In short, what we are seeking is maximum freedom to innovate and experiment along with a firm assurance that in that process the interests of those on whom education must continue to lean are not damaged.

Sincerely yours,

JOHN F. MORSE, Director of the Commission.

SUPPLEMENTAL STATEMENT OF BURTON LANE, AMERICAN GUILD OF AUTHORS AND COMPOSERS

(Statement relative to S. 597 Before the Subcommittee on Patents, Trademarks, and Copyrights, Senate Judiciary Committee, 90th Cong., 1st Sess., May 1, 1967)

3 M'S DESIRE FOR A COMPULSORY LICENSE

We wish to comment with respect to the statement submitted to you by Allen Arrow, Esq. on behalf of Minnesota Mining & Manufacturing Company, popularly known as 3M.

In that statement 3M asks for the removal of the last sentence of section 115 (a) (1) of the current bill, which reads as follows:

"A person many obtain a compulsory license only if his primary purpose in making phonorecords is to distribute them to the public for private use."

Removal of this sentence would, so far as the wording of the bill is concerned, delete all restriction upon the types of recordings for which the compulsory license could be invoked. Such removal would, in theory at least, permit makers of all types of recordings, in addition to phonograph records, to invoke the compulsory license.

3M's reason for desiring a compulsory license and maximum royalty rate is the same as the phonograph record industry-to secure a competitive advantage over music publishers and writers by statute, a demand contrary to all our tradition and economic way of life.

The Report of the House subcommittee (Report # 83, 90th Congress, 1st Session, submitted by Mr. Kastenmier) on the House version of the current bill (prior to its passage by the House of Representatives) specifically discusses application of the compulsory license to background music tapes, a fact that is not referred to in the 3M statement to your committee. Page 67 of that Report contains the following:

"The second sentence of clause (1), which has been the subject of some dabate, provides that 'a person may obtain a compulsory license only if his primary purpose in making phonorecords is to distribute them to the public for private use.' This provision was criticized as being discriminatory against background music systems, since it would prevent a background music producer from making recordings without the express consent of the copyright owner; it was argued that this could put the producer at a great competitive disadvantage with performing rights societies, allow discrimination, and destroy or prevent entry of businesses. The committee concluded, however, that the purpose of the compulsory license does not extend to manufacturers of phonorecords that are intended primarily for commercial use, including not only broadcasters and jukebox operators but also background musie services."

Removal of this sentence would benefit only 3M and other companies who make background music tapes. During the entire history of the present Copyright Law of 1909, only phonograph record companies, and no other makers, have deemed themselves legally or realistically entitled to invoke the compulsory license. Makers of recordings (disc, tape or otherwise) other than phonograph record companies, have not considered that the compulsory license in the 1909 Law was intended to apply to recordings other than phonograph records. The makers of tapes for use in automobiles, airplanes and similar places, do not make new recordings, but utilize phonograph records which have achieved some success. (For their purposes, they desire particular renditions which have proven their appeal.) They obtain their reproduction rights by license from the phonograph record makers of the particular records. They pay an agreed fee to the phonograph record companies, who pay the publishers and writers their royalties. The background music makers make new recordings, which at present, are solely instrumental without vocal renditions.

The fact that only phonograph record companies have considered themselves as coming under the existing compulsory license, is contrary to the conclusion set forth in Mr. Arrow's statement, that this compulsory license was not intended to be confined to phonograph records and that the restriction in the present bill is a new restriction. 3M itself has never invoked or attempted to invoke the compulsory license.

The fact that only phonograph makers have considered themselves as being within the scope of the compulsory license is confirmed by Professor Harry G. Henn, in his study of the compulsory license provisions of the present law (Study No. 5 of Studies Prepared for the Subcommittee on Patents, Trademarks and Copyrights of the Committee On the Judiciary, United States Senate, 86th Congress, 1st Session pursuant to S. Res. 53). In this Study, Professor Henn states (p. 51 of the Study) the following:

"Motion picture producers, when using copyrighted music in sound tracks, negotiate for synchronization rights and do not invoke the compulsory license provision.

"Like motion picture producers, the broadcasting industry, in making records, electrical transcription, magnetic tape, sound motion pictures, or kinescope recordings involving copyrighted music for radio and/or television use, negotiates for the necessary recording rights."

