Tag Archive for: consent decree

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]

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.

 

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.

All You Need To Know About The Copyright Office’s 202-Page Music Licensing Report

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On Friday, February 6, the Copyright Office issued a 202 page comprehensive report (plus appendices) on the music licensing business, “Copyright and the Music Marketplace.” The Report is the culmination of a nearly year-long process of soliciting and evaluating input from interested parties on how to fix what everybody agrees is a broken system.

Anyone with an interest in the music business should read the full report – or at least the 11-page executive summary. But in case even that’s too much, here’s all you need to know, in layman’s terms and with analysis, in little more than half the length of the executive summary:

The Report starts with four guiding principles:

– Music creators should be fairly compensated for their creations
– The licensing process should be more efficient
– Market participants should have access to authoritative data to identify and license sound recordings and musical works
– Usage and payment information should be transparent and accessible to rights holders.

Like Mom and apple pie – it’s kind of hard to argue with these. But before we get to the Report’s recommendations as to how to implement these principles, including four subsidiary principles, we need some background on the current music licensing framework. So instead of the Report’s 50-page primer (which is quite readable and mostly correct), here’s a roughly three-page summary of the current music licensing landscape, rocky as it is.

The Report is primarily concerned with the distribution of recorded music, whether through sales of physical product like CDs and downloads or public performances, whether over the radio or by streaming services on the Internet. This means that unless it’s a recording of public domain music, like Beethoven, most recordings consist of two distinct copyrights: (1) the copyright in the musical work, which is typically controlled by one or more music publishers; and (2) the copyright in the recording of that work, which is typically controlled by a record label. This is best illustrated with “cover” records. For example, I prefer the Carole King version of “You’ve Got a Friend” to James Taylor’s. Same song, two different recordings; two separate copyrights for each recording.

Let’s deal with the songwriter/publisher side first. ASCAP, BMI and SESAC are performing rights organizations (PROs) that license the public performing right (and only that right) in musical compositions (i.e., songs, but not the recordings of them) when they are performed live in stadiums, concert halls and clubs, broadcast on radio and TV or streamed over the Internet. PROs typically issue “blanket licenses” to users, meaning for a set fee (either a flat fee or percentage of the user’s revenue, depending upon the license), the user has an all-you-can-eat buffet of the music in that PRO’s repertoire allowing the user, such as a radio station, to play any song in the PRO’s catalog as often as it likes. The PROs pay 50% of the licensing revenue to the writers and 50% to the music publishers after deducting their operating costs.

ASCAP and BMI, according to the Report, represent more than 90% of the domestic music market while SESAC and another recently-formed entity represent most of the remainder. ASCAP and BMI (but not SESAC) have been operating under Department of Justice Consent Decrees since World War II. And they haven’t been amended since the dawn of the Internet. Think about that. These decrees were instituted to settle alleged anti-trust violations when 78s were the dominant recording format. Under DOJ regulations in place since 1979, most consent decrees are supposed to terminate within 10 years – not 75!

The Consent Decrees for ASCAP and BMI are overseen by two different federal judges in the New York City. When either PRO can’t reach an agreement as to a license fee either with an individual user (e.g., Pandora) or an entire industry (e.g., radio), the parties may have a “Rate Court” proceeding before the judge. Like all federal litigation,  a Rate Court case is very time consuming and costly. Both Consent Decrees state that the judge must determine a “reasonable” fee, which has been interpreted to approximate what a willing buyer and a willing seller would pay for a license in a free, open market.

Most important about these Consent Decrees is that they require ASCAP and BMI to grant a license to anyone who requests one, making the process a de facto compulsory license regime. What’s more, users often pay nothing – sometimes for months or even years at a time – while the parties either negotiate or litigate what a “reasonable” fee should be. Songwriters and publishers have long maintained that users, availing themselves of a compulsory license with the ability to use the “product” while negotiating a fee, are at a significant bargaining advantage.

