Walter McDonough, Author

100 YEARS OF COMPULSORY LICENSING: A COMMON SENSE SOLUTION TO THE PEER-TO-PEER FILE SHARING DILEMMA?

INTRODUCTION
The history of copyright law can be seen as a series of legislative reactions to disruptive technologies that threaten the status quo. According to Harvard Business School professor Clayton M. Christensen, a disruptive technology is one that unexpectedly dislodges one that is already established. The printing press, radio, television and the Internet are all examples. Each has also challenged copyright owners’ ability to protect their exclusive rights. In much the same way that at the beginning of the last century improved and integrated rail service networks made it easier for English “pirates” to physically distribute unauthorized copies of printed music throughout the United Kingdom, today, at the beginning of this century, the Internet and networked computing makes it possible to instantaneously disseminate perfect copies of copyrighted content throughout the world.

A. The Peer-to-Peer File Sharing Problem
One of the most controversial modes of Internet distribution, and the most contemporary example of a disruptive technology, is peer-to-peer file sharing (P2P) and its component software. P2P file sharing is “a popular Internet application with millions of users sharing millions of files daily” (these distributions are also known as “torrents”). The public is most familiar with P2P software through its most popular versions: KaZaA, BitTorrent, Morpheus and Grokster. The copyright infringement conviction of the proprietors of the Swedish P2P website Pirate Bay grabbed headlines throughout the world this year.

Why is P2P file sharing seen as a crisis? Although P2P can be used for many constructive purposes, users may also engage in the unauthorized copying and distribution of music, video, games and software. This conduct threatens existing business models and the monetization of copyright because neither creators nor the companies that manufacture, market and distribute their content receive compensation. The scale of this phenomenon is almost difficult to understand.

McAfee’s 2009 Third Quarter Threats Report revealed that a number of new file sharing sites (featuring unauthorized copyrighted material) grew by 300% in the three months after the court-ordered closing of the Pirate Bay web site in the late summer of 2009. Creative industries in the United Kingdom (UK) have claimed that more than 50% of Internet traffic in their country consists of unauthorized uses. These same businesses have asked the British government to deny Internet access to users who persistently download copyrighted content without authorization. Record labels in the UK believe that they are suffering losses of ₤200 million each year because CD sales have never recovered from the introduction of file sharing. The television and film industries are also concerned that increasing broadband speeds can do similar damage to their businesses. The International Federation of the Phonographic Industry (IFPI) opines that 95% of all downloads are unauthorized. It is believed that almost seven million people in the UK download without authorization. One study calculated that worldwide, as of June 2008, there were 202,144,202 PCs with installed P2P applications.

There are two schools of thought about this phenomenon. One group has seen this development as beneficial and a logical development in the free and unfettered distribution of information. This faction also maintains that P2P serves a valuable social purpose in providing consumers with almost unlimited choice and search capabilities. David Touve, a PhD candidate at Vanderbilt University, may have put this best when he stated “P2P networks are such powerful venues for music demand for reasons beyond the economic argument that we can get stuff for free – these networks offer an ideal landscape for sharing the stuff of which culture is comprised.” Ivor Tossell of Toronto’s Globe and Mail put a hip but cynical spin on this perspective when he wrote “[t]he upshot is that Internet dwellers of 2009 live in an atmosphere in which downloading copyrighted movies and music isn’t just a convenient way of getting your hands on something you want . . . [i]t has become a low-grade gesture of rebellion and as such, like love beads in 1967 or safety pins through your T-shirt in 1977, the fashion of the day.” With some irony, some observers have cited polling data that seems to indicate that those who download music without authorization spend the most money on recorded music.
The opposing side sees such technologies as a potential threat to the existence of creative industries. Industry trade associations, such as the Recording Industry of
America (RIAA), have sought stiff sanctions against unauthorized uses of their copyrights. These efforts have included the record industry’s litigation strategy against unauthorized downloaders in the United States and France’s enactment of the draconian “three strikes and you’re out” policy. In fact, the RIAA has accused 18,000 individuals of unauthorized downloading. Although most of these cases settled, two defendants, namely, a single mother and a student lost in court and were ordered to pay damages of $1,920,000 and $675,000 respectively.

