Month: September 2024

Careful What You Wish For: Consent Decrees, Compulsory Licenses and the Right to Say No

[This post first appeared on Artist Rights Institute’s Artist Rights Watch blog]

I remember you, you’re the one who made my dreams come true…
Written by Johnny Mercer

Careful What You Wish For

Remember the sales pitch for how wonderful the Music Modernization Act was going to be? An even broader compulsory mechanical license for songwriters combined with yet another safe harbor for music users (with new and improved retroactivity) was going to solve all our problems. A solution for unlicensed songs, black box, unpaid royalties, a stop for “inefficient” litigation. The new musical works database would succeed where all other efforts had failed, not to worry and now back to sleep. Good thing it didn’t make the already complex music licensing regime even more convoluted.

There is, of course, a very simple way to clean up at least some complexities in the music licensing system. Digital services don’t use a track if they don’t clear the publishing. Radio stations certainly can block tracks when they blacklist a particular song. That would, of course, require not just accepting responsibility for licensing but also for doing an effective job of licensing so the platform did not get sued. The whole point of the civil law system is to encourage honest behavior and to empower individuals to unleash hell. Don’t mistake “holding up” a license for standing up and fighting back. Those noisy smallfolk may get in the way but that doesn’t mean they’re wrong.

Who Made Them Special?

It doesn’t seem like it’s working out quite as advertised. We were told before the MMA that you just can’t ask the digital services to actually confirm they have the rights to sell their products. Why do we ask it of other commercial actors in complex rights situations but not digital services? We ask grocers, car dealers, doctors, bankers or even lawyers to know who they are dealing with and make sure they are doing so lawfully. As Justice Thomas wrote in a recent Supreme Court case, [i]n the platforms’ world, they are fully responsible for their websites when it results in constitutional protections, but the moment that responsibility could lead to liability, they can disclaim any obligations and enjoy greater protections from suit than nearly any other industry.”

If a car dealer sold a hot Ford or Ferrari, could the dealer tell the prosecutors that compliance was just too hard? If a pharmacy sold counterfeit insulin could they ask for a safe harbor? If a vaccine manufacturer ….no wait.

But no, we were told that digital services were special and that we needed to give them an even broader compulsory license and an even broader safe harbor than Section 230, DMCA and the natural safe harbor from being the richest companies in commercial history. (And there’s a connection between safe harbors and them being rich while we get a royalty that starts 3 or 5 decimal places to the right.).

After the Spotify bundling debacle, all of a sudden a broader and deeper compulsory license doesn’t look so hot. Plus it now appears that Spotify is to be singled out in the coming Phonorecords V proceeding which will be starting in a matter of months. That may not be a dog whistle to the lawyers, but it sure sounds like the meter going down. This may be a test of the antitrust exemption for what sure seems to me to be a concerted refusal to deal, but then I’m just a country lawyer and I’m not as smart as the city fellers. (All the more reason for songwriters and labels to make another separate peace on physical like Phonorecords IV and do it quickly.)

Abandoning The Right to Say No

In other words, it looks like it’s going to be making something extremely complicated with side issues galore when it really comes down to a simple issue: The right to say no. Unfortunately, the compulsory license and the ASCAP and BMI antitrust consent decrees exist for a single reason which is to take away that right to say no. But that was what they wanted and now they’ve got it.

How does the other side perceive their cherished ability to hide behind the government’s boot on our throats? A “friend of the court” brief in the current appeal of the BMI v. NACPA rate court case under the BMI antitrust consent decree gives us some insight. These briefs (also called “amicus briefs”) are sometimes filed in court cases, especially appellate cases, by entities who are not parties to the litigation but who may be affected by the outcome and who are trying to influence the court’s decision. The briefs are often filed by trade associations, giving the members of those associations plausible deniability as to their own intentions.

The “friends” or “amici” often want to point out to the members of the court potential unintended consequences or broader effects of a pending judicial decision resolving the particular controversy. It is common for groups of amici to band together, thus giving the court the benefit of the thinking of companies with (or representing) an interest in how the court rules. These briefs also give some insight into what the other side is thinking.

