Solving the Music Subscription Service Problem: New Compulsory License Laws for Songs by Chris Castle
Posted June 27, 2006 — in KOAR's Legal, Music News
Every week KOAR will bring you an in-depth article by veteran music attorney and digital music expert Christian Castle. Enjoy!
There are many legal and business problems that have slowed development of digital music services. One of them is clearing the rights for songs for music subscription services that permit on-demand streaming of sound files.Â
  The same problem exists for permanent downloads. However, record companies have agreed to take responsibility for mechanical licenses for permanent downloads on U.S. based online services, the so-called “pass through� license that is so despised in publisher and songwriter circles.
  Record companies have not, however, agreed to assume responsibility for the payment of royalties for on-demand streaming as their lawyers don’t believe their rights under mechanical licenses and the Copyright Act extend that far.Â
  Even so, one thing is clear—due to the highly fragmented state of publishing rights in the U.S. and the correctly cautious hesitancy of digital music services to expose themselves to the “hounds of hell� copyright litigation that is far too common in the online world—without the labels agreeing to take responsibility for licensing permanent downloads, it is not an overstatement to say that the launch of the iTunes Music Store (and most other digital services offering permanent downloads) would have been substantially delayed if it happened at all.
  The Section 115 Reform Act, or “SIRA�, or H.R. 5553, proposes an entirely new structure for the way online royalties are licensed and collected. While the bill is still being negotiated and a Senate version has yet to be introduced, there are some constructs that are likely to stay in the bill, so for this writing we will focus on the forest and not the trees.
  The current state of affairs that prompted SIRA is not for lack of trying.  In 2001, the Harry Fox Agency and the Recording Industry Association of America agreed a license (http://www.harryfox.com/docs/FinalRIAAAgreement.pdf) for on-demand streams for all music publishers represented by the Harry Fox Agency—the only problem was that no rate was specified, although the RIAA paid advances. It was anticipated in 2001 that a rate would be established within a year. It is evidence of how contentious this issue has been that there is still no rate. This, too, is one of the contributing factors to SIRA.
 On-demand streaming services such as Yahoo! Music, AOL Music, Rhapsody, Napster, and MusicNet struggle to have a robust offering for many reasons, but chief among them is the inability to clear publishing. There is no one-stop shop for publishing licenses as is the case in most other countries. Under the current law, the Harry Fox Agency, for example, licenses only those publishers who have elected to use HFA’s administrative services. This is probably about 70% of U.S. copyrights. Even setting aside the fact that HFA may only represent part of a song, there are still a good 30% of U.S. copyrights that are not represented by HFA or by any one-stop type licensing entity.
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  While one may well be reluctant to have the government any more involved in our business than they already are, on-demand streaming is an area of our business that cries out for a statutory solution due to the severe fragmentation of the publishing community.
  While there has been a long history of a compulsory “blanketâ€? license for permanent copies that has been extended to permanent downloads (like iTunes), there is a “newâ€? license required in the United States that pays a mechanical royalty for the temporary copy created by audio-only on-demand streaming, called a “streaming mechanicalâ€? (which also covers songs in “tetheredâ€? downloads). This is in addition to the public performance right licensed by ASCAP, BMI and SESAC—and a performance license is still necessary under SIRA.Â
  If you’re like most people, your eyes are glazing over right about now, but if you are a songwriter, music publisher, artist, record company or digital music service, or representative of any of these, it’s important to understand what’s going on, because there is a bill in Congress that is going to change the status quo for the better of the entire industry.
  SIRA establishes a statutory blanket license for on-demand streams and tethered downloads, as well as a collection and licensing system featuring “designated agents� as the licensing agents and collecting agents for royalties under the blanket license. (The bill does not set a royalty rate for the blanket license, which will be set by the copyright judges in a Copyright Review Board, a special court for copyright issues in Washington.)
  A designated agent must be an entity experienced in music publishing royalty licensing that has collected no less than a 15% share of the music publishing market, and has been approved by the Copyright Office as a designated agent.
