By Brian Lynch

Late last month both houses of Congress introduced the Internet Radio Fairness Act in an effort to reduce the royalty rates internet radio stations pay to copyright holders of sound recordings.  The current fee structure for digital audio transmissions is set by a panel of three judges who make up the ImageCopyright Royalty Board.  This system has been criticized by internet radio stations because it has led to sites like Pandora paying out 50% of its revenues for royalties, while satellite radio stations pay a lower rate of 8% of gross revenues.  Pandora of course applauds the proposed law claiming “A more equitable rate structure would drive investment and innovation, bringing greater choice for consumers, and ultimately greater revenue for performing artists.”

The separate rate structure for satellite radio and internet radio stems from the Digital Millennium Copyright Act that in essence divided up non-interactive digital audio providers into two categories.  Satellite radio providers were allowed to fall under the fee standard in section 801(b) of the Copyright Act, while internet radio companies fell under a willing buyer/willing seller standard.  In the latter, fee decisions are based on the standard of what a willing buyer and a willing seller would agree to in a hypothetical marketplace.  This two tier system may have made sense 15 years ago when the DMCA was introduced, but the resulting gap in rates doesn’t seem to be fair today for entities using copyrighted works in the essentially the same way.

If one rate is now needed to level the playing field, which one should be used: 801(b) or Willing Buyer/Willing Seller?

The Internet Radio Fairness Act would apply the 801(b) standard to internet radio stations.  The standard involves four criteria used to determine a royalty rate:  Maximize the availability of creative works to the public; Insure a fair return for copyright owners and a fair income for copyright users; Reflect relative roles of capital investment, cost, and risk, and; Minimize disruptive impact on the industries involved.

A competing bill in the House, the Interim Fairness in Radio Starts Today Act, would adopt the willing seller/willing buyer standard.   This standard has been criticized for giving the seller (music publishers) too much leverage when acting as a group.  UCLA Professor John Villasenor makes a case for applying 801(b) across the board here.

Brian served as President of Suffolk Media Law from 2011-2012.