyright owners and pricing their licenses accordingly. And both PROs declared the Court’s decision to be a major victory for songwriters.

After a brief recitation of the facts, including DOJ’s outlining its position last month and BMI’s seeking a declaratory judgment in support of fractional licensing, Judge Stanton began his discussion by stating: “Nothing in the Consent Decree gives support to the  [Antitrust] Division’s views.” He went on hold that the BMI Consent Decree “does not address the possibilities that BMI might license performances of a composition without sufficient legal right to do so, or under a worthless or invalid copyright, or users might perform a composition licensed by fewer than all of its creators.” The Court supported its conclusion by relying on Section XIV (D) of the Consent Decree, which reads as follows:

Nothing in this Article XIV shall prevent any applicant from attacking the aforesaid [rate court] proceedings or in any other controversy the validity of the copyright of any of the compositions in defendant’s repertory nor shall this Judgment be construed as importing any validity or value to any of said copyrights.

The Court construed this provision to mean that “[q]uestions of the validity, scope and limits of the right to perform compositions” are left, like the redress of copyright infringement, to determinations outside of the application of the Consent Decree. Neither DOJ in its statement, nor the Copyright Office in its memorandum addressing 100% licensing, nor BMI in its application for a declaratory judgment, cited Section XIV (D).

Judge Stanton then distinguished the situation where he had ruled in the Pandora case that the BMI decree forbids the partial withdrawal of rights by publisher members (i.e., where BMI would not be authorized to license performances online services like Pandora, leaving the publishers to license such services directly.  With regard to “partial withdrawal,” the Court, quoting its prior decision in the Pandora case, stated that “[t]he BMI Consent Decree requires that all compositions in the BMI repertory be offered to all applicants” that seek a license.

Judge Stanton’s quick and summary rejection of 100% licensing gives BMI a knockout victory over DOJ. However, this is not the end of the matter. ASCAP is governed by a separate but very similar Consent Decree that is overseen by its own Rate Court judge, Denise Cote, also of the Southern District of New York. Either ASCAP or DOJ could seek a declaration from Judge Cote, who could rule contrary to Judge Stanton. Similarly, DOJ could appeal Judge Stanton’s decision to the Second Circuit, regardless of whether Judge Cote rules on the issue. Moreover, as DOJ’s review of the ASCAP and BMI Consent Decrees encompassed several other issues besides 100% licensing, ASCAP has already started the process of seeking relief from Congress – something even DOJ suggested. BMI beat DOJ in the first battle but the war wages on.

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]

Interview on Music Publishing Podcast

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Before the Memorial Day holiday, I had the pleasure of being interviewed by my friend and colleague, the composer Dennis Tobenski. Our 90-minute talk, which was posted last week, covered a variety of topics applicable to composers, songwriters and other creators, including copyright principles, fair use, the role of PROs and estate considerations for artists.

Here’s how Dennis summarized our discussion:

In our conversation, we talked about:

  • basic tenets of copyright
  • the limits of what is copyrightable
  • the Poor Man’s Copyright
  • the benefits of and incentives to registering your copyrights
  • fighting infringements
  • folio registrations
  • working with living poets vs. dead poets’ estates
  • Performing Rights Organizations
    • selecting
    • collecting performance royalties
    • what PROs don’t do
  • estate planning for artists
  • international copyright issues
  • why you should get permission <strong>before</strong> setting a text
  • First Sale Doctrine
  • licensing vs. selling
  • copying licenses
  • Fair Use
    • Fair Use is not a right; it is a defense against an infringement accusation*
    • the four factors of fair use
    • transformative use vs. derivative works
    • the false “rules of thumb” of fair use

And here’s the link to our talk:

MPP #4: Copyright and Fair Use with Marc Ostrow

 

The Question Songwriters Should Ask Obama at SXSW

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This Friday, President Obama will be delivering the keynote address at this year’s South by Southwest (SXSW) Interactive Conference in Austin, Texas. Although originally just a music conference, SXSW now has three overlapping sections, Interactive, Film and Music. While it is doubtful that the President will be taking questions from the audience, songwriters and other musicians who may attend the Interactive portion of the should question him about what his Justice Department has proposed to do to them.

For over a year the Justice Department has been undertaking a review of the decades-old consent decrees that govern ASCAP and BMI, neither of which has been amended since the dawn of the digital age. Those of us who represent songwriters and publishers had been cautiously optimistic that the restrictions would be lessened. Indeed, in February 2015, the Copyright Office, in its comprehensive music licensing study and report, Copyright and the Music Marketplace (the “Music Study,” which I summarized and critiqued here), recommended several modifications.

However, last summer DOJ, of its own initiative, threw in a monkey wrench when it asked for comment on the possibility of ASCAP and BMI licensing entire works even where either performing rights organization (PRO) had only been assigned a portion of the copyright to the particular song by its members. This is referred to as “100% licensing.” Traditionally, music publishers and the PROs that represent them only license the percentage of the rights in a particular song that they own, which is referred to as “fractional licensing.”