  Designated agents are allowed to represent songwriters or publishers for purposes of the blanket license, and can collect monies on behalf of the songwriters or publishers they represent. A copyright owner can “opt out� of the designated agent system if they like, and represent themselves in a voluntary license with digital music services, but they must do so for their entire catalog. As drafted, SIRA prohibits copyright owners from refusing to license to a digital music provider, although they can set their own terms. This is not very different from the long-standing compulsory license regime for mechanical royalties which apply to “phonorecords� including permanent downloads.
  If a songwriter or publisher does not contract with a designated agent or “opt out�, they will be represented by the “General Designated Agent,� a flavor of designated agent. The “General Designated Agent� will most likely be the Harry Fox Agency. The General Designated Agent may also act as a designated agent, meaning that songwriters and publishers can contract with the GDA just as they would a designated agent, so the GDA doesn’t solely get those who haven’t chosen a designated agent or opted out.
  One of the most interesting and groundbreaking points in SIRA is that the direct costs of creating and maintaining the licensing structure are to be borne in part by the licensees. While one may argue that costs of licensing regimes have been passed through in the past, SIRA specifically places responsibility on the licensees to bear some of the start-up costs of the regime.
  There are still issues to be resolved, not the least of which is how to deal with the ability of designated agents to charge their administrative costs against monies they collect but for which they cannot identify a royalty recipient.
  There are many other aspects of SIRA, but these are the cornerstone rules that are not likely to change. It is unclear at this writing if the bill has a chance of passing in what remains of this session of Congress, but if it does not it will surely be reintroduced in January 2007 and some version of it will likely be presented to the President for signature in the next Congress.Â
  As an observer of copyright law and legislation and practices in the music publishing industry, I would suggest that whether or not you agree with SIRA, David Israelite and his legislative team at the National Music Publishers Association and their counterparts at the Digital Media Association have done a remarkable job of steering a contentious issue through many interested parties and getting a bill introduced on a topic that has stymied music publishers and digital music services for nearly a decade.
For further information:
Subcommittee on Courts, the Internet
and Intellectual Property http://judiciary.house.gov/committeestructure.aspx?committee=3
Copy of current version of H.R. 5553:
http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.5553:
U.S. Copyright Office:Â Â Â Â Â http://www.copyright.gov/
National Music Publishers Association:Â Â Â Â Â Â Â Â Â http://www.nmpa.org/
Digital Media Association: Â Â Â http://www.digmedia.org/
Chris Castle is a music attorney in Los Angeles where he represents artists (including KOAR fav 10 Years), producers, music industry executives, songwriters, independent publishers and record companies, and technology companies. Chris frequently publishes and speaks on digital media topics, and recently was a panelist at a Congressional seminar on digital media issues at the U.S. House of Representatives sponsored by the Progress & Freedom Foundation a Washington-based think tank with which he is associated. He is on the board of directors of the Austin Music Foundation and moderates the digital panel at SXSW. Before law school, he was the drummer for Jesse Winchester, Long John Baldry and Yvonne Elliman
THE SECTION 115 REFORM ACT OF 2006
The proposed legislation concerning revisions to Section 115 of the Copyright Act may in fact turn out to be the landmark internet blanket licensing legislation some claim that it will be. However, many songwriters as well as numerous large independent publishers and copyright administrators should be concerned that the bill currently pending in the House of Representatives is flawed in several significant ways, and requires substantial amendment in order to better protect the interests of music creators and rights owners.