The joint amicus brief that caught my eye in the BMI v. NACPA BMI rate court case was a brief filed by a number of amici including the National Association of Broadcasters (NAB) and the Digital Media Association (DiMA). That alliance caught my eye. Three guesses why.

The Satanic Cult known as the MIC Coalition

The core logical flaw of the argument by these amici is that they omit the solution of saying no. They want the court to believe that using music is all too complicated. For example:

The [BMI rate court’s] decision here is wrong. It set a rate for BMI using as “benchmarks” rates obtained by two very different performing rights organizations, SESAC and GMR, in very different economic circumstances than pertain to the marketplace governing BMI and ASCAP licensing. 

What’s the principal difference between rates paid to BMI (and ASCAP) and rates paid to SESAC and GMR? The biggest difference identified by the trade association “friends” representing companies that together have market capitalizations in the $3 trillion range is that songwriters represented by SESAC and GMR are free to negotiate. And we can’t have that, now, can we? Here’s the explanation from the “friends”:

BMI and ASCAP, which together control over 90% of all public performance rights in musical works…are subject to consent decrees intended to protect entities like amici from the anticompetitive abuses that come with the aggregation of vast numbers of copyrights in the hands of a single licensing entity….As amici have experienced firsthand [oh, my, first hand? Poor babies!], SESAC and GMR are not subject to the same constraints on anticompetitive conduct as BMI and ASCAP, and amici enjoy none of the consent decrees’ protections when they negotiate—as they must—with SESAC and GMR.

Although SESAC and GMR have smaller repertories than BMI and ASCAP do (partially because they are invitation-only organizations, unlike BMI and ASCAP), each nonetheless controls the rights to multiple thousands of musical compositions, including works of writers as iconic as those who populate the ranks of BMI and ASCAP (such as Adele and Bob Dylan who are licensed by SESAC, and Bruce Springsteen and John Lennon who are licensed by GMR).  

Friends Don’t Let Friends Change One-Way Streets

So what the friends argue is that the BMI rate court should not have taken into account the rates negotiated by SESAC and GMR at arms length when setting the consent decree rate for BMI. In other words, when setting what is effectively a government-mandated rate, the BMI rate court should not have considered a willing buyer/willing seller negotiated rate because that was mixing apples and rotten apples. Which those poor babies know “first hand”–they, too, have been bullied by those “iconic” writers who fancy themselves worth more to music users than the other 90%. Oh, the arrogance!

And here is the fallacious conclusion of the false choice:

Industry reality thus makes it a necessity for amici to obtain blanket licenses from SESAC and GMR as well as BMI and ASCAP. This is particularly the case because music rights are often fragmented, with multiple PROs controlling interests in a single song. Adding to the problem, composition ownership information is opaque and inaccurate. Amici thus face, on the one hand, the threat of crippling copyright infringement liability if they do not obtain SESAC and GMR licenses and, on the other, supra-competitive prices that SESAC and GMR invariably charge when they do. As a result, they find themselves wedged between a rock and a hard place. 

This is the essence of the false choice that keeps coming up in these relationships. The underlying fallacy is that in order to use the music, the richest companies in commercial history must negotiate with SESAC and GMR (especially GMR if you ask me) and those pesky, albeit iconic, songwriters who allow these PROs to represent them. SESAC and GMR are not compelled by the government to bend the knee. If songwriters are allowed to keep going down that road outside the government’s boot, God knows where that might end up. They might get it in their heads that they’re actually worth something. We can’t have that, now can we?

And worse yet, if the government’s rate courts start using these freely negotiated terms to set compulsory rates, the one way street might change direction. And we can’t have that, either. But isn’t the essence of a compulsory license that the government is supposed to approximate what a willing buyer would pay a willing seller for the licensed rights? So aren’t the SESAC and GMR rates for the same use exactly the kind of benchmark the government should use when setting rates for everyone else?

