By David O. Hartman
The relationship between the creators of music and the businesses that use it for their com-mercial purposes has been contentious since the invention of recording devices and the establish-ment of broadcast companies in the early 1920s. Music-licensing rules that currently govern this relationship date from 1941 and with the advent of new technology, as well as the expanded com-mercial uses of music, it has needed full review for some time. In response to this need, the US Department of Justice (DOJ) announced on June 5, 2019, that it would be initiating a review of music licensing laws. This initiative is part of a broader initiative to examine old legal settlements, known as consent decrees, that affect several industries. This article will review some of the sig-nificant aspects of the existing consent decrees as they apply to music licensing, and look ahead to see what might be in store for this area of music licensing.
The DOJ entered into consent decrees with The American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI), the two most important performance rights organizations (PRO) in the US in 1941. PROs provide licenses to commercial enterprises such as restaurants, TV stations, and internet distributors to publicly perform musical works in a manner incidental to those enterprises’ principal lines of business. For example, to create a more pleasant dining environment, a restaurant may have music playing – perhaps from a local radio sta-tion. To legally do this without a blanket license, the restaurant would be required to obtain an indi-vidual license to “publicly perform” each piece of music that is broadcast by the radio station. This is, of course, virtually impossible. Instead, PROs issue blanket licenses as a way to work around these practical limitations.
Blanket and Fractional Licenses
A blanket license permits a PRO, for example, ASCAP, to license a user (in this case, the restaurant) to perform any or all of the songs within ASCAP’s repertory; over 10 million works in all, as many or as few times as they would like. The fees paid for a blanket license are calculated based on how the payee “performs” the music, not on how much of the music they perform. The blanket licenses that are granted make the process of obtaining music much more efficient; howev-er, because there is a single price paid regardless of the amount of music that is performed, it has been argued that blanket licensing has the effect of lessening competition. This, in turn, has given rise to the subject of initiating restraint of trade.
Based on the consent decrees signed with the DOJ, which sought to work around this re-straint of trade argument, PROs have engaged for the last 80 years in so-called fractional licensing. That is, they have licensed only the portion of a song represented by their members. Thus, if a song had two authors, and each belonged to a different PRO, each would be fractionally represent-ed in licensing by their PRO. Consequently, the DOJ brought antitrust lawsuits against ASCAP and BMI alleging that each organization had unlawfully exercised market dominance in violation of Section 1 of the Sherman Antitrust Act since they purported to represent works which were not under their complete licensing control. The purpose of the consent decrees was to limit the anti-competitive market power of the PROs while preserving the efficiencies of blanket licensing.
The most recent limited review of the ASCAP and BMI consent decrees was completed in August of 2016. The subject of this review was the status of how PROs handled the licensing of jointly owned works. On September 22, 2015, the Antitrust Division of the DOJ requested public comments; several groups representing artists, PROs, and users of licensed music responded.
DOJ Requests for Comments
ASCAP indicated their belief that the use of fractional share information was important to the efficiency of the marketplace negotiations between PROs and music users since it made the process of comparison of rights more transparent. They went on to say that this was the historical licensing practice of PROs in the US although this was not the way it was handled in other coun-tries. They added that if the big three PROs in the US (SESAC was the third) were to count full each song that their members had only a fractional interest in, then each PRO could make a claim to a much larger part of the market than it actually had and charge a higher license fee as a result. The result would be that music users would “double pay” for works that would be listed in multiple PROs because of split ownership.
In addition to the letter from ASCAP and its law firm, a large number of songwriters who were members of ASCAP (75 pages of members names times approximately 50 members per page or approximately 3,700 members) signed a letter in which they extolled the benefits of receiving fractional licensing of their songs. An additional letter from music heavyweights Burt Bacharach, Don Henley and Sir Elton John among others reiterated the need to retain fractional licensing .
In spite of a substantial outpouring of support as evidenced by the above letters, the DOJ saw fit to interpret the prior consent decrees as requiring the PROs to provide full-work licenses. Full work licensing means that a PRO may only grant rights to a musical work with multiple rights owners when each owner agrees . The previous understanding and method of operation of the PROs were that they would license only the portion of the musical work that they represented. DOJ indicated that it believed that “modifying the consent decree to permit fractional licensing would undermine the traditional role of the ASCAP and BMI licenses in protecting from unintend-ed copyright infringement liability and immediate access to the works in the organizations’ reperto-ries”.
The DOJ went on to say that fractional licensing would impair the functioning of the mar-ket for public performance licensing and potentially reduce the playing of music. The DOJ also made a point of describing a circumstance in which the music from a radio playing in a bar is effec-tively selected by others; a disc jockey for a radio station for instance, and that the bar owner can-not pre-clear the rights of public performance. The blanket license allowed the bar owner to per-form music without determining whether they had cleared the rights to the work. If a fractional licensing regime existed, it would leave the bar owner exposed to infringement liability since the PROs could only license their artists. Since a substantial number of songs these days have multi-ple writers represented by different PROs, only a full-work license will provide the coverage need-ed in a blanket license.
