Siding with music users, DOJ concludes that Decrees call for “full-work” – rather than “fractional” – music licensing; ASCAP and BMI head to court and Congress. 

doj-ascap-bmi-3The U.S. Department of Justice (DOJ) has formally closed its two-year-long review of the decades-old ASCAP and BMI Consent Decrees. Those Decrees mandate federal court oversight of the rates ASCAP and BMI can charge and the conditions they can impose when licensing public performances of their members’ musical compositions. As my colleague, Kevin Goldberg, reported when the review was first announced, DOJ’s inquiry – which was opened at ASCAP’s and BMI’s request – introduced the possibility that the competitive protections afforded by those Decrees could be weakened, to the detriment of music users – broadcasters, telecommunications companies, webcasters, and others – who rely on such licenses.

It looks like that bullet has been dodged: DOJ has announced that it will not seek any modifications to the Decrees despite pressure from ASCAP and BMI to do so.

If you’re not into music licensing or you’ve been living in a hole for the past, um, century or so, ASCAP and BMI are the two largest U.S.-based performing rights organizations (PROs). They represent composers, authors, and publishers (the “C,” “A,” and “P” in ASCAP’s name) in licensing public performances of songs. (They don’t represent record labels or performers in licensing public performances of recordings of those songs.) “Public performance” in this context includes broadcasting, webcasting, and a wide range of other performances.

PROs provide a convenient way for publishers and other copyright owners, on one hand, and broadcasters and other music users, on the other, to make necessary licensing arrangements. But because ASCAP and BMI collectively represent the overwhelming majority of songs available for licensing in the U.S., these two PROs wield enormous market power, which increases the risk of anticompetitive, inflated license pricing. Recognizing this, DOJ sued both PROs in 1941 (and sued BMI again in 1964), alleging antitrust violations.

The Consent Decrees were the upshot of those suits. They are designed to prevent (or at least discourage) anticompetitive conduct by reducing the collective market power of ASCAP and BMI. For example, under the Decrees in their current form, ASCAP and BMI can’t pressure music users to accept inflated license rates by refusing to allow those users the right to perform the music while licenses are being negotiated. And if a PRO and a music user can’t agree on a rate, a designated federal judge may be called upon to set a competitive market rate.

The two Decrees have been revisited and revised periodically, ASCAP’s most recently in 2001 and BMI’s in 1994. In 2014, DOJ – having heard that ASCAP, BMI, and others thought that further revision was necessary “to account for changes in how music was delivered to and experienced by listeners” – invited comments on whether (and, if so, how) the Decrees should be modified. Over 50 organizations and nearly 200 individuals chimed in.

Following that initial round of comments, DOJ homed in on one particularly controversial licensing issue: the treatment of musical works whose copyright is owned by multiple persons, some – but not all – of whom happen to be members of ASCAP or BMI.

When a music user (say, a radio station) acquires a license from one PRO to use such a work, the user generally understands that it’s getting a full license, and not a “fractional” license reflecting only the interests of some, but not all, copyright holders. The Consent Decrees support this understanding – each requires ASCAP and BMI to offer licenses to the “works” (that’s from the ASCAP Decree) or “compositions” (from the BMI Decree) in their repertories, not to “interests” in those works or compositions. But because a PRO collects royalties only on the basis of the interests held by its own members (and pays only those members), some rightsholders questioned whether, in such circumstances, the PRO was really conveying the full right to play the song. DOJ solicited a second round of comments on this question in 2015. In rolled another 150 or so comments, including about 40 from organizations.

Not surprisingly, music users – including NAB, Sirius XM, and Pandora, among others – argued that the Consent Decrees have always required, and should continue to require, that ASCAP and BMI grant full-work licenses. In their view, a shift to fractional licensing would upend the competitive licensing marketplace in multiple ways. With fractional licensing, unaffiliated PROs and publishers holding partial interests in musical works would enjoy greatly increased market power because they would be able to hold performances of those works hostage until their desired license prices were paid. Fractional licenses also would decrease the value of ASCAP and BMI licenses without decreasing those PROs’ market power.

For users, this change would make the licensing process – and the licenses themselves – much more expensive and burdensome, not to mention uncertain. Even with an ASCAP or BMI license, the user would still have to take steps to identify, track down, and negotiate with other copyright holders not represented by the PRO providing the license. Such an approach would be inconsistent with the threshold goal of PROs – i.e., providing one-stop shopping for the right to play a large number of copyrighted musical works owned by various entities.

Needless to say, ASCAP and BMI saw things differently. They claimed that licensing parties long have paid and distributed royalties on a fractional share basis and that the Decrees should be modified to acknowledge fractional licensing expressly. In their view, requiring full-work licensing would disrupt current practices, thwart copyright owners’ ability to monetize their partial interests, and trigger a long list of other undesirable results.