One provision that should be of grave concern to independent music publishers and self-published songwriters is the proposed concept of the General Designated Agent (“GDA�) for digital licenses. Contrary to the existing tried and true concept of free enterprise and individual owners making decisions about their works subject to certain “compulsory license provisions� now in existence, the legislation proposes a single, centralized company (expected to be the Harry Fox Agency (“HFA�)) to unilaterally make the decisions and grant the digital licenses. The Copyright Office could certify other agents but only if they represent the reproduction and distribution of at least 15% of all published compositions. Other than maybe EMI and Warner/Chappell, all others companies and individuals would either be required to affiliate with the HFA data base or, if not, then HFA would be entitled to simply grant the license in absencia and the rights holder would be required to go to HFA to collect whatever amount had already been agreed to and collected for the digital license, less whatever fees HFA unilaterally had deducted for its services. This monopolistic practice would effectively give all the power to HFA (or possibly one or two other large, corporate conglomerates designated as GDA’s) and would strip all the independent companies and individual songwriters of any control over the rates set and the digital uses of their songs.
Another problem with centralized corporate power is the inability of the little guy to effectively collect his fair share from the one holding his or her monies (not an uncommon problem throughout the history of the record industry). A songwriter or rights administrator should be able to obtain from the GDA the same usage data and royalty collection information applicable to them that the GDA provides to the music publishers it represents. Songwriters need to be able to verify that the royalty payments they are receiving correlate to the actual royalties earned. In addition, the proposed legislation does not require the distribution of royalties collected by the appointed GDA to the copyright owners by a date certain following receipt of such royalties which is of great concern given that participation by the copyright owner in this system is not voluntary.
Songwriters who are also recording artists should be gravely concerned about the proposed provisions requiring songwriter-recording artists with un-recouped recording artist advances to direct the GDA to divert their entire digital music publishing royalty payments to record labels pursuant to “letters of direction.� This provision also appears to indicate that if a label, prior to June 1, 2006, had not been able to negotiate such a recoupment provision in the recording contract with the songwriter-artist, the statute will now provide the label with such cross-collateralization rights as an unprecedented matter of law. There has been a lot discussion about making provision for non-payment of mechanical royalties on promotional and free goods w hich would break a 97 year statutory requirement that mechanical royalties be paid on all copies distributed, going back to the 1909 Act.
As a matter of basic fairness, if the GDA is going to have the extraordinary power to bind a songwriter who would otherwise object to such representation, as is provided in the proposed legislation, then the songwriter should at least have the right to appoint a representative to that GDA’s governing board. Music publishers may own 50-100% of the copyright to a musical work in a significant number of cases, but publishing contracts typically define the royalty stream as 50-75% to the writer, and 25-50% to the publisher. Many songwriters are also co-publishers of their compositions and have merely assigned administration rights to the music publisher. The party with an average of approximately two-thirds of the royalty stream at stake –songwriters– should reasonably have at least one seat on the GDA Board
The unbridled authority granted under the current bill to a GDA to deduct and spend administrative fees for almost any initiative the GDA wishes has already been labeled “unconscionable” by the U.S. Copyright Office. The current language, for example, would allow the GDA to hold a meeting on “current legislative and litigation issues” at some exotic location anywhere in the world without any restraint on the cost, and charge writers and publishers for this event. Under the current provisions of the bill, songwriters would in essence be paying on average for two-thirds of the GDA’s activities (which could in some extreme circumstances be in conflict with the priorities, rights and interests of creators) without the authority to limit in any way the GDA’s discretionary spending
Songwriters and their respective publishing administrators would be well-advised to strongly oppose this legislation until some of the foregoing issues are resolved in their favor just as they have long objected to other issues related to the application of controlled composition clauses to music publishing rights in general. The fight against monopoly control of individual property rights is one that should resonate with every fair-minded person. Otherwise, it would seem that the giant cellular companies and other digital licensees with lobbying muscle in Washington DC, under the guise of simplifying the business model in order to make licensing digital rights easier and less costly for themselves, will strong-arm Congress into enacting legislation that strips control of property rights from songwriters. This was not the original intent of the Copyright Act, one of the few statutes standing between songwriters and the loss of their intellectual property rights.
Wallace Collins, Esq is an entertainment lawyer with the New York firm of Serling Rooks & Ferrara, LLP
Comment by koar — July 5, 2006 @ 2:21 pm