In a non-precedential summary order on December 19, the Second Circuit affirmed a decision interpreting the BMI consent decree, which governs Broadcast Music International, a performance rights organization (“PRO”) that gathers music rights together to be packaged in a single blanket license. The details of the music battle and its implications are discussed in my previous posts [1, 2, 3, 4]. The affirmance means that BMI can not only fractionally license, it can do so under the consent decree as it is currently drafted. This decision will be terrible for the music industry, enabling new forms of market power that could be abused by license holders to increase prices.
On August 31, the Department of Justice made an interesting strategic move that turned a fight over consent decree language into an epic standoff. In its reply brief, the DOJ called BMI’s bluff and almost completely turned BMI’s legal strategy on its head. Reading the brief, one could almost imagine the DOJ reciting Dirty Harry’s famous line “You have to ask yourself, do I feel lucky?”
The fight is over fractional licensing, or the licensing of only a portion of a song’s copyright. Fractional licensing does not give a licensee the rights to play a song, because the licensee must first contract with all other fractional owners to assemble 100% of the rights. Fractional licensing can be a drag on the use of music, so Congress set the default rule as full-work licensing – meaning each copyright owner can license the full work but owes each co-owner their share of profits. While parties are free to change the default rule by contract, the DOJ argues that the antitrust consent decrees that govern ASCAP and BMI contain restrictions on the use of fractional licensing. BMI disagrees.
If that explanation seems vague, it’s because it is now clear that what we all thought the DOJ was arguing is dramatically different from their actual position. It all started with BMI’s attempt at a strawman argument. BMI thought the DOJ was taking the position that fractional licensing is completely barred by the consent decrees. BMI argued that under current law on consent decree construction, the DOJ can’t get all the way there, due to the way the consent decree is drafted. BMI argued that if you only take DOJ’s plausible arguments, you get the result that fractional licensing is not regulated under the consent decree at all. Perhaps believing that this could not possibly be what the DOJ wants, BMI then advanced its interpretation where it gets to engage in fractional licensing but under the antitrust restrictions of the consent decree.
It is indisputable that the performing rights organizations (“PROs”) have played an important and procompetitive role in making the music industry what it is today. The benefits that PROs provide are mainly that they offer “unplanned, rapid, and indemnified” access to the songs in their catalogue. Nearly all music users, until recently, have been able to get immediate access to public performance licenses for the music they need simply by taking blanket licenses from the major PROs of the time.
The full work licensing question has never definitively been answered, but it has at the very least historically been assumed by the DOJ, Supreme Court, and music users that the PROs effectively offer full work licenses. The language the Supreme Court uses to describe the service provided by the PROs – “unplanned, rapid, and indemnified access” – implies full work licensing. However, the reason why there is still even room for debate is that it’s never really mattered. Most music users take licenses from the three major PROs (ASCAP, BMI, and SESAC) and pay these PROs based on fractional market shares. In exchange, these music users have never worried that they do not have the rights to play the songs in these PROs’ catalogues. The question only becomes relevant when music publishers wish to fragment music licensing and move rights out of the PROs.
For the purposes of this post, I will assume that – despite the findings of the DOJ – it is debatable whether the PROs have offered full work licenses to date. Even still, the historical assumption of a full work licensing environment has great implications for how the courts and the DOJ have treated the music industry under the antitrust laws.MORE »
What Do Licensing, the Rhine, and the Silk Road Have In Common?
In my last post I explained the history of the music fight, and in this post I wanted to look forward to the problems music users fear if they can no longer get full work licenses from ASCAP and BMI. The biggest issue is from what law professor Michael Heller described as the tragedy of the anticommons. This tragedy might sound complicated, but it’s actually a simple way of describing a wide range of coordination breakdowns that can come from too much ownership of a single resource.
The Bloody History of the Anticommons
The tragedy of the anticommons is not merely academic: it actually has a very interesting and sometimes bloody history. The tragedy has been developed by a number of economists and scholars to describe a wide range of modern problems, like hold-up, double marginalization, patent thickets, and submarine patents. However, one of the clearest examples of the tragedy comes from toll collectors along the Rhine River in medieval Germany.
