What’s Ahead For IP And The Music Industry – Interview with Jacqueline Charlesworth, National Music Publishers’ Association

With technology causing groundbreaking changes in global music industry business models, intellectual property rules governing music are in question. At the annual Midem gathering in Cannes in late January, Intellectual Property Watch’s William New sat down with Jacqueline Charlesworth, senior vice president and general counsel of the (US) National Music Publishers’ Association (NMPA) to get her views on policy and legal issues for the year ahead, including plans to amend the US Copyright Act, setting of royalty rates, negotiations on compulsory licenses for ringtones, and the industry’s response to the explosion of user-generated content online.

INTELLECTUAL PROPERTY WATCH (IPW): Can you tell me about legislative reform of digital licensing in the US?

JACQUELINE CHARLESWORTH (JC): Last year, 2006, NMPA along with DiMA [Digital Media Association], which represents digital music companies, got together and framed a proposal for [the US] Congress to reform Section 115 of the Copyright Act. Section 115 governs the compulsory license for musical works in the US. The goal was to update the compulsory licensing system so US digital services companies could more easily obtain licenses for US repertoire. The resulting legislation was initially known as the Section 115 Reform Act, or SIRA, and later, with some additions, became the Copyright Modernization Act.

Under section 115 of the Copyright Act, anyone who wants to reproduce and distribute a musical work that’s previously been distributed under authority of the copyright owner has the ability to do that by serving a compulsory license notice, and paying the statutory royalty. We’ve had the compulsory license provision for close to 100 years. It provides for song-by-song licensing, which for a digital service that suddenly needs a million songs online can be a cumbersome process. That’s why the digital services are very interested in changing that process. The concept was to allow for blanket licensing for digital services so that they could basically file one piece of paper and be licensed to make permanent downloads and operate subscription services offering limited downloads and interactive streams.

“It’s important to publishers and songwriters to be paid for the server and other copies that facilitate interactive streaming because if the world moves to an all-streaming model and people stop transferring permanent files, that could erode or eliminate mechanical payments.”For the music publishers’ side, obviously we’re very interested in the success of digital music services. We had a couple of other goals in the legislation as well. There has been a controversy in the United States about whether users have to pay mechanical royalties for interactive streaming. The legislation would have resolved this by first of all establishing a definition of interactive versus non-interactive streaming, that is, how much control the user has to have over what they’re listening to, or what type of services would fall on one side of the line or the other. It’s important to publishers and songwriters to be paid for the server and other copies that facilitate interactive streaming because if the world moves to an all-streaming model and people stop transferring permanent files, that could erode or eliminate mechanical payments.

The mechanical right is the right to reproduce and distribute copies of sound recordings. In the United States, historically that right has been licensed and administered separately from the performance right, which is the right to publicly perform music. If you are, for example, a radio station, a broadcast station, you would get licenses from the performing rights societies, ASCAP, BMI and SESAC, but not a mechanical license. With the digital age, though, the line between performance and distribution is becoming less clear. I think that that’s an issue that’s very much in play in the United States, and we are trying to come up with clear guidelines and a licensing regime for digital activities.

IPW: Is it urgent that this be resolved?

JC: I think it’s very clear what’s going on with CD sales, that they are steadily declining and the world is moving to digital. I think digital is the future of our industry and we need to work out efficient and fair licensing rules that everyone can live by. Obviously we also have the threat of piracy and the more difficult it is to license, the easier it is for pirates to take over the marketplace. NMPA is very interested in making sure that songwriters and music publishers get paid for their creative efforts.

IPW: So do you expect this legislation will be reintroduced into this new session of Congress as a stand-alone bill or as part of a larger package?

JC: Last year, the bill passed the Intellectual Property Subcommittee of the House of Representatives. Unfortunately, there was some controversy about some of its provisions. This is one of the new dimensions to this industry — it’s not just the record labels and the music publishers anymore, there are plenty of other people involved in the marketplace, people interested in distributing music. For example, the broadcasters came in at the last minute and complained loudly about certain aspects of the bill, and the bill wasn’t able to move forward.

This year, we have a new Congress, and a new Member in charge of the House Intellectual Property Subcommittee, Representative Howard Berman. My understanding is that Mr. Berman cares about copyright a great deal. Right now we’re looking at the best way to move forward on these issues.

IPW: Was there something that was most problematic in the bill that is being reconsidered this time around?

