Does Compulsory Licensing of Music on the Internet Violate the Fifth Amendments Takings Clause?
By Laurie Messerly
Edited by Renee Giachino
In recent years, music lovers have discovered vast access to free music on the Internet. This includes not only free listening, but also free downloading of their favorite songs and free copying of choice music. Companies such as Napster gained almost instant notoriety because they provided users with the ability to trade or share copies of sound recordings through centralized file sharing. However, the Internet file sharing of often-unlicensed sound recordings has many in the music industry seeing red. According to the copyright holders of these sound recordings, file-sharing services, such as Napster, are promoting widespread "piracy."
Digital distribution of music over the Internet often includes trading, sharing and downloading music that is subject to one or more copyrights, which makes it the property of others. The primary question is how to compensate music copyright holders for the use of their copyrighted works on the Internet. Traditionally, the copyright holders receive royalty payments for use or distribution of their works through voluntary license arrangements or compulsory statutory licensing fees. But these traditional methods of paying royalties to the copyright holders are increasingly being destroyed by "free" public distribution of music over the Internet.
Music copyright owners, joined by the record labels and others in the music industry, have understandably stormed our courts with claims of copyright infringement, demanding compensation for the delivery of downloaded music from the Internet. Copyright is a specific intellectual property right protected by the United States Constitution. Article I, section 8 empowers Congress to protect authors and inventors against unauthorized use of their copyrighted works by others. Such copyright protection extends to copyright holders in the music industry (songwriters, music publishers, and record companies) from the infringing use of their works by others.
Angered in part by the arrogance of the "Napsters" of the World Wide Web, major record companies and music writers generally have been unwilling to negotiate with Internet "pirates" over copyright infringement issues. This has led to a battle cry from advocates of digital distribution that it is time for Congress to impose yet another statutory royalty payment scheme.
Compulsory licensing of music is a statutory royalty payment scheme for use of copyrighted musical material. The license is "compulsory" because it allows unauthorized use of copyrighted material, so long as the "user" pays the required statutory fees. Section 115 of the Copyright Act1 provides that once a song has been recorded and publicly distributed, the publisher is required to license the song, in exchange for a fee, to anyone who wants to record and distribute the song. Organizations and trade associations have been administering these statutory license fees for music publishers.2
Compulsory licensing takes away one of the copyright holders rights; namely their right to exclude others from use. Property rights are protected by the Fifth Amendment to the U.S. Constitution, which prohibits the government from taking private property for public use without just compensation. Such protection is afforded to intellectual property (copyright, patents, and trade secrets) as well as real property.3
This article argues that it violates the Fifth Amendment Takings Clause for Congress to require music copyright holders to allow unauthorized use of their material on the Internet and to force them to accept licensing fees as established through a compulsory licensing arrangement. Compulsory licenses take away control of copyright holders; a copyright holder has no right to refuse, restrict, or in any way interfere with a licensees enjoyment of applicable statutory rights under compulsory licensing. Congress attempt to make music more easily available over the Internet through compulsory licensing would have the effect of "taking" away the copyright protections that copyright holders have come to expect from Congressional action.
Where the elements of a taking have been satisfied, the Takings Clause requires the government to pay the property owner just compensation. But in light of the unique quality of digital transmissions4 via the Internet, allowing for worldwide distribution of pirated materials in near perfect quality, it is difficult, if not impossible, to easily determine just compensation. Although this does not mean that ultimately a fair market value cannot be determined, this article argues that the arbitrariness that will likely result from statutory royalty schemes should not trump the marketplace solutions proffered by the industry. Multiple technologies exist that meet the polar objectives of the copyright laws: to promote widespread dissemination of original creative works while maintaining copyright integrity. This article concludes that government intervention should be avoided as it discourages private negotiation and inhibits the development of marketplace solutions. This article is intended to serve as a starting point and does not include analysis on many other relevant issues such as free speech, due process, the defense of fair use, numerous federal5and state laws, and U.S. international copyright treaty obligations.
