THE EVER CHANGING LEGAL LANDSCAPE OF DIGITAL MUSIC
by Serona Elton

Over the past two and a half years or so, there have been a number of hugely important legal decisions rendered by the courts, the Register of Copyrights, and the Copyright Royalty Board, as well as a few pending ones. These decisions are shaping the new digital landscape of the music industry. They define terms such as digital phonorecord delivery (a.k.a. permanent digital download), ringtone, and interactive streaming; distinguish between a reproduction and a performance; establish licensing procedures; set royalty rates, and; address whether or not a permanent download should be treated as a sale or as licensing income for artist royalty purposes.

The documents involved in these decisions are well written and full of historic references and present day explanations of the music copyright landscape. They contain well articulated arguments for and against the proposal or issue at hand, written in a manner that is easy to follow for someone who has already obtained a basic level of understanding in music copyright. Reading these documents is far better than reading the brief snippets that can be found on the various music news sites, and together they make a nice supplemental reading assignment for any music copyright course.

Unfortunately, it isn’t that easy to find all of this information on the internet. Some information can be found on:

-The Copyright Office website
-The Copyright Royalty Board website
-The Library of Congress website
-Third party law sites like www.lawupdates.com

-The Federal Judiciary’s centralized system, PACER

The PACER (Public Access to Court Electronic Records) system is available to the public. There is no cost to register. However, there is a per-page charge of 8 cents for any documents that are downloaded. This system is a useful tool for obtaining legal briefs and court opinions relating to federal lawsuits. To set up an account, go to http://pacer.psc.uscourts.gov/psco/cgi-bin/register.pl. You will need to put a credit card on file for any per-page charges. When using the system, you will want to begin by searching the U.S. Party / Case Index database to find the case you need.

This article summarizes most of the recent topics. Where possible, I have provided a link to the relevant PDF. If you are unable to find the documents referenced below, feel free to email me at selton@miami.edu and I will email you the PDFs.

Ringtones and mechanical licensing
Memorandum Opinion
Issued by Marybeth Peters, Register of Copyrights
October 16, 2006
(Docket No. RF 2006-1, 34 pages)
http://www.copyright.gov/docs/ringtone-decision.pdf

Summary:
This document contains the official Register of Copyrights opinion that ringtones are digital phonorecord deliveries (DPDs, i.e. permanent downloads), and are subject to statutory licensing under 17 U.S.C. § 115. Simply put, this determination means that someone wanting to make part of a cover record available as a ringtone can “go compulsory” if they are unable to obtain a negotiated license from the music publisher. This determination also means that the statutory royalty rate is applicable to ringtones. At the time of this decision, the statutory rate was 9.1 cents or 1.75 cents per minute or fraction thereof, whichever is greater, with no special rate set for ringtones. However, many negotiated licenses were already in place between record companies, music publishers, and mobile telephone companies regarding the ringtones selling in the marketplace. Those between the major record companies and music publishers are called “New Digital Media Agreements” (NDMAs) and were executed in November of 2004. These negotiated licenses typically had royalty rates set at the greater of 10 cents, 10 percent of the retail price, or 20 percent of the wholesale price, all of which are higher than the statutory rate. Despite this opinion, the major record companies decided to continue obtaining mechanical licenses for ringtones under the rates and terms in place in their negotiated licenses, even though it meant paying a higher mechanical royalty.

The current statutory royalty rate for ringtones is different from what it was at the time of this opinion, and is discussed below.

The new statutory mechanical royalty rate for phonorecords, permanent downloads, and ringtones
Final Determination of Rates and Terms
Issued by Copyright Royalty Judges
November 24, 2008
(Docket No. 2006-3 CRB DPRA, 102 pages)
http://www.loc.gov/crb/proceedings/2006-3/dpra-public-final-rate-terms.pdf
Codified into 37 CFR 385 Subpart A (Sections 385.1 – 385.4)

Summary:
This final determination was reached after a full proceeding including 28 days of testimony, which filled over 8,000 pages of transcripts, over 140 exhibits, and a docket containing over 340 pleadings, motions, and orders. The ruling set the statutory rate for physical phonorecords, permanent digital downloads (i.e. DPDs), at 9.1 cents or 1.75 cents (which happens to be what it has been since January 1, 2006) and set the rate for ringtones at 24 cents. It also set a late fee for late royalty payments, and defined a ringtone. The question of whether or not to adopt a percent of price (or revenue) model was raised in the proceeding. Presently only the U.S. and Canada use a penny-rate model for mechanical licensing. The decision to stick with the penny-rate model was made in order to avoid disputes that may arise due to each party’s lack of familiarity with dealing with revenue-based models, and to avoid some higher costs to music publishers that would have to modify their publisher-songwriter contracts that are structured on a penny-rate system.

