Month: April 2017

Five Things Congress Can Do to Stop Tens of Millions of “Address Unknown” NOIs

Copyright reform is on the front burner again after the passing of the  Register of Copyrights Selection and Accountability Act by a vote of 378-48.   But there’s another problem the Congress needs to fix that won’t require legislation in the short run:  The mass filing of tens of millions of “address unknown” notices under the archaic compulsory license for songs.

I’m going to assume that readers know the general background on the millions of “address unknown” NOIs filed with the Copyright Office under a loophole in the Copyright Act (Sec. 115(c)(1)).   If that is Geek to you, see my recent paper on mass NOIs for more complete analysis (or previous posts on MTS for the armchair version of the story.   The first distinction to remember is that we are only concerned in this post with song copyrights and not the sound recording.  This story implicates songwriters and publishers, not artists and record companies, and it only applies to the government’s compulsory license for songs, a uniquely American invention.

In a nutshell, Amazon, Google, Pandora, Spotify and other tech companies are serving on the Copyright Office tens of millions of “address unknown” notices of intention to obtain a compulsory license to make and distribute recordings of certain types of songs.  Under what can only be called a “loophole” in this compulsory license, a service can serve these “address unknown” NOIs on the Copyright Office if the owner is not identifiable in the Copyright Office public records.  The Copyright Office stands in the shoes of the “address unknown” copyright owner to receive and preserve these notices.

On the one hand companies like Amazon, Google, Pandora and Spotify say that they can’t find these millions of song owners, while at the same time at least some of the same companies brag about how comprehensive and expensive their song databases are (like Google’s Content ID) or their agents puff up the agent’s own massively complete song databases as “the worlds largest independent database of music copyright and related business information.”  And yet, these same companies and their agents can’t seem to find songwriters whose names, repertoire and contact information are well known, or whom they already pay through their own systems or through their agent.

The Database Double Loophole Trick

Here’s the loophole.  First, the loophole requires a very narrow reading of Section 115(c)(1) of the Copyright Act, a 40 year old statute being applied to NOIs served at a scale the Congress never intended.  If the song owner isn’t found in the public records of the Copyright Office, even if the digital service or its agent has actual knowledge of the song copyright owner’s whereabouts, the digital service can say they are not required to look further.

Even if you buy into this willful blindness, these digital services may not be looking at the complete public records of the Copyright Office.  The only digitized records of the Copyright Office are from January 1, 1978 forward, and my bet is those easily searchable records are the only records the services consult.  That omits the songs of Duke Ellington, Otis Redding, The Beatles and five Eagles albums not to mention a very large chunk of American culture.

The Copyright Office records from before 1978 are available on paper, so the pre-78 songs are still in the public records (which is what the Congress contemplated in the Copyright Act).

The identifiers are just not “there” if you decide not to look for them.  However, it is not metaphysical, it is metadata that exists in physical form.  This is the “double loophole”.

The Double Triple:  New Releases

Another category of song copyrights that will never be in the public records of the Copyright Office in their initial release window are new releases with recently filed but not yet finalized copyright registrations.  The Copyright Office itself acknowledges that it can take upwards of a year to process new copyright registrations.  This allows “address unknown” filers to bootstrap a free ride on the back of Congress during that one-year period.

No Liability or Royalties Either:  Trebles All Round

Once a company serves the “address unknown” NOI on the Copyright Office, songwriters are arguably compelled by the government to permit the service to use their songs.  Filing the “address unknown” NOI arguably allows the service to avoid liability for infringement and also–adding insult to injury–to avoid paying royalties.  If the NOI is properly filed, of course.

