Archives For Public Performance

A Regulatory Failure of Imagination

Julian Morris and Kristian Stout — 21 August 2019

Underpinning many policy disputes is a frequently rehearsed conflict of visions: Should we experiment with policies that are likely to lead to superior, but unknown, solutions, or should we should stick to well-worn policies, regardless of how poorly they fit current circumstances?

This conflict is clearly visible in the debate over whether DOJ should continue to enforce its consent decrees with the major music performing rights organizations (“PROs”), ASCAP and BMI—or terminate them.

As we note in our recently filed comments with the DOJ, summarized below, the world has moved on since the decrees were put in place in the early twentieth century. Given the changed circumstances, the DOJ should terminate the consent decrees. This would allow entrepreneurs, armed with modern technology, to facilitate a true market for public performance rights.

The consent decrees

In the early days of radio, it was unclear how composers and publishers could effectively monitor and enforce their copyrights. Thousands of radio stations across the nation were playing the songs that tens of thousands of composers had written. Given the state of technology, there was no readily foreseeable way to enable bargaining between the stations and composers for license fees associated with these plays.

In 1914, a group of rights holders established the American Society of Composers Authors and Publishers (ASCAP) as a way to overcome these transactions costs by negotiating with radio stations on behalf of all of its members.

Even though ASCAP’s business was clearly aimed at ensuring that rightsholders’ were appropriately compensated for the use of their works, which logically would have incentivized greater output of licensable works, the nonstandard arrangement it embodied was unacceptable to the antitrust enforcers of the era. Not long after it was created, the Department of Justice began investigating ASCAP for potential antitrust violations.

While the agglomeration of rights under a single entity had obvious benefits for licensors and licensees of musical works, a power struggle nevertheless emerged between ASCAP and radio broadcasters over the terms of those licenses. Eventually this struggle led to the formation of a new PRO, the broadcaster-backed BMI, in 1939. The following year, the DOJ challenged the activities of both PROs in dual criminal antitrust proceedings. The eventual result was a set of consent decrees in 1941 that, with relatively minor modifications over the years, still regulate the music industry.

Enter the Internet

The emergence of new ways to distribute music has, perhaps unsurprisingly, resulted in renewed interest from artists in developing alternative ways to license their material. In 2014, BMI and ASCAP asked the DOJ to modify their consent decrees to permit music publishers partially to withdraw from the PROs, which would have enabled those partially-withdrawing publishers to license their works to digital services under separate agreements (and prohibited the PROs from licensing their works to those same services). However, the DOJ rejected this request and insisted that the consent decree requires “full-work” licenses — a result that would have not only entrenched the status quo, but also erased the competitive differences that currently exist between the PROs. (It might also have created other problems, such as limiting collaborations between artists who currently license through different PROs.)

This episode demonstrates a critical flaw in how the consent decrees currently operate. Imposing full-work license obligations on PROs would have short-circuited the limited market that currently exists, to the detriment of creators, competition among PROs, and, ultimately, consumers. Paradoxically these harms flow directly from a presumption that administrative officials, seeking to enforce antitrust law — the ultimate aim of which is to promote competition and consumer welfare — can dictate through top-down regulatory intervention market terms better than participants working together.

If a PRO wants to offer full-work licenses to its licensee-customers, it should be free to do so (including, e.g., by contracting with other PROs in cases where the PRO in question does not own the work outright). These could be a great boon to licensees and the market. But such an innovation would flow from a feedback mechanism in the market, and would be subject to that same feedback mechanism.

However, for the DOJ as a regulatory overseer to intervene in the market and assert a preference that it deemed superior (but that was clearly not the result of market demand, or subject to market discipline) is fraught with difficulty. And this is the emblematic problem with the consent decrees and the mandated licensing regimes. It allows regulators to imagine that they have both the knowledge and expertise to manage highly complicated markets. But, as Mark Lemley has observed, “[g]one are the days when there was any serious debate about the superiority of a market-based economy over any of its traditional alternatives, from feudalism to communism.”

It is no knock against the DOJ that it patently does not have either the knowledge or expertise to manage these markets: no one does. That’s the entire point of having markets, which facilitate the transmission and effective utilization of vast amounts of disaggregated information, including subjective preferences, that cannot be known to anyone other than the individual who holds them. When regulators can allow this process to work, they should.

Letting the market move forward

Some advocates of the status quo have recommended that the consent orders remain in place, because

Without robust competition in the music licensing market, consumers could face higher prices, less choice, and an increase in licensing costs that could render many vibrant public spaces silent. In the absence of a truly competitive market in which PROs compete to attract services and other licensees, the consent decrees must remain in place to prevent ASCAP and BMI from abusing their substantial market power.

This gets to the very heart of the problem with the conflict of visions that undergirds policy debates. Advocating for the status quo in this manner is based on a static view of “markets,” one that is, moreover, rooted in an early twentieth-century conception of the relevant industries. The DOJ froze the licensing market in time with the consent decrees — perhaps justifiably in 1941 given the state of technology and the very high transaction costs involved. But technology and business practices have evolved and are now much more capable of handling the complex, distributed set of transactions necessary to make the performance license market a reality.

Believing that the absence of the consent decrees will force the performance licensing market to collapse into an anticompetitive wasteland reflects a failure of imagination and suggests a fundamental distrust in the power of the market to uncover novel solutions—against the overwhelming evidence to the contrary.

Yet, those of a dull and pessimistic mindset need not fear unduly the revocation of the consent decrees. For if evidence emerges that the market participants (including the PROs and whatever other entities emerge) are engaging in anticompetitive practices to the detriment of consumer welfare, the DOJ can sue those entities. The threat of such actions should be sufficient in itself to deter such anticompetitive practices but if it is not, then the sword of antitrust, including potentially the imposition of consent decrees, can once again be wielded.

Meanwhile, those of us with an optimistic, imaginative mindset, look forward to a time in the near future when entrepreneurs devise innovative and cost-effective solutions to the problem of highly-distributed music licensing. In some respects their job is made easier by the fact that an increasing proportion of music is streamed via a small number of large companies (Spotify, Pandora, Apple, Amazon, Tencent, YouTube, Tidal, etc.). But it is quite feasible that in the absence of the consent decrees new licensing systems will emerge, using modern database technologies, blockchain and other distributed ledgers, that will enable much more effective usage-based licenses applicable not only to these streaming services but others too.

We hope the DOJ has the foresight to allow such true competition to enter this market and the strength to believe enough in our institutions that it can permit some uncertainty while entrepreneurs experiment with superior methods of facilitating music licensing.

In Amazon, Apple, Copyright, Intellectual Property, Justice Department, Patent, Platforms, Regulation, Truth on the Market blockchain, consent decree, consent order, copyright, licensing, Mark Lemley, music, Music industry, Public Performance

Second Circuit’s BMI Decision Commendably Overturns the Justice Department’s Interference with Efficient Contracting in Performance Rights Licensing

Alden Abbott — 22 December 2017

Introduction and Summary

On December 19, 2017, the U.S. Court of Appeals for the Second Circuit presented Broadcast Music, Inc. (BMI) with an early Christmas present. Specifically, the Second Circuit commendably affirmed the District Court for the Southern District of New York’s September 2016 ruling rejecting the U.S. Department of Justice’s (DOJ) August 2016 reinterpretation of its longstanding antitrust consent decree with BMI. Because the DOJ reinterpretation also covered a parallel DOJ consent decree with the American Society of Composers, Authors, and Publishers (ASCAP), the Second Circuit’s decision by necessary implication benefits ASCAP as well, although it was not a party to the suit.

The Second Circuit’s holding is sound as a matter of textual interpretation and wise as a matter of economic policy. Indeed, DOJ’s current antitrust leadership, which recognizes the importance of vibrant intellectual property licensing in the context of patents (see here), should be pleased that the Second Circuit rescued it from a huge mistake by the Obama Administration DOJ in the context of copyright licensing.