On January 29, in response to a January 12 request of Rep. Doug Collins (R-GA), the Register of Copyrights, Maria A. Pallante, issued a 29-page report, replete with footnotes, Views of the United States Copyright Office Concerning PRO Licensing of Jointly Owned Works (the Report). The Report addresses the PROs and joint licensing more specifically than was done in last year’s Music Study. On February 4, Rep. Collins forwarded the Report to Attorney General Loretta E. Lynch for consideration by the Antitrust Division, which has oversight over the PRO consent decrees and is conducting the review of them.

In short, the Copyright Office stated in no uncertain terms that DOJ’s proposed 100% licensing scheme is a really bad idea that is based upon a misunderstanding of both the Copyright Act and plain old contract law, as well as long-standing music industry custom. The Copyright Office’s takedown of DOJ’s proposal is impressive. I’ll give you a few highlights below.

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 the top of page three! The Report goes on to discuss the divisibility of individual copyright rights and that the default rule is that each joint owner of a work may license the entire work subject to a duty to account to the other owners for their proportionate share of the proceeds. Against that backdrop, the Report states:

While the 1976 Act establishes default rules for joint works, it must be remembered that they are subject to the Act’s express provision that a copyright, and the exclusive rights thereunder, can be divided and separately owned. As a leading treatise explains, the default rules within the Act are merely a” starting point, “ with collaborators… free to alter this statutory allocation of rights and liabilities by contract.”

Addressing industry custom among co-writers of songs, the Report also noted:

The co-authors of jointly created musical works often enter into agreements that define the percentages of copyright ownership of each co-author and provide that each will retain control over his or her “share” of the work. For example, a typical clause might stipulate that each contributor “shall administer and exploit only [his or her] respective ownership share” of the work. The “administration” of the copyright is commonly understood in the music industry to encompass the right to issue licenses and otherwise exploit the song and collect royalties from those uses.

Turning specifically to the interpretation of the ASCAP and BMI Consent Decrees, the Report stated:

Even setting aside the express mandate of the Copyright Act, the decrees – like any contract – must be interpreted in light of the prevailing customs of the industry. Thus, while the consent decrees require ASCAP and BMI to license users to publicly perform their respective “repertoires,” each consent decree describes those repertoires in a manner that can, and should, be read consistently with the practice of fractional licensing.

Again turning to basic contract principles, the Report stated:

The PROs’ practice of fractional representation is consistent with the basic legal precept that one cannot validly convey rights to more than what one owns or controls….. Accordingly, the ability of ASCAP or BMI to license public performances for their respective members’ works is ultimately constrained by the terms of songwriter, publisher and administration agreements entered into by those members, which, as explained above, typically reflect understandings of divided ownership and fractional licensing.

And these choice comments only get us about half way through the Report! It goes on in this vein and addresses the practical concerns that ASCAP and BMI do not have contractual privity with non-members and are not able to account to any non-members for their interests in a 100% licensing regime. Here’s the heart of what I submitted to DOJ last November during the public comment period – about 27 pages shorter than the Report but making many of the same points:

While it is true that absent a written agreement to the contrary, an author of a joint work may license 100% of the rights in that work subject only to a duty to account to that author’s co-writers for their share of the proceeds, that is not how the music industry operates. For decades, songwriters and publishers have routinely entered into, and continue to enter into agreements where each party separately administers that party’s interest – and only that party’s interest — in the particular song.

In the area of synch licensing, music supervisors and other music clearance professionals know that they need to obtain permission from all parties that separately administer a portion of the copyright in the song. Similarly, mechanical licenses are issued on a fractional basis where multiple publishers separately administer their interest in a particular work. ASCAP and BMI likewise administer only their shares in the song and price their licenses accordingly.

ASCAP and BMI operate on a fractional licensing basis because contractually they cannot license greater rights than they are granted by the underlying rights holders, the music publishers. To require ASCAP and BMI to license on a 100% basis not only flouts decades of industry practice but vitiates the myriad agreements voluntarily entered into by songwriters and music publishers . It would also require songwriters and publishers to be involuntarily subjected to the licensing and payment terms of a PRO other than the one the parties chose to represent their interests in the particular works.

At a recent meeting of the AIMP [Association of Independent Music Publishers], we were informed that it in the Justice Department’s view, if the songwriters and publishers either do not – or cannot – agree to 100% licensing, ASCAP and BMI simply will not be able to represent the works where that is the case. If true, that would be a horrendous result, mandating that DSPs and other licensees would have to engage in the grossly inefficient process of directly licensing innumerable works from each individual rights holder. Given the way most popular songs are now written, this would require separate negotiations with multiple rights holders for the performance rights in each and every song rather than two or three PROs for all songs.

In sum, 100% licensing is contrary to longstanding industry practice and countless voluntarily negotiated contracts. It would turn a relatively straightforward and efficient licensing scheme for performance rights into one that is fractured, unwieldy and unworkable.

The Report reaches the same conclusion:

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.

