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.
In a bit of legal jiu jitsu, the DOJ’s recent reply thanks BMI for conceding most of the DOJ’s points and declares that what BMI held up as a strawman is exactly what the DOJ is arguing as the correct interpretation. There is a particular paragraph on page 14 of the DOJ’s brief that could send shockwaves through the music industry:
The United States agrees with BMI that the Decree does not prohibit BMI from offering fractional licenses in all contexts. In particular, the Decree does not prohibit BMI from providing fractional licenses for songs that are outside the repertory, as defined by the Decree, and separate from the blanket license. Such licenses would be outside the auspices of the Decree and, thus, not subject to its requirements or its protections. For example, the rate court could not determine the reasonableness of rates for fractional licenses, nor for any per-program or blanket licenses that included fractional licenses. And if BMI engaged in collective licensing of fractional interests of songs outside the repertory, the United States would have to determine whether to investigate that conduct and, if so, determine whether such collective licensing violates the antitrust laws. But that issue is not presented here.
This simple paragraph contains many important points that will likely have a huge impact on the music industry. First, the DOJ sends a not too subtle message that the consent decrees are beneficial to ASCAP and BMI by protecting them from antitrust laws. Both ASCAP and BMI have complained of the perceived unfairness that they are under consent decrees while other performance rights organizations – like SESAC – are not. This should raise huge alarm bells for ASCAP and BMI to not advocate any policy in the future that does not include some form of compromise that protects them from the antitrust laws.
Second, while it is now clear that ASCAP and BMI can engage in fractional licensing outside the consent decree, the DOJ has just leveled the full force of the antitrust laws at ASCAP and BMI and asked them to try – if they feel lucky. ASCAP and BMI will find it hard to navigate these waters. They must find a way to efficiently license a potentially large number of fractional licenses without engaging in price fixing. Attempts to simplify pricing into something like a blanket license will surely get them in trouble, as will any attempts to establish a pricing scheme that does not permit licensees to make choices between competing composers or licensors to undercut rival songs to encourage air time. Even if they met these basic requirements, there are still plenty of opportunities to get into trouble.
Third, this tactic by the DOJ appears to be very King Solomon-esque in its impact on the music industry. In the famous parable, King Solomon orders a baby cut in half to motivate the parties to either sort the problem out themselves or give him the information needed to fairly resolve the case. While the DOJ’s position seems to set the stage for a brighter future in music licensing, the short term will undoubtedly be tricky. Many important details will need to be worked out if the court sides with the DOJ. ASCAP and BMI would probably need new consent decrees to cover fractional licensing. In the meantime, either music users would need to strike direct deals or rights-holders would have to guarantee that ASCAP and BMI have full-work licensing rights.
Finally, it is important to note that this does not mean that the DOJ is changing its position in the middle of a case. The DOJ explains that there seems to be some confusion based on the conflating of what ASCAP and BMI can do under the consent decree and what ASCAP and BMI can do. The DOJ clarifies that its original statement on the meaning of the consent decree, which started this case, did not intend to bar ASCAP and BMI from fractional licensing. The statement only stated that ASCAP and BMI cannot engage in fractional licensing under the auspices of the consent decree and any antitrust immunity that would bring. This effectively cuts off BMI’s primary argument that the DOJ is trying to read a complete prohibition of fractional licensing into the consent decree where none exists. It also leaves them naked if they try to offer fractional licenses.
BMI’s legal battle will go down in history as taking something that didn’t matter much and turning it into something that could upend the way they do business. In a world where all licensors use performance rights organizations and all licensees take blanket licenses from these organizations, the question of fractional licensing is of little consequence. All licensees get 100% of the songs they play and all licensors get paid. The question of fractional licensing had yet to come up because this was roughly the world the industry was living in.
The efforts of BMI seem to be directed at providing publishers an avenue for leveraging their fractional interests outside of performance rights organizations to increase licensing fees for the industry (see In re Pandora for an example of related behavior). However, greed may not have been good for BMI in this instance.
Matthew Lane is a lawyer and policy advocate who has spent his career tackling the interesting issues that occur when competition and intellectual property law and policy collide. Follow @MattCameronLane