In current practice, a mass “address unknown” NOI is usually a single notice of intention filed with a huge attachment of song titles with the required fields, such as this one Google filed for Sting’s “Fragile”, the anthem of the environmental movement (which was clearly filed incorrectly as the song was registered long ago):

sting-fragile-google-noi

The number of mass “address unknown” NOIs being posted by the Copyright Office on an almost daily basis suggests that tech companies now view mass “address unknown” NOIs as the primary way to put one over on songwriters and the Congress, too.  Companies like Amazon, Spotify, Google, Pandora and others are using this heretofore largely unused loophole on a scale that flies in the face of Chairman Goodlatte’s many hearings in the last session of Congress on updating the Copyright Act.

This “address unknown” practice also undermines the efforts of Chairman Goodlatte and Ranking Member Conyers to modernize the Copyright Office.  Indeed, based on the very lopsided vote on HR 1695 the Register of Copyrights Selection and Accountability Act, it is clearly the desire of the overwhelming majority of Members of Congress, too.

March Spotify NOI Filings

What Can Be Done?

Congress can play a role in in providing immediate relief to songwriters by stopping the mass “address unknown” NOIs or at least requiring the Library of Congress and the Copyright Office to take steps to verify the NOIs are filed correctly.

At the moment, the government takes away property rights from the songwriters by means of the compulsory license without taking even rudimentary steps to assure the public that the “address unknown” NOI process is being implemented correctly and transparently.

Here are five steps the Congress can take to rectify this awful situation.

  1.  Stop Selling Incomplete Data:  Congress should instruct the Library of Congress to stop selling the post 1978 database until due diligence can be performed on the database to determine if it is even internally correct.  It appears that many if not all the mass “address unknown” NOI filers use the LOC database to create their NOIs.  It is also highly unlikely that this database will include new releases.  Congress can simply instruct the Librarian to stop selling the database.loc-prices-databases
  2.  Stop Accepting “Address Unknown” NOIs With Compressed File Attachments: Congress should instruct the Library of Congress and the Copyright Office to immediately cease accepting “address unknown” NOIs with compressed files as attachments for what appears to be a single NOI.  These compressed files are so large in most cases that songwriter can never uncompress them on a home computer to determine if their songs are subject to “address unknown” NOIs.  Google in particular is a major offender of filing huge compressed files.  Each compressed file contains tens of thousands of song titles.Google March NOIs
  3.  Require Accounting Compliance with Copyright Office Regulations:  Long standing regulations require that anyone relying on an NOI must file mostly and annual statements of account reflecting usage of the songs subject to the NOIs.  The tech companies serving mass NOIs are not rendering these statements and thus fail to comply with the transparency requirements of Copyright Act.  All of the “address unknown” NOIs served during 2016 are out of compliance with the regulations, and all “address unknown” NOIs served in the first quarter of 2017 are likewise out of compliance.  Congress should instruct the Copyright Office to require monthly and annual statements of account be filed with the Copyright Office for anyone who has relied on these NOIs as required by the regulations.  All statements of account should be certified in the normal course as required by the regulations, and made available to the public by posting to the Copyright Office website.
  4. Require the Library of Congress to Create a Searchable Database of NOIs:Congress should instruct the Library of Congress to create a single database maintained online that is maintained by an independent third party and is searchable by songwriters in a manner similar to a state unclaimed property office.  That database needs to be updated on a regular schedule.  Given the size of the compressed files served to date, it is essentially impossible for songwriters to determine if NOIs have been filed on their songs.  This is particularly true as the NOIs are served on an effectively random basis, so even if songwriters were able to search, they would essentially have to search all the time.
  1.  Pay Royalties Into A Permanent Trust Account:  Given that it is highly likely that the mass NOIs filed to date have a significant number of errors, it is also likely that songwriters will become entitled to payment of royalties retroactively if these errors are ever caught.  Therefore, the Congress should require that royalties should be paid to a trust account maintained at the Copyright Office and held in perpetuity like a state unclaimed property office.  Of course, it is equally likely that the song copyright owners will be entitled to terminate any purported license under 17 USC Sec. 115(c)(6).  These payments should be based on actual usage and not black box.  This is another reason why the statements for “address unknown” NOIs should be public.

