Chris Castle’s Comment to Justice Department on 100% Licensing: Part 2

We are reprinting comments on 100% licensing made to the Justice Department by Chris Castle in November 2015, Keith Bernstein of Crunch Digital and David Lowery, starting with Chris.  Some will be in multiple parts.  This is Part 2 of two parts, read part 1 here.

3.  Questions for Comment

(a) Have the licenses ASCAP and BMI historically sold to users provided the right to play all the works in each organization’s respective repertory (whether wholly or partially owned)?

Music users I am aware of understand that they need to obtain PRO licenses from ASCAP, BMI and SESAC because of fractional ownership and affiliation of songwriters individually and as co-writers.  The licenses issued by all the PROs are limited to the rights controlled by the applicable PRO.

(b) If the blanket licenses have not provided users the right to play the works in the repertories, what have the licenses provided?

Respectfully, the question is ambiguous and a complex question.  As noted above, the blanket licenses provide users the right to play the works in the respective ASCAP or BMI repertories to the extent of the contributory share of an affiliated co-writer or in its entirety if the work is 100% written by an affiliated songwriter.  As is quite well known in the relevant market, blanket licenses provide users the right to publicly perform the subject works as a necessary but not always sufficient condition as other PRO licenses may be required.

(c) Have there been instances in which a user who entered a license with only one PRO, intending to publicly perform only that PRO’s works, was subject to a copyright infringement action by another PRO or rightsholder?

What motivates PRO licensing is the music.  I have never encountered or heard of a user who would only get one PRO license.  There is no “ASCAP format” or “BMI genre”.

Attempting to use songs represented by one PRO would be ill-advised as such a practice would require someone at the user to monitor songs being performed with 100% accuracy, probably before their performance.  I’ve never known or heard of a user who wanted to do this or who viewed it as an opportunity to be sought out.  If this is a question based on a real event in the marketplace, I would appreciate being told how it arose.

If a user adopted such an ill-advised scheme, then they would be assuming the risk that they would make a mistake and perform works represented by another PRO for which the user had no license.  Those works would be then unlicensed and leave the user open to potential infringement claims.

Events might occur that would make a single license appropriate, such as a Broadway show that was written entirely by an ASCAP songwriter or team, but even so, as a matter of business practice theaters would typically obtain licenses from all three societies.

(d) Assuming the Consent Decrees currently require ASCAP and BMI to offer full-work licenses, should the Consent Decrees be modified to permit or require ASCAP and BMI to offer licenses that require users to obtain licenses from all joint owners of a work?

Respectfully, if the Consent Decrees required ASCAP and BMI to offer full-work licenses, i.e., if the government currently forced ASCAP and BMI writers to permit the other society to grant licenses for their works, I would be willing to bet that would be news to everyone in the music business around the world, including heirs.

As noted above, in my experience the default position is that all songwriters license through their PRO to the extent of their share only.  It is also the expectation of music users that they need to obtain licenses from all three PROs in order to have full coverage.  To my knowledge, this issue has never arisen before in any licensing negotiation with a PRO, nor has it ever been raised by any rate court.  Given the way songwriters are frequently treated by the government’s rate courts, it seems unlikely that they would have missed an opportunity to impose even greater burdens on songwriters if they thought that was a possibility.

If the Consent Decrees are this out of step with the long-standing expectation of songwriters, music publishers and PROs, including ex-US songwriters and music publishers, then respectfully this previously unknown ambiguity in the Consent Decrees should be clarified to conform to reality and not the other way around.

(e) If ASCAP and BMI were to offer licenses that do not entitle users to play partially owned works, how (if at all) would the public interest be served by modifying the Consent Decrees to permit ASCAP and BMI to accept partial grants of rights from music publishers under which the PROs can license a publisher’s rights to some users but not to others?

It is axiomatic that under the 1976 Copyright Act, copyright is a bundle of rights.   Copyright owners are largely free to exploit their rights or subdivisions of copyright in whole or in part or to withhold the exploitation of those rights.  This is arguably the fundamental reason why PROs exist—to administer the performance right subdivision of the bundle.

Methods of monetizing songs have evolved with technology as the marketplace identifies previously unknown methods of exploitation by previously unknown users.  Some songwriters may not wish to do business with some users who have a bad commercial reputation in the marketplace, are widely perceived to not respect the rights of creators, or who are known to leverage their dominant or monopoly positions in the marketplace in ways that are perceived by particular songwriters as unfair or untrustworthy.  A brief article search online will provide the Department with ample evidence of how songwriters perceive certain music users.

