Antitrust Alert: U.S. Department of Justice Rejects Modification of Music Licensing Consent Decrees

After a two-year investigation, the U.S. Department of Justice has decided not to seek modification of longstanding music licensing consent decrees with the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music Inc. (BMI). Moreover, the proceeding that followed the request to modify gave DOJ the opportunity to clarify a long-debated issue regarding the type of license ASCAP and BMI offered, potentially changing the future business practices of these organizations. The decision is a blow for music publishers like Universal Music Publishing Group and Sony/ATV Music Publishing and a win for music service providers like Pandora and Spotify.

Background

ASCAP and BMI are "performing rights organizations" (PROs), which manage music rights between (a) composers and songwriters and (b) users, such as restaurants, radio/television stations, online services, and performance venues that want to play music for the public. PROs aggregate copyrights held by composers and songwriters and license the rights to music users. ASCAP and BMI are the largest PROs and are responsible for licensing a large majority of works in the U.S.

In 1941, DOJ settled antitrust lawsuits against ASCAP and BMI that alleged they had used their market power to aggregate public performance rights and fix prices in violation of Sherman Act § 1. Unusual for being perpetual consent decrees, these settlement agreements still are in effect today.

In 2014, ASCAP and BMI requested that DOJ agree to seek modification of the existing decrees to allow publishers to partially withdraw works from PROs, to prevent PROs from licensing such works to digital music users such as Pandora or Spotify; streamline the process by which fee disputes are resolved; and permit PROs to offer licenses to rights other than the public performance right, particularly for users that also need a performance license.

In response to its solicitation for public comments on the proposed modifications, DOJ received more than 200 responses from various stakeholders, such as composers, publishers, music licensees, and advocacy groups. Although stakeholders proposed numerous additional modifications, during its investigation DOJ determined that it first had to resolve questions about the treatment of multi-owner works. Specifically, conflicting views existed about whether DOJ's settlement permitted PROs to offer "fractional" licenses.

Fractional licenses

A fractional license grants licensees the right to play multi-owner works only if all the owners or artists are represented by the PRO, meaning licensees might need licenses from multiple PROs for some multi-owner works. For example, a licensee could not play the country music great, "Mamas Don't Let Your Babies Grow Up to Be Cowboys," without licenses to play the works of both Waylon Jennings and Willie Nelson. 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. First, textual interpretation and historical judicial interpretation of the consent decrees do not square with a fractional license interpretation. Licensees with ASCAP and BMI are supposed to obtain immediate use of covered compositions, but a user obtaining a fractional license might have to obtain additional licenses to the works of the co-owners (both Willie and Waylon). Second, fractional licensing would impair the market for public performance licensing because music users would need to track song ownership meticulously to avoid copyright infringement. Moreover, DOJ expressed concern that owners of fractional interests in songs would be incentivized to withhold partial interests for a higher royalty.

Without clarity on the effects of its new full-license interpretation of the consent decrees, DOJ could not immediately evaluate the modification proposals. Therefore, DOJ agreed to forego enforcement actions based on any purported fractional licensing by ASCAP or BMI for one year, as long as ASCAP and BMI proceed in good faith to ensure compliance with the consent decrees as now interpreted. During this year, ASCAP and BMI will need to resolve challenges associated with complying with the full-work licensing requirement, including the identification of songs that can no longer be included in ASCAP's or BMI's repertories because they cannot be offered on a full-work basis and the voluntary renegotiation of agreements between co-owners to allow ASCAP or BMI to provide a full-work license to a particular song.

DOJ then determined that, without industry consensus on full-work and fractional licenses, there is too much uncertainty to determine whether further modification of the ASCAP and BMI consent decrees would be in the public interest. Since the DOJ decision, BMI and ASCAP have announced that they will fight DOJ's interpretation in court and in Congress. BMI has submitted a pre-motion letter to the New York federal district court that entered the decrees (in 1941), seeking a ruling that the DOJ's interpretation of the consent decrees is wrong, or in the alternative to modify the consent decrees. BMI and ASCAP allege that the DOJ's interpretation is contrary to longstanding industry practice, benefits no one, and will disrupt the music marketplace.

Implications

Although perpetual consent decrees are unusual, this matter highlights the current DOJ's regulatory approach. The current administration is more likely to favor intervention where past administrations more often relied on the market sort out these issues. Indeed, according to BMI, the practice of fractional licensing has existed in the music industry for the last 50 years. Moreover, the result in this matter shows that DOJ is not shy about going beyond the scope of a requested review (or investigation) into matters it thinks would benefit from its attention. Here, the PROs asked DOJ to modify its consent decrees, but found themselves with additional burdens that will require changing their business practices and renegotiating an untold number of contracts.

DOJ's closing statement, which totals 22 pages, is significant with respect to its length and the detail provided can be found on its website.