Music Royalty Settlement Announced on Mechanical Royalties - Not A Decision on Webcasting Rates

by Davis Wright Tremaine LLP
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The broadcast and music trade press brought news of a settlement between music companies and digital media services regrading digital music royalties.  Some press reports jumped to the conclusion that the decision had something to do with the royalty rates that Internet radio companies pay SoundExchange for streaming their music on the Internet.  Others expressed disappointment that it did not seem to address that issue at all.  In fact, the reason that the settlement had nothing to do with webcasting was because it was a settlement of a Copyright Royalty Board proceeding involving a totally different right - essentially the right to reproduce a the musical work, i.e. the words and music to a song - not any public performance right that is involved in Internet radio streaming.

As we have written before (including the last time a similar settlement was announced), webcasters pay their royalties principally under Section 114 of the Copyright Act, which sets up a "statutory license" requiring that all copyright holders in a "sound recording" (a recording of a song by a particular artist) make their songs available for public performance to any digital music service that meets certain criteria - including principally that their service is a non-interactive one, where listeners cannot pick the particular song that they want to hear.  In exchange for this right, digital music services pay a fee set by the Copyright Royalty Board.  These fees cover liabilities for music use in a process where a service generates a product that goes from the service to many people, much like radio does in the traditional world, without making any sort of lasting digital copy that would be akin, in the physical world, to a CD or record.  The settlement that was just announced deals with rights that like those paid, in the physical world, by a record company to a music publisher for using a musical composition in a record or CD that the record company is recording with a particular artist, not with the public performance right.

The settlement dealt with Section 115 of the Copyright Act, which deals with payments made to the composers of songs - those who write the words and music of the songs - usually represented by a publishing company.  These paymnets are usually refered to as "mechanical royalties."  Under Section 115, those who want to make a sound recording can use the musical composition of any song, where that song has already been used in a sound recording.  Essentially, anyone can make a cover version of a song once it has first been "fixed" as a sound recording and distributed to the public.  In exchange for that right, the publishing company gets paid for every copy of any sound recording made using that musical composition.  

In the physical world, the Section 115 right covered the amount that record companies pay publishing companies for the use of these musical compositions.  The deal announced yesterday in fact includes such payments - essentially keeping the royalty for physical product the same as it has been - 9.1 cents per copy made (or 1.75 cents per minute for longer songs). 

But, in a digital world, it is much more complex to determine when a copy is made that demands compensation under Section 115 - when there has been a "digital phonorecord delivery" or a "DPD".  The parties have entered into a very complex agreement setting the amount to be paid by a digital music service for all sorts of potential uses of a musical composition.  The simplest is setting a fee for permanent digital downloads at the same 9.1 cents per copy as for physical copies.  For  ringtones, also a fairly simple situation where the number of copies of a song is easily computed, a fee is set at 24 cents for each time a musical composition is downloaded or copied for use in a ringtone.  

But this agreement goes much further - setting fees for all sorts of digital music uses that involve making available musical compositions in various interactive formats - from on-demand streams, to various types of cloud services where music can be played on demand either from music that users have uploaded or from music provided by a service itself, to various types of conditional downloads or cached copies of music available for some limited period of time.  All are assigned rates, for the most part computed as a percentage of the royalties paid to the record companies for the use of sound recordings (digital services that offer music on demand cannot rely on the Section 114 royalty available to noninteractive webcasters, each service will have to negotiate a royalty with the record company or other copyright holder for use of their sound recordings). 

There is also another complexity in the copyright world over the question of just when is a copy or DPD made. In the noninteractive world, just as sound recording copyright holders are compensated by services for the public performance of their music, publishers are also compensated for the public performance of their musical compositions.  That compensation is made by payments to ASCAP, BMI and SESAC (the Performing Rights Organizations or "PROs").  But in the digital world, there is a real issue that has been struggled with as to when a public performance ends and when a digital copy of the work begins.  For instance, should the provider of an on-demand stream be paying ASCAP, BMI and SESAC for the services music use as a public performance, or should they be paying the music publishers directly for a reproduction?  Or should they be paying both - essentially getting music back to the songwriter from two separate sources?

Rather than providing a simple answer to that question (as, under current law, there may not be one - see our article on a proceeding that the Copyright Office had to investigate the issue of when DPDs are made - which ultimately led to a conclusion that was, much like the defintion of obscenity that one Supreme Court justice came up with - we may not be able to define it, but we know it when we see it), the agreement instead sets up formulas where the fees paid to the PROs are subtracted from the fees to be paid to the publishers under this agreement - leaving open the question of how much is owed to the PROs for the public performance and how much is owed under the rights of reproduction (and distribution - a separate copyright under the law, stated to be covered under this agreement as the right to distribution usually goes hand-in-hand with the right of reproduction).

The details of this agreement, and the specific percentages of revenue to be paid as royalties by different services will be set out when the Copyright Royalty Board publishes this agreement in the Federal Register and requests public comment.  The last time such a deal was reached on the mechanical royalty, there were objections raising the questions of whether services like on-demand streams really implicated the reproduction right at all, or whether these kinds of services should only pay the PROs.  We may see that objection again here, or services may instead attempt to follow the finely crafted terms of this agreement that seem to cover most situations where music is used by digital media services.   

As for the noninteractive services that rely on Section 114 - don't look for change real soon, as the next proceeding to set new rates for webcasters starts in 2014 to set a rates by late in 2015 for the period from 2016-2020.  SiriusXM also pays royalties under Section 114 - and is currently in a proceeding to set royalties for its service for 2013-2017 (see our article about the litigation over their attempts to negotiate lower royalties to potentially be used as evidence in their proceeding).  Expect a decision in the CRB case setting SiriusXM's royalties by the end of this year - which could give some preview of what webcasters can expect in their upcoming case.

 

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Davis Wright Tremaine LLP
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