What started in April 2016 as a trickle of NOIs from a handful of companies has now expanded exponentially.  Based on Rightscorp’s analysis in January 2017, some 30 million “address unknown” NOIs had been filed–and that did not include the dozens of “address unknown” NOIs filed by Spotify in March 2017 alone which themselves likely total over a million songs.

NOI Table
Top Three Services Filing NOIs

April, 2016-January 2017

 Number of NOIs Per Service
Amazon Digital Services LLC 19,421,902
Google, Inc. 4,625,521
Pandora Media, Inc. 1,193,346

It is rapidly becoming standard practice for tech companies to try to pull the wool over the eyes of the Congress by leveraging an apparent loophole and they are doing it on a grand scale.

As we have seen with everything else they touch from the DMCA to royalty audits, the tech companies will continue this loophole-seeking behavior until they are forced to stop.  Since no one at the Library of Congress seems to have the appetite to right this wrong, the Congress itself must step in.

Ultimately Congress should fix the loophole through legislation, but in the meantime most of the harms can be corrected overnight by policy changes alone.

#irespectmusic and #savesoho Join Forces in London, Tuesday, April 18!

IRM London

BBC 6 Music’s Matt Everitt hosts this very special event.

The Save Soho pop-up venue returns to The Union Club for a special meeting bewteen two artists, both well known for their activism in the music sector. Blake Morgan, from New York – founder of #IRespectMusic and Tim Arnold from London – founder of Save Soho.

This will be a chance to hear both artists perform as well as hear each of them discuss their passion for protecting the rights and freedoms of the creative communities in the UK and the U.S with their campaigns.

The Reservation continues the Soho tradition to support emerging artists.. For this event we are delighted to welcome singer Sara Strudwick in her debut London show.

Make your reservation now….

http://www.seetickets.com/event/save-soho-the-reservation/the-union-club/1064413

Spotify IPO Watch: Will Spotify’s “IPO” Be a Cautionary Tale for Stock-for-Royalty Deals?

The Wall Street Journal and other business news outlets are reporting that the much anticipated Spotify initial public offering may not look like what everyone was expecting and may end up not looking much like what almost everyone was thinking it would look like.

If you asked anyone in the music business over the history of Spotify, they would probably tell you that this time was different.  This time MTV wasn’t going to build a business on our backs–we had the Spotify stock.  So if the “tech guys” go into their mysterious counting house and come out with billions, then the people who built and invested in the one product that they all depend on would be treated fairly this time.  The people who really invested in the only product these companies sold–music–would be along for the ride.

Time will tell if that will turn out to be true, but it’s starting to look like there are some serious questions about what will be in the pot at the end of the rainbow, or even if the rainbow will actually end at all.

The assumption all along has been that Spotify will float what’s called a “full commitment underwriting” as opposed to a “busted underwriting” aka Deezer.  In a full commitment underwriting, an underwriter (like Spotify banker Goldman Sachs) agrees to buy all the shares of the issuing company that are available–generally less than all, maybe around 25% of the shares issued and outstanding on an “as-if-converted” basis (an important distinction in Spotify’s case that we will come back to).

What actually happens then is that the issuer doesn’t actually sell shares to the public in the traditional sense, they instead sell shares to underwriters who then sell the shares to the public.  The underwriters usually have a lead (like Goldman Sachs) who then puts together an underwriting syndicate to buy up all the shares that are available.

The proceeds, aka money, from those shares sold to the underwriters go into the issuing company’s treasury, aka bank account.  Thus the primary function of the IPO is fulfilled-raising money for the issuing company.  The company passes the market risk to the underwriters in return for locking in a share price.  So far the shares have not be available to trade, although all of the regulatory hurdles will have been met by this point, SEC clearances, etc. (a final approved Form S-1, for example).

