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.

New Copyright Office Regulations Regarding Pre-72 Recordings

Title II of the Music Modernization Act (“MMA”), (also known by its own bill title the Classics Protection and Access Act or the “CLASSICS Act) is self-executing legislation that gives certain federal copyright protections to recordings released prior to February 15, 1972.  One of the new protections is the right to recover the customary statutory damages for infringements of those pre-72 recordings available to copyright owners in the normal course.

However, in order to be eligible to recover statutory damages, copyright owners of pre-72 recordings must file Excel spreadsheets of schedules listing their pre-1972 recordings and contact information with the U.S. Copyright Office to be indexed by the Copyright Office into the Office’s public records.  This formality is in lieu of filing the customary copyright registrations.  Statutory damages are only available for infringements occurring more than 90 days after indexing.   The index is available at https://www.copyright.gov/music-modernization/pre1972-soundrecordings/search-soundrecordings.html.

In addition to imposing this formality on copyright owners, the MMA creates a new safe harbor for infringers.  That safe harbor was just coincidentally added at the insistence of Senator Ron Wyden under threat of a Senate hold on the entire bill.  If the infringer is making a noncommercial use of a sound recording that is not being commercially exploited, statutory damages are not available provided that the infringer has made a ‘‘good faith, reasonable search for’’ the infringed work in the indexed schedules before determining that the recording is not being commercially exploited.

The MMA creates an additional and separate safe harbor for entities that were transmitting pre-72 recordings at the time the MMA was enacted.  Rights owners must provide specific notice to such entities before pursuing remedies against them.  In order to provide such notice, that transmitting entity must register their contact information with the Copyright Office within 180 days from enactment (which expired April 9, 2019) (available at https://www.copyright.gov/music-modernization/pre1972-soundrecordings/notices-contact-information.html).

For those reading along at home, the Final Rule is found in 37 C.F.R. §201.35 (available at https://www.copyright.gov/title37/201/37cfr201-35.html) and was published at 84 Fed. Reg. 10679 (March 22, 2019) https://www.govinfo.gov/content/pkg/FR-2019-03-22/pdf/2019-05549.pdf.

Postdicting the Future: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime from The Hill

[This is a July 30, 2013 summary from The Hill of my series that first appeared in the Huffington Post on July 26, 2013–let’s see how I did after the Music Modernization Act.]

1.  Create an Audit Right for Songwriters for Compulsory Licenses:  One of the oldest compulsory licenses in the Copyright Act is the “mechanical license”, the statutory mandate forcing songwriters to license songs that dates from 1909.  The government mandates the license and also mandates the rate that songwriters are paid—from 1909 until 1977 that rate was set at 2¢ per recording.  Although that rate was eventually indexed to inflation leading to the current 9.1¢ minimum, songwriters had to dig out of a deep hole.

Getting paid is another story.  This statutory license requires songwriters be sent “statements of account” for royalties—but songwriters are not allowed to conduct a “royalty compliance” examination (called an “audit”).  The law requires a company officer and a CPA to certify the company’s statements—a practice rarely complied with.  As recently demonstrated by Aimee Mann’s lawsuit against Medianet, if songwriters don’t get paid there’s not much they can do except sue—a costly process.

The government tells the songwriter “trust—but don’t verify.”  This is an easy fix.  Congress could give songwriters an audit right as they did for stakeholders in the contemporary digital performance compulsory license for satellite radio and Internet radio.

2.  Allow Artists and Songwriters to Opt Out of the Compulsory License:  The recent blow-up regarding the so-called “Internet Radio Fairness Act” and the related ASCAP and BMI rate court proceedings should let the Congress know that there are many artists and songwriters who want to be able to decide who gets to license their songs.  Again, the digital performance compulsory license allows copyright owners to control “interactive” uses of their works—why not at least do the same for the mechanical license as well?

3. Require Digital Royalties for pre-72 Sound Recordings:  Sound recordings did not receive federal copyright protection until 1972.  When the Congress established the digital performance royalty, it seemed to clearly apply to all recordings and did not arbitrarily exclude recordings prior to 1972.  However, this “gotcha” is used by SiriusXM and others to avoid paying great American artists whose records were released before 1972—jazz, R&B and rock legends get nothing.  Congress could fix this “gotcha” and secure a fair share of digital performance royalties to these authors of our musical heritage.

