Statement of Marybeth Peters
The Register of Copyrights
before the
Subcommittee on Courts and Intellectual Property
Committee on the Judiciary

United States House of Representatives
105^th Congress, 1^st Session

July 17, 1997

Fairness in Musical Licensing Act of 1997 (H.R. 789)

Mr. Chairman, members of the Subcommittee, thank you for the opportunity to testify today on this proposed legislation, which would have a significant impact on the U.S. copyright system. Although I understand that this hearing will focus on section 2(a) of H.R. 789, which would expand the “homestyle” exemption of existing section 110(5), I will address the full scope of the bill in my written statement.

The Copyright Office has serious concerns about the substantial broadening of the existing exemptions for the public performance of musical works that would be accomplished by this bill, and about certain aspects of the restraints that would be imposed on the business operations of the organizations that license such performances on behalf of the authors, composers and other copyright owners. Our concerns involve both domestic considerations, and the implications for the United States in connection with its international treaty obligations.

The substantive provisions of H.R. 789 can be divided into three categories: (1) new or expanded exemptions to the public performance right; (2) a new limitation on which parties may be liable for infringing public performances; and (3) regulation of the conduct of business by performing rights societies. I will analyze each in turn from a domestic perspective, providing some technical and historical context, and then discuss the international implications.

Domestic Policy Considerations

(1) New or Expanded Exemptions

Section 2 of the bill would place the following new or expanded exemptions in section 110 of the Copyright Act: (1) an expansion of the existing “homestyle” exemption in section 110(5), dealing with communications to the public of transmissions embodying a performance or display of a work; (2) an expansion of the existing exemption in section 110(6), dealing with performances at annual agricultural fairs and similar events; (3) an expansion of the existing exemption in section 110(7), dealing with performances in record stores to promote record sales; and (4) a new exemption for performances at children's camps.

· General

The right of public performance is a core right for the owners of copyright in musical works. Public performance is one of the major ways in which these works are exploited, and the largest source of income for their owners. Most of the exceptions to this right are collected in section 110 of the Copyright Act. These exceptions are detailed and complex, referring to specific categories of works and narrowly-delineated types of uses. Their scope was thoroughly debated during the 20-year consideration of the general copyright revision completed in 1976. They represent a hard-fought, careful balancing of interests between right holders and users.

The existing exceptions share certain common characteristics. Generally, they either accommodate a particular public interest type of use, or are otherwise calibrated to cause minimal economic impact on the copyright owner. Thus, several relate to specific non-profit, educational or charitable uses; others narrowly limit the circumstances of the use to ensure that it does not substitute for meaningful commercial exploitation.

The changes proposed in section 2 of H.R. 789 would fundamentally alter the nature of section 110. It would no longer be limited to non-profit and minor small business exceptions, but would allow businesses of any size to make significant commercial uses of musical works without permission or payment. This represents a major shift in the balance struck in 1976.

· Expansion of “homestyle exemption”

Section 2(a) of the bill, entitled “Business Exemption,” would amend section 110(5) to expand the existing “homestyle” exemption. This exemption allows transmissions embodying a performance or display of a work to be communicated to the public without the copyright owner's consent in certain circumstances. Under current law, there are three important limitations on such communication: (1) it must be done through a single receiving apparatus of a kind commonly used in private homes (hence the term “homestyle” ); (2) there must be no direct charge for seeing or hearing the transmission; and (3) the transmission must not be further transmitted to the public.

As explained in the legislative history to the 1976 Act, the purpose of section 110(5) is to exempt from copyright liability anyone who merely turns on, in a public place, an ordinary radio or television receiving apparatus of a kind commonly sold to members of the public for private use . . . [T]he clause would exempt small commercial establishments whose proprietors merely bring onto their premises standard radio or television equipment and turn it on for their customers' enjoyment, but it would impose liability where the proprietor has a commercial ?sound system' installed or converts a standard home receiving apparatus (by augmenting it with sophisticated or extensive amplification equipment) into the equivalent of a commercial sound system.

H. R. Rep. No. 1476, 94th Cong., 2d Sess. 87 (1976). Congress intended to cover uses that were “remote and minimal,” where “in the vast majority of cases no royalties are collected today.” Id. at 86.