Still sticking with songs (as opposed to recordings), when a song is covered by another artist, the Copyright Act provides the label with a compulsory license whereby the label pays a statutory rate to the owner of the song. This is how Carole King the songwriter gets paid for James Taylor’s cover recording. The statutory rate is currently set every five years by the Copyright Royalty Board (CRB) in Washington, DC. This three-judge panel sets the fee, not based upon a market rate standard, but in accordance with a separate statutory provision requiring a “fair return” to the work’s creator, while balancing certain public policies, such as maximizing availability of works and minimizing a disruptive impact on businesses and industry practices. The Report indicates that this standard results in lower rates than a fair market standard. Although designed to be solely a license for cover recordings with first recording rights reserved to the copyright owner, most recording contracts have provisions tying the release and payment of all songs to the statutory scheme (often at a lower payment rate). Songwriters and publishers have long maintained that this compulsory scheme, as with performing rights, provides artificially low rates.

This statutory compulsory license (meaning music publishers and songwriters are subject to an “offer” they can’t refuse) is called a “mechanical” license due to the mechanical reproduction of the music and is a term dating back to the days of piano rolls when the license provision was first enacted. But the mechanical license applies solely to audio-only recordings – there is no compulsory license for film, TV, videos, games and other AV uses. Although many music publishers issue mechanical licenses directly, a licensing collective, the Harry Fox Agency (HFA), issues these licenses for probably more than half of the market. However, unlike the performing rights licenses issued by PROs, there are no “blanket” mechanical licenses and they are issued on a work-by-work basis, something that online music services find particularly inconvenient and impractical.

As for audio-visual uses, a “synchronization” (or “synch”) license is required from both the owners of the song and the recording of that song. So, if you want to use Tony Bennett and Lady Gaga’s recording of “Cheek to Cheek” in a movie, you need to get permission from Irving Berlin’s music publisher and also permission from the artists’ label for that particular recording of the standard. Synchronization licenses, unlike mechanical licenses, are typically negotiated and issued directly by the copyright owners, the labels and publishers.

The Report states that between public performance and mechanical income, about 75% of a songwriter’s (and therefore a music publisher’s) income is subject to government regulation (compare that to a novelist whose income isn’t regulated at all). So, that means that the majority of a songwriter’s income can be determined by four judges – one in New York and three in DC. By contrast, a label’s income (and therefore a recording artist’s income) consists mostly of sales of recordings (e.g., CDs and downloads) and licensing of those recordings, such as “synchronization” usage as discussed above. There are no compulsory licenses or consent decrees for these uses so it’s a pure, free market negotiation between labels and users for these rights. And music publishers, who can negotiate synch licenses in a free market unshackled by consent decrees and compulsory licenses, are usually able to get about the same fee for their rights as the label gets for theirs.

But not all restrictions disadvantage the songwriter. With respect to performances, the United States, except in very limited circumstances discussed below, does not grant a public performing right in a sound recording. For example, when Sinatra’s recording of “New York, New York” is played on oldies radio (or over loudspeakers at Yankees games), the songwriters, Kander & Ebb, and their music publisher, get paid through their PRO. What do Sinatra’s heirs and his label get? Nothing! As the Report points out, the United States is one of less than a handful of industrialized nations, including Iran and North Korea, which do not have a public performing right in a sound recording for radio.

Why? There are historical reasons in that the radio stations felt that they were providing the labels with promotion for the sale of recordings. Also, every Congressional district has at least one or more radio and/or TV stations. As the Report points out, with the recent shift in consumer preferences from purchases (e.g., CDs and downloads) to streaming (e.g. YouTube), the promotional value of radio probably isn’t what it used to be.

However, because of laws enacted in the 1990s, there is a limited public performing right in a sound recording for digital transmissions, basically, streaming over the Internet, whether through YouTube, Spotify, Pandora or another service. And there is a compulsory license for non-interactive streaming services, which like the mechanical license, has a rate that’s determined by the CRB. The royalties for the compulsory streaming licenses are administered by a collective that’s similar to the PROs, SoundExchange, which distributes this income to labels (50%), featured artists (45%) and side artists (5%). As for “interactive services” (and the Report spills much ink over the lengthy statutory provisions about what is and is not “interactive”), these license fees are determined in market negotiations by the parties.

