Compulsory Licensing in Music Industry: A Ray of Hope

Compulsory licensing limits the arbitrary use of a creative work and may aid in the long-term resurrection of the revenue flow in the music business.
Compulsory Licensing in Music Industry
Compulsory Licensing in Music Industry

Music impacts all of us. For every mood there exists some music. And no matter how one is feeling, music soothes the soul and brings peace. Thankfully, music is now available at the touch of a button, thanks to commercialization of the music business. However, the flip side being that such easy availability adversely affects the revenue collection from such songs which ultimately brings down the earning of the music industry.

Therefore, compulsory licensing is a legal remedy that may provide some cure to this problem. Compulsory licensing limits the arbitrary use of a creative work and invention and while on the face of it, compulsory licensing may appear to take away the owners' exclusive rights, this is not the case. A closer examination would reveal that compulsory licensing may actually aid in the long-term resurrection of the revenue flow in the music business.

Copyright law treats recorded music differently from published sheet music. For example, if The Beatles and Frank Sinatra both paid the writer of the sheet music, copyright law allows both of them to utilize the same sheet music and make different recordings without a copyright infringement. But the fundamental issue that has arisen time and again is why composers were either not getting compensated at all or were not being adequately compensated. In this context it may also be worth examining the case of White-Smith Music Publishing Co. v. Apollo Co., 209 U.S. 1 (1908). In this case, the US Supreme Court held that “mechanical reproduction of compositions is not copying within the meaning of the 1870 Copyright Act, and thus does not infringe the rights of copyright holders.” This ruling caused havoc in the music industry since it permitted economic exploitation of digital copies of copyrighted sheet music. In fact, the Aeolian Company, a prominent record label, contracted with most of the leading professionals in the field to get exclusive rights to record their work and as a result, got exclusive rights to market such music. Therefore it appears that the then prevailing situation was drastically detrimental to composers and healthy competition in the music industry. So, the Congress came up with the remedy of statutory licensing (now commonly referred to as compulsory licensing).

Simply put, “A compulsory license lets a musician record (and sell) a rendition of a previously recorded song by paying royalties to the original composition artist who is the legal copyright holder of the work.” Hence, compulsory licensing sought to solve the problems that initially arose due to economic exploitation of digital copies of copyrighted sheet music.

However, as technical developments advanced, more copyright issues with the music industry arose. With expansion of the internet, the amount of data that could be transferred also increased. People started downloading music and sharing it offline, making it impossible to track the persons involved in the copyright violation. For example, in June of 1999 Napster launched a peer to peer based file-sharing software that enabled music sharing without due payments to the creators. In this context, the court in A&M Records Inc. v. Napster Inc., 239 F.3d 1004 (9th Cir. 2001) held that the said software by Napster was actively inducing customers to infringe copyright laws. Also, in another case, the court denied Staple Article of Commerce’s defense as established in Sony Corporation of America v. Universal City Studios Inc., 464 U.S. 417 (1984) on the grounds that the software in question was beyond a simple article of commerce. The court further held that the database actually provided the defendants with full control over making inducements and its intentional ignorance by the defendants, amounted to active involvement in the infringement process by the defendants. So the defendants were held liable.

Despite being decided in favour of the record labels, the effects of the judgment were going to be harsh. To legitimize the online music sharing business, the subscription-based model was introduced but it was a total disaster at the time due to Napster’s initial influence on the customers to get free ownership of the music and increased establishments of new companies to fill in the void created by its winding up. This further gave rise to piracy. For example, “Some reports estimate that as much as 95% of music is downloaded illegally, for free, on a year”. Since most of the revenues to the record labels accrued from the sales of music albums and songs, this resulted in a huge fall in the annual revenues of the labels. Furthermore, this diminished revenue led to a further trickle down effect of decreased budgets with regard to creating a recording and paying artists their royalties. All of this, left the consumers with limited supply and diversity in terms of available music choices.

It was in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 919 (2005) where the United States Supreme Court introduced a test called the ‘active inducement test’, which allowed the courts to hold intermediaries, inducing or having a reckless attitude towards user infringement, liable.