The proposed amendment would significantly broaden this exemption by removing two of its limitations: the use of a single receiving apparatus of a kind commonly used in private homes, and the ban on retransmissions. It would exempt any communication by any electronic device of a transmission embodying a performance or display of a nondramatic musical work by the reception of a broadcast, cable, satellite or other transmission, as long as no admission fee is charged to see or hear the transmission and the initial transmission itself was properly licensed. For example, a national restaurant chain could install a sophisticated professional loudspeaker system in each of its restaurants, and enhance their ambiance by providing a musical background for diners, transmitted from a radio station without any compensation to the copyright owners. The proposed exemption might also permit free use of music that is communicated not only by radio or television, but through new technologies such as digital computer networks.

Unlike the other section 110 exemptions, this exemption would not further nonprofit public interest goals, or be limited in its economic impact. It would allow business entities of any size to use copyrighted music for free in order to entertain their customers, and thereby stimulate sales of their own goods or services--a financial benefit that does not depend on the existence of an admission charge. It could also lead to the result that Congress sought to avoid in 1976, supplanting existing background music services and other licensing arrangements that provide revenue to copyright owners today.

On the other side, the need of users for such a broad exemption has not been established. The financial impact of the present system on business users seems limited. It is our understanding that the amounts involved are small for each individual establishment--somewhere in the range of a dollar or two a day for each of the three licensing organizations. In the aggregate, however, these licensing fees represent a significant source of income for copyright owners.

For these reasons, the Copyright Office opposes enactment of section 2(a) of H.R. 789 in its present form.

· Expansion of agricultural events exemption

Section 2(b) of the bill, entitled “Agricultural Events,” would amend existing section 110(6), which exempts government and nonprofit sponsors of annual agricultural or horticultural fairs or exhibitions from liability for performances of nondramatic musical works, including under doctrines of vicarious liability or related infringement for performances by concessionaires, business establishments, and other persons at the event. The amendment would broaden the coverage of the exemption from agricultural or horticultural fairs or exhibitions taking place once a year to any “agricultural or horticultural fair, convention, meeting, event, or exhibition.” This language is ambiguous; it is unclear whether the term “agricultural or horticultural” modifies the terms “convention, meeting, event, or exhibition.” In addition, the amendment would further exempt the event sponsors from liability under the doctrine of contributory infringement — a doctrine that conditions liability on both knowledge of and participation in an act of infringement.

Like the section 110(5) exemption, the current section 110(6) is circumscribed to conduct that has minimal economic impact on the copyright owner. Removal of the “annual” limitation, and the inclusion of conventions, meetings and all types of events in the exemption, would lead to a much greater impact. Business conventions or other meetings involving thousands of paying participants might be entitled to perform music without authorization or payment. The Copyright Office cannot support such an expansion.

· Expansion of promotional exemption

Section 2(c) of the bill, entitled “Exemption Relating to Promotion,” would expand existing section 110(7), which permits unlicensed performances of nondramatic musical works by stores, when done solely to promote sales of copies or records embodying those works. The amendment would extend eligibility for this exemption beyond stores selling music or records, to cover any establishment that performs the works to promote sales of audio and video equipment. It would also remove the restrictions that require promotion to be the sole purpose of the performance, and that require the performance to take place “within the immediate area where the sale is occurring.”

Although the uses permitted today under section 110(7) are commercial in nature, they relate directly to the promotion of sales of copies or recordings of the copyrighted works being used. Consequently, the diminution of licensing revenue to copyright owners can be expected to be offset by increased sales of copies of their works. Exempting performances that promote sales of unrelated consumer electronic products such as televisions and stereos cannot be justified in the same way.

Moreover, the spatial limitation in the existing exemption ensures a close tie between the performance and the product being promoted. The result of its removal, combined with the deletion of the word “sole” and the allowance of purposes beyond the promotional, is that music could be used generally to entertain and attract customers by any type of business, as long as the business places on sale even a single device used in the performance.

Again, the effect of the proposed expansion would be to grant all business entities the right to use copyrighted music for free anywhere on their premises, in order to enhance their own sales. The Copyright Office therefore cannot support this provision.

