Toward an efficient licensing and rate-setting regime: reconstructing s. 114(i) of the Copyright Act.

AuthorPomianowski, Joseph

Why is Sony/ATV Music Publishing, the world's largest music publisher, (1) unhappy about its massive hit single "Happy"? (2) According to CEO and Chairman Martin Bandier, the answer comes down to the math behind digital streaming revenues. In the first three months of 2014, the Internet radio titan Pandora streamed "Happy" more than forty-three million times, (3) but this translated into only $2,700 in publisher and songwriter royalties. (4) In contrast, Pandora paid twenty times that rate--$56,000--in sound-recording royalties. (5)

Happily for the songwriter, Pharrell Williams, he is also the recording artist on the smash-hit track and is thus entitled to a share of both types of royalties. Generally, however, songwriters and their publishers receive royalties under a rate-setting regime distinct from that governing artists and their recording labels. The resulting headline-grabbing disparity between the two types of royalties has become a source of major contention within the music industry. (6)

At the heart of the battle over fee parity is [section] 114(i) of the Copyright Act. (7) This statutory provision prohibits the rate-setting court charged with determining a reasonable royalty rate for musical works (paid to songwriters and their publishers) from taking into consideration the much higher sound-recording royalties (paid to labels and recording artists) set by the Copyright Royalty Board (CRB). Although it is well understood that publishers favored [section] 114(i) before they opposed it, the rationale behind that initial support has been misconstrued. Most notably, when setting the musical work royalty rate in a closely watched 2014 decision, the designated rate-setting court declared that publishers pushed for the provision two decades ago because they were concerned that sound recording performance rates would be set lower than musical work performance rates--and thus drag musical work performance rates down. (8)

This Comment examines historical context to correct the record and to renew the call for reducing some of the inefficiencies deliberately built into our disjointed music-licensing and rate-setting regime. Part I explains that publishers supported [section] 114(i) twenty years ago for much the same reason they opposed the creation of sound recording performance rights fifty years ago: they feared that the newly created sound-recording royalties would cut into publishers' existing royalty pie. Now that sound recording royalties far surpass musical-work royalties, the appeal of [section] 114(i) has flipped: publishers and songwriters support modifying or eliminating the statute on the theory that a court permitted to use sound-recording rates as a benchmark might be persuaded to raise composition rates. In contrast, music users who pay licensing fees support retaining [section] 114(i) because they fear the rise of musical-work royalties.

So told, the story of [section] 114(i) is significant in two respects. As Part II details, the provision's simple but overlooked history helpfully illustrates why digitalstreaming services and songwriters and publishers should support eliminating the provision. Although the industry currently sees [section] 114(i) as an obstacle to fee parity and thus beneficial to the music services interested in keeping musicalwork royalties down, the provision is inherently problematic for music services in the long run. Part III then draws on the larger significance of [section] 114(i)'s passage and retention. Enacted out of the fear that newly created soundrecording royalties would cut into existing publisher and songwriter royalties, [section] 114(i) was a reactionary attempt to avoid a holistic revenue system that would take into account both types of royalties. Recognizing and rejecting the shortsighted motivations behind the provision's enactment is an important step toward a more consolidated and more efficient licensing and rate-setting regime.

  1. THE CREATION OF A DIGITAL PUBLIC PERFORMANCE RIGHT FOR SOUND RECORDINGS

    A digital music streaming service--be it Pandora, Apple Music, Spotify, or Music Choice--must obtain two kinds of copyright licenses for the "public performance" of any song. (9) The musical-work copyright, owned by songwriters and their publishers, covers the song's composition and its accompanying lyrics. (10) The sound-recording copyright, owned by artists and their record labels, covers the performing artist's recorded rendition of the composition. (11)

    The story of how the second of these public-performance rights was belatedly born is key to understanding the purpose-and flaws-of [section] 114(i) and why music services should join the publishing world in advocating for its elimination.