4.  Require All Unpaid Statutory Mechanical Royalties Be Paid to the State Unclaimed Property Offices:  As Aimee Mann’s alleged in her lawsuit against the white label provider Medianet, witnesses stated that 23 percent of the songs used by Medianet are unlicensed—which could easily be millions of songs if true.  And there are likely a number of digital music services that are arbitrarily holding unpaid royalties in an unauthorized “escrow.”

It seems that there could be substantial royalties controlled by the very retailers who must pay songwriters under the law, a potentially significant moral hazard.  Congress could require that any “escrowed” royalties be paid over under State unclaimed property laws—a lawful “escrow.”

5.  Require that Online and Offline Videos Follow the Same Rules:  As online video platforms become available through Internet enabled home televisions, attention should be paid to a frequently overlooked category of songwriter—the film and television music composers.  Current reporting by online video platforms makes it difficult for score composers to be paid for their work.  The Congress may well ask whether those who seek to replace television should be held to the same licensing standards as television.

These are but a few ideas the Congress could be addressing that might make a difference in the lives of artists and songwriters and would cost the taxpayer very little.  All leverage existing structures and bureaucracies, eliminate “gotchas,” and help to reduce the unintended consequences of government mandated compulsory licensing.

Postdicting the Future: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 4: Fixing Unmatched Songwriter Royalties

[In 2013, I wrote 5 articles on Huffington Post titled “5 Things Congress Could Do That Wouldn’t Cost Taxpayers a Dime”. After the MMA, how did I do on predictions?  These posts were written from a 2013 perspective.]

The US is alone in the world in maintaining a compulsory license for songs. The government forces songwriters to license their songs at a rate approved by the government and then has rather flimsy rules about how songwriters actually get paid. These flimsy rules, I suggest, have resulted in unknown amounts of royalties not finding their way to songwriters, particularly under compulsory licenses used by on-demand digital music services.

There’s an easy fix for this — the same rule that was applied against record companies and music publishers for unclaimed royalties in the past: Pay the money to state unclaimed property offices. If songwriters are getting ripped off by brand sponsored piracy on the unlicensed sites, then let’s at least make sure they get paid on the licensed services.

The Compulsory License for Songs

When the Congress established the compulsory license in 1909, the legislative body was concerned that granting exclusive rights in “mechanical royalties” for songs in piano rolls might create a monopoly if a single publisher could buy up the market in songs. However real that concern might have been at the time, the most common complaint from digital music services about songs is that the music publishing market is too fragmented, so it seems that argument is no longer relevant.

One of the big users of compulsory licenses is, of course, Google Play. Concern about the antitrust lusting of songwriters is particularly difficult to comprehend in a world in which the same government allows Google to buy and subsidize YouTube with monopoly rents, buy Double Click to achieve a dominant position in online advertising, and is given a pass by the FTC for antitrust violations. But those songwriters…boy, we have to keep a close eye on them.

Unsupervised Digital Music Services

So what appears to be happening is this: Digital music services use the compulsory license and its labyrinthine regulations — often with notices that are too late, accountings that are noncompliant and data that is just incorrect. To give you a sense of scope, digital music services often offer 20 million or so recordings, all of which contain the co-equal copyright in the song being recorded. Songs and recordings of songs have to be separately licensed for on-demand streaming services (especially the popular “cover recordings”). Songs are frequently co-owned — so the service using the compulsory license must notify a minimum of 20 million songwriters of their use of the song and often two or more writers per song. So let’s just call it tens of millions of licenses.

The digital music services must then track the use of these songs and recordings and match the usage to licenses obtained. There inevitably will be songs for which the writers cannot be found. So even if you assume that these companies can get to the matching stage without making any mistakes at all, what happens when there is usage — and therefore payable royalties — for songs that the service is unable to match — even for the most honest of reasons.

How Digital Music Services Pay Themselves Free Money

Add to this problem another problem — digital music services frequently try to dupe songwriters — the ones they have found — into agreeing that the service need only account to them if the songwriter has over a certain amount in payable royalties — somewhere between $50 and $250 depending on the service. (Google Play, for example, has a $100 minimum threshold — unilaterally imposed — on all international and “friction free” electronic payments.)

To put some math on this, realize that there are about 20 million songs typically available in a broad based retail offering such as Google Play or Spotify. Assume that on average 50 percent achieve $25 in earnings in a given calendar quarter accounting period. (This is consistent with both the “long tail” power law type sales distribution and the miniscule royalties paid to songwriters by these services.)

