Webcaster Settlement Act: Can it Really Save Internet Radio?

by: Adam Denhoff, Associate Editor, MTTLR

Image this is podcasting by Thomas Kamann. Used under a Creative Commons BY 2.0 license.

Internet radio broadcasters were given renewed hope of long-term stability when President Bush signed the Webcaster Settlement Act in October. The Act allows webcasters and record labels to continue negotiating for a reduced performance royalty rate while Congress is in recess, as it extends the deadline for a new deal to February 15, 2009. The issue stems from a March, 2007 decision by the Copyright Royalty Board (CRB), which would force webcasters to pay for each song streamed to each user at a retroactive rate as follows:

2006: $0.0008 per song, per listener
2007: $.0011
2008: $.0014
2009: $.0018
2010: $.0019

SoundExchange, the organization that represents artists and record labels, favors higher performance royalties because it believes that musicians deserve their fair share of Internet radio profits. The Digital Media Association (DiMA), a trade organization that represents a number of prominent webcasters including AOL Radio and Yahoo! Music, believes that the decision of the Copyright Royalty Board would bring about the end of Internet radio by forcing webcasters to pay outrageously high performance royalties at rates that they simply could not afford.

The Radio and Internet Newsletter (RAIN) calculates that, assuming the average Internet broadcasting station plays 16 songs per hour, a webcaster would have a royalty obligation of 1.28 cents per listener hour in 2006 (which would skyrocket almost three-fold by 2010). These royalties would only cover use of the sound recording, and webcasters also have to pay an additional fee to holders of copyrights in the composition. Using the CRB’s proposed royalty structure, it would be nearly impossible for an Internet radio station to remain profitable, and most, if not all webcasters would be forced out of business. Tim Westergren, the head of Pandora (one of the nation’s most popular Web radio services), believes that its royalty fees for this year could represent 70% of its projected $25 million dollar revenue. According to David Oxendide, a lawyer representing many smaller webcasters, CRB’s royalty structure would be a fatal blow to small and medium sized stations whose royalties would be between 100% and 300% of annual revenues.

Traditional radio broadcasters, like those represented by the National Association of Broadcasters (NAB), have seen web-based radio as a serious threat to their dominance. They lobbied against the Webcaster Settlement Act. However, they retracted their aggressive opposition to the Act when the negotiating deadline was extended to February 15; the extension will allow the NAB to negotiate its own performance royalty structure with SoundExchange. Today, terrestrial radio broadcasters pay licensing fees only, but SoundExchange is working to change that.

What does all this mean for Internet radio? Well, even SoundExchange acknowledges that the royalties in CRB’s model might be unworkably high. Nonetheless, SoundExchange officials complain that Internet radio stations have done too little to turn a profit from streaming music on the web. Webcasters counter by arguing that advertisers have yet to embrace Internet radio which makes it nearly impossible to get investment funding.

Although the music is industry is in shambles and record labels are desperate for new sources of revenue (i.e. performance royalties from online radio stations), perhaps biting the hand that feeds is not the right approach. A thriving source of online music is essential for the survival of the music industry. Surely record companies would prefer that new music be spread via web-based radio rather than on illegal file sharing networks? Introducing performance royalties into both the digital and terrestrial radio schemes makes sense; why should radio stations be required to compensate the songwriter, but not the performer or record label for use of copyrighted material? However, the Recording Industry Association of America, SoundExchange, and DiMA should negotiate a performance royalty rate that benefits all parties by ensuring that Internet radio lives on. The impossible-to-interpret “willing buyer, willing seller” model utilized by the CRB is not a transparent approach. The Webcaster Settlement Act, which allows the parties to negotiate further, is a step in the right direction.

State-Funded Stem Cell Research and Benefit Sharing

by: Hilary J. Libka, Associate Editor, MTTLR

Stem Cell Petri Dish
by Hilary Libka.

Individual US states have been setting their own policies regarding human embryonic stem (hES) cell research - due to both the increased application of private and state money to hES cell research, and the federal government’s failure to change or expand its regulations and funding for this controversial science. While the majority of states restrict research on embryos, at least twelve states have now implemented public funding schemes for some type of stem cell research, and eight states permit or even channel funds specifically to hES cell research.¹ The states have organized funding through bond sales, the Tobacco Master Settlement Agreement, executive expenditures, and legislative appropriations.² Depending on the state and award, the funds are either directed toward particular research projects or infrastructure development at public and private institutions as well as non-profit and for-profit organizations.³

Public funding of stem cell research presents policy controversies that extend far beyond the science. Each state that participates must develop oversight for its investment and consider the potential outcomes of accelerating the market. One imminent issue that must be resolved is how the state should benefit from any intellectual property (IP) that may result from the funding.

