In a non-precedential summary order on December 19, the Second Circuit affirmed a decision interpreting the BMI consent decree, which governs Broadcast Music International, a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.
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.
Less than a week after agreeing to pay $1.75 million to the Department of Justice to settle an investigation into antitrust misconduct, the American Society of Composers, Authors and Publishers (ASCAP) was on Capitol Hill yesterday, asking lawmakers to roll back the consent decree to which the performing rights organization is bound.
On May 12, DOJ had asked a federal court to hold ASCAP in contempt, stating that the PRO had “undermined a critical protection of competition” and violated its federal commitments. Concurrently, DOJ and ASCAP filed a settlement relating to the alleged misconduct.
As DisCo has previously covered, two federal courts found “troubling coordination” among ostensible competitors in the music publishing industry, which contributed to Justice’s recently concluded investigation. The 7-figure settlement is a stark reminder of the continuing need for antitrust protections, even as Congress is being asked to relax those commitments.
This afternoon, U.S. Government antitrust policies will come under the microscope as a Senate Judiciary subcommittee holds an antitrust oversight hearing, with testimony from Assistant Attorney General William Baer from the Department of Justice’s Antitrust Division and Federal Trade Commission Chairwoman Edith Ramirez.
The Administration is coming into the hearing fresh off a highly publicized win over Apple, as the Supreme Court refused Monday to hear Apple’s effort to overturn rulings that it engaged in unlawful e-book price-fixing with major publishers (DisCo coverage of DOJ’s win here.) With that issue put to bed, attention may turn to other antitrust priorities. For example, just in the area of technology, a number of major DOJ and FTC merger reviews and enforcement actions have recently concluded, and the FTC has had a long-running review of dubious practices by patent assertion entities.
Another issue that may appear on the antitrust radar is the ongoing DOJ review of consent decrees governing collusive practices by performing rights organizations (PROs) licensing of musical compositions. The consent decrees – the product of antitrust suits against music publishers and rightsholders – are credited with enabling the development of new lawful music delivery services, even if transparency concerns persist. Exactly one year ago today, DisCo covered a previous Senate hearing on PRO practices under these rules, noting that DOJ’s review of PRO practices has the potential to increase transparency in the notoriously opaque music licensing landscape. Currently, licensing uncertainty and gridlock are some of the most significant barriers to a robust and viable music marketplace. Courts have previously found that this uncertainty has been weaponized for use in licensing negotiations.
Likely in response to findings of licensing misconduct in private litigation, DOJ’s attention turned to the problem of so-called “fractional licensing” by PROs and their constituent publishers. Fractional licensing deals with the question of when multiple parties hold an interest in a copyrighted work. How many co-owners’ permission must one obtain? (I.e., If nine co-owners agree to license a work and the 10th says ‘no,’ can the licensee proceed?) Conventional copyright law says yes, and the authorizing owners have a duty to account for profits to remaining owners. One co-owner can’t hold up all the others. Music industry practices attempt to reverse this rule, however, such that everyone can say ‘no,’ but no one rightsholder can unilaterally authorize a licensed use of a work. The rationale for challenging this practice is that it magnifies market share in an already concentrated market. With just a 10% interest in a work, a rightsholder can dictate usage of the entire work. Although the practice is a prescription for gridlock, the possibility that the Justice Department might weigh in on this particular practice nevertheless produced much “unhappiness” in the music publishing industry, as Mike Godwin wrote last year for Techdirt.
PRO oversight is not necessarily the top issue on the Judiciary committee’s agenda, and it may not receive sufficient attention in the hearing. Nevertheless, the outcome of DOJ’s investigation into PRO practices under the consent decrees will have a significant impact on music delivery services nationwide.