The Internet Radio Fairness Act: Revamping the Online Radio Marketplace

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Royalties for online radio and other digital music services are a prominent topic for today’s recorded music industry, and the discussion has only grown with the recent introduction of the Internet Radio Fairness Act in the House and Senate. IRFA aims to revamp the parts of the Copyright Act that create licenses for online radio services to pay for transmitting sound recordings to their users. More specifically, IRFA would change the standard by which online radio royalty rates are set, alter the qualifications and appointment procedures for the Copyright Royalty Judges, and make several more changes to the process of setting online radio royalties.

There are a whole host of complicated issues surrounding this bill, particularly in mapping out how changes to the current royalties system would actually impact the growth of online music services and artists’ revenues. These connections are not intuitive and depend a lot on putting IRFA in the context of music industry practices and the current state of the online music streaming market.

But for now, this post will just give an overview of what IRFA actually does from a legal perspective. You can also click here for an in-depth summary of the details of IRFA.

Setting Online Radio Royalty Rates

The parts of IRFA that have made the biggest waves so far are the parts that change the standard by which the federal government sets online radio royalty rates.

First, some background. As you probably know, the Copyright Act balances the exclusive rights granted to copyright owners with a number of limitations and exceptions to those rights, some of which are called “compulsory licenses.” A compulsory license is when the details of a license are set by law, instead of by contract, for specific types of uses. If a use qualifies for one of the compulsory licenses, the user can choose to only pay the rate set by law, instead of negotiating directly with the copyright owner.

One of the uses that qualify for a compulsory license is online radio streaming. This includes companies like Pandora and broadcast radio stations that stream their programming on their websites, but does not include services like Spotify that let you pick each song you listen to. This online radio license, created in section 114 of the Copyright Act, is set by a panel called the Copyright Royalty Judges (more on them later), who must make the rates the same as the rates that online radio would have had to pay “in the marketplace between a willing buyer and a willing seller.” The CRJs are also required to consider whether online radio substitutes for or promotes the copyright owners’ other revenue streams, and the roles that the copyright owners and online radio services play in creating the content and streaming services (including contributing creativity or technology, investing money, or taking on risk).

The New Online Radio Royalty Standard

IRFA would change the willing buyer/willing seller standard to the same one currently used for satellite and cable streaming (think SiriusXM). Incidentally, this standard is also used to determine how much record labels pay publishers and songwriters to record and sell songs that have already been recorded at least once. This standard, found in section 801(b) of the Copyright Act, requires the CRJs to aim to:

  1. maximize the availability of works to the public,
  2. give copyright owners and online services a fair return,
  3. reflect the relative roles of the copyright owner and online service, and
  4. minimize disruptive impact on the structure of the industries involved and general industry practices.

In addition to the 801(b) standard, IRFA would require the CRJs to consider the public’s interest in creating new sound recordings and in fostering online music services, and the level of income necessary to provide a reasonable return on investment, including losses from prior periods. IRFA would also require the CRJs to:

  1. not disfavor rates that are set based on a percentage of the online service’s revenue,
  2. establish a fee structure that encourages competition among copyright owners and between online radio and other services,
  3. consider the promotional value of online radio,
  4. consider the value online radio gives to the value of the works it streams, and
  5. not consider interactive license fees or prior CRJ rates.

That last factor is a response to previous CRJ ratemakings, where the CRJs tried to calculate the market value of online radio by taking the rates used for interactive streaming (think Spotify), and estimating and subtracting the portion of those rates attributable to the interactive-ness of the service.

Under IRFA, the CRJs can only consider voluntary deals that are achieved in “competitive market circumstances.” Competitive market circumstances are when an online radio service gets a license from a licensor that does not have market power resulting from the aggregation of copyrights. This section seems aimed at major record labels and collective licensing organizations that can use their large copyright catalogs to obtain higher rates from online services.

The current law also requires the CRJs to set a minimum annual fee, while IRFA would make the minimum fee discretionary and set a cap on the minimum fee at $500. This would no doubt be good news for small and start-up webcasters.

One practical note: the change from the willing buyer/willing seller standard to the 801(b) standard is widely anticipated to significantly lower the royalty rates that online radio services pay. There is also a substantial need here for more economic data and analysis to predict what practical impact this bill would have on consumers, artists, and online music service. But, as I noted above, the explanation of how this would actually impact the online music marketplace and artist revenues is tricky and deserves a post of its own, so I will leave that discussion for next week.