The fact that the present compulsory license was intended to apply only to phonograph records, is also expressed by the compulsory license royalty rate of 24. This is a rate which, however inequitable, was obviously intended to relate to a retail price of phonograph records. A 2¢ rate has a relationship to a record having a retail price of something about $1.00 or less, containing one selection per side. It has a relationship to a record containing a group of compositions and selling for something about $4.00 or $5.00. It does not have relationship to a motion picture sound track or a background music tape which is not sold, or to a background music tape which is sold to users, as in the case of the 3M tapes. The present 3M tapes usually contain 700 compositions each. At 2¢ per composition, the maximum total royalty of a 700-selection tape is $14.00. (The total royalty could be lower, as no doubt some of the selections are in public domain.) According to our information, the 700-selection tape is sold for $99.00. We cannot believe that a 2¢ royalty per composition has any direct relationship to a tape which sells for many dollars. For this reason alone (aside from other reasons set forth in this statement) we believe it obvious that the present compulsory license was not intended to apply to such devices as background music tapes. The new bill simply carries out, in specific terms, the limitation of the compulsory license provision to phonograph records, which was implicit in the bill of 1909.

However, even though the compulsory license provision in the present law in practice has been construed to comply only to phonograph records in various forms, in view of the fact that this sentence is in the present bill, its removal might be construed as evincing legislative intention to have the provision apply to all sorts of recordings in addition to phonograph records or at least some would attempt to so contrue it.

The compelling reason for retention of the compulsory license, in new copyright law, is that it has existed since 1909. The record industry has vociferously chorused that their methods of business during all this time are based upon the existence of a compulsory license. As has been aptly said, if there were no compulsory license provision in the old law, there would be none in the new law. The compulsory license is a statutory restriction that limits fundamental rights. Consequently, it should be as restricted as possible in its application and certainly it should not be extended.

The reason for the compulsory license in the present law, no longer exists. The Register of Copyrights, in his report on the General Revision of the U.S. Copyright Law, July 1961, 87th Congress, 1st Session, stated the following in relation to the passage of the 1909 Law:

"As stated at some length in their reports (H. Rept. No. 2222, S. Rept. No. 1108, 60th Cong., 2d sess.) the congressional committees felt that composers should be given adequate compensation for the use of their music in sound recordings. They were first inclined to give the copyright owner the exclusive right to make sound recordings, in the same way that all other rights are given exclusively. During the course of the hearings, however, it was learned that one dominant record company, anticipating the establish

ment of an exclusive recording right, had contracted with the leading music publishers for the exclusive right to record all their music. To forestall the danger that this company would acquire a monopoly in the making of records, the committees adopted the device of the compulsory license."

"The danger of a monopoly in the situation existing in 1909 was apparently the sole reason for the compulsory license. There are now hundreds of recording companies competing with one another, and the music available for recording is widely scattered among hundreds of competitive publishers. The market for recordings and the number and variety of compositions recorded have increased tremendously. The volume of music available for recording is immense and constantly growing." Professor Henn, in his aforesaid Study, pointed out that the compulsory license principle embodied in the Copyright Law in 1909 was a compromise, and stated: "Whether the 1909 compromise was sound in the light of the then-existing situation has been much debated. Be that as it may, the situation today is substantially different.

"In 1909, the rights under consideration had been held nonprotectable and hence were available to all. The Aeolian Co. and the then major music publishers had allegedly made exclusive contracts which would become effective upon the recognition of mechanical reproduction rights by court decision or congressional enactment. This potential monopoly, whether real or imagined, was regaded as a serious threat at a time when effective antitrust regulation was still in its infancy." (emphasis ours).

The publishers against whom 3M levels its rather uncertain accusations, have not demonstrated in any way, shape or manner that they are or will be inclined to combine against 3M. Indeed, the reverse is true at least two of the large music publishing companies which are the subject of 3M's purported apprehensions, entered into agreements with 3M several years ago, for the furnishing of their music to 3M for its background music tapes. 3M has entered into such contracts with a substantial number of music publishers. It states that its entrance into the music field "has been a highly successful development," and that since 1965 it has recorded over 2,000 selections! Just how is this resourceful company-one of the country's corporate giants, "discriminated" against?

