Guest Blog: Josh Wattles and Compulsory Licensing

Back in April, I did a post on a new reverse value theory. Josh Wattles, a friend and lawyer in Los Angeles with long, vast experience in the copyright and entertainment fields, made some comments. Offline, we talked about him writing a longer piece, and maybe doing a guest blog. He has now done so, and here it is:

Josh Wattles

The process of fixing prices and terms under compulsory licenses in the Copyright Act needs change. Streamlining is not a meaningful option but better participation by the government to represent the public interest might go a long way in producing useful results.
Compulsory licenses are born in politics. They are compromises.

Every compulsory license is also an admission of failure - - a confirmation that neither the market nor the rights of copyright owners are flexible or efficient enough to permit a common place licensing structure or to avoid the compulsory approach.

On principle a compulsory license should occur only at last resort and from absolute necessity after a proof of market failure and a need for the statute to intercede. Most, however, have nothing to do with lofty aspirations of balance or with enabling an otherwise impossible market or even with a measured response to benefit a clamoring public. Instead, they have everything to do with power players reaching for commercial advantages within a niche market. A compulsory license can even be a feint at its obvious purpose, price setting: neither the commercial user group nor the copyright owner group wants to actually rely on the license or its price because they just want to set a ceiling or set a default to stage private side arrangements.

Compulsory licenses aren’t conceptually challenging, like fair use is, and they are never intellectually amusing once drafted. They are brutishly commercial in purpose and in application - - and painful to read. The compulsory licenses from the recent past were drafted by skilled lobbyists and lawyers and the result suffers from a lack of simplicity and economy. Finding out what the license covers or how it can be triggered is like tracing a tan-colored line through the Pismo dunes. Try §119, the compulsory and statutory licenses for cable and satellite retransmissions.

Compulsory licenses are apparently haphazard: there is a compulsory license you can use to carry some broadcast signals on cable, but not all; or there is a compulsory license to use the underlying music in a recording but not to use another recording; or there is a statutory license for non-interactive webcasting if the service doesn’t repeat songs too often or play albums in sequence; and so forth. This happens because compulsory licenses are designed not as market solutions but as small nips and tucks that ease other commercial uses of copyrighted content without anyone losing out on important parallel interests.

Because a compulsory license comes out of a political process you would think ultimately a deal was made at some level. But as it turns out, increasingly the “license” is just a set of rules for a follow-on process - - a rate setting proceeding before a Copyright Royalty Board itself generating reams of spinfastic briefings, dueling economists and industry experts, with live testimony and written submissions. In a proceeding designed to set a “market rate” equivalency which would ultimately be openly published, the CRB procedures nonetheless permit liberal, secret submissions of the parties’ pricing activities on the ground of commercial sensitivity. All struggle in the CRB forum to apply various standards of review left intentionally vague in the statute as a result of prior failures to arrive at compromises on clear guidelines. A CRB decision is inevitably appealed by disgruntled parties - - which can mean everyone who was there. The whole process is petty and overdrawn favoring in outcome those most capable of withstanding the tedium and boredom.

There is no mystery in how the process became so over-wrought. It is a result of serial manipulations by well funded commercial interests seeking wholly appropriate advantages over competitors, suppliers or customers. Sometimes they trip over each other and themselves. AOL argued the user side and Warner Music Group argued the copyright owner side of a webcasting proceeding back when they were both owned by Time Warner. Those subsidiaries also lobbied on opposite sides to produce the statute giving rise to that compulsory license.

A Congressional committee is currently sponsoring private negotiations towards a revision of the compulsory that sets the price for the use of a musical work in a recording or in a download. There, the four largest music publishers are up against the four largest record companies - - well, not really, because each of these is a perfect pair. The four largest record companies also own and control the four largest music publishers. All eight enjoy a combined market share of around 70% to 80% of all music. As close as they are as family, the record companies and their music publishers have managed to tied up the committee and the Copyright Office for years trying to broker terms for their latest “compulsory” license.
There is no shame certainly among the participants about any of this gaming for advantage. In fact, it seems certain that more compulsory and statutory licenses with the same structural defects will be used with still more twists and tweaks hoping to tip the outcome. Almost every discussion of licensing Internet-based distribution ends up with a compulsory or statutory license proposal.