The Missing Piece: AM/FM Radio

There is, notably, one piece of the puzzle IRFA omits: royalties paid by terrestrial AM/FM broadcast radio stations. Mostly due to the twists and turns of the law's history in this area, traditional AM/FM radio stations only pay the songwriter, not the recording artist, although they must also pay sound recording royalties if they want to webcast their programs.

Supporters of IRFA point out that IRFA very logically treats like uses alike by pulling online radio under the same umbrella as satellite and cable music services. The same logic applies to AM/FM radio: if we are to treat like services alike and be as technology-neutral as possible, it follows that AM/FM broadcasters should be included along with everybody else.

Changing the Copyright Royalty Judges

IRFA would also change how the CRJs are appointed. The CRJs are currently appointed by the Librarian of Congress, consulting with Register of Copyrights (the Copyright Office is housed within the LoC). But under IRFA, CRJs will be appointed by the President with the advice and consent of the Senate. This will make the debate surrounding nominees much more public-facing, but will also risk that CRJ appointments will be stymied if the Senate refuses or delays confirmation for unrelated political reasons.

This change would also firmly resolve the question of whether the CRJs’ appointments satisfy the requirements of the Appointments Clause in the Constitution, since the President would be appointing the CRJs directly. The most recent case on the subject, Intercollegiate Broadcasting System v. Copyright Royalty Board, actually found that the CRJs are appointed constitutionally by invalidating other parts of the CRJ appointment statute, but the changes in IRFA would make the analysis much more straightforward.

IRFA would also change the qualifications for CRJs, by removing the current requirements that one of the CRJs have experience in economics and one CRJ have experience in copyright, instead requiring that all CRJs have significant experience as judges or adjudicators. A side effect of this change may be that none of the CRJs will have significant knowledge of or experience with federal copyright law. Federal judges are unlikely to leave their positions for a temporary position as a CRJ, and state or municipal arbitrators will probably have little familiarity with federal copyright law because those lawsuits are usually removed to the federal court system. For example, the most recent Chief CRJ, James Sledge, was previously an Alabama bankruptcy court judge, a position that did not require him to be a copyright expert, although he had significant experience with running adjudicatory proceedings.

Removing the requirements for knowledge of economics or copyright could cut both ways. As discussed above, this may mean that the CRJs are more likely to have a learning curve in the position. On the other hand, this may ensure that the judges arrive at the topic objectively, without established inclinations to agree with one party over others.

But IRFA's More Than Just Royalty Standards and CRJs

Although the online radio royalty standard has been the most controversial part of IRFA, the law contains many more changes to the CRJs and online radio licensing. For example:

  1. IRFA would broaden section 112(a) of the Copyright Act to increase the number of incidental copies an online radio service could make in the process of transmitting music.
  2. IRFA would change the procedure of the CRJ proceedings, applying the Federal Rules of Civil Procedure and Federal Rules of Evidence, which are used in US federal courts.
  3. IRFA would require courts to review the CRJs’ legal conclusions and application of the 801(b) standard de novo, which means the court would not give any deference to the CRJs’ interpretation. But, pure findings of fact would only be reversed if they contained “clear error” and all other CRJ actions would be upheld unless they were an “abuse of discretion.”
  4. IRFA would only allow common agents with non-exclusive rights to negotiate on behalf of copyright owners, so no one negotiating agent would be the only source for a license. IRFA also specifies that this section does not permit copyright owners to jointly interfere with direct licensing instead of licensing through a common agent.
  5. IRFA would also require common agents or collective rights organizations to publicly list all of the artists and sound recordings they license. 
  6. Finally, IRFA would require the Librarian of Congress, in consultation with IPEC and USPTO, to make a set of recommendations to Congress on how the U.S. government can make a sustainably financed global music registry.

So there you have it. The compulsory licensing system for online radio has a lot of moving parts, and IRFA would significantly change many of them. The above explanation doesn’t go into the likely real-world impacts of IRFA on the online radio marketplace, but setting out the legal changes IRFA would make is the first step in unraveling how IRFA would change the development of online music services.

Click here for more details about IRFA's provisions, and stay tuned for more analysis and commentary on the PK website.

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