Copyhype

Internet radio service Pandora has been in the news in recent weeks as it gears up for a fight to reduce the amount it pays out to musicians, a fight that will take place in front of the public, Congress, and the courts. Most recently, Pandora has sued ASCAP, seeking lower license rates from songwriters and music publishers.

This might seem odd to someone unfamiliar with music and copyright in the US — how can you sue someone just for offering a price you think is too high? If you’re asking yourself that or something similar, read on.

Leaving Public Performance to the PROs

Recorded music by and large consists of two separate and discrete copyrights. One copyright covers the musical composition, which is the underlying song. The other covers the particular sound recording of that song. In addition, each copyright is actually a bundle of divisible rights; the holder of a musical composition copyright has the exclusive right to reproduce, distribute, create derivative works, and publicly perform the composition. ¹The sound recording copyright includes all these rights except the right to publicly perform; instead, a sound recording copyright holder only has a narrower right to publicly perform “by means of a digital audio transmission.”

The public performance right of musical compositions is almost always administered by performing rights organizations (PROs). ²These organizations are sometimes also called “performance rights organizations”. The US Copyright Act uses the term “performing rights society.” 17 USC § 101. These organizations fall under a broader umbrella of what are called “collective rights organizations”, “collective management organizations”, or “collective societies.” These agencies don’t own the copyrights, they license them to various entities like radio stations, live venues, and websites, collect royalties, and pay them out to their members — these are blanket licenses, meaning a single license covers every song in the PRO’s catalog. The US has three PROs: ASCAP, BMI, and SESAC. Other countries have their own PROs. For example, SACEM in France, one of the world’s first PROs, has licensed public performances since 1847; Canada has SOCAN, and the UK has PRS.

ASCAP was formed in 1914 through the efforts of composer Victor Herbert and attorney Nathan Burkan to collectively administer the public performance rights of songwriters and composers. ASCAP would clash with radio broadcasters during the coming decades over compensation for public performance of music over the airwaves. In 1939, partially in response to a rate increase by ASCAP, the National Association of Broadcasters (NAB) created BMI as a competing performing rights organization.

Consent Decrees

Under pressure from NAB, the US Justice Department sued ASCAP and BMI in 1940, alleging violations of the Sherman Antitrust Act. As a result, both agencies entered into a consent decree with the government. ³United States v. ASCAP, 1940-43 Trade Cas. ¶56,104 (SDNY 1941); United States v. Broadcast Music, Inc., 1940-43 Trade Cas. ¶56,096 (ED Wisc. 1941). ASCAP’s consent decree was amended in 1950, establishing the authority of a district court to act as a “rate court” to settle disputes over rates when ASCAP and licensees could not reach agreement. ⁴United States v. ASCAP, 1950-51 Trade Cas. ¶62,595 at 63,754 (SDNY 1950). The ASCAP decree was amended again in 1960 and 2001. ⁵US v ASCAP, Second Amended Final Judgment, No. 41-1395 (WCC) (SDNY June 11, 2001). BMI was the subject of a second suit by the US in 1964, with a new consent decree in 1966, ⁶United States v. Broadcast Music, Inc., 1966 Trade Cas. ¶71,941 (SDNY). amended in 1994 to include a similar “rate court” provision. ⁷United States v. Broadcast Music, Inc., 1996-1 Trade Cas. ¶71,378 (SDNY 1994).

ASCAP and BMI together license the vast majority of musical composition public performances in the US. But there is a third performing rights organization in the US: SESAC. SESAC was originally formed in 1930 “to serve European composers not adequately represented in the United States.” SESAC does not operate under a consent decree. However, it is currently involved in a lawsuit alleging similar antitrust violations that resulted in ASCAP and BMI’s consent decrees. That lawsuit survived a motion to dismiss in 2011 and remains ongoing.

The consent decrees sharply limit ASCAP and BMI‘s conduct.

