Pandora Media, Inc., (“Pandora”), with over 250 million registered users and over 70% of the market share of Internet radio, is known as a leader in the digital music industry.
In 2013 alone, Pandora streamed 16.7 billion hours of music, including stations that featured genres such as “Motown,” “Oldies,” “70s Folk,” and “Classic Rock.”
While Pandora streams iconic songs from these genres, Pandora ceased paying royalties on songs recorded before February 15, 1972 (“pre-1972 sound recordings”), which are only protected by state copyright laws. In an effort to recoup unpaid royalties by Pandora, Capitol Records, LLC, among other record companies, sued Pandora under New York state law for copyright infringement, misappropriation, and unfair competition, leaving Pandora potentially liable for millions of dollars in damages. This article provides an overview of the Pandora case and summarizes some of the complexities of copyright protection of pre-1972 sound recordings.
Record Labels Launch Copyright Infringement Lawsuit against Pandora
Capitol Records along with four other record labels, including Sony Music Entertainment, UMB Recordings, Warner Music Group, and ABKC Music & Records (collectively, “Plaintiffs”), filed a copyright infringement lawsuit on April 17, 2014, in the New York Supreme Court in Manhattan against Pandora. Plaintiffs assert that Pandora copied “thousands” of pre-1972 sound recordings and has been streaming them without holding a license or paying royalties, in violation of New York State copyright law. Plaintiffs allege that Pandora exploits the artists of pre-1972 sound recordings by not paying royalties, and argue that “[t]hese artists and their families rely heavily on the income they receive from the commercial exploitation of their performances in Pre-1972 Recordings.”
The complaint also includes a non-exhaustive list of over 1400 pre-1972 sound recordings that are allegedly being infringed, including iconic hits, such as the Beatles’ “Hey Jude,” Aretha Franklin’s “Respect,” Bob Dylan’s “Like a Rolling Stone,” Elvis Presley’s “Hound Dog,” and Jackson 5’s “ABC.” In addition to compensatory and punitive damages, Plaintiffs seek an injunction to prevent Pandora from reproducing and streaming pre-1972 sound recordings for “massive and continuing unauthorized commercial exploitation.”
In its answer, Pandora admitted to copying Plaintiffs’ pre-1972 sound recordings to its servers, which are located outside the State of New York, and streaming them to Pandora users within the State of New York. Internet streaming of music is considered a “public performance” under copyright law. Pandora also noted that up until February 2012, it paid royalty fees for streaming the pre-1972 sound recordings owned by the Plaintiffs. Pandora, however, asserts fifteen affirmative defenses, including that the complaint fails to state a claim upon which relief may be granted.
Record Labels Open Pandora’s Box for More Cash Money
Understanding the parties’ motives behind this copyright infringement battle over royalties requires some perspective. There are generally two forms of royalties paid for music. While publishing companies and songwriters receive composition royalties, record labels and performing artists receive sound recording royalties. Under the U.S. Copyright Act, publishing companies and songwriters enjoy the full bundle of exclusive rights, including reproduction and public performance rights. On the other hand, record labels and performing artists only enjoy exclusive rights with respect to the reproduction, derivative works, and distribution of their sound recordings. Therefore, when a song plays on the terrestrial radio, the publishing companies and songwriters get paid, but the record labels and performing artists do not.
However, record labels and performing artists were finally allowed to collect royalties whenever a song they produced or sang was streamed in digital format after the passage of the Digital Performance Right in Sound Recording Act (“DPRA”) in 1995 and the Digital Millennium Copyright Act (“DMCA”) in 1998, which further expanded the DPRA to include nonsubscription-based, non-interactive digital audio transmissions. Digital music services, such as Pandora, Sirius XM, and Spotify are thus required to pay sound recording royalties through a statutory license provision. In fact, Pandora paid out forty-eight percent of its total revenue last year to SoundExchange, a performance-rights administrator created by the DPRA to negotiate, collect, and distribute royalties to record labels and performing artists. When Pandora pays SoundExchange, SoundExchange distributes fifty percent of the sound recording royalties to the record labels, forty-five percent to the performing artists, and the remaining five percent to the session musicians and backup singers on the recording. But the record labels and performing artists are not getting paid by some of the digital music services, such as Pandora, for songs recorded before 1972 because the U.S. Copyright Act does not protect pre-1972 sound recordings. As such, record labels are now turning to state law for a larger piece of the pie.