3M talks of a possible combination of a few music publishers against it, as though this were a foregone conclusion. Actually it is an impossibility. The Department of Justice has demonstrated that it is constantly ready to proceed against combinations of copyright owners, and others in the same or related fields, as demonstrated by its suits against ASCAP and BMI, its fairly recent suit against Music Corporation of American and its suit some years ago against the major motion picture producer-distributors. 3M's argumentation against the threat of monopoly is entirely without foundation. 3M is certainly also aware of the alertness of the Department of Justice, as the Department proceeded against 3M itself in connection with restraint of trade.

3M maintains the notion (page 7), that the small group of music publishers which it has set up as a straw threat, might combine to "merge performing and recording rights." 3M must surely be aware of the fact that the writers, who own the compositions in the first place, have something to say about this and would emphatically oppose any such move. Morever, the performing rights societies would definitely refuse to take part in any such gambit and abandon their function and reason for being. The very statement (page 8) of Mr. Arrow quotes Sidney M. Kaye, Chairman of the Board of BMI, in opposition to any such thought.

Yet another, but important, aspect of 3M's demand for a compulsory license, represents nothing less than an attempted interference with the contract rights of others. The standard form of contract of American Guild of Authors and Composers, which has been signed by many thousands of writers, with publishers, over many years, contains provisions intended to prohibit the publishers who have ignored these contracts, from entering into certain license agreements, including licenses such as those made by 3M, without the express written approval of these writers. A compulsory license by which 3M could obtain licenses of the compositions of such writers, without their consent, would in fact deprive them of this contractual right. It would be in effect a negation of important provisions of their contracts with their publishers and constitute an interference

with the rights of the writers in their relations with their publishers. We have every reason to believe that one purpose of 3M's desire for a compulsory license is to bring about just such a negation of the rights of the writers.

3M cries "discrimination" when in fact it seeks to extend an existing discrimination. The compulsory license, as has been amply demonstrated in the statements submitted to your Subcommittee, is a discrimination against music publishers and writers. It should not be extended to discriminate further against them. The existence of a form of discrimination should not in itself be a reason, as 3M maintains, to extend the discrimination.

PAYMENT OF ROYALTIES UPON ALL RECORDS MADE

We desire now to comment upon the request of the phonograph record industry, regarding manner of accounting for record royalties.

The present bill (Sec. 115(c)(2)) provides that:

"The royalty under a compulsory license shall be payable for every phonorecord made in accordance with the license." (italic ours).

In the statement of Miss Isabelle Marks before you, the record industry requests that the royalty apply only to records "sold and distributed." The amendment of Senator Williams to this bill (Amendment No. 131) provides (page 5 of the Amendment) that "*** the royalty under a compulsory license shall be payable for every phonograph record made in accordance with the license and distributed to the public." (italic ours).

We are most distressed by this request. We urge as strongly as we can that it be denied.

We do not believe that we are overfearful in our belief that if royalties for records produced under the compulsory license may be paid on some basis. other than on all records made, the result will be disasterous for music publishers and writers.

Here again, this industry desires to "have it all its own way." We submit that if they desire the advantage of a compulsory license, they should be willing to live with a conditon which may possibly be as light disadvantage to them, since such conditions is vitally important in protecting publishers and writers. Accounting for royalties for records manufactured under compulsory license is related to factors which do not exist in the case of a negotiated agreement. Under compulsory license, a music publisher must do business with any and all record makers, regardless of their history, reputation or culpability concerning financial responsibility, honesty and accounting for royalties to the publisher. He is compelled, without his consent, to license record makers who have established a pattern of evasion of royalty obligations. Such persons invoke the compulsory license, and manufacture and distribute records, and then resort to chicanery, while the copyright owners must stand by helplessly and then find themselves unable to obtain proper accountings. Requirement of payment and accounting for all records made will greatly help the publishers to obtain adequate accountings, and make it more difficult for such record makers to evade their financial liabilities.

The statements before you, submitted by Julian T. Abeles, Counsel for National Music Publishers Association, who has been concerned for many years with the legal pursuit of such record makers, give more details concerning this situation.

