The Copyright Office’s Music Licensing Report Explained! (Hopefully)

Stephen Carlisle February 19, 2015

On February 5, 2015, the Copyright Office dropped their long awaited position paper on reforming the music licensing system, “Copyright and the Music Marketplace.” ¹ I think “dropped” is an appropriate description, as the report runs for 202 pages of single spaced text, 975 footnotes and an additional 43 pages devoted to exhibits.

My guess is most artists and legal followers of this blog will find the prospect of slogging through those 202 pages a bit daunting, even if the subject matter is easy to comprehend, which it most certainly is not. But fear not. As my position as Copyright Officer requires me to be as current as possible on all aspects of copyright, I have indeed read the report and shall take this blog space to illuminate the major proposals from the Copyright Office.

My initial thought was simply to use excerpts from the actual text of the report and categorize them under broad headings, so the reader could read the actual words of the report. That thought lasted until I realized I had generated 10 pages of text containing 5,487 words. So, I will attempt to condense the main points, and where required, to give some explanation as to why a proposal is being made. Faithful readers of this blog will recognize some of the issues being dealt with, particularly sound recording rights, streaming services, etc.

The report proposes the following:

Creation of Sound Recording Performance Rights for Broadcast Radio

Currently, a U.S. radio station need only pay one party when they play a song; the composer of the song. These rights are brokered through one of three performing rights organizations (PROs) that go by various “alphabet soup” identifiers, e.g. ASCAP, BMI and SESAC. There is no payment made to the owner of the sound recording copyright. The U.S. is the only major country in the world that does not pay to perform sound recordings. The result is that in other countries where sound recordings do generate performance payments, no payments are collected for U.S. sound recordings, resulting in a large loss of revenue to the owners of sound recordings. ² For their part, the broadcasters have always contended that the playing of music creates “free publicity” for the sound recording owners, justifying the payment of nothing for the performance right.

The Copyright Office (CO) proposes to end this exemption, so that all performances of sound recordings must be properly licensed and paid for. This already occurs in the realm of digital performances, where the rates are set through the Copyright Royalty Board (CRB) and collected by SoundExchange, a recording industry collective, much like the PROs. For their part, the CO is unimpressed with the “free promotion” argument.

“Significantly, as consumer preferences shift away from music ownership, the potential for sales is becoming less relevant, and the promotional value of radio less apparent… In this regard, the creation of a terrestrial sound recording performance right need not overlook or negate the question of promotional value, because this factor can be taken into account by a rate-setting authority, or in private negotiations, to arrive at an appropriate royalty rate.” ³

The fighting over this will be intense. The broadcasters have a very large and powerful lobby in Washington, and have actively sought for years to roll back the payments they make to the PROs. Just because the CO is in favor of the proposal does not in any way make its passage a sure thing, and I, for one, would be very surprised if such a bill would pass.

Create Performance Rights for Pre-1972 Sound Recordings…With a Catch

Faithful readers of this blog will recognize this issue. The battles between Flo and Eddie and Sirius XM have been duly noted here ⁴ and are amongst the most read blog posts. The proposal of the CO is to clean-up the mess that would result with 50 different laws regarding the performance of pre-1972 sound recordings by granting Federal Copyright protection to those sound recordings. But that protection will come with a price. The CO is proposing “full federalization” of pre-1972 sound recordings.

“After considering input from stakeholders, the Office concluded that pre‐1972 sound recordings should be brought under federal copyright law with the same rights, exceptions, and limitations as sound recordings created on or after February 15, 1972.” ⁵

This would mean that pre-1972 sound recordings would be subject to the application of the DMCA safe harbor rules and rights‐balancing exceptions such as fair use. ⁶ Given the abuses of the DMCA safe harbors by Google and others already documented by this blog, I’m not sure that pre-1972 sound recording owners would find this such a great deal. There is pending in Congress the RESPECT act, which would only allow the collection royalties for pre‐1972 performances and provide a safe harbor from state liability for paying services. ⁷ As noted before, the streaming service Pandora opposes the RESPECT act, but has stated it would support the “full federalization” proposed by the CO.