The latest news with respect to this determination is that on Friday, February 25, 2009, the RIAA filed a challenge to the ruling of the Copyright Royalty Judges' determination with the U.S. Court of Appeals in the District of Columbia. According to various reports, the challenges focus on the late fees and ringtone rate portions of the determination.

The new statutory royalty rate for interactive streaming, other incidental digital phonorecord deliveries, and limited downloads
Final Determination of Rates and Terms
Issued by Copyright Royalty Judges
November 24, 2008
(Docket No. 2006-3 CRB DPRA, 102 pages)
http://www.loc.gov/crb/proceedings/2006-3/dpra-public-final-rate-terms.pdf
Codified into 37 CFR 385 Subpart B (Sections 385.10 – 385. 17)

Summary:
Until this determination, the Copyright Law and the Code of Federal Regulations didn’t address how interactive streams, incidental DPDs, and limited downloads should be handled. In 2001, the RIAA, NMPA, and the Harry Fox Agency entered into an agreement regarding subscription services on the internet. Without this agreement, the subscription services of today wouldn’t exist. This agreement set up a licensing mechanism so that the services could operate without infringing on recording and musical work copyrights. However, it left the royalty rate to be determined at a later time. At the time the agreement was signed, the RIAA made an advance payment to Harry Fox of $1 million dollars. The agreement established a further advance payment schedule to be followed until a rate was set.

This final determination was a result of the adoption of an amended settlement agreement reached between the various interested parties in the rate proceeding (parties such as the National Music Publishers Association, the RIAA, DiMA., etc.), with some changes made by the Copyright Royalty Judges. This determination was part of the same overall proceeding that determined the statutory rates for phonorecords, as listed above. However, this part of the rate determination has been a bit more confusing. The procedural history since September has been as follows:
-On September 22, 2008, the parties filed the agreement in the proceeding at hand.
-On October 1, 2008, the proposed language was published as a notice of proposed rulemaking in the Federal Register, giving other parties who would be bound by the adopted terms of the agreement an opportunity to comment and object to its adoption. Only one comment was filed, and the entities that filed the comment jointly were not parties affected by the proposed rates and so they lacked legal standing to object.
-On November 24, 2008, the final decision was published, which included the adoption of the agreement.
-On January 26, 2009, the Register of Copyright issued a decision identifying and correcting errors contained within the November 24th determination. This decision is only binding on future proceedings.
-On February 6, 2009, two of the three Copyright Royalty Judges decided to exercise their authority to amend their decision, taking into account what was in the Register’s opinion, and an Amendment to Final Determination of Rates and Terms was published.
- The Amendment to Final Determination of Rates has not yet been published in the Federal Register.

The language, as it appears in the Final Determination and the Amendment to it, defines a number of terms such as interactive stream, limited download, stream, etc. It sets forth rates, including promotional rates, for a number of different types of services, including ad-supported and subscription based services. I would very much like to summarize the rates here for you, but, frankly, they are too complicated for me to do so easily and briefly. There are 26 pages of double-spaced text in this Subpart, and you may want to take your own notes as you read it so that you can keep track.

The simplest way to explain them is to say they are the greater of an allocation of a percentage of adjusted revenue based on actual usage (e.g. $100 of adjusted revenue, 10.5% of revenue, 8 different recordings/songs played, results in (100 x .105)/ 8 = $1.3125 dollars allocated to each recording/song), after all public performance royalties have been deducted, or a minimum royalty rate.

Proposed legislation to create a terrestrial transmission performance right for sound recordings
Performance Rights Act
H.R. 848, 111th Congress (approximately 2 pages)
http://www.opencongress.org/bill/111-h848/show

Summary:
This bill, labeled the Performance Rights Act (officially titled To provide parity in radio performance rights under title 17, United States Code, and for other purposes), was reintroduced in the House on February 4, 2009. It had been originally proposed as H.R. 4789 in December of 2007, but stalled in a committee. It has currently been referred to the House Committee on the Judiciary. To summarize, the proposal suggests changes to the text of a number of different sections of the copyright law, primarily by changing language where “digital audio transmission” appears to simply “audio transmission”. The full text of the proposed amendment can be found using the link above.

