On September 17, Judge Denise Cote of the Southern District of New York—the Judge responsible for administering the American Society of Composers, Authors and Publishers (ASCAP) antitrust Consent Decree—determined that the Decree did not permit ASCAP to change its rules to allow publisher members to withdraw digital performing rights from the ASCAP repertory for the purpose of directly licensing digital music distribution services like Pandora Media at rates higher than those charged by ASCAP. This decision is likely to have implications for the digital music industry far beyond the facts of the proceeding, United States v ASCAP, 41 Civ. 1395 (DLC), In Re Petition of Pandora Media, Inc., 12 Civ. 8035 (DLC).

By way of background, both ASCAP and Broadcast Music Incorporated (BMI) are performing rights licensing organizations, also known as performance rights organizations (PROs), whose members and affiliates, respectively, grant the organizations the right to license the non-dramatic public performances of the copyrighted musical compositions they create, own or control. (There is a third, much smaller entity, Society of European Stage Authors and Composers, Inc (SESAC). that does much the same thing, but its activities are not pertinent to this discussion). In turn, ASCAP and BMI license radio stations, television stations and networks, cable television systems and networks, and tens of thousands of other music users, including digital music services like Pandora, the internet radio service. Both ASCAP and BMI collect license fees and distribute those fees to their writer and publisher members or affiliates as the case may be.

Because both organizations represent hundreds of thousands of copyright owners and consolidate the rights of those copyright owners in the licenses they offer, the antitrust laws are implicated. To eliminate the anti-competitive concerns raised by the activities of the organizations, both operate under Consent Decrees negotiated with the US Department of Justice. Both Decrees are similar; each provides that a music user must be granted a performance license for all of the musical works in the PRO's repertory upon written application to each respective organization. Each also provides that if the user and the organization cannot agree on a fee, a federal judge will determine a reasonable fee after trial.

There are rate proceedings involving Pandora currently pending in the ASCAP Rate Court before Judge Cote and in the BMI Rate Court before Judge Louis Stanton, also of the Southern District of New York. It is important to understand the circumstances that led to the institution of these proceedings in order to appreciate the implications of Judge Cote’s decision.

With the advent of digital media for the distribution and performance of music at the beginning of this century, it has become increasingly clear that future generations generally will obtain access to music through the internet as we know it or as it evolves. Accordingly, the parties that control music—record labels for recordings and music publishers for the underlying compositions—have sought to obtain the highest license fee rates possible from digital music services in order to best position themselves for the future. To date, the record labels have fared far better. Typically, they receive 50-70 percent of the revenue collected by internet streaming services. Music publishers, however, are represented by ASCAP and BMI whose license fee rates are constrained by the Consent Decrees described above. Their fees, combined, are about five percent of the revenue of these Internet services.

Chafing at this huge disparity and, thus far, unable to obtain relief from Congress, the major music publishers determined that they would withdraw certain of their digital performing rights from ASCAP and BMI (leaving these organizations to license all other media on their behalf) and directly license internet music services like Pandora at rates not constrained by the Consent Decrees. Without the supervision of the Rate Courts, the publishers would be able to demand essentially any rates they wanted because any commercially viable music service must obtain licenses from all of the major publishers in order to operate. To accomplish this goal, they persuaded ASCAP to change its bylaws to permit such withdrawals (the large publishers sit on ASCAP’s Board). Pandora, the largest Internet music service, objected, to no avail. BMI soon changed its rules to permit the publishers to withdraw these rights. To ensure continued access to the music, Pandora entered into a direct license with Sony/ATV/EMI and then challenged the validity of the withdrawal in an ASCAP Rate Court proceeding. BMI then filed its own proceeding against Pandora. Pandora filed a motion for summary judgment in the ASCAP proceeding and Judge Cote granted the motion based entirely on her “four corners” interpretation of the Decree.

Essentially, Judge Cote ruled that the Decree requires ASCAP to grant licenses to perform all of the “works” in the ASCAP repertory, not, as ASCAP argued, whatever rights in those works remained in the repertory after the publishers' purported withdrawal of certain digital performing rights for digital services. The crux of ASCAP’s argument was that because a copyright is divisible by different rights—the right to copy, the right to distribute, the right to perform—the publishers, too, could divide the rights granted to ASCAP. But, Judge Cote ruled that the plain language of the Decree speaks of the “works in the ASCAP repertory,” not the rights in those works at a particular moment in time. Because the music publishers had not withdrawn their catalogs entirely, for all types of licensees, those catalogs remained in the ASCAP Repertory, as defined in the Consent Decree, and must be included in all licenses granted by ASCAP.

Undoubtedly, the decision will be appealed. If it stands, the publishers’ withdrawals from ASCAP will remain invalidated. It is also likely that the BMI Decree will be similarly construed. This result is a significant victory for the entire digital music industry. Even at existing rates for the sound recording and musical composition licenses, no internet streaming service has ever turned an annual (much less cumulative) profit. Most have quickly exited the business. If the music publishers had been allowed to use their market power to set rates outside of the Rate Courts, the overall licensing burden on these services would have increased even further, quickly putting all services out of business. Such a result would not have been in anyone’s long term best interest, including the songwriters whose interests are also represented by ASCAP and BMI.