The U.S. Copyright Act defines “sound recordings” as works that are fixed from “a series of musical, spoken, or other sounds, but not including the sounds accompanying a motion picture or other audiovisual work.” Sound recordings made prior to February 15, 1972, are only protected by state law. This protection will last until the year 2067, at which time state protection will be preempted by federal law and pre-1972 sound recordings will enter the public domain. Consequently, states are free to protect pre-1972 sound recordings via statute and common law, making the scope of protection for these sound recordings broad and inconsistent from state to state. On February 15, 1972, however, sound recordings were brought within the scope of federal copyright protection. Thus, sound recordings made after this time are protected by federal law.
New York Common Law Copyright Protection of Pre-1972 Sound Recordings
Here, Plaintiffs correctly assert that while federal law does not protect pre-1972 sound recordings, the State of New York recognizes exclusive ownership rights of pre-1972 sound recordings. Although not at issue in this case, article 275 of the New York State Penal Code contains multiple provisions that apply exclusively to pre-1972 recordings. The provisions are designed to protect anyone whose legitimate business interests are harmed by those who profit from pirated recordings. Instead, Plaintiffs’ claims rely solely on New York common law.
In 2005, the New York Court of Appeals in Capitol Records, Inc. v. Naxos of America, Inc. affirmed the existence of common law copyright protection for pre-1972 sound recordings until 2067, the effective date of federal preemption. Under New York law, copyright infringement is established by showing: (1) the existence of a valid copyright; and (2) unauthorized reproduction of the work protected by the copyright. In Naxos, Capitol Records brought a common law copyright infringement action against Naxos for selling restorations of original recordings that were made in England in the 1930s and were exclusively owned by Capitol Records. The district court granted Naxos’ motion for summary judgment and Capitol Records appealed to the Second Circuit. The Second Circuit asked the New York Court of Appeals to determine whether there is common law copyright protection for pre-1972 sound recordings. In determining that common law copyright protection did exist for pre-1972 sound recordings, the New York Court of Appeals recognized that because the original recordings were pre-1972 sound recordings, it was New York’s responsibility to determine the scope of copyright protection under its common law. The New York Court of Appeals also acknowledged that common law copyright infringement and unfair competition are distinct causes of action under New York law.
Additionally, the Naxos case is significant because it potentially broadened the scope of copyright protection for pre-1972 sound recordings by considering the sound recordings at issue to be “unpublished” despite their commercial availability to the public. Typically, common law protection of a work ceases when the work is made publically available because federal copyright protection takes over. However, because pre-1972 sound recordings are ineligible for federal copyright protection, the Naxos court reasoned that “the public sale of a sound recording otherwise unprotected by statutory copyright does not constitute a publication sufficient to divest the owner of common-law copyright protection.”
Unlike other jurisdictions, common law precedent exists in New York involving pre-1972 sound recordings that may bear on the outcome of this case. For example, in 2014, the New York Supreme Court in Capitol Records, LLC v. Harrison Greenwich, LLC, held a restaurant owner liable for common law copyright infringement for playing a pre-1972 sound recording on the restaurant website without a license. The court found that it was undisputed that the defendant uploaded the pre-1972 sound recording to the website, and that it was “well settled” that this action constituted copyright infringement. Additionally, the court reiterated that copyright infringement is akin to a strict liability offense because the plaintiff need not prove bad faith or ill intent on behalf of the defendant in order to succeed. Likewise, in the Pandora case, the New York Supreme Court will need to decide whether Pandora’s actions fall under the broad protections of its common law.
Implications and the Future of Pre-1972 Sound Recordings
A favorable outcome for the record labels in this case could have a major impact on Pandora’s business. In a filing with the Federal Securities and Exchange Commission, Pandora addressed the potential negative impact of being required to license pre-1972 sound recordings by stating: “[i]f we are required to obtain licenses for pre-1972 sound recordings to avoid liability and are unable to secure such licenses, then we may have to remove pre-1972 sound recordings from our service, which could harm our ability to attract and retain users.” Pandora could also be forced to stop streaming these songs if the record labels are successful. On the other hand, a win for the record labels could mean increased revenues for the artists of the pre-1972 sound recordings. However, Pandora is not alone in the royalty battle, as other satellite and Internet radio providers are facing similar lawsuits.