    1. Performance Rights for Musical Works and Sound Recordings

      Musical compositions became copyrightable in 1831, (12) and in 1897, Congress granted musical composition copyright owners the right to control the public performance of their copyrighted works. (13) Because of the tremendous transaction costs that individual copyright owners would incur to personally enforce their rights, the member-owned performing rights organization (PRO) has long collected and distributed license fees on behalf of its members. (14) The two largest and oldest PROs, the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI), (15) must offer a blanket license to all music users under the terms of two separate decades-old consent decrees with the Department of Justice. (16) These blanket licenses grant licensees the nonexclusive right to perform a PRO's entire repertory of works in exchange for a flat fee or a portion of the licensees' revenues (17) and require a designated rate-setting court to set a reasonable license fee should the parties fail to timely negotiate a rate. (18)

      But sound recordings did not receive federal-copyright recognition until 1971--more than a century after musical compositions. (19) Even then, the copyright was limited to reproduction and distribution rights and did not include an enforceable public-performance right. That changed in 1995, when Congress passed the Digital Performance Right in Sound Recordings Act (DPRA) (20) in response to the emergence of music streaming, which threatened to displace sales of physical records and leave artists and their labels uncompensated for the widespread enjoyment of their work. (21)

      The DPRA created a limited digital performance right for sound recordings by way of a complex licensing scheme. (22) Under the statute, noninteractive Internet radio services like Pandora are eligible for compulsory licenses, (23) which are administered today by the CRB using a "willing buyer, willing seller" standard meant to protect the licensee from above-market royalties. (24)

      The CRB was created only after successive failures to establish a royalty regime that would not crush small webcasters under the combined weight of sound recording and composition-licensing fees. (25) However, the CRB too has touched off its share of royalty controversy--a fact that demonstrates the problems associated with webcasters' multipart and disjointed licensing obligations. For example, on June 26, 2007, Internet radio went dead as dozens of radio stations observed a "day of silence" to protest a CRB ruling mandating a major webcasting royalty rate increase. (26)

      One notable characteristic of the CRB's current rate-setting regime is that the CRB is permitted to consider the rates paid to publishers and songwriters when it determines the rates that should be paid to recording labels and artists. Indeed, the CRB has deliberately set compulsory-license fees for sound recordings at rates multiple times higher than the prevailing rates for composition-performance licenses, on the grounds that the markets for these two types of licenses are materially distinguishable. (27) In contrast, thanks to [section] 114(i), the rate-setting courts are prohibited from considering sound-recording royalties when setting musical-work royalties. (28) Although publishers and songwriters revile that legal prohibition today, as discussed below, half a century ago they were its primary proponents.

    2. The Feared Effects of Sound Recording Performance Rights: Enter [section] 114(i)

      In the 1960s, some thirty years before Congress created a limited-performance right for sound recordings, broadcasters and music publishers formed an "unlikely alliance": together they successfully opposed the creation of a general public-performance right in sound recordings, because they feared the effect on their revenue streams. (29) Broadcast stations balked at the idea of paying performance royalties to record companies and recording artists on top of the performance royalties they already paid to music publishers and songwriters. (30) Meanwhile, the PROs feared the consequences of a limited-royalty pie--that is, the PROs believed that broadcasters forced to pay royalties to record companies for sound recordings would have less money to pay publishers and songwriters for the underlying compositions. (31)

      This fear of a finite overall "royalty pie" not only formed the basis for the PROs' opposition to the creation of public-performance rights in sound recordings (32) but also laid the groundwork for the creation of [section] 114(i) decades later. Indeed, the idea resurfaced in 1995 when bills proposing a limited performance right for certain digital transmissions of sound recordings were pending in the House and the Senate. (33) In a House hearing that year, Marybeth Peters, Register of Copyrights and Associate Librarian for Copyright Services, explained in no uncertain terms that the inclusion of language that would eventually become [section] 114(i) in early versions of sound-recording legislation was the Senate's attempt to address the concerns of music-composition owners: "These concerns related to what is sometimes referred to as the 'pie'...

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