Saying the Quiet Part Out Loud

This drives them wild, of course. They actually say the quiet part out loud:

[T]he impact of [SESAC and GMR’s] supra-competitive [free market] licensing practices on licensees has been cabined before the decision below, in large part because (a) the actual prices, while inflated, are not so high as to be ruinous to licensees given the comparatively smaller repertories involved; and (b) no rate court until now had relied on SESAC or GMR rates in setting rates for the much larger BMI and ASCAP repertories. In relying on SESAC and GMR’s rates, the district court turned a long-standing consent decree designed to protect music users on its head. The BMI consent decree was designed to stop BMI, a music-rights aggregator with monopoly power, from abusing that power. But [BMI Rate Court] Judge Stanton’s decision effectively endorsed those abuses by setting a rate that BMI could never get in a competitive marketplace, even though that is the governing standard for BMI (and ASCAP) rate-setting cases. 

And there’s the false choice again. If you can’t afford Le Bernadin, no one is forcing you to dine there. All these music users can just say no. They don’t want to. What they want is to get the music on the cheap. And, frankly, take a lazy approach to licensing. Yet the amici acknowledge that the court is bound to use a rate from a competitive marketplace as the “governing standard” in setting consent decree rates.

Here’s the rub. Until SESAC and especially GMR came along there effectively had never been a competitive performance royalty rate so the “governing standard” was essentially iterative and therefore meaningless. All these companies represented by amici got the government discount in rate court because of their lobbying power. As Senator John Kennedy told Mark Zuckerberg, tech companies are like countries and they get whatever they want in Washington–the primary reason artists have never been paid for broadcast radio performances of their recordings. And a recession is when Google lays off 25 Members of Congress.

While these music users are supposed to negotiate before going to rate court, those negotiations are just inconveniences so they could get to rate court and start running up legal fees. And shocker–when they have to negotiate with GMR and cannot go to rate court, they end up paying more. Just FYI, there’s also gambling in Rick’s American Bar.

The False Choices

So false choice number 1: The users don’t have to use music they can’t afford. False choice number 2: When songwriters cannot step away from the table and refuse to license, it’s the government that imposes a lower rate particularly when staying in rate court costs a fortune.

The government doesn’t protect the user from anticompetitive behavior, it protects the user from a competitive marketplace. That insulated rate is brought about through lobbying the executive branch and ultimately the Department of Justice. My bet is that this is the only reason–the only reason–that the ASCAP and BMI consent decrees are the longest running consent decrees in US history and probably world history.

Remember when the DOJ was reviewing all antitrust consent decrees in 2018 and terminated over 1000? But not for those dangerous anti-competitive songwriters. Yes, sir, as soon as that writer room door closes they get right down to colluding because that is the essence of songwriting.

For some reason–I wonder why–the DOJ decided that songwriters needed to be right up there with Otis Elevator and Microsoft and continued the bloodsucking consent decree cottage industry that has sent generations of children through prep school, college and law school. So here we are again arguing over the false choices. Hopefully, we may be entering a new era of enlightened thinking where publishers are willing to stand up and be counted to get the government’s boot off their throats.

 

Fired for Cause:  @RepFitzgerald Asks for Conditional Redesignation of the MLC

U.S. Representative Scott Fitzgerald joined in the MLC review currently underway and sent a letter to Register of Copyrights Shira Perlmutter on August 29 regarding operational and performance issues relating to the MLC.  The letter was in the context of the five year review for “redesignation” of The MLC, Inc. as the mechanical licensing collective.  (That may be confusing because of the choice of “The MLC” as the name of the operational entity that the government permits to run the mechanical licensing collective.  The main difference is that The MLC, Inc. is an entity that is “designated” or appointed to operationalize the statutory body.  The MLC, Inc. can be replaced.  The mechanical licensing collective (lower case) is the statutory body created by Title I of the Music Modernization Act) and it lasts as long as the MMA is not repealed or modified. Unlikely, but we live in hope.)

I would say that songwriters probably don’t have anything more important to do today in their business beyond reading and understanding Rep. Fitzgerald’s excellent letter.

Rep. Fitzgerald’s letter is important because he proposes that the MLC, Inc. be given a conditional redesignation, not an outright redesignation.  In a nutshell, that is because Rep. Fitzgerald raises many…let’s just say “issues”…that he would like to see fixed before committing to another five years for The MLC, Inc.  As a member of the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet, Rep. Fitzgerald’s point of view on this subject must be given added gravitas.