The implication of the question is that songwriters should be denied their right to decide who they want to associate themselves with by means of a performance right license.  Unlike the government’s compulsory license under Section 115 of the Copyright Act, collective licensing is not a suicide pact.

I would also point out that the question is miscast slightly, but in important ways.  ASCAP and BMI have always offered licenses that allow users to play the works these PROs represent to the extent of the ownership share of their respective affiliated songwriters.  The premise of the question assumes facts not in evidence, that is, that ASCAP and BMI currently are authorized by their affiliated songwriters to offer a license of more than the songwriter’s contributory share of particular works.

Therefore, the long-standing practice has been that ASCAP and BMI (and every other PRO) can only license partially owned works.  So while the antecedent condition is not necessarily false, it states in a kind of tautology the condition that is the only possibility, i.e., “If ASCAP and BMI were to offer the only licenses they are capable of offering….”

  (f) What, if any, rationale is there for ASCAP and BMI to engage in joint price setting if their licenses do not provide immediate access to all of the works in their repertories?

Again, there is an unhelpful ambiguity in the compound question.  ASCAP and BMI license all available repertoire to the extent of the contributory share of their affiliated writers.  This is no secret to any music user I have ever encountered or heard of.

A music user lacking appreciation of the creative process or the administration of rights in the music business may find it inconvenient that they have to get multiple licenses.  It certainly is true that getting three licenses is a greater inconvenience than getting one, just like it would be easier if Lennon-McCartney were just Lennon or McCartney.

However, it is arguably most likely to be the greatest inconvenience to a user who intends to take the regulated PROs through the vastly expensive rate court over each license.  Given the relatively recent explosion of rate court cases, we know that these users are frequently well-heeled public companies with multi-billion dollar market caps like Google, Pandora or SiriusXM who know full well what the licensing requirements are in the music business.

4.  Common Practical Applications

You may wish to consider the following non-exhaustive examples of common fact patterns that routinely arise in the music industry that could be negatively affected by a change to 100% licensing by PROs.

In my view, it is common practice for attorneys representing songwriters to recommend that the songwriter client at least attempt to obtain some form of agreement documenting the contributory share of each writer and establishing the administration rights of each writer.  One of those rights is each writer’s ability to collect their contributory share of each song directly from the applicable PRO.  I will leave it to others to determine whether failing to advise clients of the need to obtain these agreements amounts to negligence, but it is very, very common.

It is hard to know how many written contracts exist regarding all compositions currently in copyright, but a reasonable estimate would be hundreds of thousands and an untold number of oral agreements.  All of these agreements would be affected by a change in the default position.

(a) Separate Administration Agreements:  Probably the most common arrangement, songwriters who write together frequently sign a one or two page “split agreement” which is essentially the default position.  A split agreement at a minimum memorializes their respective (1) contributory share of (2) particular songs plus their (3) PRO affiliation, (4) contact information and (5) a simple statement that they each will administer their respective shares of the song (6) including registering the song with their PRO reflecting the applicable song splits and the right to collect monies directly from their PROs.

(b) Artist/Writer Administration Agreements:  A joint administration agreement usually provides the same basic terms as the separate administration agreement in 4(a), but instead of the separate administration rights in (5) the artist/writer may ask for the non-artist co-writer (or “outside writer”) to pre-approve certain common marketing type uses (such as free licenses for a “download of the week” or performance video) but still taking a hands-off approach on PROs as in 4(a)(6) so that co-writers and their publishers can authorize their PRO to collectively license the co-writer’s contributory share of the song and collect applicable monies.

(c) Leaving Members:  It is common for group artists to also be self-contained songwriting teams.  When groups break up or members leave, there is typically either a settlement agreement or a self-executing “buy-sell” type agreement in place through a group partnership or shareholder agreement.  The leaving member may then be treated similarly to the “outside” co-writer.  When groups break up, like any other partnership dissolution there may be bad blood, so the fewer loose ends the better.

Given the inability of any government to stop massive piracy, performance royalties have become even more important revenue sources to songwriters so a leaving member may be able to use 100% PRO licensing to gum up the works thus handing the leaving member potentially significant leverage.  Alternatively, the remaining members could use 100% licensing to the disadvantage of the leaving member.

(d) Bank Loans, Tax Liens and PRO Advances:  Songwriters may use their PRO payments to collateralize loans.  This usually results in the songwriter directing the songwriter’s affiliated PRO to make payments to the lender.  If the debtor songwriter’s catalog is subject to 100% licensing by a PRO that the songwriter is not affiliated with, then those payments might trigger an event of default under the applicable loan documents.

