The Sound and the Fury: The Copyright Office Unmatched Report’s Confused Thesis

One of the first world problems with the Copyright Office unmatched report (and frankly the legislative history) is that the Office seems to confound matching transitory royalty payments with building a permanent asset. There is an inherent tension in utilizing a cost benefit analysis to decide which songs are “worth” identifying and paying compared to which songs are “worth” identifying to build the Congressionally mandated core asset of the Mechanical Licensing Collective–the public’s musical works database.

These are two entirely different projects. The unmatched report misses the opportunity to properly distinguish them and emphasize the priority that must be given to building the gold standard musical works database–for which the services pay and in consideration for which the services received a Congressionally mandated retroactive safe harbor for the legion of past infringements. It now becomes apparent that the services were not really serious about doing the hard work and wanted to do just enough to be able to get their safe harbor.

But what about the $424 million in black box, you say? Didn’t they pay beaucoup bucks to settle up with songwriters? Yes, it’s true–the services paid songwriters with what services said was the amount of the songwriters own money that the services owed them due to extraordinarily sloppy licensing practices. Hopefully when the accounting data is made public, we will have a better idea of whether this $424 million makes sense as the semi-accurate number. If, however, it turns out that the vast bulk of the retroactive payment of $424 million accrued over the last few years, that is, since the passing of the MMA Title I safe harbor to benefit those who need it least, it will become apparent that the “historic” retroactive payment was neither historic nor particularly retroactive. Watch the Eight Mile Style case in Tennessee for some answers on this where both Spotify and the Harry Fox Agency are being sued by Eminem’s publishers.

Yet this confusion over the difference between complying with the Congressional mandate to build an authoritative musical works database and some line in the legislative history that the lobbyists inserted about “play your part” is another reason why using a cost benefit analysis for identifying long tail royalty payments makes no sense.

The MLC is charged by Congress with creating the public musical works database–an asset. The MLC is also charged with accounting for royalties–a payment. The report says “The MLC should take reasonable steps to ensure that its data is of the highest possible quality, meaning, among other things, that it is as complete, accurate, up-to-date, and de-conflicted as possible, and is obtained from authoritative sources.” But not if the cost of quality data exceeds the royalties payable in a particular month?

Payments change, assets do not. The MLC are either building a “highest possible quality asset” or they are doing the usual 80/20 “industry standard” slop that is already becoming the MLC’s go-to excuse for failure. Because rest assured–it will always be someone else’s fault. Who do you think caused that “industry standard” to exist? One of the MLC’s principal vendors, mebbbie?

The services like the Title I safe harbor just fine, but obviously no one is interested in actually building an asset of the “highest quality” which is a different enterprise than royalty accounting.

Which is it going to be? I think we all know the answer. If we let it, it will be a lot of sound and fury signifying nothing.

What the MLC Can Learn from Orphan Works

As you may be aware, The MLC recently received $424 million as payment of the “inception to date” unmatched mechanical royalties held at a number of streaming platforms, sometimes called the “black box.” Why do we have a black box at all? For the same reason you have “pending and unmatched” at record companies–somebody decided to exploit the recording without clearing the song.

Streaming services will, no doubt, try to blame the labels for this missing data, but that dog don’t hunt. First, the streaming service has an independent obligation to obtain a license and therefore to know who they are licensing from. Just because the labels do, too, doesn’t diminish the service’s obligation. It must also be said that for years, services did not accept delivery of publishing metadata even if a label wanted to give it to them. So that helps explain how we get to $424 million. Although the money was paid around mid-February, it’s clearly grown because The MLC is to hold the funds in an interest bearing account. Although The MLC has yet to disclose the current balance. Maybe someday.

This payment is, rough justice, a quid pro quo for the new “reach back” safe harbor that the drafters of Title I came up with that denies songwriters the right to sue for statutory damages if a platform complies with their rules including paying this money. That’s correct–songwriters gave up a valuable right to get paid with their own money.

The MLC has not released details about these funds as yet, but one would expect that the vast majority of the unmatched would be for accounting periods prior to the enactment of Title I of the Music Modernization Act (Oct. 11, 2018). One reason that expectation would be justified is that Title I requires services to try hard(er) to match song royalties with song owners. The statute states “…a digital music provider shall engage in good-faith, commercially reasonable efforts to identify and locate each copyright owner of such musical work (or share thereof)” as a condition of being granted the safe harbor.

The statute then goes on to list some examples of “good faith commercially reasonable efforts”. This search, or lack thereof, is at the heart of Eight Mile Style and Martin Affiliated’s lawsuit against Spotify and the Harry Fox Agency. (As the amended complaint states, “Nowhere does the MMA limitation of liability section suggest that it lets a DMP off the hook for copyright infringement liability for matched works where the DMP simply committed copyright infringement. The same should also be true where the DMP had the information, or the means, to match, but simply ignored all remedies and requirements and committed copyright infringement instead. Spotify does not therefore meet the requirements for the liability limitations of the MMA with respect to Eight Mile for this reason alone.”)

The MMA language is similar to “reasonably diligent search” obligations for orphan works, which are typically works of copyright where the owner cannot be identified by the user after trying to find them. This may be the only aspect of orphan works practice that is relevant to the black box under MMA. Since considerable effort has been put into coming up with what constitutes a proper search particularly in Europe it might be a good idea to review those standards.

We may be able to learn somethng about what we expect the services to have already done before transferring the matching problem to the MLC and what we can expect the MLC to do now that they have the hot potato. The MMA provides non-exclusive examples of what would comprise a good search, so it is relevant what other best practices may be out there.

Establishing reference points for what constitutes “good faith commercially reasonable efforts” under MMA is important to answer the threshold question: Is the $424 million payment really all there is? How did the services arrive at this number? While we are impressed by the size of the payment, that’s exactly the reason why we should inquire further about how it was arrived at, what periods it is for and whether any deductions were made. Otherwise it’s a bit like buying the proverbial pig in the proverbial poke.

One method lawmakers have arrived at for determining reasonableness is whether the work could be identified by consulting readily available databases identified by experts (or common sense). For example, if a songwriter has all their metadata correct with the PROs, it’s going to be a bit hard to stomach that either the service or the MLC can’t find them.

Fortunately, we have the Memorandum of Understanding from the European Digital Libraries initiative which brought together a number of working groups to develop best practices to search for different copyright categories of orphan works. The Music/Sound Working Group was represented by Véronique Desbrosses of GESAC and Shira Perlmutter, then of IFPI and now Register of Copyrights (head of the U.S. Copyright Office). The Music/Sound Working Group established these reasonable search guidelines:

DUE DILIGENCE GUIDELINES

The [Music/Sound] Working Group further discussed what constituted appropriate due diligence in dealing with the interests of the groups represented at the table—i.e., what a responsible [user] should, and does, do to find the relevant right holders. We agreed that at least the following searches should be undertaken:

1. Check credits and other information appearing on the work’s packaging (including names, titles, date and place of recording) and follow up through those leads to find additional right holders (e.g., contacting a record [company] to find the performers).

2. Check the databases/membership lists of relevant associations or institutions representing the relevant category of right holder (including collecting societies, unions, and membership or trade associations). In the area of music/sound, such resources are extensive although not always exhaustive.

3. Utilise public search engines to locate right holders by following up on whatever names and facts are available.

4. Review online copyright registration lists maintained by government agencies, such as the U.S. Copyright Office.

Perhaps when the MLC audits the inception to date payments we’ll have some idea of whether the services complied with these simple guidelines.