Our discussion began with the notion that there are two copyrights in a recording: one in the underlying song and one in the actual recording or “master.” However, for historical reasons, recordings that were made prior to 1972 are not covered by the federal Copyright Act, unlike the songs embodied in them. Rather, these recordings, which are still purchased and performed all the time, are governed by state law.

Recent well-publicized lawsuits in New York and California have determined that, at least in those two states (and likely in many others), there is a state-based public performance right in a sound recording, the contours of which remain largely unknown. For example, it’s possible that in some states, this performing right for pre-1972 recordings could be even broader than the one granted under federal law for later recordings in that there conceivably could be a performing right in the older recordings played over the radio under various state, but not federal laws. This could lead to a quagmire of uncertain and inconsistent  treatment.

The Report also contains a lengthy discussion of recent ASCAP and BMI Rate Court decisions, both of which held that publishers could not partially withdraw certain rights from ASCAP and BMI while leaving others. For example, Sony/ATV, one of the three major publishers, felt that it could negotiate better deals regarding digital performances than what it could get through ASCAP and BMI because of the constraints imposed on those PROs by the Consent Decrees. Reaching the same conclusion albeit under slightly different reasoning, both the ASCAP and BMI Rate Court judges determined that a publisher had to be either “all in” or “all out” and that it couldn’t cherry pick certain aspects of the performing right. These decisions figure prominently in the Report’s recommendations.

Why would a major publisher feel they could get a better deal by itself? As we’ve seen in the synch license arena, where there’s a free market, song copyright owners get paid about the same as recording copyright owners in most instances. Contrast that to the download situation where the publisher gets paid 9.1 cents for the download (the compulsory statutory rate) while the label gets about 70% of the sale price on iTunes (a market negotiation).

The Report also contains lengthy and detailed descriptions of the lack of uniformity in data associated with both musical works and sound recordings. Without going into detail about ISWCs, ISRCs, ISNIs and DDEX standards, suffice to say there is currently no consistent, uniform, international process for assigning codes to musical compositions, albums or individual tracks, writers or artists. And there’s no centralized database for this necessary information. This leads to inefficiencies and delayed licensing and payment for creators.

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With the foregoing background, here are the Copyright Office’s four subsidiary principles regarding implementation of their four Guiding Principles:

– Government licensing should aspire to treat like uses of music alike
– Government supervision should enable voluntary transactions while supporting collective solutions
– Rate-setting and enforcement of anti-trust laws should be separately managed and addressed
– A single market-oriented rate-setting standard should apply to all music uses under statutory licenses

So now let’s look at the Report’s most significant recommendations to implement its eight principles:

– Regulate musical works and sound recordings in a more consistent manner. (As we’ve seen, song and master recording rights are often treated differently, with more restrictions on songwriters and publishers than on recording artists and labels.)
– Extend the public performance right for recordings to traditional “terrestrial” radio. (This fosters the first goal and the Report recommends that non-interactive radio be subject to the same compulsory license scheme as are non-interactive streams.)
– In keeping with similar treatment for similar rights, the Report also recommends full federal copyright protection for pre-1972 recordings. (Besides being fair to older artists, this avoids the potential legal chaos discussed above).
– The Copyright Office further suggests that all rate-setting for both recordings and the underlying musical works should (a) be subject to the same “willing-buyer / willing seller” or “fair market value” standard and (b) that all rate setting, even for music performance rights, should be done by the CRB. (This would remove rate-setting for music performance rights from a single, life-tenured federal judge in New York and place it before a tribunal with a specific mandate and expertise. It also fosters the goal of uniform treatment for songs and records.)
– The Report also states that the CRB should only meet as needed and that procedures for setting interim rates, as well as for the overall process, should be streamlined. (This should foster voluntary negotiations and make rate-setting proceedings faster and cheaper).
– The Report also suggests that detailed provisions, such as what constitutes an interactive streaming service, should be put into regulations rather than in the copyright statute, so that they can be more easily modified to adjust to changes in the marketplace.
– The Report stopped short of stating that the ASCAP and BMI Consent Decrees should be repealed. (This position is undoubtedly in deference to the Justice Department’s ongoing review of those decrees, but is clearly supportive of relaxing restrictions, as discussed below.)
– Allow for audit rights under the compulsory mechanical license and allow SoundExchange to terminate licensees who avail themselves of a compulsory license but do not pay. (These are obvious legal loopholes that need to be plugged. If creators are subjected to a compulsory licensing regime, they should at least have the ability to ensure they’re being properly paid and that deadbeats don’t keep the benefits of the license).