Background

BMI and ASCAP are the two leading U.S. “performing rights organizations” (PROs). They contract with music copyright holders to act as intermediaries that provide “blanket” licenses to music users (e.g., television and radio stations, bars, and internet music distributors) for use of their full copyrighted musical repertoires, without the need for song-specific licensing negotiations. This greatly reduces the transactions costs of arranging for the playing of musical works, benefiting music users, the listening public, and copyright owners (all of whom are assured of at least some compensation for their endeavors). ASCAP and BMI are big businesses, with each PRO holding licenses to over ten million works and accounting for roughly 45 percent of the domestic music licensing market (ninety percent combined).

Because both ASCAP and BMI pool copyrighted songs that could otherwise compete with each other, and both grant users a single-price “blanket license” conveying the rights to play their full set of copyrighted works, the two organizations could be seen as restricting competition among copyrighted works and fixing the prices of copyrighted substitutes – raising serious questions under section 1 of the Sherman Antitrust Act, which condemns contracts that unreasonably restrain trade. This led the DOJ to bring antitrust suits against ASCAP and BMI over eighty years ago, which were settled by separate judicially-filed consent decrees in 1941.

The decrees imposed a variety of limitations on the two PROs’ licensing practices, aimed at preventing ASCAP and BMI from exercising anticompetitive market power (such as the setting of excessive licensing rates). The decrees were amended twice over the years, most recently in 2001, to take account of changing market conditions. The U.S. Supreme Court noted the constraining effect of the decrees in BMI v. CBS (1979), in ruling that the BMI and ASCAP blanket licenses did not constitute per se illegal price fixing. The Court held, rather, that the licenses should be evaluated on a case-by-case basis under the antitrust “rule of reason,” since the licenses inherently generated great efficiency benefits (“the immediate use of covered compositions, without the delay of prior individual negotiations”) that had to be weighed against potential anticompetitive harms.

The August 4, 2016 DOJ Consent Decree Interpretation

Fast forward to 2014, when DOJ undertook a new review of the ASCAP and BMI decrees, and requested the submission of public comments to aid it in its deliberations. This review came to an official conclusion two years later, on August 4, 2016, when DOJ decided not to amend the decrees – but announced a decree interpretation that limits ASCAP’s and BMI’s flexibility. Specifically, DOJ stated that the decrees needed to be “more consistently applied.” By this, the DOJ meant that BMI and ASCAP should only grant blanket licenses that cover all of the rights to 100 percent of the works in the PROs’ respective catalogs (“full-work licensing”), not licenses that cover only partial interests in those works. DOJ stated:

Only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses that distinguish ASCAP’s and BMI’s activities from other agreements among competitors that present serious issues under the antitrust laws.

The New DOJ Interpretation Was Bad as a Matter of Policy

DOJ’s August 4 interpretation rejected industry practice. Under it, ASCAP and BMI were only allowed to offer a license covering all of the copyright interests in a musical competition, even if the license covers a joint work.

For example, consider a band of five composer-musicians, each of whom has a fractional interest in the copyright covering the band’s new album which is a joint work. Prior to the DOJ’s new interpretation, each musician was able to offer a partial interest in the joint work to a performance rights organization, reflecting the relative shares of the total copyright interest covering the work. The organization could offer a partial license, and a user could aggregate different partial licenses in order to cover the whole joint work. Following the new interpretation, however, BMI and ASCAP could not offer partial licenses to that work to users. This denied the band’s individual members the opportunity to deal profitably with BMI and ASCAP, thereby undermining their ability to receive fair compensation.

As the two PROs warned, this approach, if upheld, would “cause unnecessary chaos in the marketplace and place unfair financial burdens and creative constraints on songwriters and composers.” According to ASCAP President Paul Williams, “It is as if the DOJ saw songwriters struggling to stay afloat in a sea of outdated regulations and decided to hand us an anchor, in the form of 100 percent licensing, instead of a life preserver.” Furthermore, the president and CEO of BMI, Mike O’Neill, stated: “We believe the DOJ’s interpretation benefits no one – not BMI or ASCAP, not the music publishers, and not the music users – but we are most sensitive to the impact this could have on you, our songwriters and composers.”

The PROs’ views were bolstered by a January 2016 U.S. Copyright Office report, which concluded that “an interpretation of the consent decrees that would require 100-percent licensing or removal of a work from the ASCAP or BMI repertoire would appear to be fraught with legal and logistical problems, and might well result in a sharp decrease in repertoire available through these [performance rights organizations’] blanket licenses.” Regrettably, during the decree review period, DOJ ignored the expert opinion of the Copyright Office, as well as the public record comments of numerous publishers and artists (see here, for example) indicating that a 100 percent licensing requirement would depress returns to copyright owners and undermine the creative music industry.

Most fundamentally, DOJ’s new interpretation of the BMI and ASCAP consent decrees involved an abridgment of economic freedom. It further limited the flexibility of copyright music holders and music users to contract with intermediaries to promote the efficient distribution of music performance rights, in a manner that benefits the listening public while allowing creative artists sufficient compensation for their efforts. DOJ made no compelling showing that a new consent decree constraint was needed to promote competition (100 percent licensing only). Far from promoting competition, DOJ’s new interpretation undermined it. DOJ micromanagement of copyright licensing by consent decree reinterpretation was a costly new regulatory initiative that reflected a lack of appreciation for intellectual property rights, which incentivize innovation. In short, DOJ’s latest interpretation of the ASCAP and BMI decrees was terrible policy.

The New DOJ Interpretation Ran Counter to International Norms

The new DOJ interpretation had unfortunate international policy implications as well. According to Gadi Oron, Director General of the International Confederation of Societies of Authors and Composers (CISAC), a Paris-based organization that regroups 239 rights societies from 123 countries, including ASCAP, BMI, and SESAC, the new interpretation departed from international norms in the music licensing industry and have disruptive international effects:

It is clear that the DoJ’s decisions have been made without taking the interests of creators, neither American nor international, into account. It is also clear that they were made with total disregard for the international framework, where fractional licensing is practiced, even if it’s less of a factor because many countries only have one performance rights organization representing songwriters in their territory. International copyright laws grant songwriters exclusive rights, giving them the power to decide who will license their rights in each territory and it is these rights that underpin the landscape in which authors’ societies operate. The international system of collective management of rights, which is based on reciprocal representation agreements and founded on the freedom of choice of the rights holder, would be negatively affected by such level of government intervention, at a time when it needs support more than ever.

The New DOJ Interpretation Was Defective as a Matter of Law, and the District Court and the Second Circuit So Held

As I explained in a November 2016 Heritage Foundation commentary (citing arguments made by counsel for BMI), DOJ’s new interpretation not only was bad domestic and international policy, it was inconsistent with sound textual construction of the decrees themselves. The BMI decree (and therefore the analogous ASCAP decree as well) did not expressly require 100 percent licensing and did not unambiguously prohibit fractional licensing. Accordingly, since a consent decree is an injunction, and any activity not expressly required or prohibited thereunder is permitted, fractional shares licensing should be authorized. DOJ’s new interpretation ignored this principle. It also was at odds with a report of the U.S. Copyright Office that concluded the BMI consent decree “must be understood to include partial interests in musical works.” Furthermore, the new interpretation was belied by the fact that the PRO licensing market has developed and functioned efficiently for decades by pricing, collecting, and distributing fees for royalties on a fractional basis. Courts view such evidence of trade practice and custom as relevant in determining the meaning of a consent decree.

The district court for the Southern District of New York accepted these textual arguments in its September 2016 ruling, granting BMI’s request for a declaratory judgment that the BMI decree did not require Decree did not require 100% (“full-work”) licensing. The court explained:

Nothing in the Consent Decree gives support to the Division’s views. If a fractionally-licensed composition is disqualified from inclusion in BMI’s repertory, it is not for violation of any provision of the Consent Decree. While the Consent Decree requires BMI to license performances of those compositions “the right of public performances of which [BMI] has or hereafter shall have the right to license or sublicense” (Art. II(C)), it contains no provision regarding the source, extent, or nature of that right. It does not address the possibilities that BMI might license performances of a composition without sufficient legal right to do so, or under a worthless or invalid copyright, or users might perform a music composition licensed by fewer than all of its creators. . . .