Good News for Music Tech Startups: DLC Changes Fee Structure for Using Blanket Compulsory License

Title I of the Music Modernization Act established a blanket mechanical royalty license, the mechanical licensing collective to create the musical works database and collect royalties, the Digital Licensee Coordinator (which represents the music users under the blanket license) and a system where the services pay for the millions evidently required to operate the MLC and create the musical works database (which may happen eventually but which currently is the Harry Fox Agency accessed via API).

Title I also established another first (to my knowledge):  The United States became the first country in the world to charge music users a fee for availing themselves of a compulsory license.  The way that works is that all users of the blanket license have to bear a share of the costs of operating the MLC and eventually establishing the musical works database (and whatever else is in the MLC’s budget like legal fees, executive pension contributions, bonuses, etc.).  This is called the “administrative assessment” and is established by the Copyright Royalty Judges through a hearing that only the DLC and the MLC were (and probably are) allowed to attend, yet sets the rates for music users not present.

The initial administrative assessment is divided into two parts: The startup costs for developing the HFA API and the operating costs of the MLC.  The startup costs for the API, vendor payments, etc., were assessed to be $33,500,000; that’s a pricey API.  The first year MLC operating costs were assessed to be $28,500,000.  Because it’s always groundhog day when it comes to music publishing proceedings before the Copyright Royalty Judges, the method of allocating these costs are a mind-numbing calculation that will require lawyers to interpret.  With all respect, the poor CRJs must wonder how anything ever actually happens in the music business based on the distorted view that parades before them.  You do have to ask yourself is this really the best we can do?  Imagine that the industry elected to solve its startup problems by single combat with one songwriter and one entrepreneur staying in a room until they made a deal.  Do you think that the best they could come up with is the system of compulsory licensing as it exists in the US?  Maybe.  Or maybe they’d come up with something simpler and less costly to administer in the absence of experts , lobbyists and lawyers.

My feeling is that the entire administrative assessment process is fraught with conflicts of interest, a view I made known in an op-ed and to the Senate Judiciary Committee staff at their request when the MMA was being drafted.  The staff actually agreed, but said their hands were tied because of “the parties”–which of course means “the lobbyists” because the MMA looked like what they call a “Two Lexus” lobbying contract.  Not for songwriters, of course.

Yet, the DLC appears to have reconsidered some of this tom foolery and should be praised for doing so.  The good news is that the market’s gravitational pull has caused the allocation of the assessment on startups to come back to earth in a much more realistic methodology.  Markets are funny that way, even markets for compulsory licenses.  While still out of step with the rest of the world, at least the US precedent appears much less likely to have the counterproductive effects that were obvious before MMA was signed into law due to the statute’s anticompetitive lock in.  And the DLC should be commended for having the courage and the energy to make the fairness-making changes.  That’s a wow moment.

Hats off to the DLC for getting out ahead of the issue.  I recommend reading the DLC filing supporting the revisions (technically a joint filing with MLC but it reads like it came from DLC with MLC signing off).  It’s clearly written and I think the narrative will be understandable and informative to a layperson (once you get past the bizarre structure of the entire thing).  The DLC tells us the reasons for revisiting the allocation:

Since the Judges adopted the initial administrative assessment regulations, the Parties [i.e., the DLC and MLC since no one else was allowed to participate even if they had a stake in the outcome] have gained a better understanding of the overall usage of sound recordings within the digital audio service industry, as well as the relative usage of various categories of services. This information has led the Parties to conclude that the allocation methodology could have significant impacts on smaller Licensees, and that the allocation methodology should be modified to better accommodate these Licensees, and that such is reasonable and appropriate. This is particularly the case as these Licensees transition to the new mechanical licensing system set forth in the Music Modernization Act (“MMA”) and navigate new reporting requirements, and further as the country continues to generally struggle through the economic and health effects of the ongoing COVID-19 pandemic. While the cost, reporting requirements, and impacts of the pandemic are experienced by all Licensees, the Parties believe that it is reasonable and appropriate to modify the administrative assessment to better address the situations of smaller Licensees.

The “old” allocation resulted in this payment structure for services buying into the blanket license (setting aside download stores for the moment):

Old Assessment Alloction

It was that $60,000 plus an indeterminate share of operating costs that was the killer.  The new allocation is more precise applicable to other than download stores:

New Assessment Alloction

This makes a lot more sense and one can believe that some startups actually were asked what they think. Remember, David Lowery sent an open letter to the CRJs in 2019 raising this exact point reacting to the bizarre initial administrative assessment hearings:

The Judges should take into account that no startup has been present or able to negotiate the many burdens placed on them by this settlement. In particular, they have not been able to be heard by the Judges on the scope of these financial burdens that their competitors—some of the richest multinational corporations in history—have unilaterally decided to place on them with no push back.

This isn’t to say that any would be brave enough to come forward and challenge their betters if given a chance. But they should at least be given a chance.

There are some twists and turns to the new rule which was adopted by the CRJs as a final rule on January 8, 2021, and any startup should obviously get smart about the rules. But–these latest amendments have established two really great things: First, the DLC is paying attention. That is very good for the reasons David raises. The other is that the DLC is apparently actually talking to someone other than Google and Spotify and coming up with reasonable compromises. This is very, very good. Let’s hope it continues.

We’ll be watching.

Making Sense of the New Blanket Mechanical License and the Mechanical Licensing Collective

This is a recording of a webinar about the Mechanical Licensing Collective that I did with Abby North and Gwen Seale, sponsored by Texas Accountants and Lawyers for the Arts, Austin Texas Musicians and Austin Music Foundation.  

The webinar is from the point of view of self-published songwriters who are trying to make sense of the Mechanical Licensing Collective (currently, “The MLC, Inc.”) and what is going to happen to their mechanical licensing revenue now that the blanket license is available to digital music providers (or “DMPs”).  

Here’s a couple basic concepts:  

A “mechanical” royalty must be licensed by a DMP for the “mechanical” reproduction of the song, and a separate royalty paid for uses under that “mechanical license.”  The mechanical license also covers distribution of the copies permitted.  See the Copyright Office Circulars on the digital side and the physical side (somewhat different rules apply to each configuration).

Up until January 1, 2021, mechanical licenses were issued on a song-by-song basis in the United States under a compulsory license.  There was no blanket compulsory license.  The Music Modernization Act established both the blanket compulsory license for permanent downloads, limited downloads, and interactive streaming (available after January 1, 2021) and a mechanical licensing collective which can be run by different non-profit corporations at different times.  The head of the Copyright Office “designates” or “approves” the non-profit corporation to be the mechanical licensing collective and reviews the performance of the designated company every five years.  The Copyright Office approved a non-profit corporation that styles itself “The MLC, Inc.” or “The MLC” so it gets confusing as to whether you are talking about “the mlc” or the organization described in the Music Modernization Act or The MLC, Inc., the corporation approved by the Copyright Office with the backing of the National Music Publishers Association among others.

So it is the usual government alphabet soup, but be clear about one thing–unless you know with certainty that your song catalog is being paid under voluntary licenses outside of the blanket license, you will stop being paid however you have been paid and you will start being paid by The MLC if you can be matched to revenue.  

That means that your songs must be registered with The MLC correctly, including your banking information.  Do not count on that happening by itself.

Here are a few links as a companion to the webinar:

Please take the MLC Awareness Questionnaire, 10 questions, responses and responders are anonymous.

The MLC, Inc.

When Do I Get Paid By the MLC?

