In a letter obtained by Billboard.biz, the Harry Fox Agency notified MusicNet late yesterday (Dec. 12) that it is withdrawing its proposed license for interactive streams from the service, which supplies music for Microsoft, MTV, Yahoo! and others. The mechanical rights agency charges that DiMA, the trade group for MusicNet and other digital music services, did not propose a rate for the streams in the pending Copyright Royalty Board proceeding thereby implying an attempt to avoid paying royalties for the past five years.

Although not stated expressly in the letter, the failure to seal a licensing deal could lead to copyright infringement suits by publishers against digital services not covered by any license.

"We expect to resolve this matter with Harry Fox quickly and amicably," Cindy Charles, senior VP and general counsel for MusicNet, tells Billboard.biz. "I can't respond to the specifics since these discussions are private and ongoing, however I can say that we have enjoyed a successful relationship with Harry Fox for many years and are confident that our mutual success will continue."

MusicNet was initially covered by an agreement reached in 2001 between HFA
and the RIAA, which represented labels who then held ownership interests in many online services. At the time, MusicNet owners included BMG Music, EMI Music and Warner Music Group. Although there has not been a legal decision stating whether or not an interactive stream requires a license for copying compositions (which HFA licenses for many publishers) in addition to one for performing (which ASCAP, BMI or SESAC license), the online services agreed to pay royalties for interactive streams and limited downloads once rates were set through industry negotiations or a rate proceeding before the copyright board. Under the agreement, royalties would be paid retroactive to 2001 once rates were set.

MusicNet, a business-to-business music service that secures licenses and supplies music for other companies, announced in April 2005 that Baker Capital acquired the company. The following month, HFA notified MusicNet that it was no longer covered by the RIAA agreement, and the parties began negotiating a new deal.

"MusicNet contended that there was no new deal necessary, but agreed in good faith to negotiate a new deal," adds Charles.

A new deal was reportedly close to completion recently. But in its case filed with the CRB on Nov. 30 over compulsory rates (section 115 of the Copyright Act), DiMA did not request a rate for interactive streams. Cases filed by the RIAA and the NMPA proposed rates for the reproduction right in interactive streams. A source close to the parties tells Billboard.biz that it seems DiMA, on behalf of its members, will likely argue that no royalties should be paid for copying compositions used for interactive streams.

The letter stated that HFA will continue to negotiate with MusicNet for limited downloads, but not for streams.

HFA and DiMA could not immediately be reached for comment.