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Interactive services, where the listeners have the ability to set up playlists or otherwise direct which songs will be heard, or a download service, where the pick specific songs to add to their music library, are not covered by the statutory royalty.  That means that the operator of a service that wants to provide listeners the ability to direct the songs that can be played, must first secure the permission of the copyright holders (usually, for major label releases, the record companies).  And the copyright holders are free to refuse to provide permission for the use of some of their catalog for some or all interactive purposes - such limitations sometimes set out in the record company's agreements with some of their artists.  Not only can the record company withhold permission for the use of certain sound recordings, but the company can also charge different amounts for different songs - effectively letting a "must have" band like the Beatles withhold their music until their terms are met.

These are only some of the issues that come up in setting up a digital music service.  The line between an interactive service and a non-interactive service is not a clear one, as shown by the arguments in the case we summarized last year.  In addition, non-interactive services must meet the performance complement (or get a waiver, as broadcasters have done for simulcast streaming) or, to some extent, they don't qualify for the statutory royalty.  And we're dealing here only with the sound recording copyrights - and there are a whole different set of rules for the copyright in the musical composition.  Obviously - it's not easy to operate a digital music service - much less a profitable one.  For more information about some of these issues, see our guide to the Basics of Music Licensing in Digital Media, here.  

After an exhaustive analysis of the process that Launchcast goes through to create a stream for a listener, the Court focused on several facts.  First, the Court found that much of the music in any stream delivered by Launchcast was not music selected by the user in their list of preferred artists and songs, but was instead picked by Launchcast from its vast library of songs using a number of factors. The Court also made clear that listeners had no ability to game the system to make it play more favorites of the listener.  While a listener could skip some songs, and pause a song in the middle of its play, it could not go backwards to replay songs or otherwise make particular songs play more frequently. In short, the Court found that the system was set up so that it would not substitute for the purchase of music as listeners could not get songs or even particular artists when they wanted. The Court used the term “predictability” – and found that the user had no predictability in determining whether or when any specific song would play during any listening session, and thus the service was not a substitute for a purchase of a song.

This was important in the Court’s analysis. First, the Court determined that the phrase in the statute defining an interactive stream to be “a transmission specially created for the recipient” was not a model of clarity, and was capable of many interpretations. While the record companies argued that any stream that was created specifically for a user based on the user’s preferences was, by definition, “specially created for the recipient”, the Court found that such a simplistic view could not be sustained.  Instead, the language of the statute has to be interpreted in light of the intent of Congress in the adoption of the statute. The Court went through a thorough analysis of the history of the sound recording royalty and how the DMCA provision at issue here came to be in the 1998 Act. The Court noted that the sound recording performance right was first adopted in the US in 1995 and was intended to be a narrow right, initially being applied only to subscription services. After its adoption, upon fears of piracy on the Internet, the right was expanded three years later to include noninteractive streams. In enacting the broader performance royalty, the DMCA broadened the definition of an interactive stream to include the phrase at issue here, focusing primarily on the issue of digital piracy and the fear that a predictable stream of music would allow digital copying. The Court cites specific language of the House of Representatives report on the DMCA where the House stated that you have an interactive stream “if a transmission recipient is permitted to select particular sound recordings in a prerecorded or predetermined program.”

After looking at the history and the way the service functioned, the Court focused on the language of the statute that said that there had to be a “transmission of a program” that was specially created for the user before the program was deemed to be interactive. The definition of a "transmission of a program" looked at the transmission of a program as a whole – to find that there was an interactive transmission of a program one has to look at the entire transmission to see if the entire transmission was created specially for the user. The Court determined that, given the way the Launchcast system was set up, the user was really able to specifically influence only a small number of songs that were played in his or her stream. The vast majority of the songs were selected by Launchcast and would be of the same genre as the listener's preferences, but what the songs would be was not at all predictable. Finding that the user thus had no predictability in the entirety of the program that was transmitted, the Court found that the streams would not significantly substitute for the purchase of specific music, and thus should not be considered interactive in the meaning that Congress intended.

The decision is very interesting in the depth of its specific analysis of the methodology for the formation of a playlist by Launchcast, and in its examples of music references sprinkled throughout (references to U2's Joshua Tree CD, to Gordon Lightfoot and the Beatles, and to “‘special requests’ [on AM radio which] represented love-struck adolescents’ attempts to communicate their feelings to that ‘special friend.’” The judges also candidly acknowledge that they are “appointed for life” and thus have varying degrees of familiarity with the technology which they are discussing.

