Addressing the Digital Millennium Copyright Act (DMCA) grandfather clause that allows “pre-existing subscription services” to pay the pre-1998 reduced royalty rate for digital music licensing, the US Court of Appeals for the District of Columbia Circuit reversed the district court’s dismissal, holding that the defendant was not entitled to the lower royalty rate for service transmissions in connection with its newly acquired business. SoundExchange, Inc. v. Muzak LLC, Case No. 16-7041 (DC Cir., Apr. 25, 2017) (Silberman, J) (Rogers, J, concurring).

In 1995, the Digital Performance Right in Sound Recordings Act for the first time granted copyright owners the right to collect royalties from digital music services. The DMCA increased those royalty rates in 1998, but provided a grandfather clause that allowed “pre-existing subscription services” to pay the lower, pre-1998 rates. The change was intended to provide a fairer “market rate” for the copyright holders, and the grandfather clause was intended to benefit three businesses that had invested during the lower rate period.

At the time the DMCA was passed, Muzak, one of the three businesses protected by the grandfather clause, provided licensed music through its DishCD service to Dish Network customers. In 2011, Mood Media Corporation acquired Muzak, as well as one of Muzak’s competitors that was not covered by the grandfather clause. Mood Media arranged for Muzak to acquire the competitor’s customers so that Muzak could pay the grandfathered rate for all of its transmissions, including those resulting from its acquisition of the competitor company. As a result, SoundExchange, a nonprofit responsible for collecting royalties on behalf of performing artists and copyright owners, sued Muzak for underpaying royalties.

The district court dismissed SoundExchange’s complaint, likening Muzak’s acquisition of the competitor to Muzak simply acquiring more customers. SoundExchange appealed.

The DC Circuit reversed, explaining that it did not agree with the district court’s analysis. The Court explained that “Mood-Muzak’s acquisition [], if allowed to expand Muzak’s grandfather eligibility to ‘services’ other than DishCD, threatens the very purpose of the Act.” The Court reasoned that allowing such an interpretation might result in the “complete elimination of the market-rate regime by Mood-Muzak’s acquisition strategy.”

In reaching its decision, the DC Circuit analyzed the definition of “pre-existing subscription service,” which reads, “[a service] that performs sound recordings by means of noninteractive audio-only subscription digital audio transmissions, which was in existence and was making such transmissions to the public for a fee on or before July 31, 1998.” Concluding that the statute and the legislative history were unclear as to whether “service” refers to the business entity or the original program offerings, the Court interpreted the grandfather clause narrowly and concluded that “the better interpretation of the statute is that the term ‘service’ contemplates a double limitation; both the business and the program offering must qualify before the transmissions are eligible for the favorable rate.” Accordingly, the Court reasoned that Muzak’s expansion and provision of additional transmissions did not qualify as pre-existing subscription services and were not eligible for the reduced grandfathered rate.