If a service holds royalty payments from songwriters until payable royalties exceed $25 (such as Google Play’s $100 default threshold as stated in their “Publisher Statement of Account Preference”), this means that the service could then be sitting on up to $250,000,000 in interest-free money. Free money that they theoretically may never have to pay out and only have to pay out when the service determines that the songwriter’s account is payable. Free money that is not permitted under the compulsory license rules for songs.

And that’s one service.

This policy of withholding royalties is fraught with moral hazard and practical problems: The heirs of one songwriter recently tried to sort out these payments and were told they needed to hire a lawyer to deal with the highly litigious digital music service. They couldn’t afford a lawyer so guess what happens to the unclaimed monies? And then there’s the statute of limitations.

Unmatched and Unclaimed Royalties

But there’s another problem with the digital music services — if they service cannot match usage (and earnings) to a royalty recipient in their systems, what happens then? Particularly with monies based on a share of advertising revenue that is distributed proportionately based on usage?

In this example, if in one month all songs were played 100 times and your song was played 10 times, then you would get 10/100 (or 10 percentt) of the advertising pie for that period. But — if there were actually 120 songs played during that period but only 100 could be matched, what happens to the other 20 that were unmatched? There is a growing belief that what happens is that the services don’t count the 20 unmatched songs, and divide the pie up based on the 100 they are able to match.

That means — there are 20 songs that were exploited but that are never paid and are not on the books. Even though there should be no songs on the service that were unlicensed because the compulsory license applies. If this seems high, remember that MediaNet’s lawyers acknowledged in a declaration cited in the current case by Aimee Mann against MediaNet that 23 percent of the millions of songs on the service are unlicensed.

By not counting the unmatched (and probably also unlicensed) songs, a service could argue — albeit fallaciously — that it had no “unallocated” royalties as it allocated all payable royalties to songs it could match and did not accrue any unpaid royalties. If I’m right about this, services are overpaying the matched songs with a share of revenue from the unmatched songs (in our example, 10/120 or 8-1/3 percent instead of the overpayment of 10/100 or 10 percent).

Because the Congress does not allow songwriters to audit the digital music services, there is no real way to know whether this is happening or the degree to which it is happening. If 23 percent of the MediaNet songs are unlicensed, royalties payable on any activity on these songs seems like it should at least be accrued until the songwriters can be found.

This is, of course, why states have unclaimed property statutes. In 2004, then Attorney General Eliot Spitzer chased record companies and music publishers for unpaid royalties for artists who could not be found for a variety of reasons, some plausible, some not so plausible. Spitzer forced the royalties to be paid—like utility deposits, dividends, abandoned bank accounts, the works—to the state unclaimed property office where the monies are held forever and where somebody eventually tries to track down the rightful owner.

Of course — there is a chance that if the digital music services did this voluntarily they might be admitting that they were using unlicensed songs and they want to keep a good eye on those kinds of admissions. So they will come up with many excuses for why they should not be subject to the same laws as everyone else. It is, after all, the Internet, and you know how that can be.

An Easy Fix for Congress: Pay unclaimed money to people who deal with unclaimed money

Even if the Congress does not establish an audit right for songwriters for mechanical royalties as they have for rights holders under the more contemporary webcasting compulsory license and the Audio Home Recording Act, it would be quite simple for the Congress to clarify once and for all that unpaid royalties — whether for the unmet minimum thresholds unilaterally imposed by digital music services, unknown addresses for songwriters, or any other reason — should be paid to the state unclaimed property offices in the state of the songwriter’s last known address or at least the state where the company does business.

Companies that want to take advantage of the compulsory license rules for songs shouldn’t also get to make their own rules to take advantage of songwriters.

Postdicting the Present: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 3: Create an Audit Right for Songwriters

[In 2013, I wrote 5 articles on Huffington Post titled “5 Things Congress Could Do That Wouldn’t Cost Taxpayers a Dime”. After the MMA, how did I do?  These posts were written from a 2013 perspective.]

Once a song is distributed to the public with the permission of the owner of the copyright in the song, the U.S. Copyright Act requires songwriters to license songs for reproduction and distribution under a “compulsory license.” This license is typically called a “mechanical license” because it only covers the “mechanical reproduction” of the song and does not, for example, include the right to use the song in a YouTube video or a motion picture, create a mashup or reprint the lyrics of the song.

When the Congress first developed the compulsory mechanical license in 1909, the concern was that “the right to make mechanical reproductions of musical works might become a monopoly controlled by a single company.” This monopoly never came to pass, and given the fragmentation in music licensing in the current environment, is unlikely to ever come about.

