Tags: justice department | copyright | trolls | music

Department of Justice Prevents Creation of Music Copyright Trolls

Department of Justice Prevents Creation of Music Copyright Trolls

By    |   Thursday, 21 July 2016 09:18 PM

The Department of Justice will shortly issue its decision on the status of two antitrust consent decrees with the two largest collectives of the songwriters and music publishers, the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music Inc. (BMI). 

Following antitrust actions against both, ASCAP and BMI have operated under consent decrees with DoJ for decades. These consent decrees allow ASCAP and BMI to maintain their monopolies and at the same time protect consumers from monopoly pricing.

ASCAP and BMI asked DoJ to make sweeping changes to how music is licensed.  These changes would require DoJ to relax the anticompetitive restraints provided in the consent decrees.

After two years of analyzing the marketplace, DoJ has reportedly decided that no changes should be made to the consent decrees.

In rejecting ASCAP and BMI’s effort to change the way music is licensed, DoJ also prevented the same problems facing patent users from infecting those that license copyrights.

For the past several years, Congress has attempted to mitigate the negative economic impact of patent trolls.  Businesses, large and small and from every industry, have been hit with frivolous suits by those claiming infringement a stake in a patent. 

In most cases, it is easier for the business to pay off these trolls rather than to litigate the issue.  In some cases, however businesses are forced to spend heavily defending themselves against erroneous claims.  These trolls are a drain on the country’s economy and creativity.

Had DoJ agreed to ASCAP and BMI’s requested changes to the consent decrees, it would have created a new form of “copyright troll.”  ASCAP and BMI asked DoJ to upend the way music has been licensed by moving to a fractional basis. 

Restaurants, retail stores, radio stations – any business that plays music - has to license millions of songs as a form of insurance against inadvertent copyright infringement.  Most of these millions of songs have more than one owner – some have many different owners.

Businesses have always been able to license a song as long as one of the owners agrees (that owner is usually a member of ASCAP or BMI), and all the other owners are compensated.

ASCAP and BMI wanted DoJ to change the rules to require businesses to license with every owner of every song, a process called “fractional licensing.”  In general, the publishers want fractional licensing because the added hold-up power will drive prices upward.

If a restaurant has negotiated a price with 3 of 4 owners, the fourth owner can hold out for more money. This kind of negotiation might be fine in other sectors, but there are two distinctions to remember about music compositions. First, the volume of music licenses makes this impossible to manage. Licensees have to license millions of works meaning tens of thousands to hundreds of thousands of different rights holders.  Second, the licenses cannot simply walk away from a negotiation if we don’t like the price.

These licenses provide the right to play a song and they serve as insurance policies against infringement. For example, even if a bar does not play a specific work, they don’t have 100% control of the music that ultimately is performed, therefore they have to license everything or open themselves up to millions if not billions in infringement liability.

The terms of the consent decrees clearly prohibit fractional licensing. For one thing, it would be physically impossible for a business to negotiate with every owner of the millions of songs needed to license to prevent infringement. More importantly, fractional licensing would further increase anticompetitive behavior and lead to the same behavior that has infected the patent world.

A move to fractional licensing would mean an owner with a 1% stake in a song would have the same hold up power as someone with a 99% share. Since a business must license with both owners in this example in order to obtain the rights needed, there would be no competition over price. Fractional licensing would only create a stacked monopoly situation – not exactly the best goal for a market.

Another way to look at it is that under fractional licensing, two owners would not compete in terms of setting a price.  Both licenses would be equal “must haves” in order to play the song. Hence the 1% owner has substantial hold up power and these licenses can serve as indemnification against an infringement claim. Statutory infringement penalties are up to $150K per infringed work and some licensees play thousands and thousands if not millions of works. If fractional licensing were allowed, infringement coupled with hold up power would be the leverage point to force higher rates.

Such a process would be easily manipulated to raise prices and lead to a flood of new copyright infringement suits.  The sole purpose of ASCAP and BMI pushing fractional licensing was to raise prices businesses pay for music. By granting additional hold up power, the cost of music would have increased dramatically.

To make matters worse, businesses licensing music do not have knowledge of who owns what stake in what song, so many businesses would be exposed to infringement claims. Real or not, as is the case with patents, many businesses would simply pay to make massive infringement risks and attorney fees go away.

By doing nothing, DoJ’s Antitrust Division did exactly the right thing.  Had DoJ bent to ASCAP and BMI’s demands, businesses across the country would have faced higher costs and constant threats of litigation by copyright trolls.

Christopher (Chris) Versace is the editor of the newsletter The Growth & Dividend Report and is a featured columnist to The Street.com as well as a contributor to FoxBusiness.com and Forbes.com. To read more of his blogs, CLICK HERE NOW.

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For the past several years, Congress has attempted to mitigate the negative economic impact of patent trolls.
justice department, copyright, trolls, music
Thursday, 21 July 2016 09:18 PM
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