JC: The interactive streaming issue that I mentioned has been controversial for a long time. There are a number of groups out there – not the DiMA companies, who supported the bill – but other players that, for example, might be interested in entering the streaming marketplace, who don’t want to pay royalties for the copies made in the course of that activity. That’s one concern.

“We believe that when you create a 10-second snippet or excerpt of a song to serve as a ringer on a mobile phone, that constitutes a derivative work and takes it outside the compulsory license.”Another one was the record labels, who certainly supported aspects of the bill but had some concerns of their own. Right now the labels take licenses from the publishers for full downloads and ringtones and pass those licenses through to third parties, and publishers really don’t like this practice. There’s a lack of transparency because publishers are at least one step removed from the retailer. There’s a middleman, and we don’t see the need for a middleman. In the digital marketplace, we are licensing the right to the musical work to a third party in parallel to the record companies’ licensing of the sound recording – there’s no reason that right should go through the labels. Unfortunately, current US law allows this. So one of the goals from the publishers’ perspective was to largely eliminate that practice, but there was a fair amount of resistance from the labels on that issue and some other issues relating to the fact that the labels wanted to be able to recoup songwriter advances through the new blanket licensing agency, something the songwriters opposed.

A third concern that came up with the bill was what we were doing with non-interactive streaming, or pure webcasting. In the US, publishers have a right to license the server copies used to engage in streaming activities. There was a concern raised by broadcasters that even though the bill granted an exemption for those server copies, that that would be used against them. In other words, as part of the legislative compromise, the publishers were willing to say, ‘as long as you’re engaged in strictly non-interactive streaming with no copying, we will allow you to make those server copies for free, you will have an exemption from copyright law which doesn’t exist today’. Unfortunately, that still did not sit well with broadcasters. SIRA has not yet been reintroduced. We are working with people on our side of the table, if you will, to see how we might refine the proposal to address concerns.

IPW: But no one would argue that there is not a need to update laws for the digital age.

JC: We’re regrouping, I think the process right now, is to see what we would like to pursue. I think there’s a lot of interest in continuing to pursue a model like SIRA. Congress and in particular Representative Berman I am sure have thoughts about these issues, so we will be seeking to work closely with Congress to figure out the best way to move forward.

IPW: Are there any other policy issues you anticipate this year?

“Every day seems to bring a new business model, and I think the real challenge today is being able to be flexible and react and respond quickly with licensing programmes that are user-friendly, and fairly compensate the rights holders.”JC: We also have a major rate proceeding underway, and really everything is on the table for music publishers and songwriters. There is a new ratesetting body in the US, the Copyright Royalty Judges. It’s a three-judge panel that decides statutory royalty rates. This is our first proceeding before that panel. The proceedings occur every five years. The major players in the current proceeding include NMPA and two songwriters’ organisations, the Songwriters Guild of the America and Nashville Songwriters Association International. Ultimately, this is about protecting the rights of the people who write the songs. The other parties are the record labels, represented by the RIAA [Recording Industry Association of America], and the digital media companies, represented by DiMA. Each of these groups filed its direct case in November 2006, which is a preliminary case that presents proposed royalty rates in each category. It’s not just digital; the proceeding also covers CDs, in addition to downloads, limited downloads, and interactive streaming. Each party submitted proposed rates. What will happen next is there will be a discovery period where we trade information, and then there will be a hearing. The judges have not set the schedule yet but the expectation is that the hearings will be this year. At the end we should have rates set for each of these activities. A big issue in the proceeding is that the record labels want to move from a penny rate, which is what we have had for almost a hundred years, to a percentage rate for physical product and for downloads, like Apple iTunes. Right now, the rate for those is 9.1 cents per CD or download, and the labels want to change it to a percentage of revenue rate that would have them paying less.

IPW: Any other significant legal cases, such as the XM radio case?

JC: The XM case was brought by the record labels. The basic issue there is that XM, which is a satellite radio service, distributes devices that allow users to copy and store songs transmitted by XM and disaggregate them. So you can fill a device and it becomes the functional equivalent of an iPod. XM is claiming that as long as they pay royalties under the Audio Home Recording Act, which is basically a levy on digital audio recording devices to make up for home recordings – and it’s a fairly minimal amount – as long as they’re doing that, they don’t actually have to pay royalties for the recordings they are distributing. This is a concern obviously to music publishers, songwriters and the labels, and right now the labels are in litigation with XM. XM moved to dismiss the lawsuit but the court ruled against XM on its defense under the Audio Home Recording Act, so the case is moving forward toward trial. NMPA is watching that case very closely. Our interests are very much aligned with the labels because we want to get paid for copies of our music.

