Friday, September 2, 2011

It's Not Stealing, It's Sharing: The Most Important Legal Cases That Are Shaping The Future Of The Music Business

It’s Not Stealing, It’s Sharing: The Most Important Legal Cases That Are Shaping The Future Of The Music Business

It’s important to understand that the “rules” around the music industry aren’t just arbitrarily set. Rather, like the rules governing our country generally, they grow and evolve, building on past decisions — the legal phrase for this is stare decisis — and attempt to address the changing nature of the world (technology, etc.).
To paraphrase what Churchill said about democracy: while our legal system isn’t perfect, it’s the worst option, except for all the rest.
With all the changes, fights and lawsuits flying around, we thought it worthwhile to look at several of the important legal cases that not only guide the way the music industry works today but will also have an impact on your own personal bottom line and right to sue. Many thanks to both George Howard, John P. Strohm and Bertis Downs for the input on this article.

MGM Studios, Inc. v. Grokster, Ltd.
Summary: In 2005, Grokster, which was the parent company of P2P file-sharing site Morpheus, was sued by MGM and twenty-seven other entertainment companies. These entertainment companies felt that Grokster was “inducing” (i.e. compelling) people to infringe upon their copyrighted material (movies) by making it so easy to illegally download.
Grokster defended itself citing an earlier case — Sony Corp. of America v. Universal Studios, Inc. (the so-called “Betamax Decision”) — which ruled that making individual copies of copyrighted materials (in this case, TV shows) for the purpose of time shifting (watching later) did not constitute infringement, because the technology that Sony (and others) used for Betamax (VCRs, generally) had “substantial noninfringing uses.”
Why It’s Important: This case drew a line between technology that has or does not have “substantial noninfringing uses.” While the VCR was deemed to have noninfringing uses that outweighed its potential infringing uses, Grokster was deemed to fall on the other side — the infringing uses outweighed the noninfringing uses. This sent a loud and clear message to all P2P services: make sure that you can justify your service as having uses that do not infringe, and make sure that you are not seen as compelling users to engage in infringing activity. If your only value is to let people steal copyrighted material, then you’re going to be held liable and shut down.

Bridgeport Music, Inc. v. Dimension Films
Summary: Rap group N.W.A. sampled two seconds of Funkadelic’s “Get Off Your Ass and Jam” in their song “100 Miles and Runnin” without Funkadelic’s (or their publisher’s or label’s) permission. Even though N.W.A. altered the sample (lowering the pitch, etc.), Bridgeport, the owner of Funkadelic’s copyrights, sued for infringement.
The U.S. Court of Appeals for the Sixth Circuit overturned a lower court’s decision and ruled in favor of Bridgeport, stating in summary, “Get a license or do not sample. We do not see this as stifling creativity in any significant way.”
Why It’s Important
This case clarified a still-active misnomer regarding sampling: that you can use a small (or altered) piece of someone’s work. This is not the case. This decision clearly states that even de minimis use of copyrighted material requires a license. Absent the license, you cannot use someone else’s copyrighted material in your work. You can learn more about this in TuneCore’s guide to the 6 legal rights (in particular, derivative works, right to reproduce, right to distribute).
The matter is not dead-simple. In Newton (company that claimed ownership of a flute sample used in a Beastie Boys’ song) v. Diamond (The “Beastie Boys Case”) the judge ruled in favor of the Beastie Boys stating that their use of a brief flute sample did not constitute infringement:
“When viewed in relation to Newton’s composition as a whole, the portion is neither quantitatively nor qualitatively significant… Because Beastie Boys’ use of the sound recording was authorized, the sole basis of Newton’s infringement action is his remaining copyright interest in the ‘Choir’ composition. We hold today that Beastie Boys’ use of a brief segment of that composition, consisting of three notes separated by a half-step over a background C note, is not sufficient to sustain a claim for copyright infringement.”
So stick that in your F clef!