Decision on whether or not permanent downloads are also performances
US v ASCAP - Civil Action No. 41-1395; 485 F.Supp.2d. 438 (S.D.N.Y. 2007)
http://www.lawupdates.com/pdf/postings/copyright/U.S._v._ASCAP.pdf (17 pages)

Summary:
On April 25, 2007, the U.S. District Court for the Southern District of New York issued an opinion stating that the downloading of a digital music file is a reproduction and not a performance. The decision was part of an ASCAP rate proceeding with AOL, RealNetworks, and Yahoo before Judge William Connor. The court has jurisdiction under the 1941 antitrust consent decree to oversee ASCAP's activities in the music industry, which includes determining royalty rates when parties cannot agree on them. The parties were unable to negotiate performance rates for the services, so they asked the court to decide. The effect of this decision is that services offering a-la-carte downloads do not need to obtain public performance licenses from ASCAP, BMI, or SESAC.

Decision on the public performance royalty rate online music services such as AOL, RealNetworks and Yahoo will pay to ASCAP
US v. ASCAP – Civil Action No. 41-1395; 559 F.Supp.2d. 332 (S.D.N.Y. 2008)
http://www.ascap.com/press/2008/pdf/ratecourtdecision.pdf (156 pages)

Summary:
On April 30, 2008, the U.S. District Court for the Southern District of New York issued an opinion stating that the rate shall be 2.5% of adjusted music-use revenues. The decision was part of an ASCAP rate proceeding with AOL, RealNetworks, and Yahoo before Judge William Connor. Click here for a well written article analyzing this decision.

Decision on whether or not the use of music in preview clips of ringtones and ringbacks must be licensed
US v. ASCAP
Civil Action No. 41-1395 (Case no: 1:41-cv-1395); not published
(a copy of the opinion can be found through the court’s PACER system)

Summary:
On January 30, 2009, the U.S. District Court for the Southern District of New York issued an opinion denying a motion by AT&T requesting summary judgement on the issue of whether its use of ASCAP music in its “ringtone” and “ringback tone” previews constitutes fair use. The decision was part of an ASCAP rate proceeding with AT&T before Judge William Connor. The parties to the case will now proceed with discovery. It will be interesting to see how this proceeding develops.

Decision on whether or not permanent downloads and ringtones should be treated as sales or licensing income when calculating artist royalties
F.B.T. Productions, LLC, Em2M, LLC v. Aftermath Records, Interscope Records, UMG Recording, Inc., Ary, Inc.
Case no: 2:07-cv-03314-PSG-MAN in the United States District Court, Central District of California; not published
(a copy of the opinion can be found through the court’s PACER system)

Summary:
This case was filed on May 21, 2007. The plaintiffs, representing rapper Eminem, claim that his record label underpaid him on permanent downloads and ringtones because it treated them as sales, applying a royalty percentage rate ranging from 12% - 20% rather than licensing income, which would have been paid at a 50% of net receipts rate. The jury trial began on February 20, 2009, and on March 6, 2009, the jury reached a verdict in favor of the defendant record companies. According to a report by Bloomberg news, the plaintiffs indicated they will likely appeal the verdict.

Public performance royalty rate for digital audio transmissions of sound recordings: Final Determination of Rates and Terms

http://www.loc.gov/crb/proceedings/2005-1/final-rates-terms2005-1.pdf
(Docket No. 2005-1 CRB DTRA, 125 pages)
April 23, 2007

Summary:
This determination sets the rates for the public performance of sound recordings and for ephemeral recordings for commercial and noncommercial webcasters.

Webcaster Settlement Act of 2008
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ435.110.pdf
October 16, 2008

Summary:
This amendment to the Copyright Law allows for a settlement agreement regarding rates between a group of webcasters and the SoundExchange to become effective and binding on all copyright holders upon submission to the Copyright Royalty Board and publication in the Federal Register. According to this Act, the settlement must be reached by February 15, 2009. On February 13, the Copyright Office was notified that an agreement was reached with the Corporation for Public Broadcasting. On February 15, two deals were reached: one with the National Association of Broadcasters; one with the Small Webcasters. On March 3, 2009, a notice of agreement appeared in the Federal Register, listing these three agreements. The terms of the agreements can be found here. The Copyright Office has no responsibility for administering the agreements. Webcasters that meet the agreements respective eligibility conditions can choose to use the rates and terms contained within them rather than the rates and terms determined by the Copyright Royalty Judges.

A well-written article regarding this topic was published on February 18, 2009, and therefore does not mention the third deal with the Small Webcasters, or the publication of the deals in the Federal Register.


Serona Elton is an Assistant Professor at the University of Miami’s Frost School of Music, in the Music Business and Entertainment Industry Program. Previously, she was the Vice-President, Mechanical Licensing and Repertoire Data Services for EMI Recorded Music, North America. She is also an attorney, licensed in New York and Florida.