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Is the Justice Department taking a stand against music licensing gridlock?

· July 31, 2015

Yesterday Billboard wrote that the Department of Justice was reportedly taking a position against a major source of gridlock in music licensing: so-called “fractional licensing.”

As readers of DisCo may recall, the Department of Justice has been investigating alleged anticompetitive activities by the nation’s performance rights organizations (PROs).  Two of the major PROs, ASCAP and BMI, are already governed by long-standing consent decrees originating from previous antitrust cases.  In the course of efforts to update those consent decrees, DOJ has reportedly said that it will look disfavorably on contractual terms that gridlock musical compositions.

This is a crucial development, because gridlock is one of the greatest impediments to more viable options for music delivery, and, one federal judge has already found, has been used anticompetitively in an effort to extract supra-competitive prices.

What exactly has the Justice Department frowned upon?  A practice called “fractional licensing.”  Understanding fractional licensing requires a bit of copyright background.  Generally, under copyright law, when multiple authors have a claim in a particular work, each is empowered to license full (but not exclusive) use of that work to others.  As copyright scholar Bill Patry explained in his 1994 Copyright Law & Practice treatise,

“Each joint author may exercise his or her rights (including granting nonexclusive licenses) without the other authorities permission or joinder and is immune from an infringement claim by the other author. The only obligation of corners to account for any profits earned from the exploitation.”

In fact, members of Congress said more or less the same thing upon enacting the Copyright Act of 1976, with a report from the House of Representatives explaining that co-owners of a work are to “be treated generally as tenants in common, with each coowner having an independent right to use or license the use of a work, subject to a duty of accounting to the other coowners for any profits.”

The upshot of this rule is that if a work has a half-dozen co-authors, a potential licensee need not haggle over six individual deals to use that work (non-exclusively).  The license can be struck with one co-author, and then the co-authors can decide amongst themselves how money is distributed.  Imagine striking five deals only to have the sixth hold all that work hostage by strategically holding out.

This is no small matter.  Many, if not most, songs have multiple authors.  According to Billboard’s article, 93 of the top 100 songs last year had co-writers, and 68 of them were registered with more than one PRO.  (Another source said 64.  It may be a commentary on the state of uncertainty in music licensing that even the publisher insiders venting to Billboard cannot accurately report how many works are in multiple hands.)

To pick one specific example, the recent hit “Uptown Funk” already had six credited songwriters before it became embroiled in a rights dispute, such that there are now 10 credited songwriters/publishers for this one song.

Congress intended for any one rightsholder to be able to authorize a work’s use (and be accountable for any profits to his or her co-rightsholders) as it would be inefficient for a potential licensee to strike 10 different contracts with 10 co-authors to use one individual work.

But in fact that can happen.  Why?  Because of the fractional licensing practices with which DOJ has apparently taken issue.  Embedded in contracts across the music industry, fractional licensing terms attempt to unwind Congress’s anti-gridlock rule.  These contractual provisions between multiple co-rightsholders purport to deprive one another of the ability to authorize the full use of the work.

The effect of fractional licensing (or “split works”) creates various problems.  First, it increases transaction costs.  When every co-author can unilaterally veto a use, but no individual co-author can unilaterally authorize that use, gridlock and uncertainty reign.  The fractional licensing environment makes it significantly more difficult to put creative works to use in the marketplace by vesting veto power in numerous rights-holders with relatively small interests in the work.  As I have observed before, when everyone is empowered to say “no,” but no one is empowered to say “yes,” it is far easier to hold up progress than to achieve it.

Second, and more important from an antitrust perspective, sophisticated licensors can “weaponize” these defects due to the notoriously disorganized nature of our nation’s copyright records, holding songs hostage despite owning only small shares of them.  Moreover, with rights spread across multiple music publishers, the possibility of coordinated refusals to license certain works is a greater risk, in an industry where one federal court has already found “troubling coordination” among publishers intent on “extract[ing] supra-competitive prices.”

This may explain why the Justice Department has taken an interest in this issue.  If the DOJ sticks to its guns on this issue in response to music publisher discontent, the result would be to resolve one source of gridlock in the music ecosystem.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Intellectual Property

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