Copyright

On August 20, 2018, the 9^th Circuit Court of Appeals reversed a lower court ruling that basic digital remastering of pre-1972 sound recordings created a new sound recording copyright.[ref]ABS Entertainment, Inc. v. CBS Corporation 2018 WL 3966179 9^Th Circuit Court of Appeal 2018[/ref] I wrote a blog post about the ruling at the time of the previous decision. Back then, I noted that this ruling presented two problematic consequences:[ref]Everything Old is New Again! Are We On the Road to Perpetual Copyright in Sound Recordings?[/ref]

• By continually remastering a sound recording, the owner could, in effect, create a perpetual copyright
• By continually remastering a sound recording, the owner could frustrate an artist's right to terminate the work under 17 USC 203 by constantly creating "new" derivative work that only served to move the goalposts at the expense of the artist.

As recounted by the 9^th Circuit: "The district court explained that ‘during the remastering process, at least some perceptible changes were made to Plaintiff's Pre-1972 Sound Recordings,' and that these changes were not merely ‘mechanical' or trivial changes, but rather reflect multiple kinds of creative authorship, such as adjustments of equalization, sound editing, and channel assignment.' The court thus concluded that as to the 57 works reviewed by both parties' experts, the remastered sound recordings were entitled to federal copyright protection as original derivative works."[ref]ABS Entertainment, Inc. at 4[/ref] Again, as I wrote at the time in my blog post: "In particular, the Court recounted the changes made to Ace Cannon's "Tuff" which included additional reverberation, and being played in a different musical key and at a faster tempo. Here's the problem with this analysis. Merely speeding up the rate at which the source tape is played back will both increase the tempo and change the key in which the song is heard. Not being a musician, the Judge would not know this. To me, merely speeding up playback is a fairly mechanical act, and not nearly as complex artistically as re-adjusting the bass, mid-range, treble and equalization on a multi-track recording."[ref]Everything Old is New Again! Are We On the Road to Perpetual Copyright in Sound Recordings?[/ref] At trial, testimony was introduced from one of the engineers that his goal was to "do a better version of maybe what the production process was at that time because you have a little more control that they had."[ref]ABS Entertainment, Inc. at 13[/ref] But the 9^th Circuit rejects this "old wine in new bottles" approach. Making an existing recording better is not the same thing as engaging in creative decisions that substantively change the work. "Although we do not hold that a remastered sound recording cannot be eligible for a derivative work copyright, a digitally remastered sound recording made as a copy of the original analog sound recording will rarely exhibit the necessary originality to qualify for independent copyright protection." (emphasis original)[ref]ABS Entertainment, Inc. at 13[/ref] The Court was particularly critical of CBS' expert testimony, namely that the recordings were different if there was any difference at all in one of four analyzed characteristics.[ref]ABS Entertainment, Inc. at 11[/ref] One of these "differences" was if the source recording and the remastered recording had a differential of 1 decibel or more of loudness.[ref]ABS Entertainment, Inc. at 11[/ref] Again, as I noted previously, loudness is one of those things that tricks the ear of the listener: "..[I had] a conversation I had with a studio engineer (he worked with The Eagles, among others) about the relative merits of [then] new ‘super-audiophile' formats such as SACD and DVD audio. He told me that loudness was a great way to ‘trick the ear.' That in merely making the sounds louder, the general perception of the public was that the recording was now ‘better.' So, simply making the elements louder in volume is a change in the master, and makes the recording seem better, but does not strike me as an ‘artistic choice' that warrants new copyright protection."[ref]Everything Old is New Again! Are We On the Road to Perpetual Copyright in Sound Recordings?[/ref] To this I can add, you can increase the "loudness" of the recording by walking a few steps to your stereo and turning the volume knob clockwise. While you are there you can also adjust the emphasis of the bass, treble, and (depending on how much you spent) the mid-range frequencies. As the Court states: "[I]f [the] task [of the remastering ] seeks to improve quality, brightness or crispness of sound, [this] is persuasive evidence that the final product likely contains little more than a trivial contribution and does not, in fact, result in an original work."[ref]ABS Entertainment, Inc. at 9 [/ref] And most comprehensively, the Court holds: "If an allegedly derivative sound recording does not add or remove any sounds from the underlying sound recording, does not change the sequence of the sounds, and does not remix or otherwise alter the sounds in sequence or character, the recording is likely to be nothing more than a copy of the underlying sound recording and is presumptively devoid of the original sound recording authorship required for copyright protection. Such a work lacks originality. This presumption may, of course, be overcome, by showing that the work contains independent creative content, recognizable contributions of sound recording authorship or variations in defining aspects that give a derivative sound recording a new and different essential character and identity."[ref]ABS Entertainment, Inc. at 9 [/ref] Note that unfortunately, like many courts, this opinion constantly conflates the concepts of "originality" and "authorship," two distinct concepts under copyright law. But I think you get the point. So where can we draw the line? To read this Court, there has to be a substantial change to the underlying recording, not just "remastering." For example, the version of the song "FM" on the compilation "A Decade of Steely Dan" is the familiar version and runs 4:50. The version on "Steely Dan: Gold" has clearly been remixed, has an extended sax solo not present in full on the previous version, and runs for an additional 16 seconds. The version of Billy Joel's "Pressure" that appears on his "Greatest Hits" collection is the single version, not the version that appears on "The Nylon Curtain" album. The version on "Greatest Hits" is missing an entire verse. Columbia Records was notorious for cutting down the length of sound recordings. You can hear Billy express his displeasure about this on the song "The Entertainer," with this lyric: It was a beautiful song But it ran too long If you're gonna have a hit You gotta make it fit So they cut it down to 3:05 You're not alone Billy. The version of "Make Me Smile" on Chicago's "Greatest Hits" runs 2:59. On the collection "Group Portrait" it runs 4:35. But I digress. This is, I think, the minimum necessary to create a new sound recording copyright. Something must be substantially different, not just tweaking the EQ and adding reverb. Clearer are things like "club" remixes where verses and choruses are rearranged and expanded, these should obviously qualify for new sound recording protection. So, merely pouring old wine into a new bottle will not work. There's got to be some new wine in there as well.