The user of the compulsory license (or “licensee”) has to comply with the rules for these licenses — including an obligation to account and pay royalties. If the licensee fails to comply, then the songwriter can in theory terminate the license, although making that termination stick usually requires an expensive copyright infringement lawsuit.

The bare compulsory license was not widely used before the advent of Internet music services — and then became something of a weapon of its own — music services bought into the “long tail” theory and tried to clear millions of songs overnight by massive mailings of notices of their intention to use the work. Given that songs are frequently co-written, this required sending huge numbers of notices. Behind each notice — supposedly — is a royalty account and statement of usage as required by law.

So if you’re following, songwriters suddenly were required to license to services they did not ask to be included in (unlike artists recording “cuts” the songwriter solicited), and only a limited paper trail to confirm the accuracy of royalty payments.

Trust, But Don’t Verify

Intuitively, you are probably thinking that songwriters would have the right to make the licensee provide evidence to demonstrate if this morass actually resulted in correct payments, right? Checking the evidence is called a “royalty compliance examination” or an “audit”. Since there is no “auditor general” of compulsory licenses appointed by the Congress, it would seem strange to believe that the intent of Congress was to codify the moral hazard of allowing the person doing the paying to examine their own books.

And yet, in the current practice, the fox is squarely among the chickens. This is because the government requires that the licensee merely “certifies” their own statements (i.e., promises the statements are true). This certification is done on a monthly basis by an officer of the licensee and annually by the licensee’s CPA. And songwriters are told “trust me.”

The Industry Standard

It’s safe to say that this certification process is drastically different than any industry-standard mechanical license. There is a long history of audits in the music business — the State of California even passed legislation in 2004 protecting the artist’s right to audit record companies. But when it comes to songwriters, the federal government forces songwriters to take the compulsory license, tells them the royalty rate they are to be paid, but does not permit songwriters to audit the licensee.

Instead, the government permits the licensee to “certify” their own statements (i.e., promises the statements are true). This certification is done on a monthly basis by an officer of the licensee and annually by the licensee’s CPA. And songwriters are told “trust me.”

The Blanche Dubois Approach to Royalty Accounting

As Blanche Dubois said in A Streetcar Named Desire, “I have always depended on the kindness of strangers” and until the Congress updates this certification business model, that’s exactly what songwriters are expected to do, too.

The compulsory license requires certification by the licensee on a monthly basis and by a CPA on an annual basis.

An officer of the licensee is to include this certification oath with the songwriter’s monthly statement:

“I certify that I have examined this Monthly Statement of Account and that all statements of fact contained herein are true, complete, and correct to the best of my knowledge, information, and belief, and are made in good faith.”

The Annual Statement of Account requires this certification by a Certified Public Accountant for the licensee:

“We have examined the attached “Annual Statement of Account Under Compulsory License For Making and Distributing Phonorecords” for the fiscal year ended (date) of (name of the compulsory licensee) applicable to phonorecords embodying (title or titles of nondramatic musical works embodied in phonorecords made under the compulsory license) made under the provisions of section 115 of title 17 of the United States Code, as amended by Pub. L. 94-553, and applicable regulations of the United States Copyright Office. Our examination was made in accordance with generally accepted auditing standards and accordingly, included tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.”

Do you think that the CPA has in fact examined millions of annual statements? Does the CPA’s risk manager or insurance carrier know that the CPA is certifying to a multitude of songwriters that the CPA has actually “examined the attached “Annual Statement of Account…” when it is highly unlikely that the CPA has done any such thing?

Congress crafted this language in a much simpler time. Remember — there are now millions of these statements every month. Do you think that the certification oath could possibly be true every time? Some of the time? How would you find out?

Certification is a One-Way Street

This certification runs only one way — the government only offers licensees and CPAs the opportunity to certify that the books are correct, not that they are incorrect. Under current practice, if a company or CPA is squishy about how accurate their books and records are, songwriters typically get no certifications at all and just an uncertified royalty statement if they are lucky.

What conclusion should be drawn from a failure to certify? Why not provide an alternative certification — that the licensee’s books and records cannot be certified. While it may be unrealistic to think that companies would ever disqualify their own books, it is not unrealistic to think that a CPA might choose this option on the annual statement of account given the CPA’s licensing responsibilities.

And it is definitely not unrealistic to think that the company’s books would be more likely to be accurate if the company knew that this disqualification option were available to the CPA. But the simplest thing Congress could do is to create an audit right for the compulsory license.