The Consent Decree does not regulate the elements of the right to perform compositions. Performance of a composition under an ineffective license may infringe an author’s rights under copyright, contract or other law, but it does not infringe the Consent Decree, which does not extend to matters such as the invalidity or value of copyrights of any of the compositions in BMI’s repertory. Questions of the validity, scope and limits of the right to perform compositions are left to the congruent and competing interests in the music copyright market, and to copyright, property and other laws, to continue to resolve and enforce. Infringements (and fractional infringements) and remedies are not part of the Consent Decree’s subject-matter.

The Second Circuit affirmed, agreeing with the district court’s reading of the decree:

The decree does not address the issue of fractional versus full work licensing, and the parties agree that the issue did not arise at the time of the . . . [subsequent] amendments [to the decree]. . . .

This appeal begins and ends with the language of the consent decree. It is a “well-established principle that the language of a consent decree must dictate what a party is required to do and what it must refrain from doing.” Perez v. Danbury Hosp., 347 F.3d 419, 424 (2d Cir. 2003); United States v. Armour & Co., 402 U.S. 673, 682 (1971) (“[T]he scope of a consent decree must be discerned within its four corners…”). “[C]ourts must abide by the express terms of a consent decree and may not impose additional requirements or supplementary obligations on the parties even to fulfill the purposes of the decree more effectively.” Perez, 347 F.3d at 424; see also Barcia v. Sitkin, 367 F.3d 87, 106 (2d Cir. 2004) (internal citations omitted) (The district court may not “impose obligations on a party that are not unambiguously mandated by the decree itself.”). Accordingly, since the decree is silent on fractional licensing, BMI may (and perhaps must) offer them unless a clear and unambiguous command of the decree would thereby be violated. See United States v. Int’l Bhd. Of Teamsters, Chauffeurs, Warehousemen & Helpers of Am., AFLCIO, 998 F.2d 1101, 1107 (2d Cir. 1993); see also Armour, 402 U.S. at 681-82.

Conclusion

The federal courts wisely have put to rest an ill-considered effort by the Obama Antitrust Division to displace longstanding industry practices that allowed efficient flexibility in the licensing of copyright interests by PROs. Let us hope that the Trump Antitrust Division will not just accept the Second Circuit’s decision, but will positively embrace it as a manifestation of enlightened antitrust-IP policy – one in harmony with broader efforts by the Division to restore sound thinking to the antitrust treatment of patent licensing and intellectual property in general.

In Antitrust & Competition, Antitrust Division, Copyright, Intellectual Property, Justice Department, Patent, Truth on the Market antitrust, consent decree, copyright, economic freedom, music, Public Performance

A Flag On the Play: Gigi Sohn Commits a Copyright Foul

Geoffrey Manne & Kristian Stout — 14 September 2016

As Commissioner Wheeler moves forward with his revised set-top box proposal, and on the eve of tomorrow’s senate FCC oversight hearing, we would do well to reflect on some insightful testimony regarding another of the Commission’s rulemakings from ten years ago:

We are living in a digital gold age and consumers… are the beneficiaries. Consumers have numerous choices for buying digital content and for buying devices on which to play that content. They have never had so much flexibility and so much opportunity.

* * *

As the content industry has ramped up on-line delivery of content, it has been testing a variety of protection measures that provide both security for the industry and flexibility for consumers.

So to answer the question, can content protection and technological innovation coexist? It is a resounding yes. Look at the robust market for on-line content distribution facilitated by the technologies and networks consumers love.

* * *

[T]he Federal Communications Commission should not become the Federal Computer Commission or the Federal Copyright Commission, and the marketplace, not the Government, is the best arbiter of what technologies succeed or fail.

That’s not the self-interested testimony of a studio or cable executive — that was Gigi Sohn, current counsel to Chairman Wheeler, speaking on behalf of Public Knowledge in 2006 before the House Energy and Commerce Committee against the FCC’s “broadcast flag” rules. Those rules, supported by a broad spectrum of rightsholders, required consumer electronics devices to respect programming conditions preventing the unauthorized transmission over the internet of digital broadcast television content.

Ms. Sohn and Public Knowledge won that fight in court, convincing the DC Circuit that Congress hadn’t given the FCC authority to impose the rules in the first place, and she successfully urged Congress not to give the FCC the authority to reinstate them.

Yet today, she and the Chairman seem to have forgotten her crucial insights from ten years ago. If the marketplace for video content was sufficiently innovative and competitive then, how can it possibly not be so now, with audiences having orders of magnitude more choices, both online and off? And if the FCC lacked authority to adopt copyright-related rules then, how does the FCC suddenly have that authority now, in the absence of any intervening congressional action?

With Section 106 of the Copyright Act, Congress granted copyright holders the exclusive rights to engage in or license the reproduction, distribution, and public performance of their works. The courts are the “backstop,” not the FCC (as Chairman Wheeler would have it), and section 629 of the Communications Act doesn’t say otherwise. All section 629 does is direct the FCC to promote a competitive market for devices to access pay-TV services from pay-TV providers. As we noted last week, it very simply doesn’t allow the FCC to interfere with the license arrangements that fill those devices, and, short of explicit congressional direction, the Commission is simply not empowered to interfere with the framework set forth in the Copyright Act.

Chairman Wheeler’s latest proposal has improved on his initial plan by, for example, moving toward an applications-based approach and away from the mandatory disaggregation of content. But it would still arrogate to the FCC the authority to stand up a licensing body for the distribution of content over pay-TV applications; set rules on the terms such licenses must, may, and may not include; and even allow the FCC itself to create terms or the entire license. Such rules would necessarily implicate the extent to which rightsholders are able to control the distribution of their content.

The specifics of the regulations may be different from 2006, but the point is the same: What the FCC could not do in 2006, it cannot do today.

In Copyright, Federal Communications Commission, Intellectual Property, Telecommunications, Truth on the Market copyright, copyright policy, FCC, Federal Communications Commission, Public Performance, Section 629, Set-Top Box

No, The FCC Should Not Have the Power to Cancel Contracts

Kristian Stout — 9 August 2016

Copyright law, ever a sore point in some quarters, has found a new field of battle in the FCC’s recent set-top box proposal. At the request of members of Congress, the Copyright Office recently wrote a rather thorough letter outlining its view of the FCC’s proposal on rightsholders.

In sum, the CR’s letter was an even-handed look at the proposal which concluded:

As a threshold matter, it seems critical that any revised proposal respect the authority of creators to manage the exploitation of their copyrighted works through private licensing arrangements, because regulatory actions that undermine such arrangements would be inconsistent with the rights granted under the Copyright Act.

This fairly uncontroversial statement of basic legal principle was met with cries of alarm. And Stanford’s CIS had a post from Affiliated Scholar Annemarie Bridy that managed to trot out breathless comparisons to inapposite legal theories while simultaneously misconstruing the “fair use” doctrine (as well as how Copyright law works in the video market, for that matter).

Look out! Lochner is coming!

In its letter the Copyright Office warned the FCC that its proposed rules have the potential to disrupt the web of contracts that underlie cable programming, and by extension, risk infringing the rights of copyright holders to commercially exploit their property. This analysis actually tracks what Geoff Manne and I wrote in both our initial comment and our reply comment to the set-top box proposal.

Yet Professor Bridy seems to believe that, notwithstanding the guarantees of both the Constitution and Section 106 of the Copyright Act, the FCC should have the power to abrogate licensing contracts between rightsholders and third parties. She believes that

[t]he Office’s view is essentially that the Copyright Act gives right holders not only the limited range of rights enumerated in Section 106 (i.e., reproduction, preparation of derivative works, distribution, public display, and public performance), but also a much broader and more amorphous right to “manage the commercial exploitation” of copyrighted works in whatever ways they see fit and can accomplish in the marketplace, without any regulatory interference from the government.

What in the world does this even mean? A necessary logical corollary of the Section 106 rights includes the right to exploit works commercially as rightsholders see fit. Otherwise, what could it possibly mean to have the right to control the reproduction or distribution of a work? The truth is that Section 106 sets out a general set of rights that inhere in rightsholders with respect to their protected works, and that commercial exploitation is merely a subset of this total bundle of rights.

