As we wrote in our previous articles on the music licensing issues being considered during this summer of copyright (here, here and here), one of the concerns driving many of the proposed reforms is the current demand of songwriters and publishing companies for a larger share of the music royalty pie.  In licensing the public performance of musical compositions, ASCAP and BMI represent the vast majority of songwriters, with SESAC representing far fewer writers (together ASCAP, BMI and SESAC are referred to as the “PROs,” the performing rights organizations).  ASCAP and BMI, having such a significant representation of musical compositions, have for over 50 years been subject to antitrust Consent Decrees that limit their operations and oversee the rates that they set for the use of their music.  Among the many requirements under the consent decree are those that obligate ASCAP and BMI to license all users of music who are similarly situated under the same rates and standards, and the oversight of a “rate court” to determine whether rates are reasonable whenever either of the PROs can’t agree on the amount of those rates with a class of music users.  In June, the US Department of Justice asked for public comment on several aspects of the consent decrees, and whether modifications of the decrees were called for.  Comments on the DOJ notice are due today.  Why was this proceeding started, and what is the DOJ looking at?

In two recent hearings examining music licensing, the motivations for ASCAP and BMI to seek changes in the consent decrees were discussed.  The first proceeding was a Copyright Office roundtable held in Nashville in June, in which I was a participant.  There, representatives of ASCAP discussed potential changes to the laws dealing with music licensing. The second was at the two part House Judiciary Committee hearing on music licensing held in late June.  ASCAP and BMI representatives in these forums suggested that there were several objectives in their seeking these reforms, and several specific changes that were requested in the Consent Decrees.  These include the following:

  • Replacing the rate court judges who determine rates when ASCAP or BMI don’t reach an agreement with a company that uses music (currently US Federal District Court Judges in the Southern District of NY) with an arbitration panel.
  • Instead of setting “reasonable rates” as required under the current consent decrees, the PROs request that a new standard be used to set rates – the willing buyer willing seller standard currently used in setting Internet radio sound recording performance royalty rates.
  • Allow publishers to withdraw some of their compositions from the PROs for licensing to certain classes of companies – specifically to withdraw so that the publishers can negotiate with digital media companies at rates that are not overseen by a rate court, while still leaving those same compositions with the PROs to collect from business establishment services (retail businesses that use “background” music) and potentially over the air radio stations – companies where there are lots of licensees who pay small amounts, making it difficult for anyone but a large, well-established company like ASCAP or BMI to pursue
  • Allow ASCAP and BMI to do more than simply license the public performance rights to music services – most likely allow them to provide reproduction and synch rights to the music that they license.
  • To impose interim royalties on any service that asks to be licensed, until an appropriate rate for that service can be set

What prompted this desire to change the consent decrees, and what will the DOJ be doing with the information it collects?

As we wrote in our earlier articles on this subject (here and here), music publishers and songwriters have been loudly complaining in recent months that their share of music royalties that are paid by digital services are inadequate.  This seems quite directly tied to the high royalties collected by the labels and performing artists from digital music services.  In many cases, the publishers are receiving one-tenth of the royalties of the sound recording rights holders.  This has prompted several large publishing companies to threaten to withdraw their catalogs from ASCAP and BMI to license that music directly to the music services.  In decisions last year in rate cases over the royalties to be paid by Pandora to ASCAP and BMI, two judges reached slightly different conclusions on the ability of these publishers to withdraw from ASCAP and BMI, but the practical effect of both decisions was to hold that the publishers could not withdraw piecemeal from the PROs – either they were in or they were out.  And now, at least one publisher has said that it is out – so that it can license its works without the overhang of the antitrust consent decrees.  On top of that, a new PRO is apparently in the process of formation, looking to license only “premium” songwriters. Pharrell Williams of “Happy” fame is reported to have withdrawn the catalog of songs that he wrote from ASCAP to allow this new PRO to license them.

As we have written before, such withdrawals pose all sorts of issues for music services.  Where a music service – whether it be a radio station or a music webcaster – needs to license the public performance rights for music, being able to license all the music that they need from a limited number of sources allows for incredible efficiencies in their operations – and effectively allows them to quickly add new music to their services.  If the service has to hunt for the organization that can license the public performance rights to a particular new song, it may be reluctant (or slow) to add that new song to its platform. 

