The National Law review

New technology continues to generate business models that test the limits of intellectual property laws enacted before such technologies were ever contemplated.  The latest example is the use of “geofencing” in an attempt to avoid certain obligations to pay certain digital performance royalties.

In February 2014, VerStandig Broadcasting, the owner of several radio stations in Virginia, sent a letter to SoundExchange, the entity responsible for administering statutory licenses and collecting digital performance royalties for sound recordings.  The letter stated that VerStandig intended to use geofencing (explained below) to stream radio broadcasts to a limited area within 150 miles of each station’s transmitter using geofencing technology.  This method, VerStandig Broadcasting said, would fall into an exemption under Section 114(d)(1)(B)(i) of the Copyright Act (17 U.S.C. §114(d)(1)(B)(i)), that would excuse it from paying digital performance royalties to recording artists.

A month later SoundExchange responded that the referenced exemption did not apply to simulcasts over the internet and urged VerStandig to seek a statutory license for such online streaming, regardless of whether such signal was “geofenced” to a limited 150-mile area.  Six weeks later, VerStandig filed a declaratory judgment action against SoundExchange, seeking a judicial interpretation of whether its radio stations could avoid paying digital performance royalties by using geofencing to restrict online streaming (WTGD 105.1 FM v. SoundExchange, Inc., No. 14-00015 (W.D. Va. filed Apr. 30, 2014)).

Geofencing is a location-based technology that creates a virtual perimeter around an area or location ranging in size from a single building to an entire state and then allows an entity to determine if a user’s mobile phone, device or computer is within this perimeter based upon the user’s IP address, WiFi and GSM access points, and GPS coordinates.  The technology has many applications.  For example, a company might use it for fleet management to determine when a vehicle has left a certain zone, a business might use it for BYOD security by limiting network access to employees’ devices within a certain geographical area, or a retailer might use it to interact with registered mobile customers who have entered a store. The state of New Jersey, which passed a law allowing Atlantic City casinos to offer intrastate online gaming, uses geofencing technology to make sure that only users located within the state’s borders are able to gamble online.  Recently, the anonymous messaging app Yik Yak used geofencing to build virtual “fences” around middle and high schools to block teenagers from accessing the app from school property in the hope of limiting instances of cyberbullying.

Under existing law, AM/FM radio stations are exempt from paying performance royalties to performers and record labels, but pay royalties to songwriters or their publishers.  Congress struck this balance many decades ago based on the assumption that radio stations could play music and earn advertising revenue and the recording industry could capitalize from the airplay with increased song and album sales (though, in recent years, recording artists groups have advocated for reform).  Enter the digital age, and the online simulcast of AM/FM broadcasts (or “webcasting”).   In the mid-1990s, Congress amended the Copyright Act and granted copyright holders in sound recordings the right to perform their works publicly “by means of a digital audio transmission,” 17 U.S.C. § 106(6), along with an accompanying statutory licensing scheme to calculate and collect these digital performance royalties.

In general, radio webcasters are subject to statutory licenses, which require the transmitter to make royalty payments to SoundExchange, the collective responsible for obtaining and distributing digital royalties to the copyright holders.  However, §114 of the Copyright Act outlines several exemptions to this digital performance right, such as when a radio station’s AM/FM broadcast is being transmitted no more than 150 miles from the station’s transmitter (note, this is a simplification of the statutory exemption, as the text references a number of terms defined under the statute, such as “retransmission,” and “subscription” and “nonsubscription” transmissions, and should generally be read in context of the entirety of §114).

The plaintiffs contend that their geofenced webcasts would essentially be exempt retransmissions of a nonsubscription broadcast transmission under 17 U.S.C. §114(d)(1)(B).  Of course, when this provision was drafted, geofencing technology did not exist and content streamed over the internet could not be restricted geographically, requiring station owners that streamed their broadcasts online to pay digital performance royalties.

In its Memorandum supporting its motion to dismiss, SoundExchange argued that the court lacks jurisdiction to hear this action because the plaintiffs have not presented an “actual controversy” or “real and substantial” dispute that touches parties with adverse legal interests.  On a more substantive level, SoundExchange also countered that geofenced streams of radio content are not exempt from the statutory license provisions, pointing out that theCopyright Office previously ruled that the 150-mile exemption does not apply to radio retransmissions made over the internet, even if such transmissions were restricted geographically.  In a 2002 ruling setting royalty rates for internet streaming, the Copyright Office ruled that, based on the interplay between sections 112 and 114 of the statute, “the better interpretation of the law is that the exemption does not apply to radio retransmissions made over the Internet.” Moreover, SoundExchange argued that the 150-mile exemption was intended to apply to “cable radio” and similar satellite transmission systems and that Congress did not contemplate that such an exemption would be available to retransmissions via the internet.  In its opposition, the plaintiffs stated that the statutory exemption is unambiguous and should be interpreted without resorting to legislative history, and that the Copyright Office’s interpretation is nonbinding on the court, unpersuasive and drafted during an earlier technological era.

Unfortunately for those interested in the court’s interpretation of the Copyright Act, it looks like, at least in the short term, an answer will not be forthcoming.

Last month, a magistrate judge issued a Report and Recommendation to dismiss the action on jurisdictional grounds for lack of Article III standing.  The judge found that while plaintiffs’ desire to know whether geofencing their simulcasts might protect them from copyright liability was understandable, to reach the merits of that question, the court would be issuing an impermissible advisory opinion.  In finding that the plaintiffs’ declaratory action failed to raise a justiciable controversy, the judge found that the issue of copyright liability is not “traceable” to SoundExchange’s role as an organization collecting and distributing royalties because SoundExchange does not own or enforce copyrights or have the authority to bring an action to compel a broadcaster to obtain a statutory license.  As the judge stated: “Any dispute that may arise in that scenario is between the copyright owner and the broadcaster.  Thus, the copyright owners themselves, who are ‘not party to this litigation, must act’ (or not act, as the case may be) in order for this particular injury to be cured.”

It remains to be seen whether the district court will adopt the magistrate’s report and dismiss the lawsuit on procedural grounds (note: the plaintiffs have filed an objection to the magistrate’s report).  In the event the court ultimately dismisses the action, it will be interesting to see whether VerStandig would continue to pursue its plan and make a sizeable investment in geofencing technology without the safety net of a judicial ruling affirming the legality of it under the Copyright Act.

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