What is the impact of the case? It undoubtedly helps solidify the position long taken by webcasters that some degree of user influence is permissible by a service that relies on the statutory license for noninteractive webcasting.  However, the decision was very fact dependent, with few clear boundaries as to what percentage of a stream can be user influenced and what degree that influence can be exercised to remain within the statutory license. Moreover, this is the decision of a single Court of Appeals – albeit an important one sitting in New York, covering the Northeast, and very active on copyright issues. But other cases in other circuits would not be bound by this decision, though they will no doubt find it to be instructive.  But, with other facts, any court might not reach the same decision. Thus, the question of which streams are interactive requiring that a service get a negotiated license from each copyright holder to perform the sound recordings, and which are noninteractive and can be streamed simply by paying SoundExchange the statutory royalty (and I say “simply” with a grain of salt given the multiplicity of options for paying the statutory royalty), will no doubt not be put to rest by this one decision. 

Also, this rate covers only these three Internet services, and only covers ASCAP.  Of course, the decision may be instructive as to the rates that would apply to other similar companies (and potentially for BMI rates in the future, as they also are subject to a consent decree - though SESAC is not).  However, most Internet companies, especially smaller companies that cannot afford expensive rate court litigation, are paying royalties under the "experimental licenses" that ASCAP posted on its website (and which have rates somewhat lower than the decision here for non-interactive services, and somewhat higher for interactive services), and should not, for the time-being, be affected by this decision. 

While this decision involves a different right than does the CRB decision for somewhat different types of services, the rights are similar, yet the approaches taken by the Court here and the CRB in the setting the sound recording royalty were quite different.  For instance, one of the criticisms of the CRB decision, especially by the small webcasters that I represented in the proceeding, was that the CRB refused to adopt a percentage of revenue royalty, finding it difficult to compute what revenue was to be included as being subject to the royalty and because it did not represent a payment for all of the music used.  The CRB found that a per performance (e.g. per song, per listener) rate was more appropriate as it insured a fair return to the copyright holder in the sound recording even by a service that did not maximize its revenue.  Under a percentage of revenue royalty, the CRB determined, there might be minimal payments for the use of music.  Here, however, the Court found almost exactly the opposite,  concluding that a percentage of revenue rate appropriate for the following reasons:

• It was economically efficient, as it did not provide any disincentive to a service not to use music as might be the case for a royalty that demanded a per performance fee
• It adapts to changing conditions, as it will collect more when a service makes more revenue and less when a service has hard economic times, thus taking into account changing economic and competitive conditions, variations in financial fortunes and changes in technology and other unforeseen changes in the circumstances of the services that may occur over time
• Revenues were simple to verify as information about total revenues were routinely collected by a service
• That these royalties provided the kinds of efficiencies expected for a blanket license - easy administration, that covered all rights to all the music represented by ASCAP, and gave the service certainty as to its music costs so that it did not need to take royalties into account in deciding how to introduce any new aspect of its service

By contract, the new CRB rates require many services to pay based on performances, a metric that many services don't currently track, and which many may not be able to accurately count (see our post here).  The CRB royalties also are such that they the webcaster must carefully consider them in making any decision as to whether or not to launch any new service as, if that service attracts listeners but not revenue, the service could owe significant fees without having earned the revenue to pay for the music use.  The per performance royalty does not adjust to changing economic conditions, either, as it remains at the level set by the CRB, regardless of the ability of the service to monetize the use of music or changing economic and competitive conditions.  In effect, the per performance royalty does not encourage the use of music, as evidenced by many of the larger services that are reportedly limiting their listening or (as in the case of AOL), getting out of the Internet radio industry entirely (see our post here).

The Court in the ASCAP case stated that deciding the marketplace value of music under a blanket license like the one at issue here is a difficult process, as there really are few if any real examples of what a willing buyer and willing seller would agree to.  The existence of the blanket license and the threat of a rate court proceeding itself distorts the market, and contributes to results of any voluntary deal that is negotiated for similar rights.  And the consideration of benchmark royalties negotiated for other services (a number of which were considered here) all have some differences with the situation at hand, meaning that some sort of inexact and hypothetical adjustment must be done to use the benchmark to determine the rate applicable in the pending case.  Regardless of whether or not one thinks that the decision reached in this case was the correct one, the considerations that went into reaching the rate are ones that might be instructive for future cases involving the CRB's decision on the sound recording royalty.