Brief Look at Copyright Law
Article I, section 8 of the United States Constitution grants to Congress the authority to establish copyright protection for authors and inventors. Pursuant to this authority, Congress enacted the Copyright Act of 1976 (the "Copyright Act"),6 which protects authors of creative works against the infringement of those works by others. The Copyright Act provided five basic exclusive rights to the owners of the copyright: (1) reproduction of the work in copies or records; (2) the preparation of derivative works based on the original work; (3) distribution of copies or phonorecords of the work to the public by sale or other transfers, or by rental, lease, or lending; (4) the public performance of the work; and (5) the public display of the work.7 There are two types of copyrights for a recording of musical work: the "musical work" copyright and the "sound recording" copyright. Musical work copyright protects the songwriter and publisher of the music and lyrics of the songs. Sound recording copyright protects the performer of a recording of a work. Radio stations traditionally only paid a royalty for the musical work copyright in a song.8
1. Digital Performance Right in Sound Recordings Act of 1995
The Copyright Act was amended in 1995 by the Digital Performance Right in Sound Recordings Act ("DPRSRA")9, essentially to prevent "pirates" from exploiting the Internet. DPRSRA grants copyright holders a sixth exclusive right: to receive royalties for the digital audio transmission of sound recordings for which they hold a copyright. Before DPRSRA, only songwriters and publishers were paid royalties when their music was broadcast to the public (i.e. when their songs were played in a restaurant or on the radio). Record companies did not have any rights in the public performance of their sound recordings. The DPRSRA specifically addressed broadcast transmissions, subscription transmissions and on-demand transmissions. Additionally, DPRSRA created an exemption for digital broadcasts (i.e. transmissions by FCC-licensed radio stations) and a statutory license for certain "non-interactive" subscription transmissions (i.e. transmissions not made "on demand" in response to a specific request of a recipient.10
2. Digital Millennium Copyright Act of 1998
After DPRSRA, several entities began broadcasting digital music over the Internet, which became known as webcasting. This transmission did not fall into any of the DPRSRA categories. Congress responded by adopting the Digital Millennium Copyright Act of 1998 ("DMCA"),11 which reinforced current copyright law with provisions agreed to in international treaties on worldwide copyright protection, and expanded the statutory license for subscription transmissions to include non-interactive webcasting. According to the Recording Industry Association of America (RIAA), the primary purpose of non-interactive webcasters is to provide audio or entertainment programming and not to sell or promote particular products or services. Non-interactive webcasters (i.e. Spinner.com and Broadcast.com) must obtain a statutory license from the record company to "perform" the sound recording for its users.
The DMCA requires that industry members agree to a statutory rate, otherwise an arbitration panel will determine the royalty rate at fair market value. However, any uses of sound recordings that fall outside the scope of the non-interactive criteria in the DMCA will not qualify for statutory license (i.e. webcast services where a listener can request specific songs). These "interactive" online music services must negotiate a license individually with the appropriate record label.12 Entities such as Napster would appear to fall into this latter category of online music providers since they allow the user to select specific songs to hear. Thus they are not entitled to benefit from any statutory royalty scheme under current copyright laws, but must negotiate with record labels for the rights to perform songs.
Internet music providers, such as Napster, favor another amendment to the Copyright Act, extending compulsory licensing to interactive online music providers. Statutory fees benefit the music service provider by generally setting lower rates than if freely negotiated.13 Record companies, on the other hand, are opposed to this possibility, since they lose their ability to control their intellectual property right and to negotiate royalties, thus suffering significant financial loss.
In A & M Records, Inc. v. Napster, Inc., the Ninth Circuit Court of Appeals denied Napsters request for imposing a compulsory royalty payment schedule, because it would have given Napster an "easy out" of the case.14 Compulsory licensing would have given Napster the freedom to choose to both continue and pay royalties, or to shut down. Music copyright holders would have been forced to do business with a company that profited from the unauthorized use of intellectual properties, and would have lost the power to control their own intellectual property by not being allowed the choice of whether to do business with Napster. Finally, if these copyright holders decided they wanted to do business with Napster, compulsory royalties would have taken away any ability to negotiate the terms of a contractual agreement.15 Clearly the debate is still being waged over how copyright holders will be justly compensated by Internet music providers for the use of their copyrighted musical works on the Internet.