Streaming is the future of the music business. Everybody knows this. Except, it appears, the record companies. On Tuesday, August 7, 2018, in an earnings call with stock analysts, Warner Music Groups revealed that it had now sold all of its holdings of stock in Spotify, realizing $504 million.[ref]Warner Music Group Sells Its Entire Stake in Spotify[/ref] This is the culmination of a trend. Within one month after Spotify's shares first traded publically in the United States (April 3, 2018), the labels immediately started dumping their shares.

• Sony Music sold 50% of its shares.[ref]Sony Sells Half Its Spotify Stock, Signaling Payday for Label's Acts & Indies[/ref]
• Warner Music Group sold 75% of its shares.[ref]Merlin Divests Fully From Spotify, Shares Proceeds With Members[/ref]
• Independent Record Label Global Digital Rights Agency sold 100% of its shares.[ref]Merlin Divests Fully From Spotify, Shares Proceeds With Members[/ref]

And now, less than three months after the initial stock dump, Warner Music Group has joined Merlin in the "total divestment club." When asked for a reason for the sell-off, WMG CEO, Steve Cooper, was all standard issue Silicon Valley unicorns and rainbows. As reported by Variety: "'Just so there won't be any misinterpretation about the rationale for our decision to sell, let me be clear:  We're a music company, and not, by our nature, long-term holders of publicly traded equity,' he said. ‘This sale has nothing to do with our view of Spotify's future. We're hugely optimistic about the growth of subscription streaming, we know it has only just begun to fulfill its potential for global scale. We fully expect Spotify to continue to play a major role in that growth.'"[ref]Warner Music Group Sells Its Entire Stake in Spotify[/ref] Except that WMG is not a stand-alone music company. It is wholly owned by the investment firm Access Industries.[ref]Wikipedia - Access Industries[/ref] Which is very much in the business of holding long term equity stakes.[ref]Wikipedia - Access Industries[/ref] One would assume that companies such as WMG and Sony know a thing or two about the music business. One would also assume that as direct shareholders of Spotify, they would be privy to day to day operational information about Spotify that the general public would not necessarily know. Please note that I am not suggesting anything resembling insider trading. Spotify's management style, as discussed below, seems to involve burning large amounts of cash without regard to the bottom line. Something like this would be very apparent to a shareholder of a not yet publically traded company. Yet, if the prospects for Spotify are as rosy as the internet would have you assume, why, in a least two cases, dump the stock and run for the hills? (As of the writing of this post, only Universal Music Group still retains its full share out of the major labels.) As they like to say in politics, "the optics of this are not good." Most of this is likely because the business model of Spotify does not work, and does not have prospects for working anytime soon, as previously posted on this blog.[ref]More Money, No Profit: Is the "Free For All" Ethos of the Internet Killing Streaming?[/ref] But don't take my word for it. Forbes Magazine published this article the day after Spotify shares were first publically traded, titled "3 Reasons Not to Buy Spotify Stock."[ref]3 Reasons Not To Buy Spotify Stock[/ref] The reasons boil down to the simple fact that Spotify has never turned a profit, loses hundreds of millions of dollars every year, and it's getting worse. As reported by Forbes: "Spotify is growing fast, losing money, and burning through a common measure of cash flow. According to its prospectus, between 2015 and 2017, revenues grew at a 45% annual rate to €4,090 million. In 2017, Spotify reported a net loss of €1,235 million, nearly six times more than it lost in 2015, and its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) was negative €324 million."[ref]3 Reasons Not To Buy Spotify Stock[/ref] Further, Forbes quotes Spotify's own prospectus on this point: "Since our inception in April 2006, we have incurred significant operating losses and as of December 31, 2017, had an accumulated deficit of €(2,427) million. For the years ended December 31, 2015, 2016, and 2017, our operating losses were €(235) million, €(349) million, and €(378) million, respectively."