Rate Courts: An Outdated Institution or a Necessary Force for Fair Licensing?

John Bissett
J.D. Candidate 2016, UCI Law

Performance Rights Organizations (PROs) play an important function in the world of copyright. Public performance is one of the many rights a copyright holder owns in copyrightable works, and as such, if one wants to publicly perform a copyrighted work, one must obtain a license. The Association of Songwriters, Composers, Authors, and Publishers (ASACP) and Broadcast Music, Inc. (BMI) are the two largest PROs in the nation. According to some accounts, they license approximately 90% of music publicly performed in most venues. Due to this extreme market concentration, these organizations have been under antitrust regulation under the Sherman Act, and are subject to Consent Decrees specific to each organization. While the terms of the different consent decrees are not harmonized, they contain many of the same regulatory provisions designed to ensure a competitive music licensing marketplace. One such mechanism is what is commonly referred to as the “Rate Court.” When negotiations with a licensee are at an impasse, ASCAP and BMI or a licensee may petition the respective Rate Courts when to determine a “reasonable” rate for the license.

The PROs and licensees agree that the procedure is exceedingly expensive, and could benefit from reform to reduce costs, but what form any such change would take is a continued point of contention. For the PROs, the Rate Court presents not only a time consuming and expensive procedure, but an institution that lacks guidance in determining reasonable rates and deters negotiation when it interacts with other regulatory mechanisms such as compulsory licensing. However, for licensees, the Rate Court is seen as a necessary protection against unfair negotiation. The parties agree that change is necessary, and both the courts and licensees are looking towards the PROs to present an alternatives to the current Rate Court system. The PROs suggest that expedited arbitration is the solution, but licensees feel that such an arrangement would put them at an inherent disadvantage in licensing negotiations without the discovery rules of the Federal Rules of Civil Procedure to ensure a level playing field.

No party may like the costs associated with the current format of dispute resolution, but it seems that only the PROs are charged with the responsibility of determining what is to follow. With such heavy market concentration, one must consider ceding competitive protections with care, but it is undeniable that new services such as Pandora and Sirius XM radio have fundamentally altered how music is consumed and distributed. New media services present new challenges in determining appropriate fees, and new players enter and drop out of the market place at an accelerated pace. It is during this negotiation period that PROs claim they are open to exploitation, and the new media marketplace exacerbates this problem. It begs the question of whether the Rate Court is still serving its primary function of promoting competition and negotiation, or if these regulations are hampering the PROs’ ability to secure rates that reflect the true value of their licenses. This article will examine the arguments for modifying the Rate Court process, and touch upon the competitive interests that the institution is designed to protect.

The Problems

The Rate Court is Costly and Inefficient

It is agreed upon by both sides of the issue that the Rate Court is an extremely expensive and time consuming process. ASCAP and BMI have spent millions of dollars over the last few years litigating in their respective Rate Courts, and they cite the Federal Rules of Civil Procedure (FRCP) as the main culprit for the costs and delays of Rate Court. The parties in Rate Court are entitled to the entirety of discovery and pretrial motions allowed by the FRCP. The trials are also lengthy proceedings, often taking over a year from the date of the initial application to determine a final fee, and appellate proceedings can extend the time to make this determination further. Licensees share concerns about costs, but maintain that the costs serve as an important deterrent to the Rate Court, encouraging settlement and negotiation, and the discovery rules of the FRCP are necessary protections in lawsuits against the PROs.

Compulsory Licensing and Exploitation of the Interim License

ASCAP and BMI argue that the lack of any mechanism to ensure a negotiation timetable or to compel Rate Court litigation allow users to take advantage of compulsory licenses in order to use their repertories without paying for the full value of the license. Under the compulsory licensing regulations, licensees are granted the right to publicly perform the entirety of either PROs’ catalogue of music upon the submission of a written request for a license. Before the final fee is negotiated, an applicant may enter into an interim license, but an interim fee is only determined by mutual agreement or Rate Court determination, and PROs claim that these interim fees do not reflect the true value of the license. If the interim fee is contested, an applicant may be able to use the music without paying any fees.

Without a mechanism to compel Rate Court proceedings or a timeline to set final fees, PROs claim that users are allowed to exploit interim fees to avoid paying the full value for the right to perform their works. They point to examples of users remaining on interim licenses for a decade or longer, employing deliberate tactics to delay negotiating a final fee. The nature of new media services specifically exacerbates this issue. While the PROs are well versed in determining the appropriate rates for traditional music services such as terrestrial radio and broadcast television, new media services are highly varied in their reach and in the scale of their music usage. This makes determining an appropriate fee a complex process, and in some cases applicants will simply ignore requests for information to make this determination. Thus, the PRO is left to either keep the user as an interim licensee, paying what they believe to be below true market value for the license, or go through the costly process of the Rate Court. Furthermore, in a market as volatile as new media, players could drop out before a rate is even determined, sometimes leaving the PROs no recourse to collect.

