In Short
The Background: Since 1941, performing rights organizations ("PROs"), which pool the copyrights held by a work's composer, songwriter, and publisher and collectively license those rights to music users, have been subject to consent decrees.
The Proposed Change: In 2014, two of the largest PROs asked the Department of Justice ("DOJ") to modify their consent decrees to allow music publishers to partially withdraw from the PROs, which would have prevented the PROs from licensing the withdrawing publishers' music to digital services. Following an investigation, DOJ declined to modify the PROs' consent decrees, and declared that the PROs' blanket licenses are full-work licenses as opposed to fractional licenses.
The Decision: One PRO petitioned a federal district court, asking the court to declare that its consent decree does not require full-work licensing. The court found that nothing in BMI's consent decree prohibits fractional licensing. The Second Circuit recently affirmed that decision, rejecting DOJ's regulatory use of the decree that went beyond the plain text of the order.
A federal court of appeals has rejected the efforts of the Obama Antitrust Division to expand the scope of a decades-old consent decree that governs licensing of musical works for public performance. This dispute highlights the limitations of industry regulation through consent decrees, which coincidentally is a theme that has been forcefully advanced by the new leadership at the Antitrust Division in the Trump Administration.
Background
Two copyrights cover any piece of recorded music, the sound recording and the composition. Record labels typically own the sound recording, while songwriters, composers, and publishers hold the rights for the composition. Anyone who wants to publicly perform a musical work must obtain a license. Performing rights organizations ("PROs") pool the copyrights held by a work's composer, songwriter, and publisher and collectively license those rights to music users, such as restaurants, radio stations, online services, television stations, and performance venues. PROs offer a "blanket" license to give music users immediate access to millions of songs without having to negotiate individual licenses for each work.
The two largest PROs are the American Society of Composers, Authors and Publishers ("ASCAP") and Broadcast Music, Inc. ("BMI"). ASCAP and BMI are subject to consent decrees that settled antitrust lawsuits brought in 1941 by the Department of Justice ("DOJ"), which alleged that each organization had unlawfully exercised market power acquired through the aggregation of music performance rights. The consent decrees have been modified several times, but they are still in effect today, nearly 80 years later. (A consent decree is the court order that memorializes the settlement agreement under which a company commits to take certain actions to resolve a government antitrust enforcement action.)
In 2014, ASCAP and BMI proposed to the Antitrust Division modification of the consent decrees, to allow publishers to "partially withdraw" from the PROs. Under a partial withdrawal system, a publisher would be able to partially withdraw its rights from a PRO and thereby prohibit the PRO from licensing the withdrawing publishers' music to digital services such as Pandora or Spotify. DOJ initiated an investigation to determine if it would join ASCAP and BMI in proposing this modification to the federal court that has jurisdiction over the consent decrees.
The DOJ investigation stumbled into a related question: If no single PRO controls all the copyrights to a musical work, does a license from a PRO that has some of the copyrights allow the licensee to publicly perform that work, or must the user obtain licenses from all PROs holding copyrights to multi-owner works? If the consent decree were interpreted to require a full-work license, then a user could contract with only one PRO to have access to the full-work. But if fractional licenses are permitted, then the user must license each fractional piece of the work. In this dispute, music users claimed that PROs always offered full licenses to perform all works in their repertories, whereas music rightsholders claimed that PROs were not entitled to offer full licenses to perform fractionally owned works.
DOJ concluded that its consent decrees require ASCAP and BMI to offer full-work licenses, rather than fractional licenses. But this issue eventually overshadowed the original question of partial withdrawal. As DOJ explained, "the lack of industry consensus as whether the PROs offer full-work licenses creates too much uncertainty to properly evaluate the competitive impact of allowing partial withdrawal." Thus, after two years of investigation, that included hundreds of public comments and dozens of stakeholder meetings, DOJ declined to answer the question of "partial withdrawal." In August 2016, DOJ issued a closing statement that did not modify the consent decrees, and stated its position that the PROs' blanket licenses are full-work licenses as opposed to fractional licenses. (This dispute was discussed in more detail in our prior Alert.)
BMI immediately petitioned the court (the U.S. District Court for the Southern District of New York) to declare that its consent decree does not require full-work licensing. Judge Stanton agreed with BMI and held that "the Consent Decree neither bars fractional licensing nor requires full-work licensing." "Nothing in the Consent Decree gives support to the Division's views." DOJ appealed this decision to the Second Circuit, which affirmed Judge Stanton's decision, leaving in place an interpretation of the decree that neither requires full-work licensing nor prohibits fractional licensing.
Implications
Enforcement of a Consent Decree is Limited to its "Four Corners." DOJ had concluded that the consent decrees require full-work licenses, relying "not only on the language of the consent decrees and its assessment of historical practices, but also because only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses." On appeal, DOJ argued that, if fractional licenses were allowed, license negotiations would be delayed, because users would need to obtain rights from all the fractional owners before performing the works in the ASCAP and BMI repertories. The court was not persuaded by this policy argument, holding that consent decree interpretation "begins and ends with the language of the consent decree…. To the extent DOJ asks us to read an additional requirement into the decree to advance these procompetitive objectives, we are foreclosed from doing so."
The court may also have been influenced by the argument that DOJ's interpretation would have reversed established industry practice. DOJ had conceded that requiring full-work licenses would "require adjustment by some market participants." DOJ was willing to forego enforcement actions against fractional licensing by ASCAP or BMI for one year, so long as they proceeded in good faith to ensure compliance with the consent decrees as now interpreted. BMI's view was that this "adjustment" would have had massive costs and "cause unnecessary chaos in the marketplace." The district court's familiarity with how these decrees historically had been enforced may have made it hesitant to accept DOJ's new interpretation of the consent decree.
Modernization of Consent Decrees. The ASCAP and BMI consent decrees have been in place since the days of the phonograph. And while the original purpose of the 2014 investigation was to determine the effectiveness of the consent decrees given changes in how music is consumed, DOJ's new approach closing statement had the effect of increasing regulation.
The Trump DOJ has taken a completely different approach, announcing a policy to avoid regulatory consent decrees and a plan to review old antitrust consent decrees, with a view to seeking to end those that are no longer useful. DOJ's top antitrust official said this would include decrees in the entertainment and music industries. "We have industries that have rapidly been changing that are regulated by the Justice Department through a consent decree in some court…. Is the market a better place, is the market the better way to regulate prices? Obviously Congress knows how to pass copyright law. Maybe they are the better ones who are informed rather than us for 77 years regulating how that business applies." (Legislation has been introduced in Congress to revise the music copyright system, although this Music Modernization Act would retain court oversight of ASCAP and BMI.)
The courts' rejection of the Obama DOJ's goal-oriented interpretation of these consent decrees closely aligns with the views of the new Administration that antitrust consent decrees are not good regulatory tools and should be limited in time. It should be expected that today's DOJ decision-makers will limit the use of decrees that involve regulatory or conduct commitments by companies, whether in the context of antitrust challenges to mergers (as discussed elsewhere) or other business conduct.
Three Key Takeaways
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Under the Obama Administration, DOJ sought to use the PROs' consent decrees to expand regulation, but the Trump DOJ has been more skeptical of regulation through consent decrees.
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Going forward, DOJ is expected to use consent decrees only on a limited basis. DOJ leaders have considered whether consent decrees provide less effective regulation than the market or copyright law would provide.
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Legislation known as the Music Modernization Act has been introduced in Congress to update the music copyright system, although the legislation would continue court oversight of ASCAP and BMI.
Matthew Accornero, an associate in our Los Angeles Office, assisted with the preparation of this Commentary.
