CMU Trends Labels & Publishers Legal

Trends: A matter of consent – why American publishers are talking about collective licensing rules

By | Published on Monday 4 July 2016

US Department Of Justice

Last week the American collecting societies BMI and ASCAP met with the US Department Of Justice to discuss the ongoing review of the consent decrees. It’s fair to say that the news they received was not welcomed by the music community. But what are the consent decrees anyway? Why were they being reviewed? What was the outcome the music publishers wanted? And what is the outcome they are going to get? CMU Trends reviews the basics before outlining the latest developments.

THE REGULATION OF COLLECTIVE LICENSING
Music rights make money when third parties want to exploit the controls that come with copyright – so they want to copy, distribute, rent out, adapt, perform or communicate a song or recording. The copyright owner can either make a copy of their work for the third party, or give that third party permission to copy, distribute, rent, adapt, perform or communicate. That permission-giving is licensing.

When music rights owners license, they can choose to do so directly or collectively. In the former, the rights owner and the licensee agree a bespoke deal, money (usually) changes hands, and the third party can then make use of the song or recording in whatever way they requested.

In the latter, all the artists and labels, or all the songwriters and publishers – more or less – put their rights into one pot and appoint a central organisation – often called a collecting society, collective management organisation (CMO) or performing rights organisation (PRO) – to do the deals with licensees on behalf of the sector at large.

Sometimes copyright law forces rights owners to license collectively via a compulsory licence: a specific scenario where labels or publishers are obliged to license, usually at a statutory or court-set rate. Other times rights owners choose to license collectively, often where you have a set of licensees which uses a lot of music but has relatively limited monies to share, or where direct licensing would be impractical or costly to implement. Or both.

Copyright law generally approves of collective licensing and, indeed, as already mentioned, sometimes forces it onto rights owners. But competition law doesn’t like collective licensing at all, because all rights owners licensing as one sounds a bit like a monopoly. To this end, in many countries copyright law sets out extra rules and regulations for whenever collective licensing occurs, which can include a special court being empowered to set the rates if and when collecting societies and licensees can’t agree on terms.

In the US – as is often the way – things work slightly differently. For starters there are four collecting societies all representing the performing rights in songs, whereas in most other countries there is just one. American songwriters therefore must choose which society to join, and licensees wishing to use the entire song repertoire need licences from all four societies.

Only two of those societies are directly regulated – the big two, ASCAP and BMI – and that regulation comes from bespoke agreements reached in the dim and distant past between the societies and the US Department Of Justice. These are the ‘consent decrees’.

REFORMING THE CONSENT DECREES
The music publishers in the US have long complained that various elements of the BMI and ASCAP consent decrees are becoming problematic in the digital age. The biggest complaint relates to partial withdrawal.

This particular complaint came to ahead in the music industry’s battle for better royalties from Pandora. Until recently, the American personalised radio service mainly licensed the recording rights in the tracks it streams via the SoundExchange-administered compulsory licence, and the accompanying publishing rights via BMI and ASCAP.

For a number of years Pandora invested a lot of energy into trying to get the royalties it pays under the collective licensing system down, lobbying the Copyright Royalty Board that sets the SoundExchange rates, and presenting arguments in the rate courts that ultimately rule on BMI and ASCAP licences.

In the latter domain, Pandora enjoyed some success. So much so, the major music publishers announced plans to pull their digital rights from the collective licensing system to force digital services – Pandora in particular – into direct deals that wouldn’t be at the whim of the rate court judges, a move that would almost certainly result in better royalties for the publishers and songwriters.

The big five publishers in Europe were already licensing digital services directly – albeit in partnership with the collecting societies – but in a way that took the deal making out of the collective licensing system. With the American divisions of the same publishers seeking to do likewise, Pandora actually started negotiating direct deals with some of the majors.

At the same time, Pandora execs – who were still in something of a fighting mood when it came to keeping royalty payments down – went to the aforementioned rate courts to argue that the consent decrees actually said that the publishers couldn’t force digital services into direct deals in this way, because the rule book said that rights owners were either “all in” or “all out” when it came to collective licensing.

The rate court judges ultimately agreed with that interpretation of the consent decrees. Partial withdrawal was not allowed. The big publishers couldn’t just pull their digital rights from the collective licensing system Stateside. The only way to force Pandora into direct deals would be to pull from the collecting societies entirely.

Nobody really wants to go that route, because it would mean the publishers would have to license directly all the radio stations, venues, cafes and bars which currently pay performing right royalties via BMI and ASCAP, which would be a major administrative headache.