Grand Upright Music, Ltd. v. Warner Bros. Records Inc.
Similar to the above, this case, which pitted Warner Bros., who released the rapper Biz Markie’s song “Alone Again,” which sampled a portion of Gilbert O’Sullivan’s song of the same name, against Grand Upright Music, the owner of O’Sullivan’s copyrights.
Warner Bros. used the argument that they (Warner Bros.) should be able to do it, because everyone else was doing it (sampling). The court responded the way any parent of a five-year old who uses such an argument would, by stating: “The defendants…would have this court believe that stealing is rampant in the music business and, for that reason, their conduct here should be excused.”
Why It’s Important:
The court stressed that Warner Bros. knew that they were infringing, and that their disregard was so flagrant as to be criminal in nature (the judge referred the case to the U.S. Attorney for criminal prosecution).
This case, and the above, has not only changed the sound of hip-hop forever, but also led to the practice of so-called “interpolation” (or “re-playing”), in which the publishers of copyrighted works grant the rights to a reproduction/derivitave, but the producers don’t bother getting the rights from the master holder (the labels), but instead “replay” or “cover” the portion of the song they use for the sample.

WPIX, Inc et al v. BMI (Broadcast Music, Inc.)
If you operate a business and you desire to broadcast music in a manner that the public can hear it — for example, a radio or TV station, a venue, a restaurant, etc. — you must get a license and pay a royalty to the copyright holder of the song that you broadcast. This is because one of the six legal rights that copyright holders are granted automatically when they create a work and fix it in a tangible medium is the right to publicly perform the work. In order to simplify the process, and not require that every entity that desires to publicly perform music have to negotiate a license with individual songwriters, clearing-house agencies were created that represent the songwriters, and negotiate on their behalf with the broadcasters. In the U.S., these agencies are called Performance Rights Organizations (PROs), and there are three of them: ASCAP, BMI, and SESAC.
In this case, numerous broadcasters, including lead plaintiff, WPIX, sued BMI to compel them to “carve out” a portion of the overall license fee that these broadcasters pay BMI should the broadcasters negotiate directly with a songwriter, rather than with BMI on the songwriter’s behalf.
As you can imagine, BMI did not want to allow this carve out, as it would threaten its very existence if broadcasters were able to negotiate directly with songwriters. Additionally, granting these carve outs would cast a light (transparency anyone?) upon the otherwise non-understandable and secret license fees created by a “blanket license.” In other words, broadcasters, by negotiating directly with copyright holders, would be able to understand whether or not the amount they were paying BMI was reasonable by comparing it to the fee they negotiated themselves directly with the songwriter.
BMI went down swinging trying to protect the old ways, but the court held (after numerous appeals) that the carve out was merely an extension of the blanket license, and thus BMI must offer this type of license.
In other words, BMI finally has to answer the question: “How much will it cost me for one of these, sir? And you must answer in a language that I speak.”
Why It’s Important:
As technologies change and evolve, and we’re better able to track the usage of songs, and as new means of “broadcast” — streaming, in particular — emerge, it becomes increasingly important that songwriters and broadcasters have a range of options with respect to how this licensing transaction occurs and that there is increased transparency and understanding about the costs and royalty structures involved. This case went a long way towards ensuring the PROs do not have a monopoly.

FBT Productions v. Aftermath Record (The “Eminem” Case)
Summary: Eminem’s production company, FBT, sued Universal’s imprint, Aftermath, because Eminem’s production company believed that he should be paid half the net receipts that Universal received from the sale of digital downloads (dominantly from Apple’s iTunes), as opposed to a standard “band royalty”, ala what he would receive from the sale of CDs (for artists signed to major labels, they receive a percentage of the list price of the sale of the CD — typically, between 12 and 20%). The difference between half of the net receipts and a percentage of the list price is very material.
Universal argued that downloads were essentially the same as a sale of a physical good, and thus the royalty should be paid in the same manner as the sale of a CD. Eminem’s production company’s lawyers argued that downloads were more similar to a master license (such as when songs are used in movies), and thus the income should be divided equally on a net basis.
The judge ruled in favor of Eminem’s production company.
Why It’s Important
While Eminem’s production company won the case, it’s important to note that this case is not precedential. The court was ruling on the language in the contract, and not one standard practices within the industry. This points out an important point about record label contracts and practices: they change. Essentially, this case (as others before) served to put record company lawyers on notice that they must clarify precisely how royalty streams for existing and to-be-developed technologies will be handled. In short, all record company contracts today make clear that downloads will be treated the same as sales of physical copies with respect to royalties.