One “Rate Court,” One Standard, One Set of Rules

The current system of setting rates is fragmented and unequal. Rates for the PROs are determined (when necessary) by a Federal Court in Manhattan. Rates for Sirius XM and Pandora are set by the CRB. The rate court for the PROs uses the “fair market” standard and the CRB uses the “willing seller/willing buyer” standard. Composers are subject to a compulsory licensing system, whereas sound recording owners are not.

The CO proposes to consolidate all rate-setting authority in the CRB. ⁸ It also proposes that the CRB adopt one standard, either “fair market” or “willing seller/willing buyer,” which “should be designed to achieve to the greatest extent possible the rates that would be negotiated in an unconstrained market… there is no policy justification to demand that music creators subsidize those who seek to profit from their works.” ⁹ (Are you listening, Pandora?) Lastly, musical compositions and sound recordings should be treated equally.

“The Office’s approach would offer a free market alternative to musical work owners, in the form of an opt‐out right, in the most significant areas where sound recording owners enjoy unfettered digital rights—namely, interactive streaming uses and downloads. And where sound recording owners are subject to statutory rate-setting—i.e., in the case of non-interactive streaming—musical works would remain regulated.” ¹⁰

This would also require the repeal of the rate setting standard of Section 114(i), which the CO absolutely endorses. ¹¹

One has to question why the Government is setting rates at all. Google can charge anything it wants for advertising on YouTube. Likewise, Sirius XM, Pandora and Spotify can charge whatever they want for their services. So why should the Government mandate the rate that a copyright owner can charge for their product? Does this not go against the principles of free market capitalism? Some would argue that copyrights are a monopoly, and thus require government intervention. Yet, patents are also a monopoly and there is no government regulation on what a patent holder might charge for a license, nor is there any requirement that a patent owner license their product at all. So why is there compulsory mechanical licensing for musical works, and compulsory performance licensing by the PROs at rates set by the Government? As the CO pointedly observes:

“Viewed in the abstract, it is almost hard to believe that the U.S. government sets prices for music. In today’s world, there is virtually no equivalent for this type of federal intervention—at least outside of the copyright arena.” ¹²

“Even given greater latitude to make licensing decisions, it would seem that musical work owners would be strongly incentivized to license services that they believed would pay a reasonable return. This seems to be true of the record labels, which have authorized a wide range of download and interactive music services outside of a mandatory licensing regime. But the labels are not required to license services that show little promise or value. Why is this demanded of music publishers and songwriters?” ¹³

“The Office believes that the question of whether music copyright owners should be able to choose whether to agree to a license is an especially critical one. Understandably, those seeking permission to use music appreciate the security of compulsory licensing processes and certainty of government‐set rates—as buyers of content likely would in any context. But modern competition law does not view the rights enjoyed by copyright owners as intrinsically anathema to efficient markets. As the DOJ itself has explained, “antitrust doctrine does not presume the existence of market power from the mere presence of an intellectual property right.” ¹⁴

Modify or Eliminate the Need for the PRO Consent Decrees

Two of the PROs, ASCAP and BMI operate under consent decrees with the U.S. Department of Justice, to avoid anti-trust issues and anti-competitive behavior. The CO does not call for the repeal of the consent decrees, but questions their continuing usefulness and instead recommends modification. The question of how this might be achieved looms large. It is not clear that Congress has the authority to repeal a legal judgment brought by the executive branch and administered by the judicial branch. It would seem that one of the parties to the consent decree would have to petition the court in order to make the changes suggested by the CO.

The CO proposes these steps to radically alter the consent decrees:

• Allow publishers to withdraw their digital performance rights
• Allow PROs to issue mechanical licenses
• Migrate rate-setting to the CRB
• Institute “pay to play” requirements for licensees

Currently, the rule is that a publisher has to be “all in” or “all out” with regards to their rights. This is leading some of the major music publishers, namely Sony/ATV and Universal Music Group to contemplate removing their works from ASCAP and BMI entirely. If you want to see true chaos, contemplate what that might mean. In the absence of a new performance license, it would mean virtually every radio station and TV station, as well as YouTube, Sirius XM and Pandora would be operating illegally. So it might be better to allow the publishers to remove some rights, rather than risk the chaos that “no rights” would entail. Also consider that under the consent decrees, ASCAP and BMI are required to grant a license to any user who asks for one. ¹⁵ If the major publishers pull out, this right would vanish as to the songs controlled by them.