***

Songwriters are unique among artistic creators in that about 75% of their income is regulated by the federal government. The biggest chunk of income songwriters receive is from public performances licensed by the PROs, of which the two largest, ASCAP and BMI and accounting for about 90% of the market, operate under consent decrees. The second biggest chunk, income songwriters receive from the purchase of recordings (whether in the form of CDs, LPs or downloads), is subject to a compulsory license with rates set by the Copyright Royalty Board. By contrast, recording artists, filmmakers, novelists, dramatists, and other fine and visual artists are under few, if any, federal restrictions on their livelihoods.

There are myriad articles in the popular press about the paltry royalties songwriters receive from streaming services such as Spotify, Pandora and YouTube. Few address the fine points of the PRO consent decrees and other statutory licensing regimes that form the backdrop for these payments. The Copyright Office, in its Music Study, recommended changes to the current music licensing regime that would relax restrictions on songwriters and music publishers and enable them to obtain income that more closely reflects fair market value.

It is somewhat telling that the President will be speaking not at the SXSW Music conference for creators of music, but at the Interactive conference, dominated by companies that use music and benefit from a licensing regime that keeps fees low. So the question songwriters should ask is “when will the government, specifically your Justice Department, stop screwing us?”

A Peek at the Congressional Briefing Book on the Music Business

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On September 22, the Congressional Research Service (“CRS”) of the Library of Congress, released a report, Copyright Licensing in Music Distribution, Reproduction and Public Performance (the “Report”). The Report states its purpose as follows:

This report provides an overview of the complexities of the Copyright Act’s provisions concerning music licensing. It also discusses four issues involving copyrights in musical works and sound recording that have been the subject of recent congressional and judicial consideration: (1) extending copyright protection to pre-1972 sound recordings; (2) requiring radio broadcasters to compensate recording artists; (3) changing the standard used to calculate royalties for digital music transmissions; and (4) modifying antitrust consent decrees governing songwriter performance royalties.

For those of you unfamiliar with CRS, this is what it does, according to its website:

The Congressional Research Service (CRS) works exclusively for the United States Congress, providing policy and legal analysis to committees and Members of both the House and Senate, regardless of party affiliation. As a legislative branch agency within the Library of Congress, CRS has been a valued and respected resource on Capitol Hill for more than a century.

The CRS defines its mission as follows: “CRS serves the Congress throughout the legislative process by providing comprehensive and reliable legislative research and analysis that are timely, objective, authoritative and confidential, thereby contributing to an informed national legislature.” Accordingly, the Report provides a briefing book for members of Congress – or at least their staffs – on the current statutory and regulatory issues shaping the music industry. So it might be interesting to  know what’s in it.

The 41-page report provides a dense, but useful summary of much of the statutory framework of the current music licensing landscape, including a discussion of recently introduced legislation. If this sounds somewhat familiar, it’s because the Copyright Office traversed this terrain earlier this year in its comprehensive 202-page report, Copyright and the Music Marketplace, and which I summarized here. And of course, the Copyright Office, like the CRS, is also a division of the Library of Congress, although perhaps may change, as the Register of Copyrights has proposed that the Copyright Office leave the Library of Congress and become an independent agency.

In keeping with its stated purpose, the CRS Report (as well as the Copyright Office’s earlier iteration) covers several key issues, including:

  • The Justice Department’s ongoing review of the ASCAP and BMI Consent Decrees, including the issue of “partial withdrawal” of works from their respective repertoires;
  • The background to the Fair Pay Fair Play Act of 2015, which would mandate that traditional AM/FM radio stations pay public performance royalties on sound recordings, just like their internet streaming counterparts do, as is done in virtually every other country in the world; and
  • The Songwriter Equity Act of 2015, which would modify regulatory standards to have all licenses fees set by statute, as  under the ASCAP and BMI Consent Decrees, to be under a “willing buyer / willing seller” standard.

The Report also refers to the Copyright Office’s prior music licensing survey and its various recommendations, but does not contain any of its own.

The CRS Report provides a particularly detailed history of the current statutory framework, including case law and legislative developments, something one would expect in a Congressional briefing memo. However, in attempting to educate Congress about the relevant issues facing the music industry, the Report falls somewhat short in that there is no discussion of the music marketplace as a whole, as opposed to the particular statutory and regulatory scheme currently in place. One might think that putting the various legislative and consent decree proposals in context with the overall music marketplace would be highly relevant to Congressional consideration.

For example, there is no discussion about synchronization or “synch” licenses, which are the permissions required from both the copyright owner of the song (the music publisher(s)) and the copyright owner of the particular recording (the record label) to use a piece of recorded music in film, TV, advertising and other audio-visual uses. This significant portion of the music business is a free market, unregulated by statute or consent decree. Typically, music publishers and record labels command the same fees for synch licenses.

This is in stark contract to license fees for the distribution or downloading of  recordings or the streaming of them over the internet. Both of these areas are regulated and there is a large disparity between the fees labels and artists receive as opposed to those received by publishers and songwriters.   It is critically important that Congress understand the overall music licensing marketplace when considering any change in music licensing policy, including the pending legislation.

