CHORUSS’S COVENANT:

THE PROMISED LAND (MAYBE) FOR RECORD LABELS;

A LESSER DESTINATION FOR EVERYONE ELSE

(Originally published at IP-Watch.org on March 17, 2009)

The music industry has struggled for more than a decade to find effective ways to monetise use of its content on the internet. One initiative, which has been incubating since March 2008, is led on behalf of Warner Music Group by Jim Griffin. It involves efforts to generate fees from college students in the United States who wish to engage in P2P file-sharing. For this purpose, Mr. Griffin formed Choruss, LLC. To date, Choruss’s membership includes three of the four major record labels. Universal Music Group has not yet joined.

An outline of Choruss’s programme was first made public by Mike Masnick in December 2008, in a blog at techdirt. Mr. Masnick based his report on a PowerPoint created by Mark Luker, a vice-president at Educause. Mr. Luker based his PowerPoint on discussions he had with Mr. Griffin.

Choruss claims it will offer college students the freedom to engage in P2P file-sharing using whatever software or service they wish. In return, students will pay a monthly fee to Choruss through their schools. The schools will monitor student file-sharing activities and report music use information to Choruss. Choruss will divide the student fees among the record labels it represents.

On 26 February, 2009, Mr. Griffin delivered a keynote speech at Digital Music Forum East. The speech, available here, was billed as an “exclusive look under the hood of Choruss.”

According to Mr. Griffin, it remains to be determined exactly how Choruss will operate. He said that Choruss will not “apply any one size fits all approach.” And that “[Choruss] will seek to implement different approaches at different college networks.” He hopes to launch Choruss at six colleges by the fall semester of 2009. If Choruss proves successful at the college level, Mr. Griffin will seek to extend it to ISPs [internet service providers], and, through them, to all US-based internet users who access the network through broadband connections.

Throughout his speech, Mr. Griffin sought to analogise Choruss with ASCAP, BMI and SESAC, the three US-based collective licensing organisations. I found this odd because, according to Mr. Luker, Choruss does not intend to engage in any form of licensing, collective or otherwise. (See, in particular, the 5th slide of Mr. Luker’s PowerPoint.) Rather, Choruss will implement its programme through a legal mechanism known as a covenant not to sue. That is, Choruss’s label members will refrain from asserting claims of copyright infringement against compliant students for their file-sharing activities. They also will refrain from asserting claims against the schools these students attend arising from file-sharing of Choruss’s members’ recordings over the schools’ networks.

During a Q&A period, I asked Mr. Griffin to clarify whether Choruss intends to issue licences or to rely instead on covenants not to sue. He responded that several attorneys had assured him that the two approaches are effectively the same and that it makes no difference on which basis Choruss proceeds. I said I disagreed, but was not given the opportunity to elaborate. Mr. Griffin ended our exchange, saying: “We’ve spent over a decade with the lawyers nitpicking over what we call the transfer of money for music and I’m tired of it. What we’re trying to do [with Choruss] is to make sure we don’t have another decade of nitpicking because this business won’t survive.”

On 3 March, 2009, Mr. Griffin was interviewed by Steve Worona, director of policy & networking programs at Educause. Mr. Worona asked Mr. Griffin to comment on whether Choruss would rely on covenants not to sue. Mr. Griffin responded that that is a matter for attorneys to decide. Beyond that, his response was no more informative than the one he gave me. (You can listen to Mr. Worona’s question and Mr. Griffin’s answer beginning at the 30:40 mark of the interview.)

To be sure, there are circumstances, in patent law, for example, where a covenant not to sue is roughly equivalent to a licence. However, licences have always been the gold standard for music industry rights administration. And, as discussed in the remainder of this post, in the particular context of P2P file-sharing of recorded music by students on college campuses, the differences between licences and covenants not to sue are fundamental and far-reaching.

As Mr. Griffin said in his speech: “The light of day is the best disinfectant, so let’s make a few exemplary comparisons between the myths about Choruss and what’s really happening.”

Choruss’ reliance on covenants not to sue will enable the major labels to extract revenue from student file-sharing while continuing their efforts to eradicate P2P altogether.

The music industry has no intention of allowing P2P file-sharing to be lawful; at least not file-sharing of the sort that might actually meet consumer demand. The recent torpedoing of Virgin Media’s file-sharing service in the U.K illustrates the point. And in his speech, Mr. Griffin confirmed that “licensed P2P is not our focus in Choruss.”

The cornerstone of the labels’ assault on file-sharing services and technology providers (as opposed to their campaign against consumers themselves) is the 2005 decision of the US Supreme Court in the Grokster case. There, the Court created the concept of inducement liability. It held that “one who distributes a device with the object of promoting its use to infringe copyright . . . is liable for the resulting acts of infringement by third parties.”

To date, practically every instance of student file-sharing of major label content constitutes copyright infringement. This is because the majors have refused to license uses of their recordings for that purpose. Therefore, under Grokster, P2P services and software providers who promote use of their products on college campuses risk exposure to inducement liability for the resulting acts of infringement by students.

