The prices we all pay for products and services are affected by patent and copyrights, and we should all be concerned about the process by which intellectual property is governed. The creation of the Inter Partes Review (IPR) process under the Patent Act lead to its abuse by those who would challenge patents that would come to be known as “patent trolls.” IPR allowed interested third parties to challenge patents, after they were approved, but it abused by patent trolls to the point of causing financial damage to the holders of many legitimate patents.
Legislation to reform the Patent Act, including proposals to eliminate IPR, is currently pending in Congress while there have been attempts to change the Copyright process for the licensing of music that could lead to “copyright trolls” that might well game the system in this area as the patent trolls have done.
The antitrust consent decrees, under which music publishers have operated since the 1940s, have been under review for two years by the Department of Justice (DOJ). The two largest representatives of songwriters and music publishers, the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music Inc. (BMI) represent about 90 percent of copyright holders.
ASCAP and BMI have sought to be released from the consent decrees or likewise remove the anti-competitive protections in the consent decrees in order to leverage their market power to extract much higher licensing fees from millions of business that license music, from restaurants, bars, retail stores and radio stations. If they got their wish, ASCAP and BMI would exercise monopoly power, and drive up music costs across the spectrum. The federal court in the Southern District of New York, which has jurisdiction over them, has rejected the attempt to weaken the consent decrees.
While is seems unlikely, the publishers have also asked the DOJ, in their review process, to weaken the consent decrees. Now the music publishers are pushing for the DOJ to rewrite the music licensing rules in a different way, the creation of the practice of “fractional licensing” of music. The simple way to understand this is, if a restaurant wants a license to broadcast a song, it will need permission from all the owners of that song. But it’s not actually that simple.
Fractional licensing is hardly workable hypothetically, let alone in the real world. Right now, to gain a license to play a song, a restaurant or department store buys a license from the Performance Rights Organization (PRO), such as ASCAP or BMI, that represents the owner of the copyright over that song. The PRO can sell to the restaurant a license to play potentially millions of songs whose copyright owners they represent. The license fees function much like insurance against copyright infringement by the restaurant.
Under fractional licensing, this kind of agreement on licensing would essentially be eradicated, because the restaurant would be required to negotiate a license with any copyright owners not covered by the PROs. There are millions of songs that have three or four co-owners who would have be negotiated with separately under fractional licensing.
Fractional licensing would prove to be entirely unworkable, and would present an opportunity for those who seeks to game the system, to further complicate the situation. Here is where we might well see “copyright trolls” involved in this process.
No sooner would fractional licensing get implemented we would see a thriving sub-industry of price manipulation. Copyright trolls would acquire minor shares of songs and hold up negotiations over licensing and will easily leverage copyright infringement threats to gain much higher licensing fees.
Imagine someone holding as little as one percent of the ownership of a popular song having as much power in the process under fractional licensing as another owner holding the remaining 99 percent. A restaurant that might successfully negotiated licensing with three of the four owners might be held up to pay a high rate to the fourth copyright owner. Since the restaurant owner must negotiate licensing with all the copyright owners, they are not competing on price. And if one of them is a copyright troll holding out for much higher rates, the restaurant has the choice of either paying what is essentially ransom to the copyright troll or not getting the licensing agreement to play the music.
Copyright trolls would impose a cost on the consumers of music licenses in much the same way the patent trolls were an economic burden imposed on businesses. They increases costs to business without adding any value to the licenses that were purchased. Likewise, copyright trolls would hinder innovation and development of new products. In the end, consumers would have fewer choices because of the costs and limits imposed by copyright trolls.
Perhaps the DOJ will see this and decline the proposals, by the music publishers, to rewrite the rules established under the consent decrees. Fractional licensing is an idea whose time has not and should not come, and there is no need to disrupt the music licensing marketplace in this way.