 

No, You Don’t Own Your Arrangement of That Hit Song

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[Note: A slightly edited version of this post has been published in Vol.35, No.9 of The Licensing Journal (Wolters Kluwer, October 2015)]

A guitarist contacted me recently. He creates arrangements of popular songs and puts the PDFs of the music for sale on his website. The first thing I asked him is whether he got permission from the copyright owners of the songs to post his arrangements, being pretty sure he hadn’t. He was quite surprised and disappointed when I told him that what he was doing was flat-out illegal. So many well-meaning musicians still either don’t know about, or don’t understand the concept of, derivative works.

Section 101 of the Copyright Act defines a derivative work as follows:

A “derivative work” is a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications, which, as a whole, represent an original work of authorship, is a “derivative work”.

Note that “musical arrangement” is right near the top of the laundry list. And of course copyright mavens know that Section 106 sets forth the “bundle of rights” that a copyright owner possesses. These include the exclusive right to, or authorize others to, “prepare derivative works based upon the copyrighted work.”

So that means our guitarist, however well-intentioned, doesn’t “own” his arrangements of pop tunes and he can’t sell or even give away copies of them, whether they’re in the form of a lead sheet, guitar tabs, a fully scored chart or ancient runes – unless he gets permission from the copyright owner (More on that later).

But talking about derivative works and rights bundles of intangible property is kind of esoteric and doesn’t always convince wrongdoers of the error of their ways. So I’ll remind these folks that nobody would give a rodent’s posterior about “your” arrangement but for the fact that the song was written, recorded and made famous by someone else. So when you’re using somebody else’s music and trading off their art and good will, it’s only fair that you get their permission and give them a piece of the action.

But, my guitarist exclaimed, there’re all these other sites out there that do this – what about them? I explained that individual music publishers, as well as organizations like the Music Publishers Association, in conjunction with the National Music Publishers’ Association (yes, I know, it’s kind of like the People’s Front of Judea versus the Judean People’s Front for Life of Brian fans), have sent DMCA take down notices to many unlicensed sheet music, guitar tab and lyric sites. Simply because some infringing sites are still up doesn’t mean they won’t be taken down later or even sued for copyright infringement.

And as I’ll often explain, just because a rights holder doesn’t go after some infringers, it doesn’t mean they can’t go after you. It’s like complaining to the cop who pulls you over for speeding about all the other cars he could’ve pulled over and didn’t.

However, not “owning” an arrangement of a copyrighted musical work isn’t the end of the story. There are actually lots of things you can do without getting permission. For example, you can perform your version for your own amusement – or for that of your friends and relatives. Section 106 grants copyright owners only the exclusive right to public performances. That’s why it’s no infringement to sing in the shower – even if your private performances constitutes an aesthetic infraction. Copyright Act Section 101 defines a public performance as one at “a place open to the public or at any place where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered.” The definition also includes broadcasts and streaming.

Our gutsy guitarist can even publicly perform his arrangement, provided the venue has licenses from the appropriate performing rights organizations (PROs), ASCAP, BMI and SESAC. PROs license venues to perform the songs in their respective repertoires and artists are free to perform their own renditions of the songs. So if our guitar guy gets a gig at a local club that’s properly licensed he’s good to go. [2017 update: a colleague contacted me regarding reliance upon PRO licenses for orchestral arrangements, as opposed to those performed just by members of a cover or tribute band. Even assuming the public performances are covered (and the ASCAP license has a specific restriction), the creation, copying and distribution of the sheet music to this derivative work to hired musicians would, as discussed below, require permission from the copyright owner, i.e., the music publisher.]

And our guitarist could even make and distribute a recording of his arrangement – provided that he gets a compulsory “mechanical” license under Section 115 of the Copyright Act or the equivalent either directly from the copyright owner(s), usually one or more music publishers, or The Harry Fox Agency (HFA). HFA is a clearinghouse many publishers use to issue mechanical licenses on their behalf. Since the license is compulsory, the copyright owner can’t say “no” so long as the recording artist (i.e., guitar guy), pays the statutory royalties, currently 9.1 cents per unit distributed for a recording of a song that’s five minutes or less.

The Section 115 license specifically allows artists doing cover recordings to record their own arrangements of the work:

A compulsory license includes the privilege of making a musical arrangement of the work to the extent necessary to conform it to the style or manner of interpretation of the performance involved, but the arrangement shall not change the basic melody or fundamental character of the work, and shall not be subject to protection as a derivative work under this title, except with the express consent of the copyright owner.

Minor variations in the melody are generally OK. As for what constitutes a change in the “fundamental character” of the song, that’s not clear except that it’s well established that you can’t change lyrics without permission.

However, the compulsory mechanical license only applies to audio-only recordings like CDs and MP3s. Our gutsy guitarist still couldn’t legally post a video of his performance or use his arrangement of the song in a movie, TV show, video game or other audio-visual work unless he got permission from the owner of the arranged song to do so. That permission is called “synchronization” or “synch” license, since you’re synching sound to picture. YouTube does have synch deals with some, but by no means all, of the music publishers.

