The Copyright Office this past week released its Report following its study of music licensing in the US; a comprehensive report addressing a number of very controversial issues concerning music rights and royalties.  Whether its release during the week of the Grammy Awards was a coincidence or not, the report itself, which takes positions on many issues, is sure to initiate lots of discussion and controversy of its own.  The report was issued after two rounds of comments (the questions that were asked in each request for comments are detailed in our stories here and here) and three roundtables held in three different cities where representatives of music companies provided ideas on the questions asked (I participated in the Nashville session).  As detailed below, the report addresses some of the hot button issues in the music royalty space including the broadcast performance royalty, publisher withdrawals from ASCAP and BMI (see our article here), and pre-1972 sound recordings.

Before getting into the details of the proposals, it is important to note that the Copyright Office, unlike many other government agencies, does not itself make substantive rules.  Instead, it merely makes recommendations.  For any of the substantive proposals that it suggests in the Report to become law, Congress must act – which is never easy.  In the Copyright world, it is particularly difficult, as the rules and industry practices are so complex and often obscure, and where any change can have a very dramatic effect on some industry player or another.  Often, a simple change in the rules can take money from someone’s pocket and deposit into someone else’s.  Moreover, copyright is not an area where there are clear partisan divides.  Oftentimes, it matters more where a Congressman’s home district is than his or her party affiliation in their leanings on copyright matters.

So, while the recommendations of this report have already received much play in the trade press, these reports often don’t mention that quite often, Copyright Office reports go nowhere. Even when they lead to reform, the final legislation often ends up being dramatically different from what was initially recommended.  In the music area, the Copyright Office has in the not-too distant past released reports on issues including pre-1972 sound recordings, the Section 115 process for determining “mechanical” royalties, and orphan works, none of which have resulted in legislation.  This year may be different as the House Judiciary Committee chairman last year indicated his intention of tackling comprehensive copyright reform.  He proposed a “Music Bus” comprehensive bill addressing music issues, and also held hearings on other aspects of copyright law.  But how quickly any final bill takes shape and makes its way through the Congressional processes, and whether the suggestions from this report make it into any final legislation, remains to be seen.

But we should still review the details of the report, as it will certainly play an important role in jumpstarting the conversation.  So let’s look at some of the specific proposals it makes:

  • Broadcast Performance Royalty/Platform Parity – Not surprisingly, the Report suggests that broadcasters should start to pay a performance royalty for their use of sound recordings.  While this suggestion has made headlines in much of the broadcast trade press, I say that it is not surprising as this suggestion has been made by the Copyright Office for decades (see, e.g. our article on a speech by the current head of the Copyright Office soon after she assumed her position).  In the Report, the Office suggests that broadcasters should be covered by a sound recording performance royalty as all digital music provides that offer a similar service should pay a similar amount for their music royalties (see our article on “platform parity” hearings in Congress several years ago, here).  The Report also repeats the argument made by recording industry representatives that there are significant overseas sound recording performance royalties that are never paid to US artists as we don’t have a royalty here.  The Report dismisses the NAB’s statement that, in fact, many of these overseas royalties are actually collected on behalf of US artists by affiliated record companies in those countries – not because it was inaccurate, but because the Report says that “no evidence” of such collections was presented, even though the report was not generated by any evidentiary process.  In any event, this issue will no doubt continue to be contentious in any reform legislation.
  • Rate Setting Standards – The Report favors a marketplace-based standard for setting royalty rates, suggesting that the 801(b) standard (which has been used by the Copyright Royalty Board for determining satellite radio royalties and for assessing the rates that record companies pay to composers under Section 115 for mechanical royalties) depresses the rates that copyright owners receive. The Report suggests that royalty rates set in compulsory licensing proceedings should replicate what would be paid in a marketplace transaction for music rights, and the rate-setting authorities should use appropriate benchmarks to establish what that would be.  As we have written before (e.g. here and here), the 801(b) standard, while looking to provide a fair return to copyright owners, also looks to the public benefits of the distribution of music and the stability of relevant industries who pay royalties.  The report thus emphasizes the aspect of copyright law which looks to protect the rights of creators, and deemphasizes the objective that looks to encourage the dissemination of such works to the public by eliminating the factors that encourage royalties that don’t destabilize relevant industries
  • Compulsory Licenses for Noninteractive Services – The Report suggests that noninteractive music services that pay under the Section 114 license for the rights to publically perform sound recordings should also have a compulsory license for the public performance of the “musical work” (also referred to as the musical composition – the words and musical notes of any song, as opposed to the actual recording by a specific artist).  These rights are currently administered by ASCAP, BMI and SESAC, which provide blanket licenses that effective cover virtually all musical compositions in much the same way that a statutory license works.  But there has been much recent discussion about allowing publishers to withdraw their works from these PROs to directly license (at presumably higher rates) their works to digital services, which would give such publishers the ability to withhold works from certain services.  So this suggestion in the Report would keep rights to all musical compositions available to be licensed through collectives for noninteractive services.  While the Report suggests a statutory license for noninteractive uses of the musical compositions, it does support publisher withdrawals to negotiate higher rates with interactive services – just as interactive services must currently directly license the public performance rights for sound recordings (see our article here).
  • Consolidate all rate-setting in the Copyright Royalty Board – In what is, I think, an unexpected proposal, the Report suggests that all rate setting, including that for the suggested statutory license for musical compositions, be held before the Copyright Royalty Board.  Musical composition rates are currently set by US District Court judges in the Southern District of New York. These judges administer the antitrust consent decrees under which ASCAP and BMI operate, which has involved them in rate setting for decades longer than the CRB has even existed.  But the Report suggests that antitrust issues be separated from rate-setting, and that the rate-setting all be done by the CRB, where the CRB can relate the sound recording performance royalty to those for the musical works.
    • It was suggested that the rates paid for musical works be closer to those that are paid for sound recordings (where, in the digital world, sound recording rates are multiples of the composition rates).  There even seems to be some recognition that this might entail a reduction in the sound recording rates, as services may not be able to afford an increase in the musical works rates on top of what most services believe are already very high sound recording rates that make it difficult if not impossible for services to make consistent profits.  See our article on this issue here.
    • A suggestion was also made that CRB proceedings should be on an as-needed basis, rather than the standard 5 year schedule. It was suggested that this would allow for more stability in licensing, with proceedings only arising when parties felt that the old rates no longer made sense.
    • It was also suggested, based on an RIAA proposal, that the CRB look at different rates for “custom” Internet radio and rates charged to totally non-interactive Internet radio.  The argument is that custom radio is more of a substitution for buying music, and thus has a larger impact on record industry sales. 
    • The Report recognized that the CRB already has the rights to set different rates for different types of services, but it has not done so in the past. The Report also suggested that the CRB be given the right to change the “performance complement” and other restrictions on the use of music by noninteractive services (e.g. the limitation on preannouncing when a song will play or the limits on how many songs by the same artist can be played in a given period of time).  Those requirements are set by statute, and thus effectively cannot be amended, changed or waived by SoundExchange or the CRB.  Only copyright holders themselves can waive these rights under current law (see our article here on the performance complement and certain waivers that the NAB was able to negotiate with certain record labels).
  • Separate Comprehensive Proceeding for Noncommercial Entities – In response to comments of several nonprofit music user groups, the Report suggests that rates for noncommercial entities for musical works, sound recordings, and reproductions for all platforms (broadcast and digital) all be determined in a CRB proceeding separate from the proceedings that determine the rates for commercial entities.  Currently, noncommercial broadcast performance rights for musical compositions are set by negotiation (or by the CRB in a separate proceeding if no deal can be reached).  But all digital rights to sound recordings are part of the same process as for commercial webcasters, and the digital rights for musical compositions are left up to the normal process for commercial entities, which could theoretically end up in a rate court proceeding in District Court if no voluntary agreements could be reached.
  • Bring Pre-1972 Sound Recordings Under Federal Law – The Report suggests that pre-1972 sound recordings should be fully brought under Federal law, to eliminate the issues that have arisen in state law contexts (see our articles here and here, and our article on the similar recommendation made by the Copyright Office three years ago).  This suggestion goes beyond what the recording industry had suggested last year (Federalizing only the performance rights), and would include DMCA safe-harbor coverage in connection with user-generated content (where there have been some court decisions questioning if pre-1972 sound recordings are covered under the safe-harbor provisions of the law).
  • Blanket Licensing with Opt-Out for Mechanical Royalties – The report suggests that there continue to be Section 115 licensing for the reproduction rights for the musical compositions, but it would allow particular composers to opt-out of the system.  That would mean that big name composers could decide not to allow cover versions of the songs that they have written without a specific negotiation with the writer (or his or her publisher).  For those publishers who remain covered by Section 115, the Report suggests establishing a blanket licensing system, where digital services can get rights for all the songs licensed by a particular organization in one transaction, rather than licensing them on a song-by-song basis.
  • Joint Licensing of the Public Performance and Mechanical Licenses – The Report suggests allowing ASCAP and BMI, and any other organization that license music, to license both the mechanical and public performance rights in musical works.  Currently, the antitrust consent decrees prevent ASCAP and BMI from licensing anything but the public performance rights.  The Copyright Office suggests that licensing both public performance and mechanical rights would simplify the licensing process for digital music services.

These are just some of the many recommendations and suggestions made in the Copyright Office Report.  As we have written, we will no doubt see many more developments on these issues in the coming year, as the DOJ concludes its review of the ASCAP and BMI consent decrees, as Congress continues its review of the Copyright Laws, and as various court cases play out.  But the Report tees up many issues for consideration.  So now, let the debate begin!