Some lawyers also pointed out that the publishers can’t just unilaterally pull all the song rights they represent out of the collective anyway. For starters, by convention the performing rights of non-US repertoire belong to the societies not the publishers, which is why the direct licensing of digital in Europe still involves the likes of PRS. And even with US repertoire, there is debate over whether the wording of songwriter contracts allows publishers to just pull from the collective licensing system on a whim.

Nevertheless, Sony/ATV chief Marty Bandier heavily implied at one point that he might consider complete withdrawal in order to gain more control over digital licensing, presumably assuming his songwriters would support such a move to secure better streaming royalties. But then the Department Of Justice announced plans to review the consent decrees, which gave the publishers hope that the rate court’s ruling on partial withdrawal might be a mere temporary set back.

As the review got underway, the publishers requested various changes to the consent decrees – all required to bring the ageing regulations up to date, the music rights owners argued – though partial withdrawal was at the top of the wish list.

100% LICENSING
It felt like the publishers started the consent decree review in an optimistic mood, pleased that they had a formal opportunity to call for an overhaul of the collecting society regulations that they were finding increasingly frustrating. And, possibly, to take digital licensing out of the collective and demand higher streaming rates, as had generally been achieved by direct deals in Europe.

But then that optimism started to wane, not least because the Department Of Justice revealed that at the top of its agenda was a proposal from some on the licensee side of the review that the collecting societies should be forced into 100% licensing.

Because songwriting is often a collaborative process, it’s very common for song copyrights to be co-owned by multiple parties, whether they be songwriters, publishers or societies. In most countries, copyright law says that if you want to license a co-owned song you must do separate deals with each and every rights owner, any one of which can say “no”.

This is called fractional licensing, and it makes the collective licensing system a more attractive option for licensees, because – with just one collecting society representing the performing rights in songs in most countries – that one organisation can usually provide one-stop licences for co-owned works, without the problem of one co-owner potentially not agreeing to do the deal.

So a radio station – licensed through the collective – doesn’t need to worry about there being multiple owners of one song, whereas an ad agency looking to do a sync – where the sync bit of the deal is not done through the collective – must identify and successfully negotiate a deal with each and every rights owner.

However, US copyright law is different in this regard. It says that any one co-owner in a work can do a licensing deal on behalf of all their fellow co-owners, providing they then share any income with the other stakeholders pro-rata based on each party’s respective share of the copyright. This process is called 100% or whole licensing.

That process still requires at least one co-owner to do the deal, and in the main US songwriters and publishers are wary of 100% licensing, with many having agreements with their collaborators that say they won’t do deals in this way. So in the American sync market – while in theory music supervisors could secure songs by doing a deal with just one co-owner – that deal is rarely on offer, and separate arrangements with each stakeholder in the copyright are required.

But what about collective licensing? In the past it has been widely assumed – certainly by the music industry – that 100% licensing doesn’t apply. So if a licensee has an ASCAP license, any songs in that society’s repertoire that were co-written by a songwriter allied to BMI – or one of the smaller societies, like SESAC and Global Music Rights – cannot be utilised without a licence from that other society.

Not everyone agrees with that viewpoint, and half way into its big consent decree review the Department Of Justice revealed that this was a question it intended to tackle.

Perhaps 100% licensing did apply to collective licensing, meaning a licensee with an ASCAP licence could in fact utilise every song in that society’s catalogue, oblivious of whether BMI, SESAC or GMR members were involved in any one song’s creation. ASCAP just had to know that – if it received 100% of the royalties due on a song it doesn’t control outright – it had to share the income with the other societies.

This might be particularly useful for licensees today, as some key songwriters choose to take their songs to the two smaller societies, SESAC and GMR, which – while potentially subject to anti-trust action in the courts – are not regulated by the consent decrees. Songwriters allied to SESAC and GMR in theory have more flexibility. But if – through 100% licensing – licences from the bigger societies still apply on songs where any co-writers are BMI and ASCAP members, that flexibility may be less useful.

THE DOJ’S TAKE
Last week the Department Of Justice confirmed the US music publishing sector’s worst fears, which is that the anti-trust division there isn’t convinced that any changes are necessary to the consent decrees – which means partial withdrawal won’t be allowed – but that on the 100% licensing front, the DoJ will rule that the consent decrees do oblige the societies to start operating on that basis in the future.