A second issue is ringtones. As part of the rate proceeding, the labels asked our Copyright Office to rule that ringtones are under the compulsory license. The background here is that for several years, since ringtones came into existence, publishers have licensed them outside the compulsory license framework in the US at higher royalty rates. Unfortunately, the labels prevailed before the Copyright Office and we have appealed that decision. We believe that when you create a 10-second snippet or excerpt of a song to serve as a ringer on a mobile phone, that constitutes a derivative work and takes it outside the compulsory license.

In the original compulsory license, in 1909, the concern was that one company was buying up all the rights to make piano rolls. So we’ve moved a long way away from that. I think many music publishers would like to be in the free market, just as the labels are, to negotiate freely, and that was the case with ringtones until this decision. Because we’ve appealed it, we’re hopeful that we’ll prevail on the issue ultimately, because ultimately, I think it’s an economic issue. If the labels pay under the compulsory license, then they are paying less for ringtone uses. They’re economically driven. The question was whether ringtones by definition fall under the compulsory license. Publishers for many years have said they don’t, so voluntary licenses were negotiated. Then this proceeding came along, and the labels saw an opportunity make a motion to the Copyright Office for a ruling and that’s what they did.

The third issue is where we are with illegal filesharing in the wake of the Grokster decision. In June 2005 the US Supreme Court ruled unanimously that a service that encourages massive infringement by facilitating peer-to-peer filesharing can be held responsible for that infringement. That case, which involved a number of peer-to-peer services, got sent back to the district court level and we’re still wrapping it up, and there have been some important settlements. Kazaa settled and, as was publicly reported, paid over $100 million to the labels and also made payment to the publishers for operating their service. With respect to another company, Streamcast, we won an important decision from the district court on summary judgment that holds that company responsible for operating its filesharing service. So I think the law in this area has been clarified through the efforts of the music publishers in conjunction with the record labels and the motion picture studios.

IPW: At Midem, one of the key topics of discussion has been user-generated content such as on MySpace, and the question of how much such websites should pay for that content. Can you comment on this area?

JC: The issue is that MySpace and other sites like it allow users to post content and often that content includes copyrighted material, especially music, for which the songwriters, music publishers and record labels are not being paid. Obviously, this model, as evidenced by the recent Google purchase of YouTube for $1.65 billion, is generating a lot of value. But right now, we don’t have an established licensing framework. A major challenge is figuring out ways to find out what content is being used and how to fairly compensate the rights holders. I think this will be very much an issue in the upcoming year. It already is an issue, but I think we’ll be focusing on that, definitely in the US and I’m sure elsewhere.

Already there have been some deals. The publishers are evaluating the situation. Obviously, publishers are interested in having people use and enjoy their content as long as they are being paid. The goal here, I think for many music publishers, would be to enter into licensing relationships and figure out how to be paid and pay their songwriters for their creative works. It’s one of many new things. Every day seems to bring a new business model, and I think the real challenge today is being able to be flexible and react and respond quickly with licensing programmes that are user-friendly, and fairly compensate the rights holders. That was a major goal of the SIRA legislation, and I hope we’ll achieve it.

IPW: Looking internationally, are their key policy developments outside the US you anticipate the industry will have to respond to this year?

JC: The issue of pan-European licensing, and how to resolve that in a way that’s good for both users and rights holders, is very high on the agenda. From the US standpoint, I think it’s a very simple issue, which is that many US publishers do business in Europe. So they care about how their content is licensed in Europe, and they want to make sure it’s done in a way that makes sense.

IPW: Thank you.

As Senior Vice President and General Counsel of the National Music Publishers’ Association (NMPA), Jacqueline C. Charlesworth serves as the primary legal advisor for the legislative and legal initiatives of the leading trade association representing the interests of music publishers in the United States. Prior to assuming her position with NMPA in early 2006, Charlesworth served as Senior Vice President and General Counsel of The Harry Fox Agency, Inc., a subsidiary of NMPA and the premier licensing agency representing music publishers in the United States, with over 27,000 publisher clients. Before moving to HFA in 2001, Charlesworth was an associate in the litigation department of Paul, Weiss, Rifkind, Wharton & Garrison. Charlesworth holds a law degree from Yale Law School and is a magna cum laude graduate of Brown University.

William New may be reached at wnew@ip-watch.ch.