Along with the compulsory licensing scheme, the CO recommends that “pay to play” be instituted for the PROs. Currently, the PROs must issue a license, but there is no mandated payment required of the licensee until the rate is set, either by negotiation or the rate court. The CO recommends that some payment be required until the final rate is set.

“The problem is exacerbated by the substantial burden and expense of litigating a rate in federal court—a contingency both sides seek to avoid. Licensees may pay nothing or greatly reduced fees for years as negotiations drag on, while still enjoying all of the benefits of a license.”

“Once again, the Office does not see why music is treated differently from the goods of other suppliers in the marketplace. A fair and rational system should require licensees to pay at least an interim rate from the inception of their service, subject to a true‐up when a final rate is negotiated with the PRO or established by the rate-setting authority.” ¹⁶

Currently, the PROs cannot issue mechanical licenses, that is, the right to reproduce a song in the form of a sound recording. The CO recommends removing this restriction as part of a larger scheme to allow the formation of “Music Rights Organizations” or “MROs” that would control both the reproduction right and the performance right, greatly simplifying the licensing process. ¹⁷

Allow Creation of MROs or the “One Stop Shop”

The biggest proposal of the CO is to allow the creation of MROs, with the creation of a “Government Music Rights Organization” to act as a back-stop where a licensee wishes to license an unaffiliated work or an “orphan work” where the copyright owner cannot be located. ¹⁸

“An MRO could be any entity representing the musical works of publishers and songwriters with a market share in the mechanical and/or performance market above a certain minimum threshold, for example, 5%. Existing rights organizations, such as ASCAP, BMI, HFA and others, could thus qualify as MROs. Each MRO would enjoy an antitrust exemption to negotiate performance and mechanical licenses collectively on behalf of its members—as would licensee groups negotiating with the MROs—with the CRB available to establish a rate in case of a dispute.” ¹⁹

The catch is that all MROs would be required to issue “blanket licenses,” that is, “all rights” licenses for the payment of one set rate.

“Ultimately, it is in the interest of music owners as well as licensees to improve the licensing process so it is not an obstacle for paying services. To further facilitate the rights clearance process and eliminate user concerns about liability to unknown rights owners, the Office believes that mechanical licensing, like performance licensing, should be offered on a blanket basis by those that administer it. This would mean that a licensee would need only to file a single notice to obtain a repertoire‐wide performance and mechanical license from a particular licensing entity. Song‐by‐song licensing is widely perceived as a daunting requirement for new services and an administrative drag on the licensing system as a whole. The move to a blanket system would allow marketplace entrants to launch their services—and begin paying royalties—more quickly.” ²⁰

Again, I fail to see the fairness in having the government mandate how and for what price I might sell my product, when it does not do this for any other business other than an electric utility. However, the one plus of the MRO blanket license system is that no one will be able to contend that they did not know how to properly license a musical work, and might lead to a much higher compliance rate.

Revise but Not Eliminate Compulsory Mechanical Licensing

Frankly, I think the entire compulsory mechanical licenses scheme should be scrapped. There is no reason why I should be forced to give a license at a rate set by the government. Too many times in my private practice I would receive notifications from record companies invoking their “compulsory license rights” while at the same time trying to change the requirements that would be imposed upon them by section 115. The compulsory license rates artificially set the ceiling for all mechanical licenses in a way that unfairly impinges my right to do business as I see fit. There are no statutory audit rights, and compulsory licenses frequently suffer from non-compliant accounting, as well as “slow pay” and “no pay.” The CO proposes to do the following to section 115:

• Allow copyright owners to withdraw streaming and download rights from compulsory licensing. ²¹
• Licensing of physical copies does not grant the right to stream or sell downloads. ²²
• Create specific audit rights for compulsory uses. ²³
• Sunset existing compulsory licenses in order to move them to the MRO system. ²⁴

Well, that’s all for now folks. Obviously there is a lot more in the report, particularly in the area of requiring the proposed MROs to create certain databases, but these are the highlights of what seem to be the most significant and wide ranging proposals. Congress, it’s over to you.