The developments in the past decade were more prominent than occurred over the past century, but the laws remained stagnant when it came to copyright in the music industry. The new companies were finding new loopholes with the then existing system to promote themselves and pay the minimum amounts possible to those who rightly deserved the compensation. One such provision was the safe harbour provision provided by the Digital Millennium Copyright Act of 1998. And in Viacom International Inc. v. YouTube Inc., 2010 WL 2532404 (S.D.N.Y.) the court upholding this safe harbour provision held that these intermediaries were passively providing the users with a platform to promote their content. So they cannot be held liable for these user-generated content for copyright infringement. This decision absolved intermediaries like YouTube, Facebook, Instagram from any such infringement liability as established in the Napster case and MGM Studios case, as mentioned above. In the Indian Music Industry Convention 2019, Lauri Reichardt of International Federation of the Phonographic Industry pointed out that intermediaries like YouTube amount for 50% of all the time spent listening to music and yet they have no copyright infringement liability, as they were considered passive providers.

Recently, such intermediaries in fact had to testify before Congress about their data collecting practices. In today’s context, such safe harbour clause should be outdated and the decisions in the Napster case and MGM Studios case, should be deemed applicable so that such intermediaries may be held liable for their actions. Also, as a plausible mid-way solution, may it would be good to have better compulsory licensing rules that protect the authors' rights while also considering the presence of these intermediaries.

While Napster’s software harmed the music industry, Apple’s iTunes helped in its growth. After its release Apple’s iTunes, allowed downloading a single song for US$0.99 and an album for US$9.99. Its popularity was evident when it exceeded its half-yearly sales goals in just six days. Apple's contract-based strategy merged with compulsory licensing would thus be extremely beneficial to the music industry in this digital era.

A similar approach has been adopted in the USA currently. The royalty rate fixed by the law is US$0.08 for five minutes worth of music or less, and US$0.0155 per minute for more than five minutes of music. While, the 2012 amendment of the Copyrights Act, 1957 provided for compulsory licensing for broadcasting and music works vide Section 31-D it failed to provide for a statutory rate at which royalties must be paid. Formulating further amendments to the compulsory licensing statute with some level of crossover with the contracts law could therefore be very useful.

In India, a model similar to the model followed by the United States currently, could be implemented after deciding a statutory rate of payment, based on fair value usage of music. Such a provision could allow anyone to utilize a sound recording just by making the necessary payments to the label. And in case, the party wants to pay less or utilize the same at a commercial scale, they can enter into contract at a negotiated price too. This approach could further be adapted to benefit the creators of the sheet music. A certain percentage of payment like provisioning at 5% to 10% could be worked out in favour of creators of sheet music. Moreover, this rate could and should be revised annually to account for the inflation and changing market share of different mediums and platforms that broadcast music.

Nevertheless, a vigil enforcement mechanism is also required for the effective utilization of this licensing methods. For example, the Chinese government implemented Sword Net Action strategy, which allowed the copyright office to invite complaints from the public and resolve the cases by removing the content and fining those guilty. Such provisions could while reducing piracy actions could also regulate those involved in copyright infringements and make good the loss of revenue to the music industry.

It may be highlighted here, that the introduction of Netflix was a huge step in revolutionizing the broadcasting industry. Similarly, introduction of Spotify revolutionized the music industry. While Netflix has gained quick popularity and works on subscription-based business model, Spotify though a huge name, is still struggling in shifting to that business model due to the inherited perception of consumers that “music should be free”.

Platforms like Spotify have a massive database, allowing them to keep track of what is being played and how many times, making it easier to pay the artists that utilize the compulsory licensing model. Similarly, any platform could utilize the recording just by paying the statutory rate of royalty to the owner, without their prior permission.

While the first grant of compulsory license was in 2012 in the case of Bayer Corporation v. Union of India, 2013 IndLaw IPAB 20 and it was highly criticized internationally as being negative for the business, it must be remembered that the case dealt with patents for pharmaceutical industry. Every industry must be governed differently keeping in mind its requirements. Therefore, compulsory licensing which is a bane for the pharmaceutical industry, can turn out to be a boon for the music industry. This improved licensing model along with strict enforcement regulations could allow for improved cash flow into the music industry leading thus to the revival of this sector altogether.

The author, Nikhil Sikka, is a fifth year B.B.A. LL.B. (Hons.) Student at Jindal Global Law School.

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