The Justice Department Quietly Backs Away From a Hard Line on Music Licensing

Yes, the DOJ is suing over the AT&T-Time Warner merger, but on the antitrust front, the Trump administration appears to be retreating in other places.
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Ed Sheeran

In the past week, the antitrust division of the U.S. Department of Justice has drawn great scrutiny thanks to its bold lawsuit seeking to block AT&T's proposed acquisition of Time Warner. According to the government, if the merger is allowed, AT&T would have the incentive and ability to substantially lessen competition in the media industry by doing something such as withholding or raising the price on an asset like HBO. The Justice Department could have demanded that AT&T promise to fairly license HBO and other assets to cable and satellite companies (similar to what Comcast once accepted in order to acquire NBCUniversal), but as the DOJ's antitrust chief Makan Delrahim put it in a recent speech, "If a merger is illegal, we should only accept a clean and complete solution, but if the merger is legal we should not impose behavioral conditions just because we can do so to expand our power and because the merging parties are willing to agree to get their merger through."

Pay attention here, because it might be an important signal that the Justice Department could actually be retreating from regulation. That might sound like an odd statement coming as the government puts its foot down on AT&T/Time Warner, but consider what's been happening under the radar in the government's big ongoing antitrust case over music licensing, which will be argued Friday at the 2nd Circuit Court of Appeals.

First, some background.

In 1941, in the midst of an antitrust investigation, the Justice Department entered into consent decrees with ASCAP and BMI that governed the licensing of public performance rights of songwriters, composers and music publishers. Since then, users of music — radio and television stations, bars, restaurants, fitness clubs, etc. — have enjoyed the ability to obtain blanket licenses for songs whenever they wished. If there's a dispute on licensing rates and terms, it goes to a New York federal court.

A couple years ago, the Justice Department decided to review these consent decrees, and while many in the music industry asserted that the rules had become outdated in the digital age, the DOJ decided to keep them. What's more, the government decided that 100 percent licensing, or "full-works licensing," was required under the consent decree. A hit song might be co-written by a star like Ed Sheeran, who uses BMI, and produced by someone else who uses ASCAP, but the performance rights organizations couldn't license their fractional shares of their respective catalogues. It had to be all. Or so it seemed.

BMI and ASCAP went ballistic over this — one executive called it "a clusterfuck of epic proportions," with warnings of administrative mayhem and the possibility that certain groups of songwriters might no longer be able to collaborate with each other. 

Lawsuits came, and U.S. District Court Judge Louis Stanton put a stop to the government's "full-works licensing" interpretation by handing BMI a win.

Now, the DOJ is appealing, but what has gone largely unnoticed is how the Trump administration has subtly shifted its arguments in the case in recent months. So much so that one may wonder if the consent decrees will have as much purpose going forward.

When the government's original brief was filed back in May, DOJ lawyers wrote how "fractional licensing would not be in the public interest," that it would impair the reliability of a blanket license and "would also create an incentive for the owners of fractional rights to hold out for disproportionate payments for them." As to the proposition that some split works like the Sheeran example above would then become unlicensable, the DOJ lawyers proposed that "songwriters and publishers have within their power the ability to agree to confer full-work licenses on PROs."

Unsatisfied, BMI responded with a pizza analogy.

"Suppose a consent decree imposes an obligation on a pizzeria to sell pizzas to all customers, without specifying that the pizzeria may only sell 'pizzas,'" stated a BMI brief. "Suppose further that the consent decree does not expressly address the sale of pizza slices, and the parties disagree as to whether the term 'pizzas' includes pizza slices. Under either scenario, the pizzeria is permitted to sell pizza slices, in addition to whole pizzas. Either pizza slices are included in the definition of 'pizzas' and the pizzeria is obligated to sell them under the decree, or they are not 'pizzas' under the decree and are unregulated, meaning that the pizzeria can offer slices, but is not required to do so. The same is true here."

Apparently, the government has now come to the view that a good chunk of the "pizza" — that is, song works — needn't be regulated.

In a reply brief in September, the Justice Department explained that it's not really seeking to prohibit BMI from offering fractional licenses in all contexts. That's because in the government's restated view, songs in BMI's repertory that fall under the consent decree are limited to those for which BMI has the right to grant full-work licenses. As for the songs which BMI only partially controls, the reply brief continues, "the Decree does not prohibit BMI from providing fractional licenses for songs that are outside the repertory, as defined by the Decree, and separate from the blanket license. Such licenses would be outside the auspices of the Decree and, thus, not subject to its requirements or its protections. For example, the rate court could not determine the reasonableness of rates for fractional licenses, nor for any per-program or blanket licenses that included fractional licenses."

In other words, a music user might need to negotiate a separate license for that Sheeran "split-work" song. A blanket license wouldn't cover it.

So what the hell is this appeal about then? Back to the pizza analogy.

"In pizza terms, the fractional license is closer to a cup of flour," write DOJ lawyers. "And anyone who delivers only a cup of flour after agreeing to deliver a pizza plainly is in breach."

Guess who doesn't like this interpretation one bit?

Google, iHeartMedia, the National Association of Broadcasters, MTV-owner Viacom, Netflix, SoundCloud, the restaurant and beverage industry, etc.

On Nov. 17, these entities acting collectively sought permission to participate in oral arguments before the 2nd Circuit. After reading the government's reply brief, they are alarmed at what the Justice Department is now saying about licensing "outside the auspices of the Decree." Although the government leaves the door open to a future antitrust lawsuit over fractional licenses if circumstances merit, the "important and controversial" prospect of unregulated music licensing has these users of music begging the 2nd Circuit for attention.

"In amici’s view, to allow BMI to engage in collective licensing of the right to publicly perform musical compositions in a manner that does not comply with the decree by the simple expedient of declaring its activities to be outside of the decree would be fundamentally inconsistent with the decree," states their brief. "Music users would effectively have no choice but to pay for not only the BMI license governed by the decree, but also the additional collective BMI fractional license — without the protection of an effective compulsory license on application or rate-court oversight. And that additional fractional license would not entitle music users to publicly perform the compositions in BMI’s shadow repertory, as that shadow repertory would not contain compositions at all, but rather mere fractional ownership interests in compositions."

On Wednesday, before the 2nd Circuit rejected this group's request to participate at the oral hearing, BMI sounded what might as well be its victory song.

"As the District Court held, and the Government now agrees, the Decree contains no prohibition on fractional licensing," wrote BMI's lawyers. "Because the Government now concedes that the Decree does not prohibit fractional licensing, the only question on appeal with respect to fractional licensing is whether BMI’s fractional licensing is subject to the constraints of the Decree or whether BMI’s fractional licensing is unregulated by the Decree."

The 2nd Circuit and maybe the U.S. Supreme Court will have final word on this.

In the meantime, don't assume Trump's Justice Department is a tough antitrust cop just because it is cracking the whip over the AT&T merger.  As the case over music licensing shows, the government may be headed towards more leniency even if it means taking a step back from more than 75 years of policing the music licensing business.

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