The Report also recommended that, as the Copyright Office had previously, licensing collectives be permitted to expand their role and become Music Rights Organizations (MROs) that would license both performing and mechanical rights and possibly other rights as well. ASCAP’s Consent Decree forbids it from licensing mechanicals and other rights and BMI has voluntarily refrained from doing so to date. However, the CEOs of both organizations have indicated that expansion of their licensing capabilities is in their business plans and users should welcome the availability of multi-use licenses.

For example, if ASCAP, BMI, SESAC, Harry Fox and Sound Exchange all became MROs and licensed performing rights and mechanical rights, there would be six MROs competing for business. The Report also recommended congressional overrule of the Rate Court decisions, to the extent of allowing publishers to withdraw digital rights for interactive streaming so that publishers are on parity with the labels in the ability to negotiate for these rights. Although not mentioned in the Report, I think that the MROs should also be able to license the posting of lyrics, as HFA currently offers this service. The PROs and HFA currently allow for a music publisher to issue a direct license and not go through the collective. This should be maintained to both ensure free competition and allow copyright owners to handle individual negotiations where warranted.

If there are six competing MROs offering a variety of bundled licensing services, which would include the right to withdraw certain rights and directly license all rights, it would seem that the ASCAP and BMI Consent Decrees would not be needed (at least not in their present form) as there would be ample competition. As the Report indicated, there are currently only three major labels and three major publishers. They aren’t subject to Consent Decrees. While the US currently has three PROs, most other nations have only one, and that PRO often is able to bundle mechanical rights. The time has come to recognize that the public doesn’t need excessive government protection from the collective licensing by songwriters.

The Report also recommended that membership in MROs be mandatory and that there be a “general” MRO, the GMRO that would act as a stop-gap for certain unrepresented parties and would standardize data formats and create a global rights database for users. I believe neither mandatory membership in a MRO (given that membership in licensing collectives is currently voluntary), nor the creation of a GMRO, another level of governmental involvement, is necessary. First, if a MRO were able to offer more comprehensive services and there was competition for members, there would be enough incentive for all writers, publishers, artists and labels to join one.

Second, as the Report acknowledges, the various interested parties, including the PROs, have been working on various projects to facilitate the uniformity and transparency of data. If, for example, the PROs were to offer mechanical licensing, they would be strongly incentivized to synch their works registrations with recording and artist information. Similarly, if HFA were to offer performing rights, they would be incentivized to ensure that their recording information is coordinated with works information. Third, with MROs having both data for songs and recordings, they could create an aggregate portal for users to look up who controls which rights to songs and recordings. Finally, I also don’t think that a GMRO is necessary to address the problem of unlicensed or unaccounted for shares in works and other missing data. The MROs can license based upon partial representation and hold reserves until such time other interested parties properly register their works and shares.

The Report attempts to address the issue of transparency of licensing and royalty information. Standardizing works and recording codes will help. So will the elimination of the “pass through” mechanical license for downloads in that publishers have to be paid through the labels and not directly by the download services like iTunes. And while the issue was raised regarding equity stakes in and advances from, streaming services like Pandora, no real solutions regarding creators sharing in the wealth were offered. Similarly, the Report alluded to the “whack-a-mole” problem under the DMCA of dealing with rampant infringement on services like YouTube but did not offer any recommendations, an area where the balance between the services and creators, especially individual artists, should be adjusted .