The Rhine River was the commercial superhighway of Western Europe from around 800 AD. As such, the Holy Roman Empire closely guarded the tolling rights along the river and kept tolls low to promote trade. However, local German leaders, usually low-ranking nobility, erected unsanctioned castles along the Rhine River to collect tolls without permission. These “robber barons” would stretch chains across the river to prevent passage without payment. As the total cost for traveling the Rhine went up, merchants started to avoid the Rhine entirely. Each baron was acting in their own self-interest by taxing a resource common to all stakeholders: the commerce along the river. In the aggregate, however, these individually rational decisions turned out working to everyone’s disadvantage. It actually became cheaper for merchants to take much more difficult land routes to their destinations. This of course had a disastrous effect on trade and the income from sanctioned toll collection.
The solution came in the form of the Rhine League, which actually led military campaigns against the robber barons and destroyed their castles. Today, the oldest surviving international organization – Central Commission for Navigation on the Rhine – was actually formed in part to coordinate fees and duties among the countries along the Rhine River.
The Rhine is not the only place in history where the tragedy appears. It seems that the prosperity that came from the trade of goods and culture between Europe and China starting in the early 1300s was due to the consolidation of lands by Genghis Khan under the Mongolian Empire. Prior to Genghis Khan, the route from Europe to China went through many countries that were unsafe and demanded tribute from merchants transporting goods. These taxes and dangers cut into the profits of traders and the trip was not especially attractive. Genghis Khan’s conquest greatly diminished the amount of tribute gatherers and, along with the prioritization of safety, led to the rise of the Silk Road. The trade that resulted introduced Europeans to a wide variety of goods, spices, and gunpowder. Important ideas were also exchanged, leading to the introduction of bills of exchange, deposit banking, and insurance to Europe.
As DisCo has covered before, a major legal battle is being waged in the music industry. The battle concerns the intersection of music copyright and antitrust law, and it could dramatically change how consumers interact with music. On May 18, the Department of Justice (“DOJ”) is expected to file its opening brief in an appeal of a district court decision rejecting its interpretation of a consent decree entered into in 1941 (and amended since). The outcome of this appeal could have major and long lasting repercussions for Internet radio and music streaming.
How the Music Industry Historically Worked Out Its Issues
The music industry joins a handful of other industries, like major league sports, which have a unique relationship with antitrust laws. These industries all have very significant and unique problems that are solved through competitor coordination, but competitor coordination is normally illegal under the antitrust laws. These industries generally operate under some kind of exception to the antitrust laws, because the problems outweigh the competitive concerns in a limited coordination. In the case of the music industry, a complicated basket of rights extended across millions of songs would make it nearly impossible for music services to exist without some market intervention. Every recorded song is covered by two copyrights, one for the recording and one for the composition, and every copyright can have any number of owners. This leads to a counter-intuitive relationship between buyers and sellers where buyers want the smallest number of sellers possible, as long as those sellers are required to play fair. This leads to the lowest search cost and the easiest way for buyers and sellers to find each other.
Enter the performance rights organizations (“PROs”). These PROs gather many composition licenses together and offer them at a blanket rate to music buyers. This is, of course, called price fixing in antitrust terms. However, the DOJ recognized the benefits of PROs and negotiated a settlement that would allow the PROs to continue to operate unchallenged by antitrust laws as long as they were bound by certain rules that ensure the PROs played fair and didn’t abuse their immense power. This assessment of the PROs was later endorsed by the Supreme Court. The set of rules the PROs operate under is called the consent decrees, which cover the two largest PROs in the music industry – ASCAP and BMI. These consent decrees provide a floor of protections for music buyers.
Today, virtually all music services take blanket licenses from the major PROs. The PROs in turn gather composition rights primarily from large publishing houses like Sony and Universal Music Publishing Group.