While record companies pursue litigation to recover royalties, some lawmakers and recording artists are seeking to resolve royalty issues with digital radio by bringing pre-1972 sound recordings under the protection of the U.S. Copyright Act. In May 2014, a new Act titled “Respecting Senior Performers as Essential Cultural Treasures” or, “the RESPECT Act,” was introduced into the House of Representatives and proposes an amendment to 17 U.S.C. § 114(f)(4) that would create a statutory license for pre-1972 sound recordings. This amendment would not alter any remedy available under state law, which, for now, is the only avenue by which record labels may seek damages from unpaid royalties for pre-1972 sound recordings.
While the outcome of the Pandora case remains to be seen, this case highlights the challenges for record labels, artists, and digital music providers alike in the licensing and use of pre-1972 sound recordings.
 Defendant Pandora’s Answer to the Complaint at ¶ 24, Capitol Records, LLC v. Pandora Media, Inc., No. 651195/2014 (Sup. Ct. N.Y. 2014), [hereinafter Answer].
 Id. at ¶¶ 5, 24.
 Id. at ¶ 4 (admitting that it had not “paid royalty fees for its public performance of Plaintiffs’ Pre-1972 Recordings since February 2012.”).
 Plaintiffs’ Complaint for Common Law Infringement at ¶¶ 39-49, Capitol Records, LLC v. Pandora Media, Inc., No. 651195/2014 (Sup. Ct. N.Y. 2014), [hereinafter Complaint]. Along with asserting a common law copyright infringement claim, Plaintiffs also brought a claim for unfair competition under New York state law. Id. at ¶¶ 50-66.
 Id. at ¶ 1.
 Id. at ¶ 2.
 Schedule A of Plaintiffs’ Complaint for Common Law Infringement, Capitol Records, LLC v. Pandora Media, Inc., No. 651195/2014 (Sup. Ct. N.Y. 2014).
 Complaint at ¶¶ 19-20; ¶ 1.
 Answer at ¶ 17.
 See Capitol Records, LLC v. ReDigi Inc., 934 F.Supp.2d 640, 652 (S.D.N.Y. 2013) (noting that “audio streams are performances because a stream is an electronic transmission that renders the musical work audible as it is received by the client-computer’s temporary memory. This transmission, like a television or radio broadcast, is a performance because there is a playing of the song that is perceived simultaneously with the transmission.”) (citations omitted).
 Answer at ¶ 4.
 Pandora asserts that Plaintiffs’ claims are barred, in whole or in part, by the doctrine of waiver, estoppel, acquiescence, unclean hands, implied license, and fair use. Answer at ¶¶ 13-14. Pandora further asserts the statute of limitations and lack of harm from the alleged conduct bars Plaintiffs’ claims. Id. at ¶¶ 14-15.
 John McDuling, The Future of Digital Music May Hinge on Elvis, Quartz (May 21, 2014), http://qz.com/210189/the-future-of-pandora-spotify-sirius-xm-may-hinge-on-elvis/. Publishing companies may provide value for songwriters by promoting the use of their songs in films, television, advertising, ringtones and video games in addition to sheet music and music books. Jon M. Garon, Copyright Basics for Musicians (March 2009), http://www.gcglaw.com/resources/entertainment/music-copyright.html. The publishing companies generally receive fifty percent of the composition revenue in exchange for these services. Id.
 Digital Performance Right in Sound Recording Act of 1995, Pub. L. No. 104-39, 109 Stat. 335 (codified as amended in scattered sections of 17 U.S.C.). The owner of copyright under this title has the exclusive rights to do and to authorize…in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission. 17 U.S.C. § 106(6).
 See 17 U.S.C. § 114(d)(2) (“The performance of a sound recording publicly by means of a subscription digital audio transmission not exempt under paragraph (1), an eligible nonsubscription transmission, or a transmission not exempt under paragraph (1) that is made by a preexisting satellite digital audio radio service shall be subject to statutory licensing.”).
 Angus McDonald, Pandora Is Now Over 50% SoundExchange’s Royalty Collections, Rain News (Apr. 10, 2014), http://rainnews.com/pandora-is-now-over-50-soundexchanges-royalty-collections-implications-for-webcasting-iv/; Laws and Regulations, SoundExchange (2013), http://www.soundexchange.com/advocacy/federal-copyright-protection/regulations/.