[ref]3 Reasons Not To Buy Spotify Stock[/ref] So if you hold shares in a company that is running a deficit of over 2 Billion Euros, with annual losses approaching 400 million Euros, you might come to the conclusion that Spotify is not going to make any real profits for quite some time, and thus no dividend to you, the shareholder. It might also point towards the conclusion that Spotify's continuing losses will not have an upward effect on the stock price, making it more prudent to sell now. Could Spotify turn a profit by reducing its costs? Of course, and Spotify is always ready to point the finger at greedy copyright owners. "We have incurred significant costs to license content and continue to pay royalties to music labels, publishers, and other copyright owners for such content. If we cannot successfully earn revenue at a rate that exceeds the operational costs, including royalty expenses, associated with our Service, we will not be able to achieve or sustain profitability."[ref]3 Reasons Not To Buy Spotify Stock[/ref] Boo! Hiss! Greedy copyright owners! Except there's this. In February of 2017, despite losing truckloads of money for years, Spotify found it necessary to open offices in New York City. And not just in any old office building. It rented space in the newly rebuilt World Trade Center.[ref]Spotify Is Paying $2.77 Million a Month In Rent for Its World Trade Center Offices[/ref] According to Digital Music News, this is 478,000 square feet of office space spread over a total of 14 floors. This was not enough. Spotify later signed an option to take on 100,000 more square feet.[ref]Spotify Is Paying $2.77 Million a Month In Rent for Its World Trade Center Offices[/ref] I suggest that you click on the link provided in the endnote and take a look at the pictures. Nice pool table, guys. The cost of this? Again according to Digital Music News:

• $2.77 million a month, or $33.29 million a year
• Over the 17 years lease, more than $566 million in rent
• $31 million in upfront payments

To this we can add the fact that:

• In 2015, executive and board member pay was $16.9 million, an increase of 300% over the previous year.[ref]Average Annual Salary for a Spotify Employee: $168,747[/ref]
• In 2015, the average Spotify employee made $150,000.[ref]Average Annual Salary for a Spotify Employee: $168,747[/ref]
• During 2015, Spotify lost $253.8 million (235 million Euros).[ref]3 Reasons Not To Buy Spotify Stock[/ref]

It does not seem from these numbers that Spotify is interested in reducing its costs, if it has to come by way of reducing their prestigious digs and creature comforts. If you are a record company, and you know this from close up observation, it might make sense to sell your shares. Also mystifying is that if the Music Modernization Act is passed, Spotify is about to get a huge gift from Congress. This is by way of the provision for complete immunity from lawsuits from copyright owners that will be retroactive to January 1, 2018.[ref]Spotify Is About to Receive a Giant Gift from Congress. Which Might Explain Their Latest Acquisition.[/ref] I have my doubts that this provision is constitutional, but we shall see, when and if the MMA is passed by Congress. But the record companies would know this as well. So why are they selling? Possibly because of the totality of what they know, they are afraid the stock price of Spotify is going to collapse. And it just might. When public trading of Spotify commenced, the share price translated to a market value of $25.6 billion. This is for a company that has a deficit of over $2 billion and loses hundreds of millions of dollars every year, and every year it gets worse. I obviously am not a securities specialist, but these numbers fairly boggle the imagination. How is it that a company that loses hundreds of millions of dollars every year, and always has, is worth $26.5 billion? Yet, for the most part, all we have been reading about is how streaming is going to "save the music business," and glowing reviews about Spotify in particular. These reports inevitably highlight the amount of revenue being realized, without ever qualifying this with the fact that overall revenue in the music business is far below what it was. And almost never questioned is whether streaming, as Spotify performs it, is in fact a sustainable business model. It appears that we largely have our answer. One 50% cash-out. Two 100% cash outs. Sony and Warner's gross revenues from the sale totaled $1.264 billion. The prospect of increasing that amount was either not lucrative enough, or not very likely enough, to get them to stay. As they say, "the optics of this are not good."