In case you’re not following along at home, the Copyright Office is currently conducting an operational and performance review of The MLC, Inc. to determine if it is deserving of being given another five years to operate the mechanical licensing collective.  (See Periodic Review of the Mechanical Licensing Collective and the Digital Licensee Coordinator (Docket 2024-1), available at https://www.copyright.gov/rulemaking/mma-designations/2024/.)

The redesignation process may not be quickly resolved.  It is important to realize that the Copyright Office is not obligated to redesignate The MLC, Inc. by any particular deadline or at all.  It is easy to understand that any redesignation might be contingent on The MLC, Inc. fixing certain…issues…because the redesignation rulemaking is itself an operational and performance review.  It is also easy to understand that the Copyright Office might need to bring in some technical and operational assistance in order to diligence its statutory review obligations.  This could take a while.

Let’s consider the broad strokes of Rep. Fitzgerald’s letter.

Budget Transparency

Rep. Fitzgerald is concerned with a lack of candor and transparency in The MLC, Inc.’s annual report among other things. If you’ve read the MLC’s annual reports, you may agree with me that the reports are long on cheerleading and short on financial facts.  It’s like The MLC, Inc. thought they were answering the question “How can you tolerate your own awesomeness?”   That question is not on the list.  Rep. Fitzgerald says “Unfortunately, the current annual report lacks key data necessary to examine the MLC’s ability to execute these authorities and functions.”  He then goes on to make recommendations for greater transparency in future annual reports.

I agree with Rep. Fitzgerald that these are all important points.  I disagree with him slightly about the timing of this disclosure.  These important disclosures need not be prospective–they could be both prospective and retroactive. I see no reason at all why The MLC, Inc. cannot be required to revise all of its four annual reports filed to date (https://www.themlc.com/governance) in line with this expanded criteria.  I am just guessing, but the kind of detail that Rep. Fitzgerald is focused on are really just data that any business would accumulate or require in the normal course of prudently operating its business.  That suggests to me that there is no additional work required in bringing The MLC, Inc. into compliance; it’s just a matter of disclosure.

There is nothing proprietary about that disclosure and there is no reason to keep secrets about how you handle other people’s money.  It is important to recognize that The MLC, Inc. only handles other people’s money.  It has no revenue because all of the money under its management comes from either royalties that belong to copyright owners or operating capital paid by the services that use the blanket license.  It should not be overlooked that the services rely on the MLC and it has a duty to everyone to properly handle the funds. The MLC, Inc. also operates at the pleasure of the government, so it should not be heard to be too precious about information flow, particularly information related to its own operational performance. Those duties flow in many directions.

Board Neutrality

The board composition of the mechanical licensing collective (and therefore The MLC, Inc.) is set by Congress in Title I.  It should come as no surprise to anyone that the major publishers and their lobbyists who created Title I wrote themselves a winning hand directly into the statute itself.  (And FYI, there is gambling at Rick’s American Café, too.)  As Rep. Fitzgerald says:  

Of the 14 voting members, ten are comprised of music publishers and four are songwriters. Publishers were given a majority of seats in order to assist with the collective’s primary task of matching and distributing royalties. However, the MMA did not provide this allocation in order to convert the MLC into an extension of the music publishers.

I would argue with him about that, too, because I believe that’s exactly what the MMA was intended to do by those who drafted it who also dictated who controlled the pen.  This is a rotten system and it was obviously on its way to putrefaction before the ink was dry.

For context, Section 8 of the Clayton Act, one of our principal antitrust laws, prohibits interlocking boards on competitor corporations.  I’m not saying that The MLC, Inc. has a Section 8 problem–yet–but rather that interlocking boards is a disfavored arrangement by way of understanding Rep. Fitzgerald’s issue with The MLC, Inc.’s form of governance:

Per the MMA, the MLC is required to maintain an independent board of directors. However, what we’ve seen since establishing the collective is anything but independent. For example, in both 2023 and 2024, all ten publishers represented by the voting members on the MLC Board of Directors were also members of the NMPA’s board.  This not only raises questions about the MLC’s ability to act as a “fair” administrator of the blanket license but, more importantly, raises concerns that the MLC is using its expenditures to advance arguments indistinguishable from those of the music publishers-including, at times, arguments contrary to the positions of songwriters and the digital streamers.