The federal Bayh-Dole Act is one model states could look to for managing IP. The Act gives US universities, small businesses, and non-profit organizations the right to inventions developed through research funded by the federal government.⁴ The government keeps a nonexclusive license to the invention (among several other rights), but no royalties are collected.⁵ The biotech industry is pushing for this model at the state level.⁶ On the other end of the spectrum, consumer advocates argue for a public ownership model, where the state would retain the rights to any patents resulting from public funding.⁷ As a state that has been struggling with IP agreements, California is an important starting place to understand the complexities of benefit sharing in the realm of stem cell research funding.

Case Study: California

In November 2004, California became the largest source of funding for stem cell research in the world when voters passed Proposition 71 (a.k.a. the California Stem Cell Research and Cures Bond Act).⁸ The petition-driven initiative authorized the state to sell $3 billion in general obligation bond funds to be disbursed to in-state researchers over ten years.⁹ Up to $350 million may be paid out annually, and the funding is guaranteed by the state, which pays the principal and interest costs with bond sales for the first five years of the program, then with state income taxes and sales tax.¹⁰ Proposition 71 was incorporated as a politically-insulated state constitutional amendment: modifications are only possible with an unlikely 70% legislative majority and the governor’s signature.¹¹ High expectations are attached to the initiative, which was sold to voters on two points: (1) “Cures for California” and (2) economic benefits, such as IP revenues, reduced health care costs (state welfare programs and government employee benefits), and additional research activity (more jobs and taxable income).¹²
Proposition 71 established the California Institute for Regenerative Medicine (CIRM), a state oversight agency, to disburse funds to research organizations.¹³ CIRM is also charged with regulating state-funded stem cell research activities.¹⁴ This includes:

[E]stablish[ing] standards that require that all grants and loan awards be subject to intellectual property agreements that balance the opportunity of the State of California to benefit from the patents, royalties, and licenses that result from basic research, therapy development, and clinical trials with the need to assure that essential medical research is not unreasonably hindered by the intellectual property agreements.¹⁵

Although this provision stresses that California should benefit from resulting technologies, it fails to specify how the benefit sharing should take place. The generality is especially striking given the tendency of the legislation to delineate CIRM elements narrowly (sometimes too narrowly, as with the composition of the governing board and working groups, none of which included any legal experts).¹⁶ Initial uncertainty and qualms about transparency and accountability have slowed the process of developing IP standards.
Early lawsuits tried to overturn Proposition 71 by claiming CIRM was unconstitutional; complaints focused on CIRM’s validity as a public agency and its members’ affiliations with patient advocacy groups, biotech companies, and research institutions.¹⁷ A $150 million loan to CIRM from the governor kept the program afloat while the initial legal issues were resolved,¹⁸ but these “built-in conflicts of interest” continue to plague operations. Both pro- and anti-hES cell research advocates have raised ethical concerns, and in 2008, the state Controller audited CIRM’s grant approval process.¹⁹

Most recently and against steep odds, the state legislature successfully passed Senate Bill 1565, which called for a study of the governance structure of the program by the independent Milton Marks “Little Hoover” Commission on California State Government Organization and Economy.²⁰ SB 1565 also would have forced a ceiling on the price of drugs resulting from CIRM-funded research and required a plan from funded organizations that would make the drugs accessible to uninsured Californians.²¹ Although Governor Schwarzenegger vetoed the bill because of its restrictions on CIRM’s authority to adopt IP standards, the oversight commission has announced it will still proceed with its investigation.²²

In March 2008, after two years of research and debate, the CIRM governing board finally approved IP standards for the funding program.²³ Like the Bayh-Dole model, nonprofit organizations receiving public funds may retain their patents and must share net revenues with individual inventors.²⁴ But unlike the Bayh-Dole model, after a threshold amount of revenues and in proportion to CIRM’s support, the organization must pay 25% of its share to the state’s General Fund; the rest may only be used to support scientific research or education.²⁵ Meanwhile, for-profit organizations also keep their patents, but the state gets 25% of royalties on licenses after a threshold amount as well as a fraction (2-5% unless a blockbuster drug, which generates more than $250 million of revenue annually) of the revenues from any products commercialized by the organizations.²⁶ Furthermore, for-profit organizations must sell products at low prices to California’s discount prescription drug program.²⁷