The ability to contract with other parties over these rights is also a necessary corollary of the property rights recognized in Section 106. After all, the right to exclude implies by necessity the right to include. Which is exactly what a licensing arrangement is.

But wait, there’s more — she actually managed to pull out the Lochner bogeyman to validate her argument!

The Office’s absolutist logic concerning freedom of contract in the copyright licensing domain is reminiscent of the Supreme Court’s now-infamous reasoning in Lochner v. New York, a 1905 case that invalidated a state law limiting maximum working hours for bakers on the ground that it violated employer-employee freedom of contract. The Court in Lochner deprived the government of the ability to provide basic protections for workers in a labor environment that subjected them to unhealthful and unsafe conditions. As Julie Cohen describes it, “‘Lochner’ has become an epithet used to characterize an outmoded, over-narrow way of thinking about state and federal economic regulation; it goes without saying that hardly anybody takes the doctrine it represents seriously.”

This is quite a leap of logic, as there is precious little in common between the letter from the Copyright Office and the Lochner opinion aside from the fact that both contain the word “contracts” in their pages. Perhaps the most critical problem with Professor Bridy’s analogy is the fact that Lochner was about a legislature interacting with the common law system of contract, whereas the FCC is a body subordinate to Congress, and IP is both constitutionally and statutorily guaranteed. A sovereign may be entitled to interfere with the operation of common law, but an administrative agency does not have the same sort of legal status as a legislature when redefining general legal rights.

The key argument that Professor Bridy offered in support of her belief that the FCC should be free to abrogate contracts at will is that “[r]egulatory limits on private bargains may come in the form of antitrust laws or telecommunications laws or, as here, telecommunications regulations that further antitrust ends.” However, this completely misunderstand U.S. constitutional doctrine.

In particular, as Geoff Manne and I discussed in our set-top box comments to the FCC, using one constitutional clause to end-run another constitutional clause is generally a no-no:

Regardless of whether or how well the rules effect the purpose of Sec. 629, copyright violations cannot be justified by recourse to the Communications Act. Provisions of the Communications Act — enacted under Congress’s Commerce Clause power — cannot be used to create an end run around limitations imposed by the Copyright Act under the Constitution’s Copyright Clause. “Congress cannot evade the limits of one clause of the Constitution by resort to another,” and thus neither can an agency acting within the scope of power delegated to it by Congress. Establishing a regulatory scheme under the Communications Act whereby compliance by regulated parties forces them to violate content creators’ copyrights is plainly unconstitutional.

Congress is of course free to establish the implementation of the Copyright Act as it sees fit. However, unless Congress itself acts to change that implementation, the FCC — or any other party — is not at liberty to interfere with rightsholders’ constitutionally guaranteed rights.

You Have to Break the Law Before You Raise a Defense

Another bone of contention upon which Professor Bridy gnaws is a concern that licensing contracts will abrogate an alleged right to “fair use” by making the defense harder to muster:

One of the more troubling aspects of the Copyright Office’s letter is the length to which it goes to assert that right holders must be free in their licensing agreements with MVPDs to bargain away the public’s fair use rights… Of course, the right of consumers to time-shift video programming for personal use has been enshrined in law since Sony v. Universal in 1984. There’s no uncertainty about that particular fair use question—none at all.

The major problem with this reasoning (notwithstanding the somewhat misleading drafting of Section 107) is that “fair use” is not an affirmative right, it is an affirmative defense. Despite claims that “fair use” is a right, the Supreme Court has noted on at least two separate occasions (1, 2) that Section 107 was “structured… [as]… an affirmative defense requiring a case-by-case analysis.”

Moreover, important as the Sony case is, it does not not establish that “[t]here’s no uncertainty about [time-shifting as a] fair use question—none at all.” What it actually establishes is that, given the facts of that case, time-shifting was a fair use. Not for nothing the Sony Court notes at the outset of its opinion that

An explanation of our rejection of respondents’ unprecedented attempt to impose copyright liability upon the distributors of copying equipment requires a quite detailed recitation of the findings of the District Court.

But more generally, the Sony doctrine stands for the proposition that:

“The limited scope of the copyright holder’s statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts. The immediate effect of our copyright law is to secure a fair return for an ‘author’s’ creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good. ‘The sole interest of the United States and the primary object in conferring the monopoly,’ this Court has said, ‘lie in the general benefits derived by the public from the labors of authors.’ Fox Film Corp. v. Doyal, 286 U. S. 123, 286 U. S. 127. See Kendall v. Winsor, 21 How. 322, 62 U. S. 327-328; Grant v. Raymond, 6 Pet. 218, 31 U. S. 241-242. When technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of this basic purpose.” Twentieth Century Music Corp. v. Aiken, 422 U. S. 151, 422 U. S. 156 (1975) (footnotes omitted).

In other words, courts must balance competing interests to maximize “the general benefits derived by the public,” subject to technological change and other criteria that might shift that balance in any particular case.

Thus, even as an affirmative defense, nothing is guaranteed. The court will have to walk through a balancing test, and only after that point, and if the accused party’s behavior has not tipped the scales against herself, will the court find the use a “fair use.”

As I noted before,

Not surprisingly, other courts are inclined to follow the Supreme Court. Thus the Eleventh Circuit, the Southern District of New York, and the Central District of California (here and here), to name but a few, all explicitly refer to fair use as an affirmative defense. Oh, and the Ninth Circuit did too, at least until Lenz.

The Lenz case was an interesting one because, despite the above noted Supreme Court precedent treating “fair use” as a defense, it is one of the very few cases that has held “fair use” to be an affirmative right (in that case, the court decided that Section 1201 of the DMCA required consideration of “fair use” as a part of filling out a take-down notice). And in doing so, it too tried to rely on Sony to restructure the nature of “fair use.” But as I have previously written, “[i]t bears noting that the Court in Sony Corp. did not discuss whether or not fair use is an affirmative defense, whereas Acuff Rose (decided 10 years after Sony Corp.) and Harper & Row decisions do.”

Further, even the Eleventh Circuit, which the Ninth relied upon in Lenz, later clarified its position that the above-noted Supreme Court precedent definitely binds lower courts, and that “fair use” is in fact an affirmative defense.

Thus, to say that rightsholders’ licensing contracts somehow impinge a “right” of fair use completely puts the cart before the horse. Remember, as an affirmative defense, “fair use” is an excuse for otherwise infringing behavior, and rightsholders are well within their constitutional and statutory rights to avoid potential infringing uses.

Think about it this way. When you commit a crime you can raise a defense: for instance, an insanity defense. But just because you might be excused for committing a crime if a court finds you were not operating with full faculties, this does not entitle every insane person to go out and commit that crime. The insanity defense can be raised only after a crime is committed, and at that point it will be examined by a judge and jury to determine if applying the defense furthers the overall criminal law scheme.

“Fair use” works in exactly the same manner. And even though Sony described how time- and space-shifting were potentially permissible, it did so only by determining on those facts that the balancing test came out to allow it. So, maybe a particular time-shifting use would be “fair use.” But maybe not. More likely, in this case, even the allegedly well-established “fair use” of time-shifting in the context of today’s digital media, on-demand programing, Netflix and the like may not meet that burden.

And what this means is that a rightsholder does not have an ex ante obligation to consider whether a particular contractual clause might in some fashion or other give rise to a “fair use” defense.

The contrary point of view makes no sense. Because “fair use” is a defense, forcing parties to build “fair use” considerations into their contractual negotiations essentially requires them to build in an allowance for infringement — and one that a court might or might not ever find appropriate in light of the requisite balancing of interests. That just can’t be right.

Instead, I think this article is just a piece of the larger IP-skeptic movement. I suspect that when “fair use” was in its initial stages of development, it was intended as a fairly gentle softening on the limits of intellectual property — something like the “public necessity” doctrine in common law with respect to real property and trespass. However, that is just not how “fair use” advocates see it today. As Geoff Manne has noted, the idea of “permissionless innovation” has wrongly come to mean “no contracts required (or permitted)”:

[Permissionless innovation] is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright…, which otherwise requires those pernicious licenses (i.e., permission) from others.

