Congress Reintroduces a Market-Based Reform for Songwriter Copyright

Free markets are characterized by exchanges between willing buyers and willing sellers. But certain aspects of the market for copyrighted music are subject to restrictions making it less than free. Legislation recently introduced in Congress keys in one realistic reform that, if applied broadly, would move music copyright policy more in line with free market principles.

 The federal Copyright Act recognizes copyrights for songwriters and for owners of recordings. Under most circumstances, music copyright holders are subject to a compulsory licensing system in which licensees pay copyright holders royalties based on government-set rates. Copyright holders are often free to negotiate royalties with music service providers, but royalty rates provide the backstop when negotiating is especially burdensome or unsuccessful. In many instances, federal copyright policy sets rates using a standard that emphasizes protectionist concerns rather than consumer welfare and the rights of sound recording owners or songwriters.

On prior occasions, we have called attention to aspects of copyright law regarding public performances of sound recordings that need free market reform. Particularly troublesome is the Section 801(b) standard by which the Copyright Royalty Board is charged with setting royalty rates in several contexts, including cable and satellite video service providers. Section 801(b) includes a protectionist proviso that rates should “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.”

This standard has it completely backwards. Disruption is a sign of market dynamism and ongoing transition to new generations of products and services. Consumers are much more likely to benefit from ongoing supplies of new types of products and services than from static markets lacking innovative impact. For those reasons and more, I previously warned against expanding the scope of Section 801(b) to webcasting services for digital music. As I argued: “Congress Should Make Way for a Free and Disruptive Digital Market.”

On the positive side, digital music webcasting services are currently subject to the more market-oriented “willing buyer/willing seller” standard. Under that standard, the Copyright Royalty Board determines what royalty rates “most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” If copyrighted music is to remain under rate regulation, the “willing buyer/willing seller” standard should always be preferred over the anti-disruptive Section 801(b) standard.

In fact, Congress should seriously consider making “willing buyer/willing seller” the uniform standard for all copyright royalty rates. Congress should likewise apply the “willing buyer/willing seller” rate to radio broadcasting. Under existing law, broadcast radio can play copyrighted music pursuant to the compulsory licensing system but enjoys a special exemption from having to pay any royalties.

On March 4, the “Songwriter Equity Act of 2015” was introduced in both the Senate and House of Representatives. For its part, the Songwriter Equity Act addresses regulatory constraints and inequities in the law’s treatment of songwriters.

Under existing law, when a copyrighted song is reproduced and distributed – via digital download, CD, or vinyl record, for instance – the songwriter is entitled to royalties via a “mechanical license.” The mechanical license royalty rate for songwriters is set by the Copyright Royalty Board. The current rate is 9.1 cents per song or 1.75 cents per composition minute – whichever is greater. Songwriters insisted this rate is far below market value.

Of course, Section 115 of the Copyright Act incorporates the Section 801(b) standard. That means the mechanical license is subject to protectionist proviso that royalty rates should “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.”

The most praiseworthy part of the Songwriter Equity Act is its proposed replacement of the current protectionist standard for royalty rates with a “willing buyer/willing seller” standard that seeks to approximate the “fair market value” of the rights. By this standard:

“The Copyright Royalty Judges shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In establishing such rates and terms, the Copyright Royalty Judges shall base their decision on marketplace, economic, and use information presented by the participants. In establishing such rates and terms, the Copyright Royalty Judges may consider the rates and terms for comparable uses and comparable circumstances under voluntary license agreements.”

The point deserves to be reiterated: So long as copyrighted music remains subject to compulsory licensing and rate regulation, the “willing buyer/willing seller” standard should be preferred over the Section 801(b) standard. If rate regulation of copyright royalties is a fact of life, it should at least be governed by a standard that seeks to emulate market outcomes instead of one that seeks to produce protectionist outcomes.

The Songwriter Equity Act comprises one piece of a much larger music copyright reform project. By rolling back the Section 801(b) standard and expanding the “willing buyer/willing seller” standard for copyright royalty rates, Congress can bring music copyright policy closer to free market principles while protecting the rights of both sound recording owners and songwriters.