Although the Copyright Office had previously suggested that the compulsory mechanical license be repealed, the Report stops short of advocating it. Instead, it suggests that publishers have limited opt-out rights for interactive streaming and downloads. It further recommends that mechanical licensing should be done on a blanket license basis, like the PROs. The Report’s recommendation that an artist may obtain a compulsory license for a cover recording released as a CD but not as a download makes no sense to me as it is a needless discrimination in format (e.g., LP versus cassettes in the analog world) rather than means of distribution (e.g., purchases versus performances).

I also believe that the song-by-song mechanical license should still be available as an option. For example, an artist making a self-produced recording that include covers should be able to obtain only the licenses needed. And those licenses should be available for both physical copies and downloads. Finally, I think that if the mechanical licensing regime remains compulsory, the CRB should set rates for different tiers of usage. Three should suffice. In the synch market, for example, a Rolling Stones song will command a higher fee than one by an unknown writer. The publisher can select which tier it wants its song priced at and if the user market balks, the publisher can then change to a lower tier.

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In sum, the Report offers some solid recommendations as to changes to the legal and regulatory aspects of music licensing. Other suggestions such as creating a new agency, the GMRO, and mandating coding standards are probably unnecessary if private parties are better incentivized through revised laws and regulations. But the Report contains far more detail and nuances, both regarding the current licensing landscape and its recommendations, than can be covered in my brief summary. Songwriters and composers, whose income is currently regulated the most, would likely benefit most from the Report’s recommendations, although recording artists could also receive a significant boost to their income with the adoption of a performing right for radio and TV airplay.

Undoubtedly, major players in the user community, such as streaming services, will object to some of the proposed changes to the music licensing landscape, such as relaxing Consent Decree restrictions and having all compulsory licenses subject to a fair market standard. However, as the Report points out, music creators should not have to subsidize any particular business model. But as the Report also notes, it is ultimately up to Congress, rather than the Copyright Office or the Justice Department to make most of the needed changes. Given Congress’ recent history, it’s hard to be optimistic about legislative fixes happening anytime soon. But one can hope….

A Peek from the Peaks of the PROs: the ASCAP, BMI and SESAC CEOs Speak

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Yesterday, the Association of Independent Music Publishers (AIMP) sponsored a luncheon where veteran entertainment lawyer Bob Donnelly interviewed the CEOs of the three performing rights organizations (PROs): ASCAP’s John LoFrumento, BMI’s Mike O’Neill and SESAC’s Pat Collins. The meeting took place before a packed house in the performance space at the barbecue joint, Hill Country, in Manhattan and it was the heads of the organizations, rather than any of the musicians they represent, who took the stage for a discussion that lasted about 90 minutes.

Rather than having a panel discussion, Donnelly interviewed each leader separately while the other two left the room, supposedly to avoid any possibility of collusion. O’Neill, who spoke last, joked that he LoFrumento had a nice chat while Collins was interviewed. And after the meeting, a senior BMI executive confirmed to me that the theatrics were not legally required and further stated that “if I were going to collude with ASCAP I wouldn’t do it in front of the entire music industry.”

Topics included the Department of Justice (DOJ) review of the ASCAP and BMI Consent decrees and the proposed Songwriter Equity Act, subjects I’ve previously written about here and here. The ASCAP and BMI Rate Court proceedings with Pandora were also a major topic of discussion as was the development of the MusicMark portal for registering works.

Much ink has been spilled over the Pandora decisions in the ASCAP and BMI Rate Courts, entities I’ve previously discussed. In short, both Rate Court judges largely sided with Pandora, with LoFrumento noting that all of ASCAP’s proposed rate-setting benchmarks were rejected by Judge Cote and O’Neill discussing BMI’s similar fate. One of the central issues in both cases was the ability of a publisher to withdraw certain digital rights from the PROs and license them to users directly while remaining a member of the particular PRO for all other uses, such as terrestrial broadcast and live performances. Both Judges said “no” with O’Neill stressing that the ASCAP judge said the publishers were “all in” while the BMI judge said that the publishers would be “all out,” meaning none of their repertoire would be covered by a BMI license if they withdrew. Both cases are on appeal.