But this position is nonsense — intangible property is still property. And at root, property is just a set of legal relations between persons that defines their rights and obligations with respect to some “thing.” It doesn’t matter if you can hold that thing in your hand or not. As property, IP can be subject to transfer and control through voluntarily created contracts.

Even if “fair use” were some sort of as-yet unknown fundamental right, it would still be subject to limitations upon it by other rights and obligations. To claim that “fair use” should somehow trump the right of a property holder to dispose of the property as she wishes is completely at odds with our legal system.

How the Court’s “looks-like-cable-tv” test in Aereo protects the cloud

Geoffrey Manne, Ryan Radia & Ben Sperry — 26 June 2014

In our blog post this morning on ABC v. Aereo, we explain why, regardless of which test applies (the majority’s “looks-like-cable-TV” test or the dissent’s volitional conduct test), Aereo infringes on television program owners’ exclusive right under the Copyright Act to publicly perform their works. We also explain why the majority’s test is far less ambiguous than its critics assert, and why it does not endanger cloud computing services like so many contend.

Because that post was so long, and because the cloud computing issue is key to understanding the implications of this case, this post pulls out the cloud computing argument from that post and presents it separately.

In our April essay on these pages, we identified several reasons why the Court could and should rule against Aereo without exposing innovative cloud computing firms to copyright liability:

Both fair use and the DMCA’s safe harbor likely protect cloud hosting services such as Dropbox so long as they respond to takedown notices and are not otherwise aware of the nature of the content uploaded by their users;
Cloud computing services typically lack the volitional conduct necessary to be considered direct infringers; and
If consumers acquire licensed content from cloud services such as Amazon or Google, and stream themselves that content from the cloud, the services’ privity with rights holders should render them safe from copyright infringement liability.

The Court explicitly endorsed our privity argument and implicitly acknowledged our point about DMCA and fair use. As the Court wrote:

[A]n entity that transmits a performance to individuals in their capacities as owners or possessors does not perform to ‘the public,’ whereas an entity like Aereo that transmits to large numbers of paying subscribers who lack any prior relationship to the works does so perform.

The majority’s “looks-like-cable-TV” test (the dissent’s name for it, not ours) actually offers a clearer basis for distinguishing cloud services than the dissent’s (and our earlier blog post’s) volitional conduct test.

Many commenters lament that the Court’s decision leaves cloud computing in peril, offering no real limiting principle (as, they claim, applying the volitional conduct test would have). Vox’s Timothy B. Lee, for example, opines that:

The problem is that the court never provides clear criteria for this “looks-like-cable-TV” rule…. The Supreme Court says its ruling shouldn’t dramatically change the legal status of other technologies…. But it’s going to take years of litigation — and millions of dollars in legal fees — to figure out exactly how the decision will affect cloud storage services.

But the Court did articulate several important limits, in fact. Most significantly, the opinion plainly excepts transmission of underlying works “own[ed] or possess[ed]” by subscribers from its definition of public performance. It also circumscribes what constitutes a public performance to transmissions from a person to large groups of people “outside of [her] family and [her] social circle,” and reinforces that fair use limitations continue to protect those who perform copyrighted works.

At the same time, the Court characterizes Aereo—and the aspect of the service that give rise to its liability—as “not simply an equipment provider…. Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.”

Crucially, Aereo makes available to each of its subscribers copyrighted content that he or she does not necessarily otherwise own or possess—even if the company also offers its viewers “enhancements” much like a modern cable system. As we noted in our previous post, this distinguishes Aereo from the cloud computing services to which it is compared:

Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content.

Even if the Court’s holding were applied in contexts beyond traditional television programming, how many cloud services actually deliver content—rather than just enhancing it, as a DVR does—that its users do not otherwise own or possess? Vanishingly few, if any. Most obviously, talk of the risks Aereo poses to cloud storage and digital lockers—services that, by definition, apply only to content provided by the user and thus previously “owned or possessed” by the user—is simply misplaced.

Insofar as the transmission of third-party content is the defining characteristic of a “looks-like-cable-TV” system, the Court’s test actually offers a fairly clear delineation, and one that offers no risk to the vast majority of cloud services. This may remind many of Justice Potter Stewart’s infamous “I know it when I see it” test for adjudging obscenity, but it firmly removes a large swath of cloud computing services from the risk of direct copyright liability under Aereo.

And to the extent that some cloud services might seem to fail this test—YouTube, for example—those services (like YouTube and unlike Aereo) routinely obtain performance licenses for the content they provide. Although some of YouTube’s content may not be legally provided to the service, that doesn’t affect its direct copyright infringement liability. Instead, it merely affects the indirect liability YouTube faced before Aereo and continues to face after Aereo. And any such providers that do not currently obtain public performance licenses can and will simply do so with small textual amendments to their existing content licenses.

In other words, the Court’s ruling boils down to this: Either get a license to provide content not already owned by your subscribers, or provide only that content which your subscribers already own. The crux of the Aereo ruling is remarkably clear.

Meanwhile, the volitional conduct test, like most legal tests, doesn’t offer a bright line, despite some commenters’ assertions that it would have been a better grounds for deciding the case. While the volitional conduct test is an imprecise, sliding scale—regardless of the type of service or the underlying relationship between end-users and content providers—the Court’s Aereo test offers relatively clear rules, imposing direct liability only on services that transmit without a public performance license content that its users do not already own or possess.

For the many cloud services we know and love—and for the cloud computing startups yet to exist—the Court’s decision in Aereo should be little cause for concern. Legitimate hand-wringing over potential threats to the cloud will have to wait until another day.

In Amazon, Copyright, Google, Intellectual Property, Platforms, Supreme Court, Telecommunications Aereo, broadcasting, cloud computing, contracts, copyright, Public Performance, startups, Supreme Court, television

Why the Supreme Court’s Aereo Decision Protects Creators Without Endangering the Cloud

Geoffrey Manne, Ryan Radia & Ben Sperry — 26 June 2014

Yesterday, the Supreme Court released its much-awaited decision in ABC v. Aereo. The Court reversed the Second Circuit, holding that Aereo directly infringed the copyrights of broadcast television program owners by publicly performing their works without permission. Justice Breyer, who wrote the opinion for the Court, was joined by five other Justices, including Chief Justice Roberts, Justice Kennedy, and the liberal-leaning bloc. Interestingly, Justice Scalia dissented on textualist grounds, joined by his conservative-leaning colleagues Justice Thomas and Justice Alito.

As this split illustrates, debates about intellectual property often don’t break down along partisan or ideological lines, and the division between the majority and the dissent in Aereo focused entirely on how to interpret the copyright statute, not on the underlying philosophical merits of property rights or policy judgments regarding the costs and benefits of stronger or weaker IP.

The majority, relying on both the legislative history and the text of the Copyright Act of 1976, emphasized that the Act sought to foreclose the workaround by cable companies of broadcasters’ copyrights that the Supreme Court had previously sanctioned in a duo of cases—and that Aereo’s conduct was functionally almost identical to the unauthorized retransmissions by cable companies prior to the 1976 Act.

Justice Scalia dissented on two grounds: first, that the majority based its reading of the statute on legislative history, a practice he opposes as a means of divining a statute’s meaning; and second, that the majority relied on a vague and inapt comparison between Aereo’s allegedly infringing conduct and cable companies’ pre-1976 retransmissions of broadcast network programming.

We argue here, building on our amicus brief and our previous blog post on Aereo, that, regardless of which test applies, Aereo infringes on television program owners’ exclusive right under the Copyright Act to publicly perform their works. Moreover, we argue that the Court’s test in Aereo is far less ambiguous than its critics assert, and that it does not endanger cloud computing services like so many contend.