The Takings Clause of the United States Constitution states in part that private property may not "be taken for public use, without just compensation."16 To determine if compulsory licensing of music on the Internet is a taking, four questions must be addressed: (1) Is an existing copyright a property interest protected by the Fifth Amendment? (2) If so, does compulsory licensing of copyrighted music for use on the Internet effect a taking of that property interest? (3) If there is a taking, is it a taking for a public use? (4) If there is a taking for a public use, does compulsory licensing adequately provide for just compensation?17
1. Is an existing copyright a property interest protected by the Fifth Amendment?
Most Supreme Court decisions regarding violations of the Takings Clause involve real, as opposed to intangible, property. However, the Court has held that intangible property can have many of the same characteristics of more traditional forms of property (i.e. trade secrets, patents, contracts, liens), thus concluding that some kinds of intangible property are the kind of property which is constitutionally protected in the Takings Clause.18 In addition to trade secrets and patents, copyrights and trademarks are regarded as intellectual property. Like trade secrets, copyrights are freely assignable.
The right to exclude has traditionally been a key feature of common law property. The Court has repeatedly described the right to exclude others as one of the most essential rights of property and a fundamental element of property rights.19 Justice Rehnquist noted in Kaiser Aetna v. United States that the right to exclude others is generally "one of the most essential sticks in the bundle of rights that are commonly characterized as property."20 Years later, Justice Scalia cited this quotation when he noted that "[t]he hallmark of a protected property interest is the right to exclude others."21 Through the Copyright Act, Congress has granted to copyright holders the right to exclude others from the infringing use of their copyrighted works, subject to public "easements" like fair use. This right to exclude, together with other features, including free assignability, leads to the conclusion that copyright should be an intellectual property right protected by the Fifth Amendment Takings Clause.2. Does compulsory licensing of copyrighted music for use on the Internet effect a "taking" of that property interest?
Following from copyright as a property interest protected by the Fifth Amendment, the issue turns to whether compulsory licensing constitutes a taking. The Supreme Court has generally been unable to establish a set formula for determining when justice and fairness mandate that economic injuries caused by governmental action must be considered a taking, requiring just compensation. The inquiry into whether a taking has occurred is essentially an ad hoc, factual inquiry and specific to the circumstances. Takings are usually found to be a "takings per se" or a regulatory taking.
The Court has found a takings per se when (a) the government action authorizes a permanent physical occupation/invasion of ones property (or regulation authorizing a physical occupation) or (b) the governments regulation of ones private property deprives all use of value of property or does not substantially advance legitimate state interests. When a taking is not a takings per se, the Court generally uses the three factor analysis from Penn Central Transp. Co. v. New York City to determine if the government action goes beyond permissible regulation and effects a regulatory taking, requiring just compensation. Here, we will examine both arguments.
a. Takings Per Se
In Loretto v. Teleprompter Manhattan CATV Corp, the Supreme Court held that a New York City law authorizing a cable company to install cables on private rental property constituted a taking, requiring just compensation. This permanent physical occupation destroyed the owners rights to exclude others from using the property. The power to exclude has traditionally been considered one of the most treasured strands in an owner's bundle of property rights. A property owner suffers a special kind of harm when a stranger invades and occupies the owners property. However, the size of the area permanently occupied is not a factor in determining constitutional protection of private property rights. Such an invasion is more severe than a regulation of the use of property, since the owner may have no control over the timing, extent, or nature of the invasion. A permanent physical occupation is invariably not exempt from the Takings Clause. On the other hand, when a physical invasion is just short of being a permanent occupation (hence a regulatory taking), courts must do a Penn Central balancing test analysis.
Compulsory licensing of music on the Internet destroys the copyright holders right to exclude others from using the copyrighted material. The government sets a royalty rate, the payment of which entitles the licensee to use the work. Users need only to pay the required statutory fee, fixed for all users. It is a license, unauthorized by the copyright holder, for any and all to use copyrighted material. This is a taking of the copyright holders right to exclude, one of the basic exclusive rights granted to the copyright holder. Arguably this is similar to a stranger invading and occupying (using) the owners property without permission from the property owner.