Or in the words of ASCAP boss Beth Matthews: “This week, ASCAP and BMI met jointly with the US Department Of Justice Antitrust Division to hear the government’s proposal regarding our respective consent decrees. The DoJ is recommending no updates to the consent decrees at this time and, instead, the DoJ believes that the consent decrees currently require that ASCAP and BMI license all songs in our respective repertories on a 100% basis, ending the long-standing industry practice of fractional share licensing”.

THE MUSIC INDUSTRY’S RESPONSE
Needless to say, the music publishers are not pleased with this turn of events, with one unnamed exec telling Billboard that “this decision will create a clusterfuck of epic proportions for the US music publishing industry”.

The aforementioned Sony/ATV chief Marty Bandier, meanwhile, told reporters that: “We are incredibly disappointed by the unjust way the department has decided to interpret the consent decrees. Its decision is going to cause a tremendous amount of uncertainty and chaos in a market place that has worked well for years”.

Adding that “the decision raises more questions than answers”, Bandier concluded that a forced move to 100% licensing would “adversely impact everyone in the licensing process, including PROs, licensees, music publishers and most of all songwriters who can ill afford to hire lawyers to figure out their rights under this inexplicable ruling”.

ASCAP’s Beth Matthews continued: “All of us at ASCAP are deeply disappointed by the DoJ’s proposal – especially given that thousands of ASCAP members wrote to the DoJ expressing serious concerns about 100% licensing and how it would impact songwriters’ livelihoods and creative freedom. The US Copyright Office and numerous members of Congress voiced their opposition to 100% licensing as well”.

While her counterpart at BMI, Mike O’Neil, said: “We are disappointed with the DoJ’s recommendation, which after years of hard work and discussion brings us no closer to much-needed consent decree reform than when we started”.

THE OTHER SIDE OF THE DEBATE
Many licensees, however, will welcome the DoJ’s conclusion. Entertainment lawyer Paul M Fakler at Arent Fox LLP has represented various broadcasters over the years, and therefore sees the debate from their side.

He argues that the DoJ ruling isn’t – in fact – a radical departure from past practice, but simply confirmation that 100% licensing has always been the default position in the US collective licensing system. He told CMU: “As various licensees demonstrated in their submissions on this issue, the language of the consent decrees, the language of the licences granted by the PROs, the PROs’ agreements with songwriters and music publishers, and the PROs’ internal operating documents all provide for whole licensing, and are inconsistent with fractional licensing”.

He goes on: “The publishers, in their written submission and public relations activities, incredibly took the position that fractional licensing had always been the industry practice and that any recognition of a whole licensing requirement would constitute a change to both industry practice and the consent decrees. This is simply false on both counts. The licensees had merely been requesting a clarifying confirmation that the consent decrees have always required whole licensing”.

As for the DoJ’s rejection of partial withdrawal, Fakler says: “The only reason the publishers wanted it was so they could keep the benefits they get from using the PROs for certain types of licensing, while discriminating against certain types of licensees – ie digital music services – by forcing those services to license without the protection of the rate courts or other protections of the consent decrees. All of the licensees that submitted comments – including those who would not be directly affected – agreed that this would have been a terrible idea”.

He adds: “What the publishers do not seem to understand is that everyone benefits overall from a healthy music ecosystem, and anything that would destabilise an entire section of that ecosystem is bad for everyone. Fortunately, the DoJ seems to have understood that partial withdrawal would have had significant anti-competitive effects and would have weakened the ecosystem. In doing so, it is saving the publishers from themselves”.

WHAT NEXT?
The review process is not completely at an end just yet. BMI and ASCAP could opt to fight the DoJ on this one, plus the findings of the review must also be approved by the rate courts, where the publishers may have another opportunity to present their arguments, especially on 100% licensing.

Says Beth Matthews back at ASCAP, in a letter to her members: “We want you to know that while the DoJ has expressed their views, this is not the final outcome of this process. ASCAP strongly disagrees with the DoJ’s position, and we are carefully considering all of our options, including potential legislative and legal remedies. We know that you may have questions and concerns and we hope to have more answers and clarity to share in the coming weeks as we work through this process with the DoJ”.

Ironically, since all this kicked off, Pandora has voluntarily entered into direct deals with some of the big publishers, because in the US the societies don’t enjoy exclusivity over the performing rights they represent, meaning that while the publishers are obliged to offer digital platforms licences via the collective system, the platforms can choose to circumvent that system if they so wish.

This means that the big publishers may get the direct digital deals they desired anyway, while the consent decree review they initially welcomed forces a new obligation onto the societies that few in the music community wanted.



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