The Court Adopts (Some of) Our Arguments

In our brief, we reviewed two key Supreme Court rulings that influenced how Congress rewrote the Copyright Act in 1976. As we explained:

In the 1960s, two owners of programming aired over broadcast television separately brought copyright infringement suits against cable companies that—like Aereo—retransmitted television broadcasts of the plaintiffs’ works without compensating the owners. Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390 (1968); Teleprompter Corp. v. CBS, Inc., 415 U.S. 394 (1974). In both cases, this Court found for the defendants, holding that a cable company’s retransmission of a television broadcast signal did not constitute a “performance” of that program under the Copyright Act in force at the time. Dissatisfied with these rulings, Congress effectively abrogated Fortnightly and Teleprompter in the Copyright Act of 1976, defining a transmission of a performance as a performance itself. 17 U.S.C. § 101. Although Congress’s immediate reason for making this change was to bar cable companies from retransmitting broadcast television programs without compensating their owners, the law was written so as to be as future-proof as possible.

We argued that for the Court to find that the Copyright Act does not reach Aereo’s conduct would run contrary to the law’s text and purpose, for Aereo designed its system to evade copyright in much the same way as cable companies operated prior to 1976. The Court agreed with this analogy, holding that:

By means of its technology (antennas, transcoders, and servers), Aereo’s system receives programs that have been released to the public and carries them by private channels to additional viewers. It carries whatever programs it receives, and it offers all the programming of each over-the-air station it carries [alterations, citations, and quotation marks omitted].

Furthermore, in our April essay on these pages, we identified several reasons why the Court could and should rule against Aereo without exposing innovative cloud computing firms to copyright liability:

Both fair use and the DMCA’s safe harbor likely protect cloud hosting services such as Dropbox so long as they respond to takedown notices and are not otherwise aware of the nature of the content uploaded by their users;
Cloud computing services typically lack the volitional conduct necessary to be considered direct infringers; and
If consumers acquire licensed content from cloud services such as Amazon or Google, and stream themselves that content from the cloud, the services’ privity with rights holders should render them safe from copyright infringement liability.

The Court explicitly endorsed our privity argument and implicitly acknowledged our point about DMCA and fair use. As the Court wrote:

[A]n entity that transmits a performance to individuals in their capacities as owners or possessors does not perform to ‘the public,’ whereas an entity like Aereo that transmits to large numbers of paying subscribers who lack any prior relationship to the works does so perform.

What about Dropbox and similar services? The Court took pains to note that its opinion does not consider “whether the public performance right is infringed when the user of a service pays primarily for something other than the transmission of copyrighted works, such as the remote storage of content.” The Court also cited the Digital Millenium Copyright Act of 1998, observing that “to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.”

Below, we first discuss Justice Scalia’s dissent, and explain why Aereo’s volitional conduct with respect to copyrighted works sufficed to render the company directly liable for infringement, even under Scalia’s standard. We next discuss the implications for cloud computing, and explain why the Court’s test may in fact be clearer than the volitional conduct test, actually offering more legal protection for cloud computing than the dissent’s standard would.

Aereo Is Liable for Copyright Infringement Under the Volitional Conduct Test

Scalia, ever the critic of judges relying on legislative history and exercising too much discretion over substantive law, rejected what he called the majority’s “looks-like-cable-TV” standard. Instead, he argued that the Court should adopt the volitional conduct test used by various federal appellate courts, writing that “[a] defendant may be held directly liable only if it has engaged in volitional conduct that violates the Act.”

Scalia then asserted that Aereo is more like a copy shop than a video-on-demand service, because Aereo allows its customers to choose which programs they view and when to activate the copying function. Therefore, Scalia argued, Aereo “plays no role in selecting the content, [and] cannot be held directly liable when a customer makes an infringing copy.” Distinguishing Aereo’s conduct from that of Netflix, Scalia noted that the latter company’s “selection and arrangement [of content] constitutes a volitional act directed to specific copyrighted works and thus serves as a basis for direct liability” (or would so serve if Netflix lacked the requisite licenses).

Yet even if Justice Scalia is right that the volitional conduct test would be easier for courts to apply in future cases than the majority’s “looks-like-cable-TV” test—and, as we discuss below, we believe this widely-held view is incorrect—it does not follow that the dissent properly applied the volitional conduct test to Aereo.

First, Aereo does in fact “curate” the content it offers, in several respects. In its attempt to drive a Mack truck through the 2nd Circuit’s holding in Cartoon Network that a cable company doesn’t publicly perform works by offering its users remote DVR service, Aereo built a business model around over-the-air television content—which represents only a small fraction of the content Aereo could have obtained from free, publicly accessible sources (e.g, the Internet). Aereo also selected the cities in which it installed the dime-sized antennas that pick up over-the-air programming.

Perhaps most importantly, as far as we can tell, Aereo does not offer all the ATSC broadcasts transmitted over-the-air in the cities where the service is available. In New York, for example, Aereo claims to offer 16 channels (and several virtual sub-channels), but it doesn’t claim to offer such channels as WMBQ-CD, WDVB-CD, WNYZ-LP, or WASA-LD—all of which are broadcast over-the-air throughout central New York, according to AntennaWeb. Meanwhile, Aereo does offer Bloomberg TV—a non-broadcast channel for which Aereo voluntarily sought and acquired licenses to retransmit.

Second, evaluating whether Aereo’s actions to make available over-the-air programming embody sufficient volition to render the company itself—as opposed to its users—directly responsible for performing broadcast television turns on more than the extent to which Aereo curated its offerings. As the Court explained, Aereo built a complex system of “antennas, transcoders, and servers” for the sole purpose of monetizing broadcast television shows. In “providing this service,” the Court noted, “Aereo uses its own equipment, housed in a centralized warehouse, outside of its users’ homes.” If Aereo merely bought some office space near the top of a New York skyscraper, along with some general-purpose servers connected to the Internet via fiber-optic broadband, the company could certainly rent out these assets to the general public without facing any liability for directly publicly performing copyrighted broadcast programs. Even if some of Aereo’s subscribers placed tiny antennas in their allocated spaces and configured their server instances to stream broadcast television to themselves, Aereo would—at the very worst—face liability for vicarious copyright infringement. But this is not how Aereo operated.

Aereo has, in other words, actually taken numerous “volitional” steps to make available copyrighted content to its subscribers. And while it also offers some services ancillary to the transmission of content (most notably remote-DVR functionality), it offers those as adjuncts to its core function of transmission, not as standalone services.

Had Aereo prevailed, the company and its competitors would likely have pursued other technical workarounds to monetize other types of copyrighted works without their owners’ permission. Although Aereo chose to start with over-the-air broadcast programming—presumably because it could plausibly argue that its subscribers already had an implied right to view over-the-air broadcasts—broadcast television is hardly the only form of valuable content that the public can lawfully access free of charge in one way or another. What about cable television networks that stream some of their shows online for free? Or news websites that allow unauthenticated users to access a limited number of stories free of charge each month? If Aereo had convinced the Court to bless its business model, it would have sent copyright owners a very clear message: don’t publicly distribute your works in any format, or else.

The Court’s Holding Doesn’t Imperil Cloud Services

The problem is that the court never provides clear criteria for this “looks-like-cable-TV” rule…. The Supreme Court says its ruling shouldn’t dramatically change the legal status of other technologies…. But it’s going to take years of litigation — and millions of dollars in legal fees — to figure out exactly how the decision will affect cloud storage services.

But the Court did articulate several important limits, as we note above. Most significantly, the opinion plainly excepts transmission of underlying works “own[ed] or possess[ed]” by subscribers from its definition of public performance. It also circumscribes what constitutes a public performance to transmissions from a person to large groups of people “outside of [her] family and [her] social circle,” and reinforces that fair use limitations continue to protect those who perform copyrighted works.

Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content.

Even if the Court’s holding were applied in contexts beyond traditional television programming, how many cloud services actually deliver content—rather than just enhancing it, as a DVR does—that its user do not otherwise own or possess? Vanishingly few, if any. Most obviously, talk of the risks Aereo poses to cloud storage and digital lockers—services that, by definition, apply only to content provided by the user and thus previously “owned or possessed” by the user—is simply misplaced.