Similarly, if the Internal Revenue Service or a state tax authority places a lien against a songwriter’s public performance income, if the tax debtor songwriter’s catalog is subject to 100% licensing by a PRO that the songwriter is not affiliated with, any payments might escape the lien and trigger a tax penalty or other action by the governmental entity concerned.

Songwriters frequently are paid a prepayment of performance royalties (“advance”) by their PRO.  PRO advances are then recouped from PRO payments (either the writer’s share or the publisher’s share or both).  These advances are often part of a songwriter’s financial planning and are calculated by reference to past performance and future activity based on timing and contributory share of the songwriter’s compositions.

It is unclear what affect 100% licensing would have on these payments, but if there is a risk that otherwise dependable cash flow would be interrupted then PROs will be less likely to pay advances to their affiliated songwriters.  If that were the result, it would be very unfortunate for songwriters.

(e) Parodies:  Major parodists often negotiate a stand-alone deal with the owner of the parodied composition rather than rely on the fair use defense.  Such an agreement quiet’s title to the parody and gives comfort to the parodist who may be investing significant sums in videos, marketing and other promotion.  These agreements allow the parodist to collect their share of performance royalties directly from the parodist’s PRO.  In a 100% PRO licensing structure, the owner of the underlying composition may be reluctant to grant such a license.  Alternatively, the parodist may not find it attractive to create the parody.

(f) Samples:  It is common for owners of sampled material to exhibit hold out behavior.  100% PRO licensing will hand the owner of the sampled material the opportunity to use their (usually small) share of the interpolating song to collect 100% of the revenue.

(g) Hold Outs:  If the government forces PROs to collect 100% on co-written songs, each co-writer will have to rely on the other to actually pay through the monies owed for the co-writer’s share.  Even if the co-writer receiving the monies actually intends to pay over the other writer(s) share(s), it is unlikely that the collecting PRO will take responsibility for making that payment and each writer will have to bear the responsibility and the cost of making these payments.

(h) Co-Writer Selection:  It is likely that songwriters will start leaving ASCAP and BMI to avoid 100% licensing interfering with their contracts and business practices, and will also start selecting their co-writers based on their PRO.  This has never before been an issue, but the 100% licensing model will be so horrendously confused and disruptive that no songwriter who could get away from it will fail to do so.  If a songwriter can leave ASCAP or BMI, they would not then co-write with an ASCAP or BMI member in order to avoid getting dragged right back into the mess.

(i) Writers Share/Publisher Share:  It is unclear whether the DOJ is anticipating 100% licensing applying to both the writer’s share and the publisher’s share of public performance revenue.  This is important because the writer’s share is typically paid through to the songwriter directly by the writer’s PRO, unless there is a loan, tax lien, advance or other reason to redirect the payments.

If the intention is to for the 100% licensing to truly be 100%, that might require every PRO to pay back up withholding to the IRS for the writer’s share as well as the publisher’s share.  My guess is that at a minimum all PROs would find their administrative costs would at least double overnight and the PRO would likely have no contractual basis to deduct the administration costs they would be forced to incur from revenues paid to unaffiliated writers.

(j) Valuations:  It is difficult to say how 100% licensing would affect the valuation of music publishing companies.  In theory, the earnings should not change, but the transaction costs involved can reasonably be anticipated to go through the roof.  This increase in costs would have the effect of decreasing net publisher’s share, which is the cornerstone measurement of publishing catalog valuation.

(k) Duplicative Transaction Costs:  To conclude with what is the most important reason to leave the status quo alone, 100% PRO licensing would necessarily create new and duplicative accounting and transaction costs that will ultimately be passed along to the songwriters.  For example, in order to make payments for the share of the song that the co-writer does not own, the co-writer will have to obtain W-9s, file tax documents and potentially have to set up an entirely new business organization.

Realize that these will be new costs, not a transfer of the user’s administrative costs as noted above.  The new costs will be from reprogramming accounting systems that will essentially require producing a manual statement to confirm the accuracy of the 100% license, and then incurring the new cost of matching 100% payments collected.  This is all assuming that there is some knowable choice made regarding which PRO does the collecting and which one does the receiving and that no disputes arise.

I appreciate the opportunity to participate in the Department’s fact finding regarding this critical issue.  I hope I have helped to persuade you that this 100% licensing is a wrong headed idea that could have disastrous effect on the music industry that is already suffering a massive decline in revenue from unstopped piracy.

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