Most recent Copyright Office rules for payments by DMPs to the MLC of your money

Rules for when MLC must pay copyright owners (including copyright owners who are self-published songwriters)

Guest Post: The Music Modernization Act is Stifling Innovation in the Music Industry

[The chickens are coming home to roost.  As I warned before the Music Modernization Act was passed, Title I has big problems.  Remember that Title I established the Mechanical Licensing Collective (publishers and songwriters) and the Digital Licensee Coordinator (digital music platforms). It was sold to songwriters on the basis that “the services pay for everything”.  We will see how true that ends up being (as the copyright owners have to pay their costs to populate or correct the HFA database which is a massive undertaking).  Nobody talked to any DMP startups when the legislation was drafted or when the “administrative assessment” was litigated before the Copyright Royalty Judges.  But now startups are getting the bill and they’re not too happy, particularly 115 services that never had to pay for a license other than royalties.  I addressed some of this in a 2018 post on MusicTech Solutions that was reposted on Newsmax Finance.]

From: Max Fergus
Date: Tue, Nov 10, 2020 at 11:06 AM
Subject:
To: LUM Team

A Letter to the Music Industry,  

Beware, the future of music is in jeopardy.

The Music Licensing Collective (“MLC”) recently announced that it will begin to regulate the largest major music streaming platforms in 2021. However, this agency, formed behind closed doors between the major labels and streaming services themselves, will only hurt those of us who are actively fighting the unjust practices of the platforms that are being regulated in the first place.

The Music Modernization Act is a “competition killer” set out to destroy the platforms that are trying to create a new tomorrow for independent musicians and stifling current and future innovation within the industry.

We are not alone and it’s time to fight. 
Please find our LinkedIn Article here as well as a link to our post
Please share and repost if possible in our fight against the MMA.

___________________________________________
Article Preview
We were told when we started our company that the institutions within the music industry were always going to be against us. In fact, many people told us these institutions would do everything in their power to curb innovation to make sure the money stayed where it always has – in the pockets of the major labels and the major music streaming services.

Finally, after 10 years of archaic practices in the music streaming industry, which widened the financial gap between the one percent of the music industry stakeholders and the rest of the starving artists, the Music Modernization Act (“MMA”) was created. At its most basic level, the goal was to take the onus off of major streaming platforms to track and remit royalties generated from these major platforms into the pockets of the right artists/labels in a more timely fashion through a new government-subsidized organization known as the Mechanical Licensing Collective (“MLC”).

Sounds great, right? Wrong. This will set back the music industry for years to come.

Imagine starting a process to MODERNIZE MUSIC and how music is monetized for all artists, yet the only stakeholders the MLC brought in to discuss how the MMA and the MLC would operate are the major streaming platforms and major labels themselves. So, what did they do? They structured the MLC in a way that will save these major corporations millions of dollars while completely neglecting the reason why the law was written in the first place – to oversee the music streaming platforms that have consistently, purposefully and negligently not paid the creators – whose content drives their service – their fair share in a transparent and efficient way.

The MMA was designed to regulate and modernize the practices of “royalty-bearing” music streaming services like Spotify, YouTube, and Apple. Next year, the MLC will open its doors and, as part of its first year of operations, it requires the companies included within the MLC to help pay for “start-up fees.” Companies outside of the largest music streaming companies, such as smaller DSPs and smaller royalty-bearing music streaming platforms, must also share unproportionally in these expenses. Essentially, the MLC and the largest streaming platforms want smaller services to pay more than their fair share for the MLC to oversee and audit the largest players in the music streaming industry…even those services who operate to fix the same problems as the new entity itself.

It gets worse.

LÜM was created to serve a similar foundational mission to these entities – to help guide an industry that needs to better support its creators through innovation. Because of that, we made a choice to not be a part of the traditional recorded music industry. We pay NO royalties and instead have proven that there is a better future. Instead of royalties, LÜM created the first virtual gifting system in a music discovery platform that allows fans to help directly support their favorite independent artists. The result?

Artists on LÜM earn an average of ~6x more per stream than every single other music streaming platform in the U.S.

Just like so many other companies that are trying to advance the music industry, LÜM is now facing an uphill battle against an organization (MLC) that was developed in conjunction with the same stakeholders who put the music industry in this position in the first place. The fees LÜM and other innovative companies are facing, to help fund the MLC, are substantial. Every new innovative company will face them and will provide a financial hurdle that will leave the majority of current and future innovative music startups dead in the water. No new entrants and no new competition mean the industry will stay exactly where it has for the last 15 years – putting money in the pockets of the rich and neglecting those that are trying to change the industry for the better.

We cannot let this happen. Innovation must continue or we face a scary reality for the music industry and the majority of artists and innovators that have been neglected by it.

— 
Max Fergus | Chief Executive Officer

Check out my favorite song on LÜM Here!

The World is not Flat: @CISACNews and BIEM Focus on Vendor Lock-in at the MLC

One of the many U.S.-centric shortcomings of Title I of the Music Modernization Act (that created the Mechanical Licensing Collective, the safe harbor giveaway and the blanket license) is that it pretty much ignores the entire complex system of content management organizations outside the U.S. As they describe themselves, “CISAC and BIEM are international organisations representing Collective Management Organisations (“CMOs”) worldwide that are entrusted with the management of creators’ rights and, as such, have a direct interest in the Regulations governing the functioning of the Database and the transparency of MLC’s operations. CISAC and BIEM would like to thank the Office for highlighting the existence and particularity of entities such as CMOs that are not referred to in the MMA.”

I have to say at the outset that as someone who lived outside the U.S. for a big chunk of time, it’s rather embarrassing but sadly unsurprising that so little attention has been paid to the global system of CMOs and the cold fact that we are now weeks away from the January 1, 2021 deadline.

You would not be aware of this unless you read the many comments to the Copyright Office on the MLC oversight rule makings. Aside from the fact that these organizations have decades of experience with blanket mechanical licensing (which the MLC might benefit from), CISAC and BIEM should have been included in the MLC itself, particularly since the MLC promoters appear to have been handing out non-voting directorships to themselves. It is embarrassing, kind of like those Americans who think the best way to speak French is to speak English louder.

CISAC and BIEM raise excellent issues in their comments, which often are accompanied by gentle hint language indicating the points have been raised before and ignored, or at least not responded to. According to a recently posted “ex parte” letter, CISAC and BIEM have focused in on a critical issue–where is the MLC’s statutorily required database and what benefits accrue to its vendor–principally HFA which was recently reunited in the MLC with its former owners.

You can read the CISAC and BIEM ex parte letter here. (Ex parte letters essentially document private discussions by the Copyright Office on matters they are currently regulating. Ex parte letters help to build a full record on matters placed before the Copyright Office by interested parties that may or may not be addressed in regulations.)

Here’s a key excerpt that I think deserves more attention (and is not going to be covered by the trade press until the system collapses in all likelihood).

CISAC/BIEM also raised further concerns regarding potential competitive advantages that The MLC or its vendors’ access to information may have and risks that such information could potentially be used for purposes outside of Section 115 mechanicals. The USCO assured the CMOs that they were perfectly aware of this issue, which had also been raised by other parties, and considered that these concerns were being addressed in the Confidentiality Rulemaking, and that the Statute requires Regulations to prevent the disclosure or improper use of information or MLC records. The proposed Rule establishes that MLC vendors cannot use the data obtained for processing for other purposes. The USCO further confirmed that it was very much aware of the need to ensure the necessary balance and that it was still contemplating how best to resolve this, including whether there should be more regulation.