The old adage of "be careful what you wish for, because you might get it" was never more true than when looking at Bit Torrent litigation. A recent case from Oregon highlights this. The District Court refused to award attorney's fees to a successful Bit Torrent Plaintiff. The Court justified the denial partly because the same attorney had filed over 300 copyright infringement cases, thus indicating an "overaggressive assertion of copyright claims." The Ninth Circuit, in reversing, pointedly noted that the large amount of copyright cases was due in part to the District Court's own case management order which limited Bit Torrent plaintiffs to suing one defendant at a time.[ref]Glacier Films (USA) Inc. v. Turchin 2018 WL 3542839 Ninth Circuit Court of Appeals at 2 and at endnote 6[/ref] In other words, if you've got 100 people participating in a Bit Torrent swarm, you're going to get 100 lawsuits. It's understandable that the Courts are frustrated with the large number of copyright lawsuits currently clogging up the court system. But these numerous lawsuits are the direct result of various court rulings making the conduct of Bit Torrent suits more difficult. Let's rewind, shall we? Way back when in 2003, the RIAA tried to serve subpoenas on Verizon to obtain the names and addresses of Verizon subscribers they suspected of peer to peer file sharing. Verizon refused. Ultimately, the Court of Appeals for the District of Columbia ruled that Verizon was not subject to a subpoena under the DMCA and directed the District Court to quash the subpoena.[ref]Recording Industry Association of America v. Verizon Internet Services 351 F.3d 1229 District of Columbia Circuit 2003[/ref] So instead of simply serving a subpoena on an ISP, and getting a name, you now have to file a lawsuit. Since you do not know the name of the person behind the IP address, you have to sue them anonymously, then ask the Court for leave to file a third party subpoena. This leads to the eye-catching headlines of "RIAA sues grandmother" or "RIAA sues 12 year old girl." No they didn't. They sued an IP address because that's what the Court said they had to do. They had no idea who was behind the IP address. And, of course, these arguments never explain why being a grandmother confers blanket immunity from being sued for copyright infringement. But, I digress. Next, the Courts struggled with how many people could be sued in a single lawsuit. The theory underlying suing several persons in one case was that due to the nature of Bit Torrent technology, namely, that participants in a "swarm" (technical explanation here)[ref]Copyright Infringement Litigation Over BitTorrent File Sharing: Truth or Troll?[/ref] constituted a "single transaction or occurrence." Some Courts adopted this logic.[ref]Malibu Media, IIC v. Does 1-5 285 F.R.D. 593 District Court for the Southern District of New York, 2012[/ref] Other Courts noted that multiple defendants "raised a panoply of individual defenses, including…technological savvy, misidentification of ISP accounts, the kinds if WiFi equipment and security software utilized; and the location of defendant's router."[ref]In Re: BitTorrent Adult Film Copyright Infringement Cases 296 F.R.D. 80 Eastern District of New York 2012 at 12[/ref] I can understand and appreciate the Court's position. However, requiring the Plaintiff to sue only one defendant at a time ensures that copyright owners wishing to vindicate their rights will be forced to file numerous lawsuits, possibly in the hundreds. How this is going to prevent "a waste of judicial resources"[ref]Id. at 15[/ref] is a mystery to me. And, thus is born the tautology of the "copyright troll." Because the copyright owner has been forced by Court rulings to file lots of lawsuits against Bit Torrent users, the copyright owner now becomes a "copyright troll," well, because they file lots of lawsuits. Part of the antipathy towards Bit Torrent Plaintiffs arises from the fact that many of the early cases were brought by producers of pornography.[ref]Id. at endnote 7[/ref] This has led to, in the words of the Ninth Circuit, a "one size fits all"[ref]Glacier Films at 1[/ref] approach to Bit Torrent litigation, in which the sins of other Bit Torrent cases are brought to bear on individual Bit Torrent cases. Yet, the case at issue, Glacier Films (USA) Inc. v. Turchin, does not involve pornography at all. Plaintiff is the producer of a mainstream Hollywood movie: American Heist. The movie was set for wide release but was leaked over the internet before its release, where it was downloaded over 100,000 times.[ref]Glacier Films at 2[/ref] So devastating was this to the financial prospects of the film, that the distribution deal collapsed, forcing Plaintiff to release the film straight to DVD.[ref]Glacier Films at 7[/ref] Plaintiff tracked copies of the movie to Defendant's IP address, where their film had been shared over 80 times, and was associated with 700 other movie titles. As you might imagine, Defendant was less than the picture of virtue. His litigation tactics bore this out.