And yet, even with these new explicit standards, the uncertainty persists. CIRM’s agenda for its latest IP meeting included, "Consideration of draft amendments to consolidate non-profit and for-profit intellectual property regulations and begin formal process of adoption."²⁸ CIRM has also been considering additional in-state discounts, and Californians, especially the state legislature, will continue considering CIRM. Although the state has been successful in attracting biotechnology,²⁹ “[CIRM] is still an unknown quantity, and that spooks the biotech industry.”³⁰ Several company executives and investors have been echoing the concerns of one general counsel: “We will take CIRM money last. We don’t want to be in a position where, years from now, we are actually forced to sell [our products] in California at a loss.”³¹

Moving Forward

The sheer dollar value of California’s funding continues to attract the stem cell industry despite uncertainty regarding public access requirements and other forms of benefit sharing. What about states thinking of or already implementing smaller stem cell research funds? Can they afford to promise a program that will “pay for itself,” followed by years of figuring out how to “pay back the taxpayers”?³²

IP revenues and restrictions are great selling points to taxpayers but terrible incentives for industry. The program is useless if it fails to attract participants. When it comes to access issues, which consumers should receive a discount? If beneficiaries of government programs and the uninsured are covered for new medical treatments, is that fair to the insured taxpayer whose insurance may not cover the treatment and whose rates will probably go up regardless of coverage? By what time do you have to start paying taxes in California to get the benefit of a new drug—before development, before clinical trials? Do you have to pay taxes to the state or even be a California resident? Medical tourism may benefit the state, but being the capital of social welfare probably will not.

As more states consider implementing public funds for stem cell research, the benefit sharing issues are going to be critical for collecting and maintaining public and industry confidence. Maybe the question California made a mistake in postponing when it passed Proposition 71 was not how, but whether the state should force benefit sharing at all. State stem cell research funding programs still have much to offer in terms of economic advantages and future medical breakthroughs, even if the state does not directly share in IP revenues. States should attempt to quantify and communicate expected revenues. Because funding states cannot foresee research outcomes (both treatments and revenues), it’s not an accurate measure to ask taxpayers how much they would pay to eliminate spinal cord injuries, cancer, or one of many other suggested targets. However, some taxpayers are interested in taking a shot at these cures, and it’s possible that the total value of the research to taxpayers may be much greater than any state’s investment.

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1 California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, and Wisconsin fund hES cell research. Meanwhile, Indiana, North Carolina, Ohio, and Virginia only fund adult stem cell research. See National Conference of State Legislatures, Stem Cell Research, Jan. 2008.
2 Id.
3 Id.
4 35 U.S.C. §§ 200-212 (1980).
5 Id.
6 Joe Mullin, Stem Cell Gold Rush, IP Law & Bus., June 2008.
7 Id.
8 CIRM, About CIRM, (last visited October 20, 2008).
9 Legislative Analyst’s Office, Proposition 71: Stem Cell Research. Funding. Bonds. Initiative Constitutional Amendment and Statute., July 2004.
10 Id.
11 Jesse Reynolds & Marcy Darnovsky, Center for Genetics & Society, The California Stem Cell Program at One Year: A Progress Report 7 (2006).
12 Ralph Brave, Stem-cell Wonderland, Sacramento News & Rev., Oct. 20, 2005 (“Cures for California” was the name of the Proposition 71 campaign); Legislative Analyst’s Office, supra note 7.
13 Id.
14 Id.
15 State of California, Text of Proposed Laws: Proposition 71, (last visited October 20, 2008).
16 Lori P. Knowles, State-sponsored Human Stem Cell Research: Regulatory Approaches and Standard Setting, 21 (2006).
17 Judge Rules Suits Challenging Stem Cell Agency Have No Merit, N.Y.Times, Apr. 22, 2006.
18 Christine Vestal, Stem Cell Wars Rage in State Capitols, Stateline.org, July 20, 2006.
19 Op-Ed, Stem Cell Housecleaning, L.A. Times, Dec. 12, 2007.
20 S.B. 1565, 2007-08, Reg. Sess. (Cal. 2008).
21 Id.
22 Governor Vetoes California Stem Cell Bill, Sacramento Bus. J., Sept. 29, 2008.
23 Mullin, supra note 4.
24 17 Cal. Code of Regs. § 100308 (2008).
25 Id.
26 17 Cal. Code of Regs. § 100408 (2008).
27 17 Cal. Code of Regs. § 100407 (2008).
28 IP Task Force Subcommittee, Agenda for October 29, 2008.
29 Office of the Governor, Governor Celebrates California Innovation and Research at 2008 Biotechnology Industry Organization Conference, June 18, 2008 (citing 3,000 new companies, $4.3 billion in venture capital—nearly half of what is invested nationwide, and $73 billion in estimated annual revenues).
30 Mullin, supra note 4.
31 Id.
32 Reynolds & Darnovsky, supra note 9, at 9 (suggesting that the Proposition 71 campaign was misleading).