I have to say that this is not the impression I got from the first panel of “MLC week” rather that the panel seemed to think that at least any member of the public could use the data provided to the MLC for any purpose. Since the MLC’s vendors would also be members of the public ostensibly, it does seem that disconnect needs to be cleared up.

The ex parte letter continues:

The CMOs CISAC/BIEM considered that some of these concerns were based on the January 1 deadline and whether The MLC would be operating with HFA’s database or with its’ own DQI processed separate database.

This depends on the antecedent of “its” in the last clause. If you take The MLC as the antecedent, the meaning would be “or with The MLC’s own DQI processed separate database.” If you take HFA as the antecedent, the meaning would be “whether The MLC would be operating with HFA’s database or with HFA’s own DQI processed separate database.”

While I think that CISAC and BIEM meant the former, the reality appears to be the latter however nonsensical it may seem. This is because there do not appear to be two separate databases, just the HFA database that The MLC accesses through an API. The DQI operation is designed to improve the data quality of the HFA database which benefits both The MLC and HFA.

There seems to be more than a little confusion about this:


USCO noted that there are still open questions regarding this issue, as it seemed that the HFA database would be used as a starting point, but through programmes like DQI data was being updated, so it did not seem as if both databases were identical.

I would argue with this (and have). This idea that DQI was updating a database other than the HFA database sounds like there is a stand-alone musical works database as required by the statute. If so, where is it? Why does the DQI produce search results like this:

HFA DQI

The USCO reiterated that the proposed Confidentiality Rulemaking specifies the limitations imposed on proposed vendors and that The MLC had in writing acknowledged that neither The MLC nor its vendor owned the data. The USCO acknowledged that there was a lot of concern expressed about this issue and ensured the CMOs it was going to address this issue.

Ownership alone is not the only issue and misdirects attention. On the one hand, The MLC says it does not own the database (another example of drafting oversights in Title I of the MMA–ownership is one of those issues you would think would be clearly spelled out but was only referenced indirectly).

I come away from reading the ex parte letter more concerned than ever that the core issue that The MLC was tasked with by the Congress is simply not being addressed–where is the Congress’s musical works database? Remember the words of the legislative history:

“Music metadata has more often been seen as a competitive advantage for the party that controls the database, rather than as a resource for building an industry on.”

Who Owns The MLC Database of Songs?

If you’ve been following the evolution of the “aircraft carrier” revision of the U.S. Copyright Act styled the “Music Modernization Act,” you will remember that America now has a blanket license for the mechanical reproduction of songs (or will have as of 1/1/21).  The “MMA” comes in three parts (or as I say three and one-half):

  • Title I which establishes the blanket license, a willing-buyer willing-seller standard for mechanical royalty rate setting, the Mechanical Licensing Collective (called the “MLC”), the all-important safe harbor for Big Tech’s massive infringement of songs, and authorized the creation of the “musical works database” which is the subject of this post;
  • Title I-1/2 which gives certain small benefits to ASCAP and BMI;
  • Title II which provides meaningful relief and largely fixes the pre-72 loophole that the Turtles sued over (formerly the CLASSICS Act); and
  • Title III which gives producers a statutory basis for SoundExchange royalties, another truly meaningful change.

I supported Title II and Title III, but I have lots of bones to pick with Title I, not the least of which has to do with the musical works database.  A lot of my issues have to do with what I perceive as sloppy drafting and a mad rush to “get a bill” at all costs which has led to a strong need to “fix” a lot of “glitches” in Title I itself (such as the failure to dovetail the major change in the compulsory mechanical from a per-song basis to a blanket basis. This in turn has an affect on other copyright provisions such as the termination right for songwriters which is now having to get solved–maybe–through the caulking of regulations to cover sloppy workmanship.  (Caulk cracks.)

For those of us who sweep up behind the elephants in the circus of life, I fear that the musical works database of other people’s things is an 11th Century solution to a 21st Century problem–a list of things that will be very difficult to get right and even more difficult to keep right, not unlike William the Conqueror’s Domesday Book.  Static lists of dynamic things necessarily are out of date the moment they are fixed.  We are going to discuss Title I musical works database today from a very simple threshold question:  Who owns it?

Spoiler alert:  The public owns it.  This is logical, but like so many things in the drafting of Title I, the drafting is glitchy, which is what you call it if you’re in a good mood.  I apocryphally attribute the term “glitch” when applied to massive Internet data breaches to the Fathers of the Internet who not only failed to take care that the herd was protected but also created a never ending series of data breaches.  That, in turn, birthed the entire Internet security industry–you know, “glitch” protection. (Looking at you, Vint Cerf.)

When you consider that the most valuable asset of the MLC is going to be the song database, and this database of other people’s things must be created by the efforts of potentially hundreds of thousands of songwriters given no choice in the matter, ownership matters.  It would be a bit much for the U.S. Congress to require all this only to enrich one U.S. corporation controlled by the U.S. publishers by leveraging a compulsory license to create a very valuable private asset.  Particularly one paid for by other people that might then get taken and given to a replacement MLC.  (There’s that “taken” word again.)  That’s typically not what they do.

Let’s also remember that on paper, the MLC does not pay a penny for the cost of its operations, including the creation of the database.  The entire cost of the MLC’s operations is borne by the users of the blanket license through an organization called the Digital Licensee Coordinator.  (If you’re thinking what’s with these names, I know, I know.  Forget it, Jake, it’s Washington.)

This database ownership issue has been raised a couple times, and no one has answered it.  I made it part of a recent comment I filed with the Copyright Office in the current rule making for regulations implementing Title I.  Maybe they’ll get around to answering the question this time.  After a while, you have to wonder why they have not.

A side note demonstrating both that ownership matters and that The MLC is thinking about ownership:  a service mark registration for “The MLC”.  (A service mark is a kind of trademark.)  There is a difference between “the MLC” and “The MLC”.  That’s because “the MLC” is the organization envisioned by the Congress that has to be redesignated (think “re-approved”) by the Copyright Office every five years.  On the other hand, “The MLC” refers to “The MLC, Inc.” which is the corporation created by the super popular proponents of Title I who were designated the first MLC and who style themselves “The MLC” using the definite article.  But if I told you that there was a difference between “the MLC” and “The MLC” would you find that confusing?

The clear implication of the definite article seems to be that they don’t envision any future in which they will not be the MLC, i.e., will not be redesignated.  They also probably don’t envision a future where a different corporation would be designated the MLC and The MLC would be looking for something to do.  Maybe they know something we don’t, but there it is.

This also raises some interesting trademark questions should The MLC seek to prevent a successor from trading under the name “MLC”, enough to stop The MLC from claiming a proprietary interest in the statutory description.  That mark is arguably descriptive and probably should be denied.  In fact it’s so descriptive it actually asserts a private intellectual property interest in the statutory language that describes the organization created by statute.  Sort of like asserting a trademark in “TVA” or “ICC” or “FOIA”.

MLC TM Registration

Let’s be clear about who owns the Congressional database.  As you will see, the musical works database does not belong to the MLC or The MLC and if there is any confusion about that, the Copyright Office should clear it up right away (which would save having to go to other avenues to do the same thing).  There really isn’t a practical alternative to the Copyright Office jurisdiction.  Congress gave the Copyright Office broad regulatory powers over the MLC (and, therefore, The MLC).

The public “musical works database” that Congress envisioned in Title I of the Music Modernization Act is largely a crowdsourced asset.  Congress has asked the world’s songwriters or copyright owners to spend considerable time preparing their catalogs in whatever format The MLC and the DLC determine is good for The MLC (with the Office’s blessing through regulations).  There inevitably will be quality control and accuracy review costs invested by the world’s songwriters and copyright owners in making sure that their catalogs are correctly reflected in the musical works database.  “Copyright owners” may also include sound recording copyright owners asked to contribute their ISRCs or other data that they, too, have invested considerable expense in creating and maintaining.