If Choruss were to grant licences, file-sharing by students who buy in to Choruss’s programme would no longer constitute infringement. In such event, student file-sharing could not serve as the basis for claims of inducement liability by Choruss’s record label members. Obviously, the major labels that dominate Choruss are not prepared to accept that result.

On the other hand, in the context of Choruss’s programme, a covenant not to sue would constitute nothing more than a promise by the labels involved to refrain from asserting legal claims against compliant students. It would not negate the labels’ underlying position that student file-sharing constitutes copyright infringement. And, in such event, P2P services and technology providers would remain exposed to claims of inducement liability by Choruss label members even for the file-sharing activities of those students who buy in to Choruss’s programme; and this despite that the students themselves would be free of infringement claims by those same record labels. Only if Chorus relies on covenants not to sue can its label members continue unimpeded with their efforts to eradicate file-sharing altogether.

Choruss’s reliance on covenants not to sue will render its program a classic bait and switch.

Students who buy in to Choruss’s programme will do so believing that that will free them to engage in file-sharing using whatever P2P services or software products they wish. However, if Choruss relies on covenants not to sue, students likely will find that the very services they signed up to use have been shuttered in response to copyright infringement actions brought by Choruss label members. Mr. Griffin hinted at this in his speech when he acknowledged longing for the day when “Limewire [the most widely used P2P software product] will be the answer to a trivia question.” Thus, to the extent that Choruss offers students freedom of choice, it will be the freedom to choose from among the P2P services and software products, if any, that the major record labels approve.

Choruss’s covenant not to sue students who engage in file-sharing of recordings owned by Choruss label members does not mean that those students will not be sued for doing exactly that.

P2P file-sharing implicates the reproduction and distribution rights in the sound recordings that are shared. It also implicates the reproduction and distribution rights of the songs contained in those recordings. With respect to individual songs, these rights, collectively known as the “mechanical right,” may be owned by a single music publisher or, more likely, owned jointly by multiple co-publishers.

Typically, when record labels grant licences for digital downloads of their recordings in the United States they assume responsibility to “clear” mechanical rights. That is, they obtain and pay for mechanical rights licences for the benefit of their licensees. The labels’ licensees, in turn, reimburse them for this cost and effort through the licence fees they pay. In addition, when labels clear mechanical rights, they also commit to indemnify their licensees for claims made by music publishers for infringement of those rights.

The current rate under the compulsory mechanical licence in the United States is 9.1 cents per song per download. For so-called “controlled compositions,” those written, owned or controlled in whole or in part by the recording artist, a bargain rate of 75 percent of the compulsory rate, or 6.825 cents, is charged per song per download.

It has been reported that “the current per-student monthly figure being kicked around is somewhere less than $5.” Given this, the economics of Choruss’s programme will not allow its record label members to clear mechanical rights for participating students. Of course, Choruss could limit students to a handful of downloads per month but that would make Choruss a difficult sale on campus. Instead, Choruss will refrain from issuing licences and rely on covenants not to sue. In that way, Choruss’s members can avoid even the implication that they have any legal obligation for mechanical rights licences.

If Choruss does not clear mechanical rights, then students who buy in to its programme will bear sole responsibility to secure and to pay for those licences. Students who fail to do so - and that will be practically every student on campus - will be exposed to claims of copyright infringement by every music publisher with any interest whatsoever in any of the songs that the students share.

It remains to be seen whether music publishers would sue students for these infringements. The music publishing industry may not want to repeat the public relations disaster that resulted from the RIAA’s long campaign of infringement litigation against consumers. But the fact remains that if Choruss relies on covenants not to sue, students who buy in to its program will not be fully protected from exposure to infringement liability for sharing the very recordings that Choruss represents.

(Given all this, one may wonder what appeal Choruss possibly could have for college students, especially in light of the RIAA’s announcement that it is suspending its litigation campaign against consumers. The answer is that it doesn’t matter what students think about Choruss. Mr. Griffin said in his speech that Choruss is “working with professors and chancellors and provosts, university attorneys, IT departments and their public policy advocates.” The decision whether or not Choruss’s programme will be implemented at particular campuses, whether or not students will be required to participate, what limits, if any, may be placed on student file-sharing activities, and how much the monthly fee will be, will all be made at the university administration level. It does not appear that student groups will have meaningful input into this decision-making process.)

Under Choruss’s programme, songwriters and music publishers will not have an enforceable right to receive royalties through Choruss for student file-sharing of recordings that contain their songs.

In the United States there is no public performance right in an internet transmission that is nothing more than a digital download of the song that is transmitted. Because P2P file-sharing involves digital downloads, songwriters and music publishers will not have any claim to payment of public performance right royalties derived from the student file-sharing fees that Choruss collects.