The attempts by major publishers such as Sony/ATV to withdraw digital rights and do deals directly with licensees could have a significant impact on PRO revenues and the ability for independent publishers to obtain comparable terms. That said, the consensus was that partial withdrawal of rights should be permitted, instead of the Rate Court rulings of “all in” or “all out” as this flexibility fosters competition. Regarding withdrawal, Donnelly asked both LoFrumento and O’Neill what would happen if a publisher were to withdraw rights but the writer did not. Both were equivocal, with O’Neill elaborating that the situation would require a case-by case evaluation of many factors, including provisions in the publisher and writer contracts and the status of any advances.

In the discussion of the Rate Court Proceedings, the Songwriter Equity Act and the DOJ Consent Decree Review, all three leaders stressed that the rules for music licensing (emphasizing performance, but including mechanicals) need to be changed from current benchmarks to market rates, with consideration of what a willing buyer and seller would negotiate as the appropriate rate-setting inquiry. All maintained that the current rate-setting system has significantly undervalued music for decades.

LoFrumento, Collins and O’Neill were all in favor of scrapping the ASCAP and BMI Rate Courts, which lead to very lengthy and costly litigation, and replacing them with arbitration. For example, LoFrumento stated that 10% of ASCAP’s costs are paid to outside counsel. The CEOs favor a three-member arbitration panel whose members would have music industry expertise and would serve limited terms, unlike Rate Court judges who serve indefinitely.

Given the discussion of Consent Decree reform, competition was a theme throughout the discussion. When asked about SESAC being at a disadvantage because, unlike ASCAP and BMI, it has to earn a profit for its private equity owners, Collins stated that they, like all private companies, have to compete and that “nobody joins SESAC to be paid less.” However, he conceded that unlike ASCAP and BMI, SESAC does not disclose what percentage of their revenue is paid to writers and publishers. And O’Neill, when asked about Irving Azoff’s new venture that includes licensing performing rights, chuckled and replied: “Competition is good no matter what, even if it’s bad.” He went on to say that BMI started as a competitor to ASCAP and that competition made both companies stronger.

The three leaders all seemed to agree that the future for the PROs is for each to be an efficient portal for licensees, a one-stop shop for music users. This would entail some form of bundling of music rights ( e.g., mechanical and synch rights, in addition to performing rights) which would need to be allowed under the Consent Decrees. They also indicated that while technology continues to allow for movement from sampling to a census of performances, some areas, such as “general licensing” including payment on performances in clubs, do not lend themselves to a census.

With regard to creating a more efficient environment, both LoFrumento and O’Neill touted their collaboration with SOCAN on MusicMark, a portal which allows publishers to register works only once if they use common works registration or electronic batch registration formats and those works will be registered with all three organizations. MusicMark, however, is not being built as a hub for licensing, which would still be done separately by each of the PROs.

When asked why SOCAN, rather than SESAC was an initial collaborator, O’Neill replied that SOCAN, unlike SESAC, already has both ASCAP and BMI data and they were the logical partner to help reconcile the data. LoFrumento stated he expects MusicMark to be operational in 2015 and the goal is to create a hub where others, including SESAC, HFA and CMRRA could participate. When asked if SESAC plans to join, Collins stated “we applaud the initiative and have an interest in being part of it and we’ll see how it goes but we’re not part of it today.”

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Regardless of what type or genre of music one writes, income from public performances has always been, and continues to be, a critical component of any composer’s income. All composers should be aware of the continuing market, legislative and legal challenges the PROs face – and the entities that are posing these challenges to their ability to earn a living. It’s not often that the CEOs of all three PROs share the same stage – even if not at the same time – and the fact that each of them sees becoming a one-stop for a variety of music rights licenses as critical to their future success is something worth noting.