Broadcast Law Blog : Broadcast Lawyer & Attorney : Davis Wright Tremaine Law Firm : Broadcast Law Blog : Seattle, Los Angeles, Washington D.C., New York, San Francisco, Shanghai

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. 

The CRB did note that there is still the need for some approximation for certain services that pay the royalties.  For instance, as satellite radio (Sirius XM) and digital cable radio do not have the technology to compute how many listeners are listening to every song, they have to come up with some proxies for that number based on how often the song was played.  In the Internet radio world, small webcasters already had agreed to census reporting in the Small Webcasters Settlement Act, and the requirement was carried forward under the unilateral deal extended by SoundExchange to some small webcasters last year (see our article here).  Large webcasters agreed to this reporting as part of their deal to limit the minimum fees which would have otherwise been due under the CRB decision (see our summary here). 

Where this change is likely to have the most impact is in connection with the operations of broadcasters who also stream their programs on the Internet.  Noncommercial broadcasters, such as college radio stations, have repeatedly complained that their small staffs to not have the ability to maintain these electronic records, especially where the stations are volunteer-programmed by DJs who select their own music on the spot.  Some of the most creative and eclectic of broadcasters may have the most problem with this rule.  Commercial broadcasters have also had difficulty with the reporting requirements, especially when dealing with syndicated programming, where the syndicator does not provide the necessary information about the recordings that it includes in its programming to the stations that carry such programs.  Some of the current systems used for paying the royalties have had difficulty tracking the number of "performances" (songs played times the listeners to each song) played by broadcasters using syndicated programming, and these problems will only be magnified by the adoption of this proposal.

Parties that will be impacted by this proposal should start gathering their information now, and be prepared to file comments on the proposed increase in reporting information by the January 29 deadline.  If there are improvements that can be made in the system, now is the time to ask. 

If this stratagem were to succeed, there may be an impact far beyond this particular game. In any decision of the Copyright Royalty Board as to the value of music in assessing what a willing buyer and a willing seller would agree to in a marketplace, the Board has always assumed that there would be some agreed upon value of music, as interactive or on-demand providers of music, such as video game makers, have traditionally paid for the use of the music they feature. Were this paradigm to change, music services could well argue that Internet radio and other services that are subject to the royalty should pay little or nothing for that royalty given the promotional value that they deliver. Of course, part of any such analysis would be proof. In the case of Guitar Hero, which features a limited selection of music, Activision can show that the sale of the featured music climbs coincident with a new release of a version of the game that features that music. Internet radio, on the other hand, which features a wide variety of music over a prolonged period, music that may also be featured on other services, has a harder time demonstrating the direct connection between airplay and music sales. But tests could be conducted (see RAIN’s proposal for the Three Dog Night test, here). It may very well benefit companies to conduct such tests before the next CRB proceeding, scheduled to begin next year.