However, within a month of the DOJ’s statement, a federal judge had ruled against DOJ and for BMI in a case heard in the Southern District of New York in which the United States of America was sued by BMI. Judge Louis Stanton ruled on Sept. 16, 2016, that the original Con-sent Decree neither “barred fractional licensing nor required full-work licensing” . Judge Stan-ton’s opinion stated that “if the licenses were fractional, they would not provide immediate use of covered compositions; users would need to obtain additional licenses before using many of the covered compositions”. He went on to write that “such fractional licenses would not avoid the de-lay of additional negotiations, because users would need clear rights from additional owners of fractional interest in songs before performing the works in the ASCAP and BMI repertories”. In other words, a licensee of a song that has multiple co-writers, each represented by different PROs, would need to get all of the writers and copyright holders to agree to be licensed. This would be time-consuming and contribute to a greater cost and perhaps, if all the rights holders could not be timely contacted or agreed to the license, it would result in denial of the work’s monetary exploita-tion.
Not surprisingly, the contentious issue of fractional licensing did not go away. Indeed, in November 2016, the DOJ lodged a challenge with Second Circuit Court of Appeals in Springfield, MA. to Judge Stanton’s ruling .
In March of 2017, the Second Circuit Court ruled that BMI can collect for fractional licens-es and upheld the Southern District’s ruling. Broadcasters and the Justice Department had argued that the consent decree required blanket licenses, but the Court did not agree. BMI was delighted with the verdict; BMI President Mike O’Neill said, “We have said from the very beginning that BMI’s consent decree allowed for fractional licensing”. Under the current fractional licensing sys-tem, TV stations pay $150 million per year, and radio stations pay $350 million to songwriters and publishers, according to the National Association of Broadcasters.
This issue has continued to burn bright in certain quarters and has created interesting bed-fellows. Chief among them is the TV and Radio broadcasters (NAB), multi-family real estate in-dustry (NAA, NHMC), American Beverage Licensees, American Hotel & Lodging Association, National Restaurant Association, and the National Retail Federation, among others. These groups came to form the MIC Coalition to advance their primary agenda of reducing the royalties that their members pay to songwriters for use of their music. The NAA/NHMC members had a two-pronged wish list which included lower royalty payments since they felt they did not gain the eco-nomic value from the music that was proportional to the cost and absent new law, continuation of the consent decrees since they feared an unregulated system.
However, despite a general lack of interest by the industry and commercial users of music in terminating the consent decrees, in March of 2018 DOJ Assistant Attorney General (AAG) for the antitrust division Makan Delrahim indicated that his division would take a fresh and critical look at the consent decrees. Speaking at Vanderbilt Law School Mr. Delrahim indicated that a broad review of consent decrees was appropriate because of the changes in many industries and he singled out the ASCAP and BMI music licensing decrees as a good background on the issue.
Congress Weighs In
As the DOJ continued its push Congress also weighed in. In late April of 2018, the House of Representatives passed the Music Modernization Act, designed to create a blanket licensing sys-tem for music streaming services while providing compensation to artists and others involved in the production of recorded music. A similar legislative package was introduced in the Senate at about the same time. The MIC coalition said that the decrees shouldn’t be terminated until Congress can enact a legislative alternative.
The DOJ, seeking to settle the consent decree matter opened a formal review on June 5, 2019, of the consent decrees governing music-licensing rules with ASCAP and BMI. Antitrust chief Delrahim said it was important to determine whether the rules “… continue to serve the American consumer and whether they needed to be changed to achieve greater efficiency and en-hance competition in the light of innovations in the industry.” Public comment was originally invited to be made with a period closing on July 10, 2019, which was subsequently extended to August 9, 2019.
For its part, the music industry was quick to respond with leaders from ASCAP, BMI and the Recording Academy, all voicing support for the review; saying among other things that re-duced regulation would permit greater competition, and that the consent decrees hindered the crea-tivity of its artists. For its part, NAA/NHMC continued to seek stability concerning the consent decrees and lower royalty payments.
In a somewhat unusual event, AAG Makan Delrahim said on Sept. 13, 2019, that the con-sent decree review would likely be concluded before the end of the year . The DOJ had received 850 comments and AAG Delrahim indicated that they would need to review all of them before making their decision and this could extend into 2020. Once a decision is made it must still be ap-proved by both ASCAP and BMI rate courts in the Southern District of New York and this will add an unknown amount of time to the final settlement date. The Assistant Attorney General said that “nearly 600 decrees are now history” and hundreds are still being reviewed for termination.
Given the complex nature of the issue and the antagonistic positions regarding blanket li-censing held by the DOJ and industry participants, it would be surprising if this issue is anywhere near resolution. Absent the creation of new law that can settle the matter for the foreseeable future, it seems likely that there will be continued legal wrangling for the foreseeable future.
Steele, A. & Kendall, B., 2019
Statement of the Department of Justice, 2016
ASCAP Licensing Terms Defined, 2019
Public Comments of ASCAP, Regarding Pro Licensing Of Jointly Owned Works, 2015
Letter from ASCAP songwriters, 2015
Comments of Burt Bachrach, John Bettis et al., 2015
National Apartment Association HQ Organizational News, 2016
Statement of the Department of Justice, 2016
United States District Court Southern District of New York, 2016
Eggerton, J., March 16, 2018
Eggerton, J., March 28, 2018
Steele, A. & Kendall, B., 2019
DOJ Justice News, 2019
Hertweck, N., 2019
Christman, E., 2019