But what if our guitarist actually wanted to get permission to print and distribute his arrangement of the song? He would need to contact the music publisher(s) of the work for permission. ASCAP, BMI and SESAC all have searchable databases and if you put in the title of the song you can usually find out who controls the rights to it as well as contact information for the publishers listed.

Armed with that information, our intrepid guitarist should then send a request, including a copy of the arrangement, to the “permissions” or “business affairs” department of the publisher who has the right to say yea or nay and to set the terms for the license to arrange. The process for getting a synch license (or clearing a sample, or reprinting lyrics) is much the same as getting permission to arrange. Find the publisher(s) on the PRO databases, and send a written request to the “business affairs” or “licensing” department explaining what you want to do and how much of the work you intend to use.

So in sum, while there are some things you can’t do without permission (e.g., sell sheet music or post videos), there’s still a lot you can do legally with an arrangement of a song – even though you don’t “own” it.

What’s Next for ASCAP and BMI as SESAC Buys The Harry Fox Agency?

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A lot of people are wondering what it means for the music industry since it was reported that the National Music Publishers Association (NMPA), the leading trade organization for US music publishers, has sold its wholly-owned mechanical licensing subsidiary, The Harry Fox Agency, Inc. (HFA) to SESAC, Inc., the smallest of the three domestic music performing rights organizations (PROs). While I don’t have a crystal ball, I suspect that this strategic acquisition is part of the trend to transform PROs from mere licensors of performing rights to broader music rights and data mining clearing houses.

Published reports in Billboard and elsewhere state that SESAC’s winning bid of about $20 million over others, including PROs, BMI and SOCAN, was the culmination of a process that began a year ago when NMPA put HFA up for sale. As to why BMI, but not ASCAP was a bidder, it may have to do with the Consent Decrees under which the two organizations have operated for decades.

ASCAP’s Consent Decree (last amended in 2001) and BMI’s Consent Decree (last amended in 1994) are similar but far from identical. Specifically, under Article IV(A) of its Consent Decree, the only music right ASCAP is permitted to license is the  public performing right (although it can also serve as an agent to collect royalties from the sale of blank digital audio tape). BMI, under Section IV(B) of its Consent Decree is only specifically precluded from being a record label or a record or sheet music distributor.

That said, until recently, BMI traditionally refrained from entering other aspects of the music business, such as mechanical (songs used in audio-only recordings) and synchronization (songs used in audio-visual use in film, TV, video, etc.) licensing out of concern that the Department of Justice (DOJ) would seek to impose more stringent restrictions. However, this is one instance where the Internet really has changed everything, with ASCAP and BMI welcoming the ongoing DOJ review.

The revenue for licensed digital performances (e.g., streaming) is growing and the online environment knows no geographic boundaries. So while the traditional analysis focused on competition for domestic public performing rights among the three US PROs, foreign PROs, which often bundle performance and mechanical rights, have been creating competitive transnational alliances. And, as extensively discussed in the Copyright Office’s Music Licensing Report earlier this year, the major publishers (which are free to bundle all music rights) sought to withdraw digital performance rights from ASCAP and BMI because they felt Consent Decree and other legal restrictions (i.e., de facto compulsory licensing and statutory rate setting standards) artificially suppressed the fees these PROs could obtain from licensees such as streaming services.

However, the judges that oversee the ASCAP and BMI Consent Decrees held that such “partial withdrawals” were invalid. So, among other things, ASCAP and BMI are seeking modification of their Consent Decrees to allow partial withdrawal of digital rights and the bundling of various music licenses (e.g., performance, mechanical and synchronization). The Copyright Office Report supports relaxing the Consent Decree restrictions as well as amending the Copyright Act to have all licenses that are set by a tribunal (whether Rate Court or the Copyright Royalty Board) to be determined on a willing buyer/seller standard.

Conventional wisdom holds that DOJ is likely to relax ASCAP and BMI’s Consent Decree restrictions. SESAC doesn’t have a Consent Decree but has been subject to anti-competition litigation. What this means for the PROs is far from secret. Last year, at a public forum held by the Association of Independent Music Publishers (AIMP), the CEOs of the three PROs shared the stage and their thoughts about the future of their businesses. All three agreed that the future for the PROs is to offer efficient one-stop licensing for music users who often require several distinct music rights, including mechanicals currently offered by HFA (and music publishers who don’t license through HFA), synch rights which are controlled by each individual publisher, and even performing rights in sound recordings (currently licensed by SoundExchange), especially if such performing rights are statutorily extended to radio broadcasts, as endorsed in the Copyright Office’s Music Licensing Report. Indeed, the Report recommends that the PROs and other licensing collectives morph into broader “music rights organizations” (MROs).