Unfortunately, the transaction cost to the songwriter and copyright owner for participation in The MLC and crowdsourcing Congress’s database is an unfunded mandate at the moment.  From a commercial perspective, the dynamic evolution of data is a potentially limitless expense, yet we have both this unfunded mandate which will spike in the early years but continue on a rolling basis essentially forever.  Yet the MLC’s administrative assessment appears to be capped at a fixed increase by a settlement agreement.  Again, a “glitch.”  Still, MLC executives seem positively giddy about their prospects with all the relief of someone who got tapped for lifetime employment with a pension (no doubt) while the songwriters these leaders are to serve are having the fight of their lives.

Yet, it seems clear that at the time of passing Title I, Congress had no intention of using a public law to create a private asset.  Neither was their intention to use the law to leverage the creation of an asset for private ownership by whoever the head of the U.S. Copyright Office designated to be the MLC, regardless of how “popular” they might have been.

The creation of the musical works database is replete with hidden costs paid or incurred by songwriters and copyright owners.  Neither the Congress nor the Copyright Royalty Judges  were asked to directly address these hidden costs of creating the musical works database.   (The Copyright Royalty Judges (or “CRJs”) are relevant because they approve the DLC’s financial contribution to the MLC through the “Administrative Assessment.”  The assessment is intended to cover the “collective total costs” which includes broad categories of cost items related to the database.)  And as usual, these costs appear to have gone straight over the heads of the Congressional Budget Office in their mandated assessment of the costs of Title I.

Even so, the MMA Conference Report from Congress addresses the cost issue head on:

The [Congress] rejects statements that copyright owners benefit from paying for the costs of collectives to administer compulsory licenses in lieu of a free market. Therefore, the legislation directs that licensees should bear the reasonable costs of establishing and operating the new mechanical licensing collective. This transfer of costs is not unlimited, however, since it is strongly cabined by the term ‘‘reasonable.’’[1]

It will be impossible for the “new mechanical licensing collective” to fulfill its statutory duties or build the complete musical works database to which the United States aspires without songwriters and copyright owners around the world doing the intensive and costly spade work to prepare their data to be exported to The MLC.[2]  It is clear that the reasonable costs of preparing and exporting that data should be borne by The MLC[3] as part of the “Administrative Assessment.”[4]  This material cost clearly is covered by the definition of “collective total costs”[5] and so was, or should have been, included in the current Administrative Assessment,[6] unless the intention was to cover The MLC’s side of these costs and force songwriters and copyright owners to eat their side of the same transaction.  If that is the case, it would be helpful for the Copyright Office to clarify that intention in the name of transparency through their broad regulatory authority.

If there is another drafting glitch there, it is worth noting that the CRJs clearly contemplated revisiting the Administrative Assessment  on their own motion for good cause.[7]  If there were ever good cause, the staggering cost of registering potentially millions of songs would be it.[8]

It should be clear that no one’s intention was for the services to pay to create the musical works database and for the songwriters and copyright owners to labor to export their data to make the musical works database complete, only to have The MLC claim ownership of the musical works database, particularly if The MLC were not redesignated as the MLC following the five-year review by the Copyright Office.  That unhappy “take my ball and go home” arbitrage event is foreseeable and would entirely cut against the “continuity” contemplated by Congress.[9]

It is critical that the Copyright Office clarify in regulations that neither The MLC nor any other MLC owns the musical works database.  In fact, the MMA clearly states that “if a new entity is designated as the mechanical licensing collective, [the Office shall] adopt regulations to govern the transfer of licenses, funds, records, data, and administrative responsibilities from the existing mechanical licensing collective to the new entity.”[10]  Since The MLC will have to transfer the musical works database and the other statutory materials to the new MLC if they fail to be redesignated, there should be no misconceptions that The MLC “owns” the database and could withhold all or part of it.[11]  Because The MLC is just An MLC.

It should also be made clear that any MLC or DLC vendor does not obtain an ownership interest in any copy of all or part of the musical works database they may obtain for any reason.

This should be an easy ask of the Copyright Office.  Watch this space to find out if it is.

          * * * * * * * * *

[1] Report and Section-by-Section Analysis of H.R. 1551 by the Chairmen and Ranking Members of Senate and House Judiciary Committees, at 1 (2018) at 2 (emphasis added).

[2] This effort is referred to as “Play Your Part™” a business process trademarked by The MLC available at https://themlc.com/preparing-2021.

[3] I would point out that the way The MLC should work—and in the end probably will end up functioning as a practical matter–is that The MLC needs to be able to handle however songwriters ingest their data.  Instead, it appears that The MLC is trying to dictate to all the songwriters in the world how they should assemble their song data before they register with The MLC. If The MLC wants to shift that burden, they should expect to pay for it.  Otherwise, this is exactly backwards.

[4] 17 U.S.C. §115 (d)(7)(D).  The Administrative Assessment is what makes the MLC different from other PROs or CMOs where members bear their own cost of participation.  The Administrative Assessment is to cover the entire cost of creating the musical works database, not just The MLC’s startup or overhead costs.  If nothing else, another way to treat these out of pocket costs is as a contribution to the operating costs of The MLC by songwriters and copyright owners that should be offset against future Administrative Assessments.

[5] 17 U.S.C. § 115 (e)(6).

[6] Order Granting Participants’ Joint Motion to Adopt Proposed Regulations, In re Determination and Allocation of Initial Administrative Assessment to Fund Mechanical Licensing Collective (U.S. Copyright Royalty Judges Docket No. 19-CRB-0009-AA (Dec. 12, 2019)).

[7] The CRJs included this footnote in their ruling on the administrative assessment (emphasis added):  “The Judges have been advised by their staff that some members of the public sent emails to the Copyright Royalty Board seeking to comment on the proposed settlement agreement. Neither the Copyright Act, nor the regulations adopted thereunder, provide for submission or consideration of comments on a proposed settlement by non-participants in an administrative assessment proceeding. Consequently, as a matter of law, the Judges could not, and did not, consider these ex parte communications in deciding whether to approve the proposed settlement. Additionally, the Judges’ non-consideration of these ex parte communications does not: (i) imply any opinion by the Judges as to the substantive merits of any statements contained in such communications; or (ii) reflect any inability of the Judges to question, [on their own motion without a filing from a participant] whether good cause exists to adopt a settlement and to then utilize all express or reasonably implied statutory authority granted to them to make a determination as to the existence…of good cause [to reject the settlement now or in the future].”   Order Granting Participants’ Joint Motion to Adopt Proposed Regulations, In re Determination and Allocation of Initial Administrative Assessment to Fund Mechanical Licensing Collective (U.S. Copyright Royalty Judges Docket No. 19-CRB-0009-AA (Dec. 12, 2019) n.1 (emphasis added)).

[8] There is a simple solution to determining these costs to songwriters and copyright owners.  The Copyright Office could designate several metadata companies who could compete to handle the various steps of creating and exporting metadata to The MLC, such as in the CWR format, for example North Music Group and Crunch Digital have such tools.  To avoid picking winners and losers and to preserve competition, the Office could alternatively establish a benchmark of quality control or some other criteria for becoming an approved company.  The costs charged would likely vary depending on the size of the catalog, but The MLC need only pay the invoice of these companies which would be included in the Administrative Assessment.  Obviously, the entity performing such work should be independent of The MLC, the DLC or any of its members, or any of their respective vendors.  This would, of course, introduce the concept of competition into the monopoly which may interest no one but might benefit everyone.

