Setting the licensing rates for music copyrights is usually the domain of high-priced lawyers, managers and business executives.

But in the early '40s, a federal court in New York decided that, left to its own devices, ASCAP would behave as a monopolist, and thus ruled that it must determine "reasonable" rates for the blanket licenses issued by the performance rights organization.

The court's consent decree, last updated in 2001, leaves enormous power in the hands of federal judges to shape not just the legal, but the business aspects of the publishing industry.

The latest example of the court's exercise of this unusual power came last week in a decision by the U.S. Court of Appeals for the Second Circuit involving Yahoo and RealNetworks, both Internet companies with extensive music-related components to their services. (RealNetworks owned Rhapsody until April of this year.)

The appellate court made two decisions that will have important repercussions for a wide variety of licenses issued for online use of music. First, the three-judge panel confronted the question of which of the copyright owner's rights are implicated by a song download. There's no dispute that an unlicensed download violates the copyright owner's exclusive right to reproduce its works. But industry players vigorously challenged whether a download also constitutes a "public performance" of a work, necessitating a license from the publisher.

Over ASCAP's protestations, the Second Circuit held that a download-the transfer of a digital file that can't be audibly perceived until after its completion-doesn't fall within the statutory definition of "perform": "to recite, render, play, dance or act [a copyrighted work], either directly or by means of any device or process."

So the publisher will still get paid for the reproduction (an increasingly anachronistically named "mechanical" license) made in the course of a download, and for the public performance inherent in a playable Internet stream of its work. But under the Second Circuit's new opinion (which upheld the district court's 2007 decision in this case), asking an Internet service to pay an additional license fee for the alleged "performance" involved in a download that no one can hear until later playing it back is a bridge too far.

In the other part of the Second Circuit's decision, the panel disagreed with the district court's determination of the "reasonable" rate Yahoo and RealNetworks must pay to perform the millions of songs in ASCAP's catalog. The district court had set a rate of 2.5% of the revenue attributable to the music-related portions of those services, adjusted by a formula intended to account for the amount of time users spent streaming performances in relation to their time on the respective websites. But the court of appeals determined that the lower court's methodology was flawed, for numerous reasons.

For example, the district court failed to distinguish between the value of a song playing on Yahoo's home page, where the viewer is exposed to numerous ads, from the value of one heard on Yahoo Music, which many users play with the browser window minimized, thus avoiding any contact with visible ads.

In the case of RealNetworks, the panel determined that the district court simply didn't do a good enough job of justifying the "music use adjustment factor" that it applied to various aspects of RealNetworks' music offerings. And the court took issue with the district court's reliance on certain other music licensing agreements from the Internet and TV context in setting the proper royalty rates.

So what's the district court to do? Given that it was Yahoo and RealNetworks complaining about the rates set by the lower court, it's likely that the companies will come out better in the next round, and ASCAP will be disappointed.

But the Second Circuit didn't exactly issue detailed instructions for remand, instead throwing the issues back to the district court without much guidance: "We leave it to the district court to determine the best way to proceed consistent with the concerns we have discussed."

In a statement after the decision, ASCAP said, "We anticipate that in the end, the proceeding will result in a fair and favorable license fee to be paid by commercial online services for the valuable intellectual property they use to sustain their businesses."

Maybe so. But with federal judges-not experienced music business negotiators-determining the price of a license, many in the industry are bound to be disappointed in the courts' definition of "fair and favorable."