In one of those year-end decisions that got lost in the holiday rush, in late November, the Copyright Royalty Board issued its final ruling on the rates to be paid to SoundExchange by “business establishment services” for the ephemeral copies of sound recordings when these music services transmit programming to their customers. We wrote about the CRB’s proposal to adopt these rules in May of last year, and our comments on the decision remain relevant to explaining this order. A slightly revised version of our May post follows.

While Copyright Royalty Board decisions on royalties for webcasters, Sirius XM and mechanical royalties get most of the attention, the CRB also sets rates paid by “business establishment services” for the “ephemeral copies” made in their music businesses. Business establishment services are the companies that provide music to businesses to play in retail stores, restaurants and other commercial establishments. These services have come a long way from the elevator music that once was so derided – and now set the mood in all sorts of businesses with formats as varied as the commercial businesses themselves.  While the rates paid by these services pay for music rights is a little off-topic for this blog, these rates are a bit unusual, so they are worth mentioning.  The Copyright Royalty Board in May announced a proposed settlement between the services that were participating in the CRB case and SoundExchange which will raise the rates gradually from the current 12.5% of revenue to 13.5% over the next 5 years, with a minimum annual fee of $20,000, up from $10,000. These rates, which apply to any company that does not negotiate direct royalties with the sound recording copyright holders, went into effect on January 1, 2019 and will be in place through 2023.

We have written about the rates paid by these services before (see for instance our articles here, here and here).  What makes them unusual is that the royalties are not paid to SoundExchange for the public performance of sound recordings, as are the royalties paid by other digital music services including webcasters (here and here) or Sirius XM.  That is because, in adopting Section 114 of the Copyright Act, Congress did not want to impose on businesses a new performance right, as there is no general public performance right in sound recordings in the United States.  Businesses and other services that do not digitally transmit performances of audio recordings have no obligation to pay copyright holders in the sound recordings (usually the record companies) or artists for the public performance of music.  Users do, however, pay fees for the public performance of the underlying composition through ASCAP, BMI and SESAC and GMR.  As we wrote here, the Register of Copyrights has in the past suggested that a general public performance right in sound recordings should be paid in the United States. But that would impose new fees on all businesses that use recorded music in the US, from stadiums playing “We Will Rock You” at the appropriate point in a big game, to DJs spinning their discs in nightclubs, to the trendy tunes playing in the hip clothing retail stores, to over-the-air radio. This proposal is therefore very controversial.  So, if they are not paying public performance fees, why do background music services have to pay SoundExchange?

Payments are made for the “ephemeral copies” made by these services, and paid under Section 112 of the Copyright Act.  Ephemeral copies are those copies made in the digital transmission process – everything from the server copies that the music services make in their music storage systems when they put the programming together to the copies made elsewhere on the Internet as these tunes make their way to the ultimate user.  If a retailer just wanted to play CDs in its stores, there would be no SoundExchange liability as there would be no ephemeral copies (though, except where very limited uses of music are made pursuant to very strictly defined exceptions under the Copyright Act, there would still be an obligation to pay ASCAP, BMI and SESAC and GMR for the performance of their musical works i.e. the underlying lyrics and music of a song – see our article here).  But the digital transmission makes the difference and requires that the companies providing these digital music services pay these business establishment license fees.

The rates themselves are interesting, in that they are so high for the making of copies that are essentially transitory.  As we have written before, there are debates as to whether these ephemeral copies really have any independent value at all.  In connection with royalties for other digital music services, they are in effect treated as part of the performance royalty, and are usually just a percentage (under 10%) of that royalty.  But, in connection with the Business Establishment Service, where they are the entire royalty, the rate is 12.5%-13.5% of the entire revenue of the business – presumably just a way of getting a performance royalty by a different name. These rates have all been set through settlements between the parties – presumably as the parties don’t want to face the huge costs of litigating for an uncertain outcome, so these theoretical issues have never been tested.

So business establishment services – those music services digitally providing music to commercial establishments to use in their businesses, need to be aware of the new royalties and the higher fees that kicked in on January 1, 2019.