[9] See H. Rep. 115-651 (115th Cong. 2nd Sess. April 25, 2018) at 6 (hereafter “House Report”); S. Rep. 115-339 (115th Cong. 2ndSess. Sept. 17, 2018) at 5 (together with identical language, hereafter “legislative history”) (“Although there is no guarantee of a continued designation by the collective, the Committee believes that continuity in the collective would be beneficial to copyright owners so long as the entity previously chosen to be the collective has regularly demonstrated its efficient and fair administration of the collective in a manner that respects varying interests and concerns. In contrast, evidence of fraud, waste, or abuse, including the failure to follow the relevant regulations adopted by the Copyright Office, over the prior five years should raise serious concerns within the Copyright Office as to whether that same entity has the administrative capabilities necessary to perform the required functions of the collective.”)

[10] 17 U.S.C. § 115 (d)(3)(B)(ii)(A)(II).

[11] It seems that if an incumbent MLC that was not redesignated and continued to operate, it would almost unavoidably compete with the newly designated MLC but with a substantial leg up.  I realize there have been some statements made about The MLC taking on work beyond the blanket license, such as voluntary licenses.  That additional work might require additional investment, or a sharing of the total collective costs by third parties.  I have not addressed that allocation as I for one would like to see The MLC stick to their knitting and succeed at the job they are obligated to do, and, frankly, paid to do, before worrying about expanding into profitable roles for the non-profit corporation.   It does seem that if The MLC is not redesignated, there would not be much for them to do once they transfer the public’s assets to the new MLC.

Copyright Office Unclaimed Royalties Study Meeting 12/6/19

 

One of the loose ends from Title I of the Music Modernization Act is how the Congress is going to permit the Mechanical Licensing Collective and the Digital Licensee Coordinator to process the “black box” or unclaimed royalties.   It’s common to hear people using the experience with various private settlements as a guide for how to handle the MLC’s black box.  It is said that a small percentage of the black box was actually claimed, so it’s the fault of those who failed to make their claim that they missed out.

There may be a kernel of truth in that, but the real question is why was there such a small percentage claimed in the first place?  Wouldn’t the administration of settlements with poor claiming history be an example of what not to do in the future?  Certainly with a government mandate forcing the issue?

Congress clearly recognized their oversight role on the black box by mandating the Copyright Office conduct an unclaimed royalties study to develop best practices:

Not later than 2 years after the date on which the Register of Copyrights initially designates the mechanical licensing collective…the Register,in consultation with the Comptroller General of the UnitedStates, and after soliciting and reviewing comments and relevant information from music industry participants and other interested parties, shall submit to the Committee on theJudiciary of the Senate and the Committee on the Judiciary of the House of Representatives a report that recommends best practices that the collective may implement in order to—

(A) identify and locate musical work copyrightowners with unclaimed accrued royalties held by thecollective;

(B) encourage musical work copyright owners to claimthe royalties of those owners; and

(C) reduce the incidence of unclaimed royalties.

The Copyright Office held the first public consultation on the study last December, and posted a video of the meeting that is well worth watching.  As I noted in an MTP post last year:

There are two currently existing standards that the Copyright Office can reference for examples of industry best practices-the SoundExchange unclaimed royalty search for new members and the Lowery-Ferrick Spotify class action Songclaims portal powered by Crunch Digital.  It seems inescapable that these claiming standards should be guideposts for both the Copyright Office and the Copyright Royalty Judges.

Having such clear cut standards–already operational so not theoretical–is fortunate because it seems obvious that the Congress is both concerned with the black box distributions not being gamed and also intends to exercise its statutory authority to retain oversight over the Mechanical Licensing Collective’s operations.  In fact, Senator Grassley specifically stated in his questions for the record following the Copyright Office oversight hearing that:

“The success of the Music Modernization Act (MMA) will depend, to a large extent, on the effective and efficient operation of the Mechanical Licensing Collective (MLC). The MMA included provisions to ensure that there was robust ongoing oversight of the MLC by both the Copyright Office and Congress, and that the new MLC would be accountable to the stakeholders.”

Defiance or Collaboration? The Role of the Presidential Signing Statement in MLC Board Appointments

Even though they have a long history, Presidential Signing Statements are not exactly front and center in every civics class or constitutional public law class in America.  You may be hearing about them for the first time now.  But that doesn’t mean they have not been an important part of Constitutional law-making and jurisprudence.

Presidential Signing Statements were first used by President James Monroe in 1822 in the form of a “special message” to the Senate. Presidents Andrew Jackson, John Tyler and Ulysses Grant also issued signing statements, but they were used infrequently until the 20th Century.  Then their use picked up quite a bit starting with President Theodore Roosevelt and continuing to the present day.  So the use of Signing Statements is quite bipartisan.  While Signing Statements may not themselves have any actionable legal effect, they should not be ignored, either.

The MMA Presidential Signing Statement

Not surprisingly, there is a Presidential Signing Statement accompanying the Music Modernization Act (“MMA”) specifically relating to Title I and at that specifically relating to the MLC board appointments.  The relevant language is:

One provision, section 102, authorizes the board of directors of the designated mechanical licensing collective to adopt bylaws for the selection of new directors subsequent to the initial designation of the collective and its directors by the Register of Copyrights and with the approval of the Librarian of Congress (Librarian). Because the directors are inferior officers under the Appointments Clause of the Constitution, the Librarian must approve each subsequent selection of a new director. I expect that the Register of Copyrights will work with the collective, once it has been designated, to ensure that the Librarian retains the ultimate authority, as required by the Constitution, to appoint and remove all directors.

Let’s explore why we should care about this guidance.

According to Digital Music News, there have been changes at the Mechanical Licensing Collective, Inc. (“MLCI”) the private non-profit permitted under Title I of the MMA:

[I]t appears that two separate MLC board members are jumping ship.  The details are just emerging and remain unconfirmed, though it appears that two members — one representing indie songwriters and the other on the publishing side — are out of the organization.

Because the board composition of MLCI is preemptively set by the U.S. Copyright Act along with many other aspects of MLCI’s operating mandate, the question of replacing board members may be arising sooner than anyone expected.  As MLCI is a creature of statute, it should not be controversial that law-makers play an ongoing role in its governance.

The Copyright Office Weighs In

The Copyright Office addressed board appointments for MLCI in its first request for information for the designation of the Mechanical Licensing Collective (83 CFR 65747, 65750 (December 21, 2018) available at https://www.govinfo.gov/content/pkg/FR-2018-12-21/pdf/2018-27743.pdf):

The MLC board is authorized to adopt bylaws for the selection of new directors subsequent to the initial designation of the MLC. The Presidential Signing Statement accompanying enactment of the MMA states that directors of the MLC are inferior officers under the Appointments Clause of the Constitution, and that the Librarian of Congress must approve each subsequent selection of a new director. It also suggests that the Register work with the MLC, once designated, to address issues related to board succession.

When you consider that MLCI is, for all practical purposes, a kind of hybrid quasi-governmental organization (or what the Brits might call a “quango”), the stated position of the President, the Librarian of Congress and the Copyright Office should not be surprising. 

Why the Controversy?