Having a limited number of sources from which clearances have to be obtained, and having those sources governed by consent decrees, also eliminates issues that can arise when a rights organization can set fees for thousands of songs with no oversight.  Suddenly, services can find themselves forced to buy music that they don’t need in order to get music that they do need, or to effectively pay much higher rates for all music to get the rights to the music that they need.  And when rightsholders are not totally transparent with the music that is in their catalogs (and so far they have not been willing to stand by their online list of compositions that they represent), services must buy licenses from all for fear that, if they don’t buy a license from one rights organization, that rightsholder will have some song that is not listed in its catalog that the service will play, and potentially be liable for statutory damages (as high as $150,000 per infringement). 

TV broadcasters have pointed out these issues in their lawsuit against SESAC, the one big PRO that is not currently subject to antitrust consent oversight.  As TV broadcasters can’t choose the music that may show up in programming that they buy from syndicators and other program providers, they may face substantial liability if they play a piece of music licensed by a PRO from whom they have not received clearances.  So far, in response to preliminary motions to dismiss their case, the Courts have found that the TV broadcasters have stated a potentially good claim for antitrust relief against SESAC.  In a similar case brought by radio broadcasters, there has been a similar result.

So broadcasters as well as digital services have a significant stake in the outcome of the DOJ’s review of the antitrust consent decrees.  What questions is the DOJ asking?  Their request for comments, available here, asks:

  • Do the Consent Decrees continue to serve important competitive purposes today? Why or why not? Are there provisions that are no longer necessary to protect competition? Are there provisions that are ineffective in protecting competition?
  • What, if any, modifications to the Consent Decrees would enhance competition and efficiency?
  • Do differences between the two Consent Decrees adversely affect competition?
  • How easy or difficult is it to acquire in a useful format the contents of ASCAP’s or BMI’s repertory? How, if at all, does the current degree of repertory transparency impact competition? Are modifications of the transparency requirements in the Consent Decrees warranted, and if so, why?
  • Should the Consent Decrees be modified to allow rights holders to permit ASCAP or BMI to license their performance rights to some music users but not others? If such partial or limited grants of licensing rights to ASCAP and BMI are allowed, should there be limits on how such grants are structured?
  • Should the rate-making function currently performed by the rate court be changed to a system of mandatory arbitration? What procedures should be considered to expedite resolution of fee disputes? When should the payment of interim fees begin and how should they be set?
  • Should the Consent Decrees be modified to permit rights holders to grant ASCAP and BMI rights in addition to “rights of public performance”?

Obviously, the questions about rate-setting are ones sought by the PROs to see if they can find a forum more conducive to their arguments that the rates should be higher – rather than the US District Courts that have for so long overseen the rate-setting process.  It is interesting that the PROs seem to want an arbitration process when, in the past, the parties contesting the rates under the compulsory license for sound recordings objected to the high cost of arbitration, and had Congress establish a new government agency – the Copyright Royalty Board – to set rates to avoid those costs and to have a specialist in royalty matters that did not need to be re-educated each time a royalty dispute arose.

ASCAP and BMI also want the right to do more than simply license the public performance rights for musical compositions – looking to be able to license rights to sych right (e.g. when a song is used in a commercial or movie production) or rights to reproduction (the mechanical rights necessary for a download or an on-demand music service).  Having the ability to bundle these rights might make ASCAP and BMI more attractive to many publishers, and to many services looking for that one-stop shop for music rights.  But, giving these companies more control over music could be seen as an increase in their market power, necessitating the continuation and strengthening of the consent decrees.

The consent decrees also provide protections to songwriters – requiring that 50% of all royalties collected be paid directly to the songwriter (as opposed to the publishing company), and insuring that all songwriters are treated the same.  Big name songwriters are paid at the same rate as a new songwriter.  Some songwriters have also sought more transparency in the process of paying out the royalties, so there are additional issues that may be considered in this antitrust review.  For instance, many songwriters have asked why ASCAP and BMI keep reporting record revenues in recent years, but some songwriters complain that they don’t see the benefits of these new revenues.

There are obviously important and complicated issues that will be considered in this review.  Will anything happen at the end of the day? It seems that few think that the decrees will be terminated, and even ASCAP and BMI don’t seem to be seeking that.  But the degree to which they will be modified remains the big question – one to watch in the upcoming months as today’s comments are reviewed and digested by the DOJ.  At the end of the day, the DOJ will make its recommendations to the very Courts that the PROs seek to replace, as the Courts are the ones that oversee the administration of the Decrees.  It will no doubt be a long and contentious process – one that may also be affected by the proposed Congressional omnibus music licensing bill that we recently wrote about.  There is much to review, and much to consider – and all music services need to watch and stay involved as this process develops.