Conclusion

Strange bedfellows aside, the Supreme Court reversed the Second Circuit and adopted a rationale similar to the one we articulated in our amicus brief. Even under the volitional conduct test advocated by Scalia in his dissenting opinion, Aereo should lose, just as we argued in our previous post on the issue. This will not be the last time the Court wrestles with applying the nearly 40 year-old Copyright Act to novel technology, but Aereo stands little chance of undermining the cloud computing sector. Although the great IP debate will surely continue, this much is settled law: You cannot build a business model around the idea of rebroadcasting copyrighted network content without paying for it.

A Supreme Court ruling against Aereo won’t spell the end of cloud computing

Geoffrey Manne, Ryan Radia & Ben Sperry — 17 April 2014

Interested observers on all sides of the contentious debate over Aereo have focused a great deal on the implications for cloud computing if the Supreme Court rules against Aereo. The Court hears oral argument next week, and the cloud computing issue is sure to make an appearance.

Several parties that filed amicus briefs in the case weighed in on the issue. The Center for Democracy & Technology, for example, filed abrief arguing that a ruling against Aereo would hinder the development of cloud computing. Thirty-six Intellectual Property and Copyright Law Professors also filed a brief arguing this point. On the other hand, the United States—represented by the Solicitor General—devoted a section of its amicus brief in support of copyright owners’ argument that the Court could rule against Aereo without undermining cloud computing.

Our organizations, the International Center for Law and Economics and the Competitive Enterprise Institute, filed an amicus brief in the case in support of the Petitioners (as did many other policy groups, academics, and trade associations). In our brief we applied the consumer welfare framework to the question whether allowing Aereo’s business practice would increase the societal benefits that copyright law seeks to advance. We argued that holding Aereo liable for copyright infringement was well within the letter and spirit of the Copyright Act of 1976. In particular, we argued that Aereo’s model is less a disruptive innovation than a technical work-around taking advantage of the Second Circuit’s overbroad reading of the law in the Cablevision case.

Although our brief didn’t directly address cloud computing writ large, we did articulate a crucial distinction between Aereo and other cloud computing providers. Under our reasoning, the Court could rule against Aereo—as it should—without destroying cloud computing—as it should not.

Background

By way of background, at the center of the legal debate is what it means to “perform [a] copyrighted work publicly.” Aereo argues that because only one individual subscriber is “capable of receiving” each transmission its service delivers, its performances are private, not public. The Copyright Act gives copyright owners the exclusive right to publicly perform their works, but not the right to perform them privately. Therefore, Aereo contends, its service doesn’t infringe upon copyright owners’ exclusive rights.

We disagree. As our brief explains, Aereo’s argument ignores Congress’ decision in the Copyright Act of 1976 to expressly define the transmission of a television broadcast “by means of any device or process” to the public as a public performance, “whether the members of the public capable of receiving the performance … receive it in the same place or in separate places and at the same time or at different times.” Aereo has built an elaborate system for distributing live high-def broadcast television content to subscribers for a monthly fee—without obtaining permission from, or paying royalties to, the copyright owners in the audiovisual works aired by broadcasters.

Although the Copyright Act’s text is less than artful, Congress plainly wrote it so as to encompass businesses that sell consumers access to live television broadcasts, whether using traditional means—such as coaxial cable lines—or some high-tech system that lawmakers couldn’t foresee in 1976.

What does this case mean for cloud computing? To answer this question, it’s worth dividing the discussion into two parts: one addressing cloud providers that don’t sell their users licenses to copyrighted works, and the other addressing cloud providers that do. Dropbox and Mozy fit in the first category; Amazon and iTunes fit in the second.

A Ruling Against Aereo Won’t Destroy Cloud Computing Services like Dropbox

According to the 36 Intellectual Property and Copyright Law Professors, a loss for Aereo would be bad news for cloud storage providers such as Dropbox:

If any service making multiple transmissions of the same underlying copyrighted audiovisual work is publicly performing that work, then the distinction between video-on-demand services and online storage services would vanish, and all such services would henceforth face infringement liability. Thus, if two Dropbox users independently streamed “We, the Juries,” then under Petitioners’ theory, those two transmissions would be aggregated together, making them collectively “to the public.” Under Petitioners’ theory of this case—direct infringement by public performance—that would be game, set, and match against Dropbox.

This sounds like bad news for the cloud. Fortunately, however, Dropbox has little to fear from an Aereo defeat, even if the professors are right to worry about an overbroad public performance right (more on this below). The Digital Millenium Copyright Act (DMCA) grants online service providers—including cloud hosting services such as Dropbox—a safe harbor from copyright infringement liability for unwittingly storing infringing files uploaded by their users. In exchange for this immunity, service providers must comply with the DMCA’snotice and takedown system and adopt a policy to terminate repeat-infringing users, among other duties.

Although 17 U.S.C. § 512(c) refers only to infringement “by reason of … storage” directed by a user, courts have consistently interpreted this language to “encompass[] the access-facilitating processes that automatically occur when a user uploads” a file to a cloud hosting service. Whether YouTube streams an infringing video once or 1,000,000 times, therefore, it retains its DMCA immunity so long as it complies with the safe harbor’s requirements. So even if Aereo loses, and every DropBox user who streams “We, the Juries” is receiving a public performance, DropBox will still be safe from copyright infringement liability in the same way as YouTube, Vimeo, DailyMotion, and countless other services are safe today.

An Aereo Defeat Won’t Kill Cloud Computing Services like Amazon and Google

As for cloud computing providers that provide copyrighted content, the legal analysis is admittedly trickier. These providers, such as Google and Amazon, contract with copyright holders to sell their users licenses to copyrighted works. Some providers offer a subscription to streaming content, for which the provider has typically secured public performance licenses from the copyright owners. Cloud providers also sell digital copies of copyrighted works—that is, non-transferable lifetime licenses—for which the provider has generally obtained reproduction and distribution licenses, but not public performance rights.

But, as copyright law guru Devlin Hartline argues, determining if a performance is public or private turns on whether the cloud provider’s “volitional conduct [is] sufficient such that it directly causes the transmission.” When a user streams her own licensed content from a cloud service, it remains a private performance because the cloud service took no willful steps to facilitate the playback of copyrighted material. (The same is true for Dropbox-like services, as well.) Aereo, conversely, “crosse[s] the line from being a passive conduit to being an active participant because it supplies the very content that is available using its service.”

Neither Google’s nor Amazon’s business models much resemble Aereo’s, which entails transmitting content for which the company has secured no copyright licenses—either for itself or for its users. And to the extent that these services do supply the content being transmitted (as Spotify or Google Play All Access do, for example), they secure the appropriate public performance right to do so. Indeed, critics who have focused on cloud computing fail to appreciate how the Copyright Act distinguishes between infringing technologies such as Aereo and lawful uses of the cloud to store, share, and transmit copyrighted works.

For instance, as CDT notes:

[S]everal companies (including Google and Amazon) have launched personal music locker services, allowing individuals to upload their personal music collections “to the cloud” and enabling them to transmit that music back to their own computers, phones, and tablets when, where, and how they find most convenient.

And other critics of broadcasters’ legal position have made similar arguments, claiming that the Court cannot reach a holding that simultaneously bars Aereo while allowing cloud storage:

[I]f Aereo is publicly performing when you store a unique copy of the nightly news online and watch it later, then why aren’t cloud services publicly performing if they host your (lawful) unique mp3 of the latest hit single and stream it to you later?… The problem with this rationale is that it applies with equal force to cloud storage like Dropbox, SkyDrive, iCloud, and Google Drive. If multiple people store their own, unique, lawfully acquired copy of the latest hit single in the cloud, and then play it to themselves over the Internet, that too sounds like the broadcasters’ version of a public performance. The anti-Aereo rationale doesn’t distinguish between Aereo and the cloud.

The Ability to Contract is Key

These arguments miss the important concept of privity. A copyright holder who does not wish to license the exclusive rights in her content cannot be forced to do so (unless the content is subject to a compulsory license). If a copyright holder prefers its users not upload their licensed videos to the cloud and later stream them for personal use, the owner can include such a prohibition in its licenses. This may affect users’ willingness to pay for such encumbered content—but this is private ordering in action, with copyright holders and licensees bargaining over control over copyrighted works, a core purpose of the Copyright Act.