As the Songwriters Guild of America notes in comments to the Copyright Office in part relating to the Presidential Signing Statement (my emphasis):

Further, it seems of particular importance that the Executive Branch also regards the careful, post-designation oversight of the Mechanical Collective board and committee members by the Librarian of Congress and the Register as a crucial prerequisite to ensuring that conflicts of interest and bias among such members not poison the ability of the Collective to fulfill its statutory obligations for fairness, transparency and accountability. 

The Presidential Signing Statement, in fact, asserts unequivocally that “I expect that the Register of Copyrights will work with the collective, once it has been designated, to ensure that the Librarian retains the ultimate authority, as required by the Constitution, to appoint and remove all directors.”

SGA regards it as a significant red flag that the NMPA-MLC submission to the Copyright Office devotes the equivalent of ten full pages of text principally in attempting to refute this governmental oversight authority, and regards the expression of such a position by NMPA/MLC as arguably indicative of an organization more inclined towards opaque, insider management control than one devoted to fairness, transparency and accountability.

So the Presidential Signing Statement to the MMA is obviously of great import given the amount of ink that has been spilled on the subject.  Let’s spill some more.

How might this oversight be given effect and will it be in the public record or an informal process behind closed doors?  Presumably it should be done in the normal course by a cooperative and voluntary collaboration between the MLC and ultimately the Librarian.  Minutes of such collaboration could easily be placed in the Federal Register or some other public record on the Copyright Office website.  Failing that collaboration, it could be done by either the Department of Justice (unlikely) or by individuals (more likely) asking an Article III court to rule on the issue.  

Of course, the issue should not delay the Copyright Royalty Judges from proceeding with their assessment determination to fund the MLC pursuant to the controversial voluntary settlement or otherwise.  One could imagine an oversight role for the CRJs given that Congress charged them with watching the purse strings and the quantitative implies the qualitative.  The CRJs have until until July 2020 to rule on the initial administrative assessment and appeal seems less likely today given the voluntary settlement and the elimination of any potential objectors. 

Since the Title I proponents drafted the bill to require a certain number of board seats to be filled by certain categories of persons approved by Congress in a Madisonian balance of power, the Presidential Signing Statement seems well grounded and furthers the Congressional mandate.

Yet there is this conflict over the Presidential Signing Statement.  What are the implications?

A Page of History is Worth A Volume of Logic

The President’s relationship to legislation is binary—sign it or veto it.  Presidential Signing Statements are historically used as an alternative to the exercise of the President’s veto power and there’s the rub. 

Signing Statements effectively give the President the last word on legislation as the President signs a bill into law.   Two competing policies are at work in Presidential Signing Statements—the veto power (set forth in the presentment clause, Article I, Sec. 7, clause 2), and the separation of powers. 

Unlike some governors, the President does not enjoy the “line item veto” which permits an executive to blue pencil the bits she doesn’t like in legislation presented for signature.  (But they tried–Line Item Veto Act ruled unconstitutional violation of presentment clause in Clinton v. City of New York, 524 U.S. 417 (1998).) The President can’t rewrite the laws passed by Congress, but must veto the bill altogether.  Attempting to both reject a provision of a new law as unconstitutional, announce the President’s intention not to enforce that provision AND sign the bill without vetoing it is where presidents typically run into trouble.

Broadly speaking, Presidential Signing Statements can either be a President’s controversial objection to a bill or prospective interpretive guidance.  Signing Statements that create controversy are usually a refusal by the President to enforce the law the President just signed because the President doesn’t like it but doesn’t want to veto it.  Or to declare that the President thinks the law is unconstitutional and will not enforce it for that reason—but signed it anyway.  

The President can also use the Signing Statement to define or interpret a key term in legislation in a particular way that benefits the President’s policy goals or political allies.  President Truman, for example, interpreted a statutory definition in a way that benefited organized labor which was later enforced by courts in line with the Signing Statement.  President Carter used funds for the benefit of Vietnam resisters in defiance of Congress, but courts later upheld the practice—in cases defended by the Carter Justice Department.  The practice of using Presidential Signing Statements is now routine and has been criticized to no avail for every administration in the 21st Century including Bush II, Obama and now Trump. 

Since the 1980s, it has become common for Presidents to issue dozens if not hundreds of Presidential Signing Statements during their Administration.  So it should come as no surprise if the Department of Justice drafted up the statement for the MMA prior to it being presented to the President to be signed into law.  (See the American Presidency Project archives https://www.presidency.ucsb.edu/documents/presidential-documents-archive-guidebook/presidential-signing-statements-hoover-1929-obama)

Defiance or Collaboration?

What does this mean for the MMA?  The President certainly did not call out the statutorily required board membership of the MLC as an unconstitutional overreach that he would not enforce.  To the contrary, the MMA Signing Statement expresses the President’s desire that the legislation comply with the requirements of the Constitution.  

Moreover,  the MMA Presidential Signing Statement is not a declaration about what the President will or won’t enforce but rather interprets a particular section of a long and winding piece of legislation.  (Title I principally amended Section 115 of the Copyright Act—now longer than the entire 1909 Copyright Act.)  This kind of interpretation seems to be consistent with the practices of prior Presidents of both parties, not an end-run around either the veto power or separation of powers.

Failing to acknowledge the admonition of the signing statement would seem an unnecessary collision both with long-standing jurisprudence and with a sensible recommendation from the President of how the Librarian, the Copyright Office and the Justice Department expect to approach the issue in collaboration with the MLCI.  That’s possibly why the Copyright Office restated the Signing Statement in the RFP.

Title I of the MMA is a highly technical amendment to a highly technical statute.  A little interpretive guidance is probably a good thing.  Collaboration certainly makes more sense than defiance.

Should the Copyright Office’s Best Practices Shine Sunlight on the Unmatched?

[This post first appeared in the MusicTechPolicy Monthly newsletter.  Become an email follower of this blog to get your copy.]

We’ve all heard that the digital music services are sitting on a pile of cash in unmatched statutory mechanical royalties also known as the “black box”.  No one knows how much because Title I of the Music Modernization Act does not require them to disclose the unmatched sums being held as of the enactment date (October 11, 2018–a year ago), much less a bring down of the current amount.  And unsurprisingly, no service has voluntarily disclosed how much they are holding.

One may ask, why can’t you just look up on the financial statements of at least the public companies how much they are accruing for their share of the black box?  Good luck with that.

The monies owed to the unmatched “known unknowns” is probably the number one question the services don’t ask their third party reporting agents.  And because of the well known agency principle that “notice of a fact that an agent knows or has reason to know is imputed to the principal if knowledge of the fact is material to the agent’s duties to the principal,” these services likely know as a matter of law how much is in their principals’ respective black boxes or at least what they couldn’t match.  (Restatement (Third) of Agency Sec. 5.03.)

Fortunately, the Copyright Office is tasked with establishing best practices for distributing these unmatched black box monies through regulations to implement these and other provisions of the Music Modernization Act, such as the late fee for non-compliant services.

The Copyright Office has also announced the “kick off” of its study of unclaimed royalties study to be held in Washington, DC on December 6.  This will be great for Washington area songwriters, as well as convenient for the lobbyists and lawyers, but everyone else will have to wait for the transcript and video which unfortunately (and perhaps incredibly) will not be live streamed.  Even so, these pending regulations and the upcoming mandated study on matching are the best chance songwriters have had for a generation to get a straight count on unmatched mechanicals.

There are two currently existing standards that the Copyright Office can reference for examples of industry best practices-the SoundExchange unclaimed royalty search for new members and the Lowery-Ferrick Spotify class action Songclaims portal powered by Crunch Digital.  It seems inescapable that these claiming standards should be guideposts for both the Copyright Office and the Copyright Royalty Judges.

