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

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

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?”