• Failed to respond to Plaintiff's numerous letters, forcing the issuance of a subpoena.
• At his deposition, admitted to pirating American Heist. In fact, he had continued to use Bit Torrent to pirate movies right up to the day before his deposition.
• Failed to file an answer to Plaintiff's complaint for almost three months.
• Filed an answer only after Plaintiff moved for default.
• Despite admitting pirating Plaintiff's work in his deposition, denied liability in his answer.
• Raised seven "baseless" defenses, including that downloading via Bit Torrent was "fair use" and that American Heist was not eligible for copyright protection.[ref]Glacier Films at 7-8[/ref]

After eight months of this, the parties reached a settlement: $750 in statutory damages, a permanent injunction against further distribution, and attorney's fees, as set by the Court. The Court, based on this record, awarded no attorney's fees. The District Court rationalizes this by calling Plaintiff's victory de minimus. It ruled that since Plaintiff's film had been downloaded over 100,000 times but the suit at issue resulted in an injunction against only one person, it hardly would have an effect on piracy.[ref]Glacier Films at 4[/ref] This, of course, ignores the fact that this is the result of the Court's own order that all Bit Torrent defendants had to be sued individually.[ref]Glacier Films at 4[/ref] The Ninth Circuit wastes no words: "An assertion that ‘lots of other people are doing it too' is not a persuasive equitable principle and does not counsel toward a denial of fees. Instead we see dissonance between the district court's citation to the large number of infringers and its conclusion that fees are unnecessary as a deterrent."[ref]Glacier Films at 4-5[/ref] Also: "This case fits squarely within the tradition of copyright enforcement. Turchin's conduct—pirating and distributing dozens of copies of Glacier's film—does not "promote the Progress of Science and useful Arts"…[r]ather, this case is the digital equivalent of standing outside the neighborhood Redbox—or Blockbuster Video, for fans of history—and giving away copies of the movie for free. Nevertheless, the district court did not analyze whether Turchin's conduct furthers or frustrates the goals of the Copyright Act."[ref]Glacier Films at 6[/ref] Finally, but most significantly, the Ninth Circuit reverses the District Court for its "one size fits all" determination that makes this Plaintiff pay for the sins of other Bit Torrent litigators. "Instead, its decision rested on a view that awarding ‘attorney fees in this case would only contribute to the continued overaggressive assertion and negotiation of' other copyright claims. Apparently, the court saw the fact that Glacier's counsel had filed 300 copyright actions against BitTorrent infringers as an "overaggressive assertion of copyright claims," which counseled toward a denial of fees. (continuing in endnote) That Glacier's counsel filed many actions may be a product of the district court's Case Management Order, which provides that copyright holders may name only one potential infringer per BitTorrent suit." Precisely. "The court also based its decision on generalizations about other BitTorrent cases, not on the "totality of circumstances in [this] case… (citation omitted)The district court nonetheless lumped the present case together with the worst of "these BitTorrent copyright cases," even though it shares none of the unsavory characteristics. Here, Glacier did not "demand thousands of dollars to settle a claim ... where the infringing defendant admits early in the case that they illegally downloaded the movie." The company did not seek a confidential or uncounseled settlement not subject to court approval, or "pursue particularly vulnerable individuals." Nor is Glacier a quintessential "copyright troll"—a term defined by the district court as an entity "more focused on the business of litigation than on selling a product or service or licensing their [copyrights] to third parties to sell a product or service."[ref]Glacier Films at 7[/ref] This is precisely where the Courts struggle to get it right. Yes, litigation should not be a "profitable business model"…for the copyright owner. It does have to be a profitable business model for the attorney who provides services. Here, the attorneys sought $4,833.35 in attorney's fees,[ref]Glacier Films at 3[/ref] some of this clearly attributable to the Defendant's bad faith and dilatory tactics. Yet, an attorney who incurs $4,000 in fees to recover $750 will soon find himself without paying clients, and out of business. The Courts in turn will find that settlements such as these, for the minimum amount of statutory damages, will disappear. Without the prospect of attorney's fees, in this Court being denied on a blanket basis, Plaintiffs will insist on a damages award at least equal to the fees incurred, and the litigation will roll on, clogging up your docket. Be careful what you wish for…