When a copyright holder wishes to license content to a cloud provider or user, the parties can bargain over whether users may stream their content from the cloud. These deals can evolve over time in response to new technology and changing consumer demand. This happens all the time—as in therecent deal between Dish and Disney over the Hopper DVR, wherein Dish agreed that Hopper would automatically excise the commercials accompanying ABC content only after three days elapse after each show airs.

But Aereo forecloses the possibility of such negotiation, making all over-the-air content available online to subscribers absent any agreement with the underlying copyright owners of such programs. Aereo is thus distinct from other cloud services that supply content to their users, as the latter have permission to license their content.

Of course, broadcasters make their programming freely available over the airwaves, without any express agreement with viewers. But this doesn’t mean broadcasters lose their legal right to restrict how third parties distribute and monetize their content. While consumers can record and watch such broadcasts at their leisure, they can’t record programs and then sell the rights to the content, for example, simply replicating the broadcast. The fact that copyright holders have entered into licenses to “cloud-ify” content with dedicated over-the-top apps and Hulu clearly suggests that the over-the-air “license” is limited. And because Aereo refuses to deal with the broadcasters, there’s no possibility of a negotiated agreement between Aereo and the content owners, either. The unique combination of broadcast content and an unlicensed distributor differentiates the situation in Aereo from typical cloud computing.

If broadcasters can’t rely on copyright law to protect them from companies like Aereo that simply repackage over-the-air content, they may well shift all of their content to cable subscriptions instead of giving a free option to consumers. That’s bad news for folks who access free television—regardless of the efficiency of traditional broadcasting, or lack thereof.

The Cablevision Decision Doesn’t Require a Holding for Aereo

Commentators argue that overruling the Second Circuit in Aereo necessarily entails overruling the Second Circuit’s Cablevision holding—and with it that ruling’s fair use protections for DVRs and other cloud computing functionality. We disagree, however. Rather, regardless of whether Cablevision was correctly decided, its application to Aereo is improper.

In Cablevision, the individual cable subscribers to whom Cablevision transmitted copies of plaintiff Cartoon Network’s television programming were already paying for lawful access to it. Cartoon Network voluntarily agreed to license its copyrighted works to Cablevision and, in turn, to each Cablevision subscriber whose cable package included the Cartoon Network channel.

The dispute in Cablevision thus involved a copyright holder and a licensee with a preexisting contractual relationship; the parties simply disagreed on the terms by which Cablevision was permitted to transmit Cartoon Network’s content. But even after the decision, Cartoon Network remained (and remains) free to terminate or renegotiate its licensing agreement with Cablevision.

Again, this dynamic of voluntary exchange mitigates Cablevision’s impact on the market for television programming, as copyright holders and cable companies settle on a new equilibrium. But unlike the cable company in Cablevision, Aereo has neither sought nor received permission from any holders of copyrights in broadcast television programming before retransmitting their works to paying subscribers.

Even if it is correct that Aereo itself isn’t engaging in public performance of copyrighted work, it remains the case that its subscribers haven’t obtained the right to use Aereo’s services, either. But one party or the other must obtain this right or else establish that it’s a fair use.

Fair Use Won’t Save Aereo

The only way legitimately to rule in Aereo’s favor would be to decide that Aereo’s retransmission of broadcast content is a fair use. But as Cablevision’s own amicus brief in Aereo (supporting Aereo) argues, fair use rights don’t cover Aereo’s non-transformative retransmission of broadcast content. Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content:

Aereo is functionally identical to a cable system. It captures over-the-air broadcast signals and retransmits them for subscribers to watch. Aereo thus is not meaningfully different from services that have long been required to pay royalties. That fact sharply distinguishes Aereo from cloud technologies like remote-storage services and remote DVRs.

* * *

Aereo is not in the business of transmitting recorded content from individual hard-drive copies to subscribers. Rather, it is in the business of retransmitting broadcast television to subscribers.

* * *

Aereo…is not relying on its separate hard-drive copies merely to justify the lawfulness of its pause, rewind, and record functions. It is relying on those copies to justify the entire television retransmission service. It is doing so even in the many cases where subscribers are not even using the pause, rewind, or record functions but are merely watching television live.

It may be that the DVR-like functions that Aereo provides are protected, but that doesn’t mean that it can retransmit copyrighted content without a license. If, like cable companies, it obtained such a license, it might be able to justify its other functionality (and negotiate license terms with broadcasters to reflect the value to each of such functionality). But that is a fundamentally different case. Similarly, if users were able to purchase licenses to broadcast content, Aereo’s additional functionality might also be protected (with the license terms between users and broadcasters reflecting the value to each). But, again, that is a fundamentally different case. Cloud computing services don’t create these problems, and thus need not be implicated by a proper reading of the Copyright Act and a ruling against Aereo.

Conclusion

One of the main purposes of copyright law is to secure for content creators the right to market their work. To allow services like Aereo undermines that ability and the incentives to create content in the first place. But, as we have shown, there is no reason to think a ruling against Aereo will destroy cloud computing.

Art and Politics

Todd Henderson — 19 December 2009

When I first met my father in law, he spent hours trying to convince me of the cultural superiority of his tastes. Some of these were indeed triumphs. I’m thinking here of “Dr. Strangelove,” “The 400 Blows,” and the music of Richard Wagner. (Others were not. I’m thinking here of “Children of Paradise,” a movie about mimes.) His love of Wagner is curious; he was born in Israel and almost his entire family was murdered in the Warsaw ghetto. This is not a trivial issue. Hitler loved Wagner too, and used his music for political ends. Wagner was himself a hater of Jews. Accordingly, Israel banned public performance of Wagner’s music nearly six decades ago, and the taboo was not broken until 1995 when “The Flying Dutchman” was played on Israeli radio. Six years later Daniel Barenboim (a Jew) led the Berlin Staatskapelle in a performance of an overture from “Tristan und Isolde” at an Israel Festival, which only reignited the controversy.

I respect my father-in-law’s ability to separate politics and art. But this is also just a necessity for me; listening to only Ted Nugent and watching only Chuck Norris movies would make my leisure time quite depressing. So I pay to see movies by Nora Ephron and Steven Spielberg, and I listen to music by Bruce Springsteen. But maybe there should be lines.

I love the music of “The Clash,” agreeing with a British critic who called them “the only band that matters.” But what should I make of their 1980 album “Sandinista!”? With its red and black colors and vehemently anti-American lyrics, the album is a political disgrace. For instance, the song “Washington Bullets,” which is not an homage to the NBA team of the (then) same name, tells us where the Clash were coming from:

   For the very first time ever
   When they had a revolution in Nicaragua,
   There was no interference from America
   Human rights in America
   Well the people fought the reader,
   And up he flew ...afdb
   With no Washington bullets what else could he do?

But the music is pretty wonderful. Should I put aside the political idiocy and just listen to the music? I’m not sure this can be done. After all, I would never buy an album called “National Socialists!” or “CCCP!”, no matter how incredible the music was. For now, I’ll pass, belieiving that, as cultural critic Wayne Booth wrote, the company we keep matters.

In Copyright, Intellectual Property, Truth on the Market music, Public Performance

Truth on the Market

Archives For Public Performance

A Flag On the Play: Gigi Sohn Commits a Copyright Foul

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No, The FCC Should Not Have the Power to Cancel Contracts

Look out! Lochner is coming!

You Have to Break the Law Before You Raise a Defense

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Art and Politics

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Archives For Public Performance

The consent decrees

Enter the Internet

Letting the market move forward

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Look out! Lochner is coming!

You Have to Break the Law Before You Raise a Defense

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The Court Adopts (Some of) Our Arguments

Aereo Is Liable for Copyright Infringement Under the Volitional Conduct Test

The Court’s Holding Doesn’t Imperil Cloud Services

Conclusion

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Background

A Ruling Against Aereo Won’t Destroy Cloud Computing Services like Dropbox

An Aereo Defeat Won’t Kill Cloud Computing Services like Amazon and Google

The Ability to Contract is Key

The Cablevision Decision Doesn’t Require a Holding for Aereo

Fair Use Won’t Save Aereo

Conclusion

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