B. Potential Licensing Solutions
Is there another way to look at this issue and can United States copyright law adapt to this new disruptive technology and balance the interests of consumers and copyright owners? The Electronic Frontier Foundation (EFF), the Songwriters Association of Canada (SAC) and the Future of Music Coalition (FMC) have each offered proposals to solve this dilemma. At a recent press conference in Ottawa, Billy Bragg, Safwan Javad of Wide Mouth Mason, Minister of Parliament and the NDP’s Heritage critic Charlie Angus and the Songwriters Association of Canada discussed proposal for greater artist participation in the digital distribution debate. Don Quarles, the President of the SAC proposed “[a] license fee of a few dollars a month paid by those who wish to file share [that] would create a new business model, one that creates good value for the consumer and ease of access to the music, while ensuring the music creators and rights holders are farily compensated for the use and enjoyment of their work.” While the EFF and SAC have proposed voluntary systems, is there a place for compulsory licensing in this debate?

Conceptually, such a proposal would allow Internet Service Providers (ISPs) and/or their subscribers to be compulsory licensees that could then allow them to engage in P2P file sharing without the threat of litigation. In exchange, customers would pay a monthly surcharge on their broadband bill, in much the same way that cable customers pay extra now for HBO or Showtime on their monthly cable bill. Such monies would be paid to a central collection society, e.g., Sound Exchange (the organization that currently collects and distributes compulsory monies under sections 112 and 114) and then paid to copyright owners and other stakeholders.
A February 2008 British Music Rights Association survey found that 80% of current illegal downloaders would be willing to pay for legal file sharing. A November 2009 conducted by the German Institute for Strategy Development indicated that 50% of that country’s most active Internet uses would also pay a flat fee to legally download content by utilizing P2P file sharing. Politically, there may be a large constituent group of Internet users who would support such a proposal. In order to place this concept into a more meaningful context, however, it is important to review the last one hundred years of copyright history.

THE HISTORY OF COMPULSORY LICENSING: 100 Years Ago: Crisis Creates A New Idea (1909)

Imagine a world where new technological devices have disrupted the status quo. The public has overwhelmingly embraced these inventions and they have become the popular consumer products of their time. These technologies are so disruptive that the music industry legitimately believes that its actual existence is in question. To further complicate the situation, there are no rules in place that would guarantee compensation to copyright owners for the use of their music. Are we talking about the Internet and the 21st Century? No, this is a description of the early 20th Century and the emergence of the player piano and the record player.

In 1909, the United States passed its first major omnibus revision of copyright law. Known as the Copyright Act of 1909, the bill replaced the original Act of 1790. The 1909 act introduced the concept of “compulsory” licensing. The reasons for the adoption of this provision and the genesis of compulsory licensing are fascinating for our purposes.

The most controversial aspect of this era of copyright reform was the provisions regarding the control of so-called “mechanical music.” Also known as the “canned music” debate, this issue consumed Congressional committees for a good part of the decade. The player piano was the disruptive technology of its time. This machine was a self playing keyboard instrument that was programmed by perforated or “mechanical” rolls. These rolls were the instructions that controlled what keys were struck so the piano could play the most popular songs of the day without human intervention or assistance. This became a major form of home entertainment throughout the western world. The other invention that disrupted the established order was the phonograph player.

To set the stage for this historic debate, one first has to understand the level of popularity of these two devices. Second, at the turn of the century the manufacturers of these devices were not paying royalties of any kind to the copyright owners of the music that they were consuming. The great composer John Phillip Sousa wrote an impassioned essay for Appleton’s Magazine underscoring this problem. When the hearings began, there was no consensus as to whether or not the music reproduced even fell within the parameters of then existing copyright law. There was also a fear that these machines could lower the demand for live music.

Congress understood the threat of these new disruptive technologies and, consequently, sought to update the present copyright law. When Congress began the process of copyright reform in 1905, it featured conferences before the Library of Congress and emotional hearings before Congress. Eventually, these developments produced the compulsory license. On one side were the music publishers, composers and their allies and on the other side were the player piano manufacturers and phonograph manufacturers. Some commentators have opined that the controversial and incendiary rhetoric on both sides of the debate set a tone for music industry politics that continues to this very day.

