In mid-September, a federal judge in New York made an abrupt and highly controversial ruling that will impact millions of businesses across the country.
During a routine procedural hearing, the judge overturned decades of industry practice involving the licensing of musical rights.
The target of the judge’s ruling was a recent Department of Justice decision regarding the two largest collectives of the music industry – ASCAP and BMI.
Millions of businesses (from restaurants to night clubs to radio stations to retail stores) purchase licenses to play music through ASCAP and BMI.
However, due to a history of anticompetitive abuses, ASCAP and BMI operate under antitrust consent decrees with the Department of Justice. These consent decrees permit ASCAP and BMI to maintain their monopolies, but include restraints that protect consumers from monopoly pricing.
Over the past several years, ASCAP and BMI have undertaken a campaign to relax the anticompetitive protections of the consent decrees. Despite record revenues, ASCAP, BMI, and their largest music publisher members know that without these market protections, their market power could generate higher fees on businesses.
ASCAP and BMI took their case to the Department of Justice in 2014.
In addition to relaxing the anticompetitive protections of the consent decrees, ASCAP and BMI also asked DoJ to change the way music has been licensed for decades. Specifically, ASCAP and BMI asked DoJ to move to what is called fractional licensing – an approach that would require a license from every owner of a song. While this approach sounds somewhat reasonable, in practice, it would prove impossible. A business like a restaurant or a retail store must license millions of songs to protect itself from copyright infringement claims. Since the average song has several owners, fractional licensing would require businesses to license millions of the same rights multiple times over.
Fractional licensing would not only ground the market for music licenses to a halt, it would expose millions of businesses to a high risk of copyright infringement. There is no plausible way that a business can identify who owns what, much less, who owns what share of a work. This would leave many businesses unsure if they had secured the proper rights and leave many open to massive infringement liability.
Just as bad, the added exposure to infringement liability would promote the same troll-like behavior that has invaded the world of patents. Infringement would be used as leverage to extort higher and higher ransoms from businesses of all shapes and sizes.
Following more than two years of exhaustive review, in August, Justice determined that the marketplace needed to preserve these protections, and opted not to change the consent decrees. Further, Justice clarified that fractional licensing is not permitted under the consent decrees.
This was a monumental loss for ASCAP and BMI, and the two organizations immediately undertook a campaign to undo DoJ’s decision. ASCAP ran to its allies on Capitol Hill, and BMI ran to the federal court for the Southern District of New York, which has jurisdiction over both consent decrees.
It was no accident that BMI took the lead in the courts. The judge overseeing the BMI consent decree has traditionally proven friendlier to the monopolist than the judge overseeing the ASCAP consent decree.
The venue shopping paid off.
In an initial procedural hearing, without the benefit of any testimony, the BMI judge issued his decision to overturn DoJ’s decision on fractional licensing. To say this judge’s actions were questionable is an understatement. Not only was there no testimony on the merits, the fact the judge issued a six page written decision within the hour, suggested the whole event was pre-packaged.
Most industry observers expect that the Department of Justice will not only appeal this decision, and will very likely win on appeal. Beyond the clear prohibition of fractional licensing in the consent decrees, which both ASCAP and BMI agreed to, all legal precedent supports DoJ’s position.
Unfortunately, millions of businesses are left in limbo in the meantime.
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