Reconceptualizing Compulsory Copyright Licenses

Stanford Law Review Volume 72 April 2020 ARTICLE Reconceptualizing Compulsory Copyright Licenses Jacob Victor* Abstract. United States copyright law generally assumes that by providing property entitlements in creative works, the free market will balance between two competing priorities: incentivizing creators to produce works and ensuring the public has adequate access to this content. But the Copyright Act also outlines several detailed compulsory licensing schemes requiring the owners of certain copyright interests, musical works in particular, to license to anyone at government-set prices. Consistent with broader property theory concepts, scholars tend to treat compulsory copyright licenses as liability rules used only to address market failures caused by transaction costs. This Article questions that account, arguing that compulsory licensing also plays an important and underexplored role in furthering copyright’s specific policy agenda. A close analysis of the music regulatory regime and its history shows that its primary function has been to recalibrate the balance between creators’ financial incentives and public access to expressive works in situations where free market licensing would yield problematic outcomes. Unlike liability rules designed only to address transaction costs, for which regulators generally try to mimic market rates using market proxies, the compulsory music licensing regime traditionally used rate-setting criteria oriented around copyright policy. Applying these criteria, regulators often chose low royalty rates * Acting Assistant Professor, New York University School of Law; Fellow, Engelberg Center on Innovation Law & Policy. For invaluable comments and conversations, I thank Amy Adler, BJ Ard, Ian Ayres, Barton Beebe, Ilya Beylin, Michael Carrier, Michael Carroll, Mala Chatterjee, Jon Choi, Graeme Dinwoodie, Rochelle Dreyfuss, Seth Endo, Richard Epstein, William Eskridge, Bridget Fahey, Joseph Fishman, Gary Fox, Jeanne Fromer, Kristelia García, Paul Goldstein, Scott Hemphill, Esther Hong, Camilla Hrdy, Amy Kapczynski, Tal Kastner, Christina Koningisor, Mark Lemley, Shirley Lin, Glynn Lunney, Yaran Noti, Michael Parsons, Claire Priest, Carol Rose, Matthew Sag, Pam Samuelson, Chris Sprigman, Xiyin Tang, Ari Waldman, and Rebecca Wexler; the editors of the Stanford Law Review; and participants in the 2019 Tri-State IP Workshop, the 2019 Works in Progress in IP Colloquium, the 2019 IP Scholars Conference, and workshops at New York University Law School and Yale Law School. Thanks also to Jasmine Badreddine for excellent research assistance. I represented a participant in the Phonorecords III Copyright Royalty Board proceeding in 2018. All discussions in this Article are based on publicly available information and not on anything learned while serving as counsel. 915 Reconceptualizing Compulsory Copyright Licenses 72 STAN. L. REV. 915 (2020) explicitly designed to allow access-expanding music dissemination technologies—from the player piano to digital radio—to flourish. In recent years, however, policymakers have begun to lose sight of this access-encouraging role. A series of legislative changes, including the recent Music Modernization Act, has made the compulsory music licensing regime increasingly inconsistent and ill equipped to handle new forms of music dissemination. Policymakers now seem to view compulsory licensing as justified only in the face of transaction-cost-based market failures and have begun privileging market mimicking over copyright policy when choosing royalty rates. This shift has yielded increasingly high royalty rates, which have made it more difficult for new disseminators, such as streaming services, to facilitate access to music. This Article argues that the shift away from policy-focused compulsory licensing prevents the regime from maintaining balance in the copyright system, a problem that is especially apparent in the experience of the burgeoning music streaming industry. In particular, a copyright-policy-based approach is necessary to prevent the malleability (and manipulability) of market-mimicking rate-setting standards from yielding royalty rates that are unworkable for streaming services. Although the Music Modernization Act has pushed the existing regime even farther away from its original role by implementing a market-focused rate-setting standard, this Article suggests ways that regulators could still further copyright policy goals in future rate-setting proceedings. 916 Reconceptualizing Compulsory Copyright Licenses 72 STAN. L. REV. 915 (2020) Table of Contents Introduction ............................................................................................................................................................ 918 I. Justifications for Compulsory Copyright Licensing ............................................................. 925 A. Compulsory Licensing as a Response to Transaction Costs .................................... 927 B. Zero-Price Licenses and the Incentives/Access Tradeoff .......................................... 930 C. Bridging the Gap: Compulsory Licensing as a Tool of Copyright Policy ........... 935 II. The Mechanical License and Copyright Policy ........................................................................ 938 A. The Origins of the Mechanical License ............................................................................... 939 B. The Origins of Policy-Driven Rate Setting ....................................................................... 943 III. The Erosion of Policy-Driven Compulsory Music Licensing .......................................... 948 A. Legislative Context ......................................................................................................................... 948 1. The sound recording copyright .................................................................................... 948 2. Competing narratives in the § 114 license ............................................................... 951 3. Interactive streaming’s exclusion from the § 114 license ................................ 956 4. The gradual transformation of the mechanical license ................................... 957 5. Reform and the Music Modernization Act ............................................................. 960 B. Rate-Setting Context ..................................................................................................................... 962 1. The 801(b) factors in the digital era ............................................................................. 962 2. Phonorecords III ......................................................................................................................... 965 IV. Policy-Driven Compulsory Licensing in the Age of Streaming ...................................... 971 A. Why Compulsory Licensing? ................................................................................................... 972 1. Access-enhancing innovation ........................................................................................ 972 2. The distorting effects of market power .................................................................... 976 B. Why Policy-Driven Rate Setting? .......................................................................................... 982 1. Rate setting and the incentives/access tradeoff .................................................... 982 2. The malleability of market-mimicking rate setting in regulated licensing markets ................................................................................................................... 985 C. Furthering Copyright Policy Goals Under the Willing Buyer- Willing Seller Standard ................................................................................................................ 988 Conclusion ................................................................................................................................................................ 992 917 Reconceptualizing Compulsory Copyright Licenses 72 STAN. L. REV. 915 (2020) Introduction The United States copyright system generally favors free market licensing. For almost all copyright interests, creators of the copyrighted works—or the business entities, such as movie studios or book publishers, that frequently hold the actual copyright interests—are free to choose their licensees and negotiate royalties.1 This Article addresses an outlier: When music distributors like Spotify or Pandora want to obtain licenses in order to disseminate a song, they can sometimes take advantage of the compulsory licenses provided by the Copyright Act.2 Although these schemes are notoriously complex, their basic function is to allow anyone to license a work without permission of the copyright owner for a predetermined royalty rate, set periodically by a regulatory body known as the Copyright Royalty Board (CRB).3 Many find this unusual regulatory regime difficult to explain or justify, and its very existence is increasingly controversial.4 As a recent government report noted: “Viewed in the abstract, it is almost hard to believe that the U.S. government sets prices for music. In today’s world, there is virtually no equivalent for this type of federal intervention . .”5 This Article provides a new account and defense of compulsory copyright licensing. By charting the 1. 17 U.S.C. § 106 (2018) (listing copyright owners’ exclusive rights, including rights to control copies, sales, and public performances of works);

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