Viacom Inc. v. YouTube, Google Inc.
Summary: Viacom (owners of, among other properties, MTV) sued the Google (owner of YouTube) for (assume Dr. Evil voice) one billion dollars claiming that YouTube knowingly and willfully infringed upon Viacom’s intellectual property by allowing Viacom’s copyrighted material to be broadcast on their (YouTube) site.
Google relied on the so-called “Safe Harbor” provision of the 1988 Digital Millennium Copyright Act (DMCA), which protects owners of web sites that broadcast user-generated content, so long as the owners of the site remove infringing material upon notification of the copyright holder.
The courts found in favor of Google/YouTube.
Why It’s Important
Had the courts gone the other way, and essentially rejected the DMCA, anyone who wanted to have user-generated content on their site (meaning two cats playing with each other etc) would have to secure licenses with the copyright holders in advance of the material appearing on the site. This would, of course, make it impossible for user-generated sites to operate, and thus impede innovation.
To wit: YouTube finally became profitable recently after introducing a profit-sharing model with rights holders that divides income from ads between YouTube and the rights holders when a clip is broadcast. In this way, YouTube monetized infringement to the benefit of themselves and the copyright holder.

Summary: This case deals with the appropriate license fees DMX (not to be confused with the rapper), a background music service provider, would pay BMI in light of DMX’s direct licensing activities. DMX is a company that provides music to restaurants and other venues that pay them a fee and then DMX pumps pre-set playlists of music into their store. In order to do this, DMX must get a license and pay the entity that controls the recording of the song (called the “Master”) and the entity that controls the right to the “Public Performance” (either the songwriter or “Publisher”).
In the United States, the songwriter/publisher will outsource the job of issuing licenses and collecting money for Public Performances to ASCAP, BMI or SESAC. The PROs then enter into licenses with broadcasters and other entities that perform the music. It is these license agreements that enable BMI to collect royalties on behalf of its affiliates. Typically, BMI offers a type of license called a blanket license. This license would allow an entity, such as DMX, to play as much music as it wants from BMI’s repertoire for a flat rate. BMI is required to offer a blanket license pursuant to an agreement it has with the Department of Justice, called a consent decree. The problem here is that DMX wanted a special kind of blanket license that would account for direct licensing by basing its fee proposal on the over 500 agreements that it entered into with various publishers. Because the parties couldn’t agree on how their deal should be structured, DMX sued in federal court for a determination of the appropriate license fee. The court ultimately agreed with DMX and considered the over 500 publisher deals as a benchmark in setting its fee.
In a subsequent action, ASCAP also lost its case against DMX. ASCAP’s fees were reduced below those set by the BMI rate court. Both cases have been appealed and a decision is pending from the second circuit.
Why it is important:
This case lays the foundation to allow entities like DMX, and many others to negotiate and pay publishers directly for the rights to Public Performances and then reduce the amount of money they paid to ASCAP, BMI and SESAC. Similar issues are pending in litigation between BMI/ASCAP and the local television and radio industries, who seek a model that favors direct licensing over the traditional blanket licensing regime.
Clearly, this is but a small sampling of the cases that have shaped and continue to shape the record industry, but by looking at them, and noting how our courts attempt to wrestle with changing technology, we can better position ourselves to not only understand the landscape, but profit from it.

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