The underwriters then sell the shares are then registered for sale to the public by licensed broker dealers with the idea that the underwriters will get at least a “2 handle” or “3 handle” on the first day of trading because there is a lot of enthusiasm for the stock with the retail stock market.  That means that the underwriters will double or triple their money (give or take) overnight, plus get some nice fees for doing the work and taking the market risk off of the issuer’s books.

The underwriters don’t want a whole bunch of shares of stock crowding into the market and interfering with the 2x or 3x (or more x) that they plan on making.  That’s why issuers have lock up agreements with certain investors (especially insiders) that prevent the sale of shares for anywhere from 90 to 180 days after an IPO.  That’s also why there are some executives (like Pandora’s Tim Westergren) who sell a predetermined number of shares on a predetermined date, which is almost always a sign of a “10b5” agreement that allows insiders to gradually cash out over a fairly long period of time (while not “trading” as in both selling and buying the company’s shares).

So what does all this mean for Spotify?  According to the Wall Street Journal, Spotify is not going the full commitment underwriting route at all–but remember, none of this is coming from the company directly, so they could still back out.  But they’re not denying the story so  far.

Spotify evidently is skipping the underwriting step altogether.  MTS readers will recall in our “Spotify IPO Watch” series that I was skeptical about Spotify’s ability to put together an underwriting syndicate, and the decision to skip an underwriter is being passed off as a way to save some millions in fees.  That’s whistling past the graveyard–those fees are high, but are more than justified if the IPO raises a bunch of money which is usually the point.

According to the Wall Street Journal:

The Swedish company, last valued at $8.5 billion, is seriously considering not holding a public sale of shares. Instead it is exploring simply listing its shares on an exchange in what is known as a direct listing, according to people familiar with the matter. It wouldn’t raise money—the hallmark of an IPO—or use underwriters to sell the stock.

The approach has advantages for Spotify and its existing investors. It could enable the firm to save tens of millions of dollars in underwriting fees, prevent its existing holders from having their stakes diluted, and enable executives to publicly tout the company ahead of its listing, unlike a strictly regulated IPO, the people said….

In direct listings, early investors would be subject to less stringent lockups governing the sale of insiders’ shares and the company could avoid the first-day trading pop that characterizes many IPOs shepherded by underwriters. They are good for some investors but also indicate a company potentially left money on the table. Having a public stock would also give Spotify’s investors and employees the opportunity to cash in their shares.

There are risks to this approach, whose consideration by Spotify was earlier reported by Mergermarket. With market forces determining the share price from the outset, the company’s public debut could be more volatile and unpredictable. Also missing would be the large blocks of stock underwriters typically allocate to investors they believe will hold the shares for the long term and promote trading stability.

Spotify last year issued a $1 billion convertible bond to parties including TPG and Dragoneer Investment Group. The interest rate of 5% increases 1 percentage point every six months until the company goes public, giving it a potential incentive to pursue a listing sooner rather than later. If it lists directly, Spotify would likely need to renegotiate terms of the facility, one of the people said.

Spotify had agreed that the investors could convert the debt into equity at a 20% discount to the share price if an IPO takes place one year hence. If it takes place later, the discount increases. Since this wouldn’t be a typical public offering, it may not trigger a conversion. So Spotify may need to negotiate with the investors a price at which they would receive equity.

I find it hard to believe that sophisticated investors like Texas Pacific Group and Dragoneer will be bamboozled by Spotify taking a loophole on their IPO.  The rest of the shareholders–hard to say.

One thing is almost certain–that “need to negotiate” the WSJ refers to is almost certainly going to result in more stock or cash or relief from lockups or some preferential goodie going to the bond holders who very likely have a first position security interest on all the assets of the company as collateral for their $1 billion plus loan.  (Assuming, of course, that a direct registration doesn’t constitute an event of default under the loan that could allow the bondholders to take over the company.)

It is also almost certainly going to result in other “investors”–the stock for royalties folk–not getting those same benefits.

Stay tuned–Spotify may give us the best argument yet for not taking equity-in-lieu of cash in companies that should be paying royalties like everyone else.