Having such clear cut standards–already operational so not theoretical–is fortunate because it seems obvious that the Congress is both concerned with the black box distributions not being gamed and also intends to exercise its statutory authority to retain oversight over the Mechanical Licensing Collective’s operations.  In fact, Senator Grassley specifically stated in his questions for the record following the Copyright Office oversight hearing that:

The success of the Music Modernization Act (MMA) will depend, to a large extent, on the effective and efficient operation of the Mechanical Licensing Collective (MLC). The MMA included provisions to ensure that there was robust ongoing oversight of the MLC by both the Copyright Office and Congress, and that the new MLC would be accountable to the stakeholders.”

This is in addition to the oversight role of the Copyright Royalty Judges with respect to the Administrative Assessment and at least budgetary aspects of the MLC’s operations that inevitably will turn the quantitative into the qualitative.

During her July 30 testimony at the Copyright Office oversight hearing of the House of Representatives Committee on the Judiciary, Register of Copyrights Karyn Temple was peppered with questions about the black box from Members of the Committee, including Representatives Ted Deutch, Sheila Jackson-Lee and Chairman Jerry Nadler.

These months after the hearing, the gravamen of the Committee’s questions were crystalized in yet another copyright infringement suit brought against Spotify, this time by Eminem’s publishers.  The key theory of the suit is that Spotify is out of compliance with the conditions for the new safe harbor for copyright infringers that is one of the central themes of the MMA.  The Copyright Office can use the complaint as another guidepost for best practices to be compassed by their new regulations.

As drafted, Title I is an invitation for litigation, so it should be no surprise that the independent publishing community stepped forward to sue as that was the only way to find out what was going on behind the curtain.  However, as Senator Grassley emphasized, Congress charged the Copyright Office to establish regulations to implement Title I and gave the Copyright Royalty Judges a defacto oversight role through their approval of the MLC’s budget.

  1. Copyright Office Regulations

The Copyright Office is in the process of drafting regulations for a number of areas in Title I.  The Copyright Office therefore is in a unique position to avoid a maelstrom of litigation by adopting regulations that shine light on the unmatched, recognize industry practices by SoundExchange and Crunch Digital, and accomplish simple goals.  This is not hard.

Regulations should require iterative public disclosure to accompany the iterative matching  required by Title I.  Remember-many of these services are the biggest, smartest and richest companies in the history of commerce.  They know something about these systems as they all have to one degree or another developed significant in-house expertise.

However, it is crucial to have the unmatched actually administered by an unrelated and trusted infomediary.  This could be done by repurposing existing searchable databases for unclaimed funds while simultaneously disclosing to the public the amounts owed for each song.

Balance the Checkbook:  Immediate Public Release of Trial Balance and Monthly Updates of Unmatched

Each service currently participating in the Initial Administrative Assessment proceeding before the Copyright Royalty Judges should disclose an aggregate trial balance of the total sums they are holding in their respective unmatched accounts.  This total number should be made public as well as the methodology used to calculate it.  Nothing should or needs to be redacted.

The services should update that initial disclosure on a monthly basis.  The monthly calculation should show the month’s starting balance of unmatched royalties, how much was paid out during the month, how much was added during the month, and the remaining balance at the end of the month.  This simple calculation would allow songwriters to know what monies were being held with no intermediaries.  It’s as simple as balancing a checkbook.

Unmatched Lookup

If the services know the total sums, they should also be able to disclose the sound recording titles at least, if not the artist names, ISRCs, other metadata for the recordings of the songs that comprise the totals.  These services should be able to provide a simple web-based look-up so that songwriters could know if their songs are included in a service’s unmatched accrual.

Cost Reimbursement

It is becoming increasingly obvious to independent publishers that there will be significant resources and costs required to deliver their data to the MLC and claim their unmatched.   Those transaction costs of delivering data to the MLC-without which the imagined global rights database would not be functional enough to distribute the black box effectively-are incremental to publishers who have been doing business prior to the MMA and the MLC.

These incremental costs are easily identifiable and should be invoiced to the MLC by rights owners to be included in the next administrative assessment and reimbursed by the services.

Future Licensees

Any future licensee (blanket or nonblanket) should also be required to comply with these obligations and disclosures.

2.  Role of the Copyright Royalty Judges

The Copyright Royalty Judges are currently conducting a proceeding to establish the initial “administrative assessment” for the MLC.  The rules of the proceeding require the MLC and the Digital Licensee Coordinator to attempt to reach a voluntary agreement on the amount of the assessment.  If they fail, the CRJs will determine it for them.  The voluntary negotiation is divided into two periods: July 8 to September 6, and then September 7 to January 28.

The parties have failed to reach an agreement in the first period already, so a very basic assessment of probabilities means there’s less than a 50% chance they will agree during the second period.  If they fail to reach an agreement by February 17th, the CRJs will commence a hearing to reach the decision for them.  (One could argue that the likelihood of a voluntary agreement increases with the passing of time, but that doesn’t seem to be the case at this point-it seems to be going the opposite direction.)

Remember-the MLC is supposed to have their imagined global rights database up and running and be fully operational and able to render statements shortly after January 1, 2021, or a little over 14 months from now.  At this point, it seems that there is a greater than 50% probability that Congress will have to amend the MMA to extend the deadline.  Presumably something has happened in the last year to advance the ball.

Crucially, there is an inextricable link between the amount of the administrative assessment and what the MLC intends to do with the money.  Two of those functions will be (1) the MLC’s own efforts at matching whatever is unmatched when the Digital Licensee Coordinator delivers the unmatched accounts (and presumably transaction logs) from the services to the MLC after January 1, 2021, and (2) ingesting data for the imagined global rights database.

Unmatched Best Practices and Disclosures

The CRJs should take a very close look at both the startup and the operating budget for the MLC as well as the underlying assumptions, processes and vendors for those functions to take on the U.S. accounting burden for the entire world.  It should be obvious that the services have a great deal of experience in licensing copyrights and operating royalty systems.

The CRJs should also consider whether they have the authority to address the nexus between the best practices to be adopted by those seeking to rely on the retroactive safe harbor, payments of the newly matched prior to 1/1/21 and public reporting of both accrued unmatched royalties and claiming before and after 1/1/21.  I think they do and they probably have an obligation to do so that is at least as great as the obligation on the Copyright Office.<

Sufficiency of Funding and Sufficiency of Allocation

As Senator Grassley has asked, the CRJs need to address what happens if the process fails to hit the deadlines as part of their determination of the administrative assessment.  Each passing day makes it more likely that the entire procedure will grind to a halt before statements can be rendered.

This concerns both the DLC funding the MLC sufficiently, but it also depends on the MLC allocating those sums appropriately across its operations–and the quantitative implies the qualitative.  Moreover, the CRJs need to fashion a procedure for relief that can be taken up inexpensively by any copyright owner that has a good faith belief they have simply not been accounted to. An example would be someone who was being paid under a statutory license (NOI or modified compulsory) prior to January 1, 2021 whose statements then drop to zero thereafter or who simply receive no statements at all.

While the Register said in response to Rep. Deutch during the Copyright Office oversight hearing that both MLC and AMLC had agreed with the Copyright Office interpretation that unclaimed funds are not to be distributed before 2023, the MLC’s actual statement on the issue is more nuanced.  The judges need to take this into account and leave nothing to the imagination in their determination.

3.  Sunlight is the Best Disinfectant

As Mr. Justice Brandeis taught us in Other People’s Money-And How Bankers Use It,“sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

Songwriters are in need of both.