Most proposals for compulsory licenses argue the commercial case - - why that particular market segment needs unitary licenses or set prices- - and they might argue the social utility of the license - - providing full access or some other benefits for end-users. But inevitably when it comes to process there is less focus. The CRB has gone through a variety of iterations. Still procedural issues come up by and large as efforts to tip the scales more than to protect the scales from tampering.

So, if gaming is inevitable across the board, why not let us all in to play?

Here is the opening salvo for reform.

First, if you are going to throw in the towel on making an open, free market deal and use the government to impose one, then the government should be a continuing party in interest and not just a rental hall where the negotiation takes place. The DOJ should be in every compulsory license proceeding with the brief to protect the commercial fairness of the outcome. Second, the people should be openly invited too. Of course, it’s so crushingly boring the public would never come, so the FTC should be in every proceeding as well with the brief of representing the interests of end-use consumers.

Some reasons for the DOJ to be in the room: (1) Every compulsory license is by definition anti-competitive in origin. It exists because there was no competitive milieu in which an adequate license could be fashioned. (2) Ultimately, every compulsory license results in an aggregation of commercial users, an aggregation of owners or both to argue the rate and to distribute the proceeds of the license. These are powerful collectives inherently capable of mischief. (Some like ASCAP and BMI are already under court supervision as an antitrust matter; but other more ad hoc collectives are not, such as SoundExchange.) (3) These collectives carry even greater market power because they enjoy broad statutory anti-trust exemptions in order to participate in the rate setting process. (4) Finally, all compulsory licenses impact businesses well beyond the scope of the license itself. Someone needs to take a long view inside the rate proceedings to argue the impact of price and terms on competitiveness and on adjacent open markets. That isn’t happening now.

Protecting end-users would seem to be an even more self-evident requirement in setting rates and terms under compulsory licenses. The whole purpose and logic of permitting a compulsory license has to do with creating efficiencies so that the general public benefits through access and, one would hope, fair pricing. The compulsory license should meet this goal by creating order where otherwise there would be a distribution bottleneck. But the statute sets up a false bargaining process in which owners and users debate the appropriate terms and rates before a tribunal that has only loose instruction (and at times none) on protecting the public interest on price and terms. The process assumes the commercial parties act as surrogates for the end-user consumers and assumes that the general public itself is unaffected.

For example, a statutory standard to be followed in a couple of the compulsories is establishing “rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” §114(f)(2)(B) and §112(e)(4). Leaving to one side that, by definition, a compulsory license would not and cannot be negotiated in the marketplace at all precisely because the market doesn’t impose any price or term by compulsion, the standards of review in §114 have no care as to whether the public is served by the resulting rates and terms.

The CRB is not generally charged, as it should be, to arrive at a price and at terms that the public itself might want and might accept or that might spur further entries into the market in order to benefit public choice. In some instances, the distributors and the copyright owners have no obligation to show the CRB that the resulting compulsory pricing would actually fly with any end-user consumer. But just stating these as factors that the CRB should consider without providing advocates leaves open the question of how the judges would go about gathering appropriate evidence, surveys and expert opinions. If there were organized consumer groups we could give them standing to argue their interests. But it is too much to ask, particularly in emerging markets, that consumers either organize or loose at the table. The FTC should do it for them and provide the analytical expertise to learn the market and raise adverse impacts.

The basic premise of a real marketplace is that either side can just walk away. A compulsory license changes that critical dynamic. Once gone, the parties can’t battle things out by themselves in front of an arbitrator to produce even a mock negotiation. Instead, licensing authority needs to be exercised by the CRB on a fully informed, not just partisan, basis.