· New exemption for children's camps

Section 2(d) of the bill, entitled “Performances at Children's Camps,” would create a new exemption for performances of nondramatic musical works at organized children's camps if the children sing the work, play games or dance to it, or if the performance is instructional. It appears to be the outgrowth of media coverage last year of ASCAP's communications with Girl Scout camps regarding their performance of musical works.

The uses that would be permitted by section 2(d) seem more closely related to public interest uses than the business exemptions in sections 2(a) and (c). But many summer camps are operated by for-profit businesses. Yet, unlike existing exemptions in section 110 for similar purposes, the proposed exemption is not subject to any limitation on the type of entity that is eligible. To the extent that a new exemption is warranted, it would be more appropriate, and more consistent with the general approach of section 110, to limit it to nonprofit entities, and to performances made “without any purpose of direct or indirect commercial advantage,” as required by sections 110(4), (8), and (9).

It is not clear, however, why even a narrower version of this exemption is needed. Existing paragraph (4) of section 110 already exempts most nonprofit performances that take place at children's camps. It allows unlicensed live performances of nondramatic musical works, when they are done without any purpose of direct or indirect commercial advantage and without payment of any compensation for the performance to the performers, promoters, or organizers, if two conditions are met: (1) there is no direct or indirect admission charge; and (2) any proceeds above and beyond costs are used exclusively for educational, religious or charitable purposes and not for private financial gain (unless the copyright owner has served a specific notice of objection in a prescribed form and manner).

(2) Limitations on Liability

The bill also contains a carve-out from existing doctrines of third-party liability for various parties who own or manage the premises on which infringing performances take place. Section 7 would eliminate the possibility of imposing liability for performances on landlords, convention organizers and sponsors, facility owners, and similar parties, under theories of vicarious liability or contributory infringement based on the party's right or ability to control, or actual control over, the premises or their use. To qualify for the exemption, the contract granting the right to use the space must prohibit infringing public performances, and the party relying on the exemption must not exercise control over the selection of works performed.

This proposal would effect a major change to U.S. copyright law, with implications that go beyond the music licensing issues addressed in the bill. It represents a significant derogation from the well-established doctrines of vicarious liability and contributory infringement, applicable to all types of uses of all categories of works.

Under the doctrine of vicarious liability, a party that has the right and ability to control infringing activity, and receives a direct financial benefit from the infringement, is held liable for the infringement. Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304, 307 (2d Cir. 1963). The doctrine of contributory infringement imposes liability on parties that have knowledge of, and induce, cause, or materially contribute to an infringement. Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir. 1971). These are circumstances where it has long been considered just and appropriate to impose liability for the infringing acts of others. See Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 435 (1984); 3 Melville B. Nimmer and David Nimmer, THE LAW OF COPYRIGHT § 12.04[A] (1996); H.R. Rep. No. 1476, 94th Cong., 2d Sess. 61 (1976) (noting statutory recognition of doctrine of contributory infringement in 1976 Copyright Act).

The bill would give immunity from these doctrines to one particular type of business activity for one particular type of use of one particular type of work. No justification has been advanced for this special treatment, and immunity could be provided for knowing, profit-making conduct by a commercial entity that may be the only financially responsible party involved in an act of infringement.

(3) Regulation of Business Operations of Performing Rights Societies

Other provisions in H.R. 789 regulate the manner in which performing rights societies conduct their business. Section 3 of the bill would require binding arbitration of rate disputes involving performing rights societies, such as ASCAP, BMI and SESAC, at the request of the music user, and would limit the amount of damages for past infringement in such a proceeding. Section 4 would require these societies to offer per programming period licenses for radio broadcasters as an alternative to blanket licenses, with limitations on the license fees that could be charged. Section 5 would mandate public dissemination by the societies of information about the works in their respective repertoires both on-line and in hard copy form, updated every three months, as well as documentation regarding their licenses with their members. It would also restrict their ability to participate in an infringement action or charge a fee for a per programming period license if these requirements are not met.

The Copyright Office has concerns about the impact of a number of these provisions on the practical ability of copyright owners to enforce their rights and obtain a fair return for the use of their works. These concerns arise in part from the nature and history of collective licensing in this country.