And while SESAC is principally owned by a private equity firm, BMI probably had more than $20 million in its war chest to offer NMPA but didn’t. Why? ASCAP and BMI together represent north of 90% of US songwriters and music publishers. With HFA going to SESAC, that shifts the domestic competitive landscape, giving even more reason for DOJ to relax Consent Decree restrictions, which is probably more valuable to BMI. Moreover, even with mechanical income falling to about 21% of music publishing income from about double that at the peak of the CD market (and with overheads staying static or increasing due to processing millions of micro-payments, reason enough for NMPA to sell), the data HFA has regarding the 48,000 publishers it represents and the 6.7 million musical works it’s licensed on 21.4 million recordings, is probably more valuable to the much smaller SESAC than to BMI.

So what happens now? First, I don’t see SESAC significantly trying to grow its market share as a PRO. Their business model in that arena will likely continue to be, as it states on its web site, “a selective organization, taking pride in having a repertory based on quality, rather than quantity.” So I don’t see SESAC courting writers and publishers in a more concerted manner although adding HFA may make them a more viable alternative to ASCAP and BMI. In fact, I don’t foresee significant changes in writer-publisher relations at any of the three PROs.

Rather, I think that the game plan for all three PROs is what SESAC states in the news release posted on its web site:

SESAC’s acquisition of HFA is part of a previously announced strategy under its new leadership team to pursue a simplified and more efficient, multi-right, multi-territory licensing model utilizing an ongoing focus on information technology and data science to meet the developing needs of music users, distributors, writers, composers, publishers and other stakeholders. The transaction enables SESAC to enhance value by offering music streaming and other digital platforms greater efficiency and transparency in the music licensing process, thereby delivering better monetization outcomes for its affiliated writer and publisher clients.

As much bigger companies, ASCAP and BMI already have plenty of data, even without adding HFA’s to the mix. And reading between the lines (as was hinted at by the three CEOs at last year’s AIMP forum), lies the ancillary and potentially very lucrative business of mining, packaging and selling the vast stores of data the PROs collect to entities both inside and outside of the music industry, thus taking a page from the Google and Facebook playbooks.

If the ASCAP and BMI Consent Decrees are relaxed, then all three PROs can more freely pursue diversified business strategies. This could lead to higher performance royalties to writers and publishers through both more competitive negotiations and, by leveraging the data they collect, lower overheads – but potentially at the cost of control of “proprietary” information and transparency if the PROs expand beyond core music licensing businesses.

And there is also the risk that HFA, now to be owned by a for-profit privately held business as opposed to a trade organization controlled by its member music publishers, may impose higher tolls to access data and could potentially lead to less, rather than greater industry-wide licensing transparency. But the likelihood of this occurring will be diminished if ASCAP and BMI offer mechanical and other forms of licensing. And I don’t think SESAC will have HFA cease licensing ASCAP and BMI composers. That would be a bad business move, especially since SESAC will want to maintain as much current music data as possible.

Anyway, that’s how I see it. That said, the only certainty about the music business is that it’s always unpredictable.

Update: 14 September 2015:

It’s now been reported that the sale of HFA to SESAC has been approved by the NMPA Board and membership. The sale is now complete and SESAC now officially owns HFA.

Update: 1 October 2015:

It’s now been reported, quoting SESAC’s CEO, that up to 30% of HFA employees are being let go because of what is euphemistically called in HR-speak, “redundancies” between the SESAC and HFA staffs.

Why Pandora’s Batting 500 with BMI’s Recent Rate Court Win

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On May 18, BMI’s “Rate Court” judge, Louis L. Stanton of the Southern District of New York, ruled in BMI’s favor in its rate dispute with Pandora. However, it wasn’t until May 28 that Judge Stanton’s 60-page opinion was made public. As my former colleague, BMI’s CEO, Mike O’Neill, reminded me at the BMI Student Composer Awards on May 18, Rate Court opinions are not made public for several days until confidential information is redacted. Mike was fairly giddy that evening given that Judge Stanton gave BMI a slam dunk in finding that the rate BMI sought, 2.5% of Pandora’s revenue, was reasonable. This was particularly good news for songwriters and music publishers as well since Pandora was the clear winner in its prior Rate Court dispute with ASCAP.

BMI and ASCAP are music performing rights organizations (PROs) and both operate under decades-old Consent Decrees which are currently being reviewed by the Justice Department. Both decrees contain a provision that if either ASCAP or BMI and a licensee can’t agree upon a rate, either party can submit the dispute to their respective “Rate Court” for a determination of a “reasonable” rate, in each case a district judge in the Southern District of New York. BMI’s Rate Court Judge is Judge Stanton and ASCAP’s is Denise Cote.

Because BMI and ASCAP are heavily regulated, a Rate Court’s determination of a “reasonable” rate under the relevant Consent Decree (i.e., what a willing seller and buyer would negotiate in an arm’s length transaction) usually requires referring to one or more “benchmarks,” which as Judge Stanton explained, are “the rates set in (or adjusted from) contemporaneous similar transactions.” BMI and Pandora bitterly argued over what the appropriate benchmark(s) should be for Pandora’s internet streaming service.

