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Legal Update

Second Circuit Rules That Performing Rights Organization BMI Is Permitted to Engage in Fractional Licensing

22 December 2017
Mayer Brown Legal Update

On December 19, 2017, the US Court of Appeals for the Second Circuit held, in a summary order, that nothing in the Department of Justice’s (DOJ) consent decree with BMI barred the practice of “fractional licensing.” Fractional licensing refers to only licensing a portion of a song, rather than the entire song, in instances where ASCAP or BMI only control a portion of the rights to the song (as in the case of ownership splits).

Currently, ASCAP and BMI are each subject to consent decrees with the DOJ, which were first implemented in 1941 as a result of antitrust lawsuits brought by the DOJ. Recently, the DOJ had opened, and concluded, a review of the decades-old consent decrees and determined that no modifications to the decrees were necessary at this time. One of the biggest points of contention during the DOJ review was whether the language of the consent decrees required ASCAP and BMI to engage in “full work licensing” or whether “fractional licensing” was permitted. Licensees such as Sirius XM strongly opposed the argument that the consent decrees could be read to permit fractional licensing, noting that a “blanket license”—which is what ASCAP and BMI are allegedly providing—by its very name required full-work licensing, as fractional licenses would require licensees to secure additional rights from other licensors before a licensee could perform that song.

On August 4, 2016, the DOJ issued its Statement on the Closing of the Antitrust Division’s Review of the ASCAP and BMI Consent Decrees, stating, inter alia, that the consent decrees “require ASCAP and BMI to offer full-work licenses,” noting that the Antitrust Division had reached this assessment because “only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses that distinguish ASCAP’s and BMI’s activities from other agreements among competitors that present serious issues under the antitrust laws.” (Statement, at 3.) The DOJ further reiterated that if it were to permit fractional licensing, such fractional licenses would inevitably result in additional negotiations, because users would need to clear rights from additional owners of fractional interests in songs before performing the works in the ASCAP and BMI repertories. This could, of course, result in hundreds of piecemeal, protracted negotiations—exactly what blanket licensing was meant to preclude.

After the DOJ issued its statement, BMI sought a declaratory judgment before US District Court Judge Louis Stanton that the consent decrees do not require full-work licensing. Judge Stanton held that the plain language of BMI’s consent decree does not support the Antitrust Division’s view that full-work licensing was required.

In briefing and argument in the appeal to the Second Circuit, the DOJ retreated from its earlier position, arguing that BMI is permitted to engage in fractional licensing “for songs that are outside the repertory,” as such licensing would occur “outside the auspices of the Decree, and, thus, not [be] subject to its requirements or its protections.” (Dkt No. 173 at 18.) The DOJ further noted that “if BMI engaged in collective licensing of fractional interests of songs outside the repertory, the United States would have to determine whether to investigate that conduct and, if so, determine whether such collective licensing violates the antitrust laws.” (Id.)

The Second Circuit unanimously affirmed Judge Stanton’s ruling and observed that if the DOJ decides that the consent decree, “as interpreted by the district court, raises unresolved competitive concerns, it is free to move to amend the decree or sue under the Sherman Act in a separate proceeding.”

The Second Circuit’s holding in BMI’s favor is bound to have widespread implications for the music industry. For example, there may be additional litigations brought before the S.D.N.Y rate court (under the consent decrees, ASCAP and BMI must litigate any rate disputes before Judges Denise Cote and Stanton, respectively) as to the rates a service should pay for these fractional licenses (which a licensee might argue should be valued less than a full-work license). And there may be greater proliferation of fractional owner “hold-outs” to try to increase the rates charged for fractional rights not controlled by BMI or ASCAP as well as an incentive for the creation of additional PROs not yet governed by consent decrees and betting on a laissez-faire antitrust policy at the DOJ under the current administration. As the landscape for the licensing of public performance rights in musical works is bound to shift in the next several months, we will be closely monitoring for any new developments.

Authors

  • Richard M. Assmus
    T +1 312 701 8623
  • A. John P. Mancini
    T +1 212 506 2295
  • Allison L. Stillman
    T +1 212 506 2209
  • Xiyin Tang
    Associate
    T +1 212 506 2217
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