Said another way, Rep. Fitzgerald is concerned that The MLC, Inc. is acting very much like HFA did when it was owned by the NMPA.  That would be HFA, the principal vendor of The MLC, Inc. (and that dividing line is blurry, too).

It is important to realize that the gravamen of Rep. Fitzgerald’s complaint (as I understand it) is not solely with the statute, it is with the decisions about how to interpret the statute taken by The MLC, Inc. and not so far countermanded by the Copyright Office in its oversight role.  That’s the best news I’ve had all day.  This conflict and competition issue is easily solved by voluntary action which could be taken immediately (with or without changing the board composition).  In fact, given the sensitivity that large or dominant corporations have about such things, I’m kind of surprised that they walked right into that one.  The devil may be in the details, but God is in the little things.

Investment Policy

Rep. Fitzgerald is also concerned about The MLC, Inc.’s “investment policy.”  Readers will recall that I have been questioning both the provenance and wisdom of The MLC, Inc. unilaterally deciding that it can invest the hundreds of millions in the black box in the open market.  I personally cannot find any authority for such a momentous action in the statute or any regulation.  Rep. Fitzgerald also raises questions about the “investment policy”:

Further, questions remain regarding the MLC’s investment policy by which it may invest royalty and assessment funds. The MLC’s Investment Policy Statement provides little insight into how those funds are invested, their market risk, the revenue generated from those investments, and the percentage of revenue (minus fees) transferred to the copyright owner upon distribution of royalties. I would urge the Copyright Office to require more transparency into these investments as a condition of redesignation.

It should be obvious that The MLC, Inc.’s “investment policy” has taken on a renewed seriousness and can no longer be dodged.

Black Box

It should go without saying that fair distribution of unmatched funds starts with paying the right people.  Not “connect to collect” or “play your part” or any other sloganeering.  Tracking them down. Like orphan works, The MLC, Inc. needs to take active measures to find the people to whom they owe money, not wait for the people who don’t know they are owed to find out that they haven’t been paid.  

Although there are some reasonable boundaries on a cost/benefit analysis of just how much to spend on tracking down people owed small sums, it is important to realize that the extraordinary benefits conferred on digital services by the Music Modernization Act, safe harbors and all, justifies higher expectations of those same services in finding the people they owe money.  The MLC, Inc. is uniquely different than its counterparts in other countries for this reason.

I tried to raise the need for increased vigilance at the MLC during a Copyright Office roundtable on the MMA. I was startled that the then-head of DiMA (since moved on) had the brass to condescend to me as if he had ever paid a royalty or rendered a royalty statement.  I was pointing out that the MLC was different than any other collecting society in the world because the licensees pay the operating costs and received significant legal benefits in return. Those legal benefits took away songwriters’ fundamental rights to protect their interests through enforcing justifiable infringement actions which is not true in other countries.

In countries where the operating cost of their collecting society is deducted from royalties, it is far more appropriate for that society to consider a more restrictive cost/benefit analysis when expending resources to track down the songwriters they owe. This is particularly true when no black box writer is granting nonmonetary consideration like a safe harbor whether they know it or not.

I got an earful from this person about how the services weren’t an open checkbook to track down people they owed money to (try that argument when failing to comply with Know Your Customer laws).  Grocers know more about ham sandwiches than digital services know about copyright owners. The general tone was that I should be grateful to Big Daddy and be more careful how I spend my lunch money. And yes I do resent this paternalistic response which I’m sorry to say was not challenged by the Copyright Office lawyer presiding who shortly thereafter went to work for Spotify.  Nobody ever asked for an open check.  I just asked that they make a greater effort than the effort that got Spotify sued a number of times resulting in over $50 million in settlements, a generous accommodation in my view. If anyone should be grateful, it is the services who should be grateful, not the songwriters.

And yet here we are again in the same place.  Except this time the services have a safe harbor against the entire world which I believe has value greater than the operating costs of the MLC.  I’d be perfectly happy to go back to the way it was before the services got everything they wanted and then some in Title I of the MMA, but I bet I won’t get any takers on that idea.

Instead, I have to congratulate Rep. Fitzgerald for truly excellent work product in his letter and for framing the issue exactly as it should be posed.  Failing to fix these major problems should result in no redesignation—fired for cause.