The PROs’ publisher members, particularly the majors (Universal, Warner-Chappell and Sony/ATV (which now controls the EMI catalog)), felt they could negotiate better deals for digital (Internet) rights themselves than through ASCAP and BMI because of the Consent Decree restrictions. So the majors undertook a “partial withdrawal” of their grant to ASCAP and BMI to license public performances of their music to Internet streaming services, allowing the PROs to continue licensing the publishers’ works for all other purposes.

This partial withdrawal was itself the subject of Rate Court litigation, with both Judge Stanton and Judge Cote eventually ruling, albeit with slightly different rationales, that publishers could not partially withdraw their grants to ASCAP and BMI, respectively. In other words, they were either “all in” or “all out” at ASCAP and BMI and the partial withdrawals were invalid.

However, between March 2012 and December 2013 (before the Rate Courts said such deals were verboten), the major publishers entered into a series of separate deals with Pandora, with rates ranging from 2.25% to 5.85% of Pandora’s revenue. BMI also submitted as benchmarks, agreements with Pandora’s competitors, entered into between 2010 and 2013, with rates ranging between 2.5% and 4.6% of the service’s revenue. Pandora disputed not only the validity of the interregnum partial withdrawal agreements but also the agreements of its “competitors” as appropriate benchmarks.

As for the agreements made during the period of partial withdrawals, Pandora claimed they were not, in fact, arms-length negotiations, but rates that the PROs extracted under threat of infringement litigation. As for the other agreements, Pandora claimed its service was different from its competitors, and more like traditional over-the-air radio, which has a rate of 1.75% of revenues, which was also the rate for Pandora’s prior BMI license. The foregoing is very much an over-simplified distillation of more the more than 30 pages of factual background in the Court’s opinion.

After the lengthy recitation, including quoting various email exchanges, the Court began its discussion with a concise statement of its conclusion:

The evidence presented at trial shows that BMI’s proposed license fee of 2.5% of Pandora’s gross revenue is reasonable, and indeed at the low end of the range of recent licenses. The direct licenses between Pandora and Sony and UMPG [Universal] for the 2014 calendar year are the best benchmarks because they are the most recent indices of competitive market rates.

Shortly after this, Judge Stanton quotes verbatim an email chain which consists of several single-spaced pages of internal discussion among Pandora’s executives (leaving one to wonder what was actually redacted from the Court’s public opinion), in support of its conclusion that Pandora’s deals with the publishers were, in fact, market rate negotiations: “Once the rate negotiations were freed from the overhanging control of the rate courts, the free-market licenses reflect sharply increased rates.”

The Court then went on to distinguish how Pandora is not just different from traditional radio, but also from other online streaming services: “

The fact (not unusual when traditional business models are evolving and shifting) is that Pandora cannot be accurately characterized as in any specific category for which rates have been established. It has aspects of several, but it is not confined to any one in particular.

As for radio, even considering Pandora’s purchase of a traditional radio station, Judge Stanton concluded:

Pandora is not similarly situated to any RMLC [Radio Music Licensing Committee] licensee, including iHeartMedia. The rate for the ten thousand terrestrial broadcasting members of the RMLC is not a useful benchmark for Pandora.

Both ASCAP and BMI, in their respective Rate Court cases, relied upon the testimony of Peter Brodsky, Sony’s EVP and in-house counsel, to demonstrate the arm-length nature of the negotiations he had with Pandora’s attorney, Robert Rosenblum, during the “partial withdrawal” period. Judge Cote specifically found that Brodsky‘s testimony wasn’t credible. Judge Stanton took great pains set forth the specifics of these negotiations in his concluding that “I do not find Brodsky’s credibility impaired.”

Similarly, in rejecting Judge Cote’s conclusion in the ASCAP proceeding that the rates produced in the Pandora-publisher negotiations were not proper benchmarks because of the fear of “crippling copyright infringement liability, Judge Stanton stated that the record before him, many months after the closing of the record in the ASCAP case, “is far more extensive that what Judge Cote had before her.”

As with Judge Cote’s decision, Judge Stanton’s decision will likely be appealed. If, as with Judge Cote’s ASCAP decision, Judge Stanton’s BMI decision is affirmed, it will be a significant victory for the publishers of the songs streamed on Pandora, although the publishers still get a fraction of what the labels, who are not subject to Consent Decrees, get paid by streaming services. And Pandora can still take solace in its ASCAP win.

The conflicting decisions reached by the ASCAP and BMI Rate Courts regarding Pandora are another example of why the Copyright Office, in its Music Licensing Report, recommended that rate-setting for PROs and their licensees should be removed from a single life-tenured federal district judge and instead be given to the Copyright Royalty Board, with its panel of specialized judges who each serve for a limited term. While that won’t eliminate results that some may not like, at least there will be consistency in the decision-making.

So, What’s The Songwriter Equity Act About?

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Update: I originally published the post below on May 14, 2014, shortly after the Songwriter Equity Act was introduced last year. The bill has was re-introduced in both houses of Congress on March 3, 2015 by the same sponsors as before, led by Sen. Hatch (R-UT) and Rep. Collins (R-GA), who posted the bill on his website. In addition to my original piece below, I also discuss the background underlying the rate-setting for songwriter royalties from the sale of recordings (“mechanical” royalties) in my post on the Copyright Office’s recently-released music licensing study, which advocated for the changes incorporated in the proposed legislation.