Requirement that record companies pay royalties and accounts for all records made (in the absence of a negotiated agreement) is even more necessary now than in the past, in view of certain practices that have been adopted by the record industry.

One practice is the giving away of records as gifts, by record clubs to their subscribers as inducements for the joining of the record clubs or for the purchase of other records. Practically all the record clubs are owned by record manufacturers. The publishers and writers should not be deprived of royalties on such records given away for the economic benefit of the record manufacturers. Under the compulsory license, a record company, if obligated to account only for records sold, could manufacture an unlimited quantity of records and distribute them "free," e.g., to its record club, or for promotion purposes related to other, unrelated records.

Record companies have adopted the practice of giving away large quantities of records (as distinguished from limited quantities of samples or records fur

nished for promotion in the traditional manner) to stores or distributors. These records are then sold to the public at usual retail prices. These records are furnished "gratis," to promote sales of others of the same records, or other, unrelated records. If the record makers are not required to pay and account for all records made, they can find various ways of giving away records free, for various advantages to themselves, without accounting or compensation to the publishers and writers, for such records. You may well be assured that many record companies will take advantage of any and all "loopholes," or relaxation of payment and accounting requirements, in order to bypass publishers and writers or obtain unfair advantages. Such dealing should not be facilitated by law.

Miss Marks' statement gives two reasons for the desire of the record companies to be permitted by law to pay and account on some basis other than on all records made.

One reason is, that music publishers will suddenly, en masse, decide to insist upon accountings for all records made. In practice, as Miss Marks confirms in her statement, the record companies and music publishers negotiate agreements in which accounting is made on another basis or bases mutually acceptable to them. Any change in the statute will not compel or encourage music publishers to change a practice which they and the record makers have established for many years, and which seems to work well as a practical matter. The record industry's "fears" in this regard are asserted only in their effort to gain unfair advantages which they should not be permitted to have.

The second reason given by the record industry in its attempt to alter the accounting provisions of the law, is that a record company is inevitably left with an inventory which it can no longer sell, even in the case of a successful record. Many manufacturers, in many industries, are likely to be left with unsold inventory representing various kinds of costs paid and not recouped. The existence of such inventory is part of the normal cost of doing business, and the expenses entailed are of various kinds in addition (in the record business) to record royalties. A well-managed record company, on the basis of its experience, can readily minimize its unsold inventory, particularly under the modern methods of manufacturing which this industry has adopted. Records can be quickly "pressed" (reproduced) for distribution. Orders can be quickly filled without the necessity of excessive inventories.

Surplus inventories are usually further reduced or entirely eliminated, by the fact that they are disposed of ("remaindered") for sale at reduced prices in stores which specialize in such sales.

In short, the presence of surplus inventories is not as much of an economic blow as the record industry would have you believe. Its existence should not be accepted as a reason for a handicap to be imposed upon publishers and writers in their attempt to obtain proper accountings for record royalties.

In its argumentation for keeping a compulsory license and statutory royalty fee, the record industry has constantly maintained that the compulsory license and statutory rate have been a basic factor in the expansion and prosperity of this industry. As we have said, the chief reason the compulsory license is retained in the present bill, is that the record industry has emphatically maintained that the compulsory license and statutory rate are an established aspect of its method of operation. That being the case, the record industry cannot in good faith now maintain that one aspect of the compulsory license procedure, i.e. the necessity to account for records made rather than records sold or distributed, is injurious and should be changed. In other words, if, as the industry maintains, the compulsory license system has been so uniquely advantageous to it, it should not be permitted at the same time to maintain that one part of it could now cause it injury.

The law permits record makers to invoke the compulsory license and produce records without the consent of the publishers and writers. If it also permits them to account on some basis other than for all records made, a door will be opened through which publishers and writers can be despoiled in a wholesale manner in a number of ways. This will be the real consequence of this change in the bill, as desired by the record companies. Their request in this regard will not have innocent results, nor is it innocently made. We urge that your subcommittee give most earnest consideration to the writers and publishers which will inevitably come to pass if the bill is changed to provide that makers of records under compulsory license may with impunity account on some basis other than for all records made.