Similar to the situation in Loretto where the cable installation did not destroy all of the owners use of the property, but rather destroyed all of the use of that portion of the property being occupied by the cable, compulsory licensing of music on the Internet permanently destroys all of that particular use of the copyright and the copyright holders right to exclude. What could be closer to a permanent physical occupation? As such, a strong argument can be made that compulsory licensing is a permanent occupation/invasion of copyright, which is a taking per se, requiring just compensation.b. Regulatory Taking
Government regulation of private property generally prohibits or restricts particular uses of the property (laws prohibiting using property for brickyard business, manufacturing carbon black, livery stables, liquor store, excavating). Physical occupations, by contrast, do not merely restrict use of the property, but actually destroy the owners right to possess, use, dispose, and exclude, thus constituting a categorical taking requiring just compensation. Because compulsory licensing destroys the copyright holders right to exclude others from use of his property it should be regarded as a taking per se, thus requiring just compensation.
A more likely reading, however, would be that compulsory licensing is a regulation restricting the copyright use, rather than permanently occupying or invading the copyright holders use of their copyrighted material on the Internet. In the absence of a takings per se, a regulatory taking analysis is appropriate.
The Supreme Court established in Penn Central that where the government action interferes with the owners use or enjoyment of her property (not a physical invasion), the court will consider three factors to determine whether a government action effects a regulatory taking: the character of the government action, its economic impact, and its interference with reasonable investment-backed expectation. A significant number of cases deal with this third factor in determining if a regulation is ultimately a taking. Yet, the Supreme Court's ad hoc and confusing application of the balancing test makes it rather hard to predict when a government regulation will constitute a taking requiring just compensation.
In 1984 the Supreme Court held in Ruckelshaus v. Monsanto that a statute mandating disclosure of trade secrets (intellectual property) was a regulatory taking requiring just compensation. Justice Blackmun used the reasonable investment-backed expectation theory to analyze the taking of this type of intellectual property based on Monsantos ability to control the use and dissemination of the trade secrets it possessed. The right to exclude others is crucial to the very definition of the property interest in trade secrets. Once the trade secret is disclosed to others, or others are allowed to use the data, the holder of the trade secret has lost his property interest in the data. The fact that Monsanto was able to retain some usefulness with regards to the data was found to be irrelevant in determining the economic impact of the regulatory action on Monsantos property right. "The economic value of that property right lies in the competitive advantage over others that Monsanto enjoys by virtue of its exclusive access to the data, and disclosure or use by others of the data would destroy that competitive edge." Loss in market value of the data because of the disclosure of the trade secrets was factored into the economic analysis. Key to the basis of a reasonable investment-backed expectation was that the Federal Government had explicitly guaranteed to Monsanto a measure of confidentiality and exclusive use.
Using the Monsanto reasonable investment-backed expectation analysis for determining whether a government regulation constitutes a taking requiring just compensation, we must examine the value of the music copyright holders ability to control the copyright. A copyright holder depends on the ability to control the use of the copyrighted work by authorizing use or excluding from use. If Congress establishes compulsory licensing of music on the Internet, it forces the copyright holders to allow others to use their music, thus destroying the right to exclude.
Assuming that for many music copyright holders the economic value of the copyright lies in their expectation that their works will be protected from unauthorized use, the presence of this protection stimulates and encourages the creation of more music. Compulsory licensing would permit companies like Napster to pay a statutory fee for enabling copyrighted material to be "swapped" between users. Digital technology allows music that is downloaded and copied from the Internet to be perfectly reproduced (or "burned" onto CDs). Once the user has the perfect copy of music, more copies can be made and distributed. It is likely that if users are able to make infinite numbers of copies of songs without paying, retail sales of music will decline. Even though "store bought" compact discs are already frequently copied and shared, the government should not make it any easier for additional copyright infringements to occur through music sharing sites on the Internet. If musicians and record companies have their copyright protection taken away by compulsory licensing, the value of their copyright as intellectual property will significantly decrease, perhaps even eliminating all economic value beyond the statutory licensing fee.
Moreover, current copyright law protects copyrighted works from unauthorized use. Compulsory licensing forces copyright holders to involuntarily allow use of their works, which negates the very protection granted by the copyright laws passed by Congress under its authority granted by Article I of the Constitution. This type of taking violates the Fifth Amendment and requires just compensation.
3. If there is a taking, is it a taking for public use?
Public use will be found as long as the taking has some conceivable public character. It is hard to imagine a government action that would not fall within this wide scope of public use or public benefit. Arguably a public benefit exists in providing the music through the Internet because the public benefits from increased access to the creative endeavors of artists and music may be more quickly available on the Internet.