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Given the continuing Congressional deadlock, I generally don’t pay too much attention to the mere introduction of bills relating to copyright and music.  So, I didn’t pen a post when Rep. Doug Collins (R-GA) introduced H.R. 4079, the “Songwriter Equity Act” at the end of February. This bill, it were somehow to pass, would amend the Copyright Act with respect to how songwriters’ statutory “mechanical” royalties and certain public performance royalties are determined. It has 14 co-sponsors, including Representatives Steve Cohen (D-TN) and Steve Cooper (D-TN).

But now Senators Lamar Alexander (R-TN), Bob Corker (R-TN), the senators who represent Songwriter City (a/k/a Nashville) and Orrin Hatch (R-UT), himself a songwriter, have announced that they will be introducing their own version of the “Songwriter Equity Act” in the Senate. This, along with the Copyright Office’s extending their public comment period for their Music Licensing Study until May 23, makes me think that there may be some real momentum to make changes in the laws affecting those who create and license music.

Any tunesmith will tell you that their two biggest income streams are royalties from the public performance of their works and royalties from the sales of recordings of their songs. Unlike most creators of copyrighted works, songwriters’ ability to earn a living is heavily regulated by the federal government. Let me explain, starting with royalties from recordings.

Section 115 of the Copyright Act essentially provides that once a song has been recorded, anyone can do a “cover” of that song, under a compulsory license from the copyright owner(s), i.e., music publishers, provided they are paid the statutory royalty known as a “mechanical” royalty, which has applicable first to piano rolls, then to 78s, to LPs, 45s, cassettes, CDs and now, downloads. Under authority of the Copyright Act, a  tribunal called the Copyright Royalty Board sets this statutory rate, which is currently 9.1 cents per recording distributed for a recording that is 5 minutes or less. This statutory rate serves as a benchmark, even for voluntarily negotiated “mechanical” licenses, such as those issued by The Harry Fox Agency.

Let’s move on to performance royalties. The majority of songwriters belong to ASCAP or BMI, which are private entities known as performing rights organizations (PROs). PROs are collectives that issue licenses to publicly perform music on radio, TV, in live music venues, over the Internet and elsewhere. ASCAP and BMI issue “blanket” licenses of all the works they control to users and distribute the royalties they collect to songwriters and music publishers.

However, since the 1940s, ASCAP and BMI have operated under Department of Justice Consent Decrees which were last amended in 1994 (BMI) and 2001 (ASCAP), long before the advent of digital download and streaming services. The ASCAP and BMI Consent Decrees are each overseen by a federal District Judge in the Southern District of New York. When a user (e.g., Pandora) or group of users (e.g., the radio broadcasters) can’t agree with ASCAP or BMI on an appropriate license fee, the parties can have a “Rate Court” proceeding before the judge overseeing the ASCAP or BMI Consent Decree. The Rate Court judge then must determine a “reasonable rate” for the particular user. However, there are certain limitations placed on the judge by the Copyright Act as to how to determine a “reasonable rate” for the user(s) in question.

The ASCAP and BMI Consent Decrees were entered into as part of a settlement of anti-trust litigation. At the time, it seemed like the PROs had a certain amount of market power when dealing with radio and later,TV stations. The PROs now argue that the playing field has dramatically changed in the ensuing decades and it’s new players like Apple (iTunes) and Google (YouTube) and telecommunications companies like Verizon and Comcast that have the real power and that therefore the Consent Decrees should either be amended or scrapped because of this and other shifts in the marketplace. And by including the functioning of the Consent Decrees in its music licensing study, the Copyright Office may ultimately share the PRO’s view.

So, what does this all have to do with the proposed “Songwriter’s Equity Act”? As David Israelite, President of the National Music Publishers Association (NMPA) put it: “Roughly two-thirds of a songwriter’s income is heavily regulated by law or through outdated government oversight,” which results in devalued intellectual property rights.” The bill would change the standard of how the CRB sets mechanical rates and the criteria under which ASCAP and BMI Rate Court judges determine a “reasonable rate” for public performances.

Specifically, the bill would amend Section 114(i) of the Copyright Act to allow introduction of sound recording royalty rates in a Rate Court proceeding. It would also amend Section 801(b)(1) of the Copyright Act to direct the Copyright Royalty Board to set the statutory mechanical rate under Section 115 based upon a fair market rate, or what a willing buyer and seller would negotiate, including looking to comparable rates and agreements, rather than “reasonable” rate based on factors other than market conditions.

Advocates argue that songwriters would greatly benefit from these revised rate-setting standards and songwriter royalties would more closely align with those for the use of the sound recording, which are often many times higher than the comparable songwriter royalty. In short, this bill, should it become law, would be sweet music to songwriters’ ears. This bill, along with one granting labels and recording artists royalties when records are played on the radio  that was introduced last year (and the U.S. is one of less than a handful of nations that don’t already have this), would create a more level music licensing landscape.