Guidance for Reasonable Rates

The PROs claim that a compulsory license has another negative side effect on Rate Court determinations, because it plays a crucial role in how the Rate Court determines the meaning of a “reasonable” rate. The “reasonable” rate is not defined, but the Rate Court has leaned on the concept of “fair market value” to determine a reasonable rate. This concept is defined as “the price that a willing buyer and willing seller would agree to in an arm’s length transaction,” and is determined by referencing benchmark rates between ASCAP and BMI and licensees. The PROs claim that this is an unfair reference point, because these license rates were obtained under the terms of the consent decrees, and do not reflect a value in a true competitive market. With compulsory licenses, ASCAP and BMI are unable to refuse selling their licenses, and they argue that this creates an unfair benchmark for rates (“imperfect surrogates”) as they are unable to negotiate as a seller would in a free market. ASCAP proposes a shift to utilizing direct licenses negotiated outside of the consent decree regulations between publishers and users as a reference for rates. In order to achieve this, ASCAP recommends creating a presumption that these direct licenses are the best evidence of reasonable rates. However, licensees argue that these benchmarks are create important precedent upon which parties can rely, and to look toward direct licenses would effectively eliminate principles of stare decisis.

The Central Proposal

Expedited Arbitration as an Alternative to Rate Court

It is uncontested that Rate Court is a time-consuming and costly process, and the PROs have proposed a solution: expedited arbitration. This proposal is hotly contested by licensees, and although it would undoubtedly promote a more efficient and cost-effective form of rate-setting, licensees fear that it would significantly disadvantage them in rate-setting proceedings. The PROs tout that this proposal would create a definite timeline with less costs, and it would also alleviate the problem of users taking advantage of interim licenses. With a streamlined procedure and a definite timeline, ASCAP claims that this procedure might eventually eliminate the need for interim licenses altogether. Furthermore, by increasing the frequency of decisions, it would build a body of precedent in an efficient manner to create reliability for future decisions.

However, a central point of concern in this proposal for licensees is what is briefly mentioned as “narrowly focused discovery” in ASCAP’s comment to the DOJ. The primary fear of licensees such as Pandora is that by limiting the ample rights of discovery afforded by the FRCP, there would be an unallowably large information deficit between the parties in arbitration. With access to the details of a vast number of agreements made over the years, the PROs enter into negotiations with a wealth of information on the market. Conversely, licensees only have access to the limited number of agreements that they themselves have performed. Licensees also argue that the benefits that are touted by the PROs are accomplishable by streamlining Rate Court procedures. The ASCAP Rate Court judge has requested suggestions from ASCAP to streamline the process, but it seems unlikely that the PROs will be offering much in the way of solutions within the federal court process while the consent decrees are up for review. While the PROs wish for a more cost-efficient process, they specifically identify the FRCP discovery rules as a cause for the heavy costs and time delays of Rate Court. While the very rules of the consent decrees are in review, their foremost proposals will most likely aim limit those rights by pursuing Rate Court litigation through another forum not bound to the FRCP.

Conclusion

There seems to be little common ground in this aspect of the Consent Decree review, but one thing that is common is a desire for a lower-cost procedure for judicially determined rates. How such a goal is to be achieved seems like a sticking point for either side, as the rules of discovery in the FRCP are seen as a crucial protection by licensees and seen as costly and time-consuming obstacles to fee determination by PROs. As long as the DOJ is reviewing the consent decrees, ASCAP and BMI will provide full-throated advocacy for a method of dispute resolution that avoids the FRCP and focuses on free market rates for reference in determining fees. Conversely, the perceived importance the FRCP in leveling the playing field for licensees assures that licensees will continue to advocate against any such solution. That being said, there is hope for reductions in costs and increases in efficiency, but they lie in adherence to a determined timeline for these proceedings. It is not the desired function of the consent decrees to allow users to take unfair advantage of the compulsory license, and it serves no competitive interest to allow such behavior. However, one must never forget the extreme bargaining power that lies in two companies that collectively own practically nine tenths of commonly licensed music for public performance. There are potentially perilous consequences for licensees if removing protections such as the FRCP goes through, but if solutions exist otherwise that promote a more efficient process, then it would seem that both parties could benefit from the reform. For the moment, it does not seem like the Rate Courts are going anywhere, but it does not seem like the PROs will back down from supporting expedited arbitration either. It seems like the most viable solutions to retain protections while fixing a flawed system will come from reform internal to the Rate Court, rather than doing away with the institution entirely. We may just have to wait until the possibility of dissolving the institution is entirely off of the table before the parties walk that path to reform.