During the hearings, copyright advocated argued for the following language “the copyright secured by this Act shall include the sole and exclusive right to make, sell, distribute, or let for hire any device, contrivance, or appliance especially adapted in any manner whatsoever to reproduce to the ear the whole or any material part of any work published and copyrighted after this Act shall have gone into effect, or by means of any such device or appliance publicly to reproduce to the ear the whole or any material part of such work.” The manufacturers did not want to be subject to copyright law. Over the course of the debate, they eventually realized that they would have to pay in order to have certainty over the licensing process.
What complicated the matter was President Roosevelt learned in 1907 that a group of publishers had created a “giant music monopoly” for the purposes of supplying one player piano manufacturer with an exclusive right to reproduce new popular songs. In fact, during the hearings, the committee heard evidence that the Aeolian Company had pre-existing to do this very thing. This agreement had been entered into in 1902 and was contracted to last for thirty-five hence.

To further muddy the waters, contemporaneous to the Congressional hearings, the Supreme Court ruled in 1908 in White-Smith Music Publishing v. Apollo Company, that the “mechanical” rolls of player pianos were not “copies” under copyright law because they were not formatted in a way that could be read literally as a piece of music. The Court noted that because Congress was familiar with this issue, the Congress could have legislated a solution if they had deemed this issue to be important. Was it a copy if the underlying creative work could not be perceived as original work of authorship? In the words of Justice Holmes “the result is to give to copyright less scope than its rational significance and the ground on which it is granted seems to me to demand. . . . [o]n principle, anything that mechanically reproduces that collocation of sounds ought to be held a copy, or if the statute is too narrow, ought to be made so by a further act, except so far as some extraneous consideration of policy may oppose.” Furthermore, Justice Day wrote the underlying issues “properly address themselves to the legislative and not to the judicial branch of the Government” and that “as the act of Congress now stands, we believe it does not include these records as copies or publications of the copyright music involved in these cases.”

That was the issue that Congress faced when it conceptualized the 1909 Act, it not only wanted to redefine what constituted a copy but it also wanted to avoid the potential for monopolistic control of music (musical work copyright owners could have used their exclusive rights to license in a non-competitive manner). The result was section 1(e) of the 1909 Act. Under Section 1(e), musical work copyright owners had the exclusive right to authorize “mechanical” reproduction of their works subject to some limitations. After the copyright owner approved the first use, any person could make a “similar use” provided that there was a payment made to the copyright owner of two cents for “each part manufactured.” Thus, the statutory or compulsory license was born 100 years ago.

Today, a statutory or compulsory license allows a user to use copyrighted materials without the approval of the owner. In exchange, the statutory licensee adheres to reporting and payment requirements. If the user complies with these rules, he or she is not an infringer and not subject to litigation.

What are some of the current compulsory or statutory licenses? There are licenses for: secondary transmissions by cable systems; making ephemeral recordings; the public performance of sound recordings by means of a digital audio transmission; the use of musical works in making and distributing phonorecords; the use of certain works in connection with non¬commercial broadcasting; secondary transmissions of superstations and network stations for private home viewing; secondary transmissions by satellite carriers within local market ; and the distribution of digital audio recording devices and media. This group of copyright provisions, in some instances, reflects the Congress’ intent to adapt the law to meet the challenges of new and potentially disruptive technologies.

Does statutory licensing produce tangible results? The most recent data concerning the Copyright Office’s collection of statutory licensing monies comes from its 2007 Annual Report. It covers the fiscal year ending September 30, 2007. Among the almost $280 million in distributions were: $3,002,596.73 of the 2002, 2003, and 2004 Musical Works Fund; $1,538,780.83 of the 2005 Copyright Owners of Sound Recordings and Featured Artists Subfunds; $938,605.32 of the 1993 to 2001 final supplemental distribution to Non-Featured Musicians Subfund, Non-Featured Vocalists Subfund, Featured Artist Subfund, Sound Recording Copyright Owners Subfund, Music Publishers Subfund and Writers Subfund; $1,658,959.68 to Major League Central Fund, for the 1993 to 1997 Cable and 1994 to 1995 Satellite Funds; $194,220,505.37, comprising the final cable royalty distributions from the 1999 through 2002 cable royalty pool to the Music Claimants, Joint Sports, Commercial Television Claimants, Public Television Claimants, and Canadian Claimants; $76,484,928.33 to Joint Sports and Program Suppliers of the 1998 and 1999 cable royalties; and $2,086,531.64 of the 2006 Sound Recording Copyright Owners and Featured Artists Subfunds. In addition, Sound Exchange and the Alliance of Artists and Recording Companies (AARC) collect monies for the statutory licenses for ephemeral recordings and the public performance of sound recordings by means of a digital audio transmission (sections 112 & 114) and the statutory obligation for distribution of digital audio recording devices and media (chapter 10) respectively. Looking at the universe of collections and distributions, large sums of money have been distributed to copyright owners and stakeholders.