Compulsory licensing of music on the Internet is likely to be justified as necessary if record companies and Internet music providers fail to agree to license arrangements. Since music is currently being played on the Internet by a variety of providers in a variety of ways, Congress may justify compulsory licensing as benefiting the public because it eliminates copyright infringement, avoids numerous lawsuits and makes it more efficient to access music on the web.
However, even though case law supports the conclusion that the courts most likely will determine that compulsory licensing is for public use, merely making music more available and convenient for use on the Net does not justify the public use that was intended by the Fifth Amendment. This particular use would seem to stretch the bounds of the Takings Clause beyond where the courts should be willing to go.4. If there is a taking for public use, does compulsory licensing adequately provide for just compensation?
Assuming that compulsory licensing of music on the Internet is a taking that would require just compensation, a statutory royalty payment scheme arguably does not provide just compensation for the music copyright holder. Understanding how just compensation is determined in taking cases is just as confusing as trying to understand the taking analysis itself. In United States v. Cors, Justice Douglas stated that the Court had been careful not to reduce just compensation to a formula. The Fifth Amendment "does not contain any definite standards of fairness by which the measure of just compensation is to be determined The Court in an endeavor to find working rules that will do substantial justice has adopted practical standards, including that of market value But it has refused to make a fetish even of market value, since it may not be the best measure of value in some cases."
In most instances, just compensation will be determined by fair market value of the property taken. Fair market value is the price that a willing buyer will pay a willing seller for the property. However, a court should not use market value if it would seriously undercompensate or overcompensate the property owner for the economic loss. Specifically, the Court has suggested that the market value standard should not be used when it is too difficult to determine or when its application would result in injustice to the owner or public.
Existing means of compulsory licensing use fair market value in establishing a statutory royalty payment scheme. But many of the existing forms of compulsory licenses came before the significant technological advancements of today. Recent advancements in digital technology allow the average individual to copy music (whether store bought or Internet downloaded) in studio quality without a decline in generation-to-generation copying. Internet companies like Napster make file sharing so simple that kids can sit in their room at home, download songs onto their hard drives in studio quality digital format, then burn "studio perfect" copies of the songs onto CDs for unknown and multiple secondary uses. With millions of Napster users downloading millions of songs, digital copying of music from the Internet has to have a severe impact on the economic value of the music copyright. It is very likely that the volume of abuse by unauthorized users has increased with technological advancements. Just because compulsory licensing works in some instances even when there are unauthorized uses, does not mean that it should be applied to the Internet file sharing.
The Supreme Court has suggested that the market value standard should not be used when it is too difficult to determine or when its application would result in injustice to the owner or public. Where endless studio quality copying is made easier through technological advancements, determining fair market value becomes more arbitrary. Although arbitrary determinations do not necessarily mean they are unjust for Fifth Amendment purposes, Congress should be cautious in considering compulsory licensing for the Internet and should consider whether existing methods of valuing compensation are appropriate with todays technological advancements.
The Constitution grants to Congress the authority to protect copyrights as a property right through Article I and the Fifth Amendment. Compulsory licensing of music on the Internet may seem like a convenient way of providing public access to music, while providing compensation to copyright holders, but this destroys the copyright holders right to control his property. Congress should continue to protect property rights such as copyright and allow the music copyright holders the freedom to continue to negotiate terms for others to use their property.
Congress should resist the temptation to impose compulsory licensing as a "quick fix" to the battle for control within the music industry. Legislators should not intervene in the private marketplace for intellectual property rights by imposing compulsory copyright licenses that discourage private negotiation and inhibit the development of marketplace solutions. Industry advances, such as digital envelopes, digital boxes, digital wallets, watermarking and other forms of encryption are being developed and multiple alternatives exist, such as pay-per-listen, that maintain copyright integrity without imposing compulsory licensing and denying the copyright holder the right to exclude. Congress should heed the advice of the U.S. Copyright Office that "[i]n our free enterprise, marketplace system, a government mandated compulsory taking of property rights is a last resort."
J.D. Candidate (May 2003), Chapman University School of Law; B.A. (with honors), California State University Fullerton (1989). I would like to thank Professor John Eastman and Professor Tom Bell who provided helpful editorial comments.
General Counsel, Center for Individual Freedom.
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