 See Eliot Van Buskirk, SoundExchange Reveals What Pandora Pays Artists,Hyperbot.com (2012), http://www.hypebot.com/hypebot/2012/10/soundexchange-reveals-what-pandora-pays-artists.html. According to a 2012 blog post by Pandora Founder, Tim Westergren, artists such as Drake and Lil Wayne are getting paid almost $3 million annually by Pandora through SoundExchange. Tim Westergren, Pandora and Artist Payments, Pandora Blog (Oct. 9, 2012), http://blog.pandora.com/2012/10/09/pandora-and-artist-payments/.
 See 17 U.S.C. § 301(c) (“With respect to sound recordings fixed before February 15, 1972, any rights or remedies under the common law or statutes of any State shall not be annulled or limited by this title until February 15, 2067.”).
 See generally Program on Information Justice and Intellectual Property, Protection for Pre-1972 Sound Recordings under State Law and Its Impact on Use by Nonprofit Institutions: A 10-State Analysis (Sept. 2009), available at http://www.loc.gov/rr/record/nrpb/pub146.pdf for a description of state statutory and common law copyright laws applicable to pre-1972 sound recordings.
 See Capitol Records, Inc. v. Naxos of America, Inc., 830 N.E.2d 250, 263 (N.Y. 2005); The U.S. Copyright Office, Federal Copyright Protection for Pre-1972 Recordings 5 (2011), available at http://www.copyright.gov/docs/sound/pre-72-report.pdf.
Complaint at ¶ 4.
 N.Y. PEN. LAW §§ 275.00-.45 (Consol. 2006). The law was added in 1978 to stop the illegal traffic in unauthorized sound recordings. Program on Information Justice and Intellectual Property Wash. College of Law, American University, Protection for Pre-1972 Song Recordings under State Law and Its Impact on Use by Nonprofit Institutions 71 (2009), [hereinafter State Report]. The statute was amended in 1990, to include modern forms of recordings, such as videocassettes and to add a prohibition on the rental as well as the sale of unauthorized recordings. Id. New York uses a broader definition for “recordings” than the U.S. Copyright Act to include “an original phonograph record, disc, tape, audio, video cassette, wire, film, hard drive, flash drive, memory card or other data storage device or any other medium on which such sounds, images, or both sounds and images are or can be recorded or otherwise stored, or a copy or reproduction that duplicates in whole or in part the original.” N.Y. PEN. LAW § 275.00.
 State Report at 71.
 830 N.E. at 264.
 Id. at 266.
 Id. at 252-253.
 Id. at 253.
 Id. at 252.
 Id. at 253.
 Id. at 266.
 Id. at 264 (noting that “[w]ith regard to literary works, it has long been the rule that common-law protection ends when a writing is distributed to the public…because it is at that point that federal statutory copyright protection controls.”) (internal citations omitted).
 North Carolina, for example, abolished common law copyright by statute. See N.C. Gen. Stat. Ann. § 66-28 (West 2014) (“The sole intendment of this enactment is to abolish any common-law rights attaching to phonograph records and electrical transcriptions, whose sole value is in their use, and to forbid further restrictions of the collection of subsequent fees and royalties on phonograph records and electrical transcriptions by performers who were paid for the initial performance at the recording thereof.”).
 984 N.Y.S.2d 274, 276 (Sup. Ct. 2014).
 Id. at 280 n.2.
 Pandora Media, Inc., Quarterly Report Form 10-Q, at 36 (Apr. 29, 2014), available at http://archive.fast-edgar.com//20140429/A7A2MG2C8W22QZZ222292ZZZI6GHH2T2D262/; see also Answer, supra note 7, at ¶ 6.
 See Complaint at ¶ 2.
 See, e.g., Capitol Records, LLC v. Sirius XM Radio Inc., No. BC520981, Complaint (Cal. Supp. Ct. Sept. 11, 2013).
 Respecting Senior Performers as Essential Cultural Treasures Act of 2014, H.R. 4772, 113th Cong. § 114(f) (2014), available at http://pub.bna.com/ptcj/HR4772introMay29.pdf.
 Id. at (D)(ii).
Jae T. Pak is a 2014 summer associate with MBHB.