ASCAP, for example, is limited to licensing public performance rights on a non-exclusive basis — it cannot offer exclusive licenses or license any other right in the copyright bundle. It cannot prevent direct licensing between its members and music users, not can it offer different rates and terms to users who are “similarly situated” to existing licensees. And, perhaps most importantly, ASCAP is required to grant licenses to anyone who requests one. ⁸Though there are differences between the two decrees, both are broadly the same.

The Rate Court

The rate court provisions of the consent decrees are perhaps their most unusual aspect. The existence of a “rate-setting court” in the US is, in the words of one scholar, “extremely rare.” ⁹Daniel Crane, Bargaining in the Shadow of Rate-Setting Courts, 76 Antitrust Law Journal 307 (2009). Only a handful of consent decrees, mostly from the 1940s, 50s, and 60s, have included such provisions, and outside of ASCAP and BMI, only one court has actually ever exercised this function. ¹⁰Id., citing US v American Optical, 95 F.Supp. 771 (SDNY 1950). There is generally a deep skepticism toward US courts engaging in rate-setting. ¹¹See, for example, Arsberry v Illinois, 244 F.3d 558, 562 (7th Cir 2001), noting a “historical antipathy to rate setting by courts, deemed a task they are inherently unsuited to perform competently”; In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation, 906 F.2d 432, 445 (9th Cir 1990), “The federal courts generally are unsuited to act as rate-setting commissions.” In many other countries, such functions have been expressly delegated to governmental administrative bodies. ¹²Laurence R. Helfer, Collective Management of Copyrights and Human Rights: An Uneasy Alliance Revisited, Collective Management of Copyright and Related Rights, 75, 91 (Daniel Gervais (ed.), Kluwer Law Int’l BV 2010), “governments in nearly all countries in which CMOs operate exercise some form of regulatory control over licensing practices to prevent abuse of their dominant positions. The source, extent and enforcement of these regulations vary widely, however. In some countries, copyright laws limit CMO activities. In others, administrative agencies, tribunals or other specialized regulatory bodies monitor CMO activities and adjudicate complaints by licensees. In yet other nations, users seek relief from the courts by filing competition or antitrust claims against CMOs, leading to judicial monitoring of licensing practices in the form of detailed consent decrees”;

Simon Helm, Intellectual Property in Transition Economies: Assessing the Latvian Experience, 14 Fordham Intellectual Property Media & Entertainment Law Journal 119, 201 (2003), “An example is the Copyright Board in Canada. Invested with quasi-judicial powers, the Copyright Board functions as an arbitral tribunal, and its decisions have the effect of superior court judgments. Under the Canadian model, collective rights administrative societies are required to submit an annual tariff, which is then published. The Copyright Board has jurisdiction to receive submissions from interested parties in relation to the proposed tariff and to make any amendments to the tariff that it considers necessary. Canadian law also sets tariffs for wireless broadcasters based upon their advertising revenues. In cases where an individual license cannot be agreed between the collective rights administration society and a user, the Canadian scheme provides for the submission of the dispute to the Copyright Board for resolution.”

Regardless, in the US, a federal court — specifically, the Southern District Court of New York — plays the role of rate-making agency for music composition public performance licenses. Here’s how it works: under the consent decree, ASCAP is required to provide a reasonable fee upon request. If a potential licensee disagrees with the fee provided by ASCAP, it can bring suit in court. ASCAP has the burden of proving the reasonableness of the fee; otherwise, the court will weigh the evidence to determine a reasonable fee.

It is under this provision that Pandora has brought suit against ASCAP. Pandora has been operating under a license from ASCAP that expired in 2010, and, as Bloomberg has reported, negotiations over the past year for a new license have been unsuccessful. So, in a sense, it’s a bit imprecise to say Pandora “sued” ASCAP. The court filing doesn’t allege any sort of malfeasance or breach that you’d ordinarily see in a civil lawsuit. Instead, it is part of the process for rate-setting established under ASCAP’s consent decree.