Moreover, if Choruss relies on covenants not to sue and thereby avoids the obligation to clear mechanical rights, songwriters and music publishers will end up with nothing, or next to nothing from student file-sharing of their songs. In order to avoid that result, they may be willing to forego their right to mechanical rights royalties under existing law and accept the best terms they can negotiate directly with Choruss. Mr. Griffin would call this dynamic “a voluntary market approach to compensation.” Songwriters and music publishers would likely call it something else.

Under Choruss’s programme, recording artists will not have an enforceable right to receive royalties for student file-sharing of their recordings.

The circumstances under which individual recording artists have a right to receive royalties for digital downloads, as well as the amounts of those payments, will be specified in their agreements with their respective record labels. Recording artists can be eligible to receive up to 50 percent of record label licence fee revenues (albeit net of various and often costly deductions). However, it is practically unheard of for a recording artist to have a right to share in record label revenue derived from covenants not to sue.

To be sure, if Choruss relies on covenants not to sue, some of its label members may share student file-sharing fees with their artists. But any such payments would be voluntary, and likely not made in a uniform, predictable or transparent manner. The way to assure that recording artists have an enforceable right to receive royalties for student file-sharing under Choruss’s program is for Choruss to issue licenses.

Colleges and universities will participate in Choruss’s programme largely out of fear of losing federal funding if they refuse.

Mr. Griffin said in his speech that colleges and universities are motivated to cooperate with Choruss because “[t]hey want to do the right thing.” That is an understatement.

Recently, in response to vigorous lobbying by the music and motion picture industries, Congress imposed certain obligations on schools with respect to copyright infringement on campus. According to an analysis prepared by the American Council on Education, the Higher Education Opportunity Act of 2008 (the “HEA”) requires that colleges and universities “develop a plan to combat unauthorised distribution of copyrighted material.” It also requires that they “offer, ‘to the extent practicable’ and in consultation with the chief information officer, alternatives to illegal downloading.” The consequences of non-compliance are severe. According to Kent Wada, director of IT strategic policy at UCLA, the HEA provides that schools that fail “to combat digital piracy . . . risk fines and being cut off from federal student funds.”

The HEA renders colleges and universities particularly vulnerable to Choruss’s approach regardless of the merits of the legal mechanism Choruss will employ to implement its program. Mr. Griffin seeks to position Choruss as the provider of choice of the means by which colleges and universities can demonstrate (what the schools must hope will pass as) adequate compliance under the very provisions of the HEA that the music industry urged Congress to pass in the first place. (Interestingly, Choruss does not hold leverage equivalent to the HEA over ISPs generally. That may explain why it has singled out colleges and universities on which to experiment.)

“’When I use a word,’ Humpty Dumpty said in a rather scornful tone, ‘it means just what I chose it to mean - neither more nor less.’”

The question remains, how will Choruss implement its scheme? Will it issue licences or rely on covenants not to sue? At Digital Music Forum East, Mr. Griffin announced that because of a felt-need to be precise he would read a prepared speech rather than speak extemporaneously as is his want. He then proceeded scrupulously to avoid specifically using either term to describe what Choruss will do.

But Mr. Griffin need not address the matter directly in order to affect public perception of it. Through his repeated analogy of Choruss to ASCAP, BMI and SESAC, he has firmly fixed in the minds of many that Choruss will operate as a collective licensing organization.

For example, articles about Mr. Griffin’s speech bear headlines such as: Colleges ready to try blanket licenses from Choruss; Consultant Provides Details About ISP Music Licensing Plan; and New label initiative to experiment with campus music licensing. Even bloggers who spot the issues inherent in Choruss’s likely reliance on covenants not to sue almost invariably fall back on the more familiar nomenclature and perpetuate the mischaracterisation that Choruss will be engaged in licensing. Worse, MusicTank, the U.K.-based music industry think tank whose goal is to “bring hot topics into sharp focus,” has uncritically reported that Choruss “goes as far as legitimising students’ P2P behaviour within college networks by providing a blanket licence to cover file sharing activity.” (See page 12 of MusicTank’s March 2009 report entitled “Let’s Sell Recorded Music.”)

In the context of P2P file-sharing by students on college campuses, licences and covenants not to sue are not equivalent, not interchangeable. The differences between them may seem obscure or inconsequential to some, but they are real and substantial.

If Choruss abandons the time-tested approach of licensing and relies instead on covenants not to sue, it will facilitate a brazen money grab by the major labels it represents, leaving songwriters, recording artists and music publishers empty-handed, and college students holding the bag. It is difficult to believe that Mr. Griffin’s handlers at Warner Music Group have not fully vetted the possible outcomes of Choruss’s plan. It could well be, therefore, that it is precisely these results that are intended.

In my opinion, time spent pursuing Choruss’s programme will only further delay implementation of change that might actually meet the needs of the many competing stakeholders in the digital music marketplace. To echo Mr. Griffin’s sentiment, we must not allow more time to be wasted “because this business won’t survive.”