The Supreme Court’s recent declination to hear an appeal from the American Society of Composers, Authors and Publishers (“ASCAP”) regarding the Second Circuit’s decision in United States v. American Society of Composers, Authors and Publishers, 627 F.3d 64 (2d Cir. 2010), has provided the digital music industry with a steadfast digital adaption to the definition of what constitutes a “public performance” — a definition within which song downloads to do not fall. Moreover, the Second Circuit’s decision, untouched by the Supreme Court, provides some guidance for how the district court should properly calculate the royalties that ASCAP should receive from companies that stream music from ASCAP’s musical repertory.
Licensing Music and Public Performance
ASCAP protects the rights of its over 420,000 members by controlling the licensing of the use of its members’ copyright-protected music and helping to collect and distribute the appropriate royalties for public performances of the music. Potential licensees can either license the use of specific musical works or they can negotiate a blanket license fee for the use of ASCAP’s full musical repertory, as was the situation in the instant case. Under copyright law, ASCAP and its largest competitor Broadcast Music, Inc. (“BMI”) have the exclusive right to play their members’ music publicly and to permit others to do the same.
Traditionally, a public performance of a musical work meant a performance for “a substantial number of persons outside of a normal circle of a family and its social acquaintances.” 17 U.S.C. §101. In the present age of technology, a public performance is understood to mean the transmittance or communication of a musical work “to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.” Id. Thus, the broadcast of ASCAP or BMI copyright-protected music on a television show, over the radio, or streaming online requires the broadcaster to construct a licensing agreement with the respective organization. In the instant case, ASCAP argued that digital downloads should fall within the second definition of a public performance that generally covers electronic broadcasting.
Settling the Legal Standard
In United States v. ASCAP, the Second Circuit addressed the royalties that Yahoo! and RealNetworks should pay ASCAP for online use of its copyright-protected music in digital downloads and online streaming. Both Yahoo! and RealNetworks agreed that they should pay royalties for digital downloads as copies of the musical works. However, ASCAP argued that digital downloads are also “public performances” and, accordingly, that the companies should compensate ASCAP with additional royalties for such “public performances.”
The Second Circuit held that digital downloads do not constitute “public performances” because “[t]he downloaded songs are not performed in any perceptible manner during the transfers; [thus,] the user must take some further action to play the songs after they are downloaded.” 627 F.3d at 73. In effect, the Court interpreted a “public performance” to be something that is “contemporaneously perceived by the listener” and since digital music downloads cannot be listened to during the actual electronic transfer, they do not meet that standard. Id. This electronic transmission understanding of “public performances” differs from the broadcast transmission by television and radio stations — covered by the statutory definition of “public performance” discussed above — for which the ASCAP can earn royalties. As a result of this holding, ASCAP cannot collect additional royalties for digital downloads apart from the royalties they currently receive for the downloads as copies of copyrighted music.
Issues Still in Dispute
Unlike the dispute over whether or not digital music downloads constitute public performances, all of the parties in the instant case agreed that streaming music online does constitute a public performance. However, the proper royalty rate for online streaming as a public performance was disputed.
In a separate holding in the opinion, the Second Circuit found that the district court’s analysis for determining the blanket license fees that ASCAP can charge Yahoo! and RealNetworks for the use of online music streaming was unreasonable, and provided some guidance on how to properly determine the fees. Conceptually, the Second Circuit agreed with the lower court that relevant factors for consideration include: what the Internet companies would pay for the blanket music license in a competitive market, ASCAP’s monopolistic hold on the market for music rights, ASCAP’s agreements with similar parties in the digital music industry, ASCAP’s competitor BMI’s agreements with similar parties, and most importantly, the portion of each Internet company’s ad revenue that can be attributed to the company’s use of the copyright-protected music. 627 F.3d at 76-77. However, the Second Circuit disagreed with the lower court’s actual analysis of these factors in determining the reasonable royalty fees.
On remand, the Second Circuit suggested that the district court’s calculation should better reflect how both Yahoo! and RealNetworks actually derive their advertising revenue from their use of the copyright-protected music. Id. at 79. The Court noted that the advertising revenue cannot be calculated based simply on the amount of time music is streamed, because time does not correlate with the advertising revenue. Id. As an alternative, the Court suggested that the district court should take a more tailored approach for assigning the proper royalty rate for each company, reflecting actual advertising practices. Id. For example, Yahoo! charges a lower rate for ads appearing in its music player than it does for ads on its homepage or other areas of its website, because users often minimize the player and view other websites while the music streams. However, the Court left the ultimate decision for how to correct the rate calculation to the district court on remand.
Implications for ASCAP and the Digital Music Industry
ASCAP voiced both disappointment and hope in a statement following the Second Circuit’s decision. Other songwriters, composers and music publishers in the digital music industry around the country will likely share in ASCAP’s sentiments. The Supreme Court’s denial to hear the case on appeal, as encouraged by the Obama administration in its brief in opposition to the ASCAP’s writ of appeal, essentially establishes the case’s broad application in other jurisdictions. Thus, even were ASCAP to reach a favorable decision in a different Circuit, the Supreme Court would likely resolve such a circuit split in favor of the Second Circuit. It seems that digital downloads of music files will never be deemed “public performances” for royalty calculation purposes.
However, the Second Circuit’s decision still leaves open the issue of calculating proper royalty rates for online music streaming to further discussion and litigation. ASCAP announced its optimism for reaching a “fair and favorable” licensing agreement with both Yahoo! and RealNetworks as it works with the district court to more properly align the royalty rate with actual ad revenue practices. Other music creators and musical copyright holders should share this optimism. Although the more precise calculation falls below the original rates proposed by the ASCAP in its first round of litigation with the Internet companies, the calculation marks a significantly higher rate than the Internet companies proposed.