But DOJ wasn’t buying what ASCAP and BMI were selling. It concluded that the Consent Decrees require (and have always required) ASCAP and BMI to issue full-work licenses and that the Decrees should not be modified to permit fractional licensing, which it said was not in the public interest.

DOJ acknowledged that license pricing and royalty distribution have historically been based on fractional ownership interests. But it also recognized that an important pro-competitive benefit offered by ASCAP and BMI is granting music users immediate access to works in those PROs’ respective repertories without fear of infringement liability. It found that fractional licensing would undermine that access and protection from liability, i.e., the “key procompetitive benefits of the PROs preserved by the consent decrees.” It also observed that fractional licensing would “impair the functioning of the market for public performance licensing and potentially reduce the playing of music.”  It concluded that “only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses that distinguish ASCAP’s and BMI’s activities from other agreements among competitors that present serious issues under the antitrust laws.”

DOJ disputed ASCAP’s and BMI’s claims that its decision necessarily would disrupt their licensing practices. In DOJ’s view, co-owners of a song who are members of different PROs could still choose to be paid for their interests through their respective PROs (who each could be said to grant a full-work license for that song). Nonetheless, to enable ASCAP and BMI to conform their practices to a common understanding that their licenses grant full-work licenses, DOJ announced that it would refrain from initiating enforcement actions against purported fractional licensing for a one-year period.

Predictably, reaction to DOJ’s decision – which was preliminarily disclosed a few weeks ago to interested parties – was sharply divided, with music users cheering the decision and the PROs lambasting it. NAB saw the decision as maintaining “fundamental antitrust safeguards” while preserving the “longstanding and successful relationship that broadcasters have had with ASCAP, BMI,” and their respective members. The Television Music License Committee viewed it as confirmation that “the current music performing rights license system is not ‘broken’” but “has functioned well overall.”

By contrast, BMI bemoaned the “shift to a 100% licensing model and the creative and financial impact it would have on [the nearly 13,000 BMI songwriters’] ability to create music.” ASCAP was more colorful: “It is as if the DOJ saw songwriters struggling to stay afloat in a sea of outdated regulations and decided to hand us an anchor, in the form of 100% licensing, instead of a life preserver.”

While these reactions were easily predicted, it is much harder to predict where all of the chips ultimately will fall. ASCAP and BMI, for their part, wasted no time in broadcasting their next moves: they announced that they would “[j]oin [f]orces to [f]ight” DOJ’s interpretation. In a one-two punch strategy, BMI will be taking the lead in challenging the decision in federal court, while ASCAP will head up the effort to seek legislative change. This division of labor was no accident – conventional wisdom has it that the rate court overseeing BMI’s operations is more favorable to PRO interests than is the court charged with monitoring ASCAP. (Within hours of DOJ’s formal announcement, BMI had already fired off a letter to its rate court judge seeking to get the ball rolling on the judicial side.)

Meanwhile, some members of Congress have already gotten involved in the issue – on July 20, five members wrote to the Attorney General to express concern about the decision and to request an independent review of the matter. It remains to be seen whether these efforts will result in changes to, or a reversal of, DOJ’s determination.

If DOJ’s decision withstands the PROs’ two-front assault, ASCAP and BMI will need to take steps to ensure compliance with DOJ’s full-work licensing pronouncement. Either or both might decide to seek to become the collection and distribution agent for non-member copyright owners of joint works some (but not all) of whose copyright owners belong to that PRO. If they go that route, the PROs would undoubtedly seek to increase their license prices accordingly.

On the other hand, ASCAP and/or BMI might choose an opposite approach: They could disclaim the right to license any works authored by multiple copyright owners who do not all belong to the same PRO until they re-confirm that they can offer full-work licenses for those works, warning users that they perform any such work at their own risk. This “be careful what you wish for” tactic could dampen music users’ enthusiasm for DOJ’s full-work licensing decision in at least a couple of ways. It could easily scare users with the increased threat of infringement suits if the necessary additional licenses are not obtained. And it would give rise to higher licensing costs and transactional inefficiencies in securing those licenses. PROs and their members eager to reverse DOJ’s decision would undoubtedly be delighted if music users reversed course even a little bit in their support of DOJ’s decision.

And let’s not forget the copyright holders themselves. If they prefer the option of fractional licensing, they may opt to abandon ASCAP and BMI in favor of another PRO – such as SESAC, Inc. or Global Music Rights – not currently required to operate under an antitrust consent decree. A substantial exodus could seriously devalue ASCAP and BMI licenses and increase the license price and negotiating power of the alternative PROs as their membership increases. But if that happens, it undoubtedly would not be long before the government would be scrutinizing the other PROs for anticompetitive behavior with an eye toward imposing consent decrees on them, too.

What is clear is that DOJ’s strong endorsement of the pro-competitive benefits of full-work licenses has not ended the fight over that issue. We’ll keep a close eye on developments. Stay tuned.