As a practical matter, performing rights must be exercised collectively. Musical works are performed all around the country, in large and small establishments of varying types, often without advance planning or advertising. Individual composers and music publishers cannot monitor all uses, negotiate with all users and collect royalties. The only feasible way for them to enforce their rights is to rely on performing rights societies like ASCAP, BMI and SESAC. The mechanism of collective licensing for the public performance of musical works is widely utilized around the world.

Collective administration of rights has been successful in large part because it minimizes transaction costs for both copyright owners and users. It allows copyright owners to enforce their rights and profit from their works without the prohibitive expense of finding and negotiating with multiple users; it allows users to lawfully perform musical works in public without the difficulty of obtaining permissions from multiple copyright owners.

The performing rights societies are responsible for developing a workable mechanism for licensing multiple and far-flung performances of numerous short works, including a simple and generally applicable fee structure and a reliable basis for the distribution of royalties. In establishing a fee structure, they negotiate collectively with industry associations of user groups. Businesses like restaurants or nightclubs typically utilize a “blanket license,” setting a single fee for unlimited performances of all works in the society's repertoire during a certain period of time (usually a year). The result is a reasonable approximation of the value of all of the performances as a group.

There has been a long history of challenges to both ASCAP and BMI under the antitrust laws, and antitrust restraints have shaped the operations of these organizations. Today, both ASCAP and BMI operate under consent decrees. The restraints in the decrees include a prohibition against licenses of more than five years duration, and a requirement that a list of repertoire be maintained and available for inspection. Since 1950, music users have been able to seek determination of a reasonable license fee for ASCAP works in the federal court for the Southern District of New York; in November 1994, BMI's license fees were also placed under that court's jurisdiction. Thus, substantial safeguards already exist against abusive practices or unreasonable charges.

Under H.R. 789, dissatisfied users could instead seek to resolve their differences over rates through arbitrators who are instructed to determine “fair and reasonable fees.” The resulting multiplicity of proceedings could cause great expense and lead to widely divergent rulings. Under the consent decrees, in contrast, similarly situated parties must be treated the same, with all determinations made by the single rate court. This court has expertise and provides continuity and consistency in its rulings, thereby promoting settlements.

In addition, H.R. 789 would sharply limit the amount of damages that could be recovered by a music copyright owner for past infringement. In a (mandatory) arbitration proceeding prior to court action, section 3 of the bill limits potential damages to the amount that a license would have cost for the infringing performance. In a “court-annexed” arbitration, the amount cannot exceed two times the ordinary blanket license fee for the years in which the performances occurred.

Under current law, copyright owners are entitled to recover, in lieu of actual damages, statutory damages between $500 and $20,000, with a potential rise to $100,000 in the case of willful infringement. Limiting the possible monetary recovery for past infringement to the license amount removes any incentive to obtain a license in advance. In order to avoid such perverse incentives, courts have held that damages should be set at an amount high enough to create a meaningful financial difference between compliance with the law and infringement. See, e.g., International Korwin Corp. v. Kowalczyk, 855 F.2d 375, 383 (7th Cir. 1988); Iowa State Univ. Research Foundation v. American Broadcasting Cos., 475 F. Supp. 78 (S.D.N.Y. 1979), aff'd, 621 F.2d 57 (2d Cir. 1980).

With respect to radio broadcasts, under current law and practices broadcasters can obtain three different types of licenses for the performance of musical works: (1) direct licenses from the copyright owner; (2) per program licenses from a performing rights society; or (3) blanket licenses from a performing rights society. The bill would mandate that copyright owners make available, at the broadcaster's option, a per programming period license with detailed constraints on the price that could be charged. In the view of the Copyright Office, as a matter of general policy, the government should not interfere in the marketplace and place limitations on the contractual freedom of copyright owners and users to negotiate terms and conditions for the use of copyrighted works. Today, such governmental constraints have been imposed only in the context of antitrust law, through the operation of the consent decree under the jurisdiction of the federal court in New York. We also question the limitations on fee-setting, which, when combined with the mandatory nature of the per programming period license, appear to have the potential to greatly reduce the income generated for copyright owners under the current system, as well as the economic feasibility of a system that may require monitoring the broadcasts of every radio station in America.