WHAT WOULD A PROPOSED P2P COMPULSORY LICENSE LOOK LIKE?

Copyright owners enjoy the exclusive right to make copies and distribute their works. The very nature of P2P file sharing facilitates unauthorized distributions or torrents that result in perfect and unauthorized digital copies. Any system of statutory licensing would have to address this.

The architecture of the Internet would necessitate that the ISP or the customers would be the licensee. In that way, ISPs could do the following things: serve as an immunized and licensed bridge to P2P networks; collect data regarding the distribution of particular torrents; and, finally, serve as the agent in the collection of customer levies. Because ISPs would be the statutory licensee, they would have the traditional obligations of reporting and payment. ISPs could then extend their rights under the statutory license to their customers. All customer obligations and responsibilities would be outlined in the traditional customer agreements and terms of use.
Because we are dealing with all forms of copyrighted material, it would necessary to add a new chapter to title 17 in much the same way that the Audio Home Recording Act of 1992 added chapter 10, “Digital Audio Recording Devices and Media.” It could be entitled “Statutory Licensing for P-2-P File Sharing.” This chapter would allow customers of ISPs, which had conformed to statutory provisions, to distribute and copy copyrighted materials through the use of P2P software.

There would, however, need to be a few exclusions. First, only customers who actually used P2P file sharing software would have to pay levies. Consumers who use their computers solely to retrieve e-mail or check the latest news or sports scores would not be required to subscribe. Second, copyright owners could exclude certain works for defined periods of time. For example, the motion picture industry could exclude films during the first year of their release. The recording, television and publishing industries could also follow this practice. At the end of this period, however, consumers would be free to distribute and copy such works.

The CRB would set the rate for the monthly fee that ISP customers would pay. ISPs could then pay these monies to Sound Exchange (or another designated collection entity). This entity could then monitor torrents and then make calculations based upon what was actually distributed and downloaded. As a recent survey has found, there is a correlation between the popularity of individual P2P torrents in the digital world and the popularity of the most popular artists and works in the physical world. In other words, if Eminem is selling the most CDs in the physical world, it is highly likely that he would be the most downloaded recording artist on P2P.

Finally, the last component of this proposed statutory license is probably the most difficult. Who should be the recipient of the royalties? Should copyright owners (in many cases multi-national media corporations) receive all of the proceeds or should there be some form of payment to the original creators (who most likely transferred their interests under work-for-hire agreements)? Ultimately, this could be answered contractually or through collective bargaining, but in the embryonic stages of this license, this almost metaphysical question would have to be answered in some fashion. Creators should be allotted some share of these monies in addition to whatever payments would be due to the creative industry unions under their existing agreements.

CONCLUSION

The challenges that face the music industry have historical antecedents. When the political will existed, Congress was able to craft a workable solution that has now been in place for a century. Applying these lessons to the Internet may replace and even surpass lost revenues.

Sandy Pearlman, the noted producer, songwriter and Distinguished Professor at the Schulich School of Music at McGill University in Montreal, once asked “what is the real value of a download?” His answer was “anything greater than zero.” That is the premise of this proposal. P2P file sharing is an unmonetized use of copyright materials that brings no remuneration to copyright owners or to the creative community.

Until there are concrete efforts to harness the enormity of this distribution method, copyright owners will see declining revenues as media migrates from the physical to digital world. Any fair-minded observer also cannot discount the robust search capabilities of P2P and the potential benefits that it offers to maximize consumer choice. In conclusion, an income positive policy of monetizing millions of torrents seems a better option that an income negative policy of litigation and “three strikes and you’re out.”

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