Let’s Keep it Simple

Chairman Goodlatte has said he intends to update the Copyright Act to bring it into line with the digital age. The Congress already allowed audits for the compulsory license for sound recordings and the webcasting royalty established under Section 114. This mechanism that Congress created in the recent past is working quite well.

Chairman Goodlatte could borrow heavily from the audit rights for the Section 114 compulsory license for sound recordings, and allow songwriters to conduct group audits under Section 115 to avoid a multiplicity of audits.

These changes would bring help bring song licensing into the 21st century and allow songwriters to enjoy greater confidence that they are being paid properly. Creating an audit right under Section 115 compulsory licenses would allow market forces to work to align the incentives toward better payments for songwriters.

What Does the New MLC Candidate Mean for the Copyright Office?

Nate Rau reports in The Tennessean that there is a new group competing to be the “Mechanical Licensing Collective” under the Music Modernization Act.  I would expect there will be at least one more group come forward in the coming weeks.  This competition was easy to expect, but it does call to account the short time frames for setting up the MLC in the Music Modernization Act.  Those time frames fail to take into account the potential delaying effects of competition.

Multiple competitors also suggests that whoever wins the designation of the Copyright Office should be looking over their shoulder before the 5 year review of the MLC’s performance by the Copyright Office.  It’s likely that whoever is the runner-up in that designation pageant will still be around and may be critical of the winner when that 5 year review comes around.

It’s also worth noting that no one seems to be very interested in the music services’ counterpart to the MLC, being the “Digital Licensee Coordinator” or the “DLC”.  Whoever ends up getting to be the DLC is also going to be subject to a 5 year review, likely to be side by side with the MLC’s review.

As it now seems like there may be hard feelings on the part of the runner up for the MLC, this would be a good time for the Copyright Office to come up with objective criteria for both the selection of a winner and the definition of success when the 5 year review comes up.  It appears from the statutory language that Congress intends for the Copyright Office to come up with these criteria, and the clearer and more transparent the criteria, the less likely it will be for hard feelings to result in a meltdown.

The review of both the MLC and the DLC are governed by the same language in the Music Modernization Act:

Following the initial designation of the [mechanical licensing collective/digital licensee coordinator], the Register shall, every 5 years, beginning with the fifth full calendar year to commence after the initial designation, publish notice in the Federal Register in the month of January soliciting information concerning whether the existing designation should be continued, or a different entity meeting the criteria described in clauses (i) through (iii) of subparagraph (A) shall be designated. Following publication of such notice, the Register shall—

“(I) after reviewing the information submitted and conducting additional proceedings as appropriate, publish notice in the Federal Register of a continuing designation or new designation of the [mechanical licensing collective/digital licensee coordinator], as the case may be, and the reasons for such a designation, with any new designation to be effective as of the first day of a month that is not less than 6 months and not longer than 9 months after the date on which the Register publishes the notice, as specified by the Register; and

“(II) if a new entity is designated as the [mechanical licensing collective/digital licensee coordinator], adopt regulations to govern the transfer of licenses, funds, records, data, and administrative responsibilities from the existing mechanical licensing collective to the new entity.

The Congressional mandate to the Copyright Office is very broad–“soliciting information” could mean just about anything even remotely germane.  Given that the Copyright Office is to designate each of these crucially important offices empowered by Congress and to then measure their competency five years from now, it does seem that the Copyright Office would do well to give both the MLC and the DLC notice of what’s expected of each of them, and to do so before the designation is made.

For example, record keeping regarding customer service responsiveness, accuracy of the ownership database, overbudget or underbudget spending, complaints by songwriters, matching rates, number of audits of services undertaken, audit recoveries and distributions and executive compensation might all be relevant in the case of the MLC.

Some of these same criteria might be relevant for the DLC, although the DLC would have its own issues not common to the MLC.  These might include responsiveness of the DLC to potential blanket licensees, confidential treatment of competitive information, fair allocation of the assessment and communication with all licensees, especially the significant nonblanket licensees.

The Copyright Office would do well to recall the “seven anonymous amici” from the Microsoft antitrust litigation who were so dependent on Microsoft and so afraid of retaliation that they could not even use their own names to file an amicus brief in the case.  If the Copyright Office intends to have a candid assessment of either the MLC or the DLC, it might be a good idea to make an anonymous comment process available to competitors who fear retaliation.

If the Copyright Office makes a nonexhaustive list of qualities that constitute a successful completion of the five year trial period at the beginning of that period rather than the end, it might make succesful completion more likely.