Finally, we have concerns about section 5's restrictions on the participation by a performing rights society in an infringement suit or the charging of a per programming period license fee. The result might be to penalize a blameless composer for an error or omission by the society, and make it impossible as a practical matter to enforce his or her rights.

International Considerations

(1) New or Expanded Exemptions

Several provisions of this bill also raise concerns from the perspective of the obligations of the United States under international treaties.

The Copyright Office believes that several of the expanded exemptions, if passed in their current form, would lead to claims by other countries that the United States was in violation of its obligations under the Berne Convention for the Protection of Literary and Artistic Works, incorporated into the Agreement on Trade-Related Aspects of Intellectual Property Rights (” TRIPs” ) of the Uruguay Round of GATT. Berne requires member states to provide to authors of musical works exclusive rights of public performance, communication to the public, and broadcasting, including “the public communication by loudspeaker or any analogous instrument transmitting, by signs, sounds or images, the broadcast of the work.” Berne Articles 11 and 11bis. In addition, TRIPs Article 13 requires World Trade Organization members to “confine limitations or exceptions to rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder.”

As to the proposed expansion of the homestyle exemption, we see significant problems. An exception this broad appears to be outside the scope of the permissible “small exceptions” to the Berne rights of public performance and communication. Allowing virtually every business to play music to its customers through loudspeakers or audiovisual devices would invite a difficult case against the United States for violating our TRIPs obligations.

Similar arguments could be made about the other exceptions to the public performance right in the form proposed in H.R. 789, particularly the promotional use exemption and the other exemptions not limited to non-commercial uses.

These concerns as to the international implications are not purely theoretical. Last month, after receiving a complaint from the Irish Music Rights Organization (” IMRO” ), the European Commission opened an investigation of U.S. licensing practices for European music as they relate to the exemption in existing section 110(5). The complaint alleges that the United States is currently in breach of its obligations under the Berne Convention and TRIPs Agreement, and asserts that last year's legislative proposals to broaden the exemption, if enacted, would further damage the economic interests of copyright owners. During the past year, in connection with a review of the copyright laws of all developed countries in the TRIPs Council of the World Trade Organization, several countries questioned the United States as to the permissibility and status of those bills.

The Copyright Office nevertheless believes that a reasonable exemption of narrower scope could be crafted to clarify permissible conduct by small businesses that would clearly comply with the standards of Berne and TRIPs. We would be pleased to assist in formulating the criteria for such an exemption, as was proposed in the 104th Congress in S. 1619, the Music Licensing Reform Act of 1996.

(2) Regulation of Business Operations of Performing Rights Societies

Three other provisions of H.R. 789 may also raise international problems: (1) the provision in section 3 that provides for mandatory binding arbitration to resolve disputes between performing rights societies and users relating to fees for both past and future performances; (2) the provision in section 3 that limits the damages available to copyright owners in a mandatory arbitration proceeding; and (3) the provision in section 5 that bars infringement actions and fee collection by performing rights societies for the public performance of works that have not been identified and documented as required by that section.

The Copyright Office is concerned that these provisions could invite claims by our trading partners that the United States is violating its obligations under the TRIPs Agreement to “make available to right holders civil judicial procedures concerning the enforcement” of copyrights, and to provide authority to judicial authorities to order an infringer to pay “damages adequate to compensate for the injury the right holder has suffered.” TRIPs Arts. 42 and 45. (The term “right holder” is defined in the TRIPs Agreement, fn. 11, to include associations having legal standing to assert rights.) Similarly, the requirement that works be identified and documented as a precondition to suit or fee collection by performing rights societies could subject the United States to claims that it is violating the Berne Convention's prohibition of formalities imposed on the enjoyment and exercise of rights. Berne Art. 5(2).

Conclusion

In sum, the Copyright Office has significant concerns about a number of the provisions of H.R. 789 from a policy and international perspective. We do believe, however, that acceptable compromise solutions are possible in at least some of these areas. These would include the scope of the homestyle exemption in paragraph 110(5), and aspects of the administration of the collective licensing system. We would be happy to work with Congress and the affected parties to assist in finding such solutions.