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The ASCAP Royalty Decision and Understanding Business Agreements

The ASCAP Royalty Decision and Understanding Business Agreements

The American Society of Composers, Artists and Performers represents roughly half the musical composers and song publishers in the United States. Basically, individual artists assign their publishing rights to ASCAP, who in turn licenses the works to others businesses. Since the 1940s, ASCAP's business practices have been subject to a “ consent decree” with the Antitrust Division of the U.S. Department of Justice, which is designed to ensure ASCAP does not abuse its dominant position in the marketplace. The consent decree itself is subject to periodic review and revision, most recently in 2011, when a federal judge in Manhattan approved the most recent form of the decree. Accordingly, any disputes arising under the consent decree are also decided in New York.

The rise of Internet-based distribution in the early 21st century has posed a number of new challenges for ASCAP and its members. Some publishers feel the consent decree is too restrictive, as it gives the federal court in Manhattan the right to set royalty rates for ASCAP-based music licenses. Some publishers contemplated leaving ASCAP altogether and licensing songs on their own, outside the framework of the consent decree. To prevent such defections, a few years ago ASCAP changed its internal rules, permitting publishers to separately license their works to “new media,” i.e. YouTube and online streaming services. ASCAP would then retain licensing rights to more traditional media forms.

One new media company, Pandora, challenged this practice before the Manhattan federal court, arguing such “partial withdrawals” were not permitted. A publisher either had to allow ASCAP to license songs to all interested parties or withdraw completely from the organization. The consent decree required an “all or nothing” approach, according to Pandora.

The court agreed. In March 2014, U.S. District Judge Denise Cote held partial withdrawals were not permitted under the 2001 version of the consent decree. Furthermore, Judge Cote set royalty rates for Pandora and other new media companies. For the disputed licensing period, which was 2011-2015, Pandora requested a flat rate of 1.7% of revenue. ASCAP asked for a progressive rate scale ranging from 1.85% to 3%. Judge Cote ruled closer to Pandora's request, establishing a fixed rate of 1.85% for all five years.

On May 6, the U.S. Second Circuit Court of Appeals in New York upheld Judge Cote's decision. With respect to the issue of partial withdrawals, the appeals court said allowing such a practice would “rewrite the decree so that it speaks in terms of the right to license the particular subset of public performance rights being sought by a specific music user.” This goes against the “plain language of the decree,” the court said.

Do You Need Help Negotiating or Enforcing a Contract?

While the ASCAP consent presents an extraordinary situation, it does illustrate the importance of properly negotiating and understanding contractual arrangements. All businesses make and enforce agreements, and it is essential to have qualified legal representation for such matters. If you need to speak with an experienced New York business attorney, contact our office today.

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